[¶5267] In the Matter of Charles F. Watts, Farmers Bank of Vine Grove, Vine
Grove, Kentucky, Docket Nos. 98-046e, 98-044k (8-6-02).
The FDIC Board adopted the conclusion of the administrative law judge
and assesses both a Civil Money Penalty in the amount of $304,000, and
an Order to Prohibit based on evidence that the Respondent had
willfully committed unsafe or unsound practices and breach of fiduciary
duty and violated laws or regulations.
[.1] Regulation OExtension of CreditRelated Interest
Respondent authorized unsecured extensions of credit to related
interests to cover overdraft activity.
A Cease and Desist Order was issued based on findings of insider abuse
through liberal and improper use of overdrafts, many violations of law
and regulation, an unacceptable level of classified assets, lax
underwriting standards, weak credit administration, and a decreasing
level of capital.
[.3] Fund Manipulations and diversion of Loan Proceeds
Respondent concealed the use of loan proceeds for his own personal
benefit resulting in losses to Bank.
[.4] Prohibition, Removal or SuspensionMisconduct
Respondent had numerous Regulation O violations as well as multiple
violations of the Cease and Desist Order.
[.5] Prohibition, Removal or SuspensionEffects test, loss to Bank
The charge offs required because of misconduct resulted in a loss to
[.6] Prohibition, Removal or SuspensionCulpability Requirement
The Board found that the Respondent had engaged in personal dishonesty
and willful disregard to abnormal risk of loss or harm.
The statutory requirements for a CMP have been proven.
[.8] Civil Money Penalties (CMP)Ability to PayEvidence of Wealth
Determination the CMP required consideration of the size of financial
resources of the person charged. Respondent has refused to provide any
information whatsoever regarding his financial condition. Since the
Respondent refused to produce pertinent materials he is barred from
challenging the assessment.
[.9, .13] Civil Money Penalties (CMP)Punishment and Deterrent
The CMP of $304,000 issued by the ALJ and upheld by the Board serves to
both adequately punish the Respondent and create a deterrent to others,
achieving the goals of the statute.
[.10] AdmissionsFailure to Respond to Proceedings
All of the underlying factual allegations supporting the charges have
been admitted by virtue of Respondent's failure to respond. Moreover,
a default judgment would be appropriate because as a practical matter,
the proceeding was uncontested.
[.11] Prohibition, Removal or SuspensionBank Affairs, Conduct of Denied
In the Matter of
CHARLES F. WATTS,
individually, and as an institution-affiliated party of
FARMERS BANK OF VINE GROVE VINE GROVE, KENTUCKY (Insured State Nonmember Bank)
DECISION AND ORDER
TO PROHIBIT FROM
AND ASSESSMENT OF
CIVIL MONEY PENALTY
This matter is before the Board of Directors ("Board") of
the Federal Deposit Insurance Corporation ("FDIC") following the
issuance on May 1, 2002, of a Recommended Decision and Order by
Administrative Law Judge Ann Z. Cook ("ALJ") ("Recommended
Decision") granting FDIC Legal Division Enforcement Counsel's
("Enforcement Counsel") Motion for Summary Disposition and
Assessment of Civil Money Penalty. For the reasons discussed below, the
Board affirms the Recommended Decision, as supplemented, and issues an
Order of Prohibition and Assessment of a Civil Money Penalty against
Charles F. Watts ("Respondent" or "Watts").
II. PROCEDURAL BACKGROUND
The FDIC initiated this action on February 13, 2001, pursuant to
sections 8(e) and 8(i)(2) of the Federal Deposit Insurance Act ("FDI
Act"), 12 U.S.C. §§ 1818(e) and (i)(2). A Notice of Intention to
Prohibit From Further Participation, Notice of Assessment of Civil
Money Penalty, Findings of Fact and Conclusions of Law, Order to Pay,
and Notice of Hearing ("Notice") was issued against Respondent,
individually, and as an institution-affiliated party of Farmers Bank of
Vine Grove, Vine Grove, Kentucky ("Bank").
Respondent in his role as president and a member of the Bank's board
of directors, is charged with engaging in unsafe or unsound banking
practices, breaches of fiduciary duty, and violations of laws, rules,
and regulations, and a cease and desist order. The Notice cites many
violations of Regulation O of the Board of Governors of the Federal
Reserve System ("Federal Reserve Board"), 12 C.F.R. part 215,
violations of a 1998 cease and desist order ("Cease and Desist
Order"), and unsafe or unsound banking practices including improper
fund manipulations, failing to record or perfect security interests,
renewing or restructuring loans in contravention of the Bank's
policies and unauthorized withdrawal and diversion of borrower funds.
Enforcement Counsel alleged that this conduct resulted in a gain to
Respondent and a loss to the Bank and evidenced Respondent's
continuing or willful disregard for the safety and soundness of the
Following the issuance of the Notice, the Respondent, in a March 7,
2001, letter to FDIC Associate Director John L. Lane, requested a
hearing and submitted the following general denial of the charges
outlined in the Notice: "I Charles F. Watts deny any wrong doings in
the above mentioned matters." Two weeks later, on March 21, 2001,
Enforcement Counsel, pursuant to sections 308.10, 308.11 and 308.19(b)
of the FDIC Rules of Practice and Procedure ("Rules"), 12 C.F.R.
§§ 308.10, 308.11 and 308.19(b), filed a Motion for Specific
Responses to the Allegations of Fact in the Above-Captioned Cases, and
that Respondent's Answers be Properly Served and Filed in Accordance
with FDIC Rules of Practice and Procedure.
On April 3, 2001, the ALJ granted Enforcement Counsel's motion and
issued an order ("April 3, 2001 Order") directing Respondent to
respond specifically to the facts contained in the Notice as required
under §308.19(b). The ALJ further ordered Respondent to properly
file and serve his responses within 20 days from the issuance of the
April 3, 2001 Order, in accordance with §§ 308.1011.
In an April 20, 2001, letter to the ALJ, Respondent repeated his
general denial but once again failed to provide specific responses as
required by the Rules and the ALJ's April 3, 2001 Order. As was the
case with his first general denial, Watts's April 20 letter was not
filed and served in accordance with the Rules.
On May 3, 2001, Enforcement Counsel filed, pursuant to §308.19(b), a
Motion to Declare as Admitted All Undenied Allegations of Fact in
FDIC's Notice. Thereafter, on June 6, 2001, the ALJ issued an Order to
Show Cause notifying Respondent that unless he showed good cause for
not filing specific responses and filed such responses within 20
working days, the allegations in
the Notice would be deemed admitted.
Watts replied by letter dated June 30, 2001, in which he generally
denied the allegations but provided neither specific responses nor good
cause. On July 13, 2001, the ALJ issued an Order Declaring as Admitted
All Undenied Allegations of Fact ("July 13, 2001 Order").
On October 16, 2001, Enforcement Counsel, pursuant to section 308.25 of
the FDIC Rules of Practice and Procedure, 12 C.F.R. §308.25, served
on Respondent FDIC's First Request For Production of Documents To
Respondent Charles F. Watts ("Document Request") to obtain for
the civil penalty phase of this case information regarding
Respondent's financial condition. On November 11, 2001, Enforcement
Counsel received a one-page letter from Respondent stating that he had
none of the documents that Enforcement Counsel had requested regarding
certain corporate entities, that the FDIC already had his tax
returns,1 that he would agree to sign a prohibition order
but not pay a civil penalty, and that he had been advised by legal
counsel not to provide the requested information due to other matters
involving the U.S. Department of Justice. Respondent's letter was not
served and filed in accordance with §§ 308.1011.
On November 27, 2001, Enforcement Counsel, pursuant to
§308.25(f)(1), filed a Motion to Compel Production of Documents by
Issuance of a Subpoena Compelling Production ("Motion to
Compel"). Respondent did not respond to Enforcement Counsel's
Motion to Compel. On December 10, 2001, the ALJ issued an Order
Granting Motion to Compel ("Order to Produce") and a Subpoena
Duces Tecum ordering Respondent to produce to Enforcement Counsel on
December 20, 2001, documents responsive to the Document Request.
Respondent produced no documents in response to the subpoena and Order
Enforcement Counsel, on March 5, 2002, filed, pursuant to section
308.29(b) of the FDIC Rules of Practice and Procedure, 12 C.F.R.
§308.29(b), a Notice of Motion and Motion for Summary Disposition
and Assessment of Civil Money Penalty ("Motion for Summary
Disposition"). In support of its Motion for Summary Disposition,
Enforcement Counsel submitted a Memorandum of Points and Authorities, a
Statement of Material Facts as to Which There is No Genuine Issue, and
a sworn Affidavit of FDIC Examiner-in-Charge Donald K. Buford
("Buford Affidavit") and exhibits thereto. The same day,
Enforcement Counsel also filed a Motion for Sanctions seeking an order
prohibiting Respondent from offering evidence in opposition to the
assessment of a civil money penalty ("CMP") or contesting a
finding that he should be assessed a CMP in the amount of $304,000.
In response, Respondent submitted a one-page letter dated March 6, 2002
("March 6, 2002 Letter"), opposing the motions generally and
requesting that the FDIC proceedings against him be suspended pending
the resolution of a related criminal proceeding.2
Respondent also stated in the letter that he was unable to pay a
$304,000 judgment and that he had been advised not to submit any
information in this matter. Respondent's March 6, 2002 letter was not
filed and served in accordance with §308.1011.
On March 8, 2002, the ALJ issued an Order Accepting Letter as Motion to
Stay ("March 8, 2002 Order") which stated that Enforcement
Counsel could respond in accordance with section 308.23 of the FDIC
Rules of Practice and Procedure, 12 C.F.R. §308.23. Pending
resolution of Respondent's Motion to Stay, the ALJ lifted the deadline
for Respondent to respond to Enforcement Counsel's Motion for Summary
Disposition. On March 13, 2002, because Enforcement Counsel had not
received a copy of Respondent's March 6, 2002 letter until March
11,3 ALJ Cook issued a related Order on Deadline for
Response to Motion which provided that for purposes of responding to
Respondent's March 6th letter, March 11th would be the effective date
of service on Enforcement Counsel.
1 The record in this proceeding does not
include any of Respondent's tax returns or related documents.
2 On February 4, 2002, in a six-count
indictment in the United States District Court for the Western District
of Kentucky, Respondentin his role as president of the Bankwas
charged with misapplication of bank funds and making false entries in
bank records in violation of 18 U.S.C §§ 656 and 1005. A copy of the
indictment is attached as Exhibit 4 to Enforcement Counsel's Response
in Opposition to Motion to Stay.
3 Respondent did not serve the March 6, 2002
letter on Enforcement Counsel in accordance with §308.11. After
receiving the ALJ's March 8, 2002 Order, Enforcement Counsel obtained
a copy of the letter from the Office of Financial Institution
On March 21, 2002, Enforcement Counsel filed a Response in Opposition
to Respondent's Motion for Stay of Proceedings. On March 25, 2002, the
ALJ issued an Order Denying Stay and directing the Respondent to
respond by April 12, 2002 to the pending motion for summary
disposition. Respondent submitted nothing further in this matter.
On May 1, 2002, the ALJ issued the Recommended Decision and Order in
which the ALJ concluded that Respondent's conduct warranted a
prohibition order and a CMP in the amount of $304,000. The ALJ found
that Respondent had willfully committed unsafe or unsound practices and
breaches of fiduciary duty and violated laws or regulations. R.D. at
4.4 In addition, the ALJ concluded that Respondent's
misconduct had caused the Bank to suffer losses and prejudiced
depositors' interests. Id. The ALJ further found
Respondent's pattern of misconduct warranted a second tier CMP.
Id. at 45. The ALJ also ruled that, based on Respondent's
failure to produce documents in response to the Order and subpoena,
sanctions were appropriate. Id. at 23. The ALJ included an
Order granting sanctions ("Order on Sanctions") in the
Recommended Decision. R.D. at 5. The ALJ also concluded that
Enforcement Counsel was entitled to summary judgment because (1) no
genuine issues of material fact were in dispute as all allegations of
fact were deemed admitted by the July 13, 2001 Order, and (2)
Enforcement Counsel had demonstrated through its points and authorities
in support of Motion for Summary Disposition, the Buford Affidavit and
other supporting materials, that a prohibition and second tier CMP were
warranted. Id. at 34.
Neither party filed exceptions to the ALJ's Recommended Decision.
For the reasons set forth, the Board finds that the record
contains substantial evidence supporting both an Order to Prohibit
pursuant to section 8(e) of the FDI Act and the assessment of a CMP in
the amount of $304,000 pursuant to section 8(i) of the FDI Act. The
Board, therefore, affirms and adopts the ALJ's Recommended Decision
and agrees with the ALJ's determination that the facts alleged in the
Notice and deemed admitted by the ALJ's July 13, 2001 Order form
sufficient legal bases to impose a prohibition and to assess a
CMP. R.D. at 4. The Recommended Decision is supplemented below by
discussion of several matters.
A. Factual Summary and Conclusions of Law
Respondent was employed at the Bank and served as president, chief
executive officer, and a member of the Bank's board of the directors
from November 1, 1992, until he resigned on November 12, 1998. As such,
Respondent was an "institution-affiliated party" of the Bank as
defined in section 3(u) of the FDI Act, 12 U.S.C. §1813(u), and for
purposes 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). S.F. ¶ 3, 4. During the
relevant time period, the Bank was a corporation, existing and doing
business under the laws of the Commonwealth of Kentucky, with its
principal place of business at Vine Grove, Kentucky. The Bank is and
was during the pertinent time period an insured state nonmember bank.
S.F. ¶ 1.
This proceeding involves Respondent's activities at the Bank in the
nearly two-year period between December 1996 and November 1998. During
that time Respondent intentionally engaged in a series of transactions
that constituted violations of Regulation O of the Federal Reserve
Board, violations of the 1998 Cease and Desist Order, and other unsafe
or unsound practices including fund manipulations and unauthorized
diversions of loan proceeds.
Respondent and his wife, Carolyn Watts, engaged in a number of
business deals with Steven and Karen Welch ("Welches"). Their
business interests included Westport Food Mart, Inc.
("Westport"), WE WA, Inc. ("WE WA") and W & W Rentals, Inc.
("WW"). S.F. ¶ 8. Respondent, his wife and the Welches were
makers and guarantors of, and therefore personally liable for, nine
extensions of credit to WE WA and WW at four other financial
institutions located in Kentucky:
4 Citations to the record shall be as follows:
Recommended Decision "R.D. at "
Statement of Material Facts As To Which There Is No Genuine Issue "S.F. ¶ "
Affidavit of FDIC Examiner Donald K. Buford "Buford Affidavit ¶ " or "Buford Affidavit Exhibit at " (referring to Bates stamped page numbers).
First Citizens Bank, The Cecilian
Bank, Republic Bank & Trust Company, and PNC Bank. S.F. ¶ 9a-d. To
make payments on those loans Respondent authorized overdrafts on the
Westport and WW demand deposit accounts ("DDA") at the Bank. S.F.
Regulation O governs the permissible lending relationships between a
financial institution and its executive officers, directors, principal
shareholders and their related interests. Regulation O prohibits a bank
from making an extension of credit to one of the above-described
categories of persons and related interests unless the extension of
credit falls within limits permitted by the regulations. As an officer
and director of the Bank. Respondent was an insider under Regulation O.
12 C.F.R. §215.2(h). For purposes of Regulation O, any transaction
whereby an insider becomes obligated either directly or indirectly to
pay money to his or her bank is an extension of credit to that insider.
Regulation O provides that an extension of credit is considered to be
made to an insider to the extent that the proceeds are transferred to
the insider or are used for the tangible economic benefit of the
insider. 12 C.F.R. §215.3(f). S.F. ¶ 10d.
Between December 30, 1996 and January 12, 1998, Respondentto make
payments on the above loansauthorized the final payment of 38
overdrafts on the Westport and WW DDA accounts. S.f. ¶ 10. The
overdrafts were extensions of credit under 12 C.F.R. §215.3(a)(2).
Because these overdrafts were used to amortize the debt that Respondent
had personally guaranteed at the four other financial institutions,
Respondent received an extension of credit subject to Regulation
O. S.F. ¶ 9-10, 12.
To cover the overdraft activity in the Westport DDA, Respondent caused
the Bank to extend credit to Westport and WE WA. On April 26, 1996, he
caused the Bank to extend $145,000 in credit to WE WA. S.F.
¶ 11. Of that amount, $135,000 was used to pay down outstanding
overdrafts in the Westport DDA. S.F. ¶ 11. The WE WA loan was to
be secured by a third lien on the Westport collateral, but Respondent
did not perfect the lien. S.F. ¶ 11. On June 27, 1997, Respondent
caused the Bank to extend $185,000 in unsecured credit to Westport once
again for the purpose of reducing overdrafts in the Westport DDA.
S.F. ¶ 12. Bother of these loans were for Respondent's tangible
economic benefit as the proceeds were used to pay off the overdrafts
that funded payments on the loans guaranteed by Respondent at the four
other institutions. S.F. ¶ 11-12. Respondent's unsecured extensions
of credit to Westport and WE WA, which were not documented in a manner
consistent with the Bank's loan policies and did not specify adequate
repayment terms, violated one of the primary restrictions of Regulation
O which prohibits loans on terms and conditions more favorable to
insiders than to non-covered parties. 12 C.F.R. §215.4(a). S.F.
Because of Respondent's conduct in connection with the Westport and WE
WA extensions of credit, the Bank suffered a direct loss in the amount
of $303,777 in the following manner: $184,777 of the $185,000 loan to
Westport was classified as a loss and charged off by the Bank during
its January 1998 examination. Of the $145,000 loan to WE WA, $87,000
was adversely classified and written off as a loss during the bank's
1999 examination. S.F. ¶ 14. After the 1999 FDIC examination of the
Bank, additional overdrafts of $32,000 were uncovered in the Westport
DDA and charged off as a loss. S.F. ¶ 15.
[.2].2 Violations of the 1998 Cease and Desist Order
Commencing on January 26, 1998, the FDIC conducted an examination
of the Bank as of September 30, 1997 ("1998 Examination"). Buford
Affidavit ¶ 5, Buford Affidavit, Exhibit 4. As a result of findings
of the 1998 Examination, the Bank's board of directors stipulated to
and the FDIC issued the Cease and Desist Order pursuant to section 8(b)
of the FDI Act, 12 U.S.C. §1818(b), which became effective on August
3l, 1998. Buford Affidavit Exhibits 1 and 2. The Cease and Desist Order
was based on findings at the 1998 Examination of insider abuse through
liberal and improper use of overdrafts, many violations of law and
regulation, an unacceptable level of classified assets, lax
underwriting standards, weak credit administration, and a decreasing
level of capital. The terms of the Cease and Desist Order precluded the
Bank from permitting final payment on any demand item for any customer
account which when aggregated with all other overdrafts of that
customer would exceed $5,000 unless such payment received
prior approval of the Bank's board of directors. The Cease and Desist Order
also prohibited the Bank from extending credit for the purpose of
eliminating overdrafts. S.F. ¶ 16.
On July 29, 1998, Respondent opened a demand deposit account in the
name of Joe and Gina Saltsman ("Saltsman DDA"). By September 9,
1998, the Saltsman DDA had a negative balance of $3,084.58. S.F.
¶ 17. Between September 10 and October 5, 1998, Respondent, without
the Bank board's prior approval and in direct contravention of the
Cease and Desist Order, authorized the payment of 12 separate
overdrafts on the Saltsman DDA which ultimately resulted in a negative
account balance of $36,865. As a result of Respondent's violation of
the Cease and Desist Order and other fund manipulations associated with
the Saltsman DDA, as detailed in paragraphs 30 through 38 of the
Notice, the Bank was required to charge $19,002 to its loan loss
reserve. S.F. ¶ 17a-h. These transactions were discovered by the FDIC
during an October 26, 1998 visitation to the Bank to assess compliance
with the Cease and Desist Order. Buford Affidavit ¶ 5. On November
12, 1998, after Watts was confronted with the FDIC's findings, he
resigned from the Bank. S.F. ¶ 3; Buford Affidavit ¶ 13(2).
[.3].3 Fund Manipulations and Diversion of Loan Proceeds
Respondent deceived Bank customers and manipulated their
accounts by misappropriating loan payments and deposits; making
unauthorized draws on lines of credit and then diverting those proceeds
to various deposit and loan accounts; extending nominee loans and then
redirecting those funds to other accounts, and otherwise concealing the
use of loan proceeds for his own personal benefit. S.F. ¶ 19-51.
Including the Nitschke loan conversion described by the ALJ in the
Recommended Decision, R.D. at 4, three other customer
relationshipsthe Cain, Saltsman and Casey DDAs and loanswhich were
directly linked to Respondent's misconduct, resulted in losses to the
Bank totaling $84,626. Each of the facts in connection with these
activities, which are briefly described below, has been admitted. S.F.
Cain Loan Proceeds Diversion: Between April 3 and August
3, 1998, Respondent engaged in a series of transactions among accounts
in the names of David L. Cain, D.L. Cain Construction, Richard and
Donna Pearman, Richard Pearman d/b/a Richie Built, and Georgia P.
Furgeson. The transactions included fund manipulations and extensions
of credit, which resulted in a $44,837 loss to the Bank. S.F.
Saltsman Funds Conversion and Repayment: From July 29
through November 12, 1998, Respondent engaged in a series of improper
transactions involving the Saltsman DDA and two loan accounts at the
Bank. The transactions involved a conversion of funds by Respondent
combined with an unorthodox and suspicious repayment to the accounts,
which caused a loss to the Bank in the amount of $19,002.68. S.F.
Casey's Plumbing & Pipe Funds Manipulation and
Diversion: Between August 3 and November 12, 1998, Respondent
manipulated and diverted funds from Casey's Plumbing & Pipe DDA
which resulted in the loss of $6,718 to the Bank. S.F. ¶ 39-47.
B. A Section 8(e) Prohibition is Warranted
As noted in the Recommended Decision, Enforcement Counselto meet
its burden in a prohibition actionmust show that Respondent engaged
in prohibited conduct (misconduct), the effect of which was to cause
the Bank to suffer financial loss or damage, to prejudice or
potentially prejudice the Bank's depositors, or to provide financial
gain or other benefit to the Respondent (effects). Enforcement
Counsel must also demonstrate that such misconduct evidences
personal dishonesty or a willful or continuing disregard for
the safety and soundness of the Bank (culpability). 12 U.S.C.
§1818(e)(1); R.D. at 3; See In the Matter of Ramon M.
Candelaria, 1 FDIC Enforcement Decisions and Orders ¶ 5242,
A-2837, A-2839 (1997); In the Matter of Leuthe, 1 FDIC
Enforcement Decisions and Orders, ¶ 5249, A-2915, A-2961-2963 (1998),
aff'd, 194 F.3d 174 (D.C. Cir. 1999). As discussed below,
the Board finds that Respondent's activities during the period from
December 1996 through November 1998 overwhelmingly satisfy the three
standards necessary to impose a prohibition.
and Desist Order, and unsafe or unsound practices and
breaches of fiduciary dutyis well established by the record. The FDIC
has interpreted "violations of law" as including violations of
state lending or credit concentration restrictions as well as credit
extended in violation of Regulation O. In the Matter of Richard
Robertson, FDIC Enforcement Decision and Orders, ¶ 5211, A-2394,
A-2399 (1994). In addition to the numerous Regulation O violations,
Respondent's multiple violations of the Cease and Desist Order are
well documented. S.F. ¶ 17a-h.
The Board also finds that Respondent's activities in connection with
the Regulation O violations, the violations of the Cease and Desist
Order and the account manipulations and diversion of loan proceeds
demonstrates unsafe or unsound conduct contrary to prudent practice
which exposed the Bank to an abnormal risk or loss or harm. See
Landry v. FDIC, 204 F.3d 1125, 1138 (D.C. Cir. 2000), cert
denied, 531 U.S. 924 (2000); VanDyke v. Board of Governors
of the Fed. Reserve Sys., 876 F.2d 1377, 1380 (8th Cir. 1989).
Respondent personally benefited from the transactions at the expense of
the Bank's interests. In so doing, he committed a serious breach of
his fiduciary duty to the Bank and its depositors. See In the
Matter of Ronald J. Grubb, FDIC Enforcement Decisions and Orders,
¶ 5181, A-2006, A-2008 (1992), aff'd on other grounds,
Grubb v. FDIC, 34 F.3d 956 (10th Cir. 1994);
Candelaria ¶ 5242, A-2847.
The record also establishes satisfaction of the "effects"
test. As a direct result of Respondent's activities, the Bank had to
charge-off hundreds of thousands of dollars, including the $304,000 in
personal gain to Respondent as a result of the Regulation O violations.
Moreover, the Bank suffered "other damage" within the meaning of
12 U.S.C. §1818(e)(1) in that a large part of Respondent's
misconduct was a direct attempt by him to conceal from the Bank's
board the financially troubled condition of Westport and WE WA.
SeeIn the Matter of Tim M. Lane, FDIC
Enforcement Decisions and Orders, ¶ 5205, A-2333, A-2342 (1993). In
addition, because a substantial portion of Respondent's misconduct
involved the manipulation, conversion and diversion of funds from four
Bank customer accounts, Respondent's conduct seriously prejudiced the
interests of the Bank's depositors. See Lane ¶ 5205,
A-2334 n.6; In the Matter of Henry P. Massey, FDIC
Enforcement Decisions and Orders, ¶ 5204, A-2313 (1993).
As noted, Respondent received a direct benefit in the amount of
$304,000 attributable to the Westport and WE WA extensions of credit.
Buford Affidavit ¶ 13(7). Moreover, a loan made in violation of law
to an institution-affiliated party or his related interest, like those
to Respondent, has been held to be a benefit in and of itself.
SeeLeuthe ¶ 5249, A-2929; In the Matter
of Wayne Lowe, FDIC Enforcement Decisions and Orders, ¶ 5153,
A-1537 (1990), aff'd, 958 F.2d 1526 (11th Cir. 1992).
The term "personal dishonesty" as it is used in 12 U.S.C.
§1818(e)(1) has been held to mean "a disposition to lie, cheat,
defraud, misrepresent, or deceive. It also includes a lack of
straightforwardness and a lack of integrity." In the Matter of
Allan Hutensky, 1 FDIC Enforcement Decisions and Orders, ¶ 5204,
A-2566 (1995), aff'd, Hutensky v. FDIC, 82 F.3d
1234 (2nd Cir. 1996). The Board finds the record laden with instances
of Respondent's deceitful behavior. His repeated Regulation O
violations from which he received a direct personal gain and his many
self-dealing and deceptive acts at the Bank including the authorization
of overdrafts, fund manipulations and diversion of proceeds make
Respondent's a symbol of personal dishonesty.
"Willful disregard" refers to that conduct which is practiced
deliberately with full knowledge of the facts and risks, and which
potentially exposes a bank to abnormal risk of loss or harm.
"Continuing disregard" refers to that conduct which is
voluntarily engaged in over time, with heedless indifference to the
possible consequences. Massey ¶ 5204, A-2330; In
the Matter of Constance C. Cirino, 1 FDIC Enforcement Decisions
and Orders, ¶ 5261, A-3166 (2000). The Board finds that Respondent's
conduct exemplifies the "willful or continuing disregard"
standard. He deliberately violated Regulation O and the Cease and
Desist Order. Moreover, he manipulated, converted and diverted
Bank funds that exposed the Bank to abnormal risk of harm and was
to prudent banking practices. Respondent's misconduct
involves at least 80 incidents occurring over a period of nearly two
years. S.F. ¶ 8-46. See, e.g.,
Candelaria ¶ 5242, A-2842 ("continuing disregard"
found by two nominee loans over a period of six months); In the
Matter of Frank E. Jameson, FDIC Enforcement Decisions and Orders,
¶ 5154A, A-1541, A-1542-1542.1, 1542.6, aff'd,
Jameson v. FDIC, 931 F.2d 290 (5th Cir. 1991) (two incidents
of falsifying loan records to hide self-serving transactions occurring
within three months held to be "continuing disregard").
C. Assessment of a CMP Pursuant to Section 8(i) is Warranted
The Board finds, based on Respondent's undisputed misconduct
described above, that a $304,000 CMP is appropriate. The pertinent
factors are briefly analyzed below.
The FDIC sought a second tier CMP against Respondent which, as
noted in Leuthe, is a remedy which requires two elements
of proof: first, "misconduct," i.e., either a
violation of any law or regulation or final order, or breach of a
fiduciary duty, or recklessly engaging in an unsafe or unsound practice
in connection with the Bank, 12 U.S.C. §1818(i)(2)(B)(i); and
second, "effects," i.e., either a pattern of
misconduct, or conduct which caused or was likely to cause more
than minimal loss to the institution, or which resulted in a
gain or benefit to the Respondent. 12 U.S.C. §1818(i)(2)(B)(ii).
Leuthe ¶ 5249, A-2930. As set forth in the Recommended
Decision, and in the discussion above related to the Order to Prohibit,
the statutory requirements for a CMP have been proven.
Because the statutory requirements authorizing the assessment of a
CMP have been met, the appropriate amount of the penalty can be
calculated. Leuthe ¶ 5249, A-2965. Using a straightforward
analysis of Respondent's improper extensions of credit to Westport and
WE WA, Examiner-in-Charge Buford determined that a Tier II CMP of
$304,000 should be assessed. Buford Affidavit ¶ 13-15. He arrived at
this figure based on the amount the Bank suffered due to the
charge-offs and the direct personal gain to Respondent5 as
a result of these transactions as well as Respondent's ability to pay
based on available materials. Id.6
As is evident from the record in this case, Examiner-in-Charge Buford
considered the statutory mitigating factors found at 12 U.S.C.
§1818(i)(2)(G), the 13-factor analysis found in the interagency
Policy Regarding the Assessment of Civil Money Penalties by the Federal
Financial Institutions Regulatory Agencies, 45 Fed.
Reg. 59,423 (Sept. 9, 1980) ("Interagency Policy"),
and the financial gains and other benefits that accrued to Respondent
as a result of his actions. R.D. 34; Buford Affidavit ¶ 12, 13. The
Board notes, as a preliminary matter, that the Interagency Policy cited
by Examiner Buford in his affidavit was updated in 1998, 63
Fed. Reg. 30,226 (June 3, 1998). The Board finds,
however, that Examiner Buford's reliance on the earlier Interagency
Policy is inconsequential because the 13 factors cited for
consideration in determining a CMP assessment are virtually identical
in both versions of the Interagency Policy. For purposes of this
review, however, the Board applies the 1998 Interagency Policy.
In determining the amount of any penalty, section 8(i)(2)(G) of the FDI
Act, 12 U.S.C. §1818(i)(2)(G), and section 308.132(b) of the FDIC
Rules of Practice and Procedure, 12 C.F.R. §308.132(b), require
consideration of the size of financial resources and good faith of the
person charged; the gravity of the violations; the history of previous
violations; and such other matters as justice may require.
As to the first mitigating factor, Respondent has steadfastly refused
to provide any information whatsoever regarding his financial
condition. He failed to respond to the
5 Rounded off to nearest thousand from losses
6 Examiner-in-Charge Buford also found that a
much higher CMP could have been assessed. The FDI Act authorizes a
second tier CMP in the amount of $27,500 per day for each day the
violations, unsafe practices or breaches exist. Taking into
consideration only the Regulation O violations with respect to the
Westport and WW DDAs, the Respondent authorized payment of 38
overdrafts during a 379-day period between December 30, 1996 and
January 12, 1998. During a 26-day period between September 10, and
October 5, 1998, Respondent authorized additional overdrafts in
violation of the Cease and Desist Order. Based upon these violations,
the FDIC would be entitled to assess a CMP of $10,422,500 (379 days x
$27,500) for the first set of overdrafts and an additional $715,000
penalty for violations of the Order (26 days x $27,500) for a total of
$11,137,500. Buford Affidavit ¶ 11; SeeLeuthe
¶ 5249, A-2965.
FDIC's Motion to Compel, and he
ignored the ALJ's subsequent Order to Produce and Subpoena for
production of documents regarding his financial resources. R.D. 2;
Buford Affidavit ¶ 15.
The FDIC has in its possession three self-certified financial
statements for Respondent. One was included in the 1998 examination
report and two he filed as a debtor with other financial institutions.
According to those records, Respondent was born in July 1952 and had a
stated net worth of $737,919 as of February 4, 1997 (Buford Affidavit
Exhibit 5), $721,000 as of January 29, 1998 (Buford Affidavit Exhibit 4
at 02294) and $152,305 as of May 18, 1999 (Buford Affidavit Exhibit 6).
Buford Affidavit ¶ 14.
The Board finds that, given the age of these records, they are of
limited probative value regarding his current financial condition. The
Board notes, however, that Respondent has been made fully aware from
the time that the Notice was issued in February 2001, that the FDIC was
seeking the imposition of a $304,000 CMP. Yet other than a general
statement in his March 6, 2002 letter the ALJ claiming that he was
unable to pay the assessed amount, Respondent has provided no evidence
supporting his contention. Respondent ignore Enforcement Counsel's
Document Request and the ALJ's Order to Produce and Subpoena
directing him to provide materials relating to his current
financial condition. Indeed, Respondent's continuing failure to
produce any evidence regarding his ability to pay was the basis for the
ALJ's Order on Sanctions issued in conjunction with the Recommended
Decision which prohibited Respondent from contesting the CMP or
challenging evidence offered by Enforcement Counsel in support of the
assessed CMP. The Board finds that in view of Respondent's persistent
refusal to produce pertinent materials, the ALJ was correct in issuing
the Order on Sanctions. As such, the Respondent is barred from
challenging the $304,000 assessment.7
As for the "good faith" factor above, the continued
violations and repeated misconduct by Respondent as well as his
subsequent blatant disregard for the FDIC Rules and the ALJ's Orders,
preclude a finding that Respondent acted in good faith. With respect to
the gravity of the offenses, as is clear from the record, the
violations not only resulted in losses to the Bank of hundreds of
thousands of dollars, but also contributed largely to the Bank's
significantly undercapitalized position. Buford Affidavit
Respondent's repeated history of misconduct is evident in the record.
He has demonstrated a pattern of noncompliance with law and regulation
andby paying no attention to the Cease and Desist Orderan obvious
disregard for the regulator's concerns. S.F.§8-59; Buford Affidavit
§5, 9, 10, 13(2), 13(9), 13(13).
The last mitigating factor allows the consideration of other matters as
justice may require in assessing a CMP. In this case, even after
regulators identified Respondent's misconduct and the Cease and Desist
Order was implemented, Respondent devised alternative schemes to
conceal his self-dealing. For instance, Respondent used the Saltsman
DDA to convert funds for his use and benefit. S.F. ¶ 1618; Buford
Affidavit ¶ 13(3), 3038.97 Because Respondent failed to file exceptions
to the Recommended Decision, he is now barred from challenging any
aspect of the ALJ's Recommended Decision including the CMP assessment.
In the Matter of Chul Song, FDIC Enforcement Decisions
and Orders, ¶ 5214, A-2445 (1994); In the Matter of Kevin L.
Jensen, 1 FDIC Enforcement Decisions and Orders, ¶ 5240, A-2808
(1996); In the Matter of Raymond M. Phillips, 1 FDIC
Enforcement Decisions and Orders, ¶ 5232, A-2759 (1996)
(Respondents' failure to file exceptions to the Recommended Decision
pursuant to 12 C.F.R. §308.39 must be deemed a waiver of any
objection to the ALJ's Recommended Decision). Thus, at this point in
the proceeding, the ALJ's Order on Sanctions is subsumed by the
Recommended Decision and this Final Decision and Order.
8 According to the report from the 1998 and
1999 FDIC Examinations, Respondent essentially controlled the Bank's
board. His unchecked powersparticularly with respect to his lending
practicescontributed significantly to the Bank's deterioration.
Buford Exhibit 3 at 02103, 02126-02127, 02130, 02140; Buford Exhibit 4
at 02226-02228, 02232-02235.
9 In addition to the statutory mitigating
factors, Examiner-in Charge Buford also considered the 13 factors
contained in the Interagency Policy which are:
1. Whether the violation was committed with a disregard for the law or
the consequences to the institution;
2. The frequency or recurrence of the violations and the length of time
the violation has been outstanding;
3. The continuation of the violation after the Respondent became aware
4. Failure to cooperate with the agency in affecting an early
resolution of the problem;
5. Evidence of concealment of the violation or its voluntary
6. Threat of or actual loss or other harm to the institution;
7. Evidence that participants or their associates received financial or
other gain; or benefit or preferential treatment as a result of the
8. Evidence of restitution by the participants in the violation;
9. A history of similar violations;
10. Previous criticism of the institution for a similar violation;
11. The presence or absence of a compliance program and its
12. The tendency to create unsafe or unsound banking practices or a
breach of fiduciary duty; and
13. The existence of agreements, commitments or orders intended to
prevent the subject violations.
Examiner-in-Charge Buford found that none of the 13 factors favored the
Respondent and, as such, saw no reason to justify any reduction in the
assessment sought. Buford Affidavit ¶ 13. SeeLeuthe ¶ 5249, A-2966.
[.9]3. The Amount Assessed is Appropriate and Consistent with Policy Goals
A CMP serves two basic policy goals(1) to adequately sanction an
offender, and (2) to create a deterrent to others who may consider
engaging in improper activities. See Interagency Policy;
Leuthe ¶ 5249, A-2931. The Interagency Policy also advises
that in cases where the wrongdoer has financially benefited from his
misconduct, removal of the economic gain may be insufficient by itself
to promote the statutory goals behind CMP assessments.
In this case, where the amount of the CMP assessed is essentially equal
to the amount of Respondent's gain, the Board concludes that a civil
penalty in excess of $304,000 would have been justified. However,
Enforcement Counsel did not file an exception to the amount assessed
and has, in fact, from the inception of this proceeding sought a
$304,000 CMP. Thus, after considering the complete record herein, the
Board declines to increase the CMP assessment. Likewise, in light of
Respondent's failure to cooperate with the regulators in discontinuing
his violations, and the benefit he derived from his wrongdoing, the
Board finds no mitigating factors that would warrant a lower
assessment. As such, the Board finds that the CMP imposed will
adequately achieve the goals of the statute.10
In addition, the Board agrees with the ALJ that the factors raised
in Respondent's March 6, 2002 letter are wholly without merit.
Respondent has openly disregarded the ALJ's clear requirements for
participation in this proceeding. Under the circumstances, it appears
that Respondent has consciously opted not to take part in this action
even after he has been given numerous opportunities to do so. Thus, his
claim, in the March 6, 2002 letter that "there are numerous
allegations which can be proven not to be the total facts" is
unsustainable because all of the facts alleged in the Notice were
deemed true by the ALJ's July 13, 2001 Order. R.D. at 4. Similarly,
Respondent was barred by the ALJ's Order on Sanctions from raising
issues regarding the CMP assessment. R.D. at 4. Thus, for the reasons
discussed above and because Respondent has produced no evidence
demonstrating that he is unable to pay the amount sought, the Board
finds no reason to disturb the ALJ's $304,000 CMP
[.10] After a thorough review of the record in this proceeding, and for the
reasons set forth above, the Board finds that an Order of Prohibition
and the Assessment of a CMP in the amount of $304,000 are warranted
against the Respondent. A hearing in this case is not necessary to
render a decision on the merits.12 All of the underlying
10 The Board notes too that Respondent will
likely be subject to criminal penalties as a result of his indictment
in the Western District of Kentucky. See n. 2.
11 The Board notes too that Respondent's
ability to pay a CMP is not limited by his present financial condition.
SeeLeuthe ¶ 5249, A-2931. Moreover, given
Respondent's current age of 50, there is no reason to believe that his
future earning potential will not support the CMP assessed.
SeeId.; Raney v. Honeywell, 540 F.2d
932, 936 (8th Cir. 1976).
12 The Board does not have to reach this issue
but the record also supports a conclusion that a default judgment would
be appropriate in this case because, as a practical matter, this is an
uncontested proceeding. Although Respondent had, at several points
during the course of this proceeding, written letters to ALJ Cook in
response to the Notice and the pleadings filed by Enforcement Counsel,
he repeatedly and inexcusably failed to respond to the charges against
him in accordance with the FDIC Rules of Practice and Procedure.
Significantly even though the ALJ directed him to do so and provided
him with additional time to respond, Respondent did not, as required by
FDIC Rule 19(b), respond with specificity to the charges in the Notice.
He also failed, in flagrant disregard of the ALJ's repeated Orders, to
file and serve his answer and other responsive pleadings in accordance
with FDIC Rules 10 and 11. Respondent's conduct clearly demonstrates
an intentional disregard of, or willful failure to follow, the FDIC's
procedural requirements. As such, a default judgment would be
warranted. In the Matter of Raymond M. Phillips ¶ 5232,
A-2759 (1996); In the Matter of Hiram L. Fong, 1 FDIC
Enforcement Decisions and Orders, ¶ 5230, at A-2749 (1995),
Cirino ¶ 5261, A-3127. Such defaults constitute a consent
to entry of an order of prohibition as well a CMP assessment.
Id.; In the Matter of Kevin L. Jensen ¶ 5240,
A-2807, A-2808 (1996).
supporting the charges in the Notice have been
admitted by virtue of Respondent's failure to respond and the ALJ's
July 13, 2001 Order. In addition, the fully admitted charges are
sufficient to sustain an Order of Prohibition and the Assessment of a
$304,000 CMP. Thus, the ALJ properly found that summary disposition is
appropriate. 12 C.F.R, §308.29(a); R.D. at 5.
In this case, the record plainly shows that, time and again, Respondent
ignored the law and regulatory directives with respect to his operation
of the Bank. Instead, in a clear abuse of his role as president and a
member of the Bank's board of directors and in violation of federal
law and regulation and the Cease and Desist Order, Respondent defrauded
the Bank and its customers to prop up his own failing business
interests. In fact, Respondent took his scheme as far as he could go
with it and only stopped when he was compelled to resign from the Bank.
Moreover, Respondent has further signaled a general disdain for the
FDIC's regulatory authority by his intransigence in the face of the
ALJ's Orders. In view of Respondent's repeated transgressions and his
propensity for disregarding the regulators, the Board is persuaded that
he should be permanently barred from the banking industry. Moreover, in
light of the entire record, the Board finds the CMP imposed to be an
appropriate amount and one which is consistent with the statute's
Based on the foregoing, the Board concurs in and adopts by reference
the findings of fact and conclusions of law in the Notice, the FDIC's
Statement of Material Facts as to Which There is no Genuine Issue and
the Buford Affidavit; affirms the Recommended Decision of the ALJ as
supplemented; and issues the following Orders implementing its
ORDER TO PROHIBIT
The Board of the FDIC, having considered the entire record of the
proceeding and finding that Respondent, Charles f. Watts, an officer
and director of the Bank, violated laws and regulations, engaged in
unsafe or unsound banking practices, violated a cease and desist order,
and breached his fiduciary duty, causing financial loss to the Bank and
resulting in personal benefit to him, and that said actions involved
personal dishonesty and willful and continuing disregard for the safety
and soundness of the Bank, it is hereby ORDERED and DECREED that:
[.11]1. Charles F. Watts shall not participate in any manner in any conduct
of the affairs of any insured depository institution, agency or
organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C.
§1818(e)(7)(A), without the prior written consent 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.
[.12]2. Charles F. Watts shall not solicit, procure, transfer, attempt to
transfer, vote, or attempt to vote any proxy, consent or authorization
with respect to any voting rights in any financial institution, agency,
or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12
U.S.C. §1818(e)(7)(A), without the prior written consent 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.
3. Charles F. Watts shall not violate any voting agreement with respect
to any insured depository institution, agency, or organization
enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C.
§1818(e)(7)(A), without the prior written consent 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.
4. Charles F. Watts shall not vote for a director, or serve or act as
an institution-affiliated party, as that term is defined in section
3(u) of the FDI Act, 12 U.S.C. §1813(u), of any insured depository
institution, agency, or organization enumerated in section 8(e)(7)(A)
of the FDI Act, 12 U.S.C. §1818(e)(7)(A), without the prior written
consent 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).
The Board, having considered the entire record in this proceeding,
taking into account the appropriateness of the penalty with respect to
the size of the financial resources and good faith of Respondent, the
gravity of the violations and such other matters as justice may
require, it is hereby ORDERED and DECREED that:
[.13]1. A civil money penalty is assessed against Respondent Charles F.
Watts in the amount of $304,000 pursuant to 12 U.S.C. §1818(i).
2. This ORDER shall be effective and the penalty shall be final and
payable thirty (30) days from the date of its issuance.
The provisions of these ORDERS will remain effective and in force
except to the extent that, and until such time as, any provision of
these ORDERS shall have been modified, terminated, suspended, or set
aside by the FDIC.
IT IS FURTHER ORDERED that a copy of this Decision and Order to
Prohibit From Further Participation and Assessment of Civil Money
Penalty shall be served on Charles F. Watts, Enforcement Counsel, the
ALJ, and the Commissioner, Department of Financial Institutions for the
Commonwealth of Kentucky.
By the direction of the Board of Directors.
Dated at Washington, D.C., this 6th day of August, 2002.