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FDIC Enforcement Decisions and Orders
FDIC reverses stay issued by administrative law judge, allowing FDIC administrative enforcement proceeding pursuant to section 8 of the Federal Deposit Insurance Act, 12 U.S.C. §1818, against former officers and directors of Connecticut Bank of Commerce, Stamford, Connecticut, to proceed. FDIC found the burden on respondent of facing parallel proceedings did not warrant a stay.
[.1] Interlocutory ReviewStandardsModification of contested rulingInadequate Remedy
[.2] Interlocutory ReviewStayBurden of Proof
[.3] StayBurden of ProofRemoval Action
[.4] StayJudicial ProceedingEffect
In the Matter of
Before the Executive Secretary of the Federal Deposit Insurance Corporation ("FDIC"), pursuant to authority delegated by the FDIC Board of Directors ("Board") under 12 C.F.R. §308.102(b)(2)(ii), is a Petition for Interlocutory Review ("Petition") referred by the Administrative Law Judge ("ALJ") pursuant to 12 C.F.R. §308.28(c) by her order dated September 17, 2003. The Petition was filed by enforcement counsel for the FDIC ("Enforcement Counsel") on August 20, 2003 and opposed by a response filed by Respondent Randolph W. Lenz ("Lenz") on September 12, 2003 ("Lenz Opposition") and by Respondent Steven B. Levine ("Levine") on August 28, 2003 ("Levine Opposition").
The underlying matter involves an FDIC administrative enforcement proceeding pursuant to section 8 of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §1818, against former officers and directors of Connecticut Bank of Commerce, Stamford, Connecticut ("Bank"), which was closed by Connecticut bank regulators on June 26, 2002, with the FDIC being appointed as receiver. Specifically, the FDIC charged that Respondent Lenz, the Bank's chairman and controlling shareholder, among other things engaged in unsafe and unsound banking practices and violated federal law and regulation and an FDIC cease and desist order which caused the Bank to lose tens of millions of dollars and directly contributed to its failure. The FDIC sought removal of Lenz from the banking industry pursuant to section 8(e) of the FDI Act, 12 U.S.C. §1818(e), and assessed a civil money penalty ("CMP") against him in the amount of $2 million pursuant to 8(i) of the FDI Act, 12 U.S.C. §1818(i). As to Respondent Levine, the FDIC alleged unsafe or unsound banking practices, breaches of fiduciary duties, or violations by him in connection with his responsibilities as a member of the Bank's board, and assessed a CMP against him in the amount of $500,000 pursuant to section 8(i) of the FDI Act.
The subject of Enforcement Counsel's Petition is an Order Granting Motions to Stay ("Stay Order") issued by the ALJ on August 5, 2003. Respondent Lenz had earlier argued in support of his stay request that an ongoing criminal investigation by the U.S. Attorney for the District of Connecticut compromised his right to assert his Fifth Amendment privilege and limited his access to certain documents seized by the FBI in connection with the criminal investigation. Respondent Levine had also argued that a stay was necessary because the FBI's control of Lenz's documents prevented him from adequately defending himself in the administrative proceeding. The ALJ granted Respondents' stay requests and it was this Stay Order that became the subject of Enforcement Counsel's Petition, which as noted was referred by the ALJ to the Board. For the reasons set forth below, interlocutory review is granted and the ALJ's Stay Order is reversed.
[.1] As a threshold matter, the arguments presented by Enforcement Counsel
in its petition satisfy one or more of the criteria for interlocutory
review set forth in 12 C.F.R. §308.28(b). In particular, subsequent
modification of the Stay Order at the conclusion of the proceeding may
not be an adequate remedy. 12 C.F.R. §308.28(b)(3). A removal and
prohibition pursuant to section 8(e) is a form of equitable or remedial
in the nature of an injunction, designed to eliminate what regulators have determined to be an existing and ongoing threat to the banking industrynot just to any particular banking institution. Individuals who have demonstrated certain negative banking-related proclivities (even if no longer employed at the institution with which they had been affiliated) pose a continuing threat to the industry. See, e.g., In the Matter of Billy Proffit, FDIC Enforcement Decisions and Orders, ¶5251 (1998), 1998 WL 850087, at *78. As such, it is important to determine earlier, rather than later, whether a stay of these proceedings is appropriate. Along these same lines, subsequent modification of the Stay Order would cause unusual and unneeded delay if the Board did not act now on an interlocutory basis. 12 C.F.R. §308.28(b)(4). Finally, immediate review may materially advance the ultimate termination of this proceeding becauseif a decision is made to lift the staythis matter could proceed in a timely fashion to discovery, hearing, and final decision, 12 C.F.R. §308.28(b)(2).
[.2] Going to the merits, the ALJ and the parties properly recognized the important factors to consider in weighing whether to stay this enforcement action pending resolution of the criminal proceeding: (1) the agency's interest in proceeding expeditiously with the civil litigation and the potential prejudice caused by a delay; (2) the burden the civil action may impose on the defendant in the criminal proceeding; (3) the convenience of the court in the management of its cases and the efficient use of judicial resources; (4) the interests of non-parties to the litigation; and (5) the public's interest in the pending civil and criminal litigation. FSLIC v. Molinaro, 889 F.2d 899, 902903 (9th Cir. 1989); U.S. v. Kordel, 397 U.S. 1, 1112 (1970).
[.3] In issuing the Stay Order, it appears that the ALJ was swayed most by the second criterionthe burden of the civil action on Respondent Lenz. In particular, she highlighted (1) Lenz's dilemma regarding assertion of his Fifth Amendment rights which, if raised in a civil proceeding, could give rise to adverse inferences but, if those rights were not raised, his testimony could aid the criminal prosecution, and (2) Lenz's asserted lack of access to documents in the custody of the FBI which he claims are material to his defense in this proceeding. Stay Order at 12. Upon closer look, however, neither of these two interests attributed to Lenz either separately or together is compelling enough to tip the scale in favor of a stay, particularly in light of the strong public interest in promptly enforcing laws designed to protect the integrity of the banking industry. See, e.g., Kordel, 397 U.S. at 11; Keating v. OTS, 45 F. 3d 322, 326 (9th Cir. 1995).
[.4] Before examining the particular circumstances in this case, it is worth reiterating the ALJ's observation that the government is not constitutionally barred from proceeding simultaneously in parallel civil and criminal proceedings. SEC v. Dresser Industries, 628 F.2d 1368, 137475 (D.C. Cir. 1980). Stay Order at 1. Moreover, as Enforcement Counsel notes, a stay of civil proceedings pending the outcome of related criminal matters is an extraordinary remedy which should be reserved for extraordinary or special circumstances. Petition at 1012. Well v. Markowitz, 829 F. 2d 166, n. 17 (D.C. Cir. 1987). See also, SEC v. Dressler Industries, 628 F. 2d at 1377 (civil proceedings should not be stayed in favor of criminal proceedings "in the absence of `special circumstances' in which the nature of the proceedings demonstrably prejudices rights of the investigated party or of the government"). Finally, Enforcement Counsel correctly asserts that pre-indictment requests for stays are generally declined, particularly in cases like the present where there is no clear indication when or even if an indictment will be issued. See, e.g., SEC v. Dressler Industries, 628 F. 2d at 1376; FSLIC v. Molinaro, 889 F.2d at 903; CFS-Related Sec. Fraud Litig., 256 F. Supp 2d. 1227, 1237 (N.D. Okla. 2003).
With these considerations in mind, Respondents simply cannot demonstrate that a stay is warranted at this point in the proceedings. While Respondent Lenz's argument regarding his dilemma in invoking the Fifth may have some surface appeal, the fact is that a defendant facing parallel civil and criminal charges "has no absolute right not to be forced to choose between testifying in a civil matter and asserting his Fifth Amendment privilege." Keating v. OTS, 45 F.3d at 326.
[.5] Moreover, Lenzin suggesting that his invoking the Fifth Amendment in
this enforcement proceeding will result automatically in a
determination adverse to himhas overstated the negative impact of his
refusal to testify. Enforcement Counsel must
still prove its case and Lenz, regardless of whether or not he chooses to testify in his own defense, may cross-examine witnesses and offer documentary and testimonial evidence from his own witnesses. Thus, contrary to Lenz's contention, his failure to testify in this enforcement proceeding would not automatically result in an adverse outcome or even, for that matter, an adverse inference. See Baxter v. Palmigiano, 425 U.S. 308, 318 (1976); see also In the Matter of Harold Hoffman, FDIC Enf. Decisions & Orders ¶5140, a-1494 (1989); 1989 WL 609345, at *7; In the Matter of Marsha Yessick, Cornerstone Community Bank, Chattanooga, Tennessee, Docket No. FDIC-00-050k (6-3-03).
Finally, Lenz's claim regarding the dilemma of invoking the Fifth Amendment in the face of parallel proceedings might hold more sway were there any indication that an indictment is imminent. As it now stands, however, any conflicting interests posed by dual proceedings are only speculative and, therefore, of limited weight in balancing the competing interests of the parties.
Likewise, Respondents Lenz's and Levine's contention that they do not have sufficient access to documents now in FBI custody to defend themselves in the enforcement proceeding is unpersuasive and does not support the granting of a stay. By way of background, approximately 300 boxes of documents from Lenz's Ft. Lauderdale business office were seized earlier this year pursuant to a search warrant. These documents are now in the custody of the FBI at its Fairfield, Connecticut office but are accessible to Lenz by pre-arrangement with FBI staff. Stay Order at 1. Although the ALJ seemed persuaded that Lenz's somewhat restricted access to the seized records was unduly burdensome, the fact is that Lenz remains in possession of his own electronic records and he and his representatives have access, upon request to the FBI, to the documents now in FBI custody. Petition, Exhibit A §§ 2, 4. Lenz also has been offered the opportunity to duplicate the documents in FBI custody. Petition, Exhibit A §7. Thus, although the FBI's custody of Lenz's documents may be inconvenient for him and, perhaps, pose some logistical difficulties, he is by no means deprived of access to the records in question. As such, the FBI's custody of Lenz's documents should not have been a decisive factor in issuing the stay.1
In sum, the factors weighing in favor of a staychiefly the burden on Respondent Lenz of facing parallel proceedingsare far less compelling when compared to the other four factors set out in the Molinaro and Kordel, all of which tip against the issuance of a stay. These other considerations are discussed below.
At the outset, it should be understood that with respect to the issue of prompt resolution of the enforcement matter, the interests of the FDIC, uninsured Bank depositors and the public in this case converge because each group has a strong interest in seeing that this proceeding is concluded without delay. The FDIC has alleged that Respondent Lenz engaged in a complex fraud that led to the failure of the Bank. Indeed, the public and the uninsured Bank depositors have a substantial interest in the speedy resolution of this enforcement matter. Keating, 45 F.3d at 326 ("public's interest in a speedy resolution of the controversy and the OTS's concern for efficient administration" would be impaired by a stay). The public interest is generally deemed paramount where Congress has authorized an agency to protect the nation's financial system and bank depositors from unsafe and unsound practices through prompt enforcement action. See Kordel, 397 U.S. at 11.
Administrative enforcement proceedings initiated by federal banking
agencies are designed with a remedial and deterrent purpose for the
safety and the soundness of the banking industry and for public
confidence in the integrity of the banking system. See In the
Matter of Alan Hutensky, 1997 WL 557612, at *2 (July 8, 1997)
aff'd Hutensky v. FDIC, 82 F. 3d 1234 (2nd Cir. 1996)
("Declining to issue an order of prohibition or limiting it in any
manner would weaken the statutory authority of the bank regulatory
agencies in protecting the public interest, and with respect to the
FDIC, the viability of the Bank Insurance Fund, by lessening the
deterrent effect of agency enforcement actions."). Delay in the
enforcement remedies clearly lessens their impact. As the Board recently observed, "[t]he assessment of CMPs . . . will have the maximum regulatory impact if such assessment closely follows the alleged improper conduct." In the Matter of Marsha Yessick, Cornerstone Community Bank, Chattanooga, Tennessee, Docket No. FDIC-00-050k (6-3-03).
Moreover, swift resolution of the enforcement action in this case is particularly important because, in addition to substantial civil money penalties for the alleged losses caused by Respondents Lenz and Levine and their co-respondents, the FDIC is seeking an order of removal from the banking industry against Lenz and Respondent Donald Weand, Jr. Lenz has not yet (contrary to the implication in the Stay Order) been removed from the banking industry. Stay Order at 2. Although he was removed from his position of the Bank by virtue of the Bank's having been placed in receivership, Lenz is not subject to any type of order prohibiting him from participating in the banking industry. For this reason, the FDICcharged with protecting the safety and the soundness of the industryand the public at large, who have an obvious stake in the integrity of the nation's banking system, have a substantial interest in an expeditious resolution of the enforcement proceeding.
Furthermore, the interests of the uninsured depositors cannot be overlooked. At this point, the uninsured depositors stand to lose substantial sums, and a stay of this enforcement proceeding only delays further their opportunity for recoup losses stemming from the Bank's failure.
Thus, all things considered, the FDIC, the uninsured depositors, and the public have a compelling interest in a quick resolution of this enforcement matter. Moreover, the general interest in economy of proceedings weighs against a stay because even if Lenz eventually is indicted, there is not, at this point, any indication that the same remedies would be sought in a criminal proceeding. In the meantime, however, there is no way to determine how long the criminal investigation will last or how it will end. In contrast, the FDIC and the other interested parties have a strong present interest in moving this matter forward so thatif violations are foundappropriate remedies will issue.
This decision to lift the Stay Order does not foreclose the possibility of any of the parties seeking a stay of this matter at a later point should the criminal investigation progress in such a way, or any other new circumstances arise, that would warrant additional consideration.
The ALJ's Order, dated August 5, 2003, granting the motions to stay of Respondents Lenz and Levine is reversed and this matter shall be placed back on the ALJ's docket to proceed in a timely manner in accordance with the FDIC's Rules of Practice and Procedure.
Pursuant to delegated authority, upon the advice and recommendation of the Deputy General Counsel for Litigation.
Dated at Washington, D.C., this 4th day of December, 2003.
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