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FDIC Enforcement Decisions and Orders

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   [8033] In the Matter of James E. Abbott, Richard L. Gordon, Morris R. Shields, John H. Westering, Alan W. Friesen, Bruce A. Hocking, Glenn P. Oorlog, Ritch A. Bahe, Community First State Bank, Alliance, Neb., Nos. FDIC-94-167e and FDIC-95-187k (7-26-96)

   FDIC denies respondents' request for a private hearing. Respondents' claims promote their own personal interests rather than the public interest, including the safety and soundness of any financial institution.

   [.1] Hearings—Private vs. Public Hearings—Burden on Respondent
   Respondents seeking a private hearing must be able to distinguish themselves from the typical respondent and "demonstrate in a concrete fashion how the effects of this proceeding differ so significantly from those involving other banks as to warrant special treatment" to justify the request for a private hearing.
   [.2] Hearings—Private vs. Public Hearings—Standard for Requiring Private Hearing
   Concern for the safety and soundness of an institution should be the primary consideration in determining whether to mandate private proceedings in a particular case.
   [.3] Institution-Affiliated Parties—Definition
   There is no requirement anywhere in the Federal Deposit Insurance Act that there be a judicial or administrative finding on the record of "guilt" to be considered an institution-affiliated party.
   [.4] Hearings—Private vs. Public Hearings—Privacy Interests of Outsiders
   The effectiveness of the FDIC to protect the public interest in the stability of the deposit insurance fund and the banking system would be frustrated if private hearings were granted to individuals who engaged in improper conduct that threatened the safety and soundness of a financial institution simply because they were not officers, directors, or actual employees of the institution.
   [.5] Hearings—Private vs. Public Hearings—Concern for Respondents' Reputation
   Concern that a public hearing will damage a respondent's reputation is not, in and of itself, grounds for a private hearing.
   [.6] Hearings—Private vs. Public Hearings—Privacy Interests of Nonparties
   Existence of non-party privacy interests is insufficient to serve as the basis for a private hearing.
   [.7] Hearings—Private vs. Public Hearings—Claims of Innocence
   If claims of innocence were enough to grant a private hearing, it is likely that all respondents would make such claims, thus frustrating the purpose of the Federal Deposit Insurance Act.
   [.8] Hearings—Private vs. Public Hearings—Discussions Between FDIC and Respondent
   Discussions between the FDIC and a respondent prior to the issuance of a Notice of Charges have no bearing on whether a private hearing is in the public interest.

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In the Matter of
JAMES E. ABBOTT,
individually and as a principal
shareholder, director, person
participating in the conduct of the
affairs and/or an institution-affiliated
party of,
RICHARD L. GORDON,
individually and as a person
participating in the conduct of the
affairs and/or an institution-affiliated
party of,
MORRIS R. SHIELDS,
individually and as a director, a person
participating in the conduct of the
affairs and/or an institution-affiliated
party of,
JOHN H. WESTERLING,
individually and as an officer, a person
participating in the conduct of the
affairs and/or an institution-affiliated
party of,
and
ALAN W. FRIESEN, BRUCE A.
HOCKING
, GLENN P. OORLOGAND
RITCH A. BAHE
,
individually and as persons
participating in the conduct of the
affairs and/or institution-affiliated
parties of,
COMMUNITY FIRST STATE BANK
(formerly The Abbott Bank)
ALLIANCE,NEBRASKA
(Insured State Nonmember Bank)
FDIC-94-167e
FDIC-95-187k
DECISION AND ORDER ON
REQUESTS FOR PRIVATE HEARING

BACKGROUND

   On February 28, 1996, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Intention to Prohibit From Further Participation; Notice of Assessment of Civil Money Penalties, Finding of Facts and Conclusions of Law, Order to Pay and Notice of Hearing (collectively "Notices") against Respondents James E. Abbott, Richard L. Gordon, Morris R. Shields, John H. Westering and Alan W. Friesen, Bruce A. Hocking, Glenn P. Oorlog, and Ritch A. Bahe pursuant to sections 8(e) and 8(i)(2) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §§ 1818(e) and 1818(i)(2). The Notices allege that Respondents Friesen, Hocking, Oorlog and Bahe, as institution-affiliated parties of Community First State Bank, Alliance, Nebraska ("Bank") (formerly The Abbott Bank), knowingly and/or recklessly participated in violations of law or regulations and/or unsafe or unsound practices which caused more than a minimal financial loss to, or a significant adverse effect on, the Bank.
   This matter comes before the FDIC on the Requests for Private Hearing filed on May 7, 1996, by Respondents Friesen, Hocking, Oorlog, and Bahe. FDIC Enforcement Counsel filed an Opposition on May 16, 1996.

DISCUSSION

   Each Respondent, in varying degrees of detail, proclaims his innocence, asserts that holding a public hearing would harm his professional and personal reputation, and argues that he cannot be deemed an institution-affiliated party unless and until found "guilty" of the allegations. In addition, each argues that because no bank is named as a respondent in the Notices, the safety and soundness considerations underlying prior decisions denying requests for private hearings are inapposite and, therefore, unique privacy considerations are present militating in favor of a private hearing.

   [.1,.2] Section 8(u) of the FDI Act requires public hearings, "unless the agency, in its discretion, determines that holding an open hearing would be contrary to the public interest." 12 U.S.C. § 1818(u)(2). Respondents seeking a private hearing must be able to distinguish themselves from the typical respondent and "demonstrate in a concrete fashion how the effects of this proceeding differ so significantly from those involving other banks as to warrant special treatment" to justify the request for a private hearing. In the Matter of The Citizens Bank of Clovis, Clovis, New Mexico, FDIC-91-406b, 1 (Aspen) FDIC Enf. Dec. & Ord., ¶8012, p. I-46 (1992). The Board of Directors of the FDIC ("Board") observed that "common sense suggests that concern for the safety and soundness of an institution should be the primary consideration in determining whether to mandate private proceedings in a particular case." Id.
   Respondents in the instant matter attempt to show that this case "differs so significantly from those involving other banks as to warrant special treatment" by arguing that they are unlike the typical respondents which usually consist of either banks or insider in- {{6-30-97 p.I-113}}stitution-affiliated parties such as officers, directors or employees. See 12 U.S.C. § 1813(u)(1). They state that they are neither. Respondents claim that because they had no personal interest in the Bank and were merely outsiders hired to provide professional services the public interest would not be served by a public hearing.

   [.3] Further, Respondents claim that because the Notices charged them as institution-affiliated parties pursuant to 12 U.S.C. § 1813(u)(4),1 they cannot legally be considered institution-affiliated parties unless and until there has been a finding of "guilt" on the merits of the allegations. While Respondents' argument has some surface appeal, they are indeed institution-affiliated parties.2 There is no requirement anywhere in the statute that there be a judicial or administrative finding on the record of "guilt" to be considered an institution-affiliated party. The Respondents in this case are alleged to have knowingly and/or recklessly permitted the Bank to pay more than $750,000 in personal accounting expenses of Respondent Abbott.

   [.4] Moreover, the claim that Respondents are not a financial institution has no bearing on the safety and soundness of a bank. The effectiveness of the FDIC to protect the public interest in the stability of the deposit insurance fund and the banking system would be frustrated if private hearings were granted to individuals who engaged in improper conduct that threatened the safety and soundness of a financial institution simply because they were not officers, directors or actual employees of the institution.

   Respondents' argument also ignores the fact that the public hearing requirement includes section 8(e) prohibition proceedings which must be brought against institution-affiliated parties that are almost always individuals. If Congress was concerned about privacy of individuals when it amended section 8(u), it is likely there would have been an exception to the public hearing requirement for section 8(e) proceedings. Creating such an exception under the circumstances of this case would have substantially frustrated the purpose of the public hearing statute.3

   [.5] Respondents further contend that a public hearing will damage their professional reputations. Respondents' anticipation of harm from a public hearing is speculative at best. Concern that the reputation of a party subjected to a public hearing will be unjustly damaged exists in all section 8 proceedings. In the Matter of Freedom Financial Thrift and Loan Association, El Toro, California, FDIC-92-68b, 1 (Aspen) FDIC Enf. Dec. & Ord., ¶8020, p. 1-65 (1992); In the Matter of The American Bank of the South, Merritt Island, Florida, FDIC-92-17b, 1 (Aspen) FDIC Enf. Dec. & Ord., ¶8015, p. I-57 (1992). Thus, concern that a public hearing will damage a respondent's reputation is not, in and of itself, grounds for a private hearing. Freedom Financial, at I-66.

   Respondents rely heavily on the holding in Anonymous v. FDIC, 617 F. Supp. 509 (D.D.C. 1985) to support their view that concern for a respondent's reputation and privacy are valid in the circumstances of this case. In Anonymous, the FDIC requested the court to unseal the proceedings with the exception of bank examination reports. The court denied the request holding the plaintiff's privacy interest and reputation outweighed the public's interest in the plaintiff's identity. Respondents' reliance on this case is unfounded since this decision was issued when all FDIC administrative enforcement proceedings were, by statute, held in private and only the final decision without the names of the individual respondents was published. In 1991, Congress amended section 8(u) and expressed the preference for public hearings.


1Pursuant to 12 U.S.C. § 1813(u)(4), an institution-affiliated party is "any independent contractor (including any attorney, appraiser or accountant) who knowingly or recklessly participates in a violation ... which caused or is likely to cause more than a minimal financial loss to, or a significant adverse effect on," the subject bank.

2In addition to the definition of institution-affiliated parties in section 3(u)(4), section 3(u)(3) defines institution-affiliated parties as "any shareholder ... consultant, joint venture partner, and any other person as determined by the appropriate Federal banking agency (by regulation or case-by-case) who participates in the affairs of an insured depository institution." 12 U.S.C. § 1813(u)(3) (emphasis added). The Notice specifically charged Respondents as persons "participating in the affairs" of the Bank.

3Moreover, any adverse impact of publication Respondents anticipate should have already been realized since Respondent Gordon publicly revealed the allegations against Respondents by attaching the FDIC's "Notice of Charges" as an exhibit to his complaint filed with the District Court for the District of Nebraska. See Gordon v. Hansen, Doc. No. 8CV96–160. As a result, Respondents have already lost any expectation of privacy in the matter.
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   [.6] Respondents further contend that not only does their firm's reputation stand to be damaged in a public hearing, but the reputation of those individuals affiliated with their firm as well. It is acknowledged that the possibility of injury to innocent third parties is a potential risk. However, disclosure of certain information regarding individuals who are not parties to the proceeding does not threaten the safety and soundness of the insured institution. American Bank, at I-58. Non-party interests are afforded protection by other methods such as "sealed reports of examination and other documents." Clovis, at I-49. Thus, the existence of non-party privacy interests is insufficient to serve as the basis for a private hearing. American Bank, at I-58.

   [.7] Likewise, each Respondent expresses confidence that he is innocent of the charges and will be vindicated at the hearing. The argument continues that because the FDIC has erred in bringing the charges, a public hearing of the matter is against the public interest. Similar to the cases concerning reputation, the Board has observed that if claims of innocence were enough to grant a private hearing, it is likely all respondents would make such claims, thus frustrating the purpose of the statute. See In the Matter of National Bank of Pakistan, Karachi, Pakistan (Chicago, Illinois Branch), FDIC-92-183c & b, 92-065-B-FB, 92-065-CMP-FB, 1 (Aspen) FDIC Enf. Dec. & Ord., ¶8018, p. I-62; Freedom Financial, at I-66; In the Matter of The Farmers Bank, Windsor, Virginia, FDIC-92-292b, 1 (Aspen) FDIC Enf. Dec. & Ord., ¶8025, p. I-83 (1992).

   [.8] Finally, Respondents argue that they were denied an opportunity to respond to the allegations against them prior to the issuance of the "Notice of Charges," and the public airing of these untested allegations prior to an adjudicated determination that they are institution-affiliated parties, is against the public interest.4 Discussions between the FDIC and a respondent have no bearing on whether a private hearing is in the public interest. "The primary duty of the FDIC is to protect the insurance fund, and therefore, the `public interest' test should reflect this emphasis by concentrating on safety and soundness concerns." Clovis, at I-48.

   In the Matter of Visalia Community Bank, Visalia, California, FDIC-93-141b, 1 (Aspen) FDIC Enf. Dec. & Ord., ¶8028, p. I-95 (1993), the FDIC also held "certain financial transactions involving [named individuals] are a critical part of this action," thus, "these [named individuals] are in fact institution-affiliated parties" that must adhere to any orders issued as a result of the administrative proceeding. Like the actions of the respondents in Visalia, the actions of Respondents in the instant matter are integral to this action. Their acts constituted a threat to the safety and soundness of the Bank. Specifically, Respondents are accused of knowingly and/or recklessly permitting the Bank to pay more than $750,000 in personal accounting expenses of Respondent Abbott.
   Respondents have failed to articulate a reason why closure of the hearing would be in the public interest. Respondents' individual and collective claims promote their own personal interests rather than the public interest, including the safety and soundness of any financial institution. Further, Respondents have failed to distinguish themselves from other cases where reputation or privacy interests of institution-affiliated parties are at issue. Accordingly, the Requests for Private Hearing are denied.

ORDER

   For the foregoing reasons, it is hereby ORDERED that the Requests for Private Hearing are DENIED, pursuant to delegated authority, upon the advice and recommendation of the General Counsel.
   Dated at Washington, D.C., this 26th day of July, 1996.


4 The Respondents' argument is based on a criminal case in which the rules of a grand jury proceeding are questioned. Douglas Oil Co. v. Petrol Stops Northwest, 441 U.S. 211 (1979) The instant matter consists of a civil administrative proceeding where there is a statutory preference for public hearings, unlike grand jury proceedings in criminal cases.

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