FINAL ENFORCEMENT DECISION ISSUED BY THE BOARD OF GOVERNORS.

In the Matter of Incus Co., Ltd. Tortola, British Virgil Islands And Carlos Hank Rhon An Institution-Affiliated Party of Incus Co., Ltd., and Laredo National Bancshares Laredo, Texas

Docket Nos. 98-038-B-FHC, 98-038-B-I, 98-038-CMP-FHC, 98-038-CMP-I, 98-038-E-I

Determination on Request for Private Hearing

Background

This is an enforcement proceeding brought by the Board of Governors of the Federal Reserve System (the "Board") against Incus Co., Ltd., and Carlos Hank Rhon (the "Respondents") pursuant to the Federal Deposit Insurance Act (the "FDI Act"). Hank Rhon is the registered owner of Incus, an offshore shell bank holding company that controls Laredo National Bancshares ("LNB"). In a Notice of Intent to Prohibit and Notice of Charges and of Hearing (the "Notice") issued December 16, 1998, the Board alleged that Hank Rhon used nominees to secretly acquire additional LNB stock without Board approval, that he transferred significant equity interests in Incus to his father and two business associates in violation of commitments and representations made to the Board, and that he caused Laredo National Bank, LNB's principal subsidiary, to engage in lending and other transactions with affiliates that violated commitments made to the Board. The Notice seeks an order of prohibition against Hank Rhon, a cease and desist order requiring divestiture of Incus's interest in LNB, and significant civil money penalties against both Respondents.

In accordance with section 8(u)(2) of the FDI Act, 12 U.S.C. [sections] 1818(u)(2), the Notice advised the Respondents that any hearing held in this matter would be public, unless the Board determines that an open hearing would be contrary to the public interest. The Notice informed Respondents that they could submit a statement detailing any reasons why the hearing should not be public. On January 11, 1999, Respondents duly filed a motion with the Board seeking a private hearing in this matter. Board Enforcement Counsel opposed the motion.

Respondents make three principal arguments in support of their request for a closed hearing. First, they assert that the safety and soundness of the financial institutions involved could be jeopardized as a result of a public hearing. They note that Hank Rhon is currently the chairman of the board of LNB and is active in its management, and express concern that the allegations lodged against Hank Rhon "could well affect the public's confidence in the involved institutions." Second, they assert that a public hearing would compromise substantial individual privacy and reputational interests, not only of the Respondents themselves but also of the other individuals whose private dealings with Hank Rhon and Incus would be made part of the public proceedings. Third, they suggest that Mexican and U.S. cross-border investments could be adversely affected by a public hearing. Specifically, they argue that publicizing "private and personal business affairs" could act as a disincentive for foreign investors, with unidentified repercussions in Mexico.

Discussion

In 1990, Congress amended the FDI Act to provide that all hearings held on the record in enforcement cases such as this "shall be open to the public, unless the agency, in its discretion, determines that holding an open hearing would be contrary to the public interest." 12 U.S.C. [sections] 1818(u)(2). Simultaneously, Congress required that a transcript of all testimony and documentary evidence be prepared and that the transcripts of all public hearings be made available through the Freedom of Information Act, 12 U.S.C. [sections] 1818(u)(4), provided that the agency may file a document under seal in an administrative proceeding "if disclosure of the document would be contrary to the public interest," 12 U.S.C. [sections] 1818(u)(6), and required agencies to provide Congress with a written report of any determination to close a hearing, 12 U.S.C. [sections] 1818(u)(3).

These amendments, which reversed the prior presumption in favor of closed hearings, reveal a congressional belief that the public benefits of open hearings would generally outweigh the disruptions inherent in them. In the Matter of Zbinden, 80 Federal Reserve Bulletin 360, 361 (1994). As the Chairman of the Senate Banking Committee observed at the time, publicity is "the greatest disinfectant." 136 Cong. Rec. S17,599 (daily ed. October 27, 1990).

Accordingly, before the Board exercises its discretion to close a hearing, there should be a substantial basis for concluding that the case reflects unusual circumstances that overcome the presumption in favor of open hearings. In general, in light of the congressional requirement that the proceedings be open unless "contrary to the public interest," those circumstances should involve serious safety and soundness concerns flowing from a public hearing. Generalized claims of a possible loss of confidence or a "run on the bank," or claims of impairment of the privacy or reputational interests of respondents and third parties, should not be sufficient to result in a closed hearing. Rather, a party seeking a closed hearing should be required to demonstrate how the effects of this proceeding differ so significantly from those involving other banks in terms of the public interest as to warrant special treatment. See In the Matter of Citizens Bank of Clovis, FDIC-91-406b, 2 FDIC Enf. Dec. (P-H) 8012 (March 2, 1992).

The arguments advanced by Respondents do not meet this standard. Although Respondents speculate that the public's confidence in LNB's subsidiary banks may be adversely affected by an open proceeding, they provide no evidence to support their argument and no basis for the Board to distinguish this case from any other case involving an open institution. The Board has previously rejected such conclusory and speculative arguments as a basis for closing an enforcement hearing. See In the Matter of National Bank of Pakistan, No. 92-065-B-FB (August 20, 1992). Moreover, the Board and other banking agencies have held public enforcement hearings without a serious effect on public confidence in open institutions, including enforcement actions involving the ownership and control of the bank involved. E.g., Interamericas Investments, Ltd., v. Board of Governors of the Federal Reserve System, 111 F. 3d 376 (5th Cir. 1997).

Similarly, the privacy interests of the Respondents and third parties do not implicate the "public interest" necessary to justify a closed hearing. As the Board observed in In the Matter of Zbinden, "Enforcement proceedings, by their nature, involve allegations that, if made public, could adversely affect a respondent's reputation or career. Nevertheless, in establishing a statutory presumption in favor of open hearings, Congress implicitly determined that the public benefit from conducting proceedings in the open outweighs the privacy interests of the individuals involved." In the Matter of Zbinden, 80 Federal Reserve Bulletin 361 (1994). As in Zbinden, the Board here "does not believe that the disruptions cited by Respondent[s], which are a normal consequence of such proceedings, are sufficient to overcome the statutory presumption favoring public hearings." Id. at 361-62.(1) The same is true for asserted privacy interests of third parties. In the Matter of Interbank Holding Company, et al., No. 96-018-B-HC (August 14, 1996) (rejecting claim that potential harm to third parties justifies closing enforcement hearing).

Respondents have provided no evidentiary support for their final argument, that an open hearing would inhibit Mexican and U.S. cross-border investment. In particular, they offer no reason why Mexicans who are willing to comply with U.S. laws would be reluctant to do so if their dealings were made public. Foreign nationals who invest in regulated industries in the United States are subject to United States laws and are not entitled to special treatment reflecting their differing "business customs and practices." As one federal court put it, the argument that nationality can act as a predicate for different standards for BHC Act liability is "beyond frivolous." Interamericas Investments, Ltd., 111 E3d at 384.

In short, because Respondents have not shown that an open hearing is contrary to the public interest, the request for a private hearing in this matter must be denied.

Respondents' separate request that all documents related to this proceeding be kept confidential is also denied. As noted above, the FDI Act provides that the Board may file a particular document or part of a document under seal "if disclosure of the document would be contrary to the public interest." 12 U.S.C. [sections] 1818(u)(6). Pursuant to the Board's

Rules of Practice for Hearings, this authority has been delegated to Board Enforcement Counsel, who has the discretion to determine which documents, if any, should be filed under seal. 12 C.F.R. 263.33(b). If Respondents have particular concerns about public disclosure of a specific document or part of a document, they may address these concerns to Board Enforcement Counsel. In the Matter of Zbinden, 80 Federal Reserve Bulletin 362-63 (1994).

By Order of the Board of Governors, this 12th day of February, 1999.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Jennifer J. Johnson Secretary of the Board