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   [5204] In the Matter of Henry P. Massey, First Bank, Houston, Texas, Docket No. FDIC-92-211e (10-5-93).

   FDIC accepts ALJ's recommendation and orders respondent prohibited from further participation in banking as a consequence of his unsafe and unsound practices, breaches of fiduciary duty, personal dishonest, and willful disregard for the safety and soundness of the bank.

   [.1] Prohibition—Factors Determining Liability—Disregard for Safety and Soundness
   By extending credit without requiring borrowers to fulfill loan conditions and concealing resulting problems from bank's loan committee, respondent exhibited continuing and willful disregard for the bank's safety and soundness.

   [.2] Prohibition—Factors Determining Liability—Dishonesty
   Tampering with bank records by withholding detrimental credit information from bank examiners and auditors constituted violation of law and was evidence of personal dishonesty.

In the Matter of
HENRY P. MASSEY, individually
and as an officer, director,
and/or person participating in
the conduct of the affairs of
FIRST BANK
HOUSTON, TEXAS
(Insured State Nonmember Bank)
DECISION AND ORDER
FDIC-91-211e

I. INTRODUCTION

   On September 9, 1991, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Intention to Prohibit From Further Participation ("Notice") against Henry P. Massey ("Respondent"), pursuant to section 8(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(e) (1982).1 The Notice alleges that Respondent, individually and as an officer, director, and/or person participating in the conduct of the affairs2 of First Bank, Houston, Texas ("Bank"), engaged in certain unsafe or unsound banking practices, and breached his fiduciary duty as an officer and director of the Bank, by concealing material adverse financial information from the Bank's Loan and Discount Committee ("Loan Committee") and the Bank's board of directors ("Directorate") in connection with the origination and/or renewal of four extensions of credit; that the Bank suffered substantial fi-


1 Because it occurred before enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 101 Stat. 183 (August 9, 1989) ("FIRREA"), Respondent's conduct will be measured by the pre-FIRREA standard of section 8(e)(2) of the FDI Act, 12 U.S.C. § 1818(e)(2). The scope of any removal order is determined by post-FIRREA section 8(e)(6) and (7) of the FDI Act, 12 U.S.C. §§ 1818(e)(6) and 1818(e)(7).

2 Respondent served as president, chief executive officer, and as a director of the Bank from November 1, 1985, to February 13, 1989, when he was terminated by the chairman of the board and tendered his resignation. Tr. at 40, 234, 248.
{{12-31-93 p.A-2314}}nancial losses totalling $697,652.76 with respect to these extensions of credit; that Respondent was involved in the removal of detrimental information from the Bank's files in order to conceal the same from examiners and external auditors, which conduct constituted a violation of law; and that the alleged acts and/or omissions of Respondent demonstrate willful and continuing disregard for the safety or soundness of the Bank and evidenced Respondent's personal dishonesty.
   After a hearing at which the Respondent appeared pro se,3 Administrative Law Judge Arthur L. Shipe ("ALJ"), issued a Recommended Decision ("R.D.") that Respondent be prohibited from further participation in the conduct of the affairs of any insured depository institution under section 8(e) of the FDI Act, 12 U.S.C. § 1818(e). Neither party filed Exceptions.
   After careful review of the entire record, the Board adopts the ALJ's Recommended Decision except as described below, and finds that the record as a whole supports prohibition of Respondent from further participation in any federally insured financial institution. The Board also reviewed Respondent's requests for additional discovery and an additional continuance and has concluded that the denials were appropriate and did not unfairly inhibit Respondent's ability to defend himself.

II. DISCUSSION

   The Board concludes that the reasons stated by the ALJ for denying Respondent's discovery requests, specifically that his requests were intended to delay and obstruct the proceeding and that he had ample opportunity to prepare a defense, but chose not to, are supported by the record and appropriate in the circumstances.
   However, because Respondent appeared pro se, and argues that denial of discovery requests deprived him of a fair opportunity to defend, the Board has reviewed the record to determine whether more liberal discovery would have assisted the Respondent.
   The Board is satisfied that Respondent's unsuccessful discovery requests either had no relevance to the charges against him or could not have influenced the credibility or nature of the record of evidence concerning the charges.4 With respect to the Fort Bend Nissan and Turtur Nissan credits—as to which Respondent was denied certain discovery—the Board finds that if discovery revealed the facts which Respondent alleges would be revealed, the Board would nevertheless conclude with respect to those two credits that Respondent engaged in unsafe or unsound practices and breached his fiduciary duty to the Bank.
   As to the other loan transactions in question, the files were made available to Respondent, but he failed to review them.
   The Board concludes that even if the charges against Respondent were limited to those loans for which discovery was made available, and the record tampering charges (for which no relevant discovery was requested), the preponderance of evidence of record would demonstrate Respondent's willful and continuing disregard for the safety or soundness of the Bank and his personal dishonesty, thus supporting the prohibition of Respondent from further participation in the banking industry.
   With respect to other defenses raised by Respondent, the Board agrees with the ALJ's findings and conclusions.

III. CONCLUSIONS

   [.1] The Board agrees with and adopts the ALJ's Findings of Fact and Conclusions of Law, except for minor corrections as noted.5 The Findings of Fact are clearly supported by a preponderance of the evidence of record, which reveals a pattern of conduct in which


3 Initially, the ALJ issued a Recommended Decision on default, but the Board of Directors of the FDIC ("Board") remanded for hearing, because the Respondent filed an eleventh-hour Answer. In the Matter of Henry P. Massey, Docket No. FDIC-91-211e, 1 P-H Enf. Dec. ¶5182 (9-15-92).
On remand, Respondent filed extensive discovery requests, most of which were denied, but failed to review the files made available. At the hearing, Respondent questioned the FDIC Enforcement Counsel's witnesses, and testified, but presented no other witnesses or documents. (FDIC Enforcement Counsel called four present and former Bank officers and/or directors and an FDIC Bank Examiner, and introduced 112 exhibits.)

4 Most of Respondent's denied discovery requests concerned matters unrelated to the charges, but which he said were related to witness credibility. He could not articulate how the discovery might enable him to impeach witnesses, and the Board could find no apparent connections.

5 Finding of Fact No. 96 is corrected to read, "[r]espondent's February 18, 1987 loan proposal for Servos did not reflect the true status of the Commonwealth stock." Conclusion of Law No. 7 is modified to read, "[i]t is an unsafe or unsound practice to engage in or otherwise participate in a violation of law in the course of and related to performing official duties as an officer, director or person participating in the affairs of an insured depository (Continued)

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Respondent sought approval of a loan, allowed the loan to be made without fulfillment of the loan conditions, and concealed the resulting problems from the Loan Committee and Directorate. Each of the loans at issue resulted in substantial losses to the Bank. Moreover, the record shows that Respondent also withheld detrimental credit information from bank examiners and auditors by tampering with Bank records.

   [.2] The Board concludes that Respondent's conduct constituted repeated unsafe or unsound practices and breaches of fiduciary duty of the Bank, is evidence of personal dishonesty, and demonstrates a willful and continuing disregard for the safety or soundness of the Bank, causing the Bank to suffer substantial financial losses in the aggregate sum of $697,652.76 and compromising the integrity of Bank records; and that the Respondent should be permanently prohibited from future participation in the affairs of the banking industry under the provisions of section 8(e) of the FDI Act, 12 U.S.C. § 1818(e).

ORDER

   The Board of Directors of the Federal Deposit Insurance Corporation, having considered the entire record in this proceeding, finds that Respondent Henry P. Massey engaged in unsafe or unsound banking practices, breached his fiduciary duty to the Bank, and violated the law, while a director, officer, and institution-affiliated party of the Bank; that by reason of such practices and breaches of fiduciary duty, Respondent caused the Bank to suffer substantial financial losses; that such practices and breaches demonstrate Respondent's willful and continuing disregard for the safety or soundness of the Bank, and his personal dishonesty; and that such practices and breaches demonstrate Respondent's unfitness to serve as a director, officer, or institution-affiliated party of any insured depository institution, or any other agency or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A).
   IT IS FURTHER ORDERED, that Respondent shall not
   (A) participate in any manner in the conduct of the affairs of any institution or agency specified in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A);
   (B) exercise in any manner any voting rights in an institution described in section 8(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal banking agency as defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D);
   (C) violate any voting agreement previously approved by the appropriate Federal banking agency as defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D); or
   (D) vote for a director, or serve or act as an institution-affiliated party.
   IT IS FURTHER ORDERED, that the Respondent may not, while this ORDER is in effect, continue or commence to hold any office in, or participate in any manner in the conduct of the affairs of, an insured depository institution or any other institution described 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 defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D).
   IT IS FURTHER ORDERED, that the Executive Secretary, or his designee, is instructed to execute and serve copies of the attached Decision and Order on Respondent, FDIC Enforcement Counsel, the Administrative Law Judge, the Bank, and the Banking Commissioner for the State of Texas.
   IT IS FURTHER ORDERED, that this ORDER shall be effective at the expiration of thirty days after service upon Respondent.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 5th day of October, 1993.
   /s/ Robert E. Feldman
   Deputy Executive Secretary

_______________________________________

RECOMMENDED DECISION

Arthur L. Shipe, Administrative Law Judge:


5 Continued: institution." On page 19 of the Recommended Decision, the date of the penultimate line is corrected to read, "October of 1987."
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I. SUMMARY

   This action was instituted by the Federal Deposit Insurance Corporation on September 9, 1991, by the issuance of a Notice of Intention to Prohibit the above respondent, Henry P. Massey, 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 ("Act"), 12 U.S.C. § 1818(e) (1982).1
   The Notice alleges that Respondent, in his capacity as director, officer, and institution-affiliated party of the First Bank, Houston, Texas, engaged in certain unsafe and unsound practices, or committed certain acts, omissions, or conduct, which constitute a breach of the Respondent's fiduciary duty to the institution.
   The Notice further alleges that by these acts and practices, the Respondent has demonstrated personal dishonesty and/or his willful or continuing disregard for the safety or soundness of the Bank, which has suffered substantial financial loss or other damage. The Notice set hearing on the question of whether the Respondent should be prohibited from industry participation under the provisions of Section 8(e) of the Act.

II. PROCEDURAL HISTORY

   This proceeding was initially recommended for disposition by reason of default. On December 18, 1991, after the Respondent failed to appear and answer the allegations contained in the Notice, Enforcement Counsel for the Federal Deposit Insurance Commission moved for entry of a default order.
   The Respondent was directed to Show Cause why default should not be entered, and after failing to appear and show any such cause, a Recommended Decision on Default was entered June 11, 1992, granting the FDIC Motion.2
   On September 15, 1992, the FDIC Board of Directors denied the Motion for Entry of an Order on Default, and remanded the proceeding to the Administrative Law Judge for further hearing. Pursuant to Notice dated September 25, 1992, a telephonic Scheduling Conference convened on October 30, 1992. Respondent did not appear at the Conference, nor did he comply with the provisions of a previous Order, which required that he file with this office a certification of his current address and telephone number.3
   The Oral Hearing was scheduled to commence on December 8, 1992, in Houston, Texas. Respondent later appeared and moved for a six month continuance of the proceeding for the purpose of engaging in requested discovery. His motion for continuance of the proceeding was denied, and the hearing convened as scheduled.
   The Enforcement Counsel presented the agency's case in chief. Respondent Massey, citing the need for further discovery, refrained from any significant cross examination of the government's witnesses, and negotiated with the enforcement counsel a two month adjournment of the proceeding, during which certain document discovery would be made available to him. After Enforcement Counsel rested, the proceeding was adjourned until February 8, 1993.
   During the course of the two month adjournment, a number of relevant documents were made available to the respondent for his inspection and copying, including all of the applicable loan and legal files of the First Bank, as well as certain other documents that had been requested by the respondent, and were retrieved from the receiver of the failed RepublicBank-Spring Branch, N.A.4


1 The conduct alleged in this proceeding occurred prior to the enactment of the Financial Institutions Reform, Recovery, Enforcement Act of 1989 (FIRREA). FIRREA had the effect of amending Section 8(e) of the Act. While any relief to be granted in this proceeding will be governed by the Act as amended, the conduct alleged in the Notice must be measured under the pre-FIRREA standards.

2 In response to the personal service of the Show Cause Order, the Respondent appeared pro se, filing his Answer to the Notice. The Answer, however, was not received until after the Recommended Decision on Default had already been transmitted to the FDIC Board.

3 The Respondent has complained throughout this proceeding that he has received inadequate service of the various pleadings that have been issued. A review of the record indeed indicates that most, if not all correspondence addressed to the Respondent at his address of record, was eventually returned by the U.S. Postal Service as undelivered. The reasons, however, for the difficulty in receipt of such correspondence are attributable only to the respondent's own furtive actions, by refusing to claim the correspondence after being notified by the postal service of its availability, or by closing his box, and then continuing to use the closed post box as his address of record. To insure adequate notice of the Oral Hearing, I ordered the FDIC Enforcement Counsel to personally serve each hearing notice upon this Respondent.

4 Management of the First Bank refused to permit Respondent Massey upon the bank's premises for the (Continued)

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   The record reflects that respondent made no effort whatsoever during this two month adjournment to review, inspect, or copy any of the documents that were made available to him. Rather, Respondent began the process of requesting further discovery, filing no fewer than six additional document requests upon the Enforcement Counsel. Enforcement counsel opposed the additional discovery requests, which requests were then denied.
   Despite the Respondent's several motions for further continuance and reconsideration, the Oral Hearing reconvened as scheduled, on February 8, 1993. As a preliminary matter, the Respondent presented argument on his need for additional document discovery, conceding that he had not taken the opportunity to review or inspect those documents made previously available to him at considerable effort.
   At that point I concluded the Respondent's various motions were not out of any genuine desire to conduct further discovery, for he had not made any evidentiary use of the discovery materials which were available to him. Rather, it was apparent that his actions were primarily designed to further delay and obstruct this proceeding, and the requests were therefore denied.
   A pro se respondent should be accorded some procedural latitude in legal proceedings, and I have endeavored to afford this particular respondent that latitude which is due. Had he honestly and genuinely pursued the available discovery, I may have been inclined to permit him leave for further such efforts. His conduct throughout, however, has been otherwise, and he has elected not to take advantage of those opportunities previously made available. His claimed need for further discovery is quite simply disingenuous, and is not motivated out of any desire to defend his actions, but rather, to delay and postpone the conclusion of this proceeding.
   The evidence of record is sufficient to support the entry of Findings of Fact and Conclusions of Law, and the Respondent has had ample opportunity to prepare a defense, but has chosen not to. Accordingly, I enter the following Discussion, Findings of Fact, and Conclusions of Law.

II. DISCUSSION

   Respondent Massey is the former President and Chief Executive Officer of the First Bank, a federally insured state nonmember bank located in Houston, Texas. He was elected to this position in November of 1985, and continued in such duties until his dismissal in February of 1989.
   Before joining the First Bank, respondent previously served as Chief Executive Officer of another Houston banking institution, the RepublicBank-Spring Branch, N.A..
   As the new President and Chief Executive Officer of the First Bank, respondent naturally exercised significant control over the overall operation of the bank. He held significant responsibility in connection with his duties as President and CEO, as a member of the bank's board of directors, as well as the bank's Loan and Discount Committee ("Committee").
   The Notice instituting this proceeding alleges that Respondent Massey engaged and participated in unsafe and unsound practices, through the commission of certain acts or omissions which constituted breach of his fiduciary duty to the bank. The Notice specifically sets forth five allegations, the first four of which involve various loan transactions, in which Respondent is alleged to have concealed from the bank's loan committee and directorate, certain material facts and financial information in connection with the origination, extension, and renewal of these various loans.
   The fifth and final allegation avers that Respondent, in his position as a senior executive officer, directed and participated in the criminal tampering with the bank's files and records, by removing certain detrimental information therefrom, for the purpose of concealing this information from bank examiners and external auditors. It is alleged that Respondent removed and then stored this negative documentation in certain "working files," which were maintained within his exclusive custody and possession.
   The discussion concerning each of these allegations is set forth below, in the order in which the allegations appear in the Notice.


4 Continued: inspection of bank documents. Therefore Enforcement Counsel made arrangements for the transfer of all applicable documents to the FDIC Houston Field Office, for review by Respondent Massey at his convenience.
{{12-31-93 p.A-2318}}A. C.M. Turtur Credit
   On July 15, 1987, Respondent Massey presented to the Loan and Discount Committee a proposal for the extension of a $150,000 revolving line of credit to C.M. Turtur Investments, Inc. ("Turtur Investments"). The minutes of the committee meeting reflect the respondent's representations that this particular credit would be fully secured by an assignment of certain life insurance commissions, as well as the personal guaranty of the corporation's chairman, Mr. Chris M. Turtur. Based upon these representations, the credit extension was approved by the committee.
   In an attempt to properly collateralize the loan, the Respondent corresponded with three insurance companies on July 17, 1987, in which he notified the companies of Mr. Turtur's assignment of the commissions to the bank, and requested the companies to acknowledge the existence of the bank's priority lien on the commissions.
   By early August of 1987, the Respondent was notified by each of the three companies that the pledge of the insurance commissions would not be honored, as each of the companies refused to waive any rights associated with their respective priority claims.
   By letter dated August 19, 1987, Respondent wrote Mr. Turtur, acknowledging that the loan could not be properly collateralized by the insurance commissions, and that further arrangements must be made to either secure substitute collateral for the loan, or to immediately retire the indebtedness.
   By this time Turtur Investments had taken four draws against the credit line for an aggregate amount of $70,000. Notwithstanding his personal knowledge of the unsecured status of the line, the Respondent permitted this borrower to take five additional draws against the credit, commencing on August 20, 1987, and ending on September 15, 1987, for an additional $75,500. The record reflects that no additional collateral had been secured from the debtor to justify these subsequent extensions, nor were any limitations imposed upon the credit to restrict these further draws.
   On February 17, 1988, the Turtur credit came before the loan committee for review and renewal. Respondent Massey presented the Loan and Credit Summary to the committee, recommending renewal of the credit. The summary presented by Respondent falsely reflected that the credit remained fully collateralized by the life insurance commissions, and nowhere mentioned the refusal by the various insurance companies to acknowledge the bank's lien.
   At hearing, the testimony of the various members of the loan committee was clear and unequivocal. Had any notice of the collateral deficiency been presented to the committee, renewal of the Turtur credit would have been immediately denied, and efforts would have been immediately undertaken to either secure substitute collateral, or to retire and call the indebtedness.
   The record reflects that on February 28, 1988, Turtur Investments, Inc. filed a petition for protection under Chapter 11 of the United States Bankruptcy Code. This fact was personally known by the respondent as early as March of 1988, when he participated in a telephone conference with the bank's outside bankruptcy counsel concerning the proceeding.
   It was policy of the First Bank to publish a monthly "Problem Loan Report," which was distributed to the loan committee and the members of the board. The problem loan report was designed to notify the directors and officers of any potential collection problems on loans in excess of $25,000.
   This report was the responsibility of each individual credit officer. Any adverse information concerning the financial ability of a borrower was to be listed in the report, including information on delinquent payments, foreclosure or legal action, and most certainly, any notice of potential bankruptcy.
   The record reflects that Respondent Massey failed to list the Turtur bankruptcy filing on the problem loan report for a period of eight consecutive months, during which the credit was again reviewed and renewed by the loan committee on three occasions. The evidence clearly establishes that at each and every committee meeting, Respondent Massey, the originating credit officer, falsely represented to the members of the committee that the loan remained collateralized by the insurance commissions. At no time during this period were the committee members ever made aware of the fact that the debtor had filed for bankruptcy protection.
   On September 15, 1988, the Respondent, for the first time, disclosed on the bank's problem loan report the fact that this particular borrower had filed a bankruptcy petition some eight months earlier.
{{12-31-93 p.A-2319}}    The borrower eventually defaulted on the obligation, and the bank's attempts to foreclose upon the purported collateral were, naturally, unsuccessful. Less than one year later, the bank charged as loss the total balance of this particular credit, in the amount of $149,436.50.
   In defense of his actions, the Respondent argues that there existed other insurance companies whose commissions were pledged as collateral for the loan. Respondent argues that some eleven or twelve companies were involved, beyond just the three companies which have been established by this record, such that his actions were justified in originating, extending, and renewing the credit.
   Respondent had access to all of the bank's records, and could have presented such evidence, if any existed. The fact of the matter is, and the Respondent has not disputed, that the entire amount of this loan was charged as loss by the bank, as any and all efforts to foreclose upon the collateral were unsuccessful.
   Further the respondent argues that the committee was aware of the status of this particular borrower, and acted with full knowledge of such condition. This allegation, however, is completely refuted by all of the evidence of record, which clearly establishes that the Respondent concealed this important information from all concerned, and repeatedly misrepresented to the loan committee the known facts and circumstances concerning this particular loan transaction.

B. Fort Bend Nissan/Turtur Nissan Credit

   At his former position with RepublicBank-Spring Branch, N.A., Respondent Massey had occasion to extend credit to an automotive dealership known as Fort Bend Nissan, Inc. The former loan to Fort Bend Nissan had been secured by the equipment, furniture, and fixtures of the dealership, which security interest had been perfected by the UCC financing statement, properly filed by RepublicBank on February 3, 1984. Respondent Massey, in his capacity as the former chief executive officer of RepublicBank, personally executed the above financing statement.
   Thereafter on May 31, 1985, the Nissan Motor Acceptance Corporation perfected a priority lien upon the inventory and receivables of the dealership, by properly filing for public record a UCC financing statement.
   On November 6, 1985, five days after the Respondent had assumed his new position with the First Bank, a proposal was presented to purchase the Fort Bend Nissan loan from the RepublicBank. The proposal, which was intended to provide additional working capital for the dealership, was represented to the loan committee as collateralized by the equipment, furniture, and fixtures of the dealership, as well as the inventory and receivables, which assets were, of course, subject to priority lien of Nissan Motor, perfected some six months earlier.5
   The Respondent personally attended the committee meeting at which this loan was proposed and approved, and also attended the meeting of the board of directors at which the loan was ultimately ratified.
   In considering this proposal, the bank ordered a lien search of the dealership. The search report, which was issued on November 6, 1985, indeed reflected the fact that Nissan Motor Acceptance Corporation held a recorded lien upon the dealership, but did not specify the type of collateral that was encumbered by either the Nissan or the RepublicBank liens.
   Notwithstanding the report and his prior personal knowledge of the credit, Respondent directed the preparation of proposed loan and security documents, which incorrectly reflected the collateral as including inventory and receivables of the dealership. On December 27, 1985, the bank purchased the loan from RepublicBank, in the amount of $346,893.91, taking assignment of the RepublicBank lien.
   In connection with this transaction, the two principals of the dealership, Messrs. Servos and Papadakis, executed a promissory note for the principal sum of $400,000, and the balance of the loan proceeds were then disbursed to Servos and Papadakis for use in the dealership's operations.
   The Respondent, though he knew or should have known, failed to disclose the fact that both the inventory and accounts receivable of the dealership were the subject of a prior encumbrance of record, filed on behalf of Nissan Motor.
   On July 1, 1987, Respondent presented


5 The inventory and the accounts receivable were the two assets of most significant value to this transaction.
{{12-31-93 p.A-2320}}the committee a proposal to finance the sale of the Fort Bend Dealership to Turtur Investments, the same debtor subject of the preceding transaction.
   Under the Turtur loan proposal, Turtur Investments was to assume the outstanding balance of the loan in the amount of $282,893.91, with the collateral remaining the same as reflected in the prior documents. As further security, the bank would also require the personal guaranty of Mr. Turtur.
   Because of the prior lien upon inventory and receivables, the loan as proposed by Respondent could not possibly be fully collateralized. Respondent, however, represented to the committee and the directorate otherwise, and the loan was approved and funded on July 22, 1987.
   On February 28, 1988, Turtur Investments, as discussed above, filed a petition for relief under Chapter 11 of the United States Bankruptcy Code. The Respondent, though he had actual knowledge of the bankruptcy petition as early as March of 1988, concealed this fact for the committee and board, and on August 10, 1988, presented a proposal for renewal of the Turtur Nissan credit.
   The purported collateral for the proposed renewal remained the same, and based upon the recommendation of the Respondent, the renewal was approved.
   Turtur investments defaulted on this obligation likewise, and the bank began steps to foreclose upon this collateral. Soon thereafter it was discovered that no secured interest was held in either the inventory or receivables of the dealership, and the bank subsequently suffered a loss on the credit in the amount of $222,893.91.
   The evidence presented at hearing on this matter was likewise very clear. Had either the committee or the board been properly advised of all material and relevant facts concerning the collateral securing this credit, the original loan to Servos and Papadakis would never have been extended, the sale of the dealership to Turtur Investments would never have been financed, and the loan to Turtur Investments would never have been renewed.
   Respondent Massey does not dispute that the bank acquired an unperfected security interest in the contested collateral. He insists, however, that the former position of the RepublicBank was indeed secured by the inventory and receivables of the dealership, and that through fault of some other unspecified bank employee, assignment of the wrong lien was accepted. It was this action, he claims, which then caused the First Bank to lose its priority position with respect to the collateral. Respondent maintains that documents from the files of the failed RepublicBank can support such contention, which documents have not been produced in this proceeding.
   First, I quite frankly do not believe this contention.
   Second, even if the RepublicBank did have at one time a perfected interest in this collateral6, the fact of the matter is that First Bank, the institution to which Respondent owed his fiduciary duty of care, ultimately received an unsecured interest in the collateral, which situation the Respondent knew or certainly should have known, and which should have been immediately disclosed to the other members of the committee and board.
   Finally, those documents filed with the office of the Texas Secretary of State are really the only documents material in determining whose security interests are perfected, and with what level of priority. Therefore, regardless of what documents may be retrieved from the files of the failed RepublicBank, the fact of the matter is those documents are not and were not filed in such manner to perfect the interest of either Republic of the First Bank, which interests it was Respondent's duty to protect.

C. Servos and Papadakis Loans

   On August 13, 1986, Respondent Massey presented to the Loan Committee a proposal to extend a $430,000 commercial loan to Messrs. Servos and Papadakis, who were business associates with another enterprize known as James Coney Island. The Respondent's proposal to the committee indicated that the loan was to be secured by 40,000 shares of stock, with a purported fair market value of $640,000.


6 The shear weight of all evidence clearly suggests that this cannot be so. RepublicBank, the Respondent admits, did not finance the acquisition of the dealership inventory, and it simply strains credulity to conclude that the Nissan Motor Corporation, who did so finance, would, for whatever reason, subordinate its claim to RepublicBank.
{{12-31-93 p.A-2321}}
   The evidence is clear that at the time of the proposal the understanding of all committee members, as well as the directorate, was that this loan would be a first-lien credit extension, secured by actual possession of the collateral stock. Based upon this understanding, the loan was approved as proposed.
   For reasons that appear calculated to circumvent the bank's legal lending limits, the Respondent thereafter divided the credit into two separate loans. One-half of the total amount was allotted to each borrower, and then booked as two separate loans, the proceeds of which were extended on August 22, 1986.7
   At the time the loan was funded, the record reflects that possession of the collateral stock had not been accomplished, and in fact, three days after disbursing the loan proceeds, Respondent learned by letter that the brokerage firm of Kidder Peabody & Company held the stock to secure a margin debt, such that First Bank was in an unsecured lien position.
   Over the next year, each of these two loans came before the committee on three separate occasions for review and renewal. At each of the three reviews, Respondent continued his representation that the outstanding loans were secured by the stock, making no disclosure whatsoever that attempts to procure possession of the collateral had been unsuccessful.
   At each of the above reviews, the committee closely monitored the value of the stock, which had dropped precipitously since the initial loans were made. Director Papadopoulos, in particular, was concerned about the deteriorating value of the stock, and on repeated occasions suggested to Respondent that the stock should be sold to protect the bank's interests.
   The record reflects that Respondent Massey would convince and persuade the committee members, including Director Papadopoulos, that the bank should continue holding the stock. The Respondent argued that the value was expected to soon rise, based upon some inside information he alleged to know. Respondent further convinced the members that to force a sale of the stock in such distressed conditions might jeopardize the financial condition of the borrowers. In October of 1989 the value of the stock slid even further, to a value less than the amount of the outstanding loans. After again considering the possibility of foreclosing upon the collateral to pay the loans, the committee, at Respondent's suggestion, decided to demand of the two borrowers additional collateral, which would secure that portion of the indebtedness not covered by the stock's current value. The additional collateral was eventually secured.
   At some point during the year 1988 the loans became past-due and nonperforming. It was at this point that the committee and board members discovered, for the first time, that the stock was not in the bank's possession, and that despite Mr. Massey's repeated representations, the bank had no security interest whatsoever in the collateral.
   The bank immediately began the process of arranging for substitute collateral, but was unable to fully secure the indebtedness, and in the year 1989 sustained a total loss on the two credits in the amount of $306,340.95.
   At no point does the Respondent ever dispute this allegation. He claims at one point he thought the bank had secured powers of attorney from the borrowers to sell the stock in the event of default. Even if that did occur, which the evidence suggests that it did not, the collateral position with respect to the loans would have remained unsecured, until possession of the stock were ultimately achieved.

D. Rincon Loans

   Between January and April of the year 1986, the First Bank made four extensions of credit to borrower Joseph Rincon III. The first, which was extended on January 22, 1986, was a 90 day loan in the amount of $6,500, collateralized by a 1985 Ford Mustang. The purpose of the loan was to purchase and repair the automobile, and to pay certain unspecified "personal expenses."
   Mr. Rincon's credit application was incomplete and inaccurate in a number of material respects, and his credit report, which was considered in connection with the application, reflected adverse financial information in the form of a federal tax lien in the amount of $17,785.


7 The proceeds of both loans were combined and distributed into the personal bank account of Mr. Servos. This suggests that the entire amount of the indebtedness was originally intended for this particular borrower.
{{12-31-93 p.A-2322}}
   On March 17, 1986, the above loan was scheduled for renewal. Respondent Massey served as the originating officer of the renewal loan, which rolled the former loan into a new note, and provided for an additional cash advance in the amount of $2,000. The credit application submitted for the renewal loan was likewise incomplete, and the borrower's credit report continued to reflect the existence of the federal tax lien. Notwithstanding the above circumstances, and in violation of prudent lending practices, Respondent approved the renewal loan in the amount of $10,608, an amount within his respective authority to lend.
   Less than two weeks later, on March 31, 1986, Mr. Rincon applied for yet another loan. This request sought an unsecured loan in the amount of $3,500, for the stated purpose of repairing a 1984 Toyota truck. Respondent Massey approved the loan the following day, despite the derogatory credit information that concerning this borrower.
   Some three weeks later, Mr. Rincon applied for his fourth and final loan, in the amount of $6,829.04. The purpose of this particular loan was to retire a prior installment debt at the RepublicBank-Spring Branch, N.A. The loan was to be collateralized by a 1976 Chevrolet Corvette, which had been pledged to secure the Republic loan.
   Mr. Rincon had, in fact, defaulted on the Republic loan, and the Corvette automobile had been repossessed by that institution, to be sold to satisfy the balance owed. Mr. Rincon had until April 27, 1986, in which to redeem the collateral.
   These facts notwithstanding, Respondent Massey approved the loan application on April 23, 1986, essentially allowing the purchase of a defaulted loan from the RepublicBank, without taking any steps whatsoever to secure the transfer of the collateral to First Bank.
   Soon thereafter, Mr. Rincon defaulted on all of his loans with First Bank, which thereafter undertook the costly process of repossessing the Corvette, restoring it to salable condition, and disposing of the collateral by sale. Despite the sale of the above collateral, the bank sustained a total loss on the Rincon credits in the amount of $18,981.
   In response to these allegations, the Respondent argues that none of the other loan officers brought to his attention the existing tax lien, and that he had no knowledge whatsoever that the installment indebtedness being purchased from the other institution was in default.
   The Respondent admits, however, that the borrower's credit report was contained within the loan file, which file he personally reviewed on each of the three occasions in which he approved the various Rincon loans. His responsibility cannot in any fashion be placed upon the other employees of the institution.
   Nor can his ignorance of the status of the Republic loan in any way excuse his actions, for a simple inquiry of the other institution would have immediately revealed the default status of this borrower. Under the circumstances, the Respondent's claim of ignorance, which claim, quite frankly, I do not believe, does not and cannot excuse this imprudent and unsafe action.

E. Record Tampering

   The evidence clearly establishes that Respondent Massey repeatedly tampered with the Bank's records and credit files, in his attempt to conceal negative information from bank examiners, auditors, officers, and other directors of the bank. For example, on one occasion the bank's chief operating officer, as she was leaving the bank for the evening, noticed Respondent Massey, along with other loan officers, diligently reviewing the credit files. As she approached the Respondent to inquire about this unusual night-time activity, she was told to go home for the evening, that her assistance was not needed, and that all would be later explained.
   The following day she questioned one of the loan officers about their activities the evening before. It was at that point that the loan officer indicated that Mr. Massey had instructed all of the junior officers to stay late that evening, and to remove any negative or derogatory information that might exist within the credit files, These officers were instructed to transfer the negative information into a "working file" that would not be accessible to the bank's examiners or auditors.
   On another occasion, during the midst of an FDIC examination of the institution, Respondent Massey brought to one of the loan officers a list, which he instructed her to type and then duplicate for distribution to the other officers.
   Though unknown to her at the time, this loan officer later learned that the list brought to her by the Respondent was a list of credit
{{12-31-93 p.A-2323}}files that the examiners would be reviewing the following day. The Respondent had been seen by another employee of the bank, surreptitiously removing this list from the examiner's portfolio, and then later replacing it, in an apparent effort to obstruct the examination process.
   The list was then distributed to the other loan officers, who were directed to purge the listed files of any negative information, in an attempt to conceal such from the examiners.
   The evidence of record goes on to establish that Respondent stored certain files off the bank's premises, in violation of bank policy, that he instructed certain officers in writing to purge files or to create separate "working files," and that he directed that certain files be "screened" before being given to examiners or auditors.
   The Respondent simply denies these allegations. His denial, when contrasted with the substantial and credible evidence to the contrary, must be rejected. The evidence clearly and convincingly establishes a very disturbing pattern of continuous record tampering on the part of the Respondent, in violation of safe and sound banking practices and applicable federal law.

DISCUSSION OF LAW

   Since the conduct at issue in this proceeding occured prior to the enactment of the Financial Institution Reform, Recovery, and Enforcement Act of 1989 (FIRREA), the Respondent's actions must be measured under the pre-FIRREA standards of Section 8(e) of the Act, 12 U.S.C. § 1818(e)(1982). See In the Matter of Stoller, FDIC 90-115e, FDIC Enf. Dec. & Ord. ¶5174 at A-1872 (1992). Those standards provide that the appropriate Federal Banking agency may remove or permanently prohibit any director or officer of an insured bank, who has engaged in specific misconduct (engaging in violations of law, unsafe or unsound banking practices, or breaches of fiduciary duty), which misconduct has a particular effect (financial gain to the respondent or substantial financial harm or other loss to the institution), and where it is shown that the misconduct involved culpability of a particular degree (personal dishonesty, or a willful or continuing disregard for the safety and soundness of the institution).
   In the instant case, the Respondent's conduct in each of the four loan transactions described above, constitutes unsafe and unsound banking practices within the meaning of Section 8(e). His continued concealment of known facts from the bank's committee and board constituted breaches of his fiduciary duty to the institution, while his removal of files and information from the bank's records constitutes violations of applicable law.
   Though Respondent has not received any financial gain by his actions, he has inflicted upon the institution substantial financial loss in the total amount $697,652.76.
   Finally, the Respondent's conduct clearly demonstrates the requisite personal dishonesty, and willful and continuing disregard for the safety and soundness of this bank.
   Accordingly, I must recommend his permanent prohibition from the industry, and to that end, enter the following Findings of Fact, Conclusions of Law, and Proposed Order.

FINDINGS OF FACT

A. Introductory Matters
   1. At all time pertinent to the charges herein, the First Bank was a corporation existing and doing business under the laws of the State of Texas, with a principal place of business in Houston, Texas.
   2. On or about November 1, 1985, the Respondent was elected President and Chief Executive Officer ("CEO") of the Bank; and continued to serve in such capacity until his eventual dismissal on or about February 13, 1989.
   3. At all times pertinent to the charges herein, Respondent was a member of the Bank's Board of Directors ("Directorate"), as well as the bank's Loan and Discount Committee ("Committee").
   4. By virtue of his position as the senior executive officer, Respondent was responsible for all of the Bank's daily affairs.
   5. Respondent exercised a controlling influence over the management, policies and practices of the Bank, including extensions of credit.

B. C.M. Turtur Investment

   6. On or about July 15, 1987, the Respondent presented a proposal to the Loan Committee for a $150,000 revolving line of
{{12-31-93 p.A-2324}}credit to be extended to C.M. Turtur Investments, Inc. ("Turtur Investments").
   7. The collateral for this line of credit to Turtur Investments was to be an assignment of life insurance commissions by, and the personal guaranty of, Mr. Chris M. Turtur ("Turtur").
   8. The line of credit to Turtur Investments was approved by the Committee at its meeting of July 15, 1987.
   9. On July 29, 1987, the loan was formally approved by the Committee and entered upon the Bank's books.
   10. On behalf of Turtur Investments, Mr. Turtur executed a Commercial/Business Purpose Note and Security Agreement, each dated as of July 17, 1987, in favor of the Bank.
   11. To secure repayment of this loan, Mr. Turtur executed, in his individual capacity, an Owner's Consent to Pledge, as well as a Guaranty Agreement, each dated as of July 17, 1987.
   12. At all relevant times, Respondent Massey was the servicing officer on Turtur Investments credit.
   13. On or about July 17, 1987, Respondent sent correspondence to the Philadelphia Life Insurance Company, the Combined Insurance Company of North America, and the Transamerica Life Insurance Company, (collectively, "Insurance Companies") notifying them of Turtur's assignment of commissions.
   14. By his letters the Respondent requested acknowledgement by the various insurance companies of the existence and priority of the Bank's lien, the execution of waivers to any present and future commissions owing to Turtur, and the remitter of all such commission checks.
   15. The submission of this request by Respondent to the Insurance Companies was in accordance with existing practices of the Bank.
   16. In late July or early August of 1987, the Respondent received correspondence from the Insurance Companies stating that each asserted prior contractual claims to Turtur's commissions.
   17. Given these prior claims of the Insurance Companies, Turtur's pledge could not be effected and the Bank could not perfect a preferred lien upon the commissions.
   18. By this time Turtur Investments had taken four draws against the credit facility totalling $70,000.
   19. On August 19, 1987, Respondent advised Mr. Turtur by letter that the Bank lacked a collateral position in the commissions.
   20. Notwithstanding his knowledge of the Insurance Companies' prior claims, Respondent permitted Turtur Investments to make five additional draws against the credit, for a total amount of $75,500.
   21. Of the five draw requests, Respondent personally signed those made on August 20, 1987, September 14, 1987 and September 15, 1987.
   22. The other two draw requests were authorized by credit officers Pat Olle and Jeff Velligan, both of whom reported to Respondent.
   23. Under the Bank's policies and procedures, Respondent, as the originating loan officer, could delegate to junior officers the authority to disburse funds to a borrower, such as Turtur Investments.
   24. Bank policy required that the junior officers first report to Respondent before actual disbursement of the funds.
   25. Respondent violated the Bank's lending policy and internal controls by authorizing or otherwise permitting Turtur Investments to make continued draws against the unsecured credit line.
   26. Respondent did not disclose the collateral problem to the Committee when the Turtur credit line was presented for renewal on February 17, 1988, and on July 6, 1988.
   27. Respondent did not disclose the collateral problem to the Directorate when the Turtur loan renewals were ratified.
   28. Respondent's continued failure to disclose the collateral problem with the Turtur Investments credit constituted a breach of the Bank's policies and procedures.
   29. The Bank sustained a $149,436.50 loss on August 11, 1989, when the line of credit to Turtur Investments was charged.

C. Fort Bend Nissan/Chris Turtur Nissan

   30. Before his employment with the Bank, Respondent served a senior executive officer at Republic Bank - Spring Branch, N.A.
   31. In or about February, 1984, Republic extended a loan to an automotive dealership known as Fort Bend Nissan, Inc. ("Fort Bend"). This loan was secured by all of the
{{12-31-93 p.A-2325}}dealership's equipment, furniture and fixtures.
   32. Respondent had actual knowledge of the Republic lien, as evidenced by his personal execution of the UCC Financing Statement filed by Republic with the office of the Texas Secretary of State on February 3, 1984.
   33. On May 31, 1985, Nissan Motor Acceptance Corporation ("Nissan") perfected a lien upon all of Fort Bend's inventory and accounts receivable, and perfected said lien by the public filing of a Financing Statement.
   34. On November 6, 1985, the First Bank was presented with a proposal to purchase the Fort Bend loan from Republic.
   35. The stated purpose of this proposed loan was to provide "working capital" for Fort Bend. The loan, as proposed, was to be collateralized by accounts receivable, inventory, equipment, fixtures, and furniture.
   36. The Committee approved the loan proposal at its November 6, 1985 meeting.
   37. Respondent attended the Committee meeting of November 6, 1985, and January 8, 1986, at which the Fort Bend loan was discussed and approved.
   38. On November 6, 1985, Capitol Commerce Reporter, Inc. issued a lien search report to the Bank for Fort Bend, which report reflected Nissan as the holder of a valid lien.
   39. Notwithstanding the lien search findings and his prior knowledge of the credit, Respondent directed the preparation of loan and security documents reflecting the dealership's inventory and accounts receivable as being part of the collateral pool.
   40. As a member of the Directorate, Respondent attended the meeting at which the Committee's approval of the loan was ratified.
   41. On or about December 30, 1985, before the Committee gave final approval to the loan proposal, the Fort Bend loan was purchased and the sum of $346,893.91 disbursed to Republic.
   42. The balance of the loan proceeds were disbursed to the principals of Fort Bend, A. Louis Servos ("Servos") and James T. Papadakis ("Papadakis"), for use in the dealership's operations.
   43. Servos and Papadakis executed a Commercial/Business Purpose Note in favor of the Bank for the principal sum of $400,000.
   44. A Security Agreement and an Owner's Consent to Pledge, each dated as of December 27, 1985, were also executed by Servos and Papadakis. Those documents reflected the Bank's collateral as including accounts and inventory.
   45. When the Bank purchased the loan from Republic, an assignment of lien was executed.
   46. At all times following receipt of the lien search report, and until consummation of the loan transaction on or about December 30, 1985, the Respondent did not disclose to the Committee the fact that Ford Bend's inventory and accounts receivable were subject to a prior encumbrance of record.
   47. Respondent also failed to disclose this fact to the Directorate when the Fort Bend loan was ratified.
   48. The existence of the priority lien position of the Nissan Motor Corporation upon the inventory and accounts receivable of the dealership was a material fact that should have been disclosed by Respondent to the Bank's Committee.
   49. Had the truth been known about the nature and extent of the available collateral pool, the Bank would not have extended the $400,000 loan to Fort Bend.
   50. Had the Bank agreed to extend this loan to Fort Bend, with the understanding that a second lien position would be taken on the inventory and accounts receivable, then the Bank, as a matter of standard procedure, would have required the inclusion of language in the promissory note, security agreement and any related pledge documents which expressly acknowledged such a subordinate lien position. The inclusion of such language in loan and security documents would be the responsibility of the originating officer of the loan.
   51. None of the Fort Bend loan and security documents contain any reference to a subordinate lien position on inventory or accounts receivable.
   52. On July 1, 1987, the Respondent presented to the Committee a proposal for financing the sale of the Fort Bend dealership from Servos and Papadakis to Turtur Investments.
   53. Under the proposal, Turtur Invest-
{{12-31-93 p.A-2326}}ments would assume the $282,893.91 balance of the Papadakis and Servos loan.
   54. The collateral for this proposed loan to Turtur Investments would remain the same as that reflected in prior loan documents, to-wit: accounts receivable, inventory, and equipment. To further secure the loan, the Bank also required Mr. Turtur to personally guarantee the debt.
   55. The proposed loan to Turtur Investments could not be fully secured because of the prior lien upon the accounts receivable and inventory by Nissan Motor Corporation.
   56. Respondent again failed to advise the Committee of Nissan's first lien upon the accounts receivable and inventory, either before, or at any time during, the loan to Turtur Investments.
   57. Respondent also failed to advise the Directorate of the lien position at the meeting where the Committee's approval of this loan was ratified.
   58. The existence of a first lien in favor of Nissan Motor upon the dealership's inventory and accounts receivable was a material fact that should have been disclosed by Respondent to the Committee and Directorate.
   59. Had the truth been known about the nature and extent of the available collateral pool, the Bank would not have financed Turtur Investment's purchase of the Fort Bend dealership.
   60. On July 24, 1987, the Bank filed a UCC-1 Financing Statement with the Texas Secretary of State, which reflected Turtur Investments d/b/a Chris Turtur Nissan as the debtor and identified the collateral as including accounts receivable, contracts, chattel paper, and inventory.
   61. Following disbursement of the proceeds, Respondent acted as the servicing officer on this loan.
   62. In February, 1988, Turtur Investments filed a petition for relief under Chapter 11 of the United States Bankruptcy Code.
   63. Respondent learned of the bankruptcy filing in late March or early April of 1988.
   64. Respondent concealed the bankruptcy filing of Turtur Investments from the Committee and Directorate until September, 1988.
   65. The dealership loan of Turtur Investments matured on July 2, 1988.
   66. On August 10, 1988, Respondent presented to the Committee a proposal to renew the dealership loan of Turtur Investments.
   67. The collateral for the proposed loan renewal remained the same as that for the prior loans: accounts receivable, inventory, equipment, furniture, fixtures, and Turtur's personal guaranty.
   68. The Committee granted the renewal request at its August 10, 1988, meeting.
   69. Respondent attended the meeting of the Directorate at which the Committee's approval of the renewal loan to Turtur Investments was ratified.
   70. The Chapter 11 bankruptcy filing of Turtur Investments was a material fact of which the Committee and Directorate should have been made aware.
   71. The bankruptcy status of a borrower, such as Turtur Investments, would be a material fact in determining whether to internally classify a loan as a "problem" credit.
   72. The bankruptcy status of a borrower, such as Turtur Investments, was also a material factor in any decision to renew or restructure a credit.
   73. The Bank's procedure required the bankrupt status of a borrower, whose loan exceeded $25,000, to be reflected in certain reports given on a monthly basis to the Directorate.
   74. Each loan officer at the Bank was responsible for giving to the Loan Secretary all data and comments relevant to the question of whether a particular loan should be internally classified as a problem, and the contents of the problem loan report were subject to review and approval by the Bank's President.
   75. None of the Bank's Problem Loan Reports before September, 1988 refer to the dealership loan of Turtur Investments.
   76. In presenting the Turtur Investments dealership loan for renewal in August, 1988, the Respondent failed to advise the Committee and the Directorate that the inventory and accounts receivable were subject to a prior encumbrance of record.
   77. In connection with this loan renewal, Respondent also failed to disclose the Chapter 11 filing of Turtur Investments and did not present any revised valuation of the equipment, furniture and fixtures serving as collateral.
   78. Had the Bank been in possession of all material facts concerning the identity and value of the available collateral and the bor-
{{12-31-93 p.A-2327}}rower's current financial position, the loan would not have been renewed on the terms presented.
   79. The Bank suffered a loss of $222,893.91 when this credit was charged-off on August 11, 1989.

D.A. Louis Servos and James T. Papadakis

   80. On August 13, 1986, Respondent presented to the Committee a proposal for a $430,000 loan to business partners Servos and Papadakis.
   81. Servos and Papadakis were to be jointly liable for the entire loan amount; and, the loan was to be secured by 40,000 shares of stock issued by Commonwealth Savings Association, Houston, Texas ("Commonwealth Stock"), having a purported fair market value of $640,000.
   82. The loan terms approved by the Committee were different from those originally presented. Instead of one loan to joint obligors, two separate loans, each for $215,000, were to be made to Servos and Papadakis. Each borrower would deliver to the Bank as collateral certain certificates representing 20,000 shares of Commonwealth Stock.
   83. The loans to Servos and Papadakis, as modified, were approved by the Committee on August 27, 1986.
   84. Before the Committee approved the loans, as modified, Respondent authorized disbursement of the entire $430,000.
   85. The proceeds of each loan were not disbursed to the named borrower. Rather, all of the funds from both loans were deposited into Servos' personal checking account, number 50-8648-5.
   86. Neither loan was made in the name of a partnership composed of Servos and Papadakis.
   87. The manner in which the loan proceeds were disbursed violated the Bank's policies and procedures.
   88. The manner in which the loans to Servos and Papadakis were funded is inconsistent with good internal controls, and is possible evidence of an apparent attempt to circumvent legal lending limits.
   89. The Bank had to obtain physical possession of the stock certificates from Servos and Papadakis in order to perfect a lien upon the Commonwealth Stock.
   90. Respondent authorized disbursement of the loan proceeds without first acquiring possession of the Commonwealth Stock certificates.
   91. At the time of funding, the Commonwealth Stock was held by Kidder, Peabody & Co., Inc. ("Kidder Peabody"), to secure a margin debt of approximately $307,500. Kidder Peabody did not and would not relinquish possession of the stock.
   92. The existence of a prior lien upon the stock in favor of Kidder Peabody was a material fact that would have affected any credit decision made by the Bank with regard to the Servos and Papadakis loans.
   93. The Committee would not have approved the loans to Servos and Papadakis had it known the Commonwealth Stock was subject to the prior Kidder Peabody.
   94. The loan to Servos matured on February 18, 1987.
   95. Respondent submitted to the Committee a proposal to renew the Servos loan, notwithstanding that the Bank had no secured lien upon the stated collateral.
   96. Respondent's February 18, 1987 loan proposal for Servos did into reflect the true status of the Commonwealth Stock.
   97. Respondent's proposal was approved by the Committee on February 18, 1987, and subsequent ratified by the Directorate on March 17, 1987.
   98. The renewal loan to Servos matured on August 18, 1987.
   99. Respondent's second proposal to renew the Servos loan for an additional 30 days was approved by the Committee on August 26, 1987.
   100. The renewal loan was subsequently ratified by the Directorate on September 15, 1987.
   101. The renewed Servos loan matured on September 17, 1987.
   102. Respondent's third proposal to renew the Servos loan for an additional 30 days was approved by the Committee on October 7, 1987.
   103. Servos executed a new promissory note, dated as of September 17, 1987 and bearing number 23220.
   104. Servos loan number 23220 matured on October 19, 1987, though Respondent did not present to the Committee a proposal to renew the credit until January 13, 1988.
   105. The Bank sought additional collat-
{{12-31-93 p.A-2328}}eral from Servos because of concerns about the steadily declining value of the Commonwealth Stock.
   106. Thus, in addition to the 20,000 shares of Commonwealth Stock, the proposed collateral for this renewal loan was to consist of an assignment of certain lease proceeds from James Equipment of Texas, an assignment of Servos' partnership interest in James Equipment of Texas, and a deed of trust covering certain real estate in Harris County, Texas.
   107. The loan proposal was approved and a new promissory note was executed by Servos. The note, which bore no. 23429, was back-dated to October 19, 1987 and reflected a maturity date of April 18, 1988.
   108. The original loan to Papadakis (number 22124) matured on February 18, 1987.
   109. Respondent submitted a proposal to renew Papadakis loan number 22124.
   110. Approximately six months earlier, Respondent had learned from C. Barrett Monday of Kidder that Papadakis' Commonwealth Stock was held in a margin account.
   111. Kidder had not agreed to release its lien upon the Commonwealth Stock.
   112. Respondent's February 18, 1987 loan proposal for Papadakis did not reflect the true status of the Commonwealth Stock.
   113. This proposal was approved by the Committee on February 18, 1987, and subsequently ratified by the Directorate on March 17, 1987.
   114. The renewal loan to Papadakis matured on August 18, 1987.
   115. Respondent again submitted a proposal to the Committee for a 30 day renewal of the Papadakis loan, which proposal was approved on August 26, 1987.
   116. This renewal loan was subsequently ratified by the Directorate on September 15, 19897.
   117. The Papadakis loan matured on September 17, 1987.
   118. For a third time, the Respondent proposed to the Committee that the Papadakis loan be renewed for an additional 45 days, which proposal was approved on October 2, 1987.
   119. Papadakis executed a new promissory note, dated as of September 17, 1987, bearing no. 23203.
   120. On November 2, 1987, Papadakis loan no. 23203 matured. This loan was reflected as past due on the Bank's books for November, 1987.
   121. At Respondent's request, the Bank continued to renew the Papadakis loan through September, 1988.
   122. When the Papadakis loan was renewed, Respondent concealed from the Committee and the Directorate the fact that Papadakis' 20,000 shares of Commonwealth Stock would not be available to the Bank as collateral.
   123. The purported availability of the Commonwealth Stock as collateral was a material factor in the decisions of the Bank's Committee and Directorate to renew the loans to Servos and Papadakis.
   124. At each of the loan renewals for Servos and Papadakis, Respondent failed to disclose or otherwise concealed from the Committee and the Directorate, the fact that the Commonwealth Stock was held in a margin account by Kidder Peabody.
   125. Had the truth been disclosed by Respondent to the Committee and the Directorate, the loans to Servos and Papadakis would not have been renewed on the terms presented, and collection efforts would have been promptly pursued if acceptable substitute collateral could not be pledged by those borrowers.
   126. Whenever Respondent was confronted with the Chairman's demand to sell the Commonwealth Stock, he represented that such action would be premature because Servos and Papadakis possessed "inside" information bearing upon the stock's future value. Respondent made those representations during meetings of the Committee and the Directorate.
   127. The Bank sustained an aggregate loss of $306,340.95 on these loans to Servos and Papadakis.

E. Joseph E. Rincon, III

   128. On or about January 22, 1986, the Bank extended a $6,500 loan to Joseph E. Rincon, III ("Rincon") for the purpose of purchasing and repairing a 1985 Mustang, and for payment of other unspecified personal expenses ("Mustang Loan").
   129. Rincon's credit application did not reflect existing expenses or disposable income.
   130. Rincon's credit application also understated his personal debt, as it did not reflect his $17,785 Federal tax lien.
{{12-31-93 p.A-2329}}
   131. The Bank's credit report concerning Rincon reflected the Federal tax lien as of April 1985.
   132. It was standard practice for the Bank to order credit reports on prospective borrowers.
   133. Under the Bank's lending policy, the presence of a tax lien upon a prospective borrower would disqualify a loan from further consideration.
   134. The Mustang Loan was not presented to the Committee and Directorate, as it fell within the approved signature authority of the lending officer, Janet Evans.
   135. On or about March 18, 1986, the Mustang Loan to Rincon was renewed, the accrued interest was rolled into the new note, and an additional $2,000 was advanced.
   136. Rincon did not submit another credit application to obtain this renewal loan.
   137. On its face, Rincon's credit application lacked sufficient information for a Bank officer to make an informed credit decision.
   138. Respondent was the credit officer who renewed the Mustang Loan.
   139. As the responsible officer, Respondent had access to Rincon's loan file and credit report.
   140. Renewal of the Mustang Loan did not require prior approval by the Committee nor ratification by the Directorate, as the amount financed fell within the Respondent's approved signature authority.
   141. The Bank suffered a $9,100.41 loss when the Mustang Loan was charged-off on February 23, 1987.
   142. On April 1, 1986, the Bank extended an unsecured loan to Rincon in the amount of $3,500.00, for the purchase and repair a 1984 Toyota truck ("Toyota Loan").
   143. Respondent was the originating officer on the Toyota Loan.
   144. As the responsible officer on the Toyota Loan, Respondent reviewed Rincon's loan file and credit report.
   145. Respondent knew that Rincon had not paid any of the interest or principal on the Mustang Loan when he made the Toyota Loan.
   146. The Toyota Loan did not require prior approval by the Committee nor ratification by the Directorate, because the amount financed fell within Respondent's pre-approved signature authority.
   147. Respondent should not have made the Toyota Loan, because Bank policy forbade the extension of credit to any borrower subject to a Federal tax lien.
   148. The Bank suffered a $3,855.59 loss when the Toyota Loan was charged-off on February 20, 1987.
   149. On April 23, 1986, Respondent made a third loan to Rincon for $6,829.04.
   150. The purpose of this third loan was to retire a prior installment debt at RepublicBank, and was to be secured with the 1976 Chevrolet Corvette which Rincon had pledged to RepublicBank on the previous debt ("Corvette Loan").
   151. The Corvette Loan was for a term of 180 days, at which time all accrued interest and principal would be immediately due.
   152. On April 23, 1986, the Bank issued cashier's check number 212029 to Republic.
   153. As in the case of the Mustang Loan and Toyota Loan, prior approval of the Corvette Loan by the Committee was not required for funding, because the loan amount fell within the Respondent's signature authority.
   154. Under the Bank's lending policy, it would be unusual for a loan to be made on an automobile that was more than five years old. An exception to this general policy existed only as to antique automobiles whose value and physical condition would first be determined.
   155. In deciding whether to pay off any loan at another depository institution, the Bank's credit officers were required to review the prospective borrower's financial statements, credit report, and payment history at that other institution.
   156. Both a history of slow payments and a prior loan default would be highly negative factors in the Bank's decision to finance the payoff of a loan at another institution.
   157. Rincon had defaulted on the Republic loan; and, the Corvette was repossessed and scheduled for auction on April 27, 1986.
   158. Respondent's origination of the Corvette Loan to Rincon violated the Bank's lending policy due to the presence of a Federal tax lien and Republic's foreclosure upon the automobile.
   159. The Bank suffered a financial loss of $6,025.00, notwithstanding its subsequent
{{12-31-93 p.A-2330}}repossession, repair and sale of the Corvette in February, 1987.

F. Record Tampering

   160. Immediately before the start of a regulatory examination, Respondent would request junior officers to purge the Bank's loan and credit files of all documents containing negative information and to place those documents into a separate work file.
   161. Respondent instructed junior officers to conceal these "work files" from examiners, and designated credit officer Jeff Velligan as the person through whom all credit files had to pass before going to examiners and auditors.
   162. The purging of documents also occurred during safety and soundness examinations by the FDIC and the Texas Department of Banking.

CONCLUSIONS OF LAW

A. Introductory Matters

   1. At all times pertinent herein, the Bank was an insured State nonmember bank, subject to the Federal Deposit Insurance Act (the "Act"), 12 U.S.C. §§ 1811–18311, the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws of the State of Texas.
   2. Respondent was an "institution-affiliated" party, as that term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), and for purposes of sections 8(e) of the Act, 12 U.S.C. § 1818(e).
   3. The FDIC has jurisdiction over the Bank, the Respondent, and the subject matter of this proceeding.
   4. Although it is customary for a bank's president and chief executive officer to delegate one or more tasks to junior officers or other employees, the act of delegation does not release the president from ultimate responsibility for the consequences.
   5. As President and CEO, Respondent owed a fiduciary duty to the Bank, Directorate, shareholders, and depositors, to ensure that the institution's affairs were run in a safe and prudent manner.
   6. An unsafe or unsound practice is any action or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk of loss or damage to the institution, its shareholders, or the agencies administering the deposit insurance funds.
   7. It is an unsafe or unsound practice to engage in or otherwise participate in a violation of a law.
   8. It is an unsafe or unsound practice to make or renew a loan that is not adequately secured.
   9. It is an unsafe or unsound practice to make a loan without regard for the borrower's ability to make payment.
   10. The failure to maintain adequate or current financial information on a borrower is an unsafe or unsound practice.
   11. It is generally an unsafe or unsound practice to renew a loan without collection, in cash, of the interest due.
   12. Respondent's fiduciary duty as an officer and director required that he promptly and fully disclose adverse information about potential and existing borrowers to the Committee and Directorate, to investigate, where necessary, and to protect the Bank's interests through compliance with applicable State and Federal banking law.
   13. Willful disregard refers to that conduct which is practiced deliberately with full knowledge of the facts and risks, and which potentially exposes a bank to abnormal risk of loss or harm.
   14. Continuing disregard refers to that conduct which is voluntarily engaged in over time, with heedless indifference to the possible consequences.

B. C.M. Turtur Investment

   15. By authorizing or otherwise permitting Turtur Investments to draw against the line of credit before obtaining an effective assignment of Turtur's commissions, the Respondent engaged or participated in an unsafe or unsound banking practice.
   16. Respondent engaged or otherwise participated in the commission of an unsafe or unsound banking practice when he continued to authorize or permit Turtur investments to draw against the credit line after having received correspondence from the insurance Companies stating that the assignment of Turtur's commissions would not be honored.
   17. Respondent's repeated failure to disclose to the Committee and the Directorate the absence of a valid, enforceable first lien upon Turtur's commissions constituted a breach of fiduciary duty, is evidence of per-
{{12-31-93 p.A-2331}}sonal dishonesty, and demonstrates a willful and continuing disregard for the safety and soundness of the bank.
   18. By reason of Respondent's unsafe or unsound banking practices and breaches of fiduciary duty, the Bank suffered a financial loss of $149,436.50 on the loan to Turtur Investments.

C. Fort Bend Nissan/Chris Turtur Nissan

   19. As the originating loan officer, Respondent had the responsibility to ensure that the Bank had a valid first lien upon all of the collateral being pledged by the Fort Bend dealership.
   20. In originating the Fort Bend loan, Respondent engaged in an unsafe or unsound banking practice and breached his fiduciary duty to the Bank by failing to accurately present to the Committee and the Directorate all of the known facts concerning the nature and scope of the available collateral.
   21. Each time the loan to the automobile dealership was renewed, the Respondent engaged in an unsafe or unsound banking practice and breached his fiduciary duty by failing to apprise the Committee and the Directorate of the fact that Nissan had a valid first lien upon the inventory and accounts receivable.
   22. When the dealership loan to Turtur Investments was renewed in August of 1988, the Respondent engaged in an unsafe or unsound banking practice and breached his fiduciary duty by failing to apprise the Committee and the Directorate that Turtur Investments had previously filed a petition for Bankruptcy protection under the provisions of Chapter 11 of the Bankruptcy Code.
   23. Respondent's repeated failure to disclose all of the known facts, over a two and one-half year period, concerning the true scope of collateral, as well as the borrower's financial ability to pay, is evidence of Respondent's personal dishonesty and demonstrates a willful or continuing disregard for the safety and soundness of the Bank.
   24. By reason of Respondent's unsafe or unsound banking practices and breaches of fiduciary duty, the Bank suffered a financial loss of $222,893.91 on the loan to the automobile dealership.

D.A. Louis Servos and James T. Papadakis

   25. Respondent's failure to acquire physical possession of the Commonwealth Stock from Servos and Papadakis before authorizing the Bank to disburse the loan proceeds was an unsafe or unsound banking practice.
   26. In submitting the loans of Servos and Papadakis to the Committee and Directorate for renewal, Respondent engaged in an unsafe or unsound banking practice and breached his fiduciary duty when, after having received notice of a prior perfected lien upon the Commonwealth Stock, he continued to represent the credit as being fully collateralized by such stock.
   27. The repeated failure or refusal of Respondent to disclose all known facts to the Bank's Committee and Directorate concerning the true scope of available collateral is evidence of his personal dishonesty and demonstrate a willful or continuing disregard part for the safety and soundness of the Bank.
   28. By reason of Respondent's unsafe or unsound banking practices and/or breaches of fiduciary duty, the Bank suffered an aggregate financial loss of $306,340.95 on these loans to Servos and Papadakis.

E. Joseph E. Rincon, III

   29. In originating and/or servicing the Mustang, Toyota and Corvette Loans to Rincon, Respondent engaged in unsafe or unsound banking practices.
   30. By failing to take note of the recorded Federal tax lien and by continuing to advance new funds to a borrower who had defaulted with another institution, Respondent exhibited a continuing or willful disregard for the safety and soundness of the Bank.

F. Record Tampering

   31. Respondent's requesting, instructing or otherwise directing junior officers to purge the Bank's loan and credit files of all documents containing negative information and to segregate those documents from the files to be given to examiners constitutes an unsafe or unsound banking practice and a breach of fiduciary duty.
   32. Respondent's requesting, instructing or otherwise directing junior officers to purge the Bank's loan and credit files of all documents containing negative information and to segregate those documents from the files
{{12-31-93 p.A-2332}}to be given to examiners is evidence or personal dishonesty and demonstrates a willful disregard on the part of Respondent for the safety or soundness of the Bank.
   33. The Respondent's repeated acts of tampering with bank records as established herein, constitute violations of Title 18 U.S.C. § 1005.

G. Impact Upon Bank

   34. By reason of Respondent's unsafe and unsound banking practices and breaches of fiduciary duty, the Bank suffered substantial financial loss in the aggregate sum of $697,652.76.
   35. By reason of Respondent's violations of law, the integrity of Bank documents was compromised, and the interests of the Bank's depositors could have been seriously prejudiced.
   36. The Respondent, Henry P. Massey, is unfit for further participation in the affairs of federally insured financial institutions, and should, therefore, by permanently prohibited from future participation under the provisions of Section 8(e) of the Act, 12 U.S.C. § 1818(e).
   So Ordered, this 24th day of May, 1993. /s/ Arthur L. Shipe
   Administrative Law Judge
   Date: May 24, 1993

Proposed Order on Prohibition

   The Board of Directors of the Federal Deposit Insurance Corporation having considered the entire record made at hearing, briefs, and arguments of counsel, and the Recommended Decision and Order of Administrative Law Judge Arthur L. Shipe, and exceptions thereto, finds that:
   Respondent Henry P. Massey has violated applicable law, has engaged and participated in unsafe and unsound banking practices, and has breached his fiduciary duty to the above institution, while a director, officer, and institution-affiliated party thereof;
   By reason of such practices and breaches of fiduciary duty, the said Respondent had inflicted substantial financial loss upon the above institution; and
   Such practices and breaches demonstrate the said respondent's willful and continuing disregard for the safety and soundness of the Bank, as well as his personal dishonesty.
   The Board of Directors further finds that such practices and breaches of fiduciary duty demonstrate the Respondent's unfitness to serve as a director, officer, or person participating in the conduct of the affairs or as an institution-affiliated party of any insured depository institution, or any other agency or organization enumerated in Section 8(e)(7)(A) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(e)(e)(7)(A).
   Accordingly, IT IS HEREBY ORDERED:
   Henry P. Massey is hereby, without the prior written approval of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in Section 8(e)(7)(D) of the Act, 12 U.S.C. § 1818(e)(7)(D), prohibited from:
   a. participating in any manner in the conduct of the affairs of any financial institution or organization enumerated in Section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e)(7)(A);
   b. soliciting, procuring, transferring, attempting to transfer, voting or attempting to vote any proxy, consent or authorization with respect to any voting rights in any financial institution enumerated in Section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e)(7)(A);
   c. violating any voting agreement previously approved by the appropriate federal banking agency; or,
   d. voting for a director, or serving as an institution-affiliated party.
   IT IS FURTHER ORDERED that this ORDER shall become effective upon the expiration of thirty (30) days after its service. The provisions of this Order will remain effective and enforceable except to the extent that, and until such time as, any provision of this Order shall have been modified, terminated, suspended, or set aside by action of the Federal Deposit Insurance Corporation or a reviewing court.
   So Ordered, this ____ day of ____
   BOARD OF DIRECTORS
   FEDERAL DEPOSIT INSURANCE CORPORATION

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