Full text of Statements and Speeches of John L. Douglas : Testimony Before the Subcommittee on Crime of the House Judiciary Committee

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AUG 2 11989
FEDERAL DEPOSIT INSURANCE CORPORATION

SUMMARY OF STATEMENT OF JOHN L. DOUGLAS, GENERAL COUNSEL
FEDERAL DEPOSIT INSURANCE CORPORATION
_
BEFORE THE SUBCOMMITTEE ON CRIME OF THE HOUSE JUDICIARY COMMITTEE
July 20, 1989
The FDIC’s experience has been that fraud, criminal conduct
and insider abuse is present in approximately one-third of commercial
banks that have failed during the past five years. In addition, the
FDIC has found evidence of fraud, criminal conduct and insider abuse
in approximately fifty percent of the savings and loan associations
that the FDIC is managing in its conservatorship and receivership
program. Thus, the RICO statute can be an important instrument to
deter such improper behavior and to facilitate recovery of lost
funds.
While the FDIC’s use of RICO has been very restrained and
limited, it has been proven to be an effective tool in deserving
situations. While the Corporation does not foresee a great number of
RICO claims, it is anticipated that it will be used prudently and
judiciously in order to recover funds for the receivership estates of
failed institutions and to preserve and protect the deposit insurance
fund.
With respect to H.R. 1046, the FDIC offers the following
comments:
— The legislation should clarify the FDIC’s right to sue for
treble damages when suing either in its corporate or receivership
capacities;
— The legislation should also preserve the right of the FDIC
to assert RICO claims in either federal or state courts;
— The procedural affirmative defense of 'good faith reliance"
on regulatory decisions prior to the inititation of discovery may
effectively preclude the ability to pursue appropriate claims
promptly and effectively;
_ Suggest a six year statute of limitations be incorporated
in the legislation;
_ Support efforts to limit treble damages to true criminal
conduct.







TESTIMONY OF JOHN L. DOUGLAS, GENERAL COUNSEL

FEDERAL DEPOSIT INSURANCE CORPORATION

BEFORE THE SUBCOMMITTEE ON CRIME OF THE
HOUSE JUDICIARY COMMITTEE

JULY 20, 1989

TESTIMONY OF JOHN L. DOUGLAS

We welcome the opportunity to testify before the Subcommittee on Crime of
the House Judiciary Committee on the RICO Reform Act of 1989 (H.R.
The

Federal

Deposit

Insurance Corporation

has a keen

1046).

interest in RICO in

its capacity as insurer and regulator of our nation's banks, and we support
efforts to refine its scope and to help it achieve its intended purpose.

The FDIC

The

FDIC

provide

is

insurance

designed

in

Currently,
premiums

a government

for depositors

part

to

deposits
to

the

controlled

bring

are

FDIC

commercial

stability

insured

for

in

corporation,

this

to

the

established

banks.

This

nation's

in

protection.

The

to

insurance was

banking

up to $100,000 per depositor.
insurance

1934

system.

Banks

FDIC

pay

insurance

fund currently exceeds $14 billion.

As

insurer,

the

a bank fails.

FDIC

has

direct

obligations

and

responsibility whenever

In such capacity, the FDIC must assure that depositors receive

their deposits up to the amount of deposit insurance.
obligation,

the

FDIC

becomes

the estate of the failed bank.

subrogated

In fulfilling such

to the depositors'

claims

In addition, whenever an insured bank fails,

thé FDIC must also be appointed receiver of the failed bank.




against

As receiver

2

-

it “steps

into

the

shoes"

-

of the failed bank,

undertaking the obligation

to marshall the assets of the bank in order to satisfy the bank's liabilities.

As

receiver,

pursue

the

other

FDIC will

claims

third parties,

that

liquidate the assets of the bank,

the

bank may

have

against

bonding companies and others.

officers,

as well

as

directors,

In pursuing these collection

efforts, the FDIC minimizes the costs of the failure and preserves the value
of the FDIC insurance fund.

In addition

to

its

role

as insurer,

the FDIC is also the direct federal

regulator and supervisor of approximately 8,000 state chartered commercial
banks that are not members of the Federal

Reserve System.

regulator,

in

the

FDIC

has

a

keen

interest

the

As insurer and

health

and

vitality

of

would expand

the

role of the

commercial banks and the commercial banking system.

Pending
FDIC.

legislation
The

FDIC,

(H.R.

1278 and

S.

774)

through a separate insurance fund, would also become the

insurer of the nation's savings and loan associations.
responsibilities

of

the

Federal

Savings

and

Loan

Further, by assuming
Insurance

Corporation,

and through its expected relationship with a newly created Resolution Trust
Corporation, the FDIC will be charged with the liquidation and receivership
activities of failed savings and loan associations.

It

is

the

combination

of

these

various

roles

receiver that gives the FDIC an interest in RICO.




as

insurer,

regulator

and

- 3 Recent Bank and Thrift Failures

It is safe to say that the past few years have been among the most turbulent
time for commercial banks and savings and loan associations.
and

1988, an average of over 200 commercial

banks each year either failed

or required FDIC assistance to prevent imminent failure.
and

loan

associations

FSLIC in 1988.

were

"resolved"

In 1986, 1987

through

Over 200 savings

assistance

provided

by the

The current level of bank failures in 1989 equals the pace

of 1988, and currently approximately 240 savings and loan associations are
operating

in

conservatorships

and

receiverships

under

the

management

of

the FDIC, awaiting liquidation or resolution pending receipt of funds from
the legislation now pending in Congress.

We do

not attribute

the

high

to fraud and criminal conduct.
m

criminal

conduct

of commercial

and

insider

level

of bank and

thrift failures directly

However, our experience has been that fraud,
abuse

is

present

in approximately one-third

banks that have failed during the past five years.

We have

found evidence of fraud, criminal conduct and insider abuse in approximately
50 percent of the savings and loan associations that the FDIC is managing
in its conservatorship and receivership program.
more than

$%

billion

And according to the FBI,

has been lost to bank and thrift institutions over

the past four years.
These are sobering statistics.

It is in the interest of the FDIC to deter

th,is illegal and improper behavior.




It is also in the interest of the FDIC

- 4 to use every appropriate
illegal

conduct.

tool

to recover funds lost as a result of this

The RICO statute can be an important instrument to deter

such improper behavior and to facilitate recovery of lost funds.

The FDIC's Use of RICO

Consistent with the role and function of the FDIC, the FDIC's use of RICO
has been very restrained and limited.

As receiver, the FDIC's goal

recover funds for the receivership estate.

is to

Asserting a RICO claim may be

an appropriate means of recovering funds, and it has been so used by the
FDIC.

In determining whether or not to

evaluates the

initiate a RICO claim,

strength of the claim, the damages incurred,

the

the FDIC
likelihood

of success, the type and nature of defenses to be asserted, the anticipated
recovery date, and the probable resources available to satisfy any judgment.
A RICO claim can only be brought with the concurrence of the head of the
Division of Liquidation, the General

Counsel

and the Chairman of the Board

of Directors of the FDIC.

Although the use of RICO has been very restrained, RICO has proven to be
an effective tool
used

in a case

in deserving situations.
involving a nationwide

In FDIC v. Renda, the RICO was

scheme to defraud

banks through a

practice known as "linked financing," as well as the largest union pension
fund fraud ever prosecuted by the Justice Department's Organized Crime Strike




- 5 Force.

In

FDIC

v.

Antonio, millions

of dollars

of

fraudent

loans

were

siphoned from a Denver bank to known members of organized crime on the east
coast under the pretext of a gold purchase project.

We note, however, that such cases are difficult to investigate and prosecute,
they often result in very vigorous and aggressive defenses, and the prospect
for

recovery

is

uncertain.

However,

we

do

believe

that

RICO can

be

an

important tool in the arsenal of the FDIC.

We anticipate that in our role as liquidator for insolvent savings and loan
associations,

there will

appropriate.

While

we

be other instances where the use of RICO will
do

not anticipate

a great number of

be

RICO claims,

we can anticipate that it will be used prudently and judiciously in order
to recover funds

for the

receivership estates

of failed

institutions

and

to preserve and protect the deposit insurance funds.

Comments on H.R. 1046

With

respect

to

specific

provisions

of H.R.

1046, we offer the following

comments:

It is important that the legislation acknowledge the FDIC's right to assert
a RICO claim for treble damages as a "governmental entity" even when acting
as receiver for a failed




institution.

Since, as receiver, the FDIC steps

into the shoes of the failed institution, it should be made clear that the
legislation

provides

under RICO.

the

FDIC

the

right to assert a treble

damage

claim

Thus, we suggest that the legislation clarify the FDIC's right

to sue for treble damages when suing either in its corporate or receivership
capacities.

The legislation
claims

should also preserve the right of the FDIC to assert RICO

in either federal

or state courts.

Congress has granted the FDIC

this flexibility in dealing with failing financial

institutions.

The FDIC

should have the option to choose the most appropriate form to assert its
interests.

We
a

are

concerned

procedural

about

a provision

affirmative

defense

in the

of

"good

legislation
faith

decisions prior to the initiation of discovery.

that would

reliance"

on

create

regulatory

We are troubled that this

affirmative defense may effectively preclude the ability to pursue appropriate
claims

promptly

and

may

complicate

the

effectively because of inherent delay.

ability

to

prosecute

the

claim

We believe that such an affirmative

defense can be effectively and properly adjudicated in the context of the
trial

on the merits without giving defendants a procedural

discovery.

This

documents,

cover

delay
up

can

illegal

permit

ill-intentioned

operations,

complicate

defendants
the

or otherwise impede the future discovery of wrongful acts.




right to delay
to

destroy

tracing of funds,

- 7 We

think

it

appropriate

incorporated
fair

in the

recognition

appropriate

that

a

legislation.

of

lawsuits

the
with

fairly
A

statute

of

limitations

six year statute of limitations

difficulties
a

long

limited

in

investigating

staff.

Such

an

and

extended

be

is a

assembling
statute

of

limitations is not unfairly long to perpetrators of organized crime.

Finally, we support efforts to limit the treble damage provisions of RICO
to true criminal conduct.
disputes
and

into

support

We are troubled by converting legitimate business

racketeering

efforts

to

claims

assure

with

that

the

RICO

potential
accomplishes

for treble
only

its

damages,
intended

purpose.

Conclusion

In

conclusion,

we

support

efforts

to

refine

the

RICO

legislation.

RICO

is and should continue to be one tool to deter misconduct in our nation's
commercial banks and to facilitate the recovery of funds by the FDIC following
bank failures.
and

supervision

It has been used sparingly by the FDIC, under strict controls
to

assure

mission of the agency.

that

its

use

is consistent with

the

We believe that it can continue to be a useful tool,

and hope that the Committee will preserve its usefulness to the FDIC.




statutory