Federal Deposit
Insurance Corporation

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   [¶5265] In the Matter of Roque de la Fuente II, individually and as an Institution-Affiliated party of First International Bank, Chula Vista, California, (Insured State Nonmember Bank) FDICDocket No. 97-031e (11-21-00).

   The FDIC Board of Directors determined that Respondent Roque de la Fuente II (Respondent) granted extensions of credit totaling over $9 million to entities he controlled, in violation of Regulation O, breached his fiduciary duty and engaged in unsafe and unsound practices. The Board entered an order to remove Respondent and prohibit him from further participation in the affairs of any federally insured institution.

   [.1] Prohibition, Removal, or Suspension—Willful Disregard for Safety or Soundness—Self Dealing

   Respondent personally benefited from extensions of credit and the Bank suffered loss or other harm, satisfying the effect test required for an Order of Prohibition. Respondent concealed information from the Bank and misrepresented facts, evidencing personal dishonesty and a continuing willful disregard for the Bank's safety and soundness.

   [.2] Standard of Proof—Preponderance of the Evidence

   The proponent in an administrative procedure must prove his case by a preponderance of the evidence, as provided in the Administrative Procedures Act, rather than the less rigorous standard of substantial evidence.

   [.3] Administrative Law Judge—Bias

   Where the findings are precise, and supported by the evidence in the record, there is nothing wrong with the ALJ adopting them as his own.

   [.4] Administrative Law Judge—Bias,

   Actual bias, or risk of bias must have a specific basis in the record, other than the ALJ's rejection of Respondent's arguments.

   [.5] Due Process—Notice

   The language in the Notice is typical of notices in administrative proceedings, and did not conclude, rather than allege wrongdoing. Additionally, the hearing on the record and de novo review by the Board and the court's review of the Board's final determination provide due process.

   [.6] Due Process—Oral Argument

   Due process does not require that Respondent testify, and the Board does not need to hear from Respondent to assess his credibility, particularly where Respondent failed to testify at the hearing.

   [.7] Burden of Proof—Exceptions

   Respondent's exceptions are dismissed for lacking specific reference to the record, relying on evidence outside the record, and quibbling with the Findings without challenging them.

   [.8] Fiduciary Responsibilities—Conflict/Control

   A finding of control over entities getting loans is sufficient conflict to warrant prohibition. Control means that Respondent benefited from the transactions, exhibited personal dishonesty or willful disregard for the Bank's safety and soundness.

   [.9] Fiduciary Responsibilities—Conflict/Control

   The interrelationship between the entities and close associates of Respondent, and Respondent's relationship to all, evidences Respondent's role as the central, controlling figure throughout.

   [.10] Fiduciary Responsibilities—Conflict, affirmative duty to disclose

   Some actions taken by an entity, such as using a bank loan to pay down a classified loan and purchasing loans that allowed the Respondent to avoid contempt of court fines, can only be explained by Respondent's controlling influence.

   [.11] Fiduciary Responsibilities—Benefit

   As a 25% beneficiary of a revocable trust, Respondent received a benefit when the trust received an extension of credit from Respondent's bank.

   [.12] Fiduciary Responsibilities—Disclosures

   Respondent's disclosure of his status as successor trustee, but not as a beneficiary to the trust is not an adequate disclosure of his potential conflict of interest.

   [.13] Loans—Lending Limits

   A violation of Regulation O only requires that loans to insiders or their related entities exceed a certain limit, regardless of whether or not the loans were valuable to the institution.

   [.14] Prohibition, Removal or Suspension—Personal Gain

   Actual loss to the Bank is not required for an Order of Prohibition. It is sufficient that Respondent or Respondent's entities benefited or that the Bank would probably suffer damage.
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   [.15] Prohibition, Removal, or Suspension—Willful disregard for safety or soundness—Self Dealing

   Respondent did not disclose his involvement, nor the fact that the collateral substituted for the Bank would cause a substantial loss.

   [.16] Fiduciary Responsibilities—Conflict, affirmative duty to disclose

   Respondent had a duty to disclose information to the Bank's directors regarding a transaction they did not understand, that benefited entities to which he was a party, and cost the bank $800,000.

In the Matter of
ROQUE DE LA FUENTE II
Individually and as an Institution-affiliated party of
FIRST INTERNATIONAL BANK
CHULA VISTA, CALIFORNIA
(Insured State Nonmember Bank)
DECISION AND ORDER

FDIC-97-31e

   This case comes before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") on the Recommended Decision ("R.D.") of Administrative Law Judge Arthur L. Shipe (the "ALJ"), dated March 24, 2000, removing Roque de la Fuente II ("Respondent") from his position as an institution-affiliated party of First International Bank, Chula Vista, California (the "Bank"), and prohibiting him from further participation in the industry pursuant to section 8(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §1818(e). the case primarily involves numerous extensions of credit to entities allegedly controlled by Respondent as well as one loan to Respondent himself. The crucial issue is whether, in fact, Respondent does control these entities, thus rendering the extensions of credit violative of Regulation O, 12 C.F.R. Part 215, and/or section 23A of the Federal Reserve Act, 12 U.S.C. §371c. In addition, the Bank entered into two other transactions allegedly for Respondent's benefit that evinced breaches of his fiduciary duty to the Bank and unsafe or unsound practices. For the reasons set forth below, the Board agrees with the ALJ that these loans violated the law, adopts and incorporates by reference the ALJ's R.D., and orders the removal and prohibition of Respondent.

   On June 11, 1997, the FDIC issued a Notice of Intention to Remove from Office and to Prohibit from Further Participation ("Notice") against Respondent. He duly contested the Notice, and the case was assigned to the ALJ for hearing. After discovery, the parties tried the matter before the ALJ from April 20 to May 15, 1998, in San Diego, California. At that hearing, Respondent appeared pro se and did not testify.

   On March 24, 2000, the ALJ issued a 116-page R.D. removing and prohibiting Respondent. Respondent filed timely Exceptions to the R.D. Pursuant to delegated authority, the Deputy Executive Secretary remanded this case to the ALJ on July 5, 2000, to clear up questions regarding the contents of the record and the Certified Index. The case was resubmitted to the Board for final decision on September 13, 2000.

   This case involves multiple persons, entities and transactions. The R.D. describes these in great detail. Most of the facts set forth in the R.D. are undisputed, and therefore, a brief summary is sufficient here.

   1. Persons and Entities

   Respondent is the majority shareholder and a director of the Bank. He was board chairman from 1987 to 1993. Sidney Schwarz, a close associate of Respondent who has repeatedly performed accounting and other services for Respondent's family and its entities, is currently board chairman of the Bank and has been a director since 1993.

   Respondent is the sole owner of American International Enterprises ("AIE"), a real estate development and management com- ¹"Tr. (Vol._)" references are to the hearing transcript. "Ex." references are to the trial exhibits of the FDIC or Respondent. "Exc." references are to the Respondent's Exceptions to the R.D. "Br." references are to Respondent's Brief in support of the Exceptions.
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   pany. A close associate, Jose Luis Andreu, is vice president. Until early 1995, Respondent was the sole owner of National Enterprises, Inc. ("NEI"). In 1995, he transferred the stock in NEI to trusts set up for each of his children ("childrens' trusts"). The trustees of the trusts at the relevant times were Schwarz and Isaias Zapata, another close associate of Respondent. Andreu was vice president of NEI and is now chairman of its board of directors. Schwarz is a director of NEI.

   Rancho Vista del Mar, Inc. ("RVDM") and Rancho de la Fuente International Industrial Park ("RDF/IIP") are entities owned by Respondent's mother through offshore corporations. Respondent's mother lives in Mexico City and is a housewife who does not participate in the operations of these companies. Andreu is an agent for both. AIE has a contract to manage the property owned by these companies. RVDM had no employees.

   Fine Particle Technology Corporation ("FPTC") is a company in which Respondent owned an interest (5.6 percent) that he transferred to the childrens' trusts in 1995. Andreu and Zapatas owned 24.42 percent and 5.02 percent of FPTC respectively as of early 1995. Andreu has been a director and board chairman of FPTC and is currently president of FPTC. The company has no employees.

   C.T. Produce, Inc. ("C.T.") is an entity with which Respondent has a joint venture. Andreu is chairman of C.T.

   Respondent is also a beneficiary of a revocable trust set up by his father, the Roque de la Fuente Alexander Trust ("Alexander Trust"). He has a 25 percent interest in the Alexander Trust.

   2. Extensions of Credit

   In addition to the interrelationships of people and entities, the entities had significant economic relationships among themselves and with the Bank. The record describes numerous intercompany transactions. R.D. 45–51. Moreover, most of these entities received extensions of credit from the Bank. R.D. 6–7, 75–76. During the period from 1990 to the end of 1995, these extensions totaled slightly in excess of $9 million. In addition, in 1992, Respondent received an $800,000 extension of credit. It is undisputed that these extensions exceeded the Bank's legal lending limits under Regulation O and section 23A. R.D. 7–8 and n. 2.

   3. Other Transactions

   Two other transactions were at issue in this case. The first involved the release and substitution of collateral on a loan from the Bank to RVDM. R.D. 25–31. The original collateral to secure a $1.6 million credit consisted of 320 acres of property owned by RDF/IIP. The substituted collateral consisted of a first lien on other property owned by RVDM. The Bank already had a second lien position against this property. Four months after the release of the original collateral, Respondent was able to sell it for $2.1 million and used the money to pay down an NEI debt to another lender. In the same transaction, he also sold some land he owned for which he received $235,000. The Bank, however, was forced to foreclose on the loan and sold the substitute collateral at a loss in excess of $700,000.

   The second transaction involved a sale Respondent arranged of a parking lot the Bank held as Other Real Estate Owned ("OREO") to an unrelated third party, (" * * * "), with Bank financing. R.D. 31–33. * * * learned that the lot had environmental contamination problems and threatened suit against Respondent unless the Bank rescinded the transaction. To avoid the suit, Respondent arranged for an employee of NEI and AIE to acquire the parking lot and assume the loan through a company established by Respondent for this purpose. The transaction had the effect of releasing a solid borrower from a personal guarantee. Because neither the employee nor the company were financially qualified to engage in the transaction, Respondent arranged for NEI to fund loan payments.²

   Respondent repeatedly misled examiners concerning the status of the credit, and, as a result, was able to cause the FDIC to improve the loan's classification and forestall the need to recognize a loss or a capital adjustment. In addition, his actions permitted him to avoid any potential liability from the threatened fraud suit and from having to make a capital injection required under an outstanding cease and desist order. ² Ultimately, however, the Bank suffered no loss as a result of this transaction.
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   The ALJ, based on the record before him, recommended that Respondent be removed and prohibited. He found all three prongs of a section 8(e) action—misconduct, effect, and culpability—satisfied by the evidence. With regard to misconduct, he concluded that the repeated extensions of credit to Respondent and the various entities violated Regulation O and section 23A, governing limits on loans to or for the benefit of bank insiders and affiliates, and also constituted a breach of fiduciary duty. R.D. 6–24, 33–34. He concluded that the collateral substitution and * * * transactions constituted unsafe or unsound practices and breaches of fiduciary duty. R.D. 25–33, 35, 37.

   [.1] The ALJ also found the effect test satisfied because Respondent benefited personally from all of the transactions and the Bank suffered losses or other harm on some of the loans. R.D. 34, 35–36, 37. Finally, the ALJ concluded that Respondent's actions evinced both personal dishonesty and willful and continuing disregard of the Bank's safety and soundness. In the ALJ's view, Respondent concealed from the Bank his control over the entities involved in the Regulation O and section 23A violations, misrepresented the facts of the collateral substitution transaction while knowing he was benefiting at the Bank's expense, and, in the case of * * * , set up a sham transaction for his own benefit. R.D. 34–35, 36, 37–38.

   1. Control of the Affiliated Borrowers

   In arriving at these conclusions, the ALJ addressed a variety of contentions raised by Respondent at trial and in his Exceptions. Respondent claimed that he committed no Regulation O violations because he did not control the entities to which the Bank had made the loans. R.D. 8. As the ALJ recognized, the lending limits in Regulation O only apply to loans to an insider or that person's "related interests," and the issue of whether an interest falls within the ambit of Regulation O depends on whether the insider controls the interest. R.D. 8.³ However, he had no difficulty concluding that Respondent controlled the entities receiving extensions of credit and that they were "related interests."

   With respect to RVDM and RDF/IIP, owned by his mother, the ALJ noted that Respondent's company, AIE, had the exclusive contract to manage the property owned by the two entities and that Respondent testified that his mother did not want any responsibility for managing the companies. R.D. 11–12, 52–53, 55. Indeed, she could not be active without jeopardizing the special tax treatment of these companies based on her status as a non-resident alien. R.D. 50–52. The ALJ concluded that Respondent simply made all of the decisions for these companies, and that these decisions were `allegedly' ratified by his mother as owner. R.D. 12, 55. In his view, the conclusion that Respondent controlled these entities was "inescapable." R.D. 14.⁴

   The ALJ also concluded that Respondent controlled NEI even though he had transferred his interest in the entity to the trusts of his three children. R.D. 14–15. He observed that Respondent admitted continuing to make investment decisions for the trusts and that the trustees, close associates of Respondent, lacked any real knowledge of the trusts or their activities. R.D. 14–15, 59–62. In addition, AIE, by contract, managed NEI. R.D. 15, 62. Thus, in the ALJ's view, Respondent controlled the trusts and NEI. R.D. 15.

   Finally, FPTC, the ALJ found, was also a Respondent-controlled entity. R.D. 15–19. Not only did Respondent and two close associates control more than 25 percent of the stock, but FPTC took actions benefiting Respondent. FPTC permitted Respondent to use money lent to FPTC by the Bank to pay down a classified loan at the Bank and bought loans from the Bank that spared Respondent and other Bank directors from paying contempt fines even though prior to that time FPTC was not engaged in the business of purchasing loans. R.D. 16–17, 66, 70, 71; Tr. (Vol. 7) 202–05. In the ALJ's view, an independent company would not have taken these actions, and therefore, FPTC was "part ³ Regulation O places limits on loans to an "insider." 12 C.F.R.§215.4(d)(1). An "insider" includes the "related interest[s]" of that individual. 12 C.F.R. §215.2(h). A "related interest" is an entity "controlled" by the insider. 12 C.F.R. §215.2(n)(1). "Control" of an entity requires that the insider have either direct or indirect control of 25 percent of the voting securities, the power to elect a majority of the directors, or otherwise have the power to "exercise a controlling influence." 12 C.F.R. §215.2(c) (emphasis supplied).

   ⁴ The ALJ also found that Respondent failed to disclose these entities as related interests in filings that he made with the Bank and represented to the FDIC that he was not involved with these companies.
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   of the De La Fuente common enterprise." R.D. 17.⁵

   Respondent also challenged the allegation that the loan to the Alexander Trust violated Regulation O because, in his view, he was a beneficiary of a revocable trust, his 25 percent interest was contingent, and the loan, therefore, could not have provided him with the "tangible economic benefit" required by Regulation O. R.D. 9. Relying on an opinion of the Federal Reserve System General Counsel, the ALJ concluded that in fact the contingent interest would be enough to create a tangible economic benefit because of the inevitable danger of conflict of interest created by "incentive [the beneficiary has] to keep the trust funded and keep favor with the trustor, so as to ensure that any future contingent interest might come to fruition." R.D. 10.

   2. Misconduct Issues

   The ALJ found that the collateral substitution and transactions constituted unsafe or unsound practices and breaches of fiduciary duty. R.D. 25–33. Although Respondent did not vote on the collateral substitution transaction, the evidence was clear that he "was involved in every aspect of the . . . transaction from beginning to end" and "on every conceivable side of the transaction." R.D. 27. None of the other Bank board of directors members understood it, in part, because Respondent withheld critical information. R.D. 27–29, 96–97. Ultimately, the board approved the collateral substitution because it believed that the value of the original collateral was "clouded" by certain problems, and the proposed collateral was of approximately equal value but "unclouded." R.D. 29, 101–02. Respondent, however, because of his intense involvement in the negotiations of this transaction, knew that the proposed collateral was worth less. R.D. 97. He knew that the two "clouds"—the RDF/IIP bankruptcy and the endangered species issue—were non-existent. R.D. 88, 102. He also knew that the release of the original collateral would benefit him and that the transaction to create that benefit was already in place at the time of board approval of the substitution. R.D. 36, 95–96. Yet, he did not disclose what he knew to the Bank's board. R.D. 30–31, 36–37, 97–98, 101, 102.

   Indeed, although Respondent did not vote on the proposal because of the conflict of interest, the board asked him to come into the meeting at one point to explain the transaction. R.D. 27. In the end, despite portraying the deal as advantageous for the Bank, Respondent and his interests ended up receiving a benefit of $2 million while the Bank suffered a $700,000 loss. R.D. 30. As the ALJ put it, "[Respondent] engineered a transaction whereby he usurped the Bank's opportunity to have a problem loan paid off." R.D. 30.⁶

   Respondent was also "involved in all aspects of the transaction." R.D. 31. He misrepresented aspects of the transaction to FDIC examiners, avoiding classification of the loan. R.D. 32, 105. The transaction had the negative effects on the Bank of releasing a solid borrower from a guarantee and causing the loan to become delinquent. The transaction benefited Respondent by relieving him of potential liability through fraud litigation and of the need to make a capital injection that an outstanding cease and desist order might have required. R.D. 31–32, 110–11.

   3. Benefit/Loss Issues

   The final major issue addressed by the ALJ involved the effect of Respondent's misconduct for each transaction. In most cases, FDIC Enforcement Counsel had alleged a benefit to Respondent rather than a loss or other harm to the Bank.⁷ Relying on this Board's precedent, the ALJ rejected the contention that Respondent himself had to benefit personally; all that was necessary as a legal matter was an economic benefit to Respondent's related interest. R.D. 24–25. Most of the transactions, of course, directly benefited a related interest, although Respondent himself received one of the loans, for ⁵ The ALJ also found that 10 of the 12 loans that violated Regulation O violated section 23A governing loans to affiliates because of the control Respondent exercised over the entities. R.D. 21–24. The ALJ concluded that the test for "control" for purposes of section 23A was the same as for Regulation O, rejecting Respondent's claim that under the statute, control could exist only by virtue of share ownership, control of the election of a majority of the directors, or by a determination of the Board of Governors of the Federal Reserve System. Id..

   ⁶ Because Respondent had failed to provide accurate information to the Bank's board, the ALJ concluded that the bank directors could not have exercised good business judgment in approving the transaction. R.D. 30.

   ⁷ The gain to Respondent from the Regulation O and 23A violations totaled $6.35 million and $5.3 million respectively. R.D. 86.
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   $800,000. With regard specifically to the C.T. Produce loans, the ALJ found that since the proceeds were used to fund a joint venture between NEI and C.T. the loans were for the indirect benefit of a related interest, NEI. R.D. 19–20.⁸

   Respondent also contended that one extension of credit to FPTC, in July 1995, was exempt from Regulation O because, under the exemption contained in 12 C.F.R. §215.3(b)(4)(ii), it was allegedly extended "for the purpose of protecting the bank against loss or of giving financial assistance to it." R.D. 18. The ALJ found as a factual matter that the extension of credit was designed to "spare the directors [of the Bank] (including Respondent) from the imposition of [contempt of court] penalties" and concluded that as a legal mater the exemption only applied in circumstances not present in this case: the need to protect the Bank "against a loss arising from a credit extended to an unrelated third party." R.D. 19 (quoting from an Interpretive Letter of the General Counsel of the Federal Reserve Board).

   Both the collateral substitution and * * * transactions also raised an issue of whether Respondent had benefited or the Bank had been harmed. The ALJ found that these transactions had both effects. The proceeds from the sale of the released collateral in the collateral substitution transaction served to pay down an outstanding loan NEI had received from a third party. The ALJ found that "Respondent received the benefit of the $1.8 million proceeds used for this purpose," and, in addition, Respondent received $235,000 from the sale of his own personal property in connection with the sale of the collateral. R.D. 35. Thus, in the ALJ's view, Respondent plainly benefited from the transaction. Id. The transaction also injured the Bank, because, as the ALJ observed, the Bank was "placed in an inferior collateral position" and "incurred actual losses of approximately $716,000" when the underlying loan to RVDM went into default. R.D. 36.

   The ALJ also concluded that the * * * transaction resulted in a benefit to Respondent by relieving him of potential liability to * * * and the "need to personally inject capital into the Bank." R.D. 37–38. He also endangered the Bank and prejudiced the interests of depositors by arranging for assumption of the loan by an obviously unqualified borrower. R.D. 37.

   Respondent has filed a number of exceptions. One common theme is that the ALJ improperly based his findings on the "preponderance of the evidence" standard rather than the "substantial evidence" standard. Respondent challenges approximately 32 of the 599 Findings of Fact on a variety of issues including whether he received a benefit or the Bank sustained a loss as a result of the transactions at issue. He also takes exception to most of the ALJ's Conclusions of Law based on the "preponderance of the evidence" standard used.

   In his brief in support of the exceptions, Respondent challenges the ALJ's findings that he controlled the entities at issue, that the Alexander Trust was a related interest, that he received a benefit from the C.T. loan, and that he engaged in improper behavior in connection with the collateral substitution and * * * transactions. He also claims he did not receive due process from the FDIC and ALJ.

   After careful review of the record, the ALJ's very thorough Recommended Decision, and Respondent's exceptions, the Board concludes that the ALJ properly determined that Respondent should be removed and prohibited. It is clear to the Board that the transactions at issue, far from being appropriate arms-length transactions with independent parties, were engineered by Respondent with entities he controlled, for his benefit, and to the detriment of the Bank. Thus, the Board adopts and incorporates the ALJ's findings as supplemented by the discussion below.

   The issues raised by the exceptions can be divided into two groups: alleged errors infecting the entire proceeding and exceptions to specific findings. The Board will address the more general exceptions first.

   [.2] A. The General Exceptions

   The "preponderance of evidence" and due process issues, in Respondent's view, infected the entire proceeding and require reversal. However, the Board finds that these allegations have no merit and only require a brief discussion. ⁸ The ALJ found undisputed losses associated with the RVDM and Alexander Trust loans. R.D. 8, 34, 84–86.
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   As the Supreme Court and this Board have held, in an administrative proceeding, as here, governed by the Administrative Procedure Act ("APA"), the proponent of an action (in this case, FDIC Enforcement Counsel) must prove its case by a preponderance of the evidence. Steadman v. SEC, 450 U.S. 91 (1981); IMO John Westering, FDIC-94-167e, FDIC-95-187k at 5, n. 9 (May 17, 2000). The substantial evidence test applies to court review of an agency decision, not to the administrative proceeding itself. See In Re Seidman, 37 F.3d 911, 924 (3rd Cir. 1994). Thus, the ALJ applied the correct standard, and, in any case, Respondent benefited because the preponderance of the evidence standard is more rigorous than the substantial evidence standard. See Consolo v. FMC, 383 U.S. 607, 619–20 (1966) (Substantial evidence "is something less than the weight of the evidence").⁹

   [.3] The due process issue also gives the Board little pause. Although Respondent accuses (Br. 21) the ALJ of being a rubber stamp because he adopted the FDIC Enforcement Counsel's proposed Findings of Fact verbatim, Respondent challenges a very limited number of them (approximately 32), and many of those challenges are not based on any specific reference to the record. The Board notes that the findings were almost all quite precise, not vague, and supported by specific references to the record. Where the findings of fact proposed by a party are supported by the evidence in the record, there is nothing improper or objectionable about the ALJ's adoption of them as his own.

   [.4] Respondent also alleges (Br. 22) that the "FDIC has an `actual bias' or, at the very least, the `risk of actual bias.' " Apparently, he is referring to the ALJ. However, he identifies no specific basis in the record supporting this allegation. Rather, he seems to be arguing (Br. 22–23) that the bias existed because the ALJ rejected his view of the case. This argument lacks any colorable legal basis.

   [.5] [.6] His final due process claim (Br. 23–24) is that the outcome of this action was foreordained because the statute, 12 U.S.C. §1818(e), provides that the action for removal and prohibition be initiated when the FDIC "determines" that the requisite elements are present and the Notice used language that did not allege wrongdoing but rather, concluded it was present. This claim is meritless. The Board notes that the statute and Notice language are typical in the setting of administrative proceedings as well as of court proceedings, and the procedures here—a hearing on the record before the ALJ, the requirement of proof by a preponderance of the evidence and of a detailed recommended decision by the ALJ, the Board's de novo review, and court review of the Board's final determination—serve to ensure that a person charged under 12 U.S.C. §1818(e) has ample opportunity to challenge the allegations made in the Notice and present testimony and evidence supporting his position.¹⁰

   [.7] The specific exceptions are numerous. Nevertheless, the Board can deal with a significant number of them summarily. Many lack specific references to the record or specifically rely on evidence outside the record.¹¹ Some simply quibble with an inference drawn from the Finding of Fact but do not challenge the Finding itself.¹² The Board, therefore, overrules these Exceptions on this basis alone. ⁹ Respondent also alleges that two Findings of Fact (## 453 and 475) are unsupported because they rely on inadmissible hearsay. However, hearsay is admissible in administrative proceedings. In the Matter of * * * ((Insured State Non-Member Bank), FDIC-83-172b, 1 FDIC Enf. Dec. & Ord. (P-H) ¶ 5330 at A-338 (Nov. 19, 1984), aff'd on other grounds sub nom. Bank of Dixie v. FDIC, 766 F.2d 175 (5th Cir. 1985). In any event, none of the evidence relied on runs afoul of the hearsay rules. Finding of Fact #453 is based on an internal memorandum of a financial institution and is thus a business record for purposes of Fed. R. Ev. 803(6). Finding of Fact #475 is based on a document (Ex. 45) authored by * * * , who testified at the hearing, a document (Ex. 41) authored by someone else who had attended the meeting and authenticated by * * * , Tr. (Vol. 10) 13–14, and on testimony of an expert examiner based on a letter authored by Respondent. Thus, there is no hearsay problem with any of the evidence the ALJ relied upon.

   ¹⁰ Contrary to Respondent's view (Br.24–25), the 30-day period to file exceptions is perfectly reasonable. In addition, the Board does not believe that oral argument would benefit its decisionmaking process in this case and denies Respondent's request for it. His contention that the Board needs to hear from him to assess his credibility rings hollow in light of his failure to testify at the hearing.

   ¹¹ Exceptions to Findings of Fact nos. 93, 383, 384, 388, 389, 390, 394, 395, 398, 399, 400, 401, 437, 454, and 475.

   ¹² Exceptions to Findings of Fact nos. 93, 383, 384, 388, 389, 394, 400, 401, 437, 454, 455, 475, 483, 485, 487, 516, 517, 525.
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   In addressing the rest of the exceptions and challenges to the R.D., the Board, for convenience, will examine them on a transaction-by-transaction basis except for those involving the issue of control of the entities.

   1. Control of the Entities

   [.8] As noted above, the finding of violations of Regulation O and section 23A depends on the Bank making extensions of credit for the benefit, directly or indirectly, of a "related interest" (Regulation O), or an "affiliate" (section 23A), that is, an entity controlled by Respondent. 12 C.F.R. §   215.2(c) ("control"), (n) ("related interest"); 12 U.S.C. §   371c(b)(1)(C)(i) ("affiliate"), (b)(3)(A) ("control"). Indeed, once the finding of control is made, there is really no dispute about the violations or the appropriateness of prohibition. The finding of control means that Respondent benefited from each transaction (the requisite effect) and demonstrated personal dishonesty or at least willful and continuing disregard for the Bank's safety and soundness (the requisite culpability).¹³

   Respondent does not challenge the Findings of Fact concerning control of the entities except for #470 (Exc. 11). He contends, without any record support, that he was not the primary decisionmaker for RVDM and RDF/IIP. He also broadly alleges (Br. 4), without citing to the record, that he did not control RVDM, RDF/IIP, NEI or FPTC.

   Finally, he contends (Br. 11–12, 20) that he did not control NEI, C.T. or FPTC.¹⁴ In the case of NEI, he alleges (Br. 11–12) that no witness testified to his control over the entity and that the Federal Reserve had never made the finding he believes the law requires that NEI is an affiliate for purposes of section 23A.¹⁵ With regard to FPTC (Br. 20), he points out that the ALJ's finding of control is based on the combined stock ownership of Respondent and his associates, Andreu and Zapata, as well as testimony by one of the former shareholders that no one ever told him how to vote.

   [.9]The Board finds these exceptions without merit. Given the relationship among the people and entities and the numerous intercompany transactions, the ALJ correctly determined that Respondent was the central, controlling figure. As discussed above, RVDM and RDF/IIP are owned by his mother who cannot be and, in fact, is not active in their operation. Respondent's company, AIE, manages the property of these companies and his close associate, Andreu, is agent for them. AIE also manages NEI. In addition, at all relevant times, the trustees of the trust holding NEI stock were close associates, Schwarz and Zapata, or, for one period another person, * * * , none of whom had any real idea of the trust's business. R.D. 59–62. Schwarz is currently a director of NEI. R.D. 45. Furthermore, Respondent admitted making investment decisions for the trust.¹⁶

   [.10] FPTC's major shareholders at the relevant period during 1995, in addition to Respondent through the children's trust, were his close associates, Andreu and Zapata. In addition, the ALJ was persuaded by evidence that the company took two actions benefiting Respondent that could only be explained by his controlling influence over FPTC: allowing him to use money loaned by the Bank to FPTC to pay down a classified loan at the Bank and purchasing loans with financing help from the Bank that allowed the Respondent and other directors to avoid paying contempt of court fines.¹⁷

   In short, the evidence overwhelmingly points to Respondent's control of these en- ¹³ The findings of violations of either Regulation O or section 23A, standing alone, would support the removal and prohibition.

   ¹⁴ The ALJ never made a finding that C.T. was a related entity.

   ¹⁵ In the Board's view, the appropriate banking agency for enforcement purposes can make this finding after a hearing, as happened here. The enforcement process could not function if the Board of Governors of the Federal Reserve System needed to make this finding in cases in which it was not bringing the enforcement proceeding. The Board notes that the ALJ distinguished (R.D. 24) between the third prong of the control test under section 23A, 12 U.S.C. §371c(b)(3)(A)(iii), and a finding of "actual control" that the ALJ found to obviate the need to consider the third prong test. In the Board's view, the evidence the ALJ found to show "actual control" more than satisfies the third prong of the test—"exercises a controlling influence over the management or policies of the other company".

   ¹⁶ Respondent contends (Br. 11–12) that NEI is not a related interest because it does not meet the test under section 23A. However, that test applies to "affiliates" rather than "related interests" (covered by Regulation O rather than section 23A). The ALJ did not find that NEI was an "affiliate" for purposes of section 23A. R.D. 24 n. 11.

   ¹⁷ Respondent's reliance on the testimony of * * * to prove his lack of control over FPTC is misplaced. * * * sold all of his stock by the end of January 1995. R.D. 66. The two actions the ALJ believed to be indicative of Respondent's control happened during the latter half of 1995. The purchase of the loans occurred in July 1995 and the use of the loan money in September 1995. R.D. 16–17, 70–71. Indeed, the actions took place after the period during 1994 and very early 1995 when Andreu was accumulating most of his almost 25 percent holding of FPTC stock. R.D. 66.
{{1-31-01 p.A-3189}}

   tities, through his mother, his close associates, and his active participation in their affairs, rather than to a group of independent companies doing business at arms length.¹⁸ The record is replete with examples of Respondent negotiating on behalf of these entities and representing that he had decisionmaking authority. See, e.g., R.D. 49–51, 52, 55–58, 63–64, 71, 88–89, 91, 93–96, 98–101. The Board can only conclude that for purposes of Regulation O and section 23A, these entities are "related interests" or "affiliates."¹⁹

   2. The Alexander Trust

   [.11] Respondent raises several challenges (Br. 6–10 and n. 3; Exc. 3, 5–6) to the finding that the loan to the Alexander Trust supports the removal and prohibition.²⁰ His primary contention (Br. 6–10) is that as a beneficiary of a revocable trust, he could not receive a "tangible economic benefit" for purposes of finding a violation of Regulation O. See 12 C.F.R. §215.3(f). In the Board's view, the ALJ correctly determined that he did receive a "tangible economic benefit." The Board agrees with the opinion of the Federal Reserve System's General Counsel (quoted at R.D. 9) that because of the danger of conflict of interest, a 25 percent beneficiary of a revocable trust receives a benefit as that term is used in section 215.3(f) when the trust receives an extension of credit. As the ALJ put the matter: "The beneficiary of a contingent interest would have incentive to keep the trust funded and keep favor with the trustor, so as to ensure that any future contingent interest might come to fruition." R.D. 10.²¹

   [.12] Respondent also challenges (Br. 8–10; Exc. 3) the ALJ's finding that he failed to disclose his interest in the trust to the Bank at the time of the extension of credit. Respondent is simply wrong. As the Exhibit he relies on (#299) makes clear from the portions he has quoted, the Commercial Credit Authorization does not disclose his 25 percent interest. It only discloses his status as successor trustee (with a proviso that one of his close associates would act for him because of his interest in the Bank) in the event of his father's death. Thus, the Bank's board would not have known the current status of his interest at the time of the extension of credit.²²

   3. FPTC

   Respondent contends (Br. 14–15) that an exception to Regulation O applies to one of the four extensions of credit to FPTC: the loan that facilitated FPTC's purchase of two loans from the Bank that the ALJ concluded were purchased to relieve the directors, including Respondent, of contempt fines (R.D. 17). Regulation O provides an exemption for extensions of credit "for the purpose of protecting the bank against loss or of giving financial assistance to it." 12 C.F.R. §215.3(b)(4)(ii). While Respondent raises a point that theoretically could provide a defense, the record does not support the theory.

   The Board agrees with the ALJ's reliance ¹⁸ As Justice (then-Judge) Cardoza stated: "We must not close our eyes as judges to what we must perceive as men." People ex rel. Alpha Portland Cement Co. v. Knapp, 230 N.&. 48, 63 (1920), cert. denied sub nom. State Tax Comm'n v. Alpha Portland Cement Co., 256 U.S. 702 (1921), quoted in Donovan v. Bierwirth, 680 F.2d 263, 272 (2nd Cir., cert. denied, 459 U.S. 1069 (1982). In this case, the intertwining of the entities, their personnel and their transactions alone strongly suggests Respondent's control.

   ¹⁹ Respondent erroneously contends (Exc. 7) that he received no gain from the Regulation O and section 23A violations because no "money went into [his] pockets." The Board agrees with the ALJ that the test for gain or benefit under Regulation O and section 23A is whether the party or his related interests received a benefit. R.D. 24–25 (quoting Board cases). Respondent does not allege that under this test he received no benefit.

   ²⁰ Respondent challenged the findings (Exc. 5–6) that this loan resulted in losses to the Bank. However, he cites no record evidence to support this challenge, and, therefore, the Board upholds these findings.

   ²¹ Respondent puts much emphasis (Br. 8) on having been disinherited by his father at one point. The ALJ properly found this fact to be unpersuasive. The father's action is not relevant; he did not remove Respondent as a beneficiary of the trust, and, indeed, the possibility that his father would take some action to do so might lead Respondent to be even more inclined to favor the trust's interest over the Bank's to please his father. See R.D. 10.

   ²² His abstention from the vote on the loan does not absolve him from liability, contrary to his contention (Br. 9–10 and n. 3). Without disclosure of his true interest, his abstention is fatally undermined. However, the violation of Regulation O does not depend on his conduct since the Regulation imposes absolute limits on the amounts he can receive as an insider without regard to other limits imposed by the regulations concerning extensions of credit to insiders. Cf. 12 C.F.R. §215.4(d) (lending limits) with 12 C.F.R. §215.4(b) (prior approval requirement). The failure to disclose his interest would prevent the loan from satisfying the prior approval requirements and furnish another reason for concluding that the loan violated Regulation O.
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   on the Interpretive Letter of the Federal Reserve Board's General Counsel that the exception only applies "to enable an insider to protect a bank against loss arising from a credit extended to an unrelated third party" (R.D. 18–19 quoting the Interpretive Letter). Nothing in the record suggests that the loans purchased fell within the terms of this exception. The Board agrees, for the reasons stated by the ALJ, with his conclusion that, as a factual matter, the purpose of the transaction was to protect the directors from contempt fines since FPTC had never before engaged in this type of business (R.D. 18, 69–70). Indeed, the Declaration of Bank president James L. Redman readily admits that such was the purpose. Ex. 178, ¶ 5.

   [.13] That these loans might have turned out to be valuable to the Bank, as Respondent contends (Exc. 15), is irrelevant to the Regulation O inquiry. A violation of Regulation O merely requires that the extensions of credit to insiders or their related entities exceed a certain limit. 12 C.F.R. §215.4(d). Likewise, by its terms, the exception's applicability does not turn on whether or not the loans provide a benefit to the Bank as well as the insider. Thus, the purchase of these loans violated Regulation O.²³

   4. * * *

   [.14] Respondent challenges the ALJ's findings concerning the * * * loan as a basis for removal and prohibition, contending (Exc. 17–18; Br. 19) that the Bank suffered no loss on the loan. The flaw in this contention is that the ALJ never found that the Bank actually suffered a loss on the loan. R.D. 113. Rather, the ALJ's discussion and conclusions reveal two bases for removal and prohibition. First, Respondent benefited from the loan and his misrepresentations to the FDIC concerning its status because "1) it relieved him of any potential liability to * * * from threatened litigation and 2) it forestalled Respondent from having to make any capital injections, as the Bank did not immediately recognize losses associated with the * * * loan, and [sic] make any capital adjustments which may have been required by the existing cease and desist order." R.D. 32–33, 110–11, 113. Second, the Bank suffered potential loss and other damage because the transaction released a "solid borrower . . . from his personal guarantee on the loan" and substituted a borrower who was unable to service the debt resulting in the debt becoming delinquent. R.D. 32, 108–10, 113. Under the statute, it is enough either that Respondent benefited from the transaction and that the Bank would probably suffer loss or other damage. 12 U.S.C. §   1818(e)(1)(B). Actual loss is not necessary for removal and prohibition. See In the Matter of Bily Proffitt, FDIC-96-105e, 1 FDIC Enf. Dec. & Ord. (P-H) [Transfer Binder] ¶ 5251 at A-2977 (Oct. 6, 1998), aff'd, 200 F.3d 855 (D.C. Cir. 2000).

   5. NEI/C.T.

   Respondent contends (Br. 11) that there was insufficient evidence of a joint venture between NEI and C.T., thus precluding the loans to C.T. from violating Regulation O. The Board initially notes that since Andreu is board chairman of both companies, R.D. 44, the notion of a joint venture is hardly far-fetched. See note 15, supra. In addition, the Board agrees with the ALJ that the documents in the record and FDIC examiner Shovlowsky's testimony establish the existence of a joint venture between NEI and C.T. R.D. 73–74; FDIC Ex. 236, 241, 252–54; Tr. (Vol. 2) 196–97, 212–16.²⁴

   6. The Collateral Substitution Transaction

   Respondent mounts a major challenge to the ALJ's findings that the collateral substitution transaction constituted a breach of fiduciary duty and unsafe or unsound practice.²⁵ Most of his exceptions to specific facts (Exc. 7–14) and his Brief (Br. 12–19) deal ²³ The Board rejects Respondent's contention (Br. 4–5) that the FDIC was engaged in a "witch hunt" against the Bank. The internal memorandum (FDIC Ex. 870) quoted concerning reversal of gains appears to the Board to be simply a standard memorandum between staff raising an issue and attempting to explore what information would be needed to determine whether reported gains should be reversed. The Board also notes that the testimony of board member Dr. Willis, conceded that, notwithstanding the implication of his testimony that the FDIC treated the directors as if they were "nincompoops," he also said that "I think it's important to realize that there was some good advice given [by the FDIC] in many cases." Tr. (Vol. 16) 277.

   ²⁴ Respondent's attack (Br. 11) on Mr. Ankenbrand's testimony on this point is irrelevant since the ALJ did not rely on that testimony. R.D. 73–74.

   ²⁵ In connection with his challenge, he has relied extensively on deposition testimony of Bank president James Redman. Mr. Redman was not called as a witness at trial, and the deposition testimony was attached to Respondent's Post-hearing brief. Since this testimony was not admitted at trial, it is not part of the record before the Board, and, therefore, we do not consider it.
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   with this transaction. He attempts to paint a picture of a transaction in which he was relatively uninvolved and which would have worked out favorably but for the machinations of local government. After consideration of the record, the Board concludes that his claims are entirely disingenuous. There is strong evidence that Respondent did breach his duty to the Bank.

   The Recommended Decision describes this transaction in detail. The Board will only summarize its crucial aspects. The Board concludes that its complexity alone, as well as its transformation during its course, suggests a transaction generated with something other than the Bank's interests in mind. Or, to quote Director Schwarz's euphemistic view: "The purpose of doing this was basically to accommodate a client of the bank." Tr. (Vol. 16) 222. There is no doubt that Respondent's involvement was pervasive. R.D. 26–27, 88–99.²⁶ The Board agrees with the ALJ that it was undertaken primarily to benefit him and his interests. R.D. 30.

   In evaluating the transaction, the Board focuses, as the ALJ did, on the roles of Respondent and the Bank's board. The crucial questions concern Respondent's role in arranging this complex transaction, his knowledge of the details and the Bank board's decision-making process. Respondent did not vote at the board meeting approving the transaction. This recusal, however, only has legal significance for Respondent if the Bank's board had adequate information so that it could make a fully-informed, independent decision on the transaction. In the Board's view, this was not the case.

   By 1992, the Bank had outstanding extensions of credit to RVDM totaling $1.6 million secured by parcels of real estate, some of which RDF/IIP owned. R.D. 86–87. On January 27, 1994, RDF/IIP, an entity Respondent controlled, entered into an agreement to sell some land, including a portion of the land partially securing the RVDM loans, for $1.9 million. R.D. 87. Subsequently, the deal expanded to include all of the RDF/IIP land partially securing the RVDM loans. R.D. 87. The purchaser of the land needed "environmental mitigation" property to offset land it was developing elsewhere. Id.

   During the months of March and April, 1994, the deal evolved as Respondent negotiated to have some of his personal property, as well as some property owned by RVDM and securing the extensions of credit, included in the deal as well. R.D. 88–90.²⁷ As of April 4, the land owned by RDF/IIP appeared to be the primary "mitigation" property under consideration by the purchaser. R.D. 90.²⁸

   In order to effect the transaction, the Bank had to agree to release the RDF/IIP property as collateral for the RVDM loan. On April 7, Respondent made such a request, suggesting that other property owned by RDF/IIP could be substituted as collateral. R.D. 91–92. The Bank president responded favorably so long as the substituted collateral was of at least equal value and marketability. R.D. 92. He noted a concern about the original collateral because he believed RDF/IIP was in bankruptcy. Id. He was apparently unaware that those bankruptcy proceedings had been dismissed in early March (R.D. 88). At this time, RVDM proposed certain property it owned as the substitute collateral. R.D. 92.

   At about the same time and prior to the ²⁶ One issue he raises repeatedly in challenging specific Findings of Fact (##439, 440, 442, 455) is whether the initials "RDLF" in the Bank's contact sheet (FDIC. Ex. 26) refer to him or to "Rancho De La Fuente" (Exc. 7–8, 10). * * * , the handling officer for the loan who prepared the contact sheet specifically testified that "RDLF" stood for Roque De La Fuente. Tr. (Vol. 9) 182–84. This testimony is confirmed by a reference on Ex. 26 at 5: "RDLF request we order appraisal immediately on property he is requesting to be substituted." (emphasis supplied). Respondent relies on statements made by * * * on cross-examination for the contrary proposition (Exc. 8), but what * * * implied on cross-examination was that he did not consistently use either Respondent's name or initials but one or the other. Tr. (Vol. 9) 203 (1.25)—204 (1.6). Respondent also points out that the actual letter referenced is from RDF/IIP. While this is true, it merely proves what the ALJ found: that in everyone's eyes Respondent effectively was the company.

   Respondent also contests (Exc. 11) Finding of Fact #470 stating that he was the primary decision-maker on behalf of four entities involved in the transaction. He admits being the decision-maker for two of the four but not for RDF/IIP and RVDM. In light of the Board's finding that he controlled those two entities, this challenge lacks any merit and, in any case, is belied by the course of negotiations outlined by the ALJ. R.D. 87–99.

   ²⁷ Respondent admitted intimate involvement in these negotiations. R.D. 91.

   ²⁸ Respondent contends (Exc. 7) that Finding of Fact #434, on which this sentence is based, is inconsistent with Findings of Fact ##419 and 420. This is wrong because those findings (##419 and 420) address an earlier time frame (mid-March) and, in any event, are not inconsistent.
{{1-31-01 p.A-3192}}

   disposition of this transaction by the Bank's board, Respondent's company, NEI, already committed the proceeds of the sale of the original collateral to pay down a loan from another financial institution. R.D. 93–94. Respondent did not inform that institution that the source of the money pledged was property currently serving as collateral for a loan at the Bank. R.D. 94.

   On June 15, 1994, Respondent attended a meeting, on behalf of all of the entities selling property to the purchaser, with the purchaser and the U.S. Fish and Wildlife Service concerning environmental issues. R.D. 95. He alone represented the sellers. Id. At the meeting, he offered a further modification of the transaction that would result in the sale of 310 acres of RDF/IIP property securing the RVDM loans and 40 acres of property he owned personally. R.D. 95–96. This proposal appeared to satisfy the government and ended up representing almost exactly the actual transaction. R.D. 96.

   On June 17, the Bank's board held a meeting concerning the collateral substitution transaction. Id. Other than Respondent's abstention from voting, what is undisputed about this meeting is that the board did not understand the transaction. The loan officer handling the matter, * * * , had not prepared a credit memorandum because he did not have an adequate understanding of the transaction. R.D. 96. Nonetheless, the meeting went ahead. Id. * * * did not make a recommendation on the advisability of the Bank entering into the transaction and could not explain the details. Id. He still does not understand the transaction. Tr. (Vol. 9) 187.

   During the meeting, the board called Respondent into the meeting to explain the transaction. R.D. 96–97. He apparently explained the details of the transaction. Tr. (Vol. 9) 187. However, his explanation did not touch on a number of issues that board members felt were important and of which they were apparently unaware. R.D. 28, 101–02.

   For example, Director Richins was unaware that RVDM was delinquent on the loan at the time, that RDF/IIP was no longer in bankruptcy, and that another bank had begun foreclosure procedures against RVDM in 1993. Tr. (Vol. 16) 6–8. The board minutes do not reflect the fact that Respondent's transaction involving the original collateral was in place at the time of the board meeting or that he had already pledged the proceeds. R.D. 98. The mathematics of the transaction were not discussed. R.D. 97. Finally, as minutes of a later board meeting make clear, the board members were under the impression that the bankruptcy and environmental issues "clouded the possible sale" of the original collateral whereas the substituted collateral appeared not to raise any of these issues. R.D. 101–02.

   [.15]Respondent, as the individual who controlled RDF/IIP, would have known that the entity was no longer in bankruptcy. As the person involved in the negotiations with the federal government, he would have known that no environmental issues existed with respect to the original collateral. R.D. 102.²⁹ He also knew that the substitute collateral was not of equal value to the original collateral. R.D. 97.

   [.16] Despite his knowledge, he appears not to have communicated any of this information to the Bank's directors. This Board is very concerned that the Bank's directors would invite the interested party to explain to them a transaction they did not understand so that they could vote on it. If they and the officers did not understand the transaction, they should not have voted on it until they did understand it rather than asking Respondent to explain it. However, once they invited Respondent to explain the details of the transaction and he agreed to do so, he had an obligation to put the Bank's interests before his own and disclose any information that might bear on his role in, and the prudence of, the proposed transaction. See Lowe v. FDIC, 958 F.2d 1526, 1535–1536 (11th Cir. 1992), aff'g FDIC-89-21k, 1 FDIC Enf. Dec. and Ord. (P-H) ¶ 5153 at A-1536 (1990). Therefore, he breached his fiduciary duty to the Bank and committed an unsafe or unsound practice.

   One defense seems to be that the Bank had more than ample collateral even with the substitution. However, that was a decision for the Bank's directors to make, once they were fully informed of all of the facts. Thus, his challenge to the ALJ's conclusion that he engaged in a breach of fiduciary duty and an unsafe or unsound practice must fail. ²⁹ It is not entirely clear from the testimony or the ALJ's findings what the extent of the environmental "cloud" was. The clearest indication from the testimony is that board members believed the original collateral to be unmarketable because of the environmental issue involving the gnatcatcher. Tr. (Vol. 15) 216–17. That Respondent had been able to find a market for the collateral as "mitigation" property would be important.
{{1-31-01 p.A-3193}}

   Respondent also attempts to defend on the basis of the alleged failure of the County of San Diego to honor an agreement concerning RVDM property. This defense is based (Br. 16, 17) on an Exhibit 905 never admitted into evidence and the deposition testimony of Mr. Redman attached to Respondent's post-hearing brief and also never admitted into evidence. In any event, this evidence would not change the key facts: the Bank's board made a decision to substitute less-valuable collateral based on incomplete information. Accordingly, Respondent cannot rely on the County's alleged action.³⁰

   This record contains more than ample justification for Respondent's removal. It is clear that he used the Bank to finance the companies and other entities comprising the interlocking web of his interests with little regard for the law or the Bank's safety and soundness. Indeed, once the Board disposes of the control issue and the question of whether Respondent received gains by his actions, the myriad Regulation O and section 23A violations are undisputed. In addition, the Board concludes that any one or combination of those loans that, in addition to the $800,000 loan to Respondent personally, would violate the lending limits of either Regulation O or section 23A and would suffice to justify his removal and prohibition. In addition, the Board concludes that the collateral substitution and * * * transactions together independently justify his removal and prohibition. Accordingly, based on the overwhelming record in this case, the Board adopts and incorporates by reference the ALJ's recommended decision removing and prohibiting Respondent and issues the following order implementing this Decision.³⁰

   For the reasons set forth above, and pursuant to section 8(e) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e), it is hereby ORDERED that:

   1. Roque de la Fuente II is hereby removed from First International Bank, Chula Vista, California.

   2. Roque de la Fuente II shall not participate in any manner in the conduct of the affairs of any insured depository institution, agency or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. §1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. §1818(e)(7)(D).

   3. Roque de la Fuente II shall not solicit, procure, transfer, attempt to transfer, vote, or attempt to vote any proxy, consent or authorization with respect to any voting rights in any financial institution, agency, or organization enumerated in 12 U.S.C. §1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. §1818(e)(7)(D).

   4. Roque de la Fuente II shall not violate any voting agreement with respect to any insured depository institution, agency, or organization enumerated in section 8(e)(7)(A) of ³⁰ Respondent also challenges (Exc. 4–5) the ALJ's findings that the Bank suffered a loss on the collateral substitution transaction. In his view, whatever loss was suffered has been or will be recouped by the Bank. This contention does not help Respondent because the undisputed gain to him on the transaction would justify the removal and prohibition. In addition, he failed to raise the issue of whether the transaction resulted in a loss before the ALJ and has therefore waived it. 12 C.F.R. §308.37(a)(2). However, the undisputed fact that the Bank initially sustained losses and took a charge-off certainly establishes "other damage" and probably "loss" for purposes of 12 U.S.C. §1818(e), even if the loss is later recouped. See In the Matter of James L. Leuthe, FDIC-95-15e and 95-16k, 1 FDIC Enf. Dec. & Ord. (P-H) [Transfer Binder] ¶ 5249 at A-2930 (Aug. 31, 1998), aff'd mem., 194 F.3d 134 (D.C. Cir. 1999). A charge-off simply constitutes recognition of a loss and has the same effect as a loss: a reduction in a bank's capital. That the bank may recoup the loss later does not change this initial effect. In any event, the Board's review of the only record evidence cited by Respondent in support of his challenge, Tr. (Vol. 20) 169–78, views that evidence as supporting a different proposition: that ultimately the Bank would recoup its losses and charge-offs, not that there was no loss. This is a very different point.

   ³¹ Respondent filed a request on August 30, 2000, to reopen the record because he believes the current record is stale. His request, however, does not specify why our decision would be affected in any way by the fact that the hearing was held in 1998, and, therefore, the request is denied on this basis alone. Indeed, given the content of his exceptions, it seems likely that his request to update the record is really a request for an opportunity to prove that the Bank ultimately suffered no losses because of his conduct. Since, the Board's decision does not depend on a finding that the Bank ultimately suffered losses on any of the loans at issue, see n. 27, supra, there is no reason to reopen the record for such evidence.
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   the FDI Act, 12 U.S.C. §1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. §1818(e)(7)(D).

   5. Roque de la Fuente II shall not vote for a director, or serve or act as an institution-affiliated party, as that term is defined in section 3(u) of the FDI Act, 12 U.S.C. §1813(u), of any insured depository institution, agency, or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. §1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. §1818(e)(7)(D).

   This ORDER will become effective thirty (30) days from the date of its issuance. It will remain effective and in force except to the extent that, and until such time as, any provision shall have been modified, terminated, suspended, or set aside by the FDIC.

   IT IS FURTHER ORDERED that copies of this Decision and Order shall be served on Roque de la Fuente II, FDIC Enforcement Counsel, the ALJ, and the Superintendent of Banks for the State of California.

   By direction of the Board of Directors.

   Dated at Washington, D.C., this 21st day of November, 2000.

In the Matter of
ROQUE DE LA FUENTE II
Individually and as an Institution-affiliated party of
FIRST INTERNATIONAL BANK
CHULA VISTA, CALIFORNIA
(Insured State Nonmember Bank)
DECISION AND ORDER

FDIC-97-31e

   For the Federal Deposit Insurance Corporation:

   Ms. JoAnna A. Gekas, Esq.

   Ms. Frances L. Johnston, Esq.

   Mr. Joseph J. Sano, Esq.

   For the Respondent:

   Mr. Roque De La Fuente II, pro se

   ARTHUR L. SHIPE, Administrative Law Judge

   This action arises out of a Notice of Intention to Remove from Office and to Prohibit from Further Participation, issued by the Federal Deposit Insurance Corporation on June 11, 1997. The Notice, brought pursuant to section 8(e) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e), seeks to remove Respondent Roque De La Fuente II as an institution-affiliated party of the First International Bank, Chula Vista, California, and to prohibit his further industry participation.

   The matter was tried before me during the period April 20 to May 15, 1998, in San Diego, California, wherein the FDIC appeared through the above enforcement counsel and Respondent appeared pro se.

   On the record as a whole, including my personal observation of the witnesses, briefs, and arguments presented, I recommend that the FDIC Board of Directors remove and permanently prohibit Respondent De La Fuente, for the reasons set forth below.

   Respondent De La Fuente II (hereinafter "Respondent") is the majority shareholder of First International Bank (hereinafter "FIB" or "the Bank"), having acquired control of the institution in 1987. He sits as a member of the Board of Directors, and served as its Chairman from 1987 to 1993. Immediately before acquiring control of FIB, Respondent served as director of * * * until his unsuccessful attempt to acquire control of that institution.

   Respondent is a businessman, engaged in multiple ventures, partnerships, and other associations. He is the sole owner of American International Enterprises (hereinafter "AIE"), a real estate development and management company with holdings in and around San Diego. He was the 100 percent owner of National Enterprises, Inc. ("NEI") until early 1995 when he transferred the stock of the company to three trusts of his children, and reportedly resigned from all positions with the company. As the evidence demonstrates, however, Respondent continued to exercise considerable control and influence over the operations of NEI.
{{1-31-01 p.A-3195}}

   His many other business interests are interconnected through complex and intricate means. Witnesses described the many different entities as a "spider web" or a "bowl of spaghetti," and Enforcement Counsel utilized the following diagram to depict the relationship between the various entities relevant here:

[Diagram not viewable on line.]

   These characterizations, it turns out, are completely accurate. Among the Respondent's related entities there existed a series of management agreements whereby Respondent himself, through AIE, managed certain of the companies pursuant to contract. Some companies would lend collateral among themselves; some would transfer funds between them; others would enter option agreements to purchase stock or realty from one another; while others would enter into joint ventures. Virtually all of Respondent's activities operated out of his offices located at 5440 Morehouse Drive in San Diego, California.

   Suffice it to say that Respondent's many business activities are somewhat commingled and transfused. For this reason, it becomes difficult to distinguish among the separate entities—a distinction quite important when dealing in the regulated field of banking.

   Aside from the interconnections and interrelationships that exist, there are many other facts and transactions which can be explained only by assuming that the De La Fuente entities are all related. Respondent raises considerable objection to these assumptions, but elected not to testify and explain the circumstances. In many respects he alone is the only person that could truly know, understand, and explain the intricacies and details concerning the organizations. For whatever reason he chose not to do so.

   Among the various entities relevant to this proceeding are the following: Rancho Vista del Mar, Inc. (hereinafter "RVDM") and its sister company Rancho De La Fuente/International Industrial Park ("RDF/IIP"). The Respondent's mother, Bertha Guerra de De La Fuente, technically owned these entities through a series of offshore corporations, and served as president of RVDM. As the evidence demonstrates, however, Re-
{{1-31-01 p.A-3196}}

   spondent's involvement with these entities is substantial.

   AIE (introduced briefly above) is a California corporation wholly-owned by Respondent De La Fuente. Respondent at all times relevant served as president of AIE, and naturally exercised considerable control over its management and policies. NEI (also introduced briefly above) is a California corporation wholly owned by Respondent De La Fuente until early 1995. That year Respondent purportedly "gifted" the stock of this company to three irrevocable trusts for his children, and claims to have ended his involvement in the affairs of NEI. The evidence, however, establishes otherwise.

   The Roque De La Fuente Alexander Revocable Trust No. 1 ("Alexander Trust") is a trust created by Respondent's father in 1979. Respondent admittedly has a 25 percent contingent interest in this trust, which holds title to a number of other business assets. Respondent has regularly reported his interest in this asset, though when necessary for other purposes, he seeks to distance himself from the trust.

   Witec Cayman Patents ("Witec Patents") and Witec Cayman Services ("Witec Services") are two entities of which Respondent is a part owner, and previous officer. His involvement with these entities dates back to at least 1982 when he was appointed vice-president of Witec Services, eventually becoming president in 1990.

   Several other related entities which play a somewhat lesser role in this proceeding include Fine Particle Technology Corporation ("FPTC"), a company in which Respondent held an ownership interest which he transferred to the 1995 Irrevocable Trusts. American International Racing ("AIR") is Respondent's wholly-owned company; D&D Landholdings ("D&D") is a partnership of which Respondent owns at least 75 percent through AIR. C.T. Produce, Inc. ("C.T. Produce") is an entity involved in a joint venture with Respondent.

   Of the above entities, the Alexander Trust, RDF/IIP, RVDM, FPTC, NEI, and C.T. Produce have all been borrowers of the First International Bank during the time covered by the FDIC's Notice. Loans to the Alexander Trust and RVDM have resulted in losses to the Bank in excess of $1.3 million.

   The FDIC's case against Respondent is based on three primary allegations:

   (1) That Respondent concealed his interest in and control over his various related interests which resulted in multiple extensions of credit by the Bank in violation of Regulation O and Section 23A; (2) that Respondent proposed and personally benefited from a transaction to substitute collateral held by the Bank for less valuable collateral and (3) that Respondent arranged a Bank transaction designed to conceal and forestall the recognition of Bank losses on a loan made to * * * , thereby protecting himself from personal liability.

   1. Extensions of Credit to Respondent's Related Interests

   The Notice alleges that a number of extensions of credit made by the Bank violated provisions of Regulation O (12 C.F.R. Part 215) and that Respondent participated in and aided and abetted those violations. Regulation O limits loans that banks may extend to insiders, and defines the term "insider" as a director or principal shareholder including "any related interest of such person." 12 C.F.R. §215.2(h).

   The applicable limitation here is that no more than 15 percent of the bank's unimpaired capital and surplus may be loaned to an insider and his related interests, with the term "related interest" including any company "controlled" by an insider.¹ The regulation provides that an extension of credit is considered made to an insider to the extent that the "proceeds are transferred to an insider or are used for the tangible economic benefit of the insider." 12 C.F.R. §215.3(f).

   The specific loans at issue in this allegation include the following:

   – $1 million extension of credit to the Alexander Trust on May 17, 1990 which exceeded the Bank's $630,000 lending limit.

   – $1 million extension of credit to RDF/IIP on October 8, 1990, which exceeded the Bank's $702,000 lending limit.

   – The $400,000 extension of credit to RVDM on December 26, 1990, which, when aggregated with the previous extensions of credit exceeded the Bank's $702,000 lending limit.

   – The $800,000 extension of credit to RVDM on January 24, 1992, which when aggregated with the then existing extensions of credit, exceeded the Bank's $820,000 lending limit.

   – The $1.6 million extension of credit to RVDM on July 15, 1992, which exceeded the Bank's $976,000 lending limit.

   – The $800,000 extension of credit to Respondent on September 9, 1992, which when aggregated with the existing extensions of credit exceeded the Bank's $976,000 lending limit.

   – The $763,000 extension of credit to FPTC on July 20, 1995, which when aggregated with the existing extensions of credit exceeded the Bank's $814,000 lending limit.

   – The $1.35 million extension of credit to FPTC on August 11, 1995 which exceeded the Bank's $814,000 lending limit.

   – The $750,000 extension of credit to NEI (by virtue of assumption of Respondent's loan) on October 27, 1995, which when aggregated with the existing extensions of credit exceeded the Bank's $854,000 lending limit.

   – The $600,000 extension of credit to FPTC on November 8, 1995, which when aggregated with the existing extensions of credit exceeded the Bank's $857,000 lending limit.

   – The $200,000 extension of credit to C.T. Produce on December 18, 1995, which was for the tangible economic benefit of NEI, when aggregated with the existing extensions of credit exceeded the Bank's $854,000 lending limit.

   – The additional $800,000 extension of credit to FPTC on December 28, 1995, which when aggregated with the existing extensions of credit exceeded the Bank's $854,000 lending limit.

   Respondent does not dispute that the above loans were made, nor does he dispute that as a Bank director and controlling shareholder, Regulation O applies to him. With one exception, Respondent admits that Enforcement Counsel accurately calculated the Bank's lending limit for purposes of determining whether Regulation O was violated.²

   Nor does Respondent dispute that the loan to the Alexander Trust on May 17, 1990, and the loan to RVDM on July 15, 1992 both defaulted, causing collective loss to the Bank in the amount of $1.34 million. Rather, the only issue with respect to the Regulation O allegations is whether these entities are in fact Respondent's related interests due to "control," and whether Respondent and his interests received the tangible economic benefit of the Alexander Trust and C.T. Produce loans.

   Regulation O defines the term "control" as follows:

   (1) Control of a company or bank means that a person directly or indirectly, acting through or in concert with one or more persons—

   (i) owns, controls, or has the power to vote 25 percent or more of any class of voting securities of the company or bank

   (ii) controls in any manner the election of a majority of the directors of the company or bank; or

   (iii) has the power to exercise a controlling influence over the management of the company or bank.

   12 C.F.R. §215.2(c).

   a. The Alexander Trust

   Enforcement Counsel contend that Respondent received the "tangible economic benefit" of the Alexander Trust loan within the meaning of 12 C.F.R. §215.3(f). While the proceeds of the credit were not transferred directly to Respondent, Enforcement Counsel contend they were used for his economic benefit.

   There is no dispute that the Respondent at all times relevant to the Notice had a 25 percent interest in the assets of the Alexander Trust. Respondent repeatedly claimed this ownership in filings made with the FDIC in 1985 and 1987; in a loan application in 1990; and in civil depositions conducted in 1990 and 1995. Respondent's position is simply that the term "tangible economic benefit" does not apply to a beneficiary of a revocable trust, as the contingent interest of ² Though Respondent denied that the FDIC had accurately calculated the Bank's lending limit as of December 31, 1999, I find the calculation correct in all respects. Respondent did stipulate at hearing that the calculation was correct for the hearing only.
{{1-31-01 p.A-3198}}

   a revocable trust may be later changed at the wishes of the settlor.

   In 1980 the General Counsel of the Board of Governors of the Federal Reserve System issued an interpretive opinion of Regulation O. In describing an issue substantially similar to the one at hand, the opinion states:

   The final question posed in your letter is whether an extension of credit by a member bank to an estate or trust of which a director of the member bank is a beneficiary (but not a trustee or executor) is covered by Regulation O. Under section 215.3(f) of Regulation O, an extension of credit may be considered made to the director-beneficiary to the extent "the proceeds of the extension of credit are used for the tangible economic benefit of, or are transferred," to the director. An extension of credit by a member bank to an estate or trust of which a member bank director is a beneficiary would, in our view, inure to the benefit of the director as a beneficiary of the trust or estate. Whether or not the extension of credit to the estate or trust would be considered made to the director-beneficiary under section 215.3(f) would depend upon the size of the director-beneficiary's interest in the estate or trust. In our view, and consistent with the definition of control in the statute, an extension of credit by a member bank to the estate or trust would be considered made to the director-beneficiary if the director-beneficiary has a 25 percent or more present or contingent interest in the estate or trust. This position is consistent with a 1974 Board staff interpretation that a loan by a member bank to a trust in which an executive officer of the bank was a beneficiary would be considered a loan under section 22(g) of the Federal Reserve Act and then existing Regulation O. The staff reasoned that a personal interest in the income or assets of the trust, even a future interest, inevitably creates the danger of a conflict of interest between the officer's duty to the bank and his/her personal enrichment.

   1980 W.L. 119519 (F.R.B.), Ruling No. 3-1062.1 (May 23, 1980) (emphasis added).

   I find this analysis convincing. It stands to reason that a contingent interest in a trust, which Respondent admits he had here, would be sufficient to create a "tangible economic benefit" within the meaning of Regulation O. The insider would naturally be inclined to favor his interest as beneficiary of a trust. In the case of a revocable trust, wherein the trustor may change the beneficiary designation, the insider may be even more inclined to favor this interest. The beneficiary of a contingent interest would have incentive to keep the trust funded and keep favor with the trustor, so as to ensure that any future contingent interest might come to fruition.

   Respondent argues at length that the contingent nature of his interest in the Alexander Trust makes the limitations of Regulation O inapplicable. I cannot agree with this position, however.

   Rather, I find the advisory opinion correctly states what must be the law on this issue, Regulation O applies to credit extensions to an estate or trust in which an insider has a 25 percent or greater interest, regardless of whether the interest is present or contingent. Loans of this nature present the types of risk which Regulation O intended to avoid. For these reasons I conclude that the contingent nature of Respondent's interest in the Alexander Trust renders applicable the appropriate limitations of Regulation O.

   Respondent raises several other arguments concerning this allegation, including that his abstention from the vote on the Alexander Trust loan should excuse any violation, that the FDIC should have earlier challenged this credit extension, and his claim that he was allegedly at one point disinherited from his father's will (there is no evidence that he was ever removed as a beneficiary of the Alexander Trust). I find these arguments unpersuasive, and conclude that Respondent De La Fuente received the tangible economic benefit of this loan, within the meaning of Regulation O. Similarly I find the limitations contained in the regulation were violated.

   b. RVDM and RDF/IIP

   Enforcement Counsel argue that Regulation O applies to the RVDM and RDF/IIP loans as Respondent has "power to exercise a controlling influence over the management or policies of the compan[ies] . . . " 12 C.F.R. 215.2(c)(1)(iii). Enforcement Counsel concede that Respondent's mother, Bertha Guerra de De La Fuente is the ostensible owner of RVDM and RDF/IIP through offshore corporations. They argue, however, that Respondent has power to exercise a controlling influence over these companies, and in fact has had such power from the moment
{{1-31-01 p.A-3199}}

   the companies were formed. Respondent denies substantive involvement with the two companies—a denial rather quickly disproven.

   The evidence establishes that RVDM and RDF/IIP are the successor corporations to two companies which originally acquired a single piece of real property in the Otay Mesa area of San Diego. Respondent engineered the purchase of this real estate in 1982, and decided how best to structure the two resulting companies and how best to allocate the property between them. The resulting corporate structure was designed to receive the most favorable tax treatment possible, and was accomplished through ownership of the companies by Respondent's mother, a foreign national.

   After creating this corporate structure, Respondent's wholly owned company AIE was given the exclusive contract to manage the property on behalf of RVDM and RDF/IIP. As Respondent himself described in prior testimony in another proceeding, given in 1990:

We [i.e. AIE] were involved from the inception of acquiring the property, managing the property, selling the property, processing different permits through the governing bodies, and eventually is selling—to sell the property.

   FDIC Exhibit 326.

   Respondent also testified in the prior proceeding that his mother, the owner of RVDM and RDF/IIP "did not want to have the day-to-day responsibility of managing the company . . . " and wanted to be a "completely passive 100 percent investor[   ]." Id. Indeed, as a non-resident alien, Respondent's mother was subject to restrictions as to the amount of time that she could spend in the United States and would have suffered adverse tax consequences if she had actually been running the companies she owned.

   Pursuant to the management agreement, agreement, Respondent, through AIE, managed and developed the properties owned by RVDM and RDF/IIP. Respondent made all decisions regarding purchase, sale, trade, investment, and development of the properties, which decisions were allegedly "ratified" by his mother, the legal owner.

   Respondent caused a number of important steps to be taken concerning the development of real property in the Otay Mesa area. His biggest success came as a result of a county condemnation case in which he received approximately $38 million when property owned by RVDM and RDF/IIP was condemned by the County of San Diego.

   Respondent was a constant participant in the condemnation proceedings on behalf of RVDM and RDF/IIP. He negotiated all aspects of the case with county officials, attended meetings, and testified as principal on behalf of the corporations. From at least 1987 to 1992 he identified himself as vice president of both RVDM and RDF/IIP, and ample evidence exists from business associates that Respondent actually exercised day-to-day control of RVDM and RDF/IIP. He negotiated loans from financial institutions, settled fee disputes with accounting firms, negotiated and sold tracts of property, retained accountants and appraisers, and otherwise exercised complete and actual control over the companies.

   Respondent denies, however, that he exercised any controlling influence over the management or policies of the companies. He argues that section 215.2(c)(1)(iii) requires that "the power to exercise a controlling influence" requires some showing of ownership, authority to vote stock, or ability to elect directors. He cites a Federal Reserve Board Staff Opinion and FDIC Advisory Opinion for the proposition that the "power to exercise a controlling influence" must relate to ownership.

   Neither of the cited opinions gives support to his claim. Rather, the two opinions deal with the rebuttable presumption of control by ownership under section 215.2(c)(1)(i)—and not the power to exercise a controlling influence under section 215.2(c)(1)(iii). These are two very different measures of control, and the FDIC has never alleged Respondent's ownership of RVDM and RDF/IIP. Rather, the allegation has always been that he exercised a controlling influence over the entities, which has never required ownership as the OCC noted, when concluding:

   Section 215.2(b)(1)(iii)³ requires only that an individual have the power to exercise a controlling influence over the management of the company. No share ownership is required. If share ownership were a pre-

   requisite for a finding of control in all circumstances, the regulation could easily be evaded, especially in the case of closely held family corporations, by placing shares with a spouse, or otherwise limiting share ownership to passive investors within the family. Such a formalistic approach ignores the fact that Regulation O clearly contemplates situations in which control may be established by indirect means.

   OCC Interp. Ltr., April 22, 1991, 1991 WL 338390 (OCC).

   The conclusion is inescapable that Respondent De La Fuente exercised a "controlling influence" over both the management and policies of RVDM and RDF/IIP. As the above opinion contemplates, Respondent here has created by "indirect means" a situation in which he controls RVDM and RDF/IIP through a network of closely held family corporations. He limits "share ownership to passive investors within the family," while exercising actual control in all instances. His argument is the "formalistic approach," which the above opinion rejects. I conclude that the exercise of "controlling influence" does not require a showing of share ownership (or something akin thereto). Rather, I find that it may be established by the exact types of actions which have clearly been established here.

   c. NEI

   The evidence establishes that Respondent owned NEI until 1995, when he transferred his entire interest in this company to the trusts of his three children. In October of 1995 Respondent claims to have relinquished his management positions with NEI, and no longer reported or disclosed any interest therein.

   His divestiture of the company was pro forma at best, however, as Respondent continued to exercise a controlling influence over both the owners of NEI (i.e. the 1995 Irrevocable Trusts) and management of the company itself.⁴ Respondent admitted that he himself continued to make investment decisions for the trusts. Although "independently" directed, the appointed trustees were rather candid when testifying in this proceeding about their complete lack of knowledge about the trusts, or how management of the trust business is conducted.

   An employee of NEI served as the actual day-to-day manager of the trusts activities, and maintained virtually all of the records associated with trust transactions. In my opinion Respondent De La Fuente controlled all actions of the trusts, which in turn owned NEI. The "independent" trustees, which have always been very close associates and confidants of Respondent, simply rubber stamp any and all decisions made or presented by Respondent.

   Just as control of the trusts is not what it appears to be, so too control of NEI is not what it is represented to be. Despite his purported separation from NEI, Respondent continued his heavy involvement in NEI matters. As with RVDM and RDF/IIP, Respondent's wholly owned company AIE managed NEI pursuant to contract. As such, Respondent personally negotiated the purchase of assets on behalf of NEI, settled pending litigation with NEI, acted as guarantor on NEI's debts, and otherwise demonstrated the complete power and control over the management and policies of NEI. His "controlling influence" over virtually all of NEI and its actions is so clearly established.

   d. Fine Particle Technology Corporation

   Respondent's involvement with FPTC goes back many years. The evidence conclusively establishes his control over this entity through both stock ownership, as well as his exercise of a controlling influence over its management and policy.

   In March of 1987 Respondent owned approximately 5.53 percent of the outstanding FPTC stock. Respondent's close associate, Isaias Zapata Oscoz ("Zapata"), owned approximately 4.96 percent.⁵ Together they pursued a joint course of conduct with respect to FPTC to place another of Respondent's close associates, Jose Luis Andreu ("Andreu") on the FPTC board.⁶ The collective ⁴ The evidence suggests that Respondent's true motivation in "divesting" his interest in NEI was not for any tax purposes, but rather, to continue permitting NEI to purchase RTC assets which it would otherwise have been prohibited from doing as a result of a judgment obtained by the FDIC against Respondent.

   ⁵ Respondent and Mr. Zapata were extremely close friends and business partners of many years. They both served as directors and shareholders of the Bank; they both participated in filing the change of control application to acquire the Bank; Mr. Zapata served as co-trustee on the children's trusts; and both were involved in business ventures together, including FPTC, Witec Patents, and Witec Services. Mr. Zapata regrettably died a tragic and untimely death shortly before the hearing in this matter.

   ⁶ Mr. Andreu is another of Respondent's closest associates, and served variously as an officer, director, and agent for several of Respondent's related entities, including vice-president of AIR; agent for RVDM and RDF/IIP; agent for the Alexander Trust; former officer and director of NEI, FPTC, and other related entities.
{{1-31-01 p.A-3201}}

   votes of Respondent and Zapata secured Andreu's seat, and by January 6, 1990 Andreu was Chairman of the Board, and by March 11, 1991 he was President.

   In mid-1994 Andreu began acquiring FPTC stock, and by July 21, 1995, the date of the first FPTC extension of credit at issue in this proceeding, Andreu had acquired 24.42 percent of the company. To acquire this stock, Andreu used funds drawn on an account of Witec Patents, which company Respondent had been part owner of since 1981.

   Respondent, Zapata, and Andreu had been intimately involved in the affairs of the Witec companies for many years. By May of 1990, Andreu informed the FPTC Board that he held proxies of all the shareholders of Witec, who were also the shareholders of FPTC.

   These facts lead to the conclusion that Respondent, directly or indirectly, or acting in concert with others had the power to vote at least 25 percent of the stock of FPTC. In addition to the power to vote this stock, however, the evidence also establishes that Respondent had the power to exercise a controlling influence over the management and policies of FPTC. The best evidence of Respondent's controlling influence concerns his receipt of $600,000 of loan proceeds to FPTC in 1995. The proceeds were diverted to Respondent and used to pay down his recently classified loan at the Bank. There can be no reason that an independent, unaffiliated company would transfer this kind of money to Respondent for such purpose, other than through some exercise of controlling influence.

   Another example of Respondent's control of FPTC concerns its purchase of loans from the Bank to save the directors, including Respondent, from the individual payment of $500/day contempt sanctions. In that situation, the FDIC had brought action against the Bank's directors in federal district court, seeking to impose sanctions for their failure to comply with a court order enforcing an outstanding FDIC cease and desist order. On July 14, 1995, the United States District Court for the Southern District of California entered an order assessing Respondent and other directors individual fines of $500/day until the Bank came into compliance with the court's order.

   By the following Monday, July 17, 1995, FPTC, which had apparently never been in the business of purchasing loans before, completed due diligence and was prepared to purchase the loans provided that the Bank finance the sale. As a result of this well-timed transaction, FPTC purchased two loans, the Bank came into compliance with the court's order, and the directors were spared the payment of contempt penalties.

   It is doubtful that a truly independent company would have been aware of, and much less interested in, purchasing these loans under the circumstances. Rather, the obvious conclusion is that FPTC was not an independent entity, but rather, was part of the De La Fuente common enterprise, subject to his control. FPTC was a functioning member of the De La Fuente web, assisting Respondent with infusions of cash and purchases of Bank assets whenever needed. Whether one concludes that Respondent exercised control of more than 25 percent of FPTC's stock, or whether one concludes that Respondent had the power to exercise a controlling influence over FPTC and its activities, the result is the same; the extensions of credit to FPTC were clearly covered and restricted by Regulation O. These restrictions were plainly violated.

   Respondent's principal argument in reply to this allegation is that the extension of credit that facilitated FPTC's loan purchase was for the benefit of the Bank, and therefore not an extension of credit within the meaning of Regulation O. An exception does provide that an extension of credit is not covered by the regulatory restrictions if it is extended "for the purpose of protecting the bank against loss or of giving financial assistance to it." 12 C.F.R. §215.3(b)(4)(ii).

   Of course it should be noted that the July 1995 extension (the only credit which Respondent argues is covered by this exception) is but one of four different credits to FPTC alleged to have violated Regulation O. This argument does not apply to the other credits, which were used for other purposes.

   I cannot accept that even the July 1995 extension qualifies for this exception. The Bank and Respondent had contended initially that the loans sold to FPTC were valuable assets. To now claim that the credit to purchase the loans was for the purpose of
{{1-31-01 p.A-3202}}

   "giving financial assistance" to the Bank is quite inconsistent with this previous claim. Rather, the evidence adequately establishes that the intent in selling the loans, and offering FPTC the necessary financing, was not to confer some assistance upon the Bank, but rather, to spare the directors (including Respondent) from the imposition of penalties.

   The FDIC Board of Directors has concluded that the "statutory exceptions to insider lending limitations must be strictly construed." In the Matter of Amberg, 2 P-H FDIC Enf. Dec. ¶ 5181 (1992) at A-2113. The Federal Reserve Board, consistent with the FDIC's position, has given similar interpretation of the "protecting the bank or giving financial assistance" provision. The General Counsel of the Federal Reserve Board stated:

   Section 215.3(b)(4)(ii) of Regulation O does not permit a bank to avoid the lending limit of the Act and the regulation, or to show preferential treatment to an insider. In the context of the other provisions of 12 C.F.R. §215.3(b)(4), this exemption is intended to enable an insider to protect a bank against loss arising from a credit extended to an unrelated third party. For example, the bank's executive officer or principal shareholder would be permitted to provide a guarantee on a loan by the bank to an unrelated person where the credit has deteriorated.

   FRB Interp. Ltr., June 14, 1989, 1989 WL 513159 (FRB) (emphasis added).

   In summary, both factually and legally the loan to FPTC in July 1995 was not for the purpose of providing financial assistance to the bank as permitted by the above authority. Rather, the loan is an "extension of credit" within the meaning of Regulation O, violating the limitations contained therein.

   e. C.T. Produce

   With respect to the C.T. Produce loan, the Enforcement Counsel argue that the "tangible economic benefit" rule should apply. The Enforcement Counsel have adequately proved that Respondent controls NEI through his actual control of the trusts, and through his power to exercise a controlling influence over NEI's management and policies.

   The Enforcement Counsel allege here that the proceeds of the C.T. Produce extensions were used to support a joint venture with NEI. They argue therefore that the proceeds of the credit were for the tangible economic benefit of NEI, and thus subject to the limitation of Regulation O.

   I find sufficient evidence to establish the joint venture between C.T. Produce and NEI. Bank documents clearly indicate that C.T. Produce was engaged in a joint venture with De La Fuente. Respondent's confidant, Mr. Andreu, who served as the C.T. Produce board chairman, wrote the Bank to acknowledge the relationship that existed between NEI and C.T. Produce. In that correspondence he indicated that NEI had "engaged" C.T. Produce to act as broker, discussed how the "project has worked as planned," and how the "agreement reached with C.T. Produce was [an] arms length transaction." FDIC Exhibit No. 241.

   I am convinced that NEI was an indirect beneficiary of the Bank's loan to C.T. Produce. I believe the Bank's loan enabled C.T. Produce to expand its operations into a business relationship with NEI, which proved profitable to both entities. The tangible economic benefit of the C.T. Produce loan inured NEI.

   f. Section 215.6 Limitations

   Section 215.6 of Regulation O provides that no director or principal shareholder of a bank shall knowingly receive or permit a related interest to receive, directly or indirectly, any extension of credit that is not authorized. 12 C.F.R. §215.6. This provision became effective on May 18, 1992, and applies only to extensions of credit made after that date. Given the violations of Regulation O that I find in this decision, I also find that Respondent De La Fuente has violated §215.6 with respect to the following transactions that were made after the effective date of this provision:

   – July 15, 1992 RVDM - $1.6 million

   – September 9, 1992 Respondent - $800,000

   – July 20, 1995 FPTC - $763,000

   – August 11, 1995 FPTC - $1.35 million

   – October 27, 1995 NEI - $750,000

   – November 8, 1995 FPTC - $600,000

   – December 18, 1995 C.T. Produce - $50,000

   – December 26, 1995 C.T. Produce - $200,000

   – December 28, 1995 FPTC - $800,000

   2. Extensions of Credit to Bank Affiliates

   The Notice alleges that 10 of the 12 extensions of credit cited as violations of Regulation O, also constitute violations of Section 23A of the Federal Reserve Act, 12 U.S.C. §371c.⁷ Section 23A limits "covered transactions" that banks may make to an "affiliate,"⁸ and defines covered transaction to include "a loan or extension of credit to the affiliate." 12 U.S.C. §371c(b)(A).

   An "affiliate" includes, among other things, any company "controlled directly or indirectly, by trust or otherwise, by or for the benefit of shareholders who beneficially or otherwise control, directly or indirectly, by trust or otherwise, the . . . bank." 12 U.S.C. §371c(b)(1)(C)(i). Under Section 23A, covered transactions with affiliates may not in the aggregate exceed 20 percent of the bank's capital stock and surplus. 12 U.S.C. §371c(1)(B).

   Respondent admits that he controls 56.72 percent of the Bank's stock. He also admits that the extensions of credit which Enforcement Counsel claim violated section 23A were actually made. With two exceptions, he admits that the FDIC accurately calculated the Bank's lending limit for purposes of determining whether Section 23A was violated.⁹ What Respondent denies is that he "controlled" the Bank's "affiliates." With respect to C.T. Produce, Enforcement Counsel do not contend this to be an affiliate, but rather, argue that the "tangible economic benefit" of the loans to C.T. Produce inured to NEI, which is an affiliate. Respondent denies this as well.

   "Control" may be found by reference to three different standards, or presumptions:

   A company or shareholder shall be deemed to have control over another company if -

   i) such company or shareholder, directly or indirectly, or acting through one or more other persons owns, controls, or has the power to vote 25 percent or more of any class of voting securities of the other company

   (ii) such company or shareholder controls in any manner the election of a majority of the directors or trustees of the other company; or

   (iii) the Board [of Governors of the Federal Reserve System] determines, after notice and opportunity for hearing, that such company or shareholder, directly or indirectly, exercises a controlling influence over the management or policies of the other company

   12 U.S.C. §371c(b)(3)(A).

   Enforcement Counsel do not allege control by stock ownership (aside from FPTC), or by control of the election of directors. And they claim that no determination of controlling influence under the third presumption is necessary for a finding of control to be made.

   Rather, Enforcement argue that Respondent exercises actual control over the affiliates, thus obviating the need to even rely on the presumptions of section 23A. They contend the presumptions are not the exclusive way to demonstrate control, and cite the following:

   Section 23A does not confine its determination of control to situations that are deemed "control" by the statute. The use of control is broader than the absolute presumption established by the statute.

   FDIC Advisory Opinion 89-32, FDIC Law, Regulations, and Related Acts (October 12, 1989) (emphasis original).

   Similarly they cite another FDIC Advisory Opinion for the proposition that:

   The ownership of voting securities. . ., the control of the selection of trustees. . ., as well as the Board of Governors determination . . ., are not the exclusive means of control recognized by the statute.

   FDIC Advisory Opinion 93–53, FDIC Law, ⁷ The ten loans alleged to violate Section 23A include RDF/IIP ($1 million); RVDM ($400,000); RVDM ($800,000); RVDM ($1.6 million); FPTC ($763,000); FPTC ($1.35 million); NEI ($750,000) FPTC ($600,000); C.T. Produce ($200,000); FPTC ($800,000).

   ⁸ Section 23A of the Federal Reserve Act is made applicable to state nonmember banks by section 18(j) of the FDI Act, which states:

   Section 23A and 23B of the Federal Reserve Act shall apply with respect to every nonmember insured bank in the same manner and to the same extent as if the nonmember bank were a member bank.

   12 U.S.C. §1828(j)(1)(A).

   ⁹ Although Respondent denied that the FDIC had accurately calculated the Bank's lending limit as of December 31, 1991 and September 30, 1995, at hearing he stipulated that the FDIC's calculations were correct for purposes of the hearing only. I find both calculations correct.
{{1-31-01 p.A-3204}}

   Regulations and Related Acts (August 2, 1993).

   Enforcement Counsel argue that it would elevate form over substance to allow Respondent to hide behind the fiction of ownership when in fact he is the individual actually controlling the affiliates. There is no doubt that Respondent exercised actual control over RVDM, RDF/IIP, NEI, and FPTC. The evidence of this actual control is overwhelming.

   It is accepted that actual control, as described in the two FDIC Advisory Opinions, obviates the need to rely on the presumptions contained in section 23A. The presumptions are exactly that — circumstances in which control may be presumed. They are not the exclusive means by which to show control.

   In addition, it is accepted, as Enforcement Counsel argue alternatively, that FDIC may find controlling influence under the third presumption of section 23A. While the statute seems to require that the Board of Governors of the Federal Reserve make "controlling influence" determinations, this would make little sense in the context of cases brought by FDIC pursuant to 12 U.S.C. §1828(j), which makes section 23A applicable to nonmember banks, over which the Board of Governors has no jurisdiction.

   Rather, it seems to me the better interpretation is that the Board of Directors of the FDIC, and not the Federal Reserve Board, should determine whether a "controlling influence" is exercised in the context of cases involving state nonmember banks. It is my finding and conclusion that Respondent De La Fuente did exercise such control over the above entities, so as to make them affiliates, within the meaning of section 23A, 12 U.S.C. 371c(b)(3)(A)(iii). In addition to establishing actual control, the facts also satisfy the third statutory presumption of controlling influence.

   Respondent received financial gain by reason of the extensions of credit to himself and his related interests in violation of Regulation O and Section 23A. For purposes of Regulation O, the gain is the sum of the loans improperly extended, in this case $6,650.000.¹⁰ For purpose of Section 23A, Respondent's gain was $5.6 million.¹¹ That these amounts may be properly attributed as gain to Respondent were addressed in a similar situation, in which the FDIC board stated:

   First, there is no question that both of Lowe's related interests received the extensions of credit that exceeded ICB's lending limits. As a legal matter, the receipt of credit that should not have been received is an economic benefit which must be directly attributed to Lowe.

   In the Matter of Lowe, et. al., Bound Volume 2, P-H FDIC Enf. Dec. ¶ 5153 (1990), aff'd 958 F.2d 1526 (11th Cir. 1992).

   Similarly, the FDIC Board has also held:

   A loan made in violation of law to an institution-affiliated party or his related interests . . . has been held to be a benefit in and of itself. . . Therefore, all loans to Respondent or his related interests in violation of law . . . resulted in gain or other benefit to Respondent for the purposes of Section 8(e).

   In the Matter of Leuthe, 1 P-H FDIC Enf. Dec. and Orders ¶ 5249 (1998), aff'd 977 F. Supp. 357.

   While Respondent De La Fuente obviously gained from the multiple credit extensions, the Bank, on the other hand, sustained losses of more than $1.3 million. The personal interests of the Respondent were clearly placed ahead of the Bank's interests.

   3. Collateral Substitution Transaction

   Respondent orchestrated a complex transaction whereby he caused the Bank to release its lien on 320 acres of property owned by IIP which served as collateral for a troubled credit to RVDM in the amount of $1.6 million. Respondent sold the released collateral approximately four months later for $2.1 million, and used the cash proceeds to pay down a debt NEI owned to another lender, * * * . As part of this same transaction, Respondent sold 40 acres of his own land for approximately $260,000.

   In return for the release of this collateral, the Bank accepted from NEI as substitute collateral a first deed position on other property owned by RVDM. The Bank already had a second lien position against the sub- ¹⁰ For purposes of Regulation O the loans are: Alexander Trust ($1 million); RDF ($1 million); RVDM ($900,000 - the total extension of $1.6 million minus the $700,000 used to satisfy the RDF extension); Roque De La Fuente II ($800,000); FPTC ($1.35 million) FPTC ($600,000); C.T. Produce ($200,000) and FPTC ($800,000).

   ¹¹ For purposes of Section 23A, the $1 million extension to the Alexander Trust is not included and the $750,000 extension to NEI is included instead of the $800,000 extension to Respondent De La Fuente.
{{1-31-01 p.A-3205}}

   stituted property, and NEI merely subordinated to the Bank the first deed position as well. The stated value of NEI's first deed position was approximately $550,000.

   After the substitution, RVDM defaulted on the loan and the Bank foreclosed on the substituted collateral and lost over $700,000. Respondent, of course, after having secured the release sale of the original collateral, received the benefit of over $2 million.

   There are several separate and significant events which make up the collateral substitution transaction. For ease of understanding the transaction, the following timeline is presented:

   January 27, 1994 — The Original Purchase Agreement is executed between IIP and purchaser.

   April 7, 1994 — Respondent requested that the Bank release the subject collateral owned by IIP

   April 8, 1994 — RVDM sent a letter to Bank proposing substitute collateral

   April 12, 1994 — Proceeds from sale are promised to * * * by NEI

   April 14, 1994 — Respondent requested that Bank order an appraisal on the proposed substitute collateral

   April 29, 1994 — * * * granted a $2.5 million advance to NEI, with IIP proceeds identified as a source of repayment

   May 27, 1994 — Respondent formally assigned IIP proceeds to * * * on behalf of NEI

   June 15, 1994 — Respondent met with purchaser and state and federal regulators to negotiate the final sale of IIP's 320 acre parcel and Respondent's 40 acre parcel

   June 17, 1994 — The Bank's board of directors meets and approves the release of the Bank's lien on the IIP property. Respondent explains the collateral substitution transaction at the meeting but abstained from voting on transaction.

   July 21, 1994 — The Bank released its lien on the IIP property.

   The evidence establishes that even before the Bank's board of directors met to consider releasing the IIP collateral, Respondent and NEI had already pledged the proceeds of the sale to * * *

   Respondent met and negotiated extensively with the purchaser and members of state and federal regulators concerning environmental issues associated with the transaction. Respondent was involved in every aspect of the collateral substitution transaction from beginning to end. His involvement at the bank level was substantial: he contacted the Bank to request the release of the IIP property as collateral; he contacted the Bank to request that it immediately order an appraisal on the substitute property; and he explained the transaction to the Bank board of directors when it met to approve the transaction in June of 1994. Respondent essentially involved himself on every conceivable side of the transaction.

   At the June 17, 1994 board meeting, the directors discussed and approved the transaction. The bank officer handling the RVDM loan was unable to fully and accurately explain the proposal however, and Respondent, though not voting because of his conflicting interest, was brought into the meeting to explain the transaction. He was the only individual with enough knowledge to describe the details.

   In contrast to the Respondent's extensive knowledge concerning the collateral substitution, the Bank's lack of knowledge is alarming. Neither bank management nor members who approved the transaction had full details concerning it. Mr. * * * , the officer who handled the RVDM loan and who presented the transaction to the board testified repeatedly concerning his lack of understanding of the details. From the beginning of the transaction until the time of the Board meeting, Mr. * * * testified, he never understood it. The Bank president asked Hayes to prepare a proposal for the meeting, which task he could not complete as he lacked the necessary information and understanding. Mr. * * * , testified that he made no recommendation at the board meeting as he did not understand the transaction.

   Similarly the board members voting to approve the transaction demonstrated considerable misunderstanding of the proposal. Director Norm Richins, who voted to approve the substitution, testified at hearing that he was unaware that RVDM was delinquent on its loan at the time of the proposed substitution; was not aware that IIP had emerged from bankruptcy; and was not aware that the * * * had started foreclosure against RVDM in 1993. These would obviously be very important factors to consider in making a decision whether to release collateral from the
{{1-31-01 p.A-3206}}

   loan. Respondent De La Fuente obviously knew all these facts.

   Furthermore, the minutes of the June 17, 1994 board meeting state the following with respect to the board's discussion:

   Release/Substitution of Collateral

   The request for release and subordination of the Rancho Vista Del Mar collateral was discussed (refer to loan file). It was decided to request a 125\% fee and payment of the appraisal from the borrower. A motion for approval was then made by Mr. Richins and seconded by Mr. Redman. Motion carried. Mr. De La Fuente II abstained.

   FDIC Ex. 43 at 2.

   The minutes obviously do not (and could not) reflect the extent of the Respondent's involvement in the transaction, including the pre-arranged sale of the IIP property, that the proceeds were already pledged by Respondent to * * * , and that the property being released had value of some $2.1 million. Respondent chose not to divulge these details.

   A year later, concerned about how the collateral position developed, the board decided to revisit the transaction. The minutes of the June 23, 1995 meeting provide more information:

   Classified Loan Report

   Relative to the Rancho Vista Del Mar loan, Mr. Redman expressed his concern regarding the substitution of collateral which was done in 1994. Several months after the substitution, the original 320 acres which had been released, was sold for $2.1 million. The Board requested that Ms. Southwick bring the loan file to the meeting. A review indicated that the Board, at the time of the release and substitution, was aware of a pending escrow. However, it was explained that the Bankruptcy issue concerning the property and the endangered species issue regarding the gnatcatcher and other problems, clouded the possible sale. The proposed substitution property was of approximately equal value with none of the clouded issues. After the substitution the Federal issues were resolved and the escrow eventually closed.

   FDIC Ex. 66.

   These minutes supply interesting detail concerning the board's understanding of the transaction. They suggest the board approved the proposal for the following reasons: (1) bankruptcy and endangered species issues which clouded the collateral; and (2) the represented value of the "unclouded" substitute collateral.

   The board had obvious concern that neither the pending bankruptcy proceeding nor the endangered species issues prevented Respondent from selling the property almost immediately. These apparent "clouds" on the property were the primary reason the board elected to release the property and accept a "clearer" collateral. Additionally, the value of the substitute collateral, when compared with the price received form the sale of the released collateral, became of some further concern to the board.

   In contrast to the Respondent's full knowledge of all aspects of the transaction, the Bank had very little information on which to base its decision to release $2.1 million in collateral on a large, delinquent, problem loan. To the extent the Bank did have information, I find that Respondent misrepresented the transaction by withholding from the board several pieces of critical information to make this decision.

   On brief, Respondent submits two principal arguments to the collateral substitution allegations: (1) that the transaction was not unsafe and unsound and that Respondent did not breach his fiduciary duty in participating therein; and (2) that at the time the bank directors approved the substitution, it was a good business judgment. I must reject both of these conclusions.

   The evidence of Respondent's breach of duty is overwhelming: he engineered a transaction whereby he usurped the Bank's opportunity to have a problem loan paid off. Instead of the Bank retaining its secured position, Respondent received the benefit of over $2 million while the Bank ended up losing over $700,000. His participation constitutes a very clear conflict of interest, and a very clear breach of his fiduciary duty.

   Respondent's claim that the board made a "business decision" must also fail. The board agreed to release the collateral based on information that was inaccurate and misleading, a fact well-known to the Respondent. This "decision," which Respondent very purposefully arranged, cannot somehow shield Respondent from liability here.

   Finally, I note with respect to this "business judgment" argument that Respondent attempts to rely rather heavily on evidence which I expressly excluded at hearing. The
{{1-31-01 p.A-3207}}

   material was excluded as its reliability could not be sufficiently tested.

   That exclusion notwithstanding, Respondent on brief discusses at length the "evidence" which supports his claim. The plain fact of the matter is that none of these claims have any substantive or legal merit, and must be rejected.

   4. * * * Transaction

   The final allegation at issue in this proceeding involves Respondent's involvement in the * * * transaction. The details of this transaction are summarized below.

   In June of 1992 Respondent De La Fuente arranged for the Bank to sell a parking lot that it held as Other Real Estate Owned. The sale was financed through a Bank loan of $560,000 to * * * and at the time of the sale the parking lot contained several environmental contamination problems.

   Respondent was again involved in all aspects of the transaction, from first proposing the sale to * * * owner * * * , to negotiating all of the details. Within two months of the transaction, however, * * * claimed that Respondent had fraudulently induced him to purchase the property, and threatened to sue Respondent unless he caused the Bank to rescind the transaction and take back the property.

   In response to the * * * threats, Respondent again negotiated extensively to resolve the situation. In a meeting in early 1995 Respondent promised Mr. * * * that he would find someone to acquire the property and assume the loan.

   Respondent then arranged for an employee of NEI and AIE, Mr. Gabriel Arce, to acquire the parking lot from * * * through a limited liability corporation established as another of the De La Fuente companies. Neither Mr. Arce, nor the company through which he acquired the parking lot were financially qualified to assume the Bank loan. Nevertheless, Respondent, who was involved in all negotiations concerning the transaction, orchestrated it such that Mr. Arce acquired the property and assumed the loan.

   Because Arce was not able to service the debt, NEI began supplying Arce funds with which to make payment. Respondent was fully aware of these facts.

   Respondent and the Bank made several misrepresentations to FDIC examiners. First, the June 1994 board minutes reflected that the property was "clean," suggesting that the environmental problems had been remedied. This was admittedly not the case.

   Additionally, during the 1994 examination Respondent represented that he had negotiated a settlement with * * * , and that it was only a matter of drawing up the agreement. Based on these representations, examiners improved the classification of the * * * loan from "substandard," to "special mention."

   Finally, during the 1994 examination Respondent received a letter from * * * renewing the demand for rescission. This letter was not in the Bank files, and was never disclosed to the FDIC examiners.

   This transaction, and the Respondent's actions taken therein, had three significant effects on the Bank: 1) it inaccurately improved the adverse classification of the * * * loan, forestalling the need for the Bank to recognize the risk of loss on the credit; 2) it forestalled the Bank from recognizing a capital adjustment that would be later needed for an environmental clean-up reserve; and 3) it released Mr. * * * a solid borrower, from his personal guarantee on the loan.

   This transaction likewise had two significant effects on Respondent: 1) it relieved him of any potential liability to * * * from the threatened fraud litigation; and 2) it forestalled Respondent from having to make any capital injections, as the Bank did not immediately recognize losses associated with the * * * loan, and did make any capital adjustments which may have been required by the existing cease and desist order.

   5. Prohibition Elements, 12 U.S.C. 1818(e)

   To prohibit remove and prohibit Respondent De La Fuente from participation in the affairs of a financial institution, the Board must find each of the elements of section 1818(e) established, namely: 1) there must be a specified type of misconduct—violation of law, unsafe or unsound practice, or breach of fiduciary duty; 2) the misconduct must have a prescribed effect—financial gain to the Respondent or financial loss or other damage to the institution; and 3) the misconduct must involve culpability of a certain degree—personal dishonesty or willful or continuing disregard for institutional safety or soundness. As the United States Court of
{{1-31-01 p.A-3208}}

   Appeals for the Third Circuit has summarized the prohibition elements:

   Under Section 1818(e)(1), at least one of the prohibited acts, accompanied by at least one of the three prohibited effects and at least one of the two specified culpable states of must be established by substantial evidence on the whole record before the regulatory agency can properly remove a person from office and ban him from banking or thrift industries.

   In the Matter of Seidman, 37 F.3d 911, 929 (3rd Cir. 1994).

   a. Regulation O and Section 23A Violations

   The receipt by Respondent and his related interests of loans in violation of the lending limits of Regulation O and Section 23A, clearly constitute violations of law cognizable under section 8(e). See Greenberg v. Board of Governors of the Federal Reserve System, 968 F.2d 164, 170 (2d Cir. 1992); Hutensky v. FDIC, 82 F.3d 1234 (2d Cir. 1996); In the Matter of Lowe, et. al. Id. These violations have been clearly established on the record, as further set forth in my findings and conclusions below.

   So too has Respondent's breach of fiduciary duty. The self-dealing nature of the repeated insider loans, in which Respondent's interests are advanced at the cost of the Bank, clearly demonstrate a misuse of position, and breach of his duty to the Bank. See In the Matter of Candelaria, P-H FDIC Enf. Dec. (Looseleaf) ¶ 5242 (1997). When confronted with conflicting interests, Respondent De La Fuente unfortunately chose his personal interests over those of the Bank, in the form of repeated loans which violated existing regulatory limitations. These violations seem to have meant nothing to Respondent, whose real interest was obtaining the funding required by his web of companies.

   The evidence clearly establishes that by reason of the Respondent's participation in the Regulation O and section 23A violations, Respondent received personal gain and the Bank suffered financial loss or other damage. Respondent received the direct economic benefit of all the improperly extended loans. Of course the Bank suffered direct losses on the RVDM and Alexander Trust loans, in the amount of $1.3 million. Collectively this financial gain to Respondent and loss and damage to the Bank prejudice the interests of the Bank's depositors.

   In connection with the Regulation O and Section 23A violations, I find that Respondent has demonstrated personal dishonesty by concealing from the Bank, and the FDIC, his control over certain of his entities, which thereby caused the multiple lending violations, which resulted here.

   The same facts which demonstrate personal dishonesty also demonstrate Respondent's willful and continuing disregard for safety and soundness. Respondent concealed the extent of his control over related interests and Bank affiliates for years. Respondent was the only person who knew the extent of his involvement with RVDM, RDF/IIP, FPTC, and NEI, and yet after supposedly divesting himself of the entities, he continued nonetheless to exercise control over the entities while soliciting and receiving Bank credits in violation of applicable law. His disregard for Regulation O and Section 23A was both willful and continuous.

   b. Collateral Substitution

   The collateral substitution transaction is but another classic example of Respondent putting his personal interests ahead of the Bank's interests. It was transparently a breach of his fiduciary duty to the Bank. Respondent usurped the Bank's opportunity to have a large, problem loan nearly repaid by orchestrating the release of the IIP property held as collateral.

   He did so with knowledge that the substitute collateral was worth far less than the released collateral, and that the released collateral was already slated for sale. His self dealing, as evidenced in this transaction, establishes his breach of fiduciary duty, and clearly constitutes both an unsafe and unsound practice.

   The facts clearly establish that by reason of Respondent's participation in the collateral substitution transaction, Respondent received personal gain and the Bank suffered financial loss and other damage.

   First, Respondent received the benefit of the proceeds of the property sale, as NEI's loan at * * * was paid down. Since NEI was wholly owned by Respondent at the time, Respondent received the benefit of the $1.8 million proceeds used for this purpose. Respondent also individually received $235,000 from the proceeds of the sale of his personal property. There is no question that Respondent received personal gain from the collateral transaction.
{{1-31-01 p.A-3209}}

   Second, the Bank suffered financial loss and other damage. The Bank suffered as soon as the transaction occurred in terms of being placed in an inferior collateral position. Once the loan to RVDM defaulted, the Bank incurred actual losses of approximately $716,000, which losses it would obviously not have incurred if it had received the benefit of the sale proceeds of the original collateral—$1.8 million.

   Finally, the loss in the Bank's collateral value and the losses incurred by the Bank on the RVDM loan, in and of themselves, prejudiced the interests of the Bank's depositors. Respondent's participation in the collateral substitution resulted in personal gain, financial loss and other damage to the Bank, and prejudice to the Bank's depositors.

   The facts demonstrate that Respondent intimately participated in the collateral transaction for months without making a full and accurate disclosure to the Bank concerning the specific details. No one at the Bank knew that the IIP escrow proceeds, which rightfully belonged to the Bank, had already been pledged by Respondent before the Board even considered the transaction. No one at the Bank knew that Respondent had negotiated and arranged for the transaction to close. In fact, there is evidence that Respondent misrepresented the details of the transaction to the board and Bank management.

   At a bare minimum, such facts show Respondent's want of fairness and straightforwardness, a lack of integrity, and untrustworthiness. At their worst, they show deliberate deception, and disposition to cheat and defraud. Respondent's conduct amply satisfies the standard necessary to establish personal dishonesty.

   These same facts also demonstrate a willful and continuing disregard for the safety and soundness of the Bank. Respondent deliberately participated in the transaction knowing that he would receive the benefit of the proceeds, while at the same time knowing that the swapped collateral was worth less to the Bank than the existing collateral. This is a very clear case of willful disregard.

   Likewise this conduct evidences a continuing disregard, in that his planning and negotiating the collateral substitution took place over a period of nine months, during which time he never made disclosure of his role and intended benefit in the transaction. Throughout the course of this extended transaction Respondent continued to act toward one goal and one goal only: to receive the benefit of the $2.1 million sale instead of the Bank. This conduct establishes continuing disregard.

   c. * * * Transaction

   The * * * transaction is just another case of an insider orchestrating a sham transaction for his benefit. Respondent committed a breach of fiduciary duty and unsafe and unsound practice in arranging for an employee of his to assume a loan in order to forestall recognition of losses, and absolve himself of any potential liability to * * * as a result of his own actions. Respondent was again wrongfully involved on all sides of the transaction.

   The facts demonstrate that by reason of the Respondent's participation in the transaction, Respondent received personal gain or other benefit, the Bank suffered financial loss or other damage, and the interests of the Bank's depositors were prejudiced.

   Finally, Respondent's willingness to arrange the assumption of a half-million dollar loan by a borrower obviously not qualified to assume such debt, is but a sham transaction evidencing personal dishonesty. It is just simply a dishonest act to set up a straw borrower through whom one must funnel payments to keep a loan transaction afloat. The entire transaction is dishonest.

   These same facts also evidence a willful and continuing disregard for the safety and soundness of the Bank. Respondent's primary concern was in removing * * * as a borrower of the Bank, and in turn, relieving himself of any liability to * * * and forestalling any need for him to personally inject capital into the Bank. By knowingly and deliberately putting his own self-interest before that of the Bank, Respondent willfully disregarded safety and soundness.

   Furthermore the same conduct evidences a continuing disregard, in that the transaction took place over a four-year period of time. During this time period, Respondent controlled every significant act and decision affecting the * * * property and loan. Throughout the course of this transaction Respondent continued to act toward one end: to absolve himself of any liability on the transaction, and to forestall recognition of loss on the parking lot property.
{{1-31-01 p.A-3210}}

   Accordingly, all three prongs of Section 8(e) of the Act have been met by a preponderance of the evidence with respect to (1) Respondent's failure to disclose his related interests and resulting violations of Regulation O and Section 23A; (2) Respondent's participation in the collateral substitution transaction, and (3) Respondent's participation in the * * * transaction.

   The foregoing demonstrates that Respondent is not fit to participate in the banking industry. He has taken advantage of the Bank, failed to disclose his true involvement and controlling influence over related entities, and orchestrated a sham transaction. These actions evidence a blatant disregard for safety and soundness, and the law and regulations which must apply to insured institutions. For these reasons I enter the following Findings of Fact, Conclusions of Law, and Proposed Order, seeking Respondent's removal and prohibition from the industry.

   1. At all times pertinent to this proceeding, First International Bank, Chula Vista, California was a corporation existing and doing business under the laws of the State of California, having its principal place of business at Chula Vista, California. Respondent's Answer, ¶ 1 (hereinafter cited as "Resp. Answer ¶ _").

   2. The Bank is and has been, at all times pertinent to this proceeding, an insured State nonmember bank, as defined by the laws of the State of California. Resp. Answer ¶ 2.

   3. At all times pertinent to the charges herein, Respondent , Roque De La Fuente II was a director of the Bank. Resp. Answer ¶ 5.

   4. At all time pertinent to the charges herein, based on the Bank's stock ledger, Respondent was a controlling shareholder of the Bank. Resp. Answer ¶ 6.

   5. According to the Bank's stock register as of December 15, 1995 for common stock and December 31, 1995 for preferred stock, De La Fuente II directly or indirectly controlled at least 2,737,507 of the Bank's total voting rights, or 56.72 percent of the Bank's total outstanding voting rights. Resp. Answer ¶ 6.

   6. De La Fuente II owns 410,840 shares of the Bank's common stock representing 410,840 voting rights, and 75,066 shares of the Bank's Series C Preferred (5x) stock representing 375,330 voting rights. Resp. Answer ¶ 6.

   7. De La Fuente II's wife, Katayoun Yazdani de De La Fuente, owns 195,000 shares of the Bank's common stock representing 195,000 voting rights, and 15,000 shares of the Bank's Series B Preferred (3x) stock representing 45,000 voting rights. Resp. Answer ¶ 6.

   8. De La Fuente II's three children, with De La Fuente II acting as their custodian, own 474,287 shares of the bank's common stock representing 474,287 voting rights, 50,000 shares of the Bank's Series B Preferred (3x) stock representing 150,000 voting rights, and 160,000 of the Bank's Series D Preferred (5x) stock representing 800,000 voting rights. Resp. Answer ¶ 6.

   9. De La Fuente II's three children, with Katayoun Yazdani De La Fuente acting as their custodian, own another 167,050 shares of the Bank's common stock representing 167,050 voting rights, and 20,000 shares of the Bank's Series B Preferred (3x) stock representing 60,000 voting rights. Resp. Answer ¶ 6.

   10. De La Fuente II's five godchildren, with De La Fuente II acting as their custodian, own 60,000 shares of the Bank's common stock representing 60,000 voting rights. Resp. Answer ¶ 6.

   11. The FDIC commenced examinations of the Bank on or about the following dates: October 3, 1994 (utilizing financial information as of September 30, 1994), and February 5, 1996 (utilizing financial information as of December 31, 1995). FDIC Exhibit 1 (hereinafter cited as "FDIC Exh. _"); FDIC Exh. 2.

   12. Otay Mesa ("Otay Mesa") is an area in San Diego County, California in which De La Fuente II related entities, De La Fuente II family members and/or De La Fuente II business associates and/or employees are landowners. Resp. Answer ¶ 18.

   Entities Involved

   13. American International Enterprises, Inc. ("AIE") is a California corporation owned 100% by De La Fuente II. Resp. Answer ¶ 9, 27; FDIC Exhs. 76A–76H; Andreu, Vol. 7, p. 182 lines 11–14.

   14. Respondent was the president of AIE. FDIC Exh. 77; FDIC Exh. 79.
{{1-31-01 p.A-3211}}

   15. De La Fuente II has had the power to exercise a controlling influence over the management and policies of AIE from inception to present. Resp. Answer ¶ 60.

   16. American International Racing ("AIR") is Respondent's wholly owned company. FDIC Exh. 76D; Shovlowsky, Vol. 1, pp. 166–67.

   17. Respondent was the president of AIR. FDIC Exh. 80; FDIC Exh. 81.

   18. D' & D' partnership originated as an equal partnership composed of De La Fuente II and his father's trust, the Roque De La Fuente Alexander Revocable Trust No. 1. Resp. Answer ¶ 22.

   19. D' & D' partnership was formed for the purpose of acquiring, investing in, developing and selling real estate. Resp. Answer ¶ 22.

   20. D' & D' partnership owns real property in Otay Mesa. Resp. Answer ¶ 22.

   21. D&D Landholding ("D&D"), a California Limited Partnership, is the successor to D' & D' partnership, and was listed by De La Fuente II as one of his related interests in the 1994 FDIC Examination and the 1996 Examination. Resp. Answer ¶ 22.

   22. Respondent was the managing partner of D&D Landholding. FDIC Exh. 76A.

   23. AIR is a 75 percent owner of D&D. FDIC Exh. 76D; FDIC Exh. 256G Shovlowsky, Vol. 2, p. 235 lines 13–19.

   24. Bertha Guerra de De La Fuente, through offshore corporations, is the sole shareholder of Rancho Vista Del Mar ("RVDM") and International Industrial Park, formerly known as Rancho De La Fuente (hereinafter referred to as "RDF/IIP"). Respondent's Response to FDIC's Request for Stipulations ("Resp. Stip."), ¶ 39.

   25. Bertha Guerra de De La Fuente is the mother of De La Fuente II. Resp. Answer ¶ 29.

   26. National Enterprises Inc. ("NEI") is a California corporation which was 100 percent owned by De La Fuente II until he "gifted" his stock in early 1995 to three irrevocable trusts established in 1995 by De La Fuente II for his children, the Ricardo G. De La Fuente Yazdani 1995 Irrevocable Trust, the Roque De La Fuente III 1995 irrevocable trust, and the Katayoun De La Fuente Yazdani 1995 Irrevocable Trust (collectively referred to as the "1995 Irrevocable Trusts"). Resp. Answer ¶ 21.

   27. Fine Particle Technology Corporation ("FPTC") is a corporation, 5.6% of which was owned by De La Fuente II as of June 1994. Resp. Answer ¶ 23.

   28. The Roque De La Fuente Alexander Revocable Trust No. 1 ("Alexander Trust"), is a trust created in 1979 by De La Fuente II's father, Roque De La Fuente Alexander ("Alexander"). Resp. Answer ¶ 24.

   Individuals Involved

   29. Isaias Zapata Oscoz ("Zapata") was Respondent's very close friend. Andreu, Vol. 8, p. 285–86.

   30. Zapata was a resident of Mexico City. Andreu, Vol. 8, pp. 284–85.

   31. From approximately 1969 forward, Respondent always vacationed over Christmas time with Zapata. Andreu, Vol. 18, pp. 11–12.

   32. In March 1987, Respondent and Zapata, along with two other individuals, filed a Change in Bank Control application to acquire control of People's Bank. After the FDIC approved the application, People's Bank was subsequently renamed First International Bank. FDIC Exh. 307; Resp. Stip. ¶ 10.

   33. Zapata was a director of the Bank from 1987 until 1992. He was also a principal shareholder of the Bank, controlling 10.29\% of the Bank's voting stock. Resp. Answer ¶ 51; Resp. Stip., ¶ 12.

   34. Zapata was a shareholder in Witec Patents and Witec Services. Shovlowsky, Vol. 2, pp. 243–44.

   35. As of March 17, 1987, Respondent owned 436,564 shares of FPTC representing 5.53 percent of the total ownership. Zapata owned 391,564 shares of FPTC representing 4.96 percent of the total ownership. Resp. Stip., ¶ 14.

   36. Zapata was one of the two original co-trustees of the 1995 Irrevocable Trusts. Resp. Answer ¶ 51; FDIC Exh. 138; Schwarz, Vol. 16, pp. 138–39.

   37. Jose Luis Andreu ("Andreu") is and has been vice president of AIE for the past ten years. Resp. Answer ¶ 25, 55; Andreu, Vol. 7. pp. 167–68.

   38. Jose Luis Andreu is vice president of
{{1-31-01 p.A-3212}}

   AIR. FDIC Exh. 82; Shovlowsky, Vol. 2, pp. 32–33.

   39. Jose Luis Andreu is the agent for RVDM. Andreu also testified as RVDM's representative when RVDM filed a petition in bankruptcy. Resp. Answer ¶ 55; FDIC Exh. 91; Andreu, Vol. 7, pp. 158–59.

   40. Jose Luis Andreu is the agent for RDF/IIP. Resp. Answer, ¶ 25, 55; FDIC Exh. 120, at 1–2; Andreu, Vol. 7, pp. 158–59.

   41. Jose Luis Andreu is the agent for D&D. Andreu, Vol. 7, p. 167 lines 2–16; Shovlowsky, Vol. 2, pp. 32–33.

   42. Jose Luis Andreu is the agent for the Alexander Trust. Andreu, Vol. 7, pp. 155–157.

   43. Jose Luis Andreu was vice president and president of NEI, and is the chairman of the board of NEI. Resp. Answer, ¶ 25, 55; FDIC Exh. 128; Andreu, Vol. 7, pp. 163–64; Shovlowsky, Vol. 2, pp. 32–33.

   44. Jose Luis Andreu has been associated with FPTC, first as director, then as chairman of the board and then as president, his current position. Resp. Answer ¶ 25, 55; Andreu, Vol. 7, pp. 162–63.

   45. Jose Luis Andreu is vice president of Witec Cayman Patents ("Witec Patents"). Andreu, Vol. 7, pp. 159–60.

   46. Jose Luis Andreu is vice president of Witec Cayman Services ("Witec Services") Andreu, Vol. 7, pp. 161 lines 11–21.

   47. Jose Luis Andreu is chairman of the board of C.T. Produce. Andreu, Vol. 7, p. 164 lines 15–24.

   48. Sidney Schwarz ("Schwarz") was an employee of the De La Fuente Family's longtime accountants, * * * , Vol. 11, pp. 6–8.

   49. Sidney Schwarz testified as an expert witness on behalf of Respondent's father in a case against Schwarz's former employer, * * * Schwarz, Vol. 16, p. 246 lines 11–19.

   50. Sidney Schwarz, while an employee of * * * , provided professional services to RVDM, RDF/IIP, D&D, AIE, AIR and possibly the Alexander Trust. Schwarz, Vol. 16, p. 223–224.

   51. After Sidney Schwarz left * * * , he continued to provide professional services to the same De La Fuente interests that he had served while employed with the firm, only the number of entities grew larger. Schwarz, Vol. 16, p. 225 lines 3–20.

   52. Sidney Schwarz is chairman of the board and a director of the Bank. Schwarz, Vol. 26, p. 227 lines 15–24.

   53. Sidney Schwarz is co-trustee of the children's trusts. Schwarz, Vol. 16, pp. 227–228; Shovlowsky, Vol. 2, p. 242 lines 7–21.

   54. In 1993, Schwarz was acting as consultant for NEI. Schwarz, Vol. 16, p. 191 lines 6–12.

   55. Sidney Schwarz is a director of NEI. Schwarz, Vol. 16, p. 227–28.

   56. Sidney Schwarz has formed limited liability companies for the De La Fuentes and their entities. FDIC Exh. 258; FDIC Exh. 261; Schwarz, Vol. 16, pp. 225–27.

   57. Sidney Schwarz, on the recommendation of Jose Luis Andreu, was hired to perform services for FPTC. * * * Vol. 17, pp. 104–05.

   58. Sidney Schwarz formed the limited liability company that Gabriel Arce used as a vehicle to acquire Bank collateral and later assume * * * loan at the Bank. Schwarz, Vol. 16, pp. 254–56.

Intercompany Transactions

   59. D&D and AIR had option agreements to purchase the real property of RVDM. FDIC Exh. 129, at 6, 9; * * * , Vol. 10, pp. 141–43.

   60. D&D and AIR had option agreements to purchase the real property of RDF/IIP. FDIC Exh. 100; FDIC Exh. 101; Shovlowsky, Vol. 2, p. 62–64.

   61. NEI entered an option agreement with C.T. Produce to purchase C.T. Produce stock. FDIC Exh. 255; Shovlowsky, Vol. 2, pp. 235–26.

   62. RVDM pledged collateral for the benefit of AIR and D&D so that AIR and D&D could receive the bulk of the proceeds of a County condemnation case. FDIC Exh. 104; Shovlowsky, Vol. 2, pp. 90–91.

   63. The property pledged by RVDM so that the defendants in the County condemnation case could receive a distribution of the $21 million deposit was supposedly worth more than $21 million. * * * Vol. 8, pp. 93–94.

   64. RDF/IIP pledged collateral for the benefit of RVDM to secure RVDM's $1.6 million loan at the Bank. Shovlowsky, Vol. 2, p. 93 lines 6–22.

   65. RDF/IIP pledged collateral for the benefit of RVDM to secure RVDM's loan at the * * * Shovlowsky, Vol. 2, pp. 93–94.

   66. NEI pledged its assets to secure C.T.
{{1-31-01 p.A-3213}}

   Produce's loan at * * * in December 1996. FDIC Exh. 255; Shovlowsky, Vol. 2, pp. 225–26.

   67. D&D pledged collateral (93.09 acres of raw land in Otay Mesa) to secure the Alexander Trust's $1 million loan from the Bank. Resp. Answer, ¶ 64; Shovlowsky, Vol. 2, pp. 227–29.

   68. RVDM owed funds to NEI as a result of NEI's purchase of RVDM's loan from * * * Shovlowsky, Vol. 2, 95 lines 10–22.

   69. RVDM's note to * * * had been in the principal amount of $550,000. * * * , Vol. 10, pp. 138–40.

   70. NEI purchased a loan that RDF/IIP owed to a third party. Shovlowsky, Vol. 2, pp. 96–97.

   71. The amount of RDF/IIP's loan that NEI purchased was $1.225 million. FDIC Exh. 31, at 3.

   72. As of May 31, 1993, RDF/IIP owed RVDM $465,000. FDIC Exh. 124 Shovlowsky, Vol. 2, pp. 98–99.

   73. As of May 31, 1993, RVDM owed AIE $500,577. FDIC Exh. 124 Shovlowsky, Vol. 2, p. 99 lines 13–24.

   74. As of October 19, 1994, RDF/IIP owed RVDM $3,683,000. Exh. 91 Shovlowsky, Vol. 2, p. 100 lines 3–23.

   75. As of December 31, 1994, NEI owed D&D $187,342. FDIC Exh. 155, at 8; Shovlowsky, Vol. 2, pp. 136–37.

   76. As of December 31, 1994, NEI owed AIE $296,515. FDIC Exh. 155, at 8; Shovlowsky, Vol. 2, p. 137 lines 9–17.

   77. As of December 31, 1994, NEI owed the Alexander Trust $1,404,908. FDIC Exh. 155, at 8; Shovlowsky, Vol. 2, pp. 137–38.

   78. As of February 24, 1995, NEI received approval from its lender to advance the total of $483,587 to D&D and AIE, with the advances to be repaid no later than May 31, 1995. FDIC Exh. 162, Shovlowsky, Vol. 2, pp. 141–42.

   79. During the time period December 7, 1995 to January 5, 1996, C.T. Produce received by check the following sums from the named entities: from NEI through AIE - $35,000; from NEI - $150,000; from NEI through AIE (d.b.a. American International Realty)-$50,000, $50,000 and $50,000, for a total of $335,000. FDIC Exhs. 242–245; Shovlowsky, Vol. 2, pp. 200–08.

   80. In the space of less than a year, beginning in March 1996, FPTC had increased its lending to C.T. Produce from $250,000 to $1.7 million. Andreu, Vol. 7, pp. 244–46.

   81. In June 1994, AIR and D&D wrote a check for $5,000 that was deposited to the account of Witec Patents. FDIC Exh. 334; Shovlowsky, Vol. 2, pp. 238–39.

   82. FPTC and NEI jointly purchased problem loans from the * * * FDIC Exhs. 202–206; Shovlowsky, Vol. 2, pp. 191–94.

   83. AIE and the Alexander Trust participated in a joint venture. FDIC Exh. 76A; Shovlowsky, Vol. 2, p. 232 lines 10–21.

   84. AIE was a 1 percent owner of certain limited liability companies of which NEI was the 99 percent owner. Shovlowsky, Vol. 2, p. 234 lines 4–15.

   85. AIR served as agent for service of process for NEI. Shovlowsky, Vol. 2, pp. 236–37.

   86. The Bank permitted NEI to assume Respondent's loan at the Bank in November 1995, but left Respondent as the guarantor on the loan and took collateral pledged by Respondent and his interests. FDIC Exh. 141 Shovlowsky, Vol. 2, pp. 127–31.

   87. NEI purchased loans from the Bank at year-end 1993 and 1994. Shovlowsky, Vol. 2, pp. 142–43.

   88. At year-end 1995 FPTC bought a loan from the Bank thus permitting the Bank to recognize a gain that improved the Bank's income numbers and capital ratios. FDIC Exhs. 191–194; Shovlowsky, Vol. 2, pp. 181–86.

   89. Most of the De La Fuente business entities have offices in 5540 Morehouse, a building owned by the Alexander Trust. Resp. Answer, ¶ 56; FDIC Exhs. 77–87, 90, 152, 230, 234, 235, 303; Schwarz, Vol. 16, p. 246 lines 7–10; Shovlowsky, Vol. 2, pp. 13–31.

   90. The books and records of RVDM were at 5440 Morehouse Drive. * * * Vol. 11, p. 28 lines 3–12.

   91. The bankruptcy examiner found the books and records of RVDM at 5440 Morehouse Drive. * * * Vol. 10, p. 131 lines 3–8.

   92. To pay the proceeds of the County condemnation case, the County drew checks as instructed by Respondent. FDIC Exh. 125; * * * Vol. 8, pp. 124–25, 133 lines 11–17.

   93. It was the opinion of * * * RVDM's bankruptcy examiner, that RVDM should have received at least $420,000 more than it
{{1-31-01 p.A-3214}}

   did with respect to the County condemnation case. FDIC Exh. 129, at 10 * * * Vol. 10, pp. 145–46.

   94. * * * found RVDM's related party transactions to be pervasive and significant. * * * Vol. 10, p. 134 lines 3–18.

   95. According to * * * of the * * * firm, Respondent has been the controlling influence behind all of the De La Fuente entities, including RVDM and IIP, since Respondent's father has suffered a stroke. * * * Vol. 11, pp. 12–13, 17–19, 25–26, 28 lines 13–16, 94–95.

   96. Respondent's father had a stroke in September 1990. Andreu, Vol. 8, p. 226 lines 8–15.

   97. Respondent represented that he was the controlling authority for all the entities involved in the County condemnation case. He made all the decisions for them. * * * , Vol. 8, pp. 44–45, 47 lines 15–22.

   98. * * * RVDM's bankruptcy examiner, found RDF/IIP, NEI, First International Bank, AIE, AIR and D&D, among others, to be related parties of RVDM. * * * Vol. 10, pp. 134–36.

   99. * * * testified: "As I say, I don't recall the exact change in title in all these entities. It's like a spider web." * * * Vol. 11, p. 86 lines 22–23.

   100. * * * testified: "As you get into this report [on the RVDM bankruptcy], you're going to find a lot of names, and I feel it's very important to have a road map of who is who, and in this particular case, it was like a bowl of spaghetti. There is so many companies, so many individuals, so many related-party transactions, that it's very confusing. As I say, a bowl of spaghetti is the best way I can describe it." * * * Vol. 10, pp. 131–32.

   101. In * * * opinion, the numerous De La Fuente entities were essentially meaningless and were used to create obstacles for creditors. * * * , Vol. 11, pp. 103–04.

   102. It was the opinion of * * * auditor that: "Roque transferred funds amongst his affiliates whenever and wherever needed." FDIC Exh. 31, at 3; * * * Vol. 7, pp. 122–23.

   103. The RVDM bankruptcy examiner's report stated: "The Debtor [RVDM], throughout the time that the Examiner has had some occasion to look at its records, has had significant dealings with related parties, including providing liens on its assets without consideration to itself, but for the benefit of related parties. Thus demonstrating that this debtor has been unable or unwilling to act independently and in a manner as a fiduciary for its own true creditors who are not related parties." FDIC Exh. 129, at 22; * * * , Vol. 10, p. 153 lines 4–17.

   RVDM-RDF/IIP

   104. RVDM is the successor to 3250 Corporation. Resp. Stip., ¶ 37.

   105. IIP is the successor to RDF, which was the successor to 275 Corporation. Resp. Stip, ¶ 38.

   106. RVDM and RDF/IIP, successor corporations of 3250 Corporation and 275 Corporation, respectively, acquired a single piece of real estate in the Otay Mesa area of San Diego. FDIC Exh. 326, at 15–18.

   107. RVDM's only asset was land. Andreu, Vol. 17, pp. 292–93.

   108. RDF/IIP's only asset was land. FDIC Exh. 123, at Schedules A & B.

   109. Respondent negotiated the purchase of the Otay Mesa property on behalf of the De La Fuente family. FDIC Exh. 325, at 10, lines 18–24 FDIC Exh. 326, at 17, lines 5–11; Shovlowsky, Vol. 2, pp. 34–38.

   110. The De La Fuente family acquired the Otay Mesa property in 1982 and at that time there was virtually no development. * * * , Vol. 17, pp. 197–99.

   111. Respondent's parents executed a post-nuptial agreement in anticipation of the purchase of the Otay Mesa property. Respondent's father took the operating companies and Respondent's mother took the raw land, or passive investments. * * * , Vol. 16, pp. 107–09.

   112. RVDM and RDF/IIP were structured so as to obtain favorable tax treatment, which was afforded to RVDM and RDF/IIP as a result of Respondent's mother's non-resident status. * * * , Vol. 16, pp. 56–58.

   113. Similar favorable tax treatment would not have been available to Respondent or his father. * * * , Vol. 16, p. 76, lines 9–18.

   114. Up until 1980, Respondent's father basically had the final say on all matters. After the family moved to Otay Mesa, however, he became less active and Respondent became more active. At that point, Respondent basically made all the decisions. FDIC Exh. 330, at 92–93.

   115. Respondent determined what part of the Otay Mesa property would be allocated to the predecessors of RVDM and RDF/IIP.
{{1-31-01 p.A-3215}}

   FDIC Exh. 330, at 196–97, 199–200; Shovlowsky, Vol. 2, pp. 38–45.

   116. After the Otay Mesa property was purchased, AIE was given contracts to manage the property of RVDM and RDF/IIP and their predecessors. FDIC Exhs. 97–99; Shovlowsky, Vol. 2, pp. 46–50 Andreu, Vol. 7, p. 158 lines 5–15, 159 lines 3–10, 177–78, 182 lines 15–19.

   117. Respondent testified in 1990 that the owners of RVDM and RDF/IIP did "not want to have the day-to-day responsibility to managing the company. . . . They want to be completely 100 percent passive investors." FDIC Exh. 326, pp. 31–32.

   118. The ostensible owner of RVDM, Respondent's mother, had no involvement in the operations of that entity. * * * Vol. 11, p. 26 lines 8–21.

   119. As a non-resident alien, Respondent's mother was subject to severe restrictions on the amount of time that she could be in the United States and would have suffered adverse tax consequences if she had actually been running the operations of RVDM. * * * , Vol. 11, p. 26–27.

   120. Jose Luis Andreu, in RVDM's bankruptcy proceeding, stated that Bertha Guerra de De La Fuente was not involved in the operations of RVDM. FDIC Exh. 120, at 39 lines 9–20.

   121. Bertha Guerra de De La Fuente is "a full-time housewife and [is] not otherwise employed outside [her] home on a regular basis." Further, Bertha Guerra de De La Fuente has maintained her residence in Mexico City for 35 years and only visits California occasionally. FDIC Exh. 121, ¶ 2 & 3.

   122. Andreu testified in RVDM's bankruptcy proceeding that "management of the assets of the debtor [i.e., RVDM] are conducted as per the agreement between the two companies [i.e., AIE and RVDM]." FDIC Exh. 120, at 44 lines 14–24.

   123. With respect to RVDM's property, AIE was "involved from the inception of acquiring the property, managing the property, selling the property, processing different permits through the governing bodies, and eventually is selling— to sell the property." FDIC Exh. 326, at 8–10.

   124. AIE supplied the same services to RDF/IIP as it did for RVDM. Id.

   125. Pursuant to AIE's management contract with RVDM, AIE proposed all decisions regarding purchase, sale, trade, investment and development to RVDM for ratification. Andreu, Vol. 7, pp. 178–79.

   126. Respondent single-handedly caused to be taken a series of steps that caused Otay Mesa to be developed, adding great value to the property because of utilities, roads and other development. * * * , Vol. 17, pp. 197–99.

   127. Respondent exchanged portions of the Otay Mesa property for a state prison. As a consequence of the prison development, utilities were brought to the property. * * * Vol. 17, pp. 197–99.

   128. AIR was formed to develop an international automobile racetrack, but that never occurred. FDIC Exh. 330 at pp. 20–21.

   129. Respondent entered into a contract with * * * to develop a private detention facility on the Otay Mesa property involved in the County condemnation case. * * * Vol. 17, pp. 198–200.

   130. * * * was involved with Respondent in trying to get the private detention business started in San Diego. * * * Vol. 17, pp. 198–200.

   131. Respondent, as president of AIE, represented to * * * Inc., in an agreement dated April 22, 1985, that AIE had exclusive authorization and approval to propose construction and lease of a private detention facility on property owned by RVDM. Resp. Stip. ¶ 57.

   132. AIR, rather than AIE, had the option to acquire RVDM's property in Otay Mesa area. FDIC Exh. 330 at pp. 20–22.

   133. Before 1986, Respondent approached County of San Diego officials in an attempt to sell RDF/IIP property to the County for a jail site. Resp. Stip., ¶ 73.

   134. From 1987 to May 27, 1992, De La Fuente II was the Vice President of RVDM. Resp. Answer ¶ 30; Resp. Stip., ¶ 80–81.

   135. From 1987 to 1992 De La Fuente was the Vice President of RDF/IIP. Resp. Answer ¶ 35; Resp. Stip. ¶ 80–81.

   136. In 1989, Respondent, on behalf of RVDM, negotiated a loan of $2 million from the * * * and executed a commercial guarantee in connection with the loan. Resp. Stip. ¶ 59.

   137. Respondent personally guaranteed RVDM's 1989 debt to * * * Resp. Stip., ¶ 62.
{{1-31-01 p.A-3216}}

   138. * * * approached Respondent, not his mother, with regard to the RVDM loan. There were "extensive negotiations" over the loan. Resp. Exh. 738, ¶ 2.

   139. As of March 1989, Respondent was "running the day to day operations in developing the Otay Mesa holdings." Resp. Exh. 799, at 3; Richins, Vol. 15, p. 292 lines 11–21.

   140. As of March 1989, Respondent's mother was "essentially non-active in business transactions but [was] respected for her opinions." Resp. Exh. 799, at 3; Richins, Vol. 15, p. 293 lines 1–5.

   141. Respondent was the individual principally responsible for retaining the * * * firm with respect to the defense of the County condemnations case. * * * , Vol. 17, pp. 162–63.

   142. Respondent was a constant participant on behalf of the defendants throughout the entire County condemnation proceeding. * * * Vol. 8, p. 15 lines 15–23.

   143. Respondent negotiated with the County, attended meetings, discussed the acquisition prior to litigation, attended all the depositions and testified on behalf of the defendants. * * * , Vol. 8, pp. 15–18.

   144. Mr. * * * defendants' attorney in the County condemnation case, thought that Respondent should be the individual to testify in that case on behalf of the defendants. * * * Vol. 17, p. 201 lines 15–23.

   145. De La Fuente II testified in 1990 as "principal" of RDF/IIP and RVDM in a condemnation suit by the County of San Diego. Resp. Answer ¶ 33, 38; FDIC Exh. 96; Vol. 8, pp. 18 lines 11–13, 47 lines 15–22; Vol. 17, pp. 238–39.

   146. Respondent testified as a representative of the property owners, including RVDM. There was no one else that Mr. * * * wanted to testify. Respondent was the appropriate person to testify under all the circumstances. * * * Vol. 17, pp. 203–04.

   147. When the County of San Diego took, by the power of eminent domain, certain real property that was owned by RVDM and RDF/IIP, Respondent testified as the principal of RVDM and RDF/IIP in the trial that began in 1990. County of San Diego v. Rancho Vista Del Mar, 20 Cal. Rptr. 2d 675, 677, fn. 1 (Cal. App. 4 dist. 1993), FDIC Exh. 96, official notice taken, Tr., Vol. 2, p. 56 lines 10–21.

   148. The settlement of the County condemnation case resulted in a $38 million payment to the defendants. * * * , Vol. 17, pp. 211–12.

   149. On May 27, 1992, Respondent wrote a letter resigning his position as Vice President of RVDM. FDIC Exh. 136; Resp. Stip., ¶ 81.

   150. In 1992, during the same time frame as his resignation from RVDM, Respondent wrote a letter resigning his position as Vice President of RDF/IIP. Resp. Stip., ¶ 82; [Respondent's] Supplemental Responses to FDIC's Request for Documents No. 5 at p. 6.

   151. Prior to October 1992, the * * * firm had prepared tax returns and provided tax advice to the De La Fuente family and related business entities for approximately 10 years. Resp. Stip., ¶ 71.

   152. FDIC Exhibit 133 contains a January 7, 1993 engagement letter from the * * * firm to RVDM signed by Respondent. FDIC Exh. 133, at Exh. II; * * * Vol. 11, pp. 14–16.

   153. FDIC Exhibit 134 contains engagement letters from the * * * firm for RDF/IIP signed by Respondent dated January 20, 1989 and March 9, 1987. It also contains transmittal letters to Respondent for RDF/IIP's tax returns for the tax years 1988, 1989, and 1990. FDIC Exh. 134; * * * Vol. 11, pp. 19–22.

   154. Engagement letters are, in essence, contracts to provide accounting services and they are important documents. * * * Vol. 11, pp. 14–16.

   155. The * * * firm generally sends transmittal letters for tax returns to the person who is perceived to be in charge of the filing entity. * * * Vol. 11, pp. 21–22.

   156. Respondent corresponded with the * * * firm as vice president on behalf of RDF/IIP in 1989. FDIC Exh. 134; * * * , Vol. 11, p. 22 lines 7–16.

   157. In October 1992, Respondent and * * * , principal of the accounting firm of * * * compromised a dispute concerning fees owed to the * * * firm by De La Fuente family entities. * * * Vol. 11, pp. 8–10.

   158. In connection with the compromise with the * * * firm, Respondent executed three promissory notes and a guarantee letter. * * * , Vol. 11, pp. 10–11.

   159. One of the promissory notes, executed on October 15, 1992, was signed by Respondent, as Vice President of RVDM,
{{1-31-01 p.A-3217}}

   and litigated RVDM to pay $17,000 to RVDM's accountants, the Levitz firm. Resp. Stip., ¶ 83; FDIC Exh. 133, at Exh. II; * * * Vol. 11, p. 13 lines 9–19.

   160. On October 15, 1992 Respondent, on behalf of RDF/IIP also reached a settlement on behalf of RDF/IIP, obligating RDF/IIP to pay the * * * firm $4,000. Resp. Stip., ¶ 84; Basney, Vol. 11, p. 12 lines 1–12.

   161. Twenty acres of property on which the Bank had a lien was sold in 1993 to * * * for environmental mitigation purposes. Richins, Vol. 15, pp. 231–32, Vol. 16, pp. 9–10.

   162. Respondent negotiated the sale of environmental mitigation property to Andreu, Vol. 18, p. 80 lines 3–9.

   163. Respondent requested that the County release RVDM property that was included in the County's $21 million blanket lien. * * * , Vol. 8, p. 11 lines 1–19.

   164. * * * has known Respondent professionally for approximately 12 to 13 years. * * * Vol. 9, pp. 126–27.

   165. * * * was hired by Respondent to do appraisals for RDF/IIP. He was not aware that Respondent's mother owned the company or what Respondent's title was at that point. * * * Vol. 9, p. 164 lines 3–18.

   166. * * * was appointed examiner of the affairs of RVDM by the bankruptcy court in May 1996. * * * Vol. 10, p. 125 lines 8–17.

   167. * * * looked at RVDM's books and records back to 1987. * * * , Vol. 10, p. 134 lines 19–21.

   168. * * * , concluded that Respondent's mother had nothing to do with the day-to-day operations of RVDM and that Respondent's company was running RVDM. * * * Vol. 10, p. 157 lines 4–11.

   169. RVDM had no employees on its payroll. * * * Vol. 10, p. 131 lines 9–11.

   170. Eventually the bankruptcy examiner had to go to Respondent to get answers concerning RVDM when * * * and Andreu were unable to provide information. * * * Vol. 10, pp. 128–29, 136–37, 184 line 3–14.

   171. The bankruptcy examiner was told that Respondent's mother lived in Mexico City and was not active in the operations of RVDM. * * * Vol. 10, p. 152 lines 6–21.

   172. The bankruptcy examiner was informed that RVDM was being managed by AIE, a company owned by Respondent. * * * Vol. 10, pp. 152–53.

   173. * * * formed the opinion that Respondent controlled RVDM and that all of the related companies were in common control. * * * Vol. 10, pp. 173 lines 2–18, 255 lines 15–20.

   174. Respondent did not disclose RVDM or RDF/IIP as his related interests in any filing that he made with the Bank. FDIC Exhs. 76A–76H.

   175. Respondent has represented to the FDIC that RVDM and RDF/IIP were his mother's companies and that he had nothing to do with them. Ankenbrand, Vol. 11, pp. 198–99.

   Irrevocable Trusts

   176. The children's trusts have only invested in NEI-related assets and FPTC assets. Schwarz, Vol. 16, p. 244 lines 21–25.

   177. Schwarz does not know who negotiated a contract payable to purchase additional FPTC stock on behalf of the children's trust. Schwarz, Vol. 16, pp. 243–44.

   178. Pursuant to the trust agreement, supposedly, only a trustee can select a successor trustee. FDIC Exh. 138, at 10.

   179. * * * first met the De La Fuentes in 1976 or 1977. He had a professional relationship with the De La Fuentes until the early 1990's. * * * , Vol. 16, pp. 26–27, 79–85.

   180. * * * served as one of the original co-trustees of the children's trusts as an accommodation to Respondent. FDIC Exh. 138 * * * Vol. 16, p. 102 lines 3–12.

   181. * * * reluctantly agreed to be the co-trustee of the children's trust on a temporary basis but after approximately one year, he told Respondent to find someone else to act as trustee. * * * , Vol. 16, p. 85 lines 16–24.

   182. Respondent found Sidney Schwarz to act as co-trustee of the children's trust. Vol. 16, pp. 85–86.

   183. Respondent asked Sidney Schwarz if he would succeed Waring as co-trustee of the children's trust. Schwarz, Vol. 16, p. 228 lines 9–16.

   184. * * * served as co-trustee of the children's trust from December 1994 to August 1, 1995. Schwarz, Vol. 16, p. 140 lines 10–15.

   185. In May, 1996, * * * executed a declaration in which he stated that as co-trustee
{{1-31-01 p.A-3218}}

   of the children's trust: he had no recollection of the specific nature of the trusts' acquisitions; had not made copies of any of the documents that he had signed in his capacity as trustee; and had never requested or received any documents relevant to the transfer of NEI stock to the children's trusts. * * * Vol. 16, pp. 86–89.

   186. * * * could not remember that NEI was the major asset of the children's trusts. * * * Vol. 16, p. 102 lines 3–12.

   187. * * * could not remember when he became a trustee of the children's trusts, when he resigned as co-trustee of the children's trusts, or that he had to choose his successor trustee. * * * Vol. 16, p. 102 lines 13–22.

   188. At the time that Schwarz succeeded * * * he and * * * had a few minor conversations, characterized as brief and without any details. Schwarz, Vol. 16, pp. 228–29.

   189. At the time that * * * resigned, he only provided Schwarz with his resignation and appointment of successor. He did not give Schwarz any other documents, including the executed trust agreements. Schwarz, Vol. 16, p. 229 lines 2–12.

   190. Schwarz received a copy of the executed trust agreements from * * * , an employee of NEI. Schwarz, Vol. 16, p. 229 lines 16–23.

   191. * * * an NEI employee, kept the vast majority of the records associated with the children's trust, but Schwarz did keep some. Schwarz, Vol. 16, p. 232 lines 5–20.

   192. NEI serves as the actual day-to-day manager of the trust activities, with Schwarz's contact being Andreu or Wick (i.e., the president of NEI). Schwarz, Vol. 16, p. 231 lines 13–25.

   193. Essentially when trust transactions occur, they were faxed simultaneously to Schwarz and Zapata and if both agreed they signed the agreement and there would be no need to discuss the decision. Schwarz, Vol. 16, p. 231 lines 1–8.

   194. Schwarz did not discuss all the decisions that had to be made with respect to the children's trusts with Zapata before the decisions were made. Schwarz, Vol. 16, p. 230 lines 21–25.

   195. Schwarz can not recollect if he had ever met in person his co-trustee, Zapata, before August 1997. Schwarz, Vol. 16, p. 230 lines 6–20.

   196. Schwarz was more involved in the day-to-day activities of the trust than Zapata. Schwarz, Vol. 16, p. 232 lines 1–4.

   197. Zapata died in 1998. Schwarz, Vol. 16, p. 142 lines 6–12.

   198. Schwarz selected a co-trustee to replace Zapata approximately ten days before he testified in the section 8(e) proceeding. Schwarz, Vol. 16 p. 143 lines 11–21.

   199. Schwarz could not remember the last name of the trustee that he selected as a replacement for Zapata. Schwarz, Vol. 16, p. 144 lines 15–23.

   200. Schwarz knows that the successor trustee that he selected is the godfather to one of the Respondent's children and a businessman of a large business in Mexico City. He does not know if he is a lawyer. Schwarz, Vol. 16, pp. 144–45.

   NEI

   201. De La Fuente II had the power to exercise a controlling influence over NEI from inception through October 1995. Resp. Answer ¶ 60.

   202. De La Fuente II reportedly resigned as president of NEI on or about October 25, 1995. FDIC Exh. 139; Resp. Answer ¶ 21.

   203. Zapata signed a resolution adopted by unanimous written consent of the shareholders appointing Andreu as president and Schwarz and Andreu as directors on November 15, 1995. The resolution was effective as of October 26, 1995. Exh. 140; Schwarz, Vol. 16, pp. 237–38.

   204. Respondent was the sole director of NEI until October 24, 1995. FDIC Exhs. 44, 139.

   205. NEI is probably worth in excess of $40 million. Andreu, Vol. 9, pp. 59–60.

   206. NEI was Respondent's "bread and butter." Richins, Vol. 15, pp. 115–16.

   207. Sidney Schwarz recommended that Respondent and his wife consider making gifts to their children since Congress considered decreasing the deduction for estate tax purposes from $600,000 to $200,000. This change never occurred. Schwarz, Vol. 16, pp. 133–36.

   208. There was an oral management agreement between AIE and NEI as of December 31, 1994, December 31, 1995 and December 31, 1996. The sums charged under the agreement were: $1,386,100 (1994); $1,160,000 (1995) and $1,560,000 (1996). FDIC Exhs. 155–157; * * * Vol. 7, pp. 97–98; Shovlowsky, Vol. 2, pp. 134–36.
{{1-31-01 p.A-3219}}

   209. Respondent was not paid by NEI for his duties as president; rather he was paid by AIE to provide services to NEI. Andreu, Vol. 9, p. 60 lines 14–22.

   210. Andreu's salary as vice president or president of NEI was never more than $86,000, while on the other hand, Respondent made $450,000 while he was president of NEI. FDIC Exhs. 148, 150; Shovlowsky, Vol. 2, pp. 115–21.

   211. Respondent continued to guarantee NEI's lines of credit with * * * after he had transferred his ownership to the 1995 Irrevocable Trusts. * * * Vol. 7, p. 28 lines 3–14.

   212. * * * a loan officer with * * * , would have considered recommending the release of Respondent's guaranty of the NEI line in 1996 and 1997. * * * Vol. 7, pp. 74–75.

   213. Respondent continued to meet with * * * after he had transferred his ownership of NEI and was no longer president. * * * Vol. 7, pp. 94–96.

   214. The main purpose of the * * * lines was so that NEI could purchase loans from RTC. * * * , Vol. 7, pp. 40–41.

   215. NEI was alleged to be a prohibited purchaser from the RTC because of a judgment the FDIC had on a guarantee given by Respondent. Andreu, Vol. 18, pp. 95–96.

   216. Respondent discussed with * * * his concerns regarding pending litigation involving Respondent's guarantee. * * * Vol. 9, pp. 73–74.

   217. NEI was involved in litigation over a debt allegedly owed by a partnership in which * * * was involved. * * * Vol. 9, pp. 86–87.

   218. Mr. * * * an attorney of the De La Fuente family aware of the dispute, put together a luncheon for * * * Respondent, and others, in an effort to see if "they could avoid some contested thing." * * * Vol. 17, pp. 225–27.

   219. The luncheon meeting was held on October 6, 1996. FDIC Exh. 154 * * * Vol. 9, p. 73 lines 2–9.

   220. Respondent discussed with * * * that NEI was one of any number of entities that he owned and controlled and that in many cases he had to put the entities into irrevocable trusts for his children so that he could still act on behalf of the companies. * * * Vol. 9, pp. 73–74.

   221. Respondent represented to * * * that NEI was owned by the childrens' trusts as a matter of administrative convenience. * * * Vol. 9, p. 94 lines 2–9.

   222. Respondent represented to * * * that he had complete control and authority to settle litigation between Mr. * * * interest and NEI. * * * Vol. 9, pp. 71–73.

   223. Respondent represented to Mr. * * * that he could resolve the litigation between NEI and Mr. * * * , interest "here and now." * * * Vol. 9, pp. 92 lines 18–25, 96 lines 9–12.

   224. * * * assumed that Respondent was the president of NEI. * * * , Vol. 9, p. 73 lines 10–18.

   225. * * * had never met the then president of NEI, Jose Luis Andreu, until the day that he testified in the FDIC's section 8(e) proceeding. * * * , Vol. 9, p. 96 lines 3–8.

   226. In statements filed with the Bank up until 1995, Respondent acknowledged that NEI was his related interest. FDIC Exhs. 76B–76D.

   227. In statements filed with the Bank in 1996 and after, Respondent did not report NEI as his related interest. FDIC Exhs. 76F–76H.

   FPTC

   228. As of June 1994, De La Fuente II owned 5.6% of FPTC. According to Bank records, De La Fuente II "gifted" his ownership in FPTC to his children. Resp. Answer ¶ 43.

   229. De La Fuente II signed checks drawn on accounts controlled by De La Fuente II and made payable to FPTC for the purchase of additional stock in FPTC as custodian of the children to be given to the 1995 Irrevocable Trusts for the benefit of the children. Resp. Answer ¶ 44.

   230. Respondent was a director of FPTC from 1983 to 1989. [Respondent's] Supplemental Response to FDIC's Request for Production No. 16.

   231. On May 6, 1989, Jose Luis Andreu and Respondent both ran for the board of directors of FPTC. FDIC Exh. 212; Andreu, Vol. 7, pp. 188–89.

   232. Isaias Zapata and Respondent voted their shares, respectively 2, 182, 820 and 1,957,820 on a cumulative basis, for Andreu at the May 6, 1989 election for FPTC's board of directors. FDIC Exh. 213; Andreu, Vol. 7, pp. 188–90.
{{1-31-01 p.A-3220}}

   233. As of January 6, 1990, Andreu was the chairman of FPTC. FDIC Exh. 215, at 2.

   234. At the January 6, 1990 FPTC board meeting, Andreu asserted that he represented approximately 20 percent of the shareholders of FPTC. FDIC Exh. 215, at 2.

   235. The twenty percent of the shareholders that Andreu represented would have included Respondent and Zapata. FDIC Exh. 215; Andreu, Vol. 7, pp. 193–94.

   236. By March 11, 1991, Andreu was the president of FPTC. FDIC Exh. 167.

   237. As of March 11, 1991, Andreu and * * * reported that FPTC was no longer active and was in the process of liquidating. Exh. 167; Shovlowsky, Vol. 2, pp. 155–56; Andreu, Vol. 8, pp. 177–79.

   238. After it sold its high-tech business, FPTC was a shell corporation that owned real property which was being leased to a third party. Shovlowsky, Vol. 2, pp. 152–54; Andreu, Vol. 8, pp. 178–79, 191–92.

   239. FPTC has no employees. * * * Vol. 17, p. 103 lines 13–15.

   240. Sometime after June 30, 1994, Andreu began acquiring stock in FPTC, using checks drawn on Witec Patents' checking account. Andreu, Vol. 7, pp. 264–66.

   241. As of July 21, 1995, Andreu had allegedly acquired over 1.9 million shares, or 24.42 percent of FPTC's stock. FPTC Stock 2 Ankenbrand, Vol. 11, pp. 204–05.

   242. The purpose of the checks drawn on Witec Patents' account which were included in Exhibit 233 was to purchase shares of FPTC from certain individuals. FDIC Exh. 237; Andreu Vol. 7, p. 237 lines 16–22.

   243. The Witec Patents checks were used to purchase the stock of * * * (June 1994 - 1,083,885 shares), * * * (July 1994 - 112,500 shares), * * * (June 1994 through January 1995 - 660,000 shares) and * * * (March 1995 - 50,000 shares), which was transferred to the name of Jose Luis Andreu. FDIC Exh. 233; FPTC Stock 1 & 2; Andreu, Vol. 7, pp. 264–66 Ankenbrand, Vol. 11, p. 26 lines 18–25.

   244. Checks drawn on the account of Witec Cayman Patents, totaling $175,600, were used to purchase * * * 660,000 shares of FPTC. * * * Vol. 11, pp. 110–12.

   245. * * * , a shareholder in FPTC, had conversations with Andreu prior to June 1994 in which they discussed gaining control of FPTC. * * * , Vol. 11, pp. 109–10.

   246. * * * subsequently offered to sell his FPTC shares to Andreu and Andreu agreed to buy them. * * * Vol. 11, p. 110 lines 5–9.

   247. In 1981, the shareholders of Witec Cayman Patents and Witec Cayman Services agreed that Respondent and Zapata would each receive a 30 percent interest in the combination of the two companies, but since it was necessary for a non-U.S. citizen to own at least 50 percent of Witec Cayman Patents for tax reasons, Zapata would own 50 percent of Witec Cayman Patents. FDIC Exh. 227; Ankenbrand, Vol. 11, pp. 207–08.

   248. In 1981, the shareholders of Witec Cayman Patents and Witec Cayman Services agreed that the profits and equity of the combination of the companies would be distributed 30 percent to Respondent and 30 percent to Zapata. FDIC Exh. 227; Ankenbrand, Vol. 11, pp. 208–09.

   249. In a November 18, 1981 memorandum, the shareholders of Witec Cayman Services agreed that the shares of the company would be distributed as follows: Zapata (50 shares); * * * (650 shares); Respondent (650 shares); and * * * (200 shares). FDIC Exh. 227.

   250. On April 15, 1982, the board of directors agreed to distribute the shares of Witec Cayman Services as follows: Zapata (500 shares) * * * (650 shares); Respondent (650 shares); and * * * (200 shares). FDIC Exh. 228.

   251. In a November 18, 1981 memorandum, the shareholders of Witec Cayman Patents agreed that the shares of the company would be distributed as follows: Zapata (1000 shares); * * * (400 shares); Respondent (400 shares); and * * * (200 shares). FDIC Exh. 227.

   252. On April 15, 1982, the board of directors agreed to distribute the shares of Witec Cayman Patents as follows: Zapata (1000 shares) * * * (400 shares); Respondent (400 shares); and * * * (200 shares). FDIC Exh. 333.

   253. On April 15, 1982 Respondent was appointed vice president of Witec Cayman Services. FDIC Exh. 228, 333.

   254. The 1987 change in control application for People's Bank states that Zapata is a shareholder in "Witec and Fine Particles." FDIC Exh. 307, at 8.

   255. On August 18, 1989, at a special meeting of the shareholders of Witec Patents in San Diego, Respondent, Zapata, and An-
{{1-31-01 p.A-3221}}

   dreu were all in attendance. Respondent acted as chairman of the meeting, and Zapata acted as secretary. Zapata was elected president and Andreu was elected vice president and secretary of Witec Patents. FDIC Exh. 229.

   256. At the September 11, 1989 FPTC Board meeting, Andreu announced that he had been appointed a director of "Witec." FDIC Exh. 214, at 2.

   257. As of January 30, 1990, Respondent was the President of Witec Cayman Services. Resp. Stip., ¶ 35.

   258. As of January 30, 1990, Respondent wrote a letter as president of Witec Services to FPTC in which the "Witec Cayman Group," which included both Witec Cayman Patents and Witec Cayman Services, offered to buy a division of FPTC. FDIC Exh. 216; Andreu, Vol. 7, pp. 194–96, Vol. 8, pp. 298–99.

   259. As of May 22, 1990, Andreu informed FPTC's board "that he is Vice President of Witec and that he holds the proxies of all four shareholders of Witec, who are also shareholders in FPTC." Exh. 218, p. 3; Andreu, Vol. 8, pp. 304–05.

   260. Zapata and Respondent did not care about Witec Patents because it had "no assets whatsoever" and "it was zero." No one was paying the fees to keep it in good standing. Andreu, Vol. 8, p. 295 lines 1–17.

   261. In 1995, FPTC changed its business strategy to begin investing in promissory notes secured by real estate, primarily from the FDIC, RTC, and banks. This is the same business in which NEI is engaged. Resp. Answer ¶ 52; Andreu, Vol. 7, pp. 204–05.

   262. On July 14, 1995, the United States District Court for the Southern District of California found the Bank and the Bank's directors, including De La Fuente II, guilty of contempt of court for failure to comply with the FDIC's 1992 Cease and Desist Order which had been entered as an order of the District Court in December 1994. Resp. Answer ¶ 245; Ankenbrand, Vol. 11, pp. 155–56.

   263. As a result of the contempt finding, the Bank's directors were ordered to pay daily fines of $500 until the contempt was purged. Resp. Answer ¶ 245; Ankenbrand, Vol. 11, pp. 155–56.

   264. The imposition of fines was delayed until July 24, 1995. Resp. Answer ¶ 245.

   265. As of July 17, 1995, Andreu, on behalf of FPTC, had done due diligence on three loans being offered for sale by the Bank and he was recommending that FPTC purchase the loans. FDIC Exh. 222; Andreu, Vol. 7, pp. 202–03.

   266. FPTC purchased the * * * and * * * loans from the Bank on July 20 or 21, 1995. FDIC Exh. 223; Ankenbrand, Vol. 11, pp. 151–52.

   267. The purchase of the * * * and * * * loans permitted the Bank to recognize a gain to income of approximately $445,000 and, thus, to claim that it had come into compliance with the district court's order. Resp. Answer, ¶ 248; FDIC Exhs. 174, 178; Ankenbrand, Vol. 11, pp. 156–58.

   268. The Bank provided financing in the amounts of $186,750 and $576,000 to permit FPTC to purchase the * * * and * * * loans. Resp. Answer, ¶ 246, 247; FDIC Exhs. 173–175 Ankenbrand, Vol. 11, pp. 154–58.

   269. The purchase of loans from the Bank in July 1995 was a "brand new business" for FPTC. Andreu, Vol. 8, pp. 193–98.

   270. The July 1995 extensions of credit were paid off by the proceeds of a new Bank loan in the amount of $1,350,000. Resp. Answer ¶ 250.

   271. The Bank's $1,350,000 extension of credit [to FPTC] was paid off by the proceeds of a third party loan to FPTC. Resp. Answer ¶ 252.

   272. On September 20, 1995, the third party lender's escrow agent wired excess loan proceeds in the amount of $620,579 to the Bank for the account of FPTC. Resp. Answer ¶ 253.

   273. In September 1995, FPTC did not have a deposit account with the Bank. Resp. Answer ¶ 254.

   274. Andreu, as president of FPTC, instructed the Bank to deposit $600,000 into the account of CA SM No. One, LLC ("CA SM"). Resp. Answer ¶ 255.

   275. CA SM is wholly owned by the 1995 Irrevocable Trusts. Resp. Answer ¶ 255.

   276. On September 20, 1995, a check for $600,000 was drawn on CA SM's account. De La Fuente II was both the payee and the signor of the check. Resp. Answer ¶ 256.

   277. The proceeds of the $600,000 CA SM check were used by De La Fuente II to
{{1-31-01 p.A-3222}}

   pay down his adversely classified loan at the Bank. Resp. Answer ¶ 257.

   278. Jose Luis Andreu represented to * * * of * * * that FPTC was one of the "De La Fuente" companies. * * * Vol. 7, pp. 33–34.

   279. Andreu was a full time employee at AIE, while devoting around 10 percent of his time to FPTC. Andreu, Vol. 8, pp. 201–02.

   280. Andreu's wife is also a director of FPTC. Andreu, Vol. 7, p. 169 lines 8–15.

   281. Respondent prior to 1995 disclosed that he had a 5.46 percent ownership interest in FPTC. FDIC Exh. 76B; FDIC Exh. 76C.

   282. By July 21, 1995, the 1995 Irrevocable Trusts owned 5.60\% and Isaias Zapata Oscoz owned 5.02% of FPTC. Resp. Answer ¶ 51.

   283. Respondent disclosed his interest in Witec Patents and Witec Services in the 1987 change in control application for Peoples Bank, indicating that he owned 400 shares of Witec Patents and 650 shares of Witec Services, valuing his interests respectively at $530,000 and $2,120,000. FDIC Exh. 307, at Exh. 3 to the application, Notes to Financial Report.

   284. As of November 26, 1991, Respondent reported to the Bank that he had a 20 percent interest and Zapata had a 50 percent interest in Witec Patents. FDIC Exh. 76B.

   285. As of November 26, 1991 and October 6, 1992, Respondent reported to the Bank that he had a 20 percent interest in Witec Patents and a 32.5 percent interest in Witec Services. FDIC Exhs. 76B, 76C.

   286. Witec Cayman Patents was identified by De La Fuente II as one of his related interests in the FDIC's 1992 examination of the Bank. Resp. Answer ¶ 48.

   287. Respondent reported to the Bank the "paper" allocation of stock in Witec Patents and Witec Services, respectively 20 and 32.5 percent, rather than his true beneficial interest of 30 percent of both companies. Ankenbrand, Vol. 11, pp. 212–15.

Alexander Trust,

   288. De La Fuente II is a beneficiary of the Alexander Trust. Resp. Answer ¶ 61.

   289. Respondent's future interest in the Alexander Trust is 25 percent. Pursuant to paragraph 2.04 of the Alexander Trust, Respondent and his sister are entitled to a 25 percent distribution during the life of Bertha Guerra de De La Fuente (i.e., Bertha receives $200,000/year and Respondent and his sister each receive $100,000/year after the death of the trustor). Pursuant to ¶ 2.05, after Bertha's decease, Respondent and his sister split the trust residue equally. FDIC Exh. 298; Ankenbrand, Vol. 11, p. 185 lines 1–7.

   290. Respondent, as a beneficiary of his father's revocable trust, would have a contingent beneficial interest. * * * Vol. 16, p. 35 lines 15–18.

   291. In a March 25, 1985 letter to the FDIC, Respondent represented that he had a 25 percent interest in De La Fuente Inc., indirectly as a beneficiary of his father's trust. FDIC Exh. 300; Ankenbrand, Vol. 11, pp. 172–75.

   292. In the 1987 change of control application for People's Bank, which he represented to be true and complete, Respondent claimed to have a 25 percent interest in De La Fuente, Inc. by virtue of a family trust held by his father. FDIC Exh. 307, at Exh. 3 to the application, Notes to Financial Report; Ankenbrand, Vol. 11, pp. 167–70.

   293. In the 1987 non-disapproval of the change in control application for People's Bank, the FDIC stated that Respondent reported that he had a one-quarter interest in a trust established by his father. FDIC Exh. 308, at 2; Ankenbrand, Vol. 11, pp. 170–71.

   294. In Respondent's January 31, 1990 financial statement, he claimed to have a 25 percent interest in De La Fuente, Inc. FDIC Exh. 309 Ankenbrand, Vol. 11, pp. 175–77.

   295. In Respondent's June 30, 1990 financial statement, he claimed to have a 25 percent interest in De La Fuente Inc. FDIC Exh. 310 Ankenbrand, Vol. 11, pp. 175–78.

   296. De La Fuente Inc. was in the car dealership business. FDIC Exh. 76A; Ankenbrand, Vol. 11, pp. 179–80.

   297. In depositions in 1990 and 1995 Respondent testified that he had a 25 percent beneficial interest in the family car dealerships by virtue of his father's trust. FDIC Exh. 326, at 7–8; FDIC Exh. 330, at 71 lines 1–15; Ankenbrand, Vol. 11, pp. 180–83.

   298. $500,000 of the proceeds of the $1 million extension of credit to the Alexander Trust were disbursed to De La Fuente, Inc. FDIC Exh. 311 Ankenbrand, Vol. 11, pp. 178–79.

   299. The credit authorization for the Alexander Trust extension of credit does not disclose Respondent's 25 percent contingent
{{1-31-01 p.A-3223}}

   interest in the trust. FDIC Exh. 299. This would be the primary document that the Bank would look at in authorizing the loan. Ankenbrand, Vol. 11, pp. 185–86.

   C.T. Produce

   300. * * * was the president of C.T. Produce in 1995. FDIC Exh. 237, at 2.

   301. A December 8, 1995 Bank document from loan officer, * * * , to president, Jim Redman, concerning an extension of credit to C.T. Produce states: "Mr. * * * informs me that his company is doing a Joint Venture with Roque and Jose Luis (not reduced to a written document) verbally to trade in fruit/produce which will involve a $1MM worth of sales, 1,250 semi truck loads of produce all over the next seven months period of time." FDIC Exh. 236 Shovlowsky, Vol. 2, pp. 196–97.

   302. On February 13, 1996, Jose Luis Andreu wrote to the Bank concerning NEI's relationship with C.T. Produce. Mr. Andreu stated that NEI had engaged C.T. Produce to act as broker since NEI did not have expertise in the sale of perishable items. FDIC Exh. 241 Shovlowsky, Vol. 2, pp. 198–99.

   303. In the February 13, 1996 letter, Jose Luis Andreu also stated that NEI had made further advances to the grower either directly or through C.T. Produce. FDIC Exh. 241; Shovlowsky, Vol. 2, pp. 199–200.

   304. On December 18, 1995, the Bank increased the extension of credit to C.T. Produce from $50,000 to $200,000. FDIC Exh. 237; Shovlowsky, Vol. 2, pp. 197–98.

   305. Using its line of credit at the Bank, FPTC sent $250,000 to C.T. Produce in February 1996. FDIC Exhs. 246–250; Shovlowsky, Vol. 2, pp. 209–11.

   306. Documents produced by NEI (contracts and assignments of deeds of trust) dated between October and December 1995 indicate that NEI, FPTC and C.T. Produce were involved in some type of joint venture related to * * * and its property in Nogales, Arizona. FDIC Exhs. 252–254; Shovlowsky, Vol. 2, pp. 212–16.

   307. In October 1995 Respondent, using his line of credit at the Bank, wired $500,000 to * * * the principal of * * * FDIC Exh. 335; Shovlowsky, Vol. 2, pp. 216–18.

   308. In a FDIC visitation of the Bank, the FDIC noted that Respondent had personally brought a proposal to the Bank to make a loan to * * * Resp. Exh. 860, at 10; Ankenbrand, Vol. 11, pp. 149–51.

   309. Even though the Bank management determined that the * * * loan was not within the Bank's policy, Respondent brought the loan to the full board of directors for consideration. Resp. Exh. 860, at 10; Ankenbrand, Vol. 11, pp. 150–51.

   310. Jose Luis Andreu and Respondent approached * * * through * * * the account officer on the NEI line at * * * for financing of C.T. Produce, a produce company that they were starting that was in some way related to NEI. * * * Vol. 7, pp. 34–36.

   311. Respondent represented to the Court that C.T. Produce had in the prior year sold $40 million of produce and had a $10 million line of credit, facts that were confirmed by Andreu, C.T. Produce's chairman of the board. Andreu, Vol. 7, pp. 165–66.

Extensions of Credit

   312. On or about May 17, 1990, the Bank extended a loan of $1,000,000 to the Alexander Trust. Resp. Answer ¶ 74.

   313. The Alexander Trust loan was secured by: a) real property in the Otay Mesa area pledged by D&D; and b) the personal guarantee of De La Fuente II's father. Resp. Answer ¶ 74.

   314. On or about October 8, 1990, RDF/IIP assumed a loan in the amount of $1,000,000 that the Bank had originally extended to RVDM. Resp. Answer ¶ 75.

   315. Due to a participation, the Bank's loan to RDF/IIP was reduced to $700,000 in December 1990. Resp. Answer ¶ 75.

   316. On or about December 26, 1990, the Bank extended a revolving line of credit in the amount of $400,000 to RVDM. Resp. Answer ¶ 76.

   317. The RVDM loan was secured by: a) real property in the Otay Mesa area pledged by RVDM; and b) the personal guarantee of De La Fuente II's mother. Resp. Answer ¶ 76.

   318. On or about January 24, 1992, the Bank renewed the $400,000 revolving line of credit to RVDM and increased it to $800,000. Resp. Answer ¶ 77.

   319. On or about July 15, 1992, the Bank increased the RVDM revolving line of credit to $1,600,000. Resp. Answer ¶ 78.

   320. $700,000 of the increased RVDM
{{1-31-01 p.A-3224}}

   loan amount was used to pay off the RDF/IIP loan at the Bank. Resp. Answer ¶ 78.

   321. The collateral securing the RDF/IIP loan was transferred to secure the RVDM revolving line of credit. Resp. Answer ¶ 78.

   322. On or about September 9, 1992, the Bank extended a revolving line of credit of $800,000 to De La Fuente II. Resp. Answer ¶ 79.

   323. On or about July 20, 1995, the Bank extended a loan to FPTC in the amount of $763,250, using two separate notes, on an unsecured basis. Resp. Answer ¶ 82.

   324. The July 1995 extension of credit [to FPTC] was paid off by the proceeds of a new Bank loan in August 1995. Resp. Answer ¶ 82.

   325. On or about August 11, 1995, the Bank extended a loan to FPTC in the amount of $1,350,000. Resp. Answer ¶ 83.

   326. The Bank's $1,350,000 extension of credit [to FPTC] was paid off by the proceeds of a third party loan to FPTC. Resp. Answer ¶ 83.

   327. On or about October 27, 1995, the board of directors of the Bank approved the assumption by NEI of De La Fuente II's existing $800,000 line of credit, with a committed amount of $750,000. Resp. Answer ¶ 84.

   328. On or about November 8, 1995, the Bank extended a line of credit in the amount of $600,000 to FPTC for unspecified investments. Resp. Answer ¶ 85 [first].

   329. On or about December 28, 1995, the Bank extended a commercial loan to FPTC in the amount of $800,000 to facilitate the purchase of a loan from the Bank. Resp. Answer ¶ 85 [second].

   330. On or about December 12, 1995, the Bank advanced a revolving line of credit in the amount of $50,000 to C.T. Produce for the stated purpose of "accelerat[ing] cash flow of accounts receivable." Resp. Answer ¶ 70, 86.

   331. Six days later, on or about December 18, 1995, the Bank increased the C.T. Produce line of credit to $200,000. Resp. Answer ¶ 87.

   332. By December 27, 1995, C.T. Produce had drawn on its line of credit at the Bank three times, totaling $200,000. Resp. Answer ¶ 89.

Lending Limits

   333. As of March 31, 1990, the Bank's Call Report reported that the Bank's capital stock and surplus equaled $4,203,000. Resp. Answer ¶ 92.

   334. As of the March 31, 1990 Call Report, fifteen percent of the Bank's unimpaired capital and surplus equaled $630,450. Resp. Answer ¶ 93.

   335. The $1 million extension of credit to the Alexander trust on May 17, 1990 exceeded the fifteen percent lending limit of $630,000. Ankenbrand, Vol. 12, pp. 17–18.

   336. As of September 30, 1990, the Bank's Call Report reported that the Bank's capital stock and surplus equaled $4,678,000. Resp. Answer ¶ 95, 139.

   337. As of the September 30, 1990 Call Report, fifteen percent of the Bank's unimpaired capital and surplus equaled $701,700. Resp. Answer ¶ 96.

   338. The $1 million extension of credit to RDF/IIP on October 8, 1990 exceeded the fifteen percent lending limit of $702,000. The aggregate of the $1 million Alexander Trust and $1 million RDF/IIP extensions also exceeded the $702,000 lending limit. Ankenbrand, Vol. 12, p. 18 lines 10–23.

   339. The $400,000 extension of credit to RVDM on December 26, 1990, when aggregated with the $1 million extension of credit to the Alexander Trust and the then outstanding $700,000 extension of credit to RDF/IIP exceeded the fifteen percent lending limit of $702,000. Ankenbrand, Vol. 12, pp. 21–22.

   340. As of the September 30, 1990 Call Report, ten percent of the Bank's unimpaired capital and surplus equaled $467,800. Resp. Answer ¶ 140.

   341. As of the September 30, 1990 Call Report, twenty percent of the Bank's unimpaired capital and surplus equaled $935,600. Resp. Answer ¶ 163.

   342. The $1 million extension of credit to RDF/IIP on October 8, 1990 exceeded the 10 percent lending limit of $468,000 to a single affiliate and the 20 percent lending limit of $936,000 to multiple affiliates. Ankenbrand, Vol. 12, p. 33 lines 8–22.

   343. The $400,000 extension of credit to RVDM on December 26, 1990, when aggregated with the then outstanding $700,000 extension of credit to RDF/IIP exceeded the
{{1-31-01 p.A-3225}}

   20 percent lending limit of $936,000 to multiple affiliates. Ankenbrand, Vol. 12, pp. 33–34.

   344. The Bank's lending limit for December 31, 1991, as calculated by the FDIC in the Notice, was stipulated to be correct by Respondent, for the purposes of this proceeding only. Ankenbrand, Vol. 12, p. 22 lines 5–14.

   345. As of December 31, 1991, the Bank's Call Report reported that the Bank's Capital stock and surplus equaled $5,468,000.

   346. As of the December 31, 1991 Call Report, fifteen percent of the Bank's unimpaired capital and surplus equaled $820,200.

   347. The $800,000 extension of credit to RVDM on January 24, 1992, when aggregated with the $1 million extension of credit to the Alexander Trust and the then outstanding $700,000 extension of credit to RDF/IIP exceeded the fifteen percent lending limit of $820,000. Ankenbrand, Vol. 12, pp. 22–23.

   348. As of December 31, 1991, ten percent of the Bank's unimpaired capital and surplus equaled $546,800.

   349. As of the December 31, 1991 Call Report, twenty percent of the Bank's unimpaired capital and surplus equaled $1,093,600.

   350. The $800,000 extension of credit to RVDM on January 24, 1992 exceeded the 10 percent lending limit of $547,000 to a single affiliate and when aggregated with the then outstanding $700,000 extension of credit to RDF/IIP exceeded the twenty percent lending limit of $1,094,000 to multiple affiliates. Ankenbrand, Vol. 12, pp. 34–35.

   351. As of June 30, 1992, the Bank's Call Report reported that the Bank's capital stock and surplus equaled $6,507,000. Resp. Answer ¶ 102, 145, 169.

   352. As of the June 30, 1992 Call Report, fifteen percent of the Bank's unimpaired capital and surplus equaled $976,050. Resp. Answer ¶ 103.

   353. The $1.6 million extension of credit to RVDM on July 15, 1992 exceeded the fifteen percent lending limit of $976,000. The aggregate of the $1 million Alexander Trust and $1.6 million RVDM extensions of credit also exceeded the $976,000 lending limit. Ankenbrand, Vol. 12, p. 23 lines 6–17.

   354. The $800,000 extension of credit to Respondent on September 9, 1992, when aggregated with the $1 million Alexander Trust and $1.6 million RVDM extensions of credit also exceeded the fifteen percent lending limit of $976,000. Ankenbrand, Vol. 12, pp. 23–24.

   355. As of the June 30, 1992 Call Report, ten percent of the Bank's unimpaired capital and surplus equaled $650,700. Resp. Answer ¶ 146.

   356. As of the June 30, 1992 Call Report, twenty percent of the Bank's unimpaired capital and surplus equaled $1,301,400. Resp. Answer ¶ 170.

   357. The $1.6 million extension of credit to RVDM on July 15, 1992 exceeded the ten percent lending limit of $651,000 to a single affiliate and also exceeded the twenty percent lending limit of $1,301,000 to multiple affiliates. Ankenbrand, Vol. 12, p. 35 lines 4–14.

   358. As of June 30, 1995, the Bank's Call Report reported that the Bank's capital stock and surplus equaled $5,427,000. Resp. Answer ¶ 106, 148 172.

   359. As of the June 30, 1995 Call Report, fifteen percent of the Bank's unimpaired capital and surplus equaled $814,050. Resp. Answer ¶ 107.

   360. The $763,000 extension of credit to FPTC on July 20, 1995, when aggregated with the outstanding $800,000 extension to RVDM and the $800,000 extension to Respondent, exceeded the fifteen percent lending limit of $814,000. Ankenbrand, Vol. 12, p. 24 lines 7–19.

   361. The $1.35 million extension of credit to FPTC on August 11, 1995 exceeded the fifteen percent lending limit of $814,000. The aggregate of the $1.35 million FPTC extension, the then outstanding $800,000 RVDM extension and the $800,000 extension to Respondent, exceeded the fifteen percent lending limit of $814,000. Ankenbrand, Vol. 12, pp. 24–25.

   362. As of the June 30, 1995 Call Report, ten percent of the Bank's unimpaired capital and surplus equaled $542,700. Resp. Answer ¶ 149.

   363. As of the June 30, 1995 Call Report, twenty percent of the Bank's unimpaired capital and surplus equaled $1,085,400. Resp. Answer ¶ 173.

   364. The $763,000 extension of credit to FPTC on July 20, 1995 exceeded the ten percent lending limit of $543,000 to a single affiliate and, when aggregated with the then
{{1-31-01 p.A-3226}}

   outstanding $800,000 extension to RVDM, exceeded the twenty percent lending limit of $1,086,000 to multiple affiliates. Ankenbrand, Vol. 12, pp. 35–36.

   365. The $1.35 million extension of credit to FPTC on August 11, 1995 exceeded the ten percent lending limit of $543,000 to a single affiliate and, when aggregated with the then outstanding $800,000 extension to RVDM, exceeded the twenty percent lending limit of $1,086,000 to multiple affiliates. Ankenbrand, Vol. 12, p. 36 lines 4–18.

   366. The Bank's lending limit for September 30, 1995, as calculated by the FDIC in the Notice, was stipulated to be correct by Respondent, for the purposes of this proceeding only. Ankenbrand, Vol. 12, p. 25 lines 9–18.

   367. As of September 30, 1995, the Bank's Call Report reported that the Bank's capital stock and surplus equaled $5,690,000. Resp. Answer ¶ 110, 120.

   368. As of the September 30, 1995 Call Report, fifteen percent of the Bank's unimpaired capital and surplus equaled $853,500. Resp. Answer ¶ 111.

   369. The $750,000 extension of credit to NEI (by virtue of its assumption of Respondent's loan) on October 27, 1995, when aggregated with the then outstanding $800,000 extension to RVDM, exceeded the fifteen percent lending limit of $854,000. Ankenbrand, Vol. 12, pp. 25–26.

   370. The $600,000 extension of credit to FPTC on November 8, 1995, when aggregated with the then outstanding $800,000 RVDM extension and the $750,000 NEI extension, exceeded the fifteen percent lending limit of $854,000. Ankenbrand, Vol. 12, p. 26 lines 8–21.

   371. The $200,000 extension of credit to C.T. Produce on December 18, 1995, which was for the tangible economic benefit of NEI, when aggregated with the existing $750,000 extension of credit to NEI, exceeded the fifteen percent lending limit of $854,000. When the $200,000 extension to C.T. Produce and the $750,000 extension to NEI are aggregated with the then outstanding $800,000 extension to RVDM and the $600,000 extension to FPTC, the total exceeds the fifteen percent lending limit of $854,000. Ankenbrand, Vol. 12, pp. 26–27.

   372. The additional $800,000 extension of credit to FPTC on December 28, 1995, when aggregated with the existing $600,000 extension to FPTC, exceeded the fifteen percent lending limit of $854,000. When the total $1.4 million extension to FPTC is aggregated with the then outstanding $800,000 extension to RVDM and the $950,000 extension to the combination of C.T. Produce and NEI, the total exceeds the fifteen percent lending limit of $854,000. Ankenbrand, Vol. 12, pp. 27–28.

   373. As of the September 30, 1995 Call Report, ten percent of the Bank's unimpaired capital and surplus equaled $569,000.

   374. As of the September 30, 1995 Call Report, twenty percent of the Bank's unimpaired capital and surplus equaled $1,038,000. Resp. Answer ¶ 177.

   375. The $750,000 extension of credit to NEI (by virtue of its assumption of Respondent's loan) on October 27, 1995, exceeded the ten percent lending limit of $569,000 to a single affiliate and, when aggregated with the then outstanding $800,000 extension to RVDM, exceeded the twenty percent lending limit of $1,040,000 to multiple affiliates. Ankenbrand, Vol. 12, pp. 36–37.

   376. the $600,000 extension of credit to FPTC on November 8, 1995 exceeded the ten percent lending limit of $569,000 to a single affiliate and, when aggregated with the then outstanding $800,000 extension to RVDM and the $750,000 extension to NEI, exceeded the twenty percent lending limit of $1,140,000 to multiple affiliates. Ankenbrand, Vol. 12, p. 37 lines 5–17.

   377. The $200,000 extension of credit to C.T. Produce on December 18, 1995, which was for the benefit of NEI, when aggregated with the existing $750,000 extension of credit to NEI, exceeded the ten percent lending limit of $569,000 to a single affiliate. When the $200,000 extension to C.T. Produce and the $750,000 extension to NEI are aggregated with the then outstanding $800,000 extension to RVDM and the $600,000 extension to FPTC, the total exceeds the twenty percent lending limit of $1,140,000 to multiple affiliates. Ankenbrand, Vol. 12, pp. 37–38.

   378. The additional $800,000 extension of credit to FPTC on December 28, 1995, when aggregated with the existing $600,000 extension to FPTC, exceeded the ten percent lending limit of $569,000 to a single affiliate. When the total $1.4 million extension to FPTC is aggregated with the then outstanding $800,000 extension to RVDM and the $950,000 extension to the combination of
{{1-31-01 p.A-3227}}

   C.T. Produce and NEI the total exceeds the twenty percent lending limit of $1,140,000 to multiple affiliates. Ankenbrand, Vol. 12, pp. 38–39.

   379. The following extensions of credit, in violation of Regulation O, were knowingly received by Respondent or his related interests, directly or indirectly; July 15, 1992 RVDM - $1.6 million; September 9, 1992 Respondent - $800,000; July 20, 1995 FPTC - $763,000; August 11, 1995 FPTC - $1.35 million; October 27, 1995 NEI - $750,000; November 8, 1995 FPTC - $600,000; December 18, 1995 C.T. Produce - $50,000 December 26, 1995 C.T. Produce - $200,000; December 28, 1995 FPTC - $800,000.

Loss to the Bank & Personal Gain to Respondent

   380. The RVDM loan eventually went into default in 1994. Resp. Answer ¶ 80.

   381. In February 1995 the Bank foreclosed on 160 acres of the collateral securing the $1.6 million RVDM loan for a bid amount of $800,000. Resp. Answer ¶ 80.

   382. The remaining $800,000 balance of the RVDM loan remained in default while RVDM was in bankruptcy until the loan was purchased by NEI in 1996. Resp. Answer ¶ 80.

   383. The Bank expended $50,685 in direct expenses on the RVDM loan. FDIC Exh. 75; Shovlowsky, Vol. 1, p. 272 lines 20–23.

   384. The Bank recognized a charge-off of $128,000 when the Bank foreclosed on some of the RVDM collateral. FDIC Exh. 75; Shovlowsky, Vol. 1, p. 273 lines 3–9.

   385. The total amount of hard costs incurred by the Bank which arose from the RVDM loan was $178,000. FDIC Exh. 75; Shovlowsky, Vol. 1, p. 274 lines 14–17.

   386. The Bank incurred $103,567 in carrying costs for the RVDM loan, and $45,642 in carrying costs for the Other Real Estate acquired when the Bank foreclosed on some of the RVDM collateral. FDIC Exh. 75 Shovlowsky, Vol. 1, p. 273 lines 20–25.

   387. The total amount of carrying costs arising out of the RVDM loan was approximately $148,000. FDIC Exh. 75; Shovlowsky, Vol. 1, p. 274 lines 17–18.

   388. The Bank incurred $354,000 in opportunity costs for the RVDM loan, and $148,000 in opportunity costs for the other real estate property. FDIC Exh. 75; Shovlowsky, Vol. 1, p. 274 lines 11–13.

   389. The total amount of opportunity costs incurred by the Bank in the RVDM loan was approximately $388,000. FDIC Exh. 75; Shovlowsky, Vol. 1, p. 274 lines 18–19.

   390. The Bank incurred losses totaling approximately $716,000 on the RVDM loan and other real estate. FDIC Exh. 75; Shovlowsky, Vol. 1, p. 274 lines 20–22.

   391. The Alexander Trust loan eventually went into default. Resp. Answer ¶ 81.

   392. On or about July 14, 1995, after initiating a foreclosure of the [Alexander Trust pledged real] property, the Bank obtained title to the real property collateral. Resp. Answer ¶ 81.

   393. Bank losses on the Alexander Trust loan were categorized, similar to the RVDM loan, as hard costs, carrying costs and opportunity costs. Losses were only calculated as of December 31, 1996. FDIC Exh. 75 Ankenbrand, Vol. 12, pp. 43–46.

   394. The Bank recognized hard cost losses of $60,348 on the Alexander Trust loan. FDIC Exh. 75, at 2.

   395. The Bank further realized hard cost losses of $13,447 and $425,068 for charge-offs taken on the Alexander Trust ORE. FDIC Exh. 75, at 2.

   396. The Bank's carrying costs on the Alexander Trust loan were $16,329 and the carrying costs on the Alexander Trust ORE were $42,419. FDIC Exh. 75, at 2.

   397. The Bank's lost opportunity costs on the Alexander Trust loan were $47,435 and the lost opportunity costs on the Alexander ORE were $19,825. FDIC Exh. 75, at 2.

   398. The Bank's total loss on the Alexander Trust extension of credit was $624,871. FDIC Exh. 75; Ankenbrand, Vol. 12, p. 47 lines 1–4.

   399. The Bank's total loss on the Alexander Trust and RVDM extensions of credit was $1,341,141. FDIC Exh. 75; Ankenbrand, Vol. 12, p. 47 lines 9–12.

   400. The gain to Respondent on the extensions of credit in violation of Regulation O was $6.35 million. Ankenbrand, Vol. 12, pp. 41–42.

   401. The gain to Respondent on the extensions of credit in violation of section 23A was $5.3 million. Ankenbrand, Vol. 12, pp. 42–43.
{{1-31-01 p.A-3228}}

   Collateral Substitution Transaction

   402. On or about December 26, 1990, the Bank extended credit to RVDM, in the amount of $400,000. Resp. Answer ¶ 189.

   403. De La Fuente II's mother, Bertha Guerra de De La Fuente, executed a personal guarantee for repayment of the Bank's loan to RVDM. Resp. Answer ¶ 189.

   404. The RVDM loan amount was increased twice in 1992, resulting in an outstanding extension of credit in the amount of $1,600,000. Resp. Answer ¶ 189.

   405. As of July 1992, the RVDM loan was secured by real property. Resp. Answer ¶ 190.

   406. The Bank had a first deed of trust on 340 acres of land in the eastern section of Otay Mesa owned by RDF. Resp. Answer ¶ 190.

   407. The Bank also had first deeds of trust on a 160 acre parcel and a 40 acre parcel of land in Otay Mesa, and second deeds of trust on various other parcels in the Otay Mesa area, all owned by RVDM. Resp. Answer ¶ 190.

   408. In November 1993, 20 acres of the 340 Otay Mesa parcel were sold by RDF's successor, IIP, and the proceeds were applied to delinquent interest on the RVDM loan and to the establishment of an interest reserve for future interest payments. Resp. Answer ¶ 190.

   409. The interest reserve was eventually exhausted and only two other partial payments were received by the Bank. Resp. Answer ¶ 190.

   410. On or about January 27, 1994, IIP entered into an agreement with * * * Rey * * * , a partnership owned by * * * (collectively referred to as * * * to sell * * * 256 acres of land in the Otay Mesa area, including 176 of the 320 acres which partially secured the Bank's $1.6 million loan to RVDM for a purchase price of $1.9 million. Resp. Answer ¶ 191; FDIC Exh. 10.

   411. This transaction subsequently was expanded into a sale of the entire 320 acres which served as a portion of the collateral on the Bank's loan to RVDM. Resp. Answer ¶ 191; FDIC Exh. 20.

   412. The original agreement and subsequent expansion were signed by Andreu on behalf of IIP. Resp. Answer ¶ 191; FDIC Exh. 10; FDIC Exh. 20.

   413. * * * was seeking to purchase "environmental mitigation" property in the San Diego County area to offset the loss of land that it was developing elsewhere in the County. Resp. Answer ¶ 192.

   414. State and Federal environmental authorities had the power to determine if the environmental mitigation property that * * * acquired would meet the requirements of law. Resp. Answer ¶ 192.

   415. The initial agreement executed on January 27, 1994, between * * * and IIP, was contingent upon the dismissal of IIP's pending bankruptcy or approval of the sale by the bankruptcy court. Resp. Answer ¶ 193; FDIC Exh. 10.

   416. Since the Bank was a party to the IIP bankruptcy, the order of dismissal was approved as to form by Bank counsel and was also served on Bank's counsel. Resp. Answer ¶ 194.

   417. On March 3, 1994, IIP's bankruptcy was dismissed. FDIC Exh. 14, at 7–9; Shovlowsky, Vol. 1, pp. 181–82.

   418. On March 8, 1994, a copy of the document dismissing IIP's bankruptcy was faxed to the escrow agent from NEI. FDIC Exh. 14, at 6–9; Shovlowsky, Vol. 1, pp. 181–82.

   419. From March 14, 1994 to March 30, 1994, the Respondent was engaged in negotiations with * * * for additional alternatives for open space mitigation. FDIC Exh. 16, 18 & 19; Shovlowsky, Vol. 1, pp. 184–87.

   420. On March 14, 1994, * * * of the * * * wrote a letter to * * * indicating that "Roque wants us to consider the attached parcels for the open space mitigation for * * * FDIC Exh. 16.

   421. On March 21, 1994, * * * wrote a memorandum regarding a meeting held between the parties to the * * * transaction, indicating that "RD - Proposed several alternatives to the original mitigation parcel because of complications regarding the ownership of the 80 acre." FDIC Exh. 18.

   422. * * * wrote another memorandum dated March 30, 1994, stating: "Based on recent negotiations with Roque De La Fuente (the O'Neal [sic] Canyon property owner). |b5 |b5 ." FDIC Exh. 19.

   423. No individual other than the Respondent is identified in the March memorandum from * * * and * * * as being involved in the negotiations on behalf of the sellers of the property in O'Neill Canyon. FDIC Exh. 16; FDIC Exh. 18; FDIC Exh. 19.
{{1-31-01 p.A-3229}}

   424. On April 4, 1994, IIP entered an agreement with * * * for the purchase by * * * of 300 acres of Otay Mesa property for $1,968,750, 220 acres of which served as collateral for the Bank's loan to RVDM, and for the right by * * * to purchase an additional 100 acres of Otay Mesa property at $6,500 per acre, all of which served as collateral for the Bank's loan to RVDM. FDIC Exh. 20.

   425. The 300 acre parcel owned by IIP is graphically displayed as the yellow and green set of parcels on FDIC Exh. CS Maps #3. FDIC Exh. CS Maps #3; Shovlowsky, Vol. 1, p. 190 lines 11–24.

   426. The 100 acre parcel owned by IIP is graphically displayed as the red set of parcels labeled "IIP Option" on FDIC Exh. CS Maps #3. FDIC Exh. CS Maps #3; Shovlowsky, Vol. 1, pp. 190–91.

   427. On April 4, 1994, De La Fuente II entered into an agreement with * * * giving * * * an option to purchase an additional 80 acres of Otay Mesa property owned personally by De La Fuente II which was pledged as collateral to secure De La Fuente II's continuing guarantee of a loan made by * * * to NEI, which at that time was wholly owned by De La Fuente II. Resp. Answer ¶ 195; FDIC Exh. 21.

   428. The 80 acres parcel owned by De La Fuente II is graphically displayed as the red rectangular parcel labeled as "RDLF II Option" on FDIC Exh. CS Maps #2. FDIC Exh. CS Maps #2. Shovlowsky, Vol. 1, p. 190 lines 9–10.

   429. On April 4, 1994, D&D entered into an agreement with * * * giving * * * the right to purchase an additional 18.65 acres of Otay Mesa property for $131,250. Resp. Answer ¶ 196; FDIC Exh. 22.

   430. The agreement between D&D and * * * was signed by De La Fuente II on behalf of D&D. Resp. Answer ¶ 196; FDIC Exh. 22.

   431. The 18.65 acre parcel owned by D&D is graphically displayed as the red rectangular parcel to the far left labeled as "D & D Option" on FDIC Exh. CS Maps #2. FDIC Exh. CS Maps #2; Shovlowsky, Vol. 1, p. 190 lines 6–8.

   432. On April 4, 1994, RVDM entered into an agreement with * * * giving * * * an option to purchase an additional 120 acres of Otay Mesa property for $780,000, which property served as additional collateral for the Bank's loan to RVDM. Resp. Answer ¶ 197; FDIC Exh. 23.

   433. The 120 acre parcel owned by RVDM is graphically displayed as the L-shape red parcel labeled as "RVDM Option" on FDIC Exh. CS Maps #2. FDIC Exh. CS Maps #2; Shovlowsky, Vol. 1, p. 190 lines 8–9.

   434. As of April 4, 1994, the 300 acre parcel owned by IIP was the primary piece of mitigation property being considered by * * * FDIC Exh. CS Maps #2; Shovlowsky, Vol. 1, pp. 190–91.

   435. De La Fuente II was intimately involved with the sale of the IIP, RVDM and D&D properties and his personal property from the date that the respective escrows were opened. Resp. Answer ¶ 200.

   436. On or about April 6, 1994, Andreu, on behalf of RVDM, executed a letter to the Bank informing the Bank of the RVDM option agreement with * * * and indicating that any payments received would be given to the Bank to reduce amounts owed by RVDM. Resp. Answer ¶ 198; FDIC Exh. 25.

   437. * * * was the handling officer on the RVDM loan until he left the Bank in September 1994. * * * Vol. 9, p. 238 lines 23–24; Southwick, Vol. 20, p. 127 lines 13–24, pp. 129–30.

   438. Mr. * * * maintained a contact sheet on the RVDM loan, which was recorded at or near the time of the conversations noted. * * * Vol. 9, pp. 180–81.

   439. When Mr. * * * referred to "RDLF" in the contact sheet, he meant "Roque De La Fuente." * * * , Vol. 9, pp. 182 lines 21–22, 183 lines 18–20.

   440. "RDLF" did not stand for "Rancho De La Fuente," but stood for "Roque De La Fuente." * * * , Vol. 9, pp. 182 lines 21–25, 183–84.

   441. The RVDM contact sheet maintained by Mr. * * * states the following for the date of April 7, 1994: "Jim Redman says he received a request from RDLF to release collateral property and substitute other property owned by RVDM. Details to follow." FDIC Exh. 26, at 5; * * * Vol. 9, p. 182 lines 12–20.

   442. On April 7, 1994, the Bank's president, James Redman ("Redman"), indicated that he received a request from Respondent to release collateral property and substitute
{{1-31-01 p.A-3230}}

   other property by RVDM. FDIC Exh. 26, at 5; * * * Vol. 9, pp. 181–82, 246 lines 17–21.

   443. On or about April 7, 1994, Andreu, on behalf of IIP, sent a letter to the Bank suggesting a substitution of collateral on the RVDM loan. Resp. Answer ¶ 202; FDIC Exh. 27.

   444. On or about April 7, 1994, Redman, on behalf of the Bank, sent a letter to IIP expressing concern about having collateral for a loan to RVDM pledged by IIP, which he claimed was still in bankruptcy. Resp. Answer ¶ 203; FDIC Exh. 28.

   445. Redman proposed to permit a collateral substitution as long as the collateral was equal to or superior in value and marketability than the existing collateral. Resp. Answer ¶ 203; FDIC Exh. 28.

   446. The collateral substitution proposed was subject to the approval of the Bank's board of directors. FDIC Exh. 28.

   447. On April 8, 1994, Andreu, on behalf of RVDM, executed a letter to the Bank offering to substitute 92 acres of Otay Mesa property for the 320 acres pledged to the Bank by IIP which had been appraised at $1,600,000. Resp. Answer ¶ 204; FDIC Exh. 29.

   448. At that time, the Bank held a second deed of trust on the offered property, behind NEI's trust deed which was stated to be in the amount of $550,000. Resp. Answer ¶ 204.

   449. The proposed arrangement was for NEI to subordinate its position to the Bank's. Resp. Answer ¶ 204.

   450. In October 1993, RVDM deeded property to NEI in satisfaction of the $550,000 lien amount. FDIC Exh. 129, at 5 lines 25–26; * * * , Vol. 10, pp. 138–40.

   451. At the time of the proposed collateral substitution transaction, the Bank had already moved into first position on the proposed substitute property. Shovlowsky, Vol. 1, p. 210 lines 12–13.

   452. On April 12, 1994, * * * a loan reviewer for * * * visited NEI's offices to review various loans, including the loan from NEI to IIP. FDIC Exh. 30; Shovlowsky, Vol. 1, pp. 202–03.

   453. During this review, Mr. Robinson indicated in a memorandum to * * * the account officer on the NEI line at * * * , that "Rocky is in the middle of closing escrow on an adjoining parcel and when this transaction closes * * * will receive a paydown of $1.6 million." FDIC Exh. 30.

   454. As of April 12, 1994, the Respondent's wholly owned company, NEI, had already promised IIP proceeds in the amount of $1.6 million to * * * FDIC Exh. 30; Shovlowsky, Vol. 1, p. 203 lines 7–17.

   455. The RVDM contact sheet maintained by Mr. * * * on April 14, 1994, states, in part: "Received letter request to substitute collateral. According to JR, RDLF request we order appraisal immediately on property he is requesting to be substituted." FDIC Exh. 26, at 5; * * * Vol. 9, p. 183 lines 9–17.

   456. On April 14, 1994, the Respondent requested that the Bank order an appraisal immediately on the property requested to be substituted. FDIC Exh. 26; * * * , Vol. 9, 183 lines 9–20.

   457. The RVDM contact sheet maintained by Mr. * * * on April 14, 1994, further states, in part: "Advised JR: (1) current repayment program will provide a substantial paydown of principal in the short term—why substitute property? What would our repayment program be and why would it be better than the existing program; i.e., what is best for the bank?" FDIC Exh. 26, at 5; * * * Vol. 9, pp. 184–85.

   458. In an April 18, 1994 * * * internal memorandum, it is noted that on April 15, 1994, "Rocky spent a lot of time describing five transactions that have been reviewed by * * * FDIC Exh. 31, at 2.

   459. On April 15, 1994, Respondent personally discussed the IIP note and related proceeds with * * * auditors. FDIC Exh. 31.

   460. On April 29, 1994, * * * agreed to overadvance NEI $2.45 million. FDIC Exh. 33; Shovlowsky, Vol. 1, pp. 203–04; Chang, Vol. 7, pp. 21–23.

   461. The sources of repayment of * * * overadvance to NEI was $1.9 million in IIP escrow proceeds being assigned to * * * FDIC Exh. 33; Shovlowsky, Vol. 1, p. 204 lines 15–21; * * * Vol. 7, p. 23 lines 11–18.

   462. Mr. * * * was not aware that the property subject of the $1.9 million escrow was serving as collateral for a loan at the Bank, nor was he ever made aware of that fact. * * * Vol. 7, pp. 23–24.

   463. There was never any representation to * * * that the IIP escrow might not close. * * * Vol. 7, p. 24 lines 4–7.

   464. * * * would most likely not have granted the overadvance to NEI if the IIP
{{1-31-01 p.A-3231}}

   proceeds had not been assigned to * * * Vol. 7, p. 24 lines 12–15.

   465. On May 1, 1994, the Bank received the appraisal on the property requested to be substituted. Resp. Answer ¶ 206; FDIC Exh. 34.

   466. The May 1, 1994 appraisal valued the 92 acre property at $1,384,000. Resp. Answer ¶ 206.

   467. On May 5, 1994, Respondent and * * * executed an agreement whereby agreed to release its lien on Respondent's property. Resp. Answer ¶ 208.

   468. On May 27, 1994, * * * , Andreu and Respondent executed a letter stating: "The net sales proceeds [of the IIP escrow] are to be used in partial satisfaction of a loan made by National Enterprises, Inc., to International Industrial Park, Inc., and in partial satisfaction of a loan made by * * * to National Enterprises." FDIC Exh. 40; Shovlowsky, Vol. 1, pp. 217–19.

   469. * * * negotiated with the Respondent to purchase the land in O'Neill Canyon. Vol. 10, p. 10 lines 5–18.

   470. Respondent was the primary decision-maker on behalf of the sellers involved in the four escrows from the beginning to the end. * * * Vol. 10, pp. 24–26.

   471. Respondent was the individual in control of negotiations with * * * and State and Federal environmental authorities. * * * Vol. 10, pp. 10 lines 5–18, 12 lines 7–9, 16–18 FDIC Exh. 16, 18, 19, 41, 45, and 47.

   472. On June 15, 1994, Respondent attended a meeting with * * * and U.S. Fish and Wildlife Service personnel to negotiate an alternate deal. FDIC Exh. 41, * * * Vol. 10, pp. 16–18.

   473. Respondent was the only individual in attendance at the June 15, 1994 meeting on behalf of the sellers of the property. * * * Vol. 10, pp. 17–18.

   474. At the June 15, 1994 meeting, the Respondent was an advocate in an attempt to convince the regulators to accept his offer of substitute property. * * * Vol. 10, p. 18 lines 4–15.

   475. At the June 15, 1994 meeting, Respondent offered the following alternate transaction: the sale of 310 acres owned by IIP and 40 acres owned personally by the Respondent. FDIC Exh. 41; FDIC Exh. 45, Shovlowsky, Vol. 1, pp. 224–27.

   476. At the end of the June 15, 1994 meeting, Mr. * * * indicated that the "thought [Respondent's proposal] might be an acceptable route to go down." * * * , Vol. 10, p. 17 lines 20–22.

   477. On June 17, 1994, the Bank's board of directors held a meeting. FDIC Exh. 43.

   478. De La Fuente II was present at the Bank's board of directors' meeting on June 17, 1994. Resp. Answer ¶ 211; FDIC Exh. 43.

   479. At the June 17, 1994 meeting of The Bank's board of directors, the board discussed the collateral substitution transaction. FDIC Exh. 43, at 2; Shovlowsky, Vol. 1, p. 232 lines 6–17.

   480. Mr. * * * never prepared a credit memorandum for the collateral substitution transaction because he never understood the transaction enough and did not verify the details of the transaction. * * * , Vol. 9, pp. 185–86.

   481. Mr. Redman asked Mr. * * * to prepare a proposal on the collateral substitution transaction for the board meeting a day or two before the meeting. While Mr. * * * told him that he did not have the information to prepare it adequately, the meeting went on as scheduled. * * * Vol. 9, p. 186 lines 5–15.

   482. Mr. * * * made no recommendation to the board concerning the collateral substitution transaction. * * * Vol. 9, p. 186 lines 16–22.

   483. At the June 17, 1994 board meeting, Mr. * * * was unable to explain the details of the collateral substitution transaction, so the Respondent did instead. * * * Vol. 9, pp. 186–87; Richins, Vol. 15, pp. 227–28; Schwarz, Vol. 16, p. 213 lines 23–25; Southwick, Vol. 20, pp. 153–54.

   484. Mr. * * * was not fully aware of the details of the transaction before the Respondent explained it to the board. * * * Vol. 9, p. 187 lines 6–12.

   485. At the June 17, 1994 board meeting, Respondent explained the transaction as a three-way exchange of property involving * * * and * * * FDIC Exh. 26 at 7; * * * Vol. 9, p. 187 lines 16–22.

   486. The RVDM contact sheet maintained by Mr. Hayes on June 17, 1994 states:

   Board Meeting - Mr. De La Fuente said that RVDM was doing a three way swap of property between * * * & * * * . At the

   Board Meeting a substitution of property was approved to substitute a 1st D/T (NEI to subordinate * * * position (They recently purchased not) to FIB for the release of - 300 A which was appraised 11/93 @ $5M/Acre.

   FDIC Exh. 26, at 7.

   487. At the June 17, 1994 board meeting, no one explained or discussed the mathematics of the subordination part of the transaction, nor were any values placed on the property being subordinated. * * * Vol. 9, pp. 187–88.

   488. Respondent knew that the value of the substitute collateral was less than the existing collateral. Resp. Answer ¶ 211.

   489. At the June 17, 1994 board meeting, the board approved the release of the Bank's first deed of trust secured by the 320 acres of Otay Mesa property and the substitution of a first deed of trust on 92 acres of Otay Mesa property on which the Bank already had a second deed of trust. Resp. Answer ¶ 210; FDIC Exh. 43, at 2.

   490. The minutes of the June 17, 1994 board meeting state the following with respect to the board's discussion of the collateral substitution transaction:

Release/Subordination of Collateral

   The request for release and subordination of the Rancho Vista Del Mar collateral was discussed (refer to loan file). It was decided to request a 125% fee and payment of the appraisal from the borrower. A motion for approval was then made by Mr. Richins and seconded by Mr. Redman. Motion carried. Mr. De La Fuente II abstained.

   FDIC Exh. 43, at 2.

   491. The June 17, 1994, board minutes do not reflect the extent of the Respondent's involvement in the transaction, the near completion of the sale of the IIP property, or the fact that the proceeds of the sale of the IIP property were pledged by the Respondent to * * * FDIC Exh. 43.

   492. On June 17, 1994, $20,000 in funds were released to IIP from the IIP escrow, and $10,000 in funds were released to Respondent from Respondent's personal escrow. FDIC Exh. 42; Shovlowsky, Vol. 1, p. 231 lines 10–18.

   493. On June 22, 1994, Respondent executed a letter to * * * on IIP letterhead. FDIC Exh. 45, at 4–5.

   494. In Respondent's June 22, 1994 letter, Respondent indicated that the only properties to be sold would be 320 acres owned by IIP, and 40 acres owned personally by Respondent. FDIC Exh. 45; at 5; Shovlowsky, Vol. 1, pp. 225–26; * * * , Vol. 10, pp. 112–13.

   495. The deal presented by the Respondent in his June 22, 1994 letter was the final deal that was accepted. FDIC Exh. 45 at 5; FDIC CS Maps #4; * * * , Vol. 10, p. 113 lines 2–15.

   496. On June 22, 1994, Mr. * * * executed a letter to Mr. * * * at the U.S. Fish and Wildlife Service. FDIC Exh. 45, at 2–3.

   497. In Mr. * * * letter of June 22, 1994, Mr. * * * describes the 358.6 acre site "presently owned by Roque has indicated he is willing to provide. . .", and that "Roque also provided you with a letter at our meeting from the State of California. . ." FDIC Exh. 45, at 2.

   498. On June 23, 1994, Respondent executed a resolution on behalf of NEI subordinating its first deed of trust to the Bank's second deed of trust on the 92 acres of substitute collateral. FDIC Exh. 44.

   499. On July 5, 1994, the U.S. Fish and Wildlife Service gave its preliminary approval to the deal set forth by the Respondent at the June 15, 1994 meeting and in Respondent's June 22, 1994 letter. FDIC Exh. 47.

   500. The July 5, 1994 approval letter from U.S. Fish and Wildlife refers to the proposal coming from * * * [sic] and Mr. De La Fuente". FDIC Exh. 47, at 1.

   501. The Bank's lien on the 320 acres was formally released on July 21, 1994. Resp. Answer ¶ 210; Shovlowsky, Vol. 1, p. 238 lines 15–21.

   502. Ms. Southwick became the handling officer on the RVDM loan after Mr. * * * left the Bank in the fall of 1994. Southwick, Vol. 20, pp. 127–29.

   503. Other than ordering and reviewing the appraisal on the substitute property, attending the board meeting and executing the reconveyance of the property, Ms. Southwick had no other involvement with the collateral substitution transaction. Southwick, Vol. 20, p. 193 lines 17–23.

   504. On October 27, 1994, Andreu, on behalf of IIP and RVDM; De La Fuente II on his own behalf; and * * * executed a
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   Global Amendment to Purchase Agreements. Resp. Answer ¶ 212; FDIC Exh. 56.

   505. This global amendment contemplated that only the IIP and De La Fuente II escrows would close, and that deposits to the RVDM and D&D escrows would be released to RVDM and D&D respectively. Resp. Answer ¶ 212; FDIC Exh. 56.

   506. Respondent determined how the deposits for the four escrows should be allocated. * * * Vol. 10, pp. 24–25.

   507. The IIP escrow with * * * and Respondent's escrow with * * * closed on October 31, 1994. FDIC Exh. 57; FDIC Exh. 59; Shovlowsky, Vol. 1, p. 239 lines 7–14.

   508. The purchase price for the IIP property was $2,100,000. Resp. Answer ¶ 212; FDIC Exh. 57.

   509. * * * financed $233,980 of the purchase price by executing a note in favor of IIP. FDIC Exh. 57; Shovlowsky, Vol. 1, p. 243 lines 17–18, 244 lines 16–22.

   510. After deducting the broker's commission, escrow fees and other charges, net cash proceeds of $1,549,581.61 were due IIP. FDIC Exh. 57 Shovlowsky, Vol. 1, p. 243 lines 17–22.

   511. On October 31, 1994, $1,549,581.61 was wired to * * * from the IIP escrow. Resp. Answer ¶ 213; FDIC Exh. 58 Shovlowsky, Vol. 1, pp. 243–44.

   512. The $1,549,581.61 which was wired to * * * was applied to NEI's loan at * * * FDIC Exh. 58; * * * Vol. 7, pp. 25–26.

   513. The purchase price for the Roque De La Fuente II property was $260,000. Resp. Answer ¶ 212; FDIC Exh. 59.

   514. * * * financed $234,770 of the purchase price by executing a note in favor of Respondent. FDIC Exh. 59; FDIC Exh. 60 Shovlowsky, Vol. 1, p. 244 lines 13–14.

   515. After deducting the broker's commission, escrow fees and other charges, Respondent received net cash proceeds of $229.00. FDIC Exh. 59.

   516. At the FDIC's 1994 examination of the Bank, bank management never indicated that they were aware that the IIP transaction had closed. Shovlowsky, Vol. 1, pp. 249–50.

   517. In a 1995 deposition on an unrelated matter, Respondent testified: "I sold 300 acres to * * * FDIC Exh. 332, at 668 line 7 Shovlowsky, Vol. 1, pp. 266–67.

   518. On June 23, 1995, the Bank's board of directors held a meeting. FDIC Exh. 66.

   519. Respondent was present at the June 23, 1995 meeting of the Bank's board of directors. FDIC Exh. 66.

   520. At the June 23, 1995 board meeting, the board revisited the collateral substitution transaction. FDIC Exh. 66, at 3.

   521. At the June 23, 1995 board meeting, Mr. Redman expressed his concern regarding the collateral substitution transaction. FDIC Exh. 66, at 3.

   522. The minutes of the June 23, 1995 board meeting at which the transaction was revisited provide a little more information:

   Classified Loan Report

   Relative to the Rancho Vista De Mar loan, Mr. Redman expressed his concern regarding the substitution of collateral which was done in 1994. Several months after the substitution, the original 320 acres which had been released, was sold for $2.1 million. The Board requested that Ms. Southwick bring the loan file to the meeting. A review indicated that the Board, at the time of the release and substitution, was aware of a pending escrow. However, it was explained that the Bankruptcy issue concerning the property and the endangered species issue regarding the Gnatcatcher and other problems, clouded the possible sale. The proposed substitution property was of approximately equal value with none of the clouded issues. After the substitution the Federal issues were resolved and the escrow eventually closed.

   FDIC Exh. 66, at 3.

   523. There was no endangered species issue that clouded the possible sale of the IIP property. Shovlowsky, Vol. 1, p. 254 lines 2–6 * * * Vol. 10, p. 19 lines 5–16.

   524. The substitute property was not of equal value. Shovlowsky, Vol. 1, p. 254 lines 10–16.

   525. The June 23, 1995 board minutes do not reflect that the Respondent pledged the proceeds of the IIP escrow to * * * before the board ever considered the substitution request. FDIC Exh. 66.

   526. The June 23, 1995 board minutes do not reflect that the Respondent negotiated the final transaction two days before the board met to consider the substitution request. FDIC Exh. 66.
{{1-31-01 p.A-3234}}

   527. The June 23, 1995 board minutes do not reflect that Respondent, through NEI, received the benefit of the proceeds of the sale to * * * instead of the Bank. FDIC Exh. 66.

   528. On November 9, 1995, * * * paid off its note to IIP by issuing a check to IIP in the amount of $234,492.83. FDIC Exh. 67 * * * Vol. 10, p. 97 lines 1–12.

   529. The $234,492.83 check made payable to IIP was deposited into * * * account for the benefit of NEI. FDIC Exh. 67, at 2 * * * Vol. 7, p. 26 lines 12–24.

   530. On November 9, 1995, * * * paid off its note to Respondent by issuing a check to Respondent in the amount of $235,284.56. FDIC Exh. 68; * * * Vol. 10, p. 97 lines 17–25.

   531. On October 29, 1996, NEI purchased the remainder of the RVDM loan from the Bank, but not the RVDM Other Real Estate. Resp. Answer ¶ 218; FDIC Exh. 165.

   532. A total of $1,784,073 in IIP sale proceeds was received by * * * and applied to NEI's loan at * * * FDIC Exh. 58; FDIC Exh. 67; Shovlowsky, Vol. 1, p. 260 lines 10–23 * * * , Vol. 7, pp. 118–19.

   533. Respondent individually received a total of $235,513.56 from the sale of his property. FDIC Exh. 59; FDIC Exh. 68.

   534. The Bank's collateral value on the RVDM loan decreased by $1.6 million. Shovlowsky, Vol. 1, p. 210 lines 18–21.

Transaction,

   535. Respondent contacted * * * the owner of * * * , to arrange for * * * purchase of a parking lot from the Bank after the Bank foreclosed on the property. FDIC Exh. 271, at 1; Shovlowsky, Vol. 2, p. 257 lines 10–17; Southwick, Vol. 20, pp. 203–04.

   536. Respondent was the only individual at the Bank who approached Mr. * * * about purchasing the property from the Bank. Southwick, Vol. 20, p. 203 lines 12–17.

   537. Respondent was the individual who called Ms. Southwick to advise her that Mr. * * * was interested in purchasing the property. Southwick, Vol. 20, p. 204 lines 2–6.

   538. On April 30, 1992, Respondent sent a soils report on that parking lot property to Mr. * * * at * * * FDIC Exh. 264; Shovlowsky, Vol. 2, pp. 258–59.

   539. On or about June 29, 1992, the Bank extended credit in the amount of $560,000 to * * * at a reduced interest rate in order to facilitate the sale of Bank-owned Other Real Estate. Resp. Answer ¶ 221; FDIC Exh. 262.

   540. The collateral for the loan consisted of a self-serve parking lot located in San Diego, California. Resp. Answer ¶ 221.

   541. The president of * * * also provided a personal guarantee for the entire amount of the loan. Resp. Answer ¶ 221 FDIC Exh. 262.

   542. At the time of * * * purchase, the parking lot contained environmental problems. FDIC Exh. 267; FDIC Exh. 271, at 1.

   543. On August 19, 1992, Mr. * * * at * * * wrote a letter to Respondent at the Bank, claiming that a fraudulent transaction was perpetrated by the Respondent, and requested that the Bank rescind the transaction or * * * would pursue all remedies available. FDIC Exh. 267; Shovlowsky, Vol. 2, pp. 259–61.

   544. On September 1, 1992, the Bank executed a hold harmless agreement with * * * FDIC Exh. 268; Shovlowsky, Vol. 2, pp. 262–63.

   545. The Bank's minutes of the June 17, 1994 combined Board of Directors and Loan and Investment Committee meeting indicate that the Bank believed the parking lot site to be clean, even though the Bank never undertook further remediation of the site and final certification from environmental authorities was never sought or received. Resp. Answer ¶ 224; FDIC Exh. 43, at 3; Shovlowsky, Vol. 2, pp. 263–64; Southwick, Vol. 20, pp. 204–05.

   546. In September 1994, the FDIC's 1994 examination of the Bank commenced. FDIC Exh. 1.

   547. On December 16, 1994, Mr. * * * at * * * wrote a letter to Respondent at the Bank, demanding rescission of the transaction and threatening litigation, which letter was not in the Bank files. FDIC Exh. 270; Shovlowsky, Vol. 2, pp. 226–68; Southwick, Vol. 20, pp. 205–06.

   548. In or about December 1994, Bank officials represented to the FDIC that De La Fuente II was negotiating a release of any further liability for environmental clean-up with principal. Resp. Answer ¶ 225 Shovlowsky, Vol. 2, p. 265 lines 5–8.

   549. In January 1995, Bank President Redman indicated to FDIC Examiner Shovlowsky that the Respondent had represented that he had met with the owner of * * * and that had agreed to a $10,000 settlement to
{{1-31-01 p.A-3235}}

   release the Bank from any remaining liability. FDIC Exh. 1, at 3d.6 FDIC Exh. 271, at 2; Shovlowsky, Vol. 2, pp. 265 lines 8–11, 269 lines 8–15.

   550. Mr. * * * never considered accepting the $10,000 settlement offer from Respondent. FDIC Exh. 271, at 2; Shovlowsky, Vol. 2, p. 269 lines 15–20.

   551. In early 1995, Mr. * * * met with the Respondent. FDIC Exh. 271, at 2; Shovlowsky, Vol. 2, p. 269 lines 2–4.

   552. At the early 1995 meeting between Mr. * * * and the Respondent, Mr. * * * told Respondent that "he wanted out of the property." FDIC Exh. 271, at 2; Shovlowsky, Vol. 2, p. 269 lines 21–23.

   553. The Respondent told * * * owner to continue making payments to the Bank, and that he would find someone to assume the loan. FDIC Exh. 271, at 2; Shovlowsky, Vol. 2, pp. 269–70.

   554. In mid-January 1995, the FDIC's 1994 examination of the Bank concluded. Shovlowsky, Vol. 2, p. 268 lines 9–21.

   555. At the 1994 FDIC Examination of the Bank, the FDIC listed the * * * credit as special mention because of the unresolved environmental liability and recommended that the Bank establish a reserve account in the amount of $93,000. Resp. Answer ¶ 223 FDIC Exh. 1, at 3d.5; Shovlowsky, Vol. 2, pp. 264–66.

   556. If the December 1994 letter from Mr. * * * had been disclosed, the FDIC would have classified the * * * loan as "Substandard" instead of the improved "Special Mention. "Shovlowsky, Vol. 2, pp. 267–68, Vol. 3, p. 28 lines 20–25.

   557. If the * * * loan was classified as "Substandard," the Bank would have needed to make an additional provision to its allowance for loan and lease losses to adequately reserve for the risk in the loan. Shovlowsky, Vol. 3, pp. 28–29.

   558. De La Fuente II found someone to assume * * * at the Bank. Resp. Answer ¶ 227.

   559. Gabriel Arce ("Arce") is an employee of NEI and was an employee of AIE. Resp. Answer ¶ 226.

   560. Arce is the President of LJF Investments, Inc., ("LJF"), an entity whose sole director is Respondent's sister, Bertha Motaref, and is located at 5440 Morehouse Drive, Suite 4000. Resp. Answer ¶ 226; FDIC Exh. 257, at 2.

   561. LJF was listed as having acquired a 24% partnership interest in D&D on January 1, 1994, in an unsigned limited partnership agreement. FDIC Exh. 256c.

   562. De La Fuente II introduced Arce to * * * Resp. Answer ¶ 227.

   563. On January 17, 1995 Gabriel & Gabriel, LLC was organized by Sidney Schwarz. FDIC Exh. 272, at 3.

   564. On February 1, 1995 Gabriel & Gabriel, LLC's name was changed to Parking Lot Enterprises, LLC, by Sidney Schwarz. FDIC Exh. 272, at 2.

   565. On February 15, 1995, Sidney Schwarz filed a Statement of Information with the California Secretary of State's office as attorney-in-fact for Parking Lot Enterprises, LLC. FDIC Exh. 272, at 1.

   566. On or about February 15, 1995, * * * executed a grant deed whereby it deeded the parking lot property to the LLC. Resp. Answer ¶ 229; FDIC Exh. 273.

   567. Mr. Schwarz was never paid by Mr. Arce for the organization of the LLC. Schwarz, Vol. 16, p. 256 lines 17–19.

   568. In or around March 1995, Arce approached the Bank stating that he now owned the parking lot property and requesting that he be allowed to assume * * * loan. Resp. Answer ¶ 230.

   569. Mr. * * * indicated that the Respondent had been working on the assumption by Mr. Arce for some time, and seemed surprised that the Bank did not know before March 1995. FDIC Exh. 271, at 2.

   570. The original * * * loan agreement provided that the loan was assumable only by a qualified buyer at a principal balance of not more than $500,000. Resp. Answer ¶ 231.

   571. The loan balance at the time that Arce approached the Bank was over $500,000. Resp. Answer ¶ 231.

   572. Mr. Arce's personal financial statement as of March 21, 1995 listed total assets of $236,500, total liabilities of $157,400, and a net worth of $79,100. FDIC Exh. 274; Shovlowsky, Vol. 2, p. 274 lines 1–5.

   573. Mr. Arce's assets consisted of his residence valued at $145,000, the LLC valued at $50,000, personal property valued at
{{1-31-01 p.A-3236}}

   $39,000, and cash amounting to $2,500. FDIC Exh. 274.

   574. Mr. Arce's tax return reflected total income of only $24,504, including wages of $23,100. FDIC Exh. 275; Shovlowsky, Vol. 2, p. 274 lines 24–25.

   575. The credit report obtained by the Bank reflected that Mr. Arce had a poor credit record, including a bankruptcy filing in 1994. FDIC Exh. 276; Shovlowsky, Vol. 2, pp. 275–76.

   576. NEI is listed as having inquired into Mr. Arce's credit on February 16, 1995. FDIC Exh. 276; Shovlowsky, Vol. 2, p. 276 lines 9–15.

   577. The LLC's financial statement as of March 22, 1995 listed total assets of $851,060, total liabilities of $554,370, and net worth of $296,690. FDIC Exh. 279.

   578. The LLC's assets consisted of the parking lot valued at $850,000, and cash of $1,060. FDIC Exh. 279.

   579. The parking lot was appraised at $850,000 three years prior to the assumption, and the appraised value did not consider the toxic problems on the property. Southwick, Vol. 20, pp. 212–13.

   580. Mr. Arce used very aggressive assumptions for income on the property without indicating how he arrived at such assumptions. Shovlowsky, Vol. 3, pp. 10–11.

   581. Neither Mr. Arce nor the LLC were qualified to assume the $550,000 * * * loan at the Bank. Shovlowsky, Vol. 3, pp. 18 lines 6–18, 40 lines 14–18; Southwick, Vol. 20, p. 210 lines 5–9, p. 214 lines 1–4.

   582. On or about March 27, 1995, the Bank informed Mr. Arce by letter that due to his poor financial condition it would not approve the assumption of * * * debt until Arce had made twelve consecutive payments within the grace period, obtained proof of liability insurance, and signed a release of the Bank's liability for the environmental clean-up of the subject property. Resp. Answer ¶ 235; FDIC Exh. 281.

   583. From March 1995 through July 1995, the LLC's payments on the * * * loan were consistently delinquent, and delinquency letters were sent by the Bank to the LLC. FDIC Exh. 282 - FDIC Exh. 285; FDIC Exh. 287; Shovlowsky, Vol. 3, pp. 19–22.

   584. On or about July 11, 1995, the Bank informed both * * * and the LLC, by letter, that the loan was delinquent. Resp. Answer ¶ 236; FDIC Exh. 285.

   585. On or about August 11, 1995, the LLC signed a release agreement with the Bank through which it released the Bank from any liability for the environmental clean-up of the subject property. Resp. Answer ¶ 237; FDIC Exh. 288.

   586. On September 22, 1995, the Bank's board of directors approved the assumption of the * * * loan by the LLC, FDIC Exh. 290, at 3–4.

   587. On September 26, 1985, the Bank released Mr. * * * from his personal guarantee. FDIC Exh. 271, at 4.

   588. From September 29, 1995 through November 30, 1995, Mr. Arce received approximately $12,800 in financial support from NEI. FDIC Exh. 292; FDIC Exh. 293; Shovlowsky, Vol. 3, p. 38 lines 4–14.

   589. One of the checks from NEI directly provided Mr. Arce with the funds needed to make his $3,250 payment to the Bank. FDIC Exh. 292 Shovlowsky, Vol. 3, pp. 34–35.

   590. At the 1996 FDIC Examination of the Bank, the loan assumed by the LLC was seriously delinquent, and was adversely classified as "Substandard" in the amount of $533,000. Resp. Answer ¶ 239; FDIC Exh. 2, at 3c–17.

   591. The Bank forestalled recognizing the risk of loss in the * * * loan for two years. Shovlowsky, Vol. 3, pp. 28–29.

   592. On July 19, 1996, the board of directors approved increasing the Bank's reserve allocation for environmental liability to $93,000 over the Respondent's objection. FDIC Exh. 294, at 5.

   593. The Bank forestalled recognizing a $93,000 capital adjustment for an environmental clean-up reserve for eighteen months. Shovlowsky, Vol. 3, p. 31 lines 20–25.

   594. If the Bank had been forced to rescind the transaction with * * * and take the parking lot property back, the Bank would have incurred losses of several hundred thousand dollars, as well as having been responsible for the environmental remediation work. Shovlowsky, Vol. 3, p. 32 lines 7–18.

   595. On October 29, 1996, the LLC loan was sold to NEI as part of a package of loans. FDIC Exh. 165; Shovlowsky, Vol. 3, p. 28 lines 7–15 Ankenbrand, Vol. 11, pp. 139–40.

   596. At the time of the sale of the LLC loan to NEI, the LLC loan was still delinquent. Shovlowsky, Vol. 3, p. 28 lines 15–17; Southwick, Vol. 20, pp. 214–15.
{{1-31-01 p.A-3237}}

   597. The Bank forestalled recognizing losses on the parking lot property. Shovlowsky, Vol. 3, p. 32 lines 7–18.

   598. By releasing * * * from its loan at the Bank, Respondent relieved himself of any potential liability to * * * Mayher, Vol. 14, p. 24 lines 12–24.

   599. By releasing * * * from its loan at the Bank, Respondent was able to avoid making capital injections at the Bank. Shovlowsky, Vol. 3, pp. 41–42.

   600. The Bank is subject to the provisions of the Act, 12 U.S.C. §   1811 through 1831u, and the FDIC's Rules and Regulations, 12 C.F.R. Chapter III.

   601. The FDIC has jurisdiction over the Bank. 12 U.S.C. §1813(e)(2).

   602. Respondent is an institution-affiliated party of the Bank. 12 U.S.C. §1813(u).

   603. Respondent is subject to the FDIC's jurisdiction. 12 U.S.C. §   1813(e)(2), (u).

   604. The FDIC has jurisdiction over the subject matter of this proceeding. 12 U.S.C. §1818(e)(1).

   605. The Bank is subject to section 22(h) of the Federal Reserve Act, as amended 12 U.S.C. §375(b), and Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 215, promulgated thereunder and made applicable to insured State nonmember banks by section 18(j)(2) of the Act and section 337.3 of the FDIC Rules and Regulations, 12 C.F.R. §337.3.

   606. Respondent is an "insider" of the Bank as that term is defined by section 215.2(h) of Regulation O, 12 C.F.R. §215.2(h).

   607. The Bank is subject to section 23A of the Federal Reserve Act, 12 U.S.C. §371c, which is made applicable to insured State nonmember banks by section 18(j)(1) of the Act, 12 U.S.C. §1828(j)(1).

   608. As a director and controlling shareholder, Respondent owed the highest fiduciary duty to the Bank, its creditors, including depositors, and other shareholders. Resp. Answer ¶ 12.

Related Interest Conclusions

   609. By virtue of Respondent's failure to disclose his related interests, Respondent committed violations of law. 12 U.S.C. §1818(e)(1)(A)(i).

   610. By virtue of Respondent's failure to disclose his related interests, Respondent engaged or participated in unsafe or unsound practices in connection with the Bank. 12 U.S.C. §1818(e)(1)(A)(ii).

   611. By virtue of Respondent's failure to disclose his related interests, Respondent breached his fiduciary duty as a director of the Bank. 12 U.S.C. §1818(e)(1)(A)(iii).

   612. By reason of these violations, unsafe or unsound practices, and breach of fiduciary duty, the Respondent received financial gain or other benefit. 12 U.S.C. §1818(e)(1)(B)(iii).

   613. By reason of these violations, unsafe or unsound practices, and breach of fiduciary duty, the Bank suffered financial loss or other damage. 12 U.S.C. §1818(e)(1)(B)(i).

   614. Respondent's actions demonstrate his willful or continuing disregard for the safety and soundness of the Bank, and evidence his personal dishonesty. 12 U.S.C. §1818(e)(1)(C).

Collateral Substitution Conclusions

   615. By virtue of Respondent's participation in the collateral substitution transaction, Respondent engaged or participated in unsafe and unsound practices in connection with the Bank. 12 U.S.C. §1818(e)(1)(A)(ii).

   616. By virtue of Respondent's participation in the collateral substitution transaction, Respondent breached his fiduciary duty as a director of the Bank. 12 U.S.C. §1818(e)(1)(A)(iii).

   617. By reason of these unsafe or unsound practices and breach of fiduciary duty, the Respondent received financial gain or other benefit. 12 U.S.C. §1818(e)(1)(B)(iii).

   618. By reason of these unsafe or unsound practices and breach of fiduciary duty, the interests of the Bank's depositors were prejudiced. 12 U.S.C. §1818(e)(1)(B)(ii).

   619. By reason of these unsafe or unsound practices and breach of fiduciary duty, the Bank suffered financial loss and other damages. 12 U.S.C. §1818(e)(1)(B)(i).

   620. Respondent's actions demonstrate his willful or continuing disregard for the safety and soundness of the Bank, and evidence his personal dishonesty. 12 U.S.C. §1818(e)(1)(C).

Transaction Conclusions

   621. By virtue of Respondent's participation in the * * * transaction, Respondent engaged or participated in unsafe or un-
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   sound practices in connection with the Bank. 12 U.S.C. §1818(e)(1)(A)(ii).

   622. By virtue of Respondent's participation in the * * * transaction, Respondent breached his fiduciary duty as a director of the Bank. 12 U.S.C. §1818(e)(1)(A)(iii).

   623. By reason of these unsafe or unsound practices and breach of fiduciary duty, the Respondent received financial gain or other benefit. 12 U.S.C. §1818(e)(1)(B)(iii).

   624. By reason of these unsafe or unsound practices and breach of fiduciary duty, the interests of the Bank's depositors were prejudiced. 12 U.S.C. §1818(e)(1)(B)(ii).

   625. By reason of these unsafe or unsound practices and breach of fiduciary duty, the Bank suffered potential financial loss and other damage. 12 U.S.C. §1818(e)(1)(B)(i).

   626. Respondent's actions demonstrate his willful or continuing disregard for the safety and soundness of the Bank, and evidence his personal dishonesty. 12 U.S.C. §1818(e)(1)(C).

   627. An order should be issued against Respondent pursuant to the provisions of section 8(e) of the Act, 12 U.S.C. §1818(e), removing Respondent as an institution-affiliated party of the Bank and prohibiting Respondent from further participation in the conduct of the affairs of the Bank, and any other insured depository institution or organization listed in section 8(e)(7) of the Act, 12 U.S.C. §1818(e)(7), without the prior written approval of the FDIC and such other appropriate Federal banking depository institution regulatory agency. 12 U.S.C. §1818(e)(4).

   For the reasons set forth above, and pursuant to section 8(e) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e), it is hereby ORDERED, that:

   1. Roque De La Fuente II shall not participate in any manner in the conduct of the affairs of any insured depository institution, agency or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. §1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. §1818(e)(7)(D); and

   2. Roque De La Fuente II shall not solicit, procure, transfer, attempt to transfer, vote, or attempt to vote any proxy, consent or authorization with respect to any voting rights in any financial institution, agency, or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. §1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. §1818(e)(7)(D); and

   3. Roque De La Fuente II shall not violate any voting agreement with respect to any insured depository institution, agency, or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. §1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. §1818(e)(7)(D); and

   4. Roque De La Fuente II shall not vote for a director, or serve or act as an institution-affiliated party, as that term is defined in section 3(u) of the FDI Act, 12 U.S.C. §1813(u), or any insured depository institution, agency, or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. §1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D), of the FDI Act, 12 U.S.C. §1818(e)(7)(D).

   This ORDER will become effective thirty (30) days from the date of its issuance.

   The provisions of this ORDER will remain effective and in force except to the extent that, and until such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.