{{8-31-03 p.A-3269}}
[¶5270] In the Matter of Marsha Yessick, Cornerstone Community Bank,
Chattanooga, Tennessee, Docket No. 00-050k
(6-3-03).
Respondent is ordered to pay a civil penalty in the amount of
$5,000.
[.1] Civil Money Penalties (CMP)-Statutory Threshold
[.2] Civil Money Penalties (CMP)- Amount of penalty-Statutory
factors
[.3] Civil Money Penalties (CMP)-Mitigating circumstances
In the Matter of
MARSHA YESSICK,
individually and as an institution-affiliated party of
CORNERSTONE COMMUNITY BANK
CHATTANOOGA, TENNESSEE
(Insured State Nonmember Bank)
{{8-31-03 p.A-3270}}
DECISION AND ORDER OF ASSESSMENT OF CIVIL MONEY PENALTY
FDIC-00-050k
I. INTRODUCTION
This matter is before the Board of Directors ("Board") of
the Federal Deposit Insurance Corporation ("FDIC") following the
issuance on February 14, 2003, of a Recommended Decision and Order by
Administrative Law Judge Arthur L. Shipe ("ALJ") Assessing a
Civil Money Penalty ("Recommended Decision") against Marsha
Yessick ("Respondent"). The ALJ found that FDIC Legal Division
Enforcement Counsel ("Enforcement Counsel") established the
necessary elements, pursuant to sections 8(i)(2) and 18(j) of the
Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C.
§§ 1818(i)(2) and 1828(j), to assess a civil money penalty
("CMP") against Respondent in the amount of $5,000. For the
reasons discussed below, the Board adopts in full and affirms the
Recommended Decision and issues an Order Assessing a $5,000 Civil Money
Penalty against Respondent.
II. PROCEDURAL BACKGROUND
The FDIC initiated this action on October 11, 2001, pursuant to
section 8(i) of the FDI Act, 12 U.S.C. §1818(i), issuing a Notice of
Assessment of Civil Money Penalty, Findings of Fact and Conclusions of
Law, Order to Pay, and Notice of Hearing ("Notice") against
Respondent, individually and as an institution-affiliated party of
Cornerstone Community Bank, Chattanooga, Tennessee ("Bank"). The
Notice charged that Respondent, as a director and
institution-affiliated party of the Bank as defined in section 3(u) of
the FDI Act, 12 U.S.C. §1813(u), violated sections 23A and 23B of
the Federal Reserve Act, as amended, 12 U.S.C. §§ 371c and
371c-1("Section 23A" and "Section 23B"), which are made
applicable to insured State nonmember banks by section 18(j)(1) of the
FDI Act, 12 U.S.C. §1828(j)(1). Specifically, the Notice alleged
that Respondent, by causing or allowing the Bank's holding company to
overdraw its demand deposit account with the Bank, extended credit to
the holding company without obtaining collateral in violation of
Section 23A. The Notice further alleged that, because the holding
company was not required to pay overdraft fees or interest on the
extensions of credit, Respondent violated Section 23B in that such
extensions were made on terms not generally available to the Bank's
customers. The Notice also alleged that Respondent engaged in similar
violations of Section 23A and Section 23B by causing or permitting the
Bank to issue unfunded cashier's checks to the holding company's
principal shareholder without obtaining a promissory note from the
holding company or requiring the holding company to pay interest to the
Bank.
Although issued on October 11, 2001, the Notice was not officially
served on Respondent until January 9, 2002. Respondent answered the
Notice on January 28, 2002, and submitted an amended Reply on April 14,
2002.
Subsequently, both parties filed motions for summary disposition. On
July 31, 2002, after Enforcement Counsel, in its reply to Respondent's
motion for summary disposition, raised new allegations concerning
Respondent's role on the Bank's audit committee and Respondent
objected to the new allegations, the ALJ ordered that allegations not
raised in the Notice could not properly be considered part of the
proceeding unless made subject to an amended Notice. Thereafter, on
August 6, 2002, Enforcement Counsel issued an amended Notice including
allegations that Respondent, in her role as a member on the Bank's
Audit Committee, caused and/or permitted the violations of Section 23A
and Section 23B. Respondent replied to the amended notice on August 19,
2002, denying all allegations of misconduct against her.
A three-day oral hearing was held October 810 in Chattanooga,
Tennessee. Enforcement Counsel presented evidence through four
witnesses. Respondent, who acted as her own counsel throughout the
proceedings, did not testify but presented three witnesses on her
behalf.
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. On March 17, 2003, Respondent filed
Exceptions to the Recommended Decision and requested Oral Argument in
this matter, or, in lieu of oral argument, a stay, modification,
termination or setting aside of the recommended order ("Stay
Request"). On March 27, 2003, Enforcement Counsel filed a Response
in Opposition to Respondent's Request for Oral Argument.
{{8-31-03 p.A-3271}}
Request for Oral Argument
The grant of a request for oral argument is an extraordinary
matter within the discretion of the Board. In the Matter of
Ronald J. Grubb, FDIC Enforcement Decisions and Orders
¶5181, A-2008 (1992); 1992 WL 813163, at *2. In the instant
proceeding, the Board has a complete transcript of the hearing, a full
set of exhibits submitted by both parties, as well as pleadings, briefs
and other written submissions filed by the parties which, in the
Board's view, adequately state the factual and legal contentions of
both sides. For this reason, the Board sees no reason why it cannot
make its determination based on the written record before it.
Therefore, after considering Respondent's Stay 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' submissions, (2) no
benefit will be derived from oral argument, and (3) Respondent 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 of Practice and Procedure ("FDIC's Rules"), 12 C.F.R.
§308.40, and denies Respondent's Request for Oral Argument.
See, e.g. id.; In the Matter of the Bartlett Farmers
Bank, FDIC Enforcement Decisions & Orders ¶5220, A-2505 (1994);
1994 WL 711717, at *3.
Request for Stay
The Board also considered Respondent's Stay Request. A stay
pending judicial review is an extraordinary action committed to the
discretion of the FDIC. Section 8(h)(3) of the FDI Act, 12 U.S.C.
§1818(h)(3), provides that the commencement of proceedings for
judicial review shall not, unless specifically ordered by the court,
operate as a stay of any order issued by the appropriate federal
banking agency. See 12 C.F.R. §308.41; In the
Matter of Stanley R. Hendrickson, FDIC Enforcement Decisions and
Orders ¶5238, A-2797-2998 (1996), 1996 WL 627770, at *1. At this
point, however, until such time as Respondent files a timely appeal
from this Final Decision and Order, her Stay Request is premature.
Moreover, the Board's decision to adopt in full the ALJ's Recommended
Decision and Order effectively denies Respondent's request to
terminate, modify or set aside the ALJ's decision.
III. DISCUSSION
A. Factual Overview
1. Bank Structure
Because the ALJ provided a detailed and well-reasoned opinion
replete with citations to the record, the Board finds it unnecessary to
reiterate in full the contents of the Recommended Decision. The
discussion below, however, provides a description of the context in
which Respondent's violations occurred.
Respondent, a Chattanooga business owner and an active member of local,
civic, and business groups, was elected to the Bank's board of
directors and appointed to its Audit Committee in the latter part of
1996, not long after the Bank first opened for business. R.D. at 23;
FDIC Exh. 75, p. 8.1.1 In October 1997, the Bank of East
Ridge, which was owned by a holding company, East Ridge Bankshares,
merged into the Bank. R.D. at 23; Tr. Vol. 1 at 125. As a result of
the merger, East Ridge Bankshares became the owner of the Bank but its
name was changed to Cornerstone Bankshares, Inc. ("the Holding
Company"). After the merger, Respondent was a director of both the
Bank and the Holding Company and a member of the Bank's Audit
Committee. R.D. FOF ¶6; Tr. Vol. 1 at 82. Respondent's violations
relate to transactions between the Bank and the Holding Company. R.D.
at 3.
2. Internal Audit Deficiencies
From its inception, the Bank was criticized by regulators for
deficiencies in its internal audit function. In January 1997, less than
a year after the Bank first opened for business and before the merger,
the FDIC commenced a safety and soundness examination of the Bank's
books and records as of
1 Citations to the record shall be as follows:
Recommended Decision "R.D. at "
ALJ's Finding of Fact "R.D. FOF ¶ "
Transcript "Tr. Vol. at "
FDIC Exhibits "FDIC Exh. "
Respondent's Exhibits "Resp. Exh "
Respondent's Exceptions "Resp. Except. at "
Notice "Notice ¶ "
{{8-31-03 p.A-3272}}
September 30, 1996. Although the Bank received
an overall CAMEL rating of 2, the examination report included findings
that the Bank's Audit Committee was not active in 1996 and that the
Bank had not implemented an internal audit program. R.D. FOF ¶8; FDIC
Exh. 75 at 1.1, 8.2. During a February 18, 1997 meeting, the FDIC
Examiner-In-Charge ("Examiner") notified the Bank's board that a
functioning Audit Committee was needed. R.D. FOF ¶9; Tr. Vol. 1 at
3940; FDIC Exh. 75 at 15.
Yet when FDIC examiners returned to the Bank in August 1998, for a
safety and soundness examination of the Bank's books and records as of
June 30, 1998, they found that that although internal audit procedures
had been adopted in July 1998, the criticized areas had not improved
and that "[i]nternal audit is non-functioning." R.D. FOF ¶11;
FDIC Exh. 76 at 1. The examiners also noted that although the Audit
Committee met once in 1997, minutes were not maintained. FDIC Exh. 76
at 1, 6, 2930. Even Bank management admitted that only minimal
internal controls were in place. R.D. at 7; FDIC Exh. 33, p.2. The 1998
examination report included many findings relating to lack of internal
controls and audit deficiencies, noting, among other things, a failure
on the part of management to adequately direct and supervise, and lack
of a written procedures manual for internal audit guidance. R.D. FOF
¶11; FDIC Exh. 76 at 1, 6, 39. It was during the course of the 1998
examination that Section 23A and Section 23B violations were
discovered. R.D. at 7.
Before discussing the violations, however, the Bank's conduct in the
aftermath of the 1998 examination must also be considered because,
despite the revelation of legal violations and sharp regulatory
criticism two years in a row for the same deficiencies, the Bank
continued to operate with a noted lack of internal audit controls. R.D.
at 89. After the violations were found, the Examiner recommended the
assessment of civil money penalties against each of the Bank's
directors. R.D. at 7; FDIC Exh. 36; Tr. Vol. 2 at 208. While no
immediate steps were taken in that regard, the Bank, in November 1998,
entered into a Memorandum of Understanding ("MOU") which
required, among other things, that the Bank "implement internal
audit procedures." R.D. at 8; FDIC Exh. 50 at ¶12.
When the FDIC examiners returned to the Bank in June 1999 to
participate in a joint examination with the Tennessee Department of
Financial Institutions examiners, they found that the deficient areas
remained unimproved. R.D. at 8. The 1999 report of examination
("joint examination report") included findings of non-compliance
with certain aspects of the MOU, deficient internal audit function,
failure on the part of the audit committee to properly address the
internal audit function, and a lack of minutes or quarterly meetings of
the Audit Committee. R.D. at 89; R.D. FOF ¶¶2930; FDIC Exh. 77 at
3, 13, 27.
3. Violations of Section 23A and Section 23B
a. Overdrafts
The Holding Company maintained a demand deposit account with the
Bank. During the 1998 examination, it was discovered that the Holding
Company's account was overdrawn by $36,607 between January 8 through
April 7, 1998, and by $22,444 between May 5 and May 26, 1998. As found
by the FDIC examiners and by the ALJ, these overdrafts, which were not
collateralized and bore no interest, amounted to extensions of credit
in violation of Section 23A and Section 23B of the Federal Reserve Act.
R.D. at 5; FDIC; R.D. FOF ¶¶1220; FDIC Exh. 76 at 35. Specifically,
Respondent, as a director of the Bank, caused or allowed the Bank to
extend credit to the Holding Company in violation of Section 23A by
permitting the Holding Company to remain overdrawn without requiring
securitization.2 R.D. FOF ¶17. By the same token,
Respondent, in violation of Section 23B, caused or allowed the Holding
Company to remain overdrawn under terms not available in comparable
transactions with non-affiliated parties, as it was not required to pay
fees, or interest, or to execute a promissory note. R.D. FOF
¶18.3
2 Section 23A(c), made applicable to state
nonmember banks by section 18(j)(i) of the FDI Act, 12 U.S.C.
§1828(j)(1), requires that each loan, extension of credit,
guarantee, acceptance or letter of credit issued on behalf of an
affiliate by a bank or its subsidiary be secured at the time of the
transaction by collateral of at least 100% of the amount of such
transaction. 12 U.S.C. §371c(c)
3 Section 23B, made applicable to state
nonmember banks by section 18(j)(i) of the FDI Act, requires that any
loans or extensions of credit between affiliates must be on terms and
under circumstances that are substantially the same or at least as
favorable as those prevailing at the time for comparable transactions
with or involving non-affiliated companies. 12 U.S.C. §371c-1(a). In
this case, the Holding Company did not reimburse the Bank for these
overdraft charges and interest until December 1998, following
notification of the violations by the FDIC examiners. R.D. FOF ¶19;
FDIC Exh. 12 at 000176.
{{8-31-03 p.A-3273}}
b. The Young Puts
As part of the merger transaction between the Bank's predecessor
and the Bank of East Ridge, the Holding Company entered into a separate
agreement with David E. Young ("Young"), the principal
shareholder of the Bank of East Ridge's holding company, which
permitted Young to put to the Holding Company certain amounts of his
shares over a three-year period from 1998 through 2000. R.D. at 16. To
exercise his put options, Young was required to notify the Holding
Company of his intent in writing by March 1 of the respective year.
Upon receipt of the notice, the Holding Company was required to redeem
the stock within 30 days. R.D. at 4; R.D. FOF ¶21; FDIC Exh. 4.
Although Young apparently did not provide the required written notice
beforehand, he purported to exercise his puts, on March 23, 1998, by
presenting a number of shares to Timothy Hobbs ("Hobbs"), who was
then president of both the Bank and the Holding Company. In return,
Hobbs issued two Bank cashiers checks to Young and a related affiliate,
totaling $400,107.35 ("the cashier's checks"). Although the
Holding Company was listed on the checks as the remitter, the Bank
actually funded the checks because the Holding Company account was at
that time overdrawn. The amount of money involved in these extensions
of credits represented by the cashier's checks far exceeded Hobbs's
lending authority. R.D. at 9. The Bank recorded the amounts due first
in its general ledger as miscellaneous receivables but later moved the
entries to a Due From Banks account. Finally, in September 1998, a
group of the Bank's directors, using proceeds from a loan they
obtained from another bank, bought the stock previously tendered by
Young in order to clear the Holding Company's debt to the Bank. R.D.
at 4; R.D. FOF ¶¶20-24; FDIC Exh. 76 at 36.
The FDIC examiners and the ALJ concluded that the cashier's checks
were extensions of credit from the Bank to the Holding Company and
further determined that Respondent caused or allowed the Bank to
violate Section 23A in that the Bank failed to secure the extensions of
credit before it issued the cashier's checks. R.D. FOF ¶2527; Tr.
Vol. 1 at 145; FDIC Exh. 76 at 3536. They also concluded that
Respondent caused or allowed the Bank to violate Section 23B because
she never sought to have the Bank obtain a promissory note from the
Holding Company or require the Holding Company to pay interest or
principal on the loan. R.D. FOF ¶28; FDIC. Exh. 12 at 00176.
B. Legal Analysis: Assessment of a CMP Pursuant to
Section 8(i) is Warranted
The Board finds that based on the Bank's violations of Section
23A and Section 23B, an assessment of a CMP against Respondent is
appropriate. The pertinent factors are briefly analyzed below.
[.1] 1. Statutory Threshold
One of the statutory tools provided to the FDIC to make certain
that bank directors comply with their fiduciary obligations is the
imposition of CMPs for their violations or a bank's violations of law
or regulation. See Lowe v. FDIC, 958 F.2d 1526 (8th Cir.
1992). Pursuant to section 8(i) (2) (A) of the FDIC Act, the FDIC has
authority to impose CMPs by tiers in terms of the gravity of the
offense and concomitant severity of the penalty. In this case, the FDIC
sought to impose what is known as a First Tier CMP against Respondent
as a result the Bank's violations of Section 23A and Section 23B.
Unlike the imposition of Second or Third Tier CMPs, which require
increasingly higher elements of proof, the assessment of a First Tier
CMP requires only one element of proof that a violation occurred. 12
U.S.C. §1818(i)(2)(A). In other words, to assess First Tier
penalties, it is not necessary to demonstrate either knowledge or
intent. Id.; R.D. at 6. Because no knowledge or culpability
is required for the imposition of a First Tier CMP, Respondent cannot
escape liability based on her claim that she did not know of violations
until after they occurred. As the court in Lowe observed,
"if a director's liability is triggered by his knowledge, the
incentive is not to know too much." Lowe, 958 F.2d at
1536. Thus, the specter of First Tier CMPs should serve to keep
directors mindful of their fiduciary obligations.
{{8-31-03 p.A-3274}}
In this case, Enforcement Counsel established and the ALJ found that
the Bank and the Holding Company had engaged in transactions which
violated Section 23A and Section 23B of the Federal Reserve Act.
Respondent, who has readily acknowledged that she did not learn of the
violations until FDIC examiners notified the Bank's board, has claimed
that as an outside director, she could not possibly have learned of the
overdrafts and the cashier's checks as the violations were occurring.
Resp. Except. at 34. She further argued that because outside
directors do not routinely see the Bank's account and reconciliation
statements, she could not have learned of the overdrafts before they
were discovered by the examiners. Id.
But Respondent seems to miss the point that although she was not
expected to prevent the violations from occurring, had proper audit
procedures and internal controls been in place, she could have, as a
member of the Bank's board and Audit Committee, discovered and
remedied the violations before the FDIC examiners uncovered them. R.D.
at 7, 13. Moreover, Respondent cannot claim and has not claimed that
she was not notified on many occasions of the regulators' concerns
regarding audit and internal control deficiencies. As discussed above
and in the Recommended Decision, the Bank's board of directors was
notified repeatedly between 1997 and 1999 by the FDIC, the Tennessee
Department of Financial Institutions, and its own auditors both
orally and in the reports of examination that the Bank was operating
with sorely insufficient internal controls and audit procedures.
Significantly, even after the Bank's board was notified of the
violations in 1998, it was cited for the same deficiencies in the 1999
joint examination report. R.D. at 89.
A fundamental duty of a bank board of directors is "to monitor
operations to ensure that they are controlled adequately and are in
compliance with laws and policies." Pocket Guide for Directors, p.
1. (FDIC 1997). A director cannot ignore this duty even after warnings
and expect her inattention to protect her from First Tier penalties
when regulatory violations flourish because of her laxity. Moreover, as
a member of the Bank's Audit Committee who had been alerted to the
Bank's audit deficiencies, Respondent had a heightened duty to follow
up on the cited problems. See, e.g., In the Matter of Baker, FDIC Enforcement Decisions & Orders ¶5199, A-2285 (1993); 1993 WL
853609, at *7 (director's failure to inquire, investigate, verify,
clarify or explain is a breach of an officer or director's fiduciary
duty); In the Matter of Leuthe, 1 FDIC Enforcement Decisions
and Orders, ¶5249, A-1235 (1998), 1998 WL 438323, at *13 ,
aff'd, 194 F. 3d 174 (D.C. Cir. 1999) ("The greater the
authority of the director or officer, the broader the range of his
duties; the more complex the transaction, the greater the duty to
investigate, verify, clarify and explain.") . In the Matter of
***, FDIC Docket No. 80-35K, Adjudicated Decision ¶5004-A-53
(1980); 1980 WL 140861, at *19 ("[N]either the Board's passivity
nor its lack of knowledge concerning overdrafts will excuse it from
[the statute's] reach.").
[.2] 2. The $5,000 CMP Assessment is Warranted
Because the statutory requirements authorizing the assessment of
the CMP have been met, the appropriate amount of the penalty can be
calculated. Leuthe ¶5249, A-2965. Pursuant to section
8(i)(2)(A) of the FDI Act, 12 U.S.C. §1818(i)(2)(A), the agency may
assess a First Tier CMP against an institution or an
institution-affiliated party of as much as $5,500 for each day during
which the violation continued.4 But before assessing a
CMP, the FDIC, pursuant to section 8(i)(2)(G) of the FDI Act, 12 U.S.C.
§§ 1818(i)(2)(G), and section 308.132(b) of the FDIC's Rules, 12
C.F.R. §308.132(b), must consider as possible mitigating factors the
financial resources and good faith of Respondent, the gravity of the
violations, Respondent's history of previous violations, and other
matters as justice may require.
[.3] As is evident from the record in this case, the Examiner considered the
statutory mitigating factors found at 12 U.S.C. §1818(i)(2)(G) as
well as the 13-factor analysis found in the Interagency Policy
Regarding the Assessment of Civil Money Penalties
4 Section 308.132(c)(3)(i) of the FDIC's
Rules adjusted upward the statutory penalty from $5,000 per day to
$5,500 per day. 12 C.F.R. §308.132(c)(3)(i). The Board notes that
the FDIC Examiner in his May 31, 2002 Affidavit filed in support of his
CMP calculation ("Affidavit") mistakenly cited to section
308.116(4) of the FDIC's Rules in referring to the increased daily
penalty. Resp. Exh. 19 at 7 n.1. However, his reliance on that
provision which applies only to willful violations of the Change in
Bank Control Act is harmless because the ceiling for First Tier CMPs
was increased in both sections to $5,500 per day.
{{8-31-03 p.A-3275}}
by the Federal
Financial Institutions Regulatory Agencies, 45 Fed. Reg. 59,423 (Sept.
9, 1980) ("Interagency Policy").5 FDIC Exh. 36. The
Examiner found and Respondent agreed that Respondent had sufficient
resources to pay the $5,000 CMP. Tr. Vol. 3 at 373374; Resp. Exh. 19
at 8. The Examiner also found that Respondent was cooperative with the
regulators and showed genuine concern about remedying the Bank's
violations. Even though the joint examination report revealed that the
Bank still lacked internal audit procedures, Respondent had, upon
notification of the Section 23A and Section 23B violations, personally
requested that Bank management routinely forward overdraft reports to
the Bank's board. FDIC Exh. 37 at 6; R.D. at 14. She was also involved
in discharging Hobbs and hiring new management. Resp. Except. at 3, 6;
Tr. Vol. 3 at 527.
Among other factors considered by the Examiner was the length of time
the violations remains undiscovered and uncorrected as well as the
amount of moneymore than $450,000involved. Resp. Exh. 19 at
¶¶1819. After reviewing all of the pertinent factors,
including the Bank's continued failure to establish an audit program
and internal controls in compliance with the MOU, the Examiner
recommended that each of the Bank's 14 board members pay a CMP of
$5,000. Resp. Exh. 19 at 12.6
After reviewing the entire record and considering the statutory and
regulatory factors, the Board is satisfied that the imposition of a
$5,000 CMP against Respondent is appropriate.
C. Respondent's Exceptions
Respondent has filed Exceptions to the Recommended Decision, some
of which have been addressed by the ALJ in the Recommended Decision and
by the Board in the discussion above. The issues raised by
Respondent's Exceptions can be divided into two categories: (1)
challenges to various aspects of the proceedings and the ALJ's
findings, and (2) mitigating factors. The Board will address in turn
both categories of exceptions.
1. Challenges Regarding the Proceeding
Respondent's Failure to Testify
Respondent claims that she was disadvantaged because she did not
testify at the hearing. Resp. Except. at 2, 8. Although the decision
about whether or not to testify was clearly Respondent's choice, she
argues that because she is not an attorney and has never participated
in a trial, she mistakenly assumed that Enforcement Counsel would have
called her as a witness, at which point she would have had the
opportunity to tell her story in a narrative fashion. Id. at
2.
Having considered Respondent's argument, the Board finds that it is
for several reasons without merit. First, Respondent, as she was free
to do, chose to represent herself in this proceeding.7
Because she decided to proceed pro se, she cannot
now claim a disadvantage or use her lack of expertise to
5 The Board notes that the 1980 Interagency
Policy cited by the Examiner in his Affidavit was updated in June 1998
and, therefore, should have been referenced by the Examiner.
See 63 Fed. Reg. 30,226 (June 3, 1998); Resp. Exh. 19 at
¶19. The Board finds, however, that the Examiner's reliance on the
earlier Interagency Policy is inconsequential because the 13 factors
cited for consideration in determining a CMP assessment are virtually
identical in both versions of the Interagency Policy. The 13 factors
contained in the Interagency Policy are:
1. Whether the violation was committed with a disregard for the law or
the consquences to the institution;
2. The frequency or recurrence of the violations, and the length of
time the violation has been outstanding;
3. The continuation of the violation after the Respondent became aware
of it;
4. Failure to cooperate with the agency in effecting an early
resolution of the problem;
5. Evidence of concealment of the violation or its voluntary
disclosure;
6. Threat of or actual loss or other harm to the institution;
7. Evidence that participants or their associates received financial or
other gain or benefit or preferential treatment as a result of the
violation;
8. Evidence of restitution by the participants in the violation;
9. A history of similar violations;
10. Previous criticism of the institution for a similar violation;
11. The presence or absence of a compliance program and its
effectiveness;
12. The tendency to create unsafe or unsound banking practices or a
breach of fiduciary duty; and
13. The existence of agreements, commitments, or orders to prevent the
violations.
6 Except for the Respondent, each of the
Bank's directors agreed, prior to the issuance of the Notice, to pay a
$5,000 CMP. R.D. at 5.
7 Section 308.6(a)(2) of the FDIC's Rules
permits a non-attorney to appear on his or her own behalf in FDIC
adjudicatory proceedings. 12. C.F.R. §308.6(a)(2).
{{8-31-03 p.A-3276}}
challenge the
ALJ's Recommended Decision.8 But more importantly, the
Board finds that Respondent was not in fact disadvantaged by her
failure to testify. Respondent's factual and legal arguments were
fully elicited through her witnesses, her written submissions, her
exhibits and her closing argument to the ALJ. Because neither the ALJ
nor the Board drew an adverse inference from Respondent's silence, the
issue is not material to the Board's decision.9 See
In the Matter of Harold Hoffman, FDIC Enf. Decisions & Orders
¶5140, A-1494 (1989); 1989 WL 609345, at *7.
Duration of the Violations
Respondent also asserts that the FDIC never properly notified her
regarding the length of time of the underlying violations. While it is
difficult to determine the precise nature of her complaint in this
regard, the Board notes that the period of time that each of the
overdrafts was outstanding was specifically delineated in the Notice.
Notice ¶¶13-20. Moreover, section 8(i) of the FDI Act, 12 U.S.C.
§1818(j)(2)(G), plainly states that a CMP may be assessed for each
day a violation continues. In addition, because the contents of the
Notice fully complied with the requirements of section 308.18(b) of the
FDIC's Rules, 12 C.F.R. §308.18(b), Respondent's claim insofar as
it appears to attack the sufficiency of the Notice is baseless.
Singled Out
Respondent also argues that unlike her fellow Bank directors, she
was singled out in the amended Notice with additional charges relating
to her duties as a member of the Bank's Audit Committee. But in fact,
as noted above, each of the Bank's other 13 directors consented to the
issuance of a $5,000 CMP against them before any formal Notice was
filed. Thus, as expected, because she was the sole Bank director who
did not consent to a CMP beforehand, Respondent was the only
institution-affiliated party named in the Notice. As discussed above,
Enforcement Counsel, pursuant to the ALJ's order, amended the Notice
ten months after it was originally issued to include allegations
relating to Respondent's Audit Committee duties. There was nothing
improper about amending the Notice and, in fact, section 308.20(a) of
the FDIC's Rules confers on all parties broad authority to amend
pleadings.10 The amendment served to provide additional
detail of the charges that were already set forth in the original
Notice, to all of which charges Respondent was offered an adequate
opportunity to respond. See Leuthe ¶5249 at
A-2925; 1998 WL 438323, at *10. Thus, Respondent's due process rights
were not violated and her claim that she was deliberately treated
differently from her fellow directors is baseless. So long as it was
established that Respondent was an institution-affiliated party and
that a violation occurred, the agency was free to proceed against her.
Id. at ¶5249, A-2923, 1998 WL 438323, at *7 ("[T]he
decision to proceed with this matter was an appropriate exercise of the
FDIC's discretion and wholly consistent with the legal requirements
for the remedies applied.")
Elements of Proof
Respondent also argues in her Exceptions that some element of
intent or willfulness must be shown in order to impose a CMP. Resp.
Except. at 8. However, as discussed in greater detail above, the
imposition of First Tier CMPs requires just one element of proof
that a violation occurred that can be attributed to the individual
charged. In this case, Enforcement Counsel has demonstrated and
Respondent has acknowledged that the Bank violated Section 23A and
Section 23B. Thus, regardless of intent, a First Tier CMP may be
assessed, since in her position as a director, Respondent is an
affiliated party to whom the violation is attributable.11
See Fitzpatrick v. FDIC, 765 F. 2d 569, 576 (6th Cir. 1985).
Lack of Knowledge
In a similar vein, Respondent takes issue with the ALJ's
finding that because she was a Bank director, she was
8 The Board notes too that Respondent is not
the typical pro se litigant to whom courts normally afford
great leniency an indigent with limited education. See Neitzke
v. Williams, 490 U.S. 319,330 (1989). Respondent is a successful
businesswoman who could have obtained qualified legal counsel to
represent her during this proceeding.
9 In fact, the Board, in reviewing the record
in this case in particular the hearing transcripts and Respondent's
written submissions is favorably impressed by Respondent's written
and oral advocacy skills,, notwithstanding the ruling on the merits of
her claims.
10 The notice or answer may be amended or
supplemented at any stage of the proceeding." 12 C.F.R.
§308.20(a).
11 A violation includes "any action (alone
or with others) for or toward causing, bringing about, participating
in, counseling, or aiding or abetting a violation." 12 U.S.C.
§1813(v). As discussed above, Respondent's breaches of fiduciary
duty and unsafe practices by permitting the overdrafts constituted such
violations.
{{8-31-03 p.A-3277}}
likely solicited
by Bank management to buy the Young stock and, as such, should have
been tipped off about the cashier's checks before the FDIC examiners
discovered the overdrafts. Resp. Except. at 1; R.D. at 1213.
Respondent, for her part, flatly denies that she was asked to
participate in the Young stock purchase. Id. at 12.
However, whether or not Respondent knew about the cashier's checks in
advance of the examiners' discovery is beside the point. The important
detail is that Respondent, as a member of the Bank's board and its
Audit Committee, should have learned of the violations at some point
before hearing it from the examiners, but that due to lax oversight and
the absence of internal controls, she did not.
For the same reason, Respondent's claim, to the effect that the ALJ
erred in assessing the CMP because it was the Bank's president who
circumvented the lending limit parameters, is also baseless. Resp.
Except. at 3. The fact that the environment allowed for such violations
underscores the importance of internal audit controls. The FDIC
examiners had warned in 1997 that internal audit functions needed
improvement. As a Bank director and a member of the Audit Committee,
Respondent is properly held accountable for the violations that might
have been prevented (or at least detected much sooner) if Respondent
had insisted that the Bank's systems function as they were supposed
to. R.D. at 17; FDIC Exh. 76 at 1, 6, 29.
Delays
Finally, Respondent argues that she has been prejudiced by the
FDIC's delay in initiating the formal CMP proceeding against her. R.D.
at 9. Respondent is correct that more than four years have passed since
she first learned from FDIC examiners of the Section 23A and Section
23B violations. FDIC Exh. 37 at. 3; FDIC Exh. 76 at 7. Although the
FDIC considered assessing CMPs against the directors when the
violations were discovered in 1998, the FDIC decided not to pursue them
at that point. R.D. at 78; Tr. Vol. 2 at 208. It was not until after
the MOU had been put in place and the joint examination report revealed
that the Bank's internal audit program remained woefully deficient,
that the FDIC regulators decided to take action. R.D. at 9; Tr. Vol. 3
at 438.
In February 2000, Respondent and her co-directors received notice from
the FDIC Regional Director that the FDIC was considering recommending
CMPs against each of them for the 1998 violations. In the spring of
2000, each Bank director except Respondent, instead of going to
hearing, settled the matter by signing a Stipulation and Consent to the
Issuance of an Order to Pay and agreeing to pay a CMP of $5,000. FDIC
Exh. 64.
Shortly thereafter, Respondent was informed by letter from the Regional
Director that the FDIC intended to proceed against her with the civil
money penalty assessment pursuant to section 8(i) of the FDI Act. Resp.
Exh.18. Fifteen months later, on October 11, 2001, the FDIC issued the
Notice, which was served on Respondent three months after that in
January 2002.
The Board notes at the outset that the Notice was filed within the
five-year statute of limitations established in Proffit v
FDIC, 200 F. 3d 855 ( D.C. Cir. 2000) (FDIC has five years to
issue a notice beginning from the date of the transaction or occurrence
that gives rise to the enforcement action). Nonetheless, the better
practice would have been to issue the Notice earlier in time. The
assessment of CMPs against directors for a Bank's legal misconduct
will have the maximum regulatory impact if such assessment closely
follows the alleged improper conduct.
Notwithstanding the above, the Board is not persuaded that Respondent
was harmed by the delay. In terms of the amount of the penalty, the
FDIC demanded nothing more from Respondent in the formal Notice than it
asked in 2000 from all of the Bank directors including Respondent.
Moreover, Respondent has not claimed and the record does not show that
she was harmed by unavailable testimonial or documentary evidence,
faulty memory or any of the other circumstances that might arise with
the passage of time. Thus, there is no basis for concluding that the
ALJ would have made different findings or imposed a lesser penalty had
the Notice been filed in 2000 and, as such, the FDIC's delay cannot
serve as a basis for disturbing the Recommended Decision and Order.
2. Mitigating Factors
Respondent's remaining exceptions relate to mitigating factors.
As discussed above,
{{8-31-03 p.A-3278}}
the ALJ found that the FDIC had fully justified its
CMP assessment in accordance with the statutory and regulatory
requirements. R.D. at 14. As described in detail in his affidavit, the
Examiner fully considered the mitigating factors set forth in 12 U.S.C.
§1818(j)(2)(G) and 12 C.F.R. §308.132(b). He also reviewed and
considered the 13 factors set forth in the Interagency Policy. Resp.
Exh. 19.
Based on his analysis, the Examiner concluded that the FDIC could have
assessed a total CMP as high as $1.6 million ($5,500 per day for each
day that the overdrafts were outstanding). Resp. Exh. 19 at 7. However,
after considering the mitigating factors, he arrived at a CMP of a flat
$5,000.
Each mitigating factor raised by Respondent in her Exceptions was
addressed by the Examiner. He considered, for example, that she had no
prior banking experience and was unfamiliar with the pertinent law.
Resp. Except. at 1; Resp. Exh. 19 at 8. He also noted in her favor that
she had been cooperative with the FDIC and had taken corrective steps.
Resp. Except. at 6; Resp. Exh. 19. at 8, 10. Finally, the
Examiner took into account the fact that the Bank had not been
previously cited for Section 23A and Section 23B violations. Resp.
Except. at 4, 6; Resp. Exh. 19 at 8, 11. Thus, because it is clear that
the Examiner carefully considered each of the mitigating factors as it
relates to Respondent and the Board has found no basis for
second-guessing either his thoughtful analysis or the ALJ's
conclusion, each of Respondent's exceptions in this regard are denied.
See, In the Matter of Anderson County Bank, Clinton,
Tennessee. 2 FDIC Enforcement Decisions and Orders ¶5165A,
A-1734.4 (1991) (considerable deference and weight should be given to
the opinions and conclusions of FDIC examiners.); accord Sunshine
State Bank v. FDIC, 783 F.2d 1580, 158283 (11th Cir. 1986).
IV. CONCLUSION
After a thorough review of the record in this proceeding, and for
the reasons set forth above, the Board finds that an Assessment of a
CMP against Respondent in the amount of $5,000 is warranted. The
Bank's violations of Section 23A and Section 23B were clearly
established and the dollar amount of the assessment is appropriate
under the statute, even as the Board accepts the ALJ's acknowledgement
of Respondent's positive contribution to the Bank.
Based on the foregoing, the Board affirms the Recommended Decision of
the ALJ, adopts in full the findings of fact and conclusions of law
included therein, and issues the following Order implementing its
Decision.
ORDER TO PAY CIVIL MONEY PENALTY
The Board, having considered the entire record in this proceeding,
taking into account the appropriateness of the penalty with respect to
the size of the financial resources and good faith of Respondent, the
gravity of the violations and such other matters as justice may
require, it is hereby ORDERED and DECREED that:
1. A civil money penalty is assessed against Marsha Yessick in
the amount of $5,000 pursuant to 12 U.S.C. §1818(i).
2. This ORDER shall be effective and the penalty shall be final and
payable thirty (30) days from the date of its issuance.
The provisions of this ORDER will remain effective and in force
except to the extent that, and until such time as, any provision of
this ORDER shall have been modified, terminated, suspended, or set
aside by the FDIC.
IT IS FURTHER ORDERED that copies of this Decision and Order shall be
served on Marsha Yessick, Enforcement Counsel, the ALJ, and the
Commissioner of Banking for the State of Tennessee.
By direction of the Board of Directors.
Dated at Washington, D.C., this 3rd day of June, 2003.