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FDIC Enforcement Decisions and Orders

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{{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.

[Next page is A-2571.]

{{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

INTRODUCTION

   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


1 Charges against Leonard C. Misenor ("Misenor") and the Bank have been withdrawn. For brevity, Respondents will be referred to by surname. Jointly they will be referred to as the "Individual Respondents" or the "Law Firm Respondents."

2 Respondent Field appears pro se. All other Respondents are represented by common counsel. Respondent Rasmussen filed Exceptions on his own behalf and on behalf of Bruce A. Rasmussen & Associates, Ltd.

3 A CMP of $50,000 was originally sought against Rasmussen. When, after the issuance of the original Notice, the evidence of Rasmussen's illegal insider loan was discovered, FDIC Enforcement Counsel amended the Notice increasing this amount to $750,000.

4 Citations to the record shall be as follows:
to the Recommended Decision: "R.D. at ____"; to the transcript: "Tr. ____"; to the Respondents' Exceptions: "Resp. Exc. at ____"; to the FDIC's Exceptions: "FDIC Exc. at ____"; to Respondent Field's Exceptions: "Field Exc. at ____"; to Respondent Rasmussen's Exceptions: "Rasmussen Exc. at ____"; to the FDIC's Exhibits: "FDIC Ex. No. ____"; to the Respondents' Brief: "Resp. Br. at ____"; to the FDIC's Brief: "FDIC Br. at ____"; to the ALJ's Findings of Fact or Conclusions of Law: F.F. No. ____"; "C.L. No. ____."

5 Respondents assert in their Exceptions that the delay of eight months between submission of final briefs and the ALJ's decision violated 12 C.F.R. § 308.08, which provides that an ALJ shall file his recommended decision "[w]ithin 45 days after expiration of the time allowed for filing reply briefs," prejudiced Respondents and deprived them of due process. Respondents' Exception is particularly unwarranted in light of the size of the record in this Continued

{{10-31-95 p.A-2572}}Directors ("Board") of the FDIC with supplemental information. Timely responses to this request were made. Two subsequent reopenings of the record were required, however, to compel Respondents' compliance with the Board's request.

OVERVIEW

   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.

SUMMARY OF THE FACTS7

   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,


5 Continued case and the fact that counsel took in excess of six months to brief this case. The Board finds the delay insufficient to prejudice Respondents or deprive them of due process. Respondents' additional concerns regarding the ALJ's "miscitations and omissions" can be adequately addressed by the Board, which fully reviews the record.


6 See page 25, infra.

7 The ALJ describes the details of this case in seventy-eight pages. The Board, therefore, will limit itself to a summary of the critical facts.

8 CCC is a one-bank holding company. Capital Bank is its only significant asset. Thus, ownership or control of CCC would provide ownership or control of the Bank.

9 A third participant in the purchase of CCC shares had a falling out with Donohoo and resigned as a director of Capital Bank and disassociated himself from Donohoo and Mathies and the takeover of the Bank.

10 Respondents Donohoo and Mathies paid Heaton $627,680 in cash and assumed one-half of Heaton's liability to the Wenzels (approximately $400,000). The cash portion of the purchase price was financed through a $150,000 loan to Donohoo from People State Bank, Winthrop, lowa ("Peoples Bank"), and a $500,000 loan to Donohoo and Mathies from The Midway National Bank of St. Paul, Minnesota ("Midway").

11 Capital Bank had a total of 6,750 shares issued and outstanding, of which 6,685 shares were owned by CCC. The remaining 65 shares were owned by three shareholders who took no part in these events.
{{10-31-95 p.A-2753}}Donohoo and Mathies sought investors to buy "investment units" to pay off the $500,000 loan from Midway which they had used to purchase their CCC shares, and also to finance the exercise of their option to purchase the remaining shares of CCC.12 Respondents' stated intent was to obtain control of Capital Bank through ownership of CCC, Tr. 1499-1500, 2026. By fall of 1988, Donohoo was a director, chairman of the board, and president of CCC. He was also a director, vice chairman of the board, and president of Capital Bank. Although nominally hired by Capital Bank as a consultant, Mathies was in actuality serving as the chief executive officer of Capital Bank from the fall of 1988 until his election as executive vice president in May 1989. By January 1989, Donohoo and Mathies controlled Capital Bank's board of directors, having replaced independent directors with their selections.13 Donohoo and Mathies also had effective control of the day-to-day affairs of CCC after February 1990, when Mathies was added to the CCC board.
   The group attempted, but failed, to acquire control of Capital Bank through control of CCC because insufficient investor funds were obtained while exercise of the option was worthwhile. First, the third original investor and other potential investors defected from the plan. Second, shortly after Donohoo and Mathies acquired their interest in CCC, Capital Bank began experiencing large losses which led to CCC's insolvency in mid-1989.14 Facing the loss of investment contributions already made or expected, Respondents Donohoo and Mathies formed a second investor group around a nucleus of survivors from the first group.15 Neither the first nor the second investor group exercised the option to purchase the remaining shares of CCC. From late 1988 through June 1990, Donohoo and Mathies engaged in protracted, but ultimately unsuccessful, negotiations to purchase the Bank Stock Loan from Midwest Federal and then from the Resolution Trust Corporation ("RTC"), receiver for Midwest Federal16 which held the defaulted Bank Stock Loan. By purchasing the loan from Midwest and replacing Midwest Federal/RTC with themselves as the holder of the Bank Stock Loan, they would gain control of the Capital Bank shares collateralizing the Bank Stock Loan. Tr. 1507-8, 2026. The RTC had obtained an appraisal of $2,550,000 for the 6,685 shares of stock securing the Bank Stock Loan and was soliciting bids from parties interested in purchasing Capital Bank by purchasing the Bank Stock Loan. FDIC Ex. No. 157; Tr. 918-28. The RTC announced its desire to sell Capital Bank by the end of July 1990. FDIC Ex. No. 141. Thus, by July 1990, Respondents Donohoo, Mathies, Field, and Godbout-Bandal faced imminent loss of their considerable investment in gaining control of Capital Bank because the Wenzels, holders of a secured interest in 100 percent of the CCC stock, were threatening foreclosure, and the RTC was about to sell Capital Bank from under them.
   Had the RTC sold the Bank Stock Loan, Respondents would have been left with no interest in Capital Bank, 24.9 percent interest in a worthless holding company which was about to be foreclosed upon, no employment for Donohoo and Mathies, and a continuing obligation on their part to make payments on the Wenzel Note, which was a term of their original CCC stock purchase from Heaton.17 R.D. at 11; Tr. 1413.
   At this point their investment focus shifted

12 In a letter dated June 14, 1988, from Donohoo to Midway, Donohoo stated "[the loan from Midway] would be repaid from sale of our existing bank or more likely the contribution of additional investors/partners." FDIC Ex. No. 53. Notes in the Midway credit file dated June 27, 1988, state "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. No. 32.

13 At its meeting on July 20, 1988, the Bank's board of directors was informed by Donohoo that it should start considering Heaton as the former owner. FDIC Ex. No. 28f.

14 The value of the Bank (and therefore CCC) dropped below the outstanding balance plus accrued interest of the Bank Stock Loan at Midwest Federal. Tr. 1507. FDIC Exs. Nos. 11, 12, 133. Thus, Donohoo and Mathies and the other investors in CCC faced the conundrum of either paying more than the Bank's worth to salvage their investment, or losing their investment.

15 The first investor group consisted of Donohoo, Mathies, Godbout-Bandal, Field, Misenor, Fred Thorne, Brooks Hauser, and Robert Christianson. Thorne and Christianson died and Hauser declared bankruptcy and became subject to an Order of Prohibition pursuant to section 8(e) of the FDI Act prior to July 30, 1990. Misenor had insufficient financial resources to make further investments. Thus, four of the five members of the second investment group were the only remaining members of the original group of eight able to participate in additional investments.

16 The RTC was appointed receiver of Midwest Federal on October 5, 1990.

17 By this time, Heaton, Donohoo, and Mathies had ceased making payments to the Wenzels.
{{10-31-95 p.A-2574}}to acquiring direct control of Capital Bank through stock ownership, rather than secondary control of Capital Bank through stock ownership of its holding company or through purchase of the Bank Stock Loan. In a last ditch effort to salvage their investment, they obtained control in the only way left to them—by issuing a sufficient number of new shares of Bank stock to take over majority control of Capital Bank.
   On June 28, 1990, at a meeting of Capital Bank's board of directors consisting of Donohoo, Mathies, and Rasmussen18, the board directed Donohoo to call a special meeting of Capital Bank's shareholders on July 9, 1990, for the purpose of amending Capital Bank's Articles of Incorporation to increase the Bank's authorized stock from 6,750 shares to 13,750 shares.
   As stated by the ALJ, "the required notice to CCC of this special meeting was given by Donohoo on June 28, 1990, no doubt acting with his right hand on behalf of Capital Bank, delivering the notice to himself by placing it in his left hand in his function as president of CCC on June 28, 1990." R.D. at 33. George Heaton, owner of 75.1 percent of the outstanding stock of CCC, was not given notice of the meeting;19 nor were the Wenzels, who had a secured interest in 100 percent of the CCC shares, the RTC or the FDIC.20
   The special meeting of Capital Bank's shareholders was held as scheduled on July 9, 1990, and was attended only by Donohoo and Mathies. At this meeting, Donohoo, as president of CCC, voted CCC's shares of Capital Bank in favor of amending the Bank's Articles of Incorporation to more than double the number of shares of the Bank, from 6,750 to 13,750, thereby diluting the prior majority stock holdings.
   The Respondents structured the stock issuance so that no Individual Respondent directly acquired 25 percent of the stock, thereby attempting to avoid creation of the presumption of control for purposes of the CBCA. See page 25, infra.21 Nonetheless, this record makes it clear that spearheaded by Donohoo and Mathies, but with the knowledge and cooperation of all Respondents, this group of investors acquired control of Capital Bank. They did so with the participation of Leonard Misenor,22 and Respondents Rasmussen, Field, and Godbout-Bandal.
   The 7,000 shares of new stock were issued on July 30, 1990, and purchased by Donohoo, Shari Mathies (wife of Respondent Mathies),23 Godbout-Bandal, Field, and Rasmussen.24 The price was $142.86 per

18 Rasmussen, a long-time acquaintance of Respondent Donohoo, Tr. 1651-2, was made a director of the Bank on January 11, 1989.

19 The manner in which Donohoo voted CCC's shares was contrary to CCC's customary practice which involved calling a meeting of CCC's directors to issue a proxy to a designated individual. This would have required notifying Heaton, a director and secretary of CCC. Tr. 1527-30.

20 The issuance of this stock was concealed from the majority shareholder of the Bank's holding company and from two creditors because Respondents knew their actions would be detrimental to the creditors and principal shareholder, who, in all likelihood would have taken measures to prevent their acquisition of control. Indeed, shortly thereafter a lawsuit was filed by the Wenzels and the holding company seeking, among other things, to undo the stock issuance. See discussion of Wenzel Lawsuit, infra.

21 The following shares were purchased:
Purchaser Shares Percent Direct Ownership
Donohoo and Mathies 2100 15.2%
Field 2100* 15.2%
Godbout-Bandal 2100 15.2%
Rasmussen 700 5.0%
TOTAL 7000 50.6%

Because Donohoo, Mathies and Field also had an indirect ownership of Capital Bank shares through their ownership of 24.9 percent of CCC, they actually owned a greater percentage of the Bank.


* On July 30, 1990, Field purchased 2,100 new shares of Capital Bank. It is unclear from the record how Field's shares were reduced to 1,896. However, in December 1992, when the Bank was sold to Amundson, Field sold only 1,896 shares and held no other shares thereafter.

22 The FDIC and Misenor reached a settlement of all enforcement charges stemming from the purchase of controlling shares of the Bank prior to the hearing. Misenor testified extensively confirming the allegations of the FDIC. The ALJ recognized that Misenor was "a witness who might be considered to be tainted and whose statements must be considered in light of his participation in the alleged unlawful schemes, his possible personal financial liability and his having been able to affect [sic] a settlement with the agency." R.D. at 5. Nonetheless, the ALJ found Misenor's testimony to be credible, and the Board concurs.

23 It is uncontested that the shares issued to Shari Mathies are attributed to Mathies because she is his wife and Mathies paid for the shares issued to her. Tr. 2114-5.

24 Obviously, CCC was not given an opportunity to purchase any of the new shares, although it was the largest shareholder.
{{10-31-95 p.A-2575}}share. As of July 30, 1990, prior to the issuance of the 7,000 new shares, the book value of the 6,750 issued and outstanding shares of Bank stock had been $2,218,765.00 or approximately $328.71 per share. Immediately after the issuance of the new shares, the book value of Capital Bank's previously issued 6,750 shares had been reduced to $231.00 per share, while the value of the newly issued stock increased from the purchase price of $142.86 per share to $231.00 per share. The previous 99.04 percent majority stock ownership of CCC was reduced to a minority interest, while majority stock ownership of Capital Bank passed to the Individual Respondents, no one of which directly owned more than 25 percent. In December 1992, 99.52 percent of Capital Bank was sold to Lloyd Amundson. Respondents sold their 7,000 shares to Amundson for $380.91 per share.25 FDIC Ex. No. 349.

FDIC ENFORCEMENT COUNSEL'S POSITION

   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.

THE RESPONDENTS' POSITION

   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


25 The remaining 6,750 shares held by the RTC as collateral for the Bank Stock Loan and the three minor shareholders were sold to Amundson at the same time for $167.27 per share. FDIC Ex. No. 349.

26 Section 22(h) of the Federal Reserve Act, 12 U.S.C. § 375b and Regulation O, 12 C.F.R. Part 215, prohibit certain loans between a bank and its executive officers, directors and principal shareholders.
   Section 23A of the Federal Reserve Act, 12 U.S.C. § 371c, prohibits certain loans between a bank and its affiliates.
{{10-31-95 p.A-2576}}purchase Bank and CCC stock, they claim that none of the loan transactions are attributable to Respondents Donohoo and Mathies, and they were not violative of Regulation O or Section 23A.27 Respondents also deny the allegations regarding unsafe and unsound bonus payments and golden parachute provisions, improper advance payments and indemnification agreements, false statements made in Officers' Questionnaires, and violations of the 1984 Cease and Desist Order between the FDIC and Capital Bank.

THE RECOMMENDED DECISION

   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.
   The case turns on the credibility of Respondents, and on this issue the ALJ's findings are quite clear. A few examples of his findings will suffice:
       ...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.
Quite simply, the ALJ did not believe the testimony of the Respondents.28 He therefore found that all Individual Respondents were aware of the requirements of the CBCA, R.D. at 12, and acted in concert to violate the CBCA. See C.L. Nos. 17–18, R.D. at 128. Based on his findings regarding concerted activity, the ALJ aggregates the stock ownership of each Individual Respondent and attributes each with the total stock ownership of all. R.D. at 41.
   The ALJ also found that Respondents Donohoo and Mathies participated in a series of seven insider loans, commencing in November 1988, and continuing through July 1990, which violated Regulation O and a 1984 Cease and Desist Order entered into between Capital Bank and the FDIC. The transactions involved loans to Misenor, Field (two loans), Godbout-Bandal or her related interests, Robert Christianson, and Brooks Hauser (members of the original investment group).29 They either exceeded lending limits, were made on preferential terms, had inadequate collateral protection, presented more than the normal risk of repayment, or had other unfavorable features. See C.L. Nos. 21–27; 35–38; 47–53; 63, 64, 69. In at least five instances, the participants obtained loans from Capital Bank and transferred the loan

27 Respondents admit to a single violation of Regulation O regarding inadequate documentation for Capital Bank's loan in the amount of $485,000 to one of Respondent Godbout-Bandal's partnerships, Pentagon Park Associates ("PPA"). They assert, however, that any penalty "should be de minimis as the violation was inadvertent, resulted in no loss to the Bank, was immediately corrected and there is no history of previous violations of this nature by Godbout-Bandal." Resp. Br. at 97–98.

28 In addition to Donohoo and Mathies, the ALJ discredits the testimony of the other Respondents. For example, he finds that" [t]he essence of the testimony of Donohoo, Mathies, Rasmussen, Godbout-Bandal, and Kris Bandal (Godbout-Bandal's husband) is: $200,000 of the PPA Loan proceeds were used to finance a portion of the purchase of 2,100 shares of new Bank stock by Godbout-Bandal on July 30, 1990, but no one knew [it] or can explain how it happened...The documents, however, indicate by a preponderance of the evidence to the contrary." R.D. at 28. Even Respondent Field challenges the testimony of Donohoo and Mathies. See, Wayne Field Pro-Se Rejection of Decision of Judge Alprin at 2.

29 The Christianson and Hauser loans were made in connection with purchases of CCC shares, not Capital Bank shares.
{{10-31-95 p.A-2577}}proceeds to Donohoo and Mathies. Christianson and Hauser received extensions of credit from Capital Bank in close proximity to their investments. Donohoo and Mathies disavow any wrongdoing in connection with these loans, claiming they were either unaware of the loan itself or unaware that the monies transferred to them were the proceeds of these loans. The ALJ found, however, that the facts clearly indicate that Donohoo and Mathies knew about these loans and the purpose behind them and coordinated each of them. R.D. at 13–16. He noted that in each of the five instances where loan proceeds were used, the loan and the purchase occurred either on the same day or within a single day of each other, and that Donohoo and Mathies were not only involved with, but contemporaneously controlled both sides of, the loan transactions. They controlled the bank that made the loans and they immediately received the loan proceeds. R.D. at 16. The ALJ concluded that "the seven transactions cannot properly be viewed separately as distinct, unrelated events. They are too close in time, too much in harmony with Donohoo's and Mathies' announced intent to control Capital Bank, too conducive to saving Donohoo's and Mathies' investment, and too consistent with a common plan or scheme to be merely coincidental or isolated transactions." R.D. at 14–15.
   Further, the ALJ found that the loan to Respondent Rasmussen from Peoples Bank (which was controlled by Donohoo) violated the restrictions and collateral requirements for transactions between affiliates set forth in Section 23A. R.D. at 52, 231-33. The ALJ found that the payment of a $10,000 bonus to Donohoo and to Mathies in the face of criticism by the State, and in light of Capital Bank's severe capital problems was an unsafe and unsound banking practice and a breach of Donohoo's and Mathies' fiduciary duty to a problem bank. R.D. at 32, 136-37. Respondent Donohoo's false response to the Officers' Questionnaires submitted in connection with the 1989 State and FDIC Examination of Capital Bank also constituted an unsafe and unsound banking practice and breach of Donohoo's fiduciary duty to Capital Bank. R.D. at 137.
   Although the Board generally agrees with the determinations made by the ALJ, it disagrees with several findings made and conclusions reached by the ALJ which are discussed in detail below. The following portions of the recommended order are adopted: 1) the recommendation prohibiting Respondents Donohoo and Mathies from further participation in the affairs of a federally insured financial institution, 2) the recommendation requiring Respondents to cease and desist from unsafe and unsound banking practices and violation of fiduciary responsibilities, and 3) the recommendation requiring correction of past abuses by repayment of any outstanding loans received in violation of Reg O.

THE EXCEPTIONS

   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


30 Respondent Rasmussen joins the Exceptions filed by counsel on behalf of the other Individual Respondents and makes several additional exceptions. He claims that he has been denied his constitutional right to a trial by his peers and has been denied equal protection of the law. He further claims that he has been denied due process because of the incompetence, bias, and ignorance of the ALJ, because of excessive delay, because of flawed evidence, and because of recommendations that are not supported by the evidence. The Board sees no evidence on this record supporting Respondent's charges regarding "incompetence, bias, or ignorance" on the part of the ALJ. Further, Respondent has presented no evidence indicating how he has been harmed by any delays in this proceeding. Therefore, Respondent's due process claims are without merit. There is no right under the Constitution (Continued)

{{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.

DISCUSSION

   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


30 Continued to a jury trial in an administrative proceeding. Atlas Roofing Company, Inc. v. OSHA, 430 U.S. 442 (1977). The remainder of his exceptions, though more elaborately stated, simply disagree with the findings of the ALJ. Respondent Field also filed Exceptions which need not be addressed separately.

31 Contrary to Respondents' assertion, delay in the Board's decision neither deprives the Board of jurisdiction, nor deprives them to due process. The 90-day period set forth in 12 U.S.C. § 1818(h)(1) and the regulations promulgated thereunder, 12 C.F.R. § 308.40, is not jurisdictional. Saratoga Savings and Loan Association v. FHLBB, 879 F.2d 689, 694 (9th Cir. 1989), and cases cited therein. Respondents have provided no support for their denial of due process claim and no evidence of harm. The Board's request for information regarding legal fees expended defending this enforcement proceeding is based on a statement made in Respondents' brief which raised the issue. It is therefore appropriate for the Board to seek clarification of Respondents' statement.
In a separate Response, Respondent Field asserts that the Order dismissing him as a defendant in the Wenzel Lawsuit is evidence "that Field was an innocent victim to all the charges by the FDIC." The charges field by the FDIC against Respondent Field in this matter and the charges in the Wenzel Lawsuit are substantially different. The Notice issued by the FDIC contains charges regarding Respondent Field's violation of the CBCA, and his participation in loans which violate Regulation O. The Wenzel Lawsuit contains no such charges against Respondent Field. Therefore, dismissal of Respondent Field from the Wenzel Lawsuit has no bearing on this Decision and Order.

32 Respondents admit that had they exercised their option to purchase additional shares of CCC, control of CCC would have transferred to them and such change in control would have required approval of the Board of Governors of the Federal Reserve System. R.D. at 10–11; FDIC Ex. Nos. 129, 132.
{{10-31-95 p.A-2579}}CBCA by the regulators and, perhaps more significantly, because they could not wait the required sixty days for approval, Respondents issued and purchased the new Bank shares in violation of the CBCA.
1. Restitution or Civil Money Penalty.

[.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.
   Hence, the statute applies to any concerted group acting directly or indirectly in obtaining the power, to directly or indirectly control the management or policies of an insured bank or to vote 25 percent or more of any class of voting securities of an insured bank. The R.D. correctly finds that Respondents acted in concert to obtain the power to control the management and policies of Capital Bank. R.D. at 37–40. In brief, the Board concurs with the ALJ's findings that:
   1. Beginning in May 1988, Donohoo and Mathies actively sought to establish an investment group to finance the exercise of their holding company stock option, whereby Donohoo and Mathies, with the direct or indirect concerted action by the "investment unit" purchasers, would gain control of Capital Bank through control of its holding company.
   2. The Capital Partners Direct Deposit Account ("CP-DDA")35 was the vehicle for collecting and funneling the funds of the investment group to pay the outstanding debts of Donohoo and Mathies on their stock purchase in CCC as well as amassing the funds to exercise the stock purchase option.
   3. The money so invested came primarily

33 There is a discrepancy in the Recommended Decision as to the amount of CMPs recommended against Donohoo, Field, and Godbout-Bandal. As discussed below, the CMPs referenced on page 141 of the Recommended Decision are adopted by the Board as the basis for its Order to Pay Civil Money Penalties. Elsewhere in his decision, however, the ALJ recommends greater CMPs against Respondents Donohoo, Field, and Godbout-Bandal. R.D. at 117, 120, and 121.

34 There is much argument in the pleadings over the significance of this account. Respondents assert that it has no significance other than as "the name of a checking account." Resp. Br. at 13. FDIC Enforcement Counsel speak of it as a partnership, presumably evidencing Respondents' concerted activity. The argument itself is totally tangential as the record contains more than adequate evidence of concerted action without it. The Board finds, however, that the circumstances surrounding the use of this account are probative of the state of mind or intention of the Respondents. All investment checks were made payable to "Capital Partners" and were deposited to the CP-DDA. The checks were endorsed by Donohoo and Mathies and used to pay off debts or to purchase stock. Whether a partnership agreement existed is not necessarily relevant. By use of this account, Donohoo and Mathies were holding "Capital Partners" out to be some "entity." Investors were led to believe that they were investing in something—not merely handing Donohoo and Mathies a check to deposit and disburse as they pleased. That "something" was the Donohoo/Mathies investment group. The CP-DDA is probative of the fact that each of the investors knew they were participating in an investment group and knew what was expected to result from their investment. See fn. 37, infra.
{{10-31-95 p.A-2580}}from loans to the investors from Capital Bank, disguised by passing the loan funds through other financial institutions.
   4. When foreclosure on the Bank Stock Loan could be stalled no longer, and when simultaneously the RTC threatened to sell Capital Bank to other purchasers, and the FDIC was impatient to have Capital Bank's dangerously low capital funds increased, Donohoo and Mathies decided to issue new Bank stock and sell it directly to members of the investment group, thus giving the individual Respondents as a group a majority (not merely controlling) interest in the Bank. R.D. at 38–39.
   It is in this context that the pattern of Respondents' actions must be considered.
   Significantly, the ALJ recognizes, and the Board concurs, that:
       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.
   Indeed, in the circumstances of this case, the absence of such agreements supports the Board's conclusion. In each effort to organize an investment group, Donohoo and Mathies courted no strangers. All of the participants were known to Donohoo and/or Mathies. Because all of the participants were "insiders," no formal documentation was necessary to obtain or compel allegiance to the group endeavor.35 The agreement to act in concert for a common purpose of controlling Capital Bank was easily obtained voluntarily.
   The plain language of the statute recognizes concerted action as a means of obtaining control. Respondents' assertion that documentary "indicia" of concerted action is mandatory to find concerted action is erroneous. The Board is unaware of any holding requiring documentary evidence to prove concerted action. The United States Supreme Court has stated that in civil cases "[d]irect evidence of a fact is not required. Circumstantial evidence is not only sufficient, but may also be more certain, satisfying and persuasive than direct evidence." Michalic v. Cleveland Tankers, Inc., 364 U.S. 325, 330 (1960).
   FDIC Enforcement Counsel cite two CBCA cases which support the obvious conclusion that concerted action to acquire control of a bank often exists without formal agreement and, where found, requires notice to and prior approval by the appropriate Federal regulatory agency. In FDIC v. D'Annunzio, 524 F. Supp. 694, 699 (N.D.W.Va. 1981), the court combined the shares of three individuals to find that they constituted the largest single shareholder within the meaning of the CBCA even though there was no evidence of a formal voting agreement. In Mid-Continent Bancshares, Inc. v. O'Brien, Fed. Sec. L. Rep. ¶98,734 at 93,709 (E.D. Mo. 1981), the court found a violation of the CBCA although the defendants "as a group, never had the power to vote twenty-five percent of Mid-Continent's common stock..." It found that "defendants have, from the beginning intended to acquire `control' of Mid-Continent by exceeding the ten percent ownership level which creates a presumption of control under 12 C.F.R. § 225.7(a) and the twenty-five percent ownership level which the statute defines as always constituting control. 12 U.S.C. § 1817(j)(8)(B)." In discussing the CBCA the court stated that
    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

35 The solicitation was akin to a private offering; no "prospectus" was prepared and none was required by law. The use of the term "prospectus" in the pleadings and the Recommended Decision is unfortunate, if only because it adds unnecessary confusion. The "History" prepared by Respondents was not a prospectus. It did, however, serve the purpose of a prospectus in describing for prospective investor-buyers of stock the terms and expectations of the Donohoo-Mathies investment group opportunity. FDIC Ex. No. 22.
    {{10-31-95 p.A-2581}}with the requirements of the Change in Bank Control Act before commencing their acquisition.
Mid-Continent Bancshares, Fed. Sec. L. Rep. ¶98,734 at 93,709.
   In analogous cases involving violations of Section 13(d) of the Securities and Exchange Act, 15 U.S.C. § 78m(d)(13), it has been well established that:
    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.
Wellman v. Dickinson, 682 F.2d 355 (2d Cir. 1982); Securities and Exchange Commission v. Savoy Industries, Inc., 587 F.2d 1149 (D.C. Cir. 1978). See also Corenco Corp. v. Schiavone & Sons, Inc., 488 F.2d 207, 217 (2d Cir. 1973); Texasgulf Inc., v. Canada Development Corp., 366 F. Supp. 374, 403 (S.D. Tex. 1973).
   The record before the Board more than supports the conclusion that these Individual Respondents did act in concert, notwithstanding the absence of written documentation. First, Respondents Donohoo and Mathies admitted the intention of the initial investment group to obtain control of CCC and thus, the Bank. Second, each of the Respondents knew that Donohoo, Mathies, and Rasmussen controlled management of the Bank and were seeking to salvage their investments by obtaining majority stock control.
   Significantly, the Board finds that Donohoo's own testimony acknowledges the concerted nature of the group:
    "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.
   Furthermore, during cross-examination regarding whether he and Mathies acted together to purchase 2,100 shares of Capital Bank of July 30, 1990, Respondent Donohoo testified:
    "Acting together—well, we were part of a group of investors who were purchasing the stock." Tr. 1573.36
   In addition, the record contains uncontroverted evidence of Donohoo and Mathies claiming that they and their investor group held control not just of the management and policies of Capital Bank, but of the voting shares as well. On July 13, 1990, Donohoo and Mathies sought a loan from Midway to finance their purchases of the soon to be issued new Capital Bank stock. Notes in the Midway loan file dated July 13 and 24, 1990—at least 6 days before the stock issuance—indicated who the investors in the new stock would be and that insiders would hold 52 [sic] percent of the shares and the remaining shares would be held by the holding company and "outsiders." FDIC Ex. No. 33, p. 13. That Donohoo and Mathies controlled more than just their own shares of Bank stock is further evidenced by Midway loan file notes dated January 22, 1991, indicating that the RTC had 48 percent of Capital Bank and Donohoo and Mathies had 51 percent. FDIC Ex. No. 33, p. 14.
   Ample evidence supports the ALJ's determination that all Individual Respondents were part of a group formed to acquire, and which did acquire, control of Capital Bank.
   Respondents' Exceptions assert that they were merely individuals with "prior common investments," Resp. Exc. at 8, and that "under the ALJ's new theory of `acting in concert,' every person who purchases stock in a financial institution must file an application for prior approval pursuant to the CBCA, because every such purchaser has or could conceivably acquire the ability or capacity to vote his or her stock as part of a group, whether or not the purchaser has any intention of doing so." (Emphasis in original.) Id. at 10–11. The argument misses the crucial point that Respondents herein did intend to act together to acquire control. The record is clear that these Respondents, by knowingly acting to form a group to gain control of Capital Bank, acted in concert within the meaning of the CBCA.37

36 Donohoo and Mathies admittedly acted in concert to acquire 15.28 percent of the Bank. Answer ¶30(g) and (j); Tr. 2114-5.

37 Respondent Field asserts that he knew only Respondents Donohoo and Mathies and that therefore he could not have acted in concert with the group of investors. See Field Exc. at 5. In making this argument, however, he (Continued)

{{10-31-95 p.A-2582}}
   Respondents complain that their due process rights have been violated because they had no notice of what the FDIC considered "acting in concert." They accuse the FDIC of "making up" the interpretation of the requirements of the CBCA and claim that because there are no previous FDIC Decisions, advisory opinions, or interpretations of the CBCA discussing "acting in concert," there was no way for Respondents to have notice of the FDIC's interpretation of the CBCA. Resp. Exc. at 3. While there is little precedent directly involving the FDIC, the concept of prohibiting certain kinds of "concerted activity" and the parameters of such prohibited activity is not new to the law and should not have been unknown to the Bank's counsel.38 At the very least, Bank counsel should have been aware of and not ignored the body of law discussed at pages 28–30, supra. Moreover, Respondents were warned by the FDIC that issuance of 7,000 shares of new stock was likely to be a violation of the CBCA and they were asked by the FDIC to postpone the issuance.39 They refused to do so at their peril and indeed on the very day of the issuance Respondents Donohoo and Mathies purposely misstated to the FDIC many facts related to the stock issuance. R.D. at 112-13. Respondents' exception is rejected.
3. Respondents Allege that Their Attempts to purchase CCC is Not Evidence of "Acting in Concert" to Purchase Capital Bank.

   [.3] Respondents take exception to the ALJ's reliance on their past efforts to acquire CCC in finding that Respondents acted in concert in purchasing Bank stock. They assert that the "purchase of Capital Bank stock involved a different entity, a different time period, some different investors, a different structure, and 48 percent less of a total interest." Resp. Exc. at 6–7. The Board finds that the purchase of Capital Bank and the attempted purchase of CCC cannot be viewed as separate transactions.40 They are both means to the stated goal of acquiring control of Capital Bank. Indeed, the purchase of Capital Bank shares was resorted to because the group's attempt to purchase CCC failed. The ALJ's analysis of these as interrelated transactions, providing probative evidence of the history, motivation, and mechanics for the issuance of the new Bank shares and the acquisition of control in violation of the CBCA is appropriate. Respondents' exception is rejected.

4. Advice of Counsel.

   [.4] Respondents argue that, if a CBCA violation is found, only a de minimis penalty is appropriate because they relied on the advice of counsel fully apprised of the facts. Respondents' theory that they were justified in relying on the advice of counsel—albeit erroneous—eviscerates the role of regulators. Under their theory, one could be shielded against prosecution, or more than de minimis civil penalties, for all manner of illegal activity by mere assertion of reliance on counsel. This, of course, is not the law. Legal advice "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. 541, 101st Cong., 1st Sess. 1, 467 (1989) reprinted in 1989 U.S.C.C.A.N. 86,263. (Discussion of the amendments to section 8(i) of the FDI Act by section 907 of FIRREA.) See also In the Matter of Steven J. Hirsch, et al., FDIC-91-24k, 1 FDIC Enf. Dec., P-H ¶5189 at A-2143 (1992).
   Respondents' argument is not aided by the fact that, contrary to their pleadings, their counsel clearly was not apprised of all the relevant facts when he rendered his legal opinion.41 Although Bank counsel, Kevin


37 Continuedadmits his intention to invest with Respondents Donohoo and Mathies and that is sufficient to find that he acted in concert with one or more persons. All members of a group acting in concert need not know each other. Blumenthal v. United States, 332 U.S. 539, 557 (1947).

38In addition to Bank counsel Costley, Donohoo, and Rasmussen are attorneys. Tr. 1325, 1650.

39 On the morning of July 30, 1994, FDIC Field Office Supervisor Dennis Fagerland and FDIC Examiner Brian Peters met with Respondents Donohoo and Mathies and specifically advised that the stock issuance might violate the CBCA for which civil money penalties might be assessed. Donohoo and Mathies were asked to delay the issuance until they or their counsel had discussed the matter with the FDIC's Kansas City Regional Office. They refused to delay the issuance. A letter confirming the FDIC's views was telefaxed to the Bank's board of directors and to its attorney, Costley, at approximately 1:30 p.m. that day. At 2:30 p.m. on July 30, 1990, FDIC Review Examiner Kirchoff discussed the matter by telephone with Costly, who indicated he did not know whether the stock had been issued. It had in fact been issued prior to their conversation. R.D. at 35-7.

40 Respondents are charged only with violation of the CBCA in connection with their acquisition of control of Capital Bank on July 30, 1990. They have not been charged with violations in connection with a change of control of a bank holding company incident to their acquisition of shares of CCC.

41 At the time Costley gave his opinion he was unaware
of the loan to Misenor and two loans to Field;
(Continued)

{{10-31-95 p.A-2583}}Costley, testified that had he been aware of the additional information later pointed out to him, his opinion would not have changed, the ALJ and the Board discount this testimony as totally self-serving given Costley's day-to-day involvement in the scheme, his role as a member of Respondent Lindquist & Vennum, and his natural reluctance to admit to providing erroneous legal advice. The Board concurs with the ALJ's finding that based upon the July 31, 1990, letter prepared by Costley, which did not set forth accurately the factual situation known to Respondents, "none of the Individual Respondents could have reasonably relied on Costley's opinion." R.D. at 240.

5. Golden Parachutes.

   [.5] Donohoo and Mathies entered into employment agreements with Capital Bank dated June 1, 1989 (the "Original Employment Agreements"), which provided generous golden parachutes if Capital Bank terminated either or both for reasons other than breach of fiduciary duty, or if either or both were terminated within one year of a change in control. F.F. Nos. 311–313. As of June 1, 1989, Capital Bank's potential liability under the golden parachutes was 8 percent of its equity capital. F.F. No. 316. The Original Employment Agreements were amended on August 1, 1990 (the "Amended Employment Agreements"), two days after Donohoo and Mathies and the Individual Respondents acquired control of Capital Bank in violation of the CBCA. The amendments sweetened the golden parachutes so that as of August 1, 1990, they represented a liability for Capital Bank of 22 percent of the Bank's equity capital. F.F. No. 320. The ALJ found that the Amended Employment Agreements "were not necessary to retain Donohoo and Mathies as officers of the Bank." F.F. No. 319. In addition, the ALJ found that both the Original and Amended Employment Agreements were authorized by Capital Bank's board of directors of which Donohoo, and later Donohoo and Mathies were members. On neither occasion did the board discuss the terms of the agreements or their impact on Capital Bank. Neither Donohoo nor Mathies abstained from voting on the agreements, but rather, voted to approve them. FDIC Ex. Nos. 28s, 28qq; F.F. Nos. 310, 317, 318.
   Other related findings of the ALJ are significant:
· Donohoo and Mathies have also engaged in unsafe or unsound practices by ... entering into self-serving and abusive employment agreements. R.D. at 80;
· Their [Donohoo's and Mathies'] acquisition of control of the Bank in violation of the CBCA was facilitated by ... unsafe or unsound practices committed in connection with the Employment Agreements...." R.D. at 81;
· Donohoo and Mathies also engaged in abusive insider transactions ... as evidenced by the unsafe and unsound practices involving the ... golden parachutes. R.D. at 84;
· Donohoo and Mathies engaged in numerous acts of self dealing detailed above, including ... arranging and voting the abusive golden parachutes for themselves.... R.D. at 87; and
· Donohoo and Mathies in fact engaged in the consummate pattern of insider abuse, demonstrating both willful and continuing disregard for the safety and soundness of the Bank.... They also contrived to give themselves employment agreements with golden parachutes that exposed the Bank to payment obligations which represented as much as 22 percent of its capital. R.D. at 93.42


41 Continued
· of the fact that Field, Donohoo, Mathies, and Godbout-Bandal were previously associated with the attempt to obtain control of CCC and that any of them had an ownership interest in CCC;
· of the loan to Rasmussen;
· of the two Bank loans to Godbout-Bandal or her related interests, and believed no financing was involved in purchasing her shares of the Bank;
· that Donohoo and Mathies had attempted to assemble an investment group to exercise the option to purchase the remaining shares of CCC and that Field and Godbout-Bandal were part of that group;
· of any of the financing involved for the investments in CCC by Mathies, Donohoo, Misenor, Field, and Christianson;
· of the Capital Partners account and its use to funnel funds for debt service and stock purchases. F.F. No. 291, R.D. at 239.

42 At the June 3, 1988 FDIC examination, the Bank had $4.7 million in capital. FDIC Ex. No. 11. FDIC Review Examiner Kirchoff testified that at the time of the first golden parachute agreement, June 1, 1989, "Capital Bank(Continued)


{{10-31-95 p.A-2584}}
   These findings are quoted in great detail because they starkly contrast with the ALJ's conclusion that the Original and Amended Employment Agreements, with their golden parachute provisions, were not unsafe or unsound practices nor breaches of Respondents' fiduciary duty. R.D. at 57.
   The Board adopts FDIC Enforcement Counsel's exception to this conclusion. The Board is unable to reconcile the ALJ's findings of fact outlined above, which are supported by the record and appropriate, with his conclusion of law. First, this was not voluntary business decision arrived at by disinterested managers. These agreements were conceived and presented to the Bank by the people they were designed to benefit. The minutes of the Bank's board of directors indicate that the board never reviewed the terms of these agreements or considered the impact they could have on the already poor condition and earnings of the Bank. FDIC Ex. Nos. 28s, 28qq. Neither Donohoo nor Mathies abstained from voting approval for these benefits. Id. Second, there was no valid business reason for the golden parachutes. They were not necessary to attract Donohoo or Mathies who were already employed as officers of the Bank. Nor were they necessary to retain Donohoo and Mathies as officers. They had no legitimate job insecurity because they were in control. FDIC Ex. No. 22; Tr. 1181, 1184–85. While golden parachutes are not per se an unsafe or unsound practice, the findings made on this record lead logically and inevitably to the conclusion that these golden parachute provisions were abusive and self-serving, and that Donohoo's and Mathies' actions in connection with them were unsafe or unsound practices and breaches of their fiduciary duty to Capital Bank.43

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


42 Continuedhad a composite rating of 4. It was a problem bank and was already incurring operating losses. Any additional pay-out, particularly of this amount [$340,000 or 8 percent of capital], would have had a significant impact on the bank, on the bank's condition and capital structure." Tr. 1175. He further testified that "the Bank was still designated as a problem bank" as of August 1, 1990, when the agreements were amended to require the Bank to pay approximately $630,000 or 22 percent of the Bank's capital. Tr. 1178.

43 Respondents argue that no payments were made under the golden parachutes and therefore the issue is moot. This is not quite accurate. While a cease and desist order regarding the golden parachutes is no longer necessary, the Agreements were abusive, self-dealing, unsafe and unsound practices imposed upon the Bank by Donohoo and Mathies. Thus, they are support for other relief ordered. Included in the price paid by Amundson to Donohoo and Mathies for their Bank stock was the amount each was entitled to pursuant to his golden parachute. Therefore, that amount has been included in calculating their illicit gain and in the CMPs issued against them.
{{10-31-95 p.A-2585}}FDIC Enf. Dec. ¶5112 (1988). R.D. at 52, 231-33. Therefore, the Board also rejects this exception.

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


44 See, FDIC Enforcement Counsel's correct and detailed explanation at fn. 42, pp. 129-30 of their brief.

45 The Board's concern here is not so much with the existing shareholders, whose grievances presumably will be fully addressed by the Wenzel Lawsuit. Rather, the Board is concerned with the disadvantage to the Bank caused by the failure of Respondents to properly value the stock.

46 Not only was Costley clearly an interested party, but he was so involved in these transactions that the Board significantly discounts the value of his "expert" testimony.

47 Amundson, the purchaser of the Bank from Respondents, of course has an interest in testifying that at $1 million, Respondents paid fair market value for their 7,000 shares. But even Amundson testified the shares were worth $20.10 per share more than Respondents paid. Tr. 1045-55.
{{10-31-95 p.A-2586}}clear that the difference between the two documents is that Olander "twice deduct[ed] the dollar amount of the additional provision to the ALLL he determined necessary for a fully funded ALLL." R.D. at 72; FDIC Ex. No. 157, Resp. Ex. No. 87.
   Because Respondents presented no credible evidence in support of their assertion of stock valuation except that of their own witness, Mr. Olander, the Board finds no basis in the record to disturb the ALJ's determinations as to the credibility of witnesses or other findings regarding the value of the stock, and, therefore, rejects Respondents' exceptions. "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." R.D. at 77.48 Of course, if the price of the stock had been set at arm's length, the fair market value, which might well have been different, would not have been an issue in dispute.

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

48 The Board concurs in the ALJ's finding that the purchase price per share paid by Respondents was the function purely of the amount of capital infusion required ($1 million) divided by the number of shares required to provide the Respondents with majority control (7,000 shares). The price paid by Respondents had no relationship to actual fair market value. Tr. 2033.

49 Securities Exchange Act of 1934, §§ 10(b), 16(b), 15 U.S.C. §§ 78j(b), 78p(b).
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    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.)
517 F.Supp. 1202.
   The Board finds the analysis in these cases to be persuasive and concludes that similar analysis is applicable under the FDI Act. Therefore, the Board concludes that the illgotten gain to be disgorged by Respondents is the difference between the purchase price and the sales price of their Capital Bank shares. Respondents' proposed deductions are inappropriate reductions of their profit and the Board rejects Respondents' exception.50
   Respondent Field has his own, novel formula for calculating gain on his investment in Capital Bank. He asserts that the cost of an investment is the purchase price plus "either the interest you pay on borrowed funds, or interest you lose if you do invest your own `after-tax' dollars. FDIC is wrong when they [sic] do not factor interest expense into a gain or loss on a capital investment." Field Exc. at 4. According to Respondent Field, the only gain he made is the difference between the purchase price plus what he would have made had he invested the money at current interest rates, and what he received from the sale of his shares. Id. There is no support in relevant legal analysis for the idea that in calculating profit for purposes of determining the amount to be disgorged under the remedial federal statute, only the windfall over and above the so-called normal return one would have received on his money is the proper amount. Texas Internat'l Airlines, 714 F.2d 540. Indeed, in enforcement of insider trading prohibitions in securities law, it has even been held that a trader can be made to disgorge "theoretical" profit where he has actually suffered net loss on short-swing profits. Id. at 541. Respondent Field is patently wrong and his exception is rejected.

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


50 The $50,000 in legal defense funds is a specific, negotiated element of the Sales Agreement between Respondents Donohoo and Mathies and Lloyd Amundson. FDIC Ex. No. 345. It is obviously bargained-for profit, appropriately subject to being disgorged.
{{10-31-95 p.A-2588}}Bank, there is no cause to limit the Law Firm defendants [Respondents Lindquist & Vennum and Bruce A. Rasmussen & Associates, Ltd.] being retained and paid by the Bank." and his failure to order the amounts expended on behalf of the Individual Respondents and on behalf of Capital Bank restored to Capital Bank. R.D. at 102. The Board disagrees with the ALJ, holding that the Bank's agreement to indemnify the Individual Respondents is improper and the Bank must be reimbursed for all legal fees and expenses paid, for the reasons discussed below.

   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


51 The Board cannot reconcile the ALJ's findings with his recommendation. He finds that:
   Each Individual Respondent was unjustly enriched within the meaning of section 8(b)(6)(A)(i) of the [FDI] Act ... in connection with their respective violations of [Minnesota law governing indemnification] 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. C.L. No. 78, R.D. at 138.
He also concluded:
   Donohoo and Mathies caused the Bank to pay all the expenses of defending the Wenzel Lawsuit, including their own. As the results of their misconduct, the Bank has suffered financial loss in the form of attorneys' fees and expenses in defending itself and them in [the Wenzel Lawsuit] and will probably suffer additional loss from the Wenzel Lawsuit. R.D. at 83.
Notwithstanding these well-supported findings, the ALJ does not recommend an order requiring the Individual Respondents to reimburse Capital Bank for payments made on their behalf.
{{10-31-95 p.A-2589}}of Capital Bank and the Individual Respondents are "indivisible."52
   The Wenzel Lawsuit was a fight among shareholders of CCC for control of Capital Bank. The essence of the dispute was the actions taken against CCC, Heaton, and the Wenzels (respectively shareholder and security holders of CCC) by Donohoo and Mathies in their capacity as shareholders, officers, and directors of CCC. The lawsuit plaintiffs alleged they were damaged by the issuance of 7,000 shares of Bank stock authorized by the directors of CCC, because they lost control of Capital Bank and the value of their CCC shares was reduced. CCC sought to regain control of Capital Bank and the Wenzels sought to restore the value of their collateral. Capital Bank was made a defendant primarily to enable the court to provide appropriate relief if the plaintiffs won.53 Hence, Capital Bank was not central to this lawsuit and should have been taking a back seat, not the leading oar.
   Moreover, as a defendant, the Bank was exposed to liability for acts which it did not commit, namely self-serving acts of the Individual Respondents in their capacities primarily as directors, officers, and shareholders of CCC.54 The primary duty of Bank's counsel should have been to seek indemnity from the Individual Respondents and to advocate in the lawsuit that the Bank was not liable for the acts of the Individual Respondents. See Sorenson v. Safety Flate, Inc., 298 Minn. 353, 216 N.W.2d (1974). This was not done.55

   [.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


52 The ALJ also recognizes that the defendants' counterclaims have nothing to do with the Bank, and he recommends that the individual defendants pay all expenses related to them. The Board concurs and rejects Respondents' Exception to the ALJ's finding. Based on the record in this proceeding, the counterclaims, which relate to the indictment of the Wenzels in a separate proceeding, is of interest only to defendants Donohoo and Mathies in connection with their purchase of CCC shares. It has nothing to do with Capital Bank.

53 The central issues of the Wenzel Lawsuit complaint involve the Individual Respondents and their actions as officers, directors, and shareholders of CCC. See fn. 54, infra. Only the portions of the complaint in the Wenzel Lawsuit seeking relief really pertain to the Bank, which for example, as a party to the lawsuit could be ordered to issue shares to the plaintiffs to restore the value lost when shares were issued and sold to the Individual Respondents.

54 Case law establishes that indemnification is not proper where the acts giving rise to the lawsuit were not performed by the defendants in their capacity as officers and directors or were performed in their personal capacities or for purely personal reasons, Tomash v. Midwest Technical Development Corporation, 160 N.W.2d 273 (Minn. 1968); Plate v. Sun-Diamond Growers of California, 225 Cal. App.3d 1115, 275 Cal. Rptr. 667 (1990); Petty v. Bank of New Mexico Holding Company, 190 N.M. 524, 787 P.2d 443 (1990); Sorenson v. The Overland Corporation, 242 F.2d 70 (3rd Cir. 1957). The complaint in the Wenzel Lawsuit contains allegations of misconduct by Mathies, Donohoo, and Rasmussen in their capacity as Bank officers and directors, and as Bank directors and officers they did call a special shareholders' meeting for the purpose of increasing the Bank's authorized level of stock, and they issued and sold the stock. See FDIC Ex. No. 304a, ¶¶5, 6 and 7; FDIC Ex. Nos. 28nn, 22pp; Tr. 182-203. However, it is the misconduct of Donohoo and Mathies as officers and directors of CCC, not the Bank, that enabled them to authorize the increase in stock of the Bank and improperly acquire control. It is the improper acquisition of control, to the detriment of CCC and the holders of the Wenzel Note, which is the gravamen of the complaint in the Wenzel Lawsuit. The complaint also alleges self-dealing by Mathies and Donohoo as co-shareholders of CCC in negotiating with the RTC for the purchase of the holding company's stock loan, and breach of their fiduciary duties as directors of CCC in authorizing the increase in the Bank's stock. Other allegations pertain to breach of the Stock Purchase and Option Agreement between Donohoo, Mathies, and Heaton for the purchase of CCC stock, and breach of the related pledge agreement. Moreover, the three counterclaims pertain to the sale of CCC stock to Donohoo and Mathies. None of these allegations involve Donohoo and Mathies as directors of the Bank. The actions of Donohoo, Mathies, and Rasmussen as directors and officers of the Bank were minor ministerial actions in the context of the Wenzel Lawsuit.

55 This failure has been extremely detrimental for the Bank. The initial judgment issued in the Wenzel Lawsuit ordered damages only against Respondents Donohoo and Rasmussen in the amount of $523,600. However, the final judgment order made Capital Bank liable for this amount under the theory of vicarious liability. Second Amended Order for Judgment, December 15, 1994. Whether counsel for the Bank, which replaced Respondent Lindquist & Vennum shortly before the trial, has appealed the judgment against the Bank is not part of this record. Moreover, the eleventh hour substitution of counsel for the Bank could not cure earlier deficiencies resulting from the absence of independent Bank counsel.
{{10-31-95 p.A-2590}}need for independent representation in the Wenzel Lawsuit exposed the Bank to unnecessary risk and expense and constituted an unsafe or unsound practice.56
   Independent analysis on behalf of the Bank of the issues in the Wenzel Lawsuit would have revealed that on the issues of the value of the Bank's shares and the improper loans alleged to have financed the stock purchases, Capital Bank gained nothing by support of the defendants. There was no advantage for Capital Bank to argue the defendants' valuation was correct. If plaintiffs were right, the Bank might be entitled to more money. Nor should Capital Bank have been defending the stock loans. Since the individual defendants are the beneficiaries of the alleged less-than-book-value sale and the favorable loans, they could adequately protect their own interests. Finally, Capital Bank had no interest in the question of who owned the controlling interest in the Bank, other than to assure that the laws concerning control of the Bank were observed.
   Even if there were some commonality of interest between Capital Bank and the other lawsuit defendants, there certainly was no parity of interest. Capital Bank's only reason to actively participate in this litigation was to separate itself from the Individual Respondents and claim contribution from them.57 There was certainly no reason for it to fund the defense of all parties. The individual defendants had much stronger interests in a vigorous defense to protect their investments. Capital Bank's interest, if any, was a distant second. The Board concludes that the interests of the Bank and the Individual Respondents are not indivisible, and that Capital Bank's funds have been improperly expended for the defense and benefit of the Individual Respondents, not for Capital Bank's defense or benefit.58

   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:


56 See e.g., ABA Model Code of Professional Conduct Rule 1.7 (1992); The Director's Book at 52–53, Office of the Comptroller of the Currency (1987). See also, decisions interpreting the fiduciary duties of trustees under the Employee Retirement Income Security Act of 1974, Leigh v. Engle, 727 F.2d 113 (7th Cir. 1984); Donovan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982) in which the court held that the trustees' investigations did not amount to the thorough, careful, and impartial investigation needed to justify actions which would, at least incidentally, benefit themselves. 680 F. 2d at 272. The court noted that "one way for the trustees to inform themselves would have been to solicit the advice of independent counsel." Id.

57 The justifications for obligating the Bank to defend the Individual Respondents stated in the October 22, 1991, minutes of the Bank's board of directors are totally spurious, as is the testimony of Kevin Costley regarding the appropriateness of Capital Banks' payment on behalf of all defendants. See, FDIC Ex. No. 28mmm; Resp. Br. at 85; Tr. 2128-29. Most disingenuous is the claimed obligation by the Bank to "defend the title to its stock since it was the entity that sold the stock to the shareholders." FDIC Ex. No. 28mmm. There is no claim anywhere in the Wenzel Lawsuit that the issued shares were bogus or that title was in any way flawed.

58 Because its interests were different from those of the individual defendants in the Wenzel Lawsuit, the Bank should have had independent counsel. Even assuming that common counsel was acceptable, the fee arrangement, which was not "arms length" because the corporate client who paid all the fees was a captive of the other clients, cannot be justified if indemnification was not proper.

59 Respondents' counsel claims the issue of "indemnification" is moot because no indemnification payments have been made. That no indemnification payments have been made (as opposed to "advances" of legal fees) is not surprising, since indemnification would not be made until the completion of the lawsuit. Indemnification under the Minnesota statute is essentially a post hoc determination which awaits full disclosure of all facts. Delay in payment does not moot the issue, however, particularly under the facts of this case where the indemnification resolution itself constitutes an unsafe or unsound practice and breach of fiduciary duty. See discussion infra at 60.

60 The record is not always careful to distinguish between "advances" and "indemnification." Both are permitted under Minnesota law when certain conditions are met, but they are quite different and serve different purposes. Approximately $190,500 in legal fees was paid by Capital Bank to the Law Firm Respondents, Lindquist & Vennum and Bruce A. Rasmussen & Associates, Ltd. through February 1992. FDIC Ex. Nos. 366a & b. These are "advances" covered by the Minnesota statute because they are paid "in advance of final disposition of the proceeding," Section 300.083, Subd. 3, regardless of whether they are paid in advance of "due dates," as asserted by Respondents. Respondents' statement that "Capital Bank made no advance payments" at paragraph 7 of their Response to Request for Supplemental Information is clearly untrue, and contradicts their statement that "Lindquist & Vennum continued to bill Capital Bank for the defense of the Wenzel litigation." Id at 16. Not only does this constitute improper advance payments, see discussion at page 59, infra, but it violates a district court ruling prohibiting the Bank from making payments on behalf of the Individual Respondents. (Richard D. Donohoo v. FDIC, 4092 Civil 914 (D.Minn. 1992) (MacLaughlin, C.J.). Respondents cannot have it both ways. Either they are advances, or they are indemnification payments.
{{10-31-95 p.A-2591}}
       (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...
Given the findings of the Board regarding Donohoo, Mathies, and Rasmussen's absence of good faith, failure to act in the best interests of Capital Bank, and receipt of improper personal benefit, it is difficult to see how they could ever satisfy the statutory criteria for mandatory indemnification. Non-mandatory indemnification, allowed by the Minnesota statute, would be proper only where an appropriate business purpose is shown, consideration paid, or a determination made by an independent board or independent counsel. See discussion at 54-55, supra. None of these factors exists with respect to Donohoo, Mathies, and Rasmussen. Nor is there reason for Capital Bank to provide indemnification for Respondents Field and Godbout-Bandal and Shari Mathies, wife of Respondent Mathies, who are not officers and directors, but simply shareholders protecting their investments. Defense of their purchase and continued ownership of the shares involves no corporate purpose.61
   Respondent claim that the legal fees paid by Capital Bank in connection with the Wenzel Lawsuit were advances against indemnification, which are authorized by the Minnesota statue, Section 300.083, Subd. 3. The record is clear that the Respondents have not complied with the statutory requirements for advances. Persons seeking advances are required to submit their request for advance payments in writing; the corporation must receive from each of them a written affirmation of a good faith belief that the criteria for indemnification has been satisfied; they must commit in writing to repay the amounts advanced if it is ultimately determined such criteria has not been met; and the corporation must determine that the facts would not preclude indemnification. Id. Respondents admit they have failed to comply with any of these requirements. Answer ¶38(g)(i) and (ii); Resp. Reply Br. at 30, fn. 24.
   In addition, the board resolution permitting advances and indemnification was not made in accordance with Subdivision 6 of Section 300.083 which establishes who shall determine a person's eligibility for advances and indemnification. Because three of Capital Bank's four directors at the time were likely to be parties to the Wenzel Lawsuit, the determination was required to be made by special legal counsel, defined in the statute as "counsel who has not represented the [Bank] or a related corporation, or a director, officer, member of a committee or board, or employee whose indemnification is in issue." Minn. Stat. Ann. § 300.083, Subd. 1(e). The only opinion provided to the board came from Costley, Capital Bank's lawyer. Thus, the resolution itself fails to comply with the requirements of Minnesota law and would appear to be inoperative. The Board concludes it is an unsafe or unsound banking practice for directors of a bank to issue such a resolution in clear contravention of the statutory requirements and without the necessary business purpose.
   Here the resolution adopted by the board of directors of a bank conferred personal benefits upon those very same directors. Whenever such a situation arises, there is the appearance of or an actual conflict of interest. In such a situation, this Board is of the view that the propriety of the decision to bestow such a benefit should never be determined by those who will receive the benefit. Instead, the decision should be made by disinterested parties, such as independent outside directors. If there are no disinterested parties, the decision should be

61 Respondents claim that although excluded from the mandatory coverage of Section 300.083 as neither officers nor directors, these shareholders nonetheless may be indemnified under Section 300.083, Subd. 10, which states that "nothing in this section shall be construed to limit the power of the corporation to indemnify other persons by contract or otherwise." See also, Minn. Stat. Ann. § 300.08(b), granting corporations the discretion to "indemnify other persons" not identified in Section 300.083.
   Although his findings and conclusions are inconsistent, the ALJ seems to state that all Respondents could be indemnified under Section 300.083, Subd. 10. R.D. at 102. The Board rejects this position because it conflicts with the clear intent of the statute and common sense. First, such an interpretation would mean that shareholders (in whom the Bank has a much more attenuated interest than it does in its officers and directors) would be able to obtain indemnification without meeting any of the statutory safeguards imposed upon officers and directors. Second, Respondents' reading would permit indemnification for acts totally without nexus to corporate business or interest. Third, officers and directors who cannot satisfy the requirements of Section 300.083 nonetheless would be eligible for indemnification. This would nullify Section 300.083.
{{10-31-95 p.A-2592}}made only after all the facts and circumstances of the situation have been thoroughly scrutinized, and a recommendation has been obtained from a completely independent outside course such as an unrelated law firm or consultant. Here, the Board finds that the failure of the Bank's fiduciaries, both its directors and counsel, to require independent assessment of the propriety of the indemnification exposed the Bank to unnecessary risk and expense and constituted an unsafe or unsound practice.
   In sum, Respondents' claim for mandatory indemnification fails because they cannot meet the standards set forth in the statute and because they failed to comply with the objective statutory requirement that "special counsel" determine whether indemnification is appropriate. Their claim for discretionary indemnification and their claim for advances under the statute must fail as well because the indemnification resolution was passed by self-interested parties, there is no corporate purpose supporting such indemnification, and Respondents failed to satisfy the prerequisites for advances under the statute.
   Respondents breached their fiduciary duty to the Bank by causing it to pay legal fees on behalf of all defendants in the absence of a statute or by-law requiring it to do so, or an arms-length agreement for sharing of costs in litigation. Accordingly, the Board will enjoin the acceptance of any further payments, advances, or indemnification payments under the October 21, 1991, board resolution, and order the Individual Respondents to reimburse Capital Bank in the amount of all payments made by the Bank to the Law Firm Respondents in connection with the Wenzel Lawsuit because Respondents' actions constituted unsafe or unsound practices, and reckless disregard for the applicable statute, by virtue of which Respondents were unjustly enriched.62 12 U.S.C. §§ 1818(b)(1) and (6).
c. Statutory Authority
   Respondents claim that the FDIC's statutory authority to regulate indemnification payments is limited by section 18(k) of the FDI Act, 12 U.S.C. § 1828(k), to those circumstances where indemnification is sought for:
    (1) administrative enforcement proceedings; or
    (2) litigation initiated by a Federal banking regulator.
Because the Wenzel Lawsuit is neither an administrative proceeding nor a suit brought by the FDIC, they claim the FDIC is without authority to issue a cease and desist order regarding indemnification in the Wenzel Lawsuit. This is simply wrong. Section 18(k), added the FDI Act by the Comprehensive Crime Control Act of 1990, Pub. L. No. 101–647, 104 Stat. 4789 (1990), was intended to bolster the FDIC's enforcement authority, not narrow it. See, H.R. Rep. No. 681(I), 101st Cong., 2d Sess. 1 (1990), reprinted in 1990 U.S.C.C.A.N. 6472. But section 18(k) of the FDI Act is irrelevant to this proceeding.

   [.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


62 Respondents also claim that the issue of indemnification is moot because the Bank will not "need" to indemnify Respondents. Allegedly, Amundson has agreed to do so. Resp. Br. at 85 fn. 19. However, the Board's reading of the Stock Purchase Agreement between Richard D. Donohoo, Shari Mathies, Craig R. Mathies, and Lloyd A. Amundson is quite different than Respondents'. The Agreement provides in relevant part:
    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).
FDIC Ex. No. 345.
Thus, on its face this Agreement provides no substitute indemnification regarding the Wenzel Lawsuit. On the record before the Board, the Bank remains obligated under the indemnification resolution to indemnify the Individual Respondents for any liability imposed on them as a result of the Wenzel Lawsuit.
{{10-31-95 p.A-2593}}the Board. In the Matter of The Citizens Bank of Clovis, Clovis, New Mexico, FDIC-91-406b, Bound Vol. 2 P-H FDIC Enf. Dec. ¶5208 (1993); In the Matter of The Citizens Bank of Cortez, Cortez, Colorado, FDIC-89-220b, Bound Vol. 2 P-H FDIC Enf. Dec. ¶5166, (1991); FDIC-84-181b, 1 P-H FDIC Enf. Dec. ¶5052 (1985).

   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.

   [.14] He does not, however, recommend a Conclusion of Law that the Law Firm Respondents are institution-affiliated parties and thus are subject to the enforcement provisions of section 8 of the FDI Act, or recommend appropriate remediation.64 Consistent with the holding of the United States Court of Appeals for the Second Circuit in Cavallari v. Office of the Comptroller of the Currency,65 the Board finds that the Law Firm Respondents are institution-affiliated parties and will issue an appropriate remedy.
   While representation of the Bank by Lindquist & Vennum and Rasmussen & Associates, Ltd. was certainly different in degree,66 the conduct of both Law Firm Respondents satisfies all of the elements of the definition of the term "institution-affiliated party." It is clear from the record that the Law Firm Respondents, in billing only the Bank and accepting all their fees in the Wenzel Lawsuit from Capital Bank, knowingly or recklessly disregarded the requirements of Minnesota law governing indemnification and advances, participated in unsafe or unsound practices, and violated Judge MacLaughlin's order prohibiting payments from the Bank on behalf of the Individual Respondents, see fn. 60 supra, causing more than minimal financial loss to the Bank.
   Lindquist & Vennum provided two opinion letters in response to inquiry by the FDIC regarding the appropriateness of the Capital Bank board resolution to indemnify the individual defendants in the Wenzel Lawsuit. FDIC Ex. Nos. 290, 292. In each, the firm took the position that the resolution was proper. Lindquist & Vennum chose to ignore the statutory requirement applicable in this case that the determination of eligibility for indemnification be made by "special legal counsel," the statutory definition of which Lindquist & Vennum did not satisfy. See Minn Stat. Ann. § 300.083 Subd. 1(e); Subd. 6(a)(3). Moreover, the firm knowingly ignored a valid order of the United States District Court for the District of Minnesota prohibiting legal fees for the individual defendants to be paid by Capital Bank. In the face of such a court order, the firm's failure to apportion legal fees among the defendants constitutes reckless behaviour. There is nothing in the record to support its decision to have Capital Bank pay one hundred percent of the legal fees in the Wenzel Lawsuit.
   As previously discussed, the Law Firm

63 The Board leaves to the appropriate forum questions of possible conflict of interest, or other violations of the Minnesota Rules of Professional Conduct by the Law Firm Respondents.

64 12 U.S.C. § 1813(u)(4) defines the term "institution-affiliated party" to include—
(4) any independent contractor (including any attorney, appraiser, or accountant) who knowingly or recklessly participates in —
    (A) any violation of any law or regulation;
    (B) any breach of fiduciary duty; or
    (C) any unsafe or unsound practice,
which caused or is likely to cause more than a minimal financial loss to, or significant adverse affect on, the insured depository institution.

65 Augustus I. Cavallari, Jr. v. Officer of the Comptroller of the Currency, and Board of Governors of the Federal Reserve System, ____ F.3d ____, 1995 WL 276954 (2nd Cir., May 11, 1994). The court upheld a removal order, a civil money penalty, and an order of restitution against a lawyer as an institution-affiliated party. The lawyer was found to have "participated" in the transactions at issue because he had provided oral and written advice which was "not the kind of good faith legal advice that FIRREA shields." He was found to have engaged in reckless behavior because he ignored a cease and desist order of which he was aware, and failed to make adequate investigation of the facts underlying his advice. 1995 WL 276954, *4.

66 The Bank paid $252,755.00 to Lindquist & Vennum through April 1994 and $8,111.00 to Rasmussen & Associates, Ltd. through February 1992. Respondents claim that Rasmussen & Associates, Ltd. provided no legal services with respect to the Wenzel Lawsuit after that date, except to Respondent Rasmussen.
{{10-31-95 p.A-2594}}Respondents' assertion that the bulk of their fees were incurred on behalf of the Bank and that the Individual Respondents were merely coming along for the ride, is contrary to fact and common sense.67 Lindquist & Vennum prepared the answer filed in the Wenzel Lawsuit and was, or should have been, well aware of the true nature of the lawsuit as a dispute among the shareholders of CCC. They prepared the counterclaim, which was purely personal to Donohoo and Mathies. FDIC Ex. No. 304b. Moreover, the improper board resolution which it prepared and defended in legal opinions exposed the Bank to significant loss. At the time of the hearing the amount of legal fees paid by the Bank on behalf of all defendants, approximately $200,000, was a significant amount relative to the size of Capital Bank. F.F. No. 337. Respondent Lindquist & Vennum admits that additional attorneys' fees and expenses have been paid by the Bank on behalf of all defendants since the hearing and has submitted evidence of additional billings in the amount of $70,353.29. Most important, under the board resolution the Bank is exposed to substantial liability for any judgment issued against any or all of the Wenzel individual defendants.68
   Though not earning comparable legal fees, Rasmussen & Associates, Ltd. also satisfies the definition of an institution-affiliated party and has engaged in breaches of fiduciary duty and unsafe or unsound practices for which remediation under section 8 is appropriate. The firm's only apparent principal was Respondent Rasmussen who, as a director of Capital Bank, knew all the facts. Tr. 1650. The firm through Respondent Rasmussen knew or should have known of the divergent interests of Capital Bank and the Individual Respondents in the Wenzel Lawsuit. The firm participated in the presentation of the counter-claim and knew or should have known that because the counter-claim only asserted claims related to individual defendants, not the Bank, the Bank's payment for legal fees in connection therewith was improper. By court order the individual defendants in the Wenzel Lawsuit were prohibited from having their legal fees in connection with the Wenzel Lawsuit paid by the Bank. The firm was aware of the court order, but billed Capital Bank and accepted legal fees from Capital Bank for representation of individual defendants in spite of the court order. The impropriety in accepting the fees was compounded by the firm's attempt to evade the court order by asserting that all legal services were provided on behalf of the Bank.69 Most importantly, the firm knew or should have known that the requirements of section 300.083 had not been complied with, especially the requirement that the determination to advance expenses should have been made by special legal counsel. Tr. 2156-57, 2161-62. Although its legal fees were not substantial, the firm's participation and acquiescence in the scheme to have Capital Bank fund the entire defense of the Wenzel Lawsuit resulted in substantial loss to the Bank and exposure to substantial liability.
   The Board concludes that the Law Firm Respondents are institution-affiliated parties within the meaning of section 3(u)(4) of the FDI Act. As such, they are subject to the provisions of section 8 of the FDI Act. The Law Firm Respondents will be ordered to reimburse Capital Bank for the entire amount of legal fees paid to them by Capital Bank in connection with the Wenzel Lawsuit.70 Because of their knowing disregard of Minnesota law, because of their failure to provide independent representation of the Bank, and because of their failure to comply with the order of Judge MacLaughlin, all fees were obtained as a result of violations of a court order, breaches of fiduciary duty, and unsafe or unsound banking practices. Accordingly, divestiture of their improper gain is appropriate.

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


67 Respondents claim all payments were made on behalf of the Bank. Resp. Reply Br. at 27; Tr. 2179. For the reasons discussed above, the Board disagrees.

68 Even if the court order holding the Bank liable under the theory of vicarious liability for the judgement against Donohoo and Rasmussen is overturned on appeal, there is nothing in the record before the Board indicating that the October 1991 board resolution has been rescinded. Thus the Bank remains liable under the October 1991 board resolution.

69 As counsel to the Bank, the firm had an obligation not to cause the Bank to violate the court order.

70 The Board's Order requiring reimbursement by the Individual Respondents and reimbursement by the Law Firm Respondents will provide for joint and several liability to avoid double payments to the Bank.
{{10-31-95 p.A-2595}}meaning of section 3(u)(4) of the FDI Act, 12 U.S.C. § 1813(u)(4), in that Rasmussen and Associates, Ltd. through Respondent Rasmussen, and Lindquist & Vennum, through David A. Allgeyer, Sally J. Whiteside, and Kevin J. Costley, knowingly and/or recklessly participated in violations of a court order, breaches of fiduciary duty, and unsafe or unsound practices in connection with Capital Bank which caused or are likely to cause more than minimal financial loss to Capital Bank.
   2. The violations of the CBCA, as well as other violations of Regulation O and Section 23A and unsafe or unsound practices committed by the Individual Respondents in furtherance of their scheme to acquire control of Capital Bank, involved a reckless disregard for the CBCA, Regulation O and Section 23A.
   3. The Wenzel Lawsuit was brought about by self-serving and abusive violations of law, regulation and order, breaches of fiduciary duty, and unsafe or unsound practices committed by the Individual Respondents in furtherance of their scheme to illegally and wrongfully acquire control of Capital Bank.
   4. It was an unsafe or unsound practice by Donohoo, Mathies, and Rasmussen to cause, and by all Individual Respondents to accept, payment by Capital Bank for their legal fees and expenses, incurred in the Wenzel Lawsuit and to permit Capital Bank to pay and undertake the payment of and indemnification for all attorneys' fees, expenses, and liabilities associated with the Wenzel Lawsuit.
   5. Donohoo, Mathies, and Rasmussen did not satisfy the requirements for mandatory indemnification and advances of section 300.083 of the Minnesota Statutes, Minn. Stat. Ann. § 300.083, specifically subdivisions 2, 3 and 6 of section 300.083.
   6. Respondents Donohoo, Mathies, and Rasmussen were not entitled to mandatory indemnification because their actions in connection with the purchase of Capital Bank shares and in causing the Bank to pass the indemnification resolution and to pay legal fees of all defendants in the Wenzel Lawsuit:
       (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.
   7. None of the Respondents were entitled to discretionary indemnification because the indemnification resolution was passed by self-interested parties, there is no corporate purpose for such indemnification and Respondents failed to satisfy the prerequisites for advances under the statute.
   8. The actions of directors Donohoo, Mathies and Rasmussen in causing the Bank to pass the indemnification resolution and to pay legal fees of all defendants in the Wenzel Lawsuit were breaches of fiduciary duty and unsafe or unsound banking practices.
   9. The Law Firm Respondents knowingly and/or recklessly participated in breaches of fiduciary duties and unsafe or unsound practices in connection with the indemnification of the Individual Respondents by Capital Bank and the billing and accepting of all legal fees and expenses for the defense of the Wenzel Lawsuit solely from Capital Bank. Evidence of record indicates that the Bank has paid $260,866.00 in legal fees and expenses to the Law Firm Respondents for the defense of the Wenzel Lawsuit.
   10. These breaches of fiduciary duty and unsafe or unsound practices have caused or are likely to cause Capital Bank more than minimal financial loss and/or have a significant adverse effect on Capital Bank.

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:

Respondent Restitution CMP Total
Donohoo $925,554 $75,000 $1,000,554
Mathies $925,554 $50,000 $975,554
Rasmussen $23,600 $15,000 $38,600
Field $295,012 $75,000 $370,012
Godbout-Bandal $120,000 $30,000 $150,000

   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).


71 The maximum CMPs under the First Tier which may be assessed against the Individual Respondents for their respective violations and the CMPs requested are:
Respondent Maximum CMP CMP Sought
Donohoo $24,660,000 $1,000,000
Mathies $20,800,000 $1,000,000
Rasmussen $14,535,000 $75,000
Field $8,290,000 $75,000
Godbout-Bandal $5,635,000 $75,000

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-


72 By virtue of their ability to sell control of Capital Bank, Respondents Donohoo and Mathies received a "package" of benefits in addition to the sales price of their shares under the Stock Purchase Agreement with Lloyd Amundson. Included were $400,000 escrowed to satisfy any expenses and liability of Donohoo and Mathies arising out of a collection suit filed by the Wenzels; a buy-out of their employment agreements ($200,000 each); a non-compete and consulting agreement ($300,000 each); their Bank-owned cars ($30,377 total), an escrow fund for attorney fees and expenses incurred in this proceeding ($50,000); and a $43,131 "plug figure" to reach the amount Amundson was willing to pay for Capital Bank. Because all of these items were part of the Stock Purchase Agreement and because they were all part of the Stock Purchase Agreement and because they were all made possible by Donohoo's and Mathies' illegal control of the Bank, they are appropriately included in the gain attributed to Donohoo and Mathies. From the total amount of $2,151,108 paid by Amundson to, or for the benefit of, Donohoo and Mathies, subtraction of the $300,000 they paid for their shares results in a total net gain of $1,851,108, or $925,554 each.

73 At the time of the hearing the Rasmussen loan still had an outstanding balance of $10,000. R.D. at 103. It cannot be determined from the record whether a balance remains. To the extent that it does, payment will be ordered.
{{10-31-95 p.A-2598}}enor. FDIC Ex. Nos. 65, 67; Stipulated Tr. at 208-209, 233. Field's loans were paid with the proceeds from his sale of Capital Bank stock. Tr. 2133. The loan to Godbout-Bandal's interest, PPA, was classified "Substandard" and paid only at the insistence of the FDIC that it be removed from the Bank. FDIC Ex. Nos. 13, 289; Tr. 1465.
   Finally, while noting that Capital Bank's financial condition improved, the Board reiterates its conclusion in Grubb that
    ... 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.
FDIC-88-282k and FDIC-89-111e, ¶5181 at A-2029.
   The Board has reviewed the evidence and finds the ALJ's recommended CMPs to be appropriate when added to the amount of profit made by each Individual Respondent. The Board will order the payment of CMPs in the following amounts:
Respondent CMP
Donohoo $1,000,554
Mathies $975,554
Rasmussen $38,600
Field $370,012
Godbout-Bandal $150,000
3. Cease and Desist Order

   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.
12 U.S.C. § 1818(b)(1).
   Therefore, an order requiring the Law Firm Respondents, as institution-affiliated parties, and the Individual Respondents, to reimburse Capital Bank for all monies paid in connection with the Wenzel Lawsuit is appropriate.

CONCLUSION

   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.

ORDER

   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).

   II. ORDER TO PAY CIVIL MONEY PENALTY — Respondents Richard D. Donohoo, Craig R. Mathies, Bruce A. Rasmussen, Cheryl C. Godbout-Bandal, Wayne Field.
   By reason of the violations of law, regulation and/or cease and desist order, unsafe or unsound practices and/or breaches of fiduciary duties engaged in by each Respondent, and after taking into account the appropriateness of the penalty with respect to the financial resources and the good faith of each Respondent, the gravity of the violations, the history of previous violations, and such other matters as justice may require, penalties are hereby assessed against Respondents pursuant to sections 7(j)(16), 8(i)(2) and 18(j)(4) of the FDI Act, 12 U.S.C. §§ 1817(j)(16), 1818(i)(2) and 1828(j)(4), as follows:
       (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.
   
III. ORDER TO CEASE AND DESIST

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");
   IT IS FURTHER ORDERED that Respondent Bruce A. Rasmussen shall pay any outstanding unpaid balance plus interest on Loan No. 4100-29836 entered into between Peoples Bank and Respondent Rasmussen on or about July 30, 1990, and any amendments thereto.
   IT IS FURTHER ORDERED that with respect to any expense or legal fees arising out of, or in connection with, the lawsuit entitled:
   Alice E. Wenzel, Ronald G. Wenzel and Lawrence D. Wenzel, Trustees under the Gilbert P. Wenzel Testamentary Trust and Capital City Corporation, Plaintiffs v. Craig R. Mathies and Richard D. Donohoo, Shari {{10-31-95 p.A-2600}}
Mathies, Bruce Rasmussen, Wayne Field, Cheryl Bandal, Capital Bank, John Roe and Mary Roe and John Doe and Mary Doe filed in the State of Minnesota District Court ("Wenzel Lawsuit").
   Within 30 days of the effective date of this ORDER, the Law Firms and each Individual Respondent, jointly and severally shall make restitution or provide reimbursement to Capital Bank for any and all attorneys' fees, disbursement or any other expense or liability paid by Capital Bank to Bruce A. Rasmussen & Associates, Ltd., and/or to Lindquist & Vennum through the date of this Order on behalf of Capital Bank and/or any other defendant in connection with, or arising out of, the Wenzel Lawsuit.
   This ORDER shall become effective 30 days from the date of its issuance.
   The provisions of this ORDER shall remain in effect and enforceable except to the extent that, and until such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   IT IS FURTHER ORDERED, that copies of the Decision and Order be served upon all Respondents, counsel for all parties, the ALJ, and the Commissioner of Commerce for the State of Minnesota.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 5th day of July, 1995.
/s/ Jerry L. Langley
Executive Secretary

__________________________________________
RECOMMENDED DECISION

(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

I. STATEMENT AND NATURE OF THE
CASE

   This proceeding was instituted by the Federal Deposit Insurance Corporation ("FDIC" or "agency") on September 9, 1992. Following prehearing procedures, the hearing of this matter was conducted on twelve days between April 12 and 27, 1993. Briefing was delayed upon the application of agency and of Respondents for various reasons, and was concluded on November 12, 1993. The extensive delay in producing this Recommended Decision was occasioned both by the requirements of other matters pending in this Office, and the complexity and number of issues in this single multiparty proceeding.
   The inception of this proceeding lies in the events surrounding the 1990 acquisition of control of Capital Bank, of Saint Paul, Minnesota ("Bank") by Richard D. Donohoo ("Donohoo"), Craig R. Mathies ("Mathies"), Bruce A. Rasmussen ("Rasmussen"), Cheryl C. Godbout-Bandal ("Godbout-Bandal"), and Wayne Field ("Field"), who allegedly acted in concert, pursuant to a joint scheme, as aided and abetted by the law firms of Bruce A. Rasmussen, and of Lindquist & Vennum (jointly "the Law Firms," or individually by firm name) to purchase a controlling interest in the Bank.1 In order to finance the arrangement they allegedly engaged in and concealed a number of illegal and improper banking transactions

1 Charges against Leonard C. Misenor ("Misenor") and against Capital Bank ("Bank") have been withdrawn.
{{10-31-95 p.A-2601}}and failed to provide prior notice to, and obtain the approval of the FDIC as required by the Change in Bank Control Act.
   The relief requested in the various Notices filed is:
       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.
   Though two and a half weeks of hearing time, even with a large number of documentary exhibits, may not appear to reflect an overly complex case in an area where complexity is the rule rather than exception, the allegations and evidence adduced in this matter is indeed, as described by FDIC Enforcement Counsel, similar to a highly complex jigsaw puzzle, where the multiple-imaged picture cannot be discerned until each piece is placed in position. The record must be burdened with lengthy findings of facts, delegated to the end of the document, as an appendix. Many, if not all of these facts are also stated, in less detail and without docket reference, in the Discussion portion of the Recommended Decision, immediately following. Individual facts will directly or indirectly bear on more than one of the disparate issues of the proceeding, and require some repetition. There is little dispute as to the facts, 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.
   The vortex of the dispute is the nature of the Change in Bank Control Act, section 7(j) of the Federal Deposit Insurance Act, found at 12 U.S.C. § 1817(j), but this Draft Recommended Decision follows a more historical approach, attempting to establish facts, in order of date, within the framework of each issue, and hence the portion relating to the primary issue is not found until page 36, the segment entitled "Acting in Concert." It is the undersigned's recommended decision that the requirements of prior agency approval applies to groups which can be recognized as acting in concert, referred to herein as "concerted groups," who achieve the designated power in the sense of the ability, rather than, as argued by Respondents, in the sense of mutual binding obligation. The recommendation thus is involved with the capacity of the concerted group, and not with the binding which ties the individual rods into the fasce, those agreements, pledges, contracts, joint covenants, or whatever other instruments of enforcement the legal mind can conceive. The undersigned takes this position based upon his understanding that the intent of the statute is to provide an exercise of discretion in authorizing this power, this ability, to control financial institutions in a world where the enforcement techniques are not only complex but may in fact be hidden and, as is painfully apparent in the past decade, not appear until a later date, when the agency's intervention cannot undo the harm which may have been done.
   In summary, the Recommended Decision will find as fact generally as follows: A concerted group formed by Respondents Donohoo and Mathies, which admittedly would have required both Federal Reserve Board and FDIC authority, failed to acquire control of the Bank through control of its holding company. Some of the investors defected from the plan, and facing the loss of investment contributions already made or expected, Respondents Donohoo and Mathies formed a second group around a nucleus of survivors from the first group, with a common purpose of acquiring direct ability to control the Bank through stock ownership in that entity, rather than secondary control of the Bank through stock ownership of its holding company. If not from universal joint decision, as known to Donohoo and Mathies the contributions of the concerted group members came from the proceeds of the bank itself. The Respondents claim some form of epiphany through which their prior under- {{10-31-95 p.A-2602}}standing that the change required authorization, was transmogrified to a current under{{10-31-95 p.A-2602}}standing that, without the manacles of binding agreement to forevermore act jointly, achieving ability to control through dilution of outstanding stock interests does not constitute an act requiring the approval of the designated supervisory and regulatory agency.
   That this second concerted group achieved its goal through the continued use of violative unsafe and unsound practices, fiduciary breaches, and other violations in order to meet the time and quantitative requirements of interest payments, capital contributions, and avoiding having the Bank sold to other interests, led to further violations alleged in the Notices and ruled upon herein. But always bear in mind that the cycle was instituted by the attempts to establish a concerted group for the purpose of achieving control, and that this was achieved without the required agency approval.

II. DISCUSSION

A. GENERAL

   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.

B. VIOLATIONS

   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 Lang and Donohoo owned 50 percent each of the outstanding shares of First Winthrop Bancorporation, Inc., which owned in excess of 99 percent of the outstanding shares of Peoples State Bank, Winthrop, Iowa
{{10-31-95 p.A-2603}}each representing 71,000 shares. These certificates were placed in escrow with Jon Albrightson and pledged as collateral with the remaining shares owned by Heaton to secure the Wenzel Note.
   During the summer and fall of 1988, Donohoo and Mathies moved to positions from which they controlled the day-to-day affairs of the Bank. By fall of 1988, Donohoo was a director and chairman of the board and president of CCC, which, as noted, was the holding company which owned virtually all of the stock of the Bank. He was also a director and vice chairman of the board and president of the Bank. Although allegedly hired by the Bank as a consultant, Mathies actually served as the chief executive officer of the Bank from the fall of 1988 until his election as executive vice president in May 1989. Mathies became a director of the Bank in December 1989. Donohoo and Mathies also secured the replacement of independent directors on the Bank's board with individuals selected by them. By January 1989, Donohoo and Mathies controlled the Bank's board of directors. The CCC board then consisted of Donohoo, Mathies, and Heaton. Heaton was inactive, and from and after February 1990, when Mathies had been added to the CCC board, Donohoo and Mathies also had effective control of the day-to-day affairs of CCC.
   During the summer of 1988, Lang had a falling out with Donohoo, resigned as a Bank director and withdrew from the group taking several of the investors group with him. When the Bank Stock Loan from Midway came due on August 26, 1988, Lang refused to co-sign a renewal note and put pressure on Donohoo and Mathies as well as Midway to be released from any liability on Midway Loan #1. Rather than lose the collateral pledged by Lang, Midway continued to carry the note in "past due" status. Donohoo and Mathies, meanwhile, were scrambling to put together a new investment group not only to pay off Midway Loan #1, on which they were personally liable, but also to exercise the option to purchase the remaining shares of CCC. After receiving several defaulted statements from Donohoo and Mathies that they just about had their investment group together, on November 1, 1988, Midway sent Lang, Donohoo, and Mathies, a letter stating that Midway would commence foreclosure on Lang's and Donohoo's stock in First Winthrop if Midway Loan #1 was not paid in full by November 15, 1988.
   Between November 4, 1988, and November 18, 1988, Donohoo and Mathies sold four investment units raising a total of $292,000.3 Using these funds, Donohoo and Mathies reduced their liability on Midway Loan #1 to approximately $219,000, and Midway agreed to release Lang, and to renew Midway Loan #1 until January 3, 1989.
   By the early part of 1989, Donohoo and Mathies completed their investment group, consisting of themselves and GodboutBandal, Field, Thorne, Hauser, Misenor, and Christianson. All but Thorne were indebted to the Bank at the time of their investments. Hauser and Christianson received extensions of credit from the Bank in close proximity to their investments. Misenor's and Field's investments were actually financed by funds from the Bank. Although these individuals invested substantial funds in the venture, the group never exercised the option to purchase the remaining shares of CCC, probably because shortly after Donohoo and Mathies acquired their interest in CCC, the Bank began experiencing large loan losses which led to CCC's insolvency in mid-1989. In addition, Heaton was experiencing financial difficulties and was delinquent on the stock loan at Midwest Federal, where though CCC was the primary obligor Heaton had guaranteed payment. Heaton was also delinquent on his share of the payments on the Wenzel Note. The Federal Reserve and the FDIC were insisting that CCC repay the Bank for excessive tax payments upstreamed to CCC. Additionally, Thorne and Christianson had died and a third member of the group, Hauser, a director of the Bank, declared bankruptcy and resigned as a director, having consented to an Order issued in early 1990, by the Office of Thrift Supervision issued pursuant to section 8(e) of the Act, 12 U.S.C. § 1818(e), prohibiting him from further participation in the affairs of federally insured financial institutions.
   Although the effort to purchase CCC had been stymied, Donohoo and Mathies soldiered on with their efforts on behalf of the group to acquire control of the Bank by ne-

3 As hereinafter described, two of these units were purchased using funds of the Bank. A third unit was not directly financed by the Bank, but the Bank did lend the individual funds at the same time he made his investment.
{{10-31-95 p.A-2604}}gotiating to purchase the Bank Stock Loan from the Resolution Trust Corporation ("RTC"), receiver for Midwest Federal.4 The RTC had obtained an appraisal of the 6,685 shares of stock securing this loan and was soliciting bids from parties interested in purchasing the Bank by purchasing the Bank Stock Loan. From the date of their initial purchase of the 24.9 percent of CCC in May 1988 through as late as June 1, 1990, Respondents' communications and correspondence with the Bank, the State regulatory authority, the FDIC, Midwest Federal and Midway indicated they were well aware of the requirements of the CBCA, and believed it necessary to file a prior notice of change in control of the Bank if the investment group exercised their option to purchase the remaining shares of CCC or purchased the Bank Stock Loan.
   By late June and early July 1990, Donohoo, Mathies, Field and Godbout-Bandal were facing immediate danger of losing the Bank and their investment to date. Donohoo and Mathies stopped making their share of the payments on the Wenzel Note and the threat of foreclosure on the 569,812 shares of CCC stock securing the Wenzel Note was imminent. Also, the RTC had several interested purchasers of the Bank Stock Loan who were preparing to schedule due diligence reviews. The RTC had indicated that it hoped to sell the Bank Stock Loan to the highest bidder by the end of July 1990.

   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


4 The Resolution Trust Corporation was appointed receiver of Midwest Federal on October 5, 1990.

5 Net worth of course is not an indication of available ready cash without the sale of some other asset.
{{10-31-95 p.A-2605}}either unaware of the loan itself or unaware that the monies transferred to them were the proceeds of these loans. However, the facts clearly indicate that Donohoo and Mathies knew about these loans and the purpose behind them.
   On November 4, 1988, three days after Midway's default notice, Christianson made a $73,000 purchase of investment unit in Capital Partners. That month, the Bank made two loans to Christianson subsequently classified "Substandard" at the 1989 FDIC Examination. FDIC Ex. 12, p. 29.
   On November 14, 1988, the day before Midway's foreclosure deadline, the Bank made a $256,000 loan to Field who, the next day, transferred $73,000 to Donohoo and Mathies to purchase an investment unit in Capital Partners.
   On December 20, 1988, Hauser purchased an investment unit for $50,000 in Capital Partners. Four days later, the Bank renewed a $400,000 loan to Hauser. On Friday, January 20, 1989, the Bank's board of directors, consisting of Donohoo, Mathies, Rasmussen and Hauser, reaffirmed a $650,000 line of credit for Hauser. The following Monday, Hauser transferred $96,000 to Donohoo and Mathies to purchase an investment unit in Capital Partners.
   On April 7, 1989, the Bank made a $434,000 loan, which included an additional advance of $200,000, to Field. That same day, Field transferred $60,000 to Donohoo and Mathies to purchase an investment unit through the Capital Partners account.
   On July 25, 1990, the Bank made a $485,000 loan to PPA, a related interest of Godbout-Bandal. When the proceeds were advanced on July 31, 1990, $200,000 of the proceeds were used to finance Godbout-Bandal's purchase of 1,400 shares of the new Bank stock. Also on July 31, 1990, the Bank permitted a $90,000 overdraft in Godbout-Bandal's personal account to fund her purchase of an additional 700 shares of bank stock.
   The seven transactions cannot properly be viewed separately, as distinct, unrelated events. They are too close in time, too much in harmony with Donohoo's and Mathies' announced intent to control the Bank, too conducive to saving Donohoo's and Mathies' investment, and too consistent with a common plan or scheme to be merely coincidental or isolated transactions. Donohoo and Mathies claim to have had no knowledge of these loans or to have been unaware they were receiving loan proceeds. The facts and circumstances of each of these transactions will be dealt with in more detail to show that Donohoo and Mathies knew of and coordinated each of these loans.
   First, Donohoo and Mathies controlled the day-to-day affairs of the Bank when each loan was made. Donohoo was president and chairman of the board of directors. Mathies, although nominally a "consultant," oversaw the day-to-day affairs of the Bank and was in effect the Bank's executive vice president. He officially became executive vice president June 1, 1989. Mathies attended all loan committee meetings and all but one director meeting. The only Bank loan officers with a lending limit in excess of $75,000 during this time were Misenor and Donohoo, until Mathies officially became an officer of the Bank on June 1, 1989.
   Second, Donohoo and Mathies controlled all aspects of the investments in the Capital Partners scheme, and the later authorization and issuance of the 7,000 shares of new Bank stock on July 30, 1990. As previously noted, when Donohoo and Mathies purchased 24.9 percent of CCC, they set up a demand deposit account at Midway bearing the name Capital Partners ("CP DDA"). They used this account exclusively from June of 1988 through July 30, 1990, as the clearing account for the purchases of investment units through Capital Partners, to make payments on Midway Loan #1 and the Wenzel Note, and to purchase their own Bank stock. All of the funds which flowed into the CP DDA insured to Donohoo's and Mathies' benefit. They both endorsed each check deposited to the account and both signed each check drawn on the account. All of the above referenced purchased of investment units through Capital Partners from borrowers at the Bank were received personally by Donohoo and Mathies and deposited by them to the CP DDA. When they purchased a unit in Capital Partners, each investor executed an Investment Agreement6 which was also signed by Donohoo and Mathies.

6 These agreements did not contain proxy assignments, purchase and sale agreements, or any other indicia of a grant of power to control or vote the stock if, as and when purchased.
{{10-31-95 p.A-2606}}
   Third, in each of the five instances where Bank loan proceeds were used to purchase investment units through Capital Partners or to purchase Bank stock, the loan and the purchase occurred either on the same day or within a single day of each other. Thus, Donohoo and Mathies were not only involved with but contemporaneously controlled both sides of the loan transactions. They controlled the Bank that made the loans and they immediately received the loan proceeds.
   In sum, 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. With this realization, it is apparent that the testimony of Donohoo and Mathies was not credible. Moreover, as each of these transactions is reviewed in greater depth, this conclusion that Donohoo and Mathies and the individual borrowers-investors-purchasers knew of the loans and of their purpose is even more compelling.

1) The Misenor Loan

   On November 15, the date Midway said it would commence foreclosure on the collateral securing Midway Loan #1, Midway advised Donohoo and Mathies that it would renew Midway Loan #1 if the balance was paid down to $200,000. Donohoo and Mathies informed Midway that this would be done by Friday, November 18, 1988, when they expected to receive the investments of Brooks Hauser and Leonard Misenor. On November 18, 1988, the Bank made a $76,000 loan purportedly to Misenor's parents, the proceeds of which were transferred to Misenor. On that same day, Misenor transferred $73,000 of the proceeds to Donohoo and Mathies by giving them his check in that amount. Also, on November 18, 1988, Donohoo, Mathies and Misenor visited Midway where the check received from Misenor was endorsed by Donohoo and Mathies and used to make an interest and principal payment which reduced the balance of Midway Loan #1 to $218,520.66. That same day, Midway renewed the balance on Midway Loan #1 for 45 days to January 3, 1989, and released Lang from his obligation of the loan. Midway's threatened foreclosure on Donohoo's First Winthrop stock was averted, by using the credit facilities of the Bank to fund investments in Donohoo's and Mathies' scheme to change control the Bank.7
   Respondents Donohoo and Mathies testified they were unaware that the money received from Misenor came from the proceeds of the Misenor Loan. The operative facts demonstrate they were well aware of the source of Misenor's payments. On Tuesday, November 15, 1989, Donohoo and Mathies told Midway they would have Misenor's money by Friday. On Friday, November 18, 1989, the Bank made the loan to Misenor's parents. Also, on Friday, Donohoo, Mathies and Misenor apparently hand carried the check to Midway. Donohoo was the originating loan officer of record for the Misenor Loan, and admitted he initialled the officer's loan comment dated November 29, 1988 as such. Prior to making the loan, Donohoo, Mathies and Misenor discussed funding Misenor's investment through a loan by the Bank to his parents.
   While Misenor's testimony may be looked upon with some credulity itself, under the factual circumstances the testimony of Donohoo and Mathies is not merely undeserving of credibility but is completely ludicrous.
   Misenor testified that Donohoo and Mathies approached him about purchasing an investment unit in Capital Partners. Misenor also testified that he discussed the Misenor Loan and the true use of proceeds with Donohoo and Mathies before the loan was made. Donohoo and Mathies denied Misenor's testimony, and testified that Misenor approached them and asked to be permitted to invest. They claimed they first became aware of the Misenor Loan in December 1988 and first learned that the loan proceeds were used for Misenor's investment when they received the Notice in this case. In support of their claim, they testified that they would not have approached Misenor, because he was not the type of investor they wanted, because he did not have the financial strength they desired for their investment group. In fact, Misenor's lack of financial strength actually supports Misenor's

7 Previously, on November 15, 1988, Donohoo and Mathies had used an investment received from Field to reduce the outstanding balance on Midway Loan #1. As discussed below, Field's investment was made with the proceeds of a loan he received from the Bank.
{{10-31-95 p.A-2607}}testimony. Donohoo and Mathies needed Misenor's investment because of the pressure from Midway. With his investment, they were able to pay down the Midway Loan and obtain a renewal on November 18, 1988. No other investor came forward with money until Hauser did so one month later, on December 19, 1988. Moreover, if Donohoo and Mathies really believed that Misenor did not have the desired financial strength, they should have been concerned about where he was going to get the $73,000 investment and ultimately the $60,000 payment due February 1, 1989. Yet both Donohoo and Mathies testified they were not concerned. Donohoo even testified that when he bought back a portion of Misenor's interest in CCC in September of 1989, he thought Misenor "was in way over his head anyway ..." Donohoo's and Mathies' testimony that they were not concerned about the source of Misenor's investment is one of many instances in this case in which Respondents plead lack of knowledge as a defense, where it is the obvious fact of the matter that they purposely buried their heads in the sand to provide themselves, to use that fine word of the 1980s and 1990s, "deniability."
   Another discrepancy in Donohoo's and Mathies' testimony of deniability was their claim never to have investigated the Misenor Loan and, therefore, did not know the Misenor Loan proceeds were used for Misenor's investment until after they received the Notice in this proceeding. Their cloning of the legendary ostrich position was obviously assumed because they knew full well that the proceeds of the loan were to be used in their investment scheme. Donohoo testified that Mathies warned Misenor prior to his investment that he could not use Bank funds. Further, if Donohoo and Mathies felt constrained to warn Misenor, they certainly should have made it their business to take precautions against such a loan, should have noted the obvious lack of bona fides in granting the loan, and been immediately suspicious of Misenor's sudden access to the exact amount of funds required. Donohoo admitted that he initialed the November 29, 1988, loan comment for the Misenor Loan, but failed to see any connection at that time between Misenor's investment and the Misenor Loan, so, according to Donohoo, no investigation was made. Both Donohoo and Mathies testified they probably first learned of the Misenor Loan when it would have shown up on the Bank's loan reports in December of 1988, but again, claim that they did not notice any connection between the loan and Misenor's investment in Capital Partners or even feel it necessary to investigate. Second, at the FDIC's August 25, 1989 examination, the Misenor Loan was criticized and would have been adversely classified if the loan had not been restructured and reduced by a $20,000 payment September 14, 1990, prior to the close of the examination. Donohoo and Mathies gave Misenor a $20,000 check to pay down the Misenor Loan so it would not be classified. Donohoo attempted to justify the $20,000 transfer to Misenor as a buy back of a portion of Misenor's investment in Capital Partners. However, elsewhere Donohoo testified that CCC had become insolvent prior to July 1989, well in advance of the purported buyback. Since CCC was insolvent, Misenor's investment in Capital Partners was worthless, and Donohoo's explanation for the transfer of $20,000 from the CP DDA account to Misenor is insupportable. It make no logical sense at all for Donohoo and Mathies to make a $20,000 gift to Misenor in these circumstances. It is far more logical, when all of the surrounding circumstances are taken into account, to conclude that Donohoo and Mathies gave Misenor $20,000 to pay down his parents' loan, because they knew all about this loan and were concerned that the FDIC would classify it, investigate further, and learn the true purpose of the loan. They paid $20,000 to prevent this from happening.
   Finally, at the September 19, 1990, meeting with Donohoo and Mathies, Examiner Nyberg advised that he was recommending criminal referrals against Misenor, Donohoo and Mathies, in part because of his findings with respect to the Misenor Loan. Donohoo and Mathies testified they did not investigate the Misenor Loan even after this meeting. They did not investigate the loan then or at any other time in order to support their claimed deniability because they already knew that the proceeds were used to invest in their scheme to acquire control of the Bank. They not only received the check from Misenor, but they also received direct benefit by using these funds to reduce their personal indebtedness at Midway, and further, the funds also avoided Midway's foreclosure on Donohoo's First Winthrop stock. The
{{10-31-95 p.A-2608}}Donohoo and Mathies is not only palpably false, but even if taken at face value is proof of their failure to heed fiduciary responsibilities.

2) The Field Loans

   On November 14, 1988, the Bank made Field Loan #1 which included an advance of $200,000 in additional loan funds. On the same day, Field gave Donohoo and Mathies a check for $73,000 for his purchase of an investment share in Capital Partners. The $73,000 check was funded by the proceeds of the loan. In addition, on November 15, 1988, Field's $73,000, along with investments of a like amount from two other investors, was used by Donohoo and Mathies to reduce the principal balance of Midway Loan #1 from $500,000 to $281,000. Donohoo and Mathies allege they did not know about the advance to Field, because it was made pursuant to a line of credit without their involvement. Even if this were believable, Donohoo and Mathies clearly violated their fiduciary responsibilities by not guarding against lending Field additional funds with their right hands while accepting what is claimed to be a disassociated payment with their left hands.
   On April 7, 1989, Field Loan #1, which had an unpaid balance of approximately $234,000, was renewed and an additional $200,000 was advanced by the Bank, leaving an outstanding balance of $434,000 ("Field Loan #2). Also on April 7, 1989, Field paid an additional $60,000 toward his purchase of an investment share in the Capital Partners scheme by giving Donohoo and Mathies a check in that amount payment to Capital Partners. The check was funded from the proceeds of Field Loan #2. Donohoo and Mathies used the $60,000 to make payments on their obligation on the Wenzel Note and to fund a portion of their purchase of new Bank stock on July 30, 1990.
   Donohoo and Mathies testified they had no knowledge that Field used the loan proceeds in this manner. They also testified they were unaware that the loan was made, claiming it was a drawdown on an existing line of credit. However, the operative facts do not support their testimony.
   After the hearing had concluded, Respondent's counsel submitted a motion to expand the record, to include as FDIC exhibits 95 and 101, consisting of line items referring to a line of credit held by Field which apparently had expired, a stamp appearing stated "RENEWED, 4-17-89."8 Field Loan #1 was made on November 14, 1988, and Field Loan #2 was made on April 7, 1989, both of which dates were prior to the renewal of the expired line of credit. Nyberg's affidavit reiterates that the bank files did not have any bank authorized line of credit agreement with Field on file despite post-facto references to "line of credit" and "credit line," and that the promissory notes and other loan documents for Field Loans #1 and #2 "were written as term debts, not as advances against a line of credit." (Underlining added.) Further, even if the loans were made as a result of an existing line of credit under which it was unnecessary for Donohoo and Mathies to have considered it, such a process would not excuse the unsafe and unsound nature of the loan to purchase bank stock, and would not have excused Donohoo and Mathies from using at least a grain of caution in determining just where Field's funds were coming from in view of their specific advice to him that it must not come through a loan from the Bank.
   As with the earlier loans described, it is beyond explanation that the two people who were running the Bank and who received one third of the loan proceeds from the borrower on the same day the loan was made, and who were aware of the consequences of bank funding of the investment and had warned the borrower of those consequences, did not question the source of the funds being utilized, were unaware of the loan, and did not "put two and two together" to add up to 60,000.

(3) The Godbout-Bandal Loans

   On July 25, 1990, Godbout-Bandal, as general partner of Pentagon Park Associates ("PPA"), executed a note for $485,000 to the Bank. On July 31, 1990, the Bank and PPA established a written line of credit of $485,000. On July 31, 1990, PPA drew down the entire $485,000 on the line of credit ("PPA Loan") despite a statement in the loan application that approximately $207,000 would not be needed right away. Godbout-Bandal then immediately used $200,000 of the loan proceeds, after an illusory interbank transfer, to fund two-thirds of her purchase of new Bank stock on July 30, 1990.
   Godbout-Bandal paid $300,000 for 2,100

8 Over objection, this motion is granted.
{{10-31-95 p.A-2609}}shares of stock issued July 30, 1990. The $300,000 was paid by a $100,000 check dated July 23, drawn by Godbout-Bandal on her personal account at the Bank, which had a balance of less than $4,000. The balance of the purchase price was paid by a check drawn on the account of Hudson Road Office Park at Union Bank. When posted to the account July 31, 1990, this $200,000 check created a $114,000 overdraft. Proceeds of the PPA Loan were used to cover the overdraft in the Hudson Road Office Park account and part of the overdraft in Godbout-Bandal's personal account.
   Donohoo and Mathies deny any knowledge that any of the proceeds of the PPA Loan were used to fund Godbout-Bandal's purchase of new Bank stock. Donohoo, Mathies and Rasmussen testified that they advised Kris Bandal, Godbout-Bandal's husband and business agent, that loan proceeds could not be used to fund the new Bank stock purchase. This obviously evidences that Donohoo and Mathies knew that they had to be and were concerned that the proceeds of the loan not be utilized for the stock purchase. Nevertheless, they were willing to permit the immediate draw of all loan proceeds,9 even though Mathies admitted he thought it was "unusual" and even though that same day they learned that Godbout-Bandal's check for $100,000, also used in her purchase of the Bank stock, had created a $90,000 overdraft at the Bank. The only logical explanation is that Donohoo and Mathies were not concerned because they believed they had established "deniability," and they permitted the immediate draw knowing that the proceeds would be used to purchase Bank stock in the by then established "give with the right hand, take with the left hand" procedure.
   The loan was also made even before the Bank had the proper documentation for making the loan. Donohoo and Mathies maintain the loan was not rushed through to facilitate Godbout-Bandal's purchase of stock, but to avert a loss to the Bank due to the impending charge off of a loan to C. J. Hedlund. Kris Bandal, husband and agent of Godbout-Bandal, testified that his partner, C. J. Hedlund, had a loan from Capital Bank. Kris Bandal further testified that $183,000 of the PPA loan proceeds was used to repay this loan. Despite their testimony that the only reason for their action was the inexplicable request of Kris Bandal and for "bookkeeping purposes," Mathies and Donohoo also testified that the PPA Loan was made in a hurry due to the impending bankruptcy of Hedlund and to avoid another $180,000 loan charge-off. However, nothing in the Bank's loan committee's minutes supports this contention. There are no documents to support any transactions with Hedlund, and had there been such it would only sport the need to advance $183,000, not of $485,000. If Donohoo and Mathies did have the need to act exigently to accomplish their purposes, they could have withheld further advances until the proper documentation had been obtained.10
   Kris Bandal attempted to establish "deniability" and justify the use of PPA loan proceeds to purchase new Bank stock by claiming that they had plenty of funds on hand and simply got sloppy about which account had sufficient funds. He testified he was not aware of the overdraft in the Union Bank account of Hudson Road Office Park until September 1990. He also testified that, since he did not become aware of the overdraft on the Hudson Road Office Part Account at Union Bank until September, his bookkeeper must have covered the overdraft the next day on August 1, 1990. Godbout-Bandal attempted to establish both "deniability" and lack of responsibility by testifying that she had purchased 2,100 shares of new Bank stock on July 30, 1990, because her husband recommended it, that she had no involvement in negotiating the PPA Loan, or in the decision as to how the PPA Loan proceeds were to be used, and that she thought she had purchased the Bank stock with the proceeds of other investments.
   The essence of the testimony of Donohoo, Mathies, Rasmussen, Godbout-Bandal, and Kris Bandal is: $200,000 of the PPA Loan

9 When asked why they permitted the immediate draw of al the PPA Loan proceeds, Donohoo's and Mathies' only answer was "because Kris [Bandal] wanted it that way" for "bookkeeping purposes." Why this did not set off some sort of alarm in their minds as to the immediate liquidity of Godbout-Bandal in paying for her stock can be explained again only by the obvious desire of Donohoo and Mathies to retain "deniability."

10 Respondents have admitted the loan was made with numerous document deficiencies. Even though their loan policy permitted exceptions, Donohoo, Mathies and Rasmussen did not even follow their own procedures in this regard. See Section XIV to the Bank's Loan Policy, FDIC Ex. 279.
{{10-31-95 p.A-2610}}proceeds were used to finance a portion of the purchase of 2,100 shares of new Bank stock by Godbout-Bandal on July 30, 1990, but no one knew or can explain how it happened. Donohoo and Rasmussen, lawyers by training, and Mathies, and experienced senior bank officer, testified that they were very careful to warn Kris Bandal that he must not use any PPA Loan proceeds to purchase new Bank stock, but never connected the "give and take" nature of the transaction. Kris Bandal testified he knew nothing until September about the $114,454.79 overdraft created in the Hudson Road Office Park account at Union Bank by the $200,000 check he wrote July 30, 1990, to purchase 1,400 of the 2,100 shares by Godbout-Bandal. Godbout-Bandal says she essentially was a cipher in the transaction who knew nothing at all about anything. The documents, however, indicate by a preponderance of the evidence to the contrary. On July 30, 1990, Kris Bandal wrote a check for $200,000 on the account of Hudson Road Office park at Union Bank. The account was not merely insufficient, but grandly, gloriously insufficient by a large margin to cover the $200,000 check. The very next day, Godbout-Bandal, not Kris Bandal, executed loan documents for a revolving line of credit and, despite stating in the application papers that there was no immediate need for the monies, immediately drew the entire balance, which was deposited to the PPA deposit account at the Bank. That same day Godbout-Bandal, not Kris Bandal, drew a $200,000 check on the PPA deposit account, payable to the Bank, to purchase a $200,000 cashier's check payable to Union Bank, which also on that date was deposited to the Hudson Road Office Park account. The cashier's check, in the exact amount of the stock purchase check, covered the overdraft at Union Bank the next day, closing the circle by which the proceeds of the loan were used to purchased stock in the Bank. The only purpose for the intervening cashier's check, as opposed to a direct deposit from the PPA account to the Hudson Road Office Park account, was to attempt to conceal the fact that the PPA Loan proceeds were used to purchase the new Bank stock. The most credible and inevitable explanation for this chain of events is that Donohoo and Mathies either orchestrated or at least were aware of this entire transaction, and that the charade of passing checks between entities and between bank accounts was not some clerical error, but because there was insufficient cash available without the undesired disposition of other assets, no matter the size of the other accounts and the other investment and assets, to pay for the bank stock without utilizing the proceeds of the bank loan.

(4) The Hauser Loan

   On December 15, 1988, Hauser's $400,000 note at the Bank was renewed. Four days later, on December 19, 1988, Hauser purchased an investment unit in the Capital Partners scheme by transferring $50,000, giving Respondents Donohoo and Mathies a check payable to Capital Partners in the amount of $50,000. Donohoo and Mathies endorsed and deposited this check to the Capital Partners DDA on December 21, 1988. $23,602 of these proceeds were used by Donohoo and Mathies to make their payment on the Wenzel Note which had been past due since November 21, 1988.
   On Friday, January 20, 1989, the board of directors of the Bank, consisting of Donohoo, Rasmussen and Brooks Hauser, voted to renew Hauser's line of credit in the amount of $650,000. Three days later, Brooks Hauser made an additional payment toward investment units in the Capital Partners scheme of $96,000, by a check for $23,000 dated Monday January 23, 1989, and a check dated January 30, 1989, for $73,000. The $73,000 check was given to Donohoo and Mathies on or before January 23, 1989, and post-dated January 30, 1989. Hauser's $96,000 was used to reduce Donohoo's and Mathies' indebtedness on Midway Loan #1. In the FDIC Report of Examination of August 25, 1989, the outstanding balance of the Bank's loans to Hauser was classified "Loss" in the amount of $650,000 and later charged off. Again, Donohoo and Mathies were controlling operations of the Bank at this time. Although Hauser did not use proceeds of his Bank loans to directly invest in Capital Partners, the modus operandi of Donohoo and Mathies in arranging for funding for the purchase of bank stock through bank loan is indicative of the entire scheme of acting in concert through improper loans to fund a common purchase and transfer of control.

(5) The Christianson Loan

   This loan did not have a nexus with the final stock purchase, but is included to further demonstrate the modus operandi of Donohoo and Mathies in providing bank funding to a common group of investors acting in concert in order to obtain control of the Bank.
{{10-31-95 p.A-2611}}
   On November 4, 1988, Robert Christianson had paid Donohoo and Mathies $73,000 for one investment unit in the Capital Partners scheme. The $73,000 was funded by a loan from Midway dated November 4, 1988, the proceeds of which were advanced to Capital Partners and deposited to the CP DDA on the same date. Also in November of 1988, the Bank made two loans to Christianson. One was a $156,800 loan, consisting of the renewal of a prior note plus $50,000 in additional monies. The other was a $50,000 loan for personal investments. These loans exposed the Bank to significant loss, because the unpaid balance of $209,000 was classified "Substandard" in the FDIC's Report of Examination of the Bank of August 25, 1989.
   As noted above, Donohoo and Mathies controlled the day-to-day affairs of the Bank when this loan was made. Although Christianson did not use proceeds of his Bank loans to purchase investment units through the CP DDA directly, the chain of events and the surrounding circumstances warrant the conclusion that Donohoo and Mathies used the leverage of Christianson's borrowing relationship with the Bank to get Christianson's purchase of an investment unit through CP DDA.

b. Bonus Payments

   On the theory that virtually anything is a possibility, the payment of the bonuses to Donohoo and Mathies on July 13, 1990, and the timing of their activities at Midway could be purely coincidental, but the timing and the need for these payments leads to a contrary conclusion. Donohoo and Mathies required the additional funds from their bonuses in order to avoid default by refinancing Midway Loan #2 and to enable them to procure financing for their acquisition of additional new Bank stock on July 30, 1990, and thus gain control of the Bank. The payment of the bonuses in the face of criticism by the State, and of the Bank's severe capital problems was an unsafe or unsound banking practice, its grant and acceptance was in breach of fiduciary obligations to a problem bank, and they actually could only have been considered because of the necessity to complete Donohoo's and Mathies' plans.

3. Authorization of Stock Issuance

   To protect themselves against possible foreclosures on the Bank and CCC stock, Mathies and Donohoo formulated and implemented a scheme to acquire direct control of the Bank through the remaining original participating investors in the Capital Partners scheme of exercising the option on the Bank's holding company, without the requisite authorization. On June 28, 1990, at a meeting of the Bank's board of directors consisting of Donohoo, Mathies and Rasmussen, the board directed Donohoo to call a special meeting of the Bank's shareholders on July 9, 1990, for the purpose of amending the Bank's Articles of Incorporation to increase the Bank's authorized stock from 6,750 shares to 13,750 shares.11
   The required notice to CCC of this special meeting was given by Donohoo on June 28, 1990, no doubt acting with his right hand on behalf of the Bank, delivering the notice of himself by placing it in his left hand in his function of president of CCC on June 28, 1990.12 Heaton, who owned 75.1 percent of the outstanding stock of CCC, was not given notice of the meeting. The special meeting of the Bank's shareholders was held as scheduled on July 9, 1990, and was attended only by Donohoo and Mathies. At this meeting, Donohoo, as president of CCC, voted CCC's shares of the Bank in favor of amending the Bank's Articles of Incorporation to increase and more than double the number of shares of the Bank, from 6,750 to 13,750, thereby diluting prior majority stock holdings.
   The 7,000 shares of new stock were all issued on July 30, 1990, and purchased by Donohoo, Shari Mathies (wife of Respondent Mathies), Godbout-Bandal, Field and Rasmussen. The price was $142.86 per share. As of June 30, 1990, prior to the issuance of the 7,000 new shares, the book value of the 6,750 issued and outstanding shares of Bank stock had been approximately $322,81 per share. Immediately after the issuance of the 7,000 new shares, the book value of the Bank's 13,750 outstanding shares had been

11 Kevin Costley, the Bank's attorney, reviewed the Bank Stock Loan documents and determined they did not preclude the Bank from issuing new stock.


12 Notice of the special meeting was mailed on the day of the meeting, June 28, 1990, to the three minority shareholders of the Bank who owned in the aggregate 65 of the 6,750 shares outstanding. None of the three minority shareholders attended the special meeting.

{{10-31-95 p.A-2612}}reduced by slightly less than one-third to $231.00 per share, while the book value of the newly issued stock increased to that amount, a gain of slightly more than one-third, and the 99.04 percent majority stock ownership of CCC was reduced to a minority interest of 48.62 per cent while majority stock ownership passed to Donohoo, Mathies, and the other individual Respondents, no one of which, however, directly or indirectly owned more than 25 percent.

4. FDIC Warning

   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, and 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. 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. Donohoo advised 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.
   Donohoo further advised that the investors for the stock were himself, Mathies, Field, Rasmussen and Godbout-Bandal, and 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, which was correct, though he did not advise that the other investors had contributed to the interest payments on the loans; that Field purchased his 2,100 shares with his own resources, which was incorrect; that he did not know the source of funding for the purchases of the stock by Godbout-Bandal, which was incorrect; and, that he did not know the source of funding for the purchases of the stock of Rasmussen, which was likewise incorrect. Donohoo advised Thorn that the Bank had not provided any financing for the stock acquisition, which was less than correct. All of this was also known by Mathies, who did not correct the statements.
   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. 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, 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 Donohoo and Mathies did not mention the RTC steps to foreclose the loan and sell the stock. The further stated that the Bank's intentions to issue additional stock because their attorney, Kevin Costley, had advised them that in his opinion and on the facts as known to him at that time, no change in control would occur as the result of the stock issuance.
   In response, Thorn advised Donohoo and Mathies that it appeared that a change in control would occur if the stock was issued, and that civil money penalties could be imposed for violations, and discussed the requirements of the CBCA. 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.
   On 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 Costley ("July 30 Letter"), advising 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. 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..." At the time of the July 30 Letter, 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, but the stock had in {{10-31-95 p.A-2613}}fact been issued prior to the time of Kirchhoff's and Costley's discussion.

5. Acting in Concert

   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...
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 centrum or more of any class of voting securities of an insured bank.
Hence, the statute applies to any concerted group acting directly or indirectly in obtaining the power, to directly or indirectly control 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. So far as this Recommended Decision is concerned, the primary issue is whether a concerted group was formed to achieve the power to direct management or vote twenty five percent or more of a class of voting stock.
   The facts here clearly show:
   1. That beginning in May of 1988, Donohoo and Mathies actively sought to establish a control group to finance the exercise of their holding company stock option, whereby Donohoo and Mathies, with the direct or indirect concerted action by the "investment unit" purchasers, would gain control of the Bank through control of its holding company.
   2. That the CP DDA, sophistically referred to as "just a bank account," was in fact the mechanism for acting in concert to make payments on the outstanding debts of Donohoo and Mathies on their stock purchase in CCC as well as amassing the funds in a single depository with and from which to exercise the option for the purchase of the remaining stock by the group in order to control the Bank.
   3. That Donohoo and Mathies, with the concerted group of purchasers of investment units, fully understood that the approval of an application under the CBCA was necessary in order to complete their acquisition, that they planned to make such application and await action thereon before completing the acquisition of control.
   4. That funds for the purchase of investment units came through loans from the Bank, disguised by passing through other financial institutions, and that this was necessary in order to obscure the fact that the money was actually the proceeds of loans.
   5. That when Midway's foreclosure of the loan could be stalled no longer, that when RTC threatened to sell to other possible purchasers, that when the FDIC was becoming more impatient to have capital funds increased, Donohoo and Mathies grasped at the straw of majority Bank stock dilution in order to permit the alternate form of concerted action, to wit, direct purchase of Bank stock, to provide for a joint majority, not merely controlling, interest.
   6. That while the identities and number of those forming the group involved in concerted action as, if one will, 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 the Bank, the intention and end sought and achieved by Donohoo and Mathies always was control over the Bank funded by a concerted group of co-investors. The mere fact that cross-voting or proxy agreements, buysell agreements or cross pledges of collateral were not employed to compel continued compliance with the common purpose does not obscure the clarity of that purpose.
   7. That the only method by which to timely conclude such purchase, particularly with the need for stealth which existed because of the dilution of control by current owners, was to go forward without filing an application for change in bank control, much less awaiting approval.
   In summary, the past history of attempts to control the bank holding company, CCC, is not charged as a violation, but is presented as proof of continuing concerted action. Whether control was achieved directly or through the bank holding company is immaterial. An old "pop" song lyric recorded by bandleader Jimmy Lunceford ran "It aint what you do, it's the way that you do it," a {{10-31-95 p.A-2614}}truism in many areas of law. So far as change in bank control, however, it aint how you did it, it's what you've done done!

C. VIOLATIONS - UNSAFE AND UNSOUND ACTIVITIES AND VIOLATION OF FIDUCIARY RESPONSIBILITY

   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.

a. Misenor Loan

   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


13As used in the Act, the term "violation" includes any action (along or with another or others) for or toward causing, bringing about, participating in, counseling, or aiding or abetting a violation. 12 U.S.C. § 1813(v).

1412 C.F.R. § 215.2(j), 12 C.F.R. § 215.2(h) was formerly 12 C.F.R. § 215.2(f), and 12 C.F.R. § 215.2(m) was formerly 12 C.F.R. § 215.2(k). This section was amended effective May 18, 1992, 57 Fed. Reg. 22,424 (1992). There were no substantive changes in language, therefore, for ease of reference, the current designations have been cited to.

{{10-31-95 p.A-2615}}C.F.R. § 215.2(l). He was also an executive officer of the Bank within the meaning of section 215.2(d) of Regulation O, 12 C.F.R. § 215.2(d). Because $73,000 of the Misenor Loan proceeds were transferred to Donohoo and Mathies through the CP DDA and applied toward their indebtedness on Midway Loan #1, the Misenor Loan 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).
   The Misenor Loan was made in violation of section 215.4(a) of Regulation O, 12 C.F.R. § 215.4(a), in that it (i) was not made "on substantially the same terms, including interest rates and collateral, 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," (ii) involved "more than the normal risk of repayment," and (iii) presented "other unfavourable features."
   The Misenor Loan also contained preferential terms, because the loan was advanced with inadequate collateral protection and no provision for the periodic repayment of principal.
   Although the examiners did not compare the Misenor Loan terms with other noninsider loans made around that time by the Bank, such a comparison is unnecessary in this instance to establish preferential terms. In In the Matter of * * *, FDIC-86-117k, [Bound Vol. 1] FDIC Enforcement Decisions and Orders (P-H) ¶5090, at A-1116 (May 28, 1987), the Board ruled that it is usually necessary to compare the specific credit term in issue to the terms offered other bank customers during the relevant period. That case involved issues of whether the rate of interest and the term of the loan were preferential. Here, the Misenor Loan had a loan to collateral ratio of 102.7 percent and contained no provision for the periodic repayment of principal. The FDIC examiner who reviewed the loan for credit quality, testified that Everett and Nellie Misenor's creditworthiness did not support a $76,000 loan with such terms. As the FDIC's Board of Directors has stated, "the legislation [section 22h] and the regulation {Regulation O] was [sic] designed principally to curb uncontrolled borrowing by bank insiders, with no collateral or inadequate collateral and at below-market rates of interest." The uncontroverted testimony of Examiner Rucks was that the loan was inadequately collateralized and contained inadequate repayment terms. Therefore, the Misenor Loan was preferential when made and the fact that the Bank may or may not have made similar loans to non-insiders is irrelevant in light of the Board's ruling.
   The Misenor Loan also involved more than normal risk at the time it was made. Examiner Rucks also testified that he was prepared to classify the Misenor Loan "Substandard" at the August 25, 1989, FDIC examination primarily because, as noted above, it was inadequately secured and was written with an inadequate repayment schedule. Both deficiencies existed at the time the loan was made.
   The loan was secured only by the personal residence of Everett and Nellie Misenor, which was appraised at $74,000, which is $2,000 less than the amount of the loan. The loan was due on demand, but in no event later than November 18, 1991. It called for quarterly payments of accrued interest, but made no provision for principal reductions. Examiner Rucks testified that Everett and Nellie Misenor's financial statement revealed that they did not have the financial resources to make a lump sum repayment of the loan at maturity. He further testified that the Misenor's financial condition did not support a $76,000 loan that exceeded the value of the collateral and did not provide for periodic repayment of principal.
   Mr. Rucks did not adversely classify the loan in the FDIC Report of Examination only because the Misenor Loan was modified during the course of the examination to eliminate the deficiencies. Misenor obtained $20,000 from Donohoo and Mathies on September 14, 1989, which was applied to reduce the principal balance of the loan to $56,000 and the terms of the loan were modified to require principal reductions of $500.00 quarterly. Although the partial payment and modification saved the Misenor Loan from being classified, the fact remains that the loan, when made, contained more than normal risk.
   In addition tot he preferential terms and more than the normal risk of repayment, the Misenor Loan presented other unfavourable features in violation of Regulation O. The unfavorable features involved false loan comments and inadequate loan documentation. Each of these unfavorable features also constituted violations of the 1984 Order to Cease {{10-31-95 p.A-2616}}and Desist which was in effect on the date the loan was made.15
   The credit file was also inaccurate and/or misleading about the purpose of the loan. Donohoo, the originating loan officer for the Misenor Loan, made the following comment, dated November 29, 1988, in the credit file, when he knew the true purpose of the loan: "Funds needed for personal investment." Nothing in the credit file indicates that the loan proceeds were to be used by Misenor to invest in CCC or by Donohoo and Misenor to reduce their indebtedness to Midway.
   In addition to being an unfavorable feature within the meaning of section 215.4(a), the failure to maintain accurate file comments regarding the purpose of the loan violated paragraph 3 of the 1984 Order to Cease and Desist, which provided in pertinent part:
    3. ...the Bank shall not extend credit without first obtaining...(iv) file comments stating the purpose of the loan...
FDIC Ex. 5. Compliance with this provision inherently requires that these file comments be accurate.
   Another unfavorable feature is that no appraisal of the Misenor residence, which secured the loan, was obtained until after the loan was made. The appraisal is dated as of November 21, 1988, but the Bank's Credit Report Review indicates the appraisal was not obtained until November 29, 1988. In any event, the loan was made on November 18, 1988, a full three days before the date of the appraisal and eleven days before November 29, 1988. Furthermore, Donohoo's and Mathies' failure to obtain the appraisal before the loan was made violated paragraph 3(ii) of the 1984 Order to Cease and Desist, which reads, in pertinent part:
    3. ...the Bank shall not extend credit without first obtaining...(ii) an appraisal or other evaluation of the pledged collateral ...
FDIC Ex. 5.
   In addition, no commitment for title insurance on the Misenor's property was obtained. The title insurance policy was not ordered until November 29, 1988, and was not received until December 14, 1988. Also, a mortgage deed containing the necessary signatures giving the Bank an adequate mortgage was not obtained until December 14, 1988. Not only did this constitute an unfavorable feature within the meaning of section 215.4(a) of Regulation O, but also violated paragraph 3(iii) of the 1984 Order to Cease and Desist, which required, in pertinent part:
    3. ...the Bank shall not extend credit without first obtaining...(iii) documentation necessary to perfect the Bank's lien on any pledged collateral...

b. Field Loans #1 and #2.

   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.


15 The Misenor Loan was also made in violation of sections 226.17, 226.18, and 226.23(c) of Regulation Z, 12 C.F.R. §§ 226.17, 226.18 and 226.23(c) (1988). The Misenor Loan was made in violation of sections 226.17 and 226.18 of Regulation Z because the Truth-in-Lending disclosures required by those sections were not provided. Further, because the Misenor Loan proceeds were disbursed prior to the expiration of the Misenors' right to rescind under section 226.23(a)(3), the Misenor Loan was made in violation of section 226.23(c) of Regulation Z. Because of their position as officers of the Bank and their control of the day-to-day affairs of the Bank, Donohoo and Mathies are ultimately responsible for these violations. In addition to being separate violations of law, the violations of Regulation Z constitute another "unfavorable feature" of the Misenor Loan and a violation of section 215.4(a) of Regulation O, 12 C.F.R. § 215.4(a). Though the record in this proceeding does not compare the manner in which this loan was arranged with the arrangement of other loans, there is every appearance that the loan was given speedy approval in order to meet the payment requirements of Donohoo and Mathies. [Editor's note: The next footnote is Footnote 30.]
{{10-31-95 p.A-2617}}§ 215.5(b). Field was, through attribution as explained above, an executive officer or director of any such bank, owing, controlling, or having the power to vote more than 10 percent of a class of voting securities.
   Prior approval by the Bank's board of directors for loans to insiders which exceed the higher of $25,000 or 5 percent of a bank's unimpaired capital and surplus, which these loans indubitably did, was required pursuant to 12 C.F.R. § 215.4(b), for the same reasons. As noted above, these loans were not draw-downs on a letter of credit, in that no letter of credit was found in the bank records, a prior letter of credit had expired, and the form of note utilized was for an ordinary loan, not a draw-down.
   In obtaining Field Loan #1 and Field Loan #2, Field, Donohoo and Mathies were in violation of paragraph 3 of the 1984 Order to Cease and Desist which provides in pertinent part:
   3. ...the Bank shall not extend credit without first obtaining...(iv) file comments stating the purpose of the loan....
   The file comments did not disclose that a purpose of Field Loan #1 or Field Loan #2 was to purchase one of the 10 investment units sold by Donohoo and Mathies representing an interest in CCC. Respondents argue that there was no requirement to do so, since the loan was a drawdown on a letter of credit previously entered into. As noted above, however, there was no record of such letter of credit in the loan file, the prior letter of credit had expired, and the loan had all the appearances of a direct loan not issued pursuant to drawdown. Respondents also argue that the Cease and Desist Order should not be taken literally, since no reasonable institution-affiliated party would have agreed to becoming liable for such a violation. To the contrary, the purpose for the entry of a cease and desist order is to emphasize requirements already in force, as a warning if you will that the repetition of such activity will result in sanctions. Any other interpretation presupposes that the statutory authority to issue an order to cease and desist is meaningless, a pure exercise in futility.

c. PPA and Overdraft Loans

   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.

d. Rasmussen Loan

   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.

2. Indemnification of Legal Expenses

   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
   The Bank has paid all costs of defense of the Wenzel Lawsuit which, to the date of hearing herein, amounted to $190,512.71.31 Lindquist & Vennum and Rasmussen & Associates, Ltd. knowingly and/or recklessly participated in the violation of Minnesota statues, 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.
   Respondents claim that the FDIC has no authority to order the cessation of indemnification payments or to require restitution or reimbursement to the Bank of payment made by the Bank to defend the Wenzel Lawsuit. Though of no immediate need, for the record the undersigned rejects this proposition and considers that, in an otherwise appropriate case, the FDIC would have such authority. The undersigned also will not write further on whether or not Minnesota Statues § 300.083 provides for mandatory indemnification, other than noting that the applicants in no way followed the required procedure in seeking it, did not follow the required procedure in establishing eligibility, and failed to show that they either acted in good faith or received no improper personal benefits. It is the undersigned's posi-

30 The judge made it clear, however, that he was not denying the FDIC's authority to order such reimbursement after an administrative hearing. He simply did not think such a provision was "fair" in the context of an ex parte Temporary Order.
    THE COURT: Let me ask you, if I do not uphold that [reimbursement] part of your order, I take it that's still an issue in this administrative law hearing, isn't it?
    MR. TAYLOR: Yes, it is.
    THE COURT: If you are right on it, you are right on it. And if these people are well-to-do and have some deep pockets, you can still go forward with that. I am just bothered by that. That doesn't seem fair to me, and it doesn't seem right to me.

31 The Bank paid the sum of $182,401.71 to the firm of Lindquist & Vennum through April 1993 and the sum of $8,111.00 to the firm of Rasmussen & Associates, Ltd. through February 1992. FDIC Ex. 366a & b. Rasmussen & Associates, Ltd. provided no legal services with respect to the Wenzel Lawsuit after February 1992, according to Respondents.

{{10-31-95 p.A-2619}}tion that as set forth in the portion of this Recommended Decision on restitution as part of an order to cease and desist, as testified to by Costley the 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.

   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")

a. Relevance of 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.

b. The New Stock Issuance and Donohoo's, Mathies' and Rasmussen's Fiduciary Responsibility.

   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).
In the Matter of Stoller, FDIC-90-115e, ¶5174 at A-1880.
    [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.
In the Matter of R. Wayne Lowe and Jimmy A. Spivey, FDIC-89-21k, FDIC Enforcement Decisions and Orders (P-H) ¶5153 at A-1536 (April 16, 1990). In structuring transactions with a bank, caution must be the touchstone of directors' conduct to avoid a conflict of interest. Directors must deal fairly with the Bank and any transaction involving a director must be at "arms-length." In the Matter of Thomas K. Benshop, The Colorado State Bank of Walsh, Walsh, Colorado, FDIC-91-248e, 1 FDIC Enforcement Decisions and Orders (P-H) ¶5192 at A-2156 (January 19, 1993).
   Here, it is obvious that the purchase price per share was the function purely of the amount of capital infusion required, $1,000,000, divided by a sufficient number of share to provide the purchasers jointly with an actual majority controlling interest, 7,000 shares. The resulting purchase price had no bearing upon actual fair market value.
   Although the Bank supposedly received the benefit of a $1,000,000 capital infusion,32 Donohoo, Mathies, and Rasmussen authorized the issuance of the stock, as officers and/or directors of CCC and/or the Bank, and purchased 2,800 shares of stock for their own benefit. Accordingly, the issuance of the stock presented a conflict of interest on their part requiring that the transaction be fully disclosed, fair and at armslength. The transaction met none of these critical criteria. Donohoo, Mathies and Rasmussen arranged the issuance and eventual purchase of 7,000 shares of new Bank stock for their own benefit at a price that not only substantially diluted the book value of the

32Since the funds came from loans made by the bank, the infusion of the funds merely cancelled out the debit portion of the exchange, and no actual infusion occurred until the loans were paid.

{{10-31-95 p.A-2621}}already issued and outstanding 6,750 shares of Bank stock, but also was less than the FMV of the outstanding shares. Donohoo and Mathies, as directors and officers of the Bank and CCC, thus placed their personal interests above those of the Bank and CCC. Similarly, Rasmussen, as a director of the Bank, placed his personal interests above those of the Bank. As more fully discussed elsewhere, the facts establish that their actions with respect to the new Bank stock were performed without full and complete disclosure, and lacked fairness and armslength dealing.

c. Full Disclosure

   Because the issuance of the new Bank stock presented a potential conflict of interest, it was incumbent upon Donohoo, Mathies, and Rasmussen to take every reasonable means to assure that the price and the method of arriving at the price for the 7,000 shares of stock be fully disclosed. The minutes of the meeting of the Bank's board of directors held June 28, 1990, at which the board decided to issue new shares of stock, contain nothing about how the new stock was priced or anything about the price whatsoever. Similarly, the minutes of the shareholders' meeting on July 9, 1990, attended only by Donohoo and Mathies, at which at the Articles of Incorporation of the Bank were amended to authorize the 7,000 new shares, say nothing about the price at all. Because Donohoo and Mathies were among the purchasers of the new stock, fairness and full disclosure mandated that, at a minimum, the shareholders of CCC be advised of the new stock issuance and its price per share.
   Federal Reserve Examiner Pellowski conducted an inspection of CCC August 14, 1990, as part of which he reviewed the circumstances surrounding the issuance of the new Bank Stock by CCC. Pellowski's inspection raised several concerns. He found nothing, at either CCC's or the Bank's level, indicating that all the shareholders of CCC were notified of the stock issuance by Donohoo and Mathies, or supporting the price at which the new Bank stock was sold to Mathies, Donohoo and their cohorts. It was Pellowski's opinion that CCC's authorization for the new stock issuance required the Federal Reserve Bank's prior approval pursuant to paragraph 4 of the outstanding Cease and Desist Order issued by the Board of Governors of the Federal Reserve System against CCC.33 The Federal Reserve was never notified of, and obviously never approved, the transaction involving the 7,000 new shares of Bank stock.
   Although, Donohoo testified that Heaton, the 75 percent owner of CCC, was kept advised of the stock issuance, the evidence belies this testimony. The notice of the July 9, 1990, shareholders' meeting the Bank was made by Donohoo, as president of the Bank, to himself alone, as president of CCC. As president of CCC, the ambidextrous Donohoo also voted the Bank stock held by CCC in favor of amending the Articles of Incorporation. This vote of CCC's shares of Bank stock was contrary to the customary practice CCC followed in voting its Bank shares. Minutes of previous Bank shareholders meetings reflect that CCC customarily gave a proxy for the voting of the shares. The obvious reason for the lack of notice in the customary manner and the covert voting mechanism employed by Donohoo and Mathies was to prevent Heaton, the FDIC, the FDIC, the State of Minnesota, or anyone else, from learning of the new stock issuance prior to its completion. Furthermore, the fact that the minutes are devoid of any mention of the price of the 7,000 new shares and Heaton's letter of August 14, 1990, to Donohoo wherein he states the stock issuance was done in a fraudulent manner, buttress the conclusion that Donohoo and Mathies acted in their self-interest and not in the best interest of the Bank and CCC, and

33 Paragraph 4(a) of the Order provides:
   Capital City shall not, directly or indirectly, enter into, participate, or in any other manner engage in any transaction with the Bank, without the prior written approval of the Reserve Bank.
FDIC Ex. 358. (Emphasis added.) Paragraph 4(c) provides:
   a "transaction" may include, but is not limited to...the transfer, sale or purchase of any asset....
Pellowski was of the opinion that CCC's actions, through Respondents Donohoo and Mathies, was an indirect transfer, sale or purchase of an asset. By authorizing the issuance of additional 7,000 shares, the sale of which reduced CCC's ownership from 99 percent to 48 percent, Pellowski believed that CCC, through Respondents Donohoo and Mathies, indirectly participated in the sale of one-half of the Bank. Therefore, CCC's authorization to issue 7,000 shares, that it had no intentions of purchasing, was a transaction within the meaning the FRB Order which required the Federal Reserve's prior approval.
{{10-31-95 p.A-2622}}that they purposefully did not give prior notice to interested and affected parties of the new stock issuance. Thus, Donohoo and Mathies as directors of CCC and the Bank, and Rasmussen as a director of the Bank, breached their fiduciary duty to disclose their interests in the new stock issuance, and to document how the new stock was priced and whether the pricing was fair.34
d. Fair Market Value of Bank Stock as of July 30, 1990

(1) General

   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.

(2) Valuations by Rasmussen, Mathies, and Donohoo

   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


34 Donohoo testified that CCC was insolvent and was not a source of capital. He also testified Heaton was not a source of capital. This is not an excuse for Donohoo's breach of his fiduciary duty to CCC. If we assume the price of $142.86 per share was a fair price for the 7,000 shares, CCC only needed $27,143.40 to purchase 190 shares and retain a majority interest.
{{10-31-95 p.A-2623}cross-examination that he "never went through any analysis in terms of trying to set a price" for the 7,000 shares.
   Contrary to their testimony at the hearing Donohoo, Mathies and Rasmussen placed a considerably higher value on the Bank than $1,000,000. On June 1, 1990, Donohoo and Mathies offered Midwest Federal $1,400,000 to purchase the Bank Stock Loan or $1,600,000 for the Bank stock securing the Bank Stock Loan. At the meeting of the Board of Directors on June 28, 1990, Rasmussen is reported in the minutes as stating that, after the $700,000 provision to the ALLL, which was unanimously approved by the board at that meeting, and with the proposed addition of at least $700,000 of new capital, "the Bank now would have a fully funded Loan Loss Reserve and adequate capital." Donohoo testified that they were very concerned in June that the ALLL was adequate and made a provision of $700,000 to the ALLL. The Board Reports for the months of June and July, submitted to the Bank's board of directors July 11, 1990, and August 15, 1990, respectively, indicated that there was an overage in the Bank's ALLL. No additional provision to the ALLL was made during July 1990. Furthermore, the 1984 C&D Order required that the Bank cease and desist from "failing to provide and maintain an adequate reserve for loan losses."
   Based upon the foregoing, it clearly appears that Donohoo and Mathies in fact believed that the ALLL was adequate at that time, which would make the value of the Bank was closer to $2,200,000 than $1,000,000.35
   Despite documentation to the contrary, and despite Donohoo's opposite representations, at the hearing Donohoo, Mathies and Rasmussen testified that the Bank's value was less than the book value of the old 6,750 shares of stock, exclusive of the ALLL, because of the expectation of additional loan losses. If their testimony were accurate, the necessary implication of their testimony is that as of July 1990, Donohoo, Mathies and Rasmussen knew that the ALLL was in fact not adequate, and were not only submitting, or permitting the maintenance of, false board reports and minutes, but were also violating the ALLL provision of the 1984 C&D Order.36

(3) Testimony of Amundson

   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-


35 As of July 31, 1990, the Bank reflected equity capital of $3,218,765, exclusive of the ALLL, and inclusive of the $1,000,000 capital injection on July 31, 1990. FDIC Ex. 284, p. 90. Subtracting out the $1,000,000 capital injection, on July 30, 1990, the Bank had $2,218,765 in equity capital in addition to a fully funded ALLL.
   Amundson, whose testimony is considered at a later point, testified that, if he were president and a director of Capital Bank as of July 30, 1990, and seeking to purchase the Bank, he would have attached a value of approximately $2,200,000 to the Bank because, if he were running the Bank, the ALLL would have been adequate.

36 Furthermore, Donohoo, Mathies and Rasmussen were showing the June board of directors' reports, which reflected an adequate ALLL, to prospective purchasers of the Bank stock, during the very period of time that, according to their testimony, they anticipated additional loan losses. FDIC Ex. 284, p. 1; Tr. 2031, 2145. Though commented upon in a proffer of excluded testimony by Amundson, it would obviously be improper to Donohoo, Mathies and Rasmussen to make representation to the Bank's directors that ALLL was inadequate while at the same time evaluating the stock on the basis of it being inadequate. The statement reflects adversely on the credibility of their testimony.
{{10-31-95 p.A-2624}}equate, and it follows that Amundson's estimate of the need to add $425,000 to the ALLL was in error by $255,000 and his estimated value of the Bank was likewise understated by at least the same amount.
   The estimate of Amundson, as an outside purchaser, must be evaluated in the light of his not having the benefit of the inside information available Donohoo, Mathies and Rasmussen. On the other hand, Donohoo, Mathies and Rasmussen knew the condition of the Bank and, as a consequence, knew they understand the Bank's value as of July 30, 1990. Also, without intending to impugn Amundson's integrity, it must be noted that his testimony is far from that of a disinterested party. His valuation of the Bank is must be viewed after considering that it was in his best interest to establish that the Individual Respondents paid FMV for the 7,000 new shares. The Bank is a defendant to the Wenzel Lawsuit wherein the plaintiffs are seeking rescission of the stock issuance of July 30, 1990, which could impact upon Amundson's ownership interest in the Bank. One of the issues in the Wenzel Lawsuit is the fairness of the price paid for the 7,000 new shares by the Individual Respondents. Thus, it was in Amundson's best interest to testify to the lowest valuation possible as of July 30, 1990, and accordingly, Amundson's testimony in this regard cannot be viewed as that of a disinterested third-party purchaser. Amundson was also contractually bound to cooperate with Respondents Donohoo and Mathies in the Wenzel Lawsuit. Even so, he testified to a much higher value than that at which the Individual Respondents' purchased the 7,000 new shares.

(4) Testimony of Costley

   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.

(5) Olander's 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-


37 The fair market value of the Bank arrived at using the three different methods were the same or substantially the same in the draft as in the final report.
{{10-31-95 p.A-2625}}der erred in preparing the draft by twice deducting the dollar amount of the additional provision to the ALLL he determined necessary for a fully funded ALLL.38 In short, he undervalued the Bank in the draft, but corrected the error and properly valued it in the final appraisal.
   Although, Olander's appraisal was as of December 22, 1989, and the 7,000 new shares were issued July 30, 1990, the Olander appraisal is a fair approximation of the Bank's fair market value as of July 30, 1990, largely because his projection of the need to add $1,190,000 to the ALLL was substantially accurate. From December 22, 1989, to July 30, 1990, the Bank added $950,000 to the ALLL.39 As of August 10, 1990, the FDIC determined that another $430,000 had to be added to make the ALLL adequate. Therefore, between December 22, 1989 to August 10, 1990, $1,380,000 was required to adequately fund the ALLL. Between December 22, 1989 and February 21, 1992, total additions actually made to ALL were as follows:
Provision
Date to ALLL
12/22/89 - 12/31/89 $125,000
1990 $1,325,000
1991 0
01/1/92 - 2/21/92 0
$1,550,000

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.

(6) Grande's Independent Review of Olander's Independent Valuation

   Respondents also introduced a review of the Olander Appraisal by David L. Grande of Larson, Allen, Weishair & Co., which was also performed by Grande at the request of Midwest Federal. Based upon his review, Grande estimated the value of the Bank as of December 22, 1989, at between $1.3 million and $2.1 million. He added that "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 [the] Bank would fall in the lower half of the range indicated," i.e. between $1.3 and $1.7 million.
   Grande emphasized, however, that his different points of emphasis "do not mean the appraiser [Olander] was wrong in his conclusion." He also made clear that his review of the Olander appraisal was not an appraisal. Several of his points of emphasis bear repetition:
   In point 16, Grande remarked that "[g]iven the history of this Bank and its current questionable general condition, the net asset value is the most appropriate method to use." Thus, using Olander's net asset value method as of July 30, 1990, the Individual Respondents paid significantly less than the FMV of the new stock they purchased. As of July 31, 1990, the board of directors of the Bank showed equity capital of $3,218,765, and an adequate ALLL. Deducting the $1,000,000 capital injected as of July 30, 1990, the net asset value method shows a value of

38 In both the draft and final appraisal reports, Olander determined that an additional provision of $1,190,000 was required to bring the ALLL to a fully funded amount. See FDIC Ex. 157, p. 11–13, for an explanation of how Olander arrived at this amount. The draft and final appraisal reports, as well as Olander's testimony, show that a potential buyer would recognize the need for an additional provision to the ALLL of $1,190,000, which he deducted from the Bank's equity capital. FDIC Ex. 157; Tr. 1767. This adjustment is readily seen under Olander's net asset value approach:
    In this method, we start with the equity of the Bank, which is $2,888,000. [sic] and deduct the amount of reserve that we feel is necessary to arrive at an adjusted equity figure or net asset value figure. Doing so, we have as follows: $2,888,000 equity at December 22, 1989 minus $1,190,000 equals $1,698,000.
FDIC Ex. 157, p. 28. To this figure, Olander added a premium for the deposit base and the good quality loans to arrive at a net asset value of $2,533,000. Tr. 1841; FDIC Ex. 157. However, in the draft, Olander again deducted $1,190,000 to arrive at his inaccurate fair market value of $1,260,000. Ex. R-87, p. 32–33. Thus, he inappropriately deducted $1,190,000 twice in the draft, and testified at the hearing that he believed that was the reason for the difference between the draft and final appraisal report. Tr. 1843. In fact, the difference between the two was exactly $1,190,000.

39 As of December 22, 1989, the Bank had made provisions to the ALLL of $1,376,000. FDIC Ex. 157, p. 36. Total provisions to the ALLL for 1989 were $1,501,000. FDIC Ex. 13, p. 9. Total provisions to August 10, 1990, for the year 1990 were $825,000, none of which were provided after June 30, 1990. FDIC Exs. 13, p. 9; 284, p. 109. Thus, total provisions from December 22, 1989 to July 30, 1990, were $950,000.
{{10-31-95 p.A-2626}}$2,218,765 without any premium for the deposits and good loans. As of August 10, 1990, after an additional provision of $430,000 for an adequate ALLL, the necessary charge-offs for loans classified "Loss" and 50 percent of loans classified "Doubtful," and deducting the $1,000,000 capital injection, the net asset value method results in a value of $1,791,000 calculated as follows:
    $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.
Again, this is exclusive of any premium for the deposits and good loans.
   Two other points emphasized by Grande in his review of the Olander appraisal are:
    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.
   These were factors Grande considered would negatively affect the value of the Bank to a third-party purchaser, and obviously affected his opinion of the value of the Bank. However, since Donohoo and Mathies were insiders benefiting from these factors, they would not adversely affect their valuation of the Bank.

   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:

Rasmussen 7/30/90 $1,000,000
Mathies 7/30/90 $1,000,000 to
$1,300,000 to
$1,400,000
Costley 7/30/90 $1,000,000
Amundson 7/30/90 $1,100,000

By Disinterested Individuals:

Olander 12/22/90 $2,550,000
$1,300,000 to
Grande -- $2,100,000
Kirchhoff 6/30/90 $2,179,000

   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.

III. RELIEF GRANTED

A. PROHIBITION

   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.

a. Financial Gain and Other Benefit.

   (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


40 Part of the misconduct occurred prior to August 9, 1989, when section 8(e) was amended by FIRREA. Specifically, the misconduct prior to August 9, 1989, involved the Misenor Loan, Field Loans #1 and #2 and the Original Employment Agreements. Section 903(e) of the FIRREA provides that the amendments to the standard of removal in section 8(e) "shall apply with respect to violations committed and activities engaged in after the date of the enactment of" FIRREA. Because the misconduct prior to August 9, 1989, was part of an ongoing plan to acquire control of the Bank that continued pre- and post-FIRREA, and post-FIRREA standard should be applied. However, the issuance of an Order of Prohibition against Donohoo and Mathies is also supported solely by the misconduct involved with the Misenor Loan, Field Loans #1 or #2 or a combination thereof, under the pre-FIRREA standard. The substantive changes by FIRREA to the section 8(e) removal standard are in the second element -effect. With respect to the element "financial loss" to the Bank, FIRREA deleted the quantifier "substantial"; with respect to "prejudice to the depositor," FIRREA removed the quantifier that the prejudice be "serious;" and with respect to the element "financial gain" FIRREA added "or other benefit." Where relevant, the differences will be discussed in the memorandum.
{{10-31-95 p.A-2628}}and as part of their purchase of the 2,100 shares of new Bank stock on July 30, 1990. See, In the Matter of Stoller, FDIC-90-115e, ¶5174 at A-1881, holding that a loan to a related interest to satisfy a personal obligation of Respondent constitutes financial gain.

(2) New Stock Issuance

   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.

(3)Bonuses

   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.

(4) Golden Parachute Agreements

   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.

(5) Indemnification

   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.

b. Financial Loss to the Bank

   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.

c. Prejudice to the Depositors

   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).

d. Culpability

   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.

e. Personal Dishonesty

   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).
In Van Dyke v. Board of Governors of the Federal Reserve System, 876 F.2d 1377, 1379 (8th Cir. 1989), the court adopted the above definition and added that personal dishonesty included, "misrepresentation of facts and deliberate deception by pretense and stealth[;] * * * [or] want of fairness and [straightforwardness]." The record in this case provides evidence of personal dishonesty by Donohoo and Mathies.

1. Concealment of Purpose of Loans

   The evidence establishes that Donohoo and Mathies knew and concealed the purpose of the Misenor Loan, Field Loans #1 and #2, the PPA Loan, and the Overdraft Loan.
   From November 15, 1988, through August 15, 1990, Donohoo and Mathies repeatedly caused or permitted the board of directors' minutes to reflect that they had reviewed the 1984 C&D Order and were in compliance with its provisions. Paragraph 3 of the Order required that the Bank not make any loans without documenting the purpose of the loan. Donohoo and Mathies knowingly permitted the Bank's files to falsely reflect the purposes of the Misenor, Field and PPA Loans, acts of personal dishonesty. See, In the Matter of Frank E. Jameson, Docket No. FDIC-89-83e, 1 FDIC Enforcement Decisions and Orders (P-H) ¶ 5154A at A-1542.6 (June 12, 1990) (aff'd 931 F.2d 290 (5th Cir. 1991)).
   In order to deceive or mislead Federal and State bank examiners, Donohoo submitted a false Officer's Questionnaire in connection with the 1989 State and FDIC examinations. As the loan officer for the Misenor loan, Donohoo was aware that the proceeds of this loan were transferred first to Misenor and then to Mathies and himself. He also knew this loan was made with preferential terms. Nevertheless, he omitted this loan from his responses to questions #5 and #7 of the Officer's Questionnaires, thereby avoiding scrutiny of the loan by the examiners. Donohoo and Mathies were present during discussions with FDIC examiners regarding the Misenor Loan and knowingly permitted Misenor to misrepresent the purpose of the Misenor Loan at the 1989 and 1990 FDIC examinations, as well as at the September 19, {{10-31-95 p.A-2630}}1990, meeting between the FDIC and the Bank's Board of Directors, long after returning monies to Misenor so that the loan could be "improved" and not be rated as substandard.

2. Self dealing

   "Personal dishonesty" includes "selfdealing practices." Donohoo and Mathies engaged in numerous acts of self dealing detailed above, including voting themselves the July 13, 1990, bonuses without board approval to make a payment on Midway Loan #2, arranging and voting the abusive golden parachutes for themselves, by authorizing, issuing or arranging for the purchase of the 7,000 new shares of Bank stock without providing notice to the Federal Reserve Board or others, and by other means.
   Donohoo and Mathies also used their positions as insiders to issue and purchase of a portion the 7,000 shares of Bank stock at a price that was less than fair market value. Their positions as insiders and purchasers of the new stock presented a clear conflict of interest that demanded the stock transaction be fully disclosed to interested parties and be fair and at arms-length. The transaction was not disclosed, fair, or at arms-length. These actions also evidenced a want of fairness and straightforwardness.

3. Impeding FDIC Investigation

   On July 30, 1990, Donohoo and Mathies told Field Office Supervisor Fagerland that the Bank was not providing any financing and that they did not know the source of funding for Godbout-Bandal's and Rasmussen's purchase. These statements were false. Donohoo and Mathies were aware that the PPA Loan and Overdraft Loan were used to finance Godbout-Bandal's purchase of Bank stock, and they admitted that they learned of the Overdraft Loan on the morning of July 31, 1990. It was therefore incumbent upon them to advise Fagerland that their previous statements were incorrect. At the July 30, 1990 meeting, Donohoo also knew that Rasmussen got his funding from Peoples Bank, but told Fagerland that he did not know the source of Rasmussen's funding. After the July 30, 1990, meeting, Donohoo and Mathies continued to misrepresent the financing for the new stock purchases. By letter dated July 31, 1990, the Bank's counsel responded on behalf of the board of directors of the Bank that "[e]ach of the investors (with the exception of Mr. Mathies and Mr. Donohoo) obtained the funds for their purchase of the new bank stock 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 other investors." This statement was made in response to the FDIC's letter dated July 30, 1990, to the Bank's board of directors which stated in part, "[e]fforts to obtain information in regard to the source of the funding for a large portion of the planned injection have been unsuccessful even though such funds are already on deposit at your bank in contemplation of the stock transaction." This letter also followed Fagerland's efforts to ascertain the source of any financing during his meeting that same morning. Particularly considering the FDIC's concerns for the source of funding, the statements in the July 31 letter were deceptive. As was known by Donohoo and Mathies, the Bank had in fact financed Godbout-Bandal's purchase and the associated Peoples Bank had in fact funded Rasmussen's purchase.41 The statement in the letter was further false in that it states that "[e]ach of the investors...did not rely...on any other type of support from any of the other investors," (emphasis added) in that Rasmussen did clearly rely on support from Donohoo to obtain his financing at Peoples through personally presenting and supporting the loan, and changing Rasmussen's net worth submission. The July 31 letter also falsely stated that Kris Bandal, not Respondent Godbout-Bandal, purchased 15.27 percent of the Bank's stock. In another letter dated September 11, 1990, Kris Bandal was again referred to as a purchaser and it was stated that he purchased his shares with cash and no financing was involved. As of September 11, 1990, Donohoo, Mathies and Rasmussen at least knew of the Overdraft Loan. It is apparent that they allowed counsel for the Bank to make misrepresentations in the July 31 and September 11 letters.
   It must be noted and emphasized that attorneys are frequently placed in the position of making statements based upon the claims, true or false, of their clients, and no inference of impropriety on the part of Costley is intended in this regard. Like the computer

41 Donohoo, Mathies and Rasmussen were also apparently dishonest with their attorney who testified he did not know of the PPA Loan, Overdraft Loan or Rasmussen Loan. Tr. 2101–2102, 2169–2171.
{{10-31-95 p.A-2631}}axiom "garbage in, garbage out," it was the source of the information, not the transmitter, which is faulty.
   Respondents continued their efforts to disguise the existence of the Rasmussen Loan as late as April 1991, when Mathies asked Misenor to have Rasmussen revise his financial statement by deleting reference to the Rasmussen Loan. Although Mathies denied Misenor's testimony on his, neither Donohoo, Mathies nor Rasmussen disclosed this financing to the FDIC in July or August of 1990, despite the FDIC's repeated efforts to learn of the funding of each investors' stock purchase.
   The evidence establishes by well more than a preponderance that the violations, unsafe or unsound practices and breaches of fiduciary duty by Donohoo and Mathies involved personal dishonesty.

4. Willful or Continuing Disregard

   "Willful disregard" or "continuous disregard" is not defined in the Federal Deposit Insurance Act. The phrase "willful or continuing disregard" was added to section 8(e) by the Financial Institutions Regulatory and Interest Rate Control Act of 1978, Pub. L. No. 95–630, 92 Stat. 3641, 3657 (1978) ("FIRIRCA"). This language was discussed in some detail by the ALJ in his Recommended Decision In the Matter of * * * Bank * * * Bank, FDIC-85-215e, [Bound Vol. 1] FDIC Enforcement Decisions and Orders (P-H) ¶ 5069, at pp. A-948, 948 July 17, 1986.42
    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.
FDIC-85-215e ¶ 5069 at A-947, 948 (Emphasis added.) (Footnote omitted).
   Therefore to show "willful disregard" it is not even necessary to show Donohoo and Mathies knew of or intended to violate any law, regulation, or order, knew of or intended to breach any fiduciary duty, or knew or intended to commit any unsafe or unsound practice. In the Matter of * * * FDIC-86-56e, [Bound Vol. 1], FDIC Enforcement Decisions and Orders (P-H) ¶ 5110 at A-1195 (January 19, 1988). Nor is it necessary to show Donohoo and Mathies engaged in any conduct with an intent to harm the Bank. Willful disregard may exist even if the Respondents believed they were acting in the best interests of the Bank. Id at A-1196.
    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.
In the Matter of James C. Amberg, et al.,

42 Subsequent to the issuance of the ALJ's decision, the Respondent in this matter stipulated to the issuance of the Order of Prohibition From Further Participation which was issued by the Board of Directors of the FDIC. The ALJ's decision was therefore never considered by the Board.
{{10-31-95 p.A-2632}}FDIC-89-144k, FDIC 1 Enforcement Decisions and Orders (P-H) ¶ 5187 at A-2127 (October 27, 1992). Donohoo and Mathies in fact engaged in the consummate pattern of insider abuse, demonstrating both willful and continuing disregard for the safety and soundness of the Bank. They used the proceeds of the Misenor Loan, and Field Loans #1 and #2 to reduce their indebtedness on the Midway Loan #1 and/or to make payments on their obligation on the Wenzel Note. They used the leverage of the Bank's lending relationship with Christianson and Hauser to obtain their investments in Capital Partners. Christianson's and Hauser's loans were subsequently classified "Substandard" or "Loss" in the 1989 FDIC Report of Examination. They procured improper bonuses to make payments on Midway Loan #2 in the face of criticism of such practice by the State and even though they recognized a need for additional capital for the Bank. They also contrived to give themselves employment agreements with golden parachutes that exposed the Bank to payment obligations which represented as much a 22 percent of its capital. They financed part of the purchase of the new Bank stock sale through an insider loan to Godbout-Bandal's related interest and a sizable overdraft on her personal account at the Bank. The PPA Loan and Overdraft Loan were made with more-than-normal risk of repayment and in excess of the Regulation "O" lending limit. They issued 7,000 new shares to themselves and the other Individual Respondents in a surreptitious manner and below fair market value knowing full well that it was likely to bring litigation upon themselves and the Bank, and then passed the entire expense of the litigation on to the Bank.
   Donohoo and Mathies were both experienced bankers and Donohoo was a lawyer as well. Their actions were intended and amounted to insider dealing and abuse that exposed the Bank to risks which threatened the Bank's safety and soundness. At best, their conduct was voluntarily engaged in over a period of time with needless indifference to the consequences. At worst, their conduct was willful, intentional and motivated by self interest with indifference to the consequences for the Bank.
   The FDIC has established by a preponderance of the evidence each of the elements necessary to warrant the issuance of an Order of Prohibition against Donohoo and Mathies.

B. ORDERS TO CEASE AND DESIST

   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.
Affirmative action is governed by subparagraph (6) of the provision, portion (A) of which states that it includes authority to require the party to make restitution or provide reimbursement, indemnification, or guarantee against loss if either the party was unjustly enriched in connection with the violation or practice, or the violation or practice involved a reckless disregard for the law or any applicable regulations or prior order of the appropriate Federal banking agency. As a catch-all, portion (F) of the subparagraph authorizes the regulatory agency to "take such other action as the banking agency determines to be appropriate."
   Addressing the basic threshold issue, the FDIC's cease-and-desist authority contained in section 8(b) of the Act, 12 U.S.C. § 1818(b), ("section 8(b)") clearly extends to indemnification agreements by a bank that constitute a violation of law or otherwise constitute an "unsafe or unsound" practice.43 Abusive indemnification practices are yet another manifestation of dangerous insider practices that are clearly within the reach of section 8(b) and well within the FDIC's statutory authority to address.
   Federal banking statutes grant the FDIC and other federal banking regulators flexible and far-reaching enforcement tools. Among the most important is the ability to issue and enforce cease and desist orders. The FDIC may use this authority to prevent violations of law, or to "prevent any practice or procedure" by a bank that the FDIC, in its discretion, deems to be an unsafe or unsound practice. Cease and desist orders have been used to regulate virtually all aspects of a bank's operations. See In re Franklin National Bank Securities Litigation, 478 F. Supp. 210, 218 (E.D.N.Y. 1979).
   In construing the scope of the cease-and-desist authority granted to Federal banking regulators under Section 8(b)(1), the courts have previously recognized that:
    [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."
Mid America Bancorporation v. Board of Governors of the Federal Reserve System, 523 F. Supp. 568, at 576, (D. Minn. 1980) (citations omitted) Red Lion Broadcasting Co. v. F.C.C., 395 U.S. 367, 381 (1969). The courts have also recognized that section 8 and related provisions authorize a Federal banking regulator to:
    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.
Mid American Bancorporation, 523 F. Supp at 574.
   Congress confirmed and enhanced this broad authority when it specifically authorized the FDIC to fashion temporary or permanent cease and desist orders that require a bank or institution-affiliated party to take affirmative action to correct or remedy a violation or unsafe or unsound practice. For example, 12 U.S.C. § 1818(b)(6)(D) specifically authorizes issuance of orders that serve to rescind agreements or contracts. Moreover, 12 U.S.C. § 1818(b)(7) authorizes placing limitations upon the "activities or functions of an insured depository institution" which provides direct authority to restrict an institution's ability to authorize abusive indemnifications to directors or insiders.
   The FDIC's interpretation of its cease and desist authority pursuant to Section 8(b) to reach indemnifications payments is fully con-

43 "Unsafe or unsound banking practices" are defined as "conduct deemed contrary to accepted standards of banking operations which might result in abnormal risk or loss to a banking institution or shareholder.'" Northwest National Bank, Fayetteville, Arkansas v. Office of the Comptroller of the Currency, 917 F.2d 1111, 1115 (8th Cir. 1990), citing to First Nat'l Bank of Eden v. Department of Treasury, 568 F.2d 610, 611, n. 2 (8th Cir. 1978).
{{10-31-95 p.A-2634}}sistent with the plain language of Section 8(b). The indemnifications addressed in this action are simply another form of self-dealing that has long "been indentified as an unsafe or unsound practice because of the conflict it creates between the interests of the institution and the interests of an individual." Hoffman v. FDIC, 912 F.2d 1172, 1174 (9th Cir. 1990) (abusive "Golden Parachute" prohibited). Such "breaches of fiduciary duty by bank officials are inherently dangerous and cannot be considered safe." Id. The FDIC plainly has the statutory authority to reach the indemnities at issue in this case.
   Respondents attempt to challenge the FDIC's authority to issue a cease and desist order in connection with the Wenzel Lawsuit indemnifications by arguing that the FDIC's authority to prohibit abusive indemnifications does not extend beyond payments made to a defendant or respondent in the context of an administrative enforcement action or suit brought by a Federal banking regulator. Plaintiffs argue that the exclusive authority to prohibit or limit indemnifications is provided by section 18(k) of the Act, 12 U.S.C. § 1828(k), which they interpret as limiting the FDIC's cease and desist authority pursuant to section 8.
   Enacted as part of the Comprehensive Crime Control Act of 1990, Pub. L. No. 101–647, 104 Stat. 4789 (1990), section 18(k) provides that the FDIC "may prohibit or limit, by regulation or order, any golden parachute payment or indemnification payment." 12 U.S.C. § 1828(k)(1). "Indemnification payments" are defined as payments or agreements to make payments by an insured depository institution in order to reimburse an institution-affiliated party who has been assessed a civil money penalty, removed or prohibited from participating in the affairs of an institution, or has been subject to a cease and desist order. 12 U.S.C. § 1828(k)(5)(A).
   Under Plaintiffs' construction of this provision, the FDIC and other Federal banking regulators may not limit or prohibit otherwise abusive indemnity agreements that fall outside of the scope of this definition. Plaintiffs; contention is that if an indemnity agreement is provided in the context of private litigation, i.e., litigation not initiated by a Federal Banking regulator, it is not subject to the cease and desist authority of section 8(b). Respondents shallow reading of this statute utterly fails to provide any "compelling indication" that the FDIC's interpretation of its authority under section 8(b) is incorrect, Mid America Bancorporation, 523 F. Supp. at 574, and is at odds with the plain language of sections 8(b) and 18(k).
   Section 18(k) was enacted to strengthen the FDIC's ability to prevent a respondent in an administrative action who has been found to have violated a law or abused his or her position with an institution from avoiding the financial consequences of their acts, or to actually pass along the cost of defending their actions to the victim.44 It provides a clarification of the law and supplies Federal banking regulators with unquestioned statutory authority to address a very specific policy concern.
   Section 18(k) contains no language which expressly or impliedly limits the FDIC's broad authority to issue cease and desist orders under section 8(b). Respondents can point to no legislative history or other authoritative interpretation that would support their narrow construction. As discussed previously, section 8(b) on its face permits a regulator to address a broad range of abusive practices at a bank—including those specifically contemplated by section 18(k)45— and the FDIC is authorized to issue cease and desist orders that serve to rescind indemnity agreements or limit an institution's ability to issue indemnifications.

   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-


44See, H.R. Rep. No. 681(1), 101st Cong., 2d Sess. 1 (1990), reprinted in 1990 U.S.C.C.A.N. 6472.

45 See Hoffman, 912 F.2d at 1174 ("Golden Parachute" purchase of employment contract deemed an unsafe or unsound practice).
{{10-31-95 p.A-2635}}spondents herein. A review of the complaint in the civil proceeding alleges personal liability for the individual defendants based not only on an allegedly illegal (under Minnesota law) devaluation of plaintiffs' stock interest, but also seeks:
    (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; ...
FDIC Ex. 304a. As has been seen above, the stock has been sold to a third party, which raises a few difficulties in the event plaintiffs are successful, and the Bank certainly requires the services of counsel in defense of the claimed legality of the stock issuance.
   It is true that Respondents did not proceed properly under the requirements of the Minnesota statute, § 300.083 (1993). That statute refers to mandatory indemnification, whether the corporation desires to grant it or not, as well as to voluntary indemnification. While Subdivision 6, governing qualification for mandatory eligibility, have not been complied with, Subdivision 10, dealing with non-mandatory coverage, states:
    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.
   It is the recommendation of the undersigned that, so long as the defense of the individuals is indivisible from that of the Bank, there is no cause to limit the Law Firm defendants being retained and paid by the Bank.
   Unfortunately, however, Costley's statement happens not to be completely true. The firm of Lindquist and Vennum has presented three counterclaims on behalf of Respondents Donohoo and Mathies. One counterclaim does not name the Bank as a cross-complainant. The other two counterclaims do name the Bank as a cross-complainant, but the relief prayed for in all three claims is only on behalf of Donohoo and Mathies. See, FDIC Ex. 304b. To the extent that services for these counterclaims have been paid by the Bank, Respondents Donohoo and Mathies will to order to return an appropriate portion of the retainer and expenses to the Bank, and Lindquist and Vennum, and Respondent Bruce A. Rasmussen, & Associates, LTD, both of which appeared on the counterclaim, will be ordered not to accept future payments from the Bank regarding the counterclaims. The factors in determining the amounts paid for these specific retainers are peculiarly and uniquely within the knowledge of the Law Firms, and Enforcement Counsel having presented the total amount of fees and expenses paid, the burden of proving the limitation on the total reverts to Respondents. It will be recommended that if the parties are unable to agree on an amount, that issue shall be remanded for further hearing.

   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.

C. ASSESSMENT OF CIVIL MONEY PENALTIES

   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:

Respondent Maximum CMP CMP Sought
Donohoo $24,660,000 $1,000,000
Mathies $20,800,000 $1,000,000
Rasmussen $14,535,000 $75,000
Field $8,290,000 $75,000
Godbout-Bandal $5,635,000 $75,000

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

(1) General

   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.
(Citations omitted.) The amount of profit obtained by the Individual Respondents is a good "starting point in determining" the amount of the penalty. Miller v. FDIC, 956 F.2d 58, 62–63 (4th Cir. 1992); In the Matter of * * * Bank, FDIC-85-2k, 1 FDIC Enforcement Decisions and Orders (P-H) ¶ 5063 at A-818 (April 7, 1986). In this case, however, since Respondents will be separately ordered to make restitution of their profits, they will not be required to be paid the prof-

46 CMPs for violations of Regulation O and Section 23A of the Federal Reserve Act were previously authorized pursuant to section 18(j)(4) of the Act. This section was deleted in 1991, because section 8(i)(2) was amended in 1989 by FIRREA to authorize CMPs for any violation of law. Section 18(j)(4) was subsequently stricken from the Act in 1991 because violations of Section 23A and Regulation O are now covered by section 8(i)(2). For actions prior to August 9, 1989, CMPs are authorized with respect to this action only for the violations of Section 23A of the Federal Reserve Act and Regulation O pursuant to section 18(j)(4) and of the 1989 Order to Cease and Desist pursuant to section 8(i)(2).

47 The FDIC's Notice and Amended Notice allege the necessary elements to maintain Tier II and Tier III CMPs under both sections 7(j)(16) and 8(i)(2). Such allegations not only authorized higher daily penalties for the violations of law, regulation and 1984 Order to Cease and Desist, but also permit the assessment of CMPs for the unsafe or unsound practices and breaches of fiduciary duty committed by the respective Individual Respondents. Enforcement Counsel continue to maintain that the evidence justifies CMPs at these higher tiers and for the unsafe or unsound practices and breaches of fiduciary duty. Justification for assessment is not briefed, however, because Enforcement Counsel suggest that the CMPs sought in this proceeding are more than adequately supported at the Tier 1 level, with which the undersigned concurs.
{{10-31-95 p.A-2637}}its a second time as a portion of civil money penalties.
   The Individual Respondents each profited from their violation of the CBCA, and also from their respective violations of Regulation O, Section 23A and/or the 1984 Order to Cease and Desist, because these violations were committed in furtherance of their scheme to acquire control of the Bank. Each Respondent purchased his or her shares of new Bank Stock on July 30, 1990, at below market value and sold them at a substantial profit in December 1992. Kirchhoff testified that he calculated the profit received by aggregating the amount of money the Individual Respondents received from their sale of the new Bank stock to Amundson in December 1992, less what they paid for the stock on July 30, 1990.
   As part of discovery, the FDIC requested the latest financial statements and the tax returns of the Individual Respondents. The FDIC also gathered financial statements of the Individual Respondents during its investigation. The uncontroverted documentary evidence establishes each Individual Respondents' financial condition.

(2) Other Benefit Received

   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.

(3) Gravity of the Violations

   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)
In the matter of Ira Lee Brannan, et al., FDIC-91-37k, ¶ 5176 at A-1973.
   The misconduct in this case was, in the main, perpetrated by insiders and was therefore grave. Donohoo, Mathies and Rasmussen engaged in a systematic pattern of insider abuse. Substantive and egregious violations of Regulation O occurred in connection with the Misenor Loan, Field Loans #1 and #2, the PPA Loan, the Overdraft Loan and the Rasmussen Loan. Review Examiner Kirchhoff testified that the FDIC viewed these types of violations of Regulation O very seriously. Tr. 1212.
   The CBCA Violation was also the result of insider activity. The CBCA was amended as part of the Financial Institutions Regulatory and Interest Rate Control Act of 1978, Pub. L. No. 95–630, 92 Stat. 3641 (1978), to provide for the first time that individuals or groups of individuals must give 60 days notice prior to acquiring control of a Bank. The purpose of the Act was to assure the continued stability of the banking system by protecting the system from undesirables who might acquire a bank and use it for selfdealing purposes. H.R. Rep. No. 1383, 95th Cong., 2d Sess. 1 (1978), reprinted in 1978 U.S. C.C.A.N., 9273, 9291–9292. "Indeed, one of its primary purposes was to ensure the safety and soundness of the target institution and the banking industry as a whole." Mid-Continent Bancshares, Fed. Sec. L. Rep. ¶ 98,734 at 93,707. CBCA violations are serious. Cf. United States v. Tuohey, 867 F.2d 534 (9th Cir. 1989) (Defendant convicted of conspiracy to defraud the federal government where he and eight others in concert acquired control of a bank is willful violation of the CBCA.) Thus, as Kirchhoff testified, the FDIC views violations of the CBCA's prior notice requirements as serious.

4. History of Previous Violations

   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.

5. Good Faith

   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.
In the Matter of Steven J. Hirsch, et. al., FDIC-91-24k, ¶ 5189 at A-2143. (Citations omitted.) It was thus up to Respondents to take protective measures rather than no merely rushing forward, but in fact denying that the matter was a fait accompli in the midst of discussions.
   As other evidence of lack of good faith, it is noted that after the FDIC became aware of the Individual Respondents' plans to acquire control of the Bank, the Individual Respondents not only failed to cooperate with the FDIC, but intentionally mislead the FDIC in its investigation of the stock issuance. Furthermore, despite FDIC Field Office Supervisor Fager- land's efforts on July 30 to convince them to delay their transaction, Donohoo and Mathies immediately issued the stock after his departure from the Bank. They did not delay the transaction long enough to permit the Bank's counsel to discuss the issue with the Regional Office of the FDIC as Fagerland requested.48

48 The FDIC's July 30, 1990 Letter, was faxed at 1:24 p.m., July 30. FDIC Ex. 277. Costley's July 31, 1990,

Continued) {{10-31-95 p.A-2639}}
   Finally, Respondents permitted Ms. Curtin, who responded to the FDIC's 15-day letter on behalf of all Individual Respondents, to state that the proceeds of the PPA Loan were used as indicated in the loan application when they knew this was not true. Even if Donohoo's, Mathies' and Rasmussen's statements that they were unaware of the use of the PPA Loan proceeds were true, Godbout-Bandal clearly knew she used funds from the PPA Loan and the Overdraft Loan to purchase her stock. She signed the check drawn on PPA's account used to purchase the $200,000 cashier's check which she deposited to Hudson Road Office Park's account to cover the $200,000 check written to purchase the stock. She drew the $100,000 check on her personal account when she knew it had a balance of less than $1,000.
   In regard to such other matters as justice may require to be considered, it is noted that all of the insider loans except the Rasmussen Loan (which has a balance remaining of $10,000) have been paid. However, this is only a mitigating factor in determining the amount of CMPs.

    The purpose of civil money penalties is to reduce risk to financial institutions by discouraging the types of insider transactions which experience has shown to be the major cause of Bank failure. To hold that prohibited transactions "don't count" for civil money purposes if the insider repays them, would eliminate the major deterrent purpose of civil money penalties...Repayment may be taken into account as a mitigating factor, "as justice may require."
Grubb, FDIC-88-282k and FDIC-89-111e, ¶ 5181 at A-2028. In this case, the fact the insider loans were paid is entitled to only slight, if any, mitigating weight. The Misenor Loan was repaid largely by Donohoo's and Mathies' $20,000 check drawn on Capital Partners and by the Bank from the settlement of the employment agreement between the Bank and Misenor. Field Loans #1 and #2 were paid with the proceeds from this sale of Bank stock. The PPA Loan was classified "Substandard" and paid only at the insistence of the FDIC that it be removed from the Bank.
   The Bank's condition improved from 1988 to February 21, 1992. FDIC Exs. 11–14. Without the capital injection, the Bank's asset quality would still have improved and, in this respect, Donohoo's, Mathies' and Rasmussen's fiduciary duties required no less. However,
   [T]he Board is of the view that 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. That 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.
Grubb, FDIC-88-282k and FDIC-89-111e, ¶ 5181 at A-2029.

6. The Amounts of Civil Money Penalties Recommended

1. Respondents Donohoo and Mathies

   Review Examiner Kirchhoff calculated the combined gain of Donohoo and Mathies from the sale of their 2,100 new shares of Bank Stock to Amundson to be $1,851,108. Donohoo and Mathies were paid $627,600 for their shares pursuant to the Stock Purchase Agreement.49 Kirchhoff also included an additional $400,000 in his calculations of Donohoo's and Mathies' profit. This amount was paid to Lindquist & Vennum, as escrow agents, and put into escrow to insure the availability of funds to satisfy any expenses and liability of Donohoo and Mathies arising out of a collection suit filed by the Wenzels.50 Because the $400,000 benefited Donohoo and Mathies and was included as part of


48 Continued letter said the stock transaction was completed prior to the receipt of the FDIC's July 30 FDIC Ex. 278. Costley and Kirchhoff communicated at approximately 2:30 p.m. July 30. Tr. 1113–1114. At the time of Fagerland's visit, Donohoo and Mathies indicated stock had not been issued. Tr. 795. The stock was issued sometime between 10:30 a.m. and 1:30 p.m. Tr. 791, 795.


49 The $627,600 was paid to Donohoo and Mathies by two checks. FDIC Ex. 349. Check #593669 was made payable to Donohoo and Midway and was used to pay off existing indebtedness of Respondents Donohoo and Mathies at Midway incurred for the purpose of purchasing the new Bank stock (Midway #1). FDIC Ex. 350, Tr. 2134–2135. Check #593668 represented the difference between the $627,600 contract price and the amount used to pay off Midway #3. Tr. 2135.

50 This was a lawsuit maintained by the Wenzels to collect on Donohoo's and Mathies' obligation resulting from their assumption of one-half the liability on the Wenzel Note as part of their purchase of 24.9 percent of CCC in
(Continued)

{{10-31-95 p.A-2640}}the Stock Purchase Agreement, as a portion of what Amundson was willing to pay for the stock regardless of how the payment was titled, it is appropriately included in their profits.
   Also as part of the Stock Purchase Agreement, Donohoo and Mathies negotiated a buy-out of their employment agreements ($200,000 each), a non-compete and consulting agreement ($300,000 each), the Bankowned vehicles they had been using ($30,377 total), and an escrow fund for attorney fees and expenses incurred in this proceeding ($50,000). Kirchhoff also included these in his calculation of Donohoo's and Mathies' gain, because they were included in the Stock Purchase Agreement. See, generally, Miller v. FDIC, 956 F.2d 58, 62 (4th Cir. 1992). Their inclusion is also appropriate because Amundson testified that he had in mind a specific amount to pay for the Bank and the manner in which the funds were allocated was irrelevant to him.
   Finally, Kirchhoff included a payment to Donohoo in the amount of $43,131 in Donohoo's and Mathies' gain, even though Amundson had attributed this amount to Field. This amount was a "plug figure" that Donohoo and Mathies received for the sale of the Bank to round out the payment to the total agreed to.
   From the total of $2,151,108 paid by Amundson to, or for the benefit of Donohoo and Mathies, Kirchhoff subtracted the $300,000 they paid for the 2,100 shares of Bank Stock on July 30, 1990, resulting in a net gain of $1,851,108. Dividing this amount equally between Donohoo and Mathies, each received financial gain of $925,554 from their illegal acquisition of control of the Bank.
   Donohoo and Mathies also received financial benefit in the amount of $260,000 from the proceeds of the Misenor Loan and Field Loans #1 and #2, which they received and used to pay down the indebtedness on Midway Loan #1 and the Wenzel Note. Approximately $50,000 was also used in the purchase of their 2,100 shares of new Bank stock on July 30, 1990.
   Donohoo's March 1, 1992, financial statement provided to Midway on May 6, 1992, showed a net worth of $1,304,200 and an expected 1992 annual income in excess of $100,000. His adjusted gross income for 1990 was $180,620, and his income tax Form 4868 for 1991 dated April 14, 1992, showed an anticipated tax liability for 1991 of $123,444. Previous financial statements dated March 1, 1991; May 1, 1988; and December 31, 1989, showed net worth of $1,412,400, $2,174,026, and $1,753,600, respectively. Donohoo is 54 years old, and a trained lawyer who was very successful in his private practice prior to his association with the Bank in 1988. He testified that his salary in private practice was $135,000 to $160,000.
   Considering the number and seriousness of the violations, the amount of $925,554 profit made through these unlawful activities which is required to be paid in restitution, Donohoo's financial condition, the 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 be assessed against Respondent Donohoo.
   Respondent Mathies' net worth as of July 6, 1992, as shown on his financial statement provided to Midway on July 20, 1992, was $403,373. FDIC Ex. 218. Previously he had shown a net worth of $607,899 as of June 6, 1988. He is 49 years of age. FDIC Ex. 317. His regular wages for 1992 were $80,749.84 plus miscellaneous income of $6,500. FDIC Ex. 372a. His regular wages for 1991 were $99,000.
   Considering the number and seriousness of these violations, the amount of $925,554 profit made from these unlawful activities which is required to be paid in restitution, Mathies' financial condition, Mathies' 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 $50,000 be assessed against Respondent Mathies.

(2) Respondent Field

   Field's gain from his participation in the illegal acquisition of control was $295,012. Field received $565,869 for his sale of 1,896 new shares to Amundson. This amount was paid by three separate checks; one, for $216,200 was payable to Donohoo and satisfied Field's personal indebtedness to Donohoo; another, for $324,689, was payable jointly to the Bank and Field satisfied Field's indebtedness to the Bank; and the third, for $25,000 was payable to Field and was a "plug figure" that represented the difference


50 Continued 1988. FDIC Ex. 345; Tr. 2137. Of the $400,000, $300,000 settled the collection action, $66,000 was distributed equally to Donohoo and Mathies, and the balance paid for attorney fees incurred in the collection action. Tr. 2137.
{{10-31-95 p.A-2641}}between the contract sales price and the amounts used to satisfy Field's indebtedness to Donohoo and the Bank. From this amount, Review Examiner Kirchhoff deducted $270,867 which represented Field's basis in the 1,896 shares purchased July 30, 1990.51
   As of some period after June 30, 1992, Field reported a net worth of $1,564,572. FDIC Ex. 343, p. 1. He is approximately 70 years of age. FDIC Ex. 343, p. 1. He owns Field Financial Corporation. FDIC x. 343, p. 15 and 16. However, his net worth has been reported at substantially higher amounts.
Date of Financial
Statement Net Worth
1/15/91 $6,562,213
9/27/91 $22,197,212
10/4/91 $21,953,158
2/19/92 $22,176,587
4/9/92 $21,755,432

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.

3. Respondent Rasmussen

   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.

4. Respondent Godbout-Bandal

   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.

III. CONCLUSIONS OF LAW

Jurisdiction

   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


51 On July 30, 1990, Field purchased 2,100 new shares for $300,000. It is unclear in the record how Field's shares were reduced to 1,896 other than that as part of his two $100,000 loans from Donohoo, apparently 204 shares were sold to Donohoo's relatives. Field's basis was calculated as follows: $270,857 = 1,896x $300,000.

{{10-31-95 p.A-2642}}U.S.C. §§ 1811–18311, the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws, rules and regulations of the State of Minnesota.
   2. Peoples State Bank, Winthrop, Iowa ("Peoples Bank"), is a corporation existing and doing business under the laws of the State of Iowa and has its principal place of business at Winthrop, Iowa. Peoples Bank is and has been, at all time pertinent to these Conclusions of Law, an insured State nonmember bank. Peoples Bank is subject to the Act, 12 U.S.C. §§ 1811–1831t, the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws and regulations of the State of Iowa.
   3. 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 ("Regulation O"), 12 C.F.R. Part 215, are applicable to the Bank and Peoples Bank by section 18(j)(2) of the Act, 12 U.S.C. § 1828(j)(2), and section 337.3(a) of the FDIC Rules and Regulations, 12 C.F.R. § 337.3(a), respectively.
   4. Section 23A of the Federal Reserve Act, 12 U.S.C. § 371c, is made applicable to Peoples Bank by section 18(j)(1) of the Act, 12 U.S.C. § 1828(j)(1).

Capital City Corporation

   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).

Donohoo

   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).

Mathies

   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).

Leonard Misenor

   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).

Godbout-Bandal

   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).

52Regulation O was ammended effective May 18,1992, 57 Fed. Reg. 22,424 (1992). Section 215.2(1) was formerly 12 C.F.R. § 215.2(k). There was no substantive change to this section or other sections of Regulation O pertinent to these Conclusions of Law. Therefore, for ease of reference, all citations to Regulation O are to the current regulation.
{{10-31-95 p.A-2642}}
Field

   10. At all times pertinent to these Conclusions of Law, Field 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) a person participating in the conduct of the affairs of the Bank in connection with Field Loans #1 and #2, within the meaning of section 1818(j)(4) of the Act, 12 U.S.C. § 1818(j)(4); and
       (c) an institution-affiliated party of the Bank in that he was a controlling shareholder 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).53

Respondent Rasmussen

   11. At all times pertinent to these Conclusions of Law, Rasmussen was:

       (a) a director of the Bank within the meaning of section 215.2(c) of Regulation O, 12 C.F.R. § 215.2(c); and
       (b) an institution-affiliated party within the meaning of section 3(u)(1) of the Act, 12 U.S.C. § 1813(u)(1).

All Individual Respondents

   12. On or about July 30, 1990, Donohoo, Mathies, Godbout-Bandal, Field and Rasmussen acquired control of the Bank, and at all times pertinent to these Conclusions of Law subsequent to July 30, 1990, are and have been institution-affiliated parties within the meaning of section 3(u)(2) of the Act, 12 U.S.C. § 1813(u)(2), because they were required to file a change-in-control notice prior to acquiring said control with the FDIC pursuant to section 7(j) of the Act, 12 U.S.C. § 1817(j).
   13. At all times pertinent to these Conclusions of Law, the FDIC is the "appropriate Federal Banking Agency" within the meaning of section 3(q)(3) of the Act, 12 U.S.C. § 1813(q)(3), and has jurisdiction over the Bank, Peoples Bank, the Respondents and the subject matter of this proceeding.

Other Definitions

   14. As used herein, pursuant to section 3(v) of the Act, 12 U.S.C. § 1813(v), the term "violation" includes any action (alone or with another or others) for or toward causing, bringing about, participating in, counseling or aiding or abetting a violation.
   15. At all times pertinent to these Conclusions of Law, the Bank has been subject to an Order to Cease and Desist, Docket No. FDIC-84-131b, issued by the FDIC against the Bank on August 10, 1984, and effective August 20, 1984 ("1984 C&D Order"). The 1984 C&D order is a final order issued pursuant to subsection 8(b) within the meaning of section 8(i)(2) of the Act, 12 U.S.C. § 1818(i)(2), and a cease-and-desist order which has become final within the meaning of section 8(e)(1)(A)(i)(II) of the Act, 12 U.S.C. § 1818(e)(1)(A)(i)(II).
   16. At all times pertinent to these Conclusions of Law, CCC has been subject to a final Order to Cease and Desist, Docket No. 85-47-B-HC, issued by the Board of Governors of the Federal Reserve System on, and effective against CCC, May 23, 1985.

UNSAFE OR UNSOUND PRACTICES; VIOLATIONS OF LAW, REGULATION AND ORDER TO CEASE AND DESIST WHICH HAS BECOME FINAL AND BREACHES OF FIDUCIARY DUTY

   17. On or about July 30, 1990, Donohoo, Mathies, Godbout-Bandal, Field and Rasmussen acted directly or indirectly, or in concert with each other within the meaning of section 7(j)(1) of the Change in Bank Control Act ("CBCA"), 12 U.S.C. § 1817(j)(1), to acquire control of the Bank within the meaning of section 7(j)(8)(B) of the CBCA, 12 U.S.C. § 1817(j)(8)(B), through the purchase of 7,000 shares of Bank stock, giving them the power, directly or indirectly, to direct the management or policies of the Bank, or to vote 25 percent or more of the Bank's stock, or both.
   18. Donohoo, Mathies, Godbout-Bandal, Field and Rasmussen violated section 7(j) of the Act; 12 U.S.C. § 1817(j) in that no Notice of Acquisition of Control of the Bank was filed with the FDIC, as required by section 7(j) of the Act, 12 U.S.C. § 7(j), by or on behalf of any Individual Respondent, individually or as a group, prior to the acquisition of control of the Bank through purchase of the 7,000 shares of Bank stock on


53Civil money penalties are sought against Field for violations of Regulation O in connection with Field Loans #1 and #2, which occurred prior to FIRREA. Section 18(j)(4) was stricken from the Act in 1991 because section 8(i)(2) of the Act, 12 U.S.C. § 1818(i)(2) was amended by FIRREA to cover all violations of law, including Regulation O.

{{10-31-95 p.A-2644}}or about July 30, 1990, and to date, no such notice has been filed.

Insider Loans to Finance Investments in Capital Partners

Misenor Loan

   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.

Field Loans #1 and #2

   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.

INSIDER TRANSACTIONS TO FINANCE PURCHASE OF BANK STOCK

PPA Loan and Overdraft Loan

   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;
and thereby Donohoo, Mathies and Rasmussen engaged in unsafe or unsound practices.
   57. It was an unsafe or unsound banking practice to use, or permit the use of the PPA Loan proceeds for a purpose different than stated in the credit file, and thereby, Donohoo, Mathies, Rasmussen and Godbout-Bandal engaged in unsafe or unsound practices.
{{10-31-95 p.A-2646}}
   58. It was an unsafe or unsound practice for the Bank to extend credit by means of the PPA Loan to increase the Bank's own capital accounts, and thereby Donohoo, Mathies and Rasmussen engaged in unsafe or unsound practices.

Rasmussen Loan

   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).

UNAUTHORIZED BONUSES

   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.

1985 CEASE AND DESIST ORDER AGAINST CCC

   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.

OFFICERS' QUESTIONNAIRE

   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}}

OTHER UNSAFE OR UNSOUND PRACTICES AND BREACHES OF FIDUCIARY DUTY

   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.

REMEDIES

   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.

Section 8(e) Orders Against Donohoo and Mathies

Misconduct

   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.

Effect

   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.

Culpability

   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).

Civil Money Penalty

   82. The Individual Respondents' respective violations of Regulation O, Section 23A, section 7(j) of the Act, and 1984 Order to Cease and Desist:
   (a) were part of a pattern of conduct within the meaning of section 8(i)(2)(B)(ii)(I) and section 7(j)(16)(B)(ii)(I) of the Act, 12 U.S.C. §§ 1818(i)(2)(B)(ii)(I) & 1817(j)(16) (B) (ii)(I), committed in furtherance of their scheme to acquire control of the Bank, and
   (b) resulted in pecuniary gain or other benefit to the Individual Respondents within the meaning of section 7(j)(16)(B)(ii)(III) and section 8(i)(2)(B)(ii)(III) of the Act, 12 U.S.C. §§ 1817(j)(16)(B)(ii)(III) and 1818(i) (2)(B)(ii)(III);
and accordingly under either subsection each Individual Respondent may be assessed civil money penalties ("CMPs") of $25,000 for each day such violations continued.
{{10-31-95 p.A-2648}}
   83. The maximum amount of CMPs that may be assessed each Individual Respondent under Tier One and Tier Two of sections 7(j)(16) and 8(i)(2) of the Act, 12 U.S.C. §§ 1817(j)(16) and 1818(i)(2), for their respective violations are at least as follows:

Respondent Tier One Tier Two
Donohoo $24,000,000 $123,000,000
Mathies $20,000,000 $104,000,000
Rasmussen $14,000,000 $72,000,000
Field $8,000,000 $41,000,000
Godbout-Bandal $5,000,000 $28,000,000

   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:

Respondent CMP
Donohoo $75,000
Mathies $50,000
Rasmussen $15,000
Field $75,000
Godbout-Bandal $30,000

   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.

Respondent Amount
Donohoo $925,554
Mathies $925,554
Rasmussen $23,600
Field $295,012
Godbout-Bandal $120,000

   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.

IV. PROPOSED ORDER

(Donohoo and Mathies)

   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.

V. PROPOSED ORDER

(Rasmussen, Field, and Godbout-Bandal)

   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.

VI. PROPOSED ORDER

(Lindquist and Vennum, and Bruce A. Rasmussen & Associates, Ltd.)

   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.

VII. APPENDIX - FINDINGS OF FACT

A. JURISDICTION

   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.

B. BANK AND HOLDING COMPANY OWNERSHIP MAY 27, 1988

   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.


54As used in these Findings of Fact, references to "Answer" mean the Answer and the Answer to the Amended Notice, respectively, filed by Curtin and Barnes on behalf of all Respondents in this proceeding except Respondent Field.
{{10-31-95 p.A-2650}}
C. MAY 27, 1988 PURCHASE OF CAPITAL CITY

   8. On or about May 27, 1988, Richard D. Donohoo ("Donohoo") and Craig R. Mathies ("Mathies"), together with George Lang "Lang") 55 entered into an agreement to purchase 142,000 shares, or 24.9 percent, of the CCC Stock from Heaton ("1988 Purchase Agreement"). The agreement included an option, expiring on February 1, 1989 and never exercised, to purchase the remaining 427,812 shares of CCC Stock for $2,965,389.56 ("Option"). Admitted - Answer ¶ 21; FDIC Ex. 18, pp. 3. 4. and 17.
   9. The price for the 142,000 shares of CCC Stock was $1,025,000, to be paid as follows:
       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.
   10. Under the terms of the assumption of one-half the liability on the Wenzel Note, Donohoo and Mathies were obligated to make monthly payments of $2,000 and an additional payment of $17,602 each November 23rd. FDIC Ex. 18, pp. 3 & 28.
   11. The $627,680.18 cash portion of the purchase price for the 142,000 shares of CCC Stock was financed by Donohoo and Mathies through a loan of $150,000 from Peoples State Bank, Winthrop, Iowa, a bank controlled by Donohoo, and from the proceeds of a loan of $500,000 to Lang, Donohoo and Mathies from Midway National Bank, St. Paul, Minnesota ("Midway"). Admitted - Answer ¶ 23.
   12. On or about June 10, 1988, Certificates of Stock numbers 10 and 11, each representing 71,000 shares of CCC Stock, were issued in the names of Donohoo and Craig R. Mathies, respectively. Admitted - Answer ¶ 25; FDIC Exs. 18, pp. 106-111; 162 & 163. These certificates were pledged as security for Donohoo's and Mathies' liability on the Wenzel Note, placed in escrow with Albrightson on or about June 10, 1988 (Admitted - Answer ¶ 25), and remained in Albrightson's possession at all times pertinent hereto. Tr. 1011–1012; FDIC Exs. 162 & 163.
   13. On or about June 20, 1988, George Heaton used the cash down paymnt received pursuant to the 1988 Purchase Agreement to bring the Bank Stock Loan current as of February 15, 1988, and Midwest Federal agreed to continue to carry the Bank Stock Loan on a demand basis until February 15, 1989, when the loan was to be paid in full. Tr. 1341; FDIC Ex. 125.

D. OWNERSHIP IN AND POSITIONS OF DONOHOO AND MATHIES IN CAPITAL CITY

1. Ownership

   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.


55Lang later withdrew, and never invested in the stock.
{{10-31-95 p.A-2651}}
17. On June 20, 1988, Heaton used the cash down payment received pursuant to the 1988 Purchase Agreement to bring the Bank Stock Loan current as of February 15, 1988, and the Resolution Trust Corporation ("RTC"), which was then acting on behalf of Midway, agreed to continue to carry the Bank Stock Loan on a demand basis until February 15, 1989, when the loan was to be paid in full. Tr. 860–861. The $500,000 loan, as well as the Wenzel obligation, were all eventually paid in full. FDIC Ex. 125; TR. 1341, 1344–1346, 985–986.

2. Donohoo's Corporate Positions

   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.

3. Mathies' Corporate Positions

   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).

E. DIRECTION OF CAPITAL CITY'S MANAGEMENT AND POLICIES BY DONOHOO AND MATHIES

   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.

F. FUNDING PURCHASE OF CAPITAL CITY - ESTABLISHMENT OF THE CAPITAL PARTNERS CHECKING ACCOUNT AND THE NEW INVESTMENT GROUP

1. Midway Loan No. 1

   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.

2. Capital Partners' Demand Deposit Account and Transfers

   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:

Date Check Number Amount
6/29/88 501 $2,000
7/26/88 1001 2,000
8/29/88 1003 2,000
9/22/88 1005 2,000
10/27/88 1006 2,000
12/22/88 1009 23,602
2/27/89 1017 4,000
3/28/89 1018 4,000
5/3/89 1019 4,000
5/23/89 1020 4,000
6/27/89 1021 4,000
7/26/89 1023 2,000
9/11/89 1024 2,000
10/3/89 1026 2,000
10/31/89 1027 2,000
12/11/89 1028 21,602
1/29/90 1029 2,000
2/27/89 1030 2,000
4/6/90 1031 2,000
4/25/90 1032 2,000
6/1/90 1033 2,000
7/5/90 1034 2,000

   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:

Date Check Number Amount
9/19/88 1004 $12,902.77
11/16/88 1007 219,000.00
11/21/88 1008 73,000.00
1/23/89 1014 23,000.00
1/30/89 1013 73,000.00
2/7/89 1015 60,000.00
2/21/89 1016 68,698.99

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.
FDIC Exs. 65, 66 and 67.
   49. On or about April 12, 1989, Donohoo and Mathies opened an interest bearing checking account, #7027441, at Midway ("CP Savings Account"), FDIC Exs. 70 and 71, and on or about April 20, 1989, transferred $100,000 from the CP DDA to the CP Savings Account. FDIC Exs. 71, p. 1; 66, p. 11; Stipulated - Tr. 519. All the funds deposited to the CP Savings Account, including interest earned, were transferred to the CP DDA. As of July 30, 1990, all but $9,000 of the funds deposited to the CP DDA were used by Donohoo and Mathies to fund the purchase of stock of CCC or the Bank, and the CP Savings Account was closed August 1, 1990. FDIC Ex. 71.

3. The Bank's Condition Is Worse Than Anticipated

   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.
   53. As a result of the June 3, 1988 ROE, the Bank was assigned a composite rating of 4: "Institutions in this group have an immoderate volume of serious financial weaknesses or a combination of other conditions that are unsatisfactory. Major and serious problems or unsafe and unsound conditions may exist which are not being satisfactorily addressed or resolved. Unless effective action is taken to correct these conditions, they could reasonably develop into a situation that could impair future viability, constitute a threat to the interests of depositors and/or pose a potential for disbursement of funds by the insuring agency. A higher potential for failure is present but is not yet imminent or pronounced. Institutions in this category require close supervisory attention and financial surveillance and a definitive plan for corrective action." FDIC Ex. 11, p. 1-a-2.
4. Establishing the New Investment Group

   54. By letter dated August 5, 1988, Lang advised Midway that he was no longer a shareholder in the Bank and that he should be released from any liability on Midway Loan #1. FDIC Ex. 55. By notice dated September 2, 1988, Midway advised Lang, Donohoo, and Mathies, that Midway Loan #1 was past due. FDIC Ex. 57.
   55. On or about September 16, 1988, Donohoo and Mathies advised Thomas at Midway that Lang had pulled out of the purchase of the Bank and taken several investors with him. FDIC Ex. 32. Lang refused to consign a renewal note when Midway Loan #1 came due August 26, 1988. FDIC Ex. 32. After August 26, 1988, until November 21, 1988, when Lang was released from liability on Midway Loan #1, Lang was pressuring Donohoo and Mathies to either pay off Midway Loan #1 or have him released of any liability on Midway Loan #1. Stipulated -Tr. 150; FDIC Ex. 62.
   56. After Lang disassociated himself from Donohoo and Mathies, Donohoo and Mathies began to assemble a new investment group to purchase CCC or the Bank. FDIC Ex. 32; Tr. 63-64. This investment group is hereinafter referred to as the "Capital Partners," that being the title of the checking account utilized for transactions, to which account deposits were made and upon which checks were drawn as reported herein.
   57. In order to attract investors to assist in their efforts to purchase CCC or the Bank, Donohoo and Mathies prepared and signed a document entitled "History" (previously and hereinafter referred to not by title but by purpose as "Prospectus") dated September 23, 1988. FDIC Ex. 22; Tr. 186–187. The Prospectus gave a history of the Bank, summarized the problems of the Bank, the potential for profitability, the amount necessary to purchase the Bank, projections of return on assets through December 31, 1992, cash-flow projections through February 1994, and the investment required to purchase one of the ten investment units Donohoo and Mathies proposed to sell in the Capital Partners. FDIC Ex. 22. It referred to Donohoo and Mathies as "on-site owner management," and stated, "we have two months operating history with good earnings." FDIC Ex. 22, pp. 3, 9.
   58. The Prospectus indicated the purchasers would return the Bank to profitability and sell the Bank at the end of 5 years for an estimated profit of $571,624 per investment unit. FDIC Ex. 22, p. 9. The purchase price for a unit of investment was $133,000 of which $73,000 was payable upon execution of an agreement to invest ("Investment Agreement") and the balance of $60,000 was due February 1, 1989. FDIC Exs. 22; 24a.
   59. On or about September 16, 1988, Donohoo and Mathies advised Thomas, at Midway, that they had investors to replace Lang and needed 30 days to put their investment group together, but that they first had to call a special board of directors' meeting to oust Johnson as president of the Bank.
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FDIC Ex. 32. Midway agreed to grant the additional time before taking any action on Midway Loan #1. FDIC Ex. 32.
   60. By the end of the 30 day extension, on or about October 17, 1988, the investments had not been fully forthcoming, and Mathies advised Thomas, at Midway, that Donohoo nearly had their investment group together, FDIC Ex. 33, p. 6, and on or about October 19, 1988, further advised that they had five commitments of $75,000 each and expected five more in a short period. FDIC Ex. 33, p. 6. On or about October 28, 1988, Mathies further advised Midway that they had six firm commitments of $73,000 each and would have three more in a day or two. FDIC Ex. 33, p. 6.
   61. By letter dated November 1, 1988, Midway advised Lang, Donohoo and Mathies that it would commence foreclosure if Midway Loan #1 was not paid in full by November 15, 1988. FDIC Ex. 59.
   62. On or about November 1, 1988, Donohoo and Mathies advised Midway that Christianson was interested in financing his $73,000 investment in the Capital Partners with Midway. Other potential investors were Ted Priem, Field, Hauser and F.W. Thorne. FDIC Ex. 33, p. 6.
   63. On or about November 4, 1988, Midway made a loan of $73,000 to Christianson, the proceeds of which were advanced by cashier's check #714336, dated November 4, 1988, payable to the order of the Capital Partners. FDIC Exs. 64; 69, pp. 10–13.
   64. On or about November 4, 1988, cashier's check #714336 was deposited to the CP DDA. FDIC Exs. 69, pp. 10–13; 65; 66, p. 6.
   65. In November of 1988, the Bank made a loan to Christianson in the amount of approximately $156,000 which consisted of the renewal of an existing note and an advance of $50,000. Also in November of 1988, the Bank make a second loan to Christianson in the amount of $40,000. The unpaid balance of these loans was classified "Substandard" in the amount of $209,000 in the FDIC Report of Examination of the Bank as of August 25, 1989. FDIC Ex. 12.
   66. On or about November 10, 1988, Mathies advised Midway that the total for each investor would be $133,000, $73,000 payable 3 and $60,000 next February. FDIC Ex. 33, p. 7.
   67. On or about November 14, 1988, Mathies and Donohoo advised Midway they had $73,000 each from Christianson and Thorne and expected to get three more investors the next day. FDIC Ex. 33, p. 7.
   68. On or about November 15, 1988, Donohoo and Mathies advised Midway that they were selling 10 units for a total of $133,000, that each unit was payable $73,000 immediately and $60,000 in February 1989, that Christianson, Thorne and Field had paid and that Hauser and Misenor would pay by Friday, November 18, 1988. FDIC Ex. 33, p. 7. On or about the same day, Midway advised Donohoo they would renew Midway Loan #1 and release Lang if the principal balance was reduced to $200,000. FDIC Ex. 33, p. 7. In turn, Donohoo and Mathies advised Midway that they expected to reduce the balance of Midway Loan #1 to $200,000 by November 18, 1988. FDIC Ex. 33, p. 7.
   69. On or about November 15, 1988, Field issued check #1684 payable to the Capital Partners in the amount of $73,000 drawn on his account #10-08-964 at Fidelity Bank. FDIC Ex. 69, p. 16; Stipulated - Tr. 538. Field check #1684 was funded by the proceeds of a loan from the Bank to Field made on November 14, 1988. Tr. 542. On or about November 14, 1988, Thorne issued check #1018 payable to Donohoo and Mathies in the amount of $73,000 drawn on his account at Capital City State Bank. FDIC Ex. 69, p. 16. On or about November 15, 1988, both Field's and Thorne's checks were deposited to the CP DDA. FDIC Exs. 65; 69, pp. 14–17; 66, p. 6; Stipulated - Tr. 520.
   70. On or about November 15, 1988, Donohoo and Mathies made a $219,000 payment on Midway Loan #1 by check #1007 drawn on the CP DDA. FDIC Exs. 65; 67, p. 12; 36; Stipulated - Tr. 518–519. This check was funded by the investments in the Capital Partners by Christianson, Field and Thorne of $73,000 each. FDIC Exs. 65; 66, p. 6; Tr. 541–542.
   71. On or about November 18, 1988, Misenor made a $73,000 payment to the Capital Partners by check #1098 dated November 18, 1988, drawn on his account #10-02833 at the Bank. FDIC Exs. 65; 69, p. 20; 74; Tr. 201. Misenor's check was funded by the proceeds of a $76,000 loan from the Bank to his parents dated November 18, 1988. Tr. 201–202. On November 18, Misenor, Donohoo and Mathies hand delivered Misenor's check to Midway, where it was deposited in the CP DDA. FDIC Exs. 33, 65, 69, pp. 18–21; 66, p. 6.
   72. On or about November 18, 1988, Donohoo made a $73,000 payment on Mid- {{10-31-95 p.A-2657}}way Loan #1 by Check #1008 dated November 18, 1988, drawn on the CP DDA. FDIC Exs. 36; 65; 66, p. 6; 67, p. 13. Stipulated - Tr. 518–519. This reduced the principal balance on Midway Loan #1 to $218,520.66. FDIC Ex. 36. Midway thereupon renewed Midway Loan #1 to Donohoo and Mathies in the amount of $218,520.66 for 45 days to January 3, 1989. FDIC Ex. 32. By letter dated November 21, 1988, Midway released Lang from liability on Midway Loan #1. FDIC Ex. 62.
   73. On or about November 18, 1988, Donohoo and Mathies advised Midway they had several "sure thing" investors and expected to pay the balance of Midway Loan #1 prior to its maturity January 3, 1989. FDIC Ex. 32. On December 13, 1988, Mathies advised Midway that he and Donohoo were meeting with Hauser and were going to give him an "ultimatum" about investing in the Capital Partners. FDIC Ex. 33, p. 8.
   74. On December 15, 1988, the Bank made a $400,000 loan to Hauser. FDIC Ex. 12, p. 35. On or about December 19, 1988, Hauser, a director of the Bank, made a payment to the Capital Partners by Check #1911 in the amount of $50,000 drawn on his account at Minnesota Valley Savings Bank. FDIC Exs. 65; 69, pp. 22–25; 66, p. 7. On or about December 21, 1988, Hauser check #1911 was deposited to the CP DDA. FDIC Exs. 69, pp. 22–25; 66, p. 7. On or about December 29, 1988, Mathies advised Midway that Hauser paid $50,000 and the funds would be used to make a payment to Alice Wenzel. FDIC Ex. 33, p. 8. In point of fact, the $50,000 from Hauser was used to fund a $23,602 payment to Alice Wenzel on the Wenzel Note (Stipulated - Tr. 518) and to fund a $22,543.84 check to Donohoo. FDIC Exs. 65; 66, p. 7; 67, pp. 14 and 16. On or about December 29, 1988, Mathies also advised Midway that 8 of the 10 investment units were complete. FDIC Ex. 33, p. 8. On or about January 18, 1989, Mathies advised Midway that he expected to have $96,000 from Hauser on Friday, January 20, 1989. FDIC Ex. 33, p. 8. On or about January 20, 1989, the Bank's board of directors, consisting of Rasmussen, Donohoo and Hauser, approved a line of credit to Hauser in the amount of $650,000. FDIC Ex. 28m. On or about the same day, Hauser made a $23,000 payment to the Capital Partners by check #1963 drawn on his account at Minnesota Valley Savings Bank, brining his total investment in the Capital Partners to $73,000. FDIC Exs. 65; 69, p. 28. Hauser Check #1963 was endorsed by Donohoo and Mathies and deposited to the CP DDA on or about the same day. FDIC Exs. 65;66, p. 8; 69, pp. 28–33. On or about the same day, Donohoo and Mathies made a $23,000 payment on Midway Loan #1 by Check #1014 drawn on the CP DDA. FDIC Exs. 46, 67, p. 19; Stipulated - Tr. 518–519. Check #1014 in the amount of $23,000 was funded by the $23,000 investment in the Capital Partners by Hauser. FDIC Exs. 65; 66, p. 8. On or about the same day, Midway then renewed Midway Loan #1 in the amount of $200,518.39 for 60 days to March 24, 1989. FDIC Exs. 36; 33, p. 8.
   75. Hauser Check #1964 was endorsed by Donohoo and Mathies and deposited to the CP DDA on or about January 30, 1989. FDIC Exs. 69, pp. 34–38; 66, p. 8; 65. On or about January 23, 1989, Donohoo and Mathies gave Midway check #1013, postdated January 30, 1989, in the amount of $73,000 and drawn on the CP DDA, which was used January 30, 1989, to make a payment on Midway Loan #1. FDIC Exs. 33, p. 8;, 36; 67, p. 18. Stipulated - Tr. 518–519. That check, from CP DDA to Midway, was funded by the $73,000 investment in the Capital Partners by Hauser. FDIC Exs. 65; 66, p. 8.
   76. On or about February 5, 1989, Thorne made a $60,000 payment to Donohoo and Mathies by check #1022 drawn on his account at Capital City State Bank. The payment was for the balance of his unit. FDIC Ex. 69, p. 41. On or about February 7, 1989, Hauser's business interests began to have bankruptcy difficulties, and subsequently in the FDIC Report of Examination of the Bank as of August 25, 1989, the loans to Hauser were classified "Loss" in the amount of $650,000. FDIC Ex. 12, p. 35.
   77. Thorne check #1022 was endorsed by Donohoo and Mathies and deposited to the CP DDA on or about February 7, 1989. FDIC Exs. 65; 66, p. 9; 69, pp. 39–44. On or about the same day, Mathies made a $60,000 principal payment on Midway Loan #1 by check #1015 drawn on the CP DDA. FDIC Exs. 36; 65; 67, p. 20; Stipulated - Tr. 518–519. This check to Midway was funded by the balance of Thorne's $133,000 investment in one unit of the Capital Partners. FDIC Exs. 65; 66, p. 9.
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   78. On or about February 10, 1989, Thorne purchased another one-half unit of investment in the Capital Partners by check #1023, dated February 10, 1989, in the amount of $66,500 payable to Donohoo and Mathies. FDIC Exs. 65; 69, pp. 47 and 48. This check was endorsed by Donohoo and Mathies and deposited to the CP DDA on or about the same day. FDIC Exs. 65; 66, p. 9; 69, pp. 45-49.
   79. On or about February 20, 1989, Godbout-Bandal made a $66,500 payment to the Capital Partners by check #1801 drawn on her account at the Bank to purchase a unit in the Capital Partners. FDIC Exs. 65; 69, p. 52. At the time of her investment in the Capital Partners, Godbout-Bandal's business interest, Viking Center, had a loan at the Bank. FDIC Ex. 12. Godbout-Bandal check #1801 was endorsed by Donohoo and deposited to the CP DDA on or about the following day, February 21, 1989. FDIC Exs. 65, 66, p. 9; 69, pp. 50-57. The proceeds of Godbout-Bandal check #1801 and Thorne check #1023 were used to fund Donohoo's and Mathies' $68,698.99 loan payment on the Midway Loan #1 on February 21, 1989, by check #1016 drawn on the CP DDA, which payment paid the Midway Loan #1 in full. FDIC Exs. 36; 65; 66, p. 9; Stipulated - Tr. 518-519.
   80. On or about February 21, 1989, Donohoo advised Midway that Thorne had died about one and one-half weeks previously in Costa Rica. FDIC Ex. 33, p. 9.
   81. On or about April 7, 1989, Field made a $60,000 payment to the Capital Partners by check #1884 drawn on his account #3008964 at Fidelity Bank. The payment was the balance of the amount due for his one unit of investment in the Capital Partners. FDIC Ex. 69, p. 60; FDIC Ex. 112. The check was endorsed by Donohoo and deposited to the CP DDA on or about April 10, 1989. FDIC Exs. 65; 66, p. 11; 69, pp. 58–62. Field check #1884 was funded by the proceeds of a loan from the Bank to Field made on April 7, 1989. Tr. 544–545.
   82. As of April 7, 1989, the following individuals other than Donohoo and Mathies had purchased units in the Capital Partners:
   Christianson, one unit, $73,000.
   Hauser, two units, $146,000
   Misenor, one unit, $73,000
   Godbout-Bandal, one-half unit, $66,500
   Thorne, one and one-half units, $199,500
   Field, one unit, $73,000
FDIC Exs. 33, 65, 69.
   83. Each of the investors in the Capital Partners executed an agreement with Donohoo and Mathies reflecting his/her purchase of a unit of investment ("Investment Agreement"). FDIC Exs. 24a & The Investment Agreement assigned each investor a 10 percent interest in the 142,000 shares of CCC Stock purchased by Donohoo and Mathies on or about May 27, 1988. FDIC Exs. 24a & 354. It also provided that the option to purchase the remaining 75.1 percent of the CCC was to be exercised February 1, 1989, or as soon as regulatory approval was obtained, and that if approval of the change in control was not obtained by August 1, 1989, each investor would get a pro rata share of the stock purchased to date unless the date was extended by mutual agreement. FDIC Exs. 24a & 354.
   84. As of April 7, 1989, the Capital Partners consisted of Field, Godbout-Bandal, Misenor, Donohoo, Mathies, Christianson, Hauser, and Thorne (deceased). FDIC Exs. 33 & 69.

G. ATTEMPTS TO COMPLETE ACQUISTION OF CONTROL

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..."
FDIC Ex. 129.
   88. The Bank Stock Loan was in default from on or about February 15, 1989. FDIC {{10-31-95 p.A-2659}}Ex. 155. By letter dated March 21, 1989, Donohoo advised Midwest Federal that the new investors in the Capital Partners did "Not wish to disclose [their financial] information until approval of the FRB is obtained." FDIC Ex. 132. By letter dated April 6, 1989, Midwest Federal notified Donohoo and Mathies of the default status of the Bank Stock Loan. FDIC Ex. 133.
   89. At all times pertinent to these proceedings, from on or about June 30, 1989, CCC was insolvent. FDIC Ex. 12, p. 67; 13, p. 29; 14, p. 60.
   90. In mid-1989, Lindquist & Vennum attorney J. Kevin Costley ("Costley") was retained to represent the Bank and to advise the Bank as to regulatory applications or other types of laws that might apply if the option was exercised. Costley, Vol. XII, p. 2077. For the prior 17 years, Costley specialized in representing parties buying and selling financial institutions, reorganizing financial institutions, and generally representing community banks in a variety of legal problems. Tr. 2077. Costley was qualified as an expert witness with respect to financial institution law and the valuation of financial institutions for the purpose of purchases or sales. Tr. 2142.
   91. Costley advised Donohoo and Mathies on behalf of the Bank, that CCC's insolvency would prevent the Bank from obtaining the necessary regulatory approvals and that the Bank's first priority had to be getting additional capital. Tr. 2078. Costley further advised the Bank that in his opinion the value of the Bank was significantly less than the $3,500,000 to $4,000,000 owed by CCC to the RTC. Tr. 2078.
   92. Costley was asked by the Bank to represent it in negotiations with the RTC to see if the CCC bank stock loan could be discounted such that it reflected the true value of its sole asset, the Bank. Tr. 2079. As part of these negotiations, Costley, RTC employee Entgelmeier and RTC attorney Valdis Silins agreed that the RTC would have an independent appraisal done of the Bank. Tr. 2080.
   93. In late 1989, the RTC commissioned an appraisal of the Bank stock. Although Costley made several requests for a copy of that appraisal and was told that a copy of the appraisal would be provided to him, the RTC refused to provide a copy of the appraisal to Costley. Tr. 950, 887.
   94. Paul Olander was the individual commissioned by the RTC to conduct the Bank appraisal. Tr. 1758. By letter dated January 22, 1990, Olander forwarded to RTC employee Entgelmeier a draft of his December 22, 1989 Bank appraisal, which indicated a $1,360,000 fair market value for 99.04% of the Bank stock. R. Ex. 87, pp. 32–33, p. 1. The cover letter for the draft appraisal requested that RTC employee Entgelmeier "[]et me [Olander] know as soon as possible of any changes that should be made in the report." R. Ex. 87.
   95. According to FDIC Field Office Supervisor Dennis Fagerland, it is an unsound practice for an appraiser to send a draft appraisal for comment to an institution which has requested the appraisal. Tr. 804–805; 808–809.
   96. By letter dated January 10, 1990 (eight days after the draft appraisal had been sent), Olander forwarded to RTC employee Entgelmeier the final draft of the Bank appraisal. FDIC Ex. 157. The January 30, 1990 cover letter states in part that "[t]he changes that I discussed with you have been made, and the results of the appraisal are now more clear. Please destroy the other draft copy." FDIC Ex. 157. Olander's changes increased his appraisal of the Bank's fair market value from $1,360,000 to $2,550,000. FDIC Ex. 157.
   97. Olander could not recall his conversation(s) with RTC employee Entgelmeier and could not recall why he had concluded that the original assessment required revision. Tr. p. 1771.
   98. A review of the Olander Appraisal, was made by the firm of Larson, Allen, Weishair & Co., at the request of Midwest Federal ("LAW Review"). FDIC Ex. 158. The LAW Review dated October 12, 1990, estimated the fair market value of the Bank as of December 22, 1989, which was prior to the issuance of the 7,000 shares, within the range of "$1.3 million to $2.1 million," which would have been a price per share for the 6,750 shares ranging from $192.59 to $311.00. FDIC Ex. 158.
   99. The LAW Review stated, in part:
    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.
FDIC Ex. 158.
    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.
FDIC Ex. 158.
   101. By letter dated August 8, 1989, to the State, Donohoo advised the State that he and Mathies were in negotiations with Midwest Federal "regarding the bank stock loan which has a direct bearing on the change of control application." FDIC Ex. 269.
   102. By letter dated August 16, 1989, a proposal was made to the RTC, then standing in the shoes of Midway. By letter dated September 25, 1989, to Midwest Federal, Donohoo proposed:
    [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].
FDIC Ex. 137. Neither proposal was accepted.
   103. At a special meeting of the Bank's board of directors held October 10, 1989, attended by Donohoo, Mathies and Hauser, the board of directors advised FDIC Examiner Nyberg and FDIC Field Office Supervisor Thorn that violations of the Act would be addressed pending the Bank's change in control and that the change in control was currently in negotiations. FDIC Ex...
   104. At the October 16, 1989, regular meeting of the Bank's board of directors, Mathies advised the board that a "written documented capital adequacy plan will be finalized and submitted to the Board." FDIC Ex. 28z.
   105. By letter dated November 15, 1989, to Donohoo, FDIC Ex. 138, Midwest Federal set forth its conditions for restructuring the Bank Stock Loan, as follows in part:
    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.
FDIC Ex. 138.
   106. By letter dated December 28, 1989, to the FDIC, Donohoo advised the FDIC of the Bank's plans to capitalize the Bank once "our change of control has been approved ..." Donohoo further stated the "[c]hange of control will be submitted as soon as a solution is reached with Midwest Federal." FDIC Ex. 271. By letter requested that it be kept advised of any progress by the Bank to develop a realistic capital enhancement program. FDIC Ex. 272. By letter dated January 17, 1990, to Midwest Federal, Donohoo advised that "officials to the FDIC desire immediate attention and action on a capital plan." FDIC Ex. 139. By the same letter dated January 17, 1990, Donohoo advised Midwest Federal that, "[w]e do have the investors, but a delay is not helpful to them or for the FDIC." FDIC Ex. 139.
   107. The FDIC's August 25, 1989 ROE, for which FDIC Examiner David DC. Nyberg acted as Examiner-in-Charge, indicated that the FDIC viewed the Bank's capital position as inadequate, reporting that:
    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.
FDIC Ex. 12, p. 1-a. As a result, the FDIC continued to rate the Bank a composite 4. FDIC Ex. 12, p. 1-a-2.
   108. By letter dated January 5, 1990, to the Bank's board of directors, FDIC Regional Director Charles Thacker stated:
       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.
   110. Mathies' reaction to the January 5, 1990 letter was of great concern, and he believed that there would be losses, requiring recapitalization of the Bank. Tr. 1985–1986.
   111. The reaction of Donohoo and Rasmussen to the FDIC's January 5, 1990 letter was one of great concern, recognizing that in the event of insurance cancellation the value of the stock, in which he had a great deal invested, would be zero, and fearing that the Directors would be subject to suit. Tr.p. 1429–1430, 1657.
   112. Although the letter was on its face clearly conditional, referring to future conditions, and not stating that termination action would be instituted but only that it would be recommended, and if instituted would be commenced pursuant to as specified provision in the act which provided for notice and an opportunity to oppose, of which counsel of such great expertise must have known and advised his clients accordingly, counsel and Respondents espoused great fear because they were not told that the FDIC "was not serious." Tr. 1253–1257.

2. Offers To Purchase The Bank Stock Loan

   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.
Tr. 2094–2095. It does not appear that an opinion letter to this effect was presented or prepared.
   130. Costley testified that it has been his experience that where a group of individuals buys a bank, the question always arises as to whether they have to file a change of bank control application under the CBCA. In rendering his expert opinion Costly relied on the factors that regulatory bodies had identified in various telephone discussions, letters and in previous transactions as being indicia of concerted action. He further testified that no regulatory agency had ever suggested to Costley that prior financial dealings were an indicator of acting in concert or that prior common investments were an indicator of acting in concert. Tr. 2096.
   131. Costley also testified that had he known about Godbout-Bandal, Field, Donohoo and Mathies' prior ownership of CCC Stock that knowledge would not have changed his opinion that no change in control application was necessary. Costley, Vol. XVI, pp. 2179–2180.
   132. When he gave his opinions concerning the legality of the issuance of additional Bank stock, Costley understood that he was giving the Board advice that the Board and that all of the investors would rely upon in issuing the Bank stock. Tr. 2097–2100. Donohoo, Mathies and Rasmussen all testified that they had relied in good faith on Costley's opinion concerning the legality of the stock issuance. Tr. 1446, 1996, and 1669.
   133. At a special meeting of the Bank's Board of Directors on or about June 28, 1990, Donohoo, Mathies and Rasmussen authorized Donohoo as president of the Bank to call a special meeting of the Bank's shareholders to be held July 9, 1990, for the purpose of raising at least $1,000,000 of new capital. FDIC Ex. 28oo. On or about the same day, Donohoo gave notice of a special shareholder's meeting for the stated purpose of amending the Bank's Articles of Incorporation by increasing the authorized number of shares of stock of the Bank from 6,750 shares to 13,750 shares. FDIC Ex. 28mm. The notice of special meeting was served by mail on June 28, 1990, on the three minority shareholders owning 65 shares in the aggregate, FDIC Ex. 28mm; Admitted - Answer ¶30(b), and on CCC by hand delivery to Donohoo, as president of CCC. FDIC Ex. 28mm; Admitted - ¶30(b).
   134. Neither Heaton, the holders of the Wenzel Note nor Midwest Federal were given notice of the Special Meeting. FDIC Ex. 28mm; Admitted - Answer ¶30(b).
   On or about July 9, 1990, the special meeting of the Bank's shareholders was held as scheduled ("Special Meeting"), FDIC Ex. 28pp; Admitted - Answer ¶ 30(b), and was attended only by Donohoo and Mathies. FDIC Ex. 28pp; Admitted - Answer ¶ 30(c). Donohoo, as president of CCC, voted CCC's shares of the Bank to authorize an amendment to the Bank's Articles of Incorporation increasing the authorized number of shares of the Bank by 7,000 shares from 6,750 to 13,750. FDIC Ex. 28pp; Admitted - Answer ¶ 30(c).
137. Mathies, as a director of CCC, permitted Donohoo to vote the Bank stock owned by CCC without objection or notice to any interested party. Admitted - Answer ¶28pp. CCC's customary practice was for CCC's board of directors, which included Heaton, to execute a proxy to a designated individual to vote the stock. Tr. 1527–1530; FDIC Exs. 27c & e, 1 & cc. Donohoo's vote of the 6,685 shares of Bank stock was contrary to CCC's customary practice of voting its Bank stock.
138. At the time Donohoo voted the shares of CCC to authorize the increase in the stock of the Bank, Donohoo and Mathies knew {{10-31-95 p.A-2664}}that they, together with other members of their investor group, would purchase the additional shares of Bank stock. FDIC Ex. 33; Tr. 1521 & 2025. On or about July 12, 1990, Certificates of Stock, each dated July 12, 1990, were prepared as follows:
       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.
The total number of shares issued was 142,000. FDIC Exs. 164–171; Admitted - Answer ¶30(d). These represented the 142,000 shares specified by Certificates of Stock #10 and #11 issued to Donohoo and Mathies, respectively, on or about June 10, 1988. FDIC Exs. 162–171; Admitted - Answer ¶30(d).
   139. Each of the CCC Certificates of Stock Nos. 13–20 were signed by Donohoo as president of CCC, but none were signed by Heaton, CCC's secretary/treasurer. FDIC Exs. 28qq and 164–171; Tr. 1013–1014. CCC Certificates of Stock Nos. 13–20, were sent to Albrightson on August 7, 1990, and continuously remained in his possession up to and including the time of the hearing in this matter. Tr. 1012–1014. Certificates of CCC Stock #10 and #11 were not surrendered to CCC, but were held to escrow by Albrightson as collateral for the Wenzel Note at all times pertinent to this proceeding. Tr. 1012–1014.
   140. By letter dated July 10, 1990, to Kevin Costley of Respondent Lindquist & Vennum ("Lindquist & Vennum"), Donohoo forwarded the Notice of the Special Shareholders Meeting scheduled July 9, 1990, the minutes of the July 9, 1990, special shareholders' meeting, and the Amendment to the Articles of Incorporation increasing the authorized shares of the Bank from 6,750 to 13,750. FDIC Ex. 175. On or about July 26, 1990, Elizabeth M. Janssen, Legal Assistant for Lindquist & Vennum, acting on behalf of the Bank, faxed drafts of Amendment to Articles of Incorporation, Certificate of Stock, and Payment of Increase in Capital and Affidavit of Stock Being Offered to Old Stockholders, to Connie Green at the State of Minnesota Department of Commerce to see if they were suitable for filing. FDIC Ex. 177. On or about Friday, July 27, 1990, at approximately 11:00 a.m., the necessary documents for receiving approval of the Amendment to the Bank's Articles of Incorporation were filed with the State of Minnesota Department of Commerce. FDIC Ex. 178. By letter dated July 27, 1990, with copies to the State Examiner and the FDIC, Connie Green forwarded to the Bank a copy of Bulletin No. 5057, dated July 27, 1990, and executed by Allan R. Long, Assistant Commissioner for the State of Minnesota, Department of Commerce. FDIC Ex. 179. By letter dated July 27, 1990, Elizabeth Janssen of Lindquist & Vennum forwarded the approval of the amendment from the State of Minnesota Department of Commerce to the Bank. FDIC Ex. 180. The Bulletin certified that the amendment to the articles of incorporation was effective July 27, 1990. FDIC Ex. 179.
   141. On or about the following dates, the following individuals issued the following checks for subscription to the 7,000 shares of stock to be issued by the Bank:
       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.
   Total contribution was $1,000,000. FDIC Ex. 203; Stipulated - Tr. 512.
   141. As of the date checks #7513, signed by Kris Bandal for $200,000, and #2155, signed by Godbout-Bandal, were written, the available balance in the respective accounts on which the checks were drawn was approximately $87,000 and $900. These balances were substantially insufficient to cover the amount of the checks. FDIC Exs. 201 & 202.
   142. On July 27, 1990, Mathies certified to the State that the $1,000,000 had been paid, in cash, and was on deposit at the Bank. FDIC Ex. 178. At the time of this certification there was only $900 available in Godbout-Bandal's personal account at the Bank to cover check #2155 for $100,000 drawn on this account. FDIC Ex. 201.
{{10-31-95 p.A-2665}}
   143. On or about July 27, 1990, Donohoo and Mathies resigned as officers and directors of CCC. Answer ¶30(e). On or about Monday, July 30, 1990, the following entries were made to the Bank's capital accounts with the approval of Donohoo: credit of $700,000 to the Bank's common stock account and a credit of $300,000 to the Bank's undivided profit account. These entries effected the issuance of the newly authorized 7,000 shares. FDIC Ex. 182; Stipulated - Tr. 510-512. The Bank then issued the following shares of stock to the following individuals
Donohoo 1,050
Shari Mathies 1,050
Field 2,100
Godbout-Bandal 2,100
Rasmussen 700
-------
7000

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.
   Amundson testified that, knowing as an insider the ALLL was proper, he would offer $2,300,000 to $2,350,000 for X bank. Tr. 1077.
   161. The 7,000 shares of Bank stock were issued at a price per share that was $235.14 less than the value per share established by the Olander Appraisal and from $49.73 to $168.25 less than value estimated by the LAW Review. FDIC Exs. 157, 158; Tr. 1167.
   162. Amundson owns the Bank which is a party to the Wenzel Lawsuit, and he therefore has an interest in establishing that the fair market value of the Bank as of July 30, 1990, was $1,000,000. FDIC Exs. 304a-1; 345.
   163. As of July 31, 1990, the Bank's equity capital, which included the $1,000,000 from the proceeds of the issuance of 7,000 shares of July 30 ("capital injection"), was $3,218,765. FDIC Ex. 284, p. 90.
   164. Donohoo, Rasmussen, and Mathies testified they believed the Bank to be worth approximately $1,000,000 as of July 30, 1990. Tr. 1662, 1994–1995, 2032.
   165. The minutes of the board of directors' meetings and the Bank's shareholder meetings do not contain any reference to the price at which the 7,000 shares should be issued, the value of the Bank or that Don- {{10-31-95 p.A-2667}}ohoo, Mathies and Rasmussen were going to purchase a substantial portion of the stock. The relevant minutes contain no reference to any discussion considering the value of the Bank or the names of the purchasers. FDIC Exs. 28mm-qq.
   166. Donohoo, Mathies, and Rasmussen did not obtain an independent appraisal of the Bank in determining the price at which the stock should be issued. Tr. 2034.
   167. The book value of the Bank as of July 30, 1990, prior to the capital injection was $2,218,765. FDIC Ex. 284.
   168. As a finding of fact, the fair market value of the Bank's 6,750 shares of issued and outstanding stock prior to the issuance of the 7,000 new shares of $1,000,000 was approximately $2,200,000 or approximately $326.00 per share.
   169. Donohoo, Mathies and Rasmussen never went through any analysis prior to the purchase to set a price for the 7,000 shares of stock issued July 30, 1990. Tr. 822–823, 2033.
   170. On or about September 25, 1990, Olander analyzed the effect of the issuance of the 7,000 shares on the value of the 6,685 shares owned by CCC and held by Midwest Federal as security for the Bank Stock Loan ("Olander Reappraisal"). FDIC Ex. 159.
   171. The Olander Reappraisal concluded that his estimate of fair market value for the stock as of December 22, 1989, must be reduced because CCC's ownership was now a minority interest ("Minority Discount") and because a minority interest was more difficult to sell ("Marketability Discount"). FDIC Ex. 159.
   172. The Olander Reappraisal also concluded the Minority Discount was 31.01 percent and Marketability Discount could range from 20 percent to 80 percent where the shares are not publicly traded. The Olander Reappraisal did not reestablish the value of the 6,685 shares held by Midwest Federal as collateral for the Bank Stock Loan. FDIC Ex. 159.
   173. The effect of the issuance of the 7,000 shares was to dilute the book value of the already issued and outstanding 6,750 shares. FDIC Ex. 159. The issuance further diluted the value of the 6,685 shares of Bank stock owned by CCC because its percentage ownership of the Bank was reduced from a majority interest of 99.04 percent to 48.62 percent. FDIC Ex. 159.
   174. There was no documentation at either the CCC or the Bank level that Donohoo, Mathies or Rasmussen disclosed to the shareholders of either CCC or the Bank that they would be purchasers of a substantial portion of the 7,000 shares of Bank stock. Tr. 822–823.

4. The September 19, 1990 Exit Review Meeting

   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.

5. Notification of the Intent to Assess CMPs

   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.

H. FUNDING MISENOR THROUGH INSIDER TRANSACTION

   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.
FDIC Ex. 79. The Misenor residence was not appraised prior to the Misenor Loan being made or before the $76,000 proceeds were disbursed. FDIC Exs. 81, 82. Tr. 406–407. An appraisal dated November 21, 1988, appraised the Misenor residence at $74,000. FDIC Ex. 81; Tr. 405. Even this appraisal was not obtained by the Bank until November 29, 1988. FDIC Ex. 82. The Misenor Loan had a loan-to-collateral value in excess of 100 percent at the time it was made by the Bank. FDIC Exs. 72, 81; Tr. 406. It was an obvious unsafe or unsound practice to make the Misenor Loan in excess of the value of the collateral. Tr. 406.
   187. The Misenor Loan made no provision for periodic principal payments, but called for a balloon payment at maturity. Tr. 409, FDIC Ex. 72. Given the collateral protection and the financial condition of the borrowers, it was an unsafe or unsound practice to make the Misenor Loan without provision for periodic principal payments. Tr. 410.
   188. On or about November 23, 1988, the Bank's Credit Department review noted the following exceptions for the Misenor Loan:
       (a) the mortgage deed was missing two signatures;
       (b) the mortgage title insurance commitment/policy was missing; and
       (c) an appraisal was missing.
FDIC Ex. 82. Each of these exceptions was a hazardous and lax lending practice. Tr. 411–412. The Bank did not verify whether Everett and Nellie Misenor had good and marketable title to their residence prior to disbursing the proceeds, FDIC Ex. 82; Tr. 411, did not obtain a commitment for title insurance prior to making the Loan, FDIC Ex. 82; Tr. 411, and did not provide Everett or Nellie Misenor a Truth in Lending disclosure statement either prior to or after making the Loan, FDIC Ex. 85. The financial condition of Everett and Nellie Misenor did not warrant a loan with the collateral and repayment terms granted by the Bank in making the Loan, Tr. 410, and it involved more than the normal risk of repayment. Tr. 416.
   189. The Misenor Loan was consummated November 18, 1988, and the proceeds were disbursed the same date. FDIC Exs. 72, 73. The $76,000 proceeds of the Misenor Loan were disbursed by Bank cashier's {{10-31-95 p.A-2669}}check #136584 dated November 18, 1988, payable to Everett and Nellie Misenor. FDIC Ex. 73. The check was endorsed by Everett and Nellie Misenor and deposited to Misenor's account, #1002833, at the Bank on or about November 21, 1988. FDIC Exs. 73, 74, 76; Tr. 203.

   190. On or about November 18, 1988, Misenor had issued check #1098 in the amount of $73,000 payable to the Capital Partners drawn on his account #1002833 at the Bank. FDIC Exs. 74; 69, p. 20; Tr. 202. On or about the same day Donohoo, Mathies and Misenor personally delivered check #1098 to Midway. FDIC Ex. 33. Check #1098 in the amount of $73,000 was funded by the proceeds of the Misenor Loan. Tr. 202–203; Stipulated - Tr. 208–209.
   191. Check #1098 payable to the Capital Partners was endorsed by Donohoo and Mathies and deposited to the CP DDA on or about November 18, 1988. FDIC Exs. 69, pp. 18–21; 65; 66, p. 6. On or about the same day, Donohoo and Mathies drew check #1008 on the CP DDA in the amount of $73,000 payable to Midway. FDIC Exs. 65; 67, p. 13. The entire proceeds of Check #1008 were applied to the payment of principal and interest on Midway Loan #1. FDIC Ex. 36; Stipulated - Tr. 518–519; Admitted - Answer ¶33(c). Check #1008 in the amount of $73,000 was funded by the proceeds of the Misenor Loan. FDIC Exs. 65; 66, p. 6. Of the $76,000 proceeds of the Misenor Loan, $73,000 was transferred to, or used for the benefit of, Donohoo and Mathies. Admitted - Answer ¶33(c).
   192. The promissory note executed by Everett and Nellie Misenor on November 18, 1988, stated that the purpose of the loan was "personal investment." FDIC Ex. 72. The Officer's Comments in the Misenor Loan credit file dated November 29 initialed by Donohoo noted the purpose of the loan was for personal investment and that repayment would come from personal income and/or return on investment, but did not state that repayment was expected from anyone other than Nellie or Everett Misenor. FDIC Ex. 83; Tr. 414. The actual purpose of the loan was to enable Misenor to invest in the Capital Partners. Stipulated - Tr. 208–209. Donohoo and Mathies knew the loan was not to be repaid by Misenor's parents. Tr. 193–195, 213. As a result, both Donohoo and the records of the Bank materially misrepresented the purpose of the loan and the expected source of repayment.
   193. Paragraph 8 of the 1984 C&D Order requires the Bank to take all necessary steps to ensure the Bank's future compliance with all applicable laws, rules and regulations, FDIC Ex. 5, and Paragraph 3 of the 1984 C&D Order requires that the Bank not extend credit without first obtaining (a) an appraisal or other evaluation of the pledged collateral, (b) file comments stating the purpose of the loan, (c) documentation necessary to determine and perfect the Bank's security interest and (d) an established plan for repayment which was to be clearly defined in the credit files. FDIC Ex. 5.
   194. As a result of his credit review of the Misenor Loan during the August 25, 1989, FDIC Examination, FDIC Examiner Rucks advised Bank management he was prepared to classify the Misenor Loan "Substandard" primarily for the reasons that the loan-to-collateral value exceeded 100 percent and the repayment source based on the terms and structure of the Note was questionable. Tr. 415. Donohoo, Mathies and Misenor discussed modifying the loan to avoid classification by the FDIC examiners and Donohoo suggested that the loan be paid down. Tr. 210-212. Mathies and Donohoo testified that Misenor told them he had made an error in arranging the loan, and needed to pay it down to avoid adverse classification, so that he wished to reduce his investment by $20,000. Donohoo and Mathies drew check #1025 on the CP DDA dated September 12, 1989, in the amount of $20,000 payable to Misenor, FDIC Exs. 67, p. 30; 93; Tr. 210, 416, the proceeds of which were transferred to Everett and Nellie Misenor to make a $20,000 payment on the Misenor Loan on September 14, 1989, reducing the principal balance to $56,000. FDIC Ex. 94, Tr. 207-210; Stipulated - Tr. 208-209. In addition, Everett and Nellie Misenor entered into an agreement modifying the Misenor Loan to require quarterly principal payments of $500. FDIC Ex. 94. As a result of these actions, FDIC Examiner Rucks did not adversely classify the Misenor Loan in the FDIC Report of Examination of the Bank as of August 25, 1989. Tr. 415-416; FDIC Ex. 12.
   195. Question #5 of the Officer's Questionnaire dated August 28, 1989, and answered in connection with the August 25, 1989, Examination reads:
{{10-31-95 p.A-2670}}
       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.
FDIC Ex. 12, pp. 16–19. This refers to any loans in which the proceeds are used by someone other than the maker of the Note. Tr. 531. Nyberg testified that in his opinion the Misenor Loan was an extension 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 within the meaning of Question #5 of the Officer's Questionnaire. Tr. 532. On August 28, 1989, Donohoo certified the Officer's Questionnaire as being true and correct by Donohoo, who stated "None" in response to Question #5. FDIC Ex. 12, pp. 16–19; Tr. 531.r's Questionnaire on August 28, 1989.
   196. FDIC Examiners Rucks and Nyberg also testified that the Misenor Loan had preferential terms, in that the loan was in excess of 100 percent of the value of the collateral and did not provide for periodic principal repayments by the borrowers, neither of which preferential terms were supported by the financial condition of Everett and Nellie Misenor. Tr. 416; 532.
   197. Question #7 of the February 8, 1989, Officer's Questionnaire answered in connection with the State of Minnesota examination as of January 31, 1989, reads:
       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.
FDIC Ex. 356,¶. 13–15. FDIC Examiner Nyberg testified that in his opinion the Misenor Loan should have been identified in response to Question #7 of the February 8, 1989, Officer's Questionnaire. Tr. 535. Donohoo knew or should have known that the Misenor Loan should have been identified in response to Question #7 of the February 8, 1989, Officer's Questionnaire. The Officer's Questionnaire, certified on February 8, 1989, to be true and correct by Donohoo, stated "None" in response to Question #7. FDIC Ex. 356, ¶. 13–15.
   198. FDIC Examiner Nyberg testified that he reviewed the Officer's Questionnaire in the State of Minnesota Report of Examination of the Bank as of January 31, 1989, and the Officer's Questionnaire completed during the FDIC Examination of the Bank as of August 25, 1989, during the examination, and that, had the Misenor Loan been identified in response to either question #5 or #7 on either Officer Questionnaire, the Misenor Loan would have received closer scrutiny and the loan advance would have been investigated. Tr. 532–533, 535–536.
   199. Mathies and Donohoo permitted Misenor to misrepresent the purpose of the Misenor Loan to FDIC Examiner Nyberg at the FDIC's 1990 Examination of the Bank and at the September 19, 1990, meeting when Donohoo and Mathies well knew the true purpose of the Misenor Loan. Tr. 529, 609, 735, 1401.
   200. Repayment of the loan in full was made by Misenor at the time he left the Bank in 1991, from funds provided him as a settlement of his employment contract also at the time he left the Bank in 1991. Tr. 233.

I. FUNDING FIELD PURCHASE THROUGH INSIDER TRANSACTION

   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.
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   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.
FDIC Ex. 319. Field was generally aware that changes in control required prior approval. FDIC Ex. 319.

204. Field was experienced in banking affairs. He was a director of the Bank during 1982–1984. Tr. 1866. He was criticized for receiving preferential loan terms from the Bank while he was a director. Tr. 1894. Together with his wife, Field invested in his wife's name in Oak Park State Bank, a failed Bank, the loan portfolio of which contained a number of insider loans, Tr. 1332, 1336, and Field and his wife lost approximately $200,000 from the investment. Tr. 1889, 1892. This investment and loss was prior to Field's first investment in CCC. Tr. 1332, 1336, 1892, 1931.
   2. Field's Loan No. 1
   205. On or about November 14, 1988, the Bank made a loan to Field, in the amount of $256,008.82, Loan #4005138-17 (Field Loan #1). FDIC Ex. 99. $56,008.82 of the proceeds of loan were used to renew loan #4005138-16, and the remaining $200,000 of the proceeds were disbursed to Field by Bank cashier's check #136550, dated November 14, 1988. FDIC Exs. 100, 102.
   206. About two days later, on or about November 16, 1988, Field deposited cashier's check #136550 to his account #3008964 at Fidelity Bank, Edina, Minnesota ("Fidelity Bank"). FDIC Exs. 103 and 105. $73,000 of the $200,000 proceeds of Field Loan #1 was used to fund Field's purchase of an investment unit in the Capital Partners, made by check #1684 drawn on Field's account #3008964, dated November 15, 1988, and made payable to the Capital Partners. Admitted - Answer ¶34(b); FDIC Exs. 24a; 65; 69, p. 16; 105; Tr. 542–544. Thus, 73,000 of the $200,000 proceeds from Field Loan #1 were transferred to Donohoo and Mathies by check #1684 dated November 15, 1988. FDIC Ex. 69, p. 16. Donohoo and Mathies endorsed check #1684 and deposited it to the CP DDA on or about November 15, 1988. FDIC Ex. 69, pp. 14–17. The proceeds of check #1684, were used to fund $73,000 of the $219,000 payment on the Midway Loan #1 by Donohoo and Mathies made by CP DDA Check #1007 dated November 15, 1988. FDIC Ex. 36; 65; 66, p. 6; 67, p. 12; Stipulated - Tr. 518–519; Admitted - Answer ¶34(b).
   207. $73,000 of the $200,000 proceeds from Field Loan #1 were used for the tangible economic benefit of Donohoo and Mathies in that it reduced their liability on Midway Loan #1. FDIC Exs. 36; 65; 66, p. 6; 67, p. 12; Stipulated - Tr. 518–519.
   208. The credit file stated the purpose of the loan was for "injections" into Field's Financial Corporation, a related interest of Field. Admitted - Answer ¶34(a). During the FDIC Examination of the Bank as August 25, 1989, FDIC Examiner Nyberg was advised that the purpose of Field Loan #1 was for working capital, in particular, remodeling of some nursing homes. Tr. 661.
   209. The Bank's credit file for Field Loan #1 did not indicate that $73,000 of the loan was to be used by Field to invest in the Capital Partners on November 15, 1988. Tr. 661.
   210. Donohoo, Mathies and Rasmussen advised Field that he could not utilize loans from the Bank to pay for his stock, but did nothing further in the face of the extensive loan being made.
   211. FDIC Examiner Nyberg concluded that since had the loan not been made, Field's account was insufficient to cover his check for purchase of the Bank's stock, and such purchase was therefore funded by the Bank's loan. 542–544.
   212. At the time Field Loan #1 was made, 5 percent of the Bank's capital and unimpaired surplus was not more than $238,000. Stipulated - Tr. 1144–1147. Field Loan #1 exceeded 5 percent of the Bank's capital and unimpaired surplus and required the prior approval of the majority of the entire {{10-31-95 p.A-2672}}board of directors of the Bank with the interested directors abstaining. Neither the October 19, 1988, the November 15, 1988, nor the December 12, 1988, minutes of the Bank's board of directors reflect that Field Loan #1 was discussed (FDIC Exs. 28i, 28j, 28k), and Director Graham testified Field Loan #1 was never brought to the attention of the Bank's board of directors. Tr. 118. Had the interested directors abstained from approving, Field Loan #1 would not have received the prior approval of the majority of the entire board of directors with the interested directors abstaining. FDIC Exs. 28i, 28j, 28k.
   213. At the time that Field's $73,000 CCC investment was made, Field had four accounts at Fidelity with combined balances of $99,337. Tr. 1874. Bank personnel had no ability to trace the proceeds of the November 14, 1988 advance to the extent that those funds left the Bank, other than by asking Field. Tr. 642–643. Both Donohoo and Mathies testified that they did not know that Field had used a portion of the proceeds of Field Loan #1 to purchase CCC stock. Tr. 1389, 1956–1957.
   3. Field Loan No. 2
   214. On or about April 7, 1989, Field Loan #1, which had an unpaid balance of $234,377.02, was renewed by Field's loan #4005138-18 in the amount of $434,377.02 ("Field Loan #2"), which included an additional advance of $200,000 disbursed by Bank cashier's check #140905 payable to Field, dated April 7, 1989. FDIC Ex. 109, 111. Field deposited the check to his deposit account #3008964 at Fidelity Bank. FDIC Exs. 111, 114. $60,000 of the proceeds of Field Loan #2 was transferred to Donohoo and Mathies by check #1854 dated April 7, 1989, the same date the loan proceeds were disbursed. FDIC Ex. 69, p. 60.
   215. Donohoo and Mathies deposited this check to the CP DDA on or about April 10, 1989. FDIC Exs. 65; 66, p. 11; 69, pp. 58–62. The proceeds were used by Donohoo and Mathies to fund payments on the Wenzel Note and to fund part of the purchase price of the 2,100 shares of Bank stock which they, Donohoo and Mathies, purchased on or about July 30, 1990. FDIC Exs. 65; 66, pp. 11–26.
   216. Because there would have been insufficient funds in Field's account to cover the check #1845 and because the state of the loan and the date of the check coincided, check #1854 was funded by the proceeds of Field Loan #2. Tr. 544–545, 689–690.
   217. At the time Field Loan #2 was made, 5 percent of the Bank's capital and unimpaired surplus was not more than $247,000. Stipulated - Tr. 1144–1147. Field Loan #2 exceeded 5 percent of the Bank's capital and unimpaired surplus and thus required the prior approval of the majority of the entire board of directors of the Bank with the interested directors abstaining. The minutes of the Bank's board of directors do not reflect that the Field Loan #2 was ever discussed, or receive the prior approval of the majority of the entire board of directors of the Bank with the interested directors abstaining. FDIC Exs. 28a-vvv.
   218. Donohoo, Mathies and Rasmussen did not take all steps necessary to ensure Field Loan #2 received the prior approval of the entire board of directors of the Bank with the interested directors abstaining.
   219. It is an unsafe or unsound practice to use loan proceeds for a purpose different than stated in the credit file. Tr. 567–568.

J. FUNDING DONOHOO AND MATHIES THROUGH INSIDER TRANSACTION

   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.
   222. By letter dated May 31, 1990, to the Bank's board of directors, the Department of Commerce for the State of Minnesota ("State") criticized the payment of bonuses to Donohoo and Mathies. FDIC Ex. 43. The State, in its May 31, 1990, letter to the Bank's board of directors, stated, "the bank's weakened condition should preclude any payment of bonuses to officers with any direct or indirect ownership in the bank." FDIC Ex. 43. The letter also viewed the Bonuses as reflecting "a return on investment" and stated, "There is no apparent basis for the board to authorize bonus payments to ownership." FDIC Ex. 43.
   223. Despite and in disregard of the State's criticism of the payment of bonuses to Donohoo and Mathies, Donohoo and Mathies paid themselves the Bonuses on July 13, 1990, only three days after responding by letter dated July 10, 1990, to the State's criticism. FDIC Ex. 275. Their reasons for accepting the bonuses was basically that they believed they deserved them for services rendered. In addition to reflecting upon insider funding of stock purchases, Donohoo's and Mathies' actions in paying themselves the Bonuses was an unsafe or unsound banking practice under the circumstances because the Bank's board of directors never approved the Bonuses, they were paid at a time the Bank was seeking to inject new capital and they reflected a return on Donohoo's and Mathies' ownership interests. Tr. 589–590.
   2. Midway Loan No. 3 and 7,000 Share Purchase
   224. On or about July 13, 1990, the date Midway Loan #2 was renewed, Donohoo and Mathies discussed with Thomas at Midway borrowing $250,000 to purchase 2,100 shares of the 7,000 new shares in the Bank. FDIC Ex. 33, p. 12. Dave Gross, an officer of Midway, tentatively approved Donohoo's and Mathies' loan request based, among other factors, upon knowing the other investors. FDIC Ex. 33, p. 12. The handwritten notes of Thomas in the Midway credit file dated July 24, 1990, reflect that the additional purchasers of the 7,000 shares were to be Field, Rasmussen, and Kris Bandal, the husband of Godbout-Bandal. FDIC Ex. 33, p. 13.
   225. The July 24, 1990, handwritten notes also reflect that after issuance of the 7,000 shares, the 7,000 shares would represent 52 percent of the total outstanding shares of the Bank, and the remaining 6,750 shares will be held by the holding company and "outsiders." FDIC Ex. 33, p. 13.
   226. The loan officer comments dated July 26, 1990, at Midway reflect that Donohoo and Mathies "have three investors who are putting in $700,000 and Dick [Donohoo] and Craig [Mathies] are putting in $300,000." FDIC Ex. 32.
   227. According to the loan officer's comments at Midway dated July 26, 1990, the expected source of repayment of the loan would be "from the restructuring of the bank stock loan which is presently at Midwest Federal." FDIC Ex. 32.
   228. On or about July 26, 1990, Midway made a loan to Donohoo and Mathies in the amount of $250,000, note #50043199, for the purpose of purchasing 1,050 shares each of the 7,000 shares of Bank stock that were issued July 30, 1990 ("Midway Loan #3"). FDIC Ex. 44. The proceeds of that loan were deposited to the CP Savings Account #7027441 at Midway on or about July 26, 1990, and transferred to the CP DDA on or about the same date to cover check #1035 dated July 26, used by Donohoo and Mathies to fund their purchase of the 2,100 shares of Bank stock on or about July 30, 1990. FDIC Exs. 46; 65; 66, p. 26; 67, p. 40; 71.
   229. On or about January 13, 1991, Midway Loans #2 and #3 were renewed and consolidated into a single loan in the amount of $380,000 due July 13, 1991. FDIC Ex.
{{10-31-95 p.A-2674}}
32. The handwritten comments of Thomas at Midway dated January 22, 1991, reflect that Midwest Federal, then in the hands of the RTC, had 48 percent of the Bank and Donohoo and Mathies had 51 percent. FDIC Ex. 33, p. 14.

NG GODBOUT-BANDAL THROUGH INSIDER TRANSACTIONS

1. Pentagon Park Associates (PPA) Transactions

   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.
{{10-31-95 p.A-2676}}
       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.
FDIC Ex. 364.
   247. The loan was made prior to obtaining all necessary documentation in order to finance Godbout-Bandal's purchase of Bank stock on July 30, 1990. FDIC Exs. 13, p. 37 & 38, 364.
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   248. The PPA Loan was not made in compliance with the Bank's own loan policy as stated in the policy at Section II, D. 3 and 4. Section VII, A. 1, 2, 4, and 5, Section XI, A. and B., Section IV, A. and B. and Section XV, C. FDIC Ex. 279; Tr. 452–460.
   249. None of the appraisals on the real estate collateral securing the PPA Loan were made in accordance with the Bank's Appraisal Policy Statement. FDIC Ex. 279; Tr. 460.
   250. The PPA Loan when made exhibited more than the normal risk of repayment and involved other unfavorable features.
   251. Donohoo, Mathies and Rasmussen participated in the approval of the PPA Loan on or about July 11, 1990, and voted to approve the PPA Loan. FDIC Ex. 28qq. Donohoo and Mathies voted to approve the PPA Loan as members of the Bank's loan committee. FDIC Ex. 353. Donohoo initialed the PPA note as a loan officer. FDIC Ex. 190. Donohoo was involved in the making of the PPA Loan. Tr. 1457.
   252. During the course of the FDIC examination of the Bank as of August 10, 1990 ("1990 Examination"), FDIC Examiner Voss performed the credit review of the PPA Loan. Tr. 427. Donohoo, Mathies and Rasmussen knew that proceeds of the PPA Loan were used to fund Godbout-Bandal's acquisition of Bank stock on July 30, 1990. Voss met with Donohoo and Mathies during the 1990 Examination to discuss the PPA Loan. Tr. 439. In response to his inquiry as to why the entire proceeds of the PPA Loan, a line of credit, were advanced almost immediately, Mathies replied that was the way the borrower wanted it done. Tr. 439-440, 1466. They also stated that the proceeds were used as stated in the loan application. Tr. 439. Mathies was surprised that the PPA was completely drawn down on July 31, 1990. Tr. 2005 - 2006.
   253. It is an unsafe and unsound practice for loan proceeds to be used by a person other than the borrower. Tr. 440–441, 567. Godbout-Bandal's use, and Donohoo's, Mathies' and Rasmussen's permission of the use of the loan proceeds for a purpose different than stated in the Bank's credit file was an unsafe or unsound banking practice. Tr. 441.
   254. The PPA Loan involved an unsafe or unsound banking practice in that the proceeds were used for a capital injection which proceeds were immediately reflected in the Bank's capital accounts. If a bank were to be allowed to follow such a practice, it could inflate its capital account by continuously making new loans to fund capital. Tr. 568.
   2. The Overdraft Loan
   255. On or about July 23, 1990, the same date as the application to the Bank for the PPA Loan, Godbout-Bandal gave the Bank check #2155 in the amount of $100,000 drawn on her account #6559999 at the Bank payable to the Bank. The account had a balance of only approximately $900. FDIC Exs. 201, 203.
   256. The check causing the overdraft, Check #2155, was given in partial payment of Godbout-Bandal's purchase of 2,100 shares of the 7,000 shares of Bank stock issued on or about July 30, 1990. FDIC Ex. 203; Stipulated - Tr. 512. Mathies checked the balance of Godbout-Bandal's accounts at the time the PPA Loan was made. Tr. 2004. At all times between June 29, 1990, and July 31, 1990, Godbout-Bandal's account #6559999 at the Bank had a balance of approximately $900 from July 10, 1990, and never exceeded $1,300 from June 29, 1990, to the date check #2155 was posted to the account. FDIC Ex. 201.
   257. PPA's balance in account #2432544 at the Bank was approximately $11,000 when the note was executed July 25, 1990, and approximately $19,000 on July 31, 1990, prior to the deposit of the PPA Loan proceeds. FDIC Ex. 210. Godbout-Bandal's financial statement submitted to the Bank in connection with the PPA Loan showed "cash on hand or in banks" of only $73,000. FDIC Ex. 199. Yet, on July 27, 1990, Mathies certified to the State that all funds for the $1,000,000 capital injection on July 30, 1990, which included Godbout-Bandal's check #2155 for $100,000 was on deposit, in cash at the Bank. FDIC Ex. 178. Mathies knew that the funds for the capital injection by Godbout-Bandal were not in fact on deposit in cash when he so certified to the State on July 27, 1990. FDIC Exs. 178, 201; Tr. 2004.
   258. On or about July 30, 1990, check #2155 was posted to Godbout-Bandal's account #6559999 at the Bank. FDIC Ex. 201. At the time check #2155 was posted to account #6559999, the account had a balance of $713. FDIC Ex. 201. Payment of check #2155 by the Bank resulted in an advance of $9,300 against Godbout-Bandal's Ready re-
{{10-31-95 p.A-2678}}serve Account and an $89,986 overdraft to account #6559999. FDIC Exs. 200, 201.
   259. Godbout-Bandal's account #6559999 was overdrawn in the amount of $89,986 on July 30, 1990, and in the amount of $89,317 on July 31 through August 2, 1990 ("Overdraft Loan".) FDIC Exs. 200, 201. On August 3, 1990, the Overdraft Loan of $89,317 was covered by a $94,000 deposit to Godbout-Bandal's account #6559999. FDIC Exs. 201, 216. The $94,000 deposit consisted of a transfer of $44,000 from PPA account #2432544 of the Bank and a $50,000 loan from the proceeds of Certificate of Deposit #777901-90896, in the name of Hudson Road Office Park. FDIC Exs. 200, 201, 210, 216. The source of a large portion of the $44,000 transfer of funds from PPA account #2432594 was at least $20,000 of the proceeds of the PPA Loan. FDIC Ex. 210; Tr. 572.
   260. FDIC Examiner Nyberg testified it was an unsafe or unsound banking practice to fund the purchase the bank stock with an overdraft and to allow an overdraft to Godbout-Bandal who was having extreme credit problems. Tr. 572-573.
   261. At the time the Overdraft Loan was made 5 percent and 15 percent of the Bank's unimpaired capital and unimpaired surplus was $157,050 and $471,150, respectively. Stipulated - Tr. 1145–1147. The Overdraft Loan when aggregated with the PPA Loan exceeded $157,050 by $417,936 and required the prior approval of the majority of the Bank's board of directors. The Overdraft Loan was made without the prior approval of the Bank's board of directors. FDIC Exs. 28oo, pp, qq; Tr. 1461, 1673, 2005.
   262. The Bank did not charge any overdraft fee or interest on the Overdraft Loan for the 5 days the overdraft was outstanding. FDIC Exs. 200, 201. It was substantially larger than other overdrafts paid by the Bank during this time. FDIC Ex. 200, 284. It also involved more than the normal risk of repayment when made. Tr. 572–573. The Overdraft Loan, when made, presented other unfavorable features. Tr. 572–573.
   263. Donohoo and Mathies knew on July 30, 1990, that Godbout-Bandal's account did not have anywhere near sufficient funds to cover the $100,000 check drawn on the account in the purchase of Bank stock. The PPA Loan and Overdraft Loan were made for the tangible economic benefit of Donohoo and Mathies as well as the other Individual Respondents in that it enabled them to complete the issuance of the 7,000 shares of Bank stock and acquire control of the Bank.
   264. When asked how it happened that some of the loan proceeds from the PPA Loan ended up being used to purchase stock in the Bank, Bandal testified he was unaware of an overdraft situation coming in one of Godbout-Bandal's accounts at the Union Bank, did not know which account was involved, and that both he and Godbout-Bandal were unaware that the loan was repaid from that account. Tr. 1710–1711.

L. FUNDING RASMUSSEN THROUGH INSIDER TRANSACTIONS

   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.

M. ACTIONS TO THE CHANGE IN BANK CONTROL

   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.
FDIC Ex. 278.
   291. At the time Costley gave his opinion regarding the CBCA and wrote the July 31, 1990, letter on behalf of the Bank's board of directors he had not been advised of relevant facts, and was unaware:
       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.
   292. Based upon the information as set forth in his letter, upon which Costley relied in providing his opinion that the Stock issuance was not subject to the CBCA, none of the Individual Respondents could have reasonably relied on Costley's opinion.

3. FDIC Examination of August 10, 1992 and Responses Thereto

   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.

4. Rasmussen Financial Statement

   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.
FDIC Ex. 158. This comment was based upon the Employment Agreements that existed as of December 22, 1989, and not as amended August 1, 1990.
   322. Sections Four and Five of the Employment Agreements and Amended Employment Agreements made the Bank less attractive to potential purchasers of the Bank, other than Donohoo and Mathies. FDIC Ex. 158.

O. INDEMNIFICATION OF DEFENDANTS TO WENZEL LAWSUTT

   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.
FDIC Ex. 304(a).
   327. On or about December 10, 1991, the Defendants in the Wenzel Lawsuit filed an Answer and Counterclaim through Lindquist & Vennum, by David A. Allegeyer and Sally J. Whiteside, and through Bruce A. Rasmussen & Associates, by Rasmussen. FDIC Ex. 304b; Admitted - Answer ¶38(c). Donohoo and Mathies, as two of the Defendants to the Wenzel Lawsuit, brought three counter-claims in the Answer and Counterclaim filed in the Wenzel Lawsuit against the plaintiffs, all of which pertain to claims arising out of the sale of the 142,000 shares of CCC Stock to Donohoo and Mathies by Heaton on or about May 27, 1988. None of the counter-claims alleged in the Answer and Counter-claim relate to any conduct or action on the part of any individual as an officer or director of the Bank. FDIC Ex. 304b. The Wenzel Lawsuit is a dispute among shareholders of the Bank over control of the Bank.
   328. Indemnification with respect to the Wenzel Lawsuit, if appropriate for Donohoo {{10-31-95 p.A-2685}}and Mathies, should be by CCC, not the Bank.
   329. On or about October 22, 1991, at a meeting of the Bank's board of directors held at the Law Offices of Lindquist & Vennum, the board adopted a resolution for the Bank to undertake the cost of defense of all defendants to the Wenzel Lawsuit, and to reimburse and indemnify all defendants against any costs and liabilities incurred in the Wenzel Lawsuit. FDIC Ex. 28mmm; Admitted-Answer ¶38(b). Donohoo, Mathies and Rasmussen, three of the Bank's four directors and defendants to the Wenzel Lawsuit, voted to approve the resolution. FDIC Ex. 28mmm.
   330. By letter dated May 20, 1992, Costley, of Respondent Lindquist & Vennum, and who had been representing the Bank for approximately three years, advised the Bank that indemnification of all defendants in the Wenzel Lawsuit was proper. ("May 20 Opinion Letter") FDIC Ex. 290; TR 2077. The May 20 Opinion Letter did not specifically address Minn. Stat. Ann. §§ 300.08 or 300.083. FDIC Ex. 290.
   331. Costley's testimony was that in his opinion it was proper and appropriate for the Bank to pay all of the legal fees expended in defense of the Wenzel Lawsuit for three reasons: first, that the Bank is a named party to the suit, which seeks reversal of the $1 million capital infusion which would damage the bank; second, that the Bank, as issuer and seller of the stock to the purchasers had a common law obligation to defend title and indemnify purchasers from later claims; and, third, that the success of plaintiff in the suit, or even the effect of the possibility thereof, could result in control of the Bank reverting to Wenzel, which the Directors felt would be detrimental to the Bank. Tr. 2128–2129.
   332. Costley further testified that payment by the Bank of the expenses and costs of the Wenzel suit inured directly to the Benefit of the Bank, and were and will be required by the Bank's interest whether or not it also inures to the benefit of other Respondents. Tr. 2179.
   333. By letter dated June 16, 1992, Attorney David A. Allgeyer, of Lindquist & Vennum, then representing the defendants, provided the Bank a second opinion letter as to the propriety of the Bank indemnifying the defendants to the Wenzel Lawsuit ("June 16 Opinion Letter"), also concluding that indemnification of all the defendants to the Wenzel Lawsuit was proper pursuant to section 300.083 of the Minnesota Statutes. FDIC Exs. 292, 304a-1.
   334. The Bank did not comply with all provisions of Minn. Stat. § 300.083 prior to indemnifying the defendants to the Wenzel Lawsuit, to wit:
   335 Donohoo, Mathies and Rasmussen did not:
       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).
   336. The determination to advance expenses, including attorneys' fees and disbursements, required by subdivision 3(b) of section 300.083, Minn. Stat. Ann. § 300.083, Subd. 3(b) (West Supp. 1992), was not made as required by Subd. 6(e)(3), (4) or (5) of section 300.083, Minn. Stat. Ann. § 300.083, Subd. 6a(3), (4), (5) (West Supp. 1992), because of the Bank's board of directors, only Director Haubrich was not a party defendant to the Wenzel Lawsuit. Admitted - Answer ¶ 38(g)(ii).
   337. At the time of the hearing in this matter, the Bank had paid legal fees and expenses to Lindquist & Vennum in the approximate amount of $182,000 and to Bruce A. Rasmussen & Associates, Ltd., in the approximate amount of $8,000 on behalf of all the Individuals and the Bank (FDIC Exs. 366a & b), which amount was significant in relation to the Bank's earnings. Tr. 1200 & 1208.
   338. At the time Costley gave his May 20 Opinion Letter, the FDIC had criticized the Bank for indemnifying the defendants in the {{10-31-95 p.A-2686}}Wenzel Lawsuit. FDIC Exs. 14, 290. Costley specialized in banking law. and knew or should have known that indemnification by the Bank of its officers, employees and directors was subject to the requirements of Minn. Stat. Ann. § 300.083. Tr. 2076-2077.
   339. At the time Allgeyer gave his June 16 Opinion Letter, he either knew that the Bank had not complied with the requirements of Minn. Stat. Ann § 300.083 or had recklessly failed to verify the Bank had so complied.
   340. Lindquist & Vennum, through the actions of Costley and Allgeyer, knowingly or recklessly participated in the Bank's violation of Minn. Stat. Ann. § 300.083.
   341. At the time Costley and Allgeyer gave their opinions regarding indemnification, Rasmussen knew or should have known that the Bank was indemnifying the defendants, including himself, to the Wenzel Lawsuit. Respondent Bruce A. Rasmussen & Associates, Ltd., through its principal, Rasmussen, knowingly or recklessly participated in the Bank's violation of Minn. Stat. Ann. § 300.083.
   342. The Bank's continued indemnification of the defendants in the Wenzel Lawsuit constituted reckless disregard for the provisions of Minn. Stat. Ann. § 300.083.

P. SALE OF STOCK TO LLYOD AMUNDSON

   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.
   348. Donohoo and Mathies were paid $43,131 on December 10, 1992, after Field's shares were purchased by Amundson. This represented a figure between what Amundson was willing to pay for the 7,000 shares, and the amount actually paid to the Individual Respondents pursuant to their respective Stock Purchase Agreements. FDIC Ex. 350, Tr. 2138–2139.
   349. The total benefit of Donohoo and Mathies under the Stock Purchase Agreement was $2,151,108. FDIC Ex. 345; Tr. 1147–1155.
   350. Donohoo's and Mathies' profit from the sale of their 2,100 shares on July 30, 1990, or $925,554 each, a total of $1,851,108 for both. Tr. 1155.
   351. On or about December 7, 1992, Rasmussen entered into a Stock Purchase Agreement to sell and then sold 700 shares of Bank stock to Amundson for $123,600. FDIC Exs. 345, 349 and 350. His profit from the sale of his 700 shares of Bank stock was $123,600 minus the $100,000 he paid on July 30, 1990, or $23,608. Tr. 1156.
   352. On or about December 7, 1992, Godbout-Bandal entered into a Stock Purchase Agreement to sell and then sold 2,100 shares of Bank stock to Amundson for $420,800. FDIC Exs. 347, 349, and 350. Her profit from the sale of her 2,100 shares of Bank stock was $420,800 minus the $300,000 she paid July 30, 1990, or $120,800. Tr. 1156.
   353. On or about December 10, 1992, Field entered into a Stock Purchase Agreement to sell and then sold 1,896 shares of Bank stock for $565,869. FDIC Exs. 348, 349 and 350. The amount paid was $324,689 to satisfy Field's indebtedness to the Bank (FDIC Exs. 348 and 350, Tr. 2133); $216,200 to Donohoo to satisfy Field's indebtedness to Donohoo (FDIC Exs. 348 and 350; Tr. 2134); and {{4-30-00 p.A-2687}} the remaining $25,000 to Field. FDIC Ex. 350; Tr. 2133-2134.
   354. Field's profit from the sale of his 1,896 shares of Bank stock was $565,869 less the amount he paid for the 1,896 shares on July 30, 1990, i.e., $270,857, leaving a net profit of $295,012. Tr. 1157.

Q. FINANCIAL CONDITION OF RESPONDENTS

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

Date of Financial Statement "Net Worth
1/05/91 $7,710,083
9/27/91 22,197,212
10/4/91 21,953,158
2/22/92 22,774,624
4/02/92 21,755,432
Undated 1992 1,564,572

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

Year AGI
1990 $2,209,674
1991 477,712
1992 112,760

FDIC Exs. 323, 326, 343, p. 1
   357. By letter dated September 20, 1991, Field estimated "that Field Financial will make approximately $500,000 a year to me personally over the next ten years." FDIC Ex. 322.
   2. Mathies
   358. Mathies' Financial Statement dated June 6, 1988, provided to Midway on October 12, 1988, reflects a net worth of $607,899. FDIC Ex. 318, p. 2. His Financial Statement as of July 6, 1992, and provided to Midway, reflects a net worth of $403,373. FDIC Ex. 318, p. 3.
   359. Mathies' W-2 Forms for 1991 and 1992 show income of approximately $99,000 and $90,000, respectively. FDIC Exs. 372a,b.
   3. Donohoo
   360. Donohoo's Financial Statements reflect the following: as of March 9, 1988, a net worth $1,198,000 (FDIC Ex. 316); as of May 1, 1988, $2,174,026, with income in excess of $125,000 (FDIC Ex. 315, p.p. 12, 13); as of December 31, 1989, a net worth of $1,753,600, with net income in excess of 1,100,000 (FDIC Ex. 315, p. 16); as of March 1, 1992, to Midway on or about April 24, 1992, of $1,304,200 with net income in excess of $100,000 (FDIC Ex. 315, p. 1.).
   4. Rasmussen
   361. Rasmussen's Financial Statement as of August 11, 1992, reflects a net worth of $566,012, and an annual income of $92,000. FDIC Ex. 314. His Financial Statement dated April 28, 1991, reflects a net worth of $465,089, and annual income of $92,000, FDIC Ex. 344.
   5. Godbout-Bandal
   363. As of August 2, 1990, Godbout-Bandal had a net worth of $4,624,798, FDIC Ex. 199, and has interests in about a dozen business entities, including AIC Industrial Lubricants, Hudson Road Office Park, Pentagon Park Associates and ASHA. FDIC Ex. 199; Tr. 1702–1703.

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