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FDIC Enforcement Decisions and Orders

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   [5122] Docket Nos. FDIC-87-143e and FDIC-87-79c&b (Consolidated) (12-13-88).

   Individual participating in conduct of Bank's affairs prohibited from further participation in affairs of Bank or any insured bank. Individual engaged in unsafe or unsound practices, showed personal dishonesty and willful disregard for Bank's safety, violated banking laws, and caused Bank to suffer substantial financial losses. (A previous decision in Docket No. FDIC-87-79c&b appears at [¶5100]).

   [.1] Prohibition, Suspension, or Removal—FDIC Authority to Order
   FDIC has broad discretion to prohibit a "person participating in the conduct of [Bank's] affairs" from further participation in the affairs of any insured bank.

   [.2] Participants in Conduct of Affairs—Effective Control and Manipulation
   Individual who is not a director, officer, or employee of Bank is "a person participating in the conduct of [Bank's] affairs" where, among other things, he offered to buy out the shareholders of failing Bank, executed options to purchase virtually all Bank's shares, gave actual direction to Bank's employees, effectively nominated 50% of Bank's directors, and manipulated existing directors and officers.

   [.3] Prohibition, Removal, or Suspension—Participants in Bank's Affairs
   Individual participating in the conduct of Bank's affairs engaged in unsafe or unsound practices where, among other things, he induced Bank to purchase loans that lacked documentation and that excessively concentrated Bank's credit, to pay for those loans with a cashier's check that Bank could not cover, and to pay substantial fees for which no value was received.

   [.4] Prohibition, Removal, or Suspension—Defenses—Repayment of Losses
   FDIC may prohibit from participation a person who caused Bank substantial financial losses even where losses were ultimately repaid to Bank by its shareholders.

   [.5] Change in Bank Control Act—Compliance
   Individual who effectively directed bank's management and who controlled a corporation that acquired 24% of Bank's stock and options to purchase 64% of Bank's stock is required to file notice of change of control.

   [.6] Prohibition, Removal, or Suspension—Factors Determining Liability— Dishonesty
   Unfitness to participate in the affairs of an insured bank is demonstrated by personal dishonesty and willful disregard of Bank's safety and soundness.

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In the Matter of ***, Individually and as
Participant in the Conduct of the Affairs
of *** BANK,

(Insured State Non-Member Bank).

   This proceeding is a consolidation of a cease and desist action under section 8(b) of the Federal Deposit Insurance Act ("FDI Act") (FDIC-87-79c&b) and an action to remove and prohibit under section 8(e) of the FDI Act (FDIC-87-143e) brought by the Federal Deposit Insurance Corporation ("FDIC") against *** ("Respondent"), in connection with his activities at *** Bank, *** ("Bank").1 The attached proposed Decision and Order adopts most of the Administrative Law Judge's ("ALJ's") Recommended Decisions as well as the exceptions to that Decision filed by FDIC Enforcement Counsel.
   After a thorough review of the record in its entirety, the Board of Directors ("Board") finds that the ALJ's Recommended Decision in this consolidated action is fully supported by the law and facts in evidence.2 The Board, therefore, adopts the ALJ's Recommended Decision in its entirety except as noted below, and incorporates it herein by reference.
   On September 26, 1988, FDIC Enforcement Counsel filed exceptions to the ALJ's proposed decision.3 Enforcement Counsel filed these exceptions because the ALJ's proposed order excluded specific language that would prohibit Respondent from participating in the conduct of the affairs of any other banks insured by the FDIC without the prior written approval of the FDIC.4 The ALJ declined to propose an order containing this language on the grounds that the source of the prohibitory language— section 8(j) of the FDI Act, 12 U.S.C. § 1818(j)—does not specifically authorize the issuance of such an order.5 Recommended Decision (hereinafter Rec. Dec.) at 37-8, n. 19.

   [.1] The FDIC issues orders of removal and prohibition pursuant to the authority granted to it by Congress in section 8(e)(5) of the FDI Act, 12 U.S.C. § 1818(e)(5). As a result, the narrow issue before the Board is whether the FDIC has the authority under this section to issue an order prohibiting the Respondent from participating in the affairs of any FDIC-insured bank without the prior written approval of the relevant federal banking authority.
   Section 8(e)(5) of the FDI Act grants the FDIC broad discretion in framing administrative orders designed to protect insured banks and the banking industry. Brickner v. Federal Deposit Insurance Corporation, 747 F.2d 1198, 1203-04 (8th Cir. 1984). This

1 *** is the only remaining Respondent in the cease and desist action, FDIC-87-79c&b. The Board issued a cease and desist order against *** and *** on November 24, 1987. ***, ***, ***, ***, ***, ***, and *** each stipulated to the entrance of a cease and desist order which was issued by the Board on December 1, 1987. A cease and desist action against *** was terminated on January 14, 1988.

2 The ALJ's Recommended Decision also discusses Mr. ***'s involvement with *** in ***. ***, a corporation owned by Respondent ***, was involved in a sale of loans without documentation to that institution in a pattern similar to the facts in this action. ***'s involvement with *** is probative of his fitness to continue his involvement with FDIC-insured institutions, as it establishes a pattern of behavior with regard to similar transactions with financial institutions. However, the *** episode is not used as a jurisdictional basis for the FDIC's present action.

3 Respondent *** did not file exceptions to the ALJ's Findings of Fact and Proposed Decision.

4 The relevant sections of the order proposed by FDIC Enforcement Counsel state that:
   (1) The Respondent is hereby prohibited from participation in any manner in the conduct of the affairs of the Bank [*** Bank, ***], or any other bank insured by the FDIC, without the prior written approval of the FDIC.
   (2) The Respondent is hereby prohibited from voting for a director of the Bank or any bank insured by the FDIC without the prior written approval of the FDIC.
   (3) The Respondent shall not directly or indirectly solicit or procure, or transfer or attempt to transfer, or vote or attempt to vote, proxies, consents, or authorizations in respect of any voting rights in the Bank or any other bank insured by the FDIC.
   FDIC Brief at 67.

5 Section 8(j) provides in relevant part that
   [a]ny director or officer, or former director or officer of an insured bank, or any other person, against whom there is outstanding and effective any notice or order (which is an order which has become final) served upon such director, officer, or other person under subsections (e)(4), (e)(5), or (g) of this section, and who...(ii) without the prior written approval of the appropriate Federal banking agency, votes for a director, serves or acts as a director, officer, or employee of any bank, shall upon conviction be fined not more than $5,000 or imprisoned for not more than one year, or both.
   12 U.S.C. § 1818(j).
{{4-1-90 p.A-1392}}statute provides that, if after a hearing the grounds for the proposed removal or prohibition are established, the agency may issue orders of suspension or removal from office, or prohibition from participation in the conduct of the affairs of the bank "as it may deem appropriate." 12 U.S.C. § 1818(e)(5) (emphasis added).
   While this section 8(e)(5) specifically provides for the removal or prohibition of the Respondent from further participation in the affairs of the *** Bank, the broad discretion accorded to the FDIC in framing an appropriate and effective order provides the basis for the limited restrictions that the Board imposes upon the Respondent's future participation at FDIC-insured institutions. Viewed as a statutory whole, the provisions of section 8 reveal Congressional concern not only over the present threat posed by dishonest or unscrupulous individuals at a specific institution, but also the threat of future exploitation of other insured banks by such individuals if they choose to persist in their illicit practices.
   Section 8(j) of the FDI act (12 U.S.C. § 1818(j)) is an expression of this concern. Section 8(j)(ii) provides that it is a criminal act for a person subject to a section 8(e) Order that has become final to serve as an officer, director, or employee of any insured bank without the written approval of the appropriate Federal banking agency. While the criminal prohibitions of section 8(j) do not require an individual to seek written permission to "participate in the affairs" of other FDIC-insured institutions, it does show Congress's concern of the potential effects that a person subject to such an order may have on other insured banks, and it does indicate that Congress clearly contemplated that a removal or prohibition order may extend to a respondent's activities beyond the specific bank that is the site of offending activity.
   The structure of section 8(j) and its interplay with section 8(e)(5) reveals Congress's intent that the FDIC should have sufficiently broad discretion to fashion remedies that it determines are necessary to protect the integrity of the banking industry from future abuses by persons subject to removal or prohibition orders. This broad discretion is essential to ensure that insured banks are adequately protected from repeated exploitation by persons such as the Respondent.
   The soundness of this result is particularly apparent in this instance. If only available restrictions on Respondent's future activities at insured banks were the provisions of section 8(j), insured banks would not be protected from the type of scheme perpetrated by the Respondent at least twice before. The restrictions of section 8(j) do not reach to those "participating in the affairs" of an institution, as contrasted to acting as an officer or employee. At both, *** Bank and ***, the Respondent's position was outside the organization of the bank, and beyond the reach of section 8(j).
   It should also be noted that while the Bank did not suffer critical harm from the Respondent's scheme, such a ploy could easily have caused the failure of the *** Bank, creating losses for the Bank's stockholders and ultimately to the deposit insurance fund. The fact that the Bank did not suffer critical harm does not mitigate the need for this restriction. It was more by chance rather than by design that the Bank did not experience severe damage.
   In reaching this conclusion, the Board notes that its Order against Respondent *** is preventive—not punitive—in nature. He is being required only to apply to the appropriate Federal banking agency6 for approval should he again wish to become involved in the affairs of a bank. Thus, this Order is not an absolute exclusion from banking or the affairs of a bank. Rather, in accordance with the FDIC's important oversight functions, it is an order intended to protect the banking industry.


   Having found and concluded that ***, in his capacity as a participant in the conduct of the affairs of *** Bank, *** ("Bank"), engaged in conduct and practices with respect to the Bank which resulted in substantial financial loss, has evidenced personal dishonesty and a willful or continuing disregard for the safety and soundness of the Bank, and has evidenced his unfitness to participate in the conduct of the affairs of any other bank insured by the FDIC, IT IS HEREBY ORDERED that ***:

6 Enforcement Counsel's proposed Order provided that permission to participate in the affairs of an insured bank was to be sought from the FDIC. The Board notes that the provisions of section 8(j) do not provide that written approval is to be sought from the FDIC in all instances, but that approval is to be sought from the "appropriate Federal banking agency". Consistent with this, the Board's Order adopts this language.
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    (1) is hereby prohibited from participation in any manner in the conduct of the affairs of the Bank, or any other bank insured by the FDIC, without the prior written approval of the "appropriate Federal banking agency" (as defined in section 3 of the Act, 12 U.S.C. § 1813(q));
    (2) is hereby prohibited from voting for a director of the Bank or any bank insured by the FDIC without the prior written approval of the appropriate Federal banking agency (as defined in section 3 of the Act, 12 U.S.C. § 1813(q)); and
    (3) shall not directly or indirectly solicit or procure, or transfer or attempt to transfer, or vote or attempt to vote, proxies, consents, or authorizations in respect of any voting rights in the Bank or any other bank insured by the FDIC.
   IT IS FURTHER ORDERED, that ***, his employees, agents, successors and assigns, cease and desist from any further participation in the conduct of the affairs of the Bank, including but not limited to:
    (1) participating in the exercise of any control over the management or policies of the Bank in violation of section 7(j) of the FDI Act, 12 U.S.C. § 1817(j), and in violation of section 15(9) of the *** Banking Act, *** Rev. Stat., Ch. 17 §332.9;
    (2) acquiring any shares of voting stock of the Bank on behalf of himself or any other entity without first notifying the Regional Director of the FDIC's *** Regional Office ("Regional Director") and the Commissioner of Banks for the State of *** ("Commissioner"); and
    (3) selling to the Bank or participating in the sale to the Bank or participating in the purchase by the Bank of any asset or assets without the prior written approval of the Regional Director and the Commissioner.
   These Orders shall become effective within thirty (30) days from the date of service thereof.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 13th day of December, 1988.


IN THE MATTER OF: ***, Individually
and as Participant in the Conduct of the
Affairs of *** BANK, *** (Insured State
Nonmember Bank)

***, Regional Attorney, *** Regional
Attorney, and ***, Assistant General
Counsel, (on brief), ***, for Complainant,
Federal Deposit Insurance Corporation.
***, Esq., ***, of *** for Respondent,

   MICHAEL O. MILLER, Administrative Law Judge: I heard this matter on January 19, 20 and 21 and March 29, 1988, in ***, upon a Notice of Charges and Hearing (FDIC-87-79c & b) issued by the Board of Directors of the Federal Deposit Insurance Corporation (herein FDIC) on April 16, 1987 and a Notice of Intention to Prohibit from Further Participation (FDIC-87-143e) which issued on July 21, 1987, all pursuant to the Federal Deposit Insurance Act, 12 U.S.C. Sections 1811-1831d and FDIC Rules of Practice and Procedure, 12 C.F.R. part 308.1
   The Notice of Charges alleges that *** (herein *** or Respondent), as a participant in the affairs of *** Bank (herein the Bank), engaged in unsafe and unsound banking practices in violation of laws and regulations in conducting the business of the Bank. The Notice of Intention to Prohibit from further participation alleges that Respondent's conduct with respect to the Bank and another insured institution, *** Bank of ***, evidenced personal dishonesty and/or willful or continuing disregard for the safety and soundness of both banks and his unfitness to participate in the conduct of the affairs of the Bank or any other bank insured by FDIC. Respondent's timely filed answers2 admit certain factual allegations and deny that the FDIC's conclusions were warranted.
   Both parties were represented at hearing by able counsel and were afforded full opportunity to examine and cross examine witnesses, introduce documentary evi-

1 The April 16, 1987 Notice of Charges and Hearing named other individuals and the *** Bank as Respondents. They are no longer parties to this proceeding.

2 On August 21, 1987, Administrative Law Judge William Gershuny issued a Recommended Order of Default Judgment and Order to Cease and Desist against Respondent for failure to timely answer the Notice of Charges. That Recommended Order was rejected by the FDIC Board of Directors and the cease and desist action was remanded to be consolidated with the removal action.
{{4-1-90 p.A-1394}}dence, argue orally and submit proposed findings of fact and conclusions of law, recommended Orders and supporting briefs. Proposed findings, conclusions and Orders, and a brief, were filed on behalf of FDIC. All of the parties' arguments, testimony and documentary evidence have been carefully considered.
   Based upon the entire record, including my observation of the witnesses and their demeanor, I make the following:


A. *** Bank

   *** Bank is an *** Corporation operating a small (approximately $5,000,000) insured state nonmember bank in ***.4 In 1986, it had sustained an operating loss of $67,000 and was showing a small profit in early 1987. In January of 1987,5 the Bank's major stockholders, Mr. and Mrs. ***, who held about 64 percent, ***, their son, and ***, a director, listed their shares for sale with a broker. They offered to sell at least 634 shares, out of a total of 674 owned by them, at $545 per share, the approximate book value. Other shares were held in lesser amounts by other directors.
   ***, the Respondent, is a *** citizen. He is president and chief executive officer of both *** and its subsidiaries, *** (herein ***), *** (a *** corporation), and the latter's wholly owned subsidiary, ***, a *** corporation, (herein called ***).
   *** learned of the opportunity to acquire the Bank from the broker and on February 2, *** contacted ***, the Bank's president. He introduced himself as representing *** and expressed an interest in acquiring the Bank. Talks between them continued over the next two weeks. *** then came to the Bank on February 13, accompanied by ***, a personal friend. Although *** was a legal secretary with a *** law firm, possessing no familiarity with banking law and procedures, *** introduced her to the Bank's Board of Directors as a colleague in his organization who possessed special expertise in banking law.6
   ***, stating that he represented, and provided business direction to, a group of *** investors with a pool of equity capital, opined that he could put a deal together. He claimed the authority to approve necessary financing for this otherwise unidentified group.
   *** told *** that he wanted to get all of the documents together and signed before notifying the appropriate regulators. *** and the Bank's Board of Directors, however, wanted to get regulatory approval first and *** asked if it would be all right for him to talk with a contact in the *** Banking Commissioner's office, a former consultant to the Bank. *** okayed this but warned ***, "Be careful what you tell him, because regulators have a way of slowing deals down."7 The Bank's Board agreed to pursue the transaction but came to no final agreement.
   On February 23, *** met with *** at ***'s *** office and discussed the transaction in greater detail. As explained by *** at that time, *** (herein ***), an allegedly existing bank holding company,8 would purchase 24 percent of the stock (held by the various directors, including ***) and would take an option to buy the 64 percent held by the ***, exercisable when regulatory approval had been given for the change in control. *** would give the *** a promissory note for the full value of the shares (533 shares at $545 a share) for the option and *** would immediately buy that note, assuring the *** of their money.

3 FDIC's Proposed Findings of Fact are accepted, in toto, and subsumed herein.

4 The Bank is subject to the FDI Act, 12 U.S.C. Section 1811-1831d, the Rules and Regulations of the FDIC and the laws of the State of ***.

5 All dates hereinafter are 1987 unless otherwise specified.

6 In so finding, I credit the testimony of *** over that of ***; she had claimed that *** only introduced her by name without asserting that she had any special knowledge. I find *** to be, in all respects, a candid and credible witness. *** did not deny having so introduced *** and ***'s testimony is consistent with the manner in which *** used *** throughout the transactions. *** may have alluded to her alleged expertise when she was not present.

7 The former consultant advised *** that it was not unusual to put a deal together first and sign the documents before filing for a change of control.

8 In fact, *** was not registered as a corporation in *** until March 23. It was allegedly headed by ***, a director and the secretary of *** until March 31, 1987, according to forms filed with the Registrar of Companies in the Province of ***, ***'s uncorroborated testimony, contradicting this official record and claiming that *** had only been a director of *** for a very short period ending before this series of transactions began, is not credible. I note that *** was still receiving correspondence, at ***'s direction, at ***'s *** address as late as March 17, 1987 (See FDIC Exh. 9).
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   *** explained that a change of control application would be filed when the sale of the 24 percent of the stock was consummated, and the option to purchase the remaining shares would be exercised when that application was approved. The initial purchase was purposely structured at 24 percent, based upon ***'s mistaken impression that no change of control application was required unless 25 percent or more was being acquired by a single group acting in concert. In fact, under the *** Banking Act, Section 15(9), *** Rev. Stat., Ch. 17, Section 322.9, such an application was required before acquisition of only 10 percent of the Bank's stock.
   In the course of their meeting, *** also volunteered that *** would add $1,000,000 to the bank's capital, increasing its ability to make larger loans; such a capital infusion had not been requested by the Bank's Board of Directors. The funds for all of this would come to the bank, *** stated, by wire transfer. There was no mention of the Bank purchasing any mortgage loans in connection with the transaction.
   Subsequent to this meeting, *** had a "due diligence" examination of the Bank performed by accountants from the *** accounting firm. That report went to ***. At the same time, *** presented the deal to the Bank's directors.
   On March 11, *** and ***, acting as attorney-in-fact for his elderly father, met with ***, in ***. At that time, ***'s option agreement for ***'s stock, its promissory note to *** for $290,484, and its agreements to purchase a total of 24 percent of the stock from other stockholders, all to be effective March 31, were executed. The price for the option to purchase the ***'s shares was the full value of those shares; it was subject to FDIC and *** Commissioner of Banks approval under the Change of Control Acts but was non-refundable. Also signed at that time were agreements by *** to retain *** and ***, another employee/director, in their present employment for a period of one year. The latter agreements were entered into at the request of the *** and the employees (FDIC Exhs. 4, 5, 6, 7, and 8). *** signed all of the documents on behalf of ***. On March 9, ***, as President of ***, had already offered, in writing, to purchase ***'s promissory note from ***, said purchase also to be made on March 31 (FDIC Exh. 3).
   In the course of this meeting, *** told *** that, henceforth, *** (in whose offices they were meeting) would be the Bank's attorney and *** of *** Company would be its auditor. While the Bank had both an attorney and an accountant prior to that time, *** was cautioned that there was a distinction between Bank and stockholder expenses. He was lead to believe that the Bank would not pay if any money was spent on attorneys or accountants other than *** and ***. The closing was scheduled for March 26 but was postponed until March 30. There was no discussion of the Bank purchasing mortgage loans in this meeting.
   On March 17 or 18, *** and *** opened checking accounts in the Bank and signature cards were sent to *** at *** in ***. *** was also sent, for his signature, checks in the amounts required to pay the stockholders for the shares which made up the initial 24 percent *** was acquiring.
   *** arrived at the Bank late in the afternoon of March 30, accompanied by ***. Coincidentally, an examination of the Bank had begun that day, conducted by the *** Commissioner of Banks. *** and *** left the Bank to discuss the details of the transaction. It was at this point in time that *** first told *** that the transaction would be accomplished through the Bank's purchase of mortgage loans, rather than by wire transfer of funds.9
   The transaction, which *** claimed was more convenient for him, was to proceed in the following manner:
    The Bank would purchase mortgage loans and send a check to ***, and *** would deposit the funds back into the Bank to the account that was already set up, and the monies would go from ***'s account into ***'s account, and *** would pay the minority of shareholders their money and *** would also write a check to *** for the note to ***.
In addition, *** would place $1,000,000 into the Bank as a capital contribution. In support of the transaction, *** was shown a computer listing of the loans by number, borrower's name, interest rate and origination dates. There were 28 loans, totalling approximately $2,260,000, most of which

9 *** earlier told *** that this was how the transaction would be conducted.
{{4-1-90 p.A-1396}}had originated in 1984. Although the schedule did not indicate this, they were all located in ***.
   *** also showed *** a prepared agreement for the purchase of the mortgage loans. *** did not read it carefully until after it was executed on the following day (allegedly because of the rush to complete the entire transaction). That agreement provided, inter alia, that there would be a fee of one percent payable to the seller (FDIC Exh. 1).
   During the evening of March 30, the Bank's Board of Directors called a special meeting to accept the resignations of three board members. ***'s "nominees" to fill the vacated positions, ***, *** and ***, were unanimously accepted by the Board. Of these, only *** had been to *** or had met any of the existing directors before the election.
   On the following morning, ***, concerned about the nature of the transaction, called ***, the accountant *** had instructed the Bank to use, and ran the deal by him. *** told him that it balanced from an accounting standpoint and suggested that he discuss it with the Bank's new counsel, ***. *** called *** and was taken aback when *** asserted that he represented *** and not the Bank and therefore saw a conflict of interest. At the suggestion of the president of a neighboring bank, *** then discussed the transaction with the State examiners then in the Bank. Those examiners saw major problems: the appointment of three new Board members (50 percent of the Board) violated Section 16 of the *** Banking Act (*** Rev. Stat. 1985, Ch. 17) precluding the change of more than one-third of a bank's directors by appointment;10 the transaction violated the *** Change of Control Act, (*** Rev. Stat. Ch. 17, Section 322.9) which required approval upon a 10 percent change in control; the mortgage loan transaction would be in violation of the Bank's current lending policies; and, the loan purchase would result in a dangerous concentration of credit in one area.
   *** voiced these concerns when *** arrived at the Bank around 1:30 or 2:00 p.m. *** told him that he should "stick to what [he] did best which was run the bank, and the regulators should stick to what they did best, which was examine the bank, and he [***] would stick to what he did best, which was buying the bank."
   Although they were unable to get the full Board of Directors together on March 31, the transactions were completed and booked on that day. The Bank purchased the 28 mortgages and deposited a cashier's check for nearly $2,260,000 into ***'s account. At that moment, the Bank did not have the liquidity to cover that check had it been presented for payment; *** hadn't given that possibility any thought. Notwithstanding that a "due diligence" examination of the Bank had been conducted at his direction and reported to ***, *** similarly claimed to be surprised upon learning that this small bank would have been unable to cover that check.
   The Bank then withdrew $800,000 from ***'s account and issued eight CDs of $100,000 each to ***, payable at the end of April and May. When *** expressed concern about whether the Bank had sufficient liquidity to cover these certificates of deposit, *** examined the Bank's security books and directed *** to cash 11 CDs. *** further directed that $290,484 be withdrawn from ***'s account and transferred to that of ***, in consideration of the option agreement on his stock and the promissory note between *** and ***. He also directed that another $130,000 be withdrawn from ***'s account and paid to the other shareholders for their shares. A check for $1,000,000 was drawn from ***'s account and paid into the Bank's surplus account on ***'s behalf. Neither at this point in time nor at any subsequent time did the Bank receive any additional documentation on the mortgage loans.
   Additionally, at ***'s direction, the Bank paid *** a brokerage fee of $22,598 for selling the mortgages, as set forth in the loan purchase agreement, and an additional $50,000 as a fee for supplying the $1,000,000 capital infusion on ***'s behalf.
   On April 1, the Bank's Board of Directors held a special meeting by telephonic conference call. The meeting was conducted by ***, following an agenda suggested by ***. The various transactions of March 31, including payment of the fees to ***, were approved without discussion.11 The Board also approved a resolution retaining *** ***

10 The election, however, had been conducted in a manner consistent with an earlier adopted resolution of the Bank's directors. *** had been given a copy of that resolution (Resp. Ex. 1).

11 In so finding, I credit the testimony of ***, as corroborated by ***, over that of ***.
{{4-1-90 p.A-1397}}as business consultants to the Bank at a monthly fee of $3500, and a resolution changing auditors to the firm selected by ***, ***. (See FDIC Exh. 10.) There had been no detailed discussion of the consulting agreement, what it would entail or what it would cost. Neither was it embodied in any written agreement.
   ***, who had earlier expressed concerns over the entire transaction, approved it as the Bank's president. When asked why, he testified that he wanted to accommodate the *** family, who were eager for the deal to go through. Secondarily, he said, he had gotten to know ***, saw him as a "wheelerdealer" who knew what he was doing and trusted him. *** also saw *** as the principal in every business entity to which they had been introduced and anticipated that *** would be directing the Bank's operations after the transaction was completed. *** acknowledged, however, that it was his responsibility, as the Bank's president, to approve the loan purchase transaction.
   According to ***, the sale of the Bank's stock would have taken place even if the loan purchase had been rejected. The loan purchase had been introduced into the transaction, he said, in order to set up a long term relationship with the Bank. The commissions and fees, he testified, were normal attributes of those transactions.
   On Friday, April 2, *** began to receive indications that the regulatory agencies were concerned with the transactions. Thus, the office of the *** Commissioner of Banks and the FDIC called and questioned the absence of change of control applications, the purchase of loans without adequate documentation, the concentration of credit in one geographical area, the apparent violation of the Community Reinvestment Act, and the lack of information given to the FDIC.
   In this same time period, the FDIC's Assistant Regional Director, *** ***, did some checking and learned that *** had only registered as a corporation in *** on March 23, that there was no record of *** in *** and that *** was not registered with the State of ***. He tried to call *** at the *** telephone numbers listed on its letterhead and reached only a pizza parlor and the phone of an individual named ***. On April 6, the FDIC classified the loans purchased from *** as "loss" because of the lack of documentation.
   When *** came in the Bank on April 7, he reassured ***, stating that Federal law would prevail where the State and Federal requirements on change in control were in conflict, that *** would be getting together with the lawyers to prepare the change of control applications, that the loan policies were being rewritten in *** to incorporate the loan procedures just approved, and that the documentation for the loans would be coming in by the end of that week or the beginning of the next. *** similarly assured ***, ***' First Deputy Commissioner, that the loan documentation would be forthcoming shortly.
   On that same date April 7, an examiner from the *** Commissioner's office orally ordered the Bank to unwind the transaction; it was followed up by a one page written order later that same day. Neither order, it seems, was enforceable.
   On April 8, *** and *** signed agreements with the *** Bank Commissioner freezing the balances of *** and *** through April 30.
   On April 13, *** suggested to *** that he send a letter to *** asking that *** repurchase the loans. She dictated the letter which he sent (FDIC Exh. 13). ***, who had suggested that letter to *** and discussed with her what it should contain, feigned surprise that the Bank would make such a request of him, but offered to comply. However, he claimed that he needed until April 30 to do so and required both a cashing of the CDs and an additional one percent fee, payable to ***, for this repurchase transaction (FDIC Exh. 14).
   On April 14, ***'s CDs were placed in trust with ***, the Bank's original general counsel, to be held for *** until "on or before May 1, 1987" (Resp. Exh. 13–14).
   On April 16, the FDIC served Respondent and all other parties with its Temporary Cease and Desist Order. Pursuant to that Order, all participants were ordered to cease and desist from purchasing any loans from, extending credit, paying or transferring any assets to, or entering into any agreements with, ***, ***, ***, and ***. The Bank was precluded from re-registering, transferring or paying dividends on its stock, making distributions from its capital {{4-1-90 p.A-1398}}accounts to *** or his related enterprises, redeeming the CDs issued to ***, or permitting withdrawal of any of the funds deposited pursuant to this transaction. Further, the Bank was ordered to obtain documentation as to the validity and creditworthiness of the 28 mortgages from *** and to acquire documentation regarding ***'s legal status. Finally, the Bank was ordered to dispose of the assets purchased from *** without loss or liability and ***, his affiliated companies, and *** were prohibited from participating in the Bank's management.
   On April 21, the *** Commissioner issued a similar order. Under that Order, the Bank was further ordered to reverse the stock transfers as having been in violation of *** law (Resp. Exh. 8).
   On April 28, the Bank again requested documentation on the loans from ***. Additionally, the Bank requested return of the CDs, information regarding ***'s authority to enter into the mortgage transaction, and documentation necessary to unwind all of the foregoing transactions (FDIC Exh. 15). Respondent's attorney replied on April 30, claiming that *** was in possession of all the documentation necessary to complete the transaction and expressing its continued willingness to do so. However, he extended ***'s offer to repurchase the loans, with no refund of the fees already paid and with an additional one percent fee to be imposed for the repurchase (FDIC Exh. 37). No documentation was ever furnished.
   On May 1, the Bank brought suit against *** and *** for breach of contract and failure to produce the loans.
   On August 1, all of the foregoing transactions were rescinded. *** retained the $50,000 brokerage fee, with certain shareholders reimbursing the bank for that expenditure (Resp. Exh. 10, 11, and 12). As a result of these transactions, the Bank incurred legal expenses of $39,100.
   ***, the FDIC's Assistant Regional Director, testified that the transactions between the Bank, *** and *** were extremely unsafe and unsound for a plethora of reasons, set forth supra. The fact that the transactions were subsequently unwound did not alter ***'s impression as to their unsound and unsafe nature. Neither was his, nor the FDIC's, opinion affected by the fact that the possible negative events feared by them never came to pass or the fact that the funds were ultimately frozen. Even if the loans were legitimate and documented, he testified, the other defects were sufficient to invoke FDIC intervention.
   ***'s basic position is that the loans were valid and could have been documented if he had not been prevented from doing so by the regulatory agencies. Any failure which made the transactions unsafe were by others, particularly ***, over whom he had no control. The Bank, he said, could have gone to its counsel had it deemed that necessary and once the regulators expressed concerns, he took steps to protect the assets.

B. Transactions with *** Corporation and
*** Bank

   *** Corporation is a publicly held corporation with an office in ***, engaged in the origination and sale of mobile home loans. *** is its vice-president of secondary marketing. In mid-June 1986,13 *** received a letter of commitment from *** to purchase $7,691,041 in mobile home loans, known as "Conventional Pool #83." They were to be acquired in thirds, one-third each month commencing on August 1. The seller was to pay a one percent commitment fee, from which the broker's fees would be paid (FDIC Exh. 19) and *** Bank of *** (herein called ***) was to act as custodian of the contract files. *** agreed to fund the first part of the transaction on August 1 and the contracts were assigned (but title did not pass) to *** on July 18. *** was to audit the loan files on July 21 and the parties were to meet and finalize the deal on July 25 (FDIC Exh. 20 and 40).
   *** failed to fund the loans on August 1, *** told *** that he was having trouble putting the money together. *** again failed to fund the loans on September 1 and *** gave the same excuse. Shortly thereafter, *** received $500,000 from *** and escrowed those funds until *** could review the loan files and determine their validity as ***'s agent. *** spoke again with ***, who continued to assert his intention of buying the remainder of pool #83.
   *** Bank (herein called ***) was a savings bank operating under the authority of the Federal Home Loan Bank Board (herein called FHLB) and the Federal Savings and

12 The testimony of ***, ***, and *** with respect to these inter-related transactions was credibly offered and stands uncontradicted.

13 All dates in this portion of the decision are 1986 unless otherwise specified.
{{4-1-90 p.A-1399}}Loan Insurance Corporation (herein called FSLIC) in ***. In 1986, it was operating with negative net worth, at least partly attributable to certain out-of-state loans, known as the *** and *** loans, and was under a consent resolution with the FHLB. That consent agreement essentially authorized the FSLIC to work out a merger, reorganization, or acquisition of ***, and prohibited *** from entering into any "material transaction" not in the ordinary and usual course of business or invest in any loan or set of loans in excess of $100,000. It further provided: "That the foregoing resolution would automatically be rescinded upon the payoff of the *** and *** loans or the capital infusion by Mr. *** [the sole stockholder]" (FDIC Exh. 23).
   About August 6, 1986, ***, ***'s General Manager and vice-president, met with *** and ***, in ***, at the request of ***, chairman of ***'s Board of Director.14 *** stated that he represented a group of investors who would purchase ***'s stock and the *** and *** loans. This, he said, would automatically release *** from the consent resolution. Relating a "horror story" about another business venture, he gave *** the impression, undenied by ***, that he did not want to get involved with the Federal regulators. *** also claimed that he had $23,000,000 in real estate mortgages, including single family, mobile homes and FHA insured loans, to sell. The transaction proposed by ***, it is clear, envisioned a purchase of the loans by ***.15
   On the following day, *** and an associate met with ***'s Board of Directors to go over his proposal. He showed the Board samples of documentation on the loans and the Board agreed, in principle, to the transaction if it could be approved by the regulators. *** expressed an eagerness to close the deal immediately, indicating that he had problems with lines of credit which would not permit him to participate in both this and another deal on which he was working. On advice of counsel, the transaction was not consummated at the time because of the lack of documentation.
   Within a day or two, at ***'s request, *** returned to *** where he met again with *** in an effort to salvage the transaction. They discussed splitting the transaction between the other bank with whom *** was allegedly dealing and ***, with *** buying about $7,000,000 in loans. At this time, *** and ***, ***'s attorney alerted ***, Assistant Vice-President and supervisory agent for FHLB, of the intended transaction. As explained by ***, in an August 11 letter to *** (FDIC Exh. 41), *** was to purchase $7,000,000 in "full recourse mobile home loans" with a note to ***, and would both purchase the *** and *** loans and infuse capital into the bank sufficient to place it in net worth compliance.
   *** then sought information on *** which was to service the loans, and verification of the existence and ownership of those loans. He got some information and, on August 14, told *** that he needed 10 more days to examine the loans. *** insisted that he had only until the following morning to make the deal.
   *** did not hear from *** again but was called by *** on August 20. The transaction described to him by *** differed from that described by ***. As described by ***, ***, representing a group of investors, would infuse $5,000,000 in mobile home loans, apparently owned by ***, in return for stock of the bank. *** and *** then argued over whether such a transaction required the filing of a change control application. None was ever filed.
   On August 28, ***'s Board met again and *** presented a new deal from *** wherein *** would issue 5,000,000 shares at $1.00 per share and pay *** five percent of the capital thus raised. (See FDIC Exh. 39, ***'s confirming letter to ***, which *** understood to have been drafted by ***.) *** met with the Board on September 2 and offered a further modified proposal: the bank would exchange $5,000,000 in stock and $2,500,000 in cash for $7,500,000 in mobile home loans. *** would also enter into a consulting agreement with *** and would pay fees on both the selling of the stock and the purchase of the loans. An

14 It would appear that this is the same *** named by *** for election to the *** Bank's Board of Directors.

15 *** created the impression that he owned the loans and was in possession of the relevant documents by commenting that he had difficulty getting the cumbersome loan packages through Customs. While it is clear that *** was proposing to sell the $7,691,041 in loans from *** to ***, the record contains no reference to his being in possession of, or negotiating for, additional loans such as would bring the total to $23,000,000.
{{4-1-90 p.A-1400}}agreement to purchase the loans, a stock purchase agreement and an assignment of the loans were all executed that day (FDIC Exhs. 24, 25, and 26). At that time, the Board believed that *** owned the loans it would be transferring, an assumption warranted by the foregoing facts and not dispelled by ***. The minutes of the Board of Director's meeting of September 2 reflects rescission of the FHLB consent resolution based upon the infusion of capital.
   About September 3, *** paid *** approximately $2,300,000 for the loans and in fees for the sale of the loans and for the capital infusion.
   On September 8, *** learned from state examiners that *** had entered into the deal with ***, transferring out $2,300,000 and selling stock for $7,300,000 in loans. He then attempted to verify the transaction, sending examiners to *** where the loans were allegedly being held for ***. He learned that only $498,000 in loans was being held and those were in ***'s name; *** was unaware of ***'s interest in any loans. ***, from which the loans had come, verified that *** had purchased $498,000 in loans and had a commitment to acquire more. On September 12, *** informed the *** Board of his findings and *** executed a consent agreement limiting its authority to transfer funds and reinforcing FSLIC's authority to negotiate for it (Resp. Exh. 15).
   When *** informed *** of his findings, *** and ***'s president, ***, called ***. *** claimed that he was, at that moment, on the line with *** which was in the process of transferring the loans over and packaging them up. *** suggested that *** (or ***) would have them on that day or the next. At that time or later, *** asserted that he had a full 30 days to produce the loans. *** went to *** on September 15 or 16, met with *** and ***, and confirmed what *** had learned from the State and FDIC examiners.
   On September 12, *** voided the remainder of the June 16 commitment letter with *** (FDIC Exh. 28).
   On September 18, *** called the FHLB and spoke with *** and ***, its President. They asked *** if he was going to fund the $5,000,000 called for in the agreement. *** said that he was reluctant to do so because of the threat of receivership hanging over the bank. He insisted, contrary to ***'s contentions, that the transaction was legitimate and that he intended to perform on the loan purchase.
   On September 19, *** sent a new commitment letter to ***, covering ***, for an undisclosed amount of money. *** never returned it. However, shortly thereafter, *** received a check for $1,268,000 for loans to be added to the $498,000 previously acquired. This was contrary to the normal practice of using a wire transfer for such funds. While there was no outstanding signed commitment for more loans, *** was still willing to sell loans to ***. However, ***'s check was returned as uncollectable.
   According to ***, the practice in his industry is to release funds for loans before receiving the documentation only if you have an on-going relationship with the seller. Otherwise, you escrow the funds and verify the loans first, as *** did with the initial $498,000 from ***.
   By October 2, *** had paid out approximately $2,300,000 for the loans plus fees and commissions of one percent of the value of the loans and $250,000 for the alleged capital infusion. It had received nothing except about $84,000 in interest from ***. FSLIC placed *** into receivership.
   According to ***, the foregoing transactions were unsafe and unsound. They violated the change of control regulations and the supervisory agreements under which *** was operating. He noted that the bank did not make a due diligence examination on the ownership and existence of the loans and received no documentation. ***'s counsel contended that any improper conduct in this matter was ***'s or ***'s, not Respondent's.


A. General-Elements to the Established

   In First National Bank of Scotia v. United States, 530 F.Sup. 162 (D.C., 1985), it was stated, at 166:

    The statutory scheme set out in FISA [the Federal Institutions Supervisory Act] grants Federal agencies such as the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Board wide-ranging supervisory and enforcement authority over our nation's banking system... Those agencies are charged with the task of overseeing that banking system for protection of the public and the national economy as a whole... The
    {{4-1-90 p.A-1401}}most significant of their supervisory powers is the capacity to issue and enforce cease and desist orders. [These agencies] may draw upon this power to prohibit any banking practice or procedure...[deemed] unsafe or unsound.
See, also, Anonymous v. Federal Deposit Insurance Corp., 617 F.Supp. 509 (D.C., 1985). In the instant case, the FDIC has charged *** with engaging in unsafe and unsound banking practices, in violation of laws and regulations, in conducting the affairs of the *** Bank, has sought a cease and desist order, and issued a temporary restraining order, pursuant to Section 1818(b) and (c) of the Act.
   In order to prevail under section 1818(b), Complainant must show that: (a) Respondent was a "person participating in the conduct of the affairs" of an insured bank (inasmuch as he was not a director, officer, employee or agent) and (b) that he had engaged "in an unsafe or unsound practice" in conducting the affairs of that bank or had violated "a law, rule, or regulation ..."
   Additionally, Complainant sought to prohibit *** from further participation in the conduct of the affairs of the *** Bank "or any other bank insured by the FDIC," under Section 1818(e)(2) of the Act. In order to prohibit Respondent from further participation in the Bank's affairs, Complainant must show that Respondent, as a "person participating in the conduct of the affairs of an insured bank, by conduct or practice with respect to such bank or other insured bank or other business institution which resulted in substantial loss or other damage, has evidenced personal dishonesty or a willful or continuing disregard for its safety and soundness, and, in addition, has evidenced his unfitness to participate in the conduct of the affairs of such insured bank..."

C. Respondent's Participation in the
Bank's Affairs

   [.2] *** was not a director, officer, or employee of the *** Bank and denied that he was a participant in its affairs such as would bring him within the purview of Section 1818(b), (c) and (e). He was, he claims, merely proffering a transaction which the Bank's directors, officers, and employees were free to accept or reject, admittedly influencing events but not controlling them. I find that the facts belie Respondent's contention; he was, in fact, manipulating both the people and the events, in a Svengali-like fashion, to achieve his desired ends and thereby was participating in the conduct of the Bank's affairs.
   Neither the Act, its legislative history, nor its case law have defined who is a "person participating in the conduct of the affairs" of a bank. Therefore, analysis must proceed upon an application of the specific facts to the plain meaning of these words.
   Here, Respondent arrived on the scene, offering to buy out the anxious-to-sell shareholders of a failing bank without even questioning their price. He created the impression that he was an expert in banking and banking law who had the full authority to deal for an undisclosed group of investors possessing ready cash. In essence, he was the purchaser or at least its agent, executing all documents himself. He ingratiated himself with the Bank's major shareholder by offering to pay, in full, for an option on his shares, even before they could be transferred. Most significantly, by March 11, 1987, Respondent had executed options or agreements to purchase virtually all the shares in the Bank and was clearly seen as the person who would be directing the affairs of that bank in less than one month. He appointed its new auditors and legal counsel and discouraged the existing officers from seeking independent counsel and advice. He controlled the timing of events, holding out the promise of an advantageous cash transaction until the eleventh hour and then switching to the disputed mortgagesale transaction at a point in time when the closing was already scheduled to take place in less than a day and everyone was most anxious to conclude the sale. By so doing, he effectively discouraged, if not precluded, careful consideration of his new proposal.
   Further, Respondent gave actual direction to the Bank's employees, ordering the issuance of checks and the selling of securities in order to achieve adequate liquidity. He arranged for a capital infusion, which the existing directors had not sought, with fees for that infusion going to one of his companies. He effectively nominated fully 50 percent of the Bank's new directors and set the agenda for their meeting, approving the transactions he had set up, including a consultancy agreement that would personally benefit him greatly. He dictated corre- {{4-1-90 p.A-1402}}spondence to be sent from the Bank to himself.
   Respondent's existing directors and officers, particularly ***, clearly bore responsibility for the events of February, March and April, 1987. However, the fact that they could have, with greater diligence and independent initiative, sought advice and averted the Bank's involvement in the transaction, does not preclude a finding that they were manipulated, in their failure to do so, by ***. His manipulation of events, his actual direction and control of them and his control of the Bank's stock makes him a participant in the conduct of the affairs of the Bank, bringing him under the strictures of Sections 1818(b), (c) and (e).

D. Unsafe and Unsound Practices

   As with the question of who is a "participant" in the affairs of a bank, the statute does not define what is an "unsafe or unsound" banking practice. Here, however, there is precedent to offer guidance. In First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 685 (5th Cir. 1983), the Court adopted the definition which had been proposed by the Comptroller in First National Bank of Eden v. Department of the Treasury, 586 F.2d 610, 611, fn. 2 (8th Cir. 1978):

    Unsafe and unsound banking practices 'encompass what may be generally viewed as conduct deemed contrary to accepted standards of banking operations which might result in loss to a banking institution or shareholder.'
The Court in Bellaire further held that the Comptroller's finding of unsafe and unsound banking practices must be supported by substantial evidence, and that the findings of "unsafeness and unsoundness" had to be reasonable (even if not necessarily correct). Reasonableness was defined as a rational connection between the evidence as a whole and the conclusion. Substantial discretion is given to the regulators' expertise and their conclusions of unsafe and unsound practices are weighty. See also, Groos National v. Comptroller, 573 F.2d 889, 897 (5th Cir. 1978).

   [.3] Here, the FDIC's Assistant Regional Director testified that, in his and the Agency's opinion, the transactions between Respondent and Respondent's businesses, *** (for whom he was at least the agent) and the Bank were unsafe and unsound for a number of reasons.16 First and foremost among the practices labeled unsafe and unsound, i.e., contrary to accepted standards of banking operations, was the Bank's payout of $2,260,000 without having received any documentation on the loans being purchased, without "knowing the collateral," a fundamental banking precept. As noted by ***, vice-president of ***, it is contrary to the practice of banks to release funds for loans before receiving adequate documentation absent an ongoing relationship with the seller. Here, the Bank had never done business with *** or his companies before and did not even seek to document his legitimacy or that of his companies (a related but separate element of unsafe and unsound practices). The loans could have been lacking in present value and the assurances given in the loan commitment agreement would not necessarily have protected the Bank. They did not permit the Bank to reject any loan it deemed undesirable, only those which did not "meet the requirements of the commitment."17 Moreover, the Bank paid for these undocumented loans with a cashier's check and an unscrupulous seller could have presented the Bank's check for payment (or insisted upon early withdrawal of the funds represented by the CDs) and absconded without ever delivering the promised loans. Similar practices have previously been found to be unsafe and unsound (First National Bank of Eden, supra) and I find that they were here.
   Second, the Bank did not have sufficient liquidity to cover the check which it issued for $2,260,000. Had it been presented for payment, the Bank would have failed. While primary responsibility for this failure must lie with ***, *** was party to it, having

16 Respondent did not contradict ***'s testimony other than to assert that others not he, were responsible for them and to point out that the dire consequences feared by the regulatory agencies never came to pass. It is irrelevant that unsafe or unsound practices have been corrected or did not bring about the feared deleterious effects. See First National Bank of Wayne County v. FDIC, 770 F.2d 81 (6th Cir. 1985) and cases cited therein at page 83. Moreover, I have found **** to be a participant in those events, rejecting his contention that he was not responsible for any unsafe or unsound practices.

17 The commitment required that the loans be first liens on single family homes, of not more than 30 years duration, "underwritten and documented to F.H.L.M.C. generally accepted underwriting procedures", carrying mortgage insurance of at least 25 percent on all loans in excess of 80 percent loan-to-value if owner occupied and 65 percent if non-owner occupied.
{{4-1-90 p.A-1403}}sought and accepted the check, with knowledge of the Bank's fiscal condition stemming from the *** "due diligence" examination performed for him and at his direction.
   Additionally, the loan pool was both an excessive concentration of credit in relation to its capital accounts (150 percent) and an excessive concentration in credits which were both out of its lending area and in a single economic/geographic area. The loans would have been difficult to administer if ***, about whom the Bank knew nothing, failed in its servicing obligations, they violated the Community Reinvestment Act, and they exceeded the industry standard for investments in any single area by a factor of six. An economic downturn in the *** economy would seriously and adversely impact on the value of the loans and the safety of the Bank.
   Similarly, according to Complainant's expert witness, the Bank, which was in poor fiscal condition to begin with, had paid out substantial sums of money in fees, receiving nothing of value in return. As pointed out by ***, it was not the Bank's obligation to pay a fee for the capital infusion. If a fee was due, it should have been paid by the stockholders; *** structured the transaction so that the Bank paid the fee. The Bank also obligated itself, upon ***'s initiative, to pay *** $3500 per month as its consultant; it knew nothing of *** and had received no indication of what he would, or could, do for it that might be worth more than it was currently earning. A contract which would so seriously eat into the Bank's limited earnings, with no assurances or even reasonable expectations of increased earnings, is inherently risky. The Bank also paid Respondent $22,598 as a brokerage fee for the mortgage loans. It never received those loans and there is no indication in this record that Respondent ever owned them or intended to deliver them. (Indeed, if Respondent's dealings with the Bank followed the pattern set in the *** Bank transaction, Respondent did not own the loans it purported to sell the Bank.)
   Finally, *** believed that *** had succeeded in "ramming" this transaction down the Bank's figurative throat; for the Bank to enter into the March 31 transaction, on a day's notice, and approve it by a Board of Directors stacked by Respondent, was unsafe and unsound. I agree. Such unseemly haste, orchestrated by *** as seller of the loans,18 is not the "staid and conservative" business practice which has traditionally characterized the banking industry. (See testimony of ***, Vice-chairman, Board of Governors of the Federal Reserve System, Hearings on S. 3158, 89th Congress, 2d Session, 39–40 (1966)). It is easy to see how risky such dealings could be. Again, no special expertise is required to conclude that to do business in this manner is both unsafe and unsound.
   In like manner, Complainant contends, and I agree, that Respondent's dealings with *** were unsafe and unsound. Respondent sold *** loans which he did not own, exacted fees from *** and caused *** to pay out approximately $2,300,000 for loans which were not documented or delivered. Additionally, he structured the transaction so as to circumvent a FHLB Supervisory Agreement and, in so doing, *** violated the Agreement's prohibition against making disbursements without having obtained documentation necessary to determine the safety of the investment.

E. Substantial Losses

   [.4] Complainant contends, and I agree, that both the Bank and *** suffered substantial financial losses, bringing Respondent's conduct within the ambit of Section 1818(j). The Bank paid nearly $2,260,000 for loans it never received, it paid nearly $23,000 in fees for the purchase of those same loans and it incurred a loss of the $50,000 brokerage fee paid to Respondent for the unrequested capital infusion. It is immaterial that this money was ultimately repaid or reimbursed to the Bank by its shareholders. First State Bank of Wayne County v. F.D.I.C., 770 F.2d 81 (6th Cir. 1985) and cases cited therein at page 83. Anonymous v. FDIC, supra. Additionally, it incurred legal fees in excess of $39,000.
   ***'s losses were as great or greater than the Bank's. It paid *** $2,200,000 for loans

18 *** knew, in advance of March 31, that he intended to change the transaction from a wire transfer to one involving the purchase and sale of mortgage loans. He had earlier told *** that this is how the transaction would proceed. Moreover, the sale of loans appears, from the *** transaction, to have been ***'s standard operating procedure, the method of doing business which he had sought to keep secret by the confidentiality agreement proffered to ***.
{{4-1-90 p.A-1404}}which it never received and $250,000 in fees for an infusion of capital which never came to pass. The transactions lead to ***'s closing by FSLIC and the FSLIC was unable to recover over $73,000 of the loss. The receiver was forced to expend more than $100,000 in legal fees in order to recover as much as it did.

F. Violations of the Change in Control

   [.5] Respondent, on behalf of ***, a corporation, acquired 24 percent of the Bank's stock and options, fully paid-for and nonrefundable, on an additional 64 percent, without filing change of control applications in either *** or with the FDIC. This was deemed, by the *** Commissioner of Banks, to violate the *** Banking Act, Section 15(9), which requires that an application be filed upon acquisition of more than 10 percent of a bank's stock. I further find that it violates the Federal Change of Control Act, 12 U.S.C. 1817(j).
   Section 1817(j) prohibits any "person" from acquiring control in an insured bank "through purchase, assignment, transfer, pledge, or other disposition of voting stock" without notice being provided to the appropriate banking agency. "Person" is defined in 1817(j)(8)(A), to include corporations, joint ventures, pools and syndicates and "control" is defined to "mean the power, directly or indirectly, to direct the management or policies of an insured bank or to vote 25 per centum or more of any class of voting securities..." ***, with *** as its agent, acquired 24 percent of the Bank's voting stock; additionally, it had 64 percent more "pledged" to it by virtue of the fully paid-for option agreement. Moreover, whether or not Respondent was able to vote the ***'s shares, he had, and exercised, effective control and was able to "direct the management or policies" of the Bank. He directed the retention of the Bank's auditors and attorneys, controlled the appointment of new Board members, set the agenda for the Board of Directors' meeting and secured the new Board's approval of his transactions, fees and consultancy agreement. He directed the purchase of the mortgage loans, which involved a change in the Bank's lending policies, and the payment therefor, including the selection of which assets should be sold to fund related certificates of deposit. All of this, I conclude, demonstrates the acquisition of a level of control requiring notice under Section 1817(j); Respondent filed no such notice and therefore must be deemed to have been in violation of that Section.

G. Personal Dishonesty and Willful or
Continuing Disregard for Safety and

   [.6] Complainant contends that Respondent's dealings with the Bank, *** and *** establish his personal dishonesty. I am compelled to agree. The record here is replete with instances of what may best be described as misrepresentation, high pressure sales tactics, and self-dealing.
   *** misrepresented the deal he was proposing to the Bank, purporting to offer a cash transaction while intending, from the very inception I believe, to switch it at the last moment to a sale of mortgage loans, to his substantial advantage. FDIC's counsel correctly labels this "bait and switch." He misrepresented his companion and nominee to the Bank's new Board of Directors to be something she was not, a business associate and an expert in banking law and regulation. He misrepresented his client, ***, as a corporation in place and ready to do business as a bank holding company. He misrepresented (to the Court) that ***'s president was more independent of *** than he really was. He maneuvered the timing to place maximum pressure upon a relatively inexperienced bank president who was anxious to please the Bank's major stockholders and a lay Board of Directors who stood to benefit from his deal even if the Bank suffered. He discouraged the Bank's officers from seeking independent legal or financial advice. He caused a letter to be sent to himself, feigned surprise upon its receipt, and then sought to impose further fees in return for repurchasing loans which he had never delivered (and may never have owned). He claimed to possess loans which he did not and, with respect to ***, clearly sold and accepted payment for loans which he did not own and never delivered. He promised to deliver loan documentation but failed to do so. He made commitments to purchase loans which he was unable or unwilling to fulfill. And, he attempted to circumvent both State and Federal regulators, their Change in Control regulations and consent agreements. Such conduct, I find, evidences personal dishonesty. It would be untoward on "Cheap Charlies" used car lot (with apologies to legions of {{4-1-90 p.A-1405}}honest car salesmen) and is most certainly out of place in the staid and conservative world of small town banking.
   At the very least, Complainant contends, Respondent's conduct evidences his willful or continuing disregard for the safety and soundness of the Bank and ***. I agree. Respondent's conduct was willful or knowing; he knew what he intended to do with respect to the transactions, he knew that he was misleading the banks' officers, he knew that his actions potentially conflicted with the Change of Control laws, and he had to know that what he was causing the banks to do was contrary to accepted banking practice and was unsafe and unsound. That is all that is required to establish willfulness. Federal Savings and Loan Assoc. v. Geisen, 382 F.2d 900 (7th Cir. 1968); Capitol Packing Co. v. U.S., 350 F.2d 67 (10th Cir. 1965); Corsicana National Bank v. Johnston, 251 U.S. 68 (1919). Moreover, Respondent's conduct was ongoing, with two separate banking institutions, and even if his intent did not rise to the level of "willful," his knowledge of the facts, of the potential for harm to the banks, and his reckless pursuit of the transactions satisfies the Statute's separate "continuing disregard" standard. Brickner v. F.D.I.C., 747 F.2d 1198 (8th Cir. 1984).
   The Statute, Section 1818(j) sets out what appears to be a separate element necessary to prohibit a participant from further participation in the affairs of an insured bank. It requires, that, "in addition [the respondent] has evidenced his unfitness to participate in the affairs of such insured bank." To the extent that a separate conclusion is required, I find that Respondent's repeated and continuing disregard for the safety and soundness of the banks involved in two separate transactions demonstrates a business pattern which, if allowed to continue, will continue to endanger the safety and soundness of insured banks. This evidences the requisite unfitness to participate in the conduct of the affairs of an insured bank. Similarly, his demonstrated proclivity to make misrepresentations by either explicit or implicit action establishes unfitness.
   Based upon the foregoing findings of fact, the brief and arguments of counsel and the entire record, I hereby issue the following: Conclusions of Law
   1. The Respondent was a participant in the conduct of the affairs of *** Bank within the meaning of 12 U.S.C. Section 1818(b), (c), (e)(2) and 1818(j).
   2. The FDIC has jurisdiction over the Respondent and the subject matter of these proceedings.
   3. The Respondent's conduct and practice with respect to both *** Bank and *** evidenced personal dishonesty and both a willful and a continuing disregard for the safety and soundness of those institutions.
   4. As a result of Respondent's conduct at *** Bank and ***, both of those institutions suffered substantial financial losses.
   5. The Respondent has evidenced his unfitness to participate in the conduct of the affairs of *** Bank by his conduct at *** Bank and *** Bank.
   ACCORDINGLY, I hereby issue the following:


   IT IS HEREBY ORDERED, that ***, his employees, agents, successors or assigns:
   Cease and desist from any further participation in the conduct of the affairs of *** Bank, including but not limited to:

    (1) Participating in the exercise of any control over the management or policies of the *** Bank, ***, in violation of Section 7(j) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1817(j), and in violation of Section 15(9) of the *** Banking Act, *** Rev. Stat., Ch. 17, Section 322.9.
    (2) Acquiring any shares of voting stock of *** Bank on behalf of himself or any other entity without first notifying the Regional Director of the *** Region of the FDIC (Regional Director) and the Commissioner of Banks in the State of *** (Commissioner).
    (3) Selling to the *** Bank or participating in the sale to the *** Bank of any asset or assets without the prior written approval of the Regional Director and the Commissioner.
    (1) Prohibited from participation in any manner in the conduct of the affairs of the *** Bank without prior approval of the FDIC.
    {{4-1-90 p.A-1406}}
    (2) Prohibited from voting for any director of the *** Bank without the prior written approval of the FDIC.
    (3) Prohibited from directly or indirectly soliciting or procuring, transferring or attempting to transfer, voting or attempting to vote, proxies, consents, or authorizations in respect to any voting rights in the *** Bank.19
   These Orders shall become effective 20 days from the date of the service thereof unless any party files written exceptions to the Recommended Decision, findings, conclusions and Proposed orders within that time with the Executive Secretary of the FDIC, as required by FDIC Rules and Regulations, Section 308.14(a).20
   Dated: August 30, 1988


   I, Michael O. Miller, Administrative Law Judge, hereby certifies that the following:

    Recommended Decision, Findings of Fact, Conclusions of Law, and proposed Order;
    Transcript of Hearing (Volumes 1, January 19–21, 1988, and 2, March 29, 1988);
    FDIC Exhibits, Numbers 1 through 45, inclusive;
    Respondent's Exhibits, Numbers 1–15, inclusive, and,
    Complainant's Proposed Findings of Fact, Conclusions of Law, Orders and Brief, dated June 13, 1988,
constitute the complete administrative record in the matter of ***, individually and as a person participating in the affairs of *** Bank, ***, FDIC-87-79c & b and FDIC-87-143e.
Dated: August 30, 1988

19 Complainant sought a broader order, prohibiting Respondent from participating in the affairs of any other insured bank without prior written approval of the FDIC, asserting that Section 1818(j)(2) authorizes such relief. I do not find this position justified by the plain language of the Statute. Pursuant to that section, a "person against whom there is an outstanding and effective...notice or order (which is an order which has become final)..."may not participate in the affairs of any insured bank without such prior written approval. There is not, at this juncture, any final order outstanding against Respondent. If and when the FDIC adopts my Proposed Order, or issues a separate Order, and that Order becomes final, the prohibition sought by Complainant will apply by operation of law.

20 Pursuant to Regulations 308.14(b), failure to file timely exceptions to the Administrative Law Judge's Recommended Decision, findings of fact, conclusions of law, or proposed Order constitutes a waiver of objections thereto.

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