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FDIC Enforcement Decisions and Orders |
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A bank was ordered to cease and desist from prior unsafe and unsound banking practices. Even if the bank's condition has improved as a result of new management, improved financial status, and cessation of violations of laws or regulations, a cease and desist order may be issued to avoid instituting a new enforcement proceeding at a later date, and to assure that the bank would not continue or resume its former unsafe practices.
[.1] Cease and Desist OrderDefencesCessation of Violation
[.2] Cease and Desist OrderDefencesCessation of Violation
[.3] Practice and ProcedureEvidenceAdmissibility of Remedial Conduct
IN THE MATTER OF * * * BANK OF
On December 5, 1983, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Charges and of Hearing against respondent * * * Bank of * * * ("Bank"), charging that the Bank engaged in specified unsafe or unsound practices. A hearing began on July 10, 1984, in * * * and concluded on July 16, 1984, in * * *.
STATEMENT OF THE CASE
In 1980 a cease and desist order was issued against the Bank by the State Banking Commissioner of * * *. The record does not reflect the terms of the order and there is no evidence concerning the reasons for its issuance by the state. In December 1981, a group headed by * * * acquired control of the Bank's parent holding company, * * * ("Holding Company"), which owned over 90% of the Bank. As a result the * * * group acquired control of the Bank and Mr. * * * was made chairman of its board of directors. Within a short time after these changes, the * * * Banking Commissioner lifted his cease and desist order.
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ALJ's RECOMMENDED DECISION
In his Recommended Decision the ALJ found that:
DECISION
Based upon review of the record, the Board of Directors of the FDIC ("Board") finds that the ALJ's Findings of Fact 1 through 8, at pages 12 14 of his Recommended Decision, were correct as to the unsafe or unsound practices of the Bank and its serious financial condition at the June 23, 1983 examination and the September 19, 1983 FDIC visitation. The Board also agrees that based on the circumstances existing at that time, a formal cease and desist order was justified. However, the Board disagrees with the ALJ's conclusion that, based on events occurring later, a formal order is no longer justified or required. The Board reverses that portion of the ALJ's Recommended Decision and finds that a formal cease and desist order is required in this case.
[.1] These facts and the record as a whole support the ALJ's Findings 18, set forth at pages 12 14 of his Recommended Decision. The Board, therefore, adopts those Findings of the ALJ. However, the Board of Directors is of the opinion that, even if the Bank's condition may have improved somewhat, there would still be a need for a formal enforcement order.
[.2] This conclusion is fully consistent with applicable statutory and case law. Section 8(b) of the Act provides in applicable part that a cease and desist order may be issued against any bank, "If upon the record made [at] any hearing, the agency shall find that any violation or unsafe or unsound practice specified in the notice of charges has been established. . .." Of course, in any litigation there must be a point of departure for determining the facts. To require proof of continuing acts would result in a paralysis of fact finding. Furthermore, enforcement action based on prior conduct is clearly contemplated by Section 8(b) which also provides that an order may be issued "[i]f. . .any insured bank. . .is engaging or has engaged. . .in an unsafe or unsound practice. . .." Thus, Section 8(b) encompasses both unsafe and unsound practices which are ongoing at the time of the issuance of the order to cease and desist and those that have already occurred, clearly indicating that there need not necessarily be an unsafe or unsound practice actually occurring at the moment of issuance of a cease-and-desist order by the FDIC. Thus, in a very recent unreported decision by the Fifth Circuit Court of Appeals2 the Respondent contended that the FDIC Board of Directors erred by not considering evidence of improvements made by Respondent in its operating procedures. The court disagreed, holding that determination of whether the offensive practices have actually been abandoned is appropriately made
ORDER
IT IS HEREBY ORDERED, that * * * Bank of * * *, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, CEASE AND DESIST from the following unsafe or unsound banking practices and violations of laws and regulations:
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RECOMMENDED DECISION, FINDINGS OF FACT AND CONCLUSIONS OF LAW
On December 5, 1983, the Federal Deposit Insurance Corporation, hereinafter referred to as "FDIC," issued a Notice of Charges and Hearing against the respondent, * * * Bank of * * *, hereinafter referred to as "Bank." The Notice of Charges and Hearing sought an order under the provisions of 8(b)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Sec. 1818(b)(1). This Notice was issued under the provisions of the above Act, 12 U.S.C. Sec. 1811-1831(d), and the FDIC's Rules of Practice and Procedure, 12 C.F.R., Part 308.
GENERAL
The Administrative Law Judge feels that in order to put this matter and the issues in a proper perspective that a resume of the facts leading up to the filing of the Notice of Charges by the FDIC against the Bank is necessary. The evidence supports the following findings: * * *, is a small town of approximately 11,000 inhabitants located just north of * * *. The Bank has been doing business in * * * since June 20, 1899. The Bank is one of three banks located in the City of * * *. Sometime in 1980, a cease and desist order was issued against the Bank by the State Banking Commission of * * *. The basis for that order was not before this court. In December of 1981, a group headed by Mr. * * * acquired control of the Bank's parent holding company, * * *, hereinafter referred to as "Holding Company." The Holding Company owned over 90% of the Bank and as a result the * * * group took control of the Bank. * * * was made Chairman of the Bank's Board of Directors. Within a short time thereafter, the * * * Banking Commission lifted its cease and desist order. At this point in time, the Bank was in decent shape and was not considered a problem bank. Under the leadership of * * *, problems began to develop in 1982. Unsafe and unsound banking practices were being engaged in by * * * who dominated the entire operation of the Bank, its officers, employees, and Board of Directors. Among other things, * * * expended bank funds on unauthorized entertainment; ordered payment to himself of a substantial bonus without approval of the Bank's board; and made bank loans or ordered them made to individuals without adequate collateral or in some cases without any security or based on falsified financial statements and without any consideration or approval of the loan committee. The Bank's President, * * *, and the Board of Directors were unable to control Mr. * * *. The Bank was examined in May of 1982 by the * * * Banking Commission. The examination revealed, among other things, losses in excess of $350,000 which seriously affected the Bank's earnings and capital adequacy. This report was reviewed by Mr. * * *, Chief Bank Examiner for the FDIC. As a result, Mr. * * * was directed by the Regional Office of the FDIC to visit the Bank which he did in August of 1982. The results of that visitation by * * * are contained in Exhibit R-4. Differences between * * * and the other members of the Board of Directors had become so great that they could not be resolved. The board threatened to remove * * * who refused to resign and in turn threatened to sue the other board members. * * * offered to but them out and entered into a contract for that purpose in July of 1982. Examiner * * * met with the Board of Directors on August 20, 1982, to discuss possible criminal violations by * * *. Mr. * * * received no cooperation at the time from the board members since they were apparently more interested in being bought out by * * * and did not want to do anything which might jeopardize that buy-out. On September 23, 1982, the President, * * *, notified Mr. * * * that approximately $1,500,000 in loans would be processed out of the Bank to effectuate the buy-out by * * *. Mr. * * * wrote to the FDIC Regional Director, * * *, advising him of these facts on September 27, 1982. No action was taken by the FDIC at that time; however, an FDIC examination of the Bank was done on October 12, 1982. At that time, instead of $1,500,000 in loans being booked out of the Bank to effectuate * * * buy-out, it was determined that on September 22 and 23 of 1982 $2,500,000 had actually been taken out for that purpose. The problem caused by these insider loans was their lack of credit quality. In effect the Bank, through these unauthorized loans, had bought itself. According to Mr.
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{{4-1-90 p.A-432}}by the examiner that a cease and desist order under Section 8(b) was needed to expedite improvement. Regional Director of the FDIC, Mr. * * *, reported on August 29, 1983, that since the Bank's asset condition had improved sufficiently to remove any immediate risk of insolvency and to protect the depositors that a cease and desist order should be instituted in lieu of termination of insurance under Section 8(a). On September 16, 1983, the * * * State Banking Department requested the Bank to immediately inject capital in the amount of approximately $750,000 in order to bring its capital up to the $2,500,000 required by the FDIC correction order of April 1983. This was not done due to the continuing ownership dispute between * * * and the * * * group. Until that dispute was resolved, there was understandably no willingness to inject further capital. The ownership dispute was resolved in October 1983 when * * * gained control of the Holding Company and the Bank.
FINDINGS OF FACT
Before addressing the issue of improvements, the court will first consider the Bank's claim that, in spite of those subsequent improvements, the results of the June 1983 examination and the September 1983 visitation do not justify the issuance of a cease and desist order.
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CONCLUSION OF LAW
The court agrees with the FDIC that a cease and desist order may be issued against a bank which "is engaging or has engaged" in unsafe or unsound practices and that Section 8(b) encompasses both unsafe and unsound practices which are going on at the time of the issuance of the order and those that have already occurred which indicates that the unsafe or unsound practices need not be occurring at the time such an order is issued. It is also true that the FDIC has broad discretion to determine if a cease and desist order is needed to prevent resumption of continuation of such practices. However, that discretion should be confined within the bounds of reasonableness. See Fairyfoot Products Company v. F.T.C., 80 Fed. 2d 684. Also, in Eugene Dietzen Company v. F.T.C., 142 Fed. 2d 321, the court stated:
ADDITIONAL FINDINGS OF FACT
The FDIC, in order to rebut the Bank's evidence of improvements subsequent to the June 1983 examination, introduced into evidence a report of an examination of the Bank by the State Banking Department on May 18, 1984 (Exhibit P-15). This examination was done by state banking examiner * * *. Improvements were noted in certain areas such as loans and management; however, the composite rating assigned to the Bank by Mr. * * * remained a 4 indicating a need for formal supervision. In this regard, it is interesting to note that the minutes of a meeting held on June 1, 1984, between Mr. * * * and the Bank's Board of Directors reflects Mr. * * * advised the board that due to the improved condition of the Bank that he was going to assign a composite rating of 3 (Exhibit R-49). In his
{{4-1-90 p.A-435}}deposition, Mr. * * * testified that there had been some improvement made but he could not recall telling the board that he was going to give them a 3 rating. He further stated that he didn't think that the Secretary of the Board, Mr. * * * would have signed these minutes if they were not correct.
FURTHER CONCLUSIONS OF LAW
Here we have a bank that has undergone considerable difficulties during the period December 1981 to June 1983 brought about by the unlawful acts and unethical conduct of the * * * group. In January of 1983, the Bank was for all practical purposes insolvent and on the verge of going under. Rumors within the community were running rampant, its public image was at an all-time low with a large outpour of deposits, its ownership was in dispute, and management was ineffective. * * *, although no longer on the Board of Directors, was still, by reason of his interests in the Holding Company, exerting considerable influence on the operation of the Bank. The President, * * * , though well meaning, did not have the experience or ability to effectively guide the Bank out of its troubled condition. Morale within the Bank was very low. Again, the only thing that kept the Bank from foreclosure was the efforts of * * *. |
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Last Updated 6/6/2003 | legal@fdic.gov |