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FDIC Enforcement Decisions and Orders |
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FDIC Board adopts ALJ's recommendation to prohibit respondent from
further participation in affairs of insured institutions because he was found
to have engaged in unsafe or unsound practices, violations of Regulation O and
breaches of fiduciary duty. These actions exhibited disregard for the safety
and soundness of the bank, and resulted in personal benefit to respondent and
losses to the bank.
[.1] Prohibition Factors Determining
Liability Disregard for Safety and Soundness
Respondent's misconduct regarding his own loans and the significant
outflow of capital to his affiliate organizations in the form of tax
payments and dividends to the holding company of which he was sole shareholder,
and excessive fees to accounting firm of which he was principal
demonstrated abusive self-dealing and deliberate disregard for the bank's
safety and soundness.
[.2] Prohibition Factors Determining
Liability Loss to Bank
The effects of respondent's misconduct, financial gain for himself and
substantial loss to the bank, support his prohibition from further
participation in banking.
[.3] Prohibition Factors Determining
Liability Personal Gain
Where there is a conflict between a bank director's personal interests
and those of the bank, the director's primary duty is to the bank. One who
uses his position to benefit personally at the bank's expense merits
prohibition from participation in the affairs of any institution. [.4] Prohibition Scope of
Prohibition
A consultant who participates in the conduct of affairs of an institution is an
institution-affiliated party; and even if respondent is no longer an institutionaffiliated party, he is still prohibited from "participating in any manner" in the
affairs of any insured institution without first securing the written permission of
the FDIC.
In the Matter of
The Federal Deposit Insurance Corporation ("FDIC") issued a Notice of
Intention to Prohibit From Further Participation (" Notice") against Thomas K.
Benshop ("Respondent"), on October 18, 1991, based on allegations that
Respondent had engaged in unsafe or unsound banking practices, violations of
law and regulation, and breaches of fiduciary duty. The Notice sought to
prohibit Respondent from further participation in the conduct of the affairs of
The Colorado State Bank of Walsh, Walsh, Colorado ("Bank"), and any other
insured depository institution, as provided by section 8(e)(7) of the Federal
Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(e)(7) (1989). The
Notice was issued pursuant to section 8(e) of the FDI Act, 12 U.S.C. §
1818(e), and Part 308 of the FDIC's Rules of Practice and Procedures, 12 C.F.R.
Part 308.1 The Notice alleges that the
Respondent engaged in unsafe or unsound banking practices in connection with
his role as president of the Bank, and that he breached his fiduciary duty as a
director of the Bank by the payment of a series of improper dividends and
income tax payments or other fees to entitles under his control. The Notice
further alleges that, as a result of the unsafe or unsound practices and
breaches of fiduciary duty, the Bank suffered substantial financial losses or
other damage, and/or that the interests of the Bank's depositors were seriously
prejudiced. Notice at 3-19.
The Notice also alleges that Respondent has received financial gain to
the detriment of the Bank in the amount of $404,713. The Notice states that
Respondent's conduct demonstrates a willful or continuing disregard for the
safety and soundness of the Bank and, as such, is evidence of the Respondent's
unfitness to participate in the affairs of the Bank or to participate in the
conduct of the affairs of any other federally insured depository institution.
The Notice seeks to prohibit Respondent from further participation in the Bank,
and seeks to bar him from further participation in the affairs of any federally
insured depository institution.2
A hearing was held in St. Paul, Minnesota, on May 6 and 7, 1992, before
Administrative Law Judge Arthur L. Shipe ("ALJ"). The ALJ filed his
Recommended Decision with the Office of the Executive Secretary on September
18, 1992, in which he found upon the record as a whole that Respondent should
be prohibited from further participation in the affairs of federally insured
financial institutions. R.D. at 1.3 Neither
party filed Exceptions to the ALJ's Recommended Decision.
For the reasons set forth in detail below, after careful review and
analysis of the complete record in this proceeding, the Board of
2 Because Respondent resigned from the
Bank on January 17, 1990, only the bar from participation in the affairs of any
federally insured institution is at issue here.
3 Citation in this Decision shall be as
follows:
The facts of this proceeding are not materially disputed. Respondent has been a Certified Public Accountant since at least 1970,
with twenty-two (22) years of experience in the banking industry. Respondent
held controlling interests in two bank holding companies, four banks, and
numerous investment, consulting, and accounting enterprises, many of which were
either directly or indirectly affiliated with his various banking interests. R.D. at 2.
In September 1979, Respondent became president and sole shareholder of
Walsh Bancorporation, Inc. (hereinafter "the holding company"), a one-bank
holding company owning 100 percent of the outstanding common stock of the Bank.
Respondent acted as personal guarantor, and the holding company financed the
acquisition of the Bank by pledging all of the Bank's stock as security for a
loan extended by the United Bank of Denver National Association, Denver,
Colorado ("United Bank"). R.D. at 3.
As president of the holding company that was the sole stockholder of
the Bank, the Respondent would convene the annual stockholders' meetings, and
install and remove the Bank's directors. He would also establish fees,
compensation, and authorize, establish, and ratify various Bank practices. R.D.
at 3. Respondent controlled the Bank and its board of directors, the holding
company, and various affiliated organizations. Respondent's affiliated
accounting firm. Thomas K. Benshop, P.A., was the Bank's and the holding
company's sole provider of accounting and tax services until 1990.
On June 18, 1987, when Respondent was appointed to the board of
directors of the Bank, his affiliated enterprises were experiencing significant
financial losses, characterized in the record as "cash flow problems." R.D. at
4. Respondent remained a director, president, and chief executive officer of
the Bank until he resigned on January 17, 1990.
Respondent was personally indebted to the Bank. In 1978, he was
extended two personal loans from the Bank, totalling $140,000, for the purpose
of funding his short-term cash needs and those of his affiliated businesses,
whose stock secured the loans. In 1992, these loans were classified
substandard for more than a normal risk of repayment, largely due to
Respondent's deteriorating financial position. 4
R.D. at 4. Between 1982 and 1987, Respondent's outstanding loans from the
Bank, repeatedly classified substandard by the FDIC, were consolidated and
restructured several times.5
As of November 1989, Respondent had an outstanding balance of $95,000
on a prior loan from the Bank. R.D. at 19, F.F. No. 26. On or about November
6, 1989, the Bank loaned Respondent an additional $4,500 for his operating
expenses. R.D. at 19, F.F. No. 28; Resp. Ex. 5; Tr. II at 166. This loan
violated Regulation O of the Board of Governors of the Federal Reserve System,
12 C.F.R. § 215.4(a)(2), because it involved more than the normal risk of
repayment and presented other unfavorable features. R.D. at 19, F.F. No. 29.
On February 16, 1990, the Bank charged off $99,500 in loans to Respondent,
including $4,523.57 in principal and interest on the November 6, 1989 loan.
R.D. at 19, F.F. No. 30.
Respondent was also responsible for a significant outflow of the Bank's
capital in the form of dividends, fees, and tax payments to certain affiliated
corporations under his control.
During 1988 and 1989, the Bank paid dividends totaling $256,674.40 to
Respondent or entities he controlled. R.D. at 30, F.F. No. 82. No restrictions
were in place at the Bank to limit the payment of dividends and the Bank's
overall condition and earnings at the time made the payment of dividends an
5 Respondent's obligation to another
federally insured financial institution, United Bank also underwent
restructuring. In 1987, United Bank initiated a foreclosure proceeding to sell
the Bank's stock which Respondent averted through certain renegotiations. R.D.
at 5. In 1986 and 1987, the Bank was criticized for excessive and improper
tax payments calculated by Thomas K. Benshop, P.A., Respondent's accounting
firm. R.D. at 30, F.F. Nos. 84, 86; Tr. I at 59. Examiners advised the Bank
in 1986, 1987, and 1988 to retain an independent accountant, but Respondent and
the Bank rejected this advice. R.D. at 3031, F.F. Nos. 8692. One
of the matters on which Respondent gave improper tax advice involves a series
of tax payments, totaling $101,766.02, that the Bank made to Respondent's
holding company at the direction of his accounting firm for fiscal year 1989.
R.D. at 3233, F.F. Nos. 93 and 99. These income tax payments were
recorded on the Bank's books as an uncollateralized loan of $100,353.13 to the
holding company. R.D. at 3233, F.F. Nos. 95, 97. A cover letter dated
November 1989, forwarding the holding company's tax return to the Bank,
acknowledged that the holding company owed the Bank a refund for excess tax
payments of $101,766.02. The return itself stated that the holding company and
its subsidiaries owed no taxes to the Internal Revenue Service. R.D. at 34,
F.F. Nos. 106 and 107.
For fiscal year 1990, the holding company owed the Bank $41,750 for
excess income tax payments. R.D. at 32-33, F.F. Nos. 94, 96; Tr. I at 165; Tr.
II at 5960. The holding company did not provide collateral to the Bank
and has been unable to repay both of these overpayments, totaling $143,516.02.
R.D. at 35, F.F. No. 109. Respondent benefited from these improper income tax
payments constituting unsecured extensions of credit in violation of section
23A of the Federal Reserve Act, 12 U.S.C. § 371c. R.D. at 35, F.F. No.
III. A portion of the total, $99,744.54, was charged off the Bank's books on
February 16, 1990. R.D. at 35, F.F. No. 110.
As stated above, the Bank failed to retain independent accountants from
1987 through 1989. R.D. at 3541. Examiners had criticized Respondent's
accounting firm because fees had been excessive, a written contract had not
been executed, and the Bank was billed for services ordinarily performed by
bank directors or employees. R.D. at 36, F.F. No. 116. For example, in 1989
the Bank paid $77,849, a five-year high, to Respondent's accounting firm. R.D.
at 39, F.F. Nos. 132, 133. The 1989 monthly invoices described the following
services normally performed by bank directors or employees: (1) attendance by
Respondent at monthly board of directors' meetings; (2) review and analysis of
various FDIC loan packages for potential bid; (3) telephone calls to bank
officers to discuss 4- and 5-rated loans; (4) calls to bankers to arrange for
certificates of deposit; and (5) follow-up work on loan participations. R.D.
at 3940, F.F. No. 134. The Bank employed new accountants in 1990 and
1991. R.D. at 40, F.F. No. 136.
Respondent does not deny the existence of these transactions. He
asserts that the board of directors of the Bank is also responsible since they
voted and approved these improper actions, payments, and fees.
The ALJ's Recommended Decision contains a thorough, extensive
discussion and analysis of the above conduct and transactions supporting this
prohibition action. This discussion contains sufficient analysis of the
The ALJ's Recommended Decision, however, contains limited discussion of
Respondent's defenses. The ALJ rejects Respondent's central argument that he
was but one of several directors who voted for and approved the improper
dividends, tax payments, and fees. R.D. at 1213. The ALJ reasoned, and
the Board agrees, that this does not justify Respondent's disloyalty to the
Bank, nor in any way limit his responsibility as a director of that
institution to maintain its safety and soundness. R.D. at 13. The ALJ also
reasoned that the Respondent, as sole stockholder of the Bank, exercised great
influence and control over the other directors. R.D. at 13. Because the ALJ
does not otherwise discuss Respondent's defenses, the Board has addressed these
in its Discussion, infra.
The ALJ concluded, and the Board agrees, that removal and prohibition
from the industry under section 8(e) of the FDI Act is a very serious and
drastic sanction, reserved for only those cases which clearly demonstrate a
complete and willful disregard for the law. The ALJ found, and the Board
agrees, that this is such a case.
[.1] 1. Misconduct
The record provides ample support for the allegations of misconduct,
including violations of Regulation O, and the significant outflow of the Bank's
capital to Respondent's affiliated entities. Respondent maintained delinquent
personal loans at the Bank, repeatedly criticized, from 1982 through 1988, as
violations of Regulation O, 12 C.F.R. § 215.4(a)(2). 7
During this period, the Bank was unsuccessful in attempting to require
Respondent to correct the problems with his loans.8
It was not until 1988 that the Bank's directors placed Respondent's loans on a
non-accrual status, and on February 16, 1990, they were charged
off.9 FDIC Ex. 25; Tr. II at 58. R.D. at 1719; F.F. No. 30.
Respondent argues that it was only the examiner's opinion that his
loans, and others, should be adversely classified, and that the Bank's board
disagreed. Resp. Reply Brief at 2. The fact that the Bank's board initially
disagreed with some of the loan classifications does not excuse Respondent's
misconduct.10 Respondent also asserts that his
actions were not willful, and that events which caused losses on some loans
were beyond his control.11 The Board is mindful
that Respondent did not cause every loan loss described in this record,
nonetheless, these assertions ignore the overwhelming evidence of Respondent's
misconduct.
Regarding the payment of dividends, fees, and tax payments, Respondent
asserts that: (1) the dividends were all unanimously approved by the Bank's
board and it was his intention and the Board's to fulfill their fiduciary
responsibilities to the Bank, Resp. Reply Brief at 7; (2) the fees to Thomas K.
Benshop, P.A., were "in the normal course of business," not at higher than
market rates, and he abstained from the voting process, Resp. Reply Brief at
56; and (3) since the tax overpayments the Bank made to the holding
company were not extensions of credit when made, "they cannot be considered a
violation of section 23A, "Resp. Reply Brief at 8.
Whether or not the dividends were unanimously approved by the Bank's
board, and even if the fees paid to Respondent's affiliates were paid in the
ordinary course of business, the effect of these actions was to inflict serious
harm on the Bank. Respondent's contention that market rates were charged
ignores the substantial evidence to the contrary and the fact that the total
fees
8 Instead of requiring Respondent to
service his debts from outside sources, the bank alloewed respondent to expend
further Bank funds ; for example, the September 20, 1988, dividend of
$25,000, so that Respondent could pay his loans at the bank. R.D. at 18, F.F.
No. 21: tr. I at 65.
9 Respondent's loans totalled $99,500 as
of February 16,1990.
10 The ALJ notes that, following a 1986
examination, the examiners recommended t the Bank's board that it charge off
one-half of the value of certain loans classified "doubtful." The directors,
with the firm backing of Respondent Benshop, refused to deduct any changes from
the credits and carried each account at full value. R.D. at 5.
11 Further, Respondent's assertion that
he did not act willfully is not credible. In the Board's view, he should have
known that his actions presented a danger to the Bank's safety and
soundness. The ALJ noted, and the Board agrees, that Respondent's misconduct
regarding his own loans and the significant outflow of capital to his affiliate
corporations, in the form of dividends, fees, and tax payments demonstrated
abusive self-dealing. R.D. at 6. The ALJ concluded, and the Board agrees, that
Respondent's conduct evidences a deliberate disregard for the Bank's safety and
soundness. R.D. at 12.
[.2] 2. Effect Under
the second tier of section 8(e)(1) of the FDI Act, as applicable to this case,
misconduct is deemed to have had an actionable effect if: (a) the Bank
suffered, or was likely to suffer substantial financial or other loss;
or (b) the interests of the depositors were or were likely to be
prejudiced; or (c) the Respondent received financial gain. The record
supports a finding of both direct loss to the Bank and gain to Respondent. The
specific financial loss or other damage suffered by the Bank and the financial
gain or other benefit received by the Respondent are, at a minimum, $404,713.99
calculated as follows:
Notice at 19: R.D. at 19, 30, and 32, F.F. Nos. 30, 82, 93, and 94.
Accordingly, there is ample evidence that Respondent's conduct, as the ALJ put
it, "played a degenerative role in the Bank's capital structure" by causing a
substantial loss to the Bank. R.D. at 10.
[.3]3. Culpability
The third tier of section 8(e)(1) of the FDI Act provides three
alternative standards of culpability: continuing disregard for the Bank's
safety or soundness, willful disregard for the Bank's safety or soundness, or
personal dishonesty. The record contains ample evidence of culpability.
Respondent's assertions that his actions were not willful simply ignores the
statutory standard and the detrimental effects his actions had on the Bank.
12 U.S.C. § 1818(e)(1)(c).
The ALJ states, and the Board agrees, that bank directors must deal
fairly with a bank in any business transaction to ensure that personal
interests do not bias board decisions. See In the Matter of Stoller,
FDIC90-115e, 2 P-H FDIC Enf. Dec. ¶ 5174 (1992). Directors must not use
their position to benefit personally at the Bank's expense. R.D. at 12. This
duty of loyalty requires that a director's personal transactions at the Bank be
at arm's length. R.D. at 11. The ALJ states, and the Board agrees, that
caution should be employed in structuring business transactions with the Bank
to avoid a conflict of interest.13
The ALJ found, and the Board agrees, that a conflict of interest was
present and that Respondent failed to employ the requisite caution in dealing
with the various affiliates under his control. R.D. at 12. Presented with
conflicting interests, Respondent repeatedly chose self-interest over those of
the Bank. The ALJ concluded, and the Board agrees, that Respondent repeatedly
exercised influence over the Bank, draining exorbitant amounts of money from
the Bank under the guise of fees, dividends, and tax payments, in an
unsuccessful effort to avert personal financial ruin.14 R.D. at 12. The Board concludes that the
evidentiary support of culpability is overwhelming indeed Respondent's
consistent pattern of putting his own interests above those of the Bank is the
most troubling and egregious aspect of this case.
[.4]4. Other Matters
Respondent seeks guidance on the parameters of this sanction. In his
reply brief he states: "The definition of `institutionaffiliated party' is so
vague that an order banning one from banking could possibly be misused to end
the independent consultation
13 The ALJ cites; See Focus on the
Bank Director, American Bankers Association, 97-125 (1984); see also
Schlichting, rice, & Cooper, Banking Law, § 6 (1984).
14 In late 1990, Respondent declared
bankruptcy. Section 8(e)(4) of the FDI Act, 12 U.S.C.
§ 1818(e)(4) (1989), provides that "if upon
the record made at any such hearing the
agency shall find that any of the grounds
specified in such notice have been established, the agency may issue such orders of
suspension or removal from office, or prohibition from participation in the conduct of
the affairs of the depository institution, as it
may deem appropriate." Upon a thorough
review of the record in this proceeding, the
Board finds that the serious nature of Respondent's unsafe or unsound conduct and
serious breaches of fiduciary duty merit prohibition from participating in the conduct of
the affairs of any other federally insured depository institution or organization listed in
section 8(e)(7) of the FDI Act, 12 U.S.C.
§ 1818(e)(7) (1989).
For the reasons set forth in the above Decision, and pursuant to section 8(e) of the
FDI Act, 12 U.S.C. § 1818(e), the Board of
Directors of the Federal Deposit Insurance
Corporation hereby ORDERS that:
1. Thomas K. Benshop shall not participate in any manner in the conduct of the
affairs of the Bank or any insured depository
institution, agency, or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12
U.S.C. § 1818(e)(7)(A)(1989), without prior
written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C.
§ 1818(e)(7)(D).
2. Thomas K. Benshop shall not solicit,
procure, transfer, attempt to transfer, vote,
or attempt to vote any proxy, consent, or
authorization with respect to any voting rights
in the Bank or any insured depository institution, agency, or organization enumerated
in section 8(e)(7)(A) of the FDI Act, 12
U.S.C. § 1818(e)(7)(A), without the prior
written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C.
§ 1818(e)(7)(D).
3. Thomas K. Benshop shall not violate
any voting agreement with respect to any
insured depository institution, agency, or organization enumerated in section 8(e)(7)(A)
of the FDI Act, 12 U.S.C. § 1818(e)(7)(A),
previously approved by the appropriate Federal financial institutions regulatory agency,
without the prior written consent of the FDIC
and the appropriate Federal financial institutions regulatory agency, as that term is
defined in section 8(e)(7)(D) of the FDI Act,
12 U.S.C. § 1818(e)(7)(D).
4. Thomas K. Benshop shall not vote for
a director, or serve or act as an institutionaffiliated party, as that term is defined in
section 3(u) of the FDI Act, 12 U.S.C.
§ 1813(u), of the Bank or any insured depository institution, agency, or organization, enumerated in section 8(e)(7)(A) of the
FDI Act, 12 U.S.C. § 1818(e)(7)(a), without the prior written consent of the FDIC
and the appropriate Federal financial institutions regulatory agency, as that term is
defined in section 8(e)(7)(D) of the FDI Act,
12 U.S.C. § 1818(e)(7)(D).
This ORDER shall become effective thirty
(30) days from the date of its issuance.
The provisions of this ORDER shall 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.
Dated at Washington, D.C., this 19th day
of January, 1993.
By direction of the Board of Directors.
/s/ Robert E. Feldman
Deputy Executive Secretary
In the Matter of
This action was instituted by the Federal
Deposit Insurance Corporation on October
18, 1991, by the issuance of a Notice of
Intention to Prohibit the above respondent,
Thomas K. Benshop, from further participation in the conduct of the affairs of federally insured depository institutions pursuant to section 8(e) of the Federal Deposit
Insurance Act, 12 U.S.C. § 1818(e).1
The Oral Hearing was held May 6 and 7,
1992, in St. Paul, Minnesota, where the
FDIC appeared through enforcement counsel of the Dallas Regional Office, and the
respondent appeared pro se.
Based upon the evidence presented therein,
and the totality of the circumstances as established by the record, I enter the following
Recommended Decision.
The facts of this proceeding are not materially disputed. Respondent Benshop is a
Certified Public Accountant with extensive
practice and experience in the banking industry. During his 22 years of banking practice, the respondent has held controlling interests in two bank holding companies, four
banks, and numerous investment, consulting, and accounting enterprises, many of
which were either directly or indirectly affiliated with his various banking interests.
In September of 1979, respondent became President and sole share-holder of the
Walsh Bancorporation, Inc. (hereinafter "the
Holding Company"), a one-bank holding
company owning 100 percent of the outstanding common stock of the Colorado State
Bank of Walsh (hereinafter "the Bank").
The respondent acted as personal guarantor
in the transaction in which the Holding Company financed the acquisition of the bank by
pledging all of the bank's stock as security
for a loan extended by the United Bank of
Denver, N.A., Denver, Colorado.
As president of the Holding Company and
sole stockholder of the bank, respondent Benshop unilaterally possessed great influence
over the activities of the institution, its board
of directors, the parent corporation, and the
various affiliated organizations. As the sole
stockholder, Respondent would convene the
annual stockholders' meetings, would install and remove the bank's directors, would
establish their fees and compensation, and
would authorize, establish, and ratify various bank practices.
Respondent held two personal extensions
of credit from the bank, totalling some
$140,000. The loans were initially extended
in 1978, for the purpose of funding the shortterm cash needs of respondent and his various closely held corporations2, and were
secured by stock of two of respondent's other
business entities.
An examination of the institution conducted in 1982 first classified these loans to
respondent as substandard. The principal basis for such classification included the fact
that the loans were deemed to involve more
than normal risk of repayment in violation
of section 215.4(a) of Regulation O, 12
C.F.R. § 215.4(a), largely because of deterioration in respondent's financial position,
which was, at the time, very illiquid and
highly leveraged.
The value associated with the stock collateral which secured these loans was determined to be inflated, and the shares of these
2 The two affiliate corporations most at issue in this proceeding include Thomas K. Benshop, P.A., the bank's
exclusive accounting firm, as well as the Walsh Bancorporation, the institution's holding company. Both were
owned and directed by respondent. As a result, the respondent's loans were
continuously classified as substandard at each
examination thereafter, until the loans were
eventually declared a loss, and charged
against the loan loss reserve in 1990.
On June 18, 1987, respondent Benshop
was appointed to the Board of Directors and
the Colorado State Bank of Walsh.3 During
this time the respondent and his various enterprises were experiencing significant financial losses, characterized in the record as
"cash flow problems." The respondent's outstanding loans from the bank were consolidated and restructured several times, as was
the respondent's obligation to the United
Bank of Denver, who had in that year initiated action to foreclose and sell the bank's
stock, which foreclosure was averted through
respondent's renegotiations with that institution.
A joint examination conducted by FDIC
and Colorado state bank examiners as of
July 10, 1987, concluded that the condition
of the bank had undergone serious deterioration as of the previous examination.
The major occurrence affecting the institution was the adverse "Loss" classification
of two sizable loan accounts, which had in
the previous examination been classified as
doubtful, with an FDIC recommendation that
the Board of Directors charge one-half the
value of these assets against the loan loss
reserve. Despite the 1986 recommendation,
the directors, with the firm backing of respondent Benshop, refused to deduct any
charge from the credits, and carried each
account at full value.
As a result of the 1987 "Loss" classification, the board of directors was advised
that the entire value of both loans should be
charged against the reserve. With respect to
one of these classified assets, the W.R. Moffett account, the board of directors, at the
behest of the respondent, strongly disagreed
with the loss classification, and refused to
recognize the loss associated with this loan.
By not charging the Moffett loan as a loss,
and by continuing to treat the account as an
asset, the earnings of the bank were artificially inflated.
The examination also indicated a significant depletion of the bank's capital over the
previous examination. The examiner concluded that the bank's weakened capital position was basically attributed to two factors, the first, being the major loan losses
classified in the examination, and the second, being the significant outflow of capital
to the bank's affiliate corporations, in the
form dividends, fees, and tax payments.
The examiner was extremely critical of
this second factor, namely, the significant
outside payments made to the bank's insider, respondent Benshop. The history of
these insider payments demonstrated that they
were abusive and self-dealing, as well as
unsafe and unsound, particularly given the
bank's decreased income.
The examiner also criticized the practice
of the bank submitting regular income tax
payments to the holding company, for the
purpose of calculating and filing consolidated tax returns. The principal concern was
the fact that all of these outside payments to
respondent, as well as the income tax payments to the holding company, were based
upon the accounting calculations submitted
by Thomas K. Benshop, P.A., the respondent's wholly-owned accounting firm, and the
only accountant and auditor of the bank's
records, whose employment with the bank
was not and had never been evidenced by
any form of written contract.
The examiner reasoned that since the company calculating and recommending these
increased payments was wholly-owned by
the respondent, as was the company that
would receive the benefit of such payments,
that there existed a complete lack of independence, particularly given that respondent Benshop, as member of the board of
directors of the bank, exercised the authority to approve and ratify such payments.
This examiner, as had others, recommended that independent accounting and auditing services be procured for the bank.
Because of the unsatisfactory operating
losses, as well as the practices described
above, the institution received a composite
CAMEL rating of 4.
The institution was again examined as of
August 26, 1988. During the course of this
examination it was revealed that the institution's earnings had increased, largely through
Despite the institution's undercapitalization, there appeared to be in
place no restriction on the payment of dividends, and this was of great concern
to the examiner. The report of this examination, which was furnished respondent
as a member of the Board of Directors, concluded that the constant excessive
outflow of dividends and fees was wholly unsatisfactory, particularly given the
inadequate capital levels as well as a continuing deficiency in the loan loss
reserve.
Nor did there appear to be any restriction on the remittance of tax
payments to the parent holding company, which payments the examiner concluded
were in excess of the bank's income tax liability.
Also of great concern was the fact that the Moffett credit, which was
not charged against the institution's loan loss reserve as recommended in the
previous examination, was continued as an asset of the bank, largely upon the
remote hopes of management that credit on the account might be salvaged through
litigation.
The conclusion of this examination also resulted in a composite CAMEL
rating of 4.
The institution underwent another joint examination as of November 24,
1989, which concluded that the overall condition of the bank had seriously
deteriorated since the previous examination.
The reserve for loan losses was inadequate, the profit and capital
position of the bank was materially overstated, and the detrimental
transactions with affiliated organizations owned by respondent Benshop
continued unabated, through excessive dividend payments, tax remittances, and
service fees. At this examination, the 1989 capital outlay was calculated at a
five year high.
A consolidated tax return filed for the tax year ending March of 1989,
indicated that the bank, pursuant to the recommendations of the respondent's
accounting firm, had remitted an overpayment of income tax remittances in the
amount of $101,000 to the respondent's holding company, which amount then
became due for an immediate retroactive credit. During the examination
respondent Benshop was confronted about the parent corporation's intent to
reimburse the bank for the tax overpayments, to which the respondent
acknowledged that the parent firm lacked the financial resources to effect
prompt reimbursement of the total amount due and payable.
Accordingly, the total amount of the overpayment was declared a
receivable to the bank from the holding company. The receivable was classified
as an unsecured loan to the holding company in violation of Section 23A of the
Federal Reserve Act, and repayment of this loans was seriously questioned.
During this examination it was further revealed that, despite the
respondent's troubled financial position and seriously delinquent outstanding
loans, the respondent applied for and was extended further credit by the bank
on November 6, 1989. This loan was in the amount of $4,500, and was apparently
secured by an automobile owned by the respondent, which automobile was located
in the state of Minnesota.
The examination report indicates that the respondent, when questioned
about the purpose of this loan, indicated that he could not recall the specific
application of the loan proceeds, only one month after its extension. Further
inquiry revealed respondent's financial position to be rapidly deteriorating,
as one of the other financial institutions owned by the Grand Ridge
Bancorporation, another of respondent's holding companies, had been foreclosed
upon during the month of October by yet another creditor. This was
particularly important, as the stock of the Grand Ridge Bancorporation was the
collateral securing respondent's loans to the Bank of Walsh.
The viability of the institution was determined by the examiner to be
seriously threatened, with the principal culprit being the bank's director,
Respondent Benshop, who played a degenerative role in the bank's capital
structure. An exit meeting was held with the entire bank board of directors on
December 15, 1989, where the dire results of this examination were discussed.
The conclusion of the exam resulted in the bank being assigned a composite
CAMEL rating of 5.
On January 17, 1990, approximately one month later, respondent Benshop
resigned his director position with the Bank of WalshThe United Bank of Denver,
one of respondent's principal creditors, foreclosed upon the stock of the bank
as a result of the holding Respondent later that year declared personal bankruptcy, and all of respondent's
outstanding loans, as well as that of the parent corporation, were charged as Loss to the
loan loss reserve.
A bank director is responsible for dealing fairly with the bank in its
various business transactions and ensuring that personal interests do not bias
board decisions. See In the Matter of Stoller, 2 FDIC Enf. Dec. ¶
5174. This concept is often referred to as the director's duty of loyalty, and
requires that directors ensure that their own personal relationships with the
bank, as well as their ties to fellow directors, are always at arm's length.
See Focus on the Bank Director, American Bankers Association, 97-125
(1984); See Also Banking Law, Schlichting, Rice, & Cooper, § 6, (1984).
This duty of loyalty does not prohibit a bank director from doing
business with the bank; as many bank directors are very important customers.
Directors must ensure, however, that neither they nor others abuse their
position to benefit personally at the bank's expense, and they should take
appropriate precautions in structuring their business and personal ties to the
bank to avoid even the appearance of a conflict of interest. Id.
Respondent Benshop did not employ such caution. His position on the
board of directors, when juxtaposed with his ownership of the institution and
its various affiliates, clearly created a conflict of interest which cannot be
countenanced.
As a result of these conflicting interests, namely, the interest of
the bank contrasted with the respondent's self interest, Mr. Benshop chose the
latter, in what I conclude was a deliberate disregard for the bank's safety and
soundness. Despite constant warning from regulators, respondent systematically
drained from this institution exorbitant amounts of money under the guise of
fees, dividends, and tax payments, all in a desperate struggle to keep his
personal financial situation from complete ruin.
Respondent attempts to defend his actions by claiming that he was but
one of several directors who voted for and approved these actions. Though this
may be indeed true, it cannot be said to justify his disloyalty to the
bank, nor does it in any way limit his responsibility as a director of
that institution to maintain constant concern for its safety and soundness,
which concern the law requires. In the Matter of Anonymous, 2 FDIC Enf.
Dec ¶ 5112 (1988).
Furthermore, the Respondent as sole stockholder of the bank, exercised
great influence over the other directors. Though he disputes this, the fact
remains that he held a position of great leverage over the other directors,
with the power to remove any director that he saw fit. The record reflects at
least one instance in which such power was indeed exercised, which action
reverberates a subtle, yet very powerful control over the board and its
actions.
Removal and prohibition from the industry under Section 8(e) of the
Federal Deposit Insurance Act is a very serious and drastic sanction. It is
reserved, in my opinion, for only those cases which clearly demonstrate a
complete and willful disregard for the law, as in the case of Respondent
Benshop, whom I must recommend for such removal and prohibition.
Accordingly, I make the following Findings of Fact and Conclusions of
Law:
A. Introduction
1. At all times pertinent to the charges herein, the Colorado State
Bank of Walsh was a corporation existing and doing business under the laws of
the State of Colorado, having its principal place of business at Walsh,
Colorado. (Admitted - Answer ¶ 1)
2. The Walsh Bancorporation, Inc., a onebank holding company, owned
100% of the outstanding common stock of the Bank from September 4, 1979 until
May 1, 1990. (Admitted - Answer ¶ 5)
3. Respondent owned 100% of The Walsh Bancorporation, Inc. from
September 4, 1979 until August 12, 1988 and owned 70.55% from August 12, 1988
until January 17, 1990.
(Admitted - Answer ¶ 6)
4. From August 12, 1988 until January 17, 1990, the remaining shares
of The Walsh Bancorporation, Inc. were owned as follows:
(Admitted Answer ¶ 7)
5. The corporation entities owning stock in The Walsh Bancorporation,
Inc. were each owned 100 percent by Respondent with one exception; Aldrick
Corporation was owned 50 by the Respondent and 50 percent by his wife.
(Admitted Answer ¶ 8)
6. At all times pertinent to the charges herein, Respondent was
President of The Walsh Bancorporation, Inc. (Admitted - Answer ¶ 6)
7. The Bank's directors were elected by The Walsh Bancorporation,
Inc., of which Respondent Benshop directed. (Tr. I at 54; Resp. Ex. 3)
8. On or about June 18, 1987, Respondent was appointed to the Bank's
board of directors on which he served until January 17, 1990. (Admitted -
Answer ¶ 6)
9. Respondent owned 100 percent of the outstanding common stock, and
was president of, of Thomas K. Benshop, P.A., an accounting firm. (Admitted -
Answer ¶ 14)
10. At all times pertinent to the charges herein. Thomas K. Benshop,
P.A. prepared the Consolidated Federal Income Tax Returns for The Walsh
Bancorporation, Inc. and the Bank and computed the Federal income taxes for
both entities. (Admitted Answer ¶ 16, ¶ 17)
11. At all time pertinent to the charges herein, Respondent was
personally liable as guarantor for a bank stock loan made by the United Bank of
Denver to The Walsh Bancorporation, Inc. (Admitted - Answer ¶ 18)
12. The balance owing on this loan was approximately $750,000 as of
March 1988 and $700,000 as of March 1989. (FDIC Ex. 2, p. 35; FDIC Ex. 3, p.
62)
13. The FDIC conducted a joint examination of the Bank with the
Colorado State Banking Department as of the close of business on July 10, 1987.
A joint report of examination was prepared and served upon both the Bank and
Respondent. (FDIC Ex. 1; Tr. I at 24)
14. The FDIC conducted a joint examination of the Bank with the
Colorado State Banking Department as of the close business on August 26, 1988. A joint report of
that examination was prepared and served upon the Bank and Respondent. (FDIC Ex.
2; Tr. I as 24)
15. The FDIC conducted an examination of the Bank as of the close of
business on November 24, 1989. A report of examination was likewise prepared
and served. (FDIC Ex. 3)
16. The FDIC conducted an examination of the Bank as of the close of
business on February 15, 1991 ("1991 Examination"), and a report of examination
was prepared ("1991 Report of Examination"). (FDIC Ex. 4)
B. Violations of Regulation O
17. Respondent's personal loans at the Bank were found to be
delinquent at the 1988 Examination, reflecting a lack of credit worthiness on
the part of Respondent. (Tr. I at 6263)
18. The collateral for these loans was of questionable value. (Tr. I
at 63, 167)
19. Respondent's financial statements also revealed weaknesses and his
ability to service debt was questioned by the directors and by FDIC examiners.
(Tr. I at 6264, 166-67)
20. Respondent's loans were placed on non-accrual status by the Bank's
directors as of the 1988 Examination; his loan problems, and renewal of his
loans, were frequently discussed at directors' meetings. (Tr. I at 62; Resp.
Ex. 3, pp. 16, 19, 2223, 25, 32, 41)
21. The Bank admittedly declared a dividend of $25,000 on September
20, 1988, for the stated purpose of giving Respondent money to pay his loans at
the Bank. (Resp. Ex. 8, p. 2; FDIC Ex. 2, p. 2; Tr. I at 65)
22. On September 21, 1988, Respondent attended a meeting with
examiners at which his personal loans were criticized. (Tr. I at 78)
23. The 1988 Report of Examination identified Respondent's personal
loans as apparent violations of section 215.4(a)(2) of Regulation O, 12 C.F.R.
§ 215.4(a)(2), because those loans involved more than the normal risk of
repayment and/or presented other unfavorable features. (FDIC Ex. 2, pp. 4, 37)
24. Despite the 1988 criticisms, Respondent's loans remained in
apparent violation of
25. Respondent's June 1989 financial statements again indicated that
his ability to service debt was questionable. (FDIC Ex. 3, pp. 12, 32)
26. In November 1989, Respondent had an outstanding balance on a prior
loan from the Bank in the amount of $95,000. (Admitted - Answer ¶ 27)
27. This loan, and other loans to Respondent, had been adversely
classified since 1982, at five preceding examinations conducted by FDIC. (Tr.
I at 60)
28. The Bank loaned Respondent $4,500 on or about November 6, 1989,
for his operating expenses. (Resp. Ex. 5; Tr. II at 166)
29. The November 1989 loan violated section 215.4(a)(2) of Regulation
O, 12 C.F.R. § 215.4(a)(2), because it involved more than the normal risk
of repayment and/or presented other unfavorable features. (FDIC Ex. 3, p. 12;
Tr. II at 166-67)
30. On February 16, 1990, the Bank charged off loans to Respondent in
the amount of $99,500, part of which represented a charge off of $4,523.57 in
principal and interest on the November 6, 1989 loan. (FDIC Ex. 25; Tr. II at
58)
C. W.R. Moffett Loans
31. The Bank extended credit of $350,000 to W.R. Moffett in 1980 as a
restructure of existing debt, and extended additional credit to this borrower
in 1981. (FDIC Ex. 1, p. 32; Tr. I at 37)
32. The Moffett loans became delinquent in 1981 and remained
delinquent thereafter. (Tr. at 38)
33. The Farmers Home Administration (FmHA) refused to honor its
guarantee of the Moffett loans, and the parties entered into litigation on the
matter in 1983. (Tr. I at 38)
34. FDIC examiners criticized the W.R. Moffett loans beginning in
1982. (Tr. I at 3940)
35. FDIC and State examiners classified the Moffett loans "Doubtful"
in the amount of $198,000 in 1986. (FDIC Ex. 1, p. 1)
36. FDIC and State examiners classified the Moffett loans "Loss" in
the amount of $198,000 at the 1987 Examination. (FDIC Ex. 1, pp. 1, 2, 3, 32)
37. The Bank acknowledged in 1987 that the classification of the
Moffett loans affected its capital ratios. (Tr. II at 7778)
38. During the 1987 Examination, the Bank refused, however, to charge
off the "Loss" portion of the Moffett loans. (FDIC Ex. 1, p. 1; Tr. I at 41,
79)
39. The Bank's loan loss reserve was inadequate at the time of the
1987 Examination to even charge this particular loan account. (FDIC Ex. 1, p.
3)
40. The 1987 Report of Examination recommended that the Bank review
the adequacy of the reserve on a quarterly basis and use a "prospective or
forward looking approach that encompasses an estimate of potential loss
exposure in classified and nonclassified loans." (FDIC Ex 1, p. 3; Tr. I at
47)
41. The Bank and Respondent disregarded the 1987 recommendation
regarding reserve calculations. (Tr. I at 48)
42. FDIC and State examiners again classified the Moffett loans "Loss"
in the amount of $198,000 at the 1988 Examination. (FDIC Ex. 2, pp. 1, 40)
43. During the 1988 Examination, the Bank and Respondent again refused
to charge off the "Loss" portion of the Moffett loans. (FDIC Ex. 2, p. 1; Tr. I
at 41, 79)
44. The Bank's adversely classified assets represented an excessive
97.75 percent of total equity capital and reserves in August 1988. (Tr. I at
34; FDIC Ex. 2, p. 7)
45. The Bank's loan loss reserve was an inadequate $229,000 in August
1988. (FDIC Ex. 2, p. 8; Tr. I at 34)
46. A charge-off of the "Loss" portion of the Moffett loans in August
1988 would have reduced the Bank's loan loss reserve from $229,000 to $31,000.
(Tr. I at 4243)
47. The Bank's total loan portfolio in August 1988 was $14,822,000.
(FDIC Ex. 2, p. 6)
48. The Bank's historical net losses to average total loans and leases
was approximately 1.4 percent; its average net chargeoffs to average total
loans was approximately 2.4 percent. (Tr. I at 4445)
49. When calculating an adequate loan loss reserve in 1988, the Bank
should have considered the risk relating to individual credits as well as
historical factors. (Tr. I at 46)
50. On September 21, 1988, Respondent
51. The 1988 Report of Examination recommended that the Bank conduct a
detailed and "realistic analysis" of the adequacy of the reserve. (FDIC Ex. 2,
p. 4)
52. The Bank and Respondent disregarded the 1988 recommendation
regarding reserve calculations. (Tr. I at 152)
53. The Bank charged off as "Loss" $259,070.24 of the Moffett loans on
September 39, 1989, and charged off the remaining $200,000 on October 30, 1989,
for a total charge-off of $459,070.24. (FDIC Ex. 27)
54. The Bank's adversely classified assets represented an excessive
230.33 percent of its total equity capital and reserves in November 1989. (Tr.
I at 150-51)
D. Dividend Payments
55. Dividend payments of $42,000 were criticized in the 1987 Report of
Examination as "excessive." (FDIC Ex. 1, p. 1)
56. FDIC and State examiners determined that the Bank's loan loss
reserve was inadequate during the 1987 Examination. (FDIC Ex. 1, p. 3)
57. Respondent attended an exit meeting with examiners following the
1987 Examination at which FDIC's concerns about dividends were expressed.
(FDIC Ex. 1, p. 5)
58. Respondent also received the 1987 Report of Examination which
criticized dividend payments as excessive. (Tr. I at 24; FDIC Ex. 1, p. 1)
59. Respondent voted to approve dividend payments totalling $80,000 in September and December 1988. (Tr. I at 5152, 84;
Resp. Ex. 3, pp. 25, 28)
60. The 1988 Examination revealed that
the Bank had primary capital in the amount
of $957,000. (Tr. I at 31)
61. Relevant aspects of the Bank's condition in August 1988 were as follows:
a. The Bank's net operating income (pre-tax) was $131,000 which
included a substantial amount of non-recurring gains. (FDIC Ex. 2, pp. 4, 8;
Tr. I at 3031, 50)
b. The Bank's net income, following adjustments for taxes, was
$68,000. (FDIC Ex. 2, p. 8; Tr. I at 50)
c. The Bank's ratio of primary capital to Part 325 total assets was
5.14%. (FDIC Ex. 2, p. 7; Tr. I at 31)
d. The Bank's loan loss reserve was an inadequate $229,000. (FDIC Ex.
2, p. 8; Tr. I at 34)
e. Total loans classified "Loss" were $198,000. (Tr. I at 33)
f. Total loans adversely classified were $813,000. (Tr. I at 34)
g. The Bank had an excessive level of adversely classified assets,
representing 97.75 percent of total equity capital and reserves. (Tr. I at 34)
62. The Bank's primary capital was below the minimum capital
requirement of Part 325 of FDIC's Rules and Regulations, 12 C.F.R. Part 325.
(Tr. I at 31)
63. The Bank's inadequate reserve in August 1988 caused its earnings
to be overstated. (FDIC Ex. 2, p. 4; Tr. I at 46)
64. The Bank paid a September 20, 1988 dividend of $25,000 for the
stated purpose of enabling Respondent to pay his delinquent loans. (FDIC Ex.
2, p. 2; Tr. I at 65)
65. On September 21, 1988, Respondent attended an exit meeting with
examiners at which the 1988 dividend payments were criticized as excessive.
(Tr. I at 78)
66. On or about December 8, 1988, the directors approved, and the Bank
paid, a $55,000 dividend to The Walsh Bancorporation, Inc. (Tr. I at 88)
67. The Bank's Part 325 capital calculation, reviewed by the directors
of the Bank on or about November 30, 1988, while determining whether to pay
dividends, did not take into account the Bank's reserve, asset quality, or
earning prospects. (Tr. I at 13536)
68. Respondent received a copy of the 1988 Report of Examination which
criticized dividend payments as excessive. (Tr. I at 24; FDIC Ex. 2, p. 2)
69. The Bank and Respondent disregarded the 1988 criticism of the
Bank's dividend payments by FDIC and State examiners. (Tr. I at 173-74)
70. From January 1989 through December 1989, the Bank's directors,
including Respondent, directed payment to The Walsh Bancorporation, Inc. of the
following dividends:
71. The Bank's payment of the $60,674.40, referred to as a "bonus" and
the $10,000, referred to as "salary," constituted dividends because those funds
were paid to the Bank's sole shareholder. The Walsh Bancorporation, Inc. (Tr.
II at 4041)
72. Prior to December 1989, the Colorado State Banking Department
denied the Bank permission to pay a $25,000 dividend. (Tr. I at 177)
73. On or about December 1, 1989, the Bank's directors, including
Respondent, nonetheless approved, and the Bank paid, a $25,000 dividend. (Tr.
I at 175)
74. The FDIC determined that relevant
aspects of the Bank's condition, as of November 24, 1989, were as follows:
a. The Bank's net operating income (pre-tax) was $183,000. (FDIC Ex.
3, p. 8; Tr. I at 154)
b. The Bank's net income, following adjustments for tax, was $97,000.
(FDIC Ex. 3, p. 8; Tr. I at 154)
c. The ratio of the Bank's primary capital to Part 325 total assets
was 2.93%. (FDIC Ex. 3, p. 7)
d. The ratio of the Bank's adjusted primary capital to adjusted Part
325 total assets was 2.83%. (FDIC Ex. 3, p. 7)
e. The Bank's loan loss reserve was $125,000. (FDIC Ex. 3, p. 8; Tr.
I at 151)
f. The Bank's loan loss reserve was inadequate for the level of risk
contained in the Bank's loan portfolio. (FDIC Ex. 3, p. 8; Tr. I at 151)
g. Total loans classified loss were $619,000. (FDIC Ex. 3, p. 6; Tr.
I at 150)
h. Total loans adversely classified were $2,738,000. (FDIC Ex. 3, p.
6; Tr. I at 150)
75. The Bank's net income had been grossly overstated due to the
Bank's failure to charge losses, its failure to provide an adequate provision
to the loan loss reserve, and the improper transfer of unearned deferred gains
on loans to income accounts. (FDIC Ex. 3, p. 2; Tr. I at 154-55)
76. The Bank experienced a net operating loss of $592,000 in 1989, the
same year in which it paid dividends of $202,000. (Tr. I at 52)
77. Respondent attended a meeting with examiners on December 15, 1989,
at which excessive dividend payments, excessive income tax payments, payments
to the accounting firm, and Respondent's personal loans were criticized. (Tr.
I at 176-77)
78. Despite further massive deterioration in the Bank's condition
following its charge off of the Moffett loans, Respondent continued to disagree
with FDIC's concerns about excessive payments of dividends, income taxes and
fees to the accounting firm. (Tr. I at 177)
79. From August 1988 through November 1989, the Bank's primary capital
decreased from $957,000 to $593,000. (FDIC Ex. 2, p. 7; Tr. I at 149)
80. From August 1988 through November 1989, the Bank's adjusted
primary capital decreased from $929,000 to $572,000. (FDIC Ex. 2, p. 7; FDIC
Ex. 3, p. 7)
81. The Bank's payment of dividends reduced its capital. (Tr. I at
149)
82. The Bank's payment of $356,674.40 in dividends in 1988 and 1989
was excessive in light of the Bank's condition at the time. (FDIC Ex. 2, p. 4;
FDIC Ex. 3, p. 3)
83. The dividends benefitted Respondent as owner of The Walsh
Bancorporation, Inc. and as personal guarantor on the stock loan of that
company. (Tr. I at 5455)
E. Income Tax Payments
84. The Bank's income tax payments were criticized as excessive and
improper in the 1986 and 1987 Reports of Examination. (FDIC Ex. 1, p. 5)
85. These payments were calculated by Thomas K. Benshop, P.A.,
Respondent's wholly owned accounting firm. (FDIC Ex. 1, p. 5; Tr. I at 58)
86. Examiners advised the Bank in 1987 to retain independent
accountants. (FDIC Ex. 1, p. 5; Tr. I at 59)
87. Respondent received a copy of the 1987 Report of Examination which
criticized the income tax payments and which recommended employment of an
independent accounting firm. (Tr. I at 24; FDIC Ex. 1, p. 5)
88. The Bank and Respondent disregarded the 1986 and 1987
recommendations
89. The Bank's income tax payments were again criticized at the 1988
Examination as excessive and improper. (FDIC Ex. 2, p. 1)
90. On September 21, 1988, Respondent attended a meeting with
examiners at which the income tax payments to the holding company were
criticized as improper and excessive. (FDIC Ex. 2, p. 5; Tr. I at 78)
91. Respondent received a copy of the 1988 Report of Examination which
criticized the income tax payments. (Tr. I at 24; FDIC Ex. 2, p. 1)
92. The Bank and Respondent disregarded the 1988 criticism of the
income tax payments by FDIC and State examiners. (Tr. I at 173)
93. The Bank paid income taxes to the holding company for the fiscal
year ending March 31, 1989 as follows:
94. The Bank paid income taxes to the holding company for the fiscal
year ending March 31, 1990 as follows:
(Admitted Answer ¶ 58)
95. On or about November 30, 1989, the income tax payments for the
fiscal year ending March 31, 1989 were recorded on the Bank's books as a
$100,353.13 loan to the holding company. (FDIC Ex. 19; Tr. II at 5657)
96. The holding company owes the Bank $41,750 for the income tax
payments for the fiscal year ending March 31, 1990. (Tr. I at 165; Tr. II at
5960)
97. The holding company did not provide the Bank with collateral to
secure the income tax receivable of $100,353.13. (Admitted - Answer ¶ 61;
Tr. I at 159; Tr. II at 33)
98. The holding company did not provide the Bank with collateral to
secure the $41,750 owed to the Bank. (Admitted - Answer ¶ 61; Tr. II at
33)
99. The income tax payments were made by the Bank at the direction of
Respondent's accounting firm. (Admitted - Answer ¶ 16, ¶ 17)
100. Respondent's accounting firm filed a Form 7004, dated June 4,
1989, with the Internal Revenue Service to request an extension of time to file
the consolidated tax return for the fiscal year ending March 31, 1989.
(Admitted - Answer ¶ 64)
101. The Form 7004 stated that the taxes expected to be paid were "0."
(Admitted Answer ¶ 65)
102. At that time, the Bank had already paid to the holding company
Federal Income taxes in the amount of $77,600.00. (Admitted - Answer ¶ 67)
103. The FDIC determined that the Bank's earnings had been grossly
overstated due to, among other things, the Bank's failure to charge-off losses
and its failure to provide an adequate provision to the loan loss reserve.
(FDIC Ex. 3, p. 2; Tr. I at 117, 15455)
104. The tax calculations for the Bank's fiscal years ending March 31,
1989 and March 31, 1990 were made, and payments obtained in connection
therewith, on the basis of said overstated earnings. (Tr. I at 56 57,
157, 160)
105. The Federal income taxes allegedly owed for the Bank's fiscal
years ending March 31, 1989 and March 31, 1990 were not paid to the Internal
Revenue Service. (FDIC Ex. 3, p. 4; Tr. I at 157)
106. Respondent prepared a Consolidated Federal Income Tax Form 1120
for the holding company and its subsidiaries, dated November 17, 1989, that
stated that no tax was owed to the Internal Revenue Service. (Admitted -
Answer ¶ 73, ¶ 74)
107. The cover letter which forwarded the tax return to the Bank in
November 1989 acknowledged that the holding company owed the Bank a refund for
tax payments of $101,766.02. (Admitted - Answer ¶ 75)
108. The holding company, at a minimum, owes the Bank $143,516.02 for
the income tax payments transferred to the holding company for the Bank's
fiscal years ending March 31, 1989 and March 31, 1990. (Admitted - Answer
¶ 77; Tr. I at 65; Tr. II at 5960)
109. The holding company is unable to repay the income tax payments
owed. (Admitted - Answer ¶ 78; Tr. II at 33)
110. On or about February 16, 1990, the Bank charged off $99,744.54 of
the income tax receivable which was booked as a loan on November 30, 1989.
(Tr. II at 57)
111. The income tax payments made by the Bank for its fiscal years
ending March 31, 1989 and March 31, 1990 benefitted Respondent as the owner of
The Walsh Bancorporation, Inc. in that the holding company which he controlled
was provided with unsecured extensions of credit in violation of section 23A,
12 U.S.C. § 371C.
F. Payments to Accounting Firm
112. The Bank employed Thomas K. Benshop, P.A. ("accounting firm") at
the suggestion of The Walsh Bancorporation, Inc. (Tr. I at 68; Resp. Ex. 3, pp.
14, 29)
113. The Bank's employment of the accounting firm was not evidenced by
a written contract. (Admitted - Answer ¶ 82; Tr. I at 71; Tr. II at
169-70)
114. The Bank's payments of fees to the accounting firm were
criticized in the 1987 Report of Examination because they appeared to be "very
high in relationship to the types and quality of services performed" and
because the accounting services were not provided by an independent accounting
firm. (FDIC Ex. 1, p. 4; Tr. I at 6668)
115. The Bank was advised in the 1986 and 1987 Reports of Examination
to obtain an independent audit by outside accountants. (FDIC Ex. 1, p. 5)
116. The Bank was further advised in the 1987 Report of Examination to
discontinue its payments to the accounting firm for services ordinarily
rendered by directors. (FDIC Ex. 1, p. 4; Tr. I at 6768)
117. Respondent received a copy of the 1987 Report of Examination
which criticized the Bank's payments to the accounting firm. (FDIC Ex. 1, p.
5; Tr. I at 24)
118. The Bank and Respondent disregarded the 1987 criticism about
payments to the accounting firm. (FDIC Ex. 2, p. 2; Tr. I at 75)
119. During the 1988 Examination, the fees paid to the accounting firm
were again criticized as "poorly documented and seem high." (FDIC Ex. 2, p. 3;
Tr. I at 72, 73, 75, 100)
120. During the 1988 Examination, FDIC examiners obtained two
estimates for the cost of an opinion audit for a bank of comparable size; the
estimated fees were $15,000 to $25,000 (Arthur Anderson of Denver, Colorado)
and $10,000 to $15,000 (Kennedy & Coe of Lamar Colorado). (Tr. I at 70)
121. The audit provided by Respondent's accounting firm was not an
opinion audit because of the lack of independence created by the affiliation
between the firm and the Bank. (Tr. I at 71)
122. The Bank paid the Respondent's accounting firm a total of $54,118
in 1988. (FDIC Ex. 28; Resp. Ex. 1)
123. During this period, the Bank employed another individual with
accounting expertise, Mr. Larry Harper, President of the Bank and a certified
public accountant. (Tr. I at 7374)
124. The Bank's 1988 payments to the accounting firm were excessive.
(Tr. I at 73)
125. A significant portion of the 1988 fees was paid for services
other than accounting services. (Tr. I at 96, 99100)
126. Much of the work performed by Respondent for the Bank was that
which might normally be expected of a director with his experience and
training. (FDIC Ex. 1, p. 4; FDIC Ex. 2, p. 2; Tr. I at 6668; Tr. II at
21)
127. Respondent attended a September 21, 1988 meeting with examiners,
at which the Bank's continued employment of, and payment of fees to, the
accounting firm were criticized. (FDIC Ex. 2, p. 5; Tr. I at 78)
128. The Bank and Respondent disregarded the 1988 recommendations,
neither reducing fees, retaining an independent accounting firm, entering into
a written agreement with the accounting firm, nor improving the documentation
for services rendered. (Tr. I at 167-68, 170, 172, 174; FDIC Ex. 3, p. 3)
129. The 1989 accounting invoices remained poorly documented; in fact,
the detail provided by the accounting firm deteriorated further; the invoices
for August through December 1989 omitted the number of hours worked and the
identity of individuals responsible for providing services to the Bank. (Tr. I
at 72, 9495, 100, 170; Resp. Ex. 1, pp. 3943)
130. The accounting invoices further continued to contain charges for
services ordinarily provided by directors. (Resp. Ex. 1, pp. 3143; Tr. I
at 171, Tr. II at 16)
131. A significant portion of the 1989 fees
(Tr. I at 96, 99100)
132. During 1989, the Bank paid the accounting firm $77,849.
(Admitted - Answer ¶ 86; FDIC Ex. 3, p. 60; Resp. Ex. 1, pp. 3143)
133. The Bank's payment of $77,849 was a five-year high for payments
to the accounting firm and represented an increase of $23,731 over the payments
made in 1988. (FDIC Ex. 3, p. 3; Tr. I at 169)
134. The 1989 monthly invoices described services which are normally
expected of a bank director, including, but not limited to, the following:
a. Attendance by Respondent at monthly Board of Directors meetings (12
invoices).
b. Review of Bank's results of operations for the month (12 invoices).
c. Review of Revised Colorado State Banking Regulations (3 invoices).
(Resp. Ex. 1, pp. 3143; Tr. I at 6668; Tr.
II at 21)
135. The 1989 invoices described activities which are normally
expected of a bank officer or employee, including, but not limited to, the
following:
a. Review of collection results relating to FDIC loan packages (5
invoices).
b. Review and analysis of various FDIC loan packages for potential bid
(8 invoices).
c. Telephone calls to bank officers to discuss 4 and 5 rated loans (3
invoices).
d. Call bankers to arrange for certificates of deposit (4 invoices).
e. Follow-up work on loan participants (12 invoices).
(Resp. Ex. 1, pp. 3143; Tr. I at 6668; Tr. II at 21)
136. The Bank employed new accountants in 1990 and 1991. (FDIC Ex. 4,
p. 11; Tr. II at 70)
137. The Bank's relationship with the new accountants was evidenced by
a written contract. (Tr. II at 70)
138. The new accountants charged the Bank $8,900 for accounting
services in 1990 and estimated a fee of $10,000 for an opinion audit. (FDIC
Ex. 4, p. 11)
G. Impact upon Bank
139. Following the 1989 Examination, the Bank drastically increased
its loan loss reserve; the reserve had been raised from $125,000 to $378,000 at
the 1989 Examination; by December 1989, it was raised an additional $436,000 to
a total of $814,000. (Tr. II at 7475)
140. The Bank experienced a net loss of $592,000 in 1989. (FDIC Ex.
4, p. 14; Tr. II at 68)
141. Respondent resigned from the Bank's board of directors on January
17, 1990. (Tr. II at 61)
142. Due to the continuing financial deterioration of Respondent and
the holding company, the United Bank of Denver foreclosed on the stock loan
made to the holding company and took possession of the stock, thereby obtaining
ownership of the Bank on or about April 30, 1990. (FDIC Ex. 4, p. 2; Tr. II at
61, 67; Answer ¶ 5)
143. The Bank continued to struggle with the adverse consequences of
the criticized transactions almost a year after Respondent resigned; it
suffered a net loss as of December 1990 in the amount of $114,000. (FDIC Ex.
4, pp. 1, 2, 3, 14; Tr. II at 68)
144. The Bank's ratio of total adversely classified assets to total
equity capital and reserves was an excessively high 197.55 percent as of the
1991 Examination. (FDIC Ex. 4, p. 13; Tr. II at 69)
145. Because it was concerned about the Bank's condition, the Colorado
State Banking Department issued a capital call to the Bank between the 1989 and
1991 examinations; the Bank was ordered to redress its capital deficiency by
adding an estimated $750,000 to capital. (Tr. II at 71)
146. For the years 1987 through 1989, the Bank experienced a net loss
of $436,000. (Tr. II at 72)
147. For the years 1987 through 1989, the Bank paid
a. Dividends of $324,000,
b. Income payments of $167,000 and
c. Fees to Thomas K. Benshop, P.A. of $188,000
(Tr. II at 7273)
148. During the period of time in which
the Bank experienced a net loss of $436,000,
it paid approximately $679,000 to Respondent and his affiliates. (Tr. II at 73)
149. Following Respondent's resignation
from the Bank's board of directors, and his
removal as controlling shareholder of the
a. It stopped dividend payments,
b. It employed new accountants and reduced fees paid,
c. It stopped income tax payments to
the holding company, and
d. It charged off Respondent's loans.
Tr. II at 7374; FDIC Ex. 4, p. 6, 9, and 11)
1. At all times pertinent to the charges
herein, the Bank is, and has been, an insured State nonmember bank, subject to the
Act, 12 U.S.C. §§ 18111831l, the Rules
and Regulations of the FDIC, 12 C.F.R.
Part 3, and the laws of the state of Colorado.
2. The FDIC has jurisdiction over the
bank, the respondent, and the subject matter
of this proceeding.
3. At all times pertinent to the charges
herein, the respondent was a person participating in the conduct of the affairs of the
bank and an "institution-affiliated party" of
the bank as that term is defined in Section
3(u) of the Act, 12 U.S.C. § 1813(u).
4. At all times pertinent to the charges
herein, the Bank was subject to sections 23A
and 23B of the Federal Reserve Act, 12
U.S.C. §§ 371c and 371c-1, as made applicable to insured state nonmember banks by
section 18(j)(1) of the Act, 12 U.S.C.
§ 1828(j)(1).
5. At all times pertinent to the charges
herein, the Bank was subject to section 22(h)
of the Federal Reserve Act, 12 U.S.C.
§ 375b, and Regulation O of the Board of
Governors of the Federal Reserve System,
12 C.F.R. Part 215, as made applicable to
insured state nonmember banks by section
18(j)(2) of the Act, 12 U.S.C. § 1828(j)(2),
and section 337.3(a) of the FDIC's Rules
and Regulations, 12 C.F.R. 337.3(a).
6. At all times pertinent to the charges
herein, Respondent was a "director" of the
Bank as that term is defined in section 215(c)
of Regulation O, 12 C.F.R. § 215.2(c).
7. At all times pertinent to the charges
herein, the Respondent, as the principal
shareholder of the Walsh Bancorporation,
Inc. was a "principal shareholder" of the
Bank, as that term is defined in section
215.2(j) of Regulation O, 12 C.F.R.
§ 215.2(j).
8. At all times pertinent to the charges
herein, The Walsh Bancorporation, Inc. was
an "affiliate" of the Bank, as that term is
defined in section 23A(b)(1)(A), 12 U.S.C.
§ 371c(b)(1)(A).
9. At all times pertinent to the charges
herein, Thomas K. Benshop, P.A. was an
"affiliate" of the Bank as that term is defined in sections 23A(b)(1)(C) and 23B(d)(1),
12 U.S.C. §§ 371(b)(1)(C) and 371c1(d)(1).
10. At all times pertinent to the charges
herein, Respondent "violated", as that term
is defined in section 3(v) of the Act, 12
U.S.C. § 1813(v), section 215.4(a)(2) of
Regulation O, 12 C.F.R. § 215.4(a)(2), and
section 23A and section 23B of the Federal
Reserve Act, 12 U.S.C. §§ 371c and 371c-1,
by acting alone and with others, for or toward causing, bringing about, participating
in, counseling, or aiding or abetting one or
more violations of said statutes and regulations.
11. The Bank, acting under the direction
and control of Respondent, violated section
215.4(a) of Regulation O, 12 C.F.R.
§ 215.4(a), through the November 1989 extension of credit to the Respondent in the
amount of $4,500, which extension of credit
involved more than a normal risk of repayment and presented other unfavorable features.
12. The Bank, acting under the direction
and control of Respondent, engaged in unsafe and unsound practices in 1988 and 1989
by paying dividends which were excessive
in light of the bank's condition.
13. The Bank, acting under the direction
and control of Respondent, violated section
23A(b)(7)(A), 12 U.S.C. § 371c(b)(7)(A),
by making unsecured extensions of credit to
The Walsh Bancorporation, Inc., an affiliate of the bank, through the disbursement of
excessive income tax remittances.
14. The Bank, acting under the direction
and control of Respondent, violated section
23B(a), 12 U.S.C. § 371c-1(a), when it paid
Thomas K. Benshop, P.A., an affiliate of
the bank, excessive accounting and consulting fees.
15. By reason of the foregoing acts and
omissions, Respondent has committed violations of both law and regulation, and has
engaged in unsafe and unsound banking practices in connection with the Bank, and has
16. By reason of the foregoing acts, omissions, practices, and breaches, which occurred before the enactment of FIRREA on
August 9, 1989, the Bank has suffered substantial financial loss and other damage and
the Respondent has received financial gain
and other benefit.
17. By reason of the foregoing acts, omissions, practices, and breaches, which occurred after the enactment of FIRREA on
August 9, 1989, the Bank has suffered financial loss and other damage and the Respondent has received financial gain and
other benefit.
18. By reason of the foregoing acts, omissions, practices, and breaches, the Respondent demonstrated a willful or continuing disregard for the safety and soundness of the
Bank.
19. By reason of the foregoing acts, omissions, practices, and breaches, the Respondent should be prohibited from any further
participation, in any manner, in the conduct
of the affairs of any insured depository institution, pursuant to section 8(e)(7) of the
Act, 12 U.S.C. § 1818(e)(7).
Entered this 18th day of September, 1992,
at Washington, DC.
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Last Updated 6/6/2003 | legal@fdic.gov |