Federal Deposit
Insurance Corporation

{{5-31-91 p.A-1541}}
   [¶5154A] In the Matter of Frank E. Jameson, Docket No. FDIC-89-83e(6-12-90).

   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
   FDIC has jurisdiction to issue Notice of Removal and Prohibition despite Respondent's resignation as director and officer.

   [.2] Participation in Conduct of Affairs — Independent Consultant — Factors Determining
   In determining whether an independent consultant was participating in the conduct of Bank's affairs, FDIC looks to nature of work performed, ability of individual to cause harm to institution, and relationship between institution and individual.

{{5-31-91 p.A-1542}}
   [.3] Directors and Officers — Duties and Responsibilities — Informing Fellow Directors
   When Bank's Board of Directors is required to approve a loan to respondent, who is a director and vice president of Bank, and Bank's president fails to inform Bank's Board of Directors, Respondent is obligated to raise the matter.

   [.4] Directors and Officers — Ratification of Prior Actions — Illegal Act
   Bank's Board of Directors has no authority to ratify an illegal act.

   [.5] Directors and Officers — Removal or Prohibition — Falsification of Records
   Falsification of Bank records is an unsafe or unsound practice and evidence of personal dishonesty, even where Bank suffered no loss and Respondent did not intend to profit by falsifications.

   [.6] Removal or Prohibition — Determination of Term
   FDIC may prohibit an individual from participation in affairs of any insured institution for a limited term to reflect the nature of the offense and mitigating circumstances.

In the Matter of
FRANK E. JAMESON, individually
and as vice president, a director, and a
person participating in the conduct of
the affairs of FIRST STATE BANK
LIBERTY, TEXAS
(Insured Nonmember State Bank)
DECISION AND ORDER

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.
   A hearing was held in Beaumont, Texas on October 24 and November 15, 1989, before Administrative Law Judge Steven M. Charno ("ALJ"). Both parties filed Proposed Findings of Fact, Conclusions of Law, Briefs, and Reply Briefs. The ALJ filed his Recommended Decision with the Office of the Executive Secretary on March 7, 1990, in which he fund that FDIC Enforcement Counsel "had failed to meet its burden of proof as to virtually every statutory factor which it was required to establish in order to prevail in an action to remove an individual from banking," Rec. Dec. at 11.¹Enforcement Counsel for the FDIC filed Exceptions to the ALJ's Recommended Decision on March 27, 1990. This case is now before the Board of Directors of the FDIC ("Board") for final decision and order.

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.)
   In late March 1988, Respondent met with the Bank's President, Benny Rusk, and requested a loan to pay some home repair

   "Sean's Construction Company
   By: /s/ Frank E. Jameson."

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.
   At the end of June 1988, Respondent again met with President Rusk and requested further financial assistance with some outstanding bills. Again, Rusk told Respondent "the Bank would be able to help [him]" and told him to handle it in the best manner to benefit [him]." (Tr. at 57-8). Respondent submitted a June 27, 1988, statement which directly paralleled the March 31 document. He explained to the Bank's cashier that, this time, $5,000 was to be paid by means of a check payable to Sean's Construction Company. After verifying the accuracy of Respondent's instructions with the Bank's President, the cashier issued and signed the requested check. Respondent deposited the check to his personal account.
   Sean's Construction Company is a fictitious entity named after Respondent's son. At Respondent's direction, both checks payable to Sean's Construction Company were reflected on the Bank's books and records as "repairs and maintenance" expenses, rather than as compensation to Respondent.
   Following the examination of the Bank in October 1988, Jerry Albright, another of the Bank's officers learned of the payments to Respondent, was "very disgruntled" that Respondent had received compensation which he had not received, complained to the FDIC about the "bonuses," and later submitted documentary proof of the transactions to the FDIC. (Tr. at 193.)
   In response to questions from bank regulators, Respondent set forth in a January 20, 1989, letter to the Texas Banking Commissioner his explanation of the transactions. Respondent asserted the following:

I justified the funds as a reimbursement of expenses I had incurred over the years, in lieu of being issued as salary or bonus. A major factor in this decision was to keep `goodwill' among the other employees. In a bank such as ours, everyone knows each others' salaries, etc. No one else had received a sizeable bonus over the last few years, and I did not want any `hard feelings' among the staff. This has occurred in the past; it happens every time someone gets a larger raise than the next person. [FDIC Ex. 13.]

   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].
   The ALJ found that jurisdiction cannot be premised on section 8(e)(1) based upon a narrow reading of a sentence in the Conference Report discussing section 905(a). H.R. CONF. REP. NO. 222, 101st Cong., 1st Sess. 440 (1989). (Rec. Dec. at 7). Paragraph 4905 of the Conference Report provides, in pertinent part: "This section does not create a new offense; it is procedural in nature, and can therefore be applied retroactively to yet undiscovered misconduct and to currently pending supervisory matters that have been stayed awaiting congressional action."
   The ALJ read this sentence as creating a limitation on the applicability of section 905(a), finding that "the statute on its face permits retroactive application only where a proceeding had not been formally commenced by the filing of a notice prior to the enactment of FIRREA." The Board finds the ALJ's interpretation to be in error.
   The language of section 905(a) is clear, unambiguous and without limitation (other than the six year time frame). Therefore, reference to the Congressional Report is unnecessary. Even if reference to the Congressional Report were appropriate, the Board reads the language relied upon by the ALJ as merely illustrative of the type of situation in which the statute may be applied, rather than creating a limitation not found in the statute. The Board notes that other sections of FIRREA were specifically limited to prospective application.⁴Thus, Congress well knew how to create limitations on the applicability of certain sections of this legislation and cannot be deemed to have intended a limitation in section 905(a) which does not appear in it.⁵The point of the Conference Report is that section 905(a) is procedural in nature. Section 905 does not create a new offense, i.e., it does not make illegal those acts which previously

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).
   The issue presented to the district court in Hykel was whether Hykel's activities in acting as a real estate agent on behalf of a savings association constituted "participation in the affairs of the institution." The court held that such activity did constitute participation in the affairs of the institution and that Hykel's removal was appropriate. In reaching this conclusion, the court looked to the legislative history and noted that the removal provisions were remedial in nature and designed to protect the institutions, the depositors, and the interest of the Government which underwrites the insuring agencies from the activities of those individuals in responsible positions which may tend to undermine public confidence. See FSLIC v. Hykel, supra, 333 F. Supp. at 1311.
   Mr. Hykel was a real estate agent described by the court as having "broad discretionary powers with respect to the sale or rental of property." The ALJ relied on the court's analysis of whether the agent's continued participation in the same affairs offered any opportunity for a recurrence of dishonest behavior. The ALJ distinguishes Hykel because he finds that Respondent's consultancy involved "virtually no operational discretion" and that the record "is devoid of evidence that his consultancy provided any other opportunity to engage in dishonest behavior." He thus concluded that Respondent was not a person participating in the affairs of the Bank and that the FDIC did not have personal jurisdiction over Respondent under section 8(e)(2). (Rec. Dec. at 8.) The Board reaches the opposite conclusion

   [.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 51–52). 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.
   The Board does not read Hykel as requiring a person to have unfettered discretion or to have actually subsequently injured the institution in order to be "participat[ing] in the affairs of an institution." In the instant case, Jameson had sufficient influence on the decision whether to fund loans and sufficient opportunity to harm the institution to pass the jurisdictional threshold.

{{2-28-91 p.A-1542.4}}

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.
   Similarly, the removal pursuant to section 8(e)(2) of a person participating in the affairs of an insured bank requires the FDIC to prove: (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) 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.
   The pivotal finding made by the ALJ, and upon which his other findings are based, is that "the record evidence overwhelmingly establishes that the Bank's Board of Directors delegated its compensation-setting authority to the President and that he exercised that delegated authority to grant Respondent bonuses totalling $8,100." (Rec. Dec. at 9.) Thus, the ALJ finds that Respondent did not engage in the breach of fiduciary duty and unsafe or unsound banking practice of obtaining Bank funds without proper authorization. (Id.) Upon a thorough review of the record, the Board concludes that this finding and the ALJ's findings which flow from it, are erroneous.
   1. Authorization of the Payments to Respondent.
   The record is clear that at the time the Bank President indicated to Respondent that the Bank would "take care of" him, the President did not have the actual delegated authority to set or grant bonuses to officers. (Tr. at 174; Jnt. Stip. No. 5.) Although the record shows that Bank President Rusk had in the past given bonuses to officers, it also shows that these bonuses were announced by the President and then, relatively contemporaneously, ratified by the board of directors. (Tr. at 174, 183.) This was not the procedure followed with Respondent's "bonuses."⁶
   In initially seeking a loan, Respondent quite properly approached the Bank President. When President Rusk informed him that the Bank "would take care of him," the Board finds that it was understandable, given the nature of this Bank, for Jameson to expect Rusk to take responsibility for raising the matter with the board for approval or ratification.

   [.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.
   One year later, after the regulatory authorities were informed about these transactions, the Bank's board of directors ratified the two bonuses totalling $8,100.00. Presumably, this is the delegation upon which the ALJ relies.⁷However, we find this delegation to be insufficient as a matter of law and thus, inoperable. The record establishes that, at the time of the vote to ratify the bonuses, the board members were not aware of all aspects of the transactions and the underlying material facts. Consequently, the ratification is not valid. Lang. v. Lee, 777 S.W. 2d 158 (Tex. Ct. App. 1989).
   The ALJ relies upon "the disclosures in Respondent's letter" to the Texas Banking Commissioner and the language of the Bank board's February 4, 1989, resolution ratifying the bonuses in finding full disclosure and thus a valid ratification. (Rec.

WHEREAS, based on usual and customary banking practices in other small banks, payment to Frank E. Jameson in the manner in which it was done was for the sole purpose of avoiding in-house employee bickering and internal politics. . . [Rec. Dec. at 6, fn. 18; Ex. 4.]

   [.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.
   Finally, while the Bank's board of directors could validly ratify the act of giving Respondent a bonus, ratification of the falsification of the Bank's records would only establish the board's complicity in the deception and would, in-and-of-itself, be a breach of fiduciary duty. Therefore, even assuming, arguendo, that the Bank's directors had been aware of the falsification of records, the Board holds that the Bank's board of directors is without authority to excuse such an illegal act.

   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
   Notwithstanding these findings, however, because the ALJ also found that the payments to Respondent were authorized, he finds that the breaches occurred after authorized payments were made and thus, "the falsifications could not cause either a loss to the Bank or a gain to the Respondent." This conclusion requires a very strained interpretation of the facts of this case, with which the Board does not concur.
   In seeking to weave the facts of this case into a coherent tapestry, it is impossible to segregate the breach of fiduciary duty and unsafe and unsound practice related to the falsification of Bank records from the compensation received by Respondent, whether

   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
PROHIBITION
FROM FURTHER PARTICIPATION

   For the reasons set forth in the above Decision, and pursuant to section 8(e) of the Act, as amended by sections 903 and

   (i) Any insured depository institution;
   (ii) Any institution treated as an insured bank under sections 8(b)(3)-(4) of the Act including: (1) any bank holding company, (2) any subsidiary of a bank holding company, (3) any foreign bank that maintains a branch or agency in a State, (4) any foreign bank or foreign company controlling a foreign bank that controls a commercial lending company organized under State law, and any company of which any foreign bank or company referred to in (3) or (4), above, is a subsidiary, or as a savings association under section 902(a) of FIRREA, including any savings and loan holding company, any subsidiary of a savings and loan holding company, any service corporation of a savings association, and any subsidiary of any service corporation of a savings association;
   (iii) Any insured credit union under the Federal Credit Union Act;
   (iv) Any institution chartered under the Farm Credit Act of 1971;
   (v) Any appropriate Federal depository institution regulatory agency;
   (vi) The Federal Housing Finance Board and any Federal home loan bank; and
   (vii) The Resolution Trust Corporation.

In the Matter of
Frank E. Jameson, individually and
as vice president, a director, and a
person
participating in the conduct of the
affairs of
First State Bank
Liberty, Texas
(Insured Nonmember State Bank)
Steven M. Charno, Administrative Law Judge:

   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.
   A hearing was held before me in Beaumont, Texas on October 24 and November {{5-31-92 p.A-1542.8}}15, 1989.¹Initial Briefs were filed by Petitioner and Respondent under due date of January 2, 1990, and reply briefs were filed by the parties under due date of January 17, 1990.²

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.
   The Bank's By-Laws vest authority in the Board of Directors to set the annual compensation of the Bank's officers. By virtue of a delegation of this authority, the Bank's President "had the express blanket authority from the Board to remunerate . . . any officer or employee . . . for their services, without individual prior Board approval or authority . . ."⁵The record is bare of direct evidence which might suggest that this delegation was other than wholly regular. While some bonuses given to officers by the President were later ratified by the Board, there is no evidence that all such bonuses were so approved.⁶
   It was the practice of the Bank to conceal an officer's bonus from other officers who were not similarly compensated in order to preserve "employee good will."⁷On at least one occasion, this practice resulted in paying a bonus by drawing a check to a payee other than the Bank officer who ultimately received the proceeds.⁸The Bank's use of such a subterfuge was brought to Respondent's attention in 1985.⁹

   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.
   Several days before the end of March 1988, Respondent met with the Bank's President in the latter's office prior to the commencement of business and requested a loan to pay some home repair expenses. The President instead authorized the immediate payment to Respondent of a $3,100 "bonus prior to year end." When Respondent indicated that he was concerned as to how other employees would view such a bonus at a time when the Bank was "cutting back," the President instructed Respondent to "handle the transaction" in whatever manner the latter thought best. Respondent thereafter submitted a March 31¹⁰"state-

{{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:
   "Sean's Construction Company
   By: /s/ Frank E. Jameson."
Contemporaneously with the submission of this Statement, a March 31 check for $3,100 payable to Sean's Construction Company was prepared pursuant to Respondent's instructions. The check was signed by the Bank's President, and Respondent endorsed it and converted the proceeds to his personal benefit.¹²
   Approximately one week before the end of June in 1988, Respondent met with the Bank's President during the evening at the latter's home and requested further financial assistance with some outstanding bills. On the 26th or 27th of the month, the President authorized the payment of an additional $5,000 bonus to Respondent and told the latter to make such "entries as he felt . . . necessary." Respondent submitted a June 27, 1988 statement, which directly paralleled the March 31 document described above,¹³and explained to the Bank's Cashier that the $5,000 bonus was to be paid by means of a check payable to Sean's Construction. After verifying the accuracy of Respondent's instructions with the Bank's President, the Cashier issued and signed the requested check. Respondent thereafter deposited the check to his account.¹⁴

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
   In response to questions from bank regulators, Respondent wrote a January 20, 1989 letter setting forth the manner in which both bonuses had been paid. On February 4, the Board of Directors were made aware of the disclosures in Respondent's letter¹⁸and were told by the President that the $8,100 was an early bonus which he "did not want the other employees to become aware of . . .."¹⁹While the Board thereafter unanimously resolved to ratify the payment of both of Respondent's bonuses, they noted that their approval was

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).
   Because the Notice was served after Respondent had resigned as an officer and director, jurisdiction cannot be premised on Section 8(e)(1). Stoddard v. Fed. Reserve System, 868 F.2d 1308, 1310 (D.C. Cir. 1989). Petitioner maintains, however, that jurisdiction over Respondent as an officer and direction of the Bank can be effected by retroactively applying 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, which was enacted on August 9, 1989. 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 . . . ." The remainder of the language in Section 905(a) provides no guidance as to whether the phrases "to issue any notice" and "proceed under this section" are intended to be read in the disjunctive, as appears to be Petitioner's contention, or in the conjunctive. Fortunately, the provision's statutory history provides the answer. The Conference Committee effectively mandated a conjunctive interpretation when it stated that the provision was intended to apply retroactively "to yet undiscovered misconduct and to currently pending supervisory matters that have been stayed awaiting congressional action."²⁷H. R. Conf. Rep. No. 222, 101st Cong., 1st Sess. 440 (1989). I must therefore read the two phrases conjunctively and conclude that the statute on its face permits retroactive application only where a proceeding had not been formally commenced by the filing of a notice prior to the enactment of FIRREA.²⁸Accordingly, I conclude that FIRREA was not intended by Congress to be, and cannot constitutionally be, retroactively applied under the facts of this case.²⁹

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.
   In order to satisfy these statutory requirements, Petitioner argues that Respondent obtained "Bank funds without proper authorization" and that doing so constituted a breach of fiduciary duty and an unsafe or unsound banking practice.³⁴The record evidence overwhelmingly establishes that the Bank's Board of Directors delegated its compensation-setting authority to the President and that he exercised that delegated authority to grant Respondent bonuses totalling $8,100.³⁵Accordingly, I find that Respondent did not obtain Bank funds without proper authorization and that he did not, therefore, engage in the alleged

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.
   2. At all times relevant to this proceeding, the Bank was insured by the FDIC and was not a member of the Federal Reserve System.
   3. From January 1, 1988 through March 31, 1989, Respondent served the Bank in the capacities of Vice President and Advisory Director.
   4. From April 3 through April 28, 1989, Respondent was a temporary consultant to the Bank.
   5. Respondent's consultancy was not shown to be a position in which he had any opportunity (a) to exercise authority or discretion or (b) to engage in dishonest behavior or in a willful or reckless disregard for the Bank's safety or soundness.
   6. Respondent was personally served with a copy of the Notice on April 27, 1989.
   7. Respondent was not shown to be an officer, director or person participating in the affairs of the Bank at the time he was served with the Notice.
   8. Pursuant to Section 16 of the By-Laws of the Bank, the Bank's Board of Directors was vested with authority to set the compensation to be received by the Bank's officers.
   9. The Bank's Board of Directors delegated authority to the Bank's President to set the compensation to be received by the Bank's officers.
   10. Although the Bank's Board of Directors on several occasions ratified bonuses previously authorized by the Bank's President, it was not shown to be their standard practice to do so.
   11. It was the Bank's policy and practice to conceal the giving and amount of an officer's bonus from other officers.
   12. In furtherance of this policy, the Bank in 1984 paid an officer's bonus by drawing a check to a payee other than the officer who received the proceeds.
   13. The Bank's Board of Directors on January 12, 1988 set the Respondent's monthly compensation for 1988 at $3,333.33.
   14. On or about March 31, 1988, the Bank's President authorized a $3,100 bonus for Respondent.
   15. After that bonus had been authorized, a Bank expense check for $3,100 payable to Sean's Construction Company was prepared at Respondent's request, was signed by the Bank's President and was endorsed in the name of the payee by Respondent.
   16. On or about June 27, 1988, the Bank's President authorized a $5,000 bonus for Respondent.
   17. After that bonus had been authorized, a Bank expense check for $5,000 payable to Sean's Construction was prepared at Respondent's request, was signed by the Bank's Cashier and was deposited to Respondent's account.
   18. Sean's Construction Company was a fictitious business entity utilized by Respondent to prevent other Bank employees from learning of his bonuses.
   19. Respondent was not shown to have obtained funds from the Bank without proper authorization.
   20. Respondent intentionally falsified the Bank's records.
   21. Intentional falsification of a bank's records by an officer or director is a breach of fiduciary duty and an unsafe or unsound banking practice.
   22. Respondent's conduct resulted in damage to the Bank to the extent of a breach in the integrity of its records.
   23. Respondent's conduct was not shown to have resulted in the destruction of the Bank's credibility as an insured depository institution.
   24. Respondent's breach of fiduciary duty and commission of an unsafe or unsound banking practice did not result in (a) a substantial financial loss to the Bank or (b) a financial gain to Respondent.
   25. Respondent's conduct was not shown to have involved personal dishonesty or to have demonstrated a willful or continuing disregard for the safety or soundness of the Bank.
   26. Respondent was not shown to be unfit to participate in the affairs of an insured depository institution.

   1. Petitioner did not have jurisdiction over Respondent under Section 8(e)(1) of the Act.
   2. Petitioner did not demonstrate that it had jurisdiction over Respondent under Section 8(e)(2) of the Act.
   3. Petitioner's burden of proof is one of a preponderance of the evidence.
   4. Respondent committed a breach of fiduciary duty and engaged in an unsafe or unsound banking practice by intentionally falsifying the Bank's records.
   5. Petitioner has failed to establish by a preponderance of the evidence those elements of Section 8(e) of the Act necessary to support issuance of the Order sought.
   6. The Notice should be dismissed.
   Upon the foregoing findings of fact and conclusions of law, and upon the entire record in this case, I hereby issue the following recommended:

ORDER

   The Notice of Intention to Remove from office and to Prohibit from Further Participation is dismissed.
   Done at Washington, this 5th day of March, 1990.