In the Matter of: Seidman and Bailey , 37 F.3d 911 ( 1994 )

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
9-13-1994
In the Matter of: Seidman and Bailey
Precedential or Non-Precedential:
Docket 92-3722 & 92-3729
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
Nos. 92-3722 & 92-3729
___________
IN THE MATTER OF:
LAWRENCE B. SEIDMAN AND JOHN BAILEY,
Individually, as Persons Participating
in the Conduct of the Affairs of Crestmont
Federal Savings and Loan Association,
Edison, New Jersey
JOHN BAILEY,
Petitioner at No. 92-3722
LAWRENCE B. SEIDMAN,
Petitioner at No. 92-3729
___________
On Petition for Review of a Final Order of
The Office of Thrift Supervision,
United States Department of the Treasury
(OTS Order No. 92-149)
___________
No. 92-5392
___________
LAWRENCE B. SEIDMAN,
Appellant
v.
OFFICE OF THRIFT SUPERVISION,
DEPARTMENT OF THE TREASURY,
UNITED STATES OF AMERICA,
Appellee
___________
Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil Action No. 92-00505)
Argued: August 3, 1993
PRESENT: STAPLETON, HUTCHINSON, and ROTH, Circuit Judges
(Filed September 14, 1994)
___________
John J. Sarno, Esquire (Argued)
Robinson, St. John & Wayne
Two Penn Plaza East
Newark, NJ 07105
Attorney for John Bailey
Samuel D. Bornstein, Esquire
The Atrium
80 Route 4 East
Paramus, NJ 07652
and
Frank J. Eisenhart, Jr., Esquire (Argued)
Arthur W. Leibold, Jr., Esquire
Edward Jewett, Esquire
Dechert, Price & Rhoads
1500 K Street, N.W.
Washington, DC 20005
Attorneys for Lawrence B. Seidman
Faith S. Hochberg, Deputy Chief Counsel
Office of United States Attorney
970 Broad Street
Room 502
Newark, NJ 07102
Richard E. Shapiro, Esquire
Office of Thrift Supervision
10 Exchange Place
Jersey City, NJ 07302
and
Harris Weinstein, Chief Counsel
Carolyn B. Lieberman, Senior Deputy Chief Counsel
Thomas J. Segal, Deputy Chief Counsel
Aaron B. Kahn, Assistant Chief Counsel (Argued)
Teresa A. Scott, Esquire
Office of the Chief Counsel
Office of Thrift Supervision
Fourth Floor
1700 G Street, N.W.
Washington, DC 20552
Attorneys for Office of Thrift Supervision,
United States Department of Treasury
___________
OPINION OF THE COURT
___________
HUTCHINSON, Circuit Judge.
In these consolidated cases, Lawrence Seidman
("Seidman") and John Bailey ("Bailey") petition for review of the
order of the Director ("Director") of the Office of Thrift
Supervision ("OTS") subjecting them to administrative sanctions
for their part in a loan transaction Crestmont Federal Savings
and Loan ("Crestmont") considered while Seidman was Chairman of
Crestmont's Board of Directors ("Board") and Bailey was one of
its officers. Specifically, Bailey petitions for review of that
portion of the Director's order publicly directing him to cease
and desist from participating in unsafe and unsound lending
practices. Seidman's petition seeks review of that portion of
the Director's order removing him from his office at Crestmont
and banning him from further participation in the banking
industry.
When the Director issued the order against Seidman and
Bailey, he remanded the case to an administrative law judge
("ALJ") to determine their ability to pay civil monetary
penalties because the ALJ who had heard the case failed to assess
a civil penalty against Bailey and to properly document Seidman's
ability to pay the $930,000 civil penalty the ALJ had
recommended. The remand order raises a question of finality that
we must consider before deciding whether we have jurisdiction to
review Bailey's and Seidman's petitions. We conclude in Part II
that we do have jurisdiction.1
In the administrative proceeding, the Director found
Bailey approved a commitment for a purchase money mortgage to a
real estate buyer who was buying property from a seller in which
Seidman had an interest. The Director concluded that approval of
this commitment was an unsafe and unsound lending practice
justifying a cease and desist order against Bailey under section
1818(b) of the Federal Deposit Insurance Act ("FDIA"), 12
U.S.C.A. §§ 1811-1833 (West 1989 & Supp. 1994), as amended by the
Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), P.L. No. 101-73, 103 Stat. 183 (1989).
The Director concluded that Seidman's conduct required
him to issue a prohibition and removal order in accord with 12
U.S.C.A. § 1818(e). To support this ultimate administrative
sanction the Director found Seidman impermissibly used his
position at Crestmont for his own benefit in order to obtain a
release from his personal guarantee of a loan; this loan had been
made by another lending institution to a real estate partnership
1
. Seidman and Bailey also attack the remand order on the
merits. Because we will grant Bailey's petition and reverse the
cease and desist order against him, those proceedings can no
longer continue against Bailey. We will therefore order the
Director to terminate them. Because of our conclusion on
Seidman's petition that his case be remanded for the Director to
consider entry of a cease and desist order against him, we will
stay the proceedings against him concerning assessment of any
monetary penalties until the Director has finally decided whether
to direct Seidman to cease and desist from any further attempts
to hinder OTS in any investigations pertinent to its regulatory
authority.
from which Seidman was in the process of withdrawing; Seidman's
withdrawal from the partnership was being negotiated at the same
time that Bailey made the loan commitment for a purchase from the
partnership, resulting in the Director's cease and desist order
against him. As additional support for his order removing
Seidman from Crestmont's Board of Directors and banning him from
banking for life, the Director also found that Seidman failed to
renotify Crestmont's Board or Senior Loan Committee of his
continuing interest in the real estate partnership he was
withdrawing from while they were considering the loan OTS
objected to and that Seidman later attempted to hinder the
ensuing OTS investigation by covering up his part in preparing a
memo in support of his request for the release. The Director
concluded that each of these findings warranted Seidman's removal
as Chairman of Crestmont's Board and required him to be
permanently barred from banking.
We believe the Director erred in concluding Bailey's
issuance of a purchase money loan commitment to a buyer from the
real estate development partnership from which Seidman was in the
final stages of withdrawing exposed Crestmont to the serious,
abnormal risk that constitutes an unsafe or unsound practice.
Therefore, we will grant Bailey's petition for review and vacate
that part of the Director's order commanding Bailey to cease and
desist from such practices.
We reject Seidman's preliminary argument that 12
U.S.C.A. § 1818(e) violates due process because it fails to
afford him a trial before a fair and unbiased tribunal. We
conclude, however, that the Director's findings that Seidman
violated 12 U.S.C.A. § 1818(e)(1) when he sought to utilize his
position at Crestmont to obtain a release from his guarantee and
when he failed to remind Crestmont's Board or Senior Loan
Committee of his interest in the real estate partnership are not
supported by substantial evidence. Though the Director properly
determined that Seidman engaged in an unsafe or unsound practice
when he attempted to hinder the OTS investigation, we conclude
that there is no evidence to support the Director's finding that
this act of Seidman resulted in his receipt of an actual benefit
meeting section 1818(e)(1)(B)(iii)'s condition of an untoward or
prohibited effect.2 Accordingly, we will grant Seidman's
petition for review and vacate that part of the Director's order
permanently removing him from his job at Crestmont and banning
him from banking. Nevertheless, because of our conclusion that
Seidman did commit an unsafe or unsound practice when he
unsuccessfully attempted to hinder the OTS investigation in his
dealings with his former partners and their lender, we will
remand the case to OTS for the Director to consider entering a
cease and desist order and civil monetary penalties against
Seidman as authorized by section 1818(b).
2
. The Director relied exclusively on section
1818(e)(1)(B)(iii)'s receipt of benefit from a prohibited act to
meet its requirements concerning effect and made no finding that
Seidman's conduct met the alternate requirement of section
1818(e)(1)(B)(i) by posing a possibility of prejudice to
Crestmont's depositors or the other alternate condition of
section 1818(e)(1)(B)(ii) by creating a likelihood of loss to
Crestmont.
Our disposition of the merits of Seidman's petition
requires us to vacate the OTS preliminary suspension order for
the reasons given in Part VII of this opinion. Therefore, we
find it unnecessary to consider Seidman's appeal of the district
court's order dismissing, for lack of jurisdiction, his action to
enjoin the preliminary suspension order.
I. Factual and Procedural History
A. Seidman's Business Dealings
Lawrence Seidman is an attorney in his mid-forties who
has been engaged in the practice of banking and securities law
for twenty years. During the past decade he has specialized in
real estate investments and begun to pursue a career in banking.
In 1989, he headed a group of investors who purchased stock in
Crestmont, a thrift institution in Edison, New Jersey.3 Seidman
became a director of Crestmont and, in November 1989, was named
Chairman of its Board of Directors.
In 1986, before he became a Crestmont director, Seidman
formed a partnership, Fulton Street Associates ("FSA"), with
James Zorlas ("Zorlas") and Lawrence Rappaport ("Rappaport") to
purchase and develop industrial condominiums on a piece of
commercial property ("Boonton Project"). FSA's partners made
substantial capital contributions to the Boonton Project and
3
. At the time the parties argued and briefed these cases,
Crestmont was not one of the failed thrifts that led to the
"S & L bailout." We have not been advised of any change in this
respect.
obtained additional financing from United Jersey Bank ("UJB"),
secured in part by all the partners' personal guarantees.
Seidman listed his affiliation with FSA on conflict disclosure
forms he filed with Crestmont when he became a director.
In mid-1990, Seidman decided to focus his business
activities on Crestmont. Recognizing that his outside business
ventures could create conflicts that would prevent Crestmont from
making otherwise desirable loans, Seidman advised the Board that
he had begun to withdraw from his outside business ventures and
started disposing of various business interests to his former
partners. Rappaport agreed to acquire Seidman's interest in FSA,
promising to indemnify Seidman against any continuing obligation
on FSA's loan from UJB without any further consideration flowing
to Seidman. On June 1, 1991, Seidman's transfer of his interest
in FSA to Rappaport became the subject of a formal agreement.
Seidman testified that he lost all of the $320,000 he had
invested in FSA but that he thought Crestmont offered even
greater potential for profit.
Months before the June 1st agreement, however, UJB
started to worry about its loan to FSA. On January 21, 1991, it
sent FSA a notice of default. UJB gave FSA a chance to cure the
default, but FSA denied it was in default, contending any default
would have been cured if an interest reserve fund had been
properly credited against its debt. Though UJB then sent FSA a
demand for immediate payment, negotiations between them
continued.
James Risko ("Risko"), a Poole & Co. commercial loan
broker, handled negotiations to resolve the dispute between FSA
and UJB. Poole & Co. was the commercial loan company that had
placed the FSA loan with UJB. Roger Eberhardt ("Eberhardt"),
chairman of UJB's real estate management committee, and Thomas
Stackhouse ("Stackhouse"), the UJB commercial lending officer
assigned to the FSA loan, were key participants in the
negotiations. Risko, Eberhardt and Stackhouse all testified that
the participants, including Seidman, discussed end-user financing
for FSA's Boonton condominiums.4 Crestmont was mentioned as a
potential source of end-user loans, but no one testified that
Seidman or Crestmont promised to make any loan. On May 20, 1991,
the parties agreed to restructure the UJB loan. As part of the
restructuring, the FSA partners, including Seidman, signed
personal guarantees covering $4.45 million. Seidman's successful
efforts to be released from the guarantee figure prominently in
these proceedings, but other ongoing events also play a
significant role.
4
. End-user financing permits a person who plans to occupy a
unit in a development to buy the unit or rent it to others. The
institution that has financed the project has a strong interest
in facilitating end-user financing because it usually receives a
substantial part of the price the end-user pays, thus reducing
its exposure on the loan to the developer.
B. The Levine Loan
John Bailey is the Executive Vice President of
Crestmont. His responsibilities include underwriting commercial
loans, managing a commercial loan portfolio, producing new
lending business and supervising Crestmont's loan officers.
Bailey had authority to approve loans of less than $500,000 if
they did not directly involve the interests of Crestmont's
directors but had no authority to approve loans in excess of
$500,000 or loans in which Crestmont's officers or directors had
an interest. Loans over $500,000 went before a "Senior Loan
Committee" made up of Bailey, Seidman and Crestmont's President,
S. Griffin McClellan ("McClellan"). Commercial loans in which an
officer or director had an interest were prohibited at Crestmont.
In December of 1990, Steven Levine ("Levine") of S & N
Realty approached Bailey about end-user financing for a $466,000
office condominium in FSA's Boonton project. Levine, who had
been referred to Crestmont and Bailey by Zorlas, sought $375,000.
On December 18, 1990, Bailey contacted Zorlas, Rappaport and
Seidman about Levine's loan request and asked them how things
stood on Seidman's partnership interest in FSA. All three FSA
partners individually represented to Bailey that Seidman was in
the process of withdrawing from the partnership and that the
withdrawal would be completed "shortly." Bailey Appendix
("Bailey App.") at 319. Bailey memorialized this conversation
and placed a memo about it in a file marked "Seidman Financial
Associates." Id. Rappaport testified he told Bailey no loan
could be made to Levine until Seidman was out of the partnership.
Assured Seidman would soon be out of FSA, Bailey
decided to get a head start on the Levine loan and assigned James
Little ("Little"), a Crestmont loan officer, the task of writing
it up. Little interviewed Levine and told him the loan could be
approved but no other action could be taken on it until Seidman
left FSA. Little became involved with other things and gave the
paperwork on the loan back to Bailey to complete. Still assured
that Seidman would soon be out of FSA, Bailey did extensive work
on it.
Bailey prepared a Credit Summary for the Levine loan on
February 21, 1991.5 On March 19, 1991, Bailey and Little
approved the loan and issued a commitment letter to Levine.6
5
. In the Credit Summary form there is a space headed "Bank
Officers and Directors Interest." Bailey says he thought this
heading referred to the officers and directors of the Levine
partnership, not FSA, the developer. Bailey also listed the
applicant as "[a] N.J. General Partnership, the ownership of
which is 100% Steven K. Levine and Ned Levine." Bailey App. at
321. Clarence Hartwick, a twenty-seven year veteran in banking
and an executive at First Fidelity Bank in New Jersey,
corroborated Bailey's understanding at a hearing before an OTS
ALJ. He testified:
That line refers to the borrower. Is the
borrower an officer or director of the bank,
it's as simple as that.
Id. at 304. Bailey entered the word "none" on the line calling
for disclosure of "Bank Officers and Directors Interest." Id. at
321. Other underwriting documents included with the Credit
Summary clearly disclosed FSA's interest.
6
. The commitment was later modified and reissued on May 10,
1991. Unknown to Bailey, Levine had already entered into a
Contract of Sale with FSA on or about May 10, 1991. Seidman did
not formally withdraw from FSA until June 1, 1991. Questioned
about what would have happened if Seidman had failed to withdraw
from a similar transaction, Crestmont's President, McClellan,
testified, "We would not have closed the loan. It was clearly
Levine did not sign the commitment letter until May 30, 1991,
when Bailey was given a check for $2,000 in exchange for the
commitment.7
C. Crestmont's Loan Policies
Crestmont had a loan policy which Bailey had authored.
It was based on OTS regulations and stated:
The policy of the bank is to carefully
administer extensions of credit which are
subject to special reporting requirements.
These loans include the following:
. . .
- [L]oans to individuals or entities
that conduct business or have
conducted business with officers or
directors of the bank.
These situations are clearly described
in the bank's loan committee credit summary.
They are presented to the bank's Senior Loan
Committee regardless of their size.
Id. at 314. Crestmont had another policy, also based on OTS
regulations, which forbade it from
either directly or indirectly mak[ing] any
loan to or purchase . . . any loan made to
(..continued)
understood by all involved that that was a condition to closing."
Id. at 191.
7
. Crestmont negotiated that instrument but the date of
negotiation is unclear. OTS contends that the check was
negotiated before June 1, 1991, the date Seidman transferred his
interest, but Bailey contends the check was cashed after Seidman
relinquished his partnership. Levine's delivery of the check for
$2,000 resulted in a binding contract two days before Seidman's
formal withdrawal. See generally Restatement (Second) of
Contracts § 17 (1981).
any third party on the security of real
property purchased from any affiliated person
of the association unless the property was a
single-family dwelling owned and occupied by
the affiliated person as a permanent
residence.
OTS Appendix ("OTS App.") at 96-97 (citing 12 C.F.R.
§ 563.43(c)(1)). Crestmont's policies also put on its directors
a fundamental duty to avoid placing
themselves in any position which creates,
leads to or could lead to a conflict of
interest or even the appearance of such
conflict of interest between the
accomplishment of the purposes of the
association and the personal financial
interests of the directors, officers and
other affiliated persons.
Id. at 98-99 (citing 12 C.F.R. § 571.7). Specifically,
Crestmont's directors were supposed to avoid any transaction in
which
a third party purchaser seeks to obtain a
loan from the association secured by real
estate acquired from the affiliated
partnership or as to which the affiliated
partnership holds a security interest.
Id. at 100. Bailey and Seidman were fully aware of these
policies.
D. The Garden Park Loan
At the same time that Crestmont was negotiating the
Levine loan, Seidman and OTS were engaged in a tense dialogue
over property owned by Garden Park Associates ("Garden Park"),
for which Seidman was attempting to arrange financing at
Crestmont. Seidman had an interest in Garden Park and had also
personally guaranteed the development loans for Garden Park.
Seidman fully disclosed his interest in Garden Park to the
Crestmont Board and Crestmont formally asked OTS to permit it to
make the Garden Park loan. On May 23, 1991, OTS denied
Crestmont's request citing 12 C.F.R. § 563.43(c)(1) (1991) which
forbade certain transactions with affiliated parties.8 Seidman
contacted OTS's Chief Examiner in charge of Crestmont, Joseph
Donohue ("Donohue"), for a further explanation of OTS's position.
Donohue told Seidman that OTS considered the Garden Park loan
impermissible so long as Seidman remained a guarantor of Garden
Park's obligation. Seidman asked for reconsideration, but OTS
still refused to allow the loan.
8
. OTS amended this regulation subsequent to the ALJ's decision,
but the Code of Federal Regulations no longer contains any
independent OTS conflict of interest rules. Instead, 12 C.F.R.
§ 563.43 incorporates the Federal Reserve Board regulations found
at 12 C.F.R. § 215 et seq. See 57 Fed. Reg. 45,977 (1992)
(codified at 12 C.F.R. § 563.43). There is no provision in the
Federal Reserve Board regulations comparable to former 12 C.F.R.
§ 563.43(c)(1). For the text of former section 563.43(c)(1), see
infra typescript at 44.
E. Seidman's Release from the UJB Guarantee
Until his May 23, 1991, conversation with Donohue,
Seidman seems to have believed that his withdrawal from FSA would
permit Crestmont to make the Levine loan. After speaking with
Donohue about Garden Park, Seidman had second thoughts about his
personal guarantee of FSA's loan from UJB and began to wonder
whether it would disqualify Crestmont from loaning money to
Levine even after Seidman completed his withdrawal from FSA.
Seidman turned to James Poole ("Poole") of Poole & Co., who
advised Seidman to get a release from the UJB guarantee and to
discuss this with Risko. Seidman did so and Risko approached
Eberhardt. Risko told Eberhardt that the conflict between
Seidman's obligation on the guarantee and his fiduciary duties to
Crestmont created problems in Crestmont's providing end-user
financing for the FSA project. Eberhardt told Risko to put a
proposal for Seidman's release in writing and UJB would consider
it.
Events now moved rapidly. On May 30, 1991, the day
Levine signed the commitment letter, Risko contacted Seidman and
told him UJB would consider releasing Seidman. Risko suggested
Seidman draft a letter asking for the release and that he, Risko,
would sign a letter giving UJB the reasons for granting Seidman's
request. Risko testified Seidman and he agreed that Seidman
would do an initial draft of both the request for release and
Risko's supporting letter. Risko testified he was only to
approve and sign the supporting letter and that Seidman faxed him
the draft. Seidman testified that Risko dictated the draft to
Seidman's secretary and she forwarded it to Risko for review.
While drafts were being faxed back and forth between
Risko and Seidman, OTS examiner Thomas Angstadt ("Angstadt") was
at Crestmont on other business. While using a Crestmont fax
machine, Angstadt saw a copy of the draft of Risko's letter lying
on a desk. Angstadt secretly read and copied the draft.
The final version of Risko's letter was identical with
the draft except for one sentence that Risko added.9 Seidman had
no objection to Risko's addition.
On June 7, 1991, UJB notified Seidman that it would
release him from his guarantee of FSA's loan. Eberhardt later
testified UJB understood that the release did not obligate
9
. Risko's supporting letter reads as follows, with the sentence
Risko added emphasized in bold face type:
As you are aware, Mr. Seidman is the Chairman
of the Board of Crestmont Federal Savings and
Loan Association and Crestmont is
entertaining financing certain condo
purchasers who are purchasing units from
Fulton Street. His position as Chairman may
make this financing impossible if he is also
a partner in Fulton Street. The inability to
finance the end users, in our opinion, does
not serve either United Jersey Bank's
position or that of the developer. At the
present time, Crestmont is entertaining
$700,000 in financing for two users and a
third potential buyer has indicated the need
for approximately $1 million in financing.
Crestmont would be willing to consider future
financing of condo units in the Boonton area,
assuming qualified buyers.
OTS App. at 2 (emphasis added).
Crestmont to provide such financing, but he prepared a
handwritten memo that indicated availability of end-user
financing from Crestmont was a consideration in UJB's decision to
release Seidman.
In the meantime, on June 3, 1991, OTS prohibited the
Garden Park loan, and Seidman again asked Donohue for an
explanation. Donohue now told Seidman that OTS believed conflict
of interest prevented a thrift from making a loan to an entity in
which an officer or director of the thrift had had an interest,
including liability on a guarantee, at any time within two years
before the loan was made. Seidman protested that such a policy
had no support in OTS regulations, but Donohue was not moved.
Frustrated, Seidman ordered Bailey to stop considering
commercial loans on projects in which Seidman had an interest
either as a partner or guarantor. On June 4, 1991, Bailey sent
both the Levine and the Garden Park loans to the Savings Bank of
Rockland.10 On June 5, 1991, OTS issued a supervisory directive
forbidding Crestmont from making any commercial loans and
launched the investigation for "conflict of interest" that gave
rise to the cases now before us.11 It is undisputed that
Crestmont never made the loans OTS questioned.
10
. Seidman is also a member of the Board of Directors at
Rockland, but that lending institution is regulated by FDIC, not
OTS.
11
. The transfer of the loan documents took place one day before
the OTS supervisory directive and three days before Seidman
received word that he would be released from his guarantee of the
UJB loan. Thus, neither the OTS order to cease commercial
transactions nor the outcome of the UJB proceedings induced
Crestmont's decision to transfer the loans.
F. The OTS Investigation, Charges and
Seidman's District Court Action
Though Crestmont had made no prohibited loan and now
proposed none, OTS went on with its investigation into what it
suspected were violations of OTS's regulations on conflict of
interest. On September 13, 1991, OTS deposed Seidman, focusing
on the draft letter Seidman had faxed to Risko. Seidman never
admitted writing the original draft of Risko's letter. He said
he believed that Risko had dictated it over the phone to
Seidman's secretary, Janet Greenhill ("Greenhill"). Greenhill
testified she did not remember these details.12 Seidman admitted
that he had approved the text of the letter as sent with the
additional sentence stating it would be in UJB's best interest to
free him from the guarantee because that could open another
source of end-user financing for FSA.
After he was deposed, Seidman learned that Risko and
Poole & Co.'s records had been subpoenaed by OTS and that Risko
planned to testify on deposition without an attorney. Seidman
called Risko to find out what Poole & Co.'s files contained
concerning Seidman's request for a release from his guarantee and
asked whether he could review the file. Risko testified he told
12
. Greenhill did testify it was her practice to put Seidman's
initials on any letter he dictated to her and there were no such
initials on the initial draft of Risko's letter. She also
testified it was not unusual for her to take dictation from
others over the phone.
Seidman that he had a fax of the initial draft along with the fax
sheets showing it was transmitted from Crestmont.
On September 16, 1991, before his OTS deposition, Risko
met with Seidman. Seidman testified Risko told him he was going
to tell OTS the letter was Seidman's idea. Seidman testified he
told Risko this was a lie. Seidman said he reviewed the file and
pulled out a number of documents relating to his request for a
release. Risko testified Seidman asked him to "make sure that
[the documents] get thrown away" and asked Risko to do his "best
to make sure [the documents were] not around." Seidman Appendix
("Seidman App.") at 347-48. Risko also testified that Seidman
told him to forget the documents ever existed. Seidman
emphatically denies ever saying this. Both Risko and Seidman
agree that Seidman told Risko he should tell OTS the truth.
Things grew tense. Risko left the room to speak with
Poole. Seidman was left alone with the documents. Poole
reentered the conference room, picked up the draft, crumpled it
and left the room with it. Seidman followed Poole to his office
where they had a heated exchange. Seidman grabbed the crumpled
copy of the draft and tore it up. Seidman testified he did this
"in a rage of anger" after learning Risko had made copies of all
the relevant documents. Id. at 481-82. Risko testified he never
informed Seidman that copies existed.13
13
. The ALJ found Seidman destroyed the documents intentionally
but "it was done in a fit of anger and not for the purpose of
destroying material and relevant evidence." Seidman App. at 49.
The Director's decision concluded cryptically that the ALJ found
Seidman had destroyed material evidence. While the ALJ found
On October 30, 1991, OTS filed notice of charges
against Seidman and Bailey.14 On the same day, it issued a
preliminary Order of Suspension removing Seidman from his posts
at Crestmont without pay.15 From April 20, 1992, through May 1,
1992, Treasury Department ALJ Walter Alprin ("Alprin") held
hearings on the charges against Seidman and Bailey. On
August 13, 1992, Alprin issued his decision recommending that the
Director issue a Removal and Prohibition Order permanently
barring Seidman from any work in the banking field and assessing
$930,000 in civil penalties against him. Alprin also recommended
an order directing Bailey to "cease and desist from engaging in
(..continued)
Seidman engaged in a number of culpable acts, it seems clear that
the ALJ did not think destruction of evidence was one of them.
14
. The OTS sought the following relief against Seidman: (1) a
preliminary order immediately suspending Seidman from his office
at Crestmont and from further participating in Crestmont's
affairs; (2) an order removing Seidman from his office at
Crestmont and banning him from the banking industry; (3)
disgorging any unjust enrichment or avoidance of loss; (4)
providing a new guarantee to UJB on the FSA loan; (5) civil
monetary penalties; and (6) any other relief the Director deemed
appropriate.
15
. Seidman commenced a district court action seeking a
preliminary injunction to enjoin further enforcement of the Order
of Suspension on February 7, 1992. In his complaint, Seidman
alleged that the Order of Suspension was facially invalid because
it exceeded OTS's statutory authority. On February 17, 1992, OTS
filed a motion for dismissal under Federal Rule of Civil
Procedure 12(b)(1), 12(b)(6), or, in the alternative, summary
judgment under Federal Rule of Civil Procedure 56. On May 22,
1992, the district court granted OTS's Rule 12(b)(1) motion and
dismissed the Rule 12(b)(6) and Rule 56 motions as moot. Because
we will grant Seidman's petition for review and reverse the
Director's order removing him from office and banning him from
banking, we do not consider Seidman's appeal of the May 22, 1992
order. See infra Part VII.
any unsafe or unsound practices in conducting the business of any
financial institution . . . ." Id. at 89. Alprin did not
recommend any monetary penalty against Bailey.
G. The Director's Decision
Seidman and Bailey sought the Director's review of the
ALJ's recommended decision and asked for oral argument. The
Director denied the request for argument and issued a decision on
December 4, 1992, finding against Seidman and issuing the Removal
and Prohibition Order the ALJ had recommended. The Director
determined, however, that the record was not sufficient to
support the recommended civil penalty of $930,000 against Seidman
and remanded the case to the ALJ to take further evidence
concerning Seidman's ability to pay.16 The Director also agreed
with the ALJ's recommended findings of fact and conclusions of
law as to Bailey and entered a Permanent Cease and Desist Order,
but he disagreed with the ALJ's conclusion that no civil
penalties were warranted against Bailey and sent Bailey's case
back for further fact finding on money penalties.
In support of his order removing Seidman and banning
him from banking, the Director found Seidman engaged in self-
16
. On January 15, 1993, Seidman challenged the legality of the
remand by filing a motion with the Director to stay further
proceedings before the ALJ. He also sought a stay from this
Court. We denied Seidman's request for a stay without stating
whether our denial was on the merits or because Seidman had
failed to exhaust his administrative remedies. The motion before
OTS remained undecided at the time Seidman filed his opening
brief in this Court (March 1993). We have not been advised of
any subsequent action.
interested conduct by insinuating to UJB that a release from his
FSA guarantee would cause Crestmont to provide end-user financing
for FSA's Boonton project. The Director also found that
Crestmont unlawfully made a loan commitment to Levine while
Seidman was still a partner in FSA. Finding these acts of self-
dealing were never disclosed to Crestmont's Board or the Senior
Loan Committee, the Director held Seidman breached his fiduciary
duties to Crestmont. The Director also held Seidman violated
OTS's conflict of interest provision, 12 C.F.R. § 571.7(b), and
sought to benefit personally from these acts through the release
from his FSA guarantee.
The Director independently held that Seidman's attempt
to destroy evidence and cover-up his activities during the
investigation violated section 1818(e)(1). He found the
attempted cover-up, which involved giving misleading testimony,
destroying the original record of the fax of the early draft of
Risko's letter from Seidman to Risko and requesting that Risko
forget about the letter, inter alia, constituted an unsafe or
unsound practice. The Director concluded that these acts
established personal dishonesty within the meaning of section
1818(e)(1)(C)(i) and conferred a personal benefit on Seidman
within the meaning of section 1818(e)(1)(B)(iii).
The Director also held Bailey had engaged in an unsafe
and unsound banking practice. He found Bailey knew of Seidman's
interest in FSA, failed to disclose it to the Board of Directors
or the Senior Loan Committee and issued a commitment letter for
the Levine loan before Seidman withdrew from FSA. The Director
concluded this created an "abnormal risk of loss" to Crestmont
and that a cease and desist order was appropriate under section
1818(b). Seidman App. at 121.
II. Jurisdiction
The Director had jurisdiction over these proceedings
pursuant to 12 U.S.C.A. § 1818(h)(1). Seidman and Bailey filed
timely petitions for review pursuant to 12 U.S.C.A. § 1818(h)(2).
Because of the Director's remand to an ALJ for further findings
on Seidman's and Bailey's ability to pay civil penalties, we must
consider whether their petitions seek review of a final order.
Generally, an order which decides all issues of liability but
remands on issues of damages is not immediately appealable. See
Teledyne Continental Motors v. United States, 906 F.2d 1579, 1582
(Fed. Cir. 1990). Here the agency clearly contemplates further
action concerning civil penalties. So long as the assessment of
monetary penalties is pending, the full impact the Director's
decisions may have on either Seidman or Bailey is uncertain.
Under FDIA, parties sanctioned by OTS
may obtain a review of any order . . . by the
filing in the court of appeals of the United
States for the circuit in which the home
office of the depository institution is
located . . . within thirty days after the
date of service of such order, a written
petition praying that the order of the agency
be modified, terminated, or set aside. . . .
Upon the filing of such petition, such court
shall have jurisdiction, which upon the
filing of the record shall . . . be
exclusive, to affirm, modify, terminate, or
set aside, in whole or in part, the order of
the agency. Review of such proceedings shall
be had as provided in chapter 7 of Title 5.
The judgment and decree of the court shall be
final, except that the same shall be subject
to review by the Supreme Court upon
certiorari . . . .
12 U.S.C.A. § 1818(h)(2) (West 1989). Nothing in FDIA expressly
states that the "order" must be a final one. We recognized in
Shea v. OTS, 934 F.2d 41 (3d Cir. 1991), however, "'there is a
strong presumption that judicial review is only available when an
agency action becomes final . . . .'" Id. at 44 (quoting Bell v.
New Jersey, 461 U.S. 773, 778 (1983)). This presumption
recognizes that postponement of review until final action can
sometimes avoid the inefficiency of piecemeal review and, in some
cases, make any review unnecessary. CEC Energy Co. v. Public
Serv. Comm., 891 F.2d 1107, 1112 (3d Cir. 1989); see also
Fidelity Television, Inc. v. Federal Communications Comm'n, 502
F.2d 443, 448 (D.C. Cir. 1974) (quoting Chicago & Southern Air
Lines v. Waterman S.S. Corp., 333 U.S. 103, 113 (1948) and
Isbrandtsen Co. v. United States, 211 F.2d 51, 55 & n.24 (D.C.
Cir.), cert. denied, 347 U.S. 990 (1954)).
In Shea we concluded, "in this Circuit, the finality of
a disposition is determined by its consequences[,]" including
"whether the OTS's decision 'imposes an obligation' or 'denies a
right.'" Shea, 934 F.2d at 44-45. In CEC Energy we reasoned
that "[a]pplication of the ripeness doctrine prevents the
entanglement of the courts in administrative policy disagreements
and protects the agencies from judicial interference until
decisions are formalized and their effects felt in a concrete
way." CEC Energy Co., 891 F.2d at 1109 (citation omitted). We
went on to state, "[t]he doctrine of ripeness requires an
evaluation of the fitness of the challenged issue for review and
the hardship to the parties of withholding judicial
consideration." Id. at 1109-10 (citation omitted); see also
Federal Trade Comm'n. v. Standard Oil, Inc., 449 U.S. 232 (1980);
Solar Turbines Inc. v. Seif, 879 F.2d 1073, 1080 (3d Cir. 1989)
(concluding Supreme Court's finality standard incorporates
ripeness standard). An important but not dispositive factor is
an agency's classification of its order as final. Because
finality is a pragmatic requirement informed but not decided by
an agency classification of its decision, we looked at several
other factors in CEC Energy:
1) whether the decision represents the
agency's definitive position on the question;
2) whether the decision has the status of law
with the expectation of immediate compliance;
3) whether the decision has immediate impact
on the day-to-day operations of the party
seeking review; 4) whether the decision
involves a pure question of law that does not
require further factual development; and 5)
whether immediate judicial review would speed
enforcement of the relevant act.
CEC Energy Co., 891 F.2d at 1110 (citing Solar Turbines Inc., 879
F.2d at 1080). Thus, we turn to the facts that are material to
our jurisdiction over Seidman's and Bailey's petitions for
review.
Under the Director's order, Seidman is permanently
removed from, and prohibited from returning to, the banking
industry. The order denies Seidman a right to pursue the trade
he has chosen. It also firmly concludes that Seidman is not fit
to be a banker and that Bailey should be publicly reprimanded.
The order notifies Seidman and Bailey of their right to petition
for judicial review and the agency states it is final. Most
significantly, the order demands immediate compliance and impacts
immediately on Seidman's and Bailey's day-to-day affairs. OTS is
currently enforcing the order precluding Seidman from taking part
in the business of banking, and it is clear the agency has
definitely decided to ban Seidman from that industry. Although
the consequences to Bailey are not as harsh as those visited upon
Seidman, the agency has indicated that it will engage in no
further factual development or reconsideration of its order
publicly directing Bailey to cease and desist from unsafe
practices. The order has a continuing effect on Bailey's
reputation and it too poses legal questions that can be fully
reviewed at this time. In addition, Seidman's and Bailey's
petitions pose questions that are mainly legal in nature and
judicial review now is likely to facilitate the appropriate
enforcement of applicable law.
Because assessment of any civil penalties hinges on the
Director's conclusion that Seidman and Bailey violated FIRREA, we
believe review at this juncture serves the interest of judicial
economy. This case turns not on the civil penalties that are yet
to be determined on the Director's remand to an ALJ but on the
legality of the decisions the Director has already made. The
Director's decision "'imposes . . . obligation[s]'" and
"'denies. . . right[s].'" Shea, 934 F.2d at 44-45. Therefore,
we have jurisdiction under 12 U.S.C.A. § 1818(h)(2) to review the
Director's order removing Seidman from his position at Crestmont
and banning him permanently from the thrift industry, and
directing Bailey to stop engaging in unsafe or unsound
practices.17
III. Standard of Review
The Administrative Procedure Act ("APA"), 5 U.S.C.A.
§ 706(2) (West 1977), defines the scope of judicial review over
the Director's findings and conclusions of law. We must uphold
the Director's order against Bailey and Seidman unless we
determine that the Director has made an error of law or that his
findings are not supported by substantial evidence on the whole
record. See Hoffman v. FDIC, 912 F.2d 1172, 1173-74 (9th Cir.
1990). Substantial evidence is "such relevant evidence as a
reasonable mind might accept as adequate to support a
conclusion." Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229
(1938). Issues of law are subject to plenary review. Dill v.
INS, 773 F.2d 25, 28 (3d Cir. 1985). In deciding legal issues,
we must defer to an agency's consistent interpretation of the
statute it administers unless it is "arbitrary and capricious,"
17
. Our resolution of this issue of appealability is further
supported by analogy to a district court proceeding in which one
defendant had been enjoined from engaging in the banking business
and a second defendant had been enjoined from engaging in unsafe
and unsound banking practices. The granting of the injunctions
by the district court in this situation would be appealable under
28 U.S.C.A. § 1292(a)(1) (West 1993). We conclude that the same
injunctive effect of the civil penalties imposed on Seidman and
Bailey argues in favor of permitting this appeal.
Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
467 U.S. 837, 844 (1984). Nevertheless, when "bizarre"
interpretations of a statute are made out of "regulatory zeal,"
deference is not appropriate. See Wachtel v. OTS, 982 F.2d 581,
585 (D.C. Cir. 1992). Similarly, interpretations contrary to the
plain meaning of the statute are unacceptable. Elliot Coal
Mining Co., Inc. v. Director, OWCP, 17 F.3d 616, 629 (3d Cir.
1994). Seidman's due process attack on the statute in question,
the merits issue to which we first turn, is subject to plenary
review. United States v. Engler, 806 F.2d 425, 429 (1986).
IV. Seidman's Due Process Challenge to the Statute
Seidman argues that 12 U.S.C.A. § 1818(e) violates due
process because it fails to afford him a hearing before a fair
and unbiased tribunal. He says a sanction so severe should not
be entrusted to a person who has the combined functions of
investigation, prosecution and adjudication. Although the
Supreme Court has held that the Constitution requires
administrative agencies to be fair and unbiased, see In re
Murchison, 349 U.S. 133, 135-36 (1955), it has also held that the
Constitution permits the investigative, prosecutorial and
adjudicative roles to be combined in one agency. See Withrow v.
Larkin, 421 U.S. 35, 46-47, 52-53 (1975). Agency administrators
are presumed to be "'capable of judging a particular controversy
fairly on the basis of its own circumstances.'" Id. at 55
(quoting United States v. Morgan, 313 U.S. 409, 421 (1941)).
Seidman argues Withrow does not permit all three roles to be
combined in one person who also has the power to find facts and
judge credibility without even hearing the witnesses.
The Director of OTS has the power to authorize an
investigation, to determine whether charges should be brought, to
issue notice of charges proffered and then to decide them as to
law and fact. See 12 C.F.R. §§ 509.4, 509.18 (1993). Although
OTS charges are usually heard by an ALJ, "[t]he Director may, at
any time during the pendency of a proceeding perform, direct the
performance of, or waive performance of, any act which could be
done or ordered by the [ALJ]." Id. § 509.4. The ultimate
decision is entirely the Director's and he is free to disregard
not only the ALJ's legal conclusions but also the ALJ's findings
of fact, including findings on credibility. See id.
§ 509.5(b)(7) (". . . only the Director shall have the power to
grant any motion to dismiss the proceeding or to decide any other
motion that results in a final determination of the merits of the
proceeding . . . ."); id. § 509.40 (1993).
In Murchison, the Supreme Court held that a statutory
scheme which gave a state judge power to sit as a grand jury,
compel testimony, charge perjury and try and convict the persons
charged violated due process. Murchison, 349 U.S. at 133-34. In
Withrow, however, the Court stated, "Murchison has not been
understood to stand for the broad rule that the members of an
administrative agency may not investigate the facts, institute
proceedings, and then make the necessary adjudications."
Withrow, 421 U.S. at 53. In Withrow, the combination of
functions under attack permitted Wisconsin's state board for the
examination of physicians to conduct investigative proceedings,
institute charges, hold a hearing and adjudicate the charges.
Id. at 54. The Supreme Court held that this combination of
regulatory powers did not violate due process. It stated:
"[T]here was no more evidence of bias or the risk of bias or
prejudgment than inhered in the very fact that the Board had
investigated and would now adjudicate." Id. (footnote omitted).
The Supreme Court pointed out that the defendant and his counsel
were permitted to be present throughout the investigation,
counsel attended the hearings and counsel was aware of the facts
presented to the board. Id. at 55. Ultimately, the Court
required a showing of actual bias or at least a risk of bias and
held neither was present under the Wisconsin scheme. Id.
In United Retail & Wholesale Employees Teamsters Union
Local No. 115 Pension Plan v. Yahn & McDonnell, Inc., 787 F.2d
128 (3d Cir. 1986), aff'd by an equally divided court, 481 U.S.
735 (1987), we held that the provisions of the Multiemployer
Pension Plan Amendments Act of 1980 governing procedure in
administrative adjudications were unconstitutional because bias
or a likelihood of bias is present when an agency's adjudicator
has a fiduciary or fiscal stake in the decision. Id. at 139-40.
But see Concrete Pipe & Prods. v. Construction Laborers Pension
Trust for S. California, 113 S. Ct. 2264, 2276-78 (1993) (holding
that even where an initial determination is made by a biased
party, due process is met where there are provisions for a
neutral de novo review and adjudication of all factual and legal
issues). Consistent with Withrow's requirement of bias, we held
that the presumption that administrative decisionmakers are
unbiased may be rebutted by a "'showing of conflict of interest
or some other specific reason.'" Id. at 138 (quoting Schweiker
v. McClure, 456 U.S. 188, 195 (1982)).
Seidman contends that Murchison, not Withrow, controls
when the power of decision is vested in one individual instead of
a multi-member board or commission. His argument implies that
bias is inherent in such a process because it permits a single
person to act as prosecutor, investigator and adjudicator as to
the severe sanctions of section 1818(e). We think Withrow
implies the contrary and actual bias or a likelihood of bias must
appear if an otherwise valid administrative sanction is to be
overturned because of a denial of due process. Though in Withrow
a board, not a single person, combined the functions which the
Director of OTS possesses under section 1818(e)(1), we do not
think that distinction is controlling. In Withrow the Court
stated:
The risk of bias or prejudgment in this
sequence of functions has not been considered
to be intolerably high or to raise a
sufficiently great possibility that the
adjudicators would be so psychologically
wedded to their complaints that they would
consciously or unconsciously avoid the
appearance of having erred or changed
position. Indeed, just as there is no
logical inconsistency between a finding of
probable cause and an acquittal in a criminal
proceeding, there is no incompatibility
between the agency filing a complaint based
on probable cause and a subsequent decision,
when all the evidence is in, that there has
been no violation of the statute. . . .
The initial charge or determination of
probable cause and the ultimate adjudication
have different bases and purposes. The fact
that the same agency makes them in tandem and
that they relate to the same issues does not
result in a procedural due process violation.
Clearly, if the initial view of the facts
based on the evidence derived from
nonadversarial processes as a practical or
legal matter foreclosed fair and effective
consideration at a subsequent adversary
hearing leading to the ultimate decision, a
substantial due process question would be
raised. But in our view, that is not this
case.
Withrow, 421 U.S. at 57-58 (footnote omitted).18 Any interest
the Director might have in sustaining his own charges is no
different than the board had in Withrow. Seidman has not shown
bias or a likelihood of bias.19 His due process argument fails.
We therefore turn to the substantive requirements of the statutes
which Bailey and Seidman were charged with violating. We begin
with the charges against Bailey because their consideration will
18
. Congress, however, has expressed concern over the exercise
of the power to remove a banker from office and ban him or her
from the industry:
[T]he power to suspend or remove an officer
or director of a bank or savings and loan
association is an extraordinary power, which
can do great harm to the individual affected
and to his institution and to the financial
system as a whole. It must be strictly
limited and carefully guarded.
Accordingly, the committee adopted
language which . . . imposes the further
requirement that the violation or practice
must be "one involving personal dishonesty on
the part of [the] director or officer."
With this limitation, and with the
opportunity given to seek judicial review of
suspension or removal orders . . . the
committee concluded that the danger of abuse
of the power has been reduced to the minimum.
S. Rep. No. 1482, 89th Cong., 2d Sess. (1966), reprinted in 1966
U.S.C.C.A.N. 3532, 3539; see also 112 Cong. Rec. 24984 (1966)
(remarks of Rep. Patman concerning possible agency abuse of
"unsafe or unsound practice" provision).
19
. Seidman contends various OTS officials may be biased against
him, see Brief of Petitioner Seidman at 11 n.12 (explaining
adversarial history with OTS), but he points to no specific facts
tending to show that Director Ryan, the decisionmaker, was
biased.
require us to analyze some of the same concepts that underlie the
more serious charges against Seidman.
V. The Charges Against Bailey
Section 1818(b)(1) prohibits unsafe and unsound
practices. OTS argues that Bailey's commitment to the Levine
loan conflicts with Crestmont's policy of prohibiting purchase
money loans on the security of real property in which a Crestmont
officer or director had an interest. An officer's violation of a
banking institution's policy, however, is not enough to justify a
cease and desist order under section 1818(b)(1). While the
statute gives the Director considerable discretion, it
nevertheless requires substantial evidence showing that the
violation of policy amounted to an unsafe and unsound practice.
Section 1818(b)(1) provides:
If, in the opinion of the appropriate Federal
Banking Agency . . . any institution-
affiliated party . . . has engaged . . . in
an unsafe or unsound practice in conducting
the business of [a] depository institution,
. . . the agency may issue and serve upon the
. . . party a notice of charges in respect
thereof. . . . [I]f upon the record made at
. . . [a] hearing, the agency shall find that
any . . . unsafe or unsound practice
specified in the notice of charges has been
established, the agency may issue and serve
upon . . . the institution-affiliated party
an order to cease and desist from any such
. . . practice.
12 U.S.C.A. § 1818(b)(1).20
20
. Bailey and Seidman are institution-affiliated parties. See
12 U.S.C.A. § 1813(u)(1) (West 1989).
Because the statute itself does not define an unsafe or
unsound practice, courts have sought help in the legislative
history. See, e.g., Northwest Nat'l Bank v. United States, 917
F.2d 1111, 1115 (8th Cir. 1990); Gulf Federal Sav. & Loan Ass'n
v. Federal Home Loan Bank Bd., 651 F.2d 259, 264 (5th Cir. 1981),
cert. denied, 458 U.S. 1121 (1982). In hearings before Congress
prior to its adoption in the Financial Institutions Supervisory
Act of 1966, Pub. L. No. 89-695 (1966) John Horne, Chairman of
the Federal Home Loan Bank Board ("FLHBB"), OTS's predecessor,
testified:
Generally speaking, an "unsafe or unsound
practice" embraces any action, or lack of
action, which is contrary to generally
accepted standards of prudent operation, the
possible consequences of which, if continued,
would be abnormal risk or loss or damage to
an institution, its shareholders, or the
agencies administering the insurance funds.
Financial Institutions Supervisory Act of 1966: Hearings on
S. 3158 and S. 3695 Before the House Committee on Banking and
Currency, 89th Cong., 2d Sess. 49-50 (memorandum submitted by
John Horne) (citations omitted). Thus, courts have generally
interpreted the phrase "unsafe or unsound practice" as a flexible
concept which gives the administering agency the ability to adapt
to changing business problems and practices in the regulation of
the banking industry. See Groos Nat'l Bank v. Comptroller of the
Currency, 573 F.2d 889, 897 (5th Cir. 1978) ("The phrase 'unsafe
or unsound banking practice' is widely used in the regulatory
statutes and in case law, and one of the purposes of the banking
acts is clearly to commit the progressive definition and
eradication of such practices to the expertise of the appropriate
regulatory agencies.").
Among the specific acts that may constitute an unsafe
and unsound practice are "paying excessive dividends,
disregarding a borrower's ability to repay, careless control of
expenses, excessive advertising, and inadequate liquidity." Gulf
Federal Sav. & Loan Ass'n, 651 F.2d at 264. In Gulf Federal, the
court had to decide whether a bank's breach of contract was an
unsafe or unsound practice that justified an FHLBB order to cease
and desist. Id. at 262. The FHLBB concluded that the bank's
potential liability for breach and possible "loss of public
confidence in the institution" meant the breach was an unsafe and
unsound practice that authorized the agency to order the bank to
perform its contract. Id. at 264. The court disagreed and held
that a breach of contract is not an unsafe or unsound practice
that threatens a bank's financial soundness. Id. The court
expressly rejected FHLBB's conclusion that liability for breach
and consequent loss of public confidence in the bank's
willingness to honor its commitments give rise to an unsafe or
unsound practice that authorized a cease and desist order. Id.
It stated:
Such potential "risks" bear only the most
remote relationship to [the bank's] financial
integrity and the government's insurance
risk. . . . We fail to see how the [FHLBB]
can safeguard [the bank's] finances by making
definite and immediate an injury which is, at
worst, contingent and remote.
Approving intervention under the
[FHLBB's] "loss of public confidence"
rationale would result in open-ended
supervision. . . . The [FHLBB's] rationale
would permit it to decide, not that the
public has lost confidence in [the bank's]
financial soundness, but that the public may
lose confidence in the fairness of the
association's contracts with its customers.
If the [FHLBB] can act to enforce the
public's standard of fairness in interpreting
contracts, the [FHLBB] becomes the monitor of
every activity of the association in its role
of proctor for public opinion. This departs
entirely from the congressional concept of
acting to preserve the financial integrity of
its members.
Id. at 264-65 (footnote omitted).
In Northwest National Bank the court upheld the
Comptroller of the Currency's ("Comptroller's") conclusion that
evidence showing failure to maintain an adequate loan to loss
reserve and inadequate capital, together with deficient loan
administration, established unsafe or unsound banking practices.
Northwest Nat'l Bank, 917 F.2d at 1113-14. The court agreed with
FHLBB that the bank's failure to maintain adequate reserves and
capital was an unsafe or unsound practice. Id. at 1115. The
court defined the phrase "unsafe and unsound banking practices"
in general terms similar to those that appear in the legislative
history: "Unsafe and unsound banking practices are . . .
'conduct deemed contrary to accepted standards of banking
operations which might result in abnormal risk or loss to a
banking institution or shareholder.'" Id. (quoting First Nat'l
Bank of Eden v. Department of the Treasury, 568 F.2d 610, 611 n.2
(8th Cir. 1978) (per curiam)). The court in Northwest National
Bank decided that the poor state of the bank's loan portfolio and
the insufficient level of its capital and reserves permitted an
inference that unsafe lending practices had occurred. Id.
Accordingly, it upheld the Comptroller's finding that the bank
had engaged in unsafe and unsound banking practices. Id. at
1115-16; see also First Nat'l Bank of Eden, 568 F.2d at 611
(upholding Comptroller's issuance of cease and desist order for
unsafe and unsound banking practices when record showed
accumulation of unsafe assets, inadequate internal controls and
auditing procedures, lack of credit information on certain bank
investments in violation of federal regulations and payment of
excessive bonuses to bank officers).
In MCorp Financial, Inc. v. Board of Governors, 900
F.2d 852 (5th Cir. 1990), aff'd in part, rev'd in part on other
grounds, 112 S. Ct. 459 (1991), the Board of Governors of the
Federal Reserve concluded that MCorp's failure to provide capital
to its subsidiary banks was an unsafe or unsound practice and
entered a cease and desist order directing MCorp to transfer
assets to its banking subsidiaries. MCorp Fin., Inc., 900 F.2d
at 862. On review, the court of appeals concluded that Congress
had failed to provide a clear definition of "unsafe or unsound
practice." Id. at 862. Limited by Chevron U.S.A., Inc. v.
Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), but
relying on Gulf Federal Savings & Loan Association, the court
concluded that the Board of Governors' order directing MCorp to
transfer assets to its troubled subsidiaries was itself contrary
to "'generally accepted standard[] of prudent operation.'" Id.
at 863 (quoting Gulf Federal Sav., 651 F.2d at 254). "Such a
transfer of funds would require MCorp to disregard its own
corporation's separate status; it would amount to a wasting of
the holding company's assets in violation of its duty to its
shareholders." Id.
We think at least one common element of an unsafe or
unsound banking practice relating to the health of the
institution can be deduced from these cases and the legislative
history. The imprudent act must pose an abnormal risk to the
financial stability of the banking institution. This is the
standard that the case law and legislative history indicates we
should apply in judging whether an unsafe or unsound practice has
occurred.
With this in mind, we turn to the specific imprudent
acts OTS charges against Bailey. They are:
(a) failing to disclose Seidman's interest in
Fulton Street Associates to the Senior Loan
Committee . . ., (b) approving the Levine
Loan without presenting the loan for review
to Crestmont's Senior Loan Committee . . .,
and (c) approving the Levine Loan even though
Bailey knew that Seidman had an interest in
Fulton Street Associates.
Bailey App. at 20. Only one of them has any potential for
causing Crestmont loss--Bailey's premature issuance of the
commitment letter.21
21
. The first two grounds relied upon by the Director--a failure
to disclose Seidman's interest in FSA to the Senior Loan
Committee and Bailey's approval of the loan without submitting it
When Bailey issued the commitment letter, he made
Crestmont responsible for the Levine loan. He did this despite
the fact that Seidman had not extricated himself from the FSA
partnership or from the UJB guarantee. When Levine accepted the
commitment, Crestmont remained ineligible to make the loan.
Thus, Crestmont became responsible for the loan despite the
potential illegal conflict. We think this act was imprudent.
Although all parties testified that their understanding was that
the loan would not go through absent Seidman's complete
withdrawal, Bailey had nevertheless obligated Crestmont to a loan
it might not be able to make. Obligating one's institution to
transactions that might be illegal is not in accord with
"generally accepted standards of prudent operation." See MCorp
Fin., Inc., 900 F.2d at 862. After Levine accepted the
commitment letter, Crestmont either had to make the loan, breach
the agreement to make it or place the loan with another
institution regardless of Seidman's position. Although, as it
turned out, Crestmont was able to place the loan without incident
or loss, we recognize that a risk was present when Bailey issued
the commitment. Obliging an institution to choose between
(..continued)
to the Senior Loan Committee--were not material to Bailey's act
of approving the loan and issuing a commitment letter. The
record establishes that all the members of the Senior Loan
Committee were fully aware of Seidman's interest and had agreed
that the Levine loan was not to be approved until Seidman fully
disassociated himself from FSA. Moreover, reliance on the
omission of Seidman's interest on the Credit Summary form is
misplaced. Undisputed testimony supported Bailey's claim that
the entry on the form referred to an affiliated party's interest
in the borrower. See supra note 5.
covering fluctuations in the interest rate, engaging in an
illegal transaction or breaching a binding agreement is not
prudent.
Imprudence standing alone, however, is insufficient to
constitute an unsafe or unsound practice. A cease and desist
order is designed to prevent actions that if repeated would carry
a potential for serious loss. Although issuance of even this
single commitment exposed Crestmont to some potential risk of
loss, that potential risk did not begin to approach the abnormal
risk involved in Northwest National Bank, where the bank was
exposed to a serious threat to financial stability by its general
failure to monitor its loans adequately and to maintain adequate
reserves and capital. The potential loss to which Bailey
subjected Crestmont is rather like that present in Gulf Federal.
Contingent, remote harms that could ultimately result in "minor
financial loss[es]" to the institution are insufficient to pose
the danger that warrants cease and desist proceedings. Gulf Fed.
Sav. & Loan Ass'n, 651 F.2d at 264. Though it is not
particularly onerous to require a loan officer to satisfy himself
that the institution may legally make a loan before the
commitment is issued, we cannot conclude that the commitment
Bailey authorized posed such an abnormal risk that Crestmont's
financial stability was threatened.
We hold that Bailey's approval of the Levine loan and
the commitment he issued on behalf of Crestmont in violation of
its policies, while imprudent, did not pose an abnormal risk to
Crestmont's financial stability and therefore was not an unsafe
or unsound practice within the meaning of section 1818(b).
Accordingly, we will grant Bailey's petition for review and
vacate the part of the Director's order pertaining to Bailey.
VI. The Charges Against Seidman
Courts have recognized that the power to remove a bank
officer is an extraordinary power that should be carefully
exercised in strict accordance with the law. Cf. Manges v. Camp,
474 F.2d 97, 100-01 (5th Cir. 1973). Accordingly, we might
expect that the statute under which OTS sought the far more
serious sanction of Seidman's removal from office and his
permanent prohibition from participation in the thrift industry,
12 U.S.C.A. § 1818(e), requires elements additional to those that
justify the lesser sanction of a cease and desist order. We are
not disappointed. By requiring a three part conjunctive test in
section 1818(e)(1), Congress has imposed significant additional
conditions before a banker can be deprived of his office and
permanently barred from banking. Thus, before an agency
regulating a banking institution can impose this ultimate
administrative sanction on any banker, it must show by
substantial evidence that: (1) the banker has committed an
unlawful act; (2) the act has either an adverse effect on the
regulated institution or its depositors or confers a benefit on
the actor and (3) the act is accompanied by a culpable state of
mind.22 See Oberstar v. FDIC, 987 F.2d 494, 500 (8th Cir. 1993).
22
. The full text of section 1818(e)(1) is:
(..continued)
(1) . . . Whenever the appropriate Federal
banking agency determines that--
(A) any institution-affiliated party
has, directly or indirectly--
(i) violated--
(I) any law or
regulation; . . .
(ii) engaged or participated in any
unsafe or unsound practice in
connection with any insured
depository institution or business
institution; or
(iii) committed or engaged in any
act, omission, or practice which
constitutes a breach of such
party's fiduciary duty;
(B) by reason of the violation,
practice, or breach described in any
clause of subparagraph (A)--
(i) such insured depository
institution or business institution
has suffered or will probably
suffer financial loss or other
damage;
(ii) the interest of the insured
depository institution's depositors
have been or could be prejudiced;
or
(iii) such party has received
financial gain or other benefit by
reason of such violation, practice,
or breach; and
(C) such violation, practice, or
breach--
(i) involves personal dishonesty on
the part of such party; or
The acts come in three varieties. The effects also divide into
three subclasses, but there are only two kinds of culpable mental
states. Under section 1818(e)(1), at least one of the prohibited
acts, accompanied by at least one of the three prohibited effects
and at least one of the two specified culpable states of mind,
must be established by substantial evidence on the whole record
before the regulatory agency can properly remove a person from
office and ban him from the banking or thrift industries. Id.
The Director concluded five separate charges warranting
the sanction of removal and prohibition were proven against
Seidman: (1) acting to gain release from the UJB loan; (2)
failing to notify Crestmont's Senior Loan committee of his
interest in FSA and the Boonton project; (3) destroying material
information during the investigation; (4) giving misleading
testimony in a deposition; and (5) instructing a material witness
to withhold evidence. We will examine the record as to each to
see if the evidence relevant to each meets the statutory
requirements we have just described.
A. Seidman's Release From His Guarantee on the UJB Loan
1. Did Seidman Violate "Any Law or Regulation"
in Seeking the Release?
(..continued)
(ii) demonstrates willful or
continuing disregard by such party
for the safety or soundness of such
insured depository institution or
business institution.
12 U.S.C.A. § 1818(e)(1) (West 1989).
On the first charge, we begin with the particular acts
described in section 1818(e)(1)(A). If Seidman's effort to
secure a release from the UJB guarantee is not among the three
kinds of acts section 1818(e)(1)(A) prohibits, we need not
consider any of the particular effects section 1818(e)(1)(B)
specifies or either of the culpable states of mind section
1818(e)(1)(C) describes because the elements of act, effect and
state of mind are conjunctive. Oberstar, 987 F.2d at 500. Each
must be established by substantial evidence before the Director
may issue an order of removal and prohibition under the statute.
OTS contends Seidman acted in violation of "law or
regulation" under section 1818(e)(1)(A)(i)(I) when he and Risko
took steps to secure Seidman's release from his guaranty of FSA's
indebtedness to UJB. The ALJ concluded that Seidman violated 12
C.F.R. § 563.43 in securing his release from the UJB guarantee.23
Section 563.43 made it improper for a savings association to
"[m]ake any loan to . . . any third party on the security of real
property purchased from any affiliated person of such
association, unless the property was a single-family dwelling
owned and occupied by the affiliated person as his or her
principal residence." 12 C.F.R. § 563.43(c)(1) (1991) (since
repealed).24 Seidman argues section 563.43(c)(1) does not apply
because it expressly requires consummation of a loan, and
23
. In his opinion the Director does not expressly find a
violation of section 1818(e)(1)(A)(i)(I) on this ground, but his
acceptance of the ALJ's recommendation implies he did.
24
. See supra note 8.
Crestmont never granted any prohibited loan. We agree with
Seidman.25
The Director also held, however, that Seidman violated
12 C.F.R. § 571.7, and that violation met section
1818(e)(1)(A)(i)(I)'s requirement of a prohibited act because it
was a violation of a "regulation." Seidman argues that section
571.7 is a policy statement, not a regulation, and therefore any
violation of it did not meet section 1818(e)(1)(A)(i)(I)'s
requirement. Section 571.7 is expressly labeled a "Statement of
Policy" and reads, in relevant part:
[E]ach director, officer, or other affiliated
person of a savings association has a
fundamental duty to avoid placing himself or
herself in a position which creates, or which
leads to or could lead to, a conflict of
interest or appearance of a conflict of
interest. . . .
12 C.F.R. § 571.7(b) (1993). OTS's predecessor, FHLBB,
consistently drew a distinction between "general statements of
policy" and substantive regulations. See 12 C.F.R. §§ 508.11,
508.12, 508.14 (1989).26 The enactment of FIRREA does not remove
this distinction because the APA, 5 U.S.C.A. § 553(b)(A) (West
1977), requires more exacting procedures of notice and comment
for the promulgation of rules that have the force of law than it
25
. Indeed, in his brief and argument on Seidman's petition for
review, the Director appears to place little, if any, reliance on
this regulation.
26
. After enactment of FIRREA, OTS amended the old FHLBB
regulations. The version applicable to Seidman's case, however,
is the FHLBB version.
does for statements of policy. A regulated person's failure to
follow the guidance of a policy statement is not sanctionable
under section 1818(e)(1)(A)(i)(I) unless it is also shown that
the failure to follow the policy violated some specific statute,
rule or regulation that has the force of law:
[C]ourts are in general agreement that
interpretive rules simply state what the
administrative agency thinks the statute
means, and only "remind" affected parties of
existing duties. In contrast, a substantive
or legislative rule, pursuant to properly
delegated authority, has the force of law,
and creates new law or imposes new rights or
duties.
Jerri's Ceramic Arts, Inc. v. Consumer Prod. Safety Comm., 874
F.2d 205, 207 (4th Cir. 1989) (citations omitted); see also FLRA
v. Dep't of the Navy, 966 F.2d 747, 762 (3d Cir. 1992) (in banc);
Northwest Nat'l Bank, 917 F.2d at 1117. The United States Court
of Appeals for the District of Columbia has observed:
A general statement of policy . . . does not
establish a binding norm. It is not finally
determinative of the issues or rights to
which it is addressed. When the agency
applies the policy in a particular situation,
it must be prepared to defend it, and cannot
claim that the matter is foreclosed by the
prior policy statement.
Guardian Federal Sav. & Loan Ass'n v. FSLIC, 589 F.2d 658, 666
(D.C. Cir. 1978) (internal quotation and citation omitted).
FHLBB issued section 571.7 as a caution against the
risk that is added when an affiliated person like Seidman has a
personal stake in a business transaction his savings institution
is considering, a risk inherent in self-dealing. See generally
First Nat'l Bank v. Smith, 610 F.2d 1258, 1265 (5th Cir. 1980).
The FHLBB first announced section 571.7 in 1968 as a policy
without giving interested persons any opportunity for comment.
See 33 Fed. Reg. 16,382 (1968) (codified at 12 C.F.R. § 571.1).
In 1975, the FHLBB published a request for comment on a number of
conflict of interest proposals that had been adopted on
November 19, 1970. It included section 571.7. See 35 Fed. Reg.
12,216, 18,038 (1975). Nevertheless, section 571.7 continued to
appear in a section of C.F.R. entitled "Statements of Policy."
Accordingly, Seidman argues it is wrong to take away a person's
livelihood under a provision promulgated, codified and described
as a policy statement rather than as a rule or regulation having
the force of law.
In Northwest National Bank the bank was charged with
violating 12 C.F.R. § 7.3025 (1987). Northwest Nat'l Bank, 917
F.2d at 1116. The court concluded that the rule was legislative
in nature because it "clearly purports to create new substantive
requirements." Id. at 1117. It considered several factors,
including the text of the rule and the procedure the agency had
used to promulgate it, in deciding whether it was "interpretive"
or "legislative" in nature. Id. at 1116-17. The rule's
classification as "interpretive" was an important but not
dispositive factor. Id.
The legislative rule the court in Northwest National
Bank considered is materially different from section 571.7, which
imposes no specific substantive requirements. Moreover,
Northwest National Bank's failure to follow 12 C.F.R. § 7.3025
plainly led to a violation of the statute itself. Id. at 1116
("The Comptroller found Northwest in violation of [the
regulation] and thereby in violation of 12 U.S.C. § 29.").
In addition, the text of section 571.7 does not support
OTS's position. Section 571.7 has not changed since it was first
published as a policy statement. OTS has since promulgated
regulations with the force of law prohibiting specific conflicts
of interest. They would be redundant if section 571.7's general
statement independently has the force of law. See, e.g., 12
C.F.R. §§ 563.40, 563.41, 563.43 (1993).
Considering the Northwest National Bank factors
together, we hold section 571.1(b), whose text, title and
codification as a policy statement have never changed, is just
that--a policy statement, not a regulation.27 Congress and the
agencies that regulate lending institutions have specifically
prohibited particular acts as conflicts of interest in statutes,
rules and regulations that plainly do have the force of law.28
Congress and the regulators have shown that they know how to
27
. We need not and do not decide that FIRREA does not give OTS
the authority to expand the duty of loyalty officers of banking
corporations OTS regulates owe their institutions from actual
conflicts of interest to appearances of conflict, but we do hold
that if it wishes to assert such authority its intent to do so
must be more clearly expressed than it is in section 571.7.
28
. Nothing about policy statements in general nor section
571(b) in particular would indicate to persons who might be
affected by them that violation of the policy against apparent
conflicts could subject them to an order banning them from the
trade or profession they work in.
define specific conduct that gives rise to an illegal conflict of
interest. We think the sweeping language of section 571.7(b)
indicates it is no more than a statement of policy that a
director of a banking institution, like Seidman, should use as a
guide for personal conduct, not a rule whose violation triggers
the severe penalty section 1818(e) imposes. Accordingly, we
reject the Director's conclusion that section 571.7(b)'s
"Statement of Policy" is a "regulation or law" within the meaning
of section 1818(e)(1)(A)(i)(I).
2. Did Seidman Engage in an Unsafe or Unsound
Practice by Seeking the Release?
Because Seidman did not act in violation of a law or
regulation as required by section 1818(e)(1)(A)(i)(I) when he
sought the release, we next consider whether by doing so he
engaged in an unsafe or unsound practice under section
1818(e)(1)(A)(ii). The Director summarily concluded that
Seidman's conduct in seeking a release from the UJB guarantee
without informing the Board or the Senior Loan Committee of his
interest in FSA, the second charge against him, constituted an
unsafe or unsound practice. OTS urges us to affirm this holding.
As stated previously,
an "unsafe or unsound practice" embraces any
action, or lack of action, which is contrary
to generally accepted standards of prudent
operation, the possible consequences of
which, if continued, would be abnormal risk
of loss or damage to an institution, its
shareholders, or the agencies administering
the insurance funds.
MCorp Fin., Inc., 900 F.2d at 862 (quotation omitted). An unsafe
or unsound practice has two components: (1) an imprudent act (2)
that places an abnormal risk of financial loss or damage on a
banking institution. See supra Part V. OTS contends that
Seidman's conduct in seeking a release from his UJB guarantee and
failing to inform the Board or the Senior Loan Committee of his
interest meets these requirements.
OTS and the Director equate the imprudence component of
an unsafe or unsound practice with a breach of the fiduciary duty
of due care, once called the "prudent man rule" and now more
often described as the "business judgment" rule. See Revised
Model Business Corporation Act ("RMBCA") § 8.30 comment (1992).
In its brief, OTS asserts "[t]he prudent operation of Crestmont
certainly requires that its directors and officers comply with
OTS regulations concerning conflicts of interest as well as
Crestmont's own policy governing conflicts." Appellee Brief at
31.29
While the same act may be both an unsafe or unsound
practice under section 1818(e)(1)(A)(ii) and a breach of a
fiduciary duty under section 1818(e)(1)(A)(iii), we hesitate to
make one a proxy for the other.30 If OTS seeks to prove a
29
. OTS also relies on Hoffman v. FDIC, 912 F.2d 1172 (9th Cir.
1990), but that case dealt with self-dealing, a breach of the
fiduciary duty of loyalty, not the fiduciary duty of care.
30
. Congress obviously thought the concepts were distinct enough
to require separate specification in section 1818(e)(1)(A).
Here, we need not consider the details of any overlap between
acts that are unsafe or unsound practices and those that are
breaches of fiduciary duty because we apply different tests to
determine which category applies to any particular act. It is
violation of section 1818(e)(1)(A)(ii), it must satisfy the
definition of an unsafe or unsound practice. Conversely, if OTS
wishes to prove a violation of section 1818(e)(1)(A)(iii), it
must do so under the standards that define a fiduciary's duty.
Our present inquiry is only whether the first charge against
Seidman concerning his successful efforts to obtain a release
from his guarantee of FSA's obligations to UJB was an unsafe and
unsound practice. So considered, we conclude Seidman's attempt
to secure a release was not an unsafe and unsound banking
practice with respect to Crestmont. OTS not only placed Seidman
in the position of selecting between his business life and his
banking life but also compelled him to deprive Crestmont of
potentially desirable loans. OTS told Seidman he had to
relinquish his outside interests and disengage himself from the
obligations he had incurred while a partner in FSA and then, when
he did so, charged him with an unsafe and unsound practice.
Seidman's successful effort to secure a release from his
guarantee was potentially beneficial to Crestmont by giving it an
added source of desirable loans. The record does not support a
conclusion that Seidman's attempts to extricate himself from the
UJB guarantee were contrary to accepted banking practices for
persons acting on behalf of Crestmont.
(..continued)
important, however, in deciding cases and in imposing sanctions
to separately compare the act under consideration with all the
elements of each category. The Director's failure to do so is a
source of many of the problems and much of the confusion in this
case.
Even if we were to conclude that Seidman behaved
imprudently in seeking the release, OTS would still have to show
that his actions created an abnormal risk of financial loss for
Crestmont. See supra Part V. Unable to identify any specific
harm to Crestmont, OTS argues, "if directors are free to make
choices for the institutions they control based on the personal
benefit that would result from their choice there would be an
inherent risk that the interests of the depositors and the
institution would take a back seat to the personal interest of
the director." Appellee App. at 31. OTS again fails to
recognize any distinction between the separate requirements of
section 1818(e). Its argument conflates the act of engaging in
an unsafe practice with the prohibited effect of personal gain.
Compare 12 U.S.C.A. § 1818(e)(1)(A)(ii) with id.
§ 1818(e)(1)(B)(iii). This record does not show that Seidman's
attempt to obtain relief from his guarantee and free Crestmont
from OTS's prohibition against end-user financing on FSA's
Boonton development created an abnormal risk of loss or damage to
Crestmont. We therefore turn to section 1818(e)(1)(A)(iii).
3. Did Seidman Violate Any Fiduciary Duty
In Seeking the Release?
In a final attempt to demonstrate that Seidman's
release from the UJB guarantee was an "act" under section
1818(e)(1)(A) and therefore one of the three elements needed to
justify a removal and prohibition order, OTS argues that the
Director correctly concluded that Seidman's efforts to secure his
release constituted self-dealing and violated his fiduciary duty
of loyalty to Crestmont under section 1818(e)(1)(A)(iii).31 As a
member of the board and an officer of Crestmont, Seidman did owe
a duty of loyalty to Crestmont. Section 8.42 of the RMBCA
states:
(a) An officer with discretionary
authority shall discharge his duties under
that authority:
(1) in good faith;
(2) with the care an ordinarily
prudent person in a like position would
exercise under similar circumstances;
and
(3) in a manner he reasonably
believes to be in the best interests of
the corporation.
RMBCA § 8.42 (1992). Common law also imposes on a director a
duty of loyalty to the corporation served. See Fleishacker v.
Blum, 109 F.2d 543, 547 (9th Cir.), cert. denied, 311 U.S. 665
(1940). The duty of loyalty includes a duty to avoid conflicts
of interest. See Pepper v. Litton, 308 U.S. 295, 306, 310-11
(1939).
In In re Bush, OTS AP 91-16, 1991 OTS DD LEXIS 2
(April 18, 1991), the Director discussed both a director's duty
31
. The Director also concluded that Seidman breached his duty
of candor when he failed to inform the Senior Loan Committee or
the Crestmont Board of his interest in FSA before the Levine loan
commitment. This argument is addressed infra at Part VI.B. The
Director did not conclude either of these acts violated Seidman's
fiduciary duty of care, only the duty of loyalty.
of loyalty and the initial inquiry of whether a director has a
conflicting interest in a transaction:
A fundamental component of the fiduciary
duties of directors in every jurisdiction,
however, is that directors owe a duty of
loyalty to the institution they serve. This
duty prohibits directors from engaging in
transactions that involve conflicts of
interest with the institution. . . .
* * *
The threshold inquiry in assessing
whether a director violated his duty of
loyalty is whether the director has a
conflicting interest in the transaction.
Directors are considered to be "interested"
if they either "appear on both sides of a
transaction []or expect to derive any
personal financial benefit from it in the
sense of self-dealing, as opposed to a
benefit which devolves upon the corporation
or all stockholders generally."
In re Bush, OTS AP 91-16 at 11, 15-16, 1991 OTS DD LEXIS at *18,
*21 (footnote and citations omitted). The RMBCA defines a
director's conflicting interest transaction as "a transaction
effected or proposed to be effected by the corporation . . .
respecting which a director of the corporation has a conflicting
interest." RMBCA § 8.60(2) (1992). Perhaps because this
definition tautologically defines the defined in terms of itself,
the Commissioners, in commentary, observed that "[t]o constitute
a director's conflicting interest transaction, there must first
be a transaction by the corporation, its subsidiary, or
controlled entity in which the director has a financial
interest." RMBCA § 8.6 comment 2(1) (emphasis added).
As Seidman points out, Crestmont never granted any loan
secured by property whose sale could reduce Seidman's obligation
on his guarantee or UJB's exposure on its loan to FSA, nor did
Seidman ever promise anyone that Crestmont would make such loans
in exchange for his release. OTS clearly suspected that Seidman
promised UJB Crestmont's favorable consideration for end-user
loans on FSA properties in return for UJB's release. Suspicion
is not enough, however, and OTS's suspicion that Seidman had
promised he would use his position at Crestmont to insure end-
user financing on the FSA project is not supported by substantial
evidence. Risko's letter does not show any such quid pro quo in
either of its versions. Indeed, if we accept the Director's
finding that Seidman prepared the original draft, the version of
the evidence most favorable to OTS, it appears that Risko took
pains to make it clear to UJB that no quid pro quo was promised
in the version Risko finally sent to UJB without any objection
from Seidman. The evidence on this record is just as consistent
with a finding that UJB released Seidman because Crestmont was a
good prospect for the end-user financing it needed to reduce its
own exposure on a worrisome project as it is with the conclusion
that UJB granted the release in exchange for Seidman's unlawful
promise to use his influence to obtain Crestmont's approval of
loans that would reduce its exposure on FSA's Boonton project and
to favor end-user loans on the Levine property or any other
property in the Boonton project.32
32
. Additional evidence which supports a conclusion that UJB's
recognition that Crestmont could not lawfully supply end-user
OTS's position puts Seidman in a "Catch-22." If he
remained liable on his guarantee to UJB, Crestmont would be
unable to consider potentially profitable end-user loans on the
Boonton project; but when Seidman acted to secure a release from
the guarantee, he subjected himself to removal from Crestmont's
Board. The only way Seidman could avoid the conflict of interest
that OTS saw in his relation to FSA was to extricate himself from
the FSA partnership and all the entanglements it entailed,
including the guarantee. This record shows that this is what he
did. Moreover, when we consider the whole record, as we must, we
see substantial evidence that Seidman did not act as he did to
benefit himself at Crestmont's expense, but rather because he
wished to eliminate outside interests that could have a potential
for conflict with Crestmont's interests.33 Corporate law imposes
(..continued)
loans on the Boonton project unless UJB released Seidman's
guarantee motivated its approval of the release. It shows that
the release was good business for UJB, Seidman and Crestmont
because it increased the pool of potential lenders in a tight
market and gave Crestmont an opportunity to acquire good loans on
their merits.
33
. The situation would be entirely different if OTS had shown
that Seidman had committed Crestmont to underwrite risky loans in
exchange for his personal release, but there is no evidence that
the Levine loan or any other end-user financing Crestmont
considered was more risky than any other loan Crestmont might
grant, nor is there evidence that Seidman promised to look
favorably on any Boonton loan. Until OTS decided loans could not
be made on property developed with loans which a thrift director
has guaranteed, Seidman was seeking only to withdraw from FSA as
a partner against a promise of indemnity from the partner who was
acquiring Seidman's interest. This record shows Seidman was
trying to meet OTS regulations rather than trying secretly to
seek a release from his own potential liability at Crestmont's
expense.
a duty of loyalty not because the conflict appears improper to a
third party but to "'prevent[] a conflict of opposing interest in
the minds of fiduciaries, whose duty it is to act solely for the
benefit of their beneficiaries." FSLIC v. Molinaro, 889 F.2d
899, 904 (9th Cir. 1989) (quoting Restatement of Restitution
§ 197 comment c (1937)) (emphasis added). This record shows
Seidman acted to avoid that conflict, not because of it.
We do not think every appearance of wrongdoing
justifies the sanction of removal and prohibition. Rather, we
believe such a drastic sanction should require some evidence of
actual misconduct or evidence from which a reasonable person
acquainted with the facts could conclude there was misconduct.
Here, Crestmont never made any loan to an end-user on the FSA
project, and Seidman told Bailey to stop considering any loans in
which Seidman had an interest before OTS began its investigation.
Seidman did so as soon as he realized he could not persuade OTS
that his guarantee did not matter. Seidman's earlier attempts to
persuade OTS to the contrary were not improper. Viewed as a
whole, we think this record contains substantial evidence that
Seidman acted to further the interests of Crestmont, not just his
own, when he attempted to obtain a release from his guarantee,
and therefore his actions did not constitute a breach of the
fiduciary duty of loyalty contained in section
1818(e)(1)(A)(iii).
In summary, we hold Seidman's conduct in seeking a
release from the UJB guarantee did not violate any "law or
regulation" under section 1818(e)(1)(A)(i)(I) or constitute an
"unsafe or unsound" practice under section 1818(e)(1)(A)(ii) or a
breach of fiduciary duty under section 1818(e)(1)(A)(iii). To
the extent the Director relied on Seidman's conduct of seeking a
release from his guarantee of FSA's indebtedness to UJB to
support the order of removal and prohibition, the Director erred.
B. Seidman's Failure to Remind Crestmont's Board
or Senior Loan Committee of His Interest in FSA
Next, we consider whether the Director erred in
concluding that Seidman's failure to remind Crestmont's Board or
Senior Loan Committee of his interest in FSA constitutes an act
under section 1818(e)(1)(A) that could support an order of
removal and prohibition. The record shows Seidman had already
made his interest in the Boonton project known through disclosure
on the conflict forms he filed with Crestmont. The Director,
however, thought Seidman had to bring his interest in FSA to the
specific attention of Crestmont's Board or Senior Loan Committee
before it began processing the proposed loan to Levine. Neither
OTS nor the Director points to any general regulation or
Crestmont policy that imposes any duty on Seidman more specific
than his general duty to disclose his interest in FSA to
Crestmont.34 OTS does not cite any law or regulation requiring
34
. A fiduciary's duty of candor is encompassed within the duty
of loyalty. The duty of candor requires "corporate fiduciaries
[to] 'disclose all material information relevant to corporate
decisions from which they may derive a personal benefit.'" In re
Bush, OTS AP 91-16 at 19, 1991 OTS DD LEXIS at 19 (quoting Mills
Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del.
1989)).
Seidman to remind the Board or Senior Loan Committee of what he
had already disclosed to them, nor does OTS argue Seidman's
failure to repeat his disclosure constitutes an unsafe or unsound
practice. Even if the Director were technically correct in
finding that Seidman breached a fiduciary duty of candor when he
failed specifically to remind the Senior Loan Committee of his
interest in FSA each time the Levine loan came before the
Committee, that breach would not be material because the record
plainly shows that all three of the members of the Senior Loan
Committee, Bailey, Seidman and arguably McClellan,35 were fully
aware of Seidman's interest in FSA.36 Therefore, the Director
erred when he decided Seidman breached his fiduciary duty of
candor in not specifically reminding the Board or the Senior Loan
35
. Before the ALJ, McClellan testified that as President of
Crestmont he would review conflict of interest disclosure forms
filed by relevant Crestmont personnel. It is further undisputed
that Seidman had disclosed his FSA interest on the most recent
two conflict of interest forms filed prior to the Levine loan.
Thus, McClellan had imputed knowledge of Seidman's interest in
FSA.
36
. There is another reason why a renewed specific disclosure to
the Senior Loan Committee was not material to Crestmont's
decision to grant or deny the Levine loan. Crestmont's internal
regulations do not require the Senior Loan Committee to review
applications for loans of less than $500,000 unless they are for
loans to "affiliated parties." The Levine application did not
exceed $500,000, and the evidence on this record indicates that
Crestmont would not have granted the loan if Seidman had not
completed his withdrawal from FSA. Crestmont's President
McClellan testified that it was the understanding in other
similar situations that Seidman would withdraw his interest
before Crestmont made any loans. See Bailey App. at 191. While
Bailey should not have issued a commitment letter before Seidman
completed his formal withdrawal from FSA, there is no evidence
showing that Seidman anticipated Bailey's premature action.
Committee about his interest in FSA, and this second charge
cannot be grounds for a removal and prohibition order under
section 1818(e)(1)(A)(iii).
C. Seidman's Attempt to Hinder the OTS Investigation
Finally, we must consider whether Seidman's actions
during the pendency of the OTS investigation support removal and
prohibition. The Director found Seidman lied in his deposition
of September 13, 1991, destroyed material evidence and encouraged
Risko to testify falsely about events surrounding the draft of
Risko's letter to UJB. The Director stated:
The OTS has a right to accurate and
reliable information in the course of its
examinations and investigations. Seidman's
lack of integrity, evidenced by his
misleading testimony, his attempts to destroy
evidence and his attempts to solicit false
and misleading testimony, poses as a natural
consequence an abnormal risk of loss or
damage to the institution, the very essence
of an unsafe or unsound practice. The
Director concludes that Seidman committed an
unsafe and unsound practice by these attempts
to obstruct the OTS investigation.
. . .
Seidman benefitted from his efforts by
depriving the OTS of reliable and material
evidence, thwarting the OTS enforcement
action and hampering the prompt resolution of
the self-dealing charges. Seidman
demonstrated personal dishonesty by giving
misleading testimony and omitting material
facts during an OTS investigation and
examination; destroying evidence; and
soliciting another witness to give false
testimony and destroy material evidence.
Seidman App. at 119-20. While the Director did not directly
relate his conclusions to the statutory requirements, it is clear
he concluded that Seidman's conduct during the investigation
constituted an unsafe or unsound practice under section
1818(e)(1)(A)(ii)37 and that Seidman satisfied the effect
component of section 1818(e)(1)(B)(iii) by receiving a personal
benefit.
We agree with the Director that hindering an OTS
investigation is an unsafe or unsound practice as that term has
come to be used in the banking industry. Section 1818(e)(1)(A)
can be satisfied by evidence showing the conduct with which an
affiliated person like Seidman is charged falls within section
1818(e)(1)(A)(ii)'s proscription of unsafe or unsound practices
because it "is contrary to generally accepted standards of
prudent operation" and "the possible consequences of [the act],
if continued, would be abnormal risk or loss or damage to . . .
the agenc[y] administering the insurance fund[]." Gulf Federal
Sav. & Loan Ass'n, 651 F.2d at 264 (quotation omitted); see also
supra Part V. We believe an attempt to obstruct an OTS
investigation is such an act. OTS is statutorily charged with
preserving the financial integrity of the thrift system. See 12
U.S.C.A. § 1462(a) (West Supp. 1994); id. § 1463(a). To meet
that responsibility, OTS has the power to investigate. See 12
C.F.R. § 509.16 (1993). Where a party attempts to induce another
37
. The Director also concluded that Seidman's conduct violated
a law or regulation under section 1818(e)(1)(A)(i)(I). We do not
question that conclusion.
to withhold material information from the agency, the agency
becomes unable to fulfill its regulatory function. Such
behavior, if continued, strikes at the heart of the regulatory
function. Seidman's attempt to obstruct the investigation, if
continued, would pose an abnormal risk of damage to OTS.
Accordingly, we hold that an attempt to hinder an OTS
investigation constitutes an "unsafe or unsound practice," thus
satisfying the act requirement of section 1818(e)(1)(A).38
38
. We believe that Seidman's act of soliciting false testimony
was an attempt on Seidman's part to hinder the OTS investigation.
We also believe his attempt to destroy material evidence could be
viewed as hindering an OTS investigation, although, in this
respect, the Director failed to state his reasons for
disregarding the ALJ's credibility finding that Seidman acted
without intent to hinder the investigation. See infra note 37.
In addition, we note our disagreement with the Director's
conclusion that Seidman gave deposition testimony that was
"intentionally misleading as to material facts concerning
Seidman's knowledge of the letter's contents and omitted material
facts concerning the drafting of the letter." Seidman App. at 119
(footnote omitted). The transcript of Seidman's deposition
reveals that the OTS investigator never directly questioned
Seidman about the draft of the letter OTS charged him with
concealing. Instead, the investigator asked only whether Risko
and he had discussed OTS's investigation of the circumstances
surrounding Seidman's release from the UJB guarantee. Seidman
truthfully admitted that he had discussed the topic with Risko
"two or three times." Seidman App. at 46. The investigator
failed to ask Seidman about the initial draft of Risko's letter
in support of the release, who had prepared the letter or what it
meant, even though OTS not only knew about the early draft but
had secretly obtained a copy of it.
Likewise, we do not think Seidman's failure to volunteer
information about the draft of the Risko letter can, in and of
itself, show an intent necessary to satisfy the culpable states
of mind section 1818(e)(1)(C) requires. To satisfy section
1818(e)(1)(C) it must be shown that Seidman's act was either
personally dishonest or in willful disregard of the safety of
Crestmont. See 12 U.S.C.A. § 1818(e)(1)(C). OTS never directly
asked Seidman the questions it now charges him with evading. A
deponent's failure to volunteer information that the deponent
Our conclusion that Seidman's attempts to obstruct the
OTS investigation constitute a prohibited act does not end our
section 1818(e) inquiry. The act must still have a prohibited
effect with a culpable intent before the severe sanction of a
removal and prohibition order may issue. See Oberstar, 987 F.2d
at 502. Section 1818(e)(1)(C)'s culpability element of personal
dishonesty is shown by the undisputed evidence that Seidman asked
Risko to forget about the draft of the letter to UJB.39 The
requirements of section 1818(e)(1)(B) remain.
(..continued)
might wish to conceal but is not directly asked about does not
show an intent to deceive. Accordingly, we believe Seidman's
deposition testimony is, by itself, insufficient to show either
of the states of mind section 1818(e)(1)(C) requires. Cf.
Bronston v. United States, 409 U.S. 352, 362 (1973) ("Precise
questioning is imperative as a predicate for the offense of
perjury. It may well be that petitioner's answers were not
guileless but were instead shrewdly calculated to evade.
Nevertheless, . . . any special problems arising from the
literally true but unresponsive answer are to be remedied through
the 'questioner's acuity' and not by a federal perjury
prosecution.").
39
. We note, however, that the Director's determination that
Seidman intentionally destroyed the draft letter to thwart the
investigation may not be adequately supported. The Director
gives no reason for his decision to disregard the ALJ's finding
that Seidman's testimony that he acted in anger and frustration
without intent to destroy material evidence was credible.
Seidman admits that he ripped up the initial draft of Risko's
letter to UJB but says he acted in the heat of passion without an
intent to conceal any improper conduct. The ALJ who heard
Seidman made a specific finding that this testimony was credible.
See Seidman App. at 49 ("The finding of fact is . . . while
Seidman destroyed the documents intentionally, it was done in a
fit of anger and not for the purpose of destroying material and
relevant evidence."). The Director, without explanation,
reversed this finding and concluded instead that Seidman's act of
tearing up the draft was still another basis for the order of
removal and prohibition.
The Director concluded that section 1818(e)(1)(B)'s
requirement of an untoward or prohibited effect was satisfied
because Seidman had benefitted from the release of his guarantee
of FSA's loan to UJB. We conclude, however, that none of
Seidman's attempts to obstruct the OTS investigation resulted in
any benefit to Seidman, the sole basis the Director relied on to
satisfy section 1818(e)(1)(B)'s condition of an untoward or
prohibited effect. The Director made no other finding concerning
any effect of Seidman's conduct that could satisfy section
1818(e)(1)(B) other than his conclusion that "Seidman benefitted
from his [attempt to obstruct the OTS investigation] by depriving
OTS of reliable and material evidence, thwarting OTS enforcement
action and hampering the prompt resolution of the self-dealing
charges." Seidman App. at 120. Section 1818(e)(1)(B)(iii)
proscribes an act from which the actor "has received financial
gain or other benefit by reason of such violation, practice, or
breach . . . ." 12 U.S.C.A. § 1818(e)(1)(B)(iii) (emphasis
added).
Seidman's attempt to solicit false testimony from Risko
was rebuffed; therefore, Seidman received no benefit from his
request that Risko forget about the draft letter. Similarly,
(..continued)
The Director's finding, contrary to the finding of the ALJ,
that Seidman acted with one of the culpable states of mind the
statute specifies when he attempted to destroy evidence of the
draft is not explained in the record now before us. We recognize
that the Director owes no deference to the findings of an ALJ,
see supra, typescript at 28-29, but if he rejects an ALJ's
finding on a witness's credibility we think it would be better
practice for him to state his reasons for disregarding it. See
Citizens State Bank v. FDIC, 718 F.2d 1440, 1444 (9th Cir. 1983).
Seidman's destruction of a draft letter that OTS already
possessed and his unwillingness to volunteer information in his
deposition failed to thwart the OTS investigation.
Subsection (iii) requires a person who has committed an
act that supports removal under section 1818(e)(1)(A) to have
received an actual benefit from the act. In that respect, it is
unmistakenly different from 12 U.S.C.A. § 1818(e)(1)(B)(ii),
which uses the subjunctive "could be prejudiced" to describe a
potential effect on the depositors as one of the untoward results
that are a necessary condition of an order removing an affiliated
person like Seidman from his office and banning him from banking
forever. Section 1818(e)(1)(B)(iii)'s text is clear as to mode
and tense, and we are bound by its text unless the result of
following the text would be demonstrably at odds with Congress's
intent. See, e.g., Griffin v. Oceanic Contractors, Inc., 458
U.S. 564, 571 (1982); Dutton v. Wolpoff and Abamson, 5 F.3d 649,
654 (3d Cir. 1993). The statute does not permit removal and
prohibition for acts which fail to confer a benefit on the actor.
It requires a benefit that has been received. An unsuccessful
attempt to secure a benefit is not one of the effects that can
support removal and prohibition under section 1818(e)(1).
Seidman has not received any actual benefit from his alleged
attempts to obstruct the OTS investigation. Therefore, we hold
that the Director erred in concluding that section 1818(e)(1)(B)
had been satisfied.
It therefore follows that the Director's order removing
Seidman from office and banning him for life from the banking
business was "unwarranted in law." See Butz v. Glover Livestock
Comm'n Co., 411 U.S. 182, 185-86 (1973); Oberstar, 987 F.2d at
503. Accordingly, we will grant Seidman's petition for review
and vacate the Director's order as it pertains to him. This is
not to say, however, that we approve of Seidman's conduct during
the course of the OTS investigation. We conclude only that OTS
may not, on this record, impose the draconian sanction of removal
and prohibition under section 1818(e) because all the conditions
that statute imposes on that ultimate penalty have not been met.
However, we believe, for the reasons discussed supra, that
Seidman's attempts to obstruct the OTS investigation into his
dealings with FSA and UJB, particularly his act of counseling
Risko to withhold potentially material facts, do constitute an
unsafe or unsound practice and so could support a cease and
desist order and monetary penalties as authorized by section
1818(b)(1). While the notice of charges did not specifically
request a cease and desist order with respect to Seidman's
obstructionist conduct, it did ask for "[a]ny other relief deemed
appropriate by the Director of OTS." Seidman App. at 20. Thus,
we will remand so that the Director may consider whether a cease
and desist order with accompanying civil penalties is appropriate
in this instance.40
40
. We believe the notice provisions of section 1818(b)(1) have
been satisfied. Seidman was put on notice of the facts alleged
to constitute an unsafe or unsound practice by the notice of
charges issued pursuant to section 1818(e)(4). Compare 12
U.S.C.A. § 1818(b)(1) and 12 U.S.C.A. § 1818(e)(4).
VII. The Preliminary Suspension Order
Because we conclude we must vacate that part of the
Director's order removing Seidman from his office at Crestmont
and banning him from the banking industry, we find it unnecessary
to address Seidman's argument that the district court erred in
dismissing his action to enjoin enforcement of the OTS
preliminary suspension. Though we will remand for the Director
to consider whether a cease and desist order should be entered
against Seidman pursuant to 12 U.S.C.A. § 1818(b), that section
of the governing statute, unlike section 1818(e), does not
authorize entry of a preliminary suspension order. See 12
U.S.C.A. § 1818(b) and (e). We will therefore vacate the
Director's order suspending Seidman from his office at Crestmont
and from participating in Crestmont's business activities.
VIII. Summary
In sum, we will grant Seidman's petition for review of
that part of the Director's order removing Seidman as a director
of Crestmont and prohibiting him from participating in the
banking industry and reverse that particular part of the order
because the Director's conclusion that Seidman's attempts to
obstruct OTS's investigation conferred a benefit upon him is not
supported by substantial evidence on this record and is erroneous
as a matter of law. Nevertheless, because of the nature of
Seidman's attempt to obstruct OTS and our conclusion that this
attempt does constitute an unsafe or unsound practice, we will
remand Seidman's case to the Director for him to consider whether
Seidman should on this record be subjected to the lesser sanction
of a cease and desist order along with any monetary penalties
that may be properly imposed. Because section 1818(b), unlike
section 1818(e), does not authorize Seidman's removal from office
and his prohibition from banking, we will also vacate the
preliminary suspension order that the Director entered pursuant
to section 1818(e)(3).41
IX. Conclusion
For these reasons, we will grant Bailey's petition for
review and reverse that part of the Director's order commanding
him to cease and desist. We will also grant Seidman's petition
for review of that portion of the Director's order removing him
from his position as director and chairman of the board of
Crestmont, reverse it and remand Seidman's case to the Director
41
. Because we will vacate the Director's temporary suspension
order, Seidman's challenge to the district court's order
declining jurisdiction at our Docket No. 92-5392 is moot. This
resolution also renders Seidman's and Bailey's challenge to the
propriety of the remand to determine civil penalties moot.
Seidman and Bailey both argued the Director's remand to the ALJ
for further findings concerning the assessment of civil penalties
unfairly gave OTS a second chance to make out its case. While
this issue is now moot, we nevertheless note that the applicable
regulations expressly authorize the Director to remand the
"action or any aspect thereof" to the ALJ. 12 C.F.R.
§ 509.40(c)(2) (1993). In the cases now before us, the Director
determined that the agency incorrectly assigned the burden of
production on the assessment and mitigation of penalties to
Seidman and Bailey. Exercising his regulatory authority to
remand, the Director therefore sent the penalty issues back to
the ALJ. Other courts have permitted similar remands when
questions about the burden of production and proof were present.
See, e.g., Dazzio v. FDIC, 970 F.2d 71, 75 (5th Cir. 1992);
Merritt v. United States, 960 F.2d 15, 18 (2d Cir. 1992).
for further proceedings consistent with this opinion. Finally,
we will vacate that part of the Director's order temporarily
suspending Seidman from his office at Crestmont and from
participating in Crestmont's business activities.
IN THE MATTER OF SEIDMAN AND BAILEY
Nos. 92-3722 and 92-3729
SEIDMAN V. OFFICE OF THRIFT SUPERVISION
No. 92-5392
STAPLETON, J., Dissenting:
I agree that we have jurisdiction to review the cease
and desist order against Bailey and the removal and prohibition
order against Seidman. Unlike my colleagues, I would deny both
petitions for review. As the Director noted at the beginning of
his opinion, "[u]se of institutions by insiders for their own
benefit has been one of the greatest threats to the safe and
sound operation of savings associations and has exposed the
Federal deposit insurance funds to significant risks." App. 94.
Fortunately, the risk created by the conduct of Seidman and
Bailey in this matter did not result in actual loss to their
savings association or to the Federal deposit insurance funds.
That fortuity, however, does not mandate that we overturn the
orders before us.
The Director found that Seidman had engaged in
undisclosed negotiations with UJB to secure release of a
substantial personal obligation by representing to UJB
Crestmont's willingness to make end-user loans to financially
qualified purchasers of a UJB debtor and had later obstructed the
OTS's investigation of the matter. The Director concluded that
the self-dealing and the obstructive conduct provided independent
bases for a removal and prohibition order. With respect to
Bailey, the Director concluded that he had engaged in an unsafe
and unsound banking practice by causing a commitment to be made
on a loan to a partnership in which Seidman had a financial
interest without disclosing the transaction to the Board of
Directors or the Senior Loan Committee. I will examine each
charge in turn.
I.
The ALJ and the Director found that Seidman had
arranged with Poole & Co. to pursue a request by him that UJB
release him from his $4.45 million personal guarantee. They
further found that Seidman drafted a letter for Risko to send on
his behalf, along with a brief letter of his own asking for the
release, pointing out that Seidman was the CEO of Crestmont, that
Crestmont was entertaining requests for $1.7 million from
prospective purchasers of property from Fulton Street Associates
("FSA"), a developer financed by UJB, and that Seidman's personal
guarantee created a conflict of interest problem which would
foreclose Crestmont from acting favorably on those requests.
Seidman was also found to have approved an addition to his draft
representing that "Crestmont would be willing to consider future
financing [of such purchasers], assuming qualified buyers." App.
41. The letter was dispatched on May 31, 1991.
That the intended message was heard and understood is
evidenced by the internal documents generated by UJB in response
to Seidman's request. The memo that went to UJB's Real Estate
Asset Management Committee stated:
UJB has been approached by Lawrence B.
Seidman, principal and guarantor of Fulton
Street, requesting the release of his
personal guaranty. Mr. Seidman is Chairman
of the Board of Crestmont Federal Savings and
Loan, the institution providing end loan
takeouts of our warehouse loan. Mr. Seidman
has conflict of interest in approving these
takeouts while serving as UJB's guarantor and
the project's principal. Crestmont is
currently reviewing $1.7MM in end loan
financing requests in an illiquid market. In
order to reduce our exposure in the project,
it becomes necessary to release Mr. Seidman.
The only other alternative would be to
provide the end loan financing ourselves at
roughly twice the dollar UJB already has out
to Borrowers . . . .
Although Mr. Seidman shows a net worth
of $1.4MM, his liquidity is only $116M. In
addition, he has recently contributed equity
to the project, further depleting his
liquidity. He does generate an income of
$225M p.a. as CEO of Crestmont; however, he
can be more valuable to the repayment of our
loan as a source of end loan financing.
App. 42. UJB's Executive Vice President Eberhardt initialed this
memorandum and added: "Agree. End loan financing has been
critical to recent sales success."
Eberhardt testified that there was not a broad market
for financing industrial condominium projects and that Crestmont
was one of the few institutions willing to provide financing to
potential purchasers of FSA's industrial condominiums at the
Boonton site. The other members of the Committee agreed with
Eberhardt's views and Seidman was notified on June 7, 1991, that
UJB would release his guarantee.
Seidman did not advise Crestmont's Board of Directors
or its President that he was seeking a release of his guarantee
or that in pursuing a release he was trading on Crestmont's
ability to provide end loan financing.
On June 1, 1991, an OTS examiner conducting an
examination at Crestmont saw the first page of the draft letter
sent in Risko's name to UJB. OTS immediately commenced a formal
investigation and Seidman's deposition was taken. When
questioned concerning the source of the arguments set forth in
the letter favoring a grant of the release, Seidman gave the
following testimony:
Q. Did you discuss with Mr. Risko what
he would write?
A. I won't say we discussed it. I saw
the letter, but --
Q. Did you see the letter before he
sent it to Mr. Eberhardt?
A. He thinks he sent it to me the day
he sent it, and my secretary called him and
told him I said it was okay, but I don't
recall seeing it, but I may have.
Q. Okay.
A. I wasn't really -- I'm sorry,
Q. Did you discuss with him what
position you would take with UJB to seek
release from your personal guarantee?
A. No.
Q. How did he know? Was it typical for
him to write letters of this nature without
discussing it with you?
A. He knew the details backwards,
forward and upside down. He knew the deal
much better than I did./ He was intimately
involved in this transaction. I was the
outside guy. I mean I was just the financial
guy in this deal. I knew almost nothing
about this transaction. He knew the tenants
better than I did. He stayed on it much
better than I did.
* * *
Q. Did you ask Mr. Risko -- I am sorry.
Let me show you OTS No. 7, which is a letter
from James Risko to Robert Eberhardt, dated
May 31, 1991 and ask you if you recall seeing
that letter.
A. Yes. This is the letter that I
referred to before that Mr. Risko thinks he
sent me the day he sent it to Mr. Eberhardt.
Q. Okay. And that is the letter where
you thought your secretary said you had read
it and that you didn't have any problems with
it?
A. Right.
Q. Do you recall reviewing that letter?
A. No.
Q. Okay. Now, how did Mr. Risko come
up with those reasons? Did you ever discuss
with him, first of all, the fact that, and
why don't you give me the letter for a
second.
Did you discuss with him the fact that
your position as Chairman of Crestmont
Federal Savings & Loan may make the financing
of certain condo purchasers impossible if you
were also a partner in Fulton Street?
A. No.
Q. Okay. Did you discuss with Mr.
Risko the fact that the inability to finance
the end users, does not serve the United
Jersey Bank's position or that of the
developer?
A. Mr. Risko and I had a discussion two
or three times. We had that discussion, like
I said before. Even Bob Eberhardt, who
stated either Bob or George Rinneman or
Stackhouse, that if there were any end users
that they felt to be qualified, that they
should send them to UJB, and most likely UJB
would make a considerate effort to do those
end loan financing.
So, I mean that was discussed at one of
the meetings. I don't know if Mr. Risko was
in that part of the conversation or not.
App. 44-46.
As I have noted, the ALJ and the Director found, with
ample record support, that Seidman was the author of all but the
concluding sentence of the Risko letter and that he had approved
the addition of that sentence. While acknowledging that Seidman
had not been asked direct questions in his deposition about the
authorship of the letter, both the ALJ and the Director found the
above quoted testimony to be "intentionally misleading" with
respect to the source of the message conveyed in the Risko
letter.
During the remainder of the investigation, Seidman was
found to have (1) asked Risko and another principal of Poole &
Co. to destroy relevant documents, (2) requested Risko to make
false statements and avoid full disclosure and (3) personally
destroyed material evidence in a fit of rage.
It is apparent to me from the text of the statute that
Congress intended courts to defer the agency's determination of
what constitutes an "unsafe and unsound practice".42 As my
colleagues acknowledge, Seidman's efforts to obstruct the
investigation of the regulating agency undeniably constituted an
"unsafe and unsound practice."43 Since I cannot say the Director
was arbitrary or capricious in similarly characterizing Seidman's
secret negotiations with UJB, I would sustain the conclusion of
the Director that Seidman's conduct satisfied § 1818(e)(1)(A) in
two different ways.
The legislative history of the
Act provides
the following
general insight
into what
Congress meant
by an "unsafe
and unsound"
practice:
42
. As the court noted in Groos Nat'l Bank v. Comptroller of
Currency, 573 F.2d 889, 897 (5th Cir. 1978):
[t]he phrase "unsafe or unsound banking
practice" is widely used in the regulatory
statutes and in case law, and one of the
purposes of the banking acts is clearly to
commit the progressive definition and
eradication of such practices to the
expertise of the appropriate regulatory
agencies.
43
. My colleagues do not acknowledge that Seidman's deposition
testimony constituted "an unsafe and unsound practice" apparently
because they do not find it materially misleading. As I explain
hereafter in applying § 1818(c)(1)(B), I disagree.
[A]n "unsafe or unsound practice" embraces
any action, or lack of action, which is
contrary to generally accepted standards of
prudent operation, the possible consequences
of which, if continued, would be abnormal
risk of loss or damage to an institution, its
shareholders, or the agencies administering
the insurance funds.
MCorp Fin., Inc. v. Bd. of Governors, 900 F.2d 852, 863 (5th Cir.
1990) (quoting from 112 Cong.Rec. 26474 (1966)), aff'd in part,
rev'd in part on other grounds, Board of Governors v. MCorp Fin.,
Inc., 502 U.S. 32 (1991). I do not disagree with my colleagues
that the required "abnormal risk of loss or damages" refers to
something more serious than the consequences of a breach of
contract in the regular course of the bank's business. On the
other hand, it seems clear from the above-quoted legislative
history that the relevant "risk" is not that occasioned by the
specific conduct engaged in in this particular case, but rather
the risk that would be occasioned if similar conduct were
"continued" as a way of doing business.
The record reflects that the market for end-user loans
for industrial condominiums was thin. It further reflects that
Boonton project had experienced financial difficulties, that few
commercial lenders were willing to undertake end user financing
for that project, and the UJB, Boonton's principal debt financer,
was concerned about getting its money back. Crestmont had loan
applications for a substantial amount of end user financing from
prospective purchasers of Boonton properties. It had not
previously engaged in such financing and it was faced with a
decision on whether it was in the bank's best interest to extend
credit under these circumstances. Seidman's was a very
influential voice in Crestmont's decision making process on such
matters.
It was against this background that Seidman approached
UJB seeking release of his guarantee without informing his fellow
officers and directors. To secure that release, he drafted,
approved, and caused to be dispatched, the Risko letter. It was
clearly not unreasonable for the ALJ and the Board to understand
this as a successful effort by Seidman to use the bank's ability
to provide Boonton financing in order to secure a personal
benefit. To be sure, Seidman testified that his letter was
motivated by his desire to put Crestmont in a position to make
loans he thought were desirable from its point of view and
neither the ALJ nor the Director made a finding that this
subjective motivation did not exist. It thus may be that
Crestmont, as well as Seidman, under other circumstances might
have benefitted from the release of Seidman's guarantee. But
Seidman's reliance on his motivation ignores the fact that he
failed to disclose his release and the representation he made as
to Crestmont's willingness to provide end user financing to
purchasers of Boonton property who were financially qualified.
While it is true that Seidman made no legally binding
commitment on behalf of Crestmont in the course of seeking the
release of his $4.5 million guarantee, it was not arbitrary and
capricious for the Director to recognize that communications like
Seidman's Risko letter and responsive actions like those of UJB
would have a significant potential for affecting decision making
at the bank, a potential that was greatly increased by Seidman's
failure to disclose his activities. It is not unrealistic, it
seems to me, to believe that the judgment of someone in Seidman's
position on whether to undertake Boonton end-user financing would
be influenced, if not altogether controlled, by his release.
Nor, I believe, is it unrealistic, given Seidman's failure either
to reveal the release transaction to his co-fiduciaries or to
disqualify himself from participating in discussions of Boonton's
financing, for the Director to perceive an abnormal risk that the
bank's decision making process regarding that financing would be
substantially skewed.
In short, I do not think the Director acted arbitrarily
or capriciously in concluding that a continuing practice of
undisclosed trading on the chief executive's corporate influence
for personal benefit would hold an abnormal risk of loss or
damage to the bank.
Turning to Section 1818(e)(1)(B), I would sustain the
Director's conclusions once again. While Seidman contends
otherwise, the Director was clearly justified in concluding that
Seidman benefitted from the release of his $4.5 million
guarantee. I believe he was also entitled to find that Seidman
benefitted from his obstructive tactics during the investigation.
While I agree that, fortuitously, Seidman did not benefit from
his efforts to suborn perjury and destroy evidence, this leaves
his materially misleading deposition testimony. In the words of
the Director, "Seidman benefitted from his efforts by depriving
the OTS of reliable and material evidence, thwarting the OTS
enforcement action and hampering the prompt resolution of the
self-dealing charges." App. 120.
I do not agree with my colleagues' apparent position
that misleading testimony before an investigating regulatory
agency cannot constitute an "unsafe and unsound practice" unless
it is perjurious. Accordingly, I have no difficulty with the
failure of the examiners to ask more specific questions. Nor
can I agree with my colleagues that Seidman's testimony was not
materially misleading. As I read the transcript, Seidman did not
acknowledge that he was the source of the strategy reflected in
the Risko letter and, indeed, purposefully led the examiner to
believe he was not. At the time of the deposition, the agency
did not know that Seidman was the author of that strategy and
that fact was clearly material to an investigation into whether
Seidman had secretly traded on his influence at the bank to
secure a release of his personal guarantee.
Finally, I turn to § 1818(e)(1)(C). Based on my
reading of the Seidman deposition, the ALJ and the Director were
justified in concluding that Seidman's conduct involved "personal
dishonesty" within the meaning of subsection (i). I also believe
they were justified in finding that Seidman's undisclosed
negotiations with UJB demonstrated a "willful . . . disregard for
the safety and soundness" of the bank within the meaning of
subsection (ii).
"Willful" is a word that has different meaning in
different contexts, and the courts have not yet defined it in the
context of subsection (ii). Whatever the precise definition may
turn out to be, however, I am satisfied that the "willful
disregard" requirement of subsection (ii) is met in this case.
The undisclosed negotiations with UJB found by the Director to be
an unsafe and unsound practice were intentional and deliberate.
That Seidman has a subjective appreciation of the wrongfulness of
his conduct and of the risk conduct of that kind poses for a bank
can reasonably be inferred from the fact that he tried to cover
up his conduct when the investigation commenced.
II.
Mr. Bailey's case is a more sympathetic one, but it
seems relatively clear to me that the Director did not abuse his
discretion in issuing a cease and desist order directing that
Bailey's conduct with respect to the Levine loan application not
be repeated.
Steven Levine applied to Crestmont in December of 1990
for end-user financing for the purchase of a commercial
condominium at the Boonton project. The Boonton Project was
owned by FSA, a partnership in which Bailey knew Seidman was a
general partner.
A mortgage commitment on the Levine application was
issued by Crestmont on March 19, 1991, and modified on April 12,
1991. For some reason, Levine and FSA did not consummate the
purchase at that time, and the commitment was not timely
accepted. Negotiations continued, however, and a contract for
the purchase, for the price of $466,680, was entered into on May
10, 1991. A superseding commitment letter was issued by
Crestmont on May 19, 1991, through Bailey, committing to a loan
of $375,000. The purchaser accepted the commitment letter after
its expiration date, with delivery of a deposit check for $2,000,
which was deposited by Crestmont.
Under Crestmont's internal operating rules, any loan
transaction in which an officer or director of Crestmont had an
interest had to be submitted to the Senior Loan Committee for
approval. Bailey, Seidman, and Crestmont's then president, Mr.
McClellan constituted the Senior Loan Committee. The bank's
commitments to the Levine financing were made without the
approval of the Senior Loan Committee. Neither Mr. McClellan nor
anyone else on Crestmont's Board of Directors were informed
before these commitments were made that Levine wished financing
for a purchase of property from a partnership in which Seidman
had a financial interest.44
Bailey asked Seidman and his partners on three
occasions about the fact that Seidman had an interest in the
transaction Levine wished to finance. On each occasion, he was
advised that Seidman was "getting out" of FSA and it was Bailey's
understanding that Levine wouldn't actually be given any money
44
. It is true, as my colleagues stress, that Seidman had
disclosed his interest in FSA on the conflict of interest forms
he had filed with the bank prior to the approval of the Levine
financing and that McClellan testified he reviewed those forms
from time to time. But the ALJ and the Director concluded, with
record support, that because of Bailey's failure to submit the
Levine application to the Senior Loan Committee, McClellan was
not exposed to any communication alerting him to the fact that
Levine's application related to a purchase from FSA.
unless and until Seidman was "out." As I have noted, Seidman did
not get all the way "out" until UJB released his $4.45 million
guarantee at some point after June 7, 1991. Indeed, when the
commitments were made, Seidman and his partners were attempting
to renegotiate FSA's financing with UJB and Seidman's
participation was understood by all to be necessary to reaching
an agreement with UJB on a reorganization. Agreement was reached
on May 20, 1991, and it was on that day that Seidman signed his
guarantee. Thus, at the time of each of the three bank
commitments made to Levine with Bailey's approval, Seidman had an
interest in the transaction Levine intended to finance.
Bailey's understanding that Levine would get no money
until Seidman was "out" of FSA does not mean the Director erred
in finding an "unsafe and unsound practice" and issuing a cease
and desist order. Conflicts of interest are important because of
the potential they hold for undermining an institution's decision
making process. Here Seidman and Bailey made the decisions to
commit the bank to Levine when Seidman had a conflicting interest
and when Seidman's and Bailey's judgments were susceptible to
being influenced by that conflicting interest. That is the
crucial fact that makes Bailey's conduct an "unsafe and unsound
practice" in the Director's eyes. Seidman and Bailey obviously
had no plans to submit Levine's loan application to the Senior
Loan Committee or anyone else before the financing was issued.
For better or for worse, if events had transpired as Seidman and
Bailey anticipated in the Spring of 1991 they would, the bank
would have made a substantial loan based on the judgment of
Seidman and Bailey exercised when Seidman's personal fortunes
were very much still tied to those of FSA.
Crestmont's loan policy prohibited loans being approved
in the manner Seidman and Bailey approved the Levine financing
precisely because a continuing practice of approving loans in
that manner would pose an abnormal risk to the financial
stability of the bank. I am unwilling to fault the Director for
reaching the same conclusion Crestmont's management did when it
established its rules.
III.
I would deny the petitions of Seidman and Bailey for
review.