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FDIC Enforcement Decisions and Orders |
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Board adopts ALJ's recommendation that bank official be prohibited from further participation in the affairs of insured institutions because of his involvement in an ongoing check kiting scheme. Repeated authorizations for overdrafts and immediate credit for customer's deposited checks constituted unsafe or unsound practices and breaches of fiduciary duty, which prejudiced the interests of the institution and demonstrated continuing disregard for the bank's safety.
[.1] ProhibitionLiability FactorsUnsafe or Unsound Practices
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[.3] ProhibitionLiability FactorsDisregard for Safety and Soundness
In the Matter of
The Board of Directors ("Board") f the Federal Deposit Insurance Corporation ("FDIC"), having reviewed the entire record, finds that the Recommended Decision (appended hereto) of the Administrative Law Judge ("ALJ") following a hearing in this case, is fully supported by the law and the evidence. The Recommended Decision concludes that an order of prohibition against James G. Welk ("Respondent") was warranted, pursuant to section 8(e) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(e), for Respondent's involvement in an ongoing check kiting scheme.
The Board of the FDIC, having considered the entire record in this proceeding including the record made on February 24, 1992, through February 27, 1992, briefs and arguments of counsel, and the Recommended Decision and Order of the Administrative Law Judge, and exceptions thereto, finds that:
In the Matter of
WALTER J. ALPRIN, Administrative Law Judge,
This proceeding was instituted on August 20, 1991, by the Notice of the Federal Deposit Insurance Corporation (FDIC) of its intention to remove and to prohibit James G. Welk (Respondent), from further participation in the conduct of the County Bank of Merced, Merced, California (County Bank), and any other federally insured depository institution listed in section 8(e)(7) of the Federal Deposit Insurance Act (the Act), 12 U.S.C. § 1818(e)(7), without the prior written approval of the FDIC and such other appropriate Federal depository institution regulatory agency (the Notice). Hearing was held at Sacramento, California, from February 24th through 27th, 1992. Following hearing, the parties filed concurrent Proposed Findings of Fact and Conclusions of Law1 (briefs) and Reply Briefs.
The County Bank, a corporation existing and doing business under the laws of the State of California with its principal offices at Merced, California, is and was at all times pertinent hereto an insured State nonmember banks as defined in Section 3(e)(2) of the Act, 12 U.S.C. § 1813(e)(2). At all times pertinent Respondent was the County Bank's senior vice president and a person participating in the affairs of the County Bank. The FDIC has jurisdictional authority to institute this proceeding.
A. Background to February of 1988
The FDIC conducted an examination of the County Bank as of close of business on February 23, 1990. Within the first week of examination, the examiners independently determined a strong suspicion of kiting on the Camco account for a test period beginning in September of 1989, because of (1) the policy of granting immediate credit upon check deposit, (2) the small or negative continuing balance of the account, (3) Camco's record of having its checks returned for insufficient funds, and (4) a number of checks issued by Campbell or Camco on accounts at other banks, payable to Camco, deposited by Camco in its account at the County Bank, and in a number of instances dishonored and requiring resubmission for payment.
Respondent received Morehouse's memoranda dated March 5, 1988, April 15, 1988, and January 13, 1989 (FDIC Exs. 5, 6, and 7). In each instance he had a conversation with Campbell, telling him to discontinue such practice. Respondent "...told him to get his, stop writing checks against insufficient funds." (TR IV, 50.) Respondent then would report this to Morehouse orally without further direction or instruction. At one point he contemplated closing Campbell's account, but "Then I on the other hand we have a $2,100,000 obligation and this, I felt, was a way of me retaining his account, was a way of controlling him and knowing what was going on and also having a leash on him. And I felt if I terminated the account, we would be faced with a substantial loss by MAIN on Copper Tree." (TR IV, 22.)
The FDIC additionally produced the testimony of David Promani, FDIC Review Examiner, Sacramento, and Donald Pfeiffer, FDIC Assistant Regional Director, San Francisco. Respondent also produced the testimony of Millen, Mineni and Anderson. The testimony of these witnesses will be cited as required within the "Discussion" portion of this Recommended Decision. Respondent also called Campbell as its witness, but Campbell respectfully refused to answer any questions pursuant to the Fifth Amendment of the Constitution of the United States.
Respondent argues on brief that the proper standard of proof is "beyond a reasonable doubt."10 The argument has no merit, as the
The Notice instituting this proceeding, as based upon the underlying statute, charges Respondent, as an institution-affiliated party, with having directly or indirectly (1) engaged or participated in unsafe or unsound banking practices, or breached his fiduciary duty as an officer of the insured depository institution, and (3) such action either involved personal dishonesty or demonstrates willful or continuing disregard for the safety or soundness of the depository institution.
[.1] The Notice specifically alleges Respondent engaged in unsafe or unsound practices by "aiding, abetting, and/or participating in a scheme perpetrated by Campbell and/or Camco to receive the benefit of uncollected funds from approximately March, 1988 through March, 1990." The phrase "unsafe or unsound banking practices" is not defined in 12 U.S.C. § 1818, but as reflected in the legislative history of the Financial Institutions Supervisory Act of 1966, both Houses of Congress cited with favor the view of then Chairman of the Federal Home Loan Bank Board, John Horne, who stated:
The specific methods of permitting Camco to receive the benefit of uncollected funds were twofold. First, there was the standing order to in all instances grant Camco the general privilege of County Bank's depositors of immediate credit on deposited checks prior to collection, coupled with the standing order unless otherwise advised to "reprocess" Camco's outgoing checks returned for insufficient funds.
Still another option for allowing the benefit of uncollected funds is to permit the customer to kite a check by supposedly depositing funds from another of the customer's accounts for immediate credit, thus reducing the amount of overdraft even though the other account itself had insufficient funds to cover.
That both overdrafting and kiting are actions contrary to generally accepted standards of diligent or prudent operations is virtually self explanatory. To again quote Review Examiner Promani, the attributes of kiting, equally applicable to overdrafting, are that:
From as early as March 5, 1988, Camco's account was being continuously granted immediate credit for deposit of highly questionable checks, and the existence of a kite on the Camco account was suspected by Morehouse. As a subordinate, Morehouse reported his suspicion to the Respondent. Morehouse (1) approved amounts of deposits over the maximum permitted to tellers, (2) could see from deposit skips the source and amounts of the deposits, (3) could see the current status of the County Bank account as deposits were made, (4) later could see which of the deposits had been dishonored by the bank on which issued, and (5) could compare the amounts of checks deposited with the amounts of overdrafts, and the amounts of checks issued to the amounts of checks from the Camco accounts deposited to cover. He thus could see the entire chain of events in which checks were issued against insufficient funds, covered by checks deposited from another account by the same party payable to his own entity, and particularly which of these covering deposits by themselves were based on insufficient deposits to pay. Morehouse properly reported the facts to his senior management supervisor, the Respondent, as part of his special instructions regarding this account, without going through the Branch Manager. Morehouse directly pointed the finger at what he first suspected and eventually knew to be a kiting operation, and he did so on March 5, 1988, April 15, 1988, January 13, 1989, February 13, 1989, and September 26, 1989. He did it without going beyond the limits of his "chain of command," even though he recognized the danger of personal responsibility, and he did it even though his continuing pleas for specific written directives which would exculpate him were never responded to. While it might be said that Morehouse should have gone directly to the Board of Directors, he certainly displayed more integrity, loyalty, and personal courage than any of the others involved in this sorry drama.
[.2] The statute, 12 U.S.C. § 1818(e) (1)(B), sets forth in the alternative three prerequisites, any one of which may be presented to prove violation. One is that the insured depository institution has suffered or will probably suffer financial loss or other damage, another is that the interests of the institution's depositors have been or could be prejudiced, and the third is that the party committing the violation received financial gain or other benefit as a result.
[.3] The same statute, subsection (e)(1)(C), also sets forth in the alternative two prerequisites, either of which must be proven to have been involved in the violation, and they are that the violation "demonstrates willful or continued disregard... for the safety or soundness of such insured depository institution...," or that the violation "involves personal dishonesty on the part of" the institution-affiliated party.
In view of all the above, the following Conclusions of Law are hereby recommended: |
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Last Updated 6/6/2003 | legal@fdic.gov |