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   [5264] In the Matter of Richard M. Wright, Jr., individually and as an Institution-Affiliated party of Midland Bank of Kansas (f/k/a The Tower State Bank), Mission, Kansas (Insured State Nonmember Bank) (In Receivership) FDIC Docket No. 00-100ej; FDIC Docket No. 95-79e (10-2-00).

   The FDIC Board denied Respondent Wright's request to a general modification of an Order of Prohibition to allow him to provide legal services for securities matters, as legal counsel representing financial institutions and organizations.

   [.1] Modification of Orders—Review

   The FDIC is required to use predictive judgment to protect the public when reviewing applications to modify Orders of Removal and Prohibition.

   [.2] Modification of Orders—Burden of Proof

   Respondent must demonstrate that he is fit to participate in the conduct of the affairs of the institution, and that his participation would not pose a risk to the safety and soundness of the institution or erode public confidence.

   [.3] Modification of Orders—Burden of Proof

   Respondent must provide evidence sufficient to refute the likelihood of repeat conduct when placed in a position with similar responsibilities to those leading to the Order of Prohibition.

   [.4] Modification of Orders—Burden of Proof

   Respondent must show that a sufficient amount of time elapsed since the Order of Prohibition, during which he demonstrated his rehabilitation.

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   [.5] Attorneys—Fiduciary Responsibilities

   Like the officers and directors of an insured institution, an attorney representing the institution occupies a position of trust and has fiduciary responsibilities.

In the Matter of
RICHARD M. WRIGHT, JR.,
individually and as an institution-affiliated party of
MIDLAND BANK OF KANSAS
(f/k/a The Tower State Bank)
MISSION, KANSAS
(Insured State Nonmember Bank)
(In Receivership)
DECISION AND ORDER DENYING MODIFICATION OF ORDER OF PROHIBITION FROM FURTHER PARTICIPATION

FDIC-00-100ej
FDIC-95-79e

STATEMENT OF THE CASE

A. Introduction

   On July 26, 1999, Richard M. Wright, Jr. ("Respondent"), through a letter ("July 26 Application") addressed to the Regional Director of the Kansas City Regional Office of the Federal Deposit Insurance Corporation, made application to the Federal Deposit Insurance Corporation ("FDIC") for written consent to a request for modification of the Order of Prohibition from Further Participation ("Order of Prohibition") issued against him in order for him to be allowed to serve as legal counsel representing financial institutions or organizations enumerated in section 8(e)(7)(A) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(e)(7)(A), in securities matters. This application arises under section 8(e)(7)(B) of the Act, 12 U.S.C. § 1818 (e)(7)(B) and section 8(j) of the Act, 12 U.S.C. § 1818(j).

B. Background

   From April 1991 through May 1992. Respondent served as chairman of the board of directors of Midland Bank of Kansas, Mission, Kansas, and vice chairman of Country Hill Bank, Lenexa, Kansas, two out of a group of five insured depository institutions under the control of Leopold H. Greif ("Greif Banks"). Although Respondent had no prior banking experience or formal training in banking, he was trained as an attorney and had over ten years of experience in private practice with a law firm.

   Management of the Greif Banks, including Respondent, engaged in an aggressive and unsafe and unsound lending strategy that resulted ultimately in the demise of the Greif Banks. In particular, Respondent originated and structured loans in an unsafe and unsound manner and in violation of applicable laws and regulations with regard to three large transactions that resulted in loss to the Greif Banks of a total of $9.2 million. Respondent structured these transactions to avoid recognition of these problem assets and loan losses by transferring the assets to new borrowers with financing provided by the same institution or one of the other affiliated Greif Banks, and by arranging for the sale of real estate collateral pledged to problem loans to "nominee" borrowers with the institution providing 100 percent, non- or limited-recourse financing. Further, Respondent withheld and misrepresented material information regarding these transactions from the examiners.

   On November 27, 1995, prior to issuance of a Notice of Intent to Prohibit From Further Participation ("Notice"), Respondent stipulated to the issuance of an Order of Prohibition; and on September 16, 1996, the FDIC issued the Order of Prohibition pursuant to section 8(e) of the Act, 12 U.S.C. § 1818(e). In the Matter of Richard M. Wright Jr., FDIC ENFORCEMENT DECISIONS AND ORDERS, Paragraph 11339, C-4255. The Order of Prohibition prohibits Respondent from participating in the conduct of the affairs of any financial institution or organization enumerated in section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the Act, 12 U.S.C. § 1818(e)(7)(D).

C. The Application

   In his July 26 application, Respondent requested that the FDIC modify his Order of Prohibition. The purpose of the application is to obtain approval from the FDIC that the
{{12-31-00 p.A-3178}} Respondent "may again serve FDIC insured banks as securities counsel for which [he is] well qualified," without having to seek the prior written approval from the FDIC. July 26 Application at p. 1. His performance of legal service would be limited to acting solely in the capacity of independent contractor. Respondent states that he "do[es] not request any change in the Order to allow me to act as an officer, director or employee of an FDIC insured institution." Id. at p. 2.

   Respondent's rationale for seeking a general modification is that, since joining a law firm in May 1992 which acts primarily as tax-exempt bond counsel for its clients, Respondent has developed expertise in handling securities matters. With the enactment of recent banking legislation, insured depository institutions are now authorized to engage in significant securities activities. Respondent wants to expand his business opportunities by being "in a position to represent banks underwriting municipal securities," without the delay associated with obtaining the written consent of the FDIC before every proposed engagement of his professional services. Id.

FINDINGS OF FACT

   In his application for modification of the Order of Prohibition, Respondent sets forth several grounds for requesting such relief. First, Respondent states his belief that with the passage of the financial institutions reform legislation, banks will become directly involved in municipal securities underwriting. Second, Respondent states that the banks that have engaged in underwriting municipal bonds under one of the Glass-Steagall exceptions typically do not hire separate underwriter's counsel. Since Respondent asserts that he is regarded as one of the few experts in Missouri and Kansas practicing in this area of the law, Respondent believes that he can offer a "fairly unique level of experience to banks in the underwriting of municipal securities." Id. Finally, Respondent asserts that he had demonstrated his competence and integrity as a securities lawyer over the past seven years and that his representation of FDIC insured institutions "will not create a risk of loss to those institutions in the future. Id. at p. 3.

DECISION AND ORDER

   Section 8(e)(7)(B) of the Act states in pertinent part:

   (7) INDUSTRYWIDE PROHIBITION.—

   (B) EXCEPTION IF AGENCY PROVIDES WRITTEN CONSENT.—If, on or after the date an order is issued under this subsection which removes or suspends from office any institution-affiliated party or prohibits such party from participating in the conduct of the affairs of an insured depository institution, such party receives the written consent of—

       (i) the agency that issued such order; and

       (ii) the appropriate Federal financial institutions regulatory agency of the institution described in any clause of subparagraph (A) with respect to which such party proposes to become an institution-affiliated party,

   subparagraph (A) shall, to the extent of such consent, cease to apply to such party with respect to the institution described in each written consent.

   12 U.S.C. § 1818(e)(7)(B).

   [.1] In reviewing applications to modify orders of removal and prohibition under section 8(e) of the Act, the FDIC is required to use its predictive judgment to protect the public. Sletteland v. FDIC, 924 F.2d 350, 353 (D.C. Cir. 1991). Orders of removal and prohibition under section 8(e) of the Act are remedial and are issued not to punish, but rather to protect the public, further underscoring the importance of the FDIC's predictive judgment. See Hudson v. United States, 522 U.S. 93, 103 (Congress intended the debarment sanctions against bankers to be civil in nature)(1997); United States v. Stoller, 78 F.3d 710 (1st Cir. 1996).

   [.2] In applications to modify orders of prohibition, a respondent has a strong burden of proof to justify the modification that he seeks. The respondent must demonstrate: (1) his fitness to participate directly or indirectly in the conduct of the affairs of an insured depository institution; (2) that his participation would not pose a risk to the institution's safety and soundness; and (3) that his participation would not erode public confidence in the institution. See In the Matter of Michael D. McCormick, FDIC ENFORCEMENT DECISIONS AND ORDERS, Paragraph 5212, pp., A-2408, A-2411, In the Matter of Charles E. Floyd, FDIC ENFORCEMENT DECISIONS AND ORDERS, Paragraph 5177, pp. A-1976 and A-1978; In the Matter of Frederick M. Pfeiffer, FDIC ENFORCEMENT DECISIONS
{{1-31-01 p.A-3179}} AND ORDERS, Paragraph 5163A, p. A-1656; and Docket No. FDIC-83-153e, FDIC ENFORCEMENT DECISIONS AND ORDERS Paragraph 5117. p. A-1303. By this July 26 Application, Respondent seeks to have the Order of Prohibition modified to permit him to serve as legal counsel on securities matters for any financial institution or organization enumerated in section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e)(7)(A).

   Upon review of the record as a whole, the FDIC finds that while Respondent has expressed remorse for his conduct when serving as chairman and vice chairman of two of the Greif Banks, he has not presented sufficient evidence to obtain a limited modification of his Order or Prohibition. See In the Matter of Stephen F. Redman, FDIC ENFORCEMENT DECISIONS AND ORDERS, Paragraph 5257, pp., A-3081, A-3085; In the Matter of Charles E. Floyd, FDIC ENFORCEMENT DECISIONS AND ORDERS, Paragraph 5177, pp., A-1976 and A-1978. Although Respondent was not trained as a banker and had no experience in holding such a position, he was an attorney trained in the law and he knew or should have known the legally questionable nature of his activities. Respondent engaged in concealment of material facts and misrepresentations to bank examiners in addition to structuring loan transactions in violation of safe and sound banking practices and various laws and regulations that caused the Greif Banks to lose $9.2 million.

   Respondent now seeks to serve as legal counsel to any insured depository institution in order to provide advice on how to draft disclosure documents for underwriting municipal securities that are "full, complete and accurate." July 26 Application at p. 3. Such services include ultimate responsibility for the production of the disclosure documents—"which includes not only gathering, verifying and presenting information to be disclosed, but also making multiple decisions on what information is legally material and therefore necessary for actual disclosure." Manning Gilbert Warren, "The Primary Liability of Securities Lawyers," 50 SMU L. Rev. 383 (1996) at 383. Specifically, this includes determining preliminary conflicts of interest; directing and overseeing a competent working group for the disclosure process; establishing a due diligence environment; conducting meetings with officers of issuer and other persons; preparing a due diligence check list; obtaining personal information about directors, officers, and other relevant persons; conducting and controlling an extensive due diligence investigation for the purpose of obtaining and verifying all material information necessary for the inclusion in the disclosure documents; comparing all written or oral information from all sources to identify, disclose and reconcile material inconsistencies; and writing, editing and revising disclosure drafts of the disclosure document. Id. at 388-389.

   Respondent acknowledges the irony in seeking a position to prepare disclosure documents "the hallmark of which is full and complete disclosure of all known investment risks," given the fact that he was banned from banking for his active concealment of the true nature of transactions that he approved from examiners. July 26 Application at p. 3. As the FDIC's Board of Directors ("Board") noted in In the Matter of William Marvin Clark, Sr., FDIC ENFORCEMENT DECISIONS AND ORDERS, Paragraph 5162, pp. A-1609, A-1618, the likelihood of repeat conduct occurs when an individual is placed in a position with responsibilities similar to that held when the offending conduct occurred.

   [.3] In this case, Respondent has failed to provide evidence to demonstrate that he has been sufficiently rehabilitated to provide such services so that there is no likelihood of repeated conduct. Respondent as a start could have provided a list of clients who have sought out his expertise and who could have provided references on the quality of his services, that he understood the nature of the types of disclosure necessary in providing this type of expertise, and that he demonstrated responsible and professional conduct in providing those services. However, Respondent did not provide this information or any other evidence demonstrating that he has been rehabilitated in his July 26 Application.

   [.4] Further, Respondent must prove that a sufficient amount of time has elapsed since the prohibition order issued against him during which he has engaged in activities demonstrating his rehabilitation. Respondent has not provided this information as well.

   [.5] The FDIC has long recognized that an attorney representing a financial institution, like the institution's officers and directors,
{{1-31-01 p.A-3180}} occupies a position of trust and has important fiduciary obligations to the institution.1 As the Board stated in In the Matter of Robert E. Stoller, FDIC ENFORCEMENT DECISIONS AND ORDERS, Paragraph 5184, p. A-2082:

    Because of this position, attorneys have a significant opportunity to harm the institution if they are so inclined. Even an attorney representing the institution in real estate conveyancing transactions, . . . is in a position to cause significant harm. . . . For example, an attorney drafting loan documents can slant the provisions in favor of either the borrower or the lender, if he sees fit. A bank officer, however, depends upon his attorney to exercise the utmost loyalty and fidelity to the bank's interest. He does not have the expertise to police the attorney's conduct and should be able to assume that the attorney is zealously representing the bank's interests.

   Id. at A-2085. Clearly, an attorney providing underwriting services to an insured depository institution for municipal securities where the dollar amounts are much greater than those involved in real estate conveyancing can cause great harm to an institution. See United States v. Benjamin, 328 F.2d, 854, 863 (2nd Cir. 1963), cert. denied, 377 U.S. 953 (1964).

   Accordingly, the FDIC finds that Respondent's request to obtain approval to provide legal services for securities matters should be denied. However, the FDIC notes that Respondent retains his license to continue in the practice of law and that he may even represent parties involved in transactions with financial institutions so long as he does not represent the institutions themselves.

   Pursuant to delegated authority.

   Dated at Washington, D.C. this 2nd day of Oct., 2000.

   Michael J. Zamorski

   Deputy Director

   Division of Supervision


1 Because of this position, the Board has conclusively determined that an attorney providing services to an insured institution is participating in the conduct of the affairs of such an institution. Id. at 2085. See also FSLIC v. Hykel, 333 F. Supp. 1308, 1310-12 (E.D.Pa 1971), vacated as moot 468 F .2d 1386 (3d Cir. 1972); In the Matter of Frank Jameson, FDIC-89-83e, FDIC ENFORCEMENT DECISIONS AND ORDERS Paragraph 5154A at A-1542.3 (relying on Hykel), aff'd on other grounds, 931 F.2d 290 (5th Cir. 1991); FDIC-85-25e, -85-112k, -85-113k, FDIC ENFORCMENT DECISIONS AND ORDERS Paragraph 5082 at A-999-1002 (interpreting the phrase "participating in the conduct of the affairs" of a bank).

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