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   [5205] In the Matter of Tim M. Lane, First State Bank, Hawarden, Iowa, Docket No. FDIC-92-96e (11-23-93).

   FDIC Board adopts the findings and recommendation of an ALJ to prohibit respondent from further participation in the affairs of insured institutions. Board accepts ALJ's conclusions that respondent misled the bank's board concerning loans on which he was loan officer and falsified some bank records, and that these actions met the statutory criteria for permanent prohibition from banking.

   [.1] Prohibition—Factors Determining Liability—Personal Gain
   By misleading the bank and its regulators as to the true condition of some loans and borrowers, respondent falsely increased profits on the bank's books, and thereby derived personal gain in the form of his profit-based bonus.

   [.2] Prohibition—Factors Determining Liability—Disregard for Safety and Soundness
   Falsification of bank records was unlawful and a breach of fiduciary duty, and constituted continuing disregard for safety and soundness of bank.

In the Matter of
TIM M. LANE, individually and as
an officer, director, and person
participating in the conduct of
the affairs and an institution-
affiliated party of
FIRST STATE BANK
HAWARDEN, IOWA
(Insured State Nonmember Bank)
DECISION AND ORDER
FDIC-92-96e

INTRODUCTION

   This is a proceeding initiated by the Federal Deposit Insurance Corporation ("FDIC") on June 17, 1992, seeking to prohibit from further participation in federally insured financial institutions Tim M. Lane ("Respondent"), former director, president, and senior lending officer of First State Bank, Hawarden, Iowa ("Bank").
   This proceeding involves three types of alleged misconduct. First, in two instances Respondent allegedly led the Bank's loan committee and board of directors to believe that loans were guaranteed by the Farmer's Home Administration ("FmHA") when, in fact, they were not. Recommended Decision1 at 4–5. Respondent unsuccessfully sought reconsideration of FmHA's denials of the guarantees. R.D. at 4–5. Based upon Respondent's representation that FmHA guarantees were in place, the Bank extended loans to a borrower on April 17 and May 22, 1989.
   The second variety of misconduct involved Respondent's alleged falsification of a borrower's financial statements for the years 1987, 1988, and 1989. The borrower's statements, as prepared by a certified public accountant, showed that his business was insolvent and operating at a loss. Respondent allegedly caused to be prepared false financial statements for this borrower which reflected a positive net worth and operating profits for these three years. R.D. at 6.
   Third, Respondent allegedly prepared real estate loan documents for a borrower who was willing to pay about $18,000 for a property. The loan documents
2 reflected a loan amount of $33,000, which Respondent allegedly persuaded the borrower to sign, representing that the terms would not apply, but the documents were needed for the Bank's records.3 R.D. at 8. The actual agreement, a 12 percent loan of about $18,000 repaid at $275 per month for ten years, was not made part of the Bank's records until after Respondent's departure when the side agree-


1 Citations to the record of this proceeding shall be as follows:
Recommended Decision — "R.D. at ____."

2 There were actually two separate loan agreements, each reflecting a $33,000 loan amount. The first had an interest rate of 12 percent and payments of $275 per month for ten years, with the balance due at the end of ten years. When the borrower refused to sign the first note, Respondent prepared a second agreement stating "0 percent interest will accrue" and that after ten years of $275 monthly payments, the borrower would own the property free and clear of the Bank's mortgage. R.D. at 8.

3 This side agreement was an alleged attempt to disguise a loss on the Bank's pre-existing loan on the property.
{{1-31-94 p.A-2334}}ments were discovered. The Bank then executed a third note reflecting the actual terms of the loan. R.D. at 8.
   After a hearing at which Respondent appeared pro se, Administrative Law Judge Arthur L. Shipe ("ALJ"), issued a Recommended Decision that Respondent be prohibited from further participation in the conduct of the affairs of any federally insured depository institution, under section 8(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(e)(7). Neither party filed Exceptions.

DISCUSSION

   After a thorough review of the record in this proceeding, the Board of Directors ("Board") of the FDIC agrees with the ALJ's findings and conclusions regarding the alleged conduct4 and discussion of the statutory criteria.5 Accordingly, the Board adopts and incorporates herein by reference the ALJ's Recommended Decision.

CONCLUSION

   The Board concludes that Respondent's conduct constituted unsafe or unsound practices and breaches of fiduciary duty to the Bank, is evidence of personal dishonesty, and demonstrates a willful and continuing disregard for the safety or soundness of the Bank, which compromised the integrity of Bank records;6 and that the record fully supports issuance of an order to permanently prohibit Respondent from further 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 OF PROHIBITION

   Accordingly, the Board, having considered the entire record in this proceeding, HEREBY ORDERS that, 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 FDI Act, 12 U.S.C. § 1818(e)(7)(D), Tim M. Lane is hereby 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 FDI 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 FDI 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 FDIC.
   Dated at Washington, D.C., this 23rd day of November, 1993.
   By direction of the Board of Directors.
   /s/ Robert E. Feldman Deputy Executive Secretary


4 Respondent was pro se and failed to testify about matters within his personal knowledge. The ALJ drew adverse inferences from his failure to testify, cf. In The Matter of Harold Hoffman, et al., 2 FDIC Enf. Dec. ¶5140 at A-1494 (1989), but found other evidence against Respondent overwhelming. R.D. at 3.
Regarding the FmHA guarantees, Respondent suggested in argument that he may have believed the FmHA guarantees were effective, since copies of the denials were not in the Bank's files. The ALJ correctly rejected this argument pointing out that Respondent's conduct in seeking reconsideration of the denials demonstrated his awareness of the FmHA's initial denial of guarantees. R.D. at 5–6.
Concerning the false financial statements, Respondent gave a secretary copies of the financial statements with the correct data crossed out and the false figures inserted in writing. Further, the accountant's comments on insolvency were deleted from the copy in the Bank's files. R.F. at 6. Although Respondent attempted to suggest that the borrower may have been the source of the bogus figures, the ALJ found, and the Board agrees, that the evidence supports a finding that Respondent was responsible for inserting the false information. R.D. at 7.
Regarding the side agreement with the borrower involving the $18,000 loan recorded on the Bank's books as a $33,000 loan, the Board concurs with the ALJ's finding that had the side agreement been carried out, it would have disguised and spread over a period of ten years the loss on a previous borrower's preexisting loan on this property. R.D. at 11.

5 See R.D. at 9-13.

6 The Board also agrees with the ALJ's finding that Respondent's conduct seriously prejudiced the interests of depositors and resulted in his financial gain. R.D. at 8–13.
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____________________________________________

RECOMMENDED DECISION

In the Matter of
Tim M. Lane, individually and as
an officer, director, and person
participating in the conduct of
the affairs and institution-
affiliated party of:
First State Bank
Hawarden, Iowa
(Insured State Nonmember Bank)
FDIC-92-96e
Arthur L. Shipe, Administrative Law Judge:

   This proceeding was instituted on June 17, 1992, by the issuance of a Notice of Intention to Prohibit from Further Participation (Notice), pursuant to 12 U.S.C. § 1818(e).
   The proceeding was instituted to determine whether an appropriate order should be issued prohibiting Respondent from further participation in the conduct of the affairs of any institution or agency specified in 12 U.S.C. § 1818(e)(7). The Notice alleges that Respondent's conduct as a bank director and officer justifies such an order.
   The Respondent filed his Answer in this matter, pro se, but then retained counsel. That counsel, however, moved to withdrawn his representation on December 2, 1992. On January 11, 1993, the motion of withdrawal was granted.
   Prehearing statements were required to be filed by December 31, 1993. Respondent did not file such a statement and did not seek additional time for doing so. In February 1993, Respondent sought a delay in the oral hearing in this matter. That request was denied on March 5, 1993.
   On March 3, 1993, the FDIC moved for sanctions against Respondent for his failure to file the prehearing statement. An order prohibiting him from introducing witnesses or exhibits at the hearing was requested. The motion was not ruled on before the hearing in order to obtain a response from Respondent.
   Oral hearings were held in the proceeding on March 23 and 24, 1993, in Sioux City, Iowa.
   The motion for sanctions was renewed at the commencement of the hearing. Respondent stated that he had no exhibits to offer, and probably would not seek to testify. The motion was thereupon deemed "more or less moot." (Tr. p. 5.)
   During the course of the hearing Respondent made purported factual statements while cross-examining government witnesses. Upon inquiry by FDIC counsel, these statements were determined not to be evidentiary.
   Respondent was then informed that in view of the seriousness of the allegations against him, if he sought to be a witness, he would be heard, but he declined to testify. (Tr. p. 263.)
   This proceeding involves very specific factual matters that reflect adversely on Respondent. Although these matters are within his personal knowledge, he has attempted to refute them without testifying under oath. In the circumstances, I have drawn adverse inferences from his failure to testify, though other evidence against him is overwhelming. Cf. In the Matter of Harold A. Hoffman, et al., 2 FDIC Enforcement Decision and Orders, ¶5140 at A-1494 (1989).
   Post-hearing briefs, and replies thereto have been filed.
   Based upon the entire record, including the exhibits and testimony received at the hearing and my observation of the witnesses' demeanor, and Respondent's failure to testify, the following Discussion of Facts and Law, Findings of Fact, Conclusions of Law, and Order are entered.

DISCUSSION OF FACTS AND LAW

   The FDIC seeks in this proceeding an order, pursuant to 12 U.S.C. § 1818(e), that would prohibit Respondent from participating in any manner in the conduct of the affairs of any financial institution or agency specified in that section.
   The basis for the order consists of allegations that Respondent misled the Loan Committee and the Board of Directors of the involved Bank with respect to loans on which he was the loan officer, and incident to these deceptions falsified various Bank records.
   During the activity in question Respondent was a director of the Bank, as well as its President, and senior lending officer. He was discharged from these positions on May 29, 1990, upon discovery by other Bank officials of the activity in issue here.
   In two instances the Respondent allegedly
{{1-31-94 p.A-2336}}led the Bank's Loan Committee and Board of Directors to believe that loans were guaranteed by the Farmer's Home Administration (FmHA) when, in fact, that agency had denied the application to provide any guaranty. The Bank Loan Committee had decided, in December 1988, to pursue FmHA guarantees in order to extend credit to the borrower, some of whose loans had previously defaulted.
   After the application to FmHA was initially denied by letter, dated March 28, 1989, Respondent met with officials of FmHA seeking a reconsideration of the denial. Upon reconsideration, the application was again denied, by letter of April 11, 1989. Based on Respondent's representations that FmHA guarantees were in place, loans to this borrower were made on April 17 and May 22, 1989.
   Respondent suggests in argument that he may have believed that the sought FmHA guarantees were effective. The clearly established facts demonstrate that he had no grounds for any such belief, and had, on the contrary, clear evidence that the application was denied. As stated, Respondent did not see fit to testify under oath that he believed the guarantees were effective.
   The denial letters were not in the Bank's loan files when the loans were extended; unsigned copies were later obtained from FmHA. I do not conclude, however, that Respondent was unaware of either letter. Clearly, he knew the contents of the first letter of denial since he set up and attended a meeting for the purpose of reversing the conclusions it contained. Respondent's false representations that loans guarantees had been approved affords some basis for inferring that he removed the original letters from the Bank's loan files.
   The second series of alleged mispresentations by Respondent concern falsifications of a borrower's financial statements for the years 1987, 1988, and 1989. The borrower's statements, as prepared by a CPA, showed that the involved business was insolvent and operating at a loss. The accountant's letters, accompanying the statements, stated that the business "may be unable to continue in existence without additional capital injection and a substantial improvement in future results of operations."
   Respondent caused to be prepared false financial statements for this borrower that reflected a positive net worth and operating profits for the three years indicated. He gave to a secretary for computer processing copies of the financial statements prepared by the accountant with the correct data crossed out and the false figures inserted in writing.
   The accountant's comments on the insolvency of the firm were deleted from the copies of the letters in the Bank's files.
   Respondent attempted to suggest during his cross-examination of a witness that the borrower may have been the source of the bogus figures. (The borrower's signature appears on the false statements but it cannot be determined if he actually signed them, or whether the signature was inserted in some other manner.) Again, Respondent did not choose to explain his role in the matter under oath.
   Even if the false data were supplied by the borrower, the manner in which the alterations were made suggests their specious nature. Therefore, Respondent was clearly responsible for inserting the false information into the Bank's records, and presenting it to other loan officials, without reason to believe in its validity.
   The facts pertaining to the third set of allegations are uncontested and uncontestable. Respondent created for the borrower in question a loan agreement reflecting a loan of $33,000, at 12 percent interest, and payments of $275 per month for 10 years, with the balance payable at the end of the 10 years.
   The purpose of this loan was to purchase real estate for which the borrower was willing to pay about $18,000. The Bank had no existing lien on that property to secure a loan to another borrower. The $18,000 which the buyer was willing to pay for the property would not satisfy the outstanding loan it secured.
   When the purchaser refused to sign the described loan agreement Respondent prepared a second agreement with different terms. That agreement purported to reflect a loan of $33,000, but it provided that "0% interest will accrue," and stated that upon payment of $275 per month for ten years the borrower would own the subject property free from the Bank's mortgage. Those payments would amortize a 12 percent loan of about $19,000, close to the amount the borrower was willing to pay for the property.
   After this agreement was signed, Respondent persuaded the buyer to also sign the first agreement, which provided for full repay-
{{1-31-94 p.A-2337}}ment of $33,000 at 12 percent. Respondent indicated to the buyer that those terms would not apply, but the agreement was needed for the Bank's records. The actual agreement was not made a part of the Bank's records, and was not discovered by other Bank officials until after Respondent's departure from the Bank. A third note was then drawn reflecting a loan amount of $18,000.
   The relevant statute, 12 U.S.C. § 1818(e), as effective when most of the described activity occurred, sets forth the elements that must be present in order for a prohibition order to be entered.1
   The general elements required for prohibition under Section 1818(e) have been categorized as misconduct, effect, and culpability.
   Misconduct may be a violation of a law, rule, regulation, or a cease and desist order, or the commission of an unsafe or unsound banking practice, or the breach of a fiduciary duty.
   As the foregoing discussion demonstrates, Respondent engaged in the statutorily defined misconduct. The falsification of Bank records and the related deceptions were clearly unlawful, and a breach of Respondent's fiduciary duties to the Bank, and constituted unsafe and unsound banking practices. Cf. In the Matter of Frank E. Jameson, 2 FDIC Enforcement Decisions and Orders, ¶5154A at A-1542-A (1990).
   Misconduct, in order to justify a prohibition order, must also have had the effect of causing "substantial"2 actual or probable financial or other damage to the Bank, or to have seriously prejudiced the interests of depositors, or to have resulted in the perpetrator receiving financial gain.
   Though Respondent's activities clearly caused financial loss to the Bank, I am unable to accept FDIC's computations of such losses. For instance, the FDIC attributes loan write-offs of $35,000 and $48,000 to Respondent's deception on the FmHA guarantees. However, $35,000 in that borrower's loans had been previously written off. They were re-booked when the first supposedly guaranteed loan was extended, and again written off when the deception was discovered. Most of the proceeds of both loans that were approved subject to the supposed guaranty were used to pay off existing loans.
   It is not believed that losses from credits extended before the improper conduct occurred can be entirely attributed to that conduct.
   There were write-offs of $20,000 on the loans related to the false financial statements prepared by Respondent. His deceptions on this credit extended over three years. The statements for 1989 obviously occurred post-FIRREA. As indicated, losses to be actionable under section 1818(e), prior to the effectiveness of FIRREA, must be substantial, but under present law only "losses" are required.
   Although these deceptions also related to an existing line of credit, in view of the extended period that Respondent's activity kept the Bank from being aware of the borrower's precarious financial condition, and the post-FIRREA conduct, it is concluded that there were actionable losses with respect to this borrower.
   As discussed, in one instance Respondent made a side agreement with a borrower by which the borrower was in substance extended a $19,000 loan that was recorded on the Bank's books as a $33,000 loan. The $33,000 was also credited on the books of the Bank as a recovery from another borrower. Thus, the effect of this stratagem was to conceal a loss being taken on the prior loan. When the true nature of the $33,000-loan was discovered, the note was re-written to reflect an amount of $18,000. A loss on the other borrower's loan was then taken in the amount of $16,926. It is not believed, however, that this loss can be deemed to have been caused by Respondent's artificial loan. If Respondent's side agreement had been carried out, the loss on the prior loan would have been disguised and spread over a period of ten years, but this did not cause the loss being incurred.
   A separate ground for prohibition exists when misconduct seriously prejudices the interests of the Bank's depositors. Respondent's activity concealed the true condition of loans and borrowers from other Bank officials, and from federal and state regulators.


1 Although the pre-FIRREA statute provides the standards for judging the questioned conduct, FIRREA remedies, including industry-wide prohibition may be applied. In the Matter Robert S. Stoller, Collidge Corner Cooperative Bank 2 FDIC Enforcement Decisions and Orders, ¶5174 (1992).

2 "Substantial" was omitted as a requirement by FIRREA.
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Although it is unnecessary to decide the matter, it is difficult to perceive how the activity of Respondent could not have seriously prejudiced the interests of depositors in being served by an honestly operated Bank.
   Section 1818(e) further specifies as a alternative ground for removal, misconduct resulting in financial gain to the violator involving personal dishonesty.

   [.1] Respondent received a bonus related to the Bank's profits. The described misconduct of Respondent had the effect in each instance of falsely increasing the profits shown for the Bank. Loans that should not have been extended, or that should have been written off, or placed on non-accrual, were carried as performing loans. As stated, in one instance, actual losses on a loan were disguised by a phony agreement. Respondent was also enabled to enjoy for a time the image of a successful banker based in part on the exaggerated earnings of the Bank.
   Although his financial gain cannot be computed to an exact figure it is clear that Respondent's misconduct did redound to his financial gain, and did involve personal dishonesty on his part.

   [.2] As an alternative to financial gain, a violator may be subject to prohibition when other elements of Section 1818(e) are met if the conduct demonstrates a willful or continuing disregard for the safety or soundness of the Bank. The misconduct of Respondent fits this description. Clearly, a bank cannot operate safety or soundly with falsified records in the manner perpetrated by Respondent.
   It is concluded that the record in this proceeding amply demonstrates misconduct by Respondent, that this misconduct entailed financial loss to the Bank, that the interests of the Bank's depositors could be seriously prejudiced by this misconduct, that Respondent's misconduct resulted in financial gain to him and involved his personal dishonesty, and that it demonstrated a willful or continuing disregard for the safety and soundness of the Bank.
   As more specifically set forth in the following Findings of Fact and Conclusions of Law, I find that an order prohibiting Respondent from participating in the conduct of the affairs of any financial institution described in Section 1818(e)(7) should be issued.

FINDINGS OF FACT
BACKGROUND

   1. The First State Bank, Hawarden, Iowa ("Bank") is a corporation existing and doing business under the laws of the State of Iowa. (FDIC Exhibit ("FDIC Ex.") 5.)
   2. The Bank's principal place of business is at Hawarden, Iowa. (FDIC Exs. 5, 6.)
   3. The Bank has been and is a State nonmember bank. (Tr. pp. 15, 302; FDIC Ex. 6.)
   4. The Bank has been and is an insured depository institution. (FDIC Ex. 7.)
   5. From on or before December 31, 1987, through on or about June 1, 1990, Respondent was:

       (a) a director, the president, and the senior lending officer of the Bank;
       (b) a person participating in the conduct of the affairs of the Bank; and
       (c) an institution-affiliated party of the Bank. (Admitted.)
   6. On or about May 30, 1990, Respondent's employment with the Bank was terminated after Bank management discovered the activity that is the subject of this proceeding. Tr. pp. 134–136; FDIC Ex. 21.)

BORROWER I

   7. On or about December 12, 1988, the Bank's Loan Committee determined that any loans to one particular borrower must be made only upon the condition that the Farmers Home Administration ("FmHA") guarantees the loan(s). (Tr. p. 33; Exs. 14, 16.)
   8. At all times pertinent to these proceedings, Respondent was a member of the Bank's Loan Committee. (Tr. p. 14; FDIC Ex. 16.)
   9. Respondent prepared and signed the "FmHA Application for Guaranteed Loan," dated January 3, 1989, regarding loans to the considered borrower. (Tr. p. 38; FDIC Ex. 17.)
   10. At a Loan Committee meeting on March 23, 1989, Respondent informed the Loan Committee that the loans to that borrower would be FmHA guaranteed. (FDIC Ex. 16, p. 3.)
   11. By letter dated March 28, 1989, from Clay Zellmer, FmHA Assistant County Supervisor, to Respondent at the Bank, FmHA denied the Respondent's application for a guaranty on the loans. (Tr. pp. 40, 182–184; FDIC Ex. 17.)
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   12. After the FmHA's denial of the application for a guaranty on the loans in question, Respondent appealed to Clay Zellmer of the FmHA to reconsider the decision not to grant the guaranty. (Tr. pp. 185, 186, 189, 190.)
   13. By letter, dated April 11, 1989, from Clay Zellmer of the FmHA to Respondent, FmHA again denied the Respondent's application for a guaranty. (Tr. pp. 40, 184, 190, 191; FDIC Ex. 17.)
   14. Despite the denial on March 28, 1989, of the FmHA guaranty of the application, in a report to the FDIC, dated April 4, 1989, describing changes made by the Bank in its reserve for loan losses, Respondent concealed FmHA's denial of the application, by informing the FDIC that an FmHA guaranty had been obtained for a loan to this borrower, the proceeds of which would be used to pay charged off loans, resulting in a reduction in the amount of loan losses suffered by the Bank. (FDIC Ex. 18, p. 3.)
   15. On or about April 17, 1989, the Bank extended credit in the amounts of $45,000 to the borrower. (Tr. p. 27; FDIC Ex. 9.)
   16. Respondent was the loan officer responsible for the April 17, 1989, loan. (Tr. pp. 32, 34; FDIC Ex. 14, 16.)
   17. Respondent prepared the note reflecting the April 17, 1989, extension of credit. (Tr. p. 29; FDIC Ex. 9.)
   18. Respondent concealed from Bank management and examiners the fact that the April 17, 1989, loan was not FmHA-guaranteed by including on the note a statement that 90 percent of the loan was guaranteed by FmHA. (Tr. p. 28; FDIC Ex. 9.)
   19. Though Respondent knew that FmHA had not agreed to guarantee the loan, he concealed the denial from Bank management and examiners and made the April 17, 1989, extension of credit in the amount of $45,000.
   20. The following loans to the involved borrower, totalling $35,000, which had previously been charged off as uncollectible, were paid off from the proceeds of the April 17, 1989, loan:

       (i) Loan number 924980—$14,000;
       (ii) Loan number 925261—$3,500; and
       (iii) Loan number 922670—$17,000. (Tr. pp. 24, 25, 28, 29; FDIC Exs. 10, 11, 15.)
   21. The Bank's directors authorized the rebooking and pay off of the charged off loans as of March 31, 1989, because Respondent had misinformed them that the loans would be paid off from the proceeds of the April 17, 1989, loan, which he claimed was guaranteed by the FmHA. (Tr. p. 104.)
   22. The April 17, 1989, Davis loan was approved by the Bank's board of directors, including Respondent, at the May 8, 1989, board meeting. (FDIC Ex. 19, p. 3.)
   23. At the May 8, 1989, board meeting, Respondent misinformed the Bank's board of directors that the April 17, 1989, loan was guaranteed by the FmHA although he knew that the loan was not guaranteed. (Tr. pp. 44, 104; FDIC Ex. 19, pp. 1–3.)
   24. On or about May 22, 1989, the Bank extended another credit in the amount of $45,000 to this borrower. (Tr. pp. 45, 46; FDIC Ex. 12.)
   25. Respondent was the loan officer responsible for the May 22, 1989, extension of credit. (Tr. p. 46; FDIC Ex. 12.)
   26. Respondent concealed from Bank management and examiners the fact that the May 22, 1989, loan was not guaranteed by including a statement on the note that 70 percent of the loan was guaranteed by FmHA. (Tr. p. 47; FDIC Ex. 12)
   27. Respondent knew that the loan was not guaranteed by FmHA, yet he caused or permitted the Bank to make the May 22, 1989, extension of credit in the amount of $45,000.
   28. The proceeds of the May 22, 1989, loan were used primarily to pay off outstanding loans by the Bank. (Tr. pp. 48–50; FDIC Ex. 13.)
   29. The May 22, 1989, loan was approved by the Bank's board of directors, including Respondent, upon Respondent's motion, at the June 21, 1989, board meeting. (FDIC Ex. 19, p. 1)
   30. At the June 21, 1989, board meeting, Respondent misinformed the Bank's board of directors that the May 22, 1989, loan was guaranteed by the FmHA although he knew that the loan was not guaranteed. (Tr. pp. 43–45; FDIC Ex. 19, pp. 1, 2.)
   31. On June 15, 1990, upon finding that the loans were not guaranteed, the Bank's board of directors charged off $35,000 of the loans. (Tr. p. 52; FDIC Ex. 10.)
   32. Respondent was paid a bonus based
{{1-31-94 p.A-2340}}on the Bank's earnings. By falsely inflating the Bank's earnings through these loans, Respondent increased the amount of his bonus. (Tr. pp. 17, 19, 138.)

BORROWER II

   33. From December 1987 through December 1989, the financial statements and other documents in the Bank's credit files for this borrower reflected that its capital was positive and increasing in amount, as follows:

       (i) 1987—$48,098.23;
       (ii) 1988—$69,614.75; and
       (iii) 1989—$81,673.68. (Tr. pp. 56, 57; FDIC Ex. 25.)
   34. From December 1987 through December 1989, the financial statements and other documents in its credit files reflected that its earnings were positive, as follows:
       (i) 1987—$6,665.07;
       (ii) 1988—$9,016.52; and
       (iii) 1989—$7,003.80. (Tr. pp. 56, 57; FDIC Ex. 25.)
   35. These financial statements were false and inaccurate. (Tr. pp. 57, 58, 163–165.)
   36. Cover letters accompanying the financial statements were falsified versions of letters prepared by a Certified Public Accountant to omit reference to negative capital and negative earnings in the actual letters. (Tr. pp. 163–165; FDIC Exs. 25, 26.)
   37. The actual financial statements and accompanying cover letters for the period from December 1987 through December 1989, prepared by the Certified Public Accountant reported that the borrower had negative capital, as follows:
       (i) 1987—negative $36,963.77;
       (ii) 1988—negative $9,640.30; and
       (iii) 1989—negative $10,479.29. (Tr. pp. 160–162; FDIC Ex. 26.)
   38. The actual financial statements for the period from December 1987 through December 1989 prepared by the Certified Public Accountant, reported that the borrower had negative earnings, as follows:
       (i) 1987—negative $31,655.07;
       (ii) 1988—negative $12,076.45; and
       (iii) 1989—negative $23,003.80. (Tr. pp. 161, 162; FDIC Ex. 26.)
   39. Respondent was responsible for the falsification of the financial statements and thereby concealed the true condition of the borrower from Bank management and examiners, because:
       (i) he was the Bank loan officer responsible for all of the loans made by the Bank to this borrower. (Tr. pp. 59, 60, 172);
       (ii) he provided the Bank's loan secretary with the false information, and caused her to prepare at his direction, the false financial statements. (Tr. pp. 173, 176, 177);
       (iii) the false statements reflected that the borrower had a positive cash position with the Bank, when in fact it was repeatedly overdrawn at the Bank, and as the Bank's president and loan officer responsible for this line of credit, Respondent knew or should have known of such overdrafts. (Tr. pp. 319–321); and
       (iv) he maintained the credit files with the false financial statements therein. (Tr. pp. 59, 60).
   40. During the period from at least December 1987 through December 1989, Respondent reviewed the status of the loans for the Bank's directors four times a year using the false financial statements in the credit files, and thereby deliberately misled Bank management about the true financial condition of the borrower. (Tr. pp. 59, 60.)
   41. Bank management relied on the false financial statements in the credit files and therefore did not consider the risk of loss to the Bank in the line to be significant. (Tr. pp. 57–59.)
   42. Because Bank management did not consider that this line of credit posed a significant risk of loss to the Bank during the period from December 1987 through December 1989, it continued to report accrued interest for the loans thereby inflating the Bank's earnings and thus Respondent's bonus. (Tr. pp. 19, 20, 65–69, 138; FDIC Ex. 28.)
   43. At the FDIC's examinations of the Bank as of January 3, 1989, and February 23, 1990, relying on, and misled by, the false financial statements in the credit files, FDIC examiners determined not to adversely classify the loans. (Tr. pp. 212, 213, 223, 246, 248, 249; FDIC Exs. 2, 3, 27.)
   44. If the FDIC examiners conducting the examinations of the Bank as of January 3, 1989, and February 23, 1990, had reviewed the accurate financial statements they would have adversely classified the loan. (Tr. pp. 222, 223, 252; FDIC Ex. 26.)
{{1-31-94 p.A-2341}}
   45. As of August 14, 1990, after the false financial statements in the credit files were discovered and the true condition or the borrower became known by Bank management, and examiners, of the remaining $143,000 of the line outstanding, the State of Iowa adversely classified $128,000 "Substandard," and another $10,000 "Loss." (Tr. pp. 273–276; FDIC Ex. 4)
   46. After Bank management discovered the false financial statements in the credit files, and the examiners adversely classified a large part of the loan balance, the Bank charged off the following amounts:
       (i) as of September 5, 1990— $10,000; and
       (ii) as of February 28, 1991— $10,000. (Tr. pp. 70, 71; FDIC Ex. 29.)

BORROWER III

   47. On or about March 28, 1989, one borrower at the Bank sold real estate to another Bank customer for approximately $18,000. (Tr. pp. 87, 91, 93, 193; FDIC Ex. 36.)
   48. The property sold was collateral for a Bank loan to the seller. That loan, which as of March 28, 1989, totaled $47,012.38, with accrued interest of $4,157.62. (Tr. pp. 96, 97; FDIC Ex. 34.)
   49. The seller's loan was a problem asset because:

       (a) As of January 3, 1989, $13,000 of it was adversely classified "Substandard." (Tr. p. 225; FDIC Ex. 3, p. 35.); and
       (b) As of February 27, 1989, the Bank's Loan Committee reflected the loan on its Watch List and its Problem Loan List. (Tr. p. 91; FDIC Ex. 35.)
   50. In order to reduce or eliminate the seller's loan at the Bank by sale of the collateral, the Respondent and other members of the Bank staff had informed the other Bank customer that the property was for sale. (Tr. pp. 87, 193, 194.)
   51. On or about March 24, 1989, to finance the purchase of the property, Respondent offered the interested buyer a 10-year loan of $33,000 with an interest rate of 12 percent and provided a note for his signature. (Tr. pp. 194, 195; FDIC Ex. 31.)
   52. The March 24, 1989, note was prepared by Respondent. (Tr. p. 74; FDIC 31.)
   53. The buyer refused the loan terms offered by Respondent on or about March 24, 1989, because he only needed to borrow $18,000 to purchase the property and, therefore, the terms offered did not reflect the terms he wanted—a loan of approximately $18,000 with interest at 12 percent a year for 10 years to be repaid at $275 per month, resulting in a total repayment of $33,000. (Tr. pp. 295, 198.)
   54. After the buyer refused to accept the loan terms offered by Respondent, he created and offered the buyer a second document entitled "Agreement" which stated, among other things, that $33,000 would be borrowed at 0 percent (i.e., without) interest to be repaid by payments of $275 per month for 10 years. (Tr. pp. 77–79, 196; FDIC Ex. 32.)
   55. The buyer consented to the terms of the Agreement, and he and Respondent signed the Agreement on or about March 31, 1989. (Tr. pp. 7, 196; FDIC Ex. 32.)
   56. A few days after signing the Agreement, Respondent approached the buyer with the earlier March 24, 1989, note and asked him to also sign it, stating that the note was needed for Bank records and computer entries. (Tr. pp. 196, 197.)
   57. After being assured by Respondent that he did not have to pay 12 percent interest per year on the $33,000 principal amount stated on the March 24, 1989, note and that Respondent would see that interest was not charged notwithstanding the stated terms, the buyer signed the March 24, 1989, note. (Tr. pp. 196, 197; FDIC Ex. 31.)
   58. On or about March 28, 1989, Respondent booked the March 24, 1989, note as a loan of $33,000 with a 12 percent interest rate and a 10-year maturity, notwithstanding that he knew that the buyer had not agreed to the terms of the note and that they had agreed that he would not be bound by the terms of the note. (Tr. p. 82, FDIC Exs. 33, 34.)
   59. Respondent concealed the Agreement from Bank management, which was not informed of the Agreement until the borrower presented it to Bank management after Respondent had been fired. (Tr. pp. 79, 118.)
   60. Respondent caused or permitted the Bank to reflect the loan on the Bank's records using only the terms of the March 24, 1989, note and:
{{1-31-94 p.A-2342}}
       (a) the loan was booked as a $33,000 extension of credit with interest to accrue at 12 percent per year for 10 years (Tr. p. 82; FDIC Exs. 33, 34.) and,
       (b) from on or about March 28, 1989, until on or about June 26, 1990, the Bank accrued interest on the loan using a principal amount of $33,000 and an interest rate of 12 percent.
   61. The Agreement did not represent a legitimate Bank transaction. (Tr. pp. 78–82.)
   62. The proceeds of the purported $33,000 loan went towards the payoff of the seller's loan. (Tr. p. 87.)
   63. On or about March 29, 1989, Respondent falsely and deliberately recorded a $51,170 payoff on the seller's loan, including $47,012.38 to principal and $4,157.62 to interest. The proceeds from the sale of the real estate were the primary source of funds for the purported payoff of the loan. (Tr. pp. 86, 87, 97; FDIC Ex. 34.)
   64. Respondent prepared the documents recording the payoffs of the loan. (Tr. pp. 86, 87; FDIC Ex. 34.)
   65. Respondent recorded the loan to the buyer with a principal balance of $33,000, rather than approximately $18,000 that he had agreed to borrow, so that a larger amount of loan proceeds could be applied toward the total payoff of the seller's loan, and a charge-off of approximately $15,000 (i.e., a loss to the Bank) could be avoided. (Tr. pp. 96–98.)
   66. Respondent used the buyer's loan to falsely overstate the Bank's earnings and, increase Respondent's bonus which was tied to the Bank's earnings, by:
       (a) concealing the $15,000 loss to the Bank that would have resulted from a charge-off on the seller's loan if the buyer's loan had properly been reflected as an $18,000 loan; and
       (b) falsely inflating the Bank's earnings by accruing interest at 12 percent on a $33,000 loan rather than an $18,000 loan.
   67. On or about June 26, 1990, after being advised of the side agreement, and recognizing the validity of its terms, the Bank cancelled the March 24, 1989, loan to the buyer and replaced it with a loan of $18,000 at an interest rate of 12 percent to mature in 10 years. (Tr. pp. 93–95, 198.)
   68. On or about June 26, 1990, in recognition of the side Agreement and the rewriting on the terms of the loan, the Bank charged off $16,929.17 on the seller's loan, including $2,089.17 in interest. This was a loss to the Bank. (Tr. pp. 97, 98; FDIC Ex. 37.)

GENERAL FINDINGS

   69. Respondent's misconduct was contrary to acceptable bank standards, exposed the Bank to undue risk of loss and, therefore, was unsafe or unsound. (Tr. pp. 305, 308, 310, 311, 317.)
   70. Respondent's misconduct breached his fiduciary duty because Respondent acted contrary to the Bank's interests to further his gain. (Tr. pp. 306, 308, 309, 311.)
   71. As a result of Respondent's misconduct regarding the subject loans, the Bank also incurred loss from costs in the form of audit and legal fees.
   72. As a result of Respondent's misconduct regarding the subject loans, the Bank incurred "other damage" because his concealment of material information about the loans and/or the borrowers precluded Bank management from taking timely corrective action on the loans which might have avoided loss to the Bank. (Tr. pp. 308, 314, 315.)
   73. The Bank's bonus plan for officers continued regularly, depending on the level of the Bank's income, for a number of years including the period from 1987 through 1990. (Tr. pp. 125, 126.)
   74. Bank officers expected to receive a bonus when the Bank's income warranted. (Tr. p. 126.)
   75. It was the practice of Bank management to pay a sum equal to 50 percent of all of the Bank's income in excess of 1.29 percent of the Bank's average assets, from which bonus pool payments would be distributed among the Bank's officers, with a majority of the bonus pool going to the Bank's senior officer. (Tr. pp. 138, 139.)
   76. In 1989, Bank management paid 63 percent of the Bank's bonus pool, or $22,000, to Respondent. (Tr. pp. 22–24, 141; FDIC Ex. 24.)
   77. Respondent realized financial gain from his misconduct regarding the subject loans. By falsely inflating the Bank's income, Respondent increased the amount of the Bank's bonus pool and, therefore, increased his share of the bonus pool. (Tr. pp. 19, 20, 138.)
   78. Respondent also benefitted in nonfinancial ways from his misconduct regarding
{{1-31-94 p.A-2343}}the subject loans. By concealing from Bank management and examiners the true risk in the Bank's loan portfolio for which he was responsible, Respondent maintained the appearance for a time that he was adequately managing all loans, and built upon his good reputation with his employers. (Tr. p. 316.)
   79. By falsifying documents, concealing material information from, and lying to, Bank management and examiners about the subject loans, Respondent demonstrated his personal dishonesty. (Tr. pp. 307, 309, 310, 312.)

CONCLUSIONS OF LAW

   1. The facts set forth in the above Findings of Fact constitute grounds for the issuance of an order prohibiting Respondent from any further participation, in any manner, in the conduct of the affairs of any insured depository institution pursuant to 12 U.S.C. § 1818(e).
   2. The following order of prohibition should, accordingly, be issued.
   So Ordered, this 10th day of August, 1993.
   /s/ Arthur L. Shipe
   Administrative Law Judge
   Date: August 10, 1993

ORDER OF PROHIBITION

   Tim M. Lane 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 review court.
   So Ordered, this ____ day of August, 1993.

   BOARD OF DIRECTORS FEDERAL DEPOSIT INSURANCE CORPORATION

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