Full text of Statements and Speeches of L. William Seidman : Testimony on the Prosecution of Financial Crimes, Before the Subcommittee on Criminal Justice Committee on the Judiciary, United States House of Representatives

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TESTIMONY OF

L. WILLIAM SEIDMAN
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION

THE PROSECUTION OF FINANCIAL CRIMES

BEFORE THE

SUBCOMMITTEE ON CRIMINAL JUSTICE
COMMITTEE ON THE JUDICIARY
UNITED STATES HOUSE OF REPRESENTATIVES

9:30 A.M.
WEDNESDAY, JULY 11, 1990
ROOM 2226, RAYBURN HOUSE OFFICE BUILDING

Good morning, Mr. Chairman and members of the Subcommittee.

is a pleasure be here today to discuss the actions the Federal
Deposit Insurance Corporation and the Resolution Trust
Corporation are taking to identify and punish those involved in
fraud and abuse in the banking and savings and loan industries
and to comment on pending legislation to improve prosecutions of
financial institutions crime.

The FDIC and the RTC have long put the fight to curtail
fraudulent activity in financial institutions at the top of
their regulatory agendas.

In the last five years, we have

developed specially trained fraud squads to pursue those
committing fraud and have given our examiners special tools to
help in detecting such abuses.

Greedy and unscrupulous

individuals, insiders, advisors or related parties must not be
allowed to profit at the expense of the deposit insurance funds
and the American taxpayer.

Our testimony will outline the FDIC and RTC programs to prevent,
detect and punish fraud and abuse by individuals and financial
institutions.

We also will comment on H.R. 5050 which recently

was reported by the Financial Institutions Subcommittee of the
House Banking Committee.

H.R. 5050 is designed to provide the

banking regulators and law enforcement agencies with additional
tools to control fraudulent activities by individuals involved
with banks and thrifts.

While a number of other bills are

pending in th^e House on this subject, our comments will focus on
H.R. 5G50 since it is the one that primarily affects the FDIC
and the RTC.

The FDIC and the RTC have authority to bring civil -- but not
criminal -- actions against banks and thrifts for fraudulent or
other unlawful activities.

Our prosecution of civil fraud cases

provides an additional significant role in the prosecution of
financial crimes.

We investigate every failed bank and thrift

to determine whether civil or criminal activity was involved in
a bank or thrift failure.

In addition, our examiners look

carefully for evidence of fraudulent activity during the regular
examination process of all open institutions.

In the case of

both failed and open institutions, we refer suspected criminal
activity to the appropriate law enforcement agencies.

We also provide much of the basic information needed by the law
enforcement agencies throughout all stages of a criminal
prosecution.

To that end, we participate in the regional

inter-agency bank fraud working groups to encourage
communication and improve coordination of criminal
investigations..

The FDIC also uses administrative enforcement actions to stop
fraud and abuse in operating institutions.

In addition, the

FDIC and the RTC bring civil suits for money damages and
restitution (against officers, directors and other insiders)
after an institution has failed.

3
P?tS£ting ftDfl RfPgrting Fraud— and Abuse in Open Institutions

FDIC examiners are trained ,to detect the signs of fraud and
other illicit or improper insider actions.

Potential problems

often can be uncovered when certain warning signs are evident.
In 1987, we developed a list of time tested "red flags” to
assist our examiners in the early detection of apparent fraud
and insider abuse.
and now is m

The "red flag” list has been expanded once

the process of being updated and expanded again.

Examples of the areas that the ”red flags” cover include:
linked financing/brokered transactions; loan participations;
offshore transactions; lending to buy tax shelter investments;
and wire transfers.

When "red flag” warnings are detected,

specially trained members of our "fraud squad” may be called in
to pursue the matter using their special training.

Training and role of examiners.

New examination personnel begin

their careers as Assistant Examiners and usually serve a minimum
of three years before they can qualify as commissioned
examiners.

During these first three years, Assistant Examiners

are required to attend four schools that include training in
investigatory techniques and detection of insider abuse and
fraud.

Assistant Examiners also receive on-the-job training in

the detection of insider abuse and fraud.

Through the training process, our examiners gain a familiarity
with the principal criminal statutes applicable to insured
institutions.

They also learn how to complete the standard

4
criminal referral forms (Reports of Apparent Crime) used by all
financial institution regulators.

Additionally, examiners

receive instruction on potential problems and warning signs
pertaining to bank fraud and insider abuse ~
flags.

namely, the red

The Division of Supervision's Manual of Examination

Policies also sets out alternative investigative procedures
appropriate to particular circumstances and addresses the
handling of criminal violations when they are discovered.

An examiner's detection of management fraud or other abuse in an
operating state nonmember bank generally results in one or more
administrative enforcement actions by the FDIC and, in some
cases, criminal referrals to the respective U.S. Attorney and
the appropriate criminal investigatory agency.

Criminal

referrals prepared by examiners are reviewed by regional office
staff and forwarded to the FBI and U.S. Attorney as soon as
possible.

However, when examiners detect significant apparent

violations, we immediately contact the FBI and the U.S. Attorney
by telephone before the examiner prepares the written referral.
When requested by law enforcement agents, our examiners will
assist in developing evidence and appear as expert witnesses.

Role of institutions.

Bank directors and management also bear

great responsibility for preventing and detecting fraud and
insider abuse.

Bank directors must assure that appropriate

internal controls are in place.

Bank management and employees

who suspect a criminal violation are required —

under Part 353

of the FDIC's Rules and Regulations -- to submit Reports of

5
Apparent Crime to the appropriate FDIC Regional Office, the U.S.
Attorney, the appropriate State Banking Authority and the
appropriate Federal investigative authorities (either the FBI,
the Secret Service, the Postal Service, or the IRS) within
'thirty days of discovering the suspicious activity.
different forms are used for this purpose.

Two

The Report of

Apparent Crime (Short Form) is used to report suspected criminal
violations involving less than $10,000 and suspicious
transactions that indicate possible money laundering.

The

Report of Apparent Crime (Long Form) is used to report suspected
criminal violations involving amounts of $10,000 or greater and
all cases, regardless of amount, involving an executive officer,
director or principal shareholder of the institution.

Copies of Reports of Apparent Crime involving amounts of $10,000
greater, those involving executive officers, directors and
major shareholders, and those involving suspected money
laundering are forwarded by the regional offices to the FDIC's
Special Activities Section in Washington.

Those reports are

reviewed and certain data from the reports are entered into an
automated records system.

During 1988 and 1989, the Special

Activities Section received 902 and 938 reports, respectively.

The Special Activities Section forwards Reports of Apparent
Crime indicating losses of $200,000 or more to the Department of
Justice for special tracking.

The individual U.S. Attorneys

then make decisions about which criminal cases to pursue.
Reports forwarded for tracking totaled 200 in 1988 and 284 in

1989.

The Department of Justice enters information from these

reports into a computer tracking system and periodically advises
the FDIC of their status.

Reports of Apparent Crime filed by banks usually result from such
events as teller shortages, false entries, theft, false
s^a^enen^s on

applications, embezzlement or misapplication

of funds, check kiting, mysterious disappearance of bank funds,
or money laundering.

jpjC »fraud Squad" Investigations of Fraud

The FDIC has its own "fraud squad."

Created in 1986, it is a

national investigations unit that investigates fraud and other
criminal activities when necessary in operating institutions and
in All closed insured banks and in those thrifts that were closed
before January 1, 1989.

(The RTC's investigatory activities will

be addressed below.)

The FDIC's investigations unit is comprised of over 500
investigators and staff.

(This number does not encompass

attorneys, examiners and other staff who deal with fraud in their
day-to-day activities, but who are not full time investigators or
support staff for the "fraud squad.")

Investigators receive

specialized training in all phases of financial institution
operations, accounting, investigative techniques and specific
fraudulent schemes.

The result is a team of individuals who are

well equipped to look into the affairs of failed institutions, as
well as operating institutions when called upon to do so.

7
Each time a financial institution is declared insolvent, an
investigative team is dispatched to determine 1) what caused the
failure, 2) whether any criminal activity took place and
3) whether any professional liability claims exist.

The

investigations unit currently is pursuing approximately 942
active claims and investigations.

When possible criminal activity is discovered, the investigators
file criminal referrals with the appropriate law enforcement
agency.
made.

Since 1987, approximately 331 such referrals have been
The investigators also follow up on these referrals

through participation in the local bank fraud working groups.
These groups bring together law enforcement personnel and
representatives of the financial institution regulatory agencies
on a monthly basis to discuss various issues related to bank
fraud and other criminal activity.

Each of the FDIC's regional

offices and consolidated office sites has a designated
participant in the local working groups or a contact person for
the U.S. Attorney's offices and relevant investigative agencies.

Participation in these groups aids financial institution civil
and criminal fraud prosecution in many ways.

Few people are as

familiar with the records of the financial institution or have
the analytical expertise as the investigative team assigned to
the failed institution.

This expertise is made available in

formal and informal ways to aid civil and criminal authorities
in discovering, documenting and prosecuting fraud.

In some

instances, individual investigators are assigned full-time to a
grand jury investigation.

The investigations unit also documents and requests restitution
pursuant to the Victim and Witness Protection Act when
individuals are convicted of crimes involving failed financial
institutions.

RTC Investigations of Fraud in Closed Institutions

Investigations u n i t .

The RTC also has its "fraud squad" with a

corps of trained, experienced financial investigators.
RTC's Office of Investigations —
300 investigators and staff —
investigators by year-end.

The

which now has approximately

projects to have 300

The Office provides the

investigatory support to initiate civil and criminal recoveries
from thrift owners, managers and professionals —
accountants and lawyers —

such as

who caused losses through fraudulent

or criminal conduct or professional malpractice.

Recoveries can

come from insurance policies covering professional conduct or
directly from the assets of insiders and professionals.
Successful recovery, however, requires thorough investigation
and, in many instances, litigation.

The investigator's task is to:

gather facts about insider

abuse; identify the individuals who caused the thrift's losses;
assess the degree of culpability of each party —

from negligent

and reckless mismanagement to fraud or criminal conduct —

and

help determine whether and what sort of litigation should be
initiated to maximize recoveries.

Investigators are involved

throughout the civil litigation process, supporting the RTC
attorneys and outside counsel.

9
A second, but equally important, responsibility of the Office of
Investigations is to assist the Department of Justice and other
Federal agencies in prosecuting individuals who engaged in
criminal conduct, particularly those who benefited personally at
the taxpayers' expense.

RTC investigators are being trained to

work with law enforcement agents to achieve our mutual
objectives.

Similarly, law enforcement agents are being trained

to understand and respect the RTC's responsibility to recover
assets for the thrift receiverships.

The investigator's initial task after RTC is appointed
conservator of an insolvent thrift is to conduct a preliminary
investigation of the facts leading to insolvency and to prepare
a "Preliminary Findings Report."

As of June 30, 1990, 397

Findings Reports had been completed, representing
about 87 percent of the 454 thrifts under the RTC's control.

Ipgjfler ftfe.
uge enfl .misconduct in insolvent thrifts.

As a result

of our experience over the past few months, we estimate that:

Approximately 50 percent plus of RTC-controlled thrifts
have had suspected criminal misconduct referred to the
Department of Justice;

In about 40 percent of RTC-controiled thrifts, insider
abuse and misconduct contributed significantly to the
thrift's insolvency;

About 15 percent of the thrifts appear to have been
involved in irregular and possibly fraudulent
transactions with other financial institutions.

The average asset size of RTC—controlled thrifts is about $500
million, and they are complex organizations with numerous
subsidiaries and affiliates.

Many were owned or dominated by

one individual and operated more like real estate development
organizations, investment banks, or mutual funds than thrift
institutions.

This situation allows for abuse and lack of control.

It creates

opportunities for self-dealing, fraud, theft and other
misconduct to occur unabated.

The RTC works with other Federal

agencies and, where necessary, retains investigators with
specialty skills in securities, commodities, and other
disciplines to assist in documenting complex and sophisticated
schemes of abuse and misconduct by insiders and other affiliated
parties.

Trends and patterns of fraud and m isconduct.

Evidence of

insider abuse and misconduct in RTC thrifts ranges from
embezzlement and loan fraud to complex schemes to generate paper
accounting profits that allowed cash to flow to thrift owners
through subsidiaries or personal holding companies.

Many of the

complex lending schemes involve over-valued property that was
swapped several times between borrowers or among various
thrifts.

These "land flip” schemes created false values and

generated excessive fees that were parceled out to appraisers,
brokers, developers and others —

including thrift insiders.

Real estate development loañs were made with no recourse to the
borrower if the project failed.

We are investigating these

situations, as well as instances of unauthorized trading in
mortgage-backed securities, junk bonds and other financial
instruments in which insiders took the profits and pushed the
losses onto the institution.

The example of Drexel Burnham Lambert and Michael Milken is a
case in point.

As announced last month, a special FDIC and RTC

task force is actively and aggressively investigating possible
claims against Drexel and Michael Milken for substantial losses
suffered by failed financial institutions in junk bond
investments.

Based on preliminary information available to us,

we anticipate filing claims in the Drexel bankruptcy proceedings
against the $750 million pool being administered by the
Securities and Exchange Commission, and for any civil recoveries
available.

Abuses are more prevalent in the Southwest and Southern
California.
and Florida.

More recent problems are arising in the Northeast
The RTC's Central Region, comprising Arkansas and

11 Midwestern states, reports far and away the lowest percentage
of thrifts exhibiting fraud and abuse —

less than 30 percent.

Civil Actions Against Directors. Officers, and
Institution-Affiliated Parties

When an insured depository institution fails, the FDIC or the
RTC becomes the legal owner of the institution's claims against
its former directors, officers, employees, attorneys,
accountants, and other professionals employed by the
institution.

In the case of every failed institution and those

placed in conservatorship, the FDIC or the RTC conducts an
investigation of potential professional liability claims.

These

investigations focus on whether the potential claim is
meritorious and, if so, whether it would be cost effective to
bring a civil suit seeking money damages.

The Professional Liability Section of the FDIC's Legal Division
is responsible for litigating the FDIC's cases involving:
directors' and officers' liability ("DiO"); attorney
malpractice; accountants' liability; commodity and securities
brokers' liability; claims under bankers blanket bonds; and
certain appraiser malpractice cases.

This section also works in

conjunction with the RTC's Office of Investigations to pursue
similar actions on behalf of the RTC.

Prior to February 1989, when the savings and loan
conservatorship program began, the FDIC had pending
investigations of professional liability claims involving
approximately 500 institutions.
lawsuits on file.

The FDIC also had more than 100

13 Following the merger with the Federal Savings and Loan Insurance
Corporation (FSLIC) in August 1989 and the creation of the RTC
which formally took over those savings institutions placed in
conservatorship after January ll 1989 —

the FDIC became

responsible for the investigation of potential claims and the
prosecution of viable claims involving a vastly increased
caseload of institutions.

The FDIC and RTC currently are

conducting investigations in 1300 institutions and have filed
than 500 lawsuits against former directors, officers and
other professionals for damages ranging from $1 million to
billion.

The 1300 institutions we have responsibility for

in-house can be broken down as follows:

Banks

550 Institutions

Thrifts (old FSLIC)

350 Institutions

Thrifts (RTC)

400 Institutions

In 1989, the FDIC's and the RTC's recoveries for professional
liability claims totaled approximately $100 million.

This

figure includes old FSLIC recoveries taken in after the
August 9, 1989 merger.

During 1989, an additional $50 million

in recoveries was received by FSLIC prior to August 9 for
professional liability claims.

A rough breakdown of these

recoveries follows:

FSLIC Thrifts (prior to August 9)

$50 million

FSLIC Thrifts (after August 9)

$35 million

FDIC Banks (1989)

$60 million

RTC Thrifts (1989)

$4 million

14
Our recoveries for the first quarter of 1990 alone total more
than $100 million.

Settlements and judgments during the first

half of 1990 will produce recoveries totalling in excess of $200
million.

That is in excess of $1 million per day in recoveries.

Over the past few years, the FDIC has litigated claims involving
approximately 50 percent of those institutions for which it has
been appointed receiver.

This percentage of claims in

litigation may drop somewhat —
thrifts —

particularly as to the RTC

because of a scarcity of recovery sources, including

D&O insurance and personal assets among many of the potential
defendants.

The FDIC and the RTC contract with approximately 150 law firms
to prosecute professional liability claims.

Our in-house

attorneys- supervise and manage this litigation to ensure
consistency in arguing legal issues and conformity to case plans
and budgets, among other things.

In-house attorneys also

directly conduct settlement negotiations involving claims.

Much of the litigation now pending in the Professional Liability
Section involves claims brought against former directors and
officers who managed the failed institutions.

These claims

range from fraud and insider abuse to grossly negligent failures
to conduct or supervise the financial institution's affairs.

Although historically many of the FDIC's cases are based on
abusive lending practices, that is not the only basis for filing

15
suits.

We also have brought suits based on the payment of

unreasonable dividends, imprudent or illegal investments in bank
buildings, speculative securities trading, unreasonable
compensation and expenses paid to directors and officers, and
fraudulent "land flips” and other complex real estate
transaction schemes.

As mentioned before, the FDIC and the RTC pursue those
directors, officers, and other professionals who have committed
fraud upon failed financial institutions if our investigation
supports such allegations.

However, it is not cost effective to

pursue suits against such individuals when the litigation costs
would exceed any collectible judgement.

In those cases in which

fraud or dishonest conduct by professionals is present, but in
which the FDIC or the RTC determines that cost considerations
prohibit filing civil suits, every effort is made to encourage
and assist criminal prosecutions by the appropriate law
enforcement authorities.

Fraud and dishonesty underlie FDIC claims brought under
financial institutions "bankers blanket" or fidelity bonds.
Fidelity bonds insure the financial institution against losses
caused by the fraudulent or dishonest activity of an
institution's employees.

The FDIC and the RTC have aggressively

pursued claims under fidelity bonds covering failed banks and
thrifts.

The FDIC's largest single recovery in the first

quarter of 1989, for example, involved the settlement of a bond
claim for $60 million.

16
Open Institution Enforcement
/
The Compliance and Enforcement Section of the FDIC's Legal
Division provides legal support, advice, and counsel to the
Division of Supervision (•'DOS*') and prosecutes civil enforcement
actions on behalf of DOS against depository institutions or
institution-affiliated parties whose activities pose a threat to
depositors or the deposit insurance funds.

The Compliance and

Enforcement Section acts as the "district attorney's office" for
DOS, which must police the banking industry through such
administrative actions.

DOS and Compliance and Enforcement are

the first line of protection for the Federal deposit insurance
funds.

The Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 (FIRREA) greatly enhanced the enforcement powers of all
of the Federal banking agencies.

Civil money penalties for

violations of laws, rules, regulations and orders have increased
from $1,000 per day to ranges of $5,000 to $1,000,000 per day
per violation.

Call report penalties have increased from $100

per day per violation to ranges of $2,000 to $1,000,000 per day
per violation.

Other enforcement powers have been clarified —

such as jurisdiction over individuals separated from insured
depository institutions, personal liability of individuals to
insured depository institutions, records-keeping, and the like.
Hew enforcement powers have been added, including the right to
suspend temporarily the deposit insurance of an institution
operating with no tangible capital under the capital guidelines

17
of the appropriate Federal banking agency, and the
cross-guaranty provisions rendering affiliated depository
institutions liable for losses reasonably anticipated by the
FDIC when a commonly-controlled institution fails.

The most common administrative enforcement tool used by the FDIC
is the cease-and-desist order.

Cease-and-desist orders are used

to halt and correct unsafe or unsound banking practices
committed by state nonmember banks or individuals related to
those institutions.

In 1988 and 1989, the FDIC issued 98 and 97

cease-and-desist orders, respectively.

The FDIC also has the ability to terminate an insured
institution's Federal deposit insurance for engaging in unsafe
or unsound practices or for violations of law.

As mentioned

above, FIRREA also gave the FDIC the power to suspend
temporarily the deposit insurance of institutions not meeting
tangible capital requirements.

In 1988, the FDIC initiated 77

proceedings to terminate deposit insurance.

During 1989, the

FDIC initiated 73 such proceedings and 1 proceeding to suspend
deposit insurance temporarily.

The FDIC can remove directors, officers, and other
institution-affiliated parties from any involvement in an
institution's affairs if the individual violates any law or
engages in unsafe or unsound practices.

The FDIC also is

authorized to assess substantial civil money penalties against
depository institutions and institution-affiliated parties for

18
violations of law or outstanding enforcement orders.

During

1988, the FDIC issued 33 final removal orders and assessed civil
money penalties in 10 instances.

In 1989, we issued 10 final

removal orders and assessed civil money penalties against
institutions or individuals in 9 cases.

In general, there has

been a shift in emphasis over the past few years to enforcement
actions against individuals, in keeping with the FDIC's
commitment to reduce insider abuse.

Cross-guaranty actions, as mentioned above, are a new
enforcement power granted to the FDIC by FIRREA.

In such

actions, commonly-controlled depository institutions may be
assessed for the loss reasonably anticipated by the FDIC due to
the default of a related depository institution.

The first such

action was initiated in 1989.

H.R. 5050. the Financial Crimes Prosecution and Recovery Act of
ISLiO

On the whole, the FDIC and RTC support H.R. 5050 since it would
provide the FDIC and the RTC with a number of important new
enforcement tools.

These new tools will allow us to combat

financial institutions fraud more effectively and save money for
the Federal deposit insurance funds.

A detailed discussion of

the individual provisions of H.R. 5050 —
amendments —

as well as recommended

are contained in the attachment to this statement.

We favor Title IV of the bill, the "Taxpayer Recovery Act,"
which contains proposed amendments to the Federal Bankruptcy

19 Code.

These amendments would enhance the FDIC's ability to

recover funds from individuals who have defrauded federally
insured financial institutions. These individuals often file
t
personal bankruptcy to discharge judgments or debts based on
fraudulent, wrongful or criminal conduct.

Although the FDIC has

actively attempted to prevent such discharges, the Bankruptcy
Code and case law interpreting it often make it difficult for
the FDIC to prevent these individuals from avoiding these
debts.

Title IV would remedy this situation.

The attachment

contains a few recommended changes, however, that are needed to
clarify that all of the enhancements would apply to the RTC, as
well as the FDIC, and in their corporate, conservatorship and
receivership capacities.

Another very important area to the FDIC is Section 318 of H.R.
5050.

Section 318 would provide us with the ability to prohibit

or limit excessive or abusive golden parachutes in depository
institutions.

The FDIC thinks it unconscionable that directors,

officers and others responsible for an insured institution's
failure -- or near-failure —

should be able to line their

pockets with an insured institution's money at the expense of
the Federal deposit insurance funds.

Paying golden parachute

money to a director, officer, or other responsible party in the
case of a failed or failing insured institution amounts
essentially to paying that person with a check drawn on the
Federal deposit insurance funds.

H.R. 5050's golden parachute

provisions are necessary to enable the FDIC to limit the
liabilities of the funds.

Section 305 is another very important provision.

It would make

the law very clear that the FDIC and the RTC have priority over
competing claims against former directors, officers, employees,
accountants or other professionals that had provided services to
a failed institution.

The FDIC also favors the provisions of

H.R. 5050 that would:

allow the FDIC and RTC to make

prejudgment attachments of the assets of persons obligated to
failed insured depository institutions; authorize the FDIC and
the RTC to have access to income tax returns in exercising their
liquidation and conservatorship powers

Iff

although we request

that the authority be expanded to encompass enforcement actions
taken by the FDIC in its corporate capacity against open
institutions; and provide the FDIC with the ability to avoid
certain fraudulent transfers of assets made within five years of
the appointment of a receiver.

We object, however, to Section 205.

That section would allow

the Attorney General to retain civil money penalties assessed
and collected for banking crimes affecting financial
institutions.

In the FDIC's view, civil money penalties

collected for banking crimes should be used to reimburse the
appropriate deposit insurance fund for losses suffered as a
result of actions involving failed financial institutions.

it is, the deposit insurance funds are rarely made whole for
their losses from insured institution failures.

Depriving the

insurance funds of a source of reimbursement from civil money
penalties simply further increases those losses.

We do believe

it is appropriate, however, for the Department of Justice to be

reimbursed from the civil money penalty collections for its
actual costs of investigating and pursuing these actions.

We have many substantive and technical comments on the specific
provisions of H.R. 5050 that are included in the detailed
attachment.

Among other things, we suggest that a number of the

bill's provisions need to be amended to ensure that all of the
new enforcement tools apply to both the FDIC and the RTC.

addition, some of the provisions need to be modified to clarify
that they apply to the FDIC and the RTC acting in their
corporate, conservatorship and receivership capacities.

would be happy to work with the Subcommittee to further explain
our comments and the suggested amendments we have included in
the attachment.

Conclusion

In conclusion, Hr. Chairman and members of the Subcommittee, the
FDIC and the RTC are vitally concerned with the threat that
fraud and insider abuses pose to the continued safety and
soundness of insured institutions and the deposit insurance
funds.

We believe that our aggressive enforcement efforts, the

increased penalties and stronger enforcement authority provided
to us in FIRREA, and the legislative initiatives now being
considered in H.R. 5050 will prove to be a formidable deterrent
to financial institution fraud and abuse.

July 11, 1990

FDIC & R/TC COMMENTS ON H.R. 5050
THE FINANCIAL CRIMES PROSECUTION & RECOVERY ACT OF 1990
June 29, 1990 Committee Print

This memorandum contains the FDIC's and the RTC's comments
on H.R. 5050 as reported by the Subcommittee on Financial
Institutions, Supervision, Regulation and Insurance of the House
Banking Committee. Where appropriate, ve have included in the
attached Appendix revised statutory language that reflects the
FDIC's and RTC's recommended changes to the legislation.
Page 2, Section 2. Definition of "Appropriate Federal Banking
Agency»
This term is defined as it is in the FDI Act. However, for
purposes of this bill, such a definition is insufficient since it
does not include the RTC. Also, the definition may be
interpreted to apply only to the "appropriate Federal banking
agency" in its corporate capacity, but not as receiver or
conservator.
[See Appendix p. 1]
Page 2. Section 2. "Definitions"
H.R. 5050 uses the definition of "institution-affiliated
party" contained in the FDI Act. However, that definition
applies a "knowing and reckless" standard to independent
contractors which is not appropriate in the context of H.R. 5050.
Therefore, we suggest the addition of a new defined term,
"institution-related party" which will be defined in the same way
as "institution-affiliated party" except it will not include the
"knowing and reckless" requirement.
[See Appendix p. 2]
Pages 2-8. Title I. "National Commission on Financial Crimes"
Section 103 fai(1)
This provision establishes the membership composition of the
National Commission on Financial Crimes. Sub-section (a)(1)

provides for two government employees to be among five
individuals who are to be appointed by the president.
The FDJC believes that at least one of the government
employees should come from a federal banking regulatory agency
(e.g., FDIC, RTC, OCC, the Fed, or OTS). [See Appendix p. 3]
The FDIC is also concerned about Commission members or
employees divulging information from confidential bank
examination reports. Therefore, ve recommend the addition of a
new section patterned after 18 U.S.C. 1906.
[See Appendix p. 3]
Section 104 fc)(1)
This provision empowers the Commission to obtain information
necessary to its mission from any department or agency of the
United States. However, it would appear to require the
disclosure of information subject to attorney-client or work
product privileges. The Corporation recommends that language be
added to protect any potential civil litigation privileges that
may be applicable to the requested information.
[See Appendix p.

Eflqes 8-3-0,_Sections 201-203. "Local Financial Crimes Strike
Forces1'
The FDIC defers to the Department of Justice with regard to
any comments concerning these sections.
Page 11. Section 204(b). "Report of Apparent Crime”
While the FDIC supports this provision, we have several
concerns with the way it has been drafted. First, this
subsection refers only to priority in the investigation of
matters referred by federal banking agencies, but not their
prosecution. In our opinion, both investigation and prosecution
of these matters should have a priority. Second, this subsection
applies only to referrals from the agency which is the primary
regulator of the financial institution involved. Thus, if the
FDIC discovers an irregularity at a national bank or at a Federal
Reserve member bank, the statute does not require that our
referral to the Department of Justice be given priority. Also,
referrals from the RTC are not included.
Moreover, this section ignores a very valuable source of
referrals, the institutions themselves. Whenever the FDIC
examiners uncover apparent fraud in an open and viable depository
institution, the institution is required to file a Report of
Apparent Crime. This serves several purposes. Primarily, it
places responsibility for oversight of the activities of the

institution where it belongs - with the institution's ff.anageir.ent.
It also encourages the institution's management to take a strong
stance against criminal activity, both with the institution's
employees, as well as the public. These criminal referrals
coming from viable institutions can serve as a valuable tool to
early detection cf bank fraud. Such referrals should be given as
much consideration and priority as those made by the banking
agencies. We therefore recommend that this section be amended to
include any referral of criminal activity involving an insured
depository institution, regardless of the source of the referral.
Lastly, this subsection should apply to institutions and their
affiliates.
[See Appendix p. 5]
Bsqg 12.-Section 2P5, "Availability of Civil Money Penalties*'
Section 205 amends Section 951 of FIRREA to provide for the
disbursement of all civil money penalties collected under that
Section to the Attorney General. It is the FDIC's position that
the civil money penalties collected by the Attorney General for
banking crimes affecting financial institutions should be used to
reimburse the appropriate insurance fund (if the institution is
in receivership or liquidation) or the institution itself (if it
is not in receivership or liquidation). However, it is our
opinion that the Department of Justice should be reimbursed from
the collections for the costs of investigating and pursuing these
actions.
[See Appendix p. 6]

Bgqes 12.tl.?^, Section 206^ "Administrative Subpoena Authority"
Section 206 permits the FBI to compel production of
documents and other physical evidence before a grand jury is
empaneled or without issuance of a grand jury subpoena which
subjects the material to Rule 6(e) restrictions.
Because this section will allow materials collected by the
FBI to be shared with regulatory agencies with a need for the
information without conflict with Rule 6(e), we support it.
However, we see one serious problem with the provision. To the
extent that the materials sought by use of this administrative
subpoena are customer records of a bank or SLL, customers will
have to be notified of the subpoena pursuant to the Right To
Financial Privacy Act. Obviously, this notice will alert them to
the investigation.
In cases where the FBI wishes to subpoena information from
an administrative agency, the FDIC is concerned that any
potential civil litigation privileges that may be applicable be
maintained. Thus, the Corporation recommends that this provision
parallel the procedures currently in use for grand jury

subpoenas. In those cases, the FBI is required to obtain the
consent of the U.S. Attorney prior to issuing such a subpoena.
.a*so ■•xPlicitly provide that any potential
^^^fction privileges would not be waived by providing the
information.
[See Appendix p. 7]
Pfigg 1|g gf

2 Q 7 , "Additional Resources»

The FDIC has no comment with regard to this section.
Eflggg 17“1$. Section 2Pg, "Interagency Coordination*
.

fefv^0r^?08 *Pec^^^caH y authorizes the agencies to
the Att®r^ey Ganeral to accept the assistance of
agency attorneys and investigative personnel to assist DOJ in the
prosecution of crimes affecting savings associations.
suPP°rt this provision, although we see no
real need for it. The Department of Justice already can reach
the same result through designation of agency attorneys as
Special Attorneys or Special Assistant U.S. Attorneys and
designation of other agency employees as agents of a grand jury.
I^Drev^ZnrM S??tiPn ?g?‘ "Saving? AS5PC»tjpn Law EnforcPTn.nt
This section governs DOJ follow-up on criminal referrals and
efforts to obtain restitution.
The. FDIC believes that the language in subsection (a) is
counter-productive.. Instead of requiring that at least one half
of the pending criminal referrals be addressed by a certain
date, it would be more effective to require that DOJ initiate
action on the most important cases. The recent Top 100 Criminal
Referrals submitted by FDIC/OTS would be an excellent example.
.
subsection (b) of Section 209, the Attorney General is
required to take "appropriate action" to recover amounts lost as
a result of fraud or embezzlement by any person from a savings
association. The term "appropriate action" is undefined and
hence vague. Does it mean opening an investigative file,
obtaining an indictment, or securing a conviction? The term is
also troubling in that it could be read to require control by
the Attorney General of claims brought by the RTC or FDIC. if
so, such a provision is contrary to the provisions found in
Section 11(c)(2)(C) of the FDI Act.
We recommend that section 209 be redrafted to address the
Top 100 Criminal Referrals and define what specific action is

o^sired by Congress. The FDIC would be happy bo assist, in this
effort, but did not attempt it due to the policy considerations
involved.
[See Appendix p. 8]
1E-2Q. Section 210, "Appearance Before Congress1'
The FDIC defers to the Department of Justice with regard to
any comments concerning this section.
Eases 2Qz21t Section .201. "Subpoena Authority»»
Section 301 of H.R. 5050 is drafted to give the ETC, as well
as the FDIC, as conservator or receiver, the authority to issue
subpoenas to gather information in determining claims and
liquidating assets of failed financial institutions. The
provision, with the minor amendments described below, will
provide the RTC with a powerful tool in conducting closed
institution investigations. However, the provision is
problematic as it pertains to the FDIC, as receiver. The FDIC
has authority to issue administrative subpoenas under Section
10(c) of the Federal Deposit Insurance Act. Thus, if Congress
fails to pass Section 301, adverse parties may infer that the
FDIC does not have authority under Section 10(c). Either the
statute itself or the legislative history must make clear that
this provision is only meant to expand RTC's authority and to
•clarify FDIC's existing authority. We propose the following
explanatory language be added to the Committee Report:
This provision clarifies existing subpoena powers conferred
pursuant to 12 U.S.C. 51820(c) to both FDIC in its corporate
capacity and as receiver or liquidator of failed financial
institutions. Most courts have generally recognized FDIC
subpoena powers in connection with its investigations of
claims arising out of failed financial institutions. This
provision only clarifies existing FDIC subpoena powers while
expanding the authority to include the RTC and, with regard
to any pending claims challenging the FDIC's authority to
issue subpoenas under existing law, this provision will be
completely neutral.
The recommended amendments conform the provision to the
FDIC's authority under Section 10(c). As such, the term
"subpoena" has been substituted for the word "summons" and the
authority to issue the subpoenas can be appropriately delegated
by the Board of Directors. The provision, as submitted,
prevented delegation. The FDIC has long exercised its subpoena
authority by delegation. To prevent delegation would cause an
enormous and unnecessary burden on the already busy schedules of
both the FDIC and RTC Boards and would be inconsistent with the
existing FDI Act Section 10(c) authority.
[See Appendix p. 9]

Paqg3.-21-:22, Section 302. "Access to

irs

Record«;»»

This section authorizes the FDIC and RTC to have access to
incone tax returns and return information in exercising their
liguidation/conservatorshlp powers. We recommend that this
section by expanded to include the administration of sections 7,
®1 21, 22, 13 and 18 of the Federal Deposit Insurance Act — the
sections which authorize the FDIC to order restitution and
reimbursement, and which grant the FDIC the authority to assess
civil money penalties.
Since the FDIC, acting in its corporate capacity pursuant to
Its enforcement powers, can order restitution or reimbursement to
an institution by an institution-affiliated party before the
institution may be closed, access to income tax returns and
return information could assist the agency in getting an “early
2n making restitution to the institution. This could lead
to recovery while the institution is still viable, possibly
preventing the closing of the institution. Currently, in the
case of civil money penalties, the FDIC must expend valuable
resources in collecting these penalties, with no tool available
to determine what assets the individual might have.
[See
Appendix p. 10]

Pages 22-25. Section 303. “Foreign Investigations»
The FDIC believes that it is inappropriate for subsection
(b) to mandate that the FDIC and RTC, as receiver and
conservator, maintain permanent offices to coordinate foreign
investigations and investigations on behalf of foreign banking
authorities. As in the rest of this section, the agencies should
be given the discretion to do these things if they feel such
action is warranted, either on a temporary or permanent basis.
[See Appendix p. 11]
25, Section 304. “FDIC Corporate Powers»1
This provision is intended to clarify existing authority of
the FDIC. The FDIC considers this provision unnecessary.
£flqes 25-27, Section 305. “Priority of Claims“
Section 305 of H.R. 5050 is drafted to give the FDIC and RTC
priority over competing claims against former directors,
officers, employees, accountants or other professionals formerly
providing services to the failed institution.

in the FDI Act includes independent contractors, such as
attorneys, appraisers and accountants, only if they have acted
knowingly or recklessly, imposes a very high standard.^ This
additional requirement for independent contractors, originally
enacted in connection with the enhanced enforcement powers
conferred by FIRREA on the regulatory agencies, is illogical in
the context of the priority proposal. This higher standard is
appropriate in enforcement proceedings where the subject of those
proceedings may lose his/her job or be banned from the industry.
However, it is not appropriate in this context where the FDIC and
RTC will be attempting to collect on a debt. Therefore, we have
substituted the newly defined term "institution-related party."
We also have extended the use of the priority beyond execution of
judgment to include satisfaction of any judgment.
Hew language concerning an exception to the priority rule
also has been added to Section 305. This new language adds to a
general exception for claims by other Federal agencies and the
United States, by including "any Federal Reserve Bank or Federal
Home Loan Bank". This language is unnecessary since any claims
by the Federal Reserve or Federal Home Loan Banks are normally
secured. To clarify and narrow this exception, we have
substituted the phrase "except for any claim of any federal
agency under Section 6321 of the Internal Revenue Code of 1986 or
Section 3713 of Title 31, United States Code", which was included
in an earlier version of this bill, to protect government liens
for unpaid taxes and other government claims for indebtedness.
Since this proposal calls for prospective application only,
clarifying language must be added to the legislative history to
avoid the unnecessary implication, should this proposal fail to
be enacted, that the FDIC is not entitled to a priority under
case law in some jurisdictions.
The following clarification is suggested for insertion in
the legislative history:
This provision would provide a priority for the FDIC over
certain competing claims against directors, officers,
accountants, attorneys and other parties. Several trial
courts previously recognized this priority while others did
not. Host recently a federal appeals court reversed a
district court order which had recognized the priority as to
claims against third parties which are filed after
enactment. With regard to pending claims, the provision
will be completely neutral. That is, it should neither
support nor under cut any party's position with regard to
whether the FDIC is already entitled to a priority under
existing law.
[See Appendix p. 12]

PAges 27^25^— Section 3 0 6 , "Fraudulent Conveyances”

Section 306 provides the FDIC with the ability to avoid
fraudulent transfers of assets by institution-related parties
and debtors, if the transfers were made within 5 years of the
appointment of the receiver. Current law is limited to fraud
against the depository institution. This provision will be a
welcome tool in the FDIC's continuing fight to combat financial
institution fraud. However, we have three suggestions which
would strengthen Section 306.
The Corporation’s first suggested revision is to Section
(17)(A)(1) and provides that attempts to defraud the Corporation
or other federal banking agencies will result in an avoidable
transfer. The current provision is limited to fraud against the
depository institution.
Our second amendment adds Sections (17)(A)(1) through
2(B)(iii) and recognizes that fraud can be both actual, as set
forth in subpart (A)(1), and constructive, as set forth in
subpart (A)(2). This provision is drawn from the Bankruptcy Code
and allows the FDIC to avoid transfers based on both actual and
constructive fraud.
The third amendment is found at (17)(D). This subsection
provides that the rights of the Corporation take precedence over
the rights of a trustee in bankruptcy. Without this provision,
if a debtor or an institution-related party filed bankruptcy, he
or she would be able to argue that Section 306 was superseded by
the bankruptcy code. Such an argument would render Section 306
virtually meaningless.
[See Appendix p. 13]

Pages 29-31. Section 307,. "Preiudgment Attachments’1
Proposed new paragraph 18 amends Section 11(d) of the Act
(12 U.S.C. § 1821(d)) to provide generally for prejudgment
attachment of the assets of any person obligated to failed
insured depository institutions. The FDIC's recommended language
clarifies the ability of the FDIC to request a prejudgment
attachment in connection with any of the powers conferred on it
as a receiver or liquidator by Sections 11, 12 and 13 of the Act,
and deletes what appears to be an unnecessary NwillfulnessM
requirement if the term "institution-affiliated party" is used
instead of "institution-related party." (As discussed earlier on
page 1 hereof.)
Kith regard to paragraph 4 of subsection (b) on page 30, if
pre-judgment attachment is limited only to section 8(i) offenses,

FDIC will lose a valuable bool in conserving assets in a
Festitution/reimbursement action. Thus, ve also recommend that
this section be changed to encompass actions under all of Section
8, as well as Sections 7 and 18 of the FDI Act.
>
Additionally, in the portion of this proposed legislation
which proposes to amend section 8(i) of the Act, the term "court"
is not defined. Since 8(i) deals with administrative hearings,
it seems that perhaps the best way to accomplish this process is
to require that application be made in federal court while the
administrative action is pending. Section 8(h) of the FDI Act
deals with hearings and judicial review. We therefore propose
that this provision be added to section 8(h) of the Act, and
expanded to include all civil money penalties issued by the
appropriate Federal banking agency, as well as
restitution/reimbursement actions.
The Corporation also recommends that the power to utilize
such attachments be expanded to include situations where the FDIC
can demonstrate that fraud has occurred. This would parallel at
least one favorable court decision obtained in the Fifth Circuit.
[See Appendix p. 14]
Pages 31-32. Section 308. "Concealment of Assets"
This provision should be amended to include the FDIC and PTC
in their corporate capacities since certain claims are sometimes
transferred to the agencies to be pursued in their corporate
capacity as opposed to as receiver or conservator.
[See Appendix
p. 15]

Efi.ges 32-3.3, Section 309. "Mandatory Education for Directors"
We commend this proposed change to the FDI Act. It has long
been the position of the FDIC that many banking law violations
are directly attributable to improper education or lack of
education of officers and directors of insured depository
institutions. The only change we would offer here is to require
completion every 5 years. For small institutions with limited
staffs, comprehensive training may lead to staffing shortages
while such training is going on. By increasing the time to five
years, this allows for a greater "spread" time for employees to
attend training.
[See Appendix p. 16]
Pages 33-34. Section 310. "Grand Jury Secrecy"
Section 310 would permit a court, on application of the
Attorney General, to disclose Grand Jury materials gathered

If *
V.lg!*lem °f • banking law violation to personnel
«its2.5«Pw ! ^ ? £ institution regulatory agency for general use m
in
th« S9«ncy's jurisdiction. Disclosure »ay be nade
on a showing of substantial need.
We support this provision since it will simplify the process
and procedures for the regulatory agencies to obtain grand jury
"ff****“ *®*
ln th«it «*» actions. This will increase thi
efficiency of the governments efforts to combat and punish
ta*en toy fraud through the elimination
duplication of investigative efforts caused by
6i i L rf?trictlons and procedures.
However, the
biw believes that the standard used should be ’’relevancy* as
opposed to a "substantial need." [See Appendix p. 17]
Page 34« Section 211, "Restitution in Certain Fraud Cases"
This ,
section attempts to offset the adverse consequences of
]*toe recent Jiughjgy decision issued by the U.S. Supreme Court.
That decision held that convicted defendants can only be required
iOT lo?ses directly tied to counts which they
jury^
to or *or which they are found guilty by a judge or
¿ , . StP FDIC fully supports the intent of section 311 but
believes that it could be drafted more clearly. In addition,
tnis section should be expanded to include administrative
proceedings undertaken for enforcement purposes.
[See Appendix
p. 18 ]

Eftges ?4-?5. Section 312. "Civil Forfeitur»»'
This section would: 1) sake the proceeds of the new offense
found in Section 308 of concealing assets from the FDIC or RTC
*° ^or^e^toure? 2) permit the Attorney General, in
addition to the Secretary of the Treasury, to seize forfeitable
prSC??dE«.?eriv?d *roB ?ifenses affecting financial institutions?
and 3) allow the forfeited assets to be given to the appropriate
regulatory agency, the appropriate insurance fund or the affected
financial institution without regard to the distinction, found in
current law, as to whether the institution is open or closed.
Since we support enactment of the new proscription against
concealment, we support the first objective. We also support the
other two since each adds flexibility to the forfeiture process

_K.

r c-

-c ^

In keeping with the amendments proposed in section 205 of
this legislation which allow the Attorney General to retain
civil money penalties assessed and collected by him for purposes
of defraying expenses in enforcing certain provisions of lav, we
recommend that all civil money penalties collected by the FDIC be
retained by the FDIC and covered into the appropriate insurance
fund, to help defray the expenses of the costs to the funds
incurred by administration of enforcement activity, as well as
receiverships, and liquidations. The other Federal banking
agencies, notably the OTS, should also be allowed to use any such
funds collected to defray the costs of administration of all
enforcement activities.
[See Appendix p. 19]
Paces 37*38. Section 314. "Breach of Fiduciary Duties".
Section 523(a)(4) of the Bankruptcy Code provides that a
debt based upon "fraud or defalcation while acting in a fiduciary
capacity*' is not dischargeable. In the past, the FDIC has had
difficulty convincing Bankruptcy Courts that a breach of
fiduciary duty by directors, officers, controlling persons, and
affiliated parties of a failed insured depository institution
constitutes a "defalcation" within the meaning of Section
523(a)(4). This proposed Section 314 would make it clear that a
breach of fiduciary duty by any one of these individuals
constitutes a "defalcation."
However, this section would make any judgment owed by a
director, officer or controlling person based upon a breach of
fiduciary duty owed to the institution, no matter who the debt is
owed to, (e.g., to a borrower) not dischargeable. If it is the
committee's intent to enhance the recovery to taxpayers, it
should be limited in scope to debts owed to the FDIC, PTC or
other financial regulatory agencies.
[See Appendix p. 20]
Pages 38-43. Section 315, "Technical Amendments to Title-1M
The FDIC has no comments on this Section.

Page 43. Section 316. "Wiretap Authority for Bank Fraud!*.
This Section would give the Attorney General authority, not
contained in present lav, to apply for a court order permitting
wiretaps in connection with investigations of 18 U.S.C. §1215
(bribery of bank officials), 1014 (false statements on loan
applications), 1343 (presently wire fraud, to be amended as fraud
by use of facility of interstate commerce) and 1344 (bank fraud).

Presumably the inclusions of these financial institution
related offenses m the wiretap predicates is intended to
underscore the fact that Congress takes a serious view of fraud
as it affects our insured financial institutions. However,
comment on the wisdom of this approach and the choice of
statutory provisions is best left to the Department of Justice.
Egqçg 4?-44, Section 3.17, »'Whistleblower Protects on»«
The FDIC has no comment with regard to this section.
Efl-gg? 44-4?, Section 318. »«Golden Parachutes»»
. . The FDIC strongly supports this section of the proposed
legislation. We recommend several minor drafting changes on
pages 47 and 49. The FDIC also recommends the deletion of
subparagraph 3(D)(iii), since that language unintentionally
limits subparagraph 3 (D)(i). [See Appendix p. 21]
Eaqe 49,.Jtew gççtiop 31?, “Clarification of FDIC Authority»
This is a proposed new section that is needed to cure a
ma}or problem that the FDIC is currently facing.
The FSLIC Resolution Fund provisions, as currently codified,
create two basic problems:
1.

The Corporation, in managing the FRF, is not explicitly
given any of its normal powers under Sections 9, li
12, 13 or 15 of the FDI Act.

Nowhere in FIRREA is the Corporation explicitly
appointed receiver for savings and loan associations
that failed prior to January 1, 1989.

These two problems have been exhibited in many different
ways. When the FDIC, as receiver for pre-January 1, 1989
receiverships, has brought suit to collect on notes, litigants
have argued that the FDIC is not the receiver for these
institutions. They have alternatively argued that even if the
receiver, it has none of its receivership powers under
Section 11 of the FDI Act. Similarly, certain title insurance
companies have refused to issue title insurance to FDIC as
receiver, arguing that they cannot find any reference to these
pre-January 1, 1989 receiverships in FIRREA. Similar problems
exist when the FDIC has attempted to collect on assets that are

In crafting a legislative clarification to correct these
problems, it is important to maintain the distinction between FRF
liabilities and the assets and liabilities of each of
the pre-January 1, 1989 Receiverships. The FSLIC Resolution Fund
is only composed of those assets and liabilities that belonged to
FSLIC in its corporate capacity (i.e., those assets that the
FSLIC corporate purchased as part of its SfcL assistance
agreements). The pre-January 1, 1989 receivership estates each
bave their own assets and liabilities. Any receivership
liability can only be paid from the liquidation of that failed
institution^ assets. If this distinction were to be blurred,
the FRF could become responsible for these receivership
liabilities.
To correct the existing problems we need the two provisions
forth in the Appendix hereto. However, the more important of
the two provisions is subsection (9) • [See Appendix p. 22]
Eflqes 49-54, Title IV. "Taxpayer Recovery Act"
In general, the "Taxpayer Recovery Act" found at page 49 of
H.R. 5050 contains proposed amendments to the Bankruptcy Code
which would enhance the FDIC's ability to recover funds from
individuals who have defrauded federally insured financial
institutions. These individuals often file personal bankruptcy
proceedings to discharge judgments or debts for damages based
upon fraudulent, wrongful (and in some instances criminal)
conduct. Although the FDIC has actively attempted to prevent
this, the Bankruptcy Code and case law interpreting it often make
it difficult for the FDIC to prevent these individuals from
avoiding these debts.
The FDIC supports the Taxpayer Recovery Act, and suggests
that a few changes be made in order to clarify and/or ensure that
all of the enhancements would apply to the FDIC and RTC in their
corporate, conservatorship and receivership capacities. These
suggested changes are to Sections 403 and 404 (b) of the Bill.
S.ggtlpn 401» This section gives Section 401 of H.R. 5050
the short title "Taxpayer Recovery Act of 1990."
Section 402: This section of the bill would add two new
subsections to 11 U.S.C. 523 (a).
Section 402 f3). page 49. line 23 This section adds new subsection (a)(11) to Section 523 of
the Bankruptcy Code. Section 523 (a) (11) would make it clear
that a judgment for criminal restitution (that arose out of an
act that caused loss to an insured depository institution) is not
dischargeable. In Davenport v. Pennsylvania, (decided June,

c2i?rt has *tated «>»* criminal restitution is
Bankrunf^vbr«din *„ChaPtcr.13 plan «"der Section 1328 (a) of the
M g g f t ? 5 f i
Naw Sectlon 523 (a) (U) would close this
Section 402 f3^. pace 50. line 5 th. R^vi,,I!f^i2n-#<id*v,n#w ,ubfaction (•) (12) to Section 523 of
ilSmSnt £ S L
Naw •;ctl0n 523 (a> (12) provides that any
' ®rd*r or consent decree entered by any court or any
Mnaitv¥»<¡!?]?5B!i2f*2j
obligates the debtor to pay damages, a
iorfaitur*' r**titution, reimbursement,
r £ r * ? ? Aon'
^Brantee against loss, or for acts involving
d ?f defalcation by a fiduciary with respect to an
»!!*£« *t0ry institution is not dischargeable. The PD1C
,
y ?f^lc*i*i.^lr*?tors, and controlling persons who caused
financial institutions. Although the FDIC has
thi«
f*coveri”? l»rge judgments for damages against
these individuals, these individuals often use the bankruptcy
t0v?8C2?f*?ayfn9 thase judgments. The FDIC has had
considereble difficulty convincing the Bankruptcy Courts to find
that these judgments fit into the debts currently listed in 523
(ft) as nondischargeable.
<•) (12) will eliminate these problems,
hi
(H L Bdds-a sP®clfic category for the judgments
«-.b^ Th?,T?IC
*g*instthese individuals.
since 523 (a) (12) specifically provides that a judgment, order
or consent decree is not dischargeable, this Section will
el inmate the need for the FDIC to relitigate these cases in the
bankruptcy courts.
.
addition, this section would nake enforcenent penalties
and other debts owed to the FDIC nondischargeable.
fiftetion 403. page SO. line 15 This section adds new subsection (e) to section 523 of the
Bankruptcy Code. Currently, section 523 (a) (4) of the
Bankruptcy Code provides that an individual’s debt for danages
due to "fraud or defalcation while acting in a fiduciary
capacity^* is excepted fron discharge. In the past, the FDIC has
had difficulty utilizing this section since Bankruptcy Courts
look to state law to determine who is a "fiduciary," end state
law often does not define "fiduciary" to include the directors
officers or other affiliated parties in control of an insured '
depository institution. New section 523 (e) states that these
individuals shall be considered to be acting in a fiduciary
capacity with respect to the purposes of" 523 (a) (4).

In addi

Section 403. pace SO. line 23 This section adds new subsection (f) to section 523 of the
Bankruptcy Code. Currently, section 523 (a) (2) (A) excepts a
debt from discharge if it is a debt for money or property
procured through fraud or false pretenses. Section 523 (a) (2)
(B) excepts a debt from discharge if it is a debt for aoney or
property that was acquired through the use of a false financial
atateaent. Pursuant to 523 (a) (2) (A), in order for a creditor
to prevail, it must prove that it relied upon the false
representation Bade by the debtor. Pursuant to 523
(•)(2)(B)(iii), a creditor Bust show that it reasonably relied
upon the false financial stateaent in order to block the
discharge of a debt procured through the use of a false financial
stateaent. The FDIC often has difficulty fulfilling the
•reliance" eleaent of proof, since aany tints an officer or
director of the failed institution did not rely on the false
or false financial stateaent in Baking the loan (ie:
where the borrower participated in a scheae with bank officers
designed to defraud the bank)• This new subsection would Bake it
clear that the FDIC need not prove that it or the failed
institution relied on a false stateaent or false financial
stateaent in order for a bankruptcy court to find these types of
debts, when owed to the FDIC, are not dischargeable.
Section 403. page 51. line 5 This section would add new subsection (g) to Section 523 (a)
of the Bankruptcy Code. Current Section 523 (c) puts the burden
an objecting creditor to file a coaplaint to deteraine the
dischargeability of a debt of the type listed in Sections 523 (a)
(2), (4) or (6). If a creditor fails to so file within the time
constraints iaposed by the court (usually within 60 days froa the
first meeting of creditors, unless extended by the court), the
debt is discharged. Therefore, creditors who aaintain that a
debtor owes thea aoney or property procured through fraud, the
use of a false financial stateaent, fraud by a fiduciary, or
willful and aalicious injury have the burden of establishing that
the debt is not dischargeable.
This aaendaent would greatly assist the FDIC in its attempts
to recover funds froa individuals who have defrauded insured
depository institutions, since, the FDIC often finds it difficult
or impossible to comply with the 60 day deadline set by the
bankruptcy court to object to the discharge of debts. Often, the
FDIC does not complete the investigation of the individuals who
were involved in wrongdoing at the failed institution within 60
days of the takeover of an institution. If the debtor filed his
or her bankruptcy proceeding just before or just after the FDIC
seised control of the failed financial institution (which is
often the case), the FDIC will not discover the identity of the

wrongdoing debtor or the transactions that the debtor was
involved in prior to the expiration of the 60 day deadline.
'
amendment would give the FDIC 120 days from the date of
the debtor s first »eeting of creditors, or 120 days from the
date of the appointment'of a conservator or receiver of a failed
institution (whichever is longer) to file an objection
to the discharge of a particular debt of the debtor. In RTC
purchase and assumption transactions, many loans are transferred
from a receiver to an acquiror and then can be •'put*' back to RTC
Corporate (pursuant to the purchase and assumption agreements)•
like to see an amendment to this section
which would provide that the 120 days will run from the date of
of^ h* conservator or receiver, the date of the
ggtor^
of creditors, or the date of the •»put" to
** longer). In order to provide some
finality to this extension of time, subsection (g)(2) provides
#vcnt vil1 the FDIC hav® beyond the period of
limitations provided Section 11(d)(14) of the FDIA to file this
complaint.
the reference on line 25 to Section 11
f? incorrect. The appropriate citation to the
federal statute of limitations applicable to the FDIC is found in
Section 11 (d)(14) of the FDIA.
,

/ fle8se note

S S S t i m 403. Page 52. line l section adds a new subsection (h) to Section 523 (a) of
the Bankruptcy Code, which contains definitions applicable to the
amendments discussed above. Subsection (h)(3), on line 10,
.,£ines ,,aPPr°Prl®^e Federal financial agency" by reference to 12
U.S.C. 1818 (e)(7)(D). This definition is insufficient because
it does not include the Resolution Trust Corporation.
Specifically, 12 U.S.C. 1816 (e)(7)(D) defines "appropriate
Federal financial institutions regulatory agency" to include "the
appropriate Federal Banking agency, in the case of an insured
institution" (see Section 1818 (e)(7)(D)(i)). Section
1813 (q) defines "appropriate Federal banking agency" to include
the Comptroller of the Currency, the Board of Governors of the
Federal Reserve, the FDIC and the OTS. Since the RTC is not a
regulatory agency, however, it is not included within the
definition of "appropriate Federal financial agency." (See
Appendix p. 23]
1
Also, due to the wording of this definition, it may be
interpreted to apply only to the "appropriate Federal financial
agency" in its corporate capacity. Since many objections to the
dischargeability of debts are asserted by conservators or
receivers, this definition should be expanded to include them.

Section 404 (D . page 52. line 25 #ec*i°n *»«nds section 1328 (a) of the Bankruptcy Code,
criminal restitution and debts owed to the FDIC for
♦ ®r,Proferty procured through fraud are dischargeable in a
Ji? £ 1®n un^er Section 1328 (a). The amendments to
Section 3.328 (a) provide that these debts owed to the FDIC would
not be dischargeable.
Section 404 fbi
Jhl*,?ecti?n Y ould aBend Section 522 (c) of the Bankruptcy
?**!!«.*? sllow the FDIC to invade the exempt property of a debtor
•n ord*r to satisfy a judgment that the Bankruptcy Court has
determined is not dischargeable under Section 523 (a) (2), (4),
(S)# (11), or (12). This amendment also uses the term
**nanclAl institutions regulatory agency**
and defines that term by referencing 12 U.S.C. 1818 (e)(7)(D).
As discussed above, this would not include the RTC. [See
Appendix p. 23]
1

FDIC & RTC COMMENTS ON H.R. 5050
APPENDIX

Paqg 2i Section 2, Definition of »Appropriate Federal Banking
Agency"
(2) APPROPRIATE FEDERAL BANKING AGENCY.— The term
"appropriate federal banking agency" has the meaning given to
such term in section 3(q) of the Federal Deposit Insurance Act.
It shall also include the Resolution Trust Corporation, and shall
include all such agencies whether acting in their corporate
capacity or as receiver or conservator.

Page 2. Section 2, "Definitions"
On page 2, line 15, insert the following new subsection (3):
A new section 3(y) shall be added to The Federal Deposit
Insurance Act, 12 U.S.C. 1813(y), as follows:
(y) INSTITUTION-RELATED PARTY.— The term "institutionrelated party" shall mean any insured depository institution's
director, officer, employee, agent, attorney, accountant,
appraiser or any other party employed by or providing services to
an insured depository institution.

Faflfi— 2„i— S_e.ction .103 (aHl),

"Commission on Financial Crimes”

On page 3, line 18, add the following new sentence at the
end of subsection (a)(1):
At least one of the pfficers or employees of the United
States so appointed shall be employed by either the FDIC, RTC,
OCC, Federal Reserve Board, or the OTS at the time of
appointment.
On page 4, line 5, add the following new subsection and
renumber the subsequent paragraphs accordingly:
(b)

DISCLOSURE OF INFORMATION FROM A BANK EXAMINATION
REPORT.— Any member or employee of the Commission
with access to a depository institution^ examination report, or
material derived therefrom, who discloses the names of borrowers
or the collateral for loans of any member bank of the Federal
Reserve System, or depository institution insured by the Federal
Deposit Insurance Corporation, without first having obtained the
express permission in writing from the Comptroller of the
Currency as to a national bank, the Board of Governors of the
Federal Reserve System as to a State member bank, the Office of
Thrift Supervision as to a savings association, or the Federal
Deposit Insurance Corporation as to any other insured depository
institution, or from the board of directors of such depository
institution, except when ordered to do so by a court of competent
jurisdiction, or by the direction of the Congress of the United
States, or either House thereof, or any committee of Congress or
either House duly authorized, shall be fined not more than $5,000
or imprisoned not more than one year or both.

Pftqe 6,— Section, 104 (c) (1 ) . "Powers of Commission"

On page 6, line 14, delete subsection (2) and insert the
following new subsection:
(2) PROCEDURE.— Upon request of the Chairperson of the
Commission, the head of ^hat department or agency may furnish the
information requested to the Commission on such terms and
conditions necessary to preserve otherwise applicable privileges.
The furnishing of information requested by the Commission
pursuant to this section shall not constitute a waiver of any
otherwise applicable privilege.

Page H i

gççtion 2P4(b), »♦Priority for F inancial Crime Referrals»

___» '
beginning on line 15, delete subsection (b)(1)
ana insert the following:
>
Th® Attorney General shall prescribe by a
*Ki°£nï!îat*>Hîe ¿ ~ * stigation and prosecution of any referral
off*c? of the Comptroller of the Currency,
Office of Thrift Supervision, the Board of Governors of the
Rfserve System or the insured depository institution
*î?«t0 î M P ï F î f 1*1 ?rine involving any insured depository
in default.°r in danger of default or any troubled
any affiliate of any such institution shall be
given priority in case management.

Pace 12. Section 205, "Civil Money Penalties”
On page 12, line 8, delete subsection (g) and insert the
following new subsection:
(g) DISBURSEMENT Penalties collected under authority of
this section shall be paid to:
(1) The Federal Deposit Insurance Corporation or the
Resolution Trust Corporation, as appropriate, when the conduct
which gave rise to the penalty caused a loss to an insured
financial institution, if the affected financial institution is
in receivership or liquidation - (A)

to reimburse the agency for payments to claimants or
creditors of the institution; and

(B)

to reimburse the insurance fund of the agency for
losses suffered by the fund as a result of the
receivership or liquidation.

(2) To the financial institution, if it is not in
receivership or liquidation, as restitution, upon the order of
the appropriate Federal financial institution regulatory agency.
(h) The Department of Justice shall be entitled to recover
izs reasonable costs of investigating and prosecuting such action
under Section 951 from any such penalty before the penalty is
paid to such agency.
(i) If no loss to an insured financial institution can be
established that was caused by the conduct which gave rise to the
action under Section 951, any penalty shall be paid to the
Treasury. However, any Federal financial institution regulatory
agency which provided assistance in the investigation or
prosecution of any such action shall be entitled to reimbursement
of the reasonable expenses of such assistance from any such
penalty.

Pgqe„16. Section 206. "Administrative Subpoena Authority"
On page 16, line 22, add the following new subsection (g):
#
With regard to subpoenas to be served upon administrative
agenciesi the FBI shall obtain the consent of the appropriate
United States Attorney prior to issuing such a subpoena*
The
provision of any reguested information by any federal agency
shall not waive any applicable privileges that could be otherwise
asserted in any pending or future civil litigation.

1 9 1_Section 209. "Savings Association Lav Enforcement”

On page 19, line 10, delete all of subsection (b).
>

Pages 20-21, Section 301. “Subpoena Authority»

On page 20, line 11, insert the words ”CLARIFICATION OF"
before the word "SUBPOENA.”
On page 20, line 1*?, delete the word •'SUMMONS” and insert in
its place the word "SUBPOENA.”
On page 20, line 19, delete the word ”or”, insert a comma
aftet the word ”conservator” and insert the words ”or exclusive
manager” after the word ”receiver”
On page 20, line 21, delete the word ”the” and insert in its
place the word "an”
On page 21, line 6, delete the words ”LIMITED TO” and insert
the word ”OF” in their place.
On page 21, line 7, delete the word ’'summons” and insert the
words ’’subpoena or subpoena duces tecum" in its place.
On page 21, line 9, insert the words ”or their designees"
the word "Directors”, and delete the word "summons” and
insert the words "subpoena or subpoena duces tecum” in its place.
On page 21, line 13, insert the words "or their designees)."
after the word "Corporation”, and delete the remainder of that
sentence.
On page 21, line 16, add a new subsection (iii) as follows:
(iii) RULE OF CONSTRUCTION.-- This subsection shall-not
be construed as limiting any rights that the Corporation, in
any capacity, might otherwise have under Section 10(c) of
this Act.

Pages 21-22. Section 302, »Access to IRS Records»
On page 22, line 6, delete the words "section 11" and
insert instead "sections 7, 8, 11, 12, 13 and 18"

l£3££-22z2i. Section 303. "Foreign Invest<rrati

•f

t h e existing
.2?«???* provision:
?!| ^il?e 5 insert the following language in place of
the
t
(2) nay each naintain an office on a temporary or permanent
w
coordinate foreign investigations or investigations on
behalf of foreign banking authorities.

Pages 25-26, Section 305. "Priority of Certain Claims”
On page 26, line 1, delete the word "affiliated” and insert
the word '’related"
On page 26, line 8, delete the words "the United States, or
any Federal Reserve bank or Federal home loan bank" and insert
the words "under Section 6321 of the Internal Revenue Code of
1986 or Section 3713 of Title 31, United States Code."
On page 26, line 11, insert the words "and satisfaction"
after the word "execution"

Pages 27-29, Section 306. "Fraudulent Conveyances”
On page 28, line 3, delete the word "affiliated” and insert
in its place the word ‘'related”
f
On page 28, line 9, after the word "involuntarily" insert a
dash, delete the remainder of that sentence and add the
following:
(1) made such transfer or incurred such liability with
actual intent to hinder, delay, or defraud the insured
depository institution, the Corporation or any appropriate
Federal banking agency; or
(2) (A) received less than a reasonably equivalent value in
exchange for such transfer or obligation; and
(B)(i) was insolvent on the date that such transfer was
made or such obligation was incurred, or became
insolvent as a result of such transfer or obligation;
(ii) was engaged in business or a transaction or was
about to engage in business or a transaction, for which
any property remaining with the institution-related
party or debtor was unreasonably small capital; or
(iii) intended to incur, or believed that the
institution-related party or debtor would incur, debts
that would be beyond the institution-related party's or
debtor's ability to pay as such debts matured.
On page 29, line 8, insert the following new subsection:
(D) RIGHTS UNDER THIS SECTION.— The rights of the
Corporation under this section shall be superior to any rights of
a trustee or any other party under Title 11.

Pages-29-31, Section 307. "Prejudgment Attachments"
On page 29, lines 16-17, delete the words "(in the
Corporation|s capacity as conservator or receiver for any insured
depository institution)," and insert the words "in connection
with exercising the powers conferred by this section and Sections
12 and 13 of the Act,"
On page 29, line 23, delete the words "affiliated" and
insert the word "related"
On page 29, line 23, insert the words "or may be" after the
word "is"
On page 30, line 7, insert the words "or that the Federal
banking agency can demonstrate that a fraud has occurred" after
the word "appointed."
On page 30, line 9, delete the words "Section 8(i)" and
insert instead "Section 8 (h)"
On page 30, line 10, delete the words "(12 U.S.C. 1818(i))"
and insert instead "(12 U.S.C. 1818(h))"
On page 30, line 14, delete the words "paragraph (1), the
court may," and insert instead "this section, or section 7 or 18
of this Act"

On page 30, line 15, insert after "agency" the following:
"to the United States district court, or the United States
court of any territory, within the jurisdiction of which the
home office of the depository institution is located, the
court may"

Pages 31-32. Section 308. "Concealment of Assets"

On page 32, line 3, insert the words “Corporations or” after
the word •'from"
1
On page 32, line 7, insert the word “corporate" after the
word “corporation's" and insert the word “or" after the word
“capacity.“
On page 32, line 10, insert the words “or in its corporate
capacity” after the word “receiver"

Pages 32-33,. Section 309. “Mandatory Education11
neii

On page 33, line 8, delete the word ,,3" and insert the word

Pag&_3.4,-.Section 310. »Grand Jury Secrecy”
On page 34, line 3, delete the words »'a substantial need"
and insert the word "releyancy.

Eafle

34.

Section

311 . "Ability tr, n,-der

new section^s^follows;1' del6te th* *ntire sectiem and insert ■
the F^deralhse« ™ : F C \'0CC! 0TS or the Board of Governors of
lilted in
^
tB the victi" of 8 federal offense
h6U^ :
title 18 of the U.S. Code, restitution may be ordered
the°basis°of
?n indictment or information which form
institute; ^

i i o ^ S d S ^ ^ r i ^ s a r i S 0 an epen
.o u n S ii«aofvih S r n it i? ^ iii? i9ned to protect the Mfety ana

Pgq?S

Section

313.

"Civil

Pen alties"

.
On pages 35-36, delete lines 24-25 and lines 1-2
insert instead "deleting ‘deposited in the Treasury* and
agencyt"" lnstead *Paid to the appropriate Federafbanking
•deposit*dSin3tha<1Tri«uii?*S i f j “"d.inaart in.t.ad -dalating

•t

the wordP-?llat4d«Ìne *' d*lete the word

and insert

Page 47. Section -n8 . "Co1rt»Ti Pararh.it.

■tvi delete the word
^ n?
5 ' insert a cosma after the word "action"
ana
"or.”'
colon0" P#9e 48' llne 6' insert the word "and" after the semi«M O nni?..P!
f L ! 8Xwbe9in2ii
?9 on line 10' delete the words "in the
account
after
the word “segregated”
(iii)0n P#9e 48’ beginnin9 on line 18, delete all of subsection
«-h» ^ j * 5?9®,I9' beginning on line 8, insert a semi-colon after
B
9 k
K
delete the remainder of that section 2nd
insert the following language:
any Sucl? COIninercial insurance policy is expressly
prohibited from covering any liability or legal expense of the
institution which is described in paragraph (3)(B)(ii).

Pgqe

4?, gect^pn

3 3 .9

, »Clarification of rm c Authority»

On page 49# line 11# add the following new section:
SeetlPP 31?
u s rSe*ti

CLARIFICATION OF PDIC AUTHORITY

o
the Federal Deposit Insurance Act (12
l. is amended by inserting after subsection (7)
tlie following new subsections:
"(8)

ü**
vDIC Powers* — As of August 10, 1989, the
S
r2ut°îtshdit-haVe- ^ e *“»*
powers ¿nd S r i t i e . to
of the PQTTr% d tîeî-Wlth resPect t0 the assets and liabilities
sectionsSQICi? ?iUtÎ?n Fünd as the CorPoration has under
institutions*"|
|
and 15 Wlth respect to insured depository
m-mrZiîl Corporation as Receiver. — As of August 10, 1989, the
C< m w w m n shall succeed the Federal Savings and Loan Insurance
corporation as conservator or receiver with respect to any
M M : « ! for whicl? the Federal Savings and Loan Insurance
S S O i i f w W?fo!PP°,1,itea oonservator or receiver on or before
31> 1988- When acting as such conservator or receiver,
thf Corporation shall have all of the rights, powers and
aUj °rfv^es as
CorPora^i°n has as a conservator or receiver
unaer this Act.

Psqe 52, Section 403. »»Definit ions, etr.»'
word "Act"^* 52' line 13' insert the following words after the
i1 1Sw include the Resolution Trust Corporation, and
shall refer to each agency whether it be acting in its capacity
as conservator or receiver or in its corporate capacity.
£ 9e
line 23' delete the words "8(e)(7)(D) of the
!^pos*i Insurance Act) or a conservator or receiver of an
e? ° ^ ^ institution ( es defined in section 3(c)(2) of
Jhf.Fe5<* 1 ^ P ? 811 Insurance Act)** and insert the words "(as
d®ilned in Section 523(h) (3) of this Title)**