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FDIC Enforcement Decisions and Orders

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   [5268] In the Matter of Dennis Shollenburg, Hazel Hagy, Vicky Melton, Robert Hagy, Brenda Knudson, and First Mountain Bank, Big Bear Lake, California, Docket No. 00-88e (3-11-03).

   The FDIC adopted the Recommended Decision and Order of the Administrative Law Judge (ALJ), prohibiting Dennis Shollenburg, Hazel Hagy, Vicky Melton, and Brenda Knudson from participating in the affairs of any federally insured financial institution. The FDIC dismissed from the proceedings Robert Hagy.

   [.1] Violation of Law or Regulation

   Respondents avoided paying federal and state income taxes, as well as Social Security taxes.

   [.2] Prohibition, Removal, or Suspension—Misconduct

   Respondents violated Internal Revenue Code, Federal Deposit Insurance Act, and engaged in unsound practices and breaches of fiduciary duty.

   [.3] Prohibition, Removal, or Suspension—Effects Requirement—Losses by Bank

   As a result of the respondents' activities, the bank sustained financial losses, and reputational damage.

   [.4] Prohibition, Removal, or Suspension—Culpability

   The Board found the respondents acted willfully, and with continued disregard for the possible consequences.

   [.5] Prohibition, Removal, or Suspension—Bank affairs, conduct of denied

   Respondents shall not participate in any conduct of the affairs of any insured depository institution.

   [.6] Prohibition, Removal, or Suspension—Voting rights, exercise denied

   Respondents may not exercise voting rights in any financial institution without prior consent of FDIC.

In the Matter of
Dennis Shollenburg,
Hazel Hagy,
Vicky Melton,
Robert Hagy, and
Brenda Knudson.
individually and as institution-affiliated parties of
First Mountain Bank
Big Bear Lake, California
(Insured State Nonmember Bank)
DECISION AND ORDER TO PROHIBIT FROM FURTHER PARTICIPATION AND ORDER OF DISMISSAL

FDIC-00-88e

I. INTRODUCTION

   This matter is before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") following the issuance on October 31, 2002, of a Recommended Decision and Proposed Order ("Recommended Decision") by Administrative Law Judge Arthur L. Shipe ("ALJ"). The ALJ recommended that Dennis Shollenburg ("Shollenburg" or "CEO Shollenburg"), Hazel Hagy ("H. Hagy" or "CFO Hagy"), Vicky Melton ("Melton") and Brenda Knudson ("Knudson") (collectively referred to as "Respondents") each be subject to an order of prohibition pursuant to section 8(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §1818(e). The ALJ dismissed from the proceedings Robert Hagy ("R. Hagy") who, having been diagnosed with late stage throat cancer, was unable to testify at the hearing. R. Hagy's conduct was, however, included in the discussion and findings of the ALJ's Recommended Decision and is incorporated herein as well. For the reasons discussed below, the Board affirms the Recommended Decision and issues an Order of Prohibition as to Respondents Shollenburg, H. Hagy, Melton, and Knudson, and issues an
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   Order of Dismissal as to Respondent R. Hagy.

II. PROCEDURAL BACKGROUND

   The FDIC initiated this action on August 9, 2001, pursuant to section 8(e) of the FDI Act, 12 U.S.C. §1818(e), issuing a Notice of Intention to Prohibit From Further Participation in the affairs of any financially insured financial institution with accompanying Findings of Facts and Conclusions of Law, and Notice of Hearing ("Notice") against Respondents, individually and as institution-affiliated parties of First Mountain Bank, Big Bear Lake, California ("Bank"). Each of the Respondents was charged with engaging in unsafe and unsound banking practices, breaches of fiduciary duty, and violations of law and regulation in their roles as officers and/or directors of the Bank. Specifically, the Notice alleged that, by their conduct, Respondents engaged in and caused the Bank to engage in violations of the Internal Revenue Code ("IRC") by causing the Bank to fail to withhold from their compensation income taxes and—with the exception of R. Hagy—Federal Insurance Contribution Act ("FICA") or Social Security taxes (for ease of reference, FICA and Social Security taxes will hereinafter be referred to as "Social Security taxes"). The Notice charged that Respondents also engaged in and caused the Bank to engage in violations of the FDI Act and the FDIC's Rules and Regulations ("FDIC's Rules"), 12 C.F.R. §300 et seq. The Notice alleged that this conduct resulted in a gain to Respondents, prejudice to depositors and both a financial and reputational loss to the Bank.

   The parties engaged in protracted discovery and pre-hearing motions culminating in a six-day hearing which commenced on May 13, 2002, in Riverside, California, and concluded on May 20, 2002. FDIC Legal Division Enforcement Counsel ("Enforcement Counsel") presented evidence through eight witnesses. H. Hagy testified for Respondents. Shollenburg testified for the Respondents but because he refused to submit to cross-examination, his testimony was stricken from the record. Respondents presented no other witnessed in their defense.1

   Following the parties' submission of post-hearing briefs and proposed findings of fact and conclusions of law and reply briefs, the ALJ issued his Recommended Decision. Both parties filed exceptions2 to the Recommended Decision and Respondents' counsel requested an Oral Argument in this matter.3

Request for Oral Argument

   After considering Respondents' Request and the entire record in this matter, the Board finds that (1) the factual and legal arguments are fully set forth in the parties' voluminous submissions, (2) no benefit will be derived from oral argument, and (3) Respondents will not be prejudiced by the lack of oral arguments. The Board, therefore, declines to exercise its discretion under section 308.40 of the FDIC's Rules, 12 C.F.R. §308.40, and denies Respondents' Request for Oral Argument.

III. DISCUSSION

A. Factual Overview

   Because the ALJ provided a detailed and well-reasoned opinion replete with citations to the record in support of his conclusions, the Board finds it unnecessary to reiterate in full the contents of the Recommended Decision. The discussion below, however, provides an overview of Respondents' misconduct as found by the Bank's auditors, tax counsel and FDIC supervisors and corroborated by the testimonial and documentary evidence.

1. Respondents' Tax Avoidance Activity

   During the period July 1997 to September 1999, each of the Respondents was employed


1 Each of the five Respondents is represented by the same counsel. FDIC Rule 308.8 (12 C.F.R. §308.8) requires that counsel representing two or more parties certify in writing that each party waives the right to assert conflicts of interest. Pursuant to an order dated March 14, 2002, counsel for Respondents filed, on April 5, 2002, Attorney Certification of Waiver of Conflict of Interest certifying that each of the five Respondents waives their rights to assert conflicts.

   2 Pursuant to section 308.39(a) of the FDIC's Rules, parties may file exceptions to the ALJ's Recommended Decision, findings, conclusions and evidentiary decisions. 12 C.F.R. §308.39(a). In this case, in response to the ALJ's Recommended Decision, Respondents filed Respondents' General Objections to ALJ Shipe's Recommended Decision and Respondents' Objections to Findings of Fact, Conclusions of Law of Judge Shipe. The Board construes the more specific pleading. Respondents' Objections to Findings of Fact, Conclusions of Law of Judge Shipe as exceptions filed pursuant to Rule 308.39(a).

   3 Respondents also filed, after the ALJ had issued his Recommended Decision, two motions which are addressed further at n. 6 and n. 8.
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   by the Bank. Shollenburg served as president, chief executive officer (CEO), and director of the Bank; H. Hagy was the Bank's executive vice-president and chief financial officer (CFO); Melton served as senior vice-president and loan officer; and R. Hagy, H. Hagy's husband, was vice-president and branch manager. During the same period, Knudson served initially as a new accounts officer and subsequently as assistant vice president/business development officer. R.D. 6; R.D. FOF ¶¶ 3–9.4

   [.1] Starting in August 1997, Respondents, led by CEO Shollenburg and CFO Hagy, began implementing a plan to avoid paying federal and state income taxes, as well as Social Security taxes. R.D. at 3; R.D. FOF ¶ 16. Respondents were in large part influenced by a booklet called Vultures in Eagle's Clothing by Lynn Meredith ("Meredith booklet") which purports to provide a roadmap for "lawfully" avoiding income tax payments. R.D. at 3; FDIC Exh. 118.

   To that end, in August 1997, Shollenburg, H. Hagy, and R. Hagy submitted a series of documents that caused the Bank to stop withholding income taxes from their Bank compensation. R.D. at 5; R.D. FOF ¶¶ 21, 23, 28, 32, 35, 51, 53, 63, 103, 105, 113, 115; FDIC Exhs. 1, 3, 10–12, 22, 114. Melton did the same in October 1997, followed by Knudson in November 1997. R.D. FOF ¶¶ 75–76, 87, 121, 123, 133, 26, 114. Each of the Respondents filed with the Bank virtually identical forms to initiate the non-withholding process. All of the forms appear to have been provided in or copied from the Meredith booklet. R.D. at 15; R.D. FOF ¶¶ 172–174. The documents filed by Respondents included altered withholding exemption certificates (Forms W-4) in which the Respondents claimed to be exempt from income tax withholding, non-resident alien certificates (Forms W-8) and affidavits of citizenship in which they claimed that they were not citizens of the United States but were instead citizens of the Republic of California. R.D. at 5; R.D. FOF ¶¶ 19, 23–35, 53–61, 76–87, 105–113, 123–133; FDIC Exhs. 1–3, 10, 16, 22, 26, 114.

   The Bank received each of the documents submitted by Respondents through either Shollenburg or H. Hagy in their positions as bank officers. R.D. at 6; R.D. FOF ¶¶ 22, 52, 75, 97, 121, 122; FDIC Exhs. 1, 10, 16, 19, 26. However, neither Shollenburg or H. Hagy forwarded the W-4 forms to the Internal Revenue Service ("IRS") at the time the forms were received by the Bank. R.D. at 26; R.D. FOF ¶¶ 146, 295, 344; Tr. Vol. 1 at 77–78; Tr. Vol. 3 at 124; Tr. Vol. 5 at 123–124; FDIC Exh. 93. As a result of Respondents' submission to the Bank of the documents described above, the Bank stopped the withholding of income taxes from Shollenburg's compensation as of August 30, 1997, from H. Hagy's and R. Hagy's compensation as of August 15, 1997, from Melton's compensation as of October 15, 1997, and from Knudson's compensation as of November 30, 1997. R.D. FOF ¶¶ 35, 61, 87; 113, 133; FDIC Exh. 114. The Bank continued to not withhold income taxes from Respondents' compensation through July 31, 1999. R.D. FOF ¶¶ 36, 62, 88, 114, 144; FDIC Exh. 90.

   After Respondents Shollenburg, H. Hagy, Melton, and Knudson succeeded in the cessation of their income tax withholdings, they took their tax avoidance activities a step further. In a December 22, 1997, letter to H. Hagy at the Bank, Shollenburg requested that the Bank discontinue withholding Social Security taxes from his compensation. R.D. at 6; R.D. FOF ¶ 41; FDIC Exh. 4. Subsequently, each of the other Respondents, except R. Hagy, wrote similar letters to the Bank. R.D. at 6; R.D. FOF ¶¶ 68, 94, 141; FDIC Exhs. 13, 18, 29. When Respondents Shollenburg, H. Hagy, and Melton instructed the Bank to cease withholding Social Security taxes on their behalf, they wrongly advised the Bank that it was no longer required to pay matching contributions for them. R.D. at 9; R.D. FOF ¶¶ 42, 69, 95; FDIC Exh. 4, 13, 18; Tr. Vol. 5 at 55–56. 4 Citations to the record shall be as follows:
Recommended Decision—"R.D. at ——"
ALJ's Findings of Fact—"R.D. FOF ¶——"
ALJ's Conclusions of Law—"R.D. COL ¶——"
Transcript—"Tr. Vol. —— at ——"
FDIC Exhibits—"FDIC Exh. ——"
FDIC Exceptions—"FDIC Except. at ——"
Respondents' Objections—"Resp. Obj. ¶——"

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   Subsequently, apparently because their assertions of alien status were rejected by the IRS, Respondents reversed their position on non-citizenship. R.D. at 6–7; R.D. FOF ¶ 260; Tr. Vol. 2 at 82–84; FDIC Exh. 69. On September 1, 1998, Shollenburg submitted to the Bank a Statement of Citizenship and Residence asserting that he was a citizen of and did reside in the United States but that taxes could not legally be withheld from his Bank salary because it did not constitute wages or gross income under the applicable IRC provisions. R.D. at 7; R.D. FOF ¶¶ 38; FDIC Exh. 7. Each of the other Respondents followed Shollenburg's lead by filing similar statements with the Bank, each of them directing that the Bank forward the statement to the IRS office in Philadelphia, Pennsylvania. R.D. at 7; R.D. FOF ¶¶ 64–65, 90–91, 116–117, 137–138. The Bank, through either CEO Shollenburg or CFO Hagy, honored each Respondent's request. R.D. at 7; R.D. FOF ¶¶ 39, 66, 92, 118, 139.

   Respondents began their tax avoidance activity without first informing either the Bank's board of directors ("Bank's board") or the Bank's outside counsel. R.D. at 8. The Bank's board and counsel first learned of Respondents' income tax withholding issue in early 1998, months after Respondents had stopped their state and federal income tax withholding. R.D. FOF ¶¶ 163, 180; Tr. Vol. 2 at 170, 247; Tr. Vol. 3 at 15. After that, the Bank's counsel, Gary Findley ("Findley"), discussed the issue with Shollenburg and H. Hagy who falsely informed him that all appropriate documents had been submitted to the IRS and the California Franchise Tax Board. R.D. FOF ¶ 59. Based on this incorrect premise, Findley advised the Bank's board at a March 28, 1998, board meeting that the Bank should be protected from liability. R.D. at 17, n. 3; R.D. FOF ¶ 187; FDIC Exhs. 40, 85; Tr. Vol. 2 at 177. At the same meeting, however, Findley advised the Bank's board that the Bank must withhold for Social Security taxes. R.D. FOF ¶ 188; FDIC Exh. 85; Tr. Vol. 2 at 179.

   Meanwhile, the issue of withholding Social Security taxes did not come to the attention of Paychex, the Bank's payroll processor, until the last quarter of 1998. R.D. FOF ¶ 150; FDIC Exh. 90. In November 1998, H. Hagy, as CFO of the Bank, wrote letters to Paychex directing it to stop Social Security withholding from the compensation of Shollenburg, Melton and herself. R.D. FOF ¶ 151; FDIC Exh. 90. Paychex, however, refused to comply with H. Hagy's instructions unless the Bank agreed to hold Paychex harmless from possible liability for its role in the plan. R.D. at 8; R.D. FOF ¶¶ 44, 70, 98, 157; FDIC Exhs. 90, 93.

   In response, CFO Hagy, without prior approval from the Bank's board and without consulting the Bank's counsel, provided to Paychex in November and December 1998 letters of indemnification. R.D. at 8; R.D. FOF ¶¶ 155–156. In so doing, she violated statutory and regulatory provisions restricting the Bank's authority to issue indemnification agreements. R.D. at 8; R.D. FOF ¶¶ 446–448. After receiving the indemnification from H. Hagy, Paychex stopped withholding Social Security taxes from the salary of Shollenburg, H. Hagy, Melton and Knudson.

2. The Auditors' Advice

   Respondents also disregarded the advice of the Bank's outside auditor, the public accounting firm of Varinek, Trine, Day and Company ("VTD"), which by 1998 had served as the Bank's outside auditor for at least ten years. R.D. at 9; R.D. FOF ¶¶ 207, 210. Karen Comer ("Comer"), a certified public accountant who served as VTD's engagement partner to the Bank for many years, dealt principally with CFO Hagy at the Bank. R.D. at 9; R.D. FOF ¶¶ 210, 214; Tr. Vol. 1 at 37, 40. Comer first learned of Respondents' position on tax issues in the fall of 1998, when she was in contact with CFO Hagy regarding a routine Bank Secrecy Act review of the Bank. R.D. FOF ¶¶ 216, 217; Tr. Vol. 1 at 40. At that point, H. Hagy gave Comer a letter informing her of Respondents' position on the tax issues and requested VTD's response. R.D. at 9; R.D. FOF ¶ 217. H. Hagy did not, at that time, inform Comer that Respondents had already stopped withholding taxes from their Bank compensation. R.D. FOF ¶ 220; Tr. Vol. 1 at 41–42.

   Initially, and after discussing the subject with her firm's partners and consulting with the firm's tax committee, Comer advised H. Hagy that the firm disagreed with Respondents' position and that such activity could result in legal action against H. Hagy and the Bank. R.D. at 9; R.D. FOF ¶¶ 218, 221; Tr. Vol. 1 at 40–44. H. Hagy, however, declined to communicate Comer's message to
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   the Bank's board. R.D. at 9; R.D. FOF ¶ 222; Tr. Vol. 120–21.

   Comer was therefore surprised to learn, during an audit that VTD conducted at the Bank beginning in late December 1998, that the Bank had already stopped withholding for the Respondents. R.D. at 10; R.D. FOF ¶¶ 228–229; Tr. Vol. 1 at 48–49. Comer informed her VTD partners of her discovery, and they concluded that the Bank had acted illegally in not withholding the taxes on behalf of the Respondents. R.D. at 10; R.D. FOF ¶¶ 232–233; Tr. Vol. 1 at 50–52.

   VTD, citing authoritative references, notified the Bank in writing of its conclusions that the Bank was liable for payment of income taxes required to be withheld from employee wages regardless of whether or not it had collected the tax from the employee, that the Bank was required to forward employee W-4 forms to the IRS, that altered W-4 forms were invalid, and that the Bank was liable for payment of employees' Social Security taxes regardless of whether or not it had collected the taxes from the employees. R.D. at 10; R.D. FOF ¶ 239; Tr. Vol. 1 at 53–54; FDIC Exh. 71.

   Subsequently, on March 9, 1999, Comer and another VTD partner, David Dayton ("Dayton"), met with Shollenburg and H. Hagy to discuss the firm's findings. R.D. at 10; R.D. FOF ¶ 238; Tr. Vol. 1 at 53; Tr. Vol. 2 at 49. Comer and Dayton informed H. Hagy that as CFO she had not properly filed the Bank's payroll returns, including transmittal to the IRS of W-4 forms for each of the Respondents. They further advised H. Hagy and Shollenburg that the Bank had improperly reported a significant portion of its payroll as exempt and did not properly withhold a significant amount of income taxes from the Bank officers. R.D. FOF ¶¶ 243, 248; Tr. Vol. 1 at 56, 58; Tr. Vol. 2 at 52–54; FDIC Exh. 71. Comer and Dayton also emphasized to H. Hagy and Shollenburg that these tax issues were not a matter of Respondents' individual rights but instead were part of their obligations as officers of the Bank. R.D. FOF ¶¶ 249–250; Tr. Vol. 1 at 58; Tr. Vol. 2 at 53–54.

   The auditors also advised that the Bank should promptly file amended payroll tax returns reflecting the income and Social Security taxes that had originally been excluded. VTD further recommended that because the existing W-4 forms had been altered, Respondents should, if they wished to claim tax-exempt status, resubmit valid W-4 forms. R.D. at 11; R.D. FOF ¶¶ 244–246; Tr. Vol. 1 at 56–57, 60–61; Tr. Vol. 2 at 52.

   Shollenburg and H. Hagy, however, rejected VTD's advice by insisting that the laws cited by the firm did not apply to them. R.D. FOF ¶¶ 247, 251; Tr. Vol. 1 at 57–59; Tr. Vol. 2 at 53, 55. Also, despite Shollenburg's statement to the auditors that he had indemnified the Bank and escrowed sufficient funds to reimburse the Bank should a tax problem arise, all of Respondents' written indemnifications were in fact dated March 26, 1999—after Shollenburg had met with the auditors and after VTD had notified him in writing of its view that his tax withholding conduct was illegal. R.D. FOF ¶¶ 196, 281–282; Tr. Vol. 2 at 65; FDIC Exhs. 9, 15, 21, 25, 31. Moreover, even though Respondents supplied the Bank with written indemnifications, they never set up accounts with the Bank to cover potential liabilities because according to H. Hagy, the Bank never mandated that Respondents do so. R.D. FOF ¶ 198; Tr. Vol. 5 at 170.

   Respondents further ignored a follow-up letter from VTD reiterating the firm's position and recommending that the Bank seek further advice from a tax expert in order to minimize potential liability on the part of the Bank for back taxes. R.D. at 11; R.D. FOF ¶ 255; FDIC Exh. 72. VTD also notified the Bank in writing that the Bank should disclose in its financial statements the potential liability associated with its failure to withhold taxes on behalf of Respondents. R.D. at 11; R.D. FOF ¶ 252; Tr. Vol. 1 at 61–62; Tr. Vol. 2 at 49–50; FDIC Exh. 73.

   On March 15, 1999, Shollenburg sent a letter to VTD stating in essence that Respondents' rights to avoid paying taxes were paramount to the Bank's legal obligations. He concluded the correspondence by noting that: "You might be entering an arena where you do not want to be." R.D. at 12; R.D. FOF ¶¶ 268–272; Tr. Vol. 1 at 63–64; FDIC Exh. 75. Although Comer and Dayton construed Shollenburg's March 15, 1999, letter as a threat, they were not deterred. R.D. at 12; R.D. FOF ¶ 272; Tr. Vol. 1 at 69; Tr. Vol. 2 at 59. Instead, VTD, in its response to Shollenburg, continued to reiterate its position that the Bank's conduct was illegal and requested a meeting with the Bank's audit committee.
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   R.D. at 12; R.D. FOF ¶¶ 273–276; Tr. Vol. 1 at 69–71; Tr. Vol. 2 at 60–62; FDIC Exh. 76.

   At an April 26, 1999, meeting with the Bank's audit committee, Comer and Dayton presented both orally and in a written memorandum VTD's findings and recommendations. VTD notified the Bank's board of its view that the Bank had acted illegally in 1) incorrectly reporting taxable wages as exempt from Social Security taxes; 2) discontinuing to withhold federal and state income taxes from employees' wages; 3) accepting invalid W-4 forms from certain employees; 4) neglecting to forward to the IRS W-4 forms claiming exempt status; and 5) agreeing to indemnify Paychex from any liability relating to Respondents' tax avoidance activity. VTD again advised the Bank to file amended payroll tax returns, submit valid W-4's to the IRS and promptly pay all back taxes and penalties. VTD also advised that the Bank retain an outside tax consultant to help minimize its liability and future review by federal and state authorities. The auditors further advised the audit committee that the Bank should disclose its potential liability in its financial statements. R.D. at 13; R.D. FOF ¶¶ 284–289; Tr. Vol. 1 at 76–77, 80; Tr. Vol. 2 at 69–70; FDIC Exhs. 56, 77.

   As a result of what it learned from the auditors, the Bank's board decided to include in the Bank's financial statements a footnote on potential liability for unpaid taxes. R.D. at 13; R.D. FOF ¶¶ 316, 318; Tr. Vol. 2 at 76; FDIC Exhs. 56, 59.5 The Bank's board also agreed to hire attorney Barry Guterman ("Guterman") as a tax consultant but decided not to take any further action to correct the tax problems until completion of Guterman's investigation. R.D. at 14; R.D. FOF ¶¶ 316–317; Tr. Vol. 2 at 76; FDIC Exhs. 56, 59.

   On June 1, 1999, about a month after the meeting with the Bank board's audit committee, VTD resigned as the Bank's auditor. VTD gave up the Bank's business based on its conclusion that the Bank, in failing to implement VTD's recommendations, was not meeting its corporate responsibilities. R.D. at 14; R.D. FOF ¶¶ 322, 324–325; Tr. Vol. 1 at 85–87; FDIC Exh. 80.

3. The Tax Expert's Findings and Recommendations

   Guterman, who was retained by the Bank on June 7, 1999, made—after a thorough investigation—virtually the same findings and recommendations as VTD had. R.D. at 14; R.D. FOF ¶¶ 336–338. Guterman concluded that the Bank had no legal basis to stop withholding income tax from Respondents' compensation because the W-4 forms submitted by Respondents were altered and/or not signed under the penalty of perjury. As such, the W-4 forms submitted by Respondents were invalid. R.D. FOF ¶¶ 346–350. According to H. Hagy, Respondents intentionally submitted altered W-4s based apparently on instruction in the Meredith booklet. R.D. at 15; R.D. FOF ¶¶ 172–174; Tr. Vol. 5 at 40, 51, 145. Guterman stated that the W-4 forms submitted by Respondents should not have been accepted by CFO Hagy and CEO Shollenburg on behalf of the Bank. R.D. FOF ¶ 347; Tr. Vol. 3 at 149–51; FDIC Exh. 90. Guterman also determined that the W-8 forms and Statements of Citizenship submitted by Respondents did not constitute valid exemption certificates because they did not include the requisite certifications as to income tax liabilities. R.D. FOF ¶ 348; FDIC Exh. 90; Tr. Vol. 3 at 149–150. He similarly concluded that Respondents Shollenburg, H. Hagy, Melton, and Knudson had no legal basis for failing to withhold Social Security tax from their compensation. R.D. FOF ¶¶ 357–369; FDIC Exh. 90.

   Guterman presented his preliminary findings and recommendations to the Bank's board at a meeting on July 26, 1999. R.D. FOF ¶¶ 371–372; Tr. Vol. 3 at 133–134, 137–138. He found that the Bank was liable for federal and state income taxes and both Respondents' and its own portion of Social Security taxes that it had not collected from Respondents. Guterman concluded that the Bank owed in excess of $150,000 for back income and Social Security taxes. R.D. FOF ¶¶ 351–369; FDIC Exh. 90. He also found that the Bank faced civil and criminal exposure as a result of Respondents' tax withhold conduct. R.D. FOF ¶ 370; Tr. Vol. 3 at 158–159; FDIC Exh. 90.

   At the July 26 meeting, however, Respondents 5 The auditors felt that it was not necessary to accrue actual liability at that point in part because they believed, based on Shollenburg's representation to them, that Respondents had provided indemnification to the Bank. R.D. FOF ¶ 316, 2831; Tr. Vol. 2 at 65–67.
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   continued to assert that they were not subject to either income tax or Social Security withholdings. R.D. FOF ¶¶ 373; Tr. Vol. 3 at 135–136; FDIC Exhs. 59, 90. During the meeting, Guterman advised Paychex to resume withholding Social Security taxes for Shollenburg, H. Hagy, Melton, and Knudson. R.D. FOF ¶ 376; Tr. Vol. 3. The Bank's board advised Respondents that they should submit valid W-4 forms if they wished to continue to claim exemption from income tax withholding. R.D. FOF ¶ 377; Tr. Vol. 3 at 138; FDIC Exh. 90. The following day, each of the Respondents submitted new unaltered W-4 forms signed under the penalty of perjury, in which they continued to assert that they were exempt from income tax withholding. R.D. FOF ¶¶ 378–379; Tr. Vol. 3 at 144–146.

   One month later, on August 23, 1999, after he had completed a draft of his preliminary report, Guterman met again with the Bank's board to address the Bank's and Respondents' liability for payment of the back taxes. R.D. FOF ¶¶ 386–389; FDIC Exh. 62. At the same meeting, Shollenburg and H. Hagy continued to insist that they were exempt from income tax withholdings for the first two quarters of 1999. R.D. FOF ¶¶ 390; Tr. Vol. 3 at 147–148; FDIC Exhs. 62, 90.

   The Bank authorized Guterman to assist in correcting the situation. On September 8, 1999, the Bank sent a memorandum each to Shollenburg, H. Hagy, Melton, and Knudson seeking reimbursement for back Social Security taxes. Respondents Shollenburg, H. Hagy, and Melton each made payment to the Bank for some back Social Security taxes, but each paid less than the amount that Paychex had determined they owed. Knudson did not reimburse the Bank at all. R.D. FOF ¶¶ 393–398; Tr. Vol. 3 at 159, 174–175; FDIC Exhs. 100–102, 107. On September 29, 1999, Guterman attended a meeting of the Bank's board held at the California Department of Financial Institutions, at which point he learned from FDIC examiners that the Bank had paid automobile allowances, consulting fees and/or bonuses to certain of the Respondents for which taxes had not properly been withheld. R.D. at 23; R.D. FOF ¶¶ 404; FDIC Exhs. 65, 90. Guterman presented his findings in a final report to the Bank's board, dated October 11, 1999. R.D. at 14; R.D. FOF ¶ 339; FDIC Exh. 90.

   As a result of Guterman's recommendations, the Bank issued corrected W-2 forms for each of the Respondents. R.D. FOF ¶¶ 414–419; Tr. Vol. 3 at 168–173; FDIC Exh. 106. On October 15, 1999, Guterman sent a demand letter to each of the Respondents seeking reimbursement of back taxes owed or, in the case of 1998 income tax liabilities, certification of payment of tax liabilities. R.D. FOF ¶ 420; FDIC Exhs. 107–111; Tr. Vol. 3 at 173. None of the Respondents complied with Guterman's directive. R.D. FOF ¶¶ 421–430; Tr. Vol. 3 at 174–179. On November 2, 1999, the Bank paid a total in excess of $200,000 to various taxing authorities representing the amount Respondents owed for back income and Social Security taxes as well as the Bank's employer share of Social Security taxes. R.D. FOF ¶ 431; Tr. Vol. 3 at 177–78; FDIC Exh. 112. Guterman's legal fees to the Bank for his services in connection with Respondents' tax avoidance activity amounted to $41,050. R.D. FOF ¶ 436; Tr. Vol. 3 at 193.

4. The FDIC Examination

   On July 19, 1999, the FDIC commenced a safety and soundness examination of the Bank as of March 31, 1999. R.D. FOF ¶ 438; Tr. Vol. 4 at 13–14; FDIC Exh. 115. During the course of the examination, the FDIC examiners discovered various violations of tax and banking law and regulations. The FDIC determined that Respondents were responsible for the Bank's tax law violations. In its 1999 Report of Examination, the FDIC cited the Bank for these violations and reported income tax liability as a contingent liability in the amount of $131,000. The FDIC gave the Bank an overall unsatisfactory rating that resulted in the Bank being considered a problem Bank. R.D. FOF ¶¶ 438–448; Tr. Vol. 4 at 13–18, 24–29, 33–62, 217–219; Tr. Vol. 5 at 181–182; FDIC Exh. 115. At a September 29, 1999, exit meeting, FDIC Assistant Regional Director J. George Doerr informed the Bank's board that the FDIC was seriously contemplating permanent removal actions against the five Respondents. R.D. FOF ¶ 451; FDIC Exh. 65.

B. Legal Analysis: Section 8(e) Prohibitions Are Warranted

   As noted in the Recommended Decision, the Board—to meet its burden in a prohibition action—must show that Respondents engaged in prohibited conduct (misconduct), the effect of which was to cause the Bank to
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   suffer financial loss or damage, to prejudice or potentially prejudice the Bank's depositors, or to provide financial gain or other benefit to the Respondents (effects). The Board must also demonstrate that such misconduct evidences personal dishonesty or a willful or continuing disregard for the safety and soundness of the Bank (culpability). 12 U.S.C. §1818(e)(1); R.D. at 21; See In the Matter of Ramon M. Candelaria, 1 FDIC Enforcement Decisions and Orders, ¶ 5242, A-2837, A-2839 (1997), 1997 WL 211341, at *3; In the Matter of Leuthe, 1 FDIC Enforcement Decisions and Orders, ¶ 5249, A-2915, A-2961–2963 (1998), 1998 WL 438323, at *11, aff'd, 194 F.3d 174 (D.C. Cir. 1999). As discussed below, the Board finds that the activities of Respondents during the pertinent time period overwhelmingly satisfy the three standards necessary to impose a prohibition.

   [.2] 1. Misconduct

   The record overwhelmingly establishes Respondents' misconduct: multiple violations of the IRC, the FDI Act and Regulations, and unsafe and unsound practices and breaches of fiduciary duty. Tax misconduct is an appropriate basis for enforcement actions brought under the FDI Act. See, e.g., In the Matter of Edward Towe and Thomas E. Towe, 83 Fed. Res. Bull. 849 (1997), 1997 WL 689309 (Respondents, to avoid IRS wage levies, disguised directors' fees as travel expenses, subsistence or consulting fees); In the Matter of Anonymous, 1 FDIC Enforcement Decisions and Orders ¶ 5082 (1987), 1987 WL 451206 (Respondent's overly aggressive tax planning which harmed the bank and the public served as the basis for his removal); In the Matter of Thomas K. Benshop, 2 FDIC Enforcement Decisions and Orders ¶ 5192 (1993), 1993 WL 853264 (Improper income tax payments were part of the misconduct in the case); In the Matter of Stanley R. Hendrickson, FDIC Enforcement Decisions and Orders ¶ 5235 (Transfer Binder) (1996), 1996 WL 496757, aff'd, 113 F.3d 98 (7th Cir. 1997) (Respondent's plea of guilty to willfully failing to file a currency transaction report required by the Internal Revenue Code is sufficient basis for section 8(e) action).

   As described above, during the period August 1997 through July 1999, the Respondents took multiple steps to stop withholding income taxes from their Bank compensation. As a result of this conduct, the Respondents caused, participated in, and/or aided or abetted violations of U.S. tax laws. Section 3402 of the IRC requires that every employer making payment of wages shall deduct and withhold taxes from such wages. 26 U.S.C. §3402. Section 3403 of the IRC further provides that the employer shall be liable for the payment of the amount of income tax required to be deducted and withheld. 26 U.S.C. §3403. R.D. COL ¶ 6.

   Under circumstances where the employer incurred no tax liability the preceding year and expects that he will incur none in the current tax year, the IRC permits an employee to file a Form W-4 or in Lieu of Form W-4 claiming complete exemption from income tax withholding. See 26 U.S.C. §3402(n). A valid withholding certificate must include the requisite certifications contained in section 3402(n) of the IRC and cannot contain alterations or unauthorized additions. As the auditors and Guterman testified, the W-4 forms that were submitted by Respondents were invalid because they were altered and/or not signed under penalty of perjury. In each case, Respondents, using forms provided in the Meredith booklet, either deleted a jurat or added language to it. In every case, Respondents added the phrase "without prejudice, UCC-1-207" to the forms. R.D. FOF ¶¶ 172, 346; Tr. Vol. 1 at 57; Tr. Vol. 2 at 110; Tr. Vol. 3 at 148–149, 221–222; Tr. Vol. 5 at 147–148; FDIC Exhs. 90, 118.

   Likewise, as Guterman stated at the hearing, the other documents included in the first package of withholding documents submitted by Respondents to the Bank—the Citizenship Affidavits, Forms W-8 and Forms 590—were not valid exemption certificates because they did not contain the requisite certifications as to income tax liabilities. The same was true for the Statements of Citizenship and Residence included in the second set of documents filed by Respondents, in which they reversed their position regarding citizenship and residency. R.D. FOF ¶ 348; Tr. Vol. 3 at 149–150; FDIC Exh. 90.

   As a result, CEO Shollenburg and CFO Hagy acted improperly in accepting the invalid tax forms on behalf of the Bank. R.D. FOF ¶ 347; Tr. Vol. 3 at 149–150; FDIC Exh. 90. Instead, the Bank, upon receipt of the invalid documents, should have advised each of the Respondents that it could not accept them and provided them with an opportunity to submit a valid withholding exemption
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   certificate. Based on the foregoing, Respondents had no legitimate basis for causing the Bank to fail to withhold income taxes from their compensation and, therefore, caused the Bank to violate sections 3402 and 3403 of the IRC. R.D. FOF ¶¶ 349–350; R.D. COL ¶¶ 6–7; Tr. Vol. 3 at 151–153.

   Respondents also committed violations of law with respect to withholding of Social Security taxes. R.D. at 22; R.D. COL ¶¶ 6–7. The Federal Insurance Contributions Act imposes a tax on employees and employers which is measured by the amount of wages paid with respect to employment. Section 3102 of the IRC, 26 U.S.C. §3102, provides that the employer shall collect taxes imposed by section 3101(a) (i.e., the old age, survivors, and disability component of FICA or Social Security taxes), 26 U.S.C. §3101(a), and section 3101(b) (i.e., the hospital insurance (Medicare) component of FICA or Social Security taxes), 26 U.S.C. §3101(b), by deducting the amount of taxes from wages as and when paid. The employer is liable for the employee portion of the tax (in addition to the employer portion of the tax) regardless of whether or not the tax is collected from the employee.

   As discussed above, between December 1997 and May 1998, each of the Respondents, except for R. Hagy, began instructing the Bank to stop withholding Social Security and Medicare taxes from their compensation at the Bank based on their claim that payment of Social Security tax is voluntary. Contrary to Respondents' contentions, however, it is well established that Social Security taxes are not voluntary and are not dependent upon employees' receipt of benefits under Social Security. See United States v. Lee, 455 U.S. 252, 258–59 (1982) ("[M]andatory participation is indispensable to the fiscal vitality of the social security system"). R.D. FOF ¶¶ 357–359; Tr. Vol. 3 at 154–158. As a result of the conduct of Respondents Shollenburg, H. Hagy, Melton and Knudson, the Bank was liable for Social Security taxes which it did not collect from them as well as for the employer share of these taxes. R.D. FOF ¶¶ 362–369; R.D. COL ¶¶ 6–7; Tr. Vol. 3 at 158; FDIC Exh. 90.

   In addition to the violations discussed above, each of the Respondents, except for Knudson, caused the Bank to fail to report income and properly withhold income and Social Security taxes from approximately $34,400 in automobile allowances, $50,000 in bonuses, and $11,000 in Year 2000 compensation received from the Bank in 1998 and/or 1999. R.D. FOF ¶¶ 404–411; FDIC Exhs. 65, 90, 104–105.

   By indemnifying Paychex, Respondents also committed violations of section 24 of the FDI Act and its implementing regulations, Part 362 of the FDIC's Rules, 12 C.F.R. §362. Section 24 provides that an insured State bank may not, without the consent of the FDIC, engage in any activity that is not permissible for a national bank. 12 U.S.C. §1831a. Under the rules for national banks, a letter of indemnification may be issued only under circumstances where a) the bank has a substantial interest in the performance of the transaction; or b) the transaction is for the benefit of a customer and the bank obtains a segregated deposit from the customer sufficient to cover the bank's total liability. 12 C.F.R. §7.1017. When H. Hagy caused the Bank to provide indemnification to Paychex for the benefit of herself and Shollenburg, Melton, and Knudson, neither of the threshold requirements of 12 C.F.R. §7.1017 had been met. And because the Bank never requested or received the FDIC's consent to indemnify Paychex, the issuance of the indemnification letter constituted a violation of section 24 of the FDI Act and section 362 of the FDIC's Rules. R.D. at 8; R.D. FOF ¶¶ 155, 156.

   The Board also finds that Respondents' activities in connection with their tax avoidance plan, including their violations of provisions of the IRC and the FDI Act, demonstrated unsafe or unsound practices contrary to prudent practice which exposed the Bank to an abnormal risk of loss or harm. See Landry v. FDIC, 204 F.3d 1125, 1138 (D.C. Cir. 2000), cert. denied, 531 U.S. 924 (2000); Van Dyke v. Board of Governors of the Fed. Reserve Sys., 876 F.2d 1377, 1380 (8th Cir. 1989). The failure to withhold income and Social Security taxes, as well as granting an unauthorized indemnification, is an unsafe and unsound practice. See, e.g., Seidman v. OTS, 37 F.3d 911, 928 (3d. Cir. 1994) ("Obliging one's institution to transactions that might be illegal is not in accord with `generally accepted standards of prudent operation'").

   Moreover, as the Ninth Circuit observed in FDIC v. Hoffman, self-dealing breaches of fiduciary duty by bank officials are
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   inherently unsafe and unsound practices. 912 F.2d 1172, 1174 (9th Cir. 1990). In this case, Respondents, by implementing their tax protesting plan, clearly put their own interests ahead of the interest of the Bank. Such conduct is a classic example of self-dealing. Id., see also First National Bank of Lamarque, 610 F.2d 1258, 1265 (5th Cir. 1980); Independent Banks Ass'n of America v. Heimann, 613 F.2d 1164, 1168 (D.C. Cir. 1979), cert. denied, 449 U.S. 823 (1980).

   In addition, Respondents' tax withholding misconduct and submission of the unauthorized indemnification letter constitute a breach of fiduciary duty in that, as officers of the Bank, they did not fulfill their obligation to see that the Bank operated in compliance with state and federal law. See, In the Matter of Ronald J. Grubb, FDIC Enforcement Decisions and Orders, ¶ 5181, A-2006, A-2008 (1992), 1992 WL 813163, at *28, aff'd on other grounds. Grubb v. FDIC, 34 F.3d 956 (10th Cir. 1994). Significantly, H. Hagy—the one Respondent who offered testimonial evidence in this case—told Guterman that as an officer she did not adopt the position of the Respondents, including herself, that their Bank compensation did not constitute "wages" and "gross income" under the IRC. R.D. FOF ¶ 343; Tr. Vol. 3 at 223–225; Tr. Vol. 5 at 136–137; FDIC Exh. 96. As noted in a previous ALJ opinion endorsed by the Board, "given the paramount importance of a credible and safe and sound banking system, there can be no question that officers and directors of banks are held to the very highest standard of fiduciary duty." In the Matter of Robert Stoller, 2 FDIC Enforcement Decisions and Orders §5174, A-1880 (1992), 1991 WL 789616, at *7. If Respondents had been diligent in carrying out their responsibilities, they would have, at a minimum, consulted with the Bank's board before they undertook their tax avoidance activities. Instead, their conduct suggests that they deliberately withheld critical information and, in some instances, intentionally misled the Bank's board, counsel and auditors. R.D. at 8; R.D. FOF ¶¶ 59, 281–282; Tr. Vol. 2 at 65; FDIC Exhs. 9, 15, 21, 25, 31. In fact, the Bank's board and counsel did not learn about some of Respondents' activity until the Bank's auditors met with the board's audit committee in April 1999. R.D. FOF ¶¶ 306–309; Tr. Vol. 2 at 187–189. Other IRC violations were not brought to the Bank board's attention until the FDIC examiners did so in September 1999. R.D. FOF ¶¶ 438–448; Tr. Vol. 4 at 13–18, 24–29, 33–62, 217–219; Tr. Vol. 5 at 181–182; FDIC Exh. 115.

   [.3] 2. Effects

   Besides demonstrating misconduct, the record also establishes satisfaction of the "effects" test. As a direct result of Respondents' activities, the Bank had to pay $152,799.85—for which it has not been reimbursed—to satisfy the tax responsibilities of Respondents for 1998 and 1999. R.D. at 24; R.D. FOF ¶ 432. In addition, the Bank, in order to bring itself back into compliance with the tax laws, hired Guterman and paid him fees in excess of $40,000. R.D. ¶ 436; Tr. Vol. 3 at 193. It is also likely that the Bank incurred additional auditor fees as a direct result of Respondents' tax avoidance activity. R.D. at 24; FDIC Exh. 121. These types of expenditure are recognized as losses for purposes of section 8(e). See, In the Matter of Billy Proffitt, FDIC Enf. Dec. (Transfer Binder) ¶ 5251, A-2977, n. 11 (1998), 1998 WL 850087, at *10, petition for review denied, Proffitt v. FDIC, 200 F.3d 855 (D.C. Cir. 2000).

   By the same token, Respondents' conduct benefited them financially in that they have not fully reimbursed the Bank for their tax liabilities. R.D. FOF ¶¶ 394–398, 420. Even though Respondents may ultimately have to pay their back taxes to the IRS and the California Franchise Tax Board, they have had the use of these funds in the interim and, as such, have reaped financial gain from their misconduct. See Candelaria, 1 FDIC Enforcement Decisions and Orders, ¶ 5242, A-2847 (1997), 1996 WL 880606, at *7 (even though respondent reimbursed the bank for entire amount of two straw loans, ALJ found that he had nonetheless received financial gain as a result of misconduct).

   In addition to financial loss, the Bank suffered reputational damage as the result of Respondents' misconduct. As one of the auditors observed, a bank must have a good business reputation to maintain customer confidence. R.D. FOF ¶ 329; Tr. Vol. 2 at 150–51. The Bank's directors also became concerned for the Bank's reputation as word of Respondents' tax withholding issues filtered into the community. R.D. ¶¶ 164–169; Tr. Vol. 2 at 247–248, 255–256; Tr. Vol. 3 at 25–26. As the Board has noted in the past, loss of confidence by an institution's board of directors and its depositors has an overall
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   effect contrary and prejudicial to the interest of depositors. In the Matter of James G. Welk, 2 FDIC Enforcement Decisions and Orders ¶ 5186, A-2105 (1992), 1992 WL 813217, at *13.

   [.4] 3. Culpability

   The term "personal dishonesty" as it is used in 12 U.S.C. §1818(e)(1) has been held to mean "a disposition to lie, cheat, defraud, misrepresent, or deceive. It also includes a lack of straightforwardness and a lack of integrity." In the Matter of Allan Hutensky, 1 FDIC Enforcement Decisions and Orders, ¶ 5224, A-2566 (1995), 1994 WL 812351, at *26, aff'd. 82 F.3d 1234 (2nd Cir. 1996). The Board finds the record laden with instances of Respondents' deceitful behavior. For example, Respondents stopped the withholding of their income and Social Security taxes without notifying the Bank's board or its counsel. R.D. at 8; R.D. FOF ¶¶ 163, 180. They further misled the Bank's board and counsel into believing that they had filed all the appropriate forms with the IRS. R.D. FOF ¶ 182; Tr. Vol. 2 at 176, 204. Moreover, with neither authority from nor notice to the Bank's board or the FDIC, H. Hagy granted indemnification to Paychex. R.D. at 8; R.D. FOF ¶¶ 155–156. Respondents disregarded the Bank's auditor's advice to discontinue their tax avoidance activity and failed to notify the Bank's board of the auditor's advice. R.D. at 9; R.D. FOF ¶¶ 218, 221; Tr. Vol. 1 at 40–44. In connection with their submission to the Bank of tax withholding certificates, they deliberately provided false information and they purposefully declined to submit their W-4 forms to the IRS because the IRS, in all likelihood, would have rejected their forms (and, as a result, throw a roadblock in their plans). R.D. FOF ¶¶ 297, 344; Tr. Vol. 1 at 78; Tr. Vol. 2 at 125; Tr. Vol. 3 at 124. Shollenburg also misrepresented to the Bank's auditors that he had set aside funds to reimburse the Bank when, in fact, he had not done so. R.D. FOF ¶¶ 281–282; Tr. Vol. 2 at 65; FDIC Exhs. 9, 15, 21, 25, and 31.

   The Board finds that Respondents' conduct exemplifies the "willful or continuing disregard" standard. Although proof of either willful or continuing disregard is enough to meet the culpability threshold for purposes of section 8(e) of the FDI Act, in this case Respondents' conduct was sufficiently egregious to meet both tests. See, e.g., Brickner v. FDIC, 747 F.2d 1198, 1202–1203 (8th Cir. 1984). ("`Willful disregard' refers to that conduct which is practiced deliberately with full knowledge of the facts and risks, and which potentially exposes a bank to abnormal risk of loss or harm.") Respondents, knowing very well and being fully forewarned that their activities were illegal, "turned a blind eye" to the Bank's interests so that they could pursue their own agenda. See Cavallari v. OCC, 57 F.3d, 137, 145 (2nd Cir. 1995).

   "Continuing disregard" refers to that conduct which is voluntarily engaged in over time, with heedless indifference to the possible consequences. Grubb v. FDIC, 34 F.3d 956, 962 (10th Cir. 1994); In the Matter of Henry P. Massey, FDIC Enforcement Decisions and Orders ¶ 5204, A-2330 (1993), 1993 WL 853749, at *21; In the Matter of Constance C. Cirino, 1 FDIC Enforcement Decisions and Orders ¶ 5261, A-3166 (2000), 2000 WL 1131919, at *53–54. As shown, over a two-year period, Respondents knowingly violated tax laws and took steps to conceal their behavior. They ignored counsel's advice and disregarded the Bank auditors' and Guterman's repeated advice and warnings that their tax avoidance activity was illegal. R.D. FOF ¶¶ 218, 221–222, 247–251, 255, 373–390. See, e.g., Candelaria ¶ 5242 at A-2842, 1997 WL 211341, at *6 ("continuing disregard" found by two nominee loans over a period of six months); In the Matter of Frank E. Jameson, FDIC Enforcement Decisions and Orders, ¶ 5154A, A-1541–1542.1, 1542.6 (1990), 1990 WL 711218, at *8. aff'd. 931 F.2d 290 (5th Cir. 1991) (Two incidents of falsifying loan records to hide self-serving transactions occurring within three months held to be "continuing disregard"). Respondents, any one of them, had many opportunities during this period to acknowledge that their positions were erroneous and accordingly to limit the Bank's and their own liability. Instead, at each fork in the road, Respondents, acting in their own self-interest and in complete disregard for the Bank and its depositors, steadfastly maintained their untenable positions.

C. Exceptions

1. Respondents' Exceptions
Respondents filed hundreds of objections challenging virtually every factual finding and
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   legal conclusion made by the ALJ.6 At many points, because Respondents' objections take the form of a rambling narrative, their key complaints are difficult to discern. In any event, Respondents' objections, which can be reasonably read to attack every aspect of this proceeding (including the integrity of the ALJ) are by and large frivolous, repetitious, and, in just about all instances, simply reargue merits of matters raised below which were adequately addressed by the ALJ.

   In many instances, in the course of their submission, Respondents argue facts not in evidence or issues that are irrelevant to this proceeding. They also attempt to dispute facts that were amply supported by evidence at the hearing. For instance, Respondents attack Guterman's credibility and his calculations of back taxes owed, yet they did not offer their own expert to rebut his conclusions. See Resp. Obj. ¶¶ 35–356. Respondents also make bald assertions which flatly contradict the law. For instance, although the FDI Act and implementing regulations provide otherwise, Respondents assert that H. Hagy did not need the Bank's board or FDIC permission to issue the indemnification to Paychex. Resp. Obj. ¶ 448. Respondents also claimed, contrary to the IRC, that they were not required to pay taxes on the automobile allowances. Resp. Obj. ¶ 402. Respondents also brazenly argue that their altered W-4 forms were not invalid because the IRS never notified them as such—when in fact their altered forms were never submitted to the IRS. Resp. Obj. ¶ 346. Although properly disposed of below, the Board will address briefly what appear to be the primary themes of Respondents' objections to this proceeding.

a. First Amendment Issue

   Time and again throughout this proceeding, Respondents have charged that the FDIC's initiation of these proceedings against them constitutes an infringement of their rights under the First Amendment of the U.S. Constitution. See, e.g., Resp. Obj. ¶¶ 16, 331, 357. In essence, they argue that their political beliefs—in this case the belief that they should not have to pay taxes and participate in the U.S. Social Security system—somehow trump their obligations to comply with the tax laws and their fiduciary duties to the Bank. As the ALJ made clear in his Recommended Decision, the courts have soundly rejected this proposition. See, e.g., Coleman v. Commissioner, 791 F.2d 68, 69 (7th Cir. 1986) ("The government may not prohibit the holding of these beliefs, but it may penalize people who act on them").

   Respondents cite, in their objections, a long line of cases which purportedly support their position. See, e.g., Brandenburg v. Ohio, 395 U.S. 444 (1969); Hess v. Indiana, 414 U.S. 444 (1969); Resp. Obj. ¶ 16. Yet the cases cited—which deal primarily with the issue of the advocacy of illegal acts—do not pertain to the present situation because in this case Respondents did more than simply promote illegal conduct—they engaged, and caused the Bank to engage, in violations of federal law. As the ALJ observed, it is Respondents' actions—not their beliefs—that are the bases for this proceeding. R.D. at 5.

b. Enforcement Counsel's Use of Respondents' Tax Records

   Respondents have, throughout these proceedings, argued that the FDIC illegally obtained various tax records from Respondents and that such records cannot be used as evidence of Respondents' misconduct. Resp. Obj. ¶ 16. Respondents' claim is, however, without merit because as Enforcement Counsel has explained repeatedly throughout this proceeding, the documents at issue, consisting primarily of W-4 and related forms, were obtained by the FDIC during its 1999 examination of the Bank. These documents were submitted by Respondents to the Bank and remained in the Bank's files. 6 Respondents' Motion to Strike All Allegations Citing Word for Word From Tax Documents of Respondents, filed on December 23, 2002, is discussed and disposed of infra at n. 8. On December 20, 2002, Respondents also filed a Motion to Dismiss and/or Strike Parag. 81 of Notice For Lack of Evidence. Paragraph 81 of the Notice charges that Respondents engaged in unsafe and unsound banking practices involving recordkeeping and Bank Secrecy Act ("BSA") violations when they opened "Pure Trust" accounts that purported to shelter assets from seizure or levy. Enforcement Counsel did not oppose this motion. The Board finds, after a de novo review of the entire record in this case, that the ALJ made passing reference to the pure trust and BSA issues in his findings. R.D. FOF ¶¶ 175, 185, and noted that the FDIC in its 1999 Report of Examination cited the Bank for recordkeeping violations regarding these issues. R.D. FOF ¶ 444. The Board further finds, however, that it does not appear that Enforcement Counsel offered any documentary or testimonial evidence in support of this charge. In any event, the ALJ made no legal findings on this issue in his Recommended Decision. In the absence of any party's exception to the ALJ's lack of treatment or reliance on this issue in support of his Recommended Decision, the Board deems the charge in Paragraph 81 of the Notice to be no longer part of this case.
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   Enforcement Counsel has established and Respondents have not disputed that the records at issue were not obtained from the IRS. In fact, a convincing argument might be made that some of the forms in question are not, strictly speaking, "tax forms"; the altered W-4 forms, for example, had not been submitted to the IRS at all during the relevant time period. See, e.g., R.D. at 16–18; R.D. FOF ¶¶ 146, 287, 290, 294, 295, 344, 345. In the Ninth Circuit, the law is clear that only tax return information in the IRS's possession is protected from disclosure by federal statute. 26 U.S.C. §6103. See Stokwitz v. United States, 831 F.2d 893 (9th Cir. 1987). cert. denied. 485 U.S. 1033 (1988), where the Ninth Circuit adopted the district court's holding that section 6103 "applied only to disclosure of information received by the IRS from the taxpayer, and not obtained directly from the taxpayer and others." 831 F.2d at 894.

   In this case, FDIC Exhibits 1–15 and 17–31 concerning Respondents' taxes were obtained by the FDIC in the normal course of the FDIC's business. Specifically, the records were obtained by the FDIC in conjunction with its powers to examine federally-insured financial institutions. Pursuant to section 10(b)(6) of the FDI Act, 12 U.S.C. §1820(b)(6), FDIC bank examiners have the power to thoroughly examine any insured depository institution or its affiliate. Based on the foregoing, these records, which were obtained during a routine examination of the Bank, were properly admitted into evidence by the ALJ. Tr. Vol. 2 at 22.7 Respondents' recurring claim that Enforcement Counsel inappropriately used their tax records is without merit.8

c. Selective Enforcement and Retaliation

   Respondents argue in their objections and elsewhere during the course of these proceedings that they have been singled out by the FDIC in retaliation for their lawsuit filed in 2000 in federal district court against certain FDIC employees in connection with their termination from the Bank.9 Resp. Obj. ¶ 451. In this case, Respondents' charge is flatly contradicted by the chronological evidence. As FDIC Assistant Regional Director George Doerr testified and as was confirmed in the Minutes of the Special Meeting of the Board of Directors of the Bank, the FDIC, as of at least September 29, 1999, was strongly considering instituting section 8(e) removal proceedings against each of the five Respondents. R.D. FOF ¶ 451; Tr. Vol. 4 at 158–159; FDIC Exh. 65. Respondents, however, were not terminated from the Bank until October 1999 and did not file their lawsuit in federal district court until February 8, 2000.

   Using the same argument, Respondents also claim that the FDIC did not initiate proceedings against other Bank employees who engaged in similar tax avoidance activities. Resp. Obj. ¶¶ 243, 443, 279, 283. Without regard to the merit of Respondents' contention, the Board notes that agency decisions not to prosecute are judicially unreviewable, see Heckler v. Chaney, 470 U.S. 821 (1985), and Respondents have put forward no convincing reason why the Board should second guess the judgment in this case. The FDIC has discretion as to whether to initiate removal proceedings against institution-affiliated parties of the banks. 12 U.S.C. §1818(e). Each of the Respondents, regardless of their relative position within the Bank, meets the definition of institution-affiliated parties. 12 U.S.C. §1813(u). R.D. COL ¶ 3.

   Thus, the only issue for consideration in this regard is whether Enforcement Counsel has established the necessary elements for removal under section 8(e) as to each of the Respondents. As discussed above, Enforcement Counsel has met its burden. See also Leuthe ¶ 5249, A-2923, 1998 WL 438323, at *7 ("[T]he decision to proceed with this 7 In addition, because the Stokwitz holding is equally applicable to documents obtained through civil discovery (id. at 894), Respondents have no basis for objecting to Enforcement Counsel's reliance on any of the tax records received into evidence. See, e.g., R.D. FOF ¶ 437; Tr. Vol. 3 at 270; FDIC Exh. 124.

   8 The Board's decision finding that Enforcement Counsel properly relied on and the ALJ properly admitted into evidence Respondents' tax records also disposes of Respondents' Motion to Strike All Allegations Citing Word for Word From Tax Documents of Respondents which Respondents submitted on December 20, 2002.

   9 On February 8, 2000, Respondents, in a case styled Hazel Hagy et al. v. United States, et al., Nos. EDCV 00-0065-RT (RZx) and EDCV 00-0113-RT (RZx) (C.D. Cal.), filed in the U.S. District Court for the Central District of California a Bivens action alleging constitutional and common law tort claims. In addition to the United States, the case names as defendants the FDIC, the California Department of Financial Institutions, the Bank and employees of all three entities. In essence, plaintiffs (Respondents) claim that they were wrongfully terminated and otherwise harmed because of their political beliefs regarding federal income taxation. They seek back and front pay, compensatory and special damages in the amount of $25 million and unspecified punitive damages.
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   matter was an appropriate exercise of the FDIC's discretion and wholly consistent with the legal requirements for the remedies applied.")

2. Enforcement Counsel's Exception

   Enforcement Counsel raised one exception to the Recommended Decision requesting that the Board reconsider the ALJ's dismissal of Respondent R. Hagy from the proceedings. At a minimum, Enforcement Counsel asks that, if the Board agrees that R. Hagy should be dismissed from the proceedings, it be on a basis other than his inability to testify. FDIC Except. at 1–2. Based on testimonial evidence supplied by Respondent H. Hagy, the ALJ concluded that R. Hagy was too sick to testify and should therefore be dismissed from the proceedings. R.D. at 2; Tr. Vol. 5 at 111. The Board notes that R. Hagy's misconduct is well established in the record and, as such, his removal from the industry would be fully justified. However, while R. Hagy's inability to testify might not be reason alone to dismiss him from the proceeding, it is clear that the ALJ rested his ruling on Hagy's medical condition which, in the Board's view, is an acceptable basis for dismissing him from the proceedings on the facts represented. For this reason, the Board declines to disturb the ALJ's ruling on this issue.

IV. CONCLUSION

   After a thorough review of the record in this proceeding, and for the reasons set forth above, the Board finds that an Order of Prohibition is warranted against each of the four Respondents remaining in the case.

   In this case, the record plainly shows that, time and again, Respondents ignored the law and the advice of the Bank's auditors and attorneys with respect to their tax avoidance conduct. Instead, in a clear breach of their fiduciary duties as officers and employees of the Bank and in violation of federal law, the Respondents engaged over a two-year period in an unlawful tax avoidance scheme which exposed the Bank to serious risk.

   As shown, during the course of their illegal activities, Respondents single-mindedly and recklessly pursued their own quest for tax "relief" at the expense of the Bank and in the face of dire warnings from the auditors, the tax expert, and, finally, the FDIC supervisors. In view of Respondents' continuing misconduct and, in particular, their intransigence, the Board is persuaded that Respondents should be permanently barred from the banking industry.

   Based on the foregoing, the Board affirms the Recommended Decision of the ALJ and adopts in full the findings of fact and conclusions of law included therein and issues the following Orders implementing its Decision.

ORDER TO DISMISS

   Respondent Robert Hagy is hereby dismissed from this proceeding.

ORDER TO PROHIBIT

   The Board of the FDIC, having considered the entire record of this proceeding and finding that Respondents Dennis Shollenburg, Hazel Hagy, Vicky Melton, and Brenda Knudson, formerly officers of the Bank, violated laws and regulations, engaged in unsafe or unsound banking practices, and breached their fiduciary duty, causing financial loss to the Bank and resulting in personal benefit to themselves, and that their actions involved personal dishonesty and willful and continuing disregard for the safety and soundness of the Bank, it is hereby ORDERED and DECREED that:

   [.5] 1. Dennis Shollenburg, Hazel Hagy, Vicky Melton, and Brenda Knudson shall not participate in any manner in any 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).

   [.6] 2. Dennis Shollenburg, Hazel Hagy, Vicky Melton, and Brenda Knudson 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).

   3. Dennis Shollenburg, Hazel Hagy, Vicky Melton, and Brenda Knudson shall not violate any voting agreement with respect to
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   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).

   4. Dennis Shollenburg, Hazel Hagy, Vicky Melton, and Brenda Knudson 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).

   5. This ORDER shall be 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 these ORDERS shall have been modified, terminated, suspended, or set aside by the FDIC.

   IT IS FURTHER ORDERED that copies of this Decision and Orders shall be served on Dennis Shollenburg, Hazel Hagy, Vicky Melton, Robert Hagy, Brenda Knudson, 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 11th day of March 2003.

   Robert E. Feldman

   Executive Secretary 10-31-03A-3267
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   RECOMMENDED DECISION

IN THE MATTER OF
DENNIS SHOLLENBURG,
HAZEL HAGY,
VICKY MELTON,
ROBERT HAGY AND
BRENDA KNUDSON,
individually, and as institution-affiliated parties
FIRST MOUNTAIN BANK
BIG BEAR LAKE, CALIFORNIA
(Insured State Nonmember Bank)

FDIC-00-88e

   Appearances:

       For the Federal Deposit Insurance Corporation:

         Ms. JoAnna A. Gekas, Esq.

         Ms. Frances L. Johnston, Esq.

         Mr. Rex Taylor, Esq.

       For Respondents:

         Ms. Patricia J. Barry, Esq.

         Mr. Frank Sanes, Jr., Esq.

   Authur L. Shipe, Administrative Law Judge

   This proceeding was instituted on August 9, 2001, by the issuance of a "Notice of Intention to Prohibit From Further Participation." The FDIC seeks an order prohibiting the Respondents from participating in the conduct of banking and related institutions. Respondents oppose the order sought by the FDIC.

   Oral hearings were held in the matter at Riverside, California on May 13, 14, 15, 16, 17, and 20, 2002.

   The FDIC presented its evidence through eight witnesses. Respondent Hazel Hagy testified for Respondents. Although Respondent Shollenburg gave direct testimony for Respondents, he refused to submit to cross examination. Therefore, his testimony was stricken from the record.1

   Respondent R. Hagy, husband of H. Hagy, was recently diagnosed with Stage IV throat cancer, and was not able to testify. Ts. Vol. V, p. 111. It is my conclusion that he should be dismissed from the proceeding on grounds of his inability to testify, although he is included in the discussions and findings that follow.


1 Mr. Shollenburg made the following statement in explanation of his refusal to submit to cross-examination:

       Your Honor, I would — my statement is that Ms. Barry represents the All Capital Letter Straw Man Corporate Entity, Dennis Shollenburg. I stand here as the live man, secured party to Dennis Shollenburg, corporate entity, Straw man. I have documentation to show me at that position.

       And I accept these total and complete procedures for value, you Honor. Everybody has been involved in these proceedings for value, and I will not testify. I will not be part of this kangaroo court sham any further.

   Ts. VI, p. 12.
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   Post-hearing briefs, initial and reply, have been filed. The FDIC states in its Reply Brief that Respondents' Proposed Findings should be rejected because they do not comply with Rule 308.37(a)(2), which requires that such findings be "supported by citation to any relevant authorities and by page references to any relevant portions of the record." Respondents' Proposed Findings clearly do not conform to this Rule, but they will not be rejected.

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

DISCUSSION OF FACTS AND LAW

Respondents' Tax Avoidance Activity

   Beginning in August 1997, the Respondents, individually, and as a group, came to the fixed conclusion that there were ways by which they could lawfully avoid paying federal and state, as well as Social Security and Medicare, taxes. The latter are hereinafter referred to as Social Security taxes for brevity purposes. Respondents' views were largely derived from a booklet entitled, Vultures in Eagle's Clothing, written by one Lynne Meredith. FDIC Ex. 118.

   The flavor of the booklet is provided in the following statement:

       The premise of this book is not how to "beat the tax system." It is a book about freedom, rights and truth! WE ARE NOT TAX PROTESTERS. We do not disagree with or protest the law. The Law, the Income Tax Regulations and the supreme (sic) Court all concur: "Compensation for labor, earned by an American Citizen, in any of the 50 American states, exercising an occupation of common right, is not taxable! THE GRADUATED INCOME TAX is 100% VOLUNTARY FOR THESE CITIZENS!" We agree, so there's no law to protest!

   FDIC Ex. 118, p. 13

   Emblazoned on the cover of the booklet is the blurb: "Lawfully Stop!!! Paying Income Taxes."

   Respondents' counsel describes the booklet as "amusing in part and informative in other parts," and argues the "whether any of the respondents read or relied on this book is clearly with their First Amendment rights to do so." Respondents Proposed Findings of Fact and Conclusions of Law, para. 19.

   Manifestly, one may lawfully read about many activities, including crime, that one cannot carry out in daily life; the right to read about a subject does not necessarily convey the right to rely upon what is read for conduct. The relevance of this book here is that Respondents became so fervently devoted to its teachings that they disregarded, in the performance of their duties as bank officers and employees, all advice of professional tax experts that did not jibe with those teachings. Their disputed conduct is inexplicable apart from their zealous adherence to the doctrines put forward in the Meredith publication.

   As pertinent here, the argument that a taxpayer's claimed political beliefs can immunize him from compliance with the tax laws has not been accepted by the courts. For example, the Seventh Circuit in Coleman v. Commissioner, 791 F. 2d 68, 69 (7th Cir. 1986) stated:

       Some people believe with great fervor preposterous things that just happen to coincide with their self-interest. "Tax protesters" have convinced themselves that wages are not income, that only gold is money, that the Sixteenth Amendment is unconstitutional, and so on. These beliefs all lead — so tax protesters think — to the elimination of their obligation to pay taxes. The government may not prohibit the holding of these beliefs, but it may penalize people who act on them.

   The Respondents in this proceeding seek to carry the reasoning rejected by that court a step beyond not paying their taxes as individuals. They declined, as Bank officers, to follow tax laws applying to the Bank, and now offer in defense of their conduct, what are claimed to be First Amendment rights to believe that wages are not taxable income, and to act accordingly. It is their actions that are in issue here, not their beliefs.

Respondents Tax Withholding Activity

   In pursuit of their anti-tax objectives the Respondents submitted, beginning in August 1997, to the First Mountain Bank, as their employer, various forms and documents requesting that income and Social Security taxes no longer be withheld from their compensation. Each of the Respondents submitted similar forms and documents, on various dates, including: a Form W-8, Certificate
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   of Foreign Status; a California Form 590 Nonresident Withholding Exemption Certificate; Form 6450, a Questionnaire To – Determine Exemption From Withholding; and an In Lieu of Form W-4, or a Form W-4. Most of the forms were copied from the Meredith booklet, pp. 198, 199, 200, 201, 202, 204.

   Originally, the Respondents claimed to be exempt from paying income tax on the grounds that they were not citizens of the United States. For instance, Mr. Shollenburg submitted to the Bank an Affidavit of Citizenship and Domicile, dated August 11, 1997, which states, in part:

       I hereby certify that I, Dennis Shollenburg, was born in the Oregon Republic. I was not born in a territory over which the United States is Sovereign and I am, therefore, not subject to its jurisdiction and I am not a citizen of the United States, subject to its jurisdiction, as defined in 26 CFR 1.1-1(c). I am not liable for the Title 26, Internal Revenue Code (IRC), Subtitle A, Sect. I graduated income taxes for reasons of my alienage. (Underlining appears in the original)

   Each of the other Respondents filed virtually the same statements with the Bank. Other documents were submitted by all of the Respondents containing similar averment of non-citizenship.

   By letter of December 22, 1997, Mr. Shollenburg requested that the Bank "discontinue the withholding of Social Security Tax from [his] compensation immediately as [he] no longer wish[ed] to participate in the voluntary program due to being fully vested at maximum earnings." FDIC Ex 4. All of the other Respondents, with the exception of Robert Hagy, wrote similar letters on various dates.

   All of the described documents were received at the Bank by either Mr. Shollenburg or Ms. Hagy in their positions of Bank officers. In response to the requests, they caused the Bank to cease withholding federal and state income taxes, as well as Social Security taxes, from the Respondents' compensation.

Respondents' Positions at the Bank

   Mr. Shollenburg was then president and chief executive officer of the Bank; Ms. Hagy was the Bank's executive vice president and chief financial officer; Respondent Melton was the senior vice president and senior loan officer of the Bank; Respondent Robert Hagy was a branch manager; and Respondent Knudson2 was a new accounts representative. In May 1999, she became assistant vice president and business development officer. The Respondents were terminated from their positions at the Bank in the fall of 1999.

Respondents' Reversal of Position on Citizenship

   Subsequent to their first submission of documents, Respondents reversed positions on their citizenship status, and filed documents with the Bank declaring that they were U.S. Citizens. (There is evidence that the alienage argument had been rejected by the IRS.)

   For example, Mr. Shollenburg submitted to the Bank a Statement of Citizenship and Residence on September 1, 1998, which states, in part:

       I, Dennis L. Shollenburg am a citizen of the United States by birth, born in Medford, Jackson County, Oregon on April 22, 1946. My present home residence is as specifically stated above within the United States of America and not abroad as defined and delineated within the Internal Revenue Code.

       This statement further asserts;

       My remuneration paid by First Mountain Bank is excluded from gross income under §911 of the Internal Revenue Code, entitled "CITIZENS OR RESIDENTS OF THE UNITED STATES LIVING ABROAD" and is therefore not defined as "wages" as defined in 26 U.S.C. §3401(a)(8)(A)(I).

       Another paragraph of the statement reads:

       This Statement of U.S. Citizenship and Residence is signed and Witnessed as a genuine document verifying my protected status and rights as a U.S. Citizen all remuneration paid to me is not included in gross income under §911 of the Internal Revenue Code and thus is not Subject to

2 Respondents' counsel has argued that the FDIC has no jurisdiction over Respondent Knudson because she was an employee, not an officer, when the disputed conduct occurred. That argument may now be abandoned. In any case it is not correct; agencies may prohibit any institution affiliated party, including employees. 12 U.S.C. §1813(u) and §1818(e).
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       income tax withholdings Pursuit to 26 U.S.C. §3402.

   The other Respondents submitted similar statements to the Bank. The writer of each statement ordered the Bank to send his or her statement to the IRS office in Philadelphia, Pennsylvania, which was done. That office is primarily concerned with U.S. citizens working abroad and foreign taxpayers. It did not respond to the documents sent there by Respondents.

   All of these documents and requests were honored by Mr. Shollenburg or Ms. Hagy, on behalf of the Bank, whether they asserted, under oath, that the writer was, or was not, a U.S. citizen.

Consequence of Respondents' Tax Avoidance Activity For Bank

   Respondents argue that their tax avoidance activities were of no proper concern to the Bank, or to the regulators, and that those activities were rather matters strictly between them and the IRS. However, this is manifestly not the case. At every step in Respondents' efforts to avoid paying taxes, the Bank's responsibility was defined by them solely in terms of their demands and interests, all of which were sorely misguided. The Bank, as an employer, as more fully discussed below, has legal obligations in tax matters other than complying with the demands of its employees. These obligations were either ignored, or deliberately violated by Respondents.

   The Respondents did not obtain outside professional advice on behalf of the Bank to determine what obligations the Bank had in the circumstances before the onset of their endeavor. They commenced this dubious program within the Bank without disclosure to the Bank's board, and without seeking the advice of the Bank's counsel.

   When Respondents sought to end their participation in Social Security, the Bank's payroll processor, Paychex, declined to comply with instructions to cease withholding these taxes from the Respondents' compensation, unless the Bank agreed to hold Paychex harmless from possible liability for its role in the scheme.

   In order to effectuate its Social Security objectives, Ms. Hagy provided Paychex with hold harmless letters of indemnification. This was also done without Board approval, and without consultation with the Bank's outside counsel. It violated statutory and regulatory provisions restricting the authority of a Bank to issue indemnification agreements. These letters exposed the Bank to liability in unknown and unlimited amounts with no discernible benefit to the Bank.

   Paychex had also informed Ms. Hagy that the Bank should seek the advice of accountants and tax counsel before putting this program into effect. That was not done.

   When the Respondents instructed the Bank to stop withholding Social Security taxes from their compensation, they informed the Bank that it would no longer be responsible for paying matching contributions on Respondents' behalf. This was erroneous advice; an employer is liable for remitting all Social Security taxes, including its share thereof, regardless of its failure to withhold the employee's share. This seems to be now conceded by Respondents' counsel. See e.g., Respondents Rebuttal To Proposed Findings of Fact and Conclusions of Law of FDIC. para. 434.

Respondents' Disregard of Advice of Outside Auditors

   The accounting firm of Varinek, Trine, Day and Company (VTD) had by 1998, served as the Bank's outside accountants for 10 years, or more. Karen Comer acted as the firm's engagement partner for many years, and Ms. Hagy was her contact at the Bank.

   In the fall of 1998, Ms. Hagy gave Ms. Comer a letter that set forth Respondents' position on the considered tax questions, and requested VTD's response thereto. Ms. Comer reviewed the letter, and some other such materials provided to her by Ms. Hagy. Ms. Comer also discussed the subject with other partners, and ran it by the firm's tax and administrative committees. Ms. Comer informed Ms. Hagy that the firm did not agree with the views contained in the material. Ms. Comer told Ms. Hagy that she was very concerned for her, that "it could mean the end of her career, or some legal action against her and the bank." Ts. Vol. I. p. 43, 44. Despite the dire nature of these warnings Ms. Hagy did not convey them to the Bank's board. Based on her own research, she disagreed with VTD.

   In an ensuing audit in late December 1998 and January 1999, Ms. Comer performed a more thorough than normal review of the Bank's payroll records. She was surprised to discover that withholdings for Respondents had already been discontinued. Although she
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   had discussed the subject with Ms. Hagy, Ms. Comer did not think that Ms. Hagy and the other Respondents would actually go through with it without the Bank auditors' advice. Ts. Vol. I, p. 49. VTD performed an audit of the Bank for 1997, but had not discovered that withholding had stopped in late 1997.

   Ms. Comer showed the actual withholding documents and information obtained during the audit to other partners and the firm's governing administrative committee. The firm reached the conclusion that illegal acts within the terms of the Statement of Accounting Standards had been committed by the Bank related to its role in the tax withholding program of Respondents.

   Ms. Comer and a partner, Mr. David Dayton, met with Respondents Shollenburg and Hagy on March 9, 1999, to discuss the firm's findings. Prior to the meeting VTD sent them a written statement containing VTD's findings on the tax issues and the Bank's responsibilities in this activity. FDIC Ex. 71.

   VTD provided authoritative references for the following propositions of law, which the Bank, through Respondents had ignored or violated:

       1) An employer has a duty to withhold income tax from all remuneration paid to employees.

       2) The employer is liable for the payment of income tax required to be deducted and withheld from wages paid to an employee, whether or not the employer collects the tax from the employee.

       3) If any employee claims exemption from income tax withholding, the employer must obtain from the employee a Form W-4, and forward it to the IRS.

       4) Any alteration of a Form W-4 invalidates the form.

       5) An employer has an obligation to collect Social Security taxes from the employee, and is liable therefore regardless if it has collected the taxes from the employee.

   VTD recommended that the Bank immediately file amended payroll tax returns reflecting Social Security and income taxes that were not included in the original returns. VTD, finding that the existing W-4 forms had been altered, and were, therefore, invalid, further recommended that Executive Officers wishing to claim tax exempt status should resubmit valid Form W-4's.

   VTD's advice was flatly rejected by Mr. Shollenburg and Ms. Hagy at the March 9, 1999 meeting. They claimed that the law cited by the accountants did not apply to them, and that they had individual rights not to have any taxes withheld. Ts. Vol. I, p. 58, 59.

   VTD sent a memorandum to Mr. Shollenburg and Ms. Hagy following the March 9 meeting, reiterating the points at issue, and recommended that the Bank seek an outside consultant or expert in the tax field to help minimize the Bank's exposure for back taxes owed, related penalties, and future scrutiny by federal and state agencies. FDIC Ex. 72. A subsequent memorandum indicated that disclosure of the Bank's possible liability should be contained in the Bank's financial statement.

   The Bank's management (Respondents) continued to be totally unresponsive to VTD's recommendations. On March 15, 1999, Mr. Shollenburg sent a letter to VTD stating, in part, "the Bank is being held hostage, you are withholding our F/S until certain employees comply with your wishes, against their personal wishes and beliefs."

   The letter concludes:

       Although you do not agree with what myself and various bank personnel are doing — I believe you cannot infringe on our right to proceed.

       Although some of us are officers of First Mountain Bank, this does not mean that we loose (sic) our rights when it comes to the definition of gross income.

       You might be entering an arena where you do not want to be.

   FDIC Ex. 75.

   The essence of these statements is that the Bank cannot comply with its tax withholding obligations under the law without infringing on the Respondents rights to carry out their tax avoidance activities, and their rights trump the Bank's legal obligations. That is the nub of their defense here. That position has been rejected by every tax expert that has reviewed the matter, including the payroll specialists at Paychex, several accountants and a tax specialist at VTD, and a tax attorney later engaged by the Bank board to investigate the entire tax imbroglio
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   in which the Bank had become enmeshed because of Respondents' activities.

   VTD was not intimidated by Mr. Shollenburg's threatening letter, and in response reiterated its position, and stated that it would need a meeting with the Bank's Audit Committee to discuss the matter in more detail because it had found that the activity of the Bank via Respondents constituted an illegal act.

   A meeting of the Bank's audit committee and the board was held with Ms. Comer and Mr. Dayton of VTD on April 26, 1999. At the meeting VTD presented their findings and recommendations in a memorandum provided to the board. FDIC Ex. 77. Mr. Shollenburg spoke in opposition to VTD's position.

   The board was informed that VTD believed that the Bank had committed the following illegal acts:

       1) Incorrectly reported taxable wages as exempt from Social Security and Medicare taxes.

       2) Incorrectly discontinued withholding federal and state income taxes from employee's wages.

       3) Accepted invalid Form W-4's from selected employees.

       4) Neglected to transmit Form W-4's claiming exempt status to the IRS.

       5) Agreed to indemnify the Bank's payroll processor from any liability in preparing the payroll tax returns that included the periods during which the above items had occurred.

   VTD again recommended that the Bank file amended payroll tax returns to include taxes not included in the original returns, that valid W-4's be submitted for employees claiming exemption from the withholding of taxes, and that all back taxes and penalties be paid as soon as possible.

   VTD also recommended again that the Bank engage an outside tax expert to help it minimize its liability and future scrutiny by federal and state agencies. The necessity of including a footnote to the Bank's financial statement disclosing its possible liability for additional taxes was also discussed at the meeting. The meeting was not totally successful; Mr. Shollenburg did most of the talking. Ts. Vol. I, p. 80.

   The board did accede to the inclusion of a footnote to the Bank's financial statement, disclosing its possible liability for unpaid taxes, and accepted the recommendation that it hire an outside tax expert to assist it in assessing the situation. But rather than acting immediately to clear up the matter, the board determined to have the outside expert investigate the entire tax problem before it, and to defer further action until the tax expert's investigation was completed.

   On June 1, 1998, VTD resigned as the Bank's accountants because it had concluded that the Bank was not meeting its corporate responsibilities by failing to implement VTD's recommendations. FDIC Ex. 80. VTD believed that its reputation could be harmed by being associated with a client who failed to carry out its lawful responsibilities.

Investigation Of Tax Expert

   On June 7, 1999, the Bank hired Barry Guterman, an experienced tax attorney to conduct a complete investigation of its tax withholding situation.

   After a very thorough investigation, he came to virtually the same conclusions and made virtually the same recommendations as VTD, and prepared an extensive report on his findings. FDIC Ex. 90. He found, among other things, that the Bank had no legal basis to cease withholding income taxes from Respondents' compensation because the W-4 forms submitted by Respondents' claiming their exemption from income taxes had been altered, and were therefore invalid.

   For example, Mr. Shollenburg had submitted an "In Lieu of Form W-4," on which he wrote above his signature the words "without prejudice UCC-1-207." He also struck out "the" before United States, and added "these." Other Respondents had made like alterations in their forms.

   Ms. Hagy submitted an "In Lieu of Form W-4" on which she struck out the words "under penalty of perjury."

   These alterations were made for a purpose. Ms. Hagy testified that it was her understanding that when you signed a document with the verbiage "without prejudice UCC-1-207" that you are retaining to yourself all your rights that are guaranteed to you under the Constitution of the United States." Ts. Vol. V, p. 40. She described these rights as those that "might be under the Fourth and Fifth Amendment in the Constitution, your right to privacy and your right not to have things that you've signed used against you
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   in a court of law." (Emphasis supplied) Ts. Vol, p. 145.

   Ms. Hagy explained that she scratched out the phrase "under penalty of perjury" in her In Lieu of Form W-4 "because the IRS really does not have jurisdiction to put even a clause in there, because you're not testifying in court or anything else. So they can't hold you to perjury." (Emphasis supplied) Ts. Vol. V, p. 51.

   Respondents seemed to have also derived these ideas from the Meredith booklet, p. 166.

   Regardless of the soundness of their legal reasoning, it is evident that while Respondents sought to hedge their personal liability for their statements, they deemed those statements sufficient, as officers of the Bank, to implicate the Bank in a position fraught with serious legal consequences.

   As stated, Mr. Guterman found these altered forms invalid with the result that the Bank had no legal basis to cease withholding taxes from Respondents' compensation. Both VTD and Mr. Guterman agreed that the only lawful basis for not withholding income taxes by an employer from compensation paid to an employee is the submission of a valid unaltered Form W-4. Respondents' counsel also now seems to concede as much.

   An employee claiming exemption from tax withholding must certify under penalty of perjury on a Form W-4 that she incurred no liability for income tax for the preceding taxable year, and that she anticipates that she will incur no liability for income tax in the current taxable year. The other forms submitted by Respondents, including those sent to IRS Philadelphia office, did not contain these requisite certifications and therefore were legally ineffective to control tax withholding.

Failure to File W-4 Forms with IRS

   The employer is required to file with the IRS any Form W-4, claiming exemption from tax liability. Not only were the forms submitted by the Respondents altered, and therefore invalid, they were not filed with the IRS when received, as required by law.

   Ms. Hagy testified that she had assumed that her payroll clerk had sent these forms to Paychex, and that the latter had filed them with the IRS. FDIC Ex. 96 at 1117; Ts. 44–45, 92, 121–123, 171. There is fairly conclusive evidence that this is not what happened.

   Although Ms. Hagy informed Mr. Guterman that she first learned in May 1999, that the forms had not been filed with the IRS, she had told Ms. Comer in February or March 1999, that they had not been so filed. Ms. Comer stated that "Hazel was very open about that." Ts. Vol. I, p. 78; Vol. V. p. 123–124. There is nothing in this statement to suggest that Ms. Hagy had ever erroneously assumed that the forms had been remitted to the IRS, only to later discover the error. The suggestion is that Ms. Hagy considered it unnecessary or inappropriate to send these forms to the IRS. This is confirmed in a memorandum entitled "Rebuttal on Possible Audit Exception," written by Ms. Hagy to Ms. Comer on March 15, 1999, following the unsuccessful meeting involving Mr. Shollenburg, Ms. Hagy, Mr. Dayton, and Ms. Comer on March 9, 1999. FDIC Ex. 74.

   The general thrust of the "Rebuttal" is that the Bank would be subject to legal exposure from possible law suits by the employees, such as Respondents, for failing to follow the employees' wishes in tax matters, rather than exposure for violating tax laws, as VTD believed.

   The memorandum states, in relevant part; "Chief Financial Officer [Hagy] has legally and fully complied with all Federal and State Codes and regulations re: proper filing of Bank payroll tax returns, including transmittal of Form W-4 where applicable." Id. at 2. The operative words here are "where applicable."3 Since Ms. Hagy had just confirmed with Ms. Comer days before that the W-4 forms of Respondents had not been transmitted to IRS, it is apparent that she did not consider the transmittal requirement applicable to those forms.

   This position is made more specific in the following statements contained in the memorandum:

       The law absolutely prohibits employers from sending an Exempt Form W-4 to the IRS if it does not involve wages earned by

3 Ms. Hagy had informed the Bank's outside counsel, Mr. Gary Findley, in early 1998 that all appropriate forms had been filed with the tax agencies. In reliance on that representation, Mr. Findley advised the Bank that it had no legal exposure for Respondents' activities.
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       one who is subject to the tax. [CFR 31.3402(f)(2)-1(g)]. FDIC Ex. 74 at 2.

       Since a company cannot legally demand the completion or submission of a Form W-4 from a work eligible individual, it may rely upon the individual's Statement of citizenship or resident as proof the individual is not subject to withholding, or the mere showing of a Passport (current or expired) Id. at 5–6.

       The company has resources to learn that the revenue laws apply only to those who are engaged in revenue taxable activities or privileged entities. Our officers are neither, therefore not subject to the scope of 26 U.S.C. Id. at 2.

   The unequivocal view expressed in these statements is that Respondents did not earn wages subject to the income tax at the Bank, and therefore, the law absolutely prohibited the Bank from sending an Exempt Form W-4 to the IRS. Again, there is no claim that the failure to remit the forms to the IRS was an oversight.

   Moreover, Ms. Hagy did not, in fact, file Respondents' W-4 forms with the IRS until July 1999, when she was ordered to do so by the board. According to her testimony, she was then of the opinion, and remains of the opinion, that it was unnecessary to make the filing because the Respondents had filed a Statement of Citizenship with the IRS Philadelphia office. Ts. Vol. V, p. 125–127.

   My conclusion on this matter is that Mr. Shollenburg and Ms. Hagy, because of their personal views and interests, caused the Bank to violate a statutory obligation to file with the IRS all W-4 forms submitted by employees claiming exemption from tax withholding. It was not an oversight. Mr. Guterman's conclusions on this as on other matters were amply warranted.

Resubmitted W-4's by Respondents

   Following Mr. Guterman's report and recommendations, he was authorized by the Bank to assist in correcting the situation. The Bank began withholding Social Security taxes from Respondents' compensation. Respondents' claims that payment of Social Security taxes was voluntary were completely baseless. All due back taxes were paid by the Bank. The Respondents were required to, and did, submit unaltered W-4 forms.

   Mr. Guterman was of the opinion that the Bank could rely upon the resubmitted unaltered W-4 forms that claimed exemption from income tax withholding, unless the Bank had knowledge, or was told by the employee, that the information in a form was false.

   Mr. Guterman had no personal knowledge that the forms submitted by Respondents were false, and therefore, advised the Bank that those unaltered forms could be relied upon by the Bank to exempt Respondents from the withholding of income tax from their compensation.

   Therefore, commencing with the payroll paid on August 15, 1999, he instructed the Bank that federal and state income taxes should not be withheld from the Respondents' wages, "until such time as the IRS advises the Bank differently, or the bank received information that the form submitted is false." FDIC Ex. 90 at 0411.

   The FDIC, in recognition of Mr. Guterman's conceded expertise in tax matters does not dispute his conclusions here. However, there is a serious question of whether the revised forms, despite their being facially valid, became legally invalid because the Bank may have received information that the forms were false.

   Mr. Guterman recognized that if the Respondents submitted such forms just because they had no intention of paying any kind of taxes, and the Bank knew this, the forms would not be legally valid. He stated, "that would indicate that there was no valid withholding certificate and the bank had knowledge of it and the bank should be withholding on the basis of single and zero immediately." Ts. Vol. III, p. 217.

   As noted, the revised forms were deemed effective for the payroll paid on August 15, 1999.

   On September 15, 1999, Mr. Hagy wrote a letter to the Chairman of the Board of Directors reasserting her claim that she had not received any gross income from taxable sources, and therefore, did not owe any income taxes. Resp. Ex. G.

   The letter further states:

       The Exempt W-4 submitted in July 1999 was intended to replace the Statement of Citizenship that was presented to the Bank. I firmly believe that the Statement of Citizenship presents the correct information to the Bank as to my exempt status regarding income taxes. ***However, since legal tax counsel has advised the Board of Directors to refuse to honor this statement,
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       I have no choice but to present the Bank with an exempt W-4.

   The Statement of Citizenship, which the refiled W-4 is said to have replaced, claimed that the remuneration paid by the Bank to Respondents did not constitute taxable wages, thus rendering inappropriate any withholding of taxes from such remuneration. The considered letter makes explicit that the new W-4 forms rest on precisely the same claim. According to Mr. Guterman's testimony this is not acceptable and renders the forms invalid.

   Thus, the H. Hagy letter, dated September 15, 1999, far from showing that the Respondents were finally prepared to accommodate the interests of the Bank, as their counsel argues, plainly demonstrates their continued efforts to embroil the Bank in the machinations of their tax protest activities by casting into doubt any legal basis for their renewed claims of exemption from income tax withholding, while exposing the Bank to continuing liability for its role in those activities. Ts. Vol. VI, p. 55–56.

   Mr. Guterman's final report to the Bank's board is dated October 15, 1999, but there is no indication that he had seen the discussed September 15th letter, or determined the Bank's responsibility in light of the information it contains. In the circumstances, it seems doubtful if the Bank could lawfully have given continuing effect to the W-4 forms. Respondents were terminated from employment by the Bank shortly thereafter, rendering the issue moot.

Statutory Standards For Prohibition

   In order to prohibit institution-affiliated persons from further participation in the affairs of a federally insured depository institution under 12 U.S.C. §1818(e), as relevant here, the following must be shown:

       a) Misconduct. Violation of any law or regulation, or the commission of, or participation in any unsafe or unsound practice, or a breach of a fiduciary duty.

       b) The misconduct must have the effect of a financial loss, or other damage to the institution, or actual or possible prejudice to the depositors of the institution or the party must have received a financial gain or other benefit as a result of the misconduct; and

       c) The misconduct must involve culpability in the form of personal dishonesty, or willful and continuing disregard for the safety and soundness of the institution.

   All of the statutory factors are shown here; misconduct, effect of the misconduct, and culpability.

Misconduct-Violations of Law

   The activities of Respondents caused the Bank to fail to withhold income taxes from their compensation without a valid basis in violation of section 3402 of the Internal Revenue Code, 26 U.S.C. §3402. As discussed, the forms relied upon to claim exemption from tax withholding submitted by Respondents were altered by them, and were, therefore, invalid. Moreover, the W-4 forms were not submitted to the IRS, as required by law.

   Respondents Shollenburg, H. Hagy, Melton and Knudson caused the Bank to fail to withhold Social Security taxes from their compensation in violation of Section 3102 of the Internal Revenue Code, 26 U.S.C. §3102.

   Respondent H. Hagy, for her benefit, and that of Respondents Shollenburg, Melton and Knudson, violated the law in providing an indemnification agreement to the payroll processor in connection with their demands for it to cease withholding Social Security taxes from their compensation.

   All of the Respondents caused, brought about, and participated in the violations of the income tax laws, and with the exception of R. Hagy, the same can be stated for the non-withholding of Social Security taxes. Section 3(v) of the FDIC Act defines a violation to include "any action (alone or with another or others) for or toward causing, bringing about, participating in, counseling, or aiding or abetting a violation." 12 U.S.C. §1813(v). Plainly, all Respondents committed these violations, although Respondents Shollenburg and H. Hagy were the pivotal actors in the matter.

   As succinctly stated by the FDIC:

       Within three months of each other, they each submitted a similar letter request to initially stop the withholding of income taxes from their compensation. They each submitted the same documents in support of this request. They made similar alterations to the forms submitted. They each obtained these documents from the same book. In some cases, they witnessed the
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       documents on behalf of each other. Within six months of each other, they each changed their position on why they did not feel that they had to pay income taxes. They submitted the same documents in support of this new position. All of the documents were submitted to the same two officers of the Bank, Respondents Hazel Hagy and Shollenburg. These acts suggest a joint course of conduct among all of the Respondents.4

   Brief, pp. 20, 21.

   As discovered by FDIC examiners during their examination of the Bank, Respondents Shollenburg, H. Hagy Melton and R. Hagy had received automobile allowances, bonuses, and year 2000 compensation which was not reported as income, and no Social Security or income taxes were withheld from this compensation. This constituted additional violations of the tax laws by those Respondents.

Misconduct-Breach of Fiduciary Duty

   Respondents' view of their fiduciary duties to the Bank is revealed in their answer to the allegation in the Notice, paragraph 50, that the original Form W-4's by which Respondents claimed exemption from income tax should not have been accepted by the Bank. Their answer was: "Maybe, but that is [the Bank's] problem as is this entire proceeding." Answer, paragraph 50. It hardly needs to be reiterated that the forms were accepted by Respondents Shollenburg and H. Hagy on behalf of the Bank.

   Respondents breached their fiduciary duty to the Bank in a number of ways, including: a failure to assure that the Bank was in compliance with applicable tax laws; by violation of the banking requirement for indemnification agreements; by the failure to obtain or follow professional advice on the course of conduct into which they led the Bank; by their failure to disclose their activities to the Bank's Board of Directors and outside counsel; and by their embroilment of the Bank into tax disputes and violations for their purposes without benefit to the Bank.

   In a meeting with the Bank's board in 1998, Mr. Shollenburg and Ms. Hagy promised the board that they would pay into their bank accounts an amount equivalent to their possible tax liability so that money would be available to pay their taxes if the IRS denied their claimed exemptions. They did not do this, thereby breaching their promise to the board.

   Ms. Hagy received correspondence from the IRS rejecting her claims of non-liability for income taxes, but she did not convey that information to the Bank's board. She testified that "It was none of their business," and "It was between me and the IRS." Ts. Vol. V, p. 164. It is not accepted that a fiduciary may refuse to disclose information vital to her principal's compliance with the law on the grounds asserted by Ms. Hagy.5

Effect-Financial loss of the Bank and gain to Respondents

   The Bank suffered financial loss in the amount of $152,799.85 to satisfy the tax liabilities of Respondents for 1998 and 1999, for which it has not been reimbursed. The Bank was required, when Respondents refused to follow the advice of the Bank's auditors, to hire an expert tax attorney to advise it and to correct the entire situation created by Respondents' conduct. His fees exceeded $40,000. Although the amount is not determinable, it is evident that some of the auditor's billable hours in 1999 were attributable to the tax questions, and thereby created additional losses to the Bank. FDIC Ex. 121, VTD Letter, dated July 7, 1999. ("Time was also spent by our tax department in March and April regarding tax withholding issues.") Clearly, all of this was a loss to the Bank, and all of the Respondents have reaped a financial gain by retaining funds that should have been spent to satisfy their tax obligations.

   Respondents' counsel argues that the payment of their taxes by the Bank was unnecessary in that no demand therefore had yet been made to the Bank by IRS. It is suggested by Respondents' counsel that the payment was coerced by the FDIC examiners. However, the auditors as well as Mr. Guterman, had reached their conclusions and made their recommendations before the FDIC's involvement in the matter. As Respondents' counsel state on Brief, Respondents were 4 Respondents submitted a motion after the hearing to reopen the record to show that other Bank employees did not have taxes withheld from their compensation. That motion was denied by order of June 7, 2002. Respondents' subsequent filings make repeated references to the other employees. The prior ruling on the issue is affirmed for the reasons stated therein.

   5 The described violations of law and breaches of fiduciary duty were also, per se, unsafe and unsound practices.
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   ordered to pay back taxes in July two months before the FDIC got in the act," para. 37. The FDIC was alerted to the considered tax problem when it learned of VTD's resignation as the Bank's auditor. Payment of the income taxes was not made by the Bank until early November 1999.

   It is noted by their counsel that there has been no case cited where the IRS has held an employer liable for non-withholding of taxes based on exemption forms ultimately determined by IRS to be invalid. Mr. Guterman could find no such case.

   However, the violations of tax law by the Bank as a result of Respondents' activities were flagrant, as determined by the auditing firm and Mr. Guterman, though Respondent Shollenburg persistently contended that the advice of these professionals should not be followed.

   The Board declined to act upon all of the auditor's recommendations, over the objections of one board member, Ronald Clark who testified at the hearing. Instead it sought a second opinion. Thereafter, with that opinion in the form of a report from Mr. Guterman in its lap, detailing the violations, and the possible penalties and criminal prosecutions that could follow, it would have been foolhardy for the board to have ignored the situation, and taken no action, as Mr. Shollenburg continued to advocate. See Findings of Fact 370. By acting in accordance with Mr. Guterman's advice severe penalties seem to have been averted. There is a certain dissimulation in Respondents' argument that the Bank should have waited until the IRS came calling before paying up, in view of Respondents unlawful failure to remit the W-4 forms to the IRS that would have provided it with notice of what was going on.

   Respondents argue that if the board had followed VTD's advice, they would not have needed to hire Mr. Guterman. It was, of course, the intransigence of Respondents in refusing to follow the auditor's recommendation that placed the board in the middle of this situation between the auditors and its management, which was, apart from their tax cause, apparently successful and quite acceptable to the board. Mr. Shollenburg, because of the force of his personality, and his manipulation of information presented to the board, was very influential with the board. In deference to management (Respondents) the board sought a second opinion. This is not a mitigating factor for Respondents.

Culpability

   In order for prohibition to result from violations, breaches of fiduciary duty, or unsafe and unsound practices there must be involved personal dishonesty, or a willful or continuing disregard for the safety and soundness of the institution.

   These Respondents committed acts and made statements that were personally dishonest. Their course of dealing with the Bank's board was, as discussed,. marked by a lack of candor. The commencement of their practice of not withholding taxes was not disclosed to the board. Ms. Hagy was not truthful in her representation to outside counsel that all "appropriate" forms had been filed with the taxing authorities. Information pertaining to the position of IRS on their claims was concealed from the board. The statements by Respondents, later retracted, that they were not U.S. citizens were false. Their sworn statements made in 1997 that they had incurred no liability for taxes in 1996 were false. The failure to establish bank accounts to cover their possible tax liability after promising to do so was dishonest. Respondents evinced an awareness of the falsity of their claims by altering the forms so as not to be held to them in a court of law, or not to be "held to perjury."

   As discussed, Respondents' contentions that these non-disclosures, as well as the falsely sworn, and contradictory statements are based on their "private political beliefs," and are therefore somehow justified, are not accepted. Respondents' tax avoidance activities, insofar as they legally implicated the Bank should have been disclosed to the Bank's board and professional advice thereon should have been followed.

   As indicated, the Respondents' conduct was willful in that it was carried out in defiance of professional advice provided to the Bank by numerous professional tax experts. Respondents' conduct occurred over an extended period of time, and was undertaken in complete disregard for the safety and soundness of the Bank, particularly as it involved the Bank's reputation, and its need for trust in its community that could only be undermined by being involved in an anti-tax scheme that could subject it to tax penalties,
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   and possible criminal prosecution. See Findings of Fact 164–170, 190–191, 328–329.

FINDINGS OF FACT

   The Respondents, as well as FDIC Enforcement, submitted Proposed Findings of Fact and Conclusions of Law, although as indicated above Respondents' submission is seriously deficient. It does not contain required citations to record, and relies heavily on argument and conjecture of counsel, which are frequently though not in all instances, unsupported by or contrary to, the evidence of record.

   The FDIC's Proposed Findings of Fact are amply supported by references to the record. They are succinct, accurate, and thorough. Respondent has taken no exception to many of them, and only nominal exception to others. For these reasons my Findings of Fact, with a few minor amendments, are adopted from those proposed by the FDIC Enforcement.

   1. At all times pertinent to this proceeding, First Mountain Bank ("Bank") was a corporation existing and doing business under the laws of the State of California, having its principal place of business at Big Bear Lake, California. Respondents' Answers ("Resps. Ans.") ¶1.

   2. The Bank is and has been, at all times pertinent to this proceeding, an insured State nonmember bank. Resps. Ans. ¶2.

   3. As of July 1997, Dennis Shollenburg ("Shollenburg") was the president and chief executive officer of the Bank and a director of the Bank and continued to serve in those capacities until September 1999. Resps. Ans. ¶4.

   4. As of July 1997, Hazel Hagy ("H. Hagy") was the executive vice president and chief financial officer of the Bank and continued to serve in that capacity until October 1999. Resps. Ans. ¶5.

   5. As of July 1997, Vicky Melton ("Melton") was the senior vice president and senior loan officer of the Bank and continued to serve in that capacity until October 1999. Resps. Ans. ¶6.

   6. As of July 1997, Robert Hagy ("R. Hagy") was vice president and branch manager of the Running Springs branch of the Bank and continued to serve in that capacity until October 1999. Resps. Ans. ¶7.

   7. As of July 1997, Brenda Knudson ("Knudson") was employed by the Bank as a new accounts representative. Respondents' Response to FDIC's Request for Stipulations, Set. No. 3, dated April 10, 1992 ("Resps. Stips.") ¶1.

   8. Knudson continued to serve in the capacity of new accounts representative, until she was promoted to the position of assistant vice president and business development officer of the Bank in May 1999, at the latest. FDIC Exh. 116; Starin, vol. 4, p. 21, lines 4–6 & o, 23, lines 2–5; Hagy, vol. 5, p. 24, lines 15–25.

   9. Knudson continued to serve in the capacity of assistant vice president and business development officer of the Bank until September 1999. Resps. Stips. ¶3.

   10. As the chief financial officer of the Bank, H. Hagy was responsible for the oversight of all personnel payroll matters. Findley, vol. 2, p. 203, lines 3–8.

   11. Shollenburg and H. Hagy together constituted the personnel department of the Bank. Hagy, vol. 5, p. 153, lines 11–13.

   12. In addition to Shollenburg, H. Hagy and Melton attended meetings of the Bank's board of directors. FDIC Exhs. 33–65; Jasperson, vol. 2, p. 245, lines 4–9.

   13. Paychex served as the Bank's payroll data processing service provider from January 1, 1998 through July 31, 1999. Resps. Stips. ¶8; Joint Stips, Section II, ¶5.

   14. From January 1, 1998 through July 31, 1999, the Bank input its payroll data to Paychex via computer modem. Resps. Stips. ¶10; Joint Stips, Section II, ¶6.

   15. At all times pertinent to the charges herein, Respondents were and are citizens of the United States and permanent residents of either Riverside County or San Bernardino County, State of California. Resps. Ans. ¶12; Hagy, vol. 5, p. 146, lines 21–22.

   16. In July 1997, H. Hagy and Shollenburg began to study the United States' income tax and Social Security laws and regulations and they developed certain views thereon. H. Hagy and Shollenburg discussed their views and participated in meetings with R. Hagy, Knudson and Melton, who essentially came to share the same views on these tax matters as H. Hagy and Shollenburg. Resps. Ans. ¶13.

   17. Prior to August 1997, the Bank withheld federal and state income taxes and Social Security and Medicare taxes from Bank employees' compensation and the Bank paid its share of the Social Security taxes attributable
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   to its employees, all in accordance with the guidelines and instructions furnished by its payroll tax servicer and its accountants. Resps. Ans. ¶14.

   18. It was the policy of the Bank's board of directors that employees' salaries have withholding for Social Security (FICA), Medicare, federal and state income taxes, and the Bank had previously withheld these items from bonus checks. FDIC Exh. 32; FDIC Exh. 83; FDIC Exh. 119, p. 1; Jasperson, vol. 2, pp. 254–55.

   19. Beginning on or about August 10, 1997, the Bank received various correspondence and documentation concerning income tax and Social Security and Medicare tax withholding from the Respondents, including the following:

       a. Withholding Exemption Certificate ("Form W-4").

       b. Questionnaire to Determine Exemption from Withholding ("Form 6450").

       c. Certificate of Foreign Status ("Form W-8").

       d. Affidavit of Citizenship and Domicile.

       e. Statement of Citizenship and Residence.

   Resps. Ans. ¶15.

   20. In the correspondence and documentation described in the preceding paragraph, Respondents asserted various reasons as to why the Bank should cease withholding of income taxes and/or Social Security and/or Medicare taxes from each Respondent's individual compensation. FDIC Exh. 90.

   21. On August 12, 1997, Shollenburg sent a letter to H. Hagy in which he requested that the Bank no longer withhold Federal and/or State income taxes from his compensation at the Bank. FDIC Exh. 1.

   22. H. Hagy acknowledged receipt of Shollenburg's request to stop withholding Federal and/or State income taxes from his compensation at the Bank. FDIC Exh. 1.

   23. As part of Shollenburg's request to stop the withholding of Federal and/or State income taxes from his compensation at the Bank, Shollenburg submitted the following documents: Affidavit of Citizenship and Domicile, dated August 11, 1997; Form W-8 Certificate of Foreign Status, dated August 11, 1997; and Form 590 Nonresident Withholding Exemption Certificate, dated August 11, 1997. FDIC Exh. 1.

   24. On the Affidavit of Citizenship and Domicile, dated August 11, 1997, that Shollenburg submitted to the Bank and signed under penalty of perjury, Shollenburg declared, among other things: ". . . I am not a citizen of the United States . . ." and ". . . I am a `Nonresident Alien' . . ." Further, "I am a Citizen of the contiguous California Republic . . ." FDIC Exh. 1, p. 2.

   25. The Affidavit of Citizenship and Domicile, dated August 11, 1997, that Shollenburg submitted to the Bank was witnessed by Knudson. FDIC Exh. 1, p. 2.

   26. On the Form W-8 Certificate of Foreign Status, dated August 11, 1997, that Shollenburg submitted to the Bank, Shollenburg checked boxes signifying his agreement with the following statements:

       "For INTEREST PAYMENTS, I am not a U.S. citizen or resident (or I am filing for a foreign corporation, partnership, estate, or trust)."

       "For DIVIDENDS, I am not a U.S. citizen or resident (or I am filing for a foreign corporation, partnership, estate, or trust)."

       "For BROKER TRANSACTIONS or BARTER EXCHANGES, I am an exempt foreign person as defined in the instructions below."

   FDIC Exh. 1, p. 3.

   27. Shollenburg altered the jurats on the Form W-8 Certificate of Foreign Status, dated August 11, 1997, and the Form 590 Nonresident Withholding Exemption Certificate, dated August 11, 1997, that he submitted to the Bank by adding the phrases "citizen of California republic" and "without prejudice UCC-1-207." FDIC Exh. 1, pp. 3–4.

   28. On August 12, 1997, Shollenburg submitted an In Lieu of Form W-4 Withholding Exemption Certificate to the Bank. FDIC Exh. 2.

   29. On the In Lieu of Form W-4 Withholding Exemption Certificate, dated August 12, 1997, that Shollenburg submitted to the Bank, Shollenburg claimed to be exempt from income tax withholding. FDIC Exh. 2.

   30. On the In Lieu of Form W-4 Withholding Exemption Certificate, dated August 12, 1997, that Shollenburg submitted to the Bank, Shollenburg certified that: "I incurred no liability for income tax imposed under subtitle A of Title 26 of the Internal Revenue Code for the preceding taxable year." FDIC Exh. 2.
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   31. Shollenburg altered the jurat of the In Lieu of Form W-4 Withholding Exemption Certificate, dated August 12, 1997, that he submitted to the Bank by crossing out the word "the" and replacing it with the word "these," and by adding the phrase "without prejudice UCC-1-207." FDIC Exh. 2.

   32. On August 12, 1997, Shollenburg submitted a Form 6450 Questionnaire to Determine Exemption from Withholding to the Bank. FDIC Exh. 3.

   33. On the Form 6450 Questionnaire to Determine Exemption from Withholding, dated August 12, 1997, that Shollenburg submitted to the Bank, Shollenburg checked a box signifying his agreement with the following statement: "Last year, I had a right to a refund of ALL income tax withheld because I did not have any Federal income tax liability." FDIC Exh. 3.

   34. Shollenburg altered the jurat on the Form 6450 Questionnaire to Determine Exemption from Withholding, dated August 12, 1997, that he submitted to the Bank by adding the phrase "without prejudice UCC-1-207." FDIC Exh. 3.

   35. As a consequence of the documentation provided by Shollenburg to the Bank, the Bank stopped the withholding of Federal and State income taxes from Shollenburg's compensation at the Bank as of August 30, 1997. Resps. Stips. ¶12; FDIC Exh. 114.

   36. The Bank continued to stop the withholding of Federal and State income taxes from Shollenburg's compensation at the Bank through July 31, 1999. Resps. Stips. ¶12; Joint Stips, Section II, ¶7; FDIC Exh. 90, p. 2.

   37. On September 1, 1998, Shollenburg submitted a letter to H. Hagy in which he provided notice to the Bank that he was a citizen and resident of the United States, and that he was not a non-resident alien. FDIC Exh. 7, p. 2.

   38. On September 1, 1998, Shollenburg submitted a Statement of Citizenship and Residence to the Bank, in which he declared that he was a citizen and resident of the United States, and that the remuneration paid to him by the Bank could not be legally withheld because it did not constitute "wages" under section 3401(a) and did not constitute "gross income" under section 911. FDIC Exh. 7, pp. 4–6.

   39. H. Hagy forwarded Shollenburg's Statement of Citizenship and Residence, dated September 1, 1998, to the Internal Revenue Service's Philadelphia, Pennsylvania office on September 29, 1998. FDIC Exh. 7.

   40. Shollenburg submitted a tax return to the Internal Revenue Service for the tax year 1996 in which he declared that he had incurred tax liability. Guterman, vol. 3, p. 270, lines 1–18.

   41. On December 22, 1997, Shollenburg submitted a letter to H. Hagy in which he requested that the Bank discontinue the withholding of Social Security tax from his compensation by stating: "I request that my employer, First Mountain Bank, discontinue the withholding of Social Security Tax from my compensation immediately as I no longer wish to participate in the voluntary program due to being fully vested at maximum earnings." FDIC Exh. 4.

   42. In his December 22, 1997 letter to H. Hagy at the Bank, Shollenburg also stated: "An Additional positive note is that you, as my employer, will no longer be responsible for paying matching contributions on my behalf." FDIC Exh. 4.

   43. On December 22, 1997, Shollenburg submitted to H. Hagy a copy of a letter dated December 22, 1997 to the Social Security Administration, in which he requested the Social Security Administration to send him appropriate forms to obtain a refund of payments made subsequent to the date that he became fully vested. FDIC Exhs. 4 & 5.

   44. Paychex did not stop the withholding of Social Security and Medicare taxes from Shollenburg's compensation until after November 13, 1998, when it received letters from H. Hagy, holding Paychex harmless for complying with the request. FDIC Exh. 90, p. 3.

   45. After receiving the hold harmless letters from H. Hagy, Paychex prepared amended payroll tax returns for the first three taxable quarters of 1998, which reported no Social Security and Medicare wages and taxes pertaining to Shollenburg's compensation for calendar year 1998. It is unclear whether the amended payroll tax returns were filed. FDIC Exh. 90, pp. 3–4.

   46. As a consequence of the documentation provided by Shollenburg to the Bank, the Bank stopped withholding Social Security and Medicare taxes from Shollenburg's salary as of January 1998. Resps. Stips. ¶17; Joint Stips., Section II, ¶12.

   47. On December 2, 1998, Shollenburg submitted a letter to H. Hagy in which he
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   declared that the documentation submitted to him by the Bank to stop all withholding from Federal, State, Social Security and Medicare taxes eliminated the issuance of a W-2 wage statement to the IRS at year end 1998. FDIC Exh. 8.

   48. In the December 2, 1998 letter Shollenburg sent to H. Hagy, Shollenburg stated: "I do not take this matter lightly and I request that First Mountain Bank take the proper steps to inform the Payroll Department and Paychex to implement my request without further delay." FDIC Exh. 8.

   49. In January 1999, through Paychex, the Bank issued a Wage Statement (Form W-2) for 1998 for Shollenburg reporting no federal or state income tax withholdings, Social Security or Medicare wages, or Social Security or Medicare tax withholdings. FDIC Exh. 90, p. 4; FDIC Exh. 106.

   50. The Bank continued to refrain from withholding Social Security and Medicare taxes from Shollenburg's compensation and the paying of its matching share of Social Security and Medicare taxes attributable to Shollenburg through July 31, 1999. Resps. Stips. ¶18; Joint Stips., Section II, ¶13; FDIC Exh. 90, p. 2.

   51. On August 10, 1997, H. Hagy submitted a letter to Shollenburg in which she requested that the Bank no longer withhold Federal and/or State income taxes from her compensation at the Bank. FDIC Exh. 10.

   52. On August 12, 1997, Shollenburg acknowledged receipt of H. Hagy's request to stop withholding Federal and/or State income taxes from her compensation at the Bank. FDIC Exh. 10.

   53. As part of H. Hagy's request to stop the withholding of Federal and/or State income taxes from her compensation at the Bank, H. Hagy submitted the following documents: Affidavit of Citizenship and Domicile, dated August 10, 1997; In Lieu of Form W-4 Withholding Exemption Certificate, dated August 10, 1997; Form 6450 Questionnaire to Determine Exemption from Withholding, dated August 10, 1997; Form W-8 Certificate of Foreign Status, dated August 10, 1997; and Form 590 Nonresident Withholding Exemption Certificate, dated August 10, 1997. FDIC Exh. 10.

   54. On the Affidavit of Citizenship and Domicile, dated August 10, 1997, that H. Hagy submitted to the Bank and signed under penalty of perjury, H. Hagy declared, among other things: ". . . I am not a citizen of the United States . . ." and ". . . I am a `Nonresident Alien' . . ." Further, "I am a Citizen of the contiguous California Republic . . ." FDIC Exh. 10, p. 2.

   55. The Affidavit of Citizenship and Domicile, dated August 10, 1997, that H. Hagy submitted to the Bank was witnessed by R. Hagy and Shollenburg. FDIC Exh. 10, p. 2.

   56. On the In Lieu of Form W-4 Withholding Exemption Certificate, dated August 10, 1997, that H. Hagy submitted to the Bank, H. Hagy claimed to be exempt from income tax withholding. FDIC Exh. 10, p. 3.

   57. On the In Lieu of Form W-4 Withholding Exemption Certificate, dated August 10, 1997, that H. Hagy submitted to the Bank, H. Hagy certified that: "I incurred no liability for income tax imposed under subtitle A of Title 26 of the Internal Revenue Code for the preceding taxable year." FDIC Exh. 10, p. 3.

   58. On the Form 6450 Questionnaire to Determine Exemption from Withholding, dated August 10, 1997, that H. Hagy submitted to the Bank, H. Hagy checked a box signifying her agreement with the following statement: "Last year, I had a right to a refund of ALL income tax withheld because I did not have any Federal income tax liability." FDIC Exh. 10, p. 4.

   59. H. Hagy altered the jurats on the In Lieu of Form W-4 Withholding Exemption Certificate, dated August 10, 1997, and the Form 6450 Questionnaire to Determine Exemption from Withholding, dated August 10, 1997, that she submitted to the Bank by crossing out under penalty(ies) of perjury and adding the phrase "without prejudice UCC-1-207." FDIC Exh. 10, pp. 3–5.

   60. H. Hagy altered the jurat on the Form 590 Nonresident Withholding Exemption Certificate, dated August 10, 1997, that she submitted to the Bank by adding the phrase "without prejudice UCC-1-207." FDIC Exh. 10, p. 7.

   61. As a consequence of the documentation provided by H. Hagy to the Bank, the Bank stopped the withholding of Federal and State income taxes from H. Hagy's compensation at the Bank as of August 15, 1997. Resps. Stips ¶11; FDIC Exh. 114.

   62. The Bank continued to stop the withholding of Federal and State income taxes
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   from H. Hagy's compensation through July 31, 1999. FDIC Exh. 90, p. 2.

   63. On August 20, 1997 and September 9, 1997, H. Hagy provided the same set of documents to Shollenburg authorizing the Bank to no longer withhold Federal and/or State income taxes that she had provided on August 10, 1997. FDIC Exhs. 11 & 12.

   64. On November 17, 1998, H. Hagy submitted a letter to Shollenburg at the Bank in which she provided notice to the Bank that she was a citizen and resident of the United States, and that she was not a non-resident alien. FDIC Exh. 14, pp. 2–3.

   65. On November 17, 1998, H. Hagy submitted a Statement of Citizenship and Residence to the Bank, in which she declared that she was a citizen and resident of the United States, and that the remuneration paid to her by the Bank could not be legally withheld because it did not constitute "wages" under section 3401(a) and did not constitute "gross income" under section 911. FDIC Exh. 14, pp. 4–8.

   66. Shollenburg forwarded H. Hagy's Statement of Citizenship and Residence, dated November 17, 1998, to the Internal Revenue Service's Philadelphia, Pennsylvania office on December 1, 1998. FDIC Exh. 14.

   67. H. Hagy submitted a tax return to the Internal Revenue Service for the tax year 1996 in which she declared that she had incurred tax liability. FDIC Exh. 124; Guterman, vol. 3, p. 270, lines 1–18; Hagy, vol. 5, pp. 140–43.

   68. On December 30, 1997, H. Hagy submitted a letter to Shollenburg in which she requested that the Bank discontinue the withholding of Social Security tax from her compensation, by stating: "I therefore request that my employer, First Mountain Bank, discontinue the withholding of Social Security Tax from my compensation immediately as I no longer wish to participate in the voluntary program due to being fully vested." FDIC Exh. 13.

   69. In her December 30, 1997 letter to Shollenburg at the Bank, H. Hagy stated: "An additional positive note is that you, as my employer, will no longer be responsible for paying matching contributions on my behalf." FDIC Exh. 13; See also H. Hagy, vol. 5, pp. 55–56.

   70. Paychex did not stop the withholding of Social Security and Medicare taxes from H. Hagy's compensation until after November 13, 1998, when it received letters from H. Hagy on behalf of the Bank, holding Paychex harmless for complying with the request. FDIC Exh. 90, p. 3.

   71. After receiving the hold harmless letters from H. Hagy, Paychex prepared amended payroll tax returns for the first three taxable quarters of 1998, which reported no Social Security and Medicare wages and taxes pertaining to H. Hagy's compensation for calendar year 1998. It is unclear whether the amended tax returns were filed. FDIC Exh. 90, pp. 3–4.

   72. As a consequence of the documentation provided by H. Hagy to the Bank, the Bank stopped withholding Social Security and Medicare taxes from H. Hagy's salary as of January 1998. Resps. Stips. ¶17; Joint Stips., Section II, ¶12.

   73. In January 1999, through Paychex, the Bank issued a Wage Statement (Form W-2) for 1998 for H. Hagy reporting no federal or state income tax withholdings, Social Security or Medicare wages, or Social Security or Medicare tax withholdings. FDIC Exh. 90, p. 4; FDIC Exh. 106, p. 3.

   74. The Bank continued to refrain from withholding Social Security and Medicare taxes from H. Hagy's salary and the paying of its matching share of Social Security and Medicare taxes attributable to H. Hagy through July 31, 1999. Resps. Stips. ¶18; Joint Stips., Section II, ¶13; FDIC Exh. 90, p. 2.

   75. On October 1, 1997, Melton submitted a letter to H. Hagy in which she requested that the Bank no longer withhold Federal and/or State income taxes from her compensation at the Bank. FDIC Exh. 16.

   76. As part of Melton's request to stop the withholding of Federal and/or State income taxes from her compensation at the Bank, Melton submitted the following documents: Affidavit of Citizenship and Domicile, dated October 1, 1997; In Lieu of Form W-4 Withholding Exemption Certificate, dated October 1, 1997; Form 6450 Questionnaire to Determine Exemption from Withholding, dated October 1, 1997; Form W-8 Certificate of Foreign Status, dated October 1, 1997; and Form 590 Nonresident Withholding Exemption Certificate, dated October 1, 1997. FDIC Exh. 16.

   77. On the Affidavit of Citizenship and Domicile, dated October 1, 1997, that Melton
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   submitted to the Bank and signed under penalty of perjury, Melton declared, among other things: ". . . I am not a citizen of the United States . . ." and ". . . I am a `Nonresident Alien' . . ." Further, "I am a Citizen of the contiguous California Republic . . ." FDIC Exh. 16, pp. 7–8.

   78. The Affidavit of Citizenship and Domicile, dated October 1, 1997, that Melton submitted to the Bank was witnessed by H. Hagy. FDIC Exh. 16, p. 8.

   79. On the In Lieu of Form W-4 Withholding Exemption Certificate, dated October 1, 1997, that Melton submitted to the Bank, Melton claimed to be exempt from income tax withholding. FDIC Exh. 16, p. 6.

   80. On the In Lieu of Form W-4 Withholding Exemption Certificate, dated October 1, 1997, that Melton submitted to the Bank, Melton certified that: "I incurred no liability for income tax imposed under subtitle A of Title 26 of the Internal Revenue Code for the preceding taxable year." FDIC Exh. 16, p. 6.

   81. On the Form 6450 Questionnaire to Determine Exemption from Withholding, dated October 1, 1997, that Melton submitted to the Bank, Melton checked a box signifying her agreement with the following statement: "Last year, I had a right to a refund of ALL income tax withheld because I did not have any Federal income tax liability." FDIC Exh. 16, p. 4.

   82. On the Form W-8 Certificate of Foreign Status, dated October 1, 1997, that Melton submitted to the Bank, Melton checked boxes signifying her agreement with the following statements:

       "For INTEREST PAYMENTS, I am not a U.S. citizen or resident (or I am filing for a foreign corporation, partnership, estate, or trust)."

       "For DIVIDENDS, I am not a U.S. citizen or resident (or I am filing for a foreign corporation, partnership, estate, or trust)."

       "For BROKER TRANSACTIONS or BARTER EXCHANGES, I am an exempt foreign person as defined in the instructions below."

   FDIC Exh. 16, p. 2.

   83. Melton altered the jurat on the In Lieu of Form W-4 Withholding Exemption Certificate, dated October 1, 1997, that she submitted to the Bank by crossing out the word "the" and replacing it with the word "these" and adding the phrase "without prejudice UCC-1-207." FDIC Exh. 16, p. 6.

   84. Melton altered the jurat on the Form 6450 Questionnaire to Determine Exemption from Withholding, dated October 1, 1997, that she submitted to the Bank by adding the phrase "without prejudice UCC-1-207." FDIC Exh. 16, p. 5.

   85. Melton altered the jurat on the Form 590 Nonresident Withholding Exemption Certificate, dated October 1, 1997, that she submitted to the Bank by crossing out the phrase "resident of California" and adding the phrase "Citizen of California Republic", and adding the phrase "without prejudice UCC-1-207." FDIC Exh. 16, p. 3.

   86. Melton altered the jurat on the Form W-8 Certificate of Foreign Status, dated October 1, 1997, that she submitted to the Bank by adding the phrases "I am a Citizen of California Republic" and "without prejudice UCC-1-207." FDIC Exh. 16, p. 2.

   87. As a consequence of the documentation provided by Melton to the Bank, the Bank stopped the withholding of Federal and State income taxes from Melton's compensation at the Bank as of October 15, 1997. Resps. Stips. ¶¶ 12, 13; FDIC Exh. 114.

   88. The Bank continued to stop the withholding of Federal and State income taxes from Melton's compensation through July 31, 1999. Resps. Stips. ¶¶12, 13; Joint Stips., Section II, ¶8; FDIC Exh. 90, p. 2.

   89. On January 31, 1998, Melton submitted another Form W-8 Certificate of Foreign Status to the Bank in which she claimed that she was not a U.S. citizen or resident, and on which she altered the jurat to add the phrase "without prejudice, UCC-1-207." FDIC Exh. 17.

   90. On March 24, 1999, Melton submitted a letter to Shollenburg at the Bank in which she provided notice to the Bank that she was a citizen and resident of the United States, and that she was not a non-resident alien. FDIC Exh. 20, pp. 2–3.

   91. On March 24, 1999, Melton submitted a Statement of Citizenship and Residence to the Bank, in which she declared that she was a citizen and resident of the United States, and that the remuneration paid to her by the Bank could not be legally withheld because it did not constitute "wages" under section
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   3401(a) and did not constitute "gross income" under section 911. FDIC Exh. 20, pp. 4–8.

   92. H. Hagy forwarded Melton's Statement of Citizenship and Residence, dated March 24, 1999, to the Internal Revenue Service's Philadelphia, Pennsylvania office on March 25, 1999. FDIC Exh. 20.

   93. Melton submitted a tax return to the Internal Revenue Service for the tax year 1996 in which she declared that she had incurred tax liability. Guterman, vol. 3, p. 270, lines 1–18.

   94. On February 1, 1998, Melton submitted a letter to the Bank in which she requested that the Bank discontinue the withholding of Social Security tax from her compensation, by stating: "I therefore request that my employer, First Mountain Bank, discontinue the withholding of Social Security Tax from my compensation immediately as I no longer wish to participate in the voluntary program due to being fully vested." FDIC Exh. 18.

   95. In her February 1, 1998 letter to the Bank, Melton stated: "An additional positive note is that you, as my employer, will no longer be responsible for paying matching contributions on my behalf." FDIC Exh. 18.

   96. Melton's letter to the Bank, dated February 1, 1998, requesting the discontinuance of withholding of Social Security tax from her compensation was witnessed by H. Hagy and Shollenburg on February 3, 1998. FDIC Exh. 18.

   97. On December 1, 1998, Melton submitted a letter to H. Hagy in which she indicated that she had provided the Bank with the proper documentation, including a Statement of U.S. Citizenship, to stop withholding of Federal, State, Social Security and Medicare taxes, thereby eliminating the issuance of a W-2 wage statement to the IRS for year end 1998. FDIC Exh. 19.

   98. Paychex did not stop the withholding of Social Security and Medicare taxes from Melton's compensation until after November 13, 1998, when it received letters from H. Hagy, on behalf of the Bank, holding Paychex harmless for complying with the request. FDIC Exh. 90, p. 3.

   99. After receiving the hold harmless letters from H. Hagy, Paychex prepared amended payroll tax returns for the first three taxable quarters of 1998, which reported no Social Security and Medicare wages and taxes pertaining to Melton's compensation for calendar year 1998. It is unclear whether the amended payroll tax returns were filed. FDIC Exh. 90, pp. 3–4.

   100. As a consequence of the documentation provided by Melton to the Bank, the Bank stopped withholding Social Security and Medicare taxes from Melton's salary as of January 1998. Resps. Stips. ¶17; Joint Stips., Section II, ¶12.

   101. In January 1999, through Paychex, the Bank issued a Wage Statement (Form W-2) for 1998 for Melton reporting no federal or state income tax withholdings, Social Security or Medicare wages, or Social Security or Medicare tax withholdings. FDIC Exh. 90, p. 4; FDIC Exh. 106, p. 4.

   102. The Bank continued to refrain from withholding Social Security and Medicare taxes from Melton's salary and the paying of its matching share of Social Security and Medicare taxes attributable to Melton through July 31, 1999. Resps. Stips. ¶18; Joint Stips., Section II, ¶13; FDIC Exh. 90, p. 2.

   103. On August 20, 1997, R. Hagy submitted a letter to Shollenburg in which he requested that the Bank no longer withhold Federal and/or State income taxes from his compensation at the Bank. FDIC Exh. 22.

   104. Shollenburg acknowledged receipt of R. Hagy's request to stop withholding Federal and/or State income taxes from his compensation at the Bank. FDIC Exh. 22.

   105. As part of R. Hagy's request to stop the withholding of Federal and/or State income taxes from his compensation at the Bank, R. Hagy submitted the following documents: Affidavit of Citizenship and Domicile, dated August 10, 1997; In Lieu of Form W-4 Withholding Exemption Certificate, dated August 12, 1997; Form 6450 Questionnaire to Determine Exemption from Withholding, dated August 12, 1997; Form W-8 Certificate of Foreign Status, dated August 12, 1997; and Form 590 Nonresident Withholding Exemption Certificate. FDIC Exh. 22.

   106. On the Affidavit of Citizenship and Domicile, dated August 10, 1997, that R. Hagy submitted to the Bank, R. Hagy declared, among other things: ". . . I am not a citizen of the United States . . ." and ". . . I am a `Nonresident Alien' . . ." Further, "I am a Citizen of the contiguous California Republic . . ." FDIC Exh. 22, p. 2.
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   107. The Affidavit of Citizenship and Domicile, dated August 10, 1997, that R. Hagy submitted to the Bank was witnessed by H. Hagy and Melton. FDIC Exh. 22, p. 2.

   108. On the In Lieu of Form W-4 Withholding Exemption Certificate, dated August 12, 1997, that R. Hagy submitted to the Bank, R. Hagy claimed to be exempt from income tax withholding. FDIC Exh. 22, p. 3.

   109. On the In Lieu of Form W-4 Withholding Exemption Certificate, dated August 12, 1997, that R. Hagy submitted to the Bank, R. Hagy certified that: "I incurred no liability for income tax imposed under subtitle A of Title 26 of the Internal Revenue Code for the preceding taxable year." FDIC Exh. 22, p. 3.

   110. On the Form 6450 Questionnaire to Determine Exemption from Withholding, dated August 12, 1997, that R. Hagy submitted to the Bank, R. Hagy checked a box signifying his agreement with the following statement: "Last year, I had a right to a refund of ALL income tax withheld because I did not have any Federal income tax liability." FDIC Exh. 22, p. 4.

   111. R. Hagy altered the jurats on the In Lieu of Form W-4 Withholding Exemption Certificate, dated August 12, 1997, and the Form 6450 Questionnaire to Determine Exemption from Withholding, dated August 12, 1997, that he submitted to the Bank by crossing out "under penalty(ies) of perjury" and adding the phrase "without prejudice UCC-1-207." FDIC Exh. 22, pp. 3, 5.

   112. R. Hagy altered the jurat on the Form W-8 Certificate of Foreign Status, dated August 12, 1997, that he submitted to the Bank by adding the phrase "without prejudice UCC-1-207." FDIC Exh. 22, p. 6.

   113. As a consequence of the documentation provided by R. Hagy to the Bank, the Bank stopped the withholding of Federal and State income taxes from R. Hagy's compensation at the Bank as of August 15, 1997. Resps. Stips. ¶11; FDIC Exh. 114.

   114. The Bank continued to stop the withholding of Federal and State income taxes from R. Hagy's compensation through July 31, 1999. FDIC Exh. 90, p. 2.

   115. On September 9, 1997, R. Hagy provided the same set of documents to Shollenburg authorizing the Bank to no longer withhold Federal and/or State income taxes that he had provided on August 20, 1997. FDIC Exh. 23.

   116. On February 18, 1999, R. Hagy submitted a letter to Shollenburg at the Bank in which he provided notice to the Bank that he was a citizen and resident of the United States, and that he was not a non-resident alien. FDIC Exh. 24, pp. 2–3.

   117. On February 18, 1999, R. Hagy submitted a Statement of Citizenship and Residence to the Bank, in which he declared that he was a citizen and resident of the United States, and that the remuneration paid to him by the Bank could not be legally withheld because it did not constitute "wages" under section 3401(a) and did not constitute "gross income" under section 911. FDIC Exh. 24, pp. 4–8.

   118. Shollenburg forwarded R. Hagy's Statement of Citizenship and Residence, dated February 18, 1999, to the Internal Revenue Service's Philadelphia, Pennsylvania office on March 12, 1999. FDIC Exh. 24.

   119. R. Hagy submitted a tax return to the Internal Revenue Service for the tax year 1996 in which she declared that he had incurred tax liability. FDIC Exh. 124; Guterman, vol. 3, p. 270, lines 1–18.

   120. R. Hagy chose not to stop the withholding of Social Security and Medicare taxes because he was older and felt that at some point he wanted to avail himself of Social Security benefits. H. Hagy, vol. 5, p. 172, lines 12–21.

   121. On November 17, 1997, Knudson submitted a letter to Shollenburg in which she requested that the Bank no longer withhold Federal and/or State income taxes from her compensation at the Bank. FDIC Exh. 26.

   122. On November 24, 1997, Shollenburg acknowledged receipt of Knudson's request to stop withholding Federal and/or State income taxes from her compensation at the Bank. FDIC Exh. 26.

   123. As part of Knudson's request to stop the withholding of Federal and/or State income taxes from her compensation at the Bank, Knudson submitted the following documents: Affidavit of Citizenship and Domicile, dated November 17, 1997; Form W-4 Employee's Withholding Allowance Certificate, dated November 17, 1997; Form 6450 Questionnaire to Determine Exemption from Withholding, dated November 17, 1997;
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   Form W-8 Certificate of Foreign Status, dated November 17, 1997; and Form 590 Nonresident Withholding Exemption Certificate, dated November 17, 1997. FDIC Exh. 26.

   124. On the Affidavit of Citizenship and Domicile, dated November 17, 1997, that Knudson submitted to the Bank, Knudson declared, among other things: ". . . I am not a citizen of the United States . . ." and "I am a `Nonresident Alien' . . ." Further, "I am a Citizen of the contiguous California Republic . . ." FDIC Exh. 26, p. 2.

   125. The Affidavit of Citizenship and Domicile, dated November 17, 1997, that Knudson submitted to the Bank was witnessed by H. Hagy and Melton. FDIC Exh. 26, p. 2.

   126. On the Form W-4 Employee's Withholding Allowance Certificate, dated November 17, 1997, that Knudson submitted to the Bank, Knudson claimed to be exempt from income tax withholding. FDIC Exh. 26, p. 3.

   127. On the Form W-4 Employee's Withholding Allowance Certificate, dated November 17, 1997, that Knudson submitted to the Bank, Knudson certified that she had a right to a refund of all income tax withheld the preceding year because she did not have any Federal income tax liability. FDIC Exh. 26, p. 3.

   128. On the Form W-4 Employee's Withholding Allowance Certificate, dated November 17, 1997, that Knudson submitted to the Bank, Knudson certified that she expected to have a right to a refund of all income tax withheld during the current year because she did not expect to have any Federal income tax liability. FDIC Exh. 26, p. 3.

   129. On the Form 6450 Questionnaire to Determine Exemption from Withholding, dated November 17, 1997, that Knudson submitted to the Bank, Knudson checked a box signifying her agreement with the following statement: "Last year, I had a right to a refund of ALL income tax withheld because I did not have any Federal income tax liability." FDIC Exh. 26, p. 4.

   130. On the Form W-8 Certificate of Foreign Status, dated November 17, 1997, that Knudson submitted to the Bank, Knudson checked a box signifying her agreement with the following statement: "For INTEREST PAYMENTS, I am not a U.S.citizen or resident (or I am filing for a foreign corporation, partnership, estate, or trust)." FDIC Exh. 26, p. 6.

   131. Knudson altered the jurats on the Form W-4 Withholding Exemption Certificate, dated November 17, 1997, the Form 6450 Questionnaire to Determine Exemption from Withholding, dated November 17, 1997, and the Form W-8 Certificate of Foreign Status, dated November 17, 1997, that she submitted to the Bank by adding the phrase "without prejudice UCC-1-207." FDIC Exh. 26, pp. 3–6.

   132. Knudson altered the jurat on the Form 590 Nonresident Withholding Exemption Certificate, dated November 17, 1997, that she submitted to the Bank by changing "penalties" to "penalty," changing "resident of California" to "citizen of California republic," and adding the phrase "without prejudice UCC-1-207." FDIC Exh. 26, p. 7.

   133. As a consequence of the documentation provided by Knudson to the Bank, the Bank stopped the withholding of Federal and State income taxes from Knudson's compensation at the Bank as of November 30, 1997. Resps. Stips. ¶¶12, 14; FDIC Exh. 114.

   134. The Bank continued to stop the withholding of Federal and State income taxes from Knudson's compensation through July 31, 1999. Resps. Stips. ¶¶12, 14; Joint Stips., Section II, ¶9; FDIC Exh. 90, p. 2.

   135. On January 8, 1998, Knudson submitted another Form W-8 Certificate of Foreign Status to the Bank on which she altered the jurat to add the phrase "without prejudice UCC-1-207." FDIC Exh. 27.

   136. On January 15, 1998, Knudson submitted another Form W-4 Employee's Withholding Allowance Certificate to the Bank in which she claimed to be exempt from income tax withholding, and on which she altered the jurat to add the phrase "without prejudice UCC-1-207." FDIC Exh. 28.

   137. On November 1, 1998, Knudson submitted a letter to H. Hagy at the Bank in which she provided notice to the Bank that she was a citizen and resident of the United States, and that she was not a non-resident alien. FDIC Exh. 30, pp. 2–3.

   138. On November 1, 1998, Knudson submitted a Statement of Citizenship and Residence to the Bank, in which she declared that she was a citizen and resident of the United States, and that the remuneration paid to her by the Bank could not be legally withheld because it did not constitute "wages" under section 3401(a) and did not constitute "gross income" under section 911. FDIC Exh. 30, pp. 4–8.

   139. H. Hagy forwarded Knudson's Statement
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   of Citizenship and Residence, dated November 1, 1998, to the Internal Revenue Service's Philadelphia, Pennsylvania office on December 2, 1998. FDIC Exh. 30.

   140. Knudson submitted a tax return to the Internal Revenue Service for the tax year 1996 in which she declared that she had incurred tax liability. Guterman, vol. 3, p. 270, lines 1–8.

   141. On May 26, 1998, Knudson submitted a letter to Shollenburg in which she requested that the Bank discontinue the withholding of Social Security tax from her compensation, by stating: "Please continue with no withholding of Federal and/or State income taxes from my compensation for labor. Also do not withhold Social Security from my compensation." FDIC Exh. 29.

   142. Paychex did not stop the withholding of Social Security and Medicare taxes from Knudson's compensation until after November 13, 1998, when it received letters from H. Hagy, on behalf of the Bank, holding Paychex harmless for complying with the request. FDIC Exh. 90, p. 3.

   143. As a consequence of the documentation provided by Knudson to the Bank, the Bank stopped withholding Social Security and Medicare taxes from Knudson's salary in 1998. Resps. Stips. ¶19; Joint Stips., Section II, ¶14.

   144. In January 1999, through Paychex, the Bank issued a Wage Statement (Form W-2) for 1998 for Knudson reporting no federal or state income tax withholdings, partial Social Security or Medicare wages, and partial Social Security or Medicare tax withholdings. FDIC Exh. 106.

   145. The Bank refrained from withholding Social Security and Medicare taxes from Knudson's salary and the paying of its matching share of Social Security and Medicare taxes attributable to Knudson through July 31, 1999. Resps. Stips. ¶20; Joint Stips., Section II, ¶15; FDIC Exh. 90, p. 2.

   146. No Forms W-4 submitted by Shollenburg, H. Hagy, Melton, R. Hagy and Knudson were filed by H. Hagy or Shollenburg with the IRS until July 14, 1999. FDIC Exh. 93, pp. 1–2.

   147. The IRS office in Philadelphia, Pennsylvania is responsible for processing filings of tax returns by foreign taxpayers and United States citizens residing abroad. Guterman, vol. 3, p. 126, lines 15–23.

   148. None of the filings by the Respondents with the Philadelphia, Pennsylvania office of the IRS contained Forms W-4, Guterman, vol. 3, p. 127, lines 4–8.

   149. The IRS found the March 1999 documents filed by Melton and R. Hagy to be invalid Forms W-4. FDIC Exhs. 122 & 123; Guterman, vol. 3, pp. 260–64.

   150. The issue of withholding Social Security taxes did not come to the attention of Paychex until the fourth quarter of 1998. FDIC Exh. 90, p. 3.

   151. In November 1998, on behalf of the Bank, H. Hagy wrote letters to Paychex, the Bank's payroll processor, in which she directed Paychex to block Social Security and Medicare withholding from the compensation of Shollenburg, H. Hagy and Melton. Resps. Stips. ¶15; Joint Stips., Section II, ¶10; FDIC Exh. 90, p. 3.

   152. Linda Hoisington of Paychex believed that the Bank could not claim that Shollenburg, H. Hagy, Melton and Knudson were exempt from Social Security taxes. FDIC Exh. 90, p. 3.

   153. Linda Hoisington suggested to Kathy McCoy, the Bank's payroll supervisor, and H. Hagy that the Bank verify the correctness of its actions with respect to Social Security withholding with its accountants or a tax attorney. FDIC Exh. 90, p. 3.

   154. None of the Respondents verified the correctness of their actions with the Bank's accountants or a tax attorney. To the contrary, the Bank's accountants rejected the Respondents' position, and the Bank's corporate attorney, who was not a tax attorney, had advised that the Bank must withhold for Social Security and Medicare taxes. In addition, Melton and Knudson relied on the actions of Shollenburg and H. Hagy in this regard. Resps. Stips. ¶¶21–25; Comer, vol. 1, pp. 39–44; Findley, vol. 2, pp. 163–64 & p. 179, lines 17–24; Hagy, vol. 5, p. 113, lines 7–21 & pp. 116–19.

   155. On November 13, 1998, H. Hagy sent a letter to Mike Lujan of Paychex, in which H. Hagy agreed that the Bank would hold Paychex harmless for complying with the request that Paychex cease the withholding of Social Security and Medicare taxes from the compensation of H. Hagy and Melton. Resps. Stips. ¶16; Joint Stips., Section II, ¶11; FDIC Exh. 93, p. 6.

   156. On December 7, 1998, H. Hagy sent
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   a memorandum to Teri of Paychex, in which H. Hagy enclosed a letter agreeing that the Bank would hold Paychex harmless for complying with the request that Paychex cease the withholding of Social Security and Medicare taxes from the compensation of Shollenburg, H. Hagy and Melton. FDIC Exh. 95.

   157. Paychex required the hold harmless letters executed by H. Hagy before it would "code these employees exempt for Social Security." FDIC Exh. 93, p. 3.

   158. In another November 13, 1998 letter from H. Hagy to Mike Lujan of Paychex, H. Hagy requested that Paychex not issue a W-2 to Shollenburg. FDIC Exh. 93, p. 5.

   159. On February 27, 1999, H. Hagy sent a letter to Paychex in which she advised Paychex of Shollenburg's request to remove his Social Security number from all records in the Bank's payroll system. FDIC Exh. 94.

   160. In March 1999, Paychex advised the Bank that filing payroll tax returns without Shollenburg's Social Security number did not make Shollenburg exempt from state or federal tax withholding and could subject the Bank to penalties for filing returns with missing information. FDIC Exh. 90, p. 4.

   161. On March 26, 1999, by letter from the Bank signed by either Shollenburg or H. Hagy, each individual Respondent was asked to provide indemnification to the Bank should the Internal Revenue Service and/or the California Franchise Tax Board claim that the Bank was required to pay taxes on behalf of each individual Respondent. FDIC Exhs. 9. 15, 21, 25 & 31.

   162. Each individual Respondent signified his or her assent to the Bank's request for indemnification by signing and returning the Bank's March 26, 1999 letter. Resps. Ans. ¶72.

   163. The first time the Bank's board of directors heard of the employee income tax withholding issue was in January 1998. Jasperson, vol. 2, p. 247, lines 6–14; Clarke, vol. 3, p. 15, lines 6–10.

   164. Upon learning that employees had caused the Bank to not withhold for income taxes, at least one of the directors Ms. Sharon Jasperson, who testified at the hearing, became concerned for the Bank's reputation and that the Bank would incur additional liabilities. Jasperson, vol. 2, pp. 247–48.

   165. The Bank's reputation in the Big Bear Lake area came under scrutiny and people in the community voiced their concern that the Bank was involved in the tax withholding issues. Clarke, vol. 3, p. 26, lines 5–22.

   166. At least one director, Mr. Ronald E. Clark, testified that he was concerned that the Bank might be taken over by government bank regulators. FDIC Exh. 82; Tr. vol. III, p. 26.

   167. Mr. Clarke was concerned that the Bank's financial solidarity might be questioned which might result in regulatory problems or a lowered bank examination rating. Clarke, vol. 3, pp. 25–26; FDIC Ex. 82.

   168. Bank employees were very concerned that the Respondents' actions would cause the Bank to lose accounts, lose its image in the community and possibly cause the Bank to be closed. Jasperson, vol. 2, pp. 255–56.

   169. Bank director Ron Clarke ("Clarke") was concerned that the income tax situation was "coming out of the Bank." When Clarke expressed his concerns to Shollenburg in February 1998, Shollenburg attempted to hand him the book Vultures in Eagle's Clothing. Shollenburg told Clarke that he had bought $2,000 worth of the books, and told Clarke to read it, that it might change his mind. Clarke, vol. 3, p. 12, lines 3–21.

   170. Clarke declined to accept a copy of Vultures in Eagle's Clothing from Shollenburg because he "did not think it was something that should happen within the bank's area of operation or especially on the bank's premises." Clarke, vol. 3, p. 12, lines 20–21 & p. 13, lines 6–12.

   171. Clarke equated Vultures in Eagle's Clothing to "UFO-type of reports." Clarke, vol. 3, pp. 71–72.

   172. H. Hagy admitted that the In Lieu of W-4 Forms, Forms 6450 Questionnaires, Forms W-8 and Forms 590 which were submitted to the Bank were obtained from Vultures in Eagle's Clothing. FDIC Exh. 118; Hagy, vol. 5, pp. 147–48.

   173. The Affidavit of Citizenship and Domicile submitted by all of the Respondents in which they claimed to be nonresidents of the United States is virtually identical to page 201 of Vultures in Eagle's Clothing. FDIC Exh. 118, p. 201.

   174. Vultures in Eagle's Clothing recommends reserving one's rights under UCC §1-207 any time a document is executed. FDIC Exh. 118, pp. 165–66.

   175. Vultures in Eagle's Clothing advocates the use of "pure trusts" as a tax-avoidance
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   mechanism. FDIC Exh. 118, pp. 220–23.

   176. Lynne Meredith, the author of Vultures in Eagle's Clothing was subsequently indicted for violating tax laws. Respondents' Motion for Clarification and Request for Dismissal, pp. 4–5; Hagy, vol. 5, p. 148, lines 21–25.

   177. H. Hagy knew that Lynne Meredith was under IRS scrutiny prior to her indictment, but still used the document in Vultures in Eagle's Clothing for her submission of tax documents to the Bank. Hagy, vol. 5, p. 182, lines 12–21.

   178. Gary Findley ("Findley") was the Bank's counsel for corporate and regulatory issues, but not for criminal or tax issues. Findley, vol. 2, pp. 163–64.

   179. Legal issues outside of Findley's area of practice were referred to other attorneys. Findley, vol. 2, pp. 163–164.

   180. Findley first learned of the employee income tax withholding issue from Dennis Shollenburg in the early part of February 1998. Findley, vol. 2, p. 170, lines 1–3.

   181. Findley was not informed that the Respondents planned to stop withholding income taxes for 1997. Findley, vol. 2, p. 172, lines 11–13.

   182. H. Hagy told Findley that all the necessary paperwork had been filed with the Internal Revenue Service and the Franchise Tax Board. Findley, vol. 2, p. 176, lines 3–20 & p. 204, lines 6–14.

   183. A meeting of the Bank's board of directors was held on March 28, 1998. FDIC Exh. 41.

   184. There is no record of the issue of income tax withholding being raised at a meeting of the Bank's board of directors prior to March 28, 1998. FDIC Exhs. 33–39.

   185. On March 23, 1998, prior to the March 1998 board meeting, Findley prepared a memorandum to the Bank's board of directors on the subject of pure trusts and employee income tax withholding. FDIC Exh. 85.

   186. Findley's March 23, 1998 memorandum was discussed at the March 28, 1998 board meeting. Findley, vol. 2, p. 174, lines 18–25.

   187. At the time of the March 28, 1998 board meeting, Findley advised the Bank's board of directors that if all the necessary paperwork had been filed by the Bank with the Internal Revenue Service and the Franchise Tax Board, then the Bank had taken the appropriate action. FDIC Exh. 85, p. 2; Findley, vol. 2, p. 175, lines 18–24.

   188. At the time of the March 28, 1998 board meeting, Findley advised the Bank's board of directors that the Bank must withhold for Social Security and Medicare taxes. FDIC Exh. 85, p. 44; Findley, vol. 2, p. 179, lines 17–22.

   189. At the time of the March 28, 1998 board meeting, Findley advised the Bank's board of directors, including Shollenburg, that if an individual employee misused employee income tax withholding then the Internal Revenue Service or the Franchise Tax Board may take action. FDIC Exh. 85, p. 2; Findley, vol. 2, p. 177, lines 5–15.

   190. At the time of the March 28, 1998 board meeting, Findley advised the Bank's board of directors that the Bank would suffer a reputational risk if there was some action taken against an employee of the Bank by the Internal Revenue Service or the Franchise Tax Board. FDIC Exh. 85, p. 2; Findley, vol. 2, pp. 177–78.

   191. When Findley recommended to the Bank's board of directors at the time of the March 28, 1998 board meeting that "individual employees minimize their visibility in the community with regard to this particular [tax] issue," he was concerned with reputational risk to the Bank. FDIC Exh. 85, p. 2; Findley, vol. 2, pp. 177–78.

   192. At the time of the March 28, 1998 board meeting, Shollenburg told Findley that he would indemnify the Bank for any expenses, costs or taxes that were due that were not appropriately paid. FDIC Exh. 85, p. 44; Findley, vol. 2, p. 177, lines 16–20.

   193. At the March 28, 1998 board meeting, the Respondents that were present told the concerned board of directors that they would never do anything that was going to harm the Bank. Jasperson, vol. 2, p. 248, lines 11–18.

   194. Shollenburg stated on numerous occasions that he would never do anything to harm the Bank. Jasperson, vol. 2, p. 257, lines 5–11; Clarke, vol. 3, p. 27, lines 4–12. See, e.g., FDIC Exh. 65, p. 6 ("President Shollenburg responded that he never had and never would intentionally do anything to hurt the Bank.")
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   195. H. Hagy made statements on numerous occasions that she would never do anything to harm the Bank. Jasperson, vol. 2, p. 257, lines 5–11; Clarke, vol. 3, p. 27, lines 4–16.

   196. The Respondents that were present at the March 28, 1998 board meeting also told the Bank's board of directors that they would set up their own accounts and deposit the amount of taxes that would normally have been taken from their salaries into those accounts so that funds would be available to pay the taxes should the Respondents be notified by the Internal Revenue Service or the Franchise Tax Board that they had to pay the taxes. FDIC Exh. 85, p. 44; Findley, vol. 2, pp. 178–79; Jasperson, vol. 2, p. 248, lines 11–24.

   197. The directors believed that the separate accounts to be maintained by the Respondents would protect the Bank from liability. Jasperson, vol. 2, pp. 248–49.

   198. H. Hagy testified that the separate accounts were never set up because the Respondents were never mandated by the Bank's board of directors to do so. H. Hagy, vol. 5, p. 170, lines 8–19.

   199. The Bank's board of directors requested Findley to get a representation that all appropriate documents had been filed with respect to the employee March income tax withholding. FDIC Exh. 41, p. 4; Findley, vol. 2, pp. 180–81.

   200. H. Hagy represented to Findley that all the appropriate documents that were required to be filed with the Internal Revenue Service and the Franchise Tax Board had been submitted. Findley, vol. 2, p. 180, lines 11–23.

   201. On or about July 24, 1998, Findley requested H. Hagy to retain all of the payroll records showing that the necessary forms were filed with the Internal Revenue Service and the Franchise Tax Board so the Bank would have them for future reference. Findley, vol. 2, pp. 83–84.

   202. As of July 24, 1998, Findley thought that the employee income tax withholding issue was taken care of by the filing of all of the necessary documents with the Internal Revenue Service and the Franchise Tax Board. Findley, vol. 2, p. 184, lines 14–20.

   203. After July 24, 1998, the next time the employee income tax withholding issue was discussed with Findley and the Bank's board of directors was at a board meeting on April 26, 1999 when the results of an external audit of the Bank by the accounting firm of Vavrinek, Trine, Day & Company, LLP ("Vavrinek Firm") were reported. Jasperson, vol.2, p. 249, lines 7–14; Findley, vol. 2, pp. 185–86.

   204. There is no record of the income tax withholding issue being discussed at any meetings of the Bank's board of directors between March 28, 1998 and April 26, 1999. FDIC Exhs. 42–55.

   205. The Vavrinek Firm is a public accounting firm that, by size, is in the top 100 accounting firms in the nation. Dayton, vol. 2, p. 28, lines 2–5 & p. 32, lines 9–11.

   206. Karen Comer ("Comer"), a Certified Public Accountant (Comer, vol. 1, p. 32, lines 9–18), was the partner at the Vavrinek Firm who was responsible for the Bank's audit engagement. Comer, vol. 1, p. 37, lines 2–13.

   207. The Vavrinek Firm provided various services to the Bank, including preparation of the year-end audited financial statements. Comer, vol. 1, pp. 36–37.

   208. David Dayton ("Dayton"), a Certified Public Accountant with a Master's of Business Taxation degree (Dayton, vol. 2, pp. 28–29), was the managing partner of the Vavrinek Firm's Orange County office. Dayton, vol. 2, pp. 33–34.

   209. The Vavrinek Firm's Orange County office has a specialty of providing services, including auditing financial statements, preparing tax returns and other regulatory services, to community banks. Dayton, vol. 2, pp. 32–33.

   210. Comer had been involved in audits of the Bank for approximately ten years, with six years as responsible partner. Comer, vol. 1, p. 37, lines 2–8.

   211. The Vavrinek Firm had prepared the Bank's audited year-end financial statements for 1997 and Comer was the partner responsible for the audit. Nothing concerning the failure to withhold taxes had come to her attention in connection with the preparation of the audited year-end financial statements for 1997. Comer, vol. 1, p. 65, lines 9–18.

   212. There is no specific audit test for determining whether an audit client is withholding taxes. There is analysis in connection with expenses, but the audit did not identify anything for 1997. Comer, vol. 1, p. 65, lines 15–25.
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   213. Tax withholding is generally considered a very low risk area for community banks. Comer, vol. 1, p. 66, lines 1–13.

   214. From Comer's experience, the payroll tax area is not something that has ever been a problem in community banks. Comer, vol. 1, p. 66, lines 1–13.

   215. H. Hagy was Comer's contact for the BSA review. Comer, vol. 1, p. 40, lines 6–8.

   216. In the course of the BSA review, H. Hagy raised the subject of income and payroll tax withholding. Comer, vol. 1, p. 40, lines 9–20.

   217. H. Hagy gave Comer a letter from which all identifying information had been removed, which discussed withholding of payroll and income taxes. Comer, vol. 1, pp. 40–41.

   218. Comer later gave H. Hagy her professional opinion on these materials provided by H. Hagy. Comer's opinion was that she did not agree with the position expressed on the withholding of payroll and income taxes. Comer, vol. 1, p. 41, lines 7–24.

   219. H. Hagy admitted that she had received advice from Comer that, in the opinion of the Vavrinek Firm, H. Hagy's position that she could legally stop withholding income taxes was not supportable. Hagy, vol. 5, p. 113, lines 7–11.

   220. At no time in the fall of 1998 did H. Hagy advise Comer that certain employees of the Bank had stopped withholding of taxes from their Bank compensation. Comer, vol. 1, pp. 41–42 & p. 43, lines 17–19.

   221. Comer discussed the materials that H. Hagy had given to her with members of the tax department at the Vavrinek Firm. Comer, vol. 1, p. 42, lines 4–10. They concurred with Comer's opinion that the position expressed in these materials was wrong. Comer, vol. 1, pp. 42–43.

   222. H. Hagy never advised the Bank's board of directors of the Vavrinek Firm's verbal conclusion in December 1998 that the submission of the types of Forms W-4, Citizenship Affidavits and Forms W-8 that were being submitted by the Respondents was not legal. Hagy, vol. 5, pp. 120–21.

   223. At the end of December 1998, Comer went to the Bank to start the interim auditing for the Bank's 1998 year-end audited financial statement. Comer, vol. 1, p. 42, lines 13–20.

   224. H. Hagy was Comer's contact for the interim audit of the Bank's 1998 year-end audited financial statement. Comer, vol. 1, pp. 43–44.

   225. During the interim audit, Comer had a conversation with H. Hagy in which she advised her that to go forward with non-withholding of income taxes could mean the end of her career or some legal action against her and the Bank. Comer, vol. 1, pp. 42–43.

   226. Comer asked to see the Bank's payroll runs and related documents as a part of the audit of the Bank's 1998 year-end audited financial statement. Comer, vol. 1, pp. 47–48.

   227. Comer used the Bank's payroll run and related documents to do a more extensive payroll audit than she would normally do with a bank. Comer, vol. 1, p. 47, lines 11–16.

   228. In the course of the payroll audit, Comer was surprised to discover that certain employees at the Bank were not having payroll and income taxes withheld from their Bank compensation. Comer, vol. 1, pp. 48–49.

   229. Comer confirmed with H. Hagy that certain Bank employees were not having taxes withheld from their Bank compensation, including Shollenburg, H. Hagy, Melton, R. Hagy and Knudson. Comer, vol. 1, p. 49.

   230. Comer formed the opinion that the Bank had not taken the proper steps to stop withholding of taxes from the employees' Bank compensation. Comer, vol. 1, p. 50, lines 10–15.

   231. Comer was concerned, among other things, about the Bank's failure to meet its corporate responsibilities. Comer, vol. 1, pp. 49–50.

   232. Comer took her concerns about the non-withholding at the Bank to the Vavrinek Firm's administrative committee, now called the executive committee, which is in essence the management committee of the firm. Comer, vol. 1, pp. 50–51.

   233. The Vavrinek Firm agreed that what had occurred at the Bank constituted an illegal act and that the Vavrinek Firm had to communicate with the Bank's audit committee and perhaps disclose a contingent liability in the Bank's financial statements. Comer, vol. 1, pp. 51–52.

   234. Dayton at that time was a member of the Vavrinek Firm's executive committee. Dayton, vol. 2, pp. 33–34 & pp. 37–38.
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   235. Dayton formed the opinion that the Bank had improperly applied the rules of withholding to get around the system and block tax withholding. Dayton, vol. 2, pp. 42–43.

   236. Statements of Auditing Standards are promulgated by the American Institute of Certified Public Accountants and are considered authoritative guidance for auditors. Dayton, vol. 2, pp. 47–48.

   237. Statement of Auditing Standard 54 specifically states that failure to file tax returns or pay government duties or similar fees common to the entity's industry or the nature of its business is an example of specific information that may raise questions about the existence of illegal acts. FDIC Exh. 70.

   238. Comer and Dayton met with H. Hagy and Shollenburg on March 9, 1999 in Big Bear Lake. Comer, vol. 1, p. 53, lines 11–17; Dayton, vol. 2, p. 49, lines 11–19.

   239. Comer prepared a discussion draft for the March 9, 1999 meeting entitled "First Mountain Bank, Discussion Memorandum on Possible Audit Exception." The discussion draft was provided to H. Hagy and Shollenburg before the meeting. FDIC Exh. 71; Comer, vol. 1, pp. 53–54.

   240. In the March 9, 1999 meeting with H. Hagy and Shollenburg, Comer and Dayton advised that the Bank had improperly failed to withhold income and FICA taxes from several executive officers of the Bank. FDIC Exh. 71; Dayton, vol. 2, p. 51, lines 6–9.

   241. In the March 9, 1999 meeting with H. Hagy and Shollenburg, Comer and Dayton advised that H. Hagy, as chief financial officer of the Bank, had not properly filed Bank payroll tax returns, including the transmittal of IRS Forms W-4. FDIC Exh. 71; Comer, vol. 1, p. 55, lines 10–16; Dayton, vol. 2, pp. 51–52.

   242. H. Hagy denied that she had been influenced by other executive officers in the process of not properly filing the Bank's payroll tax returns. Comer, vol. 1, pp. 55–56.

   243. In the March 9, 1999 meeting with H. Hagy and Shollenburg, Comer and Dayton advised that the Bank had incorrectly reported a significant portion of its payroll as exempt and did not properly withhold a significant amount of income taxes from its officers. FDIC Exh. 71; Comer, vol. 1, p. 56, lines 9–14.

   244. In the March 9, 1999 meeting with H. Hagy and Shollenburg, Comer and Dayton recommended that the Bank should immediately file amended payroll tax returns and include FICA and income taxes that were not withheld in the original returns. FDIC Exh. 71; Comer, vol. 1, p. 56, lines 15–20; Dayton, vol. 1, p. 52, lines 9–16.

   245. In essence, Comer and Dayton were recommending that the Bank should immediately pay the taxes and penalties associated with the amended returns. FDIC Exh. 72; Comer, vol. 1, pp. 56–57 & pp. 60–61; Dayton, vol. 2, p. 52, lines 17–22.

   246. In the March 9, 1999 meeting with H. Hagy and Shollenburg, Comer and Dayton recommended that executive officers wishing to claim exempt status should resubmit valid Forms W-4. FDIC Exhs. 71 & 72; Comer, vol. 1, p. 57, lines 7–11 & p. 60, lines 22–24; Dayton, vol. 2, p. 52, lines 9–16.

   247. H. Hagy and Shollenburg did not agree with any of the points or conclusions that Comer and Dayton discussed with them in the March 9, 1999 meeting. Comer, vol. 1, p. 57, lines 21–25; Dayton, vol. 2, p. 53, lines 16–20.

   248. In the March 9, 1999 meeting with H. Hagy and Shollenburg, Comer and Dayton also discussed the "Corporate Responsibilities for Withholding" portion of the discussion draft entitled "First Mountain Bank, Discussion Memorandum on Possible Audit Exception." That section of the discussion draft discussed the employer's responsibility for withholding and remitting income and FICA taxes; the requirement to transmit Forms W-4; and the invalidation of Forms W-4 by deleting or changing language. FDIC Exh. 71; Comer, vol. 1, p. 58, lines 1–5; Dayton, vol. 2, pp. 52–54.

   249. Comer and Dayton presented their viewpoint that these matters that the auditors were raising were corporate responsibility and the law. It was not a matter of individual rights. Comer, vol. 1, p. 58, lines 1–17.

   250. In the March 9, 1999 meeting, Comer and Dayton reiterated several times that H. Hagy and Shollenburg had responsibilities as corporate officers of the Bank. Specifically, Comer and Dayton reiterated that the Vavrinek Firm was not concerned with the officers' personal returns, personal filing preferences or personal tax beliefs, but rather their responsibilities as corporate officers to
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   follow the rules and regulations that applied to corporations. Dayton, vol. 2, pp. 53–54.

   251. At the conclusion of the March 9, 1999 meeting, the position of H. Hagy and Shollenburg versus Comer and Dayton's position was complete disagreement as to the appropriateness of what had been done. Dayton, vol. 2, pp. 54–55.

   252. Dayton advised H. Hagy and Shollenburg that they had to either follow the recommendations of the Vavrinek Firm with respect to correcting the tax withholding situation or they had to disclose it in the financial statement. Dayton, vol. 2, p. 55, lines 4–21.

   253. Comer prepared a one-page memorandum entitled "First Mountain Bank, Discussion Memorandum on Possible Audit Exception, VTD Professional Requirements," which was provided to Shollenburg and H. Hagy at the same time as the "First Mountain Bank, Discussion Memorandum on Possible Audit Exception." The discussion memorandum included a proposed footnote to the Bank's financial statement. FDIC Exh. 73; Comer, vol. 1, pp. 61–62; Dayton, vol. 2, pp. 49–50.

   254. Comer and Dayton advised Shollenburg and H. Hagy that Comer and Dayton had a professional obligation to meet with the Bank's Audit Committee given that they had found an illegal act. They had a duty to describe the illegal act and the circumstances surrounding it and to provide an evaluation of the effect of the illegal act on the financial statements. FDIC Exh. 73; Comer, vol. 1, pp. 61–62.

   255. Comer prepared a document entitled "First Mountain Bank, Memorandum Concerning Withholding Taxes," which was provided to Shollenburg and H. Hagy and which gave specific recommendations as to what the Bank should do based on the matters that she and Dayton had discussed in the March 9, 1999 meeting. FDIC Exh. 72; Comer, vol. 1, pp. 59–60.

   256. In the "First Mountain Bank, Memorandum Concerning Withholding Taxes," Comer recommended the following:

       a. Since all wages are subject to Social Security and Medicare taxes even if an employee claims to be "exempt" from taxes, all Social Security and Medicare taxes, including the employer portion should be paid;

       b. New W-4 forms should be obtained from employees and any forms in which the employee claims to be exempt, but is earning more than $200/week should be sent to the IRS;

       c. If a valid W-4 is not obtained, the Bank should withhold as if the employee were single and claimed no withholding allowance; and

       d. Since valid W-4's were not prepared for 1998, the Bank should amend payroll tax returns for 1998 and remit tax as if the employees without valid W-4's were single. The employees should reimburse the Bank for the withholdings. FDIC Exh. 72.

   257. Comer and Dayton recommended that all back taxes and penalties be paid as soon as possible because, the longer you wait, the more penalties that accrue. Comer, vol. 1, p. 61, lines 2–8.

   258. In the course of the audit of the Bank's year-end 1998 financial statements, Dayton was provided with a letter to the IRS dated February 18, 1999 in which all identifying information, including name, address, Social Security number and signature of the author was removed. FDIC Exh. 69; Dayton, vol. 2, pp. 77–79.

   259. The letter to the IRS dated February 18, 1999 was copied to United States Senator Barbara Boxer, United States Senator Dianne Feinstein and United States Representative Jerry Lewis. FDIC Exh. 69.

   260. The letter to the IRS dated February 18, 1999 indicates that it was in response to a letter from the IRS dated February 5, 1999. From looking at the letter, Dayton can conclude that the author was a Bank employee who had claimed to be a non-resident alien on his or her 1997 income tax return and that the IRS had rejected the claim of non-resident alien status. FDIC Exh. 69; Dayton, vol. 2, pp. 82–84.

   261. Dayton discussed the letter to the IRS dated February 18, 1999 with Shollenburg who provided it as support for Shollenburg's position that he was exempt and did not have to have taxes withheld. FDIC Exh. 69; Dayton, vol. 2, p. 84, lines 12–18.

   262. H. Hagy admitted that she had written a letter to the IRS which was either similar to or was the actual letter to the IRS dated February 18, 1999 provided by Shollenburg to Dayton. Hagy, vol. 5, pp. 158–62.
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   263. H. Hagy never advised the Bank's board of directors that as of February 1999 the IRS had rejected the non-resident alien status asserted by H. Hagy, Shollenburg, Melton, R. Hagy and Knudson in the Forms W-4, Citizenship Affidavits and Forms W-8 submitted to the Bank from August 1997 through January 1998. FDIC Exh. 69; Hagy, vol. 5, pp. 161–64.

   264. There is no record of the disclosure of any correspondence between any of the Respondents and the IRS, including the letter to the IRS dated February 18, 1999, in the minutes of meetings of the Bank's board of directors. FDIC Exhs. 33–65.

   265. On March 15, 1999 Comer received a document entitled "First Mountain Bank, Rebuttal on Possible Audit Exception" from H. Hagy. This was a response to the Vavrinek Firm's "First Mountain Bank, Discussion Memorandum of Possible Audit Exception" (FDIC Exh. 71). Nothing that was said in the rebuttal document caused Comer or Dayton to question the conclusions that they had reached on the tax withholding situation at the Bank. FDIC Exh. 74; Comer, vol. 1, pp. 62–63; Dayton, vol. 2, p. 56, lines 8–23.

   266. At the same time that H. Hagy had sent the Vavrinek Firm her response citing the IRS code and the CFR, she and Shollenburg started a search for another accounting firm. Hagy, vol. 5, pp. 96–97.

   267. The minutes of meetings of the Bank's board of directors do not reflect that the Bank's board of directors was informed in the time period of March 1999 to April 1999 that Shollenburg and H. Hagy were looking for a new auditing firm. FDIC Exhs. 55 & 56.

   268. Shollenburg wrote Comer a letter dated March 15, 1999 about the tax withholding situation at the Bank. FDIC Exh. 75; Comer, vol. 1, pp. 63–64.

   269. In his March 15, 1999 letter, Shollenburg alleged that the Vavrinek Firm had known about "our situation" back in August of 1998. Comer testified that she had not known about the tax withholding situation at the Bank in August of 1998. FDIC Exh. 75; Comer, vol. 1, p. 64, lines 21–25.

   270. In his March 15, 1999 letter, Shollenburg stated that "[t]his process" had been ongoing since September 1997. Comer testified that she had not learned about the failure to withhold taxes at the Bank until 1999. In fact, it was Shollenburg's letter that first alerted her that the failure to withhold had actually begun in 1997. FDIC Exh. 75; Comer, vol. 1, p. 65, lines 1–8.

   271. In his March 15, 1999 letter, Shollenburg alleged that withholding the Bank's financial statement amounted to extortion and blackmail. Comer and Dayton denied this allegation. FDIC Exh. 75; Comer, vol. 1, p. 67, lines 1–7; Dayton, vol. 2, p. 57, lines 5–8.

   272. Comer and Dayton both interpreted the March 15, 1999 letter from Shollenburg as a threat or intimidation. FDIC Exh. 75; Comer, vol. 1, p. 69, lines 6–8; Dayton, vol. 2, p. 59, lines 8–21.

   273. In response to Shollenburg's request for a letter on Vavrinek, Trine, Day & Co. letterhead explaining why the Vavrinek Firm was withholding the audited financial statement and what needed to be added to the approved draft copy, Dayton wrote and sent a letter dated March 15, 1999 to Shollenburg. FDIC Exh. 76; Comer, vol. 1, pp. 69–70; Dayton, vol. 2, p. 60, lines 5–17.

   274. In the letter from the Vavrinek Firm dated March 15, 1999, Dayton advised that the Bank had incorrectly filed in quarterly payroll tax returns, incorrectly allowed several executive officers to avoid withholding of federal and state income taxes and incorrectly reported a significant amount of compensation as exempt from Social Security and Medicare withholding. FDIC Exh. 76; Comer, vol. 1, pp. 70–71; Dayton, vol. 2, pp. 60–61.

   275. The Vavrinek Firm advised in its March 15, 1999 letter that the conduct that the Bank had engaged in constituted illegal acts under its professional standards. This opinion was joined in by Dayton, Comer, other Vavrinek Firm partners and the Vavrinek Firm's administrative committee. FDIC Exh. 76, p. 3; Comer, vol. 1, p. 70, lines 3–12; Dayton, vol. 2, pp. 61–62.

   276. The Vavrinek Firm advised in its March 15, 1999 letter that it was required by its professional guidelines to communicate directly with the Bank's Audit Committee or full board of directors an overview of the issue, its professional judgment on the issue and its recommendations for resolution of the issue. FDIC Exh. 76, p. 3; Dayton, vol. 2, pp. 61–62.

   277. A meeting was required with the Bank's Audit Committee so that the tax withholding issue could be raised to a level beyond
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   management who was involved in the conduct. Dayton, vol. 2, p. 61, lines 9–14.

   278. The size of the contingent liability had the potential to increase over time because as additional funds were not withheld, the amended returns would require more and more payment of back taxes. Dayton, vol. 2, p. 64, lines 1–7.

   279. The contingent liability had to be disclosed in the year-end 1998 financial statement because it had the potential to accrue in the near future after the date of the audit. This contingent liability met the standards for disclosure. Dayton, vol. 2, p. 63, lines 7–25.

   280. The Vavrinek Firm stated in its proposal footnote included in its March 15, 1999 letter that "[t]he officers and employees involved have indemnified the Bank from any loss in this matter." FDIC Exh. 76.

   281. Shollenburg had represented to the auditors that he had indemnified the Bank and that he had set aside funds sufficient to pay his taxes if a problem should arise. Dayton, vol. 2, p. 65, lines 1–18.

   282. All of the officers and employees' written indemnifications, in fact, were dated March 26, 1999, after the date of the Vavrinek Firm's March 15, 1999 letter. FDIC Exhs. 9, 15, 21, 25 & 31.

   283. Part of the reason why the auditors did not accrue an actual liability for the non-withheld income taxes was because of the indemnifications from the officers that they had been told existed. Dayton, vol. 2, pp. 65–67.

   284. Comer and Dayton met with the Bank's audit committee on April 26, 1999. FDIC Exhs. 56 & 77; Comer, vol. 1, pp. 76–77; Dayton, vol. 2, p. 69, lines 6–11.

   285. The entire board including Shollenburg, but excepting director Kenneth Wood, was in attendance at the April 26, 1999 meeting. H. Hagy and Melton were also in attendance at the meeting. FDIC Exh. 56.

   286. In advance of the April 26, 1999 meeting with the Bank's board of directors, Comer and Dayton prepared a letter on the Vavrinek Firm's letterhead addressed to the Bank's audit committee. The letter was signed by Dayton and distributed at the April 26, 1999 meeting. FDIC Exh. 77; Comer, vol. 1, pp. 76–77; Dayton, vol. 2, p. 69, lines 1–14.

   287. In the April 26, 1999 memorandum that was distributed to the Bank's board of directors, the Vavrinek Firm stated that the Bank had not met its corporate responsibilities with respect to withholding and payment of payroll taxes. Specifically, the Bank had:

       a. Incorrectly reported taxable wages as exempt from Social Security and Medicare taxes;

       b. Incorrectly discontinued withholding federal and state income taxes from employee's wages;

       c. Accepted invalid Forms W-4's from selected employees;

       d. Neglected to transmit Form W-4's claiming exempt status to the IRS; and

       e. Agreed to indemnify the Bank's payroll processor from any liability in preparing the payroll tax returns that include the periods the above items occurred.

   FDIC Exh. 77.

   288. The Vavrinek Firm stated that, in its opinion, the matters that it had itemized in the April 26, 1999 letter constituted "illegal acts." The Vavrinek Firm relied on Statement of Auditing Standard 54 in arriving at this opinion. FDIC Exh. 77; Dayton, vol. 2, p. 69, lines 15–22.

   289. The Vavrinek Firm further stated that it believed that the Bank's position on these matters was not valid and could result in the assessment of significant back taxes, interest and penalties against the Bank. H. Hagy and Shollenburg had told Dayton what the Bank's position was on these matters. FDIC Exh. 77; Dayton, vol. 2, p. 70, lines 14–25.

   290. Tax expert Barry Guterman ("Guterman") testified that he agreed with all five of the points that the Vavrinek Firm had made in the April 26, 1999 letter. FDIC Exh. 77; Guterman, vol. 3, pp. 192–93.

   291. H. Hagy did not agree with any one of the five points that the Vavrinek Firm had made in its April 26, 1999 letter. FDIC Exh. 77; Hagy, vol. 5, pp. 89–90.

   292. The Vavrinek Firm recommended that:

       a. The Bank file amended payroll tax returns, including all Social Security, Medicare and income taxes that were not included in the original returns;

       b. All executive officers and employees wishing to claim exempt status should resubmit valid Form W-4's and that the Form
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       W-4's should be submitted to the IRS as required; and

       c. All back taxes and applicable penalties should be paid as soon as possible.

   FDIC Exh. 77.

   293. The Vavrinek Firm also recommended that the Bank hire an outside consultant or expert in the field to help minimize the Bank's liability for back taxes, related penalties and future scrutiny by federal and state agencies. FDIC Exh. 77.

   294. The Vavrinek Firm's statement that the Bank had neglected to transmit Form W-4's claiming exempt status to the IRS was based on H. Hagy's representation to Comer. H. Hagy was very open about that subject. FDIC Exh. 77; Comer, vol. 1, pp. 77–78; Dayton, vol. 2, p. 127, lines 9–25.

   295. At the time of the Vavrinek Firm's year-end 1998 audit of the Bank, H. Hagy knew that the Forms W-4 submitted by Shollenburg, H. Hagy, Melton, R. Hagy and Knudson had not been filed with the IRS. Comer, vol. 1, pp. 77–78; Hagy, vol. 5, pp. 123–24.

   296. There is no record in the minutes of meetings of the Bank's board of directors reflecting that the board of directors was informed that the Forms W-4 had not been submitted to the IRS. FDIC Exhs. 42–55.

   297. In Dayton's experience, when a Form W-4 is submitted to the IRS in which an employee claims to be exempt, if the employee has filed tax returns in the past that showed taxable income, the Form W-4 would be kicked out immediately. Dayton, vol. 2, p. 125, lines 4–13.

   298. The Vavrinek Firm's statement in the April 26, 1999 letter that the Bank had agreed to indemnify the Bank's payroll processor from any liability in preparing the payroll tax returns was based on discussions with H. Hagy and Shollenburg. FDIC Exh. 77; Dayton, vol. 2, p. 71, lines 5–24.

   299. Comer also saw H. Hagy's memorandum to the Bank's payroll processor, Paychex, which granted the indemnification. Comer, vol. 1, pp. 78–79.

   300. Comer believed that H. Hagy did not have the authority to grant an indemnification to Paychex on behalf of the Bank. Comer, vol. 1, p. 79, lines 8–11.

   301. Comer believed that it was not a good idea for H. Hagy to obligate the Bank to indemnify Paychex. Comer, vol. 1, p. 79, lines 12–15.

   302. In Dayton's opinion, several of the items that he and Comer brought up at the April 26, 1999 meeting were a surprise and that the Bank's board members had not been aware of them. They believed that the situation had been resolved or approved and that was not what the Vavrinek Firm was telling them. Dayton, vol. 2, pp. 74–75.

   303. The Bank's board of directors, like Findley, was under the impression that Paychex had filed all appropriate forms. Comer and Dayton informed the Bank's board of directors that appropriate Forms W-4 had not been filed for the employees claiming to be exempt. Further, Comer and Dayton informed the Bank's board of directors that a Statement of Citizenship, which was not applicable, had been filed instead of Forms W-4 and they had been filed in Philadelphia. FDIC Exh. 68, p. 3.

   304. There is no record in the minutes of meetings of the Bank's board of directors reflecting that the Respondents had filed Statements of Citizenship with the IRS to Philadelphia. FDIC Exhs. 42–55.

   305. At the April 26, 1999 meeting, Findley specifically denied that he had looked at the income tax withholding situation and approved it. He said that it was outside the scope or area of his expertise. Dayton, vol. 2, pp. 75–76.

   306. Findley learned at the April 26, 1999 meeting of the Bank's board of directors with the Vavrinek Firm that all five Respondents had submitted improper W-4's. Findley, vol. 2, pp. 187–88.

   307. Findley learned at the April 26, 1999 meeting of the Bank's board of directors with the Vavrinek Firm that the Bank was not appropriately withholding for taxes and that the practice could create a contingent liability. Findley, vol. 2, p. 190, lines 3–7.

   308. Findley learned for the first time at the April 26, 1999 meeting of the Bank's board of directors with the Vavrinek Firm that the Bank was not withholding for Social Security and Medicare taxes. Findley, vol. 2, pp. 188–89 & p. 209, lines 16–25.

   309. Findley learned for the first time at the April 26, 1999 meeting of the Bank's board of directors with the Vavrinek Firm that the Bank had issued an indemnification to Paychex, the Bank's payroll processor. Findley, vol. 2, p. 189, lines 6–13.

   310. No one at the Bank discussed with Findley the indemnification of Paychex by
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   the Bank before the Bank indemnified Paychex. Findley, vol. 2, p. 189, lines 14–17.

   311. The Bank's board of directors was not informed of and did not authorize H. Hagy to send the November 13, 1998 letter holding Paychex harmless. FDIC Exh. 82; Clarke, vol. 3, pp. 24–25.

   312. There is no record in the minutes of meetings of the Bank's board of directors of the Respondents' intention to issue the November 13, 1998 indemnification letter to Paychex. FDIC Exhs. 33–55.

   313. Had the Bank's management asked Findley if it was permissible to indemnify Paychex, the Bank's payroll processor, Findley would have told them that the Bank's management could not indemnify anyone, that only the Bank's board of directors could indemnify someone, and that an indemnification could not be issued for this type of action. Findley, vol. 2, pp. 189–90.

   314. Findley believes that Shollenburg and the other Respondents did not provide him with all the information necessary to adequately represent the Bank. Findley, vol. 2, pp. 194–95.

   315. Upon learning from the accountants that the Bank's management had not given him the correct information on the employee tax withholding issue, Findley advises the Bank's board of directors to obtain an independent investigation of the issue by an attorney with expertise in tax matters. Findley, vol. 2, p. 191, lines 5–18.

   316. The Bank's board of directors did not adopt the Vavrinek Firm's recommendation for resolving the tax withholding situation. Rather, the Bank's board of directors decided: 1) to issue the 1998 year-end financial statement with footnote disclosure of the contingent liability; and 2) to hire a tax expert. FDIC Exh. 56, pp. 1–2; Dayton, vol. 2, p. 76, lines 9–24.

   317. The Bank's board of directors requested that Findley and the Bank's accounting firm find a legal expert in tax matters and the Bank's board of directors subsequently hired Guterman. Findley, vol. 2, p. 67 & pp. 192–94.

   318. The failure of the Bank to withhold income and Social Security taxes was discussed in the following footnote to the Bank's 1998 year-end audited financial statement:

       "Several officers and employees of the Bank have determined that they are exempt from the payment of federal, Social Security, and Medicare tax and have requested the Bank discontinue withholding such taxes from their income. The Bank believes they have properly complied with the applicable Internal Revenue Service (IRS) regulations in honoring these requests. Should the IRS challenge the Bank's interpretation of these regulations and prevail, the Bank could be liable for significant penalties, interest, and improperly withheld taxes. The officers and employees involved have indemnified the Bank from any loss in this matter. As of December 31, 1998, the IRS has not instituted any audit or investigation into this matter."

   FDIC Exh. 79, p. 15.

   319. By adopting the footnote to the Bank's financial statement, the Bank's board of directors was not endorsing the Respondents' position. Jasperson, vol. 2, p. 252, lines 1–24; Hagy, vol. 5, p. 139, lines 9–15.

   320. The Bank's board of directors first put the footnote in, then consulted with legal counsel in order to determine exactly what they had to do to repay the taxes and to figure out what the dollar amounts were that were owed. Jasperson, vol. 2, p. 268, lines 7–10.

   321. After the April 26, 1999 meeting, Comer and Dayton determined that Bank management was not following the Vavrinek Firm's recommendation. Comer, vol. 1, p. 84, lines 12–24.

   322. On June 1, 1999, Comer, on behalf of the Vavrinek Firm, wrote to the Bank to resign as the independent accountants for the Bank. The letter was sent to the chairman of the Audit Committee, the chairman of the Bank's board of directors, Shollenburg and H. Hagy. FDIC Exh. 80; Comer, vol. 1, p. 85, lines 3–18.

   323. Director Clarke was deeply concerned about the status of the Bank after the Vavrinek Firm resigned. He understood that the Vavrinek Firm had resigned because the Bank and/or its officials were engaged in illegal acts and he felt action was necessary. Clarke, vol. 3, p. 23, lines 6–21.

   324. The reason for the Vavrinek Firm's resignation was the Bank's position in regard to its corporate responsibility for withholding and paying payroll and employee income taxes. Specifically, the Bank had not
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   changed its position with respect to meeting its corporate responsibilities and had not implemented the Vavrinek Firm's recommendations in its April 26, 1999 letter to the Bank's Audit Committee. FDIC Exh. 80; Comer, vol. 1, pp. 85–86.

   325. In resigning, the Vavrinek Firm reaffirmed its position that the Bank's actions were illegal acts, were not valid, and could result in the assessment of significant back taxes, interest and penalties against the Bank. FDIC Exh. 80.

   326. In her experience with the Vavrinek Firm, Comer had never had to resign an auditing engagement. Comer, vol. 1, pp. 84–85.

   327. The Vavrinek Firm's decision to resign was a partnership decision. Comer, vol. 1, p. 86, lines 3–8.

   328. Dayton believed that the Bank was not moving quickly enough to resolve the tax withholding situation, which was an indication that this was the type of client that the Vavrinek Firm did not want to be associated with. The Vavrinek Firm felt strongly about the recommendation that it had made. The potential harm to the Vavrinek Firm's reputation for being associated with a client who did this was not acceptable as a business decision. Dayton, vol. 2, pp. 87–88.

   329. One of the major issues in banking is reputational risk because banking is a business of confidence. A bank must have a good business reputation to maintain contacts and customers. Dayton, vol. 2, pp. 150–51.

   330. Comer discussed the potential for criminal liability for the illegal acts that were uncovered during the year-end 1998 audit of financial statements with H. Hagy in more than one conversation. Comer, vol. 1, p. 89, lines 11–21.

   331. Comer discussed the difference between fiduciary duty and personal beliefs several times with both H. Hagy and Shollenburg. Comer, vol. 1, pp. 89–90.

   332. Comer shared her opinion with both H. Hagy and Shollenburg on the difference between fiduciary duty and personal beliefs; to wit, that as management they had fiduciary responsibilities to the Bank and their individual beliefs had nothing to do with their corporate responsibilities under the law. Comer, vol. 1, p. 90, lines 3–13.

   333. It is Dayton's opinion that the Respondents, as corporate officers, had a responsibility to follow the rules and regulations and file proper returns and they did not fulfill those obligations. Dayton, vol. 2, pp. 89–91.

   334. On or about June 7, 1999, the Bank's board of directors retained Barry L. Guterman to provide advice and counsel concerning certain federal and state employment tax matters. FDIC Exh. 90, p. 1; Guterman, vol. 3, p. 109, lines 6–21.

   335. Guterman was asked to review whether the Bank had a legal obligation to account for, collect and pay over to the United States and State of California income withholding taxes and FICA contributions from compensation paid to employees who had instructed the Bank not to withhold taxes from them. FDIC Exh. 90, p. 1; Guterman, vol. 3, p. 109, lines 15–21.

   336. From June 1999 through mid-July 1999, Guterman conducted an investigation of the federal and state employment tax matters at issue. Guterman, vol. 3, pp. 110–33.

   337. As part of his investigation, Guterman reviewed all documents provided to him by Findley and H. Hagy. FDIC Exhs. 59, p. 1, & 91; Guterman, vol. 3, pp. 111–15.

   338. As part of his investigation, Guterman interviewed H. Hagy and Linda Hoisington of Paychex. FDIC Exh. 90; Guterman, vol. 3, pp. 115–18.

   339. Guterman's final findings are contained in his report of investigation to the Bank's board of directors, dated October 11, 1999. FDIC Exh. 90; Guterman, vol. 3, p. 118, lines 10–20 & p. 148, lines 14–19.

   340. H. Hagy told Guterman that she did not learn that the Forms W-4 had not been sent to the IRS until May 1999. FDIC Exh. 96, p. 1; Hagy, vol. 5, pp. 122–23.

   341. H. Hagy told Guterman that she discussed the employment tax withholding issues with the accountants, and that the accountants had responded negatively. FDIC Exh. 96, p. 1; Guterman, vol. 3, p. 117, lines 12–22; Hagy, vol. 5, pp. 112–13.

   342. H. Hagy told Guterman that she, through her own research and analysis of laws and regulations, ascertained what the Bank's withholding obligations were. FDIC Exh. 96, pp. 1–2; Guterman, vol. 3, p. 117, lines 19–22; Hagy, vol. 5, p. 113, lines 17–21.

   343. H. Hagy told Guterman that as an officer she did not adopt the position of the officers/employees, including herself, that compensation paid them was not "wages"
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   and not "gross income" under the Internal Revenue Code. FDIC Exh. 96, p. 2; Guterman, vol. 3, pp. 223–25; Hagy, vol. 5, pp. 136–37.

   344. Guterman was never provided any documentation which reflected that the Forms W-4 submitted by Shollenburg, H. Hagy, Melton, R. Hagy and Knudson were transmitted to the IRS at or about the time they were received by the Bank. Guterman, vol. 3, p. 124, lines 7–15.

   345. Guterman was never provided any documentation which reflected that the Forms W-4 submitted by Shollenburg, H. Hagy, Melton, R. Hagy and Knudson were transmitted to the Bank's payroll processor. Guterman, vol. 3, p. 124, lines 16–19.

   346. The Withholding Exemption Certificates (Forms W-4) that were submitted to the Bank by Shollenburg, H. Hagy, Melton, R. Hagy and Knudson after July 1997 and before July 1999 were not valid W-4's because they contained alterations and/or unauthorized additions, 26 C.F.R. §31.3402(f)(2)-1(e), and/or were not signed under penalty of perjury. 26 U.S.C. §6065. FDIC Exh. 90, p. 15; Comer, vol. 1, p. 57, lines 12–20; Dayton, vol. 2, p. 110, lines 8–10; Guterman, vol. 3, pp. 148–49 & pp. 221–22.

   347. The Forms W-4 that were submitted to the Bank by Shollenburg, H. Hagy, Melton, R. Hagy and Knudson in which they claimed to be exempt from income tax withholding, should not have been accepted by H. Hagy and Shollenburg on behalf of the Bank. FDIC Exh. 90, p. 15; Guterman, vol. 3, pp. 149–51; Answer of Shollenburg ¶ 50; Answer of H. Hagy ¶ 50.

   348. The Forms W-8, Citizenship Affidavits and Statements of Citizenship and Residence submitted by Shollenburg, H. Hagy, Melton, R. Hagy and Knudson did not constitute valid exemption certificates because they did not contain the requisite certifications as to income tax liabilities. FDIC Exh. 90, p. 15; Guterman, vol. 3, pp. 149–50.

   349. The Bank could not rely on the invalid Forms W-4 submitted by Shollenburg, H. Hagy, Melton, R. Hagy and Knudson to legally stop income tax withholding from the Respondents' compensation. Guterman, vol. 3, pp. 151–52.

   350. Shollenburg, H. Hagy, Melton, R. Hagy and Knudson had no legal basis for causing the Bank to fail to withhold income taxes from their wages. Guterman, vol. 3, pp. 152–53.

   351. The Bank was liable for federal and state income withholding taxes which it did not collect from the Respondents for the period commencing January 1, 1998 through July 31, 1999. FDIC Exh. 90, p. 16; Guterman, vol. 3, p. 153, lines 4–15.

   352. The Bank was liable for $71,831.31 in federal and state income withholding taxes which it did not collect from Shollenburg for the period commencing January 1, 1998 through July 31, 1999. FDIC Exh. 90, Schedule 2; Guterman, vol. 3, pp. 179–80.

   353. The Bank was liable for $26,007.05 in federal and state income withholding taxes which it did not collect from H. Hagy for the period commencing January 1, 1998 through July 31, 1999. FDIC Exh. 90, Schedule 2; Guterman, vol. 3, p. 183, lines 13–19.

   354. The Bank was liable for $10,081.56 in federal and state income withholding taxes which it did not collect from R. Hagy for the period commencing January 1, 1998 through July 31, 1999. FDIC Exh. 90, Schedule 2; Guterman, vol. 3, p. 184, lines 9–14.

   355. The Bank was liable for $30,117.36 in federal and state income withholding taxes which it did not collect from Melton for the period commencing January 1, 1998 through July 31, 1999. FDIC Exh. 90, Schedule 2; Guterman, vol. 3, p. 185, lines 4–9.

   356. The Bank was liable for $5,374.18 in federal and state income withholding taxes which it did not collect from Knudson for the period commencing January 1, 1998 through July 31, 1999. FDIC Exh. 90, Schedule 2; Guterman, vol. 3, p. 186, lines 8–10.

   357. Shollenburg, H. Hagy, Melton and Knudson had not legitimate legal basis for causing the Bank to fail to withhold FICA or Social Security taxes from their wages. Guterman, vol. 3, p. 158, lines 5–10 & p. 226, lines 1–12.

   358. Shollenburg, H. Hagy, Melton and Knudson did not fit within any of the classes of employees whose wages are exempted from Social Security taxes. Guterman, vol. 3, pp. 154–55.

   359. Contrary to the assertions of Shollenburg, H. Hagy and Melton, FICA taxes are not voluntary and they are not dependent upon the employee's receipt of benefits under Social Security. FDIC Exh. 90, p. 18; Guterman, vol. 3, pp. 156–57.
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   360. Shollenburg, H. Hagy, Melton and Knudson erred in determining that Social Security taxes were voluntary in nature. FDIC Exh. 90, p. 18.

   361. Shollenburg and H. Hagy erred in instructing Paychex not to withhold Social Security taxes from the wages of Shollenburg, H. Hagy, Melton and Knudson. FDIC Exh. 90, p. 18.

   362. The Bank was liable for FICA contributions which it did not collect from Shollenburg, H. Hagy, Melton and Knudson. Guterman, vol. 3, p. 158, lines 11–18.

   363. The Bank was also liable for $27,804.27, which represented the employer's portion of the FICA tax pertaining to the compensation of Shollenburg, H. Hagy, Melton and Knudson. FDIC Exh. 90, pp. 16–17 & Schedule 1.

   364. The Bank was liable for $12,181.26 in FICA taxes which it did not collect from Shollenburg for the period commencing January 1, 1998 through July 31, 1999. Guterman. FDIC Exh. 90, Schedule 3.

   365. The Bank was liable for $9,656.86 in FICA taxes which it did not collect from H. Hagy for the period commencing January 1, 1998 through July 31, 1999. Guterman. FDIC Exh. 90, Schedule 3.

   366. The Bank was liable for $9,565.57 in FICA taxes which it did not collect from Melton for the period commencing January 1, 1998 through July 31, 1999. Guterman. FDIC Exh. 90, Schedule 3.

   367. The Bank was liable for $841.50 in FICA taxes which it did not collect from R. Hagy for the period commencing January 1, 1998 through July 31, 1999. Guterman. FDIC Exh. 90, Schedule 3.

   368. The Bank was also liable for $2,877.20 in FICA taxes which it did not collect from Knudson for the period commencing January 1, 1998 through July 31, 1999. Guterman. FDIC Exh. 90, Schedule 3.

   369. The Bank was liable for $7,144.70 and $20,659.57 in 1998 and 1999 respectively, in FICA employer taxes which the Respondents caused the Bank to fail to pay for the period commencing January 1, 1998 through July 31, 1999. FDIC Exh. 90, Schedule 1.

   370. The Bank faced the following potential civil and criminal penalties, for each taxable quarter at issue, if it did not correct its employment tax returns:

       a. Statutory interest computed from the due date of each employment tax return;

       b. A failure to deposit penalty under IRC Section 6656 for failure to deposit the correct amount of employment taxes equal to 10 percent of the amount of the unpaid employment taxes;

       c. An accuracy-related penalty under IRC Section 6662 for negligence or substantial understatement of tax equal to 20 percent of the amount of underpaid employment taxes;

       d. A criminal penalty under IRC Section 7201, a felony, for tax evasion, punishable by a penalty not to exceed $500,000;

       e. A criminal penalty under IRC Section 7206(1), a felony, for false statement on a return, punishable by a penalty not to exceed $500,000;

       f. A criminal penalty under IRC Section 7206(2), a felony, for aiding and assisting in the preparation of a false return, punishable by a penalty not to exceed $500,000;

       g. A criminal penalty under IRC Section 7207, a misdemeanor, for delivering a false statement or return to the IRS, punishable by a penalty not to exceed $50,000; and

       h. Corresponding civil and criminal penalties under the California Revenue and Taxation Code and Unemployment Code.

   FDIC Exh. 90, pp. 20–21; Guterman, vol. 3, pp. 158–59.

   371. On July 26, 1999, Guterman attended a meeting of the Bank's board of directors. FDIC Exhs. 59 & 90, p. 6; Guterman, vol. 3, p. 133, lines 13–18.

   372. At the July 26, 1999 meeting, Guterman presented his tentative fact findings and recommendations regarding the Bank's failure to withhold income taxes and FICA taxes from Shollenburg, H. Hagy, Melton, R. Hagy and Knudson. FDIC Exhs. 59 & 90, p. 6; Guterman, vol. 3, pp. 133–34 & pp. 137–38.

   373. At the July 26, 1999 board meeting, Shollenburg's representatives, Vera Louise Kleinfeld Pfeiffer and Lynda Wall, made a presentation concerning why they believed Shollenburg, H. Hagy, Melton, R. Hagy and Knudson were not subject to withholding for either state and federal income taxes or Social Security taxes. FDIC Exhs. 59, p. 1, & 90, p. 6; Guterman, vol. 3, pp. 135–36.

   374. At the July 26, 1999 board meeting, Ms. Pfeiffer conceded that IRC Section 911
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   (Citizens or Residents of United States Living Abroad) does not apply to exempt Shollenburg, H. Hagy, Melton, R. Hagy and Knudson from income tax withholding. FDIC Exh. 90, p. 6; Guterman, vol. 3, p. 136, lines 10–23.

   375. At the July 26, 1999 board meeting, the Bank's board of directors passed a resolution instructing officers of the Bank to commence withholding income taxes based on new Forms W-4 to be obtained from Shollenburg, H. Hagy, Melton, R. Hagy and Knudson and not claim any exemptions for Social Security taxes for the five Respondents. FDIC Exhs. 59, p. 2, & 90, p. 6; Guterman, vol. 3, pp. 137–38.

   376. After the July 26, 1999 board meeting, Guterman, on behalf of the Bank's board of directors, advised Paychex that, commencing with the Bank's payroll due August 15, 1999, Shollenburg, H. Hagy, Melton and Knudson were not to be treated as exempt from FICA taxes. FDIC Exh. 97; Guterman, vol. 3, p. 141, lines 1–23.

   377. After the July 26, 1999 board meeting, the Bank's board of directors requested that Shollenburg, H. Hagy, Melton, R. Hagy and Knudson prepare and submit new Forms W-4. FDIC Exh. 90, p. 6; Guterman, vol. 3, p. 138, lines 11–23.

   378. On or about July 27, 1999, Shollenburg, H. Hagy, Melton, R. Hagy and Knudson submitted new Forms W-4 to the Bank, claiming to be exempt from income tax withholding. FDIC Exhs. 90, p. 6, & 99; Guterman, vol. 3, p. 144, lines 4–13.

   379. Guterman reviewed the Forms W-4 submitted by Shollenburg, H. Hagy, Melton, R. Hagy and Knudson to the Bank on July 27, 1999, and found them to be valid Forms W-4 since they contained no alterations and were signed under penalty of perjury. FDIC Exh. 90, p. 6; Guterman, vol. 3, pp. 144–46.

   380. Guterman found that the Bank had no choice but to accept the new Forms W-4 as long as they were not altered and the Bank had no knowledge that they were false. Guterman, vol. 3, pp. 145–46.

   381. The new Forms W-4 were transmitted to the IRS on August 18, 1999. FDIC Exh. 115, p. 36.

   382. On August 11, 1999, Guterman completed a draft of his report of investigation. FDIC Exh. 120, Bate Stamp ##   604496–511. This draft was circulated to the Bank's board of directors, as well as H. Hagy, Melton, R. Hagy and Knudson. FDIC Exh. 62, p. 1.

   383. Guterman's advice to the Bank's board of directors was essentially the same as the Vavrinek Firm's, that the Bank should request valid W-4's from the Respondents and submit them to the Internal Revenue Service, that proper withholding should commence, and that back taxes should be paid. FDIC Exhs. 77 & 120, Bate Stamp ## 604502–03; Findley, vol. 2, p. 194, lines 16–23.

   384. In his draft memorandum, Guterman recommended to the Bank's board of directors that the Bank amend its payroll tax returns and pay any taxes shown to be due. FDIC Exh. 120, Bate Stamp #   604503.

   385. In his draft memorandum, Guterman also advised the Bank's board of directors that the Bank was potentially liable for additional civil and criminal penalties and sanctions as a result of failing to withhold taxes. FDIC Exh. 120, Bate Stamp #   604511.

   386. On August 23, 1999, Guterman attended another meeting of the Bank's board of directors. FDIC Exhs. 62 & 90, p. 7; Guterman, vol. 3, p. 147, lines 1–16.

   387. At the August 23, 1999 board meeting, Guterman reported that for Social Security taxes, the Bank and employee responsibility for 1998 and the first two quarters of 1999 amounted to $58,933. FDIC Exh. 62, pp. 1–2.

   388. At the August 23, 1999 board meeting, Findley indicated that on August 13, 1999, he had reminded Shollenburg, H. Hagy, Melton and Knudson that they would be required to reimburse the Bank for Social Security taxes which should have been deducted and withheld from their wages. FDIC Exh. 62, p. 2.

   389. At the August 23, 1999 board meeting, Guterman reviewed the status of the state and federal income tax withholding issues for 1998 and 1999. In particular, Guterman discussed relief from tax withholding liabilities for 1998 by Shollenburg, H. Hagy, Melton and Knudson certifying to the board of directors on appropriate forms that they had filed their 1998 tax returns. FDIC Exhs. 62, pp. 2–3, & 90, p. 7; Guterman, vol. 3, pp. 215–16.

   390. At the August 23, 1999 board meeting, Shollenburg and H. Hagy continued to
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   present materials with respect to whether the Statements of Citizenship and Residence submitted in January and February 1999 exempted them from income tax withholding for the first two quarters of 1999. FDIC Exhs. 62, p. 2, & 90, p. 7; Guterman, vol. 3, pp. 147–48.

   391. Guterman concluded that Shollenburg and H. Hagy refused to accept the legal authority cited in his memorandum. FDIC Exh. 90, p. 7; Guterman, vol. 3, p. 148, lines 4–6.

   392. At the August 23, 1999 board meeting, H. Hagy computed and Shollenburg approved, the Bank's liability for FICA withholding tax liabilities for calendar year 1998 and calendar year 1999 through July 31, 1999. These schedules computed a lower amount of Social Security withholding taxes due than the draft schedules prepared by Paychex. FDIC Exh. 90, p. 7.

   393. On September 8, 1999, the Bank sent a memorandum each to Shollenburg, H. Hagy, Melton, and Knudson, requesting reimbursement of Social Security and Medicare taxes based on the management prepared schedules. FDIC Exhs. 100, 101 & 102; Guterman, vol. 3, p. 159, lines 10–21.

   394. On September 9, 1999, Shollenburg reimbursed the Bank in the amount of $10,014.08, which was $2,167.18 less than the amount calculated by Paychex. FDIC Exh. 101.

   395. On September 10, 1999, H. Hagy reimbursed the Bank in the amount of $8,161.95, which was $1,494.91 less than the amount calculated by Paychex. FDIC Exh. 100.

   396. H. Hagy only reimbursed the Bank in this amount in an attempt to keep her job. Respondents' Exh. G; H. Hagy, vol. 5, pp. 75–76.

   397. On September 10, 1999, Melton reimbursed the Bank in the amount of $7,358.32, which was $2,207.25 less than the amount calculated by Paychex. FDIC Exh. 102.

   398. Knudson failed to reimburse the Bank in any amount. FDIC Exh. 107; Guterman, vol. 3, pp. 174–75.

   399. As a member of the Vavrinek Firm's audit committee, Comer wrote letters to clients to update them on the tax laws and other accounting changes. Comer, vol. 1, pp. 34–35 & p. 38, lines 5–17.

   400. Comer wrote a letter to the Bank addressed to H. Hagy and dated January 20, 1998 in which she updated the Bank on certain tax matters, including the reporting of automobile allowances on employee W-2's. FDIC Exh. 66; Comer, vol. 1, pp. 37–39.

   401. H. Hagy initialed the January 20, 1998 letter from Comer, signifying that she had received it. FDIC Exh. 66; H. Hagy, vol. 5, pp. 82–82.

   402. In the January 20, 1998 letter, Comer advised that an automobile allowance paid to an employee is considered wages and must be included on the employee's W-2 if the employee is not required to account for the business miles traveled. FDIC Exh. 66; Comer, vol. 1, pp. 38–39.

   403. On September 29, 1999, Guterman attended a meeting of the Bank's board of directors held at the office of the California Department of Financial Institutions. FDIC Exhs. 65 & 90, p. 8.

   404. At the September 29, 1999 board meeting, the FDIC's examiners advised the Bank's board of directors that automobile cash allowances, Year 2000 consulting fees, and/or bonuses had been paid to Shollenburg, H. Hagy, Melton and R. Hagy in 1998 and 1999, and had not been reported on appropriate tax filings, nor had employment taxes been deducted or paid over to the IRS. FDIC Exhs. 65, pp. 1–2, & 90, p. 8.

   405. After the September 29, 1999 board meeting, Guterman contacted H. Hagy with respect to the issues raised by the FDIC concerning automobile cash allowances, Year 2000 consulting fees, and bonuses. FDIC Exh. 103; Guterman, vol. 3, p. 161, lines 9–18.

   406. Guterman determined that automobile allowances totaling $20,000 in 1998 and $15,200 in 1999 had been paid to employees without the proper amount of employment taxes being reported by the Bank, deducted from compensation or paid over to the IRS. FDIC Exh. 90, p. 8.

   407. Of the automobile allowances at issue, H. Hagy received $4,800 and $4,000 in unreported automobile allowances in 1998 and 1999, respectively, Melton received $4,800 and $4,000 in unreported automobile allowances in 1998 and 1999, respectively, and Shollenburg received $9,600 and $7,200 in unreported automobile allowances in 1998 and 1999, respectively. FDIC Exhs. 104 & 105.

   408. Guterman determined that R. Hagy
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   received additional Year 2000 compensation of $6,000 in 1998 and $5,000 in 1999 without the compensation being reported by the Bank, employment taxes deducted from his compensation or paid over to the IRS. FDIC Exhs. 90, p. 8, 104 & 105.

   409. Guterman determined that bonuses totaling $50,000 were paid to Shollenburg, H. Hagy and Melton during January and February 1999 without being reported by the Bank, employment taxes deducted from their compensation or paid over to the IRS. FDIC Exh. 90, p. 8.

   410. Of the unreported bonuses paid, H. Hagy received $13,000, Melton received $12,000, and Shollenburg received $25,000. FDIC Exhs. 104 & 105.

   411. Shollenburg received a bonus for 1990 that was paid in January 1991, and FICA, state and federal income taxes were withheld by the Bank. FDIC Exh. 83.

   412. Shollenburg, H. Hagy, Melton and R. Hagy failed to bring the issue of unreported automobile allowances, bonuses and Year 2000 compensation to Guterman's attention prior to the FDIC's examination findings being reported at the September 29, 1999 board meeting. Guterman, vol. 3, p. 165, lines 5–9.

   413. As of October 11, 1999, the date of Guterman's final report, Guterman determined that the Bank's potential federal and California employment tax liability was $211,774.49, plus penalties and interest. FDIC Exh. 90, p. 8, & Schedule 1; Guterman, vol. 3, pp. 165–66.

   414. As a result of Guterman's findings, the Bank issued corrected Form W-2 wage statements for Shollenburg, H. Hagy, Melton, R. Hagy and Knudson for the year 1998. FDIC Exh. 106; Guterman, vol. 3, p. 168, lines 3–9.

   415. Knudson's Form W-2 for 1998 was corrected to reflect the following:

       a. An increase from $0 in Federal income tax withheld to the correct amount of $2,997.64 in Federal income tax withheld;

       b. An increase from $7,670.95 in Social Security wages to the correct amount of $26,434.28 in Social Security wages;

       c. An increase from $475.59 in Social Security tax withheld to the correct amount of $1,638.93 in Social Security tax withheld;

       d. An increase from $7,670.95 in Medicare wages and tips to the correct amount of $26,434.28 in Medicare wages and tips;

       e. An increase from $111.23 in Medicare tax withheld to the correct amount of $383.29 in Medicare tax withheld; and

       f. An increase from $0 in State income tax to the correct amount of $767.94 in State income tax.

   FDIC Exh. 106, p. 2; Guterman, vol. 3, pp. 168–70.

   416. H. Hagy's Form W-2 for 1998 was corrected to reflect the following:

       a. An increase from $86,593.16 in Wages, tips and other compensation to the correct amount of $91,393.16 in Wages, tips and other compensation;

       b. An increase from $0 in Federal income tax withheld to the correct amount of $11,573.09 in Federal income tax withheld;

       c. An increase from $0 in Social Security wages to the correct amount of $68,400 in Social Security wages;

       d. An increase from $0 in Social Security tax withheld to the correct amount of $4,240.80 in Social Security tax withheld;

       e. An increase from $0 in Medicare wages and tips to the correct amount of $95,593.16 in Medicare wages and tips;

       f. An increase from $0 in Medicare tax withheld to the correct amount of $1,386.10 in Medicare tax withheld; and

       g. An increase from $0 in State income tax to the correct amount of $6,351.38 in State income tax.

   FDIC Exh. 106, p. 3; Guterman, vol. 3, pp. 170–71.

   417. Shollenburg's Form W-2 for 1998 was corrected to reflect the following:

       a. An increase from $144.324.33 in Wages, tips and other compensation to the correct amount of $153,924.33 in Wages, tips and other compensation;

       b. An increase from $0 in Federal income tax withheld to the correct amount of $33,439.75 in Federal income tax withheld;

       c. An increase from $0 in Social Security wages to the correct amount of $68,400 in Social Security wages;

       d. An increase from $0 in Social Security tax withheld
    {{10-31-03 p.A-3268.36}}

       to the correct amount of $4,240.80 in Social Security tax withheld;

       e. An increase from $0 in Medicare wages and tips to the correct amount of $155,924.33 in Medicare wages and tips;

       f. An increase from $0 in Medicare tax withheld to the correct amount of $2,260.90 in Medicare tax withheld; and

       g. An increase from $0 in State income tax to the correct amount of $11,555.20 in State income tax.

   FDIC Exh. 106, p. 3; Guterman, vol. 3, p. 171, lines 21–23.

   418. Melton's Form W-2 for 1998 was corrected to reflect the following:

       a. An increase from $75,246.46 in Wages, tips and other compensation to the correct amount of $80,046.46 in Wages, tips and other compensation;

       b. An increase from $0 in Federal income tax withheld to the correct amount of $14,242.41 in Federal income tax withheld;

       c. An increase from $0 in Social Security wages to the correct amount of $68,400 in Social Security wages;

       d. An increase from $0 in Social Security tax withheld to the correct amount of $4,240.80 in Social Security tax withheld;

       e. An increase from $0 in Medicare wages and tips to the correct amount of $88,926.46 in Medicare wages and tips;

       f. An increase from $0 in Medicare tax withheld to the correct amount of $1,289.43 in Medicare tax withheld; and

       g. An increase from $0 in State income tax to the correct amount of $5,731.38 in State income tax.

   FDIC Exh. 106, p. 4; Guterman, vol. 3, pp. 171–72.

   419. R. Hagy's Form W-2 for 1998 was corrected to reflect the following:

       a. An increase from $33,900 in Wages, tips and other compensation to the correct amount of $39,900 in Wages, tips and other compensation;

       b. An increase from $0 in Federal income tax withheld to the correct amount of $4,550.62 in Federal income tax withheld;

       c. An increase from $39,600 in Social Security wages to the correct amount of $45,600 in Social Security wages;

       d. An increase from $2,455.20 in Social Security tax withheld to the correct amount of $2,827.20 in Social Security tax withheld;

       e. An increase from $39,600 in Medicare wages and tips to the correct amount of $45,600 in Medicare wages and tips;

       f. An increase from $574.20 in Medicare tax withheld to the correct amount of $661.20 in Medicare tax withheld; and

       g. An increase from $0 in State income tax to the correct amount of $1,372.45 in State income tax.

   FDIC Exh. 106, p. 4; Guterman, vol. 3, pp. 172–73.

   420. On October 15, 1999, Guterman sent a demand letter to each of the Respondents, Shollenburg, H. Hagy, Melton, R. Hagy and Knudson, in which he demanded on behalf of the Bank that the Respondents take the following action:

       a. Either make reimbursement of the income tax withholding liabilities incurred by the Bank for 1998 or certify to filing 1998 federal and California income tax returns and payment of income tax liabilities for 1998 by completing and signing the enclosed Form 4669 and Form DE938P;

       b. Make reimbursement of the income tax withholding liabilities incurred by the Bank for 1999; and;

       c. Make reimbursement of the amounts of FICA and/or Medicare withholding liabilities incurred by the Bank for 1998 and 1999.

   FDIC Exhs. 107–111; Guterman, vol. 3, p. 173, lines 2–25.

   421. In his October 15, 1999 letter to Knudson, Guterman demanded reimbursement on behalf of the Bank from Knudson of $5,374.18 in income withholding taxes and $2,877.20 in Social Security withholding taxes. FDIC Exh. 107; Guterman, vol. 3, p. 174, lines 10–18.

   422. Knudson did not make reimbursement to the Bank of any of the amounts demanded in the October 15, 1999 letter, nor did she provide the necessary certification with respect to the payment of her 1998 income taxes. Guterman, vol. 3, pp. 176–77 & p.179, lines 2–7.

   423. In his October 15, 1999 letter to Melton, Guterman demanded reimbursement on behalf of the Bank from Melton of $30,117.36 in income withholding taxes and $2,207.25 in Social Security withholding
{{10-31-03 p.A-3268.37}}

   taxes. FDIC Exh. 108; Guterman, vol. 3, p. 175, lines 8–12.

   424. Melton did not make reimbursement to the Bank of any of the amounts demanded in the October 15, 1999 letter, nor did she provide the necessary certification with respect to the payment of her 1998 income taxes. Guterman, vol. 3, pp. 176–77 & p. 179, lines 2–7.

   425. In his October 15, 1999 letter to Shollenburg, Guterman demanded reimbursement on behalf of the Bank from Shollenburg of $71,831.31 in income withholding taxes and $2,167.18 in Social Security withholding taxes. FDIC Exh. 109; Guterman, vol. 3, p. 176, lines 3–8.

   426. Shollenburg did not make reimbursement to the Bank of any of the amounts demanded in the October 15, 1999 letter, nor did he provide the necessary certification with respect to the payment of his 1998 income taxes. Guterman, vol. 3, pp. 176–77 & p. 179, lines 2–7.

   427. In his October 15, 1999 letter to H. Hagy, Guterman demanded reimbursement on behalf of the Bank from H. Hagy of $26,007.05 in income withholding taxes and $1,494.94 in Social Security withholding taxes. FDIC Exh. 110; Guterman, vol. 3, p. 176, lines 9–15.

   428. H. Hagy did not make reimbursement to the Bank of any of the amounts demanded in the October 15, 1999 letter, nor did she provide the necessary certification with respect to the payment of her 1998 income taxes. Guterman, vol. 3, pp. 176–77 & p. 179, lines 2–7.

   429. In his October 15, 1999 letter to R. Hagy, Guterman demanded reimbursement on behalf of the Bank from R. Hagy of $10,081.56 in income withholding taxes $841.50 in Social Security withholding taxes. FDIC Exh. 111; Guterman, vol. 3, p. 176, lines 16–21.

   430. R. Hagy did not make reimbursement to the Bank of any of the amounts demanded in the October 15, 1999 letter, nor did he provide the necessary certification with respect to the payment of his 1998 income taxes. Guterman, vol. 3, pp. 176–77 & p. 179, lines 2–7.

   431. On or about November 2, 1999, the Bank paid a grand total of approximately $209,502.85 in employment taxes to the various taxing authorities, which represented the taxes that should have been, but were not, withheld from the Respondents' compensation for the years 1998 and 1999, and the Bank's employer share of FICA taxes. FDIC Exh. 112; Guterman, vol. 3, pp. 177–78.

   432. The Bank paid a total amount of $152,799.85 to state and federal taxing authorities on behalf of Respondents, including $116,325.28 paid to federal taxing authorities alone, as follows:

TOTAL FEDERAL
Shollenburg $74,033.69 $56,578.43
H. Hagy $27,519.36 $19,082.33
Melton $32,340.91 $24,602.58
R. Hagy $11,037.81 $9,142.40
Knudson $7,868.08 $6,919.54

   433. The sums that the Bank paid to federal taxing authorities on behalf of Respondents did not include any amounts for 1997 taxes. The Bank's potential 1997 tax withholding liabilities equaling $17,280.11 in federal income withholding taxes and $4,876.98 in state income withholding taxes was mitigated due to the adoption of a "fact of filing" approach. FDIC Exh. 113; Guterman, vol. 3, p. 162, lines 6–12 & pp. 188–89.

   434. As of the date of the hearing, the Bank had paid no interest or penalties to the IRS, and had paid only minimal interest to the California Franchise Tax Board. Guterman, vol. 3, p. 187, lines 7–10 & p. 256, lines 7–17.

   435. If the Bank had not paid the IRS and the California Franchise Tax Board the amounts paid on November 2, 1999, the Bank would have faced penalties and interest from the IRS and California Franchise Tax Board. Guterman, vol. 3, p. 187, lines 4–6.

   436. The Bank incurred $41,050 in legal fees for Guterman's services to the Bank in this matter. Guterman, vol. 3, p. 193, lines 17–20.

   437. Guterman's subsequent review of federal tax returns filed by Shollenburg, H. Hagy, Melton, R. Hagy and Knudson revealed that contrary to the certification that they had incurred no liability for federal income tax for the preceding year contained in the initial employer withholding documents submitted by the Respondents to the Bank in 1997, Shollenburg, H. Hagy, Melton, R. Hagy and Knudson had declared income tax liabilities
{{10-31-03 p.A-3268.38}}

   abilities for the prior year 1996. FDIC Exh. 124; Guterman, vol. 3, p. 270, lines 1–18.

   438. The FDIC commenced a safety and soundness examination of the Bank on July 19, 1999, utilizing financial information as of March 31, 1999. FDIC Exh. 115; Starin, vol. 4, pp. 13–14.

   439. The Bank was given a composite rating of "4" at the FDIC's 1999 examination, indicating an overall unsatisfactory condition and resulting in the Bank being considered a problem bank. FDIC Exh. 115, p. 2; Doerr, vol. 4, pp. 217–19.

   440. The FDIC's 1999 examination of the Bank detailed various violations of tax laws, financial recordkeeping requirements, Bank Secrecy Act and Part 362 of the FDIC's FDIC's Rules and Regulations ("Part 362"). FDIC Exh. 115, pp. 27–37; Starin, vol. 4, p. 24, lines 13–18.

   441. The Bank was cited for apparent violations of tax laws for failing to properly withhold payroll and income taxes from the compensation of Shollenburg, H. Hagy, Melton, R. Hagy and Knudson. FDIC Exh. 115, pp. 34–36; Starin, vol. 4, pp. 24–25.

   442. The FDIC's 1999 Report of Examination of the Bank reported the income tax liability as a contingent liability in the amount of $131,000, and adversely classified $127,000 of this amount as "Substandard" and the remaining $4,000 of "Loss." FDIC Exh. 115, p. 51; H. Hagy, vol. 5, pp. 181–82.

   443. Shollenburg, H. Hagy, Melton, R. Hagy and Knudson were individually and jointly responsible for the violations of tax laws cited at the FDIC's 1999 examination of the Bank. Starin, vol. 4, pp. 33–62.

   444. The Bank was cited for violations of financial recordkeeping requirements and the Bank Secrecy Act with respect to the establishment and/or opening of "Pure Trust" accounts, accounts that purported to shelter assets from seizure or levy, at the Bank. FDIC Exh. 115, pp. 30–33.

   445. The Bank was cited for violations of Part 362 for the issuance of an indemnification to Paychex, the Bank's payroll processor, by H. Hagy, for the benefit of Shollenburg, H. Hagy, Melton and Knudson to insure that Paychex would cease withholding of Social Security and Medicare taxes from these Respondents' wages. FDIC Exh. 115, pp. 36–37; Starin, vol. 4, pp. 25–26.

   446. The Bank had no substantial interest in the performance of the transaction involved (i.e., failure to withhold taxes) and there were no Bank customers who provided segregated deposits. FDIC Exh. 115, pp. 36–37; Starin, vol. 4, pp. 28–29.

   447. The indemnification granted to Paychex would not have been permissible for a national bank and, hence, was not permissible for the Bank without the FDIC's consent. FDIC Exh. 115, pp. 36–37; Starin, vol. 4, pp. 27–29.

   448. The Bank never requested or received the FDIC's consent to indemnify Paychex under Part 362 of the FDIC's Rules and Regulations. FDIC Exh. 115, pp. 36–37; Starin, vol. 4, p. 29, lines 6–9.

   449. An exit meeting was held between the FDIC, the California Department of Financial Institutions and the Bank's board of directors on September 29, 1999, in Los Angeles, California. FDIC Exh. 65.

   450. At the September 29, 1999 exit meeting, the FDIC examiners discussed the "Substandard" classification of the contingent liability for the tax withholding matter. FDIC Exh. 65, p. 3.

   451. At the September 29, 1999 exit meeting, FDIC Assistant Regional Director J. George Doerr disclosed that the FDIC was seriously considering possible management removal, including permanent ban on serving in the banking industry, against Shollenburg, H. Hagy, Melton, R. Hagy and Knudson. FDIC Exh. 65, p. 11.

CONCLUSIONS OF LAW

   1. The Bank is subject to the FDI Act, 12 U.S.C. §1811–1831y, the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws and regulations of the United States of America and State of California. 12 U.S.C. §§ 1813(e)(2), 1813(q)(3), 1814(a)(1) & 1819.

   2. The FDIC has jurisdiction over the Bank. 12 U.S.C. §§ 1813(e)(2) & 1813(q)(3).

   3. Respondents were "institution-affiliated parties" of the Bank. 12 U.S.C. §1813(u).

   4. The FDIC has jurisdiction over the subject matter of this proceeding. 12 U.S.C. §1818(e)(1).

   5. The Bank was subject to the Internal Revenue Code, Title 26 of the United States Code, including specifically sections 3101, 3102, 3121, 3402, 3403, and 6065, 26 U.S.C. §§ 3101, 3102, 3121, 3401, 3402, 3403, & 6065, and supporting regulations. 26 U.S.C.
{{10-31-03 p.A-3268.39}}

   §§ 3101, 3102, 3121, 3401, 3402, 3403 & 6065; Guterman, vol. 3, pp. 153–54.

   6. Respondents Shollenburg, H. Hagy, Melton, R. Hagy and Knudson caused, brought about, participated in and/or aided and abetted violations of the tax laws and regulations of the United States. FDIC Exhs. 90 & 115, pp. 34–36; Guterman, vol. 3, pp. 149–53; Starin, vol. 4, pp. 24–25 & pp. 33–62.

   7. By virtue of Respondents' conduct alone and with each other in causing the Bank to fail to comply with federal tax withholding laws and federal banking laws and regulations, Respondents caused, brought about, participated in or aided or abetted violations of law. 12 U.S.C. §1818(e)(1)(A)(i)(I).

   8. By virtue of Respondents' participation in the tax withholding misconduct, Respondents engaged in unsafe or unsound practices in connection with the Bank. 12 U.S.C. §1818(e)(1)(A)(ii).

   9. By virtue of Respondents' participation in the tax withholding misconduct, Respondents breached their fiduciary duty as officers, and in the case of Shollenburg, as an officer and director of the Bank. 12 U.S.C. §1818(e)(1)(A)(iii).

   10. By reason of these violations, unsafe or unsound practices and breach of fiduciary duty, the Respondents received financial gain or other benefit. 12 U.S.C. §1818(e)(1)(B)(iii).

   11. 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).

   12. By reason of these violations, 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).

   13. Respondents' actions and omissions demonstrate a willful or continuing disregard for the safety or soundness of the Bank and evidence the Respondents' personal dishonesty. 12 U.S.C. §1818(e)(1)(C).

PROPOSED ORDER

   1. This proceeding is hereby dismissed as to Respondent Robert Hagy.

   2. Respondents Dennis Shollenburg, Hazel Hagy, Vicky Melton, and Brenda Knudson, are hereby, without the prior written approval of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the Act, 12 U.S.C. §1818(e)(7)(D), prohibited from:

       (a) participating in any manner in the conduct of the affairs of any financial institution or organization enumerated in section 8(e)(7)(A) of the Act, 12 U.S.C. §1818(e)(7)(A);

       (b) soliciting, procuring, transferring, attempting to transfer, voting or attempting to vote any proxy, consent or authorization with respect to any voting rights in any financial institution enumerated in section 8(e)(7)(A) of the Act, 12 U.S.C. §1818(e)(7)(A);

       (c) violating any voting agreement previously approved by the appropriate Federal banking agency; or

       (d) voting for a director, or serving as an institution-affiliated party.

   IT IS FURTHER ORDERED that this ORDER will become effective thirty (30) days after issuance. The provisions of this ORDER will remain effective and enforceable 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.

   Dated this 31st day of October, 2002.

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