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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.
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(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 |
