Federal Deposit
Insurance Corporation

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   [¶5248] In the Matter of First Bank of Jacksonville, Jacksonville, Florida, FDIC Docket No. 96-155b (5-26-98)

(This decision was terminated by order of the FDIC dated 8-13-03; see ¶16,348.)    The FDIC adopted the ALJ's conclusion that First Bank of Jacksonville engaged in unsafe and unsound banking practices and violations of laws and regulations stemming from improper management and activities of Clyde N. Wells, Jr. who served as bank president, chief executive officer, controlling shareholder, director, chairman of the Bank's board of directors, legal counsel, and senior loan officer. The Board agreed with the ALJ finding that the Bank practices necessitate a cease and desist order and a 25-point affirmative action plan to be implemented by the Bank. The Board held the ALJ's reliance on bank examiners as expert witnesses was appropriate, and there was no denial of due process by sanctions imposed by the ALJ after repeated failures by the Bank to comply with discovery orders and FDIC regulations. (The decision was affirmed by the United States Court of Appeals for the Eleventh Circuit, 180 F.3d 269 (Table).)
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   [.1] Expert Witnesses—Weight of Testimony
   ALJ properly accorded proper deference to experts

   [.2] Administrative Law Judges—Discovery Sanctions
   ALJ has authority to hold a Show Cause Hearing and bar the offering documents at hearing.

   [.3] Due Process—Notice and Opportunity
   Respondent was given notice and opportunity for a full and fair hearing to explain failures to comply with rules and orders.

   [.4] Due Process—Sanctions
   Repeated, unexplained failures by Bank to comply with orders warranted sanctions imposed after proper notice and hearing.

   [.5] Unsafe or Unsound Practices—Separation of Duties
   Smaller bank needs greater sensitivity to added risks of limited segregation of duties. Bank had neither adequate segregation of duties nor sufficient internal controls.

   [.6] Cease and Desist Orders—Banking Practices—Unsafe and Unsound
   Finding 16 unsafe or unsound practices illustrates compelling need for order.

   [.7] Remedies—Affirmative Action Program
   ALJ's comprehensive plan to target operational and managerial deficiencies is reasonable and workable plan for rehabilitation.

In the Matter of
FIRST BANK OF JACKSONVILLE
JACKSONVILLE,FLORIDA
(Insured State Nonmember Bank)
DECISION AND ORDER
TO CEASE AND DESIST
Docket No. FDIC-96-155b

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² Citations to the record shall be as follows:
Recommended Decision— "R.D. at ____"
Transcript— "Witness's Name/TR Page #."
Exhibits&3151; "FDIC Ex. #/Page #."

   Under 12 U.S.C. § 1818(b)(1), the FDIC may issue an order to cease and desist against an insured depository institution that has engaged, is engaging, or is about to engage in unsafe or unsound banking practices or violations of law, rule or regulations. Therefore, the issues before the ALJ were whether Respondent either had engaged in or was about to engage in unsafe or unsound practices or had violated or was about to violate a law, rule or regulation.
   The ALJ analyzed at length the findings in the DBF Report, the FDIC Report, and the EDP Report as well as the documentary and testimonial evidence presented at the hearing. In his R.D., the ALJ agreed with the examiners' findings and the FDIC's charges in its Notice and concluded that Respondent has engaged in unsafe and unsound banking practices, principally as the result of failures by its management, and that Respondent has violated both Florida state laws and federal laws and regulations.
   Because the ALJ provided a detailed and well-reasoned opinion replete with citations to the record in support of his conclusions, the Board finds it unnecessary to reiterate in full the contents of the R.D. The summary below, however, provides an overview of Respondent's managerial and operational deficiencies as found in the three examination reports and corroborated by the testimonial and documentary evidence.

   The Bank is inadequately staffed, employing Wells as its only officer. Hager TR 78–79. Before he became Bank president, Wells, who had been a director and legal counsel for a national bank, had no day-to-day bank management experience. Hager TR 79. After the DBF examination, the vice-president and loan officer and the comptroller resigned, and neither of these positions was filed. FDIC Ex. 4/21. Employee turnover has been unusually high with 29 employees and officers leaving the Bank between the 1994 and 1995 DBF examinations. Hager TR 89, 91; FDIC Ex. 4/21. At the time of the 1995 DBF examination, the Bank had only six employees. Hager TR 91. The Bank's skeletal staff created a further problem with regard to segregation of duties, since Wells was involved in all aspects of the Bank's business. FDIC Ex. 4/21.
   The Bank management received a CAMEL rating of "5" from the DBF, constituting an unsatisfactory level of management supervision. Hager TR 78. The Bank received this rating because of the gravity of its management deficiencies, the total lack of cooperation from management, and the apparent willful violation of statutes. FDIC Ex. 4/49.
   Furthermore, the DBF found that Respondent's board of directors engaged in unsafe and unsound practices by improperly delegating authority to Wells. FDIC Ex. 4/28; Hager TR 104–105. Respondent's board of directors permitted Wells to dominate all affairs of the Bank and it failed to take steps to supervise his activities, particularly where he engaged in business dealings with the Bank which presented clear conflicts of interest. FDIC Ex. 4/22. Respondents' board

   The FDIC examination of Respondent's data processing activities was conducted on June 11, 1996. FDIC Ex. 3. Included in the examination was a review of information systems audit coverage, management, systems and programming, computer operations, teleprocessing, and microcomputers. FDIC Ex. 3/6. This examination, as well, revealed many weaknesses which exposed the Bank to an excessive amount of risk and amounted to unsafe or unsound practices. Anderson TR 767–768. Respondent's data processing operation received an overall rating of "4", signifying unsuitable conditions. FDIC Ex. 3/7, 3/12. Some of the more glaring deficiencies are noted below.
   The EDP Report revealed defects in Respondent's external and internal audit coverage. While the examiner found that the Bank engaged an external auditor who conducted adequate annual director's examinations, he found, however, that the Bank's board of directors failed to take corrective action regarding areas of concern identified by the auditor. FDIC Ex. 3/8. The EDP examiner found that, although previous examination reports had criticized the Bank's lack of internal audit coverage of its data center, the problem remained uncorrected. FDIC Ex. 3/8.
   The EDP examiner also cited the Bank's inadequate oversight of the data processing function as an unsafe and unsound practice. Anderson TR 771–773. The EDP Report assigned management a rating of "4". Anderson TR 768. Among the deficiencies noted in the EDP Report was management's failure to correct previously identified problems. These included inadequate audit coverage and segregation of duties, a lack of a disaster recovery program for the data center, and a failure to maintain backup files in a fireproof area. FDIC Ex. 3/8. Although Respondent's board of directors had adopted an EDP policy to address some of the problems identified, it failed to ensure compliance with the policy. FDIC Ex. 3/9–10; Anderson TR 753.
   Serious concerns about Respondent's disaster recovery plan were raised in the EDP {{7-31-98 p.A-2902}}Report. Among other things, the Examiner found that Respondent lacked a detailed recovery program for the data center; the data center backup had not been tested in three years; employees were not familiar with disaster recovery procedures; backup copies programs, data files, documents, and contingency plans were not maintained off-site; and the software version used at the Bank was not compatible with the software at the back-up site. Anderson TR 805. Based on these findings, the Examiner concluded it is unlikely that, in the event of a disaster, Respondent could continue operations without significant interruption. FDIC Ex. 3/10.

   The ALJ concluded that Respondent engaged in unsafe and unsound banking practices within the meaning of section 8(b) of the FDI Act, 12 U.s.C. § 1818(b), by operating with a board of directors that failed to require management to implement necessary practices and procedures reflecting the operational guidelines established by the board. R.D. at 54. The ALJ further concluded that Respondent had violated the following federal laws and regulations: 12 C.F.R. § 364.101 (failure to have adequate internal controls for safety and soundness), 12 C.F.R. § 326.8 (failure to develop and provide for continued administration of a program designed to monitor compliance with the Bank Secrecy Act); 12 C.F.R. § 350.3(a) (failure to prepare and make available on request an annual disclosure statement); 12 C.F.R. § 350.3(b) (failure to make annual disclosure statement timely available to requestors); 12 C.F.R. § 350.4(a)(1) (failure to include in its annual financial disclosure, at a minimum, information comparable to the information contained in specified Call Report schedules); and 12 C.F.R. § 350.8 (failure to promptly mail or otherwise furnish an annual financial disclosure statement to a requester). Finally, the ALJ concluded that Respondent violated the following Florida Statutes: FLA. STAT. Ann. § 658.48(1)(a) (extending credit to any one borrower exceeding 25 percent of the Bank's capital accounts when the loan was fully secured); FLA. STAT. Ann. § 655.044(2) (carried as an asset in a report to the DBF or in any published report, a note or obligation which is past due or upon which no interest has been paid for one year or longer); FLA. STAT. Ann. § 658.48(5)(d) (failed to document as a first lien real estate mortgages securing loans); and FLA. STAT. Ann. § 655.60(2) (made loans based on real estate collateral without adequate written appraisal standards and without policies previously established by the board of directors). R.D. at 55–56.
   Based on his findings and conclusions, the ALJ recommended that a cease-and-desist order, with affirmative action, be issued. The proposed Order directed that Respondent, its institution-affiliated parties, and its successors and assigns cease and desist from following unsafe or unsound banking practices and violating laws and regulations. The proposed Order identifies a total of sixteen unsafe or unsound practices and violations of law or regulation constituting conduct from which the Bank must refrain. All of the proscribed activities relate to the managerial and operational deficiencies described in the R.D. R.D. at 58–59.
   The ALJ's proposed affirmative action ("Affirmative Action Program") is a 25 point comprehensive plan to rehabilitate Respondent by establishing an enforceable program set on a strict timetable and designed to enable the Bank to operate in a lawful and safe and sound manner. Among other things, the Affirmative Action Program requires the Bank to develop a written analysis of Respondent's management and staffing needs; retain qualified management consistent with the written management and staffing plan; adopt and implement an internal audit program; adopt and implement a plan to correct Respondent's internal routine and control deficiencies; prepare complete and accurate financial disclosure statements; develop an appropriate electronic data processing plan for submission to the FDIC and, upon receipt of written comments by the FDIC's Regional Director and the Florida State Comptroller ("Comptroller"), approve and implement such EDP plan; review and rewrite its written loan policy; prepare a realistic and comprehensive budget; take all necessary steps to eliminate all violations of law and regulations identified in the FDIC Report; retain a qualified Bank Secrecy Act officer, develop a three-year strategic plan for the Bank; and furnish quarterly progress reports to the FDIC Regional Director and the Comptroller, describing what steps it is taking to comply with the Order and Affirmative Action Plan and the results of these undertakings. R.D. 60–75.
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A. Respondent's Exceptions

   Respondent filed nearly 200 exceptions to the R.D., challenging virtually every factual finding, legal conclusion, and many of the ALJ's evidentiary rulings. The Board has reviewed the Respondent's exceptions and supporting brief. These exceptions, viewed charitably, constitute a rambling discourse, filled with largely unsupported and imprecise legal arguments and factual assertions which, in many instances, are, at best, difficult to understand, but which can be fairly read to attack practically every aspect of these proceedings. The Board concludes that Respondent's exceptions are, by and large, frivolous, repetitious, and, in many instances, merely reargue matters raised below which were adequately addressed by the ALJ. As such most do not justify further analysis. The few exceptions raised by Respondent that warrant further discussion are addressed below. Those not discussed are denied.
   Many of Respondent's exceptions criticize the ALJ for apparently relying too heavily on testimony of FDIC bank examiners and the bank examination reports in making his findings. At the evidentiary hearing, FDIC Enforcement Counsel offered expert testimony relating to FDIC examinations of the Bank through three FDIC officials. FDIC Examiner Rafael A. Valle ("Vallee"), the examiner-in-charge of the FDIC's examination of the Bank as of May 22, 1996, is a highly-trained examiner with more than five years of experience as a commissioned bank examiner who has participated in over 180 bank examinations. Valle TR 323. After examining Respondent, Valle concluded that the Bank engaged in conduct which posed abnormal risk of loss or damage to the institution and which, in his expert opinion, amounted to unsafe or unsound banking practices as well as violations of applicable federal banking laws. Valle further testified that, in his expert opinion and based on the findings and conclusions in the FDIC Report, corrective action was necessary. See Valle TR 314–694.
   The second expert witness to testify for the FDIC was Thomas B. Anderson ("Anderson"), the FDIC examiner-in-charge of the FDIC's June 11, 1996, EDP examination of the Bank. Anderson is also a highly-qualified examiner who has been involved in approximately 130 bank examinations. Anderson TR 700. Anderson testified in his expert opinion that, as a result of his examination of the Bank's data processing operations, he concluded that the Bank was engaging in conduct and practices contrary to prudent bank operation which, if continued, would expose the bank to abnormal risk of loss or damage, and, as a result, the Bank had engaged in unsafe or unsound practices. See Anderson TR 694–872.
   Also testifying as an expert witness for the FDIC was Assistant Regional Director James A Shumaker ("Shumaker") of the FDIC's Atlanta Regional Office, Division of Supervision. Shumaker is also a commissioned bank examiner, who has participated in approximately 150–200 bank examinations. By virtue of his substantial experience and expertise, Shumaker has risen to a senior managerial position in the FDIC's Atlanta Regional Office. Shumaker testified about the procedures involved in processing and finalizing reports of examination submitted by field examiners. Shumaker testified that he reviewed both the 1996 FDIC Report and the EDP Report and, on the basis of the findings and conclusions contained in those reports, he concluded that the Bank had engaged in unsafe or unsound practices and had violated applicable laws and regulations. Shumaker testified that, based on these facts and conclusions, he recommended the institution of formal cease and desist proceedings against the Bank. See Shumaker TR 873–960.
   Courts have long recognized that, in assessing the weight and deference to be given expert witnesses, such as those presented here by FDIC Enforcement Counsel, determination of expertise is primarily a function of a witness's experience in a given area. The court in Moran v. Ford Motor Company, 476 F.2d 289, 291 (8th Cir. 1973), held that the pertinent inquiry into a witness's qualification as an expert is whether the witness's training and experience demonstrates a significant knowledge of the subject matter. The Eleventh Circuit Court of Appeals held that the FDIC's bank examiners' unique experience leads to the conclusion that certain of their determinations are entitled to great deference and cannot be overturned unless shown to be arbitrary and capricious or outside a "zone of reasonableness." Sunshine State Bank v. FDIC, 783 {{7-31-98 p.A-2904}}F.2d 1580 (11th Cir. 1986). The court in Sunshine State Bank adopted in whole a statement by the Board on the level of deference to be paid to FDIC examiners:

Although there are no court opinions addressing the weight to be given examiners' loan classifications, the Board's inquiry on this point is guided by several decisions addressing agency functions which require similar exercises of expert judgment and informed discretion. The courts have uniformly recognized that certain types of agency judgments are not susceptible to strict "proof" because they involve the exercise of discretion, technical expertise and informed prediction about the likely course of future events. One court's explanation of the deference accorded such judgments is equally applicable to the judgments made by FDIC commissioned bank examiners in assigning loan classifications.

Congress has instructed this Board to "appoint examiners," and had provided that "[e]ach examiner shall have power to make a thorough examination of all of the affairs of the bank and its affiliates, and shall make a full and detailed report of the condition of the bank to the Corporation." 12 U.S.C. § 1820(b). After extensive training, lengthy apprenticeship and careful evaluation, FDIC examiners are appointed as "commissioned examiners," and thereby vested with authority to make informed predictions about the risk inherent in a bank's assets. This exercise of informed judgment on the part of commissioned examiners is entitled to deference, and should not be disregarded in the absence of compelling evidence that it is without rational basis.

[I]n making [judgments], the examiner must look at the underlying facts, evaluate those facts and, then, based on these facts, make a predictive judgment concerning the likelihood of repayment. If that predictive judgment is based on facts in evidence (which are subject to an ALJ's review), and if the predictive judgment is not arbitrary or capricious, or outside the zone of reasonableness, it may not be displaced by the ALJ. This is the conclusion of the Sunshine decision. 783 F.2d 1583-4.

   [.1] Under the standard described above and based on the training, experience, and expertise of the FDIC expert witnesses, the findings, conclusions, and predictive judgments of the FDIC's bank examiner witnesses are entitled to considerable weight and deference in determining whether the Bank engaged in unsafe or unsound practices and violations of banking laws and regulations. Accordingly, the Board finds that the ALJ accorded appropriate deference to the testimony of the FDIC examiners and the Assistant Regional Director.

   [.2] Respondent excepts to the ALJ's Order on Sanctions and the Show Cause Hearing which preceded it. In essence, Respondent argues that because the ALJ barred the Bank from calling witnesses and offering documentary evidence in support of its defense at the Show Cause Hearing, enforcement of the Order on Sanctions constitutes a violation of due process rights under both the Administrative Procedure Act and the Constitution of the United States. The Board disagrees. Under section 308.5 of the FDIC's Rules of Practice and Procedure, 12 C.F.R. § 308.5, the ALJ has the authority to hold prehearing conferences as set forth in section 308.31 which may address, among other things, the resolution of discovery disputes (12 C.F.R. § 308.31(b)(6)), and any other issues that may aid in the orderly disposition of the proceeding (12 C.F.R. § 308.31 (b)(8)). The ALJ, pursuant to 12 C.F.R. § 308,108(d)(2), may allow the party against whom sanctions are sought to be heard in any manner he directs, and the opportunity to be heard may be limited to a chance to respond orally.
   Respondent also challenges, on constitutional grounds, the portion of the Order on Sanctions which barred the Bank, subject to certain exceptions discussed above, from offering evidence at the hearing relating to issues in the FDIC's document requests which {{7-31-98 p.A-2905}}were not timely delivered to FDIC Enforcement Counsel. Respondent also objects to the ALJ's ruling, as required by section 308.32(b) of the FDIC's Rules of Practice and Procedure,⁶ precluding it from offering exhibits at the hearing because Respondent failed to provide an Exhibit List pursuant to the ALJ's May 30, 1997 Order. The ALJ did, however, protect the record by allowing Respondent to make a proffer of evidence with respect to the excluded documents. R.D. at 8.

   [.3] The process by which the ALJ arrived at his determination to limit Respondent's opportunity to offer evidence at the hearing did not violate Respondent's due process rights. As the record plainly shows, Respondent was provided a full and fair opportunity to explain its repeated failures to comply with the ALJ's scheduling and discovery orders and the FDIC Rules of Practice and Procedure prior to the entry of the orders at issue. An important component of due process is the requirement that a party be given adequate notice of the charges or evidence to be presented and an opportunity to respond. See e.g., In the Matter of Donald E. Thompson, Bank of Bellevue, Bellevue, Nebraska, 1992 WL 812806 (F.D.I.C.). Here, sanctions were awarded only after Respondent's persistent failure to produce documents in discovery, even after the ALJ, at Respondent's request, extended production deadlines and directed FDIC Enforcement Counsel to reimburse Respondent for copying costs.
   After Respondent continued to ignore discovery orders and deadlines, FDIC Enforcement Counsel filed a motion for the imposition of sanctions. On April 28, 1997, the ALJ issued an Order to Show Cause and scheduled the Sanctions Hearing for May 1, 1997. On the same day, the ALJ notified the parties of the order and scheduled hearing and also served copies of the order on the parties by fax and overnight mail delivery. On April 30, 1997, Respondent filed its opposition to FDIC Enforcement Counsel's Motion for Sanctions. The Sanctions Hearing was held as scheduled, and each party argued its respective position. Due process requires no more in this situation. At the conclusion of the Sanctions Hearing, the ALJ issued his ruling limiting the documents and related testimony Respondent would be permitted to offer at the evidentiary hearing. Order on Sanctions at 6.
   Likewise, the ALJ's ruling rejecting admission of Respondent's exhibits at the evidentiary hearing also satisfied due process requirements. On May 9, 1997, based on Respondent's failure to timely provide a complete exhibit and witness list as required by section 308.32(a), of the FDIC's Rules of Practice and Procedure, 12 C.F.R. § 308.32(a), FDIC Enforcement Counsel filed a Motion to Exclude Respondent's Witnesses and Exhibits from the hearing. Because the response to FDIC Enforcement Counsel's motion was due very near to the commencement date of the evidentiary proceeding, the ALJ ordered an expedited response time of May 19, 1997. Respondent timely opposed FDIC Enforcement Counsel's motion. On the following day, May 20, 1997, the ALJ issued an Order ("May 20 Order") which, among other things, found that Respondent's exhibit list, as submitted, was seriously defective, but the ALJ allowed Respondent to offer exhibits at the hearing upon the condition that it present, at the opening of the evidentiary hearing, each exhibit to be offered into evidence in an organized and identifiable manner. The May 20 Order, in fact, provided Respondent with detailed and specific instructions as to how its exhibits should be prepared and presented. The ALJ made it clear that, if Respondent failed to make a timely submission in accordance with the terms of the Order, he would withdraw the condition and grant the motion to preclude exhibits at the opening of the hearing.⁷ May 20 Order at 7–8. The ALJ further ruled that, if Respondent made the submission as directed, he would rule on each document individually when offered by the Respondent. At the commencement of the evidentiary hearing on June 2,

   [.4] The Board finds, therefore, that Respondent's exceptions to the ALJ's authority to hold the Show Cause Hearing and to the rulings barring him from offering documents at the hearing are without merit. The Board agrees with the ALJ that Respondent has offered an inadequate defense for his failure to timely comply with the ALJ's orders and the applicable FDIC regulations. Based on Respondent's conduct, the ALJ properly imposed discovery sanctions limiting Respondent's ability to introduce documentary evidence at the evidentiary hearing. See e.g., Jankins v. TDC Management Corporation, Inc. 21 F.3d 436, 443-444 (D.C. Cir. 1994) (Discovery sanctions imposed pursuant to Fed. R. Civ. P. 37(b)(2), barring employer from refuting evidence of liability in fraud trial and requiring employer to pay attorney fees and expenses, was warranted by employer's failure to produce requested financial records despite outstanding discovery order compelling production.) To hold otherwise would eviscerate the applicable procedural rules and would permit parties to simply refuse to participate in discovery at their whim. It is clear that the ALJ's orders

   [.5] The Board concludes that, in view of Respondent's comprehensive operational and managerial deficiencies, the ALJ's findings regarding segregation of duties were correct. Although complete segregation of duties is not always possible in a smaller bank, under such circumstances, the bank should have an internal audit program to ensure that one employee does not have access to total control over a transaction. In this case, the bank examiners found the Bank had neither adequate segregation of duties nor sufficient internal controls. The ALJ's Affirmative Action Program requires Respondent to implement plans that provide for appropriate segregation of duties specifically in the areas of internal routine and control, EDP operations, and Bank Secrecy Act Compliance. Both the management and staffing and EDP Plans are to be reviewed and approved by the FDIC's Regional Director and the Florida Comptroller before they are implemented. Notably, no additional requirements are imposed beyond the current mechanism for regulatory review and comments in this area. The FDIC's Regional director and the Florida Comptroller, with Respondent's cooperation, will craft a plan for the appropriate segregation of duties.

B. FDIC Enforcement Counsel's Exceptions

   FDIC Enforcement Counsel raises two exceptions to the R.D., urging that the Board add two conclusions to the ALJ's Conclusions of Law. First, FDIC Enforcement Counsel proposes that the R.D. include a conclusion that Respondent violated section 7(a)(1) of the FDI Act, 12 U.S.C. § 1817(a)(1), by submitting to the FDIC Reports of Condition and Income that contained numerous and material errors. The Board finds that this exception is supported by the record and incorporates the following additional findings of fact and conclusion of law into the final decision:

   1. During the FDIC's May 22, 1996 examination, Respondent's Reports of Condition and Income for December 31, 1994, December 31, 1995, and March 31, 1996, were found to contain numerous errors. FDIC Ex 2/55.
   2. As of the FDIC's May 22, 1996 examination, Respondent had not filed an amended Call Report as of December 31, 1994, although the DBF instructed the Respondent to do so in the 1995 DBF Report. FDIC Ex. 2/55.
   3. With respect to each of its Call Reports as of December 31, 1994, June 30, 1995, September 30, 1995, December 31, 1995, and March 31, 1996. Respondent violated section 7(a)(1) of the FDI Act, 12 {{7-31-98 p.A-2908}}U.S.C. § 1817(a)(1), by submitting Call Reports to the FDIC that contained information that was false as a result of Respondent's errors in preparing the reports and failure to maintain accurate accounting records. FDIC Ex. 2/55.

   1. The FDIC assigns insured depository institutions to supervisory subgroups as part of the process for assessing deposit insurance premiums. 12 C.F.R. § 327.4(a).
   2. Section 327.4(e) of the FDIC's Rules and Regulations states that the supervisory subgroup to which an institution is assigned is exempt information, disclosure of which is governed by the restrictions on disclosure of exempt information set forth in Part 309 of the FDIC's Rules and Regulations. 12 C.F.R. § 327.4(e).
   3. Section 309.6(a) of the FDIC's Rules and Regulations states that under no circumstances shall any person, entity, or agency disclose or make public exempt records or information without written authorization from the FDIC. 12 C.F.R. § 309.6(a).
   4. In a letter dated April 12, 1995, which was transmitted to Respondent's shareholders, Wells stated on behalf of Respondent, without authorization from the FDIC, that "the FDIC classified FirstBank as 1A which is the highest rating for safety and soundness." The Respondent thereby violated section 309.6(a) of the FDIC's Rules and Regulations. FDIC Ex. 2/56; FDIC Ex. 12/68–69.

   Based upon its review of the record, the Board finds that the ALJ's Findings of Fact and Conclusions of Law in the R.D. were correct as to Respondent's unsafe and unsound practices and violations of laws and regulations. The Board also agrees that all of the elements of section 8(b) have been proven and that, therefore, a formal Cease-and-Desist Order with affirmative action is justified.
   The Board has recognized and federal courts agree that under section 8(b) of the FDI Act, 12 U.S.C. § 1818(b), the FDIC may order an institution to cease and desist from an unsafe or unsound practice even where "it is established that the [bank] has engaged in such a practice on only a single occasion." See FDIC-83-252b&c, FDIC-84-49b, FDIC-84-50e. 1 FDIC Enf. Dec. ¶ 5049 (1985); The Greene County Bank v. Federal Deposit Insurance Corporation, 92 F.3d 633 (8th Cir. 1996). Moreover, the Board has consistently entered orders to cease and desist where it has been demonstrated that management has permitted unsafe and unsound practices to continue. See FDIC-84-191b. 1 FDIC Enf. Dec. ¶ 5052 (1985). Finally, the overwhelming majority of courts has held that the discontinuance of illicit practices or violations of law is not a defense against the issuance of a cease and desist order. See e.g., Clinton Watch Company v. Federal Trade Commission, 473 F.2d 1317 (5th Cir. 1973); Bank of Dixie v. federal Deposit Insurance Corporation, 766 F.2d 175 (5th Cir. 1985); First State Bank of Wayne County v. Federal Deposit Insurance Corporation, 770 F.2d 81 (6th Cir. 1985).
   In this case, FDIC Enforcement Counsel has conclusively established that Respondent engaged in numerous and repeated unsafe and unsound banking practices and violations of laws and regulations. The record is abundantly clear that these practices and violations have persisted despite constant regulatory efforts to correct them and assurances from Bank management that it would comply.

   [.6] The present circumstances illustrate not only a clear need but also a compelling need for an order prohibiting the adverse conduct and for a plan to correct the resulting conditions. Section 8(b) of the FDI Act provides the FDIC with broad authority to tailor an appropriate cease-and-desist order:

Such order may, by provisions which may be mandatory or otherwise, require the depository institution-affiliated parties to cease and desist from the same and, further, to take affirmative action to correct the conditions resulting from any such violation or practice.

   [.7] The Affirmative Action Program proposed in the R.D. was clearly designed to address each of the unsafe or unsound practices and violations of law and regulations {{7-31-98 p.A-2909}}established in the record of this proceeding. The Board endorses the plan proposed by the ALJ because it clearly targets the Respondent's operational and managerial deficiencies and provides what appears to be a reasonable, workable plan to rehabilitation. Section 8(b)(6) of the FDI Act confers upon the agency broad authority to fashion a corrective plan once it determines that a cease and desist order is appropriate. Sub-sections (E) and (F) provide, respectively, that the agency may order the institution to employ qualified officers or employees or to take any action the agency determines to be appropriate. 12 U.S.C. §§ 1818(b)(6)(E) and (F).
   Respondent's board of directors should be aware, however, that the success or failure of the Affirmative Action Program rests largely on its shoulders. Among other things, the Program requires Respondent's board of directors to develop and implement a Management and Staffing Plan and to approve an EDP Plan to address and correct previously cited deficiencies. Notably, the Affirmative Action Program also requires the Bank to install qualified management within 90 days from the effective date of the Cease-and-Desist Order. It is the managerial and EDP deficiencies that most seriously threaten Respondent's financial stability and ability to continue operations.
   In this case, the record clearly demonstrates that, time and again, the Bank's board of directors has either consciously ignored regulatory criticism or negligently failed to live up to its promises to take corrective action. Wells and Respondent's board of directors have been aware of cited deficiencies since at least the summer of 1995, when they received the DBF Report, yet, in most respects, they have failed to adhere to either the resolution that was generated as a result of the 1995 DBF exam or meaningfully respond to subsequent criticism by the FDIC. Given Wells' history of extreme recalcitrance and Bank management's many demonstrated failures in the past, the Board finds it necessary to admonish Respondent's board of directors that is responsible for full compliance with the Affirmative Action Program. The Board has found that Respondent has engaged in many serious violations posing great risk to the Bank, the public, and the insurance fund. The Board will not tolerate any such future misconduct. Unless the Bank demonstrates a good faith effort to fully adhere to the terms and conditions of the Cease-and-Desist Order, the Bank's board of directors may face the prospect of future regulatory action, including the imposition of civil money penalties pursuant to section 8(i) of the FDI Act, 12 U.S.C. § 1818(i), or other appropriate action under section 8, 12 U.S.C. § 1818.⁹
   Having determined that Respondent has engaged in numerous unsafe and unsound banking practices and violations of laws and regulations as set forth in the R.D., as modified, the Board finds that the issuance of the Cease-and-Desist Order accompanying this decision is supported by substantial evidence and is in the best interests of Respondent, its depositors, and the insurance fund.

   The Board of the FDIC having considered the record and the applicable law, finds and concludes that the Bank, as set forth in this Decision, has engaged in unsafe and unsound banking practices and violations of laws and regulations within the meaning of section 8(b)(1) of the Federal Deposit Insurance Act FDI Act, 12 U.S.C. § 1818(b)(1):
   Accordingly, IT IS HEREBY ORDERED, that the Bank, its institution-affiliated parties, as such term is defined in section 3(u) of the FDI Act, 12 U.S.C. § 1813(u), and its successors and assigns cease and desist from the following unsafe or unsound banking practices and violations of laws and regulations:

   A. Failing to provide adequate supervision and direction over the affairs of the Bank by the board of directors of the Bank to prevent unsafe or unsound practices and violations of laws and regulations:
   B. Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;
   C. Failure by the Bank's board of directors to require Bank management to implement practices and procedures that


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⁹ The Board also will not excuse any future failures by Respondent, its counsel, or representatives to observe the FDIC Rules of Practice and Procedure. While the ALJ did not bar Wells from representing the Bank in these proceedings, it would have been fully within his and the Board's authority to do so.

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{{7-31-98 p.A-2910}}reflect operational guidelines established by the Bank's board of directors;
   D. Failing to provide the Bank with operational personnel who have experience that is adequate to ensure safe and sound operation of the Bank and to ensure compliance with applicable laws and regulations;
   E. Failing to provide adequate training to operational personnel;
   F. Operating the Bank with policies and practices that result in excessive employee turnover;
   G. Failing to implement generally accepted internal accounting procedures and effective internal audit controls;
   H. Failing to adopt and implement fully an appropriate loan policy, and appropriate appraisal policy, and an appropriate asset/liability management policy;
   I. Failing to maintain financial records sufficiently accurate to enable the Bank to comply with applicable reporting requirements established by federal laws and regulations;
   J. Failing to prepare accurate annual financial statements;
   K. Failing to make accurate annual financial disclosure statements available to shareholders in a timely manner;
   L. Omitting pertinent or required financial information from the Bank's annual disclosure statements;
   M. Failing to maintain adequate documentation in loan files;
   N. Failing to correct operational problems identified by the Bank's external auditors;
   O. Operating the Bank with inadequate information systems and management reporting systems, as described in the FDIC's EDP Report of Examination of the Bank as of June 11, 1996; and
   P. Engaging in violations of applicable federal and state laws and regulations, as more fully described on pages 8.19 through 8.26 of the FDIC's Report of Examination of the Bank as of May 22, 1996.

   (i) identification of both the type and number of officer and operational staff positions that are needed to manage and supervise the affairs of the Bank in a safe and sound manner;
   (ii) evaluation of each current Bank officer and staff member to determine whether these individuals possess the ability, knowledge, experience, training, and other qualifications that are required to perform present and anticipated duties, including adherence to the requirements of this ORDER, adherence to the Bank's policies, and operation of the Bank in a safe and sound manner.
   (iii) a review of the rate of turnover of Bank employees during the past five years and a plan to recruit, hire, and retain any additional or replacement personnel with the requisite ability, knowledge, experience, and other qualifications to fill Bank officer or staff positions consistent with the analysis and assessment heretofore described in Paragraph 1(a)(i) and (ii) of this ORDER; and
   (iv) a review of the training deficiencies that were identified in the FDIC's Report of Examination of the Bank as of May 22, 1996.

   (i) comply with the requirements of this ORDER;
   (ii) operate the Bank in a safe and sound manner;
   (iii) comply with applicable laws and regulations; and
   (iv) restore all aspects of the Bank to a safe and sound condition.

   (i) suspense accounts are reconciled in a timely fashion;
   (ii) subsidiary accounts are reconciled to the general ledger in a timely fashion;
   (iii) accounting errors, once discovered, are resolved in a timely fashion;
   (iv) general ledger entries are initiated consistently, correctly, and in a timely fashion; and
   (v) the duties of Bank employees are segregated in a manner that minimizes the potential for misapplication of funds, defalcation, or sabotage.

   (i) the acquisition and operation by the Bank of hardware and software systems that are appropriate for the safe and sound conduct of the Bank's business;
   (ii) development and implementation of an appropriate, ongoing internal audit of the operations of the Bank's information systems;
   (iii) immediate acquisition and permanent retention of access to an EDP backup facility that is operationally compatible with the Bank's hardware, software, and data files;
   (iv) appropriate segregation of duties among the Bank's employees (and contractor personnel, if any) who perform functions related to electronic data processing;
   (v) storage of backup copies of operating systems, application programs, and data files in a secure, fire-resistant environment at a remote site;
   (vi) reconciliation of all major applications to the general ledger on a daily basis;
   (vii) development and implementation of an appropriate policy regarding the Bank's use of microcomputers;
   (viii) prompt review by the Bank's board of directors of all audit reports and regulatory reports regarding the Bank's electronic date processing, and written recordation of the responses by the Bank's board of directors to such reports;
   (ix) prompt correction of all information systems deficiencies identified in audit reports and regulatory reports; and
   (x) periodic review of the Bank's EDP Policy by the Bank's board of directors and of Bank management's implementation of the Bank's EDP Policy and EDP Plan.

   (i) a requirement that before advancing any loan the Bank must obtain, analyze, and verify credit information which will be sufficient to identify a source of repay- {{7-31-98 p.A-2913}}ment and support for the scheduled repayment plan;
   (ii) a requirement that all collateral documentation or evidence of collateral documentation be obtained and reviewed before loan proceeds are disbursed;
   (iii) a requirement for the maintenance and review of complete and current credit files on each borrower with extensions of credit outstanding;
   (iv) A requirement for the establishment of criteria and guidelines for the acceptance and review of financial statements; and
   (v) A requirement for appraisal procedures which, at a minimum, satisfy the requirements of Part 323 of the FDIC's Rules and Regulations, 12 C.F.R. Part 323, and applicable Florida banking laws and regulations.

   (i) identify the major areas in, and means by which the board of directors will seek to improve, the Bank's operating performance; and
   (ii) describe the operating assumptions that form the basis for, and adequately support, major projected income and expense components.

   (i) identify reportable transactions in a timely manner in order to obtain all the information necessary to properly complete the required reporting forms;
   (ii) ensure that all required reports are accurately completed and properly filed;
   (iii) ensure that customer exemptions are properly granted and recorded, including the maintenance of documentation sufficient in detail so as to substantiate exemptions granted:
   (iv) provide for adequate supervision of employees who accept currency transactions, complete reports, grant exemptions, or engage in any other activity covered by 31 C.F.R. Part 103; and
   (v) establish dual controls and provide for separation of duties.

   (i) a test of the Bank's internal procedures for monitoring compliance with the Bank Secrecy Act, including interviews of employees and their supervisors who handle cash transactions;
   (ii) a sampling of large currency transactions followed by a review of currency transaction report filings;
   (iii) a test of the validity and reasonableness of the customer exemptions granted by the Bank;
   (iv) a test of the Bank's record keeping system for compliance with the Bank Secrecy Act; and
   (v) documentation of the scope of the testing procedures performed and findings of the testing. Any apparent violations, exceptions or other problems noted during the testing procedures should be promptly reported to the board of directors.