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FDIC Enforcement Decisions and Orders |
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Officer and director removed from office and prohibited for three years from participation in affairs of Bank or any insured institution. (This decision was affirmed by the U.S. Court of Appeals for the Fifth Circuit, 931 F.2d 290.)
[.1] Directors and Officers Removal or Prohibition Effect of Resignation
[.2] Participation in Conduct of Affairs Independent Consultant Factors Determining
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[.4] Directors and Officers Ratification of Prior Actions Illegal Act
[.5] Directors and Officers Removal or Prohibition Falsification of Records
[.6] Removal or Prohibition Determination of Term
In the Matter of
DECISION
I. PROCEDURAL BACKGROUND
A Notice of Intention to Remove From Office and to Prohibit From Further Participation ("Notice") was served by the Federal Deposit Insurance Corporation ("FDIC") on Frank E. Jameson ("Respondent" or "Jameson") on April 27, 1989. Based on allegations that Respondent had engaged in unsafe or unsound banking practices, violations of law and regulation and/or breaches of fiduciary duty, the Notice sought Respondent's removal from banking pursuant to Section 8(e) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1818(e). Respondent's Answer denied the allegations of wrongdoing and asserted an affirmative defense based on jurisdiction.
II. FACTUAL SUMMARY
Following a five year stint with the Texas Department of Banking, as a Commissioned Bank Examiner and then as a supervisor, in May 1984, Respondent was hired by the First State Bank of Liberty, Texas, ("Bank") as an assistant vice president. His duties included, among other things, review of loan files to ascertain whether they contained appropriate documentation. From January 1, 1988, through March 31, 1989, respondent served the Bank in the capacities of vice president and advisory director. (Jnt. Stip. No. 4.)
"Sean's Construction Company
Contemporaneously with the submission of this statement, a check dated March 31, 1988, for $3,100 payable to Sean's Construction Company was prepared pursuant to Respondent's instructions. The check was signed by President Rusk, and Respondent endorsed it and converted the proceeds to his personal benefit.
Central to the ALJ's recommendation is the credence given by the ALJ to the Respondent's explanation of his motivation and actions and the finding that his actions were sufficiently justified. As a result of his credibility determination, the ALJ goes to great lengths to strain the facts and his legal analysis of this case to reach his conclusion. The Board has very carefully reviewed the entire record of this case in light of the serious nature of the sanctions at issue. For the reasons set forth below, on the basis of its detailed study of this record, the Board rejects the ALJ's conclusions of law and findings of fact and orders the removal of Respondent.3
A. JURISDICTION
The FDIC Notice alleges jurisdiction under section 8(e)(1) and section 8(e)(2) of the Act. These sections authorize the removal of a respondent who, in the case of section 8(e)(1), is a director or officer of an insured bank, or, under section 8(e)(2) is a "person participating in the conduct of the affairs" of an insured bank. The ALJ found that neither of these sections conferred jurisdiction over Respondent. As discussed below, the Board disagrees and finds that jurisdiction lies under either section.
Section 8(e)(1)
[.1] The parties stipulated that the Notice was served on the Respondent after he had resigned as an officer and director. (Jnt. Stip. No. 12.) Notwithstanding this stipulation, FDIC enforcement counsel asserts that jurisdiction is appropriate under section 8(e)(1) by application of section 905(a) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub. L. No. 101-73, §905(a), 103 Stat. 183, 459 (codified at 12 U.S.C. §1818(i)(3)). That provision states that a party's resignation will not affect a regulatory agency's jurisdiction "to issue any notice and proceed under this section against any such party, if such notice is served before the end of the 6-year period beginning on the date such party ceased to be such a party with respect to such depository institution (whether such date occurs before, on, or after the date of enactment of the paragraph)." [Emphasis Added].
Section 8(e)(2)
Subject matter jurisdiction under this section is dependent upon whether the Respondent was a "person participating in the conduct of the affairs of the Bank" at the time he was served with the Notice. It is uncontroverted that the term is not defined in the Act and has not been judicially interpreted in the context of section 8(e)(2). In reaching opposite conclusions regarding the meaning of the term, both FDIC enforcement counsel and the ALJ rely upon analysis of the term in an analogous statutory scheme contained in Fed. Sav. & Loan Ins. Corp. v. Hykel, 333 F. Supp. 1308, 1311 (E.D. Pa. 1971).
[.2] This Board has already stated that the status of a person as an independent contractor rather than an employee will not be determinative of whether such person is participating in the affairs of an institution. See FDIC-85-25e, 2P-H FDIC Enf. Dec. ¶5082 (February 3, 1987). Rather, the Board will look to the nature of the work performed, the ability of a respondent to cause harm to an institution, and the relationship between the role performed by respondent and the institution. Respondent's activities during his consultancy were an integral part of the Bank's loan process. His assessment of the adequacy of a loan file signaled its final approval for funding or the need for further documentation. Respondent admitted that this was the same work he performed as an assistant vice president of the Bank. (Tr. at 5152). The fact that real estate agent Hykel had to get approval from his principal in order to close a deal did not keep the court from finding Hykel had "broad discretionary powers." Similarly, Respondent's discretion is not diminished by the fact that as a consultant he had to report to Bank employees for final action. In addition, on a daily basis Respondent had access to loan records and other records of the Bank. Although there is no evidence that Respondent ever again modified, falsified, or destroyed records, he had the opportunity to do so during his consultancy. B. The Merits
To justify removal of an officer or director under section 8(e)(1), the FDIC must prove by a preponderance of the evidence that: (1) the officer or director engaged in (a) a breach of fiduciary duty to the bank or (b) an unsafe or unsound banking practice; (2) the breach or practice caused (a) the bank to suffer substantial financial loss or other damage or (b) the officer or director to receive financial gain; and (3) the breach or practice was one (a) involving personal dishonesty or (b) demonstrating a willful or continuing disregard for the safety or soundness of the bank.
[.3] However, this does not eliminate Respondent's independent fiduciary responsibilities. With the passage of time and failure of Rusk to act, it became incumbent upon Jameson to raise the matter. As an officer and advisory director Respondent is deemed to have constructive, if not actual, knowledge of the requirements of the Bank's bylaws. At no time did Respondent raise the question of board approval with President Rusk, or with the board directly.
[.4] Even if the Board were to agree with the ALJ regarding the meaning of the above quoted sentence, it does not find any evidence that the Bank's board was aware at the time of the ratification that Respondent had directed false entries to be made in the Bank's records to further disguise these transactions. Because the Board finds that falsification of bank records is a serious breach of fiduciary duty and an unsafe or unsound banking practice, the failure to disclose this fact to the ratifying body is a material omission which defeats the ratification. Accordingly, the Board finds that Respondent obtained Bank funds without proper authorization and, therefore, engaged in a breach of fiduciary duty and an unsafe or unsound banking practice.
2. Falsification of Records.
[.5] The ALJ found that "Respondent effectively admitted intentional falsification of the Bank's records, and the expert opinion of record is unanimous that such a falsification, regardless of motive, is both a breach of fiduciary duty and an unsafe or unsound banking practice." (Rec. Dec. at 10.) He further found "credible expert opinion supporting the argument that Respondent's falsifications damaged the integrity of the Bank's records." Id. The Board concurs and adopts these findings.8
As noted previously, the Board has engaged in much deliberation on the issue of Respondent's removal from banking. The Board reiterates the serious nature of falsification of bank records, and notes that such a breach of fiduciary duty requires the Board to take severe action. Nonetheless, like the ALJ, upon a careful reading of the record, the Board is inclined to believe Respondent's explanation of his motive. While this cannot and does not excuse his conduct, it is a mitigating factor.
[.6] Section 8(e)(5) of the Act provides that an "agency may issue such 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." This language grants the Board authority to fashion a remedy that is appropriate considering all of the circumstances. The legislative history of section 8(e) indicates that Congress desired to provide regulatory agencies with the mechanism to eradicate insider abuse and to protect the banking industry. Section 8(e) became an additional remedy to the already existing sanction of insurance termination to provide bank regulatory agencies the flexibility to take effective action against individuals who jeopardized the integrity of a bank without imposing the more disruptive and uncertain sanction of insurance termination. The Board has concluded that imposition of a fixed term suspension or removal is consistent with the legislative history, language, and purpose of section 8(e), and with the Board's prior decisions. See, FDIC-87-61e; 87-62k, 2P-H FDIC Enf. Dec. ¶5113 (April 25, 1988). Imposition of a term removal allows the agency to deal with abuses while fashioning a sanction that it deems appropriate considering the circumstances of each case. The Board finds that, in this case, the removal of Respondent from banking for a period of three years reflects the serious nature of his breaches of fiduciary duty and unsafe and unsound banking practices, as well as the mitigating circumstances. While the Board appreciates the likely hardship this term removal will impose on Respondent, the integrity of the banking system requires the consistent imposition of sanctions. Accordingly, the Board will remove Respondent from banking for a period of three years.
ORDER OF REMOVAL AND OF
For the reasons set forth in the above Decision, and pursuant to section 8(e) of the Act, as amended by sections 903 and
In the Matter of
A Notice of Intention to Remove From Office and to Prohibit From Further Participation ("Notice") was served by the Federal Deposit Insurance Corporation ("FDIC" or "Petitioner") on Frank E. Jameson ("Respondent") on April 27, 1989. Based on allegations that Respondent had engaged in unsafe or unsound banking practices, violations of law and regulation and/or breaches of fiduciary duty, the Notice sought his removal from office pursuant to Section 8(e) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1818(e). Respondent's Answer filed May 17, 1989 denied the allegations of wrongdoing and asserted an affirmative defense based on jurisdiction.
DISCUSSION
A. Background
Respondent was employed by the Texas Department of Banking from 1978 through May of 1984, serving as a Commissioned Bank Examiner for two years prior to being promoted to a managerial position. Immediately following his government service, Respondent was hired by the First State Bank ("Bank") of Liberty, Texas.3The beginning of that employment was delayed for an indeterminate period because certain officers of the Bank evinced jealous reactions over Respondent's proposed starting salary.4His duties for the first six months of his employment included the review of loan files to ascertain whether they contained appropriate documentation, but the record is silent as to his authority to attempt to correct any defects he discovered.
It was stipulated that Respondent served as a Vice president and Advisory Director of the Bank from January 1, 1988 through March 31, 1989. It was further stipulated that, on January 12, 1988, the Bank's Board of Directors set Respondent's compensation for 1988 at $3,333.33 per month.
{{2-28-91 p.A-1542.9}}ment for issuance of the check" which indicated on its face that is was a, "[b]ill in the amount of $3,100.00 for reimbursement of expenses and time in showing and maintaining other real estate properties after banking hours for the years of 1984 and 1985,"11which acknowledged that Respondent would be liable for income in the amount of $3,100 and which bore the following signature line:
C. The Aftermath
Sometime between an examination of the Bank in October of 198815and January of the following year, Jerry Albright, one of the Bank's officers, learned of Respondent's bonuses, was "very disgruntled" that Respondent had received something extra16and complained to Petitioner of the bonuses, later submitting documentary proof of the transactions to regulatory authorities.17
D. Jurisdiction
It was stipulated that the Notice which commenced this proceeding was served on Respondent on April 27, 1989. That Notice alleged that Petitioner had jurisdiction over Respondent as an officer and director of the Bank under Section 8(e)(1) of the Act, 12 U.S.C. §1818(e)(1), and as "a person participating in the affairs" of the Bank under Section 8(e)(2) of the Act, 12 U.S.C. §1818(e)(2).
E. The Merits32
To justify the removal of an officer or director of an insured bank under Section 8(e)(1) of the Act, Petitioner must establish the following elements by a preponderance of the evidence:33(1) the officer or director engaged in (a) a breach of fiduciary duty to the bank or (b) an unsafe or unsound banking practice; (2) the breach or practice caused, as relevant, (a) the bank to suffer substantial financial loss or other damage or (b) the officer or director to receive financial gain; and (3) the breach or practice was one (a) involving personal dishonesty or (b) demonstrating a willful or continuing disregard for the safety or soundness of the bank. Similarly, removal pursuant to Section 8(e)(2) of a person participating in the affairs of an insured bank requires Petitioner to show the following facts by a preponderance of the evidence: (1) the person's conduct or practice resulted in substantial financial loss or other damage to the bank; (2) the conduct or practice evidenced (a) personal dishonesty or (b) a willful or continuing disregard for the safety or soundness of the bank; and (3) the conduct or practice evidenced the person's unfitness to participate in the conduct of the affairs of the bank.
FINDINGS OF FACT49
1. At all times relevant to this proceeding, the Bank was a banking corporation organized and existing under the laws of Texas, having its principal place of business in Liberty, Texas.
1. Petitioner did not have jurisdiction over Respondent under Section 8(e)(1) of the Act.
ORDER
The Notice of Intention to Remove from office and to Prohibit from Further Participation is dismissed. |
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Last Updated 6/6/2003 | legal@fdic.gov |