Federal Deposit
Insurance Corporation

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   [¶5140] In the Matter of Harold A. Hoffman and Joseph L. Hayes and Alaska Continental Bank, Anchorage, Alaska, Docket No. FDIC-88-156c&b(9-12-89).

   Cease and Desist Order including order to make restitution of unjust enrichment. Following notice from FDIC and state banking authorities that Bank was insolvent, Bank made certain payments for the benefit of officers and directors, including the `cashing out' of president's employment contract; the creation of a self-insurance fund for potential liabilities of officers and directors; the payment of fees to a director's law firm; and the payment of fees to a director for lobbying activity. FDIC found that payments constituted self dealing and unsafe or unsound practices and ordered Respondents to make restitution of unjust enrichment to FDIC as Bank's receiver. (Motion for Stay Pending Appeal denied 7-11-89; see ¶5141. This decision was affirmed by the U.S. Court of Appeals for the Ninth Circuit, 912 F.2d 1172 (1990). This order was terminated by orders of the FDIC dated 4-29-94 and 9-13-94; see ¶¶9015 and 9016.)

   [.1] Practice and Procedure—Exceptions to Recommended Decision— Request for Oral Argument
   Request for oral argument denied where factual and legal arguments are fully set forth in submissions, no benefit will be derived from oral argument, and respondent will not be prejudiced by lack of oral argument.

   [.2] Unsafe or Unsound Practices—Statutory Interpretation—Case-by-Case Determination
   FDIC establishes unsafe or unsound practices on a case-by-case basis, considering specific expenditures in context of timing, information available, and resemblance to other ordinary expenditures.

   [.3] Directors and Officers—Duties and Responsibilities—Outside Counsel
   Retaining a law firm to challenge state banking authorities or FDIC does not constitute an unsafe or unsound practice.

   [.4] Practice and Procedure—Burden of Proof—Civil Money Penalties
   When FDIC has established that expenditures were made, Respondent bears burden of showing that nature and amount of expenditures were not improper.

   [.5] Board of Directors—Duties and Responsibilities—Insolvency
   Once FDIC and state banking authorities have found that Bank is insolvent and communicated finding to Bank's officers and directors, directors must act to preserve assets for protection of creditors and depositors rather than for their own benefit.

   [.6] Practice and Procedure—ALJ Inference from Assertion of Fifth Amendment
   ALJ may draw adverse inferences from Respondent's failure to testify and invocation of Fifth Amendment right against self-incrimination.

   [.7] Cease and Desist Order—Affirmative Remedies—Restitution
   Where Bank has closed, FDIC may order Respondents to make restitution of unjust enrichment to FDIC as Bank's receiver.

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In the Matter of
HAROLD A. HOFFMAN,individually,
and as president, director, and
participant
in the conduct of the affairs of Alaska
Continental Bank, Anchorage, Alaska,
and
JOSEPH L. HAYES, individually, and
as
chairman of the board of directors and
participant in the conduct of the affairs
of
Alaska Continental Bank, Anchorage,
Alaska,
and
ALASKA CONTINENTAL BANK
ANCHORAGE,ALASKA
(Insured State Nonmember Bank—In
Liquidation)
DECISION AND ORDER TO CEASE
AND DESIST

I. INTRODUCTION
   The Federal Deposit Insurance Corporation ("FDIC") initiated this action on July 1, 1988, pursuant to sections 8(b) and 8(c) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. ¶ 1818(b) and (c), by issuing to Alaska Continental Bank, Anchorage, Alaska ("Bank"), Harold A. Hoffman ("Hoffman"), and Joseph L. Hayes ("Hayes") (collectively "Respondents"), Findings of Fact and Conclusions of Law, Temporary Order to Cease and Desist, and Notice of Charges and of Hearing ("Notice"). The Notice charged the Bank and Respondents with removing sums of money from the Bank for the personal benefit of various officers and directors, including the Respondents, after learning that the FDIC and the State of Alaska considered the Bank to be insolvent and subject to closure by the state. The Bank and Respondents challenged the Temporary Order to Cease and Desist in the United States District Court for the District of Alaska. Their petition for a temporary restraining order against the FDIC was denied by Order dated July 20, 1988.
   A prehearing conference was held on September 7, 1988. The administrative hearing took place in Anchorage, Alaska before Administrative law Judge Steven M. Charno ("ALJ") between January 6, 1989, and January 14, 1989. Briefs and reply briefs were filed by each party. On May 19, 1989, the ALJ issued his Recommended Decision which found each of the expenditures at issue to have been an unsafe or unsound banking practice and which ordered the transactions to be "reversed" and the expenditures to be "recaptured" by the Bank. Should the Bank fail to reverse the transactions and recapture the funds, ALJ Charno further ordered the individual Respondents to reimburse the Bank to the extent that each personally benefited from any of the transactions.
   The Board of Directors ("Board") affirms the general conclusion reached by the ALJ that Respondents engaged in unsafe or unsound banking practices and are properly the subjects of a cease and desist order, and adopts those findings of fact and conclusions of law of the ALJ not specifically addressed in this decision. As more fully discussed below, however, upon its review of the record herein, the Board makes certain findings of fact which modify those made by the ALJ and which, therefore, require the modification of the ALJ's Recommended Decision and Order.

II. REQUEST FOR ORAL ARGUMENT

   [.1] After considering the Respondents' request and the allegations and arguments presented in the parties' briefs, the Board finds that (1) the factual and legal arguments are fully set forth in the parties' submissions, (2) no benefit will be derived from oral argument, and (3) Respondents will not be prejudiced by the lack of oral argument. Therefore, the Board declines to exercise its discretion under section 308.17 of the FDIC's Rules and Regulations (12 C.F.R. §308.17 (1988)) and denies Respondents' request for oral argument.

III. DISCUSSION

A. Summary

   In summary, this case involves four (4) expenditures by the board of directors of the Bank and the Respondents in their capacities as officers and/or directors of the Bank after they were informed on May 18, 1988, by the Alaska State Banking Authority ("State") and the FDIC that these regulatory authorities found the Bank to be insolvent and the State would begin steps to close the Bank immediately. The four expenditures are: (1) the "cashing out" of Bank President Hoffman's employment contract on May 26, 1988; (2) the creation of a self-insurance fund for officers and directors on June 10, 1988; (3) the payment of legal fees between May 27 and July 8, 1988, to the law firm of Bank director Rob-
{{4-1-90 p.A-1491}}ert A. Breeze for the establishment of a selfinsurance fund and the development of a defense against the FDIC and the State; and (4) the payment of lobbying fees to chairman of the board Hayes on June 10, 1988.
   The FDIC alleges that: (1) each of these expenditures was entered into at a time the board of directors of the Bank knew or should have known that the Bank was insolvent and/or was on the verge of being closed; (2) each expenditure constituted self-dealing because it resulted in a benefit to the individual Respondents and/or the board of directors; (3) each expenditure was a breach of the Respondents' fiduciary duty to the Bank, its shareholders and depositors; and (4) each expenditure was an unsafe or unsound banking practice which removed assets from the Bank to the detriment of all who might have had a claim on those assets after the Bank closed.
   Respondents deny these allegations and assert that each expenditure had a sound business basis, was taken in the ordinary course of the Bank's business and was based on management's belief in the solvency and continued viability of the Bank.
   The Board finds that the circumstances of this case make clear the disingenuous nature of Respondents' position. The Board agrees with the findings of the ALJ that the transactions were consummated at a time when "the Bank's board of directors, including chairman Hayes, were ... in possession of reliable and well-supported confidential information that the FDIC and the State believed the Bank to be insolvent and that the government agencies were engaged in a course of action which would culminate in the closing of the Bank in the immediate future." Rec. Dec. at 4.¹ The Board further concurs in the ALJ's finding that "the affected members of the Bank's board of directors acted on confidential information and in anticipation of the Bank's imminent closure to benefit themselves by removing assets from the Bank to the detriment of all who might have had a claim on those assets after the Bank closed." Rec. Dec. at 11. And, the Board further adopts the ALJ's finding that "since that group of claimants included, not only the Bank's creditors, but its depositors and shareholders, [I] further find that the payments in question were made in breach of the affected directors' fiduciary duty." Id. Accordingly, the Board finds that, with the exception of the payment of legal fees for defense against closure of the Bank, the expenditures made constitute unsafe or unsound banking practices in violation of section 8(b) of the FDI Act.

   [.2] B. The Expenditures
   Respondents suggest various hypotheses which, in the right set of circumstances, could lead to a conclusion that each of the expenditures at issue in this case was an acceptable business practice. Yet, the "right set of circumstances" is not before the Board. The Board is presented with specific circumstances which differ considerably from Respondents' proposed hypotheses. This case involves a determination of Respondents' actual motive for taking the actions at issue, rather than what their motives might have been had other facts or circumstances pertained. What may be an acceptable business practice in one context can very well be an unsafe or unsound banking practice in another. That is the reason the FDI Act does not enumerate unsafe or unsound banking practices, but leaves the regulatory agencies to make a determination on a case by case basis.² In analyzing this case, the Board considered the specific expenditures at issue in the context of the information available to Respondents, the timing of the expenditures, and the extent to which they resemble expenditures made in other, ordinary months, i.e., payments to suppliers, regular payroll, employee benefits, etc. It is a change in pattern, a change in payment practice, or an "extraordinary" expense, which raises the specter of selfdealing. The Board finds substantial evidence in the record, given the timing of these transactions and our finding, below, that the Respondents knew or should have

IV. FINDINGS OF FACT
A. The Respondents Knew or Should Have Known the Bank was Insolvent at the Time of the Expenditures.
   The ALJ indicated in his Recommended Decision that "the record does not demonstrate whether the Bank was in fact insolvent" and "Petitioner FDIC has not demonstrated by substantial evidence that the Respondents knew or should have known that the Bank was insolvent at the time the payments were made." Rec. Dec. at 12. Both parties filed exceptions to these findings. The FDIC asserts that they are incorrect based on the evidence in the record. Respondents assert that there is an internal inconsistency in the ALJ's Recommended Decision which, while making these findings, concludes that the expenditures were made in contemplation of the Bank's closing. The Board agrees with FDIC counsel that this record contains ample data, which was within the control of, or made available to Respondents, indicating that the Bank was insolvent at least as early as the May 18, 1988, meeting with the FDIC and State, and that Respondents were aware of this data or should have been.⁴
   FDIC examiner Jeffrey Mitchell testified that on May 18, 1988, he informed the Bank's board of the following as a result of the joint FDIC and State examination of the Bank as of March 31, 1988: (1) the Bank's total equity capital equalled $1,309,000, and valuation reserves equalled $1,194,000—for a total of $2,503,000 in total equity capital and reserves (Tr. at 88–90); (2) the Bank had $3,403,000 in assets classified "Loss," $410,000 in assets classified "Doubtful," and $11,913,000 in assets classified "Substandard" and adverse classifications had increased to 29% of total assets from 24%, 12%, and 5% at the three previous examinations; (3) that assets classified "Loss" exceeded total equity capital and reserves by $900,000—before adjustment for assets classified "Doubtful" or "Substandard" (Tr. at 92, 145); and (4) that approximately 20% of total assets of the Bank were non-earning. In addition, in 1986, the Bank experienced a net operating loss of $1,534,000, in 1987, a loss of $1,522,000, and from January 1, 1988, to March 31, 1988, the Bank incurred a net loss of $204,000 (Tr. at 91).
   Bank President Hoffman was informed by the FDIC and the State of the preliminary findings of the examination at meetings held on May 6 and 17, 1988, and he was supplied with a list of assets which had been found subject to adverse classification (Tr. at 74, 266, 273, 788-92, 795; FDIC Ex. 31). This list showed that assets subject to adverse classification equalled $15,724,686 and that "Loss" classifications alone amounted to $3,402,558, which exceeded the Bank's total equity capital and reserves (Tr. at 83, 85–86). No one acting on behalf of the Bank ever attempted to supply the FDIC or State with any evidence indicating that the classifications were in error, Rec. Dec. at 2 n.5. No change in the condition of the Bank was communicated to the examiners during the examination process or during subsequent meetings between Respondents and the FDIC and State (Tr. at 264, 275, 794).
   In addition, on several occasions prior to the May 18, 1988, meeting, various Bank employees made reports to the Bank's board either directly concerning the impaired financial condition of the Bank, or which reflected the effects of the impaired financial condition of the Bank (Tr. at 295-97).
   Based on the ALJ's findings and this evidence, the Board finds it impossible to reach a conclusion other than that Respondents knew or should have known at the time the four expenditures were made that the Bank was insolvent and faced imminent

   [.3] The Board also agrees with the ALJ that, notwithstanding the timing of the arrangement, the absence of a written retainer agreement, and the absence of independence of counsel, engaging a law firm to challenge the State Banking Authority or the FDIC does not constitute an unsafe or unsound banking practice.⁶
   Significantly, however, the ALJ further found, and the Board agrees, that "the record does not permit a determination of the exact amount expended by the Bank" as legal fees for the purpose of challenging the regulatory authorities. Rec. Dec. at 9. Nonetheless, certain determinations can be made.

   [.4] The Board finds that the FDIC met its burden of proving that improper expenditures were made to the Law Firm and of proving the amount paid to the Law Firm. The burden then shifted to Respondents to show that the nature and amount of certain expenditures were not improper. This burden has not been met. While the Board finds that the payments for challenging the State and the FDIC were not improper, the Board can make no finding regarding the amount of these expenditures. Because the Board considers this part of Respondents' burden and finds that Respondents have failed to provide sufficient evidence, the Board concludes that the entire expenditure must be treated as improper. The Board would ordinarily issue an order requiring the entire sum of $100,000.00 to be recaptured by the Bank.⁷ However, for reasons explained in part VI, infra, such relief would not be appropriate.

V. RESPONDENTS' EXCEPTIONS
A. Exceptions 1 Through 4.
   These exceptions, although stated differently, essentially challenge the findings

   The ALJ decision is based on the assumption that the transactions were unsafe or unsound practices if transactions are done after the [b]ank has confidential information that the FDIC and/or State intend to close the [b]ank even if the reason for the intended action by the FDIC or State is in error. (Emphasis in original). Resp. Excp. at 6.

   [.5] The Respondents may wish to debate the issue of insolvency for as long as possible; however, the public interest is not furthered by such activities. The statutory and regulatory scheme under which banks are supervised has as its focus the protection of the public interest and the deposit insurance fund. The interests of the public and the fund require that the Board not risk permitting potential wrongdoers to "raid the safe" until their assertions of solvency are proven to have been wrong. It is clear that Respondents were well aware of the conclusions and the intentions of the regulators. Rec. Dec. at 4. Once findings of insolvency and an intention to close a bank have been communicated to a bank, it is no longer "business as usual." The fiduciary responsibilities of the officers and directors require that they act to preserve assets for the protection of the depositors and other creditors, rather than expend assets for their own benefit, no matter how prudent those expenditures may be in another context. While a bank may attempt to keep the state from closing it, its directors must at all times continue to fulfill their fiduciary responsibilities and not improperly expend assets of the bank for their own benefit.

B. Exceptions 5 and 6.

   [.6] Respondents take exception to the ALJ's statement that he drew "the adverse inference" from Respondent Hoffman's failure to testify, and allege violations of the federal and state protections against self-incrimination. This argument is made without any citation to legal authority—because none exists. First, and obviously, the administrative hearing held in this case is not a criminal action, and the protections against self-incrimination which Respondent claims are inapplicable. The inference drawn by the ALJ is permissible in a civil proceeding. Baxter v. Palmigiano, 425 U.S. 308 (1976); Farace v. Independent Fire Ins. Co., 699 F.2d 204 (5th Cir. 1983). Even if the Respondent Hoffman had been the subject of a criminal investigation and had exercised his rights against self-incrimination under the Fifth Amendment, his argument would still be without merit.⁹ In a civil proceeding, adverse inferences can be drawn from both a failure to testify and the invocation of the Fifth Amendment during testimony. Id. Finally, the Board finds that

C. Exception 8.

   Respondents assert that the ALJ erred in ignoring testimony by FDIC Assistant Regional Director Densmore which contains "admissions against interest." Their arguments in support of this Exception are a distortion of the testimony in the record. The statements made by Densmore cited in Respondents Exceptions, though accurately quoted, are taken out of context or are responses to hypothetical questions and are thus an inaccurate portrayal of the witness's testimony. Resp. Excp. at 22–24. The Board finds Mr. Densmore's testimony to be clear, consistent and contrary to its interpretation by Respondents. Therefore, the Board rejects Respondents' Exception 8. Mr. Densmore found each of the expenditures to be an unsafe or unsound practice primarily because of its timing. Although he did agree with Respondents' counsel that certain of the expenditures might not be per se inappropriate (Tr. at 1041, 1042, 1056), he repeated his belief that, given the information known to Respondents and the timing of the expenditures, they were, in this set of circumstances, unsafe or unsound practices. (Tr. at 1022, 1026, 1099).

D. Exceptions 9, 11, 12, 13, and 14.

   These Exceptions challenge the findings of fact made by the ALJ with respect to three of the four expenditures and are essentially nothing more than an attempt to reargue Respondents' position.¹⁰ The substance underlying these Exceptions is that the ALJ did not agree with certain of Respondents' evidence and arguments. As previously stated, the Board's review of the record finds substantial evidence in support of the findings of fact made by the ALJ at issue in these exceptions. No purpose would be served by repeating here the analysis contained in the ALJ's Recommended Decision which rebuts the Respondents' proposed findings of fact and conclusions of law and Exceptions.

IV. REMEDY

   [.7] In accordance with the Board's findings that Respondents engaged in unsafe or unsound banking practices, an Order against Respondents to cease and desist from and to correct these practices and violations through recovery of the funds which improperly inured to the benefit of Respondents would ordinarily be appropriate. However, the Bank closed over a year ago and it is now in receivership. Thus, as a practical matter, neither the Bank nor these individual Respondents is in a position to "reverse" the transactions and "recapture" the funds to the Bank as proposed by the ALJ in his Recommended Order. Thus, the ALJ's proposed relief is no longer entirely appropriate. Furthermore, it is a matter of public record that the Bank's receiver has initiated litigation seeking to recover the improper payments that are the subject of this proceeding. However, to the extent that the individual Respondents have been unjustly enriched by the unsafe or unsound practices in which they engaged, the Board finds that it is still appropriate and within the scope of its authority under section 8(b) of the Act to order reimbursement of those funds received by the individuals and by which they were unjustly enriched. Larimore v. Comptroller of the Currency, 789 F.2d 1244, 1254 (7th Cir. 1986); First National Bank of Eden v. Dept. of Treasury, 568 F.2d 610 (8th Cir. 1978). Therefore, the Order has been modified accordingly.

ORDER TO CEASE AND DESIST

   The Board of Directors of the FDIC, having considered the record and the applicable law finds and concludes that, as set forth in this Decision, Respondents have engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act.
   Accordingly, IT IS HEREBY ORDERED, that Respondents Harold A. Hoffman and Joseph L. Hayes take immediate affirmative action as follows:
   1. Respondent Hoffman shall immediately repay to the FDIC as receiver for Alaska Continental Bank the $61,796.48 payment of May 26, 1988, by which he was unjustly enriched.

In the Matter of
Harold A. Hoffman
Joseph L. Hayes
and
Alaska Continental Bank
Anchorage, Alaska
(Insured Nonmember State Bank)
Steven M. Charno, Administrative Law Judge:
   A Notice of Charges and of Hearing ("Notice") was issued by the Federal Deposit Insurance Corporation ("FDIC" or "Petitioner") on July 1, 1988, alleging that Alaska Continental Bank ("Bank"), Harold A. Hoffman and Joseph L. Hayes (collectively, "Respondents") had engaged in unsafe or unsound banking practices. Contemporaneously, the FDIC issued a Temporary Order to Cease and Desist against the Respondents pursuant to 12 U.S.C. § 1818(c). Respondents' Answers denied that they had engaged in any such practices. AT a prehearing conference on September 8, 1988, Petitioner was allowed over Respondents' objection to amend the Notice by including an additional specification of behavior alleged to constitute an unsafe or unsound banking practice.¹
   This case was heard before me in Anchorage, Alaska on January 6 through 14, 1989.² Initial briefs were filed by Petitioner and Respondents under due date of April 5, 1989, and reply briefs were filed by all parties under due date of April 20, 1989.

DISCUSSION

A. Background

   On approximately April 18, 1988,³ the Alaska State Banking Authority ("State") and the FDIC began an examination of the Bank as of March 31. On May 6, the examiners met with Hoffman, the Bank's President, in the latter's office. During the meeting, FDIC Examiner-in-Charge Mitchell mentioned the impact of losses on the capital ratio and stated that the Bank was "technically insolvent." Hoffman replied "I agree."⁴ The parties then discussed the FDIC's procedures for selling the Bank, Hoffman disputed at least three adverse asset classifications and the examiners re-

CONCLUSIONS OF LAW

   1. At all times pertinent to this proceeding, the Bank was subject to the provisions of the Federal Deposit Insurance Act, 12 U.S.C. §§1811-1831d, the Rules and Regulations of the FDIC, 12 C.F.R. Ch. III, and the laws of Alaska.
   2. The FDIC has jurisdiction over the Respondents and over the subject matter of this proceeding.
   3. The evidential standard which the FDIC must meet in this proceeding is one of substantial evidence.
   4. The payment made to Hoffman described in Findings of Fact 13 through 17 constituted an unsafe or unsound banking practice within the meaning of 12 U.S.C. §1818(b).
   5. The establishment of the self-insurance fund described in Findings of Fact 18 through 21 constituted an unsafe or unsound banking practice within the meaning of 12 U.S.C. §1818(b).
   IT IS FURTHER ORDERED that:
   1. Should Respondents fail to reverse the foregoing transactions, (a) Hoffman shall reimburse the Bank to the extent that he personally benefited from any of the transactions identified in this Order and (b) Hayes shall reimburse the Bank to the ex-
{{4-1-90 p.A-1504}}tent that he personally benefited from any of the transactions identified in this Order.
   2. The effective date of this Order shall be thirty days after it is issued by the Federal Deposit Insurance Corporation.
   Done at Washington, D.C., this 19th day of May, 1989.
APPENDIX
TRANSCRIPT CORRECTIONS

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