Federal Deposit
Insurance Corporation

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[¶5112] FDIC Docket No. 85-356e (3-1-88).

   Former bank board chairman and director was prohibited from participating in the affairs of any bank insured by the FDIC, because of federal and state law violations, a cease and desist order violation, unsafe and unsound banking practices, a breach of fiduciary duty, and personally gaining from the violations and unsafe practices, constituting a willful and continuing disregard for the safety and soundness of the bank.

   [.1] Practice and Procedure — Administrative Proceedings Not Subject to Technical Pleading Requirements
   Administrative actions are not subject to the technical requirements of pleadings. Issues of violations of state lending limits and other statutory requirements raised by unrebutted evidence are sufficient to support a finding of violation.

   [.2] Removal, Prohibition, or Suspension — Factors Determining Liability
   An action for the removal of officers and directors must be supported by proof of (1) wrongful conduct such as, violations of law, rule or regulation or a final cease and desist order, an unsafe or unsound banking practice or a breach of fiduciary duty; (2) the effect of the wrongful conduct such as, financial loss or damage to the bank, prejudice to bank depositors' interests, or financial gain by an officer or director; and (3) the officer's or director's mental state such as personal dishonesty or willful and continuing disregard for the safety and soundness of the bank.

   [.3] Federal Reserve Act § 23 — Violation — Investment in Affiliate
   An insured bank's investment of 172% of its capital and surplus in an affiliate bank violates an FDIA provision limiting the maximum investment to affiliates at 10% of capital and surplus.

   [.4] Regulation O#151;Loans to Insiders — Unsecured Loans
   The purchase of a $1.7 million note which exceeds 15% of the bank's capital and surplus violates Reg. O.

   [.5] Capital#151;Adequacy — Unsafe or Unsound Practices
   Unsafe and unsound banking practices include excessive volume (337% of equity capital and reserves) of adversely classified assets, inadequate capital ratio of -0.73%, abusive insider transactions, violations of law and regulation, excessive concentration of credit to a few entities, and detrimental management policies and practices.

   [.6] Unsafe or Unsound Banking Practices
   Because of the unsafe and unsound banking practices, there existed within the bank a hazardous financial condition which resulted in loss, prejudiced depositors' interests, and threatened the deposit insurance fund.

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   [.7] Directors — Duties and Responsibilities
   Bank Directors and officers have a fiduciary duty to the bank and not to the persons with controlling interests in the bank.

   [.8] Prohibition, Removal, or Suspension — Factors Determining Liability — Disregard for Safety and Soundness

   An officer's willful and continuing disregard for the bank's safety or soundness and breach of fiduciary duty demonstrate his unfitness to be a bank officer.

In the Matter of ***, individually and as
an officer and/or director and/or
participant in the conduct of the affairs of
*** Bank


(INSURED STATE NONMEMBER BANK)
DECISION AND ORDER OF
PROHIBITION FROM FURTHER
PARTICIPATION
FDIC 85-356e

   On December 16, 1985, the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") issued a Notice Of Intention To Remove From Office And/Or To Prohibit From Further Participation ("Notice") to several officers and directors of *** Bank, *** ("Bank"), including Respondent ***. A hearing on the Notice as to Respondent *** was held before an Administrative Law Judge ("ALJ") on August 3-4, 1987. The ALJ issued a Recommended Decision and Order on November 16, 1987, and the matter was certified to the Board for a final decision by the Deputy Executive Secretary on December 14, 1987.
   After reviewing the entire record in this proceeding, the Board finds that the ALJ's Recommended Decision and Order is supported by the evidence and is, except as noted below, in accordance with applicable law. The Board agrees with the Recommended Decision and Order except as set forth herein.

The Recommended Decision and the
Record

   In his Recommended Decision, the ALJ correctly found that the evidence presented by FDIC enforcement counsel established each of the essential elements required by section 8(e)(1) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e)(1). The record establishes that the Respondent engaged in acts which violated Federal law and the FDIC's August 27, 1983 Cease and Desist Order. Therefore, the Board adopts and incorporates herein by reference the ALJ's Findings of Fact and Conclusions of Law regarding violations of Section 23A of the Federal Reserve Act, 12 U.S.C. §371c, of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 215, and of the Cease and Desist Order found at sections III-C, D, and F of the Recommended Decision, respectively.
   The record establishes that the Respondent engaged in unsafe or unsound practices in connection with the Bank and that he committed or engaged in acts, omissions or practices which breached his fiduciary duty as a director and chairman of the board of the Bank. The Board adopts the ALJ's Findings of Fact and Conclusions of Law at III-G and J, concerning these elements, and incorporates them herein by reference.
   The record establishes that Respondent engaged in the wrongful conduct detailed above knowingly and willfully and with continuing disregard for the safety and soundness of the Bank. As to these elements, the Board adopts and incorporates by reference the ALJ's Findings of Fact and Conclusions of Law contained in section III-K of the Recommended Decision and Order.
   As a consequence of the violations established, the record supports the ALJ's conclusion that at all times there existed within the Bank an extremely hazardous financial condition, which in fact produced loss, jeopardized the interests of the depositors and threatened the deposit insurance fund. The Board adopts the ALJ's Findings of Fact and Conclusions of Law concerning these elements at section III-H on page 7 of the Recommended Decision and Order.

Violations of *** Law

   Additionally, the ALJ found that the Respondent had violated various sections of the *** Financial Code. This evidence was, however, excluded from consideration by the ALJ because those violations had not {{4-1-90 p.A-1230}}been alleged in the Notice. The ALJ based his conclusion in this regard on his understandable but nevertheless erroneous perception that he could only consider evidence concerning violations actually charged in the Notice.

   [.1] Administrative actions are not subject to the technical pleading requirements that govern private lawsuits. Indus., Technical and Professional Employees Div. v. NLRB, 683 F.2d 305, 307-08 (9th Cir. 1982). "`[A]n issue litigated at an administrative hearing may be decided by the hearing agency even though the formal pleadings did not squarely raise the issue,' so long as the cited party had actual notice and a fair opportunity to litigate the issue." Brock v. Dow Chem. U.S.A., 801 F.2d 926, 931 (7th Cir. 1986) (quoting Nat'l. Realty & Constr. Co. v. OSHRC, 489 F.2d 1257, 1264 (D.C. Cir. 1985)). See also NLRB v. Int'l. Bhd. of Elec. Workers Local 112, 827 F.2d 530, 534 (9th Cir. 1987).
   This was clearly the case here. The Notice itself generally charged "violations of laws." (Notice at 1, 3 (¶5), 4 (¶6)). The issue as to violations of state lending limits and other state statutory requirements was raised on page 6a of the FDIC Report of Examination received into evidence as Exhibit 1, and during the course of the hearing. (Tr. at 55-62, 86-87, 92, 97-100). Respondent had ample opportunity to rebut the FDIC's evidence on the state law issue, but failed to do so. (Tr. at 104-06, 196-97). Therefore, the Board finds that the ALJ erroneously excluded this evidence and that the record fully supports Respondent's violations of the state lending limits.

Financial Gain

   In Finding III-I, the ALJ found undisputed evidence that Respondent had received financial gain from these practices and transactions. However, the ALJ declined to consider this evidence based upon his view that financial gain had not been raised in the Notice. As discussed above, the ALJ may indeed consider such evidence where the Respondent has been put on notice of such allegation and has had an adequate opportunity to present evidence to defend against any such allegation. Respondent was clearly confronted during the hearing with evidence of alleged financial gain derived from his actions in relation to the *** operation, (Tr. at 78-79, 185-90), which he failed to rebut (Tr. at 190-91, 207-08). However, in this instance the Board need not rely solely on this legal ground to consider the evidence of financial gain. While the ALJ concluded otherwise, the Notice in this proceeding in fact alleged personal financial gain. (Notice at 2). The Board therefore finds and concludes that the record sufficiently supports, and the ALJ erred in not relying upon the fact that Respondent derived financial gain from his actions.

   Personal Dishonesty

   The ALJ found that uncontroverted evidence established personal dishonesty on the part of Respondent. However, the ALJ declined to consider this evidence because it was not alleged in the Notice. As discussed supra, evidence introduced during the hearing as to an alleged 8(e) violation of which Respondent had notice and as to which he had an opportunity to present evidence in defense may be considered by the ALJ. Evidence of Respondent's personal dishonesty was produced by the FDIC at the hearing (Tr. at 69, 72, 159-61). However, it is not absolutely clear that Respondent either was or should have been aware of the implications of the evidence of personal dishonesty offered by the FDIC. Therefore, while the Board agrees with the ALJ's conclusion that the evidence established Respondent's personal dishonesty, it declines to rely upon that evidence as a basis for the Order issued in the proceeding.

CONCLUSION

   Therefore, for the reasons set forth herein, the Board adopts the ALJ's findings of fact in their entirety and his conclusions of law except as to violations of the state lending limit statute and financial gain. The Board finds that the violations of the state lending limit statute and the Respondent's personal financial gain, while not the only bases for the Order of Prohibition from Further Participation, are valid legal bases for that order.

ORDER OF PROHIBITION FROM
FURTHER PARTICIPATION

   Having found and concluded that the essential elements of Section 8(e)(1) of the Act have been established; that ***, in his capacity as director and chairman of the board of the Bank, has violated Federal and state laws and regulations and a cease-and-desist order which had become final, en-
{{4-1-90 p.A-1231}}gaged or participated in unsafe and unsound banking practices and breaches of fiduciary duty; and
   Having found and concluded that, by reason of the Respondent's conduct, the Bank suffered substantial financial loss or other damage, and the interest of depositors was seriously jeopardized, and that the Respondent has received financial gain by reason of such violations or practices; and
   Having found and concluded that such violations or practices of the Respondent demonstrated a willful and continuing disregard for the safety and soundness of the Bank, it is:
   ORDERED, that the Respondent *** be, and hereby is, prohibited from participation in any manner in the conduct of the affairs of any bank insured by the Federal Deposit Insurance Corporation without prior written approval of the appropriate Federal banking agency.
   The ORDER shall become effective thirty (30) days after service on the Respondent, and shall remain effective and enforceable except to the extent that, and until such time as, any provisions of the ORDER shall be modified, terminated, suspended, or set aside by the FDIC.
   Dated at Washington, D.C., this 1st day of March, 1988. By direction of the Board of Directors.

Hoyle L. Robinson
Executive Secretary

RECOMMENDED DECISION AND
ORDER

FDIC 85-356e

   WILLIAM A. GERSHUNY, Administrative Law Judge: A hearing was conducted in *** on August 3-4, 1987, on a Notice of Intention to Remove From Office and/or to Prohibit From Further Participation issued by the Federal Deposit Insurance Corporation on December 16, 1985, seeking the removal of Respondent ***, former Chairman of the Board of *** Bank, pursuant to Sec. 8(e)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(1). Other officers and directors, originally named as corespondents with ***, entered into settlements with the FDIC prior to the hearing.
   Upon the entire record, including my observation of witness demeanor, and pursuant to Sec. 308.13 of the FDIC Rules and Regulations, I hereby make the following:

   Findings of Fact and Conclusions of Law

I. Jurisdiction

   The Notice alleges, Respondent admits, and I find that Respondent and the *** Bank, ***, were at all relevant times subject to the Act, the Rules and Regulations of the FDIC, the laws of the State of ***, and the jurisdiction of the FDIC.

   II. The Allegations of the Notice

   The Notice alleges that Respondent ***, as Chairman of the Board and as Director until May 1985 when he resigned the positions, breached his fiduciary duty, and caused the Bank to engage in unsafe or unsound banking practices, to violate a Cease-and-Desist Order which became effective August 27, 1983, and to violate Sec. 23A of the Federal Reserve Act and Regulation O, a regulation of the Federal Reserve Board made applicable to insured State nonmember banks by Sec. 18(j) of the Federal Deposit Insurance Act, 12 U.S.C. 1828(j) and Sec. 337.3 of the FDIC Rules and Regulations, 12 CFR 337.3. The Notice alleges that, as a result of such wrongful conduct, the Bank has suffered or will probably suffer substantial loss or other damage, or the interests of its depositors could be seriously prejudiced. Finally, the Notice alleges that such conduct demonstrates Respondent ***'s willful or continuing disregard for the safety and soundness of the Bank.
   Although uncontroverted documentary evidence and testimony of the FDIC's investigator and examiners clearly establish violations of State statutory lending limits, and personal dishonesty and personal financial gain on the part of this Respondent (e.g. misrepresentations made to examiners as to the location and status of certain deed of trust notes and as to the location of supporting documentation in the *** transaction; the creation of sham leases in connection with the sale/leaseback of the bank building; and the acquisition of a luxury import automobile at below cost from a Bank subsidiary), the Notice does not contain such allegations. Where, as here, a Sec. 8(e) Notice is issued by the Board of Directors of the FDIC, it cannot be amended during the hearing by counsel for the FDIC
{{4-1-90 p.A-1231}}absent evidence of delegated authority to do so. None was offered by counsel and my examination of published FDIC regulations discloses no such delegation. Accordingly, I am not empowered to consider evidence of State law violations, personal dishonesty, or personal financial gain in making my recommended decision.
   Nevertheless, for reasons set forth below, I find and conclude that sufficient essential elements of Sec. 8(e)(1) of the Act have been established, and that the FDIC is entitled to an Order prohibiting Respondent from participating in the affairs of any bank insured by the FDIC.

III. Section 8(e)(1) Removal

   [.2] A. The Essential Elements. Section 8(e)(1) of the Federal Deposit Insurance Act provides for the removal of officers and directors of an insured bank. Admittedly Respondent *** is subject to this provision. The provision establishes three separate and distinct categories of essential elements, each with a number of alternative grounds. The first category relates to the wrongful conduct that must be established to support a removal action: (1) "any violation of law, rule, or regulation or of a cease-and-desist order which has become final;" or (2) "any unsafe or unsound practice in connection with the bank;" or (3) "any act, omission, or practice which constitutes a breach of his fiduciary duty." The second category relates to the effect of the wrongful conduct: (1) "the bank has suffered or will probably suffer substantial financial loss or other damage;" or (2) "the interests of its depositors could be seriously prejudiced;" or (3) "the director or officer has received financial gain." The third category relates to the mental state of the director or officer, i.e. "scienter:" (1) "personal dishonesty" or (2) "a willful or continuing disregard for the safety or soundness of the bank."
   As noted above, each of the alternative elements to support removal of Respondent *** are pleaded except personal dishonesty, violation of State law, and personal financial gain.
   B. Background: In May 1984, *** acquired a controlling interest in the Bank and changed its name to *** Bank. During the relevant period, all directors were either former associates of *** or were under his control. Although neither an officer nor a director, *** maintained an office in the Bank's quarters, next to offices of the President and the Chairman. President ***, an acquaintance of *** was brought into that position by *** in June 1984. *** had little or no knowledge of the details of the major transactions that are the subject of this proceeding.
   Respondent ***, then in his early thirties, was put in the position of Chairman of the Board by *** in May 1984. At the time, he had less than eight years of experience in financial institutions, all in mid-level positions. Prior to his appointment as Chairman, Respondent served as a "consultant" to ***. Respondent was the Bank's chief executive officer "in-fact" and was exclusively responsible for the Bank's large "projects," all of which are the subject of this proceeding.
   Examiner ***, in charge of the December 31, 1984 examination, observed that Respondent was "less than candid" with examiners and made "misleading statements" concerning certain assets. I also found that Respondent, as a witness, lacked credibility. He was unconvincing, more than once assuming an attitude that he need not explain the transactions, because they were so highly specialized and so complicated and thus could be understood and appreciated only by himself and his principal, ***, to the exclusion of bank examiners with vast experience. This is precisely the approach he took in dealing with other Bank directors and officers in obtaining "quick" approval of the transactions involved in this proceeding.
   Respondent *** resigned from his positions in the Bank one year later, in May 1985. At the hearing, he was unrepresented by counsel, gave sworn testimony, and made a closing statement on the record.

   [.3] C. The Section 23A Violations. On November 23, 1984, the Bank, through a wholly-owned subsidiary, ***, acquired from *** an 83% interest in *** Group for $3.2 million cash in an insider transaction characterized by Examiner *** as the "most abusive" he had ever seen in his 22 years as an examiner. The details of the transaction are described elsewhere in this Decision. *** was the controlling owner of the Bank and ***. Thus *** was an affiliate of the Bank before the transaction and a majorityowned subsidiary after. Sec. 23A of the Federal Reserve Act, made applicable to insured state nonmember banks such as *** Bank by Sec. 18(j) of the Federal Deposit {{4-1-90 p.A-1233}}Insurance Act, prohibits a bank from investing more than 10% of its capital and surplus in an affiliate. Based on its September 30, 1984 Call Report, the Bank's maximum legal investment in *** was $188,000. Its actual investment, however, amounted to 172% of capital and surplus.
   On October 29, 1984, the Bank converted $400,000 in advances to *** (engaged in the importation, purchase and sale of used luxury foreign automobiles in the "gray market") into a 100% ownership of the company. This investment amounted to 21% of the Bank's capital and surplus, also in violation of Sec. 23A.

   [.4] D. The Regulation O Violation. One of the major assets acquired by the Bank in its purchase of *** was a $1.7 million note from ***. Sec. 215.3(a) of Regulation O defines an extension of credit to include the acquisition by purchase of a note. This purchase of the *** note is in flagrant violation of Sec. 215.2(f), in that it exceeds 15% of the Bank's capital and surplus and valuation reserve by more than $1 million. It also is preferential, in violation of Sec. 215.4(a), in that it requires no principal amortization and is collateralized by undeveloped raw land whose value is inadequately substantiated.
   E. The State Financial Code Violations. The FDIC's evidence establishes that the Bank, in acquiring *** from *** for $3.2 million, violated Sections 751.3(d) and (e) and 3354 of the *** Financial Code in that it did not seek and obtain approval of the State Superintendent for its investment in a real estate investment company or its acquisition of the property of a controlling stockholder.
   The evidence also establishes that the Bank violated of Sec. 1221(a) of that Code by way of unsecured credit extended to one *** directly or indirectly (through one ***, a business partner of ***, who transferred the funds to the partnership). In this respect, as detailed in the Report of Examination as of December 31, 1984, the State's lending limits were exceeded by more than $600.000.
   As noted above, neither of these violations is alleged in the Notice. Accordingly, I am not empowered to consider such evidence in making my recommended decision.
   F. The Violations of the August 27, 1983 Cease and Desist Order. The Notice alleges a single violation of the Cease and Desist Order#151;the failure to maintain the Bank's capital-to-asset ratio at not less than 8%. ***, when he acquired his controlling interest in May 1984, injected $1.9 million of new capital into the Bank, giving the Bank (based on a pro forma) an adjusted capital of 9.4%. At the time of the examination, six months later, the Bank's capital-to-asset ratio was a negative (0.73%), below the requisite 8% level.

   G. The Unsafe and Unsound Banking Practices.

   [.5] 1. Excessive Volume of Adversely Classified Assets. The Bank's consolidated balance sheet reflects adversely classified assets of $11.1 million, of 337% of equity capital and reserves. Examiner *** characterizes this amount as "enormous." The $3.5 million in Loss classifications center on loans in the amount of $1.3 million and other assets of $1.9 million.
   The first involves a manipulative October 1984 transaction by the Bank for the sale/leaseback of its bank building, which had the effect of increasing the Bank's annual rental from $192,000 to $536,000, and, using an accounting "scheme" (in the words of Respondent ***) which violated GAAP and, according to Examiner ***, "did not hold water," permitted the Bank to reflect a profit of more than $2 million. Examiner *** reversed $1.3 million of that "profit" out of the Bank's income account. Respondent ***, who put together the project and presented it to the Board of Directors, admitted that the transaction was a "scheme" designed to boost Bank capitaxcessive cost levels for tenant improvements, and by its reliance on the "fully leased" condition of the building. *** and *** "leased" space to associates at abovemarket rates, which gave the appearance of a fully occupied building. This record versely on Respondent ***'s awareness of not only sound banking practices but also the nature of his fiduciary duty to the Bank. The appraisal was seriously flawed by the use of an income approach, by the use of out-of-area comparables, by the use of excessive cost levels for tenant improvements, and by its reliance on the "fully leased" condition of the building. *** and *** "leased" space to associates at above-mar- {{4-1-90 p.A-1234}}ket rates, which gave the appearance of a fully occupied building. This record reflects that the leases were a "sham." At no time during the relevant period did any lessee occupy the building. And, finally, *** was able to produce little of the documentation that should have been available to support the sale/leaseback transaction.
   The second transaction, in November, 1984 was the Bank's purchase, through a wholly-owned subsidiary, of ***'s interest in *** (discussed above) for $3.2 million. This purchase, presented to the Board by *** and considered by them over a period of less than two days, at which time a telephone vote was taken, is characterized by ***, a veteran examiner of 22 years, as the "most abusive transaction I've ever seen," and by Examiner *** as one which no prudent banker would have touched "with a 10-foot pole." The transaction, of whose assets $1.9 million were classified Loss and $1.2 million Substandard, was for the purpose of unjustly enriching *** and included a number of non-bank type assets. Only three Board members, including Respondent ***, voted for the acquisition; two were absent and President ***, who did not understand the transaction, abstained. The transaction was not supported by adequate documentation, and Respondent ***, despite examiner requests for six weeks, was unable to produce the supporting records. Details of the transaction, set forth on pages 2-b-10-14 of the Report of Examination, include Respondent *** falsely holding himself out in correspondence as a director of ***; *** misrepresenting to examiners that several second deed of trust notes were being held by a savings and loan institution for "safekeeping," whereas in fact the institution was holding them as collateral; one of the assets acquired, a $1.7 million note receivable from ***, involved the Bank's funding of ***'s down payment for the purchase of an interest in a housing development; another asset, a beach front commercial parcel, was supported by an appraised value which projected an unrealistic use of the property as a restaurant; and $41,000 of art work, some of which could not be located.
   2. Inadequate Level of Equity Capital. The Bank's adjusted equity capital and reserves as a percentage of adjusted assets on the consolidated balance sheet is a negative $272,000 and its adjusted capital ratio is a negative (0.73) percent. These levels present both undesirable and objectionable conditions. Respondent does not challenge either the data or the conclusions to be drawn from the data.
   3. Abusive Insider Transactions. The transactions detailed above, and the opinions expressed by the examiners, will not be repeated here. The conclusion to be drawn is inescapable: the transactions were grossly abusive and constitute an unsafe or unsound banking practice.
   4. Violations of Law and Regulation. Again, the violations of federal law and regulations are detailed above and will not be repeated here. As a matter of law, they constitute unsafe or unsound banking practices.
   5. Excessive concentrations. Page 2-c of the Report of Examination details an excessive number and dollar volume of concentrations to control owner ***, one ***, and two subsidiaries of the Bank. Large portions of these credits are classified. The examiner concluded that the concentrations demonstrated that the board and active management "have far exceeded prudent bounds in their failure to adequately diversify investment risk." Respondent does not contest either the facts or the conclusions drawn from the facts.
   6. Detrimental Management Policies and Practices. The transactions detailed above represent self-dealing by and for the benefit of control owner ***. The role of Respondent *** is abundantly clear on the record evidence: as chief executive officer "infact" he promoted and presented each transaction, and in doing so evidenced a disregard for the proper care and diligence required of management in the safe and sound operation of an insured bank.
   H. Loss to Bank and Prejudice to Interests of Depositors.

   [.6] The inescapable conclusion to be drawn from the data, the transactions, and the examiner opinions detailed above is that at all relevant times there existed within the Bank an extremely hazardous condition, which in fact produced loss, prejudiced the interests of the depositors, and threatened the deposit insurance fund. The December 31, 1984 conclusions of Examiner ***, not challenged by Respondent, and credited by me, are that there are no prospects for future net profits, that the Bank has and will continue to suffer huge month-
{{4-1-90 p.A-1235}}ly losses, and that the Bank is operating with negative adjusted capital.

   I. Financial Gain by Respondent ***.

   The Notice of Intention to Remove, does not plead that Respondent received financial gain from the practices and transactions. At the hearing, however, FDIC investigator *** testified that records of ***, a wholly-owned subsidiary of the Bank, revealed that a foreign luxury car was sold to Respondent's wife for $1200 less than ***'s cost. Respondent did not dispute these facts. However, as noted above, the Notice does not allege personal gain by Respondent ***, and I am not empowered to consider this evidence, even though it is uncontroverted.

   J. Breach of Fiduciary Duty.

   [.7] It is now hornbook law that directors and officers of a bank have a fiduciary duty to the bank. American Bankers Association, Focus on the Bank Director, 97–125 (1984); Schlichting, Rice & Cooper, Banking Law, §6.04 (1984). Generally, the duty requires that bank officials, such as Chairman of the Board ***, act as prudent and diligent persons would act safeguarding the bank's property, complying with state and federal banking laws and regulations, and ensuring that the bank is operated properly. The duty is owed to the bank, and not to persons with controlling interests in the bank. It requires the proper supervision of subordinates, a knowledge of state and federal banking laws, and the constant concern for the safety and soundness of the bank. While the standard of care for bank directors and officers, like the standard of care in negligence cases, is expressed in constant terms, the nature of the duty varies according to the facts. The greater the authority of the director or officer, the broader the range of his duty; the more complex the transaction, the greater the duty to investigate, verify, clarify, and explain.
   The record evidence in this case permits no finding or conclusion other than that Respondent ***, as chairman of the board, breached his fiduciary duty to the Bank. Indeed, it is clear that Mr. *** considered his duty as running solely and exclusively to control owner ***.
   ***'s involvement in the two principal transactions discussed above supports this conclusion. In the sale/leaseback of the bank building, he knowingly utilized an accounting "scheme" which did not comport with generally accepted accounting principles and which increased the Bank's rent from $196,000 to over $500,000. This was done, without regard to the safety and soundness of the Bank, to give the appearance of a $2 million profit.
   In the Bank's purchase of ***'s interest in ***, *** presented this complex transaction to the board of directors without a full disclosure of its terms, without proper documentation, without independent appraisals, and without permission of the state superintendent of banks. Indeed, the fact that the transaction was rushed through the board by this Respondent in less than two days is indicative of ***'s failure to appreciate either the existence of a duty to the Bank or the its nature.

   K. Willful and Continuing Disregard for the Safety or Soundness of the Bank.

   [.8] Again, the record evidence clearly establishes that Respondent *** engaged in the wrongful conduct detailed above knowingly and willfully and with continuing disregard for the safety or soundness of the Bank. In this respect, the discussion above as to the breach of his fiduciary duty is equally applicable here and will not be repeated. Suffice it to say that this Respondent demonstrated his unfitness as a bank officer or director in his dealings with the Bank president, other board directors, and the FDIC examiners and in his testimony at the hearing. He acknowledged that some of his actions were beyond that of a prudent banker, justifying them with a quick-profit motive; he acknowledged that he concocted schemes which did not comport with generally accepted accounting principles so as to paint an untruthful portrait of capital adequacy; and he created sham leases with the intent of inflating the value of the building and justifying its purchase price. These practices and attitudes on the part of this Respondent were not isolated, but continued throughout the one year he held office. As evidenced by the detailed findings of the examiner-in-charge in the Report of Examination, which I adopt, they pervaded each of the major transactions in which *** played a responsible role.
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   L. Recommended Order.^*

   Having found and concluded that the essential elements of Sec. 8(e)(1) of the Act have been established, I hereby recommend, pursuant to Sec. 308.13 of the FDIC Rules and Regulations, that an order be issued prohibiting Respondent *** from further participation in any manner in the conduct of the affairs of any bank insured by the Federal Deposit Insurance Corporation, and that the order become effective thirty (30) day after service on Respondent *** and remain effective and enforceable except to the extent that, and until such time as, any provisions of the order shall be modified, terminated, suspended, or set aside by the Federal Deposit Insurance Corporation.
   Dated: November 16, 1987.

/s/ WILLIAM A. GERSHUNY
Administrative Law Judge