Page 35 - Sharp-Hundley 2012

Banking Law Roundup

Sharp Thinking

No. 73 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. October 2012

Decision Shows FDIC Power to Ban Officials from Banking

The Federal Deposit Insurance Corp. (FDIC) has broad powers to banish bank officials from the
industry, a recent decision by the United States Court of Appeals in Chicago demonstrates.

The FDIC also has the authority to impose significant civil monetary penalties in cases of insider
wrongdoing, the decision indicates.

At issue in Michael v. FDIC, 687 F.3d 337 (7th Cir. 2012), were conduct and omissions of two
brothers who formerly owed Citizens Bank & Trust Co., a state bank insured by FDIC. The
brothers were found to have violated Regulation O (12 C.F.R. Part 215), which regulates
banks’ loans to insiders; to have double-pledged stock in support of their business
transactions; to have violated their fiduciary duties; and to have engaged in unsafe or unsound
banking practices. They were banned from banking and assessed $175,000 in civil
penalties, which the court called “modest.”

The FDIC and the court imposed those sanctions because of the brothers’ involvement in three
separate transactions, but both bodies said banishment from banking would have been supported by their
role in any one of the three situations.

In one transaction, the brothers failed to disclose their personal roles in a transaction in which a hotel
originally had been purchased for $2.58 million and put through a series of trans-
actions which supposedly justified a $3.95 million price, of which their bank agreed to
lend $2.9 million in an approval in which both brothers participated. In another
transaction, the brothers pledged the same shares of their bank’s stock to two
separate banks in support of the brothers’ transactions with those banks. In the third
transaction, the brothers failed to advise Citizens of their interest in a real estate deal
that the bank financed and in which a co-investor was allegedly duped into signing numerous papers.

The FDIC Board found that a common theme emerged when examining the transactions:
“Respondents exploited their positions as Bank directors, deliberately overstated the value of assets, and
concealed their true financial interest to entice lenders and investors to fund their business ventures.”

Affirming, the 7th Circuit said 12 U.S.C. § 1818(e)(1) authorized the Board to
permanently remove from banking a bank officer, director, employee or controlling
shareholder if (1) the person directly or indirectly violated a law, rule, or regulation,
participated in an unsafe or unsound banking practice, or breached his fiduciary duty; (2)
as a result of this conduct, the bank suffered or will probably suffer a financial loss or the
person received a financial benefit; and (3) the conduct involved personal dishonesty or
demonstrated a willful or continuing disregard for the safety or soundness of the bank.

The court’s examination of the alleged violation of a law, rule or regulation focused on
Regulation O. Under Regulation O, “[a]n extension of credit is considered made to an insider to the
extent that the proceeds are transferred to the insider or are used for the tangible economic benefit of the

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Sharp Thinking is an occasional newsletter of The Sharp Law Firm, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp
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