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FDIC Enforcement Decisions and Orders |
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Bank director and officer suspended and prohibited from further participation in the conduct of the affairs of Bank upon being indicted for a crime of dishonesty or breach of trust. Board refused to vacate order where respondent failed to sustain burden of proof.
[.1] Suspension or ProhibitionLiabilityCriminal Indictment and Conviction
[.2] EvidenceAdmissability of Evidence on Issues Previously Adjudicated
[.3] Suspension or ProhibitionBurden of Proof
[.4] Suspension or ProhibitionLiabilityWeight Given Prior Criminal Indictment
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[.6] DefinitionAccomodation Loans
[.7] Suspension or Prohibition Factors Determining LiabilityDishonesty
In the Matter of *** officer and director of
The Board of Directors ("Board") of the Federal Deposit Insurance Corporation, having reviewed the record as a whole, finds that Recommended Decision A (appended hereto), as submitted by the Presiding Officer following a hearing in this case, is in all material respects fully supported by the law and the evidence. Recommended Decision A concludes that the Notice and Order of Suspension and Prohibition issued against ***, officer and director of *** Bank, ***, under section 8(g) of the Federal Deposit Insurance Act ("Act") (12 U.S.C. 1818(g)) is merited.
RECOMMENDED DECISION
In the Matter of *** *** BANK
(Insured State Nonmember BankIn
Notice and Order of Suspension and
Upon consideration of the record Respondent has not shown that his continued service in the conduct of the affairs of the *** Bank, *** ("Bank"), is not a threat to the interests of the Bank's depositors or is not likely to impair public confidence in the bank.
INTRODUCTION
Pursuant to authority vested in the Executive Secretary of the Federal Deposit Insurance Corporation, hereafter referred to as either FDIC, the Corporation, or the Board, as set forth in 12 C.F.R. 308.61, which authority was exercised in a letter to the parties dated August 17, 1988, I was appointed as presiding officer to conduct the hearing in this proceeding and to submit a recommendation to the Board of Directors of the FDIC. The hearing was held in *** on September 8 and 9, 1988. All parties were represented by Counsel.
Background
At the time this proceeding was first instituted *** hereafter referred to as Respondent, was president and a director of the *** Bank, ***. On December 10, 1986, he was indicted in the United States District Court for the Northern District of *** Central Division for knowingly making a false statement on an individual financial statement in violation of 18 U.S.C. §1014 (Count 1) and knowingly making a false statement in and Officer's Questionnaire in violation of 18 U.S.C. §1001 (Count 2). 12 U.S.C. §1818(g)(1) provides insofar as here pertinent that whenever a director or officer of an insured bank is indicted for a crime involving dishonesty or breach of trust which crime is punishable by imprisonment for a term exceeding one year the FDIC may, if continued service by the individual may pose a threat to the interests of the bank's depositors or may threaten to impair public confidence in the bank, by written notice suspend such director or officer or prohibit him from further participation in the affairs of the bank. The same section further provides that the suspension or prohibition shall remain in effect until the indictment is finally disposed of or until terminated by the FDIC.
A procedural issue was raised at the outset of the hearing by counsel for the FDIC which if found meritorious would obviate the need to consider the evidence presented at the hearing. Counsel poses the question whether the Notice and Order is relevant when considered in the context of events which have taken place since the Notice and Order was issued in early 1987. Attention is directed to Respondent's conviction of the criminal charges in a federal jury trial. Following the trial the FDIC's regional director sought to have Respondent preliminary enjoined as a director, officer, and employee of the Bank relying on 12 U.S.C. §1829 which provides that except with the written consent of the FDIC no person shall serve as a director, officer, or employer of an insured bank who has been convicted of a criminal offense involving dishonesty or a breach of trust. In Federal Deposit Ins. Corp. v. ***. *** 1987), the United States District Court for the Northern District of ***, Central Division, by order of June 1, 1987, granted the Corporation's request for a preliminary injunction and enjoined *** Bank, ***, from allowing Respondent to serve as a director, officer, or employee of the Bank. The injunction was made permanent (see footnote 1) and Respondent is no longer associated with the Bank.
Discussion
[.1] As noted in the above comments Respondent has been suspended from his positions with the Bank since June 30, 1987 pursuant to section 1829. The occasion for this action was his conviction under Count 2 of the indictment. Respondent however, is contesting the conviction in the Supreme Court by a writ of certiorari. As of the time the record in this proceeding was developed the Supreme Court had not ruled on the writ and one cannot know with certainty the outcome of the appeal. The remedies available to the Corporation under sections 1829 and 1818(g) are similar and perhaps in some situations duplicative, but certainly not in all situations. Together they give the Corporation a wide range of remedies. Whether in a given situation it is prudent to invoke either or both depends on the problem presented. Here should the Supreme Court grant the writ of certiorari Respondent's suspension under section 1829 might be in jeopardy. The granting of the writ however, would not require the lifting of a validly imposed section 1818(g) suspension. Furthermore though the Bank has been dissolved and its deposit liabilities have been transferred to a successor bank, Respondent is contesting the transfer before the *** Supreme Court in In the Matter of the Receivership of *** Bank, *** v. ***, No. ***. For these same reasons the Supreme Court in Federal Deposit Ins. Corp. v. *** supra, Note 7, held that Respondent's conviction
Evidence Dispute
On August 30, 1988, Respondent through his Counsel, requested issuance of three subpoenas (witnesses ***, ***, and ***) and a subpoena for the production of documents directed to the Custodian of Documents, Department of Banking, State of ***, seeking documents of a 1978 examination made by the Department of the *** Bank. The purpose of the subpoenas as set forth in the covering letter is to establish the ambiguity, under *** law, of the meaning or definition of accommodation loans. The uncertainty in meaning, if established, would tend to show that Respondent's failure to list certain criticized loans was not knowingly false and therefore does not pose a threat to the interests of the Bank's depositors. Counsel for the FDIC was not initially informed of the request though on August 31, 1988, he was advised in a telephone communication by Respondent's Counsel, of the identity of the witnesses and the general purpose of the request. He was promised a copy of the covering letter but it was not received until September 6 or 7, 1988. The subpoenas were issued and the three witnesses appeared at the hearing. A sworn statement by the Custodian of Documents averred that it is the Department's practice to destroy files which are 10 years old and that such a procedure was routinely followed with respect to the documents in question.
Discussion
[.2] It is beyond dispute that Respondent may not in this proceeding defeat the reach of the Eight Circuit's finding which convicted him on both Counts in the indictment. However, this is an administrative hearing and the Corporation is not bound by the same rule of deference as would apply were Respondent in a civil proceeding seeking to defeat the thrust of a holding in a criminal case. Section 1818(g) affords the Corporation an element of discretion in deciding whether or not to invoke its powers. Rule 56(a) of the Federal Deposit Insurance Corporation's Rules of Practice and Procedures (12 C.F.R. 308) lays out the relevant considerations which are to guide the Corporation in exercising its section 1818(g) powers. It is apparent from the language of section 1818(g)(1) and (3) and the companion Rule 56(a) that in administering these provisions the Corporation will look mainly to whether or not the alleged offense is a crime punishable by imprisonment for a year or more and which involves dishonesty or breach of trust and whether or not the presence of Respondent in an official capacity is a threat to the Bank's depositors or may impair public confidence in the Bank. However, the second sentence of Rule 56(a) states "The Board of Directors may consider additional factors in the specific case that appear relevant to its decision to continue in effect, rescind, terminate, or modify a suspension, removal or prohibition order." Clearly this language authorizes the Corporation to weigh matters other than the statutory guides which it is required to evaluate. The second sentence of Rule 56(a) provides the Corporation as well as respondent a
{{4-1-90 p.A-1385}}needed element of flexibility in responding to circumstances whose direction cannot always be predicted. It should be noted that the final sentence of Rule 56(a) provides that the Corporation may not consider the guilt or innocence of the respondent with respect to the matters raised by the indictment in the exercise of its section 1818(g) powers and that as of the hearing dates the question of innocence or guilt was not conclusively resolved. Accordingly it is concluded that evidence relating to the meaning of accommodation loans is admissible for the purpose of enabling the Corporation to meet its responsibilities under section 1818(g) and the associated Rule 56(a).
EvidenceSubpoened Witnesses
Respondent subpoened witnesses ***, ***, and ***. The first two were represented at the hearing by the Assistant Attorney General, Administrative Law Division, State of ***, who objected to their being required to testify against their will. (Tr. 7077). The move to quash was denied.
EvidencePublic Witnesses
Six witnesses testified voluntarily in support of Respondent (***, ***, ***, ***, ***, and ***). All are well educated professionals with careers in local government, farming, manufacturing, homemaking, and public accounting. They are long time residents of *** who became acquainted or formed a friendship with Respondent through civic, business, or professional endeavors. They maintained business and personal checking and savings accounts at the Bank and from time to time were also borrowers. With the exception of witnesses *** and ***, who both testified at the criminal trial in ***, they heard of the indictment either through the newspaper or word-of-mouth and were familiar with the charges only in a general way. Most believe the charges and the decision of the jury to be serious matters but in their business dealings with Respondent they found him to be forthright and trustworthy and they would resume their affiliation with Respondent and the Bank if it were possible. Through their community contacts they heard of no criticism of Respondent, with an isolated exception, and were not aware of any depositors who withdrew funds from the Bank following circulation of the news of the indictment.
EvidenceRespondent
Respondent *** was called by his Counsel to identify and testify concerning Respondent's exhibits 5, 6, 7 and 8. The Exhibits are identified as "Daily Statements" for September 30, 1986, January 1, January 6, and February 2, 1987, respectively. The earliest exhibit was prior to indictment while the last three were all subsequent to the filing of the charges. In his testimony Respondent referred to the figures for total demand deposits (checking accounts), savings deposits (passbook), certificates of deposit, and the total of all three. Thus the totals were $16,241,692, $16,761,259, $17,096,282, and $16,774,213, respectively. Respondent testified that the selection process was made at random and that the variation in the totals are typical of the fluctuations that are routine in the banking business. He states that the increase in deposits for the periods subsequent to the indictment establish that public confidence in the Bank was not adversely affected by the filing of the charges. At no time subsequent to the indictment was there every any significant withdrawing of deposits. He maintains the Bank was solvent at the time it was closed by the *** authorities. The Daily Statements do not show the status of accounts with deposits exceeding $100,000. Respondent concedes that accounts with deposits over $100,000 could be found in the certificates of deposit category and in the category of demand deposits (checking), He estimates the Bank has about 2,000 checking accounts but he had no knowledge as to how many maintained balances of over $100,000. The certificates of deposit category totaled $9,838,873 on 9/30/86, and $9,280,782, $9,207,707, and $8,815,805 for the selected days in early 1987. The approximately one million dollar decline does not, according to Respondent, indicate the flight of uninsured deposits following circulation of news of the indictment.
Discussion on the Merits
[.3,.4] The structure of section 1818(g)(3) places on Respondent the burden of establishing that his participation in the affairs of the Bank is not likely to be a threat to interests of the Bank's depositors or threaten to impair confidence in the Bank. The question which the Board must pass upon is not one of guilt or innocence but rather whether or not Respondent's actions affirmatively establish his respect for and willingness to comply with regulatory processes. It is submitted that Respondent has failed to meet his burden.
[.5] It is true the omission was not monetarily large, amounting to less than one percent of net worth, but it was significant in
{{4-1-90 p.A-1389}}terms of Respondent's commitment to regulatory oversight. It is no excuse that the value of the asset may have been difficult to determine. Respondent is the chief executive of a Bank. He listed the present value of several insurance policies each of whose present worth was stated to be less than $5,000. Respondent's reliance on legalisms to escape the consequences of not listing the Partnership interest is not persuasive.
[.6] Coming now to the failure to include in the Officer's Questionnaire certain loans for the accommodation of others, the Board ought not dwell on this matter in the context of the fraud statute. Again it should consider this subject in light of what it shows about Respondent's attitude toward regulatory supervision. Witnesses *** and ***, both experienced bank examiners, testified that loans for the accommodation of others were of interest to regulators not only for purpose of ensuring conformity to lending limits but also as a supervisory device to monitor credit risk. True there is no statutory or regulatory definition of accommodation loans but all three subpoened witnesses stated that in general banking parlance such extensions of credit are known simply as loans taken out by one person for the benefit of another. Witnesses *** and *** both stated that section 524.904(1b) of the *** Code does not purport to define the term accommodation loan, but it is merely a tool to make certain that borrowers who obtain such loans do not slip through the lending limit rule. The very terms used in the posing of Question 5 of the Officer's Questionnaire, to whit, disclose loans "made for the accommodation of others than those whose names appear on the bank's records as credit instruments," are quite clear. A prudent conscientious official ought not mistake the meaning of this language.
[.7] The record refers to several practices which suggests a less than total commitment to the ethical standard expected of a banker as in the case of the 1977 cadillac, and a cavalier attitude toward the efforts of regulatory officials to monitor loan risk factors. As shown in FDIC Exhibits 14, 15, and 16, the stated purpose of the loans was equivocal so as to mislead or throw-off regulators as to the true purpose for which the loan proceeds were to be used.
ORDER
The Board of Directors finds that Respondent has not met his burden under 12 U.S.C. 1818(g)(3) and that the Notice and Order of Suspension and Prohibition be and is hereby continued in effect until further notice. |
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Last Updated 6/6/2003 | legal@fdic.gov |