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Final enforcement decisions issued by the Board of Governors.

In the Matter of

Brian Bonetti

Former Sales and Service Representative,

National City Bank,

Cleveland, Ohio

Docket No. OCC-AA-EC-04-68

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, Brian Bonetti ("Respondent"), from further participation in the affairs of any financial institution based on actions he took while employed at National City Bank, 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. 12 U.S.C. [section] 1818(e)(4).

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 filed 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 intention 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). If the respondent does not file an answer within the time provided, the respondent waives his or her right to appear and contest the allegations in the notice, and Enforcement Counsel may file a motion for entry of an order of default. See 12 CFR 19.19(c)(1) and 263.19(c)(1). Upon a finding that no good cause has been shown for the failure to file a timely answer, the ALJ shall file with the Comptroller and the Board a recommended decision containing the findings and the relief sought in the notice. Id.

B. Procedural History

On February 3, 2005, the OCC served upon Respondent a Notice of Intention to Prohibit Further Participation, Notice of Charges for Issuance of an Order to Cease and Desist for Restitution and Notice of Assessment of a Civil Money Penalty ("Notice") that sought, inter alia, an order of prohibition against Respondent based on his conduct while employed at the Bank. Specifically, the Notice alleged that Respondent, as a sales and service representative for the Bank, diverted portions of customer loan proceeds on thirteen home-equity loans that Respondent made, authorized and/or booked, by issuing checks from the loan proceeds to make payments on his own credit card accounts (or accounts for which he was an authorized user) and payments on a loan in the name of related persons, or by depositing checks into accounts that were owned or controlled by Respondent. The Notice further alleges that Respondent falsified internal loan documents to hide from the Bank the fact that he was charging customers broker fees that exceeded the Bank's broker fee cap and gave customers misleading HUD-1 Settlement Statements that masked the broker fees charged. In addition, the Notice alleged that Respondent's violations caused loss to the Bank in the approximate amount of $84,970.00

The Notice directed Respondent to file a written answer within 20 days from the date of service of the Notice in accordance with 12 CFR 19.19(a) and (b), and that failure to answer within this time period "shall constitute a waiver of the right to appear and contest the allegations contained in the Notice, and shall, upon the OCC's motion, cause the Administrative Law Judge or the Comptroller to find the facts in this Notice to be as alleged." The Notice was served in accordance with OCC rules, via overnight delivery and first class U.S. mail. The record shows that Respondent was also personally served on February 26, 2005. Nonetheless, Respondent failed to file an answer within the 20-day period or thereafter.

On June 3, 2005, Enforcement Counsel filed a Motion for Entry of an Order of Default against Respondent. On the same day, the ALJ issued an Order to Show Cause, providing Respondent until June 20, 2005, to file an answer to the Notice and to show good cause for having failed to do so previously. The Order to Show Cause, which was served upon Respondent by Federal Express and first class mail, also provides that if Respondent fails to submit an answer and to show good cause by the June 20 deadline, "the relief requested in the Notice will be recommended." To date, Respondent has not filed any reply to the Order to Show Cause or answered 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 file an answer to a Notice. Under the Rules, failure to file 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 file, 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 file a timely answer is deemed to be issued by consent. Id.

In the instant matter, Respondent failed to file an answer to the Notice 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 file an answer constitutes a default.

Respondent's default requires the Board to consider the allegations in the Notice as uncontested. The allegations in the Notice, described above, meet all the criteria for entry of an order of prohibition under 12 U.S.C. [section] 1818(e). It was a breach of fiduciary duty, conflict of interest, unsafe and unsound practice, and violation of law, for Respondent to divert portions of customer loan proceeds on 13 home equity loans without the customers' knowledge, consent, or approval; falsify internal loan documents in order to hide from the Bank the fact that he was charging customers broker fees that exceeded the Bank's broker fee cap; and give customers misleading HUD-1 Settlement Statements that masked the broker fees charged. Respondent's actions also resulted in loss to the bank in the amount of approximately $89,740.00 and financial gain to Respondent, in that he diverted loan proceeds by issuing checks to make payment on his own credit card accounts or to be deposited into his own accounts. Finally, such actions also exhibit personal dishonesty and willful disregard for the safety and soundness of the Bank. 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 20th day of September 2005.

Board of Governors of the Federal Reserve System

JENNIFER J. JOHNSON

Secretary of the Board

(1.) Service of the initial Notice and every other document served on Respondent by the ALJ or OCC Enforcement Counsel was effected by service on Respondent's counsel rather than on Respondent personally. Contrary to OCC rules, Respondent's counsel did not file a notice of appearance pursuant to 12 CFR 19.6(a)(3). Accordingly, at least the initial Notice should have been served on Respondent himself, rather than his counsel. See 12 CFR 19.11(c)(2). In cases of default, it is particularly important to ensure that service of papers meets the minimum standards of due process. While the Board is concerned about the notice procedures followed in this case, it concludes that in light of Respondent's counsel's participation in the case on behalf of his client, the minimum requirements of the Rules and of due process have been met. See Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950) (notice must be reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections); 12 CFR 19.11(c)(2)(v) (permitting service "by any other method reasonably calculated to give actual notice"). The Board will, however, direct that OCC Enforcement Counsel serve a copy of the Order of Prohibition on the Respondent by various means, including by certified mail to his last known address, which does not appear in the current record.

(2.) Because the motion for default is based solely on the allegations newly made in the Amended Notice, the Board does not consider any of the allegations in the original Notice in its determination.

(3.) Mr. Baxter subsequently paid the balance of the loan.

(4.) See footnote 1.

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 BRIAN BONETTI ("Bonetti"), 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 National City Bank, Cleveland, Ohio.

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)), Bonetti 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;

(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.

2. Any violation of this Order shall separately subject Bonetti 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 30 days after service is made.

By order of the Board of Governors, this 20th day of September 2005.

Board of Governors of the Federal Reserve System

JENNIFER J. JOHNSON

Secretary of the Board

In the Matter of

Walter C. "Charlie" Cleveland, Former Director and Senior Vice President, First National Bank, Lubbock, Texas

Docket No. OCC-AA-EC-04-47

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, Walter C. "Charlie" Cleveland ("Respondent"), from further participation in the affairs of any financial institution based on actions he took while employed at First National Bank, Lubbock, Texas (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.

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 filed 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 file 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 file a timely answer. 12 CFR 19.19(c)(1) and 263.19(c)(1).

B. Procedural History

On September 16, 2004, the OCC served upon Respondent (1) a Notice of Charges for Issuance of an Order to Cease and Desist and Notice of Assessment of a Civil Monetary Penalty ("Notice") against Respondent based on his conduct while employed at the Bank. On October 15, 2004, Respondent through counsel filed an answer to the original Notice ("Answer"), along with a timely request for a hearing on the civil money penalty.

On February 28, 2005, the OCC served the First Amended Notice of Charges for Issuance of an Order for Prohibition and Notice of Assessment of a Civil Money Penalty ("Amended Notice") upon Respondent. The Amended Notice repeated allegations made in the original Notice, (2) added new, substantive allegations relating to a loan made to Raintree Investment, Inc. (the "Raintree Loan"), and sought an order of prohibition. Amended Notice, Article III. The Amended Notice directed Respondent to file an answer within 20 days and warned that failure to do so would constitute a waiver of his fight to appear and contest the allegations. The Amended Notice was served in accordance with the OCC rules by overnight delivery, signature requested, in care of Respondent's counsel. Respondent failed to file an answer within the 20-day period.

On March 31, 2005, Enforcement Counsel filed a Motion for Entry of an Order of Default against Respondent. On April 6, 2005, the ALJ issued an Order to Show Cause, noting that although Respondent was not in default as to the Original Notice, since he had filed an answer to it, the new allegations could be the basis for a default granting the relief sought. The Order provided Respondent until April 22, 2005, to file an answer to the Amended Notice and to show good cause for having failed to do so previously. To date, Respondent has not filed any reply to the Order to Show Cause or answered the Amended Notice.

C. The Raintree Loan

The Amended Notice alleges that Respondent, as a senior loan officer for Bank, caused the Bank to loan $53,000 to Raintree Investment, Inc. ("Raintree"). The President of Raintree is Russell Baxter, Respondent's father-in-law; Respondent also served as trustee of the Deed of Trust for the property securing the loan. Respondent failed to disclose his interest in the Raintree Loan (an insider-related loan) to Bank's Board of Directors or to OCC examiners. Respondent also received two cashier's checks from the proceeds of the loan, totaling $14,892, which he converted to his personal use, applying the bulk of the proceeds toward the closing costs on his personal residence. Respondent made cash payments on the loan until his departure from the Bank, thereby concealing the loan from the named borrower. Respondent additionally instructed Bank personnel not to send letters regarding the loan to Raintree, and on at least one occasion personally removed mail addressed to Raintree from the Bank's outgoing mail.

Over a month after Respondent left his position with the Bank in June 2004, Mr. Baxter responded to a Bank communication regarding the Raintree loan stating that he was unaware he had a loan at the Bank any longer. A survey ordered by the Bank determined that some of the property securing the loan had been sold, with no record of the sale in the Bank's loan file. (3)

II. Discussion

The OCC's Rules of Practice and Procedure set forth the requirements of an answer and the consequences of a failure to file an answer to a Notice. Under the Rules, failure to file 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 file, 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 file a timely answer is deemed to be issued by consent. Id.

In this case, Respondent failed to file an answer to the Amended Notice 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 file an answer constitutes a default.

Respondent's default requires the Board to consider the new allegations in the Amended Notice as uncontested. The new allegations in the Amended Notice, described above, meet all the criteria for entry of an order of prohibition under 12 U.S.C. [section] 1818(e). It was a breach of fiduciary duty, conflict of interest, unsafe and unsound practice, and violation of law, for Respondent to: fail to remove himself from approving the Raintree loan made to a family member; administer the loan while acting as trustee for its collateral; and fail to disclose his interest in the insider loan to the Bank and to OCC examiners. He received financial benefit from the loan by using proceeds of the loan for closing costs on his own personal residence. He demonstrated both personal dishonesty and willful disregard for the safety and soundness of the Bank by purposefully withholding information about the Raintree loan from the named borrower's principal, with the effect of hiding from Mr. Baxter the fact that Baxter had an outstanding loan at the Bank; and willfully interfering with the Bank's communications with a borrower regarding the borrower's obligation to the Bank.

Accordingly, the requirements for an order of prohibition have been met and the Board hereby issues such an order. As noted above, (4) the Board directs OCC Enforcement Counsel to serve the order of prohibition on Respondent personally, by delivering to his last known address, in addition to service on his counsel.

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 August 2005.

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 WALTER C. "CHARLIE" CLEVELAND ("CLEVELAND"), 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 National Bank, Lubbock, Texas.

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)), Cleveland 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)(V)(A)).

2. Any violation of this Order shall separately subject Cleveland 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 August 2005.

Board of Governors of the Federal Reserve System

JENNIFER J. JOHNSON

Secretary of the Board

In the Matter of

Jean Peyrelevade, A former institution-affiliated party of Credit Lyonnais

03-041-CMP-I

03-041-B-I

03-041-E-I

Determination on Motion for Interlocutory Review

Background

This issue arises out of an enforcement proceeding brought by the Board of Governors of the Federal Reserve System (the "Board") against Jean Peyrelevade (the "Respondent"), the former chief executive officer of Credit Lyonnais. In a Notice of Charges against Respondent, the Board alleged that Respondent engaged in violations of the Bank Holding Company Act in connection with Credit Lyonnais's ownership and control over a California insurance company, Executive Life, in the early 1990s, and that Respondent made false representations to the Board in 2001 and 2002 concerning the knowledge of Credit Lyonnais's then senior management (including Respondent) relating to these activities.

At the request of Board Enforcement Counsel, the Administrative Law Judge ("ALJ") overseeing this proceeding issued a subpoena to Cleary Gottlieb Steen & Hamilton ("Cleary Gottlieb"), attorneys for Credit Lyonnais, seeking notes taken by Cleary Gottlieb attorneys at interviews conducted as part of an internal investigation of the Executive Life matter. Among the documents requested were notes taken during two interviews of Dominique Bazy ("Bazy"), a former Credit Lyonnais executive, that took place in May and September 1999. Bazy asserted that both sets of interview notes were subject to the attorney-client privilege and that the September 1999 interviews were protected by the joint defense or common interest privilege. At Bazy's request, Cleary Gottlieb declined to produce the notes of these interviews.

After Board Enforcement Counsel filed a motion with the ALJ to overrule these, and other, privilege objections, Bazy filed an opposition to Enforcement Counsel's motion and a sur-reply to its reply brief. Cleary Gottlieb represented that it and its client Credit Lyonnais do not object to producing the internal interview notes. On June 21, 2005, the ALJ issued an Order rejecting Bazy's privilege claims and ordering Cleary Gottlieb to produce the requested interview notes within 20 days. On July 1, 2005, Bazy filed with the ALJ a motion for interlocutory review of the June 21, 2005, Order, and requested the ALJ to stay the production of the disputed documents pending the interlocutory review request. In his motion, Bazy contends that the ALJ ignored evidence demonstrating that he had an objectively reasonable belief that his May 1999 and September 1999 meetings with Cleary Gottlieb lawyers were subject to attorney-client privilege; applied an inappropriate standard in determining the attorney-client privilege issue given Bazy's circumstance; and improperly held that Cleary Gottlieb could unilaterally waive the joint defense agreement privilege with respect to the content of the September 1999 meetings. Board Enforcement Counsel filed a response to Bazy's motion, arguing that the Board's Rules of Practice ("Rules") do not allow a nonparty such as Bazy to seek interlocutory review by the Board. In a reply to Enforcement Counsel's response, Bazy argued that he is an interested party to the proceeding as it relates to the enforcement of the subpoena served on Cleary Gottlieb and that the Board's Rules of practice merely failed to contemplate his particular circumstance. On July 11, 2005, the ALJ granted a stay of the order requiring Cleary Gottlieb to produce the documents, and, pursuant to Uniform Practice Rule 263.28(c), referred Bazy's motion to the Board for final disposition.

Discussion

A. Availability of Interlocutory Review

The Board's Rules of Practice provide that "[a]ny request for interlocutory review shall be filed by a party with the administrative law judge within 10 days of his or her ruling ..." 12 CFR 263.28(c) (emphasis added). The Rules also specifically define "party" to include only "the Board and any person named as a party in any notice." 12 CFR 263.3(j). Thus, under this definition, the only "party" in this proceeding, other than the Board, is Jean Peyrelevade, and Bazy, as a nonparty, is not entitled to interlocutory review under the Board's rules.

Bazy's arguments to the contrary are not persuasive. Bazy first argues that he is plainly "an interested party to the action as it relates to Enforcement Counsel's attempt to obtain production of the meeting notes" based upon his substantial participation in the proceedings relating to the notes. While Bazy obviously has an interest in the outcome of the production issue, the Board's rules are clear that interlocutory review is available only to a "person named as a party in [the] notice."

Bazy also argues that the Rules "do not appear to contemplate the unique procedural posture of his present circumstance." The lack of an available administrative remedy for Bazy's circumstance does not, in and of itself, demonstrate a failure to contemplate the existence of such a circumstance, nor does it leave Bazy without a remedy. In fact, the Rules contemplate allowing a party to seek interlocutory review of an ALJ discovery order that requires the production of allegedly privileged materials, while including no comparable provision for nonparty subpoenas, such as the subpoena at issue here. Compare 12 CFR 263.25 (document requests to parties) with 12 CFR 263.26 (document subpoenas to nonparties).

This distinction in the Rules pertaining to remedies available in party and nonparty discovery is logical. If a party fails to comply with a discovery order, the Board can review the discovery orders at the end of the proceeding or on an interlocutory basis under Rule 263.28 and impose effective relief. If a nonparty fails to comply with a discovery order, however, the remedy is court enforcement. See 12 CFR 263.26(c). Administrative subpoenas are not otherwise self-enforcing. See generally, Government of the Territory of Guam v. SeaLand Service, Inc. 958 F.2d 1150, 1153-54 (D.C. Cir. 1992) (noting that party to administrative proceeding may apply to district court to enforce subpoena issued by ALJ under agency procedures). Thus, if Cleary Gottlieb declined to produce the documents in violation of the ALJ's Order, Enforcement Counsel could seek to enforce the subpoena in district court. 12 CFR 263.26(c). Similarly, in the event that Cleary Gottlieb decides to produce the documents pursuant to the ALJ's Order, Bazy could initiate a court action and assert any alleged privilege claims in an attempt to enjoin Cleary Gottlieb from complying with the Order. Thus, the Board's discovery rules reflect a conscious decision to distinguish between party and nonparty discovery, as demonstrated by the enactment of separate rules setting forth distinct procedures to be applied with regard to each category of discovery requests.

Interlocutory appeals are generally disfavored because they interrupt the main proceeding and distract from the completion of the case. They present the decisionmaker with small and often disjointed parts of the underlying case, often out of context, prior to the development of the entire case. Accordingly, federal court rules and practice evince a "firm congressional policy against interlocutory or 'piecemeal' appeals, and courts have consistently given effect to that policy." Abney v. United States, 431 U.S. 651, 656 (1976).

The Board's rules and prior decisions reflect the same policy against interlocutory review. Interlocutory review is always discretionary even when the rules permit it, see 12 CFR 263.28(b) (the Board "may exercise interlocutory review" under specified circumstances), and in prior cases the Board has noted that "the scope within which such discretion should be exercised is extremely narrow," reflecting "a strong and longstanding policy against piecemeal appeals before a final judgment." In the Matter of Incus Co., 86 Federal Reserve Bulletin 246 (2000). In that light, the Board's rules limiting interlocutory review to a party are consistent with other aspects of the rules relating to such reviews.

In short, because the Board's Rules expressly reserve interlocutory review to parties, Bazy is not entitled to interlocutory review of the ALJ's June 21, 2005, Order.

B. Bazy's Privilege Claims

In the alternative, given the deferential standard with which the Board treats an ALJ's discovery decisions, even if the Board were to grant interlocutory review, it would affirm the ALJ's Order with respect to Bazy's privilege claims.

1. Attorney-Client Privilege Claim

Using the widely adopted five-factor test set forth by the Third Circuit in Bevill, Bresler & Schulman Asset Management Corp., 805 F.2d 120, 125 (3d Cir. 1986) to determine whether a corporation's attorney is separately representing a corporate employee, the ALJ properly determined that Cleary Gottlieb represented only Credit Lyonnais and not Bazy during the interviews conducted by the firm in May 1999 and September 1999 as part of Credit Lyonnais's internal investigation. Under settled law, corporate employees seeking to establish the existence of a separate attorney-client privilege with corporate counsel must show, among other things, that "the substance of their conversations with [counsel] did not concern matters within the company or the general affairs of the company." Id., 805 F.2d at 123. Here, it is undisputed that Bazy's interview related specifically to "matters within the company"; he does not claim that he was seeking advice from Cleary Gottlieb in his individual capacity. Thus, the conflicting record evidence regarding Bazy's asserted belief that the interviews were confidential is immaterial to the determination regarding privilege. Moreover, by the time of the September 1999 interview, Bazy had retained his own counsel at the request of Credit Lyonnais. This refutes any reasonable argument that Bazy believed Cleary Gottlieb was acting as his attorney during the September 1999 meeting.

2. Joint Defense Privilege Claim

Finally, Bazy has failed to demonstrate that a joint defense privilege applies to the content of his September 1999 interviews. Although Bazy cites case law noting that a joint defense privilege protects communications between an individual and an attorney for another when the communications are part of an ongoing and joint effort to set up a common defense strategy, he has failed to present any evidence demonstrating the existence of a joint defense agreement between himself and Credit Lyonnais. While a written agreement is not required to establish the existence of a joint defense privilege, a party must show, among other things, that "the parties had agreed to pursue a joint defense strategy." Bevill, Bresler, supra, 805 F.2d at 126; see also U.S. v. Weissman, 195 F.3d 96, 100 (2d Cir. 1999) (noting that in order to demonstrate the existence of a joint defense privilege, a showing of some form of joint strategy is necessary, "rather than merely the impression of one side").

Bazy's only support for his joint defense privilege claim is his stated belief that it was "[his] understanding that the Cleary Gottlieb attorneys would maintain the confidentiality of [his] statements during [the September 1999] meeting." Bazy Declaration, [paragraph] 7. Bazy has made no assertion that Cleary Gottlieb or Credit Lyonnais directly or indirectly communicated to him an agreement to pursue a joint defense strategy. Bazy's unilateral belief is plainly insufficient to establish the existence of a joint agreement, as noted in the cases cited above. Accordingly, Bazy has failed to establish that a joint defense privilege exists with respect to his September 1999 interview.

As set forth herein, the arguments advanced by Bazy fail to demonstrate an appropriate basis upon which the Board may grant interlocutory review of the ALJ's Order given his nonparty status. In the alternative, even if the Board were to grant interlocutory review, it would affirm the ALJ's June 21, 2005, Order with regard to Bazy's privilege claims. Accordingly, the Board declines Bazy's request for interlocutory review of the ALJ' s June 21, 2005, Order.

By order of the Board of Governors, this 5th day of August, 2005.

Board of Governors of the Federal Reserve System

JENNIFER J. JOHNSON

Secretary of the Board

In the Matter of

Jean Peyrelevade, A former institution-affiliated party of Credit Lyonnais

03-041-CMP-I

03-041-B-I

03-041-E-I

Determination on Motion for Interlocutory Review

Background

On December 18, 2003, Board Enforcement Counsel initiated this proceeding against Respondent Jean Peyrelevade ("Peyrelevade"). In the Notice of Charges, Enforcement Counsel alleged that Peyrelevade participated in alleged violations of the Bank Holding Company Act of 1956 in his role as chairman of Credit Lyonnais, specifically with respect to Credit Lyonnais's ownership and control over a California insurance business, Executive Life, and that Peyrelevade made false representations to the Federal Reserve Board in 2001 and 2002 regarding his knowledge of these alleged violations. Peyrelevade, who resides in France, is also currently under indictment in the United States District Court for the Central District of California for alleged conduct relating to the Executive Life matter, but has not appeared in the United States to defend the pending charges. France's extradition treaty with the United States does not permit French nationals to be extradited to the United States. See Article 3, Paragraph 1, 1996 U.S.T. LEXIS 53 (entered into force February 1, 2002, www.state.gov/documents/organization/38535.pdf).

On February 1, 2005, in response to the parties' Joint Motion for the Issuance of Requests for International Judicial Assistance ("the Joint Motion"), the Administrative Law Judge ("ALJ") issued Letters of Request and Commissions to a consular official under the Hague Convention for the Taking of Evidence Abroad authorizing testimony to be taken in Paris of 13 French national witnesses proposed by the parties, including Peyrelevade. The Joint Motion noted that the parties were not asking the ALJ to determine at that point whether particular depositions were for discovery purposes or for preservation of testimony purposes. In fact, the Joint Motion specifically indicated Enforcement Counsel's intention to file a motion with the ALJ regarding the proposed testimony of Respondent (as well as two other French witnesses of Respondent who were also named in the indictment charges in California), but that because of the lead time necessary to schedule the depositions in France, the parties agreed to submit their request to the ALJ, pending the outcome of Enforcement Counsel's anticipated motion. (1)

Accordingly, on February 18, 2005, Board Enforcement Counsel filed a Motion in Limine, requesting, among other things, that the ALJ rule that Peyrelevade be permitted to testify only by appearing in person at the hearing in the United States, rather than by a deposition to be taken in France. In its Motion in Limine, Enforcement Counsel argued that Peyrelevade should not be considered "unavailable" under the Board's Rules of Practice ("the Rules") merely because he was residing overseas, given that he would be using the deposition testimony to substitute for live testimony in order to avoid arrest for the pending criminal indictment in California, and that in-person testimony is necessary to enable the ALJ to properly assess Peyrelevade's credibility. After extensive briefing from Peyrelevade and Enforcement Counsel, on June 6, 2005, the ALJ issued an Order ("the June 6 Order") finding that Peyrelevade's residence abroad "does not ... meet the standards of 'unavailable'" and accordingly, that Peyrelevade's deposition could not be taken to preserve his testimony under Rule 263.27 of the Board's Rules or offered into evidence at the heating under Rule 263.36 of the Board's Rules.

On July 1, 2005, Peyrelevade filed with the ALJ a Request for Interlocutory Review of the June 6 Order ("the Request"). In the Request, Peyrelevade contends that interlocutory review is appropriate and necessary in this case because the ALJ's ruling improperly resolves a controlling issue of law by denying consideration of Peyrelevade's deposition testimony and by barring Peyrelevade from preserving his testimony by way of a testimonial deposition pursuant to Rule 263.27 of the Board's Rules, thereby eliminating his ability to "preserve a full and accurate record for the Board's consideration." Peyrelevade also contends that interlocutory review is appropriate in order to avoid the additional delay and expense of reinitiating the lengthy process of arranging and taking Peyrelevade's deposition in France, which would be required in the event that the Board later modifies the ALJ's June 6 Order.

Board Enforcement Counsel filed a response to Peyrelevade's Request for Interlocutory Review, arguing that the Board has previously denied an almost identical request for interlocutory review in an earlier enforcement action and that Peyrelevade has failed to satisfy any of the elements necessary for the Board to find that the circumstances "are extraordinary enough" to merit interlocutory review. On July 22, 2005, the ALJ, pursuant to Rule 263.28(c) of the Board's Rules, referred Peyrelevade's Request for Interlocutory Review to the Board for final disposition. (2)

Discussion

I. Applicable Standard

Rule 263.28 of the Board's Rules provides that the Board may exercise interlocutory review of an ALJ' s ruling if the Board finds that:

(1) the ruling involves a controlling question of law or policy as to which substantial grounds exist for a difference of opinion;

(2) immediate review of the ruling may materially advance the ultimate termination of the proceeding;

(3) subsequent modification of the ruling at the conclusion of the proceeding would be an inadequate remedy; or

(4) subsequent modification of the ruling would cause unusual delay or expense.

12 CFR 263.28(b). These provisions are similar to 28 U.S.C. [section] 1292(b), which sets forth the circumstances under which federal appellate courts may exercise jurisdiction over interlocutory appeals. Thus, the Board has previously observed that "[w]hile section 1292(b) and case law governing interlocutory review in civil proceedings are not binding in this administrative proceeding, they provide useful guidance to the [agencies] in deciding procedural issues such as the one presented here." In re Incus Co. Ltd, 86 Federal Reserve Bulletin 246 (2000) (citations omitted).

The Board has also repeatedly emphasized that interlocutory review is discretionary, and that "the scope within which such discretion should be exercised is extremely narrow." Id. (citations omitted). The Board's limitation on interlocutory review reflects a strong and longstanding federal policy against piecemeal appeals before a final judgment. Id. (citing Switzerland Cheese Ass'n, Inc. v. E. Home's Market, Inc., 385 U.S. 23, 24-25 (1966)). Accordingly, while a finding of one of the four circumstances set forth in Rule 263.28(b) is a necessary precondition to interlocutory review by the Board, it is not alone sufficient to require that the Board grant such review." Id. All four of the prerequisites are to be used to guide the Board in the exercise of its discretion. Id. at 246.

Interlocutory appeals are generally disfavored because they undermine the independence of the trial judge, expose the parties to harassment and the burdensome costs of a succession of separate appeals, promote delay, and require the unnecessary expenditure of scare judicial resources. See Firestone Tire & Rubber Co. v. Risjord, 449 U.S. 368, 374 (1981); Catlin v. United States, 324 U.S. 229, 233-34 (1945). Thus, the Board has stated that a party seeking interlocutory review "has the burden of persuading the Board that exceptional circumstances justify a departure from the basic policy of postponing appellate review until after the entry of final judgment." Incus, at 246-47, (quoting Coopers & Lybrand v. Livesay, 437 U.S. 463, 475 (1978)).

For the reasons set forth below, the Board determines that Peyrelevade has failed to meet that burden, and his request for interlocutory review is denied.

II. Analysis of June 6 Order Under Standard of Rule 263.28(b)

A. Existence of Controlling Question of Law or Policy

Peyrelevade contends that the June 6 Order involves a "controlling question of law or policy as to which substantial grounds exist for a difference of opinion." The Board has previously noted that "[p]retrial rulings on the admissibility of evidence are not ordinarily subject to interlocutory review." In re Pharaon, Order Denying Motion for Interlocutory Review, Docket Nos. 91-037-E-I7 and 91-043-E-I7, p. 3 (Sept. 12, 1995) (citing Coursen v. A.H. Robins Co., Inc., 764 F.2d 1329, 1342 (9th Cir. 1985)). More specifically, the Board has determined, on nearly identical facts, that no controlling question of law or policy existed, where the ALJ issued a prehearing order ruling that a foreign national respondent subject to a related pending criminal indictment may not present his testimony at the hearing via a deposition taken abroad. Pharaon, Order Denying Motion for Interlocutory Review, at p. 4. In denying the motion for interlocutory review in Pharaon, the Board observed that "[i]t is impossible to know whether and to what extent an in limine ruling on the admissibility of evidence would control the outcome of a proceeding absent the holding of the hearing, a ruling in the context of that hearing, and the issuance of a recommended decision." Id.

Peyrelevade contends that the instant matter is distinguishable from Pharaon and does involve a controlling issue of law in that the ALJ has ruled not only that Peyrelevade may not introduce his deposition as testimony at the hearing, but also that his deposition cannot be taken to preserve his testimony pursuant to Rule 263.27, thereby eliminating his ability to "preserve a full and accurate record for the Board's consideration." (3) The Board finds, however, that the ultimate impact of the ALJ's ruling on the outcome of this case is still entirely speculative. For instance, Peyrelevade may ultimately decide to testify in person at the hearing despite his current position; or he could prevail in the hearing without recourse to his testimony. Either one of these outcomes would moot the questions presented at this stage. Moreover, it is entirely unclear at this stage what impact his deposition testimony, even if permitted, would have on the outcome of the hearing. As the Ninth Circuit noted in Coursen, "[i]n limine rulings are by their very nature preliminary. It is impossible to determine whether the movant will be prejudiced by such ruling absent a trial, a ruling in the context of trial, and the return of a verdict." Coursen 764 F.2d at 1342.

Even if the ALJ's June 6 ruling did involve a "controlling question of law or policy," Peyrelevade has failed to establish that "substantial grounds exist for a difference of opinion" on the issue of whether he has a tight under these circumstances to testify at the hearing by deposition. (4) To the contrary, the D.C. Circuit Court of Appeals upheld the ALJ's decision in Pharaon, on nearly identical facts, that a foreign respondent was required to testify in person if he wanted his testimony considered at the hearing.

In his June 6 Order, the ALJ ruled that because Peyrelevade's testimony will involve "significant determinations regarding credibility," it is "both important and proper that [Peyrelevade] be required to appear in person at heating if he intends to testify." The D.C. Circuit, in explaining its conclusions with respect to the ALJ's ruling in Pharaon, noted that "[g]iven the significance of personal observation to credibility determinations, we cannot say that [the ALJ's] ruling amounted to an abuse of discretion." Pharaoh v. Board of Governors of the Federal Reserve System, 135 F.3d 148 (D.C. Cir. 1998), cert. denied, 525 U.S. 947 (1998). Particularly in absence of authority to the contrary, this opinion demonstrates that no substantial grounds exist for a difference of opinion with regard to the June 6 Order.

B. Other Rule 263.28(b) Criteria

Additionally, the Board does not find that immediate review of the June 6 Order would materially advance the ultimate termination of the proceeding or that subsequent modification of the Order would be an inadequate remedy or cause unusual delay or expense. Peyrelevade combines his arguments with respect to these three criteria, contending only that because the June 6 Order precludes the taking of Peyrelevade's deposition for the purpose of preserving testimony, unusual and unnecessary delay and expense will result if review and modification of the June 6 Order are deferred until the conclusion of the proceedings before the ALJ. Peyrelevade argues that because such delay and expense can be avoided through the Board's exercise of interlocutory review, the ultimate termination of this proceeding would be materially advanced by the Board's decision to exercise review.

In Pharaon, the Board determined that immediate review of the ALJ's similar in limine ruling would not materially advance the ultimate termination of the proceeding and, moreover, that subsequent modification of the ALJ's ruling would not lead to unusual expense or delay. The Board specifically rejected Pharaon's argument that the entire proceeding would have to be repeated if the Board subsequently decided that Pharaon should have been permitted to testify by deposition. See In re Pharaon, Order Denying Motion for Interlocutory Review, Docket Nos. 1-037-E-I7 and 91-043-E-I7, p. 4 (Sept. 12, 1995). Peyrelevade points out that the Board's decision denying interlocutory review in Pharaon assumed that Enforcement Counsel in that proceeding would take Pharaon's deposition for discovery purposes and expressly anticipated that the ALJ would transmit the deposition transcript to the Board along with any other rejected exhibits. This was not, however, the controlling basis for the Board's denial of interlocutory review in Pharaon and does not warrant a different outcome with respect to the ALJ's June 6 Order in this matter. (5) Even if the Board ultimately determines that the June 6 Order is improper and that Peyrelevade should be permitted to testify by deposition, the Board can simply remand the matter for consideration of a deposition of Peyrelevade by the ALL While Peyrelevade and Enforcement Counsel disagree on the amount of delay that would be caused by rescheduling Peyrelevade's deposition, it seems unlikely at this point that any substantial delay or expense would result even if it is ultimately necessary to re-request authorization for Peyrelevade's deposition, given that the French Ministry of Justice authorized the requested depositions (including Peyrelevade's) on August 26, 2005. Therefore, as the Board noted in Pharaon, "the extent to which subsequent modification would result in any delay and expense, let alone unusual delay and expense, is wholly speculative." Id. (emphasis in original).

As set forth herein, the arguments advanced by Peyrelevade fail to provide an appropriate basis upon which the Board may grant interlocutory review of the ALJ's Order. Peyrelevade has not demonstrated the exceptional circumstances necessary to justify a departure from the Board's basic policy of postponing review until the conclusion of the hearing and the close of the record. Accordingly, the Board declines Peyrelevade's request for interlocutory review of the ALJ's June 6, 2005 Order.

By order of the Board of Governors, this 16th day of September, 2005.

Board of Governors of the Federal Reserve System

JENNIFER J. JOHNSON

Secretary of the Board

(1.) Notably, on August 26, 2005, the French Ministry of Justice authorized the requested depositions.

(2.) On August 15, 2005, the ALJ granted a request by Peyrelevade for leave to file an additional reply in support of his Request for Interlocutory Review. Accordingly, Peyrelevade's additional reply was transmitted to the Board on August 15, 2005.

(3.) Peyrelevade is listed on his own witness list but not on Enforcement Counsel's. While Enforcement Counsel could take Peyrelevade's deposition under the Board's discovery rules, 12 CFR 263.53, Enforcement Counsel have indicated that they do not intend to do so.

(4.) Unless he has that right, the issue of whether he is "unavailable" within the meaning of the Board's rules is ultimately unimportant.

(5.) The Board notes that Pharaon ultimately declined to appear for a deposition in that matter.
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Title Annotation:Legal Developements
Publication:Federal Reserve Bulletin
Geographic Code:1USA
Date:Sep 22, 2005
Words:8543
Previous Article:Orders issued under Bank Holding Company Act.
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