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FDIC Enforcement Decisions and Orders

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   [8036] In the Matter of James E. Abbott, et al., Community First State Bank (Formerly the Abbott Bank), Alliance, Nebraska, Docket No. FDIC-94-167e and FDIC-95-187k (9-16-97)

   On Interlocutory Review, the FDIC Board found that FDIC Enforcement Counsel properly asserted the law enforcement privilege and that it is in the public interest to preserve confidential reports to encourage citizens' participation in investigations. The ALJ discovery order is reversed and the reports assisting a criminal investigation are not discoverable in the civil proceeding..(This order was terminated by order of the FDIC dated 5-27-99; see ¶16,221, ¶16,222, ¶16,223, ¶16,224.)

   [.1] Privileged Information—Properly Asserted by FDIC Enforcement Counsel
   Board found that because the Department of Justice was not a party to the proceedings, the FDIC Enforcement Counsel may assert the law enforcement privilege, recognized to prevent disclosure of law enforcement techniques, procedures and sources, protecting witnesses and others involved in the investigation and preventing interference with the investigation.
   [.2] Disclosures—Public Interest in Preserving Confidential Reports
   The law enforcement privilege is not absolute and alone does not bar discovery. The courts consider ten factors in balancing disclosure against protecting privileged material, including whether disclosure will thwart governmental processes by discouraging citizens from coming forward with information. Because of possible criminal indictments in this case, the balance here favors protecting the report.
   [.3] Discovery—Civil discovery not available for criminal investigation
   Respondent's rights in civil litigation are not comparable to a criminal defendant's post-indictment discovery rights and they cannot use the civil discovery process to obtain information about a potential criminal investigation in which they may be involved.
   [.4] Discovery—Prohibited by Criminal Referral reporting provisions
   The disclosure of reports containing information about possible future criminal proceedings is prohibited by section 5318(g)(2) of title 31 which provides that a financial institution that has reported a suspicious transaction to law enforcement is prohibited from notifying any person involved in the transaction that such transaction has been reported.

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; and
RITCH A. BAHE
COMMUNITY FIRST STATE BANK
(Formerly The Abbott Bank)
ALLIANCE, NEBRASKA
Insured State Nonmember Bank
Decision and Order on
Interlocutory Review

FDIC-94-167e
FDIC-95-187k

BACKGROUND

   [.1] This matter came before the Board of Directors ("the Board") of the Federal Deposit Insurance Corporation ("FDIC") upon the Motion and Request for Interlocutory Review of Discovery Ruling filed by FDIC Enforcement Counsel ("Motion"). The Motion arose out of a prehearing Order on Discovery Rulings on FDIC Assertions of Privilege (the "Order"), issued by Administrative Law Judge Arthur L. Shipe ("the ALJ"), on March 3, 1997. The ALJ ordered FDIC Enforcement Counsel to produce any Reports of Apparent Crime submitted by others1 to the United States Department of Justice.


1The ALJ upheld FDIC Enforcement Counsel's assertion of privilege with respect to Reports of Apparent Crime prepared by the FDIC.
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   Alan W. Friesen and Bruce A. Hocking ("Respondents") filed a Joint Response to Enforcement Counsel's Request for Interlocutory Review ("Joint Response"). On May 27, 1997, the Board, accepting FDIC Enforcement Counsel's view that subsequent modification of the ALJ's Order at the conclusion of the proceeding would be an inadequate remedy in this case because disclosure of the documents at issue would result in a permanent breach of confidentiality, issued a Decision and Order Granting Request for Interlocutory Review of Discovery Ruling. The Board found, however, that it could not reach a determination on the merits of FDIC Enforcement Counsel's Motion because the record before it was insufficient. Therefore, the Board ordered that FDIC Enforcement Counsel submit for in camera inspection all Reports of Apparent Crime that would be subject to the ALJ's Order.
   On June 6, 1997, FDIC Enforcement Counsel forwarded to the Board a Report of Apparent Crime ("Report") which had been prepared by an officer of the Abbott Bank, Alliance, Nebraska2 ("Bank"). FDIC Enforcement Counsel has represented to the Board that this Report is the only one responsive to the ALJ's Order. The Board, having reviewed the Report in camera, has determined that it is relevant to this proceeding but, for the reasons set forth below, reverses the ALJ's Order requiring production of the Report.

DISCUSSION

I. FDIC Enforcement Counsel Has Properly Invoked the Law Enforcement Privilege

   Federal law recognizes a governmental law enforcement privilege for the purpose of preventing disclosure of law enforcement techniques, procedures and sources, protecting witnesses and others involved in an investigation and preventing interference with an investigation. See, e.g., Coughlin v. Lee, 946 F. 2d 1152, 1159 (5th Cir. 1991); In re Dept. of Investigation of City of New York, 856 F. 2d 481, 483 (2nd Cir. 1988); Black v. Sheraton Corp. of American, 564 F. 2d 531, 545–546 (D.C. Cir. 1977); National Union Fire Insurance Co. v. Federal Deposit Insurance Corporation, 1995 WL 10483 at *4 (D. Kan) (applying law enforcement privilege to protect pending FDIC investigation), U.S. v. Lang, 766 F. Supp. 389, 404 (D. Md. 1991) (applying law enforcement privilege to protect pending Securities and Exchange Commission enforcement investigation). In this instance, unless the FDIC asserts the law enforcement privilege, it is unavailable to protect the Report. The Department of Justice is not a party to this proceeding. Therefore, the Board finds that FDIC Enforcement Counsel may properly assert the law enforcement privilege in opposition to Respondents' efforts to discover the Report. Motion at 3–4.3
II. The Public Interest in Preserving the Confidential Nature of the Report Outweighs Respondents' Need for Access to the Information Contained in the Report.

   Because the law enforcement privilege is qualified, FDIC Enforcement Counsel's assertion of the privilege is not of itself sufficient to bar discovery of the Report. "The public interest in nondisclosure must be balanced against the need of a particular litigant for access to the privileged information. The process of identifying and weighing the competing interests cannot be avoided." In re Sealed Case, 856 F.2d 268; 272 (D.C. Cir. 1988). The privilege "can be overcome if there is a compelling need for the information that outweighs the need for confidentiality." In re Telecommunications, Inc. Sec. Litig., 799 F. Supp. 1206, 1208 (D.D.C. 1992). In this case, Respondents, as the party seeking material covered by the law enforcement privilege, have the burden of establishing the need for the Report. Collins v. Shearson/American Express, Inc., 112 F.R.D. 227, 229 (D.D.C. 1986). The fact that the Report is relevant does not alone establish need. Id. at 229-30. The following ten factors have been identified to assist courts in considering whether to prohibit or permit the discovery of privileged material:
(1) the extent to which disclosure will thwart governmental processes by discouraging citizens from giving the govern-


2Abbott Bank is the predecessor to Community First State Bank, Alliance, Nebraska

3In this case, contrary to Respondents' contention at pages 2-4 of their Joint Response, FDIC Enforcement Counsel is not obliged to submit affidavits to demonstrate that the Report should be protected. Because the Report was provided to the Board for in camera inspection, it was necessary for FDIC Enforcement Counsel to submit an affidavit. Black v. Sheraton Corp., 564 F.2d at 543.
{{8-31-98 p.I-121}}ment information; (2) the impact upon persons who have given information of having their identities disclosed; (3) the degree to which governmental self-evaluation and consequent program improvement will be chilled by disclosure; (4) whether the information sought is factual data or evaluative summary; (5) whether the party seeking the discovery is an actual or potential defendant in any criminal proceeding either pending or reasonably likely to follow from the incident in question; (6) whether the ... investigation has been completed; (7) whether any intradepartmental disciplinary proceedings have arisen or may arise from the investigation; (8) whether the [law]suite is non-frivolous and brought in good faith; (9) whether the information sought is available through other discovery or from other sources; and (10) the importance of the information sought to the [requesting party's] case.
See National Union Fire Insurance Co. v. Federal Deposit Insurance Corporation, 1995 WL 10483 at *5; Everitt v. Brezzel, 750 F. Supp. 1063, 1066 (D. Colo. 1990) (quoting Frankenhauser v. Rizzo, 59 F.R.D. 339, 344 (E.D. Pa. 1973).

   [.2] In weighing these factors in this case, the Board finds that the balance tips in favor of protecting the Report from disclosure. If the discovery of Reports of Apparent Crime were permissible, the identities of the persons who provided the information contained therein would be revealed. Such a disclosure would tend to discourage bank insiders—the people in the best position to report suspicious activity—from coming forward to law enforcement authorities and bank regulators with detailed and timely reports of suspected illegal conduct. Indeed, it is in large part because of this potential "chilling effect" that the Board has consistently taken the position in third party subpoena and discovery responses that such Reports are subject to the law enforcement privilege absent come extraordinary circumstances. See In the Matter of Paul C. Hufnagle, individually and as an institution-affiliated party of Franklin State Bank, Franklin, Minnesota, Docket No. FDIC-90-104b, 1 FDIC Enforcement Decisions and Orders ¶8009 at p. I-31 n.3 (November 29, 1990).
   Moreover, without going into detail, FDIC Enforcement Counsel represented in its Motion that the local U.S. Attorney's office is conducting an ongoing investigation into certain activities of the Bank during the pertinent time period. Thus, disclosure of the Report could potentially interfere with an ongoing investigation and actual or potential criminal proceedings. See, e.g., Coughlin v. Lee, 946 F.2d at 1159; In re Dept. of Investigation of City of New York, 856 F. 2d at 483; Black v. Sheraton Corp. of America, 564 F. 2d at 545-46.
   In the instant case, Respondents have failed to demonstrate extraordinary circumstances warranting disclosure of the Report. Although the Report is evaluative in nature, Respondents argue that they are entitled to be informed as to the factual representations contained in the Report so that they may use such evidence to prepare for the hearing. See Joint Response at 6. Respondents were, however, free to pursue discovery from the Bank and other sources of non-privileged information relevant to the FDIC's enforcement proceeding against them. Thus, while the Report itself is not discoverable, all of the underlying facts related to the allegations in the FDIC Notice of Intention to Prohibit From Further Participation; Notice of Assessment of Civil Money Penalties, Findings of Facts and Conclusions of Law, Order to Pay, and Notice of Hearing would be.

   [.3] Respondents try to take their rights as civil litigants a step further by drawing a comparison between their situation as respondents in an FDIC enforcement proceeding to a criminal defendant's post-indictment discovery rights. See Joint Response at 4-5. In fact, Respondent's analogy is misguided because what they cannot do—and what their insistence upon obtaining the Report strongly suggests that they are attempting to do—is use the civil discovery process to obtain information about a potential criminal investigation in which they may be implicated. "[C]onsiderations of public policy should prevail in order to prevent the civil discovery rules being subverted into a device for improperly obtaining discovery in the criminal proceedings." Kaiser v. Stewart 1997 WL 66186 at *4 (E.D. PA.) (quoting Campbell v. Eastland, 307 F. 2d 478, 486 (5th Cir. 1962), cert. Denied, 371 U.S. 955 (1963)).

   [.4] In addition, Congress also has recognized that disclosure of information contained in Reports of Apparent Crime may interfere with the integrity of the criminal {{8-31-98 p.I-122}}process. Title 31, United States Code Section 5318(g)(2) prohibits a financial institution (and other persons covered by the statute) that reports a suspicious transaction to federal law enforcement authorities pursuant to a banking agency's criminal referral reporting regulations from notifying "any person involved in the transaction that the transaction has been reported." Based upon the plain language of the statute as well as the policy concerns outlined above, the Board interprets section 5318(g)(2) as prohibiting disclosure of the contents of Reports through civil discovery. To hold otherwise would circumvent the clear intent of the statute. This interpretation of section 5318(g)(2), as well as the FDIC's opinion that Reports are confidential, was recently codified in section 353.3(g) of the FDIC Rules and Regulations.4
   In this case, the ALJ, without explanation, upheld FDIC Enforcement Counsel's assertion of the law enforcement privilege for Reports prepared by FDIC but rejected it for Reports furnished to the FDIC from other sources. The Board finds no basis for this distinction because the FDIC treats all criminal referrals as confidential and its rationale for doing so is the same regardless of the source.5

CONCLUSION

   For the foregoing reasons, ALJ's Order requiring production of the Report is hereby REVERSED.

ORDER

   For the reasons set forth above, the Administrative Law Judge's Order on Discovery Rulings on FDIC Assertions of Privilege of March 3, 1997, requiring FDIC Enforcement Counsel to produce any Reports of Apparent Crime submitted by non-government entities is REVERSED.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 16th day of September, 1997


4 Effective April 1, 1996, the FDIC amended its regulation on reporting of suspicious activity by insured state nonmember banks. What were formerly known as Reports of Apparent Crime are now referred to as Suspicious Activity Reports. 12 C.F.R. § 353.3(g) provides:
    Confidentiality of suspicious activity reports. Suspicious activity reports are confidential. Any bank subpoenaed
   or otherwise requested to disclose a suspicious activity report or the information contained in a suspicious
   activity report shall decline to produce the suspicious activity report or to provide any information that would
   disclose that a suspicious activity report has been prepared or filed citing this part, applicable law (e.g., 31
   U.S.C. 5318(g)), or both, and notify the appropriate FDIC regional office (Division of Supervision).

5 In addition to the specific restrictions imposed by 12 C.F.R. § 353.3 (g) discussed infra at 7-8, the FDIC generally prohibits public disclosure of criminal referrals. Part 309 of the FDIC's Rules and Regulations sets forth the basic policy of the FDIC regarding information it maintains and procedures for obtaining access to such information. 12 C.F.R. § 309. Part 309.5(d)(7) exempts from disclosure files compiled for law enforcement, but only to the extent that such production could (among other things) reasonably be expected to interfere with law enforcement proceedings or disclose the identity of confidential sources. 12 C.F.R. § 309.5(d)(7). Moreover, as is noted on the pre-printed Report form, criminal referrals are subject to the protections and restrictions of the Privacy Act and the related FDIC Rules and Regulations. See 5 U.S.C. § 552 and 12 C.F.R. § 310. Reports are maintained under a Privacy Act System of Records and are exempt from disclosure under Part 310.13 of the FDIC's Rules and Regulations. 12 C.F.R. § 310.13.

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