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FDIC Enforcement Decisions and Orders

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   [8028] In the Matter of Visalia Community Bank, Visalia, California, Docket No. FDIC-93-141b (9-16-93).

   FDIC Board denies request for private hearing, finding that Respondent had not shown any reason to justify privacy.

   [.1] Practice and Procedure—Hearings—Public or Private—Burden
   Respondent must demonstrate that its situation differs so significantly from those involving other banks as to warrant special treatment.
   [.2] Practice and Procedure—Hearings—Public or Private—Privacy of Insiders
   Loans or credits to bank insiders are a critical part of the enforcement action and their disclosure does not threaten the safety or soundness of the bank, and is not a basis for a private hearing.
   [.3] Practice and Procedure—Hearings—Public or Private—Exempt Information
   Though bank's internal routine and controls are exempt information and their disclosure generally prohibited, the ALJ may receive information under seal to prevent its public dissemination where the evidence is relevant to the charge that inadequate routine and controls were detrimental to the bank and constituted an unsafe or unsound practice.

In the Matter of

(Insured State Nonmember Bank)



   On June 29, 1993, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Charges and of Hearing ("Notice") against Visalia Community Bank, Visalia, California ("Bank"), seeking the issuance of an Order to Cease and Desist, pursuant to section 8(b) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(b). The Notice alleged, among other things, that the Bank engaged in unsafe or {{11-30-93 p.I-94}}unsound banking practices and violated Regulation O of the Board of Governors of the Federal Reserve System ("Regulation O"), FDIC Rules and Regulations, and the California Financial Code.1 The Notice charged that the Bank followed hazardous lending and lax collection practices; maintained an excessive volume of poor quality or adversely classified loans; operated in a manner which resulted in unsatisfactory earnings; failed to maintain an adequate allowance for loan losses; operated with inadequate liquidity; maintained inadequate capital to support the kind and quality of assets held; operated with management whose policies and practices are detrimental to the Bank and jeopardize the safety of the Bank's deposits; and that the Bank's board of directors failed to provide adequate supervision and direction to the active officers of the Bank to prevent unsafe or unsound banking practices and violations.
   On July 21, 1993, the Bank's Response to the Notice was filed. On the same date, the Bank also filed a Motion for a Private Hearing ("Motion"). The Motion alleged that an open hearing in this case would be contrary to the public interest for the following five reasons:
   One, it would be unfair and contrary to public interest to discuss the financial standing and information of the Bank's customers in a public forum.
   Two, insider information relating to the issue of adequate capitalization and the possible types and terms of securities to be issued would be unfairly disclosed to persons attending the hearing.
   Three, the discovery of the Bank's anticipated earnings for the next one to three years would give the Bank's competitors an unfair advantage against the Bank.
   Four, it would be unfair to make public the allegations that some of the directors of the Bank have violated the laws and rules, prior to a final FDIC determination imposing civil monetary penalties against those directors.
   Five, the Bank's internal routine and controls constitute trade secrets and, as such, are privileged information; disclosure at a public hearing would make the Bank vulnerable to criminals who may attempt to capitalize on the information and jeopardize the safety of the Bank's deposits.


   [.1] In In the Matter of The Citizen's Bank of Clovis, Clovis, New Mexico, FDIC-91-406b, 2 FDIC Enf. Dec. & Ord. (P-H) ¶8012 (March 2, 1992), the Board of Directors ("Board") of the FDIC set forth the standard for judging requests for private hearings. Because of the presumption in 12 U.S.C. § 1818(u)(2) in favor of public hearings, the Board concluded that private hearings should be granted on the basis of safety and soundness concerns.2 Furthermore, in order to justify a request for a private hearing, "a bank needs to demonstrate in a concrete fashion how the effects of [a particular] proceeding differ so significantly from those involving other banks as to warrant special treatment." Id. at I-48.
   Reviewed under this standard, there is no legal basis for accepting this request for a private hearing. The Bank has failed to assert or demonstrate a proper basis for a private hearing. Essentially, the Bank bases its request on two factors: (1) the alleged unfairness of disclosing the Bank's own and its customers financial information as well as information relating to violation of laws by some of the Bank's directors in a public forum, and (2) the allegation that its internal routine and controls are privileged information and the related speculation regarding the increase of the possibility that the criminal element may attempt to jeopardize the safety of the Bank's deposits upon disclosure of such information.

   [.2] The first factor—alleged unfairness— does not distinguish the Bank from other banks involved in similar proceedings and cannot serve as justification for the request. If private hearings were to be granted based on a respondent's protestations of unfair-

1In full, the Notice cites violation of the following laws, rules, and regulations: section 23A of the Federal Reserve Act, 12 U.S.C. § 371c; sections 215.4(a), 215.4(c), and 215.7 of Regulation O; 12 C.F.R. sections 215.4(a), 215.4(c), and 215.7; Part 323 of the FDIC Rules and Regulations, 12 C.F.R. Part 323; section 337.2(d) of the FDIC Rules and Regulations, 12 C.F.R. § 337.2(d); and sections 858, 1221(a), and 1221(b) of the California Financial Code, CAL. [FIN.] Code §§ 858, 1221(a), and 1221(b).

2Section 8(u)(2) of the FDI Act, 12 U.S.C. § 1818(u)(2) provides that:
[a]ll hearings on the record with respect to any notice of charges issued by a Federal banking agency shall be open to the public, unless the agency [here, the FDIC], in its discretion, determines that holding an open hearing would be contrary to the public interest. (Emphasis added).

{{11-30-93 p.I-95}}ness, there would be no public hearings at all, because all respondents would make similar allegations to avoid the public hearing requirement. The purpose of the statute would be completely undermined. Moreover, certain financial transactions involving officers and directors and certain customers of the Bank are a critical part of this action. These officers and directors are in fact institution-affiliated parties who will be subject to the terms of any cease-and-desist order that may issue as a result of this proceeding. The mere fact that the evidence at the hearing may disclose loans or credits to these individuals does not threaten the safety or soundness of the Bank and is not a basis for a private hearing. The American Bank of the South, Merritt Island, Florida, FDIC-92-17b, 2 FDIC Enf. Dec. ¶8015 (1992).

   [.3] Reliance on the second factor is also misplaced. Although a bank's internal routine and controls as discussed in the FDIC examination materials are exempt information, such information is critical on the issue of whether the Bank operated with inadequate internal routine and controls to the detriment of the Bank and jeopardize the safety of the Bank's deposits by reason of unsafe or unsound practices and violations of law and regulation. Under relevant statutory provisions, the disclosure of exempt information is generally prohibited, 12 C.F.R. § 309.6(b), but where such information is relevant to the issues in the proceeding, the exempt information may be disclosed subject to limitations. 12 C.F.R. § 309.6(c)(8)(ii).
   Moreover, 12 C.F.R. § 308.5(b)(10) states that the Administrative Law Judge ("ALJ") shall have the power "[t]o establish time, place and manner limitations on the attendance of the public and the media for any public hearing." In addition, section 8(u)(6), 12 U.S.C. § 1818(u)(6), permits the filing of documents under seal if disclosure would be contrary to the public interest. Reading regulation 12 C.F.R. § 308.5(b)(10) with the statutory provision mandating public hearings, 12 U.S.C. § 1818(u)(2), results in the conclusion that an ALJ could, for example, exclude a disruptive attendee at a public hearing, or place other limitations which do not result in a denial of public access to the hearing, but would be consistent with both the protection of the confidential nature of the record and the requirement that the information "be produced and made part of the record of the hearing or proceeding." 12 C.F.R. § 309.6(c)(8)(ii). In light of these provisions, the ALJ has the authority to provide for the protection of confidential information as he deems appropriate.
   Moreover, the Bank's contention that the criminal element may capitalize on disclosure of the Bank's internal routines and control to the detriment of the Bank is not factually based and must be rejected as purely speculative. The Citizens Bank of Clovis, ¶ 8012, at I-48. This type of speculation does not distinguish this proceeding from any other, and granting a private hearing based on it would totally undercut the purpose of the statute. Ibid.
   Accordingly, the allegations furnished by the Bank in support of its request for a private hearing fail to establish that such a hearing is required in the public interest.


   For the foregoing reasons, it is hereby ORDERED that the request for private hearing is DENIED.
   Pursuant to delegated authority, upon the advice and recommendation of the General Counsel.
   Dated at Washington, D.C., this 16th day of September, 1993.
/s/ Hoyle L. Robinson

Executive Secretary

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