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   [5260] In the Matter of John H. Westering, Community First State Bank (formerly The Abbott Bank), Alliance, Nebraska, (Insured State Nonmember Bank) FDIC Docket No. 94-167e, 95-187k (5-10-00)

   FDIC Board determined that the FDIC failed to meet their burden of proof, and that the record did not provide substantial evidence that Respondent Westering violated laws or regulations or engaged in instances of unsafe or unsound banking practices or breached his fiduciary duty. They dismissed the Notice and declined to impose any civil money penalty.

   [.1] Regulation O—Extension of Credit—Burden of Proof

   With conflicting evidence over whether moneys paid were an extension of credit or compensation pursuant to contract for services, the FDIC has the burden of proof, which they could not meet in this case, so the Board is unwilling to deem payments to be an extension of credit.

   [.2] Prohibition, Removal, or Suspension—Falsification of Records

   Although Respondent and Bank memorialized their oral agreement in a written document and back-dated the document to reflect their understanding there is no evidence that the back-dating resulted in loss to the Bank or gain to the Respondent, so the elements of a violation of the Act are not satisfied.

   [.3] Unsafe or Unsound Practice—Disregarding Contract

   Although the practices of the Respondent and Bank did not follow the contract they had negotiated, because the Respondent did not benefit, but the Bank did, and there is no indication of motive by Respondent, there is no violation of the Act.

   [.4] Fiduciary Responsibilities—Unintentional Discrepancy

   The discrepancy between the practices of Respondent and Bank and the language in their contract was unintentional and does not evidence an unsafe or unsound practice or breach of fiduciary duties.

   [.5] Civil Money Penalty—Basis

   Without finding substantial evidence that the Respondent participated in violations of law or regulation, or unsafe or unsound practices or breached his fiduciary duties the Board declines to impose a civil money penalty.

In the Matter of
JOHN H. WESTERING
COMMUNITY FIRST STATE BANK
(Formerly THE ABBOTT BANK)
ALLIANCE, NEBRASKA
(Insured State Nonmember Bank)
DECISION AND ORDER TO DISMISS

FDIC-94-167e FDIC-95-187k

INTRODUCTION1

   The Federal Deposit Insurance Corporation (the "FDIC") initiated this action on February 28, 1996, pursuant to sections 8(e) and 8(i)(2) of the Federal Deposit Insurance Act ("FDIC Act" or "Act"), 12 U.S.C. §§1818(e) and (i)(2). A Notice of Intention to Prohibit from Further Participation; Notice of Assessment of Civil Money Penalties, Finding of Facts and Conclusions of Law, Order to Pay and Notice of Hearing (the "Notice") was issued against John H. Westering ("Respondent" or "Westering") and seven others. Prior to the hearing, settlements were reached with all named respondents except Mr. Westering. The hearing proceeded solely against him individually and


1 Citations to the record shall be as follows:
   Recommended Decision – "R.D. at .      ".
   Transcript –"Tr. at .      ".
   Exhibits – "Resp./FDIC Ex. .      ".
   Exceptions – "FDIC Except. at .      ".
   Briefs – "Resp./FDIC Br. at .      ".
{{7-31-00 p.A-3096}} as a former officer of, person participating in the conduct of the affairs of, and institution-affiliated party of, Community First State Bank (formerly "The Abbott Bank"), Alliance, Nebraska ("The Abbott Bank" or the "Bank").2

   Respondent is charged with engaging in unsafe or unsound banking practices, breaches of fiduciary duty and violations of law, rule, or regulation. FDIC Enforcement Counsel seek an Order of Prohibition and a Civil Money Penalty ("CMP") in the amount of $150,000 from Respondent.

   Following an evidentiary hearing of five days between January 5 and January 11, 1999, and the submission of briefs and reply briefs, Administrative Law Judge Arthur L. Shipe (the "ALJ") issued his Recommended Decision on December 22, 1999. The Recommended Decision concluded that none of the proposed sanctions were warranted and recommended that the proceeding be dismissed. Exceptions to the Recommended Decision were filed by both parties.

   Respondent filed an additional reply brief on March 28, 2000, and FDIC Enforcement Counsel moved to strike it. Respondent filed a response to the Motion to Strike on April 7, 2000. Other than at the request of the Board of Directors of the FDIC (the "Board"), the FDIC Rules of Practice and Procedure do not provide for the filing of briefs following the filing of Exceptions and submission of the case to the Board for final decision. The Board has not considered this set of pleadings and has disregarded all such filings as being outside the procedures provided by regulation.

   The Board has carefully reviewed the record and, for the reasons set forth below, concurs in the conclusions of the Recommended Decision, adopts the ALJ's Findings of Fact and Conclusions of Law, and enters an order dismissing the Notice.3

FACTS

   Respondent had been the manager of credit card merchant processing at * * * * and The Abbott Bank had been a customer of his at * * * Tr. at 26, 982–983. In addition, Respondent knew of The Abbott Bank because his brother-in-law, Richard Gordon, was counsel to the Bank and a predominant force in management of the Bank. In 1987, after Respondent left * * * * business, Optimum Merchant Services, Inc. ("OMS"),4 began a relationship with the Bank with the submission by Respondent of a business proposal to assist the Bank in developing a credit card merchant business. The Bank did not have the in-house expertise to accomplish this, but Respondent did. This proposal envisioned the Bank's providing merchant servicing under the umbrella of a principal Visa/MasterCard bank, * * * * * ). Pursuant to the proposal, OMS would earn a consulting fee of $12,000 per month for eight months (totaling $96,000) for the services it provided. FDIC Exs. 16 and 17. OMS worked for almost a year to negotiate a business arrangement with * * * * that would be satisfactory to all parties. Agreement was never reached and the Bank abandoned plans to enter the credit card business with * * * FDIC Ex. 16; Resp. Ex. 99.

   The Bank remained interested in developing the credit card business, however, and, in May of 1988, the plan was transformed into one in which OMS would assist the Bank directly in becoming a principal in the Visa and MasterCard systems, engaging in both credit card issuance and merchant servicing. From July 1988 through December 1992, the Bank paid OMS a consulting fee of $10,000 per month. FDIC Ex. 10 at Bates 756, 775–776; Tr. at 202–204. In 1989, OMS received an additional fee of $15,000 per month, which totaled $180,000. FDIC Ex. 10 at Bates 756, 762; FDIC Ex. 16 at Bates 809; FDIC Ex. 17. These initial arrangements between the Bank and OMS proceeded pursuant to oral agreements. The existence of these oral agreements is not disputed. Subsequently, the parties memorialized their agreement in a written contract and three addenda. The timing of the execution of the initial written contract and interpretation of several provisions is disputed.

   In its broadest terms, the contract called for OMS and the Bank to share certain rev-

2 Among the initial respondents who reached agreement with the FDIC without admitting or denying the allegations of the Notice was Richard L. Gordon. Mr. Gordon is Respondent's brother-in-law and was a predominant force in the Bank functioning as a surrogate of its president. R.D. at 45, Tr. at 65–66.

3 The Board corrects the ALJ's Finding of Fact No. 7 which should refer to a written agreement entered into on July 1, 1988.

4 In 1987, Respondent owned approximately 95 percent of OMS and the Bank owned approximately 5 percent. In December 1990, the Bank conveyed its shares at book value to Respondent, who became the sole owner of OMS.
{{7-31-00 p.A-3097}} enue arising from the credit card business. FDIC Ex. 10. Initially, the Bank was to earn 15.1 percent of gross service fees that OMS was expecting to earn from customers it developed, up to $276,000. When that figure was reached, the division of revenue changed pursuant to section 3.4 of the contract so that thereafter OMS was to pay the Bank "15.1 percent of its net revenue from all sources described in sections 2.1, 2.3, 3.1 and 3.3" of the contract. FDIC Ex. 10 at Bates 755. In December 1990, the First Addendum to the contract increased the percentage from 15.1 percent to 20 percent. FDIC Ex. 10 at Bates 762. Otherwise, these sections of the contract remained unmodified from July 1, 1991, through December 31, 1992. FDIC Ex. 10 at Bates 768–779. The Third Addendum of the contract, signed on January 9, 1993, provided for a return to calculating the Bank's share on the basis of gross revenue. Id. at Bates 773. The Bank and OMS continued their arrangement until 1995 when the Bank was sold to Community First State Bank, which subsequently sold the credit card portfolio to * * * * Tr. at 42–43.

ISSUES

   It is the contention of the FDIC that the contract between OMS and the Bank was extremely advantageous to OMS and Respondent and detrimental to the Bank. It further contends that, as an institution-affiliated party, Respondent owned fiduciary duties to the Bank which he breached and which breaches resulted in his personal enrichment at the expense of the Bank.

   FDIC Enforcement Counsel's case focuses on four primary allegations: (1) that the payment of $276,000 to OMS under the contract constitutes a violation of Regulation O of the Board of Governors of the Federal Reserve System ("Federal Reserve Board") as an extension of credit to an insider containing preferential terms and conditions;5 (2) that the initial contract was back dated and, therefore, Respondent knowingly engaged in the creation of a false bank record; (3) that the terms of the contract regarding the payment to the Bank of $276,000 did not accurately reflect the agreement of the parties; and (4) that OMS improperly determined "net revenue" and therefore underpaid the Bank by $352,000.

   The Board agrees with FDIC Enforcement Counsel that the facts in this case give rise to legitimate concerns about the relationship between respondent and the Bank and Respondent's conduct. However, FDIC Enforcement Counsel commenced the hearing in this matter by eliminating from the case the issue of whether the contract between the Bank and OMS provided an unfair advantage for Respondent because of the conflict of interest on the part of his brother-in-law, Richard Gordon, who negotiated the contract as counsel for both the Bank and for OMS. Tr. at 9.6 This concession rendered FDIC Enforcement Counsel's burden a more difficult one to shoulder in the context of this action.

   To meet its burden in this prohibition action, FDIC Enforcement Counsel must show by a preponderance of the evidence that the Respondent was an institution-affiliated party who 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 Respondent.7 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).

DISCUSSION

Regulation O Violation

   The initial contract between OMS and the Bank provided for the Bank to receive 15.1 percent of the gross service fees earned by

5 12 C.F.R. Part 215. Section 22(h) of the Federal Reserve Act, 12 U.S.C. §375b and Regulation O are made applicable to state non-member banks by section 18(j)(2) of the Act, 12 U.S.C. §1828(j)(2), and section 337.3(a) of the FDIC Rules of Practice and Procedure, 12 C.F.R. §337.3(a).

6 Also dropped at the hearing by FDIC Enforcement Counsel were allegations involving car dealers who marketed the Bank's credit cards and expansion of that program by Respondent. Tr. at 9–10.

7 The United States Supreme Court has stated that the evidentiary standard of proof for the agency decision under the Administrative Procedure Act ("APA") is "the traditional preponderance-of-the-evidence standard." Steadman v. Securities and Exchange Commission, 450 U.S. 91, 102 (1981). Furthermore, the proponent of a rule or order has the burden of persuasion, not merely the burden of production. Director, OWCP v. Greenwhich Collieries, 512 U.S. 267, 272 (1994).
{{7-31-00 p.A-3098}} OMS until the Bank received a total of $276,000. That amount is very precise because it equals the sum of monies the Bank paid to OMS as fees in 1987 ($96,000) and additional fees in 1989 ($180,000). FDIC Enforcement Counsel allege that this money actually represented a loan of start-up capital from the Bank to OMS, so that OMS could build its business and service the Bank. They contend it is a non-recourse, unsecured loan because the contract subsequently created an obligation to repay the amounts involved. Tr. at 205, 237.

   Respondent claims that the figure simply represented a benchmark for determining when the calculation of revenue-sharing under the contract would change. He states that OMS was paid fees for services rendered and that there was no expectation that the fees would be repaid. The Bank claimed the payments as an expense, not loans, for tax purposes. OMS treated them as income, not borrowed funds, for tax purposes.

   FDIC Enforcement Counsel argue that neither the intent of the parties nor their tax treatment of these monies is relevant. Rather, the "substance" of the matter governs. Tr. at 136, 731. FDIC Enforcement Counsel point to evidence that the "repayments" were tracked by the parties, Tr. at 204, 230; that a 1993 affidavit of Respondent referred to "start up cost paid by Abbott to OMS [having] been recouped," FDIC Ex. 76; that Respondent referred to an amount "left to pay back", in a notation on a letter from Richard Gordon to Bank president * * * * , FDIC Ex. 12; and that Respondent, in an interview with an examiner, referred to the $276,000 as having been owed, Tr. at 224.

   The record provides some history of this issue. In 1990, examiners for the Federal Reserve Board first raised the question of whether the considered transactions constituted a loan. FDIC Ex. 141. The 1990 examination of the Bank conducted by the state also raised this issue. FDIC Ex. 127. In response to these inquiries, the parties executed the First Addendum to the contract that stated that Respondent had resigned as an officer of the Bank, and that:

    The reference to the aggregate amount of $276,000.00 in Paragraph 3.4 of the Agreement . . . relates to consulting fees paid by [the Bank], and neither such amount nor any part thereof was ever intended or treated as a direct or indirect extension of credit or the functional equivalent of an extension of credit, and OMS has never been under any obligation, express or implied, to repay any or all of such amount.

   The parties expressly acknowledge that there has been no direct or indirect "extension of credit" or any other "covered transaction" (as such terms are defined by Section 23A of the Federal Reserve Act and Federal Reserve Board Regulation O respectively) between the parties hereto. FDIC Ex. 10 at Bates at 762.

   After receiving this response from the Bank, neither the Federal Reserve Board nor the state pursued the issue again. The FDIC conducted examinations in 1992 and 1994, with knowledge of the Federal Reserve Board's earlier examination report, and did not raise the issue. FDIC Exs. 5 and 6. In this proceeding, FDIC examiners have claimed that the omission in each of these examinations was simply an error. Tr. at 72, 74, 102, 689.

   The ALJ raises several problems with the FDIC's position. First, he notes that the FDIC seems to "ascribe no significance" to statements contrary to its theory. He points to the language of section 3.4 of the First Addendum, which FDIC Enforcement Counsel reads as indicating that "the bank had advanced $96,000 to OMS in 1987 and an additional $180,000 to OMS in 1989 and that they are now wanting those funds repaid." TR. 730. However, the same document expressly disclaims that there was any debt to be repaid, and that statement simply is rejected by the FDIC examiner as not related to "substance."

   Next the ALJ points out that the FDIC argument relates only to fees paid in 1987 and 1989. It makes no claim that the fees paid to OMS in 1988 constitute an extension of credit. The 1987 and 1989 funds were allegedly borrowed working capital. There is no assertion that the funds OMS received in 1988 were for a different purpose. It is clear from the record, however, that the need for start-up funds remained in 1988.8 The ALJ contends that "under Enforcement's theory, receipt of the 1988 funds should be deemed a more egregious violation of Regulation O than the 1987 payments because there was never any provision for their repayment. But it has made no such conten-

8 The first credit card was not issued until late 1988 or early 1989. Tr. at 916.
{{7-31-00 p.A-3099}} tion and concedes that the 1988 payments were true consulting fees." R.D. at 22. The Bank continued in 1990, 1991, and 1992 to pay OMS $10,000 per month in consulting fees, as well as a share of the revenue from the credit card operation. There is no claim that these payments constituted extensions of credit.

   It appears to be the FDIC's theory that the additional $15,000 per month paid in 1989 was debt because the services provided by OMS were already compensated by the $10,000 per month payment. Tr. at 762. Respondent claims that the additional money was additional compensation for credit card marketing services not previously contemplated by the parties and for the simultaneously required reduction in OMS' efforts on the merchant side, reducing its income potential. Tr. at 939–941; Resp. Ex. 99. Respondent's testimony regarding additional service in return for the additional fees is basically unrefuted. Even FDIC Examiner * * * admitted that, in 1989, OMS "was more involved in the development of the credit card campaigns" than either party had anticipated. Tr. at 236.

   Additionally, the timing of the transactions is troublesome. There is absolutely no evidence that, in 1987, when the first $96,000 was paid to OMS, there was any understanding that the fee arrangement created a debt to be repaid. During that time the parties were exploring the possibility of a tri-party arrangement, which was never consummated. "[The fees were] paid before the Bank made the decision to become a principal bank in the credit card business that generated the revenue which Enforcement now claims repaid it." R.D. at 22. The ALJ correctly points out that although FDIC Enforcement Counsel suggests the contrary, FDIC Br. at 12, there is no evidence of oral agreements in 1988 to repay the $96,000. Id. Moreover, in 1987, at the creation of this alleged debt, the relationship between the Bank and Respondent was in its fledgling stage. It is not clear from the record that Respondent, functioning under an oral contract with the Bank, was an institution-affiliated party at that time. The Bank had no credit card division for Respondent to manage or to participate in at the time. R.D. at 25. As noted by the ALJ, if Respondent were not an institution-affiliated party, the 1987 portion of the alleged debt would not violate Regulation O. R.D. at 26.9

   FDIC examiner * * * testified that "once the parties agreed that the funds advanced in 1987 would be repaid, that became an obligation to repay and, thus, an extension of credit." Tr. at 725. The point of her testimony appears to be that whenever parties agree to repay funds, a debt obligation can be retroactively created. While it may be possible for parties to agree ex post facto to treat a fee arrangement as a debt, in the absence of more substantial evidence of such an agreement, the Board is unwilling to do so here.

   The theories of both parties are plausible. There is conflicting evidence in support of each theory, none of which is conclusive. The Board tends to agree with Respondent, however, because of its understanding of the fundamental difference between a loan and a contract for services. A loan consists of a grant of funds in return for a promise to repay. The lender has no expectation of receiving services. Where one party has an expectation of receipt of services and another party provides such services in return for market rate payments,10 however, a contract for services is created. The subsequent return to one contracting party of its initial expenses (here, the $276,000) is a typical enough business arrangement, whereby one party to a service contract will recoup its out-of-pocket expenses before profits are shared between the parties. It is understood that the fees paid to the service-providing party included an amount for expenses and profit.

   [.1] The Board recognizes that parties may go to great lengths to disguise their arrangements in order to avoid the restrictions on

9 The ALJ further notes (R.D. at 26) that FDIC Enforcement Counsel recognize this problem, but contend that an extension of credit made in contemplation of becoming an insider is covered by Regulation O. FDIC Br. at 45, n. 41. The Board does not decide that legal question here because it finds no substantial evidence of such contemplation at the time. While the record shows that both parties were hopeful of a long-term arrangement at the time these fees were paid, they were in the exploratory phase and the entire project could have been abandoned. There is no allegation that OMS had an obligation to repay the fees if the Bank had abandoned its plans after the * * * * negotiations fell apart.

10 There is no allegation that the payments to OMS were either above or below market rate, which might have changed the analysis.
{{7-31-00 p.A-3100}} insider lending contained in Regulation O. But the FDIC has the burden of proof and, given the state of this record, the Board cannot say that this burden has been met. Therefore the Board is unwilling to deem these payments to be extensions of credit.11

Back-Dated Contract

   In January 1990, the FDIC commenced an examination of the Bank and, in connection therewith, requested a copy of the Bank/OMS agreement. In February 1990, a document was produced to the examiners. The contract was executed by * * * * on behalf of the Bank in early February 1990, and previously had been signed by Respondent on behalf of OMS. FDIC Ex. 11. Respondent cannot pinpoint the date of his signature, but thinks it was in late 1988 or 1989. Tr. at 915.

   The contract begins as follows:

    THIS AGREEMENT is entered into on this 1st day of July, 1988 between The ABBOTT BANK, Alliance, Nebraska, a Nebraska State Bank ("Abbott") and OPTIMUM MERCHANT SERVICES, INC., a Delaware corporation ("OMS").

   The signature page of the document recites that "the parties have executed this agreement as of the first above-written date," which is July 1, 1988. Paragraph 4.1 of the agreement provides that its initial term "shall be for a period of five years from January 1, 1989."

   Respondent contends that there was no misrepresentation as to when he signed because the "as of" language suggests that the document was executed on a date other than that on which it was entered into.

   Based on extrinsic, undisputed evidence, the FDIC examiners concluded that the contract was back-dated.12 The ALJ concludes that at least "to the extent the agreement suggests that the final revenue division arrangements were reached on [July 1, 1988], the written agreement is back-dated, though other agreements were entered into on that date, and may have been reduced to writing, but not signed, at least by officials at the Bank." R.D. at 28.

   FDIC Enforcement Counsel contend that, "by signing and delivering the written agreement for execution by the Bank, Westering participated in creating a false or inaccurate bank record and compromised the integrity of the Bank's records and thus compromised the integrity of the Bank examination process." FDIC Br. at 8. According to FDIC Enforcement Counsel, the failure of the Bank to inform the examiners that the contract did not exist when they requested it in January 1990, and the related inability of the regulators to know that Respondent became a vice president of the Bank by the written contract, are also significant consequences of the back-dating. FDIC Br. at 49. Because of this, "any transactions Westering had with the Bank did not receive the type of scrutiny they would have otherwise warranted for potential insider abuse." Id.

   [.2] The ALJ describes the FDIC's position as "rather over-drawn," R.D. at 29, and the Board tends to agree. Without diminishing the importance of the integrity of bank records to the financial regulatory system, the Board must also take a practical look at this issue in its context. There is agreement that the parties functioned pursuant to arrangements that evolved over time from oral to written. This has not been hidden. Indeed paragraph 8.3 of the contract recites that it supersedes and merges all prior agreements and understandings. There has been no suggestion in this case that the "back-dating" provided any additional advantage to Respondent or disadvantage to the Bank. No motive appears for back-dating. There is no evidence of an attempt to deceive on the part of Respondent with respect to the dating of the contract. There is no evidence that the back-dating of the contract resulted in loss to the Bank or financial gain to Respondent. Although the FDIC examiners apparently felt their scrutiny of Respondent's transactions would have been heightened had they known earlier that he had been made a vice president of the Bank, the ALJ correctly notes that "it was clearly more the Bank's responsibility than Respondent's to inform the examiners who its officers were." R.D. at 29. The Bank is not a respondent. Therefore, the Board does not find that the elements of a violation of section 8(e) of the Act have been satisfied with respect to this issue.

11 It is clear that if this arrangement had been an extension of credit, it would have violated section 215.4 of Regulation O because of its preferential terms.

12 The Bank did not acquire the name The Abbott Bank until August 23, 1988; the conditions related to the divisions of revenue set forth in the contract could not have been known in July 1988; and there was no record in the Bank's minutes reflecting the entry into this contract in 1988.
{{7-31-00 p.A-3101}}

Inaccurate Contract Terms

   FDIC Enforcement Counsel allege that the contract did not accurately reflect the practice of the parties with regard to how the Bank earned revenue up to $276,000. Respondent's participation in this practice, which conflicts with the contract language, is alleged to be a reckless, unsafe and unsound practice. FDIC Br. at 50 n. 47.

   The practice engaged in by the Bank and OMS, on which there is no disagreement, was for the Bank to receive a percentage of the gross merchant service fees collected. Tr. at 192–195; FDIC Ex. 16 and 17. The written contract, however, provided for the Bank to receive a percentage of gross merchant service fees collected minus the "rates."13 Reducing the gross merchant service fees by the "rates" would have significantly reduced the amount of money paid to the bank under the contract formula, thereby extending the time before the Bank received $276,000 and the revenue-sharing methodology changed. FDIC Br. at 50.

   FDIC Enforcement Counsel assert that the practice of the parties was knowingly different from the contract. The Board cannot determine from the record whether the contract did not accurately reflect the existing understanding, or whether the parties simply deviated from the contract for some (unknown) reason. The evidence is "puzzling," as the ALJ suggests. Respondent takes the position in his Reply Brief that he did not know about the accelerated payments until it was pointed out to him by OMS accountant * * * * * in July 1992, Resp. Reply Br. at 16, although FDIC Ex. 26 indicates that Respondent had been aware earlier of the discrepancy between the contract and the revenue settlement practice. In their Reply Brief, p. 26, FDIC Enforcement Counsel seem to agree that Respondent was not aware of the discrepancy until * * * * "pointed out the terms of the Bank/OMS Contract provid[ing] for reduction for the rates." Previously, the FDIC's witness testified that FDIC Ex. 26 showed that Respondent knew the contract was a false bank record, Tr. at 238, and argued that such falsification was reckless, if not intentional.

   [.3] FDIC Enforcement Counsel have not identified any motive for the inaccuracy or any harm caused by it or benefit to Respondent. The benefit appears to have been the Bank's. FDIC Enforcement Counsel claim that during a re-negotiation of the contract Respondent stated in a letter to the Bank's president, * * * *, that an accounting under the written contract would, in fact, reflect that the Bank owed OMS money. FDIC Ex. 152. OMS' accountant had indicated that the Bank received more from the accelerated payments (as opposed to payments called for by the contract) than any amounts it could dispute as over-payment to Respondent. According to FDIC Enforcement Counsel, Respondent's statement "clearly attempt[s] to use that inaccuracy at a later time for his own self-serving advantage." FDIC Br. at 51. They read the statement to * * * as a threat, presumably to thwart a review of the revenue settlement procedures. The Board agrees with the ALJ that, because it is undisputed that the Bank received more than it was entitled to under the contract, a reminder of that fact does not rise to the level of unsafe and unsound practice or a breach of fiduciary duty.14 R.D. at 31.

   [.4] The FDIC was able to examine the books and records of OMS and the Bank in great detail. Other than this discrepancy, there is no assertion that the records are incomplete or inaccurate. The inaccuracy did not impede the examination. The ALJ correctly states "there is no apparent reason why Respondent would intentionally enter into a contract while operating under terms far less favorable to him [self] than those provided in the contract." R.D. at 33. Again, the Board does not want to be read as condoning the falsification of bank records or in any way

13 Respondent testified to the following example: A merchant receives $97.00 on a $100.00 credit card transaction. Of the $3.00 "discount", part goes to the card issuing bank, part goes to third party processors and part goes to Visa/MasterCard. The payment to the card issuing bank, the payment of fees to 3rd party processors and the payment of assessments to Visa/MasterCard constitute the "Rates." Tr. at 871–872.

14 The ALJ found that Respondent was registered with the state of Nebraska as a bank officer from October 25, 1990, to July 19, 1991, and that, before and after that registration, he was involved as an affiliated party participating in the management of the Bank's credit card division. "It is clearly established that he was an affiliated person at various times." R.D. at 25. As an affiliated party, Respondent owed fiduciary duties to the Bank. The underlying thrust of Enforcement Counsel's argument is that he breached these fiduciary duties by taking advantage of the Bank through his relationship with his brother-in-law. But that argument cannot be supported on this record where such allegations have been eliminated.
{{7-31-00 p.A-3102}} subverting the importance of the integrity of accurate bank records. The Board does not deviate from the holding in In the Matter of Frank E. Jameson, FDIC-89-83e, [Bound Vol. 2] FDIC Enforcement Decisions and Orders (Aspen) ¶ 5154A (June 12, 1990), aff'd, 931 F.2d 290 (5th Cir. 1991). Rather, like the ALJ, the Board distinguishes that case from the instant case. The Board concurs with the ALJ in finding that the discrepancy should be viewed as unintentional, R.D. at 34. While the practice and the contract language are not the same, the Board is not persuaded that the conduct, in the context of this case, constitutes an unsafe or unsound practice, or a breach of Respondent's fiduciary duties. The Board, therefore, finds that the requirements of section 8(e) of the Act have not been satisfied.

Underpayment of $352,000

   The dispute here centers around the method used to calculate revenue-sharing between the Bank and OMS after the Bank received the $276,000 discussed above.15 In its simplest form, the monthly revenue settlement process worked as follows: The Bank initially received income earned from the credit card operations. After various adjustments, the Bank credited that income to OMS. After making certain deductions, OMS reported to the Bank its share of that month's revenue.

   Section 3.4 of the contract provides that "OMS shall pay to [the Bank] on a monthly basis 15.1 percent [later 20 percent] of its net revenue from all sources described in Sections 2.1, 2.3, 3.1 and 3.3 . . . " The issue is the definition of the term "net revenue from all sources," which the contract does not define.

   OMS arrived at "net revenue" after deducting various overhead expenses. FDIC Enforcement Counsel argue that deduction of such expenses was not allowed under the contract. By virtue of the differences in calculating net revenue, FDIC Enforcement Counsel claim that OMS cheated the Bank out of some $352,000, which also constituted a Regulation O violation.16

   The Recommended Decision analyzes in detail the assertions of the parties and the evidence. R.D. at 34–46. The ALJ carefully addresses each element of FDIC Enforcement Counsel's argument and the Board need not repeat such analysis. The Board, after its own review of the record, concurs with the ALJ that the contract was not "clear and unambiguous" as asserted by Enforcement Counsel. There is considerable FDIC evidence challenging this assertion.17 Notably, Examiner * * * * testified that other FDIC examiners disagreed with her theory for calculating net revenue. Tr. at 465, 474.18 Moreover, the parties to this contract agreed on its interpretation, although that interpretation did not comport with Enforcement Counsel's position.

   There is no doubt that Respondent made a good deal of money from his arrangement with the Bank. But there is no longer an issue in this case regarding collusion between Respondent and the Bank, through his brother-in-law, or a conflict of interest. Therefore, the Board must read the contract on its face, assume it was an arms-length agreement, and view it in light of the practice of the parties. When so viewed, the Board does not find that the FDIC presented sufficient evidence supporting each element of a violation of section 8(e) of the Act.

   The Board discusses here only a few elements of the underpayment issue. Section 16 of the Third Addendum to the contract contained mutual releases of liability regarding any "actions or failure to act under the Agreement prior to January 1, 1993, [with] each party hereby forever releas[ing] and discharg[ing] the other from any action or cause of action, known or unknown, which it may have against the other as a result of the performance or nonperformance of the other prior to January 1, 1993." FDIC Ex. 10 at Bates 778.

   FDIC Enforcement Counsel contend that this provision was forced upon the Bank by

15 The relevant time period is July 1991 through December 1992. In January 1993, the Third Addendum was signed by which the calculation reverted to being made on the basis of gross revenue.

16 The Notice alleges that the failure of OMS to pay the Bank this amount it allegedly owed the Bank constitutes an extension of credit within the meaning of section 215.3(a) of Regulation O, 12 C.F.R. §215.3(a).

17 FDIC Examiner-In-Charge * * * testified that there are "vagaries in the contract." Tr. at 117. A now deceased member of the 1994 FDIC examination team wrote a memo stating, in part, that "the lack of definition in the agreement makes it easy to interpret in several ways." FDIC Ex. 32 at Bates 1275–76. The 1992 FDIC examination report recognized that OMS' operating expenses were deductible before the Bank's revenue share was computed. FDIC Ex. 5 at Bates 110.

18 She claims that they were wrong and she is right. Tr. at 476.
{{7-31-00 p.A-3103}} OMS in recognition of regulatory concern with the computation of net revenue. There is evidence contradicting the coercion to which Enforcement Counsel allude and, of course, no evidence of collusion. Bank president * * * * * testified that he was more concerned with the forward focus of the Third Addendum and with negotiating a return to calculations on the basis of gross revenue, than he was with possible miscalculations in the past. Tr. at 619, 622, 629.

   The record contains evidence that FDIC examiners and accountants for the Bank had raised the issue of possible income manipulation resulting from the non-specificity of the contract. On several occasions it was suggested that the contract be modified to clarify allowable expense deductions in determining "net revenue." This same evidence shows that both the FDIC examiners and accountants for the Bank and OMS recognized that certain overhead expenses were appropriately deductible in reaching "net revenue."

   With regard to the allegations that Respondent concealed the improper deductions from the Bank, Enforcement Counsel point to FDIC Ex. 24, a document sent to Richard Gordon by Respondent in which Respondent describes several methods of calculating net revenue, one of which is the FDIC's method. From this, they conclude that Respondent knew how to make the "correct" calculation, but refused to do so. They charge that this interaction between Gordon and Respondent did not constitute disclosure to the Bank. On the record before the Board, however, this appears to have been at least constructive notice. Gordon was a controlling figure in the Bank and its counsel, R.D. at 40. That being so, it is difficult to find Respondent liable for Gordon's failure to disclose the calculation further.

   In 1992, upon the advice of its accountants, OMS changed its computation of deductions for income taxes. As a result of the new computation, it was determined that OMS owed the Bank $9,461.81 and a check in that amount was sent to the Bank, albeit without explanation. Understandably, Bank management was surprised and curious upon receipt of this check. Chief Operating Officer * * * * * wrote to Respondent and requested "an immediate, full and complete accounting of OMS operations since June, 1991. As part of the accounting, all underlying invoices, checks and other relevant supporting documents will be required . . . we ask that this information be made available as soon as possible next week." FDIC Ex. 151.

   On November 18, 1992, Respondent replied, in part, as follows:

    OMS has faithfully accounted for all monies due the bank both during the time we operated under a percentage of gross and since we operated under a percentage of net. I realize you know this because the Bank essentially already has all financial information relevant to our relationship.

   Our good faith is clear from the fact that earlier this year we voluntarily complied with your request for financial information. As at that time, OMS stands ready to allow your review of any material you reasonably need to verify the propriety of our dealings. As I mentioned to you on the telephone, simply call Victoria in our office and identify who is to come in to review financial records on-site with her. FDIC Ex. 152.

   FDIC Enforcement Counsel assert that OMS failed to provide an accounting to the Bank. OMS quickly and simply agreed to accommodate the Bank's request that all relevant information be made available. No one from the Bank came to review the OMS financial records. Neither Respondent nor OMS had a responsibility to force the Bank to review OMS records. This interaction predates by two months the mutual releases contained in the Third Addendum to the contract signed January 9, 1993. FDIC Examiner * * * * testified that Bank senior management "had as much knowledge as they wished to have" regarding understanding of OMS overhead expenses. Tr. at 541. * * * testified that he considered Respondent's letter of November 18 to be "responsive to his request." Tr. at 614. The Board cannot conclude from this that Respondent "covered up" OMS records or its true financial dealings with the Bank.

   FDIC Enforcement Counsel is most concerned about the deductions taken for taxes and shareholder distributions to Westering, the sole shareholder, and describes them as "absurd." FDIC Br. at 40. And the ALJ agrees that "such deductions are not commonly made to arrive at a net income figure." R.D. at 45. Nonetheless, because the Board finds that the contract is not clear and unambigu-
{{7-31-00 p.A-3104}} ous, the issue here is the understanding of the parties.

   There is ample evidence that Bank senior management, its auditor, and its outside accounts, * * * * * * * , recognized that the Bank was being compensated after payment of OMS expenses. Tr. at 621–622; Resp. Ex. 29; Resp. Ex. 99, p. 7; Resp. Ex. 100; FDIC Ex. 48. Furthermore, the FDIC Report of Examination as of April 1992 notes that the Bank's 20 percent was 20 percent of net income and suggests the need for complete financial statements from OMS to prevent expense manipulation. FDIC Ex. 5 at Bates 110. Thus, as Respondent states, the significance is that the Bank knew OMS was deducting expenses and the FDIC knew that the Bank knew. Resp. Reply Br. at 1–2.

   Respondent asserts that taxes were included as a deduction by OMS since, at the inception of the contract, OMS was a corporate, taxpaying entity and taxes were predictable expenses reasonably contemplated by the parties. Tr. at 953–954. He claims that the subchapter "S" election made as of January 1, 1991, changed nothing except from the IRS's standpoint. Resp. Br. at 23. As between the Bank and OMS, Respondent claims taxes remained a real expense and were properly deducted in arriving at net revenue. Tr. at 953–954.

   It is clear from the record that the parties agreed or consented to the deduction of taxes and shareholder distributions as allowable expenses. The mutual releases of the parties contained in the Third Addendum indicate they were not terribly concerned with the issue. The Board agrees with the ALJ that such deductions are not commonly taken in determining net revenue. On this record, however, the Board cannot find liability on the part of Respondent.

   [.5] Civil Money Penalty19

   In order to assess a civil money penalty, the Board must find that Respondent:

    (a) committed a violation of law or regulation; or

       (b) recklessly engaged in unsafe or unsound practices; or

       (c) breached his fiduciary duty to the Bank;

and furthermore that the said violations, practice and breach (i) were part of a pattern of misconduct, (ii) caused more than minimal financial loss to the Bank, and/or (iii) resulted in pecuniary gain or other benefit to Respondent.

   Because the Board does not find substantial evidence of Respondent's participation in violations of law or regulation, unsafe or unsound practices or breaches of fiduciary duty, it declines to impose a CMP against Respondent.

CONCLUSION

   The Board believes this case represents a unique, isolated situation and views its findings to be limited to the facts of this case. The Notice alleges a multi-faceted scheme to defraud the Bank involving eight participants. Over the five-year course of this proceeding, all other respondents and much of the evidence was eliminated from the case. At the hearing against Respondent, FDIC Enforcement Counsel dropped its allegations regarding the one-sided nature of the contract between the Bank and OMS arising from the relationship between Respondent and his brother-in-law, former respondent Gordon, and Gordon's conflict of interest as counsel to the Bank and OMS. In the current state of the case, viewing the contract as an arms-length agreement, the Board does not find on the record that the FDIC met its burden of proof to establish that Respondent violated Regulation O or underpaid the Bank. In addition, because the Board finds that the FDIC's burden has not been met with respect to proving loss to the Bank, benefit to Respondent or detriment to the depositors, or willful or continuing disregard for the safety or soundness of the Bank with regard to the back-dating or inaccuracy of the contract, the Board is unwilling to impose the sanction of prohibition against Respondent. It follows from the fact that the Board does not find a violation of law or regulation, unsafe or unsound practice, or a breach of fiduciary duty that the Board is also unwilling to issue the civil money penalty against Respondent.

ORDER TO DISMISS

   The Board of the FDIC has considered the entire record in this proceeding, including the ALJ's Recommended Decision and the Exceptions to the Recommended Decision

19 The Notice sought a CMP of $150,000 from Respondent. At the hearing, FDIC Enforcement Counsel argued that a penalty of $1,250,000 should be imposed. In its Reply Brief, Enforcement Counsel again requested a CMP of $150,000.
{{7-31-00 p.A-3105}} filed by both parties, and has concluded that the allegations of the Notice are not supported by the record.

   ACCORDINGLY, IT IS HEREBY ORDERED, that the Notice against Respondent John H. Westering is dismissed.

   By direction of the Board of Directors.

   Dated at Washington, D.C., this 10th day of May, 2000.

RECOMMENDED DECISION

In the Matter of JOHN H. WESTERING: COMMUNITY FIRST STATE BANK, (FORMERLY THE ABBOTT BANK) ALLIANCE, NEBRASKA (Insured State Nonmember Bank) FDIC-94-167e FDIC-95-187k

   Appearances:

   Jeffrey B. Hill, Esq. and John J. Oldenburg, Jr.,Esq. for the Federal Deposit Insurance Corporation.

   David L. Buelt, Esq. and David L. Crawford, Esq.for Respondent.

   ARTHUR L. SHIPE, Administrative Law Judge

I. Introduction

   This proceeding was instituted on February 28, 1996, by Notice of Intent to Prohibit From Further Participation; Notice of Assessment of Civil Money Penalties; Findings of Facts and Conclusions of Law, Order to Pay and Notice of Hearing. These Notices named eight individuals as Respondents. Prior to hearing, settlements were reached with all Respondents, except John H. Westering, hereinafter referred to as the Respondent.

   Oral hearings were held in this matter in Lincoln, Nebraska on January 5, 6, 7, 8, and 11, 1999. Opening and reply briefs have been filed.

   Based upon the entire record including the exhibits, testimony, and my observation of the witnesses' demeanor at hearing, the following Findings and Fact, Discussion of Facts and Law, Conclusions of Law, and Order are entered.

II. Findings of Fact

   1. At all times pertinent to this proceeding, the Community First State Bank ("the Bank") was a corporation existing and doing business under the laws of the State of Nebraska. The Bank was a state-chartered and FDIC insured institution, with its principal place of business at Alliance, Nebraska. Prior to August 22, 1988 when it became the Abbott Bank, it was known as The Guardian State Bank and Trust Company. In 1995, it became the Community First State Bank. FDIC Exhibit 27.

   2. From July 1987 to at least January 1993 Respondent was a consultant to the Bank, or a participant in the managerial and major policy making functions of the Bank regarding development and implementation of the Bank's credit card program (Tr. 209–213, 348–353, 488–489, 494–531) (FDIC Ex. 16, 79, 99, 99-a, 100 and 100a). Under a certain agreement of July 1, 1988, Respondent was vice-president of the Bank until December 1990. FDIC Ex. 10 at Bates 756 and 763; FDIC Ex. 28; FDIC 54; Tr. 233–234.

   3. Respondent largely owned, and completely controlled, an entity known as Optimum Merchant Services, Inc. ("OMS"). In 1987, Respondent owned approximately 95 percent of the issued and outstanding stock of OMS. The Bank owned the remaining 5 percent until December 1990, when it conveyed its shares to Respondent at book value, making him the sole owner. FDIC Ex. 6 at Bates 168; FDIC Ex. 10 at Bates 761.

   4. In mid-1987, the Bank entered into an oral agreement with Respondent and OMS to enlist Respondent to develop a credit card merchant program involving OMS, the Bank, and a third-party institution, * * * * *. The program included the issuance and funding of credit cards. Def. Ex. 16; Tr. 884–894. Respondent had previously been employed for some six years in the credit card merchant business of another bank, where he earned an annual salary of approximately $40,000. Tr. 982–983. Under the 1987 oral agreement, the Bank paid OMS a consulting fee of $12,000 per month for 8 months, totaling $96,000. FDIC Ex. 16 and 17; FDIC Ex. 10 at Bates 762.

   5. As part of this undertaking, OMS was to build a merchant network on behalf of the Bank that would generate fee income and balances within the bank, and further en-
{{7-31-00 p.A-3106}} hance the credit card distribution network on behalf of * * * *. If these efforts were successful, OMS was to receive an up front fee for every new cardholder, along with as much as .50 percent of each sale and all cash advance income. As part of this structure, the bank would have become an Affiliate of MasterCard and a Sponsored Member of VISA under the principal membership of * * * *. All cardholder loans would have been made by * * * *.

   These negotiations covered a period of almost one year. The plan involved related negotiations with * * * for a processing agreement, which would have lowered the cost of providing authorizations and other services, from the cost that could have been passed through to OMS and Abbott Bank by * * * *. The * * * * proposal was never implemented because the Bank and * * * reached an impasse in their negotiations. FDIC Ex. 16; Def. Ex. 99.

   6. As a result of the impasse the Bank began considering in May of 1988 entering the card business directly under a two party agreement between OMS and the Bank. The plan incorporated the same structure the Bank and OMS initially desired with * * * FDIC Ex. 16; Def. Ex. 99.

   7. On or about July 1, 1989, Respondent and OMS entered into another oral agreement for the marketing and development of the Bank's proposed credit card and merchant servicing program. FDIC Exs. 16 and 17. Under the terms of the 1988 agreement, OMS was to receive a consulting fee from the Bank in the amount of $10,000 per month. FDIC Ex. 16 at Bates 809. That $10,000 per month consulting fee was paid by the Bank to OMS from July 1988 through December 1992. FDIC Ex. 10 at Bates 756, 775– 776; Tr. 202–204. In addition to the consulting fee of $10,000 per month, the Bank also paid OMS $15,000 per month during the year of 1989, which totaled $180,000. FDIC Ex. 10 at Bates 762; FDIC Ex. 16 at Bates 809.

   8. In early 1990, when FDIC examiners requested the Bank-OMS agreement, it was not available. The president of the Bank, * * * * * knew Mr. Richard Gordon, the Bank's counsel, had the oral agreement in rough draft, and therefore requested Mr. Gordon to send the Bank a copy because of the examiners' request./ FDIC Ex. 20-a.

   9. The contract was executed by * * * * on behalf of the Bank in early February, 1990, and had been signed by Respondent on behalf of OMS sometime before * * * execution. FDIC Ex. 11.

   10. The written contract entered into between the Bank and OMS, which was not completed until February 1990, was amended on December 24, 1990. FDIC Ex. 10 at Bates 761. Section 3.4 of the original agreement provided, in part, as follows:

    3.4 OMS shall remit to Abbott, on a monthly basis, through direct payment from OMS to Abbott an amount equal to 15.1 percent of the gross service fees to OMS under Section 3.1, of this Agreement. The monthly payments shall continue until such time as OMS has paid Abbott an aggregate amount of $276,000. After OMS has paid an aggregate of $276,000 to Abbott as aforesaid, OMS shall pay to Abbott on a monthly basis 15.1 percent of its net revenue from all sources described in Sections 2.1, 2.3, 3.1 and 3.3

FDIC Ex. 10, Bates 755.

   11. Section 5.1 provided that neither party could enter into any competing agreements for services provided by OMS under the agreement. FDIC Ex. 10, Bates 756.

   12. Section 3.6 of the Bank/OMS Contract provided for the Bank to reimburse OMS for its expenses in connection with developing marketing programs for the Bank's credit card program. FDIC Ex. 10 at Bates 756; Tr. 313, 316 and 356.

   13. Section 8.3 of the Bank/OMS Contract provided that it was the entire agreement between the parties, and could not be modified or amended except by another written agreement signed by the parties' duly authorized officers. FDIC Ex. 10 at Bates 758. Tr. 1015.

   14. The provisions of sections 2.1, 2.3, 3.1, 3.3, 3.4, 3.6, and 8.3 of the Bank/OMS Contract remained unmodified and in full force and effect from July 1, 1991, through December 31, 1992. FDIC Ex. 10 at Bates 768–779.

   15. From July 1991 through December 1992, all revenues received in the form of "merchant discount fees" and "cardholder fees" as described in sections 2.1, 3.1 and 3.3 of the Bank/OMS Contract were initially received or collected by the Bank. Tr. 298–299.

   16. From July 1991 through December 1992, all expenses incurred by OMS that
{{7-31-00 p.A-3107}} were subject to reimbursement by the Bank pursuant to section 3.6 of the Bank/OMS Contract, were billed directly to the Bank, and paid by the Bank. Tr. 299–300, 311–313.

   17. From July 1991 through December 1992, the Bank and OMS performed a monthly two-step settlement process that consisted of:

    (a) the Bank and OMS analyzed and accounted through the "TAB/OMS Settlement Worksheets" (prepared by the Bank, i.e., FDIC Ex. 23-a at Bates 6708) and the "OMS and TAB Settlement Sheets" (prepared by OMS, i.e., FDIC Ex. 23-a at Bates 6707) for: (i) all merchant discount fees received, less "the rates," (ii) all cardholder fee income received, and the determination of forty basis points of that amount for the amount owed to OMS, (iii) an offset for any expenses billed to the Bank that were in fact expenses of OMS that were not of the type provided for Bank reimbursement under section 3.6 of the Bank/OMS Contract; and (iv) after the Bank and OMS performed and agreed with the described computations, the bank credited an account for OMS with the entire amount calculated (Tr. 297–300); and upon agreement with the Bank on the accounting, OMS then made a determination of an amount it claimed was due to the Bank under section 3.4 of the Bank/OMS Contract, although OMS did not provide the Bank with any written analyses of how the Bank's share was computed, and the Bank would then include the amount as an offset against the following month's accounting to OMS for revenues received and owing to OMS under the process set out above.

Tr. 300–301.

   18. Under the contract, the bank was responsible for remitting to OMS all the funds it received under certain types of card operations as quickly as possible. They developed a very formal, very structured process for calculating the amount that was due back to OMS which the bank then credited. Both OMS and the Bank did this from a review of their respective records, and then came together and did a reconcilement to make sure they were in agreement. The Bank would then credit OMS for the amount determined due under the settlement process.

   The bank was the only party involved in this process that could, in fact, receive the funds from the card operation. It was an agent bank for merchant processing, and also issued card accounts and had the actual receivables on its books. It received all remuneration relative to these activities onto its records and, thus, was basically the keeper of the funds until this process was completed. OMS was then given its proportionate share of income under the contract. OMS had a responsibility to remit 15.1 percent (later 20 percent) of its net revenues from specified paragraphs back to the bank. On the monthly settlements, OMS would state the amount representing the Bank's proportional interest in net revenues for the month in question. Tr. 297–301.

   19. From July 1991 through December 1992, in computing the net revenue under section 2.3, OMS deducted all of its operating expenses. These deductions substantially reduced the total "net revenues from all sources described in sections 2.1, 2.3, 3.1 and 3.3" which revenues were the subject of the 80/20 split between OMS and the Bank under section 3.4 of the Contract. FDIC Ex. 19, 22, 23, 23-a; Tr. 303–321, 35–364.

   20. From July 1991 through July 1992, OMS included certain shareholder distributions to Respondent, the sole shareholder of OMS (an "S-Corporation" (FDIC Ex. 25)). These shareholder distributions further reduced the total of "net revenue from all sources described in sections 2.1, 2.3, 3.1 and 3.3," which revenues were the subject of the 80/20 split between OMS and the Bank under section 3.4 of the Contract. FDIC Ex. 19, 22, 23, 23-a and 24; Tr. 304–309.

   21. From July 1992 through December 1992, OMS included a 38 percent adjustment for income tax instead of the actual shareholder distributions. This tax adjustment substantially reduced the total "net revenues from all sources described in sections 2.1, 2.3, 3.1 and 3.3" which were the subject to the 80/20 split between OMS and the Bank under section 3.4 of the Bank/OMS Contract (FDIC Ex. 19, 22, 23, 23-a and 24; Tr. 309–311).

   22. * * * * * * were accountants to both the Bank and OMS until June 1992. Respondent discussed the practice of taking personal distributions from OMS before computing the Bank's share of revenue with those accountants. * * * * * * indicated no objections. Tr. 226.

   23. In August 1992, the Bank's internal
{{7-31-00 p.A-3108}} auditor reviewed the Bank/OMS transactions, and found that OMS had not provided the Bank with any documentation on how the 80/20 OMS/Bank division of proceeds was performed. The auditor recommended that OMS provide an accounting for how that division had been calculated. FDIC Ex. 52 at Bates 1384.

   24. In September 1992, Respondent caused OMS to perform and provide to Mr. Richard Gordon, attorney for both the Bank and OMS (Tr. 394–395), certain analyses of the OMS calculations of the 80/20 division of revenues for the period of January 1, 1992 through August 1992, as follows:

    (a) On Thursday, September 17, 1992, at approximately 10:21 am, Respondent caused OMS to provide to Gordon the following three analyses: (i) taking OMS net operating income, less a 38 percent reduction for income tax, then multiplied by 20 percent to determine the Bank's share under that scenario; (ii) taking OMS net operating income, less "pre-tax" shareholder distributions to Respondent, and then multiplied by 20 percent to determine the Bank's share under that scenario; and (iii) taking OMS net operating income, and then multiplying by 20 percent to determine the Bank's share under that scenario (FDIC Ex. 24; Tr. 377–384); and

       (b) On Friday, September 18, 1992, at approximately 2:43 pm, Respondent caused OMS to provide to Gordon an analyses of "total merchant revenues" for 1991 and 1992, without deductions for overhead expenses or taxes.

   25. These analyses prepared by OMS/Respondent without discussion between Respondent and any officer of the Bank, were part of the analysis later used by Respondent for causing OMS to send the Bank a check dated October 10, 1992, in the amount of approximately $9,462 (Tr. 381–382, 1009–1010). That check was sent without any written explanation, other than as an adjustment owed by OMS to the Bank from the settlement process. FDIC Ex. 151; Tr. 603–604.

   26. Upon receipt of the OMS reimbursement, * * * * the Bank's Chief Operating Officer sent a letter of inquiry to Westering on November 12, 1992, requesting an explanation of this "reimbursement," and a complete accounting of the OMS Operations since June 1991. FDIC Ex. 151; Tr. 603–604.

   27. Respondent replied to * * * * by letter dated November 19, 1992, stating in part:

    OMS has faithfully accounted for all monies due the bank both during the time we operated under a percentage of gross and since we operated under a percentage of net. I realize you know this because the Bank essentially already has all financial information relevant to our relationship.

   Our good faith is clear from the fact that earlier this year we voluntarily complied with your request for financial information. As at that time, OMS stands ready to allow your review of any material you reasonably need to verify the propriety of our dealings. As I mentioned to you on the telephone, simply call Victoria in our office and identify who is to come in to review financial records on-site with her.

   With regard to the $9,461.81 adjustment, it may help you to understand that the method of computing payments of percentages of net from June, 1991, forward were based upon advice to us from * * * * *. When * * * * * advised OMS that the Coopers' method was wrong, OMS immediately recomputed amounts due and made the make-up payment to the bank. But, you should know that * * * * * also advised OMS that the seeming underpayment to the bank was more than offset by the fact that we had paid the $276,000 to the bank faster than called for by our contract. Only a portion of this was due based upon our agreement. You may wish to review your records on this point. FDIC Ex. 152.

   28. Respondent did not provide Mr. * * * copies of the analyses provided to Mr. Gordon the previous September, nor did he indicate that those analyses had been prepared. Mr. * * * did not accept the invitation to have OMS records reviewed by Bank personnel. FDIC Ex. 152, Tr. 603–607.

   29. At the time of the October 10, 1992 adjustment of $9,462, the Bank and OMS had been discussing a possible amendment to the Bank/OMS Contract. FDIC Ex. 73-a at Bates 3799, Def. Ex. 15 at p. 5, Def. Ex. 22 at p. 1; Tr. 628. When a new agreement was about to be executed in the form of a "third addendum," OMS and respondent insisted that the new agreement contain a mutual release whereby the Bank and OMS would release each other of any and all liability, known and unknown, arising from
{{7-31-00 p.A-3109}} the past transactions under the Bank/OMS Contract. Tr. 607–611; FDIC Ex. 10 at Bates 778.

   30. The Federal Reserve Bank of Kansas City inspected the Abbott Bank Group as of July 23, 1990, and reviewed the agreement between the Bank and OMS. The Report states, inter alia; "An additional issue arising from this agreement is the contractual obligation of OMS to repay $276M to the Bank. This arrangement may be a violation of Federal Reserve Regulation O and is currently under review. FDIC Ex. 141, Bates No. 6228.

   31. In response to this observation the Chairman of the Bank's board wrote to the Federal Reserve Bank as follows:

    1. The Bank and OMS will formally acknowledge that the $276,000 in question (together with all other consulting fees paid to OMS by the Bank) constituted fees for services rendered by OMS to the Bank did not and was not intended to constitute a loan (directly or indirectly) or the functional equivalent of a loan.

       2. OMS will purchase the holding company's 4.9 percent equity interest in OMS at net book value as of November 30, 1990.

       3. The percentage factor for fees paid by OMS to the Bank under the formula expressed in the agreement will increase from 15.1 percent to 20 percent.

       4. John H. Westering will resign from his position with the Bank.

       5. The Bank and OMS will formally acknowledge that OMS employees have been covered under the health plan of the Bank, as an accommodation only, and that the OMS employees have not been employees of the Bank. The parties will furthermore acknowledge that the costs of providing such benefits have been reimbursed to the Bank by OMS and that the OMS employees will be covered under a separate insurance plan.

Def. Ex. 19, p. 10. The issue was not raised in further Federal Reserve Bank reports. Tr. 679. Nor was the issue raised in the FDIC 1992 or 1994 Reports of Examination. Tr. 687–689.

   32. On May 21, 1991, an employee of OMS wrote a note to Respondent stating that there was $37,479.19 to be paid to the Bank of the $276,000. FDIC Ex. 12.

   33. In an interview with an FDIC examiner, Respondent referred to the $276,000 as an amount owed to the Bank, and as having been repaid. Tr. 224.

   34. Respondent in testimony to a bankruptcy court stated that the Bank had funded his operation to the point of $276,000, if not more. Tr. 210.

   35. On September 21, 1990, Respondent wrote to the Bank president, in part, as follows: "$276,000.00 constitutes the level at which the bank's participation in OMS revenues switches from 15.1 percent of gross income from merchant services to 15.1 percent of net income from all sources." FDIC Ex. No. 16, Bates No. 809.

   36. The Bank president, in reply to Respondent's letter, stated in part:

    We eventually agreed to the two level schedule of revenue participation which is currently in effect and which provides that the bank receive 15.1 percent from the merchant business until a total of $276,000.00 has been earned by the bank.

FDIC Ex. 17.

   37. Prior to its initial involvement with Respondent and OMS in 1987, the Bank operated predominantly as an agricultural lender located in the Panhandle area of Western Nebraska. The Bank had no personnel familiar with the development and operation of merchant processing or card issuing programs. It was merely an agent bank for another card issuing institution. The Board and management recognized that the credit card and merchant processing operations were a unique and separate business which required people with talents and skills totally different from those of an agricultural bank. Additionally it was recognized that very sophisticated data processing requirements are utilized in these operations, which were beyond the Bank's capabilities. Prior to the initial involvement with OMS, the Bank had no intention or opportunity to expand into these operations. The Bank did not have the expertise readily available to develop the operations if the idea or opportunity were presented. Through involvement with OMS, the Bank was exposed to the opportunities presented by these operations and, after initial analysis, elected to proceed with program development, on the condition that experienced personnel could be obtained. The operations were based in Omaha
{{7-31-00 p.A-3110}} for two principal reasons. First, to facilitate program development and data processing functions which were performed by * * * * * * the third party processor. Second, a more diversified and experienced labor pool was available in Omaha. The talents required on managerial and clerical levels were not readily available in the Panhandle of Western Nebraska, and the Bank recognized the difficulty in motivating this talent to relocate from largely metropolitan areas. OMS proceeded on the bank's behalf to obtain the Bank's membership as a principal of MasterCard/VISA and to negotiate a favorable contract with a third party to process credit card and merchant transactions. OMS located and negotiated leases for the operations. OMS developed and assumed operation of the merchant processing activities for the Bank. OMS located the initial staff for the operation of the card services division and continued to be actively involved in the operation of this division, principally in directing both product development and marketing.

   On an ongoing basis, OMS developed the card and bank products, developed and implemented the marketing strategies, and analyzed the markets in which the products would be offered. OMS operated under an agreement with the Bank which was different from that used with other independent sales organizations, due to the hybrid nature of the relationship and service provided by OMS. OMS, acting similar to an independent sales organization, promoted the merchant services and card products offered by the Bank. However, OMS also managed the day-to-day activities of the merchant operation, and developed and implemented the products and marketing strategy of the card division (as well as other divisions of the Bank) for an additional fee. Tr. 744–750; Def. Ex. 19.

   38. OMS, among other things, provided the following kinds of services with respect to merchants who contracted directly with the Bank, and merchants who contracted with other agent banks:

    (a) Solicited merchants, agents and Independent Service Organizations ("ISO's") to contract with the Bank for the processing of credit card transactions;

       (b) Provided customer service to such merchants, agents and ISO's, including furnishing processing supplies and responding to merchant requests for information, guidance and training;

       (c) Provided technical support to such merchants, agents and ISO's, such as furnishing equipment to facilitate credit card transactions and providing training on the use of such equipment;

       (d) Provided services relating to charge backs (i.e., resolution of disputes between cardholders and merchants in accordance with the rules and regulations of Visa and/or MasterCard;

       (e) Developed and maintained merchant files containing information required by Visa and MasterCard in order to facilitate processing of credit card transactions; and

       (f) Performed additional functions which are necessary for such merchants to be paid, and for the cardholders to be billed, for credit card transactions, regardless of whether the Bank or another bank issued the credit card.

FDIC Ex. 76, Bates 1698–1699.

   39. OMS employed as many as 12 persons and shared office space with the Bank's credit card division. Tr. 531, 536, 542.

   40. The following table shows the growth for the Bank/OMS credit card operation by number of card accounts and receivables in the card loan portfolio:

Date
Card Accounts
Receivables
7/1/88
0
0
12/31/89
38,019
$21,553,261
12/31/90
74,074
40,704,716
12/31/91
97,122
54,920,002
12/31/92
116,877
64,469,549
12/31/93
112,710
65,915,914
12/31/94
110,114
54,558,879

Def. Exs. 12 and 13.

   41. For the five years 1989 through 1993, Respondent received wages and distributions from OMS of $1,397,600. When the card portfolio was sold by the Bank pursuant to the Third Addendum of the Agreements, not in issue here, Respondent received $1,154,200 from the premium above receivables. Enforcement estimates, unsupported by documentation, that Respondent received an additional $1,000,000 from the sale of the merchant portfolio, resulting in a total estimate of Respondent's receipts from the Bank/OMS credit card operation of $3,551,800. FDIC Ex. 150.

   42. According to the Bank's reports, its credit card operation incurred losses in 1989, 1990, 1991 and 1992, but made profit in 1993. The total loss over the five year period
{{7-31-00 p.A-3111}} was $8,033,500. The FDIC examiners adjusted the Bank's reported results by more than $5 million to reflect a total loss of $13,147,300. When the card portfolio was sold, the Bank received as its share of the premium, over credit card receivables, $8,212,000. Under the Bank's figures this resulted in an overall gain from credit card operations of $178,500. Based on the examiners' adjustments, there was an overall loss to the Bank of $4,935,300. FDIC Ex. 150. The examiners estimated the value of the portfolio premium as $2.8 to $3.5 million. The portfolio sold at a premium of approximately $10.8 million. Tr. 443.

   43. All statements of fact set forth in the Discussion below are incorporated herein by reference as Findings of Fact.

III. Discussion

   The allegations of wrongdoing in this matter stem from the relationship between the Bank and an independent service organization ("ISO") Optimum Merchant Services, Inc. ("OMS"). At all times pertinent to this proceeding Respondent Westering owned and operated OMS.

   Respondent worked for another bank from 1981 until late 1986, where he had responsibility for the promotion of that bank's merchant credit card activities. He left this position over business strategy differences with his supervisor, and in 1987, approached the Bank with a proposal that it develop a credit card program through Respondent's services. Def. Ex. 16.

   The Bank was then under the de facto control of Mr. Richard Gordon, who is Respondent's brother-in-law. Tr. 65–66, 77, 351, 483; FDIC Ex. 111, Bates 2345–2356. Although the Notices allege that this family connection caused the arrangement between OMS and the Bank to be unduly favorable to Respondent, this claim was dropped at the beginning of the hearing. Tr. 9.

   The arrangements between the Bank and OMS evolved over the period of time in issue here. From mid-1987 through 1992, the services performed by OMS, and the compensation paid by the Bank changed. Enforcement does not dispute that services were performed. Nor has it sought to prove that the compensation received by OMS was, per se, excessive. The arrangements were originally conducted pursuant to oral agreements.

   These agreements were eventually merged into a written contract, which was subsequently modified by three addenda. Respondent became a registered officer of the Bank by the Second Addendum. As Enforcement points out, "the oral and written agreements . . . are the result of a single course of conduct and the surrounding and relevant circumstances have to be viewed in their entirety." Reply Brief, p. 22, n. 26.

   There are now three allegations of improper conduct by Respondent that remain in issue. First, it is alleged that there were extensions of credit in the amount of $276,000 to OMS in violation of Regulation O. Second, it is alleged that Respondent participated in a scheme to falsify bank documents and mislead bank examiners by back-dating the original written contract between the Bank and OMS. It is also alleged that the written agreement was false because it did not fully embody the existing oral agreement. Third, it is claimed that Respondent cheated the Bank out of more than $350,000 through an improper division of revenues derived from the Bank's credit card operations, and that this also entailed a Regulation O violation.

a. Regulation O — $276,000

   As stated, Respondent, through OMS, began working on behalf of the bank in mid-1987. At that time his efforts were directed toward establishing the Bank as a credit card handling agent for a North Dakota bank. Respondent was paid $12,000 per month for eight months in 1987, for a total of $96,000. His efforts to develop a relationship with the North Dakota bank were unsuccessful.

   Sometime in 1988, the Bank and OMS decided that the Bank would become a principal bank in the Visa and MasterCard networks, issuing credit cards to customers as well as processing credit card charges for merchants. The first credit cards were issued by the Bank in late 1988, or early 1989. Respondent was paid $10,000 per month in 1988.

   In 1989, Respondent was paid $10,000 per month, plus an extra $15,000 per month for additional activity in promoting customer credit cards. He was also paid $10,000 per month in 1990, and later years, but not the additional $15,000.

   At some point the parties agreed on a division of revenue produced by the credit card
{{7-31-00 p.A-3112}} operations. The agreement ultimately provided that the Bank would receive 15.1 percent of the processing fees charged to merchants, amounting to about three percent of the amount charged by the customer, until the Bank had received $276,000. Whether this division was to be made on a gross or net basis is considered below. Thereafter, there would be another formula for dividing the revenue. The $276,000 figure was derived from the fees paid to OMS by the Bank in 1987 ($96,000) and the additional $15,000 per month paid in 1989 ($180,000). Payments made to OMS in 1988, and other years, were not included in the calculation.

   Enforcement contends that this arrangement constituted an extension of credit, on a non-recourse unsecured basis, because it created an obligation to repay the amounts involved. Enforcement suggests that the $276,000 represented a line of credit to OMS for its working capital. The "repayments" were tracked by the parties, and reference was made on a document to the amount "left to pay back" and Respondent, in an interview with an examiner, referred to the $276,000 as having been owed.

   Respondent claims that the $276,000 was only a benchmark to determine when the basis for dividing the credit card revenue between the parties changed. He argues that the sums involved were paid for services being rendered, and that it could not be expected that those sums would be repaid.

   The Bank claimed the payments as an expense, not loans, for tax purposes. OMS considered them as income, not borrowed funds, for tax purposes. Enforcement argues that neither the parties' intent, nor their tax treatment of these monies, is relevant as to whether these transactions constituted a loan and that it is the "substance" of the matter that governs.

   In 1990, examiners for the Federal Reserve Board raised the question of whether the considered transactions constituted a loan. In response, the parties executed a First Addendum to their agreement, stating that Respondent had resigned as an officer of the Bank, and that:

    The reference to the aggregate amount of $276,000.000 in Paragraph 3.4 of the Agreement (as further described herein) relates to consulting fees paid by [the Bank] to OMS for services then being contemporaneously rendered to [the Bank], and neither such amount nor any part thereof was ever intended or treated as a direct or indirect extension of credit or the functional equivalent of an extension of credit, and OMS has never been under any obligation, express or implied, to repay any or all of such amount.

   The parties expressly acknowledge that there has been no direct or indirect "extension of credit" or any other "covered transaction" (as such terms are defined by Section 23A of the Federal Reserve Act and Federal Reserve Board Regulation O respectively) between the parties hereto;

   Enforcement ascribes no significance to these statements, insisting as stated, that substance governs, which it derives largely from various off-hand or cryptic references to repayment of the money, or to its being owed. Tr. 223, 229; FDIC Exs. 76, 12.

   Statements such as the above, expressing a contrary view are discounted as unrelated to substance. For instance, on September 21, 1990, Respondent wrote to the Bank's president stating that "$276,000 constitutes the level at which the bank's participation in OMS revenues switches from 15.1 percent of gross income from merchant services to 15.1 percent of net income from all sources." FDIC Ex. 16, Bates 809.

   The Bank president replied, referring to

    . . . the point at which the bank's participation in the revenue of OMS changes. <>. . . We eventually agreed to the two level schedule of revenue participation which is currently in effect and which provides that the bank receive 15.1 percent of gross revenue from the merchant business until a total of $276,000.00 has been earned by the bank.

       Allow me to confirm that a total of $92,138.60 has been paid to the bank through the end of July, 1990.

FDIC Ex. 17.

   The language in this exchange is more consistent with a joint participation in revenue being earned or to be earned, than a repayment of debt.

   The original written agreement provided, in reference to monthly payments by OMS to the Bank:

    The monthly payments shall continue until such time as OMS has paid [the Bank] an aggregate amount of $276,000. After OMS has paid an aggregate of $276,000 to [the Bank] as aforesaid, OMS shall pay to [the Bank] on a monthly basis 15.1
{{7-31-00 p.A-3113}}
    percent of its net revenue from all sources described in Sections 2.1, 2.3, 3.1 and 3.3.

   Enforcement seems to concede that under this provision the $276,000 was a benchmark, merely signifying a change in the formula for dividing revenue, because it does not identify in any way what the figure represents. Tr. 727. However, the First Addendum to that agreement states that the $276,000 "constitutes the total of consulting fees paid by [the Bank] to OMS in 1987 ($96,000.00) and additional consulting fees of $15,000.00 per month (over and above the consulting fee of $10,000.00 per month provided under Section 3.6 of the Agreement) for each month of 1989 ($180,000.00)."

   Enforcement contends that this addendum language indicates something more than a benchmark. Specifically, it is claimed that it indicates that "the bank had advanced $96,000 to OMS in 1987 and an additional $180,000 to OMS in 1989 and that they are now wanting those funds repaid." Tr. 730. (It should be noted, as set forth above, that the same addendum expressly disclaimed that there was any debt to be repaid.)

   Although there does not seem to be a substantive difference between the two provisions, Enforcement seems to attach a talismanic effect to the explanation on how the previously expressed amount was derived. It does not claim that any payments other than those included in the $276,000 were loans.

   There are other difficulties with deeming these transactions loans. It seems clear, for instance, that when the $96,000 was paid in 1987, there was no understanding that it created a debt to be repaid. It was paid before the Bank made the decision to become a principal bank in the credit card business that generated the revenue which Enforcement now claims repaid it. Enforcement suggests there may have been an oral agreement in 1988 for its repayment but there is no evidence of that. Brief, p. 12. The citations to the record do not support the claims that there were separate oral agreements for repayments. There is no evidence regarding "repayment" apart from the $276,000, a figure that could not have been determined before late 1988, or early 1989.

   It is difficult to perceive how a subsequent agreement pertaining to the division of revenue to be received in the future, retroactively created a debt as to the $96,000.

   In 1988, Respondent was paid $10,000 a month. No tie-in of these payments with the claimed debt was ever made. As stated, Enforcement argues that the $276,000 was borrowed working capital, without which OMS could not have operated. However, there is no indication that the money paid in 1988 was received for a different purpose than the 1987 funds. Under Enforcement's theory, receipt of the 1988 funds should be deemed a more egregious violation of Regulation O than the 1987 payments because there was never any provision for their repayment. But it has made no such contention, and concedes that the 1988 payments were true consulting fees.

   The Bank continued in 1990, 1991, and 1992 to pay Respondent $10,000 per month in consulting fees, as well as a share of the revenue from the credit and operation. There is also no claim that these payments constituted loans.

   It should be pointed out that the funds that Enforcement claims were repaying the debt were funds earned by the Bank. By contract, OMS was entitled to share in that revenue. In their settlement process the Bank credited certain specified monies earned in its credit card operation to OMS. After deducting its share, OMS repaid the Bank's share. Reference to OMS' "repaying" the $276,000 may merely reflect this settlement process by which all funds finally received by the Bank were "repaid" by OMS. This settlement process existed while the $276,000 was being repaid, and continued thereafter, the difference being only the basis by which the revenue was divided. Manifestly, the Bank was entitled to share in this revenue, apart from any repayment of any alleged debt.

   As stated, the Federal Reserve Board raised the Regulation O issue, but did not pursue it after receiving the Bank's response. The FDIC conducted examinations in 1992 and 1994, and did not raise the issue. It is claimed this was an error, but since the matter was raised in previous reports, it would seem that these transactions would have been reviewed in later examinations for Regulation O purposes.

   The only authority that Enforcement cites for its position is In the Matter of Joseph D. McKean, Jr., FDIC Enforcement Decisions and Orders, ¶ 5218 (August 2, 1994). The Respondent in that proceeding had received "consulting fees" for which no services were
{{7-31-00 p.A-3114}} performed, as well as illegal interest payments, all of which were found to be the equivalent of an extension of credit, and in violation of Regulation O. Although Enforcement does not dispute that services were performed by Respondent and OMS, and does not claim that the payments were illegal when made, it nevertheless characterizes the payments for Respondent's services as loans.

   McKean stands for the proposition that the wrongful receipt of funds by an insider creates an obligation to return those funds, and therefore, is tantamount to an extension of credit subject to Regulation O. Since there is no claim that these funds were wrongfully received by OMS, this decision does not support the position of Enforcement.

   In the Matter of Stanford C. Stoddard, OCC-AA-EC-85–43, (March 4, 1988), the Comptroller made an extensive analysis of Regulation O issues. His conclusions are not consistent with the position of Enforcement here. See Id. at 25–27.

   The general conclusion reached by the Comptroller was that the term "extension of credit," and related terms, "should be construed in a way that would inform reasonable bank officers and directors that a financial transaction constitutes an extension of credit, based upon a review of sections 215.3(a)(1) through (7) and his knowledge and experience in banking." Id. at 41.

   The Comptroller set forth certain indicia of credit-extending transactions, including the following: the specific funds involved should be those the bank lends as a part of its normal function of extending credit—"[b]y contrast, funds which are spent by a bank to meet its business expenses would not be considered extensions of credit;" there should be a borrower who obtains funds through the banking function of extending credit; and the transaction should follow a loan process with a credit agreement.

   I am convinced that the transactions here in dispute would not meet the Comptroller's definition of credit extension, or the Board's holding in McKean.

   There is no claim that the funds were wrongfully transferred to Respondent, thereby creating an obligation for their return, as in McKean. The money involved was not expended from loan funds, no loan process was involved, and the payments were treated as business expenses, all which under Stoddard militate against a finding that a loan was involved.

   Any debt obligation that arose here must, therefore, be based on the intention of the parties, although Enforcement contends that the parties' intent is irrelevant. Tr. 731, 800.

   The Bank expended considerable funds on the development of a credit card program, which by the end of 1988, had yielded no return. Some of those funds were compensation to OMS. Obviously, the Bank desired some return on its investment, but it could hardly expect to obtain that return from the compensation it had paid to Respondent, though in some sense it may have been referred to as repayment. Its return would necessarily be obtained from revenue generated by the credit card program.

   As noted, Enforcement argues that funds paid to OMS were needed for start-up capital and OMS could not have functioned without receiving that money. It is not disputed that OMS needed the money. But the need for a pay-check seems insufficient to transform the check received into a debt that has to be repaid with interest. This is implicitly conceded by Enforcement since it admits that the compensation OMS received in 1988 was not a loan though there is no doubt that OMS also needed those funds.

   Respondent was registered with the state from October 25, 1990 to July 19, 1991 as a bank officer. Even before and after that registration he was involved as an affiliated-party participating in the management of the Bank's credit card division. His management status was denied in the Answer, and during the hearing, but it is clearly established that he was an affiliated person at various times.

   Although it is not clear when Respondent's activity became that of an affiliated person, it could not have been in 1987, at the beginning of the relationship with the Bank; the Bank had no credit card division to manage or to participate in at the time. The documents presented by Enforcement to show Respondent's participation in management meetings relate to October 1990, and later. FDIC Exs. 99, 99a, 100 and 100a. Enforcement recognizes this problem, but contends that an extension of credit made in contemplation of becoming an insider is covered by Regulation O. Brief, p. 45, n. 41. However, there is no showing here that there was such a contemplation by Respondent or the Bank in July 1987. The project attempted then was not that which eventually emerged, and the anticipated compensation was different. FDIC
{{7-31-00 p.A-3115}} Ex. 16, Bates 803. It is speculative whether Respondent would have become an affiliated-person under that proposed arrangement.

   Thus, entirely apart from other problems with Enforcement's position, the question of what portion of the alleged debt would be covered is unclear.

   Enforcement contends the $276,000 was a line of credit. However, a line of credit is ordinarily drawn upon, as needed, within the terms under which the credit is to be extended. The payments in issue here were not made pursuant to draws of credit. They were regularly made monthly, in the manner of compensation payments.

   It is my conclusion that the $276,000 was not an extension of credit, or the functional equivalent thereof. Only by a strained interpretation of the considered transactions can they be deemed to be a loan. It is recognized that if they are called loans they were violative of numerous requirements of Regulation O, but because of the rather convoluted process leading to any such conclusion, sanctions for the resulting violations could not be justified.

b. Back-dated and Inaccurate Contract

   In January 1990, FDIC examiners who were examining the Bank asked for any written contract between it and OMS. Sometime in February 1990, a written contract was produced to the examiners. Enforcement contends that the contract was back-dated. FDIC Ex. 10; Def. Ex. 1.

   The Agreement begins as follows:

    THIS AGREEMENT is entered into on this 1st day of July, 1988 between THE ABBOTT BANK, Alliance, Nebraska, a Nebraska State Bank ("Abbott") and OPTIMUM MERCHANT SERVICES, INC., a Delaware corporation ("OMS").

   On the signature page of the document, paragraph 8.5, it states that "the parties have executed this agreement as of the first above-written date," namely July 1, 1988.

   The examiner concluded that the Agreement was back-dated, first, because the Bank did not acquire the name Abbott until August 23, 1988, and second, the conditions referring to divisions of revenue before and after the Bank had received the $276,000, previously discussed, could not have been known in July 1988. Paragraph 3.4. This is undisputed. Also there was no record in the bank's minutes reflecting the entry into the agreement in 1988. Respondent "estimates" that he signed the agreement in early 1989, though he does not remember signing it. Referring to the "as of" language on the signature page, he contends that there was no misrepresentation as to when it was signed since the "as of" language suggests that it was executed on a date other than that on which it was entered into.

   Paragraph 4.1 of the agreement provides that its initial term "shall be for a period of five years from January 1, 1989."

   The arrangements between the Bank and Respondent evolved through two or more oral agreements which were merged into written agreement. The written agreement went through one or more drafts, and was followed by at least three amendments. FDIC Ex. 20-a, Bates 1378.1 Although the initial agreement states that it "supersedes and merges all prior agreements and understandings" it cannot be determined when such

1 Enforcement, citing Rule 804.5 of the Federal Rules of Evidence, sought to introduce testimony given by Mr. Gordon that assertedly admits that the subject agreement was not created until 1990. Being of the view that if Mr. Gordon's testimony was to be received he should be called as a witness, and subject to cross-examination, I sustained Respondent's objection to this proffered evidence. Tr. 185–188, 741. Rule 804(5) is a general exception to the hearsay rule, and provides for the receipt of hearsay statements under, among other conditions, where the statement is more probative on the point for which it is offered than any other evidence which the proponent can procure through reasonable efforts." There was no claim than Mr. Gordon was unavailable as a witness, nor was any explanation given for the failure to call him as a witness. Mr. Gordon was not only the author of the most significant document in issue in this proceeding, he was a key participant in the disputed transactions. It cannot be found that a transcript of Mr. Gordon's testimony in another proceeding is more probative here than his testimony as a witness, which could have been procured through reasonable efforts.

   Enforcement renews its argument on brief, citing in addition to Rule 804(5), Rules 803(8) and 803(24). It is my view that the testimony in question was not a public record described in Rule 803(8). Rule 803(24) is also subject to the condition that the hearsay offered is more probative than other evidence that could be procured through reasonable efforts, and is, therefore, not applicable. Enforcement also relies on In the Matter of Robert S. Stoller FDIC 90-115e, FDIC Enforcement Decisions and Orders, Bound Volume 2, at A-1873, n. 27, A-1875 n. 1, where deposition testimony was received. It does not appear whether the witness was available for the hearing. Under present Rule 308.34(f), the use of a deposition is permissible only where the witness is unavailable for the hearing and all parties had an opportunity to participate in the deposition. One of the proffered exhibits is a transcript of a (Continued)
{{7-31-00 p.A-3116}} agreements and understandings were reached, or their content. It is clear, however, that the specific provisions related to the division of revenue between the Bank and OMS, as previously discussed, could not have been agreed to on July 1, 1988. Thus, to the extent that the agreement suggests that the final revenue division arrangements were reached on that date, the written agreement is back-dated, though other agreements were entered into on that date, and may have been reduced to writing, but not signed, at least by officials at the Bank.

   Enforcement contends:

    By signing and delivering the written agreement for execution by the Bank, Westering participated in creating a false or inaccurate bank record and compromised the integrity of the Bank's records and thus compromised the integrity of the Bank examination process.

Brief, p. 8.

   This seems to be a rather over-drawn argument. Enforcement is hard-pressed to establish any consequences that flowed from the claimed false back-dating of the agreement. Paragraph 3.6 of the initial agreement names Respondent an officer of the Bank with the title of Vice President. The examiners were apparently unaware of this until they obtained the written agreement in early 1990, but it was clearly more the Bank's responsibility than Respondent's, to inform the examiners who its officers were. It is not shown that any adverse consequences resulted from the failure of the Bank to include Respondent in its list of officers.

   Somewhat more serious than the allegation of back-dating of the contract is the claim that it did not reflect the existing arrangement between parties.

   Paragraph 3.4 of the agreement provides that "OMS shall remit to [the Bank], on a monthly basis, through direct payment from OMS to the Bank an amount equal to 15.1 percent of the gross service fees to OMS under Section 3.1 this agreement." The First Addendum changed 15.1 percent to 20 percent.

   The referenced paragraph 3.1 states that, "[The Bank] shall pay OMS a Service Fee each month for all Agent/Merchant accounts signed through OMS. Said Service Fee shall be based on the difference between the revenue earned pursuant to the Agent/Merchant Agreements and the Rates."

   There is no dispute that these paragraphs govern revenue received from merchants who, pursuant to agreements with the Bank, receive from the Bank payment for their credit card tickets. For this service, the merchant pays the Bank about three percent of the amount charged by a customer. These charges are called service fees. Out of this three percent, the Bank pays third parties for various processing services, but retains a portion. The cited paragraph 3.1 provides that Abbott shall pay to OMS these service fees, less the amounts paid to third parties for processing. The cited paragraph 3.4 requires OMS to then remit back to the Bank "15.1 percent of the gross service fees to OMS under Section 3.1 . . ."

   In actual practice, the amounts remitted back to the Bank were based upon the entire service fees before the "rates" (payments to third parties) were deducted. Although Paragraph 3.4 refers to "gross service fees" the parties are in agreement here that this means the net amounts credited to OMS under Paragraph 3.1. Thus, the Bank was to receive under the agreement 15.1 percent (later 20 percent) of the service fees after the rates were deducted.

   Since the Bank, in actual practice, received more and Respondent less than the agreement called for, Enforcement again finds it difficult to show any violation, or harm to the Bank, or benefit to Respondent, resulting from this discrepancy. Enforcement contends that the payments subject to these provisions, amounting to $276,000, constituted repayment of a loan. However, if this were correct, the early payment of a loan, though not in accord with the debt instruments, is not ordinarily considered a breach of those instruments.

   Enforcement points out that during negotiations between the parties over a new contract, Respondent used the early payment as a bargaining chip. According to OMS' accountant, the Bank received more from this departure from the agreement than any amounts it could dispute as over-payments to Respondent. It is not clear why Respondent's reminder to the Bank of this fact was an unsafe and unsound practice, or a breach of his fiduciary duty. (Continued) deposition. The others are transcribed testimony from other proceedings and thus are in effect, depositions as far as this proceeding is concerned. I affirm my ruling given at the hearing.
{{7-31-00 p.A-3117}}

   Although the parties agree that there was a disparity between what the written contract required and the actual settlement practice, they offer different explanations for the discrepancy.

   Enforcement introduced a memorandum dated November 19, 1992, written by the OMS accountant, which refers to meetings with Respondent and his bookkeeper on July 15, 1992, in which the accountant states that he had informed Respondent of some discrepancy between the contract and settlement practices. Respondent is quoted as stating that he was aware of the discrepancy, but that was because of a gentlemen's agreement. FDIC Ex. 26.

   At the hearing the accountant testified that it was his recollection that Respondent had not been aware of the discrepancy until the accountant brought it to his attention. He could not explain his statement in the memorandum. The subject Exhibit 26 was introduced through an FDIC examiner, who testified that it shows that Respondent knew that the contract was a false bank record. Tr. 238. However, in its Reply Brief, p. 26, Enforcement claims that, "Only at a later time when * * * * [the accountant] pointed out that the terms of the Bank/OMS Contract provided for reduction for the "rates" did Westering ever think about such a prospect." This argument seems to accept * * * testimony instead of the earlier memorandum, and assumes that the discrepancy was inadvertent. But Enforcement argues that the "falsity" was reckless, if not intentional.

   Respondent's position is also puzzling. He argues that the settlement procedures were the mistake of employees—not Respondent's mistake—and that there was never a difference between existing oral agreements and the written contract.

   If the contract is to be construed in the manner that the parties agree it should be, Respondent's position cannot be valid. It clearly provided for accelerated payments until the $276,000 mark was reached. If settlement had been on a net basis of service fees there would have been no acceleration of payments since they were deducted after the $276,000 were paid.

   The Board's decision In the Matter of Frank E. Jameson, FDIC Enforcement Decisions and Orders ¶ 5154A, is instructive here.

   In that proceeding, the involved Respondent approached the bank's president on two occasions for loans totalling $8,100. On each occasion, the president, in effect, offered to provide the employee with bonuses in the amount of the requested loans. Purportedly, to keep other envious employees from learning of the bonuses, a scheme was devised that included the submission of bills by and payments to a fictitious company. The employee received the payments. Although the scheme was approved by the bank's president, and ultimately ratified by the bank's board of directors, the FDIC Board strongly condemned the action. It was found that the bank board was not aware of all of the material facts pertaining to the transactions when it ratified them, but the FDIC Board stated that the bank board could not legitimately ratify false records, that any knowing attempt to do so "would only establish the board's complicity in the deception." Id. at A-1542.5. The FDIC Board found the described transactions constituted an intentional falsification of bank records, and as such was a breach of fiduciary duty and an unsafe or unsound banking practice.

   In the present proceeding, the alleged falsification of records constituted the claimed back-dating of the contract and the contract's failure to reflect the calculation of the Bank's share of merchant income on a gross basis without deduction of related expenses.

   Because of the "as of" execution date of the contract, there is no representation that the agreement was signed on a given date. The contract states that it was entered into on July 1, 1988. There is no dispute that an oral contract was entered into on or about that date, and that a written draft thereof was prepared. FDIC Brief, p. 12; FDIC Ex. 20-a, Bates 1378. Obviously, the final draft of the agreement that was signed included details likely not present in earlier drafts such as the name of the Bank, which changed in August 1988, and the $276,000 figure, the disputed debt/benchmark.

   It is not clear why the existing formula for dividing revenue was not set out in the final contract, if in fact it was not. Paragraph 3.4 of the agreement providing for Abbott's receipt of fees from OMS refers to "gross services fees." Ex. FDIC 10. There is no apparent reason why Respondent would intentionally enter into a contract while oper-
{{7-31-00 p.A-3118}} ating under terms far less favorable to him than those provided in the contract.

   It is my conclusion that these discrepancies in the contract are not on a par of culpability with false records deliberately created in Jameson, and that not every erroneously constructed document, or every mistaken entry on a document amounts to falsification of records under Jameson. Cf. In the Matter of Preston J. Brooks, 79 Fed. Res. Bull. 992 (August 6, 1993) (finding that an erroneous calculation of permissible dividends in violation of 12 U.S.C. §60 was insufficient to support an order of prohibition).

   FDIC thoroughly examined the books and records of OMS, as well as the Bank, pertaining to their credit card operation, and makes no complaint as to the completeness and accuracy of these records. The examiners were able to determine precisely the OMS expenses, revenues, and the division thereof with the Bank. There is no claim of false billings of expenses, or the construction of false records pertaining to those revenues and expenses as in Jameson. Whatever discrepancy may have existed, the absence of any apparent motive for this discrepancy can only be viewed as unintentional.

   Although there were no apparent adverse consequences to the Bank, or motives for the questioned contractual provisions, Enforcement argues that they were intentionally misleading and that this is shown by the absence of a recital indicating that there were prior oral agreements. FDIC Reply Brief, p. 24. The existence of prior oral agreements is not contested; Paragraph 8.3 of the original written agreement states that it "supersedes and merges all agreements and understandings." In view of this provision, the existence of prior oral agreements was not concealed.

   Though Respondent is a party to the agreement, and subject thereto, it was drafted by attorneys. The notion that the absence of "recitals" to the instrument evinces Respondent's intention to mislead somebody seems farfetched.

c. Alleged $350,000 Underpayment—Regulation O

   The Bank and OMS engaged in a monthly settlement process to determine the amount of revenue each would receive from their credit card operation. The Bank initially received the income which, after various adjustments, credited that income to OMS. After making certain deductions, OMS reported to the Bank its share of that month's revenue which was deducted from the following month's remittance to OMS.

   Enforcement claims that through this process OMS cheated the Bank out of, or stole from it, approximately $350,000, and that this also created a Regulation O violation.

   The Bank/OMS contract provided that after OMS paid the Bank the $276,000 previously considered,. "OMS shall pay to [the Bank] on a monthly basis 15.1 percent (later 20 percent) of its net revenue from all sources described in Sections 2.1, 2.3, 3.1, and 3.3 . . ."

   To arrive at a "net revenue" amount under Section 3.4, OMS deducted various overhead expenses. Enforcement argues that deduction of such expenses was not allowed under the provision quoted above. It claims that only expenses directly related to the revenue sources described in the cited paragraphs should have been deducted. Thus, under Section 2.3, which allows OMS to receive the proceeds from signing up merchants, the sale or lease of imprinters or terminals, sales and credit slips, and fees for related services, Enforcement would allow only a deduction for the cost of goods sold.

   Under Section 3.1, providing for the receipt by OMS of merchant discount income, the difference between the amount of a sale and that remitted by the Bank to the merchant, amounting to about 3 percent of the sale, Enforcement would deduct only the processing charges paid to third parties.

   Under Section 3.3, which refers to cardholder fees received by the Bank on each sale, Enforcement makes no deductions for expenses.

   Enforcement claims that the contract is clear and unambiguous—that no other interpretation is permissible.

   However, it is not disputed that the Bank, including its internal auditor, and accountants, did not so interpret the contract. In fact, the contract was reviewed by FDIC examiners in 1992, and they gave it a different interpretation from that insisted upon here. Specifically, it was then recognized that OMS' operating expenses were deductible before the Bank's revenue share was computed.

   Enforcement introduced a memorandum into evidence, FDIC Ex. 32, prepared by an
{{7-31-00 p.A-3119}} examiner, now deceased, who participated in the 1994 examination. The memorandum states that the considered agreement could not be construed to allow a deduction of OMS' overhead expenses. However, it further states that the lack of definitions in the agreement makes it easily interpreted several ways. Id. Bates 1275–1276. One examiner testified at the hearing that he was aware that the agreement contained "vagaries." Tr. 117. Plainly, one of the vagaries is the undefined term "net revenue from all sources described in Section 2.1, 2.3, 3.1 and 3.3 . . ."

   This subject was discussed by the 1992 examiners with the Bank's President, as well as with its Executive Vice President and Chief Accounting Officer, who evinced their understanding that OMS' overhead expenses were deductible. FDIC Ex. 5, Bates 110. The criticism raised against the contract at that time was that it could allow OMS to reduce payments to the Bank, and increase its own income, by manipulating its expenses and thereby reducing the net income shared by the Bank. This criticism assumed that overhead expenses were deductible.

   This difficulty led to efforts by the Bank and Respondent in 1992 to negotiate a new contract that would provide for revenue to be divided on a gross basis. The new contract became effective on January 1, 1993. Among other provisions, it provided that, "Both parties acknowledge that, as of the date of this signing of this Agreement, they are not aware of any existing breach of the Agreement by the other, and there are no previous breaches which have not been waived or released by this Third Addendum." FDIC Ex. 10, Bates 776–777.

   This effort by the parties to close the books on past transactions was unsuccessful as far as the 1994 FDIC examiners were concerned. The problem of possible expense manipulation, raised in the 1992 report, having been seemingly solved by the new contract, the 1994 examiners took the position that the problem was that the superseded contract had not been followed during part of 1991 and all of 1992, resulting in the stated shortfall to the Bank of $352,000. FDIC Ex. 6, Bates 168. It is that position which is pursued here. Under this position, the problem of possible expense manipulation would not have been possible as earlier claimed.

   Enforcement argues, consistent with its claim that the agreement is clear and unambiguous, that under Nebraska law, which governs this contract, the meaning of a contract when "couched in clear and unambiguous language, is not subject to a construction other and different from that which flows from the language used." Brief at 39. Respondent, in reply, citing ample authority, states that this rule is applicable only when the contracting parties disagree on the terms of their contract; the courts accept the construction of a contract by the parties thereto if they agree on its meaning. It, therefore, seems that as a matter of Nebraska contract law this agreement did not have the meaning ascribed to it by Enforcement.

   Enforcement's interpretation of the term "net revenue from all sources described" in specified sections is somewhat plausible, but not persuasive when considered in the context of the other terms of the agreement. For instance, that interpretation would seem to require a net figure to be derived from each of the described revenue sources. However, Enforcement makes no expense deduction from the cardholder fee income accruing under Section 3.3, resulting in the use of a gross figure. Enforcement computes net figures under Section 2.3 by deducting the cost of goods sold. However, that section also covers fees for services furnished to merchants by OMS. Enforcement seems to ascribe no expense to these services which were provided. FDIC Ex. 76, Bates 1698.

   Enforcement refers to Section 3.6 of the Agreement, which provides for the reimbursement by the Bank of certain expenses incurred in the marketing of the cardholder program. It is claimed that this provision precludes the deduction by OMS of other expenses, that the mention of these reimbursable expenses is exclusive, and that other deductions from total revenues would render Section 3.6 a nullity.

   However, there is a difference between the direct reimbursement of certain expenses, and the deduction from overall revenue of other expenses—a difference of 80 percent—since the Bank's revenue was affected by 20 percent of the amount of the deductions. Thus, there is no inconsistency in the contract by providing for the direct reimbursement of certain expenses, and the deduction from revenue of other expenses. In fact, Enforcement, would make some deductions of expenses under Section 2.3 (cost of goods sold) and Section 3.1 (the "rates"
{{7-31-00 p.A-3120}} paid to third parties). The other expenses deducted are no more precluded by Section 3.6 than these.

   During September 1992, Respondent faxed to Mr. Gordon computations reflecting four methods of deriving Abbott's share of "net revenue." One of the four computations more or less reflected the approach taken here by Enforcement.

   Enforcement argues from this that Respondent knew how to make the correct computations, and failed to make them. There is, however, no showing that Respondent knew, or believed, that these calculations were required by the contract. It was clearly his position that this was not the case.

   Enforcement seeks to draw darker conclusions from these faxes. It claims that Respondent concealed the alleged improper deductions from the Bank. Since Mr. Gordon, to whom all of the calculations was sent, was a controlling figure in the Bank, or in any event, its agent, this is a rather tenuous argument. Enforcement attempts to support its contention with the supposition that Mr. Gordon did not convey the information he received to the Bank and that he failed to do so because of the attorney-client privilege between him and Respondent/OMS. This seems to be rather fanciful speculation.

   There is no evidence that Mr. Gordon ever felt any constraint in communicating with the Bank because of a professional privilege related to Respondent. Indeed, it is fairly clear that he was under no such ethical constraint. Mr. Gordon represented the Bank as well as Respondent, with the knowledge and consent of both, and thus owed a duty to each, a duty of disclosure rather than of concealment.

   To support its argument that Mr. Gordon was constrained by his obligation to Respondent, Enforcement notes that the Bank and OMS retained separate counsel during the negotiations that led to the new contract. However, Mr. Gordon continued as the Bank's counsel for matters that included those related to the contract negotiations. Tr. 581, 608, 857–859.

   The engagement of separate counsel was in response to criticism of the joint representation of Mr. Gordon by the Federal Reserve Board in 1990. At that time the Bank Chairman committed to the retention of other counsel in the event the agreement was renegotiated. Def. Ex. 14, Attachment 6 and 22. The Bank continued to express its satisfaction with Mr. Gordon's joint representation of it and OMS. Def. Ex. 98, p. 2. Respondent had earlier engaged separate counsel to represent him in the 1990 First Addendum negotiations, and thus was not relying solely on the advice of Mr. Gordon.

   Mr. Gordon is Respondent's brother-in-law, a fact stressed by Enforcement. Mr. Gordon was a respondent in this proceeding. He settled the allegations against him by stipulating to an Order of Prohibition without admitting or denying the allegations. Without offering proof here, enforcement implies that Mr. Gordon was corrupt, and this redounded to the benefit of Respondent. However, Enforcement expressly dropped the allegations that the contract was drawn in a one-sided manner in favor of Respondent, and now relies on its terms, implicitly inferring that if the contract had been complied with according to Enforcement's interpretation it would have been a fair agreement, or at least not subject to cost manipulation. Tr. 474.

   The 1994 Report of Examination deplores Mr. Gordon's joint representation of OMS and the Bank, and further states: "The records indicate Mr. Gordon was aware of the manner in which OMS determined income participation amounts, and he did not intervene on the bank's behalf." This statement is in apparent reference to his failure to insist that the contract be interpreted in accordance with the examiners' view of the matter. As discussed, there were grounds other than the assumed corruption of Mr. Gordon for any failure on his part to construe the contract as the examiners insisted.

   The memorandum prepared by the deceased examiner who participated in the 1994 examination refers to a "falling out" between Mr. Gordon and Respondent arising from problems surfacing in late 1992, when Mr. Gordon "apparently" learned of the "inequitable method of calculating [the Bank's] OMS settlement," FDIC Ex. 32, Bates 1270. If Respondent and Mr. Gordon were at odds it is unclear why Mr.Gordon would have conspired with Respondent to cheat the Bank. I cannot, in any event conclude that notice of a fact to Mr. Gordon was not constructive and actual notice to the Bank, or that if he failed to discharge his responsibilities to the Bank, Respondent is responsible for those alleged derelictions in the circumstances described.

   In November 1992, during the negotia-
{{7-31-00 p.A-3121}} tions between Respondent and the Bank, in response to a suggestion of its accountant, OMS changed its computation of deductions for income tax, a subject further considered below. As a result of the new computations, it was determined that OMS owed the Bank $9,461.81. A check in that amount was sent to the Bank without written explanation. Def. Ex. 28. In response to the receipt of this check, the Bank's Chief Operating Officer, * * * * wrote to Respondent, noting that the check was a 29 percent adjustment in the Bank's 1992 revenues, and requested "an immediate, full and complete accounting of OMS operations since June, 1991. As part of the accounting, all underlying invoices, checks and other relevant supporting documents will be required," adding, "we ask that this information be made available as soon as possible next week." FDIC Ex. 151.

   On November 18, 1992, Respondent replied, in part, as follows:

    OMS has faithfully accounted for all monies due the bank both during the time we operated under a percentage of gross and since we operated under a percentage of net. I realize you know this because the Bank essentially already has all financial information relevant to our relationship.

   Our good faith is clear from the fact that earlier this year we voluntarily complied with your request for financial information. As at that time, OMS stands ready to allow your review of any material you reasonably need to verify the propriety of our dealings. As I mentioned to you on the telephone, simply call Victoria in our office and identify who is to come in to review financial records on-site with her.

FDIC Ex. 152.

   Despite the request that OMS records be made available for review, Mr. * * * did not send anyone to conduct an examination of OMS records in response to Respondent's offer to make them available.

   Enforcement claims that Respondent in his reply should have disclosed to Mr. * * * the various analyses pertaining to possible and actual revenue division between OMS and the Bank that had been sent to Mr. Gordon during the previous September, two months earlier. It is argued that Respondent's failure to make this disclosure at that time was "a practice contrary to accepted standards of banking operations which caused abnormal risk or loss to the Bank, its shareholders and/or the FDIC Deposit Fund." FDIC Proposed Finding of Fact 53.

   It will be noted that Mr. * * * had requested that the OMS books and records be made available for the Bank's inspection, and that Respondent agreed to accommodate such a review. It seems rather strained to claim that Respondent in addition to accommodating the requested review, should have furnished these documents even though the review was not made.

   The check sent by OMS to the Bank in November 1992 was the result of a recalculation of income tax deductions. OMS became an S-Corporation with Respondent as sole owner, as of January 1, 1991, and as such OMS paid no income taxes. Its income was treated as income to Respondent for tax purposes. Before becoming an S-Corporation it was liable for income taxes.

   It appears that the owner of an S-Corporation can make withdrawals from the corporation as either salary or dividend distributions. Salary withdrawals are subject to FICA taxes and monthly withholdings, whereas dividend payments are subject to quarterly estimates of income taxes. FDIC Ex. 51. As the end of 1991, the accountant of OMS had the withdrawals from OMS reclassified from salary to distributions for 1991.

   The referenced exhibit, FDIC 51, is a memorandum prepared by a * * * * * accountant. That firm was then the accountant for OMS, as well as for the Bank. The memorandum relates a conference call involving Respondent, Mr. Gordon, * * * * * * the OMS bookkeeper, and the accountant. It states that Mr. Gordon was concerned that the distributions did not get reflected in the income statement, and that perhaps the Bank was receiving more of the revenue than it should. When the accountant mentioned that Respondent could control the net income of OMS through the amount of his salary Mr.Gordon stated that he did not feel that this was the intent of the agreement. Although this described discussion reflects some uncertainty on how to handle taxes and OMS income, it does not reveal any effort to cheat the Bank.

   From July 1991 until August 1992, OMS reduced its net income upon which the Bank's share was computed by distributions to Re-
{{7-31-00 p.A-3122}} spondent. The deductions were related at least, in part to estimates of Respondents' tax liability. Beginning in August 1992, those deductions were made 38 percent of the OMS' net income, the approximate amount of Respondent's income taxes on OMS earnings. At that time a recalculation for the entire year 1992 was made, and it was determined that the Bank would have received over $9,000 more under the new 38 percent method, and a check reflecting the difference was remitted to the Bank.

   It is, of course, true, as Enforcement contends, that such deductions are not commonly made to arrive at a net income figure. At the same time, if parties to a contract wish to agree upon such an arrangement there is no bar to their doing so. Respondent claims that this occurred here. Enforcement argues that there is no showing that the Bank agreed to this procedure. On the other hand, there is nothing to show the Bank's disagreement with the procedure either.

   The documents sent to Mr. Gordon in September clearly disclosed the current practice, and a check was sent to the Bank based on the recalculation of these deductions. Although the check was not accompanied by any written explanation, it was discussed with a Bank employee, and it could have been expected that further explanations would be requested, which occurred. The payment of this check is not consistent with the claim that these deduction were being hidden from the Bank.

   The Bank's auditor recommended in August 1992, that the contract be amended to define net income to exclude "extraordinary items, bonuses and dividends," thereby recognizing that under the agreement as it stood it may permit those deductions.

   The 1992 FDIC examination report deplored the serious information void that existed in the Bank relative to OMS expenses. However, it is disclosed that the Bank was aware of OMS' monthly operating expenses. The examiner testifying in this proceeding conceded that senior Bank management had as much information on the subject as they wished at that time. Tr. 541.

   Ultimately, the Bank agreed that it was not aware of any existing breach of the agreement, and waived or released any previous breaches. FDIC Ex. 10, Bate 776–777.

   Enforcement's position is that the contract, as written, was clear and unambiguous, and not subject to any agreed interpretations contrary to Enforcement's understanding of its provisions. Enforcement further argues that even if there were some deductions from OMS income allowable beyond those it considers proper the deductions for distributions or taxes are not permitted. However, they were deducted by agreement or consent of the parties.

   The extant allegations in this matter relate entirely to compensation issues. If Enforcement has evidence of Respondent's wrong-doing in connection with the services he provided to the Bank, it has not been produced here.

   Enforcement describes the obligations of a person affiliated with a bank in connection with that person's compensation, as follows:

    No one would claim that the fiduciary duties of an independent contractor or consultant, or even an employee or officer, of an insured depository institution require that such person work for free. Obviously, all of these people are entitled to negotiate the best compensation package they can for themselves when dealing in an arms-length negotiation for employment. But, once retained and entrusted to serve the interest of the institution, all of these people owe fiduciary duties to the institution regarding, at a bare minimum, the matters within the scope of their responsibilities.

Reply Brief, p. 11, n. 11.

   But surely it also cannot be claimed that once hired an employee has an instant duty to diligently work for a reduction in his pay, and thereafter to forbear from requesting an increase in salary or benefits.

   Enforcement attempts in this proceeding to place Respondent's compensation within the scope of his fiduciary responsibility, and thereby require him to place the Bank's interest ahead of his own in the matter. Enforcement argues that Respondent continued to pursue a construction of the Bank/OMS Contract that was incredibly unfair and detrimental to the Bank, and extraordinarily beneficial to himself.

   This is not the case of an insider setting his own salary. Although it is clear that Mr. Gordon, Respondent's brother-in-law, was a predominate force in the Bank functioning as a surrogate of its president, allegations that Respondent obtained an unfair advantage over the Bank, because of this, in the formulation of their agreement have been dropped.
{{7-31-00 p.A-3123}}

   Respondent had, insofar as the record shows, no influence within the Bank apart from the Bank's credit card division, and even there the Bank held the upper hand. The credit card program was devised to generate income, from processing merchant credit card tickets and interest on credit extended to card holders. Approval of a merchant or card holder—which would generate income—was entirely within the Bank's discretion. All revenue was first received by the Bank, which then as part of the settlement process credited it to OMS. This clearly gave the Bank the strongest hand in the settlement process. This was recognized by the Bank's auditor where he discussed the problem of delay in the Bank's receiving its income from OMS. He stated that, "Any monies owed by OMS [to the Bank] could be netted against the 40 basis points we pay them each month to solve this problem." FDIC Ex. 52, Bates 1384.

   This proceeding concerns an evolving relationship between the Bank and an ISO in an area of business that was largely uncharted waters for both parties. The relationship was troubled by a false start, changing opportunities, unforeseen problems, and disputes, all of which led to difficulties in embodying the relationship in contractual terms, oral or written. However, Respondent is not charged with participating in verbal or vague or unclear contracts. He is charged with violating clear and unambiguous provisions of the agreements. The subject provisions were not clear and unambiguous. I have been unable to find the violations that Enforcement claims attended this course of conduct.

   Enforcement has displayed some ambivalence over Respondent's culpability for the claimed misconduct. The Notice instituting this proceeding sought a civil money penalty of $150,000 against Respondent. At the hearing it was argued that a penalty of $1,250,000 should be imposed. A witness was presented to justify the increase in the penalty. That penalty was urged in Enforcement's Brief, where it was asserted that the maximum penalty allowed exceeded $9,000,000. However, in its Reply Brief, the amount of the penalty proposed is reduced, without explanation, to $150,000. Enforcement has continuously claimed that Respondent should be prohibited from banking. It is my conclusion that none of the proposed sanctions are warranted.

IV. Conclusions of Law

   1. At all times pertinent to this proceeding, the Bank was:

    (a) a "state non-member bank," as defined in section 3(e)(2) of the Act, 12 U.S.C. §1813(e)(2);

       (b) an "insured depository institution," as defined in section 3(c)(2) of the Act, 12 U.S.C. §1813(c)(2); and

       (c) subject to the Act, 12 U.S.C. §§1811–1833(u), the rules and regulations of the FDIC, 12 C.F.R. chapter III, and the laws of the State of Nebraska. FDIC Exs. 2, 3, 4, 5, 6 and 27.

   At various times relevant to this proceeding, Respondent Westering was:

    (a) an executive officer of the Bank within the meaning of section 215.2(d) of Regulation O, 12 C.F.R. §215.2(d), in that: (i) from approximately July 1988 until approximately December 1990, Respondent Westering was a "vice-president;" and (ii) later participated in the major policy making functions of the Bank's credit card operations;

       (b) An institution-affiliated party of the Bank within the meaning of sections 3(u)(1), (3) and/or (4) of the act, 12 U.S.C. §§1813(u)(1), (3) and/or (4), by reason of his actions as:

      (i) a vice-president of the Bank;

         (ii) a consultant and person participating in the conduct of the affairs of the Bank.

   3. The FDIC is the "appropriate Federal banking agency" with respect to the Bank, as defined in section 3(q) of the Act, 12 U.S.C. §1813(q). Accordingly, the FDIC has jurisdiction over the Bank, its institution-affiliated parties, including Respondent Westering, and the subject matter of this proceeding.

   4. For an order of prohibition to be issued the elements set forth in section 8(e) of the Act, 12 U.S.C. §1818(e) must be proven by a preponderance of the evidence. The FDIC has not met its burden of proof and has not established the basis for the issuance of an order of prohibition against Respondent Westering in accordance with section 8(e) of the Act, 12 U.S.C. §1818(e).

   5. In order to assess a "Tier II" civil money penalty, the FDIC must prove by preponderance of the evidence, the elements set forth 7-31-00A-3086
{{7-31-00 p.A-3124}}

in section 8(i)(2)(B) of the act, 12 U.S.C. §181(i)(2)(B). The FDIC has not met its burden of proof and has not established the basis for assessing a civil money penalty against Respondent Westering in this proceeding.

V. Proposed Order

   It is ordered that this proceeding be, and it is hereby dismissed.

   Dated this 22nd day of December, 1999, in Washington, D.C.

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