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   [5186] In the Matter of James G. Welk, County Bank of Merced, Merced, California, Docket No. FDIC-91-201e (10-13-92).

   Board adopts ALJ's recommendation that bank official be prohibited from further participation in the affairs of insured institutions because of his involvement in an ongoing check kiting scheme. Repeated authorizations for overdrafts and immediate credit for customer's deposited checks constituted unsafe or unsound practices and breaches of fiduciary duty, which prejudiced the interests of the institution and demonstrated continuing disregard for the bank's safety.

   [.1] Prohibition—Liability Factors—Unsafe or Unsound Practices
   Bank officer's failure to investigate subordinate's reports of repeated overdrafts and check kiting (the continuous interchange of worthless checks between accounts at different banks) constituted approval of customer's scheme, and was an unsafe or unsound banking practice.

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   [.2] Prohibition—Liability Factors—Prejudice to Bank
   Bank's loss of $428,431 directly attributable to customer's overdrafting and check kiting scheme was significant and makes unnecessary a showing that respondent derived personal benefit from the scheme.

   [.3] Prohibition—Liability Factors—Disregard for Safety and Soundness
   Approval of an ongoing check kiting scheme constitutes continuing disregard for the safety or soundness of the bank.

In the Matter of
JAMES G. WELK, individually,
and as an officer, person
participating in the conduct
of the affairs, and
institution-affiliated party of
MERCED, California


   The Board of Directors ("Board") f the Federal Deposit Insurance Corporation ("FDIC"), having reviewed the entire record, finds that the Recommended Decision (appended hereto) of the Administrative Law Judge ("ALJ") following a hearing in this case, is fully supported by the law and the evidence. The Recommended Decision concludes that an order of prohibition against James G. Welk ("Respondent") was warranted, pursuant to section 8(e) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(e), for Respondent's involvement in an ongoing check kiting scheme.
   The ALJ found that Respondent, over a lengthy period, repeatedly authorized overdrafts by a bank customer, and approved the granting of immediate credit to the customer's deposited checks under circumstances which put him on notice that the customer was drawing checks against uncollected funds. The ALJ concluded that Respondent's actions constituted both unsafe or unsound banking practices and breaches of his fiduciary duty. Neither FDIC Enforcement Counsel nor Respondent filed exceptions to the Recommended Decision.
   The Board adopts the ALJ's Recommended Decision and incorporates it herein by reference. The Board also adopts the ALJ's Recommended Order of Prohibition from Further Participation issued June 5, 1992, as set forth below.


   The Board of the FDIC, having considered the entire record in this proceeding including the record made on February 24, 1992, through February 27, 1992, briefs and arguments of counsel, and the Recommended Decision and Order of the Administrative Law Judge, and exceptions thereto, finds that:
   (a) The Respondent has engaged or participated in unsafe or unsound banking practices and breaches of fiduciary duty as an institution-affiliated party of County Bank of Merced, Merced, California ("Bank");
   (b) By reason of such practices and breaches of fiduciary duty, the Bank has suffered financial loss or other damage, and the interests of the Bank's depositors have been prejudiced; and
   (c) Such practices and breaches of fiduciary duty demonstrate the Respondent's willful and continuing disregard for the safety or soundness of the Bank.
   The FDIC further finds that such practices and breaches of fiduciary duty demonstrate the Respondent's unfitness to serve as a director, officer, person participating in the conduct of the affairs, or as an institution-affiliated party of the Bank, any other insured depository institution, or any other agency or organization enumerated in section 8(e)(7)(A) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(e) (7)(A).
   Accordingly, IT IS HEREBY ORDERED that:
   James G. Welk is hereby, without the prior written approval of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the Act, 12 U.S.C. § 1818(e)(7)(D), prohibited from:
   (a) participating in any manner in the conduct of the affairs of any financial institution
{{12-31-92 p.A-2096}}or organization enumerated in section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e) (7)(A);
   (b) soliciting, procuring, transferring, attempting to transfer, voting or attempting to vote any proxy, consent or authorization with respect to any voting rights in any financial institution enumerated in section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e)(7)(A);
   (c) violating any voting agreement previously approved by the appropriate Federal banking agency; or
   (d) voting for a director, or serving as an institution-affiliated party.
   IT IS FURTHER ORDERED that this ORDER will become effective thirty (30) days after its issuance. The provisions of this ORDER will remain effective and enforceable except to the extent that, and until such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   By direction of the Board of Directors.
   Dated at Washington, D.C. this 13th day of October, 1992.
   /s/ Hoyle L. Robinson
   Executive Secretary



In the Matter of
James G. Welk, individually, and
as an officer, person participating
in the conduct of the affairs, and
institution-affiliated party of
County Bank of Merced
Merced, California

WALTER J. ALPRIN, Administrative Law Judge,
Office of Financial Institution Adjudication:


   This proceeding was instituted on August 20, 1991, by the Notice of the Federal Deposit Insurance Corporation (FDIC) of its intention to remove and to prohibit James G. Welk (Respondent), from further participation in the conduct of the County Bank of Merced, Merced, California (County Bank), and any other federally insured depository institution listed in section 8(e)(7) of the Federal Deposit Insurance Act (the Act), 12 U.S.C. § 1818(e)(7), without the prior written approval of the FDIC and such other appropriate Federal depository institution regulatory agency (the Notice). Hearing was held at Sacramento, California, from February 24th through 27th, 1992. Following hearing, the parties filed concurrent Proposed Findings of Fact and Conclusions of Law1 (briefs) and Reply Briefs.
   The general allegations of the Notice are that Respondent did, directly or indirectly, engage or participate in unsafe or unsound banking practices, or did commit or engage in acts, omissions or practices which constitute breaches of his fiduciary duty as an officer of the County Bank, by reason of which the County Bank suffered or will probably suffer substantial financial loss or financial loss or other damage, or that the interests of its depositors were or could be seriously prejudiced or that Respondent has received financial gain or other benefit by reason of such practices or breaches of fiduciary duty, and further that such practices or breaches of fiduciary duty demonstrate willful or continuing disregard for the safety or soundness of the County Bank or involve personal dishonesty, all in violation of section 8(e)(7) of the Act, 12 U.S.C. § 1818(e).
   The specific actions underlying the charge are allegedly engaging through acts or omissions "in unsafe or unsound banking practices by aiding, abetting, and/or participating in a scheme perpetrated by (Robert) Campbell and/or Camco to receive the benefit of uncollected funds from approximately March, 1988 through March, 1990." The Notice also charges that as a result of the "acts, omissions and/or practices, Respondent has breached his fiduciary duty as an officer of the (County) Bank."
   Upon the testimony given and exhibits presented at the hearing, after observing the demeanor of the witnesses and reviewing the Exhibits, the posthearing Proposed Findings and Conclusions and the Reply Briefs thereto, the undersigned makes recommended findings of fact and conclusions of law, and recommends the decision and proposed Order, as follows.

1 Respondent's filing was slightly delayed due to an internal office error. Opposing counsel was not adversely effected. While I agree that observance of the Rules of Practice and procedure is important, and intend to uphold them with sanctions where appropriate, striking Respondent's initial brief here is not warranted.
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   The County Bank, a corporation existing and doing business under the laws of the State of California with its principal offices at Merced, California, is and was at all times pertinent hereto an insured State nonmember banks as defined in Section 3(e)(2) of the Act, 12 U.S.C. § 1813(e)(2). At all times pertinent Respondent was the County Bank's senior vice president and a person participating in the affairs of the County Bank. The FDIC has jurisdictional authority to institute this proceeding.


   A. Background to February of 1988
   On October 3, 1983, Robert Campbell (Campbell) opened a demand deposit account with the Downtown Branch of the County Bank in the name of Camco Development Corporation (Camco). On March 30, 1987, Camco entered into a joint venture with Merced Area Investment & Development, Inc. (MAID), a non-banking subsidiary of County Bank, then authorized to purchase raw land and to develop it. The joint venture was known as Copper Tree, to be made a residential housing subdivision. For reasons neither pertinent nor of record, on February 18, 1988, Camco and MAID entered into an agreement for dissolution under the terms of which Camco assigned al of its right, title and interest in the venture to MAID, subject to an exclusive right to purchase 48 lots in the project at a purchase price of $28,000 per lot, $10,000 of which was in the form of debt in favor of the County Bank, subordinated to construction loans as might be issued by other institutions, According to Respondent's testimony, the arrangement left Campbell and Camco in debt to MAID in the amount of $2,118,276.
   Respondent's banking experience covers about 40 years. He was employed by the County Bank in 1983, and became a Senior Vice President, as credit administrator responsible for lending activities, in January of 1987. He was also a Vice President of MAID, and in February of 1988, was given the responsibility of handling the termination agreement with Camco, to see that the terms of the agreement were satisfied (Transcript Volume IV, pages 7–8),2 and to try to collect by "workout" the $2,100,000 owing from Campbell. (TR IV, 14.)
   Other employees of the County Bank as of February, 1988, included the following individuals:
   At the County Bank's main office, Gene D. Millen (Millen), President, and Dennis Mineni (Mineni), Senior Vice President and Chief Financial Officer.
   At the Downtown Branch of the County Bank, Ed Anderson (Anderson), Vice President and Branch Manager, and mark Morehouse (Morehouse), Operations Officer. Darcy Foster (Foster), who preceded Morehouse as Operations Officer at the Downtown Branch, was Operations Officer at the Olive Street Branch, at which Campbell also had an account.
   Morehouse was first employed by the County Bank in 1981, and became Operations Officer of the Downtown Branch about 1986. The then-Branch Manager, Jim Bik, informed him that all activity of the Camco account was to be discussed with Respondent rather than himself. This practice continued after Bik was replaced as Branch Manager by Anderson. Welk's instructions were to accept deposits, and "to pay incoming items on rejects, insufficient funds," thereby granting immediate credit without waiting for check deposits to clear. (TR I, 131.)

B. The Bank Examination

   The FDIC conducted an examination of the County Bank as of close of business on February 23, 1990. Within the first week of examination, the examiners independently determined a strong suspicion of kiting on the Camco account for a test period beginning in September of 1989, because of (1) the policy of granting immediate credit upon check deposit, (2) the small or negative continuing balance of the account, (3) Camco's record of having its checks returned for insufficient funds, and (4) a number of checks issued by Campbell or Camco on accounts at other banks, payable to Camco, deposited by Camco in its account at the County Bank, and in a number of instances dishonored and requiring resubmission for payment.

2 References will be provided as follows: Transcript references will be by the Roman numeral of the volume, followed by the page number, e.g. TR IV, 7–9, and references to exhibits will be by offeror and number, e.g. FDIC Ex. 1 for FDIC Exhibit 1. Exhibits offered by Respondent were those prepared and pre-marked by the FDIC, and pursuant to agreement the FDIC number was utilized.
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   The examination determined that for the period between September 1, 1989, and February 26, 1990, more than six million dollars was deposited to Camco's demand deposit account at the County Bank, including over four and a half million dollars in 183 checks drawn by Camco on its accounts at El Capitan National Bank (El Capitan) and Sentinel Savings and Loan Association (Sentinel). During the same period, Camco drew 143 checks on its account at County Bank, each in identical dollar amounts3 with the checks drawn on its El Capitan and Sentinal accounts, and deposits them in its El Capitan and Sentinel accounts in order to cover insufficient balances on the checks drawn from those accounts. Also during this period, all but one of the checks drawn by Camco, made payable to Camco and deposited in Camco's County Bank account were drawn against insufficient funds.
   The examination also determined that for the period from February 21 to March 5, 1990, the average daily deposits for Camco increased dramatically, from approximately $80,000 to $200,000, and that five checks drawn on the Sentinal account, and one check drawn on El Capitan, all deposited in Camco's County Bank, were returned between March 5 and 8, 1990 due to insufficient funds, creating an overdraft of $428,431.
   After independently determining much of the preliminary information, the examiners received an anonymous "tip" that there was kiting activity in the Camco account. Upon review of Camco's deposit slips, balance sheets, cancelled checks, and other documents, the examiners came to the conclusion that such a kiting operation had in fact existed, and had increased dramatically in amount. Prior to completion of the examination on or after March 29, 1990, Senior Management had admitted that a kiting had in fact taken place, and that it resulted in an overdraft of approximately $428,000. The County Bank had obtained an independent investigation by an auditor specializing in such matters, and by an independent law firm also specializing in such matters, confirming the kiting activity. The County Bank granted Campbell a loan to cover the amount of the overdraft, plus fees and costs, in the amount of approximately $427,431, secured by second and third trusts on certain properties.
C. Testimony of Independent Investigator
   County Bank had obtained an independent audit report as to the kiting from Frieze & Company, bank examiners, and also retained Brian Bird (Bird), an attorney with the firm of Fried, Kind, Holmes & August, of Los Angeles, California, specializing in banking matters including litigation and special investigations. Mr. Bird reviewed basically the same documents referred to by the FDIC bank examiners, and conducted interviews with Respondent, and Messrs Millen, Mineni, Morehouse, Foster, Anderson, and Prather. His relevant testimony included, in addition to findings of a scheme perpetrated by Campbell with the participation of Respondent to obtain the benefit of uncollected funds through overdrafting and check kiting, the following matters:
   From the inception of the Camco account in 1983, Campbell would call in to the bank to speak with Foster, Morehouse's predecessor at the Downtown Branch, on an almost daily basis to determine what the potential overdraft situation might be, after which he would arrange for additional deposits and/or "direct" Foster as to which items to pay.
   From 1988 on, after the Copper Tree dissolution, there were standing instructions from Respondent that the Downtown Branch was to reprocess, i.e. put through again, all Camco checks returned by other banks due to insufficient funds to honor.
D. Testimony of Morehouse
   As Operations Officer, Morehouse had a personal authority to approve deposits of any amount, and authority to approve payment of overdrafts up to $1,000. For overdrafts in excess of that figure, he was normally required to have Anderson, the Branch Manager, give approval for up to $5,000. Beyond that figure, Anderson was to have obtained Respondent's approval. However, pursuant to Respondent's direction, acquiesced in by the Branch Manager, Morehouse called Respondent directly for approval on payment of overdrafts. (TR I, 131-32, 183-84.) The County Bank generates a NSF (Not Sufficient Funds) Report of checks arriving to be honored which are for amounts above the payee's current balance. Respondent's instructions to Morehouse were to reprocess these checks as deposits were re-

3 Toward the end of the period the specific amounts of the checks were begun to be varied, first as to exact dollar amounts, and finally to the addition of some dollar fractions so that the match was no longer perfect.
{{12-31-92 p.A-2099}}ceived from vouchers for work in progress, or deposited from other Camco or Campbell accounts at other institutions, by giving such deposits immediate credit. Morehouse believes that starting in 1989, Respondent saw both the returned checks and the NSF reports, which Respondent denied.
   On March 5, 1988, Morehouse directed a written memorandum to Respondent, entitled "Returned items/Kiting on CAMCO" (FDIC Ex. 5, underscoring added), stating in full:
       Jim, I just want to touch base in reference to Bob Campbell' account. Bob has been depositing checks from his account at Guarantee Savings to his account at County Bank to cover NSF items. We have been getting these checks after they come back to us. I just want to know if we should continue to take these checks or limit/ eliminate taking them for deposit. I'm concern (sic) about possibly (sic) taking a loss sometime in the future. I don't know if Bob has talked to you about this. Please advise me on what should be done.
   Respondent orally advised Morehouse that he had told Campbell to discontinue the practice, and that Morehouse should continue as previously. Morehouse spoke to Respondent "pretty much daily," which Respondent denies, with Morehouse advising Respondent "what was coming in and what was being deposited, and we would normally pay the checks off those funds" (TR IV 134), but on April 15, 1988, Morehouse addressed another memorandum to Respondent, entitled "Returned items/Kiting on CAMCO," (FDIC Ex. 6, underscoring added), stating in full:
       This is a follow-up to my Memo dated 3-5-88 concerning Bob Campbell's account: (Camco). Bob is still depositing checks from Guarantee Savings which usually don't clear and come back to us NSF. He has been covering these checks eventually with good funds. I'm not sure if you have something worked out with him or not. Please advise if this should not continue.
   Again, Respondent orally advised Morehouse he had spoken to Campbell, and that Morehouse should continue as previously. On January 13, 1989, Morehouse again directed a memorandum to Respondent, entitled "Robert Campbell dba Camco Development" (FDIC Ex. 7), stating in full:
       Jim, I am encountering some problems with Bob Campbell's account. I would like to get a clarification on how I am to handle his account. In the past we have helped Bob out by reprocessing (PTA)4 checks that he could not cover. I have been told by Dennis, that we cannot do this, because of the potential loss to the bank. However, as you know we have been doing this off and on for the past several months.
       I am glad to do whatever is decided, but do not want to be the one making the decision. Yesterday (1-12-89) I was left in that position because Bob could not get in contact with you. This left me a very awkward position. Please get with Dennis and give me some guidelines to follow when this situation arises again.
       Furthermore, I am going to let Bob know that he must have his deposit in by our cutoff time of 12:30, so I don't delay the processing of the rejects. I have been waiting past the cutoff time for him to pick up checks to deposit and also for the note department to decide how much they are going to put in from vouchers. Please let me know what is decided as soon as possible. Thanks for your help!
   Again, Respondent instructed Morehouse to continue the same practice, (TR IV, 136) and Morehouse responded with another memorandum, dated February 13, 1989, with enclosures and with copy to Darcy Foster, entitled "Camco Development - Bob Campbell: Returned Items (Kiting)" (FDIC Ex. 8, underscoring added), stating in full:
       Kim, once again Bob Campbell is starting to deposit his own checks drawn on his personal accounts at other S & L's. He has accounts at Gibraltar Savings and Stockton Savings. Recently these checks have started coming bank, NSF. Darcy called me on Friday 2-10-89, wanting to know if we are accepting these checks for deposit I inform (sic) Darcy that I wasn't sure. I feel we need to resolve this so that Darcy and I are not left in a position to make a (sic) ill advised decision. Dennis had told me a few months ago not to ac-

4 PTA apparently stands for "put through again," referring to the practice of resubmitting for payment checks previously dishonored for insufficient funds to cover.
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    cept Bob's personal checks for deposit. I was unaware he was depositing these checks until we received some of them back recently. For Darcy's and my protection please advise us in a memo how you want to handle this matter. I mentioned this to Bob today and he told me he was going to talk to you about this.
   Morehouse received no reply from Respondent5, but did receive a memorandum dated February 22, 1989, from Mineni, the County Bank's Senior Vice President and Financial Officer, addressed to Morehouse and to Darcy Foster, with copies to Respondent and to Millen, the County Bank's President, entitled "Deposits of CAMCO/ Robert Campbell" (FDIC Ex. 9), and stating in full:
       On a couple of occasions, Robert Campbell has deposited checks drawn on accounts in his name from Stockton Savings and Gibraltar Savings into CAMCO. I don't know how many have been deposited but I do know that at least three have been returned "NSF".
       As of this date, do not accept checks, for deposit or any other reason, drawn on these or other banks on accounts in Campbell's name.
       It can be assumed that this is a small kite but like any kite, it could become sizeable.
       Please call me if you have any questions regarding this memo.
   On February 23, 1989, County Bank's President, Millen, sent a memorandum drafted by Mineni to Branch Manager Anderson (FDIC Ex. 10), with copy to Respondent but not to Morehouse, stating in full:
       The policy of the Bank regarding items presented against insufficient funds is either pay or return the item the day it is presented. The practice of "putting through again" items rejected for insufficient funds exposes the Bank to potential loss. Additionally, it sends a conflicting message to our employees, may cause a double charge to the customer, and possible criticism by our auditors and/or the regulators.
       There are no circumstances that justify putting an item through again. If the customer is worthy of some risk, pay the check; if not, then return it.
       Specifically, the account of CAMCO has had numerous exceptions to this policy. In this case, the Board of Directors, through management, has sent a directive to CAMCO not to write checks if funds are not in the account and a directive to management that no checks are to be paid that would cause an overdrawn status of the CAMCO account.6
       Any instructions from any individual contrary to this should be referred to me immediately.
       Please feel free to call me if you have any questions regarding this memo.
   Morehouse testified that for the next several months "we had stopped taking those for deposit...(and) I noticed towards the beginning, middle of September that he opened up another account elsewhere and started this practice again." Morehouse again spoke to Respondent, and as a result of the conversation continued taking those checks with immediate credit. (TR I. 137-38) He did, however, send another memorandum to Respondent dated September 26, 1989, with copies to Branch Manager Anderson, and to Darcy Foster, entitled "Camco Development - Bob Campbell: (Kiting)" (FDIC Ex. 11, underscoring added), stating for the most part:
       Jim, I want to let you know that a possible KITE situation involving CAMCO - Bob Campbell maybe (sic) developing....
       He transfers funds from his El Capitan line of credit to his check account. He then writes a check off the El Capitan account and deposits it into our account, (County Bank). These deposits are used to pay incoming NSF items on his County Bank account.
       Until recently, everything was alright (sic). However, on 9-15-89, a check from Mr. Campbell's account in Oakdale7 was returned to us NSF, ($28,000.00). We reprocessed the check, and have not received it back. Apparently, the check cleared his Oakdale account....
       Because of our past experience with Mr. Campbell's account and the way he is known for handling it, I'm concerned

5 See hereinafter Respondent's testimony, admitting receipt of prior memoranda and the final memoranda from Morehouse, but denying receipt of this and of Mineni's and Millen's memoranda.

6 There are no copies, documents, or other evidence regarding these directives in the record.

7 El Capitan Bank is located in Oakdale, California.
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       about the potential problem of checks being returned to us. Please notify me on what you feel is the best way to handle this situation. Until I hear from you I will continue to monitor his account.
   The uncollected funds activity continued until the end of February, 1990, as hereinafter reported growing in amount exponentially while Respondent was on vacation, until in March of 1990, Morehouse received a phone call from either the Federal Reserve Bank or the National Bank "saying they are returning two large checks, totalling over $200,000." Morehouse thereafter ordered the discontinuance of taking any further checks for deposit. (TR I, 140.)

E. Respondent's Testimony

   Respondent received Morehouse's memoranda dated March 5, 1988, April 15, 1988, and January 13, 1989 (FDIC Exs. 5, 6, and 7). In each instance he had a conversation with Campbell, telling him to discontinue such practice. Respondent "...told him to get his, stop writing checks against insufficient funds." (TR IV, 50.) Respondent then would report this to Morehouse orally without further direction or instruction. At one point he contemplated closing Campbell's account, but "Then I — on the other hand we have a $2,100,000 obligation and this, I felt, was a way of me retaining his account, was a way of controlling him and knowing what was going on and also having a leash on him. And I felt if I terminated the account, we would be faced with a substantial loss by MAIN on Copper Tree." (TR IV, 22.)
   Respondent entered the hospital on February 16, 1989 and was out of the office for "one week at least." In his absence, Millen, the President, covered his desk. Respondent testified that upon his return he did not see Morehouse's memorandum of February 22, 1989, Mineni's memorandum of February 23, 1989 or Millen's memorandum of February 23, 1989 (FDIC Exs. 8, 9 and 10 respectively).
   Respondent admitted receiving More-house's memorandum of September 26, 1989 (FDIC Ex. 11), and advised Morehouse that he could continue accepting for immediate credit checks from Campbell's other account, "but be sure that no checks were going back the other way." (TR IV, 32.) During this period Respondent was in contact with Campbell at least several times a month, or weekly, because he recognized that Campbell's overdraft activity was increasing. (TR IV, 83–84.) Respondent was telling Campbell to discontinue issuing checks against insufficient funds. (TR IV, 85–86) and was, by his testimony, in contact with Morehouse only infrequently, neither daily nor weekly (TR IV, 39–40), which is contradicted by Morehouse's testimony.8 In February, 1990, Respondent prepared documents for a direct loan to Campbell in connection with another loan from a third party to put more capital into Camco, but for various reasons that third party loan failed, and the County Bank did not finalize a further loan to Campbell. (TR IV, 87–88.) In his conversations with More-house during this period Respondent did no more than give directions to pay or to return incoming checks9 so as to stay within the limits of Respondent's authority to permit overdrafts. (TR IV, 43, 48–49.) In late February, 1990, Respondent took a two week vacation and was not at the County Bank.

F. Additional Testimony

   The FDIC additionally produced the testimony of David Promani, FDIC Review Examiner, Sacramento, and Donald Pfeiffer, FDIC Assistant Regional Director, San Francisco. Respondent also produced the testimony of Millen, Mineni and Anderson. The testimony of these witnesses will be cited as required within the "Discussion" portion of this Recommended Decision. Respondent also called Campbell as its witness, but Campbell respectfully refused to answer any questions pursuant to the Fifth Amendment of the Constitution of the United States.


A. Standard of Proof

   Respondent argues on brief that the proper standard of proof is "beyond a reasonable doubt."10 The argument has no merit, as the

8 Respondent does not explain how he would know Camco was increasing its overdrafting, or depositing checks drawn on insufficient funds, if he was neither examining documents nor being advised thereof of Morehouse.

9 It is not clear whether Respondent was referring to returning checks for insufficient funds, or returning checks for second deposit, i.e. "put through again."

10 The argument is based on Woodby v. Immigration and Naturalization Service, 385 U.S. 276 (1966).
{{12-31-92 p.A-2102}}proper standard of proof to be applied is the "preponderance of the evidence" test.11

B. Elements of the Violation Charged

   The Notice instituting this proceeding, as based upon the underlying statute, charges Respondent, as an institution-affiliated party, with having directly or indirectly (1) engaged or participated in unsafe or unsound banking practices, or breached his fiduciary duty as an officer of the insured depository institution, and (3) such action either involved personal dishonesty or demonstrates willful or continuing disregard for the safety or soundness of the depository institution.

1. "Unsafe or Unsound Banking
and "Fiduciary Duty"

   [.1] The Notice specifically alleges Respondent engaged in unsafe or unsound practices by "aiding, abetting, and/or participating in a scheme perpetrated by Campbell and/or Camco to receive the benefit of uncollected funds from approximately March, 1988 through March, 1990." The phrase "unsafe or unsound banking practices" is not defined in 12 U.S.C. § 1818, but as reflected in the legislative history of the Financial Institutions Supervisory Act of 1966, both Houses of Congress cited with favor the view of then Chairman of the Federal Home Loan Bank Board, John Horne, who stated:

       Generally speaking, an "unsafe or unsound practice" embraces any action or lack of action which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk of loss or damage to an institution, its shareholders, or the agencies administrating the insurance funds.12
Accord, First National Bank of Eden v. Comptroller of the Currency, 568 F.2d 610, 611 n.2 (8th Cir. 1978), that:
       Unsafe and unsound banking practices... encompass what may be generally viewed as conduct deemed contrary to accepted standards of banking operation which might result in abnormal risk or loss to a banking institution or shareholder.13
Thus, "(t)he phrase `unsafe or unsound banking practice' is widely used in the regulatory statutes and in case law, and one of the purposes of the banking acts is clearly to commit the progressive definition and eradication of such practices to the expertise of the appropriate regulatory agencies."14
   The phrase "fiduciary duty" has for over ten decades been generally defined as the requirement that care be exercised "which ordinary prudent and diligent men would exercise under similar circumstances."15 Bank officers, however, have been subjected to a higher standard of duty, to act honestly, fairly, and for the best interests of the bank, and that "Generally, the duty requires that bank officials...act as prudent and diligent persons would act...complying with state and federal banking laws...(The duty) requires the proper supervision of subordinates...While this standard of care for bank directors and officers, like the standard of care in negligence cases, is expressed in constant terms, the nature of the duty varies according to the facts. The greater the authority of the director or officer, the broader the range of his duty; the more complex the transaction, the greater the duty to investigate, verify, clarify and explain."16
   From the above it is clear that the indicia of engaging in unsafe or unsound banking practices, or violating the fiduciary duty of a bank officers, include those actions, or inactions, contrary to generally accepted standards of diligent or prudent operations required to avoid abnormal risk of loss or damage to the institution, its depositors, or the agencies administering the insurance funds, and further, that this includes the duties to properly supervise subordinates, and to comply with state and federal banking laws.

11 Steadman v. Securities and Exchange Commission, 450 U.S. 91, 95, reh'g denied (1981); In the Matter of Stanley A. Smith, FDIC-90-182jj, 2P-H Enforcement Decisions, A-1697 (March 9, 1991); In the Matter of Paul E. Oberstar, FDIC 89-83e, 2 P-H Enforcement Decisions, A-1829, A-1841 (November 26, 1991); In the Matter of Frank E. Jameson, FDIC-89-82e, 1 P-H Enforcement Decisions, A-1541 (June 12, 1990); and In the Matter of ***, FDIC-86-56e, 2 P-H Enforcement Decisions, A-1187, A-1194 (January 19, 1988).

12 See 112 Cong. Rec. 26474 (1966), 24984. See also Gulf Federal Savings and Loan v. Federal Home Loan Bank Board, 651 F.2d 259, 263-64 (5th Cir. 1981), cert. denied, 458 U.S. 1121 (1982).

13 Cited in First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 685 (5th Cir. 1983).

14 Gross National Bank v. Comptroller of the Currency, 573 F.2d 889, 897 (5th Cir. 1978). See also, Independent Bankers Association v. Heimann, 613 F.2d 1164, 1168-69 (D.C. Cir. 1979).

15 Briggs v. Spaulding, 141 U.S. 132, 152 (1891).

16 In the Matter of ***, FDIC-85-356e, 2 P-H FDIC Enforcement Decisions, A-1229, A-1235 (March 1, 1988).
{{12-31-92 p.A-2103}}
a. Overdrafting

   The specific methods of permitting Camco to receive the benefit of uncollected funds were twofold. First, there was the standing order to in all instances grant Camco the general privilege of County Bank's depositors of immediate credit on deposited checks prior to collection, coupled with the standing order unless otherwise advised to "reprocess" Camco's outgoing checks returned for insufficient funds.
   As testified to by Branch Manager Anderson, the general rule of immediate credit to customers was neither absolute, nor without in-place review. Thus, a customer presented his checks for deposit to the teller, who exercised a personal discretion of whether or not to accept the item for immediate credit prior to collection on sums up to several thousand dollars, depending on the individual teller's experience. Where the sum exceeded that figure, the specific approval of the Operations Officer, Morehouse, or his assistant, was required, and could be given for unlimited sums. The privilege could also be refused, or in the event that through some error the check was accepted without approvals, it could still be held by the bank "subject to collection." (TR III, 17.) To believe that the County Bank guaranteed all customers immediate credit under all circumstances in disingenuous.
   Secondly, when a customer issued a check in a sum which the account could not cover, upon its NSF return bank officers had the option, up to $5,000 at the Branch and up to $25,000 for the first level of review at the main office, to either return the check dishonored, or to pay the amount and permit an overdraft. Though it did in fact occur in the Camco account, the policy of the County Bank specifically disapproved "putting the check through a second time." (FDIC Ex. 10.)
   Permitting a customer frequently, much less continuously, to maintain an overdraft constitutes a willful disregard for the safety and soundness of a bank.17 Over a lengthy period, whether it be considered only the last four and a half months, or the full last two years of the Camco/Community Bank relationship, Respondent knowingly participated in almost constant overdrafts, and even permitted employees whom he supervised to participate, in a willful violation of his duty.

b. The Nature of a Kite

   Still another option for allowing the benefit of uncollected funds is to permit the customer to kite a check by supposedly depositing funds from another of the customer's accounts for immediate credit, thus reducing the amount of overdraft even though the other account itself had insufficient funds to cover.
   "Kiting" of checks is defined similarly both in common usage18 and as a term of art19, as obtaining use of funds through hypothecating credit granted for uncollected deposit of a check which will be dishonored upon presentation. Its usual form is the deposit in one account of the depositor of a check to the order of the depositor, drawn on an account of the depositor in another financial institution. It is not short term in nature, as usually is an overdraft, but may extend undetected as long as the perpetrator can continue a circular system of deposits to withdraw and cover within the time for presentation and payment. It requires continued withdrawals and deposits between accounts within the short time periods for as long as the need for unauthorized credit exists. It is frequently an act of financial desperation, planned to be used only until some outside event transpires which extinguishes the need for unauthorized credit, and as that event fails to take place generally requires that the amount involved be increased. If done over a short period, within the time frames required, between sufficient number of accounts, it may go undetected. As FDIC Review Examiner Promani, whose expert duties are to process, evaluate, and analyze Reports of Examination prepared by Field Examiners, graphically and poetically testified, "...the cleanest kites, you never see ...The whole idea of the kite is to create

17 In the Matter of ***, FDIC-87-61e and FDIC 87-62k, 2 P-H FDIC Enforcement Decisions, A-1236 (April 25, 1988).

18 Webster's Ninth New Collegiate Dictionary (1990), 4th meaning of "kite" being "a check drawn against uncollected funds in a bank account..."

19 Barron's Dictionary of Banking Terms (1990), at 119, "drawing against balances credited to uncollected checks"; Brady on Bank Checks, Henry J. Bailey (6th Edition, 1987), § 1811, "a continuous interchange of worthless checks between at least two accounts at separate banks."
{{12-31-92 p.A-2104}}it so the paper is kept flying in the air. There is where it gets its name." In other words, one might say that a perfect kite never lands.
   However, if the party becomes careless, exceeds the time limits, has too few accounts with which to operate, or requires sums too large to be overlooked, detection is fairly certain. If the party has a participating bank employee, the possibility and length of time of survival of the kite is increased. When all the paper credit generated can no longer remain circulating "in the air" at the same time, the kite crashes, accounts are settled, and the losers and amounts of loss are determined.
   The existence of Camco's scheme was confirmed on or about March 5, 1990, when Campbell admitted to the County Bank that he had instituted an operation at the County Bank whereby he was receiving the benefit of uncollected funds. He was subpoenaed as a witness by Respondent, but respectfully refused to answer all questions under the protection of the Fifth Amendment to the United States Constitution.

c. Overdrafting and Kiting as Breaches of Fiduciary Duty

   That both overdrafting and kiting are actions contrary to generally accepted standards of diligent or prudent operations is virtually self explanatory. To again quote Review Examiner Promani, the attributes of kiting, equally applicable to overdrafting, are that:

       ...You are granting immediate credit and paying items against that. You are creating probably what is the most liberal form of lending. There is no note involved. No evidence of debt or promissory note. There is no collateral involved. There are no terms set.... (I)t typically escalates in size and expands. So the longer you allow it to continue, the greater the volume of exposure that is created. (TR II, 185–186.)
The risks involved in permitting such loan conditions are obviously greater than the norm in banking, and the possibilities of loss to the financial institution or its depositors or to the insuring institution have in this proceeding certainly been shown to be greater than normal or acceptable.

d. Respondent's Participation

   From as early as March 5, 1988, Camco's account was being continuously granted immediate credit for deposit of highly questionable checks, and the existence of a kite on the Camco account was suspected by Morehouse. As a subordinate, Morehouse reported his suspicion to the Respondent. Morehouse (1) approved amounts of deposits over the maximum permitted to tellers, (2) could see from deposit skips the source and amounts of the deposits, (3) could see the current status of the County Bank account as deposits were made, (4) later could see which of the deposits had been dishonored by the bank on which issued, and (5) could compare the amounts of checks deposited with the amounts of overdrafts, and the amounts of checks issued to the amounts of checks from the Camco accounts deposited to cover. He thus could see the entire chain of events in which checks were issued against insufficient funds, covered by checks deposited from another account by the same party payable to his own entity, and particularly which of these covering deposits by themselves were based on insufficient deposits to pay. Morehouse properly reported the facts to his senior management supervisor, the Respondent, as part of his special instructions regarding this account, without going through the Branch Manager. Morehouse directly pointed the finger at what he first suspected and eventually knew to be a kiting operation, and he did so on March 5, 1988, April 15, 1988, January 13, 1989, February 13, 1989, and September 26, 1989. He did it without going beyond the limits of his "chain of command," even though he recognized the danger of personal responsibility, and he did it even though his continuing pleas for specific written directives which would exculpate him were never responded to. While it might be said that Morehouse should have gone directly to the Board of Directors, he certainly displayed more integrity, loyalty, and personal courage than any of the others involved in this sorry drama.
   Despite his denials, it is obvious that Respondent also came to know, if he did not in fact know from the beginning, that the Camco account was being granted excessive overdrafts and manipulated by a kite. Overdrafts were admittedly Respondent's specific line of responsibility. Further, I accept the credibility of Morehouse's testimony that at least from the middle of September, 1989, until Respondent left on vacation in February, 1990, he and Respondent engaged in telephone conferences virtually if not actually daily, during which Respondent was fully
{{1-31-93 p.A-2105}}apprised, if he did not in fact have the bank records delivered to him, of the balance of Camco's account, the number and amounts of NSF returned checks which would and did result in overdrafts if honored, the amounts of checks presented for deposit and which were from other Camco accounts in other institutions, and which of those other accounts had the previous day or so given checks which had to be returned to County Bank as NSA. Even if Respondent, as he claims, did not have sufficient information before him to necessitate further investigation on his part. Even if the existence of a kite were not within his direct area of supervision, as claimed by Respondent, as part of senior management he certainly had an obligation to properly supervise subordinates, to not only look into the reports of a kite but to report it to any other management party with direct responsibility, which he never did.
   Respondent acknowledged receipt of all of Morehouse's memoranda but for that on February 13, 1989. Respondent also denied ever having received the memoranda from Mineni and from Millen. Even if it is credited that he did not received these three documents it was certainly Respondent's duty, as part of senior management, as the individual charged with the obligation of not only overdraft protection but with the entire Camco repayment/banking/MAID/loan/ checking relationships, to look into the matter, to determine the facts as did the FDIC examiners, the independent auditor, and the independent attorney-investigator, and to take action, if not to protect Morehouse or himself then to protect the County Bank, its depositors, and eventually the federal insuring agency. To give superior loyalty to MAID, by seeing that Camco's obligations to MAID might be satisfied even if by a criminal act endangering the County Bank, is far from fulfilling the fiduciary duties of an affiliated party.
   2. Loss or Damage, and Gain or Benefit

   [.2] The statute, 12 U.S.C. § 1818(e) (1)(B), sets forth in the alternative three prerequisites, any one of which may be presented to prove violation. One is that the insured depository institution has suffered or will probably suffer financial loss or other damage, another is that the interests of the institution's depositors have been or could be prejudiced, and the third is that the party committing the violation received financial gain or other benefit as a result.
   Respondent would have us consider, in regard to these tests, that he was working for the greater good of the institution, in seeing that Camco's debt to the institution's non-banking subsidiary might be recovered. In view of current bank deregulatory trends, this is a defense which we may see a great deal more of in the future, but it is the finding of this Recommended Decision that it be given the short shrift it deserves. If there are any grounds on which banking officers are held to a higher standard of care in banking than are corporate officers of other commercial operations, then these standards must not be cheapened in the name of diversification to non-banking commerce. "Bad money drives out good," states Gresham's law, and lower standards of care are certain to drive out higher standards of care. The fact that Respondent held dual capacities in banking and in non-banking enterprises does not reduce his standard of care to the bank, to its depositors, or to the regulatory agencies insuring those depositors.
   Respondent would next argue that the extent to which the loss and damage to the institution have been decreased must also be taken into consideration in establishing whether the act constitutes a violation, or the seriousness of the violation. The argument can not be taken seriously. It is arguing that when discovering that a teller has been dipping into the till to bet at the race-track you should take no action because he might hit a winner the next day and repay at least a portion of the amount taken.
   The fact is the County Bank suffered a loss in the sum of $428,431 as of March 5, 1990. The loss was directly attributable to Robert Campbell and/or Camco having been given the benefit of uncollected funds through overdrafting and kiting of checks. In addition, the Senior management lost some of the respect and confidence of the Board of Directors, of the bank staff and of the depositors. The overall effect of all this certainly was also contrary and prejudicial to the interests of the depositors. Since the evidence of loss, damage, and prejudice to the County Bank and its depositors is so strong, it is not necessary to make a finding of personal benefit to Respondent, of which the evidence is minimal.
{{1-31-93 p.A-2106}}
   3. Willful and Continuous Disregard, or Personal Dishonest

   [.3] The same statute, subsection (e)(1)(C), also sets forth in the alternative two prerequisites, either of which must be proven to have been involved in the violation, and they are that the violation "demonstrates willful or continued disregard... for the safety or soundness of such insured depository institution...," or that the violation "involves personal dishonesty on the part of" the institution-affiliated party.
   It will not be necessary to consider Respondent's personal honesty, as his actions have been amply proven to have been willful and continuous as well as having been in disregard of safe or sound banking practices and of his fiduciary duty.


   In view of all the above, the following Conclusions of Law are hereby recommended:
   1. The County Bank is subject to the Federal Deposit Insurance Act. At all times pertinent to the charges set forth in the Notice, Respondent was an institution-affiliated party of the County Bank. The Federal Deposit Insurance Corporation has jurisdiction over the County Bank, over Respondent, and over the subject matter of this proceeding.
   2. Respondent has both directly and indirectly engaged and/or participated in unsafe or unsound banking practices in connection with County Bank.
   3. Respondent has committed or engaged in acts, omissions or practices which constitute breaches of his fiduciary duty as an officer of the County Bank.
   4. By reason of Respondent's unsafe or unsound banking practices and/or breaches of fiduciary duty, the County Bank has suffered financial loss and/or other damage, and the interests of its depositors were prejudiced.
   5. Respondent's unsafe or unsound banking practices and/or breaches of fiduciary duty demonstrate Respondent's willful or continuing disregard for the safety or soundness of the County Bank.
   6. An order in the form recommended and attached hereto and made a part hereof should issue against Respondent pursuant to the provisions of section 8(e) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(e), prohibiting Respondent from further participation in the conduct of the affairs of the County Bank, and any other insured depository institution or organization listed in section 8(e)(7) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(e)(7), without the prior written approval of the FDIC and such other appropriate Federal depository institution regulatory agency.
   /s/ Walter J. Alprin
   Administrative Law Judge
   Office of Financial Institution

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