[¶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.
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[.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.
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[.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.
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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.
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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.
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(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.
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[.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, Responden
