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   [5192] In the Matter of Thomas K. Benshop, The Colorado State Bank of Walsh, Walsh, Colorado, Docket No. FDIC-91-248e (1-19-93).

   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.
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   [.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
THOMAS K. BENSHOP,
individually, and as a director, and/or person participating in the conduct of the affairs and/or
institution-affiliated party of
THE COLORADO STATE BANK OF WALSH,
WALSH, COLORADO
(Insured State Nonmember Bank)
DECISION AND ORDER TO PROHIBIT PARTICIPATION

FDIC-91-248e

I. INTRODUCTION

   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


1 Because Respondent's activities, which are the basis of proceeding, took place both before and after the passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), the Respondent's conduct is measured against the substantive requirements of the pre-FIERRA version of section 8(e)(2) of the FDI Act,12 U.S.C. § 1818((e)(2).

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:
Recommended Decision —; "R.D. at ____, F.F. No. ____ (findings of fact)"
Transcript – "Tr. (volume) at ____."
Exhibits – "FDIC Ex. ____ ". or Resp. Ex. ____."
Briefs – "Resp. Brief at ____ ."

{{4-30-93 p.A-2153}} Directors ("Board") of the FDIC adopts and incorporates herein the Recommended Decision of the ALJ and finds that the record as a whole supports prohibition of Respondent from further participation in any federally insured financial institution.

II. FACTUAL SUMMARY

   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.

A. Respondent's Personal Loans

   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.

B. Dividends

   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 4 At the time, Respondent's financial condition was very illiquid and highly leveraged. The value of Respondent's stock in his closely held entities was inflated and the stock became unmarkable. R.D. at 4.

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.

{{4-30-93 p.A-2154}} unsafe practice.6 A significant portion of these dividends, $201,674.42, were paid to the holding company, the Bank's sole shareholder. R.D. at 27, F.F. No. 70. Respondent, as sole owner of the holding company and its personal guarantor, benefited from the payment of these dividends. R.D. at 30, F.F. No. 83. A flagrant example of the improper dividend payments is a September 20,1988, dividend of $25,000 purportedly to enable Respondent to pay his delinquent loans. R.D. at 25, F.F. No. 64. On another occasion prior to December 1989, the State Bank Commissioner for the State of Colorado specifically denied the Bank permission to pay a $25,000 dividend. R.D. at 27, F.F. No. 72. Nonetheless, the Respondent and the Bank's directors approved and paid the $25,000 dividend. R.D. at 27, F.F. No. 73; Tr. I at 175.

C. Income Tax Payments

   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 30–31, F.F. Nos. 86–92. 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 32–33, 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 32–33, 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 59–60. 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.

D. Other Fees

   As stated above, the Bank failed to retain independent accountants from 1987 through 1989. R.D. at 35–41. 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 39–40, 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.

III. THE ALJ's DECISION

   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 6 The August 26, 1988, examination assigned the Bank an overall CAMEL rating of "4," and stated that the Bank did not meet the minimum capitl requirements of 12 C.F.R. Part 325. R.D. at 7.(See extensive discussion in the Recommended Decision at 24 through 27, F.F. Nos. 61-71.) The November 24, 1989, examination report assigned the bank a CAMEL rating of "5," and noted, among other things, that the loan loss reserve was inadequate and capital position of the Bank materially overstated. R.D. at 9. (See extensive discussion of Bank's 1989 condition in Recommended Decision at 27 through 30, F.F.Nos. 74-83.)

{{4-30-93 p.A-2155}} violations of law, unsafe or unsound banking practices, breach of fiduciary duty, loss, etc., which comprise the elements (misconduct, effect, and culpability) of this prohibition action. 12 U.S.C. § 1818(e)(1).

   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 12–13. 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.

IV. DISCUSSION

   [.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 17–19; 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 5–6; 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 7 The violation of Regulation O involved a lack of credit worthiness, collateral of questionable value, and features unfavoable to the Bank. R.D. at 17-18; F.F. Nos. 17 and 24.

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.

{{4-30-93 p.A-2156}} paid were excessive.12 Even if market rates were charged, which the record does not support, certain invoices indicate that the Bank was billed for inappropriate services. Further, Respondent is incorrect—the unsecured loans to the holding company, in the form of tax overpayments are "covered transactions" under section 23A of the Federal Reserve Act, 12 U.S.C. § 371c(b)(7).

   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:

$ 4,523.57Personal Loans
$256,674.40Dividends
$143,516.02Income Tax Payments

Total$404,713.99

   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 12 The ALJ found, and the Board agrees, that the bank' 1988 and 1989 fees paid to Thomas K. Benshop, P.A., were excessive. R.D. at 37, F.F. Nos. 124 and 133-135. An FDIC examiner testified concerning two 1988 estimates, $15,000 to $25,000 from Arthur Anderson, and $10,000 to $15,000 from Kennedy and Coe to audit the Bank. T.I. 70; R.D. at 37, F.F. No. 120. In 1988, the Bank paid Respondent's accounting firm $54,118.

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.

{{4-30-93 p.A-2157}} work that has been my only source of income for the past two years."15 Under the definition of an institutionaffiliated party, set forth in 12 U.S.C. § 1813(u)(3), a consultant who participates in the conduct of the affairs of a depository institution is an institution-affiliated party. Moreover, even if in the future Respondent does not meet the definition of an institutionaffiliated party set forth in section 3(u)(3) of the FDI Act, he would nevertheless be prohibited from "participating in any manner in the conduct of the affairs of," among other things, any insured financial institution as set forth in section 8(e)(7)(A) of the FDI Act by virtue of the outstanding prohibition order. See 12 U.S.C. § 1818(e)(7)(A) (emphasis supplied). If, in the future, Respondent seeks to participate in any manner in the affairs of an insured financial institution, he must first secure written consent, as set forth in 12 U.S.C. § 1818(e)(7)(B).

V. REMEDY

   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).

ORDER OF PROHIBITION FROM
FURTHER PARTICIPATION

   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. 15 The Board has been unable to find in the record a description of respondent's independent consulting.

{{4-30-93 p.A-2158}}

   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

RECOMMENDED DECISION

In the Matter of
Thomas K. Benshop,
individually and as a director,
institution-affiliated party of
The Colorado State Bank of Walsh,
Walsh, Colorado
(Insured State Nonmember Bank)

Arthur L. Shipe, Administrative Law Judge:

   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.

Discussion of Facts

   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 1 The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) became effective on August 9, 1989. The Notice in the instant action alleges conduct arising both before and after the enactment of FIRREA. Accordingly, the respondent's conduct before the effective date of FIRREA must be measured by the substantive requirements of thepre-FIRREA version of section 8(e), whereas the conduct resulting after the effective date must be measured by the post-FIRREA standard.

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.

{{4-30-93 p.A-2159}} closely-held entities was determined to be unmarketable.

   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 3 Interestingly, even before his election to the Board, respondent Benshop regularly attended the Board's meetings, under the title of "invited guest."

{{4-30-93 p.A-2160}} a nonrecurring loan package that had been purchased from the FDIC. The bank's overall capital position, however, remained deficient, and did not comport with the minimum capitalization required of 12 C.F.R. Part 325.

   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
{{4-30-93 p.A-2161}} company's default, such that respondent eventually came to lose his controlling ownership of all of his closely held interests.

   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.

Discussion of Law

   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:

Findings of Fact

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:
{{4-30-93 p.A-2162}}

    Thomas K. Benshop, P.A.7.75%
    Northland Management7.75%
    Aldrick Corporation4.65%
    Benshop Investments4.65%
    Barbara M. Benshop (wife)4.65%

(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 62–63)

   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 62–64, 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, 22–23, 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
{{4-30-93 p.A-2163}} Regulation O and were again classified at the 1989 Examination. (Tr. I at 174-75)

   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 39–40)

   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 77–78)

   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 42–43)

   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 44–45)

   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
{{4-30-93 p.A-2164}} attended a meeting at which the Bank's loan loss reserve was criticized. (FDIC Ex. 2, pp. 3, 5)

   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 51–52, 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 30–31, 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:

    a. January 3, 1989$60,674.40 ("bonus")
    b. March 1, 198930,000.00
    c. June 22, 198944,000.00
    d. August 10, 198910,000.00 ("salary")
    e. August 17, 198935,000.00
    f. December 1, 198925,000.00

    TOTAL:$201,674.40

{{4-30-93 p.A-2165}} (Tr. I at 37, 42, 43)

   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 40–41)

   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 54–55)

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
{{4-30-93 p.A-2166}} and continued to employ Thomas K. Benshop, P.A. (FDIC Ex. 1, p. 5; Tr. I at 59)

   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:

09-29-88$19,400.00
10-07-8819,400.00
12-15-8819,400.00
03-15-8919,400.00
06-13-8917,191.41
06-13-896,974.64

$101,766.02

(Admitted — Answer ¶ 57, Tr. I at 157)

   94. The Bank paid income taxes to the holding company for the fiscal year ending March 31, 1990 as follows:

07-05-89$23,750.00
09-06-8918,000.00

$41,750.00

   (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 56–57)

   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 59–60)

   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 59–60)

   109. The holding company is unable to repay the income tax payments owed. (Admitted - Answer ¶ 78; Tr. II at 33)
{{4-30-93 p.A-2167}}

   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 66–68)

   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 67–68)

   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 73–74)

   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, 99–100)

   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 66–68; 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, 94–95, 100, 170; Resp. Ex. 1, pp. 39–43)

   130. The accounting invoices further continued to contain charges for services ordinarily provided by directors. (Resp. Ex. 1, pp. 31–43; Tr. I at 171, Tr. II at 16)

   131. A significant portion of the 1989 fees
{{4-30-93 p.A-2168}} was paid for services other than accounting.

   (Tr. I at 96, 99–100)

   132. During 1989, the Bank paid the accounting firm $77,849. (Admitted - Answer ¶ 86; FDIC Ex. 3, p. 60; Resp. Ex. 1, pp. 31–43)

   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. 31–43; Tr. I at 66–68; 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. 31–43; Tr. I at 66–68; 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 74–75)

   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 72–73)

       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
    {{5-31-93 p.A-2169}} holding company, the Bank took the following corrective actions:

         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 73–74; FDIC Ex. 4, p. 6, 9, and 11)

Conclusion of Law

   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. §§ 1811–1831l, 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
{{5-31-93 p.A-2170}} breached his fiduciary duty as a director and person participating in the affairs of the Bank.

   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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