FDIC: 1988 - Docket No. FDIC-84-192e, FDIC-84-211e, FDIC-85-40k


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[¶5118] Docket Nos. FDIC-84-192e, FDIC-84-211e, FDIC-85-40k(Consolidated) (8-16-88).

Civil Money Penalty assessed against principal shareholder and against directors and executive officers. Directors removed. Offenses included violations of lending limitations under Regulation O and Section 23A, violations of a Cease and Desist Order, and an attempt to increase Bank's capital in a fraudulent transaction that benefited Respondents personally. (Respondent in this action brought suit to overturn this action. FDIC's motion to dismiss for lack of subject matter jurisdiction was denied, 609 F.Supp. 128 (E.D. Tenn. 1985)).

[.1] Prohibition, Removal, or Suspension—Failure to Answer Notice of Intention
Respondents are deemed to have consented to order to prohibit and remove by failing to appear at the hearing.

[.2] Prohibition, Removal, or Suspension—Liability—Statutory Standard
Statutory standard for removal of directors is met where Respondents violated Cease and Desist Order, regulation O, and Section 23A.

[.3] Directors—Duties and Responsibilities—Standard of Care
Directors are obligated to act prudently and diligently in protecting the interests of Bank and its depositors and shareholders. Respondents violated that standard by approving the purchase of commercial paper in amounts Bank could not afford, a transaction that benefited them personally.

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[.4] Civil Money Penalties—Amount—Maximum Penalty Imposed
FDIC may impose maximum statutory Civil Money Penalties where Respondents offered no evidence mitigating the seriousness of the offenses charged and no evidence showing their inability to satisfy such penalty.

[.5] Bankruptcy—Effect of Bankruptcy Filing
FDIC may impose Civil Money Penalty after a filing for bankruptcy.

[.6] Civil Money Penalties—Amount of Penalty—Statutory Standard
Factors considered when determining the appropriateness of the penalty including "size of financial resources and good faith of the . . . [[bank]] or person charged, the gravity of the violation, the history of previous violations and such other matters as justice may require."

[.7] Civil Money Penalties—Additional Penalty After Notice of Assessment
After assessing Civil Money Penalties for a violation of law that has not been cured, FDIC cannot impose additional Civil Money Penalties covering the period for the issuance of a penalty notice to the date of the final order because the statute does not provide for interest.

In the Matter of *** individually and as
a principal shareholder and a person
participating in the affairs of, and ***,
and ***, individually and as members
of the board of directors and/or as
executive officers of *** BANK

(Insured State Nonmember Bank—In Receivership)
DECISION AND ORDER
I. INTRODUCTION.

   This proceeding is a consolidation of separate administrative actions brought by the Federal Deposit Insurance Corporation ("FDIC"),¹ against Dr. ***, ***, ***, ***, and *** ("the Respondents").²
   In the present action, the FDIC seeks to remove Dr. *** and Messrs. *** and *** and prohibit them from participating in the affairs of an insured institution for violations of the lending limit and loan collateral requirements of section 23A of the Federal Reserve Act, 12 U.S.C. §371c(a) and (c), violations of the lending limit, terms and creditworthiness, and prior approval of the bank's directors' requirements of Regulations 0, 12 C.F.R. §215.4(a), (c), and for violation of the FDIC's temporary Order to Cease and Desist, dated September 24, 1984.³
   The FDIC issued Notices of Intention to Remove and to Prohibit from Further Participation and Orders of Suspension and Prohibition from Further Participation against Dr. *** (Docket No. FDIC-84-192e), Mr. *** (Docket No. FDIC-84-187e), and Messrs. ***, ***, and *** (Docket No. FDIC-84-211e) in November and December of 1984 ("the Removal Notices").
   In addition to the removal actions, the FDIC issued a Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law and Order to Pay against Dr. *** (Docket No. FDIC-85-40K) on February 7, 1985 ("the CMP Notice"). The CMP Notice sought to impose civil money penalties against Dr. *** and Mr. *** each in the amount of $1,768,000. The CMP Notice also sought to impose a civil money penalty against Mr. *** in the amount of $228,000.
   Additionally, the CMP Notice sought to impose an additional $1,000 per day from February 7, 1985—the date on which the FDIC issued the CMP Notice and the day before the Bank closed—through the date on which a final order issues in this proceeding against each of the Respondents.

II. The ALJ's Decision.

A hearing was held on January 19, 1988 before Alan W. Heifetz, Administrative Law Judge (("the ALJ"). Dr. *** and Mr. *** failed to appear at this hearing, either in person or by counsel. Mr. *** was present

¹ Citations to the record herein shall be4 as follows:—to the Transcript of the Hearing: "Tr. -" -to the FDIC Exhibits: "Exh. -" -to the Recommended Decision: "R.D. -".

² The FDIC's actions against Mr. *** were dismissed on December 29, 1987, due to his death, the actions against Mr. *** have been resolved by settlement.

³ Section 23A and Regulation O are made applicable to insured state nonmember banks by sections 18(j)(1), (2), and (4) of the Federal Deposit Insurance Act ("the Act"), 12 U.S.C. §1823(j)(1), (2), and (4).
{{4-1-90 p.A-1307}}and represented himself during the proceeding.
   The ALJ issued his Recommended Decision on April 28, 1988. The ALJ found that an order of removal and prohibition against Dr. *** and Messrs. *** and *** was fully justified pursuant to section 8(e)(1) of the Act, 12 U.S.C. §1818(e)(1), for violations of section 23A, Regulation O, the FDIC's Temporary Order to Cease and Desist dated September 24, 1984, and for other wrongful acts. The ALJ also found that Dr. ***'s activities justified removal and prohibition under section 8(e)(2) of the Act, 12 U.S.C. §1818(e)(2).
   The ALJ found that Dr. ***'s activities violated the lending limit and collateral requirements of section 23A of the Federal Reserve Act, 12 U.S.C. 371c(a) and (c), the lending limit, terms and creditworthiness, and prior approval requirements of Regulation O, 12 C.F.R. §215.4(a)(c), and the FDIC's Temporary Order to Cease and Desist. The ALJ recommended a penalty in the amount of $1,768,000 against Dr. *** pursuant to sections 8(i)(2) and 18(j)(4)⁴ of the Act, 12 U.S.C. §§1818(i)(2), 1828(j)(4). The ALJ recommended a penalty in the amount of $1,367,058 against Mr. *** (reduced from a proposed penalty of $1,768,000), as well as a penalty in the amount of $228,000 against Mr. ***, for similar violations of section 23A, Regulation O, and the Temporary Order to Cease and Desist. (R.D. 16–18).⁵
   The ALJ found that, while the proposed penalty against Dr. *** was reasonable on the basis of estimates of his profit from the sale of the notes and installment contracts, as well as his role as the chief architect of the scheme to defraud the Bank, Mr. ***'s penalty should be reduced because his role in the scheme and his profits from the transactions were less than Dr. ***'s. Accordingly, the ALJ arrived at the proposed penalty for Mr. *** by reducing the potential maximum penalty that could have been sought against *** by a percentage equal to the ratio of Dr. ***'s actual penalty to his potential maximum penalty.
   Neither FDIC Enforcement Counsel nor the Respondents have filed Exceptions to the Recommended Decision.

III. STATEMENT OF THE CASE.

   The Bank was an FDIC insured state nonmember bank existing and doing business under the laws of the State of ***. (Tr. 25–26; Exh. 1). *** was the Bank's holding company and record holder of 40,117 of the Bank's 50,000 outstanding shares of common stock. (Exh. 11).
   Prior to July 2, 1984, *** owned or controlled all outstanding shares of ***. (Tr. 32). Mr. *** was elected to the board of directors of the Bank on June 14, 1983 and also served as an officer of the Bank in the area of collections, foreclosures, and repossessions. (Tr. 220–223; Exh. 44, 45, 46). *** was a real estate investment concern in the business of selling low quality "time shares notes"⁶ and installment loan contracts secured by solar energy equipment.⁷ *** was the president and sole owner of ***. (Tr. 33–41; Exh. 7–10).
   On October 17, 1983, on the recommendation of the Division of Bank Supervision, the Board of Directors of the FDIC ("Board") issued Findings of Unsafe or Unsound Practices and Condition and Order of Correction against the Bank pursuant to section 8(a) of the Act, 12 U.S.C. §1818(a) ("the 8(a) Order"). (Tr. 28–30, Exh. 3). The 8(a) Order concluded that the Bank was operating with an inadequate level of capital protection for the kind and quality of assets that were held by the Bank. It also concluded that the Bank was operating with management whose policies and practices were detrimental to the Bank and jeopardized the safety of its deposits.
   Among the corrective actions outlined in the 8(a) Order, the Bank was required to increase its total equity capital and reserves by $1,200,000 within 60 days of the receipt of the 8(a) Order. (Exh. 3). On January 21,

⁴ Formerly section 18(j)(3) of the Act (12 U.S.C. §1828(j)(3)).

⁵ The ALJ also disallowed the $1,000 dollar a day penalty against each of the Respondents pending a final order in this case on the grounds that imposition of such a penalty would constitute an impermissible assessment of interest on the civil money penalty. (R.D. 18). The Board declines to reach the merits of this issue at this time. As no exceptions to this aspect of the decision have been filed, the $1,000 a day penalty pending a final order will not be assessed.

⁶ These are promissory notes "secured" by time-share condominiums. The condominiums were of such little value that they were practically worthless as security. (Tr. 196).

⁷ Significant doubts were raised at the hearing as to the adequacy of the documentation and security interests taken in the solar energy equipment, which compromise their value as collateral for these transactions. (Tr. 153–154).
{{4-1-90 p.A-1308}}1984, the *** Region performed an examination of the Bank and found that it had not complied with the 8(a) Order in that the Bank had not increased its primary capital by the required $1,200,000.⁸ (Tr. 30; Exh. 3).
   In March of 1984, nearly 5 months after the issuance of the 8(a) Order, the Bank raised $400,000 in capital in the form of Notes executed by the directors of the Bank. (Tr. 30–32; Exh. 5). This injection of $400,000 fell $800,000 short of meeting the requirement to raise equity capital by $1,200,000.
   As part of a fraudulent scheme to give the appearance that the Bank had increased its capital by the remaining $800,000, the Bank entered into a purchase/sale arrangement with Dr. *** and ***. Pursuant to this scheme, the Bank purchased worthless (or, at best, grossly over-valued) time share notes and installment contracts from *** for $2.5 million. In turn, $800,000 of the proceeds from the sale by *** to the Bank were deposited in the Bank's Undivided Profits account, giving the appearance of supplying the required $800,000 for compliance with the 8(a) Order.
   Part of the remaining proceeds paid by the Bank to *** were used by Dr. ***, through Mr. *** (who acted as ***'s intermediary), to fund his purchase of *** from Mr. ***. Additional funds were also used to release Mr. *** from a debt secured by *** stock owed to *** Bank of *** as well as other personal debts owned to *** Bank, ***, and *** Bank, ***.⁹ (Tr. 236–237, 239–242, 260, 267–269; Exh. 48, 49, 50).
   Once Dr. *** gained control of ***, the Bank entered into five more transactions¹⁰ with Dr. *** and ***, resulting in a total purchase of $13 million in time share notes and installment contracts from Dr. ***'s companies. Unrebutted testimony indicates that Dr. *** realized an estimated $5 million in profit as a result of these sales to the Bank. (Tr. 210).
   The basic infirmity of these transactions is readily apparent. Through the device of these purchases from ***, the Bank essentially bought itself. The Bank "bootstrapped" its recapitalization through a deposit to its undivided profit account originating from its own deposits. (Tr. 95). Part of these same Bank funds were used to remove an encumbrance placed upon the
   *** stock, and provided the funds to allow Mr. *** to purchase the Bank's own holding company for Dr. *** and ***. (Tr. 97, 100). This purchase ultimately allowed Dr. *** to place himself in a position to control the Bank through his representative, Mr. ***. As a result, Dr. *** was able to drain the Bank of its depositors' money through additional purchases of low quality notes and contracts from *** or other related companies.
   The ALJ's Recommended Decision concisely and accurately sets out the relevant facts pertaining to the actions of the Respondents and the transactions at issue. Following review of the record, the Board adopts and incorporates by reference herein the ALJ's findings of fact and conclusions of law as contained in the Recommended Decision, except as modified below.¹¹

⁸ Based on the Bank's non-compliance with the 8(a) Order, the Board issued an Order Setting Hearing on Termination of Insured Status against the Bank on April 9, 1984. (Tr. 30, Exh. 4).

⁹ On the surface, these payments to and for Mr. *** appear to be part of the purchase price for ***. The Board notes, however, that Mr. *** denies having actual ownership of the *** stock at the time of the sale to Mr. ***. (Tr. 64, 266–267). He claims that he sold to Mr. *** whatever rights to the shares that he had as a result of his purchase of the stock at a foreclosure sale held by *** Bank, and that Mr. *** never had actual possession of the shares. Yet, Mr. *** was able to pledge these shares as security for his Note to *** that funded his purchase of ***, and *** took possession of these shares upon foreclosure on the *** Note on October 30, 1984. (Tr. 51–52; Exh. 21).

¹⁰ There appear to have been six transactions between the Bank and ***:
   - June 12, 1984, purchase of $2.5 million in time share notes,
   - July 25, 1984, purchase of $3,267,795 in installment loans secured by solar energy equipment,
   - August 30, 1984, purchase of $831,715 in installment loans secured by solar energy equipment,
   - August 31, 1984, purchase of $338,886 in installment loans secured by solar energy equipment;
   - September 13, 1984, purchase of $592,421 in installment loans secured by solar energy equipment,
   - November 2, 1984, purchase of $2.014 million in installment loan contracts secured by solar energy equipment, and time share notes.

¹¹ While the Recommended Decision's discussion of the application of section 23A and Regulation O suggests that Mr. *** failed to abstain from voting on the July 12 purchase of time share notes at the July 12 board meeting, (R.D. at 12), the ALJ's finding of fact correctly reflects that Mr. *** abstained from this vote. (R.D. at 6, n. 9; Exh. 17).
The Recommended Decision also incorrectly states that the September 24, 1984 Temporary Order to Cease and Desist was issued pursuant to section 8(b)(1) of the Act, 12 U.S.C. §1818(b)(1). It was issued pursuant to section 8(c)(1), 12 U.S.C. §1818(c)(1).
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VI. DISCUSSION.

The six transactions at issue in this action constitute a flagrant scheme on the part of the Respondents to drain the Bank of its funds for their own personal benefit. The record clearly supports the imposition of an order to remove and prohibit against the Respondents, as well as the imposition of civil money penalties.¹²

A. Section 8(e)(1) Removal.

Section 8(e)(1) provides for the removal of any director or officer of an FDIC insured bank under certain conditions. The statute provides that the FDIC must establish three criteria for the removal of a director or an officer from a bank. First, the director or officer must have either violated a law, rule or regulation, cease and desist order that has become final, engaged or participated in any unsafe or unsound practice in connection with the insured bank, or breached his fiduciary duty to the bank. Second, the FDIC must show that the bank has suffered, or will probably suffer, substantial financial loss or other damage or that the interests of the bank's depositors could be seriously prejudiced by reason of such violation or practice or breach of fiduciary duty, or that the director or officer has gained financially from his unlawful conduct. Third, the director's or officer's unlawful conduct must involve personal dishonesty or demonstrate a willful or continuing disregard for the safety or soundness of the bank. 12 U.S.C. §1818(e)(1). See C.F.R. §308.40.
In addition, the FDIC may prohibit an officer, director, or any other person participating in the affairs of an insured bank from further involvement with the institution if "the Board deems it necessary for the protection of the bank or the interests of its depositors." 12 U.S.C. §1818(e)(4). See 12 C.F.R. §308.44. Persons subject to an outstanding final order or notice to prohibit issued pursuant to section 8(e)(4) may not participate in the affairs of the bank(s) involved in the order, or vote for a director, serve or act as director, officer, or employee of the bank without the written permission of the FDIC. 12 U.S.C. §1818(j).

[.1] Because Dr. *** and Mr. *** failed to appear at the January 19, 1988, hearing, they are deemed by statute to have consented to the issuance of an order to remove and prohibit. 12 U.S.C. §1818(e)(5). See 12 C.F.R. §308.42. See also, FDIC No. 80-64e (Feb. 9, 1981), reprinted in FDIC Enforcement Decisions (Vol. 1), p. 5066. As Mr. *** appeared at the hearing, the remaining discussion regarding section 8(e) removal centers upon his activities.

   [.2] The Board specifically adopts the ALJ's finding that an order of prohibition and removal against Mr. *** is justified under section 8(e)(1) and the ALJ's discussion at pages 10 through 15 of the Recommended Decision. Mr. *** received the benefit of three separate payments from Bank funds that the ALJ has characterized as extensions of credit: a $415,000 payment to release his debt with *** Bank ***, and checks in the amount of $30,000 and $90,000 which were used to repay personal indebtedness at the *** and *** Banks. Each of these extensions of credit violated the terms and creditworthiness, prior approval, and aggregate lending limit requirements of Regulation O, 12 C.F.R. §215.4(a)-(c).
   In addition, Mr. *** participated in the November 2 sale of notes and loan contracts to the Bank, which also violated sections 215.4(a)-(c) of Regulation O, as well as the collateral requirements and lending limits of Section 23A, and the FDIC's Temporary Order to Cease and Desist.
   The Board concurs with the ALJ that, along with the violations of section 23A and Regulation O, FDIC Enforcement Counsel have established that Mr. *** breached his fiduciary duty to the Bank, engaged in unsafe or unsound banking practices, caused harm to the Bank and its depositors, gained financially from his unlawful conduct, and that Mr. ***'s action involved personal dishonesty and demonstrated a willful and a continuing disregard for the safety and soundness of the Bank. (R.D. at 13–15). These actions fulfill remaining criteria for an order of removal and prohibition with respect to Mr. *** under section 8(e)(1).

¹² As a result of our determination that removal and prohibition of the Respondents is justified under section 8(e)(1), the Board finds it unnecessary to reach the issue of whether Dr. *** may properly be removed pursuant to section 8(e)(2) of the Act, 12 U.S.C. §1818(e)(2).
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B. Civil Money Penalties.

   The FDIC is empowered under the act to assess civil money penalties for violations of its Cease and Desist Orders issued pursuant to section 8(c) of the Act, 12 U.S.C. §1818(c), as well as violations of section 23A and Regulation O. Section 8(i)(2) of the Act, 12 U.S.C. §1818(i)(2), provides that the FDIC may assess civil money penalties of up to $1,000 per day for each violation of a cease and desist order. Section 18(j)(4) of the Act, 12 U.S.C. §1823(j)(4), provides similar penalties for each violation of section 23A and Regulation O.
   The Board concurs with the ALJ's findings that the imposition of civil money penalties for the Respondents' violation of the September 24, 1984 Temporary Order to Cease and Desist, Regulation O, and section 23A, are justified on the record in the proceeding.
   As discussed above, the Board adopts the ALJ's finding that Mr. *** participated in the July 12 purchase of time share notes from *** which resulted in violations of the terms and creditworthiness, prior approval, and aggregate lending limit provisions of Regulation O. 12 C.F.R. 215.4(a)-(c). In addition, Mr. *** participated in the November 2 purchase of notes and contracts from ***, which also violated sections 215.4(a)-(c) of Regulation O, the collateral and aggregate lending limit requirements of section 23A, and the Temporary Order to Cease and Desist. This resulted in a total of 2,541 violation days¹³, with a maximum possible penalty of $2,541,000.
   The Board also adopts the ALJ's findings that Dr. ***'s participation in each of the six transactions also violated the terms and creditworthiness, prior approval, and aggregate lending limit requirements of Regulation O, 12 C.F.R. 214.5(a)-(c). In addition, Dr. ***'s participation in the November 2, 1984 sales of notes and contracts to the Bank violated the aggregate lending limit and collateral provisions of section 23A, as well as the FDIC's Temporary Order to Cease and Desist. This represents a total of 3,285 violation days, with a maximum possible penalty of $3,285,000.
   The Board further adopts the ALJ's finding that Mr. *** directly participated in the November 2 sale of notes and contract to the Bank which violated the collateral and aggregate lending limits requirements of section 23A, as well as sections 215.2(a)(c) of Regulation O. This represents a total of 651 violation days, with a maximum possible penalty of $651,000.
   The Board finds penalties in the amount of $1,768,000 against Dr. ***, $1,367,058 against Mr. ***, and $228,000 against Mr. *** are appropriate in light of the financial benefits reaped by each of the Respondents as a result of these transactions, the magnitude of the loss by the Bank, the absence of mitigating evidence, and the potentially larger maximum penalties that could have been assessed. (R.D. 17–18). In affirming the amount of the ALJ's recommended penalties, the Board has carefully considered the factors contained in sections 8(i)(2)(ii) and 18(j)(4)(B) of the Act, as well as the Interagency Policy Regarding the Assessment of Civil Money Penalties by the Federal Financial Institutions Regulatory Agencies, 45 Fed. Reg. 69423 (Sept. 9, 1980), and finds no evidence in the record that would support a reduction in the amounts of these penalties.

ORDER

   The Board of Directors of the Federal Deposit Insurance Corporation has considered the entire record in this proceeding, and it is
   HEREBY ORDERED that Respondents ***, ***, and *** be, and hereby are, prohibited from further participation in any manner in the conduct of the affairs of any bank insured by the Federal Deposit Insurance Corporation, without the prior written approval of the appropriate Federal banking agency.
   IT IS FURTHER ORDERED that Respondents ***, ***, and *** be, and hereby are, prohibited from voting for a director of any bank insured by the FDIC, without the prior written approval of the appropriate Federal banking agency.
   IT IS FURTHER ORDERED that a penalty of $1,768,000 be, and hereby is, assessed against Respondent ***; a penalty of $1,367,058 be, and hereby is, assessed

¹³ The violation days are calculated from the date of the infraction (November 7, 1984 being used as the date of violation of the November 2 transaction) to February 7, 1985. February 7, 1985 is (1) the day the assessment of penalties was issued, and (2) the day before the Bank was closed. Closure of the Bank prevented any further chance that the violations could have been corrected.
{{4-1-90 p.A-1311}}against Respondent ***. The penalties ordered shall be final and payable 30 days from the date of issuance of this ORDER;
   The above ORDER shall become effective thirty (30) days after service on Respondents ***, *** and ***, and shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall be modified, terminated, suspended, or set aside by the FDIC.
   Dated at Washington, D.C., this 16th day of August, 1988.
   By direction of the Board of Directors.

In the Matter of *** *** *** *** BANK
Respondents
***, Esquire For the Federal Deposit
Insurance Corporation
***, pro se
Before: ALAN W. HEIFETZ
Administrative Law Judge
RECOMMENDED DECISION
Statement of the Case

This administrative proceeding is a consolidation of the actions initiated by the Federal Deposit Insurance Corporation ("FDIC") against *** Bank ***, ***, ***, ***, *** and *** ("the Respondents"). Notice of Intention to Remove and to Prohibit from Further Participation and Orders of Suspension and Prohibition from Further Participation were issued in November and December 1984, pursuant to sections 8(e)(1), (2) and (4) of the Federal Deposit Insurance Act ("the Act"), 12 U.S.C. §1818(c)(1), (2), (4) (1982), against ***, docket number FDIC-84-192e; *** docket number FDIC-84-187e; and ***, *** and ***, docket number FDIC-84-211e. A Notice of Assessment of Civil Money Penalties, Findings of Fact, Conclusions of Law and Order to Pay issued on February 7, 1985, pursuant to 12 U.S.C. §1828(j)(3) (1982), against Messrs. ***, ***, ***, *** and ***, docket number FDIC-85-40k. These Notices included allegations resulting from the Respondents' involvement in the Bank's purchase of installment loan contracts in violation of the Act, and a Temporary Order to Cease and Desist, as well as other acts of misconduct.¹
On January 19, 1988, a hearing was held at which time documentary evidence and oral testimony were received.² Upon the entire record, which was closed on April 4, 1988, I make the following findings of fact, conclusions of law and recommended order:

Finding of Fact

A. THE PARTIES

   1. *** Bank & Trust Company, ***, ("the Bank") was a corporation existing and doing business under the laws of the State of *** and was an insured state nonmember bank subject to the Act, 12 U.S.C. §§1811–1831 (1982), the FDIC Rules and Regulations, 12 C.F.R. Chapter III, and the laws of the State of ***. (Tr. 25–26; Ex. 1). On or about February 8, 1985, the Commissioner of Banking for the State of *** declared that an emergency existed within the meaning of *** §45-2-1502(c)(1) and assumed possession and control of the Bank. On that date, the Bank was closed. (Tr. 26; Ex. 2).
   2. At all times pertinent to these proceedings, *** was the Bank's holding company and record owner of 40,117 of the Bank's 50,000 outstanding shares of common stock. Prior to July 2, 1984, *** owned or controlled all outstanding shares of ***. These shares were pledged as security for a promissory note dated December 19, 1983, in the amount of $477,707.59 executed by ***, ***, Trustee and *** to *** Bank ***. Mr. *** was personally liable on the note. (Tr. 32, 36, 227-35, 256-61; Exs. 11, 14, 47).
   3. *** was a real estate investment concern in the business of selling time share notes and installment loan contracts. *** was the President and sole owner of ***. (Tr. 37; Exs. 7–10).
   4. Beginning in June 1984, Mr. *** sought to gain control of ***, and consequently the Bank, from Mr. ***. Toward this end, Mr. *** utilized the services of

¹ The FDIC's actions against Mr. *** were dismissed on August 24, 1987, as the result of Mr. ***'s death on August 2, 1987. The actions against Mr. *** have been resolved by settlement.

² At this hearing, Messrs. *** and *** failed to appear, either in person or by counsel, and *** Bank of ***, was unrepresented.
{{4-1-90 p.A-1312}}***, who at all times acted as Mr. ***'s agent at the Bank.³
   a. Mr. *** was elected to the Bank's Board of Directors on July 10, 1984, and served in that capacity until sometime after November 1, 1984. Mr. *** also served as the Bank's chief executive officer and chairman beginning July 12, 1984. (Tr. 41; Exs. 15, 45).
   b. On or about July 2, 1984, Mr. *** entered into an option with Mr. *** to purchase from him all outstanding shares of stock in ***. (Tr. 40; Ex. 14). This option was exercised on or about July 13, 1984, using funds he secured from *** the previous day when he executed, on his own behalf and on behalf of ***, a promissory note payable to *** and Mr. *** in the amount of $1.6 million. As detailed infra, these funds were raised by the sale of time share notes to the Bank by ***. As security on the note, Mr. *** pledged 100% of ***' stock. (Tr. 49–50; Ex. 19). In late October 1984, *** formally took control of *** when *** was awarded possession and ownership of 100% of ***' stock as a result of a judgment on the July 12 note. (Tr. 50–52; Exs. 20, 21).
   5. In addition to his ownership of *** prior to July 1984, Mr. *** served on the Bank's Board of Directors from some point prior to March 14, 1984,⁴ until November 7, 1984. He also served as an officer of the Bank from July 1984 until November 1, 1984 (Tr. 220-23; Exs. 44–46), and aided in the preparation of the Bank's call reports in March and October 1984. (Tr. 105; Exs. 30, 43).
   6. *** was elected to the Bank's Board of Directors on November 1, 1984, and served in that capacity thereafter throughout all times pertinent to this proceeding. (Ex. 45).
   7. *** was elected to the Bank's Board of Directors and appointed the Bank's president on November 1, 1984, and he served in that capacity thereafter during all times pertinent to these proceedings. (Tr. 47; Ex. 17).

B. THE HISTORY OF FDIC
INVOLVEMENT WITH THE BANK

   1. On October 17, 1983, the FDIC issued Findings of Unsafe or Unsound Practices and Condition and Order of Correction ("8(a) Order") pursuant to section 8(a) of the Federal Deposit Act, 12 U.S.C. §1818(a) (1982), to the Bank. Among other things, the FDIC found that the Bank operated with an inadequate level of capital protection and that the Bank's management policies were detrimental to it and the safety of its deposits. The FDIC ordered the Bank to increase its primary capital and reserves by $1.2 million. (Tr. 29–30; Ex. 3).
   2. The FDIC performed an examination of the Bank on or about January 21, 1984, and found that the Bank had failed to increase its primary capital by $1.2 million as required by the 8(a) Order. (Tr. 27, 44, 84; Ex. 18).
   3. As a result of the January 21, 1984, examination and the alleged violation of the 8(a) Order, the FDIC issued to the Bank an Order Setting Hearing on Termination of Insured Status on April 9, 1984. (Tr. 30; Ex. 4).
   4. On or about September 13, 1984, the FDIC began a visitation of the Bank. The visitation continued until February of 1985, when the State of *** closed the Bank. (Tr. 162; Ex. 2).
   5. On September 24, 1984, the FDIC issued, pursuant to section 8(b)(1) of the Act, 12 U.S.C. §1818(b)(1) (1982), a Temporary Order to Cease and Desist ("Temporary Order") which prohibited Messrs. *** and ***, individually, and the Bank and its directors, officers, employees, agents, servants, successors, assigns, and other individuals participating in the conduct of the Bank's affairs from engaging in the following conduct:

Without the approval of the Bank's Board of Directors, Mr. *** sought an injunction in early October 1984 in the United States District Court for the Eastern District of *** to stay the FDIC's Tempo-

³ On or about June 8, 1984, Mr. *** wrote a memorandum whereby he indicated that he held 100% of the stock of *** and that he held that stock one-third for himself and two-thirds for Mr. ***. Mr. *** also wrote that he would consult with Mr. *** on all matters concerning the Bank. (Tr. 37; Ex. 12).

⁴ The record failed to contain a more specific date.
{{4-1-90 p.A-1313}}rary Order. The court denied the injunction. (Tr. 166-67).⁵
Simultaneously, the FDIC issued to the Bank, and to Messrs. *** and ***, individually, a Notice of Charges and Hearing, charging the Bank, and Messrs. *** and ***, individually, with violations of Regulation O and various unsafe and unsound practices, including undue concentrations of credit, out-of-territory extensions of credit and excessive brokered deposits. (Tr. 164; Ex. 37).
6. Pursuant to a Stipulation and Consent to the Issuance of an Order to Cease and Desist, entered into on November 6, 1984, the Bank's Board of Directors, and Messrs. *** and ***, individually, agreed to the issuance of an FDIC order requiring the Bank's directors, officers, employees, agents, successors, assigns, and other individuals participating in the conduct of the Bank's affairs, and Messrs. *** and ***, individually, to cease and desist from extending credit in violation of Regulation O, extending credit to *** or any of his related interests, or accepting brokered deposits.⁶ (Tr. 176; Ex. 40).

C. THE TRANSACTIONS

   1. On March 14, 1984, Mr. *** proposed to the Bank's Board of Directors that the Bank raise $400,000 in capital in the form of notes executed by directors of the Bank, including Mr. ***, in increments of $40,000. This proposal succeeded in injecting $400,000 into the Bank's working capital. (Tr. 30–32; Exs. 5, 6). These events occurred some five months after the FDIC ordered the Bank to increase its working capital by $1.2 million. (Tr. 29–30; Ex. 5).
   2. a. At a meeting of the Bank's Board of Directors held on July 3, 1984, Mr. ***⁷ presented a plan to recapitalize the Bank. If the Bank would agree to purchase approximately $2.5 million in time share notes with recourse, a portion of which would be purchased through brokered deposits, Mr. *** would inject $800,000 into the Bank's working capital to satisfy the FDIC's order to inject $1.2 million. The Bank's Board of Directors ratified this proposal⁸ after Mr. *** indicated he would seek regulatory approval for the transaction. Also at this meeting, the Board of Directors were informed that the *** Bank *** would foreclose on the note if it were not satisfied. (Tr. 39–40; Ex. 13).
   b. On July 12, 1984, the Bank's Board of Directors unanimously approved⁹ Mr. ***'s plan to recapitalize the Bank. The plan approved at this meeting expanded upon the plan as approved on July 3, 1984; that is, the Bank would purchase $2.5 million in time share notes from Mr. ***'s company, ***; *** would deposit $1.6 million with the Bank, out of which Mr. *** would purchase all of ***' stock and the Bank would have its working capital increased by $800,000; and *** would maintain with the Bank a loss reserve of $250,000. (Tr. 40–43; Exs. 15, 17).
   c. In conformance with this plan, the Bank purchased from *** $2.6 million of time share notes, with recourse, for $2.5 million on July 12, 1984. The Bank secured the necessary capital for this purchase through brokered deposits. On July 13, 1984, *** deposited the proceeds of this sale into its account at the Bank. This purchase was unsecured,¹⁰ made without charging interest, and created no debt instruments. The full extent of the interests of Messrs. *** and *** in this sale were not revealed to the Bank's Board of Directors prior to their approval, nor did Mr. *** abstain from voting on the purchase. (Tr. 54–55, 89–90, 107–110; Exs. 7, 23).
   d. On July 12, 1984, *** opened an account at the Bank in the name of "***, Trustee." (Tr. 91; Ex. 25). *** deposited into this account $1.6 million of the $2.5 million it received from the sale of notes to the Bank (Tr. 91, 95; Ex. 25). The following transactions were funded from this account:
-The Bank received $800,000 for its working capital. On or about July 19,

⁵ There is no evidence in the record that any other appeal was ever taken from this Temporary Order.

⁶ Because the record contains only a draft of this order, there is no evidence that this order ever became final.

⁷ Mr. *** was not elected to the Bank's Board of Directors until July 10, 1984. Mr. *** attended this meeting by invitation. (Ex. 13).

⁸ Mr. *** was not present at this meeting and therefore did not vote in favor of this proposal. (Ex. 3).

⁹ Mr. *** voted in favor of the plan, and Mr. *** abstained. (Ex. 15).

¹⁰ Although all of the time share notes purchased by the Bank were "secured" by time-share condominiums, the condominiums were not backed up by any real property and were of so little value as to make them worthless as security. (Tr. 54–55, 196; Ex. 23).
{{4-1-90 p.A-1314}}1984, ***, Trustee, issued a check in the amount of $800,000 made payable to the Bank. (Tr. 92–93; Ex. 26). This check was then deposited into a new account opened by ***. (Tr. 93–94; Ex. 26). On or about July 25, 1984, Mr. ***, acting on behalf of ***, issued a check in the amount of $800,000 made payable to the Bank, which credited it to its undivided profits account. (Tr. 93–94; Ex. 26). This transaction purported to increase the Bank's equity capital by $800,000, which, combined with the $400,000 in notes executed by the members of the Board of Directors, gave the appearance of satisfying the requirements of the 8(a) Order of October 17, 1983. (Tr. 94–95);
—Mr. ***'s obligation on the note held by the *** Bank *** was extinguished on or about July 13, 1984. ***, Trustee issued a check in the amount of $415,000 made payable to the Bank for the purchase of a cashier's check. On or about July 16, 1984, Mr. ***, acting on behalf of the Bank, issued a cashier's check drawn on the Bank in the amount of $415,000 to pay off the note and release encumbrances on the stock of *** held by the *** Bank ***. This transaction was made without security, bore no interest, nor created any debt instrument. Mr. ***, who voted in favor of the transaction, failed to reveal his full involvement in the transaction. (Tr. 96–97, 109-18; Ex. 27);
—Mr. *** received $130,000 on or about July 13, 1984. ***, Trustee issued checks in the amount of $40,000 and $90,000 made payable to Mr. *** for the purpose of exercising the option to purchase ***' outstanding stock. This transaction was also made without security, bore no interest, nor created any debt instrument. Mr. *** failed to reveal his full involvement to the Bank's Board of Directors, which never authorized the transaction. (Tr. 99–100, 109-12; Ex. 28); and
—Mr. *** received $20,000 on or about July 13, 1984. ***, Trustee issued a check in the amount of $20,000 made payable to Mr. ***, who cashed it at *** Bank, ***. (Tr. 101; Ex. 29).
   3. According to the Bank's call report of March 31, 1984 the Bank's total equity capital was approximately $186,000.¹¹ (Tr. 106; Ex. 30). On July 17, 1984, the Bank's balance sheet reflected total equity capital and reserves of approximately $178,000,¹² but the Bank had a negative working capital of roughly $195,000. (Tr. 52, 87; Ex. 22).
   4. On July 25, 1984, the Bank purchased commercial paper from *** for a second time. At a meeting attended by ***, ***, *** and ***, the Bank's Board of Directors agreed to purchase $6 million in installment loan contracts secured by solar energy equipment from *** for $3.26 million. To satisfy this obligation, Mr. ***, acting on the Bank's behalf, issued a cashier's check in the amount of $3,267,795 made payable to ***. On September 12, 1984, the Bank's Board of Directors reaffirmed the purchase of these installment loan contracts.¹³ (Tr. 120-21, 125; Exs. 32, 35).
   5. The Bank's balance sheet for July 25, 1984, indicated that the Bank had total equity capital of $160,331. (Tr. 115; Ex. 31).
   6. On or about August 30, 1984, the Bank purchased an additional quantity of commercial paper from *** when Mr. ***, acting on behalf of the Bank, issued a cashier's check in the amount of $831,715.30 made payable to *** for the purchase of purchasing from *** installment loan contracts secured by solar energy equipment. The Bank's Board of Directors approved this purchase on September 12, 1984. (Tr. 122, 125; Exs. 33, 35).
   7. On or about August 31, 1984, the Bank purchased from *** $338,886.51 in installment loan contracts secured by solar equipment. The Bank's Board of Directors approved this purchase on September 12, 1984. (Tr. 123-25; Exs. 34, 35).
   8. On or about September 13, 1984, the Bank purchased from *** an additional $592,421.20 in installment loan contracts secured by solar equipment. (Tr. 125-26; Ex. 36).

¹¹ This figure was derived by adding the Bank's equity capital ($165,000), as shown on the call report, and the Bank's loan reserve ($21,000), as shown on the call report. (Tr. 105-06; Ex. 30).

¹² This figure was derived by adding the Bank's total capital ($139,335) and the Bank's loan loss reserve ($38,806) as of July 12, 1984. (Tr. 114–115; Ex. 31).

¹³ Mr. *** was not present at this meeting, and therefore did not vote in favor of any of the transactions approved that day. At this meeting, Mr. *** "explained what commercial paper is from The Wall Street Journal and the possibility of going through a subsidiary of the holding company to invest our money." (Ex. 35).
{{4-1-90 p.A-1315}}
   9. The Bank's daily statement for October 30, 1984, listed equity capital at $1,016,902.88, including the $800,000 from the July 12 transaction, and loan reserves of $50,252.93. (Tr. 188; Ex. 43). The Bank's September 30, 1984, Consolidated Report of Condition listed equity capital, including the $800,000 from the July 12 transaction as $1,154,000 and a loan reserve of $39,000. (Tr. 183; Ex. 42).
   10. After the FDIC issued its Temporary Order on November 2, 1984,¹⁴ the Bank purchased from *** approximately $2.043 million of installment loan contracts secured by solar energy equipment and installment loan contracts secured by time share condominiums. At a special meeting of the Bank's Board of Directors, held on November 5, 1984, the Bank's attorney informed the Board of Directors that these purchases violated the Temporary Order. The Board of Directors voted to rescind the November 2 transaction, but Messrs. *** and *** voted to ratify that transaction. At a meeting held on November 7, 1984, the Board of Directors voted to reinstate and adopt the November 2 transaction. Messrs. ***, *** and *** voted in favor of reinstating the November 2 transaction. (Tr. 168-71, 173-80; Exs. 38, 39, 90).
   11. The July 25, August 30, August 31, September 13 and November 2 purchase of installment loan contracts from *** were preferential, involved more than the normal risk of nonpayment, and involved out-of-territory loans. Mr. *** voted in favor of them without revealing his interest in them. (Tr. 184-85).

D. MR. ***'S SIMILAR ACTIVITIES

In late 1982 and early 1983, Mr. *** sold to a savings and loan institution in *** time share notes which were practically worthless because the condominium developments in which investors purchased the time shares, and which acted as security for the notes, were of little, if any, value¹⁵ and subject to prior liens. These time share notes were on the same properties which were the subject of the notes purchased by the Bank. On November 1, 1983, Mr. *** was indicted in *** in connection with these activities and his promotion of a condominium project in ***. (Tr. 190–196; Ex. 24).

Discussion and Conclusions of Law

The FDIC seeks the removal of Messrs. ***, ***, and *** for their participation in violations of the Act, Regulation O and the Temporary Cease and Desist Order. It also seeks to impose civil penalties on Messrs. *** and *** in the amount of $1,768,000 and on Mr. *** in the amount of $228,000, with an additional $1,000 per day from February 7, 1985, the date the FDIC issued the notice of the civil money penalties, to the date of a final order in this case.

A. REMOVAL

   The FDIC brought these removal actions pursuant to sections 8(e)(1) and 8(e)(2) of the Act, 12 U.S.C. §1818(e)(1), (2) (1982).
   1. Section 8(e)(1)
   This section permits the FDIC to remove from office any director or officer of an insured bank under certain circumstances. First, the director or officer must have violated a law, regulation or a cease and desist order which has become final, or engaged or participated in any unsafe or unsound practice in connection with the insured bank, or breached his fiduciary duty to the bank. Second, the FDIC must determine that the bank has suffered, or will probably suffer, substantial financial loss or other damage or that the interests of the bank's depositors could be seriously prejudiced by reason of such violation or practice or breach of fiduciary duty, or that the director or officer has gained financially from his unlawful conduct. Finally, the director's or officer's unlawful conduct must involve personal dishonesty or demonstrate a willful or continuing disregard for the safety or soundness of the bank. 12 U.S.C. §1818(e)(1) (1982). The FDIC has shown that the conduct of ***,

¹⁴ Mr. *** joined the Bank's Board of Director's on November 1, 1984.

¹⁵ Mr. ***, an FDIC examiner who investigated the *** transactions in conjunction with the FDIC's action against Mr. *** in ***, testified as to the condition of one of these condominium developments located in ***:
This development [was] this old hotel [built] in the '30's when they thought they were going to have an oil boom there which never developed. . .*** is about twenty-five hundred people. The old hotel looked like this—it appeared to have about four or five units developed in the two or three rooms of the old hotel being put into a condo-type arrangement. In the hall there was just a plywood wall, the door was unlocked. [[Another investigator]] and I walked in. My first impression and I still remember clearly my statement to him that, "this looks like it's been in a war and its been bombed out and left." (Tr. 194-95).
{{4-1-90 p.A-1316}}*** and *** satisfies the three part requirement for removal.
***, *** and *** were directors or officers of the Bank, an FDIC insured institution, during the period of the alleged unlawful transactions. Section 8(e)(6) of the Act defines an officer as "an employee or officer with management functions," and defines a director to include "any person who has a representative or nominee serving in any such capacity." 12 U.S.C. §1818(e)(6) (1982). Under this section's definition, *** became a director of the Bank as of July 10, 1984, when *** was elected to the Board of Directors. He acted as ***'s representative on the Bank's Board in conformance with his June 8, 1984, memorandum disclosing that he would consult with *** on all matters pertaining to the Bank and that he held two-thirds of ***' stock for ***. As the findings of fact demonstrate, *** served on the Bank's Board of Directors from March 14, 1984, through November 7, 1984, and *** served on the Bank's Board of Directors beginning November 1, 1984.

a. Violations of Section 23A, Regulation O and the Temporary Cease and Desist Order

   The FDIC has proved that certain transactions between the Bank and *** or *** violated section 23A of the Federal Reserve Act, 12 U.S.C. §371c (1982). Section 23A places certain limitations on the ability of member banks to engage in financial transactions with affiliates.¹⁶ As the Bank's holding company and owner of 40,000 of the Bank's 50,000 outstanding shares of common stock, *** was an affiliate of the Bank. *** was an affiliate of the Bank because *** both owned *** and controlled *** through his agent, ***.
   The July 12 purchase of over $2.5 million in time share notes from *** violated section 23A(a)(1)(A) and section 23A(c)(1) of the Federal Reserve Act, 12 U.S.C. §371c(a)(1)(A) and (c)(1) (1982). Section 23A(a) places a limit, equal to ten percent of a bank's capital stock and surplus, on the amount of notes a bank may purchase from an affiliate. 12 U.S.C. §371c(A)(1) (1982); See 12 U.S.C. §371c(b)(7)(B) ("covered transaction" for purposes of subsection (a)(1) includes purchase of notes issued by affiliates).¹⁷ At the time of the July 12 purchase, the Bank's lending limit for purposes of this section equaled approximately $18,000. (Tr. 115). The Bank's purchase of these notes for $2.5 million clearly exceeded that limit. Section 23A(c) requires that extensions of credit made by a bank to an affiliate be secured by 120 percent of the amount of the extension, if the collateral is other debt instruments, and 130 percent of the amount of the extension if the collateral is real or personal property. 12 U.S.C. §371(c)(1) (1982). Since the July 12 purchase was totally unsecured, it violated section 23A(c).
   The November 7, 1984, purchase of installment loan contracts also violated section 23A(a)(1)(A) of the Federal Reserve Act, because the Bank's legal lending limit was $105,715.58¹⁸ and the purchase was for approximately $2 million. (Tr. 190). In addition, this transaction violated section 23A(c)(1) of the Federal Reserve Act because, like the July 12 purchase, it was unsecured. (Tr. 190).
   The FDIC has also proved that the transactions between the Bank and its affiliates, *** and ***, violated Regulation O, 12 C.F.R. §215 et seq. (1987). The July 12, July 25, August 30, August 31, and November 7, purchase of time share notes or installment loan contracts violated the provisions of Regulation O which place limitations on the manner in which a Bank may extend credit¹⁹ to related interests, principal shareholders, directors and officers. Pursuant to Regulation O, the Bank was required to purchase the notes from *** at substantially the

¹⁶ Section 23A defines an affiliate as
any company that controls the member company and any other company that is controlled by the bank that controls the member bank. . .[or] a bank subsidiary of the member bank; [[or]] any company. . .that is controlled directly or indirectly, by a trust or otherwise, by or for the benefit of shareholders who beneficially or otherwise control, directly or indirectly, by a trust or otherwise, the member bank or any company that controls the member bank. . .12 U.S.C. §371c(b)(1) (1982).

¹⁷ The FDIC argues that this purchase is a "covered transaction" only by virtue of the July 25, 1984, injection of $800,000 into the Bank's undivided profits account. (FDIC's Brief at 20). However, the statute clearly makes the purchase alone a "covered transaction." Since the FDIC failed to allege that the $800,000 check violated any statute or regulation independent of the $2.5 million purchase, I do not reach the question of the legality of the purported capital injection.

¹⁸ This figure is derived from the Bank's daily statement of October 30, 1988, which showed equity capital of $1,016,902.88 and a loan reserve of $50,252.93. (Tr. 188; Ex. 43). These figures include the $800,000 injected into the Bank's capital on July 12, 1984. (Tr. 188).

¹⁹ The purchase of these notes was an extension of credit under 12 C.F.R. §215.3(a)(1) (1987).
{{4-1-90 p.A-1317}}same terms as those prevailing for nonrelated interests. Since this was not the case, these transactions violated this regulation. Under Regulation O, *** was prohibited from voting, either directly or indirectly, for these transactions. Since ***, ***'s representative, voted in favor of each of these transactions, they violated this regulation. Finally, the transactions occurring between July 12 and July 25, 1984, and November 2 and November 7, 1984, violated those provisions of Regulation O which required the Bank to keep the amount of its extensions of credit to *** below $27,900 for the period between July 12 and July 25, 1984 (Tr. 106),²⁰ and $178,950 for the period between November 2 and November 7, 1984. (Tr. 183-84).²¹ Since the amounts of each of these transactions exceeded the legal lending limit, these transactions violated the regulation.
Similarly, the Bank's payment to *** Bank of $415,000 on July 13, 1984, and the checks made payable to *** in the amounts of $40,000 and $90,000 on July 13, 1984, violated Regulation O, because they were not made on the same terms as those prevailing at the time for comparable transactions, they exceeded the Bank's legal lending limit of $27,900, and they were voted for by ***, the beneficiary of the transactions.
The Bank violated the Temporary Cease and Desist Order of September 24, which prohibited ***, and the Bank's directors and others from extending credit to *** or ***. This order became final after the United States District Court for the Eastern District of *** denied ***'s request for an injunction in early October 1984. Despite this order, the Bank purchased installment loan contracts from *** in direct violation of the terms of the order.

b. Breach of Fiduciary Duty and Unsafe or Unsound Practices

[.3] Section 8(e)(1) of the Act also permits removal of directors or officers who breach their fiduciary duty to their bank or engage in unsafe or unsound practices. 12 U.S.C. §1818(e)(1) (1982). It is well recognized that a bank's directors and officers must act prudently and diligently in protecting the interests of the bank and its depositors and shareholders. See Lane v. Chowning, 610 F.2d 1385 (8th Cir. 1979); American Bankers Association, Focus on the Bank Director 97–125 (1984). The transactions at issue in this case involved the purchase of large amounts of commercial paper of dubious value and security at a time when the Bank was under an FDIC order to increase its working capital. Moreover, the Bank simply could not afford such large purchases. (Tr. 52–54). As a director of the Bank, *** knew or should have known that the Bank was financially incapable of consistently purchasing such large amounts of commercial paper. By voting in favor of each of these transactions, *** acted contrary to sound banking practices and breached his duty to care prudently for the Bank's assets. Furthermore, by voting in favor of transactions which resulted in his financial gain, *** placed his own interests above those of the Bank's and its depositors and shareholders. Finally, contrary to the terms of the Temporary Cease and Desist Order and counsel's advice, both *** and *** voted in favor of the Bank's purchase of an additional amount of questionable commercial paper from ***. Such egregious conduct violates their respective fiduciary duties to the Bank.
Their conduct also constitutes unsafe and unsound banking practices. Both violated the Temporary Cease and Desist Order, and *** violated both section 23A of the Federal Reserve Act and Regulation O. Violations of law are contrary to generally accepted standards of prudent operation, and therefore constitute unsafe and unsound practices. See, Financial Institutions Supervisory and Insurance Act of 1966: Hearing on S. 3158 Before the House Comm. on Banking and Currency, 89th Cong., 2d Sess. 49–50 (1966).

c. Harm to the Bank and Depositors and Director's Financial Gain

During 1984, the Bank engaged in a series of risky commercial paper purchases with affiliates, which totalled over $9 million. At the same time, the Bank was under

²⁰ This figure is equal to 15 percent of the sum of the Bank's equity capital ($165,000) and loan reserve ($21,000) as listed on the March 31, 1984, call report. (Tr. 106).

²¹ This figure is equal to 15 percent of the sum of the Bank's equity capital ($1,154,000) and loan reserve ($39,000) as stated on the Bank's Consolidated Report of Condition for September 30, 1984. (Ex. 42). These figures include the $800,000 from the July 12 transaction. (Tr. 184).
{{4-1-90 p.A-1318}}an order to increase its working capital by over $1 million. The testimony of the bank examiners demonstrates that the bank could not have afforded the purchases it made from *** in light of its deteriorating financial condition. In early 1985, the Bank was closed by the State of ***. The only possible conclusion from this series of events is that the Bank's purchase of poor quality commercial paper, in violation of law, was a substantial cause for the Bank's closing.
Both *** and *** gained financially from their unlawful conduct. Since *** was sole owner of ***, he gained from each sale of commercial paper to the Bank. The unrebutted evidence is that he made in excess of $5 million in profits from the purchase of the $13 million of installment contracts by the Bank. *** benefited from the Bank's paying off the note on which he was personally liable, and by receiving $130,000 when *** exercised his option to purchase the outstanding shares of *** stock.

d. Director's Dishonesty or Willful Disregard for Sound Banking Practices

   Finally, in an 8(e)(1) removal action, the FDIC must show that the director's or officer's conduct involved personal dishonesty or demonstrated a willful or continuing disregard for the safety or soundness of the Bank. 12 U.S.C. §1818(e)(1) (1982). The record indicates that *** through ***, acted for his own benefit and not that of the Bank. From July to November 1984, *** sold the Bank commercial paper of questionable value for $13 million and at a time when he knew or should have known that the Bank could not afford the transactions, nor should have allowed such a concentration of credit, and when he knew that he stood to make a substantial financial gain from those transactions. Apart from being self-serving, these transactions violated numerous banking laws and regulations as well as a Temporary Cease and Desist Order. Such a pattern and practice of illegal and self-serving conduct demonstrates a willful and continuous disregard for the safety and soundness of the Bank.
   Similarly, ***'s conduct demonstrated his continuous disregard for the Bank's safety and soundness. He voted in favor of every purchase of *** commercial paper on which he had an opportunity to vote when he knew or should have known that the Bank's financial position was poor. Furthermore, he neither took nor suggested any remedial action, nor alerted the other members of the Board to problems with the transactions, nor removed himself from the Board, nor revealed to the Board that he gained financially from the transactions.
   Like ***, *** willingly participated in the Bank's violation of the Temporary Cease and Desist Order. At the November 5, 1984, Board meeting, *** and *** were the only members to vote for the purchase. Furthermore, their vote was cast in the face of the opinion of counsel that the transaction violated the Temporary Order. At the November 7, 1984, Board Meeting, ***, *** and *** voted to reinstate the November 2 purchase. This concerted effort to push through a purchase which harmed the Bank and benefited *** demonstrates the extent to which all three men completely disregarded the safety and soundness of the Bank and the financial interests of the Bank's depositors and shareholders.
   2. Section 8(e)(2)
   The FDIC also seeks to remove ***, *** and *** pursuant to 8(e)(2) of the Act, 12 U.S.C. §1818(e)(2) (1982). Under this section, the FDIC may remove a bank's director or officer whose conduct has caused another insured bank or other business institution substantial financial loss or other damage. In addition, such conduct must evidence personal dishonesty or a willful or continuing disregard for the safety and soundness of that other bank or business. Finally, such conduct must evidence the director's or officer's unfitness to continue in that position. 12 U.S.C. §1818(e)(2) (1982).
   Because the record fails to indicate that the conduct of *** and *** had any effect on another bank or business, their removal pursuant to this section cannot be sustained.
   The conduct of ***, on the other hand, does satisfy the requirement of section 8(e)(2). *** caused a savings and loan institution in *** to purchase essentially worthless commercial paper. According to the testimony of Mr. ***,²² the scheme in

²² The FDIC emphasizes the fact that *** was indicted for his conduct in connection with a savings and loan institution in ***. Because an indictment is nothing more than a series of allegations, the only fact that may be drawn from the evidence of the indictment is that *** was indicted. In the absence of evidence of a conviction, the facts(Continued)

{{4-1-90 p.A-1319}}*** was essentially the same as that in *** and involved the same entities and time share projects. The financial harm to that savings and loan institution may be inferred to be as substantial as that to the Bank. Furthermore, the fact that *** has engaged in the same conduct with respect to more than one financial institution is evidence of a willful disregard for the safety and soundness of each institution and his unfitness to serve as a director or officer of any bank.
Sections 8(e)(1) and 8(e)(2) of the Act affords the FDIC broad discretion in determining whether removal of a director or officer is warranted. See Brickner v. FDIC, 747 F.2d 1198, 1202 (8th Cir. 1984). The evidence demonstrates that ***, *** and *** have engaged in conduct which violated section 23A of the Federal Reserve Act, Regulation O, and a Temporary Cease and Desist Order; that they have exhibited a continuing and willful disregard for the Bank's safety; that they have breached their fiduciary duties; that *** and *** benefited financially from their conduct and caused the Bank substantial financial harm; and that *** is unfit to serve as a director or officer of any insured bank. By deigning not to appear at all in this proceeding, *** and *** have consented to their removal. By failing to offer any evidence in mitigation, *** has failed to justify any remedy short of removal.

B. CIVIL MONEY PENALTIES

   Section 1828(j)(3) of the Act²³ permits the FDIC to impose civil money penalties against a director or officer of a bank who violates, inter alia, section 23A of the Federal Reserve Act or any regulation, such as Regulation O, promulgated pursuant to the Federal Reserve Act. The amount of the civil money penalty is not to exceed $1,000 per day for each day during which a violation of section 23A or Regulation O continues. 12 U.S.C. §1828(j)(4)(A) (1987).
   Section 1818(i)(2) of the Act permits the FDIC to impose civil money penalties against any director or officer of a bank who violates an FDIC cease and desist order which has become final. The amount of the civil money penalty is not to exceed $1,000 per day for each day during which a violation continues. 12 U.S.C. §1818(i)(2) (1982). Since the FDIC has established that ***, *** and *** violated the Temporary Cease and Desist Order by purchasing the installment loan contracts from ***, civil money penalties may be imposed against them pursuant to section 8(i)(2).
   The FDIC seeks $1,768,000 in penalties from *** and *** and $228,000 in penalties from ***. It also seeks an additional $1,000 per day from February 7, 1985, the date the FDIC issued the Notice, to the date of a final order in this matter.
   In calculating the maximum amount of civil money penalties which could be sought against *** and ***, the FDIC takes the position that since none of the violations was cured, a "cut-off" date of the day the assessment was issued, February 7, 1985, which was also one day prior to the Bank's closure, should be used to compute the length of the violation. Therefore, it proposes that each of the violations in each transaction is assessable for the total number of days, as follows:

As to Respondent ***, the FDIC avers that each of the six transactions violated three provisions of Regulation O, while the sixth transaction also violated three provisions of Section 23A and the Temporary Order to Cease and Desist. Respondent *** could therefore be assessed 3,285 violation days at $1,000 per day for a total of $3,285,000.
As to Respondent ***, the FDIC avers that from the July 12, 1984, transaction, he received the benefit of three separate extensions of credit: the $415,000 that paid off his loan at the *** Bank of *** and two checks for $40,000 and $90,000, respectively. Each of these three extensions of credit violated three separate provisions of Regu-

^{22 Continued:} underlying the indictment may not be found to be true in an ancillary proceeding. Those which I do find, in this case, are based on the independent testimony of various witnesses in this case.

²³ After these proceedings were instituted, this paragraph (3) was numbered paragraph (4), 12 U.S.C. §1828(j)(4).
{{4-1-90 p.A-1320}}lation O, creating nine separate offenses originating from that July 12, 1984, transaction. The sixth transaction in November violated three provisions of Regulation O, three provisions of Section 23A and the Temporary Order to Cease and Desist. Respondent *** could therefore be assessed 2,541 days at $1,000 per day for a total of $2,541,000.
Finally, the FDIC argues that ***'s involvement in the last transaction constituted three violations of Regulation O, three violations of Section 23A and one violation of the Temporary Order to Cease and Desist, for a total of 651 violation days at $1,000 per day, or a total of $651,000. (FDIC's Brief at 58–59).

[.4,.6] Sections 8(i)(2) and 1828(j)(3) require that the following factors be considered when determining the appropriateness of the penalty: "the size of financial resources and good faith of the. . .[[bank]] or person charged, the gravity of the violation, the history of previous violations and such other matters as justice may require." 12 U.S.C. §§1818(i)(2), 1828(j)(3)(B) (1982). *** testified on his behalf at the hearing, but he introduced no evidence of his inability to satisfy the penalty even after having been invited specifically to do so! Similarly, the record is devoid of any indication of *** and ***'s inability to satisfy the penalty.²⁴ The actions of *** and *** severely jeopardized the financial condition of the Bank and contributed to the Bank's failure, while they themselves benefited financially. None of the three Respondents has offered any evidence which would tend to mitigate their flagrant violation of the Temporary Cease and Desist Order. Under the circumstances, the actual penalty sought against ***, $1,768,000, is reasonable, especially given his estimated profit on the sale of the commercial paper, and his role as an architect of the scheme. However, ***'s role and profits are not as great and therefore, I conclude that his penalty should be less than ***'s. Accordingly, and using the FDIC's maximum calculation of his penalty, reduced by a similar percentage as that used to reach ***'s actual penalty, I conclude that *** should be assessed $1,367,058. The actual penalty sought from *** is reasonable, given the calculations for *** and ***.

   [.7] The FDIC also seeks to impose an additional $1,000 per day pending a final order in this case. In essence, this would amount to the imposition of interest on the amount of the civil money penalty. However, in Rodgers v. U.S., 332 U.S. 371 (1947), the Court held that no interest could be imposed upon money penalties where not specifically authorized by statute, because the underlying theory of the penalty is punishment or deterrence rather than the necessity of the government to collect revenue by a date certain in order to meet anticipated expenditures. In this case, there being no statutory authority for the penalty to bear interest, the imposition of $1,000 per day pending a final order would be inappropriate.
   Accordingly, having found cause to remove ***, *** and ***, and to prohibit them from further participation in the conduct of the affairs of an insured bank, and having found that the imposition of civil money penalties in the amount of $1,768,000, against ***; $1,367,058, against ***; and $228,000, against *** are appropriate, I recommend that the Board of Directors of the Federal Deposit Insurance Corporation enter the ORDERS which are appended.
In the Matter of ***, A PERSON
PARTICIPATING IN THE CONDUCT
OF THE AFFAIRS OF *** BANK
(INSURED STATE NONMEMBER
BANK)
ORDER OF PROHIBITION FROM
PARTICIPATION
   Having found and concluded that Respondent *** ("Respondent ***"), in his capacity as principal shareholder and a person participating in the conduct of the affairs of *** Bank, *** ("Bank"), engaged or participated in unsafe or unsound banking practices, violations of laws and regulations, at the Bank and at ***, ***, and violations of a Temporary Order to Cease and Desist which evidence his personal dishonesty and/or a continuing disregard for the safety and soundness of the Bank; and in addition has evidenced his unfitness to participate in the affairs of any bank insured by the FDIC; and
   Having found and concluded that by reason of Respondent ***'s conduct, the Bank

²⁴ *** and *** have each filed for bankruptcy. However, this does not affect the imposition of these civil money penalties. See 11 U.S.C. §523(a)(7) (1982). Moreover, the mere fact that they have filed for bankruptcy does not prove their inability to satisfy their respective penalties.
{{4-1-90 p.A-1321}}has suffered or will probably suffer substantial loss, that the interests of the depositors have been seriously prejudiced and/or that the Respondent received financial gain, it is:
   ORDERED, that Respondent *** be, and hereby is, prohibited from further participation in any manner in the conduct of the affairs of any bank insured by the Federal Deposit Insurance Corporation, without the prior written approval of the appropriate Federal banking agency, and
   IT IS FURTHER ORDERED, that Respondent *** be, and hereby is, prohibited from voting for a director of any bank insured by the FDIC, without the prior written approval of the appropriate Federal banking agency.
   This ORDER shall become effective thirty (30) days after service on Respondent *** and shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall be modified, terminated, suspended, or set aside by the appropriate Federal banking agency.
   Dated at Washington, D.C., this ________ day of ________, 1988.
   By direction of the Board of Directors.
In the Matter of ***, AND *** AS
MEMBERS OF THE BOARD OF
DIRECTORS OF *** BANK
(INSURED STATE NONMEMBER
BANK)
ORDER OF PROHIBITION OF
FURTHER PARTICIPATION AGAINST
*** AND ***
   Having found and concluded that Respondent *** ("Respondent ***") and Respondent *** ("Respondent ***'), in their capacities as officers and/or directors of *** Bank, *** ("Bank"), engaged or participated in unsafe or unsound banking practices, violations of laws, regulations, and a Temporary Order to Cease and Desist; and breaches of their fiduciary duty, all which evidence both a willful and a continuing disregard for the safety and soundness of the Bank by the Respondents; and
   Having found and concluded that by reason of Respondent ***'s and Respondent ***'s conduct, the Bank has suffered or will probably suffer substantial loss, that the interests of the depositors could be or have been seriously prejudiced and/or that the Respondents have received financial gain; and
   Having found that as a result of the above, Respondents *** and *** have demonstrated personal dishonesty and/or a willful or continuing disregard for the safety and soundness of the Bank, it is:
   ORDERED, that Respondent *** and Respondent *** be, and hereby are, prohibited from further participation in any manner in the conduct of the affairs of any bank insured by the Federal Deposit Insurance Corporation, without the prior written approval of the appropriate Federal Banking authority.
   IT IS FURTHER ORDERED, that Respondent *** and *** be, and hereby are, prohibited from voting for a director of any bank insured by the FDIC without the prior written approval of the appropriate Federal banking agency.
   This ORDER shall become effective thirty (30) days after service on Respondent ** and Respondent *** and shall remain effective and enforceable except to the extent that, and until such time as, any provisions, of this ORDER shall be modified, terminated, suspended, or set aside by the appropriate Federal banking agency.]
   Dated at Washington, D.C., this ________ day of ________, 1988.
   By direction of the Board of Directors.
In the Matter of ***, INDIVIDUALLY
AND AS PRINCIPAL SHAREHOLDER
AND A PERSON PARTICIPATING IN
THE AFFAIRS OF THE BANK AND
***, AND ***, INDIVIDUALLY AND AS
MEMBERS OF THE BOARD OF
DIRECTORS AND/OR AS EXECUTIVE
OFFICERS OF
*** BANK
ORDER TO PAY
   Having found and concluded that Respondents *** ("Respondent ***'), *** ("Respondent ***") and *** ("Respondent ***") in their capacities as officers, directors, principal shareholder and/or persons participating in the conduct of affairs of the *** Bank, *** (the "Bank"), have each committed numerous violations of Regulation O, 12 C.F.R. Part 215, and Section 23A, 12 U.S.C. §371c as well as violations of a Temporary Order to Cease and Desist issued by {{4-1-90 p.A-1322}}the Federal Deposit Insurance Corporation ("FDIC") during their involvement with the Bank; and
   Having taken into account the appropriateness of the penalties with respect to the financial resources and good faith of each Respondent; the gravity of the violations of each Respondent; the history of previous violations of each Respondent, if any; and such other matters as justice may require, it is:
   ORDERED, that a penalty of $1,768,000 be, and hereby is, assessed against Respondent ***; a penalty of $1,367,058 be, and hereby is, assessed against Respondent ***; and a penalty of $228,000 be, and hereby is, assessed against Respondent ***; and that it is;
   Dated at Washington, D.C., this ________ day of ________, 1988.
   By direction of the Board of Directors.

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