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FDIC Enforcement Decisions and Orders |
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Bank was required to correct its previously filed Reports of Condition and Reports of Income that contained materially false or misleading financial information. Bank ordered to cease and desist from filing inaccurate reports in the future.
[.1] Call ReportsAmendment Required
[.2] Call ReportsFunctions
[.3] LoansSetoffLoss Contingency
[.4] Practice and ProcedureDepositions Permitted
[.5] Practice and ProcedureDepositions Permitted
[.6] Practice and ProcedureEvidenceFederal Rules
[.7] Practice and ProcedureEvidenceExaminers ReportAdmissibility
[.8] ShareholdersDisclosure
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[.10] LoansSetoffLoss Contingency
[.11] Call ReportsFalsification
In the Matter of: * * *BANK
STATEMENT OF THE CASE
This proceeding arises under Section 8(b) of the Federal Deposit Insurance Act (the "Act") (12 U.S.C. §1818(b)). On January 16, 1985, the Board of Review of the Federal Deposit Insurance Corporation (the "FDIC") issued a written Notice of Charges and of Hearing ("Notice") to * * * Bank * * * ("Bank"), pursuant to Section 8(b) of the Act and the FDIC's Rules of Practice and Procedures (12 C.F.R. Part 308). The Notice charged the Bank with having engaged in unsafe or unsound banking practices and violating laws, rules and regulations. More specifically, the Notice alleged that the Bank filed consolidated Reports of Condition with the FDIC which contained materially false or misleading financial information in violation of 12 C.F.R. §304.2, which requires the filing of accurate reports. The Notice sought an Order under Section 8(b)(1) of the Act, requiring the Bank to correct its previously filed reports and to cease and desist from filing inaccurate reports in the future.
[.1] In his Recommended Decision, the ALJ made the following factual findings: (1) the Act and regulations are unambiguous and require banks to file Reports of Condition and Reports of Income ("Call Reports") upon the forms and in the manner prescribed by the FDIC (12 U.S.C. §1817 and 12 C.F.R. §304.2); (2) the Call Report instructions provide that contingencies which might result in gain should not be recognized prior to "realization" (FDIC Exhibit 37 at 16); (3) Bank, in certain Call Reports, set off its $1,000,000 subordinated capital note against certain losses that either had occurred or were expected to occur; (4) the FDIC informed the Bank that the setoff was unacceptable following an examination of the Bank and after receipt of certain of the Call Reports involved in this proceeding; (5) Bank's right of setoff was the subject of litigation in state court and contingent upon the outcome of that litigation; and (6) Bank did not have a legal right of setoff prior to a ruling by the state court.
OPINION
[.2] Call Reports are very important tools for monitoring the condition of each reporting bank between bank examinations. Call Reports also provide data upon which bank regulators, bankers, and the public can
{{4-1-90 p.A-896}}make analyses, including peer group comparisons. Call Reports can only serve these purposes effectively if the filings are complete, accurate, and timely and every bank reports on a basis consistent with all other banks. This proceeding arose, and the Order herein is being issued, because commencing with its December 31, 1983 Call Report, Bank failed and refused to complete its Call Reports on the consistent basis required by the Call Report instructions.
I. Background
A brief factual summary is useful in putting this matter in perspective. On August 1, 1976, Bank borrowed $1,000,000 from * * * Bank * * * under a ten-year subordinate capital note. This $1,000,000 subordinated capital note appeared as a liability on the Bank's books. Subsequently, commencing on December 9, 1981, and continuing for the next year, Bank acquired loan participations from * * *. The aggregate face value of the loan participations Bank acquired from * * * exceeded $5,000,000.
[.3] In January 1984 the FDIC conducted an examination of the Bank. In the Report of Examination dated January 3, 1984, the setoff was disallowed by the FDIC as premature, because it remained the subject of an unresolved dispute. On February 8, 1984, Bank filed a declaratory judgment action in state court requesting, inter alia, that the court declare that the $1,000,000 dollar subordinated capital note could be set off against Bank's losses on the loan participations. After that state court suit was filed, * * * reconveyed the subordinated capital note to the FDIC, and the FDIC was added as a defendant in the state court action. The state court had not ruled upon the Bank's case at the time this hearing was held before the ALJ. The state court proceeding was settled on October 28, 1985.
II. The ALJ's Recommendations
The Board of Directors ("Board") finds that the ALJ's careful and detailed Recommended Decision (appended hereto) is in all material respects fully supported by the evidence in the record. We therefore adopt the ALJ's Recommended Decision and incorporate it herein by this reference. The only limitation on our adoption of the ALJ's Recommended Decision is that insofar as the ALJ's Proposed Conclusion of Law 1 recommends an order different than the one adopted by the Board, we do not adopt that Conclusion of Law.
III. The Bank's Exceptions to the ALJ's Recommended Decision
Bank's exceptions to the ALJ's Recommended Decision include assertions of (A) unsupported findings of fact, (B) failure to adopt supported findings and conclusions, (C) procedural irregularities, and (D) erroneous evidentiary rulings. We have exam-
{{4-1-90 p.A-897}}ined the record in light of all of Bank's exceptions to the Recommended Decision and find that all of these exceptions lack merit. More notable exceptions are discussed below.
A. Exception to ALJ's Findings of Fact
Bank asserts that the ALJ's Findings of Fact regarding the proper time to effect a setoff were made without legal support or authority. Bank argues that the ALJ erred in making independent findings on this issue rather than merely accepting the legal opinions of the Bank's counsel. Bank further claims that the ALJ's finding of noncompliance with the Call Report instructions was erroneous. Bank's argument is nothing more, or less, than a claim that Bank's arguments and evidence should have been accepted and the FDIC's rejected.
B. The ALJ's Refusal to Adopt Certain Proposed Findings of Fact and Conclusions of Law
Without detailed explanation, Bank takes exception to the ALJ's failure to adopt Bank's proposed findings of fact: 9, 11, 12, 14, 16-28, 32, 37, and 38, and the ALJ's failure to adopt Bank's proposed Conclusions of Law 2-14, 17-19, 21-26, and 28-30.
C. Procedural Matters
Bank argues that the FDIC's submission to the ALJ of a proposed Order to Cease and Desist along with the Notice of Charges was in violation of 12 C.F.R. §308.07(k). 12 C.F.R. §308.07(k) concerns the Board's, and an ALJ's, authority to reopen a hearing. It has no relevance to the Bank's contention. In any event, submission of a proposed Order is in essence submission of a detailed prayer for relief. Accordingly, we find that the submission to the ALJ of a proposed Order along with the Notice of Charges was proper.
[.4.5] The rules governing issuance of a subpoena for depositions prior to an FDIC administrative hearing are set forth in the FDIC's Rules of Practice and Procedure (12 C.F.R. §308). Depositions are to be used in lieu of trial testimony, and not as a general discovery device. The regulations require the Bank to show that the proposed witness will be unavailable at the hearing, that the testimony will be material, and that the deposition will not result in undue burden or delay of the proceeding (12 C.F.R. §308.08(a)(2)). No such showing was made in Bank's request for the subpoena. Rather, it is clear both from the nature of this exception and from the papers seeking the deposition that the deposition was intended purely for discovery purposes. Consequently, the deposition was not authorized by the FDIC's regulations and the subpoena was properly denied.
D. Evidentiary Rulings
Bank also takes exception to the ALJ's admission of FDIC exhibits 32 through 35. These exhibits are four Uniform Bank Performance Reports ("UBPRs") relating to Bank.3Bank argues that these reports were improperly introduced through Mr. * * * , an FDIC employee, and expert bank examiner, who was not the "custodian" of the documents. Bank argues that the admission of these documents was not in accordance with Rule 803(6) of the Federal Rules of Evidence.
[.6.7] The ALJ properly admitted these exhibits. First, the ALJ was not bound by the Federal Rules of Evidence in this administrative proceeding.4Even if the Federal Rules of Evidence were applicable, Rule 803(6) was not violated. Under Rule 803(6), business records are not excluded as hearsay if they are kept in the course of a regularly conducted business and if it was the regular practice of that business to make the record or data compilation. UBPRs meet those criteria. The record may be admitted by the custodian or other qualified witness, unless the source of information or method or circumstances of preparation indicate a lack of trustworthiness.
IV. THE ALJ'S PROPOSED ORDER
The Board concludes that the Recommended Decision and the record as a whole fully support issuance of an order requiring the Bank to cease and desist from filing inaccurate Call Reports and requiring Bank to amend the inaccurate Call Reports that it has filed. Consequently, Bank is required by the Board's Order to amend each and every Call Report filed between December 31, 1983 and October 28, 1985, which does not show the $1,000,000 subordinated capital note as a liability. Bank is also required to file amended post October 28, 1985, Call Reports is amendments are necessary in order to accurately show recognition of the setoff on or about October 28, 1985.
[.8] Bank takes exception to a provision in the ALJ's Proposed Order to Cease and Desist requiring Bank to notify its shareholders of the contents of the Order. It is important that shareholders (who have a pecuniary interest in the Bank) be apprised of its reporting practices. Thus, as a policy matter there is a need for full disclosure to the shareholders of the substance of the Order. Further, requiring disclosure is peculiarly appropriate here, since the substance of this dispute between Bank and the FDIC was referred to in footnotes to financial statements previously distributed to Bank's shareholders. See Bank's exhibits 4 at 5-6 and 6 at n.6. On these grounds, a shareholder notification provision is included in the Board's Order.
/s/Hoyle L. Robinson
ORDER TO CEASE AND DESIST
FDIC-85-18b
IT IS HEREBY ORDERED that the * * * Bank * * * ("Bank"), its directors, officers, employees, agents, successors, and assigns, and other persons participating in the conduct of the affairs of the Bank, cease and desist from the following unsafe or unsound banking practice:
/s/Hoyle L. Robinson
RECOMMENDED DECISION
FDIC-85-18(b)
PROCEDURAL HISTORY
The Federal Deposit Insurance Corporation (hereinafter FDIC), pursuant to Section 8(b)(1) of the Federal Deposit Insurance Act (hereinafter "Act") (12 U.S.C. Sec. 1818(b)(1)), and Part 308 of the Federal Deposit Insurance Corporation Rules of Practice and Procedure (12 C.F.R. Part 308) issued on January 16, 1985, a written Notice of Charges and of Hearing to * * * Bank * * * (hereinafter "Bank" or * * *1charging the Bank with having engaged in unsafe or unsound banking practices and violations of law.
FINDINGS OF FACT
1. JURISDICTION
The Notice of Charges and of Hearing alleges, and the Bank's Answer admits, that the Bank is a corporation existing and doing business under the laws of the State of * * * and having its principal place of business at * * *. The Bank is, and has been, at all times pertinent to the charges herein, an insured state nonmember bank, subject to the Act (12 U.S.C. Sec. 1811-1831(d)) and the FDIC's Rules and Regulations (12 CFR Chapter III) and the laws of the State of * * *. The FDIC has jurisdiction over the Bank and the subject matter of this proceeding. (ALJ-1) Notice, Answer)
2. CHRONOLOGY OF EVENTS
a. The Offset Transaction:
Beginning approximately in 1975, * * * and * * * were owners of * * * , with * * * being * * * President and * * *, Chairman of the Board (Vol. III, TR. 64, 118-120).* On August 1, 1976, * * * executed a subordinated capital note (debenture) whereby * * * borrowed $1,000,000.00 from * * * Bank of * * * (hereinafter * * *) with the principal due on August 1, 1986, and with annual interest payments due on August 1 (FDIC-5, ALJ-1, Exhibit A to Attachment B).
b. The FDIC Discovery and Aftermath:
Between January 3, 1984, and January 27, 1984, the FDIC conducted an examination of the Bank's condition (Tr. 43-52, FDIC-1; Vol. III p.28-30). During the Bank's examination, the FDIC discovered the offset transaction and disallowed it in the Bank Examination Report (Tr. 45-56; 124-127; 130-132; FDIC-1; at 1-a). In essence, the FDIC disallowed the setoff as being "premature" (Vol II. TR. 171; 182; Vol. III, Tr.38).
c. The Call Reports
As noted supra, the Call Reports filed by * * * which are subject to the FDIC Notice of Charges are for December 31, 1983, March 31, 1984, June 30, 1984 and September 30, 1984 (FDIC-22 thru FDIC-26).12
d. Call Report Functions:
[.9] Call Reports are a uniform, standardized method of reporting which enables the FDIC to perform its Bank supervisory and surveillance function in a consistent manner, and ensure reasonable, accurate data to other federal19 and state regulatory authorities as well as to the general public (Tr. 138, Vol. III, Tr. 39; Tr. 176178) Specifically, the FDIC relies on Call Reports for surveillance and analytical purposes such as the preparation of surveillance screening ratios and the integrated monitoring system (IMS).20 The FDIC utilizes Call Report data to generate Uniform Bank Performance Report(s) (UBPR) which are analytical reports for each bank in the United States prepared by the Federal Financial Institutions Examination Council (FFIEC), and distributed to each primary bank supervisory agency, the bank itself, and available to the general public.21 The FDIC also uti-
3. ANALYSIS
There is no serious dispute as to the basic facts giving rise to the instant matter as it originates from the Bank's accounting of the one million dollar setoff transaction on the December 31, 1983, Call Report. It is clear that once the FDIC became aware of the transaction during the January, 1984, bank examination, it consistently22 took the position that the Bank's handling of the transaction was "premature" in that the validity of the setoff was being disputed in State Court and subject to the risk of litigation. From the outset and during the filing of the subsequent Cali Reports, the FDIC consistently23 took the position that the Bank should amend these reports to conform with the FDIC's view of the transaction. The Bank has refused or failed to comply with the FDIC's request.
[.10] * * * and * * *24, the FDIC's expert witnesses, reasoned that the setoff transaction is best viewed as a loss contingency. Both the 1980 and 1984 Call Report instructions provide that contingencies which might result in gains should not be recognized prior to "realization." FASB No. 5, which the instructions refer to, in like manner, provide that contingency gains are not recognized prior to "realization." The setoff transaction was the subject of litigation in State Court and, accordingly, contingent upon the outcome of that lawsuit. The fact that the Bank physically had the one million dollars from the debenture note in hand, does not diminish the attendant risk that a court might not allow the setoff and require the repayment of the principle plus interest. Although the Bank may reasonably rely upon the "strong attorney" opinion letters in pursuing the setoff claim in court litigation, in the final analy-
[.11] It is self-evident that the Bank's materially false entries on the Call Reports are misleading. As noted, supra., the fundamental purpose and uses of the Call Reports require that they be uniform and accurate. Once false entries infect the system, users who rely on the inaccurate data are subject to unforeseen risks which may influence them to take action not otherwise contemplated. The Bank contends that the FDIC has failed to prove that the FDIC, other regulators, or any other user of the Call Reports have been actually misled. The Bank's assertion is akin to a theory of common law fraud. It is unnecessary for the FDIC to show that the users of the Bank's Call Reports acted to their detriment in relying on the false data. The Act and regulations require no such burden. It is sufficient, as the FDIC did in the instant case, to demonstrate that the Bank willfully filed materially false Call Reports which are relied upon by Federal and State regulatory agencies and the general public with the possible consequences of abnormal risk, loss or damage.
PROPOSED CONCLUSIONS OF LAW
1. The FDIC has jurisdiction over the Bank under Section 8(b) of the Act to issue an Order to Cease and Desist requiring that the Bank cease and desist from unsafe or unsound banking practices and violations of law, and also requiring that the Bank take affirmative action to correct the conditions resulting from such practices and vio-
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Last Updated 6/6/2003 | legal@fdic.gov |