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FDIC Enforcement Decisions and Orders

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   [5239] In the Matter of Roger R. Lussier, Lyndonville Savings Bank and Trust Co., Lyndonville, Vt., Docket No. FDIC-94-204g (10-8-96)

   FDIC continues in full force and effect an order of prohibition which restricts the transfer of a minority shareholder's interest in bank.

   [.1] Prohibition, Removal, or Suspension—Scope of Prohibition
   Order prohibiting respondent from participating "in any manner in the conduct of the affairs of the Bank" encompasses his exercise of stock ownership rights, not simply his participation in the bank as an officer or director.

{{6-3097 p.A-2800}}

   [.2] Conflict of Laws—State Securities Laws
   Vermont securities law does not govern FDIC proceeding to limit respondent's stock ownership rights in bank. There is no conflict with federal law, and if a conflict existed the federal law would preempt the state law.

   [.3] Prohibition, Removal, or Suspension—Stock Transfer
   Respondent has failed to show that transferring his minority share of bank will not pose a threat to the interests of the bank's depositors or impair public confidence in the bank.

In the Matter of
ROGER R. LUSSIER
individually, and as an
institution-affiliated party of

LYNDONVILLE SAVINGS BANK
AND TRUST COMPANY

LYNDONVILLE,VERMONT
(Insured State Nonmember Bank)
DECISION AND ORDER
FDIC-94-204g

INTRODUCTION

   On February 29, 1995, the Board of Directors (the "Board") of the Federal Deposit Insurance Corporation ("FDIC") issued an Order of Prohibition From Further Participation, Findings of Fact and Conclusions of Law, and Notice of Hearing (the "Order") against Respondent Roger R. Lussier, pursuant to section 8(g)(1)(C)(ii) of the Federal Deposit Insurance Act (the "FDI Act"), 12 U.S.C. § 1818(g)(1)(C)(ii). Section 8(g)(1) (C)(ii) of the FDI Act requires the FDIC to issue an order of removal and prohibition against a party convicted of certain offenses. Respondent, a former officer and director of Lyndonville Savings Bank and Trust Company, Lyndonville, Vermont (the "Bank"), was convicted of a criminal violation of 18 U.S.C. § 1957, which is one such offense.
   Respondent timely exercised his opportunity to appear before the agency to show that the "continued service to, or participation in the conduct of the affairs of the depository institution by such party does not, or is not likely to, pose a threat to the interests of the bank's depositors or threaten to impair public confidence in the depository institution." 12 U.S.C. § 1818(g)(3).1 In accordance with section 8(g)(3) and section 308.164 of the FDIC's Rules of Practice and Procedure, 12 C.F.R. § 308.164, a proceeding was held before Presiding Officer Richard A. White, upon formal written submissions. The Presiding Officer issued a Recommended Decision denying Respondent's request that the Order be construed as applying only to the positions of officer, director, and employee, but have no bearing on his bank stock ownership. The Presiding Officer found that Respondent's submissions did not satisfy the burden of section 8(g)(3), and therefore, the Order should remain in effect and the proceeding should be dismissed.

DISCUSSION

   Respondent submitted a signed statement on June 16, 1996,2 the essence of which is his assertion that, although section 8(g)(1) (C)(ii) gives the FDIC the power to require his removal as an officer and director of the Bank, it does not give the FDIC the authority to limit the exercise of his stock ownership rights. The Order prohibits Respondent from participating "in any manner in the conduct of the affairs of the Bank." Distilled, Respondent claims that a minority stockholder who is neither a board member nor an officer ought not be considered as participating in the affairs of the Bank by selling, voting or gifting his stock.3
   The Board agrees with Respondent, in part,


1 Initially, Respondent was represented by counsel, Peter Horstmann, of Boston, Massachusetts. However, Respondent's Statements of June 16 and July 12, 1996, were submitted pro se. Because the record contains no formal notice of withdrawal by Mr. Horstmann, a copy of this decision will be sent to him.

2 Respondent also submitted a three page statement titled "Reply to Counsel for the FDIC," dated July 18, 1996. Although the FDIC's governing regulations do not provide for such a reply, because this statement closely follows the earlier statement, the Presiding Officer considered it in his deliberations. Respondent's two submissions raise several objections to FDIC conduct in the trial which resulted in his conviction and in several related court cases. The Presiding Officer correctly states that these are issues outside the purview of this proceeding and does not consider them.


3 To fully understand Respondent's claim, section 8(g) must be read in conjunction with section 8(j) of the FDI Act. Section 8(j) provides that a person subject to an order under section 8(g) who, without the prior written
(Continued)

{{6-30-97 p.A-2801}}but adopts the Presiding Officer's conclusion for the reasons discussed below.

   [.1,.2] First, the Presiding Officer correctly stated that "the terms of the Order coalesce with the statutory language and it is equally obvious that the statutes and the Order encompass more than simply barring Respondent from participating as an officer or director in the affairs of the Bank." R.D. at 4. Second, Respondent's assertion that the rules and conditions of stock ownership in this matter are controlled by the laws of Vermont is erroneous. The focus of Respondent's complaint is unclear from the record. To the extent that he is referring to state securities laws—which merely define stockholder rights and permissible activities — the Board sees no conflict with federal law. The fact that federal law prohibits certain activities which are permissible, but not required or obligatory under state law, does not create a conflict of law. Respondent has certainly not shown any conflict. In any event, if there were a conflict between state and federal law, "[t]he Supremacy Clause...of the Constitution provides Congress with the power to pre-empt state law." Louisiana Pub. Serv. Comm'n v. FCC, 476 U.S. 355, 368 (1986). The Supreme Court has held that federal law pre-empts state law where there is an outright or actual conflict between state and federal law. Id. at 368-69. The removal and prohibition of institution-affiliated parties is comprehensively and exclusively governed by the FDI Act. The statute itself very clearly sets forth certain restrictions on stock ownership in connection with its proscriptions on removal and prohibition. As such, it would pre-empt conflicting state law. The Order against Respondent is an appropriate implementation of the statutory language.

   [.3] With respect to the gravamen of his complaint, Respondent misreads the Order, which does not create an absolute prohibition. Rather, it requires a removed institution-affiliated party ("IAP") to seek the prior approval of the FDIC before engaging in any prohibited activity. Respondent, like others before him, could have sought permission to sell his shares. In this regard, in In the Matter of Peder B. Sletteland, 2 P-H FDIC Enf. Dec.¶5152 (1990), aff'd 924 F.2d 350 (1991), the Board found that "removed directors should logically be encouraged to divest themselves entirely of bank stock as the public benefits when a removed director's stock is placed in the hands of able, independent third parties ...." The Board held that divestiture of a removed director's stock is allowed following prior FDIC approval.4
   The intent of the prohibitions placed upon a removed IAP is to prevent a removed IAP from being a continuing threat to the safety and soundness of an insured depository institution through, among other things, influence as a shareholder. Thus, the statute appropriately restricts certain shareholder actions. At a hearing under section 8(g)(3) of the FDI Act, the Presiding Officer is charged with determining whether "the continued service to or participation in the conduct of the affairs of the depository institution by such [removed institution-affiliated] party does not, or is not likely to pose a threat to the interests of the bank's depositors or threaten to impair public confidence in the depository institution."5 Obviously,


3 Continued approval of the [FDIC], knowingly participates, directly or indirectly, in any manner (including by engaging in an activity specifically prohibited in such an order or in subsection [8(e)(6)]) in the conduct of the affairs of any insured depository institution...shall be fined not more than $1,000,000, imprisoned for not more than 5 years, or both. Section 8(e)(6) prohibits the following specific activities:
    (A) participation in any manner in the conduct of the affairs of any institution or agency specified in paragraph 8(e)(7)(A) of the FDI Act;
    (B) solicitation, procurement, transfer, the attempt to transfer, vote, or attempt to vote any proxy, consent, or authorization with respect to any voting rights in any institution described in paragraph 8(e)(7)(A) of the FDI Act;
    (C) violation of any voting agreement previously approved by the appropriate Federal banking agency; or
    (D) voting for a director, or serving or acting as an institution-affiliated party.
Thus, Respondent complains that the Order, which prohibits his participation in any manner in the conduct of the affairs of the Bank places limitation on his stock ownership rights.


4 This decision interpreted the language of former section 8(j) of the FDI Act. Following the passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), identical language is contained in section 8(e)(6)(B) of the FDI Act.


5 The Conference Report accompanying FIRREA states that:
Any removed institution-affiliated party may seek consent to commence or resume any affiliation otherwise prohibited. The Conferees intend that the agencies closely scrutinize any request and review the person's activity
(Continued)

{{6-30-97 p.A-2802}}depending on a number of factors, such as the number of shares held by a removed IAP, the number of outstanding shares of the institution, the relationship of the removed IAP and the controlling shareholder or shareholder group, the relationship between the removed IAP and the proposed transferee of the shares, a removed IAP who is truly a minority shareholder may not pose a threat to the institution under section 8(g) of the FDI Act by transferring his shares.
   The Presiding Officer is correct, however, that Respondent has presented no evidence whatsoever regarding any of these factors other than one sentence in his statement of June 16, 1996, in which he says he does not "see the authority [sic] of that statute extending its reach into...my right to sell or distribute my ownership of a minority of stock in the same bank." This is insufficient to establish that transfer of Respondent's shares will not pose a threat to the interests of the Bank's depositors or impair the public confidence in the Bank. Accordingly, the Board finds that Respondent has not met his burden of proof and that this matter is properly dismissed. Notwithstanding this finding, however, Respondent may at any time contact the appropriate Regional Office of the FDIC to discuss the divestiture or bequest of his shares in the Bank.

ORDER

   For the reasons set forth above, and pursuant to section 8(g) of the FDI Act, 12 U.S.C. § 1818(g), it is hereby Ordered that the Order of Prohibition dated February 28, 1995, is continued in full force and effect and that this proceeding is dismissed.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 8th day of October, 1996.

RECOMMENDED DECISION

   By Order of February 28, 1995, the Federal Deposit Insurance Corporation found that a judgment of conviction against Respondent was entered by the United States District Court for the District of Vermont concerning a criminal violation of 18 U.S.C. Section 1957. Because of this the Agency concluded that Section 8(g)(1)(C)(ii) of the Federal Deposit Insurance Act requires that Respondent be prohibited from further participation in the affairs of Lyndonville Savings Bank without prior written consent of the Agency. The Order also provided that Respondent may request an opportunity to appear before the Agency as provided for in Section 8(g)(3) of the Act. Respondent requested such an opportunity in a letter of April 3, 1995. A hearing was scheduled to begin May 15, 1995, in Boston, Massachusetts, but by Notice of April 27, 1995, was postponed pending resolution of Respondent's appeal of the judgment of conviction. Similar Notices of August 16, October 24, November 22, 1995, January 5 and April 30, 1996, postponed disposition of the proceeding. In late March 1996, the appeal process was completed, conviction was affirmed, and Respondent commenced a period of confinement in a correctional institution.
   An Order of May 14, 1996, directed that the proceeding go forward by written submissions, a procedure permitted by Section 8(g)(3) of the Act and Section 308.164 of the Agency's Rules and Regulations. In the alternative Respondent was afforded the opportunity to withdraw his request to be heard dated April 3, 1995. The due date for filing written submissions or the withdrawal of the request to be heard was June 24, 1996.
   Respondent submitted a four page signed statement dated June 16, 1996, and received by the Office of the Executive Secretary June 21, 1996. Included with the statement were seven enclosures. By Notice of July 1, 1996, the Agency's Boston Regional Office was given the opportunity to file a reply statement on or before July 12, 1996. A reply dated July 9, 1996, was timely presented.
   On July 18, 1996, a three page statement was received from Respondent titled "Reply to Counsel for the FDIC." The statement is dated July 12, 1996, shows a postmark of July 16, 1996, but does not indicate that service was made on parties of record. The statement though not an authorized filing closely follows the earlier statement and will be considered in the disposition of this proceeding.
   On page 1, 2nd paragraph, of the June 16 statement, Respondent states that he accepts that Section 8(g)(1)(C)(ii) of the Act gives the Agency the power to require his removal as an officer and director of the Bank. He


5 Continued from the time the original order was issued. The Conferees intend that consent should be given only when there is no doubt that such an approval is justified by the complete rehabilitation of an individual. All approvals have to be made public by the agencies. 135 Cong. Rec. H5172-05.

{{6-30-97 p.A-2803}}states that he resigned from these positions prior to the issuance of the Order and has not and will not seek any role as officer or director in the affairs of the Bank. At page 4 in the Conclusion and Summary section of the response Respondent declares that his conviction has been confirmed and that the Order not to participate as an officer or director is acknowledged and accepted. But he maintains that Section 8(g)(1)(C)(ii) has no relevancy to his Bank stock ownership rights. Thus he claims that a minority stockholder who is neither a board member nor an officer ought not be considered as participating in the affairs of the Bank by selling, voting, or gifting his stock. These arguments are repeated in the July 12 statement. Therein he also asks not that the Order of Prohibition be rescinded but that the Order be construed as only applying to the positions of officer, director, or employee of the Bank citing FDIC v. Mallen, 661 F. Supp. 1003 (N.D. Iowa 1987.).
   Respondent interprets the governing statutes too namely. Section 8(g)(1)(A)(ii) states that a person charged with a criminal violation of 18 U.S.C. Section 1957 may be suspended from office or prohibited from participation in the affairs of the Bank. The companion Section 8(g)(1)(C)(ii) requires that in the event of a judgment of conviction involving 18 U.S.C. 1957, the Agency shall issue an order removing the person convicted from office or prohibit such person from participating in the affairs of the bank. The Order of Prohibition issued February 28, 1995, barred Respondent from participation in any manner in the conduct of the affairs of the Bank and from holding any office. Thus it is clear that the terms of the Order coalesce with the statutory language and it is equally obvious that the statutes and the Order encompass more than simply barring Respondent from participating as an officer or director in the affairs of the Bank. Thus Respondent's acquiescence in the Order of Prohibition insofar as it would bar him from participating in the affairs of the Bank as an officer or director does not meet the full thrust of the Order of Prohibition. This is not meant to imply that the language in the Order of Prohibition stating "prohibited from further participation in any manner in the conduct of the affairs of the Bank" necessarily places an impediment on Respondent's stock ownership rights. Whether or not it does would seem to be a dispute with both legal and factual facets, but these details are not of record. As set forth in Section 8(g)(3) the purpose of this proceeding is to determine whether Respondent's continued service to or participation in the affairs of the Bank does not or is not likely to pose a threat to depositors or impair public confidence in the Bank. Respondent questions the propriety of the Order insofar as it would limit the exercise of his stock ownership rights but the statements he submitted fall far short of what is necessary to sustain his position. The reference to the Mallen case is not in point because that decision involved Section 19 of the Act.
   Respondent also raises three broad based objections to FDIC conduct in the trial which resulted in his conviction and in several related Court cases. The first (Respondent's Part 2 paragraphs beginning on page two and extending through the top of page threeJune 16 statement), refers to an Agency Fraud Alert of January 2, 1995, Vol.4, No.2, where he is said to be at the "center of illegal activities that brought down the Independent Bank Group." This is said to be an untrue statement in that Respondent was not involved and was not charged. He asserts that the Fraud Alert was issued prior to resolution of the appeals process relating to the criminal proceeding and was intended to influence the Courts.
   The matters raised by Respondent lay outside the purview of this proceeding. Here the issue is framed by the requirements of Section 8(g)(3) which stipulate that he has the burden of showing that his continued service to or participation in the conduct of the affairs of the bank does not pose a threat to depositors or impair public confidence in the Bank.
   The second criticism of Agency conduct (Respondent's Part 3 on page three) relates to FDIC pressure on Lyndonville Bank to separate him from all other Bank directors in certain legal defense efforts relating to Court cases. This separation exposed Respondent to increased legal expenses and to liability risks greater than those incurred by other directors. In the same vein he protests the Agency's employment of an attorney for work in some property disputes, who was known to be hostile to Respondent. These objections relate to trial tactics during prosecution of the criminal violation of 18 U.S.C. {{6-30-97 p.A-2804}}section 1957 and certain related cases. Respondent was convicted and the conviction upheld on appeal. An administrative proceeding such as this is not the proper forum to question prosecutorial maneuvers in a criminal case which has closed.
   The third protest (Respondent's Part 4 on page four) is directed at the pressure exerted by the Agency on the Bank to bring suit against Respondent. Also, with respect to suits against the Bank, the Agency prevailed on the Bank to offer defenses separate from those put forth by Respondent. He submits that the FDIC ought not be involved in the legal affairs of the Bank. Like several of Respondent's prior arguments this objection relates to trial tactics and legal strategy in Courts of law or legal disputes. Such matters may not be considered in an administrative proceeding whose only purpose is to determine whether the Order prohibiting Respondent from participating in the Bank's affairs should be rescinded.
   In the July 12 statement Respondent repeats several of the objections discussed in the proceeding paragraphs and also expresses the fear that when he begins the process of recovery [from financial reverses] the FDIC will use the Order of Prohibition to thwart his pursuit of information through the Freedom of Information Act, seeking redress for Agency misconduct. Respondent's fears at this time are premature. Furthermore, whether or not the Order of Prohibition supersedes the Freedom of Information Act is an issue which is outside the scope of this proceeding.
   The Senior Regional Attorney for the Agency points out in his reply of July 9, 1996, that none of Respondents contentions go toward establishing his Section 8(g)(3) burden of showing that his participation in the Bank's affairs does not or is not likely to pose a threat to depositors or impair public confidence in the Bank. There is merit in this observation. Respondent's objections to Agency procedures, even if valid, do not show that he has met the Section 8(g)(3) burden.

CONCLUSIONS

   Section 8(g)(3) gives Respondent the opportunity to show that his "participation in the conduct of the affairs" of the Bank (i.e. the exercise of his stock ownership rights) is not likely to pose a threat to the interests of the Bank's depositors or impair public confidence in the Bank. Respondent has not met this burden. His objections to the FDIC stance on his stock rights and his protests over Agency tactics in the prosecution of the criminal trial and in related Court cases or legal disputes fail to meet the statutory burden.

FINDINGS

   I find that Respondent's request that the Order of Prohibition and the statutes on which it is predicated be construed as applying only to the positions of Bank officer and director but not to his rights as an owner of Bank stock should be denied. Respondent's statements of June 16 and July 12, 1996, do not meet the burden imposed by Section 8(g)(3) of the Act.
   The Order of Prohibition issued February 28, 1995, should remain in full effect and the proceeding should be dismissed.
   I recommend that the Board enter the following Order.

ORDER

   It is Ordered that the Order of Prohibition dated February 28, 1995, be continued in full force and effect and that the proceeding be dismissed.

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