Final enforcement decisions issued by the board of governors.

In the Matter of a Notice to Prohibit Further Participation Against

Garfield C. Brown, Jr.,

Former Employee,

Mellon Bank, N.A.

Pittsburgh, Pennsylvania 

Docket No. OCC-AA-EC-03-11

Final Decision

This is an administrative proceeding pursuant to the Federal Deposit Insurance Act ("the FDI Act") in which the Office of the Comptroller of the Currency of the United States of America ("OCC") seeks to prohibit the Respondent, Garfield C. Brown, Jr. ("Respondent"), from further participation in the affairs of any financial institution because of his conduct as an employee of Mellon Bank, N.A., Pittsburgh, Pennsylvania (the "Bank"), a national bank. Under the FDI Act, the OCC may initiate a prohibition proceeding against a former employee of a national bank, but the Board must make the nal determination whether to issue an order of prohibition.

Upon review of the administrative record, the Board issues this Final Decision adopting the Recommended Decision of Administrative Law Judge Ann Z. Cook (the "ALJ"), and orders the issuance of the attached Order of Prohibition.

I. Statement of the Case

A. Statutory and Regulatory Framework

Under the FDI Act and the Board's regulations, the ALJ is responsible for conducting proceedings on a notice of charges. 12 U.S.C. [section] 1818(e)(4). The ALJ issues a recommended decision that is referred to the deciding agency together with any exceptions to those recommendations led by the parties. The Board makes the final findings of fact, conclusions of law, and determination whether to issue an order of prohibition in the case of prohibition orders sought by the OCC. Id.; 12 CFR 263.40.

The FDI Act sets forth the substantive basis upon which a federal banking agency may issue against a bank official or employee an order of prohibition from further participation in banking. To issue such an order, the Board must make each of three findings: (1) that the respondent engaged in identified misconduct, including a violation of law or regulation, an unsafe or unsound practice or a breach of fiduciary duty; (2) that the conduct had a specified effect, including financial loss to the institution or gain to the respondent; and (3) that the respondent's conduct involved either personal dishonesty or a willful or continuing disregard for the safety or soundness of the institution. 12 U.S.C. [section] 1818(e)(1)(A)-(C).

An enforcement proceeding is initiated by filing and serving on the respondent a notice of intent to prohibit. Under the OCC's and the Board's regulations, the respondent must le an answer within 20 days of service of the notice. 12 CFR 19.19(a) and 263.19(a). Failure to le an answer constitutes a waiver of the respondent's right to contest the allegations in the notice, and a final order may be entered unless good cause is shown for failure to le a timely answer. 12 CFR 19.19(c)(1) and 263.19(c)(1).

B. Procedural History

On June 3, 2003, the OCC issued a Notice initiating an enforcement action that sought, inter alia, an order of prohibition against Respondent for his participation in processing three cash advances for an acquaintance, totaling $15,000, knowing that his acquaintance presented false identification to obtain the cash advances. The Notice further alleges that Respondent recorded inaccurate identification information on the cash advance slips completed for these transactions, and that the Respondent received $500 from his acquaintance for his participation in these cash advances. (1) The Notice directed Respondent to le an answer within 20 days, and warned that failure to do so would constitute a waiver of her right to appear and contest the allegations. The record shows that the Respondent received service of the Notice. Nonetheless, Respondent failed to le an answer within the 20-day period.

On or about July 24, 2003, Enforcement Counsel led a Motion for Entry of an Order of Default. The motion was served on Respondent in accordance with the OCC's rules, but he did not respond to it. Finally, on or about July 29, 2003, Respondent received service of an Order to Show Cause directing him to submit an answer by August 13, 2003, and to demonstrate good cause for not having done so previously. That Order, too, was ignored. Respondent has never led an answer to the Notice.

II. Discussion

The OCC's Rules of Practice and Procedure set forth the requirements of an answer and the consequences of a failure to le an answer to a Notice. Under the Rules, failure to le a timely answer "constitutes a waiver of [a respondent's] right to appear and contest the allegations in the Notice." 12 CFR 19.19(c). If the ALJ finds that no good cause has been shown for the failure to le, the judge "shall le...a recommended decision containing the findings and the relief sought in the notice." Id. An order based on a failure to le a timely answer is deemed to be issued by consent. Id.

In this case, Respondent failed to le an answer despite notice to him of the consequences of such failure, and also failed to respond to the ALJ's Order to Show Cause. Respondent's failure to le an answer constitutes a default.

Respondent's default requires the Board to consider the allegations in the Notice as uncontested. The Notice alleges, and the Board finds, that on or about July 30, 1998, Respondent processed for his acquaintance two cash advances against a credit card, each in the amount of $3,500, knowing that the driver's license presented by his acquaintance matched neither the name of the acquaintance, nor the name of the cardholder against which the cash advance was taken. Additionally, on or about August 5, 1998, Respondent processed for the same acquaintance another cash advance in the amount of $8,000 against a different credit card, after the acquaintance presented the same driver's license that was used for identification in the July 30, 1998 transactions. The Notice alleges and the Board finds that on both occasions, Respondent recorded inaccurate identification information on Bank records, at the request of his acquaintance, and that Respondent received $500 from his acquaintance for his participation in these cash advance transactions. The Bank reimbursed the cardholders who were wrongfully charged, and thereby suffered a loss of $15,000.

This conduct by Respondent meets all the criteria for entry of an order of prohibition under 12 U.S.C. [section] 1818(e). It is a breach of fiduciary duty and an unsafe or unsound practice for a bank employee to give bank funds to a person the bank employee knows is not entitled to receive such funds, to accept identification documents that the bank employee knows does not belong to a customer requesting a bank transaction, and to record inaccurate information on bank records. Respondent's action caused gain to himself, as well as loss to the Bank. Finally, such actions, along with Respondent's acceptance of $500 for his involvement in this fraudulent scheme, also exhibit personal dishonesty. Accordingly, the requirements for an order of prohibition have been met and the Board hereby issues such an order.

Conclusion

For these reasons, the Board orders the issuance of the attached Order of Prohibition.

By order of the Board of Governors, this 21st day of November 2003.

Board of Governors of the Federal Reserve System 

JENNIFER J. JOHNSON

Secretary of the Board

(1.) The Notice also sought an order requiring Respondent to make restitution to the Bank under 12 U.S.C. 1818(b)(6). The OCC has authority to issue a nal decision with respect to this requested relief.

Order of Prohibition

Whereas, pursuant to section 8(e) of the Federal Deposit Insurance Act, as amended, (the "FDI Act") (12 U.S.C. [section] 1818(e)), the Board of Governors of the Federal Reserve System ("the Board") is of the opinion, for the reasons set forth in the accompanying Final Decision, that a nal Order of Prohibition should issue against GARFIELD C. BROWN, Jr. ("Brown"), a former employee and institution-affiliated party, as defined in Section 3(u) of the FDI Act (12 U.S.C. [section] 1813(u)), of Mellon Bank, N.A., Pittsburgh, Pennsylvania.

NOW, THEREFORE, IT IS HEREBY ORDERED, pursuant to section 8(e) of the FDI Act, 12 U.S.C. [section] 1818(e), that:

1. In the absence of prior written approval by the Board, and by any other Federal financial institution regulatory agency where necessary pursuant to section 8(e)(7)(B) of the Act (12 U.S.C. [section] 1818(e)(7)(B)), Brown is hereby prohibited:

(a) from participating in any manner in the conduct of the affairs of any institution or agency specified in section 8(e)(7)(A) of the FDI Act (12 U.S.C. [section] 1818(e)(7)(A)), including, but not limited to, any insured depository institution, any insured depository institution holding company or any U.S. branch or agency of a foreign banking organization;

(b) from soliciting, procuring, transferring, attempting to transfer, voting or attempting to vote any proxy, consent or authorization with respect to any voting rights in any institution described in sub- section 8(e)(7)(A) of the FDI Act (12 U.S.C. [section] 1818(e)(7)(A));

(c) from violating any voting agreement previously approved by any Federal banking agency; or

(d) from voting for a director, or from serving or acting as an institution-affiliated party as defined in section 3(u) of the FDI Act (12 U.S.C. [section] 1813(u)), such as an officer, director, or employee in any institution described in section 8(e)(7)(A) of the FDI Act (12 U.S.C. [section] 1818(e)(7)(A)).

2. Any violation of this order shall separately subject Brown to appropriate civil or criminal penalties or both under section 8 of the FDI Act (12 U.S.C. [section] 1818).

3. This order, and each and every provision hereof, is and shall remain fully effective and enforceable until expressly stayed, modified, terminated or suspended in writing by the Board.

This order shall become effective at the expiration of thirty days after service is made.

By order of the Board of Governors, this 21st day of November 2003.

Board of Governors of the Federal Reserve System

JENNIFER J. JOHNSON

Secretary of the Board

In the Matter of a Notice to Prohibit Further Participation Against

Marian L. Butler,

Former Employee,

CoreStates Financial (now First Union)

Philadelphia, Pennsylvania 

Docket No. OCC-AA-EC-02-07

Final Decision

This is an administrative proceeding pursuant to the Federal Deposit Insurance Act ("FDI Act") in which the Office of the Comptroller of the Currency of the United States of America ("OCC") seeks to prohibit the Respondent, Marian L. Butler ("Respondent"), from further participation in the affairs of any financial institution because of her conduct as an employee of CoreStates Financial (now First Union) (the "Bank"), a national banking association. Under the FDI Act, the OCC may initiate a prohibition proceeding against a former employee of a national bank, but the Board must make the final determination whether to issue an order of prohibition.

Upon review of the administrative record, the Board issues this Final Decision adopting the Recommended Decision of Administrative Law Judge Ann Z. Cook (the "ALJ"), and orders the issuance of the attached Order of Prohibition.

I. Statement of the Case

A. Statutory and Regulatory Framework

Under the FDI Act and the Board's regulations, the ALJ is responsible for conducting proceedings on a notice of charges. 12 U.S.C. [section] 1818(e)(4). The ALJ issues a recommended decision that is referred to the deciding agency together with any exceptions to those recommendations led by the parties. The Board makes the nal findings of fact, conclusions of law, and determination whether to issue an order of prohibition in the case of prohibition orders sought by the OCC. Id.;12CFR [section] 263.40.

The FDI Act sets forth the substantive basis upon which a federal banking agency may issue against a bank official or employee an order of prohibition from further participation in banking. To issue such an order, the Board must make each of three findings: (1) that the respondent engaged in identified misconduct, including a violation of law or regulation, an unsafe or unsound practice or a breach of fiduciary duty; (2) that the conduct had a specified effect, including financial loss to the institution or gain to the respondent; and (3) that the respondent's conduct involved either personal dishonesty or a willful or continuing disregard for the safety or soundness of the institution. 12 U.S.C. [section] 1818(e)(1)(A)-(C).

An enforcement proceeding is initiated by filing and serving on the respondent a notice of intent to prohibit. Under the OCC's and the Board's regulations, the respondent must le an answer within 20 days of service of the notice. 12 CFR 19.19(a) and 263.19(a). Failure to le an answer constitutes a waiver of the respondent's right to contest the allegations in the notice, and a final order may be entered unless good cause is shown for failure to le a timely answer. 12 CFR 19.19(c)(1) and 263.19(c)(1).

B. Procedural History

On August 6, 2002, the OCC issued a Notice initiating an enforcement action that sought an order of prohibition due to Respondent's actions in stealing between $10,000 and $15,000 from the Bank while working in the cash processing unit. The Notice directed Respondent to le an answer within 20 days, and warned that failure to do so would constitute a waiver of her right to appear and contest the allegations. The record shows that the OCC made numerous efforts to serve the Notice on Respondent. The initial copy of the Notice was mailed certified mail, return receipt requested, on August 7, 2002, but the receipt was never returned. A second copy of the Notice was served on Respondent by overnight delivery on September 11, 2002. The courier service returned the package as "refused" by the addressee. A process server was dispatched to Respondent's address on September 21, 2002, but was told that there was no one by Respondent's name at that address. On October 1, 2002, Enforcement Counsel sent two more copies to Respondent's home address, one by certified mail, return receipt requested, and one by courier, this time not indicating that the package was from the OCC. Although no return receipt was returned for the copy sent by certified mail, an individual with Respondent's last name signed for the couriered copy on October 4, 2002.1 Nonetheless, Respondent failed to le an answer within the 20-day period specified in that copy of the Notice. On November 27, 2002, the ALJ issued an Order to Show Cause directing Respondent to submit an answer by December 16, 2002, and demonstrate good cause for not having done so previously. The record reflects that the Order was delivered by courier to Respondent's address and signed for on December 2, 2002. Respondent did not respond to the Order to Show Cause and has never led an answer to the Notice.

II. Discussion

The OCC's Rules of Practice and Procedure set forth the requirements of an answer and the consequences of a failure to le an answer to a Notice. Under the Rules, failure to le a timely answer "constitutes a waiver of [a respondent's] right to appear and contest the allegations in the Notice." 12 CFR 19.19(c). If the ALJ finds that no good cause has been shown for the failure to le, the judge "shall le...a recommended decision containing the findings and the relief sought in the notice." Id. An order based on a failure to le a timely answer is deemed to be issued by consent. Id.

The record establishes that the OCC used methods "reasonably calculated to give actual notice" in its efforts to notify Respondent of the pendency of this case. 12 CFR 19.11(c)(2)(v). Nonetheless, Respondent failed to le an answer despite notice to her of the consequences of such failure, and also failed to respond to the ALJ's Order to show cause. Respondent's failure to le an answer constitutes a default.

Respondent's default requires the Board to consider the allegations in the Notice as uncontested. The Notice alleges, and the Board finds, that Respondent stole between $10,000 and $15,000 in cash from the Bank while working as a temporary employee in the cash processing unit. (2) This conduct meets all the criteria for entry of an order of prohibition under 12 U.S.C. [section] 1818(e). It is a violation of law and an unsafe or unsound practice for a bank employee to steal bank funds. Respondent's actions caused gain to herself as well as loss to the Bank. Finally, Respondent's actions involved personal dishonesty in taking property not her own. The requirements for an order of prohibition having been met, the Board has determined that such an order will issue.

Conclusion

For these reasons, the Board orders the issuance of the attached Order of Prohibition.

By order of the Board of Governors, this 13th day of February, 2003.

Board of Governors of the Federal Reserve System

JENNIFER J. JOHNSON

Secretary of the Board

(1.) The person who signed for the package did not provide a first name.

(2.) Respondent was an employee of Manpower Temps, and was contracted from Manpower Temps to work at the Bank. The Board finds that this qualifies her as an institution-affiliated party within the meaning of 12 U.S.C [section] 1818(u)(1), in that she was an "employee... of, or agent for, an insured depository institution."

In the Matter of a Notice to Prohibit Further Participation Against

Stephanie Edmond,

Former Customer Service Representative and Teller 

First Tennessee Bank, NA,

Memphis, Tennessee 

and

Former Teller Bank of America, NA,

Charlotte, North Carolina 

Docket No. OCC-AA-EC-03-24

Final Decision

This is an administrative proceeding pursuant to the Federal Deposit Insurance Act ("FDI Act") in which the Office of the Comptroller of the Currency of the United States of America ("OCC") seeks to prohibit the Respondent, Stephanie Edmond ("Respondent"), from further participation in the affairs of any financial institution based on her conduct while she was employed at First Tennessee Bank, NA, Memphis, Tennessee ("First Tennessee"), as well as Bank of America, NA, Charlotte, North Carolina ("BoA"), both national banking associations. Under the FDI Act, the OCC may initiate a prohibition proceeding against a former employee of a national bank, but the Board must make the final determination whether to issue an order of prohibition.

Upon review of the administrative record, the Board issues this Final Decision adopting the Recommended Decision ("Recommended Decision") of Administrative Law Judge Arthur L. Shipe (the "ALJ"), and orders the issuance of the attached Order of Prohibition.

I. Statement of the Case

A. Statutory and Regulatory Framework

Under the FDI Act and the Board's regulations, the ALJ is responsible for conducting proceedings on a notice of charges. 12 U.S.C. [section] 1818(e)(4). The ALJ issues a recommended decision that is referred to the deciding agency together with any exceptions to those recommendations led by the parties. The Board makes the final findings of fact, conclusions of law, and determination whether to issue an order of prohibition in the case of prohibition orders sought by the OCC. Id.; 12 CFR 263.40.

The FDI Act sets forth the substantive basis upon which a federal banking agency may issue against a bank official or employee an order of prohibition from further participation in banking. In order to issue such an order, the Board must make each of three findings: (1) that the respondent engaged in identified misconduct, including a violation of law or regulation, an unsafe or unsound practice, or a breach of fiduciary duty; (2) that the conduct had a specified effect, including financial loss to the institution or gain to the respondent; and (3) that the respondent's conduct involved either personal dishonesty or a willful or continuing disregard for the safety or soundness of the institution. 12 U.S.C. [section] 1818(e)(1)(A)-(C).

An enforcement proceeding is initiated by the filing of a notice of charges which is served on the respondent. Under the OCC's and the Board's regulations, the respondent must le an answer within 20 days of service of the notice. 12 CFR 19.19(a) and 263.19(a). Failure to le an answer constitutes a waiver of the respondent's right to contest the allegations in the notice, and a final order may be entered unless good cause is shown for failure to le a timely answer. 12 CFR 19.19(c)(1) and 263.19(c)(1).

B. Procedural History

On September 24, 2003, the OCC issued a Notice initiating an enforcement action that sought an order of prohibition against Respondent based on her actions while employed at two different banks. The Notice directed Respondent to le an answer within 20 days, and warned that failure to do so would constitute a waiver of her right to appear and contest the allegations. The OCC sent the Notice by over-night delivery to the two last known addresses for Respondent. On September 25, 2003, a "Ms. Edmond" signed for receipt of the Notice at one of these addresses. However, Respondent failed to le an answer within the 20-day period specified in the Notice.

On November 4, 2003, Enforcement Counsel for the OCC moved for entry of an order of default based on Respondent's failure to appear and le an answer. On November 24, 2003, the ALJ issued an Order to Show Cause, noting that Respondent had not replied to the OCC's motion, and directing Respondent to appear and demonstrate why the ALJ should not grant the default motion.

From approximately December 16, 2003, through the beginning of February 2004, a private process server hired by the OCC made nine attempts to personally serve Respondent with the Order to Show Cause at the address where the Notice had been sent and received. However, residents at this address refused to acknowledge the process server when he attempted service. The OCC confirmed in a January 2004 telephone conversation with Respondent's mother that Respondent resided at this address. The record reflects that the process server ultimately posted the Order at this address on February 11, 2004. Respondent did not respond to the Order to Show Cause and has never led an answer to the Notice.

II. Discussion

The OCC's Rules of Practice and Procedure set forth the requirements of an answer and the consequences of a failure to le an answer to a Notice. Under the rules, failure to le a timely answer "constitutes a waiver of [a respondent's] right to appear and contest the allegations in the notice." 12 CFR 19.19(c). If the ALJ finds that no good cause has been shown for the failure to le, the judge "shall le...a recommended decision containing the findings and the relief sought in the notice." Id. An order based on a failure to timely answer is deemed to be issued by consent. Id.

The record establishes that at a minimum, the OCC used methods "reasonably calculated to give actual notice" in its efforts to notify Respondent of the pendency of this case. 12 CFR 19.11(c)(2)(v). The OCC identified two last known addresses for the Respondent. On September 25, 2003, a "Ms. Edmond" signed for receipt of the overnight delivery of the Notice at one of these addresses. By telephone conversation following receipt of the Notice, Respondent's mother, Mary Edmond, confirmed that the address to which the Notice had been sent was her address, and that her daughter, the Respondent, resided with her at that address. Finally, on February 11, 2004, a process server delivered the Order to Show Cause to this same address. Nonetheless, Respondent failed to le an answer despite notice to her of the consequences of such failure, and also failed to respond to the ALJ's Order to Show Cause. Respondent's failure to le an answer constitutes a default.

Respondent's default requires the Board to consider the allegations in the Notice as uncontested. The Notice alleges, and the Board finds, that while employed at First Tennessee, Respondent fraudulently benefited from a First Tennessee installment loan by, among other things, providing false information on loan documents and forging the name and signature of a cosigner. Respondent's fraudulent loan subsequently went into default. Also while employed at First Tennessee, Respondent took out a loan in the name of a First Tennessee customer, without the customer's knowledge or consent, and by forging the customer's signature on the loan application. Respondent used the proceeds of this loan for her own benefit. Furthermore, while employed at BoA, Respondent executed a cash-out ticket without posting a corresponding ticket. This conduct meets the criteria for entry of an order of prohibition under 12 U.S.C. [section] 1818(e). It is a violation of law, a breach of duciary duty, and an unsafe or unsound practice for a bank employee to fraudulently obtain and benefit from loans issued by a bank at which she is employed. More-over, it is an unsafe or unsound practice for a bank employee to fail to maintain proper record-keeping of the transactions she executes. Respondent's actions caused gain to herself, as well as a total loss of $22,346 to these two banks. Finally, Respondent's acts involved both personal dishonesty and a willful disregard for the safety or soundness of the banks at which she was employed.

In sum, all the elements necessary for the issuance of a prohibition order are presented in this case.

Conclusion

For these reasons, the Board orders the issuance of the attached Order of Prohibition.

By order of the Board of Governors, this 17th day of June 2004.

Board of Governors of the Federal Reserve System

JENNIFER J. JOHNSON

Secretary of the Board

Order of Prohibition

Whereas, pursuant to section 8(e) of the Federal Deposit Insurance Act, as amended, (the "FDI Act") (12 U.S.C. [section] 1818(e)), the Board of Governors of the Federal Reserve System ("the Board") is of the opinion, for the reasons set forth in the accompanying Final Decision, that a final Order of Prohibition should issue against STEPHANIE EDMOND ("Edmond"), a former employee and institution-affiliated party, as defined in Section 3(u) of the FDI Act (12 U.S.C [section] 1813(u)), of First Tennessee Bank, NA, Memphis, Tennessee, and Bank of America, NA, Charlotte, North Carolina.

NOW, THEREFORE, IT IS HEREBY ORDERED, pursuant to section 8(e) of the FDI Act, 12 U.S.C. [section] 1818(e), that:

1. In the absence of prior written approval by the Board, and by any other Federal financial institution regulatory agency where necessary pursuant to section 8(e)(7)(B) of the Act (12 U.S.C. [section] 1818(e)(7)(B)), Edmond is hereby prohibited:

(a) from participating in any manner in the conduct of the affairs of any institution or agency specified in section 8(e)(7)(A) of the FDI Act (12 U.S.C. [section] 1818(e)(7)(A)), including, but not limited to, any insured depository institution, any insured depository institution holding company or any U.S. branch or agency of a foreign banking organization;

(b) from soliciting, procuring, transferring, attempting to transfer, voting or attempting to vote any proxy, consent or authorization with respect to any voting rights in any institution described in subsection 8(e)(7)(A) of the FDI Act (12 U.S.C. [section] 1818(e)(7)(A));

(c) from violating any voting agreement previously approved by any Federal banking agency; or

(d) from voting for a director, or from serving or acting as an institution-affiliated party as defined in section 3(u) of the FDI Act (12 U.S.C. [section] 1813(u)), such as an officer, director, or employee in any institution described in section 8(e)(7)(A) of the FDI Act (12 U.S.C. [section] 1818(e)(7)(A)).

2. Any violation of this Order shall separately subject Edmond to appropriate civil or criminal penalties or both under section 8 of the FDI Act (12 U.S.C. [section] 1818).

3. This Order, and each and every provision hereof, is and shall remain fully effective and enforceable until expressly stayed, modified, terminated or suspended in writing by the Board.

This order shall become effective at the expiration of thirty days after service is made.

By order of the Board of Governors, this 17th day of June 2004.

Board of Governors of the Federal Reserve System

JENNIFER J. JOHNSON

Secretary of the Board

In the Matter of a Notice to Prohibit Further Participation Against

Cynthia Rowe,

Former Employee,

Key Bank, N.A.,

Cleveland, Ohio 

Docket No. OCC-AA-EC-02-13

Final Decision

This is an administrative proceeding pursuant to the Federal Deposit Insurance Act ("FDI Act") in which the Office of the Comptroller of the Currency of the United States of America ("OCC") seeks to prohibit the Respondent, Cynthia Rowe ("Respondent"), from further participation in the affairs of any financial institution because of her conduct as an employee of Key Bank, N.A., Cleveland, Ohio (the "Bank"). Under the FDI Act, the OCC may initiate a prohibition proceeding against a former employee of a national bank, but the Board must make the final determination whether to issue an order of prohibition.

Upon review of the administrative record, the Board issues this Final Decision adopting the Recommended Decision of Administrative Law Judge Ann Z. Cook (the "ALJ"), and orders the issuance of the attached Order of Prohibition.

1. Statement of the Case

A. Statutory and Regulatory Framework

Under the FDI Act and the Board's regulations, the ALJ is responsible for conducting proceedings on a notice of charges. 12 U.S.C. [section] 1818(e)(4). The ALJ issues a recommended decision that is referred to the deciding agency together with any exceptions to those recommendations led by the parties. The Board makes the final findings of fact, conclusions of law, and determination whether to issue an order of prohibition in the case of prohibition orders sought by the OCC. Id.; 12 CFR 263.40.

The FDI Act sets forth the substantive basis upon which a federal banking agency may issue against a bank official or employee an order of prohibition from further participation in banking. To issue such an order, the Board must make each of three findings: (1) that the respondent engaged in identified misconduct, including a violation of law or regulation, an unsafe or unsound practice or a breach of fiduciary duty; (2) that the conduct had a specified effect, including financial loss to the institution or gain to the respondent; and (3) that the respondent's conduct involved either personal dishonesty or a willful or continuing disregard for the safety or soundness of the institution. 12 U.S.C.[section] 1818(e)(1)(A)-(C).

An enforcement proceeding is initiated by filing and serving on the respondent a notice of intent to prohibit. Under the OCC's and the Board's regulations, the respondent must file an answer within 20 days of service of the notice. 12 CFR 19.19(a) and 263.19(a). Failure to le an answer constitutes a waiver of the respondent's right to contest the allegations in the notice, and a final order may be entered unless good cause is shown for failure to le a timely answer. 12 CFR 19.19(c)(1) and 263.19(c)(1).

B. Procedural History

On October 3, 2002, the OCC issued a Notice initiating an enforcement action that sought, inter alia, an order of prohibition due to Respondent's actions in stealing over $40,000 from the Bank over a three-year period. (1) The Notice directed Respondent to le an answer within 20 days, and warned that failure to do so would constitute a waiver of her right to appear and contest the allegations.

The record shows that the Respondent acknowledged receipt of the Notice. Nonetheless, Respondent failed to le an answer within the 20-day period. A second copy of the Notice was served on October 25, 2002, and received by Respondent on October 30, 2002. The ALJ served an Order Setting Telephone Conference on November 13, 2002, which was received at Respondent's residence on November 14, 2002. Respondent did not, however, participate in the telephone conference call established by the Order. On November 21, 2002, Respondent was served with Enforcement Counsel's Motion for Entry of an Order of Default, but did not respond to it. On November 25, 2002, Respondent received service of an Order to Show Cause directing her to submit an answer by December 10, 2002, and demonstrate good cause for not having done so previously. That Order, too, was ignored. Respondent has never led an answer to the Notice.

II. Discussion

The OCC's Rules of Practice and Procedure set forth the requirements of an answer and the consequences of a failure to le an answer to a Notice. Under the Rules, failure to le a timely answer "constitutes a waiver of [a respondent's] right to appear and contest the allegations in the Notice." 12 CFR 19.19(c). If the ALJ finds that no good cause has been shown for the failure to le, the judge "shall file...a recommended decision containing the findings and the relief sought in the notice." Id. An order based on a failure to le a timely answer is deemed to be issued by consent. Id.

In this case, Respondent failed to le an answer despite notice to her of the consequences of such failure, and also failed to respond to the ALJ's Order to show cause. Respondent's failure to le an answer constitutes a default.

Respondent's default requires the Board to consider the allegations in the Notice as uncontested. The Notice alleges, and the Board finds, that Respondent repeatedly stole cash from the Bank's teller drawers over a three-year period. She also made fraudulent entries in the Bank's books and records to reverse overdrafts to her account at the Bank. Together, these thefts totaled over $40,000.

This conduct meets all the criteria for entry of an order of prohibition under 12 U.S.C. [section] 1818(e). It is a violation of law and an unsafe or unsound practice for a bank employee to steal bank funds and to falsify bank records. Respondent's actions caused gain to herself as well as loss to the Bank. Finally, Respondent's actions involved personal dishonesty in taking property not her own. The requirements for an order of prohibition having been met, the Board has determined that such an order will issue.

Conclusion

For these reasons, the Board orders the issuance of the attached Order of Prohibition.

By order of the Board of Governors, this 13th day of February, 2003.

Board of Governors of the Federal Reserve System

JENNIFER J. JOHNSON

Secretary of the Board

(1.) The Notice also sought an order requiring Respondent to make restitution to the Bank under 12 U.S.C. [section] 1818(b)(6)(A). The OCC has statutory authority to issue a final decision with respect to this requested relief.

Order of Prohibition

Whereas, pursuant to section 8(e) of the Federal Deposit Insurance Act, as amended, (the "Act") (12 U.S.C. [section] 1818(e)), the Board of Governors of the Federal Reserve System ("the Board") is of the opinion, for the reasons set forth in the accompanying Final Decision, that a final Order of Prohibition should issue against CYNTHIA ROWE ("Rowe"), a former employee and institution-affiliated party, as defined in Section 3(u) of the Act (12 U.S.C [section] 1813(u)), of Key Bank, N.A., Cleveland, Ohio.

NOW, THEREFORE, IT IS HEREBY ORDERED, pursuant to section 8(e) of the Act, 12 U.S.C. [section] 1818(e), that:

1. In the absence of prior written approval by the Board, and by any other Federal financial institution regulatory agency where necessary pursuant to section 8(e)(7)(B) of the Act (12 U.S.C. [section] 1818(e)(7)(B)), Rowe is hereby prohibited:

(a) from participating in the conduct of the affairs of any bank holding company, any insured depository institution or any other institution specified in subsection 8(e)(7)(A) of the Act (12 U.S.C. [section] 1818(e)(7)(A));

(b) from soliciting, procuring, transferring, attempting to transfer, voting or attempting to vote any proxy, consent, or authorization with respect to any voting rights in any institution described in subsection 8(e)(7)(A) of the Act (12 U.S.C. [section] 1818(e)(7)(A));

(c) from violating any voting agreement previously approved by any Federal banking agency;or

(d) from voting for a director, or from serving or acting as an institution-affiliated party as defined in section 3(u) of the Act (12 U.S.C. [section] 1813(u)), such as an officer, director, or employee.

2. This Order, and each provision hereof, is and shall remain fully effective and enforceable until expressly stayed, modified, terminated or suspended in writing by the Board.

Conclusion

This order shall become effective at the expiration of thirty days after service is made.

By order of the Board of Governors, this 13th day of February, 2003.

Board of Governors of the Federal Reserve System

JENNIFER J. JOHNSON

Secretary of the Board

In the Matter of a Notice to Prohibit Further Participation Against

Gene Ulrich,

Former Senior Vice President and

Senior Loan Officer,

and

Susan Diehl McCarthy,

Former Vice President and Loan Officer

Six Rivers National Bank,

Eureka, California 

Docket No. AA-EC-00-40

Final Decision

This is an administrative proceeding brought pursuant to the Federal Deposit Insurance Act (FDI Act) in which the Office of the Comptroller of the Currency ("OCC") seeks to prohibit the Respondents Gene Ulrich ("Ulrich") and Susan Diehl McCarthy ("Diehl McCarthy") from further participation in the affairs of any financial institution because of their respective conduct as officers at the Six Rivers National Bank, Eureka, California (the Bank). Respondent Ulrich served as Senior Vice President and Senior Loan Officer at the Bank, and Respondent Diehl McCarthy held the positions of Vice President and Loan Officer. As required by statute, the OCC has referred the action to the Board of Governors of the Federal Reserve System (the "Board") for final action.

Upon review of the administrative record, the Board issues this Final Decision adopting the Recommended Decision ("Recommended Decision") of Administrative Law Judge Ann Z. Cook (the "ALJ") except as specifically supplemented or modified herein. The Board therefore orders that the attached Orders of Prohibition issued against Respondents prohibiting them from future participation in the affairs of any federally-supervised financial institution, without the approval of the appropriate supervisory agency.

I. Statement of the Case

A. Statutory Framework

1. Standards for Prohibition--Under the FDI Act and the Board's regulations, the ALJ is responsible for conducting an administrative hearing on a notice of intent to prohibit participation. 12 U.S.C. [section] 1818(e)(4). Following the hearing, the ALJ issues a recommended decision that is referred to the deciding agency together with any exceptions to those recommendations led by the parties. The Board makes the final findings of fact, conclusions of law and determination whether to issue an order of prohibition in the case of a prohibition order sought by the OCC. Id.; 12 CFR 263.40.

The FDI Act sets forth the substantive basis upon which a federal banking agency may issue against a bank official an order of prohibition from further participation in banking. In order to issue such an order pursuant to section 1818(e)(1), the Board must make each of three findings: (1) that the respondent engaged in identified misconduct, including a violation of law or regulation, an unsafe or unsound practice, or a breach of fiduciary duty; (2) that the conduct had a specified effect, including financial loss to the institution or gain to the respondent; and (3) that the respondents conduct involved culpability of a certain degree--either personal dishonesty or a willful or continuing disregard for the safety or soundness of the institution. 12 U.S.C. [section] 1818(e)(1)(A)-(C).

2. Statutory and Regulatory Lending Restrictions--Section 84 of the National Bank Act (12 U.S.C. [section] 84) imposes limits on the degree to which national banks may concentrate credit to particular borrowers. In general, the total loans and other extensions of credit to a single borrower may not exceed 15 percent of a national bank's unimpaired capital and surplus. Under the OCC's regulations, loans to one borrower will be attributed to a second borrower when the proceeds of the loan are used for the "direct benet" of the second person. 12 CFR 32.5(a)(1). Proceeds are deemed to be for the "direct benet" of another person when the proceeds are "transferred to [the other] person," except in the case of a "bona de arm's length transaction where the proceeds are used to acquire property, goods, or services." 12 CFR 32.5(b).

B. Procedural History

On October 12, 2000, the OCC issued a combined Notice of Intention to Prohibit Further Participation, a Notice of Charges for Restitution and a Notice of Assessment of Civil Money Penalty (together, the "Notices") against Ulrich and Diehl McCarthy. The Notices alleged that Ulrich and Diehl McCarthy violated law and regulation, recklessly engaged in unsafe or unsound practices and breached their fiduciary duties in connection with five loans they approved in December 1996. The Notices further alleged that Ulrich and Diehl McCarthy's misconduct resulted in a substantial monetary loss to the Bank and demonstrated personal dishonesty and a willful or continuing disregard for the safety or soundness of the Bank.

Following 18 days of hearings and post-hearing briefing, the ALJ issued a Recommended Decision in this matter, to which Respondents led lengthy exceptions. The OCC did not le any exceptions. In her Recommended Decision, the ALJ concluded that the facts in this case warranted the imposition of an order of prohibition, restitution and second tier civil monetary penalties.

The case was then referred to the Board for review of the recommendation for prohibition, and to the OCC for review of the recommendations for restitution and civil monetary penalties. On September 2, 2003, the Comptroller issued a Decision and Order upholding the recommended restitution and imposing civil monetary penalties of $35,000 and $20,000, respectively, on Respondents Ulrich and Diehl McCarthy.

II. Discussion

The Board has reviewed the record in this matter to assure that substantial evidence in the record supports the factual and legal conclusions of the ALJ and warrants the imposition of a prohibition order against Respondents. The Board finds that the allegations contained in the OCC's Notices and proved at the hearing meet the statutory criteria for the issuance of an order of prohibition and adopts the Recommended Decision of the ALJ except as specifically modified or supplemented herein.

A. Facts

1. Ulrich and Diehl McCarthy's Positions at the Bank--Respondents Ulrich and Diehl McCarthy started working at the Bank around 1993 and 1994, respectively. (ALJ's Findings of Fact at [paragraphs] 2, 7) (hereinafter "FF at [paragraph]--"). Prior to coming to the Bank, each Respondent had obtained a significant amount of experience working in the banking industry, including holding positions of considerable responsibility. (FF at [paragraphs] 3-5, 8).

In December 1996, and at all other times relevant for the purposes of this Final Decision, Respondent Ulrich served as Senior Vice President and Senior Loan Officer at the Bank, and Respondent Diehl McCarthy held the positions of Vice President, Government Guaranteed Loan Manager, and Loan Officer at the Bank. (FF at [paragraphs] 1, 6). As a senior officer of the Bank, Ulrich was responsible for ensuring that loans issued by the Bank complied with the Bank's policy, as well as recommending or making revisions to the policy. (FF at [paragraph] 67). As an officer of the Bank, Diehl McCarthy also was responsible for ensuring that loans extended by the Bank complied with the Bank's policy. (FF at [paragraph] 68).

2. NCH and Straightline's Lending From the Bank--Northcoast Hardwoods, Inc. ("NCH") and Straightline Investments, Inc. ("Straightline") were two local companies to which the Bank extended loans before and during 1996. (FF at [paragraph] 11). NCH and Straightline were owned and operated by the same individual, Matthew Galt ("Galt"). (FF at [paragraphs] 9, 10). The two companies operated for all practical purposes as two units of the same business. NCH served as the operating and sales unit, while Straightline functioned as the holding company that owned the real property and equipment. (FF at [paragraph] 10). For these reasons, NCH and Straightline were considered a single borrower for lending limit purposes. (FF at [paragraph] 10).

As of early December 1996, the Bank had approved and issued loans to NCH and Straightline totaling at least $928,159. (FF at [paragraph] 62). The Bank's legal lending limit, in effect during December 1-30, 1996, was $985,322. (FF at [paragraph] 63). See 12 U.S.C. [section] 84, 12 CFR Part 32.

3. Respondents' Knowledge of NCH's History of Loans from the Bank and of NCH's Financial Condition--As of early December 1996, Respondents understood that NCH/ Straightline had almost reached the maximum lending limit for a single borrower. (FF at [paragraphs] 17, 29). In addition, Respondents knew that up to and around early December 1996, NCH consistently asked the Bank for additional loans, but simultaneously failed to meet its existing obligations to the Bank. Between February and December 1996, NCH requested and Respondents approved four loans to the company. In July and December 1996, NCH requested and Respondents approved extensions to NCH on existing loans for which payments were either "slow" or "past due" and in October 1996, NCH requested and Respondents approved a restructuring of NCH's existing debt. (FF at [paragraph] 11-12).

Finally, Respondents were familiar with the financial crisis NCH confronted by early December 1996. Respondents received letters in early December 1996 from Matthew Galt stating that NCH's net worth was negative $600,000, that the company had no money to pay for the supply and production costs of its outstanding customer orders, and that the company laid off almost 25 percent of its employees in November 1996. (FF at 13; OCC Exh. 51).

4. NCH Searches For Help: Application for a Guaranteed Loan Through USDA--Due to the financial difficulties NCH experienced in 1996, the company, with the help of both Respondents, sought additional means to obtain funds needed to maintain its operations. (FF at [paragraphs] 18-31). Respondents worked with Galt to apply for a United States Department of Agriculture loan guarantee. (FF at [paragraphs] 21- 31). Loans guaranteed by a Federal agency do not count in the calculation of loans to a particular borrower, so the Bank could have made such a loan to NCH if the guarantee could be obtained. 12 CFR 32.2(c)(4). As Respondents assisted Galt in the application process, they were well aware of NCH's troubled credit and of the extreme difficulties NCH would encounter in attempting to raise capital for the company without first receiving a conditional commitment from the USDA for the guaranteed loan. (FF at [paragraphs] 23, 26).

By letter dated December 9, 1996, the USDA declared it was unwilling to issue a conditional commitment to NCH for a guaranteed loan because of NCH's unproven products and markets, as well as the company's negative net worth of $600,000. (FF at [paragraph] 27). The letter stated if NCH was able to raise the company's tangible balance sheet equity to 10 percent, the USDA would consider issuing a conditional commitment subject to NCH being able to increase the company's tangible balance sheet equity to 20 percent. (FF at [paragraph] 27). However, the letter concluded by reiterating concerns about NCH's financial stability and warning that the USDA made no guaranty to approve a conditional commitment or guaranteed loan even if NCH increased the company's tangible balance sheet equity. (FF at [paragraph] 27).

After receiving the December 9th letter from the USDA, Respondents met with Galt to discuss how NCH could raise 10 percent equity, which equated to $970,000. (FF at [paragraphs] 28, 31). The three of them spoke about the possibility of third parties injecting capital into NCH, including the possibility that the Bank could issue loans to third parties who would inject the proceeds into NCH. (FF at [paragraph] 30). At that meeting, Ulrich told Galt that the Bank could not make any further loans to NCH. (FF at [paragraph] 29).

5. The Five December 1996 Loans From The Bank--Within days of the conversation about obtaining funds to inject into NCH, Respondents approved five loans, totaling $900,000, to friends and business associates of Galt (hereinafter, collectively, "the December 1996 loans"). (FF at [paragraphs] 32, 34). On December 16, 1996, Respondents approved a $200,000 loan to Timothy and Paula Crowley and a $200,000 loan to Frank and Virginia Nemetz; on December 18, 1996, Respondents approved a $200,000 loan to Gary Johnston; and on December 30, 1996, Respondents approved a $200,000 loan to Mitchell and Maggie Tonini and a $100,000 loan to Valerie Weyna. Within a day or two of disbursement, the proceeds of each of the December 1996 loans were transferred to NCH. (FF at [paragraphs] 38, 42, 49, 53-56, 60). (1) The aggregate amount of these loans, $900,000, equaled substantially all of the additional equity needed by NCH to enable USDA to consider a conditional commitment.

Respondents drafted and signed credit memoranda to accompany the Crowley, Nemetz and Johnston loans. These credit memoranda stated that each loan would initially "be booked by NCH as a loan," and would "convert to equity" upon approval of the USDA, or, in any event, "even if the [USDA] loan is not approved." (FF at [paragraphs] 36, 40, 47; OCC Ex. 56, 58, 60). Other documents created and/or reviewed by Respondents in connection with all five transactions also indicated that all five loans would be re-loaned to NCH. (FF at 52; OCC Ex. 57, 76).

The loan approval process for the December 1996 loans did not start until after the meeting Respondents had with Galt on December 10, 1996. (FF at [paragraphs] 28-32). Respondents allowed Galt to both contact and obtain information from the five borrowers in connection with the loans, and with one exception, Respondents communicated with the borrowers only through Galt. (FF at [paragraph] 79). (2) The loans violated the Bank's lending policy, which entirely prohibited loans for "speculative investments in securities," and also prohibited "capital loans for a start-up business" in the absence of a government loan guarantee. (FF at [paragraphs] 69-70; OCC Exh. 140). Bank policy also provided that personal loans exceeding $20,000 required adequate collateral. (OCC Exh. 140 at 269). Respondents wrote up the December 1996 loans not as personal loans but as commercial "term capital loans," a category intended to provide working capital through a direct loan to an established company. (OCC Exh. 56, 58, 60, 63, 67; OCC Exh. 140 at 23-25; Trans. 94 (Tornborg)). Under the Bank's loan policy, even this type of loans could be issued on an unsecured basis only "extremely rarely, depending on debt coverage." Id. Yet all five of the December 1996 loans were unsecured; in none was any exception to the loan policy identified in the credit memoranda generated by Respondents. OCC Exhs. 56, 58, 60, 63, 67.

The loans were structured two-year, interest-only loans, with a balloon payment of all principal due at the end of the two-year term. OCC Exhs. 144-148. Despite the substantial amount and the short term of the loans, however, Respondents never spoke to any of the borrowers or made any efforts to identify a source of funds for repayment of the loans. In the minimal efforts they made to assess the financial condition of the borrowers, Respondents failed to obtain information necessary to make realistic credit assessments, included information that was outdated and/or not indicative of the borrowers' ability to repay the loans in accordance with their terms, and excluded critical factors such as the borrowers' living expenses. (See, e.g., Trans. 3112-13, 3158 (Diehl McCarthy); Trans. 3370-71, 3373- 74, 3377-78, 3384-85, 3388-90, 3392-93 (Matt Johnson); OCC Exhs. 215, 199). This was particularly critical in the case of several borrowers, who had limited cashflow and whose net worths were tied up in personal businesses or real estate. (OCC Exh. 63, 67). Assuming, as Respondents claim to have done, that the loan proceeds would be used to acquire stock in NCH, it is difficult to understand how that investment, in a closely-held private company, could serve as a source of repayment of the principal of these loans; in any event, there is no evidence that this question was ever considered by the Respondents. (3)

As Respondents acknowledge, the December 1996 Loans caused the Bank to violate its lending limits. Under the OCC's rules, loans to one borrower are attributed to another if the proceeds of the loan are transferred to the other, unless the transfer involved a "bona de arm's length transaction where the proceeds are used to acquire property, goods, or services." 12 CFR 32.5(b). Here, there was no such arm's length transaction, and the loans were properly combined with those to NCH, causing the lending limits violation.

6. Loss to the Bank--Ultimately, none of the borrowers ever received any value in return for the $900,000 they collectively gave to NCH, the USDA never issued a loan guarantee to NCH, NCH led for bankruptcy, and the Bank was unable to collect on four of the five December loans. (FF at [paragraphs] 61, 92, 94, 95). The Bank's board of directors bought two of the loans, and settlement and restitution paid by some of the borrowers and several members of the Bank's loan committee provided some additional recovery. However, the Bank currently maintains a loss of $232,000. (FF at 95-99).

B. Legal Conclusions

1. Prohibition--The sole purpose of this Final Decision and Order is to review the ALJ's recommendation for an order of prohibition against Respondents, as the ALJ's recommendation for an order of restitution and civil monetary penalties is reviewed by the OCC. To adopt the ALJ's conclusion regarding the prohibition, the Board must find that three elements have been met: (1) misconduct, including violation of law or regulation or participation in an unsafe or unsound practice, (2) a specified effect, including financial loss to the institution, and (3) culpability. 12 U.S.C. [section] 1818(e)(1)(A)-(C). Because the evidence in the record supports that all three elements have been met, the Board adopts the ALJ's recommendation for an order of prohibition against Respondents.

(a) Misconduct and Specified Effect--Respondents concede that they participated in a lending limits violation and that the Bank suffered a loss of $232,000 as a result. (Respondents' Exceptions at pp. 25, 34). These admissions, along with the record evidence that supports them, establish the first and second elements needed for an order of prohibition.

The ALJ also found, and the evidence supports, that Respondents engaged or participated in unsafe or unsound practices even apart from their participation in the lending limits violation. (4) As detailed above, in a number of critical respects, the December 1996 loans and the process by which they were approved contravened Bank policies designed to assure safety and soundness. If considered as loans to purchase stock in NCH, as Respondents contend, the loans violated the Bank's loan policies prohibiting loans for speculative investments in securities. If considered as capital loans, the loans violated the policy against capital loans to start-up businesses in the absence of an agency guarantee. If considered as personal loans to the borrowers, the loans violated the policy requiring collateral for such loans above $20,000. Even accepting the loan category in which Respondents placed these loans in their credit memoranda--commercial "term loans for capital," a category clearly not intended for loans of this type--such loans too required collateral and could be issued on an unsecured basis only "extremely rarely, depending on debt cover." (OCC Exh. 140 at 24). (5) Nonetheless, all of the December 1996 loans were approved on an unsecured basis, and the credit memoranda failed even to note, much less explain, the departure from the lending policy. The Bank's loan policy was established to limit the bank's exposure to risk; such violations of the loan policy clearly constituted unsafe or unsound practices.

As discussed earlier, the process by which the loans were granted also constituted an unsafe or unsound practice. Respondents rushed to approve the loans on the basis of incomplete or outdated information in violation of the loan policy, and left it to Galt, whom they knew to be desperately in need of funds, to communicate with the borrowers. They thereby opened themselves, and the Bank, up to be "victimized" by Galt's scheme to the extent they did not actively endorse it. (6) Respondents also failed to identify a source of repayment for the loans despite the obvious risk that such action entailed in the case of these large balloon loans made to borrowers whose cash flow did not appear sufficient to repay principal.

(b) Culpability--The only element in dispute in the case at hand is whether the record supports the ALJ's finding that Respondents' misconduct involved the requisite culpability. In a case involving a prohibition order under the FDI Act, culpability is established by showing that a respondent's misconduct involved either personal dishonesty or a willful or continuing disregard for the safety or soundness of the institution. 12 U.S.C. [section] 1818(e)(1)(C)(i)-(ii). Whatever the precise basis of culpability, the agency must prove that the respondent's misconduct exhibited a "degree of culpability beyond mere negligence." Kim v. Office of Thrift Supervision, 40 F.3d 1050, 1054 (9th Cir. 1994).

Acts of personal dishonesty have been described as those "involving fraud or lack of integrity." Van Dyke v. Board of Governors of the Federal Reserve System, 876 F.2d 1377, 1379 (8th Cir. 1989). Continuing disregard is considered to be conduct which has been "voluntarily engaged in over a period of time with heedless indifference to the prospective consequences." Grubb v. FDIC, 34 F.3d 956, 962 (10th Cir. 1994). Willful disregard has been defined as "deliberate conduct which exposed the bank to abnormal risk of loss or harm contrary to prudent banking practices." Grubb, 34 F.3d at 961-62; Van Dyke, 876 F.2d at 1380. For example, in Cavallari v. Office of the Comptroller of the Currency, 57 F.3d 137, 145 (2d Cir. 1995), the court upheld a prohibition order where the Board found that the respondent's misconduct evidenced an "utter lack of attention to an institution's safety and soundness" or a "willingness to turn a blind eye to [the bank's] interests in the face of a known risk."

While all three types of culpability can be present in a given case, only one type is needed to support an order of prohibition. Here, the Board finds that Respondents' misconduct involved at least willful disregard for the safety and soundness of the Bank, and therefore does not reach the other bases of culpability.

Substantial evidence in the record supports a finding that Respondents' actions went beyond negligence and amounted to "willful disregard" of the Bank's safety and soundness. As noted above, Respondents approved $900,000 in loans in a matter of days, on the basis of information provided solely by a source with an obvious conflict of interest. Respondents knew that the proceeds of the loans would be transferred to NCH. As experienced bankers, they should have known that the loans were therefore attributable to NCH for lending limits purposes and would cause the Bank to violate its lending limits.

Prior to approving the loans, Respondents failed to determine whether the borrowers would be able to repay the loans based on their personal cash flow, and apparently considered the possibility that the Bank would renegotiate the loans at the conclusion of their two-year term to be sufficient for purposes of assuring repayment. Moreover, regardless of whether the five December loans are classified as commercial "term working capital loans," or as Respondents are more appropriately calling them now, "loans to individuals" (see Respondents' Exceptions at p. 27), Respondents ignored the risk they posed to the Bank by approving them on an unsecured basis. Several provisions of the Bank's loan policy established that the loans were of a type that posed an unacceptable risk to the Bank. To the extent Bank policy permitted loans of this type to be made at all, the policy required that they be adequately collateralized. Adequate collateral obviously would have assisted the Bank in avoiding the losses it suffered in connection with the loans. By approving these loans on an unsecured basis, Respondents not only violated Bank policy, but they "turn[ed] a blind eye to [the bank's] interests in the face of a known risk." Cavallari, 57 F.3d at 145.

These and other actions on the part of Respondents reveal their "utter lack of attention" to the safety and soundness of the Bank in connection with the December 1996 loans. Cavallari, 57 F.3d at 145. For example, the record reveals that Respondents were expressly asked by another bank officer whether two of these loans would be combinable with the NCH loans for lending limit purposes. Without any inquiry or research, Respondent Ulrich simply asserted they were not combinable, and Diehl McCarthy followed suit. (Trans. 2688-89 (Ulrich); Trans. 3160-61 (Diehl McCarthy)). This complete lack of concern about compliance with regulations designed to safeguard the Bank is further evidence of Respondents' "utter lack of attention" for the safety and soundness of the Bank.

The Board rejects Respondents' argument that they lacked the requisite culpability because they believed that the borrowers would use the loan proceeds to purchase stock and, as such, that they would not be combinable with NCH's loans for lending limits purposes. First, regardless of whether Respondents truly believed that the loans would eventually be converted to stock, they cannot claim that the loans would be used to purchase NCH stock upon disbursement. (7) Their own contemporaneous credit memoranda explicitly state that each of the five December loans would be "booked by NCH as a loan" from the borrower and only later "converted to equity" upon approval of the USDA loan guarantee "or even if the loan is not approved." (OCC Exhs. 56, 58, 60). Given the Respondents' knowledge of the highly uncertain nature and timing of the USDA approval, it is evident that Respondents had no expectation when they approved the loans that conversion to equity was imminent.

Moreover, even if the December 1996 loans had been for the purpose of funding the borrowers' purchase of shares in NCH immediately, the loans still would have been considered a "direct benefit" to NCH and therefore would still have resulted in violations of the Bank's lending limit. See 12 CFR 32.5(a)(1), (b); OCC Interpretive Letter, January 29, 1987 (1987 WL 149851) (OCC "considers an equity investment in a corporation to be a direct benefit because the company thereby receives additional working capital. Thus, when a borrower uses a loan to purchase newly-issued stock in a corporation, the latter has received the benefits of the proceeds and the investor's loan must be combined with any loans to the corporation."). (8)

Respondents' violations were not technical or minor violations. They were, instead, violations of law, policy, and prudent banking practices that are designed to protect the Bank from the very harm it suffered here. For these reasons, the Board finds that Respondents' misconduct demonstrated willful disregard and an order of prohibition against them is justified.

2. Procedural Issues Challenged By Respondents--The Board also finds that none of the four procedural issues raised by Respondents is sufficient to deny an order of prohibition in this case. In general, the Board defers to evidentiary and trial management rulings by an ALJ "in absence of an abuse of discretion or manifest unfairness." In the Matter of Augustus I. Cavallari, 80 Federal Reserve Bulletin, 1046, 1049 (1994). No such abuse or unfairness if evident here and the ALJ's rulings are therefore sustained. First, Respondents argue that the ALJ improperly used official notice to absolve the OCC of its burden to establish jurisdiction in this case. Specifically, Respondents challenge the ALJ's post-hearing acceptance and subsequent official notice of information from the FDIC's official website to the effect that at all relevant times, the Bank was an "insured depository institution," a prerequisite to Respondents' status as "institution-affiliated parties" as defined by 12 U.S.C. [section] 1813(u).

The ALJ's action was both appropriate and timely. The OCC's regulations permit the ALJ to take official notice of "any material fact which may be judicially noticed by a United States district court and any material information in the official public records of any Federal or state government agency." 12 CFR 19.36(b)(1). Similar information to that accepted here has been subject of judicial notice in civil cases in the federal courts. See, e.g., In Fire Wellbutrin SR/Zyban Antitrust Litigation, 2003 WL 22099725 (E.D. Pa. 2003); Morris v. Valesco, 2003 WL 21397742 (N.D. Ill. 2003); Ligon v. Doherty, 208 F. Supp. 2d 384 (E.D.N.Y. 2002). Moreover, Respondents have not suggested that the information on the FDIC web site regarding the Bank's insured status was in any way awed or incorrect. (9)

Nor was it improper for the ALJ to have accepted this material after the hearing. Respondents were on notice of Enforcement Counsel's request to take judicial notice and had a full opportunity to object. In addition, as the ALJ explained in her August 6, 2002 Order, Federal Rules of Evidence 201(d) and (f), applicable by analogy, permit judicial notice to be taken "at any stage of the proceeding" and mandate that official notice be taken if a party requests it and supplies the necessary information. Here, the OCC requested that the ALJ take official notice regarding the insured status of the Bank and supplied the necessary information as described in 12 CFR 19.36(b). Accordingly, the ALJ properly took official notice of the OCC's post-hearing submission.

Second, Respondents contend that they were denied their right to counsel because the "sequestration" order entered by the ALJ in this case prohibited them "from speaking to their counsel regarding the case while they were on the stand... including overnight breaks." (Respondents' Exceptions at p. 14). Respondents claim that the sequestration order violates their right to counsel under the Administrative Procedure Act, 5 U.S.C. [section] 555(b), the OCC's procedural rules at 12 CFR 19.183(b), and the Sixth Amendment to the Constitution. (Respondents' Exceptions at pp. 14-17).

None of these sources provides a basis to hold that the ALJ's order, which prohibited only discussion of a witness's testimony while he or she was under oath (Trans. 2594, 2806), was improper. While the Administrative Procedure Act allows parties to be "accompanied, represented, and advised by counsel," it does not state or suggest that parties are entitled to discuss their on-going testimony with counsel while on breaks at an administrative hearing. The regulation cited by Respondents, 12 CFR 19.183, applies to investigative testimony, not testimony given at an administrative hearing. Finally, the protections provided by the Sixth Amendment to the United States Constitution do not apply to administrative hearings because such protections "are explicitly confined to 'criminal prosecutions."' Austin v. United States, 509 U.S. 603, 608 (1993); see also United States v. Ward, 448 U.S. 242, 248 (1980). (10)

Third, Respondents assert that the ALJ prevented them from recalling certain OCC witnesses for further testimony after their cross-examination of those witnesses, and as such, that they were denied their right to cross-examine and confront witnesses. (Respondents' Exceptions p. 17- 19). The ALJ stated that she would consider permitting additional testimony from a witness who already had testified if Respondents submitted information as to the topics to be covered and how the testimony would provide relevant and non-repetitive information. This requirement was certainly within the ALJ's discretion to control the flow of witnesses at the hearing. Respondents failed to provide such information within the time permitted by the ALJ. As such, Respondents' argument is now moot.

Fourth, Respondents argue that the OCC never alleged unsafe and unsound banking practices or breach of fiduciary duties in its original Notice of Intent, and thus that the ALJ should have dismissed all testimony and evidence related to such claims.

The OCC's rules permit the ALJ conform the notice to the evidence where issues not raised in the notice are tried at the hearing by express or implied consent of the parties, or where the objecting party fails to show that admission of such evidence would unfairly prejudice the party's defense. 12 CFR 19.20(b). Here, Respondents were aware at least through the evidence introduced at the hearing that the allegations against them went beyond lending limit violations and involved the structure and approval of the loans, as well as the creditworthiness of the borrowers, and they failed to object to the introduction of such evidence at the hearings. For example, neither Respondent objected to the introduction of OCC Exhibit 140, the Bank's extensive loan policy manual. (Trans. 107). Furthermore, both Respondents testified at the hearing regarding the issues of the borrowers' creditworthiness and of compliance with loan policies and procedures. (See, e.g., Trans. 2776-78 (Ulrich); Trans. 3086, 3089-90, 3104-06, 3108-13, 3176- 77, 3262, 3264-75, 3279-80 (Diehl McCarthy)). (11)

Conclusion

For these reasons, the Board orders the issuance of the attached Orders of Prohibition. (12)

By order of the Board of Governors, this 15th day of October 2003.

Board of Governors of the Federal Reserve System

ROBERT DeV. FRIERSON

Deputy Secretary of the Board

(1.) The disbursements to NCH were made despite Respondents' representations to the Bank's loan committee that $500,000 of the proceeds would be held in a "bank controlled account." (OCC Ex. 57). The account was never established. (Trans. 2635 (Ulrich)).

(2.) Diehl McCarthy spoke briey with borrower Weyna at the time the loan documents were signed. (FF at 80).

(3.) Diehl McCarthy suggested that her obligation to identify a source of repayment was satisfied by suggesting to borrower Weyna that if the investment did not work out as hoped, the loan could be restructured when principal payment became due. (Trans. 3123-24 (Diehl McCarthy)). This is obviously insufficient as a means of identifying a source of repayment, even a restructured loan eventually involves the repayment of principal.

(4.) Respondents' procedural argument that any evidence relating to unsafe and unsound practices should not have been admitted is discussed below.

(5.) According to the loan policy, term loans for capital were to be "used for established companies," with an emphasis on those with a "good [credit] history" with the Bank--a category of company that clearly excluded NCH. (OCC Exh. 140 at 24).

(6.) The risk associated with this practice is evidenced by the fact that Respondents claim to have been unaware that the borrowers had no intention of investing the proceeds of the loans in NCH, and expected Galt to repay the loans for them. Had they discussed the loans with the borrowers, they presumably would have learned of Galt's scheme before approving the loans.

(7.) In any event, Respondents' contemporaneous statements make clear that they did understand that the borrowers would transfer the loan proceeds to NCH. For example, in a December 13, 1996 letter to the USDA, Diehl McCarthy stated that Crowley, Nemetz, and Johnston would each contribute to NCH the precise amount which they subsequently borrowed from the Bank, and that each would "lend these funds to [NCH]" and that "NCH's pro forma balance sheet will indicate that the funds are converted to stock." (OCC Exh. 55).

(8.) Thus, the "bona de sale" exception to the direct benefit rule, 12 CFR 32.5(b), is inapplicable even under Respondents' view of the case.

(9.) Respondents claim that they contested the Bank's insured status in their Answers. In fact, their answers claimed only that they lacked sufficient information to respond to the allegation that the Bank was an insured depository institution, and on that basis the allegation was denied.

(10.) Even under the Sixth Amendment, a criminal defendant "has no constitutional right to consult with his lawyer while he is testifying." Perry v. Leeke, 488 U.S. 272, 281 (1989).

(11.) Respondents also insist that the ALJ improperly excluded testimony from their witness, John Moulton, regarding the credit-worthiness of the borrowers. (Respondents' Exceptions at p. 24). The Board concludes that the ALJ properly excluded such evidence. Respondents did not indicate in their pre-hearing filings that Mr. Moulton would testify about the borrowers' creditworthiness, even after the issue was raised by the OCC's witness designations. (Trans. 3664-3670).

(12.) Respondents have requested oral argument but have not established good cause for such a request or identified reasons why arguments cannot be presented adequately in writing. Accordingly, their request is denied. 12 CFR 263.40(b).

Order of Prohibition

Whereas, pursuant to section 8(e) of the Federal Deposit Insurance Act, as amended, (the "FDI Act") (12 U.S.C. [section] 1818(e)), the Board of Governors of the Federal Reserve System ("the Board") is of the opinion, for the reasons set forth in the accompanying Final Decision, that a nal Order of Prohibition should issue against GENE ULRICH ("Ulrich");

NOW, THEREFORE, IT IS HEREBY ORDERED, pursuant to section 8(e) of the Federal Deposit Insurance Act, as amended, (12 U.S.C. [section] 1818(e)), that:

1. Ulrich, without the prior written approval of the Board of Governors and, where necessary pursuant to section 8(e)(7)(B) of the FDI Act (12 U.S.C. [section] 1818(e)(7)(B), another federal financial institution regulatory agency, is hereby and henceforth prohibited:

(a) from participating in any manner in the conduct of the affairs of any institution or agency specified in section 8(e)(7)(A) of the FDI Act (12 U.S.C. [section] 1818(e)(7)(A)), including, but not limited to, any insured depository institution, any insured depository institution holding company or any U.S. branch or agency of a foreign banking organization;

(b) from soliciting, procuring, transferring, attempting to transfer, voting or attempting to vote any proxy, consent or authorization with respect to any voting rights in any institution described in sub- section 8(e)(7)(A) of the FDI Act (12 U.S.C. [section] 1818(e)(7)(A));

(c) from violating any voting agreement previously approved by any federal banking agency; or

(d) from voting for a director, or serving or acting as an institution-affiliated party as defined in section 3(u) of the FDI Act, such as an officer, director, or employee in any institution described in section 8(e)(7)(A) of the FDI Act (12 U.S.C. [section] 1818(e)(7)(A)).

2. Any violation of this Order shall separately subject Ulrich to appropriate civil or criminal penalties or both under section 8 of the FDI Act (12 U.S.C. [section] 1818).

3. This Order, and each and every provision hereof, is and shall remain fully effective and enforceable until expressly stayed, modified, terminated or suspended in writing by the Board.

This order shall become effective at the expiration of thirty days after service is made.

By order of the Board of Governors, this 15th day of October 2003.

Board of Governors of the Federal Reserve System

ROBERT DeV. FRIERSON

Deputy Secretary of the Board

Order of Prohibition

Whereas, pursuant to section 8(e) of the Federal Deposit Insurance Act, as amended, (the "FDI Act") (12 U.S.C. [section] 1818(e)), the Board of Governors of the Federal Reserve System ("the Board") is of the opinion, for the reasons set forth in the accompanying Final Decision, that a final Order of Prohibition should issue against SUSAN DIEHL McCARTHY ("Diehl McCarthy");

NOW, THEREFORE, IT IS HEREBY ORDERED, pursuant to section 8(e) of the Federal Deposit Insurance Act, as amended, (12 U.S.C. [section] 1818(e)), that:

1. Diehl McCarthy, without the prior written approval of the Board of Governors and, where necessary pursuant to section 8(e)(7)(B) of the FDI Act (12 U.S.C. [section] 1818(e)(7)(B), another federal financial institution regulatory agency, is hereby and henceforth prohibited:

(a) from participating in any manner in the conduct of the affairs of any institution or agency specified in section 8(e)(7)(A) of the FDI Act (12 U.S.C. [section] 1818(e)(7)(A)), including, but not limited to, any insured depository institution, any insured depository institution holding company or any U.S. branch or agency of a foreign banking organization;

(b) from soliciting, procuring, transferring, attempting to transfer, voting or attempting to vote any proxy, consent or authorization with respect to any voting rights in any institution described in subsection 8(e)(7)(A) of the FDI Act (12 U.S.C. [section] 1818(e)(7)(A));

(c) from violating any voting agreement previously approved by any federal banking agency; or

(d) from voting for a director, or serving or acting as an institution-affiliated party as defined in section 3(u) of the FDI Act, such as an officer, director, or employee in any institution described in section 8(e)(7)(A) of the FDI Act (12 U.S.C. [section] 1818(e)(7)(A)).

2. Any violation of this Order shall separately subject Diehl McCarthy to appropriate civil or criminal penal-ties or both under section 8 of the FDI Act (12 U.S.C. [section] 1818).

3. This Order, and each and every provision hereof, is and shall remain fully effective and enforceable until expressly stayed, modified, terminated or suspended in writing by the Board.

This order shall become effective at the expiration of thirty days after service is made.

By order of the Board of Governors, this 15th day of October 2003.

Board of Governors of the Federal Reserve System

ROBERT DeV. FRIERSON

Deputy Secretary of the Board