Each depositor insured to at least $250,000 per insured bank



Home > Regulation & Examinations > Bank Examinations > FDIC Enforcement Decisions and Orders




FDIC Enforcement Decisions and Orders

ED&O Home | Search Form | Text Search | ED&O Help

{{10-31-00 p.A-3017}}

   [5256] In the Matter of Michael D. Landry and Alton B. Lewis, individually and as institution-affiliated parties of First Guaranty Bank, Hammond, Louisiana (Insured State Nonmember Bank) FDIC Docket No. 95-65e (5-25-99)

   FDIC Board adopted the findings of fact and conclusions of law of the administrative law judge that a bank officer and a bank director who was also the bank lawyer involved in forming a holding company to obtain control of their financially troubled bank, and incurring expenses in the efforts, which were paid for by the bank violated the FDI Act. The Board issues an order of prohibition, {{10-31-00 p.A-3018}}finding that the Respondents acted with willful disregard for the safety and soundness of the Bank, and with personal dishonesty, for personal gain causing large losses to the Bank. (Landry's petition for review was denied by the United States Court of Appeals for the District of Columbia Circuit, 204 F.3d 1125)

   [.1] Interlocutory Review—Delay
   A request to reopen records necessarily invokes the possibility of delay, and administrative procedures are generally flexible enough to allow agencies discretion to reopen if necessary. The Supreme Court has rejected the assertion that the Board cannot act outside the prescribed ninety-day period.

   [.2] Interlocutory Review—Delay—Reopening Record
   The Board may reopen the record to insure a fair, complete and impartial adjudication.

   [.3] Disclosures—Privilege
   Although the FDIC assertion of privilege is not supportable as to all documents claimed, the failure to disclose harmless documents is not required.

   [.4] Disclosure—Failure to disclose information not affecting substantial right
   Failure to disclose evidence that is cumulative and not affecting a substantial right is not grounds for reversal.

   [.5] Prohibition, Removal, or Suspension—Misconduct
   Using Bank funds for personal benefit, extending credit to uncreditworthy borrowers, breaching fiduciary duties and failing to disclose material changes in the Bank's operations as required by FDIC disclosure requirements provides ample evidence of misconduct.

   [.6] Prohibition, Removal, or Suspension—Misconduct—Multiple Respondents
   The FDI Act is not concerned with degree of culpability. If statutory criteria are met, the FDI Act does not require actions only against the worst offender.

   [.7] Directors—Responsibilities
   A director is charged with vigilance in the stewardship of the Bank, making him liable for what a prudent director should know, and imposing a duty to act on that knowledge.

   [.8] Fiduciary Responsibilities—Breach
   A director's, or officer's, breach of fiduciary duty is per se unsafe and unsound.

   [.9] Unsafe or Unsound Practices Breach of Fiduciary Responsibilities
   A director's, or officer's, breach of fiduciary duty is per se unsafe and unsound.

   [.10] Fiduciary Responsibilities—Breach
   Forcing extension of a $450,000 loan to uncreditworthy borrower, over objections of loan committee, placed officer's personal interests above those of the Bank.

   [.11] Fiduciary Responsibilities—Breach
   Using Bank funds to further efforts to find capital for personal acquisition of the Bank breaches fiduciary responsibilities.

   [.12] Fiduciary Responsibilities—Breach
   A director who is also the attorney for the Bank who breaches his fiduciary duty commits per se unsafe and unsound actions.

{{7-31-99 p.A-3019}}
   [.13] Unsafe or Unsound Practices—Breach of Fiduciary Responsibilities
   A director who is also the Bank's attorney who breaches his of fiduciary duty commits per se unsafe and unsound practices.

   [.14] Fiduciary Responsibilities—Breach
   Director/lawyer authorizing payment in connection with transactions without knowing why the Bank was paying, or disregarding the reasons violated fiduciary duties.

   [.15] Fiduciary Responsibilities—Conflicts of Interest
   Creating a partnership between director's law firm and bank management to use Bank's dormant Trust Department for personal gain and failing to disclose the conflict of interest is breach by director/lawyer.

   [.16] Prohibition, Removal, or Suspension—Personal Gain
   Plan to have Bank finance bank officer's acquisition of control of Bank through a holding company, including payment of $278,000 in expenses is personal gain at Bank's expense.

   [.17] Prohibition, Removal, or Suspension—Personal Gain
   Director receiving direct legal fees from Bank for helping Bank officers establish companies to gain control of Bank is personal gain for purposes of FDI Act.

   [.18] Prohibition, Removal, or Suspension—Bank Losses
   Bank payments of over $400,000 in expenses and loan losses attributable to dubious arrangements and loans set in motion by Respondents are Bank losses for purposes of the FDI Act.

   [.19] Prohibition, Removal, or Suspension—Bank Losses—Failure to Disclose
   Respondent's failures to disclose numerous schemes to raise money to take control of the Bank and giving the Bank Board an opportunity to avoid unsafe and unsound contracts, travel expenses and loans which depleted Bank's capital resulted in loss to the Bank.

   [.20] Prohibition, Removal, or Suspension—Personal Dishonesty
   Participation in and failing to disclose misuse of Bank funds, concealing contracts, and purpose of partnerships is personal dishonesty.

   [.21] Prohibition, Removal, or Suspension—Personal Dishonesty
   Failure to properly disclose role in conflicting entity is personal dishonesty.

   [.22] Prohibition, Removal, or Suspension—Willful disregard for safety or soundness
   In spite of claims of limited knowledge, director who is also lawyer, and present at FDIC meetings where termination of insurance for the Bank was discussed, who approves expenditures and acquiesces in plans harmful to bank is knowing and willful disregard for safety of the Bank.

   [.23] Fiduciary Responsibilities—Failure to Inquire
   Director/lawyer's failure to know or failure to inquire about obviously suspicious situations is abdication of fiduciary duties.

   [.24] Fiduciary Responsibilities—Failure to Inquire
   Director has obligation to inquire as to the purpose of expenses that are not for the Bank's benefit.

{{7-31-99 p.A-3020}}
   [.25] Evidence—Hearsay
   Hearsay evidence is permitted by FDIC Rules if it is relevant, material, reliable and not repetitive, so a letter found to be more credible than witness is allowed.

   [.26] Bias—FDIC Attorney
   The allegations against FDIC, even if proven, would not rebut the charges against Respondents nor absolve them of liability so is not relevant.

   [.27] Administrative Law Judge's (ALJ's)—Authority—Constitutional question
   Congress has the authority to vest authority in non-Cabinet agencies, such as the FDIC, Office of Thrift Supervision (OTS) and the Office of Financial Institution Adjudication (OFIA), to appoint inferior officers and pursuant to that authority, Congress directed federal banking agencies, under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), to hire a pool of ALJs. In light of that, the ALJ here was validly appointed within the meaning of the constitution's Appointment Clause.

   [.28] Administrative Procedures Act (APA)—Financial Institutions Reform, Recovery and Enforcement Act (FIRREA)
   FIRREA, allowing the appointment of an ALJ from a pool of ALJs, does not violate the Administrative Procedures Act requirement that agencies appoint as many ALJs as are necessary.

   [.29] Administrative Procedures Act (APA)—Appointment of ALJ
   The APA is not violated by FIRREA which allows sharing of ALJs with banking expertise because it is simply a variation on the APA's provisions allowing sharing.

In the Matter of
MICHAEL D. LANDRY AND
ALTON B. LEWIS
Individually, and as
Institution-Affiliated Parties of
FIRST GUARANTY BANK
HAMMOND, LOUISIANA
(Insured State Nonmember Bank)
ORDER TO REMOVE AND TO
PROHIBIT FROM FURTHER
PARTICIPATION

FDIC-95-65e

INTRODUCTION1

   The Federal Deposit Insurance Corporation (the "FDIC") initiated this action on April 30, 1996, pursuant to section 8(e)(1) of the Federal Deposit Insurance Act (the "FDI Act"), 12 U.S.C. §1818(e)(1). A Notice of Intention to Remove From Office and to Prohibit From Further Participation ("Notice") was issued against Alton B. Lewis and Michael D. Landry ("Respondents," "Respondent Lewis," "Respondent Landry," "Lewis" or "Landry").2 The Notice alleges that as a result of the Respondents' alleged violations of applicable laws and regulations, unsafe or unsound banking practices, and breaches of fiduciary duty, First Guaranty Bank, Hammond, Louisiana (the "Bank") suffered financial loss or other damage, and there has been actual or potential prejudice to the depositors and gain to the Respondents. The notice further alleges that these violations, practices and breaches demonstrate the Respondents' personal dishonesty or willful or continuing disregard for the Bank's safety or soundness.
   At the time of the activities alleged in the Notice, each of the named respondents was an institution-affiliated party of the Bank as that term is defined in section 3(u) of the FDI Act, 12 U.S.C. §1813(u): Rick A. Jenson


1 Citations to the record shall be as follows:
   Recommended Decision               "R.D. at ____."
   Transcript                                       "Tr. at ____."
   Exhibits                          "Resp./FDIC Ex. ____."
   Exceptions         "Landry/Lewis Except, at ____."
2 The Notice also named Rick A. Jenson, Scott P. Crabtree, and Danna A. Doucet as respondents. Each stipulated to the entry of an Order of Prohibition prior to the hearing.

{{7-31-99 p.A-3021}}was the Bank's chief executive officer, president, and a member of its board of directors; Scott P. Crabtree was a salaried Bank "turn-around" consultant;3 Respondent Landry was the Bank's senior vice-president, chief financial officer and cashier;4 Alton B. Lewis was a member of the Bank's board of directors, chairman of the board's executive committee, chairman of the board's trust committee, the board's secretary, and a member of its incentive stock option, directors loan, compensation and property management committees, as well as a legal counsel to the Bank.
   Administrative Law Judge Walter J. Alprin (the "ALJ") convened a hearing in this matter on October 6, 1997, which continued from day-to-day until its close on October 20, 1997. He issued his Recommended Decision, recommending the entry of an order to remove and prohibit against Respondents on August 14, 1998. Respondents Landry and Lewis filed Exceptions to the Recommended Decision. The matter was transmitted to the Board of Directors of the FDIC (the "Board") for final agency decision on September 30, 1998.

PROCEDURAL HISTORY

   During the pre-hearing stage of this proceeding, Respondent Landry challenged the denial of his Motion to Compel Production of Documents in a request for interlocutory review.5 That request was denied on April 7, 1997, by the Executive Secretary pursuant to delegated authority, upon the advice and recommendation of the Deputy General Counsel, because it did not satisfy the standards for interlocutory review. In giving careful consideration to these discovery issues and to create a better record for review, after submission for final agency decision, it was determined that a more detailed Privilege Log was necessary. Accordingly, the Executive Secretary, on November 30, 1998, pursuant to delegated authority, issued an Order to Reopen Record requiring FDIC Enforcement Counsel to submit a more complete Privilege Log and to permit Respondents to make a supplemental responsive filing.
   On November 11, 1998, Respondent Landry filed a Motion to Compel to complete the Record alleging that certain documents were not provided to the Board of Directors of the FDIC ("Board") as part of the record. FDIC Enforcement Counsel responded on November 30, 1998. Respondent's Motion is denied. Not only is it untimely, being filed almost sixty days after Respondent's Exceptions were filed and almost ninety days after the record was initially certified to the board, but it is totally frivolous. The Memorandum to the Executive Secretary from the ALJ certifying the record to the Board clearly indicates that the documents which Respondent claims were omitted from the record were, in fact, transmitted to the Board as part of the record. Landry's claim regarding the failure to include privileged documents which were excluded from the proceedings was preserved by his Exception on that point.

   [.1] On December 9, 1998, Landry filed a Request For Interlocutory Review of the Order to Reopen the Record ("Request For Interlocutory Review"). This Request For Interlocutory Review alleges that the Executive Secretary's issuance of the Order to Reopen Record is not authorized by the FDIC Rules of Practice and Procedure ("FDIC Rules"), and that the Order, itself, violates section 308.40(c)(2) of the FDIC Rules, 12 C.F.C. §308.40(c)(2), which provides for the Board to render a final decision within 90 days after a case has been submitted for final decision.
   Respondent Landry's Request For Interlocutory Review does not meet the criterion for interlocutory review established under the FDIC Rules, 12 C.F.R. §308.28(b); however, the Board will address the merits of the


3 In 1988, Jenson and Scott Crabtree entered into a contract with then Bank president, Josh A. Cox, to collaborate and pool their expertise in the purchase of troubled financial institutions. In July 1991, Jenson hired Crabtree as a consultant to the Bank for an initial salary of $1,000 per week. Crabtree held himself out as the Bank's "Director/Merchant Banking Services." He continued to serve in this capacity until his services were terminated by the board of directors in December 1992.
4 Although not an elected member of the Bank's board of directors, Respondent Landry attended every meeting of the board of directors and its executive committee throughout the 1991–1992 time period addressed in the Notice. R.D. at 4.
5 In September 1997, only three weeks prior to the commencement of the hearing, Respondent Landry also filed a Motion to Disqualify the ALJ, or in the Alternative, Motion to Dismiss for Lack of Jurisdiction. Respondent Lewis filed a motion to join in Landry's motion, which was granted at the opening of the hearing. The ALJ's denial of this motion is contained in his Recommended Decision and is affirmed by the Board.

{{7-31-99 p.A-3022}}request at this juncture. First, filings submitted after transmittal of the record to the Board, like Landry's, necessarily invoke the possibility of delay, especially where the record is as extensive as it is in this case. Second, administrative procedures are generally flexible enough to allow agencies discretion to reopen records upon the receipt of new evidence or new arguments. Third, the assertion that the Board cannot act outside the prescribed ninety-day period has been repeatedly rejected by the United States Supreme Court and the United States Courts of Appeal. See United States v. James Daniel Good Real Property, 510 U.S. 43 (1993); United States v. Montalvo-Murillo, 495 U.S. 711(1990); Brock v. Pierce County, 476 U.S. 253 (1986); Hendrickson v. Federal Deposit Insurance Corporation, 113 F.3d 98 (7th Cir. 1997); Brotherhood of Ry. Carmen Div. v. Pena, 64 F.3d 702 (D.C. Cir. 1995). The Board reiterates the standard set forth in these cases. Nothing in section 308.40 of the FDIC Rules, 12 C.F.R. §308.40, or section 8(h) of the FDI Act, 12 U.S.C. §1818(h) divests the Board of its jurisdiction to issue final orders for the failure of the FDIC's Board to fully adjudicate a case within the ninety-day period.
   The Board reviewed the Revised Privilege Log submitted by FDIC Enforcement Counsel and determined that privilege was appropriately asserted for forty-four documents. It concluded, however, that the Revised Privilege Log did not identify forty-six (46) documents sufficiently to enable the Board to decide the privilege issue. In order to avoid further delay resulting from a remand of the case to the ALJ, the Board again reopened the record of this case on February 22, 1999, and ordered FDIC Enforcement Counsel to produce the forty-six documents in question for the Board's in camera inspection.6

   [.2] On February 26, 1999, Respondent Landry filed a Request for Interlocutory Review of the Second Order to Reopen the Record. He again challenges the delay caused by reopening the record and asserts that the delay and the failure of the ALJ to conduct an in camera review at the time Respondent filed his Motion to Compel Production of Documents requires dismissal of the action. Respondent's Request is denied for the reasons set forth above regarding his December 9, 1998 Request For Interlocutory Review. In the interests of justice the Board may re-open the record and control the flow of an enforcement proceeding to provide a complete record and to otherwise insure a fair and impartial adjudication. See 12 C.F.R. § §308.4, 308.5. The record of the case was again closed on March 4, 1999.7

   [.3] After in camera inspection, the Board sustains the assertion of privilege with respect to all or part of 18 documents. With respect to the remaining documents reviewed in camera, the Board finds the assertion of the deliberative process privilege unsupportable, but that the failure to disclose these documents is harmless in light of all the evidence in this case. Therefore, disclosure is not required.

   [.4] The withheld documents contain no exculpatory material, no information contradicting the documentary or testamentary evidence properly admitted, and most significantly, contain no probative evidence not already in the record. Many of the documents are totally irrelevant to the charges against Respondents. Other documents relate to the financial condition of the Bank at the time relevant to the Notice, a fact to which both Respondents stipulated, and still other documents provide information which simply duplicates information that is already in the record. None of these documents materially changes the body of evidence upon which the ALJ's recommendation, and ultimately the Board's decision, is based. As such, they are merely cumulative. Evidence that is merely cumulative of other evidence establishing the basis for the agency's action does not affect a substantial right and is not a proper ground for reversal. See United States v. Treadwell, 760 F.2d 327 (D.C. Cir. 1985), cert. denied, 474 U.S. 1064 (1986); Jane Doe v. Hampton, 566 F.2d 265 (D.C. Cir. 1977); Granza v. United States, 377 F.2d 746 (5th Cir. 1967).


6 At the time the original Privilege Log was submitted to Respondents, they received 20,000 pages of responsive documents. See Decision and Order on request for Interlocutory Appeal, April 7, 1997, page 2. Since that time, Respondents have received six additional items identified on the Privilege Log and portions of two other items. Accordingly, these documents were excluded from the Board's consideration.
7 FDIC Enforcement counsel responded to Landry's Request for Interlocutory Review of the Second Order to Reopen The Record on March 16, 1999. It was unnecessary to consider this additional pleading. On April 12, 1999 Respondent Landry submitted a Notice of Filing of Schledwitz v. United States, No. 97-6057, 1999 WL 104467 (6th Cir. Mar. 3, 1999). See footnote 4, Appendix to this Decision and Order.

{{7-31-99 p.A-3023}}
   Accordingly, Respondent Landry's Exception to the failure to grant his Motion to Compel is rejected.8 The Board's analysis of the privilege assertions of FDIC Enforcement Counsel is contained in the Appendix to this Decision and Order.

THE RECOMMENDED DECISION

   The ALJ made extensive findings of fact after combing through a large and complicated record. He recommended the issuance of an order of removal and prohibition against Respondents. In support of his conclusions, the ALJ specifically found that the FDIC had established, by a preponderance of the evidence, each of the elements of an action pursuant to section 8(e) of the FDI Act.
   The Board has reviewed the record in its entirety, including the lengthy Exceptions and Memoranda of Law in Support of Exceptions filed by each Respondent and the issues raised by Respondent Landry's Motion for Interlocutory Review. The Board affirms the recommendation of the ALJ and adopts his Recommended Decision, Findings of Fact and conclusions of Law, as discussed herein.

FACTS

   From the late 1980's through the time discussed in the Notice, the Bank was in severe financial straits and had been the subject of substantial regulatory concern. Although the Bank had been placed in the FDIC's capital forbearance program, it had not met its financial expectations and its capital condition was deteriorating. On September 11, 1990, the FDIC issued a Capital Directive pursuant to section 908 of the International Lending Supervision Act of 1983, 12 U.S.C. §3907, and section 325.6 of the FDIC Rules, 12 C.F.R. §325.6. The Capital Directive required that the Bank obtain a $4,7000,000 capital infusion by January 31, 1991. An examination of the Bank as of April 26, 1991, demonstrated that it was not in compliance with this regulatory directive.9
   Following the 1991 examination of the Bank, a joint meeting of the Bank's board of directors, the Louisiana Office of Financial Institutions and the FDIC was held. Respondents Landry and Lewis were among those who attended this meeting. The FDIC informed the Bank that it would proceed with an action to terminate its Federal deposit insurance because of the Bank's critically deficient capital position. As of the 1992 examination, the Bank was a candidate for near-term failure. Tr. at 88; FDIC Ex. 3.10
   It is against this background that Bank senior management, including Respondent Landry and with the participation of Respondent Lewis, began to devise a scheme which would, at the Bank's expense, enable them to recapitalize and take control of the Bank with no investment of their own. The activities engaged in by Respondents are not in dispute. Rather, the motivation for the activities, the responsibility for the activities and the obligation to disclose these activities to the Bank's board of directors are in dispute. The Recommended Decision contains a detailed discussion of the facts which will not be repeated here. The Board will summarize the facts needed to provide the necessary underpinning for its decision.
   Many of the relevant transactions are described in detail by Respondent Landry in a June 3, 1993 letter with approximately 500 pages of attachments that he submitted to FDIC Examiner-in-Charge Martin Cooper in response to the FDIC's Confidential Officers Questionnaire ("Landry Letter"), the contents of which he adopted at the hearing. Tr. at 1793–94; FDIC Ex. 121 and attachments.


8 The Board affirms the ALJ's December 6, 1996 Order on Respondent Landry's Motion For Document Production by Petitioner, to the extent not inconsistent with this Decision and Order. The ALJ recognized that Respondents' discovery requests in this case bordered on the abusive. He appropriately sought to limit the scope of discovery and to prevent the process from becoming a fishing expedition in the government's files. This is a civil administrative proceeding, not a criminal prosecution and not a civil court proceeding. While discovery is permitted, it is limited.
9 Pursuant to the requirements of the Capital Directive, the Bank undertook a stock solicitation in October 1990 and received only nominal stock subscriptions, resulting in the solicitation's cancellation. As of December 31, 1990, the Bank's primary capital to total assets ratio was 2.89 percent, and the Bank's 1990 earnings were negative $937,000. As of April 26, 1991, the Bank's part 325 Tier 1 capital to Part 325 total assets ratio was 1.04 percent; the Bank had negative earnings of $363,000, and its adversely classified items equaled 269 percent of the total capital and loan loss reserve ineligible for inclusion in the Bank's Tier 2 capital. As of February 14, 1992, the Bank's part 325 Tier 1 capital to Part 325 total assets ratio equaled 1.54 percent, and the Bank's adversely classified items equaled 303.60 percent of its total capital and loan loss reserve ineligible for inclusion in the Bank's Tier 2 capital.
10 The parties stipulated that the Bank was in "desperately poor financial condition." Tr. at 1533.

{{7-31-99 p.A-3024}}Although the letter is self-serving in many ways, it is also credible evidence because the facts it describes are generally supported by other documentation and not denied by Landry or Lewis.
   To summarize: Respondent Landry, Jenson and Crabtree attempted to appropriate the Bank by creating a bank holding company which they would control, Pangaea Corporation ("Pangaea"), under the guise of Bank recapitalization efforts. The takeover scheme contemplated that Respondent Landry, Jenson, and Crabtree would control the Bank through their seventy percent interest in the holding company, which would obtain eighty percent of the Bank's stock. Landry, Jenson, and Crabtree would exercise control without any investment in Pangaea or the Bank. In furtherance of this plan, Respondent Landry, appearing to act on behalf of the Bank, with the knowledge and assistance of Respondent Lewis, and with no disclosure to the Bank's board, engaged in a number of improper activities. Most significantly, no disclosure of the true purpose of Pangaea and the intent of its incorporators (Jenson, Crabtree and Landry) was made to the Bank or to its regulators. A partnership entity consisting of Landry, Jenson and Crabtree and Respondent Lewis' law firm was designed to solicit international funds for Pangaea without disclosure to the board. The partnership was named Inter American Investment Services ("IAIS"). The Bank entered into costly service contracts with Funding Placement Services and Dakin & Willison; entered into costly employment contracts with William White Bolles and Richard Crabtree, Scott Crabtree's father; made high-risk loans to Pangaea investors Robert F. Smith and Robert G. Smith; and absorbed the costs and travel expenses of trips to Vancouver, British Columbia, and Quito, Ecuador associated with the capitalization of Pangaea.

A. Formation of Pangaea

   In August 1991, Respondent Landry, Jenson, and Crabtree produced a booklet entitled "Pangaea: Finance With a Global Perspective" ("Pangaea Booklet") which revealed their strategy for a management takeover of the Bank. The Pangaea Booklet discussed the formation of a corporate entity to be organized as a bank holding company, separate from the Bank, whose principals were Respondent Landry, Jenson, and Crabtree. The principals were to acquire 70 percent of the common stock in Pangaea. Outside investors would receive preferred stock in Pangaea and an option for 30 percent of Pangaea's common stock. Pangaea would own 80 percent of the common stock of the Bank. Landry, Jenson and Crabtree were to receive their 70 percent ownership in Pangaea, and thereby control the Bank, without any personal investment for their shares of Pangaea. (FDIC Ex. 11). The intention to acquire control of the Bank is explicitly set forth in the first paragraph of the accompanying document and is thereafter repeated.11
   At an August 8, 1991, executive meeting of the Bank's board of directors, attended by Respondent Landry (and Jenson), Jenson presented the "Pangaea Plan" as a Capital Enhancement Plan ("CEP"). No mention was made of a management takeover of the Bank, but the CEP was presented as a plan that would establish Pangaea as a "phantom bank" to engage in activities that the Bank could not and to raise capital for the Bank. The board was told that the CEP would cost the Bank $25,000 or less, and it was unanimously approved. Twenty-five copies of the Pangaea materials were then mailed by the Bank to persons in Vancouver, British Columbia who had been included on a list of the wealthiest persons in the world. Landry, Jenson and Crabtree then visited the Vancouver recipients from August 19–24, 1991, as previously arranged before the August 8 meeting
   On August 15, 1991, Lewis learned of the Pangaea proposals at a meeting with Jenson.12 Lewis was asked to reserve the corporate name "Pangaea" with the Secretaries of State for Delaware, Texas, and Louisiana. On August 22, 1991, Lewis reserved the name in Louisiana. At his office he "calendared" the reservation for renewal upon its regular expiration, prepared his file on Pangaea, showing the Bank as the client, and charged the reservation of the name to the


11 Respondent Landry considered the Pangaea Booklet a stock offering document. FDIC Ex. 121 p. 1.
12 Lewis was not present at the August 8,1991 meeting of the board of directors, but he later signed the minutes of the meeting as secretary to the board (FDIC Ex. 71). On August 15, Lewis approved the distribution by Federal Express of 25 Pangaea packets to potential investors in Vancouver. (Tr. at 1248–1250; FDIC Ex. 121, pg. 2; FDIC Ex. 121, Attachment 2).

{{7-31-99 p.A-3025}}Bank (Tr. at 986; Tr. at 1249, 1255–56, 1275–76; FDIC Ex. 300).
   On August 26, 1991, the Bank's executive committee met with Respondent Landry, Respondent Lewis and Jenson in attendance. Jenson spoke about the Vancouver trip and the "Pangaea Plan," and he distributed copies of the Pangaea Booklet, all of which were collected at the end of the meeting. Respondent Lewis thumbed through the booklet at the meeting, but he did not keep a copy. At no time during the meeting did Lewis comment upon the plans for Landry, Jenson and Crabtree to incorporate Pangaea as a bank holding company and ultimately own the Bank through their ownership of Pangaea.
   Meanwhile, the Bank wrote a letter dated August 12, 1991, to the FDIC, which included a copy of the CEP and draft copy of the Pangaea Booklet, informing it of the recapitalization plan. The CEP proposed that the Bank solicit $16,000,000 in capital for a holding company named "Pangaea Corporation" to recapitalize the Bank. Of the $16,000,000, solicited, $7,500,000 would be injected into the Bank as capital. The proposal called for $2,500,000 of the $7,500,000 to be injected through the purchase of the Bank's common stock, and $5,000,000 to be used for the purchase of preferred stock to be issued which would carry a guaranteed 10 percent dividend rate. Of the $8,500,000 balance remaining (from the original $16,000,000) $6,500,000 would be used to form a limited partnership which would buy other real estate from the Bank's asset portfolio, and $2,000,000 would be used to pay holding company expenses and finance the other ventures proposed in the CEP, (Tr. at 80-83; FDIC Ex. 14, pgs. 8–10; FDIC Ex. 71).
   By letter dated August 30, 1991, the FDIC informed the Bank's board of directors that the FDIC believed the CEP was inadequate because it "makes no provision for a necessary injection in the short term and provides what appears at best to be a highly speculative prospect for large capital flows from international and corporate sources in the longer term. Little reliance can be placed on prospects for capital from local investors or merger partners as these have been unsuccessfully explored for at least the past two years." The FDIC notified the Bank that it was recommending the initiation of deposit insurance termination procedures. (Tr. at 84–87; FDIC Ex. 296, g. 1).
   At a September 11, 1991, meeting of the Bank's board of directors, attended by both Respondents, the August 30 letter from the FDIC was discussed. Respondent Lewis did not inform the board that he had already reserved the corporate name "Pangaea Corporation." Respondent Landry did not inform the board that he and Jenson and Crabtree, not the Bank's current shareholders, would be Pangaea's controlling shareholders. (Tr. at 720-722; FDIC Ex. 73; FDIC Ex. 296.)

B. Inter American Investment Service

   In August 1991, changes in U.S. immigration laws were proposed which would allow foreign nationals to receive United States citizenship if they invested $1 million in a new business venture in this country that provided ten or more new employment positions. Respondent Landry, Jenson, and Crabtree conceived of a partnership, IAIS, in which they, together with Respondent Lewis' law firm, Cashe, Lewis, Moody & Coudrain ("CLMC"), would be equal partners.13 They also planned that a corporation, "Amer Invest," would be formed to be the general partner. CLMC's contribution to the partnership was to be the performance of legal work. Respondent Landry, Jenson and Crabtree intended to use this vehicle to find foreign nationals seeking to obtain U.S. citizenship under the new legislation. The proposed legislation was similar to Canadian immigration law. Thus, the trip to Vancouver enabled Respondent Landry, Jenson and Crabtree to make contacts concerning IAIS. (FDIC Ex. 121; Lewis Ex. 41, pg. 34).
   The proposed changes in immigration law also played a role in the Pangaea Plan, as it was described in the Pangaea Booklet, and they were a component of the CEP forwarded to the FDIC. Respondent Lewis began reserving the corporate and trade names "Inter American Investment Services" and "Amer Invest" with the Louisiana Secretary of State in October 1991, and he continued to reserve these names through September 1992. (FDIC Ex. 265; Lewis Ex. 41.) Respondent Lewis had a CLMC associate prepare a legal memorandum on the proposed


13 The Landry Letter gives the address of IAIS as 400 Thomas Street, Hammond LA, which is the Bank's address, FDIC Ex. 121.

{{7-31-99 p.A-3026}}changes in immigration law, a copy of which was disseminated to members of the CLMC firm on October 28, 1991 (Tr. 1058–1061; 1267; FDIC Exs. 131, 131a). The CLMC firm did not bill the Bank for the legal work on behalf of IAIS or Amer Invest.
   Respondents Landry and Lewis attended the Bank's board meeting on November 14, 1991, at which Jenson presented a draft trust agreement, involving the Bank's Trust Department, which would be used by a partnership to attract $1 million each from foreign nationals who wanted to participate in the immigration scheme. The minutes of the meeting do not identify the partnership. (Tr. at 725, 136–137; FDIC Ex. 76.) Bank director Bill Hood testified that he thought the partnership was to be between Jenson and Crabtree, that Lewis was to do the legal work for them, and that none of the expenses would be paid by the Bank. (Tr. at 1725–26.) The chairman of the board, Mary Ann Cefalu, testified that she did not hear of IAIS until sometime well after the November 14, 1991 meeting, and the secretary taking notes of the meeting testified that the only role described for Lewis' law firm was assisting the Bank to prepare proper legal documents for use by its Trust Department. Tr. at 725, 1749, 1778. The Bank's Trust Department had been dormant since 1984.

C. Funding Placement Services

   On December 6, 1991, the Bank agreed to pay Funding Placement Services ("FPS") the sum of $20,000 under a Business consultant's Agreement to solicit individuals, partnerships, corporations, and other business entities to provide services in preparing a preferred stock offering for the Bank. According to the Landry Letter, however, these services were intended to help carry out the Pangaea Plan, not further the Bank's interest.14 Tr. at 148–49, 163–64; FDIC Exs. 121, 151.
   In April 1992, after meeting with individuals associated with FPS, Jenson and Crabtree met in Los Angeles with representatives of an entity named "Blue Rose Investors" ("Blue Rose"). The Bank paid $15,000 to FPS for the introduction to Blue Rose, using a check signed by Respondent Landry. There was a fee splitting agreement between Blue Rose and FPS, and there was also a fee splitting agreement between FPS and Pangaea. Tr. at 547; FDIC Ex. 121 Attachment 4, pg. 4; FDIC Exs. 4, 151 and 151a. The FPS connection led to other questionable transactions, examples of which are discussed below.

1) Robert F. Smith Loan

   Notwithstanding the Business Agreement between the Bank and FPS, a Memorandum of Understanding ("MOU") dated May 5, 1992, between Pangaea and FPS established that loan fees and commissions would be evenly divided between the Pangaea and FPS. FDIC Ex. 151. The Bank extended $450,000 in credit to one Robert F. Smith, an out-of-territory businessman introduced to the Bank through FPS. Shares of common stock in USA Waste Services were provided as collateral. This stock was subsequently discovered to be restricted by Securities and Exchange Commission and Internal Revenue Service liens or subject to rules that limited the way it could be liquidated. The stock was not in the Bank's possession at the time the loan was made Tr. at 548–49; FDIC Ex. 4, pg. 2-a-10, FDIC Ex. 275. As described by the ALJ, "other peculiar and unusual circumstances" surrounded this loan:

    Although Landry was not a loan officer, he acted as the loan officer for this loan;
    Landry insisted upon acting as an intermediary between senior Bank loan officer Mike Lofaso and the borrower;
    The senior Bank loan officer handling the loan was opposed to the credit's extension and refused to present the loan application to the Bank's loan committee;
    Landry presented the loan application to the Bank's loan committee while the senior Bank loan officer was on vacation;
    Landry had never presented a loan to the loan committee prior to the Robert F. Smith loan;
    The amount of the loan request, $450,000, was unusually large, the borrower was located outside the bank's lending area and otherwise unknown to the Bank, and the credit bureau reports on the borrower disclosed a number of judgments and liens.

* * *

    [T]he loan committee tabled the loan, and

14 The Business Consultant's Agreement between the Bank and FPS refers to the preparation of documents for a private placement offering. The Landry Letter states that Landry received instructions to wire FPS $20,000 "to write a preferred stock offering for the Pangaea Corporation concept." FDIC Ex. 121 p. 3.

{{7-31-99 p.A-3027}}
    it was subsequently approved only upon Jenson's personal lending authority. R.D. at 32–33.
The loan was classified "substandard" at the April 1993, examination

2) Robert G. Smith Loan

   On March 24, 1992, the Bank loaned $13,000 to an FPS principal, Robert G. Smith, for the purchase of a used 1980 Porsche. The loan was made at about the time Pangaea entered into the fee splitting MOU with FPS. The credit bureau report on Robert G. Smith disclosed that he had two different social security numbers, and an investigator hired by the Bank could not verify Robert G. Smith's given address. Nonetheless, Respondent Landry, Jenson and Crabtree pressured Bank employees into presenting the loan, which was approved. The loan went into default and was charged off by the Bank.

3) Place Vendome

   On April 2, 1992, Jenson authorized a loan of $450,000 to GABL Corporation, whose principals were Byford Beasley (who participated in other Pangaea activities), George Russell, Adolph LaPlace, and Lenny LaPlace. The loan was placed through FPS. It was a loan for the development of a shopping mall in Baton Rouge, Louisiana, named Place Vendome. Respondent Landry acted as either escrow agent or trustee for several wire transfers of funds for Place Vendome between April 17, 1992, and June 9, 1992. Place Vendome was not a customer of the bank and did not have a relationship with the Bank. Thus, it did not have a trust account at the Bank into which funds could be deposited until the Bank, as trustee, was instructed regarding distribution of funds. Respondent Landry agreed, nevertheless, to receive funds for Place Vendome and pass the funds to third parties pursuant to directions provided by Place Vendome principals. In his role as transfer agent, Respondent Landry issued checks and wire transfers on Place Vendome's behalf and at its direction. Jenson negotiated a $10,000 fee to be paid to the Bank by Place Vendome for these services, but the Bank never received the $10,000 fee or payment for the costs it incurred in issuing checks and wire transfers for Place Vendome. Landry Answer, Par. 35.
   On May 1, 1991, Place Vendome was placed under a temporary injunction by the U.S. District Court for the Eastern District of Louisiana, prohibiting Place Vendome's "disposition, transfer, pledge, encumbrance, assignment, dissipation, concealment or other disposal whatsoever of any funds or assets . . ." and the "pledge, transfer, encumbrance or assignment of assets in connection with the financing of the Place Vendome Mall project." Notice, Par. 27(a). Respondent Landry had notice of the temporary injunction and knew that the payments on Place Vendome's behalf from April to June 1992 were in direct violation of its terms. As a result of these violations of the May 1, 1991 order, the Bank and Respondent Landry were sued by Place Vendome's receiver in Bankruptcy. The lawsuit alleged that Respondent Landry and the Bank wrongfully transferred $649,000 in violation of the order. In 1995, the Bank paid $70,000 to the Place Vendome receivership in settlement of the lawsuit. Landry Answer, Par. 35.

D. Other Transactions

   Pangaea Corporation, IAIS, Funding Placement Services and the Respondents, acting in concert with Crabtree and Jenson, undertook numerous additional transactions funded by the Bank. These included: a monthly retainer payment ultimately totaling approximately $69,000 to Dakin & Willison to introduce the IAIS concept to various investment groups; an automobile securitization program involving automobile loan contracts from outside the Bank's lending area, which would enable the purchasers of the securitization to set their own interest rate; a contract with William White Bolles under which Bolles received a monthly fee of $15,000 and was granted a non-exclusive right to contact potential investors and raise capital either for the Bank or for a holding company such as Pangaea Corporation;15 a July 1992, contract between the Bank and Richard Crabtree, Scott Crabtree's father, whereby Richard Crabtree received a $6,000


15 At about the time the Bank entered into the agreement with Bolles, it extended credit to him totaling $40,000. a letter in the Bank's loan file from Bolles stated that he was subject to an outstanding judgment of $26,000,719 for violation of the Racketeering Influence and Corrupt Organization Act ("RICO"). The full amount of this loan and the accrued interest were classified "loss" by the FDIC during its April 1993 examination and were ultimately charged off by the Bank.

{{7-31-99 p.A-3028}}payment for one month of non-exclusive representation of the Bank in contacting potential investors. In addition, Richard Crabtree was granted pre-approved expenses in connection with his retention to obtain deposits for the Bank's Trust Department and ten percent of the earnings for ten years by the Bank's Trust Department on accounts established as a result of his efforts. FDIC Exs. 277, 121.
   During the summer of 1992, Respondent Landry, Jenson, Byford Beasley (of GABL Corporation) and a man named Nix and his girlfriend traveled to Quito, Ecuador to investigate a capital "leverage" scheme.16 Landry had been told that in Ecuador one could invest $200,000 in U.S. dollars and in six weeks convert the amount to a million dollars. In correspondence between Landry and Jenson, using Pangaea letterhead,17 with Ed Neal of Quito, Ecuador, the terms of an agreement were discussed whereby the Bank would loan $3 million to Pangaea Corporation, enabling it, through the use of this Ecuadoran currency scheme, to accumulate sufficient funds to purchase the common stock of the Bank. Thus, according to Landry, "the Bank would be recapitalized with control placed in the hands of the incorporators of Pangaea Corporation." Tr. at 589–591; FDIC Ex. 174. The security for the loan was to be a pledge of all the shares of Pangaea and the Bank shares thereafter to be purchased with the proceeds from this transaction.
   Another letter from Respondent Landry to Ed Neal stated:
    Pangaea Corporation will grant up to a 15 percent interest in its current outstanding common equity as of June 15, 1992, to a trust held by Rothschild Trust on behalf of you or your assigns, heirs or affiliates. Such stock will be granted incremental in three installments as the preferred stock investment described in item 1 is funded. For each $2 million in preferred stock, Pangaea Corporation will grant 5 percent of the current June 15, 1992, outstanding common equity. For such consideration, you agree not to support any action now or in the future that would result in the dilution of the ownership interests of Mr. Rick Jenson, Mr. Michael D. Landry and Mr. Scott P. Crabtree, 85 percent collectively, unless support of such action is executed by Mr. Jenson and Mr. Landry as duly authorized proxies on your behalf.

(Emphasis added.) (Tr. at 473–474; FDIC Ex. 121, pg. 9–10; FDIC Ex. 142.) The Bank did not receive any benefit from this expedition to Ecuador and incurred travel expenses in the amount of $20,000. The Bank paid the travel costs of the non-Bank personnel who accompanied Respondent Landry and Jenson, and these were not reimbursed.
   While all of this activity was occurring, offers were being made to purchase the Bank.18 The first interest expressed was in the Fall of 1991 from Pai H. Chan, an Oregon bank owner looking to expand his financial enterprises. Chan and Jenson negotiated over many months, but Jenson was never satisfied with the deal. In September 1992, Jenson identified a group headed by Victor Weygard, which intended to recapitalize the Bank using a modification of the Pangaea Plan. Finally, Marshall Reynolds offered to invest $3,000,000 in the Bank and the board of directors approved the Reynolds recapitalization plan in its entirety on December 29, 1992, and it was subsequently approved by the FDIC.

DISCUSSION

   To meet its burden in this prohibition action, FDIC Enforcement Counsel must show that the Respondents have engaged in prohibited conduct, the effect of which was to cause the Bank to suffer financial loss or damage, to prejudice or potentially prejudice the Bank's depositors, or to provide financial gain or other benefit to the Respondents. FDIC Enforcement Counsel must also prove that such misconduct evidences personal dishonesty or demonstrates a willful or continuing disregard for the safety or soundness of the bank. 12 U.S.C. §1818 (e)(1). As set forth in the ALJ's Findings of Fact, all of which are amply supported in the record and which the Board adopts, FDIC Enforcement Counsel have presented substantial evidence with respect to both Respondents sufficient to sustain this action.

   [.5] FDIC Enforcement Counsel have proven that Respondents engaged in misconduct by:


16 The Bank also paid for Landry's travel to Warsaw and London with Beasley. R.D. at 35; FDIC Ex. 121.
17 The address of Pangaea Corporation is the address of Respondent Lewis' law firm.
18The FDIC agreed to delay initiation of its insurance termination proceedings while these proposed recapitalization plans were being discussed by the Bank's board of directors.

{{7-31-99 p.A-3029}}
   (1) using Bank funds for the personal benefit of the Pangaea principals and their proposed IAIS partners; (2) extending credit to out-of-territory borrowers on terms and under circumstances that resulted in the loans being adversely classified by bank regulators or written off by the Bank; (3) engaging in unsafe or unsound practices and breaches of fiduciary duties arising from failures to inquire or make disclosure regarding activities known to be in the interest of Respondents and not in the interests of the Bank; and (4) failing to disclose material changes in the Bank's operations in compliance with the FDIC's disclosure requirements. Such misconduct resulted in financial gain to the Respondents, loss to the Bank and potential prejudice to the depositors. The record conclusively demonstrates that Respondents' actions involved personal dishonesty and that they acted with willful or continuing disregard for the safety or soundness of the Bank.
   Respondent Landry, in conjunction with other senior members of Bank management, engaged in an unusual number of activities — some of which can only be described as bizarre — in an effort to secure control of the Bank and to otherwise benefit themselves.19 Although many of these activities are rationalized by Landry as indirect methods of recapitalizing the Bank, it was found by the ALJ and the Board concurs - that Landry's primary goal was to generate capital for Pangaea and recapitalize the Bank through Pangaea, thereby enriching the Pangaea incorporators, himself among them. One of the objectives of Pangaea was to have the Bank pursue non-traditional banking activities. The list of misguided and aborted projects and relationships that management entered into with minimal information and virtually no expertise is shocking. Respondent Landry, together with Jenson and Crabtree, sought and used Bank funds to pay for advice and ideas, which were, at best, unrealistic as vehicles for the generation of sorely needed capital. These included: fee-splitting agreements on behalf of Pangaea with FPS and with Blue Rose; causing the Bank to grant large loans to uncreditworthy out-of-territory borrowers, over the dissent of bank middle management, from which Respondent Landry benefited as a Pangaea principal, through the fee-splitting arrangements; causing the Bank to pay for long-term contracts with consultants (including Scott Crabtree's father) to market the Pangaea concept and the Bank's dormant Trust Department; and causing the Bank to expend funds for travel and related expenses in connection with these activities.
   The Board has carefully reviewed the factual allegations of the Notice and Respondents' proposed Findings of Fact. There is very little disagreement regarding the material allegations. To the extent that disagreement exists, Respondent Landry has misconstrued testimony, inaccurately described events, or relied on testimony taken out of context. In light of the Landry Letter detailing these numerous schemes, it is virtually impossible for Respondent Landry to deny his participation.
   Landry's resignation letter to Jenson, dated September 16, 1992, further describes Landry's role and the activities of Bank senior management:
    This letter is to advise you of my immediate resignation. . . . You have hired numerous "experts" who, for a sizable fee, offered to assist us in our efforts to capitalize Pangaea Corporation and acquire controlling interest of First Guarantee Bank. Funding Placement Services, Richard Crabtree, Dakin & Willison, William Bolles, and others — most have come and gone. All were contracted with on trips or in meetings where I was not present. In most cases, the amount of dollars spent has been proportionately greater than the services rendered. . . .
    Whether or not I have been intended to be the scapegoat all along, I do not know. I only know that I can no longer condone the "self dealing" nature of the transactions which have been entered into for the good of Pangaea Corporation at the expense of First Guaranty Bank. Nor can I endorse any transaction to our Board of Directors without the complete and full disclosure of the potential "self dealing" transactions into which we have entered. . . . FDIC Ex. 119.20

19 Only Respondent Landry was a Pangaea incorporator who would directly benefit from the Pangaea takeover of the Bank. As Bank counsel, however, Lewis and his law firm would benefit directly from the fees generated by incorporation and indirectly from the takeover.
20 Landry is still working for the Bank. His resignation (FDIC Ex. Nos. 119, 120) was not accepted by the board.

{{7-31-99 p.A-3030}}
   [.6] Of necessity then, Respondent Landry attempts to shift the blame to other, allegedly more central characters in the drama. Section 8 of the FDI Act, however, does not require that the FDIC only act against the worst wrongdoer. This Board has frequently been faced with cases involving multiple respondents. Degree of participation or culpability is not an issue. Where the statutory criteria are met, as they are here, an order to remove and prohibit is appropriate. See in the Matter of Irwin Weitz, FDIC-93-91e, 1 FDIC Enf. Dec. ¶5244 (November 1997).
   Of the two respondents remaining in this case, Respondent Landry is the one who most actively participated in the transactions and schemes intended to place control of the Bank in the hands of the Pangaea incorporators. Respondent Lewis portrays himself as a mere passive agent of his client, the Bank. He protests that he has been "simply lumped together with those who had actively formulated and enacted a plan to take over [the Bank] for no consideration in detriment to the shareholders of [the Bank]." Lewis Memorandum in Support of Exceptions to Decision at 6. Lewis argues that a director of a corporation is far less culpable than its chief executive officer or its chief financial officer. Id. at 7. He asks several times why he would have "any higher duty to investigate than any other member of the Board." Id. This argument belies the fact, however, that Respondent Lewis was not merely just "another" director.21 No one on the Bank's board held more positions of trust and responsibility than Lewis. Given the long list of committee chairmanships and positions Lewis held, although he was not involved in the day-to-day operations of the Bank, there was almost no aspect of the Bank's policies, practices or activities in which he was not involved. Respondent Lewis was privy to a wealth of "inside" information that no other director had.

   [.7] As stated by the ALJ, "the linchpin of the case against Lewis as an errant director is that he did not recognize that being a bank director is a responsibility, not a sinecure. It requires vigilant stewardship of the Bank, and an understanding of the limits of conflicting interests." R.D. at 76. Lewis' statement in his own Brief is a perfect example of his erroneous beliefs. "[W]e are not dealing with what Alton B. Lewis `should have known' but what he knew and did." Lewis Br. at 2.22 The law places a greater burden than this on Mr. Lewis, and makes him liable for what he knew or should have known as a prudent director. "The greater the authority of the director or officer, the broader the range of his duty, the more complex the transaction, the greater the duty to investigate, verify, clarify and explain." In the Matter of James F. Baker, FDIC-92-86e, FDIC Enf. Dec. (Bound Vol. 2) ¶5199, A-2277 (1993). The "ostrich" defense of hiding one's head in the sand is unavailable to bank directors. It is no defense, therefore, for a director to merely state, as Lewis does, that he "didn't know anything was going on." Id. "At the very least, the Bank had a right to know all of the facts . . . known to its counsel which may be harmful to it," United States v. Cassiere, 4 F.3d 1006, 1022–23 (1st Cir. 1993). Because Lewis was counsel to the Bank and served in so many board capacities, he had knowledge of legal requirements and of events that other outside directors did not possess, and upon which, as a director, he had a duty to act.

A. Misconduct

   [.8&.9] As noted by the ALJ, the distinction between unsafe and unsound practices and breaches of fiduciary duty is not a clear one in this case. Respondents, however, engaged in so many inappropriate activities that it is not really necessary to draw fine distinctions. A breach of fiduciary duty by a director or officer to the Bank is per se unsafe and unsound. First National Bank of Lamarque v. Smith, 610 F.2d 1258, 1265 (5th Cir. 1980); Independent Bankers Ass'n of America v. Heimann, 613 F.2d 1164, 1168 (D.C. Cir. 1979) cert. denied, 449 U.S. 823 (1980); In the Matter of Robert Stoller, FDIC-


21 Mr. Lewis asserts that "the duty of investigation that is imposed on [him] by [the ALJ's decision] is ridiculous. If this duty is imposed on directors of banks in the United States, then it eliminates the entire need for any executive officers whatsoever." Id. at 8. In his hyperbole Lewis forgets that the Bank was in extremts. A director's duty to investigate and to report is well established in the law and is indeed heightened in a severely undercapitalized institution. In the Matter of Harold Hoffman, FDIC-88-156b&c, FDIC Enf. Dec. Bound Vol. 2, ¶5140, A-1489, 1494 (1989), aff'd, 912 F.2d 1172 (9th Cir. 1990).
22 Respondent Lewis admits that he did not read the minutes of the board of directors before he signed them as secretary. He also claimed to have never done more than "thumb through" the Pangaea booklet even though he knew it was intended as a road map to the critical recapitalization of the Bank. Tr. at 714–716, 1253, 1402–1403, 1700.

{{7-31-99 p.A-3031}}90-115e, FDIC Enf. Dec., Bound Vol. 2, ¶5174, A-1865 (1992). Nonetheless, the ALJ makes findings more than adequately supported by the record that Respondents Landry and Lewis each engaged in unsafe and unsound practices and breaches of fiduciary duty. See R.D. at 56–78.
   The fiduciary duties of institution-affiliated parties to a bank for the purposes of section 8(e) of the FDI Act are established by Federal law.23 Directors, officers and institution-affiliated parties of a bank owe duties of care and loyalty, which require that they exercise a high degree of vigilance and honestly and fairly deal with the bank. Brickner v. FDIC, 747 F.2d 1199 (8th Cir. 1984). The FDIC Policy "Statement Concerning the Responsibilities of Bank Directors and Officers," 2 FDIC Law, Regulations, Related Acts at 5369 (April 30, 1993) states:
    The duty of loyalty requires directors and officers to administer the affairs of the bank with candor, personal honesty and integrity. They are prohibited from advancing their own personal or business interests, or those of others, at the expense of the bank.
    The duty of care requires directors and officers to act as prudent and diligent business persons in conducting the affairs of the bank.
   The application of bank funds for one's own use and benefit—the most obvious form of self-dealing for an institution-affiliated party—has long been held to be a breach of a director or officer's duty of loyalty to a financial institution. In Stoller, the Board stated: "[W]hen directors and officers place their personal interests above those of the corporation, or utilize corporate resources for personal gain, they have committed a serious breach of their fiduciary duty." FDIC Enf. Dec., Bound Vol. 2 at A-1870; accord, Pepper v. Litton, 308 U.S. 295, 311 (1939). Self-dealing has been identified as an unsafe or unsound practice because of the conflict it creates between the interests of the institution and the individual, First National Bank of Lamarque, 613 F.2d at 1168.
   Respondents Landry and Lewis repeatedly breached their duties of loyalty and care to the Bank. Indeed, Landry does not deny this, and the Landry Letter provides a written chronicle of the multiple occasions on which he placed his personal interest in acquiring the Bank ahead of his duty to seek the capital the Bank so critically needed. Tr. at 1693–97; FDIC Exs. 119, 120, 121, 181(a), pgs. 196–199, 181(c), pgs. 67–69. The Board concurs with the ALJ's statement that "from the moment he departed for Vancouver, British Columbia, through September 1992, all of Landry's capital raising efforts were driven by his roles as a partner in Inter American Investment Services and as a Pangaea principal. His final letter of resignation from the Bank seeks neither to disclaim nor excuse his conduct," R.D. at 70, but rather to shift the blame to others. FDIC Ex. 119.

   [.10] Respondent Landry's actions in championing and forcing the extension of a $450,000 loan to Robert F. Smith, an out-of-territory, extraordinarily uncreditworthy borrower, over the strenuous objection of the loan review committee, is one example.24 In addition to the unfavorable features of the loan, it was subject to a fee arrangement with FPS, which, in turn, had entered into a fee-splitting arrangement with Landry on behalf of Pangaea. It is obvious that the Bank's interest was not foremost at the time this loan was made, and this was confirmed by the "substandard" classification the loan received during the 1993 examination.

   [.11] Landry signed checks and paid Bank funds to Dakin & Willison, William White


23 In administrative enforcement proceedings under section 8 of the FDI Act, the fiduciary duties owed to federally insured financial institutions derive from doctrines that have been well established in a number of classic cases. See Briggs v. Spaulding, 141 U.S. 132 (1891), Geddes v. Anaconda Mining Co., 254 U.S. 590, 599 (1921) and Pepper v. Litton, 308 U.S. 295, 306 (1939).
24 This example is not exclusive. The following remarkably poor loans also were entered into with Landry's assistance, at the least. Each is connected to some fee-splitting arrangement for the benefit of Pangaea:
   -$13,000 was extended to Funding Placement Service's principal, Robert G. Smith. The loan officer could not verify the validity of Smith's two social security numbers, and an investigator hired by the Bank could not confirm Smith's business address and existing address.
   -$44,000 was extended to William White Bolles after the Bank had received a letter from Bolles indicating that he was subject to a $26 million RICO judgment.
   -$450,000 was extended, with Landry's assistance, to GABL Corporation, whose principal, George Russell, had a longstanding bad credit history with the Bank. Another GABL, principal, Byford Beasley, traveled to Ecuador with Pangaea principals, including Landry, to seek funding for Pangaea-related deals.

{{7-31-99 p.A-3032}}Bolles, Richard Crabtree, FPS, and Blue Rose in furtherance of his efforts to find capital for his personal acquisition of the Bank. It is clear from the Landry Letter that he knew that none of these arrangements were for the benefit of the Bank. As the ALJ found: "rather than preserve the Bank's few remaining assets, Landry chose to dissipate them in furtherance of his personal takeover of the Bank." R.D. at 60. This was both an unsafe or unsound practice and a breach of his fiduciary duties. Hoffman, 912 F.2d at 1174.
   Respondent Landry felt no obligation to disclose to the Bank's board of directors any of his activities on his own/Pangaea's behalf or those of Jenson, Crabtree and Respondent Lewis. He faithfully attended every meeting of the board and the executive committee. He gave monthly financial reports to the board, but he failed to disclose that Bank funds were being spent in furtherance of Pangaea and IAIS. He failed to disclose the contracts and certain uncreditworthy loans to which he or Jenson had committed the Bank, or the fee-splitting arrangements, which benefited him and Pangaea to the Bank's detriment. At no time did he disclose to the board his role in the IAIS partnership.

   [.12&.13] Lewis' imprudence in carrying out his roles as the Bank's attorney and director and his inattention to his duties as a director were both a breach of his fiduciary duty and an unsafe and unsound practice—conduct contrary to prudent action which, if continued, exposed the Bank to abnormal risk of loss. He cannot escape his fiduciary responsibilities by ignoring them or abdicating them. In the Matter of Patrick G. Huyoke, FDIC-91-86jj, FDIC Enf. Dec., Bound Vol. 2, ¶5168A, A-1807 (1991). In that case the Board stated that it

    [i]s not willing to burden the Bank and the public with the additional risk of a director who does not exercise careful, independent judgment in carrying out his fiduciary obligations and who is, at best, cavalier about the institution's federal and state regulatory obligations.
Id. at 1808.
   As the United States Supreme Court clearly admonished in Briggs v. Spaulding:
    [W]e hold that the directors must exercise ordinary care and prudence in the administration of the affairs of a bank, and that this includes something more than officiating as figureheads. They are entitled under the law to commit the banking business, as defined, to their duly-authorized officers, but this does not absolve them from the duty of responsible supervision, nor are they to be permitted to be shielded from liability because of want of knowledge or wrongdoing, if that ignorance is the result of gross inattention. . . .
141 U.S. at 166.

   [.14] As early as August 15, 1991, Respondent Lewis became aware of the Pangaea Plan and should have understood its impact on the Bank. The mere fact that three senior Bank insiders were incorporating an entity and going into business together with the intent to take over the Bank gave rise to Lewis' as a director to be alert and to further investigate any potential conflicts with the Bank to which he owed fiduciary duties. Lewis began reserving the corporate name, "Pangaea," for a bank holding company although he knew that formation of a holding company had not been approved by the board of directors. As one of the two individuals required to approve each expense voucher, Lewis certainly knew that the amounts being expended were greatly in excess of the $25,000 expenditure cap approved by the board with the Pangaea Plan. He authorized payment of travel vouchers in connection with various transactions either without knowing why the Bank was paying these expenses, or in disregard of the reasons for the payment; in either case, he violated his fiduciary duties.

   [.15] With the October 1991, arrangement to create the IAIS partnership between his own law firm and Landry, Jenson and Crabtree, and the plan to have IAIS use the Bank's dormant Trust Department for personal gain, Lewis joined in a series of breaches of fiduciary duty. He did not disclose the potential conflicts of interest inherent in having two-thirds of the Bank board's trust committee, Lewis and Jenson, and the Bank's "trustee," Landry, enter into a partnership designed to profit from the services of the Trust Department. R.D. at 74.25
   As this Board explained in In the Matter


25Lewis argues in his Exceptions that there can be no wrong-doing in connection with IAIS because no partnership agreement was ever signed. He misses the point. First, as a matter of law, Louisiana does not require a written agreement to establish a partnership. La. Civ. Code Ann., art 2801-1848 (West 1997). Thus, it is significant that the agreement among the partners to act in furtherance of IAIS is clear on the record. The (Continued)


{{7-31-99 p.A-3033}}of Lowe and Spivey, 2 FDIC Enf. Dec. ¶5153 at A-1536 (April 16, 1990), aff'd, 958 F.2d 1526 (11th Cir. 1992):
    In the Board's view, the fiduciary duty of loyalty which bank directors owe their institution requires a bank director to investigate the possibility of a conflict of interest and be completely candid with his colleagues. When a bank director finds himself in a situation involving a conflict of interest, as here, it is incumbent on him to make complete disclosure in order to affirmatively avoid a conflict, even if such disclosure seems superfluous.
   As the ALJ observed: "[I]t is difficult to imagine an arrangement more fraught with conflict, or for that matter with such a little chance of success where, as Lewis was well aware, the FDIC had already recommended termination of the Bank's deposit insurance and IAIS was supposed to be engaged in raising immediate money for capital infusion. . . . " R.D. at 75, fn 11.26

B. Effects of the Misconduct

   Both Respondents sought personal benefit from their relationship with the Bank either through Pangaea or the IAIS partnership. Each benefited by his ability to maintain his position at the Bank while focusing on these personal goals.

   [.16] Respondent Landry's goal throughout the August 1991–September 1992 period was to have the Bank finance his acquisition of control of the Bank through Pangaea. In furtherance of this goal, he engaged in the numerous activities detailed in the Recommended Decision and highlighted herein. The Bank paid expenses directly attributable to Respondent Landry's improper activities totaling $278,000. Loan write-offs related to this series of misadventures were $174,900. Landry Ex. 160 Exhibit B. While Respondent Landry was focusing on obtaining control of the Bank, he continued to receive his salary and benefits from the Bank.

   [.17] The financial gain to Respondent Lewis derived from the fact that, through his overt participation or passive acquiescence in this series of schemes, he was able to maintain a close relationship with his law firm's biggest client and its senior management, Respondent Landry, Jenson and Crabtree, and receive direct legal fees as a result of this relationship. The firm was paid by the Bank for its incorporation of Pangaea, Inc. and for the reservation of the corporate names "Amer Invest" and "Inter American Investment Services." Although Respondent Lewis claims that the billings were inadvertent clerical errors, the firm did not reimburse the funds to the Bank until May 1994, and it never reimbursed the full amount. Tr. at 1276–1277; FDIC Ex. 133, FDIC Ex. 133a, pg. 2–3.

   [.18] In addition to financial gain, Bank losses are also attributable to the Respondents. The Bank incurred more than $400,000 in expenses and loan losses paying for the advice, services, travel, contracts, loans and other arrangements set in motion by or acquiesced in by Respondent Landry. Tr. at 187–189, 264–268, 309–311; Landry Ex. 160. The Bank incurred legal fees and ultimately paid $70,000 to Place Vendome's receiver in bankruptcy because of Respondent Landry's unsafe and unsound banking practices in connection with that entity. Respondent Lewis approved expenditures which he either knew were not for the benefit of the Bank, or for which he failed to inquire or verify as for the benefit of the Bank.
   Respondent Lewis' abdication of his fiduciary responsibilities enabled Respondent Landry, Jenson and Crabtree to proceed with impunity to hire and pay consultants, incur fees and expenses in furtherance of their personal goals without fear of being questioned or confronted. During the time these activities occurred, the Bank's capital level remained precariously low, earnings were deficit, and requirements of the Capital Directive were not fulfilled. Given that the Bank had no capital margin, the situation presented


25 Continued: partnership name was reserved for almost a year by Respondent Lewis. Lewis, members of his law firm and Jenson met concerning the partnership from October 1991 through March 1992. Draft articles of incorporation were drawn up, legal research was performed and no bills for these legal services were tendered pursuant to the partnership arrangement. Tr. at 10007–8, 1043–61.
26 The ALJ also finds that Landry failed to disclose for five consecutive quarters material information in quarterly Form F-4 reports filed by the Bank with the FDIC, in violation of 12 C.F.R. 335. R.D. at 47–54. Lewis' failures to disclose related to these quarterly reports were found by the ALJ to be evidence of Lewis' participation in unsafe and unsound practices and breaches of fiduciary duty. R.D. at 48. The Board concurs in both of these findings.

{{7-31-99 p.A-3034}} the possibility of serious prejudice to the Bank's depositors.
   [.19] Had Respondent Lewis simply discussed his own activities on behalf of Pangaea and IAIS with the Bank's board of directors, there would have been an opportunity for the Bank to avoid the unsafe and unsound contracts, fee-splitting arrangements, trips and loans all linked to Pangaea and IAIS, all of which further depleted the Bank's capital base. Accordingly, the failures to disclose—by both Lewis and Landry—resulted in loss to the Bank.

C. Culpability

   The ALJ found, and the Board concurs, that both Respondents engaged in conduct which involved personal dishonesty or willful and continuing disregard for the safety or soundness of the Bank.27
   While the FDI Act does not provide a definition of acts or practices which are per se personally dishonest, case law has developed guidance. The Board of Governors of the Federal Reserve has held, and the U.S. Court of Appeals for the Eighth Circuit agreed, that in the context of a section 8(e) proceeding:

    [W]hile personal dishonesty (which is not defined in the statute) must be evaluated on a case-by-case basis it need not amount to civil fraud and could encompass a broad range of conduct. According to the board, this conduct may include: a disposition to lie, cheat[,] defraud; untrustworthiness; lack of integrity[;] . . . misrepresentation of facts and deliberate deception by pretense and stealth[;] . . . [or] want of fairness and [straightforwardness].
Van Dyke, 876 F.2d at 1379. See In the Matter of Billy Proffitt, FDIC-96-105e (October 6, 1998) (failure to disclose conflicting interest constitutes personal dishonesty or willful disregard of the bank's safety and soundness).
   In Greenberg v. Board of Governors of the Fed. Reserve Svs., 968 F.2d 164 (2d Cir. 1992), the court of appeals examined the Greenbergs' contention that their failure to fully disclose insider transactions did not constitute personal dishonesty within the meaning of section 8(e) of the FDI Act. The court stated:
    The Greenbergs also assert that the record does not support the Board's determination of personal dishonesty. More than substantial evidence exists to support the conclusion to the contrary. The Board found that the Greenbergs had not revealed several of the insider transactions to the directors of the bank. The record provides ample support for this conclusion. Minutes of the directors meetings are silent on the relationship between the Greenbergs and the limited partnership that received loans. Cum tacet, clamant. (With apologies to Cicero, literally "with silence they shout.") The Board and the ALJ were well within their discretion in rejecting the Greenbergs' self serving testimony to the contrary.
Greenberg, 968 F.2d at 171.
   With these cases as guidance, it is clear that Respondent Landry was personally dishonest. As the ALJ states, "Landry has repeatedly admitted his personally dishonest acts in depositions, in his letter of resignation, and in his epic Landry Letter to Examiner-in-Charge Cooper." R.D. at 86; FDIC Ex. 121, 181(a), 181(c), 119, 120.28

   [.20] Respondent Landry participated in and failed to disclose a series of actions, which clearly involved the misuse of Bank funds. Landry concealed the contract with Dakin & Willison from the board of directors, as well as its true purpose of facilitating the IAIS partnership with Lewis and his law firm. He also knew that Jenson had signed a contract with FPS, requiring the Bank to pay FPS to draft documents for a preferred stock offering which he knew was intended for a Pangaea, not a Bank—stock offering. After Pangaea's incorporation in February 1992, Landry signed agreements on behalf of Pangaea and permitted the use of Bank funds for Pangaea-related enterprises, including contracts with William White Bolles and Richard Crabtree and the


27 Section 8(e)(1)(C) of the FDI Act requires only a showing of either personal dishonesty or willful or continuing disregard for the safety or soundness of the Bank. 12 U.S.C. §1818(e)(1)(C).
28 In a deposition taken May 12, 1995, Respondent Landry stated as follows in response to the question "why did you resign"; "Because there was—I felt that there was a huge conflict between what Pangaea originally started to do, which was raise capital for First Guaranty Bank, and what it had become, which was a vehicle for Rick Jenson, Scott Crabtree, and at the time myself to make money off the bank. Basically . . . instead of going out and finding sources of capital for the bank, it had become an issue where we were finding sources of capital where they would give us the money, so we could go put money into the bank."

{{7-31-99 p.A-3035}} trip to Ecuador. Landry also played a major role in the extension of credit to Robert F. Smith without disclosing that, through Pangaea, he would be splitting fees generated by the credit's extension. The ALJ found that "Landry's actions from August 1991 through September 16, 1992 provide an encyclopedia of personally dishonest acts." R.D. at 87.

   [.21] Furthermore, it is significant, as found by the ALJ, that "at the board of directors meeting on November 14, 1991, at which the use of the Bank's trust department was discussed, there is an inculpating silence." R.D. at 88. See Greenberg, 968 F.2d at 171. Although Respondent Lewis asserts that he made "disclosure" to the board on November 14, his so-called "disclosure" was insufficient, and the Board concurs in the ALJ's finding that his failure to properly disclose his role in IAIS is evidence of personal dishonesty. Neither Respondent made a meaningful or comprehensible disclosure about the IAIS partnership, its members, or the potential conflicts between their duties to the Bank and representation of clients with funds in the Bank's trust department.29

   [.22] The "effects" element of the charge may also be established by a showing that Respondents acted with willful or continuing disregard for the safety or soundness of the Bank. Brickner v. Federal Deposit Insurance Corporation, 747 F.2d 1198 (8th Cir. 1984). The record fully supports the conclusion that Respondents so acted. Throughout the relevant time period, Lewis' clear intention was to maintain "deniability." In spite of Lewis' many important roles with the Bank, he asserts limited knowledge in order to deny the depth of his involvement with IAIS and Pangaea. However, "evidencing a willingness to turn a blind eye to interests in the face of known risk" constitutes willful disregard within the meaning of section 8(e) of the FDI Act. Cavallari v. Board of Governors of the Fed. Reserve Svs., 57 F.3d at 144; Hutensky v. FDIC, 82 F.3d 1234 (2d Cir. 1996). Although Lewis was present at the meeting with the FDIC, heard the comments that the CEP was speculative and would not work, and knew of the impending termination of the Bank's deposit insurance, he continued to approve expenditures without inquiry and went along with the wrongful plans in willful disregard of the Bank's safety and soundness. The ALJ correctly found that Lewis intended the results of his action and inaction; his inaction was knowing and intentional and continued throughout the August 1991–September 1992 period. R.D. at 93.
   Landry's self-dealing to seize control of the Bank and to deceive the board of directors in furtherance of that plan was deliberate and intentional. As detailed in his September 16, 1992, resignation letter to the Bank, Landry clearly knew what he was doing on behalf of Pangaea, and he was aware of his breaches of fiduciary duty and intended to breach his fiduciary duty. Such actions constitute willful and continuing disregard for the safety and soundness of the Bank and satisfy the effects prong of section 8(e).

EXCEPTIONS

   Together, the Respondents have filed some 110 pages of Exceptions challenging every legal conclusion, many evidentiary rulings and virtually every factual finding made by the ALJ. Discussed below are the major objections raised by Respondents throughout the proceeding and repeated as Exceptions to the Recommended Decision. The Board concludes that the Exceptions are generally without merit, repetitious and merely argue matters, which were adequately addressed by the ALJ. Those Exceptions not specifically discussed have been considered and are also denied.

A. Lewis' Exceptions

   [.23] Respondent Lewis' Exceptions detail at length facts of which he asserts he was ignorant. For example, he states, "there is no evidence in the record whatsoever to establish that Alton B. Lewis had any knowledge whatsoever of the self-serving actions by Landry, Jenson and Crabtree. As a matter of fact, the record contains extensive testimony indicating that Alton B. Lewis had no knowledge whatsoever of the self-serving actions." Lewis Except. at 4. As discussed above, Lewis' professed ignorance is no defense.


29 The minutes' lack of specificity as to whatever disclosures were made is mirrored by the board members and recording secretary's inability to describe what role the CLMC firm would play. No one had an accurate understanding of the proposed business venture or the relationship of the partnership and the Bank. Tr. at 725, 1725–26, 1728–29, 1749, 1778.

{{7-31-99 p.A-3036}} Either Lewis knew about the misdeeds of senior management or he did not. If he did, his liability is clear for the expenses they incurred which were paid by the Bank with his approval, and for his failure to disclose material facts to the board. If he did not, his failure to inquire about facially suspicious and irregular situations of which he was aware, and his abdication of fiduciary responsibilities at a time he knew the Bank had no capital, also create liability.
   Respondent Lewis repeatedly denies that he was aware of the incorporation of Pangaea. Lewis, Memorandum in Support of Exceptions to Decision ("Memo in Support") at 3. The evidence shows that, if he did not know of the incorporation on the date his partner, Andre Coudrain, prepared the Articles of Incorporation, he learned of this fact soon thereafter. Although Respondent Lewis had been reserving the Pangaea corporate name since August 1991, his letter and check dated February 26, 1992, reserving the Pangaea corporate name, were never processed by the Louisiana Secretary of State. FDIC Ex. 300; Lewis Ex. 41. After that date, Respondent Lewis made no further efforts to reserve the Pangaea name, while he continued to reserve the Inter American and Amer Invest names. Tr. at 1255–56; Lewis Ex. 44. If Lewis truly had not known of Pangaea's incorporation, it is fair to infer that he would have needed to continue reserving the Pangaea name beyond February 26, 1992. In addition, Coudrain sent Respondent Lewis a note, less than a month after Pangaea was incorporated, asking for Respondent Lewis' input on a question about the entity. Lewis Ex. 45. If Respondent Lewis were truly unaware of the incorporation, the request would not have been made.30

   [.24] Lewis asserts that the Recommended Decision is based on findings that "were simply presumptions" or "leaps of faith." Memo in Support at 1. Although he claims the examples "are legion," the Board will discuss one example to dispel his theory. Lewis challenges "a presumption that Alton B. Lewis knew the expenditures were for a purpose other than the benefit of [the Bank] when there is no proof whatsoever." Id. at 2. In the absence of a statement from Lewis that he knew the expenditures were not for the Bank's benefit, evidence to the contrary is of necessity circumstantial. This is not a "leap of faith," but a reasonable inference from the undisputed facts. Given Lewis' knowledge of the Pangaea, IAIS, and Trust Department activities, it is reasonable to conclude that he knew expenditures related to these activities were not for the Bank's benefit. As stated above, at the very least he had an obligation, which he failed to meet, to inquire as to the purpose of the expenditures.
   In sum, the Board concludes that the gravamen of Lewis' defense—that he had no idea of what was going on—is simply disingenuous. The number of significant positions he held in the Bank bespeak a recognition of his talents, and how much he must have known, or should have known. Frankly, the Board has great difficulty imagining him as the naif portrayed in his Exceptions. Upon a review of the entirety of Lewis' testimony, the Board finds no reason to disagree with the ALJ's apparent conclusion that his testimony is not credible.
   Respondent Lewis describes himself as the Bank's "white knight," claiming that he and "Mr. Hood are the directors who basically stopped the attempt by Jenson, Crabtree and Landry to take over [the Bank] with no investment on their part." Memo in Support at 6. There is another, more plausible, view of Lewis' role based on this record and the economic self-interest of Lewis and his law firm arising out of their ownership of Bank stock. Lewis knew of the takeover attempt as early as his August 15, 1991 meeting with Jenson. He did nothing to impede its progress for over a year. To the contrary, he actively assisted the Pangaea activities. It appears that his efforts to "save" the Bank arose only after it was clear to him, as chairman of the special committee to evaluate offers for the Bank pending before the board of directors in September 1992, that, in order to preserve his own interest in the Bank stock he and his law firm held, Tr. at 1377, existing management had to be ousted and the Reynolds bid accepted.

1) Admissibility of Landry Letter

   [.25] Respondent Lewis asserts that the Landry Letter is not admissible as to him because it is "simply hearsay." Landry Exceptions at 6. The FDIC's Rules, which govern the administrative hearings held in enforcement proceedings, specifically permit


30 Lewis claims that he didn't see the note until years later. It is clear, however, that Coudrain sent the note, and Lewis' knowledge was a reasonable inference from this fact.

{{7-31-99 p.A-3037}} the use of hearsay evidence if it is relevant, material, reliable and not unduly repetitive. 12 C.F.R. §308.36(a)(3). Moreover, Respondent Lewis had every opportunity to present evidence contrary to the assertions of the Landry Letter.
    The Landry Letter is credible for several reasons:
    —if Respondent Landry lied, he risked subjecting himself to criminal sanction for making false statements to the FDIC under 18 U.S.C. §1001;
    —The letter was written in June 1993, some four years closer to the events than the hearing;
    —Respondent Landry testified that he discussed all the events and transactions with Examiner-in-Charge Cooper at the time he wrote the letter, in 1993. Tr. at 1794.
   The ALJ found, and the Board agrees, that the Landry Letter was more credible than Respondent Lewis.

2) Inter American Investment Services

Partnership

   Respondent Lewis argues that, because the IAIS partnership was never formalized by a written document, it is not an important issue in this case. Lewis Except. at No. 21. The formality of the partnership is irrelevant to the proceedings. Under Louisiana law, no written agreement is needed to form a partnership, La Civ. Code Ann., art. 2801 (West 1997). Even without a written agreement or a federal tax ID number, the evidence clearly supports a finding that Lewis, his law firm, Jenson, Crabtree and Respondent Landry conducted themselves as if there were an IAIS partnership and acted in furtherance of that partnership, primarily funded at the Bank's expense. Respondent Lewis knew what he was doing when he approved reimbursement of the immigration fund-related expenditures for his partners, and, even if he did not, he had the duty to find out what the expenditures were for, which he failed to do. The Exception is denied.

3) Motion to Sever

   Respondent Lewis filed a Motion to Sever setting forth two bases: first, that because the Notice contains so few references to Lewis, it would "result in tremendous unnecessary and unjust expense" to Lewis to be required to participate in a proceeding involving numerous other parties and allegations that do not appear from the Notice to apply to Lewis; and second, that Lewis would be prejudiced by his possession of exculpatory information that is subject to privileges held by the Bank. The Motion to Sever was opposed by FDIC Enforcement Counsel, Respondent Landry as well as Jenson and Crabtree.
   The ALJ denied Lewis' Motion to Sever, finding that he offered no compelling reason for severance that would overcome requiring the government to duplicate its effort in presenting two cases on the same matter with the same witnesses and exhibits. 12 C.F.R. §308.22(b). The Board concurs and denies Respondent's Exception.31

4) Bias of FDIC Attorney

   Respondents alleged personal animosity or bias by FDIC attorney, Michael R. Tregle, against Respondent Lewis as the basis for the institution of these proceedings.32 FDIC Enforcement Counsel filed a Motion in Limine seeking an order excluding all evidence or legal argument related to these allegations. Opposition replies to the Motion in Limine were filed by Respondents. On July 21, 1997, the ALJ issued an Order Granting the Motion in Limine. Respondents reiterate their position in their Exceptions.
   Prior to his service with the FDIC, Mr. Tregle was in private law practice in Hammond, Louisiana. Respondent Lewis had filed a legal malpractice action against Mr. Tregle. Later, the Bank, through Respondent Lewis, filed an action against Mr. Tregle for indebtedness owed by Mr. Tregle to the Bank, obtaining a judgment against Mr. Tregle in the amount of $114,000 plus attorney's fees, interest, and costs. Subsequently, Mr. Tregle filed bankruptcy. Landry's Memorandum in Opposition to FDIC's Motion in Limine at 1–2.

   [.26] The record does not indicate why Mr. Tregle was selected by FDIC enforcement staff to work on this matter. Nonetheless, the Board agrees with the ALJ that his participation, allegedly reflecting improper moti-


31 Lewis' claim of privilege is irrelevant to the issue of severance. His responsibility to protect the attorney-client privilege is the same whether or not his proceeding is severed.
32 Respondent Landry joined Lewis in this challenge.

{{7-31-99 p.A-3038}}vation consisting of bias, personal animosity, desire for vengeance, or other iniquity, is not relevant or material to the issues of this case. Order Granting Motion in Limine at 3.
   Other than Respondent Lewis' unsupported statement that "these entire proceedings are tainted and suspect" as a result of "personal animosity or a desire for vengeance," Opposition on Behalf of Alton B. Lewis to FDIC's Motion in Limine at 1, the record contains no evidence from which a finding in favor of Respondents could be made.33 There is no allegation that the Notice in this case was not properly issued pursuant to statutory authority granted the FDIC Board and delegated to the Director of the FDIC's Division of Supervision by section 303.9(d) of the FDIC Rules, 12 C.F.R. §303.9(d). Duplicating their memoranda of law, each Respondent points to alleged erroneous assertions in the Notice which are intended to support the claim that the Notice was borne of bias or animosity. First, each of the items raised amount to no more than insignificant factual discrepancies in the context of this case. Second, the FDIC Rules call for notice pleading and permit liberal amendment. 12 C.F.R. § §308.18, 308.20. If any of the "errors" in the Notice were significant, they could have been modified by amendment. Third, it is the obligation of the ALJ to disregard any irrelevant evidence, to consider the sufficiency of the evidence presented at trial, and to base his recommendation on the facts presented at the hearing, all of which he has done.

   Only the specific acts of the Respondents alleged in the Notice are relevant and material to this proceeding. Even if proven, which they are not, the allegations concerning Tregle would not rebut the charges against Respondents nor absolve them of liability. As stated by the ALJ, "[i]f the charges of the Notice are proven true and sufficient all the prosecutorial ill-will in the world by Enforcement Counsel would not constitute a valid defense." Order Granting Motion in Limine at 3. Respondents' Exception is denied.

B. Landry's Exceptions

   Respondent Landry filed Exceptions as well with respect to virtually every finding of fact and conclusion of law made by the ALJ.34 The Board has adopted the ALJ's findings of fact and conclusions of law because they are supported by the preponderance of the evidence. Essentially, Landry's position throughout this proceeding and reiterated in his Exceptions is that, while all of the transactions described in his letter and throughout the hearing took place, he is not responsible for any of them, and their consequences cannot be attributed to him. Landry Except. at 76–91. This position does not comport with the evidence. The record clearly establishes Landry's responsibility for the inaccurate regulatory filings, breaches of fiduciary duty, unsafe and unsound practices and related Bank losses. Landry participated in the initiation, creation and implementation of plans and the expenditure of Bank funds to attempt to create a bank holding company for the sole benefit of himself, Jenson and Crabtree.
   Throughout the period August 1991 to September 1992, no meaningful disclosure was made to the Bank's board of directors of the Pangaea Plan, Pangaea's incorporation, or the agreement among Landry, Jenson, Crabtree and the Bank's law firm to form IAIS and Amer Invest, Inc. Landry was a Bank officer and an institution-affiliated party who functioned as a member of the Bank's inner management group, attending all board meetings. Although Landry was not a loan officer, he participated in and facilitated the Bank's extensions of credit to poor-quality borrowers involved with Pan-


33 Mr. Tregle was the fourth most senior attorney, of a five-person legal team, assigned to this case. The allegations of impropriety were referred by the FDIC Regional Counsel to both the FDIC's Ethics Office and the Ethics Advisory Service of the Louisiana State Bar Association and were cleared by both offices. Nevertheless, the Board notes that it is preferable to avoid creating even an appearance of a conflict.
34 A further indication of the type of Exceptions filed by Landry are the numerous completely frivolous Exceptions. For example, he claims that "the FDIC lacks jurisdiction of the securities law charge," that "the FDIC lacks jurisdiction of transactions of Pangaea not involving the Bank," and that the FDIC "lacks jurisdiction of any allegations that Landry violated an injunction of an Article III court." Landry Except. at 48–50. There were allegations of securities fraud in the Notice, but as Landry concedes, "the securities fraud allegations were dropped at trial." Landry Except. at 48. Nonetheless, he argues that the FDIC does not have jurisdiction over allegations of violations of its own disclosure regulations, which implement provisions of the Securities Exchange Act, "because section 27 of the Securities Exchange Act provides that the jurisdiction of the federal courts is exclusive with respect to violation of the Securities Exchange Act of 1934 and regulations thereunder." Id. at 49. The FDIC's jurisdiction in this administrative proceeding is clear, and the Exception is denied. No charges related to these two other assertions were at issue in this case, and these Exceptions are also denied.

{{7-31-99 p.A-3039}}gaea or IAIS and those who had consulting contracts with the Bank or fee-splitting arrangements with Pangaea. Landry argues that these extensions of credit were eventually made under the personal lending authority of Jenson, a fact he says absolves him of liability. Landry Except. at 30-33. Landry's knowledge of the nature of these transactions, coupled with knowledge that Bank loan officers had objected to the loans, should have been enough to have made Landry raise questions with the board of directors. He can not absolve himself of his duties to the Bank simply because Jenson signed many of the documents at issue. Landry's Exceptions are denied.

1) Challenges to ALJ's Authority

   Respondent Landry begins his attack on the FDIC's charges against him by challenging, once again, the ALJ's authority to preside in this case.35On the one hand, Respondent Landry charges that the ALJ lacked authority to preside over this enforcement proceeding because the ALJ's appointment, under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 (1989)("FIRREA") violated the Appointments Clause of the U.S. Constitution; art II §2, cl. 2. But before reaching this core argument, Landry also argued that the procedure used to appoint Judge Alprin to hear this matter violated the Administrative Procedure Act, 5 U.S.C. § §551 et seq. ("APA"). For the reasons discussed below, the Board finds that both of Landry's challenges to the ALJ's authority are without merit.
   Turning first to his constitutional challenge, Landry contends that both Judge Alprin's initial hiring by the Office of Thrift Supervision ("OTS") and his subsequent assignment by the Office of Financial Institution Adjudication ("OFIA")36 to preside in this case violated the Appointments Clause of the U.S. Constitution, art. II, §2, cl. 2. Landry asserts that, under the Appointments Clause, Congress may assign the appointment of "inferior officers" such as administrative law judges to the President, the courts of law, or the heads of Departments, but that Congress has no constitutional authority to assign the power elsewhere. Therefore, Landry argues, the OTS's hiring of Judge Alprin and OFIA's assignment of him to this matter were unconstitutional.

   [.27] The Board disagrees with Landry's constitutional analysis, resting as it does on the assertion that the OTS, the FDIC and OFIA are constitutionally disabled from appointing any employees who might be regarded as "inferior officers." Congress has, in many instances and for many years, vested in non-Cabinet agencies the authority to appoint inferior officers.37 In this manner, under FIRREA section 916, Congress directed the federal banking agencies to hire ALJs. Thereafter, the FDIC, the Office of the Comptroller of the Currency, the Federal Reserve Board, OTS and the National Credit Union Administration agreed to share ALJs who,


35 In his Exceptions, Respondent Landry essentially reargued his Motion To Disqualify The ALJ, Or, In The Alternative, To Dismiss For Lack Of Jurisdiction ("Motion to Disqualify") which he filed on September 11, 1997. On September 22, 1997, the ALJ had entered an Order granting Enforcement Counsel's request that it be allowed to respond to the Landry Motion to Dismiss at the time its post-hearing brief was due to be filed. On January 13, 1998, Enforcement Counsel filed a response to Landry's Motion to Disqualify. Thereafter, in response to requests for clarification from both Landry and Enforcement Counsel, the ALJ ordered that "Respondents may in their respective post-hearing briefs properly discuss any arguments raised by Enforcement Counsel in their Response to the Motion, and that Enforcement Counsel shall have the last word in their post-hearing reply to discuss any arguments properly raised by Respondents in their post-hearing briefs."
36 Until the enactment of FIRREA, none of the banking agencies employed their own Administrative Law Judges ("ALJ"). Instead, when one of those agencies brought an administrative enforcement action, it had to borrow an ALJ employed by some nonbanking agency. With FIRREA section 916, however, Congress required the banking agencies to "jointly establish their own pool of administrative law judges." 103 Stat. 486, 12 U.S.C. §1818 note. Pursuant to the mandate of section 916, the banking agencies entered into an Administrative Law Judge Agreement ("Agreement") to share ALJs. Pursuant to the Agreement, OFIA was created and, in August 1991, the OTS appointed two ALJs who are shared with the other banking agencies. While the OTS appointed both ALJs, its choice of appointees was made at the conclusion of a process in which all the banking agencies participated and concurred in the selections. The ALJs are paid by and receive their benefits from OTS. The banking agencies agree on the annual budget for OFIA and share the costs, reimbursing OTS for their respective shares of the expenses incurred.
37 See, e.g., 12 U.S.C. §1819(a) Fifth (FDIC—corporate powers "to appoint by its Board of directors such officers and employees as are not otherwise provided for in this chapter"), 47 U.S.C. §155(f) (FCC—managing director); 15 U.S.C. §78(b) (SEC—"such officers as may be necessary"); 7 U.S.C. §4a(c) (CFTC—general counsel). See also, Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991) (See particularly, 501 U.S. at 918, Scalia, J., concurring).

{{7-31-99 p.A-3040}}as an administrative matter, would be hired by OTS. See supra text accompanying footnote 35.
   Thus, pursuant to FIRREA, Congress, within its discretion, directed that the federal banking agencies establish a pool of ALJs to preside in administrative enforcement proceedings. To that end, the agencies established OFIA to oversee the work of the ALJ thus employed by OTS, and through which the banking agencies have the use of a "pool" of ALJs. Accordingly, the ALJ in this case was validly appointed within the meaning of the Appointments Clause.
   In the instant case, after the FDIC filed its Notice against the Respondents, Judge Alprin was assigned to hear this matter under Rule 103 of the FDIC's Rules, 12 C.F.R. §308.103, as required by section 916 of FIRREA. According to Landry, however, the FDIC's compliance with section 916 of FIRREA raises a conflict with section 3105 of the APA, 5 U.S.C. §3105, which provides in part that "each agency shall appoint as many administrative law judges as are necessary for proceedings required to be conducted in accordance with sections 556 and 557 of this title." Under Landry's interpretation of section 3105, the FDIC is the only "agency" that can appoint the presiding ALJ in an FDIC administrative proceeding. Landry does allow that, if the FDIC did not have enough ALJs available, it could have requested the U.S. Office of Personnel Management to appoint an ALJ in this case under section 3344 of the APA, 5 U.S.C. §3344, but since this was not the actual mechanism used to secure ALJ Alprin's appointment as presiding officer, Landry argues, OFIA's appointment of the ALJ violates the APA.

   [.28] Contrary to Landry's contention, the appointment of the two ALJs that work within OFIA is not violative of section 3105 or any other statute. The OTS is an agency under 12 U.S.C. §1462a, and its authority was used to hire both ALJs.38 Even if section 916's requirement that the banking agencies jointly form a pool of ALJs may be deemed somehow to depart from section 3105, the law is clear that such a departure is permissible. See Ramspeck v. Trial Examiners Conf., 345 U.S. 128, 133 (1953) ("The position of hearing examiners is not a constitutionally protected position. It is a creature of congressional enactment. . .Their positions may be regulated completely by Congress, or Congress may delegate the exercise of its regulatory power. . . ."). We reject Landry's hyper-technical assertion that section 3105 prohibits the practical, cooperative arrangement mandated by section 916 and established by the Agreement.
   Congress can, and does, deviate from the requirements otherwise mandated in the APA. In Schweiker v. McClure, 456 U.S. 188 (1982), the Supreme Court upheld a procedure established by Congress and the Secretary of Health and Human Services, under which hearing examiners appointed by private insurance carriers presided over hearings to determine eligibility for benefits under a federal program administered by the carriers on behalf of the Secretary. See also Marcello v. Bonds, 349 U.S. 302 (1955); Director, Office of Workmen's Compensation Program, U.S. Dept. of Labor v. Alabama By-Products Corp., 560 F.2d 710 (5th Cir. 1977). Because Congress is free to depart from the specific requirements of the APA, to the extent that it may have done so, section 916, rather than any provision of the APA, controls how the banking agencies obtain ALJs for their enforcement proceedings.39

   [.29] Moreover, as Landry himself points out, under section 3344 of the APA, 5 U.S.C. §3344; agencies are authorized to borrow ALJs from other agencies on a temporary basis as the need arises. Section 916 provides a clear expression of congressional intent that the federal banking agencies create their own pool of ALJs rather than borrowing them from other agencies on an ad-hoc basis. Thus, section 916 of FIRREA, implemented in the Agreement, is effectively nothing more than a variation of the APA's section 3344 sharing provision.
   When it enacted FIRREA, Congress recognized that the banking agencies needed


38 See Doolin Security Savings Bank v. Office of Thrift Supervision, 139 F.3d 203, 204 (1998); Edmond et al. v. United States. 117 S.Ct. 1573 (1997).
39 This result is consistent with the familiar rules of statutory construction under which a conflict between two statutes is resolved by resort to the more recent or more specific of the two. See, e.g. Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384 (1992) ("[i]t is a common-place of statutory construction that the specific governs the general. . . ."); Cheffer v. Reno. 44 F.3d 1517, 1522 n. 10 (11th Cir. 1995) ("Normally, where there is a conflict between an earlier statute and a later enactment, the later statute governs.") In this case, although the FDIC does not in fact regard the provisions of sections 916 and 3105 to be in conflict, section 916 is both more recent and more specific.


{{7-31-99 p.A-3041}} ALJs who had banking law expertise and that each agency may not have sufficient enforcement work to maintain its own staff of ALJs. Congress addressed this problem by providing the agencies a way to carry out the APA's purpose of promoting "administrative expertise" through the development of a "corps of expert hearing examiners" within the agencies, see Ramspeck v. Federal Trial Examiners Conf., rev'd 345 U.S. 128 (1953), without sacrificing ALJ independence from the agencies. See Butz v. Economou, 438 U.S. 478, 513 (1978). That is precisely what the agencies have accomplished with the creation of OFIA, and their interpretation of section 916 as authorizing the manner in which OFIA was created is entitled to deference. Chevron U.S.A. v. NRDC, 467 U.S. 837, 842–845 (1984); Morel v. INS, 90 F.3d 833, 844 (3rd Cir. 1996) ("[I]t scarcely need be stated that ordinarily the courts owe deference to an administrative interpretation of a statute.") Therefore, the agency actions in creating OFIA were authorized by Congress and should be sustained.

2) Other Exceptions

   Respondent Landry filed 20 pages of Exceptions pointing to numerous alleged factual inaccuracies of the Recommended Decision and its failure to adopt his proposed findings of fact. Landry Except. at 17-37. None of the alleged factual inaccuracies is material to the case. Landry claims, for example, that the "so-called `fee-splitting agreement' with Funding Placement Services" is actually a "memorandum of understanding between FPS and Pangaea, not the Bank." Landry Except. at 28. He then states that the FDIC admits that Jenson, not Landry caused the Bank to pay FPS $15,000 for the introduction of Blue Rose to Pangaea principals Jenson and Crabtree. Id. He conveniently omits that Landry was the third Pangaea principal and then asserts that there was "no finding that the contract with FPS benefited Landry." Id. When the Bank paid fees for the introduction of Blue Rose to Pangaea, of which Landry was a principal, however, the benefit to Landry was clear.
   In denying responsibility for loans made to uncreditworthy borrowers, Respondent Landry also denies that the Bank experienced loss on several of these loans, pointing out that they were repaid. Landry Except. at 29, 32. The Board has held, however, that the repayment of such loans is entitled to slight, if any, mitigating weight. See FDIC v. Grubb, 1 FDIC Enf. Dec. ¶5181 at A-2031, aff'd, 34 F.3d 956 (10th Cir. 1994). As the Board has pointed out, it is the "risk associated with the initiation of loans such as [these]" that has led the Board to hold that such loans, when classified, result in loss to a bank. See In the Matter of James L. Leuthe, FDIC-95-15e and FDIC-95-16k, 1 FDIC Enf. Dec. ¶5249 at A-2915 (June 1998), appeal docketed, (D.C. Cir. July 29, 1998) (No. 98-1355).

Conclusion

   In addition to the Findings of Fact, upon review of the entire record the Board adopts the ALJ's Conclusions of Law. The record amply supports finding that with respect to each Respondent the elements of an action pursuant to section 8(e) has been established by a preponderance of the evidence.
   The Board reiterates its concerns, expressed in In the Matter of Irwin Weitz, FDIC-93-91e, at A-2857, that an attorney representing a financial institution, "like the institution's directors and officers, occupies a position of trust and has important fiduciary obligations to the financial institution," (citing Stoller). Such obligations go to the very heart of the relationship between counsel and client and cannot be discarded by protestations of ignorance or denial. Although the court in United States v. Cassiere referred to a closing attorney as the "eyes and ears of the lending institution," it is no less true for an attorney, such as Respondent Lewis who has both a broad, long-term attorney-client relationship with the Bank and an intimate relationship with the Bank as one of its most influential, if not the most influential, director.
   As described above, Respondent Landry's self-dealing presents an almost classic fact pattern for removal, and his removal and prohibition is overwhelmingly supported by this record.
   An appropriate Order of Removal and Prohibition shall be entered.

ORDER OF REMOVAL AND

PROHIBITION

   For the reasons set forth above, and pursuant to section 8(e) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e), it is hereby ORDERED that:
{{7-31-99 p.A-3042}}
   1. Michael D. Landry is hereby removed from First Guaranty Bank, Hammond, Louisiana.
   2. Michael D. Landry and Alton B. Lewis shall not participate in any manner in the conduct of the affairs of any insured depository institution, agency or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. §1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. §1818(e)(7)(D);
   3. Michael D. Landry and Alton B. Lewis shall not solicit, procure, transfer, attempt to transfer, vote, or attempt to vote any proxy, consent or authorization with respect to any voting rights in any financial institution, agency, or organization enumerated in 12 U.S.C. §1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. §1818(e)(7)(D);
   4. Michael D. Landry and Alton B. Lewis shall not violate any voting agreement previously approved by an appropriate federal banking agency with respect to any insured depository institution, agency, or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. §1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. §1818(e)(7)(D);
   5. Michael D. Landry and Alton B. Lewis shall not vote for a director, or serve or act as an institution-affiliated party, as that term is defined in section 3(u) of the FDI Act, 12 U.S.C. §1813(u), of any insured depository institution, agency, or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. §1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. §1818(e)(7)(D).
   This ORDER will become effective thirty (30) days from the date of its issuance. It will remain effective and in force except to the extent that, and until such time as, any provision shall have been modified, terminated, suspended, or set aside by the FDIC.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 25th day of May, 1999.

APPENDIX

   Following review of the documents submitted for in camera inspection, the Board makes the following determinations:
   On the basis of the Revised Privilege Log, the Board sustains the deliberative process privilege claim for documents #1, 2, 3, 9, 10, 11, 12, 16, 20, 21, 23, 24, 28, 29, 37, 39, 43, 44, 45, 48, 49, 51, 52, 53, 54, 55, 56, 57, 61, 64, 80, 81, 82, 83, 87, 88, 89, 90, 91, 92, 94, 95, 96, and 97. These are documents that were sent by a subordinate to a superior and contain opinions and recommendations related to proposed supervisory activities or enforcement actions. As such, they are classic examples of documents covered by the deliberative process privilege.
   Also sustained was the claim of attorney-client privilege and law enforcement privilege for certain of these documents. These are Reports of Apparent Crime ("Criminal Referrals") or related documents prepared either by the FDIC or the Bank.1 The Criminal Referrals prepared by the FDIC and sent to the Department of Justice ("DOJ") are clearly covered by the attorney-client privilege. It is well recognized that the FDIC's attorney is the DOJ and its U.S. Attorneys with regard to investigations of bank misconduct and for the referral of suspected criminal violations for prosecution. The Criminal Referrals were disclosed in confidence to the DOJ. These are the types of documents protected by the attorney-client privilege. Federal Deposit Insurance Corporation v. Cherry, Behaert & Holland, 131 F.R.D. 596, (M.D. Fla. 1990), FDIC v. Ernst & Whinney, 137 F.R.D. 14 (E.D. Tenn. 1991).
   Items numbered 28, 29, 44, and 54 are three Criminal Referrals prepared by, or on behalf of the Bank.2 This Board has previously sustained the law enforcement privi-


1 A state nonmember bank, including First Guaranty Bank, is required to file a Criminal Referral (now "suspicious activity report") when it detects, among other things, a known or suspected criminal violation of federal law. 12 C.F.R. §353.3.
2 Document 44 is a draft of the Criminal Referral that is document 54. Documents 28 and 29 are Criminal (Continued)


{{10-31-99 p.A-3043}}lege with respect to a Report of Apparent Crime prepared by a bank absent a showing of "extraordinary circumstances warranting disclosure of the [r]eport." In the Matter of James E. Abbott et al., Decision and Order on Interlocutory Review, FDIC-94-167e, FDIC-95-187k, September 16, 1997. In the instant case, no such showing has been made, nor could it be made. This civil enforcement matter raises no charges of criminal activity against Respondent Landry, and there is no allegation that violations of a criminal statute underpin this case. The documents underlying the facts of this case have been produced to Respondent. Respondent was free to pursue discovery from the Bank and other sources of non-privileged information relevant to the FDIC's enforcement proceeding against him. He may not use the civil discovery process to obtain information about a potential criminal investigation in which he may be implicated.
   "[C]onsiderations of public policy should prevail in order to prevent the civil discovery rules being subvented into a device for improperly obtaining discovery in the criminal proceedings." Kaiser v. Stewart, 1997 WL 66186 at *4 (E.D. Pa.) (quoting Campbell v. Eastland, 307 F.2d 478, 486 (5th Cir. 1962), cert. Denied, 371 U.S. 955 (1963)).
   Finally, Criminal Referrals prepared by or on behalf of the Bank are also protected from disclosure by 31 U.S.C. §5318(g). This section expressly prohibits a financial institution voluntarily reporting a suspicious transaction to federal law enforcement authorities, pursuant to applicable criminal referral reporting regulations, from notifying any person involved in the transaction that the transaction has been so reported. Accordingly, the Board finds that 31 U.S.C. 5318(g) precludes the disclosure of these documents.3
   Of the documents reviewed in camera by the Board, the deliberative process privilege is properly asserted with respect to documents 27, 30, 32, 33, 34, 35, 36, 41, 42, 50, 60, 72, 73, 84, and 93. In addition, documents 75, 85, and 86 contain deliberative material properly withheld. Protected are opinions, recommendations and advice of FDIC employees related to agency decision making. Specifically protected here are documents related to enforcement decisions and approval determinations under section 32 of the FDI Act. These are the very types of documents intended for the protection of the deliberative process privilege to promote the free exchange of opinion, recommendation and deliberations among government staff. With respect to the remainder of these three documents and the remaining 25 documents reviewed in camera, the Board finds the deliberative process privilege to be inapplicable because they do not contain the type of information for which the privilege may be asserted. These documents do not reflect recommendations, advice or opinion provided by an agency subordinate to a supervisor involved in the decision-making chain.
   When viewed in the context of the issues in this case, however, it is clear that the failure to disclose these documents is harmless. The documents contain no new probative evidence.4 To a great extent, the information is irrelevant to the charges in the case (documents #8, 26, 31, 47, 58, 68, 76, 78), irrelevant to Respondent Landry's defense (documents #4, 5, 6) or it is already in evidence (document #46). Many of the documents contain data showing the Bank's capital condition at various times and other financial data contained in the Bank's Reports of Examination or Call Reports (documents #15, 22, 25, 59, 70). The factual portions of the Reports of Examination were disclosed under a protective order and the dismal financial condition of the Bank was the subject of a stipulation by the Respondents at the hearing. Several documents are file memoranda that memorialize meetings or conversations between the regulators and the Bank (documents #38, 40, 62, 63, 65, 66, 67, 71, 79, and 75, 85, and 86, in part). They are purely factual recitations and therefore are not privileged. However, all the information in these documents is contained else

2 Continued: Referrals prepared by the Bank which involve possible irregularities by a teller and a non-customer, respectively, neither of whom is named in the Notice. Respondent can make no justifiable claim to these documents.
3 A bank that receives a subpoena or other request for a criminal referral must notify the FDIC so that the FDIC may, if appropriate, intervene in litigation or seek the assistance of DOJ, 12 C.F.R. §353.3(g).
4 None of these documents contain exculpatory material as Respondent Landry has repeatedly claimed in his pleadings seeking access under Brady v. Maryland, 373 U.S. 83 (1963). Assuming, arguendo, Landry were entitled to Brady material in this proceeding, these documents would not be covered. The documents to which the privilege applies contain predecisional advice, recommendations or opinions, not exculpatory factual evidence. All other factual evidence contained in the contested documents has been disclosed.

{{7-31-99 p.A-3044}} where in the record, making it duplicative and merely cumulative.

{{10-31-99 p.A-3044}}

______________________________________________
RECOMMENDED DECISION

In the Matter of MICHAEL D. LANDRY, and
ALTON B. LEWIS,
Individually, and as
institution-affiliated
parties of
FIRST GUARANTY BANK
HAMMOND, LOUISIANA
(Insured State Nonmember Bank)
Docket No. FDIC-95-65e

DECISION RECOMMENDING
ORDER OF PROHIBITION
AGAINST RESPONDENTS
LANDRY AND LEWIS
(Issued August 14, 1998)

APPEARANCES:
On behalf of Federal Deposit Insurance Corporation:

    Anne D. Davenport Esq.
    C. Duane Curtis, Esq.
    Michael R. Tregle, Esq.
    Lynn R. Dadisman
    Memphis, Tennessee
On behalf of Michael D. Landry:
    John C. Deal, Esq.
    Columbus, Ohio
On behalf of Alton B. Lewis:
    Christopher M. Moody, Esq.
    Hammond, Louisiana
BEFORE:
    Walter J. Alprin
    Administrative Law Judge
    Office of Financial Institution
    Adjudication
    Washington, D.C.
TABLE OF CONTENTS

I. INTRODUCTION AND
PROCEDURAL HISTORY
1
II. STATEMENT OF THE CASE 2
III. OTHER INVOLVED
INDIVIDUALS
3
IV. FINDINGS OF FACT 3
A. JURISDICTION 4
B. OTHER INVOLVED
INDIVIDUALS
5
C. THE BANK'S ECONOMIC
CONDITION
5
D. CAPITAL ENHANCEMENT
AND PANGAEA
8
E. EFFORTS OF CAPITAL
ENHANCEMENT PRIOR TO
SALE
20
1. INTER AMERICAN
INVESTMENTS AND AM
VEST
21
2. DALKIN AND WILLISON 26
3. LENDERS OPTION
CORPORATION
27
4. WILLIAM WHITE BOLLES 28
5. RICHARD CRABTREE 29
6. FUNDING PLACEMENT
SERVICES — ROBERT F.
SMITH
30
7. FUNDING PLACEMENT
SERVICE — ROBERT F.
SMITH — LOAN 1
31
8. FUNDING PLACEMENT
SERVICE — ROBERT F.
SMITH — LOAN 2
33
9. MISCELLANEOUS
ASSOCIATED
TRANSACTIONS — GABL
CORPORATION/PLACE
VENDOME/GEORGE
RUSSELL/A VISIT TO
QUITO, ECUADOR
34
F. PAYMENT OF TRAVEL
COSTS AND EXPENSES
40
G. BREACHES OF DUTY AT
DIRECTORS' MEETINGS
42
V. DISCUSSION 45
A. STATUTORY OVERVIEW 46
B. MISCONDUCT 47
1. VIOLATION OF LAW 47
a. FAILURE TO PROVIDE
MATERIAL
INFORMATION
47
b. UNSAFE AND UNSOUND
PRACTICES
56
c. BREACHES OF
FIDUCIARY DUTY
63
C. EFFECTS OF MISCONDUCT 78
1. FINANCIAL GAIN TO
RESPONDENTS
78
2. LOSS TO THE BANK 81
D. CULPABILITY 85
1. PERSONAL DISHONESTY 85
2. WILLFUL OR CONTINUING
DISREGARD
89
VI. RULING DENYING
RESPONDENTS' MOTION
94
A. DELAY IN RULING 95
B. RESPONDENTS' MOTION 96
1. OFFICE OF FINANCIAL
INSTITUTION
ADJUDICATION
96
2. AUTHORITY TO HEAR
REMOVAL AND
PROHIBITION CASES
98
3. APPOINTMENTS CLAUSE 103
VI. CONCLUSIONS OF LAW 107
VII. PROPOSED ORDER 108
{{10-31-99 p.A-3045}}

I. INTRODUCTION AND
PROCEDURAL HISTORY

On April 30, 1996, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Intention To Remove From Office And to Prohibit From Further Participation involving five institution-affiliated parties of First Guaranty Bank of Hammond, Louisiana ("First Guaranty or Bank"). The FDIC sought to prohibit Rick A. Jenson (Jenson), Scott P. Crabtree (Crabtree), Danna A. Doucet ("Doucet"), Michael D. Landry ("Landry"), and Alton B. Lewis ("Lewis"), pursuant to section 8(e) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(e). Three of these individuals settled with the agency prior to hearing, leaving Landry and Lewis as the remain Respondents.1
A prehearing conference convened with the undersigned and the parties in New Orleans, Louisiana, on July 18, 1997, for the purposes of narrowing the issues. On September 12, 1997, Respondent Landry filed a Motion to Disqualify the undersigned, Or in the Alternative, Motion To Dismiss For Lack Of Jurisdiction, a dispositive motion, the ruling of which is later included in this Recommended Decision. On September 22, 1997, the undersigned granted agency's request to delay a response to the motion until the posthearing phase of this case. On October 6, 1997, a hearing commenced in New Orleans, Louisiana and concluded on October 20, 1997. Request for extension of time for filing briefs was granted. The Recommended Decision below is based upon a careful review of the complete record in this matter.

II. STATEMENT OF THE CASE

This case involves, for the relevant time period, an ailing institution badly in need of capital infusion and subject to a Capital Directive requiring it to infuse over $4,000,000 of additional capital. Enforcement Counsel in part charge Respondent Landry, with Jenson and Crabtree, with participating in attempting to appropriate the Bank by creating the bank holding company which they would control, Pangaea Corporation ("Pangaea") under the guise of recapitalization efforts, and would control the Bank. Enforcement Counsel allege in part that Landry, Jenson and Crabtree dissipated the Bank's assets through costly employment contracts, poor loans to investors, and associated costs and travel expenses, all for their own personal benefit, and not for the benefit of the institution. Finally, Respondent Lewis is charged with participating in these acts, failing to advise the Bank's Board of Directors of Pangaea's activities and approving the associated cost and expense statements.
Landry, with Jenson and Crabtree are charged with engaging in a scheme to raise capital by non-banking financial enterprises carried out through Pangaea, which they would control, and an associated partnership, Inter American Investment Services ("Inter American"), an entity to consist of Landry, Jenson, Crabtree and Lewis' law firm. Pangaea was to be funded by investors contributing $16,000,000, in units of $1,000,000, to take advantage of a newly arranged immigration scheme. Senior management consisted of Jenson, Crabtree and Landry, controlling and owning 70 percent of Pangaea without investing their own capital. Inter American Investing, planned to aid in immigration scheme, was an equal partnership of Landry, Jenson and Crabtree, and Lewis' law firm. The law firm's equal partnership interest was to contribute legal services. As a result of the expenditures made on Pangaea, for the benefit of Landry, Jenson and Crabtree, the Bank suffered loan-losses and wasteful expenditures totalling over $450,000 at the very time when it needed most to conserve and add to what already insufficient assets and capital it had.

III. FINDINGS OF FACT
A. JURISDICTION

1.2 At all relevant times, the First Guaranty Bank, of Hammond, Louisiana ("the Bank") was a corporation doing business under the laws of the State of Louisiana at Hammond, as a state-chartered financial institution not a member of the Federal Reserve System. Deposits held by the Bank on


1 FDIC issued an Order of Prohibition against Doucet on May 9, 1997. On October 1, 1997, Enforcement Counsel advised the undersigned that Respondents Jenson and Crabtree signed stipulations and consents to the issuance of Orders of Prohibition from Further Participation.
2 Abbreviations used without other explanation are:
Tr.—Transcript page, preceded by name of witness.
Exh.—Exhibit number, preceded by party offering.

{{10-31-99 p.A-3046}}behalf of its customers and depositors are insured by the Federal Deposit Insurance Corporation pursuant to 12 U.S.C. §§ 1811 through 1831t. The Bank was at all pertinent times subject to the requirements of the Federal Deposit Insurance Act, its rules and Regulations, and the laws of the State of Louisiana. (Admitted.)
2. Landry was hired by the Bank in 1981, and served in a variety of positions, being vice-president, chief financial officer, and cashier by February of 1992. (Admitted. Landry, Tr. 1792.) He attended every meeting of the Bank's Board of Directors, and its executive committee. (Cefalu, Tr. 708; FDIC Exhs. 61, 63, 72, 73, 80, 82, 83, 85, 86, 87, 89.)
3. Lewis was at all relevant times, and still is, a member of the law firm of Cashe, Lewis, Moody & Coudrain ("CLMC"), a general partnership organized under the laws of the State of Louisiana. (Lewis, Tr. 1224–1225.) Though primarily a litigation attorney, in 1985, Lewis began performing legal services for the Bank, and in 1988 was elected to the Board of Directors.3 (Lewis, Tr. 1226–1229.) He remained a Director and Secretary.

B. OTHER INVOLVED INDIVIDUALS

4. Jenson was a Respondent who entered into a settlement agreement prior to commencement of the hearing. He was hired by the Bank in June of 1987, and named as president and chief executive officer on February 14, 1991, also serving as a member of Board of Directors. (Stipulated. FDIC Exh. 299, pg. B-4; FDIC Exh. 2, pg. B-1.) From February 14, 1991, through December 17, 1992, Jenson served on the trust, loan, audit and examination, and executive committees of the Bank's Board of Directors. Jenson was terminated from his position by Lewis on behalf of the Board of Directors on December 18, 1992. (Cefalu, Tr. 765–768; Lewis Exh. 33.)
5. Crabtree, also a Respondent who entered into a settlement agreement prior to the commencement of the hearing, was hired by Jenson as a consultant to the Bank in July, 1991. (FDIC Exh. 121, pg. 1.) His services were terminated by the Board of Directors on December 18, 1992. (Cefalu, Tr. 708; Lewis Exh. 33.)

C. THE BANK'S ECONOMIC
CONDITION

6. In 1988. A "safety and soundness" examination of the Bank was conducted by the FDIC as of close of business May 13, 1988. The Report of Examination revealed serious asset problems which were eroding the Bank's capital position, resulting from charged-off loans and OREO property (Other Real Estate Owned as a result of foreclosure on the non-liquid asset of real estate pledged on defaulted loans). In addition, the Bank had negative earnings of $1.6 million for the year. Nearly 12 percent of assets were subject to adverse classification, total adversely classified assets represented over 367 percent of total liquid capital reserves, and the primary capital ratio had declined to 2.55 percent, defined as "Critical Deficit." (Cox Tr. 69–70; FDIC Exh. 177, pgs. 1 through 1-a-4.)
7. In 1990. Another safety and soundness examination of the Bank was conducted by the FDIC as of close of business May 4, 1990. The Report of Examination revealed that 10 percent of the bank's assets were subject to adverse classification, and that its primary capital ratio was still critically deficient at 2.55 percent. On September 11, 1990, the Regional Director of the FDIC's Memphis Region issued a Capital Directive ordering the bank to submit a plan to the FDIC's Memphis Regional Office within 60 days of the Capital Directive's issuance, detailing how the Bank would increase its capital, to eliminate its capital deficiency by injecting $4.7 million in capital by January 31, 1991, and to achieve, and thereafter maintain, a total capital ratio of 6 percent by December 31, 1991. (Cox Tr. 73–73; FDIC Exh. 299, pgs 1, 1-a-1 and 1-a-3; FDIC Exh. 6.)
8. In 1991. The FDIC conducted another safety and soundness examination of the Bank as of the close of business on April 26, 1991 to assess the Bank's compliance with the Capital Directive of September 11, 1990. The Report of Examination revealed that the Bank had not complied with the requirements of the Capital Directive by failing to obtain the $4,700,000 capital injection required. It further revealed that the Bank's primary and total capital ratios were 2.13 percent, less than the 6 percent also required by the Capital Directive, that the Bank had


3 Even at that time the financial condition of the Bank did not permit the payment of fees to the Directors, and Lewis served for some time without compensation.

{{10-31-99 p.A-3047}}continued asset problems resulting in adversely classified assets of over 250 percent of the Bank's total equity capital and reserves, that the Bank's Tier I leverage capital ratio was 1.04 percent, a critically deficient capital position, and that the Bank had massive problems. (Cox Tr. 75; FDIC Exh. 2, pgs. 1 through 1-a-5, 2, 3, 3-a, 3-a-1, 4, 4-a, and A-1.)
9. Based upon the results of the 1991 Examination, a joint meeting of the Bank's Board of Directors, the Louisiana Office of Financial Institutions, and the FDIC was held. Both Landry and Lewis attended the meeting. FDIC Assistant Regional Director McGovern advised the Bank's Board of Directors that the FDIC would proceed with an action to terminate the Bank's deposit insurance pursuant to section 8(a) of the FDI Act. (Cox Tr. 74–76.)
10. In 1992. The FDIC conducted a safety and soundness examination of the Bank as of the close of business on February 14, 1992. The Report of Examination revealed that while the Bank still had not complied with the Capital Directive, the Bank's Tier I leverage capital had increased though it was still critically deficient at 1.5 percent, that the Bank's adversely classified assets were excessive and its charge-offs were impacting on its earnings, that the Bank's overhead was extremely high and was also impacting on the Bank's earnings, that the Bank had lost $341,000 in 1991, and that the $105,000 in net income earned for January 1992 would more than be eliminated by charge-offs, and, in summary, that the Bank's overall condition was such that it was a candidate for near term failure. (Cox Tr. 87–89; FDIC Exh. 3, pgs. 1, 3-a, confidential memo, and A-1.)
11. On September 17, 1992, a meeting of the Bank's Board of Directors was held, which approved one of these offers to purchase the Bank, which was thereafter recapitalized by the purchaser in December 1992.

D. CAPITAL ENHANCEMENT,
AND PANGAEA

12. By 1991, it was clear that the Bank was in desperate need of a large infusion of capital in order to maintain a safe and sound capital condition, in the absence of which it would be imperative to sell the Bank on the best terms available.
13. Jenson had been employed by the Bank in 1988. Also in 1988, Jenson and Crabtree entered into a contract with then-Bank President Joshua Cox, in which they agreed to collaborate and pool their expertise in the purchase of troubled financial institutions. In 1991, upon Cox's retirement from the Bank, the Directors engaged Jenson as President and Chief Executive Officer, with a prohibition against being associated with any business which competed with the Bank. Jenson was a member of the Board of Directors. In August of 1991, Jenson hired Crabtree to act as consultant to the Bank at an initial salary of $1,000 per week. Without authority, Crabtree held himself out to customers as the Bank's "Director/Merchant Banking Services," and, with Jenson, was eventually discharged by the Bank's Directors in December of 1992.
14. At all times relevant to the proceeding, Lewis was a partner at the firm of Cashe, Lewis, Moody and Coudrain (CLMC) In September - November 1991, Jan Sturgill [Moody] was an associate at the CLMC firm. Coudrain was the firm's managing partner. (Coudrain Tr. 970, 968) The Bank had been a client of the CLMC firm since the firm's inception in 1989. During the period 1991-1992 the Bank comprised 20–25 percent of Andre Coudrain's legal practice. During the period here involved, the Bank was CLMC's single largest client. (Coudrain Tr. 969-73.)
15. As of May 16, 1991, Lewis served as chairman of the Board of Directors' executive, incentive stock option, directors loan, property management, and trust committees, and was Secretary to the Board of Directors. (Cefalu Tr. 710; FDIC Exh. 61.) At all times relevant to this proceeding, Lewis also served as legal counsel to the Bank. (Ellaby Tr. 676, Cefalu Tr. 713; Figueroa Tr. 1654; FDIC Exh. 63; Landry Exh. 6.)
16. In August, 1991, Landry, Jenson, and Crabtree had prepared a booklet entitled "Pangaea: Finance With a Global Perspective." ("Pangaea Booklet".) Landry took responsibility for the Bank's capital projections in the Pangaea Booklet, and believed that it might be considered as a "poorly prepared" stock offering document. (FDIC Exh. 121, p. 1.) In August of 1991, Christi Ellaby ("Ellaby"), then a Bank employee responsible for the Bank's loan operations, training, liaison between the back office operations and the Bank's branches, the credit department compliance, and loan review, was asked to come in for some confidential work {{10-31-99 p.A-3048}}in typing, proofing, and reviewing the Pangaea Booklet. After having been employed by the Bank from 1985 through October of 1995, at the time of the hearing Ellaby was Manager of First American Bank and Trust, and had been engaged in banking for twenty five years. (Ellaby, Tr. 640-41.) Ellaby discussed the Pangaea Booklet with Landry and Jenson, and formed the opinion that the entity of Pangaea, being formed by and with Landry, Jenson, and Crabtree as principals, was clearly intended to be an enterprise separate and distinct from the Bank, and intended to control ownership of both Pangaea and of the Bank. (FDIC Exh. 11, Ellaby Tr. 649–651.) When she expressed her concerns with this to Landry, he responded that he knew exactly what he was doing. (Ellaby Tr. 651–652.)
17. The Pangaea Booklet speaks in terms of "a fully secure equity investment in a diversified U.S. commercial bank holding company" (Page 3), that "will be organized as a bank holding company" which "will own over 80% of First Guaranty Bank of Hammond, Louisiana" (Page 5), with plans for funding "the holding company" (Page 9), that "Senior management ... consists of: Rick Jenson ... Michael Landry ... (and) Scott Crabtree" (Page 21). In reference to Pangaea, the booklet also states that it will be "A U.S. Bank holding company ..." (Page 21). (FDIC Exh. 11.)
18. Following page 28, the Pangaea Booklet included a flow chart detailing how Pangaea's incorporators were to be given seventy percent of its common stock. As Pangaea incorporators, Landry, Jenson, and Crabtree would acquire 70 percent of Pangaea's common stock without any investment. Outside investors could receive the remaining 30 percent of Pangaea's common stock for a total investment of $16,000,000. Pangaea itself would obtain 80 percent of the Bank's stock, so that Landry, Jenson, and Crabtree would exercise control of the Bank without monetary consideration. (Cox Tr. 117–118; FDIC Exh. 11, p. 29; FDIC Exh. 121, Attachment 2, p. 29.)
19. A document entitled "PANGAEA CORPORATION RECOMMENDATION: STRONG BUY", was also prepared in conjunction with the booklet. The first paragraph of this document begins:

    "The management team of First Guaranty Bank, Hammond, Louisiana, is seeking funding through a financial holding company, Pangaea, to acquire controlling interest in (the Bank)."
The second paragraph begins:
    First Guaranty Bank, Panagaea's acquisition target, ..."
The first paragraph of the second page begins:
    Pangaea Corporation will be organized as a bank holding company ..." (FDIC Exh. 121, attachment 3.)
20. A meeting of the Bank's Board of Directors, and an Executive Session of the Board, was held on August 8, 1991. Jenson and Landry attended these meetings. Lewis was not in attendance but, as Secretary of the Board, signed the minutes of the meetings thereafter prepared. Pangaea was presented as a Capital Enhancement Plan, and not as a plan for changing control of the Bank. (FDIC Exh. 71; FDIC Exh. 121, p. 1–2.) Cefalu, the Bank's former Chairwoman of the Board and Chief Executive Officer, testified that the Directors did not understand that the Bank would form a corporation, called Pangaea or otherwise, but understood that Pangaea was to be an ad hoc committee of the Bank. (Cefalu Tr. 759.) It was never the intention of the Bank's Board to authorize the incorporation of a Pangaea entity. (FDIC Exh. 70-90.) The Capital Enhancement Plan as presented would be a "phantom bank" or "strong arm" of the bank, formed for the purpose of raising capital for the bank through activities in which the Bank could not itself engage, and the proposed cost to the Bank was to be $25,000 or less, upon which basis the Directors approved the concept. (Cefalu Tr. 759, 769; Cox Tr. 187; FDIC Exh. 71, FDIC Exh. 121, p. 1–2; FDIC Exh. 14.)
21. On August 12, 1991, Jenson sent a letter with attachment jointly to FDIC Regional Director Houston, at Memphis, Tennessee, and Commissioner Murray, of the Louisiana Office of Financial Institutions, at Baton Rouge, Louisiana, in regard to plans to satisfy orders of capital enhancement. The letter refers to an enclosed three-page Capital Enhancement Plan, dated August, 1991 and typed single space, and a copy of the twenty seven page Pangaea booklet, typed single space, with sixteen additional pages of tabular financial projections, entitled "Pangaea Corporation — Finance with a Global Perspective."
22. The Summary of the Capital Enhance- {{10-31-99 p.A-3049}}ment Plan provided, in pertinent part, that the Bank:
    ... plans to form a holding company, Pangaea Corporation (Pangaea), which will raise $16,000,000. This money will be used to recapitalize First Guaranty Bank, to purchase the Bank's other real estate, and to expand into other products, services and markets."
The completion of this marketing effort was to take approximately 12 months and would be much less expensive, a public stock offering. The investment of $16 million was to be used as follows: $5 million to invest in convertible preferred shares of the Bank; $2.5 million in the Bank's common stock, so that together with the converted preferred shares will provide eighty percent ownership of the Bank; $6.5 million for a limited partnership to purchase the Bank's "other real estate owned" portfolio; and, $2 million retained by Pangaea "to fund expansion in other markets." The Plan further explains that the investors will be provided with "options for 30 percent of the common shares of Pangaea. ... The 30% options in Pangaea provide substantial long-term capital appreciation, since the holding company is free to expand products and services, and geographically through the acquisition of other banks." (Draft Pangaea Booklet Page 23) There is no mention of the ownership of the controlling seventy percent of Pangaea, and, at least in the copy provided to the State and Federal Regulators, and no flow chart showing that 70 percent of the stock will go, without investment, to the "incorporators." The senior management team is stated to consist of "Rick Jenson, Chief Executive Officer" and "Michael Landry, currently Chief Financial Officer of First Guarantee Bank. ..." Scott Crabtree is identified as having the responsibilities of "Non-Banking/Merchant Services." (FDIC Exh. 14.) Landry provided the projections, which he charitably describes as "more than aggressive." (FDIC Exh. 121, p. 1.)
23. Prior to August 15, 1991, Lewis had no connection with the Pangaea proposals. On that date, Lewis was called by Jenson to meet at the Bank after 5:00 P.M., where Jenson explained the Pangaea Plan to him. Lewis was told that 25 packets containing the Pangaea Booklet and Pangaea Corporation Recommendation: A Strong Buy; a traditional New Orleans mardi gras "king cake" with explanation of the tradition; and a letter of introduction written by Landry and Jenson to potential investors in Vancouver, British Columbia, were being sent by Federal Express at 6:00 P.M. that night, and that Lewis could not retain a copy. (Ellaby Tr. 652–654; Lewis Tr. 1248–1256; FDIC Exh. 121, pg. 2; FDIC Exh. 121, Attachment 2.)
24. During his August 15, 1991 meeting with Jenson at the Bank, Lewis was asked to reserve the corporate name Pangaea with the Secretaries of State for Delaware, Texas, and Louisiana. The name was already reserved in Texas and Delaware, and on August 22, 1991, Lewis reserved the name in Louisiana. (Lewis Tr. 1249, 1255-56.) He also "calendared" the reservation at his office so that each time it was about to expire he could request an extension of reservation (Lewis Tr. 1255–1256.) Lewis prepared his file on "Pangaea, Incorporated," showing the Bank as the client and charged the reservation of the name to the Bank. (Coudrain Tr. 986; Lewis Tr. 1249, 1255–1256, 1275–1276; FDIC Exh. 300.)
25. The Bank's management held administrative committee meetings with bank employee Ellaby at which it was explained that the Pangaea Booklet was to be mailed to persons listed in a publication purchased by the Bank, naming the wealthiest persons in the world on a statistical basis. A Bank employee worked on the cover letter for the distribution. (Ellaby Tr. 652-54.)
26. The Pangaea packages were sent by Federal Express to Vancouver on August 15, 1991, and Landry, Jenson and Crabtree visited Vancouver from August 19 through 24, 1991, to meet with parties as previously arranged. (FDIC Exh. 121, p. 2.)
27. The Bank's executive committee met on August 26, 1991, with Landry, Lewis, and Jenson in attendance. Jenson distributed the Pangaea Booklets to those in attendance, to be returned at the close of the meeting, and orally reported on the Vancouver trip and the Pangaea Plan. The booklet now contained the flow chart diagraming the seventy percent ownership of Pangaea being held by its "incorporators," and Pangaea's ownership of eighty percent of the Bank. Lewis thumbed through the booklet, did not request a copy to read more thoroughly, and did not comment upon plans to incorporate Pangaea with Jenson, Crabtree and Landry as incorporators. Likewise, at no time dur- {{10-31-99 p.A-3050}}ing the meeting did Landry advise that Pangaea was to be incorporated, and that he was to be one of the incorporators. (Cefalu Tr. 714-16, 718-19; Lewis Tr. 1253, 1402-03, 1700; FDIC Exhs. 72 and 121, Attachment 2, p. 29.) The first time Lewis saw the Pangaea Booklet it included the flow chart diagraming 70 percent of Pangaea's ownership being held by Pangaea's incorporators and Pangaea's 80 percent ownership of the Bank. (Cefalu Tr. 714–716; Lewis Tr. 1253, 1402–1403, 1700; FDIC Exh. 72; FDIC Exh. 121, Attachment 2, pg 29.)
28. At no time during the course of the executive committee meeting did Landry tell the Chairman of the Bank's Board of Directors, any of the Directors, or any member of the Bank's executive committee that the costs the Bank had already incurred for his, and Jenson and Crabtree's trip to Vancouver, British Columbia, were associated with Pangaea, a corporation which would be owned and controlled by Landry, Jenson, and Crabtree (Cefalu Tr. 718), or that the Pangaea package, with the Pangaea Booklet included, was for the benefit of Pangaea, which he would incorporate with Jenson and Crabtree. (Cefalu Tr. 719; FDIC Exh. 72.)
29. On August 31, 1991, the CLMC firm generated a bill to the Bank for the investigation and reservation of the name "Pangaea Corporation." The bill, in the amount of $107.50, referenced Pangaea Corporation. The second page of the bill contains the entry "8/22/91 letters to Secretary of State's office. The enumerated services were telephone calls to the Secretaries of Delaware, Texas, and Louisiana, and a letter to the Louisiana Secretary of State with a check enclosed. (Cox Tr. 445–446; Coudrain Tr. 1015–1016; FDIC Exh. 133a, pg. 2–3.)
30. On August 30, 1991, the FDIC responded to the Capital Enhancement Plan provided it on August 11, 1991, as detailed above. The FDIC letter also transmitting a copy of the Report of Examination of April 26, 1991, advised that the agency considered the plan highly speculative, and that it would not be a viable method for providing the Bank with the short term capital infusion it would need to survive. (Cox Tr. 84–87; FDIC Exh. 296, p. 1.) In pertinent part, the letter explained as follows:
    There is enclosed for your consideration a copy of the report of examination of your bank, ... as conducted concurrently with State Examiner ...
    The report discloses the bank to be in extremely poor condition as evidenced by an excessive volume of adversely classified assets, hazardously low capital, real earnings, an inadequate loan loss reserve, and numerous violations ... The Bank failed to augment capital by $4,700,000 as required by Capital Directive issued by this office on September 11, 1990, and the Tier 1 capital ratio of 1.04 is dangerously low.
    We have reviewed the capital plan submitted by President Jenson on August 12, 1991. The plan makes no provision for a necessary injection in the short term and provides what appears at best to be a highly speculative prospect for large capital flows from international and corporate sources in the longer term. Little reliance can be placed on prospects for capital from local investors or merger partners as these avenues have been unsuccessfully explored for at least the past two years. Consequently, based on the examination findings and the inability of the board to provide for the recapitalization of the bank, we are recommending that deposit insurance termination procedures pursuant to Section 8(a) of the FDIC Act be initiated....
31. On September 11, 1991, Lewis and Landry attended the meeting of the Bank's Board of Directors to address the letter from the FDIC Regional Director. Landry presented his usual financial report, but did not include that the Bank had paid for the incorporation of Pangaea, and did not advise the Board that pursuant to the proposal, he, together with Jenson and Crabtree, and without any investment by them, would jointly be the majority stockholders in Pangaea, which in turn would be the majority stockholder of the Bank. Neither Landry nor Lewis reported on the reservation of the name, or the incorporation of Pangaea. Lewis did not question the Bank's expenditure of funds for the trip to Vancouver, British Columbia, in light of the Bank's financial situation or the warnings contained in the FDIC's letter that the Capital Enhancement Plan was insufficient to meet the requirements of raising a large infusion of capital quickly. (Cefalu Tr. 720-24; FDIC Exh. 73.)
32. Pangaea continued to be variously described as a corporation, as a concept, as an arm of the bank, and as a tool in the search for capital contribution, but it was not incorpo- {{10-31-99 p.A-3051}}rated until February 21, 1992, as "Pangaea, Inc." The incorporators were listed as Landry, Jenson and Crabtree, each of whom were to be Directors and agents for service of process. The corporate address was given as 106 South Magnolia Street, Hammond, Louisiana, the address of Lewis' law firm, CLMC. (Coudrain Tr. 979-85; FDIC Exh. 8a and 8e.) Stock certificates were never issued. It is Lewis' testimony that at the time Pangaea Corporation was incorporated with its incorporators Jenson, Crabtree and Landry, the Bank's Board of Directors had not passed a resolution authorizing these individuals to form such corporation on the Bank's behalf. It is also his testimony that the only discussion of the Bank's Directors of filing a bank holding company application was years earlier, at a meeting in September 1991 when the formation of Pangaea was discussed as a capital enhancement plan. Lewis further testified that he did not know what a holding company application was, and that there was no discussion of filing one. (Lewis Tr. 1404-6.)
33. The FDIC conducted a safety and soundness examination of the Bank as of April 23, 1993, after the sale and recapitalization. (Cox Tr. 90; FDIC Exh. 4.) Field examiners acquired Bank documents and information which was forwarded to the FDIC's Memphis Regional Office for review and analysis. (Cox Tr. 90–93.) Pursuant to a questionnaire presented to him during the course of the examination, after much delay Landry presented a letter ("Landry Letter") to FDIC Examiner G. Martin Cooper on June 3, 1993, the contents of which he adopted at the hearing. (Landry Tr. 1793–1794; FDIC Exh. 121.) The letter is extensive, 21 single space typewritten pages with about 500 pages of attachments.
34. Based upon his review of the documents provided by the Bank, Bank Examiner Jerry Cox established the minimal loss to the Bank from operations of Landry, with Jenson and Crabtree, as $400,000. The losses, all hereinafter discussed, included $45,000 to William White Bolles; $6,000 to Richard Crabtree; $5,000 per month to Dakin & Willison as fees relating to Funding Placement Services; $46,000 write-off on credit extended to William White Bolles; and $20,000 for a trip to Ecuador, among others. The loss would be far greater if attorney's fees for the litigation that ensued from these deals had been included in the total. (Cox Tr. 187–189, 264-268, and 309-311; Landry Exh. 60.)

E. EFFORTS AT CAPITAL
ENHANCEMENT PRIOR TO SALE

35. The Capital Enhancement Plan identified four groups that it would target in the Bank's capital raising efforts: entities interested in acquiring a financial institution; domestic and international venture capital markets; merger candidates; and individuals or groups which the Bank had previously solicited. (Cox Tr. 83–84; FDIC Exh. 14, pg. 2.) The following outlines some of the capital enhancement attempts of Landry, Jenson and Crabtree purporting to be included in this plan, some with and some without the proposed participation of Pangaea:

1. INTER AMERICAN INVESTMENT
SERVICES AND AMER INVEST

36. In August 1991, changes in the U.S. immigration laws were proposed to allow foreigners to receive United States citizenship if they invested $1,000,000 in a new business venture in this country providing ten or more new employment positions each. Landry, Jenson, and Crabtree conceived of a partnership to be named Inter American Investment Services, in which they, Lewis' law firm, CLMC, and, at one point, Greg Figueroa, the son of Coopers and Lybrand partner David Figueroa, who was the engagement partner of the Bank's outside accountants, would be partners. They also planned that a corporation, Amer Invest, would be formed to be the general partner. CLMC's contribution to the partnership was to be the performance of legal work. Landry, Jenson and Crabtree were to find foreign nationals seeking to obtain United States Citizenship under the new legislation. Because the proposed law was similar to Canadian immigration laws, Landry, Jenson, and Crabtree made contacts concerning the Inter American Investment Services partnership during the trip to Vancouver, British Columbia. (FDIC Exh. 121, pg. 2, Figueroa Tr. 1602, 1668; Lewis Exh. 40.) Inter American Investment Services intended to use the Bank's then dormant trust department to perform services for the partnership. (FDIC Exh. 121, Attachment, pgs. 5, 7, 13, 14, 15, 20, 21, 23, 24; Lewis Exh. 41, pg. 34.)
37. The proposed changes in immigration laws and its role in the Pangaea Plan are set {{10-31-99 p.A-3052}}out in the Pangaea Booklet and were in the Capital Enhancement Plan forwarded to the FDIC on August 12, 1992. (FDIC Exh. 11, pgs. 10, 15, 21, 27; FDIC Exh. 14, Attachment 3; FDIC Exh. 121, Attachment 3, pgs. 10, 15, 21, 27.) Landry, Jenson, and Crabtree were to find investments for the foreign nationals seeking citizenship and the CLMC firm was to do the legal work related to the project. (Coudrain Tr. 1047–1048, 1057; Lewis Tr. 1266–1267, Figueroa Tr. 1668; Lewis Exh. 40.)
38. Lewis began reserving the corporate and trade names "Inter American Investment Services" and "Amer Invest" with the Louisiana Secretary of State in October 1991 and continued to reserve these names through September 1992. (FDIC Exh. 265; Lewis Exh. 41.) At that point, the correspondence and information attached to the Landry Letter established Inter American Investment Services' address as 400 Thomas St., Hammond, LA, which is the Bank's address. (FDIC Exh. 121, Attachment, pgs. 13, 14.)
39. In late 1991, the members of the CLMC firm held a meeting and discussed entering the Inter American partnership with Landry, Jenson, and Crabtree. CLMC partners Lewis and Coudrain attended the meeting, and according to the notes taken by Coudrain, the partners in Inter American Investment Services were to be the CLMC firm; Respondent Landry; Crabtree; Jenson; and Amer Invest, a corporation acting as general partner. The partners were all to be equal. (Coudrain Tr. 1039, 1047–1048, 1055; Lewis Exh. 40.) It was common knowledge in the CLMC firm that it would become an equity partner in the partnership, that it would provide legal services in exchange for its partnership interest, and that it was not to bill the time it spent drafting Inter American Investment Services articles of partnership or Amer Invest's articles of incorporation to the Bank.
40. On October 22, 1991, CLMC received notification from the Louisiana Secretary of State acknowledging the firm's fax of October 18, 1991, and indicating that the names Amer Invest, Inc. and Inter American Investment Services were available for business use. (FDIC Exh. 265.)
41. Lewis had CLMC associate Jana Sturgill [Moody] do legal research on the changes in the immigration law. Andre Coudrain remembers that the memo was disseminated to the members of the CLMC firm on October 28, 1991. (Coudrain Tr. 1058–1061; Lewis Tr. 1267; FDIC Exh.s 131 and 131a.)
42. Also on October 28, 1991, Lewis wrote letters and sent CLMC operating account checks to the Louisiana Secretary of State's Office reserving the names for a period of 60 days. (FDIC Exh. 265.) On October 29, 1991, the Louisiana Secretary of State's office wrote Respondent Lewis confirming his reservation of both names until December 28, 1991. (FDIC Exh. 265.)
43. On October 31, 1992, CLMC sent a bill for $110.50 to the Bank with the reference line Pangaea Corporation, Alton Lewis account #15-AL091-2085-1A. The services listed were Lewis' calls, letters, and checks to reserve the names Amer Invest and Inter American Investment Services, between September 13, 1991, and February 26, 1992. (Coudrain Tr. 1019; FDIC Exh. 133.) Neither Coudrain nor CLMC associate Jana Sturgill (Moody) billed their time for their respective legal work on behalf of the Inter American Investment Services partnership or Amer Invest. (Coudrain Tr. 1054–1058; FDIC Exh. 131.).
44. Landry and Lewis both attended the Bank's Board of Directors meeting on November 14, 1991, at which Jenson presented a draft trust agreement which would be used by a partnership to attract $1,000,000 each from foreigners who wanted to participate in the immigration scheme. The minutes of the meeting do not identify the partnership as being Inter American Investment Services. (Cox Tr. 136–137; Cefalu Tr. 725; FDIC Exh. 76.) However, Bank Director Bill Hood believes that the partnership was to be between Jenson and Crabtree, that Lewis was going to do the legal work for them, and that none of the expenses would be met by the Bank. (Hood Tr. 1725-26.) The Chairman of the Board testified that she did not hear of Inter American Investment Services until a deposition some time well after the November 14, 1991, meeting (Cefalu Tr. 725), and the secretary taking notes of the meeting testified that Lewis' law firm was only identified as the entity to assist the Bank in preparing the proper legal documents for the use by the Bank's trust department. (Drew Tr. 1749, 1778.)
45. Lewis testified that he did not see a potential conflict of interest between his and Jenson's roles as equity partners in the Inter American Investment Services partnership, {{10-31-99 p.A-3053}}an independent business operation to find investors in the immigration scheme using the Bank's trust department, and their roles in Amer Invest, with their roles as the majority of the board of director's three-member trust committee. (Lewis Tr. 1395.) At the meeting of the Bank's Board of Directors on November 14, 1991, at which the Inter American Investment Services partnership was discussed, Respondent Lewis failed to advise the Bank's Board of Directors that he and Jenson should recuse themselves from their role on the trust committee due to the proposed Inter American Investment Services' partnership proposal to use the Bank's trust department, nor did he identify Landry's interest in those entities. Jenson and Lewis did, however, abstain from voting on the proposed form of trust agreement. (Lewis Tr. 1395; FDIC Exh. 76, page 2.)
46. On November 20, 1991, CLMC associate Jana Sturgill wrote a letter to Crabtree conveying research that Ms. Sturgill had done on the Inter American Investment Services' partnership. (Tr. 1043; Lewis Exh. 40.)
47. On December 26, 1991, the reservation of the names was extended to January 27, 1992. (FDIC Exh. 265; Lewis Exh. 41.) Further extensions were granted expiring respectively February 2 and 28, 1992, April 28, 1992, June 29, 1992, and August 27, 1992, and again until some time after September, 1992. (FDIC Exh. 265; Lewis Exh. 41; Coudrain Tr. 1022.)
48. Coudrain's review of his draft articles of formation for Amer Invest, Inc. and for Inter American Investment Services were prepared somewhere near the end of 1991. He believes that Lewis was aware that he, Coudrain, was preparing the formation of these entities at the time he was drafting them. (Coudrain Tr. 1045, 1053, 1056; Lewis Exh. 39.)
49. In July 1992, interest in Inter American Investment Services was renewed due to the finalization of the change in the immigration laws. (FDIC Exh. 121, pg. 10.)
50. In May 1994, the CLMC firm refunded $65.50 to the Bank because Respondent Lewis realized that they had billed, and the Bank had paid, some charges for Pangaea, Inter American Investment Services, and Amer Invest, Inc. (Lewis Tr. 1276–1277.)
51. There is no indication that the scheme of raising investments in Pangaea through trust deposits in the Bank for the immigration scheme, through Inter American Services or otherwise, had any success whatsoever. In addition to the immigration scheme, the following additional transactions were undertaken.

2. DAKIN & WILLISON

52. Crabtree believed that "pension fund managers were considered a great source of investments for the Inter American Investment Services (immigration fund)." Dakin & Willison was believed to be an image enhancement firm which was recruited to be employed by major pension fund managers. In December 1991, Jenson, on behalf of the Bank, entered into a contract with Dakin & Willison, the purpose of which was to introduce the Inter American Investment Services concept, i.e. the immigration scheme to be handled through Pangaea, to different groups. (FDIC Exh. 121, pgs 3–4.) The retainer provided for payment from the Bank to Dakin & Willison the sum of $5,000 per month, plus expenses. In total, the Bank paid approximately $44,000 in varying amounts, through April 15, 1992. (Cox Tr. 123–124; FDIC Exh.s 15, 281, and 121, pgs. 3–4, 10; FDIC Exh. 121, Attachment 6.)
53. The Bank extended the retainer relationship with Dakin & Willison on March 20, 1992, and paid an additional $5,031 on May 15, 1992; $5,026 on June 30, 1992; $5,015 in July 1992; $5,840 on August 14, 1992; and $5,047 on September 15, 1992. (FDIC Exh. 281.)
54. Though she was the person responsible for credit, lending, and compliance, and other customer-related matters, Bank employee Ellaby did not meet with anyone from Dakin & Willison to discuss the Bank's image or how to enhance it. Further, Ellaby was unaware of any other person at the Bank who met with Dakin & Willison. (Ellaby Tr. 695–696.)
55. As part of Bank employee Ellaby's managerial duties, she attended committee meetings which discussed the Bank's aiding immigrants in search of green cards and the possibility that prospective immigrants would invest in Pangaea. The meetings were ongoing as long as the Pangaea effort was in effect, approximately from September 1991 to September, 1992. (Ellaby Tr. 788–789.)
{{10-31-99 p.A-3054}}

3. LENDERS OPTION CORPORATION

56. Another alternative to generate capital discussed in the Landry Letter is the "Lender's Option Corporation" referred to as the "LOC" concept. (FDIC Exh. 121, pg. 3; FDIC Exh. 121, Attachment 4.) This program was brought to the Bank by Landry, Jenson, and Crabtree, to "change the Bank's direction." (Ellaby Tr. 674–675; FDIC Exh. 121, Attachment 4, pricing committee information April 2, 1992.) LOC was an automobile securitization program whereby an insurance policy would be attached to an automobile loan contract to enhance the Bank's lending program, and the purchaser of the securitization would set their own interest rate.
57. These automobile loan contracts were to come from outside the Bank's lending area. (Ellaby Tr. 671–672; FDIC Exh. 121, Attachment 3.) In addition, the program would require hiring additional Bank personnel at a time when the Bank was attempting to preserve capital by carefully watching its overhead. In terms of soundness of the program, it involved the Bank's lending or buying grade C and D paper, a potential violation of Louisiana consumer credit laws. (Ellaby Tr. 672–673.) The LOC program was offered to a variety of foreign and domestic investors between September 1991 and August 1992. LOC required the investor to establish an account with the Bank's trust department and allowed investors to customize their rates of return. (FDIC Exh. 121, Attachment 4.)

4. WILLIAM WHITE BOLLES

58. Jenson entered into a contract on July 27, 1992, by which the Bank was obligated to pay William White Bolles ("Bolles") a monthly fee of $15,000, and at the same time granted Bolles a non-exclusive right to contact potential investors and raise capital either directly for the Bank or indirectly through a bank holding company such as Pangaea Corporation. (Cox Tr. 100, 174; Cooper Tr. 559–560; FDIC Exh. 121, pg. 11; FDIC Exh. 121, Attachment 11; and FDIC Exh. 273.)
59. Despite his opinion that the contract was not in the Bank's best interest, on July 27, 1992, Landry authorized a $15,000 payment to Bolles pursuant to the contract. (Cox Tr. 101, 174–175; FDIC Exh. 273, pgs 6–7.)
60. The Memphis Regional Office of the FDIC reviewed the contract to Bolles and was unable to establish any benefit to the Bank for the payments made to him. (Cox Tr. 176.)
61. At about the time the Bank entered into the agreement with Bolles, the Bank extended credit to him totaling $40,000. During the course of the FDIC's April 1993 examination, the FDIC reviewed this extension of credit, and the $8,000 then in accrued interest as well as the full amount of the credit were classified "loss" in part because of the weaknesses in the loan documentation, as well as a letter in the Bank's loan file from Bolles stating he was subject to an outstanding judgment of $26,000,719 for violation of "RICO," the Racketeering Influenced and Corrupt Organization Act. (Cooper Tr. 557–559; FDIC Exh. 274, last page; FDIC Exh. 4, pg. 2-a-12.) The Bank loans to Bolles referred to in the Landry Letter were charged off by the Bank. (Cox Tr. 178; FDIC Exh. 4, pg. 2-a-12; FDIC Exh. 121 pgs. 11– 12; and FDIC Exh. 274.)

5. RICHARD CRABTREE

62. On July 30, 1992, Jenson executed and Landry witnessed a contract between the Bank and Richard Crabtree, Respondent Crabtree's father. Pursuant to the contract, Landry executed the check of Richard Crabtree, in the sum of $6,000, payment for one month of non-exclusive representation of the Bank in contacting potential investors. In addition to this sum, Richard Crabtree was granted pre-approved expenses in obtaining deposits into the Bank's trust department, and ten percent of the earnings of the Bank's trust department as a result of his efforts, for the following ten years. (FDIC Exh. 121, pg 11; FDIC Exh. 121, Attachment 12; FDIC Exh. 277; Cox Tr. 102–3, 181; Cooper Tr. 323.)

6. FUNDING PLACEMENT SERVICES
—ROBERT F. SMITH4

63. On December 6, 1991, the Bank agreed to pay Funding Placement Services the sum of $20,000, to solicit individuals, partnerships, corporations, and other business entities to provide services in preparing a


4 There are two Robert Smiths involved in various loans discussed herein at this point and below. Robert F. Smith, of Chicago, Illinois, was referred to at the Bank and in the testimony at hearing as "Chicago Bob," while Robert G. Smith, of Las Vegas, Nevada, was referred to as "Las Vegas Bob."

{{10-31-99 p.A-3055}}preferred stock offering for Pangaea Corporation. The agreement also granted Funding Placement Services the right to solicit individuals, partnerships, corporations, and other business entities to provide services to the Bank in preparing a preferred stock offering for Pangaea Corporation. The Bank check in payment was signed by Landry. (FDIC Exh. 151, pg. 5–6; FDIC 121, pg. 3–8 and Attachment 5; Cox Tr. 148–9, 163.)
64. As set out in the Landry Letter, in April 1992, individuals associated with Funding Placement Services, including Robert G. Smith, of Las Vegas5, traveled to Hammond, Louisiana, to meet with Landry, Jenson, and Crabtree. (Tr. 165; FDIC Exh. 121, pg. 7.) Shortly after this April 11, 1992 meeting, Jenson and Crabtree traveled to Los Angeles to meet with an entity named "Blue Rose Investors." The Bank paid $15,000 to Funding Placement Services for facilitating the introduction, and the check to Funding Placement Services was signed by Landry. (Cox Tr. 164–165; FDIC Exh. 121, pg. 7; and FDIC Exh. 151; FDIC Exh. 151, pg. 3.)
65. The agreement was between Funding Placement Services and Robert F. Smith of Chicago, Illinois, for Robert F. Smith's introduction to Blue Rose Investors, MoniCorp, and MoniCorp Financial. (Cooper Tr. 545; FDIC Exh. 121, pgs. 6–7; FDIC Exh. 275.) There was a fee splitting agreement between Blue Rose and Funding Placement Services. (Cooper Tr. 545–547; FDIC Exh. 4; FDIC Exh. 121, pg. 7; and FDIC Exh. 151.) Through discussions with Landry and the documents reviewed during the course of the April 1993 FDIC examination of the Bank, FDIC Examiner in Charge Cooper understood that there was also a fee splitting agreement or business consulting agreement between Funding Placement Services and Pangaea Corporation. (Cooper Tr. 547; FDIC Exh. 121, Attachment 4, pg. 4; FDIC Exh. 4, FDIC Exh. 151; FDIC Exh. 151a.)

7. FUNDING PLACEMENT SERVICES
— ROBERT F. SMITH LOAN

66. During discussions with FDIC examiners in 1993, Landry explained that when seeking capital for Pangaea, they encountered an entity named Funding Placement Services, which was trying to place restricted stock. The owner of the stock, Robert F. Smith, called Landry and the loan was funded sometime after these discussions. (Cooper Tr. 540–541; FDIC Exh. 121, pgs. 6–7.)
67. On May 5, 1992, on behalf of Pangaea Corporation, Landry entered into a Memorandum of Understanding with Funding Placement Services to evenly divide any loan fees and commissions on an equal basis. (Cooper Tr. 547; Landry Tr. 1879–1880; FDIC Exh. 151, pg. 4; FDIC Exh. 28; FDIC Exh. 121, pgs. 6–8.)
68. In June of 1992, pursuant to the Memorandum of Understanding, the Bank extended $450,000 in credit to Robert F. Smith. (Tr. 166; FDIC Exh. 28; FDIC Exh. 151, pg. 4; FDIC Exh. 121, pgs. 6–7; and FDIC Exh. 275.) Funding Placement Services was to help facilitate the use of Robert F. Smith's stock in USA Waste Services as collateral for the loan. (FDIC Exh. 121, pgs. 6–7.) During the course of the FDIC's April 1993 Bank examination, it was learned that the Bank's loan to Robert F. Smith was secured by stock on which a restriction existed. (Tr. 538–539; FDIC Exh. 4, pg. 2-a-10.) In addition, other peculiar and unusual circumstances of the loan were as follows:

    Although Landry was not a loan officer, he acted as the loan officer for this loan;
    Landry insisted upon acting as an intermediary between senior Bank loan officer Mike Lofaso and the borrower;
    The senior Bank loan officer handling the loan was opposed to the credit's extension and refused to present the loan application to the Bank's loan committee;
    Landry presented the loan application to the Bank's internal loan committee while the senior Bank loan officer was on vacation;
    Landry had never presented a loan to the Bank's internal loan committee prior to his presentation of the Robert F. Smith loan;
    The amount of the loan request, $450,000, was unusually large, the borrower was from out of the Bank's lending area and otherwise unknown to the Bank, and the credit bureau reports on the borrower disclosed a number of judgments and liens.

5 Robert G. Smith, of Las Vegas, is a different individual than Robert F. Smith, of Chicago, mentioned below. In the Bank, and in testimony here, they were distinguished by referring to one as Las Vegas Bob, and the other as Chicago Bob.

{{10-31-99 p.A-3056}}(Cooper Tr. 540; Ellaby Tr. 656–661; FDIC Exh. 275.)
69. During the course of the Bank loan committee meeting at which Landry presented it, the loan was tabled and then later approved only upon Jenson's personal lending authority. (Ellaby Tr. 661–662; FDIC Exh. 4, pg. 2-a-10.) During the 1993 Bank Examination, the loan was classified "substandard" on the grounds that the borrower was out-of-territory; that the majority of the borrower's net worth was tied up in the restricted stock collateral; and the borrower's credit reports disclosed that there had been a forfeiture and several delinquencies on the part of the borrower. (Cooper Tr. 548–549; FDIC Exh. 4, pg. 2-a-10; and FDIC Exh. 275.)
70. This loan was also secured by a $100,000 certificate of deposit to be purchased with $100,000 of the loan proceeds. The stock pledged as collateral was not in the Bank's possession at the time the loan was extended, and the burden was placed on the Bank to gain possession of the collateral. (Ellaby Tr. 662–664; FDIC Exh. 4, pg. 2-a-10; FDIC Exh. 121, pg. 6–7.)

8. FUNDING PLACEMENT SERVICES
— ROBERT G. SMITH LOAN

71. On March 24, 1992, the Bank loaned $13,000 to Funding Placement Services principal, Robert G. Smith, of Las Vegas, Nevada, for the purchase of a used 1980 Porsche automobile. (Cox Tr. 171; FDIC Exh. 276.) During the course of the 1993 Examination, the FDIC examined the loan and found that the loan was made about the time Pangaea's fee splitting agreement with Funding Placement Services was executed. (Cooper Tr. 555–556; FDIC Exh. 4.) Landry, Jenson and Crabtree directed that the loan be made despite problems in establishing the borrowers' bona fides (Ellaby Tr. 667–8). The credit bureau report on the borrower, run as a matter of course prior to the loan, disclosed that he had two different social security numbers. An investigator hired by the Bank could not determine whether Robert G. Smith of the address in Las Vegas, Nevada, actually existed. (Ellaby Tr. 666– 667; FDIC Exh. 276.) Despite this, Landry, Jenson, and Crabtree put pressure on Bank employees to present the loan, which was approved. (Ellaby Tr. 667–668.)
72. The loan to Robert G. Smith went into default, (Ellaby Tr. 668; FDIC Exh. 276) and was charged-off by the Bank. (Cox Tr. 171; Cooper Tr. 558; FDIC Exh. 4; and FDIC Exh. 276.) Because the borrower and the collateral pledged to the loan were out-of-state, it was difficult and expensive for the Bank to regain the loan collateral. (Ellaby Tr. 668; FDIC Exh. 276.) The Bank ultimately paid for the collection efforts and liquidated the Porsche collateralizing the loan. (Ellaby Tr. 668; FDIC Exh. 276.)

9. MISCELLANEOUS ASSOCIATED
TRANSACTIONS

73. The Landry Letter discusses his recollection of a multi-faceted relationship between the Bank, Pangaea, and various entities associated with Funding Services, George Russell, Patrician Corporation or Place Vendome, and for Landry to act as a trustee or escrow agent for Place Vendome, transactions through Funding Placement Services, Centrex International, and travel to Quito, Ecuador, Warsaw, Poland, and London, England with Russell's associate, Byford Beasley. (FDIC Exh. 121, pgs. 2, 3, 7, 8, 9, 11, 12 and 15, and Attachment 5, pgs. 5, 6, 8, 9, 10, 11.)6
74. GABL Corporation consisted of four individuals—Byford Beasley, George Russell, Adoph LaPlace, and Lenny LaPlace. (Tr. 524; FDIC Exh. 4, pg. 2-a-4.) George Russell was the executive vice president of Hannover Corporation, which was the holding company for Place Vendome. Byford Beasley was the president of Place Vendome. (Cooper Tr. 573; FDIC Exh. 121, pg. 8.)
75. On April 2, 1992, Jenson authorized a loan of $450,000 to GABL Corporation. (Cooper Tr. 513–526; FDIC Exh. 4, pg. 2-a-4.) The loan was placed through Placement Services. This was a real estate loan for approximately 904 acres of vacant real estate located east of Baton Rouge, Louisiana. The Bank took a second mortgage on the prop-


6 Following the testimony of Commission Bank Examiner Cooper, who has worked for the FDIC over nine years and conducted approximately 180 bank examinations, regarding the contents of this letter, the undersigned asked the following (Tr. 629):
JUDGE ALPRIN: ... Did you find any of the deals outlined in Mr. Landry's letter as having been undertaken by the bank, by Pangaea, by Mr. Jenson or what-have-you as somewhat bizarre?
THE WITNESS: Bizarre is an understatement, Your Honor.
JUDGE ALPRIN: Have you ever run into anything like that in any of your examinations?
THE WITNESS: Not even close, Your Honor. Not even close.

{{10-31-99 p.A-3057}}erty to secure the loan to GABL Corporation, but did not obtain a financial statement on the borrowing entity, GABL Corporation. The Bank did not obtain an appraisal on the GABL loan collateral and really had nothing by which to value the property as of the day the credit was extended. (Cooper Tr. 524–526; FDIC Exh. 4, pgs. 2-a-4, 2-a-10.)
76. After the loan had been made, the Bank discovered that there was a cemetery on the property which was the collateral for the loan; and as a result, it would be virtually impossible to sell the property. (Ellaby Tr. 694.)
77. The loan was classified "substandard" during the 1993 Examination due to the loan's underwriting deficiencies and subordinate collateral position. (Cooper Tr. 513– 526; FDIC Exh. 4, pg. 2-a-4.)
78. The above loan, to GABL and through Placement Services, was for the development of a shopping mall at Baton Rouge, Louisiana, named Place Vendome. The principals of GABL Corporation, Beasley, Leonard LaPlace, Adolph LaPlace and George Russell, together with one Sam Recile, were involved. (Cooper Tr. 527; FDIC Exh. 121, pg. 7–8.)
79. Landry acted as either escrow agent or trustee for the wire transfer of funds. Place Vendome was not a customer of nor have a relationship with the Bank, and it thus did not have a trust account into which to deposit funds until paid out. Nonetheless, Landry transferred Place Venom's moneys through a trust account without any trustee relationship or trust instrument or agreement, in a trust department which had been dormant since 1984. During the time the Trust Department was operational there had been a charge of between $10 and $15 for wire transfers, but no charges or fees were applied to these transfers for Place Vendome. (Landry Tr. 1897–9; Cooper Tr. 528, FDIC Exh. 121, pgs. 7–8 and Attachment 9.)
80. On April 17, 1992, a document entitled, "Agreement Regarding Letter of Credit Transaction," bearing the signatures of George Russell for Place Vendome Corporation of America and Paul Kerrigan for Funding Placement Services, was signed with Respondent Landry as witness. The Agreement concerned a letter of credit transaction between Place Vendome Corporation of America and Patrician Corporation as the clients and Funding Placement Services as the counter party. (Landry Tr. 1878, 1881; FDIC Exh. 190, FDIC Exh. 291.) On May 5, 1992, Respondent Landry wrote a letter to George Russell of Place Vendome Corporation indicating that the Bank, through its trust department, had established a relationship with Place Vendome to act as Place Vendome's escrow agent for the procurement of letters of credit and other financing for the Place Vendome project. (Landry Tr. 1881; FDIC 121, pgs. 7–8; FDIC Exh. 121, Attachment 9; FDIC Exh. 291.) Prior to the agreements among Place Vendome and Funding Placement Services and Pangaea Corporation, and prior to the letter to the Bank concerning the pending SEC matter against Place Vendome, Landry had handled five wire transfers for Place Vendome; after the agreements and the letter, Respondent Landry handled an additional twenty-four wire transfers on behalf of Place Vendome. (Landry Tr. 1892–1898.)
81. George Russell, on behalf of Place Vendome, authorized the release of $300,000 to the Bank, to Centrex International, and to Funding Placement Services, which had a fee-slitting agreement with Pangaea on fees earned for the receipt of a $15,000,000 letter of credit. (FDIC Exh. 121, pgs. 7, 8, 9; Attachment 5, pgs. 6, 8, 9, 10, 11.)
82. Respondents Landry and Jenson traveled to Quito, Ecuador, with non-Bank individuals, GABL Corporation principal Byford Beasley, a man named Nix, and Nix's girlfriend. During the 1993 Examination, Respondent Landry described to Examiner in Charge Cooper the purpose of his trip as meeting someone named Ed Neal to investigate a way he and the other travelers were going to capitalize Pangaea. Landry was told of a "little known secret" that in Ecuador one could invest $200,000 in U.S. dollars and in the short time of six weeks flip the amount up to a million dollars, and that the trip to Ecuador was to investigate this investment and see if it could help Respondents Landry and Jenson raise capital. (Cooper Tr. 528, 575–576; FDIC Exh. 121, pg. 9.) On terms set out in letters from Jenson and Landry, under the letterhead of Pangaea Corporation, address given as that of Lewis' law firm, to Ed Neal of Quito, Ecuador, on June 15, 1992, a $4,000,000 letter of credit was to be issued by First Guaranty Bank on behalf of Pangaea Corporation and $2,000,000 would be put in trust to be held by the Bank's trust department. (Tr. Cox 475; FDIC Exh. 142.) A letter and agreement in Landry's files at the Bank were from Landry {{10-31-99 p.A-3058}}to Ed Neal wherein Landry explains that the Bank will act as escrow agent and that the Bank will not bear any liability or responsibility. The purpose of the agreement attached as the "stock purchase agreement" was to provide a (U.S.) $3,000,000 loan to Pangaea Corporation which would then provide $3,000,000 in Ecuadoran currency, which in turn would be utilized to purchase $6 million U.S. dollars in common stock of the Bank, thus recapitalizing the bank and placing control of the Bank in the hands of the incorporators of Pangaea Corporation. The security for the loan was a pledge of all shares of Pangaea Corporation and the bank shares purchased with the proceeds from this transaction. (Cox Tr. 589–591; FDIC Exh. 121, pgs. 9–10.)
83. The bank incurred travel expenses in the amount of $20,000 to send the Bank and non-Bank personnel to Quito, Ecuador, in June 1992. (Cox Tr. 265; FDIC Exh. 121, pg. 9–10; and FDIC Exh. 270, dated 6/9/92.)
84. A letter from Landry to Ed Neal in Quito, Ecuador, stated:
    Pangaea Corporation will grant up to a 15 percent interest in its current outstanding common equity as of June 15, 1992, to a trust held by Rothschild Trust on behalf of you or your assigns, heirs or affiliates. Such stock will be granted incremental in three installments as the preferred stock investment described in item 1 is funded. For each $2 million in preferred stock, Pangaea Corporation will grant 5 percent of the current June 15, 1992, outstanding common equity. For such consideration, you agree not to support any action now or in the future that would result in the dilution of the ownership interests of Mr. Rick Jenson, Mr. Michael D. Landry and Mr. Scott P. Crabtree, 85 percent collectively, unless support of such action is executed by Mr. Jenson and Mr. Landry as duly authorized proxies on your behalf.
(Underlining added.) (Cox Tr. 473–474; FDIC Exh. 121, pg. 9–10; FDIC Exh. 142.)

F. PAYMENT OF TRAVEL COSTS
AND EXPENSES

85. Lewis and Chairwoman Cefalu were responsible for reviewing and approving travel and expense reports. Lewis would review the travel and expense reports and initial the expenses he approved. (Cefalu Tr. 744; Lewis Tr. 1299; FDIC Exh. 270.)
86. Lewis initialed the travel voucher for Jenson's travel and expense report dated September 17, 1991, for travel by Landry, Jenson and Crabtree to Vancouver, British Columbia, for discussion of "capital/immigration funds." (Cefalu Tr. 746–7, Lewis Tr. 1485, FDIC Exh. 270.) As noted above, the purpose of the trip was to seek investments for Pangaea.
87. Lewis did not investigate the expenses incurred by Landry, Jenson, and Crabtree on October 8, 1991, in order to ensure that they did not relate to the immigration fund plan through Inter American Investment Services partnership. (Cefalu 747; Lewis Tr. 1486–1490; FDIC Exh. 270.)
88. Lewis initialed Jenson's travel and expense vouchers dated January 10, January 27, February 26, February 4, March 9, March 20, 1992; and April 20, 1992, which included Pangaea-related expenses regarding Dakin & Willison, Blue Rose Investment Corporation, and immigration fund. (Cefalu Tr. 748–749; FDIC Exh. 270.)
89. Jenson's travel voucher dated March 9, 1992, was approved and authorized by Lewis for costs incurred on March 2, 1992, in connection with discussions among D. Figueroa, J. Daigle, and Crabtree and Jenson concerning the immigration fund. Lewis did nothing to assure himself that these expenses were not related to Inter American Investment Services. (Cefalu Tr. 749; Lewis Tr. 1443–1444, and 1491–1492; FDIC Exh. 270.)
90. Jenson's travel and expense voucher dated April 20, 1992, initialed by Lewis, included costs incurred in connection with meetings with Blue Rose Investment Corporation. (Cefalu Tr. 750; FDIC Exh. 270.)
91. Lewis approved and authorized payment of Jenson's travel and expense voucher dated May 13, 1992, which included the costs associated with the trip of Jenson, Landry, and others to Quito, Ecuador. (Cefalu Tr. 750–751; FDIC Exh. 270.)
92. In his capacity as chairman of the Bank's executive committee, Lewis signed Jenson's travel and expense voucher for the trip to Quito, Ecuador, without making any inquiries as to what the purpose of the trip was or how it benefited the Bank. (Lewis Tr. 1492–1493.)
93. Lewis initialed Jenson's travel and expense voucher dated July 15, 1992, for a meeting by Jenson, Crabtree, and J. Bentivegna to discuss the immigration fund brochure. Respondent Lewis did not make any inquires to {{10-31-99 p.A-3059}}assure himself that these expenses were not for the Inter American Investment Services partnership. (Cefalu Tr. 752–753; Lewis Tr. 1492–1494; FDIC Exh. 270; FDIC Exh. 121 (Inter American Investment Services Attachment); Lewis Exh. 41, pg. 37.)

I. FIDUCIARY DUTIES AND
DIRECTORS' MEETINGS

94. It was Lewis' practice generally not to read the minutes of the meeting that he signed as the secretary to the Board of Directors. This practice continued through 1991 and 1992. In his role as secretary to the Bank's Board of Directors, Lewis would go to the Bank after the draft minutes for the board meeting had been edited by Jenson without reading them or verifying the contents with other directors or anyone else to ensure their accuracy, would sign them. (Lewis Tr. 1390–2.)
95. During the meeting of the Bank's Board of Directors on January 9, 1991, Landry presented the monthly financial statement, but did not disclose that he and Jenson had entered into a consulting arrangement with Funding Placement Services which required the Bank to pay $20,000 for the Pangaea Corporation concept. (Cefalu Tr. 727; FDIC Exh. 80; FDIC Exh. 121, pg. 4–5.)
96. Landry was present at the February 28, 1992, special meeting of the Bank's Board of Directors, and did not disclose that he and Jenson and Crabtree had caused the incorporation and were the incorporators of Pangaea. (Cefalu Tr. 729–730; FDIC Exh. 82; Lewis Tr. 1410–1411; and 1432; FDIC Exh. 82.) While Lewis was not at that meeting, he thereafter signed the minutes, but did not disclose to any of the Board that his law firm had incorporated Pangaea. (Cefalu Tr. 730, 769; FDIC Exh. 82.)
97. Landry attended the March 12, 1992, meeting of the Bank's Board of Directors and did not disclose that he, Jenson and Crabtree had formed Pangaea; nor did Landry disclose that he, Jenson and Crabtree were Pangaea's sole incorporators or that the CLMC firm had performed the legal work required to incorporate Pangaea. (Cefalu Tr. 733; FDIC Exh. 83.) Lewis likewise attended the meeting and also did not disclose to the Board that the CLMC firm incorporated Pangaea on behalf of Landry, Jenson, and Crabtree. (Cefalu Tr. 734–735, 769; FDIC Exh. 83.)
98. Lewis and Landry attended the Bank's Board of Directors meeting on May 21, 1992. Landry did not disclose that on behalf of Pangaea, he had agreed to split fees with Funding Placement Services; that he had agreed to act as trustee or escrow agent for Place Vendome; or, that credit had been extended to Funding Placement Services principal Robert G. Smith. (Cefalu Tr. 737–738; FDIC Exh. 86; FDIC Exh. 291.)
99. Landry attended the August 13, 1992, Board of Directors meeting. Landry did not disclose the contract requiring the Bank to pay William White Bolles $15,000 per month for his services on behalf of a bank holding company such as Pangaea; or that the contract with Richard Crabtree required a payment of $6,000 and the Bank's payment of 10 percent of the income from the trust department for 10 years; or that he had used Bank funds to make payments to William White Bolles and Richard Crabtree. (Cefalu Tr. 743–744; FDIC Exh. 89.)
100. The minutes of Board meetings do not reflect, and Lewis, secretary of the board, does not have an independent recollection that Landry disclosed to the directors the fee splitting arrangement he signed on behalf of Pangaea with Funding Placement Services. (Lewis Tr. 1417; FDIC Exh.s 85–89.)
101. The minutes do not reflect, and neither Lewis nor the secretary taking notes at the meeting have an independent recollection, whether Landry disclosed to the Board Meeting the contracts or agreements that were entered into with William White Bolles, Richard Crabtree, Funding Placement Services, Blue Rose Corporation, or Place Vendome. (Lewis Tr. 1284, 1430–1433; FDIC Exh.s 86–89.)
102. The minutes do not reflect, and Lewis, the secretary of the board, does not have an independent recollection that Landry disclosed to the Directors that Landry had witnessed, entered into, or used Bank funds to pay William White Bolles, Funding Placement Services, Richard Crabtree, Blue Rose Corporation, or Place Vendome. (Tr. 1284; Lewis Tr. 1430–1432; FDIC Exh. 86–89.)
103. At no time during the Board of Directors meetings held prior to September 16, 1992, attended by Lewis, did Landry disclose to the Board any of the self-dealing contracts or expenses that were approved by Lewis and paid on behalf of Pangaea or Inter American Investment Services. (Lewis Tr. 1438–1440.)
{{10-31-99 p.A-3060}}
104. Landry resigned from his positions at the Bank by a letter to Jenson, dated September 16, 1992. (FDIC Exh. 119.) Excerpts from the letter are as follows:

    This letter is to advise you of my immediate resignation
    ...
    You have hired numerous "experts" who, for a sizable fee, offered to assist us in our efforts to capitalize Pangaea Corporation and acquire controlling interest of First Guarantee Bank. Funding Placement Services, Richard Crabtree, Dakin & Willison, William Bolles, and others — most have come and gone. All were contracted with on trips or in meetings where I was not present. In most cases, the amount of dollars spent has been proportionately greater than the services rendered.
    ...
    Whether or not I have been intended to be the scapegoat all along, I do not know. I only know that I can no longer condone the "self dealing" nature of the transactions which have been entered into for the good of Pangaea Corporation at the expense of First Guaranty Bank. Nor can I endorse any transaction to our Board of Directors without the complete and full disclosure of the potential "self dealing" transactions into which we have entered.
(Underline added.) It was some time after this, June 3, 1993, that Landry provided a fairly complete, though rambling, sixteen page single space typed letter to the FDIC Examiner in Charge of the then current examination, FDIC Exh. 121, with attachments of roughly 500 pages, as discussed above.

IV. DISCUSSION

Authority to remove an institution-affiliated party from his position at a federally insured depository institution, or to prohibit an institution-affiliated party from further participation in the affairs of a federally insured depository institution, is granted by Section 8(e) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e). That section sets out a three prong criteria—the "misconduct," the result of which has a particular "effect," and the "culpability" involved. Below is the statutory overview and criteria for a prohibition.

A. Statutory Overview

In order to prohibit an individual from further participation in the affairs of a Federally insured depository institution, 12 U.S.C. § 1818(e), requires findings as follows:

    a) There must be a specified type of misconduct — violation of law, unsafe or unsound practice, or breach of fiduciary duty;
    b) The misconduct must have the effect of financial gain to the Respondent, or financial harm or other damage to the institution; and
    c) The misconduct must involve culpability through either personal dishonesty, or willful or continuing disregard for the safety or soundness of the institution.
In the instant case, Respondents are charged with all three alternative forms of misconduct set out in this above-referenced section.

B. Misconduct

1. Violations of Law

a. Failure to Provide Material Information

Section 12(i) of the Securities Exchange Act of 1934, 15 U.S. § 78, contains filing requirements for entities within its jurisdiction. Pursuant to its authority, the Federal Deposit Insurance Corporation has issued Part 335 of 12 Code of Federal Regulations, containing filing requirements of all securities of an insured bank.
Respondent Landry is charged with failing to disclose material information in quarterly and annual filings made to the FDIC in violation of 12 C.F.R. 335. The purpose of that section is to ensure that investors and regulators are adequately informed of the current financial condition of the bank. Subpart C. of Part 335, Bank Reporting, relates to various filing requirements, and section 335.330 applies to required Form F-4, the Quarterly Report, providing as pertinent that:

    Every registrant bank shall file a quarterly report in conformity with the requirements of Form F-4 for each fiscal quarter
    ...
Section 331 sets out the form for the quarterly report, Form F-4, in part at Item 2, as follows:
    Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations
    Management's discussion and analysis of the financial condition and results of operations shall be provided so as to enable the reader to assess material changes in
    {{10-31-99 p.A-3061}} financial condition and results of operations ...
Section 350 states as follows:
    Additional Information.
    In addition to the information expressly required to be included in a statement or report, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading.
(Last emphasis by underlining added.) Finally, Section 102(x) provides that:
    The term material when used to qualify a requirement for furnishing of information as to any subject, limits the information required to those matters as to which an average prudent investor ought reasonably to be informed.
As the Bank's principal financial officer or chief accounting officer, it was Landry's obligation to manually execute the quarterly reports. 12 C.F.R. § 335.331, section "E", Signature and Filing of Report.
As to Lewis' responsibility, while his failure to see that material information was included in the quarterly reports was not in violation of the cited Regulation, his failure to bring factual matters to the attention of the Board should be added to the factors discussed as evidence of his participation in unsafe and unsound banking practices, and breaches of fiduciary responsibilities. Because the issues are intertwined, they are here discussed as to both Landry and Lewis, and in the section referring to unsafe and unsound activities and breach of fiduciary duty shall be referred to again.
The goal of the securities laws is to fully inform shareholders and regulators of material information in a manner and time that allows them to act on the information. The very purpose of the period securities filing requirements, such as those found at Part 335 of the FDIC Rules, is to ensure that investors, as well as supervisors, receive adequate information concerning the operation and financial conditions of the bank. See, e.g., SEC v. Kalvex, Inc., 425 F. Supp. 310 (S.D.N.Y. 1975). Expressing Congress' clear intent that investors receive adequate information about the operations and financial condition of a bank, section 13(a) of the Exchange Act requires that such reports be true and correct and failure to comply with such would result in a violation of the securities laws. Id. Accord, SEC V. Savoy Indus., 587 F.2d 1149, 1165 (D.C. Cir. 1978), denied sub nom. Zimmerman v. SEC, 440 U.S. 913 (1979). In Kalvex, 425 F. Supp. at 315, the court reviewed the defendant's failure to disclose certain facts to shareholders and ruled that "undisclosed facts [which] might ... [lead] a reasonable stockholder to question the [defendant's] integrity ... and ... ability to discharge ... fiduciary duties" were material and required to be disclosed. Id. at 310, 315.
Landry's failure to disclose the material information in quarterly and annual filings made to the FDIC deprived stockholders and bank regulators of the ability to uncover Lewis' and Landry's conflicts of interest and Landry's attempted appropriation of the Bank. Lewis' failure to insure the proper disclosure of information to which he was privy, robbed shareholders of their right to be informed of material facts concerning their Bank.
The power to enforce and administer sections 12, 13, 14(a), 14(c), 14(d), 14(f), and 16 of the Exchange Act is vested in the FDIC for securities issued by banks and savings institutions in which deposits are insured in accordance with the FDI Act. Section 12(i)(3) of the Exchange Act, 15 U.S.C. § 781(i). This section of the Act also grants the FDIC the authority to promulgate the rules and regulations necessary to carry out the duties assigned to it. The FDIC has promulgated these regulations at 12 C.F.R. Part 335.
As noted above, the Regulations make clear that material information is that which a reasonable investor would consider in making a decision regarding the security. Courts have articulated the test for materiality in a number of ways. "[Materiality was] determined by the substantial likelihood that a reasonable person would attach importance to the matter in question. SEC v. Joseph Schlitz Brewing Co., 452 F. Supp. 824, 832 (E.D. Wis. 1978). "Material facts are facts which a reasonable stockholder in the process of deciding how to vote might consider important." SEC v. General Refractories Co., 400 F. Supp. 1248, 1257 (D.D.C. 1975). "[T]he materiality of facts is to be assessed solely by measuring the effect the knowledge of the facts would have upon prudent and conservative investors." SEC v. Texas Gulf Sulphur Co., 401 F. 2d 833 (2d Cir. 1968). The United States Supreme Court has held that {{10-31-99 p.A-3062}}"[a]n omitted fact is material if there is substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." TSC Indus. v. Northway Inc., 426 U.S. 439, 96 S. Ct. 2126, 48 L. Ed. 2d 757 (1976).
Insuring shareholders' access to information is of such importance that the very act of filing a quarterly report which contains false or misleading information is a violation of section 13(a) of Exchange Act. SEC v. Benison, 657 F. Supp. 1122 (S.D.N.Y. 1987); and SEC v. World-Wide Coin Inks., 567 F. Supp. 724 (N.D. Ga. 1983). Likewise, the act of filing a report which omits material information required to be included by statute or regulations is a violation of section 13(a) of the Exchange Act. SEC v., D: l Indus., 421 F. Supp. 691 (D. Mass. 1976), aff'd, 552 F. 2d 15 (1st Cir. 1977); and General Refractories Co., 400 F. Supp. at 1248. Where an individual has intentionally falsified regulatory filings, it is particularly important to take aggressive enforcement action against the responsible party. Otherwise, the perception may develop that there are no consequences to submitting false regulatory filings and little benefit to telling the truth. In the Matter of Ghaith R. Pharaon, Docket Nos. 991-037-CMP-I1 1-037-E-I1, 1997 WL 125217 (F.R.B.); In the Matter of Ghaith R. Pharaon, Docket Nos. 991-037-CMP-I1 1-037-E-I1, Recommended Decision, April 12, 1966, page 115; aff'd 135 F. 3d 148 (D.C. Cir. 1998). For this reason civil monetary penalties have been assessed for failure to fully follow the audit certification requirement in filing periodic disclosures found in Regulations. The failure to comply with the applicable reporting requirements are not "trivial," nor are they mere technical deficiencies. In the Matter of CBC INC., and Lynell G. Skarda, Langdon L. Skarda and Kent Carruthers, Docket Nos. 90-033-CMP-BHC, 90-033-CMP-I2, 90-033-CMP-I3, 1992 WL 685196 9 (F.R.B.).
By any measure, a proposed or potential change in bank control is material information which must be disclosed, as the very act of incorporation of a bank holding company for a financial institution is material information to the functions not only of stockholders, but of regulators as well. The FDIC considers a proposed or potential change in control as being of such materiality that its disclosure is expressly required by the FDIC Rules, 12 C.F.R. § 335.312, item 4. Similarly, the very act of incorporating a corporation which will serve as a holding company for a financial institution is material information, and is required to be disclosed to shareholders and bank regulators.
Other information which a prudent shareholder would deem material in making a decision in investing in a financial institution includes information that the Bank was planning to expand into untried fields, having little if anything to do with banking. Further, that the Bank's three most influential insiders, its president and chief executive officer, its chief financial officer and cashier, and its full time, in-house, turnaround consultant, while supposedly continuing their employment by the Bank, have gone into partnership with the Bank's law firm in a commercial venture in part utilizing the Bank's resources, is certainly material information, and certainly of particular interest to the Bank's regulators.
Based on the above case law and expert testimony of Dennis Chapman,7 there were four events which should have been disclosed by Landry and Lewis between August 1991 and September 1992.
The first event occurred with the Bank's Board of Directors' approval of the Capital Enhancement Plan. The plan in part contemplated the establishment of a bank holding company to be known as Pangaea. Although the Board of Directors did not approve the establishment of the holding company at the meeting of August 8, 1991, the Board did approve the concept of turning to foreign markets and entering into new business opportunities never utilized by the Bank. The change is business concept was material and thus to be reported pursuant to 12 C.F.R. § 335.
The second event occurred at the time Landry, Jenson, and Crabtree, the Bank insiders, determined to employ the Pangaea concept for the self-serving purpose of utilizing bank

7 Dennis Chapman is a licensed certified public accountant with a Masters Degree in Business Administration from George Washington University. He has served as a staff accountant in the FDIC's Registration, Disclosure and Securities Operations unit for 19 years. He was trained in public company reporting disclosure requirements by the Securities and Exchange Commission and has specialized in public company reporting for 23 years. Mr. Chapman was qualified as an expert in the FDIC regulations pertaining to financial institutions' public disclosure requirements. (Tr. 891.)

{{10-31-99 p.A-3063}}money to fund their ownership of the bank holding company and thus control the Bank. According to the Landry Letter, this event occurred on or about August 8, 1991, and continued until September 1992. (FDIC Exh. 121, pgs. 1–3.) Likewise, such a determination was material and reportable.
The third event occurred with the incorporation of Pangaea by Landry, Jenson, and Crabtree on February 21, 19. The very act of Bank insiders incorporating and establishing a bank holding company which further supports a potential change in control is material for disclosure purposes.
The fourth event occurred at the time it was decided by the Bank insiders and Lewis and his law firm to enter into disparate business ventures known as Inter American Investment Services and Amer Invest, Inc., associated with the Bank and using the Bank's resources for the their own benefit. Based on testimony, this joint venture surfaced in the fall of 1991, when Lewis began reserving corporate and trade names, and continued into 1992.
Certainly, Landry and Lewis cannot deny having knowledge of these events. On August 8, 1991, Landry attended the meeting at which the Bank's Board of Directors approved the Capital Enhancement Plan. Subsequently, Landry actively participated in the drafting of the Pangaea Booklet which clearly set out the future establishment of a bank holding company to be owned by the Bank's principal officers. (FDIC Exh. 11, pg. 29.) He also drafted the financial projections for the Pangaea Plan based upon his projections for the Bank's revenue. Landry himself considered the Pangaea booklet a stock offering document.8 In mid August 1991, Landry traveled to Vancouver, British Columbia, to garner support for the Pangaea Plan and the yet-to-be-formed Inter American Investment Services. In December 1991, Landry paid Bank funds to Funding Placement Services' draft a preferred stock offering. (FDIC Exh. 121, pgs. 3–4, 7.) By February 21, 1991, Landry, along with Jenson, and Crabtree, had Coudrain incorporate Pangaea, and named themselves as incorporators, directors, and agents for service.
By October 1991, the CLMC partnership had met concerning Inter American Investment Services and Lewis had directed CLMC associate Jana Sturgill, to investigate the changes in the immigration law. Lewis' partner, Coudrain, discussed the Inter American Investment Services partnership with Jenson in December of 1991 and the CLMC law firm held meetings concerning the Inter American Investment Services partnership while Coudrain was drafting articles of partnership near the time he incorporated Pangaea.
Lewis was not as closely associated with Pangaea as the other Respondents, but where a bank director, such as Lewis, is privy to information concerning a reportable item, he has a clear duty to the Bank, its shareholders and its regulators, to ensure that the information is properly and timely disclosed. Whether Lewis believed that Pangaea was for the benefit of the Bank or for the benefit of Landry, Jenson and Crabtree, he had an obligation as a Bank director to see that this material information was disclosed. Lewis did nothing to assure himself that material information concerning the potential change in control was disclosed in a timely manner to the FDIC and Bank shareholders.
In addition, Lewis did nothing to insure that his Inter American Investment Services partnership with Landry, Jenson, and Crabtree was properly disclosed to shareholders and regulators as required by section 335.312, item 10, of the FDIC rules. Lewis reserved the corporate and trade names Inter American Investment Services and Amer Invest; he attended CLMC meetings at which the incipient firm business was discussed; he had an associate, Jana Sturgill, prepare legal memoranda. He, above all others, knew the activities on behalf of this partnership. Yet he never so much as inquired as to whether this material information was being properly disclosed to shareholders and regulators.
In the first quarter of 1992, his firm met with the Inter American Investment Services principals and drew up the articles of partnership and Lewis continued to reserve the corporate and trade names Inter American Investment Services and Amer Invest through the third quarter of 1992. Yet Lewis failed to insure that Landry and the Bank disclosed these material facts to shareholders and regulators. The material items left

8 FDIC Exh. 121, pg. 1.

{{10-31-99 p.A-3064}}undisclosed were not trivial, technical or inadvertent failures to inform.

2. Unsafe and Unsound Practices

The FDI Act does not define the term "unsafe or unsound practices," nor does it specify those acts which are deemed to be either unsafe or unsound. Rather, bank regulatory agencies and courts have consistently interpreted the term as addressing any conduct which is contrary to prudent practices and which, if continued, potentially exposes a financial institution to an abnormal risk of loss or harm. Van Dyke v. Board of Governors of the Fed. Reserve Sys., 876 F. 2d 1377, 1380 (8th Cir. 1989), accord, Mcorp Fin., Inc. v. Board of Governors of the Fed. Reserve Sys., 900 F. 2d 852, 862 (5th Cir. 1990) ("[C]ongress has not spoken clearly to what constitutes an unsafe or unsound practice, leaving the development of the phrase to the regulatory agencies."); and Independent Bankers Ass'n of America v. Heimann, 613 F. 2d 1164, 1169 (D.C. Cir. 1979), reh'g denied (1980) (It has long been held that bank regulatory agencies' discretion to define and eliminate unsafe and unsound practices should be liberally construed.)
There are two common components to any unsafe or unsound practice. First, an imprudent act, which is an act contrary to acceptable standards of banking operations. First Nat'l Bank of Eden v. Department of the Treasury, 568 F. 2d 610, 611 n. 2 (8th Cir. 1978). Second, there must be an abnormal risk of loss or damage to the financial institution. Mcorp. Fin., 900 F. 2d 852; accord: Seidman v. OTS, 37 F. 3d 911, 932 (3d Cir. 1994). Unsafe or unsound practices need not rise to the level of having a reasonably direct effect on a bank's financial soundness to expose a bank to a risk of loss or other damage. Greene County Bank v. FDIC, 92 F. 3d 633, 636 (8th Cir. 1996). Indeed, courts have deferred to bank regulatory agencies' expertise in defining the parameters of an "unsafe or unsound" practice:

    The phrase unsafe or unsound banking practices is widely used in the regulatory statutes and in the case law, and one of the purposes of the banking acts is clearly to commit the progressive definition and eradication of such practices to the expertise of the appropriate regulatory agencies.
Groos Nat's Bank v. Comptroller of the Currency, 573 F. 2d 889, 897 (5th Cir. 1978).
Although unsafe and unsound practices are determined on a case-by-case basis, the Board has determined certain practices to be unsafe and unsound. Failure to follow established bank lending policies or underwriting procedures is an unsafe or unsound practice. In the Matter of William Marvin Clark, Sr., FDIC-89-199e, FDIC Enforcement Decisions and Orders [Bound vol. 2], ¶ 5162, A-1609 at A-1613; accord, In the Matter of Bay Bank & Trust Co., Panama City, Florida, FDIC-92-313b, FDIC Decisions and Orders [Bound Vol. 2], ¶5213, A-2411 at A-2422. The poor management evidenced by executive officers' failure to follow or implement a bank's lending policies is an unsafe or unsound practice. Id. Any actions taken by a bank that is in a critical capital condition that are not clearly for the preservation of the bank's assets are unsafe and unsound. In the Matter of Janice France, et al., FDIC-90-156c&b, FDIC Enforcement Decisions and Orders [Bound Vol. 2], ¶5166A, A-1766 at A-1766.5. A breach of one's fiduciary duty to the Bank is, per se, unsafe and unsound. Stoller, FDIC-90-115e Violations of law are contrary to generally accepted standards of prudent operation [of a financial institution] and therefore constitute unsafe and unsound practices. In the Matter of ***, Docket Nos. FDIC-84-192e, FDIC-84-221e, FDIC-85-40k (consolidated), FDIC Enforcement Decision and Orders [Bound Vol. 1], ¶5118, A-1305, at A-1317. While entering into a retainer agreement is not per se unsafe and unsound, the retainer agreement must be evaluated in light of the timing of the expense; the size of the retainer, and the scope of the services actually performed. In the Matter of Harold Hoffman, Alaska Continental Bank, Anchorage, Alaska, FDIC-88-156b&c, FDIC Enforcement Decision and Order [Bound Vol. 2], ¶5140, A-1489, at A-1493.
In violation of the Bank's lending policies, Landry went before the Bank's loan review committee to champion an extraordinarily large extension of credit, $450,000, to Robert F. Smith, an out-of-territory extraordinarily uncreditworthy borrower. Landry did so at a time when he knew the Bank's senior lending officer, who had strenuously objected to the credit's extension, was out of the office. When Landry presented the loan, it received fierce opposition from the loan review committee. In light of this opposition, Landry had the loan tabled. He then saw to it that Jenson extend the credit pursuant to Jenson's personal lending authority.
{{10-31-99 p.A-3065}}The loan was secured by restricted stock, a form of collateral with which the Bank had no experience, and which had limited liquidation value. At the time the loan was being underwritten, the borrower had a negative credit history and the loan officer responsible for the credit was of the opinion that its underwriting was not strong enough to support the credit's extension. In addition to these unfavorable features the Robert F. Smith loan was subject to a fee arrangement with Funding Placement Services which, in turn, had entered into a fee splitting arrangement with Landry on behalf of Pangaea. The risk of loss inherent in these practices is clear, and was confirmed by the "substandard" classification the loan to Robert F. Smith received during the 1993 examination. Under the circumstances, the loan was clearly unsafe and unsound, as was Landry's practice of championing loans for which he was receiving fees.
In addition, Landry signed the checks and paid Bank funds to retain Dakin & William White Bolles, Richard Crabtree, Funding Placement Services, and Blue Rose in furtherance of his efforts to find capital for his personal acquisition of the Bank. As documented throughout his letter, Landry knew that the agreements entered into, retainers paid, and agreements for future remuneration were of no benefit to the Bank. The agreements and payments were made at a time that the Bank's capital was all but exhausted. The size of the payments varied,9 and, when coupled with their sheer volume, they nearly depleted the Bank's remaining capital. Landry was well aware that the Bank was barely surviving and that the FDIC had recommended that the Bank's deposit insurance be terminated. Rather than preserve the Bank's few remaining assets, Landry chose to dissipate them in furtherance of his personal takeover of the Bank. Under the analysis set out in Hoffman, Landry's actions entering into and making payments on contracts, retainer agreements, and finders fees and the loss to the Bank inherent in such payments renders the practice were unsafe and unsound.
Further unsafe and unsound practices can be found in the extensions of credit that so naturally followed the initiation of a retainer agreement, finder's fee, or trust/escrow arrangement. By extending credit to these persons with whom Jenson and Landry had contracted with to raise funds for Pangaea's takeover of the Bank, they were placing the Bank's scarce, remaining capital in the hands of persons deemed uncreditworthy by the loan department.10 The risk of loss to the Bank is documented by the "substandard" through "loss" classifications these loans received during the 1993 Examination.
Additionally, Landry repeatedly placed his pursuit of personal gain ahead of his duty to the Bank, its shareholders, and depositors. It was his obligation to disclose material facts to disinterested directors of the Bank, shareholders and bank regulators, but he made no effort to disclose the true facts of two entities: Pangaea and Inter American Investment Services. Either one of these might have caused the Board, a shareholder or a regulator to question Respondent's abilities to discharge their fiduciary duties to the Bank. This failure led directly to the Board of Directors' inability to detect the fees, contracts, loans and expenses which were being incurred on behalf of Pangaea and Inter American Investment Services and exposed the Bank to loss or other damage.
In addition to Landry's unsafe and unsound squandering of Bank assets, he and

9 William White Bolles, $15,000 per month; Richard Crabtree $6,000 plus 10 percent of the trust department's earnings from his efforts for the next 10 years; Dakin & Willison $5,000 per month plus expenses; and Funding Placement Services, fees ranging from $15,000 for the introduction to Blue Rose to $20,000 for Pangaea's preferred stock offering.
10 At the time $13,000 in credit was extended to Funding Placement Service's Robert G. Smith, the loan officer was unable to establish which of two social security numbers was, in fact, Mr. Smith's. The loan officer hired a detective who was unable to correlate Mr. Smith's business address with an existing address.
At the time $44,000 was extended William White Bolles, the Bank had received a letter from Mr. Bolles indicating that he was subject to a $26 million RICO judgment.
As noted in the Landry Letter, George Russell had a longstanding bad credit history with the Bank. As further noted in the Landry letter, Byford Beasley traveled to Ecuador with Pangaea principals to seek funding for Place Vendome, Patrician, and other related ventures; yet Respondent Landry did nothing to impede the Bank's $450,000 extension of credit to GABL Corporation, a corporate interest of both Beasley and Russell.
Though not a consultant to the Bank, the $450,000 loan to Robert F. Smith was made pursuant to a fee-splitting arrangement signed by Respondent Landry, on behalf of Pangaea, and Robert G. Smith, on behalf of Funding Placement Services.

{{10-31-99 p.A-3066}}Lewis engaged in the unsafe and unsound practice of breaching other fiduciary duties to the Bank. As detailed in sections above, Landry and Lewis repeatedly breached their fiduciary duties of loyalty and care to the Bank. As a director Lewis had a fiduciary duty to inquire and investigate. Lewis did not attend the August 8, 1991, meeting of the Bank's Board of Directors. The next week, knowing nothing of the August 8, 1991, board meeting, Lewis was contacted by Jenson and asked to reserve the corporate name Pangaea in various states. Without further inquiry, on August 22, 1991, Lewis began taking steps to reserve the corporate name. Lewis attended the executive committee meeting of August 26, 1991, and the executive and Board of Directors meetings in September 1991. At no time did the Bank's Board of Directors pass a resolution authorizing the incorporation Pangaea, the incorporation of a holding company or any legal or corporate activity that would have authorized or ratified Lewis' actions of August 22, 1991. Nonetheless, Lewis did nothing to ensure that the legal representation he undertook when he investigated and reserved the corporate name was authorized by his client, the Bank. Lewis was aware of the legal activities on behalf of Pangaea in August 1991. This sort of ultra vires action is precisely contrary to generally accepted standards of prudent operation of a bank and, therefore, constitute unsafe and unsound practices.
Lewis' obligation as a director was to inquire and investigate. His imprudence in carrying out his roles as the Bank's attorney and director is an unsafe or unsound practice meeting the classic definition—conduct contrary to prudent action which, if continued, potentially exposes a financial institution to an abnormal risk of loss. The loss to which these unsafe and unsound practices exposed the Bank are documented by the Landry Letter, and the cost of the contracts, fees, agreements and travel expenses emanating from Pangaea, and are directly attributable to his inattention to directoral responsibilities.
While the Respondents have denied their culpability for these actions, they have not disputed that the activities took place, and that they participated in, or chose to ignore them. The Respondents' activity and inactivity constitutes unsafe and unsound practices within the meaning of section 8(e)(1)(A)(iii) of the FDI Act, 12 U.S.C. § 1818(e)(1)(A)(iii).

c. Breaches of Fiduciary Duty

Lewis and Landry each owed the Bank fiduciary duties of loyalty and care. The facts adduced at the hearing clearly demonstrate that Lewis' and Landry's conduct constituted a breach of these fiduciary duties.
Landry argues that Louisiana law, rather than Federal law, governed any finding of breach of fiduciary duty under section 8(e) of the FDI Act. Landry also contends that he was not subject to a finding of breach in that Louisiana law requires a predicate finding of recklessness to be a fiduciary breach and that since his actions in the Bank do not rise to the level of recklessness, there can be here no finding of breached fiduciary duty. To the contrary, the undersigned considers that even if the issue of breach were subject to local rather than Federal law, Landry's actions have been so continuous, of such long standing, and particularly so presumptuous as to fall within the definition of recklessness.
Further, it is clear that fiduciary duties to a bank for the purposes of 12 U.S.C. § 1818(e), are established by Federal law. The Financial Institutions Supervisory Act ("FISA"), Pub. L. No. 89-695, 80 Stat. 1028 (1966), granted the FDIC express statutory authority to bring enforcement actions, now found in 12 U.S. § 1818(e), against directors and officers of insured state nonmember banks for breach of fiduciary duty. At the time that FISA was enacted, there was a general consensus among State and Federal courts that the fiduciary duties owned by officers and directors were those defined in such cases as Geddes v. Anaconda Mining, 254 U.S. 590, 599 (1921); and Briggs, 141 U.S. at 132. See, e.g., Neese v. Brown, 405 S.W. 2d 577, 581 (Tenn. 1964) ("From our very thorough study of the matter we have concluded that there is no appreciable conflict of opinion among the courts as to the liability of directors [.] ... [T]he test as to whether or not a director is liable depends upon whether he has used reasonable care and diligence in carrying out his duties.") (citing, inter alia, Briggs, 141 U.S. at 132); accord, Graham v. Allis-Chalmers Mfg., 188 A. 2d 125, 130 (Del. 1963).
Absent any evidence that Congress intended otherwise, the statutory term "fiduciary duty" should be construed in accordance with that general understanding. See, Field v. Mans, 116 S. Ct. 437, 443 (1995) ("It is ... well established that `[W]here {{10-31-99 p.A-3067}}Congress uses terms that have accumulated settled meaning under ... common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning to these terms.'"); see also id. at 443 n. 9 ("We construe the [statutory] terms ... to incorporate the general common law ..., the dominant consensus of common-law jurisdictions, rather than the law of any particular State"). Because there is not the slightest indication that Congress intended fiduciary duty to mean anything other than the common-law consensus prevailing when the term was added to the statute, there is no basis for construing that term in accordance with the present day law of any particular state.
For purposes of 12 U.S. § 1818(e), fiduciary duty incorporates a traditional standard that has long been applied:

    It is now hornbook law that directors and officers of a bank have a fiduciary duty to the bank. Generally, the duty requires that bank officials, such as the Chairman of the Board ***, act as prudent and diligent persons would act safeguarding the bank's property, complying with state and federal banking laws and regulations, and ensuring that the bank is operated properly. The duty is owed to the bank, and not to persons with controlling interests in the bank. It requires the proper supervision of subordinates, a knowledge of state and federal banking laws, and the constant concern for the safety and soundness of the bank. While the standard of care for bank directors and officers, like the standard of care in negligence cases, is expressed in constant terms, the nature of the duty varies according to the facts. The greater the authority of the director or officer, the broader the range of his duty; the more complex the transaction, the greater the duty to investigate, verify, clarify, and explain.
In the Matter of ***, FDIC-85-356e, FDIC Enforcement Decisions and Orders [Bound Vol. 1], ¶5112, A-1229 at A-1235. (Citations omitted.)
Directors, officers, and institution-affiliated parties of a Bank owe it duties of care and loyalty. These duties require that the directors and officers exercise a degree of vigilance or care, which turns on the officer or director's fairness in dealing with the bank. Brickner v. FDIC, 747 F. 2d 1199 (8th Cir. 1984).
In all cases, an officer or director's personal or business interests must not be allowed to influence decisions made or actions taken in their official capacity with the bank. The FDIC Policy "Statement Concerning the Responsibilities of Bank Directors and Officers," 2 FDIC Law, Regulations, Related Acts at 5369 (April 30, 1993) states:
    The duty of loyalty requires directors and officers to administer the affairs of the bank with candor, personal honesty and integrity. They are prohibited from advancing their own personal or business interests, or those of others, at the expense of the bank.
    The duty of care requires directors and officers to act as prudent and diligent business persons in conducting the affairs of the bank.
The conversion of bank funds to one's own use and benefit has long been held to be a breach of a director's or officer's duty of loyalty to a financial institution. In Stoller, FDIC-90-115e, FDIC Enforcement Decisions and Orders [Bound Vol. 2], ¶5174, A-1866, the Board stated "[W]hen directors and officers place their personal interests above those of the corporation, or utilize corporate resources for personal gain, they have committed a serious breach of their fiduciary duty." Id. at A-1870; accord, Pepper v. Litton, 308 U.S. 295, 311 (1939).
Membership on a bank's Board of Directors is not a passive activity. It requires vigilance and attention to the information at one's disposal. The failure to inquire, investigate, verify, clarify and explain is a breach of an officer or director's duty of loyalty. In In the Matter of R. Wayne Lowe and Jimmy A. Spivey, FDIC-89-21k, FDIC Enforcement Decisions and Orders [Bound Vol. 2], ¶5153, A-1531 at A-1536, the Board stated:
    In the Board's view, the fiduciary duty of loyalty which bank directors owe their institution requires a bank director to investigate the possibility of a conflict of interest and be completely candid with his colleagues. When a bank director finds himself in a situation involving a conflict of interest, as here, it is incumbent on him to make complete disclosure in order to affirmatively avoid a conflict, even if such disclosure seems superfluous.
{{10-31-99 p.A-3068}}Additionally, in In the Matter of Ronald J. Grubb, Bank of Hydro, Hydro, Oklahoma, FDIC-88-282k and FDIC 89-111e, FDIC Enforcement Decisions and Orders [Bound Vol. 2], ¶5181, A-2006, at A-2031, the Board reviewed Grubb's actions, stating:
    Second, he proposed and personally benefited from transactions in which his personal interests and the Bank's interests were in conflict. The Board has held such conduct to constitute a breach of an officer's or director's fiduciary duty. (Citations omitted.)
Still another case held that:
    Although the creation of a conflict of interest is not per se a breach of fiduciary duty, the methods by which a director or officer handles a conflict of interest can dictate whether or not there has been a breach of fiduciary duty.
In the Matter of *** and ***, *** Bank, FDIC-87-61e and FDIC-87-62k, FDIC Adjudicated Decisions [Bound Vol. 1] ¶5113, A-1236 at A-1243-A-1244.
When we come to the issue of whether a failure to act may also constitute breaches of fiduciary duty, we find that a director or officer does not escape his fiduciary duties by ignoring them or abdicating responsibility for the oversight responsibilities he was entrusted. In In the Matter of Patrick G. Hack, Bank of Southern Oregon, Medford, Oregon, FDIC 91-086jj, FDIC Enforcement Decisions and Orders [Bound Vol. 2], ¶5168A, A-1807, the FDIC Board stated that it:
    [I]s not willing to burden the Bank and the public with the additional risk of a director who does not exercise careful, independent judgment in carrying out his fiduciary obligations and who is, at best, cavalier about the institution's federal and state regulatory obligations.
Id. at A-1808. 1. These sentiments are the very ones set out by the U.S. Supreme Court:
    [W]e hold that directors must exercise ordinary care and prudence in the administration of the affairs of a bank, and that is something more than officiating as figure-heads. They are entitled under the law to commit the banking business, as defined, to their duly-authorized officers, but this does not absolve them from the duty of reasonable supervision, nor ought they be permitted to be shielded from liability because of want of knowledge of wrong-doing, if that ignorance is the result of gross inattention.
Briggs, 141 U.S. at 165–166.
Senior executive officers are subject to a proportionally higher standard of care by virtue of their unique positions of trust and familiarity with the bank's operations. In the Matter of Steven E. Smith, Mainland Bank, Texas City, Texas, FDIC-90-159jj, FDIC Enforcement Decisions and Orders [Bound Vol. 2], ¶5163, A-1635. Similarly, the fiduciary duties owed by attorneys representing insured institutions are high: "An attorney representing a financial institution, like the institution's directors and officers, occupies a position of trust and has important fiduciary obligations to the financial institution." Stoller, FDIC-90-115e, FDIC Enforcement Decisions and Orders [Bound Vol. 2], ¶5184 at A-2085. (Citation omitted.)
Landry does not deny that he breached his fiduciary duties of loyalty and care to the Bank. To the contrary, he has freely admitted in writing that he placed his personal interest in acquiring the Bank ahead of his duty to seek the capital the Bank so critically needed. (Lewis Tr. 1693–1697; FDIC Exh. 119, FDIC Exh. 120, FDIC Exh. 121, FDIC Exh. 181(a), pgs. 196–199; FDIC Exh. 181(c), pgs. 67–69.) The record in this case is replete with instances in which Landry breached his fiduciary duty of loyalty to the Bank by engaging in self-dealing and creating situations fraught with conflicts of interest. Landry's Letter is a chronicle of agreements, expenses, and fees which he knew were of no benefit to the Bank, but which he paid in furtherance of his interest in acquiring control of the Bank through Pangaea. (FDIC Exh. 121; FDIC Exh. 119.) From the moment he departed for Vancouver B.C., through September 1992, all of Landry's capital raising efforts were driven by his roles as a partner in Inter American Investment Services and a Pangaea principal. His final letter of resignation from the Bank, FDIC Exh. 119, seeks neither to disclaim nor excuse his conduct.
In January of 1992, Landry paid Funding Placement Services $20,000 for a preferred stock offering for Pangaea. Landry also arranged for a loan of $13,000 to Funding Placement Services principal, Robert G. Smith, a highly uncreditworthy borrower, to purchase a used Porsche. Nor was Landry concerned about breaching his fiduciary duty of loyalty in May 1995, when on behalf of {{10-31-99 p.A-3069}}Pangaea, he signed a fee splitting arrangement with Funding Placement Services. The direct result of the fee splitting agreement was Landry's further breach of his fiduciary duties of care and loyalty by insisting that the Bank extend a half-million dollar credit, to an out-of-territory borrower with a weak credit history in contravention of the Bank's loan policy.
In May 1992, Funding Placement Services and Place Vendome entered into a relationship for letters of credit for Place Vendome or Patrician Corp. In order to facilitate the relationship between Place Vendome and Funding Placement Services, and in violation of his fiduciary duties of loyalty and care to the Bank, Landry agreed to arrange transfers for Place Vendome through the Bank. Landry did so at a time when: Place Vendome did not have an account at the Bank; the Bank did not have a trust agreement with Place Vendome; Landry had been warned about Securities and Exchange Commission actions pending against Place Vendome; and the Bank was not receiving any fees for the wire transfers it was making on Place Vendome's behalf.
As a further breach of his duty of loyalty, Landry, his Pangaea associates and friends, converted Bank funds to their own benefit by using Bank personnel and Bank money to travel on Bank time to Quito, Ecuador, Vancouver, B.C., and elsewhere in their quest for capital to finance their planned personal takeover of the Bank. This breach of loyalty and improper use of Bank funds was at a time when the Bank had 1 percent capital, and was required to save every penny possible to survive.
Although he saw no Bank benefit in its contract with William White Bolles, Landry breached his fiduciary duty to the Bank by making contract payments to Bolles of $15,000 monthly from July through September 1992, while he did not see any benefit to the Bank involved. Landry raised no objection to extending Bolles $48,000 in credit, which along with accrued interest of $8,000 was later written off by the Bank, even where the debtor's letter revealed that he was subject to a judgment of $26,000,000 on a RICO judgment.
Similarly, Landry could find no benefit in the Bank's contract with Crabtree's father, Richard Crabtree, but he participated in the contract and made the $6,000 payment required by it from Bank funds.
To reprise, Landry failed to disclose to the Bank's Directors any of his activities on his own and Pangaea's behalf or those of Jenson, Crabtree and Lewis at a time he was required to do so. He attended all the meetings of the Board of Directors and the executive committee. (FDIC Exh.s 61, 63, 72, 73, 76, 80, 82, 83, 85, 86, 87, 89.) He gave monthly financial reports to the board, but never disclosed that the Bank funds he was disbursing were for his own and Pangaea's and American Investment Services' interests.
As for Lewis, he similarly failed to live up to the duty of loyalty imposed upon bank directors. Lewis did not attend the August 8, 1991 meeting of the Bank's Board of Directors, but one week later, having never heard of Pangaea, Lewis was told of the federal express mailing of the 25 packages containing of the Pangaea Booklet, a King Cake, and a letter of introduction to persons in Vancouver B.C. Lewis saw the Pangaea Booklet, but did not read it and did not inquire as to whether the mailing had been discussed or authorized at the Board of Directors meeting.
The next week, while Landry, Jenson and Crabtree were in Canada, Lewis contacted various states in order to reserve the corporate name Pangaea. In violation of his fiduciary duties of care and loyalty, he under-took to reserve the name without an inquiry as to whether it was authorized by the Bank's Directors. As a member of the Bank's Board of Directors and chairman of virtually every board committee, and as secretary to the Bank's Board of Directors who executed the minutes of each Board meeting, Lewis knew or had reason to know that the board had not authorized the formation of a corporation, or a bank holding company, or even the reservation of a corporate name. Common sense and common curiosity should have led him to disclose this to the board and to make inquiry. Yet, Lewis reserved the name from August 1991 to February 26, 1992 without informing the board of his actions or seeking proper corporate approval for them. (FDIC Exh.s 61, 63, 72, 73, 76, 80, 82, 83, 85, 86, 87, 89.) Further, he sat through an executive committee meeting on the 26th of August, during which he thumbed through the Pangaea Booklet enough to verify that the diagram on page 29 of the Pangaea Book- {{10-31-99 p.A-3070}}let indicating that the incorporators of the corporation were to own seventy percent of the stock in Pangaea without investment, and that Pangaea would own eighty percent of the Bank. Had Lewis ever either disclosed his reservation of the name Pangaea to the Bank's Board of Directors, or sought the board's authority for his representation, the board would have learned of Landry, Jenson, and Crabtree's self-dealing. As one of the two individuals who were required to approve each expense voucher, Lewis certainly was aware that the amounts being expended were greatly in excess of the $20,000 cap suggested and accepted by the Board of Directors when the plan was first approved, but he never raised the issue.
In October 1991, Lewis took actions to facilitate the CLMC partnership with Landry, Jenson, and Crabtree to use the Bank's dormant trust department for personal gain through Pangaea. He wrote the Louisiana Secretary of State and billed the Bank for his out-of-pocket expenses for the reservation of the names Inter American Investment Services, and Amer Invest, Inc. Lewis continued to reserve these names on their collective behalf through September 1992. He had his associate research the law concerning the changes in immigration law.
His alleged, attempted disclosure of the Inter American Investment Services to the Bank's Board of Directors on November 14, 1991 was so ineffectual that no two attendees have a consistent explanation as to what was disclosed. In fact, some of the meeting's attendees were under the impression that the CLMC firm was going to aid the Bank, and not the partnership or the immigrants, in drafting legal documents. In addition, Lewis made no effort at the November 14, 1991, Bank board meeting, to disclose the fact that Landry, Jenson and Crabtree would be equal members of the partnership. As Lewis himself admits, he did not disclose the potential conflicts inherent in having two-thirds of the Bank board's trust committee, Lewis and Jenson, and the Bank's "trustee", Landry, enter into a partnership, which planned to use and profit from the services of the trust department. Similarly, Lewis made no attempt to avoid the conflict of interest inherent in his role as chairman of the trust committee and having CLMC clients use the Bank's dormant trust department in furtherance of the Inter American Investment Services partnership, and yet he and Jenson recused themselves on a vote to approve a form of trust agreement involved.11
Lewis further breached his duty of loyalty to the Bank by failing to ascertain how Landry, Jenson, and Crabtree were going to perform their portion of the Inter American Investment Services work without neglecting their work at the Bank. (Lewis Tr. 1445–1448.) To fail to inquire about this matter, and fail to take an active role in insuring that the Bank was not harmed in any way by the time and effort expended by activities on behalf of the partnership by Landry, Jenson and Crabtree constitutes another breach of his duty of loyalty and care.
Lewis generally attended Bank board meetings and signed the minutes for each as secretary to the Bank's Board of Directors. He had an affirmative duty as a fiduciary of the Bank to ensure the payments made by the Bank were for Bank business. Yet, he authorized the payment of travel vouchers for work concerning all sorts of transactions without any knowledge of why the Bank was paying these expenses.
Probably the linchpin of the case against Lewis as an errant Director is that he did not recognize that being a Bank director is a responsibility, and not a sinecure. It requires vigilant stewardship of the Bank, and an understanding of the limits of conflicting interests. Lewis was well aware of the Bank's financial condition. Yet he never thought to inquire why the two most senior Bank employees, Landry and Jenson, were traveling to Quito, Ecuador, for a week with non-Bank employees. Lewis' claim that he "thought" that the trip was for the Bank does not excuse him from failing to solve him of his failure to make inquiry and to exercise care on behalf of the Bank.12 As the total of costs for far flung schemes mounted up, considering the financial condition of

11 Respondent Lewis professed that there were no conflicts between his work as the Bank's attorney, a Bank director, and chairman of the Bank's trust committee and his roles as the attorney to a foreign national with a $1,000,000 deposit in the Bank's trust department and a partner in this venture with other Bank insiders. It is difficult to imagine an arrangement more fraught with conflict, or for that matter with such little chance of success where as Lewis was well aware, the FDIC had already recommended termination of the Bank's deposit insurance and Inter American Investment Services was supposed to be engaged in raising immediate money for capital infusion by soliciting $1,000,000 deposits for the Bank's trust department.
12 The Bank is a small community Bank in Hammond, Louisiana. For such an institution to travel to South(Continued)

{{10-31-99 p.A-3071}}the Bank any conscientious Director would have begun to question bills presented.
The cumulative effect of Lewis' breaches of fiduciary duty—his inattention; his failure to inquire; the CLMC firm's engaging in partnership with Landry, Jenson and Crabtree; and his intentional blindness to information he had at his disposal—created the environment which allowed Landry, Jenson, and Crabtree to continue their attempts to exploit their conflicting interests.
In addition to his breaches of fiduciary duty as a member of the Bank's Board of Directors, Lewis breached his fiduciary duties of loyalty and care to his client13, the Bank. Lewis' failure to provide full disclosure concerning the role he and his law firm would play as a full equity partner in the Inter American Investment Services and the manner in which he did not question the proposed use of the Bank's inactive trust department without further study by the Bank's disinterested board member, all acted disparately as well as jointly as breaches of his fiduciary obligations of candor, loyalty and care. As held by the Fifth Circuit in Davis v. Parker, 58 F. 3d 183 (5th Cir. 1995), an attorney who enters into a business relationship with a client has a fiduciary duty to either disclose the relevant information to the client or advise the client to seek outside counsel before completing the transaction. The failure to disclose such potential conflicts to a client may constitute a breach of fiduciary duty by an attorney if an attorney/ client relationship exists, regardless of whether the attorney entered the particular transaction as a businessman. Id. at 190, citing, Louisiana Bar Ass'n v. Aiker, 530 So. 2d, 1138, 1139 n. 2 (La. 1988). Furthermore, he and his firm undertook to simultaneously to represent the Bank, to make filings on behalf of, and ultimately incorporate Pangaea, Inc. for the benefit of Landry, Jenson, and Crabtree, and to provide "sweat equity legal services" for the Inter American Investment Services Partnership and presumably share in the fee splitting with the Bank. This conglomeration of legal representations and roles created a host of confusing and conflicting duties which Lewis failed to fully disclose or adequately discharge in favor of his longstanding client, the Bank.
In summary, Landry and Lewis had longstanding relationships with the Bank, its directors, and officers. Landry had worked for the Bank for more than 10 years and, although not an official board member, attended all the board meetings, including its executive sessions. Lewis had been active in the Bank's affairs for years, through bad times and worse times, and even served as Director without compensation. He had been the Bank's attorney for 6 years, and was the chairman of nearly every committee of its Board of Directors. Within the board itself, no one held more positions of trust and responsibility than Lewis. Lewis and Landry were considered trusted senior advisors to the Bank's Board of Directors. As such, they each had a special duty of care and loyalty, which they breached.

C. EFFECTS OF THE MISCONDUCT

1. Financial Gain to the Respondents

As a direct result of his actions, Landry was personally and unjustly enriched. He received payment for travel and expenses he incurred for travel to Vancouver, British Columbia, Quito, Ecuador, and other places to seek capital not for the Bank, but for Pangaea, Inc. in order to gain shared control over the Bank. Additionally, Landry entered into a fee-splitting arrangement with Funding Placement Services to split the fees generated by finding capital for, and the placement of restricted stock. (FDIC Exh. 121, pgs 6–7.) Landry then championed a half-million dollar extension of credit to Robert F. Smith, who himself had entered into an agreement with Funding Placement Services and was securing the credit with restricted stock. (FDIC Exh. 121, pgs 6–7; FDIC Exh. 4, pg. 2-a-10.) Landry's clear intent throughout the August 1991-September 1992 time frame was to have the Bank finance his acquisition of shared control of the Bank through Pangaea. At the hearing, the expenses directly attributable to Landry's conduct were tallied at $278,000 in expenses and $174,900 in loan write-offs. (Landry Exh. 160.) All this was in addition


12 Continued: America in search of Bank capital is highly unusual to say the least. This, in tandem with the trip's $20,000 cost, should have caused Respondent Lewis to ask questions.
13 Respondent Lewis' duties as the Bank's attorney, and his breaches thereof are more thoroughly discussed in the Statutory Violation discussion of his violations of the Louisiana Code of Professional Responsibility, Id.

{{10-31-99 p.A-3072}}to the salaries and benefits Landry was being paid by the Bank to supposedly recapitalize it.
As stated in Drobbin v. Nicolet Instrument Corp., 631 F. Supp. 860 (S.D.N.Y. 1986):
    Such are the subtleties of human relationships that self-dealing and conflicts of interest may take many forms. The conflict of interest of a director may arise out of one's personal business interests or one's directorship in another corporation; it may also stem from a desire to favor friends, relatives or business associates.
(Emphasis added.) At the same time, "The statute does not require either a finding of intent to gain or that the gain be substantial — merely evidence of financial gain." In the Matter of ***, FDIC-87-61e, FDIC Decisions and Orders [Bound Vol. 1], ¶5113 at 1244.
Lewis' failure to disclose the Pangaea and Inter American Investment Services resulted in gain to Lewis and the CLMC firm. While in Vancouver, British Columbia, Landry, Jenson and Crabtree met with persons familiar with the change in Canadian immigration laws. (FDIC Exh. 121, pgs. 1–2.) Lewis and the entire CLMC firm benefited from what Landry, Jenson and Crabtree learned during these meetings. In addition, Lewis and the CLMC firm benefited from their projected use of the Bank, its trust department and Bank employees' work on Inter American Investment Services. Lewis' law firm was paid by the Bank for its incorporation of Pangaea, Inc. and for the reservation of the corporate and trade names Amer Invest and Inter American Investment Services. Although he now argues that the billings were inadvertent clerical errors, however, the CLMC firm did not reimburse the funds to the Bank until May 1994. Indeed, the Bank has never been reimbursed the entire amount. Of more importance, the law firm could expect to retain their largest client if they cooperated in the plans for reorganization under Pangaea.
Both Landry and Lewis sought and obtained personal financial benefit from their relationship with the Bank, either through Pangaea or the Inter American Investment Services partnership within the meaning of 8(e)(1)(B) of the FDIC Act, 12 U.S.C. § 1818(e)(1)(B).

2. Financial Loss to the Bank

The FDIC has long held one need only demonstrate a nexus between the violations of law, breaches of fiduciary duty, or unsafe or unsound practices and the losses or merely probable losses to the bank to meet the statutory causation requirement of section (e)(1)(B). Thus, the probability of loss, rather than actual loss, meets the statutory causation requirement. In the Matter of ***, FDIC-84-207e, FDIC Enforcement Decisions and Orders [Bound Volume 1], ¶5048, A-476 at A-583.
In Cousin v. Office of Thrift Supervision, 73 F. 3d 1242 (2d Cir. 1996), the Second Circuit reviewed Seidman, 37 F. 3d at 911, which held that the effects prong of section 8(e), 12 U.S.C. § 1818(e)(1)(B), required a demonstrable direct or adverse effect on the financial institution. In rejecting this standard the Second Circuit stated that:

    The plain language of the statute makes clear that the [deciding official's] interpretation is proper ... requires that the interests of [the Banks] savings account holders could be seriously prejudiced by reason of such violation.... The [deciding official] need only show sufficient evidence on the record to demonstrate the possibility of serious prejudice resulting from Cousin's illegal activities for the effects prong to be met.
Id. at 1252 [emphasis added] [citation omitted]; accord, Greene County Bank, 92 F. 3d at 636.
In this case, Landry authorized and Lewis approved Bank payment for contracts with Dakin & Willison, Funding Placement Services, William White Bolles, Richard Crabtree, and a host of others, which Lewis never questioned and Landry acknowledges were never intended to have, and indeed had no benefit for the Bank. (FDIC Exh.s 121, 119, and 120.) Additionally, Landry billed and accepted and Lewis approved reimbursement from the Bank for travel to Vancouver, British Columbia, Quito, Ecuador, and other locations, which were intended to raise money for the ultimate seizure of control of the Bank through Pangaea, not for the Bank's recapitalization. Landry permitted, and Lewis approved non-Bank personnel Byford Beasley, Kelly Nix, and Kelly Nix' girlfriend's travel to Ecuador on Bank funds. (FDIC Exh. 121, pgs 9–10.) He endorsed a $450,000 extension of credit to Robert F. Smith, for which he was to split fees with Funding {{10-31-99 p.A-3073}}Placement Services, in which Lewis, through his law firm, would share. Though Lewis may not have known of the true purpose of these expenses, he had a fiduciary duty to question their propriety before approving payment, and his failure to do so were unsafe and unsound practices.
In his capacity as trustee/escrow agent for Place Vendome, Landry initiated voluminous wire transfers. The Bank usually charged customers $10 to $15 for each wire transfer, yet Landry provided this service free to Place Vendome. (P.F.F. 156, 157, 158.) Indeed, he engaged in wire transfers on behalf of Place Vendome despite warnings that such action would be in violation of an SEC order. In addition to the fact that the Bank never received its fees for the wire transfers, the Bank was sued by Place Vendome's receiver in bankruptcy. The Bank incurred legal fees to defend its actions and, ultimately, paid $60,000 to Place Vendome's receiver in bankruptcy.
As detailed at the hearing, the Bank incurred more than $400,000 in expenses paying for the advice, services, travel, contracts, out-of-territory loans, and other arrangements set in motion by or acquiesced to by Landry. (Landry Exh. 160.) Payment of these amounts by the Bank, except for the charge-off of loans, was approved by Lewis.
Either Lewis knew about Landry, Jenson, and Crabtree's misdeeds at the Bank or he did not. If he did, his liability for the expenses incurred by Landry, Jenson, and Crabtree is clear. If he did not, his ignoring his duty to inquire about the necessity for reserving, or ceasing to reserve the name Pangaea, and his responsibility for verifying the expenses on travel vouchers, fostered a climate within the Bank wherein Landry and Jenson knew that they could hire and pay consultants, incur fees and expenses, and never be questioned or confronted. Lewis abdicated his fiduciary responsibilities at a time that the Bank had no capital margin. Clearly, this is a situation which presents the possibility of serious prejudice to the Bank's depositors.
Lewis' failure to disclose and discuss his activities on behalf of Pangaea and Inter American Investment Services with the Bank's Board of Directors is the direct cause of the loss to the Bank and the years of lawsuits which have ensued. As Chairwoman of the Board Cefalu testified, the board never contemplated Pangaea's incorporation. Had Lewis simply disclosed his activities, the contracts and fee splitting arrangements would not have been entered into, the trips would not have been taken, and the $400,000 would not have been expended. The FDIC need not demonstrate actual, immediate loss in order to demonstrate that Lewis actions caused loss to the Bank, but have done so. Cousin, 73 F. 3d 1242. Here, it is clear that Lewis' breach of his duty of inquiry and the unsafe and unsound manner in which he approached his duties to the Bank resulted in loss to the Bank and prejudiced the Bank's depositors. Such expenditures clearly present the possibility of serious prejudice in the best capitalized institutions. In an institution such as the Bank, with 1.04 percent capital and the threat of termination of deposit insurance looming, the conduct of Landry and Lewis in charging these expenses to the Bank it is clear that these expenditures constitute financial loss or other damage within the meaning of the "effects" element of section 8(e)(1)(B) of the FDI Act.

V. CULPABILITY

It is required by 12 U.S.C. § 1818(e)(1)(C), that a showing of "culpability" be proven, that the misconduct at issue involve personal dishonesty or, in the alternative, that willful or continuing disregard for the safety or soundness of the financial institution involved be demonstrated.

A. Personal Dishonesty

Acts or practices which rise to the level of personal dishonesty are not specified in section 8(e) of the FDI Act. Nor do the FDIC administrative decisions define or explain what actions would be considered requisite for a finding of personal dishonesty. Rather, the administrative decisions have assumed or inferred personal dishonesty from facts of or actions chronicled in a particular proceeding. In the Matter of Frank Jamison, First State Bank, Liberty, Texas, FDIC Enforcement Decisions and Orders [Bound Vol. 2], ¶5154A, A-1541; and In the Matter of Thomas K. Benshop, The Colorado State Bank of Walsh, Walsh, Colorado, FDIC Enforcement Decisions and Orders [Bound Vol. 2], ¶5192, A-2151. However, financial institutions' case law suggests that personal dishonesty is a broad standard, from acting in a fraudulent manner or with deliberate deception by pretense or stealth encompassing everything, to acting in a manner that fails to {{10-31-99 p.A-3074}}adhere to a standard of integrity.14 The Board of Governors of the Federal Reserve has held, and the Eighth Circuit adopted the position, that in the context of a section 8(e) proceeding:

    [W]hile personal dishonesty (which is not defined in the statute) must be evaluated on a case-by-case basis it need not amount to civil fraud and could encompass a broad range of conduct. According to the Board, this conduct may include: a disposition to lie, cheat[,] defraud; untrustworthiness; lack of integrity[;]...misrepresentation of facts and deliberate deception by pretense and stealth[;]...[or] want of fairness and [straightforwardness].
Van Dyke, 876 F. 2d at 1379.
In applying any of the definitions of personal dishonesty set out in Van Dyke to Landry's actions between August 1991 and September 15, 1992, it is clear that he was personally dishonest. Landry has repeatedly admitted his personally dishonest acts in depositions, in his letter of resignation, and in his epic Landry Letter to Examiner in Charge Cooper. (FDIC Exh. 121, FDIC Exh. 181(a), FDIC Exh. 181(c), FDIC Exh. 119, FDIC Exh. 120.)
In December 1991, Landry had the Bank enter into an agreement with Dakin & Willison which required the Bank to pay Dakin & Willison $5,000/month plus expenses. Landry concealed the contract from the Bank's Board of Directors, as well as its true purpose: facilitating his Inter American Investment Services partnership with Lewis. (FDIC Exh. 121, pg 3–4.) At that time he was aware that Jenson had signed a contract with Funding Placement Services requiring the Bank to pay Funding Placement Services $20,000 for their drafting a preferred stock offering document for Pangaea. (FDIC Exh. 121, pgs. 3–4, 7.)
In February 1992, Pangaea was incorporated Landry, Jenson, and Crabtree as the incorporators. From this time forward, Landry signed agreements on behalf of Pangaea and misappropriated Bank funds for Pangaea-related enterprises including contracts with William White Bolles and Richard Crabtree, and the trip to Ecuador. Additionally, Landry exposed the Bank to potential for loss in acting as trustee for Place Vendome after he was aware that the SEC had entered an injunctive order prohibiting the transfer of funds on behalf of Place Vendome. Landry also insisted that the Bank extend $450,000 in credit to Robert F. Smith, an out-of-territory borrower unknown to the Bank, without disclosing that through Pangaea, he would be splitting fees generated by the credit's extension. Landry's personally dishonest acts on behalf of Pangaea continued unabated until September 16, 1992, the night before the Bank's ultimate purchase offered case to recapitalize the Bank. Landry's actions from August 1991 though September 16, 1992, provide an encyclopedia of personally dishonest acts within the meaning of Van Dyke.
In Greenberg v. Board of Governors of the Fed. Reserve Sys., 968 F. 2d 164 (2d Cir. 1992), the Circuit Court examined the Greenbergs' contention that their failure to fully disclose insider transactions did not constitute personal dishonesty within the meaning of section 8(e) of the FDI Act. The Court stated:
    The Greenbergs also assert that the record does not support the Board's determination of personal dishonesty. More than substantial evidence exists to support the conclusion to the contrary. The Board found that the Greenbergs had not revealed several of the insider transactions to the directors of the bank. The record provides ample support for this conclusion. Minutes of the directors meetings are silent on the relationship between the Greenbergs and the limited partnership that received loans. Cum tacet, clamant. (With apologies to Cicero, literally "With silence they shout.") The Board and the ALJ were well within their discretion in rejecting the Greenbergs' self serving testimony to the contrary.
Greenberg, 968 F. 2d at 171, incriminating.
At the Board of Directors meeting on November 14, 1991, at which the use of the Bank's trust department was discussed, there is an inculpating silence. Although both Landry and Lewis were at the meeting at which a request to use Bank facilities and personnel for an immigration service was discussed, they did not disclose the Inter American Invest-

14 See In the Matter of ***, The *** National Bank of ***, 1998 WL 427510 (O.C.C.) at 9, affirming and applying the less restrictive definition adopted by the Board of Governors of the Federal Reserve System and certified by the Comptroller of the Currency In Re: Stanford C. Stoddard, No. AA-ED-85-44 (January 29, 1988), rev'd on other grounds; Stoddard v. Board of Governors of the Fed. Reserve Sys., 868 F. 2d 1308 (D.C. Cir. 1989).

{{10-31-99 p.A-3075}}ment Services partnership. They did not disclose that the CLMC firm or Landry, Jenson and Crabtree were to be equal equity partners in the enterprise. They did not disclose how Landry, Jenson and Crabtree would discharge their duties to the Bank while representing clients with funds in the Bank's trust department. The minutes' lack of specificity as to whatever disclosures were made is mirrored by the board members and recording secretary's inability to describe what role the CLMC firm would play. To the extent that the CLMC firm's role was disclosed, director Bill Hood and recording secretary Vanessa Drew believed that CLMC would to legal work for the Bank in connection with a partnership between s Jenson and Crabtree. Here, as in Greenberg, there is ample evidence that Lewis' failure to properly disclose his role in Inter American Investment Services to the Bank's Board of Directors is evidence of personal dishonesty.

B. Willful or Continuing Disregard

The second standard applicable to the culpability element of section 8(e) of the FDI Act is that of willful or continuing disregard for the safety or soundness of the financial institution involved. Again, this term is not defined in the FDI Act or in its legislative history. The court in Brickner, 747 F.2d 1198, explored the statute's use of the disjunctive and opined that willful or continuing disregard provided two distinct alternative standards for removal. Id. at 1202–1203. The Brickner court further distinguished the separate standards of willful or continuing disregard stating: "[A]lthough `continuing disregard' may require some showing of knowledge of wrongdoing, it does not require proof of the same degree of intent as "willful disregard." Id. at 1203.
While case law has not fully described the "willful" component of a Respondent's disregard for an institution's safety and soundness, its import is clear when examined in light of the dictionary definition and court decisions interpreting it. See, e.g., Greenberg, 968 F. 2d at 170–171. Black's Law Dictionary, 5th Edition (1979), pg. 1434, defines "willful" as "intending the result which actually comes to pass; designed; intentional; not accidental or involuntary." Within the statute, it is significant that the term "willfulness" clearly refers to the intent to perform the acts or omissions constituting the unsafe or unsound banking practices, rather than indicating a deliberate intent to harm a bank. Moreover, the extent to which "willful disregard" implies a degree of knowledge by a Respondent, it refers to knowledge of the facts in question, not knowledge of the law or its violation. Federal Sav. and Loan Ins. Corp. v. Geisen, 392 F. 2d 900 (7th Cir. 1968); and Conover, 682 F. 2d at 1342.
The "willfulness" element of section 8(e) can also be imputed from the facts and circumstances of the case. Willfulness has been found in conduct which lies between simple negligence and actual knowledge so as to be "in effect intentional." Yates v. Jones Nat'l Bank, 206 U.S. 158 (1907); Goodman v. Benson, 286 F. 2d 896, 900 (7th Cir. 1961) (willfulness inferred from careless disregard for responsibilities); and Capitol Packing Co. v. United States, 350 F. 2d 67, 78–79 (10th Cir. 1965) (willfulness is an intentional misdeed or gross neglect of a known duty). Willfulness is rarely proven by direct evidence since it is a state of mind; rather, it is usually established by drawing reasonable inferences from available facts. United States v. Wells, 766 F. 2d 12, 20 (1st Cir. 1985).
Moreover, officers and directors cannot shield themselves from liability through, pleading ignorance to matters which they have a duty to know. As stated in White v. Thomas, 37 F. 2d 452, 454 (9th Cir. 1929), quoting Martin v. Webb, 110 U.S. 7 (1884):

    Directors cannot, in justice to those who deal with the bank, shut their eyes to what is going on around them. ...That which they ought, by proper diligence, to have known as to the general course of business in the bank, they may be presumed to have known in any contest between the corporation and those who are justified by the circumstances in dealing with its officers upon the basis of that course of business.
Martin, 110 U.S. at 15.
Refusal to examine or inquire into matters which one has a duty to know may constitute a "knowing" and intentional violation. See Thomas v. Taylor, 224 U.S. 73 (1912); and FDIC v. Mason, 115 F. 2d 548 (3d Cir. 1940). Similarly "evidencing a willingness to turn a blind eye to interests in the face of known risk" constitutes willful disregard within the meaning of section 8(e) of the FDI Act. Cavallari v. Board of Governors of the Fed. Reserve Sys., 57 F. 3d 137 (2d Cir. 1995).
{{10-31-99 p.A-3076}}
Landry and Lewis both attended the September board meeting. Each heard the FDIC's warnings concerning the proposals submitted to the FDIC in the Bank's Capital Enhancement Plan. In willful disregard of these direct, unambiguous cautions, Landry proceeded to implement the plan for his own benefit and Lewis did nothing to impede him. Emblematic of Lewis' willful disregard was his willingness to approved payment of the funds and have the Bank proceed despite the FDIC's comments that the Capital Enhancement Plan were speculative and would not work. (Lewis Tr. 1262.)
As clearly demonstrated throughout the hearing, Lewis refused to make even the most rudimentary inquiries concerning things within his purview at the Bank. He rarely or never read board of director minutes before signing them. He did not question other board members to verify that the minutes of the meetings that he did not attend though he did sign the minutes supposedly reflected things that actually took place at the meeting. More importantly, Lewis never inquired about the travel vouchers he was signing. He began reserving the corporate and trade names Amer Invest and Inter American Investment Services In October 1991. Sometime after October 15, 1991, he initialed a travel voucher which included costs for the "immigration fund." By his own admission, Lewis did nothing to assure himself that the expenses were not for his firm's partnership with Landry, Jenson, and Crabtree.
Lewis began reserving the name Pangaea in August 1991. At no time did he ascertain or seek to have the proper board resolutions passed to assure that his actions were on behalf of the Bank. He attended Bank board meetings and knew that the Board had not authorized a bank holding company. Yet, he proceeded to reserve the corporate name without question or concern for the Bank. Similarly, he ceased reserving the name Pangaea, without the slightest inquiry as to the reason for the cessation. Again, he utterly failed in his duty as a director to inquire as to the reason for the sudden change. On March 10, 1992, Andre Coudrain scribbled a note on Pangaea's franchise tax form asking Lewis what he, Coudrain, should do with it. Obviously, Coudrain would not have asked if he did not believe that his partner, Lewis, could provide an answer to the question. Here, as in Thomas, Lewis' refusal to examine or inquire into matters which one has a duty to know may constitute a "knowing" and intentional violation.
Lewis' partner, Coudrain, drafted the Inter American Investment Services partnership agreement at about the time he drafted the Pangaea articles of incorporation. Yet, Lewis utterly failed to inquire about the travel voucher of Jenson's that he initialed in March 1992 with "immigration fund" expenses listed on it. In July 1992, Inter American Investment Services was getting into full swing, and once again, Lewis' inaction in inquiring whether the immigration fund expenses listed in Jenson's travel and expense report is manifest. Throughout this period, Lewis acted in a manner demonstrating his clear intention not to know what was going on at the Bank. He knew only what he wanted to know in order to deny the depth of his involvement with Inter American Investment Services and Pangaea. Lewis cannot escape the results of his actions by not asking the appropriate questions and living up to the responsibilities vested in him by the Bank's Board of Directors. Lewis acted in a manner intending the results of his action and of his inaction; his inaction was knowing and intentional and continued throughout the August 1991-September 1992 period.
Landry's actions at the Bank's expense, together with those of Jenson and Crabtree, were clear, deliberate, methodical acts to seize control of the Bank from the shareholders themselves. He was involved from the very beginning. He clearly intended not to tell the members of the Board of Directors what he and Jenson and Crabtree involved in. In this way, his actions were willful. They were deliberate, intentional, and lasted for more than a year. As detailed in his September 16, 1992, resignation letter to the Bank, FDIC Exh. 119, 1 which graphically proved Landry' statement to Ellaby that he clearly knew what he was doing on behalf of Pangaea. He was quite aware that it was a breach of his duty to the Bank, and he intended his actions to be breaches of duty to the Bank. Therefore, Landry's actions, just as those of Lewis, meet the culpability standard set out in section 8(e) of the FDI Act.

VI. RULING DENYING
RESPONDENTS' MOTION TO
DISQUALIFY, OR IN THE
ALTERNATIVE, TO DISMISS FOR
LACK OF JURISDICTION

The Notice instituting this proceeding was filed on April 30, 1996. On September 12, {{10-31-99 p.A-3077}}1997, almost a year and half later and shortly prior to the scheduled hearing, Landry filed a Motion to Disqualify Or in the Alternative, Motion To Dismiss For Lack Of Jurisdiction. Lewis filed a motion to join, which was granted at the opening of the hearing. (Tr. 11)
The motion argues that neither the Federal Deposit Insurance Corporation nor the Office of Financial Institution Adjudication ("OFIA") is vested with the authority to "appoint" the Administrative Law Judge to preside over this proceeding, so that he must be disqualified. It argues further that even if authorized to "appoint" an Administrative Law Judge, the procedure followed in this matter is a violation of the Appointments Clause of the United States Constitution, Art. II, § 2, cl. 2.

A. DELAY IN RULING

Though Landry claims not to have timed this possibly dispositive motion to gain a delay in the hearing, the timing of the motion and the twenty day period permitted for response to such a motion left only about three days to rule prior to the commencement of hearing on October 6, 1997. In addition, this period would perforce interfere with Petitioner's trial preparation. The motion in effect seeks to have this case be heard by a member of the FDIC's Board of Directors and that such individual, who must by definition be the titular head of one of the banking agencies, forego his other duties, be selected and fully briefed for what was estimated to be a month-long hearing out of state, requiring inspection and consideration of correspondence and motions and orders accumulated for over a year of pre-hearing activity. The undersigned considers that intended or not, the motion would unquestionably interfere with the proper disposition of this matter. The use of motion practice to interfere offensively with the hearing is strongly disapproved.
On September 17, 1997, FDIC Enforcement Counsel moved for an extension of time in which agency counsel had to respond to the Disqualification Motion until the post-hearing phase of the proceeding, arguing that the applicable rules contemplate deferring the issues raised by Respondent until such time as the complete record can be reviewed by the agency. On September 22, 1997, the undersigned ruled that the hearing would not be delayed by the timing of Landry's motion nor would a response or ruling on such a potentially dispositive motion be rushed. Accordingly, the undersigned granted Enforcement Counsel's Motion for Extension of Time to answer the motion, until post-hearing briefs.

B. THE MOTION

The motion is based on the following arguments: First, that OFIA was improperly created; second, that OFIA's Administrative Law Judges are not authorized by 12 U.S. 1818(e) to hear matters involving removal and prohibition of institution-affiliated parties; and third, that the Appointments Clause of the United States Constitution does not authorize FDIC or OFIA to assign Administrative Law Judges to preside over these enforcement actions. Each argument will be considered separately.

1. Office of Financial Institution
Adjudication ("OFIA")

Prior to the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), none of the banking agencies employed their own Administrative law Judges, but instead borrowed them on temporary assignment from other agencies on an as-needed basis in a manner which did not permit the Administrative Law Judges to build a base of expertise. By Section 916 of FIRREA, Congress mandated that the banking agencies "jointly ...establish their own pool of Administrative Law Judges." 103 Stat. 486, 12 U.S.C. § 1818. The banking agencies therefore entered into an interagency agreement to have one agency employ Administrative Law Judges to be jointly utilized by all the agencies as required. OFIA is the entity established by the banking agencies, of which the Office of Thrift Supervision ("OTS") was chosen and contracted with to employ the Judges and provide office space, staff, and supplies to the common pool of Administrative Law Judges. With the approval of the Office of Personnel Management, OFIA is staffed with the undersigned, one other Administrative Law Judge, two attorney advisor/ law clerks, and support staff, employed by the Office of Thrift Supervision ("OTS"). Salaries and benefits are allotted to attorney advisor/law clerks and support staff on the scale applicable to all OTS employees, though salary of the Administrative Law {{10-31-99 p.A-3078}}Judges is allotted pursuant to separate statute and the requirements of the Office of Personnel Management. Cases are assigned to the respective Administrative Law Judges on a rotational basis, subject to the number of cases, hearings calendared, and estimated times required for each. All the banking agencies agree on the annual budget for OFIA and share the costs, reimbursing OTS for their respective shares of time required to operate the Office.
Accordingly, as mandated by Section 916 of FIRREA, the services of OFIA Administrative Law Judges are jointly available to all five federal banking agencies though employed, housed and supported by the OTS, the "host agency" with the authority to employ.

2. Authority to Hear Removal and
Prohibition Cases

Respondent argues in part that although 12 U.S.C. § 1818(e) specifically contemplates an Administrative Law Judge presiding over a removal and prohibition action initiated by the Office of the Comptroller of the Currency ("OCT"), it is silent with respect to who shall preside over a removal and prohibition proceeding when initiated by the FDIC. Motion to Disqualify at 2.

    The section specifically provides that:
    In any action brought under this section by the Comptroller of the Currency in respect to any such party with respect to a national banking association or a District depository institution, the findings and conclusions of the Administrative Law Judge shall be certified to the Board of Governors of the Federal Reserve System for the determination of whether any order shall issue.
This section simply provides that the final agency determination on prohibition and removal actions initiated by the OCT is made not by the OCT, but rather by the Federal Reserve Board, the rationale for which is not here pertinent. It does not even obliquely address or affect the question of who may preside at the hearing level and issue a Recommended Decision, as Respondent suggests. The reference to the Administrative Law Judge's findings and conclusions of an OCT enforcement action cannot be construed here to preclude the participation of Administrative Law Judges presiding over other enforcement actions brought by the other federal banking agencies under 12 U.S.C. § 1813(q)(3).
Not only is Respondents' reliance on the above section misplaced, but if anything, the statement read in conjunction with the section as a whole indicate that in order to meet the requirements and aims of the Administrative Procedures Act it must be Administrative Law Judges who will preside over all enforcement actions brought by the banking agencies and will make findings, conclusions and recommendations. Section 8(e) authorizes the appropriate federal banking agencies, which includes Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, Office of Thrift Supervision and Federal Deposit Insurance Corporation (the National Credit Union Administration comes under a different statute), to issue prohibition and removal orders. The statute does not treat one banking agency any differently than the others except to direct that final agency decisions in OCT removal and prohibition actions be determined by the Federal Reserve Board. There is no basis for Respondent's assumption that the statute may have different requirements as to who may preside over an enforcement action depending on the banking agency involved. Taken together, 12 U.S.C. § 1818(e)(1) provides that the "appropriate Federal banking agency" has authority under specified circumstances to remove or prohibit from further participation in the affairs of a Federally insured depository institution, and 12 U.S.C. § 1813(q)(3) provides under the facts here that the term "appropriate Federal banking agency" means "the Federal Deposit Insurance corporation in the case of a State nonmember insured bank," which is precisely what the First Guaranty Bank, of Hammond, Louisiana, was at the time. In fact, by section 916 of FIRREA, the Congress specifically required promulgation, so far as possible, of Uniform Rules of Practice and Procedure, demonstrating congressional intent that administrative proceedings before all the agencies shall be substantially similar.
Respondent then asserts that since section 8(e) is silent on the issue appointment of the Administrative Law Judge, one must turn to the Administrative Procedure Act ("APA") for guidance and follow the three prescribed options for selecting an Administrative Law Judge. Due to the misreading of the statute, the motion proceeds directly to review the {{10-31-99 p.A-3079}}APA and the three prescribed option for selecting an Administrative Law Judge under 5 U.S.C. § 556(b). This section authorizes, first, that the agency shall appoint Administrative Law Judges, secondly, that members of the body comprising the agency shall appoint its Administrative Law Judges, and third, that Administrative Law Judges are to be appointed under 5 U.S.C. § 3105, which provides in pertinent part:
    Each agency shall appoint as many Administrative Law Judges as are necessary for proceedings required to be conducted in accordance with sections 556 and 557 of this title.
Under this third option, if the agency does not have any or sufficient Administrative Law Judges available, the agency may obtain them through the Office of Personnel Management with the consent of the agencies making them available. 5 U.S.C. § 3344. Respondent asserts that section 916 of FIRREA, authorizing the banking agencies to create a common pool of Administrative Law Judges to hear enforcement actions, does not expressly amend 5 U.S.C. §§ 3105 and 3344. Landry concludes that since OFIA "appointed" the undersigned to hear this matter, rather than a single agency, the "appointment" by OFIA fails to follow any of the above three options set forth in the APA.15 However, OFIA "appointed" no one, but merely designated which of the two-man "pool" of Judges would conduct this particular hearing and issue the Recommended Decision for final agency action.
The OTS is an agency, 12 U.S.C. § 1462a, and it employed both Administrative Law Judges after they were properly qualified by OPM. The fact that OTS made this decision collectively with the other banking agencies does not invalidate its authority to make the selection and to employ.
Section 916 of FIRREA is consistent with the aims of the Administrative Procedure Act. The purpose of the creation of OFIA in part was to promote administrative expertise within a core group of Administrative Law Judges to hear enforcement matters. Also, OFIA's structure promotes the Administrative Law Judges independent judgment free from any constraint by a banking agency.
Even if the creation of OFIA and the appointment of its Administrative Law Judges were considered a departure from the traditional elements of the Administrative Procedures Act this would still not invalidate the undersigned's appointment. Congress can, and does, deviate from APA procedure. For example, in Stone v. Immigration and Naturalization Serv., 514 U.S. 386, 393 (1995), Congress amended the Immigration and Nationality Act and "chose to depart from the ordinary judicial treatment of agency orders under reconsideration." The Supreme Court held in part that:
    Both the Hobbs Act and the APA are congressional enactments, and Congress may alter or modify their application in the case of particular agencies. Id.
Furthermore, in Schweiker v. McClure, 456 U.S. 188 (1982), the Supreme Court upheld a procedure established by Congress and the Secretary of Health and Human Services, under which hearing examiners appointed by private insurance carriers presided over hearings to determine eligibility for benefits under a federal program administered by the carriers on behalf of the Secretary. See also Alliance for Community Media v. F.C.C., 10 F. 3d 812, 816 fn 2 (D.C. Cir. 1993) ("Congress may legislatively alter or revoke its delegation of authority...To require an agency to justify its change in position taken at the express direction of Congress would be tantamount to subjecting the legislative decision itself to the APA."); Castilli-Villagra v. Immigration and Naturalization Serv., 972 F. 2d 1017, 1025 (9th Cir. 1992) (Language in the Immigration and Nationality Act specifying that its procedures were the exclusive method of deporting an alien was sufficient to depart from APA procedure.); Ramspeck v. Federal Trial Examiners Conference, 345 U.S. 128, 133 (1953) ("The position of hearing examiners is not a constitutionally protected position. It is a creature of congressional enactment...Their

15 Unfortunately, the undersigned utilized the improper word "appointed" in reporting that he had been designated by OFIA as the specific OFIA Administrative Law Judge who would hear the proceeding and issue the Recommended Decision. The "appointment" of an individual as an Administrative Law Judge is through the qualification by the Office of Personnel Management, and the employment by a specific governmental body. Both of the Administrative Law Judges employed by the OTS through OFIA had been many years previously so employed and thus appointed, and served with several other agencies and departments pursuant to those appointments.

{{10-31-99 p.A-3080}}positions may be regulated completely by Congress, or Congress may delegate the exercise of its regulatory power. ..."); and Marcello v. Bonds, 349 U.S. 302 (1955) (Deportation proceedings which deviated from APA procedure were upheld.)
Here, Congress unambiguously expressed its desire to have the federal banking agencies engage a "pool" of Administrative Law Judges to hear enforcement matters. Section 916 of FIRREA is specific. Whether or not this mandate constitutes a departure from APA procedure, there is ample support for doing so.

3. Appointments Clause

The motion also argues that the manner in which the undersigned was "appointed" to OFIA, violates the Appointments Clause of the United States Constitution, Art. II, § 2, cl. 2. The Appointments Clause provides in pertinent part that:

    [The President]...shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the Supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law; but the Congress may by Law vest the Appointment of such inferior Officers as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.
Accordingly, Congress may vest the authority to appoint inferior officers, including Administrative Law Judges, in either the President, the courts of law, or the heads of Departments. The motion's position is that Congress has no constitutional authority to assign the power elsewhere, but the case citations in the preceding section show otherwise. Here, Respondent argues, the decision to employ the specific Administrative Law Judge hearing this case, and the specific Administrative Law Judges to staff OFIA, was made collectively by the banking agencies. Therefore, Respondent asserts that the undersigned's assignment to hear this matter is unconstitutional.
Actually, Respondent takes issue with the directives of section 916 of FIRREA which require the appropriate federal banking agencies and the National Credit Union Administration to both establish a pool of Administrative Law Judges and to develop a set of uniform rules and procedures for administrative hearings. Reading the two requirements together makes clear that congressional intent was to provide consistency and continuity in the banking arena. As stated above, the Appointments Clause pertains only to the appointment of officers of the United States and does not place restrictions on the creation of the entity in which the officer functions. Accordingly, the formation of OFIA within the OTS by the banking agencies collegially does not fall within the intended scope of the Appointment Clause and is therefore not governed by it.
Section 916 of FIRREA, which requires the formation of OFIA fails to use the language of "appointment." Edmond v. United States, 520 U.S. 651 (1997), involved the issue of whether two civilian judges of the Coast Guard Court of Criminal Appeals, an intermediate court in the military justice system, had been validly appointed. The Court determined that a statute that failed to use the language of "appointment" did not even invoke the Appointments Clause. The Court found that pursuant to the applicable provision of that case, 49 U.S. § 323(a), the Secretary of Transportation was authorized to appoint officers of that department, and therefore the appointments were constitutionally valid. The Court found that Article 66(a) of the Uniform Code of Military Justice, 10 USC § 866(a) did not give the Judge Advocate General of each military branch authority to appoint judges of his respective Court of Criminal Appeals. The Edmond Court ruled that Article 66(a) concerns not the appointment of judges, but only their assignment. 137 L. Ed 2d 923. Article 66(a) reads in applicable part:
    Each Judge Advocate General shall establish a Court of Criminal Appeals which shall be composed of one or more panels,. ...Appellate military judges who are assigned to a Court of Criminal Appeals may be commissioned officers or civilians...
(Emphasis added.) The Court reasoned that there is no provision in the Article of an "appointment." Instead, the statute refers to military judges "who are assigned to a Court of Criminal Appeals." Id. at 926, emphasis added. The Court concluded that since the statute did not specifically use the "appointment" language, it did not intend to invoke the Appointments Clause and the statute did not require a separate appointment—merely {{10-31-99 p.A-3081}}an assignment. Id. 926–927. The Court refused to interpret Article 66(a) in a manner that would make it inconsistent with the Constitution.
Similarly, in the instant case, the language of section 916 of FIRREA, to "establish their own pool of Administrative Law Judges...", (emphasis added) is reminiscent of the statute referenced above found by the Edmond Court to be insufficient to invoke the Appointments Clause. The undersigned, as did the Edmond court, cannot interpret section 916 as being inconsistent with the Constitution. The Federal Deposit Insurance Corporation, in its Decision and Order involving James Leuthe, also refused to interpret section 916 as constitutionally invalid.16 The statute directing the agencies to create the pool of Administrative Law Judges "does not run afoul of either the Administrative Procedure Act or any provision of the constitution."17 See Corrected Brief of Appellees, James L. Leuthe v. OFIA et al., (Case No. 97-1826, 3rd Cir., filed February 27, 1998).
In the instant case, the two Administrative Law Judges comprising OFIA were previously employed by other federal agencies prior to employment by OTS for OFIA and thus, with OPM certification, validly appointed to their positions. Furthermore, the position of Administrative Law Judge is a creature of Congressional enactment and is not constitutionally protected and may be regulated completely by Congress. See, Ramspeck v. Federal Trial Examiners Conference, 345 U.S. 128, 133 (1953), reh'g den, 345 U.S. 931 (1953). For all the reasons stated above, the formation of OFIA does not violate the intended purpose of the Appointments Clause.
Respondents' Motion to Disqualify Or in the Alternative, Motion to Dismiss for Lack of Jurisdiction is therefore denied.
The Respondents' post-hearing briefs raise exceptions to other evidentiary or procedural rulings by the undersigned. The rulings and Orders are contained in the record, and the undersigned finds no reason to reconsider the procedural and evidentiary rulings made and Orders issued.

VI. CONCLUSIONS OF LAW

1. The Federal Deposit Insurance Corporation has jurisdiction over the federally insured depository institution, and of the institution-affiliated parties Respondent.
2. The Respondents engaged or participated in violation of law or regulation, unsafe and unsound practices, and breached their fiduciary duty.
3. By reason of the violations, practices or breaches, the insured depository institution suffered financial loss, and Respondents received financial gain or other benefit.
4. The violations, practices and breaches involved personal dishonesty, and willful or continuing disregard for the safety and soundness of the insured depository institution.

VIII. PROPOSED ORDER

It is hereby recommended that an Order be issued as to the Respondents jointly, in the general form and content as attached hereto.

ED&O Home | Search Form | Text Search | ED&O Help

Last Updated 6/6/2003 legal@fdic.gov