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   [5212] In the Matter of Michael D. McCormick, The First Bank, DeLeon, Texas, Docket No. FDIC-92-248e (4-5-94)

   FDIC denies Respondent's application to modify or terminate an order of prohibition, finding that the dishonest and fraudulent acts which led to the prohibition rendered Respondent unfit to serve as an employee or consultant in a bank's loan department.

   [.1] Prohibition, Removal or Suspension—Application for Reemployment— Standards
   Applicant for reemployment after prohibition must show his fitness to participate in banking, and that his participation would not pose a risk to the institution's safety and soundness or erode public confidence in the institution.

   [.2] Prohibition, Removal or Suspension—Application for Reemployment— Burden of Proof
   Assertion by bank that it wants to employ applicant and applicant's promise to agree to restrictions on his employment are not sufficient to overcome the risk to bank that would result from reemployment of person originally terminated for fraud and personal dishonesty.

In the Matter of
MICHAEL D. McCORMICK, individually and
as an institution-affiliated party of
THE FIRST STATE BANK
DE LEON, TEXAS
(Insured State Nonmember Bank)
DECISION AND ORDER
DENYING
APPLICATION
TO MODIFY OR
TERMINATE
ORDER OF PROHIBITION
FROM FURTHER
PARTICIPATION

FDIC-92-248e

{{6-30-94 p.A-2409}}

STATEMENT OF THE CASE

Introduction

   On October 3, 1993, Michael D. McCormick ("Respondent" or "McCormick"), through a letter ("Application") addressed to both the Office of the Comptroller of the Currency ("OCC") and to the Regional Director of the Dallas Regional Office of the Federal Deposit Insurance Corporation, and application to the Federal Deposit Insurance Corporation ("FDIC") for written consent to a modification of the Order of Prohibition from Further Participation ("Order of Prohibition") to become either an employee of or an independent consultant for First National Bank of Dublin, Dublin, Texas ("FNB Dublin"), an institution regulated by the OCC. This application arises under section 8(e)(7)(B) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(e)(7)(B), and section 8(j) of the Act, 12 U.S.C. § 1818(j).

Background

   McCormick served as the president, chief executive officer, and director of First State Bank, De Leon, Texas ("First State Bank" or "Bank") from December 1989 through December 17, 1990. Effective December 17, 1990, Respondent was removed from all of these positions by the Banking Commissioner for the State of Texas ("Banking Commissioner").
   On September 11, 1992, the FDIC issued a Notice of Intention to Prohibit From Further Participation ("Notice")2 pursuant to section 8(e) of the Act, 12 U.S.C. § 1818(e), against McCormick. The Notice alleged that, in March 1990, during his tenure as a director, president, and chief executive officer of First State Bank, McCormick filed with the Bank a false financial statement which contained serious omissions of material fact about his financial condition for the purpose of inducing the Bank to make a number of extensions of credit to him.1 The Notice alleged that in reliance upon this financial statement, First State Bank purchased a $75,000 participation in a loan to McCormick from FNB Dublin on June 21, 1990; renewed a loan to McCormick in the amount of $8,163 on September 13, 1990; and granted a loan to McCormick in the amount of $11,900 on September 24, 1990.
   During a state bank examination of First State Bank in October 1990, McCormick was questioned about his financial statement by an examiner of the State of Texas Department of Banking. As a result of this conversation, McCormick submitted another financial statement dated October 24, 1990. This second financial statement, however, also contained serious omissions of material fact by designating as the debtor, McCormick Farms, and not McCormick individually or his related interests, and again failing to reflect that McCormick was a defendant in litigation.
   On May 7, 1993, McCormick stipulated to the issuance of an Order of Prohibition and on July 27, 1993, the FDIC issued the Order of Prohibition pursuant to section 8(e) of the Act, 12 U.S.C. § 1818(e). The Order of Prohibition prohibited Respondent from participating in the conduct of the affairs of the Bank or any other FDIC insured institution without the prior written consent of the FDIC and the appropriate Federal banking regulator pursuant to 12 U.S.C. § 1818(e)(7) (B).

The Application

   By letter dated October 3, 1993, Respondent made application to the FDIC for written consent to a modification of the Order of Prohibition. By his application, McCormick sought to become either an employee of or an independent consultant for FNB Dublin. In support of his application, McCormick noted that he would neither serve FNB Dublin in the capacity of an officer or director,


1 Unlike the Order issued by the State of Texas, an FDIC Prohibition Order would have the effect of prohibiting the Respondent from further involvement, not only with First State Bank, but all banks.

2 According to the Notice, the financial statement allegedly contained serious omissions of material fact about his financial condition, specifically including omissions about: (1) a loan from The First State Bank, Abilene, Texas ("First State Bank, Abilene"), to one of his partnerships in the original principal amount of $264,009.79, which McCormick owed to the FDIC as receiver of First State Bank, Abilene; (2) a loan from The Moran National Bank, Moran, Texas to McCormick in the original amount of $125,906.38, which McCormick owed to the FDIC as receiver of The Moran National Bank; (3) a loan from The Moran National Bank to McCormick in the original amount of $82,060.01, which McCormick owed to the FDIC as receiver of The Moran National Bank; and (4) a loan from The Moran National Bank to McCormick in the original amount of $72,000.00, which McCormick owed to the FDIC as receiver of The Moran National Bank. Further, the Notice alleged that McCormick failed to accurately reflect that he was involved as a defendant in a legal action.

{{6-30-94 p.A-2410}}nor have loan authority, that he would be supervised by its officers and directors, and that he would be responsible only for loan analysis and review of loan documentation. In the alternative, McCormick requested that he be permitted to become an independent consultant to FNB Dublin and perform loan analysis and review loan documentation.

FINDINGS OF FACT

   In his application for modification of the Order of Prohibition, McCormick set forth several grounds for requesting such relief. First, McCormick stated that the alleged violations were not the result of any deliberate attempt to mislead First State Bank. Second, Respondent stated that First State Bank has not been injured in any manner because the loans made by First State Bank in reliance upon the March 8, 1990, financial statement were fully repaid by Respondent.
   The Board of Directors of the FDIC ("Board"), however, finds that the facts do not support these contentions. McCormick's March 8, 19990, financial statement showed that McCormick's total assets were $617, 000, total liabilities were $70,000, that McCormick's net worth was $547,000 and that McCormick had no contingent liabilities. The financial statement further answered in the negative the question whether McCormick was involved as a defendant in any ongoing litigation or legal actions. These statements contained serious and material omissions, and accordingly, Respondent was requested by a state examiner during the October 1990 state examination of First State Bank to amend his financial statement.
   Respondent's second financial statement dated October 24, 1990, however, also contained materially false statements. Respondent attributed a total of $438,000 in debt to McCormick Farms and characterized it as an "estimated debt" rather than as debt owed by either McCormick in his individual capacity or by his related interests. Further, this financial statement failed to disclose that the following loans were made to McCormick by banks which had subsequently failed: (1) a loan from First State Bank, Abilene to one of his partnerships in the original principal amount of $264,009.79, which McCormick owed to the FDIC as receiver of First State Bank, Abilene; (2) a loan from The Moran National Bank to McCormick in the original amount of $125,906.38, which McCormick owed to the FDIC as receiver of The Moran National Bank; (3) a loan from The Moran National Bank to McCormick in the original amount of $82,060.01, which McCormick owed to the FDIC as receiver of The Moran National Bank; and (4) a loan from The Moran National Bank to McCormick in the original amount of $72,000.00.
   Finally, the October 24, 1990, financial statement continued the omission concerning whether McCormick was a defendant in any litigation or legal actions. McCormick has been named as a counterdefendant in a counterclaim in a lawsuit brought by the FDIC to collect on the note in the original principal amount of $264,009.79 made by First State Bank, Abilene. McCormick was also a defendant in an action brought by the FDIC to collect on notes, as described supra, made by The Moran National Bank.
   The Board finds that taking the facts in the most favorable light to Respondent, that McCormick submitted two financial statements which contained serious and material omissions and false statements. Further, while Respondent has repaid his debts to First State Bank, there is a significant amount of outstanding debt which continues to be owed to the FDIC as receiver and there is unresolved litigation which is still pending.

DECISION AND ORDER

   Upon review of the record as a whole, the Board finds that McCormick has failed to present any evidence or persuasive argument which meets the burden for obtaining consent from the FDIC to become an institution-affiliated party pursuant to section 8(e) (7)(B) of the Act, 12 U.S.C. § 1818(e)(7) (B).
   Section 8(e)(7)(B) of the Act states in pertinent part:

(7) INDUSTRYWIDE PROHIBITION.—

   (B) EXCEPTION IF AGENCY PROVIDES WRITTEN CONSENT.—If, on or after the date an order is issued under this subsection which removes or suspends from office any institution-affiliated party or prohibits such party from participating in the conduct of the affairs of an insured depository institution, such party receives the written consent of —
   (i) the agency that issued such order; and
   (ii) the appropriate Federal financial institutions regulatory agency of the institution described in any clause of subparagraph (A) with respect to which such party proposes to become an institution-affiliated party, {{6-30-94 p.A-2411}}subparagraph (A) shall, to the extent of such consent, cease to apply to such party with respect to the institution described in each written consent.
   12 U.S.C. § 1818(e)(7)(B).

   [.1] To meet this burden, McCormick must demonstrate: (1) his fitness to participate directly or indirectly in the conduct of the affairs of an insured depository institution; (2) that his participation would not pose a risk to the institution's safety and soundness; or (3) that his participation would not erode public confidence in the institution. See In the Matter of Charles E. Floyd, FDIC ENFORCEMENT DECISIONS AND ORDERS, Par. 5177, A-1976 (1992); In the Matter of Frederick M. Pfelffer, FDIC ENFORCEMENT DECISIONS AND ORDERS, Par. 5193A, A-1656; Docket No. FDIC-83-153e, FDIC ENFORCEMENT DECISIONS AND ORDERS Par. 5117, A-1303 (1988). All that McCormick has produced to support his application are assertions by FNB Dublin that it strongly supports McCormick's application and promises by McCormick that he will agree to any restrictions which the FDIC or the OCC may impose upon his employment with FNB Dublin.
   This evidence is not sufficient. In issuing the Notice, the Board made a prima facie finding that McCormick had breached his fiduciary duty to First State Bank, had engaged in personal dishonesty and that McCormick received personal gain as a result of these acts.

      [.2] At the time McCormick engaged in these acts, McCormick held the highest offices in First State Bank and by law was under duty to exercise his fiduciary responsibilities to First State Bank. By failing to disclose significant debts in his financial statements filed with First State Bank which, if disclosed, would have shown his financial condition to be severely distressed, McCormick engaged in serious and material misrepresentations. By submitting false financial statements concerning his own financial condition, not once but twice, not only to obtain personal loans but also to mislead a state bank examiner, McCormick engaged in fraudulent conduct.
   Banking depends upon the commitment to the highest standards of fiduciary duty long required by law for bankers. See Briggs v. Spaulding, 141 U.S. 132 (1891); Docket No. FDIC-85-291k, FDIC ENFORCEMENT DECISIONS AND ORDERS, Par. 5072, A-964, A-975; Docket No. FDIC-85-356e, FDIC ENFORCEMENT DECISIONS AND ORDERS, Par. 5112, A-1228, A-1235; see also American Bankers Association, Focus on the Bank Director, 97–125 (1984); Schlichting, Rice & Cooper, Banking Law, 6.04 (1984). Making false statements of material fact in one's own financial statement in order to influence the institution, in which one is serving in its highest offices, to make a loan does not demonstrate the qualities required by the law to participate in an insured depository institution.
   Respondent proposes to serve in a position either as an employee or outside consultant where he would be responsible for analyzing the adequacy of loan documentation, including analyzing financial statements to determine their accuracy. While McCormick proposes to be supervised in his activities, the nature of his actions does not yield to enforced supervision. His conduct does not demonstrate just poor judgment or limited skills. McCormick engaged in dishonest and fraudulent acts. Therefore, the Board finds that there is no controlled environment which could be created to adequately reduce the risk to the safety and soundness of FNB Dublin, and McCormick's service would erode public confidence in the banking system and the regulatory process.
   Accordingly, the application dated October 3, 1993, is hereby denied.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 5th day of April, 1994.
/s/ Robert E. Feldman
Acting Executive Secretary

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