Federal Deposit
Insurance Corporation

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   [¶5189] In the Matter of Steven J. Hirsch, James V. Hirsch, C.R. Hackworthy, Paul W. Hamblin, Bradley C. Lundeen, James W. O'Connell, William J. Radosevich, Richard R. Schmitz, and Richard O. Stout, Bank St. Croix, Roberts, Wisconsin, Docket No. FDIC-91-24k (12-15-92).

   Board, having earlier found respondents had violated law and regulations by opening a bank branch without prior FDIC and State authorization, finds that the ALJ improperly evaluated their level of culpability and assesses civil money penalties greater than those recommended by the ALJ. [See ¶5171A, page A-1845.]

   [.1] Civil Money Penalties—Amount of Penalty—Factors
   Blind reliance on the advice of counsel, after being informed by state and federal regulators that their actions violated the law, is not "good faith reliance" mitigating the amount of penalty assessed. Respondents are not entitled to leniency for their actions to remedy the violations.

   [.2] Civil Money Penalties—Indemnification
   Penalties and legal fees, where action was brought against respondents individually and not against the bank, are the obligation of the respondents. They may not be indemnified by the bank.

In the Matter of
STEVEN J. HIRSCH, JAMES V.
HIRSCH,
C.R. HACKWORTHY, PAUL W.
HAMBLIN,
BRADLEY C. LUNDEEN, JAMES W.
O'CONNELL, WILLIAM J.
RADOSEVICH,
RICHARD R. SCHMITZ, and
RICHARD O.
STOUT, individually, and as
institution-affiliated parties of
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BANK ST. CROIX
ROBERTS, WISCONSIN
(Insured State Nonmember Bank)
DECISION AND ORDER ON CIVIL MONEY PENALTY PROCEEDING
FDIC-91-24k

   The Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law, Order to Pay, and Notice of Hearing ("Notice") against Steven J. Hirsch, James V. Hirsch, C.R. Hackworthy, Paul W. Hamblin, Bradley C. Lundeen, James W. O'Connell, William J. Radosevich, Richard R. Schmitz, and Richard O. Stout ("Respondents") as individual directors and institution-affiliated parties of Bank St. Croix, Roberts, Wisconsin ("Bank"), on February 11, 1991. This Notice seeks to impose civil money penalties in the amount of $5,500.00 on each Respondent for violations of section 18(d)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1828(d)(1); section 221.04(1) (jm)(1) of the Wisconsin Statutes, Wis. Stat. §221.04(1)(jm)(1); and section 328.2 of the FDIC Rules and Regulations, 12 C.F.R. §328.2, by opening and operating a branch bank in Hudson, Wisconsin ("branch"), without approval of the FDIC or the Commissioner of Banking for the State of Wisconsin ("Commissioner"). Respondents were also charged with, and admitted to violating 12 C.F.R. §328.2, by failing "to display at the branch an `official bank sign.'" Answer at 3–4.¹
   Prior to the issuance of the Notice in this action, the Bank filed suit against the FDIC in the United States District Court for the District of Columbia seeking an injunction to suspend the effect of an earlier temporary cease-and-desist order issued by the FDIC, which ordered closure of the unauthorized branch.²On January 30, 1991, the District Court denied the Bank's request for an injunction. Bank St. Croix v. FDIC, 755 F. Supp. 455 (D.D.C. 1991).
   The first hearing in this civil money penalty proceeding was held on July 2, 1991, before Administrative Law Judge Steven M. Charno ("ALJ"), who recommended granting a directed verdict for the Respondents. On December 19, 1991, the FDIC Board of Directors ("Board") reversed the ALJ's Decision, and found that Respondents had committed each of the violations alleged in the Notice. In the Matter of Steven J. Hirsch, et. al., FDIC-91-24k, 2 P-H FDIC Enf. Dec. ¶5171A. The proceeding was remanded for a full hearing on the issue of the appropriate amount of civil money penalties. The Board stated that the violations at issue were shortlived, have been rectified, and the Bank is now operating under a consent agreement. Board Dec. at 18.
   A second hearing on remand was held before the ALJ on July 8, 1992, in Minneapolis, Minnesota. The ALJ's Recommended Decision, issued on August 10, 1992, concludes that the following penalties should be ordered: (1) Respondents Steven J. Hirsch, C.R. Hackworthy, Paul W. Hamblin, James W. O'Connell, William J. Radosevich, Richard R. Schmitz and Richard O. Stout, $500.00 each; (2) Respondent James V. Hirsch, $250.00, and (3) Respondent Bradley C. Lundeen, $5.00. The ALJ considered the evidence and the relevant statutory factors and reasoned that the Respondents had relied in good faith on the advice of counsel at the time they opened the unauthorized branch bank.
   The FDIC filed exceptions to the ALJ's Recommended Decision challenging the ALJ's findings on good faith, the gravity of

the Matter of Steven J. Hirsch, et al.,
FDIC-91-24k, 2 P-H FDIC Enf. Dec. ¶5171A,
"Board Dec. at ____."

   During the period from June 1989 through September 1990, Respondent Steven J. Hirsch, president of the Bank, sought and received condition approval from the FDIC and the Commissioner to open a branch bank in Hudson, Wisconsin.³However, the Bank failed to fulfill one of the Commissioner's conditions for approval of the branch bank —the infusion of $75,000 of capital from a source outside the Bank.⁴
   The Bank notified the Commissioner, by letter dated October 29, 1990, that the branch would open on November 5, 1990. Joint Stip. No. 10, June 13, 1991. On November 1, 1990, the FDIC Regional Director hand-delivered to the Bank a letter withdrawing approval of the branch application.⁵The Commissioner suspended conditional approval of the branch by letter on the same day. Joint Stip. No. 12, June 13, 1991.⁶
   On November 5, 1990, the Bank's board of directors, except for James V. Hirsch and Bradley C. Lundeen, who were not present, met and unanimously voted to open the branch after the Bank's counsel advised them to open the branch immediately and accept deposits to "establish the branch." Joint Stip. No. 13, June 13, 1991.⁷
   At the Bank's request, a meeting was held on November 8, 1990, in Chicago between representatives of the State, FDIC, and the Bank's directors (except Respondent Lundeen). At this meeting the Bank was advised that the Commissioner's approval had expired on November 1, 1990, and that the branch must be closed immediately. FDIC representatives stated that civil money penalties would be assessed unless the branch was closed immediately. Directly after the meeting, Respondents (except for Respondent Lundeen) consulted with their attorney and asked whether civil money penalties could be imposed upon them. Their attorney responded in the negative on the grounds that the Regional Director lacked authority to withdraw approval of the branch. R.D. at 4, fn. 8. The Bank continued to operate the branch until November 16, 1990, when the Bank was served with FDIC's Temporary Order to Cease and Desist, ordering closure of the branch bank.⁸Joint Stip. No. 19, June 13, 1991. In addition, during the period the branch was open, the Bank failed to display an official bank sign as required by 12 C.F.R. §328.2.

   The Board has carefully reviewed the entire record in this proceeding, including the parties' submissions, transcripts of the proceedings, the ALJ's Recommended Decision, and Exceptions filed by FDIC Enforcement Counsel. The Board notes that the ALJ properly considered the statutory factors: the size of the financial resources and good faith of the persons charged, the gravity of the violations (losses to the bank and benefit received by violators), the history of previous violations and such other factors as justice may require. 12 U.S.C. §1828(j)(3)(B), 12 U.S.C. §1818(i)(g). The ALJ also properly analyzed the guidance set forth in the "Interagency Policy Regarding the Assessment of Civil Money Penalties by the Federal Financial Regulatory Agencies," 45 Fed. Reg. 59, 423 (September 9, 1980) ("Interagency Policy") in his determination of the appropriate civil money penalties.⁹The ALJ considered the stipulated evidence of certain of the Respondents' financial resources and the fact that Respondents did not receive any type of economic benefit from the violation. R.D. at 3 through 6.
   On the issue of gravity, the ALJ found a lack of history of previous violations, that the violations were few, not recurring, of extremely limited duration, and did not cause the Bank to suffer a direct or indirect economic loss. R.D. at 6. The ALJ concluded, and the Board agrees, that the violations were not merely technical, but, on the other hand, cannot be described as "grave." R.D. at 6. Concerning other matters required by justice, the ALJ reasoned, and the Board agrees, that the deterrent emphasis of the legislative policy and the failure of Respondents to take action to close the branch, following the November 8, 1990, meeting, amply justify imposition of the civil money penalties. The ALJ did not reach the issue of whether the Order should contain a provision prohibiting Respondents from seeking reimbursement from the Bank for any penalty or legal expenses.¹⁰Finally, the Board finds that the ALJ's discussion and findings on the issue of good faith and the recommended assessments require modification.

A. Good Faith

   In the Recommended Decision the ALJ found:

(1) the evidence of record does not establish that Respondents attempted to conceal their opening of the branch or otherwise deceive either petitioner or the state, (2) the opening of the branch bank in violation of state law was not based upon respondents' good faith reliance upon the advice of counsel, (3) the opening of a branch bank in violation of federal law was based upon Respondents' reliance in good faith upon the advice of counsel, (4) the violations were remedied when Petitioner sought closure of the branch in a manner which Respondents' counsel advised was within the Petitioner's authority and (5) Respondents' cooperation with the bank's request for the November 8 meeting and by the fact that the bank has

{{2-28-93 p.A-2143}}entered into an agreement with Petitioner concerning the latter's operations.

   [.1] Recognizing that good faith is not a black or white issue, the Board places less weight than the ALJ on Respondents' "good faith" reliance on counsel in keeping the branch open after the November 8, 1990 warnings. In the Board's view, when Respondents were told by both the state and federal regulators that the branch must be closed immediately, they could no longer blindly rely on the advice of counsel that had been called into question. Prudent bankers should have either closed the branch or at least made an immediate independent inquiry at this juncture.¹¹
   Accordingly, finding 3 should be revised to state that the opening of the branch in violation of federal law was not based upon Respondents' good faith reliance upon the advice of counsel. Furthermore, the ALJ erred in findings 4 and 5 in giving Respondents credit for their actions to remedy the violations.

B. Assessments Adjusted

   The Board agrees with the ALJ's analysis and conclusions regarding the state law violation. However, because of our modifications to findings 3, 4, and 5, adjustments to the amounts of assessments are warranted. Accordingly, the assessments for Respondents Steven J. Hirsch, C.R. Hackworthy, Paul W. Hamblin, James W. O'Connell, William J. Radosevich, Richard R. Schmitz, and Richard O. Stout are increased from $500 to $1,000.
   The Board finds adequate factual evidence to support a lower penalty for James

C. Prohibition of Indemnification

   FDIC Enforcement Counsel urges inclusion in the Order of a provision prohibiting Respondents from accepting payment or seeking reimbursement from the Bank for any monetary penalty or legal expense, pursuant to section 2523 of the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990, Pub. L. No. 101–647, 104 Stat. 4789 (codified at section 8(k)(1) of the Act, 12 U.S.C. §1828(k)). This statute states that the Corporation may prohibit or limit, by regulation or order, any golden parachute payment of indemnification. 12 U.S.C. §1828(k)(1). Indemnification payment is defined at section 18(k)(5) of the Act, 12 U.S.C. §1828(k)(5), to include the reimbursement by any insured depository institution or depository institution holding company of any liability or legal expense with regard to any administrative proceeding which results in a final order assessing a civil money penalty.

   [.2] The Board observes that a prohibition of indemnification provision was present in the Notice, and that, if the Bank were to reimburse Respondents for the assessments or legal fees, such action would fall within the above definition of an indemnification payment. The Board also notes that this action was brought against the Respondents individually for their personal actions in causing the opening and operating of an illegal branch office, and no penalty was assessed against the Bank. In the Board's view, the penalties and legal fees should be borne by the individual Respondents since it would be unfair to require the Bank to bear the costs associated with these individual actions.

   The Board finds that Respondents caused the opening and the operation of a branch bank in Hudson, Wisconsin, for an eleven (11) day period without proper authority from the State and the FDIC. Respondents also caused the branch to operate without displaying an `official bank sign' in violation of 12 C.F.R. §328.2. Therefore, the Board finds that there is ample basis to assess the civil money penalties set forth in the following Order.

   The Board of Directors of the FDIC, having considered the entire record in this proceeding, taking into account the appropriateness of the penalty with respect to the size and financial resources and good faith of Respondents, the gravity of the violations, and such other matters as justice may require, it is: ORDERED, that by reason of violations set forth above, the following civil money penalties are hereby assessed: Respondents Steven J. Hirsch, C.R. Hackworthy, Paul W. Hamblin, James W. O'Connell, William J. Hackworthy, Paul W. Hamblin, James W. O'Connell, William J. Radosevich, Richard R. Schmitz and Richard O. Stout, $1,000.00 each, and Respondent James V. Hirsch, $500.00.
   IT IS FURTHER ORDERED, that the Executive Secretary, or his designee, is instructed to execute and serve copies of this Decision and Order on Civil Money Penalty Proceeding on counsel for all parties, on the Administrative Law Judge, and on the Commissioner of Banking for the State of Wisconsin.
   By direction of the Board of Directors.
   Dated at Washington, D.C. this 15th day of December, 1992.

/s/ Robert E. Feldman
Deputy Executive Secretary

In the Matter of
STEVEN J. HIRSCH, et al.,
BANK ST. CROIX ROBERTS, WISCONSIN
(Insured State Nonmember Bank)
Docket No. FDIC-91-24k

   CHARNO, Administrative Law Judge:
   On February 11, 1991, the Federal Deposit Insurance Corporation (Petitioner or {{2-28-93 p.A-2145}}FDIC) issued a Notice of Assessment of Civil Money Penalties (Notice) against Steven J. Hirsch, James V. Hirsch, C.R. Hackworthy, Paul W. Hamblin, Bradley C. Lundeen, James W. O'Connell, William J. Radosevich, Richard R. Schmitz and Richard O. Stout (Respondents) as individual directors and institution-affiliated parties of Bank St. Croix (Bank). The Notice sought to impose a $5,500 penalty on each of the Respondents for alleged violations of Section 18(d)(1) of the Federal Deposit Insurance Act (Act), 12 U.S.C. §1828(d)(1), Section 221.04(1)(jm)(1) of the Wisconsin Statutes, Wis. Stat. §221.04(1)(jm)(1), and Section 328.2 of the FDIC's Rules and Regulations, 12 C.F.R. §328.2, by opening a branch bank in Hudson, Wisconsin after approval to do so had been withdrawn by Petitioner and by the Commissioner of Banking of the State of Wisconsin (State).
   A hearing was held before me in Chicago, Illinois on July 2, 1991. At the conclusion of Petitioner's case-in-chief and prior to the presentation of Respondents' defense, I granted Respondents' motion for summary disposition. By Decision and Order Remanding the Proceeding for Further Determination (Decision and Order) issued December 19, 1991, the FDIC's Board of Directors reversed my Decision, found that Respondents had committed each of the violations alleged in the Notice and remanded the case to me for further hearing on "the sole issue of the amount of appropriate civil money penalties to be imposed on Respondents . . ."¹
   Pursuant to the Decision and Order, a supplemental hearing was held before me in Minneapolis, Minnesota on July 8, 1992.²At the conclusion of the hearing, the parties waived the submission of briefs and presented oral argument.

   Civil money penalties may be assessed whenever there is a violation of the statutory or regulatory promulgations which govern the relationship between a bank and its insiders. See 12 U.S.C. §§1818(i)(2). Respondents are concededly insiders by virtue of their positions as members of the Bank's Board of Directors. Because Respondents were found to have committed violations which render them liable for the payment of civil money penalties, the size of those penalties must be determined. In setting the amount of a penalty, Congress has mandated that:

the Corporation shall take into account the appropriateness of the penalty with respect to the size of the financial resources and good faith of the member bank or person charged, the gravity of the violation, the history of previous violations, and such other matters as justice may require. 12 U.S.C. §18(j)(4)(B).

In determining the amount of a civil money penalty, the agencies believe that a significant consideration should be the financial or economic benefit the Respondent obtained from the violation. . .. The removal of economic benefit will, however, usually be insufficient by itself to promote compliance with the statutory provisions. The penalty may, therefore, in appropriate circumstances reflect some additional amount beyond the economic benefit derived to provide a deterrent to future conduct. 45 Fed. Reg. 59423 (1980).

   A. Financial Resources

   The record establishes that, as of October 1, 1990, the Respondents named below enjoyed the indicated net worths:

The record is devoid of probative evidence concerning the financial ability of Respondents Lundeen and James Hirsch to pay a civil money penalty.⁴At the time of the hearing, Respondent Steven Hirsch had insufficient liquid assets to pay a $5,500 penalty and his net worth of at least $45,000 was subject to possible deterioration as a result of domestic difficulties.⁵Petitioner contends that the penalties sought in this action are nominal and that Respondents' ability to pay is therefore immaterial. I find that Respondents' financial resources are sufficient to allow them to pay the civil money penalties assessed herein.⁶

   B. Good Faith

   A brief recapitulation of the findings of fact contained in the Decision and Order is necessary in order to assess Respondents' claim of good faith. Prior to October 29, 1990, the Bank had approval from Petitioner and the State to open the Hudson branch. By letter dated October 29,⁷the Bank informed the State that the branch would be opened on November 5. By letter delivered to the Bank's President Steven Hirsch on November 1, Petitioner withdrew its approval to open the branch. By letter dated November 1, the State suspended its approval to open the branch. The State's letter was received as indicated below:

Based on advise of legal counsel that Petitioner did not have authority to withdraw approval of the branch, the Bank's Board of Directors, except for Respondents Lundeen and James Hirsch who were absent, unanimously voted on November 5 to immediately open the branch. The branch was in fact opened later that day. At the Bank's request, a meeting was held on November 8 in Chicago between representatives of Petitioner, the State and the Bank. The latter was represented by its legal counsel and all of the Respondents in this proceeding except Respondent Lundeen, who was absent. At this meeting, Petitioner and the State reasserted the positions set forth in their earlier letters and Petitioner's representative stated that civil money penalties would be assessed against Respondents unless the branch was closed immediately. Directly after the meeting, Respondents (except for Respondent Lundeen) consulted with their attorney and asked whether Petitioner could impose civil money penalties against them. Their attorney responded in the negative on the ground that Petitioner had not had authority to withdraw approval of the branch.⁸The Bank continued to operate the branch until November 16 when Petitioner's letter denying the branch application was received

   C. Gravity of the Violation

   The FDIC has traditionally measured the gravity of a respondent's violations in two ways: (1) the extent to which the respondent benefitted from those violations and (2) the effect of the violations upon the bank. Turning to the first measure, it is agreed that none of the Respondents in this proceeding received any type of economic benefit as a result of the violations previously found herein. Accordingly, I find it inappropriate for the penalty in this proceeding to include any element intended to remove such benefits. With respect to the second measure, the effect of Respondents' violations on the Bank appears to be minimal. As the FDIC's Board of Directors observed on appeal from my earlier Decision, "the violations at issue were short-lived, have been rectified, and the Bank is now operating under a consent agree-

   It is ORDERED that:
   1. By reason of their violations of law and regulation, Steven J. Hirsch, C.R. Hackworthy, Paul W. Hamblin, James W. O'Connell, William J. Radosevich, Richard R. Schmitz and Richard O. Stout is each assessed a civil money penalty in the amount of $500.00, James V. Hirsch is assessed a civil money penalty in the amount of $250.00, and Bradley C. Lundeen is assessed a civil money penalty in the amount of $5.00 pursuant to Section 8(i)(2) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(i)(2).
   2. This Order shall be effective and the ordered penalty shall be final and payable twenty (20) days from this Order's date of issuance by the Board of Directors of the Federal Deposit Insurance Corporation.
   Done at Arlington, Virginia, this 10th day of August, 1992.

/s/ Steven M. Charno
Administrative Law Judge