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Former Chairman of Board of Directors of Bank assessed civil money penalty for violations of lending limit and prior approval requirements, seriously harming Bank and placing it in jeopardy. (An Application for Special Leave to Appeal was denied 12-8-87. See [¶
[.1] Practice and ProcedureHearingDelay
[.2] Regulation OViolationCalculation
[.3] Civil Money PenaltiesAmount of PenaltyPersonal Gain
[.4] Civil Money PenaltiesAmount of PenaltyAbility to Pay
[.5] Civil Money PenaltiesBurden of Proof
[.6] Federal Reserve Act § 23A"Covered Transactions"
[.7] Civil Money PenaltiesAmount of PenaltyStatutory Standard
{{4-1-90 p.A-1323}}
In the Matter of ***, individually, and as
I. Introduction
This case involves the assessment of a civil money penalty by the Federal Deposit Insurance Corporation ("FDIC") against *** ("Respondent"), former chairman of the board of directors of *** Bank *** (the "Bank"), for violations occurring over approximately a two year period of time of the lending limit prohibitions and prior approval requirements of sections 22(h) and 23A of the Federal Reserve Act (the "Act") (12 U.S.C. §§375b and 371c) and Regulation O of the Board of Governors of the Federal Reserve System ("Regulation O") (12 C.F.R. Part 215).1 The large amount of money involved and the number, repetition, and continuing nature of these violations seriously harmed the Bank and placed it in jeopardy.
II. Procedural History
On April 15, 1985, Respondent requested a hearing and on June 7, 1985, filed an Answer to the Notice of Assessment. On April 1 and 3, 1985, the FDIC initiated two other unrelated actions against Respondent *** regarding his participation in the affairs of another bank. Due to the nature of these actions (i.e., permanent removal from banking and payment of a civil money penalty), agreement was reached among the Administrative Law Judge in this action, the FDIC, and Respondent *** that the trial of these other bank actions should proceed prior to the trial of this action, and that the rulings made in those actions regarding discovery and other pre-hearing matters would be followed generally in this action.4
III. Respondent's Motion to Dismiss
On October 15, 1987, Respondent filed with the FDIC Executive Secretary a Motion to Dismiss All Charges and Fine Against *** ("Motion to Dismiss"). Respondent alleged that the FDIC failed to comply with section 308.71 of the FDIC Rules of Practice and Procedures (12 C.F.R. §308.71) by failing to convene a hearing within 60 days after receipt of his request for a hearing. The FDIC filed its Opposition to the Motion to Dismiss and supplemental Opposition on October 21 and 28, 1987. At the fifth pre-hearing conference, held on November 10, 1987, Respondent's Motion to Dismiss was extensively discussed and ultimately denied by the ALJ. Respondent alleged that he had been prejudiced by the delay in commencing the hearing because certain witnesses were deceased or no longer available to testify on his behalf. The ALJ ordered (without objection from the FDIC) that Respondent could make a proffer regarding the testimony of one witness who was allegedly deceased and that Respondent could supplement the record with the sworn testimony given in another action by another unavailable witness. In denying Respondent's Motion to Dismiss, the ALJ cited the following reasons: (1) an administrative law judge does not have the authority under the FDIC Rules of Practice and Procedures to grant a motion to dismiss; (2) any delay in the commencement of a hearing in this proceeding occurred with the acquiescence of Respondent and his counsel of record, and Respondent had therefore waived his objection; (3) the 60 day period provided in section 308.71 of the FDIC Rules of Practice and Procedures is not jurisdictional; and (4) Respondent had not been actually prejudiced by the delay in the commencement of the hearing. On November 18, 1987, Respondent appealed the denial of his Motion to Dismiss. Pursuant to section 308.12(e), Respondent's Motion to Dismiss and Appeal of the Denial of the Motion have been transmitted to the Board for final agency action as part of the record in this matter.
[.1] The Board affirms the ALJ's denial of Respondent's Motion to Dismiss. The issues raised by Respondent have been fully reviewed and decided by this Board in FDIC-85-326b, 2 FDIC Enforcement Decisions ¶6780 (July 29, 1986). Upon full analysis of section 1818(b)(1) of the FDI Act and the FDIC Rules of Practice and Procedures, the Board determined that the 60 day time period is not jurisdictional, but, rather, directory only. The purpose of the time limitation is to assure an orderly proceeding, FDIC-85-326b, supra, at p.6759. Therefore, in the absence of a showing of prejudice or agency bad faith (neither of which were found by the ALJ, nor by the Board in its review), dismissal of the action is not appropriate.
IV. Discussion of the Violations and the
Respondent was an "executive officer" of the Bank and served as chairman of its board of directors. R.D. at 3.5 He was also a "principal shareholder" of the Bank as the controlling and principal shareholder of ***, a one-bank holding company that owned in excess of 90% of the Bank's capital stock. In addition, the ALJ found that Respondent exercised a significant degree of influence and control over the Bank president. R.D. at 30. All of the violations of law and regulation which are the subject of this action pertain to various loans and other extensions of credit made by the Bank to and/or for the benefit of Respondent and/or his related interests between 1982 and 1985. At issue are a total of 13 loans which were renewed numerous times over a period of approximately 3 years creating a total of 105 lending limit violations and 45 violations of the prior approval requirements of Regulation O. R.D. at 13, and fn. 21.
A. Liability
Respondent has been charged with violations of the limitation on extensions of credit to "insiders" and bank affiliates, and the prior approval requirements for such extensions of credit.
[.2] Liability for violation of these provisions of the Act and Regulation O is comparatively simple to determine. Lending limitation violations are ascertained by a straightforward mathematical calculation. The record contains tabular summaries which show the aggregate amounts of the loans made by the Bank, as well as the Bank's total capital and surplus, at the time each extension of credit at issue here was originated or renewed. The validity of these summaries and the underlying data is undisputed. R.D. at 6. Accordingly, the Board adopts the ALJ's finding that all of the direct and indirect extensions of credit made to Respondent and his related interests constitute violations of the lending limits and prior approval requirements of section 22(h) of the Act and Regulation O. R.D. at 6. The Board further adopts the findings that the extensions of credit to ***, a Bank affiliate, between February 29 and August 3, 1984, similarly violate the ten percent lending limit of section 23A, and the aggregate extensions of credit to the Bank's affiliates between July 1, 1983, and December 31, 1985, violate the twenty percent lending limit of Section 23A.7 R.D. at 6.
B. Amount of the Penalty
[.3] Section 18(j)(4)(A) of the FDI Act authorizes the FDIC to impose a maximum civil penalty for each violation of $1,000 per day for each day during which a violation of section 22(h) or 23A of the Federal Reserve Act, or any lawful regulation promulgated thereunder, continues. In determining the amount of the assessment, section 18(j)(4)(B) requires that certain factors be considered by the FDIC when it assesses civil penalties. Section 18(j)(4)(B) provides:
ORDER TO PAY CIVIL MONEY
The Board of Directors of the FDIC, having considered the entire record in this proceeding, including briefs filed by each party, the ALJ's Recommended Decision and Order, Exceptions to the Recommended Decision and Order filed by each party, and after taking into consideration the appropriateness of the penalties with respect to the financial resources and good faith of respondent, the gravity of the violations, the history of previous violations, and such other matters as justice may require, makes the following findings. The Board finds on the record before it that Respondent violated sections 22(h) and 23A of the Federal Reserve Act (12 U.S.C. §§ 375b and 371(c) and section 215.2(f), 215.4(c), and 215.4(b) of Regulation O, promulgated thereunder (12 C.F.R. §§ 215.2(f), 215.4(c), and 215.4(b)).
CHARNO, Administrative Law Judge:
A Notice of Assessment of Civil Money Penalty was issued by the Federal Deposit Insurance Corporation ("FDIC" or "Petitioner") on April 3, 1985, alleging that *** ("Respondent") violated sections 22(h) and 23A of the Federal Reserve Act ("Act"), 12 U.S.C. §§ 375b and 371c, and Federal Reserve regulation O ("Regulation O"), 12 C.F.R. Part 215.
I. Alleged Violations
Petitioner is empowered to assess a civil money penalty for certain violations of the Act committed by insured banks that are not members of the Federal Reserve System ("nonmember insured bank"). 12 U.S.C. §1828(j). In this proceeding, Petitioner alleges that the Respondent has committed three types of violations of the Federal Reserve Act: (1) violations of the lending limits of section 22(H) of the Act and Regulation O, (2) violations of the prior approval requirements of section 22(h) of the Act and Regulation O and (3) violations of the lending limits of section 23A of the Act.
D. Analysis
Proceeds of the loans to ***, ***, the *** group and *** were used for the tangible economic benefit of Respondent's related interests, and the loans to ***, *** and the *** group were either assumed or guaranteed by such interests. Accordingly, I find these five transactions to be indirect extensions of credit to Respondent's related interests and to be subject to the lending limits of Regulation O. It is uncontested that the eight direct extensions of credit discussed above are also subject to these lending limits. Because none of the security held by the Bank in connection with either the direct or indirect extensions of credit falls within the regulatory definition of "readily marketable collateral," all of these loans are subject to the 15 percent unsecured lending limit of Regulation O.
II. Amount of the Penalty
Because Respondent committed violations of the Federal Reserve Act which render him liable for payment of a civil money penalty, the size of that penalty must be determined. The maximum penalty which may be imposed is limited by statute to $1,000 for each day during which a violation continues. 12 U.S.C. §18(j)(3)(A). In determining the actual penalty to be imposed, Congress has mandated that:
[.4] A. Size of Financial Resources
Any consideration of Respondent's financial resources must be prefaced by two legal principles. Respondent's ability to pay a civil money penalty is not limited by his net worth. See [1986] F.D.I.C. Enf. Dec. (P-H) ¶5063. Moreover, it is appropriate to take Respondent's future earning capacity into account in determining the size of such a penalty. See Raney v. Honeywell, Inc., 540 F.2d 932, 936 (8th Cir. 1976); [1987] F.D.I.C. Enf. Dec. (P-H) ¶5082.
The $827,000 negative net worth derived from this revision is not a realistic figure because Respondent valued a "significant portion" of his assets at depreciated original cost, rather than fair market value.10 Accordingly, Respondent's indication that "liabilities exceed assets" of five of his corporations is meaningless in determining his true net worth. Similarly, the reported value of pledged assets on the September 28 statement ($1,173,000) may significantly understate their actual value.
B. Good Faith
Mr. *** reviewed and evaluated the record in this case in the context of a number of regulatory criteria relating to the issue of Respondent's good faith. Mr. *** found no evidence of agreements, commitments or orders intended to prevent the subject violations; no evidence of a compliance program and no evidence that Respondent had failed to cooperate with Petitioner. He accordingly rated the impact of these criteria as "neutral." Because Respondent's inability to repay his loans left "not much that could have been done," Mr. *** rated Respondent's continuation of the instant violations after becoming aware of them as only "slightly negative." Mr. ***'s evaluation of these factors is supported by the record, and I adopt it.
[.5] While the preponderance of the evidence does not demonstrate that Respondent knowingly violated the relatively complicated statutory and regulatory provisions involved here, there can be no question that he was aware of the existence of legal limitations on his activities and did nothing to explore the parameters of those limitations. Instead, he repeatedly acted in his own interest in highly imprudent disregard of his legal and ethical obligations. Accordingly, I find that Respondent's violations were not committed in good faith.
C. Gravity of the Violation
The record discloses 82 lending limit violations which were in effect for 3,063 days and 45 violations of the prior approval requirements of Regulation O.21 Accordingly, the maximum civil money penalty which may be imposed in this case is $3,108,000.
D. History of Previous Violations
The *** Bank *** was criticized for apparent violations of section 23A during Respondent's tenure as a principal shareholder and director. Thus, a 1978 FDIC Report of Examination scheduled one loan to an affiliate of Respondent as a violation of the collateral requirements of section 23A. Petitioner's 1979 Report of Examination scheduled three loans to Respondent's affiliates as violations of the collateral requirements and of the 10 and 20 percent lending limits of section 23A. Finally, Petitioner's 1980 Report of Examination scheduled a loan to one of Respondent's affiliates as a violation of the collateral requirements of section 23A.27
E. Other Matters As Justice May Require
Three further matters must be considered which bear on the appropriate size of the penalty to be assessed in this case: the tendency of Respondent's violations to create an unsafe or unsound banking practice or condition, Respondent's failure to make restitution and the deterrent emphasis of the legislative policy underlying the statutory authorization of civil money penalties.
F. Analysis
The Interagency Policy mandates that a civil money penalty must, at a minimum, remove the economic benefit flowing from an offender's violations. Since that benefit in this case may be measured by loss to the Bank, an appropriate penalty can be no less than $390,000. Taking into account the mitigating and aggravating circumstances discussed above,31 as well as the deterrent objective of the underlying statutory scheme, I find that Mr. ***'s recommendation of a penalty 36 percent larger than the Bank's losses is justified in this case. Accordingly, I shall order Respondent to pay a civil money penalty of $530,400. While this amount may exceed Respondent's net worth, it is within his projected earning capacity over the next 15 years.
FINDINGS OF FACT32
1. At all times relevant to this proceeding, the Bank was a commercial bank organized and chartered under the laws of ***, having its principal place of business in ***.
CONCLUSIONS OF LAW
1. The FDIC has jurisdiction over Respondent under 12 U.S.C. §1828(j) to impose a civil money penalty for violations of sections 22(h) and 23A of the Act and Regulation O.
[.6] 11. For purposes of applying the secured and unsecured lending limits of Regulation O, an "extension of credit" to Respondent within the meaning of section 215.3 of Regulation O includes (a) any loan or other extension of credit or any renewal thereof made by the Bank to Respondent or to any of his related interests, (b) any loan or other extension of credit or renewal thereof made by the Bank to any third party for which Respondent or any of his related interests is obligated as endorsor or guarantor, (c) any loan or other extension of credit or renewal thereof made by the Bank to any third party to the extent that the proceeds of such loan or extension of credit are transferred to or used for the tangible economic benefit of Respondent or any of his related interests and (d) the total of any loan participation purchased by the Bank or the renewal thereof where the proceeds of the loan from the originating (selling) bank were transferred to or used for the tangible economic benefit of Respondent or any of his related interests.
[.7] 23. In an action for the assessment of a civil money penalty under 12 U.S.C. §1828(j) for violations of the prohibitions of sections 22(h) and 23A of the Act and Regulation O, the determination of the appropriate amount of penalty to be imposed for such violations must take into account the five statutory factors provided in 12 U.S.C. §1828(j)(3)(B) ("statutory factors") pertaining to (a) the good faith of the offender, (b) the size of financial resources of the offender, (c) the gravity of the violations that occurred, (d) any history of prior violations involving the offender and (e) any other matters that may be required by justice.
[.8] 24. In an action for the assessment of a civil money penalty under 12 U.S.C. §1828(j) for violations of the prohibitions of sections 22(h) and 23A of the Act and Regulation O, the FDIC has the burden of proving and otherwise establishing that the amount of the penalty to be imposed is appropriate taking into account the statutory factors, except that the offender has the burden of proving any allegation or assertion that the size of financial resources of such offender are insufficient or otherwise do not warrant the assessment of a penalty because of the proprietary and subjective nature of such information.
ORDER TO PAY
After taking into account the appropriateness of the penalty with respect to the financial resources of Respondent, the good faith of Respondent, the gravity of the violations by Respondent, the history of previous violations by Respondent, and such other matters as justice may require, it is: |
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Last Updated 6/6/2003 | legal@fdic.gov |
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