Federal Deposit
Insurance Corporation

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   [¶5029] FDIC Docket No. FDIC-84-81g (9-17-84)

   Former bank official who was removed from his positions as director and acting chief executive officer of the bank for violations of federal regulations, and who retained a present shareholder interest in the bank, was prohibited from participating in the affairs of the bank. The prohibition extends to the voting of present stock ownership because of concerns that former bank official's participation may pose a threat to the interests of the bank's depositors and may threaten to impair public confidence in the bank.

   [.1] Prohibition, Removal, or Suspension—Criminal Conviction
   Falsehood, the filing of false statements, the fabrication of records, and the circumvention of currency transaction regulations designed to prevent the "laundering" of money obtained from illegal or criminal activities, are precisely the kinds of alleged offenses of the gravest concern to banking regulators such as the FDIC and the Financial Institutions of a state. Offenses of this type threaten the integrity of banks and the banking system. They inevitably pose the potential for injury to the interests of depositors and the impairment of public confidence in the banking system.

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   [.2] Change in Bank Control Act—Compliance
   Under the Change in Bank Control Act, ownership of 5 percent is presumptively a control amount.

   [.3] Removal, Prohibition, or Suspension—Threat to Depositors
   The public must have confidence in the integrity of banks and those exercising influence in their management. Bank customers and the general public must be able to view those exercising influence in the management of banks as trustworthy, without perceived identification to crime or criminal elements.

* * * BANK OF * * * (Now Known as
* * * Bank) (INSURED STATE
NONMEMBER BANK)
ORDER CONTINUING NOTICE OF
PROHIBITION
FDIC-84-81g

   IT IS ORDERED, for the reasons stated in the Recommended Decision of Presiding Officer Daniel H. Hanscom, which is incorporated herein by reference, that the Notice of Prohibition issued by the Board of Directors of the Federal Deposit Insurance Corporation against * * *, pursuant to section 8(g) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(g)), on April 27, 1984, be, and hereby is, continued in effect until terminated by the Federal Deposit Insurance Corporation.
   By order of the Board of Directors.
   Dated at Washington, D.C., this 17th day of September, 1984.
/s/ Hoyle L. Robinson
Executive Secretary

BEFORE THE
FEDERAL DEPOSIT INSURANCE
CORPORATION

   Hearing under § 308.59 of the FDIC's Rules and Regulations pursuant to the request of * * *, former member of the board of directors, former acting chief executive officer, and present stockholder of * * * Bank of * * *, that the Notice of Prohibition issued April 27, 1984, under Section 8(g)(1) of the Act be rescinded or withdrawn.

RECOMMENDED DECISION

   On June 11, 1984 and July 18–20, 1984, a hearing was held under Section 308.59 of the FDIC's Rules and Regulations on the written request filed by * * *, former member of the board of directors, former acting chief executive officer, and present stockholder of the * * * Bank of * * * ("* * * bank"), * * *, that the Notice of Prohibition issued to him under Section 8(g)(1) of the Act be rescinded or withdrawn.
   On July 13, 1983, Mr. * * * was indicted by a Federal Grand Jury in the United States District Court for the District of * * *. The indictment was in three (3) counts and charged offenses relating to alleged illegal currency transactions, to-wit: conspiracy in violation of 18 U.S.C. § 371, conspiracy to violate and violation of 31 U.S.C. §§ 5313 and 5322, the making of false and fraudulent statements in violation of of 18 U.S.C. § 1001, and the violation of Federal Regulations § 103.22, Reports of Current Transactions of § 103.25, Filing of Reports.
   As a result of the indictment on July 20, 1983, Mr. * * * was removed from his position as acting chief executive officer and director of the bank (FDIC Ex. 2, pp. A-1, B through B-2). Mr. * * *, however, continued as a stockholder, owning 7.3 percent of the stock of the * * * bank (Respondent's Ex. 9, p. 8). Indicted with Mr. * * * were Mr. * * *, chairman of the board of directors and also owner of about 8 percent of the bank's stock, * * *, cashier, and the * * * Bank of * * * itself. Both Mr. * * * and the * * * bank subsequently pleaded guilty. Mr. * * * received a suspended, sentence, and the bank was fined $125,000, $95,000 of which was suspended, in addition apparently to making certain commitments regarding its future conduct (FDIC Ex. 7).
   On April 27, 1984, a Notice of Prohibition was issued by the FDIC to both Mr. * * * and Mr. * * * prohibiting them from participating in any manner in the conduct of the affairs of the * * * bank. In effect, this Notice prevented Mr. * * * and Mr. * * * from using their ownership of stock to participate in or influence the affairs of the * * * bank since both had been removed from their positions in the bank on July 20, 1983 (see, 12 U.S.C. § 1818(j)).

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Procedural matters

   On May 10 and May 16, 1984, counsel for Mr. * * * and Mr. * * * filed written requests for a hearing for each pursuant to 12 C.F.R. § 308.59, and demanded certain prehearing discovery and relief. On May 23, 1984, counsel for Mr. * * * and Mr. * * * wrote the FDIC's Assistant Executive Secretary that he was committed to try a case in the U.S. District Court, * * *, commencing June 5, 1984, and that this trial might continue into the following week and compel him to seek a postponement of the hearing then tentatively set for June 11. On May 25, 1984, the undersigned was appointed presiding officer and the agency scheduled a joint hearing June 11, 1984, in * * *. The hearing was set for June 11, 1984, to comply with the requirements of § 308.61 of the FDIC Rules and Regulations that the hearing be held within 30 days following the written request.
   In his May 10 and May 16, 1984, requests for a hearing for Mr. * * * and Mr. * * *, a corrected first page being substituted on Mr. * * *'s request on May 23, counsel for Mr. * * * and Mr. * * * demanded the following relief:

   "Recision or withdrawal of the notice of prohibition;
   "An evidentiary hearing before an administrative law judge to determine the nature, extent, source and effect of any and all ex parte communications or other approaches that may have been made to any member, director, employee, agent or representative of the FDIC by representatives of * * * Bank or its officers or directors, or representatives of the U.S. Attorney, or the State of * * *, for the purpose of disclosing whether any improper influence tainted the FDIC's decisionmaking processes in this matter. Patco v. FLRA, 672 F2d 109 (D.C. Cir. 1982);

   "A determination of how the purpose of 12 USC § 1818(g) is furthered and served by the issuance of a Notice of Prohibition to Mr. * * *; (Feinberg v. FDIC, 420 F. Supp. 109 (D.D.C. 1976)."

The Indictment

   Mr. * * *, as stated, was in dicted by a Federal grand Jury in the United States District Court for the District of * * *. The indictment reputedly and from a "sting" operation conducted by the IRS to uncover money laundering operations (see * * *, Tr. 310, 323; FDIC Ex. 14; FDIC Ex. 1, pp. 2–3; and FDIC Ex. 11). Mr. * * * was convicted on July 6, 1984. At the hearings commencing July 18, 1984, counsel for Mr. * * * stated that he was appealing his conviction and was also seeking a new trial (Tr. 250; see also FDIC Ex. 11, p. 11).
   The indictment (FDIC Ex., pp. 4–11) charged the * * * bank, * * *, * * *, and * * * with Count I (Conspiracy), Count II (Failure to File Currency Transaction Reports; Aiding and Abetting), and Count III (False Statements; Aiding and Abetting).
   More specifically, Count I of the Indictment charged Mr. * * *, in conspiracy with the others named, with knowingly and willfully failing to timely file currency transaction reports with the IRS and with filing a false and fraudulent report identifying one "* * * from * * *, * * *" as the depositor of $135,000 when he well knew the said $135,000 was deposited by a person identified to and known by him as "* * *." According to the Indictment, "* * *" in reality was a Special Agent of the IRS. Among the overt acts alleged under Count I were the receipt by Mr. * * *, in concert with the others named, of $90,000 from " * * *," which was deposited in the * * * Bank in a fictitious account under the name "* * *"; the receipt of $90,000 which was allegedly placed in the bottom drawer of a file cabinet at the bank; the acceptance of $135,000 from "* * *"; the alleged transfer of $180,000 from the fictitious accounts of "* * *" and "* * *," at the bank to the * * * National Bank in * * *; and the alleged report by Mr. * * * to "* * *" that bank examiners had asked a lot of questions about cash transactions, but they had "weathered the storm all right."
   Count II of the Indictment alleged that Mr. * * *, with the others named, had knowingly and willfully failed to timely file Currency Transaction Reports with the IRS as part of a pattern of illegal activity involving transactions of more than $100,000 in {{4-1-90 p.A-313}}violation of the U.S. Code of Federal Regulations, specifically, failure to file reports for cash deposits of $70,000, $90,000, and $135,000, and a withdrawal of $100,000 in the approximately two week period between December 22, 1982 and January 6, 1983.
   Count III charged Mr. * * *, with the others named, with knowingly and willfully submitting a false and fraudulent Currency Transaction Report to the IRS, which identified "* * * from * * *", as the depositor of $135,000 at the * * * bank pursuant to "Repurchase Agreement #17" when Mr. * * * well knew the $135,000 was deposited by "* * *", secretly a Special Agent of the IRS as stated.
   The Indictment charged a violation of 18 U.S.C. § 371 and § 1001, 31 U.S.C. §§ 5313 and 5322, Sections 103.22 and 103.25 of Federal Regulations, and 18 U.S.C. § 2.
   31 U.S.C. § 5313 compels financial institutions to report currency transactions over a certain amount as prescribed by Federal Regulation Section 103.22 of 31 C.F.R., which sets the amount at $10,000 and prescribes the Currency Transaction Report form to be filed. Section 103.25 of 31 C.F.R. provides that Currency Transaction Reports shall be filed by the financial institution within a specified number of days of their occurrence with the Commissioner of Internal Revenue. 31 U.S.C. § 5322 provides criminal penalties for a violation of 31 U.S.C. § 5313, and 31 C.F.R. §§ 103.22 and 103.25. As part of a "pattern of illegal activity involving transactions of more than $100,000 in a 12-month period," the punishment is set at a fine of "not more than $500,000, imprisonment for not more than 5 years, or both."
   18 U.S.C. § 1001 makes it a Federal crime to knowingly or willfully falsify or make any false or fraudulent statement in any matter within the jurisdiction of any department or agency of the United States and prescribes the punishment therefor to be a fine of not more than $10,000 or imprisonment of not more than 5 years, or both.
   18 U.S.C. § 2 provides that anyone who "aids, abets, counsels, commands, induces or procures" the commission of an offense against the United States is punishable as a principal, and 18 U.S.C. § 371 makes it a Federal crime to conspire to commit an offense against the United States or any agency thereof in any manner or for any purpose, punishable by a fine of $10,000 or imprisonment for 5 years, or both.

Statutory criteria

   Section 8(g)(1) of the FDI Act states that whenever any officer or director, or other person participating in the conduct of the affairs of a bank, such as Mr. * * *, is charged with the commission of a crime involving dishonesty or breach of trust punishable by imprisonment for a term exceeding one year under Federal law, the FDIC may prohibit such person from participating in any manner in the conduct of the affairs of the bank if such participation "may pose a threat to the interests of the bank's depositors or may threaten or impair public confidence in the bank."
Mr. * * *'s contentions that the Notice of Prohibition should be withdrawn or rescinded
   Mr. * * * has been removed from his position as a director and acting chief executive officer of the * * * Bank of * * *, but continues to own 7.3 percent of the bank's stock. Mr. * * * seeks to vote his shares and maintains that voting his 7.3 percent stock ownership does not pose a threat to the depositors and does not threaten to impair public confidence in the bank. As stated, Mr. * * * introduced 10 exhibits and called two witness in rebuttal. Otherwise, Mr. * * * based his case upon questioning of the witnesses called by the FDIC staff and rebuttal of documents introduced through such witnesses.
   Respondent's exhibits 1 through 8 consist of * * * financial statements on the * * * Bank of * * * (Exhibits 1 through 3), financial records of the FDIC "Call Reports" (Exhibits 4 through 7), and the bank's month-end Statements of Condition for December 1983 through March 1984 (Exhibit 8). In addition to extensive other financial data, these records show the course of deposits in the * * * bank before and subsequent to Mr. * * *'s indictment on June 13, 1983. The financial statements of * * * show the following:
December 31, 1982 (Respondent's Ex. 3, p. 3).

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June 30, 1983 (Respondent's Ex. 1, p. 3).

December 31, 1983 (Respondent's Ex. 2, p.4).

   The unaudited * * * report for December 31, 1982, showed some difference in Demand and Time deposits from the foregoing figures, but the total is the same (see Respondent's Ex. 1, p. 3 and compare with Respondent's Ex. 3, p. 3).
   FDIC figures ("Call Reports") show the following:
June 30, 1983 (Respondent's Ex. 4, p. 7).

September 30, 1983 (Respondent's Ex. 7, p. 4).

December 30, 1983 (Respondent's Ex. 5, p.6).

March 31, 1984 (Respondent's Ex. 6, p. 9).

The bank's statement of condition show (Respondent's Ex. 8):

   Comparison of these various figures for deposits, demand, time, and comparable categories shows fluctuations, but no declines which can be directly related to the indictments on July 13, 1983, and the following events. Total deposits were about the same on September 30, 1983, $8,514,000, as they were just before the indictments on July 13, 1983, $8,552,161. And on December 31, 1983, total deposits were higher by about $335,000 than they were June 30, 1983. By January 31, 1984, deposits were higher by about $500,000 than they were June 30, 1983, and by March 30, 1984, they were again about the same. No significant growth, however, is indicated.
   Although these records of deposits do not reveal what effects there may have been on deposits in the several days immediately following the "raid" on the * * * bank (see * * *, Tr. 310, 323, * * *, Tr. 495; FDIC Ex. 14) by the IRS on July 13, 1983, they do not show any long-term sustained runoff of bank deposits or any apparent long-term deterioration in its financial position from the standpoint of its gross level of deposits. These broad deposit figures, nevertheless, do not negate the possibility that there could have been an unusual withdrawal of deposits by customers following the indictments, and that the loss of these deposits was compensated for by deposit of funds obtained from other sources such as officers, directors, or stockholders (see, e.g., FDIC Ex. 12, p. 2).
   After introducing the financial records of the bank, counsel for Mr. * * * asserted that the "figures absolutely refute the suggestion that there was a run on the bank" (Tr. 30) and rested Mr. * * *'s showing (Tr. 33). Some additional evidence, however, was offered by counsel for Mr. * * * on rebuttal which is discussed later in this recommended decision.

Evidence offered by the FDIC staff

   At the June 11, 1984, hearing, FDIC staff called two witnesses: * * *, an FDIC bank examiner, and * * *, administrator of * * *'s Financial Institutions Division. The testimony of the latter could not be completed, however, and he resumed his testimony when the hearing reconvened on July 18.
   Mr. * * * is an experienced bank examiner. He made a visitation to the * * * bank on July 14, 1983, at the instruction of the FDIC Assistant Regional Director as a result of the indictments the preceding evening of Mr. * * *, Mr. * * *, Mr. * * *, and the bank, to determine its condition. Mr. * * * and Mr. * * * were not at the bank but had been arrested (Tr. 323). At the bank on the morning of July 14, officers were meeting with customers and receiving phone calls "to discuss the situation and they were advising them of their perception of the conditions of the bank" (Tr. 51). Mr. * * * had found from his examination a {{4-1-90 p.A-315}}reasonable level of liquidity (Tr. 49). The report of his visitation to the bank on July 14 is in the record (FDIC Ex. 1, p. 1), and the Press Release of the U.S. Attorney for the District of * * * relating to the search warrant executed at the * * * bank on the evening of July 13, 1983, and the indictment of the bank and * * *, Mr. * * *, and Mr. * * * is also in the record (FDIC Ex. 1, pp. 2-3). There was considerable publicity in * * * newspapers relating to these events (FDIC Ex. 1, p. 16, FDIC Ex. 14). Mr. * * * forwarded the newspaper clippings to the FDIC Regional Office (Tr. 66).
   In the ensuing weeks, Mr. * * * conducted a full-scale examination of the bank jointly with examiners of * * *. His report was received in evidence as FDIC Ex. 2. As a result of his examination, Mr. * * * gave the * * * bank a composite rating of "3" under the Uniform Bank Rating System, indicating "a combination of financial or operational weaknesses ranging from moderately severe to unsatisfactory" (FDIC Ex. 2, p. 1-a-2; see FDIC Ex. 13 and * * *, Tr. 564-66). Certain assets were adversely classified, mostly loans (FDIC Ex. 1, pp. 1 and Pink Sheet A), and the bank's liquidity position was considered week (FDIC Ex. 2, pp. 5 and Pink Sheet A-2).
   Overall, Mr. * * * considered the * * * bank's condition "unsatisfactory, with a definite downward trend" (FDIC Ex. 2, Pink Sheet A-2). He attributed the bank's problems primarily to Mr. * * * and Mr. * * * writing:

   "...* * * was responsible for many of the newly extended and classified loans, as well as the generally lax and undesirable lending practices identified. * * * and * * * were the dominant individuals in the bank and are considered primarily responsible for the bulk of the problems identified on pages 1."
(FDIC Ex. 2, Pink Sheet A-1; see also pages 1 through 1-a-2).

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Opinion

   There is no doubt that the IRS execution of a search warrant against * * * bank on the evening of July 13, 1983, and the ensuing indictments, created an immediate crisis for the bank and also created longer term problems, particularly litigation relating to stockholder control and contentions over management. A great deal of newspaper publicity resulted from the IRS action and the arrest and temporary incarceration of the bank's chairman of the board, the chief executive officer, Mr. * * * and Mr. * * *, the bank's cashier, and the indictments of those persons and the bank itself.
   Notwithstanding these dramatic events, a major run on the bank did not occur. A number of factors, described in detail by Mr. * * * and also contained generally in the record, seem to have combined to prevent such a run.
   The Financial Institutions Division of the State of * * * was on top of the situation and took immediate measures to reassure the public and larger depositors by press release and the stationing of state representatives in the bank the very next morning on July 14, following the IRS action the night before. Their function was to calm any depositors seeking to withdraw funds. Also action was taken to station bank officers or directors in the bank lobby for the same purpose. Publicity was given to reassure the public that Mr. * * * and Mr. * * * were no longer part of the management of * * * bank (Tr. 203). The FDIC immediately sent examiners into the bank to determine its condition and liquidity. In the background, of course, was the fact that all deposits up to $100,000 were insured by the FDIC.
   If no run on the bank in the classic sense did occur, the evidence does disclose a substantial withdrawal or runoff of deposits due to the IRS action the evening of July 13, 1983, the indictments, and publicity. Depositors did withdraw funds and it is highly probable that deposits were not made in the * * * bank which otherwise would have been made. Bank operations were temporarily disrupted. The records of the Deputy Administrator of the Financial Institutions Division of * * * showing daily deposit totals (FDIC Ex. 20 ¹ reveal a substantial decrease in total deposits in the three (3) working days immediately following the indictments:

   This is a decline in deposits of $1.9 million in three days, almost 20 percent of the * * * bank's total deposits. The record does not reveal any other reason for this substantial decline and it is concluded that it was caused by the indictments of Mr. * * *, Mr. * * * and the bank, and the attendant bad publicity surrounding the * * * Bank.
   Some recovery occurred beginning July 19, 1983, but an examination of FDIC Ex. 12 shows that much of this was brought about by the procurement of a small number of new and large deposits by special efforts of the bank's officers and directors. See, for examine, FDIC Ex. 12, p. 11, items 2004508 and 20004516; p. 13, items 70004528, 70004544, 70004579, 70004587, 70004595, 70004609, and 70004617; p. 15, items 1078 and 1075. These few deposits obtained in only three (3) days, 7/19/83 through 7/22/83, totalled $442,200.
   Despite such efforts between July 19, 1983, and August 15, 1983, deposits were off a daily average of over $800,000 from what they were on July 13, 1983.
   Although it may be argued that the lowered total deposit figures toward the end of July 1983 and in the first half of August 1983, were due to new and, according to Mr. * * * and his counsel, inexperienced management of the * * * bank, such a contention does not explain the substantial drop of about $1.9 million in deposits in the three days immediately following the IRS action of July 13, 1983, the arrest, and the indictments.
   FDIC staff contends that Ex. 12 shows a runoff of very substantial volume of deposits from the * * * bank during the period July 13 through October 13, 1983. This exhibit, as described, was prepared by the current president of the * * * bank at the

   [.1] Mr. * * * was indicted and now has been convicted by a jury, although he is appealing this conviction, of serious Federal offenses involving dishonesty and breach of trust. The charges against Mr. * * * involve a series of alleged false and fraudulent actions, and a pattern of fraudulent conduct in violation of United States laws, and in abuse of his fiduciary position as director and chief executive officer of the * * * bank. Falsehood, the filing of false statements, the fabrication of records, and the circumvention of currency transaction regulations designed to prevent the "laundering" of money obtained from illegal or criminal activities, are precisely the kinds of alleged offenses of the gravest concern to banking regulators such as the FDIC and the Financial Institutions Division of the State of * * *. Offenses of this type threaten the integrity of banks and the banking system. They inevitably pose the potential for injury to the interests of depositors and the impairment of public confidence in the banking system.
   Counsel for Mr. * * * contends that the Notice of Prohibition should be withdrawn, arguing that Mr. * * * is no longer an officer or director of the * * * bank, that he has no intention of trying to regain these positions or any position with the bank, that he only owns 7.3 percent of the stock of the bank, and that the sole issue is his right to vote his 7.3 percent ownership. Mr. * * * maintains that voting his 7.3 percent stock ownership cannot pose a threat to the interest of depositors and cannot threaten to impair public confidence in the bank. In addition to contending the 7.3 percent ownership of stock is too small to present any potential for the foregoing effects, Mr. * * * argues that is unlikely that any significant portion of the public would even know of the voting of his stock.

   [.2] In the opinion of the presiding officer, these arguments are invalid. A 7.3 percent stock interest is sufficient in many cases to influence corporate action. Indeed, it appears that under the Change of Bank Control Act that ownership of 5 percent is presumptively a control amount (Tr. 790). Moreover, it is obvious, as suggested, that a 7.3 percent ownership can be combined with the ownership of other stockholders to influence or control the * * * bank, and such efforts have occurred both in 1983 and 1984 as described earlier in this recommended decision. Further, additional stock can possibly be purchased.
   It is true that Mr. * * * is no longer an officer or director of the * * * bank but this situation could possibly change if the stockholder faction identified with Mr. * * * and Mr. * * * were to regain control of the bank or reach a position of strong influence.²
   The argument that few stockholders attend stockholders meetings and that the public would not be aware if Mr. * * * were to vote his 7.3 percent stock interest (see, e.g., Tr. 769-72; 371-72), as applied to the * * * bank, is likewise invalid and is rejected. It may be true that as a generality (see Tr. 787) a small fraction of stockholders attends the meetings of major U.S. corporations, but there is no reason on this record to believe that that is the case with the * * * bank. The * * * bank is not

   [.3] The public must have confidence in the integrity of banks and those exercising influence in their management. Bank customers and the general public must be able to view those exercising influence in the management of banks as trustworthy, without perceived identification to crime or criminal elements. The charges of law violation, the conviction of Mr. * * * on those charges by a jury, even though that conviction is under appeal, the publicity disseminated throughout the * * * are relating to these events, including the IRS "sting" operation, all have the likelihood of causing bank customers, potential customers, and the public to associate Mr. * * * with crime and criminal activity.
   In sum, the undersigned finds that a preponderance of evidence in the record as a whole establishes that there is a high degree of probability that the participation of Mr. * * * in any manner in the affairs of the * * * bank will threaten to impair public confidence in the bank and will threaten the interests of the bank's depositors.

Conclusion and Recommendation

   Based on the consideration of all the evidence and the record as a whole, and all the circumstances, including the charges of conspiracy, falsehood, fabrication of records, and violation and evasion of currency transaction regulations, the undersigned concludes that participation by Mr. * * *, in any manner, in the affairs of the * * * Bank of * * *, including the voting of his 7.3 percent stock ownership, may pose a threat to the interests of the bank's depositors and may threaten to impair public confidence in the bank.
   It is recommended that the Notice of Prohibition issued April 27, 1984, against Mr. * * * be continued in effect.
/s/ Daniel H. Hanscom
Presiding Officer
Former Chief Administrative Law
Judge, Federal Trade Commission