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[¶5261] In the Matter of Constance C. Cirino individually and as an Institution-Affiliated party of Everett Savings Bank (N/K/A Eagle Bank), Everett, Massachusetts, (Insured State Nonmember Bank) FDIC Docket No. 99-100e (5-10-00).
FDIC Board determined that Respondent Cirino's repeated failures to respond to a Notice of Intention to Prohibit from Further Participation were sufficient to constitute consent to entry of an order of prohibition, but that such order was warranted on the merits as well. Cirino violated laws and regulations and by engaging in numerous instances of unsafe or unsound banking practices and breaching her fiduciary duty she caused financial loss to the bank and gain for herself. The Board issued an Order to permanently prohibit her, Cirino, from participating in the affairs of any federally insured financial institution.
[.1] Summary Judgment—Admissions, failure to respond
Failing to oppose or contest the allegations in the Notice and the Motion for Summary Disposition equals consent by Respondent to the facts alleged.
[.2] Jurisdiction—Over Institution-Affiliated Party
The Respondent, as an officer or employee of a Bank that was an insured depository institution subject to the FDI Act and FDIC Rules and Regulations, is an institution-affiliated party under the FDI Act.
[.3] Jurisdiction—Over Subject matter of proceeding
The FDI Act provides that the FDIC may issue an order prohibiting an institution-affiliated party from participation in the affairs of any insured depository institution. The FDIC has jurisdiction over the Respondent and over the subject matter.
[.4] Unsafe or Unsound Practices—Misrepresentation
Respondent's repeated material misrepresentations or failures in fully informing the Bank governing bodies of material information evidences misconduct by engaging in an unsafe or unsound practice.
[.5] Fiduciary Responsibilities—Disclosure
Respondent's failures in fully informing the Bank governing bodies of material information and material misrepresentations evidences a breach of her fiduciary duties.
[.6] Unsafe or Unsound Practices—Misapplication of loan proceeds
Respondent repeatedly caused loan disbursements to be made knowing the loan proceeds were being used for purposes other than those for which the Board had given approval, amounting to an unsafe practice.
[.7] Unsafe or Unsound Practices—False Statements and Deceptive Acts
Respondent's use of false statements and deceptive acts in interactions with the bank regulatory agency to conceal material information constitutes an unsafe or unsound practice
[.8] Fiduciary Responsibilities—False Statements and Deceptive Acts
Respondent's false statements and deceptive acts done in order to conceal material information from a regulatory agency is a breach of fiduciary responsibilities.
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[.9] Unsafe or Unsound Practices—Falsification of Records
Regardless of Respondent's motive, intentional falsification of bank records is an unsafe or unsound practice.
[.10] Fiduciary Responsibilities—Falsification of Records
Respondent's intentional falsification of bank records is a breach of her fiduciary responsibilities.
[.11] Unsafe or Unsound Practices—Contrary to Accepted Standards
Respondent's repeated approval of loans and advances on credit lines without the proper authorization or authority, or in contravention of the Board, contrary to generally accepted standards of prudent operation, which could result in abnormal risk of loss or damage to the bank, its shareholders or impacted agencies is an unsafe or unsound practice.
[.12] Fiduciary Responsibilities—Misapplication of Deposit Funds
Respondent's withdrawal of funds from an escrow account for payment to an entity not legally entitled to the funds is a misapplication of funds and a breach of an officer's fiduciary duty.
[.13] Unsafe or Unsound Practices—Contrary to Accepted Standards—Letter of Credit
Respondent's causing the Bank to enter into two agreements that were standby letters of credit by which the Bank was obligated to pay a municipality up to approximately $1.3 million to insure the completion of infrastructure and landscaping related to a housing development, without getting the proper authorization and without requiring the developer to execute an agreement to repay the Bank for any money paid as a result of the agreements was an unsafe or unsound practice.
[.14] Unsafe or Unsound Practices—Contrary to Accepted Standards—Fees
Respondent's failure to collect standard Bank fees, resulting in the Bank obtaining no financial or other benefit for assuming the substantial risk of letters of credit is an unsafe and unsound business practice.
[.15] Fiduciary Responsibilities—Self Dealing
Respondent's decision in requesting the Bank make a loan, motivated by personal reasons and resulting in personal gain by adding property to her personal residence, violates her duty of loyalty and puts her interests above the interests of the bank in violation of her fiduciary duties.
[.16] Fiduciary Responsibilities—Conflict, Affirmative Duty to Disclose
Respondent's failure to abstain from participating in a transaction in which she had a conflict of interest, and her failure to disclose that conflict, compounded by her decision to approve the loan on her own lending authority and benefit personally from the loan are breaches of fiduciary duties.
[.17] Violation of law or Regulation—Conduct
Respondent's failure to report or disclose the existence of letters of credit on reports required to be filed by the Bank, caused the Bank to violate 12 C.F.R. 304.4 and resulted in Respondent committing a violation of law or regulation.
[.18] Prohibition, Removal or Suspension—Effects Requirement—Losses by Bank
Respondent's actions resulted in losses to the Bank totaling approximately $7,747,500, in addition to other damages as a result of Respondent's actions, which included (i) the use of a straw loan scheme in which individuals fraudulently submitted loan
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applications and gave the proceeds to the developer rather than using them for the purported purpose, (ii) schemes to defraud FDIC examiners by creating fraudulent power of attorney forms, and (iii) the use of loan advances, granted for other purposes, to aid developer in covering checks in a check kiting scheme. Such actions fulfill the legal element of the effects requirement necessary for an order of prohibition.
[.19] Prohibition, Removal or Suspension—Effects Requirement—Bank's Depositors Prejudiced
Respondent's scheme to conceal the developer's financial predicaments from the Bank's Board of Investment, to promote an illegal scheme of using straw borrowers, to make misrepresentations to the Board regarding the developer's lines of credit, lying to FDIC examiners, and soliciting fraudulent powers of attorney to be placed in the Bank's files to impact pending examinations, could seriously prejudice the interests of the Bank's depositors.
[.20] Prohibition, Removal or Suspension—Respondent Benefited
Respondent personally benefited from the misconduct she committed at the expense of the Bank by obtaining an agreement whereby she would obtain property bordering her personal residence, and by concealing her acts she was able to maintain her position and reputation at the Bank.
[.21] Prohibition, Removal or Suspension—Culpability Requirement—Falsification of Records
Respondent's continued creation of false records; including powers of attorneys, straw loan files and other false records constitute personal dishonesty.
[.22] Prohibition, Removal or Suspension—Culpability Requirement—Affirmative Misrepresentations
Respondent affirmatively made misrepresentations to the Bank's Board of Investment regarding lines of credit for the developer, failed to disclose changes in the developer's business that would impact the Bank's risk and lied to the FDIC which constitute personal dishonesty.
[.23] Prohibition, Removal or Suspension—Culpability Requirement—Self-Dealing
By granting a loan in order to obtain property bordering her personal residence, Respondent engaged in self-dealing and therefore personal dishonesty.
[.24] Prohibition, Removal or Suspension—Willful disregard for safety or soundness
Respondent repeatedly exhibited willful and continuing disregard for the safety or soundness of the Bank by making material misrepresentations, failing to disclose material information including that the developer was not being required to inject any of its own capital toward the purchase of raw land, causing the bank to retain numerous false documents and records and other events estimated to total 20–30 incidents occurring over an 18-month period.
In the Matter of
CONSTANCE C. CIRINO
individually, and as an Institution-Affiliated Party of
EVERETT SAVINGS BANK
(N/K/A EAGLE BANK)
EVERETT, MASSACHUSETTS
(Insured State Non-Member Bank)
FDIC-99-011e
DECISION AND ORDER
STATEMENT OF THE CASE
This matter is before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") following a Recommended Decision issued by Administrative Law Judge Walter J. Alprin ("ALJ") on January 14, 2000.1 The ALJ recommended that Constance C. Cirino be subject to an order of prohibition pursuant to section 8(e)
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of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §1818(e).
The case arises out of a Notice of Intention to Prohibit from Further Participation ("Notice") issued on June 28, 1999, under section 8(e) of the FDI Act against Constance C. Cirino ("Respondent") and Ronald F. Shepard concerning their conduct as officers of Everett Savings Bank, Everett, Massachusetts ("Bank").2 On July 19, 1999, Respondent filed a Response to the Notice. In that pleading, Respondent failed to contest most of the facts alleged in the Notice.
In a Motion dated August 11, 1999, Enforcement Counsel sought to have the ALJ declare as admitted all of the factual allegations in the Notice that Respondent's Response failed to deny. R.D. at 2. Respondent filed no response to this Motion and, on September 2, 1999, the ALJ issued an Order deeming those factual allegations admitted. Id.
Thereafter, on November 1, 1999, Enforcement Counsel filed a Motion for Summary Disposition supported by the Affidavit of Examiner David A. Klapes. R.D. at 3. Again, Respondent failed to file any response. Id.
On January 14, 2000, the ALJ issued a 101-page Recommended Decision. After thoroughly examining the facts, he concluded that Respondent's conduct warranted a prohibition order. He found that Respondent had committed unsafe or unsound practices or breaches of fiduciary duty and violated laws or regulations. R.D. at 79–94. In addition, he concluded that Respondent's misconduct had caused the Bank to suffer losses of approximately $7,747,500 and resulted in prejudice to the interests of depositors. R.D. at 95–97. Respondent had also benefited from her conduct both by retaining her job and reputation at the Bank and acquiring real property adjoining her house as consideration for one of the loans. R.D. at 97. Finally, the ALJ concluded that Respondent's conduct evidenced both personal dishonesty and willful or continuing disregard for the Bank's safety and soundness. R.D. at 98-100. He also concluded that the FDIC was entitled to a default judgment against Respondent based on her failure to respond to the Motion for Summary Disposition. R.D. 100–01.
No party filed exceptions to the ALJ's Recommended Decision.
DISCUSSION
The ALJ concluded that both a default judgment and a judgment on the merits against Respondent were warranted in this case. The Board agrees. A default judgment is appropriate in this case for two reasons. First, Respondent failed to respond to Enforcement Counsel's Motion for Summary Disposition. Second, Respondent failed to file exceptions to the ALJ's Recommended Decision. For both of these reasons, a default judgment against Respondent is warranted. See In the Matter of In Chul Song, Empire State Bank, New York, New York, FDIC-92-140e, FDIC-92-350k, 2 FDIC Enf. Dec. and Ord. (Aspen Law & Business) ¶ 5214 at A-2445 (May 17, 1994). Such defaults constitute a consent to entry of an order of prohibition.
Even if a default judgment were not appropriate, the prohibition order would be warranted on the merits. The ALJ's Recommended Decision more than amply supports his conclusion. The Board concurs in and adopts by reference the ALJ's findings of facts, conclusions of law, and Recommended Decision.
CONCLUSION
The Board finds that Respondent's conduct warrants an Order of Prohibition. Accordingly, the Board adopts and incorporates by reference the Recommended Decision of the ALJ to that effect and issues the following order implementing its Decision.
ORDER
The Board of the FDIC, having considered the entire record of this proceeding and finding that Respondent, Constance C. Cirino, as an officer of the Bank, violated laws and regulations, engaged in unsafe or unsound banking practices, and breached her fiduciary duty, causing financial loss to the Bank and resulting in personal benefit to her, and that said actions involved personal dishonesty and a willful and continuing disregard
1 Citations to the Recommended Decision shall be "R.D. at . ".
2 Respondent Ronald F. Shepard stipulated to the issuance of a prohibition order in October 1999. Accordingly, Respondent Cirino alone remains in the case as a Respondent and will be referred to as "Respondent" for convenience.
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for the safety and soundness of the Bank, it is hereby ORDERED and DECREED that:
IT IS FURTHER ORDERED that copies of this Decision and Order shall be served on Constance C. Cirino, FDIC Enforcement Counsel, the ALJ, and the Commissioner of Banks for the Commonwealth of Massachusetts.
By direction of the Board of Directors.
Dated at Washington, D.C., this 10th day of May, 2000.
RECOMMENDED DECISION
In the Matter of CONSTANCE C. CIRINO and RONALD F. SHEPARD individually, and as Institution-Affiliated Parties of EVERETT SAVINGS BANK (N/K/A EAGLE BANK) EVERETT, MASSACHUSETTS (Insured State Non-Member Bank) FDIC Docket No. 99-011e
RECOMMENDED DECISION TO GRANT THE FDIC'S
MOTION FOR SUMMARY DISPOSITION AND PROHIBITION
(Issued January 14, 2000)
APPEARANCES:
On behalf of the Federal Deposit Insurance Corporation:
Gary T. Primavera, Esq.
Braintree, Massachusetts
Susan L. Chomicz, Esq.
Chicago, Illinois
On behalf of Constance C. Cirino:
Stanley E. Greenidge, Esq.
Cambridge, Massachusetts
On behalf of Ronald F. Shepard:
Joseph H. Aronson, Esq.
Boston, Massachusetts
BEFORE: Walter J. Alprin
Administrative Law Judge
Office of Financial Institution Adjudication
Washington, D.C.
TABLE OF CONTENTS
I. INTRODUCTION AND PROCEDURAL HISTORY
II. FINDINGS OF FACT
A. JURISDICTION
B. GENERAL FINDINGS
C. MOUNTAIN VIEW REALTY TRUST
1. MISCONDUCT RELATING TO THE ORIGINATION OF MOUNTAIN VIEW'S $4,000,000 LINE OF CREDIT
2. PARTICIPATION IN A STRAW LOAN SCHEME
3. DISCOVERY AND PAY-OFF OF MAGGIO'S CHECK KITE
4. DIVERSION OF ESCROW ACCOUNT FUNDS
5. OVERFUNDING OF MOUNTAIN VIEW'S $1,000,000 LINE OF CREDIT
D. DECEPTIVE CONDUCT DURING THE 1994 EXAMINATION
1. THE OFFICER'S QUESTIONNAIRE
2. MAGGIO'S CHECK KITE
3. RESPONDENT SHEPARD'S CREATION OF POWERS OF ATTORNEY
4. FALSE STATEMENT TO EXAMINERS REGARDING OVER-FUNDING OF THE FIRST AND SECOND MOUNTAIN VIEW LINES OF CREDIT
E. DIVERSION OF LOAN PROCEEDS
1. CROSS STREET DEFICIENCY NOTE
2. USE OF HILLCREST I FUNDS TO BEGIN HILLCREST II PROJECT
3. HILLCREST II LINE OF CREDIT
4. MISAPPLICATION OF * * * LINE OF CREDIT
F. RESPONDENT CIRINO'S ISSUANCE OF STANDBY LETTERS OF CREDIT
1. THE UNAUTHORIZED ISSUANCE OF TRIPARTITE AGREEMENTS
2. THE ISSUANCE OF WRITTEN GUARANTEE TO MOUNTAIN VIEW SUPPLIER
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III. DISCUSSION
RECOMMENDATION TO GRANT THE UNOPPOSED MOTION FOR SUMMARY DISPOSITION
RECOMMENDATION FOR ENTRY OF AN ORDER OF PROHIBITION
A. INTRODUCTION
B. THE STANDARDS FOR A MOTION FOR SUMMARY DISPOSITION
C. NO TRIABLE ISSUES OF FACT
1. SUMMARY OF FACTS SUPPORTING JURISDICTION
2. THE BASIS FOR JURISDICTION
D. NO TRIABLE ISSUES OF FACT AS ALLEGED IN THE NOTICE
1 SUMMARY OF TRANSACTIONS SUPPORTING MOTION
a. MOUNTAIN VIEW REALTY TRUST
1) MISCONDUCT RELATING TO THE ORIGINATION OF MOUNTAIN VIEW'S $4,000,000 LINE OF CREDIT
a) ORIGINATION OF LOAN
b) REPRESENTATIONS RELATING TO THE PURCHASE PRICE OF THE LAND
c) PURCHASE PRICE OF THE LAND
d) REPRESENTATIONS RELATING TO THE PREFAB NATURE OF THE HOUSES
e) REPRESENTATIONS RELATING TO THE HARD COSTS OF THE PROJECT
f) LOSS SUFFERED BY THE BANK
2) PARTICIPATION IN A STRAW LOAN SCHEME
3) DISCOVERY AND PAY-OFF OF MAGGIO'S CHECK KITE
4) DIVERSION OF MOUNTAIN VIEW ESCROW FUNDS
5) CIRINO'S OVER-FUNDING OF MOUNTAIN VIEW'S $1,000,000 LINE OF CREDIT
b. RESPONDENT'S DECEPTIVE CONDUCT DURING THE FDIC 1994 EXAMINATION
1) OFFICER'S QUESTIONNAIRE
2) RESPONDENT'S ROLE IN THE CREATION OF THE POWERS OF ATTORNEY
3) RESPONDENT'S FALSE STATEMENT TO EXAMINERS REGARDING THE OVER-FUNDING OF THE FIRST AND SECOND MOUNTAIN VIEW LINES OF CREDIT
c. DIVERSION OF LOAN PROCEEDS
1) CROSS STREET DEFICIENCY NOTE
2) USE OF HILLCREST I TO BEGIN HILLCREST II
3) HILLCREST II LINE OF CREDIT
4) CIRINO'S INVOLVEMENT IN THE MISAPPLICATION OF * * * LINE OF CREDIT
d. RESPONDENT'S UNAUTHORIZED ISSUANCE OF STANDBY LETTERS OF CREDIT
1) THE UNAUTHORIZED ISSUANCE OF TRIPARTITE AGREEMENTS
2) THE UNAUTHORIZED ISSUANCE OF A WRITTEN GUARANTEE TO A MOUNTAIN VIEW SUPPLIER
3) THE UNAUTHORIZED ISSUANCE OF HILLCREST II LETTER OF CREDIT
e. * * * LOAN
IV. CONCLUSIONS OF LAW
THE LEGAL STANDARD FOR AN ORDER OF PROHIBITION PURSUANT TO SECTION 8(e)
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b. MISAPPLICATION OF LOAN PROCEEDS
c. FALSE STATEMENTS AND DECEPTIVE ACTS INTENDED TO HINDER THE FDIC'S 1994 EXAMINATION
d. FALSIFICATION OF BANK RECORDS
e. APPROVING OR CARRYING OUT BANK ACTIVITIES WITHOUT AUTHORIZATION BY BOARD OF INVESTMENT
f. MISAPPLICATION OF DEPOSIT FUNDS
g. FAILURE TO REQUIRE EXECUTION OF NOTE OR AGREEMENT TO REPAY BANK FOR ISSUANCE OF STANDBY LETTERS OF CREDIT
h. FAILURE TO CHARGE A STANDARD BANK FEE
i. CONFLICT OF INTEREST
2. VIOLATIONS OF LAW OR REGULATION
B. EFFECTS PRONG
1. THE BANK SUFFERED LOSS OR OTHER DAMAGE
2. THE INTERESTS OF DEPOSITORS HAVE BEEN OR COULD HAVE BEEN SERIOUSLY PREJUDICED
3. RESPONDENT BENEFITED FROM THE WRONGFUL ACTIONS
C. THE CULPABILITY PRONG
V. CONCLUSION
PROPOSED ORDER (ATTACHED)
I. INTRODUCTION AND PROCEDURAL HISTORY
On June 28, 1999, the FDIC commenced this proceeding by issuing a Notice of Intention to Prohibit From Further Participation ("Notice") pursuant to 12 U.S.C. §1818(e). Under the Federal Deposit Insurance Corporation Act ("FDI"), the FDIC seeks to prohibit the Respondents from participating in the affairs of federally insured financial institutions. On July 20, 1999, Respondent Cirino filed her Answer to the Notice and requested a hearing in this matter. On July 23, 1999, both Enforcement Counsel and Counsel for Respondent Cirino file notices of appearances. Respondent Shepard filed his Answer on July 29, 1999 and his counsel entered his appearance for the record.
A Scheduling Conference was held on August 10, 1999, by telephone with representatives from all the parties. A Report Of Conference And Order Establishing Hearing Schedule was issued by OFIA on August 11, 1999, outlining the following matters. The Order set the hearing for Wednesday, January 19, 2000, in Boston, Massachusetts. Document discovery began the day of the conference call and was set to conclude on September 30, 1999. Dispositive motions were scheduled to be filed by November 1, 1999, and Witness and Exhibit Lists, Joint Stipulations of Fact and of the Genuineness, Admissibility and Contents of Specified Exhibits, if any, and Prehearing Briefs were due on November 8, 1999.
On August 16, 1999, OFIA received the Federal Deposit Insurance Corporation's Motion To Declare As Admitted All Undenied Allegations Of Fact In The FDIC's Notice. In that motion, the FDIC moved to have admitted, as waived, a majority of the Notice it filed against Respondent Cirino. Respondent Cirino did not file a response. On September 2, 1999, FDIC's Motion To Declare As Admitted was granted and a substantial amount of the Notice was deemed admitted for failure to respond or deny the substance of the allegations in her Answer.
On September 14, 1999, FDIC filed the Federal Deposit Insurance Corporation's First Request For Production Of Documents To Respondent Cirino and a request of Respondent Shepard on September 27, 1999. The FDIC and Respondent Shepard entered into a Stipulation and consent to the Issuance of an Order of Prohibition From Further Participation in this case. The agreement, according to a letter filed by the FDIC Enforcement Counsel on October 14, 1999, was sent forthwith to the appropriate FDIC officials in the Washington, D.C. office.
On October 22, 1999, Enforcement Counsel filed an unopposed motion entitled the Federal Deposit Insurance Corporation's Motion For An Extension Of Time For The Parties To File Pre-hearing Briefs and Proposed Stipulations Of
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Fact. The extension was granted on October 25, 1999, and the Pre-hearing Briefs and Proposed Stipulations of Fact were scheduled to be due on December 20, 1999. Pursuant to the FDIC Rules of Practice and Procedure §308.25(f), the FDIC filed a Motion To Compel Production Of Documents By Issuance Of A Subpoena Compelling Production, seeking to obtain the documents it requested in September. That motion, filed on October 27, 1999, was granted and a Subpoena Duces Tecum was issued by the OFIA on November 16, 1999.
On November 2, 1999, the FDIC filed the Federal Deposit Insurance Corporation's Motion for Summary Disposition. The Respondent Cirino has not filed a response. On November 8, 1999, the FDIC produced Witness and Exhibit Lists for the OFIA. Respondent Cirino has not filed either list. Subsequently, on November 19, 1999, the FDIC moved this tribunal for a Protective Order. On November 22, 1999, the undersigned issued a Protective Order and ruled, sua sponte, that Respondent Cirino is prohibited from presenting any witnesses or documentary evidence at the January 19, 2000 hearing, for failure to file a Witness or Exhibit List, unless good cause is shown.1
In summary, Respondent Cirino has failed to respond to FDIC's allegations that she directly or indirectly engaged in unsafe and/or unsound banking practices, and/or acts, omissions or practices which constitute breaches of her fiduciary duty as Vice President of Everett Savings Bank, Everett, Massachusetts, and the remaining allegations in the Notice. For the reasons stated below, the OFIA recommends that an order be issued prohibiting Constance C. Cirino from further participation in the affairs of a federally insured financial institution.
II. FINDINGS OF FACT
A. JURISDICTION
1. At all times pertinent to this proceeding, Everett Savings Bank (n/k/a Eagle Bank) ("Bank") was a corporation existing and doing business under the laws of the Commonwealth of Massachusetts, having its principal place of business in Everett, Massachusetts. The Bank had been, at all times pertinent to this proceeding, an insured State nonmember bank, subject to the Act, 12 U.S.C. §§1811–1831t or 1831u, the Rules and Regulations of the FDIC, 12 C.F.R. Part 308, Chapter III, and the laws of the Commonwealth of Massachusetts. (ALJ Alprin's Order, Notice ¶ 1).2
2. Constance C. Cirino ("Respondent Cirino") was employed at the Bank from 1974 through January 9, 1995. At all times pertinent to the charges herein, she held the position of either a vice president or a senior vice president, and she was in charge of the Bank's lending division. (ALJ Alprin's Order, Notice ¶ 2).
3. At all times pertinent to the charges herein, Respondent Cirino was an "institution-affiliated party" of the Bank as that term is defined in section 3(u) of the act, 12 U.S.C. §1813(u), and for purposes of §§8(e)(7), 8(i) and 8(j) of the Act, 12 U.S.C. §§1818(e)(7), 1818(i) and 1818(j). (ALJ Alprin's Order, Notice ¶ 3).
4. At all times pertinent to the charges herein, Ronald F. Shepard ("Respondent Shepard") was employed by the law firm of Sweetser & Lombard. At all times pertinent to the charges herein, he was a member of the Bank's Board of Trustees and he was the Bank's General Counsel. During 1993 and 1994, Respondent Shepard represented the Bank as a closing attorney on hundreds of loan closings, including many that are described in more detail in the Notice. (ALJ Alprin's Order, Notice ¶ 4).
5. The FDIC has jurisdiction over the Bank, Respondent Cirino, Respondent Shepard, and the subject matter of this proceeding. (ALJ Alprin's Order, Notice ¶ 5).
B. GENERAL FINDINGS
6. This action revolves around Everett Bank's lending relationship with Peter Maggio and Respondent Cirino's attempt, with the assistance of Respondent Shepard, to conceal the financially troubled condition of Maggio's construction project, Mountain View Estates, from the Bank's Board of Investment ("Board of Investment") and the FDIC. (ALJ Alprin's Order, Notice ¶ 7).
7. As a mutual savings bank, the Bank did
1 On December, 1999, the FDIC filed a motion pursuant to 12 C.F.R. §308.108(b), asking this tribunal to impose sanctions on Respondent. In light of the Recommended Decision to grant summary disposition, such sanction would be duplicitous.
2 Parenthetical citations refer to matters of record, and to the Exhibits attached to the Motion for Summary Disposition.
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not have a board of directors. (ALJ Alprin's Order, Notice ¶ 8).
8. At all times pertinent to the charges herein, the Bank's Board of Trustees ("Board of Trustees") carried out the role normally served by a board of directors in a stock financial institution. (ALJ Alprin's Order, Notice ¶ 9).
9. At all times pertinent to the charges herein, the Bank's Board of Investment ("Board of Investment"), a sub-committee of the Board of Trustees, supervised the Bank's lending function, including, but not limited to, approving all loan applications made to the Bank in excess of $300,000. (ALJ Alprin's Order, Notice ¶ 10).
10. At all times pertinent to the charges herein, Respondent Cirino could approve and originate loans in her capacity as Senior Vice President up to an amount of $300,000 without the prior approval of the Board of Investment. (ALJ Alprin's Order, Notice ¶ 11).
11. On or about July 12, 1993, the FDIC began a safety and soundness examination of the Bank ("FDIC's 1993 Examination"). (ALJ Alprin's Order, Notice ¶ 12).
12. The FDIC's 1993 Examination was concluded on or about August 28, 1993. (ALJ Alprin's Order, Notice ¶ 13).
13. On or about July 25, 1994, the FDIC began another safety and soundness examination of the Bank ("FDIC's 1994 Examination"). (ALJ Alprin's Order, Notice ¶ 14).
14. The FDIC's 1994 Examination was concluded on or about December 16, 1994. (ALJ Alprin's Order, Notice ¶ 15).
C. MOUNTAIN VIEW REALTY TRUST
1. Misconduct Relating to the Origination of Mountain View's $4,000,000 Line of Credit
15. On or about September 27, 1993, the Bank originated a $4,000,000 line of credit ("First Mountain View Line of Credit") to Mountain View Estates Realty Trust ("Mountain View"), an entity owned and controlled by Peter V. Maggio ("Maggio"). (ALJ Alprin's Order, Notice ¶ 16).
16. The purpose of the First Mountain View Line of Credit was to finance Mountain View's purchase and development of a 72-lot subdivision in Malden, Massachusetts ("Mountain View Project"). (ALJ Alprin's Order, Notice ¶ 17).
17. Respondent Cirino was the Bank's loan officer responsible for underwriting and analyzing Mountain View's application for the First Mountain View Line of Credit. (ALJ Alprin's Order, Notice ¶ 18).
18. In underwriting Mountain View's application for the First Mountain View Line of Credit, Respondent Cirino relied upon a financial statement for Maggio, dated June 30, 1993, which reflected liquid assets of approximately $8,000. (ALJ Alprin's Order, Notice ¶ 19).
19. On or about August 10, 1993, the Board of Investment approved the First Mountain View Line of Credit based upon a presentation by, and recommendation of, Respondent Cirino. (ALJ Alprin's Order, Notice ¶ 20).
20. The purchase price of the land that Mountain View was to purchase with proceeds from the First Mountain View Line of Credit was $3,080,000. (ALJ Alprin's Order, Notice ¶ 21).
21. As part of her recommendation to approve the First Mountain View Line of Credit, Respondent Cirino represented to the Board of Investment that the Bank would advance to, for the benefit of Mountain View, no more than $1,200,00 for the purchase of the land. (ALJ Alprin's Order, Notice ¶ 22).
22. In addition to the $1,200,00 of loan proceeds from the First Mountain View line of Credit, the remainder of the purchase price of the land was paid by Mountain View through the execution of twelve second mortgage notes ("Second Mortgages") in the aggregate amount of $1,880,000. (ALJ Alprin's Order, Notice ¶ 23).
23. Respondent Cirino did not require Mountain View to contribute any capital towards the purchase price of the land. (ALJ Alprin's Order, Notice ¶ 24).
24. It is standard and usual practice for a bank to require a construction loan borrower to contribute a significant amount of his or her own capital towards a construction project. Typically, banks require this capital contribution to be at the inception of the project in the form of a contribution towards the purchase price of the land. This requirement limits a bank's exposure to loss in a construction project, and it creates an incentive for the borrower to complete the project because the borrower is risking his or her own money in the project. (* * * Affidavit ¶ 13).
25. In recommending this loan to the Board
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of Investment, Respondent Cirino did not inform the Board that all of the remaining purchase price of the land beyond the Bank's loan proceeds of $1,200,00 was to be paid through the Second Mortgages. (ALJ Alprin's Order, Notice ¶ 25).
26. One of the Second Mortgages was a mortgage note, dated September 28, 1993, in the amount of $540,000, from Mountain View to * * *, the principal seller of the land upon which the Mountain View Project was to be built ("Mountain View $540,000 Note"). (ALJ Alprin's Order, Notice ¶ 26).
27. On or about September 29, 1993, one day after the loan closing for the First Mountain View Line of Credit, the Bank purchased the Mountain View $540,000 Note from * * * for $440,000. (ALJ Alprin's Order, Notice ¶ 27).
28. The Bank's purchase of the Mountain View $540,000 Note was the functional equivalent of a loan or extension of credit from the Bank to Mountain View. (ALJ Alprin's Order, Notice ¶ 28).
29. Since the Bank purchased the note at a discount of $100,000 from its face value, the Mountain View $540,000 Note was the functional equivalent of a loan of $440,000; however Respondent did not have the requisite loan authority to approve a loan in the amount of $440,000. (* * * Affidavit ¶ 9).
30. The Bank's Loan Policy, dated March 1994, requires all Bank loans in excess of $300,000 to receive the approval of the Bank's Board of Investment. (Exhibit A to Affidavit).
31. The 1993 and 1994 Minutes of the Bank's Board of Investment ("Board Minutes") do not reflect the Board's approval of the Mountain View $540,000 Note either as a loan or as an investment. (* * * Affidavit ¶ 9).
32. None of the Bank records relating to the Mountain View $540,000 Note indicate that any officer of the Bank or the Board of Investment authorized Respondent Cirino to purchase the Mountain View $540,000 Note. (* * * Affidavit ¶ 10).
33. The Bank's Investment Policy, dated January 5, 1994, authorized only * * *, President, and * * *, Vice President and Treasurer, "to make and cause to be executed investment decisions." (Exhibit B to * * * Affidavit at page 1).
34. The Bank's Investment Policy did not authorize Respondent Cirino on her own authority to purchase notes or any other investments. (* * * Affidavit ¶ 10).
35. Neither Respondent Cirino nor Bank President * * * had the authority to purchase the Mountain View $540,000 Note without Board of Investment approval, which they did not have. (Exhibit C to * * * Affidavit at page 90, lines 12–24 and page 91, lines 1–7).
36. Even if the Mountain View $540,000 Note is considered to be a Bank investment, Respondent Cirino did not have the authority to purchase the Mountain View $540,000 Note. (* * * Affidavit, ¶ 11).
37. Within a day of the closing of the First Mountain View Line of Credit, Respondent Cirino caused the Bank to advance to, or for the benefit of Mountain View $1,780,000 for the purchase of land, consisting of disbursements of $1,340,000 from the First Mountain View Line of Credit and $440,000 arising out of the Bank's purchase of the Mountain View $540,000 Note. (ALJ Alprin's Order, Notice ¶ 30).
38. With respect to eight of the remaining Second Mortgages ("Early Out Mortgages"), Respondent Cirino caused the Bank to commit to the holders of these mortgages that the Bank would advance money from the First Mountain View Line of Credit to Mountain View no later than December 31, 1993, to enable Mountain View to pay off these mortgages. (ALJ Alprin's Order, Notice ¶ 31).
39. From September 29, 1993, through January 14, 1994, Respondent Cirino caused disbursements to be made from the First Mountain View Line of Credit in the aggregate amount of $846,807 to pay off the Early Out Mortgages. (ALJ Alprin's Order, Notice ¶ 32).
40. For purposes of the Notice, a "prefab house" is one that is assembled by a builder from components that have previously been built by a manufacturer. (ALJ Alprin's Order, Notice ¶ 33).
41. For purposes of the Notice, a "stick built" house is one that is completely framed and constructed by the builder at the eventual location of the house. (ALJ Alprin's Order, Notice ¶ 34).
42. As part of her recommendation of the First Mountain View Line of Credit to the Board of Investment, Respondent Cirino represented to the Board that Mountain View
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would be building prefab houses, which Mountain View estimated would cost approximately $60,000 per unit to build. (ALJ Alprin's Order, Notice ¶ 35).
43. In approving the first Mountain View Line of Credit, the Board of Investment relied on Respondent Cirino's material representation that the Mountain View project would consist of prefab houses. (ALJ Alprin's Order, Notice ¶ 36).
44. At all times pertinent to the charges herein, the Board of Investment perceived the development of prefab houses to be substantially less risky to the Bank than the development of stick houses. (ALJ Alprin's Order, Notice ¶ 37).
45. Approximately one month after the closing of the First Mountain View Line of Credit, Respondent Cirino was informed by Mountain View that it had altered its project plans to build "stick" houses instead of prefab houses, resulting in an increase in projected construction costs of approximately $12,000 per unit, or $924,000. (ALJ Alprin's Order, Notice ¶ 38).
46. At all times pertinent to the charges herein, Respondent Cirino did not inform the Board of Investment of Mountain View's decision to build stick houses instead of prefab houses. (ALJ Alprin's Order, Notice ¶ 39).
47. As part of her recommendation of the First Mountain View Line of Credit to the Board of Investment, Respondent Cirino represented to the Board that Mountain View projected that it would need $1,864,000 to cover hard costs associated with developing the land into lots suitable for building. (ALJ Alprin's Order, Notice ¶ 40).
48. On September 24, 1993, three days before the closing of the First Mountain Line of Credit, Respondent Cirino was aware that Mountain view had increased its projection of the amount it would need to cover hard costs to $2,577,500. (ALJ Alprin's Order, Notice ¶ 41).
49. Neither prior to the closing of the First Mountain View Line of Credit, nor at anytime thereafter, did Respondent Cirino inform the Board of Investment of the increase in the projected hard costs for the Mountain View Project. (ALJ Alprin's Order, Notice ¶ 42).
50. The increase of $700,000 in estimated infrastructure costs and the increase of $924,000 in estimated house construction costs (resulting from the change from "prefab houses" to "stick built" houses) were each a material change in the project requiring Respondent to bring this information to the attention of the Bank's Board of Investment. Maggio at that time, reported that he had just $8,000 in cash available to contribute towards the project. In addition, each increase was large enough to cause the $4,000,000 in financing provided by the First Mountain View Line of Credit to be insufficient to complete the project. (* * * Affidavit ¶ 14 ¶ 15).
51. The First Mountain View Line of Credit, as set up by Respondent Cirino, did not contain an interest reserve. (ALJ Alprin's Order, Notice ¶ 43).
52. As part of her analysis and underwriting of Mountain View's application, Respondent Cirino did not analyze Maggio's financial ability to make interest payments on the First Mountain View Line of Credit or to fund any potential cost overruns on the Mountain View Project. (ALJ Alprin's Order, Notice ¶ 44).
53. The First Mountain View Line of Credit was classified during the FDIC's 1994 Examination as follows: Substandard $2,261,000; Doubtful $918,000; Loss $821,000. (ALJ Alprin's Order, Notice ¶ 46).
54. As of March 30, 1999, the Bank had suffered a loss of $375,000 on the Mountain View $540,000 Note. (ALJ Alprin's Order, Notice ¶ 48).
2. Participation in a Straw Loan Scheme
55. For purposes of the decision, a "nominee loan" or a "straw loan" is a transaction in which a purported borrower obtains a loan from a financial institution with no intent to personally repay the loan and turns over the proceeds of the loan to another individual, the actual borrower, an individual to whom the financial institution was unwilling or unable to grant a direct loan. (ALJ Alprin's Order, Notice ¶ 50).
56. On or about February 25, 1994, Maggio, on behalf of Mountain View, requested an additional $1,000,000 Line of Credit for construction of the Mountain View Project ("Mountain View $1,000,000 Request"). (ALJ Alprin's Order, Notice ¶ 51).
57. On or about March 14, 1994, the outstanding balance on the $4,000,000 First Mountain View line of credit was $3,996,000. (ALJ Alprin's Order, Notice ¶ 52).
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58. Respondent Cirino did not present a request for an additional $1,000,000 for Mountain View to the Board of Investment in February or March of 1994, (Affidavit ¶ 15, ¶ 16, ¶ 17).
59. Instead, Respondent Cirino suggested to Maggio that he recruit individuals ("straws") to obtain loans from the Bank in their own names and then turn the proceeds of the loans over to him so that he could continue the development of the Mountain View Project. (* * * Affidavit ¶ 18, Exhibit E to Klapes Affidavit at pages 15–21).
60. Respondent Cirino indicated to Maggio that she preferred to solve Mountain View's need for additional funding with straw loans, rather than obtaining the Board of Investment's approval of the Mountain View $1,000,000 Request, because she wanted to show the Board of Investment reductions in the outstanding balance of the First Mountain View Line of Credit from lot sales. (* * * Affidavit ¶ 18, Exhibit E to * * * Affidavit at pages 15–21).
61. In response to Respondent Cirino's suggestion, to engage in a straw loan scheme, beginning in March, 1994, Maggio approached a number of friends, family members, or business associates to act as Straws for him. (ALJ Alprin's Order, Notice ¶ 56).
62. From March 1994 through September 1994, the Bank approved and disbursed proceeds from the 19 loans ("Straw Loans") to the Straws; purportedly so that the Straws could purchase lots from Mountain View as personal investments (ALJ Alprin's Order, Notice ¶ 57).
63. At all times pertinent to the charges herein, the Straws had no intention to use the proceeds of the Straw Loans to purchase lots from Mountain View as personal investments. (ALJ Alprin's Order, Notice ¶ 58).
64. At all times pertinent to the charges herein, the Straws did not consider themselves to be personally responsible for repaying the Straw Loans. (ALJ Alprin's Order, Notice ¶ 59).
65. At the inception of each of the Straw Loans, Respondent was aware of the nominee nature of the Straw Loans. (* * * Affidavit ¶ 18, ¶ 19, ¶ 20, ¶ 22, Exhibit E to * * * Affidavit at pages 15–21).
66. Respondent Cirino was the Bank loan officer responsible for processing and underwriting all of the Straw loans. (ALJ Alprin's Order, Notice ¶ 60).
67. Respondent Cirino approved 18 of the 19 Straw Loans under her own lending authority. (ALJ Alprin's Order, Notice ¶ 61).
68. The Banks Board of Investment approved the remaining Straw Loan to * * * in the amount of $700,000, based upon Respondent Cirino's representation and recommendation. (ALJ Alprin's Order, Notice ¶ 62).
69. The names of the Straws, the Mountain View lot numbers, the loan account numbers and the dates of each Straw Loan are set forth below. (ALJ Alprin's Order, Notice ¶ 63). * * * Lot #1, 17398-9, $148,000.00, March 17, 1994; * * * Lot #2, 17421-9, $130,000.00, April 22, 1994; * * *, Lot #3, 17420-1, $144,000.00, April 22, 1994; * * *, Lot #4, 17460-7, $132,000.00, June 9, 1994; Patricia Maggio, Lot #5, 17397-1, $148,000.00, March 17, 1994; Patricia Maggio, Lot #6, 17459-9, $132,600.00, June 9, 1994; * * *, Lot #7, 17402-9, $148,000.00, March 16, 1994; * * *, Lots 8, 10, 12, 14, 16, 18, 37, 47, and 48, 1786-2, $700,000.00, July 13, 1994; * * *, Lot #9, 17403-7, $148,000.00, March 16, 1994; * * *, Lot #11, 17412-8, $133,000.00, April 11, 1994; * * *, Lot #13, 17411-0, $133,000.00, April 11, 1994; * * *, Lot #15, 17410-2, $148,000.00, April 4, 1994; * * *, 17409-4, $148,000.00, April 4 1994; Patricia Maggio, Lot #25, 17534-9, $148,000.00, September 23, 1994; * * *, 17531-5, $148,000.00, September 23, 1994; * * *, 17533-1, $148,000.00, September 23, 1994; Patricia Maggio, Lot #40, 17461-5, $150,200.00, June 9, 1994; * * *, 17532-3, $148,000.00, September 23, 1994; * * *, 17535-6, $148,000.00, September 23, 1994.
70. At the time of her processing of the loan applications from the Straws and prior to the closing of the Straw Loans, Respondent Cirino knew or should have known that the Straws did not intend to be personally responsible for repaying the Straw Loans. * * * Affidavit ¶ 18 and ¶ 19).
71. At the time of her processing of the loan applications from the Straws and prior to the closing of the Straw Loans, Respondent Cirino knew or should have known that the Straws did not have any genuine intent to purchase the Mountain View lots as their own personal investments. (* * *, Affidavit ¶ 18 and ¶ 19).
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72. At the time of her processing of the loan applications from the Straws and prior to the closing of the Straw Loans. Respondent Cirino knew or should have known that the Straws were allowing loans from the Bank to be put in their names as a favor to Maggio and/or in consideration for a fee from Maggio. (* * *, Affidavit ¶ 19 and ¶ 20).
73. The Straw Loans exhibit a number of characteristics common to nominee loans, including: (a) all or substantially all of the information on the loan applications for the Straw Loans is filled out in Maggio's handwriting; (b) some of the mortgage loan payoff sheets, related to the subsequent sales of the completed houses by the Straws to bona fide buyers, contain handwritten instructions from Respondent to the closing attorney indicating that all funds collected from the sales of the underlying properties, which would include the Straws' purported profits on the sales, were to be forwarded to the Bank so that she could use those proceeds to reduce Maggio's loan obligations, which included the First Mountain View Line of Credit. (* * *, Affidavit ¶ 19).
74. The Straws did not intend to be personally responsible for repaying the Straw Loans and did not have any genuine intent to purchase the Mountain View lots as their own personal investments, nor did he/she consider themselves to be owners of any of the Mountain View lots. Furthermore, the Straws did not contribute any of his/her own money to the loan transactions at the inception of the transactions, nor did he/she accept or receive any funds when the properties were eventually sold to the end buyers and was allowing loans from the Bank to be put in their names as a favor to Maggio and/or in consideration for a fee from Maggio. Finally, the Straws agreed in side agreements that Maggio would pay all interest and debt service payments in connection with these loans. (* * *, Affidavit ¶ 20).
75. Respondent Cirino never disclosed the nominee nature of the Straw Loans to the Bank's Board of Investment. (* * *, Affidavit ¶ 21).
76. Respondent Cirino knew that Maggio was paying most, if not all, of the interest on the Straw Loans. (* * *, Affidavit ¶ 22).
77. At all times pertinent to the charges herein, Respondent Cirino was aware that a substantial portion of the proceeds of each Straw Loan would be disbursed, directly or indirectly, to Maggio's control. (ALJ Alprin's Order, Notice ¶ 69).
78. By reason of the issuance of the Straw Loans, Respondent Cirino committed the Bank to make available for the completion of the Mountain View Project an additional $3,282,000. (ALJ Alprin's Order, Notice ¶ 70).
79. As of March 31, 1999, the Bank had suffered a loss of approximately $1,324,000 on the Straw Loans. (ALJ Alprin's Order, Notice ¶ 75).
3. Discovery and Pay Off of Maggio's Check Kite
80. On or about March 11, 1994, an official at Medford Savings Bank ("MBS"), Medford, Massachusetts, contacted * * * an officer of the Bank, and informed * * * that MSB suspected that Maggio was engaged in a check kite. (ALJ Alprin's Order, Notice ¶ 78).
81. On or about March 11, 1994, after the phone call from MSB, Respondents Cirino and Shepard met with Maggio to discuss the situation ("Kite Meeting"), (ALJ Alprin's Order, Notice ¶ 79).
82. From March 11, 1994, through March 14, 1994, Respondent Cirino advanced approximately $342,000 to Maggio from Bank lines of credit to enable Maggio to cover or provide funds for checks drawn on uncollected funds ("Kite Payoff"). (ALJ Alprin's Order, Notice ¶ 81).
83. On or about March 11, 1994, through March 14, 1994, Maggio had or would soon have only approximately $295,000 available from the First Mountain View Line of Credit to fund the Kite Payoff. (ALJ Alprin's Order, Notice ¶ 82).
84. Respondent agreed to advance $47,000 from the Hillcrest II Line of Credit to enable Maggio to cover insufficient funds balances caused by Maggio's check kite. (* * * Affidavit ¶ 23 and ¶ 24; Exhibits F and G to * * * Affidavit).
85. Respondent advanced $47,000 to Maggio through a misapplication of funds from the Hillcrest II Line of Credit. (* * *, Affidavit ¶ 24; Exhibits F and G to * * * Affidavit).
86. Respondent knew the information on the engineer's report supporting the $47,000 advance on the Hillcrest II Line of Credit was false when the engineer's report was
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submitted to her. (* * *, Affidavit ¶ 25; Exhibits F and G to Affidavit).
4. Diversion of Escrow Account Funds
87. At all times pertinent to the charges herein, Mountain View maintained escrow account #22-000732-2 ("Escrow") at the Bank for the purpose of holding down payments received from individuals who had signed agreements with Mountain View to purchase completed homes in the Mountain View Project ("End Purchasers"). (ALJ Alprin's Order, Notice ¶ 85).
88. At all times pertinent to the charges herein, the Bank served as agent of the Escrow. (ALJ Alprin's Order, Notice ¶ 86).
89. At all times pertinent to the charges herein, Respondent Cirino solely administered the Escrow on behalf of the Bank. (ALJ Alprin's Order, Notice ¶ 87).
90. At times pertinent to the charges herein, Respondent Cirino was the only signatory on the escrow signature card. (ALJ Alprin's Order, Notice ¶ 88).
91. At all times pertinent to the charges herein, Respondent Cirino made or authorized every withdrawal from Escrow. (ALJ Alprin's Order, Notice ¶ 89).
92. The End Purchasers typically paid $5,500 into Escrow as a down payment on the purchase of a Mountain View lot. (ALJ Alprin's Order, Notice ¶ 90).
93. After a sale from Mountain View to an End Purchaser was consummated, Mountain View had a legal right to the End Purchaser's down payment and such funds could be remitted from escrow to Mountain View. (ALJ Alprin's Order, Notice ¶ 91).
94. As a result of her responsibilities as the Bank's loan officer for the First Mountain View Line of Credit and the Straw Loans, Respondent Cirino was aware or should have been aware of the actual or approximate date upon which every purchase of a Mountain View lot by an End Purchaser was consummated and, therefore, when Mountain View became legally entitled to any applicable deposit from Escrow. (ALJ Alprin's Order, Notice ¶ 92).
95. On four occasions, on or about July 14, 1994, September 7, 1994, September 9, 1994, and September 14, 1994, Respondent Cirino caused withdrawals to be made from Escrow totaling $78,000 to which Cirino knew or should have known that Mountain View was not legally entitled at the time ("Escrow Diversions"). (ALJ Alprin's Order, Notice ¶ 93).
96. Thereafter, due to the consummation of sales to End Purchasers, Mountain View became entitled to $34,000 of the $78,000 of Escrow Diversions. (ALJ Alprin's Order, Notice ¶ 94).
97. Funds from one of the Escrow Diversions, in the amount of $24,500, on or about July 14, 1994, were used by Respondent Cirino to pay principal and interest on a line of credit to Hillcrest Realty Trust, another entity owned or controlled by Maggio, as set forth in more detail in paragraph 151 of the Notice. (ALJ Alprin's Order, Notice ¶ 95).
98. In January, 1995, the Bank discovered that a number of the down payments from the End Purchasers wee missing from Escrow. (ALJ Alprin's Order, Notice ¶ 96).
99. From February 2, 1995 through June 14, 1995, the Bank reimbursed eight End Purchasers a total of $43,541 representing their down payments that had been misappropriated from Escrow. (ALJ Alprin's Order, Notice ¶ 97).
100. As of August 31, 1995, the Bank suffered a loss of $43,541 as a result of the Escrow Diversions. (ALJ Alprin's Order, Notice ¶ 98).
5. Overfunding of Mountain View's $1,000,000 Line of Credit
101. On or about November 2, 1994, the Bank's Board of Investment approved a second line of credit to Mountain View in the amount of $1,000,000 ("Second Mountain View Line of Credit") to complete the construction of the project and to pay for unexpected environmental clean-up costs. (ALJ Alprin's Order, Notice ¶ 100).
102. The Board's approval of the Second Mountain View Line of Credit was based upon a presentation by and the recommendation of Respondent Cirino on or about November 2, 1994 ("November 1994 Recommendation"). (ALJ Alprin's Order, Notice ¶ 101).
103. In the November 1994 Recommendation, Cirino represented to the Board of Investment that $400,000 from the new line was to be used to reduce the outstanding balance on the First Mountain View Line of Credit to $3,600,000, with the remainder used to pay for the additional construction and
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environmental clean-up costs. (ALJ Alprin's Order, Notice ¶ 102).
104. When the Second Mountain View Line of Credit closed on November 4, 1994, Respondent Cirino caused only $300,000 of proceeds from the new loan to be applied to reduce the outstanding balance on the First Mountain View Line of Credit. (ALJ Alprin's Order, Notice ¶ 103).
105. In the November 1994 Recommendation, Respondent Cirino represented to the Board of Investment that the total outstanding balance on the First and Second Mountain View Lines of Credit would not exceed $4,600,000. (ALJ Alprin's Order, Notice ¶ 104).
106. In the November 1994 Recommendation, Respondent Cirino did not disclose to the Board that she had over-advanced the First Mountain View Line of Credit and that the present outstanding balance of that loan was approximately $4,178,000. (ALJ Alprin's Order, Notice ¶ 105).
107. By November 23, 1994, the outstanding balance on the First and Second Mountain View Lines of Credit stood at $4,861,713.29. (ALJ Alprin's Order, Notice ¶ 106).
108. In the November 1994 Recommendation, Respondent Cirino represented to the Board of Investment that the remaining balance of $3,600,000 on the First Mountain View Line of Credit would be fully secured by the $80,000 per lot value of the unsold lots in the project. (ALJ Alprin's Order, Notice ¶ 107).
109. In fact, Respondent Cirino was aware at the time that the lots would only have this value after $900,000 of additional improvements were made to the Mountain View project's infrastructure. (ALJ Alprin's Order, Notice ¶ 108).
110. As of March 30, 1999, the Bank had suffered a loss of $988,129 on the Second Mountain View Line of Credit. (ALJ Alprin's Order, Notice ¶ 109).
D. DECEPTIVE CONDUCT DURING THE 1994 EXAMINATION
1. The Officers' Questionnaire
111. As part of the 1994 Examination, the Bank was asked to answer some questions from the FDIC by completing an Officers' Questionnaire form. (ALJ Alprin's Order, Notice ¶ 111).
112. Question #5 of the Officers' Questionnaire ("Question #5") asked the Bank to list all extensions of credit for the accommodation or direct benefit of others than those whose names appear on the institution's records or on credit instruments in connection with such extensions. (ALJ Alprin's Order, Notice ¶ 112).
113. In or about late July or early August, 1994, the FDIC received a completed Officers' Questionnaire from the Bank, signed by Respondent Cirino, that indicated "None" in answer to Question #5. (ALJ Alprin's Order, Notice ¶ 113).
114. At the time respondent Cirino provided this information to the FDIC, she was aware that such information was materially false or misleading. (ALJ Alprin's Order, Notice ¶ 114).
115. In fact, Respondent Cirino should have listed the 14 Straw Loans, which had closed by the date of the completion of the Officer's Questionnaire by the Bank. (Respondent's admission in her Answer, p. 4, Exhibit 2 to FDIC's Memorandum of Points and Authorities in Support of Motion for Summary Disposition).
116. Sometime later during the FDIC's 1994 Examination, at the request of FDIC examiners, the Bank provided a list of some of the Straw Loans in response to Question #5. (ALJ Alprin's Order, Notice ¶ 116).
2. Maggio's Check Kite
117. During the 1994 Examination, FDIC examiners learned of the Bank's discovery in March of 1994, of an apparent check kite being conducted by Maggio. (ALJ Alprin's Order, Notice ¶ 127).
3. Respondent Shepard's Creation of Fictitious Powers of Attorney`
118. During the 1994 Examination, FDIC examiners discovered the fact that the Bank was routinely accepting for deposit Bank loan disbursement checks issued payable to a Straw, upon which Maggio had endorsed the name of the Straw. (ALJ Alprin's Order, Notice ¶ 131).
119. During the 1994 Examination, when Respondent Cirino was questioned by FDIC examiners as to why the Bank would honor instruments upon which Maggio had endorsed other peoples' signatures, Respondent Cirino responded that Maggio must have powers of attorney from these individuals. (ALJ Alprin's Order, Notice ¶ 132).
120. In or about early October, 1994, Re-
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spondent Cirino was asked by FDIC examiners to provide copies of the purported powers of attorney from the Straws to Maggio. (ALJ Alprin's Order, Notice ¶ 133).
121. Over the next few weeks, a number of copies of powers of attorney from Straws to Maggio were presented to the FDIC examiners, purportedly coming from Respondent Shepard's files ("Shepard Powers of Attorney"). (ALJ Alprin's Order, Notice ¶ 134).
122. The Shepard Powers of Attorney contained various dates of execution from March 16, 1994 through September 23, 1994. (ALJ Alprin's Order, Notice ¶ 135).
123. In fact, the Shepard Powers of Attorney were not copies of previously existing powers of attorney, but fraudulent documents created by Respondent Shepard (or prepared under his direction by his office) during the preceding few weeks. (ALJ Alprin's Order, Notice ¶ 136).
124. Respondent Shepard created the Shepard Powers of Attorney in response to a request from Respondent Cirino for the creation of backdated powers of attorney to be placed in the Straws' loan files and presented to the FDIC. (ALJ Alprin's Order, Notice ¶ 137).
125. Respondent Cirino indicated to Respondent Shepard during this request that the Bank's CAMEL rating would be lowered by the FDIC if the backdated powers of attorney were not in the Bank's files. (ALJ Alprin's Order, Notice ¶ 138).
4. False Statement to FDIC Examiners Concerning the Over-funding of the First and Second Mountain View Lines of Credit
126. As of October 26, 1994, Respondent Cirino had advanced loan proceeds to Mountain View on the First Mountain View Line of Credit such that a total of approximately $4,178,000 was outstanding. (ALJ Alprin's Order, Notice ¶ 143).
127. As of November 23, 1994, Respondent Cirino had advanced a total of approximately $4,860,000 on the First and Second Mountain View lines of Credit. (ALJ Alprin's Order, Notice ¶ 144).
128. On or about December 8, 1994, Respondent Cirino told FDIC examiners that the Board of Investment was aware that the First Mountain View Line of Credit had been overfunded by approximately $180,000 in late October, 1994. (ALJ Alprin's Order, Notice ¶ 145).
129. On or about December 8, 1994, Respondent Cirino also told FDIC examiners that the Board of Investment was aware that advances of $870,000 of new funds from the Second Mountain View Line of Credit were made to Mountain View, rather than the maximum of $600,000 that had been represented to the Board by Respondent Cirino in the November, 1994 Recommendation. (ALJ Alprin's Order, Notice ¶ 146).
130. In fact, at all times pertinent to the charges herein, the Bank's Board of Investment was unaware that the First and Second Mountain View Lines of Credit had been overfunded. (* * *, Affidavit ¶ 26; Exhibit I to * * * Affidavit, Exhibit J to * * * Affidavit at page 102, lines 19–24, and page 108, lines 19–21).
131. On or about December 8, 1994, when Respondent Cirino told the FDIC examiners that the Board of Investment was aware of the overfunding of the First and Second Mountain View Lines of Credit, she knew that she was making a false statement to FDIC examiners. (* * *, Affidavit ¶ 26, Exhibits H and I to * * * Affidavit, Exhibit J to * * * Affidavit at page 102, lines 19–24, and page 108, lines 19–21).
132. Respondent admitted making false statements to FDIC examiners in her sworn deposition taken in an unrelated case. (Exhibit J to * * * Affidavit at page 102, lines 19–24, and page 108, lines 19–21).
E. DIVERSION OF LOAN PROCEEDS
133. From September, 1992 through August, 1994, Respondent Cirino engaged in a course of conduct in which she misapplied Bank loan proceeds to support Maggio's various business endeavors, as more fully set forth in paragraphs 151 through 193 of the NOTICE. (ALJ Alprin's Order, Notice ¶ 150).
1. Cross Street Deficiency Note
134. On or about September 2, 1992, the Board of Investment approved a line of credit in the amount of $750,000 to Hillcrest Realty Trust ("Hillcrest I Line of Credit"), an entity owned or controlled by Maggio, to develop a 29 lot subdivision known as Hillcrest Acres ("Hillcrest I"). (ALJ Alprin's Order, Notice ¶ 151).
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135. On or about November 5, 1992, the Hillcrest I Line of Credit was issued. (ALJ Alprin's Order, Notice ¶ 153).
136. The Hilcrest I Line of Credit was secured by a first mortgage on the subdivision. (ALJ Aplrin's Order, Notice ¶ 153).
137. On or about April 12, 1993, Maggio executed a note in the amount of $175,000 ("Cross Street Deficiency Note") to repay the Bank for a portion of the outstanding balance owed the Bank on an earlier project known as "Cross Street." (ALJ Alprin's Order, Notice ¶ 154).
138. The Cross Street Deficiency Note was secured by a junior mortgage on Hillcrest I. (ALJ Alprin's Order, Notice ¶ 155).
139. On or about July 12, 1993, the FDIC's 1993 Examination commenced. (ALJ Alprin's Order, Notice ¶ 156).
140. The FDIC's 1993 Examination concluded on or about August 28, 1993. (ALJ Alprin's Order, Notice ¶ 157).
141. On or about August 6, 1993, Respondent Cirino caused an advance of $175,000 ("$175,000 Advance") to be made on the Hillcrest I Line of Credit to pay off the Cross Street Deficiency Note. (ALJ Alprin's Order, Notice ¶ 158).
142. At all times pertinent to the charges herein, Respondent Cirino knew that the $175,000 Advance was not going to be used for the purpose for which the Hillcrest I Line of Credit had been approved. (ALJ Alprin's Order, Notice ¶ 159).
143. Respondent Cirino did not obtain the approval of the Board of Investment to use the $175,000 Advance from the Hillcrest I Line of Credit for a purpose other than for which that line of credit had been approved. (* * *, Affidavit ¶ 27 and ¶ 29).
2. Use of Hillcrest I Funds to Begin Hillcrest II Project
144. On or about August 6, 1993, Respondent Cirino advanced $200,000 ("$200,000 Advance") from the Hillcrest I Line of Credit to enable Maggio to begin work on the unfinanced second phase of Hillcrest I, which became known as Hillcrest Acres II ("Hillcrest II"). (ALJ Alprin's Order, Notice ¶ 162).
145. The $200,000 Advance was not used for the purpose for which the Hillcrest I Line of Credit had been approved. (ALJ Alprin's Order, Notice ¶ 163).
146. Respondent Cirino did not obtain the approval of the Board of Investment to use the $200,000 Advance from the Hillcrest I Line of Credit for a purpose other than for which that line of credit had been approved. (* * * Affidavit ¶ 27 and ¶ 29).
147. The $200,000 Advance caused the outstanding balance in the Hillcrest I Line of Credit to exceed its approved limit. (ALJ Alprin's Order, Notice ¶ 165).
148. On August 10, 1993, the Board of Investment approved a line of credit in the amount of $1,250,000 to * * * an entity owned and/or controlled by * * * to purchase and develop Hillcrest II ("Hillcrest II Line of Credit"). (ALJ Alprin's Order, Notice ¶ 166).
149. On or about November 5, 1993, Respondent Cirino advanced an additional $255,000 from Maggio's Hillcrest I Line of Credit ("$255,000 Advance") to fund additional work on Hillcrest II. (ALJ Alprin's Order, Notice ¶ 167).
150. At all times pertinent to the charges herein, Respondent Cirino knew that the $255,000 Advance was not going to be used for the purpose for which the Hillcrest I Line of Credit had been approved. (ALJ Alprin's Order, Notice ¶ 168).
151. Respondent Cirino did not obtain the approval of the Board of Investment to use the $255,000 Advance from the Hillcrest I Line of Credit for a purpose other than for which that line of credit had been approved. (* * *, Affidavit ¶ 27 and ¶ 29).
152. The $255,000 Advance caused the outstanding balance in the Hillcrest I Line of Credit to exceed its approved limit. (ALJ Alprin's Order, Notice ¶ 170).
153. On December 22, 1993, the Hillcrest II Line of Credit was issued, enabling * * * to draw funds from the Bank to repay the advances from the Hillcrest I Line of Credit. (ALJ Alprin's Order, Notice ¶ 171).
3. Hillcrest II Line of Credit
154. From February, 1994 through July, 1994, Respondent Cirino caused four advances to be made to Maggio from * * * Line of Credit totaling approximately $260,000 ("$260,000 Advances"). (ALJ Alprin's Order, Notice ¶ 173).
155. The $260,000 Advances were deposited indirectly into one of Maggio's business accounts at the Bank. (ALJ Alprin's Order, Notice ¶ 174).
156. At all times pertinent to the charges
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herein, Respondent Cirino knew that the $260,000 Advances were being loaned by * * * to Maggio for Maggio's use on Mountain View and would not be used for the purpose for which * * * Line of Credit had been approved. (ALJ Alprin's Order, Notice ¶ 175).
157. Respondent Cirino did not obtain the approval of the Board of Investment to use the $260,000 Advances from the Hillcrest II Line of Credit for a purpose other than that for which the Hillcrest II Line of Credit had been approved. (Affidavit ¶ 28 and ¶ 29).
158. At the time of the $260,000 Advances, Respondent Cirino knew that the amount of construction that had been completed on Hillcrest II was not sufficient to entitle * * * or Maggio to the $260,000 Advances. (ALJ Alprin's Order, Notice ¶ 177).
159. At the time of the $260,000 Advances, Respondent Cirino knew that the engineer's reports submitted to the Bank to support the $260,000 Advances contained materially false or misleading representations as to the amount of construction that had been completed on Hillcrest II. (ALJ Alprin's Order, Notice ¶ 178).
160. In the fall of 1994, Respondent Cirino signed a letter drafted by Respondent Shepard, dated November 18, 1994 ("Comfort Letter"), in which Respondent Cirino, on behalf of the Bank, agreed unconditionally to credit * * * Line of Credit $100,000 in each of three consecutive months. (ALJ Alprin's Order, Notice ¶ 179).
161. At all times pertinent to the charges herein, Respondent Cirino did not have the authority to forgive a borrower's debt to the Bank. (ALJ Alprin's Order, Notice ¶ 180).
162. As of December 31, 1994, the Bank suffered a loss of $350,000 on the Hillcrest II Line of Credit. (ALJ Alprin's Order, Notice ¶ 182).
4. Misapplication of * * * Line of Credit
163. On or about June 17, 1994, the Bank issued a line of credit in the amount of $225,000 to * * * Line of Credit ("for the purpose of financing the construction of a five lot subdivision located on Lisa Lane, in Chelsea, Massachusetts Project"). (ALJ Alprin's Order, Notice ¶ 185).
164. In August, 1994, Respondent Cirino caused disbursements from the Line of Credit totaling $225,000 ("$255,000 Advances") to be made, knowing that the loan proceeds were going to be loaned by * * * to Maggio, and not used for the purpose for which the * * * Line of Credit had been approved. (ALJ Alprin's Order, Notice ¶ 186).
165. At the time of the $225,000 Advances, Respondent Cirino knew that no construction or work had been completed on the * * * Project which would entitle to receive the $225,000 Advances. (ALJ Alprin's Order, Notice ¶ 187).
166. In order to make the $225,000 Advances appear to be justified, Respondent Cirino caused a fraudulent construction request, dated August 5, 1994, to be created and placed in the credit file for the * * * Line of Credit. (ALJ Alprin's Order, Notice ¶ 188).
167. At all times pertinent to the charges herein, Respondent Cirino did not obtain the approval of the Board of Investment to use the $225,000 Advances from the Line of Credit for a purpose other than that for which that line of credit had been approved. (ALJ Alprin's Order, Notice ¶ 189).
168. * * * agreed to loan Maggio the $225,000 based in part upon * * * belief that he was doing Respondent Cirino and the Bank a favor. (ALJ Alprin's Order, Notice ¶ 190).
169. On or about July 5, 1995, the Bank credited $175,000 to the * * * Line of Credit, as a result of a negotiated settlement between the Bank and * * * over * * * liability for the $225,000 disbursed by Respondent Cirino from the * * * Line of Credit in August 1994. (ALJ Alprin's Order, Notice ¶ 191).
170. As of December 31, 1994, the Bank suffered a loss of $175,000 on the * * * Line of Credit. (ALJ Alprin's Order, Notice ¶ 192).
F. CIRINO'S ISSUANCE OF STANDBY LETTERS OF CREDIT
1. The Unauthorized Issuance of Tripartite Agreements
171. On or about October 21, 1993, Respondent Cirino caused the Bank to enter into a tripartite agreement ("First Tripartite Agreement") with the City of Malden, by which the Bank was obligated to pay the City up to the sum of $345,000 to insure the completion of construction of streets, utili-
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ties and landscaping of a portion of the Mountain View project should Mountain View fail to meet its obligations under the agreement by a specified date. (ALJ Alprin's Order, Notice ¶ 194).
172. On or about April 6, 1994, Respondent Cirino caused the Bank to enter into a second tripartite agreement ("Second Tripartite Agreement") with the City of Malden, by which the Bank was obligated to pay the City up to the sum of $951,245.50 to insure the completion of the construction of streets, utilities and landscaping on a second portion of the Mountain View project, should Mountain View fail to meet its obligations under the agreement by a specified date. (ALJ Alprin's Order, Notice ¶ 195).
173. For purposes of the Notice, a tripartite agreement is a form of a standby letter of credit. (ALJ Alprin's Order, Notice ¶ 196).
174. At all times pertinent to the charges herein, the First and Second Tripartite Agreements required the approval of the Bank's Board of Investment, as the amount of each agreement exceeded Respondent Cirino's lending authority. (ALJ Alprin's Order, Notice ¶ 197).
175. At all times pertinent to the charges herein, Respondent Cirino did not disclose to or obtain the approval of the Board of Investment prior to causing the Bank to enter into either the First or Second Tripartite Agreement. (ALJ Alprin's Order, Notice ¶ 198).
176. At all times pertinent to the charges herein, Respondent Cirino did not require Mountain View or Maggio to sign a separate binding agreement which would obligate Mountain View or Maggio to repay the Bank for any money paid by the Bank as a result of its issuance of either the First or Second Tripartite Agreements. (ALJ Alprin's Order, Notice ¶ 199).
177. It was the Bank's standard and usual practice to charge a fee of one percent of the amount of a letter of credit, in addition to an amount sufficient to pay for all closing costs. * * * Affidavit, ¶ 30, Exhibit K to * * * Affidavit).
178. By reason of Respondent's failure to charge the Bank's standard fee for the issuance of the First Tripartite Agreement, the Second Tripartite Agreement, the Guarantee Letter, and the Hillcrest II Letter of Credit, as alleged in paragraphs 201, 210 and 219 of the Notice, the Bank lost fee income of $22,500. (* * * Affidavit ¶ 30).
179. At all times pertinent to the charges herein, Respondent Cirino failed to require Mountain View or Maggio to pay a Letter of Credit Fee for the issuance of either the First or Second Tripartite Agreements. (ALJ Alprin's Order, Notice ¶ 201).
180. At all times pertinent to the charges herein, it was the regular practice of the Bank's Chief Financial Officer, * * *, in preparation for completing the Bank's quarterly Call Report, to meet with Respondent Cirino to obtain information on the existence of any contingent liabilities arising out of the business of the Bank's loan department. (ALJ Alprin's Order, Notice ¶ 202).
181. At all times pertinent to the charges herein, Respondent Cirino did not disclose the existence of the First or Second Tripartite Agreements to * * *. (ALJ Alprin's Order, Notice ¶ 203).
182. As a result of Respondent Cirino's failure to disclose the existence of the First or Second Tripartite Agreements to * * * the contingent liabilities arising out of the First and Second Tripartite Agreements were not disclosed on the Bank's December 31, 1993, March 31, 1994, June 30, 1994, and September 30, 1994 Call Reports. (ALJ Alprin's Order, Notice ¶ 204).
183. As of December 31, 1997, the Bank suffered a loss of approximately $1,000,000 on the Second Tripartite Agreement. (ALJ Alprin's Order, Notice ¶ 205).
2. The Issuance of a Written Guarantee to a Mountain View Supplier
184. On October 26, 1994, Respondent Cirino issued a letter from the Bank to Massachusetts Electric Company ("Guarantee Letter") guaranteeing payment in the amount of $17,663.85 on behalf of Mountain View in order to insure the installation of street lights at the Mountain View Project. (ALJ Alprin's Order, Notice ¶ 207).
185. For purposes of the Notice, the Guarantee Letter was a form of standby letter of credit. (ALJ Alprin's Order, Notice ¶ 208).
186. At all pertinent times to the charges herein, Respondent Cirino did not require Mountain View or Maggio to sign a separate binding agreement which would obligate Mountain View or Maggio to repay the Bank for any money paid by the Bank as a result
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of its issuance of the Guarantee Letter. (ALJ Alprin's Order, Notice ¶ 209).
187. At all times pertinent to the charges herein, Respondent Cirino failed to require either Mountain View or Maggio to pay a Letter of Credit Fee for the issuance of the Guarantee Letter. (ALJ Alprin's Order, Notice ¶ 210).
188. In October of 1994, Respondent Cirino knew or should have known that the financial capacity of either Mountain View or Maggio to repay any funds advanced by the Bank pursuant to the Guarantee Letter was questionable. (ALJ Alprin's Order, Notice ¶ 211).
189. At all times pertinent to the charges herein, Respondent Cirino did not disclose the existence of the Guarantee Letter to * * *. (ALJ Alprin's Order, Notice ¶ 212).
190. As a result of Respondent Cirino's failure to disclose the existence of the Guarantee Letter to * * * the Bank's contingent liability arising out of the Guarantee Letter was not disclosed or the Bank's September 30, 1994 Call Report. (ALJ Alprin's Order, Notice ¶ 213).
3. The Issuance Hillcrest II Letter of Credit
191. On or about November 29, 1994, Respondent Cirino caused the Bank to issue a letter of credit to the City of Peabody, Massachusetts, in the amount of $942,500 ("Hillcrest II Letter of Credit"), insuring that certain roadwork and infrastructure would be completed at Hillcrest II. (ALJ Alprin's Order, Notice ¶ 215).
192. For purposes of the Notice, the Hillcrest II Letter of Credit was a form of standby letter of credit. (ALJ Alprin's Order, Notice ¶ 216).
193. At all times pertinent to the charges herein, Respondent Cirino failed to obtain the required approval of the Board of Investment for the issuance of the Letter of Credit, as the amount of the Hillcrest II Letter of Credit exceeded her lending authority. (ALJ Alprin's Order, Notice ¶ 217).
194. At all pertinent times to the charges herein, Respondent Cirino did not require Hillcrest II or * * * to sign a separate binding agreement which would obligate Hillcrest II or * * * to repay the Bank for any money paid by the Bank as a result of its issuance of the Hillcrest II Letter of Credit. (ALJ Alprin's Order, Notice ¶ 218).
195. At all times pertinent to the charges herein, Respondent Cirino failed to require either Hillcrest II or * * * to pay a Letter of Credit Fee for the issuance of the Hillcrest II Letter of Credit. (ALJ Alprin's Order, Notice ¶ 219).
196. As of December 31, 1996, the Bank suffered a loss of approximately $169,000 as a result of the issuance of the Hillcrest II Letter of Credit. (ALJ Alprin's Order, Notice ¶ 220).
e. * * * Loan
197. On or about January 14, 1994 Respondent Cirino caused the Bank to make a loan in the amount of $132,000 to ("* * * Loan"), to enable * * * to purchase and make improvements to a house located at 95 Central Avenue, Everett, Massachusetts * * * House"). (ALJ Alprin's Order, Notice ¶ 222).
198. At all times pertinent to the charges herein, * * * was an employee of either Maggio or one of Maggio's businesses. (ALJ Alprin's Order, Notice ¶ 223).
199. At all times pertinent to the charges herein, the * * * House bordered the back of the property upon which was located Respondent Cirino's primary residence. (ALJ Alprin's Order, Notice ¶ 224).
200. Respondent Cirino agreed to make the * * * Loan to * * * upon the condition that * * * convey a portion of the backyard of the * * * House to Cirino. (ALJ Alprin's Order, Notice ¶ 225).
201. On or about April 18, 1994, a purchase and sale agreement ("P&S") was entered into by * * * * and Respondent Cirino which required Respondent Cirino to pay * * * $5,000 in exchange for approximately 3200 feet of the backyard of the House. (ALJ Alprin's Order, Notice ¶ 226).
202. Although she never acquired legal title to the backyard of the * * * House, for a period of time Respondent Cirino enjoyed the use of the property, including having Maggio make improvements to it on her behalf. (ALJ Alprin's Order, Notice ¶ 227).
203. Respondent never disclosed to either the Bank's Board of Investment or the Board of Trustees that she had a personal interest in the * * * Loan. (* * * Affidavit ¶ 31).
204. On or about July 2, 1997, the Bank charged off approximately $25,000 on the * * * Loan. (ALJ Alprin's Order, Notice ¶ 228).
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III. DISCUSSION
RECOMMENDATION TO GRANT
THE UNOPPOSED MOTION FOR SUMMARY DISPOSITION
The undersigned recommends that the Board of Directors grant the FDIC's Motion For Summary Disposition because it is unopposed and therefore deemed a consent by Respondent. By failing to respond to the motion, Respondent Cirino has waived objection to the motion and the matter is ripe for disposition.
Under the FDIC's Rules of Practice and Procedure, codified at 12 C.F.R. Part 308, "the failure of a party to oppose a written motion or an oral motion made on the record is deemed a consent by that party to the entry of an order substantially in the form of the order accompanying the motion." 12 C.F.R. §308.23. In this case, Respondent Cirino has failed to make any effort to respond to the FDIC's motion. Accordingly, the undersigned recommends that the unopposed motion for summary disposition be granted by the agency, both on the default and on the merits.
RECOMMENDATION FOR ENTRY OF AN ORDER OF PROHIBITION
[.1] A. INTRODUCTION
In this case, there is no genuine issue of material fact and the FDIC is entitled to a decision in its favor as a matter of law. By failing to oppose or contest the allegations in the Notice and the Motion For Summary Disposition, Respondent Cirino has consented to the facts as alleged. The facts, as found above, establish jurisdiction over the institution-affiliated party in this case and constitute unsafe or unsound practices under the Federal Deposit Insurance Corporation Act ("FDI"). The FDIC Office of Enforcement and Compliance has proven that Respondent Cirino violated the FDI and should be prohibited from participating in the affairs of any federally insured depository institution. The discussion below illuminates the statutory requirements for prohibition and provides the rationale for taking such action against Respondent Cirino, in substantially unchanged form from the FDIC's motion and points and authorities supporting the motion.
B. THE STANDARDS FOR A MOTION FOR SUMMARY DISPOSITION
Section 308.29 of the FDIC's Rules of Practice and Procedure, 12 C.F.R. §308.29, governs the filing of motions for summary disposition. Section 308.29(a) specifically provides as follows.
12 C.F.R. §308.29(a).
Section 308.29(b)(2) further provides that documentary evidence submitted in support of any motion for summary disposition "may take the form of admissions in pleadings, stipulations, depositions, investigatory depositions, transcripts, affidavits and any other evidentiary materials that the moving party contends support his or her position." 12 C.F.R. §308.29(b)(2).
In order to withstand this motion for summary disposition, Respondent must show there are material facts as to which a genuine dispute exists. By analogy, Rule 56(e) of the Federal Rules of Civil Procedure provides that a non-moving party to a summary judgment motion must oppose the motion with "specific facts showing that there is a genuine issue for trial." Fed. Rule Civ. Proc. §56(e). The summary judgment motion opponent must do more than simply show that there is some metaphysical doubt as to the material facts. Matsushita Electric Industrial Co. Ltd, v. Zenith Radio Corporation, 475 U.S. 574, 586 (1986). Denials unsupported by documentation of specific facts are insufficient to create issues of material fact to preclude summary judgment. Securities Exchange Commission v. Bonastia, 614 F. 2d 908, 914 (3d Cir. 1980) citing Fed. R. Civ. Pr. 56(e) and Lockhart v. Hoenstine, 411 F. 2d 455 (3d Cir. 1969) cert denied, 396 U.S. 941 (1969). Accordingly, if the record taken as a whole could not lead a rational trier of fact to find for the non-
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moving party, there is no "genuine issue for trial," Matsushita Electric at 586, citing First National Bank of Arizona v. Cities Services Co., 391 U.S. 253, 289 (1968).
In addition, section 308.29(b)(2) specifically provides that any opposition to a motion for summary disposition "must be supported by evidence of the same type as that submitted with the motion for summary disposition and a brief containing the points and authorities in support of the contention that summary disposition would be inappropriate." 12 C.F.R. §308.29(b)(2).
C. NO TRIABLE ISSUES OF FACT
1. Summary of Facts Supporting FDIC Jurisdiction
The Bank is an insured state nonmember bank. (FDIC's Statement of Material facts as to Which There is No Genuine Issue (hereinafter cited as "SF") 1). Respondent was employed at the Bank from 1974 through January 9, 1995, as either a vice president or a senior vice president, and she was in charge of the Bank's lending division. (SF 2).
2. The Basis for the FDIC's Jurisdiction
It is undisputed that the Bank is, and at all times pertinent to the allegations in this proceeding was, an insured state nonmember bank, as that term is defined in section 3(e)(2) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §
1813(e)(2). Section 4(a)(1) of the Act provides that all banks which are insured are subject to the provisions of the Act. 12 U.S.C. §1814(a)(1). Section 9(a) of the Act further provides that the FDIC has the power to promulgate regulations to carry out the provisions of the Act. 12 U.S.C. §1819(a). Therefore, as a matter of law, the Bank is subject to the provisions of the Act set forth in 12 U.S.C. §§1811 through 1831u, and the FDIC's Rules and Regulations, 12 C.F.R. Chapter III.
[.2] It is also uncontroverted that respondent was an officer of the Bank at all times pertinent to this proceeding. An institution-affiliated party is defined in section 3(u) of the Act, 12 U.S.C. §
1813(u), to include any officer or employee of an insured depository institution. Respondent was employed as an officer, either a vice president or senior vice president of the Bank. As such, Respondent was an institution-affiliated party of the Bank. Respondent's employment with the Bank was terminated on January 9, 1995. Section 8(i)(3) of the Act, 12 U.S.C. §1818(i)(3), grants the FDIC jurisdiction of an institution-affiliated party for a six-year period beginning on the date of separation. Therefore, Respondent is subject to the FDIC's jurisdiction.
[.3] Furthermore, section 8(e) of the Act, 12 U.S.C. §1818(e), provides the FDIC may prohibit any institution-affiliated party from further participation in the affairs of any insured depository institution. Therefore, the FDIC has jurisdiction over the subject matter of this proceeding.
D. NO TRIABLE ISSUES OF FACT AS ALLEGED IN THE NOTICE
This action mainly revolves around the Bank's lending relationship with Peter V. Maggio ("Maggio") and the Respondent's attempts to conceal the financially troubled condition of Maggie's construction project, Mountain View Estates, from the Bank's Board of Investment ("Board of Investment") and the FDIC. The Notice in this matter contains allegations of Respondent's misconduct relating to:
1) the origination of Mountain View's $4,000,000 Line of Credit;
2) a Straw loan scheme involving Mountain View lots;
3) her discovery and payoff of Maggio's Check Kite;
4) her diversion of Mountain View escrow account funds;
5) her overfunding of Mountain View's $1,000,000 Line of Credit;
6) her deceptive conduct during the FDIC's 1994 examination;
7) her diversion of loan proceeds;
8) her unauthorized issuance of standby letters of credit; and,
9) her undisclosed conflict of interest when approving the loan.
This Motion for Summary Disposition is based on those allegations of fact in the Notice, which have been either deemed admitted by the undersigned's Order or by Respondent's admission, the * * * Affidavit or FDIC Exhibit. The FDIC contends there is no triable issue of fact with respect to both the admitted allegations and those allegations supported by Respondent's admission, the * * * Affidavit, or FDIC Exhibit. The FDIC further contends the allegations in the Notice meet the statutory factors pursuant to
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section 8(e) of the Act. Therefore, the FDIC is entitled to relief on its prohibition claim as a matter of law.
1. Summary of Transactions Supporting FDIC's Motion
The following transactions form the basis of the FDIC's Motion for Summary Disposition on its claim for a prohibition order.
a. Mountain View Realty Trust
1) Misconduct Relating to the Origination of Mountain View's $4,000,000 Line of Credit
All allegations in the Notice relating to the Origination of Mountain View's $4,000,000 Line of Credit have been deemed admitted pursuant to the undersigned's Order, with the exception of the allegations concerning the failure to obtain permission from the Board of Investment or any other officer of the Bank to purchase the Mountain View $540,000 Note, and the loss suffered by the Bank on the First Mountain View Line of Credit. However, as described below, there is no genuine issue of material fact as to these allegations.
a) Origination of Loan
On or about September 27, 1993, the Bank originated a $4,000,000 line of credit ("First Mountain View Line of Credit") to Mountain View Estates Realty Trust ("Mountain View"), an entity owned and controlled by Maggio. (SF 15) The purpose of the First Mountain View Line of Credit was to finance Mountain View's purchase and development of a 72-lot subdivision in Malden, Massachusetts ("Mountain View Project"). (SF 16) Respondent was the Bank's loan officer responsible for underwriting and analyzing Mountain View's application for the First Mountain View Line of Credit. (SF 18) On or about August 10, 1993, the Board of Investment approved the First Mountain View Line of Credit based upon Respondent's presentation and recommendation (SF 19).
b) Representations Relating to Purchase Price of the Land
The purchase price of the land that Mountain View was to purchase with proceeds from the First Mountain View Line of Credit was $3,080,000. (SF 20). As part of her recommendation to approve the First Mountain View Line of Credit, Respondent represented to the Board of Investment that the Bank would advance to, or for the benefit of, Mountain View, no more than $1,200,000 for the purchase of the land. (SF 21). In addition to the $1,200,000 of loan proceeds from the First Mountain View Line of Credit, the remainder of the purchase price of the land was paid by Mountain View through the execution of twelve second mortgage notes ("Second Mortgages") in the aggregate amount of $1,880,000. (SF 22).
In contravention of standard banking practice, Respondent did not require Mountain View to contribute any capital towards the purchase price of the land. (SF 23). Typically, banks require a construction loan borrower to contribute a significant amount of his or her own capital towards a construction project at the inception of the project in the form of a contribution towards the purchase price of the land. This standard banking practice limits a bank's exposure to loss in a construction project, while simultaneously creating an incentive for the borrower to complete the project because the borrower is risking his or her own money in the project. (SF 24).
In addition to not requiring Mountain View to contribute any capital to the purchase price of the land, Respondent did not inform the Board when recommending this loan for approval that all of the remaining price of the land beyond the Bank's loan proceeds of $1,200,000 was to be paid through the Second Mortgages. (SF 25). One of the Second Mortgages was a mortgage note, dated September 28, 1993, in the amount of $540,000, from Mountain View to * * * the principal seller of the land upon which the Mountain View Project was to be built ("Mountain View $540,000 Note"). (SF 26). On or about September 29, 1993, one day after the loan closing for the First Mountain View Line of Credit, the Bank purchased the Mountain View $540,000 Note from * * *, for $440,000. (SF 27). The Bank's purchase of the Mountain View $540,000 Note was the functional equivalent of a loan or extension of credit from the Bank to Mountain View. (SF 28).
The Bank's Loan Policy, dated March 14, 1994, requires all Bank loans in excess of $300,000 to receive the approval of the Board of Investment. (SF 30). Therefore, Respondent did not have the authority to independently approve a loan in the amount of $440,000, such as the Mountain View $540,000 Note, which was purchased at a
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discount of $100,000 from its face value. (SF 29) Without independent lending authority to purchase the Mountain View $540,000 Note, the authorization or approval of the Board of Investment would have been required for Respondent to purchase the Mountain View $540,000 Note. This unavoidable conclusion is supported by Board of Investment and Board of Trustee member, * * *, who testified in a deposition, taken in unrelated litigation, that: (a) neither Respondent nor Bank President * * * had the authority to purchase the Mountain View $540,000 Note without Board of Investment approval, and, (b) the $540,000 Note was purchased without the authority of the Board of Investment. (SF 35).
Even if the Mountain View $540,000 Note is considered to be a Bank investment, Respondent did not have the authority to purchase the Mountain View $540,000 Note. (SF 36). The Bank's Investment Policy did not authorize Respondent to purchase notes or other investments. (SF 34). The Bank's Investment Policy authorized only * * *, President, and * * *, vice President and Treasurer "to make and cause to be executed investment decisions." (SF 33).
Without independent investment authority, the approval of the Board of Investment would be required before Respondent would be authorized to purchase the Mountain View $540,000 Note. Yet neither the 1993 and 1994 Minutes of the Board of Investment ("Board Minutes") nor any other Bank records reflect authorization given to Respondent by the Board of Investment or any Bank officer to purchase the Mountain View $540,000 Note. (SF 31). Accordingly, without either independent authority to purchase the Mountain View $540,000 Note or Bank records reflecting valid authorization or approval of the purchase, there can be no genuine issue of fact that Respondent authorized the Bank's purchase of the Mountain View $540,000 Note without obtaining permission to do so from the Board of Investment or any Bank officer.
c) Purchase Price of the Land
Within a day of the closing of the First Mountain View Line of Credit, Respondent caused the Bank to advance to, or for the benefit of Mountain View $1,780,000 for the purchase of land, consisting of disbursements of $1,340,000 from the First Mountain View Line of Credit and $440,000 arising out of the Bank's purchase of the Mountain View $540,000 Note. (SF 37). By committing the Bank to take out the Second Mortgages at the outset of the project, Respondent knew at the time of her representation to the Board of Investment that the Bank would be advancing approximately $1,780,000 for the purchase price of the land, not the $1,200,000 that she had represented to the Board of Investment.
d) Representations Relating to the Prefab Nature of the Houses
As part of her recommendation of the First Mountain View Line of Credit to the Board of Investment, Respondent represented to the Board that Mountain View would be building prefab houses, which Mountain View estimated would cost approximately $60,000 per unit to build. (SF 42). A "prefab house" is one that is assembled by a builder from components that have previously been built by a manufacturer. (SF 40). A "stick built" house is one that is completely framed and constructed by the builder at the eventual location of the house. (SF 41). In approving the First Mountain View Line of Credit, the Board of Investment relied on Respondent's material representation that the Mountain View project would consist of prefab houses. (SF 43).
The Board of Investment perceived the development of prefab houses to be substantially less risky to the Bank than the development of stick houses, due in part to the considerable difference in construction time and cost between the two types of houses. (SF 44) Respondent's representations regarding the prefab nature of the houses affected both the Board of Investment's assessment that the amount of the First Mountain View Line of Credit would be sufficient to complete the Mountain View project and the Board's expectation as to how quickly the Bank would be repaid. Approximately one month after the closing of the First Mountain View Line of Credit, Respondent was informed by Mountain that it had altered its project plans to build "stick" houses instead of prefab houses, resulting in an increase in projected construction costs of approximately $12,000 per unit, or $924,000. (SF 45).
The increase of $924,000 in estimated house construction costs resulting from the
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change from "prefab houses" to "stick built" houses was a material change in the project requiring Respondent to bring this information to the attention of the Bank's Board of Investment. (SF 50). Despite her knowledge that the Board of Investment placed material reliance on her representation that the houses would be prefab when the Board approved the First Mountain View Line of Credit, Respondent did not inform the Board of Investment of Mountain View's decision to build stick houses instead of prefab houses. (SF 46).
There is no genuine issue of fact regarding the Respondent's nondisclosure to the Board of Investment of the switch from prefab to stick houses and the resultant cost increase of $924,000, as there is no mention of such a disclosure in the Board Minutes. Moreover, Respondent's lack of disclosure of these material issues to the Board of Investment has been confirmed by Board of Investment and Board of Trustee member, (* * *, Affidavit ¶ 15).
e) Representations Relating to Projected Hard Costs of the Project
As part of her recommendation of the First Mountain View Line of Credit to the Board of Investment, Respondent represented to the Board that Mountain View had projected that it would need $1,864,000 to cover hard costs associated with developing the land into buildable lots. (SF 47). On September 24, 1993, three days before the closing of the First Mountain View Line of Credit, Respondent was aware that Mountain View had increased its projection of the amount it would need to cover hard costs to $2,577,500. (SF 48). Neither prior to the closing of the First Mountain View Line of Credit, nor at any time thereafter, did Respondent inform the Board of Investment of the increase in the projected hard costs for the Mountain View Project. (SF 49).
The increase of $700,000 in estimated infrastructure costs was a material change in the project requiring Respondent to bring this information to the attention of the Bank's Board of Investment, especially given Maggio's lack of personal financial resources. (SF 50). Maggio's financial statement, dated June 30, 1993, reflected that Maggio had just $8,000 in cash available to contribute towards the project. (SF 18). Board Minutes do not indicate any disclosure by Respondent to the Board of Investment of the increase of $700,000 in estimated infrastructure costs on the Mountain View Project, which has been confirmed by Board of Investment member (* * *, Affidavit ¶ 15).
The $700,000 increase in infrastructure costs and the $924,000 increase due to the switch from prefab to stick houses were each large enough to cause the $4,000,000 First Mountain View Line of Credit to be insufficient to complete the Mountain View Project. (SF 50). Furthermore, the First Mountain View Line of Credit, as set up by Respondent, did not contain an interest reserve. (SF 51). As part of her analysis and underwriting of Mountain View's application, Respondent did not analyze Maggio's financial ability to make interest payments on the First Mountain View Line of Credit or to fund any potential cost overruns on the Mountain View Project. (SF 52).
f) Loss Suffered by the Bank
The First Mountain View Line of Credit was classified during the FDIC's 1994 Examination as follows:
| Substandard |
$2,261,000 |
| Doubtful |
$ 918,000 |
| Loss |
$ 821,000 |
(SF 53).
The total loss suffered by the Bank on the First Mountain View Line of Credit was approximately $3,800,000, as of March 30, 1999. (SF 54). The Bank's loss is evidenced by the Bank's general ledger account entitled "Reserve for Loan Loss, Mtg.", which reflects two charge-offs of $2,217,503.19, and $1,663,000, respectively, taken on December 31, 1994. (Exhibit D to * * * Affidavit). There can be no genuine issue as to the amount of loss suffered by the Bank on the First Mountain View Line of Credit, as the Bank's own records are the only records which can prove the amount charged off by the Bank. In any event, there is no genuine issue that the Bank suffered significant loss.
Additionally, as of March 30, 1999, the Bank had suffered a loss of $375,000 on the Mountain View $540,000 Note. (SF 55).
2) Participation in a Straw Loan Scheme
Most of the factual allegations in the Notice related to the straw loan scheme, such as the fact that the straw loans are in fact nominee loans, have been deemed admitted by the undersigned's Order. (See, Exhibit 1,
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Notice paragraphs 50–52, 56–63, 69–70 and 75). The allegations not deemed admitted concern Respondent's: 1) decision to engage in a straw loan scheme instead of submitting a request for additional funds to the Board of Investment on behalf of Mountain View; 2) knowledge that the straw borrowers neither intended to be personally responsible for repaying the straw loans nor intended to purchase the Mountain View lots as their own personal investments; 3) knowledge that the straw borrowers were allowing the straw loans to be put in their name as a favor to Maggio and/or in consideration for a fee from Maggio; 4) failure to disclose the nominee nature of the straw loans to the Board of Investment; and 5) knowledge that Maggio was paying most, if not all, of the interest on the straw loans. However, as shown below, no material facts as to these matters are in genuine dispute.
With insufficient Bank funds and personal funds to complete the Mountain View Project, Maggio, on behalf of Mountain View, presented Respondent with a request for an additional $1,000,000 Line of Credit for construction of the Mountain View Project ("Mountain View $1,000,000 Request"), on or about February 25, 1994. (SF 57). On or about March 14, 1994, the outstanding balance on the $4,000,000 First Mountain View Line of Credit was $3,996,000. (SF 58).
The Board Minutes do not mention or indicate Respondent ever presented a request for an additional $1,000,000 for Mountain View to the Board of Investment in February or March of 1994, which Board of Investment and Board of Trustee member * * * and Maggio corroborate. (SF 59). Consequently, there is no genuine issue of fact that Respondent never submitted the Mountain View $1,000,000 Request to the Board of Investment for consideration.
Respondent suggested to Maggio that instead of submitting the Mountain View $1,000,000 Request to the Board of Investment, he should recruit individuals ("Straws") to obtain loans from the Bank in their own names and then turn the proceeds of the loans over to him so that he could continue the development of the Mountain View Project. (SF 60). A "nominee loan" or a "straw loan" is a transaction in which a purported borrower obtains a loan from a financial institution with no intent to personally repay the loan and turns over the proceeds of the loan to another individual, the actual borrower, an individual to whom the financial institution was unwilling or unable to grant a direct loan. (SF 56).
In Maggio's sworn affidavit, filed in earlier, unrelated litigation ("Maggio's Affidavit"), Maggio recounts why Respondent chose the straw loan scheme instead of asking the Board of Investment for an additional million dollar loan for Mountain View.
She (Respondent) stated that she and Everett Savings Bank needed to show sales activity on the Mountain View Estates project in connection with meetings of the Board of Investment of the Bank, the lending limit for the project and the FDIC audit. To satisfy Ms. Cirino's and the Bank's needs with respect to the Board of Investment, the lending limit and the FDIC audit, Ms. Cirino developed a scheme to demonstrate apparent activity on the project: various lots or houses furthest along would be transferred to "investors" or "straws" who had no interest in actually purchasing the lot or lots in question; paperwork would be created within the Bank and in the Registry of Deeds to make it appear that sales had taken place to the Straws; in reality, the Straws were not bona fide purchasers for value, but rather they were personal friends or business friends of mine (Maggio) who were willing to hold title to one or more lots before the lots were actually transferred to the ultimate home buyers.
Exhibit E to * * * Affidavit, paragraph 45 at pages 15.
In response to Respondent's suggestion that Maggio use Straws to obtain loans from the Bank, Maggio approached a number of friends, family members, or business associates to act as Straws for him, beginning in March of 1994. (SF 62). From March, 1994, through September, 1994, the Bank approved and disbursed proceeds from 19 loans ("Straw Loans") to the Straws, purportedly so that the Straws could purchase lots from Mountain View as personal investments. (SF 63). The Straws had no intention to use the proceeds of the Straw Loans to purchase lots from Mountain View as personal investments (SF 64). Furthermore, the Straws did not consider themselves to be personally responsible for repaying the Straw Loans. (SF 65).
Respondent was the Bank loan officer re-
{{7-31-00 p.A-3150}}
sponsible for processing and underwriting all of the Straw Loans. (SF 67). Respondent approved 18 of the 19 Straw Loans under her own lending authority. (SF 68). The Board of Investment approved the remaining Straw Loan to * * * in the amount of $700,000, because the amount of the Straw Loan exceeded Respondent's lending authority, based upon Respondent's presentation and recommendation, which failed to disclose the nominee nature of the loan. (SF 69).
The names of the Straws, the Mountain View lot numbers, the loan account numbers, the loan amounts, and the dates of each Straw Loan are set forth below:
| Investor |
Lot # |
Acct. # |
Loan Amt. |
Date |
| * |
* |
* |
* |
* |
| * |
* |
* |
* |
* |
| * |
* |
* |
* |
* |
| * |
* |
* |
* |
* |
| * |
* |
* |
* |
* |
(SF 70).
There can be no genuine issue of fact that Respondent knew the Straw Loans were nominee loans. First, Maggio's testimony in Maggio's Affidavit proves Respondent knew or should have known from her conversations with Maggio that at the time of her processing of the loan applications from the Straws and prior to the closing of the Straw Loans, the Straws: 1) did not intend to be personally responsible for repaying the Straw Loans (SF 71); 2) did not have any genuine intent to purchase the Mountain View lots as their own personal investments (SF 72); and, 3) were allowing loans from the Bank to be put in their names as a favor to Maggio and/or in consideration for a fee from Maggio. (SF 73).
Next, * * * Patricia Maggio, and * * * corroborate Maggio's Affidavit in that each Straw explained to Examiner Klapes that he/she: i) did not intend to be personally responsible for repaying the Straw Loans; ii) did not have any genuine intent to purchase the Mountain View lots as their own personal investments, nor did he/she consider themselves to be owners of the Mountain View lots; iii) did not contribute any of his/her money to the loan transactions at the inception of the transactions, nor did he/she accept or receive any funds when the properties were eventually sold to the end buyers; (iv) was allowing loans from the Bank to be put in their names as a favor to Maggio and/or in consideration for a fee from Maggio, and (v) agreed in side agreements that Maggio would pay all interest and debt service payments in connection with these loans. (SF 75).
Moreover, even if Respondent had not knowingly initiated the Straw Loan scheme, as Maggio has attested to in his affidavit, Respondent would have known the Straw Loans were nominee loans based on a cursory review of the Straw loan credit files, which exhibit characteristics common to nominee loans, including: (a) all or substantially all of the information on the loan applications for the Straw Loans is filled out in Maggio's handwriting; (b) some of the mortgage loan payoff sheets, related to the subsequent sales of the completed houses by the Straws to bona fide buyers, contain handwritten instructions from Respondent to the closing attorney indicating that all funds collected from the sales of the underlying properties, which would include the Straws' purported profits on the sales, were to be forwarded to the Bank so that she could use those proceeds to reduce Maggio's loan obligations, which included the First Mountain View Line of Credit. (SF 74).
Respondent did not disclose to the Board of Investment that the Straw Loans were nominee loans. (SF 76). The Board Minutes, which contain no mention or disclosure by Respondent to the Board of Investment of the nominee nature of the Straw Loans, have been corroborated by Board of Investment member * * *. Thus, there can be no genuine issue of fact that Respondent did not disclose the Bank's Board of Investment of the nominee nature of the Straw Loans.
Similarly, there can be no genuine issue of fact that Respondent was aware that Maggio was paying most, if not all, of the interest on the Straw Loans. (SF 77). According to Maggio, Respondent would telephone him and instruct him to come to the Bank and pay interest on various Straw Loans. Maggio also stated that, on a couple of occasions, he left checks for interest payments directly with Respondent.
By virtue of the very purpose of the Straw Loan scheme, Respondent was aware that a substantial portion of the proceeds of each Straw Loan would be disbursed, directly or indirectly, to Maggio's control. (SF 78). Consequently, by reason of the issuance of the Straw Loans, Respondent committed the Bank to make available for the completion
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of the Mountain View Project an additional $3,282,000. (SF 79). As of March 31, 1999, the Bank had suffered a loss of approximately $1,324,000 on the Straw Loans. (SF 80).
3) Discovery and Payoff of Maggio's Check Kite
All allegations pertaining to Respondent Cirino's involvement in the discovery and payoff of Maggio's check kite have been deemed admitted (See, Exhibit 1, Notice paragraphs 78–79, and 81–82), except for Notice paragraph 83. Notice paragraph 83 alleges Respondent advanced $47,000 to Maggio through a misapplication of funds from a line of credit belonging to another Bank borrower, * * *. However, there is no genuine dispute about this misapplication.
On or about March 11, 1994, an official at Medford Savings Bank ("MSB"), Medford, Massachusetts, contacted * * *, an officer of the Bank, and informed * * * that MSB suspected that Maggio was engaged in a check kite. (SF 81). That same day, after the phone call from MSB, Respondents Cirino and Shepard met with Maggio to discuss the situation ("Kite Meeting"). (SF 82).
From March 11, 1994, through March 14, 1994, Respondent advanced approximately $342,000 to Maggio from Bank lines of credit to enable Maggio to cover or provide funds for checks drawn on uncollected funds ("Kite Payoff"). (SF 83). During that time, Maggio had or would soon have only approximately $295,000 available from the First Mountain View Line of Credit to fund the Kite Payoff. (SF 84). In other words, Maggio needed an additional $47,000 to cover outstanding checks drawn on uncollected funds.
Maggio admitted to Examiner * * * that he was engaging in a check kiting scheme for a few months prior to March 11, 1994. Maggio used several Bank accounts to conduct the kite, including accounts of both * * * and * * *. According to Maggio, Respondent agreed to advance $47,000 from the Hillcrest II Line of Credit so that Maggio could cover insufficient funds balances caused by the kite. (SF 85).
Maggio stated in his interview with Examiner * * * that Respondent knew the Engineer's report (See, Exhibit G to * * * Affidavit) was false when it was submitted to her to support the $47,000 advance on the Hillcrest II Line of Credit. (SF 87).
* * *, obligor on the Hillcrest II Line of Credit, in his interview with Examiner corroborated Maggio's statement that the $47,000 loan advance on his line of credit was fraudulent and based on a false engineer's report. * * * said he knew the engineer's report was false because no work had been done on the Hillcrest II project for several months preceding the $47,000 advance to justify such an advance. Respondent's initials on the holdback advance request form for the $47,000 advance on the Hillcrest II Line of Credit (Exhibit F to * * * Affidavit) submitted with the false engineer's report prove that Respondent approved the advance.
Testimony of Maggio and * * * confirms there is no genuine issue of fact that, on or about March 11, 1994, Respondent advanced $47,000, the exact amount necessary to cover Maggio's check kite, to Maggio through a misapplication of funds from a line of credit belonging to another Bank borrower, * * *. (SF 86).
4) Respondent's Diversion of Mountain View Escrow Funds
The next transaction which supports the FDIC's Motion for Summary Disposition is Respondent's diversion of Mountain View escrow funds. All factual allegations in the Notice pertaining to Respondent's diversion of escrow account funds have been deemed admitted pursuant to the undersigned's Order. (See, Exhibit 1, Notice paragraphs 85–98).
Mountain View maintained escrow account #22-000732-2 ("Escrow") at the Bank for the purpose of holding down payments received from individuals who had signed agreements with Mountain View to purchase completed homes in the Mountain View Project ("End Purchasers"). (SF 88). The Bank served as agent of the Escrow. (SF 89). Respondent solely administered the Escrow on behalf of the Bank. (SF 90). Respondent was the only signatory on the Escrow signature card. (SF 91). Respondent made or authorized every withdrawal from Escrow. (SF 92). Consequently, the Escrow was solely under Respondent's control.
The End Purchasers typically paid $5,500 into Escrow as a down payment on the purchase of a Mountain View lot. (SF 93). After a sale from Mountain View to an End Purchaser was consummated, Mountain View had a legal right to the End Purchaser's down
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payment, and such funds could be remitted from Escrow to Mountain View. (SF 94).
As a result of her responsibilities as the Bank's Loan Officer for the First Mountain View Line of Credit and the Straw Loans, Respondent was aware or should have been aware of the actual or approximate date upon which every purchase of a Mountain View lot by an End Purchaser was consummated and, therefore, when Mountain View became legally entitled to any applicable deposit from Escrow. (SF 95).
On four occasions, on or about July 14, 1994, September 7, 1994, September 9, 1994, and September 14, 1994, Respondent caused withdrawals to be made from Escrow totaling $78,000 which Respondent knew or should have known that Mountain View was not legally entitled at the time ("Escrow Diversions"). (SF 96). Thereafter, due to the consummation of sales to End Purchasers, Mountain View became entitled to $34,000 of the $78,000 of Escrow Diversions. (SF 97).
On or about July 14, 1994, funds from one of the Escrow Diversions, in the amount of $24,500, were used by Respondent to pay principal and interest on a line of credit to Hillcrest Realty Trust, another entity owned or controlled by Maggio. (SF 98). The FDIC's 1994 Examination, commenced on July 25, 1994. (SF 13).
In January, 1993, the Bank discovered that a number of the down payments from the End Purchasers were missing from Escrow. (SF 99). >From February 2, 1995, through June 14, 1994, the Bank reimbursed eight End Purchasers for a total of $43,541, representing their down payments that had been misappropriated from Escrow. (SF 100). As of August 31, 1995, the Bank suffered a loss of $43,541 as a result of Respondent's Escrow Diversion. (SF 101).
5) Cirino's Overfunding of Mountain View's $1,000,000 Line of Credit
The next transaction which supports the FDIC's Motion for Summary Disposition is Respondent's overfunding of Mountain View's $1,000,000 Line of Credit. All factual allegations in the Notice pertaining to Respondent's overfunding of Mountain View's $1,000,000 Line of Credit have been deemed admitted pursuant to the undersigned's Order. (See, Exhibit 1, Notice paragraphs 100–109).
On or about November 2, 1994, the Board of Investment approved a second line of credit to Mountain View in the amount of $1,000,000 ("Second Mountain View Line of Credit") to complete the construction on the project and to pay for unexpected environmental clean-up costs. (SF 102). The Board's Approval of the Second Mountain View Line of Credit was based upon a presentation by and recommendation from Respondent on or about November 2, 1994 ("November 1994 Recommendation"). (SF 103).
In her November 1994 Recommendation, Respondent represented to the Board of Investment that $400,000 from the new line was to be used to reduce the outstanding balance on the First Mountain View Line of Credit to $3,600,000, with the remainder used to pay for the additional construction and environmental clean-up costs. (SF 104). When the Second Mountain View Line of Credit closed on November 4, 1994, Respondent caused only $300,000 of proceeds from the new loan to be applied to reduce the outstanding balance on the First Mountain View Line of Credit. (SF 105).
In her November 1994 Recommendation, Respondent represented to the Board of Investment that the total outstanding balance on the First and Second Mountain View Lines of Credit would not exceed $4,600,000. (SF 106). As part of her recommendation, Respondent did not disclose to the Board that she had already over-advanced the First Mountain View Line of Credit and that the present outstanding balance of that loan was approximately $4,178,000. (SF 107). By November 23, 1994, the outstanding balance on the First and Second Mountain View Lines of Credit stood at $4,861,713.29. (SF 108).
In the November 1994 Recommendation, Respondent represented to the Board of Investment that the remaining balance of $3,600,000 on the First Mountain View Line of Credit would be fully secured by the $80,000 per lot value of the unsold lots in the project. (SF 109). In fact, Respondent was aware at the time that the lots would only have this value after $900,000 of additional improvements were made to the Mountain View Project infrastructure. (SF 110).
As of March 30, 1999, the Bank had suffered a loss of $988,129 on the Second Mountain View Line of Credit. (SF 111).
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b. Respondent's Deceptive Conduct During The FDIC's 1994 Examination
The Respondent engaged in a series of deceptive conduct during the FDIC's 1994 examination to surreptitiously conceal her previous and ongoing misconduct with respect to the Mountain View Line of Credit.
1) Officer's Questionnaire
First, Respondent knowingly made a materially false or misleading statement of fact in a response to a question on the FDIC Officer's Questionnaire during the FDIC's 1994 Examination. With the exception of Notice paragraph 115, all factual allegations in the Notice pertaining to Respondent's knowing false or misleading statement of fact on the Officer's Questionnaire have been deemed admitted pursuant to the undersigned's Order. (See, Exhibit 1, Notice paragraphs 111-114, and 116). However, the factual allegation in paragraph 115, that Respondent should have listed the fourteen Straw Loans, which had been closed by the date of the completion of the Officer's Questionnaire by the Bank, was admitted by Respondent in the Response of Constance C. Cirino to Notice of Intention to Prohibit From Further Participation dated July 20, 1999, ("Answer"), as explained below. (See, Exhibit 2).
As part of the FDIC's 1994 Examination, the Bank was asked to answer some questions by completing an Officers' Questionnaire form. (SF 112). Question #5 of the Officer's Questionnaire ("Question #5") asked the Bank to list all extensions of credit for the accommodation or direct benefit of others than those whose names appear on the institution's records or on credit instruments in connection with such extensions. (SF 113).
In or about late July or early August, 1994, the FDIC received a completed Officer's Questionnaire from the Bank, signed by Respondent, that indicated "None" in answer to Question #5. (SF 114). At the time Respondent provided this information to the FDIC, she was aware that such information was materially false or misleading. (SF 115).
In fact, Respondent should have listed the 14 Straw Loans, which had closed by the date of the completion of the Officer's Questionnaire by the Bank. (SF 116). Respondent admits she should have listed the 14 Straw Loans in her Answer. On page 4 of her Answer, in response to Notice paragraph 111, Respondent admits "her statement to the FDIC was quickly corrected and was not material to the FDIC's 1994 examination." (Exhibit 2). If Respondent "quickly corrected" her response to Question #5 of the Officer's Questionnaire, by inference she has admitted the 14 Straw Loans should have been included in her initial response to Question #5. Moreover, Respondent's admission in her Answer does not even suggest that her failure to include the 14 Straw Loans in her response to Question #5 was an inadvertent error on her part. Indeed, it was not until sometime later during the FDIC's 1994 Examination, at the request and prompting of FDIC examiners, the Bank provided a list of some of the Straw Loans in response to Question #5. (SF 117).
Accordingly, given Respondent's admission in her Answer, there can be no genuine issue that Respondent should have listed the 14 Straw Loans, which had closed by the date of the completion of the Officer's Questionnaire by the Bank.
2) Respondent's Role in the Creation Powers of Attorney
The next deceptive act Respondent engaged in during the FDIC's 1994 Examination was the creation of fictitious powers of attorney to deceive FDIC examiners and further conceal the Straw Loan scheme. All factual allegations in the Notice pertaining to the Respondent's role in the creation of fictitious powers of attorney have been deemed admitted pursuant to the undersigned's Order. (See, Exhibit I, Notice paragraphs 131-138, and 141).
During the FDIC's 1994 Examination, FDIC examiners discovered that the Bank was routinely accepting for deposit Bank loan disbursement checks payable to a Straw, upon which Maggio had endorsed the name of the Straw. (SF 119). When Respondent was questioned by FDIC examiners as to why the Bank would honor instruments upon which Maggio had endorsed other peoples' signatures, Respondent stated that Maggio must have powers of attorney from these individuals. (SF 120).
In or about early October, 1994, Respondent was asked by FDIC examiners to provide copies of the purported powers of attorney from the Straws to Maggio. (SF 121). Over the next few weeks, a number of cop-
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ies of powers of attorney from Straws to Maggio were presented to the FDIC examiners, purportedly coming from Respondent Shepard's files ("Shepard Powers of Attorney"). (SF 122). The Shepard Powers of Attorney contained various dates of execution from March 16, 1994, through September 23, 1994. (SF 123).
In fact, the Shepard Powers of Attorney were not copies of previously existing powers of attorney, but fraudulent documents created by Respondent Shepard (or prepared under his direction by his office) during the preceding few weeks. (SF 124). According to Respondent Shepard, he created the Shepard Powers of Attorney in response to a request from Respondent Cirino for the creation of backdated powers of attorney to be placed in the Straws' loan files and presented to the FDIC. (SF 125). Respondent Cirino indicated to Respondent Shepard during this request that the Bank's CAMEL rating would be lowered by the FDIC if the backdated powers of attorney were not in the Bank's files. (SF 126).
3) Respondent's False Statement to Examiners Regarding the Overfunding of the First and Second Mountain View Lines of Credit
The final deceptive act engaged in by Respondent during the FDIC's 1994 Examination was making a false statement to the FDIC concerning the overfunding of the First and Second Mountain View Lines of Credit. Respondent's false statement to the FDIC resulted in the termination of her employment with the Bank.
The fact that the First and Second Mountain View Lines of Credit were overfunded is not in dispute. As of October 26, 1994, Respondent had advanced loan proceeds to Mountain View on the First Mountain View Line of Credit such that a total of approximately $4,178,000 was outstanding. (SF 128). As of November 23, 1994, Respondent had advanced a total of approximately $4,680,000 on the First and Second Mountain View Lines of Credit. (SF 129).
On or about December 8, 1994, Respondent told FDIC examiners that the Board of Investment was aware that the First Mountain View Line of Credit had been overfunded by approximately $180,000 in late October, 1994. (SF 130). Also, on or about December 8, 1994, Respondent also told FDIC examiners that the Board of Investment was aware that advances of $870,000 of new funds from the Second Mountain View Line of Credit were made to Mountain View, rather than the maximum of $600,000 that had been represented to the Board by Cirino in November 1994 Recommendation. (SF 131).
In fact, the Board of Investment was unaware the First and Second Mountain View Lines of Credit had been overfunded. (SF 132). The minutes of the December 15, 1994, Meeting of the Committee unequivocally state:
* * * reported that following the exit interview with the Federal Deposit Insurance Corporation, the President met briefly with examiners to provide them with certain information which they had requested. During the course of such meeting, * * * stated that examiners had asked him whether or not the Board of Investment or the Board of Trustees had been provided with information relating to the overline advance to Mr. Maggio prior to the time of such advance. * * * provided the examiners with copies of the minutes and relating documentation and informed the examiners that he could not recall the Boards being so informed. Examiners indicated that Constance Cirino had specifically told them that she had informed the Board of Investment. Mr. Carlberg indicated that Ms. Cirino's statement was not correct to the best of his knowledge and belief and that Ms. Cirino had told him information to the contrary.
(Exhibit H to * * * Affidavit at page 1). In that same Committee meeting, "* * * reported that he had interviewed Ms. Cirino and Ms. Cirino had confessed with Mr. * * * that she had lied to examiners regarding this issue." (Exhibit H to * * * Affidavit at page 2). The minutes further detail how Respondent was subsequently interviewed by Messrs * * * and Respondent indicated in that interview that "she told examiners that she had brought the Maggio over-funding to the attention of the Board of Investment that she knew such statement was not true. She indicated that while she knew the statement was not true at the time she told it to examiners, she `had just about all she could take from the FDIC.'" (Exhibit H to Affidavit at page 2).
Based on Respondent's own documented admissions to the Committee, when Respondent told the FDIC examiners that the Board
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of Investment was aware of the overfunding of the First and Second Mountain View Lines of Credit, she knowingly made a false statement to FDIC examiners. (SF 133).
Minutes of the Committee's meeting of December 20, 1994, record the Committee's decision to recommend to the Board of Trustees that Respondent's employment with the Bank be terminated for her false statement to the FDIC. (Exhibit I to * * * Affidavit). In addition, Respondent admitted making false statements to FDIC examiners in her sworn deposition taken in an unrelated case. (See, Exhibit J to * * * Affidavit at page 102, lines 19–243 and page 108, lines 19–214 ). (SF 134). Consequently, there is no genuine issue of fact as to Respondent's admitted lies to the FDIC regarding the Board of Investment's awareness of the overfunding of the First and Second Mountain View Lines of Credit, even though Respondent now contradicts her previous sworn testimony in her Answer. (Exhibit 2 at page 4).
c. Diversion of Loan Proceeds
From September 1992 through August, 1994, Respondent engaged in a course of conduct in which she misapplied Bank loan proceeds to support Maggio's various business endeavors, as more fully described below. (SF 135). The only issue not deemed admitted is whether Respondent received the approval of the Board of Investment to use loan proceeds for a purpose other than the original, approved purpose of the loan. The Bank's records, in the form of the Board Minutes, and the testimony of board of Investment member * * * confirm the allegation that Respondent did not have Board of Investment approval to use loan proceeds for a purpose other than that approved by the Board of Investment.
1) Cross Street Deficiency Note
On or about September 2, 1992, the Board of Investment approved a line of credit in the amount of $750,000 to Hillcrest Realty Trust ("Hillcrest I Line of Credit"), an entity owned or controlled by Maggio, to develop a 29-lot subdivision known as Hillcrest Acres ("Hillcrest I"). (SF 136). On or about November 5, 1992, the Hillcrest I Line of Credit was issued. (SF 137). The Hillcrest I Line of Credit was secured by a first mortgage on the subdivision. (SF 138).
On or about April 12, 1993, Maggio executed a note in the amount of $175,000 ("Cross Street Deficiency Note") to repay the Bank for a portion of the outstanding balance owed the Bank on an earlier project known as "Cross Street." (SF 139). The Cross Street Deficiency Note was secured by a junior mortgage on Hillcrest I. (SF 140).
On or about July 12, 1993, the FDIC's 1993 Examination commenced. (SF 141). The FDIC's 1993 Examination concluded on or about August 28, 1993. (SF 142). On or about August 6, 1993, Respondent caused an advance of $175,000 ("$175,000 Advance") to be made on the Hillcrest I Line of Credit to pay off the Cross Street Deficiency Note. (SF 143). Respondent knew that the $175,000 Advance was not going to be used for the purpose for which the Hillcrest I Line of Credit had been approved. (SF 144).
Respondent did not obtain the approval of the Board of Investment to use the $175,000 Advance from the Hillcrest I Line of Credit for a purpose other than for which that line of credit had been approved. (SF 145). There is no genuine issue as to this fact as the Board Minutes, which have been confirmed by Board of Investment member * * * * * * and all documents relating to the Hillcrest I Line of Credit do not reflect any Board of Investment approval to use the Hillcrest I loan proceeds for a purpose other than the development of the Hillcrest I parcel.
2) Use of Hillcrest I Funds to Begin Hillcrest II Project
On or about August 6, 1993, Respondent advanced $200,000 ("$200,000 Advance") from the Hillcrest I Line of Credit to enable Maggio to begin work on the unfinanced second phase of Hillcrest I, which became known as Hillcrest Acres II ("Hillcrest II"). (SF 146). The $200,000 Advance was not used for the purpose for which the Hill-
3 Q: What did you tell him? A: I told him what I had done. I had told the FDIC that I had discussed—when the FDIC brought the overfunding to my attention, they asked me if I had discussed it with the Board of Investment, And I told them that I had, I panicked and told him that I had and I had not.
4 Q: Were those the two reasons that you were given as to why you were terminated, the alleged overfunding of the loan, on the one hand, and the alleged lie to the FDIC on whether you told the Board of Investment? A: I believe it was because I had stated that I had told the Board of Investment when in fact I had not.
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crest I Line of credit had been approved. (SF 147).
Respondent did not obtain the approval of the Board of Investment to use the $200,000 Advance from the Hillcrest I Line of Credit for a purpose other than for which that line of credit had been approved. (SF 148). There is no genuine issue as to this material fact as the Board Minutes, which have been confirmed by Board of Investment member * * *, and all documents relating to the Hillcrest I Line of Credit, do not reflect any Board of Investment approval to use the Hillcrest I loan proceeds for a purpose other than the development of the Hillcrest I parcel. (SF 148). The $200,000 Advance caused the outstanding balance in the Hillcrest I Line of Credit to exceed its approved limit. (SF 149).
On August 10, 1993, the Board of Investment approved a line of credit in the amount of $1,250,000 to * * * an entity owned and/or controlled by * * * to purchase and develop Hillcrest II ("Hillcrest II Line of Credit"). (SF 150). On or about November 5, 1993, Respondent advanced an additional $255,000 from Maggio's Hillcrest I Line of Credit ("$255,000 Advance") to fund additional work on Hillcrest II. (SF 151).
Respondent knew that the $255,000 Advance was not going to be used for the purpose for which the Hillcrest I Line of Credit had been approved. (SF 152). Respondent did not obtain the approval of the Board of Investment to use the $255,000 Advance from the Hillcrest I Line of Credit for a purpose other than for which that line of credit had been approved. (SF 153). There is no genuine issue as to this fact, as the Board Minutes, which have been confirmed by Board of Investment member * * * and all documents relating to the Hillcrest I Line of Credit do not reflect any Board of Investment approval to use the Hillcrest I loan proceeds for a purpose other than the development of the Hillcrest I parcel.
The $255,000 Advance caused the outstanding balance in the Hillcrest I Line of Credit to exceed its approved limit. (SF 154). On December 22, 1993, the Hillcrest II Line of Credit was issued, enabling * * * to draw funds from the Bank to repay the advances from the Hillcrest I Line of Credit. (SF 155).
3) Hillcrest II Line of Credit
From February, 1994 through July, 1994, Respondent caused four advances to be made to Maggio from * * * Hillcrest II Line of Credit totaling approximately $260,000 ("$260,000 Advances"). (SF 157). The $260,000 Advances were deposited indirectly into one of Maggio's business accounts at the Bank. (SF 158).
Respondent knew that the $260,000 Advances were being loaned by * * * to Maggio for Maggio's use on Mountain View and would not be used for the purpose for which * * * Hillcrest II Line of Credit had been approved. (SF 159). At all times pertinent to the charges herein, Respondent did not obtain the approval of the Board of Investment to use the $260,000 Advances from the Hillcrest II Line of Credit for a purpose other than that for which the Hillcrest II Line of Credit had been approved. (SF 160). There is no genuine issue as to this fact, as the Board Minutes, which have been confirmed by Board of Investment member * * *, and all documents relating to the Hillcrest II Line of Credit do not reflect any Board of Investment approval to use the Hillcrest II loan proceeds for a purpose other than the development of the Hillcrest II parcel. (* * * Affidavit ¶ 28, ¶ 29).
At the time of the $260,000 Advances, Respondent knew that the amount of construction that had been completed on Hillcrest II was not sufficient to entitle * * * or Maggio to the $260,000 Advances. (SF 161). Respondent also knew that the engineer's reports submitted to the Bank to support the $260,000 Advances contained materially false or misleading representations as to the amount of construction that had been completed on Hillcrest II. (SF 162).
In the fall of 1994, Respondent signed a letter drafted by Respondent Shepard, dated November 18, 1994 ("Comfort Letter"), in which Respondent, on behalf of the Bank, agreed unconditionally to credit * * * Hillcrest II Line of Credit $100,000 in each of three consecutive months. (SF 163). Respondent did not have the authority to forgive a borrower's debt to the Bank. (SF 164).
As of December 31, 1994, the Bank suffered a loss of $350,000 on the Hillcrest II Line of Credit. (SF 165).
4) Cirino's Involvement in the Misapplication of * * * Line of Credit
On or about June 17, 1994, the Bank issued a line of credit in the amount of $225,000 to ("* * * Line of Credit") for the purpose of financing the construction of a five-lot subdivision located on Lisa Lane,
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Chelsea, Massachusetts ("* * * Project"). (SF 166). In August, 1994, Respondent caused disbursements from the * * * Line of Credit totaling $225,000 ("$225,000 Advances") to be made, knowing that the loan proceeds were going to be loaned by * * * to Maggio, and not used for the purpose for which the * * * Line of Credit had been approved. (SF 167).
At the time of the $225,000 Advances, Respondent knew that no construction or work had been completed on the * * * Project which would entitle * * * to receive the $225,000 Advances. (SF 168). In order to make the $225,000 Advances appear to be justified, Respondent caused a fraudulent construction request, dated August 5, 1994, to be created and placed in the credit file for the * * * Line of Credit. (SF 169). Respondent did not obtain the approval of the Board of Investment to use the $225,000 Advances from the * * * Line of Credit for a purpose other than that for which that line of credit had been approved. (SF 170). * * * agreed to loan Maggio the $225,000 based in part upon belief that he was doing Respondent and the Bank a favor. (SF 171).
On or about July 5, 1995, the Bank credited $175,000 to the * * * Line of Credit, as a result of a negotiated settlement between the Bank and * * * over * * * liability for the $225,000 disbursed by Respondent from the * * * Line of Credit in August, 1994. (SF 172). As of December 31, 1994, the Bank suffered a loss of $175,000 on the * * * Line of Credit. (SF 173).
d. Respondent's Unauthorized Issuance of Standby Letters of Credit
All allegations in the Notice pertaining to the Respondent's unauthorized issuance of standby letters of credit have been deemed admitted, with the exception of the allegation concerning the Bank's customary fee for letters of credit.
1) Unauthorized Issuance of Tripartite Agreements
On or about October 21, 1993, Respondent caused the Bank to enter into a tripartite agreement ("First Tripartite Agreement") with the City of Malden, by which the Bank was obligated to pay the City up to the sum of $345,000 to insure the completion of construction of street, utilities and landscaping of a portion of the Mountain View project should Mountain View fail to meet its obligations under the agreement by specified date. (SF 174).
On or about April 6, 1994, Respondent caused the Bank to enter into a second tripartite agreement ("Second Tripartite Agreement") with the City of Malden, by which the Bank was obligated to pay the City up to the sum of $951,245.50 to insure the completion of the construction of streets, utilities and landscaping on a second portion of the Mountain View project, should Mountain View fail to meet its obligations under the agreement by a specified date. (SF 175).
A tripartite agreement is a form of a standby letter of credit. (SF 176). The First and Second Tripartite Agreements required the approval of the Bank's Board of Investment, as the amount of each agreement exceeded Respondent's lending authority. (SF 177). Respondent did not disclose to or obtain the approval of the Board of Investment prior to causing the Bank to enter into either the First or Second Tripartite Agreement. (SF 178). Additionally, Respondent did not require Mountain View or Maggio to sign a separate binding agreement which would obligate Mountain View or Maggio to repay the Bank for any money paid by the Bank as a result of its issuance of either the First or Second Tripartite Agreements. (SF 179).
The Bank's standard and usual practice is to charge a fee of one percent of the amount of a letter of credit ("Letter of Credit Fee") in addition to an amount sufficient to pay for all closing costs. (SF 180). A letter of credit fee compensates a bank for the risk it assumes when issuing a letter of credit. Exhibit K to * * * Affidavit is an example of a commitment letter for a typical standby letter of credit offered by the Bank, which referenced a 1% fee. Respondent failed to require Mountain View or Maggio to pay a Letter of Credit Fee for the issuance of either the First or Second Tripartite Agreements. (SF 182).
It was the regular practice of the Bank's Chief Financial Officer, * * * in preparation for completing the Bank's quarterly Call Report, to meet with Respondent to obtain information on the existence of any contingent liabilities arising out of the business of the Bank's loan department. (SF 183). Respondent did not disclose the existence of the First or Second Tripartite Agreements to * * *. (SF 184). As a result of Respondent's
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failure to disclose the existence of the First or Second Tripartite Agreements to * * * the contingent liabilities arising out of the First and Second Tripartite Agreement were not disclosed on the Bank's December 31, 1993, March 31, 1994, June 30, 1994, and September 30, 1994 Call Reports. (SF 185).
As of December 31, 1997, the Bank suffered a loss of approximately $1,000,000 on the Second Tripartite Agreement. (SF 186).
2) The Unauthorized Issuance of a Written Guarantee to a Mountain View Supplier
On October 26, 1994, Respondent issued a letter from the Bank to * * * * * *. ("Guarantee Letter") guaranteeing payment in the amount of $17,663.85 on behalf of Mountain View in order to insure the installation of street lights at the Mountain View Project. (SF 188). The Guarantee Letter was a form of standby letter of credit. (SF 189).
Respondent did not require Mountain View or Maggio to sign a separate binding agreement which would obligate Mountain View or Maggio to repay the Bank for any money paid by the Bank as a result of its issuance of the Guarantee Letter. (SF 190). Respondent failed to require either Mountain View or Maggio to pay a Letter of Credit Fee for the issuance of the Guarantee Letter. (SF 191). In October of 1994, Respondent knew or should have known that the financial capacity of either Mountain View or Maggio to repay any funds advanced by the Bank pursuant to the Guarantee Letter was questionable. (SF 192).
Respondent did not disclose the existence of the Guarantee Letter to * * *. (SF 193). As a result of Respondent's failure to disclose the existence of the Guarantee Letter to * * *, the Bank's contingent liability arising out of the Guarantee Letter was not disclosed on the Bank's September 30, 1994, Call-Report. (SF 194).
3) The Unauthorized Issuance of Hillcrest II Letter of Credit
On or about November 29, 1994, Respondent caused the Bank to issue a letter of credit to the * * * Massachusetts, in the amount of $942,500 ("Hillcrest II Letter of Credit"), insuring that certain roadwork and infrastructure would be completed at Hillcrest II. (SF 195). The Hillcrest II Letter of Credit was a form of standby letter of credit. (SF 196).
Respondent failed to obtain the required approval of the Board of Investment for the issuance of the Letter of Credit, as the amount of the Hillcrest II Letter of Credit exceeded her lending authority. (SF 197). Respondent did not require Hillcrest II or * * * to sign a separate binding agreement which would obligate Hillcrest II or * * * to repay the Bank for any money paid by the Bank as a result of its issuance of the Hillcrest II Letter of Credit. (SF 198). Respondent failed to require either Hillcrest II or * * * to pay a Letter of Credit Fee for the issuance of the Hillcrest II Letter of Credit. (SF 199). As of December 31, 1996, the Bank suffered a loss of approximately $169,000 as a result of the issuance of the Hillcrest II Letter of Credit. (SF 200).
By reason of Respondent's failure to charge the Bank's standard fee for the issuance of the First Tripartite Agreement, the Second Tripartite Agreement, the Guarantee Letter, and the Hillcrest II Letter of Credit, as alleged in paragraphs 201, 210 and 219 of the Notice, the Bank lost fee income of approximately $22,500. (SF 181).
e. * * * Loan
All allegations pertaining to the * * * loan have been deemed admitted. Neither the Board Minutes nor the Board of Trustee minutes mention or indicate Respondent ever disclosed her interest in the * * * Loan to the Bank. (SF 207). This has been confirmed by Board of Investment member * * *. (SF 207).
On or about January 14, 1994, Respondent caused the Bank to make a loan in the amount of $132,000 to ("* * * Loan"), to enable * * * to purchase and make improvements to a house located at 95 Central Avenue, Everett, Massachusetts House"). (SF 201). * * * was an employee of either Maggio or one of Maggio's businesses. (SF 202). The * * * House bordered the back of the property upon which was located Respondent's primary residence. (SF 203).
Respondent agreed to make the * * * Loan to * * * upon the condition that convey a portion of the backyard of the * * * House to Cirino. (SF 204). On or about April 18, 1994, a purchase and sale agreement ("P&S") was entered into by * * * and Respondent which required Respondent to pay * * * $5,000 in exchange for approximately 3200 feet of the backyard of the * * * House, for a period of time Respondent enjoyed the
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use of the property, including having Maggio make improvements to it on her behalf. (SF 206). On or about July 2, 1997, the Bank charged off approximately $25,000 on the * * * Loan. (SF 208).
IV. CONCLUSIONS OF LAW THE LEGAL STANDARD FOR AN ORDER OF PROHIBITION PURSUANT TO SECTION 8(e)
In order to issue an order of prohibition the FDIC's Board of Directors must find each of the following: 1) there must be a specified type of misconduct; the misconduct must have a prescribed effect, and the misconduct must involve culpability of a certain degree. See In the Matter of Ramon M. Candelaria, FDIC Enf. Dec. and Orders ¶ 5242, A-2839 (1997). As discussed hereafter, the FDIC has established that Respondent's conduct, as alleged in the Notice, satisfies each of these prongs.
A. Misconduct Prong
1. Unsafe or Unsound Practices or Breaches of Fiduciary Duty
a. Respondent's Material Misrepresentations and Lack of Full Disclosure to the Bank's Board of Investment
The history of the Bank's lending relationship with Mountain View is replete with instances in which Respondent either made a material misrepresentation or failed to fully inform the Bank's Board of Investment or Board of Trustees of material information.
In her presentation of the First Mountain View Line of Credit to the Board of Investment, Respondent represented to the Board that the Bank would only be advancing $1,200,000 of proceeds from the proposed line of credit towards Mountain View's purchase of the land. In fact, $1,780,000 of proceeds from the First Mountain View Line of Credit were needed immediately in order for Mountain View to purchase the property.
In addition to this affirmative misrepresentation, Respondent was also less than candid in providing material information to the Board of Investment for its decision. She failed to inform the Board that Mountain View was not going to be investing any of its own capital towards the purchase price of the land. This failure on her part is important because it is a complete deviation from standard banking practices. Normally, a construction borrower, such as Mountain View, is required by its lender to commit a material amount of its own capital towards the purchase price of the land. This practice insures that the borrower has its own capital at risk in the project, and, therefore, a strong incentive to complete the project in a commercially reasonable manner.
A short time after the Board of Investment's approval of the First Mountain View Line of Credit, two events occurred that caused material changes in the project. First, on September 24, 1993, three days before the scheduled closing of the loan, Respondent learned that Mountain View had increased its projection of the amount it would need to cover hard costs for the project by approximately $700,000. An increase of this amount in hard costs for a project the size of Mountain View is significant enough that it should have been brought to the attention of the Board so that the Board could determine whether or not the project was still viable, particularly given the fact that Respondent had not analyzed Maggio's financial ability to fund any cost overruns on the project.
Second, within a month of the closing of the First Mountain View Line of Credit, Respondent learned that Mountain View had determined to build "stick houses" instead of "prefabs." Not only did this change in plans also result in an second, substantial increase in the projected costs of the project, but it eliminated an important factor which was a basis for the Board of Investment's decision to approve the loan—the Board's perception that the development of prefab houses was substantially less risky than the development of stick houses.
Despite the occurrence of these two important developments in the project within a month or so of the closing of the First Mountain View Line of Credit, Respondent failed to inform the Board of Investment of either of them, thereby depriving the Board of an opportunity to take this information into account and possibly take steps to protect the Bank's interests.
Respondent was aware of the nominee nature of the Straw Loans. In fact, it was she who suggested the idea to Maggio in order to come up with additional funds to complete the Mountain View project. Respondent was aware that the Straws: i) did not intend to be personally responsible for re-
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paying the Straw Loans; ii) did not have any genuine intent to purchase the Mountain View lots as their own personal investments; and, iii) were allowing loans from the Bank to be put in their names as a favor to Maggio and/or in consideration for a fee from Maggio. Despite her knowledge of the true nature of the Straws' involvement in the Straw Loans, Respondent never disclosed this information to either the Bank's Board of Investment or Board of Trustees.
2) Origination of Second Mountain View Line of Credit
Respondent also made material misrepresentations and/or failed to fully inform the Bank's Board of Investment with respect to its consideration and approval of the Second Mountain View Line of Credit. During the presentation of this loan to the Board of Investment, Respondent failed to inform the Board that the First Mountain View Line of Credit was already overfunded by approximately $180,000. This was an important fact since the proposal that was being presented to the Board of Investment was that the total credit outstanding under both the First and Second Mountain View Lines of Credit would not exceed $4,600,000 and that $600,000 of additional funds were needed to complete the infrastructure of the project and the environmental clean-up. Since the First Mountain View Line of Credit was already overfunded by approximately $180,000, only $420,000 would be available under the $4,600,000 cap of the two lines to complete $600,000 of proposed work.
In addition, Respondent told the Board of Investment that the remaining balance of $3,600,000 on the First Mountain View Line of Credit would be fully secured by the $80,000 per lot value of the unsold lots in the project. In fact, Respondent was aware at the time that the lots would only have this value after $900,000 of additional improvements were made to the Mountain View Project infrastructure.
[.4], [.5] By making material misrepresentations and by failing to fully inform the Bank's Board of Investment or Board of Trustees of material facts, as described above, Respondent has engaged in both unsafe or unsound practices and breaches of her fiduciary duty to the Bank. See In the Matter of Henry P. Massey, FDIC Enf. Dec. and Orders ¶ 5204, at A-2313 (1993).
In Massey, the bank's Loan and Discount Committee approved an extension of credit based upon a representation from the respondent, the bank's loan officer, that the loan would be secured by an assignment of certain life insurance commissions. After the loan closed, the respondent was notified by each of the three insurance companies that the pledge of the insurance commissions would not be honored. Not only did the respondent not inform the Loan and Discount Committee that the bank's security interest in the commissions had fallen through, he continued to falsely represent to the Committee that the loan was fully secured by the commissions in subsequent renewals of the loan. The ALJ stated: "Respondent's fiduciary duty as an officer and director required that he promptly and fully disclose adverse information about potential and existing borrowers to the Committee . . . Respondent's repeated failure to disclose to the Committee and the Directorate the absence of a valid, enforceable first lien upon Turtur's commissions constituted a breach of fiduciary duty . . ." Id. at A-2330.
Likewise, in In the Matter of Tim M. Lane, FDIC Enf. Dec. and Orders ¶ 5205, A-2333 (1994), the Administrative Law judge found that the respondent, the bank's president and senior loan officer, had breached his fiduciary duty to the bank and committed unsafe or unsound practices by engaging in a series of misrepresentations to the bank's Loan Committee and Board of Directors. In two instances, the respondent had led the Committee and Board to believe that certain loans were guaranteed by the Farmer's Home Administration when, in fact, he was aware that the agency had denied the application to provide any guaranty. The Administrative Law Judge stated: "The falsification of Bank records and the related deceptions were clearly unlawful, and a breach of Respondent's fiduciary duties to the Bank, and constituted unsafe and unsound banking practices." Id. at A-2337 [citing In the Matter of Frank E. Jameson, FDIC Enf. Dec. and Orders ¶ 5154A, at A-1542-A (1990)].
[.6] b. Misapplication of Loan Proceeds
Respondent repeatedly engaged in an unsafe or unsound practice by utilizing, or allowing Maggio or Mountain View to utilize, loan proceeds for a purpose other than for which the loans had been approved. See In the Matter of Richard D. Donohoo, et. al., FDIC Enf. Dec. and Orders ¶ 5225, at A-2570.1 (1995) (affirmed at 103 F. 3d 1409
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(8th Cir. 1997), and cert. den. 118 S.Ct. 77 (1997)). Her conduct in this regard appears to have been driven by her determination to keep Maggio and his Bank-financed construction projects afloat, regardless of the means.
Respondent caused a diversion of loan proceeds in five instances:
1) On or about August 6, 1993, she caused an advance of $175,000 to be made from the Hillcrest I Line of Credit to pay off the Cross Street Deficiency Note;
2) On or about August 6, 1993, she caused an advance of $200,000 to be made from the Hillcrest I Line of Credit to enable Maggio to begin work on Hillcrest II;
3) On or about November 5, 1993, she caused an advance of $255,000 to be made from the Hillcrest I Line of Credit to fund additional work on Hillcrest II;
4) From February, 1994, through July, 1994, she caused four advances to be made from the Hillcrest II Line of Credit to fund additional work on the Mountain View Project; and
5) In August, 1994, she caused advances totaling $225,000 to be made from the * * * Line of Credit to allow * * * to loan the funds to Maggio.
In every one of these instances, Respondent caused these loan disbursements to be made knowing that the funds were not going to be used for the purposes for which the loans had been approved. In Donohoo, the Administrative Law Judge found that it was an unsafe or unsound practice for a bank officer to utilize, or permit the use of, bank loan proceeds for a purpose other than that for which the loan had been made. Id. at A-2644-2645.
c. False Statements and Deceptive Acts Intended to Hinder the FDIC's 1994 Examination
During the 1994 FDIC Examination, Respondent participated in a number of fraudulent or deceptive acts in order to conceal from the FDIC examiners the multitude of misconduct in which she was engaging. At the beginning of the examination, Respondent signed the Officer's Questionnaire which included the false statement of "None" in response to question #5, thereby attempting to conceal the existence of the Straw Loans. When the FDIC examiners began to question why the Bank was honoring checks upon which Maggio had endorsed other peoples' signatures, Respondent caused fraudulent powers of attorneys to be created and presented to the FDIC. Finally, when she was questioned by the FDIC examiners as to the circumstances of how the First and Second Mountain View Lines of Credit had become over-funded, Respondent lied by saying that the Board of Investment was aware of the situation.
[.7], [.8] The use of false statements and deceptive acts by a bank officer to conceal material information from a bank regulatory agency has been consistently found to constitute an unsafe or unsound practice or a breach of fiduciary duty, or both. See Matter of Seidman, 37 F. 3d 911 (3rd Cir. 1994); Accord Massey at A-2313; Donohoo at A-2570.1. In Seidman, the OTS was conducting an investigation into a possible conflict of interest involving Seidman at an OTS regulated thrift. During the investigation, Seidmana lied in a deposition taken by the OTS,destroyed material evidence and encouraged another witness to testify falsely. The court upheld the OTS' determination that Seidman's conduct constituted an unsafe or unsound practice, stating: "We agree with the Director that hindering an OTS investigation is an unsafe or unsound practice as that term has come to be used in the banking industry . . . Where a party attempts to induce another to withhold material information from the agency, the agency becomes unable to fulfill its regulatory function. Such behavior, if continued, strikes at the heart of the regulatory function." Id. at 936–937.
In Donohoo, the Administrative Law Judge was confronted with one of the very same acts engaged in by Respondent Cirino. Donohoo signed the bank's Officer's Questionnaire which included the answer "none" to question #5, despite the fact that Donohoo was aware that there were a number of loans at the bank that were made for the accommodation of others than those whose names appear on the loan documents. The Administrative Law Judge found that Donohoo "breached his fiduciary duty to the Bank and engaged in an unsafe or unsound practice by falsely responding "none" to question 5 and 7 in the Officer's Questionnaires he certified as true and correct and submitted in connection with the 1989 examinat-
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ions of the Bank by the State and the FDIC." Id. at A-2646.
d. Falsification of Bank Records
In order to carry out a number of the improper loans and other transactions, Respondent caused or permitted the following fraudulent and/or false documents to be created and inserted into the Bank's records:
1) a fraudulent construction request in support of the $225,000 Advances from the * * * Line of Credit;
2) fraudulent engineer's reports in support of the $260,000 Advances from the Hillcrest II Line of Credit;
3) fraudulent powers of attorney purportedly from the Straws to Maggio that were presented to the FDIC; and,
4) the Straw Loan files.
With respect to each of these documents, Respondent was fully aware of their fraudulent nature at the time the documents became part of the Bank's records.
[.9], [.10] Intentional falsification of bank records by a bank officer, regardless of motive, has been found to constitute both an unsafe or unsound practice and a breach of fiduciary duty. See In the Matter of Frank E. Jameson, FDIC Enf. Dec. and Orders ¶ 5154A, A-1541, (1990); Accord Candelaria at A-2841 (unpublished decision 134 F. 3d 382 (10th Cir. 1998)). In Candelaria, the respondent forged the signature of his sister on two bank notes and the endorsements on two loan disbursement checks. Id. at A-2837. In Jameson, the respondent submitted two fraudulent bills to the bank in order to hide the fact that he was receiving money in the nature of a bonus, and then had the bank's records reflect the expenses as "repairs and maintenance." Id. at A-1542.1. In each instance, the respondents' actions were found to constitute an unsafe or unsound practice. The number of fraudulent documents that Respondent caused or permitted to become Bank records was significantly beyond the scope of such misconduct in Candelaria and Jameson.
e. Approving or Carrying out Bank Activities Without Authorization by Board of Investment
[.11] In order to keep Maggio and/or Mountain View afloat, Respondent repeatedly approved or carried out bank transactions without authority or in direct contravention of the manner in which the transaction was approved by the Bank's Board of Investment. Respondent engaged in the following:
1) Authorization of the Bank's purchase of the Mountain View $540,000 Note without obtaining the prior approval of the Board of Investment; 2) Causing the $200,000 Advance and the $255,000 Advance, both of which caused the outstanding amount on the Hillcrest I Line of Credit to exceed the amount approved by the Board of Investment; 3) Issuance of the Comfort Letter; 4) Approval of 18 of the 19 Straw Loans, as such loans were the functional equivalent of extensions of credit to Mountain View, and the aggregate of outstanding credit to Mountain View already exceeded her loan authority; 5) Failure to disburse the Second Mountain View Line of Credit consistent with the Board of Investment's approval; 6) Causing the Bank to enter into the First and Second Tripartite Agreements without the approval of the Board of Investment; and, 7) Issuance of the Hillcrest II Letter of Credit.
An "unsafe or unsound banking practice" has been held to mean "any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk of loss or damage to an institution, its shareholders, or the agencies administering the insurance funds." In the Matter of * * * Bank of * * * County, * * *, ¶ 5042 at A-388 (1985); First National Bank of Eden v. Department of the Treasury, 568 F. 2d 610, 611 n. 2 (8th Cir. 1968). By approving or causing Bank transactions to occur in situations in which she was not authorized to act or knowingly causing or allowing transactions to take place contrary to how such transactions were approved by the Bank's Board of Investment, Respondent engaged in an unsafe or unsound practice. (SF 209); See also In the Matter of * * * Bank of * * * County, * * * ¶ 5042, at A-391 (1985) (loan officer is held to have committed an unsafe or unsound practice by approving a loan to an individual which exceeded his lending authority).
f. Misapplication of Deposit Funds
An escrow account was maintained at the Bank for the purpose of holding down pay-
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ments received from individuals who had signed agreements with Mountain View to purchase completed homes in the project. As a result of her responsibilities as the Bank's loan officer for the First Mountain View Line of Credit and the Straw Loans, Respondent was aware of the actual or approximate date when Mountain View became legally entitled to any applicable deposits from Escrow. On four occasions, on or about July 14, 1994, September 7, 1994, September 9, 1994, and September 14, 1994, Respondent caused withdrawals to be made from Escrow and paid over to Mountain View or Maggio, or to their benefit, totaling $78,000 to which Respondent knew or should have known that Mountain View was not legally entitled at the time.
[.12] The unauthorized taking of funds from a deposit account by a bank officer for a purpose other than that for which the account was set up has been held to constitute a misapplication of funds and a breach of the officer's fiduciary duty. See In the Matter of * * * Former Assistant Cashier First National Bank of * * *, * * *, OCC Enf. Dec. LEXIS 24, at p. 102–102 (November 8, 1985). In Former Assistant Cashier, the administrative Law Judge found: "The money was owned by (Text Omitted), Respondent's father, and (Text Omitted), and was to be used only for the purpose of trading in bonds. The use of (Text Omitted) Company account for purposes other than that intended is a clear misapplication of funds on the part of Respondent and constitutes dishonesty on his part." Id. at p. 8–9. In this case, Respondent was aware that the Escrow Account held deposits from prospective buyers of houses at Mountain View and that such deposits belonged to the buyers and not Mountain View or Maggio, until the sales from Mountain View to the buyers was complete. Her unauthorized taking and use of $78,000 from the Escrow Account prior to such time constitutes a misapplication of funds and a breach of her fiduciary duty.
g. Failure to Require Execution of Note or Agreement to Repay Bank for Issuance of Standby Letters of Credit
[.13] Respondent's actions in causing the Bank to enter into the First and Second Tripartite Agreements and to issue the Guarantee Letter and the Hillcrest II Letter of Credit without requiring Mountain View, Maggio, Hillcrest II or * * * to execute a written agreement to repay the Bank any money paid by the Bank as a result of its entering into or issuing these instruments constitutes an unsafe or unsound practice. Each of these instruments is a form of standby letter of credit. Consequently, the Bank might have to extend credit on behalf of either Mountain View or Hillcrest II as a result of these instruments. As with any other form of credit it might extend, the Bank has to obtain a written promise to repay the Bank from the party requesting the standby letter of credit. It is the standard and customary practice in the banking industry to require the requesting party to execute a written promise to repay the Bank in these circumstances. Failing to obtain a written promise to repay could make it more difficult if not impossible, for the Bank to require repayment, thereby exposing the Bank to a risk of loss. (SF 210).
Consequently, it was an unsafe or unsound practice for Respondent to cause the Bank to enter into these agreements or to issue the standby letters of credit without obtaining a written agreement to repay the Bank from Mountain View or Hillcrest II. ¶ 5042 at A-388; Cf. In the Matter of * * * Bank * * * ¶ 5046, at p. A-452 (1985) ("With respect to lending practices, it is an unsafe or unsound practice to extend credit without establishing or enforcing a realistic repayment program."); In the Matter of * * * Bank * * * County, * * *, ¶ 5042 at p. A-379 ("The Respondent deviated from normal and acceptable lending practices by failing to establish a repayment program in connection with extensions of credit.")
h. Failure to Charge a Standard Bank Fee
Respondent caused the Bank to enter into the First and Second Tripartite Agreements and issued the Guarantee Letter and the Hillcrest II Letter of Credit without charging either Mountain View, Maggio, Hillcrest II, or * * * the standard fee the Bank usually charges its customers for assuming the responsibilities set forth in those instruments. Consequently, the Bank obtained no financial or other benefit for assuming the substantial risk associated with those instruments.
[.14] The failure to collect standard bank fees has been held to constitute an unsafe or unsound practice. See In the Matter of Young Il Kim, et al., 1993 WL 566418 (O.T.S.). In Kim, the ALJ found respondent's failure to
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collect fees normally imposed by the bank on its customers for returned checks to constitute an unsafe or unsound practice. In that instance, the loss of income from the waived fees amounted to $2,375. Id. at 5. Here, Respondent's failure to collect fees with respect to the First and Second Tripartite Agreements, the Letter Guarantee, and the Hillcrest II Letter of Credit caused the Bank to lose income of approximately $22,500.
i. Conflict of Interest
[.15] Respondent's decision to cause the Bank to make the * * * Loan was motivated by personal reasons—her desire to obtain a portion of the backyard of the * * * House to be added to the backyard of her primary residence. Her actions in causing this loan to be made under these circumstances without first disclosing her interests in the transaction to the Bank's Board of Investment or Board of Directors constitutes a conflict of interest and a breach of her fiduciary duty. Candelaria at A-2836; In the Matter of Allan Hutensky, FDIC Enf. Dec. and Orders ¶ 5224, at A-2533 (1995) (granting petition in part and remanding with instructions, 182 F 3d 1234 (2nd Cir. 1996)).
Officers and directors of financial institutions are deemed to be fiduciaries of the institution and, as such, owe the institution duties of care and loyalty. Candelaria, at A-2847; In the Matter of Jess T. Simpson, OTS AP 91-6 at 10–11. The duty of care requires directors and officers to act as prudent and diligent business persons in conducting the affairs of the bank. The duty of loyalty generally prohibits them from putting their personal or business interest above the interests of the bank, and requires them to administer the affairs of the bank with candor, personal honesty, and integrity. When a bank officer places personal interest above that of the bank, or utilizes bank resources for personal gain, the officer commits a serious breach of fiduciary duty. Candelaria, at A-2847. Under this fiduciary duty, directors and officers have a fundamental obligation "to avoid placing themselves in a position that creates, or that leads to or could lead to, a conflict of interest, or appearance of a conflict of interest. Simpson at 8.
"The threshold inquiry in assessing whether a director violated his duty of loyalty is whether the director has a conflicting interest in the transaction. Directors are considered to be `interested' if they either `appear on both sides of a transaction' or expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally." In Re Bush, OTS Order No. AP 91-16 at 6 (1991). A director who may experience a direct or indirect benefit is required to abstain from participating in the matter in which he has a conflicting interest and from voting on the matter. See Simpson at 8. In this case, Respondent clearly had a conflict of interest with respect to the Bank's making of the * * * Loan because in exchange for her making the loan to * * * she was to receive land from * * * to increase the size of her backyard. Id. at 4 (respondent provided a loan to an individual in exchange for the individual's purchase of respondent's boat); Compare Seidman at 934 (court held that Seidman did not engage in a conflict of interest because he did not promise to make loans in exchange for the release of his obligation on his guarantee).
[.16] If a bank officer has a conflict of interest with respect to a transaction at the bank, the officer's duty of loyalty requires that the officer abstain from participating in the decision with respect to the transaction and to disclose to the Board of Directors or Trustees the existence and the nature and extent of the officer's conflicting interest. See Bush at 7; Accord Simpson at 10; Hutensky, at A-2540 (director had duty to act affirmatively to notify the board that a loan about to be made by bank would be used for the tangible economic benefit of his related interest). Here, Respondent Cirino failed to satisfy either of these requirements. Rather than abstaining from any involvement in the approval of the * * * Loan, she approved the loan under her own lending authority. In addition, at no time did she inform the Bank's Board of Investment or Board of Trustees of the benefit she was to receive from * * * in exchange for making the loan to him.
2. Violations of Law or Regulation
Section 304.4 of the FDIC's Rules and Regulations required the Bank to prepare and file, on a quarterly basis, Consolidated Reports of Condition and Income `in accordance with the appropriate instructions contained in the Federal Financial Institutions Examination Council booklet entitled "Instructions—Consolidated Re-
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ports of Condition and Income.'" 12 C.F.R. §304.4. With respect to standby letters of credit, Schedule RC-L of the Instructions—Consolidated Reports of Condition and Income ("Instructions") required the Bank to "Report the amount outstanding and unused as of the report date of all performance standby letters of credit) issued by any office of the Bank." RC-L-4 (9/97).
[.17] Respondent's failure to disclose the existence of the First and Second Tripartite Agreements and the Guarantee Letter to * * * the Bank's Chief Financial Officer, caused the Bank to violate 12 CRF §304.4, for failing to account for such instruments in its December 31, 1993, March 31, 1994, June 30, 1994 and September 30, 1994 Call Reports. By reason of her conduct in causing the Bank to violate 12 C.F.R. §304.4, Respondent committed a "violation of law or regulation", as such term is used in 12 U.S.C. §1818(e)(1)(A)(i)(I). 12 U.S.C. §1813(v).
B. Effects Prong
1. The Bank has Suffered Loss or Other Damage
By reason of the numerous instances of misconduct carried out by Respondent, as set forth in the Notice, the Bank has suffered loss of approximately $7,747,500, consisting of charge-offs of approximately $7,725,000 and lost fee income of approximately $22,500.
[.18]. In addition, the Bank has suffered "other damage," as that term is used in 12 U.S.C. §1818(e)(1)(B)(i), in that a substantial portion of Respondent's misconduct was carried out by her in an attempt to conceal the financially troubled condition of the Mountain View Project from the Bank's Board of Investment, Board of Trustees, and FDIC examiners. Lane at A-2342 (concealment of material information about the loans and/or borrowers precluded Bank management from taking timely corrective actions on the loans thereby causing "other damage" to the Bank). For example, Respondent developed the Straw Loan scheme in order to avoid taking Mountain View's $1,000,000 Request to the Board of Investment. The creation and insertion of the fraudulent Powers of Attorney was done in order to persuade FDIC examiners that the Straw Loans were legitimate. One of the $260,000 Advances was used by Respondent to pay off outstanding checks from Maggio's check kite, thereby keeping Maggio's precarious financial position from coming to the Board of Investment's or Board of Trustee's attention.
2. The Interests of the Bank's Depositors Have Been or Could Have Been Seriously Prejudiced
As previously mentioned, a substantial portion of Respondent's misconduct related to her attempt to conceal the financially troubled condition of the Mountain View Project from the Bank's Board of Investment, Board of Trustees, and FDIC examiners. In similar situations, the FDIC's Board of Directors has previously found that the interests of the insured depository institution's depositors have been or could be prejudiced by such conduct. See Massey at A-2313; Lane at A-2333. In Massey, the Respondent ordered other bank officers to purge negative information from the bank's credit files, stored certain bank files off premises during a bank examination, and directed other officers to "screen" files before they were presented to examiners. The Administrative Law Judge found that by reason of such conduct, "the integrity of Bank documents was compromised, and the interest of the Bank's depositors could have been seriously prejudiced." Id. at A-2332. In Lane, the FDIC's Board agreed with the Administrative Law Judge that respondent's misrepresentations to the Bank's Loan Committee and Board of Directors on four loans and his having caused false financial statements to be prepared and placed in one borrower's credit file seriously prejudiced the interests of the bank's depositors. Id. at A-2334, fn 6.
[.19] Respondent's false and deceptive misconduct in this case was substantially greater in number of instances and egregiousness. She participated in the advancing of Bank funds to 19 Straw borrowers, rather than disclose to the Bank's Board of Investment Mountain View's continuing need for additional funds to complete the project. She made numerous misrepresentations to the Board of Investment in an attempt to induce the Board to approve the First and Second Mountain View Lines of Credit. She lied to FDIC examiners about the over-funding of First and Second Mountain View Lines of Credit and provided a false answer to question #5 on the Officer's Questionnaire. She solicited the creation of fraudulent powers of attorney to be placed in the Bank's credit files in order to influence the outcome of a pending examination. Her course of conduct in this regard goes well beyond the misconduct in Massey and Lane. Accordingly, such
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conduct should also be found to have seriously prejudiced the interests of the Bank's depositors.
3. Respondent Benefited From The Wrongful Actions
[.20] Respondent derived "other benefit" by reason of the misconduct she committed at the Bank. The most obvious personal benefit that she was received arose out of the Loan. In consideration for making the * * * Loan, Respondent obtained agreement to convey a portion of the backyard of the * * * House, which border upon the back of Respondent's primary residence, to Respondent. Although Respondent never acquired legal title to the land, for a period of time she enjoyed the use of the property, including improvements made upon it by Maggio.
In addition, Respondent's numerous acts of deception and fraud temporarily concealed from the Bank's Boards of Investment and Trustees and FDIC examiners the troubled financial condition of the Mountain View Project, thereby maintaining her position at the Bank and reputation with her employers. Lane at A-2342-2343.
C. The Culpability Prong
1. Personal Dishonesty
Personal dishonesty, as that term is used in 12 U.S.C. 1818(e)(1)(c)(i), has been held to mean "a disposition to lie, cheat, defraud, misrepresent, or deceive. It also includes a lack of straightforwardness and a lack of integrity." Hutensky at A-2566. Respondent's conduct in this case involves numerous instances satisfying this requirement.
[.21] Respondent engaged in numerous acts resulting in the creation of false records within the Bank, including the Straw Loan files, the powers of attorney, and the fraudulent construction request placed in the * * * credit file. Not surprisingly, the FDIC's Board of Directors has found that an officer that engages in falsification of bank records commits personal dishonesty. Candelaria at A-2841. Lane at A-2343.
[.22] Respondent engaged in affirmative misrepresentations to the Bank's Board of Investment relating to its consideration of the First and Second Mountain View Lines of Credit. She failed to disclose to the Board the Investment after its approval of the First Mountain View Line of Credit the material changes in the costs and nature of the Mountain View Project. She failed to disclose to the Board the nominee nature of the Straw Loans. Finally, she lied to the FDIC in the Officer's Questionnaire and with respect to the overfunding of the First and Second Mountain View Lines of Credit. Engaging in affirmative misrepresentations to, and the concealment of material information from other bank officials and bank regulators has been found to constitute personal dishonesty. Massey at A-2330-2332, Lane at A-2343, Donohoo at A-2629 (concealment of purpose of loans and impeding FDIC examination each constitute personal dishonesty).
[.23] Finally, personal dishonesty has been held to include engaging in self-dealing practices. ¶ 5042 at A-389; Donohoo at A-2630. Respondent's granting of the Loan in order to obtain * * * agreement to convey to her a portion of the backyard of the * * * House constitutes self-dealing, and, therefore, personal dishonesty.
2. Willful or Continuing Disregard for the Bank's Safety or Soundness
[.24] The FDIC's Board of Directors has held that "willful disregard" refers to that conduct which is practiced deliberately with full knowledge of the facts and risks, and which potentially exposes a bank to abnormal risk of loss or harm. `Continuing disregard' refers to that conduct which is voluntarily engaged in over time, with heedless indifference to the possible consequences. Massey at A-2330; In the Matter of Anonymous, 1 FDIC Enf. Dec. and Orders ¶ 5069, at A-948 (1986); In the Matter of * * *, Individually, and as president and a participant in the conduct of the affairs of * * * Bank, FDIC Enf. Dec. and Orders ¶ 5110, at A-1194-1195 [citing United States v. Tucker, 686 F. 2d 230, 232 (5th Cir.), cert. denied, 459 U.S. 1071 (1982) (finding willful disregard even though the Respondent believed he was acting in the best interest of the bank)]. It is not necessary to show that Respondent intended to do harm to the Bank. Id.
Respondent's conduct is replete with examples that satisfies the "willful or continuing disregard" standard. She repeatedly made material misrepresentations or failed to disclose materials information to the Board of Trustees about the First and Second Mountain View Lines of Credit, such as the increase in hard costs of the project, the switch to "stick houses," and the fact that Mountain View wasn't being required to inject
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any of its own capital towards the purchase price of the property. Massey at A-2331 (repeated failure to disclose to Loan Committee or Board the true status of the bank's loan collateral held to constitute willful or continuing disregard). She caused or allowed the Bank to retain numerous false documents and records, including the Straw Loan files, the construction request, the fraudulent powers of attorney, and the fraudulent engineer's reports submitted to support the $260,000 Advances. Lane at A-2338 (causing the bank to operate with false documents constitutes "willful or continuing disregard"). Finally, Respondent's misconduct involves at least 20 to 30 incidents occurring over a period of at least 18 months. Candelaria at A-2842 ("continuing disregard" found by two nominee loans over a period of six months); Jameson at A-1542-1542.1, 1542.6 (two incidents of falsifying loan records to hide self-serving transactions occurring within three months to be "continuing disregard").
V. CONCLUSION
This case does not need a hearing to render a recommended decision on the merits. All underlying factual allegations supporting the wrongful transactions in the Notice have been completely admitted by Respondent's failure to respond specifically to the allegations in her answer nor this motion for summary judgment. In addition, the fully admitted charges are sufficient to sustain the FDIC's claim for the issuance of an Order of Prohibition for Further Participation against Respondent, as a matter of law.
The FDIC has supported the factual allegations with documentary evidence in the form of admissions, depositions, affidavits, and other exhibits. Respondent Cirino has failed to respond to this motion, thereby consenting to entry of this order. Consequently, there are no genuine issues of material fact for hearing in this matter. As a matter of law, the FDIC is entitled to a decision in its favor, even after viewing the case in the light most favorable to Respondent Cirino.
Based on the foregoing determination that the Record supports a finding of default and that the allegations in the Notice support the relief sought, the undersigned recommends that the Board of Directors grant the Motion for Summary Disposition and prohibit Respondent Constance C. Cirino from further participation in the conducting of affairs of any federally insured depository institution.
