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FDIC Enforcement Decisions and Orders |
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On remand from the U.S. Court of Appeals, which found the record incomplete concerning Respondent's ability to pay, the Board of the FDIC reconsidered the amount of civil money penalty to be imposed, with consideration of the statutory factors regarding ability to pay. Unable to determine the Respondents' net worth or his current or future ability to pay because of Respondent's lack of cooperation, the Board drew an adverse inference from the lack of evidence and imposed a substantial penalty ($175,000) in order to deprive the Respondent of the financial benefit of his illegal actions, to punish him, and to provide a deterrent to such conduct in the future. (Reversed and remanded by the Fifth Circuit Court of Appeals, 970 F.2d 71, on 9-1-92.)
[.2] Civil Money PenaltiesAmount of PenaltyAbility to Pay
In the Matter of
INTRODUCTION
This case is before the Board of Directors of the Federal Deposit Insurance Corporation ("FDIC") ("Board") for reconsideration of the proper amount of a civil money penalty to be imposed after remand by the United States Court of Appeals for the Fifth Circuit, Bullion v. FDIC, 881 F.2d 1368 (5th Cir. 1989).1 With the exception of the amount of the penalty imposed, the Fifth Circuit affirmed all aspects of this Board's determinations that Respondent had violated banking regulations. Bullion v. FDIC, 881 F.2d at 1379-80.
Respondent is a well-educated,3 52 year old, married man who started in real estate by building residential homes in 1967 while employed by the Department of Labor. Tr. at 139-40. Thereafter, his real estate activities expanded to include the development of townhomes, apartment complexes, and shopping centers. After becoming a licensed real estate agent, Respondent was instrumental in the formation of the Bank and served as chairman of the board while continuing to engage in commercial real estate ventures. Tr. at 142-44.
RECOMMENDED DECISION
At the hearing on Respondent's ability to pay, an FDIC examiner testified that he is unable to determine Respondent's current and future ability to pay a civil money penalty. Tr. at 5355. Despite specific directions from the ALJ, Respondent produced only limited records regarding his financial condition. Tr. at 53. FDIC enforcement counsel contends that Respondent's production of documents was not in good faith since Respondent did not produce a verifiable financial statement. Tr. at 29.
The Respondent takes exception to a number of matters in the Recommended Decision. The Respondent objects to the ALJ's limitation of discovery and the evidence presented at the hearing on remand to his "ability to pay" (Exception 1). Respondent also objects to the scope of the remand to the ALJ and the fact that he was not permitted to address the other statutory factors (Exception 2); the ALJ's determination that Respondent was not cooperative5 (Exception 3); and the ALJ's factual determinations relating to Respondent's income and assets (Exception 4). Further, Respondent asserts that the ALJ's recommended decision is "clearly contrary to law and the facts of this particular case" (Exception 5); that the ALJ's adoption of the maximum civil money penalty6 should be rejected (Exception 6); and that the ALJ derived the penalty mechanically (Exception 7). In light of the entire record before this Board, the Board finds that none of Respondent's exceptions is meritorious.
[.1] The scope of the hearing on remand was fixed by this Board to comply with the remand order of the Fifth Circuit. After review of the remand by the Fifth Circuit Court of Appeals and the record, the Board determined that the record was adequate as to all of the statutory factors to be considered in setting a penalty except for the size of Respondent's financial resources. The purpose of the remand was to fill in a gap in the record in this proceeding perceived by the circuit court, not to give the Respondent the opportunity to relitigate the penalty provision generally. Therefore, Respondent's Exceptions 1 and 2 are without merit. The ALJ properly limited the evidence at the hearing to the sole issue of Respondent's "ability to pay" consistent with the Board's order and the decision of the Fifth Circuit, and he properly relied upon the prior determinations relating to the remaining statutory factors. 881 F.2d at 1379-80 and Tr. at 21. The exceptions based on factual determinations does not bar this Board from imposing a substantial civil money penalty upon a Respondent after consideration of all the factors. See generally Premex, Inc. v. Commodity Futures Trading Comm'n, 785 F.2d 1403, 1409 (9th Cir. 1986); Bosma v. U.S. Dept. of Agriculture, 754 F.2d 804, 810 (9th Cir. 1984).
A. Gravity of the Violations
[.3] The ALJ concluded, and the Board agrees, that the violations involved in this proceeding are very serious. Respondent used his position and influence as the chairman of the Bank to cause a loan to be made by the Bank that was in violation of its lending limits to insiders. Since the loan was below the normal rate of interest, the Bank was deprived of the income that would have been produced by a normal loan at a time when the Bank was experiencing a negative income flow. Furthermore, the loans were inadequately collateralized and the borrower did not appear to have sufficient assets or income to support repayment of the loan. As a 1988 study complied by the Comptroller of the Currency found:
B. Good Faith
[.4] In the Board's underlying decision, it held that "[t]his case does not involve personal dishonesty on the part of any Respondent." Dec. at 14. The Board noted in the Decision, however, that Respondent had failed to "comply with the subpoena duces tecum" seeking evidence as to his
C. Size of Respondent's Financial
[.5] From a review of the record of the remand proceeding, the testimony of Respondent and the documents produced, it is evident that his "game plan" was to deprive the ALJ and the Board of any current accurate financial information.14 R.D. at 3. As the ALJ found:
[.6] Respondent's efforts to avoid providing evidence and to obfuscate that evidence of his financial condition which is available leads the Board to conclude, as did the ALJ (R.D. at 6), that his testimony should be viewed not only with circumspection, but also that an inference adverse to Respondent must be drawn.17 As discussed, supra, because the evidence of Respondent's financial condition is uniquely within his control and the Board required that he produce that evidence, the Board can only infer that, had he produced such evidence, it would have been adverse to him and would have allowed Enforcement Counsel to prove that he had the ability to pay a substantial civil money penalty. The Board is unwilling to blindly accept Respondent's unsupported assessment of his current ability to pay a penalty simply because there is insufficient evidence in the record from which to adequately evaluate Respondent's true current financial condition. To do so would put every Respondent on notice that non-cooperation was the means of avoiding a civil money penalty. Therefore, the Board rejects the ALJ's determination that Respondent has a current ability to pay only a $10,000 penalty. Instead, the Board adopts an adverse inference from Respondent's failure on three separate occasions to provide objective evidence of his financial condition.
D. History of Previous Violations
The Board agrees with the ALJ18 that this factor operates in Respondent's favor. R.D. at 14. Therefore, the penalty assessed should reflect this factor.
E. Other Matters as Justice May Require
The record reflects that Respondent, through the insider abuse giving rise to this action for a civil money penalty, has caused a loss to the Bank, its receivership estate and ultimately to the deposit insurance fund in excess of $1.2 million. R.D. at 4. Despite the amount of the loss, Respondent has not attempted to repay the Sherwood Meadows loan nor to make any restitution to compensate the receiver or the insurance fund for the gain he received at the Bank's expense. As the ALJ stated, "[i]n order to have a deterrent effect, the civil money penalty should at least encompass the gain." R.D. at 14.
[.7] While there is no evidence of personal dishonesty and the evidence available does not establish with exactitude Respondent's current financial condition, the Board finds from the adverse inference described above and the evidence of record that Respondent does have the ability to pay a
Therefore, upon careful consideration of the entire record herein, the Board affirms the ALJ's recommendation of a penalty and finds that a civil money penalty against Respondent in the amount of $175,000 is justified and appropriate.
ORDER TO PAY CIVIL MONEY
The Board of Directors of the Federal Deposit Insurance Corporation, having considered the entire record in this proceeding, including briefs filed on behalf of Respondent and the FDIC, the ALJ's Recommended Decision and Order filed by Respondent, and after taking into consideration and appropriateness of the civil money penalty with respect to the statutory factors of size of financial resources, good faith of Respondent, the gravity of the violation, history of previous violations, and such other matters as justice may require, makes the following findings:
In the Matter of
The Respondent herein, Dr. Joseph A. Dazzio, was Chairman of the Board of Directors of the Metropolitan Bank & Trust Company of Baton Rouge. He along with certain officers of the Bank were assessed civil money penalties pursuant to 12 U.S.C. § 1828(j)(4)(A) and (B) for violating 12 U.S.C. § 375b and 12 C.F.R. § 215.4(a) and (c) (respectively Section 22 H of the Federal Reserve Act and Regulation O of the Board of Governors of the Federal Reserve System).
A. The Facts
The Respondent testified that he received a Ph.D. in food and nutrition in 1967 and for the next 13 years worked in that field, presumably, for the United States Department of Health and Human Services and the Department of Labor. Even while working for the Department of Labor, he began building residential homes. Subsequently, his work in construction expanded to townhouses, apartments, and ultimately shopping centers. In addition, he became a licensed real estate agent and in 1982 helped establish and became Chairman of the Board of the Bank. Until 1987 the Respondent engaged in commercial real estate ventures. According to his 1985 financial statement, he accrued a net worth of $2.2 million, but this has been reduced to $901,000 by the time of his September 1986 financial statement.
B. Analysis of the Statutory Factors
Section 1828(j)(4)(B) provides:
(a) Size of financial resources
Though ability to pay is a statutory factor to be considered, such is not determinative of the penalty to be assessed. Nor must the Board accept the Respondent's testimony of an inability to pay, particularly in light of the Respondent's failure to comply with the Board's order with regard to submitting financial data.
In its underlying decision, the Board held that this case did not involve personal dishonesty and management of the Bank undertook to cure the violation, after notice, by selling the overline portion of the loan. This latter act would amount to after-the-fact "good faith" and is relevant to the amount of the penalty. Fitzpatrick v. FDIC, 765 F.2d 569 (6th Cir. 1985). Thus, the "good faith" factor operates in the Respondent's favor.
On the other hand the violation was grave. Insider abuse is without doubt a very serious matter. The Respondent used his position as chairman of the Bank's board of directors to obtain the use of $1.5 million of other people's money. And he profited from the transaction by more than $175,000. As the Sixth Circuit said in Fitzpatrick, in approving a loan forbidden by Regulation O, the respondent "breached his legal and fiduciary duty." Thus the violation is grave even though there was no showing of personal dishonesty. The gravity of this violation would justify a substantial penalty.
There is no showing that the Respondent had previously engaged in violations of Section 375b or Regulation O. Therefore, this factor operates in the Respondent's favor.
While the Board found no personal dishonesty, it did find that the Respondent made a profit on the violative transaction of $175,000, and such, in justice, would militate against reducing the penalty.
The Board of Directors of the FDIC having considered the entire record in this proceeding including the record made on March 27, 1990, briefs and arguments of counsel, and the recommended Decision and Order of the Administrative Law Judge dated July 10, 1990, and exceptions thereto, and after taking into consideration the appropriateness of the penalty recommended with respect to the financial resources and good faith of Joseph A. Dazzio, the gravity of the violations which he has been found to have committed, the history of previous violations, and such other matters as justice may require, concludes that a penalty of $175,000 be, and the same hereby is, assessed against Joseph A. Dazzio, pursuant to § 1818(j)(3) of the Federal Reserve Act, 12 U.S.C. § 1828(j)(3). |
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Last Updated 6/6/2003 | legal@fdic.gov |
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