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STATEMENT ON
SUPERVISORY AND ENFORCEMENT EFFORTS IN
IMPLEMENTING THE ENFORCEMENT PROVISIONS OF THE
FINANCIAL INSTITUTIONS REFORM, RECOVERY,
AND ENFORCEMENT ACT OF 1989
PRESENTED TO
SUBCOMMITTEE ON COMMERCE, CONSUMER, AND MONETARY AFFAIRS
COMMITTEE ON GOVERNMENT OPERATIONS
HOUSE OF REPRESENTATIVES
BY
ARTHUR L. BEAMON
ASSOCIATE GENERAL COUNSEL, LEGAL DIVISION
FEDERAL DEPOSIT INSURANCE CORPORATION
9:30 a.m.
THURSDAY, MARCH 15, 1990
ROOM 247, RAYBURN HOUSE OFFICE BUILDING
OPENING REMARKS
Good morning Mr. Chairman and Members of the Subcommittee.
My name is Arthur L. Beamon.
I am Associate General Counsel in
the FDIC Legal Division, head of the Compliance and Enforcement
Section, which has staff both in the Regions and in Washington.
I have been the head of this Section for approximately 6 years my tenure spans both pre- and post- FIRREA activities.
I would
therefore like to relate to you some of FDIC’s experiences with
the enforcement provisions of the FDI Act, both before and after
FIRREA.
The staff has prepared specific responses to your
written questions.
These are contained in a separate report
provided to the Subcommittee.
Since 1987, the year of our last report to this
Subcommittee, the number of formal enforcement actions initiated
by the FDIC has remained at a relatively consistent level - in
1987, 236 formal enforcement actions were initiated, in 1988, 223
formal actions were initiated, and in 1989, 207 formal actions
were initiated.
This does not include Memoranda of
2
Understanding, Letter Agreements, Board Resolutions and .other
informal arrangements.
With the recent advent of FIRREA, we
expect these numbers to grow.
More parties can be reached with
the expanded enforcement powers of FIRREA, higher penalties can
be imposed, and broader jurisdiction should reach more actionable
offenses.
On the other hand, heightened public awareness of
FIRREA could lessen the number of offenses.
REMOVALS AND PROHIBITIONS
Implementation of all the new provisions of FIRREA has taken
some time, but that was to be expected.
It has taken time to
become familiar with the new provisions on the part of both
regulators and the banking industry, as well as time to adopt new
interpretive rulings.
Moreover, certain restrictions against
retroactivity contained in FIRREA itself - notably with regard
to removals and prohibitions, and civil money penalties - have
limited current application of many of its provisions.
On the
other side of the equation, FIRREA has breathed new life into
many removal actions that had been in limbo since the Stoddard
3
decision.
These cases are now being processed.
One area,
however, where FIRREA is less clear, is in the applicability of
the industrywide bar to individuals against whom
removal/prohibition orders had been issued prior to FIRREA.
A
more detailed explanation of this is contained in our written
response.
CIVIL MONEY PENALTIES
Since the new larger civil money penalties may not, for the
most part, be applied to activities that occurred prior to
FIRREA, the FDIC has had little opportunity to test their
application.
Of the 49 individuals assessed civil money
penalties in 1989, a total of 16 individuals elected to stipulate
and pay their penalties.
their assessments.
The remainder are currently litigating
We have every reason to believe that the
larger penalties will promote an even more litigious response on
the part of assessed individuals!
In the area of increased call report penalties, we have
recently made the first assessments under the increased penalty
4
provisions of FIRREA.
The change in these penalty amounts have
probably drawn more objection from the banking industry than any
other enforcement change brought about by FIRREA.
It is too soon
to tell what positive effect, if any, the increased penalty
amounts here will have on timely and accurate call report filing
- for the September Call, there were 14 late submissions; for the
December Call, there were 30 late submissions.
Although a higher
penalty than that originally contained in the FDI Act was clearly
justified, the dramatically increased amounts contained in FIRREA
seem somewhat incongruous with the gravity of the offense, and
thus may not prove to have a substantial deterrent effect.
TERMINATION OF INSURANCE
FIRREA has also made some significant changes to termination
of insurance proceedings.
With the shortened time frames, we
expect to reach more rapid resolution of termination of deposit
insurance for those institutions whose condition or activities
threaten the insurance fund.
Even with the FIRREA changes to
this subsection, involuntary deposit insurance termination still
5
will take at least one year to conclude, barring failure, of the
institution.
Several such cases are presently scheduled for
hearing.
To date, we have attempted temporary suspension of deposit
insurance on one institution.
Although the action was ultimately
successful, a problem arose with interpretation of one provision
of FIRREA.
Since deposit insurance may not be suspended unless
the condition of the institution has deteriorated to the point of
insolvency, an additional wait of 30 days after giving notice to
the primary regulator is inconsistent.
Such a wait could only
allow the condition of the institution to deteriorate further,
and cause even greater exposure to the insurance fund.
of this subsection is clearly warranted.
Amendment
Without such a waiting
requirement, we believe the temporary suspension of deposit
insurance provision of FIRREA, could prove to be an effective
tool in minimizing loss to the insurance fund.
6
OTHER PROJECTS
Other projects we have completed pursuant to the provisions
of FIRREA include adopting new regulations pertaining to
applications of senior executive officers and directors under
new Section 32 of the FDI Act, new publication guidelines for
final administrative enforcement orders, a model brief in support
of retroactive application of Sections 904 and 905 of FIRREA, a
financial institutions letter issued to all state non-member
banks and national banks explaining application of the new callreport penalties, and sample pleadings for termination of
insurance proceedings, 8(e) removal proceedings with expanded
jurisdiction under FIRREA, and civil money penalties proceedings
issued post-FIRREA.
Other projects in process include adopting
a new policy memorandum applying the expanded provisions of
Section 19 to persons convicted of crimes, preparing a letter of
understanding between the FDIC and OTS defining "exigent
circumstances," and establishing joint agency committees to
address issues of shared ALJ "pools" and uniform rules of
7
procedure.
CONCLUSION
As these items illustrate, we are in a time of trial and
testing, but we look forward to the challenge of the coming year
in light of our expanded new powers under FIRREA.
Thank you, Mr. Chairman.
I will be pleased to answer any
questions you or members of the Subcommittee may have.
SUPERVISORY AND ENFORCEMENT EFFORTS
OF THE FEDERAL DEPOSIT INSURANCE CORPORATION
ADDENDUM TO TESTIMONY
FOR THE COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE
OF THE COMMITTEE ON GOVERNMENT OPERATIONS
THURSDAY, MARCH 15, 1990
The following is the Federal Deposit Insurance Corporation's
written response to questions posed by the Commerce, Consumer,
and Monetary Affairs Subcommittee of the Committee on Government
Operations in a letter dated February 14, 1990. This response
will be further augmented by the testimonies of Paul G. Fritts,
Director, Division of Supervision, Associate General Counsel
Arthur L. Beamon, and Assistant General Counsel Thomas A. Schulz.
A.
Nature and extent of abuse and misconduct in financial
institutions:
1.
(a) Provide updated data on the number of insolvent
thrift institutions for which misconduct was identified (or
otherwise present) during 1987, 1988, and 1989, based on the same
three criteria and broken down in the same manner as the data
which the FHLBB provided in 1987-^/ ; (b) specify the estimated
losses to the deposit insurance fund from these insolvent
thrifts; and (c) specify the percentage these institutions
constitute of the overall number of insolvent thrifts for each
year.
-^/Misconduct is and was defined as conduct by an insider or
affiliated outsider that resulted in a formal or informal
enforcement action, a criminal referral, or a FSLIC lawsuit filed
(after insolvency) to recover losses resulting from intentional
wrongdoing or negligent attention to fiduciary duties. See p.
10, n. 35, of House report 100-1088 (subcommittee's 1988 study).
This information is now within the FDIC, since its incorporation
of the FSLIC.
2
Response:
(a) The number of thrift institutions for which misconduct
was identified is as follows:^/
Thrifts Where
Failed
Open Thrifts
Receiving FSLIC
Problem
Year
Misconduct Was
Identified (1)
Institutions ( 2 )
Assi stance (3)
Institut ions (4)
1987
234
79
50
28
1988
203
84
36
36
1989
170
49
11
41
(1) Misconduct is defined as conduct by an insider or affiliated outsider that resul ted in a formal
or informa l action or a criminal referral. An insider is an officer, director, or c ont rol l ing
shareholde r. An affiliated outs ider means other sharehol ders and major borrowers of the institution.
(2)
"Failed" institutions are those placed in recei versh ip.
(3) These are institutions merged or acquired with FSLIC assistance or placed in the management
cons ignmen t program ("MCP").
(4) "Problem institutions" are those that were assi gned a composite MACRO rati ng of L or 5. This
defirli t ion was chosen in lieu of "significant supervisory cases" since the Significa nt Supervisory Case
List is no longer in use.
(b) The resolution of all insolvent thrifts from January 1,
1989, to August 9, 1992, is the responsibility of the Resolution
Trust Corporation under FIRREA. The Savings Association
Insurance Fund, which was created by FIRREA to separately insure
thrifts was, and is, not at risk for insolvent thrift
institutions during the time frames requested. Pertinent
information on thrifts prior to 1989 may be available from the
Office of Thrift Supervision. The FDIC does not have data
available that would allow it to determine losses to the FSLIC
insurance fund.
These figures were obtained with the cooperation of the Office
of Thrift Supervision. The figures do not include misconduct
identified in the Professional Liability arena; however,
information on Professional Liability actions instituted against
thrift-related individuals is included in Question B(2) below.
3
(c) We defer to the Office of Thrift Supervision for the
percentage of thrifts which constitute the overall number of
insolvent thrifts for each year.
2.
(a) Provide the same data requested in 1. on the number
of insolvent banks, using the same criteria and with the same
breakdowns; (b) specify the estimated losses to the FDIC from
these insolvent banks; and (c) specify the percentage which these
institutions constitute of the overall number of insolvent banks
for each year.
Response:
(a) The following chart provides the number of insolvent
banks for which misconduct was identified (or was otherwise
present) during 1987, 1988, and 1989 and (c) the percentage which
these institutions constitute of the of the overall number of
insolvent banks for each year.
1987
1988
1989
Number of banks which failed
184
200
206
•Number of failed SNM banks
112
95
82
Number of failed banks where misconduct identified
77
62
52
Percentage of failed banks where misconduct identified
42%
31%
25%
Commonly, directors' and officers' liability suits are filed
after an investigation that lasts two to three years.
Consequently, it is not possible to tell how many bank failures
during 1987 through 1989 will result in D&O suits. It should
also be noted that, even when claims on the merits exist, suit is
not filed unless there are believed to be sufficient recovery
sources to make the suit cost effective. With those
qualifications, our experience suggests that suits will be filed
(or settlements agreed to) involving roughly half of the
failures that occurred during the 1987-1989 period.
(b) Although the question asks for the estimated losses to
the deposit insurance fund from failed state nonmember banks
where misconduct was identified, the FDIC does not track this
information in the manner requested. Consequently, the following
4
figures apply to estimated losses to the deposit insurance fund
from all failed institutions:
ESTIMATED LOSSES TO FDIC DEPOSIT INSURANCE FUND*
(In $ mill ions)
1987
3,066
1988
1989 (est.)
7,364
3,964
♦Includes losses on arranged assistance transactions
and provisions for estimated losses not yet sustained.
Excludes administrative operating expenses.
Losses
attributable to all institutions are shown because losses
wherein fraud was present cannot be extracted from FDIC
records.
3.
For the same three years, please specify the numbers of
SNM banks in which misconduct was identified (i.e. resulted in a
formal enforcement action or a criminal referral) and for each
number indicate the number of such banks .which subsequently
failed.
Response:
Formal Enforcement Actions Taken Against Insiders -
Number of Banks Involved:
Number of Banks which Failed:
1987
24
1988
1989
46
22
5
13
7
Criminal Referrals Involving Insiders -
Number of Banks Involved:
Number of Banks which Failed:
1987
358
1988
1989
331
330
37
28
20
5
4.
Describe any recent discernible trends or patterns of
fraud or misconduct, including the schemes and areas of the
country most affected.
(For example, is the FDIC finding
problems with real estate lending, as is the OCC?)
Response:
The soft real estate market, especially in the New England
area, has adversely affected many of the area's banks. With a
decline in asset quality in many of these banks, we are noticing
an increase in the number of reports of apparent crime concerning
commercial real estate loans. In many instances, the commercial
real estate loan portfolios in these banks increased at an above
average rate, and the loans at inception were poorly structured
and poorly documented. The reports of apparent crime most
frequently recite false financial statements, improper
disbursement of loan proceeds, nominee borrowers,
inflated appraisals, and failure to disclose material facts.
B. Recoveries from FDIC and FSLIC lawsuits:
1.
For the years 1988 and 1989, please provide (a) the
total dollar amount of FDIC recoveries from lawsuits against bank
directors, officers, shareholders, and other insiders and
affiliated outsiders, in connection with insolvent FDIC-insured
commercial banks, and the number of such banks involved, (b) the
number of such pending lawsuits at present, and (c) the total
amount of fidelity bond claim recoveries and the number of
insolvent commercial banks involved.
Response :
For 1988, total dollar amount of FDIC recoveries on Director
and Officer ("D&O") actions was approximately $69,000,000 covering 60 institutions. For fidelity bond actions, the total
dollar amount of FDIC recoveries was approximately $24,000,000 covering 48 institutions.
For 1989, total dollar amount of FDIC recoveries on D&O
suits was approximately $45,000,000 - covering 56 institutions.
For fidelity bond actions, the total dollar amount of FDIC
recoveries was approximately $12,000,000 - covering 27
institutions.
The number of pending professional liability lawsuits is
approximately 125.
6
2.
For the years 1988 and 1989, please provide the same
data for thrift institutions, as requested in 1. above.
Response :
For 1988, total recoveries for thrift institutions were
$109,000,000. This includes D&O, professional liability and
fidelity bond claims. The figures also include collections on
certain loans. Consequently, the figure is somewhat higher than
would be the case if only professional liability and bond claim
recoveries were reported.
For 1989, total recoveries for thrift institutions were
$87,000,000, which covers 56 institutions. This includes D&O,
professional liability, and fidelity bond claims ($8,000,000 of
this sum is attributable to bond claim coverage). Information is
not currently available as to whether any of this amount is
attributable to concurrently instituted collection actions prior
to August 9, 1989. The figure excludes such recoveries for the
post-August 9th period.
The number of pending professional liability suits is
approximately 175.
C.
Implementation of FIRREA "pay” provisions and FDIC manpower
levels :
1.
Report on the FDIC's implementation of the “pay" and
"comparability" provisions in FIRREA, namely section 1206; and
describe (a) actual percentage salary and pay differential
increases, (b) the impact on retaining experienced personnel, if
known, and (c) any problems with these FIRREA provisions.
Response:
Prior to the passage of FIRREA in August 1989, the bank
regulatory agencies — FDIC, OCC, FHLBB, NCUA, and the Federal
Reserve Board — agreed to share information concerning the
compensation levels of their respective employees. It was also
agreed to share pertinent information relating to bonuses and
other benefits to which these employees might be entitled.
Section 1206 of FIRREA expanded upon this by mandating that the
various financial institution regulatory agencies, now including
the Federal Housing Finance Board, the Oversight Board of the
RTC, the Farm Credit Administration, and the OTS, provide such
information to each other and the Congress in order to further
the interests of maintaining comparability in the pay and
benefits area.
7
These agencies are aware of the compensation adjustments
made by the Corporation, the most significant of which occurred
on May 7, 1989. On that date, the Board of Directors approved a
10% pay increase for all employees. To a large degree, this
raise was prompted by the increased work employees had been
called upon to perform following the FDIC's February 1989
assumption of conservatorship responsibilities for the savings
and loan industry. This pay increase, which predated FIRREA's
enactment by several months, was made consistent with the
Corporation's longstanding independent paysetting authority.
The most recent adjustment to FDIC base salary rates
occurred effective January 1, 1990, when the Board adopted the
3.6% government-wide COLA increase for all employees serving at
the grade 15 level and below. Additionally, adjustments were
made to the Corporation's salary differential schedules for
calendar year 1990; Appendix C—1 lists, by specific geographic
locations, these differentials as percentages of base pay.
Over the years, the Corporation has had a relatively low
level of attrition in all occupational categories. Our ability
to adjust levels of pay and to offer our own benefits package has
enabled us to attract highly qualified personnel and to compete
effectively in the labor market. As such, the "pay" and
"comparability" provisions of FIRREA have changed little about
the way the Corporation has traditionally operated.
Appendix C-2 provides the requested data on Bank Examiner
and supervisor personnel levels at year end 1988 and 1989,
including turnover and new hires.
8
2.
Provide updated data on examiner and supervisor
personnel levels at year end 1988 and 1989, including turnover
and new hires.
Response:
FIELD EXAMINERS
1988
Beginning Number of Field Examiners
New Hires
Number Leaving
Net Transfers from (to) other
FDIC Divisions, WO and RO
Ending Number of Field Examiners
1,909
284
(237)
1989
1,983
504
(234)
27
(30)
1,983
2,223
Turnover Ratio
12.0%
10.5%
SUPERVISORY PERSONNEL*
1988
Beginning Number of Supervisors and Professionals
Number Leaving
Net Transfers from (to) other FDIC Divisions
and Field Examiner Status
Ending Number of Supervisors and Professionals
Turnover Ratio
1989
337
(24)
333
(21)
20
62
374
333
7.2%
5.
♦Combines supervisors and professional support staff in both the Washington Office (WO) and
Regional Offices (RO).
9
D.
Supervision and civil and regulatory enforcement:
1. Supervision: (a) Provide for 1988 and also 1989, the
actual examination frequency for both problem and non-problem SNM
banks and also the average examination cycle times for closed
SNM banks,
and (b) describe any changes in the FDIC's
examination frequency policy, since 1987.
Response:
(a) In 1989, we conducted 4,089 on-site safety-andsoundness examinations (including 375 of savings and loans)
compared to 4,019 in 1988 and 3,653 in 1987. We had expected to
do considerably more than 4,089 in 1989, but had to revise that
goal due to our involvement as conservator for insolvent thrifts.
As of December 31, 1989, over 90 percent of the 4- and
5-rated state nonmember banks had undergone an FDIC examination,
visitation, or state examination within the preceding
twelve-month period. The others are monitored closely, already
have supervisory corrective action in place and, in most cases,
have been examined within the last two years.
Also, as of December 1989, only two percent of all 1- and
2-rated state nonmember banks have not had an FDIC or acceptable
state examination or visit within the last three years. This
percentage has been declining for some time now and we expect
this trend to continue.
■2/This updates the data provided to the subcommittee in 1987 and
1988, as set forth on p. 63 of House report 100-1088.
10
The following chart has been developed regarding examination
cycle times for closed state nonmember banks. Additionally,
attached as Appendix D-l-a are the FDIC's Regional Director
Memoranda concerning examination frequency.
FDIC Examination
Interval in Months
1 through 12
13 through 18
19 through 36
Over 36
Closed 1988
Percent
Closed 1989
Percent
79
83.2%
69
84.2%
12 *
12.6%
6
7.3%
2 **/#
2.1%
7 ##
8.5%
^
2.1%
0
0.0%
★
★★
TOTAL
95
100.0%
82
100.0%
* Five, ** one, and *** two, respectively, involved First RepublicBank units in Texas
which were being monitored with presence at only largest units as closing approached.
# One had a state authority examination within nine months of closing.
## Six had a state authority examination within nine months or less of closing, and
one had such an examination at 13 months.
(b) Today's banking environment demands that we identify
emerging trends and potential areas of risk and pinpoint
individual banks with symptoms of higher than normal risk. The
traditional methods of conducting on-site examinations based on
fixed examination cycles have given way to more continuous
methods of supervision. Our current program uses on-site
examinations and visitations complemented with off-site
monitoring, exchanges of information with other regulators (state
and federal), and the use of supervisory guidelines, policy
statements, and rules and regulations.
Our experience in recent years has indicated the need to
increase the level and frequency of on-site supervision. As a
result, in July of 1988 we revised our statement of goals
regarding examination priorities. Our goal is to have an
on-site examination every 24 months for well-rated institutions
(those rated 1 or 2) and one every 12 months for problem and
near-problem institutions (those rated 3, 4, or 5). The
intervals for those rated 1, 2, or 3 can be extended if an
acceptable state examination is conducted.
11
2.
Regulatory enforcement: Set forth the (a) numbers of
final formal and informal FDIC civil enforcement orders for 1988
and 1989, broken down in the same manner as in the
subcommittee's 11/19/87, hearing record, and (b) the amounts of
(i) CMP assessments and funds actually recovered and (ii) also
restitutions in connection such orders, for these two years.
Response:
The following material has been developed regarding the
number of informal FDIC enforcement activities:
Memorandums of
Understand!ng
Safety/Soundness
Other Purposes
Total
Formal Board
Resoluti ons
1988
Problem
1988
Nonprob
1988
Total
1989
Problem
1989
Nonprob
1989
Total
109
147
256
115
213
328
9
69
78
12
69
81
118
216
334
127
282
409
1988
1988
Total
1988
Problem
Nonprob
1989
Problem
1989
Nonprob
1989
Total
Safety/Soundness
24
150
174
30
169
199
Other Purposes
5
72
77
8
54
62
29
222
251
38
223
261
Total
12
The following material has been developed regarding the
number of formal FDIC civil enforcement orders set forth in the
manner of previous submissions to the Subcommittee:
1988
1989
Categories of Civil Enforcement Actions
Section 8(a)
77
73
34
9
17
34
1
0
Termination of Insurance Proceedings Initiated
*SNM Problem Banks Uhich Failed
21
*SNM Problem Banks Which Did Not Fail
35
♦National and State Member Banks
3
1
Final Termination of Insurance Order
Temporary Suspension of Deposit Insurance
Section 8(b)
98
97
20
78
8
89
Orders to Cease and Desist
*SNM Problem Banks Which Failed
♦SNM Problem Banks Which Did Not Fail
Section 8(c)
5
1
Temporary Cease and Desist Orders
Section 8(e)
10
33
10
10
Notice of Intention to Remove from Office
Final Removal Order
Section 8(o)
0
1
Temporary Suspension
Civi l Money Penalties Assessed
10
9
Assessment of Civil Money Penalty
During 1988, there were civil money penalties aggregating
$2,855,000 assessed against 18 individuals, with $7,500 paid to
date. One individual, Daniel K. Connors, was responsible for
$2,488,000 of the penalties assessed in 1988. Currently, his
case has been referred to the appropriate U.S. Attorney's office
for collection.
During 1989, there were civil money penalties aggregating
$2,692,750 against 47 individuals, with $57,250 paid to date.
Virtually all the remainder is currently being litigated between
the FDIC and the various respondents.
13
As has been reported in previous submissions to the
subcommittee, the FDIC is unable to provide information on
restitution made by individuals on behalf of open FDIC-supervised
institutions and failed FDIC-insured institutions; although such
restitution is sought where deemed appropriate, centralized
records are not maintained regarding amounts involved.
3.
Results of FIKREA Title IX implementation:
(a) List and then describe each FDIC interpretation and
application of the new regulatory enforcement provisions,
including all proposed and actual policy statements, guidelines,
and regulations— especially (although not exclusively) with
regard to FIRREA sections 904, 907, 910, 913, 914, 916, 917, and
918, and provide copies of any such written material; and
(b) Describe any problems, uncertainties, or concerns, with
regard to any provision in Title IX or its application.
Response:
For ease of reference, our response is divided into sections
by type of enforcement power. Each section incorporates the
answer to question 3(a), and to 3(b), if .appropriate :
Section 902 of FIRREA
(a) Section 902 amended section 8(b) and 8(c) of the Act,
12 U.S.C. § 1818(b) and (c), respectively, which pertain to an
agency's cease-and-desist authority.
The amendments to section 8(b) of the Act were largely to
clarify powers the FDIC had already been exercising with regard
to cease-and-desist actions, and consequently, it has not been
necessary to issue any new guidance in this regard. We expect
that the extension of section 8(b) jurisdiction to institutionaffiliated parties will enhance our ability to ensure that
unacceptable practices by banks and institution-affiliated
parties are curtailed. Copies of section 8(b) cease-and-desist
orders instituting the new FIRREA powers are attached. (Appendix
D-3, No. 1) With regard to the changes made to section 8(c)
regarding our authority to issue temporary cease-and-desist
orders, we would expect that the amendments will make it somewhat
easier to sustain such an emergency action.
(b) The only problem we anticipate at present regarding the
amendments found in section 902 of FIRREA concerns the action
that the FDIC can order in connection with a temporary cease-anddesist action under 8(c) of the Act. As you are aware, the
purpose of the section 8(c) temporary order is to effect relief
14
which cannot wait until the permanent cease-and-desist order
which is the result of the accompanying section 8(b) proceeding
becomes effective. Since section 8(c) limits the FDIC to the
remedies listed in section 8(b)(6)(B), there is no specific
remedy available under section 8(c) regarding guarantee against
loss. It is necessary that provision be made for escrowing of
disputed amounts in section 8(c) actions and/or for the posting
of bonds for disputed amounts, as an affirmative remedy pending
disposition of the attendant section 8(b) action.
Section 904 of FIRREA
(a) Section 904 of FIRREA amended section 8(e) of the Act,
to add a new subsection (7) which imposes an industry-wide bar
prohibiting any individual, who has been removed or suspended
from office, from holding office or participating in the conduct
of the affairs of any insured depository institution and certain
other institutions, without the approval of the appropriate
Federal banking agency.
FIRREA is silent regarding the effective date of this
section. The FDIC takes the position that the section may be
applied retroactively to cases in which the section 8(e) order is
entered based on conduct occurring prior to the enactment of
FIRREA. Several FDIC Regional Offices took strongly opposing
points of view on this issue. The attached memorandum and brief,
and the transmittal letters referenced below under section 908,
reflect the official position of the FDIC. A memorandum from the
Kansas City Regional Office expressing a contrary view on the
issue is also attached. (Appendix D-3, No. 2) The discussion
relating to section 908 of FIRREA, below, is also relevant to
this issue, insofar we did not initially rely exclusively on the
language in section 904, but also on that of section 908, to
extend the industrywide bar to individuals who had entered
stipulations prior to FIRREA, but against whom orders were
entered after the enactment of FIRREA.
Section 905 of FIRREA
(a) Section 905 of FIRREA amended section 8 (i) of the Act,
12 U.S.C. § 1818(i), to allow the FDIC to initiate enforcement
proceedings against an institution-affiliated party despite the
closing of the insured depository institution or the resignation
from office or termination of employment or participation, or
other separation of the institution-affiliated party, so long as
the action is commenced within six years of the date such party
ceased to be an institution-affiliated party, whether such date
occurs before, on or after the date of enactment of the section.
This amendment was a response to the Supreme Court decision in
Stoddard v. Board of Governors of the Federal Reserve System. 868
F.2d 1308 (D.C. Cir. 1989) which, in effect, removed jurisdiction
from the FDIC once an individual was no longer in office or
15
participating in the conduct of affairs of the institution.
The FDIC takes the position that the section overrules
Stoddard and may be applied to confer jurisdiction in cases in
which the Respondent had been separated from the institution
prior to the initiation of the action and before the enactment of
FIRREA.
As indicated under section 904 above, several FDIC
Regional Offices took strongly opposing points of view on the
issue. Attached is a copy of a memorandum which supports the
official FDIC position. (Appendix D-3, No. 3) A copy of a brief
supporting this position, as well as a memorandum from the Kansas
City Regional Office reflecting the opposing point of view are
referenced under section 904, above.
Section 907 of FIRREA
(a) Section 907 amends sections 8(i) and 18(j) of the Act,
12 U.S.C.§§ 1818(i) and 1828(j), respectively, regarding civil
money penalties. Because the sections' provisions apply for the
most part to conduct engaged in after the date of FIRREA, we do
not yet have the benefit of experience in applying the larger
penalties. We have, however, met with the other financial
regulatory agencies to determine a procedure for assessing civil
money penalties under the new statute. Discussions to date have
involved amending and perhaps adopting a matrix such as that in
use by the Office of the Comptroller of the Currency and the
Office of Thrift Supervision.
Section 908 of FIRREA
(a) Section 908 of FIRREA imposes a maximum fine of
$1,000,000 and imprisonment of not more than five years or both,
upon any person who, while subject to an order in effect under
section 8(e) or 8(g) of the Act, without the prior written
consent of the appropriate Federal financial institutions
regulatory agency, knowingly participates, directly or
indirectly, in any manner in the conduct of the affairs of any
insured depository institution, any institution treated as an
insured bank or savings association, any insured credit union,
any institution chartered under the Farm Credit Act, or the
Resolution Trust Corporation.
We have interpreted section 908 as applying to any
individual against whom there is outstanding an effective order
of removal or prohibition, including those individuals who
entered stipulations prior to the enactment of FIRREA, but
against whom an order was not issued until after the enactment of
FIRREA. Attached are copies of transmittal letters we sent to
such individuals. (Appendix D-3, No. 4) In effect, we relied
upon the language of section 908 to impose an industrywide bar
against these individuals. The attached transmittal letters
reflect the position of the FDIC on this section.
16
Section 910 of FIRREA
(a) Section 910 of FIRREA amended section 19 of the Act, 12
U.S.C. § 1829, which pertains to unauthorized participation by
convicted individuals. Attached are copies of recent letters we
have sent regarding the application of section 19. (Appendix D-3,
No. 5). Of particular note is that sent to Drexel, Burnham,
Lambert & Co., which addresses the definition of "person"
contained in section 19. We are currently in the process of
drafting a policy statement which attempts to define the
particular kinds of persons and conduct to which the section
will apply.
(b) Regarding the penalty for unauthorized participation by
convicted individuals, we ask that "conviction" here include the
same language as the new section 8(g), 12 U.S.C. § 1818(g), i.e.
"agreement to enter a pre-trial diversion or other similar
program." We also ask that the caption for section 19 be
changed, deleting "individual" and inserting instead "person."
Section 911 of FIRREA
(a) Section 911 of FIRREA amended section 7(a) of the Act,
12 U.S.C. § 1817(a) regarding penalties for late filing or the
inaccurate filing of banks’ Reports of Condition and Income, to
increase the amount of penalties that can be assessed. These
penalties apply to reports due after August 9, 1989.
Enclosed are copies of the financial institutions letter
that was sent to banks informing them of the new penalties, and
letters sent to banks against which we are contemplating
assessing civil money penalties for violation of the filing
requirements. Also attached are copies of a sample Stipulation
and Consent Order to Pay, as well as a sample Notice of
Assessment of Liability. The increased penalty amounts have
already generated an outcry from the banking industry. Responses
of several institutions to the new, higher penalties, as well as
one from the Kansas Bankers Association, are also attached. To
date, we are in the process of assessing penalties under the new
statute against eleven institutions. (Appendix D-3, No. 6)
(b) The statute, as amended, provides for a three-tier
system of assessing civil money penalties for the late filing of
Reports of Income and Condition ("Call Reports"), or for filing
false and misleading Call Reports. The first two tiers assess
maximum amounts of $2,000 and $20,000 per day, respectively,
based on either of the failure to file or a false and misleading
filing. The third tier, however, appears to limit the
application of its maximum penalty only to false and misleading
filings, despite the fact that its language pertaining to the
actual assessment of the penalty states that the maximum
$1,000,000 per day penalty amount continues "for each day during
17
which the failure continues." (emphasis added). This may be a
technical oversight in the statute, and we would suggest the
following underlined addition:
(B)...Notwithstanding the previous sentence, if any such
bank knowingly or with reckless disregard fails to make or
publish any report required under this paragraph, within the
period of time specified by the Corporation, or knowingly
and with reckless disregard for the accuracy of any
information or report described in such sentence submits or
publishes any false or misleading report or information, the
Corporation may assess a penalty of not more than $1,000,000
or 1 percent of total assets of such bank, whichever is
less, per day for each day during which such failure
continues or such false or misleading information is not
corrected.
Section 912 of FIRREA
(a) Section 912 of FIRREA added section 8(t) of the Act, 12
U.S.C. § 1818(t), to give the FDIC back-up enforcement authority
against savings associations. We have added to our number of
bank examiners, and our examiners in the field have
begun to accompany the OTS on their examinations of savings
institutions. A press release reflecting these initiatives is
attached. (Appendix D-3, No. 7)
Section 913 of FIRREA
(a) Section 913 of FIRREA added section 8(u) to the Act, 12
U.S.C.§ 1818(u), to require the disclosure of final agency
orders. Attached is a memorandum to the Board of Directors of
the FDIC which addresses the proposed implementation of this
section. In sum, the FDIC proposes to release, or has already
released (1) a list of the names of institutions and institutionfiliated parties that have been subject to final orders of
administrative enforcement proceedings that have issued since
August 9, 1989? (2) a list of the names of institutions and
institution-affiliated parties that have been subject to
modifications and terminations of final orders against them since
August 9, 1989; (3) on a monthly basis, a list of final actions,
and modifications and terminations thereof, taken by the FDIC
against institutions and institution-affiliated parties? and (4)
all final orders issued since August 9, 1989, and the
modifications and terminations thereof. Copies of two memoranda
to all Regional Counsel (Supervision), concerning the attached
press release and the gathering of information to effect this
proposal are also attached. The FDIC is also in the process of
accepting bids from publishers to publish a formal volume of all
FDIC enforcement decisions and final orders, including
modifications and terminations thereof. A copy of the request
for proposals is attached. (Appendix D-3, No. 8)
18
Section 914 of FIRREA
(a) Section 914 of FIRREA added section 32 to the Act, 12
U.S.C. § 1831i, regarding agency disapproval of senior executive
officers of insured depository institutions or holding companies
thereof. Attached is a copy of the regulations promulgated by
the FDIC regarding applications from such entities, as well as a
copy of the procedural rules applied to implement these
provisions. (Appendix D-3, No. 9)
Section 916 of FIRREA
(a) Section 916 of FIRREA allows the FDIC and other
financial institution regulatory agencies two years within which
to establish their own pool of administrative law judges and to
adopt uniform rules of procedure for administrative hearings.
We have held several meetings with the other agencies to
accomplish this purpose.
Section 917 of FIRREA
(a) Section 917 mandates the creation of a task force to
study delegation of enforcement actions. This task force has met
on several occasions already and is in the process of
establishing representation criteria among the agencies. Each
agency has to date shared with the other agencies its existing
delegations, including those delegations recently implemented by
the Office of Thrift Supervision. The FDIC already has extensive
delegations of enforcement actions in effect, as can be seen from
the attached regulations, 12 C.F.R. Part 303. Discussions have
been implemented concerning the various differences.
(Appendix
D-3, No. 10)
Section 918 of FIRREA
(a) Section 918 directs the agencies to submit an annual
report to Congress. The first annual report is due in August,
1990. In preparing for this testimony it appears we have
accomplished a great deal in gathering information required by
the annual report.
Section 926 of FIRREA
(a) Section 926 of FIRREA amended section 8(a) of the Act,
12 U.S.C. § 1818(a), which pertains to the termination of deposit
insurance. Between August 9, 1989 and December 31, 1989, there
were thirteen 8(a) actions initiated under FIRREA involving the
involuntary termination of deposit insurance. Numerous such
actions are currently in process, some of which are against
savings associations. There has been one temporary suspension of
deposit insurance.
19
The new law changed the procedure involved in section 8(a)
involuntary insurance termination actions by requiring that a
maximum of thirty days notice, setting forth the basis for the
action, be provided to the appropriate Federal banking agency of
an institution before a formal Notice of Intent to Terminate
Insured Status ("Notice") is issued. The appropriate Federal
banking agency may agree to shorten or eliminate the time period
required for notice. To comply with these procedural
requirements, we drafted a "Notification to Primary Regulator of
Findings" ("Notification") to be served upon the Primary
Regulator in all such cases. Sample copies of the Notification
are attached. (Appendix D-3, No. 11)
In addition, FIRREA expanded our jurisdiction under section
8(a) to savings associations. To gather the information
necessary to determine whether an 8(a) action against a savings
association would be appropriate, we have worked closely with the
Office of Thrift Supervision (OTS), which sets the capital
standards for those institutions. Our examiners have accompanied
OTS examiners on their examinations of such institutions, and in
all cases in which potential action was contemplated, we have
conferred with OTS regarding the ultimate resolution of the case.
Currently, several are in process.
(b) To date, our general experience with the new 8(a)
provisions has been positive. The only significant problem posed
by FIRREA regards section 8(a)(8) of the Act, 12 U.S.C. §
1818(a)(8), which provides for an order temporarily suspending
deposit insurance in cases in which an institution has no
tangible capital. Such a temporary order can be issued, however,
only if a permanent action to terminate deposit insurance under
section 8(a)(2) of the Act, 12 U.S.C. § 1818(a)(2), is pending.
As indicated in the response to 3(a) above, prior to formally
commencing such a permanent action, a potential maximum of
thirty days notice must be provided to the Primary Regulator
where the Primary Regulator is a Federal banking agency.
The foregoing requirements are a problem in cases in which
the FDIC, on an emergency basis, seeks to issue a temporary
suspension order against a national bank, member bank, or savings
association, when the required Notification to the appropriate
federal banking agency has not yet been provided, or the thirty
days have not yet elapsed. The necessity of waiting a possible
maximum of thirty days for notification and correction, before
the FDIC can commence termination of insurance proceedings,
negates the effectiveness of an immediate suspension order, and
greatly increases the chances that such an order will be set
aside by a reviewing court. The suggested resolution is to allow
the FDIC to issue a temporary suspension order at the same time
it provides notification to the Primary Regulator. Thus, we
suggest that the words "after giving the notice required under
subparagraph (A) with respect to an insured depository
institution" which appear in the first sentence of section
20
8(a)(8) of the Act be deleted. The FDIC has not interpreted the
thirty-day notice requirement to apply where the FDIC is the
appropriate Federal banking agency. We do not believe that
Congress intended the thirty-day notice requirement to apply to
any circumstance requiring immediate suspension of deposit
insurance.
Additional Amendments to Enforcement Powers
We ask that a new amendment be enacted, prohibiting the
advancement of defense costs and the payment, directly or
indirectly, by an institution of attorney's fees and civil money
penalties for an institution-affiliated party against whom the
FDIC has brought an administrative enforcement action, and pre
payment of salaries or other expenses in anticipation of failure
of the institution. This does not preclude recovery through the
Equal Access to Justice Act by Respondents who prevail against
the agency in an administrative enforcement action.
12 U.S.C. § 1818(k), prior to amendment by FIRREA, provided
a definition for what constituted "order which has become final."
It would be useful to reinstate this definition. The definition
is necessary, insofar as numerous references are made throughout
section 8 of the Act to "any order which has become final".
Finally, the provisions dealing with liability of commonlycontrolled insured depository institutions are addressed in title
II of FIRREA. Because these provisions have caused problems from
an enforcement perspective, we have also addressed them above in
our response regarding Title IX of FIRREA.
Before FIRREA, holding companies could effectively transfer
their system-wide losses to the FDIC by concentrating the losses
in one or two banks, and then allowing those banks to fail. The
"cross-guaranty" rule was supposed to enable the FDIC to reach
the good assets that belonged to the holding company system,
without regard for where the holding company moved them. The
protection is inadequate, however. There are procedural problems
related to the timing of the enforcement procedures. As a
result, holding companies may be able to protect themselves
against cross-guaranties by selling off healthy institutions
prior to the failure of an affiliate and retaining the proceeds
at the holding-company level.
We propose that when a depository institution in a holding
company system is failing, the FDIC should be able to invoke the
cross-guarantee rules against all the depository institutions
belonging to a holding company by serving notice on the holding
company that the default by one of its affiliated institutions is
"reasonably imminent." After that date, any proceeds that the
holding company might receive as a result of disposing of an
insured affiliate should be subject to FDIC recovery regardless
of where held, and any institution sold should itself remain
21
liable under the cross-guaranty. Also, if the failing
institution is disposed of by the holding company prior to its
failure, the company's other depository institution subsidiaries
should remain liable under the cross-guaranty.
E.
Criminal enforcement efforts:
1.
Discuss the adequacy of Justice Department
investigative and prosecutorial resources and efforts; and
identify any areas in the country where the FDIC has encountered
delays within the Justice Department or other problems, and, in
so doing, indicate whether or not the Attorney General's 12/7/89
allocation to these specific areas will be satisfactory.
Response :
By their nature the investigation and prosecution of bank
fraud cases are extremely resource intensive. Prior to the
passage of FIRREA, the Department of Justice's Criminal Division
and the 94 U.S. Attorney's Offices had much more limited
resources with which to attempt to deal with the rapidly
escalating problem of fraud in banks and thrifts. However, no
statistical data concerning problems with delays or other
problems with prosecution is maintained by the FDIC. We have,
however, attempted to obtain anecdotal information pertaining to
delays or other problems from FDIC's regional and consolidated
offices. We have found that the resources of the Department of
Justice are stretched thin in some areas, most notably, Dallas,
Texas, Houston, Texas, Kansas, the western part of Missouri, and
the Central District of California. The few specific instances
of "problems" identified by our offices usually involved a basic
lack of communication and a lack of clear guidelines as to
document production procedures, which are being addressed
currently through the local working groups with assistance from
Washington as needed.
Other problems noted involved overly broad document
production requests by the U.S. Attorneys and the frequency of
court appearances required of FDIC employees without sufficient
advance notice. These problems are being partially resolved by
improved communication between the U.S. Attorney's Offices and
the FDIC on a local level.
The most problems with delays were noted in our New York
region. They noted a lack of coordination of efforts in several
instances. However, they have resolved most of these problems
through improved communications, standardized procedures and the
local bank fraud working groups.
22
The Dallas region attributed delays to the financially
complicated cases and the priorities being placed on high-dollar
and high-profile cases. A lack of resources adequate to deal
with the large number of depository institutions where fraud has
been uncovered was the primary problem.
At one joint inter-agency meeting in Oklahoma the U.S.
Attorney disclosed that the primary problem encountered in
achieving timely and successful prosecution of criminal bank
fraud offenders was the lack of "experienced" attorneys familiar
with the intricacies of bank transactions within the U.S.
Attorney's Office. The U.S. Attorney proposed the special
appointment of FDIC attorneys, as Special Assistant U.S.
Attorneys, to actively assist in the prosecution of offenses
relating to financial institutions. The FDIC will consider
requests for attorney assistance of this nature in specific
matters.
We are also aware that in the past there has been a
substantial backlog of criminal referrals in the Central
District of California which was attributable to the limited
resources of the FBI and U.S. Attorney's Office. However, we
note that there have been several recent cases tried with
excellent results. In addition, the organization of a local
working group has created a cooperative atmosphere among the
Department of Justice and the regulatory agencies.
The Attorney General's December, 1989 allocation of
prosecutorial and investigative resources to areas where a need
has been identified will certainly help decrease delays and
relieve the over-worked staffs, such as in the Central District
of California. However, it is too early to assess the efficacy
of the locational assignments and the sufficiency of the numbers
allocated. In addition, it is also premature for us to assess
whether the annual $50 million three-year appropriation will be
adequate to deal with a fraud problem of the magnitude of that in
the banking and thrift industries. We are hopeful that the
Attorney General will complete the hiring and training of these
new prosecutors and investigators quickly so that these new
resources can be swiftly brought to bear.
This Committee should also be aware of the important role
that the FDIC and other banking agencies are playing in the
detection and prosecution of bank fraud. We have identified some
areas in which the utilization of FDIC personnel has been and
will continue to be essential to successful prosecutions:
1.
The early detection and communication of possible bank
fraud to the Department of Justice.
2.
The rapid response to initial inquiries by investigators
23
and prosecutors concerning criminal referrals, the institution
and individuals involved, and the relevant transactions;
3. The identification of important documents and witnesses
to facilitate grand jury investigations and the production
requested documents from institution and agency files;
4.
The availability of agency experts and expertise to
assist investigators' and prosecutors' understanding of the
records and transactions involved;
5.
trial;
The availability of agency personnel as witnesses at
6.
The participation in local fraud working groups; and
7. Cooperation with U.S. Attorney's Offices and probation
departments to obtain restitution orders and substantial periods
of incarceration for those convicted of bank fraud.
These are some of the important contributions made by the
FDIC to support the prosecution of bank fraud.
2.
List (in an appendix) each local law enforcement (bank
fraud) task force/working group, and identify for each the FDIC's
representative(s).
See Appendix E-2 for this listing.
3.
(a) Please evaluate the operations of the Bank Fraud
Working Group and discuss any improvements to its structure or
operations.
(b) Has the Working Group discussed and taken any
specific actions to implement recommendation no. 29 in the
committee's report?
Response:
(a) See Appendix E-3-a for an outline of accomplishments
of the Interagency Bank Fraud Enforcement Working Group compiled
jointly by the Federal Reserve Board, Office of Thrift
Supervision, Office of the Comptroller of Currency, Federal
Deposit Insurance Corporation, the Resolution Trust Corporation,
the National Credit Union Administration, and the Fraud Section,
Criminal Division, Department of Justice.
24
(b) No formal action has been taken by the Working Group to
implement recommendation no. 29. However, the regulatory
agencies do share information as to individuals and types of
schemes encountered by our examination teams or investigators.
This information is discussed at the group's meetings so that
the other regulatory agencies can alert their field
organizations concerning such individuals or schemes. In
addition, the FDIC has created the Criminal Restitution Unit
within the Legal Division to coordinate the collection and
dissemination of information related to fraud schemes, fraudulent
transactions and individuals suspected of involvement in such
schemes in banks and thrifts under the supervision of the FDIC.
4.
(a) Report on the FDIC's successes and failures in
obtaining both the U.S. Attorneys' cooperation in requesting, and
also the courts' cooperation in imposing, restitution, civil
money penalties, and removals from SNM banks at time of
sentencing in criminal cases, including identifying, if possible,
those districts where the FDIC has not been successful; and (b)
provide any overall figures on the amount of such restitution.
Response:
a.
Nearly all FDIC offices reported specific instances of
positive results due to the coordinated inter-agency efforts.
The following are examples:
Oklahoma Citv:
The restitution order and settlement agreement reached with
Charles Bazarian and his business operation, CB Financial
Company, payable to the FDIC in the sum of $24MM, is an
example of a cooperative effort on the part of the FDIC, the
FBI and prosecutorial agencies to resolve the massive bank
fraud committed by this individual and his company. The
circumstances involved multi-district bank fraud violations
and the assistance of law enforcement agencies in Florida,
Oklahoma, and California.
Kansas Citv:
The Regional Office is pushing for restitution in all
appropriate cases. As a result, the FDIC was recently
awarded restitution in the amount of $2 million from William
A. Deam who was convicted in the U.S. District Court for the
District of South Dakota, of bank fraud and making false
statements. Likewise, Craig Kronholm has been ordered to
pay restitution to Boundary Waters State Bank, Ely,
Minnesota and the Veranth Estate in the maximum amount
permitted.
25
New York:
There have been many instances where the New York
Consolidated Office has successfully worked in conjunction
with the U.S. Attorney to achieve positive results.
Most notable was the joint involvement by the FDIC and U.S.
Attorney in the prosecution of certain officers of Golden
Pacific National Bank ("GPNB"). The closing of GPNB on June
21, 1985 was due in large part to the activities of its
Chairman and President, Kuang Hsung J. Chuang and Vice
President, Theresa Shieh.
The New York Consolidated Office cooperated over a two-year
period with the U.S. Attorney in its investigation into the
activities of Chuang and Shieh. The voluminous documentary
evidence produced by the FDIC was crucial to the lengthy
investigation and trial, which culminated in the convictions
of Chuang and Shieh on January 18, 1989. In addition, the
U.S. Attorney was extremely cooperative in asserting the
FDIC's restitution claim against GPNB's former officers.
Another example of joint efforts producing positive results
was in the matter of Jacobo Finkielstain, the majority
shareholder (99%) of Central National Bank of New York
("Central"). Central was declared insolvent on September
11, 1987, and Finkielstain was subsequently indicted for the
fraudulent schemes which led to the bank's collapse. The
FDIC provided numerous documents to the U.S. Attorney to
assist him. Finkielstain ultimately pled guilty on August
17, 1989. With the U.S. Attorney's support and cooperation,
the FDIC successfully sought restitution against
Finkielstain. On December 8, 1989, the FDIC was awarded
restitution in the amount of $34,725,000.00.
26
<(b) We have collected the following data concerning
restitution orders resulting from criminal convictions:
FDIC INSURED INSTITUTIONS - CRIMINAL RESTITUTION
1987
1988
1989
* 983,095
$14,960,741
4 persons
2 persons
FOUR YEAR TOTAL:
5,436,258
7 persons
1988
1989
CRIMINAL RESTITUTION
1990 to date
$27,046,755
$81,119,632
$100,070,645
$17,508,322
28 persons
81 persons
69 persons
8 persons
FOUR YEAR TOTALS:
F.
$
$21,380,094 involving 13 persons
FSLIC INSURED INSTITUTIONS -
1987
1990 to date
$225,745,354 involving 186 persons
Information exchanges
1.
In its January 18, 1989, letter the FDIC responded to
the recommendations in the committee's 1988 report. Several of
those responses dealt with the report's recommendations to
improve information sharing between agency fee counsel and law
enforcement authorities the subject of Recommendations 22.a-d.:
a. To comply with this recommendation, the FHLBB had
implemented the following policy:
(i) it has directed fee
counsel employed by the FSLIC that the criminal prosecution
should take precedence over the civil recovery actions, (ii) it
had prohibited them from entering into any agreements concerning
transmittal of information to the Justice Department, and (iii)
it had incorporated in the standard contract between the FSLIC
and fee counsel an obligation on the counsel to make referrals
based on facts discovered by fee counsel. Questions: (i) Is this
policy and contractual provision still in effect with regard to
insolvent thrifts now under the FDIC's jurisdiction or has it
been changed to conform to the FDIC's policy existing in early
1989? If it has been changed, why? (ii) Has the FDIC changed
its policy with regard to insolvent banks, to follow the FHLBB's
policy? If not, why not? Please explain.
27
Response:
The FDIC has not adopted the FHLBB's policy or contractual
arrangement with outside fee counsel. The FHLBB's policy was
created to recognize the centralized organizational structure of
the Bank Board. The FDIC, on the other hand, utilizes a regional
organizational structure in which each region is highly
autonomous. In addition, the FDIC does not use outside fee
counsel to investigate failed institutions. Rather, the FDIC has
in each region a cadre of trained investigators that review
transactions that may involve criminal conduct or other abuse by
insiders and others. These investigators make criminal referrals
directly or through their regional office. Accordingly, the
majority of criminal referrals are made by FDIC employees rather
than outside fee counsel. We continue to believe that this
system is efficient and effective and allows the FDIC to better
insure that referrals receive proper attention from the agency.
While the FDIC has not adopted the FHLBB's policy in its
contracts with fee counsel, it has issued a Guide for Legal
Representation which provides directives to fee counsel
concerning the referral of criminal misconduct to the U.S.
Attorney's Offices. These directives include a reference to the
FDIC's longstanding policy of promptly notifying and assisting
law enforcement officials in investigating conduct which may
constitute a violation of criminal statutes.
b.
What has the Bank Fraud Working Group done in the
way of^discussing or implementing any of these recommendations,
including developing "pre-referral process" (as referenced on pp.
10 & 11 of the FDIC•s letter)?
Response :
The FDIC has not adopted a formal "pre-referral" process.
The FDIC encourages immediate informal contact with criminal law
enforcement authorities by its employees whenever fraud or other
possible criminal conduct is discovered. This contact is
typically made through a bank examiner, or the Regional Office's
criminal fraud liaison, whenever any situation is encountered
that could involve fraud on an operating, insured institution.
Similarly, personnel involved in failed institutions are
encouraged to make the same informal contact with appropriate
criminal law enforcement authorities whenever a situation is
encountered involving fraud by insiders or former customers that
requires immediate attention. When the fraud involves the
failed institution as well as an operating institution, immediate
attention is usually warranted, and informal contact is made to
alert the authorities.
28
In most cases, the informal contact is made in the form of a
telephone call to an FBI agent or assistant U.S. attorney
designated as the bank or savings and loan fraud contact.
c.
To the extent not described in the FDIC's respo
to a. and b. , what specific steps has the FDIC taken to implement
each of these recommendations in No. 22?
Response;
The FDIC has
and communication
therefore created
(CCRS) within its
recognized a need to foster better coordination
regarding criminal matters. The FDIC has
the Conflicts and Criminal Restitution Section
Legal Division. The CCRS is dedicated to:
1. Promoting the making of more timely and thorough
criminal referrals;
2. Coordinating the assistance of FDIC personnel in the
grand jury investigation and trial;
3. Providing the assistance to assistant U.S. attorneys in
proving damages for restitution;
4.
Tracing assets and collecting restitution orders;
5.
Investigating complex fraud matters; and
6. Reviewing matters in which one or more culpable
individuals are implicated in misconduct against two or more
insolvent institutions, a/k/a, a "daisy chain".
The following is a list of some of the projects initiated by
the FDIC-CCRS:
1. Worked closely with the U.S. Attorney in San Francisco
to obtain contempt convictions and revocation of a probation
against Jay and Leif Soderling - former directors and
shareholders of Golden Pacific Savings Association. The Court
found that the Soderlings went on a $500,000 "spending spree"
rather than make payment on the outstanding restitution order.
As a result, the court ordered the Soderlings to serve the 6-1/2
years remaining on their sentences and increased the restitution
amount to $6.7 million. Over $1.9 million has been collected and
an additional $1 million in other assets has been frozen
(Appendix F-l-c, No.l).
2. Revitalization of the Miami, Florida local fraud working
group: We gathered representatives from the FDIC, OTS, Federal
29
Reserve, OCC, FBI, U.S. Attorney's Office for the S.D. of
Florida, and the State of Florida Banking Dept., and have
continued to chair meetings focusing on individual cases and
developing better cooperation and communication in the south
Florida area;
3. Provided assistance to the Solicitor General on the
Davenport brief filed in the Supreme Court (dealing with the
dischargeability of restitution orders under Chapter 13 of the
Bankruptcy Code). We are also assisting in the Hughey case
involving a restitution issue that is being heard by the Supreme
Court this Spring (Appendix F-l-c, No. 2);
4. Orchestrated meetings regarding three thrifts that have
been put into the RTC Program (CenTrust/Miami, Fla., General
Bank/Miami, Fla., Red Hill/Red Hill, Pa.) with the FBI, Federal
Prosecutors, fee counsel, and the staff of primary regulatory
agencies to discuss ongoing criminal investigations, the
possibility of any criminal misconduct, and the methodology to
uncover possible violations, the steps to preserve and document
the location of evidence, the staffing of the investigations by
agency personnel, the identification of witnesses who are crucial
to criminal and civil investigations and making such witnesses
available to the respective agencies, and continued coordination
of civil and criminal investigations to ensure success and to
avoid conflicts;
5. Worked with fee counsel, FDIC and OTS personnel,
probation officers and Federal Prosecutors in proving damages
suffered by banks and thrifts through the drafting of restitution
letters, affidavits, memorandums, and in providing witnesses at
restitution hearings. These efforts have resulted in defendants
being sentenced to longer terms of imprisonment (Ramona; 12 and
15 years for the two defendants) and the adoption of restitution
orders (i.e., Smith: $12 million) (Appendix F-l-c, No.3); and
6. Coordinated with the FBI to obtain records sought by
grand jury subpoena that were located with fee counsel and
primary regulators.
2.
Does the FDIC still have a consumer toll-free hotline?
If so, how does it work? How is it publicized? How many
instances of alleged fraud, abuse, misconduct were reported in
1989? And what was the outcome of those reports?
Response:
Yes. The FDIC's Office of Consumer Affairs (OCA) has had
such a hotline for at least ten years. The Consumer Telephone
Hotline allows the public to ask questions or present views and
30
complaints about consumer protection or civil rights matters
involving FDIC-supervised institutions. The toll-free number is
(800) 424-5488. This phone line is manned from 9:00 a.m. to 4:00
p.m. Monday through Friday, by at least two employees full time,
with assistance by numerous specialists. This usually results in
at least four individuals answering calls at all times, with
access to additional personnel when necessary. Additionally, the
toll-free number also reaches a telecommunication device for the
deaf (TDD) and the device can be reached in the Washington area
by calling (202) 898-3537. The toll-free number and a brief
description of the service is published in all pamphlets issued
by the U.S. government concerning consumer protection - for
instance, the U.S. Office of Consumer Affairs publishes a
"Consumers' Resource Handbook" and the FDIC's number is contained
therein. Periodic press releases contain the number and describe
the consumer hotline. Parties on FDIC's Office of Consumer
Affairs mailing list are alerted in writing to the existence of
the hotline. RTC provides this number to the public during
various financial institution closings that it attends, and also
includes this number in some publications that it circulates.
During speeches at conferences throughout the country, FDIC
officials will advise attendees of the existence of the toll-free
1 hotline.
In 1989 OCA received 13,393 calls on the telephone hotline.
The major areas of concern were: insurance coverage protection,
general banking information, Fair Housing and the Home Mortgage
Disclosure Act. None of OCA's calls in 1989 appeared:£p pertain
to alleged fraud or misconduct. If OCA receives such a
complaint, it would be referred to the appropriate office, such
as the Division of Supervision's Special Activities Section or
the Securities Registration and Disclosure Section.
In some
situations, the referral might be made to the FDIC's Regional
Offices. OCA does not formally track the outcome of such
referrals.
3.
Discuss any other problems with, and suggest
improvements in, the exchanges of information (a) between and
among the Federal banking agencies and (b) between the FDIC and
Justice Department.
Response:
We believe that major improvements have been made in the
exchange of information among the regulatory agencies and the
Department of Justice. However, we are aware that more
improvement could be achieved. Among the improvements that we
believe would be helpful are:
31
1. Legislative initiatives to make clear that information
production to the Department of Justice by the regulatory
agencies pursuant to a grand jury subpoena or other formal
request in a criminal investigation does not waive or result
in the waiver of any privileges that may attach to such
information in the possession of the agencies.
2. More and better sharing of information by the Department
of Justice pertaining to the status of investigations
resulting from agency criminal referrals.
3. Increased authority for sharing of information gathered
by the Department of Justice in the course of criminal
investigations to agencies for use in connection with
administrative or civil enforcement and asset recovery
matters.
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