Federal Deposit
Insurance Corporation

{{2-28-03 p.A-2570.1}}
   [¶5225] In the Matter of Richard D. Donohoo, Craig R. Mathies, Leonard C. Misenor, Bruce A. Rasmussen, Cherly C. Godbout-Bandal, Wayne Field, Bruce A. Rasmussen & Associates, and Lindquist & Vennum, Capital Bank, St. Paul, Minn., Docket Nos. 92-249c&b, FDIC-92-250e, FDIC-92-251e, and FDIC-92-252k. (7-5-95).

   Bank directors who also served as president and executive vice president engaged in repeated misconduct—including violation of the Change in Bank Control Act, Regulation O, and Section 23A of the Federal Reserve Act—and numerous unsafe or unsound practices and breaches of fiduciary duty in connection with a plan to issue new bank stock and sell it directly to a group of "insiders" with the intention of gaining control over the bank. Civil money penalties are assessed against the directors and other individual respondents who purchased the stock as part of the takeover plan. Law firms that represented individual officers and directors pursuant to an improper indemnification resolution are ordered to reimburse the bank for legal fees. (This decision was affirmed in part and reversed in part by the United States Court of Appeals for the Eighth Circuit, 103 F.3d 1409.) (The United States Court of Appeals for the Eighth Circuit, 232 F.3d 637, determined that the statute of limitations was determined to begin running after the final administrative determination on the assessment of the Civil Money Penalty was made.)

   [.1] Restitution
   In lieu of restitution to bank, which would provide a windfall to its current owner, the civil money penalties imposed on respondents are increased by the amount of their illicit gain.

   [.2] Change in Bank Control Act—"Acting in Concert"—Definition
   Respondents who issued new bank stock and sold it directly to an investment group of "insiders" with the intention of gaining control over the bank acted "in concert" within the meaning of the Change in Bank Control Act. Neither documentary evidence nor a formal agreement is needed to prove concerted action.

   [.3] Change in Bank Control Act—"Acting in Concert"—Evidence
   Respondents' previous attempt to acquire bank's holding company is probative evidence of "acting in concert" to acquire control of the bank.

   [.4] Attorneys—Advice and Counsel
   Reliance on advice of counsel does not shield respondents from enforcement actions.

   [.5] Directors—Breach of Fiduciary Duty
   Directors who also served as bank's president and executive vice president breached their fiduciary duties to the bank by voting to approve employment agreements that included "golden parachutes" for themselves.

{{2-28-03 p.A-2570.2}}    [.6] Federal Reserve Act §23A—Definitions—Affiliate
   Where respondent controlled one bank—and simultaneously served as president, officer, and director—and owned 50 percent of a holding company that controlled a second bank, and two banks were affiliates for purposes of Section 23A.

   [.7] Regulation O—Loans to Executive Officers, Directors, and Principal Shareholders—Lending Limitations—Unsecured Loans
   Bank president/director who arranged for an "insider" to receive an unsecured loan from an affiliate bank to finance his participation in a plan to gain control of the bank violated both Section 28A of the Federal Reserve Act and Regulation O.

   [.8] Shareholders—Stock Valuation
   Respondents did not pay fair market value for their shares of bank stock, which they purchased without full and complete disclosure in a transaction that lacked fairness and arms-length dealing.

   [.9] Civil Money Penalties—Amount—III-Gotten Gains
   Proper amount of civil money penalties imposed on respondents is equal to the ill-gotten gain from their illegal stock transaction, calculated as the difference between the purchase price and the sales price of their bank shares.

   [.10] Cease and Desist Orders—Violation
   Respondents violated prior cease and desist order, which required bank to make no extensions of credit without first obtaining an appraisal or other evaluation of the pledged collateral, documentation necessary to perfect the bank's lien on any pledged collateral, and file comments stating the purpose of the loan.

   [.11] Attorneys—Advice and Counsel
   Representation by common counsel of bank and individual officers and directors named as defendants in lawsuit exposed the bank to unnecessary risk and expense and constituted an unsafe or unsound practice.

   [.12] Directors—Indemnification
   Officers and directors of bank did not meet the requirements for either mandatory or permissive indemnification under Minn. Stat. Ann. §300.083.

   [.13] Cease and Desist Orders—FDIC Authority
   The FDIC's authority to issue cease and desist orders clearly extends to indemnification agreements by a bank that constitute a violation of law or otherwise constitute an unsafe or unsound practice.

   [.14] Institution-Affiliated Parties—Outside Counsel
   Law firms that represented individual officers and directors of bank pursuant to an improper indemnification resolution are institution-affiliated parties subject to the enforcement provisions of Section 8 of the Federal Deposit Insurance Act.

{{10-31-95 p.A-2571}}
In the Matter of
RICHARD D. DONOHOO and CRAIG R. MATHIES,Individually and as officers, directors, persons participating in the conduct of the affairs and institution-affiliated parties of;
LEONARD C.MISENOR,individually, and as an officer, person participating in the conduct of the affairs and an institution-affiliated party of;
BRUCE A. RASMUSSEN,individually, and as a director, person participating in the conduct of the affairs and an institution-affiliated party of;
CHERYL C. GODBOUT-BANDAL, WAYNE FIELD, BRUCE A. RASMUSSEN & ASSOCIATES, LTD. and LINDQUIST & VENNUM,as institution-affiliated parties of
CAPITAL BANK
ST. PAUL,MINNESOTA
and
CAPITAL BANK
ST. PAUL,MINNESOTA
(Insured State Nonmember Bank)
FDIC-92-249c&b
FDIC-92-250e
FDIC-92-251e
FDIC-92-252k
DECISION AND ORDER

   Notices of Intention to Remove From Office and Prohibit From Further Participation; Notice of Charges; and Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law, Order to Pay, and Notice of Hearing ("Notice") were issued by the Federal Deposit Insurance Corporation ("FDIC") on September 9, 1992, against six individuals, two law firms and Capital Bank, St. Paul, Minnesota ("Capital Bank" or the "Bank"), as Respondents.¹ The FDIC seeks an order of removal from office and prohibition from further participation in the affairs of any financial institution against Richard D. Donohoo and Craig R. Mathies pursuant to section 8(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(e). In its Notice the FDIC also seeks civil money penalties ("CMP") against Donohoo and Mathies in the amount of $1,000,000 each, and against Cheryl C. Godbout-Bandal, Wayne Field,² and Bruce A. Rasmussen in the amount of $750,000 each, pursuant to sections 7(j), 8(i), and 18(j) of the FDI Act, 12 U.S.C. § 1817(j), 1818(i), and 1828(j).³ Pursuant to section 8(b) of the FDI Act, 12 U.S.C. § 1818(b), the FDIC also seeks an order requiring the Individual Respondents and Law Firm Respondents to cease and desist from certain unsafe or unsound banking practices and violations of law, and requiring that all Respondents take certain affirmative action including reimbursement to Capital Bank for amounts wrongfully received from Capital Bank.
   The hearing of this matter was conducted on twelve days between April 20 and May 5, 1993, before Administrative Law Judge Walter J. Alprin ("ALJ"). A recommended decision ("R.D.")⁴ of two hundred and sixty pages was issued by the ALJ on September 7, 1994, to which the FDIC and Respondents filed Exceptions.⁵ On December 22, 1994, the record was reopened and the parties were requested to provide the Board of

   The Board has carefully considered this massive and complex record. The central issue for the Board is whether the Respondents "acted in concert" when they issued and purchased 7,000 new shares of Bank stock, and thus gained control of Capital Bank, without obtaining prior approval from the FDIC in violation of the Change in Bank Control Act ("CBCA"), 12 U.S.C. § 1817(j).⁶
   The ALJ has provided an extremely detailed recommendation which finds that Respondents acted in concert to violate the CBCA and engaged in numerous illegal and unsafe and unsound practices in furtherance of their overall goal of acquiring control of Capital Bank. The Board concurs that this record more than supports a finding of concerted action and violation of the CBCA. The Board also concurs in the findings of fact and conclusions of law made by the ALJ in connection with the loan transactions which financed Respondents' acquisition of control, and with certain findings regarding unsafe and unsound practices and breaches of fiduciary duty. The Board finds substantial evidence supporting the ALJ's recommendations that a prohibition order be entered against Respondents Donohoo and Mathies, that civil money penalties be ordered against all Individual Respondents and that a cease and desist order be entered as well. However, as discussed below, the Board does not agree with several of the findings of fact and conclusions of law made by the ALJ, and has determined that additional findings and conclusions are necessary. Accordingly, the Board adopts and incorporates herein the Recommended Decision except as modified below.

   This matter arises out of the events surrounding the 1990 acquisition of control of Capital Bank by Respondents Donohoo, Mathies, Rasmussen, Field, and Godbout-Bandal, who allegedly acted in concert, pursuant to a joint scheme, aided and abetted by Law Firm Respondent Lindquist & Vennum, to purchase a controlling interest in Capital Bank. In order to finance and execute their scheme, Respondents allegedly engaged in a number of illegal and improper banking transactions. Despite prior warnings from the FDIC that compliance with the CBCA was required, Respondents did not comply with the prior notice and approval requirements of the CBCA.
   In May 1988, Respondents Donohoo and Mathies purchased 142,000 shares, or 24.9 percent, of Capital Bank's holding company, Capital City Corporation ("CCC")⁸ from George Heaton, for $1,025,000, as well as an option to purchase the remaining shares.⁹ Heaton had acquired the CCC stock from the Wenzel family in 1981 and still owed approximately $800,000 to the Wenzels (the "Wenzel Note").¹⁰ The Wenzel Note was secured by a pledge of 100 percent of CCC's outstanding shares—including the shares purchased by Donohoo and Mathies. Heaton was also a guarantor of an unpaid $3.9 million loan from Midwest Federal Savings and Loan Association of Minneapolis, Minneapolis, Minnesota ("Midwest Federal"), to CCC. The Midwest Federal loan was secured by a pledge of 6,685 shares of Capital Bank (approximately 99 percent) owned by CCC (the "Bank Stock Loan").¹¹
   Beginning shortly after their purchase,

   FDIC Enforcement Counsel claim that the Individual Respondents knew about and acted according to a preconceived plan with respect to a series of insider loans, the proceeds of which were used to finance Respondent Donohoo's and Respondent Mathies' payment of debt and Respondents' stock acquisition. They assert that Respondents violated the CBCA by failing to obtain prior approval of their acquisition of control of Capital Bank; violated Section 22(h) of the Federal Reserve Act, and Regulation O promulgated thereunder, and Section 23A ("Section 23A") of the Federal Reserve Act²⁶ and a cease and desist order through their abusive and hazardous insider lending practices; engaged in unsafe or unsound practices in connection with the improper payment of bonuses, golden parachute agreements, and violations of the Minnesota statute governing advance payments and indemnification payments; and breached their fiduciary duties owed to Capital Bank by, among other things, causing the issuance of new Bank stock and buying the stock at a price below fair market value. All these actions, they assert, were motivated by personal gain and not the welfare of Capital Bank.
   With respect to the Law Firm Respondents, FDIC Enforcement Counsel asserts that they engaged in breaches of fiduciary duty and knowing or reckless participation in unsafe or unsound banking practices in causing the Bank to bear the entire expense of the lawsuit.

   Respondents maintain that there were no violations, no unsafe or unsound practices, and no breaches of fiduciary duty. The Individual Respondents testified that they did not act in concert to acquire control of Capital Bank. Donohoo and Mathies testified that they had no knowledge that Misenor, Field, or Godbout-Bandal used proceeds of loans from Capital Bank to help fund the takeover of Capital Bank. Donohoo and Mathies further testified that their actions were taken only in pursuit of the best interests of Capital Bank.
   They assert that there has been no violations of the CBCA for two reasons. First, in the absence of 25 percent stock ownership by an individual, no Respondent controlled Capital Bank and therefore, control of Capital Bank did not change. Second, they argue that control did not pass to the group of Respondents. They claim there is no evidence of the group "acting in concert" because there is no proxy assignment, purchase and sale agreement, voting agreement, cross-pledge, collateral or cross-guarantee, or other historical indicia of "acting in concert". Resp. Br. at 72. They claim that Respondents were simply individuals with prior financial dealings and prior common investments. Resp. Br. at 29-30.
   They further assert that even if a violation of the CBCA is found by the Board, no civil money penalty can be assessed against Respondents because they were "justified in relying upon" the advice of counsel, after "all relevant facts were fully disclosed to counsel". Id.
   Because Respondents deny the FDIC's allegations concerning their awareness that Capital Bank loan proceeds were used to

   As noted by the ALJ, there is little dispute as to the facts of this case, most of which are admitted, stipulated, or well documented. "It is the significance of each fact, and the relationship of facts, disputed by contrary testimony, which forms the basis of the controversy." (Emphasis in original.) R.D. at 2–3. He recognized that "particular care is required in parsing this mass of evidence to determine whether, in view of the testamentary disclaimers, the agency has met its burden of proving the allegation by the preponderance of the evidence." R.D. at 6. With this in mind, the ALJ found that:

   these facts evince a concerted purpose, a common plan, common transactions and a common benefit, organized and carried out by Donohoo and Mathies, with the borrowers-investors' knowing participation. The purpose of the plan was to join in a common group, even if the individuals never met jointly or openly jointly concurred by agreement, for the purpose of purchasing stock control of CCC, and hence of the Bank. R.D. at 16–17.

   ...it is apparent that the testimony of Donohoo and Mathies was not credible. Moreover, as each of these transactions is reviewed in greater detail, this conclusion that Donohoo and Mathies and the individual borrowers-investors-purchasers knew of the loans and of their purpose is even more compelling. R.D. at 17.
   ...under the factual circumstances the testimony of Donohoo and Mathies is not merely undeserving of credibility but is completely ludicrous. R.D. at 18.
   ... Donohoo and Mathies testified they had no knowledge that Field used the loan proceeds in this manner..." However, the operative facts do not support their testimony. R.D. at 23.

   The Exceptions of each party are summarized below. The major Exceptions are discussed in detail subsequently under the "Discussion" heading. Exceptions not specifically discussed are rejected. They either simply restate previous arguments which have been adequately addressed by the ALJ, or, in light of the findings made herein, are legally deficient or tangential to the holdings of this decision.
1. Exceptions Filed by Multiple Parties.
   FDIC Enforcement Counsel, counsel for Respondents, and Respondent Field all filed exceptions to the ALJ's determination to include the profits made by the Individual Respondents as a result of the sale of their Capital Bank shares in 1992 in the restitution he ordered each to make as part of his recommended cease and desist order, rather than as part of the recommended CMP order. See R.D. at 107; FDIC Exc. at 5–8; Resp. Exc. at 28, fn. 21; Field Exc. at 7.
2. Respondents' Exceptions.
   Broadly, Respondents take exception to all of the ALJ's findings of fact and conclusions of law against them.³⁰ They contend that they did not "act in concert", and that

{{10-31-95 p.A-2578}}they did not violate the CBCA. They take exception to the ALJ's reliance on their attempts to purchase CCC as evidence of their acting in concert to purchase Capital Bank. Further, they take exception to the findings that they participated in violations of Regulation O and Section 23A and that they engaged in unsafe and unsound banking practices, breaches of fiduciary duty, and violations of the 1984 Cease and Desist Order. They further take exception to the ALJ's finding of the value of Capital Bank stock as of July 30, 1990, and to the ALJ's calculation of profit from the sale of Capital Bank stock.
   Respondents also submitted unmeritorious procedural and substantive objections to the Board's Request for Supplemental Information.³¹
3. FDIC Exceptions.
   With respect to the "golden parachute" provisions of the employment agreements between Capital Bank and Respondents Donohoo and Mathies, FDIC Enforcement Counsel take exception to the ALJ's conclusion that they were neither unsafe or unsound practices nor breaches of fiduciary duty.
   Finally, FDIC Enforcement Counsel take exception to the ALJ's finding that in the Wenzel Lawsuit "defense of the Bank could only be accomplished by disproving any wrongdoing by the Individual Respondents, so that the Law Firms' representation of the Bank required their defense of the individual defendants," and thus that payment by Capital Bank for the defense of the Individual Respondents is appropriate. R.D. at 55, 102.

   The Board concurs in the major findings and conclusions of the Recommended Decision, the most significant of which are that the Individual Respondents were aware of the requirements of the CBCA,³² acted in concert to violate the CBCA, and engaged in egregious insider abuse at Capital Bank. The Board has read the testimony and has no difficulty affirming the findings of the ALJ rejecting Respondents' version of events. The Board finds Respondents' testimony to be shockingly disingenuous.
   To accept Respondents' version of the events requires suspension of belief not only in the documents of record, but in one's common sense view of the world as we know it. It is simply not credible that persons as sophisticated as Respondents, with the admitted motivation of Respondents and the pressures facing them, could have been as unaware or unknowing as Respondents purport to have been. By pretending to "hear no evil, see no evil," or in the words of the ALJ, by creating "deniability," Respondents cannot escape liability. Their view that each step of each of these transactions occurred in a vacuum, never to be connected or made subject to common sense inference or conclusion, cannot be accepted.
   By July 1990, Respondents were about to lose their substantial common investments. They were faced with the threat of Midway calling the loan made to Donohoo and Mathies to purchase their CCC shares, the threat of foreclosure on CCC stock by the Wenzels, the sale of the Bank by the RTC, and pressure from the regulators to add desperately needed capital to the Bank. Because they feared disapproval under the

[.1] The only issue on which the parties agree is that any money ordered to be paid by Respondents should not be paid as restitution to Capital Bank. The ALJ concludes that the Individual Respondents were unjustly enriched as a result of their misconduct and should be required to disgorge all their ill-gotten gains. R.D. at 103. He appears, however, to have included the profits in the restitution he ordered each Individual Respondent to make to Capital Bank, rather than as part of the CMP which would be paid to the government. R.D. at 107.³³ The Board adopts the exceptions and agrees that under the specific facts of this case, restitution to Capital Bank would provide a windfall to Lloyd Amundson, who purchased Capital Bank in 1992. The ALJ's recommendation that $2,290,520 be paid by the Respondents as restitution to Capital Bank would, in effect, provide a return to Amundson of over two-thirds of the purchase price he paid to the Individual Respondents for their 7,000 shares. There is no basis in the record for providing Amundson with such a return. However, the record does support stripping the Respondents of the fruits of their wrongdoing. Accordingly, the Board's Order increases the ALJ's recommended CMP by the dollar amount of each individual Respondent's illicit gain, as found by the ALJ.
2. Acting in Concert.

   [.2] The CBCA, section 7(j) of the Act, 12 U.S.C. § 1817(j), provides in part that: No person, acting directly or indirectly or through or in concert with one or more other persons, shall acquire control of any insured depository institution through a purchase, assignment, transfer, pledge, or other disposition of voting stock of such insured depository institution...

   Section 7(j)(8)(B), 12 U.S.C. § 1817(j) (8)(B) defines control to mean:
   the power, directly or indirectly, to direct the management or policies of an insured bank or to vote 25 per centum or more of ny class of voting securities of an insured bank.

   while the identities and number of those forming the group involved in concerted action as...individual spokes surrounding the central hub of Donohoo and Mathies, did change, and while the modus operandi changed from indirect control through ownership of the holding company to control through direct stock ownership in Capital Bank, the intention and end sought and achieved by Donohoo and Mathies always was control over Capital Bank funded by a concerted group of coinvestors. The mere fact that cross-voting or proxy agreements, buy-sell agreements or cross pledges or collateral were not employed to compel continued compliance with the common purpose does not obscure the clarity of that purpose. R.D. at 39.

it was designed to provide information and regulatory review of a bank acquisition before that acquisition is consummated. Accordingly, the Act must be interpreted to mean that any person who proposes to embark on a course of conduct which could go on without interruption and result in the acquisition of control must go through the applicable notification and approval process before beginning that course of conduct. Because defendants were intent on acquiring control of Mid-Continent, they were therefore obligated to comply

{{10-31-95 p.A-2581}}with the requirements of the Change in Bank Control Act before commencing their acquisition.

Group activity such that disclosure is required when a group owns more than 5 percent of the outstanding shares of a corporation must involve a combination in support of a common objective, but the agreement need not be written and any arrangements may be formal or informal, and the existence of a group may be demonstrated circumstantially.

"Here is a group of guys that have gotten together, we are trying to save a bank, a bank that has been in trouble, and we have done what you have asked, we put in capital ... (emphasis added.)" Tr. 1475-76.

"Acting together—well, we were part of a group of investors who were purchasing the stock." Tr. 1573.³⁶

6. Violations of Regulation O and Section 23A.

   [.6] Respondents filed an exception to the ALJ's findings and conclusions with respect to alleged violations of Section 23A and Regulation O because they are based on the conclusion that Respondents acted in concert to violate the CBCA. Because the Board concurs in these findings of the ALJ regarding violation of the CBCA and the violations present in the loans to the Individual Respondents, the exception is rejected.
   Respondents also filed an exception to the ALJ's findings that the loan from People Bank to Rasmussen violated Section 23A and Regulation O because these findings are "based entirely upon the ALJ's conclusion that Respondents were acting in concert with the meaning of the CBCA." (Emphasis in original.) Resp. Exc. at 23.

   [.7] Because of Respondent Donohoo's simultaneous service as president, officer, and director of Capital Bank, his control of Capital Bank within the meaning of Section 23A, his ownership of 50 percent of the holding company which controlled Peoples Bank, and his chairmanship of the board of Peoples Bank, Capital Bank was an affiliate of Peoples Bank for purposes of Section 23A. The unsecured loan in the amount of $100,000 arranged by Donohoo from Peoples Bank to Respondent Rasmussen, enabled Rasmussen to purchase his shares of Capital Bank. This loan is an extension of credit to Donohoo, within the meaning of § 215.3(f) of Regulation O, 12 C.F.R. § 215.3(f), because the proceeds were used for his tangible economic benefit, in that it allowed an "insider" to complete the purchase of new shares necessary to obtain control of Capital Bank. It is also an extension of credit by an affiliate for the benefit of Capital Bank because the loan proceeds were transferred to Capital Bank's capital account, 12 U.S.C. § 371c(a)(2). FDIC-84-192e, FDIC-84-211e, FDIC-85-40k (Consolidated), Bound Vol. 1 P-H FDIC Enf. Dec. ¶5118 (1988); FDIC-86-139k, Bound Vol. 1 P-H FDIC Enf. Dec. ¶5088 (1987). The loan violated the lending limitations, and prior approval and collateral requirements of Regulation O and Section 23A. FDIC-85-356e, Bound Vol. 1

7. Value of Capital Bank Stock as of July 30, 1990.

   [.8] The ALJ finds that at $142.86 per share, Respondents did not pay fair market value for their shares of Capital Bank and "their actions with respect to the new Bank stock were performed without full and complete disclosure, and lacked fairness and arms-length dealing." R.D. at 60. Respondents filed an exception to this finding. Further, they took exception to the ALJ's finding of value because they claim it "is based upon the incorrect assumption that Respondents purchased a total of 100% of Capital Bank's stock." Resp. Exc. at 8. The Board rejects both exceptions and discusses them in reverse order.
   After purchase of the newly issued shares, Respondents owned 51 percent of Capital Bank's shares and they argue that the ALJ erred in crediting testimony of the value of the shares based upon 100 percent of the shares. The argument is sophistry and it is wrong. Assuming, as Respondents do in their argument, that existing shareholders of a corporation are not to be disadvantaged by the issuance of new shares, then the value of their shares should not change following the issuance of new shares, regardless of the percentage change of their holdings. For example, if the number of shares is diluted two for one, as it was in this case, then 100 percent of the pre-dilution shares should have the same value as 50 percent of the post-dilution shares.⁴⁴ The ALJ correctly relied upon testimony valuing 100 percent of the shares prior to dilution.⁴⁵
   The ALJ also appropriately credited the testimony of Respondents' witness, Paul Olander. Of the numerous witnesses who testified regarding valuation, all were interested parties except Olander. The testimony of Respondents Donohoo, Mathies, Rasmussen, Bank attorney Costley, and Bank purchaser Amundson, is not only plainly selfserving, but lacks any documentary support, analysis, or expertise.⁴⁶ R.D. at 68–71. Donohoo, Mathies, and Rasmussen did not obtain an independent appraisal of Capital Bank in determining the price at which stock should be issued, Tr. 2034, and never did any analysis, to set the price for the 7,000 shares, Tr. 822-23, 2033. The minutes of the board meetings contain no reference to the value of Capital Bank, the price at which stock should be issued, or that Donohoo, Mathies, and Rasmussen were going to purchase a substantial portion of the stock. FDIC Ex. Nos. 28mm-qq. The record is clear that by letter dated June 1, 1990, to Midwest Federal (RTC), Donohoo and Mathies offered either to purchase the Bank Stock Loan for $1.4 million or to purchase the 6,685 shares of Bank stock securing the Bank Stock Loan at a private foreclosure sale for $1.6 million. They stated that "the purchase of the stock would be contingent only upon receipt of any regulatory approvals required to complete the purchase." FDIC Ex. No. 140. Thus, by their own admission, Respondents' testimony valuing Capital Bank at $1 million undervalued Capital Bank by at least $600,000.⁴⁷
   Although Respondents testified the stock was worth $142.00 per share, the ALJ credited the testimony of Respondents' witness, Olander, a qualified bank appraiser, that the stock was worth $348.00 per share as of December 22, 1989. R.D. at 71. The ALJ also found that the Olander appraisal was a fair approximation of Capital Bank's fair market value as of July 30, 1990, because Olander's projection of the need to add $1,190,000 to the Allowance for Loan and Lease Losses ("ALLL") was substantially accurate. R.D. at 73. The ALJ also credibly reconciled the difference between Olander's draft and final appraisal. R.D. at 72. Although the testimony cited by the ALJ does not on its face reconcile the draft and final appraisal (Resp. Exc. at 12), a review of the documents themselves supports the ALJ's conclusion. It is

8. Determination of Profit From the Sale of Capital Bank Stock.

   [.9] Respondents take exception to the ALJ's determination of the profit derived from Respondents' sale of Capital Bank stock to Amundson in 1992. Respondents claim the ALJ did not include appropriate deductions to the gross profits in calculating his profit figures for the CMPs imposed. The items which Respondents claim should have been deducted from their gross profit on the sale of their Bank stock are: (1) interest paid on the money borrowed to make the initial stock purchases; (2) amounts spent on settlement of part of the Wenzel Lawsuit; (3) legal fees paid by Respondents to settle part of the Wenzel Lawsuit; and (4) $50,000 in legal defense funds provided by Amundson's purchase agreement. Resp. Exc. at 29-9.
   The Board disagrees with Respondents' exception. These items are appropriately not a part of the determination of profit for purposes of the CMP imposed herein. As the courts have held in insider trading cases under the Securities Exchange Act of 1934,⁴⁹ disgorgement is a proper remedy which serves the equitable purpose of depriving a wrongdoer of all ill-gotten gains. Randall v. Loftsgaarden, 478 U.S. 647, 663 (1986); Janigan v. Taylor, 334 F.2d 781, 786 (1st Cir. 1965), cert. denied, 382 U.S. 879 (1965); Litton Industries, Inc. v. Lehman Brothers Kuhn Loeb Inc., 734 F. Supp. 1071 (S.D.N.Y. 1990) reversed on other grounds, 967 F.2d 742 (2nd Cir. 1992). The calculation of profit to be disgorged is intended to "squeeze every possible penny of profit out of such [illegal] transactions in order to effectuate the remedial purpose of the statute." Texas International Airlines v. National Airlines, Inc., 714 F.2d 533 (5th Cir. 1983), cert. denied, 465 U.S. 1052 (1984); Blau v. Lehman, 286 F.2d 786, 791 (2d Cir. 1960), aff'd, 368 U.S. 403 (1962), citing Smolowe v. Delendao Corp., 136 F.2d 231, 239 (2d Cir.), cert. denied, 320 U.S. 751 (1943). The court in Blau also stated: "We are not ... computing profits in accordance with what might be the custom of traders and speculators in the stock market. We are construing a federal statute...." Id.
   In Lane Bryant, Inc. v. Hatleigh Corp., 517 F.Supp. 1196, 1202 (S.D.N.Y. 1981), the defendant sought to reduce the amount of profit he was to disgorge by deductions quite similar to those asserted by Respondents: (1) administrative overhead expenses, (2) interest on the loans secured to enable defendant to finance the stock purchases, (3) officer overhead, and (4) lawyers' fees and costs of litigation. The court rejected all of these proposed deductions:

None of these attempted deductions is appropriate in calculating the short-swing profits. The profits on the purchases and sales are not to be equated with the costs to the defendant of doing business, nor conducting litigation seeking the control of the enterprise. It would be inappropriate to permit the bank's administrative charges for handling the defendant's account or its interest charges on loans which the defendant secured to enable it to finance the purchases to reduce the profit on the trades. The profits contemplated by the statute are profits from the purchase and sale of the securities and not any costs such as bank charges, office overhead or collateral litigation which a party seeking control incurs. To permit the deductions

claimed would be to encourage the type of transactions from which the statute squeezes all profit to be made on the basis of third party financing of the transactions which by itself would merely multiply the problems sought to be reached [by the statute] ..." (Emphasis added.)

9. Violations of 1984 Cease and Desist Order.

   [.10] The ALJ's findings related to violations of the 1984 Cease and Desist Order between Capital Bank and the FDIC are based upon his discrediting of the Respondents' testimony denying any awareness of the nature and purpose of loans made to the Individual Respondents and Misenor. Respondents argue that the ALJ's findings and conclusions are erroneous. The Board has already indicated its concurrence with the ALJ's credibility findings. Additionally, the Board rejects this exception because the record is clear that the Misenor and Field loans violated the 1984 Cease and Desist Order which required the Bank to make "no extensions of credit without first obtaining ... 3(ii) an appraisal or other evaluation of the pledged collateral, (iii) documentation necessary to perfect the Bank's lien on any pledged collateral, and (iv) file comments stating the purpose of the loan." FDIC Ex. No. 5; R.D. at 46-9. None of these requirements of the 1984 Cease and Desist Order were met.

10. Indemnification Issues.

   These issues concern Capital Bank's agreement to indemnify the Individual Respondents from the costs of litigating, and any liability arising out of, the Wenzel Lawsuit challenging the issuance and sale of Capital Bank's 7,000 shares to the Individual Respondents. The Law Firm Respondents were retained to represent the Individual Respondents and Capital Bank in the Wenzel Lawsuit. For this common representation, the Law Firm Respondents submitted bills for services only to, and were paid only by, Capital Bank. FDIC Enforcement Counsel claim that indemnification of the Individual Respondents by the Bank was improper and an unsafe or unsound practice, and that payment by the Bank of all fees for the common representation of the Bank and the Individual Respondents was also improper and a breach of the fiduciary duty owed the Bank by the Law Firm Respondents. The Individual Respondents claim that their indemnification by the Bank was either mandatory or allowed under a Minnesota statute, and that it was proper for the Bank, as one of the several defendants in the Wenzel Lawsuit, to be billed for and to pay all fees and costs for the common defense. FDIC Enforcement Counsel takes exception to the ALJ's finding that "so long as the defense of the individuals is indivisible from that of Capital

   a. The Wenzel Lawsuit

   Prior to the issuance of the 7,000 shares of Capital Bank stock on July 30, 1990, CCC, Capital Bank's holding company, owned 6,685 shares of Capital Bank's then issued and outstanding 6,750 shares. F.F. No. 3. As of that date, George Heaton owned 75.1 percent of CCC and Donohoo and Mathies owned 24.9 percent. F.F. Nos. 4, 5, 8, 12, and 14. All of the stock of CCC owned by Heaton, Donohoo, and Mathies was pledged as security for Heaton's personal note to the Wenzels for the purchase of CCC from the Wenzels. F.F. Nos. 5 and 12. Donohoo and Mathies assumed one-half the liability on Heaton's note to the Wenzels as a term of their purchase of CCC stock from Heaton. F.F. Nos. 9 and 10. When Donohoo, Mathies, and Rasmussen orchestrated the issuance of the 7,000 new Bank shares and sold the shares to themselves and the other Individual Respondents on July 30, 1990, the book value of the 6,685 shares of Capital Bank owned by CCC was significantly reduced in value from $328.71 per share to $234.09 per share. F.F. Nos. 156 and 158. The issuance of the 7,000 shares was more significant than even the reduction of book value would indicate in that it also diluted CCC's percentage ownership of Capital Bank from 99.04 percent to 48.62 percent and transferred control of Capital Bank from CCC to the Individual Respondents. F.F. Nos. 171173. The issuance of the 7,000 shares was accomplished without notice to Heaton, the principal shareholder of CCC; the RTC, which, as receiver for Midwest Federal, held a security interest in CCC's 6,685 shares in Capital Bank; the Wenzels, who held all the stock of CCC as security for Heaton's note to them; or the FDIC and the Board of Governors of the Federal Reserve System. F.F. Nos. 134 and 151.
   On or about October 31, 1991, the Wenzels and CCC sued Capital Bank and the Individual Respondents, alleging, among other things, that Donohoo and Mathies breached their various fiduciary duties as officers and shareholders and CCC by issuing the 7,000 shares of Bank stock. F.F. Nos. 323 and 326.
   On October 22, 1991, in apparent anticipation of the Wenzel Lawsuit, Donohoo, Mathies and Rasmussen, in their capacity as directors of Capital Bank, issued a board resolution requiring Capital Bank to pay all attorneys' fees, expenses, and liabilities associated with the defense of the Wenzel Lawsuit,and to reimburse and indemnify all defendants in the Wenzel Lawsuit including Respondents Godbout-Bandal and Field who were neither officers nor directors of Capital Bank. FDIC Ex. No. 28mmm.

   b. The ALJ's Findings and Conclusion.

   (1) The Interests of the Defendants in the Wenzel Lawsuit.
   The ALJ found that "so long as the interests of the Bank and individual respondents are indivisible," payment by the Bank for the Wenzel Lawsuit is appropriate. Based on the ALJ's findings, amply supported by the Record, the Board concludes that the ALJ's analysis was incomplete, and led him to the wrong conclusion.⁵¹ The Board disagrees with the ALJ's conclusion that the interests

   [.11] The Board is of the view that whenever a bank and individual officers or directors thereof are common defendants concerning a legal claim in which bank assets could be at risk and which involves a matter or transaction in which the individual officers or directors received some benefit, the desirability of common counsel representing both the bank and other insider defendants must be carefully scrutinized by non-interested parties such as non-interested directors or special counsel. Here, the Board finds that the failure of the Bank's fiduciaries, both its directors and counsel, to require independent assessment of the Bank's

   2) The Minnesota Indemnification Statute.

   [.12] Respondents improperly committed the Bank to indemnify them, even before the Wenzel Lawsuit was filed. The Minnesota statute governing indemnification⁵⁹ and advances, Minn. Stat. Ann. § 300.083, Subdivision 2,⁶⁰ provides mandatory indemnification for officers and directors of a corporation if, with respect to the acts or omissions of the person complained of in the proceeding, the person:

   (1) ...
   (2) Acted in good faith;
   (3) Received no improper personal benefit;
   (4) ...; and
   (5) ...reasonably believed that the conduct was in the best interests of the corporation...

(1) administrative enforcement proceedings; or
(2) litigation initiated by a Federal banking regulator.

   [.13] The FDIC's cease and desist authority, contained in section 8(b) of the FDI Act, 12 U.S.C. § 1818(b), clearly extends to indemnification agreements by a bank that constitute a violation of law or otherwise constitute an unsafe or unsound practice. Abusive indemnification agreements, such as the one in this case, are a manifestation of dangerous insider practices that are the target of the FDIC's regulatory activity and well within its statutory authority. Hoffman v. FDIC, 912 F.2d 1172, 1174 (9th Cir. 1990) (abusive golden parachute prohibited). Under section 8(b), the FDIC may order the cessation of abusive indemnification payments and other reimbursement and restitution where there has been unjust enrichment or a reckless disregard for law, regulation, or prior order of

10. Indemnification. Sellers and Buyer acknowledge that the Bank has agreed to indemnify Sellers and certain other Bank shareholders against any and all legal fees and costs that may be incurred by them in connection with claims that have been brought against them by the FDIC as described more fully in Exhibit 4(j). (Emphasis added). Buyer agrees that, on the Closing Date, the Bank's indemnification obligation will be cancelled and replaced by Buyer's (or Buyer's assigns') indemnification of Sellers and those other Bank shareholders against all legal fees and costs (but not penalties), up to a maximum of $50,000 in the aggregate and not individually, that they (Sellers and the other Bank shareholders) may incur after the Closing Date in defending against any claim made against any of them by the FDIC. (Emphasis added).

   d. The Law Firm Defendants.⁶³

1) Institution-affiliated Parties.
The ALJ finds that the Law Firm Respondents knowingly and/or recklessly participated in the violation of Minnesota statutes, unsafe or unsound practices, and breaches of fiduciary duty by accepting the improper indemnification payments when they knew or should have known that the indemnification was improper. R.D. at 54, 144.

ADDITIONAL FINDINGS OF FACT AND
CONCLUSIONS OF LAW

   The following specific additional findings of fact and conclusions of law are made necessary by the Board's decision.
   1. At all times pertinent to this proceeding, Rasmussen and Associates, Ltd. and Lindquist & Vennum were institution-affiliated parties of Capital Bank within the

   (a) were not done in good faith within the meaning of subdivision 2(a)(1) of section 300.083, Minn. Stat. Ann. § 300.083 subd. 2(a)(1);
   (b) resulted in improper personal benefit to Donohoo, Mathies, and Rasmussen within the meaning of subdivision 2(a)(2) of section 300.083, Minn. Stat. Ann. § 300.083 subd. 2(a)(2); and
   (c) were not reasonably believed by them to be in the best interests of Capital Bank because they knew or should have known that their illegal and wrongful acquisition of control of Capital Bank would result in legal or administrative proceedings against them by the Wenzels, Heaton, the FDIC and/or Midwest Federal.

RELIEF

1. Order of Prohibition
   The record contains more than substantial evidence to support FDIC Enforcement Counsel's allegation of each element of a violation of section 8(e) of the FDI Act. Donohoo and Mathies engaged in repeated misconduct, including violation of the CBCA, Regulation O, Section 23A, and numerous unsafe or unsound practices and breaches of fiduciary duty. They realized financial gain from their misconduct in connection with the insider loans, the issuance of bonuses to themselves, the purchase of their shares at
{{10-31-95 p.A-2596}}less than fair market value, the sale of their shares of Bank stock for $1,851,000 more than their investment, and payment of their attorney fees and expenses in connection with defense of the Wenzel Lawsuit. At the time of the hearing Capital Bank had paid approximately $190,000 in legal fees resulting from this misconduct and illegal acquisition of control. Since then, the amount has increased to more than $260,000. The record is replete with evidence of Donohoo's and Mathies' personal dishonesty and selfdealing. They engaged in the consummate pattern of insider abuse. Their conduct was voluntarily engage in over a period of time with heedless indifference to the consequences. It involved both willful and continuing disregard for the safety or soundness of Capital Bank.

2. Civil Money Penalties

   a. Restitution Inappropriate.

   As discussed above, in addition to an order of prohibition against Respondents Donohoo and Mathies, with respect to each Individual Respondent the ALJ's recommendation included a restitution order in the amount of illegal profit made on the sale of his or her shares of Capital Bank, and a civil money penalty:

   Because the Board has determined that restitution to Capital Bank is not an appropriate remedy in this case, the illegal profit will be added to the CMP established by the ALJ, so that each Respondent will be ordered to pay as a CMP the total amount shown above.

   b. Penalties Assessed.

   The record establishes that each of the Individual Respondents has violated Regulation O and the CBCA; that Respondents Donohoo, Mathies, and Rasmussen have engaged in unsafe or unsound banking practices and breaches their fiduciary duty to Capital Bank and also violated the 1984 Order to Cease and Desist; and that Donohoo has violated Section 23A. Accordingly, the FDIC is entitled to assess CMPs. The CMPs sought by the FDIC are well within the maximum amount of $5,000 per day for the First Tier violation which may be assessed under section 7(j)(16) and 8(i)(2) of the FDI Act.⁷¹
   In determining the amount of a CMP, the FDIC must consider the following factors:
   (1) the size of financial resources of each Respondent;
   (2) the good faith of each Respondent;
   (3) the gravity of the violation;
   (4) the history of previous violations; and
   (5) such other matters as justice may require.
12 U.S.C. § 1818(i)(2)(G). This Board has stated that the purpose of a CMP is "to deprive the violators of any financial benefit derived as a result of the violations, provide a sufficient degree of punishment, and an adequate deterrent to the respondents and others from future violations of banking laws and regulations." In the Matter of * * * Bank, FDIC-91-37k,1 P-H FDIC Enf. Dec ¶5063 (1986).

Tr. 1160–1166. The maximum CMPs which may be assessed against each Individual Respondent for the violation of the CBCA alone is $3,860,000. FDIC Enforcement Counsel assert that they have alleged the necessary elements to maintain the higher Second Tier and Third Tier penalties authorized under sections 7(j)(16) and 8(i)(2) of the FDI Act. However, because the CMPs sought are more than adequately supported at the First Tier level, FDIC Enforcement Counsel does not brief the higher penalties and the Board does not address them.
{{10-31-95 p.A-2597}}
   With respect to each Individual Respondent, the ALJ reviewed the number and seriousness of the violations, the amount of profit made from the illegal activities and other benefit received, his or her financial resources, the presence or absence of good faith, and the history of previous violations. He considered factors of augmentation and mitigation. R.D. at 115–121. In light of his determinations regarding each of these factors, he established a CMP for each Individual Respondent.
   The record clearly establishes the ability of each Respondent to pay the ordered penalty. FDIC Ex. Nos. 199, 314, 315, 316, 317, 318, 322, 323, 338, 339, 340, 342, 371, 343; Tr. 1324, 1449, 1488, 1649-50, 1703, 1746-47. As found by the ALJ, the Individual Respondents each profited from their violations of the CBCA, and also from their respective violations of Regulation O, Section 23A and/or the 1984 Cease and Desist Order, because these violations were committed in furtherance of their scheme to acquire control of Capital Bank. In addition, the ALJ found that each Individual Respondent was unjustly enriched by being indemnified for or receiving the benefit of the Bank's payment and undertaking for the payment of all attorneys' fees, expenses and liabilities incurred in the Wenzel Lawsuit.
   Each Individual Respondent purchased shares of Capital Bank at below market value on July 30, 1990, and sold them at a substantial profit in December 1992. The difference between what each Respondent paid for his or her shares and the sales price constitutes the illegal profit which is to be disgorged as a CMP, Tr. 1147-48.⁷²
   Respondents seek mitigation of the proposed penalty claiming good faith reliance upon the advice of legal counsel. The Board finds they are entitled to no mitigation of the amount of the penalty because they did not rely on counsel's opinion in good faith. R.D. at 111. Moreover, the Board finds relevant to the issue of the amount of the penalty to be assessed Respondents' failure to cooperate with, and intentional misleading, of the FDIC during its investigation of the stock issuance. R.D. at 112-13.
   These Respondents engaged in CBCA violations and egregious insider abuse of the type recognized by the Board as grave violations, In the Matter of Ronald J. Grubb, et al., FDIC-88-282k and FDIC-89-111e, 1 P-H FDIC Enf. Dec. ¶5181 (1992), aff'd 34 F.3d 956 (10th Cir. 1994).
   With limited exception there is no history of prior violations. The Board notes, however, that there is evidence of violations of Regulation O in connection with the Bank's loans to Hauser in 1989, FDIC Ex. No. 12, and evidence that the purpose of a second loan from Midway was to refinance Donohoo's and Mathies' loan at People Bank to cure a violation of Regulation O at People Bank, FDIC Ex. No. 32. In addition, Respondent Field received criticism while he was a director of the Bank in 1984 because the Bank's loans to him were preferential, Tr. 1892-94, and Respondent Field was a member of the Bank's board of directors which consented to the issuance of the 1984 Cease and Desist Order. Tr. 1887–1888, 1893.
   With respect to the final factor, contrary to Respondents' assertion, the Board agrees with the ALJ that the fact that the insider loans have been paid⁷³ is entitled to only slight, if any, mitigating weight. Grubb, FDIC-88-282k and FDIC-89-111e, ¶5181 at A-2028. The loan to Misenor was repaid largely by Donohoo's and Mathies' $20,000 check drawn on CP-DDA and by Capital Bank from the settlement of the employment agreement between the Bank and Mis-

... rarely if ever would improvement in a bank's financial condition be a matter required by justice to be considered in determining the amount of a civil money penalty. The purpose of civil money penalties is to deter abusive insider conduct which has traditionally been a major cause of bank failures. The purpose would be substantially defeated if only those instances of conduct which ultimately result in damage to the affected bank's condition could be punished.

   As discussed at page 63 above, the FDIC is clearly authorized to issue a cease and desist order regarding abusive and illegal indemnification agreements. 12 U.S.C. § 1818(b).
   Furthermore, this authority includes the power to order restitution and reimbursement under the facts of this case. Section 8(b)(1) of the FDI Act authorizes the FDIC to issue orders to cease and desist from any unsafe or unsound practice or any violation of a law, rule, or regulation. The FDIC may also:

by provisions which may be mandatory or otherwise, require the depository institution or its institution-affiliated parties ... to take affirmative action to correct the conditions resulting from any such violation or practice.

   Based on the Findings set forth herein and those adopted from the Recommended Decision of the ALJ, the Board concludes that there is substantial evidence on the record as a whole to support the issuance of an Order of Prohibition against Respondents Donohoo and Mathies; Civil Money Penalties against Respondents Donohoo, Mathies, Rasmussen, Field, and Godbout-Bandal; and an Order to Cease and Desist against each of the Individual Respondents and the Law Firm Respondents regarding acceptance of payment of legal fees and expenses by Capital Bank on behalf of any defendant in the Wenzel Lawsuit and requiring the Individual Respondents and Law Firm Respondents to reimburse Capital Bank for all amounts paid by the Bank in connection with the Wenzel Lawsuit.

   The Board of Directors of the FDIC has considered the entire record in this proceeding. For the reasons set forth above, it enters the following ORDERS:

I. ORDER OF PROHIBITION —
   Respondents Richard D. Donohoo and Craig R. Mathies.
   Respondents Donohoo and Mathies, individually and as officers, directors, and persons participating in the conduct of the affairs of, and institution-affiliated parties of, Capital Bank, St. Paul, Minnesota, having violated laws, regulations, and a cease and desist order which has become final, having engaged in unsafe and unsound banking practices, having breached their fiduciary duties, and having received financial gain and other benefit by reason of such violations and breaches involving personal dishonesty and a willful and continuing disregard for the safety and soundness of the institution:

1. shall not hold any office in, or participate in any manner in the conduct of, the affairs of any insured depository institution, agency, or organization described in section 8(e)(7)(A) of the FDI Act, 12
{{10-31-95 p.A-2599}}U.S.C. § 1818 (e)(7)(A), without prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D);
   2. shall not exercise in any manner bank stock voting rights in any insured depository institution, agency, or organization described in section 8(e)(7)(A) of the FDI Act, 12 {{10-31-95 p.A-2599}}U.S.C. § 1818(e)(7)(A), without prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D);
   3. shall not violate any voting agreement with respect to any insured depository institution, agency, or organization described in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A), previously approved by the appropriate Federal financial institutions regulatory agency without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D);
   4. shall not vote for a director, or serve or act as an institution-affiliated party, as that term is defined in section 3(u) of the FDI Act, 12 U.S.C. § 1813(u), of any insured depository institution, agency, or organization, described in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A), without prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D).

   (a) against Respondent Richard D. Donohoo, a penalty of $1,000,554;
   (b) against Respondent Craig R. Mathies, a penalty of $975,554;
   (c) against Respondent Bruce A. Rasmussen, a penalty of $38,600;
   (d) against Respondent Cheryl C. Godbout-Bandal, a penalty of $150,000; and
   (e) against Respondent Wayne Field, a penalty of $370,012.

— Respondents Richard D. Donohoo; Craig R. Mathies; Bruce A. Rasmussen; Cheryl C. Godbout-Bandal; Wayne Field; Lindquist & Vennum and Bruce A. Rasmussen & Associates, Ltd.
   Each Individual Respondent and Law Firm Respondent having engaged in unsafe or unsound banking practices and/or have committed violations of law and regulation within the meaning of section 8(b)(1) of the FDI Act, 12 U.S.C. § 1818(b)(1) is hereby ordered to CEASE AND DESIST from the following unsafe and unsound banking practices and violations:

   (a) Engaging in self dealing and insider transactions;
   (b) Violating section 7(j) of the Act, 12 U.S.C. § 1817(j); and
   (c) Violating section 22(h) of the Federal Reserve Act, 12 U.S.C. § 375b, and Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 215, ("Regulation O");

(Issued September 7, 1994)

In the Matter of
RICHARD D. DONOHOO and CRAIG
R. MATHIES, individually and as
officers, directors, persons
participating in the conduct of the
affairs and institution-affiliated
parties of;
LEONARD C. MISENOR, individually,
and as an officer, person participating
in the conduct of the affairs and an
institution-affiliated party of;
BRUCE A. RASMUSSEN, individually,
and as a director, person participating
in the conduct of the affairs and an
institution-affiliated party of;
CHERYL C. GODBOUT-BANDAL,
WAYNE FIELD, BRUCE A.
RASMUSSEN &
ASSOCIATES, LTD. and LINDQUIST
& VENNUM, as institution-affiliated
parties of
CAPITAL BANK
ST. PAUL, MINNESOTA
and
CAPITAL BANK
ST. PAUL, MINNESOTA
(Insured State Nonmember Bank)
FDIC-92-249c&b
FDIC-92-250e
FDIC-92-251e
FDIC-92-252k
Walter J. Alprin
Administrative Law Judge

   Removal from office and prohibition of Respondents Donohoo and Mathies from participating in the affairs of any federally insured financial institution.
   Order requiring Respondents Donohoo, Mathies, Godbout-Bandal, Fields, Rasmussen, and the Law Firms to cease and desist from specified allegedly unsafe or unsound banking practices, and to take certain affirmative action to correct past abuses, including repaying loans received and making restitution or providing reimbursement for amounts allegedly wrongfully received.
   Assessment of civil money penalties ("CMPs") in the sum of $1,000,000 each Donohoo and Mathies, and of $75,000 each against Godbout-Bandal, Field and Rasmussen.

   The volume of factual allegations painstakingly investigated, documented and presented by agency Enforcement Counsel, establishes such a massive record that the specific findings of fact, with transcript and document reference, will be held to the final section of this Recommended Decision. It should also be recognized that Enforcement Counsel's case is built upon what it considers to be inescapable conclusions drawn primarily from their documentary presentation, those conclusions confirmed by the testimony of Misenor, a witness who might be considered to be tainted and whose statements must be considered in the light of his participation in the alleged unlawful schemes, his possible personal financial liability, and his having been able to affect a settlement with the agency. Respondents all have testified as to alternative interpretation of the documents, which not too surprisingly must be considered in the light of their participation in schemes which they do not wish to be considered unlawful, to their great financial liability.
   Particular care is required in parsing this mass of evidence to determine whether, in view of the testamentary disclaimers, the agency has met its burden of proving the allegations by a preponderance of the evidence. Credibility of testimony, in this case, must be weighed by the logic of the acts of the participants.
   The balance of this discussion shall disparately review each type of violation charged, after which the application of statutory and regulatory provisions will be considered before the specific proposed forms of relief and proposed conclusions of law are set forth.

   1.Background to Obtaining Control July 30, 1990
   A review of the events leading up to the actual stock purchase of the Bank is required in considering the later transactions. Prior to May 1988, Heaton owned all of the issued and outstanding stock of Capital City Corporation ("CCC"), which in turn owned 6,685 (or 99 percent) of the 6,750 Bank shares outstanding. Heaton had acquired the CCC stock from the Wenzel family in 1981 and still owed approximately $800,000 to the Wenzels ("Wenzel Note"). The Wenzel Note was secured by a pledge of all of CCC's outstanding shares. Heaton also was guarantor of an unpaid $3.9 million loan from Midwest Federal to CCC. The Midwest Federal loan ("Bank Stock Loan") was secured by a pledge of the 6,685 shares of Bank stock owned by CCC.
   In May 1988, Donohoo and Mathies, together with Lang, initiated a series of transactions to acquire control of the Bank through ownership of its holding company. Donohoo and Mathies purchased 142,000 shares of CCC, or 24.9 percent of the shares outstanding, from Heaton for $1,025,000. They paid Heaton $627,680 in cash and assumed one-half of Heaton's liability on the Wenzel Note. The cash portion of the purchase price was financed through a $150,000 loan to Donohoo from People State Bank, Winthrop, Iowa, and a $500,000 loan to Donohoo, Mathies and Lang from Midway National Bank, St. Paul, Minnesota ("Midway Loan #1"). Midway Loan #1 was secured by Lang's and Donohoo's stock in First Winthrop Bancorporation, Inc. ("First Winthrop").² They also obtained from Heaton an option to purchase the remaining shares of CCC, which they hoped to exercise by assembling an investor group. The stock was issued in two certificates, one each to Donohoo and Mathies,

   2. Financing Stock Purchase to Change Control

   As noted, after Lang's withdrawal from the investment scheme with other investors, Donohoo and Mathies did not have the wherewithal to complete the purchase of CCC on their own. Further, the Bank's equity capital was less than the amount owing on the Bank Stock loan, the Bank was not generating sufficient earnings to enable CCC to serve the loan, and CCC became insolvent. The loan thereby went into default, and Midwest Federal was actively pursing bids from other parties interest in purchasing the Loan and thus the Bank. Donohoo and Mathies were in a position where they had to obtain outside contributions to capital in order to salvage their investment of over $1 million. This they did through participation by Misenor, and by the "outside" element of Rasmussen, Field and Godbout-Bandal.
   Field is not a naive and unsophisticated investor who was unaware of banking regulations and inadvertently used Bank loan proceeds for his investment in Capital Partners. Field is and has been a successful businessman who reported a net worth of $22,000,000 as of April 9, 1992.⁵ Furthermore, he was a director of the Bank from 1982 to 1984. Field was well aware that acquisition of control of the Bank was subject to prior regulatory approval. He acknowledged this in a letter of the Bank in September 1989. FDIC Ex. 319. When asked why he used loan proceeds to purchase his investment unit in Capital Partners, rather than the other funds he claimed to have available, Field did not have an answer. Actions which he did not take directly but testified were done by a bookkeeper agent are attributable to him.
   Godbout-Bandal is not simply a spouse who followed her husband's recommendations. Further, her husband was acting as her agent and she cannot escape responsibility by hiding behind her agent. In addition, as will be shown below, she actively participated in the attempts to conceal the actual purpose of the insider loan she obtained.
   Rasmussen became a member of the board of directors on January 11, 1989. Donohoo had known Rasmussen for a number of years. As discussed below, Rasmussen approved the loan to Godbout-Bandal's related interest used to fund a portion of her Bank stock purchase on July 30, 1990, and actively concealed from the FDIC his loan at Peoples Bank which he used to fund his Bank stock purchase.
   a. The Seven Loan Transactions Before July 30, 1990
   Faced with the immediate threat of foreclosure by Midway, Donohoo and Mathies participated in a series of seven insider loans, commencing in November 1988 and continuing through July 1990. In at least three instances, the participants obtained loans from the Bank and transferred the loan proceeds to Donohoo and Mathies. The transactions involved loans to Misenor, Field (two loans), Christianson, Hauser, and Godbout-Bandal or her related interests. Donohoo and Mathies disavow any wrongdoing in connection with these loans, claiming they were

   The Change in Bank Control Act ("CBCA") is set forth in section 7(j) of the Federal Deposit Insurance Act, 12 U.S.C. § 1817(j), and in part provides that:

No person, acting directly or indirectly or through or in concert with one or more other persons, shall acquire control of any insured depository institution through a purchase, assignment, transfer, pledge, or other disposition of voting stock of such insured depository institution...

the power, directly or indirectly, to direct the management or policies of an insured bank or to vote 25 per centrum or more of any class of voting securities of an insured bank.

   1. Regulation "O", Insider Transactions, and Violations of Cease and Desist
   Supervisory restrictions have long been imposed by statute and Regulation in the form of lending limits, primarily as a function of insuring safety and soundness of operations. In addition to restrictions upon categories of securities, there also exist restrictions upon the nature of the borrower and the purpose of the loan, within the categories of insider transactions. These restrictions are applied to specified classes of persons including executive officers, as that term is defined, directors, "or to any person who directly or acting through or in concert with one of more persons, owns, controls, or has the power to vote more than 10 percentum of any class of voting securities..."
   The key to the conclusions of this Recommended Decision lies in the finding that the individuals who funded the acquisition of control with Donohoo and Mathies were acting indirectly through or in concert with each other, i.e. were a concerted group. In such instances, the full stock ownership of all parties, and officership of some, may be attributed to each. Hence, the percentages of stock ownership of Donohoo, Mathies, by Field, by Godbout-Bandal, and by Rasmussen individually is added together to indicate in all instances that each, through attribution, is charged with the total ownership of al, and that Donohoo's position with both the Bank and Winthrop is attributes to Rasmussen's loan from Winthrop to equal a loan directly from the Bank.
   The insider loans, referred to as the Misenor Loan, Field Loans #1 and #2, the PPA Loan, the Overdraft Loan, and the Rasmussen Loan, will be discussed first.

   The facts of this loan transaction have been reviewed above, and are also set forth in the Findings of Fact appendix. They are not disputed, though Donohoo and Mathies claim they were unaware of the true use of the loan proceeds. Mathies also denies he was an executive officer of the Bank at the time this loan was made. While Misenor is no longer a Respondent, the facts of the loan are historically instructive and important in evidencing a single, ongoing intent to obtain control of the Bank.
   First, recognize that the central purpose of the Misenor loan was to forestall foreclosure of the loan to Donohoo and Mathies.
   The Misenor Loan was made in violation¹³ of Regulation O, Regulation Z and the 1984 Order to Cease and Desist. Donohoo and Mathies controlled the day-to-day affairs of the Bank and caused or permitted the Bank to make this loan. Donohoo was the originating loan officer. Donohoo and Mathies were both aware of the true purpose of the loan at the time it was made. They even counseled Misenor to obtain the funds to invest from a loan to his parents. Donohoo and Mathies received the proceeds of this loan and used them to reduce their joint indebtedness at Midway.
   At the time the Misenor Loan was made, Misenor was an executive officer of the Bank within the meaning of section 215.2(d) of Regulation O, 12 C.F.R. § 215.2(d). The Misenor Loan was an extension of credit to Misenor within the meaning of section 215.3(f) of Regulation O, 12 C.F.R. § 215.3(f), because the proceeds were transferred to him and deposited to his account at the Bank, and because the proceeds were used for his tangible economic benefit to enable him to purchase one of the 10 investment units sold by Donohoo and Mathies. At the time the Misenor loan was made, Donohoo was a director of the Bank within the meaning of section 215.2(c) of Regulation O, an executive officer within the meaning of section 215.2(d) of Regulation O, and a principal shareholder within the meaning of section 215.2(l)¹⁴ of Regulation O, 12 C.F.R. § 215.2(c), (d) and (l). At the time that the Misenor Loan was made, Mathies was a principal shareholder of the Bank within the meaning of section 215.2(l) of Regulation O, 12

3. ...the Bank shall not extend credit without first obtaining...(iv) file comments stating the purpose of the loan...

3. ...the Bank shall not extend credit without first obtaining...(ii) an appraisal or other evaluation of the pledged collateral ...

3. ...the Bank shall not extend credit without first obtaining...(iii) documentation necessary to perfect the Bank's lien on any pledged collateral...

   The facts concerning the Field loans have been reviewed above and also set forth in the Findings of Fact appendix. The generating force in these entire financial arrangements was that the Bank required the infusion of additional capital. It is axiomatic that a contribution funded by a loan from the receiver of the contribution is not a capital infusion. It leaves the bank in precisely the same capital situation as before the loan and infusion, and constitutes an unsafe and unsound practice. Such action is clearly 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 bank, its shareholders, or the agencies administrating the Insurance Fund. It having been found that Donohoo and Mathies were aware of the true source of the borrowed funds, they, together with the investor, are not only engaged in unsafe and unsound banking practice, but in violation of their fiduciary duty to the Bank as well.
   Regulation "O" governs any extension of credit by a member bank to an executive officer, director, or principal shareholder" of that or associated, as defined, bank. 12 C.F.R.

   The facts concerning the Godbout-Bandal loans have been described above, and also in the Findings of Fact appendix.
   The Respondent admits that the PPA Loan violated Regulation O because it was a loan to a principal shareholder involving more than the normal risk of repayment because of document deficiencies, but argues that because of lack of knowledge of the Regulation, lack of intent, lack of previous violations, the fact that the bank was repaid in full, and the violation "cured" by the transfer of the loan to another institution, mitigate in favor of a token penalty. The issue of civil money penalty will be considered at a later time.
   As noted above, the practice had been found to constitute a violation of the CBCA through attribution. Further, just as in the case of the Field loans, these loans and payments were an attempt to purchase stock for the purpose of infusing capital to overcome a capital deficiency by borrowing money from the institution into which the infusion was to be made, an obvious oxymoron. As such it constituted an unsafe and unsound banking practice, in which Donohoo and Mathies participated in additional violation of their fiduciary duty to the Bank.

   The facts of this loan have been described above, and in the Findings of Fact appendix. At the time the loan was made, Donohoo owned, controlled, or had the power to vote approximately 50 percent of the stock in, and was a director and officer of, First Winthrop Bancorporation, Inc., which in turn owned in excess of 90 percent of Peoples. Donohoo was also chairman of the board of directors of Peoples. Donohoo suggested that Rasmussen seek a loan from Peoples to finance his Bank stock purchase.
   Rasmussen had no prior banking relationship with Peoples. Peoples was a community bank, yet the Rasmussen Loan was an out-of-state loan. By letter dated July 19, 1990, Donohoo forwarded Rasmussen's financial statement to Peoples, and sometime prior to the making of the loan, met with management of Peoples and determined that Peoples was interested in making the loan to Rasmussen. Donohoo was substantially involved in, arranged, or facilitated the making of the Rasmussen Loan. Through attribution, the Bank was considered as making the loan through Winthrop..
   The charge of Regulation O violation is substantiated by Rasmussen's participation in the scheme by which Donohoo and {{10-31-95 p.A-2618}}Mathies, acting in concert with the other Individual Respondents, were able to acquire control of the Bank. Rasmussen thereby violated of that Regulation, and Section 23A, 12 U.S.C. § 371c.

   As related in great detail above, it is alleged that the actions of Donohoo and Mathies in authorizing and issuing the 7,000 shares was not only a flagrant breach of their fiduciary duty as directors and shareholders of CCC, but also constituted an egregious conflict of interest on their part. As part of the present enforcement action, the FDIC issued a Temporary Order to Cease and Desist pursuant to section 8(c) of the Act, 12 U.S.C. § 1818(c) ("Temporary Order"). The Temporary Order did two things with respect to the Wenzel Lawsuit: (i) it required the Individual Respondents to bear their own defense costs by prohibiting the Bank from making any additional indemnification payments and by prohibiting the Individual Respondents and the Law Firm Respondents from accepting any such payments from the Bank; and (ii) it required the Individual Respondents to bear the Bank's costs of defending itself by requiring the Individual Respondents to reimburse the Bank on an ongoing basis for any expense incurred by the Bank in connection with the Wenzel Lawsuit after the effective date of the Temporary Order. All Respondents joined in an action in Federal District Court requesting a temporary restraining order nullifying the provisions of the Temporary Order relating to indemnification payments. Respondents claimed, among other things, that the Temporary Order prevented the Bank from paying for its own defense and thereby deprived the Bank of its right to counsel.
   In ruling on the request for a temporary restraining order, the Court upheld those portions of the Temporary Order prohibiting the Bank from indemnifying the other defendants in the Wenzel Lawsuit, but issued a temporary restraining order against enforcement of the portion of the Temporary Order which required the Individual Respondents to reimburse the Bank for the Bank's expenses incurred in defending itself in the Wenzel Lawsuit. The Judge's ruling stated that:

So I am denying the temporary restraining order except insofar as it goes to the issue of these individuals indemnifying the Bank. That will not be a part of the [Temporary O]rder. Everything else will stand as part of the [Temporary O]rder,...³⁰

   3. Golden Parachutes

   On May 25, 1989, the Bank's board of directors, consisting of Donohoo, Rasmussen and Brooks Hauser, authorized Donohoo, on behalf of the Bank, to enter into employment agreements between the Bank and Donohoo and Mathies. Donohoo did not abstain from either the discussion or final approval of these agreements by the board. The Bank entered into employment agreements ("Original Agreements") with Donohoo and Mathies, effective June 1, 1989, for terms of three years, later extended for three years and amended ("Amended Agreements"), effective August 1, 1990, immediately after the issuance of the new stock. The Amended Agreements were authorized by the board of directors at its regular meeting on July 11, 1990, prior to the issuance of the new stock. The minutes indicate Donohoo and Mathies were two of the three directors who voted to authorize the Amended Agreements.
   The employment agreements included terms referred to as the "golden parachutes." These originally required the Bank to pay Donohoo and Mathies, if they were terminated for any reason other than breach of fiduciary duty, an amount constituting twice their highest annual salary received in the previous two years, plus their highest annual bonus received in the previous two years, plus the value of their other benefits calculated as if they were still employed for an additional two years. The Amended Agreements changed the sum to be paid to the greater of their salaries, including bonuses and benefits, for the remaining terms of their three-year contracts or twice their highest annual salary, twice their highest annual bonus, the twice the value of other benefits. Another provision ("CBC Provision") required the Bank to make a substantial lump sum payment to Donohoo and Mathies if they were terminated within one year of a change in control of the Bank for any reason other than (i) death, disability or retirement, or (ii) by the Bank for a breach of fiduciary duty, or (iii) if the Respondents elected to resign without good reason. A change in control was deemed to occur under the Employment Agreements if any person acquired, directly or indirectly, 20 percent or more of the voting stock of the Bank or its holding company. The required lump sum payment was the amount of their remaining "salary and all other compensation, benefits and perquisites due through the date of their termination," plus an amount equal to twice their highest annual salary and bonus received during the previous two years, plus the "value of the benefits accorded to [them] as if still in the employ of the Bank during the two year period."
   These provisions exposed the Bank to considerable liability. As of June 1, 1989, the Bank's maximum liability under the golden parachutes to both Donohoo and Mathies was $340,000, not including the value of the other benefits. This represented 8 percent of the Bank's capital. As of August 1, 1990, the Bank's maximum liability, not including the value of the other benefits, was $630,000, or 22 percent of capital. These amounts were especially significant given the Bank's poor condition and earnings.
   However, granting golden parachutes are not per se an unsafe or unsound practice, and they have valid purposes of attracting qualified officers—particularly to troubled institutions that are likely to be subject to a change in control or closed—and of retaining qualified officers for banks similarly subject to potential changes in control. Even under the particular facts of this case is was not an unsafe or unsound practice for the Bank to enter into the Employment Agreements containing golden parachute. When the provisions were first granted, both Donohoo and Mathies were valued, valuable, and disaffected employees, whose retention as employees was required. The extension of their benefits under the scheme at a later date was no doubt warranted by their accomplishments. The undersigned does not find the employment agreements, and the golden parachutes therein, to have been unsafe or unsound practices, nor breaches of fiduciary duty.

   4. Undervaluation of Stock's Fair Market Value ("FMV")

   On July 30, 1990, 7,000 newly authorized shares of Bank stock were issued for $142.86 per share, a total capital injection of {{10-31-95 p.A-2620}}$1,000,000. The transaction involved three functions—the number of shares, the price per share, and the total capital infusion. During the course of the hearing, there was considerable testimony adduced and documentary evidence introduced regarding whether the 7,000 shares of stock were sold at or below fair market value ("FMV"). Whether the Individual Respondents paid FMV for the new Bank stock is important here because, if they paid less than FMV:
   1. It shows lack of good faith on the part of the Individual Respondents which is important in assessing the amount of the civil money penalties for violation of the CBCA;
   2. It supports a finding of personal dishonesty with respect to the removal actions against Donohoo and Mathies; and
   3. It corroborates that Donohoo and Mathies breached their fiduciary duty as officers and/or directors of CCC and the Bank, and that Rasmussen breached his fiduciary duty as a director of the Bank.

   The fiduciary responsibility of bank officers and directors has been affirmed by the FDIC's Board of Directors on numerous occasions. In the Matter of * * *, FDIC-83-21k-c, [Bound Vol. 1] FDIC Enforcement Decisions and Orders [Bound Vol. 1] (P-H) ¶5013, at A-149 (December 5, 1983), the Board stated that "[d]irectors of a bank have a fiduciary relationship to the bank and its stockholders." Emphasis added.

In general corporate matters, the Supreme Court has held, when directors and officers and directors [sic] place their personal interests about those of the corporation, or utilize corporate resources for personal gain, they have committed a serious breach of their common law fiduciary duty. Pepper v. Litton, 308 U.S. 295, 311 (1939). The standards are even higher in banking, where the officers and directors are charged with looking after other people's money. Indeed given the paramount importance of a credible and safe and sound banking system, there can be no question that officers and directors of banks are held to the very highest standard of fiduciary duty. Thus, "directors or banking corporations generally owe a greater duty than other corporate directors." Gadd v. Pearson, 351 F. Supp. 895, 903 (M.D. Fla. 1972).

[T]he fiduciary duty of loyalty which bank directors owe their institution requires a bank director to investigate the possibility of a conflict of interest and be completely candid with his colleagues. When a bank director finds himself in a situation involving a conflict of interest...it is incumbent on him to make complete disclosure in order to affirmatively avoid a conflict, even if such disclosure seems superfluous.

   Considerable testimony was introduced by Respondents regarding the value of the Bank prior to July 30, 1990, the date of the issuance of the 7,000 shares. Respondents introduced both an appraisal of the Bank conducted as of December 22, 1989, by Paul W. Olander ("Olander Appraisal"), and review of the Olander Appraisal by David R. Grande. Further, based on a FDIC examination of August 10, 1990, Respondents also posed hypothetical questions to Amundson and Costley about the Bank's value as of approximately July 30, 1990. Respondents Donohoo, Mathies and Rasmussen also testified as to the Bank's value. FDIC Review Examiner Kirchhoff testified about the book value of the 6,685 shares prior to the issuance of the 7,000 new shares and the effect of the issuance of the 7,000 new shares on the book value of the already issued 6,750 shares of the Bank.
   Enforcement counsel argues that, and Respondents dispute that, under Minnesota law Donohoo, Mathies and Rasmussen, as officers and/or directors of the Bank and/or CCC and purchasers of 2,800 of the 7,000 new shares, are required to prove that the terms of the transaction were "fair and reasonable and entered into by the directors with the best interests of the corporation in mind." Fountain v. Oreck's, Incorporated, 71 N.W.2d 646, 649 (Minn. 1955). No matter which, both sides presented evidence. The Bank's counsel also properly advised the directors that they had a responsibility to issue the stock for fair value. In order to show that the price of the 7,000 new shares was fair and reasonable, it must appear that the aggregate value of the already issued and outstanding 6,750 shares of stock, was no more than $964,285.71 on July 30, 1990.
   As stated previously, the 7,000 new shares were issued on July 30, 1990, for $1,000,000. The price per share for each of the purchasers of the new stock issuance was $142.86. On June 30, 1990, one month prior to the issuance of the 7,000 new shares, the book value of the Bank's outstanding 6,750 shares of stock was $2,179,000, or $322.81 per share, exclusive of the Allowance for Loan and Lease Losses ("ALLL"), which the Bank's board of directors had determined was fully funded. On July 31, 1990, one day after the issuance of the 7,000 new shares, the book value of the total 13,750 shares was $234.09 per share. Obviously, the book value of the already outstanding 6,750 shares of stock was diluted by the issuance of the 7,000 new shares by 27.48 percent of $88.72 per share. Between June 30, 1990 and July 31, 1990, there were no changes in the Bank's equity capital, except for the $1,000,000 addition resulting from the $1,000,000 from the 7,000 new shares, and the board of directors of the Bank considered the ALLL adequate as of both dates.

   Rasmussen testified that he believed the value of the Bank was about $1,000,000, and Mathies testified the Bank was worth $1 million to $1.3 or $1.4 million, though neither offered support for their valuation. Although Rasmussen testified that the board considered the value of the Bank in setting the stock price, none of the Respondents produced any documentation in board minutes or otherwise indicating that the board in fact determined the value of the Bank on or before July 30, 1990, the date Donohoo, Mathies and Rasmussen purchased 2,800 of the 7,000 new shares. As referenced above, the June 28, 1990, Bank board minutes and the July 9, 1990, Bank shareholders' minutes contain no reference to any discussion of value, nor any support for the purported $1,000,000 estimated value of the Bank. Further, Mathies admitted that the directors did not obtain an independent appraisal of the Bank prior to or when the new stock was issued. Indeed, Mathies also admitted on

   Respondents attempted to justify their estimated value of the Bank as of July 30, 1990, by testimony of what a so-called third-party might have paid for the Bank prior to the issuance of the 7,000 new shares. In response to a hypothetical question on cross-examination, Amundson testified that, on July 30, 1990, as an outside purchaser, he would offer about $1,100,000 for the Bank, plus a noncompete clause. If a noncompete clause were unavailable, he said he would offer $1,175,000 to $1,200,000. Even as an outside purchaser his offer exceeded Mathies' and Rasmussen's value of the Bank by $100,000 to $250,000.
   On direct, Amundson also testified that, in arriving at his estimate for July 30, 1990, he discounted the price an additional $425,000, because in his experience the ALLL of such banks was typically underfunded. Amundson's additional $425,000 reduction was over and above the $430,000 which was added to the ALLL as a result of the FDIC Report of Examination of the Bank of August 10, 1990. However, when he offered his estimate on cross-examination by Respondent, Amundson obviously did not have the benefit of a due diligence examination of the Bank. In addition, the ensuing events establish that Amundson's estimate in response to Respondent's hypothetical was significantly understated by at least $255,000. The February 21, 1992, FDIC examination confirmed that the Bank's ALLL was ad-

   In response to the same hypothetical posed to Amundson, Costley testified on behalf of the Respondents that the Bank's value as of July 30, 1990, was approximately $1,000,000. Costley produced no documentary evidence to show when, whether, or how the board of directors established the price of the 7,000 new shares. Neither did he produce any evidence that the price was established by an independent third-party. Furthermore, his estimate was based upon a hypothetical question that included information from the examination of the Bank by the FDIC of August 10, 1990, and information about the Bank's ALLL which was contrary to Donohoo's, Mathies' and Rasmussen's representations of the Bank's ALLL when the new stock was issued, and thus would cause Costley to understand the Bank's value.
   Without intending to impugn Costley's professional or personal integrity, it must be noted that he also was not a disinterested witness. He represented the Bank in connection with the issuance of the 7,000 new shares. Because the directors' purchase of the shares presented a potential conflict, it was incumbent upon him as an attorney for the Bank to ensure that the Bank received a fair price for the issuance of the 7,000 new shares, and he so advised the directors. Because of his duty to the Bank and because his law firm, Respondent Lindquist & Vennum, represents the Individual Respondents and the Bank in the Wenzel Lawsuit, wherein the value of the Bank as of July 30, 1990, is disputed, he cannot be considered as being disinterested in establishing valuation.

   Respondents' only independent third-party witness, Paul Olander, a qualified bank appraiser, testified that the Bank's value as of December 22, 1989, was $2,550,000, or $348.00 per share. Olander appraised the Bank's value to assist Midwest Federal in its efforts to sell the Bank Stock Loan to prospective third-party purchasers. His appraisal consisted of three methods—the discounted future earnings method, net asset value approach and excess earnings approach, and under each method he arrived at a FMV for the Bank in excess of $2,500,000.
   Respondents attempted to discredit Olander, their own witness, by introducing his prior draft appraisal, which set the Bank's value at $1,360,000 or $201.00 per share as of December 22, 1989. The prior draft also used the same three methods of appraisal³⁷. Olander's ultimate conclusion of the Bank's FMV was $1,360,000 in the draft and $2,550,000 in the final appraisal, a very large difference of $1,190,000.
   Olander had provided the draft to Midwest Federal for comment prior to increasing his ultimate appraised value by $1,190,000. A review of the draft and final appraisals shows that the reason for the difference between the draft and final appraisal was merely that Olan-

The addition to the ALLL of $1,190,000 estimated by Olander was short by only $190,000 as of August 10, 1990, and $360,000 as of February 21, 1992. By deducting additions to the ALLL of $1,325,000 actually made up to August 10, 1990, instead of the amount Olander estimated of $1,190,000, Olander's Net Asset Valuation approach results in a Bank value of $2,360,000 as of August 10, 1990, exclusive of the $1,000,000 capital injection of July 30, 1990.

$3,228,000 total equity
less 7,000 other assets classified "Loss" 3,221,000
less 1,000,000 capital injection 7/31/90 2,221,000
less 430,000 additional provision for adequate ALLL
$1,791,000.

19. There appears to be a significant employment agreement between the Bank and Messrs. Donohoo, Mathies and Misenor. It appears very expensive and is not well described in the appraisal report. Based on the literal comments in the appraisal report, it appears that it will cost the Bank at least $400,000 to get out of the agreement.
   20. Mr. Donohoo is an attorney and an insider, yet his opinion is being accepted by the appraiser as to the status of the law suits against the Bank. This is not very comforting.

   7. Review Examiner Kirchhoff's Valuation
   Review Examiner Kermit Kirchhoff testified as to the book value of the Bank's stock before and after the issuance of the 7,000 new shares on July 30, 1990. He stated that the Book Value of the Bank's 6,750 shares as of June 30, 1990, was $2,179,000, or $322.81 per share. He continued that between June 30, 1990, and July 31, 1990, there were no changes in the Bank's equity capital, other than the $1,000,000 injection, or to the Bank's ALLL, which the board of directors considered adequate. Thus, as of July 30, 1990, he said the book value of the Bank Stock, prior to the issuance of the 7,000 new shares, remained $2,179,000 or $322.81 per share.
   In its Board of Governors of the Federal Reserve System Interpretation Notes 3-1162 and 3-1164.1, reprinted in 1 Federal Reserve Regulatory Service (FRB) at 3-422, the Reserve Board concluded that the book value of a bank is a "reasonable basis upon which is assess the market value of a bank's stock."

(8) Summary of Valuations

   During the hearing, the following witnesses testified to the following estimated values of the Bank:

By Interested Individuals:

By Disinterested Individuals:

   Though establishing value of bank stock is an art and not a science, the testimony at the hearing, and the various exhibits, clearly established that a fair price for the 7,000 shares of new stock was more than $1,000,000, and in fact, much more. In sum, the evidence establishes that Donohoo, Mathies and Rasmussen breached their fiduciary duty to CCC and/or the Bank by issuing the 7,000 new shares to themselves and their investors at least than FMV.

   A prohibition is sought against further participation by Respondents Donohoo and Mathies in the affairs of federal insured financial institutions. The authorizing statute, 12 U.S.C. § 1818(e)(1), provides in pertinent part as follows:
(A) any institution-affiliated party has, directly or indirectly—
   (i) violated—
(I) any law or regulation;
{{10-31-95 p.A-2627}}
(II) any cease-and-desist order which has become final;
(III) ...
(IV) ...
(ii) engaged or participated in any unsafe or unsound practice in connection with any insured depository institution ...or
(iii) committed or engaged in any act, omission, or practice which constitutes a breach of such party's fiduciary duty;
(B) by reason of the violation, practice, or breach described in any clause of subparagraph (A)—
(i) such insured depository institution ...has suffered or will probably suffer financial loss or other damage;
(ii) the interests of the insured depository institution's depositors have been or could be prejudiced; or
(iii) such party has received financial gain or other benefit by reason of such violation, practice, or breach; and
(C) such violation, practice, or breach—
(i) involves personal dishonesty on the part of such party; or
(ii) demonstrates willful or continuing disregard by such party for the safety or soundness of such depository institution...
   The four requirements of imposing a prohibition are thus jurisdiction, and proof of at least one element from each of the three tiers of section 8(e)—misconduct, effect, and culpability.⁴⁰ Donohoo and Mathies have admitted jurisdiction.

   1. Misconduct
   As discussed above, Donohoo and Mathies have engaged in numerous acts of misconduct which support the issuance of an Order of Prohibition. Their misconduct was committed in furtherance of their scheme to openly acquire approved control of the Bank through stock ownership of CCC, the bank holding company, and then to surreptitiously acquire unapproved direct control over the Bank by purchase of new stock issuance, in each instance to advance their own interests. Specifically, Donohoo and Mathies have violated the CBCA, the 1984 Order to Cease and Desist, and Regulation "O" in connection with the Misenor Loan, Field Loans #1 and #2, the PPA Loan, and the Overdraft Loan. Donohoo and Mathies have also engaged in unsafe or unsound practices by (1) paying themselves unwarranted bonuses and entering into selfserving and abusive employment agreements. Finally, Donohoo and Mathies engaged in selfserving and abusive actions in authorizing, issuing and purchasing 2,100 of the 7,000 new shares of Bank stock in 1990 and thereby putting their personal interests in acquiring control of the Bank before those of the Bank and CCC. Almost incidentally, Donohoo also violated Regulation "O" and Section 23A of the Federal Reserve Act in connection with the Rasmussen Loan. These actions involved breaches of their fiduciary duty to the Bank, as well a CCC.

   2. Effect
   The misconduct engaged in by Donohoo and Mathies has resulted in financial gain and other benefit to themselves, financial loss to the Bank, and prejudice to the depositors.

   (1) Insider Loans to Finance CCC Stock
   Donohoo and Mathies received $73,000 of the proceeds of the Misenor Loan, $73,000 of the proceeds of Field Loan #1, and $60,000 of the proceeds of Field Loan #2, a total of $206,000. Of this amount, $146,000 was used directly to reduce their indebtedness on Midway Loan #1. The remaining $60,000 was used to make payments on the Wenzel Note

   Donohoo and Mathies breached their fiduciary duty to CCC and the Bank by authorizing, issuing and purchasing the new Bank stock on July 30, 1990, and in connection therewith violated the CBCA. Their acquisition of control of the Bank in violation of the CBCA was facilitated by the violations of law and unsafe or unsound practices committed in connection with the Employment Agreements, the PPA Loan, the Overdraft Loan, and with regard to Donohoo, the Rasmussen Loan. Donohoo and Mathies paid $300,000 for their interest in acquiring control of the Bank on July 30, 1990, which they sold for $2,151,108, a gain of $1,851,000. Their misconduct also resulted in "other benefit" in the form of acquisition of control and the assurance of retaining their management positions with the Bank.

   The unsafe and unsound payment of the $10,000 bonuses to Mathies and Donohoo on July 13, 1990, resulted in direct financial gain of $10,000 by each of them. Approximately $17,000 of the bonuses was used the same day to reduce their joint liability on Midway Loan #2. See, In the Matter of Frank E. Jameson, FDIC-89-83e, 1 FDIC Enforcement Decisions and Orders (P-H) ¶ 5154A at A-1542.5 & 1542.6 (June 12, 1990), which held that the surreptitious payment of bonuses subsequently ratified by the board of directors constituted financial gain.

   Although Donohoo and Mathies received $200,000 each as a buy-out of the golden parachutes negotiated as part of the transaction by which Donohoo and Mathies sold their 2,100 shares of Bank stock to Amundson in 1992, as previously stated the undersigned does not find to have been an unsafe or unsound agreement at the time made, and not a fiduciary breach. It may be noted that, however, it is found that the amount received constituted a portion of the amount paid for their stock, and subject to restitution.

   The undersigned has hereinafter recommended that a Final Decision herein not find that Donohoo and Mathies received financial gain and other benefit as a result of the Bank's payment of attorney fees and expenses incurred in defending the Wenzel Lawsuit, with the minor exception of the matter of counterclaims, hereinafter discussed in the portion concerning Cease and Desist Orders.

   Donohoo's and Mathies' misconduct in illegally acquiring control of the Bank directly resulted in the Bank being made a party to the Wenzel Lawsuit and incurring expenses in the defense of that lawsuit. Furthermore, Donohoo and Mathies caused the Bank to pay all of the expenses of defending the Wenzel Lawsuit, including their own. As a result of their misconduct, the Bank has suffered financial loss in the form of attorney's fees and expenses in defending itself and them in this action and will probably suffer additional financial loss from the Wenzel Lawsuit. As of the date of the hearing, the expense to the Bank has been approximately $190,000.
   On the other hand, it must be recognized that but for the misconduct in violating the Change in Bank Control Act, the RTC in all probability would have sold the Bank for not much if anything more than $1,000,000, appreciably less than its actual value. The difference between that figure and the amount spent by Amundson for the purchase would have been lost, were it not for the violations. The fact remains, however, that this sum of money would inure to the benefit of those who caused the violations, and, other than as ordered herein, not to the Bank.

   The FDIC has previously held that the acquisition of control of a Bank without the statutorily mandated prior approval of the FDIC involves potential prejudice to the depositors within the meaning of section 8(e)(1)(B)(ii), 12 U.S.C. § 1818(e)(1)(B)(ii). In the Matter of Paul E. Oberstar, Boundary Waters State Bank, FDIC-91-19e, 1 FDIC Decisions and Enforcement Orders (P-H) ¶ 5171 at A-1836 (November 26, 1991) (Rev'd on other grounds, 987 F.2d 494 (8th Cir. 1993)). Donohoo and Mathies, in concert with the other Individual Respondents, {{10-31-95 p.A-2629}}acquired control of the Bank without giving the required prior written notice to the FDIC. Their actions were prejudicial or could have been prejudicial to the Bank's depositors.
   Donohoo and Mathies also engaged in abusive insider transactions as evidenced by the Misenor Loan, Field Loans #1 and #2, PPA Loan, Overdraft Loan, and in the case of Donohoo, the Rasmussen Loan, and as evidenced by the unsafe and unsound practices involving the bonuses and golden parachutes. Insider abuse has been identified as one of the leading causes of Bank failures. See, In the Matter of James A. Amberg, et al., FDIC-89-144k, 1 FDIC Enforcement Decision and Orders (P-H) ¶ 5187 (October 27, 1992). "Prejudice to the depositors" have been defined to include "any action which, if continued, may ultimately cause loss to the Bank." In the Matter of * * * Bank and * * * Bank, FDIC-85-215e, [Bound Vol. 1], FDIC Enforcement Decisions and Orders (P-H) ¶ 5069 at A-951 (July 17, 1986). Insider abuse is clearly action which is prejudicial to the depositors. Accordingly, Respondents Donohoo's and Mathies' misconduct constitutes prejudice to the interests of the Bank's depositors within the meaning of 12 U.S.C. § 1818(e).

   The third tier of proof required under section 8(e) is culpability. Culpability may be established by a showing of:
   (1) personal dishonesty;
   (2) continuous disregard for the safety or soundness of the Bank; or
   (3) willful disregard for the safety or soundness of the Bank.
12 U.S.C. § 1818(e)(1)(C). The evidence establishes that Donohoo and Mathies are culpable under each of the three separate standards.

   A frequently cited definition of personal dishonesty may be found in In the Matter of * * * Bank or * * * County, * * *, FDIC-84-58e [Bound Vol. 1] FDIC Enforcement Decisions and Orders (P-H) ¶ 5042 at A-389 (January 25, 1985) as follows:

Dishonesty is a "disposition to lie, cheat, or defraud; untrustworthiness; lack of integrity." Black's Law Dictionary, 121 (rev. 5th ed. 1979). The activity need not rise to the level of an indictable offense and includes self-dealing practices. Financial Institutions Supervisory and Insurance Act of 1966: Hearings on S.3158 and S.3695 before House Comm. on Banking and Currency, 89th Cong. 2d Sess. 52 (1966).

This statutory wording was adopted in 1978. Prior to that time the personal dishonesty standard governed. Congress recognized, however, that standard "hampered the agencies in their efforts to take timely action to make certain that individuals whose actions are seriously damaging [FIRREA as noted above has since lessened the burden in this regard] the institution may be removed from their positions." H. Rep. No. 95–1383, 95th Cong. 2d Sess. (1978) at 18. Congress therefore deliberately provided a less burdensome test authorizing "removal when an individual has evidenced personal dishonesty or has demonstrated willful or continuing disregard for the safety and soundness of the financial institutions." Id. (Emphasis in original). Congress endorsed the new standard and was fully aware that it allows agencies the opportunity to move against individuals who may not be acting in a fraudulent manner but who are nonetheless acting in a manner which threatens the soundness of their institutions." [sic] Id.
The willful or continuing disregard criteria were adopted with the idea that these two gauges of conduct would encompass those practices which though not fraudulent were deliberate and effectuated in the face of an inauspicious outcome or were knowingly repeated over a period of time and threatened the safety and soundness of the bank or savings and loan association. H.R. REP. NO. 1383, 95th Cong. 2d Sess. 18, reprinted in 1978 U.S. CODE CONG. and ADM. NEWS 9273, 9290. The disjunctive language of the willful or continuing standards defines the scope of section 8(e)(1): in the case of willful conduct, it is that conduct which is practiced deliberately in contemplation of the results, and in the case of continuing conduct, it is that conduct which is voluntarily engaged in over a period of time with heedless indifference to the prospective consequences.

It has been noted, and often quoted, that:
"Problem banks and insider abuses have been virtually synonymous. Nothing appears more often on the fever charts of sick financial institutions than self-dealing ailments." H. R. Rep. No. 1383, 95th Cong., 2d Sess. 10-12, reprinted in 1978 U.S. Code Cong. and Ad. News 9273.

   1. General Statement and Statutory Provisions

   The FDIC requests two orders to cease and desist, with affirmative action. The first is an Order prohibiting the individuals named as Respondents and the Law Firm Respondents, from accepting any further indemnification payments from the Bank on account of the Wenzel Litigation, requiring the Individual Respondents to reimburse the Bank for expenses paid by the Bank in defense of the Wenzel Litigation, and requiring the Law Firm Respondents to refund to the Bank the legal fees paid by the Bank in connection with the Wenzel Litigation. The second is an order directed to Individual Respondents requiring them to cease and desist from the unsafe and unsound banking practices, and violation of fiduciary responsibilities, and to correct past abuses by repaying loans received, if any remain outstanding, and making restitution or providing reimbursement for amounts allegedly wrongfully received.
   Respondents argue that the FDIC does not have the statutory authority to issue a cease-and-desist order governing the Bank's indemnification at issue in this case. They argue that the FDIC's authority to address abusive indemnification agreements are limited to circumstances where an institution offers indemnification in the context of an administrative enforcement proceeding or civil action initiated by a federal banking regulator. It is Respondents' position that because the indemnification in the Wenzel Lawsuit are offered in the context of a private litigation and not an enforcement proceeding, the FDIC does not have the statutory authority to reach these otherwise abusive indemnities.
   The statute in question, 12 U.S.C. § 1818(b) provides at subparagraph (1), that:

If, in the opinion of the appropriate Federal banking agency, and...institution-affiliated party is engaging or has engaged, or the agency has reasonable cause to believe that the...institution-affiliated party is about to engage, in an unsafe or unsound practice in conducting the business of such depository institution, or is violating or has violated, or the agency has reasonable cause to believe that the ...institution affiliated party is about to {{10-31-95 p.A-2633}}violate a law, rule, or regulation, or any written agreement entered into with the agency, the agency may issue and serve upon...such party a notice of charges [which may result in an order to cease and desist].... Such order may...require the ...institution-affiliated parties to cease and desist from the same, and further, to take affirmative action to correct the conditions resulting from any such violations or practice.

[w]hen construing a statute that invests broad regulatory powers in an administrative agency, great deference must be given to the officers or agency charged with administration of this statute. "[T]he construction of a statute by those charged with its execution should be followed unless there are compelling indications that it is wrong."

investigate a wide variety of banking conduct—violations of laws, rules, written agreements with the [regulator], and unsafe or unsound practices. The breadth of this authority plus the provisions restricting and deferring judicial review indicate that Congress had great respect for the expertise and judgment of Board. Therefore, district courts should not disrupt activities of the Board without clear jurisdiction.

   2. Indemnification

   As previously discussed, Costley testified as to the juxtaposition of all of the Individual Respondents with the Bank as defendants in the state civil action, making it incumbent upon his firm to present evidence which is exculpatory of the individuals in order to properly defend the Bank. His testimony is that his firm has done nothing in its defense of these actions other than what must be done in defense of the Bank, whether or not it is in the interest of any individual Respondent.
   The argument is particularly appealing, as it could be seen during the hearing of this administrative proceeding that counsel for the other Respondents was forced to defend the actions of Field, though he was not her client, because of the juxtaposition of Re-

(d) An order of the Court declaring the illegal stock issuance described as the Dilution in the Complaint to be null and void and rescinded and that Capital Bank take all necessary steps to repurchase such stock from the Defendant shareholders at the purchase price therefor...or at plaintiffs' option, to permit the Trustees or Capital City Corporation [the plaintiffs] to purchase all of such shares at the price paid therefore; ...

Indemnification of other persons. Nothing in this section shall be construed to limit the power of the corporation to indemnify other persons by contract or otherwise.

   3. Loan Repayment, Restitution, Reimbursement and Making Whole
   The undersigned believes that the foregoing sections of this Recommended Decision have adequately covered the facts to support a determination that Enforcement Counsel have shown by a preponderance of the evidence that each of the Individual Respondents, through attribution of otherwise, participated in a violation of the Change in Bank Control Act, violations of Regulation "O" and other insider loan statutes, unsafe and unsound banking practices, and, limited to Donohoo and Mathies, breach of fiduciary responsibility and violation of cease and desist order. As more fully set forth below, each of the individual Respondents has, through such practices received a profit as specified in the following section regarding civil money penalties. Having been received as a result of violations of the various statutes and regulations cited herein, retention of the profits would be wrongful, and an order will be recommended requiring restitution to the Bank.
   As far as an order requiring repayment of all loans made in furtherance of the violations, at the time of the hearing all such loans had been repaid but for $10,000 of a loan by Respondent Rasmussen. It will further be recommended that Respondent Rasmussen shall be ordered to repay the balance, if any, of said loan.

   1. General
   The FDIC also seeks as part of this proceeding the assessment of civil money penalties ("CMPs") pursuant to section 7(j)(16) {{10-31-95 p.A-2636}}of the Act, 12 U.S.C. § 1817(j)(16), against each of the Individual Respondents for violation of the CBCA. Further, the FDIC seeks the assessment of CMPs against each of the Individual Respondents pursuant to section 8(i)(2) of the Act, 12 U.S.C. § 1818(i)(2), for their respective violations of law, regulation, and an order to cease and desist, unsafe or unsound practices, and breaches of fiduciary duty.⁴⁶
   CMPS are authorized in the amount of $5,000 per day ("Tier 1") for any violation of law, regulation or final order. 12 U.S.C. §§ 1817(j)(16)(A) and 1818(i)(2)(A). The FDIC has previously established that each of the Individual Respondents have violated Regulation O and the CBCA. It has been established that Respondents Donohoo, Mathies and Rasmussen have also violated the 1984 Order to Cease and Desist and, in the case of Respondent Donohoo, Section 23A of the Federal Reserve Act. Since the FDIC has established these violations with respect to each Individual Respondent it is entitled to the assessment of CMPs. In the Matter of Ronald J. Grubb, FDIC-89-282k and FDIC-89-111e, 1 FDIC Enforcement Decisions and Orders (P-H) ¶5181 at A-2026 (August 25, 1992). The only open issue is the amount of the CMPs.

   a. Maximum and Requested CMPs.⁴⁷
   Based on the testimony of Review Examinter Kirchhoff, and on the Notices herein, the maximum CMPs under Tier 1 and the requested CMPs of the Notice which may be assessed against the Individual Respondents for their respective violations are:

The maximum CMPs which may be assessed against each Individual Respondent for the violation of the CBCA alone is $3,860,000. Hence, the CMPs sought by the FDIC in this action are well within the maximum amounts that may be assessed.

   b. Bases of Recommended Assessments

   In assessing CMPs, the following mitigating factors must be considered:
   (1) the size of financial resources of each Respondent;
   (2) the good faith of each Respondent;
   (3) the gravity of the violation;
   (4) the history of previous violations; and
   (5) such other matters as justice may require.
12 U.S.C. § 1818(i)(2)(G).
   In The Matter of Ira Lee Brannan, David Brannan, and Stephen L. Brannan, Freedom Bank, DeLeon, Texas, FDIC-91-37k, FDIC 1 Enforcement Decisions and Orders (P-H ¶ 5176 at A-1964 (April 14, 1992), the Board stated:

In assessing the civil money penalties, the Board seeks to deprive the violators of any financial benefit derived as a result of the violation, provide a sufficient degree of punishment, and an adequate deterrent to the Respondents and other from future violations of banking laws and regulations.

   In addition to the profit derived from their shares of Bank stock, each of the Individual Respondents received additional benefit from the Bank's payment for the defense of the Wenzel Lawsuit, but as noted above, it has been found that while this may in fact constitute a benefit, but for the counterclaims the legal efforts were expended on the part of and for the protection of the Bank, as that even though the Individual Respondents benefited it does not constitute the type of benefit for which reimbursement is required.

   Another set of well established maxim in the type of case is that:

The devastating effects of insider dealing is well known. Where established, violations of insider proscriptions should be treated as grave and penalties assessed accordingly. See, e.g., Bullion v. FDIC, 881 F.[2d] 1368 (5th Cir. 1899) (sic)

   The FDIC did not introduce evidence of prior violations of by the Respondents herein. While the series of violations spanned the period of several years and were of various types, they were all conducted for the purpose of a single infraction of law, and will in this single instance be sanctioned as such rather than as a series of disparate violations. Such treatment relates to the specifics of this case, and should not be considered to apply in other proceedings.

   The Individual Respondents have argued that they relied on the opinion of counsel that the issuance of the 7,000 new shares was not subject to the prior notice require- {{10-31-95 p.A-2638}}ments of the CBCA. Legal advice, however, "will not shield the client from civil enforcement action and would only be relevant as a mitigating factor in a civil money penalty action." H.R. Rep. No. 54I, 101st Cong., 1st Sess. 1, 467 (1989) reprinted in 1989 U.S. C.C.A.N. 86, 263. (Discussing the amendments to section 8(i) by section 907 of FIRREA.) See also In the Matter of Steven J. Hirsch, et al., FDIC-91-24k, 1 FDIC Enforcement Decisions and Orders (P-H) ¶ 5189 at A-2143 (December 15, 1992). Furthermore, the Individual Respondents are not entitled to any mitigation of the proposed penalty, because they did not rely on counsel's opinion in good faith. Costley's opinion was not based upon the facts of this case as he knew them. On the contrary, Costley opined that if certain guidelines were followed, there would be no CBCA implications. Tr. 2093-2095. Further, Costley testified that whether the CBCA applied, "depended upon the situation." Tr. 2093.
   Significantly, Costley was not aware of all the facts when he rendered his opinion. Costley testified that at the time he gave his opinion he was unaware of Field Loans #1 and #2, of the Rasmussen Loan, of the PPA Loan and the Overdraft Loan and, in fact, believed no financing was involved on the part of Godbout-Bandal, that Field, Mathies, Donohoo and Godbout-Bandal were previously associated with Capital Partners or that any of them had an ownership interest in CCC, that Donohoo and Mathies had attempted to assemble an investment group to exercise the option under the 1988 Purchase Agreement or that Godbout-Bandal and Field were part of that group, of any of the financing involved in the investments in CCC by Mathies, Donohoo, Misenor, Field, and Christianson, and of the existence of Capital Partners. The Individual Respondents knew that Costley did not know a number of the significant facts when he gave his opinion. Furthermore, the opinion was orally given to Donohoo and Mathies in Costley's capacity as counsel for the Bank; he did not represent the Individual Respondents. Because the opinion was not based on all the facts and circumstances and was given to the Bank, not the Individual Respondents, the Individual Respondents are not entitled to rely on the opinion to mitigate their civil money penalties.
   Prior to the stock issuance, FDIC Field Office Supervisor Fagerland advised Donohoo and Mathies on July 30, 1990, that he believed that the transaction would be subject to the CBCA. He asked them to have Costley consult with the Regional Office prior to the stock issuance. Donohoo and Mathies went ahead and issued the stock before Costley consulted with the Regional Office. Though Respondents have a right to contest the opinions of agency personnel, they are not entitled to any good faith reliance on Mr. Costley's "opinion." In the Matter of Steven J. Hirsch, et al., the Board states:

The reliance upon advice of counsel does not, in and of itself, excuse the violation. Nor does it bar the imposition of civil money penalties against Respondents for the violations of federal law to which they had been forewarned by the regulators.
   In this case, Respondents relied on the advice of counsel when opening the branch on November 5, 1990. However, Respondents were informed by officials of the FDIC and a representative of the Commissioner at the meeting on November 8, 1990, that their actions violated both federal and state law and that civil money penalties would be assessed if they persisted in the violations. The fact that Respondents elected to keep the branch open in the face of these warnings is a factor relevant to the issue of good faith and our evaluation of Respondents' level of culpability for keeping the branch open for an additional eight days.

He shows gross income for the year ending 1992 of $112,760. FDIC Ex. 343, p. 1. His wages from Field Financial Corporation for 1991 were $360,296. FDIC Ex. 323, p. 1. By letter dated September 20, 1991, Field estimated Field Financial Corporation would make approximately $500,000 per year for 10 years for him personally. FDIC Ex. 322.
   Considering the number and seriousness of these violations, the amount of $295,012 profit made from these unlawful activities which is required to be repaid in restitution, Field's financial condition, Field's lack of good faith, but that there were no previous violations proven, it is the undersigned's recommendation that a civil money penalty in the sum of $100,000.

   Rasmussen received $123,600 pursuant to his agreement to sell his 700 new shares to Amundson. Rasmussen had paid $100,000 for the shares of July 30, 1990, and his gain from participation in the illegal acquisition of control was $23,600.
   Rasmussen's financial statement as of August 11, 1992, showed a net worth of $566,012, and an annual income of $92,000, consisting of salary of $58,000, commissions of $24,000 and dividends of $10,000. He is a lawyer and owns his own professional corporation, Bruce A. Rasmussen & Associates. His salary from Bruce A. Rasmussen & Associates for 1990, 1991 and 1992 was $48,939.60, $46,218, $37,368.85, respectively. He is 57 years old.
   Considering the seriousness but fewer number of these violations, the amount of $23,600 profit made from these unlawful activities which is required to be repaid in restitution, Rasmussen's financial condition, Rasmussen's lack of good faith, but that there was no previous violations proven, it is the undersigned's recommendation that a civil money penalty in the sum of $15,000 be assessed against Respondent Rasmussen.

   Godbout-Bandal received $420,800 pursuant to the agreement to sell her 2,100 shares to Amundson. She paid $300,000 for these shares July 30, 1990, so that her profit was $120,000.
   As of August 2, 1990, Godbout-Bandal's net worth was reported as $4,624,798. She owned 100 percent of ASHA, and had interests in about a dozen different partnership corporations or business entities, including AIC Industrial Lubricants, Hudson Road Office Park and Pentagon Park Associates. As of April 1993, she had a net worth of approximately $3,000,000.
   Considering the fewer number but seriousness of these violations, the amount of $120,000 profit made from these unlawful activities, Godbout-Bandal's financial condition, Godbout-Bandal's lack of good faith but that there were no previous violations proven, it is the undersigned's recommendation that a civil money penalty is the sum of $50,000 be assessed against Respondent Godbout-Bandal.

   1. Capital Bank, St. Paul, Minnesota ("Bank") is a corporation existing and doing business under the laws of the State of Minnesota and has its principal place of business at St. Paul, Minnesota. The Bank is and has been, at all time pertinent to these Conclusions of Law, an insured State nonmember bank. The Bank is hereby subject the Federal Deposit Insurance Act ("Act"), 12

   5. At all times pertinent to these Conclusions of Law, Capital City Corporation ("CCC") is and has been a one-bank holding company, within the meaning of 12 U.S.C. § 1841(a), existing and doing business under the laws of the State of Minnesota.
   6. At all time pertinent to these Conclusions of Law, the Bank has been a subsidiary of CCC within the meaning of 12 U.S.C. § 1841(d).

   7. At all times pertinent to these Conclusions of Law, Donohoo was:

   (a) a director of the Bank from December 13, 1989, within the meaning of section 215.2(c) of Regulation O, 12 C.F.R. § 215.2(c);
   (b) an executive officer of the Bank within the meaning of section 215.2(d) of Regulation O, 12 C.F.R. § 215.2(d);
   (c) a principal shareholder of the Bank within the meaning of section 215.2(1) of Regulation O, 12 C.F.R. § 215.2(1);⁵²
   a person participating in the conduct of the affairs of the Bank; and
   an institution-affiliated party within the meaning of sections 3(u)(1) and (3), 12 U.S.C. § 1813(u)(1) and (3).

   8. At all times pertinent to these Conclusions of Law, Mathies was:

   (a) a director of the Bank from December 13, 1989 until December 7, 1992, within the meaning of section 215.2(c) of Regulation O, 12 C.F.R. § 215.2(c);
   (b) an executive officer of the Bank within the meaning of section 215.2(d) of Regulation O, 12 C.F.R. § 215.2(d);
   (c) a principal shareholder of the Bank within the meaning of section 215.2(1) of Regulation O, 12 C.F.R. § 215.2(1);
   (d) a person participating in the conduct of the affairs of the Bank; and
   (e) an institution-affiliated party within the meaning sections 3(u)(1) and (3), 12 U.S.C. § 1813(u)(1) and (3).

   9. At all times pertinent to these Conclusions of Law, Leonard Misenor was an executive officer of the Bank within the meaning of section 215.2(d) of Regulation O, 12 C.F.R. § 215.2(d).

   10. At all times pertinent to these Conclusions of Law, Godbout-Bandal was:

   (a) a principal shareholder of the Bank within the meaning of section 215.2(1) of Regulation O, 12 C.F.R. § 215.2(1);
   (b) an institution-affiliated party of the Bank in that she was a controlling stockholder from on or about July 30, 1990 within the meaning of section 3(u)(1) of the Act, 12 U.S.C. § 1813(u)(1); and;
   (c) a shareholder participating in the conduct of the affairs of the Bank in connection with the PPA Loan and Overdraft Loan and as a result was an institution-affiliated party within the meaning of section 3(u)(3) of the Act, 12 U.S.C. § 1813(u)(3).

   19. The Misenor Loan was an extension of credit to Misenor within the meaning of sections 215.3(a) and (f) of Regulation O, 12 C.F.R. §§ 215.3(a) and (f).
   20. The Misenor Loan was also an extension of credit to Donohoo and Mathies within the meaning section 215.3(f) of Regulation O, 12 C.F.R. § 215.3(f).
   21. The Misenor Loan was not made on substantially the same terms as those prevailing at the time for comparable transactions by the Bank with other persons that are not covered by Regulation O and who are not employed by the Bank in violation of section 215.4(a)(1) of Regulation O, 12 C.F.R. 215.4(a)(1).
   22. The Misenor Loan when made involved more than the normal risk of repayment and presented other unfavorable features in violation of section 215.4(a)(2) of Regulation O, 12 C.F.R. § 215.4(a)(2).
   23. The Misenor Loan was made in violation of paragraphs 3 and 8 of the 1984 C & D Order.
   24. In connection with the Misenor Loan, Donohoo and Mathies violated sections 215.4(a)(1) and (2) of Regulation O, 12 C.F.R. §§ 215.4(a)(1) and (2), and paragraphs 3 and 8 of the 1984 C & D Order within the meaning of section 3(v) of the Act, 12 U.S.C. § 1813(v).
   25. The Misenor Loan was consumer credit within the meaning of section 226.2(a)(12) of Regulation Z, 12 C.F.R. § 226.2(a)(12).
   26. The Misenor Loan was made in violation of sections 226.17(a) and 226.18 of Regulation Z, 12 C.F.R. §§ 226.17(a) and 216.18.
   27. The Misenor Loan was made in violation of section 226.23(c) of Regulation Z, 12 C.F.R. § 226.23(c), in that the loan proceeds were advanced prior to the date the rescission period expired.
   28. It was an unsafe or unsound practice to make the Misenor Loan with no provision for periodic payments of principal and in excess of 100 percent of the collateral securing the loan.
   29. It was an unsafe or unsound practice to utilize the Misenor Loan proceeds for a purpose different than stated in the credit file.
   30. Donohoo caused or permitted the Bank to engage in and therefore engaged in, unsafe or unsound practices in connection with the Misenor Loan.

   31. Field Loan #1 was an extension of credit to Field within the meaning of section 215.3(a) of Regulation O, 12 C.F.R. § 215.3(a).
   32. The Field Loan #1 was also an extension of credit to Donohoo and Mathies within the meaning of section 215.3(f) of Regulation O, 12 C.F.R. § 215.3(f).
   33. Field Loan #2 was an extension of credit to Field within the meaning of section 215.3(a) of Regulation O, 12 C.F.R. § 215.3(a).
   34. The Field Loan #2 was an extension of credit to Donohoo and Mathies within the meaning of section 215.3(f) of Regulation O, 12 C.F.R. § 215.3(f).
   35. At the time Field Loans #1 and #2 were made 5 percent of the Bank's capital and unimpaired surplus within the meaning of section 215.4(b) of Regulation O, 12 C.F.R. § 215.4(b) was not more than $238,000 and $247,000, respectively, and, therefore, Field Loans #1 and #2 exceeded 5 percent of the Bank's capital and unimpaired surplus.
   36. Field loans #1 and #2 required the prior approval of a majority of the entire board of directors pursuant to section 215.4(b) of Regulation O, 12 C.F.R. § 215.4(b).
   37. The Field Loans #1 and #2 were made without receiving the prior approval of a majority of the entire board of directors in violation of section 215.4(b) of Regulation O, 12 C.F.R. § 215.4(b).
   38. Field Loans #1 and #2 were made in violation of paragraphs 3 and 8 of the 1984 C & D Order.
   39. In connection with Field Loans #1 and #2, Donohoo and Mathies, and in connection with Field Loan #2, Rasmussen, violated section 215.4(b) of Regulation O, 12 C.F.R. § 215.4(b), and paragraphs 3 and 8 of the 1984 C & D Order within the meaning of section 1813(v) of the Act, 12 U.S.C. § 1813(v).
   40. It was an unsafe or unsound practice to use the Field Loans #1 and #2 proceeds for a purpose different than stated in the credit file.
   41. Donohoo, Mathies and Field engaged {{10-31-95 p.A-2645}}in an unsafe or unsound practice in connection with the Field Loans #1 and #2.

   42. At all times pertinent to these Conclusions of Law, a partnership known as "Pentagon Park Associates" was a related interest of Godbout-Bandal within the meaning of section 215.2(m) of Regulation O, 12 C.F.R. § 215.2(m).
   43. The PPA Loan was an extension of credit within the meaning section 215.3(a) of Regulation O, 12 C.F.R. § 215.3(a), to a related interest of Godbout-Bandal, within the meaning of section 215.2(m) of Regulation O, 12 C.F.R. § 215.2(m).
   44. The PPA loan was an extension of credit to Godbout-Bandal within the meaning of section 215.2(a)(4) due to her personal guarantee of the loan.
   45. The Overdraft Loan was an extension of credit to Godbout-Bandal within the meaning of section 215.3(a)(2).
   46. The advance against Godbout-Bandal's Ready Reserve Account was an extension of credit to Godbout-Bandal within the meaning of section 215.3(a) of Regulation O, 12 C.F.R. § 215.3(a).
   47. The PPA Loan and the Overdraft Loan when made involved more than the normal risk of repayment and presented other unfavorable features in violation of section 215.4(a)(2) of Regulation O, 12 C.F.R. § 215.4(a)(2).
   48. At the time the Bank made the PPA Loan and Overdraft Loan the Bank's lending limit pursuant to section 215.2(h) of Regulation O, 12 C.F.R. § 215.2(h), was $471,150.
   49. The PPA Loan and subsequently, the Overdraft Loan when aggregated with the PPA Loan exceeded the Bank's lending limit set by section 215.2(h) of Regulation O, 12 C.F.R. § 215.2(h), and accordingly both loans were made in violation of section 215.4(c) of Regulation O, 12 C.F.R. § 215.4(c).
   50. The Overdraft Loan, when aggregated with the PPA Loan, exceeded 5 percent of the Bank's capital and unimpaired surplus of $157,050 within the meaning of section 215.4(b) of Regulation O, 12 C.F.R. § 215.4(b).
   51. The Overdraft Loan required the prior approval of a majority of the Bank's board of directors pursuant to section 215.4(b) of Regulation O, 12 C.F.R. § 215.4(b).
   52. The Overdraft Loan was made without receiving the prior approval of a majority of the Bank's entire board of directors in violation of section 215.4(b) of Regulation O, 12 C.F.R. § 215.4(b).
   53. The Overdraft Loan was not made on substantially the same terms as those prevailing at the time for comparable transactions by the Bank with other persons not covered by Regulation O and who are not employed by the Bank in violation of section 215.4(a)(1) of Regulation O, 12 C.F.R. § 215.4(a)(1).
   54. In connection with the PPA Loan, Donohoo, Mathies, Rasmussen and Godbout-Bandal violated sections 215.4(a)(2) and (c) of Regulation O, 12 C.F.R. §§ 215.4(a)(2) and (c), within the meaning of section 3(v) of the Act, 12 U.S.C. § 1813(v).
   55. In connection with the PPA Loan, Donohoo and Mathies violated paragraphs 3 and 8 of the 1984 C & D Order within the meaning of section 3(v) of the Act, 12 U.S.C. § 1813(v).
   56. It was an unsafe or unsound practice to make the PPA loan:

   (a) without first obtaining adequate documentation to determine the value of the collateral securing the loan;
   (b) without first obtaining financial statements of PPA and the guarantor, Godbout-Bandal;
   (c) without complying with the Bank's lending policy or without documenting the exceptions thereto as required by the lending policy;
   (d) without performing adequate analysis to determine the creditworthiness of the loan; and
   (e) with numerous document deficiencies;

   59. At all times pertinent to the loan to Rasmussen by Peoples Bank, Donohoo was a director, executive officer and principal shareholder of Peoples Bank within the meaning of sections 215.2(c), (d) and (1) of Regulation O, 12 C.F.R. §§ 215.2(c), (d) and (1).
   60. The Rasmussen Loan was an extension of credit to Donohoo within the meaning of section 215.3(f) of Regulation O, 12 C.F.R. § 215.3(f).
   61. The Rasmussen Loan exceeded 5 percent of Peoples Bank's unimpaired capital and unimpaired surplus, which percentage was not more than $88,750, within the meaning of section 215.4(b) of Regulation O, 12 C.F.R. § 215.4(b).
   62. The Rasmussen Loan required the prior approval of a majority of Peoples Bank's entire board of directors pursuant to section 215.4(b) of Regulation O, 12 C.F.R. § 215.4(b).
   63. The Rasmussen Loan was made without receiving the prior approval of the majority of Peoples Bank's entire board of directors in violation of section 215.4(b) of Regulation O, 12 C.F.R. § 215.4(b).
   64. In connection with the Rasmussen Loan, Donohoo violated section 215.4(b) of Regulation O, 12 C.F.R. § 215.4(b), within the meaning of section 3(v) of the Act, 12 U.S.C. § 1813(v).
   65. At the time the Rasmussen Loan was made, Donohoo, acting in concert with Mathies, owned 15.27 percent of the Bank's Stock directly and 12.1 percent of the Bank indirectly through CCC, for 27.28 percent, and therefore owned, controlled or had the power to vote 25 percent or more of the Bank within the meaning of section 23A(b)(3)(A)(i), 12 U.S.C. § 371c(b)(3)(A)(i).
   66. At the time the Rasmussen Loan was made, Donohoo, directly or indirectly, or also acting through Mathies, Rasmussen, Field and/or Godbout-Bandal owned, controlled or had the power to vote 51 percent of the outstanding voting stock of the Bank and therefore also controlled the Bank within the meaning of section 23A(b)(3)(A)(i), 12 U.S.C. § 371c(b)(3)(A)(i).
   67. At all times pertinent to these Conclusions of Law, the Bank was an affiliate of Peoples Bank within the meaning of section 23A(b)(1)(C), 12 U.S.C. § 371c(b)(1)(C).
   68. The Rasmussen Loan was an extension of credit to the Bank within the meaning of section 23A(a)(2) of the Federal Reserve Act, 12 U.S.C. § 371c(a)(2).
   69. The Rasmussen Loan was unsecured when made and therefore in violation of section 23A(c)(1) of the Federal Reserve Act, 12 U.S.C. § 371c(c)(1).
   70. Donohoo violated section 23A(c)(1) of the Federal Reserve Act, 12 U.S.C. § 371c(c)(1), within the meaning of section 3(v) of the Act, 12 U.S.C. § 1813(v).

   71. Donohoo's and Mathies' engaged in an unsafe or unsound practice and breach of their fiduciary duty to the Bank by paying themselves bonuses on July 13, 1990, without the prior approval of the board of directors and at a time they believed the Bank was in a critical need of capital.

   72. The authorization of CCC as 99 percent owner of the Bank to issue 7,000 shares of new Bank stock to persons other than CCC was a direct or indirect transfer or sale of an asset within the meaning of paragraph 4(c) of the 1985 Order to Cease and Desist against CCC, and therefore required the prior written approval of the Federal Reserve Bank of Minneapolis under paragraph 4(a) of the Cease and Desist Order.

   73. The Misenor Loan was a "loan made for the accommodation of others than those whose names appear on the Bank's records or credit instruments" within the meaning of Question #5 of the Officers' Questionnaires certified to be true and correct by Donohoo in connection with the 1989 State Examination and the 1989 FDIC Examination of the Bank.
   74. Donohoo breached his fiduciary duty to the Bank and engaged in an unsafe or unsound practice by falsely responding "none" to questions 5 and 7 in the Officer's Questionnaires he certified as true and correct and submitted in connection with the 1989 examinations of the Bank by the State and the FDIC.
{{10-31-95 p.A-2647}}

   75. Donohoo, Mathies and Rasmussen engaged in breaches of their fiduciary duty to the Bank by (a) issuing the 7,000 shares of Bank stock, and by purchasing 2,000 of such shares, at less than fair market value and (b) not fully disclosing their interest in purchasing such shares to the shareholders of CCC and the Bank.
   76. Donohoo, Mathies and Rasmussen engaged in unsafe or unsound practices and breaches of their fiduciary duty to the Bank by permitting Misenor to misrepresent the purpose of the Misenor Loan, and by misrepresenting the purpose of the Misenor Loan, Field Loans #1 and #2, and the PPA Loan in the Bank's credit files.
   77. Donohoo, Mathies and Rasmussen engaged in unsafe or unsound practices and breaches of their fiduciary duty to the Bank by engaging in insider transactions and other self-serving misconduct to acquire control of the Bank.

   Section 8(b) Order to Cease and Desist
   78. Each Individual Respondent was unjustly enriched within the meaning of section 8(b)(6)(A)(i) of the Act, 12 U.S.C. § 1818(b)(6)(A)(i), in connection with their respective violations of section 300.083 or unsafe or unsound practices involving the Wenzel Lawsuit by being indemnified for, or receiving the benefit of, the Bank's payment and undertaking for the payment of, all attorneys' fees, expenses, and liabilities incurred on behalf of all defendants to the Wenzel Lawsuit.

   79. Within the meaning of section 8(e)(1)(A) of the Act, 12 U.S.C. § 1818(e)(1)(A), Donohoo and Mathies:

   (a) violated Regulation O and the 1984 Order to Cease and Desist, engaged or participated in unsafe or unsound practices and breaches their fiduciary duty to the Bank in connection with the Misenor Loan, Field Loans #1 and #2, the PPA Loan and the Overdraft Loan;
   (b) breached their fiduciary duty to the Bank by, in a self-servicing and selfdealing manner, authorizing, issuing and purchasing Bank stock at less than fair market value and without full disclosure;
   (c) violated section 7(j) of the Act, 12 U.S.C. § 1817(j) ("CBCA"); and
   (d) with respect to Donohoo only, violated Section 23A and Regulation O in connection with the Rasmussen Loan.

   80. By reason of their specific acts of misconduct and their course of misconduct to acquire control of the Bank, Donohoo and Mathies received financial gain within the meaning of section 8(e)(1)(B)(iii) of the Act, 12 U.S.C. § (8)(3)(1)(B)(iii) in that they received gain from their sale of the 2,100 shares of stock acquired through illegal acquisition of control in violation of the CBCA, improper payment of bonuses, and other benefit in that they acquired control of the Bank and assured their employment by the Bank.

   81. Donohoo's and Mathies' course of misconduct to acquire control as well as the individual acts of misconduct involved personal dishonesty and demonstrated their willful and continuing disregard for the safety or soundness of the Bank within the meaning of section 8(e)(1)(C) of the Act, 12 U.S.C. § 1818(e)(1)(C).

   84. After taking into consideration that restitution of financial gain is also ordered, and the size of each Individual Respondents' financial resources, each Individual Respondents' lack of good faith, the gravity of the violations, the lack of a history of prior violations and such other matters as justice may require each Individual Respondent should pay a CMP as follows:

   85. After taking into consideration the factors set forth in the Discussion and in the Findings of Fact herein, each Respondent shall make restitution to the Bank the amount of profit which each obtained through exercising unauthorized control and obtaining their stock at less than fair market value, as follows. In computing the profit for Donohoo and Mathies, the amount paid ostensibly to settle their employment contracts are included as profit since the purchaser intended to and did make his purchase for a final figure without concern as to into which category it was placed.

   86. After taking into consideration the legal services of Lindquist and Vennum, and of Bruce A. Rasmussen & Associates, Ltd., in the matter of counterclaims on behalf of Donohoo and Mathies, for which the Bank paid legal fees and expenses, the two law firms shall be ordered to cease and desist from the collection of further fees and expenses in relation thereto, and Donohoo and Mathies shall make restitution to the Bank for the amount paid to the effective date of the Order herein.

   Respondents Richard D. Donohoo, and Craig R. Mathies, individually and as officers, directors, persons participating in the conduct of the affairs and institution-affiliated parties of Capital Bank, of Saint Paul, Minnesota, having violated laws, regulations, and orders issued by appropriate regulatory agencies, having engaged in unsafe or unsound banking practices, and having breached their fiduciary duties, and having received financial gain and other benefit by reason of such violations and breaches involving personal dishonesty and a willful and continuing disregard for the safety and soundness of the institution:
   1. Shall be and they hereby are prohibited from future participation in the affairs of any federally insured financial institution;
   2. Shall pay a civil money penalty in the sum of $75,000 for Respondent Donohoo, and $50,000 for Respondent Mathies; and
   3. Shall cease and desist from the violations and practices cited in the Final Decision herein and reimburse Capital Bank, of Saint Paul, Minnesota, the sum $825,554 each, plus the legal fees and expenses paid by said financial institution concerning their counterclaim in an action in the courts of the State of Minnesota, by which they were unjustly enriched in connection with said violations and practices.

   Respondents Bruce A. Rasmussen, individually, and as a director, person participating in the conduct of the affairs and an institution-affiliated party of Capital Bank, of Saint Paul, Minnesota, and Wayne Field, and Cheryl C. Godbout-Bandal, as institution-affiliated parties of Capital Bank, of Saint Pail, Minnesota, having violate laws and regulations issued by appropriate regulatory agencies, having engaged in unsafe and unsound banking practices, and having received financial gain by reason of such violations and breaches involving personal dishonesty and a willful and continuing dis- {{10-31-95 p.A-2649}}regard for the safety and soundness of the institution:
   1. Shall pay civil money penalties in the sum of $75,000 for Respondent Field, $30,000 for Respondent Godbout-Bandal, and $15,000 for Respondent Rasmussen; and
   2. Shall cease and desist from the violations and practices cited in the Final Decision herein and reimburse Capital Bank, of Saint Paul, Minnesota, the sums by which they were unjustly enriched, being $295,012 for Respondent Field, $120,000 for Respondent Godbout-Bandal, and $23,600 for Respondent Rasmussen.

   Respondents Lindquist & Vennum, and Bruce A. Rasmussen & Associates, Ltd., as institution-affiliated parties of Capital Bank, of Saint Paul, Minnesota, having participated in unsafe and unsound practices by accepting unauthorized legal fees and costs from said Bank for representing Richard A. Donohoo and Craig R. Mathies in presenting counterclaims not dealing with the operations of said Bank, shall cease and desist from such representation.

   1. At all times pertinent to these proceedings, Capital Bank, St. Paul, Minnesota ("Bank"), was a corporation existing and doing business as a State nonmember bank, under the laws of the State of Minnesota, with its principal place of business located at St. Paul, Minnesota. The Bank's deposits were insured in accordance with the provisions of the Federal Deposit Insurance Act. FDIC Ex. 1; Admitted - Answer ¶ 1.⁵⁴
   2. On or about August 10, 1984, the FDIC issued an Order to Cease and Desist against the Bank ("1984 C&D Order"), which was effective August 20, 1984, and remained in full force and effect at all times relevant to this proceeding. Admitted - Answer ¶ 5; FDIC Ex. 6.

   3. At all times pertinent to these proceedings, Capital City Corporation ("CCC") was a Minnesota corporation with its principal place of business located at St. Paul, Minnesota. On or before May 27, 1988, until on or about July 30, 1990, CCC owned 6,685 shares, a majority of 99 percent, of the 6,750 issued and outstanding shares of stock of the Bank. Admitted - Answer ¶ 6 and ¶ 20(a); FDIC Ex. 18, p.2. After July 30, 1990, CCC owned 6,685 shares, or a minority of 48.61 percent, of the 13,750 issued and outstanding shares of Bank stock. Admitted - Answer ¶ 6.
   4. On or before May 27, 1988, George Heaton owned all of the 569,812 issued and outstanding shares of stock of CCC, Admitted - Answer ¶ 20(b); FDIC Ex. 18, p.2, and CCC was indebted to Midwest Federal Savings and Loan Association ("Midwest Federal") in the amount of $3,856,000 plus accrued interest from February 15, 1988 ("Bank Stock Loan"), secured by the 6,685 shares of Bank stock owned by CCC. Admitted - Answer ¶ 20(c); FDIC Ex. 18, p.6.
   5. On or about May 27, 1988, Heaton was indebted to Ronald G. Wenzel, Lawrence D. Wenzel and the estate of Gilbert D. Wenzel on a promissory note dated November 30, 1981 ("Wenzel Note"). The Wenzel Note had a total amount owing of approximately $794,635.65, and was secured by the 569,812 shares of CCC Stock. Admitted - Answer ¶ 20(d); FDIC Ex. 18, pp. 3 and 5. The 569,812 shares of CCC Stock pledged as collateral to the Wenzel Note were held in escrow by Jon Albrightson. FDIC Ex. 18, pp. 106–111; Tr. 1011–1015.
   6. At all times pertinent to these proceedings, CCC's only significant assets were the 6,685 shares of stock of the Bank. Admitted - Answer ¶ 6 and ¶ 20(a); FDIC Ex. 18, p.2.
   7. As of June 3, 1988, William F. Johnson was president and Chief Executive Officer of the Bank, and the board of directors consisted of Timothy H. Hanson, J. Brooks Hauser, William F. Johnson, John Sargent and Jean R. Stiegemeier. FDIC Ex. 11, p. 79.

   a. $627,680.18 in cash; and
   b. Assumption of one-half of the liability of the Wenzel Note. Admitted - Answer ¶ 22; FDIC Ex. 18, p. 3.

   14. From on or about June 10, 1988, and at all times pertinent to these proceedings thereafter, both Donohoo and Mathies, each in his own name, owned, controlled or had the power to vote 71,000 shares of voting stock of CCC. FDIC Ex. 162; Tr. 1011–1012. Each of these Respondents held 12.46 percent, and jointly controlled 24.92 percent of CCC's voting stock. The purchase arrangement also contained an option to purchase the remaining shares prior to February 1, 1989, later extended to July 1, 1989, but expired unexercised. Donohoo testified that funding for the exercise of the option would have been provided by various banks, which would have required guarantees, cross pledges of collateral, buy-sell agreements and a joint obligation on the promissory note, and that had the option been exercised Mathies and Donohoo intended to file an Application for Change in Control pursuant to the CBCA. Tr. 1352–1354.
   15. At the time that the 1988 Purchase Agreement was signed, CCC was solvent. However, it had a $3,900,000 loan outstanding at Midwest Federal, with approximately $300,000 due in interest, and also owed a $221,000 tax rebate to the Bank. Tr. 1339–1340; 1934.
   16. The price for the 142,000 shares of CCC Stock was $1,025,000, to be paid by the assumption of one-half the liability on the Wenzel note, and $627,680.18 in the form of a promissory note from Donohoo and Mathies payable to Heaton. Admitted, Respondents' Answer, ¶ 22. Part of the $627,680.18 payment was made from the proceeds of a loan of $500,000 to Lang, Donohoo and Mathies from Midway National Bank, St. Paul, Minnesota ("Midway"). Admitted, Respondents' Answer, ¶ 23; Tr. 1343. The remainder of the cash payment was made from the proceeds of a $150,000 loan to Donohoo from Peoples State Bank, Winthrop, Iowa. Id.

   18. On or about June 23, 1988, Donohoo, together with Mathies and Lang were elected to the board of directors of the Bank at a special meeting of the Bank's shareholders, and were sworn in to their positions on July 1, 1988. FDIC Ex. 28c and d. Donohoo continuously served as a director and chairman of the board of directors of the Bank until his resignation on December 7, 1992. Admitted - Answer ¶ 11(a); Tr. 1484; FDIC Ex. 287. On or about July 20, 1988, Donohoo was elected vice chairman of the board of directors of the Bank and appointed vice president and general counsel. FDIC Ex. 28f. Donohoo was president of the Bank from August 17, 1988, through April 1, 1991, Admitted - Answer ¶ 11(a); FDIC Ex. 28ddd, and thereafter until December 7 officially held the title of Legal Counsel. FDIC Ex. 28ccc & qqq.
   19. Donohoo was a director of CCC from on or about June 23, 1988, until his resignation on or about July 27, 1990, and the president and chairman of the board of directors from on or about August 17, 1988, until his resignation on or about July 27, 1990. Admitted - Answer ¶ 11(a).
   20. Donohoo testified that he was never in charge of loan documentation, but that his duties involved credit administration and legal assistance with respect to work-out loans. Donohoo, Vol. VIII, pp. 1367-1368. See below, however, as to Donohoo's initialling of Misenor and other loan documents.

   21. Mathies was continuously employed in banking from 1964 to 1984. Tr. 1923–1926. From 1974 to 1984, he was employed by the Bank and was its president from 1978 until he left the Bank in 1984. Tr. 1925–1926. Though elected a director on or about June 23, 1988, for reasons not relevant herein the board of directors of the Bank, the other directors refused to permit him to be seated. FDIC Exs. 28d-28bb.
   22. During the FDIC Examination of the Bank as of June 3, 1988, FDIC Examiner Kart was informed by then President Johnson that he believed it was the intention of Donohoo and Mathies to replace him with Mathies as president of the Bank. Tr. 55.
   23. On September 1, 1988, Mathies, who had never previously worked as a consultant, TR. 1923–1926, 2043, was hired by Donohoo as a consultant to the Bank, Tr. 1371, 1943, 2041–2042, 2044, at the compensation of $75,000 with no regard for any excess hours Mathies might and did work. Tr. 1372, 1944–1945. At the time Mathies was hired, Misenor was the senior lending officer, and Donohoo was president. In the document they prepared to attract investors to assist in their efforts to purchase CCC or the Bank which was in the nature of a prospectus, i.e. a preliminary printed publication distributed to prospective investor-buyers of stock, dated September 23, 1988, Donohoo and Mathies held themselves out as "on-site" management of the Bank. FDIC Ex. 22. Mathies remained in the job category of consultant until be became executive vice president of the bank on or about June 1, 1989. Admitted - Answer ¶ 12(a)(iii); Tr. 1962. When Mathies was officially hired as an officer he was paid the same salary of $75,000 that he received as consultant. FDIC Ex. 12.
   24. Mathies testified that rather than being an executive officer of the Bank his role was as a consultant, to liquidate problem real estate, to determine a plan for dealing with problem loans and reduce loan delinquencies, and to dispose of properties in the Other Real Estate Owned (OREO) category, that his office was alone on a balcony, removed from other offices and from employees with whom he dealt daily but only on the matters referred to directly above. Tr. 1941–1947.
   25. It was the opinion of Director James Graham that it appeared to me that "[Mathies position] was a never-ending consulting job." Tr. 104.
   26. From September 1, 1988 to June 1, 1989, Mathies attended the loan committee meetings, Tr. 2042, and from September 29, 1988, through and including May 25, 1989, Mathies attended, either in the capacity of a shareholder or as consultant to the Bank, eight of the nine regularly scheduled board of directors' meetings, the special meeting {{10-31-95 p.A-2652}}of the board of directors held March 3, 1989, and the organizational meeting of the Bank's board of directors held January 20, 1989. FDIC Ex. 28h-28s; Tr. 2042.
   27. On or about December 1, 1988, FDIC Examiner Kart visited the Bank to determine, among other things, the status of the Bank's ownership and management. Tr. 56–57. From his discussions with officers of the Bank, review of Bank minutes and other bank records, on or about December 1, 1988, FDIC Examiner Kart determined that Mathies was extensively involved with the Bank, attended board meetings, was a nonvoting member of the discount committee, and had a variety of duties ranging from relatively every day workman type things like working on other real estate to handling workout credits. Tr. 57–58, 60.
   28. During the period September 1, 1988, through and including June 1, 1989, Mathies participated or had the authority to participate in the conduct of affairs, and major policy-making functions, of the Bank.
   29. From on or about June 1, 1989, through and including December 7, 1992, Mathies was the executive vice president of the Bank. Admitted - Answer ¶ 12(a)(iii); FDIC Ex. 287.
   30. On or about November 21, 1989, Mathies was elected director of the Bank, effective December 13, 1989, and was at all times thereafter a director of the Bank until his resignation on or about December 7, 1992. Admitted - Answer ¶ 12(e)(iv); FDIC Exs. 28aa & 287.
   31. From at least on or about February 23, 1990, until his resignation on or about July 27, 1990, Mathies was also director of CCC. Admitted - Answer ¶ 12(a)(i).

   32. During the summer of 1988, Lang had a disagreement with Donohoo and Mathies, withdrew from the investment group and resigned as a director of the Bank. Tr. 63; FDIC Ex. 28f. On July 20, 1988, James Graham and Richard Rotegard were elected to the Bank's board of directors, FDIC Ex. 28e, and Donohoo advised the board of directors at its regularly scheduled meeting that it should start considering Heaton as the former owner. FDIC Ex. 28f.
   33. On or about August 17, 1988, Hanson, Sargent and Stiegemeier resigned as directors of the Bank, and Johnson was forced to resign as president by Donohoo and Mathies. FDIC Exs. 28g & 32. An attempt was made to elect Donohoo as president, FDIC Ex. 28h, but it failed, TR. 97, and at the next board meeting, on or about September 29, 1988, Director Graham challenged the election of Donohoo as president at the August 17 board meeting. FDIC Ex. 28F.
   34. At the regularly scheduled meeting of the board of directors of the Bank on September 29, 1988, Graham also complained about management's lack of communication with the board of directors, the manner of hiring of Misenor as the senior loan officer and the continuing nature of Mathies' consultancy. FDIC Exs. 28th and 28j; Tr. 99–100.
   35. On or about December 1, 1988, Donohoo advised FDIC Examiner Kart, who was conducting a visitation of the Bank, that the original investor group had fallen apart as a result of a disagreement between him and Lang about Johnson as president of the Bank. He also advised Kart that he was assembling a new investment group which would include himself, Mathies, Misenor, Hauser, Respondent Wayne Field ("Field"), Robert Christianson and others, that the amount needed to exercise the option to purchase the remaining shares of CCC was about 75 percent funded, and that no single investor would own more than 20 percent of the holding company. Donohoo also told Kart that he expected to have the investment group assembled and the required change in bank control notice submitted prior to the date the Bank Stock Loan matured in February, 1989. Tr. 63–64.
   36. The 6,675 shares of Bank stock owned by CCC were represented at the annual shareholders meeting on January 11, 1989, by proxy to Donohoo and Mathies. Graham and Rotegaard were not reelected as directors of the Bank, and were replaced by Respondent Bruce A. Rasmussen ("Rasmussen") Bank along with Hauser. The Board thus consisted of Donohoo, Rasmussen, and Hauser. FDIC Ex. 281 and 28n. Rasmussen remained a director of the Bank from January 11, 1989, until his resignation December 7, 1992, while Hauser resigned in December of 1989. Admitted - Answer ¶ 16(a): FDIC Ex. 287.
   37. The new board of directors was sworn in January 20, 1989. Rasmussen was a longtime acquaintance of Donohoo, Tr. 1651–1652, and both he and Hauser had agreed to be part of Donohoo's and Mathies' investment group to purchase CCC, and had invested $50,000 as of December 19, 1988. FDIC Exs. 33, 65–69.
{{10-31-95 p.A-2653}}
   38. On or about November 21, 1989, Mathies was elected director of the Bank effective December 13, 1989, at which time Hauser resigned as a director of the Bank. FDIC Ex. 28aa, 28bb. Thus, from on or about September 1, 1988 through approximately December 7, 1992, Donohoo and Mathies controlled the day-to-day affairs of the Bank. Above, and FDIC Ex. 12, 13, 14, 22.

   39. On or about June 2, 1988, Donohoo and Mathies met with Gerald Thomas, a loan officer at The Midway National Bank, St. Paul, Minnesota ("Midway"), about obtaining a $500,000 loan to purchase 24.9 percent of the stock of CCC pursuant to the 1988 Purchase Agreement. FDIC Ex. 33, p. 10. Donohoo and Mathies advised Thomas that the loan would most likely to paid by obtaining additional investors. FDIC Ex. 33, p. 10. On or about June 27, 1988, Midway made a $500,000 loan to Lang, Donohoo and Mathies, due August 26, 1988, bearing loan #50034954 ("Midway Loan #1"). FDIC Ex. 29; Admitted - Answer ¶ 23(a).
   40. By letter dated June 14, 1988, from Donohoo to Messrs. John A. Ritt, David D. Gross and Gerald E. Thomas at Midway, Donohoo stated, "[t]his loan [Midway Loan #1] would be repaid from sale of our existing bank or more likely the contribution of additional investors/partners." FDIC Ex. 53. The written file comments by Thomas dated June 27, 1988, in the credit file for Midway Loan #1 state, in part, "Lang, Mathies and Donohoo are planning to take in several additional partners for the bank purchase and our loan will be repaid from contributions from these new investors." FDIC Ex. 32.

   41. On or about June 27, 1988, George Lang, Donohoo and Mathies opened a demand deposit account at Midway, #10-80-356, under the name of the Capital Partners ("CP DDA"). FDIC Ex. 68. On or about the same day, Midway advanced the proceeds of the Midway Loan #1 to Donohoo, Mathies and Lang by cashier's check #709808, dated June 27, 1988, in the amount of $500,000, and Donohoo, Mathies and Lang deposited the $500,000 cashier's check #709808 to the CC DDA. Admitted - Answer ¶ 24; FDIC Exs. 65; 66, p. 1; 69, pp. 1–5; Stipulated - Tr. 518.
   42. Donohoo and Mathies testified that the designation "Capital Partners" was, plainly and simply, the name of this checking account, that there was no partnership agreement and no federal or state tax ID number, that it was not a corporation or a joint venture, and in toto "just a checking account." Tr. 1347–1348, 1938. Gerald Thomas, the Midway National Bank officer who originated and serviced the $500,000 loan to Donohoo and Mathies, testified that "Capital Partners" was simply the name of a checking account Tr. 1003, and throughout the hearing Respondents continually referred to this as "just a checking account."
   43. On or about June 28, 1988, Donohoo, Mathies and Lang wire transferred $481,737.18 to Heaton's bank, the Barnett Bank of South Florida, as part of the full cash payment under the 1988 Purchase Agreement for 24.9 percent of CCC's stock. Stipulated - Tr. 518; FDIC Exs. 65; 66, p. 1; 67, pp. 103.
   44. On or about the following dates, the following checks drawn on the CP DDA by Donohoo and Mathies to Alice Wenzel were posted to the CP DDA:

   Each check to Alice Wenzel was made {{10-31-95 p.A-2654}}pursuant to Donohoo's and Mathies' obligation on the Wenzel Note assumed pursuant to the 1988 Purchase Agreement. Stipulated - Tr. 518; FDIC Exs. 65 & 67.
   45. On or about the following dates, the following checks drawn on the CP DDA by Donohoo and Mathies to make principal and/or interest payments on Midway Loan #1 were posted to the CP DDA:

Stipulated - Tr. 518-519; FDIC Exs. 65, 67 & 36.
   46. On or about September 15, 1989, check #1025 payable to Misenor in the amount of $20,000 and drawn on the CP DDA by Donohoo and Mathies was posted to the CP DDA. FDIC Exs. 65; 66, p. 16; 67, p. 30. The proceeds of check #1025, were used to make a $20,000 payment on a $76,000 loan by the Bank to Everett and Nellie Misenor, hereinafter discussed, in order to remove its classification as a problem loan. FDIC Ex. 93; Stipulated - Tr. 209.
   47. On or about July 31, 1990, check #1035, dated July 26, 1990, payable to the Bank in the amount of $299,000 and drawn on the CP DDA by Donohoo and Mathies was posted to the CP DDA. FDIC Exs. 67, p. 40; 66, p. 26. The proceeds of check #1035 were used to fund Donohoo's and Mathies' purchase of 2,100 shares of Bank stock on or about July 30, 1990. FDIC Ex. 203; Stipulated - Tr. 512.
   48. On or about the following dates, the following numbered checks drawn on the CP DDA by Donohoo and Mathies were posted to the CP DDA, in the amounts, to the payee, and for the purpose as sequentially stated:

6/29/88, #502, $9,000.00, to Preferred Financial (owned by Lang), unknown.
8/5/88, # 1002, $861.00, to Midway, Payment of attorney fees for closing of $500,000 loan.
12/23/88, # 1011, $22,543.84, to Donohoo, Reimbursement contributions to the Capital Partners.
12/23/88, # 1012, $1,000.00, to Mathies, Reimbursement for contributions to the Capital Partners.
12/30/88, # 1010, $2,500.00, to McGladrey & Pullen, Unknown.

   50. The FDIC's June 3, 1988 Report of Examination ("ROE"), commenced only days after Donohoo and Mathies had agreed to purchase 24.9% of CCC, indicated that the Bank's condition was far worse than Donohoo and Mathies had been told by Heaton. Tr. 1364–1365, 1937; see FDIC Ex. 11.
   51. FDIC Examiner Robert Karr acted as the Examiner in Charge of June 3, 1988 ROE. According to the FDIC's June 3, 1988 ROE, ..."[t]he present classified [asset] volume represents an increase from the 10.5 percent classified at the previous State examination, although the bank's asset base has declined 8 percent over that period. Classified volume now represents 120.1 percent of capital and reserves. The severity of classifications has also increased significantly from the previous examination with doubtful and loss classifications now amounting to 20 percent of the classified total." FDIC Ex. 11, p. 1.
   52. The FDIC's June 3, 1988 ROE further stated that:

..."[d]oubtful and loss loan classifications now total $1,099,000 compared to $355,000 previously. The increase in the severity of classifications is due primarily to deterioration in the following three large lines of credit: 1) the Swager related credits which total $813,000...and 3) the Ronald Wenzel line which is classified at $193,000...The Swager and Wenzel credits were significantly impacted by the {{10-31-95 p.A-2655}}recent closing of the Oak Park Bank in Oak Park Heights, Minnesota...". FDIC Ex. 11, p. 1.
"[t]he majority of the identified asset problems predate the present directorate and active officer staff." FDIC Ex. 11, p. 1-a.
..."Capital City Corporation, is in a relatively weak and deteriorating financial position which had an adverse effect on its dealings with the bank. The holding company owes the bank $222,000 in tax benefit payments resulting from the bank's 1987 operating loss." FDIC Ex. 11, p. 1-a.
"[t]he current level of capital protection continues to be viewed as less than adequate to support the excessive risk in the bank's asset structure...the holding company, under present ownership, is not considered a viable source of new capital." FDIC Ex. 11, p. 1-a-1.

1. Period January 1, 1989 to June 1, 1989
   85. In January or February 1989, Donohoo and Mathies entered into an agreement with Heaton extending the date to exercise their option to purchase the remaining shares of CCC to August 1, 1989, FDIC Ex. 129, but never exercised their option. Admitted -Answer ¶ 28; Tr. 1346.
   86. From May of 1988 through July of 1990, Donohoo and Mathies engaged in negotiations to refinance or restructure the Bank Stock Loan which negotiations ultimately evolved to efforts to purchase the Bank Stock Loan from Midwest Federal. Tr. 1507–1508.
   87. By letter dated February 13, 1989, to Midwest Federal, Donohoo and Mathies summarized the status of their efforts to acquire control of CCC ("February 13 letter") and requested a one-year renewal of the Bank Stock Loan. FDIC Ex. 129. The letter stated:

We are discussing loan take-out with other institutions but it appears that such take out is contingent on change of control approval of the regulators and the exercise of the option. Granting this request will enable us to complete the change of control application in an orderly fashion..."

The following observations and comments are intended to point out areas of disagreement with the appraiser. Such disagreements do not mean the appraiser was wrong in his conclusion. It does mean, {{10-31-95 p.A-2660}}however, that the following points are especially important and may result in different emphasis and conclusions when analyzed by different people.

100. The LAW Review concluded:
The preceding provides some of the more significant comments and observations regarding the appraisal report. Although, this letter does not constitute an appraisal report by the undersigned nor by Larson, Allen, Weishair & Co., it appears that the final fair market value estimate reflected in the appraisal report is much higher than the facts and circumstances warrant. Based only on the data furnished in the appraisal report and not having any of the additional documentation that was available to the appraiser, it appears that a more appropriate fair market value estimate for Bank would fall within a range of $1.3 million to $2.1 million. And, given the very poor history of the Bank and its bleak prospects for the future, it appears that the most appropriate fair market value estimate for Bank would fall in the lower half of the range indicated.

[A] total payment of $2.5 million to be paid within 30 days of the approval of change in control. We would file the change in control as soon as possible and in any event, not more than 60 days from the date of your approval [of the proposal to purchase the Bank Stock Loan].

The loan would mature on September 30, 1990, with the possibility of an extension on the loan based upon the application and approval of the investment group for a change in ownership.

INADEQUATE CAPITAL
Large operating losses in 1987 and 1988 have resulted in the bank having an impaired surplus account. Risk within the asset structure of the bank continues to perpetuate operating losses, further diminishing capital. Adversely classified assets aggregate 143 percent of total equity capital and reserves. The excessive volume of risk identified at this examination has diminished capital to below the regulatory required level. Total equity capital, after fully funding the loan loss reserve, equals only 5.4 percent of Part 325 total assets. This is in apparent violation of Part 325 of {{10-31-95 p.A-2661}}the Federal Deposit Insurance Corporation's Rules and Regulations as scheduled on page 6-1. It is necessary for management to immediately develop and implement a plan to increase capital to an amount above the required minimum. The parent holding company is not viewed as a source of strength. A June 30, 1989 financial statement on the holding company shows a $399,000 deficit net worth. The insolvent financial condition of the parent company further dictates the need to enact a plan for capital enhancement.

   In the event the capital of your bank continues to deteriorate, you may soon reach a point in time when the bank would be in an unsafe and unsound condition and consideration would then be given to making a recommendation to our Washington Office that a termination of deposit insurance action be initiated pursuant to Section 8(a) of the FDI Act. We hope that you are able to develop a realistic capital enhancement program prior to that time and it is requested that you keep this office advised of any progress in this regard. FDIC Ex. 139.
   109. Costley testified that this:
   ...heightened the urgency [of the negotiations with the RTC]. I actually was probably getting down to almost a phone call a week to Val Silins to try to get something out of the RTC. He kept saying it was in Washington, and that these things take time. He was sympathetic and somewhat apologetic, but conveyed the idea that it was beyond his control, it was Washington, that when they get to it they would. I think I remember one time, I said well, if you don't get to it very soon there is not going to be any bank at all here. Tr. 2083–2084.

   113. By facsimile dated March 20, 1990, George Cramer offered to purchase the RTC's $4,800,000 position in the Bank stock $3,800,000 principal, $1,000,000 interest) for $1,000,000. FDIC Ex. 142.
   114. By letter dated May 10, 1990 enclosing a signed "Agreement to Purchase Note", Equilease, by its president Jerry Minskey, offered to purchase the RTC's $4,800,000 position for $1,000,000. FDIC Ex. 144(a) and (b).
   115. The $1,000,000 offers as set forth in FDIC Ex. 142, 144 (a) and (b) were for 99.03% of the Bank. See FDIC Exs. 142, 144(a) and (b); Entgelmeier, Vol. V. p. 884.
   116. By letter dated May 3, 1990, to the Bank's board of directors, the FDIC again requested that the FDIC be advised of any progress to develop a capital plan. FDIC Ex. 274.
   117. By letter dated May 10, 1990 enclosing a signed "Agreement to Purchase Note", Equilease, by its president Jerry Minskey, offered to purchase the RTC's $4,800,000 position for $1,000,000. FDIC Ex. 144(a) and (b).
   118. The $1,000,000 offers as set forth in FDIC Ex. 142, 144 (a) and (b) were for 99.03% of the Bank. See FDIC Exs. 142, 144(a) and (b); Entgelmeier, Vol. V, p. 884.
   119. By letter dated June 1, 1990, to Midwest Federal, Donohoo and Mathies offered to either purchase the Bank Stock Loan for $1.4 million or purchase the 6,685 shares of Bank stock securing the Bank Stock Loan at a private foreclosure sale for $1.6 million.
{{10-31-95 p.A-2662}}Donohoo and Mathies stated with respect to the latter offer, "[t]he purchase of the stock would be contingent only upon receipt of any regulatory approvals required to complete the purchase." FDIC Ex. 140.
   120. By letter dated June 29, 1990, to Donohoo and Mathies, Midwest Federal acknowledged receipt of the June 1, 1990, offer. Midwest further indicated that it intended to take bids on the 6,685 shares of stock securing the Bank Stock Loan and intended to award the Bank Stock Loan and the Bank stock to the highest bidder by the end of July 1990. FDIC Ex. 141. On or about July 3, 1990, through its attorney Midwest Federal sent Confidentiality Agreements to effectuate due diligence reviews to Stearns County National Bank and Vermillion State Bank, FDIC Exs. 143b, 145a, to State Bank of Buffalo Lake on or about July 5, 1990, FDIC Ex. 150c, and to Central Financial Services, Inc., on or about July 9, 1990.
   121. By letter dated June 1, 1990, to the RTC, Donohoo and Mathies offered to either purchase the Bank Stock Loan for $1,400,000 or purchase the 6,685 shares of Bank stock securing the Bank Stock Loan at a private foreclosure sale for $1,600,000. FDIC Ex. 140. In response on June 29, 1990, the RTC acknowledged receipt of the June 1, 1990 offer, but did not respond to it. The RTC instead indicated that it intended to take bids on the 6,685 shares of stock securing the Bank Stock Loan. FDIC Ex. 141.
   122. By letters dated July 3, 1990, RTC attorney Valdis Silins notified Norman Skalicky of the Stearns County National Bank, FDIC Ex. 143(b), Stuart Henrickson of the Vermillion State Bank, FDIC Ex. 145(a), David A. Sumnicht of Das Information, Inc., FDIC Ex. 148(d), and Dennis Mathisen of Marshall Financial, that "[i]t is anticipated that a minimum of $1,000,000 will be needed to complete this purchase [of approximately 98–99% of the Bank]," FDIC Ex. 149(a).
   123. By letter dated July 10, 1990, to the State of Minnesota Department of Commerce, Donohoo advised that the board of directors had "decided to increaser the capital of the bank as soon as possible," but made no reference to the fact that the board had already called a special shareholder meeting on June 28, 1990, or that on July 9, 1990, the shareholders had authorized an amendment to the Bank's articles of incorporation to increase the Bank's authorized stock by 7,000 shares. FDIC Ex. 275.
   124. By letter dated July 17, 1990, Midwest Federal, through its attorney, forwarded confidentiality agreements executed by Vermillion Bancshares, Inc., VH Investment Group and the Stearns County National Bank to the Bank to effectuate due diligence reviews of the Bank. FDIC Ex. 152.
   125. On or about August 10, 1990, Midwest Federal sent a letter to each prospective bidder for the Bank Stock Loan advising them it was indefinitely suspending negotiations to sell the Bank Stock Loan. FDIC EXS. 143d, 145c, 150a, 151c.
   126. Donohoo's and Mathies' negotiations with Midway to extend or purchase the Bank Stock Loan were unsuccessful. Tr. 1346. Donohoo and Mathies ceased making payments on the Wenzel Note in July of 1990, and as of July, 1990, the Wenzel Note secured by the stock of CCC was in default. FDIC Ex. 65; Tr. 1563–1564.
   127. Donohoo, Mathies, and the other investors in the Capital Partners stood to lose their entire investment in CCC if either the bank stock loan was sold to persons other than themselves, or if the defaulted Wenzel loan on the CCC stock was foreclosed.
   2. June 28, 1990 Issuance of New Stock
   128. In June of 1990, Costley, Donohoo and Mathies began to discuss the feasibility of issuing additional stock at the Bank level as a means of infusing capital into the Bank in order to prevent the closing of the Bank. Tr. p. 2092–2093. Costley reviewed the pledge agreement between the RTC and CCC and determined that it contained no contractual prohibition against issuing additional Bank stock, and advised the Bank that it would not violate the pledge agreement to issue additional stock, noting that if additional stock was issued, it had to be at the fair value of that stock. Tr. 2092–2093.
   129. Finally, Costley advised the Board that if the following guidelines were followed there would be no need to file a Change of Control Application pursuant to the CBCA:

   Number one, there could be no voting ties among the different investors, i.e., any agreement to vote their stock a certain way in the future.
   Number two, there could be no buy sell ties. In other words they would sell their stock as a block or cross options to buy each others stock which we commonly see in these types of situations.
{{10-31-95 p.A-2663}}
   The third thing, is that there can be no financial ties among the investors. In other words, no cross pledges, no cross guarantees that the investors were buying as free agents, as I think I referred to it at that point in time. They are buying the stock with their own money and without any contractual obligations to vote it any particular way or sell it any particular way in the future.
   Q. When you say buying their stock with their own money, did you necessarily mean cash or would financing their purchase by okay?
   A. Well, financing their purchase is fine as long as they secure that financing— that loan that they obtain was obtained based on their own financial ability to repay that loan, i.e., collateral, and/or their income level, etc. The key was when I say own—with their own money, I mean their own money as opposed to somebody else's money. Not a lender's money but a coinvestor's money.

   Thorne (deceased), Certificate #13 for 30,231 shares.
   Field, Certificate #14 for 20,149 shares.
   Godbout-Bandal, Certificate #15, for 10,067 shares.
   Misenor, Certificate #16, for 8.023 shares.
   Peggy Ann Hauser (Hauser's wife), Certificate #17, for 22, 125 shares.
   Christianson (deceased), Certificate #18, for 11,062 shares.
   Donohoo, Certificate #19, for 20,171 shares.
   Mathies, Certificate #20, for 20,172 shares.

   Donohoo, 7/26/90, #8166, $500.
   Donohoo and Mathies (the Capital Partners), 7/26/90, #1035, $299,000.
   S. Kris Bandal (Husband of Godbout-Bandal), 7/30/90, #7513, $200,000.
   Godbout-Bandal, 7/23/90, #2155, $100,000.
   Rasmussen, 7/26/90, #5647, $100,000.
   Field, 7/26/90, #2462, $300,000.
   Shari Mathies (Wife of Mathies), 7/27/90, #1112, $500.

Admitted - Answer ¶30(f) and (g).
   144. The shares issued to Shari Mathies are attributed to Mathies by reason that Shari Mathies is the wife of Mathies and Mathies paid for the shares issued to her. Admitted -Tr. 2114–2115.
   145. Donohoo, Mathies, Field and Godbout-Bandal were four of the original eight purchasers of investment units in the Capital Partners. FDIC Exs. 164–171, 65, 69. The individual Respondents had no verbal or written understandings with respect to voting the stock; there were no voting agreements, no buy-sell agreements, no cross-pledges of collateral and no cross-guarantees. Tr. 1667–1668, 1443–1444, 1741, 1884, 1996–1997. Prior to and at the time of the stock issuance, Godbout-Bandal did not know Field, Rasmussen of Mathies, Tr. 1741–1742), Field did not know Godbout-Bandal, and had only met Rasmussen once when Rasmussen took Field's deposition, Tr. 188, and Rasmussen did not now Godbout-Bandal and had met Field once at the deposition, Tr. 1667).
   146. The other four of the original eight purchasers of investment units in the Capital Partners did not purchase any of the 7,000 shares of Bank stock. Misenor did not have the financial wherewithal (Tr. 599, 1395, 1601 & 1959); Hauser was subject to an order of prohibition from further participation in the affairs of federally insured financial institutions issued by the OTS pursuant to section 8(e) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(e) (FDIC Ex. 351); and Thorne and Christianson had died (Admitted - Answer ¶30(d); Tr. 528.).
   147. At the time the 7,000 shares of Bank stock were issued, Donohoo, Mathies, Field, Rasmussen and Godbout-Bandal were well aware of the prior notice requirements of the Change in Bank Control Act ("CBCA"). Also, Donohoo and Mathies had led Midwest Federal, Midway and the FDIC to believe the appropriate CBCA notices would be filed, FDIC Ex. 319, and Donohoo, Mathies and Rasmussen were conducting ongoing negotiations with Midwest Federal to purchase the Bank Stock Loan and for the execution of confidentiality agreements in order that Midwest Federal could have potential third party bidders for the "due diligence" the Bank Stock Loan examinations. Tr. 918–928.
   148. At the time of the issuance of the 7,000 shares, Donohoo and Mathies had defaulted on the Wenzel Note secured by 100 percent of CCC Stock. Tr. 1563–1564.
   149. At the time of Donohoo's and Mathies' actions as officers and.or directors of CCC to authorize the issuance of the 7,000 shares of Bank stock, CCC was subject to an Order to Cease and Desist that required the Federal Reserve Bank's prior written approval of the issuance of the 7,000 shares of Bank stock July 30, 1990, which approval was never given. FDIC Ex. 358; Tr. 824–826.
   150. At the time of the issuance of the 7,000 shares of Bank stock, the FDIC had been requesting that it be kept advised of the Bank's capital plans. FDIC Exs. 272, 274.
   151. The 7,000 shares of stock were issued without prior notice to Heaton, the principal shareholder of CCC (FDIC Ex. 282), the holders of the Wenzel Note (Tr. 1559–1560), Midwest Federal (Tr. 792–793, 878, 923; FDIC Ex. 153), the Federal Reserve Bank (Tr. 825–826), and the FDIC, (Tr. 792–793). Donohoo, Mathies and Rasmussen had reason to believe that, if they submitted a CBCA notice to the FDIC, their CBCA Notice might be disapproved. FDIC Ex. 12.
   152. Donohoo, Mathies, Rasmussen, Field and Godbout-Bandal failed to submit a CBCA notice to the FDIC prior to issuing the 7000 shares. No such notice has ever been filed. Admitted - Answer #40.
   153. As of June 30, 1990, prior to the issuance of the 7,000 shares of Bank stock, {{10-31-95 p.A-2666}}the book value of the 6,750 issued and outstanding shares was approximately $322.81 per share. Tr. 1167.
   154. The 1984 C&D Order had required that "the Bank, its directors, officers... cease and desist from...[f]ailing to provide and maintain an adequate reserve for loan losses." FDIC Ex. 5. As of June 30, 1990, the Bank's board of directors made an additional provision to the allowance for loan and lease losses ("ALLL") of $700,000. FDIC Exs. 28oo; 284, pp. 135 and 138. The Bank's board of directors the considered the ALLL to be more than adequate as reflected in the July 15, Board Report for the month of June. The Bank made no additional provisions to the ALLL in July 1990, and as of July 31, 1990, the Bank's board of directors considered the ALLL to be more than adequate as reflected in the August 15, 1990, Board Report for the Month of July, FDIC Ex. 284, pp. 138, 112 and 109.
   155. The Board Reports for the months of June and July were shown by Donohoo and Mathies to prospective purchasers of the 7,000 shares of stock. FDIC Ex. 284, p. 1.
   156. As of July 30, 1990, the Bank's equity capital exclusive of the capital injection was $2,218,765. As of July 30, 1990, prior to the issuance of the 7,000 shares, the book value of the 6,750 shares of Bank stock outstanding was $2,218,765 or $328.71 per share. FDIC Ex. 284, p. 90.
   157. An appraisal of the value of the Bank prior to the issuance of the 7,000 shares was done by Paul W. Olander of the Paul W. Olander Company at the request of Midwest Federal ("Olander Appraisal"). FDIC Ex. 157. It appraised the fair market value of the Bank as of December 22, 1989, at $2,550,000 and the Bank stock at $378.00 per share. FDIC Ex. 158.
   158. The 7,000 shares were issued for a price of $142.86 per share, Stipulated - Tr. 1167, approximately $180 less than the book value of the 6,750 issued and outstanding shares of Bank stock. Immediately after issuance of the 7,000 shares of Bank stock, the book value of the Bank's 13,750 then outstanding shares was $234.09 per share. Tr. 1169.
   159. Lloyd Amundson testified to the value of the Bank as of July 30, 1990, using the results of the August 10, 1990, FDIC Examination and prior to the capital injection. Tr. 1052–1055. He testified he would bid approximately $1,100,000 plus a noncompete agreement in the category of $200,000 to $250,000. Tr. 1055. Without a noncompete agreement, he would offer $1,175,000 to $1,200,000. Tr. 1056. A factor in his offer was the ALLL. Tr. 1055. He deducted an additional $425,000 over and above the findings of an adequate ALLL in the 1990 board of directors Examination Report as of August 10, 1990, from equity capital because in his experience the ALLL would be short about that amount. Tr. 1045–1046. Based upon $1,000,000, Amundson's bid would net $162.96 per share for the 6,750 shares outstanding which was $20.10 more per share than the Individual Respondents paid for their 7,000 shares.
   160. Amundson testified that he provides for an adequate ALLL in the banks he owns, Tr. 1071, and as to what he would offer for the following hypothetical bank based on data as of July 30 as follows:

   He was president and director of X bank but had no ownership interest in X bank. X bank had assets of $41,588,000, total equity of $2,218,765, an ALLL reviewed and set by Amundson at $929,797. X Bank was a CAMEL 4 subject to a cease and desist order. Tr. 1076–1077.

   175. Almost immediately after the 7,000 shares had been issued, the FDIC commenced its Examination of August 10, 1990. FDIC Examiner Nyberg acted as Examiner in Charge. FDIC Ex. 13.
   176. On September 19, 1990, an Exit Review Meeting was held between FDIC representatives and the Bank Board to discuss the results of the examination. The FDIC brought up the issuance of the 7,000 shares of stock, Tr. 1123, the Donohoo stated that he wanted to have attorney Costley present to respond to those questions, Tr. 1128, but was unable to contact him. Tr. 1474.
   177. Donohoo then offered to reverse the $1,000,000 recapitalization of the Bank, but was told that he could not do so. Tr. 1475–1476.

   178. By letter dated January 28, 1991, the FDIC notified Costley and the individual Respondents that it intended to assess CMPs against them based upon the CBCA issue and upon a loan made to Pentagon Park Associates. See, e.g., R. Ex. 57. Unbeknownst to Respondents until the hearing in this proceeding, the FDIC also prepared criminal referrals against Costley, Donohoo, Mathies, Rasmussen, Misenor and Field. Tr. 738.
   179. By letter dated February 27, 1991, attorney Mary Curtin of Curtin and Barnes responded on behalf of the Respondents to the FDIC's January 28, 1991 CMP letter. R. Ex. 58. On that same date a meeting was held between Respondents and FDIC representatives to discuss the CMPs. Tr. 2120–2121.
   180. In the February 27, 1991 letter and at the meeting, Respondents asked the FDIC the basis for its opinion that the CBCA had been violated. FDIC Assistant Regional Director Muraco responded that he wasn't going to respond, and that Respondents might be advised at a later time. The FDIC never responded to the February 28, 1991 letter requesting additional information. Tr. 1225–1226.
{{10-31-95 p.A-2668}}
   181. Costley testified that at the February 27, 1991 meeting, the FDIC requested that additional capital be raised for the Bank, and when queried whether sale of additional stock might not also be construed as a violation of the CBCA was told that it would. Tr. 2121–2122. No further action was taken by the FDIC for more than eighteen months, after which this proceeding was instituted.

   182. From on or about September 21, 1988, until July 15, 1991, Misenor was the Senior Lending Officer of the Bank. Admitted - Answer ¶13(a); Tr. 182, 232. On or before November 18, 1988, Donohoo and Mathies approached Misenor about the possibility of Misenor investing in the Capital Partners, but were advised that he did not have the personal funds to do so. Tr. 185, 189. They also discussed funding an investment through a loan by the Bank to Misenor's parents, TR 193–195, but the investment would have to be received by November 18, 1988. FDIC Ex. 33.
   183. Donohoo testified that he and Mathies specifically told Misenor that he could not borrow funds from the Bank for the investment. Tr. 1394.
   184. On or about November 18, 1988, the Bank made a loan to Everett and Nellie Misenor, the parents of Misenor, in the amount of $76,000, Loan #4009577-1 ("Misenor Loan"). Admitted - Answer ¶33(a); FDIC Ex. 72.
   185. The Bank's credit file for the Misenor Loan reflected Donohoo as the originating loan officer. FDIC Exs. 72, 82, 83, 87; Tr. 196, 203–206. Donohoo initialed the written loan comments in the Misenor Credit file dated November 29, 1988. FDIC Ex. 83; Tr. 1296–1397. FDIC Examiner Rucks performed a credit review of the loan at the FDIC examination of the Bank as of August 28, 1989, Tr. 401–402, and was told that Donohoo was the loan officer who originated the Misenor Loan. Tr. 403–404. Donohoo was the bank officer responsible for making the Misenor Loan. FDIC Exs. 72, 82, 83, 92; Tr. 196, 203–206, 213–214; Tr. 403–404.
   186. The Misenor Loan was secured by a mortgage on the personal residence of Everett and Nellie Misenor. Admitted - Answer ¶33(b); Tr. 404. The credit application of Everett and Nellie Misenor showed they:

   (a) were approximately 76 and 74 years of age, respectively;
   (b) were retired;
   (c) had a combined monthly income of $4,050; and
   (d) had a net worth of $226,650.

   (a) the mortgage deed was missing two signatures;
   (b) the mortgage title insurance commitment/policy was missing; and
   (c) an appraisal was missing.

   List all extensions of credit made since the last examination for the accommodation of others than those whose names appear on the bank's records or on credit instruments in connection with such extensions.

   List all loans and extensions of credit, whether direct or indirect, entered into since the last examination by the bank with any of the bank's principal shareholders (those owning, controlling, or having the power to vote, either directly or indirectly, more than 10% of any class of the bank's voting securities), directors, officers, or their interests that were not made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons or entities not associated with the bank.

   1. Background
   201. Since approximately 1982, Field has made numerous loans from the Bank, running as high as $1,000,000 on an unsecured basis. Tr. 1986–1867. Fields testified that these were draw-downs on the line of credit. Donohoo testified that draw-downs on lines of credit do not require Board approval because the line of credit has already been authorized. Tr. 1384–1386. Investigation at the Bank produced no evidence of a line of credit for Field, Tr. 547–548, though there was an expired letter of credit, and references in the line item statements refer to a line of credit.
   202. Field testified that he has employed a bookkeeper-comptroller for the past fifteen years to handle Field's accounts, and that he, Field, had probably written only ten checks in the past fifteen years. Tr. 1867.
{{10-31-95 p.A-2671}}
   203. After purchasing an investment unit in the Capital Partners on or about November 15, 1988, Field showed 142,000 shares of CCC as an asset on his financial statements. FDIC Exs. 320, p. 5 & 6, 340. By letter dated September 14, 1989, to the Bank, Field stated:

   As to my investment in Capital Bank stock this is subject to the Change of Control of ownership in the Bank, I made an investment at the time, if control is approved I expect to be issued stock.

   1. Midway Loan No. 2 and Unjustified Bonus Payments
   220. On or about July 14, 1989, Midway made a loan to Donohoo and Mathies in the amount of $150,000, Loan #500-40-478 due January 14, 1990 (Midway Loan #2). FDIC Ex. 37. The purpose of Midway this loan was to pay off the $150,000 loan from Peoples State Bank, Winthrop, Iowa, ("Peoples Bank"), obtained by Donohoo and Mathies to fund a portion of the cash down payment made to Heaton under the 1988 Purchase Agreement. FDIC Ex. 37.
   221. The credit files of Midway indicate the $150,000 loan from Peoples Bank, was refinanced by Midway Loan #2 because the loan at Peoples Bank was in violation of Regulation O, FDIC Ex. 32, as follows:

   a. On or about January 12, 1990, Donohoo and Mathies made a principal and interest payment on Midway Loan #2 in the amount of $18,758.33 and the loan was renewed in the amount of $140,000 and extended to July 12, 1990. FDIC Exs. 32, 41.
   b. The loan officer's comments dated January 12, 1990, at Midway discuss Donohoo's and Mathies' negotiations with Midwest Federal and state, "they are fairly close to completing the negotiations at which time they will gain complete control of the bank. Once this is completed they will be able to get additional investors and our loan will be paid off." FDIC Ex. 32.
   c. On or about July 13, 1990, Donohoo and Mathies caused or permitted the Bank {{10-31-95 p.A-2673}}to pay them each a bonus of $10,000 ("Bonuses"). FDIC Ex. 42.
   d. Also on July 13, 1990, Donohoo and Mathies inquired about a $250,000 loan to finance their purchase of 2,100 shares of new Bank Stock. FDIC Ex. 33.
   e. Also on or about July 13, 1990, the Bonuses were used by Donohoo and Mathies to make a principal and interest payment on Midway Loan #2 in the amount of $17,793.32. FDIC Exs. 41, 42.
   f. Also on or about July 13, 1990, Midway Loan #2 was renewed in the amount of $130,000. FDIC Ex. 39.
   g. The Bonuses were not authorized by the board of directors at either of the Bank's regular board of directors meetings held on or about June 13, 1990, and July 11, 1990, or the special meetings June 28, 1990, and July 9, 1990. FDIC Exs. 28nn-qq.

   230. At all times pertinent to these proceedings, PPA was a Minnesota general partnership, FDIC Ex. 199, the of which Godbout-Bandal held a 95 percent ownership interest, and ASHA Enterprises, Inc. ("ASHA"), FDIC Ex. 199, of which Godbout-Bandal was president, FDIC Ex. 223, held a 5 percent interest.
   231. On or about July 23, 1990, Pentagon Park Associates ("PPA") submitted a written application for a revolving line of credit from the Bank. FDIC Ex. 199. On or about the same day, Godbout-Bandal gave Donohoo and Mathies a check for $100,000, drawn on her personal account at the Bank, towards the purchase of Bank Stock. FDIC Ex. 203. As of July 23, 1990, the balance in Godbout-Bandal's personal account at that time was approximately only $900, less than one percent of the check. FDIC Ex. 201.
   232. Kris Bandal, Godbout-Bandal's husband, prepared the application for credit on behalf of PPA as PPA's manager and negotiated the terms of the credit on behalf of PPA. See FDIC Ex. 199, para. 9(a). Godbout-Bandal had no involvement in putting together the PPA application or in negotiating the terms of the credit. Tr. 1703, 1743. The loan application accounted for the use of all loan proceeds without reference to the purchase of Bank stock. FDIC Ex. 199. At the time that PPA was applying for credit to the Bank, Godbout-Bandal's net worth was approximately $3,000,000, and moneys available in the personal account was $900. Tr. 1703.
   233. Donohoo testified that prior to disbursement of the PPA Loan proceeds both he and Mathies had discussions with Bandal in which they told Bandal that the PPA Loan proceeds could not be used as part of the payment for Bank stock and Bandal testified he had agreed PPA Loan proceeds would not be used to purchase Bank stock. Tr. 1459–1460, 1705–1706.
   234. On or about July 25, 1990, PPA, by Godbout-Bandal, its general partner, executed a note to the Bank in the amount of $485,000, Note #6000681-01 ("PPA Loan"), FDIC Ex. 190, which she personally guaranteed, FDIC Ex. 227, and which ASHA also guaranteed. FDIC Ex. 223.
   235 On or about July 31, 1990, the PPA loan was written as a Revolving Credit Agreement, FDIC Ex. 191, and the Bank advanced the full amount of the line of credit, $485,000. This sum was deposited to PPA's account #2432544 at the Bank. FDIC Exs. 197, 207, 210. The entire amount of the line of credit was advanced immediately by the Bank on July 31, 1990, despite a statement in the application that approximately $207,000 of the funds would not be needed right away. FDIC Ex. 199; Tr. 430.
   236. Also on or about July 31, 1990, Godbout-Bandal issued check #3278 drawn on PPA's deposit account #2432544 at the Bank in the amount of $73,705.65 payable to the Bank. FDIC Ex. 211. The proceeds of check #3278 were used to pay loan #4009841-02 which the Bank had made PPA. FDIC Ex. 211.
   237. Also on or about July 31, 1990, Godbout-Bandal issued check #3279 drawn on PPA's account #2433544 at the Bank in the amount of $183,562.50 payable to the Bank. FDIC Ex. 211. Check #3279 was used to pay loan #600053-02 made by the Bank to Viking Center. FDIC Ex. 211. The payment of loans #4009841-02 and #6000053-02 was in accord with the purpose of the PPA Loan. Stipulated - Tr. 462.
   238. On or about July 31, 1990, Godbout-Bandal also issued check #3280 drawn on PPA's account #2432544 at the Bank in the amount of $200,000 payable to the Bank. FDIC Ex. 206. This check was used to purchase Bank cashier's check #146194 dated July 31, 1990, payable to Union Bank in the amount of $200,000. FDIC Exs. 205, 206; Stipulated - Tr. 465; FDIC Ex. 206. Checks #3278, #3279 and #3280 drawn on PPA's account #2432554 and totaling $457,268.15 were funded by the proceeds of the PPA Loan. Stipulated - Tr. 465; FDIC Ex. 210.
   239. Also on or about July 31, 1990, cashier's check #146194 for $200,000 was deposited to the account of Hudson Road Office ("Hudson Road") at Union Bank, Minneapolis, Minnesota, account #101003400. FDIC Exs. 202, 204; Stipulated - Tr. 465. It was posted to Hudson Road's account August 1, 1990. FDIC Ex. 202. The proceeds of the $200,000 cashier's check #146194 funded check #7513, dated July 26, 1990, drawn on Hudson Road's {{10-31-95 p.A-2675}}account #101003400 at Union Bank in the same amount of $200,000 by S. Kris Bandal, the husband of Godbout-Bandal, and payable to the Bank. FDIC Exs. 202, 203, 204; Tr. 467-471.
   240. Check #7513 funded $200,000 of the $300,000 purchase price for the 2,100 shares of stock purchased by Godbout-Bandal on or about July 30, 1990. FDIC Ex. 203; Stipulated - Tr. 468. Check #7513 was posted to Hudson Road's account #101003400 at Union Bank on or about July 31, 1990, and created an overdraft of $114,454.78. FDIC Ex. 202; Tr. 468-469. The overdraft of $114,454.78 in Hudson Road's account #10100340 at Union Bank was covered by the deposit of cashier's check #146194, the Bank's cashier check, when it was posted to the account on August 1, 1990. FDIC Ex. 202.
   241. It is apparent that of the proceeds of the PPA Loan, the sum of $200,000 was used in the purchase of Godbout-Bandal's Bank stock because there were insufficient funds in the account to cover check #7513, because check #7513 and cashier's check #146194 were both in the amount of $200,000, and because the checks were written and posted to the account within one day of each other. Tr. 469.
   242. In connection with PPA's loan application dated July 23, 1990, PPA submitted a statement of the use of the proceeds. FDIC Ex. 199; Tr. 436. According to the application, the proceeds of the PPA Loan were to be used to settle an obligation owed the First Bank System by Sancher Savoie in the approximate amount of $100,000; for improvements on property in Edina, Minnesota, totaling $207,000; and to settle the Walser note totaling approximately $183,000. FDIC Ex. 199; Tr. 436–437. A substantial portion of the proceeds of the PPA Loan were not used for the purposes stated in PPA's application. FDIC Ex. 199; Tr. 437; Tr. 465–471. The credit file of the Bank did not reflect that any of the proceeds of the PPA Loan were for use by Godbout-Bandal to purchase Bank stock. Tr. 436-439.
   243. $200,000 of the PPA Loan proceeds was used by Godbout-Bandal personally toward the purchase of 2,100 shares of the newly issued 7,000 shares, or 15.27 percent of the total outstanding shares of the Bank. Tr. 437, 465-471.
   244. At the time of PPA Loan was made 15 percent of the Bank's unimpaired capital and unimpaired surplus was $471,150. Stipulated - Tr. 1145–1147.
   245. At the time the PPA Loan was made the Bank's lending limit under section 215.2(h) of Regulation O, 12 C.F.R. § 215.2(h), was $471,150 and the PPA Loan exceeded the Bank's lending limit by $13,850. The loan was substandard and was classified "Substandard" in the FDIC Report of Examination of the Bank as of August 10, 1990 ("1990 Exam Report"). FDIC Ex. 13; Stipulated - Tr. 446. The PPA Loan was accurately classified "Substandard" due to a number of document deficiencies that existed at the time the PPA Loan was made. Stipulated - Tr. 446–447, 451.
   246.A review of the PPA Loan at the August 10, 1990, FDIC Examination of the Bank disclosed a number of weaknesses in structure, documentation, and credit at the time the loan was made, which included that:

   a. The application for Line of Credit dated July 23, 1990 ("Loan Application"), submitted by the borrower to the Bank, indicated that approximately $303M of the line would not be needed at the time the loan was made, but drawn as the need arose. However, the line was drawn to its maximum almost immediately on July 31, 1990. Management did not identify the actual use of the loan proceeds despite the apparent departure from the purposes stated in the Loan Application.
   b. The note was signed July 25, 1990, and the entire proceeds were advanced by July 31, 1990, but the financial statements from Godbout-Bandal and ASHA Enterprises, Incorporated ("ASHA"), the partners of Pentagon Park Associates, are dated as of August 2, 1990, indicating they were not received until after the loan was advanced.
   c. There was insufficient information on the financial statements or in the credit files to support the value of assets shown on the financial statements of Godbout-Bandal and ASHA.
   d. Various assets on the financial statements of Godbout-Bandal and ASHA are reported net of underlying liabilities. As such, the actual level of liabilities and their debt service requirements were not known.
   e. Revenue levels reported on the financial statements of Godbout-Bandal and ASHA were only projections with no detail provided relating to the source of the income or whether the income projections were realistic.

   f. The contingent liabilities of Godbout-Bandal and ASHA were not disclosed.
   g. A financial statement for Pentagon Park Associates was not in the credit file and the balance sheet in the 1989 tax return for Pentagon Park Associates suggested a highly leveraged condition.
   h. The net operating income projection of $147M for the Edina property taken as collateral for the loan ("Edina Property") was not supported by documentation.
   i. A rent roll obtained during the examination indicated that one-third of the Edina Property was leased on a month-to-month basis by the U.S. Government, which happened to be the Census Bureau. This fact raised concerns relative to the property's continued ability to achieve estimated net operating income.
   j. No outside, independent appraisal of the Edina Property was obtained. The value indicated in the credit file was predicated upon a 1989 real estate tax statement which was unsupported by the property's reported 1989 net operating income.
   k. the lack of supported value in conjunction with bank's junior lien position in the Edina Property raised questions regarding the level of collateral support it provided.
   l. A contract for deed between Sancher Savoie Properties and The Bedroom, Inc., was assigned to the Bank as collateral for the Pentagon Park Associates Loan. The assignment to the Bank was executed by ASHA and Godbout-Bandal, general partners for Sancher Savoie Properties. However, the May 5, 1983, partnership agreement for Sancher Savoie Properties indicated that ASHA and S. Kris Bandal were the general partners. In addition, Sancher Savoie's 1989 tax return was signed by S. Kris Bandal as general partner. No information was provided documenting a change in the general partners of Sancher Savoie Properties, raising questions regarding the validity of the assignment of the contract for deed.
   m. An independent outside appraisal of the property underlying the contract for deed was not prepared. A Bank-prepared appraisal used the April 25, 1986, contract purchase price and sales package prepared by the vendee as basis for value.
   n. The Loan Application indicated that Sancher Savoie Properties was attempting to obtain a discount on a second real estate mortgage at another financial institution relating to property subject to the contract for deed. The Loan Application also indicated that the payment history on this note was clean except June and July of 1990. This information suggested that Sancher Savoie Properties was having difficulties servicing this second mortgage.
   o. Documentation to support the worth of the $400,000 Walser Note pledged to secure the Pentagon Park Associates Loan was seriously lacking.
   p. The 1989 tax return on Pentagon Park Associates was signed by the preparer on August 6, 1990, and by Godbout-Bandal on August 7, 1990. This suggests that information was not obtained until after the credit was advanced.
   q. Both the 1989 tax return of Pentagon Park Associates, Inc. and the financial statements of the guarantors, Godbout-Bandal and ASHA, were listed as included in the Loan Application. These financial documents were all dated subsequent to the date stated on the Loan Application suggesting that they were either inserted subsequent to the date the loan was made or the package as a whole was presented after the loan was made.
   `r. The Revolving Credit Agreement between Pentagon Park Associates and Capital Bank was dated July 31, 1990, six days after the Note was signed.
   s. Section 4A of the Revolving Credit Agreement required that Pentagon Park Associates submit financial statements including balance sheets, statement of income, tax return for such year, and rent rolls as soon as available and in any event within 90 days after the end of each fiscal year of the borrower (which may be a calendar year). The Bank did not obtain a balance sheet or statement of income prior to advancing the credit and a rent roll was not obtained until examination was in progress.
   t. Paragraph 3 of the 1984 C&D Order requires that bank management obtain complete credit file documentation prior to extending any credit. Since information was lacking, the Bank was in violation of this section of the Order.

   265. At all times pertinent to these proceedings, Peoples State Bank, Winthrop, Iowa ("Peoples Bank"), was an insured state nonmember bank. FDIC Ex. 2; Admitted - Answer ¶51. At all times pertinent to these proceedings, First Winthrop Bancorporation, Inc., of which Donohoo owned, controlled or had the power to vote approximately 50 percent of the outstanding and issued stock, owned in excess of 90 percent of Peoples Bank, Admitted - Answer ¶54(a). At all times pertinent to these proceedings, Donohoo was a director and chairman of Peoples Bank's board of directors (Admitted - Answer ¶54(a), Tr. 1328) and director and either vice president or secretary/ treasurer of First Winthrop Bancorporation, Inc. Tr. 1328.
   266. Donohoo suggested that Rasmussen seek a loan from Peoples Bank to finance his purchase of Bank stock on July 30, 1990, and presented the loan to the bank. Tr. 1468–1469; 1663.
   267. Donohoo had substantial involvement in Peoples Bank making the loan to Rasmussen. Tr. 582–583. Peoples Bank was a community bank and Rasmussen was not a resident of Iowa. Tr. 1641–1642. By letter dated July 19, 1990, Donohoo forwarded the personal financial statement of Rasmussen and his wife to Lee Bossom, president of Peoples Bank, and thanked him for his assistance. FDIC Ex. 250; Admitted - Tr. 1663.
   268. On or about July 30, 1990, Peoples Bank made an unsecured loan to Rasmussen in the amount of $100,000, loan #4100-29836 ("Rasmussen Loan"). FDIC Ex. 252; Admitted - Answer ¶56. Tr. 1665. On or about July 30, 1990, the $100,000 proceeds of the Rasmussen Loan was wire-transferred by Peoples Bank to Rasmussen's account #702-1608778 at the First National Bank of {{10-31-95 p.A-2679}}Minneapolis ("First Bank"). FDIC Exs. 255, 258. Check #5647 in the amount of $100,000 was drawn on Rasmussen's account #702-1608778 on July 26, 1990, by Rasmussen, payable to the Bank for the purpose of purchasing 700 of the 7,000 newly issued shares of stock of the Bank. FDIC Ex. 203; Stipulated - Tr. 512. The proceeds of the Loan were transferred to the Bank on or about July 30, 1990, to fund check #5647, Admitted - Tr. 1662 and 1665. and the purpose of the loan was to purchase 700 shares of stock of the Bank. Tr. 1662; Admitted - Answer ¶56.
   269. Five months after issuance, in December of 1990, the lending bank requested security for the loan. Rasmussen offered the stock of the Bank, but the lending bank requested a real estate mortgage, which Rasmussen provided on his office building. Tr. 1665.
   270. On or about July 30, 1990, 5 percent of Peoples Bank's unimpaired capital and unimpaired surplus was $88,750. Stipulated - Tr. 1145–1147. The minutes of the board of directors for the meetings of Peoples Bank immediately prior to the date the Rasmussen Loan was made do not mention the Rasmussen Loan in any manner, and it hence did not receive the prior approval of the majority of the entire board. FDIC Ex. 369; Tr. 579–580. At a later time approval of the loan was given by the Directors as one of a string of other loans.Tr. 580–581.

   1. The 1984 Order to Cease and Desist
   271. An order entered without Respondent admitting or denying the allegations but requiring Capital Bank to cease and desist from numerous alleged violations, including failure to maintain adequate ALLL reserves was entered by the FDIC on August 10, 1985. FDIC Ex. 5.
   272. By letters dated June 27, 1988, October 1, 1988, November 18, 1988, January 20, 1989, December 14, 1989, and February 12, 1990, the Bank submitted written responses to the FDIC indicating the board of directors had reviewed and discussed the 1984 C&D Order. FDIC Exs. 6b-f.
   273. At the Bank's special board of directors meeting held July 1, 1988, and attended by Donohoo, FDIC Examiner Kart indicated that the Bank was not in full compliance with, among other paragraphs, paragraphs 3 and 8 of the 1984 C&D Order. FDIC Ex. 28d.
   274. At the September 29, 1988, regularly scheduled meeting of the Bank's board of directors, attended by Donohoo and Mathies, Donohoo reviewed the 1984 C&D Order and advised the board that the Bank was complying with the Order. FDIC Ex. 28h.
   275. At the November 15, 1988, January 20, 1989, April 27, 1989, June 23, 1989, August 31, 1989, December 13, 1989, February 9, 1990, April 11, 1990, June 13, 1990, and August 15, 1990, regularly scheduled meetings of the Bank's board of directors, all attended by Donohoo and Mathies, and after November 15, 1988, all attended by Rasmussen, the 1984 C&D Order was reviewed and it was stated in the minutes that the Bank was in full compliance with the Order. FDIC Exs. 28j, n, r, t, v, bb, ff, kk, nn, rr.
   2. Contacts Between About July 27 and 31, 1990
   276. On or about July 27, 1990, the Department of Commerce for the State of Minnesota advised Kermit H. Kirchhoff, Review Examiner at the Kansas City Regional Office of the FDIC, that the Bank had amended its Articles of Incorporation to authorize the issuance of 7,000 shares of new stock. On or about the same day, Review Examiner Kirchhoff contacted Dennis Thorn, Field Office Supervisor for the Minneapolis Field Office of the FDIC, and requested that he visit the Bank to investigate the stock issuance.Tr. 1110–1111.
   277. On the morning of July 30, 1990, at approximately 9:00 a.m. or 10:00 a.m., Thorn and FDIC Examiner Brian Peters met with Donohoo and Mathies at the Bank to discuss the issuance of 7,000 shares of new authorized Bank stock. Tr. 789–790. Donohoo advised Thorn that the $1,000,000 to be paid for the 7,000 shares was on deposit, which was incorrect, but that the 7,000 shares of stock had not yet been issued. Tr. 790–791. Donohoo advised Thorn that the investors for the stock were himself, Mathies, Field, Rasmussen and Godbout-Bandal.Tr. 791.
   278. Donohoo further advised Thorn that he and Mathies had obtained financing for their purchase of 2,100 shares of the 7,000 shares of stock through a joint loan from Midway, that Field purchased his 2,100 shares with his own resources, and that he did not know the source of funding for the {{10-31-95 p.A-2680}}purchases of the stock by Godbout-Bandal and Rasmussen. Donohoo advised Thorn that the Bank had not provided any financing for the stock acquisition.Tr. 791.
   279. At the time Donohoo advised Thorn that he did not know the source of funding for the purchase of stock by Godbout-Bandal and that the Bank had not financed the purchase of any of the stock of the Bank, Donohoo and Mathies knew the Bank had made a loan to Pentagon Park Associates, a related interest of Godbout-Bandal, and that a portion of the proceeds were to be used to fund her purchase of 2,100 of the 7,000 shares of stock of the Bank.
   280. Thorn asked Donohoo and Mathies why the FDIC was not apprised of their recapitalization plans as previously requested by the FDIC in correspondence with the Bank's board of directors, and why there was such a sense of urgency to raise capital at this time.Tr. 791. Mathies and Donohoo explained that it was necessary to issue the stock at this time to avoid violating the 1984 C&D Order and thereby risking the assessment of civil money penalties, Tr. 791–792, and to avoid the termination of the Bank's insurance, since their equity capital was approximately 5.2 percent after a $700,000 provision to the Bank's loan and lease loss allowance on or about June 30, 1990. Tr. 793.
   281. Donohoo and Mathies advised Thorn that the Bank had not informed Midwest Federal of the Bank's intentions to issue additional stock, explaining that their attorney, Kevin Costley, had advised them that no change in control would occur as the result of the stock issuance.Tr. 792, 793. Costley was not the attorney for Donohoo and Mathies at that time, but was the attorney for the Bank. Tr. 2161.
   282. Thorn advised Donohoo and Mathies that it appeared that a change in control would occur if the stock was issued, and discussed the requirements of the CBCA, 12 U.S.C. § 1817(j). Thorn advised that civil money penalties can be imposed as the result of violations of the CBCA.Tr. 793–794.
   283. Thorn requested that Donohoo and Mathies delay issuance of the stock until they or their attorney had discussed the matter with the FDIC's Kansas City Regional Office. Donohoo and Mathies would not agree to delay the issuance of the stock, but Donohoo did advise Thorn that he would have Costley contact the FDIC's Kansas City Regional Office.Tr. 794.
   284. On or about July 30, 1990, at approximately 1:30 p.m., the Kansas City Regional Office of the FDIC telefaxed a letter to the Bank's board of directors with a copy to their attorney, Kevin Costly ("July 30 Letter"). FDIC Ex. 277. The letter advised the Bank that the FDIC believed the issuance of the 7,000 shares of stock would constitute a change in control of the Bank requiring prior approval of the FDIC, and further advised the board of directors of the potential for civil money penalties ("CMPs") if the CBCA was violated and that the FDIC would have little recourse but to recommend CMPs. FDIC Ex. 277. The letter also stated that the FDIC's "[e]fforts to obtain information in regard to the source of the funding for a large portion of the planned injection have been unsuccessful..." FDIC Ex. 277.
   285. At the time the July 30 Letter was telefaxed, the FDIC believed that the transaction had not yet occurred. At approximately 2:30 p.m. on July 30, 1990, Kirchhoff discussed the matter by telephone with Costley. Costley advised Kirchhoff that he did not know whether the stock had been issued.Tr. 1113, 1114.
   286. The stock had in fact been issued prior to the time of Kirchhoff's and Costley's discussion. FDIC Exs. 277, 278. On the same day, July 30, 1990, after Thorn and Peters left the Bank, and prior to 1:30 p.m., Donohoo and Mathies caused or permitted the Bank to complete the stock issuance. FDIC Exs. 277, 278.
   287. Prior to the issuance of the 7,000 shares, neither Costley, the Individual Respondents, or any other representatives of the Bank contacted the FDIC to discuss whether a change in control subject to the CBCA would occur as a result of the stock issuance. FDIC Ex. 278; Tr. 1113.
   288. By letter dated July 31, 1990, Costley responded on behalf of the Bank's board of directors to the FDIC's letter dated July 30, 1990. FDIC Ex. 278. At all times when Costley gave his opinion that the CBCA was not applicable to the issuance of the 7,000 shares of Bank stock, Costley represented the Bank and not the Individual Respondents.Tr. 2161.
   289. Costley advised that he had given the board of directors his opinion that a CBCA notice was not required to be filed by the new investors. FDIC Ex. 278. Costley wrote, "Based on the facts as I understand them, it was, and continues to be, my opinion that no notice is required under the Change in Bank
{{10-31-95 p.A-2681}}Control Act." FDIC Ex. 278. Costley's opinion had not been reduced to writing prior to July 31, 1990. Tr. 1542.
   290. Costley's July 31, 1991, letter based his opinion on the "following facts" stated in his letter:

   a. No one investor held more than 25% of the Bank's stock after the purchase.
   b. The group never met together as a group to discuss their prospective investment in the Bank.
   c. Some of the investors do not even know the identity of some of the other investors.
   d. There is no agreement or understanding among these investors regarding the voting of their shares.
   e. Each of the investors (with the exception of Mathies and Donohoo) obtained their funds solely from their own personal financial resources and did not rely in any way on the cross pledge or any other type of support from any of the investors.

   a. of the Misenor Loan and Field Loans #1 and #2. Tr. 2100–2101 and 2167;
   b. of the fact that Field, Donohoo, Mathies and Godbout-Bandal was previously associated with the Capital Partners scheme to obtain control of CCC upon approval of an application to be filed, or that any of them had an ownership interest in CCC, Tr. 2100, 2103 and 2167;

c. of the Rasmussen Loan, Tr. 2102-2102 and 2165;
   d. of the PPA Loan or the Overdraft Loan and in fact believed no financing was involved on the part of Godbout-Bandal, Tr. 2102 and 2165–2166;
   e. that Donohoo and Mathies had attempted to assemble an investment group to exercise the option under the 1989 Purchase Agreement to acquire CCC or that Godbout-Bandal or Field were part of that group, Tr. 2166–2167;
   f. of any of the financing involved for the investments in CCC by Mathies, Donohoo, Misenor, Field, and Christiansen, Tr. 2167; and
   g. of the Capital Partners account and scheme to obtain, with approval, control of the Bank through control of the holding company, Tr. 1542–1543.

   293. On or about August 10, 1990, the FDIC commenced an examination of the Bank ("1990 FDIC Examination"). FDIC Ex. 13. Prior to commencing the 1990 FDIC Examination, FDIC Examiner-In-Charge Nyberg was advised by Thorn of the Kansas City Regional Office's concerns that a stock issuance may have occurred and that he should review the circumstances under which the stock was issued. Tr. 508.
   294. During the course of the examination, Nyberg met with Misenor and Mathies to discuss the purpose of the Misenor Loan. Tr. 529. Misenor advised Nyberg that the purpose of the Misenor Loan was for personal investments by his parents, including, for marketing gardening equipment. Tr. 529. Mathies, despite knowing the truth of the purpose of the loan, permitted Misenor to misrepresent its purpose to Nyberg. Tr. 529.
   295. By letter dated August 3, 1990, to the Bank's board of directors, the FDIC reiterated its position that it believed a violation of the CBCA had occurred and requested that the CBCA notification forms be completed by the investors. FDIC Ex. 280. By letter dated August 14, 1990, the FDIC responded to Costley's July 31, 1990 opinion letters, stating that the FDIC did not have sufficient information to conclude that the investors did not act in concert when they acquired the stock. The letter requested additional information, including "all documentation related to the financing and/or funding for the stock purchase ..." FDIC Ex. 281.
   296. By letter dated August 14, 1990, to Donohoo, Heaton advised Donohoo that existing shareholders had not been informed of the stock issuance nor given a chance to participate in the purchase. FDIC Ex. 282.
{{10-31-95 p.A-2682}}
   297. Costley responded on behalf of the board of directors of the Bank to the FDIC's August 14, 1990, letter with a letter dated September 11, 1990. FDIC Ex. 284. Costley's letter stated, "[t]he Board of Directors was required to sell more than a 50% interest in the Bank since, as a practical matter, no investor would ever buy stock in the Bank if another single shareholder owned a majority block of the stock." FDIC Ex. 284.
   298. The September 11, 1990, letter promised to send the remaining documents relating to financing for the purchase of the stock, but none was ever provided for Godbout-Bandal or Rasmussen. FDIC Ex. 284.
   299. On or about September 19, 1990, the FDIC held a meeting with the Bank's board of directors to discuss the results of the 1990 FDIC Examination. Tr. 591. Donohoo, Mathies and Rasmussen, Misenor, Sherman Moen from the Department of Commerce for the State of Minnesota, and Examiner Nyberg, Review Examiner Kirchhoff and Field Office Supervisor Dennis Thorn for the FDIC, were present at the meeting. Tr. 592 and 1122.
   300. In addition to discussing the condition of the Bank, FDIC Examiner Nyberg questioned the directors regarding the Capital Partners and the circumstances surrounding the 7,000 shares of stock of the Bank issued on or about July 30, 1990. Tr. 592. Donohoo, Mathies and Rasmussen refused to provide answers to questions asked by the FDIC about the stock issuance. Tr. 1123–1125.
   301. Subsequent to the September 19, 1990, meeting, Donohoo and Mathies advised Misenor that it was necessary to issue the 7,000 shares to maintain control of the Bank, that the RTC and FDIC were conspiring to remove them from the Bank, and that the FDIC would be required to establish a new regulation called the "Donohoo Regulation" to cover the procedures used in obtaining control. Tr. 225–226.
   302. The FDIC sent "15 day letters" to the Respondents and to Costley soliciting within that time frame any facts which would make assessment of a CMP inappropriate. By letter dated February 27, 1991, Mary Curtin responded, FDIC Ex. 289, stating that $100,000 of the proceeds of the PPA loan had been used to satisfy a prior lien to First National Bank in St. Paul on the property subject to the contract for deed, and that approximately $130,000 of the proceeds of that loan was used for improvements to the Edina Property. Proceeds of $200,000 were actually used by Godbout-Bandal on July 31, 1990, to fund a portion of the purchase of her Bank stock.
   303. Curtin's February 27, 1991, letter further states that "all facts were fully disclosed to Costley" when he rendered his CBCA opinion to the shareholders. FDIC Ex. 289. It is found as a fact that, as noted above, not only had all facts had not been disclosed to Costley but material misrepresentations had resulted.

   304. Rasmussen forwarded his April 29, 1991, financial statement to the Bank, addressed to Misenor. FDIC Ex. 344; Tr. 228. Misenor delivered the financial statement to Mathies who asked him to have Rasmussen delete the $280,000 contingent liability reflected on the financial statement and the $100,000 liability to Peoples Bank. Tr. 228–232. Mathies stated to Misenor that he wanted the liabilities removed from the Rasmussen financial statement to keep those liabilities from being discovered by the examiners. Tr. 229. Misenor refused to contact Rasmussen and advised Mathies to do so himself. Tr. 231–232.
   305. The FDIC did not learn of the Rasmussen Loan until after the Notice was issued in this matter in September 1992, when it learned of the existence of the Rasmussen Loan from Misenor. Tr. 1130–1131.
N. THE EMPLOYMENT AGREEMENTS
   306. On or about May 25, 1989, the Bank's board of directors authorized Donohoo to enter into employment agreements with Donohoo and Mathies. FDIC Ex. 28s.
   307. Donohoo testified that the reasons for his seeking an agreement were that he had undertaken his position expecting it to be a short term matter, and found that he had become enmeshed in the bank's operations to the point where he had given up his private practice, which he could not regain in any short period, that he was spending an inordinate number of hours working, and that he had no security, without an employment agreement, that he could not be eventually discharged without adequate compensation for all he had done. Tr. 1491–1492.
   308. Mathies testified that the reasons for his seeking an agreement were very much the same, that he was being asked to give a {{10-31-95 p.A-2683}}commitment to continue his consultancy on a regular, full time basis which he was already exceeding in hours worked, and that he also wanted some guarantee of benefit. Tr. 2021.
   309. Both Donohoo and Mathies testified that the agreements were necessary in order to retain their employment at the Bank, Tr. 1492, 2022, though obviously at this time both were deeply enmeshed in attempts to both save the bank and to establish a group of investors, with themselves participating in ownership and control.
   310. Donohoo addressed the Board, which directed that the employment agreements provide for compensation in the event of termination, but did not discuss the terms of the agreements or their potential effect on the Bank. FDIC Ex. 28s; Tr. 1174. Donohoo, one of the three members of the Bank's board of directors, did not abstain from the discussion nor is it reported in the minutes that he abstained from the vote by directors to authorize such employment agreements. FDIC Ex. 28s; Tr. 1174.
   311. Donohoo and Mathies entered into employment agreements with the Bank dated June 1, 1989 (Employment Agreements). FDIC Exs. 302 and 303.
   312. Section Four of the Employment Agreements required the Bank to pay Donohoo and Mathies twice the sum of their highest annual salary, highest annual bonus and value of benefits received over the two years prior to termination, if the Bank terminated Donohoo or Mathies for reasons other than breach of fiduciary duty. FDIC Exs. 302 and 303.
   313. Section Five of the Employment Agreements required the Bank to make a lump sum payment to Donohoo and Mathies calculated in the same method as Section Four if Donohoo's or Mathies' employment was terminated within one year of a change in control by either the Bank, or by Donohoo and Mathies. ("Parachute Provision".) FDIC Exs. 302 and 303. The only exceptions to the Parachute Provision were if the Bank terminated the employee for breach of fiduciary duty, the employee terminated his employment without good reason, or the employee died, became disabled or retired. FDIC Exs. 302 and 303.
   314. As of May 25, 1989, Donohoo had been president of the Bank since August 17, 1988 and Mathies had been a full-time consultant since September 1, 1988.
   315. When Sections Four and Five were included in the Employment Agreements it was the intention of Donohoo and Mathies to sell the Bank as expressed in the "Prospectus." FDIC Ex. 22. The Parachute Provision of the Employment Agreements were not necessary to attract or retain Donohoo and Mathies as officers of the Bank. FDIC Ex. 22; Tr. 1184–1185.
   316. As of June 1, 1989, the amount of the payment to either Donohoo or Mathies if either Section Four or Section Five of their Employment Agreements was triggered would have been approximately $170,000, or $340,000 in the aggregate, without taking into account the value of their benefits. The Bank's liability, if the Parachute provisions were triggered as to both Donohoo and Mathies, represented 8 percent of the Bank's equity capital, and was a significant amount in relation to the Bank's condition and capital structure. Tr. 1175.
   317. On or about July 11, 1990, the Bank's board of directors, two of the three of which were Donohoo and Mathies, voted unanimously to extend Donohoo's and Mathies' Employment Agreements ("Amended Employment Agreements"). FDIC Ex. 28qq. The third director was Rasmussen, and by that time all three of them had commenced the mechanism to acquire control of the Bank through the issuance of 7,000 shares of newly authorized stock. FDIC Exs. 28oo and 28pp.
   318. There was no discussion of the terms, and Donohoo and Mathies, interested parties, not only did not refrain from the board discussion, but also voted to approve them. FDIC Ex. 29qq; Tr. 1179.
   319. The Amended Employment Agreements were executed August 1, 1990, which was two days after the 7,000 new shares of Bank stock were issued, FDIC Exs. 302 and 303; Tr. 1176, and were unnecessary to retain Donohoo and Mathies as officers of the Bank. FDIC Ex. 22; Tr. 1185.
   320. As of August 1, 1990, the amount of the payment to either Donohoo and Mathies required under either Section Four or Section Five of the Amended Employment Agreements would have been at least $315,000, or $630,000 in the aggregate, without taking into account the value of their benefits. Tr. 1176–1177. This aggregate amount was 22 percent {{10-31-95 p.A-2684}}of the Bank's capital (Tr. 1176-1178), which was significant given the Bank's condition. Tr. 1178.
   321. On or about October 12, 1990, the LAW review of the Olander Appraisal highlighted several points which it considered to be important and which could result in different emphasis and conclusions by different potential purchasers. FDIC Ex. 158. 687. Number 19 of the LAW Review's points stated:

   19. There appears to be a significant employment agreement between the Bank and Messrs. Donohoo, Mathies and Misenor. It appears very expensive and is not well described in the appraisal report. Based on the literal comments in the appraisal report, it appears that it will cost the Bank at least $400,000 to get out of the agreement.

   323. On or about October 31, 1991, a lawsuit styled Alice E. Wenzel, Ronald G. Wenzel, and Lawrence D. Wenzel, Trustees under the Gilbert P. Wenzel Testamentary Trust and Capital City Corporation vs. Craig R. Mathies and Richard D. Donohoo, Shari Mathies, Bruce Rasmussen, Wayne Field, Cheryl Bandal, Capital Bank, John Roe and Mary Roe and John Doe and Mary Doe, was filed in the Ramsey County, Minnesota, District Court ("Wenzel Lawsuit"). FDIC Ex. 304; Admitted - Answer ¶ 38(a).
   324. At all times pertinent to this proceeding, the Law Firms represented all defendants to the Wenzel Lawsuit. Admitted - Answer ¶17(a).
   325. The plaintiff trustees in the Wenzel Lawsuit ("Trustees") were the holders of the Wenzel Note secured by 100 percent of the outstanding stock of CCC. The other plaintiff was CCC, which owned 6,685 shares of the stock of the Bank, which prior to the July 30, 1990, stock issuance represented in excess of 99 percent of the outstanding and issued shares of the Bank and afterward 48 percent. FDIC Ex. 304a.
   326. The complaint initiating the Wenzel Lawsuit ("Complaint") alleged that Donohoo and Mathies breached their duties as directors and shareholders of CCC by illegally issuing the 7,000 shares of Bank stock. Individual counts were as follows:

   a. Count I of the Complaint also alleged Donohoo and Mathies breached their fiduciary duties as directors of CCC and the Bank by illegally issuing the 7,000 shares of Bank stock.
   b. Count II of the Complaint alleged that Donohoo and Mathies, as directors of the Bank, breached their fiduciary duty owed CCC as a shareholder of the Bank by issuing the 7,000 shares of stock.
   c. Count III of the Complaint alleged that Donohoo and Mathies, as co-shareholders with the Trustees, breached their duty owed the Trustees as co-shareholders by issuing the 7,000 shares of stock.
   d. Count IV of the Complaint alleged that Donohoo and Mathies breached the Purchase Agreement and pledge agreement by issuing the 7,000 shares of stock.
   e. Counts III and IV of the Complaint are not brought against Donohoo and Mathies as directors, officers or employees of the Bank.

   a.provide a written request to Capital Bank to be indemnified as required by subdivision 3, section 300.083, Minn. Stat. Ann. § 300.083, Subd. 3 (West Supp. 1992); Admitted - Answer ¶38(g) (i);
   b.provide a written affirmation of good faith belief that all indemnification criteria have been satisfied as set forth in subdivision 2 of the section 300.083, Minn. Stat. Ann. § 300.083, Subd. 2 (West Supp. 1992), as required by subdivision 3(a) of section 300.083, Minn. Stat. Ann. § 300.083, Subd. 3(d) (West Supp. 1992); Admitted - Answer ¶ 35(h)(i); and
   c.provide a written undertaking to repay all amounts paid or reimbursed by the Bank if it is subsequently determined that the criteria for indemnification have not been satisfied as required by subdivision 3(a) of section 300.083, Minn. Stat. Ann. § 300.083, Subd. 3(a) (West Supp. 1992). Admitted - Answer ¶38(g)(i).

   343. In 1992, Lloyd A. Amundson purchased the Bank Stock Loan from Larry Haubrich for $1,118,217.81 or $167.27 per share. Tr. 1020–1024; FDIC Ex. 349. On or about December 7, 1992, Amundson paid $2,666,376.52 for the 7,000 shares, $380.91 per share, issued on or about July 30, 1990. FDIC Ex. 349.
   344. In the aggregate, Amundson paid $3,784,594 for 13,685 of the Bank's 13,750 issued and outstanding shares of stock representing 99.527 percent of the total Bank stock, $276.55 per share. FDIC Ex. 349.
   345. Amundson paid $260,799.08 in excess of the Bank's equity capital of $3,523,795.25 as of December 4, 1992. FDIC Ex. 349.
   346. On or about December 7, 1992, Donohoo and Mathies and Mathies' wife entered into a Stock Purchase Agreement to sell 2,100 shares of Bank stock to Amundson. FDIC Ex. 345.
   347. As part of the Stock Purchase Agreement, Donohoo and Mathies were paid as follows:

   a. $627,600 by two checks #593669 and #583668, respectively in the amount of $236,574.16 which was used to pay off Midway Loan #3, and in the amount of $391,025.84. FDIC Exs. 345, 350; Tr. 2134–2135.
   b. $60,000 per year each for five years in return for executing a consulting and noncompete Agreement; FDIC Exs 345, 346.
   c. $200,000 each at closing for their resignations as officers and/or directors; FDIC Exs. 345, 350; Tr. 2138.
   d. title to their Bank automobiles, for which Amundson reimbursed the Bank $30,276.52; FDIC Ex. 345, 349.
   r. $50,000 in the aggregate towards their defense in this action; FDIC Ex. 345.
   f. $400,000 placed into escrow with Lindquist & Vennum for any liability or expenses incurred in connection with their obligation on the Wenzel Note. FDIC Exs. 345, 349 and 350; Tr. 2137.

   1. Field
   355. Field submitted financial statements claiming a net worth for various dates as follows:

FDIC Exs. 338, 339, 340, 341, 342 and 343.
   356. Field's adjusted Gross Income was as follows: