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FDIC Enforcement Decisions and Orders |
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Former bank board chairman and director was prohibited from participating in the affairs of any bank insured by the FDIC, because of federal and state law violations, a cease and desist order violation, unsafe and unsound banking practices, a breach of fiduciary duty, and personally gaining from the violations and unsafe practices, constituting a willful and continuing disregard for the safety and soundness of the bank.
[.1] Practice and Procedure Administrative Proceedings Not Subject to Technical Pleading Requirements
[.2] Removal, Prohibition, or Suspension Factors Determining Liability
[.3] Federal Reserve Act § 23 Violation Investment in Affiliate
[.4] Regulation O#151;Loans to Insiders Unsecured Loans
[.5] Capital#151;Adequacy Unsafe or Unsound Practices
[.6] Unsafe or Unsound Banking Practices
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[.8] Prohibition, Removal, or Suspension Factors Determining Liability Disregard for Safety and Soundness
An officer's willful and continuing disregard for the bank's safety or soundness and breach of fiduciary duty demonstrate his unfitness to be a bank officer.
In the Matter of ***, individually and as
On December 16, 1985, the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") issued a Notice Of Intention To Remove From Office And/Or To Prohibit From Further Participation ("Notice") to several officers and directors of *** Bank, *** ("Bank"), including Respondent ***. A hearing on the Notice as to Respondent *** was held before an Administrative Law Judge ("ALJ") on August 3-4, 1987. The ALJ issued a Recommended Decision and Order on November 16, 1987, and the matter was certified to the Board for a final decision by the Deputy Executive Secretary on December 14, 1987.
The Recommended Decision and the
In his Recommended Decision, the ALJ correctly found that the evidence presented by FDIC enforcement counsel established each of the essential elements required by section 8(e)(1) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e)(1). The record establishes that the Respondent engaged in acts which violated Federal law and the FDIC's August 27, 1983 Cease and Desist Order. Therefore, the Board adopts and incorporates herein by reference the ALJ's Findings of Fact and Conclusions of Law regarding violations of Section 23A of the Federal Reserve Act, 12 U.S.C. §371c, of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 215, and of the Cease and Desist Order found at sections III-C, D, and F of the Recommended Decision, respectively.
Violations of *** Law
Additionally, the ALJ found that the Respondent had violated various sections of the *** Financial Code. This evidence was, however, excluded from consideration by the ALJ because those violations had not
{{4-1-90 p.A-1230}}been alleged in the Notice. The ALJ based his conclusion in this regard on his understandable but nevertheless erroneous perception that he could only consider evidence concerning violations actually charged in the Notice.
[.1] Administrative actions are not subject to the technical pleading requirements that govern private lawsuits. Indus., Technical and Professional Employees Div. v. NLRB, 683 F.2d 305, 307-08 (9th Cir. 1982). "`[A]n issue litigated at an administrative hearing may be decided by the hearing agency even though the formal pleadings did not squarely raise the issue,' so long as the cited party had actual notice and a fair opportunity to litigate the issue." Brock v. Dow Chem. U.S.A., 801 F.2d 926, 931 (7th Cir. 1986) (quoting Nat'l. Realty & Constr. Co. v. OSHRC, 489 F.2d 1257, 1264 (D.C. Cir. 1985)). See also NLRB v. Int'l. Bhd. of Elec. Workers Local 112, 827 F.2d 530, 534 (9th Cir. 1987).
Financial Gain
In Finding III-I, the ALJ found undisputed evidence that Respondent had received financial gain from these practices and transactions. However, the ALJ declined to consider this evidence based upon his view that financial gain had not been raised in the Notice. As discussed above, the ALJ may indeed consider such evidence where the Respondent has been put on notice of such allegation and has had an adequate opportunity to present evidence to defend against any such allegation. Respondent was clearly confronted during the hearing with evidence of alleged financial gain derived from his actions in relation to the *** operation, (Tr. at 78-79, 185-90), which he failed to rebut (Tr. at 190-91, 207-08). However, in this instance the Board need not rely solely on this legal ground to consider the evidence of financial gain. While the ALJ concluded otherwise, the Notice in this proceeding in fact alleged personal financial gain. (Notice at 2). The Board therefore finds and concludes that the record sufficiently supports, and the ALJ erred in not relying upon the fact that Respondent derived financial gain from his actions.
Personal Dishonesty
The ALJ found that uncontroverted evidence established personal dishonesty on the part of Respondent. However, the ALJ declined to consider this evidence because it was not alleged in the Notice. As discussed supra, evidence introduced during the hearing as to an alleged 8(e) violation of which Respondent had notice and as to which he had an opportunity to present evidence in defense may be considered by the ALJ. Evidence of Respondent's personal dishonesty was produced by the FDIC at the hearing (Tr. at 69, 72, 159-61). However, it is not absolutely clear that Respondent either was or should have been aware of the implications of the evidence of personal dishonesty offered by the FDIC. Therefore, while the Board agrees with the ALJ's conclusion that the evidence established Respondent's personal dishonesty, it declines to rely upon that evidence as a basis for the Order issued in the proceeding.
CONCLUSION
Therefore, for the reasons set forth herein, the Board adopts the ALJ's findings of fact in their entirety and his conclusions of law except as to violations of the state lending limit statute and financial gain. The Board finds that the violations of the state lending limit statute and the Respondent's personal financial gain, while not the only bases for the Order of Prohibition from Further Participation, are valid legal bases for that order.
ORDER OF PROHIBITION FROM
Having found and concluded that the essential elements of Section 8(e)(1) of the Act have been established; that ***, in his capacity as director and chairman of the board of the Bank, has violated Federal and state laws and regulations and a cease-and-desist order which had become final, en-
Hoyle L. Robinson
RECOMMENDED DECISION AND
FDIC 85-356e
WILLIAM A. GERSHUNY, Administrative Law Judge: A hearing was conducted in *** on August 3-4, 1987, on a Notice of Intention to Remove From Office and/or to Prohibit From Further Participation issued by the Federal Deposit Insurance Corporation on December 16, 1985, seeking the removal of Respondent ***, former Chairman of the Board of *** Bank, pursuant to Sec. 8(e)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(1). Other officers and directors, originally named as corespondents with ***, entered into settlements with the FDIC prior to the hearing.
Findings of Fact and Conclusions of Law
I. Jurisdiction
The Notice alleges, Respondent admits, and I find that Respondent and the *** Bank, ***, were at all relevant times subject to the Act, the Rules and Regulations of the FDIC, the laws of the State of ***, and the jurisdiction of the FDIC.
II. The Allegations of the Notice
The Notice alleges that Respondent ***, as Chairman of the Board and as Director until May 1985 when he resigned the positions, breached his fiduciary duty, and caused the Bank to engage in unsafe or unsound banking practices, to violate a Cease-and-Desist Order which became effective August 27, 1983, and to violate Sec. 23A of the Federal Reserve Act and Regulation O, a regulation of the Federal Reserve Board made applicable to insured State nonmember banks by Sec. 18(j) of the Federal Deposit Insurance Act, 12 U.S.C. 1828(j) and Sec. 337.3 of the FDIC Rules and Regulations, 12 CFR 337.3. The Notice alleges that, as a result of such wrongful conduct, the Bank has suffered or will probably suffer substantial loss or other damage, or the interests of its depositors could be seriously prejudiced. Finally, the Notice alleges that such conduct demonstrates Respondent ***'s willful or continuing disregard for the safety and soundness of the Bank.
III. Section 8(e)(1) Removal
[.2] A. The Essential Elements. Section 8(e)(1) of the Federal Deposit Insurance Act provides for the removal of officers and directors of an insured bank. Admittedly Respondent *** is subject to this provision. The provision establishes three separate and distinct categories of essential elements, each with a number of alternative grounds. The first category relates to the wrongful conduct that must be established to support a removal action: (1) "any violation of law, rule, or regulation or of a cease-and-desist order which has become final;" or (2) "any unsafe or unsound practice in connection with the bank;" or (3) "any act, omission, or practice which constitutes a breach of his fiduciary duty." The second category relates to the effect of the wrongful conduct: (1) "the bank has suffered or will probably suffer substantial financial loss or other damage;" or (2) "the interests of its depositors could be seriously prejudiced;" or (3) "the director or officer has received financial gain." The third category relates to the mental state of the director or officer, i.e. "scienter:" (1) "personal dishonesty" or (2) "a willful or continuing disregard for the safety or soundness of the bank."
[.3] C. The Section 23A Violations. On November 23, 1984, the Bank, through a wholly-owned subsidiary, ***, acquired from *** an 83% interest in *** Group for $3.2 million cash in an insider transaction characterized by Examiner *** as the "most abusive" he had ever seen in his 22 years as an examiner. The details of the transaction are described elsewhere in this Decision. *** was the controlling owner of the Bank and ***. Thus *** was an affiliate of the Bank before the transaction and a majorityowned subsidiary after. Sec. 23A of the Federal Reserve Act, made applicable to insured state nonmember banks such as *** Bank by Sec. 18(j) of the Federal Deposit
{{4-1-90 p.A-1233}}Insurance Act, prohibits a bank from investing more than 10% of its capital and surplus in an affiliate. Based on its September 30, 1984 Call Report, the Bank's maximum legal investment in *** was $188,000. Its actual investment, however, amounted to 172% of capital and surplus.
[.4] D. The Regulation O Violation. One of the major assets acquired by the Bank in its purchase of *** was a $1.7 million note from ***. Sec. 215.3(a) of Regulation O defines an extension of credit to include the acquisition by purchase of a note. This purchase of the *** note is in flagrant violation of Sec. 215.2(f), in that it exceeds 15% of the Bank's capital and surplus and valuation reserve by more than $1 million. It also is preferential, in violation of Sec. 215.4(a), in that it requires no principal amortization and is collateralized by undeveloped raw land whose value is inadequately substantiated.
G. The Unsafe and Unsound Banking Practices.
[.5] 1. Excessive Volume of Adversely Classified Assets. The Bank's consolidated balance sheet reflects adversely classified assets of $11.1 million, of 337% of equity capital and reserves. Examiner *** characterizes this amount as "enormous." The $3.5 million in Loss classifications center on loans in the amount of $1.3 million and other assets of $1.9 million.
[.6] The inescapable conclusion to be drawn from the data, the transactions, and the examiner opinions detailed above is that at all relevant times there existed within the Bank an extremely hazardous condition, which in fact produced loss, prejudiced the interests of the depositors, and threatened the deposit insurance fund. The December 31, 1984 conclusions of Examiner ***, not challenged by Respondent, and credited by me, are that there are no prospects for future net profits, that the Bank has and will continue to suffer huge month-
I. Financial Gain by Respondent ***.
The Notice of Intention to Remove, does not plead that Respondent received financial gain from the practices and transactions. At the hearing, however, FDIC investigator *** testified that records of ***, a wholly-owned subsidiary of the Bank, revealed that a foreign luxury car was sold to Respondent's wife for $1200 less than ***'s cost. Respondent did not dispute these facts. However, as noted above, the Notice does not allege personal gain by Respondent ***, and I am not empowered to consider this evidence, even though it is uncontroverted.
J. Breach of Fiduciary Duty.
[.7] It is now hornbook law that directors and officers of a bank have a fiduciary duty to the bank. American Bankers Association, Focus on the Bank Director, 97125 (1984); Schlichting, Rice & Cooper, Banking Law, §6.04 (1984). Generally, the duty requires that bank officials, such as Chairman of the Board ***, act as prudent and diligent persons would act safeguarding the bank's property, complying with state and federal banking laws and regulations, and ensuring that the bank is operated properly. The duty is owed to the bank, and not to persons with controlling interests in the bank. It requires the proper supervision of subordinates, a knowledge of state and federal banking laws, and the constant concern for the safety and soundness of the bank. While the standard of care for bank directors and officers, like the standard of care in negligence cases, is expressed in constant terms, the nature of the duty varies according to the facts. The greater the authority of the director or officer, the broader the range of his duty; the more complex the transaction, the greater the duty to investigate, verify, clarify, and explain.
K. Willful and Continuing Disregard for the Safety or Soundness of the Bank.
[.8] Again, the record evidence clearly establishes that Respondent *** engaged in the wrongful conduct detailed above knowingly and willfully and with continuing disregard for the safety or soundness of the Bank. In this respect, the discussion above as to the breach of his fiduciary duty is equally applicable here and will not be repeated. Suffice it to say that this Respondent demonstrated his unfitness as a bank officer or director in his dealings with the Bank president, other board directors, and the FDIC examiners and in his testimony at the hearing. He acknowledged that some of his actions were beyond that of a prudent banker, justifying them with a quick-profit motive; he acknowledged that he concocted schemes which did not comport with generally accepted accounting principles so as to paint an untruthful portrait of capital adequacy; and he created sham leases with the intent of inflating the value of the building and justifying its purchase price. These practices and attitudes on the part of this Respondent were not isolated, but continued throughout the one year he held office. As evidenced by the detailed findings of the examiner-in-charge in the Report of Examination, which I adopt, they pervaded each of the major transactions in which *** played a responsible role.
Having found and concluded that the essential elements of Sec. 8(e)(1) of the Act have been established, I hereby recommend, pursuant to Sec. 308.13 of the FDIC Rules and Regulations, that an order be issued prohibiting Respondent *** from further participation in any manner in the conduct of the affairs of any bank insured by the Federal Deposit Insurance Corporation, and that the order become effective thirty (30) day after service on Respondent *** and remain effective and enforceable except to the extent that, and until such time as, any provisions of the order shall be modified, terminated, suspended, or set aside by the Federal Deposit Insurance Corporation.
/s/ WILLIAM A. GERSHUNY |
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Last Updated 6/6/2003 | legal@fdic.gov |
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