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Introductory Note: This article contains the results of research conducted by the author in his representation of Glen Garrett in a civil money penalty action instituted by the FDIC. That action was resolved with the issuance of a final order dismissing all charges, with prejudice, after litigating the issues for almost four years. See In the Matter of Glen Garrett, FDIC Docket No. 94-141k, FDIC Enf. Dec. Â¶11,599 (1999). Most notable, however, is that the dismissal order was issued prior to the conclusion of the evidentiary hearing and only required that Mr. Garrett comply with a regulation that was not in effect at the time the agency issued charges against him. Such disposition of a litigated enforcement action is unprecedented in the history of the FDIC.
In order to qualify as a basis for the assessment of a Second Tier civil money penalty under section 8(i)(2)(B) of the FDI Act, the "pecuniary gain or other benefit" must have two characteristics: (1) it must be the result of actionable misconduct, and (2) it must be improper or illicit.
The gain or benefit must be the result of actionable misconduct.
The first requirement of a causal nexus between the gain and actionable conduct is an explicit prerequisite in the statute itself. Section 8(i)(2)(B) provides in applicable part:
... any institution-affiliated party who commits a violation [of law]1...recklessly engages in an unsafe or unsound practice...or breaches any fiduciary duty, which violation, practice, or breach...results in pecuniary gain or other benefit to such party, shall forfeit and pay a [Second Tier] civil money penalty...
The actionable conduct
charged in the present case is that Glen Garrett committed a "violation"
of Regulation O, "recklessly engaged in an unsafe or unsound practice"
and/or "breached his fiduciary duty" when he failed to disclose his
interest in the six alleged "nominee" loans. Even assuming,
such failure constitutes a "violation" of law, or an "unsafe or unsound
practice" engaged in "recklessly," or a "breach of fiduciary duty" as such
terms are used in section 8(i)(2)(B), it is impossible to conclude that
such failure "resulted in" or otherwise caused any type of gain or benefit
to Glen Garrett within the meaning of the same statute.
Each of the borrowers transferred the proceeds of their loans to Glen Garrett. The FDIC has charged that such transfers provided Glen Garrett with funds he needed to satisfy other financial obligations and that such transfers therefore provided the requisite "gain or other benefit" contemplated by section 8(i)(2)(B). [All of the evidence and testimony regarding such transfers will be to the effect that they were made to discharge prior debts owed by the named borrowers to Glen Garrett. The FDIC has never offered any evidence (other than voiced suspicions) to dispute such explanation.] Thus, according to the FDIC, the "gain or benefit" received by Glen Garrett for purposes of section 8(i)(2)(B) is reflected in his receipt and use of the transferred loan proceeds.
Except for the 2 loans made by the Bank to John Garrett, Glen Garrett was first informed of his receipt of any such "gain or benefit" when the borrowers (Jerry White and Glen Scott) delivered the endorsed loan proceeds checks to Glen Garrett. In the case of the 2 loans made by the Bank to John Garrett, the first notice to Glen Garrett that he would receive any such "gain or benefit" was when the loan was finally consummated with his (Glen Garrett's) execution of the promissory notes under a power of attorney from John Garrett. In all instances, therefore, the final credit decisions by the responsible loan officers (Ann Hall and J.L. Phillips) to make the loans on behalf of the Bank were made before Glen Garrett received any "gain or benefit." Accordingly, it is impossible to conclude that Glen Garrett did anything (or failed to do anything) which had the effect of causing him to receive any "gain or benefit" within the meaning of section 8(i)(2)(B).
The gain or benefit must be improper or illicit.
All banking transactions conducted by the First State Bank of Purdy arguably result in some degree or amount of "pecuniary gain or other benefit" to Glen Garrett. He owns the Bank. Common sense, however, compels a conclusion that such "pecuniary gain or benefit" is not the type of gain or benefit contemplated by section 8(i)(2)(B) of the FDI Act for which a Second Tier civil money penalty can be imposed. Such gain or benefit must have an adverse and improper taint of being contrary to law or (as a minimum) prohibited by principles of equity and fairness.
The prohibited "gain or benefit" must contemplate the receipt of a benefit that the recipient is not otherwise entitled to receive. This concept was recognized in Graphic Arts Finishers, Inc. v. Boston Redevelopment Authority, 357 Mass. 40; 255 N.E. 2d 293, 795 [295?] (defining "benefit" as the receipt of some performance or forbearance which the recipient was not previously entitled to receive.) The Graphic Arts opinion was cited in a recommended decision by ALJ Shipe in the case In the Matter of Stanley R. Hendrickson, et al., FDIC Enf. Dec. Â¶ 5235 (1996) at A-2787, in support of the conclusion that since the alleged misconduct of respondent did not result in the receipt of any benefit that respondent was not otherwise entitled to receive, such conduct did not result in the receipt of a "gain or other benefit" within the meaning of section 8(e). Although the FDIC Board reversed the recommended decision and issued an order of removal and prohibition, the final agency decision did not reject ALJ Shipe's analysis pertaining to the respondent's receipt of "financial gain or other benefit" within the meaning of section 8(e).2 Rather, the FDIC Board dismissed the relevance of the Graphic Arts case as "missing the point," concluding that since the statutory element of "loss" had been satisfied (along with the other factors pertaining to dishonesty, breach, etc.), the necessity of finding the receipt of a "benefit" within the meaning of section 8(e) was effectively mooted. Id. at A-2779.
Amount of Penalty Should Reflect "At Least" the Amount of Gain or Benefit
In the civil money penalty case of In the Matter of Joseph A. Dazzio, FDIC Enf. Dec. Â¶5157 (1990), the FDIC Board agreed with a determination in the recommended decision by ALJ Rose that the "amount of the penalty" to be imposed should "at least" deny the respondent the "economic benefit of his violations and breach of fiduciary duty." Id., at A-1585.3 If the "gain or benefit" to Glen Garrett is measured by the aggregate amount of loan proceeds that were transferred to him by the named borrowers, the principle in Dazzio of assessing a penalty equal to "at least" such benefit would require that Glen Garrett pay a penalty of slightly more than $137,000 - even though all of the loans have been repaid without any loss of principal or interest to the Bank. But since the penalty amount in this case is only a small fraction of such amount (and assuming the FDIC has not disavowed the principle in Dazzio that the penalty amount should "at least" be equal the benefit received4), it must follow that Glen Garrett has been accused by the FDIC of receiving a prohibited "gain or benefit" which is "at least" equal to $10,000. There is no evidence in the record, however, which supports the calculation of such an amount as the "pecuniary gain or benefit" (within the meaning of section 8(i)(2)(B) ) that was derived by Glen Garrett as a result of his alleged misconduct. The amount of the penalty cited in the Amended Notice is therefore arbitrary.
The principle followed in Dazzio that the penalty should be at least the amount of benefit received is an explicit and integral part of the formal interagency statement of policy on the assessment of civil money penalties announced by the Federal Financial Institutions Examination Council ("FFIEC") [which is comprised of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Federal Home Loan Bank Board, the National Credit Union Administration, and the Office of the Comptroller of the Currency] in 1980. 45 Fed. Reg. 59423, September 9, 1980, effective August 28, 1980. The formally adopted FFIEC interagency policy statement provides:
In determining the amount of a civil money penalty, the agencies believe that a significant consideration should be the financial or economic benefit the respondent obtained from the violation. Accordingly, the agencies will consider, in addition to the other factors specified in the statute, the [amount of] financial or economic benefit the respondent derived from the illegal activity. The removal of economic benefit will, however, usually be insufficient by itself to promote compliance with the statutory provisions. The [actual] penalty [imposed] may, therefore, in appropriate circumstances reflect some additional amount beyond the economic benefit derived to provide a deterrent to future [mis]conduct.
The following excerpt from the final agency opinion of the FDIC Board in In the Matter of Ira Lee Brannan, FDIC Enf. Dec. Â¶5176 (1992), illustrates the importance and emphasis placed by the FDIC Board upon identifying the amount of gain or benefit received due to illegal action:
Significant consideration is also given to the financial or economic benefit received by the respondents due to the violation. J.D. Miller v. Federal Deposit Insurance Corporation, [ ] F.2d [ ] (4th Cir. 1992) (1992 WL 14625); Bullion v. Federal Deposit Insurance Corporation, 881 F.2d 1368, 1378 (5th Cir. 1989). Financial benefit is often an appropriate "starting point" in determining the amount of a penalty. Id.; In the Matter of * * * Bank, FDIC-852k, 1 P-H FDIC Enf. Dec. Â¶5063 (1986). At a minimum, civil money penalties should negate any actual or potential benefit received by the Respondents. See id. Additionally, the FDIC Manual of Examination Policy states that the violator should "pay a penalty over and above" the amount of loss to the bank or personal gain for violating the law. This amount should be assessed as a penalty, less any restitution made by the Respondent to the Bank, since no violator should benefit from a violation.
The Amount of the Penalty
Should Reflect the "Disgorgement" of any Profit
The proper calculation (for purposes of imposing a civil money penalty) of the amount of gain and profit realized in an illegal stock transaction was one of the central issues in In the Matter of Richard H. Donohoo, et al., FDIC Enf. Dec. Â¶5225 (1995). The FDIC Board relied heavily upon insider trading cases decided under the Securities Exchange Act of 1934 regarding the proper interpretation of the remedy of disgorgement, and refused to allow any deductions for administrative or carrying (interest) charges to calculate the amount of "gain" received by the respondent vis-Ã -vis the amount of a civil money penalty requiring the disgorgement of such gain. Id. at A-2586. In the present case, of course, such considerations are inapposite. There is no charge or allegation that Glen Garrett received any type of "profit" as a result of any of the disputed loans. Accordingly, the principle of "disgorgement" adopted by the FDIC Board in Donohoo as being an appropriate measuring standard to be used in determining "gain" for civil money penalty purposes is not applicable to the present case.
1. Interestingly, paragraph 19 of the Amended Notice does not cite or include a "violation of law" as a basis for the assessment of a Second Tier civil money penalty. [Paragraph 18 of the Amended Notice contains the only allegation of a "violation of law" in support of the assessment of a First Tier penalty.] Nevertheless and even though the Amended Notice does not specifically allege a "violation" of law in support of the assessment of a Second Tier penalty, this discussion will assume the opposite is true and/or that the FDIC will plead that the Amended Notice effectively includes such claim.
2. The receipt of "pecuniary gain or other benefit" as a basis for the assessment of a Second Tier civil money penalty in section 8(i)(2)(B) is almost identical to one of the elements of a removal action under section 8(e) [receipt of "financial gain or other benefit"]. Thus, the cases and authorities interpreting the "gain or benefit" provision in section 8(e) are apropos to the meaning of the same element in section 8(i).
3. Ironically, Dazzio is a classic illustration of misguided persecution by a regulatory agency - in this case, the FDIC. The action originated in 1987 based upon loans made in 1985, and ended more than a decade later when the FDIC Board dismissed the action in 1996. Respondent Dazzio and four others were the only persons who requested a hearing. [Civil money penalty orders were issued by the FDIC against all of the other co-respondents either by consent or by default. See FDIC Enf. Dec. Â¶5099 (1987) and Â¶5115 (1988) at A-1286, fn. 2.] The FDIC Board originally issued a civil money penalty of $125,000 against Dazzio and nominal penalties of $3,000 against the bank officials who "aided and abetted" Dazzio's actions. FDIC Enf. Dec. Â¶5115 (1988) at A-1291. Dazzio appealed the order against him, and the Fifth Circuit reversed and remanded the case for failure of the FDIC Board to consider and properly evaluate all of the statutory factors. Bullion v. FDIC, 881 F.2d 1368 (5th Cir. 1989). On remand from the Fifth Circuit, the FDIC Board ordered a supplemental evidentiary proceeding to determine the appropriate penalty amount and issued an new civil money order which increased the penalty to $175,000. FDIC Enf. Dec. Â¶5157 (1990). Dazzio again appealed to the Fifth Circuit, which again reversed and remanded the case to the FDIC Board, holding that the increased penalty was erroneous as a matter of law. Dazzio v. FDIC, 970 F.2d 71 (5th Cir. 1992). After the second reversal and remand by the Fifth Circuit, and after "sitting" on the case for more than four years, the FDIC Board issued a termination order dismissing the action. FDIC Enf. Dec. Â¶16,125 (1996). The FDIC Board concluded: "A further proceeding unlikely to result in a substantial civil money penalty is not an effective use of the FDIC's resources." Such FDIC action in Dazzio is the only recorded instance where the FDIC Board based an enforcement action decision upon the grounds of cost and practicality.
4. Although the FDIC Board Decision in Dazzio was reversed by the Fifth Circuit Court of Appeals [970 F.2d 71 (5th Cir. 1992)], the cited concept was not overturned.
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