FDIC: 1997 - Docket No. FDIC-95-178e, FDIC-95-178e


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[¶5241] In the Matter of Morton R. Michaels, Independence Bank, Encino, California, Docket No. 95-178e (2-25-97)

FDIC adopts administrative law judge's recommended decision on default and permanently prohibits correspondent from participating in the affairs of any federally insured institution.

[.1] Answer—Failure to File—Prohibition, Removal, or Suspension
Respondent, who received actual notice of charges against him, was given numerous opportunities to participate in the proceeding, but failed to do so.

[.2] Practice and Procedure—Recommended Decisions—Failure to File Exceptions
Respondent did not file an answer, timely or otherwise, nor did he enter an appearance or otherwise participate in any manner in this proceeding until after the ALJ issued his recommended decision.

In the Matter of
MORTON R. MICHAELS,
Individually and as an institution-
affiliated party of
INDEPENDENCE BANK
ENCINO,CALIFORNIA
(Insured State Nonmember Bank —In Receivership)
DECISION AND ORDER
FDIC-95-178e

INTRODUCTION

   This uncontested matter is before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") following the issuance of an Order Reissuing Recommended Decision on Default and Waiver by Respondent Prohibiting Said Respondent From Future Participation in the Affairs of Federally Insured Depository Institutions (the "Default Order")¹ by Administrative Law Judge Walter J. Alprin (the "ALJ") on September 20, 1996. In his Default Order, the ALJ reissued his Recommended Decision dated March 22, 1996 (the "Recommended Decision")² which adopted the findings set forth in the Notice of Intention to Prohibit From Further Participation ("Notice") and recommended that Morton R. Michaels ("Respondent") be permanently prohibited from further participation in the conduct of the affairs of any insured depository institution pursuant to section 8(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(e). The ALJ also concluded that Respondent had defaulted on all motions pending before him.
   The record shows that the Notice alleged that Respondent, while president and director of Independence Bank, Encino, California ("Bank"), participated in and/or engaged in violations of applicable laws, unsafe or unsound banking practices and breaches of fiduciary duty, which caused financial loss to the Bank. Respondent received actual notice of the charges against him. He was also given numerous opportunities to participate in the proceedings, but nevertheless, failed to do so.
   Following a thorough review of the entire record, the Board concurs in and adopts the ALJ's Recommended Decision and his Default Order, as supplemented by the additional discussion below, and incorporates the Recommended Decision and Default Order herein by reference.

BACKGROUND

On December 14, 1995, the FDIC issued the Notice, seeking to prohibit Respondent from participating in the affairs of federally insured financial institutions. The Notice was personally served on Respondent. See Affidavit of Service of Process by a Private Person, December 15, 1995. Notwithstanding his actual receipt of the Notice, Respondent did not file an answer, timely or otherwise, nor did he enter an appearance or otherwise participate in any manner in this proceeding

¹ Reference to the Default Order herein shall be designated "D.O." followed by the appropriate page number.

² References to the Recommended Decision herein shall be designated "R.D." followed by the appropriate page number.
{{4-30-97 p.A-2824}}until after the ALJ issued his Recommended Decision.³
   On January 31, 1996, Enforcement Counsel moved for Entry of an Order of Default. Respondent again failed to respond. On February 27, 1996, the ALJ issued an Order to Show Cause Why Default Order Should Not Be Entered for the Relief Demanded Herein ("First Order To Show Cause"), which was personally served on Respondent. (See Affidavit of Service of Process by a Private Person, March 1, 1996). Once again, he failed to respond.
   Accordingly, the ALJ issued a Recommended Decision permanently prohibiting Respondent from further participation in the conduct of the affairs of any Federally insured depository institution. A copy was personally served on Respondent. (See Affidavit of Service of Process by a Private Person, March 28, 1996.)
   After the ALJ had issued his Recommended Decision, Respondent submitted a letter to the ALJ dated May 3, 1996. This letter did not state a reason for Respondent's failure to answer the Notice, nor did it purport to respond to the Motion For Entry Of Order Of Default or the First Order To Show Cause. Instead, the letter stated that Respondent had consciously "opted to remain silent" and not participate in the proceeding.
   On July 23, 1996, the Executive Secretary of the FDIC, pursuant to delegated authority, upon the advice and recommendation of the General Counsel, issued an Order remanding the matter to the ALJ and reopening the record in order to allow Respondent a full opportunity to participate. Based on the Remand Order, the ALJ issued an Order to Show Cause Why A Recommended Order Of Default Should Not Be Entered ("Second Order to Show Cause"). In response to the Second Order to Show Cause, Respondent wrote the ALJ by letter dated August 6, 1996. He explained that he had failed to respond previously due to the death of his attorney and pressing family matters. Further, Respondent generally denied the allegations of the Notice, and specifically responded to certain of them.⁴ However, he failed to address numerous material allegations and raised extensive issues unrelated to the Notice.
   After reviewing Respondent's letter, on August 12, 1996, the ALJ issued an Order Finding No Good Cause For Respondent's Failure To Answer The Notice Herein and Other Details, But Continuing The Matter On A Reopened Basis For Hearing Upon Compliance With Specified Conditions ("Order Finding No Good Cause").⁵ The ALJ concluded that there was "no good cause for Respondent's failure" to participate in the proceeding. N.G.C. at 4.⁶
   However, the ALJ recognized that courts are reluctant "to grant summary relief based on some admission by silence, or by default in defense," id. at 5, and reopened the record for a hearing on the allegations in the Notice. He predicated his action on Respondent's compliance with a series of conditions evidencing his continued willingness to participate in the proceeding. The ALJ explained that Respondent's failure to fulfill these obligations would result in the reissuance of a recommended default order. Id at 5–7. This order was served personally on Respondent. See D.O. at 6.
   On September 3, 1996, Enforcement Counsel filed a Motion For Reissuance Of Recommended Default Decision due to Respondent's failure to comply with the ALJ's initial

³ Paragraph 124 of the Notice directed Respondent to file an answer and request for hearing within twenty (20) days from date of service, as required in section 308.19 of the FDIC Rules of Practice and Procedure, 12 C.F.R. § 308.19. Respondent, however, failed to file an answer or otherwise respond to the Notice within the required time period.

⁴ For example, Respondent specifically denied the allegations in the Notice regarding the Robbins' loans; that the Bank's normal credit process was circumvented; that there was an absence of necessary supporting documentation and appraisals; and that he helped conceal the Robbins' loans from regulators; and that the Bank suffered loss from the Robbins' loans. Respondent failed to address the allegations that the information submitted by Robbins consisted of self-prepared and uncertified financial statements and that the Bank exceeded the lending limits for unsecured loans to any one borrower. Respondent also failed to address the factual statements regarding the history of the Robbins' loans and only generally responded to the allegation that the loans were made to influence Robbins to sponsor favorable banking legislation. Section 308.19(b) of the FDIC's Rules and Regulations prohibits such general denials and failures to address factual allegations, and therefore neither of Respondent's letters can be considered answers under the FDIC's rules.

⁵ References to the Order Finding No Good Cause herein shall be designated "N.G.C." followed by the appropriate page number.

⁶ In his Order, the ALJ recognized that while Respondent may have had personal difficulties, "there is no reason or explanation why a letter, or even a telephone call, could not have been sent or made, requesting additional time to respond had Respondent honestly intended to contest the Notice." N.G.C. at 4.
{{4-30-97 p.A-2825}}conditions.⁷ Service of this Motion was effected upon Respondent on September 4, 1996. (See Affidavit of Service of Process by a Private Person, September 4, 1996.) Respondent did not oppose this Motion.
Based on the continued failure of Respondent to participate in the proceedings and his failure to comply with the conditions ordered by the ALJ, the Default Order was issued on September 20, 1996. In issuing this Order, the ALJ found that Respondent's actions in continually failing to participate in the proceeding reflected a "knowing, willful and contemptuous default." D.O. at 6. The Default Order was personally served on Respondent. (See Affidavit of Service of Process by a Private Person, September 27, 1996.)

DISCUSSION

The Board affirms and adopts the ALJ's Recommended Decision. The Recommended Decision is supplemented by the discussion below.

   [.1,.2] This is an uncontested proceeding. The record shows that Respondent received actual notice of the proceeding through personal service of the Notice on him on three different occasions.
   Only after the ALJ had issued his Recommended Decision did Respondent write to the ALJ. However, his letter of May 3, 1996, fails to provide an excuse for his failure to answer the Notice or to respond to the Motion For Entry Of Order Of Default or the First Order To Show Cause. The facts further establish that Respondent was given additional opportunities to appear and participate in the proceeding after the matter was remanded. The ALJ found that Respondent's August 6, 1996, letter did not establish good cause for his delay in appearing in the proceeding. The ALJ stated that a general denial was not acceptable and set several conditions for Respondent's further participation in the proceeding (see footnote 8, above), one of which was to file a reply to the Notice specifically denying, admitting, or stating insufficient knowledge to each paragraph. The ALJ also imposed further conditions, the fulfillment of which would evidence Respondent's willingness to participate in the proceeding.
   The Board finds that the August 6, 1996, letter did not constitute an Answer, notwithstanding that Respondent was pro se and did not address certain of the allegations of the Notice. FDIC regulations require that an answer specifically respond to each paragraph or allegation of fact contained in the notice and admit, deny, or state that the party lacks sufficient knowledge to respond as to each allegation of fact. 12 C.F.R. § 308.19(b). Respondent's letter responded to only a small portion of the allegations of fact in the Notice. For example, Respondent argues that the Robbins liens and "all liens by the FDIC, as receiver for Independence Bank have been satisfied and released." Respondent may be referring to payment on a criminal restitution Order and/or payout from the BCCI Restitution Fund. However, that by no means would exonerate Respondent from liability under section 8(e) which allows entry of an Order of Prohibition where Respondent's acts caused a depository institution to suffer financial loss or other damage or prejudices the interests of the institution's depositors, or caused the respondent to receive...other benefit. The fact that the Bank failed would on its face appear to satisfy the first two requirements, and Respondent provided no evidence to rebut the third element. Therefore, his letter cannot be considered by any stretch of the imagination to be an adequate Answer. Even if Respondent's letters were to be considered answers, the failure to further participate in the proceeding would constitute a default.
   As the ALJ stated, Respondent had not "spoken in terms of a hearing to meet and overcome the allegations of the Notice in this proceeding, or of swearing to and proving his statements,...in an open proceeding, subject to cross examination and rebuttal." N.G.C. at 4. The Board further finds that the conditions imposed by the ALJ were reasonable and afforded Respondent numerous further opportunities to participate in the proceeding. Respondent forfeited his oppor-

⁷ Specifically, the ALJ required that Respondent affirm, in writing, by August 22, 1996, "his intention of actively participating in the hearing of this matter, through counsel or pro se." If Respondent intended to engage counsel, he was to inform the ALJ of his plans regarding that engagement. The ALJ further required that Respondent reply to the Notice by September 20, 1996, and that "general denials" would not be acceptable. Finally, he ordered Respondent or his counsel to participate in a telephonic scheduling conference with the ALJ and FDIC Enforcement Counsel on September 24, 1996.
{{4-30-97 p.A-2826}}tunities to meet the ALJ's conditions and defend himself in the proceeding.
Respondent's conduct clearly demonstrates an intentional and willful disregard of FDIC's procedural requirements as noted in several earlier default cases. See In the Matter of Kevin Jensen, State Bank of Springfield, Springfield, Minnesota, FDIC-93-240e and FDIC-93-241k (December 3, 1996); In the Matter of Raymond M. Phillips, The Greenville Banking Company, Greenville, Georgia, FDIC-94-208e (April 23, 1996); In the Matter of Harold Dean Ingram, First State Bank, Elmore City, Oklahoma, FDIC-92-343k, 2 P-H FDIC Enf. Dec. ¶5217, at A-2471 (August 2, 1994); In the Matter of Billy Gene Humphrey, Jr., Bay City Bank & Trust Co., Bay City, Texas, FDIC-93-55e, 2 P-H FDIC Enf. Dec. ¶5207, at A-2346 (November 23, 1993); In the Matter of George W. Glover, Bay City Bank & Trust Co., Bay City, Texas, FDIC-93-54e, 2 P-H FDIC Enf. Dec. ¶5206, at A-2343 (November 23, 1993). In addition to Respondent's waiver of his right to a hearing and the concomitant default, the ALJ made unopposed findings of fact which provide an additional basis for issuance of a prohibition order.
This case is patently distinguishable from decisions involving default judgments in which the Respondents, though untimely in their answer, nevertheless attempted to explain to the ALJ the reason for their tardiness, see Oberstar v. FDIC, 987 F.2d 494 (8th Cir. 1993); Amberg v. FDIC, 934 F.2d 681 (5th Cir. 1991). In the present case, Respondent has openly disregarded the ALJ's clear requirements for participation in this proceeding. Under the circumstances, it appears that Respondent has chosen consciously not to participate in the proceeding even after he has been given numerous opportunities. Consequently, the Board considers Respondent's action a waiver of his opportunity to participate in the process. Respondent, moreover, has failed to file Exceptions to the Recommended Decision or the Default Order pursuant to 12 C.F.R. § 308.39. The failure, therefore, must be deemed a waiver of any objections to the ALJ's Recommended Decision. See In the Matter of Chul Song, Empire State Bank, New York, New York, FDIC-92-140e, FDIC-92-350k, 2 P-H FDIC Enf. Dec. ¶5214, at A-2445 (May 17, 1994).

CONCLUSION

After a thorough review of the record in this proceeding, and for the reasons set forth below, the Board adopts and incorporates herein by reference the ALJ's Recommended Decision.

ORDER OF PROHIBITION

Accordingly, the Board, having considered the entire record in this proceeding, HEREBY ORDERS that, without the prior written approval of the FDIC and the appropriate federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D), Morton R. Michaels is hereby prohibited from:

   IT IS FURTHER ORDERED, that this ORDER shall become effective upon the expiration of thirty days after its service. The provisions of this ORDER will remain effective and enforceable except to the extent that, and until such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside by action of the FDIC.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 25th day of February, 1997.
/s/Robert E. Feldman Deputy Executive Secretary

___________________________________
ADMINISTRATIVE LAW JUDGE'S
RECOMMENDED DECISION TO
PROHIBIT RESPONDENT FROM
FURTHER PARTICIPATION

In the Matter of
MORTON R. MICHAELS,
individually, and as an
institution-affiliated party of
INDEPENDENCE BANK
ENCINO,CALIFORNIA
(Insured State Nonmember Bank—In Receivership)
Docket No. FDIC-95-178e (3-22-96)
Walter J. Alprin
Administrative Law Judge

STATEMENT OF THE CASE

Morton R. Michaels ("Respondent"), individually, and as an institution-affiliated party of Independence Bank, Encino, California ("Bank"), has directly or indirectly participated or engaged in unsafe or unsound banking practices, violations of law, and/or acts, omissions, or practices which constitute breaches of his fiduciary duty to the Bank. As a result of the above misconduct, the Bank has suffered or will probably suffer substantial financial loss or financial loss or other damage, and the interests of the Bank's depositors have been or could be seriously prejudiced. Respondent has received financial gain or other benefit by reason of such practices, violations and/or breaches of fiduciary duty and, that such practices, violations and/or breaches of fiduciary duty demonstrate the Respondent's personal dishonestly and/or his willful and/or continuing disregard for the safety or soundness of the Bank.

PROCEDURAL HISTORY

   On December 14, 1995, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Intention To Prohibit From Further Participation ("Notice") against Respondent. FDIC employed the services of a private process server to effect service of the Notice. On December 15, 1995, Respondent was personally served at his place of residence. Respondent failed to answer the charges within twenty days of service of the Notice pursuant to 12 C.F.R. § 308.19(a) of the FDIC Rules of Practice and Procedure. In fact, Respondent has never answered the charges.
   On January 31, 1996, Enforcement Counsel filed a Motion for a Default Judgement. Respondent failed to oppose the motion or respond. On February 27, 1996, the undersigned issued an Order To Show Cause Why A Default Order Should Not Be Entered For The Relief Demanded ("Show Cause Order"). Personal service of the Judge's Order, agency's Motion for a Default Order, and the Notice were served on Respondent at his residence on March 1, 1996. The Show Cause Order demanded Respondent respond to the order within ten days from the date of mailing. Respondent failed again to make a timely, or otherwise, response. No good cause has been shown for Respondent's default.
   Pursuant to 12 C.F.R. § 308.19(c)(1), the effect of a Respondent's failure to answer the Notice constitutes a waiver of his right to appear and contest the allegations in the notice. In addition, after receiving a Motion for Default Judgment and upon a finding that no good cause has been shown for Respondent's failure to answer, the undersigned shall file with the Board of Directors a recommended decision containing the findings and relief sought in the Notice. 12 C.F.R. § 308.19(c)(1). Accordingly, the undersigned recommends granting the Motion for Default Judgment and the issuance of an order against Respondent under the provisions of section 8(e) of the Federal Deposit Insurance Act ("Act"), as enacted in both 1982 and 1989, 12 U.S.C. § 1818(e)(1982) and 12 U.S.C. § 1818(e)(1989), prohibiting the Respondent from further participation in the conduct of the affairs of the Bank, and any other insured depository institution or organization listed in section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e)(7)(A), without the prior written approval of the FDIC and such other appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the Act, 12 U.S.C. § 1818(e)(7)(D).

FINDINGS OF FACT AND CONCLUSIONS OF LAW

   1. At all times pertinent to this proceeding, the Bank was a corporation existing and doing business under the laws of the State of California, having its principal place of business at Encino, California.
   2. Before January 30, 1992, the Bank was {{4-30-97 p.A-2828}}an insured State nonmember bank, as defined in section 3(e) of the Act, 12 U.S.C. §§ 1813(e), and as such was subject to the Act, 12 U.S.C. §§ 1811–1831t, and the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and was subject to the laws of the State of California.
   3. On or about January 30, 1992, the Bank was closed by the Superintendent of Banks for the State of California, and pursuant to section 11(c)(3)(A) of the Act, 12 U.S.C. § 1821(c)(3)(A), the FDIC was appointed receiver.
   4. On or about February 1, 1982, the Respondent was employed by the Bank as the executive vice president of the Bank, and continued to serve in that capacity until he became president of the Bank.
   5. On or about July 21, 1982, the Respondent was elected to the board of directors of the Bank, and continued to serve in that capacity until he resigned from the board of directors of the Bank on or about December 18, 1989.
   6. On or about October 1, 1984, the Respondent was elected as president of the Bank, and continued to serve in that capacity until he resigned from the position of president of the Bank on or about December 18, 1989.
   7. At all times pertinent to the charges herein, the Respondent has been an "institution-affiliated party" as that term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), and for purposed of sections 8(e)(7), 8(i) and 8(j) of the Act, 12 U.S.C. §§ 1818(e)(7), 1818(i), and 1818(j).
   8. The FDIC has jurisdiction over the Bank, the Respondent, and the subject matter of this proceeding.
   9. At all times pertinent to the charges herein, the Respondent exercised a controlling influence over the management, policies and practices of the Bank.
   10. On or about October 1, 1985, the Respondent was appointed by the Bank's board of directors to serve with Kemal Shoaib ("Shoaib") as the Executive Committee of the Bank, and Respondent continued to serve in that capacity until December 18, 1989.
   11. On or about January 23, 1986, the Bank's board of directors approved a resolution which stated that the Respondent and Shoaib "are the only officers of the Bank who do and shall participate in the policymaking functions of the Bank."
   12. The Respondent and Shoaib, as the members of the Executive Committee, were responsible for the approval, funding and oversight of the Bank's joint venture activities.
   13. Respondent engaged and/or participated in unsafe or unsound practices in connection with the Bank, violations of law, and breached his fiduciary duty to the Bank, as hereinafter described.

JOINT VENTURE ACTIVITIES

14. On or about January 23, 1986, the Bank's board of directors authorized the filing of the Bank's general plan for real property investments with the California State Banking Department.
15. The Bank's general plan for real property investments provided the following:

   16. On or about February 11, 1986, Respondent submitted an application to the Superintendent of Banks for the State of California ("Superintendent") for approval of the Bank's general plan of real property investment.
   17. On or about March 28, 1986, the Superintendent approved Respondent's request to allow the Bank to engage in real property investment.
   18. On or about November 18, 1987, the Bank's board of directors approved Respondent's request to amend the Bank's general plan for real property investment as follows:

{{4-30-97 p.A-2829}}
   19. On or about July 20, 1988, the Bank's board of directors approved Respondent's request that the Bank form a subsidiary, Sovereign Asset Management Co., Inc. ("SAMCO"), to handle the Bank's real estate investments. The term "Bank" as used herein includes SAMCO, and any other direct and/or indirect subsidiaries of the Bank.
   20. On or about July 20, 1988, Royce Bonds ("Bonds") was appointed as president of SAMCO. Bonds reported directly to the Bank's Executive Committee, who retained the authority to approve and fund new joint ventures.
   21. On or about September 28, 1988, the Bank's board of directors approved Respondent's request to increase the total limit on the Bank's joint venture investments from $20,000,000 to $32,000,000.

Excessive Amount of Investments in Joint Ventures

22. Respondent engaged in unsafe or unsound practices and breached his fiduciary duty to the Bank by investing an excessive amount of Bank funds in real estate joint ventures, and by exposing an excessive amount of the Bank's capital to the risk inherent in real estate joint ventures as described in paragraphs 23 through 28 below.
23. From March 31, 1987 through September 30, 1989, the Bank's joint venture activities included the following:

   24. From March 31, 1987 through September 30, 1989, Respondent caused the Bank's direct investment in joint ventures to increase from $2,091,000 to $24,065,197.
   25. From March 31, 1987 through September 30, 1989, Respondent caused the Bank's investment in joint ventures via third party debt with recourse to the Bank to increase from $9,325,000 to $130,846,470, for an aggregate investment ("aggregate investment") in joint ventures of $154,911,667 as of September 30, 1989.
   26. From March 31, 1987 through September 30, 1989, the Bank's total shareholders equity increased from $21,844,000 to $48,341,000.
   27. From March 31, 1987 through September 30, 1989, the Bank's direct investment in joint ventures increased from 10 percent of total shareholders equity to 50 percent of total shareholders equity, and the Bank's aggregate investment in joint ventures increased from 52 percent of total shareholders equity to 320 percent of total shareholders equity.
   28. By reason of the foregoing, the Bank suffered losses associated with its joint venture activity in excess of $42 million.

Violation of Section 751.3 of the California Financial Code

   29. Respondent, directly or indirectly, participated in a violation of section 751.3 of the California Financial Code, as described in paragraphs 30 through 39 below.
   30. As of September 30, 1987, the Bank's aggregate investment in joint ventures equaled approximately $27,081,000, exceeding the Bank's total shareholder equity of $22,435,000 by $4,646,000, in violation of section 751.3 of the California Financial Code, which provides that the total of all real property investment made by a bank shall not exceed the total shareholders equity of the bank, unless a higher percentage is approved by the Superintendent in writing.
   31. As of December 31, 1987, the Bank's aggregate investment in joint ventures equaled approximately $46,827,540, exceeding the Bank's total shareholder equity of $22,366,000 by $24,461,540, in violation of section 751.3 of California's Financial Code.
   32. As of March 31, 1988, the Bank's aggregate investment in joint ventures equaled approximately $64,558,540, exceeding the Bank's total shareholder equity of $27,723,000 by $36,835,540, in violation of section 751.3 of California's Financial Code.
   33. As of June 30, 1988, the Bank's aggregate investment in joint ventures equaled approximately $81,346,650, exceeding the Bank's total shareholder equity of $32,832,000 by $48,514,650, in violation of section 751.3 of California's Financial Code.
   34. As of September 30, 1988, the Bank's aggregate investment in joint ventures equaled approximately $136,744,790, exceeding the Bank's total shareholder equity of $34,396,000 by $102,348,790, in viola {{4-30-97 p.A-2830}}tions of section 751.3 of California's Financial Code.
   35. As of December 31, 1988, the Bank's aggregate investment in joint ventures equaled approximately $182,738,108, exceeding the Bank's total shareholder equity of $33,691,000 by $149,047,108, in violation of section 751.3 of California's Financial Code.
   36. As of March 31, 1989, the Bank's aggregate investment in joint ventures equaled approximately $180,073,698, exceeding the Bank's total shareholder equity of $34,626,000 by $145,447,698, in violation of section 751.3 of California's Financial Code.
   37. As of June 30, 1989, the Bank's aggregate investment in joint ventures equaled approximately $152,989,171, exceeding the Bank's total shareholder equity of $44,370,000 by $108,619,171, in violation of section 751.3 of California's Financial Code.
   38. As of September 30, 1989, the Bank's aggregate investment in joint ventures equaled approximately $154,911,667, exceeding the Bank's total shareholder equity of $48,341,000 by $106,570,667, in violation of section 751.3 of California's Financial Code.
   39. By reason of the foregoing, the Bank suffered losses associated with its joint venture activity in excess of $42 million.

Inadequate Policies, Review, Internal Controls & Supervision

   40. Respondent engaged in unsafe or unsound practices and breached his fiduciary duty to the Bank as president, director and member of the Executive Committee by failing to establish the Bank's real estate joint venture activities as described in paragraphs 41 through 89 below.
   41. From January 1986 through December 18, 1989, Respondent failed to establish any policies or procedures with respect to the Bank's investment in joint ventures other than the general plan referred to in paragraphs 14 and 18 above.
   42. From January 1986 through December 18, 1989, Respondent approved the Bank's investment in joint ventures without adequate review, appraisals, documentation, and financial information with respect to the following joint ventures: Fairbanks Ranch Associates, Farrell-Ramon Associates, Landmark Plaza Associates, Santa Barbara Turnpike, Old Towne Mall Associates, Harbor Plaza Associates, Banning Associates, Ridgeline Park Associates, Owensmouth Associates, Canyon Associates and Wilshire Fairfax Associates.
   43. From January 1986 through December 18, 1989, Respondent failed to adequately control, monitor and/or supervise the expenditure of joint venture funds by the Bank's joint venture partners with respect to the following joint ventures: Fairbanks Ranch Associates, Farrell-Ramon Associates, Landmark Plaza Associates, Santa Barbara Turnpike, Old Towne Mall Associates, Harbor Plaza Associates, Banning Associates, Ridgeline Park Associates, Owensmouth Associates, Canyon Associates, and Wilshire Fairfax Associates.
   44. The Bank's joint venture partners in the Farrell-Ramon Associates, Landmark Plaza Associates, Santa Barbara Turnpike, Old Towne Mall Associates, Harbor Plaza Associates, Banning Associates, Ridgeline Park Associates, Owensmouth Associates, Canyon Associates and Wilshire Fairfax Associates joint ventures were part of a group of companies known collectively as the City Center Group of Companies ("City Center"), whose chairman of the board was Malcolm Kingston ("Kingston").

Landmark Plaza Associates

   45. On or about October 15, 1987, Respondent and Shoaib, as members of the Executive Committee, approved an investment of $1,000,000 in a joint venture to be formed with Forest Avenue Partners, a partnership consisting of Alec J. Glasser ("Glasser") and City Center (Laguna), Inc., a City Center entity, entitled "Landmark Plaza Associates."
   46. On or about October 28, 1987, the Bank and Forest Avenue Partners entered into a joint venture agreement to form Landmark Plaza Associates. Pursuant to this joint venture agreement, the Bank was to contribute $1,000,000 in cash as capital in exchange for 50 percent ownership and a priority return of the lesser of the Bank's prime rate or ten percent. Forest Avenue Partners was not required to make an initial cash contribution for its 50 percent interest in the joint venture.
   47. Respondent approved the Bank's formation of the Landmark Plaza Associates joint venture without performing an {{4-30-97 p.A-2831}}appraisal review of the existing appraisal, or ordering or receiving an independent appraisal on the underlying real estate. No independent appraisal was ordered by the Bank until four years after the joint venture was formed.
   48. Respondent failed to adequately protect the Bank's investment in Landmark Plaza Associates by allowing Glasser to take complete and unsupervised control of the project.
   49. Respondent failed to adequately control and supervise the use of Landmark Plaza Associates funds during Respondent's tenure at the Bank, as follows:

50. Respondent failed to ensure that Glasser complied with the terms and provisions of the Landmark Plaza Associates joint venture agreement, including, but not limited to, the following provisions:

   51. From December 31, 1987 to May 31, 1991, the Bank advanced approximately $6,600,473 to or for the benefit of Landmark Plaza Associates, without collecting any funds from Landmark Plaza Associates.
   52. The FDIC, as receiver of the Bank, currently owns the underlying property, which has an estimated net recovery value of approximately $4,977,300.
   53. By reason of the foregoing, the Bank's investment in Landmark Plaza Associates has resulted in a loss of approximately $1,623,173 to the Bank.

Farrell-Ramon Associates

   54. On or about May 31, 1988, Respondent and Shoaib, as the members of the Executive Committee, approved an investment of $1,500,000 in a joint venture to be formed with City Center Wilshire Holdings, Inc., a City Center entity, entitled "Farrell-Ramon Associates."
   55. On or about June 1, 1988, the Bank and City Center Group, Inc., another City Center entity, entered into a joint venture agreement to form Farrell-Ramon Executive Center. Pursuant to this joint venture agreement, the Bank was to contribute $1,500,000 in capital in the form of letters of credit in exchange for 50 percent ownership. City Center Group, Inc. was not required to make any initial cash contribution to the joint venture for its 50 percent interest in the joint venture.
   56. On or about June 1, 1988, City Center Group, Inc. assigned its interest in FarrellRamon Associates, formerly Farrell-Ramon Executive Center, to City Center Wilshire Holdings, Inc.
   57. Respondent approved the Bank's formation of the Farrell-Ramon Associates joint venture without ordering or receiving an appraisal on the underlying real estate, obtaining financial statements from either City Center Group, Inc. or City Center Wilshire Holdings, Inc., a feasibility study or any independent information to support the City Center entities' profit estimates. No appraisal was ordered by the Bank until four months after the joint venture was formed.
   58. Respondent failed to adequately protect the Bank's investment in Farrell-Ramon Associates by allowing the City Center entities to take complete and unsupervised control of the project.
   59. Respondent failed to adequately control and supervise the use of Farrell-Ramon Associates funds, allowing approximately $279,940 in Farrell-Ramon Associates funds to be diverted to City Center, City Centerrelated entities, and other City Center joint ventures during Respondent's tenure at the Bank.
   60. Respondent failed to ensure that City Center Wilshire Holdings, Inc. complied with the terms and provisions of the Farrell- {{4-30-97 p.A-2832}}Ramon Associates joint venture agreement, including, but not limited to, the following provisions:

61. From March 31, 1989 to June 30, 1994, the Bank and the FDIC as its receiver, advanced approximately $2,562,265 to or for the benefit of Farrell-Ramon Associates, while collecting approximately $607,931 and receiving sales proceeds of $1,416,000.
62. By reason of the foregoing, the Bank's investment in Farrell-Ramon Associates resulted in a net loss of approximately $538,334 to the Bank.

Santa Barbara LCC Hotel Associates

   63. On or about May 6, 1988, an agreement and escrow instructions were executed between Turnpike Lodges, a California limited partnership, and Santa Barbara City Center Hotel Associates, a California joint venture consisting of the Bank and City Center Hotels, Inc., a City Center entity, for the purchase of a 72.5 percent interest in certain real property in Santa Barbara, California ("Santa Barbara Property"). This purchase agreement was executed by Kingston, as chairman of the board of City Center Hotels, Inc., the "authorized" joint venturer of Santa Barbara City Center Hotel Associates.
   64. On or about May 18, 1988, the Bank and LCC Hotels, Inc., a California corporation, entered into a joint venture agreement to form Santa Barbara LCC Hotel Associates for the purpose of acquiring the Santa Barbara Property. Pursuant to this joint venture agreement, the Bank was to contribute $2,300,000 in cash as capital in exchange for a 50 percent interest in the joint venture.
   65. Pursuant to the Santa Barbara LCC Hotel Associates joint venture agreement, LCC Hotels, Inc. was not required to make any initial cash contribution to the joint venture for its 50 percent interest in the joint venture, but was required to contribute all of its rights and interests in the purchase agreement with Turnpike Lodges. The joint venture was required to assume all of the obligations of LCC Hotels, Inc. under the Turnpike Lodges purchase agreement, including a $6,000,000 note payable to Santa Barbara Savings & Loan Association.
   66. On or about May 20, 1988, LCC Hotels, Inc., which was owned by Kingston, Paul Hoover, Larry Shupnick, and Ashok Advani, filed its Articles of Incorporation with the State of California.
   67. On or about June 6, 1988, Respondent and Shoaib, as the members of the Executive Committee, approved the Bank's investment of $2,300,000 in the Santa Barbara LCC Hotel Associates joint venture, and the assumption of the $6,000,000 note payable to Santa Barbara Savings & Loan Association.
   68. On or about June 14, 1988, Respondent and Shoaib, as the members of the Executive Committee, approved the Bank's execution of loan documents with Santa Barbara Savings & Loan Association in connection with the Santa Barbara LCC Hotel Associates joint venture.
   69. On or about June 17, 1988, the purchase agreement was amended to change the name of the buyer from Santa Barbara City Center Hotel Associates to Santa Barbara LCC Hotel Associates.
   70. Santa Barbara LCC Hotel Associates entered into a joint venture entitled "Santa Barbara Turnpike Associates" with Turnpike Lodges to be effective upon the date of the close of escrow of the May 6, 1988 purchase agreement. Bonds executed this agreement on behalf of the Bank.
   71. On or about July 1, 1988, Respondent and Shoaib, as the members of the Bank's Executive Committee, approved and ratified Bond's actions with respect to Santa Barbara LCC Hotel Associates, and gave Bonds sole authority to act on behalf of the Bank with respect to Santa Barbara LCC Hotel Associates.
   72. Respondent approved the Bank's formation of the Santa Barbara LCC Hotel Associates joint venture without ordering or receiving an independent appraisal on the Santa Barbara Property.
   73. Respondent failed to adequately protect the Bank's investment in Santa Barbara LCC Hotel Associates by allowing an affili- {{4-30-97 p.A-2833}}ate of LCC Hotels, Inc., Laral Hotels, Inc. ("Laral"), to take complete and unsupervised control of the Santa Barbara Property.
   74. Respondent failed to adequately control and supervise the use of Santa Barbara LCC Hotel Associates funds, allowing funds to be diverted to City Center, City Centerrelated entities, Laral and Laral-related entities during Respondent's tenure at the Bank.
   75. Respondent failed to ensure that LCC Hotels, Inc. complied with the terms and provisions of the Santa Barbara LCC Hotel Associates and/or Santa Barbara Turnpike Associates joint venture agreements, including, but not limited to, the following provisions:

76. From January 31, 1988 to December 31, 1993, the Bank and the FDIC as its receiver advanced approximately $4,280,201 to or for the benefit of Santa Barbara LCC Hotel Associates and/or Santa Barbara Turnpike Associates, while collecting only approximately $846,135.
77. By reason of the foregoing, the Bank's investment in Santa Barbara LCC Hotel Associates and Santa Barbara Turnpike Associates resulted in a net loss of approximately $3,434,066 to the Bank.

Fairbanks Ranch Associates

   78. On or about October 24, 1988, Respondent and Shoaib, as the members of the Executive Committee, approved a maximum investment of $1,800,000 in a joint venture to be formed with Glasser entitled "Fairbanks Ranch Associates."
   79. On or about November 9, 1988, the Bank and Glasser entered into a joint agreement to form Fairbanks Ranch Associates. Pursuant to this joint venture agreement, the Bank was to contribute $1,800,000 in cash as capital in exchange for 50 percent ownership and a 12 percent priority return. Glasser was not required to make any initial cash contribution for this 50 percent interest in the joint venture.
   80. Respondent approved the Bank's formation of the Fairbanks Ranch Associates joint venture without ordering or receiving an appraisal on the underlying real estate. No appraisal was ordered by the Bank until thirty-one months after the joint venture was formed.
   81. Respondent failed to adequately protect the Bank's investment in Fairbanks Ranch Associates by allowing Glasser to take complete and unsupervised control of the project.
   82. Respondent failed to adequately control and supervise the use of Fairbanks Ranch Associates funds, allowing approximately $262,183 in Fairbanks Ranch Associates funds to be diverted to Glasser, Glasserrelated entities, and/or Glasser's partners during Respondent's tenure at the Bank.
   83. Respondent failed to ensure that Glasser complied with the terms and provisions of the Fairbanks Ranch Associates joint venture agreement, including, but not limited to, the following provisions:

84. From November 30, 1988 to December 31, 1991, the Bank advanced approximately $4,145,907 to or for the benefit of Fairbanks Ranch Associates, while collecting only approximately $522,302.
85. By reason of the foregoing, the Bank's investment in Fairbanks Ranch Associates resulted in a net loss of approximately $3,623,605 to the Bank.

Other City Center Joint Ventures

86. From January 1986 through December 18, 1989, Respondent and Shoaib, as members of the Executive Committee, approved the Bank's entry into the following joint ventures with City Center entities: Old Towne Mall Associates, Harbor Plaza Asso {{4-30-97 p.A-2834}}ciates, Banning Associates, Ridgeline Park Associates, Owensmouth Associates, Canyon Associates and Wilshire Fairfax Associates (collectively referred to as "City Center Joint Ventures").
87. Respondent approved the City Center Joint Ventures notwithstanding that each of them had at least one of the following deficiencies:

88. Respondent failed to adequately control and supervise the use of City Center Joint Venture funds, allowing funds to be diverted to City Center and/or City Centerrelated entities during Respondent's tenure at the Bank.
89. By reason of the foregoing, the Bank's investment in the City Center Joint Ventures resulted in losses of approximately $27,161,804.

ALAN ROBBINS LOANS

90. From January 14, 1985 through December 18, 1989, Respondent was responsible for the Bank's lending relationship with Alan E. Robbins ("Robbins"), who was a member of the California Senate until November 1991.
91. Respondent engaged in unsafe or unsound practices and breached his fiduciary duty to the Bank by:

   92. From January 14, 1985 through December 18, 1989, Respondent circumvented the Bank's normal credit approval process by having loans made by the Bank to Robbins approved solely by himself or by Respondent and Shoaib at Executive Committee meetings.
   93. Respondent approved extensions of credit to Robbins based on financial information submitted by Robbins which consisted solely of self-prepared and uncertified financial statements, without any supporting documentation or appraisals which supported the value of assets claimed by Robbins.
   94. Respondent approved extensions of credit to Robbins which violated the Bank's credit policy by exceeding the limits on unsecured credit to any one borrower, and which met the criteria to be considered undesirable loans in violation of the Bank's credit policy.
   95. During the course of Respondent's lending relationship with Robbins, Robbins sponsored state banking legislation designed to assist the Bank and the Bank's control owner, Dr. Ghaith R. Pharaon.
Loans Extended to Robbins

96. From January 14, 1985 to November 24, 1987, the balance of unsecured real estate development loans extended to Robbins by the Bank increased from $900,000 to $3,520,000.
97. On or about June 14, 1988, Respondent approved a loan approval request for an unsecured real estate development loan to Robbins in the amount of $3,570,000, in order to renew and consolidate the following outstanding unsecured real estate development loans previously made by the Bank to Robbins:

   98. On or about June 30, 1988, Robbins executed a promissory note in the amount of $3,570,000 to the Bank. The Bank assigned loan number 10009899 to this Robbins loan.
   99. On or about August 10, 1988, the Bank extended another unsecured real estate development loan, loan number 10009921, in the amount of $725,000 to Robbins.
   100. On or about September 1, 1988, Respondent confirmed in writing to James Brown, 1st Vice President, Security Pacific National Bank ("SPNB") the following:

   101. On or about September 8, 1988, the Bank received a wire transfer from SPNB in the amount of $3,500,000, of which $2,575,996.67 was used to pay off loan number 10009899, $726,450 was used to pay off loan number 10009921, and $197,553.33 was used to purchase a cashier's check, check number 017788, made payable to Robbins.
   102. The FDIC and the California State Banking Department conducted a concurrent examination of the Bank as of September 30, 1988 ("1988 Examination").
   103. Respondent failed to disclose the existence of his September 1, 1988 agreement with SPNB, or the existence of the Bank's irrevocable commitment to retire the Robbins debt at SPNB to examiners at any time during the 1988 Examination.
   104. On or about November 2, 1988, Respondent and Shoaib, as the members of the Executive Committee, approved the extension of $3,600,000 in unsecured real estate development loans to Robbins for the purpose of retiring Robbins' debt at SPNB.
   105. On or about November 7, 1988, Robbins executed a promissory note to the Bank in the amount of $3,500,000 for loan number 10009979, the proceeds of which were used to retire Robbins' debt at SPNB, and a second promissory note to the Bank in the amount of $100,000 for loan number 10009980, the proceeds of which were disbursed to Robbins in the form of a cashier's check, check number 074011, made payable to Robbins in the amount of $100,000.
   106. On or about December 27, 1988, the Bank extended loan number 10010023 in the amount of $150,000 to Robbins, the proceeds of which were disbursed to Robbins in the form of a cashier's check, check number 419452, made payable to Robbins in the amount of $150,000.
   107. On or about February 3, 1989, the Bank extended loan number 10010047 in the amount of $500,000 to Robbins, for the purpose of renewing and consolidating the outstanding balances of loan numbers 10010023 and 10009980, and $250,000 of the outstanding balance of loan number 10009979.
   108. On or about February 7, 1989, the Bank extended loan number 10010052 in the amount of $3,250,000 to Robbins, for the purpose of renewing the remaining outstanding balance of $3,250,000 of loan number 10009979.
   109. On or about February 7, 1989, the Bank also extended loan number 10010051 in the amount of $350,000 to Robbins, the proceeds of which were disbursed to checking account number 909916 at the Bank.
   110. On or about April 3, 1989, the Bank received a wire transfer from SPNB in the {{6-30-98 p.A-2836}}amount of $4,143,555.95, which was used to pay off loan number 10010047, 10010051, and 10010052.
   111. On or about June 2, 1989, the Bank extended loan number 10010146 to Robbins in the amount of $2,880,000 on an unsecured basis, which was substantially renewed and increased to $3,380,000 on or about March 7, 1990.
   112. The FDIC adversely classified the Bank's loan to Robbins as "Loss" in the amount of $3,380,000 at its November 25, 1991 examination of the Bank.
   113. By reason of the foregoing, the Bank suffered losses of approximately $3,380,000.
   114. By reason of the foregoing, Respondent received the benefit of Robbins' political influence.

CONCLUSION AND RECOMMENDATION

   1. As a result of the Respondent's foregoing acts, omissions and/or practices, the Respondent has engaged and/or participated in unsafe or unsound banking practices in connection with the Bank.
   2. Further, as a result of the Respondent's foregoing acts, omissions and/or practices, the Respondent committed violations of law.
   3. Further, as a result of the Respondent's foregoing acts, omissions and/or practices, the Respondent has breached his fiduciary duty to the Bank.
   4. As a result of the practices, violations and breaches as specified in paragraphs 14 through 112, the Bank has suffered or will probably suffer substantial financial loss or financial loss or other damage.
   5. As a result of the practices, violations and breaches as specified in paragraphs 14 through 112, the interests of the Bank's depositors have been or could be seriously prejudiced or prejudiced.
   6. As a result of the practices, violations and breaches as specified in paragraphs 14 through 112, Respondent has received financial gain or other benefit.
   7. The acts, omissions and/or practices of the Respondent as set forth in paragraphs 14 through 112 demonstrate a willful and/or continuing disregard for the safety or soundness of the Bank and/or evidence the Respondent's personal dishonesty.
   8. Accordingly, a permanent order should be issued to prohibit the Respondent from further participation in the conduct of the affairs of the Bank and any insured depository institution or organization enumerated in section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e)(7)(A), without the prior permission of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the Act, 12 U.S.C. § 1818(e)(7)(D).
   SO ORDERED this 22nd day of March, 1996.

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