PAGENO="0001" - FEDERAL EFFORTS TO COMBAT FRAUD, ABUSE, AND MISCONDUCT IN THE NATION'S S&L'S AND BANKS AND TO IMPLEMENT THE CRIMINAL AND CIVIL ENFORCEMENT PROVISIONS OF FIRREA HEARINGS BEFORE THE COMMIERCE, CONSTIMIER, AND MONETARY AFFAIRS SUBCOM1\4TTTEE OF THE COMMITTEE ON GOVERNMENT OPERATIONS HOUSE OF REPRESENTATIVES ONE HUNDRED FIRST CONGRESS SECOND SESSION MARCH 14 AND 15, 1990 Printed for the use of the Committee on Government Operations 1~"~ &7~~: F U.S. GOVERNMENT PRINTING OFFICE 30-830 WASHINGTON : 1990 For sale by the Superintendent of Documents, Congressional Sales Office U.S. Government Printing Office, Washington, DC 20402 PAGENO="0002" COMMITTEE ON GOVERNMENT OPERATIONS CARDISS COLLINS, Illinois GLENN ENGLISH, Oklahoma HENRY A. WAXMAN, California TED WEISS, New York MIKE SYNAR, Oklahoma STEPHEN L. NEAL, North Carolina DOUG BARNARD, JR., Georgia BARNEY FRANK, Massachusetts TOM LANTOS, California ROBERT E. WISE, JR., West Virginia BARBARA BOXER, California MAJOR R. OWENS, New York EDOLPHUS TOWNS, New York JOHN M. SPRATT, JR., South Carolina BEN ERDREICH, Alabama GERALD D. KLECZKA, Wisconsin ALBERT G. BUSTAMANTE, Texas MAT]~HEW G. MARTINEZ, California NANCY PELOSI, California DONALD M. PAYNE, New Jersey JIM BATES, California GARY A. CONDIT, California Juu~ EPSTEIN, Staff Director DONALD W. UPSON, Minority Staff Director COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMIrrEE DOUG BARNARD, JR., Georgia, Chairman JOHN M. SPRATT, JR., South Carolina J. DENNIS HASTERT, Illinois MATFHEW G. MARTINEZ, California STEVEN SCHIFF, New Mexico ALBERT G. BUSTAMANTE, Texas CHUCK DOUGLAS, New Hampshire HENRY A. WAXMAN, California C. CHRISTOPHER COX, California JOHN CONYERS, JR., Michigan FRANK HORTON, New York RICHARD W. PETERSON, Staff Director ThEODORE J. JACOBS, Chief Counsel STEPHEN R. MCSPADDEN, Counsel Ps~ran J. VROOM, Minority Professional Staff JOHN CONYERS, JR., Michigan, Chairman FRANK HORTON, New York WILLIAM F. CLINGER, JR., Pennsylvania AL McCANDLESS, California HOWARD C. NIELSON, Utah RICHARD K. ARMEY, Texas DONALD E. "BUZ" LUKENS, Ohio J. DENNIS HASTERT, Illinois JON L. KYL, Arizona CHRISTOPHER SHAYS, Connecticut PETER SMITH, Vermont STEVEN SCHIFF, New Mexico CHUCK DOUGLAS, New Hampshire C. CHRISTOPHER COX, California CRAIG THOMAS, Wyoming ILEANA ROS-LEHTINEN, Florida Ex OFFICIO (II) PAGENO="0003" CONTENTS Hearing held on: Page March 14, 1990 1 March 15, 1990 295 Statement of: Arnold, Jerome G., U.S. attorney, district of Minnesota 104 Barnard, Hon. Doug, Jr., a Representative in Congress from the State of Georgia, and chairman, Commerce, Consumer, and Monetary Affairs Subcommittee: Opening statement 1 Beamon, Arthur L., Associate General Counsel, Legal Division, Federal Deposit Insurance Corporation 684 Collins, Marvin, U.S. attorney, northern district of Texas 7 Dennis, Edward S.G., Jr., Assistant Attorney General, Criminal Division, U.S. Department of Justice, accompanied by Allen Carver, Deputy Chief, Fraud Section 297 Dudine, James R., Director of Investigations, Resolution Trust Corpora- tion 627 Fritts, Paul G., Director, Division of Supervision, Federal Deposit Insur- ance Corporation, accompanied by Thomas Schulz, Assistant General Counsel 560 Revell, Oliver "Buck," Associate Deputy Director, Federal Bureau of Investigation, accompanied by Anthony J. Adarnski, Jr., Chief, Finan- cial Crimes Unit 191 Serino, Robert B., Deputy Chief Counsel for Policy, Office of the Comp- troller of the Currency 698 Stewart, Rosemary, Director, Office of Enforcement, Office of Thrift Su- pervision 372 Wortham, Robert, U.S. attorney, eastern district of Texas 95 Letters, statements, etc., submitted for the record by: Arnold, Jerome G., U.S. attorney, district of Minnesota: Prepared state- ment 111-169 Beamon, Arthur L., Associate General Counsel, Legal Division, Federal Deposit Insurance Corporation: Prepared statement 687-694 Collins, Marvin, U.S. attorney, northern district of Texas: Prepared statement 69-91 Report entitled "Fraud in Financial Institutions, U.S Attorney's Report, Northern District of Texas" 12-64 Dennis, Edward S.G., Jr., Assistant Attorney General, Criminal Division, U.S. Department of Justice: Prepared statement 301-351 Dudine, James R., Director of Investigations, Resolution Trust Corpora- tion: Prepared statement 632-683 Fritts, Paul G., Director, Division of Supervision, Federal Deposit Insur- ance Corporation: Prepared statement and answers to subcommittee questions 564-626 Revell, Oliver "Buck," Associate Deputy Director, Federal Bureau of Investigation: Prepared statement and submissions to additional ques- tions 199-286 Serino, Robert B., Deputy Chief Counsel for Policy, Office of the Comp- troller of the Currency: Prepared statement 702-769 Stewart, Rosemary, Director, Office of Enforcement, Office of Thrift Su- pervision: Prepared statement.and responses to subcommittee questions 379-556 Wortham, Robert, U.S. attorney, eastern district of Texas: Prepared state- ment 99-103 (III) PAGENO="0004" Iv Page APPENDIXES Appendix 1.-(a) Subcommittee tabulation of data on FBI and U.S. attorney resource needs, based on March 1989 FBI teletypes from 59 FBI divisions, and comparison of that data with actual resource allocations in December 1989, and (b) actual teletypes from the Denver, Dallas, Houston, Tampa, and Baltimore FBI division offices 775 Appendix 2.-Documents, letters, statements, and other material concerning the Department of Justice's resource needs for investigating and prosecut- ing financial institution fraud and embezzlement cases 842 Appendix 3.-Federal Reserve Board's May 7, 1990, submission of answers and documentation, requested by the subcommittee 870 Appendix 4.-Texas State supervisory agent's reports and other material concerning Universal Savings Association, Houston, TX 932 Appendix 5.-FBI's May 23, 1990, submission of responses, requested by sub- committee to supplement the record 953 Appendix 6.-FDIC's June 11, 1990, note to subcommittee counsel and FDIC's June 12, 1990, submission of responses and material, requested by subcom- mittee to supplement the record 982 Appendix 7.-Department of Justice submissions and material: Subcommit- tee's April 23, 1990, letter to DOJ and DOJ's June 27, 1990, responses to Commerce, Consumer, and Monetary Affairs Subcommittee and also to Subcommittee on Criminal Justice; DOJ's February 26, 1990, official re- sponse to subcommittee's 1988 report; and a fact sheet by executive office for U.S. attorneys 1040 Appendix 8.-Miscellaneous material and information, including agency ma- terial, subcommittee staff analysis, and newspaper clippings 1095 Appendix 9.-FDIC material not attached to written testimony but submitted at time of the March 15, 1990, hearing 1101 Appendix 10.-DOJ's 1990 report to Congress on the private counsel debt collection pilot project under Public Law 99-578 1148 Appendix 11.-Excerpts from the report of the National Advisory Commission on Law Enforcement, April 1990, OCG-90-2 (GAO document) 1172 PAGENO="0005" FEDERAL EFFORTS TO COMBAT FRAUD, ABUSE, AND MISCONDUCT IN THE NATION'S S&L'S AND BANKS AND TO IMPLEMENT THE CRIMI- NAL AND CIVIL ENFORCEMENT PROVISIONS OF FIRREA WEDNESDAY, MARCH 14, 1990 HOUSE OF REPRESENTATIVES, COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE OF THE COMMITTEE ON GOVERNMENT OPERATIONS, Washington, DC. The subcommittee met, pursuant to notice, at 9:32 a.m., in room 2247, Rayburn House Office Building, Hon. Doug Barnard, Jr. (chairman of the subcommittee) presiding. Present: Representatives Doug Barnard, Jr., John M. Spratt, Jr., Matthew G. Martinez, Albert G. Bustamante, J. Dennis Hastert, Steven Schiff, and Chuck Douglas. Also present: Stephen R. McSpadden, counsel; Judy Mize, secre- tary; and Peter J. Vroom, minority professional staff, Committee on Government Operations. OPENING STATEMENT OF CHAIRMAN BARNARD Mr. BARNARD. The subcommittee will come to order. Today and tomorrow, the subcommittee will examine the efforts by the Department of Justice, including the FBI, the Criminal Divi- sion, and the U.S. attorneys, and also the Federal bank regulatory agencies, to combat fraud, abuse, and misconduct in the Nation's savings institutions and commercial banks. We also will review the implementation of the new criminal and civil enforcement provi- sions in the Financial Institutions Reform, Recovery, and Enforce- ment Act of 1989. As many of you know, this committee is not new to this area. From 1982 through 1984, this subcommittee conducted numerous hearings on bank failures, including the Penn Square, United American Bank, and Empire Savings and Loan failures, finding a number of serious gaps in the regulatory process. In 1983 and in 1984, the subcommittee conducted several hear- ings specially on inside abuse and criminality in banks and S&L's. And in October 1984, we issued a major report on criminal mis- conduct and insider abuse. It recommended that Congress dramati- cally expand enforcement and civil money penalty powers for the Department of Justice and bank and S&L regulators across the (1) PAGENO="0006" 2 board and amend the Right to Financial Privacy Act. These and other subcommittee recommendations were incorporated into title IX of FIRREA, for which I was the original sponsor, as well as the Antidrug Abuse Acts of 1986 and 1988. In late 1985, the subcommittee began a series of hearings on faulty and fraudulent real estate appraisals and their role in nu- merous bank and S&L failures. That work resulted in title XI of FIRREA, the Real Estate Appraisal Reform Amendments. Subsequently, in 1987, the subcommittee held hearings in Cali- fornia and Washington, DC, on abuse, fraud, and misconduct, and then in October 1988, the Government Operations Committee issued another comprehensive report on fraud and misconduct. I would like to add that in the early years of our oversight, some of the bank regulatory agencies contended that we were overreact- ing and being alarmist. I believe the current situation certainly shows otherwise. As to the agenda for these hearings, we will examine the follow- ing: (a) The nature and the extent of inside and affiliated outsider misconduct, abuse and fraud in financial institutions. We are espe- cially interested in newly amassed FBI data on numbers of investi- gations, prosecutions, convictions, acquittals, and sentences, data which we specially requested, because it is not readily retrievable within the Justice Department; (b) The extent and adequacy of the Justice Department's investi- gative, prosecutive, sentencing, and monetary recovery efforts and the Department of Justice's recent personnel allocation to major fraud cases around the United States; and, (c) How the agencies have implemented the subcommittee's Octo- ber 1988, report's recommendations and any problems with agency implementation of title XI and title IX of FIRREA. On the issue of the Department of Justice resources, I am very concerned that 0MB and the Department of Justice have not re- quested an appropriation of all of the funds authorized by FIRREA for these efforts, $75 million, but instead, they have asked for and received less than $50 million in appropriations for fiscal year 1990. Let me say I am not intending for them to spend more money than they need, but I think that these hearings will show that the need is there and raise the question of, why are they not using the resources that Congress has authorized for them to help resolve some of these very, very serious problems? On December 7, 1989, the Attorney General held a press confer- ence to announce an allocation of over 400 additional positions to cover the financial institution front. However, our review of the prior March 1989, FBI survey of FBI field divisions and U.S. attor- ney offices raises a serious doubt that $50 million is sufficient to bring justice to at least several hundred of the "crooks" who alleg- edly caused this trouble. This question of spending another $25 million must be weighed against the hundreds of billions of dollars the S&L debacle will cost the taxpayers and the hundreds of millions of dollars for the RTC and the FDIC fee counsel who are trying to straighten out the civil side of this situation. PAGENO="0007" 3 Our review shows that the FBI and the U.S. attorney offices sur- veyed in March 1989, asked for 224 more FBI special agent posi- tions, 113 more assistant U.S. attorney positions, and 142 more sup- port staff positions than they finally received. In other words, of the numbers that they asked for, these were the numbers of posi- tions they received-and we will review these numbers as we go through. But we have thousands of inactive cases, a very, very large disparity in the numbers of positions which we really need. Our analysis raises the question whether or not the Justice Depart- ment will investigate and prosecute the thousand or more major cases now on the back burner and our preliminary analysis indi- cates the following: Certain FBI divisions and U.S. attorneys' offices with significant cases asked for increased personnel, but received nothing. No agents, no prosecutors, no support staff. Other areas did receive a large increase, but not nearly enough to respond to the problem. Federal prosecutors in other districts seem reluctant to pursue these complex white-collar crime matters. I have some difficulty in accepting that an individual who com- mits substantial fraud against an S&L or a bank may completely escape investigation and prosecution if that person committed the offense in one of many areas which did not receive enough addi- tional resources or which gives these cases a low priority. Today, we will first hear from a panel of distinguished U.S. attor- neys and then from Oliver "Buck" Revell, the No. 3 FBI official. Tomorrow we will hear from the Assistant Attorney General Dennis, of the Criminal Division, and representatives of the FDIC, the 0CC, the RTC, and the 0CC. Gentlemen, it boils down to this, and you and I know the ques- tion. The public is asking Congress, "What are we doing about these individuals who caused these institutions to fail?" What are we doing to these individuals who got away with millions, millions, and millions of dollars? Are they escaping justice? I feel that it is important that we delve into this subject. I think it is important because we need to know and the public needs to be satisfied that everything possible is being done. When you consider the cost of the S&L deposit insurance bailout to the American people, not only now but over time, then these questions need to be answered. So I am delighted that we have this opportunity to go into this subject again. As I said, gentlemen, in the beginning, this is not a new subject for this subcommittee. We have been delving into this matter since 1982. We are going to continue to keep it high on our agenda because we think it is very, very important. Do you have an opening statement, Mr. Schiff? Mr. SCHIFF. Mr. Chairman, our ranking member, Mr. Hastert, has been delayed for a few minutes. He will be along directly. On his behalf, I want to say very briefly that I welcome the panel here today. Mr. Hastert is in full support of the Chair's deci- sion to hold this hearing. As you stated, Mr. Chairman, the cost to the taxpayers of what has been called the savings and loan bailout is enormous. It is a PAGENO="0008" 4 terrible shock to the Federal budget. The expenditures that we are going to have to provide in this area are enormous. I might add that it is an expenditure of which the Congress has no choice. To some extent, I believe the term S&L bailout is a mis- nomer because it implies to many people that we are doing some- thing to bail out the institutions, when, in fact, we are providing these funds to protect the depositors, as we are obligated to do when that sticker "Insured FSLIC," or for that matter, any of the other insured institutions, appears on the door. So the Congress has to live up to its obligations to protect the deposits of the deposi- tors, which is what we are doing. At the same time, Mr. Chairman, the people, as you state, want to know that if they, as taxpayers, must support these expendi- tures, to the extent that these expenditures are caused by criminal wrongdoing-and it is generally agreed that is a significant factor in the S&L crisis-not the only factor by any means, but a signifi- cant factor, they want to be assured that everything possible is being done by the Federal Government to successfully investigate, prosecute and convict those responsible. Again, we congratulate you on having this hearing so we will have a chance to exchange information with the officials on the front line of that responsibility and the Congress. Thank you, Mr. Chairman. Mr. BARNARD. Mr. Martinez. Mr. MARTINEZ. Yes, Mr. Chairman, just a brief comment, first, to commend you for pursuing this and continuing to hold these hear- ings, and second for trying to get to the bottom of it and actually come up with some solution to the problem. It is more than just holding the hearings and listening to the testimony and going about our business as usual, as much of the savings and loan indus- try has done. I want to comment on the fact that Mr. Schiff is right, that we need to protect the investors and depositors, but the trouble is that we are doing it with other taxpayers' moneys who had nothing to do with it. At the same time, it seems to those same taxpayers that the culprits, the people that are responsible for it, are going rela- tively free and that, to answer your question, I think most of the public that I serve have the impression that, no, in fact, the wrong- doers are not being punished. Justice is not being served. What really was shocking to me at the first hearing I attended, the one that you mentioned in California, is that so much of this was being perpetrated by insiders under the watchful eye of Feder- al agencies who should have been having or conducting closer scru- tiny over these agencies. It shocked me then, and it still shocks me, that much of it is still going on with business as usual. We naturally have to do the bailout and save the depositors and the investors in those savings and loans, but what perturbed me is that legislation that was passed to try to take corrective measures is still not fully implemented. I think, as an obligation to those people who had had confidence in those savings and loans and those financial institutions to deposit their moneys and invest their moneys, there was a great breach of faith and that those people had a right to have confidence. After all, for over a period of years since the Great Depression, the Federal Government has interced- PAGENO="0009" 5 ed to make sure that those institutions would not be bankrupt, that the depositors were protected by Federal guarantees, and over the years, they relied on that guarantee. Somehow in the back of their minds imagining that everything else was hunky-dory because the Federal Government was watching and that there were agencies in place to take care of any wrongdoers. Well, it is evident now that whatever we were doing wasn't suffi- cient because what happened in Texas has happened in other places in the savings and loan industry and financiaNnstitutions. I don't think that we can go on any longer just loping along, hoping that something will eventually take place that will prevent these things from happening. I think we have to take decisive action, and Mr. Chairman, I pledge my support to you in those things that you enter into to try to correct these matters. Thank you. Mr. BARNARD. Thank you. Judge. Mr. DOUGLAS. Thank you, Mr. Chairman. Up in New Hampshire, I know, the folks are very concerned, just as you have heard so far, that we may have a dual standard of jus- tice in this country. For 2 years, I sat as a superior court judge, and if you get a kid in front of you who has at gunpoint robbed a 7- Eleven of $82, that kid is going to go to jail. Unfortunately, it seems that some people can take millions of dollars by looting a bank and they end up falling through the cracks in the system and staying outside of jail. So I think it is very important that we make sure that public confidence in the system of justice, as well as our ability to prosecute these kinds of cases, is enhanced, because right now, people are very skeptical. They figure if you are big enough, you can get away with the theft of millions of dollars. So I commend the efforts that you folks are faced with, but I cer- tainly hope that we can get to the bottom of what it is we need to do to make sure that prosecution moves forward. I am going to have to bail out for a minute or two to go to a death penalty hearing in the Judiciary Committee. I only wish we could combine the two in some way because, frankly, there are a lot of these' guys in Texas and elsewhere that I think I would like to hang at this point. But I will take the testimony and I will be back, Mr. Chairman, but we have to get the death penalty hearings opened up, too. Mr. BARNARD. Thank you very much. Mr. MARTINEZ. Mr. Chairman, may I just make one more com- ment. Sitting as a superior court judge reminded me., that in that 1987 hearing in California, I made that comment to the FBI people that were testifying to us that here a young man or person goes into a bank with a gun and holds it up or into a grocery store, as you said, and holds it up. That is a heinous crime and immediate, swift action is taken to apprehend and to punish severely. Yet, some of these savings and loan people seem to just walk away from it, claiming Chapter 11 or whatever else and their retort to me was, and I think this is very important to get on the record again, was that that person with a gun in their hand was a more immedi- ate -danger. My response is that he may be a more immediate PAGENO="0010" 6 danger, and be a lot easier to apprehend, and you need to do that, but you also need to have the same vehement desire for enforce- ment of the law with these savings and loan people as you do with that individual. Even more so because they are more devious. Mr. BARNARD. In other words, you don't think they ought to be languishing on some beautiful yacht in some beautiful lake in the State of Texas, enjoying the sunshine and the elements? Mr. MARTINEZ. Absolutely not. Like the good judge, I would like to see them hanging from a tree. Mr. SCHIFF. Mr. Chairman, before you begin with the witnesses, can I add just one very quick word? Mr. BARNARD. Sure. Mr. SCHIFF. I assure you in no way am I less desirous of the suc- cessful criminal prosecution than anyone else, but I was a former criminal prosecutor for quite a number of years. In fact, at one period of time, my specialty was white-collar crime, fraud, and em- bezzlement. It can't be ignored, much as we would like to, that these are often difficult cases to prove in terms of the criminal intent, and therefore, I think that has to be pointed .out on behalf of the prosecutors and FBI agents. But what I hope this hearing can lead to is how can we help them do the most successful job pos- sible. Mr. BARNARD. I am very positive that we are going to again hear about the difficulty of prosecuting these cases and I am sympathet- ic, but we have had that same problem going on for a long, long time, and it looks like by now we should have found the answer to it. Mr. MARTINEZ. Mr. Chairman, might I just take one more minute. In that same hearing, the big fact that came through was that it wasn't a lack of willingness, but a lack of cooperation be- tween the agencies to actually go after these. There was the ques- tion of criminal prosecution versus recovery and recovery, in most instances, has been the prime concern and the more immediate concern than criminal prosecution. I don't see why the two can't run concurrently. Mr. BARNARD. As you can see, there is a lot of interest in the committee on this subject and we have had a lot of experience with it. This morning, our first panel includes three outstanding U.S. at- torneys. Mr. Marvin Collins, from the northern district of Texas; Mr. Robert Wortham, from the eastern district of Texas, and Mr. Wortham has been here before and we welcome you again back; and Mr. Jerome G. Arnold, who is the U.S. attorney from the dis- trict of Minnesota. So we come from the North and the South in this respect, but we could just as well come from the East and the West. We will begin with the testimony of Mr. Collins and then Mr. Wortb~m and Mr. Arnold and without objection, your entire testi- mony will be included in the record. We normally like for you, if you would, to summarize as briefly as you can so that we can have the opportunity of questions, so we will begin with Mr. Collins. PAGENO="0011" 7 STATEMENT OF MARVIN COLLINS, U.S. ATTORNEY, NORTHERN DISTRICT OF TEXAS Mr. COLLINS. Mr. Chairman and members of the subcommittee, I appreciate the occasion to address the subcommittee about prosecu- tion of savings and loan and bank fraud matters in the northern district of Texas. This is an extremely large district, covering 95,000 square miles, and~has~seven divisions where courts sit. Four~ of those are manned and in all four of those divisions, Dallas, Fort Worth, Amarillo, and Lubbock, we have staffed offices. I have served as U.S. attorney since June 1985, and during that entire time, we in the northern district have been aggressively pur- suing the prosecution of bank fraud and savings and loan fraud cases. During the period, January 1, 1985, through December 31, 1989, a 5-year period, bank fraud-related charges have been filed in court against 359 individuals in the northern district of Texas. In January 1986, 6 months after I became U.S. attorney, I began requesting assistance from the Fraud Section of the Department of Justice because we did not have a sufficient staff on board to ad- dress the problems. The Department of Justice responded in an outstanding manner. Within 2 months, we had additional prosecu- tors from the Fraud Section and they were in place and working within that time. Unfortunately, we were at the same time told that the Emergen- cy Budget Deficit Reduction Control Act would also put us under a hiring freeze, so we were unable to hire any new prosecutors or fill any existing vacancies. However, ~encouraged by their rapid and ef- ficient response to my request, in April 1986, I again asked for as- sistance from the Department of Justice to take over the State Sav- ings and Loan and the Vernon Savings and Loan cases and, again, their response was quick. By the fall of 1986, there were additional resources from the Fraud Section in place in the person of two ex- perienced prosecutors in my district. In the fall of 1986, I advised the head of the Fraud Section and the Attorney General that we were still very short of prosecutor resources with which to address the massive savings and loan and bank fraud crisis and that I would be continuing to make addition- al requests of the Department for increased resources. In January 1987, I and the special agent in charge of the Dallas Division of the FBI made a formal request to our respective head- quarters for a large increase in the prosecutor resources in our dis- trict. My personal desire was to have a number of additional assist- ant U.S. attorneys provided for the purpose of forming a task force. Again, those resources were short, were not available, and in- stead-and happily, I am glad to say, fortunately, the Fraud Sec- tion again stepped into the breach and provided a number of addi- tional positions. The result of that was that the Dallas Bank Fraud Task Force was formed and began formal operations on August 3, 1987. It started with just over 50 individuals. That includes prosecutors, agents, and support staff and by the spring of 1989, had grown to just over 80 full-time people committed to the task force. PAGENO="0012" 8 The agencies involved included the FBI, the U.S. attorney's office, the Fraud Section of the Department of Justice, the Federal Home Loan Bank Board in the person of a special assistant, the IRS and the Tax Division of the Department of Justice. In December 1989, as a result of FIRREA, we had a lot of addi- tional resources that were authorized by Congress and the adminis- tration. We have begun immediately to hire those positions and put them in place. Both the FBI, the U.S. attorney's office, and the Fraud Section received substantial increases in my district. The IRS, having not received any additional resources from FIRREA, has maintained its very substantial commitment of nine full-time special agents and five revenue agents to the Bank Fraud Task Force in Dallas. The IRS has maintained this commitment in spite of the fact that no additional resources were authorized to them for this purpose by FIRREA. Although many of the newly authorized positions are either filled or already committed, it is estimated that the increased level of staffing will be fully complete by some time this summer. It is estimated that unless the problem is revealed to be even deeper than we have been able to ascertain up until now, the Dallas Bank Fraud Task Force should reach its peak size in terms of personnel by approximately September 1990. Current estimates are that the task force would then operate at this level for several more years. So for the last several years, our resource commitment in this area has been steadily growing. Until FIRREA, I feel that we had to beg, borrow, and steal the resources to put together whatever we were able to in the northern district of Texas to address this mas- sive problem. Since FIRREA, I feel that, at least for the short term, we can say confidently that we do have sufficient resources in place or will have in my office by June of this year, and then that should be reevaluated again in the fall of 1991. The U.S. attorney's office, for the last 5 years, has been aggres- sively pursuing bank and savings and loan fraud cases on three separate fronts in my district: The 1-30 or Empire Task Force; the Dallas Bank Fraud Task Force and then nontask force prosecu- tions; that is, those that have taken place outside of any task force concept. I would like to comment very briefly on each of these in turn. First, the 1-30 Task Force. In the early 1980's, fraudulent banking and real estate transactions resulted in a massive oversupply of condominiums under development along the 1-30 corridor east of Dallas. That is where the term 1-30 Task Force ôame from. An investigation was begun and it was estimated that losses in that debacle were somewhere between $500 million and $750 mil- lion. In 1985, a task force-- Mr. BARNARD. Was this the Empire Savings and Loan case? Mr. COLLINS. That is the Empire Savings and Loan. That is cor- rect, Mr. Chairman. In 1985, we formed a prosecutive and FBI task force of co-located prosecutors and FBI agents located near the U.S. attorney's office in downtown Dallas. These individuals were dedicated to that effort and nothing else. This task force proceeded in its investigative and prosecutive efforts along the tried and true pyramid theory, in which lower level individuals were prosecuted first, then succes- PAGENO="0013" 9 sively higher level individuals in turn were prosecuted until the top of the pyramid was reached. An effort such as this, while time consuming and slow, is thor- ough and tends to let the fewest people slip through the investiga- tive and prosecutive net. To date, at least 99 individuals, 82 in the northern district and 17 in Mr. Wortham's district, in the eastern district, have been convicted, 2 cases dismissed and none acquitted. A total of 111 individuals have been charged, 94 in the northern district and 10 of those are still awaiting trial. A large criminal RICO indictment is currently pending against the alleged top seven people in the scheme.. Following a 7-month trial in Lubbock, TX, there was a hung jury. At the time, news re- ports reported that the jury stood 11-to-i in favor of conviction. However, that was a hung jury. That case will have to be retried. It has been brought back to Dallas and is yet to be set for retrial by the court. Mr. BARNARD. Have you gotten to the top of the pyramid? Mr. CoLLINs. In the Empire case, we have, Mr. Chairman. Mr. BARNARD. All the way to the top? Mr. COLLINS. All the way to the top, and it took a 5-year effort. It was slow; it was tedious-- Mr. BARNARD. What is the statute of limitations on that? Mr. COLLINS. On the tax counts, it is 6 years. On the other counts, it was 5 years. This scheme started back in-- Mr. BARNARD. Aren't you approaching that time when they are going to get off the hook completely? Mr. COLLINS. We have charged all-virtually all of the individ- uals in the Empire case that are going to be charged. That task force started in 1985, so that statute period was clearly adequate when we started and has been adequate to address those transac- tions. The major case was indicted in 1987 and the major part of the scheme occurred in 1982. So we got in under the wire on all of those that were important cases. Mr. BARNARD. During your testimony, will you talk about the convictions and the sentencing, as well? Mr. COLLINS. Certainly, I will, Mr. Chairman. Mr. BARNARD. OK, good. Mr. COLLINS. Except for the single seven-defendent criminal RICO case, most of the work of that task force has been accom- plished and I have submitted for inclusion in the record a single page of statistics, which is the last page of my statement, for inclu- sion in the record. That summarizes the accomplishment of the I- 30 Task Force, not to be confused with the Dallas Bank Fraud Task Force, which is a completely separate effort, a separate set of pros- ecutors, investigators, and so forth. The 1-30 Task Force, I believe, has had an excellent record of success. I would now like to turn to the Dallas Bank Fraud Task Force. This multiagency task force was formed in August 1987, with in- volvement from the FBI, the IRS, CID, IRS Revenue for Technical Support, the U.S. attorney's office, the Fraud Section of the Depart- ment of Justice, the Federal Home Loan Bank Board in the person of one attorney who was sworn in as a special assistant U.S. attor- ney and the Tax Division of the Department of Justice. The task PAGENO="0014" 10 force is operated under the direction and control of the Director of the Regional Fraud Section Office in Dallas and the U.S. attorney and the FBI special agent in charge in Dallas. To date, that task force has charged 62 individuals with formal bank fraud-related charges and 47 of those have been convicted. Unlike the 1-30 Task Force, where we proceeded by the tried and true pyramid theory, we took an entirely different approach. In the Dallas Bank Fraud Task Force, because of the problem with the statute of limitations, which you had previously mentioned, and be- cause of the shortage of resources, we decided that the only appro- priate way to approach the prosecution of many of these other mas- sive savings and loan failure-related cases was the single-shot theory. We targeted individuals that we thought were the most culpable and we went after them with straightforward, single shots. We simply could not afford the time, nor did we have the resources to go by the older, slower, but more thorough pyramid theory; that is, starting at the bottom and working slowly to the top. So we have tried to target from the beginning midlevel and upper level individ- uals in the Dallas Bank Fraud Task Force. The task force started with just over 50 people. By the spring of 1989, it had grown to just over 80. It is now approaching 100 and I would estimate that by sometime this summer, when all of the staffing levels are completed, we will have over 140 individuals in that task force. Fortunately, with the added resources provided by FIRREA and the extended statute of limitations, we will have the resources and the time with which to deal with these massive sav- ings and loan failure-related cases in Dallas. I would now like to turn briefly to the nontask force cases. These are the ones in which we have worked the prosecutions in the northern district of Texas outside of any task force concept. This is the typical, usual case where an FBI agent, usually an FBI agent, brings to a single prosecutor a case for investigation. That prosecu- tor and that agent work that case. Each of the individuals has a number of other cases on their inventory. They simply work that case as one more case on their inventory. It is impossible to estimate the number of assistant U.S. attor- neys assigned to that effort in my district over the past few years. It is accurate, however, to say that virtually every criminal assist- ant U.S. attorney in the northern district of Texas, other than those dedicated solely to drug task force prosecutions, have or have had bank fraud-related cases as part of their active inventory. Since January 1, 1985, through December 31, 1989, 214 individ- uals have been charged with bank fraud-related offenses by individ- ual assistant U.S. attorneys working outside any task force concept. These cases range in size from those that would be considered less majorS by today's standards to major cases which rival many of those brought by the Dallas Bank Fraud Task Force. I have set forth examples of those cases on pages 10 through 20 of the booklet, "Fraud in Financial Institutions, U.S. Attorney's Report, northern district of Texas," which I have submitted along with my testimony and would ask the committee to receive and file for the record. PAGENO="0015" 11 Mr. BARNARD. Without objection, that will become a part of the record. [The report follows:] PAGENO="0016" 12 U.S. Department Of Justice U.S. Attorney Fraud in Financial Institutions January 1, 1985 - December 31, 1989 United States Attorney's Report Northern District of Texas PAGENO="0017" 13 TABLE OF CONTENTS ~gg Introduction . 1 The Northern District of Texas 2 Scope of Report Development of the Problem 8 Major Prosecution Initiatives: Non-Task Force Prosecutions 10 1-30 Task Force (TEXCON) 20 Dallas Bank Fraud Task Force (THRIFTCON) 27 Bank Fraud Working Group: Interface with Regulators 45 Future of Bank Fraud Prosecution 46 Conclusion 48 Acknowledgements Caveat . . 51 1 PAGENO="0018" 14 INTRODUCTION Beginning in the mid-l980's, savings and loans and commercial banks began failing at a rate not equalled since the Great Depression. Associated with these massive failures was a greatly increased volume of criminal fraud. In response to an unprecedented level of fraud in the banking industry in this area, the United States Attorney's Office for the Northern District of Texas has been aggressively pursuing prosecution of bank fraud violators. In this district formal bank fraud charges have been filed against 359 individuals since January 1, 1985. This report summarizes the prosecution of fraud in federally insured financial institutions in the 100 counties of the Northern Federal Judicial District of Texas, from January 1, 1985 through December 31, 1989. PAGENO="0019" 15 THE NORTHERN DISTRICT OF TEXAS The Northern District of Texas covers a vast geographic area composed of many diverse population groups. The district has prosecutive responsibility for 100 counties covering 95,895 square miles. Within the district are densely populated metropolitan areas as well as many rural and desert areas that are sparsely populated. Five of the ten nost populous cities in Texas are in the Northern District. The 100 counties of the Northern District of Texas are divided into seven multi-county divisions: Dallas, Fort Worth, Lubbock, Amarillo, San Angelo, Wichita Falls and Abilene. The United States Attorney's Office maintains staffed offices in each of the four divisions in which one or more United States District Judges are based: Dallas, Fort Worth, Amarillo and Lubbock. Fort Worth is the headquarters for the 100 county district. That office has the largest non-attorney staff because of centralized, headquarters functions. The Dallas office has the largest attorney staff, the caseload being the heaviest in that division. The Lubbock and Amarillo offices, though relatively smaller, each have very significant caseloads, and serve geographically large regions of Texas. The Abilene, San Angelo and Wichita Falls offices are serviced by the Courts and the United States Attorney's Office on a travel basis. 2 PAGENO="0020" 16 Northern District of Texas 7U~ari11o Lubbock Wichita Falls - -- lUile Ft. Worth Dallas PAGENO="0021" 17 Abilene Division (13 Counties) Callahan Jones Stonewall Eastland Mitchell Taylor Fisher Nolan Throckinorton Haskell Shackleford Howard Stephens Amarillo Division (26 Counties) - Staffed Armstrong Dallain Hartley Oldham Swisher Brisco Deaf Smith Hemphill Parmer Wheeler Carson Donley Hutchinson Potter Castro Gray Lipscomb Randall Childress Hall Moore Roberts Collingsworth Hansford Ochiltree Sherman Dallas Division (7 Counties) - Staffed Dallas Kaufman Ellis Navarro Hunt Rockwall Johnson Fort Worth Division (8 Counties) - Headquarters Comanche Palo Pinto Erath Parker Hood Tarrant Jack Wise Lubbock Division (19 Counties) - Staffed Bailey Dickens Hockley Motley Borden Floyd Kent Scurry Cochran Gaines Lamb Terry Crosby Garza Lubbock Yoakum Dawson Hale Lynn San Angelo Division (15 Counties) Brown Glasscock Runnels Coke Irion Schleicher Coleman Menard Sterling Concho Mills Sutton Crockett Reagan Tom Green Wichita Falls Division (12 Counties) Archer Hardeman Wilbarger Baylor King Young Clay Knox Cottle Montague Foard Wichita 4 PAGENO="0022" 18 SCOPE OF REPORT It is important to note at the outset what this report covers, as well as what it does not cover. It contains statistics and summaries only of cases actually filed and a matter of public record as of December 31, 1989. There were on December 31, 1989, massive and unprecedented criminal investigations in progress in this District which had not yet produced formal criminal charges. This report cannot mention, summarize, or refer to any of those investigations by name. Many of those investigations will proceed for several more years before formal charges are filed and made a matter of public record. Only those cases in which the United States Attorney's Office has authority to investigate and prosecute are included. Even though the Fraud Section of the Criminal Division, U.S. Department of Justice participates with the United States Attorney's Office in the Northern District as regards the Dallas Bank Fraud Task Force, the cases handled by the Task Force outside the Northern District of Texas are not included in this summary. For example, cases occurring in Plano, Denton, San Antonio, Houston, Austin or other states are outside the jurisdiction and power of the United States Attorney's Office for the Northern District of Texas and are not included. When cases cross jurisdictional boundaries, this United States Attorney's Office works closely with the other offices in those Districts 5 PAGENO="0023" 19 and States, as well as with the Department of Justice, to insure effeci~ive prosecution in those other Districts. While the focus of publicity in recent years has been on the savings and loan industry, this Office makes no distinction between savings and loans and commercial banks for purposes of investigation and prosecution. Fraud in a federally insured commercial bank is just as serious as fraud in a federally insured savings and loan. Indeed, some of the same people have defrauded both savings and loans and commercial banks. It is true that extra emphasis has been given to investigation and prosecution of some massive fraud involving commercial real estate development occurring in savings and loans. When counting cases for statistical purposes, care must be taken in judging the size and significance of the cases. What may have been a very significant case in scope and size four years ago, or even two years ago, may, by comparison to current cases, appear smaller. Moreover, the real measure of success is measured not only in the prosecution of the large, well-organized schemes, but also in the prosecution of the small, relatively tight-knit groups which collectively add up to large losses. The individual contemplating bank fraud on any level must know there is a genuine risk of felony prosecution and conviction. A very significant case may be brought against a heretofore unknown individual because of the significance or scope of the fraud, and a relatively small case may sometimes be brought against a very signifitant defendant because there is no other provable criminal 6 PAGENO="0024" 20 conduct (and may never be), and it is unfair to allow that individual to escape all prosecution. Finally, relatively minor cases are occasionally brought against minor individuals who are a vital link in the ability to take the next step in investigation of a larger scheme. Those cases, which may not on the surface appear significant, are often indispensable in reaching the individual who is next higher on the ladder of culpability. This report is not designed as a road map of the many highly convoluted, complex schemes which have been investigated. Indeed, the indicted cases themselves often do not attempt to re- create the entire scheme, since that is usually unnecessary to criminal prosecution, and would unduly complicate and lengthen the trial of the case. The case summaries in this report simply describe the cases which appear in the public record, which is often only a small part of an overall scheme. - The cases in which formal charges are filed are often several years old, not what the public may be reading or hearing about in the media. This is so because it may be several years after the fraudulent act that a matter is first referred to authorities by the financial institutions. Thereafter, it takes anywhere from eight months to two years to investigate these complex cases. Thus, on the criminal side we see the cases through a time warp, and ordinarily not near the time of the fraud. 7 PAGENO="0025" 21 Therefore, it should be emphasized that the bulk of the investigative effort that has been taking place within the last year to eighteen months is not reflected in this report, because those cases have not yet been filed. It is the nature of those who have committed crime not to be willing to admit their guilt until they are absolutely convinced that the prosecution has an airtight case. It is for this reason that the amount of work which goes into a guilty plea - particularly in white collar cases - is often 75% or more of the total work if the case had gone to trial. A guilty plea in a bank fraud case thus sometimes entails almost as much work and legal expertise as a contested case. Thesignificance of guilty pleas should not be undervalued in assessing the level of accomplishment. DEVELOPMENT OF THE PROBLEM During the latter half of the l970s and early 1980s, Texas experienced a period of rapid economic growth. This growth, attributable in part to the energy boon then being enjoyed in the oil producing states, created a SShotI~ real estate market which was rampant with real estate speculators, adventurists and unscrupulous promoters, as well as legitimate businessmen. The real estate growth was particularly heavy in the North Texas - Dallas Metroplex area and involved every type of real estate fron undeveloped raw land to commercial construction projects. 8 PAGENO="0026" 22 Accompanying the spiraling real estate activities were incidental increases in financial demands to service the burgeoning real estate market. These demands fell primarily on the banking and savings and loan industries. To accommodate this expanded demand for capital, numerous federally insured banks and savings and loan institutions opened their doors for the first time, or were sold and opened under new, "aggressive" management. In other cases, real estate "promoters" took over existing financial institutions, either formally or through gaining "control" of existing principals in the institutions. In this atmosphere a pattern of activity emerged in the operation of many new financial establishments which ranged from bad business practices to outright criminal fraud. The management of many of these new (or newly acquired) establishments seldom involved a substantial personal capital outlay. Investigation has substantiated that in almost all of these banks and savings and loans, which subsequently became insolvent, some level of "insider" participation in fraudulent activities had occurred. The fraudulent activity involved was sometimes the direct cause of the insolvency. The criminal activities consisted of a wide range of fraud, including misapplication (18 Usc 656 and 657); false entries (18 usc 1005 and 1006); submission of false statements (18 USC 1014); bank fraud (18 USC 1344); and far-reaching conspiracies (18 USC 371), which were devised to facilitate schemes to make wealthy the participants at the expense of the general depositing public, 9 PAGENO="0027" 23 either directly or through losses suffered by the Federal Depositort s Insurance Corporation (FDIC) and the Federal Savings and Loan Insurance Corporation (FSLIC). These wide-spread fraudulent activities have undoubtedly been the primary factor causing the insolvency of a number of financial institutions in Texas, many of which have been taken over by the FDIC and FSLIC. MAJOR PROSECUTION INITIATIVES The United States Attorney's Office for the Northern District of Texas in recent years has been conbating the bank fraud problem on three separate fronts: The 1-30 (TEXCON) Task Force, the Dallas Bank Fraud Task Force (THRIFTCON), and cases prosecuted by Assistant United States Attorneys outside of any task force concept. NON-TASK FORCE PROSECUTIONS Since 1985, Assistant United States Attorneys working outside of any task force concept have vigorously prosecuted savings and loan and bank fraud cases in the Northern District of Texas. Virtually every Assistant United States Attorney who has served in the Criminal Division since 1985 (with the exception of those dedicated solely to drug and tax prosecutions) has prosecuted some of these cases. To date 214 individuals have been formally charged by the United States Attorney's Office with bank fraud violations in non-Task Force cases. 10 PAGENO="0028" 24 The following cases constitute a small sampling of non-Ta~sk Force prosecutions. United States v. James L. Kington and Don Earney, CR1-85-OOl-R On February 19, 1985, an indictment was returned against James L. Kington and Don Earney charging them with 53 counts of misapplication of bank funds, falsifying loan applications, and causing a bank to fail to report currency transactions over $10,000. Kington was charged additionally with filing a false income tax return. At the time of these offenses, Earney was the president and Kington was the vice-president of the Abilene National Bank in Abilene, Texas, which is now defunct. Prior to the trial of this case, eighteen counts of the indictment were dismissed. Kington and Earney were found guilty on the remaining counts. Kington's conviction exposed him to a maximum possible punishment of 100 years confinement and a fine of up to $1 million. Earney's conviction exposed him to a maximum possible punishment of 128 years confinement and a fine of up to $1 million. Upon sentencing, the Court imposed punishment of twelve years imprisonment and a fine of $25,000 each on Kington and Earney. United States v. Roy Ryan. et al., CR5-86-4l An indictment charging bank fraud was filed on May 26, 1986, against Roy Ryan and eleven other individuals. Of the original twelve persons who were indicted, all but three plead guilty. The three remaining defendants were West Texas developer Roy Ryan, attorney Laurence B. Vineyard, Jr., and the owner of State Savings and Loan Association, Tyrell Barker. Following a three week trial in January 1987, the three were found guilty of conspiracy, making. false statements in connection with a loan application, wire fraudand misapplying bank funds. This case involved a complex scheme in which a series of land flips were used to inflate the value of the land to be used as collateral for a loan to purchase that land, thereby creating a windfall to the participants in the scheme. The convictions of Ryan, Vineyard and Barker exposed them to maximum possible punishment as follows: Ryan, 21 years confinement and a fine of up to $27,000; Vineyard, 19 years confinement and a fine of up to $30,000; and Barker, 17 years 11 PAGENO="0029" ~25 confinement and a fine of up to $21,000. Upon sentencing, the Court imposed punishment as follows: Ryan was sentenced to eight years imprisonment and fined $22,000. Vineyard was sentenced to five years imprisonment and fined $5,000. Barker was sentenced to five years imprisonment and fined $20,000. Ryan and Vineyard also were ordered to pay "restitution to any institution or individual determined to have suffered financial loss because of the acts of the defendant in violating the laws as alleged in counts" of which each was convicted. This case is very significant in its deterrence value. Ryan, Vineyard and Barker appealed their convictions. The Fifth Circuit Court of Appeals affirmed their convictions on October 12, 1988. United States v. Barbara Ruth Manuel, CR5-86-077 On December 10, 1986, Barbara Ruth Manuel was charged in a ten count indictment with mail fraud and bank fraud. From October 22, 1985 to November 30, 1985, Barbara Manuel executed a scheme to defraud First Federal Savings of Lubbock, Texas, and Aetna Insurance Company. Manuel reported a loss of property resulting from a burglary at her residence to Aetna Insurance Company. Aetna mailed Manuel a check in the amount of $13,058.70 as payment for the loss. Manuel opened a checking account at First Federal Savings and deposited the $13,058.70 check from Aetna. After withdrawing the majority of the funds from the account, Manuel notified Aetna that she had not received payment for her loss. Aetna stopped payment on the first check and issued a second check for $13,058.70. She then cashed the second check at Bank of the West, Lubbock, Texas. On June 9, 1987, Barbara Manuel was found guilty of Counts 2 through 10 after a trial before the Court. Manuel's conviction exposed her to a maximum possible punishment of 45 years confinement and a fine of up to $500,000. On July 14, 1987, the Court imposed a punishment of five years imprisonment to be followed by five years probation. Manuel was further ordered to pay $13,000 in restitution to First Federal Savings, Lubbock, Texas. United States v. John Trice, CR3-86-175-T On June 17, 1986, a four count indictment was filed against John Trice charging him with making false material statements in connection with requests for advances of loan proceeds from a federally insured financial institution. 12 PAGENO="0030" 26 In 1983, Trice, an attorney, established T & H Materials, Ltd., a sand and gravel business. Trice transacted the banking for T & H Materials, Ltd., initially establishing a company checking account and a $700,000 line of credit at Lancaster First Federal Savings Association (Lancaster). The indictnent alleged that Trice submitted four false invoices to Lancaster in connection with requests for loan proceeds. Specifically, Trice created and submitted invoices falsely reflecting that services had been performed, when, in fact, the services had not been performed. Other invoices reflected inflated prices of equipment purchased. Trice induced contractors to make payments back to him after he paid loan proceeds to them. A jury trial was held in October, 1986. Trice was found guilty on three of the counts and acquitted on the fourth. Trice's conviction exposed him to a maximum possible punishment of six years confinement and a fine of up to $15,000. On December 18, 1986, the Court imposed a punishment of concurrent two year terms of imprisonment on two of the counts and a suspended sentence with five years probation on the third. The conviction on the two counts which carried imprisonment sentences were reversed on appeal. The conviction on the remaining count was affirmed. United States v. William Boyd Ewing. Jr., CR3-86-373-D William Boyd Ewing, Jr., was charged on November 12, 1986, with one count of bank fraud. Ewing attempted to obtain over $35 million in loans from numerous financial institutions using bogus financial statements and false tax returns. Ewing was convicted prior to any loans being approved. Ewing's conviction exposed him to a maximum possible punishment of five years confinement and a fine of up to $10,000. On January 9, 1987, the Court imposed the maximum punishment. United States v. Robert W. Gunter. et al., CR3-87-096-G On July 23, 1987, a multiple count indictment charging conspiracy, bank fraud, and false statements to an institution whose accounts were insured by the federal government, was returned against Robert W. Gunter, president of Best Motors, Inc., and Roadshow, Inc., in Dallas, Texas. Also-charged in the indictment were Bobbie Jean Gunter, Robert's mother and corporate 13 PAGENO="0031" 27 1' secretary, title clerk, and bookkeeper, and Virginia A. Thomas, Robert's sister and representative of Robert's businesses in banking transactions. Gunter, Gunter and Thomas engaged in a fraudulent scheme which involved, among other acts, the kiting of over $60,000,000 in worthless checks between three banks during a three month period and the pledging to banks of numerous titles to cars not then owned by then or their companies in order to receive advances of loan proceeds. Gunter, Gunter and Thomas were able to conceal the declining financial condition of their companies from the lending institutions and perpetuate the scheme by repeatedly using additional worthless checks to redeem the car titles from banks and take them to other banks for use as collateral. The scheme resulted in large monetary losses to several local financial institutions. All three were found guilty after a jury trial on November 9, 1987. Robert Gunter's conviction exposed him to a maximum possible punishment of 67 years confinement and a fine of up to $500,000. Gunter committed suicide on December 30, 1987. His mother and sister's convictions exposed them to a maximum possible punishment of 47 years confinement and a fine of up to $500,000. Upon sentencing, the Court imposed a punishment of five years imprisonment each. In addition, they were ordered to make restitution of $2.2 million to the victim financial institutions. The convictions of Bobbie Jean Gunter and Virginia Thomas were affirmed on appeal. United States v. Connie C. Armstrong, et al., CR3-87-259-T Connie C. Armstrong, former chairman of the board of Premier Bank in Dallas, Texas, did a lot of wheeling and dealing while he served as chairman in 1986 and 1987. However, most of his time was spent buildIng a rapport with men (IRS undercover operatives) he believed were drug money managers in need of banks and other financial institutions to launder their drug profits. Initially, Armstrong met Joe Blanton of Tulsa, Oklahoma. Blanton was a self-proclaimed dealmaker. Blanton arranged for Armstrong to fly to Miami, Florida, to meet Amado Hernandez (undercover operative for the IRS), a purported drug money manager employed by Columbian drug dealers. Armstrong anxiously agreed to launder the "dirty" money. Armstrong used his position on the board to influence and corrupt James R. Harrison, a co-indictee and former president and chief executive officer of Premier Bank to engineer cash deposits 14 PAGENO="0032" 28 of $200,000 at Premier Bank, and cause the bank to file false currency transaction reports (CTR5). Armstrong expanded his money laundering operations and solicited the advice, expertise, and knowledge of Tom Crouch, a lawyer-auctioneer and former chairman of the Dallas County Republican Party and a presidential aide during the Nixon administration. Crouch and Armstrong established a pattern of accepting large quantities of cash in excess of $100,000 during 1986 and 1987, and failed to file currency transaction reports as required by law. These two men were financial institutions in the eyes of the law. One of these transactions occurred on December 18, 1986. Armstrong and Crouch accepted $150,000 from Amado Hernandez and never filed a currency transaction report. Armstrong arranged for Hernandez to meet Crouch at Crouch's North Dallas law office. Crouch received the cash at his law office and exchanged the cash for an auction money order. The bank money order, in the sum of $150,000 was presented to Crouch on December 17, 1986, for payment of equipment sold at auction. On December 18, 1986, the bank money order was used by Crouch and Armstrong to conceal the true source of the Hernandez cash. Armstrong and Hernandez deposited the bank money order into a fictitious car wash checking account opened by Armstrong to serve as a front to launder the drug money. Armstrong and Crouch laundered nearly one million dollars through banks and other financial institutions in the Dallas area. During the course of a jury trial in June 1987, Crouch and Armstrong plead guilty to the December 18, 1986, money laundering scheme. Harrison plead guilty to a separate bill of information charging him with filing a false CTR on behalf of Premier Bank. Blanton plead guilty to conspiracy to launder United States currency through Dallas banks and other financial institutions. In a related development, Premier Bank was dismissed from the indictment when post indictment evidence revealed the new owners and management had no knowledge of the criminal activities of the former owners and officers, and all money laundering activities had ceased before the purchase of the bank. It is worthy to note that the Armstrong case represented the first time in the Northern Distridt of Texas that a bank was indicted for criminal conduct. Also, this was the first time in the nation's history that a chairman of the board of a bank was convicted of money laundering crimes. The convictions of Crouch and Armstrong exposed them each to a maximum possible punishment of five years confinement and a 15 PAGENO="0033" 29 fine of up to $250,000. Upon sentencing, the Court imposed a punishment of two years imprisonment each and Armstrong was fined $100,000. United States v. Edwin Cox, Jr., CR3-88-l55-G Edwin Cox, Jr., Chairman of the Texas Wildlife Commission, was charged June 24, 1988, in a one count information with bank fraud. Cox, a multi-millionaire, was a member of the loan committee of Interfirst Bank, one of Dallas' largest banks. Due to financial difficulties, Cox began submitting false reports to the bank concerning his business operations so that the bank would continue his $75 million line of credit. Cox, who ultimately repaid the bank $75 million, plead guilty on September 7, 1988. Cox's conviction exposed him to a maximum possible punishment of five years confinement and a fine of up to $250,000. Upon sentencing, the Court imposed a punishment of six months imprisonment, four and one-half years probation and a fine of $250,000. United States v. Hugh Slatery, CR3-88-228-H David Puterbaugh and Hugh Slatery had been business partners in an investment brokerage firm. In April 1987, Slatery persuaded Puterbaugh to invest his own funds in a one-day stock buy/sell transaction. Slatery represented to Puterbaugh that he would buy a block of Healthdyne stock from an estate sale in Tennessee at a low price and turn around and sell it to a large brokerage firm in New York the same day at a profit. Based on that representation, Puterbaugh had his bank, located in Peoria, Illinois, wire transfer $850,000 to an account of Slatery's in Irving, Texas. Although no stock purchase was ever made, the day after the transaction was supposed to have occurred, Slatery sent Puterbaugh a letter stating that the transaction did, in fact, take place along with the exact dollar amount of the profit distribution and when Puterbaugh would receive his share plus his principal. Puterbaugh later received a check .from Slatery which purported to cover the sums involved but the check was dishonored as insufficient. Subsequently, Slatery declared bankruptcy and Puterbaugh was unable to recover any of his investment. Slatery plead guilty to an information charging him with wire fraud on October 27, 1988. Slatery's conviction exposed him 16 30-830 0 - 90 - 2 PAGENO="0034" 30 to a maximum possible punishment of five years confinement and a fine of up to $250,000. Upon sentencing, the Court imposed a punishment of five years imprisonment. Slatery was further ordered to pay $850,000 in restitution. United States v. Jon R. Webber. Thomas Reid and Michael J. Rogers, CR3-88-253-H Jon R. Webber, Thomas Reid and Michael J. Rogers were indicted on December 6, 1988, and charged with conspiracy to commit bank fraud. This case involved the Energy Bank of Dallas, the first bank in the Dallas area to fail in recent times. The prosecution, based on a scheme to defraud the bank through the misapplication of bank funds by the president of the bank, Jon Webber, resulted in the convictions of all three defendants after a trial to the jury. The convictions exposed Webber and Reid to a maximum possible punishment of 20 years confinement and a fine of up to $25,000 each. Rogers' conviction exposed him to a maximum possible punishment of 15 years confinement and a fine of up to $20,000. On July 13, 1989, the Court sentenced Webber, Reid and Rogers each to four years imprisonment. United States v. Robert Dexter Taylor, Edward Taylor and Joyce McLane, CR3-88-269-T A two count indictment was filed on December 21, 1988, charging Robert Dexter Taylor, Edward Taylor and Joyce McLane with conspiracy to commit bank fraud and bank fraud. The indictment charged that between January 1 and October 21, 1988, Robert Taylor, Edward Taylor and Joyce McLane conspired together to embezzle bank funds from First State Bank of Grand Prairie. Robert Taylor worked for his brother, Edward Taylor, of Z Corp Motor Lines. They also operated Z Corp Cattle Company, Z Corp Feed Mill, Z Corp Energy Company, and Z Corp Properties. These businesses had several accounts, one of which was with First State Bank of Grand Prairie. Robert Taylor's mother-in- law, Joyce McLane, was the vice-president and cashier at First State Bank of Grand Prairie. McClane, at the direction of Edward Taylor and Robert Taylor, caused in excess of $5 million to be illegally deposited into bank accounts controlled by Edward Taylor and Robert Taylor. 17 PAGENO="0035" 31 On December 7, 1989, Robert Taylor, Edward Taylor and Joyce McLane each plead guilty to one count of bank fraud and aiding and abetting bank fraud. The convictions of Taylor, Taylor and McClane exposed then to a maximum possible punishment of five years confinement and a fine of up to $250,000. *Joyce McClane was sentenced on January 25, 1990. The Court imposed a punishment 27 months imprisonment to be followed by three years probation. McLane was further ordered to pay $5 million in restitution. Robert Taylor and Edward Taylor are set for sentencing February 15, 1990. United States v. Warren Walton Bobo. Jr., CR3-89-001-F Beginning in 1985, and continuing through October, 1986, Warren Walton Bobo, Jr., doing business as Motor Sport Unlimited, Dallas, Texas, employed a scheme by which he defrauded Guaranty Bank of Dallas of over $600,000. The scheme essentially relied on Bobo depositing drafts, containing fraudulent automobile titles for immediate credit to his account at Guaranty Bank. However, Bobo knew that at the time the drafts were deposited at Guaranty Bank that the Bank on which they were drawn, First City Bank - Addison, Texas, did not have on deposit funds sufficient to honor his outstanding drafts. Bobo paid the drafts at First City Bank with funds supplied in the form of cashier's checks drawn on Guaranty Bank and re- deposited these and other fictitious drafts into his account at Guaranty Bank. After a period of time, the number and amount of fraudulent drafts escalated. In this manner, Bobo created an unauthorized line of credit for non-existent automobiles. Bobo plead guilty to an information charging him with bank fraud on January 13, 1989. Bobo's conviction exposed him to a maximum possible punishment of five years confinement and a fine of up to $250,000. On February 17, 1989, the Court imposed a punishment of five years imprisonment and ordered Bobo to make $610,919.80 in restitution to the Federal Deposit Insurance Corporation. United States v. Allan W. Salah also known as Wael Mohammed Al- ~alah, CR3-89-ll-T Allen Salah is a citizen of Bahrain who has been residing in the United States for approximately nine years. During that nine year period, Salah has been the subject of numerous investigations by state and local authorities in the states of Louisiana and Texas as well as investigations by the Federal Bureau'of Investigation, United States Customs, Immigration and Naturalization Service, the Internal Revenue Service, the United 18 PAGENO="0036" 32 States Secret Service, United States Postal Inspectors and others concerning various schemes and fraudulent enterprises allegedly perpetrated by Salah. A few years ago Salah was indicted on a multiple count fraud indictment in Louisiana. Apparently, Salah was able to "talk his way out" of these charges by paying back the money that was taken and promising to voluntarily leave the United States to avoid deportation. These charges were dismissed. Instead of leaving the United States, Salah, who represented that he worked for Louisiana Governor Edwin Edwards (before the Governor's indictment) and made an income over $200,000 per year, moved to Texas, married another woman, reapplied for U. S. citizenship, and got into the printing and automobile business, being follpwed by numerous monetary judgments from civil judgments against him. In the summer of 1988, while investigating a situation where Salah allegedly was shipping automobiles to Kuwait without paying for them in the United States, the FBI and the U. S. Customs Service discovered some apparent irregularities in Salah's banking practices. This led a 35 count federal indictment to be returned against Salah on January 11, 1989, charging Salah with bank fraud and various frauds against the United States. On April 20, 1989, Allen Salah plead guilty to three counts of bank fraud and false statements to the United States. Salah's conviction exposed him to a maximum possible punishment of fifteen years confinement and a fine of up to $500,000. Upon sentencing, the Court imposed a punishment of thirty months imprisonment without parole (the maximum allowable under the Sentencing Guidelines). The actual loss to the banks was held to under $250,000 by the swift action of the FBI, saving a potential loss to Dallas area banks and thrifts of well over one million dollars. The Immigration and Naturalization Service intends to deport Salah at the conclusion of his sentence. United States v. David Hess and Aaron Angle, CR3-89-l77-R On June 28, 1989, a two count indictment was filed against David Hess (an attorney), and Aaron Angle charging them with bank fraud. Aaron Angle, a loan officer for Guaranty Federal Savings and Loan Association, submitted false documents in support of applications for two loans to David Hess. On December 11,. 1988, David Hess applied for a loan of $168,500. The loan was allegedly for the purchase of a two-story home located in Austin, Texas. In order to process the loan, Angle submitted a false appraisal stating the home was worth $211,000. He also submitted a false survey of the property. It was later determined that the address of the home was actually an 19 PAGENO="0037" 33 empty lot sold to Hess, and was worth only $30,500. The original appraisal contained a picture of a two-story home actually located somewhere on the same street as the empty lot, and contained a false signature. The extra proceeds of this loan, $138,000, were deposited into David Hess' personal account. Angle received a $15,000 commission on this transaction. During June, 1988, Angle processed a $250,000 loan for Hess to purchase a two-story stone house fraudulently appraised at $370,000. The house in question, however, was actually a run- down,;gutted, one-story frame house worth only $42,000. The extra proceeds of this loan totalled $208,000. Angle received a portion of this amount as commission. Aaron Angle entered a plea of guilty to both counts on October 2, 1989. Angle's conviction exposed him to a maximum possible punishment of ten years confinement and a fine of up to $500,000. On December 15, 1989, the Court imposed a punishment of eighteen months imprisonment to be followed by three years probation. He was also fined $3,000. David Hess was found guilty by a jury on October 5, 1989. Hess's conviction exposed him to a maximum possible punishment of ten years confinement and a fine of up to $500,000. On December 15, 1989, the Court imposed a punishment of one year imprisonment. PROSECUTIONS BY 1-30 TASK FORCE In the early 1980's, fraudulent banking and real estate transactions resulted in a massive oversupply of condominiums under development along the Interstate 30 corridor east of Dallas. An investigation began by the Federal Bureau of Investigation and Texas Department of Public Safety in 1984 discovered projected losses to lending institutions in excess of $500 million. In 1985, a Task Force headed by the United States Attorney's Office with assistance from the Fraud Section of the Criminal 20 PAGENO="0038" Division, U.S. Department of Justice was formed to prosecute the large number of participants in this fraudulent scheme. The success of the 1-30 Task Force was made possible by the early investigative actions of the Dallas County District Attorney's Office and the Texas Department of Public Safety and their continued support and assistance throughout the investigation. To date 99 individuals (82 in the Northern District of Texas and 17 in the Eastern District of Texas) have been convicted, two dismissed, and none acquitted. A total of 111 individuals have been charged in the scheme (94 of whom were charged in the Northern District of Texas, 10 of whom are still awaiting trial). Professionals convicted in the 1-30 scheme include one medical doctor, `one chiropractor, two lawyers, four CPA's, one appraiser, five bankers, and one stock broker. In October 1987, seven major participants in the fraud were indicted in. 88 counts charging various violations including charges under the RICO statute and conspiring to fraudulently obtain more than $100 million in money and property from five savings and loan institutions, four of which have since gone out of business. United States v. David~ L.. Faulkner. et al., CR3-89-289-R This indictment centers on a bank fraud scheme through which hundreds of millions of dollars in loans were fraudulently obtained from five federally insured savings and loan institutions. These loans were made to fund, at artificially inflated prices, land purchases and condominium construction loans for projects along the so-called 1-30 corridor, east of Dallas, as well as elsewhere in the Dallas area. Through the course of the conspiracy, millions of dollars, representing most 21 PAGENO="0039" 35 of the land loan proceeds, were diverted to benefit the defendants and their co-conspirators. From the spring of 1982 through the end of 1983, the conspiracy was responsible for the funding of hundreds of loans involving more than fifty major land developments. These major parcels of land were subdivided into many separate tracts of land, generally two to five acres in size, each of which was supposed to become a condominium project. The purchase for each tract was funded by a separate land loan in the $500,000 to $1 million range, and for many of the tracts separate construction loans were also made. These tracts of land were to be the sites of individual condominium projects. Ultimately, most of the "planned" condominiums were not even built and those that were built could not be sold. The indictment charges that each of the defendants played a significant role in insuring that the scheme would thrive and in creating an illusion that they were legitimate real estate promoters. Defendants David L. Faulkner, James Larkin Toler and Kenneth Earl Cansler were the land developers. Initially, Faulkner and Toler were publicly associated with all the developments. Later, they hid their involvement by using intermediaries such as Cansler. Throughout, they determined how the money would be divided. They recruited and corruptly rewarded bankers, including defendants Spencer Hayward Blain and Paul Arlin Jensen, to make available virtually unlimited amounts of loan money to fund the developments they were orchestrating. Defendants Paul Douglas Tannehill and Arthur Formann, as land and condominium appraisers, supplied the inflated appraisals needed by the bankers to support the fraudulent loans. It is alleged that the purpose of the schene was to divert the vast majority of the proceeds from the fraudulent loans to the promoters, the lenders and their friends. Faulkner's illicit profits were approximately $40 million and Toler, his partner, made approximately $38 million. Toler's profits were usually channelled to family members and an array of companies he controlled. Cansler gained approximately $12 million through his participation in the scheme. It is further charged that the bankers named in the indictment, as well as other bankers, were richly rewarded for providing the money which financed the scheme. For example, Blain made $16 million through a single prearranged "land flip" transaction orchestrated by Faulkner and Toler. His total illicit gain was $22 million. Jensen, in a period of approximately six months, took $24 million from projects he caused two savings and loan institutions to fund. This case was transferred to Lubbock for trial. Trial commenced February 6, 1989, and ended in a mistrial on 22 PAGENO="0040" 36 September 15, 1989, when the jury was declared deadlocked, according to news reports having voted eleven to one for conviction of all defendants on all counts. The case will be retried in Dallas at a yet-to-be-determined date. United States v. Duncan Lawrence McKeller, CR3-85-086-R On May 30, 1985, a twelve count superseding indictment was filed against Duncan Lawrence McKeller charging him with making false statements to a federally insured financial institution in connection with an application for a loan. McKeller, a Dallas physician, participated in thirteen loan transactions from December 2, 1982, to December 1, 1983, totalling over $10 million. McKeller was convicted by a jury of all charges. McKeller's conviction exposed him to a maximum possible punishment of 24 years confinement and a fine of up to $60,000. On August 23, 1985, the Court imposed a punishment of four years imprisonment and a fine of $55,000. McKeller was further ordered to pay restitution in the amount of $191,073 and perform 300 hours of community service. This case is significant in that it was the first 1-30 case to go to trial. United States v. Larry Wayne Hutson, CR3-85-l22-G A one count information was filed on April 17, 1985, charging Larry Wayne Hutsom with one count of conspiracy. Hutson was an MAI (Master of the Appraisal Institute at the American Institute of Real Estate Appraisers) designated real estate appraiser who prepared hundreds of fraudulently inflated land appraisals used to support the loans toacquirethe land and build the 1-30 condominiums. On April 24, 1985, Hutsori entered a plea of guilty to the conspiracy charge. Hutson, who has testified at several of the 1-30 trials and is a major witness in the Faulkner. et al. case, is awaiting sentencing. Hutson1s conviction exposes him to a maximum possible punishment of five years confinement and a fine of up to $10,000. United States v. Ernest Walter Hughes, CR3-86-395-T Ernest Walter Hughes was indicted on December 9, 1986, on two counts of conspiracy. 23 PAGENO="0041" 37 Hughes was an early borrower on the 1-30 condominium projects and was responsible for recruiting other persons as borrowers. Hughes took over the business of Kitco Development Company, through Peak Investments, Inc., and other companies of which he was the principal. He distributed the proceeds of the fraudulent loans, prepared the financial packages for the borrowers, and purchased and subdivided the land into tracts for condominium projects. On December 18, 1986, Hughes plead to both counts of conspiracy. Hughes, a major witness for the government in the Faulkner, et al. case, is awaiting sentencing. Hughes' conviction exposes him to a maximum possible punishment of ten years confinement and a fine of up to $20,000. United States v. Clifford Ray Sinclair and Robert Lueben, CR3-85-398-H On December 17, 1985, a 24 count indictment was filed charging Clifford Ray Sinclair and Robert Lueben with conspiracy, making false statements to a federally insured lending institution and aiding and abetting. Clifford Sinclair and his associate, Robert Lueben, together with other conspirators, recruited over 400 individuals to invest in condominium projects. Many individuals were ordered to submit false lending information to financial institutions to obtain loans to purchase the projects. Sinclair, Lueben, and the co-conspirators also caused over 1,000 false appraisals to be prepared and submitted to financial institutions who were funding the condominium projects. These appraisals greatly overstated the value of the projects, resulting in loans with insufficient collateral. The condominium projects failed resulting in loan defaults of several hundred million dollars. Sinclair plead guilty on March 24, 1986, to a four count information charging him with conspiring to commit bank fraud, making false statements to a federally insured lending institution, and making false statements to a government agency. According to the plea agreement, Sinclair's conviction exposed him to a maximum possible punishment of thirteen years imprisonment in return for his agreement to testify in the trial of United States v. Faulkner, etal., CR3-88-067-C. In addition to thirteen years imprisonment, the Court imposed an additional punishment of three years probation, a fine of $40,000, and ordered Sinclair to pay restitution in the amount of $600,000 to the Federal Savings and Loan Insurance Corporation. 24 PAGENO="0042" 38 After a jury trial on May 23, 1986, Robert Lueben was found guilty of all 24 counts. Lueben's conviction exposed him to a maximum possible punishment of 69 years confinement and a fine of up to $155,000. Upon sentencing, the Court imposed a punishment of eight years imprisonment to be followed by five years probation and a fine of $10,000. United States v. David Cantrell, CR3-85-399-G David Cantrell was charged in a sixteen count superseding indictment on January 29, 1986, with conspiracy, making false statements to a federally insured lending institution and aiding and abetting. Cantrell, another early borrower on the 1-30 condominium projects and an associate of Ernie Hughes, was responsible for recruiting other persons as borrowers. Cantrell advised these borrowers as to how they could falsify financial statements in order to qualify for loans. Cantrell additionally submitted a number of his own falsified financial statements. Cantrell was found guilty of all sixteen counts following a jury trial on February 21, 1986. Cantrell's conviction exposed him to a maximum possible punishment of 41 years confinement and a fine of up to $95,000. On March 26, 1986, the Court imposed a punishment of eight years imprisonment and a fine of $10,000. United States v. Richard Wayne Thomas and Donald Ray Wimberly, CR3-86-220-H A 24 count indictment was filed on July 31, 1986, against Richard Wayne Thomas and Donald Ray Wimberly charging them with conspiracy, making false statements to a federally insured lending institution, and making false statements to a government agency. Thomas and Wimberly were employees first of Clifford Sinclair and later Ernie Hughes doing business as Kitco Management Company and Peak Investments, Inc., respectively. Peak succeeded Kitco in purchasing land from Danny Faulkner and James Toler, subdividing the land into tracts, obtaining borrowers and preparing fraudulent financial packages for the borrowers who used shell corporations to obtain land and construction loans. Both Thomas and Wimberly participated in preparing the false financial packages and in obtaining fraudulent inflated appraisals to support the loans. They were convicted by a jury on October 23, 1986, of seventeen counts, including conspiracy, 25 PAGENO="0043" 39 submitting their own false financial information and concealing material facts from the Federal Home Loan Bank Board. This case is of interest because convictions on the counts involving making false statements to a government agency involved the fact that the defendants personally guaranteed millions of dollars in loans to several shell corporations, and never disclosed the fact that they had contingent liabilities on prior loans when obtaining subsequent loans for said corporations. Thomas' conviction exposed him to a maximum possible punishment of 34 years confinement and a fine of up to $75,000 and Wimberly's conviction exposed him to a maximum possible punishment of 32 years confinement and a fine of up to $70,000. On November 26, 1986, the Court imposed a punishment of seven years imprisonment each. Thomas and Wimberly did not appeal. United States v. H. Wailen York, CR3-87-228-G On September 15, 1987, a multiple count indictment was returned against H. Wailen York. York, a Dallas area contractor formerly doing business with now failed Empire Savings and Loan Association, was charged with wire fraud, making false statements to a federal agency, and making false statements in connection with loan applications. This case was the result of a scheme by York to defraud Empire Savings and Loan Association of Mesquite, Texas; Bell Savings Association of Belton, Texas; Lancaster Federal Savings and Loan Association of~Lancaster, Texas; First State Building and Loan Association of Mt. Home, Arkansas; and Mercantile Bank of Garland, Texas. Between 1981 and 1984, York obtained more than 20 loans totalling in excess of $30 million by submitting five different fraudulent financial statements to the federally insured institutions. At trial it was shown that the financial statements inflated York's assets and omitted substantial liabilities. These loans were mostly intended for land acquisitions and condominium construction along the 1-30 corridor east of Dallas, Texas. At the time York was also the principal builder of projects which comprise the subject matter of a separate indictment: against seven other defendants, United States v. David L. Faulkner, et al., Criminal No. 5-88-067-C, currently awaiting trial in Dallas, Texas. York was found guilty following a jury trial on April 12, 1988. York's conviction exposed him to a maximum possible punishment of 69 years confinement and a fine of up to $109,000. On May 25, 1988, the Court imposed a punishment of 35 years imprisonment, five years probation and a fine of $108,000. York's~conviction was affirmed on appeal. 26 PAGENO="0044" 40 United States v. Lawrence D. Carpenter. Jr., CR3 -87-257-H A three count indictment was filed on October 28, 1987, charging Lawrence D. Carpenter, Jr., with making false statements to a federally insured financial institution and conspiracy. Carpenter, a city councilman for the City of Garland, Texas, consistently voted favorably regarding zoning changes which would permit the construction of thousands of condominiums along the 1-30 corridor. Carpenter was a borrower on two condominium projects in the City of Mesquite, Texas, which is contiguous to Garland. Carpenter falsified his financial information and conspired with a now convicted appraiser to overvalue a tract of condominium land. Carpenter was convicted by a jury of all counts on January 27, 1988. Carpenter's conviction exposed him to a maximum possible punishment of nine years confinement and a fine of up to $20,000. On February 25, 1988, the Court imposed a punishment of five years imprisonment. He did not appeal. PROSECUTIONS BY THE BANK FRAUD TASK FORCE In January, 1987, the United States Attorney's Office and the Dallas Federal Bureau of Investigation formally requested the Department of Justice to provide additional investigative and prosecutive resources for the formation of a multi-agency Bank Fraud Task Force in Dallas. That request was approved in May, 1987. On August 3, 1987, this task, force formally began operation in Dallas, with its primary goal being the identification, investigation and prosecution of the most culpable perpetrators of federal crimes directed against savings and loans associations and banks doing business in the Northern District of Texas. 27 PAGENO="0045" 41 Initially, the task force consisted of approximately 50 individuals, including FBI Special Agents, Assistant United States Attorneys, Criminal Division Fraud Section Trial Attorneys, Federal Bureau of Investigation Accounting Technicians, Internal Revenue Service Criminal Investigative Division Agents, Internal Revenue Service Revenue Agents, Special Assistant United States Attorneys from the Federal Hone Loan Bank and Tax Division, and various support personnel. The task force has continued to grow from its original 50, and today consists of over 80 law enforcement professionals. With the passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, additional resources have been provided, and the task force is currently in the process of further, very significant expansion. To date, the Dallas Bank Fraud Task Force has charged 58 individuals (51 in the Northern District of Texas), of whom 46 have been convicted. Those convicted include 22 bank officers, one real estate consultant, one real estate broker, two real estate developers, two accountants and 18 borrowers. United States v. Larry K. Thompson, CR5-88-002 Larry K. Thompson was charged in a one count information with aiding the willful misapplication of the funds of an institution whose accounts were insured by the Federal Savings and Loan insurance Corporation ("FSLIC"), on February 1, 1988. Thompson is a former real estate broker doing business with now failed State Savings and Loan Association in Lubbock, Texas. Thompson had aided the payment of a $100,000 kickback to Tyrell G. Barker, the majority shareholder and Chairman of the Board of Directors of State Savings and Loan Association. 28 PAGENO="0046" 42 On February 23; 1988, Thompson plead guilty to this charge. He also plead guilty on this date to a one count information filed in the Central District of California charging that he had concealed his knowledge of the commission of a felony involving a scheme to defraud victims seeking loans. Thompson's conviction exposed him to a maximum possible punishment of five years imprisonment and a fine of up to $5,000. On June 2, 1988, the Court imposed a punishment of three years probation, 300 hours of community service and a $2,250 fine. United States v. John G. Smith, CR3-88-Ol6-T A one count information was filed February 8, 1988, against John G. Smith, formerly a senior executive vice-president of Vernon Savings and Loan Association. The information charged Smith with causing a Quarterly Financial Report of Vernon Savings and Loan Association containing a false statement to be filed with the Federal Hone Loan Bank Board. Smith plead guilty February 25, 1988. Smith's conviction exposed him to a maximum possible punishment of five years confinement and a fine of up to $250,000. On October 13, 1988, the Court imposed a punishment of five years imprisonment. Execution of this sentence was suspended and Smith was placed on five years probation. He was additionally sentenced to 500 hours of community service, ordered to pay $330,000 in restitution to the Federal Savings and Loan Insurance Corporation, and barred from employment by any bank or savings and loan. United States v. Tyrell Barker, CR5-88-0l7-D A one count information charging willful misapplication of the funds of an institution whose accounts were insured by the Federal Savings and Loam Insurance Corporation was filed on February 8, 1988 against Tyrell G. Barker, formerly the majority shareholder and chairman of the Board of Directors of State Savings and Loam Association in Lubbock, Texas. Barker plead guilty February 12, 1988. Barker's conviction exposed him to a maximum possible punishment of five years confinement and a fine of up to $5,000. On March 25, 1988, the Court imposed a punishment of five years imprisonment with all but six months suspended, and five years probation. In addition Barker was ordered not to affiliate with any financial institution, to perform 100 hours of community service annually during the probationary term, and to make restitution of $100,000 to the Federal Savings and Loan Insurance Corporation. 29 PAGENO="0047" 43 United States v. San Thomas, III, CR5-88-17-D A two count information was filed February 8, 1988, against Sam Thomas, III, formerly the chief executive officer and chairman of the board of now failed Commerce Bank in Plano, Texas. The information charges Thomas with filing a false docunent with the Federal Reserve Bank of Dallas which misrepresented the financial condition of Commerce Bank. The document, the quarterly call report for the second quarter of 1987, misrepresented the condition of the institution by failing to record stand-by letters of credit issued by Thomas outside of the regular course of the bank's business. The information further charges that Thomas caused an unauthorized letter of credit to be used as collateral for a loan at the since failed Northwest Bank in Dallas, Texas. Regulators closed Commerce Bank in December, 1987, and Northwest Bank of Dallas in January, 1988. On August 23, 1989, Thomas plead guilty to both counts of the information. Thomas' conviction exposes him to a maximum possible punishment of seven years confinement and a fine of up to $500,000. He is currently awaiting sentencing. United States v. Donald W. Nahrwold, CR3-88-0l9-T On February 8, 1988, a three count indictment was returned against Donald W. Nahrwold, a real estate broker and business associate of Tyrell Barker. Barker was the majority shareholder and chairman of the board of directors of now failed State Savings and Loan Association of Lubbock, Texas. The indictment charged Nahrwold with conspiracy, aiding with the misapplication of the funds of an institution whose deposits were insured by Federal Savings and Loan Insurance Corporation, and making false statements to a federal agency. On March 10, 1988, prior to trial, Nahrwold agreed to plead guilty to aiding with a kickback to Tyrell G. Barker of $100,000 from a $2 million loan made by State Savings and Loan Association to Larry K. Thompson. Nahrwold's conviction exposed him to a maximum possible punishment of five years confinement and a fine of up to $5,000. On June 2, 1988, the Court imposed a punishment of three years probation and a fine of $3,000. 30 PAGENO="0048" 44 United States v. John V. Hill, CR3-88-059-H A one count information was filed March 24, 1988, against John V. Hill, formerly a senior vice-president of Vernon Savings and Loan Association, charging him with conspiracy to violate the bank bribery statute, to make false entries in the books and records of Vernon Savings and Loan, and to defraud the United States, in particular the Federal Hone Loan Bank Board, the Federal Election Commission, and the Internal Revenue Service. Hill plead guilty on April 7, 1988. Hill's conviction exposed him to a maximum possible punishment of five years confinement and a fine of up to $250,000. On June 16, 1988, the Court imposed a punishment of five years imprisonment. Execution of all but six months of his sentence was suspended and he was placed on probation for five years. Hill was additionally sentenôed to perform 600 hours of community service and to pay $11,500 in restitution to the Federal Savings and Loan Insurance Corporation. United States v. Herman K. Beebe. Jr., CR3-88-l24-D On April 29, 1988, two related single-count informations were filed in connection with offenses committed in the Northern District of Texas and the Western District of Louisiana, respectively, by Herman K. Beebe, Jr., a Louisiana businessman doing business with State Savings and Loan Association of Lubbock, Texas. - The informations respectively charged Beebe with assisting with the submission of a false draw request on a loan made by State Savings and Loan which transferred the funds by wire to the account of Bossier Bank and Trust Company in Louisiana and with conspiracy to file false statements to. influence the action of a Louisiana bank on a loan application. Beebe plead guilty to both informations on April 29, 1988 and was sentenced the same day. Beebe's conviction exposed-him to a maximum possible punishment of five years confinement and a fine of up to $1,000. Upon sentencing, the Court imposed a punishment of imprisonment for one year-and one day. United States v. Ronald D. Cainpksii, CR3-88-144-T A two count information was filed May 26, 1988, against Ronald D. Campbell, formerly a real estate developer, builder, and borrower from State Savings and Loan Association of Lubbock, Texas. Campbell was charged with two counts of making a false statement to State Savings and Loan Association to obtain loans. 31 PAGENO="0049" 45 - On May 6, 1988, Campbell plead guilty to one count of making a false statement to State Savings Bank of Corvallis, Oregon. The Texas case was transferred from the Northern District of Texas to the District of Oregon. Campbell's Texas conviction exposed him to a maximum possible punishment of two years confinement and a fine of up to $5,000. In the Oregon case, Campbell was sentenced to two years imprisonment, fined $5,000, and ordered to pay $150,000 restitution to the Federal Savings and Loan Insurance Corporation. In the Texas case, Campbell was sentenced to five years probation to be served after completion of his sentence of imprisonment imposed in the Oregon case, perform 240 hours of community service, and pay a $5,000 fine. United States v. Gordon Glenn Melcher, CR3-88-153-G and CR3-88-211-G On June 15, 1988, an eight count indictment was returned against Gordon Glenn Melcher, formerly a director and loan committee member of now failed Irving Savings Association, charging him with wire fraud, causing the entry of a false material statement in Irving Savings and Loan Association's books and records, and obstruction of justice. Prior to trial, Meicher agreed to plead guilty to a wire fraud charge contained in the indictment and to a one count felony information (CR3-88-211-G) filed September 28, 1988, charging him with causing a false statement to be made in Irving's records for the purpose of deceiving Irving officials and others. Melcher's convictions exposed him to maximum possible punishment of seven years confinement and a fine of up to $6,000. Upon sentencing, the Court imposed a- punishment of five years imprisonment, with execution of all but six months suspended, five years probation, 2,000 hours of community- service, and a fine of $1,000 on the wire fraud count. Melcher was sentenced on the one count information to five years probation and fined $5,000. United States v. Terry Loper, CR3-88-l54-H A one count information was filed June 16, 1988, against Terry Loper. Loper, an accountant for a Houston based company formerly doing business with now failed Sunbelt Savings Association, was charged with conspiracy to defraud Sunbelt by obtaining loan 32 PAGENO="0050" 46 proceeds from Sunbelt through the use of false and fraudulent invoices. Loper plead guilty on December 1, 1988. Loper's conviction exposed him to a maximum possible punishment of five years imprisonment and a fine of up to $250,000. On April 13, 1989, the Court imposed a.punishment of four years imprisonment. United States v. Roy F. Dickey. Jr., CR3-88-l60-T A one count information was filed June 30, 1988, against Roy F. Dickey, Jr., formerly an executive vice-president of Vernon Savings and Loan Association. Dickey was charged with making a false statement to influence the action of the Federal Savings and Loan Insurance Corporation. Dickey plead guilty on August 4, 1988 and was sentenced on September 8, 1988. Dickey's conviction exposed him to a maximum possible punishment of two years confinement and a fine of up to $250,000. Upon sentencing, the Court imposed a punishment of two years imprisonment. Execution of the sentence was suspended and Dickey was placed on five years probation, including 500 hours of community service and alcoholism treatment. United States v. Jack D. Franks, CR3-88-196-R A one count information was filed September 1, 1988, against Jack D. Franks, a Dallas real estate consultant formerly associated with Vernon Savings and Loan Association, charging him with aiding another individual connected with Vernon with illegally receiving money through a Vernon transaction. Franks plead guilty to this charge on March- 9, 1989. He also plead guilty to one count of bank fraud in United States v. Olsvik, a case indicted in the District of Oregon on May 25, 1988. The Olsvik indictment charged Franks and-others with defrauding State Federal Savings and Loan Association in Corvallis, Oregon. Franks was sentenced on September 26, 1989, to five years imprisonment and fined $5,000. United States v. Wayne Barnhart, CR3-88-206-G On September 19, 1988, a one count indictment was returned against Wayne Barnhart. Barnhart, a resident of and businessman from Waco, Texas, was charged with lying to a federal grand jury by falsely denying having any recollection that he had 33 PAGENO="0051" 47 told two Special Agents of the Federal Bureau of Investigation, individually and on three separate occasions, that a Federal Savings and Loan Insurance Corporation employee once told him that he should "get dumb" before the grand jury. The trial in this case began December 5, 1988 and ended December 7, 1988, with a jury verdict of guilty. Barnhart's conviction exposed him to a maximum possible punishment of five years confinement and a fine of up to $250,000. On February 8, 1989, the Court imposed a punishment of eighteen nonths imprisonment and two years probation. United States v. Barry S. Gillinqwater, CR3-88-212-H A one count information was filed September 30, 1988, against Barry S. Gillingwater, a businessman who once was a major borrower at Sentry Savings Association in Lubbock, Texas. Gillingwater was a major developer in the Austin area at one time employing over 300 people in his real estate development company. Gillingwater was charged with conspiracy to commit bank fraud and to make false material statements to influence Sentry to make loans. Gillingwater plead guilty to this charge involving a complex $9 million kick back scheme involving savings and loan executives. Gillingwater's conviction exposed him to a maximum possible punishment of twelve years confinement and a fine of up to $250,000. On May 25, 1989, the Court imposed a punishment of three years imprisonment. United States v. Bennett Lowell Rosenthal, et al., CR3-88-224-G On October 12, 1988, a twelve count indictment was returned against Bennett Lowell Rosenthal, a Houston real estate developer and borrower from Sunbelt Savings Association. Also charged in the indictment were Ralph Eugene Strader, a business associate of Rosenthal, and Mary Jane Wilson, office manager for Rosenthal and Strader. The indictment charged conspiracy, false statements to a federal agency, false statements to an institution whose deposits are insured by the federal government, bank fraud, and entering a financial institution with the intent to commit a felony. Rosenthal, Strader and Wilson were charged with conspiring to create and submit false invoices and other documents in connection with draw requests relating to a loan initially funded by Sunbelt Service Corporation for NT-I, Ltd., a real estate and development company with which the three were affiliated. 34 PAGENO="0052" *48 Rosenthal and Strader borrowed $17,100,000 from Sunbelt Service Corporation, a subsidiary of Sunbelt Savings Association in Dallas, under an acquisition and development loan agreement which required the borrowers to submit vendor invoices to Sunbelt as documentation for future advances of loan proceeds. The scheme involved the creation and submission of numerous invoices falsely reflecting that work had been performed on the development project. In one instance, the invoice was on the letterhead of a fictitious architectural company established by Rosenthal, who posed as "Brent Michaelson" when arranging a mailing address for the company. Wilson, a clerical employee, participated in the scheme by certifying to the authenticity of some packets of invoices sent to Sunbelt and by depositing some loan proceeds into an account she had opened in the name of the fictitious company. Rosenthal, Strader and Wilson were convicted in February, 1989. Their convictions exposed them to maximum possible punishment as follows: Rosenthal, 46 years confinement and a fine of up to $500,000; Strader, 66 years confinement and a fine of up to $500,000; and Wilson, 20 years confinement and a fine of up to $500,000. Upon sentencing, the Court imposed a punishment of ten years imprisonment for Rosenthal and Strader. Wilson was sentenced to five years probation and ordered to perform 1,000 hours of community service. Terry Loper, the accountant for the borrowers, plead guilty to his role in the scheme (United States v. Terry Loper, CR3-88- 154-H) and testified at the trial of Rosenthal, Strader and Wilson. United States v. Woody F. Lemons, CR3-88-234-T On November 13, 1988, a thirteen count indictment was returned against Woody F. Lemons, formerly the chairman of the board of directors of now failed Vernon Savings and Loan Association, charging him with bank fraud, misapplication of Vernon Savings and Loan Association funds, conspiracy, illegally sharing in the proceeds of a thrift transaction and bank bribery. The indictment charged that Lemons defrauded Vernon Savings and Loan by arranging an inflated loan for the purchase and development of property in Arlington, Texas, and receiving a share of the loan proceeds from an intermediate seller of the property. The loan was inflated by $3.5 million ostensibly for the purpose of having the intermediate seller buy either from Vernon or from Vernon borrowers properties in actual or imminent foreclosure. According to the indictment, however, Lemons planned to use one half of the $3.5 million for his own personal 35 PAGENO="0053" 49 benefit. In fact, because of funding problems at Ver~ion, only about $200,000 was eventually transferred to Lemons. The indictment also alleged that Lemons conspired to defraud the United States, specifically examiners of the Federal Home Loan Bank Board, by concealing his receipt of the loan proceeds through the use of an intermediary and bogus consulting fees. The indictment further alleged that Lemons received a $9,000 check from a loan broker in connection with a sale of Vernon loans and passed the check with a forged endorsement. Trial commenced on November 6, 1989. On December 6, 1989, the jury returned a verdict of guilty on all counts. Lemons could be sentenced to a maximum of 65 years imprisonment and fined $250,000 on each of the thirteen counts for a total of $3,250,000. Sentencing is set for March 1, 1990. United States v. Richard Randall, CR3-88-248-R A two count information was filed November 22, 1988, against Richard Randall, a businessman who once was a borrower at First State Bank of Rockwall, Rockwall, Texas. The information charged Randall with causing false statements to be made to the bank by a nominee seeking a loan on Randall's behalf. Randall plead guilty on December 16, 1988. Randall's conviction exposed him to a maximum possible punishment of four years confinement and a fine of up to $500,000. On March 31, 1989, the Court imposed a punishment of two years imprisonment. All but six months of his imprisonment was suspended with the remaining eighteen months to be served on probation. Randall was also ordered to perform 150 hours of community service, pay $28,399.67 in restitution and fined $31,600.33. United States v. Richard Boone, CR3-88-249-R A one count information was filed November 29, 1988, against Richard B. Boone, once a borrower from Northwest Bank in Dallas, Texas, charging him with submitting a false financial statement to Northwest Bank in connection with a $670,000 loan. Boone plead guilty and was sentenced on March 31, 1989. Boone's conviction exposed him to a maximum possible punishment of two years confinement and a fine of up to $250,000. Upon sentencing, the Court imposed a punishment of five years probation. Boone was also ordered to pay $60,000 in restitution and to perform 250 hours of community service during the first three years of his probation. 36 PAGENO="0054" 50 United States v. Robert H. Hopkins. Jr.. E. MortenHd~iiflS. and John W. Harrell, CR3-89-008-G On January 12, 1989, a federal grand jury in Dallas, Texas returned a 47 count indictment naming three Dallas residents as defendants. The indictment charged Robert H. Hopkins, Jr., his brother E. Morten Hopkins, and John W. Harrell, with conspiring to defraud the United States, in particular the Federal Election Commission, the Federal Home Loan Bank Board, and the Federal Savings and Loan Insurance Corporation, of its right to have its affairs conducted free from deceit, dishonesty, unlawful impairment, and obstruction. The three were also charged with committing offenses against the United States, namely, to conceal and cover up a material fact in a matter within the Federal Election Commission's jurisdiction, tomisapply funds of Commodore Savings Association, and to make false entries in the records of Commodore. Commodore was a financial institution having accounts insured by the Federal Savings and Loan Insurance Corporation. As a result of a recent merger, Commodore has been renamed Consolidated Federal Bank. During the period June 1983, to October 1985, Robert Hopkins was a principal shareholder and Chairman of the Board of Directors of Commodore. John Harrell served as Vice-Chairman of the Board and Chief Executive Officer of Commodore, and then later became Chairman. Morten Hopkins succeeded John Harrell as Vice-Chairman of the Board of Commodore. Additionally, Robert Hopkins and Morten Hopkins each were charged with two counts of causing material facts to be concealed from the Federal Election Commission. All three defendants were charged together with 22 counts of causing funds of Commodore to be misapplied and with 22 counts of causing false entries to be made in Commodore's records. The three were charged with participating in a conspiracy involving the concealment from the Federal Election Commission, the Federal Home Loan Bank Board, and FSLIC of corporate financial contributions made in support of, or in opposition to, various individuals seeking federal, state and local elective office. The indictment charged that employees of various corporations in which Robert H. Hopkins was a principal shareholder (National Mortgage Corporation of America, Big Country Savings and Commodore) were used as conduits for these corporate financial contributions, that Commodore funds were illegally employed for such contributions, and that false entries were made in the books and records of Commodore to deceive the Federal Home Loan Bank Board and to injure and defraud Commodore. On May 26, 1989, after a three week jury trial, all three defendants were found guilty of all charges. Their convictions 37 PAGENO="0055" 51 exposed them to maximum possible punishment as follows: Robert Hopkins, 235 years confinement and a fine of up to $500,000; Morten Hopkins, 235 years confinement and a fine of up to $500,000; and John Harrell, ten years confinement and a fine of up to $500,000. Robert Hopkins was sentenced on July 12, 1989. Upon sentencing, the Court imposed a punishment of fifteen years imprisonment and ordered Hopkins to pay $122,980.47 in restitution to the Federal Savings and Loan Insurance Corporation. E. Morten Hopkins and John Harrell were sentenced on July 13, 1989. The Court imposed a punishment of five years imprisonment on Morten Hopkins. Hopkins was further ordered to pay $104,062 in restitution to the Federal Savings and Loan Insurance Corporation. The Court imposed a punishment on Harrell of five years imprisonment and ordered him to pay $4,000 in restitution. United States v. Steven Rakofs~çy, CR3-89-092-.R Steven M. Rakofsky, former senior vice-president and controller of National Mortgage Company of America, was charged in a two count indictment on April 12, 1989, with knowingly making false material declarations before a grand jury. Rakofsky was convicted on November 15, 1989. The jury found that Rakofsky committed perjury in September, 1988, Mhen he testified before a federal grand jury that he had no knowledge about the 1983 - 1984 advancement of principal and interest payments by National Mortgage Company of America (NMCA) on delinquent loans owned by Commodore Savings Association of Dallas, Texas. During that time period he was the senior financial officer of NMCA. Rakofsky's conviction exposes him to a maximum possible punishment of ten years confinement and a fine of up to $500,000. Rakofsky is set for sentencing February 9, 1990. United States v. Susan Petr Hulon, CR3-89-lls-D On May 3, 1989, a seventeen count indictment was filed against Susan Petr Hulon. Hulon, a Dallas businesswoman, was charged with subscribing to a false tax return, fraudulently making a false oath, and fraudulently concealing transfer of property. Hulon entered a plea of guilty to two counts of the indictment charging income tax evasion and bankruptcy fraud. 38 PAGENO="0056" 52 The income tax evasion count charged that during the years 1984 through 1986, Susan Petr Hulon owned and operated Petr-Avery Development, Inc., a Texas corporation. Petr-Avery Development, Inc. was in the business of purchasing and selling real estate. During 1984, Petr-Avery Development, Inc. participated in six transactions involving the purchase and sale of real estate. These six land transactions involved the purchase of real estate by Petr-Avery Development, Inc., followed by an almost immediate resale of the property for a substantial profit. As a result of these land transactions, Petr-Avery Development, Inc., earned approximately $5,659,000 in gross income during 1984. On August 17, 1987, Hulon filed a 1984 U.S. Corporate Income Tax Return for Petr-Avery Development, Inc., which reported the 1984 gross sales of Petr-Avery Development, Inc., to be $7,000. The bankruptcy fraud count charged that Hulon filed sworn schedules of debts and assets in connection with her personal bankruptcy proceedings stating that her household goods and furnishings had a market value of equal to or less than $20,000, when she well knew that the said goods and furnishings had a market value substantially in excess of $20,000. Using an alias, Hulon hired a moving company to transfer designer furniture and art objects to a storage space paid for by Hulon, but leased at Hulon's request under the name of another individual. Hulon's secret transfer of property was conducted for the purpose of concealing the property from the United States Bankruptcy Court and its agents. Hulon's conviction exposed her to a maximum possible punishment of eight years confinement and a fine of up to $500,000. On January 10, 1990, the Court imposed a punishment of four years imprisonment to be followed by three years probation. United States v. Robert Bourgeois, Richard Crowe and Eric Laub, CR3-89-134-F On May 24, 1989, a seven count indictment was filed against Robert Bourgeois, Richard Crowe and Eric Laub. Crowe, a licensed attorney and former Chairman of the Board of Independent American Real Estate, Inc., Bourgeois, former President of the Investment Division of Independent American Real Estate, Inc., and Laub, a real estate syndicator, were charged with conspiring to defraud the United States by impeding and impairing the collection of federal income taxes through the submission of false statements to the Internal Revenue Service. They were additionally charged with submitting false income tax returns. 39 PAGENO="0057" .53 The indictment charged that Crowe, Bourgeois, Laub and others conspired to create a fictitious tax loss designed to offset ordinary income, which Laub expected from selling five shopping centers. This was the first tax prosecution brought by the Bank Fraud Task Force in Dallas. Trial commenced on September 11, 1989 and on October 4, 1989 the jury returned a verdict. Crowe was convicted on one count of conspiracy and two counts of aiding and abetting the filing of false federal income tax returns. The returns were based on a backdated partnership agreement stating that a California real estate investor, Eric W. Laub, had become a 98% limited partner in January, 1985. Laub actually became a partner no earlier than December, 1985. The backdated agreement allowed Laub to claim a fictitious $327,235 tax loss for 1985, rather than a loss of approximately $27,000, the maximum to which he could have been entitled. Crowe and Bourgeois gave Laub the fictitious tax loss as part of a deal involving a $34 million sale of five shopping centers and a profit of approximately $8 million to Independent American Real Estate. Bourgeois was-convicted on one count of conspiring with Crowe. He was also convicted on one count of filing a false 1985 return for the real estate partnership, and one count of aiding and abetting the filing of a false return for Laub. Laub used the Schedule K-l, Partner's Share of Income and Losses, from the false partnership return, in filing his individual 1985 return. Bourgeois worked for Crowe in New York and followed him to Texas. Laub was acquitted of conspiracy and two counts of aiding and abetting the filing of false federal income tax returns. The convictions of Bourgeois and Crow expose them each to a maximum possible punishment of eleven years confinement and a fine of up to $500,000. Sentencing for Bourgeois and Crowe is set for February 23, 1990. United States v. Ray J. Stockman, CR3-89-l37-H Ray J. Stocknan was charged in a one count information on May 26, 1989, with conspiracy to commit bank fraud. Stockman was a real estate developer and chief executive officer of Condo Homes, Inc. Condo Homes, Inc., had delinquent loans at Security Savings Association, Texarkana, Texas, from a previous construction project called Chaucer Village, that Security had financed. 40 PAGENO="0058" 54 Stockman net with others at Security's office to discuss a loan that Security and two participating institutions were planning to nake to an independent borrower. The loan closed on January 14, 1985 for approximately $5,000,000 more than the borrower had originally sought. The extra $5,000,000 was built into the loan in order to create funds so that Stockman could pay down Condo Hones' indebtedness to Security. Condo Hones was made a 50% partner with the independent borrower in the Crosstown Joint Venture Partnership on January 18, 1985, so as to create a vehicle for the diversion of the $5,000,000. Stockman contributed no assets to that partnership and had no further involvement in it. Stockman's name did not appear on any of the documents connected with the loan and there was no information in the loan file that would alert an auditor that $5,000,000 of the loan proceeds had been diverted to Stockman. On January 18, 1985, a cashier's check payable to Ray Stockman was purchased with the diverted $5,000,000 and transported by private airplane to Stockman in Dallas. On that same day, Stockman, acting for Condo Homes, and another individual went to the First City Bank, Garland, Texas, where Stockman used the $5,000,000 cashier's check to purchase a certificate of deposit for $5,000,~000. Stockman then used the certificate of deposit to secure a $5,000,000 letter of credit in favor of Security. On March 13, 1985, Security drew $5,000,000on this letter of credit and applied these funds to reduce the amount of Condo Homes' indebtedness on the Chaucer Village loan at Security. Stockman is awaiting arraignment. United States v. Patrick G. King, CR3-89-14l-T Patrick G. King was charged with 37 counts of conspiracy to commit bank fraud, making false entries, misapplication of bank funds, and aiding and abetting. King, formerly the president of Vernon Savings and Loan Association (Vernon), was charged with-conspiring with other senior officers at Vernon to defraud the Federal Home Loan Bank Board and to misapply Vernon funds and enter false statements in its books and records. King was also charged in a superseding indictment with misapplying monies of Vernon and causing false - entries to be made in Vernon's records. The scheme was designed to reimburse Vernon officers approximately $55,000 for political campaign contributions to candidates for state and federal offices. Lastly, the superseding indictment included four counts involving two alleged false statements and two alleged - 41 PAGENO="0059" 55 misapplications caused by King to pay for female companionship for himself and an official of the State of Texas. King was convicted by a jury on September 5, 1989, on thirteen of the counts. King was convicted on the conspiracy charge, six counts of making false entries and six counts of misapplying monies of Vernon. King's conviction exposed him to a maximum possible punishment of 65 years confinement and a fine of up to $500,000. On November 1, 1989, the Court imposed a punishment of five years imprisonment to be followed by five years probation. King was further ordered to pay $65,771.44 in restitution to the Federal Savings and Loan Insurance Corporation. United States v. John H. Roberts. Jr., CR3-89-l54-R On June 8, 1989, a 38 count indictment was returned by the grand jury charging John H. Roberts, Jr., with bank fraud, making false entries, misapplication of bank funds, and aiding and abetting. Roberts, the former Chairman of the Board of Summit Savings Association, plead guilty on October 13, 1989, to two counts of the indictment. Roberts engaged in the execution of a scheme to defraud Summit Savings and Loan Association and to obtain the use of $4.5 million of Summit funds, misapplying $1 million of Summit funds. The scheme involved the use of a nominee borrower to obtain a loan to acquire an aircraft for the personal use and benefit of Roberts. Roberts' conviction exposed him to a maximum possible punishment of ten years confinement and a fine of up to $15,000. On January 5, 1990, the Court imposed a punishment of five years imprisonment to be followed by five years probation and a fine of $15,000. United States v. James R. Veteto, CR3-89-l56-D A two count information was filed on June 13, 1989, charging James R. Veteto with making false statements to a federally insured financial institution and aiding and abetting same. Veteto, while serving as president of Vernon Service Corporation, a wholly owned subsidiary of Vernon Savings and Lo~an Association (Vernon), caused a Vernon borrower to make false statements for the purpose of influencing the action of Vernon. Veteto is charged with causing a Vernon borrower to file false affidavits with Vernon in which the borrower falsely certified under oath that he was using Vernon loan proceeds for the purpose 42 PAGENO="0060" 56 set forth in the loan agreement when, in fact, as Veteto and the borrower knew, a portion of the loan proceeds was being used to pay the rent on a beach house in Solana Beach, California. The beach house was primarily used by a senior Vernon official. Over a three year period, the Vernon borrower paid $577,000 in rent for the Solana Beach house. Veteto entered a plea of guilty to both counts on June 28, 1989. His conviction exposed him to a maximum possible punishment of four years confinement and a fine of up to $500,000. On August 23, 1989, the Court imposed a punishment of one year imprisonment to be followed by five years probation. Veteto was further ordered to pay $210,000.00 in restitution to the Federal Savings and Loan Insurance Corporation and perform 300 hours of community service. United States v. Joseph R. Smith, CR3-89-l83-G A one count information was filed against Joseph R. Smith on July 5, 1989. Smith, a former vice-president and loan officer of Sunbelt Savings Association, Dallas, Texas, entered a guilty plea to the information on October 26, 1989. The information charged that Smith conspired to defraud the Federal Home Loan Bank Board, in connection with its supervisory functions of Sunbelt and to defraud the Internal Revenue Service in the collection of income tax. The information charged that Smith received $125,000 in connection with a Sunbelt real estate transaction, which income Smith failed to report on his 1985 Individual Tax Return. The information further charged that in an attempt to deceive examiners of the Federal Home Loan Bank Board, Smith altered a document to conceal the true nature of a Sunbelt transaction, thus disguising from the regulators the true condition of Sunbelt's loan portfolio. Smith's conviction exposed him to a maximum possible punishment of five years confinement and a fine of up to $250,000. On January 31, 1990, the Court imposed a punishment of ninety days imprisonment to be followed by five years probation. Smith was further ordered to perform 500 hours of community service. United States v. Kenneth dive Hood, CR3-89-l84-H A two count information was filed against Kenneth Clive Hood on July 5, 1989. 43 PAGENO="0061" 57 Hood, the former chairman of the board, president and sole stockholder of Century Investments, and vice-president of Western Savings Association, Dallas, Texas, entered a guilty plea to both counts of the information. The information charged Hood with conspiracy to defraud the Internal Revenue Service by engaging in a schene to create artificial "losses" in order to offset large gains of income and thereby avoid payment of federal income taxes. Hood was also charged with making a false statement in connection with a $11,316,770 loan from Sunbelt Savings Association. Hood's conviction exposes him to a maximum possible punishment of seven years confinement and a fine of up to $500,000. Hood is set for sentencing on February 15, 1990. United States v. Bob R. Franks, CR3-89-185-R Bob R. Franks, president and director of Northpark Savings Association, was charged on July 5, 1989, with three counts of bank fraud, misapplication of bank funds, and illegal participation in a banking transaction. Franks is charged with misapplying $138,000 of Northpark monies and funds by illegally diverting the funds and obtaining direct and indirect benefits from them. These benefits included an interest payment on a $2.95 million loan, made by Centennial Savings Association, Greenville, Texas, on which Franks was a personal guarantor. If convicted of all counts, Franks faces a maximum penalty of 15 years imprisonment and $500,000 in fines. Franks is awaiting a trial date. United States v. Jack D. Atkinson, CR3-89-19l-T A two count information was filed on July 12, 1989, charging Jack D. Atkinson with submitting false statements to a federally insured financial institution. Atkinson, a Dallas real estate developer, made false statements for the purpose of influencing the action of Vernon Savings and Loan Association. Atkinson filed false affidavits with Vernon in which he falsely certified under oath that he was using Vernon loan proceeds for the purpose set forth in the loan agreement when, in fact, as both Atkinson and Vernon officials knew, a portion of the loan proceeds was used to pay the rent on a beach house in Solana Beach, California. The beach house was used primarily by a senior Vernon official. Over a three year 44 PAGENO="0062" 58 period, Atkinson paid $577,000 in rent for the Solana Beach house. Atkinson entered a plea of guilty on August 17, 1989, to both counts. Atkinson's conviction exposed him to a maximum possible punishment of four years confinement and a fine of up to $500,000. On October 26, 1989, the Court imposed a punishment of one year imprisonment to be followed by five years probation. Atkinson was further ordered to pay $210,000.00 in restitution to the Federal Savings and Loan Insurance Corporation and provide 300 hours of community service. United States v. Bennett Paul Romero, CR3-89-206-T On July 17, 1989, a one count information was filed against Bennett Paul Romero charging him with conspiracy to commit bank fraud. Romero, an executive vice-president of Pacific Realty Corporation and vice-president of Guaranty Service Corporation, a wholly owned subsidiary of Guaranty Federal Savings and Loan Association, Dallas, Texas, along with others conspired to defraud the Guaranty Federal Savings and Loan Association of approximately $10 million by causing Guaranty to lend $10 million on property that was grossly overvalued. Romero entered a plea of guilty on August 3, 1989, and was sentenced on September 21, 1989. Romero's conviction exposed him to a maximum possible punishment of five years confinement and a fine of up to $250,000. Upon sentencing, the Court imposed a punishment of three years imprisonment. DALLAS BANK FRAUD WORKING GROUP In January, 1989, the United States Attorney invited representatives from federal investigative and regulator~~ agencies working on the savings and loan fraud and bank fraud cases in the Northern District of Texas to participate in a working group along with federaL~proseCutOr5 and agents. The Dallas Bank Fraud Working Group had its initial meeting in February, 1989, and since has continued to meet on a monthly 45 PAGENO="0063" 59 basis. In addition to providing members with information about current bank fraud successes, the group has opened lines of communication that were not in place prior to the formation of the working group. The existence of the working group has enabled the regulatory agencies to stay in touch to exchange information relevant to the investigation and prosecution of bank fraud cases. The working group has been an effective forum for exchanging information among this group. A, subcommittee of the Dallas Bank Fraud Working Group was recently formed to coordinate the first attempt at an automated tracking of criminal referral information. The existence of the Dallas Bank Fraud Working Group has increased cooperation between regulatory agencies and investigative agencies in this District leading to enhanced prosecutions of savings and loan fraud and bank fraud. THE FUTURE OF BANK FRAUD PROSECUTION On August 9, 1989, President Bush signed into law the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Among the many important tools provided to prosecutors by President Bush and Congress were increased penalties for banking crimes committed on or after August 9, 1989 (from five years to twenty years per offense), and an increased statute of limitations for such crimes, where the limitations period had not 46 PAGENO="0064" 60 yet expired as of August 9, 1989 (from five years, to ten years from the date the offense was committed). Most significantly, the Act provided very substantial increases in Federal Bureau of Investigation agents and prosecutors to deal with the massive criminal conduct. Those resources have been allocated by the Department of Justice to 27 of the 94 judicial districts across the country where the problem is the greatest. The Northern District of Texas received an additional 37 Federal Bureau of Investigation agents, 17 accounting technicians, 12 Assistant United States Attorneys, two acôountants, and various support personnel. The Fraud Section of the Criminal Division, U.S. Department of Justice was allocated additional prosecutors, approximately a dozen of whom are destined for the Dallas Bank Fraud Task Force. In the Northern District of Texas, the 12 additional Assistant United States Attorneys will be deployed across the District as follows: one to the Amarillo Division (Panhandle of Texas), one to the Lubbock Division (West Texas), three to the Fort Worth Division, five to the Dallas Bank Fraud Task Force (which concentrates on the Dallas Division) and two to the Dallas Division of the United States Attorney's Office. The two accountants are based in the Fort Worth Division. A dozen new Fraud Section trial attorneys will be assigned to the Dallas Bank Fraud Task Force. This new deployment of resources will greatly increase the investigation and prosecutive effort in the Northern District of 47 PAGENO="0065" 61 Texas. Not only will the Dallas Bank Fraud Task Force grow to approximately 140 during the calendar year 1990, but new resources within the United States Attorney's Office will insure that enforcement will be more evenly spread across all of the 100 counties comprising the Northern District of Texas. It is anticipated that the augmented effort underway in the Northern District of Texas will continue for at least the next three years, and possibly several years longer. CONCLUSION It is clear~ that federally insured institutions may fail primariiy because of regional, or national economic conditions, or mismanagement, quite apart from any criminal fraud. The failure of an institution does not, in and of itself, necessarily imply criminal fraudulent activity. It is equally clear that significant criminal fraud may exist in otherwise healthy financial institutions which are not failing. While there are recurring patterns which strongly suggest fraud, it is important not to overgeneralize. There is much variation from institution to institution, and from region to region. Each investigative and prosecutive effort must be tailored to the specific circumstances present. What has been a successful approach to bank fraud prosecution in the Northern District of Texas may not be suitable or successful in the Central District of California, the Southern District of Texas, or elsewhere. 48 30-830 0 - 90 - 3 PAGENO="0066" 62 It is hoped that `this report will demonstrate the aggressive manner in which bank and savings and loan fraud has been attacked by federal authorities in the Northern District of Texas, and more importantly, the unwavering commitment to vigorbus investigation and prosecution of these crimes in the future. Much has been accomplished, but much remains to be done. The massive scope of the savings and loan and bank fraud problem in the Northern District of Texas presents a tremendous challenge to federal law enforcement. Because of the many dedicated women and men in the federal law enforcement, as well as the vast experience already gained in years past, we are prepared to meet that challenge in the coming years. /~ / I CWJh4 L-~9~1J.~4.4. MARVIN COLLINS United States Attorney Northern District of Texas February 7,. 1990 ACRNOWLEDGEXENT8 The United States Attorney's Office wishes to gratefully acknowledge the assistance. of the Dallas Division Federal Bureau of Investigation, the DallasInternal Revenue Service Criminal Investigation Division, and the Dallas Regional Office of the Fraud Section of the Criminal Division, U.S. Department of Justice, in providing information used in the preparation of th'iè report. 49 PAGENO="0067" 63 The Dallas Federal Bureau of Investigation, under the capable direction and leadership of Bobby R. Gillham, Special Agent in Charge, has been the major investigative agency involved in the investigation of almost- every significant bank fraud case prosecuted in this District. Their performance, sacrifice, and dedication has been truly outstanding. Bobby Gillham's personal involvement, professionalism and experience in bank fraud matters has been immeasurable. The Dallas Internal Revenue Service Criminal Investigation Division, led by -Patrick Dorsey, Chief - CID, has been a major factor in the Dallas Bank Fraud Task Force. Their. early recognition that criminal tax violations would probably be discovered in many of the massive bank fraud schemes, their willingness to dedicate a number of experienced agents full-time to the task force, and Pat Dorsey':s aggressive leadership has been of immense benefit to the effort. The Fraud Section Dallas Regional Office, headed by an experienced trial attorney, Richard Fishkin (Director), has been cooperative and team-players at every juncture. Most of the Fraud Section trial attorneys involved in the Bank Fraud Task Force must travel.regularly from their home base in Washington, D.C., where they and their families live. These prosecutors are thorough-going professionals. Their self-sacrifice, attitude and expertise are major factors in the success of the Bank Fraud Task Force. 50 PAGENO="0068" 64 Finally, the women and men of the United States Attorney's Office have labored long and hard to bring to justice those who have defrauded our federally insured financial institutions. Often overwhelmed by the sheer numbers of matters, they have formed the backbone of the massive effort in this District to address this problem. The bank fraud investigative and prosecutive effort in the Northern District of Texas is characterized by cooperation and team play among all of the federal investigative and prosecutive agencies. FBI-SAC Bobby Gillham, IRS-CID Chief Patrick Dorsey, and Regional Fraud Director Rich Fishkin are the leaders of this team effort which has already been tremendously successful. 2~M~ ~Li~MA' MARVIN COLLINS United States Attorney Northern District of Texas CAVEAT The information, statistics, and views expressed in this report do not constitute the official policy or position of the Department of Justice as to any of the matters covered, do not create any rights and should not create any particular expectations on behalf of any person, subject, target or defendant. 51 PAGENO="0069" 65 Mr. COLLINS. That report was completed last month as sort of a 5-year lookback at what has been accomplished in the northern dis- trict of Texas. As to sentencing and the sentencing guidelines, the committee had asked that I try. to give some feel for what sentences were being handed out in the northern district of Texas. I have listed some typical sentences for preguideline conduct. I emphasize these are preguideline because most of the cases that we have prosecuted in the northern district so far have been offenses that arosebefore November 1, 1987, when the sentencing guidelines went into ~effect. Cooperating individuals will normally receive probation at the minimum to 5 years confinement at the maximum, depending on the amount of money involved. Those are cooperating individuals. However, if the cooperating individual is a high-level individual in the fraudulent scheme, higher exposure may be required. One that comes to mind most readily, the highest in that category would be a 13-year sentence received by a cooperating individual in the Empire case. As to noncooperating individuals, the lower level individuals, some receive probation, some receive a minimum of approximately 3 and a maximum of approximately 5 years confinement. However, in the last few years, the last 2 years, I have noticed more split sentences and probations in this category for preguideline conduct than had previously been granted in my district. Once again, I want to emphasize these are preguidelines cases I am talking about and I think the guidelines are going to change that. Mr. SPRATT. Could I ask a question, Mr. Chairman? Mr. BARNARD. Sure. Mr. SPRATT. What is the effective date of the sentencing guide- lines? When does the offense have to occur for the guidelines to apply? Mr. COLLINS. On or after November 1, 1987. And we find in some of these cases, and we are finding more of those now, that the con- duct will straddle the guidelines. There will be some preguideline conduct and some postguideline conduct. That gives us more flexi- bility in dealing with the case. It gives us more-- Mr. SPRATT. Flexibility in the sense of plea bargaining or charg- ing? Mr. COLLINS. Charge bargaining is normally what we do in the northern district of Texas. The judges in our district normally will not accept the plea bargain where we agree on~ a fixed sentence. We can dismiss counts or agree to bring certain counts and not bring others, but normally our judges will not approve any type of plea where we would agree that someone gets 5-years probation, for example, or 2 years in the penitentiary. Mr. SPRATT. I don't want to interrupt you too long, but are you saying, then, that the sentencing guidelines, since they indicate a firm response from the judge, give you more leverage in charge bargaining and plea bargaining? Mr. COLLINS. Definitely. Now, the flip side of that is that we may have more trials because the guidelines are less flexible and, there- fore, leave the judge less room-- PAGENO="0070" 66 Mr. SPRATT. But that is why you are doing more charge bargain- ing than plea bargaining? Mr. COLLINS. Yes. Now, understand, the charge bargaining we have done so far in these bank cases is mostly related to preguideline conduct because we have such a massive inventory of these matters to look at that we haven't gotten to the bulk of the cases that have arisen since November 1, 1987. We simply have not had the resources in the past to do that and the statute of limitations being only 5 years in the past has driven us to prioritize the oldest cases first, not neces- sarily the most important cases first. We simply have to address the oldest ones first in order not to let them through the net. Now that the statute is extended, we have more flexibility in that regard. Midlevel noncooperating individuals in the northern district usu- ally do not receive probation and somewhere between 5- to 10-years confinement, but there are exceptions to that. Some receive proba- tion. Upper level noncooperating individuals, such as presidents, owners, and CEO's, usually start at 7 years or higher if there is at least $1 million or more in losses. To date, in bank fraud matters in our district, the greatest sentence that has been handed out was a 35-year sentence to a major contractor in one of these bank fraud cases, which, because of a reversal of one count on appeal, will ulti- mately be revised to no more than a 30-year sentence. It should be emphasized that there is much variation among in- dividual judges. While the judges in the northern district of Texas tend to sentence a little heavier in bank fraud-related cases as com- pared to other white-collar cases, individual circumstances may cause sentences to be either more lenient or more stringent for a wide variety of factors. I guess what I want to say here is so far, the sentencing guide- lines have not had a great impact on the bank fraud cases that we have actually brought to court because most of the cases so far have involved preguideline conduct. Restitution is often imposed in these cases. Sometimes the judge does not order restitution because the judge feels that the defend- ant cannot make restitution and, therefore, should not order it. Sometimes, the judges don't order it because there is parallel civil litigation by the regulators to recover the money and the judge simply decides, I think, that since there is parallel recovery going on, that it is not appropriate to order the more limited restitution usually available in the criminal case. The criminal case rarely de- scribes the full scheme that may have been involved and usually does not implicate the full range of restitution that ought to be available. We are looking at trying to convict the person first and, of course, we want to get restitution whenever we can. One thing I would emphasize about restitution is that by the time we get to these cases, the actual transactions may be 2 or 3 years old when we first see the case. Then it may take another 8 months to 2 years to investigate the case and bring the indictment. So, by that time, often any resources that were there have been dissipated. In the northern district of Texas, many of these involved real estate as PAGENO="0071" 67 collateral for these loans and has become worth only a tiny frac- tion of what it was appraised at and what the loan was granted at. Mr. MARTINEZ. Mr. Chairman, might L ask, what was the reason for the delay before you actually got the case? Was it because someone else was trying to gain restitution? Mr. COLLINS. No. We have had a good success at getting the judges to stay any civil proceedings that might interfere with a criminal case. The typical reason is that it simply was not referred, for whatever reason, either by the banking institution or by the regulators, to the FBI and the U.S. attorney's office. Often, it simply wasn't discovered for a period of time. Mr. MARTINEZ. In California, in the hearings we held, quite the opposite was testified. The fact that the authority was trying to gain restitution before a criminal case was prOceeded With is what caused the delay in the criminal procedure and sometimes to a point beyond statutes of limitation. Mr. COLLINS. I am not aware of any case where we have delayed the criminal prosecution. I am aware of cases where we have made the regulators or the fee counsel for the former FSLIC a little bit unhappy because we proceed with the criminal case first. We feel like on the criminal side, our duty is to prosecute first and then to try to obtain whatever restitution can be obtained. We don't wait on the restitution, at least in terms of a court pro- ceeding. I am sorry, I didn't want to stop any further questions on that. Mr. MARTINEZ. Go ahead. Thank you. Mr. COLLINS. As to adequacy of.~ resource and personnel levels, the U.S. attorney's office for the northern district of Texas has re- ceived 12 additional assistant U.S. attorney positions and two ac- countant positions for bank fraud prosecution. ~he FBI in Dallas has been allocated an additional 37 special agents and 17 account- ing technicians. In our office, the U.S. attorney's office, both the accountant posi- tions have been filled with entry on duty dates in March and April 1990, and 11 of the 12 new prosecutor positions have been filled. Four are now on board, two report in March, by the end of this month, two report in April, two in May, and one in June. So by June, we will have all but one, and I would anticipate that addi- tional unfilled position will be filled by the end of the month of March, with an entry on duty date, hopefully no later than June. It is my belief that with the new prosecutors and agents once in place, this will be sufficient to address the backlog in both our task force and nontask force cases. Please understand that I am addressing the northern district of Texas. The Dallas Division FBI office covers part of Mr. Wortham's district, and I cannot address the adequacy of resources from the FBI point of view to cover his district. In terms of the northern dis- trict of Texas, if all of these agents are brought on board and we get all these prosecutors that I have hired on board, as I have pro- jected, I think this would be sufficient for now. But I do think this needs to be reevaluated again in September 1991. These cases have had some impact on our courts. I do not think our courts are hopelessly overcrowded in the northern district of Texas at this point as to criminal cases. As to civil cases, I think PAGENO="0072" 68 they are very far behind because the criminal cases tend to push the civil cases aside. I do project that with all these new resources from FIRREA and then the new resources we are getting with the President's violent crime and drug bill, that over the next 5 years, we are going to have a shortage of court resources to deal with the problem in the northern district of Texas. In conclusion, Mr. Chairman, we are dedicated to full and aggres- sive prosecution of bank fraud violators in the northern district of Texas. In particular, the Dallas Bank Fraud Task Force deserves to be looked upon as a model for other districts where appropriate. I do want to emphasize that each district has individual problems with more variation than one might at first suppose. The solution in the northern district of Texas may not be appropriate in some other district. As reflected in our report, entitled, "Fraud in Financial Institu- tions," we have had a constantly escalating effort for the past 5 years in this district with, I believe, a very substantial record of success. This record of success was established with the outstanding cooperation of the various law enforcement agencies involved and in spite of a constant shortage of resources, at least until FIRREA. With the new resources now provided for this purpose by the ad- ministration and Congress, I am confident that in the next several years, we will be able to address much more fully the massive criminal fraud in our savings and loan and banking industry in the northern district of Texas. [The prepared statement of Mr. Collins follows:] PAGENO="0073" 69 ~tpartnitnf z~ ~u~ti~t STATEMENT OF MARVIN COLLINS UNTIED STATES ATTORNEY NORTHERN DISTRICT OF TEXAS BEFORE THE SUBCOMMITTEE ON COMMERCE, CONSUMER, AND MONETARY AFFAIRS COMMITTEE ON GOVERNMENT OPERATIONS UNITED STATES HOUSE OF REPRESENTATIVES CONCERNING SAVINGS AND LOAN AND BANK FRAUD AND EMBEZZLEMENT CASES ON MARCH 14, 1990 PAGENO="0074" 70 - Mr. Chairman and members of the Subcommittee, I appreciate the occasion to address the Subcommittee about prosecution of savings and loan and bank fraud matters in the Northern District of Texas. The Northern District of Texas covers a large geographic area containing approximately 95,000 square miles. This district is divided into seven multi-county divisions: Dallas, Fort Worth, Lubbock, Amarillo, San Angelo, Wichita Falls, and Abilene. We maintain staffed offices in each of the four divisions in which one or more United States District Judges are based, those being Dallas, Fort Worth, Amarillo, and Lubbock. Fort Worth is the headquarters for the 100 county district. The Abilene, San Angelo, and Wichita Falls offices are serviced by the Courts and the United States Attorney's Office on a travel basis. - I have served as United States Attorney in this District since June, 1985. During that entire time, the United States Attorney's Office has been aggressively pursuing prosecution of bank fraud violators. From January 1, 1985 through December 31, 1989 - a five year period - bank fraud related charges have been filed in court against 359 individuals. Because of lack of prosecutor resources in the United States Attorney's Office, in January, 1986, I began requesting assistance from the Fraud Section of the Department of Justice, as well as PAGENO="0075" 71 -2- requesting increases in the prosecutorial staff for the U.S. Attorneys Office. By March of 1986, within two months of my first request for assistance, the Fraud Section of the Department of Justice assigned two -attorneys to assist our office in a major task force known as the 1-30 task force. That assistance was actually in place and functioning in the month of March 1986. In that sane month, I was advised that two additional Assistant U.S. Attorney positions (general) would be allocated to the Northern District of Texas, but those positions, as well as replacements for all existing vacancies, were frozen bythe Emergency Budget Deficit Control Act. Encouraged by the rapid and effective response of the Fraud Section of the Department of Justice, in April 1986, I requested that they assume primary responsibility for the State Savings and Loan case, part of which had already been prosecuted by my office, but some of which remained for further investigation and prosecution. In July of 1986, I amended that request to ask that * the Fraud Section also assume primary responsibility for the Vernon Savings and Loan case, our largest failure up until that date. By the end of 1986 the Fraud Section of the Department of Justice had again responded with the assignment of two experienced fraud prosecutors for the State Savings and Loan and the Vernon Savings and Loan cases, and the two attorney positions which my district PAGENO="0076" 72 had been allocated were unfrozen, permitting the filling of those spots (one in Dallas and one in Fort Worth). These two new positions however were not and indeed, could not, be solely dedicated to bank fraud prosecution because of the large number of drug and other white collar cases pending in the district. In October of 1986, I advised the head of the Fraud Section and the Attorney General that we were still very short of prosecutor resources with which to address the massive savings and loan and bank fraud crisis, and that I would be continuing to make additional requests of the Department for increased resources for this purpose. In January 1987, I and the Special Agent in Charge of the Dallas Division FBI drafted a joint request to our respective headquarters for a large increase of investigative and prosecutive resources for the purpose of forming a multi-agency task force in Dallas to deal with the unfolding bank fraud crisis in North Texas. I forwarded this request to the Department of Justice in February 1987, and in March of 1987, made a personal plea to the Attorney General with regard to additional prosecutive and investigative resources. Subsequently, I and the head of the Dallas Division FBI made a joint presentation to our respective headquarters to formalize our requests for additional resources. This request was granted, and on August 3, 1987, the Dallas Bank Fraud Task Force PAGENO="0077" 73 -4- came into being with just over 50 agents, prosecutors, and support staff being housed in secure space within the FBI headquarters in Dallas. To staff the task force on the prosecution side, there were two additional Assistant U.S. Attorney positions authorized for full-time bank fraud prosecutibn, and eight fraud section trial attorneys assigned full-time, one of whom was to live in Dallas. The Dallas Bank Fraud Task Force began formal operations on August 3, 1987, and by the spring of 1989 had grown to just over 80 persons committed full-time to the task force. Agencies involved included the FBI, the United States Attorneys Office, the Fraud Section of the Department of Justice, the Federal Home Loan Bank Board, the IRS, and the Tax Division of the Department of Justice. In December, 1989, funds were appropriated for the additional positions authorized by the Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA). The United States Attorney's Office and the FBI immediately began the process of adding the additional individuals to the staffs of the FBI and the United States Attorney's Office. I am told that the Fraud Section of the Dep~artment of Justice has begun the same process. The IRS having not received any additional resources from FIRREA has maintained PAGENO="0078" 74 -5- its very substantial commitment of 9 full-time Special Agents and 5 Revenue Agents to the Dallas Bank Fraud Task Force. The IRS has maintained this commitment in spite of the fact that no additional resources were authorized to them for this purpose by FIRREA. Although many of the newly authorized positions are either filled or already committed, it is estimated that the increased level of staffing will be fully complete by some time this summer. It -is estimated that unless the problem is revealed to be even deeper than we have been able to ascertain up until now, the Dallas Bank Fraud Task Force should reach its peak size in terms of personnel by approximately September, 1990. Current estimates are that the task force would then operate at this level for several more years. Thus, for the past several years, our resource commitment to this effort has been steadily growing. General Overview During the last half of the 1970's and the early 1980's, a period of rapid economic growth was experienced in Texas. This was due in part to the energy boom occurring at that time in oil producing states which created a hot real estate market. There were many speculators and unscrupulous promoters as well as legitimate businessmen and businesswomen operating in this climate. Real estate growth was particularly heavy in North Texas, where PAGENO="0079" 75 every type of real estate from undeveloped raw land to commercial construction projects was being developed. As with any growth industry, the demands for financing were heavy, and fell most often upon the banking and savings and loan industries. In order to compete in tines of high interest rates, many federally insured institutions opened, or were sold and opened, under new aggressive management. In this rapidly expanding and seemingly never ending spiral many financial establishments succumbed to bad business practices, and in some cases to criminal fraud. Many of the persons who owned these establishments did not have a substantial personal capital investment in them, and many of the people who borrowed heavily from the institutions often did not put at risk any great amount of personal capital. In most of the banks and savings and loans that became insolvent, some level of insider participation in fraudulent activities appears to have occurred. It is reasonable to conclude that in some cases,. this fraudulent activity was the cause of the insolvency, but that is a determination appropriate for the regulators in any individual instance. I have submitted with this statement a report recently completed entitled "Fraud In Financial Institutions-United States Attorney's Report-Northern District of Texas". This report PAGENO="0080" 76 -7- contains many examples which demonstrate how the frauds have been perpetrated in this district, and describes patterns of misconduct by insiders and others. The United States Attorney's Office for the Northern District of Texas has for the past five years been aggressively pursuing bank and savings and- loan fraud on three fronts: The 1-30 Task Force, the Dallas Bank Fraud Task Force, and Non-Task Force Prosecutions. I will comment on each of these initiatives in turn. - 1-30 Task Force: - - In the early 1980's fraudulent banking and real estate transactions resulted in a massive oversupply of condominiums under development along the Interstate 30 Corridor east of Dallas -(hence the term "1-30 Task Force"). An investigation begun by the FBI and Texas Department of Public Safety in 1984 discovered projected losses to lending institutions in excess of 500 million dollars (probably less than 750 million dollars). In 1985 a task force headed by the U.S. Attorney's Office and involving the FBI and the Fraud Section of the Department of Justice was formed. - PAGENO="0081" 77 -8- That task force proceeded in its investigative and prosecutive effort along the tried and true "pyramid" theory, in which lower level individuals were prosecuted first. Then, successively higher level individuals in turn were prosecuted, until the top of the pyramid was reached. An effort such as this, while time-consuming and slow, is thorough and tends to let the fewest people slip through the investigative and prosecutive net. To date, 99 individuals (82 in the Northern District of Texas and 17 in the Eastern District of Texas) have been convicted, two cases dismissed, and none acquitted. A total of 111 individuals have been charged in the scheme (94 of whom were charged in the Northern District of Texas, 10 of ~.hom are still awaiting trial). A large criminal RICO indictment is currently pending against the alleged top 7 individuals in the scheme. A seven month trial of these individuals in Lubbock, Texas ended in September, 1989, with a deadlocked jury. According to contemporaneous news reports, the jury stood at 11-1 in favor of conviction. That case is currently pending re-trial in Dallas at a date to be set by the court. The personnel currently assigned to that task force are öo- located in secure space near the Federal Court House, and near the FBI Headquarters, in downtown Dallas. There are currently four special agents, two FBI accounting technicians, and, three PAGENO="0082" 78 -9- prosecutors assigned to the case, with one additional prosecutor to be assigned. This is projected to be adequate to the completion of the task force operations. Except for the single seven defendant criminal RICO case, most of the work of that task force has been accomplished. I have submitted for inclusion in the record a single page of statistics outlining a summary of the accomplishments and results in that task force to date. This task force effort has had an excellent record of success. Dallas Bank Fraud Task Force: This multi agency task force was formed August 3, 1987, with involvement from the following agencies: The FBI, IRS-CID, IRS Revenue (for technical support), the United States Attorney' s Office; the Fraud Section of the Department of Justice, the Federal Hone Loan Bank Board (one attorney who was sworn in as a Special Assistant United States Attorney), and the Tax Division of the Department of Justice. The task force is operated under the direction and control of the Director of the Regional Fraud Section Office in Dallas and the United States Attorney, and the FBI Special Agent in Charge in Dallas. Daily supervision ,of the attorneys is by the Director of the Regional Fraud Section Office of Dallas, two FBI supervisors, and one IRS-CID supervisor. All PAGENO="0083" 79 - 10 - agencies involved in the task force have been involved from the inception of the task force. It has from the beginning been an effort marked by outstanding cooperation among the agencies. In summary, 62 individuals have been formally charged to date, with 47 convictions. I would emphasize that in interpreting statistics from the Dallas Bank Fraud Task Force, it is important to bear in mind that from its inception the determination was made nOt to proceed by the slower more cumbersome, but more thorough, pyramid method of investigation and prosecution. Extremely limited resources and short statute of limitations simply did not permit that luxury during the initial two and a half years of the operation of the task force. The initial decision was made to target mid-level and upper level individuals, and significant transactions. Thus,, the statistics produced by the Dallas Bank Fraud Task Force so far are in fact more significant individuals or cases on the average than, for example, those produced on the average in the 1-30 task force, although the longer-running 1-30 task force has produced a number of very significant cases. As a practical matter, the FBI has simply lacked adequate resources to investigate most cases in which the loss is under $100,000. PAGENO="0084" 80 - 11 - Currently there are 39 savings and loans and approximately 10 commercial banks that are involved in these investigations. In forming and operating a task force of this large size there are always problems in the utilization and management of scarce resources. The problems which have existed in the past fall into two broad categories: budgetary and managerial. Budgetary limitations have had significant impact upon the task force in three ways: 1) at no time have there been a sufficient number of trained personnel to deal with the massive problem; but the task force effort has been an escalating effort with new resources continually being added almost from the beginning; 2) travel limitations have prevented Fraud Section trial attorneys on two occasions from being able to regularly commute to and from Washington, D.C.; this has caused some delay in the pursuit of these cases; however, it is my opinion that no defendants have escaped prosecution or will escape prosecution because of the delay; 3) various personnel hiring freezes have affected both the United States Attorney's Office and the Fraud Section; these freezes have either delayed or inhibited the bringing on of new resources or the replacement of prosecutors who have left for other work. Once again, however, because the effort has been one of an escalating commitment by the agencies involved, this has simply slowed the progress of the task force. It is my PAGENO="0085" 81 - 12 - opinion that no one has escaped or will escape prosecution because of this. Occasionally, we do lose a count or a transaction to the statute of limitations, but we normally do not find ourselves unable to prosecute the individuals because these individuals have continued a pattern -of fraudulent activity into the future. In addition, with the arrival of the new resources, which should be ~n place by the end of the summer, and with the extension of the statue of limitations from 5 to 10 years, it is felt that the task force will ultimately have an excellent degree of success in addressing the criminal portion of this massive savings and loan and banking crisis. Managerial problems have resulted not only from the necessity to obtain approval from the multiple agencies involved in the task force, but also from the hierarchy of decision making within the agencies. While in the past those agencies which have their decision making supervisors in Dallas could respond quickly, those which have their decision-making personnel in Washington responded more slowly. Even with this slower response time, there has been outstanding cooperation within the agencies which review many of these decisions in Washington. Both the Tax Division and the Fraud Section have made very effective efforts to expedite and simplify Washington-based review. Undeniably, however, this has been a past factor which has impacted our ability to reach decisions in Dallas as quickly as we would like. PAGENO="0086" 82 - 13 - Recently, the Assistant Attorney General in charge of the Criminal Division and the new Chief of the Fraud Section- of the~ Department of Justice made an on-site visit to the task force. After careful consultation over a period of days with all of the agencies involved, they have now instituted local indictment review in Dallas and local supervisor approval of plea agreements in routine cases in Dallas. The matters which will be elevated to Washington for decision are now significantly more limited. This will permit the more rapid and efficient funct~Loning of the task force. Likewise the Assistant Attorney General in charge of the Tax Division of the Department of Justice recently met in Dallas with the heads of the agencies involved in the task force and has pledged to expedite the review - in tax cases to a much greater extent than in the past. The Tax Division is detailing an experienced Tax Division prosecutor to. live in Dallas and to participate in the task force, which will assist in implementing the expedited review. In addition, several of the new Fraud Section trial attorneys who will be joining the task force will be living in Dallas, a real advantage since the commuting process uses a great deal of effort and time by the attorneys who could otherwise be performing their prosecutorial duties. It is estimated that when the- task force reaches its terminal size in approximately September of 1990, about one-half of the 30 plus attorneys will be Dallas-based prosecutors PAGENO="0087" 83 - 14 - who are available full time, and who will physically be officing in the task force space. It is felt that delegation of many of these decisions to personnel in Dallas will resolve most of the delays and problems in regard to the management of the task force and will certainly improve the effectiveness and timeliness of the investigations and prosecutions. Non-Task Force Cases: The third major effort undertaken by the United States Attorney's Office to address the savings and loan and bank fraud crisis in the Northern District of Texas is the traditional method by which U.S. Attorney's prosecute cases: an individual agent (usually FBI) receives a referral, contacts an Assistant United States Attorney, and the case proceeds as one of many other matters handled by the agent and the AUSA. It is impossible to estimate the number of Assistant U.S. Attorneys assigned to that effort over the past few years. It is accurate to say that virtually every criminal Assistant U.S. Attorney in the Northern District of Texas - other than those dedicated solely to drug task force prosecutions - have bank fraud related cases as a part of their active inventory. PAGENO="0088" 84 - 15 - Since January 1, 1985, through December 31, 1989, 214 individuals have been charged with bank fraud related offenses by individual Assistant U.S. Attorneys working outside any task force. These cases range in size from those that would be considered less major by today's standards, to major cases which rival many of those brought by the Dallas Bank Task Force. Examples of those cases are set forth on pages 10 through 20 of the "Fraud in Financial Institutions-United States Attorneys Report-Northern District of Texas". Currently there are in the United States Attorney's Office in this category 125 financial institution fraud matters open and 22 cases open - being a total 147. 119 of these involve banks, 25 involve savings and loans, and 3 involve credit unions. Sentencinc and Sentencing Guidelines: While no effort is made to account for individual variations among judges or offenses, typical sentences for pre-guideline conduct are as follows: 1. cooperating individuals will normally receive probation at the minimum to five years confinement at the maximum PAGENO="0089" 85 - 16 - depending on the amount of money involved; however, if the cooperating individual is a high level individual in the fraudulent scheme, higher exposure may be required. 2. Some lower level non-cooperating individuals receive probation; some receive a minimum of approximately 3 and maximum of approximately 5 years confinement; however, in the last two years, more split sentences and probations have been granted in this category for pre-guideline conduct than previously. 3. Mid-level non-cooperating individuals usually receive no probation, and somewhere between five to ten years confinement. 4. Upper level non-cooperating individuals such as presidents, owners, and CEO's usually start at 7 years or higher if there is at least 1 million dollars or more in losses. It should be emphasized that there is much variation among individual judges. While judges in the Northern District of Texas tend to sentence heavier in bank fraud related cases as compared to other white collar cases, individual circumstances may cause PAGENO="0090" 86 - 17 - sentences to be either more lenient or more stringent for a wide variety of factors. So far, the Federal Sentencing Guidelines have not had a great impact on these cases, because so many of the cases involve pre- guideline conduct. It is felt generally that the sentencing guidelines will eliminate the non-average sentences on both ends. Ultimately, as more guideline cases of this variety are prosecuted, fewer probations will be received just as in other categories of cases where guideline cases already predominate on the docket. Pursuant to the mandates of YIRREA, the Sentencing Commission is proposing that sentences for offenses which substantially jeopardize an institution's safety and soundness be set at level 24 within the sentencing guidelines. In my view, that is adequate, so long as appropriate provision is made for adding levels of conduct for ever-rising dollar amounts of losses. 5. Restitution is often imposed in these cases. When it is not imposed, it is sometimes because the judge is aware that the regulators are pursuing independent parallel civil litigation, where the judge may feel restitution can be more fully addressed. Occasionally a judge will feel that a defendant cannot make restitution and therefore it is not ordered. In my opinion, restitution should always be ordered, but it is unrealistic to expect a high dollar amount of actual PAGENO="0091" * 87 - 18 - recovery. By the time the cases are investigated and prosecuted, the assets are usually dissipated, or the value of the land or buildings has diminished to a small fraction of what it was when the loan was made. Adequacy of Resources in Personnel Levels: The United States Attorney's Office for the Northern District of Texas has received 12 additional Assistant United States Attorney positions and 2 accountant positions for bank fraud prosecution. The FBI in Dallas has been allocated 37 additional special agents and 17 accounting technicians. In the United States Attorneys Office, both accountant positions have been filled with entry on duty dates in March and April, 1990, and 11 of the 12 new prosecutor positions have been filled with 4 now on board, 2 reporting in March, 1990, 2 reporting in April, 1990, 2 reporting in May, 1990, and 1 reporting in June, 1990. It is my belief that the new prosecutors and agents, once in place, will be sufficient to address the backlog in both our task force and non-task force cases. * At the current time I do not feel that the United States Attorney's Office and the Task Force could optimally utilize any additional resources, but this should be reevaluated again in September of 1991. PAGENO="0092" 88 - 19 - The United States Attorney's Office currently has in place blanket declination guidelines of $25,000 loss in order to limit investigations to the more important or serious cases, provided that the FBI makes a formal referral to state prosecuting authorities of those cases under $25,000, and provided that other aggravating factors do not exist. In practice, this $25,000 limitation has been of no significance since the FBI has not had the resources necessary in the past to investigate cases where the losses involved under $100,000. Impact of these cases on the courts: While the court system in the Northern District of Texas has been able to absorb these increased savings and loan and bank fraud cases in the past, it is my feeling that in the next five years serious problems could occur should there not be additional courts created. I have recommended to the Chief Judge of the Northern District of Texas that in the next five years an additional four district courts be created in Dallas, an additional two in Fort Worth, and possibly an additional district court in Lubbock, Texas. This is based on my opinion not just of the impact of bank fraud matters and increased prosecution in that area, but also the other many areas, including drug prosecution. Currently there are three judicial vacancies in the Northern District of Texas, two in the Fort Worth Division and one in the Dallas Division. PAGENO="0093" 89 - 20 Interagency exchanges of data: We have in place in Dallas an interagency bank fraud working group which meets on a regular monthly basis. We exchange information, consult with one another, and implement various initiatives to aid and assist each other in the performance of our respective duties. It is my belief that while there will always be tension and problems between regulators and the prosecutors and investigators, this group is providing the necessary forum to resolve those problems in the Northern District of Texas. We have had good participation and cooperation from the regulators with. regard to this working group. Implementation of Title 9. Subtitles E and F of FIRREA: It is too soon to assess the impact of the enhanced civil and criminal penalties provided by FIRREA, because most of the bank fraud related matters being prosecuted involve transactions that are several years old. PAGENO="0094" 90 - 21 - Conclusion: In conclusion Mr. Chairman, we are dedicated to full and aggressive prosecution of bank fraud violators in the Northern District of Texas. In particular, the Dallas Bank Fraud Task Force deserves to be looked upon as a model for other districts, where appropriate. I do want to emphasize that each district has individual problems, with more variation than one might at first suppose. The solution in the Northern District of Texas may not be appropriate in some other District. As reflected in our report entitled "Fraud in Financial Institutions", we have had a constantly escalating effort for the past five years in this District, with, I believe, a very substantial record of success. This record of success was established with the outstanding cooperation of the various federal law enforcement agencies involved, and in spite of a constant shortage of resources. With the new resources now provided for this purpose by the Administration and Congress, I am confident that in the next several years we will be able to address much more fully the massive criminal fraud in our savings and loan and banking industry in the Northern District ~of Texas. PAGENO="0095" TOTAL PROSECUTIONS INITIATED: TOTAL CHARGED: TOTAL CONVICTED: TOTAL ACQUITTED: TOTAL SENTENCED: INDIVIDUALS PROBATED: TOTAL YEARS PROBATION: AVERAGE PROBATION: INDIVIDUALS IMPRISONED*: TOTAL YEARS PRISON: AVERAGE PRISON: PRETRIAL DIVERSION: DISMISSALS: TOTAL FINES: TOTAL RESTITUTION ORDERED: AWAITING SENTENCING: PENDING TRIAL: PROFESSIONALS CONVICTED: Medical Doctors - Chiropractors Lawyers CPA's. Appraisers Bankers Stock Brokers *Include8 Split Sentences 117 114 102 NONE 100 46 156 years 3.39 years 54 207.59 years 3.84 years 3 2 (Katherine Sinclair & Weldon Hays $576,000 $12,167,000 2 10 (Hughes & Hutson) (Faulkner et al + Keetch et al) 91 HISTORICAL DATA ON TEXCON (~I-30") NORTHERN AND EASTERN DISTRICTS OF TEXAS A major bank fraud task force investigation involving five federally insured institutions. Dallas-based task force began investigation in 1984. 1 1 2 4 1 5 1 869G PAGENO="0096" 92 Mr. BARNARD. Mr. Collins, your report here-does it include some of what I would call the sensational S&L violations and what you have done in that regard? I notice that-I don't necessarily like to deal in personalities, but sometimes you have to. I notice that you say in pending trials, you have 10 in the 1-30 corridor and that includes Faulkner, et al., and Keetch, et al. Aren't they the primary cases in that 1-30 corridor? Mr. COLLINS. I do not believe, Mr. Chairman, that we will bring any more significant cases of any greater significance than those cases. I do not think it is appropriate for me to make any detailed comments on Faulkner and Keetch because those are pending cases that have to be tried. Mr. BARNARD. Have any of those gone to trial at all? Mr. COLLINS. The Faulkner case went to trial in Lubbock and was tried for 6 months and, at the end of that, there was a hung jury-- Mr. BARNARD. That is not in your district? Mr. COLLINS. Lubbock is in my district. Mr. BARNARD. OK. Mr. COLLINS. That case was brought by our 1-30 Task Force in Dallas and the venue was changed to Lubbock, which is also north- ern district of Texas. It was changed for trial purposes. It was tried by four of my prosecutors and one Fraud Section trial attorney for a period of just over 6 months. If you include the jury deliberation time, 7 months, at the conclusion of which there was a deadlocked jury and the case has been brought back to Dallas for retrial. That case is currently pending a setting by the court. We will be ready to try the case whenever it is set by the court. We could go to trial on that case tomorrow if it were set. Mr. BARNARD. Are the Inter-American and Vernon Savings and Loan cases in your district? Mr. C0LLINS The Vernon Savings and Loan is in my district and Vernon was the-one of the precipitating factors in 1986 that caused me to ask for additional assistance from the Department of Justice. In fact, I asked the Fraud Section to assume primary re- sponsibility for the Vernon Savings and Loan case in 1986. They assigned two experienced prosecutors to come to Dallas in 1986 and then they were later subsumed into the task force. Vernon is one of the cases being worked by the Dallas Bank Fraud Task Force. Mr. BARNARD. But that is not included in your report? Mr. COLLINS. There are cases in the report that are summarized that relate to the Vernon Savings and Loan case, so if you look at-- Mr. BARNARD. Before you leave today, could you identify those? Mr. COLLINS. I will be glad to. What I need to do is simply go through the case summaries beginning on page 28 and pick out those that are Vernon. I will be glad to do that. Mr. BARNARD. If you could, I think, before you leave today, be- cause I think that is very, very important, and secondly, if it is pos- sible to get some type of a summary on Vernon and Inter-Ameri- can, like you have on the 1-30 corridor, it would be helpful. Mr. COLLINS. The problem with that is that the 1-30 Task Force basically has wrapped up its work. We can take a good complete historical look back and Vernon-I will have to say we are in the PAGENO="0097" 93 throes and the midst of, so we have convicted some people with re- lation to Vernon Savings and Loan, but we are not in the same po- sition-- Mr. BARNARD. You are still using the pyramid process there? Mr. COLLINS. We are not, Mr. Chairman. As I had mentioned ear- lier, because of the 1-30 experience, the slow nature of being able to get through a scheme, the shortage of resources, and the massive number of schemes we have had to address, we have taken the single-shot theory in the Dallas Bank Fraud Task Force and that includes Vernon and all of the other cases they are handling. That is, we try to identify the midlevel and upper level people who are the most culpable. We try to find those transactions which give us a single shot at those individuals and allow us to expose those individuals to slightly more than the maximum we think any judge in our district would give. Then when we do that, we bring that case and put it aside and go on to the next one. If we try to invent the scheme, the whole scheme in each of these cases, we simply don't have the time or the resources to do that, as we did in the big 1-30 case. Mr. BARNARD. I won't delay you any further because I think that we will have some further questions as the panel finishes. Mr. Wortham, we welcome you again to our hearing this morn- ing, and we will hear your testimony at this time. Mr. BUSTAMANTE. Mr. Chairman. Mr. BARNARD. Yes. Mr. BUSTAMANTE. Can I just ask a real quick question in refer- ence to-- Mr. BARNARD. Yes, sir. Mr. BUSTAMANTE. I am sorry that I was delayed. Mr. BARNARD. So were we. Mr. BUSTAMANTE. Mr. Collins, let me ask you, in reference to what the gentleman from California, Mr. Martinez, was asking you on the criminal prosecution, what has happened to the civil area where we are trying to collect some of the moneys? Mr. COLLINS; Not a lot of money has been collected on the aver- age. In individual cases, we have had some success. For example, one of the cases summarized in the report is the Edwin Cox case, on page 16. I cannot take credit for going out and actually collect- ing the $75 million in restitution in that case, but in the negotia- tions with the attorneys, which led to a guilty plea, I can tell you that we constantly brought to their attention the need to make res- titution and to make full restitution. We constantly brought to the attention of the attorneys that we would not bargain away any criminal liability for the making of that restitution, but that it would put the defendant in a better position once he came before the judge for sentencing. The individual in that case did pay back the $75 million, but he is an exception, a real exception, because he had money to start with. Many of the people who were involved in these cowboy-type schemes don't have any money of their own or they don't risk any money of their own. So, when you start going after what is left, you find that there may be worthless real estate. You find that at some point in the past, there were a lot of dollars generated through ac- 30-830 0 - 90 - 4 PAGENO="0098" 94 counts, but in many cases, those dollars have been dissipated and lost, especially by the time you get to the criminal side of the case. Mr. BUSTAMANTE. What are the number of people that, once they start a case, have you had any turnover or can you tell me any of the turnover ratio in your office? Or has there been any? Mr. COLLINS. Oh, yes. I think every prosecutor's office, because of our pay schedule, suffers turnover. We have been able to keep-in spite of the two personnel hiring freezes we have had since I have been in-we have been able to keep an experienced staff of pros- ecutors. We are able, fortunately, to hire experienced prosecutors, not just beginning prosecutors, where we can find those who are willing to work for what we can pay. Mr. BUSTAMANTE. In this case, you have to have somebody who is experienced to follow those trails, the money trails. Mr. COLLINS. We do. Mr. BUSTAMANTE. You just can't get somebody out of college and say, we are going to hire this. What is the average salary, by the way? Mr. COLLINS. The top salary that can now be paid in the U.S. at- torney's office is $78,200. That is not the average salary. If you are talking about a younger attorney with several years experience, they may start between $45,000 and $50,000. If they have several more years of experience, they may start between $60,000 and $65,000. I don't want to underplay the significance of losing experienced prosecutors, but we are a little bit larger district than some, so we are able to keep a good balance. As we lose some of the more expe- rienced ones, we are able to bring in some of the new prosecutors and train them so that we have a constant supply going through the system, so to speak. Then, of course, we have career prosecu- tors who don't intend to go anywhere else. Mr. BUSTAMANTE. Mr. Chairman, the reason I had asked is when we were in California 3½ years ago, or whenever we went to Cali- fornia, one of the biggest problems we had was the turnover ratio in the U.S. attorney's office, the FBI, and IRS. So it does pose a tremendous problem, especially in these very complicated cases. Mr. BARNARD. That is one of the purposes of our hearing today. Have they ifiled the void that was there years ago, as we recog- nized it in the FIRREA bill, which authorized $75 million. Less than $50 million has been appropriated, so this causes us some anxiety. I am not indicating that anybody in particular has not done a good job, but the job is out there to be done, and this is what we are trying to develop today. Mr. COLLINS. Mr. Chairman, I do want to emphasize that when I say I think we now have sufficient resources provided to us in the northern district of Texas, that comment is limited to the northern district. We have had a larger ongoing effort than many districts in the past, so we already have had in place before FIRREA a very substantial effort. So I don't at all want to speak to the adequacy of resources in other districts. Mr. BARNARD. This is the reason that we, of course, have Mr. Wortham here today from the eastern district of Texas and why we have Mr. Arnold today. As you know, Minnesota has not gotten a lot of publicity about some of the bank and S&L crime and fraud, PAGENO="0099" 95 but it may be very different there and particularly in some other areas of the country that are getting no support, no additional sup- port at all. We will move on to Mr. Wortham at this time. STATEMENT OF ROBERT WORTHAM, U.S. ATTORNEY, EASTERN DISTRICT OF TEXAS Mr. WORTHAM. Mr. Chairman, subcommittee, I was more than happy to make myself available upon your request to appear in front of you today. I would like to start off and say that we have 30 institutions that are either under supervision or have failed. We have a history of strong, aggressive prosecution in banking cases since as early as 1981 in our district. Our district was complaining of the inadequate banking laws and the regulations before most districts even knew what the banking laws were. A district that since 1981 has never declined to prosecute a banking or savings and loan violation when asked to do so by the FBI, a district whose judges are known to be firm sentencers in preguidelines cases and are known to upward depart on guidelines cases of bank fraud, a district that was pros- ecuting bank frauds before the common statement of smart-as-a- Texas-banker was ever created. Mr. Chairman, with that, I ask you, would you feel that a district with these strengths or history, would this be a district that would have a strong FBI presence? Mr. BARNARD. Ordinarily, I would say yes, but knowing the situa- tion, I am going to say no. [Laughter.] Mr. WORTHAM. Would you feel this would be a district that would have many FBI financial investigators? Mr. BARNARD. Not normally do witnesses question me, but- [laughter]-knowing you from previous association, I will submit to this testimony, not under oath, but I will say, yes-I would think yes, but 1 will say no. Mr. ~WORTHAM. Welcome to the real world, welcome to the east- ern ~district of Texas~ and welcome to rural America because it is not so. How many savings and loans were victimized by losses of more than $100,000, you asked us. I can't answer that question. What were the estimated dollars of losses resulting from the failures? I can't answer those questions because I don't know. We have many unaddressed failures, ~many unaddressed institutions that have been taken over, and the reason they are unaddressed is there is no one to go out and do the work. I mean, I could ask my mother to do it and she would probably be more than happy to do so, but I don't know if she would really know what to look for. We have asked for resources and have not received them. We have what I consider a very strong prosecution-oriented district. When you talk of cooperation of witnesses, you talk of many indi- viduals that have received sentences from 2 years to do at the low range to up to 8 years to do with most cooperating witnesses get- ting 5 or more years to do. We have numerous individuals that have received 20-plus years. Fifteen is not uncommon. PAGENO="0100" 96 You. ask us, has the savings and loan industry had an impact upon the courts in our district, and my answer is no, because we have not prosecuted as many as we would like to prosecute. I can tell the committee that there is not one case in the eastern district of Texas that has been investigated that has not been prosecuted. There simply are not enough agents to work up the cases. The FBI has taken the position that they will often service us from afar. This may be good intentions, but it has not worked.. We do not feel it will work. This is a marriage that simply can't work. You have to ~have that close working relationship between the pros- ecutor and agent. If my prosecutor needs to talk to that agent about a question, he doesn't need to have to hunt him all over the city of Dallas to find him. He needs to be able to go over to the FBI office and sit down and go through the material. We have found to have a successful prosecution of bank fraud, our assistants have to be involved in the investigative process and be made available to the process and that is what we have done. You ask us if IRS or Postal Service have become involved in our cases, and no, they have not. I think for IRS to become involved, we would probably need more agents assigned. I have not asked them. To be honest with you, I had not thought about it. I have been attempting to get Postal Service agents in our district for many years, but we have been unsuccessful in recruiting offices to be opening in our district. I do feel that they would be a very valu- able resource if they were residing in our districts. They are not, so I don't think that their long-range investigation would be adequate, would not really serve to fill our bill. You ask us about the sufficiency of the sentences. I would say that, from what we have seen in the eastern district of Texas, the guidelines are approximately half of what our preguideline sen- tences were. Of course, you have to understand that the guidelines were created to put everything in a middle-of-the-road, what was an average across the United States. I don't think our district has ever been known to be an average on anything. That is probably why our guidelines sentences now are less than what they were prior to the guidelines. I was very pleased to see that the level was raised to 24. Maybe that will be high enough. I am not so sure. I think, with larger losses, I think we have the abil- ity to climb, and when you have these $10 million losses, $6 million losses and more, I do not think a slap on the hand is sufficient. You ask us about restitution and restitution has been very diffi- cult. We probably collect approximately a million a year, but that is just simply a drop in the bucket. That is nowhere near what we would like to collect, but Mr. Collins, I think, summed it up very well in saying that these people-most of them-it is easy come, easy go. They have lost the money. The investments they had put into have very little value and so we have not been successful on restitution. What we have found, as far as the sentencing goes, you know, there is an old, old statement that says the pen is mightier than the sword. That holds true to the business of theft. You can steal substantially more with the pen than you can with the sword. We have proven it, it happens day in and day out. PAGENO="0101" 97 I think there definitely is some disparity between the amount of time a person that wears a coat and tie that steals money and the amount of time to a person that goes into a 7-Eleven and steals money. The man that goes into the 7-Eleven in ragged blue jeans, he does not hold. a position of public trust. He does create a danger to the person he is stealing from, but he does not have any special honor or any special position that has been created by his high presence in a bank, so I think there should be equal sentencing to those.that wear a coat imnd tie and those~that don't. You have asked us about the new laws, and Congressman, I ap- plaud you and all your colleagues for giving us the tools to help us do our job. As you will Temember, in May 1984, one of the main problems that I addressed the committee and told you all is that we had a short stick and that there was not a whole lot that we could do. You all have met the needs and you have come forward and fulfilled your duties and obligations by giving us bigger sticks. It is truly premature to tell us exactly. what the effect is going to be, but being a prosecutor for 9 years, I can tell you that the 20- year maximums and the 10-year statute of limitations and the abil- ity to go in and levy high fines is going to be nothing but a tremen- dous asset to those of us that prosecute. One of the primary concerns that our district has had-and that is, in the 5 years, the last 5 years, Mr. Sievert, who is here with me, who was formerly the Chief of the Criminal Division for the eastern district of Texas-I have conferred with him, as he resided in Tyler and I resided in Beaumont. We have yet to meet one person from the savings and loan industry that has come in to inform us that there is a problem. with any institution in our dis- trict. If we would know about this, we could probably solve a prob- lem before it became a major problem, but we would like to have information from the savings and loan industry that would allow us to go forward-- Mr. BARNARD. What about the regulators? Mr. WORTHAM. That is exactly what I am talking about. Oh, reg- ulators? We have had-I believe we have had a few-the regulators have given us information, but only in the last few months. Prior to that, we had received no information from the regulators. As a matter of fact, we have many institutions-as to which we have re- ceived no referrals-that have been regulated for an extended period of time. Mr. BARNARD. Why would your district be any different from Mr. Collins' district? Mr. WORTHAM. Mr. Chairman, we are country folks. The biggest city in our district is a suburb of Dallas and it is called Plano, and the second biggest city is Beaumont. After that, we don't have any major metropolitan areas and historically, we are just not treated the same as the big cities. Mr. BARNARD. But you have had significant closedowns of sav- ings and loans because of insider abuse and fraud, have you not? Mr. WORTHAM. Absolutely. Mr. BARNARD. So, in other words, you would say, then, that possi- bly the smaller institutions, even though the crimes are just as sig- nificant, are not getting the same time and attention? PAGENO="0102" 98 Mr. WORTHAM. I don't think there is any doubt about that. I have talked to many other U.S. attorneys that are in the same po- sition as I, and I just don't think that there is as much emphasis given to the less-populated areas. Mr. BARNARD. 1 won't interrupt you again. I would like to ask you, how many inactive major cases do you have in your district? Mr. WOR~HAM. I know that just in the Beaumont Division alone, we have 14 institutions that have either failed or are under super- vision, and I believe we are only currently investigating four cases out of those 14 institutions and two of those that we are attempting to investigate are inactive because there are no resources. We have the lawyers and we are willing to go forward-and I am not saying the-I am not complaining about the allocation of re- sources to our district. I think the Department of Justice has been very fair with the eastern district of Texas. I feel, though, if we were given sufficient FBI support, then, in fact, we very well could use additional prosecutors because I feel the cases are there. It is just that my lawyers can't investigate without some help. I don't want you to think we haven't prosecuted a lot of big cases. We have, and I could give you a few examples if you wish, but I doubt if that is what you are looking for today. Mr. BARNARD. We will probably come back to that through the question period. Mr. WORTHAM. With that, Your Honor, I rest. [The prepared statement of Mr. Wortham follows:] PAGENO="0103" 99 ~tpartnttnt of ~ustbt STATEMENT OF ROBERT J. WORTHAM UNTIED STATES ATTORNEY EASTERN DISTRICT OF TEXAS BEFORE THE SUBCOMMITTEE ON COMMERCE, CONSUMER, AND MONETARY AFFAIRS COMMITTEE ON GOVERNMENT OPERATIONS UWtTED STATES HOUSE OF REPRESENTATIVES CONCERNING SAVINGS AND LOAN AND BANK FRAUD AND EMBEZZLEMENT CASES ON MARCH 14, 1990 PAGENO="0104" 100 The Eastern L)istr~.ct of Texas has expw~ienced insider and affiliated outsider fraud on financial institutions by several methods. Most significantly there are large or numerous loans to developments or partnerships where of ficers or majority stockholders are silent partners. Many of SUCh loan packages are incomplete when funding or disbursements are made and such disbursements are made toward the purchase of cashier checks which then fund the transaction. A second form of insider bank fraud is the direct misapplication of loan proceeds to pay the personal or business expenses of officers or stockholders. Another form of affiliated transaction is the purchase or refinancing of risky loans from other financial institutions controlled by the sane stockholders. In one savings and loan failure, all three types of prohibited transactions were present. Losses to the U. S. Government in that case will reach approximately $50 million. In that case the stockholder obtained an of f-the-books loan from an oUt-of-state savings and loan association he owned to purchase the stock of this savings and loan association in the Eastern District of Texas. To repay the loan, the stockholder had the Texas savings and loan plac. a certificate of deposit in an out-of-state bank where it was pledged against a loan to repay the original off-the-books loan. The collateralized loan was paid of f through a diversion or misapplication of loan proceeds from the Texas savings and loan. In effect, the savings and loan was purchased and financed with its own funds, thereby reducing its regulatory capital. Upon obtaining control of the Texas savings and loan, numerous loans were made to development projects where the stockholder had financial interests. Additionally, various bad loans from the California savings and loan were purchased or refinanced by the Texas savings and loan. There are at least two other financial institutions under investigation where similar large-scale misconduct regarding loans to projects involving the stockholders are present. On a lesser scale, loan officers in various financial institutions make loans to individuals or projects where they have a financial interest. PAGENO="0105" 101 2. a. How many S&L's1and how many banks were victimized in past and pending investigations involving losses of $100,000 or more: _J100.000 or More Fl 1988 Fl 1989 Fl l990 (i) Pending Investigations 37 43 59 (ii) Individuals Under Investigation (iii) DeclinatiOns 0 0 0 (iv) Convictions 16 18 13 (v) PreTrial Diversions 1 (vi) Acquittals 0 1 0 (vii) Mistrial. 0 0 0 __~25.OOO to S~00.00O (i) Pendinc~ investigations 21 34 29 (ii) individuals Under Investigation (iii) Declinations 0 0 0 (iv) Convictions 4 5 1 (v) PreTrial Diversions 0 0 0 (vi) Acquittals 0 0 0 (vii) Mistrials 0 0 0 b. How many are open: There are approximately 13 institutions which are under supervision by Federal regulatory agencies. How many have failed: There are approximately 17 institutions which have failed and whose loan portfolios are being managed by Federal regulatory agencies. c. Estimated dollar losses from failures: Total estimated losses 4cannot be computed at the present time because many of th. poor loan portfolios being managed have yet to be completely written of f. However, many of the smaller savings and loans which have failed average approximately $50 million each in readily identifiable lassie. If possible, identify the failed institutions under investigation (past and current): Investex - Tyler, Texas Security Savings & Loan - Texarkana, Texas Citizens Bank, Clarkeville, Texas Texas American Bank, Temple, Texas Trinity Valley Savings & Loan And others yet to be announced PAGENO="0106" 102 3. Resources assigned to these cases/adequacy of personnel levels: F1±88 F? `89 ~ a. Number of AUSAs working on bank and S&L cases: *3 *3 * Work equivalency of less than one full-time lawyer. ** Two full time, two part time. b. Number of additional positions received as result of AG'S 12/88 & 1/89 allocation for these cases: There are currently 14 FBI Agents assigned to the Sherman, Texarkana, and Tyler Resident Agencies within the Eastern District of Texas. In the Beaumont office, there is currently only one FBI agent assigned to work exclusively cases involving bank fraud and embezzlement from financial institutions. As a result of the Attorney General's recent allocation, the U. S. Attorney's office received three full-time attorney positions, two of which have been filled. The third has been selected, but awaiting approval to be brought on board. We also received one accounting tech. As a result of the Attorney General's recant initiative, the assignment of three additional FBI agents is expected. One vacancy currently exists and will be filled soon. This will bring the total complement of agents to 18 for the Tyler Division of the Eastern District. The Houston Division of the FBI has agreed to send two new FBI agents and one accounting tech to the Beaumont office. These positions have not been filled yet; but, once operational, along with existing agents, bank fraud should be sufficient to support our own one full-time bank fraud prosecutor and two general crimes attorneys that handle some bank fraud cases. The Dallas Division of the FBI has committed to sending two new bank fraud agents to the Eastern District. Those positions have not been filled, but will not_be sufficient to addrebe the backlog and to sufficiently support the two ful1~~time bank fraud prosecutors and general crimes attorneys that handle bank fraud. Number of FBI agents allocated to ED of Texas by FBI SAC's: 4 (2 from the Houston Division; 2 from the Dallas Division) PAGENO="0107" 103 Nuizber of FBI agents allocated to ED of Texas by national formula: 6 c. I realize there are limits on the budget and I am not complaining about allocation of prosecutors to the Eastern District of Texas; but, when you ask how many agents and prosecutors our off ice optimally and effectively could utilize, you must understand we have many bank failures and S&L takeovers that are not being addressed because of the lack of resources. We have conservatively more than enough work for an additional fiv, or six FBI agents, two more accounting tschs, and three more prosecutors. 4 * a. FBI Houston has promised additional agents and an accounting tech whose numbers are fair and I can live with. Dallas FBI is not willing to assign agents to the field on the published ratio of two agents per AUSA. They want their agents in Dallas, which is NOT where the prosecutor institution or the work is located. The only way a major bank or S&L case can properly be handled is with extremely close coordination between the agent and prosecutor. With a 2 1/2 hour drive each way to Tyler from Dallas or 1 1/2 hour drive each way from Dallas to Sherman, it leaves very few hours for productive time for the agent and the prosecutor. b. The FBI transfer policy in the past has been devastating to both the Beaumont and Tyler offices but, now that the FBI is low on transfer money, things have stabilized -~ good work Congress. c. All of our IRS agents ars working full-time drugs cases, and I could not ask them to work fraud without additional agents being assigned to the Eastern District. Postal has no agents residing in the Eastern District of Texas, and these long distance marriages on long, time consuming cases are seldom truly productive. I have been trying for years to have postal inspectors assigned to the Eastern District and would very much like their assistance on these cases. 5. a & b. Sentences have ranged from probation to 25 years to do. The length or type of sentence is directly related to a role in. the crime, position, and amount of loss. C. The sentences under the guidelines have been running about one half of or pre-guidelines cases. d. Restitution is difficult to collect where awarded. Some Defendants will or would pay restitution, if it would keep them out of jail. PAGENO="0108" 104 Mr. BARNARD. Now I am delighted to have Mr. Arnold from the district of Minnesota. We will hear from you at this time, Mr. Arnold. STATEMENT OF JEROME G. ARNOLD, U.S ATTORNEY, DISTRICT OF MINNESOTA Mr. ARNOLD. Mr. Chairman, members of the committee, I am Jerry Arnold, the U.S. attorney for the district of Minnesota and I appreciate the opportunity to come before you at your invitation and talk about the efforts in the district of Minnesota with refer- ence to the investigation of bank and savings and loan fraud. According to one of the appendixes which is attached to my writ- ten testimony, the FBI lists some 90 banks and 12 S&L's in which cases are pending or are under active investigation. Generally, my comments will refer to fiscal years 1988, 1989, and through current 1990 or through the first quarter of 1990. However, again, attached to the written testimony are some statistics by the Minneapolis Di- vision of the FBI, going into fiscal year 1987; in the district, since fiscal year 1987 through the end of the first quarter, there have been 130 convictions in the area of bank fraud and savings and loan. In fiscal year 1988, we had 29 cases that we opened for bank fraud. The figure nearly doubled in 1989. We opened up 42 cases and, through the first quarter of 1990, we have opened up 21 cases. Thirty-five of these individuals were convicted of executing schemes against financial institutions resulting in over $10 million in losses in fiscal year 1989. That was an increase of $7 million from fiscal year 1988. For fiscal year 1990, to date, 11 individuals have been convicted and an estimated loss resulting from their crimes is nearly $2.6 million. As you know, the crimes are complex. They involve an intricate web of actions and documents usually spanning many years of busi- ness operations. You have asked me to address the Midwest Federal investigation. Midwest Federal, on February 13, 1989, was placed under Federal conservatorship. A Federal grand jury investigation of Midwest Federal, which had been commenced prior to the conservatorship, remains ongoing. The number of assistant U.S. attorneys and FBI agents assigned to the investigation has varied during the last year. The investigation involved throughout the equivalent of two full-time assistant U.S. attorneys and four full-time FBI agents. Recently, two additional assistant U.S. attorneys have been as- signed to that investigation full time. The FBI currently has nine agents assigned to the investigation, four special agents and two special agent accountants and one accountant technician are as- signed on a full-time basis, three special agents, two special agents and special agent accountant are devoting substantial part time. In addition, the IRS has been providing one full-time and two part- time agents to the investigation for a lengthy period of time and we have also obtained helpful assistance of the FDIC personnel re- garding a specialized aspect of that investigation. I can tell you, at the present time, in my opinion, the prosecutorial and investigative resources assigned to that investigation are adequate. PAGENO="0109" 105 Due to the ongoing nature of the grand jury's investigation, I am unable to comment about the scope of any particular focus of the investigation. However, attached to the written testimony is a copy of the indictment which was brought forth against one of the indi- viduals, one of the officers of Midwest Federal, which was filed on Monday. That indictment deals with one phase of the investigation, it being a Miami resort complex called the Jockey Club. That par- ticular case, as alleged in the indictment, over the last 16 months prior to the seizure of Midwest Federal by the Federal conserva- tors, there were some $12 million extended in loan credits to that institution, to the Jockey Club, from Midwest Federal, at a point in time when the Jockey Club was losing over $3 million a year. Mr. BUSTAMANTE. Is it 12 or 21? Mr. ARNOLD. The total loss to the institution was $21 million. The $12 million was extended over the last-about year, actually from about December 1987 to February or December 1988. That $12 million was extended. There was an additional $2, $3 million- $2.3 million that was attempted to be extended according to the in- dictment, but was canceled by Federal regulators. Otherwise, the loss would have been greater. According to the newspapers, the Jockey Club was sold by Feder- al regulators for $2.5 million. The net loss to the Midwest Federal is $21 million. Mr. BARNARD. Did the institution fail because of that transac- tion? Mr. ARNOLD. I don't believe I would be the one to answer that question, Mr. Chairman. The indictment alleges that one of the purposes of continuing to extend those loans was so that the insti- tution could hide the precarious financial condition of the S&L from the Federal regulators who were looking at that loan. Mr. BARNARD. Is that institution in a conservatorship? Mr. ARNOLD. Yes, it is. Mr. BARNARD. Thank you. Mr. ARNOLD. Midwest Federal is in conservatorship. Mr. BUSTAMANTE. It also says that this was just a minor problem compared to the mobile home portfolio, you know, as far as losses are concerned. Mr. ARNOLD. I have also attached to our written testimony some copies of newspaper clippings. Let me summarize what those news- paper clippings are because I do not want to comment on the grand jury investigations. Those newspaper clippings involve some additional areas that have been involved in civil litigation. They involve a transaction between Midwest Federal and its former subsidiary, Green Tree Acceptance, where, according to newspaper accounts, the loss to the institution might be $200 million. They involve an area of where the Midwest Federal sold to vari- ous investors subordinated debentures where those lawsuits indi- cate a loss of about $40 million. They involve another loan that deals with the Canterbury Downs and its owners. In terms of loans, it involves another $45 million. They involve allegations against a group known as CDR, a part- nership involving both people from Texas and Minnesota, which in- volved another $40 million. These allegations that have been set PAGENO="0110" 106 forth in the newspaper, you can be assured that we are addressing those in terms of an investigation. As you have indicated or as another member of the committee indicated, the loss in the Jockey Club may well be pale in compari- son to Midwest Federal's potential losses resulting from its other transactions. Experts in the newspapers have indicated that the cost to the taxpayers may reach $1 billion for the failure of Midwest Federal. You have asked in the questionnaire sent to our office about the interagency exchange of information, coordination, and consulta- tion. I can tell you that in the district of Minnesota, generally they are excellent. We have only had one problem, and that has recent- ly emerged in a grand jury investigation. The problem we have en- countered is the assertion of the attorney/client or work product privilege by fee counsel, FDIC attorneys, and RTC counsel. The problem has been substantial and consumed an enormous amount of attorney work hours. For example, last week, nine lawyers, all being paid for by tax- payers' dollars, were present in one meeting working out problems over the claim of attorney/client privilege on certain documents or conversations. Disclosure of the claimed attorney/client privilege material, in our opinion, which is relevant to a criminal investiga- tion, should be granted to Federal prosecutors without the necessi- ty of senior counsel of the FDIC and senior counsel of the RTC here in Washington, DC, having to sign off on those disclosures. Mr. SPRATT. What sort of work product is this, attorney work product? Is this for a restitution suit or other civil suits that are bound to be initiated? Mr. ARNOLD. We are not so much concerned about the attorney/ client or work product privilege which has occurred after a com- plaint. We are referring to documents that were put together prior to the complaint. In other words, in some instances-- Mr. SPRATT. Give me an example. I am having a hard time un- derstanding what sort of attorney work product would be denied to you in a criminal investigation. Mr. ARNOLD. Assume that the bank that is under investigation had counsel, both in-house or hired counsel, to do certain transac- tions with third parties, and they developed an attorney/client file or an attorney file, and inside that file are privileged documents under the attorney/client privilege or the work product privilege. Mr. SPRATT. But was this ifie part of the criminal fraud? Were the attorneys involved conspiring with the borrowers and with the bank officers to defraud the bank? Mr. ARNOLD. It is not-I don't want to say that it involves the attorneys except the attorneys have the documents. In other words, there are frauds perpetrated where an attorney can do the work and not know the fraud. It can be part of the fraud itself. For instance, one of the exceptions to the attorney/client privi- lege is the crime fraud exception. Now, it is easy to say, well, submit it to a court and let the court decide if it falls into that crime fraud exception. The problem is even experienced investiga- tors who have a substantial knowledge of the file can go through documents and not appreciate their significance first time through. PAGENO="0111" 107 Later on, because of additional investigation, something that seemed relatively unimportant becomes very important, and to have a court look at it and~ say, you know, "Tell us about why this is a crime fraud exception," when we haven't seen the document, is nearly impossible. That is one area. One of the other areas is where the privilege is asserted, where - there hasn't been the basis for it, namely that the advise given by the attorney was done in a business consultation. In other words, was it a good deal for the savings and loan or not, as opposed to legal advice. Those documents we need access to. Today, I can report, perhaps not the least of which my invitation being here today, that as of last Friday, in the district of Minneso- ta, all of those problems were resolved to the satisfaction of the U.S. attorney's office. Mr. SPRATT. But your sentence says that you have encountered this problem due to the assertion of the attorney/client or work product privilege by FDIC attorneys and RTC counsel. Mr. ARNOLD. Yes. Mr. SPRATT. Do you have Government lawyers asserting the at- torney/client privilege or the work product privilege and excluding U.S. attorneys from the product of their own files? Mr. ARNOLD. Yes, sir. Mr. SPRATT. I don't understand that problem. I am sorry, it is just not apparent to me on the face of what you are saying. Mr. ARNOLD. Their assertion is that the disclosure of some docu- ments may hinder their civil recovery efforts. Mr. SPRATT. So the FDIC and the RTC are saying that the civil recovery effort takes precedence over the criminal investigation, then? Mr. ARNOLD. I am not sure that they would say that. I think that they say that there has to be a recognition of their joint responsi- bility under the act, both in terms of referring for a criminal pros- ecution and their civil recovery or to lessen the impact on the Fed- eral tax dollars necessary to be paid out. Mr. BARNARD. But do they want to have the veto over producing that material? Mr. ARNOLD. Yes, sir. Mr. SCHIFF. Mr. Chairman, could I pursue one question on that? Mr. BARNARD. Yes. Mr. SCHIFF. Very briefly, Mr. Arnold, I am having just a little trouble following. These are U.S. Government attorneys who are asserting an attorney/client privilege, is that right? Mr. ARNOLD. It may come about this way, it may be that the FDIC hires fee counsel. The privilege is asserted. Mr. SCHIFF. By the FDIC. Mr. ARNOLD. By the fee counsel, hired by the FDIC. Then, when there is a confrontation between the U.S. attorney's offices and the fee counsel, in one case, the FDIC hired other fee counsels to look at the privilege question, and when it wasn't resolved then, then it involved FDIC attorneys and eventually became FDIC attorneys here in Washington, DC, and the RTC attorneys here in Washing- ton, DC, all asserting the same thing. PAGENO="0112" 108 Mr. SCHIFF. I can understand that fee counsel may, as fee coun- sel, raise an attorney/client privilege, but their client is the FDIC, is it not? Mr. ARNOLD. Yes, sir. Mr. SCHIFF. So the FDIC should say, "Thank you for raising that. Disregard it and cooperate with the U.S. attorney's office." That is what they should say, is it not? Mr. ARNOLD. That is what we would like them to say. Mr. SCHIFF. They are not saying that? Mr. ARNOLD. No, sir, not-let's put it this way-- Mr. BUSTAMANTE. Is Minnesota law different than other areas of the country? Mr. ARNOLD. No, this is Federal law. Mr. BUSTAMANTE. Federal here. Mr. ARNOLD. Yes. It is a problem that is not-I do not believe unique to our dis- trict. I think that-- Mr. BARNARD. We will have them up before us tomorrow. It gives us a very good question to start off with. Mr. ARNOLD. All right. Let me say that other than that problem, the FDIC and RTC have been most cooperative. We are very grateful for their assist- ance, their technical assistance in areas where they didn't have to give it to us, but they came forth and did it. It is just that one touchy area. It is their position, as we read it, that they want to have the final authority as to what is released pursuant to a grand jury subpoena when it involves attorney/client privilege documents. You have asked us to talk somewhat about the victims of bank frauds and while the bank fraud crimes do not generate the para- lyzing fear that violent crimes do, they can have far-reaching con- sequences, especially if the failed bank is in a community where it may be the only source of credit available to small businesses, and in the district of Minnesota, farmers. It can, in fact, dry up the only source of credit available to these small businesses. I can tell you that in the years of 1984, 1985, and 1986, those small banks- those banks in small communities that failed, they had a substan- tial impact on those entire communities. Farmers that otherwise might have been able to survive were not able to survive. They ended up in the bankruptcy court. The victims in the case of embezzlement and primarily the rash of savings and loan fraud, of course, in the end result, are every taxpayer in the United States. You have asked me to talk a little bit about the types of schemes of the diversion of funds. If you have bank officers, they are usual- ly involved in some type of concealing their diversion of funds, either through embezzlement or not. We have listed several exam- ples in the written testimony. Let me just talk about one of the more recent convictions and sentences and that was a young man who took over a bank on May 28, 1987, and he resigned that posi- tion July 30, 1987, 2 months. During that 2-month period, he was able to perpetrate an over $7 million fraud. The net loss to the FDIC was approximately $5 million. PAGENO="0113" 109 In terms of sentences, he stood trial and was convicted and was sentenced to 8 years in prison. Mr. BARNARD. Any restitution? Mr. ARNOLD. I think that the FDIC had seized anything that was in sight. I am not sure that there were any-there may have been some restitution ordered, but it would have been hollow in terms of the ability to repay it. Mr. BARNARD. I don't see how anybody could spend that much money in that short period of time. Mr. ARNOLD. He had a number of other businesses where he fun- neled the money into and did things like that. That is essentially what occurred. As to the recovery, that was in the hands of the. FDIC. In terms of the other major area of fraud, on the banks that we have seen, it has been done by borrowers and they have usually been, in terms of inflated collateral, false statements, misapplica- tion of funds, selling off the collateral or the like. The sentences there have varied. The largest of those is a case that is set for trial. It involves the founders of Endotronics. It is alleged in that indict- ment that there are various securities frauds and bank fraud charges. I believe newspaper accounts indicate that the banks lost somewhere between-between the banks and a brokerage house, $3 to $5 million, but the total amount of the loss to victims, I don't believe has been estimated because the biggest loss was in the secu- rities area, where the stock went from a high of somewhere in excess of $35 down to less than $5. The sentences imposed on the defendants in our bank fraud and embezzlement cases range from straight probation to heavy prison terms, accompanied by restitutions. Sentences handed down corre- late with the position of the individual, the loss to the financial in- stitution and extent of the fraud. Of the 16 defendants sentenced in cases after fiscal year 1988, 14 of those were sentenced to prison where they involved external fraud, and they ranged anywhere from 60 days to 60 months. Ten of that 16 were ordered to pay res- titution. For those who were associated inside the institution, 10 of the 18 individuals received prison terms. This is in fiscal year 1988. Eleven were ordered to pay restitution. That is where they were not in positions of authority. For those who held positions of au- thority within the institution, all were sentenced to prison terms and ordered to pay restitution. In terms of the sentences, if sentences for drug offenses and vio- lent crimes are used as a standard, the sentences for most econom- ic crimes are totally inadequate. It is my impression, as one of the committee members has already said, that the average person on the street believes that the more influential or well known the eco- nomic defendant is, the less prison term the defendant will be given by a court. Socioeconomic status must not be a determinant as to whether a person receives prison time or not. The effect of the sentencing guidelines are still unknown in most economic crime cases-that is most of the cases that we are dealing with-- Mr. BUSTAMANTE. How can you prohibit that, though? When that person that is in a higher economic status has that lawyer or law- yers that are far better than those that will go into a 7-Eleven and PAGENO="0114" 110 steal $50 or whatever it might be, there is no real means to ensure that the lawyers are going to be of the same status. Mr. ARNOLD. In the district of Minnesota, most of-the attorneys who are involved in representing the high-profile economic crime cases are also attorneys who are on the public defender's panel and are involved in the drug cases. Now, that doesn't answer the total question that you have raised, but I can assure the panel here that our' experience as to whether or not we obtain a conviction, and in most cases, we obtain a con- viction, does not depend on who the defense attorney is. Mr. BUSTAMANTE. I don't question their professional status. I question sometimes the effort on behalf of clients. Mr. ARNOLD. Our experience has not been that, but-- Mr. BUSTAMANTE. I am glad to hear that. Mr. ARNOLD. The sentencing guidelines will do one thing and that is, cases which previously would not have gotten a prison term, that is, the less economic crime cases, I think the sentencing guidelines will bring prison to those types of individuals. It is indeed likely that those that were given higher sentences, that the sentencing guidelines may, in fact, decrease those prison terms. However, there is available, under the sentencing guidelines in those cases, a provision for upward departure for the court. Mr. Chairman, members of the committee, I appreciate the op- portunity to talk to you today. [The prepared statement of Mr. Arnold follows:] PAGENO="0115" 111 u.s. Department of Justice United States Attorney District of Minnesota STATEMENT OF JEROME G. ARNOLD UNITED STATES ATTORNEY DISTRICT OF MINNESOTA BEFORE THE COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE OF THE COMMITTEE ON GOVERNMENT AFFAIRS CONCERNING BANK FRAUD MARCH 14, 1990 PAGENO="0116" 112 Mr. Chairman and Members of the Committee. I am Jerry Arnold, United States Attorney for the District of Minnesota. I appreciate the opportunity to be here today to discuss the efforts in the District of Minnesota with respect to the investigation and prosecution of savings and loan fraud, bank fraud, and embezzlement cases. My comments generally are confined to fiscal years 1988, 1989, and 1990 to date. In the District of Minnesota, cases of fraud and embezzlement under investigation have steadily increased since the beginning of fiscal year 1988. In fiscal year 1988, 29 cases involving bank fraud or embezzlement were opened in my office. The figure nearly doubled for fiscal 1989 -- 42 cases were initiated. And 21 cases have been opened as of the close of first quarter fiscal 1990. Thirty-five individuals were convicted of executing schemes against financial institutions in fiscal 1989, resulting in over 10 million dollars in losses to financial institutions in the state of Minnesota, an increase of nearly 7 million dollars from fiscal year 1988. For fiscal year 1990, to date, 11 individuals have been convicted at an estimated loss resulting from their crimes of nearly 2.6 million dollars. The crimes are a complex, intricate web of actions and documents sometimes spanning years of business operations and execution of the scheme. The investigations, grand jury presentations, prosecutions, and extensive court time will span years and require considerable dedication. 1 PAGENO="0117" 113 Illustrative of this type of investigation is the investigation of Midwest Federal. On February 13, 1989, Midwest Federal Savings and Loan Association, Minnesota's second largest S&L, was placed' under federal conservatorship. A federal grand jury investigation of Midwest Federal, commenced prior to the conservatorship, remains ongoing. The number of Assistant United States Attorneys and FBI agents assigned to the investigation has varied during the last year. The investigation involved the commitment of the equivalent of two full-time AUSA5 and four full-time FBI agents through its initial stages. Recently two additional AUSAs have been assigned to the investigation on a full-time basis. The FBI currently has nine agents assigned to the investigation -- four special agents and two special agent accountants, and one accounting technician are assigned on a full-time basis. Three special agents -- two special agents and one special agent accountant, are devoting substantial part-time assistance. In addition, the IRS has been providing one full-time and two part-time agents to the' investigation for a lengthy period of time. We also have obtained the helpful assistance of FDIC personnel regarding a specialized aspect of the investigation. At present, the prosecutorial and investigative resources are adequate for the investigation. Due to the ongoing nature of the grand jury's investigation, I am unable to comment about the scope or any particular focus of the investigation. On Monday of this week, the grand jury returned the first indictment resulting from the investigation. (Appendix A). 2 PAGENO="0118" 114 Also attached are copies of several news articles that reflect some of Midwest Federal's transactions or business relationships that currently are the subject of civil litigation in which fraud has been alleged. (Appendix B). Many other financial institutions, pension funds, and individual investors have suffered serious losses resulting from the failure of Midwest Federal. S&Ls have filed civil actions alleging fraud in their purchase of mobile home loans from Midwest Federal and Green Tree Acceptance. Various pension funds and individual investors have suffered in excess of 40 million dollars in losses arising from their purchase of subordinated debentures from Midwest Federal. The sale of these debentures also has resulted in the filing of several civil actions alleging fraud by Midwest Federal and several of its officers. It obviously has yet to be established the extent to which criminal misconduct involving Midwest Federal caused or contributed to the institution's failure. With respect to the Jockey Club, which is the subject matter of the indictment returned Monday, Midwest Federalhas written off over $21 million of the loans it made to that resort. That ultimately means, of course, a more than $21 million loss for the taxpayer. As you can see from the news articies, the Jockey Club's loan losses pale in comparison to Midwest Federal's potential losses resulting from its various mobile home loan transactions with its former service corporation, Green Tree Acceptance Corporation, and losses from other delinquent loan portfolios. : 3 PAGENO="0119" 115 While the District of Minnesota interagency exchanges of S information, coordination, and consultation are generally excellent one problem has recently emerged in a grand jury investigation. The problem we have encountered is the assertion of the attorney/client or work product privilege by fee counsel, FDIC attorneys and RTC counsel. The problem has been substantial and consumed an enormous amount of attorney workhours. For example, last week nine lawyers all being paid for by taxpayerst dollars were.present in one meeting working out problems over the claim of attorney/client privilege on certain documents or conversations. Disclosure of claimed attorney/client privileged material relevant to a criminal investigation should be granted to federal prosecutors without the necessity of Senior Counsel of the FDIC and Senior Counsel of the RTC, both in Washington, D.C., having to sign of f or agree to the disclosure. The criminal investigations must take precedence over civil recovery efforts. I am happy to report that late last Friday all of the issues relative to pending attorney/client claimed privileges were resolved to the satisfaction of the U.S. Attorney's Office. Let me also reiterate that except for the attorney/client privilege issue, we have had and continue to have total cooperation and assistance from the FDIC, FHLBB, and RTC, their employees, and agents. Our office is most grateful for that assistance and cooperation. 4 PAGENO="0120" 116 While bank frauds don't generate the paralyzing fear that violent crimes do, they have far reaching consequences. When the government will have to pay out somewhere between 500 million and a billion dollars to rescue just one savings and loan in Minnesota, you can appreciate that impact. In relation to other crimes of fraud, i.e. mail fraud where there are dozens of victims and the total monetary loss is spread across a large number of victims, victims resulting from bank fraud or embezzlement result in generally only one victim -- the bank. However, when that bank suffers a loss that brings it close to insolvency or suffers insolvency, the ultimate victims may be a sufficient part of a community. For instance, in a rural community a bank officer's conduct resulting in the failure of the only bank in the community, can have devastating effects on the ability of the small businessman and the farmer to obtain credit to continue in their operations. The victim in the case of embezzlement and primarily the rash of savings and loan fraud we've seen spiraling across the country, is every taxpayer in America. Bank fraud and embezzlement committed by those affiliated inside the financial institution comprise nearly 50 percent of these cases charged in the Districl of Minnesota since the beginning of fiscal year 1988. Losses sustained by the financial institutions resulting from embezzlement from internal personnel are greater among those of responsibility and authority, particularly those who have access to bank records. 5 PAGENO="0121" 117 The most common scheme utilized by bar,: officials is by the drafting of false or inflated loans. The diversion of funds is generally concealed in the alteration of bank records. - Dennis K. Albertson, the former owner and president of the State Bank of Morgan and the Citizen's State Bank of Gibbon, was convicted of embezzling over 849,000 dollars from the two banks over a period of three years. Albertson embezzled the funds by making out loans to third parties and then concealing the diversion by making false entries in the bank's loan records. The names used for the bogus loans were those of friends and relatives. Both banks were closed by the State of Minnesota. - The Boundary Waters State Bank in northern Minnesota suffered more than 208,000 dollars in losses as a direct result of embezzlement by the then-president Craig G. Kronholm. Kronholm obtained the money by bilking customers' loan and savings accounts. He channeled the funds to pay personal debts, including payments on loans originally obtained by the defendant to secure his controlling interest in the victim bank. 6 PAGENO="0122" 118 - In a complex scheme of illegal transactions and record doctoring, the former president of the Waconia State Bank, Paul Tollefsrud, embezzled nearly 200,000 dollars within a six month period from a single customer's account. Tollefsrud attempted to conceal the displaced funds by extending a loan to a company, and then used the money to replace the funds removed from the customer's account. The defendant was also charged with extending several unauthorized loans totalling more than 263,000 dollars to his wife without the consent of the bank board, and inducing a third party to sign two backdated loans. Tollefsrud concealed the loan transactions and embezzlements by deleting portions of the state bank examination report provided to the bank directors. - Daniel K. Conners, who was president and held controlling interest in the People's State Bank of Mezeppa, was charged and convicted of converting in excess of 5 million dollars in bank funds to his personal use. 7 PAGENO="0123" 119 Each conversion was disguised in bank records as various bank investments in loans. While the FDIC was conducting an examination, Conners acquired monies in excess of 6 million dollars in brokered deposits from more than 70 investors. Through a series of transactions, the investors' funds were wired to three banks before reaching the People's State Bank of Mezeppa. All in an attempt to conceal the conversion of funds from FDIC examiners. Conners bought the bank May 28, 1987, and after a series of conversions and coverups, he resigned from the bank July 30, 1987, two months after assuming his position. The bank was declared insolvent and closed by the State of Minnesota August 22, 1987. Those individuals not in positions of authority at the financial institutions perpetrate schemes that reflect their direct involvement with case transactions and access to customer accounts and account numbers. 8 PAGENO="0124" 120 - A teller had converted over 3,000 dollars in cash to her personal use by destroying daily customer transaction documents. The loss of records required the bank to reconstruct that day's transactions resulting in an ultimate loss of 11,140 dollars. - Another teller embezzled more then 56,000 dollars by keeping 125 automobile loan refund checks meant for bank customer. The most common scheme within the area of external affiliated bank fraud is the manipulation of collateral used to secure loans. - John C. Clime operated a vehicle leasing business in the Twin Cities, financing his vehicle leases through the Dealer Lease System at Marquette Bank in Minneapolis. Vehicle titles were used as collateral in the funding of the leases and were to be held by Marquette Bank until termination of the lease. It is charged that rather than handing title of the cars to Marquette, Cline used the titles as collateral for loans obtained through Firstar Bank. Several of the titles allegedly contained the forged signature of a Marquette employee relinquishing the bank's lien on the vehicles. PAGENO="0125" 121 - 2,500 head of cattle were used by Christy J. Olsen to secure a loan in excess of 1.2 million dollars. Olsen sold the steeds pledged to the bank and concealed the reduction in the herd by replacing them with cattle from third parties. - Insurance broker Conrad B. Solomonson used a pyramid scheme to divert insurance premiums from business accounts to personal bank accounts. Prior to commencing the diversions he acquired a 1.5 million dollar loan from~National City Bank. Under terms of the loan agreement, he was to submit documentation reflecting the financial position of his business. Solomonson thereafter submitted fraudulent monthly and quarterly financial statements to his Board of Directors, his accountants, and others in an attempt to conceal the diversion of premiums and its conversion to his personal use. - Robert E. Bergman falsely represented that he held government contracts to obtain bank loans. He submitted false invoices and billings, representing purchased material for use in the non-existent government contracts, as justification for the loans. Proceeds from these "contracts" were pledged to the bank as collateral. 10 PAGENO="0126" 122 - The co-founders and former executive officers of Endotronics, Inc., were indicted on charges related to their defunct bio-technical company. The indictment charges an elaborate two year scheme designed to inflate profits realized by Endotronics, thereby artificially raising and supporting the value of Endotronic stock. With Endotronics showing yearly profits and supporting a high stock value, it is charged that ~the defendants were able to secure substantial loans. The proceeds of personal loans secured by the company stock were secretary channelled into the company to appear as purchases, according to the inc3 ictment. The indictment alleges that the scheme to defraud was aimed at several Twin Cities banks and investment firms. The scheme also included the attempt to obtain millions of dollars from the State of Minnesota. Losses suffered by investors when the stock collapsed is estimated in the millions. 11 PAGENO="0127" 123 A significant number of bank `fraud cases implemented by bank customers account holders, depositors, etc. -- relate to schemes whereby checks which are forged or otherwise insufficiently funded, stolen or fraudulently obtained, are placed into a bank or checking account, only to have proceeds withdrawn before the fraudulent checks are dishonored by the bank. The establishment of bank accounts with phony I.D.s is often used in an attempt to conceal the true identity of the defendant and is a maneuver commonly used by foreigners. - Five defendants stole checks from area businesses to facilitate the bank fraud scheme. The stolen business checks were filled out in the names of people whose utility checks had been stolen from mail drop boxes at apartment buildings. The signatures were forged by tracing over the signatures on the stolen checks. The defendants took business checks to the bank that had issued the personal checks to be cashed. - A funeral director had executed a check-kite scheme causing a loss to five banks in excess of 95,000 dollars. 12 PAGENO="0128" 124 The defendant had maintained five separate checking accounts at five area banks. Each account was opened and maintained under a different business name, yet all had a business address of the funeral home. The accounts were used to transfer funds and fraudulently inflate the balances in each. The defendant wrote checks on each of the accounts which exceeded the actual balance. He would then deposit the checks into one of the other accounts. Credit was extended to the defendant based on checks deposited into the accounts. 13 PAGENO="0129" 125 The sentences imposed on defendants in bank fraud and embezzlement cases range from straight probation to heavy prison terms accompanied by restitution. Sentences handed down correlate with the position of the individual, the loss to the financial institution, and the extent of the fraud. Of the 16 external defendants sentenced in cases initiated after fiscal year 1988, 14 have been sentenced to prison. Sentences range from 60 days to 60 months; 10 were ordered to pay restitution. For those who were associated inside the institution, 10 of the 18 individuals received prison terms, 11 were ordered to pay restitution. Those who held positions of authority within the institution were all sentenced to terms in prison and ordered to pay restitution. More insiders were ordered to pay restitution than outsiders at a ratio of 3-to-l. Of the 15 individuals on whom cases were opened since FY88 and have been charged and sentenced, 5 have been ordered to pay full restitution to the institution. All except one defendant have been ordered to pay 25 percent or greater of the amount diverted from the banks as a result of their offense. In the District of Minnesota, the caseload is high and the mandatory minimum prison terms has increased the number of trials. The increases in economic crimes cases will make an already overloaded criminal trial docket even more crowded. 14 n - - c PAGENO="0130" 126 If sentences for drug offense and violent crimes are used as a standard, the sentences for most economic crimes are totally inadequate. It is my impression that the average person on the street believes that the more influential or well known the economic crime defendant is the less prison time the defendant will be given by the Court. Socio-economic status must not be a determinate as to whether a person receives prison time or not. All bank officers and those who held a position of authority when perpetrating their crime have been sentenced to prison terms not under 18 months and up to 60 months in a federal correctional facility. All have been ordered to pay restitution to the victim bank. In the case of general bank employees, the sentences are more varied. Generally, if the defendant is sentenced to a prison term, no restitution is ordered. There appears to be no correlation in these instances between the dollar loss suffered by the bank and whether a defendant will be sent to prison or ordered to pay restitution. Prison terms for general employees have been short -- under 12 months. Probation has never been under two years. Orders of restitution seem sporadic. Individuals charged in multi-defendant indictments as the main defendant in the scheme have been given stiffer prison terms and no restitution. Other sentences within these indictments relate to the dollar amount and the defendant's role in the conspiracy. The borrowers, more often than not, received lighter prison terms, accompanied by orders of restitution. 15 PAGENO="0131" 127 Mr. Chairman, I appreciate the opportunity to address the Committee on the very important issue of bank fraud. 16 PAGENO="0132" 128 ~~NDIXA UNITED. STATES DISTRICT COURT DISTRICT OF MINNESOTA THE UNITED STATES GRAND JURY CHARGES THAT: COUNT I (Conspiracy) INTRODUCTION 1. At all times material and relevant to this indictment: a. The Federal Home Loan Bank Board (Bank Board) was an agency of the United States government established to regulate and supervise savings and loan institutions insured by the Federal Savings and Loan Insurance Corporation (FSLIC). As part of its duties, the Bank Board governed the FSLIC. The Bank Board examined insured institutions to assure that they were operated in a safe and sound manner and in conformity with applicable laws and regulations. b. FSLIC was an agency of the United States established to protect depositors by insuring deposits in member savings and loan institutions in amounts up to $100,000 per account. c. The Federal Home Loan Bank of Des Moines was a district bank and member of the Federal Home Loan Bank System. District banks were wholly owned by member savings and loan institutions within a given geographic area. District banks operated within guidelines established by the Bank Board and assisted in carrying out the Bank Board's responsibilities. d. Supervisory Agents were individuals employed by the district banks who, under guidelines established by the Bank Board, were assigned the responsibility of supervising one or more FSLIC-insured savings and loan institutions within a district bank's geographic area. As part of their duties, Supervisory Agents supervised various other employees who periodically examined and reviewed each such FSLIC-~insured savings and loan UNITED STATES OF AMERICA, Plaintiff, V. SUSAN GREENWOOD OLSON, Defendant. INDICTMENT (18 U.S.C. (18 U.S.C. (18 U.S.C. (18 U.S.C. (18 U.S.C. 5371) 5657) 51001) 51014) 52) PAGENO="0133" 129 institution. Supervisory Agents were specifically designated agents of the Bank Board and the FSLIC. e. Midwest Federal Savings and Loan Association of Minneapolis (Midwest Federal), located in Minneapolis, Minnesota, was federally chartered as a savings and loan institution, the accounts of which were insured by the FSLIC. Midwest Federal was periodically examined by the Bank Board. 1. The Jockey Club, located in Miami, Florida, was a waterfront resort consisting of three condominium towers, three villas, a lounge/dinihg club, health spa, swimming pool, tennis courts, valet parking facilities, and a 38-slip marina. The Jockey Club was owned and operated by different corporations, including, but not limited to, Bay Clubs International, Inc., Jockey Club, Inc., and Jockey Club Marina Inc., which hereinafter will collectively be referred to as the "Jockey Club'. g. Harold W. Greenwood, Jr. was Chairman of the Board of Directors, President, and Chief Executive Officer of Midwest Federal. He also presided over Midwest Federal's Executive Committee and was a member of its Commercial Business Loan Committee. h. Charlotte E. Masica was Executive Vice President and Managing Officer of Midwest Federal. She reported directly to Harold Greenwood. She also was a member of Midwest Federal's Board of Directors and its Executive Committee. i. Robert A. Mainpel was Executive Assistant to the Chairman and President and a Senior Vice President in charge of the Corporate Banking Group of Midwest Federal. He reported directly to Harold Greenwood. He chaired Midwest Federal's Commercial Business Loan Committee and was responsible for establishing proper loan loss reserves for troubled Midwest Federal commercial loans. j. Defendant SUSAN GREENWOOD OLSON, daughter of Harold Greenwood, was a Vice President in charge of the Minneapolis Division of the Corporate Banking Group of Midwest Federal. She reported~ directly to Robert Mampel. She was a member of Midwest Federal's Commercial Business Loan Committee and was responsible for management of Midwest Federal's lending relationship with the Jockey Club and other entities. k. Howard N. Lorber, a resident of Hewlett Harbor, New York, was a New York investor and businessman and a member of the Jockey Club, Miami, Florida. 2 PAGENO="0134" 130 1. Peter P. Jackson, a resident of Garden City, New York, was President of the real estate appraisal firm of Howard Jackson Associates, Inc., Mineola, New York. He was a Member of the American Institute of Real Estate Appraisers and carried the designation of M~I (member of the Appraisal Institute). m. Matthew L. Smith, a resident of Williston Park, New York, New York, was a staff appraiser with the real estate firm of Howard Jackson Associates, Inc., Mineola, New York. n. Fred W. Gergen was Chief Appraiser of Midwest Federal. He was responsible for reviewing appraisals obtained by Midwest Federal to ensure that they used acceptable methods and contained appropriate valuations. He carried the designation of HAl. o. Stuart A. Benson, a resident of Hewlett Bay Park, New York, was a New York investor and businessman, and an associate of Howard Lorber. THE CONSPIRACY 2. Beginning sometime before October, 1987, the exact date of which is unknown to the Grand Jury, and continuing until on or about February 13, 1989, in the State and District of Minnesota, and elsewhere, the defendant, SUSAN GREENWOOD OLSON, did unlawfully,: willfully and knowingly conspire, combine, confederate, and agree with other persons both known and unknown to the Grand Jury to a. commit certain offenses against the United States, that is: (1) to willfully misapply the monies and funds of Midwest Federal, an FSLIC insured institution, in amounts exceeding $100, with the intent to defraud Midwest Federal, in violation of Title 18, United States Code, Section 657; (2) to knowingly and willfully conceal and cover~up, and cause to be concealed and covered up, by means of a scheme or device, a material fact in a matter within the jurisdiction of the Federal Home Loan 3 PAGENO="0135" 131 Bank Board, in violation of Title 18, United States Code, Section 1001; and (3) to willfully overvalue land for the purpose of influencing the actions of the Bank Board, and the actions of Midwest Federal whose accounts were insured by the FSLIC, upon loans, and changes and extensions of the same, in violation of Title 18, United States Code, Section 1014; and b. defraud the United States, that is, to hamper, hinder, impede, impair and obstruct by deceit and dishonest means, the lawful and legitimate functions of the Bank Board in regulating, examining, and supervising the activities of Midwest Federal, whose accounts were insured by the FSLIC. THE MANNER AND MEANS OF THE CONSPIRACY The manner and means, among others, of this conspiracy were as follows: 3. It was part of the conspiracy that, in December 1987, defendant SUSAN GREENWOOD OLSON and others arranged for Midwest Federal to make an unsafe and undersecured loan of $3.1 million, against legal advice and without recourse, to a corporate entity headed by Howard N. Lorber to enable Lorber to pay that amount to purchase the Jockey Club's marina, even though the most recent appraised value for the marina, the loan's only security, was $1.9 million. 4. It was further part of the conspiracy that, in December 1987, defendant SUSAN GREENWOOD OLSON and others arranged for about $800,000 of Midwest Federal's $3.1 mi1l~Lon loan proceeds to be paid back to Midwest Federal to- bring current various delinquent Jockey Club loan interest payments and real estate mortgage payments before year end. This action delayed the need to report to the Bank Board and Midwest Federal's Board of Directors the precarious financial status of Midwest Federal's outstanding loans to the Jockey Club and delayed Midwest Federal's need to establish proper 4 PAGENO="0136" 132 loan loss reserves for, or even foreclose on, its Jockey Club loans, which thus permitted Harold Greenwood, Charlotte Masica, Robert Mampel, and others in January 1988 to collect phantom stock bonus payments from Midwest Federal of approximately $2 2 m2.lllon 5. It was further part of the conspiracy that, in December 1987, defendant SUSAN GREENWOOD OLSON and others arranged for about $166,000 of Midwest Federal's $3.1 million loan proceeds to be Bet up as a six month interest reserve to enable Howard Lorber to make future interest payments on the marina loan past the next scheduled Federal Home Loan Bank examination of Midwest Federal. 6. It was further part of the conspiracy that, in December 1987, in order to induce Howard Lorber to purchase the Jockey Club marina, defendant SUSAN GREENWOOD OLSON and others guaranteed Howard Lorber and related parties, through corporations in which Lorber owned an interest, a minimum annual net income of $275,000 from the marina's operations, even though the marina's previous annual profits had never exceeded $165,000. 7. It was further part of the conspiracy that, in March 1988, defendant SUSAN GREENWOOD OLSON and others arranged for Howard Lorber and related parties, through corporations in which Lorber owned an interest, to acquire all of the outstanding stock of the Jockey Club, which acquisition was `accompanied by an unsafe and undersecured $6.5 million loan from Midwest Federal to the Jockey Club, and that they further arranged to indemnify Lorber and related' parties for various fees and expenses arising from the Jockey Club's operations, even though Lorber provided no personal guarantees, funds, or other collateral as part of the acquisition. 5 PAGENO="0137" 133 8. It was further part of the conspiracy that, beginning in April 1988 and continuing through June 1988, after Federal Hone Loan Bank examiners had commenced an examination at Midwest Federal and questioned the security of Midwest Federal's more than $20 million in Jockey Club loans, defendant SUSAN GREENWOOD OLSON and others knowingly failed to inform the examiners that Midwest Federal was in possession of an appraisal by an M~I appraiser, John A. Blazejack, Miami, Florida, dated June 26, 1987 and revised as of November 23, 1987, that valued the Jockey Club at only $9,700,000, which delayed any regulatory reclassification or intervention regarding Midwest Federal loans to the Jockey Club until December~ 1988. 9. It was further part of the conspiracy that, in May 1988, after Federal Home Loan Bank examiners had requested a new Jockey Club appraisal, defendant SUSAN GREENWOOD OLSON and Howard Lorber attempted to induce John Blazejack to change his 1987 Jockey Club appraisal to obtain a higher value, which Blazejack refused to do. During this time frame, Howard Lorber, on behalf of defendant SUSAN GREENWOOD OLSON, contacted Peter P. Jackson, an MAI appraiser in New York, and arranged for Jackson to appraise the Jockey Club at as close to $22 million as possible and as soon as possible, even though Jackson was not licensed to do appraisal work in the State of Florida. 10. It was further part of the conspiracy that, in June 1988, Peter Jackson and an associate, Matthew L. Smith, travelled to Miami and met with defendant SUSAN GREENWOOD OLSON and Lorber at the Jockey Club, inspected the Jockey Club premises, and later prepared a false and misleading appraisal of the Jockey Club with 6 PAGENO="0138" 134 an inflated value of the Jockey Club's land, membership income, and marina, among other things. 11. It was further part of the conspiracy that, in July 1988, Peter Jackson caused to be provided to Midwest Federal a false and misleading appraisal, dated June 17, 1988, that valued the Jockey Club at $22,750,000, which defendant SUSAN GREENWOOD OLSON and others then and there well knew was grossly inflated and purposefully misleading and thereafter caused it to be provided to Federal Home Loan Bank examiners, which delayed any regulatory reclassification or intervention regarding Midwest Federal loans to the Jockey Club until December 1988. 12. It was further part of the conspiracy that, from May 1988 to August 1988, in order to influence Peter Jackson's valuation of the Jockey Club, defendant SUSAN GREENWOOD OLSON and Howard Lorber discussed with Peter Jackson and Matthew Smith the possibility of Midwest Federal providing additional appraisal work to Howard Jackson Associates Inc., including a Minneapolis sports arena and Texas property. 13. It was further part of the conspiracy that, from June 1988 to August 1988, defendant SUSAN GREENWOOD OLSON and others arranged for Midwest Federal tO make four loans totaling approximately $2.6 million to the Jockey Club, all of which were unsafe and unsecured, and three of which, totaling $1,225,000, were originated by defendant SUSAN GREENWOOD OLSON without receiving the proper Midwest Federal loan committee approvals. 14. It was further part of the conspiracy that, from November 1988 to December 1988, defendant SUSAN GREENWOOD OLSON and others arranged for Midwest Federal to make an unsafe and unsecured $2.8 7 PAGENO="0139" 135 million loan to the Jockey Club, which loan ultimately was approved by Midwest Federal's Executive Committee and Board of Directors, before it was cancelled by federal regulators. OVERT ACTS The Grand Jury charges that, in furtherance of the conspiracy and in order to accomplish the objects thereof, defendant SUSAN GREENWOOD OLSON and other co-conspirators did commit or cause to be committed the following overt acts: 1. On or about October 13, 1987, defendant SUSAN GREENWOOD OLSON, Robert Maznpel, and other Midwest Federal personnel travelled to Miami, Florida to meet with Howard Lorber and others at the Jockey Club in order to discuss Lorber's possible purchase of the Jockey Club marina, which Robert Mampel indicated had to be completed prior to the end of 1987. 2. On or about October 29, 1987, defendant SUSAN GREENWOOD OLSON prepared a credit presentation ineinorandwn regarding a $3 million loan for Howard Lorber to finance the purchase of the Jockey Club marina, which stated that Lorber would provide a mortgage on the marina and a $500,000 certificate of deposit as collateral. 3. On or about December 11, 1987, as a result of a presentation by Charlotte Masica to Midwest Federal's Board of Directors, defendant SUSAN GREENWOOD OLSON received a 25 percent salary increase for 1988 from $40,000 to $50,000, over and above her substantial fringe benefits, such as, in 1988, over $9,300 in club membership dues and entertainment, over $5,500 in unreimbursed personal airline flights, a $3,000 car allowance, and a $35,000 unsecured executive credit line. 8 PAGENO="0140" 136 4. In or about late December, 1987, after Howard Lorber informed defendant SUSAN GREENWOOD OLSON that he no longer desired to acquire the Jockey Club marina, she then offered Lorber the opportunity to purchase the marina without him providing any personal guarantees, funds, or other collateral, which offer Lorber accepted. 5. In or about late December, 1987, defendant SUSAN GREENWOOD OLSON prepared a revised, backdated credit presentation memorandum regarding a $3.1 million loan for Howard Lorber to finance the purchase of the Jockey Club marina, which stated that the marina, the loan's sole collateral, had an appraised value of $3.1 million, when no such appraisal for that amount then existed. 6. On or about December 29, 1987, defendant SUSAN GREENWOOD OLSON, on behalf of Midwest Federal, travelled to Miami to attend the closing of the $3.1 million loan to Lorber's corporate entity for the purchase of the marina. 7. On or about December 29, 1987, prior to the actual closing, even though defendant SUSAN GREENWOOD OLSON was informed by Midwest Federal's Miami attorney that the terms of Midwest Federal's $3.1 million loan were disadvantageous to Midwest Federal, and that the loan was not safe, defendant SUSAN GREENWOOD OLSON signed the closing documents. 8. On or about February 12, 1988, defendant SUSAN GREENWOOD OLSON, who had not been eligible for a January 1988 phantom stock bonus payment, received a $15,000 "1987 incentive bonus" from Midwest Federal, at the direction of Harold Greenwood, Charlotte Masica, and Robert Mampel, but without the prior approval of Midwest Federal's Board of Directors. ~ 9 PAGENO="0141" 137 9. On or about March 8, 1988, defendant SUSAN GREENWOOD OLSON, Robert Mampel, and others received an updated financial analysis of the Jockey Club prepared by John Earney of Midwest Federal's Corporate Banking Group, which stated that the Jockey Club lost $3,000,000 in 1986, $3,000,000 in 1987, and wasprojected to lose $3,500,000 in 1988 and that Midwest Federal "probably will never~get back any additional money that it continues to advance to the Club at this point in time" and that Midwest Federal "probably will take a big loss of past advances." Earney's analysis also noted, as he previously had informed Robert Mampel on March 1, 1988, that the most recent appraisal of the Jockey Club in the fall of 1987 valued it at $8,000,000. 10. In or about late April, 1988, after a Federal Hone Loan Bank examiner asked defendant SUSAN GREENWOOD OLSON if a Jockey Club appraisal had been obtained as had been requested of her during the previous Federal Home Loan Bank January 1987 examination, she misled the examiner by her response. 11. On or about April 28, 1988, defendant SUSAN GREENWOOD OLSON sent a memorandum regarding the Jockey Club to Robert Maznpel, with a copy to Harold Greenwood, which stated, in part, "[t]he importance of an updated appraisal can not be overstated. The current FHLBB exam is requiring an appraisal to reduce any specific [loan loss] reserve requirements on t)iis credit." 12. On or about April 29, 1988, defendant SUSAN GREENWOOD OLSON arranged for Howard Lorber to meet with Harold Greenwood, Charlotte Masica, and Robert Mampel in Gulfstreani, Florida, where Lorber informed them that the Jockey Club would never be able to pay its debt service to Midwest Federal. 10 PAGENO="0142" 138 13. On or about May 16, 1988, defendant SUSAN GREENWOOD OLSON and Howard Lorber met with John Blazejack at the Jockey Club to attempt to induce Blazejack to change his 1987 Jockey Club appraisal to obtain a higher value, which Blazejack refused to do. 14. On or about June 13, 1988, defendant SUSAN GREENWOOD OLSON, Howard Lorber, Peter Jackson, and Matthew Smith met at the Jockey Club to discuss preparation of the Jockey club appraisal, wherein, contrary to national appraisal standards, Jackson stated that he would do the appraisal in sections to obtain the highest possible values. 15. On or about June 29, 1988, defendant SUSAN GREENWOOD OLSON travelled to New York City, New York, and met with Peter Jackson, Matthew Smith, and Howard Lorber to discuss the possibility of Midwest Federal obtaining a higher number than the appraisers' preliminary value for the Jockey Club appraisal and the possibility of Midwest Federal providing additional appraisal work to Howard Jackson Associates Inc. 16. On or about July 19, 1988, defendant SUSAN GREENWOOD OLSON and Robert Mampel arranged for Peter Jackson and his appraisal firm to appraise a Texas property owned by Midwest Federal. 17. On or about July 21, 1988, defendant SUSAN GREENWOOD OLSON received from Peter Jackson `a copy of Howard Jackson Associates Inc. `s June 17, 1988 Jockey Club appraisal and a $20,000 bill for the appraisal, for which she subsequently arranged complete and final payment. 18. On or about July 21, 1988, defendant SUSAN GREENWOOD OLSON communicated with Harold Greenwood regarding Howard Jackson 11 PAGENO="0143" 139 Associates Inc.'s $22,750,000 Jockey club appraisal, and Harold Greenwood then informed Midwest Federal's Board of Directors on July 21, 1988 about the Jockey Club's new appraised value and Howard Lorber's involvement in the Jockey Club. 19. On or about July 26, 1988, defendant SUSAN GREENWOOD OLSON arranged for a $50,000 unsecured line of credit to be opened for Howard Lorber at Midwest Federal and subsequently sent him a note which read, in part, "Midwest's new motto - Open Checkbook. Let me know if you want a real credit line." 20. On or about August 4, 1988, defendant SUSAN GREENWOOD OLSON placed more than $9 million of Midwest Federal's corporate banking loans to the Jockey Club on non-accrual status and then prepared a memorandum that stated, in part, that "Howard Lorber purchased the marina in December of 1987 for $3.2 million of which some loan proceeds were used to bring the Jockey Club current. If this did not occur, Midwest Federal would have been forced to close the facility and take a substantial hit on the 1987 year end balance sheet." 21. In or about early August, 1988, the exact date being unknown, defendant SUSAN GREENWOOD OLSON provided Howard Jackson Associates Inc. `s June 17, 1988 Jockey Club appraisal to Fred W. Gergen, Midwest Federal's Chief Appraiser, for his review. 22. In or about August, 1988, the exact date being unknown, * defendant SUSAN GREENWOOD OLSON stated to Fred Gergen that she was "fighting for her job" and that the Jockey Club appraisal "meant her job", following which time Gergen then prepared a false and misleading appraisal review for federal regulators, dated August 29, 1988, with a total valuation of $21,982,850. 12 PAGENO="0144" 140 * 23. In or about late August, 1988, the exact date being unknown, defendant SUSAN GREENWOOD OLSON arranged for Howard Jackson Associates Inc.'s June 17, 1988 Jockey Club appraisal and Fred Gergen's August 29, 1988 appraisal review to be provided to federal regulators, including an August 31, 1988 mailing of both items to the Federal Home Loan Bank of Des Moines by Charlotte Masica. 24. In or about August or September, 1988, the exact date being unknown, defendant SUSAN GREENWOOD OLSON arranged for Howard Lorber to speak with Harold Greenwood regarding Howard Jackson Associates Inc.'s June 17, 1988 Jockey Club appraisal, whereby Harold Greenwood thanked Lorber for helping then find the Jockey Club appraiser and indicated that the appraisal "really helped us a lot." 25. On or about September 8, 1988, defendant SUSAN GREENWOOD OLSON travelled to New York City, New York, and met with Peter Jackson and Matthew Smith to discuss the Texas appraisal, and then later met with Howard Lorber and Stuart A. Benson. 26. On or about September 12, 1988, shortly before federal regulators were to return to Midwest Federal for a special, follow- up examination, defendant SUSAN GREENWOOD OLSON prepared a memorandum, with a copy to Robert Mampel, reversing her August 4, 1988 designation of non-accrual status for more than $9 million of Midwest Federal loans to the Jockey Club. 27. On or about September 21, 1988, defendant SUSAN GREENWOOD OLSON sent a memorandum to Robert Mainpel which stated, in part, Midwest Federal "has taken the necessary steps to protect its investment in the Jockey Club. . . . Financial controls are in 13 PAGENO="0145" 141 place to ensure fiduciary responsibility. 28. On or about October 1, 1988, defendant SUSAN GREENWOOD OLSON, Harold Greenwood, Robert Mampel, and others travelled to Miami, Florida to attend both a lavish. Jockey Club party hosted by Howard Lorber and a Minnesota Vikings football game in an exclusive stadium box, which involved more than $23,000 in expenses, all paid for by Midwest Federal, mostly through a Jockey Club account. 29. On or about October 6, 1988, defendant SUSAN GREENWOOD OLSON obtained a Midwest Federal check for $37,500 from a Jockey Club account and mailed it to Florida to lease an exclusive stadium box at Joe Robbie Stadium, Miami, Florida for six professional football games and Super Bowl XXIV, without a proper business purpose or justification. 30. On or about October 22, 1988, defendant SUSAN GREENWOOD OLSON travelled to Miami, Florida to attend a professional football game with Howard Lorber and others in an exclusive stadium box, paid for by Midwest Federal. 31. On or about November 1, 1988, defendant SUSAN GREENWOOD OLSON sent a letter to the Jockey Club authorizing the payment to Howard Lorber of $35,000 in management fees for the seven prior months and $20,000 in expenses. This followed an earlier conversation between Robert Mampel and Lorber wherein Mampel asked Lorber to take only $5,000 per month in management fees and then indicated that, after the federal regulators left Midwest Federal, Lorber could take more. 32. On or about November 14, 1988, defendant SUSAN GREENWOOD OLSON travelled to Miami, Florida to attend a professional football game with Howard Lorber, Stuart Benson, and others in an exclusive 14 PAGENO="0146" 142 etadiwn box, paid for by Midwest Federal, and afterwards met with Benson and Lorber. 33. On or about November 19, 1988, defendant SUSAN GREENWOOD OLSON arranged for Midwest Federal to make a $400,000 unsecured loan to Howard Lorber to purchase an aircraft, without a loan application being filed or proper loan committee approval. 34. On or about November 23, 1988, in response to questions raised by federal examiners, defendant SUSAN GREENWOOD OLSON claimed, through a memorandum to Charlotte I4asica, that she had advanced $1,225,000 in unsecured loans to the Jockey Club during the summer of 1988 without formal committee approval because of "time constraints". 35. On or about December 8, 1988, defendant SUSAN GREENWOOD OLSON sent a memorandum to Midwest Federal's Executive Committee and Robert Mainpel which recommended that Midwest Federal fund an additional $2.8 million for various Jockey Club expenses, including payment of up to about $300,000 to Howard Lorber and related parties for certain fees and expenses. 36. On or about December 12, 1988, defendant SUSAN GREENWOOD OLSON sent a memorandum to Robert Mampel which stated, in part, "(u]nder the management and direction of Howard Lorber, the outlook for the Jockey Club is more favorable than it has been for nearly a decade", which assessment was shortly thereafter communicated in writing to the Federal Home Loan Bank of Des Moines by Charlotte Masica. 37. On or about December 15, 1988, defendant SUSAN GREENWOOD OLSON and Robert Maznpel received a letter from Howard Lorber concerning Lorber's future management fees and Lorber's request 15 PAGENO="0147" 143 for a separate payment of approximately $300,000 to him, all copies of which Robert Mampel later attempted to have located and destroyed. 38. On or about January 21, 1989, defendant SUSAN GREENWOOD OLSON travelled to Miami, Florida to attend Super Bowl XXIV with Howard Lorber and others in an exclusive stadium box, paid for by Midwest Federal. 39. On or about February 1, 1989, Howard Lorber travelled to Minnesota and met with defendant SUSAN GREENWOOD OLSON, and later with defendant SUSAN GREENWOOD OLSON, Robert Mampel, and other Midwest Federal personnel, at which time Midwest Federal's total outstanding loans to the. Jockey Club and its related entities were approximately $23,550,000. 40. On or about February 7, 1989, pursuant to an earlier arrangement between defendant SUSAN GREENWOOD OLSON and Howard Lorber, defendant SUSAN GREENWOOD OLSON and Robert Mainpel received from Howard Lorber all of Lorber's shares of stock in the Jockey Club and Lorber's resignation as an officer and director of the Jockey Club and its related entities. 41. On or about February 10, 1989, defendant SUSAN GREENWOOD OLSON telephoned Howard Lorber and discussed various matters with him. All in violation of Title 18, United States Code, Section 371. 16 PAGENO="0148" 144 COUNT II (Misapplication of Funds) 1. The Grand Jury realleges and incorporates by reference paragraphs 1, and 3 through.6 of Count I of this Indictment as if fully Bet forth herein. 2. On or about December 29, 1987, in the State and District of Minnesota and elsewhere, the defendant, SUSAN GREENWOOD OLSON, being an officer, agent, and employee of Midwest Federal Savings and Loan Association, Minneapolis, Minnesota, the accounts of which were then insured by the Federal Savings and Loan Insurance Corporation, with intent to injure and defraud Midwest Federal Savings and Loan Association, did knowingly and willfully misapply and cause to be misapplied monies, funds, and credits belonging to and entrusted to the care and custody of Midwest Federal Savings and Loan Association, in an amount in excess of $100.00, by causing Midwest Federal Savings and Loan Association to make an undersecured loan of approximately $3.1 million to ~Bay Clubs International, Inc.", in which Howard l'l. Lorber owned an interest, in a loan transaction identified as loan number 1520; all in violation of Title 18, United States Code, Section 657. 17 PAGENO="0149" 145 COUNT III (Misapplication of Funds) 1. The Grand Jury realleges and incorporates by reference paragraphs 1, and 3 through 7 of Count I this Indictment as if fully Bet forth herein. 2. On or about March 24, 1988, in the State and District of Minnesota and elsewhere, the defendant, SUSAN GREENWOOD OLSON, being an officer, agent, and employee of Midwest Federal Savings and Loan Association, Minneapolis, Minnesota, the accounts of which were then insured by the Federal Savings and Loan Insurance Corporation, with intent to injure and defraud Midwest Federal Savings and Loan Association, did knowingly and willfully misapply and cause to be misapplied monies, funds, and credits belonging to and entrusted to the care and custody of Midwest Federal Savings and Loan Association, in an amount in excess of $100.00, by causing Midwest Federal Savings and Loan Association to make an undersecured loan of approximately $6.5 million to "Jockey Club, Inc. and Bay Clubs International, Inc.", in which Howard M. Lorber owned an interest, in a loan transaction identified as loan number 1584; all in violation of Title 18, United States Code, Section 657. 18 PAGENO="0150" 146 COUNT IV (Misapplication of Funds) 1. The Grand Jury realleges and incorporates by reference paragraphs 1, and 3 through 13 of Count I of this Indictment as if fully set forth herein. 2. On or about June 7, 1988, in the State and District of Minnesota and elsewhere, the defendant, SUSAN GREENWOOD OLSON, being an officer, agent, and employee of Midwest Federal Savings and Loan Association, Minneapolis, Minnesota, the accounts of which were then insured by the Federal Savings and Loan Insurance Corporation, with intent to injure and defraud Midwest Federal Savings and Loan Association, did knowingly and willfully misapply and cause to be misapplied monies, funds, and credits belonging to and entrusted to the care and custody of Midwest Federal Savings and Loan Association, in an amount in excess of $100.00, by causing Midwest Federal Savings and Loan Association to make an unsecured loan of approximately $225,000 to "Bay Clubs International, Inc.", in which Howard N. Lorber owned an interest, in a loan transaction identified as loan number 1639; all in violation of Title 18, United States Code, Section 657. 19 PAGENO="0151" 147 COUNT V -~ (Misapplication of Funds) 1. The Grand Jury realleges and incorporates by reference paragraphs 1, and 3 through 13 of Count I of this Indictment as if fully set forth herein. 2. On or about June 24, 1988, in the State and District of Minnesota and elsewhere, the defendant, SUSAN GREENWOOD OLSON, being an officer, agent, and employee of Midwest Federal Savings and Loan Association, Minneapolis, Minnesota, the accounts of which were insured by the Federal Savings and Loan Insurance Corporation, with intent to injure and defraud Midwest Federal Savings and Loan Association, did knowingly and willfully misapply and cause to be misapplied monies, funds, and credits belonging to and entrusted to the care and custody of Midwest Federal Savings and Loan Association, in an amount in excess of $100.00, by causing Midwest Federal Savings and Loan Association to make an unsecured loan of approximately $700,000 to "Bay Clubs International, Inc.", in which Howard N. Lorber owned an interest, in a loan transaction identified as loan number 1649; all in violation of Title 18, United States Code, Section 657. 20 PAGENO="0152" 148 COUNT VI (Misapplication of Funds) 1. The Grand Jury realleges and incorporates by reference paragraphs 1, and 3 through 13 of Count I of this Indictment as if fully set forth herein. 2. On or about August 8, 1988, in the State and District of Minnesota and elsewhere, the defendant, SUSAN GREENWOOD OLSON, being an officer, agent, and employee of Midwest Federal Savings and Loan Association, Minneapolis, Minnesota, the accounts of which were then insured by the Federal Savings and Loan Insurance Corporation, with intent to injure and defraud Midwest Federal Savings and Loan Association, did knowingly and willfully misapply and cause to be misapplied monies, funds, and credits belonging to and entrusted to the care and custody of Midwest Federal Savings and Loan Association, in an amount in excess of $100.00, by causing Midwest Federal Savings and Loan Association to make an unsecured loan of approximately $300,000 to "Bay Clubs International, Inc.", in which Howard N. Lorber owned an interest, in a loan transaction identified as loan number 1684; all in violation of Title 18, United States Code, Section 657. 21 PAGENO="0153" 149 COUNT VII (Misapplication of Funds) 1. The Grand Jury realleges and incorporates by reference paragraphs 1, and 3 through 13 of Count I of this Indictment as if fully set forth herein. 2. On or about August 22, 1988, in the State and District of Minnesota and elsewhere, the defendant, SUSAN GREENWOOD OLSON, being an officer, agent, and employee of Midwest Federal Savings and Loan Association, Minneapolis, Minnesota, the accounts of which were then insured by the Federal Savings and Loan Insurance Corporation, with intent to injure and defraud Midwest Federal Savings and Loan Association, did knowingly and willfully misapply and cause to be misapplied monies, funds, and credits belonging to and entrusted to the care and custody of Midwest Federal Savings and Loan Association, in an amount in excess of $100.00, by causing Midwest Federal Savings and Loan Association to make an unsecured loan of approximately $1.4 million to "Jockey Club, Inc./Bay Clubs International, Inc.", in which Howard N. Lorber owned an interest, in a loan transaction identified as loan number 1689; all in violation of Title 18, United States Code, Section 657. 22 PAGENO="0154" 150 TCOtJNT VIII (Attempted Misapplication of Funds) * 1. The Grand Jury realleges and incorporates by reference paragraphs 1, and 3 through 14 of Count I of this Indictment as if fully Bet forth herein. 2. On or about December 8, 1988, in the State and District of Minnesota and elsewhere, the defendant, SUSAN GREENWOOD OLSON, being an officer, agent, and employee of Midwest Federal Savings and Loan Association, Minneapolis, Minnesota, the accounts of which were insured by the Federal- Savings and Loan Insurance Corporation, with intent to injure and defraud Midwest Federal Savings and Loan Association, did knowingly and willfully attempt to misapply and cause to be misapplied monies, funds, and credits belonging to and - entrusted to the care and custody of Midwest Federal Savings and Loan Association, in an amount in excess of $100.00, by attempting to cause Midwest Federal Savings and Loan Association to make an unsecured loan of approximately $2.8 million to "Bay Clubs International, Inc. `, in which Howard M. Lorber owned an interest, in a loan transaction subsequently disapproved and cancelled by the Federal Hone Loan Bank Board; all in violation of Title 18, United States Code, Section 657. 23 PAGENO="0155" 151 COUNT IX (Concealment and Covering Up by Scheme and Device) 1. The Grand Jury realleges and incorporates by reference paragraphs 1, and 3 through 14 of Count I of this Indictment as if fully set forth herein. 2. From about late April 1988, until about February 13, 1989 in the State and District of Minnesota, the defendant, SUSAN GREENWOOD OLSON, in a matter within the jurisdiction of the Federal Home Loan Bank Board, did knowingly and willfully, by a scheme or device, cause to be concealed and covered up a material fact, in that she failed to inform Federal Home Loan Bank Board examiners that she and others at Midwest Federal were knowledgeable about, and in possession of, an appraisal for the Jockey Club, dated June 26, 1987 and revised in November 1987, prepared by John A. Blazejack, Miami, Florida, which valued the Jockey Club at $9,700,000, thereby concealing and covering up that Midwest Federal's loans to the Jockey Club and related entities, which exceeded $20,500,000 as of April 28, 1988, were seriously undersecured arid in need of regulatory reclassification or intervention; all in violation of Title 18, United States Code, Section 1001. 24 PAGENO="0156" 152 COUNT X (False Appraisal) 1. The Grand Jury realleges and incorporates by reference paragraphs 1, and 3 through 13 of Count I of this Indictment as if fully set forth herein. 2. From on or about June 13, 1988 to on or about August 31, 1988, in the State and District of Minnesota and elsewhere, defendant, SUSAN GREENWOOD OLSON, aided and abetted by Peter P. Jackson and Fred W. Gergen, not indicted herein, did knowingly and willfully overvalue and cause to be overvalued land and other property for the purpose of influencing the actions of Midwest Federal Savings and Loan Association, an institution the accounts of which were then insured by the Federal Savings and Loan Insurance Corporation, and the actions of the Federal Home Loan Bank Board, upon loans, and extensions and changes of the same, that is to say, the defendant SUSAN GREENWOOD OLSON, aided and abetted by Peter P. Jackson and Fred W. Gergen, not indicted herein, did fabricate, execute, and submit and cause to be fabricated, executed, and submitted to Midwest Federal and the Federal Home Loan Bank Board, a false and misleading appraisal report, reflecting a value of $22,750,000 for the Jockey Club, Miami, Florida, which value defendant SUSAN GREENWOOD OLSON then and there well knew was grossly inflated; all in violation of Title 18, United States Code, Sections 1014 and 2. A TRUE BILL UNITED STATES ATTORNEY FOREPERSON 25 PAGENO="0157" I .~iIII. .h ~ 1~ 12 11 f Ii ~L. 1. ~tii~ijZT ~* f]. ~!I~}P~h 0 I ffi2rI ~1 153 . - PAGENO="0158" 154 Alleg'atiüS hi lit' / denied by GréènwoOd ~ jtr~sr0tt * Former Midwest non]' ~y. according to that filing, meaning * tugs and Loan Ckatrwas Ru Midwest and more than $0 otheT Greenwood "has admlttet to lendera could lose cs in fraud In that S&L's sale of *jbctdl- the rodrganlxatlcà develop- nated debt to medig mogul fltepben er'sbuslnesaemplre Adams, according to a laWsuit That reorganisatlob Wentoafly flied by Adams. could place the tdSy.Ioslns However, an attorne~ fur Great. Canterbury Downa,flcefrack ~ wood said Tuesday thefatderS&L MInnesota YaIl~flavIhgs Bank,) executIve "denies any statement, healthy I2q, mIllIon-asset SéL. any conversatIon like that",, based In MankttQ, $aler nawuen-' "Mr Adams' recollection Is ership. Maimer sets first awl at faulty:" saId attorney William ~ ths hSlnesset, though; Msuzy. That allegatjonwllLbede- ton fi~ ~seIsln ~~7&' ~ Meanwhile dévelopiti. ~ .Ba~er devises a £n to repay the Hauser owes or has. guarhtbsd ` loans of almost $55 nillllôn ~ ~. e awaflq aec Midwes~ according to. a filing In i'n~w Hsuser'çtiankruptcy. . . * PleaseS M!dweei/SA ~ PAGENO="0159" Contlnu.d from Page 1* others of securities fraud In con- nection with Mama' purchase of $2.5 million In subordinated debt from Midwest on March 31, 1911, before the S&L acknowledged It was In serious financial straits. * In the suit, Adams contends Greenwood and others lied Whim about Midwest's financial condi- tion to Induce him to buy the debt. He also contends the S&L suhse. quently loaned him money "to re- paf hlscontofhuyingthatdebt. The suit claims thatin late 1987, Greenwood "solicited as Invest- ment Is stiordisated debt of Mid- west" front Adams. According to the suIt, Greenwood told Adams thatMidwat was financially sound - which was Important, because If Midwest failed the debt probably wonid he worthies an~ Mans `wonidbaehismoney. On March 31, Adams bought $2.5 million of MldwesVs subordinated debt. Three months later, Man borrowed $7.8 million from the S&L, secured by his ownership In- terest in several Montana and Col- oradohanks.One'thlrdofthatloin, according to the lawsuit, was used "to repay Adams for the $2.5 mil- lion he ha4 invested in subordinat- ed debt of Midwest Federal." Six months later, thrIft regula- tors declared Midwest Insolvent, removing Greenwood. Midwest's new federally appointed manage- ment subsequently halted Interest payments on theS&L's subordinat- ed debt and ackaowledged that the debt Isasentlally worthIes. Hr wood Formot it chairman Adams contends that Midwest's collapse "did not arise due to a suddpn change In (Its) fortunes It arose due to the belated acknowl- edgement that Midwest Federal had been insolvent for a substan- tial tIme, certainly before March 31, 1911," when Adams purchased Midwest's debt. However, according to the suit, Greenwood and others - including "John Does 1-10," unnamcd other officers and directors of the S&L - knew the financial information given Adams to get him to buy that debt "was untrue." Potentially the most damaging allegation is Adams' contention that suhsequently "Greenwood has admitted to Adams that his con- duct in regard to the placement of the securities ... was false and fraudulent." Adams' attorney was unavaila- ble for comment Tuesday. Mid- west's attorney declined to com- ment on the suit, as did Andy Shearer, appointed president of the SAL after Greenwood's ouster. A spokeswoman for U.S. Attor- ney Jerry Arnold also declined to comment Since early February, Arnold has been conducting a wide- ranging Investigation into allega- tions of fraud involving Midwest, Greenwood and others. Part of the investigation is believed to involve Midwest's sale of subordinated debt to large borrowers. The sale. of that debt made Midwest appear to be financially sound. Adams' lawsuit originally was served directly on Midwest, uslnga Minnesota law that allows a suit to be lodged without being filed in court Late last week, however, the suit was moved to Ut court by the federal agency that seized control of Midwest on Feb. 13. The suit asks for compensatory damages of $2.5 million, as well as a declaration that the debt Adams bought "constitutes a deposit" Midwest's deposIts are being hon- ored regardless of the amount The Hauser bankruptcy filing shows he owes or has guaranteed loans of at least $54.9 million from Midwest, making the federal gov- ernment his largest creditor. Of his Midwest debts, $13.2 mil- lion are secured with various stocks, including shares in Scott- land Inc. and Minnesota Conces- sIons, Canterbury Downs' conces- sion vendor. Midwest in the largest unsecured creditor, havIng loaned Scottland-related companies at least $41.7 million. According to his bankruptcy fil- ing, Hauser has loans of $23.7 mil- lion secured with various assets worth $10.3 million. Unsecured loans - those not backed by collat- eral - or loans guaranteed by the developer total $82.8 million. On bank and SAL loans, Hauser has pledged as collateral his stock in Scottland and Minnesota Race-. track Inc., owner of the Canterbury Downs horse track. Alsopledgedas collateral is ownershIp of Minaeso- taValleySavisguBank. Park National Bank of St Louis Park holds Hauser's ownership of Minnesota Valley Savlnp Bank as collateral for a $2.8 million loan. An official said Tuesday that Park National is confident Its collateral in sufficient to offsetany loss to the bank For loans and Interest of $640,000, Prior Lake State Bank holds 133,000 shares of preferred stock in Minnesota Racetrack, Canterbury Downs' owner. Attorney Mel Orenstein said Hauser plane to file a reorganiza- tion plan. "Parties with collateral" - se- cured creditors - "have to be dealt with," said Orenstein. "They can either compromise their ponl- lions or foreclose en the collater- aL" Midwest! Greenwood fraud alleged 0i en PAGENO="0160" 156 Stareholders suing Green Tree Acceptance want to add the St. Paul-based company's former chairman, Hal Greenwood, as a de- fendant and expand that suit to in- clude a claim the mobile borne lender falsified financial state- -` The latter allegation, diacmoned In a motion to file an amended shareholder suit, Is based on an ac- counting change that Green Tree adopted earlier this year. That change resulted in a onetime- charge of $39 million to Green Tree's 1988 earninga, producing a $12.2 million Ices for the year. Pat Mcllevltt, a Green Tree at- torney, said Tuesday the share- holders' action was meritlees, add- tog the company will vigorously defend itself. Neither Greenwood, who w ousted as chairman of Midwest Federal Savin~ and Loan when that S&L was declared insolvent, nor his lawyers could be reached for comment The amended suit would make Green Tree and Greenwood code- fendants in litigation stemming from a 1985 deal iii which they have sued each other. Nonetheless, the shareholder suit means that Green Tren, which Is suing Green- wood for fraud, could have to use Its directors and offimes liability lusurauce to defend Greenweed in the shareholder suit, noted Piper Jaffray & Hopwood analyst Pat Burton. Greenwood has made no such request, McDavitt said. The shareholders filed suit against Green Tree and five of its officers and directors in Decem- ber. That suit claimed Green Tree violated securities laws by failing to disclose the deterioration of re- lations betwem it and Midwest, un- di early 1988 Grem Tree's largest customer. The amended suit seeks to be do- dared a dines action for investors. who bought Grem Tree stock he- tween the time of the 1985 Mid- west-Green Tree deal and this March, when Green Tree an- nounced the accounting change. The suit contends that 1985 transaction "artificially Inflated" Green Tree's profits and stock price. Green Tree made a $35 mil- lion profit on the 1985 deaL Its stock peaked at $38 a share In 1987'afirstquarter- ~ In a previous axs~\to the shareholder suit, Green Trehuid It :was not required to dl,c*ose Its Please see alders sold large blocks of the coin- T~any's stock prior to the disclosure of Its problems. Green Trees stock, which had been trading at $1375 dropped below $10 when it was sued by Midwest. Subsequent to the accounting change, it dropned below $6 a share. Green- wood was the largest insider seller, selling 124,000 shares for $3~3 mil- lion- Motion would add Greenwood to suit BySt*v*Brook sIatlWrItsr 5/3i(~7 Amended suit would make Green Tree and Greenwood co- defendants Green Tree Continued from Page IE fragile relations with Midwest. Green Tree also said a 1987 agree- ment should have settled any claims by Midwest relating to the to Midwest's failure to honor that settlement- Both suits allege Green Tree In- I, PAGENO="0161" (A) (A) 0 0 (0 0 Wednesday, June?, 1989 St. Paul Pioneer Press Dispatch Insurer sues Midwest over policy sales By Stsv* Brook General National Life Insurance insurance policies to 259 Minneso- tween loans and insurance sold by Stall Writr Co., also names Midwest's insur- tans. Connecticut General alleges Midwest, which failed in February. Facing the possible loss of its ance sulsidiary, the Great Oaks the agents falsely represented the That investigation found no tie-ins, Minnesota license and a $2.2 mu- Agency, and Andrew M. Myers, policies as requiring only a single state Commerce Commissioner lion fine, a New Jersey insurer has head of the Myers insurance ages- premium payment when they may Mike Hatch said last month. sued Midwest Savings and an affili- cy, as defendants. require additional payments. Hatch moved May 18 to revoke ate, A.M~ Myers & Associates, al- According to the suit, agents of The discrepancy was uncovered Connecticut General's license to leging theY m presented Insur- Great Oaks, In some cases acting by Minnesota Commerce Depart- sell insurance in Minnesota if it ance policies. as sub-agents of Myers & Associ- ment investigators looking into does not convert the policies to sin. The lawsuit, filed by Connecticut ates, sold Connecticut General life allegations of illegal tie-ins be- gle-premium investments. PAGENO="0162" Midwest Federal accused Lawyer: Letter called securities fraudulent By Joe Blade /-tplS ~cAi/y~ An attorney said Wednesday in fed- eral court that Midwest Federal Sav- ings and Loan was accused by a regu- latory agency last December of fraud- ulently issuing securities and was or- dered to~y buyers. Attorney Philip Cole asked for a copy of a letter that he said was written by an attomey on behalf of the Federal Home Loan Bank Board. Cole represents businessmen Marvin Wolfenson and Harvey Rather, who are suin Midwest for repayment of $15 million they invested in the de- bentures. The dispute does not in- volve deposits in Midwest, which continue to be insured up to $100,000. investing in the business. "It wasn't a direct turnaround of those flsnds at all," said Cole. Over the years, he declared, Ratner and Wolfenson had developed "an ex- traordinary wealth of trust and confi- dence" in Midwest, Cole said the businessmen got no response to letters written to Mid- west Jan. 25 and March 10 saying that the debentures were in default and directing that the $15 million be applied to their loans. The March letter says the two have grounds to believe that important facts were misrepresented. "Had the financial condition of Mid- west Federal been truthfully and fully disclosed to us," says the letter, "we would not have purchased the deben- ture. We have been advised by coun- sel that these misrepresentations and omissions may have violated state and federal securities laws, as well as anti-fraud provisions of the Federal Home Loan Bank Board." 158 Midwest COCtUS ID In an interview after yesterday's hearing in U.S. District `Court in Minneapolis, Cole said he had not seen the December letter. He said he understood that it revoked Midwest's right to sell debentures on the grounds that such authority was based on misinformation supplied to the board. John Paul Martin, attorney for the Federal Savings and Loan Insurance Corp., wouidsft confirm the contents of the letter to a reporter. Nor would ,he agree to release the letter in a hail discussion with Cole, Martin said that the attorney involved had once worked for Midwest Federal and that attorney-client privilege might be its- volved. Spokesmen for the Federal Home Loan Bank Board could not be reached yesterday. Judge Harry MacLauglslin took un- der advisement a request by Wolfen- son and Rather that Midwest be or- dered to apply the $15 million invest- ment against $59 million they bor- rowed in two installments from Mid- west in 1987 and 1988. MacLauglslin asked several questions probing whether investment in the debentures had been a condition of obtaining the loans. "I think not," responded Cole. Mid- west has been the exclusive lender to the two real-estate developers for 30 years. he said. The $49 million loan tn December 1987 was made 19 days before $15 million was invested in the debentures, Cole added. (A sec- ond loan for $10 million was made the next year.) Cole said much of the money put into the debentures came from chil- dren of the businessmen who were Midwest was declared insolvent in February and is being run by regula- tory agencies. Later its assets were taken over by a successor company, Midwest Savings Asaociation. Regu- lators say it has no obligation to repay the debentures, which total about $38 million. Businessman Stephen Adams, who put in $2.5 million, also has sued on grounds that Midwest was represent- ed to be financially sound when be invested. MIdwest continued on page 4D PAGENO="0163" Indictments expected soon in Midwest case Greenwood unlikely to be charged first By David Phelps ~4P15 secure cooperation from them "Hal Greenwood has nothing to fear Staff Writer ~ft~ I 9° through plea-bargain arrangements. from the truthful testimony of em- ployees of Midwest Federal, but we One year after the government sei- U.S. Attorney Jerome Arnold last would be concerned about the pur- zure of Midwest Federal Savings and week declined to say whether that chased testimony of someone facing Loan and the announcement of a would be the government's strategy. the threat of conviction and time in broad criminal investigation of its He did suggest that the indictments prison" Mauzy said. activities, the first grand jury indict- would be issued piecemeal. ments are expected soon, perhaps by The case is expected to be the largest the end of the month. - "As different phases of the investiga- bank-fraud case in state history and tion are Lompleted they will be pre- has important political ramifica- Participants in the case don't expect tented to the grand jury for indict- tions. former Midwest Chairman Harold ments," Arnold said. "It is unlikely W. Greenwood Jr. to be among that the different phases would all be Like several other highly publicized those first charged. finished at once." savings and loan failures across the country, the prosecution of Midwest Defense attorneys believe the gov- Greenwood's attorney, William officers is a priority for she Justice ernment will first prosecute other Mauzy, said the strategy could mdi- Department. It has allocated three former officers of Midwest and lesser cate that the prosecution's case con- additional government attorneys to figures involved with the savings taint gaps of evidence or is weak in Minnesota. and loan's failure in an attempt to substance. Harold W. Greenwood Jr, The Midwett case is highly visible because of Greenwood's longtime re- lationship with state political lead- ers, particularly DFL Gov. Rudy Perpich. Greenwood has been a prominent fund-raiser for Perpich. He was appointed to a pair of impor- tant state pasts by the governor - chairman of the Metropolitan Air- ports Commission and of the Great- Indictments continued on page 3D PAGENO="0164" Indictments Contln~ from page ID west Federal to Twin Cities banker Carl Pohlad, who had announced a tentative agreement to purchase the savings and loan in January. Mauzy said the government's access to hank records would have been more diffi- cult with Pohlad and a new team of managera in charge. The government is investigating alle- gations of bank fraud, wire fraud, misapplication of bank funds, false statements, embezzlement, kick' backs, bribery, securities fraud, mail fraud, obatruction ofjustice and con- spiracy to defraud the United Statea. In addition to Greenwood, other for- mer officers under investigation in- clude Esecutive Vice President Char- lotte Masica, Senior Vice President Robert Mampel, Vice President Su- san Greenwood-Olson, who is Greenwood's daughter, add Chief Fi- nancial Officer Donald Snede,'who left Midwest last summer. All of the officera have either made an appearance before the grand jury or have been informed by the U.S. attorney's office that they are targets of a grand jury investigation. Other than that, little information has been forthcoming. "They've provided us with less infor- mation than any case in which I've been involved in 11½ years of prac- tice," said Mark Peterson, attorney for Greenwood-Olson. "We have no idea what she charges will be. Mr. Arnold apparently is saying. `We'll play hardball so we have the greatest advantage.'" While she identities of other potential targets are less clear, court records from a related civil tase indicate the government is interested in a variety of financial transactions that include er Minnesota Corp., an economic de- velopmcns agency. He resigned from bath after Midwest was seized by the government. Given the expected complesisy of the charges against Greenwood and oth- ers, any trial easily could be delayed until late summer or autumn, just as Perpich's reelection campaign hits high gear. The investigation of Midwest'Izederal and its principal officers was an- nounced in headline-grabbing fash- ion on Feb. 1, 1989, when Arnold confirmed publicly that FBI aaents were probing a virtual laundry list of allegations against Midwest's execu- tives, customers and business part- ners. The. U.S. attorney's office as a rule never comments on an investigation until indictments are isaued. Arnold explained for the first time lasi week that he made the announce- ment out of concern that vital cvi- dençe, including records or bank transactions, would be destroyed un- lessahe government stepped in. "It Accomplished the removal of tbe management team of Midwest Feder- al and is prevented the further de- struction of documents," Arnold said: Sevin days after his announcement, fedejal regulators seized tbe instisu- tion; declared it insolvent and re- moQzd Greenwood and three other senigr officers from their posts. Mauzy said records were being com- piled for she grand jury, not de- stroyed, when Arnold made his an- nouncemens. He suggested that fed- eral authorities moved in so quickly in order so prevent the sale of Mid- entities or individuals in Florida, New York and Texas, in addition to Minnesota. Grand jury subpoenas indicate the following areas of inquiry: * Loans of more than $18 million by Midwest to a Miami resort and con- dominium known ax she Jockey Club. The complex, which wax owned by Howard Lorber of New York until Midwest took it over lass year, apparently received financing from Midwest far in excess of its value. Greenwood-Olson handled the Jockey Club account. After the gov- ernment took control, Midwest sold she Jockey Club for approximately $4 million. * A Texas partnership known as CDR Investments. The partnership, which also had a Minnesota affiliate and has since gone into bankruptcy, received more than $30 million from a Midwest subsidiary called MWF Mortgage Corp. Two of the partners in she Minnesota affiliate were offi- cers of MWF Mortgage and their partnership received nearly $10 mil- lion for several Twin Cities projects that were never completed. The grand jury has subpoenaed records concerning the Minnesota partners, Fred Bolxtad and Norman Herbst, and the Texas partners, Robert Mik- kelson, Craig Newhouse and Darrell Nichols, N False financial statements to she Federal Home Loan Bank Board. Au- thorities are investigating whether statements were doctored to hide Midwess't shaky financial condition from regulators. Sources previously indicated that Snede, the former chief financial officer, said he was directed by Greenwood to do so. N Subordinated debentures pur- chased by borrowers and companies providing services to Midwest. The government ix attempting to deter- mine whether buying the unsecured bonds wax a coxt of doing buxinexs with Midwest. Also the government ix investigating whether Midwest misled the bond purehasers about the condition of the institution when the debensurex were sold. Among the bond purehasers were Timberwolvex owners Harvey Rasner and Marvin Wolfenxon; me- dia magnate Stephen Adams: devçl- oper William Fine; AM. Meyers. an insurance agency that once wan part- owned by Midwest; MR. Bolin, the agency that did Midwest's advertix- ing for many years; the pension fund of Hessian, McKaxy & Soderberg, whose partner Harold Soderberg wax general counsel to the savings and loan, and Blue Croxs Blue Shield of Minnesota, which handled Midwest's health insurance account. NA complicated transaction with Green Tree Acceptance Inc., a former Midwest subsidiary, involving the $188. million purchaxe of service rights on mobile home loans by Mid- west. The government in investigat- ing. in part, whether the value of the servicing rights was artificially inflat- ed to benefit Greenwood, who wax Green Tree's chairman at the time, and who received bonuses based on Green Tree's earnings. N Canterbury Downs and loans of approximately $45 million to princi- pal owners 3. Brooks Hauser, Brooks Fields and Scossland Inc. Hauser and Scossland have filed for bankruptcy. Scostland's investments included she Canterbury Inn, a hotel adjacent to the horse track. -A Oh C PAGENO="0165" 161 APPENDIX C 2.a. Data on Financial Institutions F & E Matters (Data furnished by the Minneapolis Division of the FBI) a. Pending Investigations +100,000 111 120 91 -100,000 193 229 140 b. Individuals Under Investigation FY88 FY89 FY90 +100,000 -100,000 C. Declinations FY88 FY89 FY90 +100,000 23 27 11 -100,000 109 127 41 d. Convictions - FY88 FY89 FY90 +100,000 17 19 8 -100,000 25 21 4 e. Pretrial Diversion FY88 FY89 FY90 +100,000 2 0 0 -100,000 1 2 0 PAGENO="0166" 162 f. Acquittals FY88 FY89 FY90 +100,000 0 0 0 -100,000 0 0 g. Mistrials FY88 *FY89 FY90 +100,000 0 0 0 -100,000 0 0 0 2.b. Information Concerning the Financial Institutions 1. Involve losses of $100,000 or more Banks S&Ls Beg. 10/89 68 9 as of 1/90 87 12 4. Resources We have been allotted 3 AUSA positions, 1 auditor position, and 2 support positions through the Attorney General's December S&L allocations. We anticipate that the increase in U.S. Attorney personnel and the addition of 2 FBI agents will aid in the investigation and prosecution of bank fraud and embezzlement. PAGENO="0167" 163 ~DIXP Sentences - Internal (Generafl Defendant Prison Probation months months 48 $ Restitution Beddoe 6,700 5,600 Elsass 32,500 6 --- Honetschlager 16,782 3 60 5,000 * Larsen 62,267 24 --- Marie 11,140 36 11,140 Ouradnik undet 12 --- Sarff 11,527 60 11,527 Sevelius 5,500 --- 24 5,500 Starr 56,000 8 36 --- Tinsley undet 6 36 1,090 Wenzel undet. --- 60 7,829 Wudinich 10,321 24 --- Defenc~flt Sentences - Internal (Off icersi $Restitution $Loss Prison months Probation months Albertson 400,000 18 --- 40,000 Bishop 100,000 6 24 --- Bogges 88,868 24 40,000 Kronholm 208,000 60 60 253,640.57 Levar 209,000 60 209,037.80 PAGENO="0168" 164 Sentences - E~rtc~rn~1 Defendant SLoss Prison months Probation months S_Restitution Archie 22,256 30 24 --- Benson 96,000 4 36 95,000 Bergman 40,000 6 60 15,410 Brooks 5,500 10 24 --- Butler 21,000 27 36 --- Hoghaug 8,860 3 36 --- Keturi 5,500 --- 36 Matousek 58,000 60 Noses 22,256 8 12 Olsen undet 6 24 on own Powell 5,500 30 36 --- Shahin 4,820 60d 12 --- Solomonsori 1,300,000 46 60 616,761 Thibeaux 5,500 --- 36 --- Williams 5,500 8 36 PAGENO="0169" 165 Restitution Defendant Albertson Internal/External SLoss 400,000 $ Restitution 40,000 internal Beddoe internal 6,700 5,600 Benson external 96,000 95,000 Bergman external 40,000 15,410 Bogges internal 88,868 40,000 Honetschlager internal 16,782 5,000 Kronholm internal 208,000 253,640 Levar internal 209,000 209,037 Marie internal 43,000 11,140 Moreland external 40,000 15,593 Sarff internal 11,527 11,527 Sevelius internal 5,500 .5,500 Solomónson external 616,761 616,761 Tinsley internal undeter 1,090 Wenzel internal undeter 7,829 PAGENO="0170" 166 ~PENDIX E CONVICTIONS Fl 1987 Minneapolis FBI FILE NUMBER 29A-4 074 29C-4 134 29B-4002 29C-4214 29C-4239 29B-4l85 29C-3811 29B-4 164 29A-3556 29A-3814 29A-4076 29B-3853 29B-3979 29C-4l86 29D-4064 29B-404l 29C-3959 29A-4 050 29A-4 072 29A-423l 29C-4l57 29C-4224 29B-3883 29B-3924 29B-4l99 29C-359l 29C-4 159 29B-4043 29C-4206 29C-3956 29C~4047 29C-4 066 29C-4 102 29C-4 106 29C-4l14 29C-4 167 29A-4l60 29D-39l5 29A-4 184 SUBJECT'S CONVICTED Anthony Duane Storey Kerry A. O'Day Galen Cadle Eva J. Heck James Edward Scott James A. Gonsioroski Charles M. Blanchard Judy Lynn Scott Spencer I. Luedke Geoffrey Munger Loren W. Smith Marvin Henry Fernelius Donald W. Palmer William Nicholas Klietz Richard Lee Hodges Shelly A. Cobb-Gresrude David 3. Weiderisee Joseph Theodore Behl Gail Olding James J. Cavanaugh James W. Burns Mary K. Smith Linda Whaley Holly L. Wasieleski Richard B. Brussell Peter Donald Endres Christopher Charles Gregory Anthony D. Larkin Sherry Watkins Michael I. Hughes Charles Lester Walther Cheryl Lynn Bauer Julie Ann Bentley Sharon Kay Schwartz Debra A. Christopherson Kari D. Kruse Sandra L. Sargeant Nitsa John Martinis Debra S. Denhain Gary Wayne Underwood Michele A. Tinsley Thaddeus Adonis Lông Dennis Eugene Mentzos Edward Larry Jackson Julie Smith-Damsgard James B. Johnson Glenna Joanne Janssan Kim Marie Brillas Pamela J. Kury -~ $136,296.74 $3,500.00 $21,300.05 $5,612.40 $1,623.00 $26,694.21 $15,000.00 $87,636.45 $88,000.00 $150,000.00 $296,825.25 $16,000.00 $32,484.78 $4,500.00 $940.91 $87,147.78 $8,339.44 $160,000.00 $93,000.00 $50,000.00 $8,724.81 $18,000.00 $90,000.00 $65,000.00 $80,400.00 $16,561.32 $6,243.00 $32,851.12 $3,000.00 $7,000.00 $2,352.94 $2,973.04 $1,120.00 $2,500.00 $3,450.00 $1,000.00 $771,093.09 $2,200.00 $44,500.00 $11,500.00 $1347.38 $11,000.00 $23,380.25 29B-3 847 29D~405l 29B-4236 29B-40l6 PAGENO="0171" Fl 1988 FILE # 29A-4 067 29A-4400 2 9C-4 299 29C-3964 29C-4309 29C-4420 29A-43l2 29B-3 942 29C-4 094 29C-4288 29A-3 670 29A-3935 29A-434l 29C-3981 29A-4 380 29A-4362 29B-4 379 29C-439l 29C-43ll 29A-3759 29A-4 373 29A-4436 29C-4409 29C-4 328 2 9A- 3927 29C-4 060 29B-4394 29C-4 284 29B-4 189 29A-4 110 29A-4 171 29B-4366 29B-4453 29C-3932 29C-4335 29A-4290 29B-4 016 29C-4285 29C-4300 CONVICTIONS Fl 1988 Minneapolis FBI SUBJIECT Gary Joseph Addis Francis E. Lorenz, Jr Sharon Thompson Duane Emil Lorenz Thomas E. Boyle Gordon Lee Hart Tauber L. Hoffman Edward R. Snelgrove Barry Ray Jorgenson Morris C. Anderson Albert Spawde Kelly Jo Stokes Steven Bernard Boggess Wade Koistinen Terry Lynn Deal Jerry Ray Letellier James Lovell Viergets Herman Jerald Martin Jonathan Robert Carlson Michael J. Geier Charles Eugene Greentree Marie N. Bishop Mary Jo Vitt Carol Ann Herzog Joseph S. Sitarz Pamela G. Page Gordon J. Curren Cheryl E. Ellis Lois Marie Soyring Wayne Joseph Spangler Robert Fredei~ick Nelson Reginald Lavon Simington Ademola Banire-Isiaka Curtis P. Line Gregory James Devos Frank Florian Armbrust Kim Marie Brillas Deborah K. Kroll Donna J. Pahi 10,142.64 -0- 4,900.00 6, 000. 00 9,500.00 36,355.00 580,000.00 23,226.74 19,500.00 2,500.00 1,401.49 104,821.65 88,868.80 3,678. 00 446,632.00 106,163.33 55,000.00 1,850.00 560,000.00 177,000.00 302,220.08 100,000.00 11,696.47 3,000.00 106,000.00 1,990.00 50, 000.00 64, 654 * 52 35,000.00 129,371.94 30,747.04 18,000.00 -0- 7,042.00 18,385.30 192,479.24 23,380.25 2,520.00 3,700.00 167 LOSS PAGENO="0172" FY 1989 FILE~ 29A-4 096 29B-463l 29A-4565 29A-4489 29B-428]. 29C-4402 29C-4 612 29A-4 172 29B-4463 298-4472 29A-4 162 29A-4 188 29C-4512 29A-4046 29A-4343 29B-3991 29A-449l 29C-4458 29C-4508 2 9A-4 275 29B-4429 29C-4490 29A-445l 29A-4557 29A-3974 29A-42ll 29B-4516 29B-4200 29A-4370 29B-4511 29A-4525 29B-4497 29C-4679 29A-45l5 29D-4519 168 CONVICTIONS FY 1989 Minneapolis FBI SUBJECT Harold Vernon Larson David Merle Shroyer Adolphus Onyej inwa Dennis Leroy Seeman,. Jr Lucinda Kay Biever Bruce J. Marek Norman Aamlie James Robert Meyers Raymond Arthur Benson Marvin Gerald Westrom Conrad Bruce Solomonson Bruce J. Marek Christy Junior Olsen Dennis K. Albertson James Winslow Lundberg Renee Lavar Susan D. Wudinich Cathy Ann Beddoe James Francis McGovern Ernest Henry Matousek Laurie Ann Brault Cathie Ann Hendrickson Merle Eric Wagoner James Raymond Schmitt William John Dudley Daniel K. Conners Kaye Marie Saloun Modou Jobarteh Melodee Lynn Hargens Tylene Joy Goembel Anton Vetter Beckie Beyer 42,200.00 56,000.00 275,000.00 4,088.00 25,458.03 4,025.00 19,764.12 100,000.00 7,119.85 96,000.00 200,000.00 616,761.00 3,052.47 1,475.00 400,000.00 37,394.54 209,000.00 10,321.85 6,700.00 296,368.29 58,000.00 5,850.00 44,870.76 3,947.16 20,000.00 1,700,000.00 64,802.34 25,426.06 7,161,506.00 43,000.00 11,000.00 60,000.00 6,079.19 148,645.91 1,080.00 PAGENO="0173" 169 CONVICTIONS FY 1990 Minneapolis FBI SUBJECT'S CONVICTED Eric Jon Hoghaug Sharon Kay Johnson Vicki Lynn Ihry Cathy Sue Johnson Richard L. Carpenter Jackie J. Starr William A. Dean James J. Sletten Karen K. Langley Craig Gunnar Kronholxn David Charles Ouradnik Roxanne N. Sevelius Francis E. Lorenz YILE NUNBER 29C-4502 29B-4553 29A-29l88 29B-29560 29B-4387 29C-4476 29A-4 348 29A-29307 2 9K-4 690 29K-4473 ;29J4565 $8,860.00 $28,000.00 $400,000.00 $28,552.26 $80,500.00 $54,000.00 $11,824.00 $207 , 000. 00 $8,000.00 $5,500.00 $1,050,000.00 PAGENO="0174" 170 Mr. BARNARD. Thank you very much, Mr. Arnold, and thank you, Mr. Wortham and Mr. Collins, all, for being here this morn- ing. There are a few questions on issues that certainly I would like to clarify and see exactly what your reaction to them is. I would like to make, first of all, a statement on the perception that many Members of Congress have, and certainly the public has that we are losing leverage to deter future criminal activity against finan- cial institutions because of these delays, apparent delays in crimi- nal enforcement. And of course, if the violators don't believe they are going to get caught and stiffly sentenced, they will, you know, keep on doing it. That is the perception. The second perception seems to be the weakness in the plea-bar- gaining situation. If the crooks don't feel that there is a major crime to nail them hard, then they will go for a minimal sentenc- ing and plea bargain. I would like to ask you to comment on these observations, wheth- er they are true or not true, and if possible, to suggest ways that we can overcome any misperceptions and maybe do more to get more information out that an energetic job is being done in bring- ing criminals to justice. Mr. Collins. Mr. COLLINS. Mr. Chairman, your last question first, with regard to the plea bargaining. In the northern district of Texas, our judges have historically not, and will not support, traditional plea bar- gaining where we agree to give a certain sentence to an individual. We do charge bargaining, where we agree to bring certain charges or not bring other charges or dismiss counts of an indictment. As prosecutors, of course, I feel that our job is to expose the de- fendant in every given case, whatever the case may be, to slightly in excess of the maximum punishment that we think any judge in our district would give. Once we have done that and then bring to the attention of the court all the aggravating factors, we think we have done everything we can do as prosecutors. Everything else is overkill. It makes no difference whether you expose a person to 65 years or 10 years if the most that a judge is going to give that person is 5 years, for example. Of course, we make those judgments based on our experience as prosecutors, watching the judges, and watching their sentencing patterns. Obviously, one of the things that is going to make a lot of differ- ence is the sentencing guidelines because that does confine the judges. It does give us the ability to appeal a sentence outside the guidelines if it falls below, and of course, it correspondingly gives the defendant the right to appeal if it goes above the guidelines. But I do think that that allows Congress and the Sentencing Commission to directly impact what sentences are actually given. As prosecutors, we feel that most of the time, if we expose the de- fendant to more than what we think any judge would give in our district, then we can virtually have no further impact. The judges are, of course, lifetime appointees. They are highly independent. They make their own determinations and decisions regardless of a lawyer's persuasive powers or attempted persuasive powers. PAGENO="0175" 171 Mr. BARNARD. Haven't we legislated, though, recently in FIRREA, to impose greater sentences, rather than giving too much latitude to the judges? Mr. COLLINS. Sentencing guidelines certainly do that and I think will make a real difference in the sentences, particularly the mini- mum sentences that are imposed. I would certainly say that in the average case, this will help ensure that more uniform and correct sentences are given in white-collar cases. Mr. Chairman, you had also asked that I try to identify in the financial fraud report that I produced for the committee those cases that involved Vernon; on page 29, the John G. Smith case, and I am referring now to page 29 of the "Fraud in Financial Insti- tutions" report. He was a senior executive vice president of Vernon. John D. Hill, on page 31, a senior vice president. Roy F. Dickey, on page 33, an executive vice president of Vernon Savings and Loan. Jack D. Franks, page 33, he was a real estate consultant formerly associated with Vernon Savings and Loan. Page 35, Woody F. Lemons, the former chairman of the board, Vernon Sav- ings and Loan, and to date, the highest ranking individual in that particular institution who has been addressed. He is currently pending sentencing. Page 41, Patrick G. King, a former president of Vernon Savings and Loan. Page 42, James R. Veteto, former president of Vernon Service Corp., which was a wholly owned subsidiary of Vernon Sav- ings and Loan, and finally, on page 44, Jack D. Atkinson, a real estate developer who was-who made false affidavits with Vernon and was one of the leading borrowers. In addition, I recall that there has been brought a case that is not mentioned in the report: William Rothwell. It is a tax case. It is currently indicted and not yet been tried. Mr. BARNARD. That is good information, and I think that this is certainly worth commenting on, that you have done a good job in this investigation. I think this is something that the public needs to know and that Congress needs to know. What cases do you have now pending with Vernon Savings and Loan? Mr. COLLINS. The Rothwell case is one I just mentioned, and I don't recall any others. I am in the position where I can't comment at all on pending investigations, of course, and that is one of the difficulties with the public perception because these cases are so long-- Mr. BARNARD. Let me ask you this question. Mr. COLLINS. Certainly. Mr. BARNARD. Have there been any other indictments? Mr. COLLINS. I cannot recall other indictments in the Vernon cases to date. There may have been one or two more that I cannot now recall and that aren't in the report. Mr. BARNARD. OK. Mr. Spratt. Mr. SPRATT. Someone indicated that the statute of limitation has been extended. Have we extended the statute of limitation? Can it constitutionally apply to crimes that were committed before the statute was extended? Mr. COLLINS. It can, Mr. Spratt. I had that issue researched when FIRREA first passed because we were looking at that time at sever- PAGENO="0176" 172 al cases that might have given us a problem, and from everything I have seen, there is no problem with extending the statute of limita- tions as long as it had not expired as of August 9, 1989, the date the-- Mr. SPRATT. You can't go back and extend it once it has expired on a given offense. Have you run into many crimes with this char- acter, where the statute did run out and you simply don't have any freedom of action now? Mr. CoriiNs. The ones that I have seen, unfortunately-the de- fendants-we may lose a count or two. We may lose a major trans- action or two on a given prospective defendant, but unfortunately, these people have kept on in a continuing pattern of activity so we find that if we do further investigation, there are, unfortunately, other things they have done within the statute of limitations. Be- cause of the fact that some of these people-especially that the Dallas Bank Fraud Task Force is looking at, have been engaged in this over a continuing period of time, we are only losing counts and not defendants. Now, I am sure we have lost a few defendants to the statute of limitations. I don't mean to say that we have never lost any. But the ones we have looked at, they have engaged in enough future conduct after the-within the statute so that we are still able to prosecute them. Mr. SPRATT. Let me ask the two of you, Mr. Collins, Mr. Wortham, if you have experienced similar problems with attorney! client privileges being asserted against your attempts to obtain in- formation or work product privileges being raised as an objection? Mr. COLLINS. Let me say first that we do have a good relationship with the regulators in my district. We have a bank fraud working group that meets regularly on a monthly basis, so we try to com- municate with the regulators frequently and exchange our prob- lems. They have problems with us, just like we have problems with them. We have had a couple of instances where fee counsels, private counsels who have been hired, outside counsels, not the Govern- ment lawyers, but the outside private counsels who have been hired, have blocked our efforts to-or attempted to block our ef- forts to get records. That has slowed us down in a few cases. We have overcome it in those cases and we have visited with the regu- lators about this and I think we have that pretty well under con- trol. I won't say it wasn't aggravating at the time, it was, but like many things, sometimes it is a question of the right hand not knowing what the left hand is doing. When an attorney is hired by a client, especially a private attor- ney, they take an aggressive attitude to represent that client and even against Government lawyers, so yes, we have had the prob- lem. I believe we have resolved it in most instances and we do have an ongoing dialog with the regulators. Mr. SPRATT. Mr. Wortham. Mr. WORTHAM. Your Honor, we have not had-Congressman, we have not had that-- Mr. BARNARD. We call him judge, too. Mr. WORTHAM [continuing]. Those specific problems. What we have found is that the internal problems, the internal regulations PAGENO="0177" 173 of the bank examiners-let me tell you, on the bank examiners, we really have a good relationship with them, and maybe on the QT, we have received some information that their superiors would not want us to receive because of their internal regulations, but-- Mr. SPRATT. You mean the internal regulation about the confi- dentiality of bank examination reports? Mr. WORTHAM. Or information they have discovered while doing an examination. Mr. SPRATT. That information is denied you? Mr. WORTHAM. It is never provided to us. Mr. SPRATT. You have to obtain it by subpoena from a grand jury? Mr. WORTHAM. Yes, sir. From them, I don't even-we haven't even gotten it that way from the regulators. We have had no infor- mation received from the savings and loan regulators, none what- soever. Now, let me tell you, we do have a good working relationship with the bank regulators and we have been very successful-- Mr. SPRATT. From FSLIC and the Federal Home Loan Bank, you don't have a good relationship? They don't give you-- Mr. WORTHAM. I don't know who they are. Mr. SPRATT. You don't even know who they are? Mr. WORTHAM. We haven't received any information from them, no, sir. Mr. SPRATT. Have they referred cases to you for prosecution? Mr. WORTHAM. In the last couple months, we have received a few referrals, but you know, our doors are still on the hinges. Mr. SPRATT. When you get a referral from FSLIC, from Federal Home Loan Bank or from FDIC, do they help you work up the case? Do they provide technical accounting expert assistance in cutting through this chain of transactions, laying out the offense, the factual basis of the offense so that your investigators don't have to go in and start from A and work to Z? Mr. WORTHAM. We actually haven't been working with the sav- ings and loan regulators that long to really tell you exactly what we have or will receive from them. I will say this, though, the bank regulators have been very cooperative and worked with us within their guidelines. I think that they apparently have some restric- tions as to what they can tell us and what they can't tell us. I am not going to say that we haven't just learned of information one way or the other, but-- Mr BARNARD Would the gentleman yield? Mr. SPRATT. Sure, yes. Mr. BARNARD. Mr. Wortham, 1 thought the procedure was that the bank, through its regulators, identified the crime, because I re- alize their regulations state that the bank official discovering the crime immediately reports it to the FBI. Mr. WORTHAM. The bank is supposed to. There is a statute that says the bank-- Mr. BARNARD. Reports it to the FBI immediately, all right. Mr. WORTHAM. Yes, sir. Mr. SPRATT. And the FDIC. Mr. BARNARD. And the FDIC. Mr. WORTHAM. Correct. PAGENO="0178" 174 Mr. BARNARD. And what you are now telling me is the informa- tion which is very important to the prosecution, which would be the bank examination report and its confidential section, is not available to you? Mr. WORTHAM. What we are finding out, once we start an exami- nation or we get the referral from the bank president or whoever sang, you know, Mr. X may have done something wrong, we go back and when we start our investigation, we get in and we start finding this and that. We find out that the bank regulators had no- ticed this problem far in advance of us being notified-- Mr. BARNARD. In other words, you are getting complaints, or at least you are getting-- Mr. WORTHAM. Stale information. Mr. BARNARD. Well, you are getting complaints directly from a bank official rather than getting it from the FBI? Mr. WORTHAM. The FBI and I receive the notification from the institutions at the same time. When they mail it to the FBI, they mail it to our office. That is part of the requirements. Mr. BARNARD. But not from a regulator? FDIC or FSLIC? Mr. WORTHAM. We have had no-we have received no informa- tion until the last couple months from the FSLIC. We have-we usually do not find out about the problems from the bank regula- tors until we subpoena the information after we have received a re- ferral from the FBI. Mr. ARNOLD. Mr. Chairman, I might indicate-- Mr. BARNARD. Is that normal, Mr. Arnold? Mr. ARNOLD. What it is, is that a bank examiner or a bank presi- dent or somebody in the bank-it is very easy for them to spot a $5,000 embezzlement by a teller or a bad check, but on the other side of the ledger, they may have a $10 million loan that has gone bad and they expect that somebody did something to them, but that is not referred. The $5,000 one, that is referred right away. The $10 million one, they are still working with. And until that loan goes bad, and even after it goes bad, we may not see that until the institution goes bad. Mr. WORTHAM. Or the bank president moves on to another posi- tion or is terminated. Mr. ARNOLD. Yes, if there is a change in leadership in the bank or if the bank is sold. Mr. SPRATT. Even if the FDIC knows about that transaction and has reason to suspect fraud, you don't find out about it? Mr. ARNOLD. No, I am not saying that the-what I am saying is, I don't know if the FDIC knows about that specifically, but what I am saying is if the bank has had a loan go bad and-- Mr. SPRATT. Their tendency is to work it out internally-- Mr. ARNOLD. It works it out internally and I don't think, in all fairness to the regulators, that perhaps until the bank reaches a point of insolvency or it has some capital problems, that all of these things are looked at, and of course, if the bank goes bad or if it changes ownership, that is when we see it. Mr. WORTHAM. If it is clearcut, they will refer it to us, but if there is certainly strong reason to believe there is a problem, no. Mr. SPRATT. Take the case of an institution which has failed. Will the regulators wait until they have done a complete final ex- PAGENO="0179" 175 amination, put it into insolvency, done the followup examination after they go into insolvency, decide what are good assets, what are bad assets-in other words, do they wait until the completion of their examination of that institution before they refer any cases or do they refer cases to you as they develop in the course of the in- vestigation? Mr. ARNOLD. In Minnesota, it has been both. I haven't found any fault with the regulators, after an institution has gone into conser- vatorship, where they have not furnished the information. Mr. SPRATT. Then they have taken it over and-are you saying there is a difference, then, that they more willingly provide infor- mation to you and open the books of the organization? Mr. ARNOLD. I think that at that point in time, they are looking at the whole bank, you know, more thoroughly. That is the sense I have. Mr. SPRATT. I think what we are trying to get at is back to the point that the chairman made, namely, we think going after those who are culpable in these cases is our most important objective. Civil recovery is a secondary objective because what we are really talking about is retribution on the one hand, but deterrence even more importantly for the future. Mr. WORTHAM. Congressman, we don't think-- Mr. SPRATT. We don't think there should be any unnecessary ob- stacles in the path of your prosecutions. Mr. WORTHAM. I don't think you are going to find that civil re- covery will be the deterrent of jail time and-- Mr. SPRATT. No, I agree with you. That is why I am saying that we think what you are about is the most important thing in the whole cleanup or followup to what has happened to these S&L's and banks in the last 10 or 15 years. Mr. COLLINS. Mr. Chairman, if I may address your questions, and yours, Mr. Spratt, about the regulators in our district. First, I want to say I have noticed that in the last several years, we have had better cooperation from the regulators and particularly since we formed a working group and have a dialog with them. We are able to communicate more directly and we get more rapid response. I have noticed a greater promptness in their referrals in the last sev- eral years. I do want to comment that on referrals, of course, our referrals can come either from the regulators or from the banking institu- tions themselves and we get them from both sources. We asked the banks and the regulators both not to try to judge whether a matter is, in fact, a criminal case. As one of the prosecu- tors on the task force says, all we want is aggravated suspicion. If there is aggravated suspicion that a crime has been committed, we want the referral. We want the opportunity to look at it. Many of those referrals may not be good criminal cases by the time we finish. They may-- Mr. SPRATT. Let me ask you this. Let's say you get a file full of aggravated suspicions. Can you then turn to the FSLIC or what- ever its name is, to the examiners and FDIC and say, "We'd like more workup on that? Can you do the work for us?" Mr. COLLINS. We have had good cooperation and we can cover them with grand jury subpoenas or whatever else we need to do for PAGENO="0180" 176 them to give us the information. We have had cooperation in indi- vidual cases. Their agents may be spread thin, too. We may have to let them have time to find the agent who did the workup, who may have since been transferred and so forth, but they generally are quite cooperative with us with regard to that. Our current quarrel with them, if I may say that-it is really not a quarrel, it is a request-we would like to have some dedicated re- sources on the task force from the regulators who would be there full time. Their answer to us is, "If you will pay the freight, we will give the people," and of course, we say, "Well, we don't"-- Mr. SPRATT. You don't have FDIC-you don't have the regulators represented on your task force? Mr. COLLINS. We don't have them on the task force except that we have had in the past couple of years a special assistant U.S. at- torney from the Federal Home Loan Bank Board. But what we really want are some of the technical people who would be dedicat- ed. Of course, this is just a question of budgeting and resources. We want them to give us some of their people-- Mr. SPRATT. Wouldn't it facilitate liaison with the regulators if you had a few of those types on your task force? Mr. COLLINS. We have good liaison with the working group be- cause they participate fully in the working group, but that is not the task force. That is just the group we have to keep the lines of communication open. What we really want is some of their exper- tise in some of these transactions because you can-some of these transactions are quite complex. You may have to look at a transac- tion and follow a series of transactions through three or four differ- ent institutions to see the crime. Any individual transaction in an individual institution may not apparently be a crime, but if you look at all three of them or all four of them in a package, then you can see the crime. That is the kind of expertise that we could use. So basically, we have been requesting of the regulators that they give us some of their expert people to plug into the task force and work with us on actual cases. Now, understand, we are asking them to stop working on everything else they are working on, so this is a resource question where we are trying to, in effect, steal some of their resources. We think it is important and we would like for them to do that if they could. But I do have to say, the regulators in general, especially since we formed the working group, have been responsive, have taken the time to address our concerns just as we take the time to ad- dress theirs. Mr. SPRATT. One last question, would you all agree that if you had more resources-I know you are trying to put the best face on your situation and you are all doing Herculean work, but if you had more resources, could you do more, could you get more pros- ecutions, initiate more and obtain more convictions? Mr. COLLINS. I think my answer may be different from the other two U.S. attorneys because we have had such a longstanding effort in my district. We have a lot of Fraud Section involvement, which gives us more resources to start with. I believe, for right now, in my district, the resources that have been provided are adequate, but I want to look at that again in September 1991. Now, let me say, this is the first time they have PAGENO="0181" 177 ever been adequate for this purpose, so I don't mean to say we have had adequate resources in the past. I think maybe Mr. Wortham and Mr. Arnold may have a different perspective in their districts. Mr. SPRATT. I am going to turn to them, but let me call to your attention a March 10, 1989, teletyped from the Dallas FBI Division, from that division to FBI headquarters. The division there had re- quested 64 agents. They got 37 new agent positions and they tele- typed headquarters to this effect: "To shortchange the Dallas Task Force by not addressing its manpower needs at this time is, in our opinion, unthinkable." Do you think the FBI is adequately staffed in your division? Mr. COLLINS. I am not sure, and I do want to distinguish between remarks with regard to prosecutors and FBI agents. I am simply saying I think we have enough prosecutor resources for the time being, for the first time ever, we have enough for this particular problem. On the FBI side, my perception is, No. 1, they were cut back on some of the agents that were originally promised and re- quested. I got everything I asked for on the prosecutors side. I am not sure they did. No. 2, I believe that a lot of the new agent resources that have been provided to the FBI-not just in my district, but nationwide, have been provided essentially without support personnel, essen- tially totally without support personnel. I believe that could create a real problem for them. If you don't give the people necessary to type up the interview reports that the agents do, then you are going to have a lot of agents without the necessary technical sup- port. Mr. BARNARD. Mr. Wortham, we heard that you felt that you could use more resources. Do you want to comment further? Mr. WORTHAM. Yes, sir, yes, sir. What you have to realize is that what he got, I didn't. [Laughter.] Mr. BUSTAMANTE. You are still waiting for them. Mr. WORTHAM. I am still waiting, Your Honor. Tyler is con- trolled by the Dallas FBI Division. You have to realize that the eastern district of Texas, we don't have our own head of the FBI. The northern half of the eastern district of Texas is serviced out of Dallas; the southern part of the eastern district of Texas is serviced out of Houston. So as the resources that go into Dallas, those are to be paired off and some are to be given to us. The Attorney General, in his decisionmaking process, said that there should be two FBI agents per prosecutor. Well, I am telling you, we don't have, as we sit now, two agents per prosecutor, so we are understaffed prior to these resources being allocated to Dallas and after talking to FBI Dallas, there is no intention of sending two agents to the eastern district of Texas for every prosecutor that we are receiving from the Attorney General's allocation. Just to let you know, to have an idea of how the resources in the Tyler-Tyler is really Tyler, Sherman, and Texarkana, because it is kind of one region. When 1 was sworn in as the U.S. attorney back in August 1981, we had 12 to 14 FBI agents for the Tyler, Sherman, Texarkana area. We had four criminal prosecutors to cover the entire district, four criminal prosecutors. PAGENO="0182" 178 Now here it is, 1990, and I have approximately, give or take a few, 26 criminal positions for the entire eastern district of Texas, and more than half of those are in the-just four, Tyler, Sherman, and Texarkana, but we only have 15 FBI agents in Tyler. They have not kept up with us. Instead, they leave any and all resources they get in Dallas and they tell us, "Well, if you have a problem, we'll send someone~ out to the field to take care of you." Well, there have been times it takes them a year. We do not feel that-we feel like the stepchild to the Dallas FBI agents. Mr. BARNARD. Let me ask you-would you yield? Don't you have just as serious problems in drugs and other things in which which you are involved that would require FBI agents? Mr. WORTHAM. Let me tell you, I have begged, I have pleaded, I have called them nastynames, and I have complained as far up the ladder as I know how and the thing is, well, they are on their way. They have been on their way for 9 years and they haven't gotten there yet. Let me tell you, the Dallas FBI Division, their attitude toward the banking problems in the eastern district of Texas is-and this attitude existed as of-as late as yesterday-is send us your pros- ecutors and we will put them in the task force and then we will take care of all your banking problems when we have time to. So their resolution is for me to give them my prosecutors~and just put them in this deep hole that they have in Dallas and then they will take care of my banking problems. Mr. SPRATT. Mr. Arnold, and then I have to yield to the other members-- Mr. BARNARD. Yes, that is right. Mr. ARNOLD. Our resources, as far as addressing economic crime in general, the special agent in charge of the Minneapolis Division and I happen to share a view that it is the highest priority and so, to the extent that resources were not made available as requested, there have been some transfer from other areas. I assume that they believe they could use more resources. In terms of the prosecution effort, we had diverted resources that we had had on economic crime over to the violent crime and drug. Those have now been replaced, so we expect to be up to full steam within 2, 2½ months. Mr. BARNARD. Mr. Arnold, if the gentleman would yield, your ju- risdiction covers the entire State of Minnesota? Mr. ARNOLD. Yes, sir. Mr. BARNARD. And how many U.S. attorneys do we have in Texas? Mr. WORTHAM. Four, Your Honor. Mr. BARNARD. You have four districts. Mr. ARNOLD. I might add, it is a lot easier to be the only U.S. attorney covering a whole State, especially when you have the spe- cial agent in charge in the city in which the U.S. attorney is. Mr. BUSTAMANTE. Especially in Minnesota, compared to Texas. Mr. ARNOLD. Especially in Minnesota, compared to Texas, sir. Mr. BARNARD. Mr. Schiff. PAGENO="0183" 179 Mr. SCHIFF. Thank you, Mr. Chairman. I will endeavor to be brief because other members are also waiting. I want to thank you gentlemen for appearing today and thank you, Mr. Chairman, for holding this hearing. If I may turn to the two Texas U.S. attorneys, I do so because it is my understanding that in terms of savings and loan failures, Texas has the largest amount, both in number of institutions and number of dollars that may be needed. Is that generally a correct statement? Mr. WORTHAM. Absolutely. Mr. SCHIFF. With that in mind, we all know that a business fail- ure, by itself, is not a crime if it is through an unfortunate turn- down in business or unfortunate honest errors in investment. Yet, it is a crime to knowingly defraud an institution, either from the inside through management or from the outside through custom- ers. I wonder if you gentlemen have just a rough estimate, even a guess, based upon your experience, of the total number of savings and loans which in the last several years have failed in the State of Texas. I realize this even includes two districts beyond what you represent. Do you have an estimate or is an estimate among the U.S. attor- neys as to how many are the primary result of legitimate, but un- fortunate business failures, of which there is no crime, and how many failures are primarily the result of intentional defrauding on the part of one party or another? Mr. COLLINS. In my district, I truly do not think that is ascertain- able for a number of years. I think that will only be ascertainable when you look back. Unfortunately, there is nothing that tells us right up front, when we look at one of these institutions, whether it is just a lot of bad business judgment and a downturn in the economy, or whether it is a crime, so we have to look at it and we have to examine it and investigate to see. Most of these are in the process so we are at the point where we are right in the midst of many of these. Another complicating factor to this is that often on the criminal side, we are not trying to reinvent the scheme. We don't want to try to put the puzzle back together and see what the original scheme was. We just want to take straight shots at the criminals and, in doing so, we don't re- create the schemes. If we did, we would be talking about a tremendous extension of the length of time and effort and number of people it would take to do so. So often, when we bring a case-and I guess the Faulkner case is an exception in the 1-30 case-that is a big scheme that was put together in one big RICO indictment. But that is the only one we have had. Often, we are just taking a small part of a larger scheme and once we have identified the fact that we think there was criminal conduct, we do not try to reinvent the scheme. I will say that I think it is reasonable to conclude that criminal fraud substantially contributed to the failure of many institutions, but as a prosecutor, I don't think I have the expertise to say which ones. I think when you look back historically, though, and see where the big failures are and where the biggest number of convic- PAGENO="0184" 180 tions are and who has been convicted, especially in the scheme, the chairmen of the boards, the presidents, the major borrowers, that type of thing, then you can start reaching conclusions about which ones failed primarily because of criminal fraud. In addition to the criminal fraud, as you know, there was a downturn in the economy in Texas and there was a lot of relaxation of standards that had been in place in the past that permitted some new outsiders to come in and take advantage of the economic conditions at the time. Mr. WORTHAM. What you will find is that bank fraud is unlike a DWI. A DWI, either you are drunk or you are not drunk. Bank frauds do take substantial amount of investigation. What we have found is that the downturn in the economy has led to some of the criminal violations becoming exposed; whereas they never would have been exposed before. When you have a relationship between a bank president or-and someone that is borrowing money and you don't have anything, but you do a financial statement saying you are worth millions of dollars, and you get the money and you invest it, and even if you do so carelessly, when the economy is going full barrels, in spite of your incompetence, you make money and decide to pay the loan back, these crimes are never discovered, but with the downturn of an economy, when it takes a real busi- nessman to make money, now we are discovering kickback situa- tions or abuse of lending policies. One of the ways we discover there are a lot of loans that are going on that are uncovered is just allowing bank drafts, you know, half a million dollars in bank drafts. Some of the banks don't col- lect at all because it is the good-ol'-boy syndrome and just allow them to use this half million dollars at the bank's expense or some banks are charging tremendous service charges way and above the amount of money they would actually get if it was a loan. So I would say it is going to take some time and as aggressive as we are in our district, it just takes time to make that determina- tion. We are only going to be as strong as our weakest link. It takes cooperation between the FBI, the savings and loan examin- ers, and the U.S. attorneys offices, and if any one of those three links fail, then that is when the prosecution will not make it to the courtroom. Mr. SCHIFF. Mr. Wortham, you made a very good point when saying that when an institution fails, there is a detailed examina- tion of what went wrong with that institution, but for all we know, there could be solvent institutions anywhere in the country today that have many of the same problems, but they are not focused upon because these institutions remain in business as usual. Mr. WORTHAM. Absolutely, 100 percent. Mr. SCHIFF. Thank you. I have a couple more questions. I think we have talked about re- sources quite a bit here. Mr. Wortham, let me just ask, in your par- ticular case, do you believe that your need-the need of your dis- trict in terms of the numbers of savings and loan failures, which may have been the result of criminal fraud, warrant the additional resources that you have been requesting and have not yet received? Is there any question about that? Mr. WORTHAM. Not in my mind. As I said, as I opened, we have 30 institutions in the eastern district of Texas that have either PAGENO="0185" 181 failed or are under supervision right now. I don't know how many they have had in Dallas or Houston, but tt can't be that many more than what we have had in our district. Mr. SCHIFF. I have two other areas I would like to ask about. One is plea bargaining and one is sentencing. Mr. Collins, your answer to the chairman's question about plea bargaining was an answer that defends plea bargaining and I don't raise this again necessarily to disagree with you, but I would like to get a little more detail. When you say it is our job to get a con- viction of an amount that we think, based upon our experience, is slightly over what the judge is liable to use as a maximum, that is a defense of a plea, as I see it. I just kind of wonder what percentage of criminal cases in gener- al, if you have a general estimate, are resolved through plea in the northern district of Texas and is there any different percentage in these kinds of cases? These cases go to trial more often. Mr. COLLINS. Please understand that the comment was also di- rected toward the way we indict cases, not just the way we plead cases because there-if we know that the strongest sentencing judge in our district is not going to give more than 5 years, then if we charge counts totaling 100 or 150 years, we may have over- charged the case and put much greater burden on ourselves and made a much more complex case out of it than we needed to. What we should have done was perhaps bring a case that would expose the defendant to a maximum of 50 years and keep the case much simpler, provable to a jury, so that comment applies not just to the way we structure a plea, but the way we structure an indict- ment itself. With regard to the-I am sorry. You had a further question. Mr. SCHIFF. My question is-and I understand what you are saying. That control can come at any point in the system and I ap- preciate your pointing that out. But what I am interested in is, if you have a general estimate of the percentage of cases that gener- ally are resolved by plea across the board in the northern district of Texas, and if that percentage changes up or down in these kinds of cases? Mr. COLLINS. I think the general rule of thumb-and I have not run statistics on this-the general rule of thumb is about 10 to 1. Mr. SCHIFF. Ten to one what, sir? Mr. COLLINS. Pleas for every one case that is tried. Mr. SCHIFF. So that means-- Mr. COLLINS. If you did not have that, you simply would not be able to dispose of cases in the limited small court system we have. Mr. SCHIFF. I am a former prosecutor who has heard a lot about plea bargaining over many years, so I say this to put this on the record. What you are saying is as a statistical matter, plea bargain- ing accounts for more than 90 percent of the convictions. Mr. COLLINS. Well, charge bargaining, and please understand, once again, we really don't do plea bargaining in the northern dis- trict of Texas because our judges won't approve a plea bargain where we agree that a person gets a certain amount of sen- tence--. - Mr. SCHIFF. Excuse me, sir, you mean plea bargaining the charge, rather than plea bargaining the sentence, right? PAGENO="0186" 182 Mr. COLLINS. I mean :.dismissing or bringing certain counts and not bringing other counts, rather than agreeing to what sentence the defendant will receive, that is correct. Mr. SCHIFF. I understand that. Does that statistic change notice- ably in these kinds of cases? Mr. COLLINS. I think slightly more trials in these types of cases for two reasons, and I think we will see even more of that in the future. One reason is that many of the people we charge, or are about to charge, hire very good lawyers. They are very aggressive and sometimes very unrealistic about whether they can, in fact, escape conviction, but nevertheless, they will put you to the test and make you go to trial. Then, second, as the bulk of the cases begins to shift toward post- guideline cases, I think we will have a lot more cases tried. In those cases, it makes almost no difference whether you convict the defendant often of one count or five counts, so when we engage in the very limited charge bargaining that we do in our district, we can't say we will only bring one count against you versus five counts. That is meaningless. Under the guidelines, they will get ex- actly the same time to serve whether they are convicted of one count or five counts. - That tends to push that case to trial, as opposed to getting the case to plead. The defendant has nothing to lose, or so the defend- ant perceives. I think that is mistaken in some cases. I think they do have something to lose, but that is not the way they perceive it. Mr. SCHIFF. Let me come to the last area that I would like to ask about, and that is sentencing, which you just brought up, Mr. Col- lins. I think I heard in your prior testimony, but I would like to ask each of the three witnesses briefly, in this area, as you see sentenc- ing after a conviction, regardless of whether the conviction is through a plea or through trial. Do you believe that the sentencing guidelines will improve the sentencing in these types of cases-not disimprove it, if that is a word-reduce the effectiveness of sentenc- ing or just have no effect whatsoever? Mr. COLLINS. On the average in my district, I think it will im- prove it slightly. We had what I believed to be good sentencing judges to begin with. Now, I say that is on the average. I think it ~will eliminate the nonaverage sentences in a few cases. I think there are some cases at the bottom that are going-where some in- dividuals are going to get some time that they otherwise would not have gotten and I think that is a significant deterrent because there is a perception that if I don't do more than a certain amount of conduct or a certain amount of loss, I won't get anything more than probation at the worst. So I think that is a significant deter- rent. At the top end, occasionally it is going to eliminate the nonaver- age high sentence. I don't think that will happen often, but every once in a while, we get a judge who is extremely outraged by a par- ticular scheme and wants to really unload on a defendant and the guidelines tend to pull that judge back down. I don't see that that will have any nondeterrent effect-in other words, I don't think that is going to lessen deterrence any because those people are exposed to a lot to begin with. Once a person is PAGENO="0187" 183 exposed to 20 or 30 years, I am not sure how much else deterrence occurs because of increasing potential sentences. Mr. SCHIFF. Mr. Wortham. Mr. WORTHAM. In the eastern district of Texas, I would say, across the board, it is going to-it matters what type of cases, what level you are talking about. If you are talking about the upward level, our judges have proven that they will upward depart, and once you are given 20 to 25 years, it is hard to give too much more than that on a financial case, and I think that that is adequate. But what we are finding is in the midrange cases, you know, like the $300,000, $400,000 losses. I would say that the amount of time they are serving is about half of what it was serving on the pregui- deline cases. Mr. SCHIFF. Mr. Arnold. Mr. ARNOLD. In Minnesota, I don't think it will make much dif- ference. I think that the comments made by the northern district of Texas would apply to Minnesota. Mr. SCHIFF. My last question is for you, Mr. Arnold. Because you have the district of Minnesota, I am a former State prosecutor, and the State of Minnesota was held up to us a number of times by its advocates who, if I understand it correctly, has a plan on its State system of saying, "We are not going to build more prison cells; we are going to set priorities of those who are sentenced to prison and we are just going to draw a line and if you're below the line, you don't go to prison." That is my understanding of the Minnesota plan. If I am correct in at least my general understanding, can you tell me briefly how would a white-collar criminal be sentenced in Min- nesota, since it is not a violent crime? Would they have a tendency to get jail less often than a convicted Federal white-collar crime de- fendant or more often or the same, if you can say? Mr. ARNOLD. If restitution is ordered, I would expect that the in- dividual would get somewhere between no time and 6 months in jail, not in a prison, but in jail. Mr. SCHIFF. Under the Minnesota State plan? Mr. ARNOLD. Yes. Mr. SCHIFF. Is it a fair conclusion, then, that the Minnesota State plan's sentencing under that plan is less severe than Federal sen- tencing? Mr. ARNOLD. Certainly. The Minnesota plan is based on popula- tion, prison population control, and therefore, if the-if you have, say, 2,700 prison spots and you want to increase the penalty for people who commit murder or rape or whatever it might be, then you must decrease some others so that you hold that number at 2,700. The effect is that economic crime-essentially, if restitution is or- dered, I think the presumptive sentence is no prison time. As a matter of fact, I don't think much, 60, 90 days maybe. Mr. SCHIFF. Thank you. I spent a career fighting against that plan being brought to my State and thank you for confirming that I was on the right side of that. Thank you, Mr. Chairman. Mr. BARNARD. I am glad that wasn't well known. We would have had more problems in Minnesota than we did Texas. PAGENO="0188" 184 Mr. ARNOLD. That is one of the reasons that we have a substan- tial effort at the Federal level on economic crime because it is a tremendous void in Minnesota in terms of the sentences. Mr. BARNARD. Mr. Martinez. Mr. MARTINEZ. Thank you, Mr. Chairman. Mr. BARNARD. I am going to give you 10 minutes. Mr. MARTINEZ. OK. I am going to take a part of the 10 minutes to assert a little humor here. You know, your last comment about the prison population ad- justment in determining who gets what kind of a sentence for what crime reminds me of the two buddies that went out and got drunk together. They got so drunk, they couldn't remember what they did that night and in the morning, they were feeling remorseful and they decided to go to confession. The first guy went to confession and he says, "I don't know what I did wrong, but I must have done something bad because I feel terrible." The priest said, "Well, did you commit murder?" Then he said, "No, I don't think so." "Did you commit rape?" He said, "No, I don't think so." The priest then said, "Well, don't worry about it." He left and he met his buddy coming in and he said, "Unless you committed a murder or rape, don't even go in and confess because they are not going to give you anything." It comes to mind, then, that in this kind of a situation, the crimi- nal says, "Well, I'll commit this kind of a crime and that kind of a crime because I am going to get less of a sentence or no sentence at all or get probation." It is a pretty good system, I think, for the criminal, not for the people who are the victims of those crimes. Let me ask you this question. Is there a reason why somebody at a higher level determines what kind of support you get in regard to investigations because you might come from an urban area and you come from a more rural area? Mr. WORTHAM. I guess the best way to answer that is Texas has basically three FBI sites. One is in San Antonio, one is in Dallas, and one is in Houston. They don't have one in the eastern district of Texas, so if the eastern district of Texas does not get its~ own des- ignated resources, our resources are whatever the SAC, FBI SAC in Houston chooses to give us or whatever the FBI SAC in Dallas chooses to give us. Mr. MARTINEZ. Is that a decision made by whoever the director is of that particular area? Mr. WORTHAM. It is my understanding it is up to-- Mr. MARTINEZ. And you have no way to appeal that to a higher authority? Mr. WORTHAM. I can fuss and then people ask them to take a look at it-you see, it is that way not only with the FBI, but DEA, ATF, Postal, you know-I mean, I scream for all of them. I don't want you to think it is only the FBI I scream at. Mr. MARTINEZ. You indicated that there were 30 financial insti- tutions that had gone sour. Mr. WORTHAM. Yes, sir. Mr. MARTINEZ. In your area, what is the number? Mr. COLLINS. Mr. Martinez, I don't know what the number that have actually failed is. I know that in the last statistics I saw from the old FSLIC, they had 88 savings and loans under some type of PAGENO="0189" 185 supervisory operation in Texas and I noted, to my surprise, after looking at the locations, that only 9 of those were in the northern district of Texas. I asked the regulators why that was and they said, "Well, you've had all your failures and closures in the past and the Southwest plan took care of a lot of those." I don't know precisely what the figure has been. I can tell you that certainly north Texas and Dallas is not the only area in Texas that has been hard hit. From what I have seen, Mr. Wortham has a very significant program in the eastern district and I want to not minimize what I have seen of the criminal fraud in financial insti- tution problems in the eastern district of Texas. Mr. MARTINEZ. The ratio is something like a 4O/GO-40-percent/ 60-percent ratio, but the assignment of personnel isn't that ratio, so there is some great discrepancy there. Mr. COLLINS. If I may add one further thing here, the Federal Reserve Bank and the Federal Home Loan Bank, the old Federal Home Loan Bank, are both located in Dallas. That does provide venue for many criminal cases where the institutions may be locat- ed in other districts in Texas. Because of the types of crimes, sometimes they can be prosecuted in other districts. So let me say that some of the effort-and I have no way of estimating how much, but some of the effort in Dallas impacts upon enforcement efforts in the eastern district simply be- cause we happen to have, as a matter of history, the Federal Home Loan Bank and the Federal Reserve Bank both in Dallas. A lot of the reports and statements and so forth that come in give venue for prosecution of those cases in Dallas as well. Mr. WORTHAM. The FBI, if they have their way, they are going to try to prosecute it in Dallas instead of where the institution exists, which is something I also oppose. I mean, if citizens of Marshall, TX, that are being defrauded, it ought to be prosecuted in Mar- shall, TX, not in Dallas, TX. Mr. MARTINEZ. They would have at least some feeling of confi- dence that something is being done if they were more aware of it in the local area. Let me ask you this question. Now, you are all dependent on the FBI to do your investigations. Don't you have any in-house, in the U.S. attorney's office, investigative ability because you don't have the staff or personnel? Mr. WORTHAM. In the last allocations, I got one and I don't know-I got one investigative position to work on bank frauds. I don't know what Marvin got. Mr. COLLINS. I received two accountants and I am filling those positions with financial investigators who can supplement what is going on with regard to the FBI. Now, also, we, in the northern dis- trict of Texas, we have the IRS-CID heavily involved, also. Mr. MARTINEZ. I understand that we have to do something about those situations that exist now expeditiously in order to create any kind of a deterrent. I understand that there are a lot of people to blame for what has happened. Mr. Wortham mentioned that the bad economy and the kinds of things that happened in Texas as an area caused a lot of the less than proper kinds of actions by some of these savings and loans to be exposed, but the Federal Govern- ment surely had a role in the deregulation allowing that outside PAGENO="0190" 186 money to come in and create those insecure and unstable kinds of situations. I am going to say something that may be crazy and you say if you disagree. You wouldn't need the resources to prosecute if, let's say, the regulators and the examiners had done a better job of scrutinizing. Let me qualify that by saying it is my own personal opinion that accountability comes about as a result of close and careful scrutiny. I don't think these institutions were scrutinized to the extent that they should have been as they were conducting their business. Now, I know that some of the easier crimes are simple to identi- fy. As Mr. Arnold said, if the clerk that takes $10,000, then certain- ly the bank president or the manager is going to right away identi- fy that individual and want immediate prosecution as to deter within the bank. But he may be the same person that is a part of that $10 million loan that is going bad and he is not really going to do anything about that. The indication here is that that is kind of hard to determine. So let me ask you this: How much of the total fraud and criminal investigations that have taken place have centered around overap- praisals of property where people who are on the inside actually intended to defraud? Maybe they didn't intend to defraud, but they figured, hey, here is a way, if we overappraise the value of this property, extend the loan as high as we can, we can walk off with beaucoup dollars. Mr. WORTHAM. I think that that happens quite frequently and I think we have discovered that sometimes the officers of the bank have instructed the clients to do that and have actually participat- ed, but let me say this to the defense of the bank examiners. The bankers that are doing this are very, very intelligent. I mean, they are not your average run-of-the-mill people, and they know how to put these packages together to deceive the bank examiners. It is hard to really fault them for not knowing and understand- ing. If they go into audit and they tell them that they have checked up on the financial statement and everything is there, unless they go very narrow and very deep into an investigation, they are not going to uncover it. But I will say this, when they-over the last 5 years, when they have seen an irregularity, if they had called it to our attention, maybe we could have gotten out some grand jury subpoenas that would have assisted us to keep the problem from growing as large as it did. But to their defense, most of this conduct, until you do a detailed audit, and you may have to trace this money through two to three different institutions before you can find out that it was a bad loan and you may not even realize until you have gone very deep. You have to trace the money all the way back to the origin and it is not really as simplistic a system as it might seem to be. Mr. MARTINEZ. Are you saying that our hands are tied? That there is no system you can put in place that would help? Let's say, on the basis that Mr. Collins had referred to aggravated suspicions, that if more of those had been reported, that you might have been able to act, as you just described, which I agree with. Mr. WORTHAM. If the savings and loan regulators, if the bank regulators could have their internal restrictions removed to where PAGENO="0191" 187 they could have a more free flow of information to our offices, to Mr. Collins' office, to my office, to Mr. Arnold's office, I think that we could prevent a lot of problems from growing to what they are, but to their defense, many of these frauds are done so well and so sophisticated that if we were to require them to do the inspection to the level that it would take to detect it, there would be so much Government control and so much Government involvement in the banking system, I don't know if the banking system could exist. But when these strong suspicions come forward, if they could only. come to us then, I think we could resolve a lot of the problems and minimize a lot of the damages. Mr. MARTINEZ. Thank you. I have no further questions. Mr. BARNARD. Thank you. Mr. Bustamante. Mr. BUSTAMANTE. Thank you, Mr. Chairman. Mr. Wortham, you are correct in that when we had the hearing in California, one of the problems that we encountered was two in- dividuals getting a couple of S&L's and borrowing on the same piece of property sometimes, but not only that, they would borrow, say, like, for example, $15 or $20 million. They put $5 million in the savings and loan to cover their monthly payments. The loan was at 12- or 14-percent interest and the examiner would come in and look at that loan and it was a good loan, every month the pay- ments were there, the interest was great, but at the end of 3 or 4 or 5 years of time, this money was exhausted and then the loan became a bad loan, and they moved some of this money to Dallas, TX, to Corpus Christi, TX, to Houston, TX, in different investment areas. They took-these two individuals that we were looking at-took about $300 million from two S&L's. So it is really tough, especially when you don't have the bank examiners. I believe we are some- where in the range of about 500 bank examiners short from what I understand are-those are some of the figures that have been thrown around that I have seen. Let me ask you, to each one of you, what is the time for resolu- tion of most of these cases that come before you? Mr. WORTHAM. The cases are different as children. I have taken a case and resolved it myself within-I mean, the man being sen- tenced within 60 days of the case being brought to our attention and there are cases that take 5 years. I don't think-unless Marvin can come up with a formula better than I-there is probably a cor- relation between when you discover it and how complicated the scheme is. Mr. COLLINS. I would say that if you are talking about the aver- age complex scheme, our experience has been that from the time we actually get the referral or the series of referrals and have the resources to begin working and actually begin work, it can be about 8 months at the minimum to about 2 years at the maximum. That is what I would describe as the average complex scheme where we are trying to put back together all of the transactions necessary to make a criminal case. PAGENO="0192" 188 As I said before, we don't try to put back together the whole scheme. Otherwise, we would be buried alive in individual cases that we would never finish. But I would say, generally, if you are looking at midlevel and upper level people, 8 months to 2 years once we start. Mr. ARNOLD. Our office would be similar to the northern district of Texas. If we assigned attorney manpower at the outset of the in- vestigation, we should be able to have the-in most cases, the matter under indictment in 18 months. If, on the other hand, we wait for the full prosecutive report, add whatever time it takes that investigation-it might take a year, it might take 18 months-add another 8 months to 18 months before it is brought before the court. Mr. BUSTAMANTE. I noticed that in our area of San Antonio, it takes about an average of 48 months. This is what they cite as the time for resolution. Of course-- Mr. ARNOLD. That may well be from the time that it is referred to the FBI for investigation and you don't assign attorney manpow- er to it. Let's say it takes 18 months before it comes to the U.S. attorney and then an additional period of time and then the time awaiting trial and the time awaiting sentences, it could well take 4 years. Mr. BUSTAMANTE. Mr. Collins, in Dallas, it is 60 months. This is what I have here. Of course, it might be exaggerated, I don't know. Mr. COLLINS. First, let me say, don't confuse a referral with a case because many of these referrals are not cases and never will be. Many of these referrals may constitute one case; and my answer also is based on the premise that we have the manpower in place to begin working. Once we have the manpower in place and begin working, I think it takes about 8 months to 2 years to work the average complex scheme. But I admit that there are matters sitting among the 7 million documents that we have in the Bank Fraud Task Force in Dallas that have been sitting there for 2 years and nobody has worked them yet because we haven't had the resources to get to them. We will now have those resources and once they are in place and they begin working, that-- Mr. BUSTAMANTE. So you have all of your resources in place in the Dallas area? Mr. COLLINS. The resources on the prosecution side in the U.S. attorney's office will be in place by June. We-- Mr. BUSTAMANTE. That is where your complementary areas also-your other jurisdictions, the FBI and the IRS people and your accountants or your professional, technical people? Mr. COLLINS. I can speak for the U.S. attorney's office with some definition because I know exactly what is happening there and when they are coming on. I can say we have a number of the people on board and each month, we have more coming on board. By June, we will have all our people on board in the U.S. attor- ney's office. I am not sure about the FBI. Now, the IRS has their people there. They are dedicated, they are present, they are working. PAGENO="0193" 189 They are not getting any additional resources, but they are there and working. If I were estimating, though, my estimate would be that the Bank Fraud Task Force in Dallas will reach its peak size sometime around September 1. I think that is when most of the transfers from the FBI will have been made. All the prosecutors will be there. I think we will hit whatever our peak size is going to be at that point and then that will continue for several years. Mr. BUSTAMANTE. What about you, Mr. Wortham? Mr. WORTHAM. I would say that-- Mr. BUSTAMANTE. It depends on when you get help? Mr. WORTHAM. Right. I have-I received three attorney positions. Two of them are on board now. I have one that is waiting for ap- proval from DOJ, which is the normal procedure, and I expect him by the end of the month. So I will have my. attorneys in place, hopefully before this month is over and I will just be waiting for whatever resources I will receive from the FBI. Mr. BUSTAMANTE. On the FBI, let me ask you, it takes 2½ hours to get to~ probably some of the areas in the eastern area, you know, Texarkana and some of those other-- Mr. WORTHAM. It takes more than 2½ to get to Texarkana. It takes 2½ to get to Tyler from Dallas. Mr. BUSTAMANTE. They don't like to spend the night there? Mr. WORTHAM. Sometimes they do, sometimes they don't. Mr. BUSTAMANTE. It takes about 5 hours to go back and forth-- Mr. WORTHAM. Right. Mr. BUSTAMANTE [continuing]. Or 6 or 7 hours-- Mr. WORTHAM. Correct. Mr. BUSTAMANTE [continuing]. So that is their whole day. Unless you get somebody assigned to that area, you are not ever going to get any work done. Mr. WORTHAM. Let me tell you that there has to be a relation- ship between that prosecutor and that agent. When my prosecutor needs some information and the information and the FBI files are in Dallas, it doesn't do us a whole lot of good. Mr. BUSTAMANTE. When you send your people over there, what happens? Mr. WORTHAM. To Dallas? Mr. BUSTAMANTE. Yes. Mr. WORTHAM. Mr. Sievert has made many trips to Dallas to work on cases before. It just takes a lot longer to do the work than if we had the people assigned and there is some reason why they want to keep everybody at home in Dallas and they don't want to send them out in the field. I don't understand. Tyler is a nice place to live. Mr. BUSTAMANTE. I know. They like the urban area better than the rural areas sometimes. Mr. WORTHAM. I don't think it is the agents. Mr. BUSTAMANTE. Mr. Arnold, do you have everybody just about in place? Mr. ARNOLD. In terms of the resources originally allocated, they are all in place. We were given an additional attorney and account- ant. That attorney will be on place-he starts 2 weeks from now 30-830 0-90-7 PAGENO="0194" 190 and in terms of the accountant, that is taking us a little longer to fill. We didn't necessarily expect that. In terms of the FBI, I would expect, like Mr. Collins said, that those agents won't be up to full speed until about the first of Sep- tember because of their transfer policies. Mr. BUSTAMANTE. I have one more question. Let me ask you, Mr. Collins, in reference to the professionals convicted, you have 15 of them. Who were the others? Out of 102 in your chart that you gave us, were they contractors or field workers or what do you mean by--- Mr. COLLINS. Yes. In the 1-30 Task Force, which is separate and apart from the Dallas Bank Fraud Task Force, we convicted one medical doctor, one chiropractor, two lawyers, four CPA's, one ap- praiser, five bankers, and one stockbroker. I am not aware that any other professionals in that particular scheme have been convicted. Mr. BUSTAMANTE. Then who were the other people? You know, you said 102 were convicted. Were they just people-- Mr. COLLINS. I am sorry. First, let me say that you can get some feel for that simply by looking in the report that I supplied to the committee, beginning on page 20, and some of those are summa- rized, certainly not all of them. If I were to characterize the 1-30 defendants who have been convicted, I would say they go all the way from the borrowers at the bottom of the scheme or the base of the pyramid all the way to the upper people. The idea there was to start with the smaller people, work our way toward the top and so forth. So, if you compare the average level of the offender in the 1-30 case, for example, with those in the Dallas Bank Fraud Task Force, what you would find is, on the average, the offenders in the 1-30 statistics are smaller offenders because we did not select out just the bigger people to prosecute. We tried to prosecute as many people as we could all the way up and down the scheme. With the bank fraud task force, because of the limited resources and the statute of limitations which was pushing us and the size of the problem, we tried to pick out the larger people to prosecute. So, on the average, the Dallas Bank Fraud Task Force has more midlevel and upper level people being prosecuted. Mr. BUSTAMANTE. Thank you, Mr. Chairman. Mr. BARNARD. Gentlemen, thank you very much for your testi- mony this morning and your contribution to this hearing. We will be continuing this particular line of testimony or dialog with other U.S. attorneys throughout the country where there has been a pre- dominance of white-collar crime, but it has been very helpful to have your testimony this morning. Very possibly, there will be additional questions that will come to the minds of the committee, the staff, or some of the members who are not present this morning, so if you would be available for questions in writing, we would appreciate it very much. Mr. Cor~uNs. Thank you, Mr. Chairman, for your interest and that of the subcommittee. Mr. BARNARD. Our next witness this morning is going to be an old friend of ours, going back many years-I notice he didn't get any older. PAGENO="0195" 191 We have with us this morning, Mr. Oliver Revell, who is the As- sociate Deputy Director of the Federal Bureau of Investigation. He is accompanied by his very able Chief of the Financial Crimes Unit, who we have seen across the country from one coast to the other, Mr. Anthony Adamski. Let me say we welcome both of you gentlemen here this morning and your testimony-I have already read it-is going to be very helpful to us, and I think it is going to call into question the belief that we are sitting on our hands doing nothing, letting people get by with the tremendous crimes of defrauding and causing a failure of banks, savings and loans, and credit unions across the country and that we are not doing anything about it. I know we are. I still believe we can do more, but at the same time I hope that you will agree with me that we do have an obligation to get the message across that the public can at least know that we are not just letting criminals get by with nothing. So we welcome you this morning to these hearings and, with that, Mr. Revell, we will hear you first. STATEMENT OF OLIVER "BUCK" REVELL, ASSOCIATE DEPUTY DIRECTOR, FEDERAL BUREAU OF INVESTIGATION, ACCOMPA- NIED BY ANTHONY J. ADAMSKI, JR., CHIEF, FINANCIAL CRIMES UNIT Mr. REVELL. Thank you, Mr. Chairman. I agree with you, a lot is being done, and thanks to this committee, more will be done in the very near future. When I last had the opportunity to testify before this subcommit- tee in November 1987, I reported to you that the FBI, at that time, had 282 financial institutions that had failed and were under inves- tigation for criminal activity within those institutions. Since that time, the number of FBI investigations into failed financial institu- tions has risen substantially. There were 357 in February 1988, 404 in February 1989, and 530 at the end of February this year. Prior to 1990, the data submitted to FBI headquarters did not categorize the type of failed financial institution being investigated. They were lumped together as financial institutions. We have re- cently revamped specifically, at the request of this subcommittee, as well as for our own management purposes, many of our proce- dures in handling financial institution failures and embezzlement matters, and particularly the reporting of information on them. As a result, I can now say that of the 530 failed financial institu- tions currently under investigation by the FBI, 276 are banks, 234 are savings and loans, and 20 are credit unions. When I last provided testimony, I reported that as of September 30, 1986, the number of pending bank fraud and embezzlement cases with losses of in excess of $100,000 was 2,948. At the request of this committee recently, we have determined that at the present time, we have 3,027 investigative matters in excess of $100,000. This was as of February 22, 1990. I can also tell you that 654 of these cases are savings and loans, 2,278 are banks, 95 are credit unions. While this appears to be little change in the number of cases with losses over $100,000 since PAGENO="0196" 192 1988-I am sorry, since 1987-this does not include the 530 finan- cial institution failures that our old data collection process includ- ed. So the total would now be 3,557 in the excess of $100,000 catego- ry. Mr. BARNARD. Mr. Revell, since it is just the two of us here, we will probably interrupt from time to time if you don't have any problem with that. So, in other words, the total now is up to 3,5-- Mr. REVELL. Fifty-seven. If you add the institution failures plus those cases over $100,000 where the institution has not failed. Mr. BARNARD. 3,557, and that would include the cases that have developed from the 530 financial institution failures which you have added to your list. Mr. REVELL. Yes, sir. Mr. BARNARD. Thank you. Mr. REVELL. To give you the same statistical comparison. Mr. BARNARD. Sure. Mr. REVELL. So even though financial institution failures have increased significantly since 1987, and investigations of matters where losses exceed $100,000 have remained fairly constant, we have indeed achieved some measure of success. In 1987, the FBI conducted investigations which resulted in 740 convictions and/or pretrial diversions in cases with losses in excess of $100,000. In 1988, there were 751; in 1989, 791; and the total number of financial fraud convictions and pretrial diversions has dropped slightly in fiscal year 1987 to 2,197 in 1988 and 2,174 in 1989. Now, the reason for this is that we have put more emphasis and there have been more convictions in the larger loss cases. We have prioritized because of the limitation of resources. So the increased convictions in the higher category indicates the effort that has gone into that process. I think it is interesting to note that in 1987, court-ordered resti- tutions were $123 million. In 1988, they rose to $174 million and in 1989, they were $361 million, double what they were only in 1987. Since 1986, the FBI has fully utilized its budgeted resources in the white-collar crime program. As I told you that last time I was here, Mr. Chairman, we had to divert from a number of programs beginning in 1982 and 1983 for our drug effort. White-collar crime provided some of those resources, but beginning in 1985 and in 1986, we reallocated from other programs to get back up to where we needed to be in white-collar crime. As of now, we are not only fully utilizing; we are, in fact, overutilizing resources in this area as to those appropriated from the Congress. Mr. BARNARD. May I ask you a question at that point? Mr. REVELL. Yes, sir. Mr. BARNARD. Information that has come to my attention indi- cates that you do have a priority system at the FBI, as you have stated. Mr. REVELL. That is correct. Mr. BARNARD. As I understand it, the priority for fraud and em- bezzlement is at a priority of 10. Is that correct? Mr. REVELL. Priority of 10? No, sir. PAGENO="0197" 193 Mr. BARNARD. I was advised that the FBI had placed financial institutions, fraud, and embezzlement cases in 10th priority in terms of setting up a system to retrieve data on these cases from the FBI's field office management system. Mr. REVELL. OK, that has nothing to do with resources. Our FOIMS system, field office information management system, is a baseline system, but connected to all of our field offices and to our headquarters for administrative information. Much of what was in the base system gave us what we needed for bank fraud and embez- zlement. The enhancements were 10th in priority and that was simply be- cause we also have foreign counterintelligence, terrorism, and drugs, but the baseline information was in the system that was put in place and is now fully operational as of 1988, I believe November 1988, so it has nothing to do with the investigative priority. In 1987, the FBI utilized 356 direct agent work years. That is an accounting formula and the committee is familiar with that, but what it essentially means is one agent full time for 1 year with the associated costs. We used in that year 356 agent work years to in- vestigate bank fraud and embezzlement. In 1989, this number has increased to 397. With the resources being brought on board this year, we will be up to 600 because we have 200 additional-150 by new appropriations and 50 repro- grammed from other FBI activities, so we will be up to 600 by the end of this year. Mr. HASTERT. Would~ the gentleman yield for a second. Mr. REVELL. Yes. Mr. HASTERT. You said that you have only had 50 new FBI agents appropriated, right, because of this issue? Mr. REVELL. 150, sir. Mr. HASTERT. I am sorry, 150-- Mr. REVELL. Yes, sir. Mr. HASTERT [continuing]. And you have-- Mr. REVELL [continuing]. Reprogrammed 50 more. Mr. HASTERT. Where did those guys come from? Mr. REVELL. They came from other white-collar crime activities, governmental fraud, other types of financial crime, and public cor- ruptions. Mr. HASTERT. In your estimate-obviously, you needed to bring in another 50, SO you have 200 new people focused on that. In your estimate, what do you need? Mr. REVELL. We have asked for about-since 1987, 1,100 agents through the process. Based on the amount of work we have in the field right now, we could not hire 1,100 agents over a short term. That would be a long-term period, so we have asked for those. Some of those would be repetitive. In other words, what we asked for in 1987, we didn't get, so we asked for them in 1988 and so forth. I would say that our request for this particular initiative was in the area of-between the FIRREA and the regular appropriation process, we had asked for approximately 400 agents. Of that, we have received 150 and we have reallocated 50. Mr. HASTERT. So some of the problems we have heard here this morning, there is a reason. You just haven't got the agents. PAGENO="0198" 194 Mr. REVELL. I would like to have all the agents that the U.S. at- torney in Beaumont needs because, obviously, we have cases throughout the country-I think we have something like 21,000 matters referred that we do not have personnel to immediately in- vestigate. Mr. HASTERT. Let me just ask one other question and then I will let you go on. The 50 people that you have diverted from other white-collar crime, is that because there has been a dropoff in that white-collar crime or this is a higher priority? Mr. REVELL. Priority, prioritization. No, there has been no drop- off. We are robbing Peter to pay Paul. Right now, Paul is in the worst shape, so we just go where we have to go. Mr. HASTERT. I appreciate that. Thank you, Mr. Chairman. Mr. BARNARD. Yes, sir. Mr. REvELL. So I said, by the end of this fiscal year, we will have 600 agents and 100 accounting technicians working on bank fraud and embezzlement across the country. By the way, 73 of those 200 are going to Texas, 35 percent. So while Beaumont and Tyler may not have the exact number that Mr. Wortham wants, the State of Texas has gotten 35 percent of the `total resources for the country as far as enhancements and that is because they have the problem. There is no doubt that the savings and loan and the bank cases in Texas are the most signifi- cant in the country. Mr. BARNARD. I don't think they will have any trouble finding a place to live. Mr. REVELL. No, sir, and I think a lot of them would like to live in Tyler, too. Mr. BARNARD. I think there is adequate housing in Texas to take care of them. Mr. REVELL. The Government owns most of those houses, I think. Mr. BARNARD. That is what I have said; it is going to be at less cost to the Government. They can just let them move in? Mr. REvi~ir~. That is right. As you know, sir, this past August, the President signed the Fed- eral Institutions Reform, Recovery, and Enforcement Act of 1989, FIRREA. This legislation provided new tools to assist in the investi- gation and prosecution of financial institution fraud. Included in FIRREA were provisions to lengthen the statute of limitations and the U.S. attorney, Marvin Collins, has talked about how that al- lowed us to stretch out some of the work because of the cases that were being given priority were not necessarily because of the activ- ity, but because of the statute of limitations, so that has helped us in `prioritizing on a more realistic basis. Increases in fines and other penalties were also included. Liber- alization of certain aspects of the Right to Financial Privacy Act, one of the matters that I testified to you last time that gave us great problems. Penalties for disclosure of requests for information under the act were also included. In 1989, Congress provided the funding for FIRREA and for the FBI, this translated into funding for 153 agent positions. I will skip over this since we have already covered it and you know we will now have a total of 202 additional agents to the 400, so a total of PAGENO="0199" 195 602. So the 202 new agents are reallocated to the 400 and we will be running at about 600 in this program by August 1990. We plan that one-half of these 153 FIRREA-funded special agents will be transferred to offices that have been allocated, the 27 offices that have been allocated additional resources. The other one-half will be used to backfill agents going into those offices, but all of the 200 positions will be going into the 27 designated. Half will be new agents, half will be experienced agents from other field offices. Our efforts to date to stem the tide of financial fraud have met with some success. The Dallas task force has received significant attention. Marvin Collins has testified to that this morning. I be- lieve it is remarkable that in the approximately 2½ years of its ex- istence, their efforts have resulted in criminal charges being placed against 62 people and convictions have been obtained against 46. Many of those held ownership or executive-level positions in failed financial institutions and savings and loans in Texas. Considering the fact that in the past an average financial fraud investigation took from 1 to 4 years, the achievements of this task force are significant and a fine example of the cooperative efforts between the Department of Justice, particularly the Fraud Section, U.S. attorneys offices, the Federal Home Loan Bank Board, and the Internal Revenue Service, as well as, of course, the FBI. Mr. Chairman, I cite in my testimony about four cases and since you have the statement and since time is so short, if you would like, I will just skip over those cases. Mr. BARNARD. Fine. Mr. REVELL. They do give examples of work being done by the younger agents that we are bringing on board and some of the unique difficulties they are having to overcome and the fine job that they are doing, but in view of the time situation, I will skip over those. These cases-- Mr. BARNARD. You did comment about the task force. Are you talking about the task force that was set up during the period of Attorney General Meese's reign as Attorney General? Mr. REVELL. We have had two task forces in Dallas-- Mr. BARNARD. I mean, wasn't there a general task force set up by Attorney General Meese which came about right after our 1984 report on insider abuse? Mr. REVELL. In 1984, I raised with the Attorney General's Eco- nomic Crime Council concern over two areas of white-collar crime that I thought were being inadequately addressed. We had a meet- ing in Chicago. One was Defense Department fraud, that there were many prob- lems in the Defense Department procurement process, that we were seeing cases that were atrophying and that we were not giving proper attention to from either an investigative or prosecu- tive and so forth. The second area that I mentioned to the Attorney General's Eco- nomic Crime Council, of which I am a part, was in the area of bank fraud and embezzlement. I suggested and recommended that the * Attorney General give emphasis through his council to this pro- gram. PAGENO="0200" 196 I also brought up the problems we were having with the over- sight institutions, with the FDIC, FHLBB, the Comptroller of the Currency and so forth because of their interpretation of the Right to Financial Privacy Act and so forth and that we were not getting the referrals, we were not getting the support, we were not getting the cooperation because of their perceived adherence to regulations in law. Out of that, Attorney General William French Smith set up the Attorney Generals Interagency Bank Fraud Enforcement Working Group in Washington to address these issues. Not too long after that, we set up a task force in Knoxville to deal with the Butcher banks, in Oklahoma to deal with the Penn Square and the cases that spun out of that; in Midland, Odessa, to deal with the banks in the Permian Basin and in Dallas, we set up what we called the TEXCON, what Mr. Collins has called the 1-30 cases, to deal with the multiplicity of bank frauds that were occurring. Failures hadn't started at this time. These were just fraudulent cases that were coming to light. The failures started later, 1987, 1988, and of course, going on to the current time. So we have had a number of task forces set up around the coun- try since 1985 to deal with these problems and we have tried to benefit from the experience of each of these in setting up our re- sources under FIRREA Mr. BARNARD. Let me just comment on that. I think that that was one of the finest forward steps to correct this problem, because the reports that our committee developed even before then shows that there was a lack of working together among the agencies. There was some confusion as to who had the jurisdiction, and to bring together the attorneys from the Justice Department, the FBI, the FDIC, and the other regulators was a big step forward in trying to educate them, to assist you all in developing the evidence for the trial. So I think that has proven to be a good decision and I am glad to see that you are carrying that forward in these other areas of the country. Mr. REVELL. Mr. Chairman, it was absolutely essential if we were going to get a handle on this. We found that some of the regulators believe that they should not report indications of possible criminal- ity because to do so might make the bank fail. So, essentially, there were built-in constraints because they did not want to cause there to be a failure of an institution unless there was specific evidence of a crime. Now, I am not saying that any of them withheld specific evidence, but these so-called, these inferences that there might be problems that we now get on referrals were not forthcoming at that time and there were reasons for it because of their own par- ticular responsibilities and philosophies. Let me see what more I can skip over here to get down to the- you have just talked about the Attorney General's Bank Fraud En- forcement Working Group, so I won't go back over that. It has been successful. We have resolved most of the problems with the assist- ance of the FIRREA statute, improvements in the Right to Finan- cial Privacy Act, as well as the criminal penalties for disclosure of subpoenas. I think those issues are being worked very well. PAGENO="0201" 197 I think the major benefit of this working group has been-since it was formed in 1984-has been the ability to directly enhance communication between member agencies at the senior level to deal not only with particular cases, but with particular policy issues. As you know, the FBI, in cØnjunction with the bank supervi- sory agencies, puts on several training sessions a year for bank ex- aminers, assistant U.S. attorneys, FBI, and other investigative agencies. This training specifically focuses on financial institution failures and fraud. The joint training has created a better understanding of each component's role in financial fraud investigations. This input has resulted in major procedural changes in financial institution fraud matters within the FBI and with the U.S. attorney's offices. One of the things that we have frequently heard from the super- visory agencies is that we did not provide adequate feedback to the supervisory agencies on the disposition of their referrals. We have now instituted procedures that will provide a response to the bank supervisory agencies and the U.S. attorney's offices advising them of the general disposition of the referral. This will allow us to know the number of referrals made to the FBI, as well as to provide the bank supervisory agencies with a specific title and file number for reference purposes in future correspondence. This will also allow more precise retrieval of information from our field office information management system, the FOIMS system. We have also changed our data collections so that we can identi- fy by category of bank, thrift institution, or credit unions on which we are conducting a criminal investigation. We can provide to you in your oversight capacity much more specific data in this process. In the next few months, we will have a system to provide addi- tional data as to the number of persons convicted, whether or not they were directors or officers, insiders, outsiders, the amount of the estimated loss, and cases in which prosecution was declined and/or acquittals. This information will be captured by the financial institution cat- egories that I previously mentioned. While I think that the FBI, with the assistance of the Depart- ment of Justice and various U.S. attorneys, the bank supervisory agencies, and other Federal and local law enforcement, together, we have made great strides in combating financial institution fraud and failure. The problem is not solved, nor do we anticipate that it will be solved in the near future. Even with the resources by FIRREA, there is still a monumental amount of work to be done. Although interagency cooperation and task force investigations have increased with positive results, these complex investigations will still take substantial time to complete and on an individual- case basis, they may be, in fact, very lengthy. We do appreciate the resources that have been given, the support that has been given and, Mr. Chairman, we will continue to do the very best job we can with what we have been given and provided. Attached to my statement are several charts that I thought might graphically display some of the information that we have PAGENO="0202" 198 talked about this morning and with that, Mr. Adamski and I are ready to answer any questions you might have. [The prepared statement o1 Mr. Revell and submissions to addi- tional questions follow:] II / PAGENO="0203" 199 TESTII1W~Y OF OLIVER B. REVELL FEDERAL BUREAU OF INVESTIGATION BEFORE THE UNITED STATES HOUSE OF REPRESENTATIVES SUBCOI1MITTEE ON COI1MERCE CONSU1'1ER~ AND MONETARY AFFAIRS WASHINGTON, D.C. MARCH 14, 1990 PAGENO="0204" 200 MR. CHAIRMAN, WHEN I LAST HAD THE OPPORTUNITY TO TESTIFY BEFORE THIS SUBCOMMITTEE IN NOVEMBER OF 1987, I REPORTED TO YOU THAT THE FBI HAD 282 FINANCIAL INSTITUTiON FAILURES UNDER INVESTIGATION. SINCE THAT TIME, THE NUMBER OF FBI INVESTIGATIONS INTO FAILED FINANCIAL INSTITUTIONS HAS RISEN SUBSTANTIALLY. THERE WERE 357 IN FEBRUARY OF 1988, 404 IN FEBRUARY 1989, AND 530 AT THE END OF FEBRUARY 1990. PRiOR TO 1990, DATA SUBMITTED TO FBI HEADQUARTERS DID NOT CATEGORIZE THE TYPE OF FAILED FINANCIAL INSTITUTION BEING INVESTiGATED. WE HAVE RECENTLY REVAMPED MANY OF OUR PROCEDURES IN HANDLING FINANCIAL INSTITUTION FAILURES AND EMBEZZLEMENT MATTERS. THIS IS DUE IN PART TO THE FINDINGS AND RECOMMENDATIUNS OF THIS SUBCOMMITTEE DURING PAST HEARINGS ON THIS ISSUE. AS A RESULT, I CAN NOW SAY THAT OF THE 530 FAILED FINANCIAL INSTITUTIONS CURRENTLY UNDER INVESTIGATIUN BY THE FBI, 276 ARE BANKS, 234 ARE SAVINGS AND LOAN INSTITUTIONS, AND 20 ARE CREDIT UNIONS. WHEN I LAST PROViDED TESTIMONY BEFORE THIS SUBCOMMITTEE, I REPORTED THAT AS OF SEPTEMBER 3U, 1986, THE NUMBER OF PENDING BANK FRAUD AND EMBEZZLEMENT CASES WITH LOSSES IN EXCESS OF 100,000 WAS 2,948. AS OF SEPTEMBER 30, 1987, THIS NUMBER HAD RISEN TO ~,393. IN SEPTEMBER 1988, THE NUMBER WAS 3,446, AND IN SEPTEMBER OF 1989, THERE WERE 3,605. AS A RESULT OF A REQUEST FOR INFORMATION FROM THIS SUBCOMMITTEE, WE HAVE DETERMINED THAT THERE ARE 3,027 INVESTIGATIVE flATTERS WITH LOSSES IN EXCESS OF 100,000 UNDER INVESTIGATION BY THE FBI AS OF FEBRUARY 22, 1990. I CAN NOW TELL YOU THAT 654 OF THESE CASES ARE SAVINGS AND LOAN INSTITUTIONS, 2,278 ARE BANKS AND 95 ARE PAGENO="0205" 201 CREDIT UNIONS. WHILE THIS APPEARS TO BE A DRAMATIC DECREASE IN CASES WITH LOSSES OVER 100,000, THIS NUMBER DOES NOT INCLUDE THE 530 FINANCIAL INSTiTUTIOt~ FAILURES THAT, IN OUR OLD DATA COLLECTION PROCESS, WOULD HAVE BEEN INCLUDED IN THIS NUMBER. EVEN THOUGH FINANCIAL INSTITUTION FAILURES HAVE INCREASED SIGNIFICANTLY SINCE 1987, AND INVESTIGATIONS IN MATTERS WHERE LOSSES EXCEED 100,000 HAVE REMAINED FAIRLY CONSTANT, WE HAVE ACHIEVED SOME MEASURE OF SUCCESS. IN 1987, THE FBI CONDUCTED INVESTIGATION$ WHICH RESULTED IN 7140 CONVICTIONS AND PRETRIAL DIVERSIONS IN CASES WHERE LOSSES EXCEEDED 100,000. IN 1988, THERE WERE 751, AND IN 1989, 791. THE TOTAL NUMBER OF FINANCIAL INSTITUTiON FRAUD CONVICTiONS AND PRETRIAL DIVERSIONS HAS DROPPED SLIGHTLY FROM 2,309 IN FISCAL YEAR 1987, TO 2,1971W 1988, AND 2,1714 IN 1989. CONVICTIONS, HOWEVER, HAVE INCREASED IN THE MORE SERIOUS CATEGORIES. IT IS INTERESTING TO NOTE THAT IN 1987 COURT-ORDERED RESTITUTIONS WERE 123.2 MILLION. IN 1988, THEY ROSE TO 1714.3 MiLLION, AND IN 1989 THEY WERE 361.5 MILLION. SINCE 1986, THE FBI HAS FULLY UTILIZED ITS BUDGETED RESOURCES IN THE WHITE-COLLAR CRIME PROGRAM. IN 1987, THE FBI USED 356 DIRECT AGENT WORK YEARS (DAWYS) TO INVESTIGATE BANK FRAUD AND EMBEZZLEMENT MATTERS. IN 1988, THIS NUMBER GREW TO 379 DAWYS, AND IN 1989 IT INCREASED AGAIN TO 397 DAWY. THIS PAST AUGUST, THE PRESIDENT SIGNED THE FINANCIAL iNSTITUTiONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF 1989 (FIRREA). THIS LEGiSLATION PROViDED NEW TOOLS TO ASSIST IN THE INVESTIGATION AND PROSECUTION OF FINANCIAL INSTITUTiON FRAUD. -2- PAGENO="0206" 202 INCLUDED WERE A LENGTHENED STATUTE OF LIMITATIONS, iNCREASES IN FINES A~D OTHER PENALTIES, LIBERALIZATiON OF CERTAIN ASPECTS OF ~HE RIGHT TO FINANCIAL PRIVACY ACT, AND PENALTIES FOR DISCLOSURE OF REQUESTS FOR INFORMATION UNDER THIS ACT. iN DECEMBER 1989, CONGRESS PROVIDED FUNDING FOR FIRREA. FOR THE FBI THIS TRANSLATED INTO FUNDING FOR AN ADDITIONAL 153 SPECIAL AGENTS AND 100 ACCOUNTING TECHNICIANS TO ADDRESS FRAUD IN FINANCIAL INSTITUTIONS. IN ANTICIPATION OF FIRREA FUNDING, THE FBI ALLOCATED L~9 SPECIAL AGENTS TO OFFICES WITH AN ANTICIPATED NEED FOR FIRREA RESOURCES. THIS MEANS WHEN ALL OF THESE RESOURCES ARE IN PLACE THERE WILL BE A TOTAL OF 202 NEW SPECIAL AGENTS AND 100 ACCOUNTING TECHNICIANS ADDED TO THE APPROXIMATELY `400 SPECIAL AGENTS WE CURRENTLY HAVE DEDICATED TO FiNANCIAL FRAUD INVESTIGATIONS. WE ANTICIPATE THAT ALL OF THESE SPECIAL AGENTS WILL BE HIRED, TRAINED, AND IN PLACE BY AUGUST 1990. WE PLAN THAT ONE-HALF OF THESE 153 FIRREA-FUNDED SPECIAL AGENTS WILL BE TRANSFERRED TO OFFiCES ALLOCATED FIRREA RESOURCES. THE OTHER HALF OF THE FIRREA-FUNDED SPECIAL AGENTS WILL BE USED TO BACK FILL EXPERIENCED SPECIAL AGENTS, WHO WILL BE TRANSFERRED TO OFFICES GETTING FIRREA RESOURCES. OUR EFFORTS TO DATE TO STEM THE TiDE OF FINANCIAL FRAUD HAVE MET WITH SOME SUCCESS. THE DALLAS TASK FORCE HAS RECEIVED MUCH ATTENTION. I BELIEVE iT IS REMARKABLE THAT, IN THE APPROXIMATELY TWO AND ONE-HALF YEARS OF ITS EXISTENCE, THEIR EFFORTS HAVE RESULTED IN CRIMINAL CHARGES BEING PLACED AGAINST 62 PEOPLE AND THE CONVICTIONS OF `46 PEOPLE, MANY OF WHOM HELD OWNERSHIP OR EXECUTIVE LEVEL POSITIONS iN FAILED SAViNGS AND -3- PAGENO="0207" 203 LOANS IN TEXAS. CONSIDERiNG THE FACT THAT IN THE PAST AN AVERAGE FINANCIAL FRAUD INVESTIGATION TOOK FROM ONE TO FOUR YEARS, THE ACHIEVEMENTS OF THiS TASK FURCE ARE SIGNIFICANT. AND A FINE EXAMPLE OF THE COOPERATIVE EFFORT BETWEEN THE DEPARTMENT OF JUSTICE, THE UNITED STATES ATTORNEY'S OFFICE IN DALLAS, THE FEDERAL HOME LOAN BANK IN DALLAS, AND THE INTERNAL REVENUE SERVICE, AS WELL AS THE FBI. THERE ARE SEVERAL INVESTIGATIONS THAT MAY NOT HAVE BEEN BROUGHT TO THE SUBCOMMiTTEE'S ATTENTION, AND THEY HIGHLIGHT NUT ONLY SOME SUCCESSFUL RESULTS, BUT ALSO THE COMPLEXITY OF THESE INVESTIGATiONS. ONE IS THE IIJVESTIGAT1OW OF THE FAILURE OF THE GOLDEN Pi\CIFIC NATIONAL BANK. TWO AGENTS OF OUR NEW YORK OFFICE DETERMINED THAT THREE BAWK OFFICERS WERE iSSUING FRAUDULEHT CERTIFICATES OF DEPOSIT AND CONVERTING THE MONEY, OVER 17 MiLLION, TO THEIR 011W USE. THiS BANK HAD A PREDOM1HAIJTLY CHINESE CUSTOMER BASE WHO HAD TO BE INTERVIEWED IN CHINESE, AND FINANCIAL DOCUMENTS TRANSLATED FROM CHINESE TO BE USED iN COURT. A GREAT DEAL OF iNVESTIGATION WAS REQUESTED OF OUR LEGAL ATTACHES IN JAPAN AND HONG KONG TO IDENTiFY AND LOCATE WITNESSES IN TAIWAN AND CHINA. THIS INVESTIGATION RESULTED IN THE CONVICTION OF ALL THREE BANK OFFiCERS AND COURT-ORDERED RESTITUTION IN THE AMOUNT OF 114.8 MILLION. OUR NEW YORK AGENTS, WHO HANDLED THIS INVESTIGATION, WERE BOTH ACCOUNTANTS WITH APPROXIMATELY TWO YEARS OF FBI EXPERIENCE. NEITHER AGENT SPOKE CHiNESE. ANOTHER NEW YORK BANK FAILURE INVOLVED THE CENTRAL NATIONAL BANK OF NEW YORK. ONE OF OUR AGENTS, WHO IS A CERTIFiED PUBLIC ACCOUNTANT WITH ABOUT FOUR YEARS' EXPERIENCE IN THE FBI, PAGENO="0208" 204 TRACED THE DISAPPEARANCE OF .31.5 MILLION THROUGH REPURCHASE * AGREEMENTS OF 21 LATiN AMERICAN CUSTOMERS IN ARGENTINA. THIS INVESTIGATION REQUIRED SEVERAL TRIPS TO ARGENTINA BY THE AGENT AND THE ASSISTANT UNITED STATES ATTORNEY TO GATHER EVIDENCE FOR PROSECUTION IN THE UNITED STATES. THREE OFFICERS OF THE BANK WERE CONVICTED AND THE MAIN SUBJECT WAS SENTENCED TO SEVEN YEARS' INCARCERATION AND THREE YEARS' PROBATION. HE WAS ORDERED TO lAKE RESTITUTION OF 314.7 MILLION AND PAY 250,000 IN FINES. IN A FINANCIAL INSTITUTION FRAUD CASE INVOLVING THREE BANKS IN WYOMING AND THE LOSS OF 20 MILLION, AN AGENT WITH ABOUT ONE YEAR'S EXPERIENCE WAS ABLE TO EXAMINE AND CORRELATE DOCUMENTS FROM 20 FINANCIAL INSTITUTIONS AND HOLDING COMPANIES IN FIVE STATES RESULTING IN THE CONVICTIONS OF TWO SUBJECTS AND A GUILTY PLEA BY A THIRD SUBJECT. THIS AGENT WAS NUT AN ACCOUNTANT. HIS INVESTIGATION WAS MATERIALLY ASSISTED BY THE UNITED STATES ATTORHEY'S OFFICE IN THE DISTRICT OF WYOMING, AS WELL AS BY AN ATTORNEY ON LOAN FROM THE FRAUD SECTiON AT THE DEPARTMENT OF JUSTICE. I BRING THESE CASES TO YOUR ATTEtJT1ON BECAUSE 1 THiNK THEY DEMONSTRATE THE VARIED AND COMPLEX NATURE OF FINANCIAL FRAUD INVESTIGATIONS, AND THE FACT THAT AGENTS IN THE FBI WITH, RELATIVELY LITTLE EXPERIENCE AS FBI AGENTS, HAVE CLEARLY DEMONSTRATED THE ABILITY TO SUCCESSFULLY HANDLE THESE CASES. THESE CASES HAVE ALSO DEMONSTRATED ONCE AGAIN THE POSITIVE AND PRODUCTIVE ASPECTS OF MUTUAL COOPERATION BETWEEN THE DEPARTMENT OF JUSTICE, THE UNITED STATES ATTORNEY'S OFFICE AND BANK SUPERVISORY AGENCIES. -5- PAGENO="0209" 205 ON THAT NOTE I WOULD LIKE TO MENTION WHAT I BELIEVE TO BE THE VERY POSITIVEAND CONTINUING BENEFITS OF THE ATTORNEY GENERAL'S BANK FRAUD ENFORCEMENT WORKING GROUP. AS I'M SURE YOU'RE AWARE, THIS WORKING GROUP IS COMPRISED OF THE DEPARTMENT OF JUSTICE, INCLUDING THE FBI, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE RESOLUTION TRUST CORPORATION, THE FEDERAL RESERVE BOARD, THE OFFICE OF THE COMPTROLLER OF THE CURRENCY, THE OFFICE OF THRIFT SUPERVISION, THE NATIONAL CREDIT UNION ASSOCIATION AND THE FARM CREDIT ADMINISTRATION. WHILE SOME OF THESE ORGANIZATIONAL NAMES ARE NEW, THEIR REPRESENTATiVES WERE CHARTER MEMBERS OF THE WORKING GROUP WHICH HAS PROVIDED CONTINUITY. IN ADDITION, REPRESENTATiVES FROM THE DEPARTMENT OF THE TREASURY AND THE UNITED STATES SECRET SERVICE RECENTLY HAVE BEEN ADDED TO THE WORKiNG GROUP. IN MY VIEW THE MAJOR BENEFIT OF THiS WORKiNG GROUP IS, AND HAS BEEN SINCE iT WAS FORMED IN 198L1, ITS ABILITY TO DIRECTLY ENHANCE COMMUNICATION BETWEEN THE MEMBER AGENCIES AT A SENiOR HEADQUARTERS LEVEL TO QUICKLY RESOLVE PROBLEMS. THESE PROBLEMS MAY BE CASE SPECIFIC OR THOSE OF A POLICY NATURE, BUT THEY ARE DISCUSSED AND FOR THE MOST PART RESOLVED. AS YOU KNOW, THE FBI, IN CONJUNCTION WITH THE BANK SUPERViSORY AGENCIES, POTS ON SEVERAL TRAINING SESSIONS A YEAR FOR BANK EXAMINERS, ASSISTANT UNITED STATES ATTORNEYS, AND FBI AGENTS. THIS TRAINiNG SPECIFiCALLY FOCUSES ON FINANCIAL INSTITUTION FAILURES AND FRAUD. THE JOiNT TRAINING HAS CREATED A BETTER UNDERSTANDING OF EACH COMPONENT'S ROLE IN FINANCIAL FRAUD INVESTIGATIONS. THIS INPUT HAS RESULTED IN MAJOR PROCEDURAL CHANGES IN FINANCIAL iNSTITUTIONS FRAUD MATTERS FOR THE FBI. -6- PAGENO="0210" 206 ONE OF THE MORE FREQUENT COMPLAINTS DIRECTED AT THE FBI IN THE PAST WAS THAT WE DID NOT PROVIDE ANY FEEDBACK TO BANK SUPERVISORY AGENCIES AS TO THE DISPOSITION OF THEIR CRIMINAL REFERRALS. WE HAVE NOW INSTITUTED PROCEDURES THAT WILL PROVIDE A RESPUNSE TO BANK SUPERVISORY AGENCIES AND UNITED STATES ATTORNEYS' OFFICES ADVISING THEM OF THE GENERAL DISPOSITION OF THE REFERRAL. THIS WILL ALLOW US TO KNOW THE NUMBER OF REFERRALS lADE TO THE FBI, AND PROVIDE THE BANK SUPERVISORY AGENCY WITH A SPECIFIC TITLE AND FILE NUMBER THAT CAN BE REFERRED TO IN FUTURE CORRESPONDENCE. THIS WILL ALSO ALLOW MORE PRECISE RETRIEVAL OF INFORMATION FROM OUR FIELD OFFICE INFORMATION MANAGEMENT SYSTEM (FOIMS.. WE HAVE ALSO CHANGED OUR DATA COLLECTION SYSTEM SO 1HAT WE CAN IDENTIFY BY CATEGORY OF BANK, THRIFT INSTITUTION OR CREDIT UNION, FAILED FINANCiAL INSTITUTiONS ON WHICH WE ARE CONDUCTING CRIMINAL INVESTIGATIONS. IN A FEW MONTHS WE WILL HAVE A SYSTEM TO PROVIDE ADDITIONAL DATA AS TO THE NUMBER OF PERSONS CONVICTED, WHETHER OR tJOYTHEY WERE DIRECTORS OR OFFICERS, INSIDERS OR OUTSIDERS, THE AMOUNT OF ESTIMATED LOSS, AND CASES 1N WHICH PROSECUTION WAS DECLINED OR THERE WAS AN ACQUITTAL. THIS INFORMATION WILL BE CAPTURED BY THE FINANCiAL INSTITUTION CATEGORIES THAT I PREVIOUSL,Y MENTIONED. WHILE I THiNK THE FBi, WITH THE ASSISTANCE OF THE DEPARTMENT OF JUSTICE, VARIOUS UNITED STATES ATTORNEYS' OFFICES, BANK SUPERVISORY AGENCiES. AND OTHER FEDERAL AND LOCAL LAW ENFORCEMENT AGENCIES, HAS MADE GREAT STRIDES IN COMBATTING -7 PAGENO="0211" 207 FIHAWCIAL INSTITUTION FRAUD AND FAILURES, THE PROBLEM IS NOT SOLVED ~OR *DO WE ANTICIPATE THAT IT WILL BE SOLVED IN THE NEAR FUTURE. EVEN WITH THE RESOURCES PROVIDED BY FIRREA THERE IS STILL A MONUflENTAL AMOUNT OF WORK TO BE DONE. ALTHOUGH INTERAGENCY COOPERATION AND TASK FORCE INVESTIGATIONS HAVE INCREASED WITH POSITIVE RESULTS, THESE COMPLEX INVESTIGATiONS STILL TAKE SUBSTANTIAL TIME TO COMPLETE ON AN INDIVIDUAL CASE BASIS. WE APPRECIATE THE RESOURCES WE HAVE BEEN GIVEN, AND WILL CONTINUE TO DO THE BEST JOB WE CAN. - 8* - PAGENO="0212" NUMBER OF FAILED FINANCIAL INSTITUTIONS WITH ONGOING FBI INVESTIGATIONS BY YEAR 202 1 1986 357 L 530 1990 404 282 1989 1987 1988 PAGENO="0213" 209 ) `0 4 ) p 4 4 ) 4 4 ~C) 4fl4 N -~ PAGENO="0214" CATEGORIES OF FAILED FINANCIAL INSTITUTIONS AS OF FEBRUARY 1990 ~tii ~ ~ F II - C t BANKS CREDIT UNIONS THRIFTS PAGENO="0215" ~A\~fI~ ~UI~ \]~I~ ~ CONVICTIONS AND PRETRIAL DIVERSIONS (INCLUDES FELONIES, MISC., AND PTD) I, - 1985 1986 1987 FISCAL YEARS 1988 1989 PAGENO="0216" CONVICTIONS AND PRETRIAL DIVERSIONS CASES WITH LOSSES EXCEEDING 100,000+ 484. rI II I 198~ .1~7 SW~L V~AL~W PAGENO="0217" 213 Question A1(a). We are specifically requesting the following data, for each FBI division (and also the total) for F~s 1988, 1989, and the first quarter of 1990: a. N~bers of investigations: (i) The number of pending financial institution BF&E cases in each of the following dollar loss categories: under $25,000, $25,000 to $99,999, $100,000 to $499,999, $500,000 to $999,999, and one ailhion or ~re; (ii) for these last three dollar categories (the three higher ones), a breakdown showing type of financial institution (S&Le, banks, and oredit unions), and (iii) also, for these two higher dollar categories, figures for open institutions and failed institutions. (We would prefer the open and failed institution breakdowns by type of financial institution, if the FBI can readily obtain this.) Answer: la. (i) The following chart illustrates the currently pending BF&E cases by dollar loss categories. It should be noted that 986 cases in the under $25,000 category are being handled by a Fast Track system. Lo~ss Category Thxrnber of Cases Under $25,000 1,791 $25,000 - $99,999 2,279 $100,000 - $499,999 1,662 $500,000 - $999,999 421 Over $1 Million 944 Total BF&E cases 7,097 la. (ii) The following chart illustrates the currently pending BF&E investigations involving losses over $100,000 by type of financial institution and loss category Sl00-499K S500-999K Over SMillion Bank 1,350 319 609 Savings & Loan 245 84 325 Credit Un&on 67 18 10 la. (iii) The following illustrates the currently pending BF&E investigations involving losses over $100,000 by type of institution and whether the institution is open or failed and/or merged. Q2~! F?JLEDJMEBGED Bank Savings & Loan Credit Union 2,002 420 75 276 234 20 PAGENO="0218" 214 Questioii 1(b) Numbers of declinations, convictions, and acquittals: For each of the three higher dollar loss categories, each type of financial institution, and for open vs. failed financial institutions: the number of (i) investigations declined by U.S. Attorneys and if known the number of sub)ects/target), (ii) acquittals after trial, (lii) *istrials (where there were no subsequent convictions) and (iv) pretrial diversions and (v) convictions (whether after trial or plea bargain). Answer: The FBI is able to identify the number of cases declined by the U.S. Attorneys' Offices but with our record keeping system, we are not always able to identify the number of subjects/targets in these declinations. The number of acquittals, pretrial diversions, convictions by pleas or trials ~ :~apf~ured by s~bject/ta:~get. The FBI maintains no records ~on.;e~ing inistrials; thereforc~, we are unable to answer this part of the question. Below are the requested charts, `ategorizing the number of declinations, acquittals, pretrial ~ivers ions, and convictions by type of financial institution, tmount of io~s~ and where *~pplica.ble, open versus closed .nst.i~utions. -2- PAGENO="0219" 215 DECLtN~TION8 Type of ~~titution Banks Savings & Loans Credit Unions Number of Cases Declined 1988 Amount of Amount of Loss $100,000 Loss $500,000 to S499~9~9~ _S999~.999L 221 40 37 8 3 2 Amount of Loss $1 ~i1lion & Un 46 14 2 T,rpe of ~aving~ & Loans Credit Unions Type of ~~itution & Loans ~r'~c~it ~Jnions Number of Cases Declined 1989 Amount of Amount of Lcsc $100,000 Loss $500,000 ~~I2~2i~ 189 34 24 10 4 1 Number of Cases Declined 1st Quarter 1990 Amount of Amount of Loss $100,000 Loss $500,000 to S499~99~ ~S999~99~ 44 11 10 1 0 0 Amount of Loss $1 Mill ici);_~p 40 19 2 Amount of Loss $1 NflJ.iofl & Un 10 8 0 PAGENO="0220" A~~QUt'T'TAtS Type of ~flstitUtioJ1 Banks opened c1o~ed Savings & Loans opened closed ~-r.edit Tjj~ions opened closed Type of institution Banks opened closed Sa"tngs & Loans opened closed Credit Unions opened cl~ed Type of Institution Banks opened closed Savings & Loans opened closed Credit Unions opened closed e 216 Nunber of Defendents Acquitted 1988 Aznountof Amount of Amount of Loss $100,000 Loss $500,000 Loss $1 to S499~99~ to S999.99~ Million & Up 4 0 0 o 0 0 0 3 1 0 0 0 1 0 0 0 0 0 I'~irnber of Defendents Acquitted * 1989 Amount of Amount of Amount of Loss $100,000 Loss $500,000 Loss $1 to S499,99~ to S999~999 Million & Un 4 0 4 1 1 0 1 0 1 0 0 1 0 0 0 0 0 0 Number of Defendents Acquitted 1st Quarter 1990 Amount of Amount of Loss $100,000 Loss $500,000 to S499~99~ to~S999.999 0 0 0 0 0 0 0 0 0 0 0 0 Amount of Loss $1 I4iUiOn k_Up 0 1 2 0 0 0 PAGENO="0221" 217 PRETRIAL DIVERSIONS Number of Pretrial Diversions 1988 Amount of Amount of Amount of Type of Loss $100,000 Loss $500,000 Loss $1 ~j~stitution to~S49~I9~9 to S999.9~ Million &.3~p Banks opened 12 1 2 closed 0 0 1 Savings & Loans opened 5 0 2 closed 0 0 1 credit UnLe~ns opened 0 0 0 closed 0 0 0 Number of Pretrial Diversions 1989 Amount of Amount of Amount of Type of Loss $100,000 Loss $500,~00 Loss $~ Institution to S499.999 to S999.999 Million & Up Banks opened 11 3 1 closed 0 0 0 ~vthgs & Loans opened 2 0 0 closed 0 0 0 Credit Unions opened 3 0 0 closed 1 0 0 Number of Pretrial Diversions 1st Quarter 1990 Amount of Amount of Amount of Type of Loss $100,000 Loss $500,000 Loss $1 Institution to 8499.999 to S999~999 Million & Un Banks opened 0 0 0 closed 0 0 2 Savings & Loans opened 0 0 0 closed 0 0 1 Credit Unions opened 1 0 .0 closed 0 0 `0 PAGENO="0222" 218 - ,~nrVICTIO~S Nunber of Convictions By Trial 1988 Amount of Amount of Amount of Type of Loss $100,000 Loss $500,000 LOSS $1 Xfl~titUti0fl ~~S499 999 ~S999~99~ ~jjflion &11p Banks opened 35 16 13 closed 1 0 3 Savings & Loans o~nod 1 2 15 0 1 1 Credit Unions opened 0 0 0 r!losed 0 0 0 Nunber of Convictions by Trial 1989 Amount of Amount of Aino~.Int of Type of Loss $100,000 Loss $500,000 Loss $1 ~j~tituti~n ~ S999~99~ ?jUflon ~k_LLn Banks opened 26 1 17 closed 3 3 10 Savings & Loans - opened 2 1 7 closed 3 0 10 Credit Unions opei~ed 2 0 0 closed 0 0 0 Number of ConvictiOnS by Trial 1St Quarter 1990 Amount of Amount of Amount of Type of Loss $100,000 Loss $500,000 Loss $1 ~~stitution tJ499~99~ ~ ljjl3.ion &iJ~ Banks opened 5 1 2 closed 0 0 3 Savings & Loans opened 0 0 1 closed 0 0 4 Credit Unions opened 1 0 0 closed 0 0 0 PAGENO="0223" 219 PLEP~P Number of Convictions by Plea 1988 Amount of Amo~ànt of Amount of Typa of Loss $lOO,00 Loss $500,000 Loss $1 Institution to S499.999 to S999~999 Million &_~p Banks opened 340 69 81 closed 1 0 16 Savings & Loans opened 59 2 15 closed 3 1 1 Credit Urdons opened 14 0 2 closed 0 0 0 Number of Convictions by Plea 1989 Amount of Amount of Amount of Type of Loss $100,000 Loss $500,000 Loss $1 ~pstit~j~~ to $499.999 to $999~999 Million & Up Banks opened 317 71 94 closed 6 3 53 Savings & Loans opened 57 18 8 closed 8 9 26 Credit Unions opened 16 4 4 closed 1 0 0 Number of Convictions by Plea 1st Quarter 1990 Amount of Amount of Amount of rype ot Loss $100,000 Loss $500,000 Loss $1 Institution to S499~.999 to $999.999 Million & Up Banks opened 63 17 11 closed 0 1 15 Savings & Loans opened 15 2 5 closed 0 1 9 Credit Unions opened 11 0 0 closed 0 0 PAGENO="0224" 220 ~Zut~LiOfl AL (c): Prison sentences and fines inposed: For each of thu three higher dollar loss categories for each type of *~thancial institution, and for open vs. fahed financial. jnz.titetiOTL~ (with the sane combination of the latter two categc.des, as referenced above, if possible): (i) the prison sentences inposed-broken down by appropriate categories of fines and imprisonment (we will leave the exact categoric-s to the FBI's dirjcretion; we would antic~patc at ic-act four imprisorsment czitegories, ouch an probat~oan, lees than 6 rontha~ 6 ~Oflth5 to 1 year1 1 to ~ years, and ~ years piur3, for oxanplo) and (ii) the tothi anount of fin~x3. Answer: The FBI has provided a chart of all sentences handed down in Fiscal Years 1983, 1939, and the first quarter of 1990 for Bank Fraud and Embezzlement. Due to the way sentences are given, w~ were unable to divide the sentences into categories of probation1 less than 6 months, 6 months to 1 year, etc. The chart.~ show the FBI field office, the judicial district of the sentertcin'.j, the type of financial institution, the category of th~ ~ and th~i ectua1~ sen~enCO. Attached are the charts that show the amount of fines collected as well cc the number of cases fines were collected. PAGENO="0225" 221 E~ ~0000000 00 000000 0000000 ~O~O0O00000000000 ~ r~0'O0~O000 00 00~000 0000000 ~O%O000O~00000000 .1 ~O00O 00 oom000 0000000 ~OO~00~O0C~OOOO H;. C) H 0 ,~ o: ~ H W. 0 ~ ~ ~ is IM 30-830 0 - 90 - 8 PAGENO="0226" I I I __I.~-',.~__ ~ - I oeo.~',~a~e 00000%eooioo a~ oec~o~ 0 ooemooooooo eeeec~c~e 0000000000 0 0000 0 O~00~0Q00000 oooec~o%e 0000000000 0 0000 0 00000000000 ggg PAGENO="0227" 223 000000000000 000000 0000 0 000000000000 00000000000W 000000 0'000 0 000~000000000 00000000000W 000000 O'O0'~ 0 W00~0CCc'0~'Q~ E4~P~E4E4 ~ P~IO4Q. D. II H I w PAGENO="0228" 224 ~ oooooo~oeooooeeeoaeeeooeeeoeooe 0 oooo~oo 00000000000000000000000000'00000 0 eoeoooo ~ 0 omc~.~OO I ~, `~: (`4 ~4(*~-I~$,44.-4 I PAGENO="0229" 225 00g00 ~ ~ ~ ~ ~ ~, ~ ~ ~~ee.-Ioo `0 0000000000 0 0~000 `4 iO 00000000000 ~ ~ `-`ii OOc'iOO 0 0000000000 0 0'000 ~O `0 0'0000O(J~.)OC)C, ~ ~, ~ ~ ~ ~, ~` Iii `4 0404040401 0. 01010101010101010101 0. 010.040. 0. 0. 040101010104E~E4EIE404 I I PAGENO="0230" 226 000000000000000000 00000000000 0 00000000 o00000'O00000~00000 eo00000e000 0 00000000 ~ `0 00 000 `000 `000 m 00000 00000 0 00 0 0 0 0 0 0 0 0 o (` C. > ~ C, r4~ ~4.4 ~~~IOI E40.OiE4E4 ~ C, `0 COCO Cl) Cl) Cl) Cl) PAGENO="0231" 227 00000000 0 00 00000000000'O 0 00 0000Cd0000 00000000 0 0~I 000000000000 0 00 00000000'0 -4 `00000000 0 0~4 0000'0W00000'0 0 `00 000Qr~C~%~ dl ~ `-1 C 0~ F Ott, r~. 4 ~ t,) .4.4 ~ .-I ~4~4 ~-~-4.-4~ cot cot 0. * 0~ ~ to tocotocococococototo to o~ Ed U, 8 PAGENO="0232" 228 000 0 000000000 0 0000000000000000ø 00 00 ~ ~ ..4e,0 0 000000000 ~ 00000000000000000 00 00 C4riO 0 000000000 `0 000'00000OQ~0QOo~c.~ O.C~ ~ ~CI) ~ ç~u~ 0 ~D U3'0U ~ 0 * tO to --ii PAGENO="0233" 229 000 0 00 00000 00 0000000 000000000 0 000 ~ ~. ~ ~c*~ ~ 1000 0 00 00000 00~ 0000000 0000001000 0 000 ~ ~ .4 103C 0 00 0000.1 em 000mooO 0000001000 0 0C~ ~ ~ ~ It. P. 0.0. 0.0.0.0.0. 0.0. 0.0.0.0.0.0.0. 0.0.0.0.0.P.E~P.E4 0. 0.0.0. 0. (ii 0~ .j ~ .4 .4.-I .-I.-lClNq -I-I .-l.-lc~1.-lm.4 m.-l.-lmm.-Immm .4 ~: 9 U I PAGENO="0234" Ow ~ ~ ~ u~ - ~jpj ~ `0 sz U 0 C~0 00000 H OO0O000QOQQQ0O~Joooooooo~wooo 0 0 00 ooooe O0OO00000oooooowo~oooooo~ooo 0 0 00 00000 o~g PAGENO="0235" 231 0000000000000000 0000 000000000 00000 000 ~ 00000~O00000000~O0 0000 0cia~0C~0000 00000 000 ~ ~, ~ U, U, ~ 0000 OmriOm0000 00000 00'~ ~ ~ ~ ~ `.4,.' 0< 4~4~4 P~ E4E~E4P,P~E4 Q~E~U~U. ~i.Q,Q, 0~ ~ ~ "1 ~ I PAGENO="0236" I p~_. ~ ~ ~~PJ - ~ `~`~ `~~U~U~5 `~`~ `~~O~'D~ `~ `~Ø'~ -- - *~)O ~D ~7%C~I~O 00 0000000OO000~)0G~ 0 O~0O000O~O0 oo ooeeeeo o~o eoeoeeeo~Deeeeeo~ 0 oaeoeea~oo 00 0000000 00 0~00000000000O0 0 000000000 PAGENO="0237" 233 0 0 000000000000 0000 0 000 000 000000000 0 0 1000000000000 0000 0 000 ~O00 00000000w ~ 0 0 ~OWO0'D'O0I~O'D~O'O 0000 0 000 %000 ~r000Oc.'C.~ ~ ~ ~ ~xu~ H PAGENO="0238" I 9 3'~*~ ~ -~q~r> ,~~~oueee eeoooc~,jeo oooe~io 000ct000000 0000 CbO~00000O 000000000 0000~e 0000000000 ~t~flU~fl ~0C,O 00000o0e oeoeeeoee 000000 0oooooo~o PAGENO="0239" ~L. ~ ~ 00 O~ 00000 000 0 C~ 00000 ~ 0 000 C~ 000 0 0000~0Wooc~ 000000Qooc%ooooQq~ 00000000 0 0000000~~~ 000Q0Q0Ooo~ooOQo 00000000 e PAGENO="0240" I zcn til 0 ~cn ~ ~ - ~ ~ ()~)O~O 0001.) 0 0 00000000010100 00000)0)000 ~ ~ 0)000000 0000 0 0 000000000)0)00 000000000 0000000 0000 0 e 00000b0000000 000000000 92g PAGENO="0241" 237 00000000 000 0 00000 0 0 00000000OOO0QO~ ~ 00000000 000 00000 ~ ~ 0~0000000000000 ~ 4 (O~000O00 000 (4 00000 `0 (4 0'000O4O*QOC..c?C~(' ~ ~ ~ ~. ~ a. .4 (4e4.4.4*.4 .4 .4 c4.4.4.4..4..4,4..4,.4.~4.4 6 8 I PAGENO="0242" 238 000 000 0000 0 000000 0000000000000 0~O00 ~> ~, 000 000 0000 0 000000 .I00000000~000 0I~00 .~, ~ ~ ~ 000 000 0~O0~ 0 00000~C r.o0000ooo'oo~oo C)~L'0( ~ > ~iii~~ ~ ~u,J 2 I I PAGENO="0243" ~`b~'.~I ~~~PJt%~ ~ ~ ~ ~ ~``~`~ "~`~"~` ~ `~3 3~3'~ ~`~`~`a ~ ~ ~ `~`~ u'~'~ ~ ~ ooeo Do oeeob0000 00 co 000 oeooa~o~ 000 ooe ceDe cc oeeeeeoo cc ~ ace eeee~ ~ eoo 000 cooe Do eeeoeooe 00 C~ 000 000000 PAGENO="0244" 240 0000000000000o0000 0000000000 000000cooc, 000'000000000000000 `oeoeeeeeee 0000000ooo ~-~E-~ ~ ~OOO0Oo~L,'.c.c ~c~j ~ ~ 1 `-4 `-~ U Of~~ A ~1~1 U21 PAGENO="0245" I ~ri O~V) ~ W~V3~t1) ~r .~ .u.~ ~ ø~p~ .~ ~ ee~ aee~ooeeo~eeo c~oo~eeoo~eeo~ 0C~ 000 00000000000 00000000~000C~ 0 ~ 00 000 00000000000 000b0000000000 ~ 0 `pg 0 I.. PAGENO="0246" 242 o 0 0000 0000000 000000 0 000~O0000000000 ~ ~, ~ o 0 .-4O~O~0 0 000000 000000 0 00000W0N~O000O0 ~ 0 0. .4mr~0 0 0000C~N 000000 0 00000i~0OO(~ CI CI .~1 : 4~4~4~I ~I ~ ~.P ~4E4E4 P1 ~P1P~C~ ~ r~j N ~PI ~ U) I PAGENO="0247" 243 000 000 000000 00000000000000000000 00000 ~ (`4 000 000 000000 0000000000000(0000000 ei.-4000 ~ 0 (-4 004O 4q00 0~000~ 00.I0(1O0000C%0000~00'44 C4~'C~C~) `C >~ z 0 4~4E4E4~I ~~E4E4 ~ I i PAGENO="0248" .244 00000000000 0 0 0000000 0 000000 0000ooo~ 00000000000 0 0 ooóoooe e e~oeooo 00000000 0 000 00~O0~4O0O000 ~4 0 moooooo 0 0~O~I~4-~o O00wc~'~O.. ~ `-I H C) ~ E4E4E4E4~. ~. P~ ~. P~P~Q. Q~Q~E~Q~ I PAGENO="0249" Ii ~ .~ ,~ up~p~,U 000 00000O00O00~M 00 0 000O~0a~O%O~000~PJ0 OCbO 000i0000000000 00 0 000000U~o000000 000 e0o~eo00e00ooo eo 0 oooeoooooeoeoe PAGENO="0250" 246 E~ 0000 0000000~00000 ~ `000000 000'00000000 o'0O'0OO ~j~q ~ > ~ ,000ee0000ee~00eee 0 00000~O00000'O'O0000000'O00 `00'0'0C~0'0'0000~000'00 0 `00000'000'0'00'0'00O0OO%)~ C~ 1 `-4 p. *~p.p.p4 `.4 ,.4 `.4 C'. C'. `.1 ~4 `.4.4.4.4 `.4.4 .4 C', mm m m `.4 `.4.4.4.4.4.4.4 .4 C'. 4'C .4 C'4 C' .4 -4 -4 ~1i I PAGENO="0251" a) a) a)WW tI)WWWWWa)a)a)WWWWWa)a) a)a)tflD)WWa)WWW a)V)Wa)Wa) z~z ~ rt~~zz 0 ~ `a `a `a'a'a ~ `a'a'a'a'a'a~3~3~3 `a'a'a'a'a'a ,, 000 000O~D00I~O00Q00O0 0000000000 0000a)0 0~ 0 Qee 0000000000000000 weeeeo~eeee 00000iO I-. - 0 0 000 e0000Oe~00000e00 0000000000 000000 Lpg PAGENO="0252" 248 ~ir~ 000000000000 0000000000000000000 0 0000000 ee00000000ce oea,00000,.4~~O00OO0000 0 000'0000 ~ C'. 0 0~D0000000000 .4~O%O0000GCNC'.00000'O0O0 0 CC.~0~DC)~ z 4~4~4~4 4~4Q4~4 ~4 ~4~4QE4~4E4 ¶:~ ~ ~ ~C1~u,C/~ uu~u~um ~ (13 ~ Cl) - U I PAGENO="0253" ri~ ~ ~ U) ooooi~oooo~~ooo ~ `.) 00 00 000 000000 000000 ~ 00 ~ 0000 ~ 0 ~ 00 000 00 0 000 0O~000000Q0ObOQ0Q0QQQQOOO0OOOOO00OOOOOOQ 0 0cs0 00000000000000000000000000000000000000 0 PAGENO="0254" 250 00000~O~OW0 0000 000 00000000~0000 ~I00000000 ~ 0000O~'O'O0 0~l00 000 00000000 .0000 000000000 ~ `4 0 P4 0.4000~'~D'D 0c1'O0 W~0 00000000 0~0'4 0mOC'CQ.-40C. ,.1 ,-$`~` z I-1 4~4~I I~4~I ~4~I I~4~ I~4~4~I ~ U) H ~i1 ~ LI ~ !4~ ~L 11 I PAGENO="0255" C/)U)WWW D~CI)WtnW W WW~CAW mC~ tflCI)~WW~W W~tI) ~ ~zr~ r~rr~~z~ ~t' C1)Cb ~J) p3~P~ ~ ~ 3~P~ ~ ~ 0 - - 4 ~z~z ~ ~ 0euooo'D~ 0O~00~O 0 0G~000 00000000~C~0~0~oi-. 000 -4 ~ 0000000 00000 0 00000 O0000000O4Q~00Q00Q 000 1) 0~e000e 0o~000 0 00000 0000000000000o0e 000 iga PAGENO="0256" 252 )~ 1 o 0 0 e000000000000000000000000000000000oo :~ `I o 0 0 000000000000000000000000~0000000O000 ~, U) I 0 ~ 0 ~ <~ ;~. ;~ ~ z ~ `1 U) I-s 1' ol t4 ~ U) U) U) U) U) U) U) U) U) U) U) U) U) U) U) U) U) U) U) U) U) U) U) U) U) U) U) U U) U) U) U) U) U) U) U) C/) Cl) PAGENO="0257" 253 00000 0 000 100 00000 0 ~ ~ ~ 0 0100001 0 000 .IO 00000 0 0000000100Q0O00O~~ I ~ I: 0 o I 0o~r~ 10 000 00 ~4ea000 0 ~ ~ * ~ 30-830 0 - 90 - 9 PAGENO="0258" `LI ~ I CI, ~ ~ 2 r. :~ ~ - ~) .~ ,~ p~ *~ ~ *~p~ 3*~p~ .~ .~ ~ ~ o P~ C~ CI1~ C'~'O OOOO~OU~O~ 0 0 0OI0)-~ o o a a~ ao 00 0~0~00O00oo0 -e 0 OOiOO o 0 0 0 00 00 00000000000000 0 ecoc PAGENO="0259" 255 000 ~000000000000000000000 0~e~ mIfl00)t~0r~44IflIflLfl)flU~tflr) .-4 0 N m 0000400000000 mOO 000000000000 0 05 ~-4 s~ L' ~` c. ~:` ~ `~%`_`% _~%~ 0 m -4 00 ~ 0000.4 0 -4 .-4 00 ,-4 U~ 0 N N -4 N 00 fl 50 N 4) ~ 0-40 C' 005 r' 0 0 .4 ~50 5005 0000000000000000 000 00000000000000N5000000 ;;,~ ~ p.~4p4 05 05 I PAGENO="0260" .~ p5p~*~ OOOO~)OO000Q0000~.~~,j0 0 000ooc~o~oo 00000000 e 0000000000000000 0 e 0 ~ ~ 000 ~ 000. 0000000000000000000000000 0 0000000000~~ PAGENO="0261" 257 000000 00oooo~o 0 0 000 000 0000 000 00 000000 00000~o 0 0 000 000 0000 000 00 * ~ 0 00 000000 00E!~00~O 0 ~O ~-40 ~O00 0000 00~O `.4.4 ~$P4~4P4E4f4 Pq~ ~s Di PDi DiDiE4 iDiDiDi DiQiDi DiP. j~3 Ii PAGENO="0262" I -~ ~ `~`~`V5 P~P~'5 ~P5P~ ~ ~ ~ ~ ~ OOOOO~OOOOb OOOOO~OO~ 0 O~00 1.~4~0 ~ eooeeeeoeo~ 000000000 0 eoee ~e 00.0 0000000000 000000000 0 0000 000 0000 82g PAGENO="0263" 259 0000000 0000 000000 000000 00000 0 0 000 ~ 0000000 0000 000000 00'~000 00000 0 0 000 ~ ~ ci 0 Hf c~0000O0 00'00 0%00000 ~40~0000 fJWOO'O ~O (~ (.(.~( ~ ~ ~ ~, ~P404E4f4P40I P.A~ø. 0~h0.0~0~. ~ 0.EiEiEiO. .0. ~I~i / I it P ~ ~ I PAGENO="0264" I F ~ ~ F 0 ~,u__ U~' ~ I~ P4 P4 ~ ~ o~,a~o 0000 0C~O~00000000O 0 0 ~ ~ 000~0~0 ~ 0000 0000 000000000000 0 0 0 0000000 ~ eooo eoee ea~oeeooeeooo 0 0 0 0 0000000 0 09g PAGENO="0265" 261 0000 00 0000O000000ooooOoooooooo~~~ ~;*;~ ;~ ~ 0000 00 Cl) Cl) )~ 0000 .-40 100100 moooo,~~~ I ~ ~; 0~3 ?~jE~l C) 8 PAGENO="0266" w~wn~ ~ ~o. Hc~ ~ ~ IJpJ~~~~I ~ ~OOI-C~ ~ ~ OOOOO~OQ 00000 0 000000 000000 00 ~0O0000~Q00 00000000 00000 oc_oooc~ 000000 00 00000000000 00000000 00000 g~g PAGENO="0267" 263 000000000000000000000000000 0000000__-0____0 ~ ~ `1.-I 0000'O000ooo00eeeooooeo~o0ooe 0000000 0 0 ~oOo~ooata~oooooooooooooo~o'oooo 00-4~O 0 ~t I, 4~4~4E4E4 4Q4~Q4Q4E4 ~ U~ ~l4, x PAGENO="0268" 264 000 000 *eooo* ** oeoe ~ ,*~`~0 ~ ~0 %,~%~%`% ~ aaa,aa2 ~~2a,a,as 000 O00~000000 00000*0 0000000 3eee 0No0oooo~o fS0N*0~* 2$ 0 I~I d .c - Qi ~a. 2$ ONNN ii~ I. oj,a~ 411 I 00~~~~~~ N - - - ON N - N 000 000 000 000 ~a~$iQ. 0 oooooooo oc'o ozozozza a~ata `I k OS * I ~ I 4 I ~0 ~ 5$ k I 00 0 0 0000 00000 * 2200 *22*2 ~00~000 ~ IIIII~ u~uZu~88 ~~o! PAGENO="0269" 265 o I ~I1II~~I o 000000 ~0 0 ~ 00000000 ~0 ~ 00000000000000000000 ~0 N I. ,~ ~ ~ I ~` ~ 0 I ~ I_ ~ NI NI ZI iii zz z .3 .3.3 1.1 zz .3 .3Z ZZZZZZZZ4WJ.3.3~3.3Z2 I.1 a ~ 0OC0C~ C. ~I00000O000000ø0C' (a ~ I M000NZZV)&OZZXXXZ *~~WWNUU)UUUUtJUUUUUOV IU~ ~ I 222 ill ~ PAGENO="0270" UIUHH ~ p~r II~ fill ~ ~~iI ~ ~ ~*~E** tn~ ~tq~ ~~ti'U~ gi Ii *1s~ ~ ~ ~ ~. s ~ ~ r ~ ~ ~ O&aOOO~Ogo~.oooo..øwoo 000*o*o*.S c.o.~. .e.oo ~ ~ ~ *as.~a a.~. * oc.ee.o eeeoee~e~aoe 0000000*. .00000 00000 * *oeeoo~ *oseeo~oooo .0.0..... *oøeoo 000*0 * 99~ PAGENO="0271" 267 000 00 000000000000000 0000000000000000 0000 ~i ~ ~ ~ 000 00 0000000o0000000 000000000000000 0000 N 2 so *oee.iv~-oooseeeo see .o.,0000.,r,00 53eeee ~ I 5* - NI 2$ 141 4 1l~~ ~ a.~ ~ I F dl UI ~I MI z 0 14 ~ 0 I OWN P~ I *22 `ii El 0$ 4, U: ~ooco 0000000000000000 000000 I ~ ZN 00 ~WNWWWU *N0*aI4OZZZZZNZNIJ XZXXZZ 00000 ooino ~ ooo~~ ~ ~ ~ PAGENO="0272" 268 * OO*.~OOo*o a v U II ~ 0. ~ I ~: ~!! I D~ 1.1.1.1*1* ~I~~ooøoo ~ ~ I WWMNIIWWhIN PAGENO="0273" Typ~ ut Institution Banks opened closed Savings .6 Loans op.~n~id closed Credit Unions opened closed Amount of Loss $1 Million &j~p (29) $447,450 (5) 40,500 (10) 38,850 (5) 294,575 (0) *-0~ (0) -0.. Type of Institutjg~ Banks opened closed Savings & Loans opened closed Credit Unions opened closed Number of Cases and Amount of Pines 1989 Amount of Loss $~00,000 to 5499.999 ___________ (132) $625,975 (6) 16,400 (20) 148,825 (1) 4,600 (8) 12,400 (0) -0- Type of Institution Banks opened closed Savings & Loans opened closed Credit Unions opened closed Amount of Loss $500,000 to S999~,9gg (25) $711,000 (0) -0- (4) 3,200 (17) 100 (1) 100 (0~ -0- Number of Cases and Amount of Fines let Quarter 1990 Amount of Amount of Loss $100,000 Loss $500,000 to S499.9~ ~Q~S999~9~ (31) $83,711 (5) $15,200 (0) -0- (1) 11,670 (5) 8,600 (1) 5,000 (0) -0- (1) 1,000 (1) 50 (0) -0- (0) -0- (0) -0- Amount of Loss $1 Million & V~p (38) $661,087 (14) 218,325 (10) 298,400 (11) 361,350 (2) 15,050 (0) -0- Amount of Loss $1 Million &~Up (10) $170,221 (13) 274,349 (3) 21,850 (5~ 211,250 (Ô) ~ (0) -0- PINS 269 Number of Cases and Amount of Fines 1988 Amou~it of Amount of Loss $100,000 Loss $500,000 to5499 ~ toS999. 999 (150) $952,990 (25) $133,818 (2) 750 (0) -0- (24) 286,200 (5) 34,600 (0) -0- (1) 25,100 (7) 12,900 (1) 150 (0) -0- (0) -0- PAGENO="0274" 270 Question Al(d): Ntabers of cases in which restitution or recoveries obtained aM dollar amounts: For each of the three dol1a~ loss categories, for eac~h type of financial institution, aM for open vs. faileã financial institutions (with the 5~ cou~binaticn of these latter two categories, if possible): (i) the nusbers of cases as to which (a) some FBI recovery ~irrad or (b) the courts ordered restitution, and (iii) the total dollar a~unts of (a) recoveries and (b) restitution orders. Answer: Attached are requested charts, shoving the musher cases where recoveries occurred and th. amount of the recoveries, and the nusber of cases where restitution was ordered and the amount of the restitution. PAGENO="0275" 271 RECOVERIES Number of Cases and Amount of Recoveries 1988 Amount of Amount of Amount of Typ~ of Loss $100,000 Loss $500,000 Loss $1 Institution to~S499.pj~ to~S999999 Million ~]~p Banka~ opened (41) $4,140,055 (8) $4,423,01ó (8) $7,428,384 closed (0) -0- (0) -0- (2) 344,000 ~a~injs ~ Loans opened (7) 495,816 (1) 190,000 (2) 1,014,410 closed (0) ~0- (0) -0- (0) ~ Credit Un~.cns opened (1) 15,600 (0) -0- (0) closed (0) -0- (0) -0- (0) -0~ Number of Cases and Amount of Recoveries 1989 Type of Institution Banks opened (41) closed (0) Savings & Loans opened (2) closed (1) Credit Unions openod (1) closed (0) Number Type of Institutj~ Banks opened (17) closed (0) Savings & Loans opened (0) closed (0) Credit Unions opened (1) closed (0) Amount of Amount of Loss $100,000 Loss $500,000 to~S499~999 to~S999.999 $4,402,449 (5) $1,742,214 (13) -0- (0) -0- (2) 770,978 (2) 362,100 (2) 330,000 (0) -0- (3) 15,600 (1) 478,077 (1) -0- (0) -0- (0) of Cases and Amount of Recoveries 1st Quarter 1990 Amount of Amount of Loss $100,000 Loss $500,000 to ~499.999 toS999.~ $1,657,803 (1) $18,000 -0- (0) -0- -0- (1) 23,177 -0- (0) -0- 90,000 (0) -0- -0- (0) -0- Amount of Loss $1 Million & U~p $59,971, 624 548,200 8,639,251 6,045,717 825, OOC) Amount of Loss $1 Million & Up (0) -0- (0)~-0~ (0) -0- (0) -0- (0) *~O- (0) *.0~ PAGENO="0276" 272 RESTITUTION Number of Cases and Amount of Restitution 1988 Amount of Loss $100,000 _~S499~999 Amount of Amount of Type oi~ Loss $500,000 Loss $1 Xnst~itutiOfl ~~~$999~999 ~5,jl1ion &~Up Banks opened ~(205)326,252,777 (29) $11,273,888 (30) $45,106,782 closed ~(1) 269,~688 (1) 593,500 (3) 1,124,319 Savin*js & Loans opened (36) 4,808,246 `(9) 1,751,402 (6) 28,886,714 closed (1) 100,000 (0) ~0- (3) 3,121,000 Credit Unions opened (11) 1,077,970 (2) 535,740 (1) 1,136,000 closed (0) ~0- (0) ~0- (0) Number of Cases and Amount of Restitution 1.989 `-Amount ot Amount of LosS $i'oo,ooo Loss $500,000 _______ ~ S499~99~ to ~ `Cy~e of ~j~jtution Banks opened (180) closed (4) savings & Loans opened (2.9) closed (0) Credit Unions opened (16) closed (0) Amount of Loss $1 ~jfl ion &_UP $23,947,772 374,000. (26) (1) $12,386,342 500,000 (13) 94,542,502 3,414,100 ~O- (9) (3) 4,660,434 993,224 (6) (6) 6,665,496 18,636,252 2,071,836 -0~ (1) (0) 100,000 ~0- (1) (0) 110,000 -0~ Number of Cases and Amount of Restitution 1st Quarter 1990 Amount of Amount of Amount of Loss $100,000 Loss $500,000 Loss $1 ~S499.999 t~S999~99~ ~~1j1,1ion &iJp Type of ~titution Banks opened (45) closed (0) Savings & Loans opened (12) closed (0) Credit Unions opened (11) closed (0) $5,122,283 -0- 1,332,383 -0- 496,400 -0- (9) (1) (1) (0) (0) (0) $3,276,235 600,393 486,173 -0- -0- -0- (5) (3) (1) (5) (0) (0) *S 4,945,504 41,251,332 15,000- 1,314,771 -0- -0- PAGENO="0277" 273 QuesLi~i A2: We also request the number of failed financial institutions as to which there is an FBI investigation for cri~1~~) misconduct, as of February 1989 and also February 1990. Answers The following chart illustrates the growth of failed financial institutions under FBI inv.stigation for alleged criminal misconduct. INVESTIGATZQN~ PERCENTAGE INcREASE F~QN PRIQRY~ 1986 206 1987 282 37% 1988 357 27% 1989 404 13% 1990 530 31% Que.~tio~' A3: When will the FBI's Field Office Management System CVt~Ms) be fully operational in all P131 field offices? Why has It eee !elayed, especially since the FBI previously expected it to become completely operational in 1988? As planned, will the system include data on financial institution BF&E matters? AnSwer: The FBI's Field Office Management System (FOINS) has been operational in all FBI field offices since October, 1988. The system is currently capable of retrieving all information indexed in it on a national basis. However, FOIMS will continue to be modified to retrieve additional data as .1rtvestirr~tive needs warrant these changes. The system currently has some information on BP&E matters which will be enlarged within the next few months to identify arid categorize financial institution fraud cases, dispositions, losses, and whether or not; sri individual was an Insider, director/officer, or other, or an outsider. This data ~as:~ within FOINS has been delayed somewhat to be incorporated ~it~ "the~ procedural changes that have been recently made by the FB.t PAGENO="0278" H l.a l~ ~ M P4 00OUU~0.U1O% 0 (t. P1 0 P1 OlD P1 00 Xl-' ~J. ID p. ID 10 `~ 1< ~`1H l9~. H 2 p H ~b ~D~O~D ~D ~DWO3 o'0~ 01 .4 ) 1) n `1 ~øUi~11.aP4~0 PJOOP40~P)UO 0(~ l-'(J~~ 0101~$I$'0 ~OD0I~01 ~4Ul W(JO IWIO KolO O01OO~~ IWIO I-' ~44O% 0 PJP4 .4 WW.4 0~ PJ~O~;O 2 ~ P3 0 00(0 .40~4 PAGENO="0279" I-. o I-' I~ o o ~ I~aa~ ~ ~ 0 0WøUIU0WO~~~i~j 0 I!! PAGENO="0280" 276 The following offices requested additional resources to woLk ~z~&E n~atters. Due to the limited nature of these resources end th~ prioritization, these offices received no additional allocation. ~FFLLt ~UESTED ALBANY 3 ALBUQU~QUE 4 CHARLOTTE 2 CINCINNATI 1 COLUMBIA 1 INDIANAPOLIS 2 JACKSON 5 JACKSONVILLE 4 KNOXVILLE 4 LAS VEGAS 4 PIT~PS~T3RGH 2 ~?ORTL~ND 3 9IcSW~(D 4 ~M~r L~XE CITY 3 ~ DLEGO 5 SAN JUAN 3 SPR'NGFIELD 8 ST LOUIS 3 * This includes a request of 2 by our Butte office which was merged into Salt Lake City in the past year. PAGENO="0281" 277 Questicn 81(c): ~psrience level of agents: According to the FBI, the ccrrsnt d~ographics show a redco.d nusher of experienced specialized agents available to staff ~&E aatters. ~plain this phez~i, its ceus~, aM its impact. Answer: The following is a current breakdown of experience (in years) of Special Agents in the FBI as of March 2, 1990. * GR~P cO~T 0- 5YEARS 2,801 6-1OYEARS 1,788 11 15 YEARS 1,387 l6-2OYEARS 2,343 2l-25YEARS 1,023 26 OVER 298 TOTAL 9,640 Demographic projections indicated a trend towards a younger, less-experienced Special Agent workforce. Attrition projections are that by Fiscal Year 1999, approximately 50% of the FBI's most senior agents will be replaced by new agent hires. This attrition represents predominantly retirements, but also includes resignations, deaths, and dismissals (see attached chart). An "experience-to-experience" replacement policy, where senior experienced agents would be transferred to replace those specialized experienced agents assigned to BF&E matters would be very costly. The cost to transfer a senior agent is approximately $42,000; contrasted to the cost of a "rotational" transfer of a young agent (2-4 years experience) of approximately $28,000, or the cost of assigning a new agent of approximately $9,200. Current practice is to recruit and hire new agents with those specialized skills required to investigate BF&E matters, and to assign these agents to BF&E investigations upon their completion of training. Houston and Dallas, both of which have significant BF&E programs, have recently been designated as major Metropolitan Field Offices. One hundred and seventy agents assigned to these offices are now no longer eligible for "rotational" transfers, and other specialized agents who become eli~ible for rotational transfers to major Metropolitan field offices after 2-4 years service can now be assigned to these offices. The overall effects of the loss of senior, experienced agents is significant. Our recruitment programs are designed to ensure that the best possible investigators are hired to address our specialized operational needs including BF&E matters. PAGENO="0282" 278 ~R:J~ITE SEF~R.~T~NS F 8/5i'SB I 700k eook 5O0~ 400~ 300~ 10~1~ ~` ~ ` ~ ~ I..., ~ri ` r~ b' ` ` `A/ ~ `1/ `~:i, ~ ~Ll ~4/ ~ ~/ 1~/ ~A/ ~v i, ~ ~V ~ ~A/ ~V ç4~ IV A/ `~A/ ~ ~ p. I * ~ , I p ,~ ~/ ,~ ,~ A .4. # `~ i .4 .4 .4 .4 I ~ .4 .4 .4 .4 .4 .4 .4 .4 .4 .4 .4 .4 .4 .4 .4 .4 .4 / .4 .4 / ,I ~ / / ~JAM p. ~q ~iIiji ii 4~ U 6788 89 90 9~ 9~ ~ ~o 97 98 99 CC 0~ 0~ ~ U4 060607 YERR DATA USED 0)1 CC)4STANT PCPULATICN CF 85CC AGENTS ATTRITICN FACTCRS .09 PC? CF TilE PCPVUTICN JILL DIE .08 PCT CF TIlE POPULATION JIU. BE ~CVED 1.21 PU CF THE POPULATION BILL RESiGN mE AvERiGE AGENT RETIRES AT AGE 52 YEARS. 2 MONTHS CCVPARISCN ITEI1S FT 1~7 ACTUAL TOTALED ~O. 2 BELCI THE PROJECTION FT 1988 ACTUALS TOTAL 318 FOR 10 IICIITHS COMPUTES TO FOR THE YEAR. 4 BELCI THE PROJECTION NEEATIVE pROJECTION FACTORS AGENTS 1140 ARE OVER 52 YEARS. 2 MCI4THS AT TIME CF PROJECTION PAGENO="0283" I-. 0 U) 0 I 1' PAGENO="0284" WHITE-COLLAR CRIME INCREASED PERSONNEL REQUESTS (Dollars In thousands) 13-Mar-90 REQUEST TO DOJ AGT SPT TOTAL BUDGET YEAR WY WY WY AUTHORITY REQUEST TO OHS REQUEST TO CONGRESS CONGRESSIONAL APPROPRIATION AGT SPT TOTAL BUDGET ACT SPT TOTAL BUDGET ACT SPT TOTAL BUDGET WY WY WY~ AUTHORITY WY WY WY AUTHORITY WY WY WY AUTHORITY 1991 197 181 378' $42,669 172 130 302 $31,935 1990 326 353 679 $46,326 336 326 662 $46,737 1989 261 213 474 $47,168 251 186 437 $45,148 1988 66 85 151 $8,807 42 36 78 $3,948 62 68 110 $11,613 0 0 0 SO 236 218 454 $25,039 153 192 345 $21,985 119 154 273 $30,480 0 0 0 SO 21 40 61 $2,003 0 0 0 SO PAGENO="0285" 281 Question 3(a): Have any preliminary discossicng b~ held to resolve this expected shortfall, and if so, what has been the ~itccme? ~at preliminary decisions, if any, have been made? Answer: It is experienced that the cost of implementing P. L. 101-173 will cost the FBI approximately $42 million in 1991. The FBI, as did other Department of Justice agencies, had initially proposed reducing the number of Agent workyears to absorb this cost. This proposal would have resulted in a loss of 559 Agent workyears and positions in 1991. As a result of recent discussions and examination of funding options, I am pleased to report that the FBI will not fund the provisions of P.L. 101-173 from within the funding in the initial President's budget. To do so, we will cut base operating expenses for travel,, confidential expenditures, and equipment. Secondly, we have adjusted the lapse between positions and workyears requested as program increases to make additional resources totaling $26,655,000 available. Finally, we would propose to redirect $2,655,000 in base funding previously used for background investigations for Departmental applicants. The U.S. Attorneys will reimburse the FBI up to this amount. It will be essential that all the base funding be appropriated if we are to have sufficient resources for this expense. Absorption of increased AlTO is being proposed as follows: Travel reduction $` 1,000,000 Confidential expenditures reduction. . . . 1,000,000 Equipment reductions 10,669,000 Training 1,600,000 ADPT 2,716,000 Technical 3,630,000 Automobiles 1,064,000 Furniture 6,659,000 Reimbursements for Department applicants . 2,655,000 Increased lapse rate 26~655.OOO TOTAL 41,979,000 Question 3(b): What are the cpticns under consideration? Fcr example, what cuthacks in specific program or in other areas are w*Ier consideration, assuming that the. Congress does mot increase the appropriation over what ~IB has proposed? Answer: There are no options under consideration. Assuming Congress does not increase the appropriation over what the President has proposed, the FBI will absorb* the AUO cost as presented in Question 3a. - 11 - PAGENO="0286" 282 funding Question 4: In a January 27, 1988, letter to the subcommittee (see~the 11/19/87 bearing transcript at p. 632), the FBI provided data on (a) its monetary accomplishments during FY 1987, (b) the FBI's expenditures on investigative personnel to investigate BF&E Answer: The following chart illustrates the return on ratios for BF&E matters: TOTAL FINES, RECOVERIES COST ~WN ON RESTITUTION FUNDING RATIO *1987 $284,423,544 $37,826,000 7.51 1989 $455,866,673 $52,795,530 8.63 *Since 1987 data was originally presented at a return of funding ratio 14.55, there has been a change made in the FBI's internal costing method in an effort to more accurately match costs with accomplishments. The 1987 data has been restated to reflect this change. Question Cl(a): Briefly describe in the testimony the actions taken to implement the recommendations directed to the FBI in the subcommittee's 1988 report. Answer: Since the release of House Report 100-1088 "Combating Fraud, Abuse, and Misconduct in the Nation's Financial Institutions: Current Federal Efforts are Inadequate" on October 13, 1988, and the passage of FIRREA, almost all of the recommendations affecting the FBI have been~ implemented by the FBI. By letter dated February 26, 1990, Acting Assistant Attorney General Bruce C * Navarro provided responses regarding specific action taken on the report recommendations for the FBI. In summary, the Department of Justice and the FBI have provided information on financial fraud matters to several committees of Congress. The passage of FIRREA in August 1989, and the funding provided in December 1989, has allowed planning and implementation for resource enhancements in 27 locations in the United States where the financial fraud problem is considered to be most acute. The selection of these 27 locations was done jointly by representatives of the Fraud Section at the Department of Justice, the Director of the Executive Office of United States Attorney's, the Chairman of the Attorney General Advisory Committee of United States Attorneys and the FBI. The selection process took into account the seriousness of the problem by location, the backlog of cases and the ability of the office to successfully absorb and utilize the resources. The FBI has allocated an additional 202 Special Agents and 100 Accounting Technicians to the approximately 400 Special Agents already conducting financial institution fraud investigations. One hundred fifty-three Special Agents and 100 Accounting Technicians were funded by FIRREA. We anticipate that all of the new Special Agent resources will be in place by August of this year. - 12 - PAGENO="0287" 283 In addition to having resources in place to address this problem, the FBI has made major modifications to its record keeping systems. FBIHQ will now be more able to identify cases by type of institution, as well as dollar loss category. We will provide responses to each criminal referral received advising as to the action taken by the FBI on the referral. We hope this will provide meaningful feedback to the various bank supervisory agencies. This process will also be able to specifically identify referrals in our field offices and in FOIMS as well as to provide data on the number of referrals received by the FBI to be included in the Department of Justice's annual report to Congress. We are continuing to evaluate the needs and modifications that may be necessary to our investigative, training and record keeping process. Question Cl(b): Rec~ndaticsi No. 14.b. in that report urged the Attorney General to direct U.S. Attorneys to give bank fraud matters a higher priority. Based on several sources of information, it appears (1) that the U.S. Attorney's Office in Houston, Texas (Southern District of Texas) arid the U. S. Attorney's Office in the Middle District of Florida (Tampa, Orlando, arid Jacksonville) may not be aggressively prosecuting major finansial institution fraud cases (baa opposed to cases of lesser importance)-~fcr example, the Tampa U.S. Attorney's Office bad only 5 attorneys in its special fraud wiit In 1987 and has only 6 now-and (2) that consequently a mimber of major investigations have not progressed and a backlog resains. We have no information as to whether the FBI division offices serving these districts have contributed to these delays and non- prosecutions. I request that FBI headquarters (1) c~iduct an inojiiry of these three FBI division offices to determine the validity of this information, (ii) w~over the reasons and caused for this situation, if the c~erns are valid; arid (iii) then present a short report of its inquiry in the written testisony Answer: Within the Tampa Division of the FBI, White- Collar Crime is the number two priority. The number one priority of the Middle District of Florida and the Tampa Division of the FBI is narcotics investigations. The Tampa Division is experiencing the same shortage of investigative and prosecutorial resources as many other divisions. The SAC, Tampa arid the U.S. Attorney for the Middle District of Florida have jointly decided against diverting resources from other priority programs to address Bank Fraud and Embezzlement (BF&E) matters. The Tampa Division is ranked number 20th in terms of FBI offices with BF&E matters over $100,000 in pending status. Tampa only has three BF&E matters with losses over $100,000, which are unaddressed. While this situation is certainly undesirable, it does not meet the priority levels of other areas which received a larger allocation of resources. 13 PAGENO="0288" 284 The United States Attorney's Office in the Middle Dist~ir.$. of Florida and our Tampa Office have achieved some notable results in the area of fraud in failed financial instit~ition investigations.. The Park Bank, Florida Center Bank, and Florida National Bank have cumulatively resulted in 47 indictments and 22 convictions to date. FBIHQ will continue to monitor the situation in the Tampa Division as to its resource needs. The ~acksonville Division has r~ unaddressed major BF&E matters. In the last several years there have been no instances of a major financial crimes case which was not prosecuted. Although the U.S. Attorney's Office provides timely and appropriate support for major bank fraud cases, there are inst.ancer where prosecution is delayed. ~Jacksonville concurs with Tampa that the case delays in the Middle District of Florida are the result of an insufficient number of Assistant United States Attorneys available for these matters. The Houston Division has had a large number of bank faiiu~s. The limited resources of the Houston Division and the Southe'~n District of Texa have been fully committed to cases in which the Statute of Limitations was about to expire. Although the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) alleviated the Statute of Limitations problem, many cases were already in the criminal justice pipeline and had to be adjudicated before resources could be redirected to address the fraud in the more recently failed financial institutions. When viewed against the statistical accomplishments of all FBI field offices in the category of Convictions per Agent, per year, in BF&E matters, Houston is slightly below the field average; however, Houston is achieving positive results in addressing the BF&E problem. As a result of the FIRREA, an additional 27 Special Agents and 14 Accounting Technicians have been allocated to Houston. This almost triples the number of Special Agents assigned to BF&E matters which should help to resolve financial fraud natters in Houston. Que.stio~i 0-2 (a): ~scribe any actions (other than personnel allocations) which the FBI has taken to implement the provisions in Subtitles B & F of Title IX of Public Law 101-73 (FIRREA). Answer: The FBI is aware of the provisions of Subtitle B & F of Title IX of Public Law 101-73 `(FIRREA) and FBIHQ has advised FBI field offices of its pertinent ramifications regarding civil and criminal penalties and modifications in procedures. - 34 - PAGENO="0289" 285 ~ueztion C~2 (b) Diecuac and describe any problcs~c or concerns ~Thich nave surfaced cit FBI headquarters (for omanpie, f field of f ice coimnunicatiorts or Bank Fraud Warking Group meetings) conc~rning any provisions in Title IX of Ffl~REA. Answer: Noprobleitis or concerns have been brought to the attention of FBIHQ regarding Title XX of FIBBEA other than those involving the mechanice of the many changes in FBI procedures done in part cc a result of FflI~EA. The issue of FI~RPJ~ mandated congressional reporting reç~uiren~entc concerning criminal referrals has been raised at the Bank Fraud Enforcement Working Group meetings and the FBI has made appropriate changes in its data collection process to obtain the information required ira matters referred to the FBI. Question Dl: Discuss any problems with, and suggest improvements in, the erchanges of information between any of the Federal banking agencies and the FBI field offices? Zn responding, address also finding no. 26 and recommendations noc. 22 * ci. t~ and 23 ~n the subcommittee ~s report, First, have the problems covered lfl these findings and underlying these recommendations been resolved, or do they still occur? If so, erpicLin and sugqe~t correction action. Answer: From the FBI c perspective, criminal referrals are much more timely and complete. In matters of major significance, information regarding indications of criminal conduct has in many, if not all cases, been referred by telephonic or personal contact prior to the submission of a formal criminal referral form. FBIHQ is riot aware of any major problems arising from fee ccu~el actions nor is FBIHQ aware of any significant failures of financial institutions to make proper referrals or provide appropriate cooperation during an investigation. There will always be isolated instances where there is ci lack 0 communication or competing priorities that require some m~so1i~tion at a headquarters level. The Attorney General's Bank Fraud Enforcement Working Group has in the past provided prompt arid i~atisfactory solutions to these type of problems and we ~rt~..~pate that it will continue to do so. From the FBI's standpoint, coordination of investigations with bank supervisory agencies has been useful and appropriate and we are not aware of any significant problems in this regard. We do not believe that there is any need for changes at this tine. We continually look for ways to improve this process. 15 30-830 0 - 90 - 10 PAGENO="0290" 286 We have instituted new procedures fieldwide, Which when fully implemented in the near future, will provide feedback to each bank supervisory agency on every referral submitted to the FBI. For example, the bank supervisory agency will be advised in geneLal terms that an investigation will be conducted, the matter is not a violation of Federal law, the matter is not suitable for Federal prosecution or that it has been referred to another agency, etc. We hope that this will assist the bank supervisory agencies in monitoring the results of their referrals. Question D2: Please oo~nment on the operations of the interagency Bank Fraud Working Group; indicate the kinds of problems or concerns involving the FBI which the group has tried to resolve; and suggest any desirable changes. Answer: In the view of the FBI, the Attorney General `s Bank Fraud Enforcement Working Group remains an excellent vehicle for exchanging information on financial fraud matters and case specific problem solving. A current matter of discussion of the working group involving the FBI is the routine integration of FOIMS information into Executive Agencies record checks provided to bank supervisory agencies. The integration of this FOIMS data would make these record checks national in scope and provide the moat current data available to be considered in background investigations on employees and directors of financial institutions. However, these benefits must be weighed against factors, such as the data verification process on large voluses of possible entries. This would mean additional inquiries to the field offices to make the verifications. In addition, the rele~s~ of any information concerning a pending investigation or even the fact that an investigation exists, may hinder that investigation or prosecution. This type of process would necessarily increase turn around tine on record checks as well as the costs per record check to the bank supervisory agencies. Lastly, it would require increased staffing for the FBI's Records Manage.~nent System. The record check Vrocedures, their ramifications, and possible options will be discussed in depth with the working group in the near futureS In addition to this issue, the working group regularly discusses legal issues that arise in specific cases or legal issues that may impact on financial fraud matters in general. Joint training of examiners, Assistant United States Attorneys, and -FBI Agents are frequently discussed as are the activities of local bank fraud working groups, regional task forces, the Fast Track Program and Right to Financial Privacy aodifjcations under FIRREA and their implementation. 16* PAGENO="0291" 287 Mr. BARNARD. Thank you very much. I want to pick up on one of your last statements, and the fact is that there is still much to be done. For example, as of March 3, 1989, the Department of Justice survey of FBI divisions and U.S. attorney offices on the additional personnel needs for financial in- stitutions fraud and embezzlement cases indicate that there were a total of 8,343 of these cases. Of that number, 4,157 were what we call major cases. Now, of those cases, there were 1,298 major cases that were inactive, evidently something was not going on. So, consequently, there was a staff request of 425 agents, 231 as- sistant U.S. attorneys and 381 people as support staff. They- DOJ-actually allocated only 201 agents, 118 assistant U.S. attor- neys and 238 support staff, as far as personnel was concerned, which leaves, to my calculations, a disparity or a need of an addi- tional 224 FBI agents, 113 assistant U.S. attorneys and 142 support people. Would you indicate whether those agents and other staff are still needed? Mr. REVELL. Yes, sir. We wouldn't have asked for them if we didn't need them, but we realize that there are anumber of budget priorities that are ongoing with the Congress and with the execu- tive branch. Mr. BARNARD. Congress, though, saw fit to appropriate $75 mil- lion into this area, and according to our information, there are only about $49.2 million-less than $50 million that is being and has been spent in this regard and, as you said, the problem still looms. I can't understand why the Department of Justice would not have asked for the full appropriation. Mr. REVELL. It is my understanding that the $25-it was split into two categories. Twenty-five million dollars for fiscal year 1989 and $50 million for 1990. I believe that the 1989 was supposed to be a supplemental that never got sent up, so I believe we only had the $50 million in 1990 to deal with, and as you know, in December is when we actually got the final appropriation to us. Of that, the FBI gets approximately $22 million, with which we will be able to bring on board 153 agents, 192 support, for a total 345 positions. When we did the survey, we, of course, did ask for all the resources that would be needed to deal with the problem as we knew it at that time. I think we have received about half of those resources through this process. Mr. BARNARD. So your message to Congress today is that you still need these additional resources, as well as the appropriation. Mr. REVELL. Yes, sir. Nothing has diminished our expectation of the resource needs. We have gone forward each year with these re- quests based upon a survey of our field offices, the pending work, the unresolved work, the referrals that we do not have the re- sources to address, so there is a substantial amount to be done. I just had a briefing, and you will be talking with the Resolution Trust Corporation during these hearings-we just had a briefing and they have, of course, just begun their work, but already, they are looking at-in the State of Texas alone, they have 88 institu- tions under supervision with $21 billion in assets. They are going to pay this year $500 million for fee counsel. That is 10 times our PAGENO="0292" 288 total budget. That is what people are being hired out of the RTC to clean up the mess. Five hundred million dollars is 10 times our budget in the entire bank fraud and embezzlement area, which is less than $52 million. So the problem is very significant and, obviously, the amount of losses are going to be astronomical. I have heard estimates any- where from $50 to $300 billion. I am not an economist; so I am not going to venture forth, but it would certainly be in that area and so the amount of investigative and prosecutive resources is really, when you look at the problem, very small. Mr. BARNARD. Let me ask you about another problem, the qual- ity of agents that you are able to employ this day and time, with the salary structure that you have. Are you having difficulty bring- ing people into the FBI that really have the experience and back- ground or are capable to be trained to do the jobs that are out there, when everything is so technical today? I mean that bank fraud, especially, is one of the most difficult crimes to gather infor- mation on and prosecute. Do you have any encouragement for us as far as the types of agents that you employing to do this work? Mr. REVELL. Mr. Chairman, I think we are hiring agents that are as good or better than they have ever been. Part of our problem is when we try and move them to New York or Los Angeles, we end up losing them, but-- Mr. BARNARD. What about Texas? Mr. REVELL. Texas is not too bad. Folks-there is no income tax down there and whether it is Tyler or Dallas or Houston, they do pretty well. We don't lose many agents out of Texas. By the way, we don't transfer the agents. We have now made both Houston and Dallas into major metropolitan offices so we are not pulling the agents out of there-that was one of the complaints of the U.S.~ at- torney-any more. We still have to take them from other offices to staff these major offices. But, no, Texas isn't a problem with retention. Los Angeles, San Francisco, San Diego, Newark, New York, those areas, we do lose many of our young agent accountants, agent attorneys, and those who come in with other skills that are very important to this proc- ess. The Federal Government, in the major metropolitan areas, has not kept pace with the professions, nor even State agencies. We are having difficulty in those areas where we are not able to pay a salary that is at least competitive. Mr. BARNARD. What are your possible losses as far as any senior or experienced personnel in the FBI? Mr. REVELL. By the year 1999, which is only 8 years away, we probably will lose, based upon the demographics and the prior sta- tistical analysis, half of our agents between now and then, approxi- mately 5,000 agents. We will, of course, be having to recruit, train, and give experience to those 5,000 replacement agents, add any ad- ditional growth that might be caused by other programs, environ- mental crimes and others that seem to be looming on the horizon. Mr. BARNARD. I am going to defer to you, Mr. Hastert. You have the floor. Mr. HASTERT. Thank you. PAGENO="0293" 289 Just a question to follow up, those people who you are losing, is~ that because of attrition or they are finding other more lucrative businesses or what? Mr. REVELL. Most of them are to retirement. We only lost about-I believe it is 5 percent to either resignation and/or death or other causes, so most of it is through-we hired a number of agents in the late 1960's and early 1970's. They have now reached retirement age and they will be going into retirement from now on through 1999. Mr. HASTERT. You mentioned a few minutes ago that if you transfer agents to New York or the west coast, was it-- Mr. REVELL. Los Angeles, San Francisco. Mr. HASTERT [continuing]. That you lose them. Mr. REVELL. We have a higher attrition rate there than we do nationally, but the entire attrition rate is not as substantial a prob- lem to us. It is just the locality attrition that occurs when we move into these high-cost areas. Mr. HASTERT. So you would say, then, you are not losing many experienced FBI agents except to retirement. Mr. REVELL. That is correct. Mr. HASTERT. What age do they retire? Mr. REVELL. About 52.2 years. Mr. HASTERT. Is there any way to entice them for the next pro- ductive 5 years or so? Mr. REVELL. When you have to retire at 55, and most people don't want to leave active work at 55, they are generally going to be looking for a second career. Essentially, because of salary caps and other problems, they are already entitled to 60 or 70 percent of their salary, so they take that in retirement and go on to a second career. Many times, they will be out working the same kind of work, but for the private sector or for attorneys or-- Mr. HASTERT. Fifty-five retirement is statutory? Mr. REVELL. Mandatory, yes, sir. Mr. HASTERT. Only in the FBI? Mr. REVELL. No, it is all Federal investigative officers, all Feder- al agents. Mr. HASTERT. So in order to start that second life, they need to get a jumpstart. Mr. REVELL. That is about the way it works. They generally retire within the first 18 months that they are eligible. Mr. HASTERT. Where do they go, what kind of-- Mr. REVELL. Most of them stay in the area in which they are lo- cated and they go into investigative work-many of them go into teaching, teach law, teach accounting, virtually everything you can think of. Some come to work up here on the Hill. Mr. HASTERT. We are taking a little different path on this thing, but you talk about losing a substantial number of people. In your opinion, is that law warranted? Mr. REVELL. It became effective in 1977. Prior to that, there was no mandatory retirement for Federal investigators and we had a rather aging group. From 1978 forward, we have had, in fact, a very young core of Federal investigators. There is a burnout factor. Agents work an average of 11 hours a day. They work around the clock. There are many undercover as- PAGENO="0294" 290 signments and surveillances. It is not a normal career. I don't think that they should be required to stay on until 60 or 65. I do think an extended option, and Director Sessions has recommended to the Pay Commission that the upward limit be raised to 57. I think that is an extremely good idea. Mr. HASTERT. When you get people who have a productive life after they retire at age 50, maybe we are the cause of part of the problem here in giving those people the incentive to retire early and maybe we can do something about that, too. Interesting aspect of the manpower problem. What impact is this having on the investigation of the financial institution cases, the people who are retiring out or cycling out? Are they the guys that tend to be the senior guys that tend to be on these cases? Mr. REvi~u~. No, I think it is spread across most programs. Prob- ably our counterintelligence program has the oldest cadre and our organized crime the next. I think that white collar would be about in the middle and that we are replacing them very rapidly. We are giving extensive training. The average new agent is 29 years old. They have a great deal of experience when they come into the FBI. Mr. HASTERT. From where? Mr. REVELL. From private sector, from CPA firms, from law firms, from academic institutions, from business. So when we hire an agent, they are bringing with them a great deal of experience. They are given intensive training at the academy. We have in- creased that training in white collar and specifically in the bank fraud and embezzlement area. We also have an on-the-job training for an entire year in the field and then they have a number of in- services that go forward after that. We can get them up to speed pretty quickly. These cases I cite to you are agents with 1- to 4-years experience and they are very com- plex and difficult cases. I think that within 5 years, agents are gen- erally at about 90, 95 percent of their capacity as far as their expe- rience. The next 10 years is probably only going to fill that addi- tional 5 percent. Mr. HASTERT. What I am about to say I don't want to be miscon- strued as being a public view of the FBI agent in any way-I am treading on thin ice here, I know, but the view of the FBI agent as the guy who packs a gun and every other day has a shoot-out and those types of things, basically the people involved in these types of investigations are guys who are people, investigators, both men and women, who have a great amount, large extent of experience in some type of a pursuit. So the risk factor isn't a high-risk factor. I mean, the white-collar crime issue requires somebody who can get in there and know where he is going and have a feel of what he wants to accomplish and how to do it. Is that correct? Mr. REVELL. If you get to a white-collar squad, and that iS all they work, that is right, but when you get out into the resident agency structure, those agents work everything. They cover a tern- tory. They work bank robberies, kidnapings, extortions, and drugs and all of our agents do respond to emergency situations. They all are involved in office specials. We bring our white-collar agents, PAGENO="0295" 291 our counterintelligence agents in when we have a judge assassinat- ed, as we had Judge Vance in Birmingham. Those agents all have the basic skills to work any type of case and they are trained and maintained that way. They all maintain their firearms proficiency. They are used for surveillances and for arrests. So the general assignment, true, is not hazardous in that sense, but their additional responsibilities and duties and their availability for assistance on both an emergency response or a spe- cial does require them to maintain that kind of capability. Mr. HASTERT. I am coming kind of full circle. If people start to retire at 51, 52, 53 years of age and they can go on and maybe be productive through 60 years of age in the FBI, perhaps they should be allowed to stay. There are many other rigors and some good evi- dence that maybe they should retire early. Is that true? Mr. REVELL. Yes, there is a great deal of rigor and there are also long hours for an extended period of time. As I said, the average workweek is 60 to 65 hours and that is just an average. So there is a burnout factor. I don't think that agents involved in investigative work beyond 60 would normally be as productive as those in their earlier years. Mr. HASTERT. Is there something we can do by statute to allow you to keep resources that you need? Is there something that we need to do to keep these people-- Mr. REVELL. I think when the Pay Commission recommendation comes up with the extension to 57, it deserves your consideration because I believe that some would stay until 57 and then go on into a much less rigorous occupation-they might do part-time teaching or consulting and not go into a full second career if they could stay-- Mr. HASTERT. That would be your recommendation? Mr. REVELL. Yes, sir. Mr. HASTERT. OK. Thank you. Thank you, Mr. Chairman. Mr. BARNARD. Mr. Revell and Mr. Adamski, in view of what we have experienced in the last-I guess we can easily say now in the last 6 or 7 years because the problem sort of identified itself in 1983 and 1984 and then, of course, when the real collapse came, we really experienced it tremendously in 1987, 1988, and 1989. From your standpoint, have you got any recommendations as to what can be done to prevent bank fraud and embezzlement-it is always going to be there-do you have any ideas as to what more can be done as far as cooperation between the Justice Department, the FBI, the banks? What more can be done in this matter? Mr. REVELL. I heard the testimony this morning about economic conditions. As I told you, I was in Oklahoma, 1978, 1979, and I saw the boom, and then I saw the results of the bust when oil and wheat and cattle all went bust at the same time, and what we had was a structure built around a very hollow core. As that one little bank-it was a shopping center bank-collapsed and had $3 billion upstream and we saw Seafirst and First Continental Chicago go down the tubes because of one shopping center bank that had sold $3 billion of energy loans upstream, we have seen that replicated over and over and over. PAGENO="0296" 292 The 26 banks in the Butcher chain in the States of Tennessee and Kentucky cost $1.2 billion, $900 million of which came from Uncle Sam. We had, during, this period of time, a feeding frenzy. The more money that banks and savings and loans could put on the street, the more they expanded their portfolio, the bigger the bonuses and we had a real feeding frenzy going on. I think that has now changed substantially and the Government simply must stay involved if it has a fiduciary responsibility and an oversight responsibility. We can't walk away from it. I think we did. I think the Government walked away during this period from its responsibilities to have vigorous investigation, adequate prosecu- tion, and vigorous oversight. I don't believe that is the case now. I believe mechanisms are in place to deal with it and if we don't get into another boom feeding frenzy and walk away from our responsibilities, it shouldn't happen again. But we don't have a long time to make up for it. Mr. BARNARD. But don't we still need some quicker reporting of possible crime? I believe a man is innocent until proven guilty, I am not saying that, but it looks like to me, as brought out in some cases this morning, here you have a tremendous big loan loss where there is a suspicion of bank crime, but the bank regulator and the bank, wait and wait and wait, trying to collect the loan, even though there may be something criminal about that loan transaction. Do you see that we need a quicker reporting, a quicker resolution of problem banks? Mr. REVELL. One of the things that we have recommended-the President's Council on Integrity and Efficiency includes all of the inspectors general, the FBI, Justice, and so forth. We have recom- mended-the committee that I chair, the Integrity and Law En- forcement Committee-that all Federal auditors be required to un- dergo training in the detection of criminal activities and have re- quired in their job description, as well as their performance stand- ards, the detection and reporting of fraud. Mr. BARNARD. Does that include bank examiners? Mr. REVELL. That would include Federal bank examiners. I have also suggested this to the "Big 8" accounting firms as a standard for them under Yellowbook standards and they are somewhat less inclined because they think they work-they do work for a particu- lar client. Now, that client may be insured by the Federal Government and the ultimate loss would be to the public and I think that the ac- counting firms themselves will have to come up with some mecha- nism to not only give additional training, but to give additional in- centives to their auditors for this purpose. Mr. BARNARD. You know, some of their lack of efficiency or some of their lack of conscientiousness, we might even say, has cost them a lot of money financially. There have been some rather substan- tial cases brought against some of the major accounting firms for their laxity in reporting and accounting and auditing, and so maybe that would be a lesson they could learn. Mr. REVELL. The RTC, in contracting out, cannot use six of the eight major firms. Mr. BARNARD. You can have one more question. PAGENO="0297" 293 Mr. HASTERT. Thank you, Mr. Chairman. I know what happened in the Midwest. The Sunbelt was having a boom and we were having a bust and interest rates were sky high and the money flowed from north to south and a lot of the bad loans-the people who made the bad loans-I mean, the suppli- ers of the funds were up in my district. Is there something that you have-and I don't want to reveal any secrets, but are there red flags that pop up that get you going, things that point toward breaking the law? Do you have those types of procedures that once those red flags are there, if they are there, that you begin to pursue? Mr. REVELL. We actually have to wait on the referrals and those referrals are coming across-many of them are not criminal-- Mr. HASTERT. Right. Mr. REVELL [continuing]. And as we see patterns, then we adjust according to those patterns. We have no independent means to detect. We have to depend upon the audit agencies and the supervi- sory agencies to be our first line of defense. Once we see patterns develop, as we did in Tennessee and Texas and California and Oklahoma, then we do respond to it and we have set up special en- forcement programs in those locations. But we have no means to collect intelligence that would indicate to us, give us early warnings of pending problems short of that. Mr. HASTERT. Thank you. Thank you, Mr. Chairman, for your indulgence. Mr. BARNARD. Mr. Revell and Mr. Adamski, I want to thank you very much for being here, but I also would like to mention my ap- preciation and certainly that of the staff for the very timely way that you did submit your testimony and also for the information that you made available to the subcommittee. I realize there was a little delay in going through the agency channels concerning sub- missions to Capitol Hill, and some agencies are not as energetic as others in responding, but I do want to thank you all for your very timely response to our request. I am sure that as these hearings proceed, we will have additional questions that we would like to ask of you and we would just ap- preciate your cooperation and support at that time. Mr. REVELL. Yes, sir. Mr. BARNARD. Thank you very much. With that, the subcommittee is adjourned. [Whereupon, at 1:08 p.m., the subcommittee adjourned, to recon- vene at 9:30 a.m., Thursday, March 15, 1990.] PAGENO="0298" PAGENO="0299" FEDERAL EFFORTS TO COMBAT FRAUD, ABUSE, AND MISCONDUCT IN THE NATION'S S&L'S AND BANKS AND TO IMPLEMENT THE CRIMI- NAL AND CIVIL ENFORCEMENT PROVISIONS OF FIRREA THURSDAY, MARCH 15, 1990 HOUSE OF REPRESENTATIVES, COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE OF THE COMMITTEE ON GOVERNMENT OPERATIONS, * Washington, DC. The subcommittee met, pursuant to notice, at 9:38 a.m., in room 2247, Rayburn House Office Building, Hon. Doug Barnard, Jr. (chairman of the subcommittee) presiding. Present: Representatives Doug Barnard, Jr., John M. Spratt, Jr., Albert G. Bustamante, J. Dennis Hastert, Steven Schiff, Chuck Douglas, and C. Christopher Cox. Also present: Stephen R. McSpadden, counsel, Faye Ballard, clerk, and Peter J. Vroom, minority professional staff, Committee on Government Operations. Mr. BARNARD. The subcommittee will please come to order. Today the subcommittee is continuing its examination of the ef- forts by the Department of Justice, including the Criminal Division and the Federal bank regulatory and deposit insurance agencies, to detect and combat fraud, abuse, and misconduct in the Nation's savings institutions and banks. We will hear testimony concerning, first, the implementation of the new criminal and civil enforcement provisions in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, and also our committee's 1988 report on abuse, misconduct, and fraud; second, the Justice Department's criminal enforcement efforts; and third, the banking agencies' examination, supervisory, civil enforce- ment, and criminal referral and information-sharing activities. Yesterday, we discussed the subcommittee's past reports on this and related subjects, including hearings held and reports issued, since 1982. And yesterday, we heard from a panel of U.S. attorneys and senior FBI officials. Their testimony raised the following issues, which we want to cover today: What can be done to report any suspicious criminal misconduct on a loan transaction at an early stage, to reduce the burden on law enforcement, in lieu of trying to work out the situation through a supervisory action first? (295) PAGENO="0300" 296 What more can the banking agencies do to dedicate examiners and supervisors to the Dallas task force and to other criminal in- vestigations? And three, are the RTC and the FDIC, both Federal agencies, re- serving to themselves the power to withhold documents which they claim are privileged from Federal prosecutors, to preserve certain advantages in possible future civil litigation, perhaps giving priori- ty over the criminal prosecution? Today, I would like the RTC and the FDIC to respond to all of these issues, and the 0CC and OTS to respond to the first two. On the issue of the Department of Justice resources, I am very concerned that the 0MB and the Department of Justice have not requested, by appropriation, all the funds authorized by FIRREA for these efforts-$75 million for criminal enforcement, or possibly even more-but instead, asked for and received just less than $50 million in appropriations for fiscal year 1990, an amount which seems to be insufficient. It appears that the Attorney General's December 1989 allocation of over 400 additional positions to cover the financial institutions' front, based on the $50 million special appropriation, was far short of what was needed and what was asked for. Comparing this alloca- tion with the March 1988 FBI survey, we have discovered that the FBI division offices and the U.S. attorney offices surveyed in March 1989 asked for 224 more FBI agent positions, 113 more as- sistant U.S. attorney positions, and 143 more support staff positions than they finally received under that allocation, for responding to over 2,300 inactive bank fraud cases, 1,300 of which were major. Many offices with major inactive investigations received no in- vestigators or prosecutors, and many others received much less than they requested. This raises a serious doubt that $50 million is sufficient to bring justice to hundreds, if not thousands, of culpable persons who allegedly caused this savings and loan situation. This question of spending another $15 to $50 million must be weighed against the hundreds of billions of dollars the savings and loan debacle will cost the taxpayer and the hundreds of millions of dollars for RTC and FDIC fee counsel. Today we will first hear from Assistant Attorney General Dennis, the Chief of the Justice Department's Criminal Division, and then from the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, and the Office of the Comptroller of the Currency. I think it would be interesting to note that on one of the major networks last evening, a large part of their news program was given over to what is going to be done or what is being done or how we are going to address the problem- of those who have committed crimes in the area of inside abuse and fraud in banks and savings and loans. I thought that was very timely, because it started off with testi- mony by the President, in last August, where he was going to pledge all of his strength and resources toward punishing those who were guilty of wrongdoing. Unfortunately, it looks like that goal- is - not being pursued, not nearly as ardently and as energeti- cally as he indicated he would like to see it pursued. And certainly as serious as it is, we note that the number of cases involving defal- PAGENO="0301" 297 cations, or crimes of $100,000 and more, including failed financial institutions, are continuing to increase. With all that going on, in my evaluation, we should be doing even more and more to address this problem. So we are looking forward this morning to hearing from the De- partment of Justice as well as the Federal regulators, and to get an update on their efforts in this regard. So this morning, I would like to welcome Mr. Edward Dennis, Jr., who is Assistant Attorney General of the Criminal Division for the Justice Department. Mr. Dennis, we will hear your testimony at this time. Mr. DENNIS. Thank you very much, Mr. Chairman. Mr. BARNARD. But before you do that, I must ask, does anyone have an opening statement? Mr. Schiff. Mr. SCHIFF. No, sir. Mr. BARNARD. Mr. Cox. Mr. Cox. No. Not at this time. Mr. BARNARD. All right. We would now like to hear from you, Mr. Dennis. STATEMENT OF EDWARD S.G. DENNIS, JR., ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE, ACCOMPANIED BY ALLEN CARVER, DEPUTY CHIEF, FRAUD SECTION Mr. DENNIS. Thank you, Mr. Chairman. Mr. Chairman, and members of the committee, I am pleased to be here today to report to you on the progress made by the Depart- ment of Justice in fighting financial institution fraud in the last year and to provide my perspective on the future. I provided a longer written statement, which I would ask be made a part of the record. In addition to my comments this morning, of course, there has been a detailed response to a number of inquiries and questions, which has been made by Bruce Navarro, Acting Assistant Attorney General for Legislative Affairs, by letter dated February 26, 1990. Let me start by noting that the Department of Justice is very satisfied with the actions taken by Congress last year in passing FIRREA, which strengthens Federal supervisory and enforcement efforts involving the Nation's federally insured financial institu- tions. As one of the administration officers charged with exercising that enforcement mandate, I particularly note that Congress showed we had not only the will, but the wallet, to investigate and prosecute these cases, by appropriating over $49 million for in- creased resources in fiscal year 1990. We in the Department sustained our commitment once the ap- propriation became final. In allocating lawyer and support slots among the U.S. attorney's offices in the Criminal Division, we de- termined that the Criminal Division would receive 24 attorneys, the Tax Division would receive 6, and the remainder would go to the U.S. attorneys offices around the country. As among those offices, the positions were allocated according to need, taking into account a number of factors, including the number of matters under investigation, as well as the magnitude of PAGENO="0302" 298 the S&L failures in the FBI field division and the district or dis- tricts associated with that division. The allocation followed careful review within the Department, conducted jointly by the FBI, the Criminal Division, Executive Office for U.S. attorneys, and the Chairman of the Attorney General's Advisory Committee of U.S. Attorneys. During the time that we faced sequestration in the Criminal Di- vision, I directed that the positions designated for savings and loan association fraud would be held apart, and that cuts would have to be borne elsewhere. We in the Department well recognize that financial institution fraud threatens the very integrity of our financial institutions and, in turn, imperils the security of our economic enterprises, our family savings, and our own and our children's prosperity. I cannot overstate our commitment in this area of white-collar criminal law enforcement. Having stated our commitment to utilizing the resources provid- ed for this year, let me give a word of caution. You will not see results overnight. We expect to be accountable, and we do not shrink from our record. But let me remind you that financial insti- tution fraud cases are highly complex. They are typically the hand- iwork of clever manipulators of the banking system who have worked hard to disguise their wrongdoing. It often takes auditors and agents months, even years, to determine if a prosecutable crime has been committed. The document-intensive grand jury practice can take time. Postindictment pretrial practice tends to be a bit slower than in the average case and the trials can easily take weeks and often months. For this reason, I caution you not to expect an immediate boom in convictions. In fact, in the short term, you may very well find that due to the increase in investigators assigned to financial insti- tutions fraud matters, the statistics show a numerical increase in our backlog in some districts. Such a backlog may simply be the result of the fact that the investigation stage has come to a close in a number of matters that cannot be prosecuted immediately. Nev- ertheless, let me underscore the Department's commitment, un- wavering commitment, to significantly strengthen the law enforce- ment effort in this area. With respect to the Criminal Division, the single greatest com- mitment of personnel has been in the Dallas Bank Fraud Task Force. I have inspected the task force operations in Dallas twice. We are moving to new quarters there, we are installing new equip- ment, and we are hiring both Washington-based attorneys who will travel to Dallas and Texas-based attorneys who will stay there full time. Each year, our cases increase and our convictions increase. In fiscal year 1988, we had 12 convictions out of the task force, in 1989, 26, and in the first months of fiscal year 1990, through Febru- ary, we had 8 more. These are not simple cases. The investigations and trials can occupy one or two lawyers full time for months. Let me take a moment to comment on one of the disappointing aspects of the savings and loan effort, and that is in restitution. Although we routinely ask for and obtain restitution orders to compensate victims of these crimes, the payment of these amounts PAGENO="0303" 299 have been a grave disappointment. Our performance can be summed up in the old adage: "You cannot get blood from a stone." We believe that the defendants' lack of financial resources will pre- clude obtaining restitution in a vast number of cases. These cases often arise in different contexts than drug cases, where the asset forfeiture program has been distinguished by substantial recover- ies. In a typical savings and loan fraud case, the defendant's high- flying days are over; the bankruptcy of the loan project has ex- posed the fraud on the savings and loan association; and the pros- ecution follows the earlier economic crisis. All too often, the money has been spent or lost in the market, and cannot be traced or re- covered. The new forfeiture provisions of FIRREA are welcome additions to our prosecutive tools, because they give us another method to seize tainted assets and to deprive the criminal of his profits. Yet, even that tool may fall short of tracing or seizing the assets or in compensating the victims. We are interested in improving the results in this area but not if it means diverting resources away from prosecuting criminals. Among our priorities we have put first our obligation to investigate and to prosecute the individuals who caused the harm in the first place. Tracing assets for forfeiture and for restitution can involve thousands of hours of investigator and attorney time with the end result of an investigation which comes up empty. We are improving our relationship with the constituent organiza- tions to help collect restitutions but we note that compliance with restitution orders is overseen by the probation office and can be en- forced by the courts. Actually, it can only be enforced by the courts. As prosecutors we see our principal point of attack and our pri- mary function to be investigating and prosecuting criminals, which is yielding results, rather than searching out assets that often don't exist. Also, I would like to note that the Dallas Bank Fraud Task Force and the task force approach does not mean that we favor regional fraud offices as a matter of rule. We resist the idea of regional fraud offices for the reason that we endorse the consolidation of the organized crime strike forces into the various U.S. attorneys' of- fices in districts around the country. Having competing prosecutor offices in the district runs the risk of jurisdictional inefficiencies and a confusion of roles among prosecutors. In addition, we recognize the difficulties of maintaining an office as we have done in Dallas staffed by Washington-based prosecutors in a remote location. What the Department endorses is the task force concept, the colocation of prosecutors and investigators throughout the investigative and prosecutive stages, rather than having investigators work on their own and present their cases only at the end of their work. We endorse having the investigators and prosecutors look at the big picture early and look at it togeth- er. Together they plan investigative strategy, target those individ- uals who may plead guilty, and provide evidence against others in financial institutions or in the public sector. That, we think, is a PAGENO="0304" 300 good prosecutive approach in circumstances of such widespread or- ganizational fraud. Finally, let me state again our need to maintain strong, positive relationships with the rest of the banking community. Our rela- tionship with the Federal financial institution's supervisory agen- cies has developed into one of mutual respect and trust. There is a shared view that we must continue to work together in order to ac- complish truly effective supervision and enforcement. Thank you very much, Mr. Chairman. I am prepared to answer questions that you might have. Mr. BARNARD. Thank you, Mr. Dennis. [The prepared statement of Mr. Dennis follows:] PAGENO="0305" 301 ~tparfnunt nJ~ ~u~tier STATEMENT OF EDWARD S * G. DENNIS, JR. ASSISTANT ATTORNEY GENERAL CRIMINAL DIVISION BEFORE THE COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE COMMITTEE ON GOVERNMENT OPERATIONS UNITED STATES HOUSE OF REPRESENTATIVES CONCERNING FRAUD AGAINST FINANCIAL INSTITUTIONS ON MARCH 15, 1990 PAGENO="0306" 302 -1- Mr. Chairman and members of the Subcommittee, I am pleased to be here today to address the questions presented in your recent letters concerning fraud affecting our Nation's financial institutions. The Department of Justice welcomes this opportunity to discuss what the Department is doing to combat fraud directed against federally insured financial institutions. Let me assure you that preventing and prosecuting financial institution fraud is a top priority of the Department of Justice, as the Attorney General made clear in his December 7, 1989, public statement. The Department is committed to strengthening our enforcement effort. We fully recognize that such strengthening is of critical importance. We believe that the enactment August 9, 1989, of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, and the resulting funds which became available to the Department the end of last year, mark an important step towards the goal we all share -- bringing to justice those who have defrauded financial institutions around the United States. We appreciate the Subcommittee's efforts to assist us, and the financial institution supervisory agencies, to more effectively carry out our enforcement responsibilities. We look forward to continuing to work productively with the Subcommittee. Now let me address the questions presented in the Subcommittee's letter of February 22, 1990, which includes, also, PAGENO="0307" 303 -2- most of the questions presented in the Subcommittee's let~ter of January 29, 1990. This statement will respond to the specific questions in the order presented in the February 22 letter. question: General Overview: Based on cases handled by the Criminal Division, please provide a general overview and comment on the nature and extent of financial institution insider and affiliated outsider (e.g., borrower, accountant, or appraiser) fraud, giving examples where appropriate. Answer: This overview will highlight the statutes typically charged in our financial institution fraud cases and the broad range of conduct and defendants prosecuted. The focus here is on cases in which the Fraud Section of the Criminal Division directly participated in the period January 1, 1988 through February 28, 1990. The major emphasis of our financial institution fraud prosecutions (bank and savings and loan fraud prosecutions) has been on illegal loans and use of loam proceeds. For offenses occurring prior to enactment of the 1984 bank fraud statute, we have relied upon the statutes barring theft, embezzlement or misapplication of bank or savings and loan funds, 18 U.S.C. §~ 656- 657, to prosecute nominee loans, kickbacks, split commission schemes and land flips based on fraudulent appraisals. ~ United States v. Barker, CR 3-88-017-D (ND TX) (kickback); United States v. Faulkner, CR 3-87-240-G (ND TX) (pending trial) (alleged land flips and nominee loans). The bank fraud statute, 18 U.S.C. § 1344, bars knowingly PAGENO="0308" 304 -3- executing, or attempting to execute, any scheme or artifice to (1) defraud the financial institution, or (2) obtain money or other property of the institution by means of false or fraudulent pretenses, representations or promises. Recent prosecutions of ours have relied upon § 1344 in a variety of schemes. ~g., Unit~ States v. Roberts, CR 3-89-l54-R (ND TX) (use of nominee loan proceeds to buy aircraft); United States v. (Bob) Franks, CR 3-89- 0l85-R (ND TX) (pending trial) (alleged use of loan proceeds to pay off officer's loan at another institution); United States v. Emmott, CR S-89-5 (ED TX) (use of loan proceeds by insiders to invest in gold mines); United States v. Lemons, CR 3-88-234-T (ND TX) (payments to former chairman from loan proceeds); United States v. Rosenthal, CR 3-88-224-H (ND TX) (false invoices for draw requests); United States v. Gunter, CR 3-87-096-G (ND TX) (check kiting). Successfully prosecuted charges under §1344 have included, as presaged by cases under §~ 656-657 sustaining convictions where insiders concealed their interest in the loans, failure by the insider to provide material information to the board of directors about a loan. ~ United States v. Lemons, CR 3- 88-234-T (ND TX). In some instances, execution of the misapplication or bank fraud is accomplished by use of the mails, United States v. Emmott, CR S-89-5 (ED TX), orwires, United States v. Beebe, CR 3- 88-124-D (ND TX). Thus mail and wire fraud are additional crimes in such schemes. PAGENO="0309" 305 -4- Allegations under §~ 656-657 or § 1344 have also been accompanied by false statement counts under either 18 U.S.C. §~ 1005-1006 (false entries in the records of a bank or savings and loan) or 18 U.s.C. § 1001 (false statements to a federal agency, ~ Federal Deposit Insurance corporation, Office of Thrift Supervision or, earlier, Federal Home Loan Bank Board). In many cases, moreover, the original transaction may be questionable from a regulatory or business perspective but not necessarily criminal in nature. The crime often occurs after the transaction fails. At that point efforts to cover up the problem turn criminal with the falsification of reports to the regulatory agencies or board of directors. ~ United states v. (John) Smith, CR 3-88-016- T (ND TX) (18 u.s.c. §1001, institution paid interest on its own loans to avoid reporting the loans as delinquent); United States v. Dicicey, cR 3-88-l60-T (ND TX) (18 U.S.C. § 1008, delinquent loan list falsified). Where borrowers take over projects or perks the key issue may be whether the insider or the institution benefited from the payments. What could be a bribe may also be argued to be merely a cost of doing business -for borrowers. The falsification of documents or other concealment of the source of payments may provide a clear basis of prosecution in such schemes. ~ United States v. Veteto, cR 3-89-0l56-D (ND TX) (officer aided false draw requests); United States v. Atkinson,~ cR 3-89-Ol9l-T (ND TX) (borrower paid for lease of beach house through false draw PAGENO="0310" 306 -5- requests). Instances of bribery or unlawful gratuities to bank/savings and loan officials have been prosecuted under 18 U.S.C. § 215. ~ United States v. collier, CR 89-160-A (WD OK); United States v. Lemons, CR 3-88-234T(ND TX). The original statute, until 1984 only a misdemeanor, criminalized only the recipient of the bribe, except under an aiding and abetting theory. The 1984 felony statute reached both giver and receiver and covered any transaction of the institution, not just lending, by specifying that the thing of value be given and received "in connection with" bank business. The 1986 amendments required that the thing of value be "corruptly" given or received with intent "to influence" or "be influenced" in connection with bank business. One prosecutorial theory, often used, has been ~he second prong of the conspiracy statute, 18 U.S.C. § 371, barring agreements to defraud the United States, including any agency. Cases involving a conspiracy to defraud include United States v. ~ CR 3-89-l4l-T (ND TX) (conspiracy to defraud Federal Home Loan Bank Board by concealing true use of funds of the financial institution, reimbursing individual political contributions); United States v. (Robert) Hopkins, CR 3-89-008-G (ND TX) (conspiracy to defraud Federal Election Commission by failing to register and reimbursing political action committee contributions); United States v. Niekerk, CR 3-89-276-R (ND TX) ("impeding, impairing, obstructing and defrauding the lawful governmental PAGENO="0311" 307 -6- functions of the Internal Revenue Service of the Department of the Treasury of the United States in the ascertainment, computation, assessment, and collection" of income taxes); United States V. figQ~, CR 3-89-0184-H (ND TX) (impeding IRS); United States V. (Joseph) Smith, CR 3-89-0l83-G (ND TX) (impeding IRS). In addition to conspiracy charges for tax-related offenses, direct tax charges have formed the basis for prosecution in several cases. ~ United States v. Bourgeois, CR 3-89-134-F (false tax statement); United States v. Hulon, CR 3-89-l15-D (ND TX) (false tax statement); United States v. Rothwell, CR 3-89-328-F (ND TX) (pending trial) (alleged false tax statement and evasion). Because of difficulties in proving criminally induced appraisals, cases based primarily on appraisals have been infrequent. Where proof of extraordinary payments or repetitions of appraisals on the same property by an appraiser is present however, these types of charges have been brought. ~.g.,., United States v. Faulkner, CR 3-87-240-G (ND TX) (pending trial) (developers allegedly used inflated appraisals in land flips and paid appraiser cash bonuses and excessive fees). The other prosecuted scenario is providing false information to the appraiser to induce a high value. ~.,.g.,, United States v. Romero, CR 3-89- 206-T (ND TX). Other criminal statutes, not specifically directed to bank PAGENO="0312" 308 -7- fraud, have also been used to prosecute bank-related crime. Thus, prosecutions have included charges of (1) bankruptcy fraud, 18 U.S.C. § 152, United States v. Runnells, CR 88-53-N (ED VA); States v. Hulon, CR 3-89-ll5-D (ND TX); (2) entering a bank to commit a felony, 18 U.S.C. § 2113(a), United States~L~ Rosenth~i, CR 3-88-224-H (ND TX); and (3) interstate transportation of stolen property, 18 U.S.C. § 2314, United States v. Emmott, CR S-89-5 (ED TX). In two instances prosecution has included charges under the RICO statute, 18 U.S.C. § 1962. United State$~L~ Runnells, CR 88-53-N (ED VA); United States v. Faulkner, CR 3-87- 240-G (ND TX) (pending trial). Moreover, prosecutions have been launched to preserve the integrity of fact gathering in the criminal and agency process. ~ United States v. Barnhart, CR 3-88-2O6-G (ND TX) (18 U.S.C. § 1623, perjury before the grand jury based on claimed lack of recollection); United States v. Melcher, CR 3-88-153-G (ND TX) (plea to other counts but indictment also charged 18 U.S.C. § 1503, ttcorruptly endeavored" to influence, obstruct and impede justice by advising grand jury witness to give false and misleading testimony); United States v. Rakofsky, CR 3-89-092-R (ND TX) (18 U.S * C. § 1623, perjury before grand jury); United States v. Runnells, CR 88-53-N (ED VA) (18 U.S.C. § 1503, destruction of documents). Where bank and savings and loan executives have also sought PAGENO="0313" 309 to gain influence in politics at the direct monetary expense ~f the institution, those illegal campaign contributions can be prosecuted under traditional bank fraud and false statement prohibitions. False statements to the Federal Election Commission and bank regulatory agencies are prosecutable under 18 U.S.C. § 1001. Reimbursements of contributions may constitute both false entries, 18 U.S.C. §~ 1005-1006, and misapplication of funds, 18 U.S.C. §~ 656-657. ~ United States v. (Robert) Hopkins, CR 3-89-008-G (ND TX); United States v. Hill, CR 3-88-0059-H (ND TX); United States V. Malone, CR 3-89-127-H (ND TX); United States v. Kinc, CR 3-89-l4l-T (ND TX) (also entertainment of state regulator with female companions). Most cases have charged senior banking officials and borrowers. In some instances, however, professionals or persons who assisted management as employees but were not core officers have likewise been prosecuted. ~j, ~ United States v. Runnells, CR 88-53-N (ED VA) (attorney, accountant); United States v. Davis, CR 87-0070-J (D WY) (attorney-owner); United States v. Baggett, CR 5-89-7 (ED TX) (employee), a companion case to United States v. Emmott, CR S-89-5 (ED TX); United States v. (Jack) Franks, CR 3-88-l96-R (ND TX) (real estate consultant); United States v. Faulkner, CR 3-87-240-G (ND TX) (pending trial) (appraiser); United States v. Bourgeois, CR 3-89-134-F (ND TX) (attorney-officer). PAGENO="0314" 310 -9- The following table summarizes the types of charges brought by the Fraud Section and in Fraud Section assisted cases. TABLE 1 STATUTES USED FOR BANK/SAVINGS AND LOAN FRAUD PROSECUTIONS BY FRAUD SECTION, CRIMINAL DIVISION DEPARTMENT OF JUSTICE JANUARY 1, 1988 - FEBRUARY 28, 1990 Number of Ca~~ 18 U.S.C. §152 (bankruptcy fraud) 2 18 U.S.C. §215 (bank bribery or unlawful gratuity) 2 18 U.S.C. §371 (conspiracy) 28 [including conspiracy to defraud U.S.] 18 U.S.C. §~656-657 (misapplication of bank/S & L funds) 14 18 U.S.C. §1001 (false statements to federal agency) 11 18 U.S.C. §~l005-l006 (false entries in bank/S & L records) 13 [including §1006 participation in proceeds of loans] 18 U.S.C. §~l007-l008 (false statements to influence FDIC/FSLIC action) 1 18 U.S.C. §1014 (false statements to obtain loan/advance/draw) 23 18 U.S.C. §1341 (mail fraud) 5 18 U.S.C. §1343 (wire fraud) 8 PAGENO="0315" 311 - 10 - 18 U.S.C. §1344 (bank fraud) 9 18 U.S.C. §1503 (obstruction of justice) 2 18 U.S.C. §1623 (perjury) 3 18 U.S.C. §~1962(c),(d) (RICO) 2 18 U.S.C. §2113 (a) (entering bank to commit felony) 2 18 U.S.C. §2314 (interstate transportation of stolen property) 3 26 U.S.C. §7201 (tax evasion) 1 26 U.S.C. §7206(1) (false tax statement) 4 26 U.S.C. §7206(2) (aiding false tax document) 3 SOURCE: Indictments and information filed or tried January 1, 1988 - February 28, 1990. Several statutes nay be charged in the sane indictment or information. Multiple. counts charging violation of the same statute nay also be included in the sane indictment or information. PAGENO="0316" 312 - 11 - Qpestion: a. Please provide the following data for each of fiscal years 1988 and 1989, and currently at present, concerning those matters which have been handled by the Fraud Section where the alleged loss involved $100,000 or more: (a) numbers of (i) pending investigations, (ii) individuals under investigation, (iii) declinations, (iv) convictions, (v) pretrial diversions, (vi) acquittals, and (vii) mistrials (where there was no subsequent conviction), and (b) the venue of each judicial district involved. (Please feel free to provide similar Dallas Task Force data separately, although that is not necessary since U.S. Attorney Marvin Collins has been asked to provide it.) b. Information concerning the financial institutions involved in these above matters: (i) How many S&Ls and how many banks were victimized? How many were/are open, and how many had/have failed? (ii) What are the estimated dollar losses xesulting from these failures? (iii) If at all possible, identify the failed institutions involved. Answer: First, for fiscal year 1988, the main focus of the Fraud Section in the financial institution fraud area was on the operations of the Dallas Bank Fraud Task Force (Task Force). An overview of the Task Force and its operations is contained in the Fraud Section's 1988 report (CY `88) and the Section's 1989 report (FY `89). Copies of both reports were given to the Subcommittee's staff February 8, 1990; hence, the overview will not be repeated here. The Fraud Section's participation in~ THRIFTCON, the investigation (matter) being handled by the Task Force, required approximately eight Fraud Section trial attorney workyears plus the major part of a Fraud Section Deputy Chief's time. In fiscal year 1988, THRIFTCON involved over 400 subjects, over two dozen financial institutions, and millions of documents. In addition, one Fraud Section trial attorney worked full-time on a case venued in the Northern District of Texas, United States PAGENO="0317" 313 - 12 - v. Faulkner, CR 3-87--240-G (pending trial). Beginning in July 1988, one Fraud Section trial attorney worked full-tine on a matter/case venued in the Eastern District of Virginia, United States v. Runne].~g, CR 88-53-N (ED VA). One Fraud Section trial attorney worked full-time for about 5/6 of the fiscal year on a case venued in the District of Wyoming, United States v. Davis, CR 87-0070-J (D WY). One Fraud Section trial attorney, and a Deputy Chief of the Section, worked part-time on a matter/case venued in the District of Oregon, United States v. Harsch, CR 88-6-0002 (D OR). Together they spent about one workyear on Narsch in fiscal year 1988. Lastly, one trial attorney spent a significant part of his time on a matter/case venued in the District of Columbia, United States v. Taro, CR 88-0340 (D DC). This attorney was also assigned to Task Force work, which required the remainder of his time. In summary, approximately 15 Fraud Section attorney workyears were spent on these matters/cases in fiscal year 1988. The Task Force produced twelve convictions in fiscal year 1988. The ~ case resulted in one conviction. One defendant in the Runnells case committed suicide. There were no acquittals, mistrials, or pretrial diversions. In fiscal year 1989, the Fraud Section's main enforcement effort in the financial institution fraud area continued to be its participation with the Task Force. Ten Fraud Section attorney workyears, plus full-time attention by a Deputy Section Chief, were PAGENO="0318" 314 - 13 - dedicated to the Task Force. A second, rather substantial task force effort, involving both HtJD fraud and financial institution fraud, required one full-time Section trial attorney for the financial institution fraud effort. This operation, named OK-SKIM, was centered in the Western District of Oklahoma. In addition, one trial attorney worked about one-half workyear on the Faulkner case. The Davis (D WY), Harsch (D OR) and Runnells (ED VA) cases together consumed about one trial attorney workyear. The Task Force's efforts produced 26 convictions and only one acquittal in fiscal year 1989. (There was a mistrial of two defendants in one case in which another defendant was convicted). The Faulkner case ended in a mistrial after a six month trial, but the case will be retried. The Davis, Harsch and Runnells cases produced convictions. For more details about each of the above prosecutions, please refer to the two previously mentioned Fraud Section reports. As for the Section's fiscal year 1990 efforts, OK SKIM has produced two convictions related to financial institution fraud. One of these convictions was of the former president and chief executive officer of the now defunct First National Bank of Del City (Del City, Oklahoma). The defendant was sentenced recently to ten years' imprisonment and to make $700,000 in restitution to the Federal Deposit Insurance Corporation. In addition, two Section trial attorneys have been assigned full-time to handle financial institution fraud connected with OK-SKIM. The Dallas Bank Fraud PAGENO="0319" 315 - 14 - Task Force had produced eight convictions (there was one acquittal) through February 28, 1990. There were 11 pending cases (five cases were expected to be disposed of through guilty pleas; six were to be tried). Ten Fraud Section trial attorneys have been assigned full-time to Task Force work. (We expect to bring our Task Force commitment to 22 Section trial attorneys, comprising the 10 previously dedicated positions plus 12 of the new 24 positions under FIRREA). One Section trial attorney recently began working with the United States Attorney's Office in the District of Wyoming on a matter and will probably spend a large part of her time working with that Office. One Section trial attorney (a FIRREA position) is working full-time in a supporting role and a Deputy Chief of the Section works virtually full-time in this enforcement area. Eleven additional trial attorneys are authorized for the Fraud Section's financial institution fraud work. These trial attorneys will support field operations through both staff support and direct participation in litigation. The Fraud Section, following the President's announcement in February 1989, of the Administration's proposal for $50 million with which to combat financial institution fraud, began to solicit applicants and conduct interviews in anticipation of newly authorized positions. For the 12 month period ending February 28, 1990, the Section interviewed 208 attorneys, offered employment to PAGENO="0320" 316 - 15 - 33, and hired 20. As of February 28, the Section had on board, or almost on board, 55 of the Section's authorized strength of 73 attorneys. A number of financial institutions, both banks and savings and loans, were involved in the above prosecutions. They are named in the two reports given to Subcommittee's staff. Most of those financial institutions failed or were merged. We have no estimate of the dollar loss resulting from the failures. c~uestion: a. Please fully explain the lack of any. internal Justice Department system which provides data on numbers of major ($100,000 plus, e.g.) financial institution fraud and embezzlement cases, including numbers of grand jury investigations, prosecutions, and convictions; ranges of sentences; and amount of restitution recovered, all correlated to types of failed institutions, for example. b. (1) Given the public importance of this subject, is the Department prepared to consider a new data system? (2) Why has the Justice Department failed to implement the recommendation in the 1988 report 1 recommending specific steps to modify the Significant Referral Tracking System (SRTS) to include all major investigations and make the system current, which could help address this gap? Answer: The conclusion upon which this question is based is mistaken; the Department's system collects comprehensive information, including data on numbers of major ($100,000 plus) financial institution fraud and embezzlement (BF&E) matters and 1Combating Fraud, Abuse, and Misconduct in the Nation's Financial Institutions: Current Federal Efforts Are Inadequate", Seventy-Second Report by the Committee on Government Operations, October 13, 1988, House Report 100-1088. PAGENO="0321" 317 - 16 - cases. First, the Federal Bureau of Investigation has revised its Resource Management and Information System (RMIS) to record statistical data, including Direct Agent Workyears expenditures and accomplishments, by financial institution category (bank, savings association, or credit union), and for financial institution failure investigations in addition to dollar - loss categories. The following changes in BF&E subclassifications became effective in September 1989 (beginning of FY 1990 for reporting purposes): *29A Bank Fraud and Embezzlement - Loss or losses contributing to the failure of a federally insured ~ *29B Bank Fraud and Embezzlement - Loss or exposure of $100,000 or more involving a federally insured ~ *29C Bank Fraud and Embezzlement - Loss or loss exposure of $25,000 to $99,999 involving a federally insured ~ ~29D Bank Fraud and Embezzlement - Loss or losses contributing to the failure of a federally insured savings association *29E Bank Fraud and Embezzlement - Loss or loss exposure of $100,000 or more involving a federally insured savings association *29F Bank Fraud and Embezzlement - Loss or loss exposure of $25,000 to $99,999 involving a federally insured savings. association *29G Bank Fraud and Embezzlement - Loss or losses contributing to the failure of a federally insured credit union 30-830 0 - 90 - 11 PAGENO="0322" 318 -17- *29H Bank Fraud and Embezzlement - Loss or loss exposure of $100,000 or more involving a federally insured credit union *291 Bank Fraud and Embezzlement - Loss or loss exposure of $25,000 to $99,999 involving a federally insured credit union 29J Bank Fraud and Embezzlement - Loss or loss exposure of under $25,000 involving a federally insured financial institution and handled via Fast Track 29K Bank Fraud and Embezzlement - Loss or loss exposure of under $25,000 involving a federally insured financial institution and not handled via Fast Track * denotes Priority Case Indicator (PCI) In addition to reporting PCI subclassification by financial institution category, the revised subclassifications categorize non-PCI BF&E investigations (under $25,000 loss or loss exposure) only for those handled via a "Fast Track" system and those handled via traditional investigations. The "Fast Track" system has been encouraged by both FBIHQ and DOJ as an effective and efficient way to handle lower dollar loss BF&E matters with a minimal resource commitment. The revised subclassifications will enable FBIHQ to consider "Fast Track" results in non-PCI cases in the evaluation of a field division's performance in the White-Collar Crime Program. Any PCI cases handled via "Fast Track" are to be reported in the appropriate PCI subclassification category. Next, the Executive Office for U.S. Attorneys (EOUSA) PAGENO="0323" 319 -18- maintains a system that collects information from the 93 U.s. Attorneys about matters and cases handled by their offices. Fraud against financial institutions is a separate program category in this system ("036"). The EOUSA' s system includes an estimate of loss (a 13-digit numeric dollar estimate of value involved in the matter/case, extensive "defendant" information (for both matters and cases, including~but not limited to identifying data, charges brought via information or indictment, outcome of a prosecution (including the sentence), and appeal after conviction). The Department's system, consisting of the collection and storage of retrievable information by both the FBI and the EOUSA, and collection of information by the Criminal Division regarding its matters and cases, collects ample information about financial institution fraud matters and cases; thus, recommendations to create an entirely new system seem questionable. Of course, the existing system is not perfect. It depends upon the accurate entry of data in each FBI division, each U.S. Attorney's Office, and the Division. This requires, and will always require, supervision at the local level. Revising the system is no answer to the basic need for conscientious, careful work at the point of data entry into the system. The Significant Referral Tracking System (SRTS) is designed for a narrow purpose, to facilitate tracking for supervisory agencies. Modifying the system to duplicate or refine what the FBI and EOUSA are already doing would simply complicate the data PAGENO="0324" 320 ~l9- collection process, increase the expense of such collection, and place a burdensome (additional) reporting requirement on the U.S. Attorneys Offices. We therefore disagree with the Subcommittee's view that the SRTS should be expanded. Lastly, in connection with planning for how best to allocate resources anticipated upon enactment of FIRREA, and in connection with hearings held by the Senate Committee on Banking, Housing and Urban Affairs in February 1989, the Department conducted two comprehensive surveys. One was addressed to the Special Agents in Charge (SAC) of the FBI field divisions, who were instructed to coordinate their responses with the U.S. Attorney or U.S. Attorneys for the districts receiving investigatory support from the SAC's division. The other was addressed to all U.S. Attorneys. A copy of the results of the latter survey was recently given both to the staff of this Subcommitttee and to the staff of the Subcommittee on Oversight of the House Committee on Ways and Means. In addition, a copy of the reports from the FBI field divisions, with investigatory information deleted, recently was given to the Subcommittee. Ouestion: Has the Attorney General implemented Recommendation no. 20.a. in the committee's 1988 report, which urged him to send a special directive to Federal prosecutors concerning sentencing and restitution in major financial institution fraud cases? Answer: Recommendation 20.a. provided that: The Attorney General should direct PAGENO="0325" 321 - 20 - Federal prosecutors to make every ef fort, at the time of sentencing in major financial institution fraud cases, to emphasize to the court the importance of (i) more than minimal imprisonment in major bank fraud cases, (ii) mandatory restitution, and (iii) if appropriate, an industry-wide removal and prohibition order, as part of every sentence. The Department does not believe that issuing such a directive is necessary. Federal prosecutors routinely make every reasonable effort at the time of sentencing to ensure that the. court is fully aware of the seriousness of the offense, aggravating circumstances, and the importance of imposing a sentence that will adequately punish the offender and deter others from engaging in the same or similar conduct. Of course, Sections 961(a) through (k) of FIRREA increased * the maximum term of imprisonment from five or fewer years to twenty years and the maximum fine to $1,000,000 for a violation of 18 U.S.C. §~ 215(a), 656, 657, 1005, 1006, 1007, 1014, 1341 (affecting a financial institution), 1343 (affecting a financial institution), and 1344. Section 961(m) of FIRREA also included a PAGENO="0326" 322 - 21 - specific direction to the U.S. Sentencing Commission tO establish guidelines ensuring a substantial period of incarceration for a violation of, or conspiracy to violate, the above-listed statutes that "substantially jeopardizes the safety and soundness of a federally insured financial institution.'t The Department has recommended to the U.S. Sentencing Commission the adoption of a guideline providing that if the offense substantially jeopardizes the safety and soundness of a federally insured financial institution, and the offense level determined under Section 2Fl.l of the guidelines is less than level 24, the level will be increased to level 24 (ensuring a range of 51-63 months actual imprisonment for a first offender). Question: Does the Criminal Division have any information on the restitution imposed and collected on all financial institution fraud cases handled by the Fraud Section (during F1 `88 and FY `89)? If so, please indicate the percentage of individual convictions as to which the courts have imposed restitution, the range of amounts imposed, and the amount (i) imposed and (ii) collected. (2) Specify the amount of restitution collected in the following cases handled by the section (several of which involve Vernon S&L): U.S. v. John G. Smith ($330,000 to FSLIC), U.S~ v. Ronald Camnbell ($150,000 to the FSLIC), U.S. v. Robert Gunter et ~ ($2.2 million to victimized institutions), U.S. v. Bruce Thompson ($1.7 million in restitution to the FDIC and MUD), U.S. v. Patrick King ($65,771 to the FDIC), and U.S. v. Rarsch ($2 million to Treasury). Answer: Ordinarily the federal prosecutor's role is to seek an appropriate order of restitution for the victim of a criminal offense. Tracking subsequent payment is not a function of the prosecutor. Consequently., while we can supply information about PAGENO="0327" 323 - 22 - ordered restitution, our information about paid restitution is not definitive. Subject to this caveat, the following information is provided for the Subcommittee. In fiscal year 1988, 10 defendants prosecuted by the Dallas Bank Fraud Task Force (Task Force) were sentenced. Six of the 10 were ordered to make restitution payments, totaling $5,852,370.08. According to our records only $21,275 had been paid (as of February 12, 1990). This figure includes payments~ of $25 by Virginia Thomas and $500 by Bobbie Jean Gunter, defendants in the Gunter case. The third defendant committed suicide. We have no record of any payment in the Campbell case, one of the cases sentenced in fiscal year 1988. In fiscal year 1989, 20 defendants prosecuted by the Task Force were sentenced. Restitution Orders were directed to 9 of the 20. The total amount ordered was $3,140,523.67. Only $2,700 of this amount had been paid through February 12, 1990. No payment by John Smith had been made. According to our records, additional $110,000 restitution was ordered in the Runnells case ($10,000 against one defendant; $100,000 against the other) (we do not have payment information). In fiscal year 1990, through February 23, 1990, 11 defendants prosecuted by the Task Force were sentenced. Five of the 11 were ordered to pay restitution, totaling $2,520,271.44. According to our records, as of February 12, 1990, $50 of the total amount due had been paid. We have no record of any payment by Patrick King PAGENO="0328" 324 - 23 - nor of a restitution order in Harsch. The Bruce Thompson case resulted in a restitution order for $1,798,105. In the companion case to Thommson, United States v. Ronald Collier, the defendant was ordered to pay restitution of $700,000. No restitution has been paid in either of these cases. Question: Both before the Congress and in press conferences-most recently during the 12/7/89 press conference--the Attorney General has held out little prospect of recovering substantial amounts of funds taken from S&Ls and banks by persons convicted of financial institution fraud. This assessment is very troubling to the Congress and the public. (1) Where have the assets allegedly been dissipated in most cases? (2) What actions can and do Federal prosecutors take to determine the location of assets, such as during post-conviction proceedings? (3) Is any additional legislation needed? (4) Has the Justice Department considered assigning some of the additional personnel in U.S. Attorneys' offices to the task of locating and then retrieving assets? Are there any other possible solutions? Answer: The assessment is equally troubling to the Department of Justice, but the plain fact is that there is reason to doubt that recoveries will recoup the losses sustained by financial institutions. There are several reasons for this. First, we know of no reliable way in which we can calculate the precise dollar amount of fraud associated with a particular financial institution, at least until a federal grand jury has returned an indictment and a conviction has resulted from the indictment, or an individual has entered into a plea agreement with the government. The reason is that in many of our investigations, law enforcement agents and prosecutors spend very substantial portions PAGENO="0329" 325 -24- of tine scrutinizing all aspects of specific transactions that may involve fraudulent activity. Many transactions nay be the direct result of blatant mismanagement, such as repeated lending to unqualified or marginal borrowers, but may not be characterizable as fraud* if additional factors such as the use of a false and misleading statements were not present. Once a federal grand jury has determined that there is probable cause to believe that a particular person has committed specific federal crimes relating to such transactions and a jury has returned verdicts of guilty, or an individual has pleaded guilty to specified federal crimes, prosecutors have a clearer understanding of the scope of the fraudulent activity and can more readily quantify it. Even then, it is often not possible to precisely quantify the amount of the fraud. Typically, following the conviction of an offender, the prosecutor will seek an order from the sentencing federal district judge directing the defendant to make restitution to victims who have suffered a financial loss as a result of the offense. The government bears the burden of proving the amount of the loss by a preponderance of the evidence. The Court, in determining whether to order full restitution, must consider the financial resources of the defendant, the financial needs *and earning ability of the defendant and the defendant's dependents, and such other factors as the court deems appropriate. To the extent that the court determines that the complication and prolongation of the PAGENO="0330" 326 - 25 - sentencing process resulting from the fashioning of an order of restitution outweighs the need to provide restitution to any victims, the court nay decline to make such an order. Although restitution orders are routinely sought pursuant to the provisions of the Victim and Witness Protection Act in cases where restitution is feasible, the defendant's lack of financial resources often will preclude obtaining restitution for the victim financial institution or its federal insurer. Section 951 of FIRREA created a new civil provision (codified as 12 U.S.C. § 1833a.) that might produce monetary recoveries. The Federal Programs Branch (Branch) of the Civil Division and the Fraud Section of the Criminal Division have been working closely together towards implementing section 951. Recently, the Fraud Section gave the Branch information from the Section's Significant Referral Tracking System to assist with the identification of U.S. Attorney's Offices possibly having matters suitable for application of section 951. Based on a review of that information, the Branch has contacted most U.S. Attorney's Offices with such referrals and visited the offices in California, Colorado, Florida, and Texas with the largest number of criminal referrals. The Branch has asked the U.S. Attorneys' Offices to identify which of those referrals might be appropriate for a civil penalty action either PAGENO="0331" 327 - 26 - in lieu of or in connection with criminal prosecution. Our goal is to use the civil penalty authority to pursue major wrongdoers where the evidence of wrongdoing is strong, but perhaps not equal to proof beyond a reasonable doubt. The civil penalty authority also is expected to provide a less costly and less difficult enforcement alternative among groups of defendants, thereby allowing criminal resources to be focussed on key defendants and the cases where evidence of criminal violations is strongest. Through the process of having the U.S. Attorneys' Offices identify likely civil penalty cases, the Branch expects to have several cases ready for filing in the next few months. Thereafter the civil remedy should kick in as a routine and practical alternative to criminal prosecution. In addition, Section 963 of FIRREA created new civil and criminal forfeiture provisions (18 U.S.C. § 981(A) (1) (C) and 18 U.S.C. § 982) . These provisions should facilitate the recovery of monies in some cases. But what is needed most is enforcement of existing laws. That in turn requires sufficient numbers of investigators, prosecutors and judges to handle the existing workload. Turning to your questions about asset tracing, you have asked "where have the assets allegedly been dissipated in most cases?" There is no way of precisely answering this question, but we are confident that a major factor in determining loss is depreciation PAGENO="0332" 328 - 27 - of assets. In other words, much of.the loss is attributable to market conditions and is not recoverable by any means, much less through criminal prosecution. Next, it is not unusual to find that defendants have squandered their monies on vacations, trips, entertainment, and a variety of other items. Such monies are gone, not recoverable. As for tracing during the course of a criminal investigation it is routine for investigators and prosecutors, using grand jury process and other investigatory means, to examine a putative defendant's financial profile. But such an examination provides no guarantee that all of a putative defendant's assets will be discovered, especially when sophisticated means have been employed to conceal then. An exhaustive tracing investigation could require months or years of investigative work, substantial numbers of investigators, and tens of thousands of dollars in investigative costs, and in the end the investigation night discover no recoverable assets. Moreover, such an investigation might divert investigators and prosecutors from developing criminal cases, with the result that criminals escape prosecution. This is not to say that asset recovery is not given serious consideration. It is. But not at the expense of convicting those who have victimized financial institutions. Question: a. Please describe the ranges of sentences imposed on defendants in cases handled by the Fraud Section, in the Northern PAGENO="0333" 329 - 28 - District of Texas and separately elsewhere? What factors most influence the sentence imposed? b. Are these sentences usually sufficient, given the losses involved? What concerns or problems do you have with sentences imposed in these cases? c. (1) U.s. Attorneys surveyed -by the subcommittee have expressed concern about the minimal increases in prison time under the Federal sentencing Guidelines for someone who has defrauded an institution of $3 million as compared to someone who obtained $500,000 in a similar fashion. In your view, is this a problem, and, if so what recommendations are you prepared to make to the sentencing Commission? (2) In the February 16th Federal Register the Sentencing Commission proposed (pursuant to section 961(m), Public Law 101-73) that sentences for offenses which substantially jeopardize an institution's safety and soundness be set at level 24. In your view, is that adequate? Answer: Task Force sentences have ranged from probation to 35 years' imprisonment. Of the 10 defendants sentenced in fiscal year 1988, seven received terms of imprisonment, three received probation; six were ordered to make restitution to their victims; and four were fined. Of the 20 defendants sentenced in fiscal year 1989, 14 received terms of imprisonment, six received probation; nine were ordered to make restitution to their victims; and eight were fined. Of the eleven defendants sentenced in fiscal year 1990 (as of February 23, 1990), all 11 received terms of imprisonment; six were ordered to make restitution and two were fined. Factors affecting sentencing include the seriousness of the offense, background of the offender, and the value of the PAGENO="0334" 330 - 29 - cooperation (if any) of the offender with law enforcement. Sentences usually have been sufficient, but in several instances we would have preferred more severe sentences. But sentencing is, of course, within the province of the court. The sentencing judge has absolute authority over sentencing, subject to review only for an abuse of discretion ~ a sentence in excess of the maximum allowable under the law). We are not at this point prepared to say that the sentencing guidelines of the United States Sentencing Commission are inadequate, although if Congress should determine that more severe penalties should be provided, we would have no reason to question that determination. Indeed, if the Subcommittee has specific proposals in mind, we would be pleased to consider them and give the Subcommittee our views. 0~iestion: a. Either at the beginning of FY 1990 (prior to 12/7/89), or for all of FE 1989, how many Assistant U.S. Attorneys and how many Fraud Section attorneys were allocated to financial institution fraud matters? (Provide full time equivalency data.) Please provide the same number (based on DOJ expectations) for the end of FE 1990. (If this data is not available, indicate why not.) b. Please set forth for FE 1991, (i) the Department's requests to 0MB for funds and numbers of personnel for, first, the U.S. Attorneys' Offices and, second, the Criminal Division, for financial institution fraud cases, (ii) the same figures from the Department to 0MB, and (iii) the same from 0MB to the Congress (in the budget). Answer: The information supplied through our March 1989 survey indicates that at least 160 Assistant U.S. Attorney workyears, and PAGENO="0335" 331 - 30 - possibly as many as 200 to 250 Assistant U.S. Attorney workyears were spent on financial institution matters and cases in fiscal year 1989. One hundred and eighteen additional workyears are expected by the end of fiscal year 1990. As for the Fraud Section, the fiscal year 1989 figure is approximately 13 Section attorneys workyears. The end of fiscal year 1990 figure is estimated to be approximately 37 Section attorneys. This, of course, largely depends upon whether our recruitment efforts are successful. The information you requested was referred to the Justice Management Division. According to JMD, for fiscal year 1991, the Civil Division requested 60 positions ($3,398,000). The Department asked the Office of Management and Budget (0MB) for 60 positions ($3,419,000). The President asked Congress for the full amount requested by the Department. In addition, the Tax Division requested no new positions but requested $350,000. The Department asked 0MB for $279,000 and The President asked Congress to provide $279,000 for the Tax Division. Question: a. Geographical allocations: Please correlate the number of new U.S. Attorney attorney and support staff positions, Fraud Section positions, and Tax Division attorney positions with each judicial district receiving positions. b. Were there any U.S. Attorneys' Offices which either (i) requested additional positions for financial institution fraud matters but did not receive then or (ii) requested substantially more positions then they eventually received? If so, identify the offices in each category, and indicate the reasons that such offices were given no additional resources or less than what they requested. PAGENO="0336" 332 31 Answer: The enactment of the Financial Institutions Reform, Reform, Recovery, and Enforcement Act of 1989. (FIRREA) has made possible an increased law enforcement effort in this area. Late last year, as a result of appropriations authorized under FIRREA, $49.179 million was appropriated for enhanced enforcement in Fiscal Year 1990. Following a careful review within the Department regarding how best to employ resources under FIRREA, the Department divided the $49.l79 million among departmental components as follows: Federal Bureau of Investigation $25,039,000 United States Attorneys $20,862,000 Criminal Division $ 2,600,000 Tax Division $ 678,000 The authorized distributions of FBI Special Agents among various FBI field divisions and Assistant U.S. Attorneys among various U.S. Attorneys' Offices are listed below. The FBI is adding 153 new agents to this effort using FIRREA funds. Forty nine additional agent positions are being funded with other Bureau monies. The addition of the 202 agents will result in approximately a total of six hundred agent work years' being dedicated to financial institution related fraud and embezzlement. In addition, FIRREA will result in 118 Assistant United States Attorney positions dedicated to FIRREA enforcement. PAGENO="0337" 333 - 32 - * Assistant U.S. Attorneys by FBI Division Special Agents U.S. Attorney's Office Anchorage 2 1 District of Alaska Atlanta 3 2 Northern District of Georgia 1 Middle District of Georgia Boston 3 2 District of Massachusetts 1 District of New Hampshire Charlotte 0 2 Eastern District of North Carolina Chicago 4 3 Northern District of Illinois Cleveland 2 1 Northern District of Ohio Dallas 37 12 Northern District of Texas 3 Eastern District of Texas Denver 8 4 District of Colorado 1 District of Wyoming El Paso 1 1 Western District of Texas Houston 27 15 Southern District of Texas Kansas City 10 3 District of Kansas 3 Western District of Missouri Little Rock 4 2 Eastern District of Arkansas Los Angeles 27 15 Central District of California Memphis 1 1 Western District of Tennessee Miami 4 2 Southern District of Florida Minneapolis 5 3 District of Minnesota 1 District of North Dakota Newark 3 1 District of New Jersey New Orleans 12 3 Eastern District of Louisiana 2 Middle District of Louisiana 2 Western District of Louisiana New York 10 3 Southern District of New York 3 Eastern District of New York Oklahoma City 10 5 Western District of Oklahoma PAGENO="0338" 334 - 33 - Omaha 4 1 District of Nebraska 1 Northern District of Iowa Philadelphia 1 1 Eastern District of Pennsylvania Phoenix 6 3 District of Arizona Sacramento 1 1 Eastern District of California San Antonio 8 5 Western District of Texas San Francisco 4 3 Northern District of California Seattle 3 2 Western District of Washington Tampa 1 3 Middle District of Florida Financial Crimes Unit, White Collar Crime Section, FBI Headquarters 1 (May not be filled) TOTALS 202 118 Although most of the new resources will be located in the field, both the Tax Division and the Criminal Division received authorizations for additional positions, including six trial attorneys for the Tax Division and 24 trial attorneys for the Criminal Division, to strengthen their support to the U.S. Attorneys' Offices. In that regard, 12 of the Fraud Section's trial attorneys will be assigned to the Dallas Regional Office of the Fraud Section to reinforce the operations of the task force there. One Tax Division attorney will be stationed in Dallas with the task force. From the March 1989 survey of the FBI SACs and the U.S. PAGENO="0339" 335 - 34 - Attorneys associated with those SACs, the FBI field divisions requesting additional Special agents for major bank fraud related matters and cases, 2 but receiving none, are as follows: San Diego, CA; Pittsburgh, PA; Jacksonville, FL; Knoxville, TN; Richmond, VA; Butte, NT; and Las Vegas, NV. FBI field divisions receiving some additional special agents, but substantially fewer positions than requested, are as follows: Dallas, TX; Houston, TX; Denver,~ CO; San Antonio, TX; Chicago, IL; Tampa, FL; San Francisco, CA; Sacramento, CA; El Paso, TX; and Newark, NJ. United States Attorneys Offices (by judicial district) requesting additional Assistant U.S. Attorneys for major bank fraud related 2The term "bank fraud related" includes violations (alleged violations) of 18 U.S.C. § 215, 656, 657, 1005, 1006, 1007, 1008, 1014, 1344. It includes, also, conspiracy (18 U.S.C. § 371) to commit any of the listed offenses or to defraud a financial institution supervisory agency (Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, former Federal Savings and Loan Insurance Corporation, National Credit Union Administration, and Farm Credit Administration). The term includes mail fraud (18 U.S.C. § 1341) and wire fraud (18 U.S.C. § 1343) offenses directed against banks and savings and loan associations. Lastly, it includes items which in the judgment of the United States Attormey and the Special Agent in Charge should be reported. A "case" is a prosecution brought by indictment or information. A "matter" comprises a referral made by a financial institution supervisory agency using a criminal referral form and all other complaints and allegations received and recorded in the U.S. Attorney's office. The term "major bank fraud related matters and cases" means matters and cases involving estimated losses of $100,000 or more, a violation (alleged violation) by an officer or director of a federally insured financial institution, and matters and cases that the United States Attorney or the Special Agent in Charge, or both, consider "major." PAGENO="0340" 336 - 35 - matters and cases, but receiving none, are as follows: Northern District of Florida (Jacksonville FBI); MiddleDistrict of Florida (Jacksonville FBI); Southern District of California (San Diego FBI); Northern District~of Mississippi (Jackson FBI); Southern District of Mississippi (Jackson FBI); Western District of Pennsylvania (Pittsburgh FBI); Southern District of West Virginia (Pittsburgh FBI); Eastern District of Tennessee (Knoxville FBI); Eastern District of Virginia (Richmond FBI); District of Idaho (Butte FBI); and District of Nevada (Las Vegas FBI) United States Attorneys' Offices receiving additional Assistant U.S. Attorney positions, but substantially fewer positions than requested, are as follows: Southern District of Texas (Houston FBI) (San Antonio FBI); Southern District of New York (New York FBI); Southern District of Florida (Miami FBI); Western District of Arkansas (Little Rock FBI); Middle District of Tennessee (Memphis FBI); Eastern District of Oklahoma (Oklahoma City FBI); Northern District of Oklahoma (Oklahoma City FBI); and the District of New Jersey (Newark FBI). A significant reason why these shortages exist is that there is insufficient funding under FIRREA to fill all the requested positions. PAGENO="0341" 337 - 36 - Question: a. At the present time, how many Fraud Section attorneys are handling financial institution fraud cases? (For those working only part-time on these cases, provide the number of attorneys and a full, time equivalency figure.) b. During the FYs 1988, 1989 and 1990 (to present), how many requests from U.S. Attorneys for assistance in financial institution fraud investigations has the Fraud Section denied, and what were the reasons? Please identify the requesting offices. Answer: At the present time (March 12, 1990) 10 Fraud Section attorneys are handling Dallas Bank Fraud Task Force work (THRIFTCON) on a full-time basis. Two Section attorneys are handling 0K-SKIM (Western District of Oklahoma) work, relating to financial institution fraud, on a full-time basis. One Section attorney is assigned to work in the District of Wyoming. This is a part-time project which will require much of the attorney's time. One Section attorney is assigned full-time to financial institution fraud related project (~g.L, Interagency Bank Fraud Enforcement Working Group; training; publications; legal advice). One Deputy Chief of the Section works full-time on this enforcement effort. The Fraud Section was unable to provide assistance to the Middle District of Florida (fiscal year 1988), Northern District of Ohio (fiscal year 1989) and the District of Colorado (fiscal year 1989). The Section, because of its commitments to the Dallas Bank Fraud Task Force, the Faulkner case, and prosecutions in the District of Wyoming, District of Oregon, Eastern District of Virginia, and District of Columbia, had no trial attorneys PAGENO="0342" 338 -37- available for assignment to any other financial institution fraud work. Q~estion: Concerns about low priority of bank fraud and embezzlement cases in certain U.S. Attorneys' offices: Recommendation No. l4.b in the House Government Operations Committee's 1988 report urged the Attorney General to direct U.S. Attorneys to give bank fraud matters a higher priority. Based on several different sources of information, it appears (1) that the U.S. Attorney's Office in the Southern District of Texas and the U.S. Attorney's Office in the Middle District of Florida may not be aggressively prosecuting major financial institution fraud cases (as opposed to cases of lesser importance) - for example, the M.D. of Florida U.S. Attorney's Office had only 5 attorneys in its special fraud unit in 1987 and has only 6 now, with a large backlog of reportedly 80 to 100 major cases - and (2) that consequently major investigations have been delayed or, if completed, have not progressed to prosecution. I request that the Department (i) conduct an inquiry to determine the validity of this information, (ii) uncover the causes for this situation, if the concerns are valid; and then (iii) report the results of this inquiry. Answer: Negative statements about various United States Attorneys' offices do very little to strengthen the enforcement effort. It is time, in our view, to get down to the business of strengthening this effort through support to the field, not through undue emphasis on problems about which we are all aware. We know of no justification, moreover, for singling out the districts named in this question. Numerous districts have a significant unaddressed backlog. For years resources in many districts have been inadequate to handle fully the existing law enforcement demands. The additional resources resulting from FIRREA should improve the situation but, as noted earlier, will not supply all the resources requested by the field. PAGENO="0343" 339 - `H' - 38 - Question: Implementation of Title IX of FIRREA: Discuss all problems or concerns which have surfaced on the interpretation, application, or implementation of any provision in Title IX of FIRREA (Public Law lOl-73)~; and indicate the outcome. Answer: First, there is an anomaly in the wording of two financial institution fraud-related offenses, sections 657 and 1006 of title 18, United States Code. Both of those sections include language that limits the application of those sections to, among other things, "any institution the accounts of which are insured by the Federal Savings and Loan Insurance Corporation (FSLIC) . . . . " 18 U.S.C. § 657, 1006. On August 9, 1989, the Financial Institution Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which substantially revised regulatory and criminal enforcement provisions relating to savings and loan associations, became law. Section 401 of FIRREA, which became immediately effective, abolished the FSLIC. Under FIRREA, the Federal Deposit Insurance Corporation (FDIC), through its Saving Association Insurance Fund, is now responsible for insuring those financial institutions that previously had been insured by the FSLIC. However, FIRREA did not conform the language of section 657 and 1006 to take these changes into account. As a result, both sections now refer to an insuring entity which provides a basis for Federal jurisdiction, but which no longer exists. Second, the new 18 U.S.C. § 1510(b) (1) uses the term "subpoena for records," a term defined in 18 U.S.C. § PAGENO="0344" 340 - 39 - 1510(b) (3) (B), but the tern "subpoena," without the modifying tern "for records," is used in 18 U.S.C. § 1510(b) (2) (A) and 18 U.S.C. § 1510(b) (2) (B). Although it seems clear that Congress intended the term "subpoena" to be read as "subpoena for records," the Criminal Division has received a number of inquiries about how the term "subpoena" is to be construed. Question: Discuss any problems with, and suggest improvements in, the exchanges of information between any of the Federal banking agencies and the Criminal Division or U.S. Attorney's Offices. Answer: Effective communication between and among the federal law enforcement agencies and the financial institution supervisory agencies is and will always be an important goal of all the concerned agencies. This requires a continuing effort. No quick fix will get the job done. The professionals engaged in the ongoing effort to combat financial institution fraud know this and fully recognize that there will always be room for improvement. Instances where the system fails to perform as it should will occur from time-to-time. But our suggestion is that the professionalism and dedication of the people on the line be recognized and that they receive the support and encouragement they need to get the job done. Question: Describe the Division's actions to implement RecoinmendationsflU!flbered 22.a & b. and 23 in the committee's report. Have the problems covered in the report's findings which underlay these recommendations been resolved, or do they still occur (if known)? If so, explain and suggest corrective action. PAGENO="0345" 341 40 - Answer: The Department's position on Recommendations numbered 22.a. & b. are as stated in our recent letter to the Subcommittee (dated February 26, 1990), In response to Recommendation 22. a * we stated: As a general principle, the Department favors administrative procedures that would enable bank supervisory personnel to identify and transmit evidence of possible criminal violations at the earliest practicable time to the FBI and the Department. As a matter of practice, the FBI often consults with the concerned financial institution supervisory agency when a failure of an institution is imminent or has just occurred. In addition, the sort of coordination indicated in this recommendation is routinely a part of the investigatory process in matters involving complex financial institution fraud. We fully agree that steps like those listed above should be taken whenever practicable, but we do not believe it is necessary to employ the specific referral process as recommended. Our response to Recommendation 22.b. stated: The Department agrees that fee counsel should directly notify the FBI or U.S. Attorney if fee counsel discovers evidence of criminal misconduct. We further agree that fee counsel should fully cooperate with federal law enforcement officials and should take no action that would jeopardize their efforts to investigate and prosecute such criminal misconduct. We defer to the financial institution supervisory agencies on whether to include the PAGENO="0346" 342 -41- recommended terms in fee counsel contracts. We understand that fee counsel have long been required by the agencies who have retained them to cooperate fully with federal law enforcement officials and to make prompt reports of suspected criminal activity. Lastly, our response to Recommendation 23 is that we fully agree that the supervisory agencies should make timely referrals to the FBI and the concerned United States Attorney's Office. * We have no information justifying determining that there are substantial, systemic problems in these areas. Question: Bank Fraud Working Group: (a) Please comment on the operations of the Bank Fraud Working Group; and describe the problems and concerns which the group has addressed since January 1989 and indicate the outcome of each. (b) What actions, if any, has the Working Group taken to implement recommendation no. 29 in the committee's report. (c) Please list in an appendix the group's members. Answer: The Interagency Bank Fraud Enforcement Working Group (Working Group) continues to foster close cooperation between and among financial institution supervisory agencies and federal law enforcement officials. The Working Group is composed of officials from the Fraud Section of the Criminal Division, the Federal Bureau of Investigation (FBI), Office of Thrift Supervision (OTS), Federal Deposit Insurance Corporation *(FDIC), Office of the Comptroller of the Currency (0CC), Board of Governors of the Federal Reserve System (FRS), National Credit Union Administration PAGENO="0347" ~343 - 42 - (NCUA), Farn Credit Administration (FCA), a representative of the Attorney General's Advisory Committee of United States Attorneys, U.S. Secret Service and Department of the Treasury (represented by the Assistant General Counsel (Enforcement)). The Working Group's accomplishments include: producing a uniform criminal referral form for use by all federally insured financial institutions and supervisory agencies to facilitate prompt, thorough reporting of suspected crimes; improving both communication and coordination among its members, resulting in a tighter bond between the agencies and the law enforcement community; promoting "Fast Track," which is a law enforcement approach designed to facilitate the economical, effective prosecution of certain financial institution frauds which would otherwise probably escape criminal prosecution; establishing the Significant Referral Tracking System, a system maintained by the Fraud Section which records matters identified by financial institution supervisory agencies as significant to them; instituting and sponsoring a financial institution fraud PAGENO="0348" 344 - 43 - investigation training program, including joint training courses for FBI agents and bank examiners. In addition, two bank fraud seminars for prosecutors and agency attorneys have been presented through the Attorney General's Advocacy institute and one is in the planning stage; this training program, with the FBI's Bank Failure Seminar and the Federal Financial Institutions Examination Council's White Collar Crime School, provides training for examiners and FBI agents in how to detect and investigate fraud; promoting recent amendments to the Right to Financial Privacy Act (contained in the Anti-Drug Abuse Act of 1988) facilitating law enforcement agencies' timely receipt of information relating to suspected crimes; encouraging the creation of local financial institution fraud working groups to strengthen enforcement efforts at the local level; publishing, and distributing (including distribution to all U.S. Attorneys), the "Bank Fraud Directory" a publication designed to assist federal law enforcement personnel to better understand the function performed by the various federal financial institution supervisory agencies and to improve the coordination between those agencies and the federal law enforcement community in the investigation and prosecution of financial institution fraud cases; PAGENO="0349" 345 - 44 identifying locations most in need of additjonal federal prosecutors and investigators to handle financial institution fraud matters and cases. On December `15, 1988, the Attorney General addressed the Working Group and emphasized the Department's commitment to and high regard for it. The Attorney General also stressed the high priority the Department has given to the investigation and prosecution of financial institution fraud. Our response to Recommendation 29. is contained in our letter of February 26, 1990 to the Subcommittee. A list of the organizations belonging to the Working Group and their representatives at the Working Group's last meeting with their Washington D.C. or FTS telephone numbers, is attached to this statement. Question: Local working aroups: In an appendix, please list each local law enforcement (bank fraud) task force/working group, and identify for each the representative from the local U.S. Attorney's office. Answer: In view of the Subcommittee's interest in local working groups, an overview of them will be provided. On November 19, 1987, the Assistant Attorney General of the Criminal Division William F. Weld, while testifying before this Subcommittee, discussed the success of interagency bank fraud PAGENO="0350" 346 -45- - working groups at both the national~and local levels. Mr. Weld pledged to encourage each U.S. Attorney to consider the concept for his or her own district. By memorandum dated February 17, 1988, addressed to all U.S. Attorneys, Mr. Weld encouraged U.S. Attorneys whose districts had substantial caseloads of financial institution fraud to establish a local group modeled after the Bank Regulator Forum (Forum). The Forum was established in 1986 in the Northern District of Illinois to coordinate with other law enforcement and financial jnstitution supervisory agencies in ~address±ng problems in the area of financial institution fraud. The Forum has achieved notable, tangible results. They include location of high quality expert witnesses, identification of examiners to brief assistants and agents assigned to complex cases at early stages of investigation, and improvement in the quality of referrals by the supervisory agencies. Most importantly, such a group fosters communication and cooperation between and among the agencies involved in combating financial institution fraud. In December 1988, the Fraud Section contacted the U.S. Attorneys' Offices to identify those U.S. Attorneys' Offices having local working groups. Sixteen offices reported having such a group (or that such a group was about to be established). At the January 31, 1990 meeting of the Interagency Bank Fraud PAGENO="0351" 347 - 46 - Enforcement Working Group, additional information about the districts having local working groups was provided to the Fraud Section. Lastly, by communication to all United States Attorneys, dated February 15, 1990, the United States Attorneys were asked to report whether or not a local working group has been established. Based on our current information, the following districts have been identified as employing local working groups. D AZ (Phoenix)* (FTS 261-3011) (First Assistant U.S. Attorney Roger Dokken) ED AR (Little Rock)* (FTS 740-5342) (Assistant U.S. Attorney (AUSA) Floyd McDodson) CD CA (Los Angeles)* (FTS 798-2434) (AUSA Terree Bowers, Chief, Major Frauds Section) ND CA (San Francisco)* (FTS 556-1126) ED CA (Sacramento)* (FTS 460-2700) (AUSA Daniel Linhardt) D CO (Denver) * (FTS 564-2081) (U.S. Attorney Michael Norton) SD FL (Miami) * (FTS 350-4471) (AUSA Andrea Simonton, Acting Chief, Economic Crime Division) CD IL (Springfield) (FTS 955-4450) (First ASUA Byron Cudmore) SD IL (East St. Louis) (FTS 277-9361) (First AUSA Clifford Proud) ND IL (Chicago)* (FTS 353-6742) (AUSA Joan Safford) SD IN (Indianapolis) (FTS 331-6333) D KS (Wichita)* (Topeka)* (FTS 752-6481) (U.S. Attorney Lee Thompson) D MA (Boston)* (FTS 223-9444) (AUSA Peter Mullin, Chief, Economic Crime PAGENO="0352" 348 - 47 - Division) D NE (Omaha)* (FTS 864-4774) D NJ (Newark)* (FTS 348-2700) (Executive AUSA Melvin Kracov) ED NY (Brooklyn)* (FTS 656-7106) (AUSA Ira Belkin) SD NY (Manhattan)* (FTS 662-0046) (AUSA Mark Heller, Chief, Major Crimes Unit) ED NC (Raleigh)* (FTS 672-4530) (AUSA Peter Kellen, Chief, Criminal Division) ND OK (Tulsa) (FTS 745-7463) (U.S. Attorney Tony Graham) ED PA (Philadelphia)* (FTS 597-2556) (AUSA Gary Glazer, Chief, Fraud Section) ED TN (Knoxville) (FTS 854-4561) (First AUSA James Dedrick) ND TX (Dallas)* (FTS 334-3291) (U.S. Attorney Marvin Collins) SD TX (Houston)* (FTS 526-4600) (AUSA John Smith) ED WN (Milwaukee) (FTS 362-2700) (U.S. Attorney John Fryatt) WD WN (Madison) (FTS 364-5158) (First AUSA Grant Johnson) * A task force district as designated by the Attorney General December 7, 1989, in his public statement. By memorandum of January 18, 1990, the Fraud Section remjnded all U.S. Attorneys that the Department encourages the creation of local working groups and invited those U.S. Attorneys interested in starting a working group to contact the Fraud Section for PAGENO="0353" 349 - 48 - information and assistance. Question: Implementation of Section 965 of FIRREA (Fraud Section ~g~onal office): Preliminary information developed by the subcommittee indicates that the following problems have developed in implementing this directive: (1) There is a $5,000 to $15,000 pay differential between Fraud Section attorneys and Assistant U.S.A.s working on the same cases, which makes it harder to hire new attorneys and is somewhat demoralizing to Fraud Section staff. (2) There is no separate telephone number for the Regional Office and also no identifying sign. (3) Attorneys being interviewed for the open positions in that office express concerns because the Division has indicated that it will keep the office open only as long as so mandated by Congress (through the end of FY 1992). What actions is the Division prepared to take to address each of these problems, and is there anything prohibiting the Division from keeping this office open longer? Answer: The pay differential is a substantial problem. Criminal Division trial attorneys serving as lead counsel on a major case, for example, could find themselves working with an Assistant United States Attorney with less experience, but with a much greater salary. The Criminal Division has made its views about the situation known within the Department. With respect to the regional office, as the Subcommittee knows we remain unpersuaded that establishing Fraud Section regional offices is a sound course to follow. First, the introduction of a satellite office into a district where the U.S. Attorney's Office already has able Assistant U.S. Attorneys well versed in handling complex criminal cases, doubtlessly will create needless friction between that office and 30-830 0 - 90 - 12 PAGENO="0354" 350 49 - the Section. Even where a task force approach has been adopted, due to the shortage of resources in the field, the situation leading to the creation of the Dallas Bank Fraud Task Force, the mandatory establishment of a satellite office (regional office), with its implicit permanency, is totally at odds with the notion of the temporary deployment of a headquarters based reserve to deal with a temporary need. We believe that the concept of satellite offices is fundamentally flawed and fails adequately to recognize the role of the U.S. Attorney as the chief federal law enforcement official in the U.S. Attorney's district. It should be noted that the Fraud Section's role' is to support, not compete with, the efforts of the U.S. Attorneys. Ideally, the staffing of the U.S. Attorneys' Offices will be adequate to fully address fraud against financial institutions. But experience teaches that it is impossible to predict with absolute accuracy future investigatory and prosecutorial needs in the field. Hence, maintaining a reserve at the headquarters level is of vital importance to ensure some flexibility in responding to unanticipated needs. Second, it is not at all clear that the establishment of Fraud Section satellite offices would be cost effective. For Example, it is open to question whether the cost of such satellite offices can be paid out of the savings from reduced travel expenses. When one compares the costs of a Section attorney's PAGENO="0355" 351 -50- travel between Washington, D.C. and federal districts such as Florida or California, with the cost associated with relocating that attorney in that district for a period of two-to-three years (including the cost of returning that attorney to Washington, D.C. at the conclusion of his or her work in that district), it is not even clear that the use of satellite offices will achieve any savings of any consequence. In closing, let me emphasize that the Department will fully and effectively employ the resources it has been given to bring to justice those who have victimized federally insured financial institutions. Dramatic results, however, will not be seen immediately. The investigatory and prosecutorial process will take time--months and in some cases years. The task before us is not for those who lack the strength and endurance to handle the extraordinarily complex matters and cases warranting our attention. Moreover, the criminal law will supply no complete solution for the problems facing the thrift and banking industry. Such problems must be addressed in the first instance by sound legislation, effective federal regulatory supervision, and the promotion of integrity within the industry. PAGENO="0356" 352 Mr. BARNARD. Mr. Dennis, I have a few questions I'd like to ask as far as the completeness of your testimony is concerned. We asked that the Department furnish us details of the requests that it made to 0MB for funds for fiscal year 1991 to address these matters, and no data for the Criminal Division of the U.S. attor- neys' offices, as opposed to the Civil Division, was provided at all. Can you give us any reason why we were not able to get that infor- mation? If you would like to bring the gentleman to the table. Mr. DENNIS. This is Mr. Allen Carver who is in the Fraud Sec- tion and I would like to bring him to the table. Mr. BARNARD. Fine. Please identify yourself, sir. Mr. CARVER. I'm Allen Carver, I'm a Deputy Chief in the Fraud Section, sir, and I'm advised by the Justice Management Division budget staff that the figures were not provided because they're in the base for the budget. So, what you have for this coming fiscal year is essentially the same amount of money that we're dealing with now. So, there are moneys in there for the criminal enforce- ment effort and for the U.S. attorneys. That's my understanding of it. Mr. BARNARD. Is a breakdown available as to how those funds will be used? Requested, allocated-- Mr. CARVER. Continuing, as they are, and that breakdown is al- ready provided for the curi~ent fiscal year and the division of those moneys between the Criminal Division of the Department, the U.S. attorneys, and the Federal Bureau of Investigation is set out in our statement. Mr. BARNARD. It seems like that the information that we request- ed was referred to the Justice Management Division. According to the Justice Management Division for fiscal 1991, the Civil Division requested 60 positions. Mr. CARVER. Yes, sir, those are new. Those are over and above what would be at the base level. Mr. BARNARD. What about the Criminal Division? Mr. CARVER. Well, the Criminal Division would continue to fund the 24 attorney positions and in addition would be funding the 16, I believe, support positions that we have as a result of FIRREA, that funding effort will continue. Mr. BARNARD. Well, didn't the President and the Congress ask for the full amount requested by the Department? I mean, didn't they ask for more money than you are allocating or are requesting from 0MB? Mr. CARVER. I don't believe they did, sir, not more than was actu- ally requested. Mr. BARNARD. What did they request? What did the DOJ request of 0MB? Mr. CARVER. Well, I'm going to turn to our DOJ rep if I may and refer that to him. Mr. BARNARD. That would be fine. Mr. CARVER. Well, the request was for the $50 million which re- sulted in that, I believe, $49 plus million appropriation. That was the ultimate amount that was actually requested. Mr. BARNARD. Why wasn't the full amount of $75 million re- quested? PAGENO="0357" 353 Mr. CARVER. I can't answer that question. Mr. BARNARD. This is why we need to know: Yesterday we com- pared the allocation from the March 19, and we discovered that the FBI division offices and the U.S. attorneys' offices surveyed in March asked for 224 more FBI agent positions, 113 more assistant U.S. attorney positions, and a 142 more staff positions than they finally received. It looks like to me that the need is there, the re- quests are there, but the Department of Justice does not seem to want to satisfy those needs, and yet we've got a continuing buildup in cases and some of them are very, very major cases. Mr. DENNIS. Mr. Chairman, as I understand it, and I'm sorry that I didn't pick up on your question at the beginning, there was $75 million which was authorized by the Congress insofar as FIRREA was concerned for the Department of Justice which in- cluded the FBI, the Criminal Division, and the U.S. attorneys' of- fices, $50 was-- Mr. BARNARD. Was appropriated. Mr. DENNIS. Was appropriated. Mr. BARNARD. And that's the amount that was requested from the Department of Justice. Mr. DENNIS. That's correct. Mr. BARNARD. That's the question. It's hard for me to understand this situation when we are losing billions and billions of dollars. We've lost billions of dollars. How can we be content with trying to balance the budget on $25 to $50 million? Mr. DENNIS. Well, as I understand the budget process, it is a question of our overall balance in domestic spending. It's not just a matter of what the Criminal Division might be able to utilize and those decisions are made in the Department and in 0MB. It was decided that $50 million rather than the $75 million should be re- quested. I mean, I'm sure if maybe the $75 million had been re- quested it would have been appropriated, but-- Mr. BARNARD. See, Mr. Dennis, the question that I have to ask you is the same question that's being asked me as a Member of Congress. Are we really being conscientious enough, are we really trying to bring justice to bear in these criminal cases? The Ameri- can taxpayer, as I said yesterday, they're asking serious questions of Congress. We are going to foot the bill, and yet the people who committed these acts are walking the streets of this country free and clear. That's why I think that we have a tremendous concern and want a high priority; at least Congress has put a high priority on these investigations and prosecutions. And I must say that my first impression is that this does not have as high a priority as I think it should have with the Department of Justice. Mr. DENNIS. Well, Mr. Chairman, with all due respect, the De- partment, the Criminal Division, the FBI, the U.S. attorneys, are giving this area the highest priority. Now, in terms-even prior to the appropriations, this has been our No. 1 priority, we have devot- ed a good 20 percent of all the resources in the Fraud Section to the bank fraud area, the U.S. attorneys have moved their more senior assistants into this area on an expedited basis. The FBI has continually supported this effort and the appropriations having been received are being utilized to the fullest. PAGENO="0358" 354 As to the question about making judgments as to how much in funds in fiscal year 1990 the Department could reasonably be ex- pected to absorb, maybe another question or in terms of balancing that against other spending issues, but it certainly is a high priori- ty in terms of where we're devoting the resources that we have available to us. Mr. BARNARD. Well, I won't dwell on this subject, but let me ask you this, what did the Department of Justice ask of the 0MB for FIRREA appropriations for fiscal year 1991? Mr. DENNIS. It's the base, nothing additional beyond the $50 mil- lion. Mr. BARNARD. Did 0MB agree to that? Mr. DENNIS. I'm not certain whether 0MB has agreed to that or not. I think so. It should be for 1991, yes. Mr. BARNARD. Mr. Dennis, also in our preparation for this hear- ing we asked about the lack of an internal Department of Justice system providing tightly organized data in automated form on major fraud and embezzlement cases including, not only numbers of investigations, but also numbers of prosecutions, convictions, and ranges of sentences. Now, the FBI after a manual search involving 59 field offices did come up with much of this yesterday. It is not, as the Department of Justice seems to maintain in your testimony, though, an auto- mated system whereby anyone can quickly see from a national per- spective whether we are getting anywhere in delivering criminal justice for these financial crimes. Many persons have been interviewed on the so-called readily available data and all have agreed manual searches and surveys of the 93 U.S. attorneys is the only present way to dig out these trends. Do you have any plans in order to more systematize this recordkeeping? Mr. DENNIS. Well, the automated systems that are in place are being tailored to pull information that is being requested in this area. We are tracking through but we're dealing with a number of different systems here. The U.S. attorneys have their own system, the promise system, the FBI has its case tracking system, we have initiated a system of tracking significant cases referred from the bank regulatory agencies, and the FBI is tailoring-I think it has probably the most comprehensive system-its system to provide the type of information that is being requested by the committee. But I think that in this area of statistics and data in the criminal justice system generally the capability to draw up information often has to be designed specifically for the area that is the subject of inquiry. We don't have a unified system across all component lines from which we can just on one keyboard call up information on the kind of basis that the committee is requesting without actu- ally having to refine the system in order to-- Mr. BARNARD. Wouldn't it be helpful to have that type of infor- mation? Mr. DENNIS. Well, that would be absolutely ideal, Mr. Chairman. I recall when I came to the Criminal Division a few years ago that my predecessor, Lowell Jensen, was very dismayed that we didn't have-talking about the Department overall-better systems for assessing what we were doing in a broad range of criminal cases. I PAGENO="0359" 355 think we have made major improvements but we have quite a way to go. I think one of the reasons that you'll find that we may be a little less technologically sophisticated in this area is that when we do get resources, our effort is directed at prosecuting individuals and investigating them rather than reporting or being able to report on a macro level with a great deal of specificity through electronic data processing equipment. That has lagged. It has even lagged in areas of word processing, but I think we are gaining sophistication in that area. Mr. BARNARD. Well, I think, you know that I'm not one for throwing away money, but I think this would be money well spent, because I think that you are having difficulty keeping track of what you are doing. And certainly Congress is having a difficulty keeping track of what you're doing. Now, the FBI system is ade- quate from the standpoint of investigations, but it doesn't go beyond that; it doesn't include, as I understand it, the disposition of the cases, and I may be wrong, but I don't believe so. Mr. DENNIS. No, you have three different levels. You would have the initial allegation which might be a referral from a bank regula- tory agency, or it might come from an informant. You have the opening up of a file in the FBI, which may or may not correspond to a file open in the U.S. attorneys office, and then you have of, course the designation of a case as having been indicted in the courts, and the disposition of those cases are generally going to be found in the promise system of the U.S. attorneys, so that you have a number of different levels of inquiry, and the data base for one organization may be more than adequate for questions about the status of an investigation but may not really be up to date with regard to the disposition of the matter in court, if it's reached that point. Mr. BARNARD. There's a number of things, Mr. Dennis, I'm going to ask of the Justice Department-I certainly want to recognize my other colleagues this morning, but there are some significant infor- mation that I think was lacking in the testimony, and some of the information we were seeking has not been provided. So we're asking you, if you would, to be a little bit more complete in `some of the things that we're talking about. For example, I would like for you to respond a little bit more fully and give us your opinion about the problem of minimal in- áreases in prison terms under the guidelines for someone who de- frauded an institution of a large sum. Do you think that that is a problem? Mr. DENNIS. We have-yes, we did not feel that the guidelines as initially promulgated were adequate. The recommendation that we have made with regard to increasing the guideline computation for. white-collar crime in general, I think, are being adopted insofar as we can see from the drafts of the Sentencing Commission. And, of course, FIRREA has statutorily called for higher designations. So, this is an area in which I think we've had concern as a matter of our priority on white-collar crime cases of which, of course, this, the bank fraud area is probably the most publicly involved at the moment. PAGENO="0360" 356 Mr. BARNARD. Well, I think that is a problem which we probably need to still give serious consideration to. Let me just bring up another area that we asked the Department of Justice about, and I'm not exactly that pleased with the re- sponse. We brought to your attention specific problems about the Division's implementation of section 965 of FIRREA mandating the creation of a fraud section regional office in Dallas, the highest in- cidence area in the country for this sort of crime. Well, the Division's response as far as I can determine is the same arguments which the Department of Justice made against this provision during FIRREA's consideration and states that the Department is unpersuaded about establishing this office. Well, I can appreciate your opinion and I can appreciate your opinion not being changed, but what concerns me is that Congress did include this in the law-the law is the law. And based on pre- liminary information from the GAO, it appears to us that the Divi- sion may not be taking necessary steps to make that office work and therefore may be frustrating the intent of Congress. Would you respond to that? Mr. DENNIS. Mr. Chairman, the Dallas task force is not being starved of resources or not being supported. As I made clear in my opening statement, the establishment of a permanent regional office is not favored by the Department, is not supported by the At- torney General; and the concept of establishing permanent regional offices out of Washington is counterproductive and works against, I think, the primary thrust of the task force approach. So, we do not favor the establishment of permanent regional offices. Mr. BARNARD. Is that an explanation, though, for not carrying it out when it's in the law? Mr. DENNIS. Well, the task force is there. What aspect of the task force's operation is inadequate or not according to law? Mr. BARNARD. Well, the GAO did a study, the General Account- ing Office did a study. First, the GAO has preliminary advised us that the office has no separate telephone and no identifying sign on the door, the task force is housed in an office next to the FBI, and the phone is answered by the FBI. The director of that task force office told subcommittee staff that it is hard to hire the 12 attor- neys allocated for the office, since the office is mandated for only 2½ years more and most new attorneys want to stay in a locality longer than that. Yet, there's nothing in the legislation preventing a longer operation, and the U.S. attorney believes that there will be enough cases to keep it busy for 5 years. If the Department does not make a commitment to keep it open longer, then the intent of Congress that this office be fully staffed and maintained will be violated. I'm just giving you a report which was made by the General Ac- counting Office. Mr. DENNIS. Well, Mr. Chairman, I don't believe we have violat- ed any laws with respect to that office. The office is-- Mr. BARNARD. No, but how conscientious are you, though? We feel like that office is very, very important. In fact, it's the whole Congress that believed that this was so important; in fact, this re- quirement was included by a floor vote in the House. There was not much opposition on this, except from the Department of Justice PAGENO="0361" 357 when it was offered, and I just feel like perhaps you are supersed- ing Congress, based on the Department's own feelings. Mr. DENNIS. Mr. Chairman, first of all, the office was established not as a result of the legislation, it was established as a task force because of the perceived need by the Department in Washington as well as by the U.S. attorney in Dallas to take extraordinary meas- ures to deal with the number of cases coming out of that area. That has been fully supported. We continue to fully support it, and we will continue to support it as long as it is necessary, but we have not violated any statute with regard to-- Mr. BARNARD. No, but it's the way that it's being carried out. In other words, you were supporting a task force even before FIRREA passed, but it was on a very, very temporary basis. You were send- ing attorneys in there on an as needed basis, as I understand it. It was not a permanent force where people could move in. It was very transitory. Am I correct? Mr. DENNIS. We had attorneys in the task force that were locat- ed in Dallas as their duty station. We had other attorneys that were coming from Washington and going to Dallas. We had assist- ant U.S. attorneys that were assigned to the task force at least on a, you know, permanently on a foreseeable basis. It was as perma- nent as any task force that we have. There is no other task force that I'm aware of that has the permanency that that task force has. I think what the Department's position is that when the need for that-when we reached the point where that task force is no longer needed it will be dissolved, but I don't-right now I'm not forecasting that we would only have needed it 18 months or 2½ years or 3 years. Mr. BARNARD. Well, let me just read the manager's statement in the conference report on FIRREA, and it says this: "The conferees intend that the Criminal Division substantially reduce the number of Fraud Section attorneys traveling from Washington, DC, to Dallas by transferring some senior or supervisory personnel to Dallas and by hiring additional attorneys to work in Dallas. The Justice Department has tentatively planned to hire approximately 24 attorneys for the Fraud Section with the additional appropria- tion authorized by this legislation. The Conferees intend that the Department hire a number of these attorneys expressly for the Dallas regional office." [P. 447, House Report No. 100-222.] Can you tell me how many attorneys have been hired since FIRREA was passed to accommodate that? Mr. DENNIS. Well, first of all of the 24 attorneys that are being hired by the Fraud Section, 12 positions are permanently assigned to the Dallas task force, one-half of those, the other half will be out of Washington supplying support as needed, not just to Dallas but to other parts of the country, and we have identified four new hires for Dallas at this present time and are continuing to hire for those positions. Mr. BARNARD. Well, I will be contacting you through our staff to get some supplemental information in response to some of these questions which I have been asking. Mr. Hastert. Mr. HASTERT. I have no questions. PAGENO="0362" 358 Mr. BARNARD. Mr. Schiff. Mr. SCHIFF. Mr. Dennis, I just have a couple things I'd like to ask. You mentioned earlier in your testimony, if I understood you correctly, that the Justice Department rejected the idea of regional task force in terms of prosecuting bank fraud cases. Did I under- stand that correctly? And if I did, I wonder why that concept was rejected in the sense of, as you stated earlier in your prepared statement, these are very difficult, very complex cases, wouldn't a regional task force make some sense in terms of centralizing the specialty? Mr. DENNIS. Well, we're not opposed to task forces, per Se, what we feel is counterproductive is to establish permanent regional of- fices out of Washington on a permanent basis. There are-outside of the Dallas area we have encouraged U.S. attorneys to establish similar task forces with their FBI offices, we provide support to those efforts, and we encourage those efforts, but the establishment of permanent offices basically run out of Washington, I think, causes conflicts and overlaps insofar as the U.S. attorney's work is concerned. It does cast in concrete the allocation of resources where we would want to have more flexibility in terms of being able to, out of Washington, move into different districts where there may be a problem for a few years and then we can move into other districts. The whole issue that brought about the change in the organized crime strike force is, I think, weighs against establishing that con- cept in the fraud area. So, that's the basic thrust of our concern. The Dallas task force grew out of a specific situation and it's working well, it's being supported, and it is very well funded. Mr. SCHIFF. Well, going district by district then, I agree with your appraisal of the Dallas task force. Mr. Collins, the U.S. attor- ney for that district, testified here yesterday and I thought that he had some statistics that showed some success in a difficult area. However, sitting right next to him yesterday was Mr. Wortham from the eastern district of Texas who was not shy about voicing his complaint with the Department of Justice that the resources in his estimation were going to Dallas, and that he was short of just about everything and that his district simply was unable to make as much serious progress as he thought he could. So, my question would then be if the Justice Department feels that this kind of prosecution should not be regionalized but should be organized within the district, what does the Justice Department do to make sure that each district has a reasonable degree of re- sources to fit the needs of that district? Mr. DENNIS. Well, I spoke to Mr. Wortham a few days ago about his concerns and part of the problem is inherent in the way in which investigative resources are organized. Mr. Wortham's dis- trict is supported by the FBI divisions out of Houston and out of Dallas. His concern wasn't that he wasn't getting resources in terms of AUSA's or even FBI agents. His concern was that because these agents were working out of the-under the supervision of the Dallas division-that cases that might arise in his district which were first being reviewed in Dallas as possible task force cases, and that referrals to his office were either being slowed down or maybe PAGENO="0363" 359 there were cases that should be in his district that he wasn't seeing. I talked to the U.S. attorney in Dallas, Marvin Collins, I asked him to get together with Mr. Wortham and to see if there couldn't be an arrangement whereby if there were any questions. about venue for an investigation, that Mr. Wortham would have a fair opportunity to review those decisions and they wouldn't just be made by the investigative agencies, and I think that that's the best way to handle it. It's not an argument with Justice or the Criminal Division because Mr. Collins is very much a full partner in the task force and we've worked very well together, I think, with the U.S. attorneys and I would really expect to have his input on how that might best be addressed. Mr. SCHIFF. Well, if I may just continue this for one more moment and then I'll pass. Perhaps I misunderstood Mr. Wortham, but I don't think I did. Fle didn't leave much to the imagination, I thought, in terms of his very vociferous complaint about the De- partment of Justice. Maybe I misunderstood whether it would be~-~---~ terms of prosecutors or FBI agents, for example, but one example I remember very clearly was that Mr. Wortham said there had been established a goal-a standard, if you will, I do not know where this came from, that there ought to be two FBI agents available to each assistant U.S. attorney working in this area, and he told me that his ratio fell far short of that. I think it was even less than 1 to 1, much less 2 to 1. Just asking you about that portion, since the FBI is also in the Department of Justice, asking you about that ratio, do you agree with the ratio of two FBI agents to one prosecu- tor in each of these cases, and if so, does the eastern district of Texas have that ratio? Mr. DENNIS. I'm not aware of that ratio. In fact, when I spoke to Mr. Wortham on the phone, who is also in the Department of Jus- tice, as all the U.S. attorneys are, we all are in the Department of Justice, you know, I asked him, what could we do to fix the prob- lem as he saw it. And he did not say, look, I need more FBI agents in the eastern district of Texas. The concerns that he expressed to me were those of cases that properly belonged in his district, as he saw it, being held up in the task force for review for possible con- nections with Dallas-based cases, and I thought that that was some- thing that we could certainly alleviate if there were unnecessary delays in getting cases referred to his district. We certainly have enough cases in the Dallas task force that if the eastern district of Texas feels as though it's not being able to utilize its resources to the best effect,, we ought to try to get those cases out to them so that they can be a full participant. This matter was raised like 2 days ago and I spoke to Mr. Collins earlier this week and we're fol- lowing up on it. So, we're not-I think it's a problem that has been raised, we're going to address it, and I think we'll address it satis- factorily. Mr. SCHIFF. Well, with due respect to the Department of Justice, I can only say I believe that I understood Mr. Wortham differently here yesterday, and as you pointed out, you're all Department of Justice, you're all on the same team, I would just respectfully sug- gest some rediscussions of that matter. Thank you, Mr. Chairman. PAGENO="0364" 360 Mr. BARNARD. Mr. Bustamante. Mr. BUSTAMANTE. Thank you, Mr. Chairman. Let me ask you, do you know what the resolution time is for most of these cases? Or, let's say for instance in the Dallas office; do you know how long it takes to resolve these cases? Mr. DENNIS. Well, it's difficult to place any particular timeframe. The cases are very complex. It depends upon whether or not you have the kinds of transactions that you can develop the proof of the fraud relatively quickly, whether you have cooperating wit- nesses, but we're talking about years insofar as the development I would say of any of these cases from the time an allegation was received until the time that you would probably be able to get the case to trial. Mr. BUSTAMANTE. Would 60 months in the Dallas area be about right? Mr. DENNIS. Sixty months-- Mr. BUSTAMANTE. On an average? Mr. DENNIS. I don't-I would hesitate to guess. It would seem to me to be a bit high but the way in which-- Mr. BUSTAMANTE. That's what we're being told. Mr. DENNIS. The way in which investigations of these types-of this type develop, your earliest investigations are probably going to take the longest. You hope that as you develop more witnesses and insider witnesses that future cases will not take as long because you'll have someone pointing the way, the road map to the fraud, and so you hope that that drops off, but 60 months is almost 5 years. You'd almost be to the statute of limitations if, you know-- Mr. BUSTAMANTE. Well, this is a concern that we have and this is the reason that we cannot understand why a higher priority was not placed on hiring more people. Well, you mentioned $50 million, we authorized $75 million. Now, 0MB says, well, $50 million is all you get, and you mentioned something about the domestic spending probably took away some of that money, or cut away. Mr. DENNIS. What I said, well, I'm not in 0MB, but the decision in terms of what a department is going to receive insofar as even over and above what requests or authorization may have been- levels may have been legislated, it's-- Mr. BUSTAMANTE. The Congress-- Mr. DENNIS. It's a matter that 0MB determines. Mr. BUSTAMANTE. The Congress was willing to spend $75 million. 0MB was only willing to ask-restrict that money to $50 million. Is that correct? Mr. DENNIS. As I understand it, $75 million was authorized, $50 million was requested. Mr. BUSTAMANTE. Now, again I go back to something that you mentioned about domestic, and I can only attribute that to mean that, well, there were other areas in which 0MB felt that they could not cut or take away money from. Now, you mentioned some- thing about domestic, but I'm just trying to refresh your memory or try to get you to recall what you said. What did you mean by that? Again, was it just a budget area that you felt that 0MB was working with? I'm trying to get at the priorities, whether it be 0MB, the administration, or your Department, what priorities do PAGENO="0365" 361 you place on the movement of these cases, on the termination of all these backlogs that we have in the system? We can find money for Nicaragua, and we can find money for Panama, $300 million, we take it away from other budget areas. We cannot find money for this particular area, so they cut it at $50 million instead of $75 mil- lion. We're on the verge of having 404 FBI agents cut from the budget. Mr. DENNIS. We have asked for the $50 million, that was decided not just as a matter of the Criminal Division, the Criminal Division received $2.6 million, there were U.S. attorneys, the FBI, that was the figure that in the budget process was determined to be what we would request. I can't answer the question much beyond that. I mean, you know, I might as a manager ask for $75 million or $100 million or $150 million, or $1 billion, but, you know, in real life those requests get measured against other requests of other components and the Attorney General has to make his decision as to how much we are going to be allocated in that process, and that's pretty much the way it works. Mr~ BUSTAMANTE. The President says this was one of his highest priorities, that's what he's been saying. The Attorney General cer- tainly has put a high priority in this area. But in 1990 they only asked for $50 million. In 1991 they're asking for $50 million again. The backlog is growing. The number of cases out there continues to grow, and yet you're saying that because of budget concerns you're not getting, or you're not asking for more than $50 million. Mr. DENNIS. We're not asking for more than $50 million. Mr. BUSTAMANTE. And we are concerned about that. As I said, when we're looking at losing some 400 and some odd FBI agents because of the-is the pay, Mr. Chairman, I think it's in the pay differential; from what I understand the Department doesn't have enough money. So, we're really not taking this as one of those high-priority areas. According to a recent Wall Street Journal story based on FDIC data, the Federal Deposit Insurance Corporation has paid private law firms more than $177 million in 1989 for work related to close financial institutions primarily for investigations and lawsuits to recover funds. Former U.S. Attorney Ray Bonner of Los Angeles was so frustrated by this situation that he testified that there is something wrong with a system from an institutional stance where recovering money for the insurance funds is much more important than prosecuting these cases to punish for criminality and to deter future misconduct. Given the estimates on the cost of this bailout of the deposit insurance funds, ranging from $166 billion to over $200 billion in appropriation of an additional $25 million author- ized by FIRREA to address the needs of many FBI offices and U.S. attorneys offices would be quite reasonable. Don't you think that would be quite reasonable? Mr. DENNIS. Well, the question of comparing fee counsels' fees with what is appropriated for FBI agents or assistant U.S. attor- neys, I don't know how helpful that is. I mean, I don't know that the money that is being appropriated, the $50 million, was coming out of moneys that would otherwise be going to fee counsel. I think those are two separate issues and I'm not that familiar with the fee counsel arrangements to speak with any intelligence about it. PAGENO="0366" 362 Let me say this, obviously law enforcement can and will utilize to best effect all resources that are appropriated to it to do our jobs. When we have set a priority, we have set it according to what we have. We can't set it according to what we don't have, and there also is a factor here that to some extent you are only capable of absorbing so much in increases over a short period of time. In any case, we are working desperately hard to fill the positions that we currently have been authorized. You know, although I don't want to predict that we won't be able to do it, it may be a question as to whether or not we'll be able to actually spend the resources we've been given in fiscal 1990. So, I don't-this is a continuing process, the budget process is one that, you know, will continue. We'll need continued support, and this re- mains a high-priority area, but I can't really address it in terms other than that. Mr. BUSTAMANTE. Well, is it a high priority? Or are we just giving the public some press releases out there saying we're doing something. Mr. Chairman, this week I happened to visit with some of our investigators, criminal investigators with Customs, and some of them are DEA people. They're restricted from travel because they don't have the money to, and this travel is pertinent to the cases that they're managing, yet the Department says you cannot travel because we don't have money. Last year we were telling DEA just you can only travel so many miles a day because you don't have enough gas money, and we're doing the same thing in this area. 0MB did not take into account administratively controlled over- time increases mandated by Congress in late 1989, so the FBI is short $42 million. The FBI announced publicly in the January 30, 1990, Washington Post that it will reduce the number of agents by 404 positions and that the crimes will be felt in areas such as white collar and organized crime. Mr. BARNARD. The time of the gentleman expired. Judge Douglas. Mr. DOUGLAS. Thank you, Mr. Chairman. Mr. Dennis, page 4 of your statement, as you said this morning in your testimony, "Our performance can be summed up in the old adage: You can't get blood out of a stone." Mr. BARNARD. It's supposed to be a turnip. Mr. SCHIFF. That's only in the South, Mr. Chairman. Mr. DOUGLAS. Up where I come from we have a lot of rocks, so I think stone is a better one. Mr. BARNARD. All right, whatever suits you. Mr. DOUGLAS. I agree with your statement as far as it goes, but let me ask you, you can get blood out of a rat, can't you? Mr. DENNIS. You certainly can. [Laughter.] Mr. DOUGLAS. All right, and I guess what I'm concerned about is your approach on restitution. I read your testimony and your state- ment and I understand the reality that a lot of these guys are pros and it's not worth wasting your time chasing them if it looks like there aren't readily discoverable assets for purposes of restitution, but I'm concerned about the taxpayers in this way, is there a reason why we couldn't use a private Attorney General system like we do with title VII in the discrimination area, like we do under PAGENO="0367" 363 section 1983 of the U.S. Code in the civil rights area, where attor- neys are hired on a percentage basis to protect civil rights or to enforce some other law, why don't we create an incentive out there to turn some lawyers loose on a contingency fee basis after you've got your conviction to get some restitution for the taxpayers? In other words, you may not have the time or the interest in chasing these stones, but some of these stones are rats and I'd rather get some blood out of them, and get some money back. is there any reason why we shouldn't consider that alternative? Mr. DENNIS. Well, that's certainly an alternative that could be explored. It's not that we're not interested in restitution, or pursu- ing these individuals, the restitution orders are entered, the ques- tion usually becomes whether or not there are assets secreted away* somewhere that might be chased down, and I think we do a fairly good job of assessing that if in fact private counsel could be more creative or has means that we don't have to be able to uncover assets that we might miss, certainly that would be a feasible way of approaching it. Technically how that would be done I'm not sure, but I do think that we-where there are assets that are readily available or assets that we feel we've got some evidence actually exists, we do pursue that. The problem is I think in this area that we've seen the typical case is that these are highfliers who got into the savings and loan institutions, they were not the model of the local banker that most of us conjure up as being a very cautious, conservative, straight-backed and critical-- Mr. DOUGLAS. OK-- Mr. DENNIS [continuing]. Financier, but that they got into these schemes and by the time-- - Mr. DOUGLAS. Some of them did, some of them got into it. Mr. DENNIS. Well, many of them did, and by the time, you know, the cases we're dealing with are institutions that are busted and individuals that are often-- Mr. DOUGLAS. OK, I agree that many of them are highfliers, they lived well, they spent well, and everything is gone, but many of them are not. There are some out there who I am sure if you went to the local culture people would say he's still got his Mercedes, he still goes to Europe every other weekend, he's got property in the Bahamas, we know it, but your prosecutor thinks like a prosecutor. You've got your conviction, the judge sentences the guy, and that's pretty much it, you're generally going to close the file. You've got enough other criminal cases to go onto. What I'm suggesting is that at that point where the restitution order is made and everyone kind of walks out of the courthouse and forgets about it, that's where if restitution is not forthcoming, we then can turn it over on a fee basis because your other problem, at least, and I don't know that we've had any hearings on this Mr. Chairman, but I'm told that if you look at restitution orders generally there are tens of millions of dollars every year signed by judges, and I used to do it myself, and you just assume someone's going to follow up on it, and in this case the victim is the taxpayer. So, there's no individual to hold the guility party accountable, you know, make payments to the woman for the medical expenses, that kind of thing. It's too amorphous, and I would be willing to bet if we started lifting up some of those stones and looking under the PAGENO="0368" 364 restitution orders, dollar one hasn't even been made. Would you be willing to agree that out of hundreds of cases of restitution orders, I bet I can find hundreds where not a penny has been paid. Mr. DENNIS. Well, I'm sure. Mr. DOUGLAS. OK. Mr. DENNIS. Restitution orders, fines-- Mr. DOUGLAS. All right. Mr. DENNIS. But I think that's a matter of our effort in the area of debt collection which after the judgement is entered and assum- ing you haven't seized assets or have a lien against some assets that require further action, at that point the question of whether or not you're going to be able to collect on that judgement becomes a collection matter. Now-- Mr. DOUGLAS. I agree. Mr. DENNIS. I think we're doing much better than we have in the past as a general proposition. Before this particular crisis in the general area of debt collection but clearly we could do better. We could use support in that area. The question may be how much is it going to yield? Is it going to-- Mr. DOUGLAS. I agree. Mr. DENNIS. Is it going to cost you more than you're going to col- lect. Mr. DOUGLAS. And that's my whole point. Why not split the func- tion and say the criminal prosecution, which only your shop can do, yo i handle, but when the restitution period comes let's-when it's the taxpayers, when the victims are the 240 millions, we give you X-amount of time, 60 days, and if at that time your office indi- cates in effect a signoff on pursuit of restitution it then goes to any private lawyer who wants to step forward or some company able to do it. I don't have any problem with saying you make the decision and then let them chase the rats and squeeze the blood. At that point if they get money they ought to get paid because we're still ahead of the game as taxpayers. Mr. DENNIS. There is as a pilot project a system of private coun- sel that are being referred some of these cases in terms of collec- tion of fines-- Mr. DOUGLAS. What district is that in, the experiment? Mr. DENNIS. I'm not sure, it's run by the Civil Division because once the order is entered it becomes a civil matter insofar as the collection is concerned, but Bob Ford who was-has been working in this area for a substantial period of time out of the Department is familiar with that program, we can certainly provide you-- Mr. DOUGLAS. OK-- Mr. DENNIS [continuing]. With, you know, a description of it, and some indication of what the preliminary results are. Mr. DOUGLAS. Well, Mr. Chairman, if possible I'd like to see that because I honestly think that prosecutors should spend the bulk of their time getting the criminal convictions. For pursuit of restitu- tion you do not have to have an officer of the court who happens to be an official of the U.S. Government. It becomes a collection matter and should be turned over to let them bid on these things or chase them. If they say, well, it's a dog and we're not interested, fine, then no one's interested and at that point we all give up, but if they are used I think we'd find a better effort on the restitution. PAGENO="0369" 365 I just would like to see your report on the pilot project and if you have any thoughts on how we might in effect off-load the restitu- tion collection to the private market, any thoughts you'd have on that. If I could, one second area, RICO, I notice on pages 9 and 10 of your statement you list 136 different prosecutions, and only 2 are RICO actions. RICO, as you know, you can get treble damages de- pending on the situation. Is that not an area where perhaps we could get some more money if a case appears to have some assets worth pursuing on the back end that it be turned into a RICO action. Mr. DENNIS. Certainly RICO has been employed for its provisions related to forfeitures but the use of that statute is something that we try to employ in the context of the predicate offenses and devel- oping the cases such that RICO is not the typical statute that one uses in too broad a range of cases. It's been used somewhat judi- ciously. I'm not sure that in terms of the current statutory tools that we have that it's necessary to use a RICO statute in order to gain the legal basis for seizing assets that have been squirreled away by a defendant, let's say, as a result that are proceeds of his criminal activity. Clearly the enterprise which is usually the finan- cial institution is not going to be subject to a RICO forfeiture be- cause that's not really practical. That institution itself is often-its debts and obligations are ones that-- Mr. DOUGLAS. It may not, but the officers may have been in- volved in the racketeering activity, and they may or may not be able to-- Mr. DENNIS. It's fine to proceed that way if they have received anything, but in terms of the enterprise itself, which would be the banking facility, I think you can see that that does not really get you anywhere to try to forfeit the institution. Mr. DOUGLAS. OK, one last question, Mr. Chairman. March 10 a year ago, was a teletype from the Boston FBI division concerning the district of New Hampshire and it said the following, I'll quote, "There are 18 bank fraud matters and 4 major bank fraud matters all of which are inactive because the U.S. attorneys office in the district of New Hampshire is reluctant to prosecute complex mat-. ters in general, and any FBI cases in particular. Two or three ag- gressive prosecutors could clear this backlog easily." It's a year later, this was March 10, 1989, and I would just like you to provide a followup on what has happened to the 18 bank fraud matters and the 4 major matters because I know since that time a former deputy attorney general of New Hampshire has become the U.S. attorney and personnel changes occurred, but be- cause it affects my State and we're faced with some bank problems, I'd be curious to have an update on that and if it is still un- changed. Frankly, I'd like to know why. So, if we could get that. I don't expect you to have that information on the top of your head. I wouldn't have it either. Mr. DENNIS. Right. Mr. DOUGLAS. If you have it you can tell me, but if not I'd be glad to get it in writing, an update on a year ago. Do you know the document I'm referring to-- Mr. DENNIS. Yes, we're aware of the document, so-- PAGENO="0370" 366 Mr. CARVER. We'll follow up for the record. Mr. DOUGLAS. I'd appreciate that, thank you. Thank you, Mr. Chairman. [The material is in appendix 10.] Mr. BARNARD. Thank you. Mr. Hastert. Mr. HASTERT. Thank you, Mr. Chairman. Are you familiar with the survey done by the Department of Jus- tice, March 1989, about needs in various departments and what-- Mr. DENNIS. There were a number of surveys, that one I was not-- Mr. HASTERT. Well, this is the one that was provided to this com- mittee. Mr. CARVER. Yes, sir, the one you're referring to is one that was-the survey was drafted in the Fraud Section of the Criminal Division, so we're familiar with the one I believe you're referring to. Mr. HASTERT. It's interesting when you look through~ it. The Jus- tice Department in Dallas asked for-or the Federal Bureau of In- vestigation asked for 64 agents and then they received 37. My dis- trict, the northern district of Illinois, asked for 16 and got 4. Dallas did a lot better than Illinois, percentagewise, but there's probably a need, but what I'm saying is there's differences in what we're hear- ing from the FBI and from you, all within the Department of Jus- tice, and things aren't adding up, and let me just tell you some- thing, I'm going to lecture for a minute and not ask a question. You know, I sit back up there in Illinois and we certainly weren't touched by the savings and loan problem like people in Texas and California and Arizona, but let me tell you there was a lot of our money that flowed into those savings institutions in 1980, 1981, 1982, and 1983, because we couldn't get a mortgage in our area, things were bad, so our money flowed down there, and a lot of our people were hit. But people politically, and I'm talking politics and we're politi- cians, you have a score to keep, how many investigations you do, how many prosecutions you do, and how many convictions you get. We have a score every 2 years that we have to deal with the people who elect us and they expect performance and it's just like we expect performance out of you. The problem is people back home know that something stinks in this whole thing, they know that people perpetrated crimes, that we have a backlog of cases numbering up to 3,000, and those guys aren't being prosecuted and the reason they're not being prosecut- ed is because there's not dollars there to prosecute them, because we don't have the attorneys to prosecute them, we don't have the investigators to prosecute them, and they think that's a malfea- sance of government. Now, you guys as bureaucrats and involved in the system may go on and on and on, but the people who end up being accountable is us, so that's why we're talking, having this dialog here today. You know, I just think, quite frankly, that what you're doing is not enough and I know you have priorities and you have terrorists and you have the drug issues and all these things we have to deal with, but I think we're playing games. Quite frankly, I think we're PAGENO="0371" 367 playing games here. You know, you're coming down, and I know you've got 0MB on your back and everybody else and you're not going to come out here and say that you need X amount of agents to do this, or you need more attorneys to do it, and we're going to do it cost effective, but the fact is back home, and I want to build on something that Mr. Bustamante said, when we're spending mil- lions and millions of dollars everywhere else in this world and there's something that's a problem back home, people don't under- stand that, they expect performance, they expect us to perform, they expect you to perform, because if there are people who have $400,000 or $1 million or $4 million that they've taken the Ameri- can public for and the American Government and the American taxpayer, our expectations are they belong behind bars and there should be no issue that stops that because it breaks public confi- dence in what this Government can do. When you come up here and say, well, you know, we're going to get by, and the 0MB says this, and, you know, we haven't filled all these positions because of this or that, I don't buy it, and I think we need to go back and re-think and re-order what we're doing here. Now, you know, we do have a time limit. You are up against a 60-month situation. How are we going to get these people investi- gated, prosecuted, convicted if you don't have the manpower to do it. Now, maybe I just lay that question out to you. How are you going to be held accountable? And secondly, how are we going to be accountable? Mr. DENNIS. Well, as I said before, we are going to use the re- sources that we have. Mr. HASTERT. But wait a minute, stop, you missed the point. Asked for 64 FBI agents in Dallas, they got 37. You're not getting what you need. Mr. DENNIS. Well, I understand that we didn't get what we asked for, but we will do with what we have. Mr. HASTERT. So, you're short-handed. Mr. DENNIS. I think that anyone in law enforcement-- Mr. HASTERT. Are you short-handed? Mr. DENNIS. We have many positions that we have not filled. We are continuing to fill those positions. As I said before, it may be some question as to whether or not we will be able to actually bring on board quickly enough those assistant U.S. attorneys and division attorneys to utilize the $50 million this year. We will do as best we can with what we have. Obviously to some extent I'm not sure that it's a matter of throwing more money at the problem. I mean, I think that that may be somewhat a simplistic solution. It may be easy to say to the public, well, $75 million and we gave them $25 more million, so we should have $25 million worth of prosecutions or $25 more million worth of convictions. Mr. HASTERT. I think I understand. You know, I'm a fairly con- servative guy myself, I don't believe in throwing money at prob- lems, but I also know when there's a thousand holes in the dam and you need somebody there to start poking fingers in there and you get half of what you asked for you're going to be flooded up to your neck and maybe over your ears. If you have a war and you have half as many soldiers you're not going to win it, probably. PAGENO="0372" 368 This is the same thing, you're fighting a war. If you don't have the soldiers out there in the field to fight it, to get the infOrmation, to process the information, to prosecute and to get the convictions, you're not going to win the war, and you guys are losers but worse yet, we're losers, the American people are losers. Again, that's the theme. Mr. DENNIS. Well, I don't consider-- Mr. HASTERT. Let me ask you one point, to follow up on what you said, are you- saying that you have dollars but you can't get the personnel? You don't have the agents? You don't have the lawyers? They're not available, they don't exist? Mr. DENNIS. It's not that they don't exi~t, but obviously we have to try to get people on board, we have to get experienced people, other lawyers that are coming on board will have to be trained so it is, you know, those dollars do not translate instantaneously into AUSA's or FBI agents that are immediately available for the prob- lem. We have shifted our more experienced people into this area, we had done that before the appropriations, we are accelerating that now that we have the appropriations, but I think, you know, a judgement's been made as to how much we can reasonably-and others may disagree-can reasonably absorb, and $50 million was decided and I can't really speak beyond that in terms of-you know, if you gave us $75 million we'd try to spend it, we'd do our darndest to spend it, and spend it all, but that's not what we have, we have $50 million, and we're describing how we're spending that $50 million. It may be that, for example, there wasn't a need for more than four positions in your State, and that's a decision we have to make, too. We can't just, you know, it would be easy to spread them around to all 94 offices and say that we took care of every district so that there could be no complaints, but that wouldn't be reasona- ble. We tried to make an assessment-- Mr. HASTERT. The survey was done after you had the $50 million so, I mean, the need was there, you knew what the need was, and to fulfill it, so, we have a time -line that you're dealing with. Mr. DENNIS. Right, but I mean, we're-I'm talking about the de- cision to have to allocate resources based upon our best judgement as to how they could most effectively be utilized in the short term. Now, as more resources become available, obviously we would be able to fund increases in other offices, but it was a joint decision, it was not made by fiat, it was made in consultation with all the agencies involved trying to make a rationale judgement on where they could best be utilized. Mr. HASTERT. Well, the fact is that you knew what the need was, - you didn't ask 0MB for the money, I mean, since you got $50 mil- lion, you didn't ask for any more, you got what you asked for, and I'm afraid-- Mr. DENNIS. Well, I don't-- Mr. HASTERT. I'm afraid you're going to get what you deserve. Mr. DENNIS. We asked for $50 million and we got it all. We did not ask for $75 million. Mr. HASTERT. I know it, but you had the needs here, the needs were out here, I mean, what your people told you that you needed, and you cut it in half, or a third, or whatever. PAGENO="0373" 369 Mr. DENNIS. Well, no, I don't think that that-I'm not sure that the-whether or not we would have made that decision even if we had more resources, whether we would have made that decision, that was an allocation decision among offices, it `was not a gross de- cision in terms of $50 million versus $75 million. Mr. HASTERT. Director Sessions was up here yesterday before the Appropriations Committee and trying to talk about priorities and where dollars are going and I talked about this issue and I also talked about trying to stretch out the terms of FBI investigators so that they could do a better job. They have a shortage of people, and we can argue-we talked bureaucratese back and forth to each other, but the fact is the President asked for $50 million in Febru- ary 1989, you knew that you needed more people than that, and you didn't ask for more money than that. So, I mean the record is the record. One other thing that I want to talk about and it's a technical part, a side here. Mr. Collins in his testimony yesterday expressed a wish that the sentencing guidelines be modified for adding levels of conduct in ever-rising dollar amounts of losses, otherwise the guy who steals $500,000 and gets the same penalty as somebody who stole $4 million, do you see any changes or movements of trying to get different degrees of sentencing here? Mr. DENNIS. We're working with the Sentencing Commission very aggressively to have a fair system that recognizes-that is based primarily upon the amount of loss as a major factor as an aggravating circumstance so that as the amount of money in- creases, yes, the penalties would increase. We've also made propos- als which we feel will be adopted to increase the levels of severity insofar as white-collar type crimes are concerned. So, yes, that is being pursued. Mr. HASTERT. One other question, Mr. Chairman, if I may. What's your prognostication? Are we going to catch these guys? Are we going to prosecute them? And what is the percentage of pending cases that are piling up there? Some people say as many as 3,000 that we're going to get to before we meet the statute of limitations. What's your prognostication? Are we going to be 100 percent successful? 50 percent successful? 10 percent? Mr. DENNIS. Well, my prediction is that we are going to get to the major cases in this area and I can't predict whether or not a particular individual is going to be indicted or not, I mean, that's based on the evidence. No matter how much we might be-- Mr. HASTERT. You've been around this business a long time. What's your guess? Are we going to get these guys? Mr. DENNIS. I hesitate. Let me tell you what I tell a prosecutor or an agent. I was a U.S. attorney, I haven't been in Washington my whole life, OK, I prosecuted cases, and I tell them that I expect them to work hard and I expect them to dig for the evidence, but when it comes time to make the decision as to whether or not someone's going to be indicted in a case or convicted in a case, it's got to be based on the evidence, and I don't-I'm always a little concerned about putting pressure that they have to get this person, they have to get this indictment. What we expect is that the cases are going to be thoroughly investigated and that when we get the PAGENO="0374" 370 evidence we're not going to shrink from presenting the charges, but if the evidence isn't there, there may be cases-- Mr. HASTERT. So, you're a guy who's been around the business your whole life, from your educated guess, and I know you have to dot the "i's," and cross the "t's," and get good evidence and all that stuff. With what we have, with the manpower that you have-- Mr. DENNIS. I think the matters will be thoroughly investigated, that's what I expect them to be thoroughly investigated, I expect those-the expectation that I have is that those cases within the statute of limitations will be thoroughly investigated. Mr. HASTERT. All 3,000. Mr. DENNIS. All 3,000. Now, I don't say there's going to be 3,000 indictments, I don't say that there's going to be restitution in those cases, or that all those cases warrant being indicted, but they will be investigated and they will be disposed of. Mr. HASTERT. I relinquish my time, Mr. Chairman. Mr. BARNARD. Mr. Spratt. Mr. SPRATT. I'm sorry I wasn't here earlier. I will yield my time to Mr. Bustamante. Mr. BUSTAMANTE. I have already had my time. Mr. SPRATT. I have no questions. Mr. BARNARD. Mr. Dennis, I want to assure you that I speak for the entire committee this morning in saying that we do have the greatest respect for you and the Department of Justice. I realize that we're not the committee of jurisdiction as far as the Depart- ment of Justice's authorization is concerned, and I sometimes wonder what the attitude of the Department of Justice is about hearings such as this, but let me just say that we do have a long history of involvement in this particular problem. It goes back to 1982. This committee has done some of the most thorough hearings and investigations of inside abuse and fraud that any committee of the Congress has ever done in its history, and our continuing work brought about title IX of the recent savings and loan bill, FIRREA. So, we continue to have a very, very genuine interest in what's being done in this particular area. Unfortunately, this morning you drew the short straw as DOJ's witness for which I certainly apologize, but let me say that I think I speak for the committee in saying that we have some very serious problems with the complete written testimony of the Department of Justice this morning. Many of these concerns I have already ad- dressed during my questioning, and some others I will be covering further with the Department of Justice. I would have to say that I think as to this particular hearing that the Department of Justice has taken it somewhat lightly, and downplayed the seriousness we have on this subject. I will refer you to just one question and that is on page 37 when we were asking about some low priorities in certain areas of the United States; the response of the Department of Justice to this was an admonition to us, "negative statements about various U.S. attor- neys' offices do very little to strengthen the enforcement effort," and so on and on and on, so I would say that we do not feel too satisfied this morning with some of the responses that we have re- ceived. PAGENO="0375" 371 Nevertheless, your objective, I'm sure, is our objective. And maybe we differ on how intense the effort is, but we feel like that we have a serious problem today, as serious as any that we face, in bringing to justice those individuals who have been responsible for this savings and loan debacle. We're depending upon the Justice Department to do their job, and I don't think that you're going to find Congress happy with the priority it has expressed, and I don't believe the American people are going to be happy with the results they're presently getting. So, in closing out this testimony, I would just say that I think that you've heard the frustrations of this committee, I think they represent those of the Congress, and I think we're looking for a better effort. Mr. DENNIS. Mr. Chairman, if I might be permitted just a few closing remarks of my own. First of all I would like to assure you that the Department does hold this as its highest priority in the white-collar area and the Criminal Division has devoted very substantial resources to this. I think that from the questioning this morning there has been some concern about the level of overall appropriations. I'm sure that that will continue, but I want to assure you that the assistant U.S. attorneys, the Criminal Division lawyers, the FBI agents, the su- pervisors that are working in this area, are working very hard and that we are doing our best to devote as substantial an effort as we can. I think it will yield results, but I only caution that this is still the criminal process, that proof has to be developed beyond a rea- sonable doubt, and that although we want to see results in terms of indictments and convictions and restitutions, that we still operate within that professional framework and I want-I just want to try to~ maintain that as the tenor of our approach to this~ problem. We recognize that it's an overwhelming financial disaster and that we need to be doing our part to make sure that those that brought it about in a criminal fashion sho~ild be brought to justice and we intend to do that. Mr. BARNARD. Well, I appreciate it. It's situations like Penn Square, where one individual primarily, with a little help from his chief executive, was the cause of a $2 or $3 billion loss in some of the major institutions of this country, and to my knowledge that individual was acquitted on 25 of 25 counts. These are the kind of events that concern us. Is the process going to mean that some of these people are going to walk free, that's what worries me, and so it's not only the question of priority but it's also, I guess, what are the results of all this going to be? I don't want to name any individ- uals this morning, but there are some who have gotten a lot of pub- licity and we're going to be looking very closely at those prosecu- tions to see if they result in any convictions, that's what worries me more than anything else. I know that we've already had one acquittal, and had a hung jury in one of the worst cases in Texas, the Empire Savings & Loan, and the major figures connected with that failure. Now, of course, you can't help that, maybe, but that's what worries me, are these people going to walk out free? Mr. DENNIS. Well, I did that one particular case, you know, those things do happen. The case is going to be tried again, there are ob- PAGENO="0376" 372 viously no guarantees insofar as any criminal trial is concerned, but I can assure you that we have our best people on it and our conviction rate after indictment I think is admirable and I wouldn't expect that to be any less in this area than it is in any other-we're in the 90 percent bracket, but there will be-I'm sure there will be some that will be acquitted, but that's our system and I think our cornerstone has got to be that we have been very thor- ough in our investigation, we've been very conscientious and thor- ough in our presentation in court, and then of course it's up to the jury to decide. Mr. BARNARD. Thank you for being here this morning. There's a vote on the floor of the House so we will recess for 10 minutes. [Recess taken.] Mr. BARNARD. Our next witness this morning is the distinguished Director of the Office of Enforcement of the Office of Thrift Super- vision, the Honorable Rosemary Stewart. Rosemary, we are delighted to have you with us this morning, and we look forward to your testimony. In our communication with the RTC, I believe that we asked you to cover what you feel can be done to report any suspicious crimi- nal misconduct on a loan transaction at an early stage, what more can the banking agencies do to dedicate examiners and supervisors to the Dallas task force, and are the RTC and the FDIC, both Fed- eral agencies, reserving to themselves the power to withhold docu- ments which they claim are privileged from Federal prosecutors, to reserve certain advantages in possible future civil litigation, per- haps giving priority over the criminal prosecution. So, today, we would like to hear from you, as well as the FDIC, on these issues, as well as some others that we might develop. Without objection-and there certainly will not be any-your entire testimony will be included into the record, and you might see fit to summarize, and then we will ask the necessary questions. Thank you very much. STATEMENT OF ROSEMARY STEWART, DIRECTOR, OFFICE OF ENFORCEMENT, OFFICE OF THRIFT SUPERVISION Ms. STEWART. Thank you. On behalf of the Office of Thrift Supervision, I thank you for the invitation to discuss and update this subcommittee on the agency's supervisory and enforcement activities in response to serious mis- conduct at savings and loan associations. I would like to begin by personally thanking Chairman Barnard for his work in developing and delivering the title IX enforcement provisions. My own agency, the Federal Home Loan Bank Board, had worked for years to get many of those amendments. We did that unsuccessfully. It was not until you were able to work directly, you and your staff, to see that all of the amendments that we had been seeking, as well as many others in the criminal side, were de- livered in title IX. We have very actively been using the new enforcement authori- ties that were contained in FIRREA, as I have outlined in my writ- ten statement and in the answers to your questions that I delivered to the committee last week. PAGENO="0377" 373 On the two questions that you posed to is, we have made an effort to stress that early referrals to the . astice Department are the order of the day. These referrals are to be made at any time there is a reasonable belief that a crime may have occurred. We have encouraged our district offices to refer to the FBI, as well as the U.S. attorney, when they see suspicious transactions, so that when those loan transactions are first discovered, we are an- ticipating that referrals are being made at that early stage. We do not wait until we complete examinations. We do not wait until more formal investigative work is done. So, I hope we are directly addressing your first question. As to putting more people on the Dallas task force, we have de- tailed two full-time folks from our Dallas district office for 2 years. I have a senior attorney from the Office of Enforcement, who has been working nearly 2 years on that matter, but I think the real answer lies in detailing people case by case. I think that when an experienced examiner or attorney is familiar with a particular case or institution and can be detailed to work on that investigation or prosecution, that is where you get the real return, from the civil agencies assisting the Justice Department. So, we have attempted and will continue to follow that tact, whenever it is possible, to detail as either special assistant U.S. attorneys or as agents of the grand jury, to help the FBI during an active investigation. Looking first at the area of criminal enforcement improvements that I have outlined in my testimony, when we last updated the subcommittee, we told you, as Federal Home Loan Bank Board, at that time, that we had established in each of our 12 district offices criminal-referral units, whose responsibility it was to coordinate the activities of our civil agency with the criminal activities of Jus- tice, to identify priority criminal referrals, and to assist as appro- priate. Today, I am pleased to tell you that the work of these 12 units has become much more efficient and effective in the last couple of years. Our larger districts, in particular, are actively identifying the most serious cases that we believe should be prosecuted. They are meeting regularly with the Justice Department officials, par- ticipating in the local bank fraud task forces, which we have identi- fied in our information provided to the committee, and providing live assistance by way of examiners or attorneys that can help. The good news from these district öriminal-referral units is that the incidence of serious abuses in savings associations is clearly on the downturn. Offenses such as land-flips or contributing worthless or overvalued assets by the owners of institutions to the financial institutions have significantly decreased. In response to your question about what recent trends of crimi- nal conduct we have seen, our districts report that there is an in- creased incident of savings and loans falling victim to fraudulent sales of high-yield loans or securities or paper of any kind. Auto loan paper, for example, seems to be the scam of the last year. Savings and loans clearly are falling victim because they are under severe scrutiny and pressure to get more capital, and these are schemes that are designed to bring profits in quickly. We are not trying to focus more effort. We have been talking about this new problem in the local bank fraud working groups, and hopefully PAGENO="0378" 374 ~and we believe that the losses resulting from this type of fraud are not going to be the phenomenal amounts, but they are serious, indeed, and we are attempting to shift our focus and work on these new areas of fraud, as they are discovered. The backlog that a lot of folks have talked about here-certainly, the U.S. attorneys did yesterday-is with the criminal prosecutors, making the OTS join those prosecutors in applauding the extension of the statute of limitations from 5 to 10 years. This is absolutely essential if the backlog of cases that we have already referred, and that are piling up, are going to be dealt with. In my testimony, I outline some very real-life cases where the civil and the criminal authorities have worked very well together, where Justice obtained criminal convictions of individuals that had defrauded savings and loans of millions of dollars. With all of the press stories about fraud in the savings and loan industry, this is a story whose message is not really getting out as it deserves to be, and you, Chairman Barnard, made this point yesterday, and that story is that savings and loan fraud cases are being detected, inves- tigated, and prosecuted through very cooperative actions of both the civil and the criminal authorities. Are there more to do? You betcha. Are the backlog cases getting more and more serious? Yes, but there are significant successes. Those stories need to be told, as well, and they are stories of coop- eration between the Justice Department and the bank regulatory agencies. In my testimony, I outline just a few of the examples, and I would like to just spend a minute on each one of these. There was a criminal conviction, which I outlined, of two individ- uals-Davis and Burke-last year in Wyoming. One of the things that our National Bank Fraud Working Group does is focus on suc- cesses and failures in prosecutions. We look at cases in detail to see what went wrong, what we might be able to do to help the next time, and this is one of the cases that was featured. I recall that in one of your previous subcommittee hearings, the U.S. attorney from Wyoming was here, and I remember from his testimony that he explained that he had a very small staff that had to do everything from bank fraud to grizzly-bear maulings in the national parks. Well, in this case, his staff rose to the occasion, working with one of the Fraud Section attorneys and one of the assistant U.S. attor- neys from the Wyoming district. There was a conviction of a number of people, including Messrs. Burke and Davis, for illegally acquiring and then defrauding one savings and loan and at least two banks in that district. The Federal Home Loan Bank Board and two of the Federal banking agencies worked very closely with Justice in developing that case. One of our examiners was detailed for a full year to that investigation. The U.S. attorney praised him at the end of that case as an invaluable asset in investigating the matter and as a crucial fact witness. A Federal Reserve examiner was identified as the star witness in that case when this matter was presented to our working group later, and a conviction resulted. Mr. Davis has received a 6-year sentence. Mr. Burke has received a 4-year prison sentence. PAGENO="0379" 375 The written statement also tells you about a conviction that we learned of just last week. Mr. BARNARD. Was there any restitution as far as that is con- cerned? Ms. STEWART. I know that restitution activities are underway. Mr. BARNARD. Were there any fines collected? Ms. STEWART. I do not know that. I know that the restitution by the civil agencies is still underway. My written statement also talks about this conviction just last week, which arose from the failure of Shoreline Savings in Seattle, WA. Again, our Federal Home Loan Bank of Seattle funded a former examiner in that case for 2 full years to work with the pros- ecutors, developing this and other cases arising in that area. The defendant, a Mr. Heide, has caused millions of dollars of loss ~to the association as a borrower who had submitted false statements and... pledged bad security to Shoreline Savings Bank. He has not .been sentenced yet, but he faces up to 7 years in prison based 9fl his con- viction. United States v. Woody Lemons was a trial that we very recently analyzed in the Bank Fraud Working Group. It was a Texas task force success, successfully prosecuted by Fraud Section attorneys working with the task force folks in Dallas. A top management offi- cial of Vernon, Mr. Lemons, had been previously investigated by the FBI and the task force based on a referral that originally came by the Federal Home Loan Bank Board. There was assistance pro- vided by the Bank Board employees that have been detailed to the task force, as well as by FSLIC fee counsel, who now work for the RTC and who have continued to provide that kind of support to the prosecutive effort. This was a very hard-fought trial. Justice de- serves a great deal of credit for it, and Mr. Lemons also is awaiting sentencing. Sunrise Savings in Boynton Beach, FL, was a very well-publi- cized savings and loan failure, in which the former president, Mr. Jacoby, and a former vice president, Mr. Skubal, as well as a number of borrowers, were convicted after lengthy trials in Flori- da. I attach as an exhibit to my testimony a letter that was re- ceived from the Federal prosecutors in that case thanking the Fed- eral Home Loan Bank Board for the efforts and assistance of the agency employees, pointing out that they successfully explained to a jury a very serious series of transactions, complex bank transac- tions, which eventually led to the conviction of a number of people related to that case. Another letter of praise that we appended came from the U.S. attorney for the southern district of New York, Mr. Giuliani, early last year, talking about the Federal Home Loan Bank Board en- forcement attorneys' help in the trial versus John P. Galanis. Ga- lanis and others were involved in a particularly serious bank fraud, involving a number of financial institutions, and I believe that his 27-year sentence is the longest that I am aware of in the area of bank-fraud sentencing. In all of these cases, I do not wish, in any way, to detract from the credit that is due the Department of Justice. Their people de- serve the credit and the praise for getting these convictions, but the teamwork that supported getting the cases tc them and the PAGENO="0380" 376 teamwork that supports the investigations and prosecutions as they are being worked is something that I feel the banking regulators have a small part in and deserve some recognition for. It is some- thing that we have pledged to do and will continue to do, as we make our way through this backlog. Moving then to the civil side of the ledger, and sticking with Mr. Galanis as an example, in 1989, the Office of Enforcement of the Bank Board has obtained 10 permanent injunctions against Mr. Galanis, and nine other individuals that conspired with him, for violations of the Change and Control Act, the Savings and Loan Holding Company Act, and the Securities Exchange Act of 1934. In 1989, the Federal Home Loan Bank Board, and then the OTS, after August, issued a record number of removal and prohibition orders-62 separate orders. The number of cease-and-desist and su- pervisory agreement actions against institutions have decreased, we believe owing to the worst offenders being placed into the con- servatorship or receivership program. In direct response to this subcommittee's recommendations, we have outline in the testimony the things that have been done to affirmatively respond to those recommendations, but I would point out just a couple of those, as well. The OTS recently issued three public-policy statements on its en- forcement policies, designed to guide individual institutions and the OTS district offices about the areas discussed in those policies. They cover the civil money penalty authority that we recently re- ceived in FIRREA, our formal examination procedures and process, and the general enforcement-policy area. In January of this year, the OTS delegated a significant amount of enforcement authority to its district offices, a recommendation that was made in the original recommendation of this subcommit- tee. As a footnote, I would add-this was not resistance previously to the idea of delegation, but it was not a reality at the Federal Home Loan Bank Board as long as we did not have a regional structure, and we did not until after FIRREA or in the last years. We now have regional counsel that are employees of the agency, and we felt that it was the appropriate time that we could delegate, and we are hopeful that this will increase our ability to more efficiently deal with civil enforcement actions activities. Capital plan mechanisms have been put in place in the last few months to implement the FIRREA requirement that capital plans be filed by all deficient savings and loans. Our Supervision Office has developed very detailed guidelines and procedures for review- ing these capital plans. Our district offices will be doing the actual review and analysis of them, and we in the Enforcement Office have developed a standard set of enforcement documents that will be used for institutions that cannot submit an adequate capital plan to demonstrate their viability, which is, unfortunately, going to be the majority of institutions required to file those plans. Finally, we have been actively pursuing the net-worth mainte- nance obligations of savings and loans owners, whether they are in- dividuals or holding companies. We have accomplished four very significant settlements in the last year that have brought hundreds of millions of dollars into live savings and loans. My office is liti- PAGENO="0381" 377 gating three actions at the present time for institutions that are deficient in capital and for which there is an enforceable net-worth maintenance contract. Finally, we have transferred dozens of those obligations to the RTC, so that they may pursue them after institutions have failed and have been placed in either the conservatorship or the receiver- ship program. Finally, the FIRREA enhancement to our civil enforcement au- thority-the most dramatic of these has been the improvement in the temporary cease-and-desist authority for a lack of books and records. It is this areas where I highlight three very recent cases where the Office of Thrift Supervision has utilized the temporary cease-and-desist power to stop thrifts from engaging in activities that would produce more losses. In the case of one Federal savings bank in Miami, we used that authority to stop a thrift from sending any more money out of the country to its Spanish subsidiary. That subsidiary was allegedly op- erating as a mortgage-banking subsidiary, but the books and records did not exist for us to analyze or examine its condition. They temporarily, therefore, stopped that kind of investment alto- gether until we could complete the examination, following which the institution failed. In the case of a Federal savings bank in Conrue, TX, on Febru- ary 12, we again used the temporary books and records authority in FIRREA to direct an institution to stop funding any more loans and any more investments in an entire area of its operations, be- cause its books and records had not been able to adequately ex- plain to our examiners what the thrift was doing. The thrift had failed to record or maintain documentation regarding very signifi- cant transactions, and those were cut off entirely through the tem- porary order that was issued that day. Finally, the temporary cease-and-desist order issued against Cen- Trust Bank in Miami, FL, in December, which has been fairly well publicized, also utilized, in part, that new FIRREA-granted author- ity. In CenTrust, the temporary order was used to halt extravagant spending and investments by the institution in nonearning invest- ments that were very speculative, as well, and citing the new au- thority, based on the inability to determine their condition, the notice issued charged that CenTrust had failed to make all of its records available for examination by the OTS staff, and the tempo- rary order required that those records would be produced immedi- ately. That order also prohibited any increases in salaries for senior ex- ecutives; it prevented further payments to a retirement plan, whose records had not been provided to the examiners; and it eliminated the payment of any nonbusiness or extravagant ex- penses on behalf of CenTrust senior officials until those records could be adequately examined. Again, after issuing that temporary order and putting a halt on the institution's further expenditures in those areas, CenTrust was found to be insolvent and was immediately placed into the conser- vatorship program. In conclusion, I would note that the OTS, in general, on both the civil and the criminal side of the ledger, has not hesitated to use PAGENO="0382" 378 the expanded grounds or the expanded powers that we received in FIRREA; in particular, the appointment of conservators and receiv- ers, sending those institutions to the RTC to be shepherded and handled, made possible by FIRREA. We have been able to place a larger number of institutions by aggressively using the expanded grounds for appointments of conservators or receivers. OTS continues to be dedicated to short circuit the opportunities for insider abuse that exist at thrifts. We have improved and we believe that we are continuing to make further improvements in our examination and our supervision practices, as well as our anti- fraud program. We pledge our continued assistance to the Justice Department in the investigation and prosecution of all of these activities. I would be happy to answer any questions that you have. [The prepared statement and responses to subcommittee ques- tions of Ms. Stewart follow:] PAGENO="0383" 379 TESTIMONY of ROSEMARY STEWART DIRECTOR OF ENFORCEMENT OFFICE OF THRIFT SUPERVISION SUBCOMMITTEE ON COMMERCE, CONSUMER AND MQNETARY AFFAIRS COMMITTEE ON GOVERNMENT OPERATIONS UNITED STATES HOUSE OF REPRESENTATIVES March 15, 1990 PAGENO="0384" `380 INDEX To Testimony Submitted by Rosemary Stewart Director of Enforcement. Office of Thrift Supervision A. Written Testimony, dated March 15, 1990. B. Exhibits Accompanying the Written Testimony. C. .Appendix to the Written Testimony of Rosemary Stewart, dated March 15, 1990, delivered to the Subcommittee on Commerce, Consumer and Monetary Affairs on March 9, 1990. 1. Letter dated March 9, 1990 to the Honorable Doug.Barnard, Jr., Chairman, Subcommittee on Commerce, Consumer and Monetary Affairs, Committee on Government Operations, from Rosemary Stewart, Director of Enforcement (22 pages); 2. Appendix A - (8 pages); 3. Appendix B - (2 pages); 4. Appendix C - (7 pages) a. Exhibits to Appendix C, numbered 1 - 3 (53 pages); 5. Appendix D - (2 pages); and 6. Appendix E - (3 pages). PAGENO="0385" 381 INDEX TO EXHIBITS ACCOMPANYING THE WRITTEN TESTIMONY OF ROSEMARY STEWART March 15, 1990 1. Office of Thrift Supervision Regulatory Bulletin 13, Guidelines for Establishing a Fraud and Insider Abuse Program, Thrift Activities Handbook, Subjects: Fraud and Insider Abuse, dated June 27, 1989. 2. "OTS Gears Up to Battle White-Collar Crime," The Lamplighter, Office of Thrift Supervision, Volume 3, Number 4, March 12, 1990, at pages 3 through 5. 3. "Thrift Regulators Completed 338 Enforcement Actions in 198,9," Office of Thrift Supervision Press Release 90-17, January 24, 1990. 4. OTS Order NO. 90-331, dated February 12, 1990, EP-002A, General Enforcement Policy.' 5. OTS Order No. 90-332, dated February 12, 1990, EP-003, CivIl Money Penalties. 6. OTS Order No. 90-333, dated February 12, 1990, EP-004, Use of, Examination and Investigation Authority. 7. Letter dated June 30, 1989, from Lothar R. Genge, Attorney-in-Charge, Ft. Lauderdale Field Office, U.S. Department of Justice, Criminal Division, Organized Crime and Racketeering Section Miami Strike Force, to Robert E. Showfety, President, Federal Home Loan Bank of Atlanta, re: Prosecution of Sunrise Savings and Loan Officers. 8. Letter dated January 4, 1989, from Rudolph W. Giuliani, United States Attorney for the Southern District of New York, to M. Danny Wall, Chairman of the Federal Home Loan Bank Board, re: Steven R. Hom, Esq. and Mary Beth O'Neil, Office of Enforcement, commending their assistance on the investigation and prosecution of John P. Galanis and members of the Galanis Organization on bank, tax', securities fraud and racketeering charges. 9. "Suspension, Then Seizure of. CenTrust Points To OTS's Tougher Stance on Abuses," The Thrift Accountant, February 9, 1990, page 5. 30-830 0 - 90 - 13 PAGENO="0386" 382 INTRODUCTION Chairman Barnard, Ranking Minority Leader Hastert, and Members of the Commerce, Consumer and Monetary Affairs Subcommittee of the Committee on Government Operations, I am Rosemary Stewart, Director of Enforcement at the Office of Thrift Supervision ("OTS" or the "Agency").' On behalf of the Office of Thrift Supervision, and personally, I thank you for your invitation. I welcome this opportunity to discuss with you the Agency's supervisory and enforcement efforts in responding to unsafe or unsound practices, violations of law, and other serious misconduct in federally insured savings institutions. - Ilet me begin by commending to you the overwhelming cooperation and assistance from each of the OTS-District Offices, and many offices within OTS-Headquarters, including the Office of Supervision and the Human Resources and Management Division, which provided data and analysis that is reflected in many of the substantive answers to your February 12, 1990 letter. Those responses were submitted to you on March 9, 1990 as the Appendix to my written testimony. The testimony that I am presenting to you today, not unlike our day-to-day work at the Agency, is truly a collaborative effort of all of OTS's parts. 1. For the purpose of this Statement, the term "Agency" also refers to the predecessors of the OTS: the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation. PAGENO="0387" 383 -2- I have testified on previous occasions that insider abuse, violations of law, and unsafe or unsound practices have contributed to the insolvency of many of this nation's savings associations. Significant headway has been made in the earlier detection of many of these practices, since this Subcommittee's November 1987 hearing on these issues, as well as since the Federal Home Loan Bank Board's January 1989 written update to you. Advances particularly have been made through improved examination procedures, with strengthened examination and supervisory staffing. Further, there is a commitment by the District Offices and the Agency overall to continue developing and enhancing eicisting fraud and insider abuse detection programs. Those programs are design?d to (1) monitor the receipt and processing of criminal referrals within each district, (2) serve as a clearing house for district fraud training, (3) coordinate efforts relating to civil and criminal prosecution with the FBI and the Department of Justice, and (4) serve as acommunication liaison on fraud related matters. Successes in our area of regulation are difficult to measure. This is particularly true with the high number of savings associations being placed in conservatorsh'ip or receivership -- in most cases, although not all, due to their insolvency. And there are many, many more savings institutions that will need to be placed under federal control in the next year. PAGENO="0388" 384 -3- I can tell you, however, that five years ago, the thrift industry had a large number of institutions that were "out of control" -- institutions whose high risk activities had not been checked and whose fraud had not been detected, let alone halted. Today, you will find that nearly all of the thrift institutions that are being placed in conservatorship or receivership have had their lending, investing, and/Or management problens identified by OTS examining and supervisory personnel and have had effective restrictions placed on their activities through appropriate supervisory or enforcement actions. Still, the savings and loan crisis continues to generate a great deal of negative publicity,.not only about the current state of the industry, but about the role that fraud has played in thrift failures. However, most of the newspaper descriptions that we see today concerning fraud in the thrift, industry recount particular stories that happened y~ ~ Likewise, the increased levels of criminal prosecutions also are now successfully attacking offenses that occurred at savings and loans several ~ ~ Notwithstanding these facts, there is a burgeoning caseload in OTS-Enforcement concerning current and past activities of financial institution insiders. We expect to see dozens of cases referred to us during the next several weeks and months concerning institutions which fail to meet the capital requirements of FIRREA and whose submitted capital plans have beendenied. Further, the PAGENO="0389" 385 -4- comments received from the OTS-District Offices, evidence that fraud and insider abuse, unsafe and unsound practices, and regulatory violations at financial institutions, while for the most part substantially reduced from the early and mid-l980s, are not a thing of the past -- nor are they likely to be. We know for instance that while there were 6,100 criminal referrals involving thrift institutions in 1987, the number in 1988 and 1989 hovered atthe 5,000 level --- still an unacceptable number. This Subcommittee's October 1988 Report, which we refer to as "the Barnard Report," correctly summarized what Enforcement attorneys in my office characteristically have found in working their cases -- that greed and dishonesty, coupled with ambition and opportunity -- are at the cpre of many of the schemes which have damaged the savings and loan industry. From a supervisory perspective, the Office of Thrift Supervision staff is dedicated to short-circuiting the opportunities for insider abuse at thrifts. From an enforcement perspective, I can assure you that the detection and eradication of insider abuse, unsafe or unsound practices, and violations of civil laws and regulations is the primary goal of the Office of Thrift Supervision. In terms of my testimony today on behalf of the Office of Thrift Supervision, I will address three main areas in addition to the written information provided to you in the Appendix to my testimony: (1) The continuing efforts of the Agency and of my Office to respond to the recommendations outlined in the October PAGENO="0390" 386 -5-. 1988 Barnard Report; (2) Extensive inter-agency and intra-agency cooperation, which has resulted in substantial increases in formal enforcement orders against insiders -- highlighting a few special cases for you, and; (3) A seven month overview of the Agency's Title IX FIRREA implementation. The enhanced enforcement authority granted to OTS through Title IX of FIRREA has significantly improved our ability to immediately cut off unsound activities at savings and loans when they are discovered, making our efforts much more effective. The oversight efforts of this Subcommittee and the leadership of Congressman Barnard among the members of the House Banking Committee made the Title IX FIRREA legislation a reality. Our Agency, my Office, and I personally worked for more than five years for many of the provisions contained in Title IX. And so, again, I offer thanks for your efforts and for your partnership. I. Continuing Agency Response to the October 1988 Barnard Report Battling fraud, unsafe or unsound practices, and regulatory violations, in financial institutions necessitates a working partnership between regulatory agencies -- including the Offi~ce of Thrift Supervision -- criminal law enforcement, and the Congress. Congressman Barnard pragmatically noted the fact that, "The U.S. Government -- the bank regulators, the law enforcement agencies, and even the Congress -- will not succeed in bringing the pro~brem PAGENO="0391" 387 -6- under control, unless they all work in partnership." (The Barnard Report, page 7, October 1988) The Agency, and in particular, the Enforcement and Supervision/Operations offices, agree with Congressman Barnard on this principle. That is why the Agency listened, considered, and responded to the 1988 Barnard Report by implementing nearly all of the Subcommittee's suggestions to the federal bank regulatory agencies. The Agency responded to most of the suggestions in its letter dated January of 1989. Since that time, I would like to report to the Subcommittee several other steps taken by the Agency on your recommendations, with some due, in part, to the implementation of Title IX of FIRREA. (Additional information relative to this topic is in the Appendix to this testimony.) Recominemdatiom 5. The banking agencies should substantially increase the number of examiners trained in white collar crime and insider abuse, and should include in all training classes input from the FBI and financial institutions. In the Agency's January 1989 response to this question, the Subcommittee was notified that the Office of Regulatory Activites was in the process of developing a project plan to institute a comprehensive program to combat fraud and insider abuse in the thrift industry. In June of 1989, the Office of Regulatory Activities issued Regulatory Bulletin 13, "Guidelines for Establishing a Fraud and Insider Abuse Program." (See Exhibit 1) PAGENO="0392" 388 -7- The guidelines set forth the Agency's policy that each District should adopt a formal written Fraud and Insider Abuse Program, assessing and anticipating current and future levels of fraud and insider abuse within the District. Those assessments are based on the current number (and growth rate) of significant criminal referral cases or any other appropriate means. Upon the determination of the level of fraud in a District, the District Offices are to develop Fraud and Insider Abuse Programs based on their indicated need. The Districts were provided with a Model Fraud and Insider Abuse Program. (See Exhibit 1) Each District submitted in~~tT~i program plans to the Office of Regulatory Activities in th~ fall of 1989. Among the~chief goals of the programs is to develop and implement examination procedures which assess the risk of fraud in institutions, assess the adequacy of the institution's system of internal controls over senior management and directors, and to discover fraud and insider abuse before such activities grow to proportions that result in losses to the FDIC (SAIF). An anecdote in this week's edition of The Lamplighter, the OTS Employee Newsletter, demonstrates OTS's efforts in combatting fraud in the thrift industry with stepped-'up training and expanded procedures for its examiners and the efforts of the criminal referral units established at each of the 12 OTS-District Offices. As the article, "OTS Gears up to Battle White-Collar Crime," reports, ". . .the heightened awareness is already paying PAGENO="0393" 389 -8- dividends." (See Exhibit 2 at pages 3-5) What follows is a brief exerpt from that story: When a recent letter of credit looked suspicious, quick action by the OTS, plus the cooperation of two financial institutions and the FBI, stopped cold an attempted $250 million wire transfer scam. The scheme involved a branch manager of Great Western Bank, F.S.B., a West Coast thrift, who originated a letter that was faxed across the country to Maryland National Bank in Baltimore, Maryland. The letter said one of the thrift's customers had entrusted $500 million in "Prime Bank Notes" to the thrift as collateral. The letter then asked the bank to contact the customer's attorney for further instructions. The attorney, who had an office in Baltimore and a small account at Maryland National, asked the bank to wire $250 million to his client's account at a third financial institution immediately, without receiving the securities, which were supposed to arrive the next day. The bank was suspicious because of the unprofessional writing of the faxed letter, which included the statement, "NO PRIOk CONTACT WITH THE BANK UNDER ANY CURCUMSTANTCES." The Maryland National Bank officer called the OTS, which immediately contacted Great Western's audit department. Shortly thereafter, the FBI was contacted and the next day the branch manager was arrested following a confession. Effective and early prevention of fraud is the goal in every instance. Furthermore, OTS has made several changes with far reaching implications for its anti-fraud efforts. First, we now have a fraud risk assessment program, which is filled out by OTS examiners and is used to determine whether a more detailed examination into fraud or abuse is called for. Second, we are PAGENO="0394" 390 -9- well along in the process of developing our own .fraud detection course to be given in all twelve OTS Districts and expect to complete training the necessary instructors by next year. This complements our efforts to develop an Advanced White Collar Crime Course with the Federal Financial Institution Examination Council, our participation as lecturers and attendees in their standard White Collar Crime Course, and the same types of participation in the FBI's Bank Failure Seminar. Recoaaemdätion 6b. The 0CC, FRB, the FDIC, the FHLBB should substantially increase their use of formal civil enforcement actions against institutions. During the period of 1988 and 1989, there was an increase in formal orders against institutions. The numbers of Cease-and-Desist Orders increased each year, with the second largest number during the ten year period issued in 1989. (See Exhibit 3). As in 1986 and 1987, a larger number of troubled institutions was effectively dealt with by engaging them in Consent Merger Agreements which enable the Agency to immediately put controls on day-to-day operations. Significant numbers of enforceable Supervisory Agreements also were utilized in 1988 and 1989. Further, in 1988 `and 1989, significant numbers of formal conservatorship actions were taken by the Ag~ncy. With expanded Temporary Cease-and-Desist Order authority and expanded Civil Money Penalty authority, the Agency expects to PAGENO="0395" 391 -10- increase its volume of formal orders against institutions and individuals in the future. Recommendation 8b. The agencies should jointly develop a uniform set of rules of practice and procedure for formal adjudications. The Agency's January 1989 update to the Subcommittee noted that the Agency issued for comment in the Federal Register a comprehensive revision to its rules of procedure, adopting a - number of our sister agencies' procedures. Since that time the new rules have been formally adopted by the Agency and were published as final rules in the Federal Register on June 23, 1989 (54 Fed Reg 26349). While the rules did not seek to achieve uniformity with other agencies, the ultimate goal is the same -- to expedite the administrative process. A task force of the agencies now is working on FIRREA'S mandate that there be uniform hearing rules among all of the regulatory agencies. Recommendation 8c. The agencies should annually issue rules of general applicability and policy statements concerning enforcement policies. The Office of Enforcement drafted several proposed enforcement policies in 1989 for the consideration of the Agency's Enforcement Review Committee ("ERC'). The .ERC adopted three of PAGENO="0396" 392 -11- the policies in January 1990, which incorporated the suggestions from the OTS-District Offices. These policies were then adopted and issued publicly by the Director of OTS in February 1990. The enforcement policies adopted are: (1) EP-002A, General Enforcement Policy; (2) EP-003, Civil Money Penalties, and; (3) EP-004, Use of Formal Examination and Investigation Authority. (See Exhibits 4, 5, and 6) Enforcement Policy Statements concerning Removal and Prohibition Orders and Cease-and-Desist Orders presently are being finalized for the Enforcement Review Committee and reviewed by the OTS-District Offices. They are expected to be adopted in April1990. The first of the three policies, EP-002A, OTS Order No. 90-331, deals with the General Enforcement Policy and describes what will trigger an OTS enforcement action. The policy states, "OTS wishes to establish a regulatory environment where deficiencies in thrift institutions are corrected before they result in significant problems... " It provides that a violation or unsafe or unsound practice by a thrift having a MACRO rating of three, four or five, warrants a formal enforcement action unless the OTS District Office is satisfied that the problems are being corrected. In addition, enforcement action will be taken for seriotis violations regardless of MACRO rating, including serious insider abuse or failing tb exercise due diligence in granting loans or making investments. The policy statement alsO lists the different types of formal and informal enforcement actions, ranging from civil money penalties to board of directors PAGENO="0397" 393 -12- resolutions, and describes the procedure for pursuing an action. The second statement, EP-003, OTS Order No. 90-332, deals with OTS's powers and policies to assess civil money penalties. In this regard, OTS will take into consideration certain factors in deciding whether a civil money penalty should be imposed, and if so, in what amount. Among these factors are the financial resources and good faith of the person, association, or company being assessed, the gravity of the violation, and the history of previous violations. These considerations are combined with additional factors in a civil money penalty table/matrix. The new matrix assigns weights to various factors relating to the seriousness of the violation to make use of the increased penalty limits under FIRREA. The matrix is similar to one used by the Office of the Comptroller of the Currency (0CC), except that the OTS matrix increases the potential penalty for the most severe violations and adds a new category applicable to securities-related assessments. We also have been meeting with the 0CC and the other banking agencies to determine what further refinements are needed to fully implement the FIRREA amendments to our civil money penalty authority. Use of formal examination and investigation authority makes up the subject matter of the third order, EP-004, OTS Order No. 90-333. It describes the regulator's statutory powers under FIRREA, and the procedures used in initiating and pursuing formal investigations and examinations. It is also concerned with the PAGENO="0398" 394 -13- procedures used in seeking, enforcement of subpoenas issued in conjunction with investigations and examinations. The new policy states that OTS expects its examiners and supervisors to maximize the use of examination-related powers to obtain information before requesting a formal investigation. Only when these avenues are exhausted does OTS policy call for formal investigations to: enhance regular examinations to compel uncooperative sources to produce relevant material, enhance special examinations to determine whether enforcement action is necessary, and to produce "discovery" to determine whether formal enforcement action is appropriate. Recommendation 9a. The banking agencies should publicly disclose all formal civil enforcement actions, including the underlying facts and circumstances of each action, and also any modifications to or terminations of such orders. They should delay such disclosures only in those rare instances where disclosure would imminently jeopardize the institution's solvency. Title IX of FIRREA requires public disclosure of all formal civil enforcement actions of the Agency. Let me be the first to acknowledge that I earlier disagreed with this Subcommittee's recommendation on public disclosure of formal enforcement orders. However, OTS-Enforcement's experience since August 9, 1989 in publicly disclosing its enforcement actions has been extremely positive. In some cases, it appears to PAGENO="0399" 395 -14- have assisted us in settling cases. In other cases, it has demonstrated publicly the Agency's commitment to take an aggressive stance to resolve a s~erious problem. In no case to date has it significantly hampered either our ability to negotiate formal orders by consent or to move forward with a Notice of Charges for an administrative proceeding. II. Extensive Inter-Agency and Intra-Agency Cooperation Resulting in Increased Federal Enforcement Orders Against Insiders (See also pages 7 through 18 of the Appendix to Written Testimony, delivered to the Subcommittee on March 9, 1990) Agency Cooperation with the Department of Justice The Federal Home Loan Bank Board, and the Office of Thrift Supervision as the Bank Board's successor, increasingly provided assistance to the Dallas Bank Fraud Task Force through the designation of three agency employees as full-time agents of the grand jury and one employee (from the Office of Enforcement) as a Special Assistant United States Attorney. In addition, fee counsel previously employed by the FSLIC (now by the RTC) have provided steady assistance to this Task Force, both with document production and with assistance during inveitigations and prosecutions. The designation and assistance of these employees PAGENO="0400" 396 -l 5- and agents have allowed OTS to provide the direct assistance of agency experts to the Justice Department in order to facilitate case investigations and prosecutions. As of February 26, 1990, the Dallas Bank Fraud Task Force, to which OTS personnel have been detailed, charged 62 defendants by indictment or information, obtained 46 convictions -- 28 through guilty pleas and 18 through jury trials, and succeeded in having the Courts impose criminal fines of $574,850 and restitution of $11,928,164.52. Coordination and cooperation between civil and criminal agencies is the goal in every case. In one recent example of this, four removal and/or prohibition actions were taken against insiders of a San Antonio, Texas institution. Subsequently, as the result of a criminal investigation concerning the same institution, three of these individuals were charged with numerous counts of bank fraud. Two of the defendants have been sentenced pursuant to plea agreements to cumulative jail time of not less than seven years and orders of restitution to the savings association of nearly $l~9 million. The third defendant is scheduled for sentencing in late May of 1990. The FHLBank of Dallas/OTS-Dallas District, the Office of Enforcement, and the Texas State Savings and Loan Commission all made criminal referrals concerning the subjects of the criminal indictments. In addition to its contribution to the Dallas Bank Fraud Task PAGENO="0401" 397 -16- Force, the Bank Board/OTS and the Federal Home Loan Banks/OTS-District Offices, have provided staff members on an "as-needed" basis to serve as agents of the grand jury or as Special Assistant U.S. Attorneys, in order t.o facilitate individual investigations and prosecutions. Referrals to the FBI and the U.S. Attorneys' Offices, furnishing them with information when requested, close cooperation, and providing the Agency's employees as expert staff to the Department of Justice, all have greatly assisted in the investigations, prosecutions and convictions in the following cases, to mention just a few. United States v. Don C. Davis, et al. Don C. Davis and Danie]~ M. Burke, prominent citizens of Casper, Wyoming, were convicted of illegally acquiring and then defrauding a savings and loan and two other banks. The case was initiated based on criminal referrals to the U.S. Attorney's Off ice in Cheyenne, Wyoming from the Federal Home Loan Bank of Seattle and otherbanking agencies and the FBI's own investigation. The indictment alleged that Burke, a director of Guaranty Federal Savings Bank, Casper,.Wyorning, and Davis, a major borrower of the savings and loan, planned and carried out an elaborate scheme involving a series of transactions which diverted proceeds of loans from the now failed Guaranty Federal for their personal use. They used two other banks which they controlled, in addition PAGENO="0402" 398 -17- to holding companies and shell corporations, as conduits for the diversion of the funds from Guaranty Federal. The case was successfully prosecuted by an attorney detailed from the Fraud Section of the Criminal Division of Justice, working with an Assistant U.S. Attorney from Wyoming in a several months long trial. The Federal Home Loan Bank of Seattle provided a great- deal of support for this successful prosecution. In addition to making a criminal referral on this case, a senior field examiner worked for an entire year exclusively with the U.S. Attorney prosecuting the case. He was singled out by the U.S. Attorney as an invaluable asset in the investigation and prosecution of Davis and Burke, and served as a crucial fact witness on several key elements relatedto the fraud. Mr. Davis received a six year prison sentence on the basis of his conviction on charges of conspiracy, five counts of wire fraud, four counts of misapplication of federally insured funds, three counts of false entires in bank records, and one count of making a false statement to a bank in connection with a loan. - Mr. Burke received a four year prison sentence on the basis of his conviction on charges of conspiracy, three counts of wire fraud, four counts of misapplication and three counts of false entries in bank reco-rds. PAGENO="0403" 399 -18- United States v. Melvin Heide, et al. The Federal Home Loan Bank of Seattle also provided the referral, assistance and support to the U.S. Attorney and the FBI in the March 9, 1990 conviction of Melvin Heide, a forner borrower of Shoreline Savings Bank, Seattle, Washington. Based on information resulting from a regular exanination and then formal examination of Guaranty Federal (above) conducted by the Seattle Federal Hone Loan Bank and the Office of Enforcement, an 18 count indictment was brought against Mr. Heide for bank fraud, nail fraud and false statements. A former examiner ~worked for two years with the U.S. Attorney's Office and during that time was paid by the Federal Hone Loan Bank of Seattle/OTS. He provided invaluable assistance in developing the indictment against Mr. Heide. Among other charges, the government's indictment of Heide alleged that Heide devised a scheme to defraud Shoreline Savings Bank. Shoreline loaned Heide approximately $19 million. As part of the scheme, Heide made loans to various individuals and obtained promissory notes from them. He pledged the notes as security for his loan at Shoreline, while knowing that they could not actually be used because of various conditions. Shoreline suffered severe losses as a resiIlt of Heide's actions, which contributed to Shoreline's failtire. PAGENO="0404" 400 -19- Mr. Heide pled guilty to one count of making false statements and to defrauding ~ceztain individuals. He is scheduled to be sentenced on ~July 20, 1990. Based upon his plea, he faces up to seven years in prison, as well as Court imposed fines and restitution. ~:United States v. Woody F. Lemons Cooperation and assistance by two FHLBB/OTS employees detailed to the Dallas Bank Fraud Task Force, and many months of cooperation and assistance by FSLIC (now RTC) fee counsel, aided federal prosecutors in obtaining a conviction %against Woody F. Lemons, the former chairman and chief exectuive officer of Vernon Savings and Loam Association, Vernon, Texas -- and at least seven guilty plea/convictions of other defendants in the Vernon case, nost of whom were insiders at the institution. One of these two OTS employees has worked and continues to work exclusively with the Departnent of Justice and the FBI on the Vernon case since his detail began in .1987.. The other OTS employee detailed to the Justice Department has spent many hundreds of hours on the Vernon crininal case, as well. . In United States v. F. Lemons, tried in the Northern District of Texas, Dallas Division, Lemons was charged with engaging in an elaborate bank fraud scheme of theft of loan PAGENO="0405" 401 -20- proceeds or commissions, misapplication of funds, conspiracy, illegally sharing in the proceeds of a bank transaction, and violating the bank bribery statute. Lemons was convicted on all counts and currently is awaiting sentencing. *The Justice Department is recommending substantial consecutive terms of incarceration and restitution. The case against Lemons, and other defendants in Vernon Savings and Loan related criminal matters, was formed based on criminal referrals from the Federal Home Loan Bank Board. The case also was identified by the Agency's Office of Enforcement as one that should be "tracked" on the significant case tracking system established by Justice and the regulatory agencies. Prosecution of Sunrise Savings and Loan Association Officers Another excellent example of cooperation between the Department of Justice and the Office of Thrift Supervision is the investigation and successful criminal prosecution of former executives at Sunrise Savings and Loan Association, Boynton Beach, Florida, Robert Jacoby, former President and Chairman of the Board, and Thomas Skubal, former Vice President. In a letter dated June 30, 1989, from the' Ft. Lauderdale Field Office of the U.S. Department of Justice, Criminal Division, Organized Crime and Racketeering Section Miami Strike Force, *to PAGENO="0406" 402 -21- the Federal Home Loan Bank~of Atlanta/OTS-Atlanta District Office, the government attorney-in-charge of the case wrote that through the efforts and assistance of the Agency employees -- extending for several years -- the government was ultimately successful in explaining to the jury a series of complex banking transactions which led to the conviction of several persons related to the case. (See Exhibit 7) Two senior OTS examiners assisted in the investigation as agents of the grand jury for a number of months and at least four OTS officials were key witnesses at the trial. Jacoby was convicted of 15 bank fraud charges and Skubal was convicted of five bank fraud charges. The indictments against them included allegations of bank fraud, conspiracy, and misapplication of funds arising out of their operation and mismanagement of Sunrise. Additionally, two of Sunrise's largest borrowers, William Frederich and Thomas Moye, pled guilty on related charges. FSLIC v. Galanis, et al. Finally, the Office of Enforcement cooperated extensively with the Department of Justice -- as we do concerning many of our cases in which we perform formal investigations -- with the criminal prosecution of John P. Galanis and members of the Galanis- Organization on charges bf bank, tax, and securities fraud and racketeering. To~date, we are advised by the U.S; Attorney's PAGENO="0407" 403 -22- Office for the Southern District of New York that the 27-year jail sentence given to John P. Galanis, which he is now serving, and the sentences of others associated with the Galanis Organization's frauds at savings and loans and banks, are the longest sentences yet handed down for white collar crime offenses. In January of 1989, Rudolph W. Giuliani, United States Attorney for the Southern Di.strict of New York, delivered a special commendation letter to the Agency concerning the extensive work and cooperation of the Office of Enforcement as it related to the successful investigation and prosecution of members of the Galanis Organization. (See Exhibit 8) During the pendency of the Justice Department's proceeding, the Office of Enforcement accommodated the Justice Department's request that we put a "hold" on any further civil investigation or proceedings for a period of time in order to allow the criminal. process to be completed successfully. While doing this, we worked with the case which we had already investigated and at the close of the "hold" period vigorously pursued our civil remedies against Galanis and persons associated with his Organization. At pages 13 and 14 of the Appendix to my testimony there is a description of the OTS's civil case. In summary, in 1989, attorneys in the Office of Enforcement obtained ten permanent injunctions against John P. Galanis and nine other individuals from violating the Savingsand Loan Control Act of 1978, the PAGENO="0408" * 404 -23- Savip~g.s and Loan Holding Conpany Act, and sections 12(i) and 13(d) of the Securities and Exchange Act of 1934. The permanent injunctions were obtained following Enforcement's intensive 407(m)(2) investigation of the Galanis Organization's activities in connection with the acquisition of control of Columbia Federal SavIngs Bank in Westport, Connecticut and two other Northeastern savings institutions. At page 28 of the October 1988 Barnard Report, the Subconnittee recommended at paragraphs 22.a. and b. that the bank regulatory agencies, "should advise their examinations staff and fee counsel that criminal investigations must take precedence over supervisory actions and civil recovery efforts *" Hopefully, as the brief synopsis of cases demonstrates, Enfor~cement and the OTS-District staff try to do everything that we can to ensure the success of criminal cases relating to thrift frauds. We do this by keeping in close communication with our counterparts at the Department of Justice, through participation in the local and national-bank fraud task forces, by offering documents and expert assistance, by sharing the files of our formal investigations, when necessary and appropriate, putting a temporary "hold" on our civil investigations or proceedings when to do otherwise would compromise a criminal proceeding, and generally trying to coordinate the schedules of our efforts when they conflict. PAGENO="0409" 405 -24-- III. Overview of FIRREA Implementation Appendix C and D in the Appendix to the Written Testimony, delivered to the Subcommittee on March 9, 1990, summarizes OTS's implementation of Title IX powers and suggests certain clarifying amendments to Title IX. At pages 15 through 18 of the Appendix to the Written Testimony, the cases of Saratoga Savings and Loan Association of San Jose, California and CenTrust Savings Bank of Miami, Florida are summarized and discussedin terms of OTS-Enforcenent's use of specific Title IX enforcement enhancements. References in those case descriptions are also made to other cases, post-FIRREA, in which OTS-Enforcenent has used specific enforcement enhancements of Title IX. In this section of my testimony, I would like to briefly focus on the Temporary Cease-and-Desist Title IX enforcement enhancement, which has most significantly assisted the Agency in effectively curtailing regulatory violations and unsafe and unsound practices. (Previously in my testimony I addressed the advantages to the Agency in the Title IX requirement of public disclosure provisions .of enforcement actions I also addressed our anticipation that the broader civil money penalty authority will cause an increase in the numbers of formal orders against institutions, as well as affiliated parties. To date, OTS-Enforcement, post-FIRREA, has not received many referrals of civil money penalty cases from the Districts. It is expected, PAGENO="0410" 406 -25- however, that as a result of the recent adoption of a civil money penalty enforcement policy and the delegation of significant enforcement authority to the OTS-District Directors, the Districts will be. pursuing civil money penalty cases both in the field and through referrals to Enforcement.) Temporary Cease-and-Desist Powers Post-FIRREA, The Office of Enforcement has issued three Temporary Cease-and-Desist Orders based on the modifications and new grounds set forth in Title IX of FIRREA at Section 902(a)(8)(2) and (3). Use of the enhanced authority to issue Temporary Cease-and Desist Actions has significantly improved the Agency's ability to put a "hold" on misconduct and abuse at institutions whiäh seriously drain the viabilityof thrifts and could cause more substantial losses to the SAIF. Section 902(a)(8)(3) authorizes the issuance of a Temporary Cease-and-Desist Order for: (3) Incomplete and Inaccurate Records.- (a) Temporary Order. - If a notice of charges served under subsection (b)(l) specifies, on the basis of particular facts and circumstances, that an insured depository institution's books and records are so incomplete or inaccurate that the appropriate Federal banking agency is unable through the normal supervisory process, to determine the financial condition of that depository institution or the details or purpose of any transaction or transactions that may have a material effect on the financial condition of that depository institution, the agency may issue a temporary order requiring -- (i) the cessation of any activity or practice which gave rise, whether in whole or in part, to the incomplete or PAGENO="0411" 407 -26-- inaccurate state of the books or records; or (ii) affirmative action to restore such books or records to a complete and accurate state, until the completion of the proceedings under subsection (b)(l). In the case of a federal savings bank in Miami, Florida, OTS-Enforcement used the section 902(a)(8)(3) provisions in October 1990 to stop the thrift from sending any more money out of the country to a wholly-owned Spanish subsidiary. The subsidiary was allegedly operating as a morgtage banking entity, but there were no records confirming such actIvity. It was impossible to account for the financial condition of the thrift subsidiary, or of the thrift and its subsidiary on a consolidated basis, including the validity and impact of a recently reported recapitalizationof the thrift and use by the subsidiary of monies received from General Bank. In the case of a federal savings bank in Conroe, Texas, a Temporary Cease-and-Desist Order was issued under the new FIRREA enhancements on February 12, 1990, which directed the thrift to immediately stop identified regulatory violations and unsafe and unsound practices, and to restore the books and records of TexasBanc to a complete and accurate state. The thrift failured to record or maintain any documentation regarding significant transactions, including the creation, existence, activities and $2.8 million sale of its subsidiary, TexasBanc Financial Services, mc, and another of its subsidiaries, Tejas Financial Corporation, failed to maintain documentation regarding the financial activities of four recreation subdivisions involving approximately PAGENO="0412" 408 -27- $74 million in outstanding loans. There were numerous other - record keeping violations by the thrift. OTS issued a Temporary on the grounds that the records were so incomplete that the financial condition of the thrift, and the details of transactions that may have a material effect on the financial condition of the depàsitory institution, could not be ascertained. Finally, a Temporary Cease-and-Desist Order was brought against CenTrust Bank, a State Savings Bank, Miami, Florida in December 1989 (described at pages 16 through 18 of the Appendix to my Written Testimony). In CenTrust, the Temporary Order halted extravagant spending and further investment by the savings association in non-earning speculative investments. Citing, in part, the new authority to issue Temporary Orders based on our inability to determine certain aspects of CenTrust's financial condition or transactions, the Notice issued against the association charged that CenTrust had failed to make all of its records available for inspection by OTS examiners and the Temporary Order required such records to be produced immediately. The CenTrust Temporary Order also prohibited any increases in salaries for senior executives, prevented further payments to a retirement plan whose records were maintained outside the United States, and eliminated the payment of any nonbusiness or extravagent expenses on behalf of CenTrust's senior officials. (See Exhibit 9) PAGENO="0413" 409. -28- SUMMARY I wish, again, to thank Chairman Barnard and the Members of this Subcommittee for your efforts and partnership in reviewing and recommending enforcement enhancements to prevent, pursue, and correct serious misconduct in federally insured savings institutions. OTS-Enforcement has actively utilized the enforcement enhancements authorized by Title IX of FIRREA many times since August 9, 1989. They have measurably aided in effective, efficient, and speedy enforcement responses. We expect that efficiency to be further enhanced through the delegation of many consent enforcement initiatives to be handled at the the OTS-Districts. The Office of Thrift Supervision is dedicated to short-circuiting the opportunities for insider abuse at thrifts. We have improved and continue in our efforts at improving our examination and supervisory practices and antifraud programs. The Agency has significantly increased its removal and prohibition actions from the banking industry in order to eradicate the continuing threat of misconduct of some institution affiliated persons in our federally insured financial industries. The cooperation, both within the many offices and departments of OTS and with other federal and- state agencies, has enabled more PAGENO="0414" ~41O -29- effective civil and criminal action against insiders whose misconduct has caused substantial losses at savings and loans. Finally, the Agency has taken this Subcommittee's recommendations most seriously. Speaking for my own Office, OTS-Enforcement, and for the initiatives of many other areas of the Agency, I can tell you that we have made every effort to respond to the recommendations of the 1988 Barnard Report. With you, we are committed partners with the Congress, the other banking regulatory agencies and the criminal law enforcement agencies to ensuring the safety and soundness of federally insured savings and loans through efficient and effective supervisory and enforcement actions. PAGENO="0415" 411 APPENDIX to WRITTEN TESTIMONY of ROSEMARY STEWART Before the Commerce, Consumer and Monetary Affairs Subcommittee of the House Committee on Government Operations March 15, 1990 PAGENO="0416" 412 Office of Thrift Supervision Department of the Treasury * * 1700 0 Street, NW.. Washington, D.C. 20552 March 9, 1990 Honorable Doug Barnard, Jr. Chairman Subcommi-ttee on Commerce, Consumer and Monetary Affairs Committee on Government Operations U.S. House of Representatives Washington, D.C. 20515 Dear Mr. Chairman: - This is in response to your letter of February 12, 1990, which requested information relative to your Subcommittee's in- quiry into the supervisory and enforcement efforts of the Federal bank regulatory agencies in responding to unsafe or unsound practices, violations of law, and other misconduct in financial institutions. There follows a listing of your questions (under- lined) with our responses immediately following, with exhibits where necessary.- I will be pleased to provide additional written and oral testimony to you next week, which will draw upon the same informa- tion contained in this letter and its Appendices. l.a. Provide updated data on the number of thrift institutions for which misconduct was identified during 1987, 1988, and 1989, based on the same criteria and broken down in the same manner, as the data which the FHLBB provided in 1987 (see p. 515, 11/19/87 Hearing Transcript). l.a. Institutions Open Institutions In Which Mis- Receiving Conduct Was Failed FSLIC Problem Identified (1) Institutions (2) Assistance (3) Institutions (4 1987 234 79 50 28 1988 203 84 36 36 1989 170 49 11 41 (1) Misconduct is defined as conduct by an insider or af- filiated outsider that resulted in a formal or informal action or a criminal referral. An insider is an of- PAGENO="0417" 413 -2- (2) "Failed" institutions are those placed in receivership. (3) These are institutions merged or acquired with FSLIC assistance or placed in the management consignment pro- gram ("MCP"). (4) `Problem institutions' are those that were assigned a composite MACRO rating of 4 or 5. This definition was chosen in lieu of "significant suporvisory cases' since the Significant Supervisory Case List is no longer in use. b. Describe any recent discernible trends or atterns of fraud or misE let, in lud~~gtesc emes and areas of t e country most l.b. This question is answered in Appendix A. 2.a. Report on the OTS's implementation of the "p~y~~rovisions in FIF.~A (i ijdino the comparability provis~onsi~scribin.g ~ctu~oercentagesa~increases~Ed ~ fe rent ials, iii) the imoact on retaininq experienced personnel, ~t known, and any p ro lens wit the se F IRREA or owes ions 2.a.(i) FIRREA requires that the Office of Thrift Supervision (OTS) set and adjust total compensation, both pay and benefits, in such a way as to reronin comparable with the federal banking agencies, specifically the Federal Do- posit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Nntionnl Credit Union Administration. OTS hired Mercer Meidinger Hansen, one of the foremost consultants in the compensation area, to assist us in the development of a compensation system. The consult- ant performed a preliminary study, beginning in late July 1989, which involved talking to managers transfer- ring into OTS, analyzing information related to the pay programs covering the 14 different groups of employees who would make up. the OTS population, and collecting and analyzing pay data from the federal banking agencies identifiedin FIRREA. This preliminary study revealed that the salaries of the former Federal Home Loan Bank Board (FHLBB) were approx- imately 18-20 percent below the pay levels of the federal banking agencies. Salaries of the former Office of Regulatory Activities (ORA) employees generally ap- peared to be competitive, as were the salaries of most employees who transferred into the OTS from the District Banks. 30-830 0 - 90 - 14 PAGENO="0418" 414 -3- The consultant recommended that the OTS adopt an interim pay program to operate during 1990, until a permanent pay program could be developed for implementation na- tionwide in January 1991. This interim program became effective on October 8, 1989 and includes the following provisions: 1. Existing pay administration policies and procedures remain in place through 1990 for employees joining OTS from ORA and the District Banks. Salary ad- justments resulting from promotions and pay for performance programs are to operate as each plan requires up to the maximum levels allowed by OTS. This approach was taken to minimize the disruption to employees during a critical transfer period, as well as to provide OTS with sufficient time to change our payroll system to accommodate the new pay program. 2. The salary ranges and the salaries of the non- executive employees from the former FHLBB increased by 12 percent as of October 8, 1989 and step, pro- motion, and merit increase procedures continue as planned. A 6 percent lump sum award was provided in January 1990 to all non-executive employees whose performance met or exceeded the fully satis- factory performance level for their jobs. 3. Salary of former FRLBB Senior Executives were in- creased 35 percent (or up to the new maximum of their level) and the executives were placed into a new eight level OTS executive salary structure, also as of October 8, 1989. These changes were put into effect with the transfer of employees to the Office of Thrift Supervision on October 8, 1989 and will remain in effect until the permanent pay structure is implemented in 1991. These changes did not however unify the 14 pay systems that currently exist, one covering the former FRLEB employees, one covering the former ORA employees, and one for each of the 12 District Offices. It only brought those employees who were furthest away (former FHLBB employees) closer to the comparability require- ments of FIRREA, and it did not result in any reductions in pay or benefits for ORA and District Bank employee transfers. The study to develop a new permanent pay and benefits structure to encompass all of OTS is being carried out now. We are scheduled to complete the study and have a new system ready to put in place by January 1, 1991. While we believe that the largest adjustments needed have already been made to the pay structures, it PAGENO="0419" 415 -4- is expected that some smaller and more selective in- creases may result from the new pay structure now under development. 2.a.(ii) The history of OTS is so short that we do not have suf- ficient historical data from which to make comparisons about turnover. We know that the District and the Head- quarters offices continue to experience some loss and some replacement. However, the exact turnover rates, and how much they may have slowed, increased, or leveled off since the passage of FIRREA is very difficult to determine at this point. Once we are consolidated onto a single payroll/personnel system and are able to collect turnover data over time, we will be able to determine more definitively how the turnover rates have been affected by FIRREA. 2.a.(iii) For the most part, the FIRREA provisions have permitted wider flexibility in compensation and benefits not available to OTS before. A number of concerns have arisen, however, as part of the effort to develop the interim and permanent pay structure permitted under this flexibility. Typical of these are the following: Each of the compensation systems from the 14 organizations that were brought together to make OTS has different features. Our managers and executives have indicated that sone~of these features are quite desirable and should: be included in the permanent compensation structure. . In addition, they indicated that some features of compensation systems in other organizations should be included in the new OTS program. Thus, we are trying to develop a new compensation program that has the most desirable features possible, but that does not go beyond comparability. This requires a difficult balancing effort. We also recognize that the transition to the interim pay program this year, and the implementation of the new pay program in January 1991 have created and will continue to. create problems. Movement into a new compensation structure reasonably creates discomfort among employees, and the unification of employees who have been part of 14 pay structures into one new structure should be no exception. Contributing to these problems is the nega- tive image of federal employment faced by those trans- ferring from the private sector Federal Home Loan Banks and their expectation to retain~as much of their prior compensation and benefits~package they had as Bank employees. Management of the OTS believes that the final outcome, a pay program that provides internal equity and compara- bility with the other financial regulatory agencies and allows OTS to attract and retain quality staff, is worth PAGENO="0420" 416 -5- the transition adjustments involved. Every effort pos- sible will be made to reassure OTS employees both at the District offices and at Headquarters that the develop- nent of a unified pay program is intended to strengthen their salary potential rather than weaken it. Addition- al efforts are being made to develop a permanent pay program with clearly and consistently defined jobs, a bonus and merit increase program linked to performance, and delegation of authority for pay decisions to the lowest practical management level. b. Provide updated data on examiner and supervisory personnel levels at year end 1987, 1988, and 1989, including turnover and new hires. 2.b. 1987 1988 1989 Examiner and Supervisor Professional Staff as of 12/31 2,076 2,128 2,189 Hiring During Year 295 397 456 Turnover Rate 13.2% 16.0% 18.1% 3.a. (i) Provide for 1987, 1988, and 1989, the actual examination freguedd~for both problem and non-problem thrift institutions and also the avera~e examination cycle times for failed institutions, and (ii) describe any changes in the OTS's "uniform standards for the maximum time between examinations". 3.a.(i) Examination Frequency (in months between examinations) Non-Problem Problem Failed Institutions(1) Institutions(2) Institutions(3) 1987 15.4 11.2 12.0 1988 15.5 9.6 11.9 1989 16.8 9.8 12.1 (1) Defined as institutions with a composite MACRO rating of 1, 2, or 3 assigned at the time of the previous examination (2) Defined as institutions with a composite MACRO rating of 4 or 5 assigned at the time of the previous examination (3) Defined as institutions that went into receivership 3.a.(ii) In addition to regular ongoing off-site monitoring of thrifts by OTS field personnel, OTS has on-site exami- nation standards for reviewing the condition of insti- tutions. PAGENO="0421" -6- For the period January 1987 through July 1989, the examination frequency requirements for FSLIC insured institutions were prescribed in FHLBB Memorandum SP-69 series. Generally, these nemoranda established national uniform standards for the maximum time between on-site full procedure type examinations, based primarily on the last examination composite rating (MACRO rating) assigned for the institution of: 1 or 2 rated: 18-24 months 3, 4 or 5 rated: 12 months The memoranda emphasized that the standards for examina- tion schedules set forth the maximum time between exami- nations, with the Districts expected to use good judg- ment to conduct examinations of institutions as often as necessary based on perceived risks. Other frequency and examination type requirements were also spelled out in the memoranda to address special situations such in the event of a change of control or management in the insti- tutions, for newly chartered thrifts, or when a super- visory agreement or cease and desist action had been im- posed on the institutions. Since June 1989 with the implementation of the Regula- tory Handbooks now used by the field staff in the exami- nation and supervision of thrifts, modifications were made to the examination standards, primarily to allow more procedural flexibility with examinations. The Handbook's regulatory approach discourages the routine performance of a full range of examination procedures and encourages field staff to design examination ap- proaches to concentrate on high-risk and problem areas. Under the revised standards, the maximum frequency for on-site review, based on the last examination composite rating is essentially unchanged from SP-69: 18 months for 1 or 2 rated thrifts and 12 months for 3, 4, or 5 rated. However, the level of extended procedures are expected to be performed on a schedule of 3 years for 1 or 2 rated institutions, and 2 years for thrifts last rated 3, 4, or 5. b. Set forth the Ci) numbers of final formal and informal OTS civil enforcement orders for 1988 and 1989, broken down in the same manner as in the subcommittee's 11/19/87, Hearing Transcript, ~id (ii) the amount of CMP assessments and funds actually re covered and also restitutions, for these two years. 3.b.(i) The answer to 3.b.(i) is provided in Appendix B. 3.b.(ii) During 1988 the FHLBB did not file any assessment or collect funds for civil money penalties, primarily, as the Subcommittee is aware, because the FHLBB had little civil money penalty authority prior to the passage of PAGENO="0422" -7- - FIRREA. During 1988 the FHLBB did impose "finest of $20,000, $2,500, $50,000 and $62,500 in lieu of civil noney penalties, and the Office of Enforcement on behalf of the FSLIC obtained full recovery of these amounts. In addition, during 1988, FHLBB ordered that $33,000 be returned to a savings and loan, which also has been done. During 1989, OTS-Enforcenent assessed and collected a civil money penalty of $50,000. Currently, OTS- Enforcement has pending in a litigated proceeding a notice of assessment of a substantial civil money penalty for a Change in Control Act violation, and a number of other possible penalty actions are being developed by the OTS Districts. OTS expects to increas- ingly use its enhanced civil money penalty in the future. OTS-Enforcenent recently has obtained an Administrative Law Judge recommended decision for a $200,000 restitu- tion claim in a litigated Cease-and-Desist Order for violations of the Truth In Lending Act. A similar Notice of Charges for a Cease-and-Desist Order for Truth In Lending violations, which includes a $350,000 resti- tution amount recommended by the District, is currently being prepared by OTS-Enforcement. As of the effective date of FIRREA, all funds assessed and collected under the previous FSLIC-restitution program are under FDIC control. In addition, all former Federal Home Loan Bank Board staff who began the FSLIC- restitution program have been transferred to the FDIC. Accordingly we have asked the FDIC staff to provide us with information concerning the amount of restitution ordered and collected during 1988 and 1989. Actual amounts collected were not available, although we under- stand that FDIC staff is working on a means of gathering that information. The best figures available for the amount ordered in cases involving FSLIC-insured institu- tions, as provided by the FDIC, is given below. 1988 $81,119,632 1989 $100,070,645 1990 $17,508,322 (to date) c. Expound on any exam~1es of special accomplishments and also problems in obtaining civil enforcement orders. 3.c. Additional accomplishments directly related to imple- mentation of Title IX of FIRREA are discussed in Appendix C. PAGENO="0423" 419 -8- The Establishment of the Enforcement Review Committee: The Federal Home Loan Bank Board ("Bank Board") estab- lished an Enforcement Review Committee ("ERC") on December 4, 1987. The Bank Board delegated authority to the ERC to review and expedite resolutions of enforce- ment cases and enforcement policies for the Federal Hone Loan Bank Board. By a resolution of the Director of the Office of Thrift Supervision on January 10, 1990, the ERC was authorized to continue working on behalf of the successor agency, OTS. Since its creation, the FHLBB ERC -- now the OTS En- forcement Review Committee -- has completed the fol- lowing work: -- Approval of over 100 formal examinations/investi- gations; -- Approval of removal/prohibition orders vs. approxi- mately 120 individuals; -- Approval of 57 cease-and-desist orders; -- The termination of 5, the modification of one, and the declination to modify yet another outstanding cease- and-desist order; -- The settlement of two major cases in litigation; -- The initiation of seven litigated administrative proceedings, five accompanied by the issuance of temporary C&D orders; -- The suspension of three individuals based on their indictments; In addition, the Committee completed the following addi- Uónal matters: -- Delegated substantial enforcement authority to the OTS District Directors in February 1990, as described elsewhere in this testimony; -- Reviewed and approved a General Enforcement Policy Statement, a Policy Statement on Civil Honey Penalties and a Statement on Formal Examinations and Investiga- tions. These were publicly issued by the OTS Director in February 1990; PAGENO="0424" 420 -9- -- Approved a comprehensive set of supervisory and en- forcement documents to implement FIRREA's requirement for `capital plans" by capital deficient S&L's (prepared by an ERC-created Working Group of Headquarters and District personnel); -- Approved procedures to assign net worth maintenance enforcement actions to RTC upon the conservatorship or receivership of appropriate savings associations; -- Developed a policy position about when and how to settle net worth maintenance actions, settled two major net worth maintenance cases and delegated the approval of another major settlement to a District office; initi- ated legal action to enforce three other net worth main- tenance cases which still are pending in litigation; -- Inplenented and expanded upon FIRREA section 912's requirement for notification to be made to the FDIC of proposed enforcement actions; -- Approved a capital directive using the post-FIRREA capital standards; -- Established and updated procedures for the operation and voting processes of the ERC, the standardization of its documentation, and the conduct of its business, and in December 1989, recommended the expansion of its mem- bership; -- Assessed a civil money penalty for violations of the Change in Control Act by a shareholder and initiated a District Court action and a CM? for violations by other shareholders in January 1990; -- Prepared recommendations to FHLBB for additional delegations of authority to the ERC (Approved by FHLBB June `88 and June `89); -- Developed a policyre: standards for termination of C&D orders (will be incorporated into the final policy statement on C&D orders which is expected in April 1990); -- Developed and published an interim policy statement re: the pursuit of prohibition actions vs. former S&L~ officials (will be incorporated into the final policy statement on removal-prohibition actions which is ex- pected in April 1990); -- Approved memorandum to FHLBanks re: enforcement actions to address unsafe or unsound practices; PAGENO="0425" 421 - 10 - -- Resolved at least five enforcement recommendations where. there were disagreements among involved offices (OE,OGC and/or Districts). Enforcement Policies: At the recommendation of this Subcommittee in its Report issued in October of 1988, the Office of Enforcement drafted enforcement policies for the guidance of both the thrift industry and its own agency staff. These policies have been refined and formally adopted by the Office of Thrift Supervision after review by the ERC and receipt and incorporation of comments from the OTS District Offices. Three policies were issued on February 12, 1990 concern- ing the following: (1) a General Enforcement Policy, stating that formal enforcement action for violations or unsafe or unsound practices will be brought against institutions with a MACRO rating of 3, 4 or S unless the OTS District Office is satisfied that problems are being corrected; (2) an Enforcement Policy concerning the Assessment of Civil Money Penalties, which provides guidance for the implementation of FIRREA; and (3) an Enforcement Policy concerning the Office of Thrift Supervision's use of its FormalE~amination and Investi- gation Authority. These policies have been made availa- ble both to OTS staff. and to the public. Deleqation of Enforcement Authority: Another of the recommendations of this Subcommittee's Report -- that the agency should delegate more enforce- ment authority to its District Offices -- also was re- cently accomplished. The ERC delegated a broad range of specific enforcement authority approvals to the OTS District Directors. The delegation to the District Directors became effec- tive on February 1, l990~ and includes the approval and e~:ecution of consent orders to cease and desist, consent orders of removal and/or prohibition, consent orders involving the payment of civil money penalties in amounts of $20,000 or less and consent capital directives. The delegation further authorizes District Directors to approve and execute suspensions and pro- hibitions based on criminal indictments, Supervisory and Capital Agreements, Consent Merger Agreements, to act upon applications for leave to accept employment brought by persons against whom there are outstanding orders of prohibition, to modify or~ terminate outstanding orders to cease and desist, and to terminate outstanding orders of removal and/or prohibition. The delegation also PAGENO="0426" 422 - 11 - authorizes the District Directors to initiate formal examination and investigation proceedings upon the con- currence of the Director of Enforcement. In order to facilitate these delegations, the OTS En- forcement staff prepared a detailed handbook with sec- tions giving the District Offices guidance regarding the procedures and forms to be used for each of the powers delegated. In addition, the Enforcement staff is avail- able to provide guidance to any District requesting it. Policy guidance is also being distributed in the form of the Enforcement Policy Statements referred to herein. Dramatic Percentage Increases in the Number of Removals ~iid/or Prohibition Orders and other Enforcement Actions. The FHLBB/OTS increased its enforcement actions by 20 percent in 1989. There were a total of 338 enforcement actions completed in 1989, compared with 285 actions in 1988. Most notable was a 32 percent jump in the number of removal and/or prohibition orders issued during 1989. Of the 62 orders of removal and/or prohibition in 1989, 15 were issued after the August 9, 1989 adoption of FIRREA, resulting in industry-wide prohibitions from all federally insured financial institutions and their af- filiates. The aggressive pace of enforcement actions dealing with insider abuse at federally insured savings and loan institutions is continuing in 1990, with 23 orders of removal and/or prohibition from January 1, 1990 through March 5, 1990. Post-FIRREA, OTS-Enforcement has also issued 18 Cease- and-Desist Orders and three Temporary Cease-and-Desist Orders. The bases for the Temporary Cease-and-Desist Orders issued included the provisions of Section 902 (a)(2)(B) of FIRREA, concerning incomplete and inac- curate books and records. Significant was the success of OTS-Enforcenent attorneys and a financial analyst who, with the cooperation and assistance of the Corporate and Securities Division of OTS-Legal, and support from the District Director and staff of the OTS-Atlanta District, defended the Agency on the December 8, 1989 Temporary Cease-and-Desist Order issued against CenTrust Savings Bank, Miami, Florida: (1) After the filing of two sets of briefs and two oral argument appearances by the parties, on December 28, 1989 and January 11, 1990, the District Court for the District of Columbia denied CenTrust's filing for a temporary restraining order and preliminary injunction to suspend, modify and/or limit significant paragraphs of the Temporary Cease-and-Desist Order; (2) The United States Court of Appeals for the District of Columbia PAGENO="0427" 423 - 12 - denied CenTrust's emergency appeal from the Order of the District Court, following the filing of briefs by CenTrust's attorneys and OTS-enforcenent attorneys on January 12, 1990. (The facts of this case are discussed more fully below at "Significant Enforcement Cases.") Recoveries on Net Worth Maintenance Obligations: Within the past year, the Agency has recovered on several net worth maintenance obligations entered into by holding companies and individuals that acquired thrifts in prior years. These include a settlement of $450 million from the Pinnacle West Capital Corporation, Phoenix, Arizona, which was the holding company of MeraBank Savings Bank, based in Phoenix. Southnark Corporation, which owns San Jacinto Savings Association in Bellaire, Texas, has proposed to resolve its net worth maintenance obligation for $210 million and other consideration. The OTS has accepted this proposal as a satisfactory settlement, which is pending before Southmark's Bankruptcy Court at this tine. At Southmark's bankruptcy filing date, the conpany had a net worth of $281 million, however, using a liquidation analysis the debtor claims that it has only $181 million available for distribution to creditors. The Agency has obtained a settlement of $23 million in assets from the Security Capital Corporation of New York, New York (a company valued at $25 million prior to the settlement, which formerly owned Ben Franklin Sav- ings Association in Houston, Texas). Additionally, the Agency has obtained a settlement of $1 million from ABQ Corporation in Albuquerque, New Mexico, plus debt forgiveness of approximately $20 million owed by ABQ Bank, a Federal Savings Bank, to ABQ Corporation. ABQ Corporation was valued at $3 million prior to the settlement, $2 million of which was paid to the creditor to whom it owed more than $9 million. Further, Enforce- ment is currently litigating three net worth maintenance cases. Finally, the Agency recently issued a regulation which requires divesting companies or individuals with net worth maintenance obligations to report such plans to OTS prior to divestiture and to settle their obligations prior to divesting. Cooperation and Joint Action with Federal and State Agencies PAGENO="0428" 424 - 13 - The Federal Home Loan Bank Board's testimony and submis- sions to the Barnard Subcommittee in 1987 and 1988 noted the extensive cooperation and joint action by the En- forcement staff of OTS with other federal and state law enforcement and regulatory agencies. That cooperation continues. Enforcement's contact with the Department of Justice and U.S. Attorneys' Offices is frequent and productive. Since July of 1988, an Assistant Deputy Director of Enforcement of OTS has been loaned full-tine to the Justice Department's Dallas Bank Fraud Task Force as a Special Assistant U.S. Attorney. Three other OTS employees are full time agents of the grand jury. As of February 26, 1990, the Dallas Bank Fraud Task Force had charged 62 defendants and obtained 46 convictions, as well as obtaining criminal fines of $574,850 and resti- tution orders totaling $11,928,164. Enforcement also works in a collaborative and supportive manner with many other offices and agencies of the federal government and state governments. Significant Enforcement Cases: Highlighted below are a brief sampling of public cases since Enforcement's last report to the Committee which demonstrate our individual successes and joint successes in cooperation or collaboration with other governmental agencies. It should also be noted that several of these cases were Federal District Court Actions brought by attorneys in the Office of Enforcement and successfully resolved. FSLIC v. Galanis, et al. In 1989, attorneys in the Office of Enforcement obtained ten permanent injunctions against John P. Galanis and nine other individuals, from violating the Savings and Loan Control Act of 1978, the Savings and Loan Holding Company Act, and sections 12(i) and 13(d) of the Securities and Exchan4e Act of 1934. The permanent injunctions were obtained following Enforcement's in- tensive 407(m)(2) investigation of the Galanis Organiza- tion's activities in connection with the takeover of Columbia Federal Savings Bank in Westport, Connecticut and twO other Northeastern savings institutions. Enforcement filed a civil action in the federal district court in the District of Connecticut in 1988, seeking permanent injunctions against the defendants, along with their prohibition from the savings and loan industry and their divestiture of savings and loan related stock. Enforcement has one remaining defendant against whom PAGENO="0429" 425 - 14 - suits are ongoing for the actions noted above and con- cerning the enforcement of a net worth maintenance agreement entered into by the individual. On the criminal side of this case, referrals from the Federal ~Hone Loan Bank of New York and the Of f ice of Enforcement, as well as the full investigative files and testimony of attorneys from the Office of Enforcement, provided the bases for a significant part of the Justice Department's successful indictment of John P. Galanis and 22 others for violations of criminal statutes con- cerning bank, tax, and securities fraud, along with racketeering. John P. Galanis was successfully con- victed of numerous counts of bank, tax and securities fraud, to which the RICO statute was applied. He, along with others, is serving what is believed to be the longest sentence yet handed down for a white collar crime offense -- 27 years in prison. During the pendency of the Justice Department's pro- ceeding, the Office of Enforcement accommodated the Justice Department's request that we put a "hold" on any further civil investigation or proceedings for a period of time in order to allow the criminal process to be completed successfully. In January of 1989, Rudolph W. Giuliani, United States Attorney for the Southern District of New York delivered a special commendation letter to the Federal Hone Loan Bank Board concerning the extensive work and cooperation of the Office of Enforcement as it related to the successful investiga- tion and prosecution of members of the Galanis Organiza- tion. American Savings and Loan Association of Florida, Miami, Florida In June of 1988, the Office of Enforcement of the Federal Hone Loan Bank Board and the Securities and Exchange Commission entered into a joint settlement of a joint injunctive action the agencies brought against American Savings and Loan Association of Florida ("ASLA"). In September of 1986, the Bank Board and the SEC simultaneously filed injunctive actions against ASLA. The Bank Board's complaint alleged violations of the quarterly and annual reporting and proxy rules under the Exchange Act. The SEC's complaint alleged viola- tions of the anti-fraud provisions of the Exchange Act. Under the settlement terms, the thrift agreed to put procedures in place to ensure compliance with the law. It also consented to having an outside securities lawyer review its annual and quarterly financial and proxy PAGENO="0430" 426 - 15 - statements filed with the Bank Board, as well as its press releases relating to financial reports or corporate events. Specifically, the federal agencies' complaints stated that the thrift failed to inform investors and securities narkets generally of the material financial and business risks that resulted from a $1 billion re- purchase transaction -- a transaction that represented a departure from its ordinary course of business. There was no explanation of the repurchase transaction itself, nor its unusual size and duration, in the management's discussion and analysis section of the quarterly and annual reports. For the Bank Board, and Enforcement specifically, the case marked a number of significant `firsts.' These `firsts' included the making of significant case law in the area of reporting requirements of publicly traded companies and the first time we had gone to court for a violation of the Exchange Act. The agreement is the only published opinion on the management's discussion and analysis (MD&A) section of annual and quarterly reports, and it establishes standards for all companies, including thrifts, that file financial reports under the Exchange Act. The administrative report and order issued stated that "mere overviews or limited, cursory financial footnote disclosures do not provide share- holders with required perspective on the financial con- dition and results of operation. The report provided guidance to management that their reports should analyze the effects of such unusual transactions on the institu- tion's operations, liquidity or capital resources. Saratoga Savings and Loan Association, Sam Jose, California Saratoga Savings and Loan Association, San Jose, California (" Saratoga"), was the first active enforce- ment case put into conservatorship using the new statutory powers granted by FIRREA. The conservatorship action, headed up by the Office of Enforcement, was taken on November 9, 1989, working closely with the OTS- San Francisco District Office. Saratoga failed to meet its regulatory capital requirement and had been in- curring steady losses that continued to deplete its capital. No reasonable prospect existed for the insti- tution's capital to be replenished without federal assistance. PAGENO="0431" 427 - 16 - The FSLIC issued a Cease-and-Desist Order initiated by the Of f ice of Enforcement against Saratoga in May of 1988. The Cease-and-Desist Order required the institu- tion to cease engaging in unsafe and unsound appraisal practices, to observe federal regulations on accounting for acquisitiofl/deVelOPneflt/coflstructiofl (ADC) transac- tions, direct investments, liability growth and deferral of loan fees. The notice of charges for the Cease-and- Desist Order was challenged, based on attacks against the completeness and substance of examination reports concerning Saratoga. The Administrative Law Judge's recommended decision in an administrative hearing was against the FSLIC. Thereafter, Enforcement briefed the Bank Board and the Board voted to issue a final order against Saratoga, issuing the Cease-and-Desist Order. The Cease-and-Desist Order was appealed by Saratoga to the U.S. Court of Appeals for the Ninth District. The Cease-and-Desist Order was upheld and made public by the U.S. Court of Appeals for the Ninth District, while requiring FSLIC to rearticulate the portion of its decision concerning Saratoga's repeated violations of the ADC and direct investment regulations. Finally, two removal and prohibition orders were suc- cessfully litigated by the Office of Enforcement in this case, following an intensive formal examination con- ducted by Enforcement counsel to develop the grounds for such actions. Since the Saratoga conservatorship, Enforcement has developed the cases and recommendations for conserva- torship and receivership actions on two other active enforcement cases based on the new powers granted through Title IX of FIRREA: General Bank, a Federal Savings Bank, Miami, Florida ("General Bank"~) and CenTrust Savings Bank, Miami Florida ("CenTrust"). In both, General Bank and CenTrust, Enforcement also brought Temporary Cease-and-Desist Orders prior to the receivership or conservatorship actions which were also based, in part, on new FIRREA authority. CenTrust Savings Bank, Miami, Florida Following a referral to Enforcement from the OTS-Atlanta District in September of 1989, attorneys and a financial analyst from the Office of Enforcement, with the as- sistance of the Corporate and Securities Division of OTS-Legal and the cooperation of examiners and super- visory agents from the OTS-Atlanta District, brought several actions against CenTrust and its directors. These included the issuance on December 9, 1989 of a Temporary Cease-and-Desist Order, utilizing, in part, the new FIRREA grounds concerning inaccurate or incom- plete books and records, and a Notice of Charges for a Cease-and-Desist Order. The Temporary Cease-and-Desist PAGENO="0432" 428 - 17 - Order implemented the FIRREA amendment clarifying OTS's authority to require affirmative actions in such an order, as well as the new FIRREA language on the avoidance of contracts. Specifically, the Temporary Cease-and-Desist Order ac- complished several key Agency goals: it made all books and records available for inspection by the District Director, it froze CenTrust's Supplemental Executive Retirement Plan so that no senior officer could withdraw any money from the Plan, it froze executive compensa- tion, which the Agency found to be exorbitant, it stopped the payment of any dividends without OTS ap- proval, and it froze any payment of legal expenses pur- suant to CenTrust's Indemnity Agreement. The Order stopped the purchases of non-thrift related items which had included, but was not limited to, extraordinary expenditures on art, crystal,. china, and oriental rugs (much of which was kept at one or more directors' homes), and required the immediate reimburse- ment of any outstanding personal expenses of any director, officer and/or employee which had been charged to CenTrust. The Order required that CenTrust stop paying for any personal expenses of its Chairman of the Board, David L. Paul, which included, but was not limited to, his boat referred to by the name "Bodacious," and security services at his hone and life insurance policies. The Temporary required CemTrust to terminate, rescind, or otherwise dispose of all property, contracts, leases, or other agreements relating to its corporate jet and airport hangar, its sailboat, limousine, art design contracts and other contracts. CenTrust was ordered to establish specific reserves in an amount equal to the market losses on all defaulted securities and report such reserves on its September 30, 1989 financial state- ment. It was also ordered not to issue or sell any more subordinated debt. Other matters specifically addressed in the Notice of Charges concern trading v. investment issues, junk bonds listed on CenTrust's financial statements as commercial loans, and an in- adequately maintained securities transaction journal. OTS-Enforcement attorneys and financial analyst defended the Agency's Temporary Order against a challenge brought in federal district court in the District of Columbia by attorneys from the firm of Williams & Connolly and Dechert, Price and Rhoades on behalf of CenTrust on December 18, 1989. PAGENO="0433" 429 - 18 - After OTS's filing of a responsive brief on December 19, 1989 and presentation of an oral argument on December 20, 1989, the filing of a Supplemental Memorandum of Law on December 26, 1989 and an additional oral argument of December 28, 1989, and answering on January 8, 1990 of a SupplementalMemorandum, dated January 4, 1990, by CenTrust, which included responding to affidavits filed in support of CenTrust by noted "experts," OTS-Enforce- ment received a favorable ruling from the District Court. On January 11, the District Court denied CenTrust's challenge to the Temporary Cease-and-Desist Order. Following that ruling, CenTrust's attorneys filed an energency appeal to the U.S. District Court of Appeals for the District of Columbia on January 22, 1990. OTS- Enforcement filed a responding brief that same day. The Court of Appeals denied the emergency appeal on January 22, 1990. On January 22, the Director of OTS issued an Order of Suspension of Trading of Securities of CenTrust. From January 12 through February 2, 1990, OTS-Enforce- ment took the lead in preparing a case and administra- tive record recommending the appointment of a conserva- tor for CenTrust. The conservatorship was approved on February 1, 1990 and carried out on February 2, 1990, without disruption to CenTrust's day-to-day operations. The appointment of a conservator for CenTrust was effected using new authority for the appointment of a conservatorship under Title IX of FIRREA. In addition to these significant accomplishments, En- forcement has worked closely with the U.S. Attorney's office in Miami. More than ten criminal referrals have been filed by OTS examiners, which were reviewed by the OTS-Atlanta District and Enforcement. There has been enormous and valiant inter-agency cooperation on the CenTrust case: Florida Comptroller (joint exam), with the RTC, FDIC, SEC, and the U.S. Attorney. Further, inter-agency cooperation has been most extensive between the Office of Enforcement, the Corporation and Securities Division of OTS-Legal, the OTS-Atlanta District, and the Office of Regulatory Activities. d. List and then describe each OTS interpretation and applica tion of the new regulatory enforcement provisions, includii~g~ll p~posed and actual policy statenents,~uidelines, and regulii~ns -- especially (although not exclusively) with regard to FIRREA ~éctions 904, 907, 910, 913, 914, 916, 917, and 918, and pr~ide les of any such written material. 3. di is answered in Appendix-C. This question PAGENO="0434" 430 - 19 - e. Describe any problems, uncertainties, or concerns, with regard to any provisions in Title IX. 3.e. This question is answered in Appendix D. 4.a. Discuss the adequacy of Justice Department investigative and prosecutorial resources and efforts; and identify any areas in the country where the OTS has encountered delays within the Justice Department or other problems, and, in so doin~, indicate whether or not the Attorney General's 12/7/89 allocation to these specific areas will be satisfactory~ 4.a. In the answers received from the 12 OTS District Offices to this question, one nearly constant theme emerges. The Districts in general are impressed with the dedication and ability of the U.S. Attorneys' and FBI Offices. However, nearly every District has cited understaffing of these offices as a major problem. Specifically cited was the Central District of California (where anticipated failures of thrift insti- tutions may make current staff levels inadequate), U.S. Attorney Offices in Anchorage, Honolulu, Spokane, Boise, Billings, Cheyenne, and Salt Lake City, the Southern District of Florida (Miami), and the New Jersey District. This is in no way meant to imply a lack of effort or concern. Most OTS District Offices have re- marked that prosecutorial and investigative staff are cooperative and appear eager to work with OTS repre- sentatives. It is not possible to fully anticipate the effect of the Attorney General's allocation of additional staff last December, but several Districts doubt that the staff allocated will be sufficient. Bank fraud cases are among the most complicated and fact-intensive that an FBI agent or prosecutor is likely to handle. Conse- quently, because the newly-allocated staff does not have experience in these areas, the effect on the backlog of bank fraud cases will not be felt fully. until the staff has been in place for a while. Along with concerns about staffing, the DistrictOffices reported a number of favorable developments evidencing successful working relationships with the criminal in- vestigators and prosecutors. These include the forma- tion and continuing progress of the Dallas Bank Fraud Task Force, the imminent establishment of a Houston Bank Fraud Task Force, the deployment of four OTS-Dallas staff members to full-time work on FBI/DOJ investiga- tions, an improvement in the relationship with FBI offices throughout the Topeka District (Colorado, Nebraska, Kansas, and Oklahoma), which in one case enabled the Topeka case to make a presentation that PAGENO="0435" 431 - 20 - resulted in an investigation being reopened that had previously been declined, and improvement in contacts `with criminal investigators and prosecutors throughout the Indianapolis District (Indiana and Michigan). Despite these improved relationships in many areas, the OTS-San Francisco District Office commented that the U.S. Attorney in San Francisco was not committed to participating in the regular meetings of the local bank fraud working group and is adamantly opposed to discuss- ing cases with them. Discussion of cases is one of the principal benefits that many Districts have found are normally derived from these meetings. we understand that the U.S. Attorney involved recently has resigned. b. List (in an appendix) each local law enforcement (bank fraud) task force/working group, and identify for each the OTS's representative ( s). 4.b. This question is answered in Appendix E. c. Report on the OTS's successes and failures in obtaining both the U.S. Attorneys' cooperation in requesting, and also the courts' cooperation in imposing, restitution, civil money penal ties, and removals from national banks, including (i) identifying those districts involved and (ii) providing any overall figures on the amount of such restitution. The OTS does not require the cooperation of the federal courts in order to impose civil money penalties or to order removals. It takes such actions administratively under statutory authority. However, such cooperation is required for the purpose of obtaining restitution. As described in the answer to Question 3(b), the function of obtaining restitution is performed by the FDIC. We therefore defer to their answer of this question in response to Question E.4 submitted to them by this Subcommittee. S. Discuss an roblens with, and suggest improvements in, the excha~ges of in ormation (i) between and among the Federal Banking agencies (e~g. are the CIIS and MATS utilized regularly by the other agencies?), and (ii) between the OTS and the Justice Depart ment. 5. Since the formation of the National Bank Fraud Working Group in 1985, communications between the Federal bank- ing agencies have improved dramatically. The Group meets monthly. The Director of Enforcement represents the FHLBB and now OTS at these meetings. Perhaps the most important purpose of those meetings is to sit down with the other agencies to exchange information related to fraudulent schemes and the means of punishing offenders, as well as practical problems encountered. 4.c. PAGENO="0436" 432 - 21 - About three years ago an adjunct civil enforcement group was formed that neets the sane morning as the National Bank Fraud Working Group to discuss related civil matters. The OTS's CIIS (Confidential Individual Information System) is available to all banking agencies for use in perforning background checks or assembling information on individuals associated with institutions they regu- late. It is used, but has not been used regularly by the other banking agencies, with the exception of the National Credit Union Administration. As the FHLBB advised the Subcommittee on January 30, 1989, the MATS system was discontinued after it was determined that the information to becollectOd was more geared to the needs of the participating associations and was too detailed for use by regulators. OTS has instead developed and put in place a Shared Credits program whose primary objective is to provide a useful and consistent review and classification of major assets and participation credits held jointly by institutions within the thrift industry. Information in the Shared Credit System is shared between agencies, such as by exchanging findings concerning the review of our system with other agencies. However, because thrift institutions generally tend to participate in loans with other thrifts, and banks with other banks, there is less demand for a regular exchange of information between OTS and the commercial banking agencies from this program. The exchange of information with the Department of Justice has also improved through the National Bank Fraud Working Group, although there are still areas where improvement is needed. Generally speaking, the relationships between OTS District offices amd the local U.S. Attorneys and FBI offices is excellent, although umderstaffimg has been a problem. One of the ways in which communication has been improved is through the encouragement that the Department of Justice has given the U.S. Attorneys to establish local bank fraud working groups modeled on the national group. An attorney in Enforcement at the Agency for 5 years has been specifically designated to maintain liaison with U.S. Attorneys offices and the local bank fraud working groups. There are still some problems in communication. Among these are the difficulty in learning the status of some criminal referrals (e.g., are they being investigated or have they been declined?) and the inability to have the FBI perform a global search of their Field Office In- formation Management System from a local office. In addition, despitethree pending attempts, we have not yet been successful in getting grand jury information PAGENO="0437" 433 - 22 - fron the U.S. Attorneys' Offices, although FIRREA amended the grand jury rules to make access easier to obtain. The infornation in response to Questions 1, 4a, and 4b was provided by OTS District Offices, that in response to Question 2a was provided by the Human Resources and Management staff, that in response to Question 2b and 3a was provided by Supervision staff, the restitution figures in response to 3b were provided by FDIC staff, and other information was provided primarily by Enforcement staff. We trust that you will find this information satisfactory. Any questions about this material should be addressed to me at (202) 906-7622, John Downing, the Assistant Director of Enforcement at 906-7154, or Maureen Cooney, Trial Attorney at 906-7163. Sincerely, Rosemary Stewart Director of Enforcement PAGENO="0438" 434 l.b. APPENDIX A The information herein was supplied by OTS District Offices, much of it by the OTS San Francisco District. The following dis- cussion is intended to be a comprehensive description of the types of fraud detected in the thrift industry over the last several years. Identification of more recent trends is discussed at the end of this appendix. MORTGAGE FRAUD The savings and loan industry is vulnerable to losses result- ing from mortgage fraud due to the increased competition and re- sulting emphasis on loan volume over quality. Concern about in- creasing numbers of fraud-related claims has prompted governmental and private mortgage insurers to become more cautious in reviewing these claims. If fraud is suspected, the insurer is likely to return the claim unpaid. FHLMC and FNMA demand repurchases of loans suspected to have been fraudulently obtained and HUD suspends and debars program participants if the volume of fraudu- lent loans is deemed excessive. When an outsider/borrower attempts to deceive the financial institution in connection with a loan transaction, the technique usually involves one or more of the following: - Misrepresentation and misuse of the loan proceeds; - Misrepresentation of the financial condition of the borrower or the guarantor; and - Misrepresentation of the quality ~or quantity of the collateral. There are two distinct motivations for mortgage fraud. The first concerns frauds that are planned "for profit," where the object is to default on the loan and cause losses to the lender. The second concerns those frauds that are planned "for property," where the object is to "qualify" unqualified borrowers for loans they intend to, but are unlikely to repay. "For profit" frauds tend to be well planned and sophisticated in structure, with the intent to default on the loan(s). There are usually multiple misrepresentations per loan file, and the participants in the fraud often are paid. These frauds result in large losses to the lender per individual transaction. "For property" frauds, on the other hand, are usually un- sophisticated. Since the borrower(s) have the intention of repay- ing the loan(s), the losses are smaller per individual transac- tion. There are few misrepresentations per loan file, usually income or debt related, and the participants are rarely paid. PAGENO="0439" 435~ ~ -2- Some of the more common "for profit" frauds are described as follows: - STRAW BUYERS: A property is put on the market during a slow period, when the property doesn't sell as quickly as desired, a sale to a "straw buyer' is arranged and a non-recourse loan with a 90 to 95 percent loan-to-value ratio is made. Few, if any, payments are made on the loan, and the residence goes into foreclosure. - BUILDER/DEVELOPER BAILOUT: A builder (or a builder and construction lender) with a project it built and financed that has not sold as originally anticipated, finds straw buyers to convert the construction loan(s) into take-out loans on which mortgage insurance is ob- tained. The loans made to the straw buyers require no money down and are often made at favorable rates in amounts exceeding the market value of the security property. Frequently the construc- tion lender funds the loans and then sells them on the secondary market. Usually no more than 12 to 18 subsidized payments are made on the loans and defaults occur in concentrations. - SKINNING: "Skimming' is the practice of improperly diverting funds to benefit participants in the fraud. The three main types of skimming operations are the commission skim, the rent skim, and the equity skin. All three are similar in that: - The perpetrator looks for a distressed seller, a "for sale by owner," or a seller whose previous listing has expired; - There is no cash down payment for any of the sales of property; and - Early payment defaults will occur. * Commission Skinning This type of fraud arises when a real estate agent, or some- one posing as one, obtains a listing for the sale of a property from a targeted seller. The real estate agent may also answer a "for sale by owner" advertisement, posing as a realtor with a client/buyer interested in the property. The skimmer arranges a sale and new loan for a person (called a qualifier) who is paid to appear as a legitimate buyer for a nonexistent person. The qualifier is usually paid a fee for his services, including his consumer credit history. No money is paid for the down payment; the only cash in the deal is the proceeds of the new loan, from which the skimmer gets his commission. Few if amy payments are made on the loan. The skimmer may get a "buyer" PAGENO="0440" 436 to make an offer which includes having the seller obtain new financing and encourages th.e seller to take back a third trust deed instead of receiving a cash down payment. * Rent Skimming: The rent skimmer, or someone used by the skimmer to qualify for a new loan, buys a property from the targeted seller. The rent skimmer may even advertise for property in foreclosure, or as an investor who `must buy' a certain number of homes this month. The terms of sale are given to the seller, i.e., the buyer will assume existing loans, and will give a note for the seller's equity. No cash down payment is made. Then, the property is ranted at a discount for cash in advance. Few if any payments are made on the loan, and the loan goes into default. 1leanwhile, the title is conveyed to a fictional person or a shell corporation and bankruptcy is filed to stay foreclosure while the skimmer continues to collect the rents. * Buyer Walk-away (Equity Skim): A scam artist finds a property for sale, often "for sale by owner." A qualifier is brought in to make a reasonable offer and to qualify for a new, high-ratio purchase-money loan. On occasion, the seller is per- suaded to obtain a new second trust deed loan. The time between the acceptance of the offer and the closing is stretched out as long as possible to make the seller desperate. As the seller's an::iety level rises the terms of the offer are changed so that he must concede cash to- the buyer to close the deal. For instance, the seller is encouraged to take a note instead of a cash do~7n payment and to ~ut cash into escrow to pay for improvements, such as to put in a pool, room addition or to pay closing costs and commissions. The only cash in the deal comes from either the new loan or the seller, some of which goes to the buyer. Shortly thereafter the loan becomes delinquent. - THE PONZI: Pyramid scheme. Investors are lured into purchasing interests in worthless subordinate mortgages by promises of large returns. Amounts paid by later investors are used to pay off earlier investors. The scheme collapses when amounts owed emceed new investments. - FALSE ASSIGNNENT/RECONVEYANCE: This scheme is almost impossible to detect until it is too late. Sometime before a sale takes place, the perpetrator (property owner) records a forged Deed of Reconveyance or a Re- lease of Lien in the county recorder's office where the security property is located, which has the effect of clearing the encumbrance from public record so there is no lienholder of record when the title company searches the title. Upon the sale of the property, the perpetrator receives the sale proceeds and the lender, whose lien no longer appears on the title, is left to settle with the title company and/or locate the perpetrator. PAGENO="0441" 437 -4... - CHURNING: The "fair market value' of a property is artificially in- creased by selling and reselling it in staged sales (land flips). - DOUBLE ESCROW/FLIP: - - The fraud begins with the purchase of a property from a legitimate unsuspecting seller. The purchaser, a straw buyer, agrees to pay cash and in a simultaneous transaction, sells the property to a qualifier (a person who is paid to appear as a legitimate buyer). The qualifier agrees to purchase the property for more than the straw buyer did so as to obtain a loan large enough to cover the cash price agreed to by the straw buyer in the original deal and.to provide a handsome profit. The loan to the straw buyer is made without recourse, either through express agreement or by law (In some states, such as California, state law will not allow recourse against most borrowers). Both transac- tions close at the same time. The loan proceeds pass through the second of the two escrows to fund the first and provide the straw buyer with his profit. Title passes from the legitimate seller through the straw buyer to vest with the qualifier. The lender winds up with a loan in default, and the loan amount grossly exceeds the value of the property. A variant of this is the double pledge of collateral. If a -mortgage banker fails to take possession of the deeds of trust (or if another type of lender fails to take possession of other col- lateral), the borrower may pledge the same collateral to obtain other loans, leaving the first lender unsecured. CONSUMER LOAN RECEIVABLES A recent trend nationwide is the marketing of questionable investment programs to inadequately capitalized institutions. Such programs promise to be Low-risk investments with high rates of return and claim to answer a number of common regulatory problems including high interest rate risk and capital shortfalls. The Eleventh District recently distributed a bulletin describing these programs, which is attached. MONEY LAUNDERING Due to recent cash surpluses at financial institutions lo- cated in the Los Angeles area, the San Francisco District Office is concerned that thrifts nay be playing a part in money launder- ing. Under the Bank Secrecy Act (BSA), in addition to reporting cash transactions in excess of $10,000, financial institutions are required to report transactions involving lesser amounts of cash, if such transactions appear to be structured in such a way as to avoid filing a Currency Transaction Report (CTR) with the IRS. Any suspicious monetary transactions are required to be reported on the OTS Criminal Referral Form 366 (Form 366) and submitted to the U.S. Attorney's Office, the IRS, andthe local OTS district. PAGENO="0442" 438 -5- Such reports are monitored by the Eleventh District Criminal Referral Unit (CRU), which has noted an increase in the number of Forms 366 filed with respect to cash transactions. Despite in- creased reporting, this District is concerned that not all in- stitutions are properly reporting suspicious transactions, due to insufficient training, inadequate internal communication within thrifts, and/or disregard for reporting regulations. In general, the larger institutions file the majority of Forms 366 relating to money laundering, whereas the smaller in- stitutions, which are generally less sophisticated and less aware of BSA requirements, and which generally have less internal security, file very few. Thus, smaller institutions may be per- ceived by money launderers as good targets. Through contacts at the IRS's Criminal Investigation Division, we have learned that much of the recent money laundering activity is taking place through ostensibly legitimate businesses. Individuals who are interested in laundering cash and are know- ledgeable about BSA requirements purchase or establish businesses and open accounts at financial institutions. A pattern of cash deposits is developed to foster the appearance of legitimacy, and increasing amounts of cash are funneled through these accounts. The funds are then transferred by wire to other financial institu- tions, both domestic and offshore. FRAUD USING ADC LOANS AND DIRECT INVESTMENTS The most successful fraudulent schemes are those that (1) generate significant amounts of cash that can be used to personally benefit the perpetrators, (2) involve comparatively little financial risk from those involved, and (3) are not easily detectable for an extended period of time. Speculative invest- ments such as acquisition, development and construction (ADC) loans and equity risk investments (also referred to as direct investments), coupled with liberal accounting rules and auditors willing to "look the other way" meet these requirements. The bulk of these types of fraud were committed in the early to mid-l980s. However, the commission of these frauds in earlier years continues to be a significant cause of the failure of institutions today. With ADC loans, lenders too often have loaned the entire amount necessary to acquire and develop property and pay other expenses, including, in some cases, a development fee. In such cases, there was no down payment, no payment of principal was re- quired until maturity (i.e., a "balloon loan"), and the lender established an interest reserve account, which made the loan ap.- pear to be current even though no payments are made by the borrower until maturity, two to five years later. In the mean- time, the financial institution may have booked income in the form of points, fees, and interest, even though all "payments are funded by the financial institution. Due to the speculative nature of such projects these fees were usually very high. With the `right" audit opinion, these loans are guaranteed to be highly PAGENO="0443" 439 -6- profitable, at least on paper, for at least two years. ("Right" in this context means opinions that (1) allow the classification of these assets as loans (instead of equity risk investments) to allow interest payments and fees to be recognized immediately as income, (2) allow all fees to be booked as income, and (3) do not require losses to be recognized as they become apparent.) Fortunately, greater specificity in the acôounting literature and regulatory changes made during the nid-l980s reduced these ac- counting abuses. Direct investments involving real estate could embody the sane characteristics where projects are speculative, allowing for inflated appraisal value estimates. Such projects also could allow substantial income to be reported through the capitalization of interest, allowing various expenses to be reflected as in- creases in. asset values instead of as expenses. Again, such a fraudulent scheme can easily be hidden for years. ADC loans and land purchases are not the only speculative investments that can be used for fraudulent purposes. Any high- yield investments whose value cannot be easily established through a free market valuation methodology will allow cash to be gener- ated, because it is relatively easy to inflate values. MULTIPLE INSTITUTION FRAUD Fraudulent schemes and insider abuse often involve multiple fi- nancial institutions. This means that fraud is harder to detect and the aftermath is financially more devastating than if a fraud- ulent scheme were isolated within a single financial institution. Included within this category are mortgage fraud and the sale of consumer loan receivables, as discussed previously. We are also seeing borrowers with large troubled loans from several institu- tions. Of greater concern, however, are the schemes devised by in- siders to inflate asset values, hide problem assets from regu- latory scrutiny, or disguise improper transactions. Included here are "land flips" -- multiple purchasing and selling of land at increasingly inflated prices. An updated version of this involves high-yield securities or junk bonds -- again, any speculative asset without an easily ascertainable market value cam be used. Particularly attractive are those assets that provide sig- nificant accounting income. For example, income may be booked on zero coupon junk bonds prior to maturity, even though actual re- payments will not occur until maturity. This means that fraudu- lent schemes may not be uncovered until that time, but income may have been booked for years. Transactions involving payments-in- kind (PIKs) bonds can pose a similar problem because interest on the bonds is "paid" by issuing more bonds. We are also seeing what appear to be reciprocal arrangements. Because many transactions between a financial institution and PAGENO="0444" 440 -7- persons affiliated with the institution are prohibited, insiders agree to have their financial institutions enter into transactions benefiting an insider at another institution in return for reciprocal treatnent from that insider's financial institution. There is also the problem of financial institutions' agreeing to refinance each other's bad loans or purchase bad assets to avoid having to book losses. We are aware of a number of failed thrifts using such shan transactions to book income before their failure. Straw buyers or borrowers can also be used. Once again, no cash is put down and there is no personal liability. Additional funds nay be disbursed by the lender and fee income is often booked by disguising the fact that the lender is financing 100 percent of the purchase price. This can be done by lending money to a third party or buying~ assets from a third party at inflated values. The third party then engages in a transaction with the borrower so that the funds are paid over to the borrower who uses the funds for a down payment. Unlike most of the straw borrower cases involving mortgage frauds, insiders, not just borrowers, are involved in the fraud. Good underwriting will protect financial institutions from most mortgage fraud. Fraud involving insiders, however, is much harder to detect; there in fact may be no documentation of the fraud within the institution's records'. This means that the losses due to such frauds are massive. These types of transactions also have a detrimental effect on financial institutions that do not participate in (or are not directly victimized by) such schenes. Because appraisals are based on sales of comparable properties (and the a~5praisals on those properties), even honest appraisers and independent buyers may be deceived by fraudulent appraisals and sales. Bad ap- praisals may also fuel speculation that can eventually lead to the collapse of real estate markets, such as the collapse of the Arizona market. Fraud involving multiple institutions can only be combated by a simultaneous review of all institutions involved. This is dif- ficult to do given the number of various regulatory and law en- forcement agencies with responsibilities in the area. Better sharing of information and more joint investigations are the only way to solve this problem. Active fraud working groups, joint investigations (such as a current major investigation involving FBI agents in two states), and computerized databases are steps in the right direction. Nevertheless, more work in this area is needed. For example, each regulatory agency should have access to information in databases of other regulatory agencies. PAGENO="0445" 441 -8- RECENT TRENDS OR PATTERNS OF FRAUD The OTS Chicago District notes an increased incidence of crime in the following areas: increased automatic teller machine fraud, including depositing forged checks and unauthorized use of credit cards, excessive or~ disguised employment contracts for management, as well as delayed reporting of losses in order to justify such excessive salaries, and an increase in the purchase of extremely risky high yield loam packages, usually from out of state. The OTS San Francisco District also points to a recent in- crease in the number of cases where savings associations have purchased "high yield" loan packages such as auto loan paper or other consumer receivables (described above), which have hidden and immediate losses for the buyer. This District notes that mortgage brokers offering falsified loans for sale have presented increased risks for the less sophisticated institutions in the recent past because they have not carefully scrutinized what is offered before they purchase~ The OTS Dallas District joins this concern by noting an increase in the fraudulent sale of home loans, including refinanced home loans by mortgage companies who misrepresent the existence or terms of the loan. The mortgage companies "cover' payments for a while but eventually fail to remit, producing serious losses to the purchasers. Clearly, these trends are fueled by the immediate need of many savings associa- tions to increase capital levels. The OTS New York District commented that they had seen am increase in the number of improper insider loans and conflicts of interest by association management and board members who participate in real estate deals with borrowers. The OTS Atlanta District commented that it had seen an increase in fraud schemes involving the Buyer Walk-away (Equity Skim described above). On the positive side, recent trends would indicate that the incidence of "land flips" has fallen off markedly, as have frauds perpetrated on savings associations by shareholders who have "contributed" or "donated" assets to the associations. The latter improvement has been accomplished in large part because such con- tributions are generally discouraged or disapproved by OTS regu- lators. The Dallas District observes that the entire range of "traditional S&L frauds" has reduced significantly in the more recent past owing, we believe, to the removal of most individuals from the thrift that would perpetrate such offenses. The remainder of the OTS District Offices reported no new discernible trends in fraud or misconduct. PAGENO="0446" 3.b(i) 442 ACTIONS TA APPENDIX B KEN AGAINST INSTITUTIONS COMPANIES & SUBSIDIARIES BY 1988 OTS/FHLBB) (INCLUDING BANK HOLDING . Memos of Understanding: FHLBB Thrifts & Savings n./appl. Banks Formal Agreements: 207 Temporary C&D Orders: 1 - Cease and Desist Orders: 26 Civil Money Penalties: None TOTAL NO. 254 1989 FHLBB/OTS Memos of Understanding: Thrifts & Savings n./appl. Banks Formal Agreements: 246 Temporary C&D Orders: 4 Cease and Desist Orders: 30 Civil Money Penalties: None TOTAL NO. 280 ACTIONS TAKEN AGAINST INDIVIDUALS BY OTS/FHLBB 1988 FBLBB Thrifts & Savings Banks Formal Agreements: 2~/ Cease and Desist: 11 Suspensions, Removals, and Prohibitions: 47 Civil Money Penalties: 0 TOTAL NO. 60 PAGENO="0447" 443 1989 FHLBB/OTS Thrifts & Savings Banks Formal Agreements: None Cease and Desist Orders: 19' Suspensions, Removals, and Prohibitions: 62 Civil Money Penalties: 1 TOTAL NO. 82 ~/ These orders were both against individuals and institutions. PAGENO="0448" 444 3 .d. APPENDIX C The following is a summary of OTS implementation of the Title IX powers granted by FIRREA. Section 902-- Amendments to Cease and Desist Authority Implementation of this Section has been divided into two parts: that which merely clarified existing authority and the new powers granted. Under the heading of clarification of existing powers are the amendments addressing the agencies' ability to take `affirmative corrective action." It has long been OTS policy that such action has included the ability to order restitution, reim- bursement, guarantees against loss, the disposal of loans or assets, rescission of agreements or contracts, and employment of cualified employees. Indeed, the OTS recently argued in federal district court concerning a temporary cease and desist order is- sued against CenTrust Savings and Loan of Miami, Florida, that our authority to issue orders that contain affirmative and limiting remedial provisions is quite broad and comprehensive. In contrast, those amendments to the cease and desist authority that are substantive changes, i.e. books and records temporary cease-and-desist orders, temporary orders based on "significant" but not "substantial" loss, etc. already have been employed by the OTS in cases brought since FIRREA. In addition, the OTS pursued the new growth limitations contained in Title 9 in its order issued against CenTrust Savings and Loan of Miam~, Florrda. OTS' recant success with the amended authority has en- couraged the agency to pursue these orders aggressively. Section 903-- Merger of Removal and Prohibition Authority OTS has issued 33 removal and/or prohibition orders since FIRP.EA became effective. In implementing the authority we have. determined that because i) the grounds for a removal had been changed by the. section, and ii) the explicit language of the ef- fective date paragraph applies the amendments to violations that occur post-FIRREA, that the Section 903 modified removal and pro- hibition ~ apply only to violations that occur after August 9, 1989. Section 904-- industry-wide Application of Removal and Prohibition Orders The OTS has taken the position, and the other agencies have agreed, that the industry-wide ban for removal and prohibition actions took effect as of August 9, 1989. This includes applica- tion of the ban to pending actions. The OTS has briefed the issue PAGENO="0449" 445 -2- before an administrative law judae who agreed with the OTS analysis that the ban applied even though the actions giving rise to the removal and prohibition action were violations of now repealed statute (the National Housing Act). This opinion awaits a final Director's order (the Director has 90 days from the date the record is certified as complete to issue his Order) and an Order is expected in the near future. OTS will, in accordance with Section 913 of FIRREA, make the decision of both the Director of OTS and the administrative law judge public once the Director's Order is issued. We will be happy to supply the Subcommittee with a copy at that time. Section 905-- Enforcement Proceedings Allowed After Separation from Service Because the OTS, pursuant to its previous statutory authority, was expressly not impacted by the adverse decision in Stoddard, the major provision of OTS interest in this Section is the 6-year Statute of Limitations. It was the consensus of the several financial agencies that the 6-year limit is based upon that length of time passing from the~date of the offense notwith- standing whether the person remains with the same institution, moves to another, or leaves banking altogether. The OTS had pro- posed an interpretation that would permit the Statute of Limita- tions to be. "tolled" if the individual accepted a new position with a new financial institution, but after discussion with the other banking agencies was convinced that the plain language of the Section will not support such an interpretation. OTS supports any amendments that allow for such a "tolling" of the 6-year limit. Section 906-- Expansion of Removal Powers for State criminal Proceedings This FIRREA amendment also is viewed as a clarification of the existing practice. Section 907-- Amendments to Expand and Increase Civil Money Penalties Most of the authority granted by this Section is brand new for the OTS. Consequently, implementation of this Section has had to address a number of "start-up" issues. For the most part, these have been resolved and are reflected in an Enforcement Policy Statement issued February 12, 1990 (copy attached as Exhibit 1). OTS has adopted a modified version of the 0CC- developed civil money penalty matrix that reflected the early l980s interagency agreement on civil money penalties, while in- creasing the amount of penalties that would result from the matrix to reflect the increased penalty limits in FIRREA. We view this policy statement as an interim step that will be revised as we acquire greater experience in using the civil money penalty 30-830 0 - 90 - 15 PAGENO="0450" 446 -3- authority. We are presently participating with the 0CC and other agencies in general discussions as to improvements to the civil money penalty matrix. Further, the OTS has delegated substantial authority to its District Offices to assess and pursue civil money penalties. The Districts not only recommend the amount of penalties to be assessed, but for those penalties not exceeding $20,000, the District is authorized to pursue collection through a consent order. Again, as the authority is new, the experience of the agency is limited, but we presently are pursuing civil money penalties in a litigated case concerning violation of the Change in S&L Control Act (12 U.S.C. S 1817(j)). Any success will be public as a final agency order. In addition, the several financial agencies have agreed upon an interpretation of the effective date provisions of Subsection 907(1). That subsection provides that the amendments made by Section 907 are applicable only with respect to conduct that oc- curred after August 9, 1989, except that the $5,000 and $25,000 penalty amounts may be applied to -pre-FIRREA violations if a notice instituting an administrative hearing has not been issued and if the violation occurred after the date of the last examina- tion. For civil money penalties that the agencies had authority to bring pre-FIRREA ~ for violations of final orders), the fact that the penalty amounts have increased will not prevent the~ agencies from seeking the higher penalties even if the violations occurred pre-FIRREA. This interpretation is similar to the appli- cation of the industry-wide ban for removal and prohibition ac- tions under Section 904 of FIRREA. Where Section 907 has expanded application of civil money penalties (penalties are now available `for a vastly greater array of violations), it is OTS' position, that if the violation occurs post-FIRREA, then section 907 will apply and the new penalties will be applicable. For example, supervisory agreements entered into ~-FIRREA, but violated £~-FIRREA, will trigger the ap- * plicabi.lity of section 907. Section 908-- Clarification of Criminal Penalty Provisions for Violation of Certain Orders OTS is of the opinion that these FIRREA amendments will apply to all outstanding removal and prohibition orders whether issued pre- or post-FIRREA. Section 909-- Supervisory Records The OTS provides the FDIC and the RTC with supervisory records as requested. we are not aware of any failure to share records and will immediately correct any such failure brought to our attention. PAGENO="0451" 447 -4- Section 910-- Increased Penalty for Participation by Convicted Individuals The prohibition on participation by a convicted individual previously existed for both FDIC- and FSLIC-insured institutions; however the penalty for participation was only $100 per day. The new penalty is not more than $1,000,000 and/or 5 years imprison- ment and applies to individuals as well as institutions. Because it is a change in the remedy amount, rather than a new category of violation, OTS is of the opinion that the guidelines of Section 907(1) for retroactive application should be followed for penalties assessed against institutions. However, with regard to individuals, because this is an expansion of the class subject to the provision, OTS believes that a prospective application of the provision is appropriate. Section 911-- Amendments to Provisions Relating to Reports The OTS provisions for call reports are located in the Home Owners' Loan Act as amended by Section 301 of FIRREA. These are new provisions for OTS and the OTS policy on civil money penalties includes violations of the call report requirements. Section 912-- Authority of the FDIC to Take Enforcement Action Against Savings Associations There are two key provisions to this Section: the require- ment for notification of the FDIC from the OTS District Offices and the procedure for the FDIC to follow in taking "backup' en- forcement action. The OTS has developed a form for use by its District Offices in fulfilling the first requirement (copy of form attached as Exhibit 2). OTS has gone beyond the simple require- ments of notifying the FDIC~of intended formal enforcement actions and has included in the notification form, information relating to supervisory actions. In addition, the OTS and the FDIC are working cooperatively to address the many concerns over implementation of the FIRREA- created authorities such asSection 222, Activities of Savings Associations. To this end, the OTS and FDIC signed an agreement to assist each agency in fulfilling its statutory mandate to supervise their industries and to work together to address any overlapping concerns. The two agencies are also attempting to cooperatively define what nay constitute "exigent circumstances" whereby the FDIC may take enforcement action directly. It is OTS's desire to negate the need for the FDIC to use its "backup" authority by aggressively pursuing all necessary enforcement ac- tions. OTS is always willing to actively consider an FDIC suggested recommendation and pledges to work cooperatively with the FDIC in addressing any concern identified by the FDIC. Section 913-- Public Disclosure of Enforcement Actions Required PAGENO="0452" 448 -5- FIRREA is clear that all final orders issued after August 9, 1989, are to be publicized. The OTS has implemented this re- quirement in a number of ways. First, each final order is placed in our public reading room available to the press and any member of the public. This not only includes the actual order, but the stipulation to the entry of the order if the entity or individual consents to the order, or in a litigated case, the actual admin- istrative law judge opinion along with the final order of the Director of OTS. In addition, the OTS publishes a list, by category of action (e.g., cease and desist order or removal and prohibition order), in its own OTS Journal of each order, the name of the savings association or individual involved, the date of the action and where a copy of the order may be obtained. Finally, OTS issues press releases in selected cases that the OTS determines have significant precedential impact such as in the CenTrust case and, more recently, in an action against an individual for improper futures trading. (Copy of recent press releases attached as Exhibit 3.) Section 914-- Agency Disapproval of Directors and Senior Executive Officers of Certain Depository~ Institutions The federal banking agencies have met to discuss the regula- tions required by the statute on several occasions. OTS is cur- rently drafting such regulations. Until OTS's regulation is pro- mulgated, headquarters OTS has and continues to provide uniform interim guidance. concerning all issues arising under this Section to OTS District offices, who under delegated authority conduct reviews and approve or disapprove notices submitted in accordance with this Section of FIRREA. In an informal sampling of 56 matters handled by- the District Offices through March 6, 1990, 36 were approved, 3 denied, and 17 were withdrawn. Section 916-- Improved Administrative Hearings and Procedures The charge of the Section has been somewhat complicated by the introduction of a bill in the Senate to create an administra- tive law judge corps. (Senator Metzenbaum's S. 594). OTS urges the Congress to either include the creation of a separate pool of financial industry administrative law judges within Senator Metzenbaum's proposal or if this bill becomes law, to separate the two requirements so that there is no confusion as to which pro- vision controls. As directed by FIRREA we have met with the other banking agencies to explore how a pool of administrative law judges can best be formed, we have researched and provided information to the working group meeting on this problem, and anticipate that a structure for establishing a pool of judges will be completed within the statutory time period. PAGENO="0453" 449 -6- As to the issue of uniform administrative rules, OTS reit- erates its initial opposition to this concept and urges Congress to reconsider. FIRREA has posed so many issues of interpretation and implementation that to spend scarce agency resources on development of uniform administrative rules with little gain (each agency has recently modified and updated its own procedures) would be non-productive. The OTS recently finished the promulgation of a substantial regulatory updating of its own administrative pro- cedures in June of last year. Section 917-- Task Force Study of Delegation of Enforcement Actions As required by Section 917 of FIRREA, a joint task force of the appropriate federal banking agencies and the National Credit Union Administration has been created "to study the desirability and feasibility of delegating investigation and enforcement authority to their regional or district offices or banks." The task force is composed of members "reasonably balanced between officials fràm headquarters and officials from the regions, districts or district banks." For the OTS, there are two members, one from Washington and one from a District Office. The Task Force has agreed upon a suggested format for the required report to Congress. It will include a discussion of the current practice of each agency in its handling of enforcement matters addressing at least the following types of actions -- 1. Agreements and MOU5; 2. Cease and Desist Orders (normal and temporary); 3. Removal and Prohibition Orders; 4. Civil Money Penalties; 5. Investigations; 6. Other Actions (to allow for a description of actions used more uniquely by a particular agency). The report will then address, by agency, the strengths and weaknesses of the method within its system and with its particular regulated industry. Because the OTS completed a major project to delegate substantial portions of its consent enforcement authority to its District Offices in February of this year, a large portion of the OTS discussion will focus on this change and implementation of the changes. OTS's delegation of enforcement actions comes, in part, as a result of the 1988 report of this Subcommittee on "Combatting Fraud, Abuse, and Misconduct in the Nation's Financial InStitutions" in which the Subcommittee encouraged the FHLBB to further delegate to the District offices. At that tine, delegation was a difficult proposal for the FHLBB because it did not have real "District" offices but rather examining, supervisory and legal personnel were employed by the FHLBanks. FIRREA has now PAGENO="0454" 450 -7- eliminated that complication and delegations have been effected. In fact, by this action, OTS has already delegated much of the responsibility in each of the areas to be studied in the report. District staff are now responsible for negotiating and issuing consent civil money penalties of $20,000 or less, consent-cease and desist ordered, consent orders of removal and/or prohibition, consent capital directives, supervisory agreements, modification or termination or orders, suspension and prohibitions resulting from indictments, and other matters. Section 918-- Annual Report to Congress The OTS is attempting to keep complete records of all enforcement actions and anticipates full compliance with this Section. In the National Bank Fraud Working Group meetings we have discussed with the Department of Justice how they will track information concerning the results of criminal referrals they receive. - PAGENO="0455" 451 EXHIBT 1 TO APPENDIX C OFFICE OF THRIFT SUPERVISION OTS Order No. 90- 332 dated February 12, 1990 EP-003, Civil Money Penalties Page 2 - *Purpose Page 2 - Summary of Policy Page 4 - Statutory Authority Page 4 . - Description of Civil Money Penalty Provisions Page 7 - Amounts: General Provisions Page 9 - Amounts: Reporting Provisions Page 10 - Amounts: Other Provisions Page 11 - Statutory Provisions Concerning procedures Page 12 - Procedures Page 21 - Policies Exhibit A - OTS Civil Money Penalty Matrix PAGENO="0456" 452 order No.: 90-332 -2- PURPOSE The purpose of this policy statement is to provide a general description of the Office of Thrift Supervision's ("OTS") powers and policies for the assessnent of civil money penalties, which were greatly enhanced in the Financial Institutions Reform, Recovery and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 181 ("FIRREA"). The policy statement discusses particular statutory sections of FIRREA, the Home Owners' Loan Act of 1933, as amended ~ FIRREA (to be codified at 12 U.S.C. S5 l461-1468c) ("HOLA"), and the Federal Deposit Insurance Act, 12 U.S.C. 55 l8ll-]83ld, as amended ~ FIRREA ("FDIAt') as well as the factors to be taken into consideration by OTS in deciding whether a civil money penalty should be imposed, and if so, in what amount. The policy statement also discusses the procedures used in assessing civil money penalties and in carrying out OTS super- visory and enforcement objectives with respect to the assessment of civil money penalties. These policies and procedures are guidelines for the use of OTS, its staff and agents; they do not create substantive or procedural rights enforceable at law or in any administrative proceeding. SUNMARY OF POLICY PAGENO="0457" 453 Order No.: 90-332 -3- Because OTS's primary objectives are to promote a safe and sound thrift industry and to insure the industry's compliance with applicable laws, rules and regulations, in exercising its civil money penalty authority, OTS expects to place maximum emphasis on upholding the principles of safety and soundness an~ requiring adherence to laws and regulations related directly to the thrift industry. The assessment of a civil money penalty provides a strong deterrent to violations of laws, regulations and orders, as well as breaches of fiduciary duty and unsafe or unsound practices. When assessing a civil money penalty, OTS will consider the size of financial resources and good faith of the person, associ- ation or company being assessed, the gravity of the violation, the history of previous violations, and such other matters as justice nay require. These considerations along with additional factors are set forth in a civil money penalty matrix attached to this Policy Statement. The civil money penalty matrix is used by OTS as guidance in determining whether and in what amount to assess a civil money penalty, consistent with the three tier scheme created in FIRREA. While the civil money penalty matrix is expected to be used in all cases where an assessment is being considered, it is not a substitute for sound supervisory judgment because individual cases may possess particularly egregious or mitigating character- istics that are not included as factors in the civil money penalty matrix. PAGENO="0458" 454 order No.: 90-332 -4- This policy statement further outlines the procedures to be followed for the new delegations of authority to the OTS District Offices to negotiate consent civil money penalties and to issue the corresponding consent orders for penalties in amounts of $20,000 or less. STATUTORY AUTHORITY Description of Civil Money Penalty Provisions~J OTS possesses statutory authority under the FDIA to assess civil money penalties against savings associations.!.', their service corporatfons or subsidiaries, savings and loan holding companies L/ OTS, as successor to the Federal Home Loan Bank Board, retains authority to impose civil money penalties under statutes in effect prior to the enactment of FIRREA for those acts that occurred prior to August 9, 1989. Such authority is found at: 12 U.S.C. 55 l464(d)(8), 1464(d)(l2)(B), l730(k)(3), l730(p)(2), l730(q)(18) and l730a (j)(4) (1982). L' The tern "savings association" is defined as: a. Amy federal savings association; b. Any state savings association insured by FDIC; c. Any corporation (other than a bank) that the FDIC Board of Directors and the Director of OTS jointly determine to be (Footnote continued) PAGENO="0459" 455 Order No.: 90-332 -5- and institution-affiliated parties3J for violations of any law or regulation; violations of the terms of any final order or tempo- rary order issued pursuant to Sec. 902 of FIRREA (to be codified (Footnote 2 continued from previous `page) operating in substantially the' same manner as a savings association. Sec. 204(b)(l) of FIRREA (to be codified at 12 U.S.C. 5 1813(b)). 1/ The term "institution-affiliated party" means: a. Any director, officer, employee or controlling stockholder (other than a savings and loan holding company) of or agent for an insured depository institution; b. Any other person who has filed or is required to file a change-in-control notice with OTS under 12 U.S.C. S 1817(j); c. Any shareholder (other than a savings and loan holding company), consultant, joint venture partner, and any other person as determined by OTS (by regulation or case-by-case) who participates in the conduct of the affairs of an insured depository institution; and, d. Any independent contractor (including any attorney, appraiser, or accountant) who knowingly or recklessly participates in -- (A) any violation of any law or regulation; (B) any breach of fiducuary duty; or (C) any unsafe or unsound practice, (Footnote continued) PAGENO="0460" 456 Order No.: 90-332 -6- at 12 U.s.c. ~ 1818(b), Cc), (e), (g) and Cs)); violations of any condition imposed in writing by 075 in connection with the grant of any application or other request by the association; violations of any written agreement between the association and 075; breaches of fiduciary duty; and, unsafe or unsound practices. Sec. 907(a) of FIRREA (to be codified at 12 U.s.c. S l818(i)(2)). In addition, the FDIA authorizes OTS to assess civil money penalties against associations and institution-affiliated parties for violations of sections 22(h), 23A, 23B, of the Federal Reserve Act, 12 U.S.c. SS 375b, 371c, 37lc-l (1982) or any regulation issued pursuant thereto. Sec. 907(c) of FIRREA (to be codified at 12 U.S.C. § 1828(j)(4)). The FDIA also authorizes OTS to assess civil money penalties against persons who violate any provision of the Control Act or any regulation or order issued thereunder. Sec. 907(d) of FIRREA (to be codified at 12 U.S.C. S l8l7(j)(16) ("Control Act")). (Footnote 3 continued from previous page) which caused or is likely to cause more than a minimal financial loss to, or a significant adverse effect on, the insured depository institution. Sec. 204(f) of FIRREA (to be codified at 12 U.s_C. 5 1813(u)). PAGENO="0461" 457 Order No: 90-332 -7- Under the HOLA, OTS is authorized to assess civil money penalties against associations, holding companies or their sub- sidiaries that either fail to submit or to publish any report within the time frame required by OTS or that submit or publish any false or misleading information. Sec. 301 of FIRREA (to be codified at 12 u.S.C. § 1464(v) and 12 U.S.C. § l467a(r)). In addition, the HOLA authorizes OTS to assess civil money penalties against an association if any affiliate~' of the associ- ation re~fuses to permit any examiner of OTS to conduct an examina- tion, or, refuses to provide any information required to be dis- closed in the course of any examination. Sec. 301 of FIRREA (to be codified at 12 U.S.C. § 1467(d)). Under the provisions of Sec. 301 of FIRREA (to be codified at 12 U.S.C. 5 1467a(i)(3)) ("Holding Company Act'), the HOLA also authorizes OTS to assess civil money penalties against any company that violates or any person who participates in a violation of any provision of the Holding Company Act or any regulation or order issued pursuant thereto. Sec. 1120(b) of FIRREA provides for the assessment of a civil t/ The term "affiliate" means any person that controls, is controlled by or is under common control with, a savings association. Sec. 301 of FIRREA (to be codified at 12 U.S.C. S 1462(9)). PAGENO="0462" 458 Order No.: 90-332 -8- money penalty against financial institutions that seek, obtain, or ~give money or any other thing of value in exchange for the per- forinance of an appraisal by a person the institution knows is not a State-certified or State-licensed appraiser (as defined in Section 1116 of FIRREA)in connection with a federally-related transaction (as defined in Section'll2l of FIRREA). The type of federally-related transaction and the type of appraiser required are described in Sections 1113 and 1114 of FIRREA. For each of the above provisions (except for 12 U.S.C. S 1464(v) (reports of condition), 12 U.S.C. 5 1467 (affiliates' refusal to cooperate), and Sec. 1120(b) of FIRREA (use of non- certified appraisers), in which no definition is given), the re- spective~sections define "violation" or "violates" as including, without limitation, any action (alone, or with another or others) for or toward causing, bringing about, participating in, counsel- ing or aiding or abetting a violation. Amounts: General Penalty Provisions The civil money penalty provisions of 12 U.S.C. S 1818(i)(2) (general provisions); 12 U.S.C. 5 1828(j)(4) (affiliate trans- actions); 12 U.S.C. S 1817(j)(16) (Control Act); and, Sec. 1120 of FIRREA (non-certified appraisers) by reference to 5 1818(i), con-. tam a three-tiered structure which OTS must use when making an assessment: PAGENO="0463" 459 Order No.: 90-332 -9- The First Tier provides for the assessment of a civil money penalty of not more than $5,000 for each day that any violation of a law, regulation, order, condition imposed in writing or written agreement continues, whether intentional, or not..2.1 The Second Tier provides for the assessment of a civil money penalty of not more than $25,000 for each day during which a vio- lation as described in Tier One, an unsafe or unsound practice that is recklessly engaged in or a breach of fiduciary duty con- tinues i~ said violation, practice or breach is (1) part of a pattern of misconduct, (2) causes or is likely to cause more than a minimal loss to the institution; or (3) results in pecuniary gain or other benefit to the person being assessed. The Third Tier provides for the assessment of a civil money penalty against a person (other than an association) of not more than $1,000,000 per day; and, against an institution of not more than the lesser of $1,000,000 or 1% of the total assets of the institution for each day during which a violation, unsafe or Un- sound practice or breach of fidutiary duty continues if (a) such violation, practice or breach is knowingly undertaken and (b) a substantial loss to the association or a substantial pecuniary gain or other benefit to the party is knowingly or recklessly caused. »=./ Unsafe or unsound practices and breaches of fiduciary duty are covered in Tiers Two and Three, but not in Tier One. PAGENO="0464" 460 Order No.: 90-332 - 10 - Amounts: Reporting Provisions The civil money penalty provisions of 12 U.S.C. S 1464(v) (reports of condition) and 12 u.s.c. 5 1467a(r) (holding company reports) also contain a three-tiered structure that OTS must apply when making an assessment under those sections. The First Tier provides for the assessment of a civil money penalty .of not more than $2,000 per day against a savings associ- ation, savings and loan holding company, or any subsidiary of such holding company ("entity'), that maintains procedures reasonably adapted to avoid an inadvertent and unintentional error; but, notwithsanding such procedures, as a result of an inadvertent or unintentional error, fails to submit or publish any report or information within the time frame required by OTS; and, for the assessment of a civil money penalty of not more than $2,000 for each day that an entity inadvertently or unintentionally submits or publishes any false or misleading report or information, and fails to correct the same, or inadvertently transmits or publishes any report that is minimally late. The entity against which a notice of assessment has been issued has the burden of proving by a preponderance of evidence its inadvertence or lack of intention in the above circumstances. PAGENO="0465" 461 Order No.: 90-332 - 11 - The Second Tier provides for the assessment of a civil money penalty of not more than $20,000 against an entity for each day that the entity fails to submit or publish any report or informa- tion within the time frame required by OTS other than through an error described in the First Tier; and, for the assessment of a civil money penalty of not more than $20,000 for each day that the entity submits or publishes any false or misleading report or information in a manner not described in the First Tier and fails to correct the same. The Third Tier provides for the assessment of a civil money penalty against an entity of not more than the lesser of $1,000,000 or 1% of an entity's total assets for submitting or publishing any false or misleading report or information either knowingly or with reckless disregard for the accuracy of any in- formation or report described in the Second Tier. Amounts: Other Provisions The two other civil money penalty provisions, 12 U.S.C. S 1467(d) (affiliate's refusal to cooperate) and 12 U.s.c. S 1467a(i)(3) (Holding Company Act) do not contain a three-tiered assessment structure. The amount of the penalty for an affili- ate's refusal to cooperate is not more than $5,000 per day as- sessable against the savings association for each day the viola- PAGENO="0466" 462 Order No~: 90-332 - 12 - tion continues. The amount of the penalty for violations of the Holding Company Act is not nore than $25,000 per day for each day the violation continues. Statutory Provisions Concerning Procedures In the case of an assessment of a civil money penalty under any of the above-mentioned provisions, the person, association or company assessed has the right to challenge the assessment in a hearing ~conducted pursuant to the provisions of the Administrative Procedure Act, 5 U.S.C. ~ 554 et ~ (1982), and the provisions contained in 12 U.S.C. ~ 1818(h).!.' The respondent may exercise this right by filing with OTS within twenty days after the is- suance ot the Notice of Assessment (as described herein), a written request for an agency hearing. 12 U.S.C. S1818(i). If an order imposing a civil money penalty is entered after an agency hearing, the respondent nay obtain review by filing a notice of appeal in the United States Court of Appeals, 12 U.S.C. S 1818(h)(2). If the respondent fails to pay an assessment after it has become a final and unappealable order, or after the court of appeals has entered a final judgment in favor of OTS, OTS will !J Hearing procedures are set forth in 12 U.S.C. 5 1818(h) and in OTS regulations at 12 C.F.R. Part 509.1-.38 (1989) republished at 54 Fed. Reg. 49446, November 30, 1989. PAGENO="0467" 463 Order No.: 90-332 - 13 - seek recovery in the appropriate United States district court. This action may be brought directly by OTS or by the Department of Justice acting on behalf of OTS. In any such action in the district court, the validity and appropriateness of the final order are not subject to review. Sec. 907 of FIRREA (to be codified at 12 U.S.C. ~ l818(i)(2)(I)).JJ PROCEDURES If ~n examiner!.' discovers a violation of law, regulation or order, violation of a condition imposed in writing or a written agreement, a breach of fiduciary duty, or an unsafe or unsound 1/ Each of the civil money penalty provisions apply to conduct engaged in after August 9, 1989. However, the maximum penalties of $5,000 and $25,000 per violation per day may apply to such conduct engaged in before August 9, 1989 if such conduct -- (1) is not already subject to a notice (initiating an administrative proceeding) issued by an appropriate Federal banking agency; and, (2) occurred after the completion of the last report of examination of the institution before August 9, 1989. Sections 305(c) and 907(1) of FIRREA. `1 * The term "examiner" for purposes of this policy statement is defined to include any OTS staff person whose responsibilities include monitoring the condition of a savings association, (Footnote continued) PAGENO="0468" 464 Order No~: 90-332 - 14 - practice, that examiner should consider recommending the assess- ment of a civil money penalty. In addition, if an association receiv2s a zating of "3", "4" or "5" under the Compliance, Trust ~or MACRO Rating System due to violations of laws, regulations, unsafe or unsound practices, reporting requirements or breaches of fiduciary duty, the assessment of a civil money penalty should be considered. The examiner should apply the OTS Civil Money Penalty Matrix (as described in the "Policies" section and attached as Exhibit "A") ("matrix") to aid in his/her determination of whether and in wjiat amount to recommend that a penalty be assessed or other supervisory action taken. Once the examiner discovers that the basis for initiating a referral has occurred, he/she should proceed without waiting for the completion of the examination. AS describe~ later, it is expected that District Counsel will provide advice to the examiner and District Director throughout the as- sessment process with respect to the application of the matrix and the requirements that must be met before assessing a-civil money penalty. Under the procedures delineated on page two of the matrix, if the examiner finds that a penalty or other supervisory action should be recommended, the recommendation and supporting information should be sent to the District Director. The District Director should then consider the recommendation, request and consider (under circumstances as described in the matrix) a re- sponse from the association, person or company, determine the (Footnote 8 continued from previous page) holding company, subsidiary or service corporation thereof. PAGENO="0469" 465 Order No.: 90-332 - 15 - amount of any unrecovered financial benefit received by the re- spondent as a result of the violations, practice or breach and complete the matrix in determining an appropriate supervisory action. Enforcement is available to assist in making these de- terminations. In those cases involving securities questions, OTS Corporate and Securities Division ("CASD") is also available to provide legal interpretations and advice both with respect to the violations and the corrective action appropriate to address them. When calculating the amount of a proposed assessment pursuant to the matr~,x, the examiner and District Director should recognize that because violations, practices or breaches ordinarily continue for a period of time, it is expected that Districts will normally be able to justify the assessment under Tier One, or Tier Two in the case of unsafe or unsound practices or breaches of fiduciary duties. If the assessment is not justifiable under Tier One, it is expected that District Counsel or Enforcement will be consulted to insure that the statutory requirements df Tiers Two or Three are met. In the event the District Director recommends the as- sessment of a civil money penalty in an aggregate total amount of $20,000 or less for all violations for which civil money penalties are sought (including the amount sought to recover financial gain, if any), the District Office has been given authority by the ERC (as discussed later) to obtain the consent of the subject individual or entity to the assessment. Uniform civil money penalty documents are to be used by all District Offices when pursuing consent assessments. During the negotiation process they may be completed by the District Office and presented to PAGENO="0470" 466 Order No.:90332 - 16 - individuals or institutions against whom penalties are sought. District Offices that encounter problems with or wish to alter the standard documents in a particular case should consult Enforce- ment. Referrals for the assessment of civil money penalties in- volving securities disclosure obligations, the Control Act and Holding Company Act generally originate in CASD. CASD referrals should be made to Enforcement, which will forward those referrals for assessments of $20,000 or less to the appropriate District Office for action, unless there is a need for action that En- forcement can address more expeditiously than the particular District. The reasons for such a need must be made clear in the CASD referral to Enforcement. Enforcement will make a case-by-case determination of whether such CASD referrals will be handled in Enforcement or referred to the District Offices. In those cases referred to a District Office, the District Office will inform Enforcement within 15 days of receipt whether it will pursue the referral or prefers that it be handled instead by En- forcement based on resource constraints in the District. When negotiating a Consent Order of Assessment, the District Office must keep in mind that as of the date that the negotiated Stipulation and Order are approved, the matter is concluded. That is, the violation or practice that constituted the basis for the assessment will not provide a basis for additional civil money penalties at a later time. However, discovery of new acts or omissions may constitute new grounds for the imposition of an additional civil money penalty if the acts or omissions can in- PAGENO="0471" 467 Order No.: 90-332 - 17 - dependently support an assessment. Therefore, the District Office is expected to investigate and document the facts with great care prior to negotiating a Consent Order of Assessment. It is ex- pected that District Counsel will be actively involved in provid- ing advice to both the examiner and the District Director to in- sure that complete documentation of the subject violation, practice or breach is gathered and to insure that statutory re- quirements are met before a civil money penalty is assessed. Because a $20,000 assessment could be made pursuant to either a First, Second or Third Tier penalty, particular consideration must be given by District Counsel when Second or Third Tier penalties are assessed that the statutory elements of those tiers are net. In addition, it is expected that District Counsel will provide general guidance with respect to the application of the matrix, participate in the negotiation of consent orders, assist in the preparation of referrals to Enforcement for assessments in amounts greater than $20,000 or in those cases where the District Office has been unable to obtain a consent to the assessment in an amount of $20,000 or less, and compile the information required for the nionthly report to Enforcement as described later herein. The District Directors have been given non-delegable authority by the ERC to issue Consent Orders of Assessment in amounts of $20,000 or less. The issue of delegability will be revisited in six months to determine the desirability of further sub-delegation. The District Directors are also directed to pro- vide a report to Enforcement within twenty days of their issuance PAGENO="0472" 468 Order No.: 90-332 - 18 - of a Consent Order of Assessment pursuant to this authority. The report shall include: the signed Stipulation and Consent to an Order of Assessment; the Consent Order of Assessment; a memorandum containing a summary of the offenses that constitute the basis for the assessment; a description of any financial benefit received by the respondent as a result of the violation, practice or breach; a brief discussion of the rationale for the weights given the 13 factors listed in the matrix; the amount in which the penalties were first sought and a discussion of reasons for any reduction; and, a check made ~ayab1e to the Treasurer of the United States in the amount reflected in the order. If payment is to be made over time, this should be clearly set out in the order and the first installment' check attached at the time the report is submitted to Enforcement. Enforcement has been directed by the ERC to prepare a monthly report to the Director of OTS and the ERC (with copies to the District Directors and CASD) of all civil money penalty referrals made to Enforcement, all civil money penalty consent assessment actions initiated and collected by the District Offices and the reasons for them, as well as a list of all consent assessment negotiations initiated by the District Offices that were subse- quently not completed and the reasons therefore. The District Offices will be responsible for supplying the appropriate in- formation to Enforcement for the monthly report within .20 days as provided in the preceding paragraph. It is anticipated that this report will aid in achieving uniformity among the District PAGENO="0473" 469 Order No.: 90-332 - 19 - Offices. In addition, District Offices should give consideration to maintaining their own reporting system for tracking civil money penalty referrals. Enforcement will also be responsible for publishing Consent Orders of Assessment in accordance with OTS policy on the required publishing of all enforcement orders. It is expected that all assessment orders will be made public, and that-appropriate cases will be highlighted by the use of a press release. If the recommended assessment against any institution or individual exceeds an aggregate total of $20,000 for all viola- tions (including for recovery of financial gain, if any) or if the District Office is unable to obtain a Consent Order of Assessment, a referral should be made to Enforcement. A referral should con- tain: - the name and address of the individual or other entity against whom the District Office or CASD is reconmemding an as- sessment; - a description of any actions by or on behalf of the person, association or company that indicates a violation (in- cluding reference to the specific regulation or statute violated, if known), or breach or unsafe or unsound practice, together with PAGENO="0474" 470 Order No.: 90-332 - 20 - any supporting documents that support the deterrniflattofl by the District Office or CASD of the violation, practice or breach sub- ject of the recommendation; - a description of any actual or likely loss to the associa- tion and/or any pecuniary gain or other benefit to the person, association or company; - a discussion of the factors to be considered in assessing a civil rndney penalty and determining the amount and a completed civil money penalty matrix (See "Policies" section of this state- ment); - a listing of the names and identities of the associations, individuals and/or companies believed to be involved in the vio- lation, breach, or practice and their relationship to one another; - a summary of any communication between the District Office and any person, association or company relevant to the referral; - a summary of any effort to informally resolve the problem (including any consent negotiations) and whether any part of the effort was successful; - in the case of recommendations for second tier or third tier civil money penalties, any unsafe or unsound practices by or on behalf of the person, association or company that appear reck- PAGENO="0475" * 471 Order No.: 90-332 - 2]. - less, or indicate a pattern of misconduct, or a breach of fiduciary duty must be specifically discussed; and - any recommendation for further investigation by Enforce- ment, including a list of the documents or other information that could not be obtained. If a formal examination or investigation is performed, the District Offices and Enforcement will be guided by the procedures and poli~dies described in EP-004, use of Formal Examination and Investigation Authority. For all referrals handled by Enforcement, if Enforcement agrees that a civil money penalty should be assessed, it either begins negotiation jointly with the referring District Office or CASD, or prepares related documentation and recommends to the ERC that a Notice of Assessment ("Notice") be issued. The Notice generally contains a statement of the legal authority for the assessment, the amount of the proposed penalty, a description of the factual or legal basis for the assessment, and advice to the person, association or company of a right to a formal administra- tive hearing if requestedwithin the time limits. upon issuance of the Notice by the ERC, the Notice is served pursuant to the provisions of Section 509.9 of the OTS General Regulations (12 C.F.R. 5 509.9 republished at 54 Fed. Reg. 49449, November 30, 1989, upon the person, association orcompany that has engaged in the violation, unsafe or unsound practice, breach of fiduciary PAGENO="0476" 472 Order NoW: 90-332 - 22 - duty or other prnhihited act that provided the basis for the as- sessment. If an administrative hearing is requested by the person, association or company, the OTS "Rules of Practice and Procedure in Adjudicatory Proceedings' apply. 12 C.F.R. Part 509.1 -.38. Enforcement will represent OTS at any .such hearing or will negotiate a final Order of Assessment (after consulting with the referring District Office or CASD) with the person, associa- tion or company for consideration by the Enforcement Review Committee. In the event that Enforcement does not agree with the District Office or CASD that a civil money penalty should be as- sessed or there are material disagreements regarding the terms of a proposed negotiated settlement, the referral to Enforcement and Enforcement's response will be presented to the ERC for a decision. Enforcement will assure that appropriate persons from the referring office are notified and available to participate at the ERC meeting. POLICIES OTS recognizes that its primary role as the nation's thrift regulator is to promote the safety and soundness of the thrift industry and to insure the industry's compliance with applicable laws and regulations. The assessment of a civil money penalty is one of the enforcement tools OTS will use in carrying out that role. The primary purpose of a civil money penalty assessment is to provide a strong deterrent to violations of laws, regulations, and orders, as well as breaches of fiduciary duty and unsafe or PAGENO="0477" 473 Order No.: 90-332 - 23 - unsound practices. F!RREA has provided OTS with very broad powers to impose civil money penalties for violations of any law or regu- lation. In view of the potential breadth with which these penalties could be applied, OTS believes it is both necessary and useful to develop a framework of specific guidance~to assist in the implementation of its civil money penalty authority and to indicate to the thrift industry what our intentions are with respect to its use. Because OTS's primary objectives are to promote a safe and sound thrift industry and to insure the industry's compliance with applicable laws, rules and regulations, in exercising its civil money penalty authority OTS will place maximum emphasis on the enforcement of those laws and regulations directly related to thrifts, their activities and operations, and in addition, will act vigorously to require adherence to the principles of safety and soundness. A civil money penalty assessed against' a person, association or company, may be the sole enforcement action taken or it may be used in tandem with other enforcement or supervisory remedies. OTS will use civil money penalties to address past violative be- havior as well as ongoing misconduct. In addition to other en- forcement actions, such as cease and desist orders, supervisory agreements or other alternatives that bring about the immediate cessation of proscribed conduct, OTS will also use civil money penalties to deter future violations of law or regulation, PAGENO="0478" 474 Order No.: 90-332 - 24 - breaches of fiduciary duty or unsafe or unsound conduct. However, when violative conduct is ongoing, the prime objective of OTS will be to stop that conduct by using whatever remedy seems best designed to do so. By statute, when assessing a civil money penalty OTS must consider the size of financial resources and good faith of the person, association or company being assessed, the gravity of the violation, the history of previous violations, and such other matters~as justice may require. The Office of the Comptroller of the Currency ("0CC"), which by reason of its previously broader enforcement powers has substantially more experience in the use of civil money penalties, has incorporated the guidelines of the Interagency Policy Statement into a Civil Money Penalty Matrix. The CCC matrix is used as a tool in determining whether to recom- mend an assessment, and if so, in what amount. Due to the in- crease in the number of civil money penalty assessments antici- pated by OTS as a result of new powers provided by Congress in FIRREA and the agency's relative inexperience in this area, OTS has ~adopted a matrix that follows the basic format of the CCC matrix, while changing the way in which the most severe violations are weighed, increasing the amount of the potential penalty and adding a new category applicable to securities-related assess- ments. PAGENO="0479" 475 Order No.: 90-332 - 25 - The OTS matrix should be regarded as a living and evolving document. OTS expects to revise the matrix elements as experience is gained in assessing civil money penalties. (The OTS matrix is attached as Exhibit `A") It indicates the severity of violations of law and noncompliance and provides guidance in determining what level of penalty to recommend. For a reporting or compliance violation, it is particularly important to look at the statutory requirements as described on pages 9-10 herein when applying the matrix. The matrix is applied as follows. The left hand column has 14 f'actors, the last three of which are mitigating factors. For each factor, the examiner and/or District Director determines what degree is to be assigned under the five numbered vertical columns. Then the number in the vertical column!./ is multiplied by the weight factor in the next to last vertical column to yield the final figure. The final figures for the first 11 factors are totaled, and then those from the three mitigating factors are subtracted from them. The suggested action is then determined by taking the result and finding in what range it falls in the next page. Note that if the respondent has received a financial benefit and it has not been returned to the institution or its receiver or conservator and is not subject to a restitution order, then the amount of the benefit should be added to the penalty sought, as shown in the instructions on the last page of the matrix. In negotiating Consent Orders of Assessment, it is cx- !./ As noted below, the fifth numbered column allows the rater to choose among a range of values. PAGENO="0480" 476 Order No.: 90-332 - 26 - pected that the total penalty amount (including that required to recover a financial benefit) calculated according to the factors contained in the matrix may be be reduced to reflect the fact that OTS has achieved its goal at a lesser cost; whereas in the case of a contested assessment order, the total penalty amount is less likely to be reduced. The goal of OTS is to provide meaningful training to all examiners in the general area of civil money penalty assessments. In the interim, District Counsel are ex- pected to provide advice to District Directors and examiners on issues related to the assessment of civil money penalties. It is OTS's intent in devising the matrix to cause assess- ments to be levied in a consistent and equitable manner. The matrix is offered as guidance and it is expected that the matrix will be used in all cases where a civil money penalty assessment is being considered. The matrix however does not reduce the civil money penalty process to a mathematical equation and should not be a substitute for sound supervisory judgment. Individual cases may possess characteristics that are not set forth as factors in the matrix, in which instances, supervisory discretion should be exercised. For example, the District Office may prefer not to go forward with seeking a civil money penalty against an institution that is expected to be in receivership. The~matrix has itself been designed to allow for such supervisory discretion by provid- ing three levels (4-6) in the final numbered vertical column to select from when:deciding the importance of the most severe viola- tions and by leaving numerous blank areas for subjective PAGENO="0481" 477 Order No.: 90-332 - 27 - decisions. The District Director is encouraged to stay within the dollar limits justified by the matrix, but has authority to depart from those limits based on particular supervisory concerns. Any such departure should be discussed in the report sent to Enforce- ment, discussed previously. After using the matrix, it is necessary to determine whether the amount recommended comes within the three tier scheme that Congress established, as described earlier. Enforcement can determine whether the recommended amount of penalty is available under the statute at the tine the District Office's referral is received and is available to provide advice concerning the statute for those matters which may be negotiated without its involvement. In addition, it is expected that District Counsel will provide advice to the examiner and the District Director with respect to issues relating to Second Tier and Third Tier elements, where the First Tier assessment is insufficient to yield the amount of penalty sought or the First Tier is otherwise inapplicable (e.g. where unsafe or unsound practices or breaches of fiduciary duty are charged.) A significant consideration in determining the amount of a civil money penalty will be whether the person, as- sociation or company obtained a financial or other benefit from the violation, breach or practice. The removal of economic benefit will not, however, generally be considered sufficient by itself to achieve compliance with the statutory provisions. 30-830 0 - 90 - 16 PAGENO="0482" 478 - 28 Order No.: 90-332 By the Office of ift Supervision N Dan'~Z~ ~Q~( Dkector PAGENO="0483" $Previous ~dainis- $Non. Ittativo Actions 0.1 Iwatninga for Sloi-$ $lar violation. I IPractica ~ lConceal550t of ions $$ubject violation. I Practica or orsachl I ~ I I I__ I I - lrqtor~Pivsrel I____~~- -- %illlfuiaeaa of loon. I $should have known clear Intent I S Iviolations Unsafe I I I I I I I I lot UnaouadPrac I I i i I Iticeonoreachof I I I I I I I I I I - I- ~____i I~!i~arDu!X____._I__ IPacuniatY Gain Ot lions I I lindiroct oan.fit tolDiract Ranefit to I 3 I I lUther lanafit to I I IlnstitUti0nlffili_IIn5tit5tioh1~Uihil I I Ileotitution-Aftil-I I I latad Panty or Pa- Isted Panty or I.- I I I iated Party or na-I I I llat.d Interests hated Intareata I I I hiatedlntarant l_ I - -- I I - I Iviolation 1violatios on point Isup.cvisory L.tt.r ICID on Point or I Icited is Report of Ion Point Prior Suparvisocy I Icoanination I lAgreesent on Point I I I I I I I I I~ ~Nistory of I.iatedlione Unrelated Prior vio-Ioccsai000l br Unrelated yb- I Ilationo Ivioiationo I lViolation~ I Ilation. Prac- I I I I I Preach' $ I I I I I I Itt!!. - - 11000 to the Isv- ~IIo Loss and Mo 1110 Loan and Lou to 110w ta Moderate I Large Paount of I ~ I lingo Association IRish of Loss Inodorota Risk lions and Risk I IActuai or Pot.ntiall I l.~_ I I I I Ir.oaa ~ tlusb.r or Signif- I I l I Isigsificsnt or I 2 I I I I I licanca of Subject I I I I Inuoeroua viola- I lvioiation. Prac- I I I I ltiona. Unsafe or I 111cc or Dr.ach I I . I I lUnsound Practices. I $~f Fiduciary Duty I I I lot 5r.acbes of I I * Iriduciary DutyL_ of Sub- I I I lVlolatioslol Out- I 2 I I ~Duration IJsct Violation. I I Ipractice or ereachl I boiduciar! Duty I - of Iviolatiane) Iviolati000 Caaaid, standing for Long I Iveriod * I I - - Iviolatienls) Con- Itielatiesa still 3 I Icontinsation subject violation. Ceased Prior to Ileeadiateiy Upon ~tinued tot Period Icontinuing I Incactica or ereachltlotification Iiotification I lot Tins After soti-l I I I I Ification I I......... lPu,v050lY Coepli- Inctice Canceeloant I Icatin, Transsction Irros roasinero or Ito flake it Diffi- IAUditOta I I I I I I PAGENO="0484" 480 ::::iiJ::~~ii id; ~ * I ~ ~ ~:n ~ * ~ a * ;aa II a;! ai a `.3 a :~ .1 ili 1~ a; !~L h1 ~ ;g*~ ~ *4..1~ a a - a.3u. *~ : ig~~: :::~ ~:::3 U * I I ~g~3 C I ;i;;~i~:i~ : PAGENO="0485" I Points sucwsst.d Lotion - ~oso.nsabilitY I 0-30 Cossidar Not Making a Rsforrsl. Easolner Reviews Violation and Applies Matrix. bIark I Decision to Net Rof*r. I I papers should Support Matrix. and Pro- I 20-30 Considar sending Suparv110 ry Exaninor Reviews Violation. Applies Diottict DirOctrv. District , ..ttar or Letter of Rsprisaod. par.e R.fsrrsl to a Request That zxplanattOs I Director Considers Within.l5 DayS ~7 ~ye tot I be Supplied to tO. Director After Considaration of Reepees°$ I *.p.rtinq Vielsti~b. Director AppU*s to. satria. itt and Ref.rrsi. District sup.rvi500Y L.tter. I R.ec.udation is to District Dirsctor Takes Appropriate Action. I and Pro- I 30-40 Consider S.ndinq Supsr0100 ry Er501nsr Reviews Violation. Applies Matrix Director. District Director L.tter or As of par.. Referral to District be supplied to t~ $1 Thoue.nd to 010 Ti ouoand. Sends Request That tzpianation (7 for sapertinq Viol- I (Plus Any Firianeta I O.n.titI~ Director Within 15 Days of Reepenso end Roforral. I . tieeso. After Consideration the Matrix and C000idare I District Director Applies Financial Gain. if any. XC I I Financial Resources Supervisory Letter. I I Rec.esdation is to sent s I District Director Tahoe Appropriate is to AssOee a Penalty, I I Action. It Recoendation toenet of pesalty. sod I I District Office Deterolnes to A55055055t or ( I tither Atteopte to Obtain Refers tO gnforceeost. I Considor Assoessant of Groatar sass so Issediateiy Above. 4O-~0 ( Than $10 Thousand up to ( $20 Thousand. Plus Any rinancial 0enefitI~ Matrix, and pro- 60-SO Consider Aaeossoo~~ of Greater Exseinor Reviowe Violation, Applies Director. District Directorl Than $20 Thousand up to pares ~sf.rral to District Os supplied to the $40 Thousand. Plus Any sends Request That tzplanation for Rsp.rtis4 Viels I Linancial Benof it)' Director Within 15 Days (7 Days of and Referral. I I tieea. After Consideration Matrix and Considers I I District Director Applies Receoedation is to Assess a$ I Financial Reseurcos. If Referred tO fnforceeeet. I P.eslty, caso sheuld 00-100 Consider Aseesseont of Greator Than $40 Thousand up to $130 Thousand. (Plus ~ Financial Benefit)' 100 4 Consider A550sesent of Greater sane as Above. than $130 Thousand. (Plus I ( ( say Financial nonef it)' * `44 the dollar soeset of any financial benef it received by respeadeot and not returned or subjeCt to a iitution order 481 PAGENO="0486" FMREA Enforuamant and Supsr~1sory Action Referral EXHIBIT 2 TO From OTS District Oftic. to FOIC APPENDIX C SnUctmas~.vw.xa,w~wjon w S~cS&uano~ & A~pi~totto Ssdioit Room 500$ ~d~ommwa 550 17n5*ms.JLW. Wu~ 2042$ ~aI~'s~ o~*. A~ CC00~IWSaV~~Auor~m, ~ths Msond$nn ~t ~ntiton~ w*Ii aN s~~pI~ RJ~ut~oiyCap11of SZandar~? N not. sxptoin Is thi AssoaaNon aimady op.r~nq pw~uam to an oedsr or a rsotr rN rslatod to a capdai dsfic~sncy? .._...yss Vyss, sftglyps of dootaTm? Total Muaa*~II~s of ~oomlon Ehforcement Actions Referred to OTS Headquarters Tj~~ c(Enfor~rartA~i RdWoo to OT5&jor~irC1xs~ kwsmçaoon For pia~os of a poasti. £ d.~~on -__Cs~. w~ ~ O~sr -. Tan~~oraly C.a.. and D.a~ Ocdsr and Pvoht$lon Otdsr Nan.. of kt~viduai(s)andTll.(s)&rmndooataptoSavitqsMaocottIon 482 PAGENO="0487" 483 Enforcement Actions Referred to OTS Headquarters cant. T~a oV Erdor arAc~~ Rfvisdto O7S Enfornw~raor -c~s V~L~on ~__cMuonsyP.nsi~ss BP.n&USS . - Rs~ni~~ndaxEn Othsr.p~us.sp.~y_________________________ Supervlsory/Enforcement:Actlons'lobe Taken by~: OTS.D!StT1CtOffICe~ Tfl30 o1SuprvTsoryA~~ To B. Tak.n ByO.Ys~Ofl}~ Agr..msri* ~ Agr..msrn (~ d1ff.rni from Sup. Agr.) M.tg.r Agr..msr* - O~svaQO~Cci~ Dire~orof Enforcement, OTS PAGENO="0488" 484 EXHIBIT 3 TO APP52IDIX C Office of Thrift Supervision I~I EVIlS 17006 Sueet. NW.. Wahoinqeon D.C. 20552 Telephone 202) 906-6677 FOR RELEASE at 4 p.m. EST For further information: Friday, December 29, 1989 Contact: Ton Mason OTS 89-79 (202)906-6677 U.S. DISTRICT COURT UPHOLDS OTS ON RETURN OF CENTRUST CHAIRMAN'S BONUS WASHINGTON, D.C., Dec. 29, 1989 -- A U.S. District Court judge has denied CenTrust Bank, a State Savings Bank, Miami, Fla., injunctive relief from the Office of Thrift Supervision's (OTS) temporary cease and desist order issued on Dec. 8, 1989 requiring repayment of CenTrust's chairman's bonus. Attorneys for CenTrust had sought relief against several provisions of the order, including those requiring the thrift to obtain restitution of a $310,000 bonus paid to its chairman, David L. Paul, in October 1989, and to establish reserves in an amount equal to the market losses on all defaulted securities in its portfolio. Late yesterday afternoon, Dec. 28, U.S. District Court Judge Louis F. Oberdorfer ruled that CenTrust would suffer no injury, "irreparable or otherwise," by being required to seek restitution of Paul's bonus. He also said that although given ample time to do so, CenTrust has so far failed to offer any evidence that recording a loss based on -more- PAGENO="0489" 485 CenTrust ... 2 the market value of the defaulted bonds would cause irreparable iniury to the institution. The court is allowing CenTrust the opportunity to file evidence in support of this claim by Jan. 4, 1990. OTS will be allowed to file a counter affidavit or other evidence within several days thereafter. The other i2 provisions of the cease and desist order also remain in full force and effect. In open court, attorneys for both sides announced they had reached agreement regarding provisions relating to CenTrusts books and records, and idemnification of officers and directors. They also said they had made significant progress in resolving a provision relating to the thrift's executive retirement plan. PAGENO="0490" 486 Office of Thrift Supervision N EVIfS 700 G 0t~eet. NW.. Weihinqton, D.C. 00552 Telephone 202) 906-6677 FOR RELEASE at 5:45 p.m. EST For further information: Thursday, January 11, 1990 Contact: Tom Mason OTS 90-7 - (202) 906-6677 CENTRUST MUST SHOW LOSSES SAYS U. S. DISTRICT COURT WASHINGTON, D.C., Jan. 11, 1990 -- A U.S. District Court judge has upheld an Office of Thrift Supervison (OTS) temporary order requiring CenTrust Bank, a State Savings Bank, Miami, Fla., to carry defaulted securities in its portfolio at their current market value. The ruling from Judge Louis F. Oberdorfer came as he denied CenTrust injunctive relief from OTS' Temporary Cease and Desist Order issued on Dec. 8, 1989. The OTS temporary order requires CenTrust to immediately "establish specific reserves in an amount equal to~the market losses on all defaulted securities" held in its portfolio, and report such specific reserves on its 1989 annual financial statements due for filing with OTS on Tuesday, Jan. 16. The judge said CenTrust failed to prove it would be irreparably harmed by being required to carry the securities at their current depressed market value because the evidence submitted was too general, speculative and inconclusive. - more - PAGENO="0491" 487 CenTrust ... 2 Judge Oberdorfer also ruled that CenTrust's argument that requiring additional reserves would expose it to a conservatorship or receivership action was unfounded. Even without those reserves, he noted as of Dec 7 1989 CenTrust had failed to meet its tangible capital requirement under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) by approximately $223 million and that grounds for a conservatorship or receivership have existed since that date. PAGENO="0492" 488 Office of Thrift Supervision I~I Eli VS 1700 G S~.t. NW., Wa~,ing~n, D.C. 00502 Te(s~hons (20219064677 FOR RELEASE at 5:30 p.m. EST For further information: Friday, January 12, 1990 Contact: Tom Mason OTS 90-9 (202) 906-6677 ~ OF APPEALS UPHOLDS DISORDER AGAINST CENTRtJST WASHINGTON, D.C., Jan. 12, 1990 -- The u.s. Court of Appeals here today upheld an Office of Thrift Supervision (OTS) temporary order requiring CenTrust Bank, a State Savings Bank, Miami, Fla., to carry defaulted securities in its Portfolio at their current market value. CenTrust filed an emergency appeal this morning from yesterday's ruling by the U.S. District Court upholding the order. - The OTS temporary order requires CenTrust to immediately "establish specific reserves in an amount equal to the market losses on all defaulted securities" in its Portfolio and report such reserves in its 1989 financial statements. CenTrust estimates those losses to be approximately $26 million. The Court of Appeals denied CenTrust's notion for a stay Of the OTS temporary order and for expedited briefing and argument, stating there was no reason to disturb the lower court order and that CenTrust was repeating arguments Previously considered. The court also said CenTrust failed to demonstrate irreparable injury or that the lower court's decision was subject to substantial challenge. PAGENO="0493" 489 ~xtiWt ~ta±~ø Qlour± x~f ~ppraI~ FOR THE DISTRICT OF COLUMBIA CIRCUIT No. 9~5009 September Term, `1989 C.A. No. 89-3384 United States Coutt of Appeajs or the District of Columbia Circ .t Centrust Bank, a State Savings Bank, Appellant FILED J.4N 1 2 1990 CONSTANCE~ DUpR~ Office of Thrift Supervision, Appellee BEFORE: Ruth B. Ginsburg and Sentelle, Circuit Judges ORDER Upon consideration of appellant's motion for stay and expedited briefing and argument, it is ORDERED that the motion for stay be denied. There is no reason to disturb the district court's order entered after its consideration of the arguments which appellant repeats before this court. It is FURTRER ORDERED that the motion for expedited briefing and argument be denied. Appellant has failed to demonstrate that delay will cause irreparable injury and that the decision appealed from is subject to substantial challenge. See ~ circuit Handbook of Practice and Internal Procedur~ 40 (1987). Per Curiam PAGENO="0494" 490 Office of Thrift Supervision N ~IJ~J~ ~00 C St~et. NW. ~ D.C. 20552 T.pho.~. 202) 906-6677 FOR RELEASE at 9 a.m. EST For further information: Tuesday, January 23, 1990 Contact: Ton Mason OTS 90-14 (202) 906-6677 OTS SUSPENDS TRADING fl~ CENTRUST STOCK WASHINGTON, D.C., Jan. 23, 1990 -- Trading in the shares of CenTrust Savings Bank, a State Savings Bank, Miami, Fla., was ordered suspended today for five trading days by the Office of Thrift Supervision (OTS). The suspension became effective for five trading days beginning at 9 a.ni. (EST) today and ends at midnight (EST) Monday, Jan. 29, 1990. OTS took action under the Securities Exchange Act of 1934. Depositors are not affected by this action. The suspension was ordered because of OTS concerns about CenTrust's failure to provide full, fair and accurate disclosure in its securities filings. If properly reported, OTS said, CenTrust would be insolvent. CenTrust is traded on the American Stock Exchange in New York and the Midwest Stock Exchange in Chicago. CenTrust's annual report on form 10-K for the fiscal year ended - more - PAGENO="0495" 491 CenTrust suspended - 2 Sept. 30, 1989, filed Jan. 16, 1990, does not contain the required three full years of audited financial statements. Despite repeated directives, the thrift continues to present its financial statements in a manner inconsistent with generally accepted accounting principles (GAAP), OTS said. For example, the regulator pointed out, cenTrust characterizes the bulk of its portfolio of below investment grade corporate debt securities as "commercial loans," rather than as securities. - OTS also contended the thrift improperly characterizes certain securities that are actively traded as securities held for investment. It carries both types of securities on its books at cost, OTS said, According to OTS, the thrift fails to recognize losses that cumulatively would eliminate its reported shareholder's equity. CenTrust also continues to "publicly obfuscate its true financial condition, failing to apprise its shareholders of the impact of these issues and their impact on shareholders and the association," and to. disclose the magnitude of the dispute between OTS and CenTrust. The charges contained in the suspension order are identical with those violations of the Securities Exchange Act of 1934 contained in a notice of charges filed on Dec. 8, 1989. A hearing regarding the notice is currently set for March. OTS cautions broker-dealers, shareholders and prospective purchasers that they should carefully consider the foregoing information along with all other currently available information and any information subsequently issued by CenTrust. Furthermore, brokers - more - PAGENO="0496" 492 CenTrust Suspended ... 3 and dealers should be alert to the fact that, pursuant to Rule 15c2-ll under the Securities Exchange Act of 1934, at the termination of the trading suspension, no quotation may be entered unless and until they have strictly complied with all of the provisions of such rule. Any broker or dealer uncertain as to what is required by Rule 15c2-ll should refrain from entering quotations relating to the securities in question until such tine as he/she becomes familiar with such rule and is certain that all of its provisions have been met. If any broker or dealer enters any quotation which is in violation of such rule, OTS will consider the need for prompt enforcement action. PAGENO="0497" 493 UNITED STATES OF AI1ERICA Before the OFFICE OF THRIP~ SUPERVISION In the Matter of Trading in the Securities of ORDER OF TRADING SUSPENSEC: CenTrust Bank, A State Savings Bank, ) OFFICE OF TERIF!Y SUPERVISION Miami, Florida ) RE: Order No. 90-161 DATED: January 22, 1990 OTS No. 2745 Securities Exchange Act of 1934 Section 12(k) As CenTrust's financial statements in its periodic reports to the public have not been prepared in accordance with generally accepted accounting principles ("GAAP"), in violation of the 1934 Act and the rules promulgated thereunder, fail to show material losses, and therefore materially misrepresent CenTrust's financial condition: and As, despite repeated directives from the Corporate and Securities Division ("CASD") of the Office, CenTrust has failed not only to correctly present its financial statements, but also to. provide any meaningful disclosure of the implications of the position taken by the Office regarding CenTrust's financial statements, on the ongoing viability of CenTrust, the potential insolvency of CenTrust and the elimination of the value of its stockholders' investments; and As CenTrust's Form 10-K for the fiscal year ended September 30, 1989, which was filed on January 16, 1990, does not include an auditor's opinion regarding the financial statements for the fiscal years ended September 20, 1988 or September 30, 1987, in violation of applicable regulations of the Office under the 1934 Act; and As the presentation of certain financial information in CenTrust's Form 10-K for the fiscal year ended September 30, 1989 continues to be inconsistent with GAAP, and CenTrust continues to improperly account for certain assets and activities, the consequences of which are fundamental to CenTrust's continued existence and thus are material; and PAGENO="0498" 494 2 As CenTrust's Form 10-K for the fiscal year ended September 30, 1989 continues to contain numerous materially inadequate or misleading statements concerning activities of CenTrust, asset composition and classifications and the impact correcting CenTrust's incorrect accounting practices, as well ~s misstatements and omissions concerning the effects of z~e Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") on cenTrust's operations; THEREFORE, the Office is of the opinion that the public interest and the protection of investors requires a summary suspension of trading in the securities of Centrust. THEREFORE, it is ordered, pursuant to Section 12(k) of the Securities Exchange Act of 1934, that all trading on the American Stock Exchange and the Midwest Stock Exchange and all other trading in the securities of Centrust~ are suspended, for a period of five trading-days, from 900 a.m. (EST) on January 23, 1990 and terminating at midnight ( ST) on January 29, 1990. Office f ~ M. D nny Wall Dire or PAGENO="0499" 495 OFFICE OF TERIF'l' SUPERVISION Suspension of Trading CenTrust Bank. A State Savings Bank Miami. Florida Order No. 90-161 Date: January 22, 1990 CenTrust Savings Bank, Miami, Florida ("CenTrust") is a state-chartered savings association which has classes of securities registered with the Office of Thrift Supervision ("Office") pursuant to Section 12 of the Securities and Exchange Act of 1934 ("1934 Act") Under Section 12(i) of the 1934 Act, the powers, functions, and duties vested in the Securities and Exchange Commission to administer and enforce Section 12 and certain other sections of the 1934 Act with respect to savings associations are vested in the Office. The Office's authority to suspend trading in the securities of CenTrust is founded upon Section 12(k) of the 1934 Act, which provides in pertinent part that "If in its opinion the public interest and protection of investors so require, the (Office) is authorized summarily to suspend trading in any security (other than an exempted security) for a period not exceeding ten days . . . * The Corporate and Securities Division ("CASD") of the Office has recommended that the Office suspend trading in the securities of CenTrust based upon the following: CenTrust's financial statements in its periodic reports to the public have not been prepared in accordance with generally accepted accounting principles ("GAAP"), in violation of the 1934 Act and the rules promulgated thereunder, fail to show material losses, and therefore materially misrepresent CenTrust's financial condition. * Despite repeated directives from CASD, CenTrust has failed not only to correctly present its financial statements, but also to provide any meaningful disclosure of the implications of the PAGENO="0500" 496 2 position taken by the Office regarding CenTrust'S financ:ai statements, on the ongoing viability of CenTrust, the potent:~i insolvency of CenTrust, and the elimination of the value of stockholders l investnents. CenTrust's Form 10-K for the fiscal year ended September .l989;~ which was filed on January 16, 1990, does not include sri auditor's opinion regarding the financial statements for the ~fiscal years ended September 20, 1988 or September 30, 1987, violation of applicable regulations of the Office under the 1934 Act. The presentation of certain financial information in CeriTrust's Form 10-K for the fiscal year ended September 30, 1989 continues to be inconsistent with GAAP, and CenTrust continues to improperly account for certain assets and activities. The consequences of such improper accounting are fundamental to CenTrust's continued existence and thus are material. CenTrust's Form 10-K for the fiscal year ended September 30, 1989 continues to contain numerous materially inadequate or misleading statements concerning activities of CenTrust, its asset composition and classifications and the impact of correcting CenTrust's incorrect accounting practices, as well as misstatements and omissions concerning the effects of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIR.REA") on CenTrust's operations. i. The Director, upon consideration of an Issues Memorandum from the Corporate and Securities Division, is of the opinion that it would be in the public interest, for the protection of investors to temporarily suspend trading in the securities ~of Centrust pursuant to Section 12(k) of the 1934 Act; and 2. The Director hereby orders, in the form of the proposed Order of Trading Suspension, that all American Stock Exchange, Midwest Stock Exchange and other trading in the securities of Centrust be suspended for a period of five trading-days from 9:00 a.m. (EST) on January 23, 1990 and terminating at midnight (EST) on January 29, 1990; and PAGENO="0501" 497 3 3. The Director further orders that the Secretary is to serve copies of the executed Order, this Order, and the a ached notice to the Federal Register U~~fl each of the persons isted on the attached service list. P1. D~nny Wall Dired~or PAGENO="0502" 498 No. 90 - 161 Date: January 22, 1990 DEPARTMENT OF THE TREASURY Office of Thrift Supervision Order of Suspension of Trading AGENCY: Office of Thrift Supervision, Treasury. ACTION: Order of Suspension of Trading. SUNMARY: The Office of Thrift supervision ("Office") announced, pursuant to Section 12(k) of the Securities Exchange Act of 1934 ("1934 Act"), the temporary suspension of all trading in the securities of Centrust Bank, A State Savings Bank, Miami, Florida ("Centrust"), a state-chartered savings association, with its principal executive offices located at One Centrust Financial Center, Miami, Florida, for the five day trading-day period commencing at 9:00 a.m. (EST) on January 23, 1990 and terminating at midnight (EST) on January 29, 1990. CenTrust's securities are traded on the American Stock Exchange and the Midwest Stock Exchange. DATE: January 22, 1990. SUPPIDIENTARY INFORMATION: The suspension of trading, which occurred after the January 16, 1990 filing of CenTrust's Annual Report on Form 10-K for the fiscal year ended September 30, 1989 PAGENO="0503" 499 No. 90 -. 161 Page: 2 ("1989 Form 10-K"), was ordered because of the Office's grave concerns regarding CenTrust's continuing failure to provide full. fair and accurate disclosure in its 1934 Act reports. Specifically, despite repeated directives by the Office that CenTrust correct its accounting treatment of certain activities, report significant losses, properly characterize its current financial condition and continued economic viability, disclose the magnitude of the disputes between the Office and CenTrust and disclose the impact on CenTrust and on its shareholders of complying with the Office's directives, CenTrust has consistently refused to provide this material information to its shareholders and to the public trading market. As a result of these failures, the Office believes it is in the public interest to suspend trading in the securities of CenTrust, for the protection of investors. The 1989 Form 10-K does not presently contain the requir~d three full years of audited financial statements. Further, CenTrust continues to present its financial statements in a manner inconsistent with generally accepted accounting principles ("GAAP"), thereby failing to recognize losses that cumulatively would eliminate its reported shareholders' equity. For instance, CenTrust continues to characterize the bulk of its portfolio of below investment grade corporate debt securities as "CoflUflercial PAGENO="0504" * 500 No. 90 - 161 Page: 3 loans" rather than as securities; it improperly characterizes certain securities that are actively traded as securities held for investment; it improperly and without documentation or actions sufficient to justify such a presentation, carries both types of securities on its books at cost, thereby failing to realize significant losses, all in contravention of GAAP. These deficiencies are clearly material. If properly reported, CenTrust would be insolvent. CenTrust also continues to publicly obfuscate its true financial condition, failing to apprise its shareholders of the dimensions of these issues and their impact on shareholders and on the association. As a result of all of the foregoing, CenTrust's 1934 Act reports, including the 1989 Form lO-Kare materially deficient, false and misleading. The Office cautions broker-dealers, shareholders and prospective purchasers that they should carefully consider the foregoing information along with all other currently available information and any information subsequently issued by Centrust. Furthermore, brokers and dealers should be alert to the fact that, pursuant to Rule l5c2-ll under the 1934 Act, at the termination of the trading suspension, no quotation may be entered unless and until they have strictly complied with all of the provisions of such rule. If any broker or dealer is uncertain as to what is required by Rule l5c2-ll, he should PAGENO="0505" 501 No. 90 - 161 Page: 4 refrain from entering quotations relating to the securities i~ question until such time as he has familiarized himself with such rule and is certain tha~t all of its provisions have been net. By t1ie Office of TI~t ~ipervision M. i~anny Wall f Direàtor PAGENO="0506" 502 Office of Thrift Supervision I~I EVVS 1700 G S0~~t, NW.. Wa3W~q)6n D.C. 20552 TeIepho,~e 202) 906-6677 FOR RELEASE at 10:30 a.m. EST For further information Thursday, January 25, 1990 Contact: Paul Lockwood OTS 90-18 202/906-6677 OTS CITES S&L AND OFFICER FOR FUTURES AND OPTIONS SPECULATION WASHINGTON, D.C., Jan. 25, 1989 -- A savings and loan official has been removed from his job and banned from all federally insured financial institutions for engaging in illegal and speculative trading in financial futures and options that nearly eliminated the association's regulatory capital. The Office of Thrift Supervision (OTS), which took the enforcement action, had previously stopped the activity with a cease and desist order against the institution. The Jan. 17, 1990, OTS consent order against Thomas P. Munk,.~. removes him as executive vice president at the Garnett Savings and Loan Association, Garnett, Kan., and prohibits him from ever working for any federally insured financial institution without prior approval of the appropriate regulatory agency. Hunk began speculating in futures and options in 1988 in an attempt to bolster Garnett's regulatory capital, OTS said. However, the trading had the opposite effect, resulting in substantial financial loss to the association. -more- PAGENO="0507" 503 Garnett/Munk - 2 In April 1989, Garnett Savings and Loan signed an agreement with the Federal Savings and Loan Insurance Corporation (FSLIC) that prohibited such trading, but Munk continued to speculate in futures, violating both OTS regulations and the association's agreement with FSLIC. OTS then issued a consent cease and desist order against Garnett in November 1989 that prohibits, among other things, futures and options trading. In consenting to these orders, neither Garnett Savings and Loan Associatioz~ nor Munk admitted any wrongdoing. Garnett suffered losses totaling $500,000 as a direct result of its futures and options trading. It was placed in conservatorship Dec. 7, 1989, largely as a result of these losses. PAGENO="0508" 504 3.e. APPENDIX D SUGGESTED FIRREA ENFORCEMENT AMENDMENTS TITLE IX OTS Enforcement recommends the `following changes to the agency's enforcement authority: -- Amend Section 902 to make clear that the remedies available in a temporary cease and desist order based on in- adequate books and records are not limited to requiring that records be put in proper form, but include the halting of any activity not properly reflected in the institution's books and records or any other activity that poses a safety or soundness concern. -- Amend Section 906 to provide that when an individual who has left an institution where he is suspected of wrongdoing becomes associated with another institution, the 6 year statute of limitations begins to run again from the time he begins his asso- ciation with the new institution. -- Amend Section 916 to allow the banking agencies 36 months, rather than the current 24, to comply with the requirement of establishing a pool of administrative law judges and to develop uniform rules of procedure. Congress, should also consider repealing the requirement that uniform rules be developed, which appears to be a diversion of agency resources for little gain. TITLE III Amend 12 U.S.C. l464(d)(l)(a) to add express authority to sue and be sued, thus clarifying OTS authority to enforce its agreements in court. -- Amend 12 U.S.C. l464(d)(l)(B) and 1467a(g) to clarify that the OTS may bring its subpoena enforcement actions in the District Court for the District of Columbia, thus also making the provi- sions of the Home Owners' Loan Act and the Federal Deposit Insur- ance Act consistent. -- Amend 12 U.S.C. l464(d)(2)(C) to make the grounds for appointing a conservator or receiver for a state-chartered insti- tution consistent with those for a federally-chartered institution by adding as alternative grounds a) violation ofa final cease and desist order, b) concealment of books and records or refusal to submit books and records to an examiner, c) consent of the associ- ation to the appointment, and d) removal from Federal Home Loan PAGENO="0509" 505 -2- Bank membership or termination of insurance. -- Amend 12 U.S.C. 1464(s) to make clear that a capital directive may include any item identified in a capital plan, by adding to the Director's authority under paragraph (4)(a) the authority to take any other action he determines to be appropri- ate. -- Amend 12 U.S.c. l467a(b)(4) to give staff examining sav- ings and loan holding companies the same access to individuals and information that was given to examiners of savings associations in FIRREA, and the same power to go to court to assure such access. We also have various technical amendments to FIRREA in en- forcement areas. If the Subcommittee desires, we will assemble a more specific discussion of what changes would be necessary to accomplish the above-listed changes as well as the technical amendments. PAGENO="0510" 506 4.b. APPENDIX E LOCAL BANK FRAUD WORKING GROUPS: 1. District of Massachusetts (Boston) OTS-RepresentatiVe: Tom Barnes 2. Eastern District of New York Southern District of New York District of New Jersey (New York City) OTS Representative: Bernadette Piccininni 3. -Eastern~District of Pennsylvania (Philadelphia) OTS Representative: James G. One 4. Western District of Pennsylvania (Pittsburgh - in formation) OTS Representative: James G. One 5. Middle District of Pennsylvania (Harrisburg -~ in formation) OTS Representative: James G. One 6. Southern District of Florida (Miami) OTS Representatives: Dave Maher Bill Rachles 7. Eastern District of North Carolina (Raleigh) OTS Representative: Bob Peery 8. Middle District of Florida (Tampa - in formation) OTS Representative: Dave Maher 9. Northern District of Georgia (Atlanta - in formation) OTS Representative: Charles Jackson 10. Sou-~hern District of Indiana (Indianapolis - in formation) OTS Representative - Richard Schroer 11. Northern District of Illinois (Chicago) PAGENO="0511" 507 OTS Representatives: Jerry Gosse Dan Conway Stacy Powers 12. Central District of Illinois (Springfield) OTS Representatives: Jerry Gosse Dan Conway Stacy Powers 13. Eastern District of Missouri (St. Louis) OTS~ Representative: Ron Bergmann 14. Northern District of Texas (Dallas) OTS Representatives: R.S. Bonchak John Mitchell 15. Southern District of Texas (Houston) OTS Representatives: R.S. Bonchak John Britt 16. District of New Mexico (Albuquerque) OTS Representatives: John Mitchell John Britt 17. Northern District of Oklahoma (Tulsa) OTS Representatives: Scott Liggett Phil Magathan 18. District of Kansas (Topeka) OTS Representatives: Scott Liggett Phil Magathan Lindsey Shull 19. District of Nebraska (Omaha) OTS Representatives: Scott Liggett Phil Magathan 20. Central District of California (Los Angeles) OTS Representatives: Delwin B. Fassett Michael W. Buting Frances E. Harkins Sherri Stieg R. Marie Labat Gil Martinez PAGENO="0512" 508 21. Eastern District of California (Sacramento) OTS Representatives: Delwin B. Fassett Michael W. Buting Louise 3. Broderick Anita L. Henri 22. Northern District of California (San Francisco) OTS Representatives: Deiwin B. Fassett Michael W. Buting Louise J. Broderick Anita L. Henri 23. District of Arizona (Phoenix) OTS Representatives: Deiwin B. Fassett Michael W. Buting Janet Spadora Glen Gerhard zalka Ancely 24. Western District of Washington (Seattle) OTS Representative: John E. Morris * Although we have been heard that local bank fraud working groups exist in Salt Lake City, Utah, Tallahassee, Florida, and Savannah, Georgia, we understand that the `working groups" are actually occasional meetings between representatives of the relevant financial regulatory agency and representatives of the Department of Justice to discuss specific cases. PAGENO="0513" 509 INDEX TO EXHIBITS ACCOMPANYING THE WRITTEN TESTIMONY OF ROSEMARY STEWART March 15, 1990 1. Office of Thrift Supervision Regulatory Bulletin 13, Guidelines for Establishing a Fraud and Insider Abuse Program, Thrift Activities Handbook, Subjects: Fraud and Insider Abuse, dated June 27, 1989. 2. "OTS Gears Up to Battle White-Collar Crime," The Lamplighter, Office of Thrift Supervision, Volume 3, Number 4, March 12, 1990, at pages 3 through 5. 3. `Thrift Regulators Completed 338 Enforcement Actions in 1989," Office of Thrift Supervision Press Release 90-17, January 24, 1990. 4. OTS Order No. 90-331, dated February 12, 1990, EP-002A, General Enforcement Policy. 5. OTS Order No. 90-332, dated February 12, 1990, EP-003, Civil Money Penalties. 6. OTS Order No. 90-333, dated February 12, 1990, EP-004, Use of Examination and Investigation Authority. 7. Letter dated June 30, 1989, from Lothar R. Genge, Attorney-in-Charge, Ft. Lauderdale Field Office, U.S. Department of Justice, Criminal Division, Organized Crime ~and Racketeering Section Miami Strike Force, to Robert E. Showfety, President, Federal Home Loan Bank of Atlanta, re: Prosecution of Sunrise Savings and Loan Officers. 8. Letter dated January 4, 1989, from Rudolph!W. Giuliani, United States Attorney for the Southern District of New York, to M. Danny Wall, Chairman of the Federal Home Loan Bank Board, re: Steven R. Hom, Esq. and Mary Beth O'Neil, Office of Enforcement, commending their assistance on the investigation and prosecution of John P. Galanis and members of the Galanis Organization on bank, tax, securities fraud and racketeering charges. 9. "Suspension, Then Seizure of CenTrust Points To OTS's Tougher Stance on Abuses," The Thrift Accountant, February 9, 1990, page 5. 30-830 0 - 90 - 17 PAGENO="0514" ForFurtherInfonngdm~ Coiztaci~ The FHLBank Disthct in which you ase located or the Thrift Activities Division of the Office of Regulatory Activities, Washington, DC. Regulatory Bulletin 13 Background/Introduction In October 1988, the House Comnut- tee on Government Operations issued a report entitled Combating Fraud, Abuse~ and Misconduct in the Nation's Financial Instiftttiorisi CwTsstt Federal Efforts are Inade- quate," better known as the Barnard Report. The report was based on a recent study addressing the federal banking agencies' efforts in combat- ing fraud and misconduct in the nation's financial institutions. The report recognized the Federal Home Loan Bank Board as the only agency to establish ciminal referral units within souse of its District Banks, and recommended that sisrularunits beestablished in each of the remain- ln~ The Bank Board agrees -that eath District Bank should adopts formal Fraud and Insider Abuse Program designed to (1) monitor the reimpt arid processing of aiminal referrals within the distrIct, (2) serve as a clearing house for disthct fraud traIning, (3) coordinate efforts raise- big to civil and aiminal prosecution with the FBI and the Departtnient of Justice, and (4) serve as a consmwtl cation liaison on fraud related mat- Some districts have already devel- I oped comprehensive fraud' pro- grams and the attached model pro- gram includes many of the elements of those programs. The model pro- gram is designed primarily to assist disincta that have no written pro- gram in developing a formal pro- gram that meets Bank System objec- Since tie Incidence of fraud varies substantially among the 12 District Banks, the extent of the program needed for individual districts will likewiae vary. As a result, theguide- lines contained In the model are designed to be minimums. Pro- grains for individual districts should be expanded based on the needs of each bank and the levels of fraud experienced orantidpated PoBcySts~naitt. Bath district should adopt a formal written Fraud and kInder Abuse anticipate aurent and futwe levels of fraud and bInder a~e within the district. This assesemerit may be I based on the cesrerit nni~er(aM growth rate) of significant aiminal referral ceaea or any other appropri- ate means. Once the level of fraud has - been determined, districts should then develop a Fraud and Insider Abuse Program based on their indicated needs and on a bal' sitting of the costs with the antici- pated and potential benefits Pro- grams should establish objectives for (1) processing ainsinal referrals, (2) assisting enforcement agencies to prosecute perpetrators of thrift Irsud, (3) enhancing training and (4) developing and maintabung mm- mwiscations on fraud related mat- ters, The ;dequacy of district resources devoted to achieving those objectives should also be assessed and included in the pro- gram documentation, Fraud and Insider Abuse Programs should be updated on an annual basis with copies of the programs and all updates forwarded to the Office of Regulatory Activities. Ini- tial programs should be submitted bySeptember3O, 1989. The atteched Model Fraud and kInder Abuse Program contains ele- nauus that should be present in die- trim fraud prugrsn~ bistrict Banks - are asked to enswv that their pro- ~meet the guidelines of the Mtad~ Dare! W. Doc!aiw. Exe~jUv Director 510 Office cf Regulatory ActMlies I RegulaTOry bulletin Handbook: ThrIft Activities Ssdloni 135 Subjects: Fraud and Insider Abuse ~ 13 - ` June27, 1989 Guidelines for Establishing a Fraud and Insider Abuse Program Sumsr~aryr This Bulletin sets forth guidance for each Federal Home Loan Bank System District Bank lit develt1 enhancing Fraud and InsiderAbuaeProgzaxna. oTs/Rs - Exhibit No. 1 PAGENO="0515" 511 Attachment to Regulatory BUlletin 13, page 1 MODEL FRAUD AND INSIDER ABUSE PROGRAM L ~WORICALINCDENCES OFDISTRICT-WIDE FRAUD AND ~SIDER ABUSE * Develop and rriaintain background information reports of fraud and insider abuse occurring within thedisuict. Such background information would include any relevant data such as: - the number of ciminal referral forms submitted quarterly by institutions and examiners, - the number of outstanding cuninal referrals divided into at least two categories: significant (frauds involving management or resuitingin potential losses of $100,000 or more) and other, - prosecutions in progress and completed, and the outcome of cases, - actual and anticipated recoveries. estimates of fraud related losses within the district, and any other relevant data. The information should be used as a basis for determining the depth of the program put into place by the disthct. For example, a high level of fraud cases and related institutional losses would support the need for a comprehensive fraud program utilizing substantial resources. Con- versely, a low number of c~iminal referrals and a low amount of institution fraud losses would support the decision to devote fewer resources to the program. * For districts with a low level of fraud or ciiminal referrals and a significant number of 4 and 5 rated institutions, consideration should be given to: (1) reviewing all failed and 5 rated institu- tlons~ determine if ctrninal referrals should have been filed, and (2)sendinga fraud specialist into an institution once the EIC determines that a rating of 4 or worse will be given. IL OBTECTIVES FOR REDU~G FRAUD AND ~SIDER ABUSE * Establish objectives and strategies for reducing fraud and develop procedures to monitor the pro- gram's performance. Although objectives and strategies developed by each district will vary, some goals should be present in all plans in order to ensure the effectiveness ofa national program. Thus, all programs should contain the following objectives: - Provide adequate fraud training to examiners; -~ Require that all member institutions maintain adequate preventive controls for mitigating fraud risks and detecting fraudulent transactions; - Ensure that criminal referrals are accurately completed by institutions and exan'&iners in a hn'elymanrser Ensure that timely follow-up reviews are performed on referrals forwarded to other agencies; Establish procedures for exchanging iniormationwith and providing assistance to the FBI, the Department of Justice, and other agencies. Once strategies aie implemented, theyshould be periodicallyupdated in order to maintain the program's effectiveness and to adjust for changes that occur within the industiy. PAGENO="0516" 512 AttachmenttoRegulatoryBulletinl3,page2 ifi. STAFFING NEEDS ANALYSIS/REQUIREMENTS * De~estaffadequyforintplementingDisthtrstratagies. Onceobjectives and strat iesaeestablished,distxicbshould determine thepersonnel equize. meats forimplenrenting thes ategies, as d u,n arethoserupiirenertts with tkreappropriately trained personnel resour~it hasavailable.ruriereqthrforprocessingcTur1thalrefem1S~ conducthgfraud nves ons,neetingwith the FBI, training, etc.. should be factored into the StaffingNeeds Analysis. * Establish and implement strategies to meet stafflngneeds: organizational structure, ~b descrip- tioss, recruitment, training, etc. IV. EXAMThIER/STAFFTRAINING * Determine the adequacy of training related to Fraud/Insider Abuse. Distoct Banks must evaluate the adequacy of district-wide training designed to assist Agency Functions personnel in assessing the risks of and discovering fraud arid insider abuse within the institutions they examine. The following quesuons should be addressed: - What training has been provided toexarniners, field managersand other regulatory staff? - What percentage of examiners and field managers have attended fraud training? - How long will it take for an acceptable level of examiners (at least5O%) to receive fraud train- ingbased on the current training agenda? When will all EICs receive fraud training? * Promote awareness axnongregulatorypersonnel of the District Bank's efforts to combat fraud and insider abuse among Agency Functions staff. Thiscould be accomplished by: Making presentations to District staff rnernbers Arranging presentations by law enforcement agenaes (FBI, U.S. Attorney, rRS); - Promoting staff attendance at FFIEC "White Collar Crime" schools. * Promote awareness among others of efforts to combat fraud and insider abuse. - Thiscould be accomplished by: Briefinglaw enforcement offices/staff on the PHIl System, and finannial and real estate - Brleflnginstitutionsecurityofficers, loan review officers, and Intemal auditors on the crinti- nal referral requirements and pro~s, the availabilityof a District criminal referral contact person, and means to prevent and detect whitecollarcrime - Issuingpressreleaseswhenap,propriateto inform the industry that the Bank Systeznlntends to fully prosecute "bad actors. V. OPERATIONS * C~ntrabnernminal referral processing. PAGENO="0517" 513 Attachment to Regulatory Bulletin 13, page 3 - Establish case priorities and their follow-up; - Ensure that priority referrals are received; - De~mine whether the Right of Financial Privacy Act (RFPA) is applicable; Establish procedures to waiminal ref~mls,erthance if necessary; - Forward referrals to appropriate law enforcement agencies; - Input cin'iinal referrals into the Confidential Individual InfomationSystemand - Monitorthestatus/progressof the forwarded referrals. Assist exanilnersin completing referrals and conductinginvestigations. Send a fraud specialist on-site to examinations where a significant fraud is suspected (to assist examiners and ensure that an adequate analysis is made and the referral is properly completed); Receive, track and respond to subpoena requests; Track referrals to other enforcement actions (Cease and Desist, 407 Removal and Prohibition, rejected audits, professional referrals, etc.); and - Monitor enforcement actions (especially 407s and removal actions) to ensure that referrals are made if evidence is revealed indicating possible criminal activity. VI. COMMUNICATIONS Establish a contact person or liaison to develop and maintain both internal and external commu- nication. Responsibilities of the contact person: - Bea resource for other departments within the District Provide the FSUC, the Office of General Counsel, and theOffice of Enforcement with docu- ments needed for evidence, arrange meetings/discussions with law enforcement agencies; - Provide guidance to staff throughout the system regarding the proper completion of Form 366, fraud investigation procedures, documentation, etc.; - Ensure that regulatory personnel are aware of the distinction between FHLEank System's civil investigative authority to examine institutions as opposed to a law enforcement agency's criminal investigative authority and the importance of not blurring the two. - Coordinate the gathering of information/Investigations regarding pending applications; - Establish contact with the FBI, U.S. Attorney's Office, Grand Jury, local law enforcement officials, and state and federal banking regulators; - Provide assistance to member institutions. Answer their questions on when to file form 366, how to properly complete the forms, and stress the importance of obtaining confessions at the institutional level, when possibleand - Distribute information on "Bad Actors" to other enforcen~tt and regulatozy agencies to pre- * vent crossover of persons who have created problems in other financial institutions. When establisbingcoxnmunicationa, thedepartment should promote a mutuallybeneficial exchange of Information,so that the status of cases can be tracked. It is often helpfulto provide enforcement agencies and FBI agents with an explanation of oursystem and its history. However, assure that the release of confidential information is made In accordance with FHLBB Resolution 88-230. Fraud department personnel should also considerengaginginotheractivities that will enhance corn- munications such as promoting and attendingmneetings of local fraud working groups, and issuing periodic bulletins to mnembermnsritutions and staff on current fraud schemes. PAGENO="0518" 514 ** * * * * $ * OFFICE OF THRIFT' SUPERVISION *~$~* ~[IJC lLamptigjjter OfficeofThrIftSupev~sIon * Dep.rtmeitofthe~wy * Volun~e3,Number4 * Math 12,1990 OTS Gears Up to Battle White-Collar Crime Examiner Training to start This Summer byPaulLockwood WldteO~~hOwtostoPitaMprevefltit_jsdIawjngjncreasedattenfion th~edays from thenation'saavlngs and loan regulator. 3 PAGENO="0519" 515 O'ISls combating fraud In the thrift Industry with stepped-up training and expanded procedures for Its examineis. Also helping to uncoverwhl collar ea especial fraud units established at each of the I2OTS district offices. The agency Is alerting its examiners to beon the lookout forany unusual activities that may indicate fraud. The heightenedawareness Is already paying divideeds. Whena recent letter of credit looked suspi dous, cprick action by the OTS, plus thecooperation of two financial Institutions and the FBI, stopped * cold an attempted $250 million wire transfer scam. Thescheme Involvedab anch manager of Great WesternBanlçF.SB.,a West Coast thrift, who origi- nated a letter that was faxed across the country to Maryland National Bank In Baltimore, Maryland. The lettersald one of the thrift's customers had entrusted $500 million in `Prime Bank Notes" to the thrift as collateraL The letterthen asked the bank to contact thecustomer's attorney for further instruc- tions. The attorney, who had an office In Baltimore and a small account at Maryland National, asked the bank to wire $250 million to his client's account ata third financial institution immediately, without receiving the securities, which were supposed to arrive the next day. The bank was suspicious because of the unprofessional writing of the faxed letter, which included thestatement, "NO PRIOR CON~AC~ WiTH THE BANK UNDER ANY CURCUMSTANCES." Being cautious, Maryland National Bankcalled BlilMagrini, head of OTS's anti-fraud programs to askwhy Great Western would issuesuchaletter. Magrinicalled Great Western's Internalaudit department, which immediately began an investigation of the branch office that originated the letter. He also called inthe FBI's FinanclalCrlmes Unit. Thenext day, thebranchmanagerconfessed to the FBIaM was apprehended. The FBI Is currently Investigating the attorney In Baltimore. V V V Antifraud Program Under Way That's the kind of happy ending that should gladdenthehearts of taxpayers, who windup paying part of the cost of making good on insured deposits at failed thrifts. In some cases, the insolvent institu- tions have been the victims of fraud. Bill Magrini Is working to helpO'IS examiners bemoreeffective In the prevention and early detec- tion of fraud. "People who steal take shortcuts and they make mistakes," says MagrinL The key to fin- gerlng the bad guys Is to look forfraud patterns, such as poorloan documentation. "I have rarely seen a well-documented fraudulent loan," he adds. V Magrini wants examiners to bealert for othersuch patterns and be more skeptical of transactions that don't make sense. "We don't want our examiners to go on witch hunts, but to assess the potential for fraud based on whetherthese patterns are present." Examiners are now asked to rate an Institution's vulnerability to fraud using a fraud risk evaluation form Magrini developed for themrlft Activities Regulatory Handbook~ "Vulnerability to fraud Is almost as bad as fraud itself," says Magrini. Henotes that even If examiners don't find actual fraud, 4 PAGENO="0520" 516 institutions theta evuh_ablen edtocorrect th. situation to preventafutureoccruxerice. "Fraud isa symptom. TheprobIemisthatanthsUbz~hu left Itself wideopeL" Another pa nthat can thdk an tion's vulnerability to fraudls hlghgrowth. "In 98 percent of Identified fraud cases, the institution has expelerEed hlghgrowth," says Magrlni. "Many institu- tions drop theirgua dwhemecpelenclugtheeffeets of hlghgrowth and let basiccontrols takea back seat to lending orinvestuient operations." That's when anopportunlstlcborrower orthrlft offlcerwili be tempted to steaL O1S ecairdn swlllbelookthgforsuchsltuadons,determininglffraudls present, andhelplneinstiw.tionsln~plea~entnecessarycontsuIs. Magrinibelleves that otherregulatorypersonnelneed greaterawazuness of theproblemso they can support e n~iners wha requestadditionalti efor examinationsif patterns suggestthe existence of frau~ Examiner Classes Slated To aid regulatorypersonnel in learning to recognize fraud,anewO'IS examinercourse on fraud will begin this summer To kickit off, eachOlS dlstrlctwlll send three representatives to a three-day train- ingsessionat theagency's training anddevelopment facilities in Dallas. They will receive pointers in how to pass on their knowledge-a "train-the-trainers" schooL And they will learn new techniques OTS examiners will be expected to use to catch white-collarcroohe. These representatives will then go back to theirdistricts arid start training examlnersintwo-daysessrons. Ye want to developaft ud squs ,acadre of highly tralnedspeciallsts who can go Into an institu- tion and fetret out thecrimfnals,anddocument the cnmeso we canqulckly go toJustlcetDepartnientj * with a case theycan prosecute," says Magrini. - - Magrinl cites new weaponsin th ragainstfraud,suchasanupgraded version of the Confidential Individual InformatlonSystern (CllS), which wilibefully operational In May forall districts. Thesys- tern Is used to share Information on badactors,azid keep them out of the thrift industry. Hers also working with theFedezulFinancial Institutions Examinations Council onrevisingits white-collar crime course to put m zuernphasisonthedetectlonoffraud. And heisplanninga fraud self-assessment guide for thrifts so they can measure howwell theyare protecting themselves against such aime. Regulator Training in the 1990s Training and Development at the Head of the Class byFrankDwyer Thepace of change In legislation andregulation has complicated the jobs ofa lot of people at the Office of ThrlftSupervlslon, but perhaps no group Is challenged more than thestaff of Supervision Pol- icy's training arid developrnentunitlnDailas. Acconllngtotheunlt'sdlrector,CeneByrne, keeping tralningupto dateand "developlngcouzses as quickly as they'reneeded" has been demanding. Ma result of new coursesand strongerprograms, theunltshould produce 4000 more tralnlngdays in1990 than the 24,000 logged in 1989. 5 PAGENO="0521" 517 All~~ Cop~ ~ ~ U Office of Thrift Supervision I~1I,EIJVS 1700 G Sosst. NW.. W~iI~q~n. D.C. ~500 TlsØions (200) 9064677 FOR RELEASE at 3:00 p.m. EST For further information Wednesday, January 24,1990 Contact: Janis L. Smith OTS 90-17 202/906-6677 THRIFT REGULATORS COMPLETED 338 ENFORCEMENT ACTIONS IN 1989 WASHINGTON, D.C., Jan. 24, 1990 -- Thrift regulators completed enforcement actions at an aggressive pace in 1989, executing a total of 338 actions compared with 285 in 1988, a nearly 20 percent increase, the Office of Thrift Supervision (OTS) announced today. * In 1989, OTS issued a total of 12 cease-and-desist orders; 16 removal-prohibition orders; 51 supervisory agreements and 39 consent merger agreements between Aug. 9 and ye\~r-end. Enforcement actions completed prior to Aug. 9 were undertake~\by the Federal Home Loan Bank Board. \._. .- The pace continues to be brisk this year. Through Jan. 18, OTS completed 14 enforcement actions. "The increased number of enforcement actions -- coming during a. year when the industry shrank significantly as a result of both mergers and the appointment of conservators or receivers for failed instutions -- demonstrates OTS' emphasis on vigorous supervisory and enforcement actions to curb unsound practices," said N. Danny Wall, director of OTS. -more- OTS/RS - Exhibit No. 3 PAGENO="0522" 518 Enforcement - 2 Rosemary Stewart, director of OTS' enforcement office, said, "The record number of removal-prohibition orders in particular reflects the increased emphasis OTS has placed on identifying individual wrongdoers who participated in unsound pr~actices in order to assure that these persons do not reappear at another insured financial institution. "The removal-prohibition power is even more significant since the passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) because an order of prohibition issued by any of the federal financial institution regulators prohibits the individual named from accepting employment at any federally insured financial institution, whether it is a bank, savings association or credit union." - -Copies of all enforcement orders issued after Aug. 9, 1989 are available in the public reading room, Information Services Division of OTS, 801 Seventeenth Street N.W., Washington, D.C., (202) 416-2751. (The following chart shows total enforcement actions taken by OTS and its predecessor, the Bank Board, over the past 10 years.) itt PAGENO="0523" 519 ENFORCEMENT ACTIONS OF THE OFFICE OF THRIFT SUPERVISION (and its predecessor, the) FEDERAL HOME LOAN BANK BOARD No. of Consent Individuals Merger Calendar C&D Removed and/or Supervisory Resolutions Year Orders Prohibited Agreements & Agreements 1980 3 1 1 6 1981 8 2 0 33 1982 13 6 5 49 1983 17 21 39 22 1984 13 22 116 38 1985 28 22 233 65 1986 58 48 214 130 1987 25 44 106 102 1988 26 47 110 102 19891 30 62 118 128 1. Enforcement actions completed prior to August 9, 1989, were undertaken by the Federal Home Loan Bank Board; actions completed after August 9, 1989, were undertaken by the Office of Thrift Supervision. PAGENO="0524" 520 OFFICE OF THRIFT SUPERVISION OTS Order No. 90-331 dated February 12, 1990 EP-002A, General Enforceaent Policy I. Purpose: This Bulletin sets forth the Office of Thrift Supervision's policy for vigorous enforcement action by its regulatory staff. II. Policy: It is the policy of the Office of Thrift Supervision to fully utilize its statutory authorities to take prompt and vigorous enforcement action against thrift institutions, their directors, officers, agents, holding companies, service corporations and/or their officials where warranted to ensure the safety and soundness of such thrift institutions and the thrift industry in general. Further, it is OTS policy that, when the requirements of law have otherwise been satisfied, thrift institutions with a composite MACRO rating of 3, 4 or 5 are presumed to warrant formal enforcement action unless the District Director documents that their problems are satisfactorily corrected or in the process of full correction. - Exhibit No. 4 PAGENO="0525" 521 -2- Order No.: 90-331 III. Background: Enforcement Philosophy In applying this policy, the OTS wishes to establish a reg- ulatory environment where deficiencies in thrift institutions are corrected before they result in significant problems or situations that threaten a thrift's ongoing viability or safety and sound- ness. This approach of intervening with regulatory restrictions and requirements at the first sign of deficiency including a lack of prudent policies, procedures or controls, reflects OTS' under- standing that the thrift industry is entrusted with federally insured deposits to prudently and safely provide home financing and community-based financial services to the public. Types of Enforcement Actions The OTS has both formal and informal enforcement tools to aid it in carrying out its supervisory and enforcement responsibili- ties. These tools range from advice and moral suasion to cease and desist orders. OTS' formal enforcement tools include the following: - Supervisory Agreements - Consent flerger Agreement PAGENO="0526" 522 Order No.: 90-331 - Civil Money Penalties - Cease and Desist Orders - Temporary Cease and Desist Orders - Removal and/or Prohibition Orders - Immediate suspensions during removal and prohibition proceedings - Temporary suspensions for certain criminal indictments/convictions - Capital Directives - ~irjunctive Actions - Conservatorship - Receivership Informal enforcement tools include: - Moral suasion - Supervisory correspondence - Board of Directors Resolutions - Requests for Voluntary Management changes or reorganizations -. Supervisory Directives In order to determine which enforcement action(s) should be pursued, the OTS nay conduct formal examinations and investiga- tions. In conducting such examinations and investigations, reg- ulatory staff may compel the production of documents and sworn testimony, and enforce subpoenas in U.S. District Court. PAGENO="0527" 523 Order No.: 90-331 -4- Procedures Enforcement action against open institutions should promptly be initiated regardless of MACRO ratings, when: 1) There is serious insider abuse, even if the institution is not immediately or directly harmed. 2) The institution has failed to exercise due diligence in granting,~loans or making investments. 3) The institution has committed a significant violation of statutes or regulations. 4) An institution or any individual involved has disregarded or refused to respond to prior supervisory efforts to correct serious problems. 5) Any unsafe or unsound practice or any violation of condi- tions or agreements has occurred resulting in a significant risk or substantial loss. 6) A material violation of securities laws or the Change in Control Act has occurred. PAGENO="0528" 524 Order No~: 90-331 -5- This list is not exclusive. District Directors are expected to take or recommend appropriate enforcement action in any other situation in which they determine such action is warranted. In determining whether enforcement action is warranted and which type of action is most appropriate, consideration should be given to: - The severity and materiality of the actual or potential violation or unsafe or unsound conduct; -~Whether the illegal action, unsafe or unsound conduct or failure to correct deficiencies has been repeated; - The record of taking remedial or corrective action in the past; - The extent of actual or potential damage, harm or loss to the thrift institutions as a result of the action or inac- tion; - Whether adequate corrective action has been taken already; - The likelihood that theconduct may occur again; - The impact of the illegal or unsafe or unsound conduct on other institutions; PAGENO="0529" 525 Order No.: 90-331 -6- - The extent to which the identified problems were preventa- ble and not solely the result of external factors; and - The presence of unique circumstances. The importance of each of these factors depends on the con- duct or problems discovered, the person or entity against whom an action would be taken and the type of action or actions available. Of ~course, legal matters such as the statutory grounds for taking action must be considered. In addition, when choosing the formal action, it is important to consider the remedy for viola- tions of the available actions. For example, when choosing be- tween a &ease and desist order and a supervisory agreement, it is important to consider that violations of cease and desist orders may be redressed with court enforcement, whereas violations of supervisory agreements may not. IV. Utilization of Enforcement Powers and Supervisory Responses General The OTS uses its enforcement powers and supervisory responses for three purposes: (1) prevention, (2) remedial/corrective ac- tion or (3), in the case of civil money penalties, punitive redress. The goals sought in a particular supervisory response or PAGENO="0530" 526 Order No.: 90-331 -7- enforcement action are determined on a case-by-case basis by the considerations set out herein. Factual Basis and Statutory Grounds Before taking or initiating formal enforcement, a determina- tion must be made that the facts establish the applicable statutory grounds for initiating the action. Allegations of mis- conduct raised in the supervisory and enforcement process should be supp~orted with specific instances of such misconduct or suffi- cient factual evidence to believe reasonably that such misconduct may have occurred or is likely to occur in the future. However, the OTS will not permit conduct for which an enforcement action is justified to continue while its staff documents all of the details of such conduct. It is imperative that the staff move promptly to correct or remedy illegal or unsafe or unsound conduct upon form- ing a reasonable factual basis of the details of such conduct, as well as a reasonable belief that it must be redressed. V. - General Procedure for Formal Enforcement Actions Washington Enforcement staff and the District Offices are expected to work closely together. District Offices are en- couraged to develop legal counsel proficient in handling enforce- ment matters. Draft consent enforcement orders are required to be PAGENO="0531" 527 Order No.: 90-331 -8- submitted to legal review prior to their submittal to the respondent as are final enforcement orders before they are approved and issued. That legal review is to be done as expeditiously as possible. Knowledge that its conduct is being treated as an enforcement matter does not relieve the subject institution of its obligation to deal with its District supervisory staff on that or other matters. The supervisory staff is expected to consult with Washington, D.C. Enforcement staff concerning contacts related to a matter Enforcement is handling, and to stay involved in the case even after a referral has been made. Enforcement is expected to keep the District Office or other referring office personnel fully informedas to the progress of enforcement matters it is handling, and closely involved with the settlement or resolution of any material aspect of these cases. This policy statement supersedes EP-002, adopted by FHLBB Resolution No. 88-264, as continued by the Office of Thrift Super- vision. B the Office of Th i Supervision 11. D nay Director PAGENO="0532" 528 OFFICE. OF THRIFT SUPERVISION OTS Order No. 90- 332 dated February 12, 1990 EP-003, Civil Money Penalties Page 2 - Purpose Page 2 - Summary of Policy Page 4 - Statutory Authority Page 4 - Description of Civil Money Penalty Provisions Page 7 - Amounts: General Provisions Page 9 - Amounts: Reporting Provisions Page 10 - Amounts: Other Provisions Page 11 - Statutory Provisions Concerning procedures Page 12 - Procedures Page 21 - Policies Exhibit A - OTS Civil Money Penalty Matrix The complete copy of OTS Order No. 90-332 may be found in `Appendix to written Testimony of Rosemary Stewart." OTS/RS - Exhibit No. 5 PAGENO="0533" 529 OFFICE OF THRIFT SUPERVISION ENFORCENENT POLICIES OTS Order No. 90-333 dated: February 12, 1990 EP-004: Use of Formal Examination and Investigation Authority PURPOSE This policy describes the Office of Thrift Supervision's ("OTS") statutory powers and the procedures used in initiating and pursuing formal investigations and examinations ("Investiga- tions"). This policy also discusses the procedures used in seek- ing enforcement of subpoenas issued pursuant to these investi- gation and examination powers. These policies and procedures are guidelines for the use of the OTS, its staff and agents; they do not create substantive or procedural rights enforceable at law or in any administrative proceeding. SUMMARY OF POLICY OTS expects its examiners and supervisors to exhaust all informal means of obtaining information before requesting a formal investigation. That is, District personnel are required to seek and utilize reliable information from savings associations and OTS/RS - Exhibit No. 6 PAGENO="0534" 530 Order No.: 90-333 - -2- their affiliates, employee, agents, and such outside sources as borrowers, joint venturers, county land record offices, and other governmental authorities. When these avenues -are exhausted, formal inve~tigatiOflS can do several things including: (1) enhance regular examinations when necessary to compel uncooperative sources to produce docu- ments or statements; (2) enhance special examinations conducted to determine whether enforcement action is warranted, where subpoena power is, necessary; and (3) produce "discovery" for contemplated litigation of an enforcement action. STATUTORY AND REGULATORY CRITERIA Section 5(d)(1)(B)(v) of the Home Owners' Loan Act ("HOLA") as amended by the Financial Institutions, Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), and Sections 8(n) and 10(c) of the Federal Deposit Insurance Act, as amended by FIRREA (collec- tively referred to hereinafter as "HOLA and FDIA") contain the statutory power of the OTS to conduct formal examinations con- cerning the affairs or ownership of savings associations and their affiliateS.L' Section S(d)(l)(B)(v) provides, in part, as follows: In connection with examinations of savings associations and affiliates thereof, the Director (or his delegated representatives I may administer oaths and affirmations and examine and to take and preserve testimony under ~J The powers contained in the HOLA and the FDIA essentially duplicate one another, thus only the referenced HOLA section is set forth above. PAGENO="0535" 531 Order No.: 90-333 -3- oath as to any natter in respect of the affairs or own- ership of any such savings association or affiliate, and issue subpoenas . (to be codified at 12 u.s.c. § l464(d)(l)(B)(v)). The OTS holds closely corresponding investigat.ive authority for savings and loan holding companies at Section lO(g)(2) of the HOLA, as anended by FIRREA: The Director (or his designated representatives) nay make such investigations as the Director (or his desig- nabed representatives) deems necessary or appropriate to determine whether the provisions of this section, and regulations and orders thereunder, are being and have been complied with by savings and loan holding companies and subsidiaries and affiliates thereof. For the pur- pose of any investigation under this section, the Director (or his designated representatives) nay admin- ister oaths and affirmations, issue subpoenas, take evidence, and require the production of any books, papers, correspondence, memorandums, or other records which nay be relevant or material to the inquiry. (To be codified at 12 u.s.c. S 1467a(g)(2).) Section 7(j) of the FDIA, as amended by FIRREA, provides authority to conduct investigations into acquisitions of control over savings associations "to determine whether any person has filed inaccurate, incomplete, or misleading information under this subsection or otherwise is violating, has violated, or is about to violate any provisions of this subsection or any regulation pre- scribed under this subsection." 12 U.S.c. S 1817(j)(15)(A). PAGENO="0536" 532 Order No.: 90-333 -4- OTS has broad authority to conduct examinations under HOLA and FDIA particularly when conducting formal examinations. The OTS nay take testimony under oath and issue subpoenas and subpoena duces tecum to any person on any matter related to the affairs or ownership of savings associations and their affiliates, and en- force such subpoenas in the United States District Courts. Generally, the courts will compel compliance with investigative subpoenas if the information sought is relevant to the inquiry or is likely to lead to the discovery of relevant information. ~ Sandsend.Financial consultants, Ltd. v. Federal Home Loan Bank Board, 878 F.2d 875 (5th Cir. 1989); FSLIC v. First National Development Corp~, 497 F. Supp. 724, 731 (S.D. Texas 1980). In Sàndsend, the Court considered whether to enforce a sub- poena duces tecum issued by the FHLBB Office of Enforcement to a commercial bank seeking records of a deposit account maintained by Sandsend at that bank. The subpoena sought to trace loan proceeds obtained by Sandsend, from a FSLIC-insured institution. Sandsend was not a borrower and had no other direct connection with the institution. The Court, in ordering enforcement of the subpoena gave a liberal interpretation to the scope of the agency's inveS- tigative authority, finding that the statutory grant of power in 12 U.S.C. S 1730(m)(2)!.' is a broad-sweeping power to issue subpoenas to any person, so long as he has information "as to any 1/ This statutory grant of power was identical to the previously cited authority now held by the OTS and contained in the HOLA and FDIA, as amended by FIRREA. PAGENO="0537" 533 Order No.: 90-333 -5- matter, in respect of the affairs or ownership" of (an) institu- tion or affiliate. The results of this investigative authority -- the power to issue subpoenas for documents and sworn statements -- is a valu- able tool for OTS in carrying out its examining, supervisory and enforcement responsibilities. The procedures applicable to the conduct of investigations are contained in the OTS's regulations at 12 C.F.R. Part 512 (1989), as amended at 54 Fed. Reg. 49411 (November 30, 1989). Among other things, the OTS's rules provide that all formal exam- inations and investigative proceedings are private and for the confidential use of the OTS and its staff, unless the OTS orders otherwise. A person who offers sworn testimony is entitled to review a copy of the transcript of his testimony, and nay request permission to purchase a copy. TO do so, the individual may send a written request to the Director or a Deputy Director of Enforce- ment, or to the District Director for the district in which the institution is located. The request can be denied for good cause, such as where a sensitive investigation may be jeopardized. How- ever, such requests generally are granted on the condition that the individual maintain the confidentiality of the document. Specific procedures apply to subpoenas for information covered by the Right to Financial Privacy Act of 1978, 12 U.s.c. 55 3401-3422 (1982) ("RFPA").* The RFPA requires that when sub- PAGENO="0538" 534 Order No.: 90-333 -6- poenas are served on financial institutions other than institu- .tions supervised by the OTS for records of individuals or part- nerships of five or fewer individuals, a special notice `must be sent to the individual bank customer, along with a standardized District Cour.t motion and a copy of the subpoena. The customer then has ten days to challenge the subpoena in court; if he does' not, or if he challenges the subpoena and the Court upholds the OTS subpoena, the financial institution is obligated to turn over the subpoenaed records to the agency. The discussion below with respect to HOL~A and FDIA Investiga- tions applies also to investigations and examinations related to a holding company and subsidiaries and affiliates thereof under Section IO(g)(2 of the HOLA, as amended by FIRREA, or a change in control of a savings association under Section 7(j) of the FDIA, as amended by FIRREA. PROCEDURES In most cases, requests for authority to initiate an Investi- gation are made by the district offices in whose district the subject association is located. Requests for Investigations re- lating to savings and loan holding companies and changes in con- trol of a savings association frequently come from the Corporate and Securities Division of OTS's legal staff ("CASD"). In addi- tion, the Director of OTS or another OTS official may request an PAGENO="0539" 535 Order No~: 90-333 -7- Investigation as a result of information coming to his/her atten- tion from other activities of the agency. Also, Enforcement nay recommend an investigation with district office concurrence. The timing of a request for an Investigation is a function, in part, of the purpose of that would initiate the Investigation. An examination report need not be in final form for an Investiga- tion to be started. As described hereafter, some Investigations are conducted concurrently with a regular examination, others are initiated after the examination and supervisory processes are underway, in an effort to determine whether formal enforcement actions are necessary. Investigative authority may also be used for other appropriate factfinding purposes. It is expected that personnel from District Offices will direct an increasing number of investigations. However, District Directors are still required to refer recommendations that Inves- tigations be conducted to Enforcement. Recommendations for Inves- tigations nay be made in a short memo to Enforcement containing the following information (to the extent available and known): 1) The name, address, and docket number of the savings as- sociation( 5), 2) A brief description of facts causing the request (in- cluding reference to the provision violated, if known), PAGENO="0540" 536 Order No.: 90-333 -8- 3) A brief description of the information sought in the Investigation, 4) The purpose of the Investigation ~ obtaining documents to complete a regular examination, obtaining sworn testimony about the relationship between an officer and a borrower, obtaining information to determine whether art enforcement action is necessary, etc.), 5) Whether the District Director wants his own District Counsel to direct or to participate in the Investigation and the names and titles of the district office employees to be representatives of the OTS in the Investigation, and 6) The primary contact person at the district office for communications with Enforcement concerning the Investi- gation. The Director of Enforcement promptly will concur or disagree with the proposed investigation and advise the District Director whether District Counsel or OTS Enforcement will direct the pro- posed inquiry. Disagreements with the Director of Enforcement's decisions may be appealed to the Enforcement Review Committee. PAGENO="0541" 537 Order No.: 90-333 -9- District offices making referrals for possible violations of the Control Act, the Holding Company Act, federal securities laws, or other areas of the law where CASD provides legal advice, should also send a copy of the submitted request for Investigation to CASD. In addition, the notification form "FIRREA Enforcement and Supervisory Action Referral Form from OTS District Offices to FDIC", (see Exhibit "A") must be filled out and sent to the FDIC (with a copy to Enforcement) to notify the FDIC that a formal investigation has been requested, as required by 12 U.S.C. S l8l8(tJ(4). Furthermore, to facilitate the drafting and nailing of any subpoenas, examiners who are going to be involved in the Investi- gation should prepare accurate lists of persons and entities on whom they recommend subpoenas be served, as early as possible, together with the nailing addresses for those persons and entities and a brief description of what documents or sworn testimony each person or entity might provide in the investigation. Enforcement will review the Investigation request and, if the Director of Enforcement concurs, draft a resolution that would initiate the Investigation. That draft resolution, together with the Investi- gation request, and other relevant documents will be transmitted to the District Director. If he/she concurs with the recommenda- tion, the District Director will issue the resolution, which customarily names Enforcement and/or District attorneys and other district office personnel to act as designated representatives of the Director of the OTS to execute the Investigation powers and PAGENO="0542" 538 Order No.: 90-333 - 10 - duties in connection with the examination and investigation of the named institution(s) and any affiliates. The resolution also gives either the District Director or the Director of Enforcement the power to designate additional representatives as required. POLICY A. Initiation of an Investigation Proceedj~g An Investigation proceeding is an extension of the examina- tion process, although it nay not always be ac~ompanied or im- mediately preceded by an axanination. It enables the OTS to ob- tain access to information (in the form of subpoenaed documents or sworn testimony) that it has not obtained through the usual means of information gathering ~ the examination process and other requests by examiners and district directors for information). An Investigation is a means to obtain information that is otherwise unavailable. In the past, Investigations were sometimes initiated without first utilizing all possible avenues of less formal in- formation gathering. OTS has determined, as a matter of policy, to shift the emphasis to "field" investigations, as a means of obtaining information either within or outside the association prior to considering the use of formal investigative authority. District Directors and their staffs now are expected to exhaust all informal *means of obtaining such information before requesting the initiation of an Investigation proceeding. PAGENO="0543" 539 Order No.: 90-333_. - 11 - Because of the OTS's authority to examine the records of any savings association and that association's affiliates -- Section 5(d)(l)(B)(i) of the HOLAas amended by FIRREA (to be codified at 12 U.s.c. S 1464(d)(1)(B)(i)) -- subpoenas are not necessary to compel the production of the records of savings associations or their affiliates. Informal requests by examiners to interview persons outside the association or to review records of a borrower or other entity that is not a savings association or an affiliate thereof often can achieve the same effect. Information may also be obtaimed from publicly available sources of information, such as land record offices or state corporation commissions. Suffi- cient information may be received in these interviews and from informal requests for documents either to make an Investigation unnecessary or, if still necessary, to enable the Investigation to be limited in scope. District office staff contemplating a re- quest that an Investigation be authorized should consider the advantages and timing of formal or informal approaches to obtain- ing information. Discussions of the merits of each approach with Enforcement will often be useful. In addition, District office staff may also find it useful and are encouraged to consult with the CASD in those instances where assistance may be needed in interpreting the law with regard to possible violations of the Control Act, the Holding Company Act, the federal securities laws, or such other areas of the law where CASD provides legal advice. PAGENO="0544" 540 Order No.: 9O~-333 - 12 - The OTS's investigative powers may not be used to conduct a criminal investigation or to gather documents for the purpose of making a criminal referral. The OTS's investigative powers are civil and administrative in nature and are designed for use in carrying out the. OTS's examining, supervisory, regulatory and en- forcement responsibilities. However, when information obtained for am authorized civil purpose is sufficient to provide a reason- able factual basis for a belief that a crime has been or may have been committed and no criminal referral, or an inadequate refer- ral, has~ been made by a savings association, OTS personnel in the District or in Enforcement will make appropriate criminal refer- rals, using the OTS's Form 366. In this regard,. special units in each OTS district office perform a critical function in making referral~, providing assistance to criminal investigators and prosecutors in areas within their specialized knowledge, providing liason between OTS and the criminal authorities, and at times serving as agents of the grand jury. It also is improper for OTS to exercise its investigative powers to conduct unfocused "fishing expeditions." OTS must be able to demonstrate a reasonable basis for compelling citizens to testify and turn over their documents to the Agency. Pursuant to 5(d)(l)(B) of the HOLA as amended by FIRREA, an examiner is entitled to prompt and complete access to all associ- ation personnel and agents and to all association documents. Any refusal to supply association records or otherwise to obstruct the PAGENO="0545" 541 Order No.: 90-333 - 13 - progress of an OTS examination should be brought to the attention of Enforcement. Said section 5(d)(l)(B) grants the OTS specific authority to go to Federal Court to obtain an order requiring that such access be provided. B. Types of investigatiO~~ An Investigation can be initiated to accomplish a number of different objectives. These objectives will guide the conduct and direction of the Investigation. Some formal examinations are initiated simply to supplement an ongoing regular examination by subpoenaing records outside the control of the association being examined. The role of Enforcement or District counsel in this type of 1nvestigation generally is to prepare the package of in- formation needed to base a decision on whether to initiate the Investigation, to draft the necessary subpoena(s), and to respond to inquiries fron counsel for the recipient(s) of the subpoenas. The actual review of documents and requests for additional infor- mation needed to complete the examination is typically made by the examiners following consultation with legal staff, although on occasion the information may be reviewed by legal staff directly. The results of these formal examinations may be incorporated into the regular examination report and, depending on their nature, may end the Investigation or result in further formal enforcement inquiry and/or action. Requests for this type of formal examina- tion should be made immediately after an examiner has been denied 30-830 0 - 90 - 18 PAGENO="0546" 542 Order No.: 90-333 - 14 - access to information that he believes is necessary to properly complete his examination; such requests should not be delayed until the regular exam is completed. Another use of an Investigation is to expand the scope of an inquiry initiated during a regular examination to uncover facts needed to determine whether other formal enforcement action should be recommended or initiated. Generally this type of Investigation concerns matters which, if the results of the Investigation so warrant,. could result in initiation of a cease-and-desist or re- moval and prohibition proceeding or a securities/control case. These Investigations involve the active participation of Enforce- ment and/or District counsel in conjunction with the District's examinatfäns and supervision personnel. Such Investigations usually involve the issuance of subpoenas for documents and for sworn testimony. Depending on the information discovered in these Investigations, formal or informal enforcement action may be initiated, a criminal referral prepared, and/or a conservatorship or receivership recommended. Investigations also nay be conducted to prepare for administrative or civil litigation. In some instances where OTS's law-enforcement objectives are to be ac- complished through litigation, an Investigation will be used by Enforcement trial attorneys as the pre-trial "discovery" tool. C. Interviews, Information Requests and Subpoenas PAGENO="0547" 543 Order No.: 90-333 -15- The most common means of conducting an investigation are by interview or document request. These can be accomplished volun- tarily or by compulsion through the issuance of a subpoena. While HOLA and FDIA authority is not needed to interview a witness, interviews will sometimes be conducted in preference to sworn statements under the following circumstances: (1) when it is not believed necessary that the information sought or the witness's views of that information be recorded, (2) where the witness is cooperative, (3) when the ~infornation is of a preliminary nature and/or (4) when it must be collected very quickly. conversely, sworn recorded testinony will be favored when: (1) when the tes- timony is anticipated to be central to the Investigation, (2) when it is desired that the witness be placed under oath and be bound by his sEatement, and/or (3) when the investigator is concerned that the complexity of the information is such that it would not be fully understood unless recorded and reviewed. If he desires, any witness may be accompanied by his personal counsel when interviewed under oath. counsel for the savings association or for other witnesses are not entitled to be present and, in order to assure the independence of a witness's recollec- tion, their presence is not permitted. See 12 C.F.R. 5 512.5. Witnesses ~fl a formal Investigation do, of course, have the right to assert privileges such as, the privilege against self- incrimination. In such a case, the examining attorney or other OTS representative may ask questions of the witness for the pur- PAGENO="0548" 544 Order No.: 90-333 - 16 - pose of determining the breadth of the area of testimony in which the privilege is asserted. Witnesses who intend to assert the privilege against self-incrimination as to substantially all matters in which they anticipate inquiry are urged to contact the OTS's representative requesting or subpoenaing their. testimony prior to the date testimony is scheduled. The OTS's rules regarding service of a subpoena in connection with an Investigation are contained at 12 C.F.R. S 512.7 (1989). These rules apply both to subpoenas for testimony and for docu- ments or other tangible evidence. Prior to the time specified in the subpoena for compliance, but in no event more than 10 days after the date of service of the subpoena, any person to whom it is direcfed nay apply to the Director or amy Deputy Director of Enforcement to quash or modify the subpoena. The Director or the Deputy Director, as appropriate, responds to and rules upon such motions in a timely manner so that the Investigation will not be unreasonably delayed. If a subpoena is not fully complied with, Enforcement may file a petition in the United States District Court for its en- forcement. Enforcement, appearing before the Court on behalf of the OTS, files such petitions and supporting briefs under dele- gated authority from the OTS Director. Generally, Enforcement seeks to expedite the Court's decision by requesting that it issue an order to show cause, requiring the individual or entity sub- poenaed to appear before the Court to provide any support for his PAGENO="0549" 545 Order No.: 90-333 - 17 - failure to comply. The Courts have generally responded positively to such requests and set such cases for hearing in very short periods of time. In a subpoena enforcement hearing, the Enforcsmemt attorney offers evidence to satisfy the Court that the investigation is being conducted for a legitimate purpose. While the OTS's resolu- tion containing the finding that an Investigation is necessary in a particular case is often accorded substantial weight in demon- strating the legitimacy of the agency purpose, the Enforcement attorney nonetheless will describe why the particular subpoena is necessary and reasonable. This generally will require a brief recital of the facts and concerns the OTS and its representatives already have gathered about the subject(s) of the investigation. Typically, the District Court will enforce an administrative subpoena if three concerns are satisfied. First, the administra- tive investigation must be conducted for a lawful purpose. Second, the information sought by the subpoena must be relevant to the investigation. Third, the agency must comply with any statutes governing the issuance of subpoenas. United Stat~~~ powell, 379 U.s. 48, 57-58 (1964). PAGENO="0550" 546 Order No.: 90-333 - 18 - Enforcement attorneys also respond to any challenges to sub- poenas filed under the RFPA. In these court proceedings, it is the OTS's burden to prove that the records subpoenaed from the financial institution are reasonably related to a legitimate agency inquiry. D. Role of District Offices in Formal Investigations A close working relationship between examiners and legal staff, whether Enforcement or District counsel, is critical in investigations involving allegations of unsafe~or unsound lend- ing, investments, and operations and regulatory violations. The examiner's participation is vital both in reviewing subpoenaed documents and in identifying and pursuing area for further in- quiry. rn those Investigations in which examiners are to review the documents subpoenaed or attend the taking of sworn statements, it is imperative that their time be scheduled to accommodate this additional workload. As noted above, District counsel will be increasingly participating actively in OTS investigations and directing a growing number of such inquiries. When an investiga- tion is directed by District counsel, he/she will have the same responsibility as Enforcement attorneys for maintaining the effec- tive working relationship with examining and other District per- sonnel. The utilization of Investigation powers is a powerful govern- mental tool that must be employed with experience, sensitivity and care. For this reason experienced legal staff work together with PAGENO="0551" 547 Order No.: 90-333 - 19 - examiners, supervisory personnel and District Counsel in conduct- ing Investigations. If they desire, examiners and supervisory personnel that are experienced in formal enforcement matters will question witnesses along with Enforcement attorneys or District Counsel during the taking of sworn statements. If the witness or his counsel objects to having more than one individual asking questions, then the person responsible for directing the particu- lar investigation shall determine how best to proceed. Without the express approval of the Director of Enforcement and the OTS Chief Counsel, f cc counsel will not be involved in or designated as representatives of the OTS in Investigations or other formal Investigations authorized by statutes that the OTS implentenEL When an Investigation is ongoing, the assigned Enforcement attorney or District counsel directing the investigation will forward copies of all non-routine correspondence to the super- visory staff involved with the Investigation. Similarly, the supervisory staff will consult with the assigned Enforcement attorney or District counsel before sending non-routine super- visory letters, directives, agreements or other supervisory cor- respondence to the association that could impact on the investiga- tion or on possible enforcement proceedings. Enforcement or District counsel will respond immediately to any such inquiries so that supervisory correspondence will not be unreasonably delayed. PAGENO="0552" 548 - 20 - Order No.: 90-333 the Office of ft Supervision N. Dann~~~T'~ ~i2~ Dir~ctor PAGENO="0553" 549 FIRREA Enforcement and Supsrvlsoiy Action Referral From OTS DIstrict Office to FDIC ~,~foonaoo~~t Waxam~otn m Sps~S*u~ooo & A~pIC~ RootlO~ Room 5001 sm 17th S~ N.W. WaM~ton, 0.~ 20421 _____ o~m. ~UU1~I Ni ~ ww .i~ appl~ls RogulalosyCapilal ~aial~th1 ySS _flO lnot.exp10in Is ths Assoaaflon aia~y opsr~ng puxiuain to an otdsr or aqruri~N reIstod 0* oopdal ds1I~sflCy? ~JSS **_j1O 1ySLWhott)~Sotdl~I1? Total Mss ,1~1lIss ot Ehforcernent Actions Referred to OTS Headquarters Tip. oVErdoj~fl~ftA~Ofl A.b.a 10 OTS Enf~,ran1 Dtlaa10? - Forpwpcss ci apoub. ~as £ dssl~aotofl and Css~ Ord.r - ~Tw~oraiy Csas.and Dss4* Ocisr and Prohthlllon Ogdir Pla,nss of als)andflta(s)Worndof0n$topIOS**I9$AUO~IDfl PAGENO="0554" 550 Enforcement Actions Rferred to OTS Headquarters Coot. Enf~n*,r~, Ra~b O7~Edg~cwa.w~~ ~ch~c~ Iioi*y Psn~u ~*~y8a*~rPsnthmE . A&~aIns1ILJg~ Oth~~_____________ *SupeMsory/Enfor eat Uons~to~be Taken by~: ~ D~thctOffics~ 7)~. cVSup.Wmcr 4GfJrjv7 To B. Takan ~ * -~ CI~IAqTiSmSI~ (V~auI*1mmS~4~LAgr.) M~ss~ o~-._____________ ~. ~- UT$ai~Q~G~~ T~i~ - on D~rofEnbEcsmu,e,oTS PAGENO="0555" 551 * 12'~e1.9e9* 13:t4 ~1~Tt~S - 1404097 1755 P.SZ JUt. O5~9S9 Crimms1Dsvis~on ExECW I\'~ DEYI. Organized Cdmc arid Rackciecris~ Scales FHLBATLANTA Miami Strike Force F:.Lauderdak Field Office 2~ Lie 1,owwd lOiàYMd Room ~E - F~ bvD&~ ft Lt~ PIor~ 33~I Jun. 30, 1989 Mr. Robert E. Showfety President, Federal Bone Loan Bank of Atlanta 1475 Peachtree Street, n.E. Atlanta, Georgia 30309 RE: Prosecution of Sunrise Savings and Loan Association Officers bear Mr. Showfetys As you undoubtedty knpv, a federal jury -in Miami this week convicted Robert Jacoby, the former President and Chairman of the Board of Sunrise Savings and Loan Association, of fifteen bank fraud charges in connection with Jacoby's management of Sunrise. Thomas Skubal, a former Vice-President of Sunrise and a former federalbank examiner, was convicted of five bank fraud counta, Jacoby and Skubal face terms of imprisonment of 60 and 25 years, respectively. Th.ir sentencing is scheduled for. Septembe~ 8,1989. William Frame, the former Executive Vice-Président o~ Sunrise, who had a heart attack during the trial and had his case severed, will have a new trial date set. Of course, there exists the distinct possibility that in view of the ~jury's verdict, Frame wUl now decide to plead guilty. Two of Sunrise's biggest borrowers, William Frederich and Thomas Moye have previously pleaded guilty. Their sentencing date has not yet been scheduled. I would like to tike this opportunity to personally thank you for the outstanding cooperation and assistance of your office during the investigation and trial of this case. Zn particular I would like to thank Torn Ziimsernan, Jim DeBanedictis, Ed Jackson, Barry Bailey. Jack Chormley and Karl Stupaki who were of imeeasurable help to us in PAGENO="0556" 552 -- .~.: ç. ..:&.11~5. P.53 * `.-tvwt~s' ~3i1~ ~F1~OF ~flt~T1~ ftobsrn I. Sbowfety * P*5CTVQ Jim. 30, 1959 invsseigactnj Sun~tse and subsequently preparing the .c,a~s..for trial. Through thstr .effor~g ~nd ~aasistan~có, which extended. * over several ye*rs ,we. were ultimately successful in * effecttvely.explajning complex banking transactions to the trial jury. The verdicts in the Sunrise case are among the most significant convictions nation-wide of savings and loan executives who helped create the multi-billion dollar savings and loan crisis. Your office's full participation in this prosecution is greatly appreciated by us and is of great benefit to the nation. .* * ** *** *** * * * .** ** * *~ Sincerely, * _______ Attorney-in-Charge I Ft. Lauderdale Field Offic PAGENO="0557" 553 U.S. Department of Justice United States Attorney Southern District of New York One Saint Andrew~ Plaza New York New York 10007 January 4, 1989 Honorable M. Danny Wall Chairnan Federal Hone Loan Bank Board 1700 G Street, N.W. Washingtbn, D.C. 20552 Re: Steven R. Horn, Esct., and Mary Beth O'Neil Dear Mr. Wall: I an writing to corninend the outstanding efforts of the Bank Board's Office of Enforcernent in connection with the highly successful investigation and prosecution of John Peter Galanis and nearly twenty of his associates for various crirnes including racketeering, bank fraud, securities fraud, and tax fraud. I wish to particularly commend the efforts of Steven R. Horn, Esq., Deputy Director of the Office of Enforcement, and Mary Beth O'Neil, a paralegal specialist in that office. In early 1986, ny office began a criminal investigatiofl of the activities of a tax shelter organization headed by John Peter Galanis, a convicted stock manipulator, after it became apparent that several federal and state bank and securities regulatory agencies, as well as the Federal Bureau of Investi- gation and the Internal Revenue Service, were simultaneously investigating various aspects of the organization's activities. One of the federal agencies involved was the Federal Hone Loan Bank Board, which had been investigating the Galanis Organiza- tion's activities in connection with the takeover of Columbia Federal Savings Bank in Westport, Connecticut, as well as another institution in New Jersey. PAGENO="0558" 554 Honorable M. Danny Wall 2 I understand from Assistant United States Attorney Vincent L. Briccetti, who supervised the investigation in my office, that soon after our investigation began, Steven R. Horn, then a senior attorney in the Bank Board's Office of Enforcement, offered his assistance. During the next eighteen months, Mr. Horn on numerous occasions provided important investigative leads to the investigation, and made the Office of Enforcement's extensive file on the Galanis Organization available for our review. Mr. Horn was assisted in this regard by Mary Beth O'Neil, a paralegal specialist in the Office of Enforcement. In September 1987, a grand jury in this district returned a fifty-eight count Indictment under the Racketeer Influenced and Corrupt Organizations Act ("RICO") against Galanis and several members of his organization. The Indictment brought together under the RICO statute a number of complex and interwoven fraud schemes, each of which, if charged alone, would have been a major case in its own right. One of the schemes related to Columbia Federal Savings Bank, and the Indictment charged that the Galanis Organization fraudulently acquired control of the bank. The Indictment also charged Galanis and the former chairman of the board of the bank with conspiracy to defraud the Bank Board, securities fraud, and the making of false statements in connection with that takeover and subsequent loan transactions in which the bank engaged. All told, the bank made nearly Sli million in bad loans to Galanis Organization entities and individuals. As a result, the bank was rendered insolvent, and has suffered an out-of-pocket loss of at least 56 million. The Galanis case was tried between April and July 1988.. Mr. Horn was an important Government witness at trial, and numerous documents turned over by the Bank Board were introduced~ into evidence. In the end, Galanis was convicted of the RICO charges as well as the conspiracy and securities fraud charges relating to Columbia Federal. In September 1988, Galanis was sentenced to 27 years in prison, which I believe to be among the most severe sentences ever imposed in a "white collar" case. Fourteen other members of the Galanis Organization have also been convicted of various federal crimes in this case. PAGENO="0559" 555 Honorable M. Danny Wall - 3 - According to Assistant United States Attorney Briccetti, Mr. Hon arid Ms. O'Neil displayed the highest degree of professionalism and dedication to duty throughout the investigation. Their assistance to this Office was indispensable in the successful prosecution of this complex and important case, and their outstanding efforts deserve to be couimended. Ve~~v~7~g ~4UDOL W. G ULIANI United States Attorney PAGENO="0560" February 9, 1990 556 The Thrift Accountant Page 5 Suspension, Then Seizure of Centrust Points To OTS's Tougher Stance on Abuses ~ Accoitling to Wall, the C&D was ordezed bemuse IOS8e8and grave capital problems. theOfflceofThrlft of the offlce~ grave con~rns regarding Cent'frust's Supervision has seized Centrust Bank ofMlaxnl. the continuing failure to provide full. fair and accurate largest thrift In the Southeast. dI~CIOSUTe In itS 1934 Act reporta. Claiming thatCenfrustwou1dbeunabI~tom~tjte This occurred. Wall says. despite repeated direc- capital requirements without substantial govern- tiVes from the OTS to the thrift to correct Its accuunt- ment assistance, the OTS also cited a Substantial Ing treateinentofcertaln activities. report significant dlsslpauon ofassetsandeanii~ignduetoviroini~nn~of losses. properly characterize Its current financial law. regulations or unsafe or unsound practlces. condlUon and disclose the Impact ofthe OTS's direc- These include the purchase of more than $30 ttves on CenThist and Its Shareholders. million In artwork~ expensive oriental rugs arxi czys- In addition. the thrift's 1989 Form 10-K did not ml and the ~ and Inappropriate levels of contalntherequlredthreeyearsofaudltedflnanclals. compensation paid to Cenmiars Chairman David Yurther. CenThist continues to present its than- L. Paul. who will be relieved of all management re- claistatenients In amanner Inconsistent with gener- sponsibifity, according to the agency. allyacceptedaccountlngprlnciples. therebyfalling to The seizure follows close on the heels ofa notice of recognize losses that cumulaUvely would eliminate charges and a temporary ccase and desistorderthe its reported shareholders'equlty. o.rs filed in Januazy. TOT IflSiaIlCe. CenThist continues to tharacterlze TheC&D cameaftertheJanuaiy 16. 1990. fihlngof the bulk of its portfolio of below investment grade CenMist's annual reporton Form 10-Kforthe fiscal ~ yearthatended September30. 1989.Thestatements also Indicated that the thrift's tangible capital as of that date was a negative $245.470.000. CnJanuaiy 23, 1190, the thrift reported furtherlosses In ~ss of$4~ million In its quarterly thrift report. CenTrust soughtan Injunction against the tempo- raxyC&D order, butitwasdenied bythe U.S. District Court in Washington, DC on Januaxy 1 1. The court ruled that CenTrust had to carxy its defaulted secu- riUes at their market value. Centrust's ernez~ency appeal was rejected the next day. - First Forbearance Fight "~`~ ~iens " * ~ ~ ~ - - - ~ - - But Some Say S&Ls C~rn CONTI1W~ PROM PAoXi~ San Diego, asked fora ten ; ~xy ~trainthg enjoin the director ofthe I SfiX mandates of FIRREA In mac iii. capitalrequlrements.Inth iit,l gshlp wbenit was acquired bya veal group bar 1988, the Bank Boa agreed to lbrbear enforcingcapitalrequlreznentsfora llve-yearpertod -. . :111 met certain minimum capi at Fla1ship says It has met those re ulrements, - itnowcomplleswithaupendi Dzycapl It would suffer Irreparable hi roy tioik also claims that If permittad trap b as plan. Itwilibe prc `Lablel ~ apartnerin the ~Jashlngton.~w~~ uvi'wvai wi~wuiuu~ ~ tauiua~a. w~v wuawiuss~s of Housle3r, Goldberg & Kantarlan still maintains. tanec agreemcot Involved. butthis Is not at Isaue.~ however, that the forbearanceissue UItIInaIC1yWIU be The O'IS announced Its dedalon concerning for- resolved by the courts on a case-by-case basis, with ~ S&t.a winning in some cases. but toeing bi others. useotimpitalandaccountlngforbearancesinreach- ~Raiden. a sen1orpartnerw1ththeLosAngeJe~ office IIIgmInInIUIn capital reoulrements. U rauier than as securitles.Wali says. The thrift also charac- terized its trading protfolio as held for investment. cariylngboth itsJunkbondsand tradlngsecuritiesat cast. again masking losses. Cenmist also continues to publicly obfuscate its true financial condition, falling to apprise its share- holders of the dimensions of these issues and their Import on shareholders and on the association. Ma resultofall of the foregoing. CenTrust's 1934 Act reports, including the 1989 Form lO-Kare mate- rially deficient, false and misleading.' Wall says. OTS/RS - Exhibit No. 9 PAGENO="0561" 557 Mr. BARNARD. Thank you very much, Ms. Stewart, for that very excellent testimony, and certainly it is encouraging to know that the enforcement provisions of FIRREA, which were certainly re- quested by all of the banking agencies and which have been en- acted into the law, are having some very favorable reaction as far as your agency is concerned. From your understanding of the Dallas task force, are you en- couraged as far as this backlog of inactive major cases is con- cerned? Are you encouraged to believe that we are going to have some early results from those? Are we going to get some increased number of convictions in that area? Ms. STEWART. Yes, we are. I am convinced of it. We have kept track very closely of the work of the Dallas bank fraud group. As I mentioned, I have a senior attorney who has been working there for almost 2 years. These cases are being developed, and while the numbers original- ly looked small, we have always felt that that group is working very appropriately to identify not just one or two very minor of- fenses against these people, but try to develop a picture of the entire fraud that happened at some of these large Texas institu- tions. I believe they are doing it. I know that they have continued to negotiate plea arrangements. I know of a lot of other cases that are in the works and just cannot be publicly announced at this time. So, I am encouraged, and I am very hopeful that it is going to happen. Mr. BARNARD. How do you determine the number of your staff that works on that task force? Was that by request? Ms. STEWART. We were requested to detail---- Mr. BARNARD. By whom? Ms. STEWART. By the Fraud Section, when the program began. Mr. BARNARD. Fraud Section of the-- Ms. STEWART. Justice Department here in Washington. Mr. BARNARD. OK. Ms. STEWART. Right. Mr. BARNARD. You have how many working in that area? Ms. STEWART. We have two folks from our Dallas Examinations Office full time, and we have one attorney from Enforcement full time. Now, we also provide, as I said earlier, individuals on a case-by- case basis. Mr. BARNARD. When you consider the staff that you have provid- ed, the number of U.S. attorneys that are working there, as well as the FBI agents, do you really feel, when you consider the amount of the backlog, that that is sufficient staff to do that job? Ms. STEWART. I do not have a feel for the entire amount of prob- lems they are working on. What I have a feel for are how many cases they are developing right now, and those cases have been moving along, Mr. BARNARD. You see, that is what we have developed in this hearing, that we have got a backlog. The backlog continues to in- crease, and of course, that is understandable. With the situation being what it is in Texas, it is understandable it is going to increase, but the problem is-the question in our PAGENO="0562" 558 minds, as you have heard this morning, is do we have enough, not only in Texas but elsewhere, and in some instances, we do not even have enough requested. Yesterday, U.S. Attorney Collins indicated that we could even use even more OTS and other agency examin- ers to help in his particular area. So, I guess that is a question that Congress is going to have to determine from your testimony and others, is do we have enough personnel working in this area to get a significant resolution of these problems and whether or not we need more. Ms. STEWART. As I mentioned, we are standing by at any time to provide additional assistance. We have found that the assistance is better utilized when it is an examiner who worked on First Feder- al, for example, and he can be the one that helps on the First Fed- eral criminal prosecution, but that is one of the main responsibil- ities that our Dallas criminal referral unit has. The folks in Mr. Collins' office, as well as the other U.S. attor- neys in that district, have a point of reference right there in Dallas that they can call and say I need someone on this case, or I would like an examiner on that case. That is how we hope to deal with it. I might mention the Fraud Section just hired another of my at- torneys, not on a detail, but hired him away, also to work on this task force, and we have tried to stress that we consider that to be a very healthy kind of move, that people can continue to work in this area of fraud. Mr. BARNARD. Ms. Stewart, I know this is included in your ap- pendix, but could you summarize the data on the number of S&L's for which misconduct was identified in 1988 and 1989? Ms. STEWART. Now, in this data that we provided, misconduct was defined very broadly as conduct by an insider or an affiliated outsider that resulted in any kind of formal or informal action or a criminal referral. So, that wouldn't necessarily be a conclusion that a criminal fraud had been committed. In 1988, we found 203 institutions where such misconduct was identified; 1989, 170 institutions. This is data from surveying our 12 district offices. Mr. BARNARD. All right. Thank you very much. Ms. Stewart, could you elaborate on the problems set forth on page 21 of your appendix which the OTS has had in obtaining data from the Department of Justice and the FBI? Ms. STEWART. Historically, our district offices have felt that they do not have an ability to find out immediately what the status of a criminal referral is. We have been working at that problem through the local bank fraud working groups, and I believe where those groups exist, this problem has been lessened substantially, but the real issue there was can you find out if your case is still being investigated or whether it has been declined for prosecution. We have developed much better lines of communication with the FBI. They can tell us the status of an investigation while it is on their books. I think it was really just getting the status from a prosecutor that is not always able to be done. We now have the ability to check with the FBI, through their FOIM System here in Washington. We do not have the ability to have one of our examiners go to a local FBI office and make that kind of check there. It would have to be funneled to Washington to PAGENO="0563" 559 be able to do the nationwide check. That is something that-I do not know if it is realistic to expect that. Mr. BARNARD. As a layman not in the field of this work, why would that be necessary? Ms. STEWART. It is not necessary. It is much more efficient. Mr. BARNARD. I mean why is it more efficient to go through Washington? Ms. STEWART. No, no. I am saying it would be more efficient if we did have the ability to make these checks out in the local of- fices, but structurally, we are just not to that point yet. I am saying that in a very serious matter, all these things can be found out. We can bring them to Washington. We can use the con- tacts that we have at the FBI and the Fraud Section, and we can get to the bottom of these, but as a routine matter, it is still diffi- cult to get some of that information. Mr. BARNARD. You indicated that on three attempts you have been unsuccessful in getting grand jury information. Yet, we did include a provision in FIRREA to allow for that. Could you just briefly describe that problem? Ms. STEWART. Well, FIRREA gave us the authority to ask now, and it lessened the burden in the Justice Department deciding whether they would concur with our request. It did not obligate the courts or the Justice Department to give us that material. So, in the three cases that I identified, we have asked, and we have not been given affirmative responses yet. We are continuing to work on those matters. A couple of them are extremely high-pro- file cases, and the Justice Department feels that the integrity of the grand jury proceeding may be impacted by giving sOme of the information that they have collected to a civil regulator. I think that is a problem, a perception problem. Mr. BARNARD. Well, is this a problem with the U.S. attorney, or is it with the court? Ms. STEWART. It is the U.S. attorney. In these cases, the U.S. at- torney has not yet made that request onto the court. In other words, they have not concurred that we have the substantial need for the information. Mr. BARNARD. What have you done in the last several years to strengthen the ability of your examiners to detect criminal activi- ties in savings and loan institutions? Ms. STEWART. We have joined the other banking agencies and the Justice Department in a number of training initiatives. We, as one of the National Bank Fraud Working Group initiatives, trans- ferred the white-collar crime course for examiners to the FFIEC, so that it could be available to all of the bank regulatory examiners. We have supported that course by sending an increased number of examiners. We have supported it by developing the course work and providing instructors for it on a regular basis. The FBI has training programs that they put on for FBI agents that are working in the bank fraud area, and they now invite ex- aminers to go with them, and we have participated in that initia- tive, not only here in the Quantico training base but around the country. Over the next year, we have training programs of joint training between FBI and bank regulatory examiners all around the country. PAGENO="0564" 560 It is a problem, with the turnover in examiners, always keeping examiners as trained as we would like in the antifraud area, but through those training programs, as well as through programs that we have developed for our regular examination process-we now have a new program called "Anti-Fraud." I do not have the name here, but it is a regular program that the examiner fills out to de- termine if there are enough red flags that he should be doing a more detailed exam into fraud. If there are, he is supposed to dis- cuss with his district office and get people who are more attuned to that kind of problem into that savings and loan association. Mr. BARNARD. Well, thank you very much. I do not have any further questions, Ms. Stewart. Very possibly, some of my colleagues will be inquiring, through our two staffs, to obtain some additional information, and I know that you have always been very cooperative, and so, you may be having to provide some additional information. Ms. STEWART. That is fine. Mr. BARNARD. We thank you very much for being with us this morning, and thank you for the testimony. Ms. STEWART. Thank you. Mr. BARNARD. Our next panel includes Mr. Paul Fritts, Director of Supervision of the Federal Deposit Insurance Corporation. Mr. Fritts will be accompanied by Assistant General Counsels Arthur Beaman and Thomas Schulz, and then we have, also, Mr. James Dudine, who is the Director of Investigations of the Resolution Trust Corporation. I think all of you are cousins, now, aren't you? We thank you gentlemen very much for being with us this morn- ing and assisting us in what we think is a very, very important hearing as to how the title IX of FIRREA is being carried out. I think the timing is not unfair. We had the bill signed into law, I think, since August 9 of last year, and so, we are coming on the heels of one full year of the legislation. So, we appreciate you being with us this morning and giving us a report as to your agencies in this regard, and Paul, we will begin with your testimony, sir. STATEMENT OF PAUL G. FRITTS, DIRECTOR, DIVISION OF SUPER- VISION, FEDERAL DEPOSIT INSURANCE CORPORATION, AC- COMPANIED BY THOMAS SCHULZ, ASSISTANT GENERAL COUN- SEL Mr. FRITTS. Good morning, Mr. Chairman and members of the subcommittee. I am pleased to present the views of the FDIC on a very impor- tant subject insofar as the FDIC is concerned, fraud and abuse of position in the Nation's financial institutions. The staff has pre- pared answers to the questions in your letter of invitation, and they have been provided to the subcommittee in a separate docu- ment. I also want to join the OTS in thanking you, Mr. Chairman, and your staff for your commitment to the passage of title IX of FIRREA, and your assistance in drafting the title and supporting the enforcement provisions. PAGENO="0565" 561 As the committee is aware, the FDIC is the primary Federal su- pervisor for over 8,000 State, nonmember commercial and savings banks, with over $900 billion in assets. We also monitor the condi- tion of approximately 6,000 national and State member banks and cooperate with other Federal and State regulatory authorities~ In addition, the Financial Institutions Reform, Recovery, and En- forcement Act assigned the FDIC substantial additional responsibil- ities, in that we are now backing up supervisors of some 2,900 sav- ings associations. The main theme of our statement today is anticipatory supervi- sion. The FDIC's Division of Supervision is taking a proactive su- pervisory stance in order to detect potential problems at the earli-. est possible date. Our goal is to limit or prevent losses resulting from operational deficiencies and criminal misconduct in insured depository institutions. Our ability to do this has been enhanced with an expanded hiring program and more streamlined examina- tion procedures. Proactive supervision entails the constant assimilation of infor- mation from numerous sources, both within and outside the FDIC. In 1989, we distributed a listing of the types of information examin- ers and supervisors should consider in anticipatory supervision. You might call these red flags for identifying potential risk. In addition, we revised our frequency-of-examination policy in 1988 to increase onsite supervision. Our goal is to have an onsite examination every 24 months for well-rated institutions and one every 12 months, at least, for problem and near-problem institu- tions. We have also streamlined our examination process. The exami- nation report is now fully automated, thereby reducing processing time. Our more sophisticated offsite monitoring system points out areas of supervisory concern, and our examiners have also been given more discretion to expand or contract the scope of an exami- nation to fit the condition of the bank and the problems that are encountered. In 1989, we conducted 4,089 onsite safety-and-soundness examina- tions, compared to 4,019 in 1988 and 3,653 in 1987. In 1990, we expect to conduct even more examinations. Over the past few years, we have seen a trend of insured banks and thrift institutions growing very rapidly in a short period of time and, concurrently, developing serious problems, including fraud. Various mechanisms have been used to fund the growth, in- cluding brokered deposits, direct borrowing from the Federal Home Loan Bank, use of repurchase agreements, direct solicitation .of de- posits throughout the country by money-desk operations, and simply paying above-market rates. Often, in the environment of accelerated growth, management is spread far too thin, operational controls are weakened, and board supervision is lax. These circumstances invite abuse, and they invite fraud. In reaction to our experience with many fast-growth institutions, the FDIC staff intends to propose a regulation that would require banks to give prior notice of planned growth in excess of 7.5 per- cent over any 3-month period that would be funded by either bro- kered deposits, out-of-territory deposits, or secured borrowings. PAGENO="0566" 562 Plans for high growth could not be implemented for 30 days, in* order to afford the appropriate regulatory authorities time to review the appropriateness of the program and stop it in those cases involving undue risk. Over the past several years, downturns in regional economies have led to significant increases in banking problems. Pressures to continue profits while the quality of assets is deteriorating have often added substantially to the difficulties. In these cases, manage- ment frequently takes risks and makes unwarranted debtor conces- sions, based on the incorrect assumption that the area's economy will stabilize or improve. As losses increase, the cost of funding escalates, placing further pressure on profits. This cycle of deficit earnings often quickly leads to insolvency. The most representative example of these problems is Texas, where the continued decline in real estate values has almost direct- ly correlated to the rise in problem and failed banks. Only 6 Texas banks failed in 1984, while in 1989, there were. 1~14 insolvencies in the State. The economic collapses in Texas and the agricultural States were preceded by several years of boom times. These overheated econo- mies created an atmosphere of greed and risk taking, with poor de- cisions being masked by ever-appreciating asset values. It is evident from this history that our anticipatory supervisory efforts must be more directly focused on those areas where the economy is either declining or overheating. For example, the Pacific Northwest currently displays unusual economic growth. Local industry is going strong, and real estate prices are escalating. However, our examiners in that area have specifically been told to continue to pay very close attention to pru- dent credit standards when evaluating assets and not to acquiesce in relaxed credit standards which may be set by competitive pres- sures. New England is the opposite picture. With unsettling indicators in the region's real estate market, our supervisory efforts have in- creased significantly. In situations where problem banks and bank failures are driven, in a major part, by bad economic conditions and where management is honest and reasonably competent, we have tried to work with existing management on an informal basis, rather than utilizing formal enforcement vehicles. This has been reflected in the 23-percent increase in the number of informal en- forcement actions taken in 1989, as compared to 1988. Insider abuse was identified in 25 percent of the 206 failures in 1989. This is down 31 percent from 1988 and 42 percent from 1987. This suggests that failures today are more a result of management shortcomings and economic factors. Even when present, insider abuse, in most instances, has only contributed to the failure. Mr. BARNARD. Paul, in that statistic, are you saying that 25 per- cent of inside abuse was present or was the primary cause of the failure? Mr. FRITTS. Was present. There were very few, if any, that the insider abuse was, in fact, the major cause of the failure. Mr. BARNARD. Now, that is contrary to what it was 7 or 8 years ago or 3 or 4 years ago? PAGENO="0567" 563 Mr. FRITTS. It is substantially different, because, in fact, we are dealing with, for the most part, a different kind of problem bank and a different kind of problem banker. I do not know what year one would want to say, but let us just say, for purposes of discussion, 1980 or before, before you had mas- sive deregulation on the liability side of a bank. Show me a prob- lem bank and you could pretty much put it in two categories. Either you had a totally inept management or you had an abusive self-serving management or both, and virtually every problem bank fell into those categories. Mr. BARNARD. In one of our very first oversight hearings on this problem, I think, if I am not mistaken, we were talking about a presence of wrongdoing in about nearly 75 percent of the savings and loan failures and in only about 20 percent of them did wrong- doing actually cause the savings and loan to go under. Mr. FRITTS. From my limited experience in dealing with the sav- ings and loans, I would say that there is as markedly higher ratio of insider abuse and that kind of activity in the recent past, when compared to the bank side. Well, to go on, I wanted to mention it is the poor management decisions and not the fraud that has been the primary cause of bank failures. Even so, we do* not hesitate to move aggressively against insiders when needed to halt the deterioration in a bank's condition and remove the persons involved. The FDIC strongly believes that banks should have adequate audit programs. Such audits enable early problem detection, limit loss exposure, and in some cases, prevent loss from occurring. This is especially true in instances of criminal misconduct. Potential criminals will be more reluctant to perpetrate fraud against a bank if they realize that a regularly conducted and vigor- ous external audit program may lead to early detection. In this regard, the FDIC issued a policy statement, effective December 28, 1988, strongly urging banks to have annual external audit pro- grams. Our goal is to maintain the public's confidence in the financial system by limiting the number of failures and the cost to the insur- ance fund from the institutions that do fail. Our capability to achieve these goals has been severely tested in this era of deregula- tion, increased competition, and the recent intense volatility of re- gional economic cycles. Nonetheless, it is our belief that we understand our institutions and our vigilant in our supervision. That is not to say, however, that our programs and practices could not be further strengthened, and they are under constant review in an effort to do just that. Thank you, Mr. Chairman. We will be happy to answer any ques- tions you or the committee may have. [The prepared statement and answers to subcommittee questions of Mr. Fritts follow:] PAGENO="0568" 564 TESTIMONY OF PAUL G. FRITTS DIRECTOR, DIVISION OF SUPERVISION FEDERAL DEPOSIT INSURANCE CORPORATION ON SUPERVISORY AND ENFORCEMENT EFFORTS BEFORE THE SUBCOMMITTEE ON COMMERCE, CONSUMER, AND MONETARY AFFAIRS COMMITTEE ON GOVERNMENT OPERATIONS UNITED STATES HOUSE OF REPRESENTATIVES 9:30 a.in. THURSDAY, MARCH 15, 1990 ROOM 247, RAYBURN HOUSE OFFICE BUILDING PAGENO="0569" 565 Good morning, Mr. Chairman and members J the Subcommittee. We appreciate this opportunity to present the views of the Federal Deposit Insurance Corporation on a very important subject - fraud and abuse of position in the nation's financial institutions. The FDIC staff has prepared detailed answers to the questions contained in your letter of invitation. This report has been provided to the Subcommittee as a separate document. The FDIC directs its supervisory efforts toward maintaining the safety and soundness of the banking and thrift system and protecting the deposit insurance funds. We are the primary federal supervisor for over 8,000 state nonrnenber commercial and savings banks with over $900 billion in assets. We also monitor the condition of approximately 6,000 national and state member banks and cooperate with the other federal and state regulatory authorities in their efforts to ensure the safe and sound operation of these insured banks. In addition, the Financial Institutions Reform, Recovery, and Enforcement Act assigned the FDIC substantial responsibilities for the supervision of some 2,900 savings associations. The main theme of our statement today is anticipatory supervision. The FDIC's Division of Supervision is taking a proactive supervisory stance in order to detect potential problems at an early date. Our goal is to limit or prevent losses resulting from operational deficiencies and criminal PAGENO="0570" 566 -2- misconduct in insured depository institutions. We are responding more quickly with appropriate supervisory measures when early signs of problems are identified. We will continue to monitor banks closely with more frequent onsite examinations and more sophisticated offsite monitoring systems. Our ability to do this has been enhanced with an expanded hiring program and more streamlined examination procedures. Financial institutions operate in an environment in which there are mechanisms for obtaining funding nationwide. These monies are very interest sensitive and are generally invested where there is the greatest return. The institutions which are paying the highest rates also tend to offer the greatest risk to the FDIC. Through careful monitoring of local and regional economies which show indications of becoming overheated, supervision should be able to anticipate and prevent the cycle of unrestrained growth and the losses which tend to follow as the economy contracts. In addition, to help us deal with these problems we have proposed a regulation for monitoring and controlling rapid growth situations, develbped offsite monitoring systems to track growth, and adopted a policy statement that strongly urges banks to have an annual external auditing program performed by an independent party. We believe this is essential for the early detection of problems and determent of unsound practices and fraud. PAGENO="0571" 567 -3- ANTICIPATORY SUPERVISION The FDIC continues to emphasize the need for bank supervision to be more anticipatory in nature. Our intent is to identify and obtain corrections of weaknesses in the bank's policies and procedures that have a realistic potential to cause financial problems. Proactive supervision entails the constant assimilation of information from numerous sources both within and outside the FDIC. In 1989, we distributed a listing of the types of information examiners and supervisors should consider in active supervision (see attached Appendix 1). You might call these items "red flags" for identifying potential risks. In addition, we revised our frequency of examination policy in 1988 to increase the level and frequency of on-site supervision. Our goal is to have an on-site examination every 24 months for well-rated institutions (those rated 1 or 2) and one every 12 months for problem and near-problem institutions (those rated 3, 4, or 5) . Some of these intervals can be extended if an acceptable state examination is conducted. We have also streamlined the examination process. The examination report is automated which saves time in its preparation. Our more sophisticated offsite monitoring system points out areas of supervisory concern. Our examiners have also been given more discretion to expand or contract the scope PAGENO="0572" 568 -4- of an examination to fit the condition of the bank and the problems encountered. We are not only conducting more examinations but also are actively supervising through forms of customized contacts with banks in order to anticipate problems, identify risk in those potential problems and take appropriate preventive action. In 1989 we conducted 4,089 on~si-te safety ~and soundness examinations (including 375 savings :associations), compared to 4,019 in 1988 and 3,653 in 1987. We had expected to do considerably more, but had to revise our goal due to our involvement as conservator for the insolvent thrifts. In 1990 we expect to conduct even more examinations. MONITORING RAPID GROWTH Over the past few years we have seen a trend of insured banks and thrift institutions growing very rapidly in a short period of time and concurrently developing serious asset and/or other problems, including the presence of fraud. In fact, some of these institutions have failed very quickly thereafter, even though they had operated satisfactorily prior to the unwise growth. Various mechanisms have been used to fund growth, including brokered deposits, direct borrowing from a Federal Home Loan Bank, use of repurchase agreements, direct solicitation of PAGENO="0573" 569 -5-. deposits throughout the country by a "money desk" operation, and simply paying above-market rates. Often in the environment of accelerated growth, management is spread thin, operational controls are weakened and board supervision is more lax. These situations invite abuse and fraud. Supervisory presence at the early stages of a change in an institution's business plan is an effective method of deterring unsound practices. To this end, the FDIC proposed in April 1989 to require insured banks to provide the FDIC with prior notice of planned rapid growth. Based on comments received, the FDIC staff is revising the proposal and intends to recommend publishing for comment a revised proposed regulation. The revised regulation, which would apply to both insured banks and savings associations, would require prior notice to the FDIC of planned rapid growth in excess of 7.5 percent over any three-month period which is funded by brokered deposits, out-of-territory deposits, or secured borrowings. Plans for high growth could not be implemented for 30 days following notice in order to afford the appropriate regulatory authorities time to determine the appropriateness of the program and stop it in those cases involving undue risks. Other possible means of growth are typically slower and/or normal for most institutions and we believe these can be monitored safely after-the-fact. PAGENO="0574" 570 -6- RESPONDING TO CHANGING ECONOMIC CONDITIONS Although the past several years have been a period of overall growth in the national economy, downturns in regional economies have led to significant increases in banking problems. Ownership and market pressures to continue profits while the quality of the asset base is deteriorating have often added substantially to the difficulties. Management frequently takes risks in these situations and makes unwarranted debtor concessions based on the assumption that the area's economy will stabilize or improve. When these assumptions are wrong, significant losses have occurred. As the losses increase and the future viability of an institution is threatened, the cost of funding escalates, placing further pressures on prof its. This cycle of deficit earnings quickly leads to an insolvency where capital levels are inadequate and investor confidence is such that there is little prospect for obtaining needed capital. The most representative example of these problems is Texas where the continued decline in real estate values has almost directly correlated to the rise in problem and failed banks. Only six Texas banks failed in 1984, while in 1989 there were 134 insolvencies in the state. PAGENO="0575" 571 -7- Another example is our Kansas City region, which is conprised of seven Mid-Western states. Bank failures totaled 48 in 1986 when the agricultural sector in that region was in the nidst of econonic adversity. As the economy of the region inproved, the number of bank failures in the seven state area declined to ten during 1989. The economic collapses in Texas and the agricultural states were preceded by several years of boom times. These overheated economies created an atmosphere of greed and risk taking with poor decisions being masked by ever-appreciating asset values. It is evident from this history that our anticipatory supervisory efforts must be more directly focused on both those areas where economic indicators show trends towards a decline in a region's economy and those areas that appear to be overheated. For example, the Pacific Northwest is an area today that displays unusual economic strength. Local industry is going strong and real estate prices are escalating rapidly. However, our examiners in that area are being told to continue to pay close attention to prudent credit standards when evaluating loans and not to acquiesce in relaxed credit criteria which may be set by competitive pressures. In this way we hope to be on top of potential problems and either prevent their occurence or lessen their severity. PAGENO="0576" 572 -8- New England is the opposite picture. There we have unsettling indicators in the real estate market. This has led to a significant increase in our supervisory efforts in that area. In situations where problem banks and bank failures are driven to a major extent by bad economic conditions, and where management is honest and competent, we try to work with existing management on an informal basis rather than arbitrarily reverting to formal enforcement actions. This has been reflected in a 23% increase in the number of informal enforcement actions taken in 1989 as compared with 1988. Insider abuse was identified in 25 percent of the 206 `banks that failed in 1989. This is down from 31 percent in 1988 and 42 percent in 1987. This tells us that failures today are more a result of economic factors and management errors. Even when present, insider abuse in most instances has only contributed to failure. It is poor management decisions, particularly when faced with an economic downturn, not fraud, which is the significant cause of bank failures. Although enforcement actions taken against insiders decreased in 1989, we do not hesitate to move aggressively against insiders where needed to halt the deterioration in a bank's condition and remove the persons involved. PAGENO="0577" 573 -9- URGING INDEPENDENT AUDITS OF BANKR The FDIC strongly believes that external audits should be mandatory. Such audits not only can detect problems at an early date and limit loss exposure but can in some cases prevent any loss from occurring. This is especially true in instances of criminal misconduct. potential criminals will be much more reluctant to perpetrate fraud against a bank if they realize that a regularly conducted and vigorous external audit may lead to an early detection. We are agreeable to exclude the smallest banks from this audit requirement since they don't possess the earnings capability to absorb the costs. However, we have been unable to agree on a size exclusion that is low enough to require audits of a large percentage of banks. The FDIC issued a policy statement, effective December 28, 1988, strongly urging banks to have an annual external audit performed by an independent party. We continue to encourage banks to obtain an annual audit performed by a licensed public accountant. The FDIC Board of Directors Ofl January 16, 1990 followed-up the policy statement by adopting a "Statement of Policy providing Guidance on External Auditing Procedures for State Nonmember Banks (see attached Appendix 2) ~ The follow-up policy statement encourages certain basic external auditing procedures as a less costly alternative for 30-830 0 - 90 - 19 PAGENO="0578" 574 - 10 - banks not choosing to have a financial statement audit. The auditing procedures recommended in the policy statement are basic to any sound external auditing program. We will expect that an independent public accountant's opinion audit will generally satisfy the objectives of this statement of policy. The guidance is quite comprehensive, with specific.recommended auditing procedures on loans, loan loss reserves, securities, insider transactions, general accounting and administrative controls, and electronic data processing controls. CONCLUSION Our goal is to maintain the public's confidence in the financial system by limiting the number of failures and the cost to the insurance funds from the institutions that do fail. We have been sternly tested in this era of deregulation, increased competition and the recent intense volatility of regional economic cycles. Nevertheless, it is our belief that we understand our institutions and are vigilent in our supervision. Bank fraud cannot be entirely prevented but it can be deterred. Through active supervision and forcing banks to implement adequate audit programs, the degree of deterence will increase. Thank you, Mr. Chairman. We will be happy to answer any questions the Subcommittee may have. PAGENO="0579" 575 -------------------------- - ATTACHMENT ~1 .....~suun rIUrfl~S1 Division of Bank Supervision L 6610 CS) iDite April 14 1989 MEMORANDUM SYSTEM ~ngOffice Garfield Gitnber. 69]3_ ID Natic C M.morsndun )~CRAN~B( `10: 1~ional Directors Paul 0. Fri Director St3B~ECT: ~riticipatory Supervisi ard Qiidelines for Sch~.ilir~ Safety ard So.rx~ness ~ca~inaticns of Banks Ratod 1 ard 2 1. Purocee. To eLnasarize existing practices ard provide ~itiona1 guidar~ on supervision of 1 ard 2 ratod banks. See Section 3, ~n.tnation Intervals - Sat tey ard Sorx~ness inations in the Policy for ~ination Priorities ard Fr~ueney (7-29-88, #88-106.). 2. Back rporsf. The POIC's sttz~y of the d~csit irisuranee systen ~sit Insurar~ for the Nineties, ~p~asizes the r~ for e.çervision to be nere anticipatory in nat2re. Q~ of the re~rdations for isproved ~ervision is for re~ulatozy ageneies to develop isproved nethods for identifying risk, setting priorities ard allocating resairces effectively. It is isportant that ocntirs.ie ~ effort to reduce the historical etp~asis on periodic examinations based largely on the passage of tis~, In favor of nere fr~uent ard less structored supervision based on ocr best reading of potential risk in an institution. Investigations, ~one calls, visitations, ocrresporder~, ard other foz~ of ocstcsnized tact with banks, in order to iden~.ify potential prthl~ ard take preventative action, shocld have ir~easing priority for ocr limited resocross. This, h~ver, shocid net be taken as an attea~t to diminish the iuiortanee of periodic full scope exa2ninatia~. These remin oritical to ocr supei~visozy process ard an integral part of ~ policy on e,~nInation priorities. As ~ priorities ~tiir~ to shift s~ihat in determining what f of supervision is ~t a 4~iat8 in a given situation, so m.~st the foocs of that supervision shift as ~ll. Iz~eased esçiiasis mist be placed on the ~nageaent pro~s wit~.it reducing traditional c~cern with a bank's finaneial ocrdition. The intent shocld be to identify aid thtain ocrrections of t~aJc~sses in a bank's policies aid prc~ures that have arealistic potential to cause firianeial prthless before the adverse finansial ~dition ococre. Transmittal No. 89-046 PAGENO="0580" 576 -2- The s~~s of this effort deperds largely co the effectivensss of the Field Office Supervisor or other pers~ sthedulirg work. ~insr resocr~ Shocid be allocated aid directed based co the best info~tico available as to potential prthl~ aid withcot over ezr*~asizir~ the osre passage of tins. This has always b~ toie bit is aven sore irportant in these times of ix~eased d~ids oc aiesnimer ~ greater volatility in performarce aid ~dition beir~ eçeriesoed by the barildrg irdustry, aid ircreased cçporthnities for baz~ to ~r risk. Because of this ircreased irportancie, aid as an aid to ~ Field Off ice Supervisors or others involved in ai~inatico S edulirq aid as a renirder to the sorm e~çeriei~ perscrr~el, this ~raró will discuss s~ of the factors aid tho4it processes that s~ild be c~sidered when allccatirq e,isor rescurces to the supervisico of 1 aid 2 rated institotions. 3. Anticicetorv Sunervisicri. If we are to be effective in preventir~ prthl~, we suet ea~asize the processes of a bank as well as its oorxiiticn. If isproved sth~ilir~ all~s us to fiid wa&Q~ses before they b~ sigoificarit pr±lees, we i~ sot wait until the coidition of the bank actoally deteriorates before we take corrective action. We sust be wilhirq to make cur c~erss forcefully Jc~in to bank nsnag~nt aid work for i~ecsary corrective measures. )bral suasion aid info~l ereer~nts sorrally will be sufficient bit we suet be prepared to ~sider f~l action before the bank is rated ~me than 1 or 2 if cir~tarz~es warrant. A prospective supervisory a~rce~, entaillrg oriticien of policies aid practices before the actha]. signs of an unsafe aid unsond omdition, calls for sericus th~4it aid careful c~t by examiners. ~itica1 ~nts mist be well supported based on lcgic, pri.dent barikirq stardards aid practi~, aid the potential for harm. In questionable circristai~s where formal action is sidered a possibility, it is desirable to cm~ult with the R~ional Office while the ai=ination is in pr~ress regardln~ the material r~ed to support the potential action. 4. Sd~iedulir~ Process. The Policy for ~aminatica Priorities aid P~uercy establishes a maximma interval of 24 ~ths be~i ai~misations of banks rated 1 or 2, with the ability to exteid this interval, to 48 iths in certain clx~msterces. ~re is so required minin tins period be~ examinations. In fact t~ Policy er~m~ee P~i~l Directors "to perform additional e3asinatiors aid visitati~ wherever x~essaxy". A goal of ~inati~ of 1 ar~ 2 rated banks is to head off prthl~ before they cause sericus difficulties aid be~ a finarcial risk to the PDIC. Therefore, it is far ~e isportant to ~osn1ne, or otherwise supervise, a bank if there is reason to suspect a prthl~ than if the bank merely has sot been ~aminad for a specified time. PAGENO="0581" 577 However, a foal ~nii~aticn may sot be the soot efficient use of resources in investigatizq the risk potential a bank may represent. The objective is to assess the problen and if necessary devise a solution in the quickest sost efficient manner possible, given available resources. Frequently, a pbone call or brief cnsite visit will suffice. S~times such prelicinsry efforts will indicate that a full scope ~tht~tion is appropriate. In order for all available infoation to be considered when scheduling, it is critical that the Field Office 8t~ervisor and other appropriate personnel be w~are of and have access to it. Reqianal Directors sbould insure that copies of relevant correspondence or other inforsation are made available. Procedures sbould be established to insure that infoation that may iopact a scheduling decision is dec~r~tated and made available to scheduling personnel. Individuals doing scheduling ist insure that this infoation is revieved and considered in scheduling decisions. It is espected that success in this effort will be an inportant aspect of perfoance evaluation for the individual w~ perfos scheduling. Because of the variety of sources and fo of relevant infoation available, it is sot possible to design a nnifo systen of infomation gathering and reporting. However, we have attached a list of s~ of the kinds of infoation that may c~ to our attention and have an infl~ce in scheduling decisions. S~ of these itans, such as involv~t in FDIC assistance transactions, have specific snpervisozy schedules specified in Policy. Others are just infoation that, in and of itself, may or may net raise a ~cern depending on what else is 1~n about the bank. ~isver, these or similar it~ may give a signal that r~iires further follow-np. Such clues s~ild net be ignered. The list is obviously ~t all inclusive, bowever, it indicates the thrust of the need for supervision to be sor. anticipatory and provide a resiw~r of s~ of the c~n sources of infoation that may warrant consideration when scheduling. PAGENO="0582" 578 Effective bank ~ervjsjon entails the c~tant assinilation of infornation fron ra.~rons ~ bath within ar~ ~.ttside the ~DIC. The a~~iate response, if any, deperK1s on the cir~taxx~s, s~zvisory action alzeady urd~erway, ~at is 3o~n ab~.zt the ~tibition az~ ~4~at cen be learned fron foll~ procedures. In s~ instai~ the infox~tion serves as a "red flag", 1eadi.r~ to an irosdiate exasination. In less severe sibiations, the info~tion is retaired az~ factored into the process of sd~edulirq futore visitations az~ ~inations. It is possible that a given piece of inforoation cen be derived fron ~ than a~ socrce. Thus, s~ of the it~ listed bel~ are ir~ltx~ed in ~e than a~ of .the categories. -all rspo~s -Applications, rctices or other bank provided data -~n d~recteristica -~ination of other ban3~ -Other bank regulators -~rs, ±servati~, o~r ~IL R~ Lces for year or intern period Rapid gr~th in assets or dqx~its Sigoificant &iarqe in asset cxxipoeitjon Sigoificant d~arqe in liability ~osition ~ Diff ~iitorir~ systss Use of brokered twds Analysis of U~ E~~sive divid~s relative to earnirrs ~essive b~ ~edirq Ot1~ ratios or ra.~ers that are ~nsiasal or have d~anied drasaticaly APPLI~TI~E, 1~IT ~ ~vI ~ thai~ of ~itrol Aaq~isition or ~tablis1~it of a r~ w~ibsidiary Aczjiirirq ~rty In a PDIC arrarqed tranaaction thar~ in ~ct~*l ~itor ~cmrcies of a i~ or a r~ profit ~Tter Nexly iT~Zed bank Affiliation with a 3, 4, or 5 rated bank or holdirq ~ny ~llation of blar~t b~ lz~aocs Large defalcation _ Raview of ~A atdit r~crts Large payd~in or poyoff of previonsly classified loana PAGENO="0583" 579 ~ a~c~i~rics ~essive salaries Failure to pay~~titive salaries cmp&~atioc linked to futhre performax~ such as ir~, loan vo1t~ or deposit gr~~th Infi~itirq irivolvirq senior bank officers ar4/or directors Sigaificent litigatice against the bank or insiders C~eratirg at the margin of laws ai~ regulati~~s !4anag~erit believed to be less than trust~rthy Self-sezvirq manag~nt - ~inatin manag~t Inaxperi~1 mansg~t Substantial a~tside bssii~s interests of a key officer ~uctirq ~sinass with queseionable firma wish as certain barx~ dealers ~ OF O~ BM~Z Hirir~ of a dismissed, w~thical or marginal officer Rfiarrirq poor quality loans Imprcçer harx~lin of ocrresporx~ent bank aocc~.n~t ~dvertisirg above market interest rates T.7r~er~ittir~ oc price ar~ ored.it quality to ir~ease market share of loans Large blocks of bank stock pl~ed as collateral Ix~eased or wnisual loan participatia~s ~ affiliated or closely held ba~ Banker with past ~ loans at amther bank ~r~r harx3lir~ of correspcrxient bank ats Iz~eased or wuisual loan participations amm~ affiliated or closely held ba~ Large blocks of stock pl~ed as collateral Affiliation with a 3, 4 or 5 rated bank or holdirq o~any Large defalcation Banker with past ~ loans at another bank Hirir~ of a dismissed, w~thical or marginal officer Loana classified at other 1i~titttia~ PAGENO="0584" 580 )1A N~ thief ~ztive offiosr or thief leodirg off iosr Mverss piblicity Loss for the year or an interie period Myers. .a~uaic avant in the c~inity Natiral disaster auth as a flood, fire or earthquake Large defalcmtie~ Large fioansial c~i~t as ~ar or lead bank in a ~jor proj~t, cr devel~t Banker death or disa~earar~ A~T~~ir~t of ~or r~ activity or ~r~mnt ~/O~.VATIQ~/am~ than;. in external at~itor Hi~ or au~an s.plcyss tir~er Sir~iificent litigati~ against the bank or insiders t~ial activity in bank stock (price ~v~nt ~ or ~ or heavy tradirg volt~) Bank advertisin; above serket rats. Significant than;. in the ccupositi~i of assets or liabiitis. Questiocable loans bein; heokad Bank dealirq with b~ers of questicriable tharacter ~ifidential or ai~~s tips PAGENO="0585" 581 - ATTACHMENT #2 ~DI~ws~ }~ I?EEDThTE REL~SE PR-8-90 (1-19-90) ff~IC ISSUES EOLICY SI'~TEMENT PE~)VIDD~ GUIDANCE C*~ EX~E~L AUDT~fl~ Pi~)C~ES The Board of Directors of the Federal Deposit Insuranse C~rporation has adopted a ~ policy states~nt reccmrerxling InifliuLrn procedures for annual external auditing prograns of EDIC-supervised banks. The EDIC is taking the step because it considers objective, ontside vievs of a bank's operations to be an important part of the agensy's prograns that enc~.1rage safe ai~ scx~ud bisii~s practices. The new guidanse is in ac~ition to an EDIC policy statesient that becaam effective DecEnber 28, 1988, whith stroragly urges banks to have an annual audit by an "irx%epeedent piblic aorxt.mtant" bit also identifies alternatives that amy be acxieptable. The r~z policy stat~89nt adopted by the EDIC Board on January 16 provides guidanse on specific auditing procedures, especially for banks that forgo an annual audit of their finansial statesents by an irxEeperxlent piblic aoccentant. * In issuing the new policy states~nt, EDIC thairman L. William Seidman said: "The EDIC strcstgly reccaaterx~s that eath bank -~ supervise have an annual audit perforned by an iudeperxlent piblic accc~intant in accordance with generally accepted auditing staudards. H~ver, a bank ~ay thoose, for specific reasons, to use s~ other form of iudepenaent external auditing program. O.~ r~z policy statesent is inteeded to ercccrage certain procedures that ~ believe are key to a solid auditing program, especially for ac~ressing high risk areas of the bank." FEDERAL DEPOSIT INSURANCE CORPORATiON, 550 Seventeenth St., N.W., Washington, D.C. 20429 * 2028986996 PAGENO="0586" 582 -2- thairinan Seidinan also r~ted that FDIC examiners review the adequacy of a bank's internal ai~ external auditin prograse. me FDIC supervises a~roxinately 8,000 state-d~artered banks aoross the nation. The policy statesent provides guidarx~ cm specific auditing procedures to a~ress the foll~ing areas cmn to all banks that nay prove to be high-risk: loans; the all~zar~e for loan losses; s~rities investsents; transactions involvirq bank officers, directors ar~ other "insiders"; ai~ internal controls. The r~ policy statesent will b~ie effective when it is poblished in the Federal Recister. It states that eac*i bank shcold review the risks inherent in its particolar basiness to deternine if a&Iiticnal procedures are i~ed to cover other high-risk activities. Subsidiaries of audited bank holding cxxrpanies are r~t expected to have ssparate external auditing procedures perfornBl bit nay neal ~iticna1 review if a subsidiary's activities involve "unusual risks" net ~ressed by the c~olidated audit. me H)IC policy statesent also s~ests the nnininmt inforeation, ineludirq ininitaim sanple sizes, that irxleperxlent auditors shc*ild inelude in their report. me guidar~ also reiterates a request that eadi bank furnish its EDIC I~icmal Office with a c~y of rspcrts received frca the exten~l ~itors. me text of the policy stataient cm ainizun a~ith~ proc~ures is attad~. Attad~ent Distribiticn: PDIC-Supervised Banks PAGENO="0587" 583 Si~IT~ENT OF PDLICY PI~\7IDING ~JID1~N~E ON E~rERNAL AUDITfl~G ~~EWRES R)R ST~EE NONME~BER BANFS In its Statement of Policy Regarding Independent External Auditing Programs of State Nonmeither Banks that became effective Deceither 28, 1988, the FD~C strongly encourages each state nonmeirher bank to have an annual audit of its financial statements perfont~1 in accordance with generally accepted auditing standards by an independent public accountant. Nevertheless, the board of directors of each state nonmember bank is ultimately responsible for safeguarding the bank's assets and ensuring the integrity of its financial statements. The audit committee or board of directors of the bank may determine not to engage an independent public accountant to perform an audit for various reasons. In those instances, the FDIC ~eccmmends that each state nonmerrber bank have an independent external auditor'~ (who need not be an independent public accountant) annually perform the auditing procedures3 set forth belc~ci as part of its external auditing program. Although the purpose of this policy statement is to encourage certain basic external auditing procedures as a less costly alternative for banks choosing not to have a financial statement audit, the auditing procedures recommended in this guidance are basic to any sound external auditing program. For that reason, they should also be among the procedures performed by an independent public accountant in an audit in which an opinion is expressed on a bank's financial statements. Thus, if a bank chooses to have an audit of its financial statements perforired by an independent public accountant, such an opinion audit will generally satisfy the objectives of this statement of policy. 1pef~~ is made to Appendix A to the Statement of Policy Regarding Independent External Auditing Programs of State Nonmember Banks for the definitions of terms used in this statement of policy. 2Thid 3When a bank engages an irdependent public accountant to perform less than a full financial statement audit, the engagement letter describing the procedures for which the bank has contracted generally refers to the work as "agreed-upon procedures." ~ term "auditing procedures" used throughout this statement of policy in meant to enccmçass these "agreed-upon procedures." PAGENO="0588" 584. The auditing pro~ures contained in this statenent of policy are intended to address high risk areas ~n to all banks. However, they do not address all possible risks in a banking organization and each bank must review the risks inherent in its particular bisiness to determine if additional procedures are i~ed to cover other high risk areas in which it has activities. For exaitple, if a bank or its subsidiaries has significant real estate investments, securities broker-dealer or sinilar activities (including those described in section 337.4 of the ~DIC rules and regulations), or trust department operations, aitong others, the ~DIC urges the bank to consider expanding the scope of its external auditing program so that it includes auditing procedures in these other high risk areas. (Information on external auditing procedures applicable to other banking activities is available fran banking industry trade associations and auditing organizations.) The in~ependent auditor (or the piblic accz~intant) should be infor~ of and permitted a~ss to all examination reports, administrative orders, and any additional written ~rnminication between the bank and the FDIC or state banking authorities. The auditor should thtain bank management's written representation that he has been inforimal of and granted access to all such documents prior to the carpletion of his field work. A review of both a bank's internal and external auditing progranm will continue to be part of the FDIC's examination procedures, bit examiners will not autanatically content nogatively upon a bank that does not have an audit or all of these auditing procedures perforn~ annually by an independent, auditor. The examiner will review the risks in each bank's bisiness and operations, and will carment nogatively if internal auditing is deficient and/or sufficient external auditing procedures are not perfortmai as often as necessary to assure the safe and sound operation of the bank under examination. Extent of ~sting Where the procedures set forth below req~iire testing or determinations to be made, saitpling may be used. Both judgmental and statistical sanpling may be acceptable methods of selecting sanples to test. Judgmental sanpling may be particularly suitable for small banks, and sairple sizes should be selected `tin this rogard, section 931 of the Finanoial Institutions Reform, Recovery, and Eriforcetent Act of 1989 provides that "Each insured depository institution which has engaged the services of an independent auditor to audit such depository institution within the past 2 years shall transmit to such auditor. . . a copy of the must r~nt report of examination received by such depository institution." In addition, each depository institution is required by section 931 to provide such auditor with a ~y of any supervisory iresorandurn of understanding with the depository institution, any written agreement between any federal or state banking ageroy and the institution, and any report of any action initiated or taken by a federal banking ageroy under Section 8 of the Federal Deposit Ireuraroe Act (or similar state action) or any civil muney penalty assessed against the depository institution or any institution-affiliated party. -2- PAGENO="0589" 585 consistent with generally accepted auditing standards (for the certified poblic accccntant) or as agreed upon by the auditor and bank client. In any event, the sazpling zEthod and extent of testing (including the minimum sanple size(s) used) shccld be disclosed in the auditor's report. As with any auditing program under generally accepted auditing standards or otherwise, if an auditing procedure that is set forth belcM deals with an area or accxxint of the bank in which the axzy.ints and/or risks are not material to the bank's operations and financial results based on the experience and -judgnent of the auditor, the procedure may be anitted fran that year's auditing program. Nevertheless, the -auditor wc*ild have to review each- such area or accr~nt each year in order to --determine whether to reaffirm his/her conclusion. Reports to be Filed with the FDIC The ~DIC's Statoi~nt of Policy Regarding Independent External Auditing Programs of State Nonrnerrber Banks requests that each bank that undergoes any external auditing work, :-regardless of- the scope of the work, furnish a copy of the --repoLs~pertaining to the~external auditing program, including any managenent letters, to the-~appropriate FDIC regional office as soon as possible after their receipt by the bank. In addition, that policy statenent requests each bank to prcsptly notify the appropriate FDIC regional office when any independent p~blic accccntant or other external auditor is initially engaged to perform external auditing procedures and when a charxge in its accountant or auditor occurs. External Auditinq Procedures Required by State Banking Regulators Sczre state statutes or state banking authorities require certain auditing procedures (often called "Directors' Examinations") to be perforir~ each year with a report subaitted to the state authority. Assuming the state regairements on scope and reporting correspond to or exceed those recarmended in this statement of policy and the auditing procedures are perforited by an irdependent external auditor, the bank may satisfy this statement of policy when its state-mandated external auditing program is performed. A copy of -the auditor's report prepared for the state may be suimnitted in lieu of a separate report to the FDIC. moiuir~ Conpany When the audit carmittee or board of directors of any state nonmarnber bank on.'ned by another conpany (such as a bank holding conpany) considers its external auditing program, it may find it appropriate to express the scope of its program in terms of the bank's relationship to the consolidated groop. If the state nonmesher bank is directly or indirectly included in the audit of the consolidated financial statements of its parent crsrpany performed by an independent piblic accounting firm, this stat~nt of policy is not intended to izply that the bank is expected to have separate external auditing procedures performed. Nevertheless, if the board of directors of the subsidiary bank determines that the bank has activities that involve unusual risks to the - -3.- PAGENO="0590" 586 subsidiary aix~ these activities were not addressed by the audit of the consolidated entity (because these risks may be ionaterial to the consolidated entity), a~prc~riate additional external auditing procedures may n~ to be considered for the subsidiary bank. As provided in the FDIC's Stat~nt of Policy Regarding Independent External Auditing Programs of State Nozmamrbar Banks, where a bank is directly or irxilrectly included in the audit of a consolidated entity's financial statements, the bank may send one o~iy of the xsparable reports by the public accountant or the notification of a charge in accountants for the consolidated c~rpany to the a~prc~riate regional director. If several banks supervised by the same ~DIC regional office are ~ned by one parent ~ipany, a single copy of each report açplicable to the consolidated c~ipany may be suimnittel to the regional of fice on behalf of all of the affiliated banks. Basic External Auditirn Pro~ures: 1. Inquire as to whether the bank has policies that address the lending and collection functions. Review the bank's loan policies to ascertain whether they address the foll~drg itess: a. General fields of lending in which the bank will engage and the types of loans within each field; b. I~scriptions of the bank's normal trade area and cironnintances under which the bank may extend credit to borxwers outside of such area; c. Limitations on the maximum volume of each type of loan product in relation to total assets; d. Responsibility of the board of directors in reviewing, ratifying or approving loans; e. Lending authority of the loan or executive cminnittea (if such a ccmnnittee exists) and individual loan officers or classes of officers; f. Adherence to legal lending limits; g. Types of loans, specifying whether senired and unsecured, which will be granted; h. Circunintances under which extensions or renewals of loans are permitted; i. Guidelines for rates of interest and terms of repayment for loans; j. I~o.mantation reguirel by the bank for each type of loan; k. Limitations on the amount advanced in relation to the value of various types of collateral; 1. Limitations on the extension of credit through overdrafts; in. Level or an~.int of loans granted in specific industries or specific geograptiic locations; n. Guidelines for participations p.irthased and/or sold; o. Guidelines for documentation of new loans prior to approval, updating loan files throughout the life of the loan, and maintenance of ocmplete and current credit files on each borr~r; -4- PAGENO="0591" 587 p. Guidelines for loan review procedures by bank personnel icluding: i. An identification or groupirg of loans that warrant the special attention of nmnag~nt; ii. For each loan identified, a statesent or indication of the reason(s) why the particular loan merits special attention; and iii. A ir~hanism for reporting periodically to the board on the status of each loan identified and the action(s) taken by management. q. Collection procedures, including, bit not limited to, actions to be taken against borrcMers who fail to make timely payments; r. Guidelines for nonaccrual loans (i.e., when an asset should be placed in nonaocrual status, individuals responsible for identifying noriperforxnirg assets and placing then in nonaccrual status, and circun~tances under which an asset will be pla~ back on accrual); s. Guidelines for loan charge-of fs; t. Guidelines for in-substance foreclosures. 2. Read the board of directors' minutes to determine that the loan policies have been reviewed and approved. Through review of the board of directors' minutes arx~ through inquiry of executive officers, determine whether the board of directors revises the policies and procedures periodically as needed. 3. Obtain the minutes of the board of directors ar4/or loan cxzTlrnittee, as appropriate, and, through a ccziparison of a sairple of loans made throughout the period with lending policies, test whether loans funded during the previous year were properly authorized by the appropriate ~maittee or loan officer(s) within the bank's lending limits. 4. Select a saxrple of borrcMers (including loans from each major sen.ired and unsecured loan cateqory) and determine through examination of loan files and other bank reports whether lending and collection policies are being folloved (e.g., type of loan and any extension or renewal of a previous loan are in accordance with loan policy, funds were not advar~ until after loan approval was received from proper loan authorization level, and insurance coverage is adequate with the bank named as loss payee). 5. Using the sairple of borrovers selected fran each major cateqory of secured loans, determine through examination of files and other bank reports whether collateral policies are being folloved (e.g., loan is adequately collateralized, documentation is present and properly prepared, and assignments are perfected). 6. If material, review policies for lending on floor plan merchandise, warehouse inventory, and accounts receivable to determine that limitations on such loans and directions on verification of collateral by bank inspection are included in the policies. Ascertain that inplementing procedures have been established and test for cczrpliance by responsible bank personnel. 7. Determine whether participations pirchased and participations sold transactions have been reported to and authorized by the board of directors or loan committee, if applicable, through review of appropriate minutes. -5- PAGENO="0592" 588 8. Cbnfirm a saiiple of icipatia~ pird~ased ar~ participations sold with participating banks to verify that they are legitimate transactions ar~ that they are prc~erly reflected as being with or withcAit reccorse in the bank's records. 9. Balaxx~ detail 1e~ers or rexz~ile cxrpxter-generated trial balances with the general ledger control a~mts for each major category of loans, iclt~ing loans carried as past due or in a nonaocrual status. 10. ~nfirin a saiiple of all loans within each major category, including past due ard nenaocrual loans. 11. Fran reports to the board on the status of loans identified as warranting special attention, review the disposition of a sanpie of loans ro longer appearing on these reports. 12. Test loan interest ir~xzne ard accrued interest by: a. determining the bank's mE~thod of calculating aid recording interest accruals; b. obtaining trial balaz~s of accrued interest; c. testing the reconciliation of the trial balances to the general ledger; d. determining that interest accruals are rot made on nonaccrual loans; e. selecting sairple it~rs fran each major category of loans aid: i. determining the stated interest rate aid appropriate treatu~nt of origination fees aid costs, ii. testing receipt of payrrents aid correctness of entries to a~plicable general ledger accc~mnts, iii. calculating accrued interest aid cczrparing it to the trial balance, aid iv. reviewing recorded book value for a~r~riate accretion of disccont (net origination fess) aid anortization of prenium (net origination costs); aid f. performing an analytical review of yields on each major category of loan for reasonablenass. AtL~N~ F~ I~2i LDSSES 1. Test tharge-offs aid recoveries for proper authorization aid/or reporting by referez~ to the board of directors' minutes. Review ctharged-off loans for any relationship with bank insiders or their related interests. 2. Review the bank's cxrpitation of the arro.int needed in the a1l~ax~ for loan losses as of the erd of the nort recent quarter. IXxnixrentation shcold include consideration of the follcMing matters: a. General, local, national aid international (if arplicable) econanic corditions; b. ~erds in loan grcMth aid depth of lerding staff with expertise in these areas; -6- PAGENO="0593" 589 c. ~ncentrations of loans (e.g., by type, borrower, geograçkiic area, and sector of the ecciuny); d. The extent of renewals and extensicns to keep loans current; e. The collectibiity of ncnaocrual loans; f. Thends in the level of delinquent and classified loans cc]ipared with previais loan loss and recovery experience; g. Results of requlatory examinations; and h. The oollectibility of specific loans on the "watch list" taking into acocent borrower financial status, collateral type and value, payment history, and potential permanent iiipaimnent. SE~JR~ES 1. Review the irivesthent policies and procedures established by the bank's board of directors (BOO). Review the BOO (or investrent cccunittee) minutes for evidence that these policies and procedures are periodically reviewed and a~roved. The policies and procedures shc*ild include, bat not be limited to: a. Investment thjectives, including use of "held for sale" and trading activities; b. Remissible types of investments; c. Diversification guidelines to prevent undue concentration; d. Maturity schedules; e. Limitation on quality ratings; f. Hedginq activities and other uses of futures, forwards, ~tions, and other financial instrunsnts~ g. Handling exceptia~ to standard policies; h. Valuation procedures and frequency; i. Limitations on the investment authority of officers; and j. Frequency of periodic reports to the BOD on securities holdings. 2. ~st the investment procedures and ascertain whether information reported to the BOD (or investment ocemittee) for securities transactions is in agreen~nt with the supporting data by caiparing the following information on such reports to the trade tickets for a sanpie of items (including futures, forwards, and c~tions): a. I~scriptions b. Interest rate C. Maturity d. Par value, or number of shares e. Cost - f. Market value on date of transaction (if different than cost) 3. Using the sane sanple items, analyze the securities register for aocuracy and confine the existezun of the sanpie items by examining securities ~*iysically held in the bank and confirming the safekeeping of those sem.irities held by others. -7- PAGENO="0594" 590 4. Balance irivestr~ent suble3ger(s) or reconcile ccaipiter-generated trial balances with the general ledger control a~ints for each type of security. 5. Review policies and procedures for controls which are designed to ensure that unauthorized transactions do not- o~ir. Ascertain through reading of policies, procedures, and BOD minutes whether investhent officers ar4/or arprcpriate cczrnnittee imanbers have been properly authorized to porchase/sell investnents and whether there are any limitations or restrictions on delegated responsibilities. 6. C~tain a schedule of the book, par, and market values of securities as well as their rating classifications. Test the accuracy of the market values of a sanple of securities and c~rpare the ratings listed to see that they correspond with those of the rating agencies. Review the bank's documentation on any permanent declines in value that have occurred airong the sairple of securities to deterinime that any recorded declines in market value are a~prcpriately cczrpited. ~ainine the bank's c~rputation of the all~ance account for securities, if any, for proper presentation and adequacy. 7. Test securities inocxne and accrued interest by: a. determining the bank's method of calculating and recording interest accruals; b. ditaining trial balances of accrued interest; c. testing the reconciliation of the trial balances to the general ledger; d. determining that interest accruals are not made on defaulted issues; e. selecting itens fran each type of invesbrent and roney market holdings and: - i. determining the stated interest rate and trost recent interest payment date of coupon instruments by reference to sources of such information that are independent of the bank, ii. testing timely receipt of interest payments and correctness of entries to applicable general ledger accounts, iii. calculating accrued interest and xzrparing it to the trial balance, iv. reviewing recorded book value for appropriate accretion of discount and airortization of preniun; f. performing an analytical review of yields on each type of investment and meney market holdings for reasonableness. 8. Review investrent accounts for voltme of porcthases, sales activity and length of time securities have been held. Inquire as to the bank's intent and ability to hold sen.nrities until maturity. (If there is frequent trading in an invesbnent account, such activity may be inconsistent with the notion that the bank has the intent and ability to hold securities to maturity.) Test gains and losses on disposal of investment sen~rities by sairpling sales transactions and: - -8- PAGENO="0595" 591 a. determining sales prices by examining invoices or brokers' advices; b. checking for the use of trade date aocounting and the canputation of book value on trade date; c. determining that the general ledger has been properly relieved of the investment, acarued interest, premium, discount and other related acaconts; d. reccaipiting the gain or loss and carpare to the axe~mt recorded in the general ledger; and e. determining that the sales were approved by the DOD or a designated carimittee or were in accordance with policies approved by the DOD. INSIDER ~RN~SP~crIc~s 1. Review the bank's policies and procedures to epsure that extensions of credit to and other transactions with insiders are addressed. Ascertain that these policies include specific guidelines defining fair and reasonable transactions between the bank and insiders and test insider transactions for ccepliance with these guidelines and statutory and regulatory requirements. Ascertain that the policies and procedures on extensions of credit cc*rply with the requirements of Federal Reserve Regulation 0. 2. Obtain a bank-prepared list of insiders, including any business relationships they nay have other than as a naninal custaner. Also obtain a list of extensions of credit to and other transactions that the bank, its affiliates, and its subsidiaries have had with insiders that are outstanding as of the audit date or that have occurted since the prior year's external auditing pro~ures were performad. Ccrrpare these lists to those prepared for the prior year's external auditing program to test for ccspleteness. 3. Review the board of directors' minutes, loan trial balances, supporting loan documentation, and other appropriate bank records in conjunction with the list of insiders obtained fran the bank to verify that a sairple of extensions of credit to and transactions with insiders were: a. in caipliance with bank policy for sinilar transactions and were at prevailing rates and terms at that tine; b. subjected to the bank's normal underwriting criteria and deenud by the bank to involve no nxre than a normal degree of risk or present no other unfavorable features; 5For pirposes of this section of the auditing procedures, insiders include all affiliates of the bank (including its parent holding ccmpany) and all subsidiaries of the bank, as those terma are defined in section 23A of the Federal Reserve Act, as well as the bank's executive officers, directors, principal shareholders, and their related interests, as those tents are defined in section 215.2 of Federal Reserve Regulation 0. -9- PAGENO="0596" 592 c. approved by the board of directors in advance with the interested party abstaining fran voting; and d. within the aggregate lending limits iitposed by Regulation 0 or other legal limits. 4. Review the bank's policies and procedures to ensure that expense accounts of irdividuals who are executive officers, directors, and principal shareholders are acidressed and test a sample of the actual expense account records for cczrpliance with these policies and procedures. ]M~AL OD~TRDLS General Accounting arx~ Administrative Controls 1. Review the board of directors' minutes to verify that account reconciliation policies have been established and approved arxi are reviewed periodically by the 331). Determine that management has implemented appropriate procedures to ensure the timely carpletion of reconciliations of accounting records and the timely resolution of reconciling items. 2. Determine whether the bank's policies regarding segregation of duties and required vacations for employees (including those involved in the EDP function) have been approved by the 33D, and verify that these policies and the implementing procedures established by management are periodically reviewed, are adequate, and are folloved. 3. Confirm a sample of deposits in each of the various types of deposit accounts maintained by the bank. Inquire about controls over dormant deposit accounts. 4. ~rest to determine that reconciliations are prepared for all significant asset and liability accounts and their related accn.ied interest accounts, if any, such as "due fran" accounts; demand deposits; N~ accounts; money market deposit accounts; other savings deposits; certificates of deposit; and other tire deposits. Review reconciliations for: a. timeliness and frequency; b. aca.racy and carpleteness; and c. review by appropriate personnel with no conflicting duties. 5. Carpare a sample of balances per reconciiations to the general ledger and supporting trial balances. 6. Examine detail and aging of a sample of rexnciing items fran those acxx)unts whose reconciiations have been tested and reviewed and a sample of items in suspense, clearing, and work-in-process accounts by: a. testing aging; b. determining whether items are folloved up on and appropriately resolved on a timely basis; and - 10 - PAGENO="0597" 593 c. discussing itens resaining on reconciiations aix! in the suspense account with apprcpriate personnel to ascertain whether any should be written off. Review a saitple of charged-off reconciling and suspense itens for proper authorization. 7. Verify through irxpiiry aix! observation that the bank maintains adaguate records of its off-balance sheet activities, including, bit not limited to, its outstanding letters of credit and its loan cxzmnitments. Review the bank's procedures for sonitoring the extent of its credit exposure fran such activities to determine whether probable or reasonably possible losses exist. Electronic I~ta Processing ~ntrols 1. Read the DOD's minutes to determine whether the DOD has reviewed and approved the bank's electronic data processing (EDP) policies (including those r~arding outside servicers, if any, and the in-house use of individual personal cxxpiters (PCs) and personalized prograns for official bank records) at least annually, confirm that inanagenent has established appropriate inplensnting pro~1ures, and verify the bank's caiplianoe with these policies aix! pro~ures. a. The policies aix! procedures for either in-house processing or use of an outside service center should include: i. a contingency plan for continuation of -operations aix! recovery * when pager outages, natural disasters, or other threats could cause disniption and/or major damage to the institution's data processing support (inc~uding ccspatibiity of servicer's plan with that of the bank); ii. requirensnts for EDP-relat&1 insurance coverage which include the follc~qing provisions: (1) extended blanket bond fidelity coverage to enployees Of the bank or servicer; (2) insurance on documents in transit, including cash letters; and (3) verification of the insurance coverage of the bank or service bureau aix! the courier service; iii. review of exception reports and adjusting entries approved by s~ipervisors and/or officers; iv. controls for ixpit preparation and control and outpit verification and distribution; 6For further guidance, see the July 1989, ~EC Policy on O~ntingency Planning for Financial Institutions and Section 7 of the FFIEC EDP ~camination Handbook. - 11 - PAGENO="0598" 594 v. "back-up' of all systeirts, includinq off-premises rotation of files and progress; vi. security to ensure intogrity of data and system irodifications; and vii. necessary detail to ensure an audit trail. b. ~en an outside service center is errployod, the policies and pro~ures should address the foll~zinq additional items: i. the requireirent for a written contract for each autceatod application detailing ~znership and confidentiality of files and programs, fee structure, termination agreerient, arxl liability for docurrents in transit; ii. review of each contract by logal counsel; and iii. revi9w of each third party review of the service boreau, if any. 2. In the area of general EDP controls, determine through inqj~iiry and observation that policies and procodures have been establishod for: a. Managenent and user involverrent and agproval of new or irodifith ar.plication programs; b. Authorization, a~roval and testing of system software trudifications; c. The controls surrounding cczr~iter operations processing; d. Pestrictod aocess to conp.iter operations facilities and resources including: i. ~of f-premises storage of nester disks and ~ disks; * ii. ~security of the data center and bank's Its; and * iii. use and periodic changing of passwords. 3. With respect to ~)P applications controls, inquire about and observe: a. The controls over: i. Inixit sukznittod for processing, ii. Processing transactions, iii. Outpit, iv. Applications on PC5, and V. Teleccemunications both between and within bank offices; b. The security over unissueil or blank supplies of potentially negotiable items; and c. The control proce~ures on wire transfers including: i. Authorizations and agreeirents with custcarers, including who may initiate transactions, ii. Limits on transactions, and iii. Call back procodures. 7For further guidance on using a third-party report, see the Atterican Institute of Certifieiu Public Accountant's Audit and Accounting Guide, Audits of Service-Center Producod Records. -12- PAGENO="0599" 595 itor's Report to the Bank's Board of Directors After the ccspletion of the auditing procedures (or agreed-upon procedures) set forth above, the indepeixierit auditor should evaluate the results of his/her auditing work. The auditor should prepare and prcsptly suheit a report addressed to the board of directors (or audit cxziunittee) of the bank detailing the findings and suggestions resulting fran the performance of these auditing procedures. Independent auditors should include in their report, as a ininiimim, (1) the accounts or iteima on which the pro~ures were applied; (2) the sanplir~ method(s) used; (3) the procedures and agreed-upon extent of testing perforn~; (4) the a~unting basis (either generally accepted accounting principles [GAAP) or the instructions for the preparation of the Reports of Condition and Inccane [Call Reports)) on which the accounts or itens being audited are reported; (5) the auditor's findings; and (6) the date as of which the procedures were performed. The auditor should sign and date the report, which should also disclose the auditor's bosiness address. The report subaitted by an independent auditor who is a certified poblic accountant should be rendered in accordance with the requirenents of Statement on Auditing Standards (S1~S) No. 35, "Special Reports-Applying agreed-upon Procedures to Specified Elements, Accounts, or Iten~ of a Financial Statement," and SkS No. 62, "Special Reports." Other independent auditors may wish to refer to these auditing standards for guidance in preparing their reports. The bank is requested to send a c~y of this report to the a~r~riate FDIC reqional office as soon as possible after its receipt. By order of the Board of Directors. Ebted at washington, D.C., this _______ day of _______________, 1990. FL~IT INSURAN~ ~RE~RATIC~ Boyle L. Rthinson ~cecutive Secretary (SEAL) -13- PAGENO="0600" 596 SUPERVISORY AND ENFORCEMENT EFFORTS OF THE FEDERAL DEPOSIT INSURANCE CORPORATION ADDENDUM TO TESTIMONY FOR THE COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE OF THE COMMITTEE ON GOVERNMENT OPERATIONS THURSDAY, MARCH 15, 1990 The following is the Federal Deposit Insurance Corporation's written response to questions posed by the Commerce, Consumer, and Monetary Affairs Subcommittee of the Committee on Government Operations in a letter dated February 14, 1990. This response will be further augmented by the testimonies of Paul G. Fritts, Director, Division of Supervision, Associate General Counsel Arthur L. Beamon, and Assistant General Counsel Thomas A. Schulz. A. Nature and extent of abuse and misconduct in financial institutions: 1. (a) Provide updated data on the number of insolvent thrift institutions for which misconduct was identified (or otherwise present) during 1987, 1988, and 1989, based on the same three criteria and broken down in the same manner as the data which the FHLBB provided in l987~/; (b) specify the estimated losses to the deposit insurance fund from these insolvent thrifts; and (c) specify the percentage these institutions constitute of the overall number of insolvent thrifts for each year. ~./Misconduct is and was defined as conduct by an insider or affiliate4 outsider that resulted in a formal or informal enforcement action, a criminal referral, or a FSLIC lawsuit filed (after insolvency) to recover losses resulting from intentional wrongdoing or negligent attention to fiduciary duties. See p. 10, n. 35, of House report 100-1088 (subcommittee's 1988 study). This information is now within the FDIC, since its incorporation of the FSLIC. PAGENO="0601" 597 2 ResDonse: (a) The number of thrift institutions for which misconduct was identified is as follows:2! Thrifts Where Open Thrifts Misconduct Was Failed Receiving FSLIC Problem Year Identified (1) 1nstitutionqj~~ A~iIstancej~j jfl~titutions (4) 234 79 50 28 12M 203 84 36 36 170 49 11 41 (1) Misconduct is defined as conduct by an insider or affiliated outsider that resulted in a format or informal action or a criminal referral. An insider is an officer, director, or controlling shareholder. An affiliated outsider means other shareholders and major borrowers of the institution. (2) `Failed' institutions are those placed in receivership. (3) These are institutions merged or acquired with FSLIC assistance or placed in the management consignment program CMCP'). (4) `Problem institutions' are those that were assigned a composite MACRO rating of 4 or 5. This definition was chosen in lieu of `significant supervisory cases' since the Significant Supervisory Case List is no longer in use. (b) The resolution of all insolvent thrifts from January 1, 1989, to August 9, 1992, is the responsibility of the Resolution Trust Corporation under FIRREA. The Savings Association Insurance Fund, which was dreated by FIRREA to separately insure thrifts was, and is, not at risk for insolvent thrift institutions during the time frames requested. Pertinent information on thrifts prior to 1989 may be available from the Office of Thrift Supervision. The FDIC does not have data available that would allow it to determine losses to the FSLIC insurance fund. 2lThese figures were obtained with the cooperation of the Office of Thrift Supervision. The figures do not include misconduct identified in the Professional Liability arena; however, information on Professional Liability actions instituted against thrift-related individuals is included in Question B(2) below. PAGENO="0602" 598 3 (C) We defer to the Office of Thrift Supervision for the percentage of thrifts which constitute the overall number of insolvent thrifts for each year. 2. (a) Provide the same data requested in 1. on the number of insolvent banks, using the same criteria and with the same breakdowns; (b) specify the estimated losses to the FDIC from these insolvent banks; and (c) specify the percentage which these institutions constitute of the overall number of insolvent banks for each year. ~ç~ponse: (a) The following chart provides the number of insolvent banks for which misconduct was identified (or was otherwise present) during 1987, 1988, and 1989 and (c) the percentage which these institutions constitute of the of the overall number of insolvent banks for each year. 1987 1988 1989 Number of banks which failed 184 200 -206 °Number of failed SlIM banks 112 95 82 Number of failed banks where misconduct identified 77 62 52 Percentage of failed banks where misconduct identified 42% 31% 25% Commonly, directors' and officers' liability suits are filed after an investigation that lasts two to three years. consequently, it is not possible to tell how many bank failures during 1987 through 1989 will result in D&O suits. It should also be noted that, even when claims on the merits exist, suit is not filed unless there are believed to be sufficient recovery sources to make the suit cost effective. With those qualifications, our experience suggests that suits will be filed (or settlements agreed to) involving roughly half of the failures that occurred during the 1987-1989 period. (b) Although the question asks for the estimated losses to the deposit insurance fund from failed state nonmember banks where misconductwas identified, the FDIC does not track this information in the manner requested. consequently, the following PAGENO="0603" 599 4 figures apply to estimated losses to the deposit insurance fund from all failed institutions: ESTIMATED LOSSES TO FDIC DEPOSIT INSURANCE FUND* (In $ milLions) 1987 1988 1989 (est.) 3,066 7,364 3,964 *Includes tosses on arranged assistance transactions and provisions for estimated Losses not yet sustained. Excludes administrative operating expenses. Losses attributable to alL institutions are shown because Losses wherein fraud was present cannot be extracted from FDIC records. . 3. For the same three years, please specify the numbers of SNM banks in which misconduct was identified (i.e. resulted in a formal enforcement action or a criminal referral) and for each number indicate the number of such banks which subsequently failed. Rasponse: Formal Enforcement Actions Taken Against Insiders - Number of Banks Involved: Number of Banks which Failed: 1987 24 5 1988 46 13 1989 22 7 Criminal Referrals Involving Insiders - Number of'Banks Involved: 1987 358 1988 331 1989 330 Number of Banks which FaiLed: 37 28 20 PAGENO="0604" 600 .5 4. Describe any recent discernible trends or patterns of fraud or misconduct, including the schemes and areas of the country most affected. (For example, is the FDIC finding problems with real estate lending, as is the 0CC?) The soft real estate market, especially in the New England area, has adversely affected many of the area's banks. With a decline in asset quality in many of these banks, we are noticing an increase in the number of reports of apparent crime concerning commercial real estate loans. In many instances, the commercial real estate loan portfolios in these banks increased at an above average rate, and the loans at inception were poorly structured and poorly documented. The reports of apparent crime most frequently recite false financial statements, improper disbursement of loan proceeds, nominee borrowers, inflated appraisals, and failure to disclose material facts. B. Recoveries from FDIC and FSLIC lawsuit~i 1. For the years 1988 and 1989, please provide (a) the total dollar amount of FDIC recoveries from lawsuits against bank directors, officers, shareholders, and other insiders and affiliated outsiders, in connection with insolvent FDIC-insured commercial banks, and the number of such banks involved, (b) the number of such pending lawsuits at present, and (c) the total amount of fidelity bond claim recoveries and the number of insolvent commercial banks involved. For 1988, total dollar amount of FDIC recoveries on Director and Officer ("D&O") actions was approximately $69,000,000 - covering 60 institutions. For fidelity bond actions, the total dollar amount of FDIC recoveries was approximately $24,000,000 - covering 48 institutions. For 1989, total dollar amount of FDIC recoveries on D&O suits was approximately $45,000,000 - covering 56 institutions. For fidelity bond actions, the total dollar amount of FDIC recoveries was approximately $12,000,000 - covering 27 institutions. The number of pending professional liability lawsuits is approximately 125. PAGENO="0605" 601 6 2. For the years 1988 and 1989, please provide the same data for thrift institutions, as requested in 1. above. Response: For 1988, total recoveries for thrift institutions were $109,000,000. This includes D&O, professional liability and fidelity bond claims. The figures also include collections on certain loans. Consequently, the figure is somewhat higher than would be the case if only professional liability and bond claim recoveries were reported. For 1989, total recoveries for thrift institutions were $87,000,000, which covers 56 institutions. This includes D&O, professional liability, and fidelity bond claims ($8,000,000 of this sum is attributable to bond claim coverage). Information is not currently available as to whether any of this amount is attributable to concurrently instituted collection actions prior to August 9, 1989. The figure excludes such recoveries for the post-August 9th period. The number of pending professional liability suits is approximately 175. C. Implementation of FIRREA "pay" provisions and FDIC manpower levels: 1. Report on the FDIC's implementation of the "pay" and "comparability" provisions in FIRREA, namely section 1206; and describe (a) actual percentage salary and pay differential increases, (b) the impact on retaining experienced personnel, if known, and (C) any problems with these FIRREA provisions. Response: Prior to the passage of FIRBEA in August 1989, the bank regulatory agencies -- FDIC, 0CC, FHLBB, NCUA, and the Federal Reserve Board -- agreed to share information concerning the compensation levels of their respective employees. It was also agreed to share pertinent information relating to bonuses and other benefits to which these employees might be entitled. Section 1206 of FIRREA expanded upon this by mandating that the various financial institution regulatory agencies, now including the Federal Housing Finance Board, the Oversight Board of the RTC, the Farm Credit Administration, and the OTS, provide such information to each other and the Congress in order to further the interests of maintaining comparability in the pay and benefits area. PAGENO="0606" 602 7 These agencies are aware of the compensation adjustments made by the Corporation, the most significant of which occurred on May 7, 1989. On that date., the Board of Directors approved a 10% pay increase for all employees. To a large degree, this raise was prompted by the increased work employees had been called upon to perform following the FDIC's February 1989 assumption of conservatorship responsibilities for the savings and loan industry. This pay increase, which predated FIRREA's enactment by several months, was made consistent with the Corporation's longstanding independent paysetting authority. The most recent adjustment to FDIC base salary rates occurred effective January 1, 1990, when the Board adopted the 3.6% government-wide COLA increase for all employees serving at the grade 15 level and below. Additionally, adjustments were made to the Corporation's salary differential schedules for calendar year 1990; Appendix C-l lists, by specific geographic locations, these differentials as percentages of base pay. Over the years, the Corporation has had a relatively low level of attrition in all occupational categories. Our ability to adjust levels of pay and to offer our own benefits package has enabled us to attract highly qualified personnel and to compete effectively in the labor market. As such, the "pay" and "comparability" provisions of FIRREA have changed little about the way the Corporation has traditionally operated. Appendix C-2 provides the requested data on Bank Examiner and supervisor personnel levels at year end 1988 and 1989, including turnover arid new hires. PAGENO="0607" 603 8 2. Provide updated data on examiner and supervisor personnel levels at year end 1988 and 1989, including turnover and new hires. Respon~~ FIELD EXAMINERS 1988 1989 Beginning Number of Field Examiners 1,909 1,983 New Hires 284 504 Number LeavIng (237) (234) Net Transfers from (to) other 27 (30) FDIC Divisions, 110 and RO Ending Number of Field Examiners 1,983 2,223 Turnover Ratio 12.0% 10.5% SUPERVISORY PERSONNEL* 12M 12~2 Beginning Number of Supervisors and Professionals 337 333 Number LeavIng (24) (21) Net Transfers from (to) other FDIC Divisions and Field Examiner Status 20 62 Ending Number of Supervisors and Professionals 333 374 Turnover Ratio 7.2% 5.6% ~C~Ines supervisors and professional support staff In both the Washington Office (110) and Regional Officea (NO). PAGENO="0608" 604 9 D. ~pervision and civil and requlatorv enforcement~ 1. ~pervisiofl (a) Provide for 1988 and also 1989, the actual examination frequency for both problem and non-problem SNM banks and also the average examination cycle times for closed SNM banks, 1" and (b) describe any changes in the FDIC's examination frequency policy, since 1987. Response~ (a) In 1989, we conducted 4,089 on-site safety-and- soundness examinations (including 375 of savings and loans) compared to 4,019 in 1988 and 3,653 in 1987. We had expected to do considerably more than 4,089 in 1989, but had to revise that goal due to our involvement as conservator for insolvent thrifts. As of December 31, 1989, over 90 percent of the 4- and 5-rated state nonmember banks had undergone an FDIC examination, visitation, or state examination within the preceding twelve-month period. The others are monitored closely, already have supervisory corrective action in place and, in most cases, have been examined within the last two years. Also, as of December 1989, only two percent of all 1- and 2-rated state nonmeinber banks have not had an FDIC or acceptable state examination or visit within the last three years. This percentage has been declining for some time now and we expect this trend to continue. VThIS updates the data provided to the subcommittee in 1987 and 1988, as set forth on p. 63 of House report 100-1088. PAGENO="0609" 605 The following chart has been developed regarding examination cycle tines for closed state nonmember banks. Additionally, attached as Appendix D-l-a are the FDIC's Regional Director Memoranda concerning examination frequency. FDIC Examination Interval in Months Closed 1988 Percent Closed 1989 Percent 1 through 12 79 83.2% 69 84.2% 13 through 18 12 * 12.6% 6 7.3% 19 through 36 2 ~/# 2.1% 7 #8 8.5% Over 36 2 *** 2.1% 0 0.0% TOTAL 95 100.0% 82 100.0% * Five, one, and two, respectively, invoLved First RepubLicBank units in Texas which were being monitored with presence at only largest units as cLosing approached. # One had a state authority examination within nine months of closing. #8 SIx had a atate authority examination within nine months or Less of closing, and one had such an examination at 13 months. (b) Today's banking environment demands that we identify emerging trends and potential areas of risk and pinpoint individual banks with symptoms of higher than normal risk. The traditional methods of conducting on-site examinations based on fixed examination cycles have given way to more continuous methods of supervision. Our current program uses on-site examinations and visitations complemented with off-site monitoring, exchanges, of information with other regulators (state and federal), and the use of supervisory guidelines, policy statements, and rules and regulations. Our experience in recent years has indicated the need to increase the level and frequency of on-site supervision. As a result, in July of 1988 we revised our statement of goals regarding examination priorities. Our goal is to have an on-site examination every 24 months for well-rated institutions (those rated 1 or 2) and one every 12 months for problem and near-problem institutions (those rated 3, 4, or 5). The intervals for those rated 1, 2, or 3 can be extended if an acceptable state examination is conducted. 3O-R~O ~ - qr~ - PAGENO="0610" 606 11 2. Regulatory enforcement: Set forth the (a) numbers of final formal and informal FDIC civil enforcement orders for 1988 and 1989, broken down in the same manner as in the subcommittee's 11/19/87, hearing record, and (b) the amounts of (i) ~MP assessments and funds actually recovered and (ii) also restitutions in connection such orders, for these two years. Response: The following material has been developed regarding the number of informal FDIC enforcement activities: Memorandums of 1988 1988 1988 1989 1989 1989 Understanding Problem E~~9b Total Problem ~ TotaL Safety/Soundness 109 147 256 115 213 328 Other Purposes 9 69 78 12 69 81 Total 118 216 336 127 282 409 Format Board 1988 1988 1988 1989 1989 1989 Resolutions Problem ~ Total ProbLem 8~~.9b Total Safety/Soundness 24 150 174 30 169 199 Other Purposes 5 72 77 8 54 62 Total 29 222 251 38 223 261 PAGENO="0611" 607 12 The following material has been developed regarding the number of formal FDIC civil enforcement orders set forth in the manner of previous submissions to the Subcommittee: 1988 1989 Categories of Civil Enforcement Actions Section 8(al 77 73 Termination of Insurance Proceedings Initiated 34 17 °SNM Problem Banks Which Failed 9 21 *SNM Problem Banks Which Did Not Fail 34 35 ~ and State Member Banks 1 3 FInal Termination of Insurance Order 1 Temporary Suspension of Deposit Insurance Section 8th1 98 97 Orders to Cease and Desist 20 -8 5SNM Problem Banks Which Failed 78 89 555$ Problem Banks Which Did Not Fail Section 81ol 5 1 Temporary Cease and Desist Orders Section 8(c1 10 10 Notice of Intention to Remove from Office 33 10 Final Removal Order Section 8(g) 0 1 Temporary Suspension Civil Money Penalties Assessed 10 9 Assessment of Civil Money Penalty During 1988, there were civil money penalties aggregating $2,855,000 assessed against 18 individuals, with $7,500 paid to date. One individual, Daniel K. connors, was responsible for $2,488,00Q of the penalties assessed in 1988. currently, his case has been referred to the appropriate U.S. Attorney's office for collection. During 1989, there were civil money penalties aggregating $2,692,750 against 47 individuals, with $57,250 paid to date. Virtually all the remainder is currently being litigated between the EDIC and the various respondents. PAGENO="0612" 608 13 As has been reported in previous submissions to the subcommittee, the FDIC is unable to provide information on restitution made by individuals on behalf of open FDIC-supervised institutions and failed FDIC-insured institutions; although such restitution is sought where deemed appropriate, centralized records are not maintained regarding amounts involved. 3. Results of FIRREA Title IX implementation: (a) List and then describe each FDIC interpretation and application of the new regulatory enforcement provisions, including all proposed and actual policy statements, guidelines, and regulations--especially (although not exclusively) with regard to FIRREA sections 904, 907, 910, 913, 914, 916, 917, and 918, and provide copies of any such written material; and (b) Describe any problems, uncertainties, or concerns, with regard to any provision in Title IX or its application. Resmonse: For ease of reference, our response is divided into sections by type of enforcement power. Each section incorporates the answer to question 3(a), and to 3(b), if appropriate: Section 902 of FIRREA (a) Section 902 amended section 8(b) and 8(c) of the Act, 12 U.S.C. § 1818(b) and (c), respectively, which pertain to an agency' s cease-and-desist authority. The amendments to section 8(b) of the Act were largely to clarify powers the FDIC had already been exercising with regard to cease-and-desist actions, and consequently, it has not been necessary to issue any new guidance in this regard. We expect that the extension of section 8(b) jurisdiction to institution- affiliated parties will enhance our ability to ensure that unacceptable practices by banks and institution-affiliated parties are curtailed. Copies of section 8(b) cease-and-desist orders instituting the new FIR.REA powers are attached., (Appendix D-3, No. 1) With regard to the changes made to section 8(c) regarding our authority to issue temporary cease-and-desist orders, we would expect that the amendments will make it somewhat easier to sustain such an emergency action. (b) The only problem we anticipate at present regarding the amendments found in section 902 of FIRREA concerns the action that the FDIC can order in connection with a temporary cease-and- desist action under 8(c) of the Act. As you are aware, the purpose of the section 8(c) temporary order is to effect relief PAGENO="0613" 609 14 which cannot wait until the permanent cease-and-desist order which is the result of the accompanying section 8(b) proceeding becomes effective. Since section 8(c) limits the FDIC to the remedies listed in section 8(b)(6)(B), there is no specific remedy available under section 8(c) regarding guarantee against loss. It is necessary that provision be made for escrowing of disputed amounts in section 8(c) actions and/or for the posting of bonds for disputed amounts, as an affirmative remedy pending disposition of the attendant section 8(b) action. Section 904 of FIRREA (a) Section 904 of FIRREA amended section 8(e) of the Act, to add a new subsection (7) which imposes an industry-wide bar prohibiting any individual, who has been removed or suspended from office, from holding office or participating in the conduct of the affairs of any insured depository institution and certain other institutions, without the approval of the appropriate Federal banking agency. FIRREA is silent regarding the effective date of this section. The FDIC takes the position that the section may be applied retroactively to cases in which the section 8(e) order is entered based on conduct occurring prior to the enactment of FIRREA. Several FDIC Regional Offices took strongly opposing points of view on this issue. The attached memorandum and brief, and the transmittal letters referenced below under section 908, reflect the official position of the FDIC.~ A memorandum from the Kansas City Regional Office expressing a contrary view on the issue is also attached. (Appendix D-3, No. 2) The discussion relating to section 908 of FIRREA, below, is also relevant to this issue, insofar we did not initially rely exclusively on the language in section 904, but also on that of section 908, to extend the industrywide bar to individuals who had entered stipulations prior to FIRREA, but against whom orders were entered after the enactment of FIRREA. Section 905~f FIRREA (a) Section 905 of FIRREA amended section 8(i) of the Act, 12 U.S.C. § 1818(i), to allow the FDIC to initiate enforcement proceedings against an institution-affiliated party despite the closing of the insured depository institution or the resignation from office or termination of employment or participation, or other separation of the institution-affiliated party, so long as the action is commenced within six years of the date such party ceased to be an institution-affiliated party, whether such date occurs before, on or after the date of enactment of the section. This amendment was a response to the Supreme Court decision in Stoddard v. Board of Governors of the Federal Reserve Syste~, 868 F.2d 1308 (D.C. Cir. 1989) which, in effect, removed jurisdiction from the FDIC once an individual was no longer in office or PAGENO="0614" 610 15 participating in the conduct of affairs of the institution. The FDIC takes the position that the section overrules Stoddard and may be applied to confer jurisdiction in cases in which the Respondent had been separated from the institution prior to the initiation of the action and before the enactment of FIRREA. As indicated under section 904 above, several FDIC Regional Offices took strongly opposing points of view on the issue. Attached is a copy of a memorandum which supports the official FDIC position. (Appendix D-3, No. 3) A copy of a brief supporting this position, as well as a memorandum from the Kansas City Regional Office reflecting the opposing point of view are referenced under section 904, above. Section 907 of FIRREA (a) Section 907 amends sections 8(i) and 18(j) of the Act, 12 U.S.C.~ 1818(i) and 1828(j), respectively, regarding civil money penalties. Because the sections' provisions apply for the most part to conduct engaged in after the date of FIRREA, we do not yet have the benefit of experience in applying the larger penalties. We have, however, met with the other financial regulatory agencies to determine a procedure for assessing civil money penalties under the new statute. Discussions to date have involved amending and perhaps adopting a matrix such as that in use by the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Section 908 of FIRREA (a) Section 908 of FIRREA imposes a maximum fine of $1,000,000 and imprisonment of not more than five years or both, upon any person who, while subject to an order in effect under section 8(e) or 8(g) of the Act, without the prior written consent of the appropriate Federal financial institutions regulatory agency, knowingly participates, directly or indirectly, in any manner in the conduct of the affairs of any insured depository institution, any institution treated as an insured bank or savings association, any insured credit union, any institution chartered under the Farm Credit Act, or the Resolution Trust Corporation. We have interpreted section 908 as applying to any individual against whom there is outstanding an effective order of removal or prohibition, including those individuals who entered stipulations prior to the enactment of FIRREA, but against whom an order was not issued until after the enactment of FIRREA. Attached are copies of transmittal letters we sent to such individuals. (Appendix D-3, No. 4) In effect, we relied upon the language of section 908 to impose an industrywide bar against these individuals. The attached transmittal letters reflect the position of the FDIC on this section. PAGENO="0615" 611 16 Section 910 of FIRREA (a) Section 910 of FIRREA amended section 19 of the Act, 12 U.S.C. § 1829, which pertains to unauthorized participation by convicted individuals. Attached are copies of recent letters we have sent regarding the application of section 19. (Appendix D-3, No. 5). Of particular note is that sent to Drexel, Burnham, Lambert & Co., which addresses the definition of "person" contained in section 19. We are currently in the process of drafting a policy statement which attempts to define the particular kinds of persons and conduct to which the section will apply. (b) Regarding the penalty for unauthorized participation by convicted individuals, we ask that "conviction" here include the same language as the new section 8(g), 12 U.S.C. § 1818(g), ~ "agreement to enter a pre-trial diversion or other similar program." We also ask that the caption for section 19 be changed, deleting "individual" and inserting instead "person." Section 911 of FIRREA (a) Section 911 of FIRREA amended section 7(a) of the Act, 12 U.S.C. § 1817(a) regarding penalties for late filing or the inaccurate filing of banks' Reports of Condition and Income, to increase the amount of penalties that can beassessed. These penalties apply to reports due after August 9, 1989. Enclosed are copies of the financial institutions letter that was sent to banks informing them of the new penalties, and letters sent to banks against which we are contemplating assessing civil money penalties for violation of the filing requirements. Also attached are copies of a sample Stipulation and Consent Order to Pay, as well as a sample Notice of Assessment of Liability. The increased penalty amounts have already generated an outcry from the banking industry. Responses of several institutions to the new, higher penalties, as well as one from the Kansas Bankers Association, are also attached. To date, we are in the process of assessing penalties under the new statute against eleven institutions. (Appendix D-3, No. 6) (b) The statute, as amended, provides for a three-tier system of asses~ing civil money penalties for the late filing of Reports of Income and Condition ("Call Reports"), or for filing false and misleading Call Reports. The first two tiers assess maximum aiiiounts of $2,000 and $20,000 per day, respectively, based on either of the failure to file or a false and misleading filing. The third tier, however, appears to limit the application of its maximum penalty only to false and misleading filings, despite the fact that its language pertaining to the actual assessment of the penalty states that the maximum $1,000,000 per day penalty amount continues "for each day during PAGENO="0616" 612 17 which the failure continues." (emphasis added). This may be a technical oversight in the statute, and we would suggest the following underlined addition: (B) .. .Notwithstanding the previous sentence, if any such bank knowingly or with reckless disregard fails to make or publish any report required under this paragraph, within the period of time specified by the Corporation, or knowingly and with reckless disregard for the accuracy of any information or report described in such sentence submits or publishes any false or misleading report or information, the Corporation may assess a penalty of not more than $1,000,000 or 1 percent of total assets of such bank, whichever is less, per day for each day during which such failure continues or such false or misleading information is not corrected. Section 912 of FIRREA (a) Section 912 of FIRREA added section 8(t) of the Act, 12 U.S.C. § 1818(t), to give the FDIC back-up enforcement authority against savings associations. We have added to our number of bank examiners, and our examiners in the field have begun to accompany the OTS on their examinations of savings institutions. A press release reflecting these initiatives is attached. (Appendix D-3, No. 7) Section 913 of FIRREA (a) Section 913 of FIRREA added section 8(u) to the Act, 12 U.S.C.~ 1818(u), to require the disclosure of final agency orders. Attached is a memorandum to the Board of Directors of the FDIC which addresses the proposed implementation of this section. In sum, the FDIC proposes to release, or has already released (1) a list of the names of institutions and institution- affiliated parties that have been subject to final orders of administrative enforcement proceedings that have issued since August 9, 1989; (2) a list of the names of institutions and institution-affiliated parties that have been subject to modifications and terminations of final orders against them since August 9, 1989; (3) on a monthly basis, a list of final actions, and modifications and terminations thereof, taken by the FDIC against institutions and institution-affiliated parties; and (4) all final orders issued since August 9, 1989, and the modifications and terminations thereof. Copies of two memoranda to all Regional Counsel (Supervision), concerning the attached press release and the gathering of information to effect this proposal are also attached. The FDIC is also in the process of accepting bids from publishers to publish a formal volume of all FDIC enforcement decisions and final orders, including modifications and terminations thereof. A copy of the request for proposals is attached. (Appendix 0-3, No. 8) PAGENO="0617" 613 18 Section 914 of FIRREA (a) Section 914 of FIRREA added section 32 to the Act, 12 U.S.C. § l83li, regarding agency disapproval of senior executive officers of insured depository institutions or holding companies thereof. Attached is a copy of the regulations promulgated by the FDIC regarding applications from such entities, as well as a copy of the procedural rules applied to implement these provisions. (Appendix D-3, No. 9) Section 916 of FIRREA (a) Secti~on 916 of FIRREA allows the FDIC and other financial'* `institution regulatory agencies two years within which to establish their own pool of administrative law judges and to adopt uniform rules of procedure for administrative hearings. We have held several meetings with the other agencies to accomplish this purpose. Section 917 of FIRREA (a) Section 917 mandates the creation of a task force to study delegation of enforcement actions. This task force has met on several occasions already and is in the process of establishing representation criteria among the agencies. Each agency has to date shared with the other agencies its existing delegations, including those delegations recently implemented by the Office of Thrift Supervision. The FDIC already has extensive delegations of enforcement actions in effect, as can be seen from the attached regulations, 12 C.F.R. Part 303. Discussions have been implemented concerning the various differences. (Appendix D-3, No. 10) Section 918 of FIRREA (a) Section 918 directs the agencies to submit an annual report to Congress. The first annual report is due in August, 1990. In preparing for this testimony it appears we have accomplished a great deal in gathering information required by the annual report. Section 926 of FIRREA (a) Section 926 of FIRREA amended section 8(a) of the Act, 12 U.S.C. § 1818(a), which pertains to the termination of deposit insurance. Between August 9, 1989 and December 31, 1989, there were thirteen 8(a) actions initiated under FIRREA involving the involuntary termination of deposit insurance. Numerous such actions are currently in process, some of which are against savings associations. There has been one temporary suspension of ~deposit insurance. PAGENO="0618" 614 19 The new law changed the procedure involved in section 8(a) involuntary insurance termination actions by requiring that a maximum of thirty days notice, setting forth the basis for the action, be provided to the appropriate Federal banking agency of an institution before a formal Notice of Intent to Terminate Insured Status ("Notice") is issued. The appropriate Federal banking agency may agree to shorten or eliminate the time period required for notice. To comply with these procedural requirements, we drafted a "Notification to Primary Regulator of Findings" ("Notification") to be served upon the Primary Regulator in all such cases. Sample copies of the Notification are attached. (Appendix D-3, No. 11) In addition, FIRREA expanded our jurisdiction under section 8(a) to savings associations. To gather the information necessary to determine whether an 8(a) action against a savings association would be appropriate, we have worked closely with the Office of Thrift Supervision (OTS), which sets the capital standards for those institutions. Our examiners have accompanied OTS examiners on their examinations of such institutions, and in all cases in which potential action was contemplated, we have conferred with OTS regarding the ultimate resolution of the case. Currently, several are in process. (b) To date, our general experience with the new 8(a) provisions has been positive. The only significant problem posed by FIRREA regards section 8(a) (8) of the Act, 12 U. S.C. § 1818(a) (8), which provides for an order temporarily suspending deposit insurance in cases in which an institution has no tangible capital. Such a temporary order can be issued, however, only if a permanent action to terminate deposit insurance under section 8(a) (2) of the Act, 12 U.S.C. § 1818(a) (2), is pending. As indicated in the response to 3(a) above, prior to formally commencing such a permanent action, a potential maximum of thirty days notice must be provided to the Primary Regulator where the Primary Regulator is a Federal banking agency. The foregoing requirements are a problem in cases in which the FDIC, on an emergency basis, seeks to issue a temporary suspension order against a national bank, member bank, or savings association, when the required Notification to the appropriate federal banking agency has not yet been provided, or the thirty days have not yet elapsed. The necessity of waiting a possible maximum of thirty days for notification and correction, before the FDIC can commence termination of insurance proceedings, negates the effectiveness of an immediate suspension order, and greatly increases the chances that such an order will be set aside by areviewing court. The suggested resolution is to allow the FDIC to issue a temporary suspension order at the same time it provides notification to the Primary Regulator. Thus, we suggest that the words "after giving the notice required under subparagraph (A) with respect to an insured depository institution" which appear in the first sentence of section PAGENO="0619" 615 20 8(a) (8) of the Act be deleted. The FDIC has not interpreted the thirty-day notice requirement to apply where the FDIC is the appropriate Federal banking agency. We do not believe that Congress intended the thirty-day notice requirement to apply to any circumstance requiring immediate suspension of deposit insurance. Amendments to Enforcement Powers We ask that a new amendment be enacted, prohibiting the advancement of defense costs and the payment, directly or indirectly, by an institution of attorney's fees and civil money penalties for an institution-affiliated party against whom the FDIC has brought an administrative enforcement action, and pre- payment of salaries or other expenses in anticipation of failure of the institution. This does not preclude recovery through the Equal Access to Justice Act by Respondents who prevail against the agency in an administrative enforcement action. 12 U.s. C. § 1818(k), prior to amendment by FIRREA, provided a definition for what constituted "order which has become final." It would be useful to reinstate this definition. The definition is necessary, insofar as numerous references are made throughout section 8 of the Act to "any order which has become final". Finally, the provisions dealing with liability of commonly- controlled insured depository institutions are addressed in title II of FIRBEA. Because these provisions have caused problems from an enforcement perspective, we have also addressed them above in our response regarding Title IX of FIRREA. Before FIRREA, holding companies could effectively transfer their system-wide losses to the FDIC by concentrating the losses in one or~two banks, and then allowing those banks to fail. The "cross-guaranty" rule was supposed to enable the FDIC to reach the good assets that belonged to the holding company system, without regard for where the holding company moved them. The protection is inadequate, however. There are procedural problems related to the timing of the enforcement procedures. As a result, holding companies may be able to protect themselves against cross-guaranties by selling off healthy institutions prior to the failure of an affiliate and retaining the proceeds at the holding-company level. We propose that when a depository institution in a holding company system is failing, the FDIC should be able to invoke the cross-guarantee rules against all the depository institutions belonging to a holding company by serving notice on the holding company that the default by one of its affiliated institutions is "reasonably imminent." After that date, any proceeds that the holding company might receive as a result of disposing of an insured affiliate should be subject to FDIC recovery regardless of where held, and any institution sold should itself remain PAGENO="0620" 616 21 liable under the cross-guaranty. Also, if the f'ing ~.. institution is disposed of by the holding company.priorAto its failure, the company's other depository institution subsidiaries should remain liable under the cross-guaranty. E. Criminal enforcement efforts: 1. Discuss the adequacy of Justice Department investigative and prosecutorial resources and efforts; and identify any areas in the country where the FDIC has encountered delays within the Justice Department or other problems, and, in so doing, indicate whether or not the Attorney General's 12/7/89 allocation to these specific areas will be satisfactory. Response: By their nature the investigation and prosecution of bank fraud cases are extremely resource intensive. Prior to the passage of FIRREA, the Department of Justice's Criminal Division and the 94 U.~. Attorney's Offices had much more limited resources with which to attempt to deal with the rapidly escalating problem of fraud in banks and thrifts. However, no statistical data concerning problems with delays or other problems with prosecution is maintained by the FDIC. We have, however, attempted to obtain anecdotal information pertaining to delays or other problems from FDIC's regional and consolidated offices. We have found that the resources of the Department of Justice are stretched thin in some areas, most notably, Dallas, Texas, Houston, Texas, Kansas, the western part of Missouri, and the Central District of California. The few specific instances of "problems" identified by our offices usually involved a basic lack of communication and a lack of clear guidelines as to document production procedures, which are being addressed currently through the local working groups with assistance from Washington as needed. Other problems noted involved overly broad document production requests by the U.S. Attorneys and the frequency of court appearances required of FDIC employees without sufficient advance notice. These problems are being partially resolyed by improved communication between the U.S. Attorney's Offices and the FDIC on a local level. The most problems with delays were noted in our New York region. They noted a lack of coordination of efforts in several instances. However, they have resolved most of these problems through improved communications, standardized procedures and the local bank fraud working groups. PAGENO="0621" 617 22 The Dallas region attributed delays to the financially complicated cases and the priorities being placed on high-dollar arid high-profile cases. A lack `of-~resources adequate to deal with the large number of depository institutions where fraud has been uncovered was the primary problem. At one joint inter-agency meeting in Oklahoma the U.S. Attorney disclosed that. the primary problem encountered in achieving timely and successful prosecution of criminal bank fraud offenders was the lack of "experienced" attorneys familiar with the intricacies of bank transactions within the U.S. Attorney's Office. The U.S. Attorney proposed the special appointment of FDIC attorneys, as Special Assistant U.S. Attorneys, to actively assist in the prosecution of offenses relating to financial institutions. The FDIC will consider requests for attorney assistance of this nature in specific matters. We are also aware that in the past there has been a substantial backlog of criminal referrals in the Central District of California which was attributable to the limited resources of the FBI and U.S. Attorney's Office. However, we note that there have been several recent cases tried with excellent results. In addition, the organization of a local working group has created a cooperative atmosphere among the Department of Justice and the regulatory agencies. The Attorney General's December, 1989 allocation of prosecutorial and investigative resources to areas where a need has been identified will certainly help decrease delays and relieve the over-worked staffs, such as in the Central District of California. However, it is too early to assess the efficacy of the locational assignments and the sufficiency of the numbers allocated. In addition, it is also premature for us to assess whether the annual $50 million three-year appropriation will be adequate to deal with a fraud problem of the magnitude of that in the banking and thrift industries. We are hopeful that the Attorney General will complete the hiring and training of these new prosecutors and investigators quickly so that these new resources can be swiftly brought to bear. This Committee should also be aware of the important role that the FDIC and other banking agencies are playing in the detection -and prosecution of bank fraud. We have identified some areas in which the utilization of FDIC personnel has been and will continue to be essential to successful prosecutions: 1. The early detection and communication of possible bank fraud to the Department of Justice. 2. The rapid response to initial inquiries by investigators PAGENO="0622" 618 23 and prosecutors concerning criminal referrals, the institution and individuals involved, and ~he relevant transactions; 3. The identification of important documents and witnesses to facilitate grand jury investigations and the production requested documents from institution and agency files; 4. The availability of agency experts and expertise to assist investigators' and prosecutors' understanding of the records and transactions involved; 5. The availability of agency personnel as witnesses at trial; 6. The participation in local fraud working groups; and 7. Cooperation with U.S. Attorney's Offices and probation departments to obtain restitution orders and substantial periods of incarceration for those convicted of bank fraud. These are some of the important contributions made by the FDIC to support the prosecution of bank fraud. 2. List (in an appendix) each local law enforcement (bank fraud) task force/working group, and identify for each the FDIC's representative(s). See Appendix E-2 for this listing. 3. (a) Please evaluate the operations of the Bank Fraud Working Group and discuss any improvements to its structure or operations. (b) Has the Working Group discussed and taken any specific actions to implement recommendation no. 29 in the committee's report? ResDonse: (a) See Appendix E-3-a for an outline of accomplishments of the Interagency Bank Fraud Enforcement Working Group compiled jointly by the Federal Reserve Board, Office of Thrift Supervision, Office of the Comptroller of Currency, Federal Deposit Insurance Corporation, the Resolution Trust Corporation, the National Credit Union Administration, and the Fraud Section, Criminal Division, Department of Justice. PAGENO="0623" 619 24 (b) No formal action has been taken by the Working Group to implement recommendation no. 29. However, the regulatory agencies do share information as to individuals and types of schemes encountered by our examination teams or investigators. This information is discussed at the group's meetings so that the other regulatory agencies can alert their field organizations concerning such individuals or schemes. In addition, the FDIC has created the Criminal Restitution Unit within the Legal Division to coordinate the collection and dissemination of information related to fraud schemes, fraudulent transactions and individuals suspected of involvement in such schemes in banks and thrifts under the supervision of the FDIC. 4. (a) Report on the FDIC's successes and failures in obtaining both the U.S. Attorneys' cooperation in requesting, and also the courts' cooperation in imposing, restitution, civil money penalties, and removals from SNM banks at time of sentencing in criminal cases, including identifying, if possible, those districts where the FDIC has not been successful; and (b) provide any overall figures on the amount of such restitution. ResponRa: a. Nearly all FDIC offices reported specific instances of positive results due to the coordinated inter-agency efforts. The following are examples: Oklahoma City: The restitution order and settlement agreement reached with Charles Bazarian and his business operation, CB Financial Company, payable to the FDIC in the sum of $24MM, is an example of a cooperative effort on the part of the FDIC, the FBI and prosecutorial agencies to resolve the massive bank fraud committed by this individual and his company. The circumstances involved multi-district bank fraud violations and the assistance of law enforcement agencies in Florida, Oklahoma, and California. Kansas City: The Regional Office is pushing for restitution in all appropriate cases. As a result, the FDIC was recently awarded restitution in the amount of $2 million from William A. Ddam who was convicted in the U.S. District Court for the District of South Dakota, of bank fraud and making false statements. Likewise, Craig Kronholm has been ordered to pay restitution to Boundary Waters State Bank, Ely, Minnesota and the Veranth Estate in the maximum amount permitted. PAGENO="0624" 620 25 New York: There have been many instances where the New York Consolidated Office has successfully worked in conjunction with the U.S. Attorney to achieve positive results. Most notable was the joint involvement by the FDIC and U.S. Attorney in the prosecution of certain officers of Golden Pacific National Bank ("GPNB"). The closing of GPNB on June 21, 1985 was due in large part to the activities of its Chairman and President, Kuang Hsung J. Chuang and Vice President, Theresa Shieh. The New York Consolidated Office cooperated over a two-year period with the U.S. Attorney in its investigation into the activities of Chuang and Shieh. The voluminous documentary evidence produced by the FDIC was crucial to the lengthy investigation and trial, which culminated in the convictions of Chuang and Shieh on January 18, 1989. In addition, the U.S. Attorney was extremely cooperative in asserting the FDIC's restitution claim against GPNB's former officers. Another example of joint efforts producing positive results was in the matter of Jacobo Finkielstain, the majority shareholder (99%) of Central National Bank of New York ("Central"). Central was declared insolvent on September 11, 1987, and Finkielstain was subsequently indicted for the fraudulent schemes which led to the bank's collapse. The FDIC provided numerous documents to the U.S. Attorney to assist him. Finkielstain ultimately pled guilty on August 17, 1989. With the U.S. Attorney's support and cooperation, the FDIC successfully sought restitution against Finkielstain. On December 8, 1989, the FDIC was awarded restitution in the amount of $34,725,000.00. PAGENO="0625" 621 26 (b) We have collected the following data concerning restitution orders resulting from criminal convictions: FDIC INSURED INSTITUTIONS - CRIMINAL RESTITUTION 1987 1988 1989 1990 to date $ 983,095 $14,960,741 $ 5,436,258 4 persons 2 persons 7 persons FOUR YEAR TOTAL: $21,380,094 involvIng 13 persons FSLIC INSURED INSTITUTIONS - CRIMINAL RESTITUTION - 1987 1988 12~2 1990 to date $27,066,755 $81,119,632 $100,070,645 $17,508,322 28 persons 81 persons 69 persons 8 persons FOUR YEAR TOTALS: $225,745,354 invoLving 186 persons F. Information exchanges 1. In its January 18, 1989, letter the FDIC responded to the recommendations in the committee's 1988 report. Several of those responses dealt with the report's recommendations to improve information sharing between agency fee counsel and law enforcement authorities the subject of Recommendations 22.a-d.: a. To comply with this recommendation, the FHLBB had implemented the following policy: (i) it has direôted fee counsel employed by the FSLIC that the criminal prosecution should take precedence over the civil recovery actions, (ii) it had prohibited them from entering into any agreements concerning transmittal of information to the Justice Department, and (iii) it bad incorporated in the standard contract between the FSLIC and fee counsel an obligation on the counsel to make referrals based on facts discovered by fee counsel. Questions: (i) Is this policy and contractual provision still in effect with regard to insolvent ~thrifts now under the FDIC's jurisdiction or has it been changed to conform to the FDIC's policy existing in early 1989? If it has been changed, why? (ii) Has the FDIC changed its policy with regard to insolvent banks, to follow the FHLBB's policy? If not, why not? Please explain. PAGENO="0626" 622 27 Response: The FDIC has not adopted the FHLBB's policy or contractual arrangement with outside fee counsel. The FHLBB's policy was created to recognize the centralized organizational structure of the Bank Board. The FDIC,on the other hand, utilizes a regional organizational structure in which each region is highly autonomous. In addition, the FDIC does not use outside fee counsel to investigate failed institutions. Rather, the FDIC has in each region a cadre of trained investigators that review transactions that may involve criminal conduct or other abuse by insiders and others. These investigators make criminal referrals directly or through their regional office. Accordingly, the majority of criminal referrals are made by FDIC employees rather than outside fee counsel. We continue to believe that this system is efficient and effective and allows the FDIC to better insure that referrals receive proper attention from the agency. While the FDIC has not adopted the FHLBB's policy in its contracts with fee counsel, it has issued a Guide for Legal Representation which provides directives to fee counsel concerning the referral of criminal misconduct to the U.S. Attorney's Offices. These directives include a reference to the FDIC's longstanding policy of promptly notifying and assisting law enforcement officials in investigating conduct which may constitute a violation of criminal statutes. b. What has the Bank Fraud Working Group done in the way of discussing or implementing any of these recommendations, including developing "pre-referral process" (as referenced on pp. 10 & 11 of the FDIC's letter)? Response: The FDIC has not adopted a formal "pre-referral" process. The FDIC encourages immediate informal contact with criminal law enforcement authorities by its employees whenever fraud or other possible criminal conduct is discovered. This contact is typically made through a bank examiner, or the Regional Office's criminal fraud liaison, whenever any situation is encountered that could involve fraud on an operating, insured institution. Similarly, personnel involved in failed institutions are encouraged to make the same informal contact with appropriate criminal law enforcement authorities whenever a situation is encountered involving fraud by insiders or former customers that requires immediate attention. When the fraud involves the failed institution as well as an operating institution, immediate attention is usually warranted, and informal contact is made to alert the authorities. PAGENO="0627" 623 28 In most cases, the informal contact is made in the form of a telephone call to an FBI agent or assistant U.S. attorney designated as the bank or savings and loan fraud contact. c. To the extent not described in the FDIC's response to a. and b., what specific steps has the FDIC taken to implement each of these recommendations in No. 22? Response: The FDIC has recognized a need to foster better coordination and communication regarding criminal matters. The FDIC has therefore created the Conflicts and Criminal Restitution Section (CCRS) within its Legal Division. The CCRS is dedicated to: 1. Promoting the making of more timely and thorough criminal referrals; 2. Coordinating the assistance of FDIC personnel in the grand jury investigation and trial; 3~. Providing the assistance to assistant U.S. attorneys in proving damages for restitution; 4. Tracing assets and collecting restitution orders; 5. Investigating complex fraud matters; and 6. Reviewing matters in which one or more culpable individuals are implicated in misconduct against two or more insolvent institutions, a/k/a, a "daisy chain". The following is a list of some of the projects initiated by the FDIC-CCRS: 1. Worked closely with the U.S. Attorney in San Francisco to obtain contempt convictions and revocation of a probation against Jay and Leif Soderling - former directors and shareholders of Golden Pacific Savings Association. The Court found that the Soderlings went on a $500,000 "spending spree" rather than make payment on the outstanding restitution order. As a result, the court ordered the Soderlings to serve the 6-1/2 years remaining on their sentences and increased the restitution amount to $6.7 million. Over $1.9 million has been collected and an additional $1 million in other assets has been frozen (Appendix F-l-c, No.1). 2. Revitalization of the Miami, Florida local fraud working group: We gathered representatives from the FDIC, OTS, Federal PAGENO="0628" 624 29 Reserve, 0CC, FBI, U.S. Attorney's Office for the S.D. of Florida, and the State of Florida Banking Dept., and have continued to chair meetings focusing on individual cases and developing better cooperation and communication in the south Florida area; 3. Provided assistance to the Solicitor General on the Davenport brief filed in the Supreme Court (dealing with the dischargeability of restitution orders under Chapter 13 of the Bankruptcy Code). We are also assisting in the HuGhey case involving a restitution issue that is being heard by the Supreme Court this Spring (Appendix F-l-c, No. 2); 4. Orchestrated meetings regarding three, thrifts that have been put into the RTC Program (CenTrust/Miami, Fla., General Bank/Miami, Fla., Red Hill/Red Hill, Pa.) with the FBI, Federal Prosecutors, fee counsel, and the staff of primary regulatory agencies to discuss ongoing criminal investigations, the possibility of any criminal misconduct, and the methodology to uncover possible violations, the steps to preserve and document the location of evidence, the staffing of the investigations by agency personnel, the identification of witnesses who are crucial to criminal and civil investigations and making such witnesses available to the respective agencies, and continued coordination of civil and criminal investigations to ensure success and to avoid conflicts; 5. Worked with fee counsel, FDIC and OTS personnel, probation officers and Federal Prosecutors in proving damages suffered by banks and thrifts through the drafting of restitution letters, affidavits, memorandums, and in providing witnesses at restitution hearings. These efforts have resulted in defendants being sentenced to longer terms of imprisonment (Ramona; 12 and 15 years for the two defendants) and the adoption of restitution orders (i.e., ~jtJi: $12 million) (Appendix F-l-c, No.3); and 6. Coordinated with the FBI to obtain records sought by grand jury subpoena that were located with fee counsel and primary regulators. 2. Does the FDIC still have a consumer toll-free hotline? If so, how does it work? How is it publicized? How many instances -of alleged fraud, abuse, misconduct were reported in 1989? And what was the outcome of those reports? Response: Yes. The FDIC's Office of Consumer Affairs (OCA) has had such a hotline for at least ten years. The Consumer Telephone Hotline allows the public to ask questions or present views and PAGENO="0629" 625 30 complaints about consumer protection or civil rights matters involving FDIC-supervised institutions. The toll-free number is (800) 424-5488. This phone line is manned from 9:00 a.m. to 4:00 p.m. Monday through Friday, by at least two employees full tine, with assistance by numerous specialists. This usually results in at least four individuals answering ôalls at all times, with access to additional personnel when necessary. Additionally1 the toll-free number also reaches a telecommunication device for the deaf (TDD) and the device can be reached in the Washington area by calling (202) 898-3537. The toll-free number and a brief description of the service is published in all pamphlets issued by the U.S. government concerning consumer protection - for instance, the U.S. Office of Consumer Affairs publishes a "Consumers' Resource Handbook" and the FDIC's number is contained therein. Periodic press releases contain the number and describe the consumer hotline. Parties on FDIC's Office of Consumer Affairs mailing list are alerted in writing to the existence of the hotline. RTC provides this number to the public during various financial institution closings that it attends, and also includes this number in some publications that it circulates. During speeches at conferences throughout the country, FDIC officials will advise attendees of the existence of the toll-free hotline. In 1989 OCA received 13,393 calls on the telephone hotline. The major areas of concern were: insurance coverage protection, general banking information, Fair Housing and the Home Mortgage Disclosure Act. None of OCA's calls in 1989 appeared to pertain to alleged fraud or misconduct. If OCA receives such a complaint, it would be referred to the appropriate office, such as the Division of Supervision's Special Activities Section or the Securities Registration and Disclosure Section. In some situations, the referral might be made to the FDIC's Regional Offices. OCA does not formally track the outcome of such referrals. 3. Discuss any other problems with, and suggest improvements in, the exchanges of information (a) between and among the Federal banking agencies and (b) between the FDIC and Justice Department. Response: We believe that major improvements have been made in the exchange of information among the regulatory agencies and the Department of Justice. However, we are aware that more improvement could be achieved. Among the improvements that we believe would be helpful are: PAGENO="0630" 626 31 1. Legislative initiatives to make clear that information production to the Department of Justice by the regulatory agencies pursuant to a grand jury subpoena or other formal request in a criminal investigation does not waive or result in the waiver of any privileges that may attach to such information in the possession of the agencies. 2. More and better sharing of information by the Department of Justice pertaining to the status of investigations resulting from agency criminal referrals. 3. Increased authority for sharing of information gathered by the Department of Justice in the course of criminal investigations to agencies for use in connection with administrative or civil enforcement and asset recovery matters. PAGENO="0631" 627 Mr BARNARD Thank you very much, Sir We will now hear from the Director of Investigations of the Reso lution Trust Corporation, Mr James Dudine STATEMENT OF JAMES R DUDINE DIRECTOR OF INVESTIGATIONS, RESOLUTION TRUST CORPORATION Mr DUDINE Thank you, Mr Chairman I am pleased to be here to address the nature and extent of insid- er abuse and misconduct in insolvent thrift institutions under the control of the Resolution Trust Corporation The RTC has been in existence for just a little over 7 months, and I have personally been associated there only about 3 months. So, like any new organization, our managers are still engaged in organizing and staffing their areas of responsibility, and I ask that you take into consideration the limited experience we have had when you consider my comments today and some of the estimates that we have made. In preparing for this testimony, we surveyed our RTC investiga- tors and attorneys in the four regional offices, and they, in turn, went beyond that, to the extent needed, to gather the information. I would like to point out that 6 months from now, virtually all of the information that you and your staff asked for, I would hope, would be available through a new computer system we are deploy- ing in the Washington office and throughout our regional and con- solidated field offices. I would like to just summarize my statement, if it is all right with you, Mr. Chairman. Mr. BARNARD. Please. Without objection, your entire testimony will be included in the record, including Mr. Beamon's. We will hear shortly from you, too, Mr. Beamon. Mr. DUDINE. The testimony actually follows the letter of invita- tion and some of the questions that you asked. First, I would really like to explain a little bit the FDIC and the RTC's philosophy and practice in investigating activities that may yield recoveries as a result of fraudulent conduct and professional malpractice. The RTC has a duty to each receivership and to the taxpayers to maximize recoveries from any viable source, including directors and officers, accountants, legal counsel, appraisers, and any insur- ance policies covering the professional conduct of those people. Generally, litigation will be necessary to obtain these recoveries. The great majority of RTC's litigation will be contracted to outside law firms working under the supervision of an RTC attorney and supported by RTC investigators. We will retain control of the investigative resources. In this way, we believe, costs can be held to a minimum and incentives to engage in expensive and possibly unprofitable litigation will be minimized. This strategy will give us consistency and accountabil- ity in recommending and bringing any adverse actions against indi- viduals. Accordingly, the RTC has established an Office of Investigations in Washington and a core of investigators throughout the country to conduct investigations in each RTC-controlled thrift. They will PAGENO="0632" 628 identify the individuals who caused the insolvencies and help deter- mine whether and what sort of litigation should be initiated to re- cover fraudulently or recklessly misappropriated assets. In practice, RTC investigators will be involved initially and throughout the litigation, supporting the attorneys. RTC investiga- tors will assist FBI and the U.S. attorneys in prosecuting individ- uals who benefited personally at the taxpayers' expense. The inves- tigators' initial task, after RTC is appointed conservator of an in- solvent thrift, is to conduct a preliminary investigation of the facts leading to the insolvency and the investigator prepares a prelimi- nary findings report. As of March 13, 277 preliminary findings reports had been com- pleted, representing 71 percent of the 392 thrifts under RTC's con- trol. Using the preliminary findings as a base for our estimates- and again, I would like to emphasize that this information is very preliminary at this point-we would estimate that 169, or about 61 percent, of the 277 thrifts were subjected to serious misconduct by insiders and/or the fraudulent conduct of affiliated outsiders, usu- ally borrowers. Based on our survey, we estimate roughly 50 percent of the thrifts have already had suspected criminal misconduct referred to the Department of Justice. In also roughly about 50 percent-not necessarily the same set-insider abuse and misconduct contribut- ed significantly to the insolvency. We also estimate that about 15 percent of the thrifts that we have looked at, about 42 of them, were involved in possibly fraudu- lent transactions with other financial institutions-asset swaps, daisy-chain deals-a rather large number of thrifts, I would think. You asked that we discuss trends and patterns of fraud and mis- conduct. Our survey revealed instances of insider abuse and mis- conduct, ranging from embezzlement and simple loan fraud to com- plex conspiracies and schemes to defraud the institutions. We noted a predominance of lavish lifestyles, plush accouterments, ex- pensive autos, artwork, airplanes, and compensation incentives clearly benefiting insiders at the expense of the stockholders and the depositors. Many of the complex schemes involve overvalued property that was swapped several times between borrowers or among various S&L's. Essentially, these are land-flip schemes, and they created false values on which loans were made and generated excessive fees that were parceled out to appraisers, brokers, developers, and others, usually insiders of the S&L's. We are pursuing several instances where assets of doubtful value were exchanges with assets of even more questionable value to de- ceive the regulators into believing that the capital position of the thrift was not impaired. We are also looking into several instances of unauthorized trading in mortgage-backed securities, junk bonds, and other financial instruments, where insiders benefited personal- ly at the expense of the institution. Looking at the problem on a regional basis, abuses seem to be more prevalent in the Southwest and in California, with more recent problems stemming from the Northeast and in Florida. RTC's central region, comprising Arkansas and 11 Midwestern PAGENO="0633" 629 States, reports far and away the lowest percentage of thrifts exhib- iting fraud and abuse-less than 40 percent. You asked us about recoveries from RTC lawsuits. It is really too early in the RTC's lifespan to expect any meaningful recoveries from lawsuits. We have, however, recovered over $4 million from fidelity bond claims involving five thrifts. The RTC is now the plaintiff in approximately 56 pending lawsuits, involving 38 institu- tions, relating to insider negligence, fraud, or abuse, and we have been awarded criminal restitution of about $2.5 million in connec- tion with six convicted officials of two S&L's. The S&L's both happen to be in San Antonio. These are all cases that we inherited either from the FSLIC or from the institutions themselves. With respect to our assessment of the Justice Department's re- sources and their adequacy, our survey revealed no major bottle- necks or problems with the response of U.S. attorneys to RTC criminal referrals. The overall consensus was that the Justice De- partment's performance in responding to thrift cases has improved substantially in recent months and that the addition of the new re- sources authorized under FIRREA would further improve the proc- ess. Again, because our limited investigative resources are scarce as of now, we are really concentrating on about a dozen very signifi- cant, high-visibility cases of fraud, abuse, and misconduct, many of the ones that have been in the newspapers, and our experience with the FBI and the U.S. attorney's offices-in these cases, it is very positive. Justice is aggressively pursuing each of these mat- ters. They have allocated sufficient resources to carry out a speedy prosecution. Our coordination has been excellent, and as new cases arise, we are attempting to coordinate our efforts from the outset not only with Justice and criminal prosecutors but with other interested agencies, such as, of course, the Office of Thrift Supervision, but the Securities and Exchange Commission is interested in many of these cases, Internal Revenue Service, and some State and local prosecutors or regulators, depending on their interest in the case. With the coming of the new FIRREA resources, Mr. Chairman, it is really our belief that all the major cases will be thoroughly in- vestigated. Time will tell, of course, whether all of the cases that really deserve to be handled will be handled by the Justice Depart- ment. We do commend the Justice Department, however, on seek- ing the input of the regulatory agencies in allocating their re- sources to those 27 priority areas. We believe that the resources have been allocated to the districts where they are most needed. For example, in just looking at the criminal referrals involving RTC thrifts, three-quarters of them are being handled by U.S. at- torneys in the priority areas, and more than half of them are really being handled in five or six districts-Houston, Dallas, Los Angeles, Chicago, San Antonio, and San Francisco, all of which re- ceived sizable resources from the FIRREA allocations. I believe that you will have quite a bit of information in my testi- mony as well as that of the others on the accomplishments of the Bank Fraud Working Group. I will just say a few things about that in the interest of time. PAGENO="0634" 630 I have been involved with the Bank Fraud Working Group since its beginning. I was representing the Division of Supervision of FDIC at that time. I am continuing to meet with the working group, now representing the RTC. The working group really set out in 1985 to accomplish about six main goals, and most of those have really been accomplished. With the passage of FIRREA, all of the objectives had been achieved, and I think the working group now is turning to a little bit different areas. It continues to be a positive and influential force in combating fraud and abuse in the U.S. financial system, and recently, the Treasury Department and the Secret Service were added as mem- bers, and I think the forum for discussion now has been broadened a little bit, to include money laundering and credit card fraud. I think it is an excellent group, and it will continue to be a major force in the Government's effort to combat fraud and abuse. We at the RTC plan to monitor civil litigation a little bit more closely in the future. One of the questions that you asked us was about that. The computer system that I mentioned is really de- signed to capture a lot of information from civil litigation, names of targets and their ties with other institutions. This data will be combined into a large data base in Washington and combined with information from our Division of Liquidation on the bank side, information on criminal investigations that will also be included in the system, and we believe that it will give both the RTC and our Division of Liquidation a greatly enhanced ability to track individuals and fraud patterns across the country. The system has been implemented in several of our liquidation offices and will be implemented throughout the RTC within the next 6 months. I will turn to local working groups. I have a few comments on those. We believe that that program has the most potential to ensure efficient and intelligent investigations and, thus, produce effective prosecutions. There are presently about 20 local working groups meeting regularly or informally throughout the country. From our perspective, a few strategically located local groups hold promise for helping to coordinate the complex thrift investigations we are involved in. For example, we have already participated in the es- tablished groups, such as Dallas, Miami, Oklahoma City, Tulsa, Los Angeles, Topeka, and Springfield, IL. We really applaud the recent establishment of working groups in Houston and Phoenix, each having a concentration of thrift cases in those districts. We intend to participate in all working groups representing U.S. attorney districts in which we have a concentrated caseload and in many other groups that really believe the RTC could contribute. Working relations with the Justice Department really have im- proved quite a bit over the last few years. Chairman Seidman, who is our Chairman, also, has pledged that the RTC will vigorously assist the Department of Justice in prosecuting thrift officials and affiliated borrowers who benefited personally at the taxpayers' ex- pense. We will work with the Justice Department to gain a conviction which, I might add, would effectively bar those wrongdoers from ever again working in the financial services industry. We also are PAGENO="0635" 631 working to ask the court to order restitution of the stolen funds to the RTC and, ultimately, to the taxpayer. Nevertheless, we are not criminal investigators, and we cannot lose sight of our primary responsibility, which is to recover assets for the taxpayer. The responsibility requires the RTC to proceed aggressively to achieve civil remedies. In most cases, our civil inter- ests do not conflict with the Justice Department's criminal objec- tives. However, the potential for conflict exists and problems will arise that must be resolved. We believe that we have the framework and cooperative spirit in place to resolve on a local level most conflicts or problems that might arise from parallel civil and criminal proceedings, including any conflicts related to document control and the sharing of infor- mation. RTC investigators are being trained to work with law enforce- ment agents to achieve our mutual objectives, and law enforcement agents and prosecutors are similarly being trained to understand and respect the RTC's primary responsibility, which is to recover assets for the receiverships and for the taxpayers. Mr. Chairman, we pledge to work in partnership with the De- partment of Justice and the other regulatory and investigative au- thorities to recover assets for the taxpayer and to help send guilty thrift operators and their associates to jail. Thank you. [The prepared statement of Mr. Dudine follows:] PAGENO="0636" 632 TESTIMONY OF JAMES R. DUDINE ASSISTANT DIRECTOR (INVESTIGATIONS) RESOLUTION TRUST CORPORATION WASHINGTON, D.C. ON THE EXTENT OF MISCONDUCT IN INSOLVENT THRIFT ASSOCIATIONS BEFORE THE COMMERCE, CONSUMER AND MONETARY AFFAIRS SUBCOMMITTEE COMMITTEE ON GOVERNMENT OPERATIONS UNITED STATES HOUSE OF REPRESENTATIVES 9:30 A.M. March 15, 1990 Room 2247 Rayburn House Office Building PAGENO="0637" 633 Mr. Chairman, members of the Subcommittee. I am pleased to appear before you today to discuss the nature and extent of insider abuse and misconduct in insolvent thrift institutions under the control of the Resolution Trust Corporation (RTC). The RTC has existed for a little over seven months. My personal asso- ciation with the RTC spans only three months. Like any new organi- zation, our managers are still engaged in organizing and staffing their areas of responsibility. This is true also of FDIC lawyers who are to supervise litigation arising from the misconduct of thrift insiders. At this early date, our collective experience is limited and my comments should be viewed with this limited experience in mind. In preparing for this testimony, we surveyed RTC investigators and attorneys in the four RTC Regional Offices. They, in turn, contacted field sites and consolidated field offices, as needed, to gather the information. We also gathered information from FDIC's professional liability attorneys and from the newly-formed Conflicts and Criminal Restitution Section of the FDIC's Legal Division. I should point out that six months from now virtually all of the information you asked for will be available in Washington through a computer case tracking system called MIDAS that is being implemented currently. PAGENO="0638" 634 -2- RTC Investigations Mr. Chairman, my testimony today follows the order of your letter of invitation. Before addressing your questions, however, I would like to explain the FDIC's and the RTC's philosophy and practice of investigating activities that may yield recoveries as a result of fraudulent conduct and professional malpractice. The RTC has a duty to each receivership and to the taxpayers to maximize recoveries from any viable source, including directors and officers, accountants, legal counsel, appraisers and insurance policies covering their professional conduct. Generally, litigation will be necessary to obtain these recoveries. The great majority of RTC's litigation will be contracted to outside law firms working under the supervision of an RTC attorney and supported by RTC investigators. We believe that by retaining control of investigative resources, costs can be held to a minimum and incentives to engage in expensive and possibly unprofitable litigation will be minimized. Moreover, using RTC employees to gather facts and support litigation will give us consistency and accountability in recommending and bringing any adverse actions against individuals. Accordingly, the RTC has established an Office of Investigations in Washington and a corps of investigators throughout the country to conduct investigations in each RTC-controlled thrift. They will identify the individuals who caused thrift insolvencies through negligent and reckless mismanagement, fraud or criminal conduct. PAGENO="0639" 635 -3- Investigators will help determine whether and what sort of litigation should be initiated to recover fraudulently or recklessly misappropriated assets. The RTC's Statement of Investigation Principles is included in Attachment ~ In practice RTC investigators will be involved initially and throughout the civil litigation, supporting the attorneys. RTC investigators will assist the Federal Bureau of Investigation and U.S. Attorneys in prosecuting individuals who benefited personally at the taxpayers expense. The investigator's initial task after RTC is appointed conservator of an insolvent thrift is to conduct a preliminary invéstigationof the facts leading to insolvency and to prepare a "Preliminary Findings Report." As of March 13, 277 preliminary findings reports had been completed, representing 71 percent of the 392 thrifts under the RTC's control. Misconduct in Insolvent Thrifts On August 9, 1989, when the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was signed into law, there were 262 thrifts under conservatorship. Since then, 130 have been added and 50 resolved, leaving 392 thrifts as of March 13. Attachment fl iden- tifies the thrifts currently subject to RTC control, along with infor- mation on size and location. PAGENO="0640" 636 -4- Using the preliminary findings as a base for our estimates, and I must emphasize the preliminary nature of these findings, we estimate that 169 or 61 percent of the 277 thrifts were subjected to serious miscon- duct by insiders and/or the fraudulent conduct of affiliated outsiders, usually borrowers. Preliminary investigations are under way or about to be scheduled in another 115 thrifts. We have not yet estimated the extent of insider abuse and misconduct in these 115 thrifts. Based on our survey of the 277 thrifts for which preliminary findings are available, we estimate: Roughly 50 percent have had suspected criminal misconduct referred to the Department of Justice. (138 Thrifts) In roughly 50 percent, insider abuse and misconduct contributed significantly to insolvency. (138 Thrifts) About 15 percent were apparently involved in irregular and possibly fraudulent transactions with other financial institutions. (42 Thrifts) Dollar Losses Attributed to Fraud and Misconduct The RTC cannot estimate with any degr~e of confidence the losses / incurred by RTC thrifts that may have been directly caused by fraud and insider abuse. Many of the thrifts continue as operating financial institutions under conservatorship. Total losses due to all factors PAGENO="0641" .637 -5- cannot, as yet, accurately be estimated until each thrift is resolved. Even then, it will be difficult to separate fraud and abuse losses from those caused by negligence and mismanagement. Trends and Patterns of Fraud and Misconduct Our survey revealed instances of insider abuse and misconduct ranging from embezzlement and simple loan fraud to complex conspiracies and schemes to defraud the institutions. We noted a predominance of lavish lifestyles, plush accoutrements, expensive autos, artwork, airplanes, and compensation incentives benefiting insiders at the expense of stockholders and depositors. Many of the complex schemes involve over-valued property that was swapped several times between borrowers or among various S&L's. These land flip schemes created false values on which loans were made and generated excessive fees that were parceled out to appraisers, brokers, developers and other participants in the scheme, including insiders of the S&L's. We are pursuing several instances where assets of doubtful value were exchanged with assets of even more questionable value to deceive regulators into believing that the capital position of the thrift was not impaired. We are also looking into several instances of unauthorized trading in mortgage-backed securities, junk bonds and other financial instruments where insiders benefited personally at the expense of the institution. A look at the regional distribution of thrifts for which Preliminary Findings Reports were completed is informative. Abuses are more prevalent in the Southwest and Southern California with more recent 30-830 0 - 90 - 21 PAGENO="0642" 638 -6- problems stemming from the Northeast and Florida. RTC's Central Region, comprising Arkansas and 11 midwestern states, reports far and away the lowest percentage of thrifts exhibiting fraud and abuse--less than 40 percent. Recoveries from RTC Lawsuits It is too early in the RTC's life span to expect any meaningful recoveries from lawsuits. To date, there are none. We have, however, recovered over $4.2 Million from fidelity bond claims involving five thrifts. The RTC is the plaintiff in approximately 56 pending lawsuits involving 38 institutions and relating to insider negligence, fraud, or abuse. Included are suits or adversary proceedings in bankruptcy against directors, accountants, fidelity bond and other insurance carriers. Criminal Enforcement Efforts You asked that we discuss the adequacy of the Justice Department's resources and efforts that are being applied to S&L fraud cases and whether the Attorney General's allocations of the additional resources granted by FIRREA will be sufficient. Our survey revealed no major bottlenecks or problems with the response of U.S. Attorneys to RTC criminal referrals. Understaffing was mentioned as the primary reason for the slow pace of investigation in PAGENO="0643" 639 -7- some districts. The overall consensus was that the Justice Department's performance in responding to thrift cases had improved substantially in the past.twelve months1 and that the addition of new FIRREA resources would further improve the process. Because our limited investigative resources are scarce as of now, we are concentrating on about a dozen very significant cases of fraud, abuse and misconduct. Our experience with the Federal Bureau of Investigation and U.S. Attorneys' offices in these ~high priority cases is extremely positive. The Department of Justice is aggressively pursuing each of these matters and has allocated sufficient resources to carry out a speedy prosecution. Coordination has been excellent. As new cases arise, we are attempting to coordinate our efforts from the outset not only with criminal prosecutors but with other interested agencies, such as the Office of Thrift Supervision, the Securities and Exchange Commission, the Internal Revenue Service, State and local prosecutors and regulators. With the coming of the new resources established in FIRREA and the level of cooperation we have experienced to date, we have every reason to believe that any major criminal cases involving RTC thrifts with clear prosecutorial merit will be vigorously and successfully pursued. .~jAlthough RTC has existed for approximately 7 months, many RTC investigators transferred from FDIC's Division of Liquidation and drew upon prior experience in responding to this question. PAGENO="0644" 640 -8- Time will tell whether the Justice Department's allocations of the additional resources provided by FIRREA are sufficient to handle all deserving cases. However, we commend the Department of Justice on seeking the input of the regulatory agencies before allocating resources to the 27 priority areas, and we believe these resources have been allocated to the districts where they are most needed. To illustrate, over three-fourth's of the criminal referrals involving RTC thrifts are being handled by U.S. Attorneys in the priority areas. Over one-half of them are in the following U.S. Attorney districts (ranked highest to lowest): Houston, Dallas, Los Angeles, Chicago, San Antonio, and SanFrancisco, all of which are recipients of additional FIRREA resources. Restitution The RTC follows the same practices as the FDIC with respect to seeking restitution orders from the Court at the time of sentencing of a convicted thrift insider or associate. The RTC was recently awarded restitution in the amounts of $1,082,300 and $809,800 in connection with the convictions of two officials of Suburban Savings, San Antonio, Texas, and $464,000 in connection with four individuals associated with Alamo Savings in San Antonio, Texas. We expect to successfully pursue restitution orders in all cases where we can prove that the defendant caused a loss to the RTC. PAGENO="0645" 641 -9- Bank Fraud Working Group The Bank Fraud Working Group was established in December 1984 with representatives from the Fraud Section of the Department of Justice, the Federal Bureau of Investigation, the Federal Deposit Insurance Corporation, the Office of the Comptroller of Currency, the Federal Reserve Board, and the Federal Home Loan Bank Board (now the Office of Thrift Supervision). Other members were added later. I have been involved personally with the Bank Fraud Working Group since its beginning and, until December 1989, represented FDIC's Division of Supervision at working group meetings. I now represent the RTC. In early 1985, the working group set out to accomplish six major objectives: 1. Improve and standardize criminal referrals. 2. Train Examiners, investigators and prosecutors to detect, investigate, and prosecute bank fraud. 3. Improve communication and cooperation between examiners and law enforcement agents. 4. Eliminate barriers to the exchange of information between and among member agencies. 5. Seek legislative amendments to the Right to Financial Privacy Act and Rule 6(e) of the Federal Rules of Criminal Procedure. 6. Establish the working group as an ongoing institution. PAGENO="0646" 642 -10- With the passage of FIRREA, all of these objectives have been achieved. I will summarize briefly some of the group's major accomplishments. Over the past five years, the working group: * Revised and improved the criminal referral system. * Adopted standard forms and regulations requiring financial institutions to report apparent criminal misconduct directly to U. S. Attorneys and the Federal Bureau of Investigation. * `Established a network of personal contact people and bank fraud specialists throughout each member agency. Published a Bank Fraud Directory listing the powers and responsibilities of each agency and the names and phone numbers of contacts. Improved training programs for examiners, investigators and prosecutors by promoting interagency schools on white collar crime (basic and advanced) conducted by Federal Financial Institutions Examination Council; joint Regulator/FBI schools held at regional locations, and supported outside training opportunities. Each agency established a computer system to track criminal referrals and to retrieve criminal history by name recog- PAGENO="0647" 643 -11- nition. All agencies contribute to the Justice Department's significant case tracking system. Recommended legislative amendments to the Right to Financial Privacy Act and~Rule 6(e) granting relief from the restric- tions that impeded the exchange of information between regu- lators and law enforcement agencies necessary to secure suc- cessful prosecutions. Legislative amendments originally proposed in 1985 were adopted in 1988 and 1989. FIRREA amended Rule 6(e) to permit transfer of information vital to a regulator's primary mission, under appropriate circumstances. Encouraged and promoted the formation of local bank fraud working groups to exchange information, improve coordination of criminal investigations and to open channels of commuñi- cation prior to and after a formal referral is made. At least 20 local working groups have been formed. Informal meetings and contacts occur regularly and are encouraged so that dialogue between regulators and law enforcement agencies begins before a formal referral is contemplated. Encouraged and promoted interaction and cooperation between financial institutions and law enforcement agencies by promo- ting the Fast Track Program which focuses on low dollar PAGENO="0648" 644 -12- amount offenses and requires the cooperation of financial institution staff. Working group members actively parti- cipate in and promote law enforcement interests at industry conferences and other open forums. Established standard language for use in plea agreements that would satisfy regulators' enforcement objectives, thereby conserving scarce government resources. For example, the plea agreement can include a stipulation by the defendant to a removal or prohibition from the industry or an agreement to pay a civil money penalty or other civil remedy. Established a practice of seeking restitution of misappro- priated funds to the deposit insurance funds through resti- tution orders at the time of sentencing. The working group continues to be a positive and influential force in combating fraud and abuse in the U.S. financial system. With the addition of the Treasury Department and the Secret Service as members, it is evolving into a forum for discussing broader issues affecting the banking industry and the regulators, such as money laundering and credit card fraud. The working group continues its practice of conducting post-mortems of major fraud cases, both successful and unsuccessful. The case reviews PAGENO="0649" 645 -13- focus on-the interaction between examiners, agents, and prosecutors in preparing for trial and during the investigation, enabling the member agencies to correct past mistakes and emphasize the techniques and strategies that produce positive results. For example, a review of a successful case might be included in an upcoming training program. Patterns of conduct involving multiple institutions and individuals victimizing more than one institution are discussed at working group meetings, and such information is exchanged among the agencies' supervisory departments. In its 1988 report, the Subcommittee -recommended that the details of patterns of criminality involving multiple institutions and other complex multi-institution frauds be presented at working group meetings. This is done to some extent now on an ~ ~2pq basis. Already in progress is a plan to upstream to the national working group information of this nature that is shared at local working group meetings. FDIC's Criminal Restitution Section is collecting information on major fraud schemes and fraud groups for this purpose. We plan to monitor civil litigation more closely in the future. The MIDAS computer system is designed to capture information from civil cases, including the names of defendants and their ties to other institutions. This data will be cinbined with-similar data from civil cases being monitored by FDIC's Division of Liquidation. Information on criminal investigations is also included in this system. We believe MIDAS will give both the RTC and the Division of Liquidation (DOL) a PAGENO="0650" 646 -14- greatly enhanced ability to track individuals and fraud patterns across the country. The system has been implemented in several DOL field offices and will be implemented throughout the RTC within the next six months. Groups We believe that. the program with the most potential to ensure efficient and intelligent investigations and thus produce effective prosecutions is the program of local working groups. There are presently more than 20 local groups meeting either regularly or informally throughout the country. RTC investigators have participated in several local meetings, and as we staff-up, we intend to participate frequently. From the RTC's perspective, a few strategically located local groups hold promise for helping to coordinate complex thrift investigations. For example, we have already participated in established groups such as Dallas, Miami, Oklahoma City, Tulsa, Los Angeles, Topeka and Springfield, Illinois. We applaud the recent establishment of working groups in Houston and Phoenix, each having a concentration of thrift cases in its district. We intend to participate in all working groups representing U.S. Attorney districts in which we have a concentrated caseload and with any other groups that believe RTC investigators can contribute. PAGENO="0651" 647 -15- You asked about RTC policies requiring outside counsel to make criminal referrals. Law firms hired to represent RTC thrifts are required to follow the guidelines presented in the FDIC's Guide for Legal Representation. The guide states that: .the settlement of civil litigation may not, expressly or by implication, extend to the disposition of any criminal charges or recommendations. . . The guide additionally states that: "In conducting civil litigation1 including settlement negoti- ations, you may not agree either not to disclose or not to refer to law enforcement authorities any information related to a pos- sible criminal violation or investigation." RTC policy further states that whenever FDIC outside counsel obtains information which may indicate possible criminal behavior, they are to notify immediately the FDIC attorney who is monitoring the case or another FDIC attorney. As a matter of practice, such information is turned over to an RTC investigator who submits a criminal referral in the normal fashion. PAGENO="0652" 648 -16- We believe that our criminal reporting method has several advantages over the FHLBB policy mentioned in the Subcommittee report. First, FDIC attorneys and RTC investigators work closely with outside counsel throughout the litigation. No delays will be experienced in passing on the information to the FDIC or RTC prior to referral. Second, by requiring the referral to become part of our normal referral system, we can ensure quality, consistency, accountability and appropriate follow-up with law enforcement officials. RTC policies governing criminal referrals are included in Attachment ~fl. ~Pre-Referral" Referral - Through relationships with the Federal Bureau of Investigation at the local level, we have informally established the concept of a "Pre-Referral" referral. RTC investigators work èlosely with FBI agents and OTS examiners to ensure a smooth transition to conservatorship and to protect the integrity of evidentiary documents and potential witnesses. FBI agents are often already involved with thrifts before they come under our control. FBI agents have accompanied RTC investigators into the institution on the day of - conservatorship and are, of course, welcome to continue to do so if it is deemed important to their investigation. Working with the Justice Department in Parallel Proceedings Chairman Seidman has pledged that the RTC will vigorously assist the Department of Justice in prosecuting thrift officials and affiliated PAGENO="0653" 649 -17- borrowers who benefited personally at the taxpayers' expense. We will work with the Department of Justice to gain a conviction, effectively barring these wrongdoers from ever~ again working in the financial services industry. We will also ask the Court to order restitution of stolen funds to~the RTC and ultimately to the taxpayer. Nevertheless, we are not criminal investigators, and we cannot lose sight of our primary responsibility, which is to recover assets for the taxpayer. This responsibility requires the RTC to proceed aggressively to achieve civil remedies. In most cases, our civil interests do not conflict with the Justice Department's criminal objectives. However, the potential for conflict exists, and problems will arise that must be resolved. We believe that we have the framework and cooperative spirit in place to resolve on a local level any conflicts or problems that might arise from parallel civil and criminal proceedings, including any conflicts related to document control and the sharing of information. RTC investigators are being trained to work with law enforcement agents to achieve our mutual objectives, and law enforcement agents are similarly being trained to understand and respect the RTC's primary responsibility to recover assets for the receiverships. We pledge to work in partnership with the Department of Justice and other regulatory and investigative authorities to recover assets for the taxpayer and help send guilty thrift operators and their associates to jail. PAGENO="0654" 650 ATTACHMENT I R~kffi~ Tn~ Corpo,aflon STATEMENT OF INVESTIGATION PRINCIPLES In the words of President Bush, "unconscionable risk-taking, fraud and outright criminality were factors" in the insolvency of the federal insurance fund established to protect the public's deposits in the Nation's thrift institutions. As a result of this activity, the federally guaranteed losses have fallen upon the American taxpayer who must also shoulder the financial burden of rebuilding confidence in the nation's thrift industry. Consequently, the public has a right to demand that those who caused the losses and who benefited personally at the taxpayer' s expense are not permitted to go unpunished or to keep and enjoy their ill-gotten gains. In passing the Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA), Congress made it clear that the public demands that actions be taken (1) to recover misappropriated thrift assets and (2) to help send the individuals who caused losses to thrifts to jail when appropriate. To carry out this mandate, the RTC shall perform or direct the performance of a thorough investigation of each insolvent institution to fulfill the following objectives: 1. To determine the facts leading to the insolvency of the institution. 2. To identify the assets that were fraudulently and recklessly misappropriated from the institution. 3. To recover through investigation, claims, and litigation all funds misappropriated or fraudulently obtained by insiders, affiliated persons, borrowers or outside parties. 4. To assist in the vigorous prosecution of the individuals who benefited from the misappropriations or who otherwise engaged in criminal misconduct. 5. To ensure that restitution to the deposit insurance funds is obtained or ordered and that appropriate civil and criminal penalties are levied. 6. To coordinate, where appropriate, recovery and enforcement activity with the Department of Justice, sharing information to minimize duplication of effort. 7. To allocate resources to the most deserving cases, considering the potential for recovery of assets and deterrent value. 550 17111 Sfr~t. NWUWcshlnglon, DC 20429 PAGENO="0655" 651 RESOLUTION TRUST CORPORATION Communications Unit 550 17th Street, N.W. Washington, D.C. 20429 (202) 789-6313 ATTACHMENT II 03/13/90 AL AR AZ CA CO CT FL GA IA IL IN KS KY MD ME MI MN MO MS NC ND NE NJ NM NY OH OK OR PA SC TN TX UT VA WA WI WV WY Total 342 Total Deposits (millions) $ 1,178 $ 2,849 $14,711 $20,557 $ 1,817 $ 188 $11, 172 $ 780 $ 1,104 $ 5,222 $ 258 $ 6,979 $ 50 $ 3,131 $ 1,621 $ 40 $ 172 $ 2,064 $ 2,007 $ 1,119 $ 648 $ 678 $ 1,343 $ 8,654 $ 3,127 $ 8,053 $ 1,434 $ 2,414 $ 3,315 $ 5,413 $ 639 $ 458 $21,697 $ 1,862 $ 818 $ 1,422 $ 95 $ 108 $ 220 program: FACT SHEET State # of Institutions Total Assets (millions) 4 $ 1,061 11 $ 2,319 7 $16,608 27 $25,267 9 $ 1,705 2 $ 176 15 $14,440 4 $ 835 4 $ 1,222 29 $ 5,998 2 $ 258 16 $11,905 1 $ 50 27 $ 3,184 5 $ 2,150 1 $ 52 1 $ 194 2 $ 2,291 8 $ 2,001 9 $ 1,119 2 $ 842 2 $ 1,081 7 $ 1,469 8 $11,334 7 $ 3,194 2 $ 8,203 4 - $ 1,996 10 $ 3,001 2 $ 5,136 3 $ 7,408 1 $ 711 6 $ 506 88 $18,010 4 $2,360 5 $ 1,152 2 $ 1,623 1 $ 80 2 $ 117 2 $ 266 S&Ls enrolled in joint regulatory oversight Institutions in 39 states with Total Assets: $ 161,324 million. Total Deposits: $ 139,417 million. (Data based on 12/31/89, Thrift Financial Reports.) PAGENO="0656" 652 RTC INSTITUTIONS BY STATE as of 03/13/90 (Financial data as of 12/31/89, Thrift Financial Reports) STATE: AL 1. BALDWIN COUNTY FED SAV BANK , ROBERTSDALE , AL (03/30/89) Assets: $ 156 million. Deposits: $ 144 million in 20511 accounts. 2. CITY FED. S&L ASSOC. , BIRMINGHAM , AL (03/30/89) Assets: $ 492 million. Deposits: $ 531 million in 118334 accounts. 3. GUARANTY FED. S&L ASSOC. , BIRMINGHAM , AL (02/17/89) Assets: $ 294 million. Deposits: $ 326 million in 42287 accounts. 4. PHENIX FED S&L ASSN, F.A. , PHENIX CITY , AL (03/09/89) Assets: $ 119 million. Deposits: $ 177 million in 20786 accounts. Totals for AL: 4 Institution(s) Total Assets: $ 1,061 million Total Deposits: $ 1,178 million STATE: AR 5. CAPITAL FED. S&L ASSOC. , LITTLE ROCK , AR (07/27/89) Assets: $ 78 million. Deposits: $ 44 million in 3313 accounts. 6. COMMONWEALTH S&L ASSOC. , OSCEOLA , AR (03/02/89) Assets: $ 30 million. Deposits: $ 31 million in 7247 accounts. 7. FIRST FED. S&L ASSOC. , FAYETTEVILLE , AR (03/02/89) Assets: $ 112 million. Deposits: $ 101 million in 17891 accounts. 8. FIRST SAV OF ARKANSAS, FA , LITTLE ROCK , AR (02/10/89) Assets: $ 1,007 million. Deposits: $ 1,152 million in 108599 accounts. 9. FIRST STATE SAV. BANK FSB , MOUNTAIN HOME , AR (03/02/89) Assets: $ 83 million. Deposits: $ 117 million in 16074 accounts. 10. GRAND PRAIRIE FS & LA , STUTTGART , AR (01/26/90) Assets: $ 31 million. Deposits: $ 25 million in 1914 accounts. 11. INDEPENDENCE FED S&L ASSN. , BATESVILLE , AR (02/17/89) Assets: $ 172 million. Deposits: $ 348 million in 29524 accounts. PAGENO="0657" 653 12. LANDMARK SAV. BANK, FSB , HOT SPRINGS , AR (03/02/89) Assets: $ 116 million. Deposits: $ 141 million in 16634 accounts. 13. MADISON GUARANTY S&L ASSN. , McCRORY , AR (03 / 02/89) Assets: $ 111 million. Deposits: $ 110 million in 4538 accounts. 14. SAVERS SAVINGS ASSOC., A FS&LA , LITTLE ROCK , AR(02/lO/89) Assets: $ 566 million. Deposits: $ 753 million in 84978 accounts. 15. UNIPOINT FED SAVINGS BANK , TRUMANN , AR (03/02/89) Assets: $ 13 million. Deposits: $ 27 million in 3766 accounts. Totals for AR: 11 Institution(s) Total Assets: $ 2,319 million Total Deposits: $ 2,849 million STATE: AZ 16. MEPABANK FEDERAL SAVINGS BANK , PHOENIX , AZ (01/31/90) Assets: $ 6,382 million. Deposits: $ 4,746 million in 766994 accounts. 17. PIMA S&LA , TUCSON , AZ (03/02/90) Assets: $ 2,733 million. Deposits: $ 2,128 million in 164654 accounts. 18. SECURITY S&L ASSOC. , SCOTTSDALE , AZ (02/17/89) Assets: $ 521 million. Deposits: $ 958 million in 77397 accounts. 19. SENTINEL FS & LA , PHOENIX , AZ (02/02/90) Assets: $ 175 million. Deposits: $ 170 million in 8706 accounts. 20. SOUTHWEST S&L ASSOC., F.A. , PHOENIX , AZ (02/17/89) Assets: $ 1,750 million. Deposits: $ 1,643 million in 158076 accounts. 21. SUN STATE S&L ASSN., FSA , PHOENIX , AZ (06/14/89) Assets: $ 826 million. Deposits: S 902 million in 38710 accounts. 22. WESTERN S&L ASSOC, FA , PHOENIX , AZ (06/14/89) Assets: $ 4,221 million. Deposits: $ 4,164 million in 399174 accounts. Totals for AZ: 7 Institution(s) Total Assets: $16,608 million Total Deposits: $14,711 million STATE: CA PAGENO="0658" 654 23. AMERICAN INTERSTATE SA, FA , LOS ANGELES , CA (07/20/89) Assets: $ 19 million. Deposits: $ 20 million in 213 accounts. 24. ARROWHEAD PACIFIC FED SAV BANK , SAN BERNARDINO , (04/06/89) Assets: $ 66 million. Deposits: $ 87 million in 6583 accounts. 25. BROOKSIDE FEDERAL S&L ASSOC. , LOS ANGELES , CA (11/30/89) Assets: $ 552 million. Deposits: $ 540 million in 18004 accounts. 26~ CABRILLO FED SAVINGS BANK , SAN JOSE , CA (04/06/89) Assets: $ 51 million. Deposits: $ 43 million in 5041 accounts. 27. CITY FEDERAL S&L ASSOC. , OAKLAND , CA (04/06/89) Assets: $ 19 million. Deposits: $ 29 million in 3579 accounts. 28. FINANCIAL FS & LA , FRESND , CA (01/11/90) Assets: $ 31 million. Deposits: $ 34 million in 418 accounts. 29. FIRST FED. S&L ASSOC. , BAKERSFIELD , CA (06/29/89) Assets: $ 122 million. Deposits: $ 125 million in 11583 accounts. 30. FOUNDERS FEDERAL S&L ASSN. , LOS ANGELES , CA (04/06/89) Assets: $ 112 million. Deposits: $ 146 million in 14205 accounts. 31. GATEWAY FED SAVINGS BANK , SAN FRANCISCO , CA (04/06/89) Assets: $ 67 million. Deposits: $ 86 million in 3960 accounts. 32. GIBRALTAR SAVINGS, F.A. , 51141 VALLEY , CA (03/31/89) Assets: $ 7,148 million. Deposits: $ 5,686 million in 625048 accounts. 33. HUNTINGTON FS & LA , HUNTINGTON BEACH , CA (02/09/90) Assets: $ 120 million. Deposits: $ 120 million in 6807 accounts. 34. IMPERIAL SAVINGS ASSOCIATION , SAN DIEGO , CA (02/23/90) Assets: $ 9,658 million. Deposits: $ 6,645 million in 372414 accounts. 35. INVESTMENT FS & LA , WOODLAND HILLS , CA (0l/ll[9O) Assets: $ 248 million. Deposits: $ 241 million in 12790 accounts. 36. LINCOLN S&L ASSOC, FA , IRVINE , CA (04/14/89) Assets: $ 2,906 million. Deposits: $ 2,908 million in 127496 accounts. PAGENO="0659" 655 37. MERCURY S & LA , HUNTINGTON BEACH , CA (02/23/90) Assets: $ 2,159 million. Deposits: $ 1,792 million in 174783 accounts. 38. ROYAL OAK S&L ASSOC. , MANTECA , CA (04/06/ 89) Assets: $ 24 million. Deposits: $ 23 million in 3755 accounts. 39. SARATOGA S&L ASSOC. , SAN JOSE , CA (11/09/89) Assets: $ 105 million. Deposits: $ 91 million in 2283 accounts. 40. SECURITY FED. SAVINGS ASSOCIATION , GARDEN GROVE , (11/16/89) Assets: $ 69 million. Deposits: $ 73 million in 5705 accounts. 41. SIERRA S&L ASSOC.,FA , BEVERLY HILLS , CA (07/20/89) Assets: $ 35 million. Deposits: $ 27 million in 1056 accounts. 42. SOUTHWEST FED. SAVINGS ASSOC. , LOS ANGELES , CA (04/27/89) Assets: $ 605 million. Deposits: $ 692 million in 64786 accounts. 43. THE GUARDIAN FED S&L ASSN. , BAKERSFIELD , CA (06/29/89) Assets: $ 17 million. Deposits: $ 30 million in 527 accounts. 44. WASHINGTON S&L ASSOC. , STOCKTON , CA (04/06/89) Assets: $ 69 million. Deposits: $ 70 million in 6895 accounts. 45. WESTCO SAVINGS BANK, FSB , WILMINGTON , CA (04/27/89) Assets: $ 139 million. Deposits: $ 126 million in 11590 accounts. 46. WESTERN EMPIRE FS & LA , YORBA LINDA , CA (02/16/90) Assets: $ 407 million. Deposits: $ 318 million in 7158 accounts. 47. WESTPORT FEDERAL SAVINGS BANK , HANFORD , CA (03/09/90) Assets: $ 170 million. Deposits: $ 171 million in 7482 accounts. 48. WESTWOOD S&L ASSOC. , LOS ANGELES , CA (02/17/89) Assets: $ 271 million. Deposits: $ 357 million in 8280 accounts. 49. WILSHIRE FS&LA , LOS ANGELES , CA (01/11/90) Assets: $ 78 million. Deposits: $ 77 million in 1695 accounts. Totals for CA: 34 Institution(s) Total Assets: $25,267 million Total Deposits: $20,557 million STATE: CO PAGENO="0660" 656 50. ALPINE SAVINGS, A FS&LA , STEAMBOAT SPRINGS , Co (03/09/89) Assets: $ 45 million. Deposits: $ 36 million in 5790 accounts. 51. AMERICAN SAV. OF COLO. A FS&LA , COLORADO SPRINGS (04/06/89) Assets: $ 681 million. Deposits: $ 714 million in 40885 accounts. 52. ASPEN SAVINGS BANK F.S.B , ASPEN , CO (11/09/89) Assets: $ 112 million. Deposits: $ 113 million in 5539 accounts. 53. COLORADO SAVINGS BANK, F.S.B. , STERLING , CO (09/28/89) Assets: $ 10 million. Deposits: $ 11 million in 2252 accounts. 54. EQUITY FED. SAVINGS BANK , DENVER , CO (04/06/89) Assets: $ 3 million. Deposits: $ 4 million in 123 accounts. 55. FIRST FED. S&LA OF COLORADO SPRINGS , COLORADO SPR(03/09/89) Assets: $ 254 million. Deposits: $ 287 million in 18358 accounts. 56. OTERO S&L ASSOC. , COLORADO SPRINGS , CO (03/09/89) Assets: $ 396 million. Deposits: $ 391 million in 32387 accounts. 57. ROCKY MOUNTAIN S&L ASSN. , WOODLAND PARK , CO (03/09/89) Assets: $ 13 million. Deposits: $ 17 million in 2937 accounts. 58. SUN S&L ASSOC. , PARKER , CO (03/09/89) Assets: $ 191 million. Deposits: $ 244 million in 8543 accounts. Totals for CO: 43 Institution(s) Total Assets: $ 1,705 million Total Deposits: $ 1,817 million STATE: CT 59. COLUMBIA FED. SAVINGS BANK , WESTPORT , CT (02/17/89) Assets: $ 121 million. Deposits: $ 140 million in 16241 accounts. 60. COMMUNITY FED SAV. ASSOC. , BRIDGEPORT , CT (12/07/89) Assets: $ 55 million. Deposits: $ 48 million in 2239 accounts. Totals for CT: 2 Institution(s) Total Assets: $ 176 million Total Deposits: $ 188 million STATE: FL PAGENO="0661" 657 61. BRICKELLBANC SAV. ASSOC. , MIAMI , FL (03/16/89) Assets: $ 35 million. Deposits: $ 34 million in 1544 accounts. 62. CENTRUST BANK, A STATE SAVINGS BANK , MIAMI , FL (02/02/90) Assets: $ 8,218 million. Deposits: $ 5,922 million in 325915 accounts. 63. CO!'UyIONWEALTH FS&LA , FORT LAUDERDALE , FL (07/20/ 89) Assets: $ 1,408 million. Deposits: $ 1,086 million in 63205 accounts. 64. COMMUNITY FED S&L ASSOC , TAMPA , FL (03/16/89) Assets: $ 6 million.. Deposits: $ 13 million in 2725 accounts. 65. DUVAL FEDERAL SAVINGS ASSOCIATION , JACKSONVILLE ,(Ol/l8/9O) Assets: $ 1,027 million. Deposits: $ 857 million in 78229 accounts. 66. FINANCIAL SECURITY S&L ASSN. , DELRAY BEACH , FL (03/16/89) Assets: $ 105 million. Deposits: $ 141 million in 9546 accounts. 67. FIRST FED. S&L ASSOC. , LARGO , FL (02/17/89) Assets: $ 273 million. Deposits: $ 362 million in 35235 accounts. 68. FIRST FED. S&LA OF THE FLORIDA KEYS , KEY WEST , (03/16/89) Assets: $ 157 million. Deposits: $ 147 million in 23029 accounts. 69. FIRST VENICE S&L ASSOC. , VENICE , FL (03/16/89) Assets: $ 51 million. Deposits: $ 57 million in 6504 accounts. 70. GENERAL FEDERAL SAVINGS BANK , MIAMI , FL (11/16/89) Assets: $ 346 million. Deposits: $ 273 million in 43467 accounts. 71. HAVEN S & LA, F.A. , WINTER HAVEN , FL (03/02/90) Assets: $ 172 million. Deposits: $ 145 million in 18926 accounts. 72. LINCOLN S&L ASSOC., F.A. , MIAMI , FL (03/16/89) Assets: $ 170 million. Deposits: $ 202 million in 13396 accounts. 73. MIAMI SAVINGS BANK , MIAMI , FL (03/16/ 89) Assets: $ 115 million. Deposits: $ 138 million in 12444 accounts. 74. PIONEER SAVINGS BANK, FSB , CLEARWATER , FL (02/02/90) Assets: $ 1,936 million. Deposits: $ 1,420 million in 154782 accounts. PAGENO="0662" 658 75. ROYAL PALM FED S&L ASSOC. , WEST PALM BEACH , FL (03/16/89) Assets: $ 421 million. Deposits: $ 375 million in 23324 accounts. Totals for FL: 17 Institution(s) Total Assets: $14,440 million Total Deposits: $11,172 million STATE: GA 76. FIRST FED. S&L ASSOC. , SUMMERVILLE , GA Assets: $ 27 million. Deposits: $ 33 million in 7060 accounts. 77. FIRST FED. S&L ASSOC. , ATLANTA , GA Assets: $ 187 million. Deposits: $ 175 million in 23015 accounts. 78. FIRST FED. S&L ASSOC. , ANERICUS , GA Assets: $ 51 million. Deposits: $ 45 million in 8728 accounts. 79. GREAT SOUTHERN FED S&L ASSN , SAVANNAH , GA Assets: $ 570 million. Deposits: $ 527 million in 75687 accounts. Totals for GA: 4 Institution(s) Total Assets: Total Deposits: STATE: IA 80. ANERICAN FED. SAV. ASSOC. OF IOWA , DES MOINES Assets: $ 915 million. Deposits: $ 812 million in 95454 accounts. 81. BANC IOWA FED. SAy. BANK , CEDAR RAPIDS , IA (10/16/89) Assets: $ 146 million. Deposits: $ 134 million in 24249 accounts. 82. FIRST FS&LA OF ESTHERVILLE & EMMETSBURG , ESTHERVI(04/O6/89) Assets: $ 48 million. Deposits: $ 53 million in 7500 accounts. 83. FIRSTCENTRAL FEDERAL SAVINGS BANK , CHARITON , IA(01/O4/90) Assets: $ 113 million. - Deposits: $ 105 million in 14752 accounts. Totals for IA: 4 Institution(s) Total Assets: Total Deposits: STATE: IL 84. AMERICAN SECURITY FS & LA , CHICAGO , IL (03/16/89) Assets: $ 33 million. Deposits: $ 39 million in 4370 accounts. (03/09/89) (03/09/89) (06/22/89) (06/22/89) $ 835 million $ 780 million (02/09/90) $ 1,222 million $ 1,104 million PAGENO="0663" 659 85. AMERIMAC SAy. BANK, FS , HILLSBORO , IL (06/29/89) Assets: $ 17 million. Deposits: $ 19 million in 2686 accounts. 86. ARLINGTON HGHTS SAVASSN, F.A. , ARLINGTON HEIGHTS(l2/07/89) Assets: $ 510 million. Deposits: $ 390 million in 65551 accounts. 87. BLACK HAWK S&L ASSOC. F.A. , ROCK ISLAND , IL (08/17/89) Assets: $ 65 million. Deposits: $ 62 million in 8544 accounts. 88. CHILLICOTHE FED S&L ASSN. , CHILLICOTHE , IL (03/16/89) Assets: $ 40 million. Deposits: $ 45 million in 4999 accounts. 89. CITIZENS S&LA OF SPRINGFIELD, F.A. , SPRINGFIELD , (09/07/89) Assets: $ 81 million. Deposits: $ 72 million in 8310 accounts. 90. CLYDE FEDERAL SAVINGS ASSOCIATION , NORTH RIVERSID(02/O2/9O) Assets: $ 586 million. Deposits: $ 560 million in 60217 accounts. - 91. COMMUNITY FEDERAL SAVINGS BANK , EAST MOLINE , IL(02/23/90) Assets: $ 118 million. Deposits: $ 113 million in 22136 accounts. 92. CONCORDIA FED BANK FOR SAVINGS , LANSING , IL (02/17/89) Assets: $ 375 million. Deposits: $ 322 million in 46831 accounts. 93. CREST FED. S&L ASSOCIATION , KANKAKEE , IL (11/09/89) Assets: $ 126 million. Deposits: $ 121 million in 17013 accounts. 94. FIDELITY FEDERAL SAV. ASSOC. , GALESBURG , IL (11/09/89) Assets: $ 360 million. - Deposits: $ 356 million in 63887 accounts. 95. FIDELITY SAVINGS BANK, F.S.B. , DANVILLE , IL (02/16/90) Assets: $ 16 million. Deposits: $ 16 million in 1877 accounts. 96. FIRST FED. SAVINGS BANK , EAST ALTON , IL (04/06/89) Assets: $ 39 million. Deposits: $ 45 million in 5937 accounts. 97. FRONTIER FEDERAL SAVINGS BANK , BELLEVILLE , IL (01/18/90) Assets: $ 45 million. Deposits: $ 47 million in 5430 accounts. 98. GEM CITY FS & LA , QTJINCY , IL (01/18/90) Assets: $ 290 million. Deposits: $ 233 million in 30887 accounts. PAGENO="0664" 660 99. GREAT AMERICAN FS & LA , OAK PARK , IL (02/16/90) Assets: $ 1,013 million. Deposits: $ 732 million in 78826 accounts. 100. HERITAGE SAVINGS ASSN, FA , JERSEYVILLE , IL (08/24/89) Assets: $ 29 million. Deposits: $ 27 million in 5344 accounts. 101. HOME FS & LA OF CENTRALIA , CENTRALIA, IL (03/16/89) Assets: $ 37 million. Deposits: $ 39 million in 6992 accounts. 102. HOME SAVINGS, A FS&LA , JOLIET , IL (03/16/89) Assets: $ 126 million. Deposits: $ 111 million in 12344 accounts. 103. HORIZON SAVINGS BANK, F.S.B. , WILMETTE , IL (01/11/90) Assets: $ 1,224 million. Deposits: $ 1,089 million in 136835 accounts. 104. ILLINOIS SAVINGS BANK, FA , PEORIA , IL (03/16/89) Assets: $ 44 million. Deposits: $ 48 million in 5710 accounts. 105. LIBERTYVILLE FED S&L ASSN. , LIBERTYVILLE , IL (04/06/89) Assets: $ 77 million. Deposits: $ 81 million in 13122 accounts. 106. MADISON COUNTY FED S&L ASSN. , GRANITE CITY , IL (03/16/89) Assets: $ 110 million. Deposits: $ 113 million in 19506 accounts. 107. MIDWEST HOME FSB BELLEVILLE , IL (03/16/89) Assets: $ 93 million. Deposits: $ 79 million in 17644 accounts. 108. MIDWESTERN SAY. ASSOC. , MACOMB , IL (03/16/89) Assets: $ 90 million. Deposits: $ 82 million in 8893 accounts. 109. NEW ATHENS FS & LA , NEW ATHENS , IL (03/02/90) Assets: $ 32 million. Deposits: $ 28 million in 6155 accounts. 110. PEOPLES S&L ASSOC, FA , STREATOR , IL (07/20/89) Assets: $ 33 million. Deposits: $ 29 million in 2603 accounts. 111. SECURITY FED. S&L ASSOC. , PEORIA , IL (08/17/89) Assets: $ 234 million. Deposits: $ 211 million in 31151 accounts. 112. ST. CHARLES FS&LA , ST. CHARLES , IL (01/11/90) Assets: $ 155 million. Deposits: $ 113 million in 17602 accounts. PAGENO="0665" 661 Totals for IL: 29 Institution(s) Total Assets: $ 5,998 million Total Deposits: $ 5,222 million STATE: IN 113. FIRST FS&LA OF CENTRAL INDIANA , ANDERSON , IN (11/16/89) Assets: $ 184 million. Deposits: $ 172 million in 25935 accounts. 114. PIONEER SAVINGS, F.A. , PLYMOUTH , IN (07/13/89) Assets: $ 74 million. Deposits: $ 86 million in 12880 accounts. Totals for IN: 2 Institution(s) Total Assets: $ 258 million Total Deposits: $ 258 million STATE: KS 115. ANCHOR FEDERAL S&L ASSOC. , KANSAS CITY , KS (02/17/89) Assets: $ 658 million. Deposits: $ 499 million in 67782 accounts. 116. COLONIAL FEDERAL SAVINGS ASSOCIATION , PRAIRIE VIL(Ol/l8/90) Assets: $ 148 million. Deposits: $ 102 million in 12120 accounts. 117. FIRST FED. S&LA OF HUTCHINSON , HUTCHINSON , KS (03/02/ 89) Assets: $ 155 million. Deposits: $ 163 million in 18815 accounts. 118. FIRST FSB OF KANSAS , WELLINGTON , KS (03/02/89) Assets: $ 125 million. Deposits: $ 152 million in 24425 accounts. 119. FIRST OF KS SAVINGS, a FS & LA , HAYS , KS (04/06/89) Assets: $ 41 million. Deposits: $ 38 million in 5193 accounts. 120. FRANKLIN SA , OTTAWA , KS (02 / 16/90) Assets: $ 9,261 million. Deposits: $ 4,657 million in 150938 accounts. 121. MID KANSAS S&L ASSOC. F.A. , WICHITA , KS (10/19/89) Assets: $ 693 million. Deposits: $ 555 million in 83548 accounts. 122. MID-AMERICA FED S&L ASSOC , PARSONS , KS (03/02/89) Assets: $ 70 million. Deposits: $ 76 million in 13440 accounts. 123. PEOPLES S&L ASSOC. , PARSONS , KS (03/02/89) Assets: $ 52 million. Deposits: $ 60 million in 982Q accounts. PAGENO="0666" 662 124. SHAWNEE FED. S&L ASSOC. , TOPEKA , KS (03/02/89) Assets: $ 223 million. Deposits: $ 175 million in 24302 accounts. - 125. SUN SAVINGS ASSOC., F.A. , KANSAS CITY , KS (02/17/89) Assets: $ 135 million. Deposits: $ 136 million in 15956 accounts. 126. THE BARBER COUNTY S&L ASSN. , MEDICINE LODGE , KS(O3/02/89) Assets: $ 40 million. Deposits: $ 38 million in 4431 accounts. 127. THE GARNETT S&L ASSOC. , GARNETT , KS (12/07/89) Assets: $ 17 million. Deposits: $ 17 million in 3468 accounts. 128. THE HIAWATHA FEDERAL SAV. ASSOC. , HIAWATHA , KS (03/09/90) Assets: $ 49 million. Deposits: $ 54 million in 4039 accounts. 129. TOPEKA SAV., A FS&LA , TOPEKA , KS (03/02/89) Assets: $ 73 million. Deposits: $ 100 million in 7993 accounts. 130. VALLEY SAVINGS, A FS&LA , HUTCHINSON , KS (03/02/89) Assets: $ 165 million. Deposits: $ 157 million in 14213 accounts. Totals for KS: 16 Institution(s) Total Assets: $11,905 million Total Deposits: $ 6,979 million STATE: KY 131. HENDERSON HOME S & LA, F.A. , HENDERSON , KY (02/02/90) Assets: $ 50 million. Deposits: $ 50 million in 6260 accounts. Totals for KY: 1 Institution(s) Total Assets: $ 50 million Total Deposits: $ 50 million STATE: LA 132. AMERICAN S&L ASSOC., FA , NEW ORLEANS , LA (08/07/89) Assets: $ 54 million. Deposits: $ 63 million in 2969 accounts. 133. CENTRAL S&L ASSOC, F.A. , NEW ORLEANS , LA (08/07/89) Assets: $ 54 million. Deposits: $ 56 million in 9443 accounts. 134. CITIZENS HOMESTEAD FSA , NEW ORLEANS , LA (08/07/89) Assets: $ 99 million. Deposits: $ 106 million in 14765 accounts. PAGENO="0667" 663 135. COLUMBIA FED. HOMESTEAD ASSOC. , METAIRIE , LA (10/13/89) Assets: $ 82 million. Deposits: $ 87 million in 8665 accounts. 136. COMMERCIAL S&L ASSN., FA , HAMMOND , LA. (07/27/89) Assets: $ 69 million. Deposits: $ 62 million in 8247 account~. 137. DELTA S&L ASSOC., F.A. , KENNER , LA (08/07/89) Assets: $ 134 million. Deposits: $ 129 million in 4888 accounts. 138. DEPOSIT TRUST FEDERAL SAVINGS BANK , MONROE , LA (01/11/90) Assets: $ 98 million. Deposits: $ 91 million in 9808 accounts. 139. FAMILY FED. S&L ASSOC. , SHREVEPORT , LA (03/16/89) Assets: $ 22 million. Deposits: $ 21 million in 1697 accounts. 140. FIRST CITY FED S&L ASSOC. , BATON ROUGE , LA (08/07/89) Assets: $ 18 million. Deposits: $ 22 million in 2011 accounts. 141. FIRST FED. S&L ASSOC. , EUNICE , LA (03/16/89) Assets: $ 15 million. Deposits: $ 15 million in 1768 accounts. 142. FIRST FED. S&L ASSOC. , BATON ROUGE , LA (03/16/89) Assets: $ 37 million. Deposits: $ 39 million in 4809 accounts. 143. FIRST FED. S&L ASSOC. , SHREVEPORT-, LA (03/16/89) Assets: $ 175 million. - Deposits: $ 205 million in 20232 accounts. 144. FIRST FED. S&L ASSOC. , NEW IBERIA , LA (03/16/89) Assets: $ 56 million. Deposits: $ 61 million in 6647 accounts. 145. FIRST LOUISIANA FED. SAlT. BANK, F.A. , LAFAYETTE , (11/02/89) Assets: $ 143 million. Deposits: $ 101 million in 11256 accounts. 146. FONTAINEBLEAU FED SAV BANK , SLIDELL , LA (03/02/89) Assets: $ 31 million. Deposits: $ 33 million in 2751 accounts. 147. FRENCH MARKET HOMESTEAD FSA , METAIRIE , LA (02/ 17/89) Assets: $ 181 million. Deposits: $ 219 million in 31896 accounts. 148. HOME S&L ASSOC., F.A. , NEW ORLEANS , LA (08/07/89) Assets: $ 34 million. - Deposits: $ 33 million in 1801 accounts. PAGENO="0668" 664 149. HORIZON FED. S&L ASSOC. , METAIRIE , LA (02/17/89) Assets: $ 362 million. Deposits: $ 345 million in 16404 accounts. 150. LAFAYETTE S&L ASSN., FA , GRETNA , LA (07/27/89) Assets: $ 24 million. Deposits: $ 24 million in 2786 accounts. 151. LOUSIANA SA , LAKE CHARLES , LA (12/14/89) Assets: $ 416 million. Deposits: $ 395 million in 49849 accounts. 152. PARISH FED. S&L ASSOC. , DENHAM SPRINGS , LA (07/20/89) Assets: $ 12 million. Deposits: $ 13 million in 2516 accounts. 153. PEOPLE'S HOMESTEAD SAV. BANK, F.S.B. , MONROE , L(lO/l9/89) Assets: $ 266 million. Deposits: $ 244 million in 29139 accounts. 154. PEOPLES FS & LA OF THIBODATJX , THIBODAUX , LA (03/16/89) Assets: ~$ 18 million. Deposits: $ 18~millton in 3155 accounts. 155. RED RIVER S&L ASSOC. , COUSHATTA , LA (12/14/89) Assets: $ 10 million. Deposits: $ 7 million in 895 accounts. 156. SECURITY HOMESTEAD FSA , NEW ORLEANS , LA (08/07/89) Assets: $ 513 million. Deposits: $ 496 million in 75281 accounts. 157. SOUTH S&L ASSOC., F.A. , SLIDELL , LA (08/07/89) Assets: $ 236 million. Deposits: $ 224 million in 23867 accounts. 158. TERREBONNE S&L ASSOC, FA , HOUMA , LA (08/07/89) Assets: $ 25 million. Deposits: $ 22 million in 4745 accounts. Totals for LA: 27 Institution(s) Total Assets: $ 3,184 million Total Deposits: $ 3,131 million STATE: MD 159. BALTIMORE FED FINANCIAL FSA , BALTIMORE , MD (02/07/89) Assets: $ 1,184 million. Deposits: $ 946 million in 175272 accounts. 160. GIBRALTAR S&L ASSOC, FA , ANNAPOLIS , MD (03/02/89) Assets: $ 30 million. Deposits: $ 33 million in 6239 accounts. 161. LIBERTY FED. SAVINGS BANK, FSB , RANDALLSTOWN , M(O2/O9/9O) Assets: $ 49 million. Deposits: $ 42 million in 5817 accounts. PAGENO="0669" 665 162. VERNONT S & IA, F.A. , TIMONIUN , MD (02/09/90) Assets: $ 347 million. Deposits: $ 252 million in 41397 accounts. 163. YORKRIDGE-CALVERT FSA , PIKESVILLE , MD (12/14/89) Assets: $ 540 million. Deposits: $ 348 million in 56526 accounts. Totals for MD: 5 Institution(s) Total Assets: $ 2,150 million Total Deposits: $ 1,621 million STATE: ME 164. AMERICAN FEDERAL SAVINGS BANK , SANFORD , ME (01/ 11/90) Assets: $ 52 million. Deposits: $ 40 million in 8986 accounts. Totals for ME: 1 Institution(s) Total Assets: $ 52 million - Total Deposits: $ 40 mIllion STATE: MI 165. NEW GUARANTY FED S&L ASSN. , TAYLOR , MI (07/27/89) Assets: $ 194 milliOn. Deposits: $ 172 million in 20142 accounts. Totals for MI: 1 Institution(s) Total Assets: $ 194 million Total Deposits: $ 172 million STATE: MN 166. FAIRNONT FEDERAL SAVINGS ASSOCIATION , FAIRNONT , (02/09/90) Assets: $ 46 million. Deposits: $ 46 million in 7123 accounts. 167. MIDWEST SAY. ASSN., FA , MINNEAPOLIS , MN (02/13/89) Assets: $ 2,245 million. Deposits: $ 2,018 million in 314752 accounts. Totals for MN: 2 Institution(s) Total Assets: $ 2,291 million Total Deposits: $ 2,064 million STATE: MO 168. BLUE VALLEY FED S&L ASSOC , KANSAS CITY , MO (02/17/89) Assets: $ 681 million. Deposits: $ 710 million in 104931 accounts. 169. CASS FS& LA OF ST LOUIS , FLORISSANT , MO (04/06/89) Assets: $ 46 million. Deposits: $ 60 million in 8327 accounts. PAGENO="0670" 666 170. COLONIAL S & LA, F.A. , CAPE GIRARDEAU , MO (01/26/90) Assets: $ 177 million. Deposits: $ 157 million in 22015 accounts. 171. FINANCIAL FED. S&L ASSOC. , JOPLIN , MO (04/06/89) Assets: $ 141 million. Deposits: $ 160 million in 30219 accounts. 172. FIRST FED. S&LA OF SOUTHEAST MO , CAPE GIRARDEAU , (04/06/89) Assets: $ 274 million. Deposits: $ 296 million in 66282 accounts. 173. MID MISSOURI S&L ASSN, FA , BOONVILLE , MO (06/29/89) Assets: $ 55 million. Deposits: $ 53 million in 10701 accounts. 174. MISSOURI SAV. ASSOC., FA , CLAYTON , MO (06/29/89) Assets: $ 537 million. Deposits: $ 490 million in 99188 accounts. 175. ST LOUIS COUNTY SAVINGS ASSOCIATION,F.A. , FERGUSO(Ol/ll/90) Assets: $ 90 million. Deposits: $ 81 million in 12246 accounts. Totals for MO: 8 Institution(s) Total Assets: $ 2,001 million TotalDeposits: $ 2,007 million STATE: MS 176. BROOKHAVEN FS & LA , BROOKHAVEN , MS (01/18/90) Assets: $ 43 million. Deposits: $ 42 million in 5248 accounts. 177. CENTRAL S&L ASSOC. , JACKSON , MS (04/06/89) Assets: $ 48 million. Deposits: $ 72 million in 2755 accounts. 178. DELTA FED. S&L ASSOC. , DREW , MS (04/06/ 89) Assets: $ 6 million. Deposits: $ i2 million in 1878 accounts. 179. FIDELITY FED. SAV. BANK , CORINTH , MS (04/06/89) Assets: $ 75 million. Deposits: $ 117 million in 7716 accounts. 180. FIRST GUARANTY FS & LA , HATTIESBURG , MS (01/04/90) Assets: $ 246 million. Deposits: $ 180 million in 23167 accounts. 181. GREENWOOD FS & LA , ~GREENWOOD , MS (02/23/90) Assets: $ 28 million. Deposits: $ 25 million in 4087 accounts. 182. REPUBLIC BANK FOR SAV., FA , JACKSON , MS (04/06/89) Assets: $ 29 million. Deposits: $ 83 million in 2158 accounts. PAGENO="0671" 667 183. STATE MUTUAL FED S&L ASSN. , JACKSON , MS (04/06/ 89) Assets: $ 8 million. Deposits: $ 7 million in 1670 accounts. - 184. UNIFIRST BANK FOR SAy., A FS&LA , JACKSON , MS (08/10/89) Assets: $ 636 million. Deposits: $ 581 million in 78842 accounts. Totals for MS: 9 Institution(s) Total Assets: $ 1,119 million Total Deposits: $ 1,119 million STATE: NC 185. HERITAGE FED. S&L ASSOC. , MONROE , NC (03/30/89) Assets: $ 214 million. Deposits: $ 193 million in 23208 accounts. 186. NORTH CAROLINA S & LA, F.A. , CHARLOTTE , NC (03/02/90) Assets: $ 628 million. Deposits: $ 455 million in 65577 accounts. Totals for NC: 2 Institution(s) Total Assets: $ 842 million Total Deposits: $ 648 million STATE: ND 187. FIRST SAVINGS ASSOCIATION, F.A. , BISMARCK , ND (01/26/90) Assets: $ 121 million. Deposits: $ 100 million in 16840 accounts. 188. MIDWEST FEDERAL SAVINGS BANK OF MINOT , MINOT , N(Ol/O4/9O) Assets: $ 960 million. Deposits: $ 578 million in 81187 accounts. Totals for ND: 2 Institution(s) Total Assets: $ 1,081 million Total Deposits: $ 678 million STATE: NE 189. EQUITABLE FED. SAy. BANK , FREMONT , NE (02/17/89) Assets: $ 199 million. Deposits: $ 173 million in 23900 accounts. 190. EQUITABLE FS & LA , COLUMBUS , NE (02/16/90) Assets: $ 73 million. Deposits: $ 63 million in 13110 accounts. 191. FIRST FED. SAy. ASSOC. OF YORK , YORK , NE (01/18/90) Assets: $ 60 million. Deposits: $ 54 million in 9986 accounts. 192. HERITAGE FSB OF OMAHA , OMAHA , NE (02/16/90) Assets: $ 230 million. Deposits: $ 174 million in 25726 accounts. PAGENO="0672" 668 193. MIDWEST FED. S&L ASSOC. , NEBRASKA CITY , NE (02/17/89) Assets: $ 113 million. Deposits: $ 102 million in 14671 accounts. 194. OCCIDENTAL NEBRASKA SB, FSB , OMAHA , NE (02/17/89) Assets: $ 553 million. Deposits: $ 504 million in 82538 accounts. 195. PLATTE VALLEY SAV., A FS&LA , GERING , NE (02/17/89) Assets: $ 241 million. Deposits: $ 273 million in 15547 accounts. Totals for NE: 7 Institution(s) Total Assets: $ 1,469 million Total Deposits: $ 1,343 million STATE: NJ 196. CITY SAVINGS BANK, F.S.B. , BEDMINISTER , NJ (12/08/89) Assets: $ 8,582 million. Deposits: $6,305 million in 808046 accounts. 197. COLONIAL FED. SAVINGS ASSOC. , ROSELLE PARK , NJ (11/09/89) Assets: $ 369 million. Deposits: $ 307 million in 40001 accounts. 198. ELYSIAN FED. SAVINGS BANK , HOBOKEN , NJ (02/17/89) Assets: $ 118 million. Deposits: $ 129 million in 9370 accounts. 199. FIRST ATLANTIC S & LA , PLAINFIELD , NJ (02/23/90) Assets: $ 1,297 million. Deposits: $ 1,002 million in 120044 accounts~. 200. METROPOLITAN FED S&L ASSN. , DENVILLE , NJ (04/27/89) Assets: $ 157 million. Deposits: $ 164 million in 38832 accounts. 201. NASSAU FS & LA , PRINCETON , NJ (03/09/90) Assets: $ 313 million. Deposits: $ 275 million in 36277 accounts. 202. NORTH JERSEY S&L ASSOC. , PASSAIC , NJ (02/17/89) Assets: $ 293 million. Deposits: $ 281 million in 41636 accounts. 203. YORKWOOD FS&LA , MAPLEWOOD , NJ (03/09/90) Assets: $ 205 million. Deposits: $ 191 million in 27179 accounts. Totals for NJ: 8 Institution(s) Total Assets: $11,334 million Total Deposits: $ 8,654 million STATE: Ni'! PAGENO="0673" 669 204. ABQ BANK, A FEDERAL SAVINGS BANK , ALBUQUERQUE , (02/09/90) Assets: $ 2,019 million. Deposits: $ 1,470 million in 104727 accounts. 205. AMERICAN FED. S&L ASSOC , ALBUQUERQUE , NM (03/09/89) Assets: $ 142 million. Deposits: $ 139 million in 8880 accounts. 206. NEW MEXICO FSA , ALBUQUERQUE , NM (07/20/89) Assets: $ 197 million. Deposits: $ 183 million in 21116 accounts. 207. SANDIA FED. SAV. ASSOC. , ALBUQUERQUE , NM (02/10/89) Assets: $ 613 million. Deposits: $ 991 million in 62961 accounts. 208. SILVER SAVINGS ASSOC., FA , SILVER CITY , NM (12/21/89) Assets: $ 31 million. Deposits: $ 26 million in 6081 accounts. 209. SUN COUNTRY SB OF NEW MEXICO, FSB , ALBUQUERQUE , (03/09/89) Assets: $ 59 million. Deposits: $ 72 million in 6528 accounts. 210. VALLEY SAVINGS BANK, FSB , ROSWELL , NM (03/09/89) Assets: $ 133 million. Deposits: $ 246 million in 23052 accounts. Totals for NM: 15 Institution(s) Total Assets: $ 3,194 million Total Deposits: $ 3,127 million STATE: NY 211. EMPIRE OF AMERICA FSB , BUFFALO , NY (01/24/90) Assets: $ 8,174 million. Deposits: $ 8,024 million in 913646 accounts. 212. SALAMANCA FEDERAL SAVINGS ASSOC. , SALAMANCA , NY(ll/30/89) Assets: $ 29 million. Deposits: $ 29 million in 3708 accounts. Totals for NY: 2 Institution(s) Total Assets: $ 8,203 million Total Deposits: $ 8,053 million STATE: OH 213. BROADVIEW FEDERAL SAV BANK , CLEVELAND , OH (03/30/89) Assets: $ 1,383 million. Deposits: $ 878 million in 111553 accounts. 214. CIVIC SAVINGS BANK , PORTSMOUTH , OH (06/08/89) Assets: $ 75 million. Deposits: $ 81 million in 11675 accounts. 30-830 0 - 90 - 22 PAGENO="0674" 670 215. FREEDOM SAVINGS ASSOCIATION, F.A. , COLUMBUS , OH(O2/16/9O) Assets: $ 360 million. Deposits: $ 312 million in 36855 accounts. 216. MIDLAND-BUCKEYE SAV., A FS&LA , ALLIANCE , OH (03/30/89) Assets: $ 178 million. Deposits $ 163 million in 29347 accounts Totals for OH: 4 Institution(s) Total Assets: $ 1,996 million Total Deposits: $ 1,434 million STATE: OK 217. AMERICAN HOME S&L ASSOC., F.A. , EDMOND , OK (10/05/89) Assets: $ 84 million. Deposits: $ 78 million in 4694 accounts. 218. CONTINENTAL FS & LA, FA , OKLAHOMA CITY , OK (03/16/89) Assets: $ 529 million. Deposits: $ 481 million in 93726 accounts. 219. CROSS ROADS FS&LA, FA , CHECOTAH , OK (07/13/89) Assets: $ 14 million. Deposits: $ 17 million in 662 accounts. 220. FAMILY SAVING BANK, F.S.B. , SAPULPA , OK (10/05/89) Assets: $ 50 million. Deposits: $ 51 million in 9238 accounts. 221. FIRST FED. S&LA OF SEMINOLE , SEMINOLE , OK (03/16/ 89) Assets: $ 30 million. Deposits: $ 33 million in 3673 accounts. 222. GREAT PLAINS SAVINGS ASSOC., F.A. , WEATHERFORD , (10/26/89) Assets: $ 94 million. Deposits: $ 70 million in 7923 accounts. 223. PEOPLES FSA , BARTLESVILLE , OK (03/09/90) Assets: $ 106 million. Deposits: $ 90 million in 9024 accounts. 224. SOONER FEDERAL SAVINGS ASSOC. , TULSA , OK (11/16/89) Assets: $ 1,430 million. Deposits: $ 1,102 million in~ 160795 accounts. 225. STATE FEDERAL SAVINGS ASSOCIATION , TULSA , OK (02/16/ 90) Assets: $ 526 million. Deposits: $ 358 million in 32154 accounts. - 226. THE DUNCAN S&L ASSOC. , DUNCAN , OK (03/16/89) Assets: $ 138 million. Deposits: $ 134 million in 14130 accounts. Totals for OK: 10 Institution(s) Total Assets: $ 3,001 million Total Deposits: $ 2,414 million PAGENO="0675" 671 STATE: OR 227. FAMILY FEDERAL SAVINGS ASSOCIATION , DALLAS , OR (01/11/90) Assets: $ 168 million. Deposits: $ 101 million in 14272 accounts. 228. THE BENJ. FRANKLIN FS & LA , PORTLAND , OR (02/21/90) Assets: $ 4,968 million. Deposits: $ 3,214 million in 440061 accounts. Totals for OR: 2 Institution(s) Total Assets: $ 5,136 million Total Deposits: $ 3,315 million STATE: PA 229. ATLANTIC FINANCIAL SAVINGS, F.A. , BALA CYNWYD , (01/11/90) Assets: $ 5,299 million. Deposits: $ 3,736 million in 401505 accounts. 230. HORIZON FINANCIAL, FA , SOUTHAMPTON , PA (06/08/89) Assets: $ 1,932 million. Deposits: $ 1,528 million in 273910 accounts. 231. VANGUARD SAVINGS BANK, FSB , VANDERGRIFT , PA (02/23/90) Assets: $ 177 million. Deposits: $ 149 million in 30651 accounts. Totals for PA: 3 Institution(s) Total Assets: $ 7,408 million Total Deposits: $ 5,413 million STATE: SC 232. SECURITY FEDERAL SAVINGS, FSB , COLUMBIA , SC (11/30/89) Assets: $ 711 million. Deposits: $ 639 million in 79639 accounts. Totals for SC: 1 Institution(s) Total Assets: $ 711 million Total Deposits: $ 639 million STATE: TN 233.. CENTURY FED. SAV. BANK , TRENTON , TN (03/09/89) Assets: $ 58 million. Deposits: $ 63 million in 6438 accounts. 234. GERMANTOWN TRUST SAV BANK , GERMANTOWN , TN (03/09/89) Assets: $ 110 million. Deposits: $ 95 million in 6996 accounts. 235. HONE FED. S&L ASSOC. , MEMPHIS , TN (07/20/89) Assets: $ 192 million. Deposits: $ 174 million in 11311 accounts. PAGENO="0676" 236. INVESTOR SAVINGS BANK, FSB Assets: $ 82 million. Deposits: $ 66 million in 237. LINCOLN FED. S&L ASSOC. , MT Assets: $ 57 million. Deposits: $ 51 million in 238. UNITED GUARANTY FED SAV BANK Assets: $ 7 million. Deposits: $ 9 million in Totals for TN: 6 Institution(s) Total Assets: Total Deposits: STATE: TX 239. ALAMO FSA of TEXAS , SAN ANTONIO , TX Assets: $ 529 million. Deposits: $ 537 million in 34000 accounts. 240. AMERICAN S & LA OF BRAZORIA , LAKE JACKSON Assets: $ 189 million. Deposits: $ 275 million in 14628 accounts. 241. AMERIWAY SAVINGS , HOUSTON , TX Assets: $ 118 million. Deposits: $ 216 million in 10486 accounts. 242. AUSTIN FEDERAL S&L ASSOC. , AUSTIN , TX Assets: $ 106 million. Deposits: $ 83 million in 2796 accounts. 243. BANCPLUS SAVINGS ASSOC. , PASADENA , TX Assets: $ 489 million. Deposits: $ 775 million in 21690 accounts. 244. BANKERS S&L ASSOC. , GALVESTON , TX Assets: $ 88 million. Deposits: $ 103 million in 8343 accounts. 245. BANNERBANC FS & LA , GARLAND , TX Assets: $ 54 million. Deposits: $ 55 million in 5882 accounts. 246. BAYSHORE SAV. ASSOC. , LA PORTE , TX Assets: $ 38 million. Deposits: $ 52 million in 6548 accounts. 247. BEDFORD SAVINGS ASSOC. , BEDFORD , TX Assets: $ 72 million. Deposits: $ 79 million in 5865 accounts. 248. BENJAMIN FRANKLIN FSA , HOUSTON , TX Assets: $ 1,838 million. Deposits: $ 1,660 million in 110043 accounts. 672 NASHVILLE , TN 5367 accounts. CARMEL , TN 6920 accounts. TULLAHOMA , TN 920 accounts. (03/09/90) (03/09/89) (03/09/89) $ 506 million $ 458 million (03/02/89) TX (03/09/89) (03/09/89) (11/30/89) (03/09/89) (03/09/89) (01/04/90) (03/09/89) (04/06/89) (03/09/89) PAGENO="0677" 673 249. BEXAR SAVINGS ASSOC. , SAN ANTONIO , TX (03/02/89) Assets: $ 544 million. Deposits: $ 800 million in 30344 accounts. 250. CAPITOL CITY FSA , AUSTIN , TX (07/27/89) Assets: $ 409 million. Deposits: $ 304 million in 22827 accounts. 251. CAPROCK FED. S&L ASSOC. , LUBBOCK , TX (08/01/ 89) Assets: $ 343 million. Deposits: $ 450 million in 13288 accounts. 252. CENTRAL TEXAS S&L ASSOC. , WACO , TX (04/06/89) Assets: $ 172 million. Deposits: $ 197 million in 12270 accounts. 253. CERTIFIED FEDERAL SAVINGS ASSOCIATION , GEORGETOWN(0l/ll/90) Assets: $ 119 million. Deposits: $ 91 million in 7603 accounts. 254. CITIZENS OF TEXAS S&L ASSOC. , BAYTOWN , TX (03/09/89) Assets: $ 64 million. Deposits: $ 109 million in 5651 accounts. 255. CITY SAVINGS ASSOC. , LEAGUE CITY TX (03/09/89) Assets: $ 28 million. Deposits: $ 38 million in 1993 accounts. 256. COLUMBIA FS&LA , WEBSTER , TX (12/21/89) Assets: $ 74 million. Deposits: $ 71 million in 1804 accounts. 257. COMMERCE SAVINGS ASSOC. , SAN ANTONIO , TX (03/02/89) Assets: $ 539 million. Deposits: $ 825 million in 48151 accounts. 258. COMMONWEALTH FED SAV ASSN , HOUSTON , TX (03/09/89) Assets: $ 1,614 million. Deposits: $ 1,709 million in 110917 accounts. 259. CONTINENTAL SAVINGS, A FS & LA , BELLAIRE , TX (03/09/89) Assets: $ 222 million. Deposits: $ 555 million in 13882 accounts. 260. CORNERSTONE FED SAV ASSN. , HOUSTON , TX (07/13/89) Assets: $ 85 million. Deposits: $ 86 million in 1435 accounts. 261. DEEP EAST TEXAS SAV ASSN , JASPER , TX (03/16/ 89) Assets: $ 45 million. Deposits: $ 51 million in 6174 accounts. 262. DENTON FEDERAL S&L ASSOC. , DENTON , TX (08/24/89) Assets: $ 140 million. Deposits: $ 143 million in 13399 accounts. PAGENO="0678" 674 263. EAST TEXAS S&L ASSOC., F.A. , TYLER , TX (09/21/89) Assets: $ 293 million. Deposits: $ 203 million in 22679 accounts. - 264. EXCEL BANC SAV. ASSOC. , LAREDO , TX (04/06/ 89) Assets: $ 105 million. Deposits: $ 129 million in 7396 accounts. 265. FIDELITY FED. SAV. ASSOC. , PORT ARTHUR , TX (03/16/89) Assets: $ 207 million. Deposits: $ 232 million in 18977 accounts. 266. FIRST EQUITY SAVINGS ASSOC.,F.A. , TOMBALL , TX (03/09/89) Assets: $ 73 million. Deposits: $ 114 million in 10078 accounts. 267. FIRST FED. S&LA OF BRENHAN , BRENHAN , TX (09/21/89) Assets: $ 128 million. Deposits: $ 126 million in 17142 accounts. 268. -FIRST GARLAND FED. S&L ASSN. , GARLAND , TX (09/21/89) Assets: $ 109 million. Deposits: $ 96 million in 10646 accounts. 269. FIRST S&L ASSOC., FA , WACO , TX (07/13/89) Assets: $ 343 million. Deposits: $ 404 million in 45569 accounts. 270. FIRST SAV ASSN OF SOUTHEAST TEXAS , SILSBEE , TX (03/16/89) Assets: $ 50 million. Deposits: $ 38 million in 4453 accounts. 271. FIRST SAVINGS OF LAREDO, F.A. , LAREDO , TX (09/14/89) Assets: $ 168 million. Deposits: $ 145 million in 4671 accounts. 272. FIRST SOUTH SAV. ASSOC. , PORT NECHES , TX (03/16/89) Assets: $ 237 million. Deposits: $ 447 million in 10813 accounts. 273. FIRST STATE FED SAV ASSN , SAN ANTONIO , TX (03/02/89) Assets: $ 173 million. Deposits: $ 287 million in 7959 accounts. 274. FORTUNE FINANCIAL FED. S&L ASSOC. , COPPERAS COVE (11/30/89) Assets: $ 88 million. Deposits: $ 69 million in 4492 accounts. 275. FSA OF THE SOUTHWEST , KILGORE , TX (07/27/89) Assets: $ 35 million. Deposits: $ 38 million in 2095 accounts. 276. GENERAL SAVINGS ASSOC. , HENDERSON , TX (03/16/89) Assets: $ 41 million. Deposits: $ 43 million in 3785 accounts. PAGENO="0679" 675 277. GILL SAVINGS ASSOC. , SAN ANTONIO , TX (02/07/89) Assets: $ 920 million. Deposits: $ 1,307 million in 55424 accounts. 278. GOLDEN CIRCLE SA, FSB , CORSICANA , TX (04/06/89) Assets: $ 15 million. Deposits: $ 16 million in 938 accounts. 279. GOLDEN TRIANGLE S & LA , BRIDGE CITY , TX (03/16/89) Assets: $ 20 million. Deposits: $ 55 million in 2925 accounts. 280. GUADALUPE S&L ASSN., F.A. , KERRVILLE , TX (08/17/89) Assets: $ 25 million. Deposits: $ 15 million in 2691 accounts. 281. HALLMARK S&L ASSOC., FA , PLANO , TX (07/27/89) Assets: $ 125 million. Deposits: $ 128 million in 1509 accounts. 282. HEARNE BUILDING & LOAN ASSN.,F.A. , HEARNE , TX (08/17/89) Assets: $ 25 million. Deposits: $ 26 million in 1797 accounts. 283. HERITAGEBANC SAV. ASSOC. , DUNCANVILLE , TX (04/06/89) Assets: $ 132 million. Deposits: $ 145 million in 17596 accounts. 284. JASPER FED. S&L ASSOC. , JASPER , TX (03/16/89) Assets: $ 117 million. Deposits: $ 151 million in 18324 accounts. 285. JEFFERSON S&L ASSOC. , BEAUMONT , TX (03/16/89) Assets: $ 103 million. Deposits: $ 121 million in 14679 accounts. 286. KARNES COUNTY S&L ASSOC. , KARNES CITY , TX (01/18/90) Assets: $ 53 million. Deposits: $ 57 million in 7077 accounts. 287. LA HACIENDA SAVINGS ASSN , SAN ANTONIO , TX (03/02/89) Assets: $ 5.8 million. Deposits: $ 99 million in 2995 accounts. 288. LIBERTY COUNTY FED S&L ASSOC. , LIBERTY , TX (03/09/89) Assets: $ 42 million. Deposits: $ 47 million in 6880 accounts. 289. MARSHALL FS & LA , MARSHALL , TX (01/18/90) Assets: $ 64 million. Deposits: $ 58 million in~ 5303 accounts. 290. MERIDIAN SAVINGS ASSOC. , ARLINGTON , TX (04/06/89) Assets: $ 30 million. Deposits: $ 359 million in 6407 accounts. PAGENO="0680" 676 291. MERITBANC SAVINGS ASSOC. , HOUSTON , TX (03/16/89) Assets: $ 201 million. Deposits: $ 301 million in 21616 accounts. 292. METROPOLITAN FINANCIAL FS & LA , DALLAS , TX (08/10/89) Assets: $ 780 million. Deposits: $ 696 million in 46185 accounts. 293. MISSION SA OF TEXAS , SAN ANTONIO , TX (03/02/89) Assets: $ 51 million. Deposits: $ 74 million in 2058 accounts. 294. MURRAY FED. S&L ASSOC. , DALLAS , TX (04/05/89) Assets: $ 962 million. Deposits: $ 1,146 million in 104459 accounts. 295. NEW BRAUNFELS S&L ASSN, FA , NEW BRAUNFELS , TX (07/27/89) Assets: $ 49 million. Deposits: $ 64 million in 2745 accounts. 296. NORTH AMERICAN FSA , SAN ANTONIO , TX (07/27/89) Assets: $ 69 million. Deposits: $ 70 million in 3296 accounts. 297. NOWLIN FEDERAL SAVINGS ASSOCIATION , NORTH RICHLAN(02/23/90) Assets: $ 201 million. Deposits: $ 196 million in 16879 accounts. 298. PADRE FEDERAL SAy. & LOAN , CORPUS CHRISTI , TX (03/02/89) Assets: $ 15 million. Deposits: $ 30 million in 1014 accounts. 299. PALO DURO FS&LA , AMARILLO , TX (01/26/90) Assets: $ 65 million. Deposits: $ 42 million in 3366 accounts. 300. PERMIAN S&L ASSOC. , KERMIT , TX (03/02/89) Assets: $ 8 million. Deposits: $ 10 million in 906 accounts. 301. PLANO S&L ASSOCIATION, F.A. , PLANO , TX (09/21/89) Assets: $ 247 million. Deposits: $ 253 million in 15474 accounts. 302. RESOURCE SAVINGS ASSOC. , DENISON , TX (04/06/89) Assets: $ 387 million. Deposits: $ 376 million in 12025 accounts. 303. RUSK FED. S&L ASSOC. , RUSK , TX (03/16/89) Assets: $ 30 million. Deposits: $ 36 million in 4118 accounts. 304. SABINE VALLEY S&L ASSOC. , CENTER , TX (03/16/89) Assets: $ 29 million. Deposits: $ 27 million in 2994 accounts. PAGENO="0681" 677 , 305. SAVINGS OF TEXAS ASSOC. JACKSONVILLE , TX (03/16/89) Assets: $ 50 million. Deposits: $ 82 million in 5384 accounts. 306. SECURITY FED. SAVINGS ASSN. , TEXARKANA , TX (03/16/89) Assets: $ 163 million. Deposits: $ 447 million in 23282 accounts. 307. SOUTHEAST TEXAS S&L ASSN , WOODVILLE TX (03/16/89) Assets: $ 29 million. Deposits: $ 31 million in 3959 accounts. 308. SOUTHEASTERN SAV. ASSOC. , DAYTON , TX. (03/09/89) Assets: $ 65 million. Deposits: $ 93 million in 5925 accounts. 309. SOUTHMOST S&L ASSOC. , BROWNSVILLE , TX (03/02/89) Assets: $ 85 million. Deposits: $ 98 million in 8373 accounts. 310. SOUTHSIDE FED S&L ASSOC. AUSTIN , TX (08/17/89) Assets: $ 47 million. Deposits: $ 35 million in 2867 accounts. 311. SOUTHWESTERN FEDERAL SAVINGS ASSOC. , EL PASO T(ll/30/89) Assets: $ 120 million. Deposits: $ 113 million in 6617 accounts. 312. SPINDLETOP SAy. ASSN, F.A. , BEAUMONT , TX (03/16/89) Assets: $ 152 million. Deposits: $ 286 million in 9014 accounts. 313. SPRING BRANCH S&L ASSOC. , HOUSTON , TX (03/09/89) Assets: $ 84 million. Deposits: $ 146 million in 15435 accounts. 314. STANDARD SAVINGS ASSOC. , HOUSTON TX (01/18/90) Assets: $ 14 million. Deposits: $ 15 million in 3594 accounts. 315. SUBURBAN SAVINGS ASSOC. SAN ANTONIO , TX (03/02/89) Assets: $ 37 million. Deposits: $ 34 million in 2276 accounts. 316. SURETY FEDERAL SAV. ASSOC. , EL PASO , TX (10/19/89) Assets: $ 287 million. Deposits: $ 246 million in 19844 accounts. 317. TAYLORBANC FED S&L ASSN. , TAYLOR , TX (08/17/89) Assets: -S 130 million. Deposits: $ 127 million in 15680 accounts. 318 * TEXAS WESTERN FED. SAVINGS ASSOCIATION , HOUSTON , (11/ 16/89) Assets: $ 98 million. Deposits: $ 83 million in 8641 accounts. PAGENO="0682" 678 319 TEXASBANK SAVINGS FSB dom~oE ~X (02/23/90) Assets: $ 249 million.) Deposits: $ 385 million in 33818 accounts. 320. TIMBERLAND SAy. ASSOC. , NACOGDOCHES , TX (03/16/89) Assets: $ 44 million. Deposits: $ 40 million in 3424 accounts. 321. UNIVERSAL SAV. ASSOC. , HOUSTON , TX (03/09/89) Assets: $ 116 million. Deposits: $ 251 million in 9223 accounts. 322. UVALDE FS&L ASSOC. , UVALDE , TX (01/26/90) Assets: $ 13 million. Deposits: $ 14 million in 1723 accounts. 323. VALLEY FEDERAL SAy. ASSOC. , MCALLEN , TX (10/19/89) Assets: $ 483 million. Deposits: $ 532 million in 46878 accounts. 324. VICTORIA SAV ASSOC, FSA , SAN ANTONIO , TX (06/29/89) Assets: $ 743 million. Deposits: $ 750 million in 13990 accounts. 325. VISION BANC SAV. ASSOC. , KINGSVILLE , TX (03/02/89) Assets: $ 65 million. Deposits: $ 96 million in 3822 accounts. 326. WESTERN GULF S&L ASSOC. , BAY CITY , TX (03/09/89) Assets: $ 144 million. Deposits: $ 253 million in 7910 accounts. Totals for TX: 88 Institution(s) Total Assets: $18,010 million Total Deposits: $21,697 million STATE: UT 327. AMERICAN SAVINGS, A FS&LA , SALT LAKE CITY , UT (02/17/89) Assets: $ 1,748 million. Deposits: $ 1,277 million in 211847 accounts. 328. DESERET S&L ASSOC., F.A. , SALT LAKE CITY , UT (02/10/89) Assets: $ 130 million. Deposits: $ 155 million in 28778 accounts. 329. MOUNTAINWEST S&L ASSN, A FS&LA , OGDEN , UT (02/17/89) Assets: $ 171 million. Deposits: $ 173 million in 26492 accounts. 330. WILLIAMSBURG FS&LA , SALT LAKE CITY , UT (01/26/90) Assets: $ 311 million. Deposits: $ 257 million in 48762 accounts. Totals for UT: 4 Institution(s) Total Assets: $ 2,360 million Total Deposits: $ 1,862 million PAGENO="0683" 679 STATE: VA 331. ATLANTIC PERMANENT FED SB , NORFOLK , VA (12/08/89) Assets: $ 573 million. Deposits: $ 360 million in 28754 accounts. 332. COMMUNITY FED S&L ASSN. , NEWPORT NEWS , VA (03/30/89) Assets: $ 9 million. Deposits: $ 9 million in 1241 accounts. 333. PEOPLES S&L ASSOC., F.A. , HAMPTON , VA (06/29/89) Assets: $ 22 million. Deposits: $ 23 million in 2944 accounts. 334. SEASONS FEDERAL SAVINGS BANK , RICHMOND , VA (10/19/89) Assets: $ 206 million. Deposits: $ 189 million in 12818 accounts. 335. SECURITY FEDERAL SAVINGS ASSOCIATION , RICHMOND , (03/02/90) Assets: $ 342 million. Deposits: $ 237 million in 31022 accounts. Totals for VA: 5 Institution(s) Total Assets: $ 1,152 million Total Deposits: $ 818 million STATE: WA 336. FRONTIER FS&LA , WALLA WALLA , WA (02/23/90) Assets: $ 149 million. Deposits: $ 119 million in 16037 accounts. 337. GIBRALTAR SAVINGS BANK F. S. B. , SEATTLE , WA (03 / 31/89) Assets: $ 1,474 million. Deposits: $ 1,303 million in 82330 accounts. Totals for WA: 2 Institution(s) Total Assets: $ 1,623 million Total Deposits: $ 1,422 million STATE: WI 338. DURAND FED. S&L ASSOC. , DURAND , WI (03/30/89) Assets: $ 80 million. Deposits: $ 95 million in 30635 accounts. Totals for WI: 1 Institution(s) Total Assets: $ 80 million Total Deposits: $ 95 million STATE: WV 339. FIRST FEDERAL SAV. ASSOC. OF.BLUEFIELD , BLUEFIELD(02/23/90) Assets: $ 39 million. Deposits: $ 33 million in 6021 accounts. PAGENO="0684" 680 340. FIRST STAkDARD SAVINGS FA , FAIRNONT , WV Assets: $ 78 million. Deposits: $ 75 million in 9967 accounts. Totals for WV: 2 Institution(s) Total Assets: Total Deposits: STATE: WY 341. FIRST FEDERAL SAVINGS BANK , DIANONDVILLE , WY Assets: $ 21 million. Deposits: $ 20 million in 2126 accounts. 342. PROVIDENT FEDERAL , CASPER , WY Assets: $ 245 million. Deposits: $ 200 million in 29609 accounts. Totals for WY: 2 Institution(s) Total Assets: Total Deposits: Totals for RTC: 342 Institution(s) Total Assets: Total Deposits: (02/23/90) $ 117 million $ 108 million (11/30/ 89) (02/23/90) $ 266 million $ 220 million $ 161,324 million $ 139,417 million PAGENO="0685" 681 ATTACHMENT* lIT Resokiflon Tn.& Coipoiallon MEMORANDUM. TO: RTC Investigators FROM: DATE: February 16, 1 0 SUBJECT: Procedures for Referring Apparent Criminal Conduct to the Department of Justice 1. Purpose: To establish policy and provide general guidelines for the filing of criminal referrals involving the affairs of RTC supervised thrift institutions. 2. Re~ulatorv Requirements: Thrifts operating in conservatorship or receivership under control of the RTC are subject to the rules of the Office of Thrift Supervision (12 CFR 563.18) with respect to the reporting of known suspected criminal activity involving the day-to-day operations of the thrift. Managing Agents, therefore, should follow 12 CFR 563.18 and the guidance found in Section 135 of the OTS Regulatory Handbook and in OTS Form 366 (see attachment). Either OTS Form 366 or FDIC's Report of Apparent Crime may be used. Any known or suspected criminal activity discovered by RTC/FDIC employees, outside counsel or RTC contractors involving previous insider or borrower relationships, asset sales or other receiver- ship activities should be referred to the Investigation Depart- ment for referral on FDIC's Report of Apparent Crime (copy attached). 3. Procedures for Review and Follow-Up: Regional Directors may es- tablish policies and procedures covering the review and filing of criminal referrals within the region. For example, some may require review by regional office staff before filing with the U.S. Attorney. Copies of all criminal referrals should be maintained in region- al offices or in consolidated field offices to permit ready ac- cess as needed. Copies of significant referrals should be for- warded to the Washington Office in accordance with RTC memoran- dum to Senior Investigation Specialists dated February 8, 1990. (Copy Attached.) 4. - Cancellation: This is an interim directive. It is effective until replaced by a memorandum prepared under the RTC Directive System. Attachment 550 17th Street. NWe Washington, DC 20429 PAGENO="0686" 682 q~on m~ MEMORANDUM TO: Senior Investigations Specialists FROM: James R. Dudine, Assj~an~ Director Investigations DATE: February 8, 1990 - SUBJECT: Sianificpnt Criminal Referrals 1. Pur~g~: To establish a procedure to collect copies of signif- icant criminal referrals involving RTC controlled thrifts for entry into the Justice Department's Significant Referral Track- ing System. 2. Ba~kgr~~: The Fraud Section. of the Department of Justice's (DOJ) Criminal Division maintains a criminal referral tracking system to alert U.S. Attorneys to the referrals bank regulators consider to be significant. Over the years this system has been looked to for making resource allocation decisions within DOJ and the FBI. It has also become the information source used by Congressional Committees, GAO and others studying bank and S&L fraud problems. Consequently, it is very important that referrals that are considered significant to the RTC are included in the system. 3. Procedu~: Please inform Department Heads, Managing Agents and other appropriate officials of these procedures. Copies of all criminal referrals meeting the following criteria should be forwarded to the Office of the Assistant Director, Investi- gations. A listing of S&L referrals that are already in the DOJ tracking system is attached. Please review your files and send copies of referrals meeting the criteria that are not listed; and, henceforth, send to Washington copies of all refer- rals deemed to be significant. 4. Criteria for Signjfjca~~ Referr~: o Loss due to apparent criminal conduct is $200,000 or more. o The apparent criminal conduct involves a director, senior officer or major shareholder of the institution. o Other compelling reasons; for example, the apparent misconduct is part of a pattern or practice invol- ving other financial institutions or the scheme or suspects pose a threat to operating financial institutions. Attachment 550 17th Strt, Nws Washington, 0020429 PAGENO="0687" E. Dealings With Otber Government Agencies The smooth functioning of the FDIC's opera. tions and its relationship with other federal and state regulatory and law enforcement agencies require that scheduling of FDIC and other agency employees for depositi nsand responses to requests for documents generated by other agencies be authorized by and coordinated through the Legal Division. When you receive notices of depositions of employees of the FDIC or other agencies or when you receive sub- poenas or requests for production of documents that were generated by other agencies, you should immediately contact the responsible FDIC attorney to obtain the requisite authorization and coordination in responding. Similarly, if in preparingacase you wish to con- tact employees of the FDIC or other agencies or to obtain documents generated by another agency, you should contact the responsible FDIC attorney. F Referral of Cnrninal Misconduct The FDIC does not have authority or respon- sibility for instituting, conducting or disposing of criminal proceedings. The FDIC's policy is that the settlement of civil litigation may not, expressly or by implication, extend to the disposition of any criminal charges or recom- mendations with respect to such charges. In conducting civil litigation, including settlement negotiations, you may not agree either not to disclose or not to refer to law enforcement authorities any information relating to a possi- ble criminal violation or investigation. The FDIC has a longstanding responsibility and policy of promptly notifying and, where ap- propriate, assisting law enforcement officials in investigating conduct which may constitute a violation of criminal statutes. From time to time, the FDIC's outside counsel may obtain information pursuant to civil litiga- tion which may indicate possible criminal behavior. If this is everthe case, outside counsel must immediately notify the FDIC attorney who is monitoring the case or any other member of the FDIC Legal Division. Outside counsel should not deal directly with the criminal authorities. Procedures have been established for the referral by FDIC In-House Counsel of possible criminal misconduct. These procedures take into consideration FDIC's posi- tioü which makes it subject to the Right of Financial Privacy Act, other Federal laws and procedures. Section 3 REPORTING PROCEDURES The FDIC's case management procedures re- quire that your firm keep the responsible FDIC attorney who is assigned to the matter fully in- formed as to the status of the matter. You will be required to report to the responsible FDIC at- torney at three distinct stages; initially, when the matter is referred to you, irregularly, whenever an event or development occurs which could significantly impact the planned course or tim- ing of the matter and each time you submit your periodic fee bilL These procedures are designed to ensure that the matter will be handled in a cost-effective man- ner and that the approach remains consistent with the objectives to be achieved. They also pro- vide FDIC with information and estimates on which to make business decisions about specific asset& Properly utilized, these procedures should further the FDIC's policy of maximizing recoveries and reducing expenses. A. Initial Reports L Case Plan The Case Plan should set forth the major steps to be taken in pursuing collections of an asset or defending a case. It should outline (1) the propos- ed course of the litigation on the assumption that it will go to trial and (2) a plan for a settlement (unless settlement is clearly inappropriate). The scope and detail of the Case Plan should be commensurate with the significance of the matter. For major litigation, the Case Plan will be quite detailed. Formore routine cases, the Plan will be brief. If you are handling a number of 683 12 G~1IDE EOE ~LI ~ ~rM~rON 1** PAGENO="0688" 684 Mr. BARNARD. Thank you, Sir. Mr. Beamon. STATEMENT OF ARTHUR L. BEAMON, ASSOCIATE GENERAL COUNSEL, LEGAL DIVISION, FEDERAL DEPOSIT INSURANCE CORPORATION Mr. BEAMON. Good afternoon, Mr. Chairman and members of the subcommittee. My name is Arthur L. Beamon. I am Associate General Counsel in the FDIC Legal Division and head of the Compliance and En- forcement Section, which has staff both in the regions and in Washington. I have been head of this section for approximately 6 years, and my experience spans both pre- and post-FIRREA activities. I would therefore like to relate to you some of FDIC's experiences with the enforcement provisions both before and after FIRREA. The staff has prepared specific responses to your written ques- tions. Those are contained in a separate report provided to the sub- committee. I would also like to take this opportunity to thank the members of the subcommittee and their staffs for their efforts in the passage of title IX of FIRREA, dealing with enforcement. We have been very active in implementing those provisions and worked very closely with your staff in developing that legislation. Since 1987, the year of our last report to this subcommittee, the number of formal enforcement actions initiated by the FDIC has remained at a relatively consistent level. In 1987, 236 formal en- forcement actions were initiated; in 1988, 223 formal actions were initiated; and in 1989, 207 formal actions were initiated. This does not include memorandums of understanding, letter agreements, board resolutions, and other informal arrangements. With the recent advent of FIRREA, we expect these numbers to grow. More parties can be reached with the expanded enforcement powers of FIRREA, higher penalties can be imposed, and broader jurisdiction should reach more offenders. On the other hand, heightened public awareness of FIRREA could lessen the number of offenses. Implementation of all of the new provisions of FIRREA has taken some time, but that was to be expected. It has taken time to become familiar with the new provision on the part of both regula- tors and the banking industry, as well as time to adopt new inter- pretative rulings. Moreover, certain restrictions against retroactiv- ity contained in FIRREA itself, notably with regard to removals and prohibitions and civil money penalties, have limited current application of many of its provisions. On the other side of the equation, FIRREA has breathed new life into many removal actions that had been in limbo since the Stod- dard decision in 1989. These cases are now being processed at the FDIC, however, and we expect favorable results in many of them. Since the new, larger civil money penalties may not, for the most part, be applied to activities occurring prior to FIRREA, the FDIC has had little opportunity to test their application thus far. Of the 49 individuals which were assessed civil money penalties in 1989, a PAGENO="0689" 685 total of 16 individuals elected to stipulate and pay their penalties. The remainder are currently litigating their assessments. We have every reason to believe that larger penalties would promote even more litigious responses on the part of many assessed individuals. In the area of increased call report penalties, we have recently made the first assessments under the increased penalty provisions of FIRREA. The change in these penalty amounts has probably drawn more objection from the banking industry than any other enforcement change brought about by FIRREA, but it is too soon to tell what positive effect, if any, the increased penalty amounts will have on timely and accurate call report filing. For the September 1989 call, there were 14 late submissions. For the December call, there were 30 late submissions. Although a higher penalty than that originally contained in the FDI Act was clearly justified, the dramatically increased amounts contained in FIRREA seem a little bit inconsistent with the gravity of the of- fense and, for that reason, may not prove to have a substantial de- terrent effect. FIRREA has also made some significant changes to termination of insurance proceedings. With the shortened timeframes, we expect to reach much more rapid resolution of termination of de- posit insurance for those institutions whose condition or activities threaten the insurance fund. Even with the FIRREA changes to this subsection, involuntary termination of deposit insurance still would take at least 1 year to conclude, barring failure of the insti- tution. Several such cases are presently scheduled for hearing before administrative law judges. To date, we have attempted temporary suspension of deposit in- surance on one institution. Although that section of the statute has proven successful, a problem arose with interpretation of one provi- sion of the temporary suspension power. Since deposit insurance may not be suspended unless the condi- tion of the institution has deteriorated to the point of insolvency, an additional wait of 30 days after giving notice to the primary reg- ulator is inconsistent with the purpose of the statute. Such a wait could only allow the condition of the institution to deteriorate fur- ther and cause even greater exposure to the insurance fund. Amendment of this section is clearly warranted. Without such a waiting requirement, we believe the temporary suspension of de- posit insurance provision of FIRREA could prove to be an effective tool in minimizing loss to the insurance fund. Other projects we have completed pursuant to the provisions of FIRREA include adopting new regulations pertaining to applica- tions of senior executive officers and directors under the new sec- tion 32 of the FDI Act, new publication guidelines for final admin- istrative enforcement orders, a model brief in support of retroac- tive application of sections 904 and 905 of FIRREA, a financial in- stitution's letter issued to all State nonmember banks and national banks explaining application of new call-report penalties and sample pleadings for termination of insurance proceedings, remov- al proceedings of expanded jurisdiction under FIRREA, and civil money penalty proceedings issued post-FIRREA. Other projects in process include adopting a new policy memo- randum applying the expanded provisions of section 19 to persons PAGENO="0690" 686 convicted of crimes, preparing a letter of understanding between the FDIC and OTS defining exigent circumstances, and establishing joint agency committees to address issues of shared AU pools and uniform rules of procedure. As all of these items illustrate, we are in a time of trial and test- ing at the FDIC, but we look forward to the challenge of the coming year in light of our expanded new powers under FIRREA. Thank you, Mr; Chairman. I would be pleased to answer any questions you or members of the subcommittee may have. [The prepared statement of Mr. Beamon follows:] PAGENO="0691" 687 STATEMENT ON SUPERVISORY ~AND ENFORCEMENT EFFORTS IN IMPLEMENTING THE ENFORCEMENT PROVISIONS OF THE FINANCIAL INSTITUTIONS REFORN, RECOVERY, AND ENFORCEMENT ACT OF 1989 PRESENTED TO SUBCOMMITTEE ON COMMERCE, CONSUMER, AND MONETARY AFFAIRS COMMITTEE ON GOVERNMENT OPERATIONS HOUSE OF REPRESENTATIVES BY ARTHUR L. BEAMON ASSOCIATE GENERAL COUNSEL, LEGAL DIVISION FEDERAL DEPOSIT INSURANCE CORPORATION 9:30 a.m. THURSDAY, MARCH 15, 1990 ROOM 247, RAYBURN HOUSE OFFICE BUILDING PAGENO="0692" *688 OPENING REMARKS Good morning Mr. Chairman and Members of the Subcommittee. My name is Arthur L. Beamon. I am Associate General Counsel in the FDIC Legal Division, head of the Compliance and Enforcement Section, which has staff both in the Regions and in Washington. I have been the head of this Section for approximately 6 years - my tenure spans both pre- and post- FIRREA activities. I would therefore like to relate to you some of FDIC's experiences with the enforcement provisions of the FDI Act, both before and after FIRREA. The staff has prepared specific responses to your written questions. These are contained in a separate report provided to the Subcommittee. Since 1987, the year of our last report to this Subcommittee, the number of formal enforcement actions initiated by the FDIC has remained at a relatively consistent level - in 1987, 236 formal enforcement actions were initiated, in 1988, 223 formal actions were initiated, an~ in 1989, 207 formal actions were initiated. This does not include Memoranda of PAGENO="0693" * 689 2 Understanding, Letter Agreements, Board Resolutions and other informal arrangements. With the recent advent of FIRREA, we expect these numbers to grow. More parties can be reached with the expanded enforcement powers of FIRREA, higher penalties can be imposed, and broader jurisdiction should reach more actionable offenses. On the other hand, heightened public awareness of FIRREA could lessen the number of offenses. REMOVALS AND PROHIBITIONS Implementation of all the new provisions of FIRREA has taken some time, but that was tobe expected. It has taken time to become familiar with the new provisions on the part of both regulators and the banking industry, as well as time to adopt new interpretive rulings. Moreover, certain restrictions against retroactivity contained in FIRREA itself - notably with regard to removals and prohibitions, and civil money penalties - have limited current application of many of its provisions. On the other side of the equation, FIRREA has breathed new life into many removal actions that had been in limbo since the Stoddard PAGENO="0694" 690 3 decision. These cases are now being processed. One area, however, where FIRREA is less clear, is in the applicability of the industrywide bar to individuals against whom removal/prohibition orders had been issued prior to FIRREA. A more detailed explanation of this is contained in our written response. CIVIL MONEY PENALTIES Since the new larger civil money penalties may not, for the most part, be applied to activities that occurred prior to FIRREA, the FDIC has had little opportunity to test their application. Of the 49 individuals~assessed civil money penalties in 1989, a total of 16 individuals elected to stipulate and pay their penalties. The remainder are currently litigating their assessments. We have every reason-to believe that the larger penalties will promote an even more litigious response on the part of assessed individuals! In the area of increased call xeport penalties, we have recently made the first assessments under the increased penalty PAGENO="0695" 691 4 provisions of FIRREA. The change in these penalty amounts have probably drawn more objection fron the banking industry than any other enforcement change brought about by FIRREA. It is too soon to tell what positive effect, if any, the increased penalty amounts here will have on timely and accurate call report filing - for the September Call, there were 14 late submissions; for the December Call, there were 30 late submissions. Although a higher penalty than that originally contained in the FDI Act was clearly justified, the dramatically increased amounts contained in FIRREA seem somewhat incongruous with the gravity of the offense, and thus may not prove to have a substantial deterrent effect. TERNINATION OF INSURANCE FIRREA has also made some significant changes to termination of insurance proceedings. With the shortened time frames, we expect to reach more rapid resolution of termination of deposit insurance for those institutions whose condition or activities threaten the insurance fund. Even with the FIRREA changes to this subsection, involuntary deposit insurance termination still PAGENO="0696" 692 5 will take at least one year th conclude, barring failure, of the institution. Several such cases are presently scheduled for hearing. To date, we have attempted temporary suspension of deposit insurance on one institution. Although the action was ultimately successful, a problem arose with interpretation of one provision of FIRREA. Since deposit insurance nay not be suspended unless the condition of the institution has deteriorated to the point of insolvency, an additional wait of 30 days after giving notice to the primary regulator is inconsistent. Such a wait could only allow the condition of the institution to deteriorate further, and cause even greater exposure to the insurance fund. Amendment of this subsection is clearly warranted. Without such a waiting requirement, we believe the temporary suspension of deposit insurance provision of FIRREA, could prove to be an effective tool in minimizing loss to the insurance fund. PAGENO="0697" 693 6 OTHER PROJECTS Other projects we have completed pursuant to the provisions of FIRREA include adopting new regulations pertaining to applications of senior executive officers and directors under new Section 32 of the FDI Act, new publication guidelines for final administrative enforcement orders, a model brief in support of retroactive application of Sections 904 and 905 of FIRREA, a financial institutions letter issued to all state nOn-member banks and national banks explaining application of the new call- report penalties, and sample pleadings for termination of insurance proceedings, 8(e) removal proceedings with expanded jurisdiction under FIRREA, and civil money penalties proceedings issued post-FIRREA. Other projects in process include adopting a new policy memorandum applying the expanded provisions of Section 19 to persons convicted of crimes, preparing a letter of understanding between the FDIC and OTS defining "exigent circumstances," and establishing joint agency committees to address issues of shared ALl "pools" and uniform rules of PAGENO="0698" 694 7 procedure. CONCLUSION As these items illustrate, we are in a tine of trial and testing, but we look forward to the challenge of the coning year in light of our expanded new powers under FIRREA. Thank you, Mr. Chairman. I will be pleased to answer any questions you or members of the Subconmittee nay have. PAGENO="0699" 695 Mr. BARNARD. Thank you very much, Mr. Fritts and Mr. Dudine, for your very good testimony this morning. I especially want to commend Mr. Beamon for his helpfulness and cooperation during Congress' consideration of these enforcement provisions last year. I've just got a few questions here to ask this panel. Mr. Fritts, last March when the Congress was considering FIRREA, the FDIC was 500 examiners short, in part because of the added responsibilities of the numerous closing of thrifts institu- tions. At present, how many examiners is the FDIC short of, in terms of meeting its needs and its examination schedule? Mr. FRrrrs. We're roughly 300 short give or take 50. We have been able over the last couple of years to attract very, very good people because the FDIC has gotten a lot of press and it's sort of the place to work and we've attracted students that have in fact done outstanding jobs academically. They have come on board and advanced much much more rapidly than what has been the case in earlier years, and as a result, while our numbers have not grown as rapidly as we would have hoped because of turnover, I think we have a much stronger force in that we have more talented young people coming on. They're able to do the job, and this year is sort of a watershed year for the Division of Supervision in that we will have roughly 250 people that have reached the level where they can take their commission examiners test in 1990. And once they get through that hurdle we'll be able to examine banks without the support of other people coming ever-more seasoned. They can sign the report, handle the entire job, obviously with assistance, even taking into account that we lose commissioned examiners every year from normal attrition. Our number of commissioned examin- ers will increase somewhere in the neighborhood of 150 to 180, and that will be a marked improvement on where we've been either 2 or 3 years ago. We have made an awful lot of progress on staffing. We've gone from about 1,650 in 1986 to roughly 2,230 now. We think that the number will get right up near 2,600 before the end of the year. We're still a couple of years from being totally adequate, totally trained, and totally capable of doing the job. But keep in mind, if you would, that the 2,600 figure in part takes into account our in- creased responsibility on the savings institution side that we really didn't know we were going to get until about a year ago. So, I'm happy with where we are, I'd like to be in better shape than we are, but I think given the pressures that have been put on us with FIRREA and the backup supervision of savings and loans, I think we're in fairly decent shape. Mr. BARNARD. As you know, during markup of FIRREA, the Banking Committee in its good judgment failed to adopt my amendment to require a salary increase for FDIC personnel, but I notice that shortly thereafter there was a judicious decision on the part of the FDIC to do that, so I ask the question do you think that that recognition of salaries had something to do with your success in getting and retaining more agents, more examiners? Mr. FRrrrs. I'm absolutely confident that it did and it had a tre- mendous, favorable impact obviously on morale. The FDIC examin- ers I think to some extent are asked to do more than any of the other bank regulatory groups because we now have the S&L's as PAGENO="0700" 696 backup, we have the banks as well, and by number we have a lot more banks and as a result of the fact that in some respects much of our problems are in geographic regions, there's a lot more travel in a lot of instances with our work and the people are under a lot of pressure. I think if we could ever get back to a little bit steadier times our turnover rate could be stopped. I think for the most part the salary levels are up now, competi- tive, I think we still need to do a little bit more with our very senior examiners but we're working on that and this Board of Di- rectors that we deal with now and this Chairman are very, very aware of that situation and they have cooperated very well to try to accomplish what we've been trying to do for several years. Mr. BARNARD. I've been very much concerned over the years about the employment of outside attorneys, you know. It's been hard for me to understand why such a large amount of money is expended each year for outside attorneys, and I notice the RTC this morning was indicating that they will be depending considerably more upon outside attorneys for some of their work. How do you intend to police this? I mean, frankly, we've got numerous cases whereby attorneys have certainly abused the system, delayed and delayed and delayed the civil prosecution of directors after lawsuits have been filed. And because of the time constraints on this com- mittee, we were never able to hold a formal hearing on this sub- ject, but we are still very much interested in the justification for the large amount of money in the past that has been spent by the former Federal Home Loan Bank Board and now the RTC. Of course, I even think the FDIC has spent a tremendous amount of money on outside attorneys, too. So, my question is how do you tend to police that? Mr. DUDINE. Well, I'll answer that and then if some of these other gentlemen want to-- Mr. BARNARD. Well, you might just say you're going to do what Mr. Fritts is going to do and I'll just listen to one of you at a time. Mr. DUDINE. We're very sensitive to the problems of runaway law firms and runaway costs in that area. We have pledged to do only what we call cost-effective litigation. We try to control that in a couple of ways, and one of the main ways is by making sure that we have our own people involved throughout the litigation and indeed up front. And that's what the investigators that I supervise are there for, is to go in there and gather the facts, and based on those facts, working in partnership with our legal division, make determinations and decisions as to whether or not we even want to go forward with the litigation in a particular situation. Mr. BARNARD. You don't employ any attorneys on a contingency basis, do you? Mr. DUDINE. No, sir, not yet. I listened to the comments of the gentleman this morning on collecting some of those assets and using that as a basis and we are certainly looking for very innova- tive ways to collect some of the assets out there and maybe some day we will entertain some sort of a proposal like that, but at the moment I don't believe we do. Mr. BARNARD. Have there been any cost-benefit analyses done on the use of outside attorneys? PAGENO="0701" 697 Mr. DUDINE. I can't answer that. Mr. Schulz perhaps can, but let me just say that it's the nature of the business. We could not do what we have to do without employing outside counsel. Mr. BARNARD. Mr. Schulz, we're delighted to have you with us today. I didn't mean to ignore you, but I didn't understand that you had a opening statement. Mr. SCHULZ. No, sir, I did not prepare an opening statement. I'm here primarily to answer questions that the committee may have. Mr. BARNARD. Well, I'm going to let you answer that one. Mr. SCHULZ. All right, we have looked at the cost effectiveness of utilizing outside attorneys. One of the factors which comes into play is that there is a top-load expense in bringing on full-time staff attorneys for situations which may clear up after a series of litigation have been completed. It is more effective, we believe, to utilize local law firms who are familiar with the court systems in a particular jurisdiction' and to pay their fees rather than continue with those fees for in-house staff on a long-term basis where they may not be used effectively in the future. We have utilized, in answer to your question about contingency fees, we actually have on a few occasions utilized contingency fees with respect to some of the smaller cases, some of the smaller asset collection cases. We have not done that on a major scale but we also are looking at ways to become more efficient in our efforts to collect on assets. Unlike the Federal Home Loan Bank Board, we have not utilized outside counsel to prepare or investigate suits of directors' and offi- cers' liability nature or professional liability nature. Like the RTC, the FDIC has its own in-house investigation staff which pre- pares-- Mr. BARNARD. You have used outside attorneys to prosecute those cases, haven't you? Mr. SCHULZ. We do use them to prosecute but not to determine which cases are the most cost effective to bring. We also utilize a sort of return for the dollar test in determining which lawsuits should be brought in the professional liability area. It is not very cost effective to spend millions of dollars in fees when there are no assets from which we can collect. So that is a major factor which we utilize. Mr. BARNARD. Mr. Fritts, do you want to add anything to that? Mr. FRITTS. I was just going to mention that our Chairman is very, very sensitive to that cost-benefits test in the legal-cost area and does in fact personally look at some of the major cases involv- ing director liability. Mr. BARNARD. Let's get into the criminal restitution unit of the FDIC. Does this unit actually collect restitutions, Mr. Schulz? Mr. SCHULZ. Well, no, Mr. Chairman, this unit was formed to assist the Department of Justice in its efforts to obtain restitution orders as an aspect of the criminal prosecution. They will utilize in- house expertise to collect information that can be utilized to obtain those orders. We are in the process currently of studying ways in which we can more effectively trace assets and that unit is in- volved in that process. One of the concerns that we have is that despite the fact that we may get very large orders from the courts for restitution the inabil- PAGENO="0702" 698 ity to find assets from which we can collect remains a major con- cern. We are looking for new ways where we can trace assets, new techniques, and that unit will be involved in that process. Mr. BARNARD. Several times during our hearings-and this will be my last question-but I'm concerned about it, there's been some indication that within the savings and loan industry and the bank- ing industry there were some problems in the area of auto leasing. What is this development? Mr. FRrrrs. We have seen that, Mr. Chairman, in a case or two, and at least the cases that I've seen is wholesale paper, that is a finance company or some other entity originates the paper and a bank or a savings and loan buys that paper. For the most part, it is a very poor quality to start with, it sells at a discount, and a lot of it is to people that have difficulty getting credit in the past. It sells at substantial discounts, very, very high returns, with the idea going in that there will be a high-enough return to offset the losses that are sure to follow as a result of the general quality of the paper. We have one case that I'm aware of out on the west coast right now that we issued a temporary cease-and-desist order against stop- ping it totally. They claim that that paper can be sold. I don't know. It hasn't been long since we did that, in the last couple of months anyway. That's the only live example that I'm aware of now. Mr. BARNARD. We haven't determined a nice name for that prac- tice? Mr. FRITTS. Maybe it's "car flips" or something. [Laughter.] Mr. BARNARD. Well, we had junk bonds, you know, I guess we could have junk cars, something of that kind. Well, that's some- thing that's somewhat new to me, that practice. At this point I don't have any further questions except to say I want to thank you, all of you, for being with us this morning and for this testimony. And I might add something from one who has been in this area for many, many years and who worked very close- ly to get this title IX legislated into law, I want to certainly com- mend you on what you're doing during this first 6, 7 months. I think this is an area that we will continue to be very much inter- ested in and we will probably continue these hearings in the future to some degree. So, thank you very much. Mr. FRrns. Thank you. Mr. DUDINE. Thank you. Mr. SCHULZ. Thank you. Mr. BARNARD. Our next witness today is Mr. Robert Serino, who is Deputy Chief Counsel for Policy of the Comptroller of the Cur- rency. Mr. Serino, as always, we are pleased to have you appear before this subcommittee and we expect the same fine testimony that you usually offer. STATEMENT OF ROBERT B. SERINO, DEPUTY CHIEF COUNSEL FOR POLICY, OFFICE OF THE COMPTROLLER OF THE CURRENCY Mr. SERINO. Thank you, Mr. Chairman, the pleasure is all mine. PAGENO="0703" 699 Mr. BARNARD. Without objection your entire testimony will be in- cluded in the record and as you see fit to~ summarize you may do so. Mr. SERINO. Thank you, sir. Mr. Chairman, it is a pleasure for me to appear before you today to testify concerning the efforts of the Office of the Comptroller of the Currency to respond to unsafe or unsound banking practices, violations of law or misconduct in national banks. This subcommittee's concern is timely given the events which have transpired since this subcommittee last held hearings in this area. I am pleased to report to you on the OCC's efforts during this intervening period. We have accomplished much during this period, both independently and working with our fellow regulatory agen- cies and the law enforcement community. Our intolerance for abuse of banks, and our commitment to strengthening defenses against such activities and to responding vigorously to penalize those who commit such abuses remain strong and resolute. Full and effective cooperation with all elements of the law enforcement community is stronger today than it was before. Many barriers to such cooperation have been eliminated or significantly lessened, and while we have more yet to do in this regard, we have come far. Responses to the detailed questions you posed in your letter of invitation have been previously submitted and are included in the appendix to this statement. These responses should serve to more specifically illustrate just how much progress we have made and how well the process is working at the 0CC. Today I would like to address some of the central themes requested by you, Mr. Chair- man. While we share the subcommittee's concern about existing and potential fraud and misconduct affecting national banks, the matter must be viewed in proper perspective. Insider abuse was considered a significant factor leading to the failure in approxi- mately 30 percent of the banks that failed during the 1988 and 1989 period, and material, fraud was found to be a significant con- tributing factor in approximately 20 percent of the 193 failures during this period. We should not lose sight, however, of the fact that most national banks are free of insider abuse. The vast majori- ty of men and women who serve the Nation's banking needs rou- tinely perform their duties in a safe and lawful manner. One of the reasons significant cases of insider abuse or fraud are considered sensational news is that they do not represent the norm in the na- tional banking system. Notwithstanding this fact, let me make clear at the outside that the 0CC believes strongly that no level of bank fraud or insider abuse is acceptable. We have zero tolerance for it. Such fraud and abuse must be vigorously pursued and those who commit it must be punished. Despite our best efforts to combat fraud and insider abuse, however, there has always been and there will no doubt always be a small percentage of those who will seek to take advan- tage of their positions. Some of these individuals may even manage to escape or delay detection of their activities. The OCC's enforcement policy places strong emphasis on the im- portance of proceeding against instances of insider abuse and seri- ous violations of law or compliance problems. When instances of in- PAGENO="0704" 700 sider abuse do occur, they are answered with the strongest enforce- ment actions at our disposal. Whenever there is evidence of fraud, whatever the source, the matter is expeditiously referred to the Justice Department or the law enforcement community for crimi- nal prosecution while we proceed with our administrative reme- dies. The 0CC also continues to take strong and vigorous administra- tive actions in the civil area. We have detailed a number of exam- pies of how we have used our various enforcement authorities to respond to abusive practices and violations of the law. As now en- hanced by the provisions in title IX of FIRREA, which you worked very hard for, Mr. Chairman, and we do appreciate it, these au- thorities will provide us with even more flexibility going forward. Since last testifying before this subcommittee, our enforcement process has been invoked to respond to a variety of threats and has frequently been used at the same time that we have pursued an appropriate law enforcement response. In many of these cases we referred suspected criminal activity to the law enforcement com- munity and worked closely with them in their investigation and prosecution of the individuals involved. The 0CC has a very good working relationship with the Depart- ment of Justice, the local U.S. attorney offices and the FBI. I am happy to note that the three U.S. attorneys that testified here yes- terday and Buck Revell from the FBI and Ed Dennis today have a similar feeling about the regulators working with law enforcement. This relationship in my opinion has been greatly enhanced through the operation of the Bank Fraud Working Group and the many local bank fraud working groups throughout the United States. A close cooperation with law enforcement has reaped tangible re- sults. Time after time the 0CC has dedicated its resources to sup- port law enforcement investigations and prosecutions of bank fraud matters. This cooperation is essential to uncover and prove a bank fraud. To illustrate the depth of deception and the tangled web that can be weaved by one bent on fraud, we have attached as appendix B to the written submission a summary of our work with the U.S. attor- ney in the investigation and prosecution of Jacobo Finkielstain, who caused the failure of the Central National Bank. It is a study, Mr. Chairman, of how effective the Government can be working to- gether. I also note that yesterday when Buck Revell from the FBI testi- fied he, too, mentioned this case, that is, the case of the Central National Bank and Jacobo Finkielstain. He also mentioned the work of the FBI in investigating the failure of the Golden Pacific National Bank. I would like to note for this subcommittee that we had two examiners who worked for approximately 3 years with the U.S. attorney on that case also. In fact, one of those examiners who worked on that case had previously spent 5 years working with the U.S. attorney several years ago on the Franklin National Bank failure. The examiners' work in those cases is a tribute to the diligent work performed by countless examiners who on a daily basis per- form their function without publicity or recognition. We believe the deterrent effect of such convictions to be extremely beneficial in PAGENO="0705" 701 that they send a strong message to those who would abuse finan- cial institutions. They also let honest bankers know that the regu- latory agencies and the law enforcement community are prepared to come down hard on bank fraud. Our response to your letter traces some of the accomplishments of the Bank Fraud Working Group, which was first organized in December 1984. I will not repeat them here, they are in our sub- mission, and Mr. Dudine discussed some of them today. The 0CC has been a continued and enthusiastic participant in this group since its inception. We are proud of its accomplishments. In my opinion it stands as a model of how Government should work to- gether to attack a serious problem. The 0CC has taken significant steps to incorporate FIRREA's strengthened enforcement authority into our supervisory process. We are in the process of developing regulations and revisjng 0CC policies. We continue to work in consultation with our fellow regu- lators to implement some of FIRREA's title IX provisions. With FIRREA, you have given us additional tools we need to meet the challenge of effective bank supervision, and we will use them vigor- ously. The 0CC also has taken a number of steps in response to the growth in the real estate loans by national banks and the rise in the percentage of these loans that are nonperforming. Our examin- ers have specifically targeted the real estate lending practices of national banks in regions of the country where there is evidence of a softening in the real estate markets or unsound lending prac- tices. We have also issued advisory notices to all national banks highlighting our concerns about increased real estate credit expo- sure. We are evaluating closely the methods that banks are using in making loans~and also in monitoring their performance. In conclusion, Mr. Chairman, I would like to answer those who have complained about the regulatory agencies that we are overly aggressive and those on the other side who complain that we are not tough enough, with the words of the 13th Comptroller of the Currency, John Skelton Williams, in his report to Congress in 1916. His words are what I consider to be our enforcement creed. This is his quote: "This office has no desire to do injustice to any bank. Its single aim is to promote sound, honorable, and safe banking, and to use the powers which the law has conferred upon it for the protec- tion of the legitimate banking interest of the country and for the prevention of those practices which, throughout banking history, have brought injury and disaster to innocent depositors and to the business communities where bank failures have occurred. No na- tional bank need have the slightest fear of any conflict or trouble with the Comptroller's office so long as it obeys the law and ob- serves the rules of sound and safe banking; but no national bank, however big or little, and no officer or stockholder, however influ- ential or important, is above the law. The Comptroller must en- force the law and the rules and regulations of the Comptroller's office impartially and unswervingly, whether the bank be big or little and whether or not the officers and directors be important or influential." Thank you, Mr. Chairman. [The prepared statement of Mr. Serino follows:] 30-830 0 - 90 - 23 PAGENO="0706" 702 STATEMENT OF ROBERT B. SERINO DEPUTY CHIEF COUNSEL (POLICY) OFFICE OF THE COMPTROLLER OF THE CURRENCY BEFORE THE COMMERCE, CONSUMER AND MONETARY AFFAIRS SUBCOMMITTEE COMMITTEE ON GOVERNMENT OPERATIONS UNITED STATES HOUSE OF REPRESENTATIVES March 15, 1990 Mr. Chairman and members of the Subcommittee: I am pleased to testify today on the efforts of the Office of the Comptroller of the Currency (0CC) to respond to unsafe or unsound practices, violations of law or other misconduct in national banks. This Subcommittee's concern is timely given the events which have transpired since this Subcommittee last held hearings in this area. I am pleased to report to you on OCC's efforts during this intervening period. We have accomplished much during this period, both independently and working with our fellow regulatory agencies and the law enforcement community. Our intolerance for abuse of banks, and our commitment to strengthening defenses against such activities and to responding vigorously to penalize those who commit such abuses remain PAGENO="0707" 703 strong and resolute. Full and effective cooperation with all elements of the law enforcement community is stronger than ever. Many barriers to such cooperation have been eliminated or significantly lessened, and while we have more yet to do in this regard, we have come far. Responses to the detailed questions you posed in your letter of invitation have been previously submitted and are included in the appendix to this statement. These responses should serve to more specifically illustrate just how much progress we have made and how well the process is working at the 0CC. Today, I would~ like to address some of the central themes identified by your questions. NATURE AND EXTENT OF ABUSE AND MISCONDUCT IN NATIONAL BANKS While we share the Subcommittee's concern about existing and potential fraud and misconduct affecting national banks, the matter must be viewed in proper perspective. We should not lose sight of the fact that most national banks are free of insider abuse. The vast majority of men and women who serve the nation's banking needs routinely perform their duties in a safe and lawful manner. One of the reasons significant cases of insider abuse or fraud are considered sensational news is that -2- PAGENO="0708" 704 they ~g ~ represent ~ ~ in the national banking system. Notwithstanding this fact, let me make clear at the outset that the * 0CC believes strongly that no level of bank fraud or insider abuse is acceptable. Such fraud and abuse must be vigorously pursued and those who commit it must be punished. Despite our best efforts to combat fraud and insider abuse, however, there has always been and there will no doubt always be a small percentage of those who will seek to take advantage of their positions. Some of these individuals may even manage to escape or delay detection of their activities. Cases involving nominee loans, "kickbacks schemes, fictitious loans, or false entries are difficult to detect -- particularly if the individual involved is intent on concealment. Compliance with laws and regulations pertaining to insiders and the bank's systems for ensuring compliance with such laws and regulations are targeted for review in OCC's examinations. The OCC's enforcement policy places strong emphasis on the importance of proceeding formally against instances of insider abuse and serious violations of law or compliance problems. When instances of serious insider abuse do occur, they are answered with the strongest enforcement actions at our disposal. In addition, we believe that in certain circumstances the deterrent value of exposure makes public disclosure -3- PAGENO="0709" 705 appropriate. Accordingly, on a case-by-case basis, we often make public the facts of our enforcement actions and, since the passage of FIRREA, we are making public all final enforcement orders. Whenever there is evidence of fraud, whatever the source, the matter is expeditiously referred to the law enforcement community for criminal prosecution while we proceed with our administrative remedies. CIVIL AND REGULATORY ENFORCEMENT The 0CC continues to take strong and vigorous administrative action. In our written response to the questions you have raised in your invitation letter, we have detailed a number of examples of how we have used our various enforcement authorities to respond to abusive practices and violations of law. As now enhanced by the provisions in Title IX of FIRREA, these authorities will provide us with even more flexibility going forward. Since last testifying before this Subcommittee, our enforcement process has been invoked to respond to a variety of threats and has frequently been used at the same time that we have pursued an appropriate law enforcement response. -4- PAGENO="0710" 706 Some of our more significant efforts in this area included: o Revocation of the trust powers of a national bank for abusive investment practices; o Use of our cease and desist powers, int~ ~ to respond to abusive practices involving mortgage servicing rights; o Use of our temporary cease and desist authority to direct reimbursement of improper bonuses; o Extensive use of our removal and civil money penalty authorities to respond to a variety of abusive practices and violations of law; including fraudulent or nominee loans, loans to fictitious borrowers, lending limit and insider lending violations, and falsification of bank documents. Where appropriate, we also used our suspension powers to remove individuals who posed an immediate threat to an institution; and 0 Use of our investigative authority in a variety of instances, including investigation into a series of bank takeovers by individuals whose intent was to -5- PAGENO="0711" 707 divert bank funds to themselves. In many of these cases, we referred suspected criminal activity to the law enforcement community and worked closely with them in their investigation and prosecution of the individuals involved. CRIMINAL £IL~EU ru.t~~ The 0CC has had a very good working relationship with the Department of Justice, the local U.S. Attorney Offices and the FBI. This relationship has been greatly enhanced through the operation of the Bank Fraud Working Group and the many local Bank Fraud Working Groups throughout the country. We believe that the Department of Justice, while it could always use additional resources to combat bank fraud, is working very well to focus resources where they find a necessity. While there will always be instances where more could be done, we believe we have established an outstanding working relationship to ensure that resources are sent to where help is needed. In addition, the further increase in manpower for the Department of Justice as the result of the passage of FIRREA should greatly enhance the Department of Justice's ability in this area. There have been many cases in which we believe the examining and legal side of the Office have done an excellent job in -6- PAGENO="0712" 708 coordinating matters with the law enforcement authorities. For example, we have detailed examiners to law enforcement agencies as agents of the Grand Jury and provided other means of support, such as making one of our enforcement attorneys available to the Department of Justice Fraud Section for two years to assist in the investigation and prosecution of a major bank fraud case in the Southwest. Our close cooperation with law enforcement has reaped tangible results. In our response to your questions, we have highlighted~ a number of instances of investigations, prosecutions and other follow-up actions that have resulted from our close working relationships. Some of these involved direct referrals by 0CC examiners of suspected criminal -activity. Others involved instances of law enforcement alerting the 0CC to information which would assist us in supervising the banks involved. Still others involved continuing and long-term cooperation and support in instances where referrals blossomed into full-blown prosecutions. Time after time, 0CC has dedicated its resources to support law enforcement investigation and prosecution of bank fraud matters. To serve to illustrate this, we have included a case study with our separate response detailing our efforts involving a major bank fraud in the Northeast. -7- PAGENO="0713" 709 We are pleased to provide these resources since many of these efforts have led to convictions and significant criminal sentences. we believe the deterrent effect of such convictions to be extremely beneficial in that they send a strong message to those who would abuse financial institutions and let honest bankers know that the regulatory agencies and the law enforcement community are prepared to come down hard on bank fraud. Each of these instances is representative of our close and continuing cooperation with law enforcement. We have worked hard to improve and foster this cooperation and will continue to do so. OPERATIONS AND ACTIVITIES OF THE BANK FRAUD WORKING GROUP Our response to your letter of February 23, 1990, traces some of the accomplishments of the Bank Fraud Working Group, which was first organized in December of 1984. 0CC has been a continued and enthusiastic participant in this group since its inception and is proud of its many accomplishments. This group has successfully built upon its initial points of agreement and continues to function as a central and vital point of coordination between and among its participants. It stands as a -8- PAGENO="0714" 710 model for how government should work together to attack a serious problem. When we last testified before this Subcommittee, we were able to report to you on the group's accomplishments reflected in its October 1986 progress report. Chief among the accomplishments identified in that report were: o Adoption of a mandatory criminal referral requirement and uniform criminal referral form; o Establishment of national and local points of contact; o Creation and implementation of a joint examiner/investigator training course in the bank fraud area to be given 3-4 times each year in various parts of the country; o Adoption of a number of legislative initiatives intended to ease communications between the agencies; and o Development of a significant case tracking system and enhancement of the FBI `5 Field Office Information Management System (FOIMS). -9- PAGENO="0715" 711 Since the BFWG's first accomplishment report, the BFWG has continued to work on many of the projects described above and has also undertaken other projects. The BFWG continues to prove itself to be an excellent forum for effective communication between and among the law enforcement community and the bank regulatory agencies. The rapid proliferation of more than 14 such groups in major metropolitan areas is perhaps the most direct evidence of the benefits to be derived from this kind of group. During this period, some of the BFWG's more significant accomplishments included: o Development and dissemination of uniform guidelines for compliance with the Bank Bribery Act; o Development of additional training programs for prosecutors and examiners; o Use of the group as a forum for establishing better coordination between FDIC/FSLIC fee counsel and law enforcement in bank failure cases; o Use of the BFWG to serve as a forum for the exchange of information regarding significant fraudulent schemes or particular investigations or prosecutions that cut across jurisdictional lines; -10- PAGENO="0716" 712 o Use of the BFWG as a conduit to the Economic Crime Council and the U.S. Attorney General's Council on issues of concern to the group, including priorities to be assigned to prosecution of bank fraud cases; o Use of the BFWG as a forum for development of a number of significant legislative proposals, including proposals to amend the Right to Financial Privacy Act and grand jury secrecy rules, and enhancement of civil and criminal enforcement authorities; - o Use of the BFWG as a conduit for providing direct assistance to law enforcement in individual prosecutions by making agency personnel available; o Use of the BFWG to review important prosecutions and to provide a focal point for other presentations intended to increase the understanding of the BFWG in a number of key areas; o Production and widespread distribution of a comprehensive Bank Fraud Directory; o Use of the BFWG to discuss implementation and coordination of the various new responsibilities and authorities under FIRREA; -11- PAGENO="0717" 713 o Use of the group to assess and develop a coordinated response to other developments in the law impacting on civil and criminal law enforcement, e.g., the ~ Hal~er decision; and o Production and distribution of a model plea agreement. We believe that the Bank Fraud Working Group has been a resounding success and has accomplished much during its tenure. Improvements in communication and coordination of activity among the civil and criminal law enforcement agencies represented by this group have been significant indeed. This group stands as an excellent example of how agencies with common interests can pull together to break through barriers to communication that otherwise all too frequently exist in government. FIRREA TITLE IX IMPLEMENTATION The 0CC has taken significant steps to incorporate Title IX'S strengthened enforcement authority into our supervisory process. We are in the process of developing regulations and revising 0CC policy statements, including our internal policies and procedures. We are also providing informal guidance to examiners, bankers, and bank counsel pending the final issuance of the regulations and statements of policy. -12- PAGENO="0718" 714 On March 5, 1990, we published in the Federal ~~gister a teni~orary rule that became effective immediately and requests -comments implementing FIRREA's Section 914 requirement that national banks give at least 30 days' notice to the 0CC before adding any individual to the board of directors or employing any individual as a senior executive officer if the bank has been chartered for less than two years, has undergone a change in control within the preceding two years, is not in compliance with minimum capital requirements, or is otherwise in a troubled condition. We recently used the Section 914 authority to turn down an application based, in part, on information which we obtained from the Department of Justice after we made a request for the use of Grand Jury information pursuant to the authority granted by section 964 of FIRREA. While we were able to obtain and act on this information within the 30 day limit imposed by Section 914, we are concerned that the amount of time available to obtain and follow up on such information may- not always be - sufficient. We have implemented the requirements of Section 913 of FIRREA regarding publication of final enforcement orders by publishing listings of our final enforcement orders on a monthly basis in an 0CC publication, Internretations. Copies of the actual orders also are available to the general public upon request. -13- PAGENO="0719" 715 We are particularly pleased that Section 905 of FIRREA has now clarified our continuing jurisdiction to bring removal and civil money penalty actions against individuals for offenses committed while they were associated with an institution even though they may have subsequently been separated from the institution or the institution may have failed. To date, we have reinstituted approximately 17 actions against individuals pursuant to Section 905 which might not have been initiated without this authority. We believe that it will prove to be an effective and valuable aid in our enforcement efforts. The 0CC continues to work in consultation with the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, and the National Credit Union Administration to implement some of FIRREA's Title IX provisions. An interagency working group is currently drafting guidelines to implement the civil money penalty provisions to reflect the increased assessment authority contained in Section 907 of FIRREA. That group is revising the existing guidelines issued by the Federal Financial Institutions Examination Council, which set forth the standards that are used to assess civil money penalties. We are also revising our internal policies and -14- PAGENO="0720" 716 procedures to reflect the increased authority to assess civil money penalties for late call reports contained in Section 911 of FIRREA. Another interagency working group is examining the feasibility of delegating additional enforcement authority to .regional or district offices as required by Section 917 of FIRREA. To establish the pool of administrative law judges required by Section 916, an interagency working group is conducting research and gathering information, such as statistics on the number of administrative hearings held by the agencies to determine the number of judges needed. In addition, the agencies soon will begin a joint revision of our rules of practice and procedure to make them more consistent and uniform. The annual report to Congress concerning enforcement actions taken by the 0CC, as required by Section 918, will be submitted to Congress at the end of the year. We are now in the process of compiling statistics in the format required by FIRREA on actions that have been taken to date. At that time, we will also make any recommendations we may have for additional legislative initiatives that we believe are necessary. IMPLEMENTATION OF EMPLOYEE COMPENSATION PROVISIONS Title XII of FIRREA directs the Comptroller of the Currency to set pay and benefits of 0CC staff at levels comparable to those -15- PAGENO="0721" 717 of the other Federal bank supervisory agencies. The 0CC took its first step to implement this provision on August 13, 1989. These initial adjustments are meant to target those groups of 0CC employees with the most obvious pay gaps relative to other financial institution supervisors. As part of the interim adjustments, all employees assigned to positions in certain high cost cities now receive a percentage-based supplement to base pay. As a result, approximately 1,800 of the 3,250 0CC employees currently receive geographic pay differentials. These employees are located in high cost-of-living cities in which the 0CC has problems retaining experienced staff. Also, upper level management and 1,100 trainee-level employees received across-the-board pay increases to make their salaries more comparable to the other Federal bank supervisors. To further implement the compensation provisions of FIRREA, the 0CC has retained a compensation consultant to assist us in ensuring that the 0CC compensation program is comparable to those of other financial regulators. We expect to have recommendations from the consultant this summer and to implement any additional changes to our pay structure thereafter. REAL ESTATE LENDING ISSUES The 0CC has taken a number of steps in response to the growth in real estate loans by national banks and the rise in the -16- PAGENO="0722" 718 percentage of those loans that are nonperforming. Our examiners have specifically targeted the real estate lending practices of national banks in regions where there is evidence of softening real estate markets or unsound lending practices. We have also issued advisory notices to all national banks highlighting our concerns about increased real estate credit exposure. To help examiners target the most serious problems, the CCC recently developed a real estate valuation model which simulates the effect of a downturn in real estate markets on bank equity capital. The model will be used to identify potentially vulnerable banks and to prioritize such institutions for more in depth review. Results generated by the model will not be used, however, as a basis alone for downgrading any particular bank without additional specific review of that bank. The 0CC is working with other bank supervisory agencies to ensure the sharing of relevant data on bank real estate holdings and underlying market conditions. In 1989 and continuing into this year, the 0CC conducted targeted examinations of banks with large real estate portfolios in the softening New England market. On a priority basis, Wstreamlinedw real estate examinations will be conducted at selected New England regional banks to identify credit administration weaknesses and determine the need for full scope asset quality examinations. -17- PAGENO="0723" 719 Going forward, we will continue to monitor trends in real estate markets and bank exposure to real estate loans. We are paying particular attention to some commercial real estate markets in areas of the country that have experienced sharp increases in their vacancy rates. Although weaknesses in those markets do not appear at this time to be as severe as they have been in the southwest, many national banks have significant commercial real estate loan exposures, and some have experienced rising levels of nonperforming real estate loans and real estate loan charge-off s. CONCLUSION As we have indicated, 0CC has already done much to implement the various provisions of EIRREA. Congress has have given us the additional tools we need to meet the challenge of effective bank supervision going forward and we will use them vigorously. Many of these will enhance our ability to respond to fraud and abuse whenever we encounter it. Let me conclude by repeating that the 0CC will not countenance wrong doing in the national banking system and will continue to use the full range of its enforcement powers to respond to it. We look forward to continuing to work with our fellow agencies and the Justice Department to do all that we can in this effort. -18- PAGENO="0724" 720 C) Comptroller of the Currency Administrator of National Banks Washington, D.C. 20219 March 13, 1990 The Honorable Doug Barnard, Jr. Chairman Commerce, Consumer and Monetary Affairs Subcommittee Committee on Government Operations United States House of Representatives Washington, D.C. 20515 Dear Mr. Chairman: I am pleased to forward our responses to the questions you raised in your letters of February 8 and February 23, 1990. I look forward to appearing before you on March 15, 1990 and reporting to you on our efforts regarding the various concerns and issues raised in your letters. Sincer ertB. 0 Deputy Chief ~ounsel (Policy) PAGENO="0725" 721 ~ Nature and extent of abuse and miSconduct in national banks la. provide updated data on number of failed banks as to which insider abuse or major borrower misconduct was a significant contributing factor, and any 0CC data on numbers of national ~~cs in which criminal misconduct was alleaed. OCC's previously released data in the Bank Failure Study summarized insider abuse and fraud in banks that failed between 1979 and 1987. Similar data has been collected on national banks that have failed subsequent to 1987. The impact of abuse and fraud remains similar to what we have noted earlier. Insider abuse (self-dealing, undue dependence on the bank for income or services by a board member or shareholder, inappropriate transactions with affiliates, or unauthorized transactions by management officials) was considered a significant factor leading to failure in approximately 30% of the banks that failed during 1988 and 1989. This is a reduction from the 35% level noted in failures prior to 1988. Material fraud as a significant contributor to failure was noted in approximately 20% of the banks duri~ig the recent two year period. Prior to 1988, 11% of the tailures were judged to have been significantly caused by fraud. It is important to note that the levels of insider abuse and fraud stated here apply only to failed institutions (representing collectively about 5% of the national bank population during the 1980's). The level of abuse and fraud reflected here cannot be applied to the vast majority of banks that have not failed. lb. Describe any new or recent discernible trends or patterns of fraud or other misconduct, including fraudulent schemes and i~as of the country most affected. No new trends or patterns of insider abuse or fraud are noted. 1While this appears to represent a large percentage increase, one should keep in mind the fact that bank fraud in these cases was not necessarily the only factor causing the failure of the institution. In addition, the percentage change may not be statistically significant in light of the relatively small numbers at issue here. Furthermore, it appears that the examining staff of the 0CC, due to increased and improved training and efforts, is uncovering more fraud in the national banking system than before. PAGENO="0726" 722 Many of the same problems that have occurred previously continue to affect particular institutions. Schemes such as diversion of income and resources via loans to insiders and their interests, lending to uncreditworthy borrowers, and payments of large fees to insiders are all examples -of abuse documented in banks over the past few years. The impetus for these actions is generally an acute need for liquid funds by insiders, borrowers or outside contractors. Specific examples of schemes perpetrated against national banks are detailed below: Several banks have been harmed through their purchase of loans secured by fraudulent insurance annuity contracts. The 0CC advised national banks in June, 1989 that large losses have occurred in at least one bank, contributing to its failure. The losses were realized when the underlying borrowers did not repay their obligations and the expected collateral (insurance annuities) proved to be nonexistent. In January, 1989, the CCC alerted national banks about schemes involving the fraudulent use of municipal leases. Some individuals and corporations were selling seemingly sound leases entered into by municipalities and diverting the proceeds for their own benefit. Ownership of the leases was misrepresented, in some cases the same -lease was sold to more than one institution; in other cases, leases that had been prepaid were sold not evidencing the whole or partial prepayment. Further, in order to conceal default by the lease obligor, some payments were made by the fraud perpetrator. A number of financial institutions have been impacted by the purchase of fraudulent or low-quality consumer loan contracts. Often these purchases are made by troubled institutions hoping to achieve sizable and rapid monetary gains. Unfortunately this objective exposes a bank to less than scrupulous loan brokers and dealers. At times, the underlying collateral does not exist, the "guarantee" offered by the broker/dealer is worthless or the collateral is grossly insufficient to cover the face amount of the loan. 0CC has detected several-attempts by outside parties to unlawfully gain control over troubled or failing banks. This has been accomplished by purchasing at a discount the stock loans held by third party lenders. Once in control, these individuals arranged complex schemes to siphon off the bank's remaining liquid assets. 0CC has warned banks to be careful of groups or individuals who represent themselves as "new" ownership and to be certain that appropriate, change-in-control notices are filed with the regulatory authorities. -2- PAGENO="0727" 723 The 0CC has also conducted a comprehensive investigation into this activity and is taking steps to prohibit 13 individuals from further participation in federally insured financial institutions based on the findings of the investigation. These 13 individuals had been involved in attempted and successful, takeovers of approximately 15 banks in the past. The 0CC initiated contact with the FBI, the Department of Justice, and the FDIC at the outset of the investigation and continues to supply' information to these agencies. While the above referenced activity is not specifically isolated to one area of the country, much of it emanates from the Southwest where there is a large number of national banks and and the largest percentage of bank failures. lc. Discuss the OCC's recent efforts in New England, and summarize the OCC's findings during its examinations there. The 0CC has taken a number of steps in response to the growth in real estate loans by national banks and the rise ,tn the percentage of those loans that are~ nonperforming. Our examiners have specifically targeted the real estate lending practices of national banks in regions where there is evidence of softening real estate markets or unsound lending practices. Where we have found banks that have high real estate credit exposures and weak or inappropriate systems to control and manage their exposures -. including inadequate reserves - we -have directed them to take appropriate corrective action. We have also issued advisory notices to all national.banks highlighting both our cónçerns about increased real estate credit exposure and our examination findings that some banks have failed to follow sound principles in making real estate loans and in monitoring their performance. To help examiners target the most serious problems, the 0CC recently developed a real estate valuation model which simulates the effect of a downturn in real estate markets on bank equity * capital. The model will be used to identify potentially vulnerable banks and to prioritize these institutions for more in depth review. The 0CC is working with other bank supervisory agencies to ensure the sharing of relevant data on bank real eétate holdings and underlying market conditions. In 1989 and continuing into this year, the 0CC conducted targeted examinations of banks with large real estate portfolios in the softening New England market. As we see the results from these examinations, we will determine whether loan loss reserves and policies and procedures are adequate. If they are not, we will take corrective action. As part of this process, an examination of Bank of New England Corporation (BNEC) commenced in October, 1989. The focus of -3- PAGENO="0728" 724 this examination was on the asset quality of the Bank of New England, N. A. (BNE). The examination was expanded in December, 1989 as part of an interagency effort and encompassed all bank subsidiaries of BNEC. As a result of our findings, a detailed cease and desist order has been consented to by the BNE Board of Directors. Concurrently, the Federal Reserve Board (Fed) has also executed a Consent Order with BNEC. In addition, the 0CC continues to monitor BNE's funding on a daily basis. Senior Washington 0CC personnel and the designated Examiner in Charge are in regular contact with BNE management to ensure that appropriate corrective action is implemented. Interagency (0CC, FDIC, Fed) examinations of the bank subsidiaries of other financial holding companies in the Northeast are being undertaken with the primary focus on asset quality. On a priority basis, "streamlined" real estate examinations will be conducted of a number of New England regional banks to identify credit administration weaknesses and to determine the need for full scope asset quality examinations. To ensure consistency, examiners who participated in the BNEC examination and examiners who are experienced in analyzing real estate creduts are conducting these examinations. Going forward, we will continue to monitor trends in real estate markets and bank exposure to real estate loans. We are paying particular attention to some commercial real estate markets in the Northeast, Southeast, and West that have experienced sharp increases in their vacancy rates. Although weaknesses in those markets do not appear at this time to be as severe as they have been in the Southwest, many national banks have significant commercial real estate loan exposures, and some have experienced rising levels of nonperforming real estate loans and real estate loan charge-off s. As we stated above, we are requiring banks to take a hard look at their real estate loan portfolios and will require additiona1~provisions to loan loss reserves where severe weaknesses in local real estate markets have impaired credit quality. 2. IMPLEMENTATION OF FIRREA "PAY" PROVISIONS AND 0CC MANPOWER LEVELS: 2a. Set forth examiner and supervisor levels for FY 1988 and ~1989. includino turnover and new hires. Examiner and supervisor levels at the beginning of calendar year 1988, 1989 and 1990 are as follows: -4- PAGENO="0729" 725 Jan 19B8 j~~n-~ 1949 Jan 1990 Non-Supervisory Field Examiners 1890 1810 1774 Supervisory Field Examiners 120 . . 119 115 Total 2010 1929 1889 Turnover rates for 0CC field examiners were 10.2% in 1988 and 9.9% in 1989. 0CC hired 120 field examiners in 1988, 161 in 1989 and 37 since January 1, 1990. 2b. Report on the OCC's implementation of the "pay" provisions in FIRREA (including the comparability provisions), describing (i) actual percentage salary increases and any pay differentials, (ii) the impact on retaining experienced personnel, if known, and (iii) any problems with these FIRREA p~pvisions. Actual percentace salary increases. Effective August 13, 1989, the 0CC made interim pay adjustments based on the pay provisions of FIRREA. The pay adjustments were targeted at groups of employees for which there were apparent pay gaps with the other financial regulators. These groups are summarized as follows: o All employees assigned to positions in high cost cities now receive a percentage based differential (or supplement to base pay). Approximately 1,800 of 0CC' s 3,200 employees receive these geographic differentials. Differential rates now in effect are attached as Appendix A. Also attached as part of Appendix A are copies of two letters previously submitted to Congress summarizing the actions we have taken thus far in this area. o CP-1 through CP-4 employees (typically trainee levels at OCC) received across-the-board annual base pay adjustments as follows: Amount % of Average Salary CF-i $ 400 1.9% CP-2 800 3.4% CP-3 800 3.0% CP-4 1,000 3.1% o OCC's CF-il and CP-12 level employees (OCC's upper management levels) were relieved from the pay cap constraints of $75,500. The average CF-li's pay increase was $1,500 or 2.0%. The average CP-12's pay increase was $5,500 or 7.3%. -5- PAGENO="0730" 726 o 0CC executives, previously in the Senior Executive Service (SES), also received interim base pay adjustments. At the beginning of 1990, consistent with past practices of annual adjustments by the 0CC and the other regulators, the 0CC made the following additional adjustments: o All 0CC executives and GG level employees (support staff) received 4% across-the-board pay increases. o The CP salary structure was adjusted by 4%. This structure adjustment did not result in across-the-board pay increases since 0CC's merit pay practices provide for performance based increases on the anniversary date of the employee's last promotion. o All CP-l employees received, average base pay adjustments of $200. o All CP-2 employees received base pay adjustments which averaged $600. Impact on Retaining Experienced Personnel: A valid assessment of the effectiveness of the pay adjustments is difficult since OCC's pay adjustments were not effective. until mid-August of 1989 and turnover is traditionally low during the second half of the year (particularly the fourth quarter). In comparing field'examiner losses for the September-December 1988 period with those same months during 1989 after 0CC implemented interim ~payR provisions in FIRREA, there were 21 fewer losses or .31% less turnover in 1989. However, data for such a very limited time period shouldnotbe construed as representative of a full year. Assessment of the FIRREA RppyN provisions: In the process of implementing the pay provisions of FIRREA, the 0CC has hired a compensation consultant who is assisting us in assessing individual job responsibilities and evaluating comparability of current 0CC pay with the pay of the other financial regulators. Because this study is still underway, we have no basis for identifying any problems with the FIRREA pay provisions. 2c. Describe changes (if any have occurred) in the OCC's policy of not scheduling examinations at any particular intervals of freauemcy. The increasing complexity and volatility of the risks faced by the banking system, coupled with existing examiner resources, -6- PAGENO="0731" 727 required that the 0CC adopt more efficient and effective methods of supervising national banks. In May, 1986 the 0CC decided to end its reliance on the periodic, calendar driven "snapshot" approach to bank examinations. In its place, we identified a "hierarchy of risks" to the banking system which is now the framework for decisions on where our supervisory resources will be allocated. Our goal has been to allocate supervisory resources more effectively by focusing on those activities and those banks that pose the greatest risk to the system, and to leverage those resources through the use of technology and more efficient supervisory methods. In November, 1987, when we last testified before the Subcommittee Ofl this subject, we had approximately 18 months experience with the hierarchy of risk approach to allocating supervisory resources. Since that time, we have continued to ref inc that approach. In order for decisions based on our hierarchy of risk to be correct, it is important that adverse or potentially harmful changes in the ownership, management, . or operation of each bank, or changes in its environment, be recognized as early as possible. Therefore, in June, 1988, we implemented a "portfolio, management" system for providing on. going supervision of banks at the field level. Under this approach, every bank has an examiner' assigned to it on an on going basis. Under this portfolio approach, ~ going supervision of a bank is accomplished through frequent, formal and informal contacts by national bank examiners who are responsible for monitoring and analyzing conditions in an assigned portfolio of banks using both on-site and off-site methods. As the focal point for all information about conditions in his or her assigned banks, the supervising examiner is in the best position to recognize changes in a bank's operations or environment. The supervising examiner is also in the best position to judge whether those changes are within the capacity of the bank to manage, or whether they are likely to have an adverse effect. As portfolio manager, the supervising examiner is also responsible for developing and carrying out an annual supervisory strategy tailored to the risks in each of the banks in his or her portfolio. The supervisory strategy describes the overal] supervisory objectives for the coming twelve months, along with plans for on-site and off-site supervisory activities that will be used to accomplish those goals. The strategy, which is ` subject to review and approval by higher levels of 0CC management, is revised as necessary to account for any significant changes in the bank's condition or environment, or in planned supervisory activities. We believe that our current supervisory process is an effective and efficient one. -7- PAGENO="0732" 728 3. Civil and Regulatory Enforcement 3a. Set forth the (i) numbers of final formal and informal 0CC civil enforcement orders (not actions initiated).for 1988 and 1989, broken down in the same manner as in the Subcommittee's November 19, 1987, Hearing Transcript (pp~ 639-44), and (ii) the amount of CMP assessments and funds actually recovered and also restitutions for these two years. ACTIONS TAKEN AGAINST INSTITUTIONS Commitment Letters 117 118 Memoranda of Understanding 10 22 Formal Agreements 63 87 Temporary Cease and Desist Orders 0 3 Cease and Desist Orders 25 42 Civil Money Penalties .....Q ......Q 215 272 ACTIONS TAKEN AGAINST INDIVIDUALS Commitment Letters 0 0 Memoranda of Understanding 0 0 Formal Agreements 0 0 Temporary Cease and Desist Orders 0 1 Cease and Desist Orders 0 0 Suspensions and Removals 29 142 Civil Money Penalties ~.2.1 150 143 2~ should be noted that the decline in removal actions in 1989 was precipitated by the adverse ruling in the Stoddard decision from the D.C. Circuit Court of ~ppea1s. The banking agencies (other than OTS) had to wait until the passage of FIRBEA to effectively overturn the Stoddard decision before we could resume taking removal actions against persons who were no longer associated with a national bank. -8- PAGENO="0733" 729 CIVIL MONEY PENALTIES Amount assessed - $1,832,000 $1,572,000 Amount settled for 433,500 190,000~ Amount collected during year4 281,590 153,350 3b. Expound on any examples of special accomplishments and also problems in obtaininc civil enforcement orders. As demonstrated by the numbers set forth above, the 0CC continues to take strong and vigorous administrative action. FIRREA has provided us with enhanced enforcement powers which we continue to use. We have not discerned any problems in obtaining civil enforcement orders. ` The existence of the - enforcement powers alone tends to serve as a potential deterrent to wrongdoers. There have been many cases in which we believe the examining and legal side of the Office have done an excellent job in coordinating matters with the law enforcem~nt authorities and in taking timely and forceful administrative action. We have detailed many examiners to work with the law enforcement agencies and to function as agents of the Grand Jury. The services of our employees have alway~ been appreciated and noted by the law enforcement community. In two separate cases, three examiners so detailed were honored with awards by the FBI at the 3me amount settled for in civil money penalty cases is by nature less than the amount originally assessed. This is true because the settlement represents a negotiated figure which is acceptable to both sides and because settlements represent a great savings in terms of manpower and expense in litigating such cases. In addition, it should be noted that many assessments are based on a presumption that the individual has an ability to pay the assessed imount which is not always the case. Also, many settlements are reduced due to the defendant agreeing to other remedies as well, such as a removal order. 4These amounts represent penalties collected during the year, but not necessarily just from assessments made that year. 5one~ potential problem the agencies currently have in imposing civil money penalties is du. to the United States v. Ralper, 109 U.S. 1892 (1989) case in which the Supreme Court ruled that an administrative penalty assessment, which was based on the same grounds as an earlier criminal fine, was improper under the double jeopardy clause of the Constitution. We have studied the case carefully with the Department of Justice and have to date not encountered an insurmountable problem with regard to this case. -9- PAGENO="0734" 730 conclusion of the detail. In another case, due to the close contact we maintained with the FBI, when the president of a national bank walked into a local FBI office with his attorney to confess to a major misapplication of bank funds, the FBI immediately notified us and we were able to commence an on site examination of the bank that same day. In yet another case, we were able to notify the FBI in advance of the closing of a national bank so that the FBI could be present at the closing to secure records and immediately take statements from the bank's employees. In another case, a bank fraud conviction was obtained as a result of a coordinated effort between the 0CC, IRS and the FBI. The defendant in the case had purchased the bank and his concealed illegal activities caused the bank to fail ifl spite of * and subsequent to forceful administrative action by the 0CC, which included civil money penalty assessments and removal actions. - In other cases, we successfully litigated the revocation of the trust powers -of a national bank. (This case is currently up on * appeal before a Circuit Court of Appeals.) In another case, we were successful in issuing a cease and desist order against a bank for various unsafe and unsound banking practices prior to those practices having a negative impact on the earnings of the bank. We have also been successful in suspending and removing a bank president and assessing him a $25,000 civil money penalty for his involvement in authorizing the bank to make a large volume of fraudulent real estate loans. In addition, after a criminal referral was made by this Office, the principals of that scheme, including the bank president, were convicted of-bank fraud and other charges and received sentences of incarceration, fines, and restitution. The Enforcement & Compliance Division detailed an attorney to the Department of Justice Fraud Section to work full-time and assist in the prosecution of the criminal case. In addition, a national bank examiner was made an agent of the grand jury to assist in the investigation. In a cease and desist action, the 0CC issued an order which prohibited the bank from purchasing additional mortgage - servicing rights and other externally generated assets, and required the bank to obtain a market valuation of the mortgage servicing rights which were already on the bank's books. An examination disclosed that the bank had purchased these assets -at a price which was greatly inflated over their actual market -_ value, and had continued to carry them on its books at cost. The bank's board of directors consented to the order, which also prohibited the bank from entering into transactions with certain affiliated companies and addressed other safety and soundness -10- PAGENO="0735" 731 considerations as well. The bank subsequently failed as a result of write-downs on the mortgage servicing rights. An investigation into the bank's acquisition of the rights is ongoing. The Comptroller issued a temporary cease and desist order against a bank and three of its officers ordering the officers to reimburse the bank for over $100,000 in bonuses that were paid to the officers at a time when the bank was in a troubled financial condition. Shortly before the institution failed, the officers paid back the bonuses. The Comptroller issued an order prohibiting a bank's former chairman of the board from participating in the affairs of any federally insured financial institution, and assessing him a $25,000 civil money penalty for lending limit and insider violations. The former chairman benefited from many of the violations, and the violations resulted in a large loss to the institution. A criminal referral has been filed, and an investigation is ongoing. * In a case involving two failed community banks,* the Comptroller issued orders prohibiting the banks' former controlling shareholder, and two of its former directors, from participating in the affairs of any federally insured institution for engaging in violatiOns of 12 U.S.C. §~ 84 and 375b. The violations involved a complex nominee loan scheme by which the former controlling shareholder used the banks' own funds to pay off his bank stock debt. The violations resulted in a total loss of approximately $1 million at the two institutions, and contributed to the banks' failures. The former controlling shareholder also was assessed a $16,500 civil money penalty, one former director was assessed a $15,000 penalty and the other former director was assessed a $12,500 penalty for their roles in the scheme. Criminal referrals have.been filed and the OCC's examiners are actively cooperating in the investigation. In another case, the 0CC removed a bank's former CEO for making numerous fraudulent nominee loans, from which he and his business associates benefited. The 0CC also assessed a $60,000 civil money penalty against the former CEO. The former CEO was subsequently convicted of sixteen counts of conspiracy, embezzlement and false statements, and ordered to serve a ten year prison sentence and pay nearly $1.5 million in fines and restitution. The 0CC first alerted the criminal law enforcement agencies as to the suspected violations and 0CC examiners cooperated extensively with the U.S. Attorney's Office and the FBI to help secure his conviction. In another action, the 0CC removed a bank's former president and the bank's former assistant cashier and chief lending officer PAGENO="0736" 732 for making loans to fictitious borrowers. The 0CC also assessed $100,000 civil money penalties against each of them. The 0CC first detected the scheme during an examination of the bank and ordered the bank to employ an outside auditor who unraveled the violations. Both individuals were convicted of numerous counts of bank fraud and received prison sentences. 0CC examiners actively cooperated with and assisted the FBI during the course of its investigation. In another action, the 0CC removed a bank's former president who had been convicted of misapplication of funds and false entries. The former president had falsified bank records in making a nominee loan to himself, and misrepresented the true purpose of the loan to the OCC's examiners. As a result of his conviction, he was fined and received a suspended sentence. The OCC's examiners were instrumental in detecting the violations and assisting in the former president's prosecution. In.yet another case, an individual pled guilty to 5 counts of conspiracy to commit bank fraud in a scheme to defraud the bank of approximately $38 million. The individual has been sentenced to 7 years imprisonment - with one year specifically for lying to the 0CC. Two others have been indicted and another plea arrangement is pending. Attached as Appendix B to this response is a detailed account of how the 0CC worked closely with the FBI and the U.S. Attorney to develop this case and see it through to successful completion. The extent to which 0CC worked with the law enforcement community in this case provides an excellent case study of how effective this type of cooperation can be. 3c. RESULTS OF FIRREA TITLE IX IMPLEMENTATION The 0CC continues to work in consultation with the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, and the National Credit Union Administration to implement some of FIRREA's Title IX provisions. Various interagency working groups comprised of representatives from these agencies are jointly working to achieve uniformity and consistency in the way that we fulfill some of our responsibilities, under FIRREA. In addition, we have taken the following actions to implement some of the key provisions of FIRREA. 0CC RecTulations and Annlicatiofl of New Provisions - The 0CC has taken significant steps to incorporate Title IX's strengthened enforcement authority into our supervisory process. We are in the process of developing regulations and revising 0CC policy statements, including our internal policies and procedures. We also are providing informal guidance to examiners, bankers, and bank counsel pending the final issuance of the regulations and statements of policy. -12- PAGENO="0737" .733 On March 5, 1990, we published In the Federal Register an immediately effective temporary rule to implement Section 914 of FIRREA. This regulation requires national banks to give at least 30 days' notice to the 0CC of any proposed appointment to the board of directors or to the position of'senior executive officer if the bank has been chartered for less than two years, has undergone a change in control within the meaning of the Change in Bank Control Act within the preceding two years, is not in compliance with minimum capital requirements, or is otherwise in a troubled condition. The bank may not add the individual to the board, or employ the individual as a senior executive officer if the 0CC issues a notice of disapproval. A copy of this regulation is provided as Appendix C. We have already implemented this regulation and recently used it to turn down an application based in parton information which we obtained from the Department of Justice after we made a request for the use of Grand Jury information pursuant to the authority set forth in section 964 of FIRREA. The individual, who was being proposed as a Vice President of a bank, had been - involved in certain transactions which represented serious conflicts of interest while he was an officer of another bank. Specifically, the-individual had been the servicing officer for loans to three individuals with whom he had extensive business dealings. In addition,. the proposed Vice President was aware of a false statement contained in a document that was used in connection with the funding of -a loan from which he received benefit. Based on the foregoing, the 0CC determined that the proposed Vice President's character and integrity indicated that~ it would not be in the best interests of the bank's depositors or the public to permit him to serve as the bank's Vice President and, thus, denied the 914 application. In implementing Section 914, we have found a defect in the effective operation of the statute. Section 914 contains a strict 30-day time frame for agency disapproval of directors and senior executive officers. This amount of time may not be sufficient in some circumstances due to the necessity of obtaining information from other entities, such as reports from the Federal Bureau of Investigation. - Section 913 of FIRREA requires the appropriate Federal banking agencies to publish and make available to the public final enforcement orders or any modifications or terminations of final orders. We are fulfilling these disclosure requirements by publishing listings of the final enforcement orders on a monthly basis in an 0CC publication, Interpretations. Our Communications Division maintains a file of all final orders, copies of which are available to the general public upon request. -13- 30-830 0 - 90 - 24 PAGENO="0738" 734 An important part of FIRREA's enhanced enforcement authority is the continuing jurisdiction provision in Section 905. This provision allows agencies to bring removal and civil money penalty actions against individuals for offenses conm~itted while they were associated with an institution even though they may have subsequently been separated from the institution or the institution may have failed. To date, we have reinstituted approximately 17 actions against individuals pursuant to Section 905 which could not have been initiated without this authority. We believe that it will prove to be an effective and valuable aid in our enforcement efforts. We are revising our internal policies and procedures to reflect the increased authority to assess civil money penalties for late call reports contained in Section 911 of FIRREA. Also, as permitted by Section 911(a), we are revising our regulation, 12 C.F.R. Part 21, to eliminate the requirement that banks file with the 0CC periodic reports on the installation, maintenance, and operation of security devices. An interagency working group is currently drafting guidelines to implement the civil money penalty provisions to reflect the increased assessment-authority contained in Section 907 of FIRREA. That group is ±evising the existing guidelines issued by the Federal Financial Institutions Examination Council, which sets forth the standards that are used to assess civil money penalties. In the meantime, however, the 0CC will apply the increased civil money penalties, as appropriate. Another interagency working group is examining the desirability and feasibility of delegating additional enforcement authority to regional or district offices as required by Section 917 of FIRREA. Prior to the enactment of FIRREA, the 0CC had delegated considerable enforcement authority to its District Offices. Under our current delegation policies, the District Offices have authority to initiate, negotiate, execute, modify, and terminate actions such as commitment letters, formal agreements, cease and desist orders involving all but 5 rated banks and to issue and negotiate civil money penalties in amounts under $10,000. To establish the pool of administrative law judges required by Section 916, an interagency working group is conducting research and .is gathering information, such as statistics on the number of administrative hearings held by the agencies to determine the number of judges needed. Before the pool is established, it will also be necessary to resolve certain technical issues such as hiring procedures, housing of administrative law judges, and proportionate contribution to their compensation. We are proceeding in the resolution of these issues. In addition, the. agencies soon will begin a joint revision of our rules of practice and procedure to make them more consistent and uniform. -14- PAGENO="0739" 735 Some provisions of FIRREA are largely self-implementing and need no specific agency action to become effective. For example, the provision governing industry-wide application of removal, suspension, and prohibition orders, contained in Section 904, does not require the agencies to issue additional interpretation or regulations. - In your letter. of invitation, you specifically asked about our actions to implement Section 910, which automatically prohibits participation by an individual convicted of certain crimes in the affairs of an insured depository institution without prior written consent of the Federal Deposit Insurance Corporation. This section increased the penalty which can be assessed for violations and made the penalty applicable to the individuals as well as the institutions. If an individual knowingly violates the statute, referrals will be made to the U.S. Attorney for the imposition of fines, the same as is currently done.with other criminal violations. No additional procedures are required by the 0CC. The annual report to Congress concerning enforcement actions taken by the 0CC, as required by Section.918, will be submitted to Congress at the end-of the year.. We are now in the process of compiling statistics in the format required by FIRREA on actions that have been taken to dath. Concerns with Provisions of Titie_IX FIRREA enhanced the enforcement authority of the Federal depository institution regulators. We appreciate the additional tools that it provides for protecting the safety and soundness of the banking system and enforcing the laws applicable to national banks. However, in your letter of invitation, you asked us to comment on problems, uncertainties, or concerns with *any of the Title IX provisions, we have previously mentioned one concern regarding Section 914. Another concern involves our civil money penalty authority. Because the civil money penalty statutes are phrased in the present tense, a respondent in a civil money penalty case has argued that the 0CC may not impose civil money penalties for past violations that are not occurring at the time that a Notice of Assessment is issued. This issue was recently raised in a case pending before the Seventh Circuit Court of Appeals and raises serious questions about our ability to pursue civil money penalty assessments for past violations since the agency rarely ~catches the bank or the individual in'the acts. Most commonly, the examination process uncovers violations of law which have occurred between examinations. Even when the violations are continuing, it has been the practice of the 0CC to offer the bank or the director or officer an opportunity to explain why a -15- PAGENO="0740" 736 civil money penalty assessment would be inappropriate before the 0CC actually issues one. Obviously, once the views of the bank, director or officer are solicited, they would have the opportunity to temporarily cease the practice and thus avoid a civil money penalty assessment. We certainly hope that the court recognizes these practical infirmities of deciding against the agency in this case and we will keep the Subcommittee apprised of this case. Section 911 of FIRREA, which permits the assessment of increased civil money penalties for violations of call report requirements, has raised an issue. Section 911 states that the third-tier civil money penalty ($1,000,000 per day) may be imposed on a bank which knowingly or recklessly files a false or * misleading. call report. It is unclear whether the 0CC can impose a third-tier civil money penalty on a bank that refuses to file a call report, even if knowingly done. While not specifically mentioned in FIRREA, two other concerns about the existing enforcement statutes have been identified. * First, pursuant to 12 U.S.C. 55 1818(b)(1),1818(e)(5), and l818(g)(3), a hearing in a cease and desist action, removal action, or prohibition action must currently be held within 30 to 60 days after issuance of the Notice of Charges. A continuance of the hearing in excess of the 30 to 60 day time period can be granted only upon the request of the respondent; neither the 0CC nor the administrative law judge may postpone the hearing. Our experience with actions brought under these statutes has shown~ that this time period is sometimes not sufficient, particularly in complex cases where prehearing motions may require more than 30 to 60 days to decide. In addition, the administrative law judge assignecLto the case may * have a conflicting schedule and may be unable to conduct a hearing within the short timeframe. While we recognize the right of a charged person to a prompt administrative hearing, we are also concerned that this statutory inflexibility may adversely impinge on the effectiveness of the OCC's enforcement efforts. Some questions exist concerning the regulators' ability under 12 U.S.C. § 1818(g) to tring a suspension or removal action against a former institution-affiliated party of a failed bank who has been charged with or convicted of a felony. At any hearing to assess the appropriateness of the suspension or removal, the agency must consider whether continued service or participation ~by the individual may pose a threat to the interest of the bank's depositors or may threaten to impair public confidence in ~ bank. (Emphasis added.) Once a bank has failed, the bank, as set forth in the statute, no~ longer exists and, thus, there are no depositors whose interests could be threatened and no bank for the public to lose confidence in. The regulators' ability to prove this element in such a situation is -16- PAGENO="0741" 737 questionable and the ability to prohibit the individual from participating in the affairs of other financial iflStitutiOflS could be impaired. 4a. Discuss the adequacy of Justice Department investigative and prosecutorial resources and efforts; and identify any areas in the country where the 0CC has encountered delays within the Justice Department or other problems, and, in so doing, indicate whether the Attorney General's 12/7/89 allocation to these areas ~j~ll be satisfactory. The 0CC has had a very good working relationship with the Department of Justice, the local U.S. Attorney Offices and the FBI. This relationship has been greatly enhanced through the operation of the Bank Fraud Working Group and the many local Bank Fraud Working Groups throughout the country. We believe that the Department of Justice,. while it could always use additional resources to combat bank fraud~, is working very well to focus resources where it finds a necessity. While there will always be instances where more could have been done, we believe we have established an outstanding working relationship to ensure that resources are sent to where help is needed. In addition, the further increase in manpower for the Department of Justice as the result of the passage of FIRREA should greatly enhance the Department of Justice's ability in this area. 4b. List (in an appendix) each local law enforcement (bank fraud) task force, and identify for each the OCC's representative ( s). See Appendix D to this response. 4c. Indicate the present utility of the significant referral tracking system and inclusion of all major cases (irrespective of referral). The significant referral tracking system is potentially very useful since it consolidates all of the important bank fraud referrals nationwide in one report for the use of the agencies and the Department of Justice. The system could be improved if it contained all of the significant banking cases being handled by the United States Attorneys' Offices throughout the country with periodic updates. 4d. Report on the OCC's successes and failures in obtaining both the U.S. Attorneys' cooperation in requesting, and also the courts' cooperation in imposing, restitution, civil money penalties, and removals from national banks, including (i) identifying those districts involved and (ii) providing any figures on the amount of such restitution. The 0CC has been quite successful in obtaining the cooperation -17- PAGENO="0742" 738 of the U.S. Attorneys' Offices in defending and collecting civil money penalties, as well as working with those offices in criminal cases to insure appropriate steps are taken during any plea or sentencing process to protect the interests of the agency. With respect to civil money penalties, we follow the practice of seeking collection of any unpaid penalties and work with the responsible U.S. Attorney's office in this regard. We have received a high degree of cooperation in these efforts. With respect to criminal prosecutions, together with the other financial institution regulatory agencies, we have worked with the Justice Department Fraud Section to develop a model plea agreement for use in bank fraud cases that contains recommended language which preserves the enforcement rights of the regulatory agencies, provides for global settlement and resolution of such actions (to include removals and civil money penalties), and where appropriate, incorporates suitable provisions for restitution to the insurance funds. Where convictions result, we make a practice of working with the prosecutor to provide information to the court which may bear on sentencing. Frequently, this takes the form of a letter from the 0CC in which we articulate for the court's benefit our strong negative reaction to the defendant's conduct and stress the reasons why a stiff criminal sentence should result. A copy of such a letter is attached as Appendix E. 5i. Discuss any problems with, and suggest improvements in the exchanges of information between and among the federal banking aoencies. The 0CC has no significant problems with, or suggestions for improvements in the exchange of information between and among the federal banking agencies. The 0CC and the other federal banking regulators work together to meet their independent supervisory and regulatory responsibilities. Coordination and cooperation among the federal regulators of depository institutions occur through informal channels, such as regular meetings of the heads of the regulatory agencies, and through formal structures such as the Bank Fraud Working Group, the Enforcement Working Group, FFIEC, ICERC, and the Comptroller's and OTS Director's responsibilities to serve as directors of the FDIC and RTC. In addition, our District offices are working with the state regulators in their areas to improve the coordination of efforts and sharing of information where we have joint responsibility in multi-state and multi-charter banking companies. We coordinate our activities in many areas including training programs, enforcement actions, and regulations. For example, -18- PAGENO="0743" 739 the Federal Reserve Board consults with the 0CC on merger or licensing decisions within its jurisdiction that involve holding companies that have national bank subsidiaries. The failures of several large regional banks in the Southwestern states required an enormous amount of coordination among the 0CC, the Federal Reserve Board and the FDIC. In addition, as a general matter, the FDIC usually participates with the 0CC in examinations of deeply troubled national banks. Most recently, we have consulted with the Office of Thrift Supervision on some of its regulatory initiatives. In addition, we have been working with the Conference of State Bank Supervisors, the Federal Reserve Board and the FDIC on a pilot program of coordinated examinations. In that program, examinations are done holding company-wide. Examiners fromeach agency that has supervisory responsibility for a bank owned by the holding company work together to set the scope of the examination, share information, develop aconsolidated report, and jointly attend meetings with bank managers and the board of directors. Finally, through the Bank Fraud Working Group, the 0CC meets on a regular basis with representatives of the other regulatory agencies and law enforcement community to coordinate our efforts to combat bank fraud. The 0CC has been an active member of this working group for the past five years. - Coordination, however, does not imply uniformity. Bank supervision involves judgment, and reasonable people can sometimes disagree about the proper course of action in particular circumstances. Ultimately, the agency with primary supervisory responsibility - the 0CC in the case of national banks, the Federal Reserve Board and FDIC in the case of state member banks and state nonmembers, respectively - has to make a decision. Communication among the agencies can ensure that the agency responsible for making a decision has the benefit of the views of the other agencies. When disagreements arise, the agencies not responsible for making a decision have the opportunity to understand why a particular course of action was taken. 5ii. Discuss any problems with, and suggest improvements -in, the exchanges of information (ii) between the 0CC and the Department of Justice, including the resolution of any such problems. - We have not encountered any difficulties with regard to the sharing of information between the 0CC and the Department of Justice. 0CC would welcome complete implementation of the FBI FOIMS system in such a manner as to permit agency access to this valuable data base when appropriate. We remain concerned over the fact that under the Right to Financial Privacy Act we cannot freely exchange information with all of the other federal agencies. We believe that upon proper certification, the 0CC should be permitted to provide relevant information to any other -19- PAGENO="0744" 740 Government agency (e.g., GNMA) where such information may be directly relevant to a legitimate inquiry of that agency. l. Problems with Real-Estate Lending in National Banks: Your 2-8-90 letter to national banks states that "0CC examination activity has revealed a significant number of fundamental deficiencies and negative trends in national bank real estate lending which require the immediate attention of bank managements and Boards of Directors. QUESTIONS: a. Please describe the kinds of risky real estate lending practices which 0CC examiners have uncovered in recent times, and provide examnies. Pour specific issues are currently of particular concern. Those are: o Underwriting practices; o Nonperforming loan recognition; o Appraisal practices; o Insubstance -foreclosure policies; Underwriting nractices and non~erforming loan recognition: We have noted a deterioration in underwriting standards in some bank credit policies. These deficiencies have the effect of allowing real estate loans to remain on accrual status if sufficient "interest carry" remains unádvanced, despite weakening market conditions. Such practices allow loans to be carried on-a performing basis, even though collateral margins may have deteriorated, or there is no documented paying capacity of either the borrower or guarantor. In many cases, additional interest carry is advanced to keep the loan current without requiring the borrower to provide additional collateral or reduce principal. These practices inhibit the proper functioning of the risk identification process and may lead to an overstatement of the quality of the portfolio. Anpraisal practices: - Quality appraisals, performed in an independent manner, are fundamental to a sound credit process and are indispensable if prudent banking practices are to be followed. Credit appraisal practices sometimes have not been well defined, nor do they provide for an independent valuation of property value. Specifically, capitalization rates, discount rates, assumptions and comparable sales data are not documented or justified. Consequently, appraisal valuations may be overstated and provide management with misleading collateral information. Pertinent -20- PAGENO="0745" 741 information, such as rent rolls, leasing data, and operating performance on projects is often not maintained or analyzed on a current basis. As a result, timely adjustments to appraisals are not being made. In-house appraisal departments have lacked independence from line lending groups. We have seen instances where appraisal units or internal appraisers report directly to real estate lending managers or are closely involved with lending decisions. Insubstance Foreclosure Policies~ Insubstance foreclosure -occurs when all of the following criteria are met: 1) The borrower has little to no equity in the collateral; 2) sources of repayment are dependent on the operation or sale of the collateral; and 3) the borrower has abandoned control of the collateral. In some instances, the borrower might still retain control of the collateral, but because of financial weaknesses or-economic prospects, it is unlikely that be or she will be able to rebuild equity in the collateral. Insubstance foreclosure policies are frequently incomplete, reflecting inadequate knowledge on the part of the * bank with regard to the issue. - Consequently, real, estate lending pol-icies. have not ref lecte& proper accounting treatment and do not address accurate regulatory reporting requirements. Real estate that has been foreclosed insubstance should be accounted for in the same manner as that which has been' formally, foreclosed. b. Please quantify the extent of the "significant number" of deficiencies found. For example, (i) in how many national banks examined during the last year were such `deficiencies found, and (ii) how many national banks have been placed in a 3-5 rating .catecorv wholly ornartly because of such loans? 0CC supervises banks using a "hierarchy of risk" concept. Banks are placed in hierarchies consistent with the risk they pose to the banking system. The 0CC, however, does not keep track of the specific reasons or causes of the problems in national banks on a statistically retrievable basis. In addition, it should be noted that the evaluation of the condition of banks is based on numerous factors, including, but not limited to, real estate lending. Correspondingly, a poor rating of the condition of a bank is likely to be the result of a combination of deficiencies, usually not one type of deficiency in a specific area. It bears emphasis that the kind~of deficiencies and practices addressed in the prior question, while always-of concern, take on added significance in the context of a downturn in the economy. More important than the absolute number of banks in which -21- PAGENO="0746" 742 deficiencies were found is the fact that a developing trend has been identified. We have been dealing with such incidences in the Southwest for a number of years and are now taking action in other geographic regions which have been or are being similarly affected. c. Have 0CC examiners recommended any enforcement actions because of such deficiencies? If possible, specify the number ~f~such actions so recommended. It is the policy of the 0CC to take formal or informal action whenever we discover deficiencies in any part of a bank's lending portfolio. Prior to the issuance of the 0CC February 8, 1990 Advisory Letter referenced in the question above,. enforcement actions had been taken against banks which were experiencing significant problems in their real estate portfolios as well as other portions of their loan portfolios. Although the doct~ments may not identify real estate separately, several articles ãddréss monitoring problem loans, seeking appraisals, and limiting additional credit to troubled borrowers. - Enforcement actions often cover a wide range of deficiencies. While such actions may not specifically refer to real estate lending, the vast majority address the bank's overall lending practices which would include real estate lending practices. This results in the bank addressing both general and specific lending deficiencies. In addition, it should be noted that since 0CC data systems are bank specific, we are not able to provide summary information on the components of enforcement actions, i.e., the number of times we specifically addressed real estate lending deficiencies. d. Describe any other special actions or reviews which the 0CC is~takinp. As specified in the 2-8-90 0CC Advisory to National Banks, we are in the process of reviewing and updating real estate related issuances. Additionally, revisions to our.Bandbook for National Bank Examiners are in process. By issuing the Advisory we are reminding the industry of our long-held belief that concentrations of credit in any area are a source of potential risk to lending institutions. Analyses of concentrations of credit form a regular part of our program of .supervision and are conducted bank-by-bank pursuant to guidelines detailed in Section 216 of the Comptroller's handbook for National Bank Examiners. Those guidelines make clear that our goal in supervising concentrations of credit is to ensure that the senior officers in a bank are aware of what - concentrations the bank carries and -22- PAGENO="0747" 743 that the added risks those concentrations pose are properly managed. We do this on a case-by-case basis, without a formula, because we recognize - that identical concentrations at different banks do not pose identical risks. Two banks with identical volumes of concentrations of credit to the same business sectors, but with different underwriting standards, will likely experience different loss rates on their loan portfolios in those areas of concentration. Banks often knowingly develop concentrations of credit in areas where they have specialized lending expertise; when properly managed, those concentrations do not present undue risks to such banks, and we do not instruct banks to eliminate such concentrations. In the spring of 1988, the 0CC conducted an extensive review of real estate lending policies and practices at regional banks in the Southeast which was then exhibiting the first signs of a softening real estate market. Inadequate lending policies or discrepancies between policies and actual practices were brought to the attention of senior bank managers for corrective action. Similarly, in 1989 the 0CC conducted targeted examinations of banks with large real estate portfolios in the softening New England market. Targeted real estate examinations at banks in the Northeast are continuing in 1990. We are requiring banks to take a hard look at their real estate portfolios. As we see the results from their revisions and our examinations, we will determine whether loan loss reserves and policies and procedures are adequate. If they are not, we will take corrective action. To help examiners target the most serious problems, the CCC recently developed a real estate valuation model which simulates the effect of a downturn in real estate markets on bank equity capital. - As you are aware, Title XI of FIRREA required the promulgation of a real estate appraisal regulation. Earlier this month, we issued our draft rule. Title XI and the proposed regulation provide the 0CC with added assurance that real estate appraisals (used in connection with federal responsibilities and requirements) are performed in accordance with uniform standards by individuals whose competency has been demonstrated and whose conduct will be subject to effective supervision. - 0CC representatives continuously address public groups in an effort to alert affected parties to our concerns as well as to keep the industry informed of our expectations. Public outreach is an ongoing 0CC priority. 2. 0pei~ations and activities of the Bank Fraud Working Group~ Please (a) comment on the operations of the Bank Fraud Working Group, and (b) describe the problems and concerns which the group has addressed since January 1989 and indicate the outcome -23- PAGENO="0748" 744 (a) The Bank Fraud Working Group was first organized in December of 1984 and consisted of senior representatives from the Department of Justice (the Criminal Division's Fraud Section and the FBI) as well as representatives from the federal financial institution regulatory agencies (including the 0CC, FDIC, FRB and FHLBB (now the OTS)). After a number of meetings, the Group arrived at 20 separate points of agreement which served to set its agenda for future meetings. These included commitments to: develop and implement a uniform criminal referral system, improve coordination and information sharing between and among the agencies, develop and implement a tracking system for significant cases, improve bank fraud related training for investigators and examiners, and propose appropriate legislative changes to the Right to Financial Privacy Act and the Bank Bribery Act. In October. of 1986, the Group issued a progress report on the points of agreement and reported the following accomplishments: 1. Adoption of a mandatory criminal referral requirement and uniform criminal referral form. 2. Establishment of national and local points of contact in law enforcement and the agencies to facilitate better communication, and the creation of local bank fraud working groups. 3. Improved coordination of the exchange of information at local and headquarters levels through increased delegations of authority to release information. 4. Creation and implementation of a joint examiner/investigator courséin the bank fraud area to be given 3-4 times each year in various parts of the country. 5. Adoption of a number of legislative initiatives intended to ease communications between the agencies and law enforcement authorities; including revisions to the Right to Financial Privacy Act and Grand Jury secrecy rules. 6. Development of a significant case tracking system. 7. Enhancement of the FBI's Field Office Information Management System (FOIMS) to collect and make available information on bank fraud criminal referrals, whatever the source. Since the BFWG's first accomplishment report, the group has continued to meet on a monthly basis and has worked steadily to follow through in the above areas and to expand into others. Additional accomplishments since that time have included the -24- PAGENO="0749" 745 following: 1. Uniform guidelines were developed and disseminated in accordance with the Bank Bribery Act. 2. Refinements were made to the criminal referral reporting form to amend the threshold reporting requirements for credit card fraud and to clarify reporting responsibilities in the bank secrecy area. 3. Additional tra±ning programs for prosecutors and examiners izere either developed or enhanced and the regulatory agencies committed to providing instructors. 4. ~The U.S. Attorney from Delaware was added as a sitting member of the group to provide the group with the important perspective of his colleagues. 5. The Significant Case Tracking System was further refined by the Fraud Section and each agency developed systems for ~providing input ~into that system. 6. The BFWG has been used as a forum for discussing better coordination between FDIC/FSLIC fee counsel and law enforcement in bank failure cases. As a result of these discussions, clear guidance has been provided to improve this coordination. 7. The BFWG has continued to serve as a forum for the exchange of information regarding significant fraudulent schemes or .particular investigations or prosecutions that cut across jurisdictional lines. 8. BFWG members reviewed and commented on the U.S. Sentencing Commission Guidelines in an effort to increase potential penalties for bank fraud and provide for restitution. 9. The BFWG has served as a conduit to the Economic Crime Council and the U.S~. Attorney General's Council on issues of concern to the~group, including priorities to be assigned to prosecution of bank fraud ca~es. 10. The BFWG has served as a forum for development of a number of significant legislative proposals, including proposals to amend the Right to Financial Privacy Act and Grand Jury secrecy rules. In addition, many of the regulatory agency proposals for enhancement of agency enforcement authorities were developed through these discussions. 11. During this period, many of the regulatory agencies. provided direct assistance to law enforcement in individual prosecutions by making agency personnel available. 0CC -25- PAGENO="0750" 746 provided an attorney to work on a full-time basis with the Fraud Section for a period of two years to assist in bank fraud prosecutions growing out of the Southwest. In addition, policies and guidelines for making personnel available were also worked out. - (b) Since January of 1989, the BFWG has continued to work on a number of the projects described above and has also undertaken other projects. The BFWG continues to prove itself to be an excellent forum for effective communication between and among the law enforcememt community and the bank regulatory agencies. The rapid proliferation of localized groups is perhaps the most direct evidence of the benefits to be derived from this kind of group. During 1989, the BFWG's accomplishments include the following: 1. Review of important prosecutions and other presentations: a. The BFWG bad several presentations on prosecutions as a means to discuss what worked and what could be better done in other cases. b. Other presentations were also given during the year to increase-the understanding of the BFWG in a number of key areas; including: wire transfer systems; credit card security systems; the Department of Justice Fast Track Program (guidance on this program was also widely distributed to financial institutions by the regulators). 2. Added the Department of the Treasury as a member, which had the effect of facilitating the sharing of information between the banking agencies and various *Treasury Bureaus, including Customs and IRS. Also added a representative from the RTC. 3. Produced and widely distributed a comprehensive Bank Fraud Directory. In addition to containing the names and telephone numbers of key people in each organization, the Directory also provides background information on each agency a summary information on records and information which can be obtained from each agency. This Directory will be maintained and updated on an ongoing basis. 4. Discussed implementation of the various new responsibilities and authorities under FIRREA, with particular emphasis on coordinated responses where independent authorities may overlap (e.g., civil money penalties or other enforcement actions to be taken where criminal prosecution is contemplated). 5. Produced and distributed a model plea agreement which -26- PAGENO="0751" 747 contained appropriate provisions to preserve the rights of the regulatory agencies to take other actions and/or settle those actions as part of the agreement. 6. Discussed the FDIC's newly established program aimed at *obtaining restitution in bank failure cases. A member of this group attends BFWG meetings and serves as a point of coordination. 7. Discussed and coordinated input into key provisions of FIRREA. Subsequent to its enactment, the BFWG continues to follow up on various phases of FIRREA's implementation. 8. Analyzed the impact of the U.S. v. Ha]~pe~ decision (involving double jeopardy issues in the context of a criminal prosection following a civil money penalty issued by an agency). The BFWG has served as a central point of discussion and guidance. -27- PAGENO="0752" CITY SAN FRANCISCO NEW YORK CITY GREAT NECK, LONG ISLAND ANAHEIM GLENDALE (Li) PARAMUS WOODERIDGE NEWARK BOSTON WASHINGTON, D.C. WESTN.NT CHICAGO VERNON HILLS ARLINGTON HEIGHTS DES PIJtINES SYRACUSE MANCHESTER MILWAU~E MINNEAPOLIS DETROIT MIAMI AUSTIN PHILADELPHIA PORTlAND PITTSBURGH STATE CA NY NY CA CA NJ WI NJ MA IL IL IL IL IL NY NH WI NH XI FL . TX PA OR PA 1990 RATE 22.4% 18.5% 18.5% 18.2% 18.2% 14.5% 14.5% 14 * 5% 13.2% 11.5% 9.2% 9.2% 9.2% 9.2% 8.5% 7.4% 5.9% .5.7% 5.3% 3.0% 2.8% 2.3% I * 9% 1.6% NOTE: Cleveland, Salt Lake City, Seattle, and Atlanta are no longer 1% or sore above ~Standard City, USA,~ therefore, employees in these cities will not receive a differential after January 13, 1990. 748 APPENDIX A DIFFERENTIAL RATES FOR 0CC CITIES EFFECTIVE JANUARY 14, 1990 (BY DIFFERENTIAL) -REVISED INTERIM-' PAGENO="0753" 749 Comptroller of the Currency Administrator of National Banks Washington, D.C. 20219 August 25, 1989 The Honorable Henry B. Gonzalez Chairman Committee on Banking, Finance and Urban Affairs United States H6use of Representatives Washington, D. C. 20515-~4320~ Dear Mr. Chairman: The purpose of this letter is to inform you, pursuant to section 1206 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, that the 0CC has adopted changes to its current compensation schedules, effective August 13, 1989. Compensation at the 0CC has been below, and for some positions substantially below, that offered at other federal bank regulatory agencies. These discrepancies have impaired the OCC's ability to attract and retain the top quality personnel that we .need to meet our responsibilities for -supervision of the national banking system. The immediate changes we have made will address the greatest and most obvious discrepancies between our current pay schedules and those at the other agencies. A much more comprehensive review and job-by-job analysis, which we expect to take as long as a year, will address the overall structure of our compensation schedules and benefits program. Because of our concerns in this area, we have been tracking compensation at other federal bank regulatory agencies for some time, as part of the ongoing administration of our compensation systems. Also, in anticipation of the passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, we consulted with the FDIC, the Federal Reserve System, the Federal -Home Loan Bank System, and the National Credit Union - Administration about their compensation programs. Based on the information we received from these consultations, i determined that certain initial adjustments were required to effect general comparability between the OCC's current compensation schedules and the compensation schedules at other federal bank regulatory agencies and directed that adjustments PAGENO="0754" 750 be made effective August 13, 1989. The adjustments are as follows: Employee base pay is being supplemented with the addition of a geographic pay component. The FDIC and the Federal Reserve System already have geographic-based pay. Our geographic pay program mirrors the FDIC. Adjustments were made to current salaries in the lowest four of our twelve professional pay levels. These adjustments have brought average 0CC salaries at those levels into line with salaries offered at comparable levels at other federal bank regulatory agencies. The maximum payable salary for positions at the two highest non-executive levels has been increased. These changes will bring salary ranges for positions at those levels to a level comparable to the FDIC compensation schedule. An interim executive pay schedule has been implemented to replace the Senior Executive Service pay program. The amounts payable under this schedule are comparable to executive pay at other federal bank regulatory agencies. Based on the analyses we performed, I am satisfied that these changes in. 0CC' s compensation program were necessary and that they move us towards general comparability, as directed by the Congress under the Financial Institutions Reform, Recovery, and Enforcement Act. The attached memorandum by which we announced these changes to OCC's employees provides further detail on the OCC's recently implemented pay changes and explains how we plan to proceed during the next year in seeking to achieve, and maintain comparability in our overall compensation and benefits program. Sincerely, - Robert L. Clarke Comptroller of the Currency Enclosure PAGENO="0755" .751 Comptroller of the Currency Administrator of National Banks Washington. D.C. 20219 TO: All Employees FROM: Robert L. Clarke DATE: August 16, 1989 SUBJECT: Interim Pay Adjustments On August 9, 1989, when President Bush signed the historic Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (the "Act) the 0CC was provided the compensation flexibility it has long been seeking. The Act confirms the OCC's authority to manage its pay and benefits programs and removes 0CC executives from the SEE. The guiding standard is that the 0CC shall seek to maintain comparability with the other federal bank regulatory agencies. This is a significant event in the 126 year history of the 0CC. It was achieved because of a recognition by the Administration and the Congress that effective bank supervision cannot continue without the development and retention of well-trained, experienced, and adequately compensated professionals. The effort was supported by the President, the Secretary of the Treasury, the leadership of the Senate and House Banking Committees, and by the industry we supervise. The effort was led on our behalf by Chief Counsel Allan Schott and Senior Deputy Comptroller for Legislative and Public Affairs Frank Maguire and countless other dedicated 0CC staff who logged many long days and weekends. All deserve your thanks. Revisions to the 0CC compensation program will take place in two steps. -The first step is immediate action to make interim changes to our current pay systems to address what have been the greatest and most obvious discrepancies in compensation between 0CC and the other federal bank regulatory agencies. These changes will achieve what we believe to be general comparability with the other agencies. The plan reflecting these interim changes will be effective with the pay period beginning August 13, 1989. PAGENO="0756" * 752 -2- The second step will be a more thorough analysis of our jobs, pay levels, and pay systems in comparison with those of the other federal bank regulators.. In this analysis, we will be assisted by a compensation consultant to be selected within the next few weeks. At the conclusion of the analysis, we will adopt a comprehensive compensation and benefits program that may include, for instance, additional pay levels and changes in pay ranges~and/or pay levels for some categories of positions. The interim pay plan includes the following adjustments in selected pay levels which we believe are necessary to make our current pay schedules generally comparable with the other regulators: -~ o All employees who hold permanent appointments or temporary appointments in excess of one year will receive geographic differentials, in addition to base pay, in identified high cost of living areas of the country. Attached is a schedule of the geographic differentials by location. The amounts of these differentials are comparable to those paid by the FDIC. The locations involved and the percentages applied are subject to periodic change, based on nation-wide cost comparison data. o CP-l through CP-4 level employees will be given across- the-board base pay adjustments to bring average ccc salaries generally in line with average salaries for - similar positions at other bank regulatory agencies. The amounts of the annual increases are $400 for CP-ls, $800 for CP-2s and CP-3s, and $1000 for CP-4s, not to exceed the maximum of current pay ranges. o For CP-1l and CP-12 employees, whose compensation has previously been limited by Treasury policy to the federal pay cap, salaries have been adjusted to achieve what we believe are ranges comparable with other federal -bank regulators. The salary range maximums for these CP levels have been changed to $77,000 and $81,000 respectively. - o Executives who have previously been in the Senior Executive Service will be placed on an interim basis in a three tier pay schedule comparable to the pay schedules applicable to executives at other federal bank regulatory agencies. PAGENO="0757" 753 -3- I want to emphasize that these are all temporary adjustments to our pay structure. They are subject to change based on the results of the second stage analysis which will take a closer look at individual jobs and job functions. Changes could include further adjustments in our compensation program itself (e.g., a different number of pay levels, changes in benefits, or change in structure of geographic pay), as well as adjustments up or down in pay levels assigned to certain positions, if such changes are necessary to achieve or maintain comparability. As I indicated, this is an important change in the way the 0CC has done business. The compensation flexibility permitted by the Act is a vote of confidence in the professionalism of the 0CC. But with this flexibility comes a high responsibility. The cost of our most important resource - our people - will go up. Consequently, more than ever, we cannot afford inefficiency. We must remember that we are spending money provided by assessments on national banks. This resource is not without limit. I know that I can count on each of you to redouble your efforts to achieve efficiencies in all 0CC activities. - - We have accomplished an objective that has been sought for a long time. The challenge to us now is to justify the confidence placed in us by continuing to find ways to improve our efficiency and effectiveness in supervising the national bank system. PAGENO="0758" 754 C) Comptroller of the Currency Administrator of National Banks Washington, D.C. 20219 January 5, 1990 The Honorable Henry B. Gonzalez Chairman Committee on Banking, Finance and Urban Affairs United States House of Representatives Washington, D.C. 20515-4320 Dear Mr. Chairman: Because our fiscal year begins on January 1, rather than October 1, we are making adjustments to OCC's compensation for the calendar year 1990. Our compensation structure will be shifted 4%, and our geographic differentials will be modified to reflect changes in the cost of living in various parts of the country, based upon similar E'DIC adjustments. As stipulated by FIRREA, these changes are necessary for us to maintain general comparability with other Federal financial regulators, with whom we continue to consult regularly on these issues. Sincerely, Robert L. Clarke Comptroller of the Currency PAGENO="0759" 755 APPENDIX B 0CC CASE STUDY A case study on how effective the Federal government can be in working together to ensure those bent on violating the law are firmly dealt with is the prosecution of Jacobo Finkielstain. On January 10, 1990, Jacobo Finkielstain began serving a seven-year sentence for having stolen more than $38 million from the Central National Bank of New York (CNB) in numerous- highly sophisticated schemes leading to the failure of the bank. According to the United States Attorney for the Southern District of New York, the case against Jacobo Finkielstain was one of the largest bank fraud cases ever prosecuted in New York. Finkielstain recruited the services of his most trusted associates and friends and promoted his schemes through an extensive web of deceit. These schemes, operating concurrently, included fraudulent repurchase agreements, phonéy or wnominee~ loans, and the laundering of illicit funds through financial institutions on four continents. Under the weight of this massive fraud, CNB w~s declared insolvent in September 1987, closed, and placed into FDIC receivership. The total cost to the FDIC -is presently estimated at more than $70 million. - PAGENO="0760" 756 At the sentencing hearing, the District Judge placed the full responsibility for the series of crimes on Finkielstain, citing his role as the ~major architect and beneficiary of this conspiracy.~ Although cases of white collar crime have routinely resulted in sentences of three to five years, particularly in the Northeast, the judge sentenced Finkielstain - to seven years imprisonment. Finkielstain was also ordered to make restitution for the full amount stolen. The successful prosecution of Finkielstain was the culmination of a two-year criminal investigation by the combined offices of *the Federal Bureau of Investigation, the Department of Justice, and the Office of the Comptroller of the Currency. Shortly before the closing of CNB, the National Bank Examiner in charge of the bank examination was asked to assist in the investigation. He was assigned to the FBI for the duration of the case, in support of the OCC's commitment to work with law enforcement to deter white collar crime and insider abuse. Finkielstain was the principal shareholder of CNB. In order to raise cash for his business and personal expenses, he began to engage in fraudulent repurchase agreements ~ `repos"). He used the repos to transfer approximately $31 million from CNB through numerous accounts in the United States, Switzerland, South America, Panama, and Europe. The repos were initiated in the names of customers of CNB, without their knowledge. Most of -2- PAGENO="0761" 757 these customers were involved in Argentine foreign exchange operations. Telexes were sent from the bank's representative office in Buenos Aires to the bank in New York, stating falsely that bonds had been received from the customers as the first part of the repurchase agreement. The bonds had supposedly then been secured in third-party financial institutions in Argentina. At Finkielstain's direction, the proceeds of the repurchase agreements were transferred to accounts in the United States and abroad, ultimately for his direct benefit. The on-site review of the bank in 1987 determined that there was a total absence of any control or direction over accounts. When information demonstrating control over the underlying collateral was explicitly requested, delays and excuses became the norm. Meetings were held with CNB's "big eight" accountants, to review their workpapers and see if they had done confirmations on these assets. Confirmations had not been done. Finkielstain was requested to immediately transfer the bonds to the United States, where inventory could be taken and control properly enforced. Examiners were told that they obviously did not realize bow sensitive it was for an Argentinian to respond to a U.S. regulator. Political ramifications, tax complications, capital flight considerations, and the possibility of a bank run were given as reasons why requests for information should not be pursued. -3- PAGENO="0762" 758 Finkielstain falsely assured the OCC that the bonds did exist and were under the control of the bank's representative office in Buenos Aires. Because it was uncertain whether the request to transfer the bonds out of Argentina was legal or not, the examiners then requested that they be sent to a branch of a major U.S. money center bank in Argentina and locked in a safe deposit box. When that had been done, either the 0CC-designated accountants or representatives of the~OCC would go to Buenos Aires to physically inspect the bonds. On September 2, 1987, at a specially called notification" meeting that included the entire board of directors of CNB as well as Finkielstain, representatives of the 0CC District Office informed the bank that the 0CC would accept nothing short of actually ~seeing" the bonds. The board was further informed that if the bonds did not exist and immediate, massive capital injections could not be made, CNB would fail. Finkielstain stated at this meeting that the bonds had been physically transferred to the Caja de Valores, the Argentine Stock Exchange in Buenos Aires, and that they were safe. Detailed telexes were provided to the examiners, showing an itemized breakdown of each bond by denomination and serial number. Still, due to the unusual circumstances and ongoing lack of safeguarding, the 0CC stood by its request for physical -4- PAGENO="0763" 759 verification and control over this collateral. The repos at this time represented approximately one-sixth of total bank assets and were being flaunted by the bank's senior management as prime liquid assets that had markedly improved the balance sheet. Through cooperation with officials in the Argentine government and the Central Bank we attempted to verify the authenticity of the telexes. We determined that these telexes, written on Argentine Stock Exchange letterhead, with government seals and authorized signatories, were in fact forgeries. Finkielstain initiated another plan. He immediately flew to Argentina and informed the examiner-in-charge by telephone that the bonds had been stolen from the stock exchange. He attempted to "rent bonds" to fool the bank regulator. He was, in fact, successful in "renting bonds to post as collateral but through the continued pressure by the examiner to lock up the bonds on sight, the sham fell through and at this point, Finkielstain had as many bonds as he had had at the beginning -- none. Based on the information developed through this process and the fact that the apparent perpetrator had left the country, we immediately contacted the Deputy United States Attorney for the Southern District of New York for assistance, We suggested some type of civil or criminal complaint in order to enjoin any -5- PAGENO="0764" 760 further dissipation of assets and to arrest Finkelstain if he returned to the United States. The United States Attorney immediately assigned Assistants from both the civil and criminal side of his office to work in conjunction with us. Based on this coordinated effort a criminal complaint was issued. When Finkielstain returned to the United States on October 2, 1987, he was arrested based on a complaint issued by the U.S. Attorney. At the bond hearing the judge set a bond of $30* million and restrained certain real estate owned by Finkielstain in the United States. The AUSA, together with the FBI and the examiner from the CCC, continued to investigate the case. On January 8, 1989, an indictment was returned by the Federal Grand Jury charging Finkielstain with conspiracy, bank fraud and false statements to deceive National Bank Examiners. Each charge against Finkielstain was supported by many flow charts and exhibits, as well as testimony and depositions from individuals from three countries. In order to prove the case it was necessary to show the use of numerous accounts in the United States, South America, Panama and Europe to move the funds ultimately to be deposited in Finkielstain controlled accounts which were located in North and South America and Switzerland. The successful resolution of this case `was ~founded upon the Government's ability to trace all of this money through the -6- PAGENO="0765" 761 labyrinth it took before it reached the Finkielstain accounts. The mastery of these facts was attributable in large measure to the exceptional and comprehensive work performed by the national bank examiner detailed to work with the prosecutors and investigators. . In light of the strength of the case and the risk of significant jail time exposure, three days before trial on August 17, 1989, Finkeistain pled guilty, and on December 3, 1989, was sentenced to seven years imprisonment and directed to make restitution~ The judge included one year of that sentence specifically because Finkielstain had lied to the 0CC. Another CNB officer and director was found guilty. of co-conspiracy, as was the bank's representative in Buenos. Aires who falsified the Telexes. Action has been taken against another menior officer and director to bar him from banking for life. Our examiner was recognized for his action by the 0CC and also from the Director of the FBI. The 0CC likewise commended the Department of Justice for the expeditious treatment of a major time-sensitive matter, expressing our belief that it is a -visible example of how effective we are when law enforcement~ and regulators work together. The examiner's work and that of many others like him is a tribute to the diligent work performed by countless examiners without publicity or recognition. -7- PAGENO="0766" 762 )~ t~i'.j - T~pp~t~)~ C i C.) * 2592 £adecal Regular I VoL 55. No. 43 .1 Monday. March 51990 I Rules and Regulations DEPA~ENTOFThE TRE.LJRY Institutions Reform. Recovery, and notice of bteni to add a director or - Enforoemeni Act of 1SCS. employ a senior executive officer.The ___ Section 914. whic1i~s codified a112 fi~,tcetegory is ansitiutnal bank c~ency U.S.C. 18311. requires specified chartered for fewer than two ve~,rhe categunaanl.national banks to furnish second category is a nattorial~nk that. 12C!~ Part S the DCC with.atiaa.al 3O4ayt notice within the preceding two yswu. has before adding anyindividual to the undergone a change In con~ol requiring board oI4irccinrs or employixtg any a notice to be filed under the Char.ge in ~u~a,Pn~se ar4 ~ j0~ IndiciduaLas a seniorazecutire cfllcar. Bank Control Act.12 U.Sr~sv(j). or Corprata Ac vctiu..~ C?tartgs.airt A national bank is subject to the notice under OCCs implementing regulation. Directors wo~ ~rior Enecutlva requirement If the baniu (1) Has been I2CFR 5.50. The third category is a charteced Inrlewer then two years. ce national bank that is not In cornoliance (2) has undergone a change In control witblthe minimum capital requirements aeency Oflice~NteComnptrdller of the within the preceding two yeam. or (3) Is applicable to LI or that is otherwise in Currency. ~meesnoy. not in compliance with the~iniitturn troubled conditions. £07131C Tempcmrtmryiule with request for capital requirements applicable to It or Of the three categories the second is comment. Is othereeise~xza troubledomsditaon. the most subject to differing as determined on the baais of tthe Inlergrrtationa.&cauae aecticem 914 assaxnThia temporary rule bank's] moe! recent report of condition refers to `change in control" An a generic ~plsmenis aeclisn 914 of theI~nancIel orseport.afexamination or1napection.~ sensezath~ than speclficallyloihe l~icns~.covery sod Section 914dm prohibits a national Change inBank Control Aci.hmi~ct be EcforcemenL~ct of 2~a9 byadding a bank from adding the individual to the ~nad thatiheosew statute new section to 22~'3 partS. The ~ew boaxd..or employing the individual as a section requires-certaIn national banks senior executive officer-U ttw ccc encornpasset oil changes in control. to files notice with the'Dfflce of the issues a notice of disapproval, including mergers and acquisitions of a Comptroller cflthetuorency ~C") The OCCisimplementing section ~ banl~byabank boldmg compang which priortv~edthngvrrsplacong aonemberol by.msano.of.a.tenoporaiynuls..and are exempted from the Change In Bank Control Act by U.S.C. 1517(j))17) and theboard of directors. znd ~rtor1o nationalbanks are required to comply -.550(f) and employing orctmogtng'the be~ n~ha4ate of the~izle~s responsibilities of en-individual to a publication in the FadsralR.egLstes~ 1fhl)~ DCC believes, however, that positisn4aietitor e~cveoThrer.The Comments will be received for 60 days Congress did.oot intend to cover every O~sss~thscpprose arry~ropesed after~ublicatinzi. A Llnalrule ~iu~ transaction that might be cbaraatarixed board merzthor~ senior executive be adopted with changes as warranted. - as a chan~ In controLEvidence that offlcerwh~~s~is not considered Congreso bad the.CbangeinBank to~ In'th,~~saui nicks Iusee Control Actin mind Is the~expoesa deposisored&he~ai bank orthe Cornmenuis Ine'Itad onany of the reference, elsewhere In aectsosm-914, to public. * ~ d~Ibad.bel~. section 7L1115)(A). which deamibee the s)aTs~ This to~'eryo'ule.er effective 1-Definition of senior executive kind of info~uon'to be aubmitted an on Ma.rch~. t~tCommenta mustbe officer. ~e tarn "senior executive the rsotmce.Moreovar.lhe standard (or received na~ befme Msyd. 1990. ofhcer"asdelinedio include any disaporovaLin section 934 (notAn the ______ individual who exercises jger~n~ beet interests of the depositors or the aoo~s~ Cononense should he influence over, or participates in, major pubba) 1. virtually identical to one of the directed to: Docket No. 905. policymaking decisions of a national stsndardsf.or dtsapprovalimt the Change Communicatiao~Division. 5th Floor.491 bank without regard to title, salary or - In Batik ControlAcl. 22 U.S.C. L'Enfant Place Eui.SW.. Wauhingion. compensation. Certain positions. listed 181?~)(J(D).5irtally. 21sf Iegialatlve DC8. A.fl~am ~atVt C~'~ in generic form. are.sutontstically history of section 914 shows no Comments will he-amiablefor P1ibli~ covereS. Congressional4seeatssfsctsos with Inspection end photocopying em the `The term~aenior executive offlcer~ exenaptioce contained an the Changem name loostino. also inclrodes an employee of an Bank Control Act and adopted by the s'os euarwes ,e~uerow cosrvacu organization, such as a consuhiog firm. ~~t0t7 agencies:if Congress thought Frank R.Carhrmne. National BaRk who actually perfcrrmna theftmctions of a ~ tbt exemptions were Inappropriate. Examiner. SupervisionPolicylP.e,eerdh position covered by the regulation on the legislative histomynfeec1ion~14 Division, t~ 447-1164. Kathleen behalf of. national beck. presumably would have .o'sndststed. DBrisn,~ä~sstal~Benk.Examnmer. Bsiajs 2. Definition of trotibled condition. Thus, theiemporsryivguistiondues The term "troubled comodltion"Is defined ~ reqmafre~~crnotice-uf the addition 1184: or Thuy Dinh. Aoaornsy.tegal to Include sll7iatial'bsnb with a ofadlrector or theeooploymentnfe AdvIsory ServizesDivision. (3~) 447_ composite r~mg of.s or 5-smder the senior executive officer within two 1882. OffIce of th~Compiroller of ~ Uniforoi7innnmsi Inst looms Rating years of a change In cmatrvl~eomptsd In Currency. 490 L'Enfsnt Plaza East, SW. System. aseecllass.Ii banks subject to a 12 CFR 5.50 (f)anel (g)ll)W). Washington. DC 20219. cease end doeist ~omading or o,der.or An.ad±tlzmnal Issue u'whetharaeclion sue,uvcrAsvioxa~avosc a formal wmxuen~eernent. unless the 914's raoticeoequisemeot coveeusg'the bank is otherwise E~mmed bytheDCX "employment cf~my Individual sea Dearrsws meosuai'row Principal in wr~ti~. eenier.rx~thw off's~" Includes drafters of ibis docti~t were Gerard J. The term "troubled condition" also promotions and Iei~l'tranxfers tothat Sexton. Attorney. andlncd Barrett, includes aorational bank tbc Is position. CtCCbeuievse thetiidoaa.axsd Assistant Director. Legislative and informed in writing as a result of a therefore the temporary rule requires a Regulatory Analysis Division. supervisory analysis that It has been notice whenever there is a "change In Back~ound designated as in "troubled condition" responsibilities" of any indtvidusl for purposes of this regulation. resulting In his or her assumption of a On August 9.1989. the President 3. Prior notice requirement. Three senior executive officer position. With signed Public Law 101-~'3. the Financial categoriea of national banks must files respect to section 914's r.nversgv of the "-7 PAGENO="0767" 763 Federal Register / `Vol. 55. No. 43 / Monday. March 5. 1990 I Rulea and Regulations ySS3 `pt'oposed addition of any tndivtdusl to Similarly. the 0CC beltevea that Federal. State or' local government tha board of directors.' the temporary aectton 914 does not diaplace orrepeal agencies. or geopaphic regiont have a rule covers nOt only inoesses in board section 71j)(12) of the Federal Deposit significant adverse effect on membership but also replacementa end Inaurance Act. 12 U.S.C 1S17(j)(12). competition. amployment, investment the filling of vacancies on the board. which states that whenever a change In productivity, innovation, or the ability of 4. Effective date. Thit temporary rule control occsoe. the bank `shall report United Statea.besad enterprises to Ia effective on the day it is published in promptly' * `any changes or compete with foreign.based enterprises the FadeS Register. Thus. every replacement of Its thIef executive officer In domestic or foreign markets. national bank chartered or subject to a or of any director occurring in the next nonexempt change in control after the twelve.month period.'' "Tha Adoptsoo Wlthoot NoeS and Comment effective date of this tamporary male authority likewise does not requIre 0CC aS Russo for~diata Effsctiva must comply with the rule's notice to complete Its review and act on any requirement for a period of two years. auth report in 30 days. The DCC has determined that there ia Additionally: a national bank that Is less Finally, the 0CC believes that section good cause for adopting this temporary than two years old on the effective date, 914 does not displace or repeal any rule Immediately spon publication In the orthat underwent a non~exempt change provision of aeculon 5(bl of the Federal Fadaral Ragistar without prior notice In control less than two yen before the DePoeit Insurance Act 12 U.S.C 1515(b). and comment Adoption with notice and effective date. Ia covered by the notice This statute authorizes the 0CC to comment 30 days after publication is requirement until the two years has . Include a provision in a cease and desIst contrary to the public interest Section elapsed. For example. a new national order requiring a national bank to take 914 requires 0CC to review the hank chartered in March 1989 would `affirmative action to correct the competence. experianca. character and remain covered until March 1991. and . oondttions resulting from (any) violation integrity of an individual proposed for a therefore a notice would have s~ be filed or practtce'. Under this authority, the position ass directoror senior for any addition to the board or any 0CC can require a national bank 50 axecutive officer of oertain national obtain prior approval from the 0CC banks. This requiremantis intanded to employment of a senior executive officer befora a proposed individual becomes a enitance the safety and soundness of the effected prior to March 1991. Similarly, a national bank that director oL orls employed by, the national banking system. For this underwent a non.exempt change i~ national bank. This authority does not reason, Congress dacided to make the control in March 1989 would be covered require the 0CC to complete Its review requirement effective Immediately upon by the temporaryrule until Merch 1991 and act on a proposed Individual In ~ the signing of the Financial Institutions days. Reform, Recovery, and Enforcement Act for any additton to the board or any ~, ,%firceioneoue /nuea~AJthough the on AitgustP. 1989. Unless this regulation employment of a senior executive definition of `national hank' includes is made Immediately effective, the 0CC officer. any Federal branch or Federal age~y, cannot perform Its statutorily mandated Since section 914 became effective this temporary rule is not intended tO responsibilities, thus resting a risk so upon the signature of the President on covers change Ins aenlorexecutive the safety and soundness of the national August 9. 1989. the DCC reserves the officer or a director of a foreign bantk banking systen Any Increased risk to nght. on a case by case baats. to requIre that operates a Federal branch or the national banking system is contrary a national bank to file the notice Federal agency. With respect to the required by section 914 for changes in Federal branch or agency. the thief to the public interest. senior executive officers and directors managing officialS covered, Uat of Suhjacia In 12 CIt Parts occurring from Auguor 9. 1989. until the This temporary rule also don not date this temporary rule in published ~ cover an advisory director as that ~ National banks Banking. Corporate activitiea. Senior executive officer. the Federal Regiater. Is defined In Federal Reserve Regulation Director. Notice. & Effect on other s::wres. Although 0. 12 CTh 215.2(c). section 914s notice requirement applies to a narior.al bank that has been Regulatory Flaxlhlllty ~ AuthorIty and Issuance .chsriered fewer than two years. a Pureuantts the Regulatory FlexIbility For the reasons set forth in the nitionui bunk that has undergone a Acts U.S.C 505(b). It Is certified that preamble. parts of chapter 1 of tills 12 of change in control within the preceding this regulation will not have a the Code of Federal RegulatIons is two years. and a national bank subject sIgnificant economic Impact on a amended as set forth below: so certain enforcement proceedings, the substantial numberof small entities. DCC doea not believe Congress Accordingly, a Regulatory FlexIbIlity PAm' 5-(A&SENDRD) Intended to repeal other statutory Analysis Snot required. This temporary 1. The authority citation for Parts- suthonty permttttng DCC to require rule Implements section 914 of ths Rules. Policies. and Procedures for notice rn the same attuattons. Financial Institutions Reform, Recovery, Corporate Activities continues to read Specifically.'section 914 does not and Enforcement Act of 1989. and don as followE displace or supersede OCC'a authority not significantly Increase tha burden implied in the National Bank Act's Imposed by the statute, AathseItr12U.S.C,1 etaeq.: 12 U.S.C. chartenng provisions (12 U.S.C 21 at Execotive Order 11=1 seq.) to requtre. as a condition of LA new 5.51 Ia added to read as granting the charter, prior review of DCC has determined that this follows: proposed changeo in executive officers amendment Is not a `ma)orrule' and for two yearn. Such a condition has been therefore don not requIre a Regulatory Sat Ctsssen M dksetoeawdaesaer Impoued on new bank charters for many Impact Analysis. This temporary rule esimrsn etttoses. years and. unlike the prior review will not: have an annual effect on the (a) Authority. 12 U.S.C 15311. authority In section 914. does not require economy of $100 million or more: result (b) Rules of GesserolAppl/cobiJity. the DCC complete its review and issue a In a maiorlncreaae In costs or prices for Sections 5.4.8.8 and 5.8 thru 5.11 do not notice of diaapproval within 30 days. conaumera. individual industries, apply so changes in dlrectora and senior PAGENO="0768" 764 fl94 £ademl Register I Vol. 55. ?&45fMonday. March 5, iggo/Rolee and Regulations cxemthvtofflcma.&12SPPLeZ. hsstttutioncrto otherwise in Doubled officer may begin aerviceswon the exceptSai.thelaat*dajof arty condition. expiration of the 30-dayperiod Iullu~ applicable pnmod~hsll heincludad (e).Pnthzra& jt)F.thng.Wotzct ootthcettonof a technicallycomplate regardlean olwhatherltin SatuSIJ. Notic~nkailbe ified withsheDCC notice wtleaa the Office Ieeuesszotioi. Sunday oriegAtholidav. District orffieldflffice eeegoosiblefor of disapproval by the and of the e~da3 ~r~Juo~-lf) birector. The leon the.diract euperviaiooofiheaatial pnio& ~disectof' Inctudsa eeerynrsatbank bank. except ihct.muliinationel banke .ji)ApproL Within lldeyts alacccipt director except en edvlsory director £hallSla with the Deputy Comptroller ole notice of diaepprovatibe who is not etectedby the ehereholdere for) Itioationai2aok ..Dotict.foa diaapprovod.thdividual or the beokowy dthstokt.ony dJis prmte.wbo Ia ond instructions oao.be Ioundinssactioo oppaaidse disapproval mtshe ground not estbminad,to,etntotettarebefom (idol the Comptrollare Manual for that tharoeaone givenfor diaapprovet the board of directors. and who provides Corporate Activiiiea. The Comptroller or ore contrary to fact, that auth toaeone eolelygcncroJpolicy advice so.tha board his deuignee may require additional ore thau.fficiant to juetify disepprova.L or of direceoro. Information, Eaobindividuel on ashen hot Ibeeppeat ahall be oddroesed to ltftno!5arrkTheflrm ~ncttonal bahalfenotice~shled muss attaetio the the Comptroller. and eball ostrich btmenyrtional bank. any validity of the InformatiooSted whelasiardocumente and written diste~ctbn&~ anyTrdernltrarrth or pertaining to that individuaL The 20-day orgument theappealiog penyveiabea to Federal agency.. noticepeciod will begin to ntis on the be considered to aupport of the appeaL (3lSeniarCeeeothta Officer. Thetartn data ihe.Officadetesmi.oau that all The noticeof disapproval aholt.be ~cortioreaacsrtive officer'teenucny required iolornootion has been provided euotained unleaa the oppeetlirtg party ftdividualesbocxestheucigrrtflmnt and notifies the.benk that theooticn to ccrrim the burden of demonstrating On Inlltance ee'er.'orpetlitopotes in. mafer tnchnicaliy complete. theeasisfaction of the Comptrolleror hie policymnlriogdeciaionsef eatetinnal (2)XoL/re of Dieopprovol The Office designee that the reasons given forthe bank withootiegerdtatitte.enlsry. or may disapprove en.individstal prOPOead disapprovatare contrary to fact or that compesrnattnntte aernsfnctedm but to as a memberofihe board of directors ~ auch.reasonsare insufficient to juulify net limtseflte thepnnltioren ofiyresident. eanior executive officer upon the disapprovaL Written notice of The chiefcceetetive effiner..d}iiet managing determininrg.theL cc)ba basis of the ffmat decision of the Comptroller orhis official (in.efederelbrnoch orfedernt tndisidttnte compeosnca.experiaace. designae absill be ecot to the appealing egenryaperseef b~te foreign benki. character. or.lotegrlty..tt wouldont be In p~y. thiefcpnreifrsgcfilcer.chief financial the beslintareats of the depositors oLdie offiorr.chieLtendtrrgcffiae.crchiel berth or In the best tntereuts of the ~ filets. MventmerstcffiaerYTbe terre clan publicingarmit zbeksdividuaLto be flabrnttarks. Includes eonplo~sesaf entibes retitoad emplcyadby. oraaaociatad with. she Cossptminfthr Cerreery. by.aaatenelbarikta pevfmincuth notions) bank,lf the.Offlce dir.approvee 4Th Doe. eo-aeatt Filed 3-2-Oft 040 erel fsmceinns thlimdd*oetlyhbtng the en iodisddusLthe beaktvill.be notified. eaten once eses.ss-a Individual. The notice nfdiaapprosral will ointaine - - ldlZmuhl~Cb~Won. The terre etatonentof she baeiaior disapprovaL `troobladda~Seema national 13) Nos/ce.ofloteat!JVo! to.Ossopp~-ova OSDosaf 310510 &tspsrvlaloes bank then An tndieidssalpmpnsedess.membarof (flUes acomposiwntmg of 4 orG the buard of dircctnre or.asenior 12 CFR.PntdlO under the UnifnYioznciat Institutions executive officerleay begin earvice ieto.eo-resl - Rating Systems: or beforethe expiration of the 30-day (ii)laaubjectlac cease and desist period fi the Office notifies the national Avnflablllty'of Reported Essnileeston proceeding orordar.tra fomtelwsrtton bank of an intention not to disapprove. and Other Unpublished Information agreement. ertlesu otherwise Infroedin (4) We/var of Prior Notice. (ilUpon writing by the Office: or petition to the appropriete 0CC AWlCY: Office of TI-i/i Supesviaino. (iiil to infsrrriediewrttlng no a oesutt supervisory office. the Office-may waive Treasury. of a supervisory analysis that it baa the prior notice requirement but not the ac'rsosc.Fmat rsiie. been designated as in `troubled filing cequired under this eectino If the conditirm~foriha purposes of this Office finds that dalaycould harm the StseMATt The Office of Thrift section. nstionslbat~ker.the public intereat or Supervosion ("Office") is ensending 22 (dl Prior Not/ce. lilA national bank that other extraordinary cirmsmstaocas CER part 510 so clarify that repone-of shall provide writtn~otice to the Office justify waiving prinrnstice. Ifs waiver examination andvthermforsoatson.nf at least 30 daya prior to she effective tsgranle.d.tbe eequlred notice shall be the Office aretbe propersy.oftheOfftce date of airy addition orseptecementef a filed wIthin the lime period specified in and can onlybeieleaaedintpecifioalty menjber of theboerd oTdirectarsor tire the waiver. A waiverahall oct affect the limited circuorstancea. The amendment emptoymenter change in ntrtboriry of the Office to issue a notice provides that institutions or in.divtdusla responsibilities of any individusl to $ of dieepproval within 30 days of the In possession of documents or pssitiss as * senior exem,tve officer, If: receipt of a technically complete notice. information of the Offace.and served (lIThe nationsl bank hss been (ill In the case of the election at a with $ aubpoens or request for chartered less than two years: or meeting of the shareholders of a new productinn.ofaucb docunsenta or (ill WIthinthe preceding two years the director not proposed by m.anagensenL tnfarenation. notify the Office of such national bank baa undergone a change such weivaris granted. huts completed aensice or request and notify thecaurs or In control that aequired a notice to be notice must be filed with the appropriate fribunal of the raquirementoof this filed under the Change in Bank-Control OCCaupervi.aory office within 40 hours section. Finally. theamendmenr also Act or I Sfl-or of the election. eeqeireu that institutions or individuals (till Tire nation.albank La not in (II Consnsesrcesrsent of Service.An served with such subpoena or reqseel compliance with the minimum capisal Individual proposed as a niember of the eeepectfully refuas to produce such eeqsirements applicable to such board of directors or senior executive documents or information until the PAGENO="0769" 765 C) APPENDIX D Comptroller of the Currency Administrator of National Banks Enforcement & Compliance Division Mail Stop 5-9-1-E, Phone:(202) 447-1818 Washington, D.C. 20219 - LOCAL BANK FRAUD WORKING GROUPS Northeastern District New York Group -- New York and Northern New Jersey Philadelphia Group -- Eastern Pennsylvania and New Jersey Boston Group (additional group may be forming in Baltimore/Washington area] Southeastern District Miami Group (additional group may be forming in Richmond, Virginia area] Midwestern District St. Louis, Missouri Group -- Eastern District Missouri Wichita, Kansas Group District of Kansas Omaha, Nebraska Group -- District of Nebraska Central District - Chicago, Illinois Group Cleveland, Ohio Group Springfield, Illinois Group [additional group may be forming in Cincinatti, Ohio] Southwestern District Dallas, Texas Northern District of Texas Houston, Texas Southern District of Texas Tulsa, Oklahoma -- Northern District of Oklahoma . - Albuquerque, New Mexico -~ District of New Mexico Western District * Los Angeles, California Central District of California San Francisco, California -- Northern District of California Denver, Colorado -~ District of Colorado ** The 0CC participates in each of the established local groups. Although the particular individuals vary from time to time, the 0CC is routinely represented at group meetings by a member of the law department and a senior member of the supervisory staff of the appropriate. district office. n - ot~~ - PAGENO="0770" 766 APPENDIX E Comptroller of the Currency Administrator of National Banks Enforcement & Compliance Division Mail Slop 5-9-1-E. Phone:(202) 447-1818 Washington, D.C. 20219 January 19, 1990 J. Gaston B. Williams, Esquire Trial Attorney Fraud Section United States Department of Justice Post Office Box 28188 Central Station Washington, DC 20038 Re: Ronald L. Collier Dear Mr. Williams: I understand that Mr. Ronald L. Collier, former president of the failed First National Bank of Del City, Del City, Oklahoma, is scheduled to be sentenced in early February 1990, having been found guilty of thirty-one counts of bank fraud, false entry, bribery and misapplication of funds. As the primary regulator of national banks, including the former First National Bank of Del City, the Office of the Comptroller of the Currency (0CC) urges you to consider the following information when preparing your sentencing recommendations. As you know, Mr. Collier's activities severely impacted the financial condition of the First National Bank of Del City. As a result of the fraudulent loans be arranged for the Bank to aake to Bruce Thompson and Thompson-controlled individuals and entities, the bank suffered a total loss of approximately $2 million. This loss directly contributed to the bank's failure in March 1988. The gravity of Mr. Collier's acts is not s~easured simply by the loss to the First National Bank of Del City and the Federal deposit insurance fund. As the bank's president, Mr. Collier held a position of trust and responsibility. The jury nonetheless found that he exploited these positions by engaging in carefully orchestrated acts of premeditated deceit for his own personal gain. PAGENO="0771" 767 The United States financial system has been undergoing dramatic changes and adjustaents over the past decade. This is particularly true for the Southwest, where the effect has been profoundly negative on those institutions which have been unable to adjust. When compounded by bank fraud, these stresses can be catastrophic not only for the affected institution, but also on the entire community it serves. Bank fraud is a serious problem confronting the banking industry in terms of losses to the industry, to the Federal deposit insurance fund, to innocent third parties, and ultimately to the taxpayers. Moreover, bank fraud is clearly increasing across the nation at an alarming pace. In 1984, the Federal Bureau of Investigation (FBI) completed 7,390 bank fraud cases, involving losses of $382 million. By 1986, the FBj had completed 10,416 cases, involving losses of $606 million. In 1987, the FBI completes 11,879 bank fraud. cases, involving losses of $861 million. In June 1988, the 0CC published a report entitled RBank Failure An Evaluation of the Factors Contributing to the Failure of National Banks.R The study analyzed 171 banks that were ~declared insolvent between 1979 and 1987. This figure `represei~ted 94 percent of all national bank failures during that period.' The review also included an evaluation of 51 similarly situated banks that encountered significant problems from which they recovered. A third group of 38 banks that had remained healthy throughout the sane period served as a control group against which the 0CC compared the two groups that experienced problems. The results of the study indicated that insider abuse was present in many of the failed and rehabilitated banks during their decline. According to the findings: - Insider abuse e.g., self-dealing, undue dependence on the bank for income or services by a board member 1Testimony of Jeffrey J. Jamar, White Collar Crimes Section, Criminal Investigative Division, Federal Bureau of Investigation, before the House of Representatives Committee on Government Operations, Subcommittee on ~Commerce, Consumer and Monetary Affairs, on June 13, 1987. 2Info~tion obtained from the FBI Headquarters in Washington, D.C. 3The six percent omitted from the study were banks for which sufficient information was not available at the time of the review. PAGENO="0772" 768 or shareholder, inappropriate transactions with affiliates, or unauthorized transactions by management officials - was a significant factor leading to failure in 35 percent of the failed banks. About a quarter of the banks with significant insider abuse also had significant problems involving material fraud. Material fraud, in fact, played a significant role in 11 percent of the failures. During their decline, 24 percent of the rehabilitated banks experienced significant insider abuse, but4none were seriously affected by material fraud. There was no significant insider abuse or fraud in any of the 38 healthy banks. The existence of-abusive, and sometimes fraudulent practiceè, extends beyond national banks. A recent report by the House Committee on Government Operations, based on a study made by its Commerce, Consumer, and Monetary Affairs Subcommittee, clearly indicates that not only national banks, but state banks, thrifts, and credit unions have suffered the consequences of serious misconduct by insiders. The report also noted that an increasing amount of fFaud and abuse by outsiders has surfaced in recent years. While the comments in the report were expansive and a number of remedial actions were recommended, the Committee specifically concluded that [tjhe lack of eventual prosecutions and the imposition of often lenient sentences together constitute the greatest sincle imoediment to det~rrina criminal behavior in the banking and thrift industrv.R Too often those that ~g prosecuted for * criminal activity receive minimal sentgnces and/or are ordered to pay inadequate restitution, if any. This must dhange. 4Office of the Comptroller of the Currency, U.S. Treasury Department 9 (June 1988). - 5ffouse Committee on Government Operations, Combating Fraud, Abuse, and Misconduct in the Nation's Financial Institutions: Current Federal Efforts are Inadequate H .R. Rep. No. 1088, 100th Cong., 2d Sees. (1988). *at 8. 7ig. at 18 (emphasis in original). 8See ~. at 35-39. PAGENO="0773" 769 As stated in the Committee's report, [tjhe offenses are serious and the harm caused by financial institution fraud are severe. Just punishment demands nothing ~ess than definite prison sentences of adequate duration. Without question, individuals who engage in fraudulent and abusive practices similar to those committed by Mr. Collier, spread their harm beyond the particular financial institution involved. Customers suffer and, when an institution fails, the Federal deposit insurance fund is adversely affected. Moreover, as illustrated by the recent enactment of legislation to bail out the savings and loan industry, the federal government will be forced to bear much of the financial burden arising out of the failure of the nation's financial institutions. I hope you will give due consideration to the issues discussed above when recommending an appropriate punishment for Mr. Collier. As the result of the fraudulent scheme in which he engaged, Mr. Collier is undeniably responsible for the bank's insolvency. Mr. Collier and other individuals contemplating or convicted of financial crimes should be given a clear message that such activity will no longer be tolerated by Federal prosecutors, the courts or society. I, therefore, strongly urge you to recommend a meaningful sentence of incarceration, fines. and restitution against Mr. Collier. Sincerely rtB.Se puty Chief Co 1 (Policy) cc: Vanessa Thurman, Probation Officer Lewis Michalko, Special Agent, FBI James Adams, Special Agent, FBI- Kevin Matthews,- Trial Attorney, U.S. Department of Justice at 41. PAGENO="0774" 770 Mr. BARNARD. Thank you, Mr. Serino. On page 19 of the appen- dix it says that you would welcome complete implementation of the FBI's FOIM System so as to permit agency access to this valuable data base when appropriate. What is in this data base which would be useful to the Office of the Comptroller of the Currency? Mr. SERIN0. Well, the main thing that we're looking for, Mr. Chairman, is we think that there ought to be a central data bank and FOIM's sounds like it's the central data bank. Any time a bank regulatory agency, or a bank, makes a referral on a potential violation of law, that information should be captured in a central data bank so that if that person leaves that institution and goes into another institution, we would like to be able to check in one central location and have that central location be able to say: "We've got three or four referrals on this individual from a bank in California, he went to a savings and loan subsequently, so we ought to be aware of it." We think there ought to be a central data bank. We know the FBI is working on that and we encourage them to complete their work on it. Mr. BARNARD. In that connection, what has the Comptroller of the Currency done to effect better communications, in response to the development in the Penn Square case, with the Comptroller's office in Dallas and the Comptroller's office in Chicago? You know, we had a little problem there, one district didn't know what the other district was doing. What has been done to improve that? Mr. SERIN0. We've done several things, Mr. Chairman. No. 1, we now have what's called an SMS system, a supervisory monitoring system. We have all of our information on banks on a computer, so if somebody in Chicago wants to know what's going on in a bank in Texas, he can just call it up on his screen and he can find out for himself what's going on in the bank. That's a major improvement. Second, what came out of the Penn Square case was that we cre- ated environmental analysts. That is a group of people in each of the districts that are focusing on things such as economic concerns or any other concerns that might be a problem to our office. They are submitting those concerns to the Washington office and to the other district offices so the other district offices will realize that now we have a problem with oil, now we have a problem with real estate, et cetera. We also have on our computer what we call a systemic risk system. On our systemic risk system we put issues that might be of concern to the rest of the country. We put a summary of the con- cern so that when an examiner turns on his computer and plugs into the system, he can see what the list of major concerns are to our office. One of the concerns, for instance, is about money laun- dering as a systemic risk. We ought to be aware of money launder- ing problems; our examiners ought to be aware of that when they go in to examine banks. Another would be real estate, which would be on that system, things of that nature. Mr. BARNARD. Well, that sounds like a pretty good system, I'm wondering if you all might lend some of that expertise to the De- partment of Justice because it looks like they're having some prob- lems in trying to develop and catalog computerized data in that particular area. PAGENO="0775" 771 Mr. SERINO. We have bugs that we're working out of it, but I think it's working. Mr. BARNARD~ Is it surprising to you that the FBI said yesterday that, of the 530 failed financial institutions currently under investi- gation by the FBI, 276 were banks, 234 were savings and loan insti- tutions, and 20 are credit unions. You know, I would have thought the figure on savings and loans would double that of banks. Mr~ SERINO. Well, if you look at the number of banks, there are about 13,000 banks in the United States, and there are about, I think, 3,000-- Mr. BARNARD. There were-- Mr. SERINO. There are about 4,000 savings associations, 50 1 guess it does double it. Mr. BARNARD. So, you're not surprised. Mr. SERINO. Well, I'm not surprised. Quite frankly, I would hope that the FBI would have investigations in cases where banks fail or * savings and loans fail. Mr. BARNARD. Is the Comptroller's office happy with the success of prosecutions and convictions for wrongdoing? Mr. SERINO. I was here this morning and I heard your concern expressed on the Penn Square case. We had sjmilar concerns and, quite frankly, when Mr. Patterson was acquitted in Oklahoma City, that was one of the impetuses for the creation of the Bank Fraud Working Group. The Comptroller had me get in touch with the-- Mr. BARNARD. Has he ever been convicted? Mr. SERIN0. He was subsequently, I believe. He had a hung jury with Mr. Lytle in Chicago and then they subsequently entered a plea, both Mr. Lytle and Mr. Patterson entered a plea of guilty. Mr. BARNARD. Was he sentenced? Mr. SPRATT. I think he was sentenced to 1 year, and I think he actually did jail time. But to your question specifically, we are con- cerned when there are acquittals, but I do know, and I do echo what Mr. Dennis indicated this morning, it is very difficult to put together a bank fraud case. It is extraordinarily complicated, and I would ask you to look at appendix B of my testimony about the Finkielstain case. We had an examiner work with the FBI for a 2- year period putting that case together. They traveled to three or four countries putting the case together; it was an extraordinary effort. The problem is that when they're finished with that case they end up with one statistic; we prosecuted one person. It's a lot easier to get 100 statistics by prosecuting bank robbery cases. So, I guess that's one of my concerns, are we recognizing those people that are prosecuting the difficult cases? Likewise, you're always going to get juries that are going to get hung up on things. Mr. BARNARD. Is the President promising too much to the public that we are going to remove and to prosecute and put in jail these people who have caused these savings and loan failures? Are we really promising the public too much? Mr. SERIN0. We're going to do our damnedest to put them all in jail. We really are. The only thing you can do is work, work, work. I think that with the Bank Fraud Working Group and the local bank fraud working groups, the relationship between agents, U.S. attorneys, and bank regulators has never been better. They know that it's important to their agency that they work closely with us; I PAGENO="0776" 772 have absolutely no reservation about picking up the phone and calling one of the Deputy Attorney Generals in Justice and saying this is a case we really need some work on. In fact, if you look at that Finkielstain case, we had information during the course of an examination during the latter days of the bank that the principal culprit, Mr. Finkielstain, had gone to Ar- gentina and the bonds that were supposedly securing his loans were nonexistent. I immediately called the U.S. attorney's office in New York, the southern district of New York, and I talked to the No. 2 man in the office. I said listen, you need to get an indictment or a complaint issued immediately so that when that guy comes back into the United States, they'll be waiting for him at the border. In fact, as a result of the U.S. attorney working with our office, when that guy was silly enough to come back into the United States, they grabbed him at the border. So, the system did work. The Customs Service computer worked because they put the war- rant into their system. They grabbed him and threw him in jail and set a bond of $30 million. Mr. BARNARD. I was going to comment that this ought to be a lesson to bank robbers. It would be better to get a job with a bank, so they could get off much easier than they could if they robbed the bank, you know, I mean that would be much easier. Mr. SERIN0. Mr. Chairman, we tell the Justice Department, we've told them this on numerous occasions: No.1, the first thing a prosecutor ought to do when they get a referral from a bank or from a banking agency is to call the regulator and ask us what we can do. Second, when they are sentencing these people, we want to comment on the sentence. I have written several letters over the past several years to judges and to probation officers telling them how significantly we think they ought to be sentencing these people. We are asking judges for long jail time, restitution, and barring defendants from banks. Several judges have done that. In the Finkielstain case, the judge ordered complete restitution. The fact is I don't think he has any money, but the judge has ordered restitution. When he comes out in 7 years, hopefully we'll be able to get something. We think that sentencing is important. Mr. BARNARD. Mr. Serino, can you imagine what went through my mind when I read this 0CC advisory of February 8, 1990? Mr. SERIN0. I hope what went through your mind was-- Mr. BARNARD. I told you so. Mr. SERIN0. Oh. Mr. BARNARD. It says here that appraisal policies are deficient. Too many national banks have failed to obtain accurate, independ- ent, and timely appraisals. The absence of proper documentation has often been excused by the need to meet the competition. I can go on, but if you recall, you know, we didn't get a lot of cooperation out of the Office of the Comptroller of the Currency when we were pursuing our appraisal legislation, but we finally got it, I know, but it was like putting on a shoe one or two sizes too small. Mr. SERIN0. We always have had a requirement that banks get appraisals. Mr. BARNARD. Yes, but look where they come from. PAGENO="0777" 773 Mr. SERINO. The problem is in these cases they weren't getting the appraisal, or getting old appraisals, I mean, they weren't get- ting good appraisals, but you're absolutely right, no, you're right. Mr. BARNARD. I'm glad you saw the light. Well, thank you very much for being here this morning, and we appreciate your testimo- ny. We appreciate the progress that's being made. And as I said to the other witnesses, this committee is very intently interested in this subject, and we will continue to pursue it. Thank you very much. Mr. SERINO. We appreciate your interest, Mr. Chairman. Mr. BARNARD. With that the subcommittee is adjourned. [Whereupon, at 1:16 p.m., the subcommittee adjourned, to recon- vene subject to the call of the Chair.] PAGENO="0778" PAGENO="0779" COMPARISON OF (1) MARCH 1989 DOS SURVEY of FBI DIVISIONS and US ATTORNEY OFFICES on ADDITIONAL PERSONNEL NEEDS for FINANCIAL INSTITUTION FRAUD & EMBEZZLEMENT (F E( CASES with (2) the ATTORNEY 6ENERALS 12/07(09 ACTUAL ALLOCATION OF SUCH PERSONNEL (Revised 5/4/90) -~ 07w * FEE CASES Pending Cases Open Inactive Major Total Maior Total STAFF REOUES TED FBI Osst. US Support ~ ~ J~LL STAFF ALLOCATED FAD Osst. US Support ~ ~1~L ~L DISPARITY BETWEEN REOUESOED STAFF AND FINAL ALLOCATION FBI Asot. US Support jfl~L ~Y!L T 01015 4,157 8,373 1,333 2,377 425 231 * 380 * Figures reflect saaiwue staff requests to process all Inactive Cases. ° Figures coibine support staff requests by the FBI and U.S. Attorney Offices. I. 201 118 238 ° - 224 - 113 - 142 (47%) (51%) (63%) PAGENO="0780" 776 GLOSSARY OF ~ fl~I'IVE cs~ cases wh~icth are open bot are not beii~ p~rsu~ for lack of investigative or Secitorial re5Q~s. Inactive onses are includ~ in the Open cases. figures. NAICR (~SE Refers to onses itwolvir~ estiret~ losses of $100, 000 or nore, a violation by an officer or dirnotor of a f~eraily insured institLxticn, ar~ onses that the ~ Attorsey or the ~ cases where the FBI bas r~eiv~ a cx~,1aint ar~ opened an investigation. Incl~es both active ~i inactive open onses. p~1D~ ~SE See definition for Open case. R~II7IT~~ E.inated rber of nths reguired to fully investigate inactive PFBIOD onses. ABBREVIATIONS C) Centoal. Distaict C/D Cemiot determine figure ~a date provided D Distoict (of the t~ Attorney's Office) SD Eastern Diattict ND Northern Disttict N/A No answer given SD Southern Diattict U~ U.S. Attorney's Office RD Western Disttict ] Ir~icetes data provided for na~or onses only PAGENO="0781" 777 Footnotes to Table A ~ta provided for the USN) Districts do not add to total cose figures. B Figures shown for Inactive ~ses reflect correction to data provided; based on Subcczrnnittee analysis. C ~ta provided on requested US~D support staff did not reflect a request for 1 staff nenber in the Montana District office. Subccxsnittee changed the total figure to include this request. D The Task Force is located in the Northern District of Texas. E !~ta provided on requested support staff was not broken down by USAD District. F The Task Force was allocated 6 U.s. Attorneys arxi 32 Attorneys from the Criminal Division's Fraud Section, for a total of 18 new personnel in this category. G The El Paso FBI Division aixi the San Antonio FBI Division both overlap with the USAD Western District of Texas. Total new staff requested/allocated for the WD-lexas are as follows: . . Assistant US Attorneys: 8 / 6 Support Staff: 15 / 7 H The Houston FBI Division arxi the San Antonio FBI Division both overlap with the tJSAD Southern District of Texas. Total new staff requested/allocated for the SD-Texas are as follows: Assistant US Attorneys: 27 / 15 Support Staff: 20 / 18 I The Jacksonville FBI Division arxi the Tanpa FBI Division both overlap with the USAO Middle District of Florida. Total new staff requested/allocated for the ND-florida are as follows: Assistant US Attorneys: 6 / 3 Support Staff: 5 / 4 ~ The Newark FBI Division arxi the Pailadelphia FBI Division both overlap with the USAD District of New Jersey. Total new staff requested/allocated for the D-New Jersey are as follows: Assistant US Attorneys: 4 / 1 Support Staff: 0 / 1 PAGENO="0782" COMPARISON OF (1) MARCH 1989 DOJ SURVE of FBI DIVISIONS and US ATTORNE( OFFICES on ADDITIOVAL PERSONNEL NEEDS for FINANCIAL INSTITUTION FRAUD I. EMBEZZLEMENT (F & El CASES with (2) the ATTORNEY GENERALS 12/07/89 ACTUAL ALLOCATION OF SUCH PERSONNEL (Revised 5/4190) (See Attached Glossary rf Tens and Footnotes) FBI DIVISION USAO DISTRICT FEE CASES STAFF REQUESTED STAFF ALLOCATUD DISPARITYBETWEENREOUESTEDSTAFF ~ID FINAL ALLOCATION Pending Cases ----- Open Inactive Major Total Major Total Resolution Penod )aonths) FBI ~ Asst. US ~j Support j~ FBI/OSAO FBI ~ Asst. US ~ Support ~f FBI/USAO FBI Asst. US Support ~ - JMLL FBI/USAO ALBANY DIVISION o ND-NEW YORV * D-VERMONT ALBUQUERQUE DIVISION aD-NEW MERICO ANCHORAGE DIVISION ID-ALASKA 42 128 7 57 12 *23 *91 *3 053 *12 *14 *26 `4 * 4 * 6 21 47 V 24 15 17 1) 10 24 3 3 2 / I `2 `2 `1 *1 `1 `V 4 1 2 / 2 2 2 1 / 2 NO STAFF ALLOCATED NO STAFF ALLOCATED 2 1 1 / 1 . - 3 - 3 -2 1 -1 *-~ `-2 `-1 0-I `-1 *0 - 4 - 1 -2/ -2 ~ V - I 0 I -l ATLANTA DIVISION `ND-GEORGIA `MD-GEORGIA BALTIMORE DIVISION `D-MARYLANB BIRMINGHAM DIVISION `ND-ALABAMA 86 243 15 40 24 `72 `212 `N/A `N/A *24 *14 * 31 `N/A `N/A `24 29 52 V V V 24 55 V V 0 121 3 4 1/0 *N/A `2 `N/A `2 0 V V / V 0 V V / 0 3 3 1 I 3 `2 `2 `1 `1 NO STAFF ALLOCATED NO STAFF ALLOCATEB 0 - 1 0 I +3 ` 0 `+2 *-1 0 0 0 I 0 V 0 0 I 0 BOSTON DIVISION 76 115 228 48 ` 124] 36 (91 14 121 6 (71 9/ 1 3 1 I 3 (-6] 11 (00 -3 1-6] -8 I +2 `ED-MASSACHUSETTS ON/A `N/A `lB `0-MAINE `N/A `N/A ` 0 `3V * 1241 36 *3 `1 `2 `2 `-1 `+1 `0-NEW HAMPSHIRE `N/A `N/A * 4 `N/A *0 `0 `0 `0 0 0 a *0-RHODE ISLAND `N/A ON/A o V I V `N/A oN/A `3 *0 `V *0 `1 `0 *1 0-2 `+1 Page 1 PAGENO="0783" FBI DIVISION * USAT DISTRICT FEE CASES STAFF REBUESTED STAFF ALLICATED DISPARITYBETWEENRESUESTEISTAFF ANI FINAL ALLICATIIN Fending Cases Resolution FBI Asst. US Support FBI Asst. US Support FBI Asst. US Support Ooen Inactive Period -~ ~ ~ ~OO~ ~ J~L ftSUD~ ~L J~L flaVor Total Naior Total /oonths) FBI/USAI FBI/USAO FBI/USAS BUFFALO DIVISION owl-NEW YORK 27 74 0 1 0 NI STAFF RETUESTED - 1 -2/-3 BUTTE DIVISION DI 68 6 25 12 2 1 2 I 3 ° NO STAFF ALLOCATED - 2 0-1 0-2 *1-IDAHO *1-MONTANA *19 * 9 *32 *36 * 6 * 0 *10 *15 *12 *12 *1 *0 *2 *1 a 0 0-1 CHARLOTTE DIVISION 123 162 V 0 36 2 0 1 I U 0 2 V I 2 - 2 + 2 0+2 -l /+2 0+2 *ED-NORTH CAROLINA *MD-NORTH CAROLINA owl-NORTH CAROLINA *123 ON/A ON/A *160 *N/A ON/A oN/A ON/A oN/A *2 *0 *0 *2 *0 *0 0 0 * 0 0 0 0 CHICABO DIVISION oND-ILLINOIS CINCINNATI DIVI510H *51-OHIO CLEVELAND DIVISION *ND-IHIO 110 300 N/A N/A 18 1100 IV 4 3 / 2 4 3 2 / 4 1-61 -12 - 1 -l /+2 28 87 V 13 6 1 1 2 I I NO STAFF ALLICATEI - 1 - I -2/-S 35 105 2 2 I 0 0 2/0 2 1 1/1 +2 +1 -1/fl CDLUMBIA DIVISION 27 55 1 4 12 1 1 0 I 3 0 0 0 / 0 il-SOUTH CAROLINA DALLAS DIVISION 923 1014 437 496 60 1591 64 21 46 37 15 17/lB OTASK FORCE 0 ON/A ON/A ON/A ON/A *N/A *N/A ON/A ON/A ON/A ON/A *16 * 3 oN/A oN/A *6 03 oN/A 0 4 0ED-DEIA5 ON/A ON/A ON/A oN/A * 6 oN/A *6 0 14 0ND-TEBAS -S -l 01-3 0-221 -27 -13 -11 0+2 oC/D *0 *C/D *0 iC/I Page 2 PAGENO="0784" STAFF ALLOCATED FBI As~t. US Support ~ooio ~L ~f FBI/USAO FBI DIVISION * USAO DISTRICT FEE CASES STAFF REOAES'TED Fending Cases Resolution FBI Asst. IS Support ~ jo~LUv~ ~rood ~ iii~L ItAIL Major Total Major Total I.onths) FBI/USAD DISPARITY BETWEEN REOUESTED STAFF AND FINAL ALLOCATION FBI Asst. US Support j~ FBI/USAO DENVER DIVISION *0-COLORADO `O-WYONINS - DETROIT DIVISION `ED-MICHIGAN *60-MICHIGAN EL PASO DIVISION * `ND-TEXAS 73 113 56 83 36 ON/A `N/A ON/A `N/A *36 `N/A `N/A `N/A ON/A `36 66 106 0 V N/A `N/A `N/A `N/A `N/A `N/A `N/A 50 89 10 15 1241 3V 12 6 B I 7 * 5 *5 * 1 `2 0 0 5 I V 13] 4 2 6 I 3 8 5 4 /4 *4 *3 *1 *1 NO STAFF ALLOCATED 1 1 0 I 7 * - 4 - I -41-3 a-I `-2 * V 0-1 V~ 0 -5/ V -3 - 1 0 -6 I C/B HONOLULU DIVISION *0-HAWAII HOUSTON DIVISION *50-TEVAS INDIANAPOLIS DIV. `SO-INDIANA `ND-INDIANA 10 31 4 IV 9 192 410 88 112 60 25 76 0 24 48 * 6 `68 *24 `24 `10 *25 ` V `N/A 0 1 V I 1 1500 55 25 25 /100 2 1 V I 1 *1 *1 *0 `V NO STAFF ALLOCATED 27 15 ° 14/18 ND STAFF ALLOCATED V - I 01-1 0-23] -28 -10 `° -II /C/B - 2 - I V I-I `-1 `-1 * 0 ` Page 3 JACKSON DIVISION 32 65 0 V 24 14) 5 4 0 I 0 NO STAFF ALLOCATED 1-41 -5 - 5 -I I V `NO-MISSISSIPPO 050-NI55055IpPD `N/A `N/A ON/A `N/A *24 `24 *2 *2 . `-2 JACKSONVILLE DIVISION 49 102 16 55 N/A 4 `-2 040 5 1 I 4 V V U I 4 - 4 0-4) -5 -I I V *NO-FLORIDA *NO-FL0010A 0 *23 *44 * 3 `37 `N/A `2 *2 *0 `U `-2 `-2 PAGENO="0785" FBI DIVISION * USAO DISTRICT FEE CASES STAFF RESUESTED STAFF ALLOCATED DISPARITVBETWEENREOUESTEDSTAFF AND FINAL ALLOCATION Pending Cases lIen Inactive Mator Total Mator Total Resolution Penod (.onths) FBI AsSt. US ~ jfly~ Support j~ FBI/USAO FBI Vsst. US ~ ~ Support Stafl FBI/USAO FBI Asst. US Support ftg~ j~ Stafl FBI/USAO KANSAS CITY DIVISION cD-KANSAS `AD-MISSOURI KNOXVILLE DIVISION cD-TENNNE55EE LAS VEGAS DIVISION cl-NEVADA 75 145 lB 62 36 c4B *74 * B *37 *36 `27 *71 *10 `25 *36 19 63 12 26 24 5 5B 4 30 36 1120 16 160 B 6 /10 *4 *5 *4 *5 13] 4 12] 3 3 I 4 Ill 4 110 2 1 I N/A 10 6 5 I B *3 *4 *3 *4 NO STAFF ALLOCATED ND STAFF ALLOCATED 1-2] -6 IV] -2 -11-2 `-I *-~ c-I `-1 1-31 -4 1-20 -3 -31-4 1-lI -4 1-1] -2 -l I U . LITTLE ROCK DIVISION `ED-ARKANSAS `AD-ARKANSAS LOS ANGELES DIVISION cCO-CALIFDRNIA LOUISVILLE DIVISION `ED-KENTUCKY cAD-KENTUCKY 25 50 17 21 24 *19 `37 `II *14 *24 * 5 `13 * 5 * 7 *24 3B9 540 126 225 24 26 74 V V V *16 *41 `IV *33 B 4 4 I 3 *2 `2 *2 *1 12B] 40 114] 20 17 I B NO STAFF REOUESTEO 4 2 2 I 2 `2 *2 *0 *0 27 15 14 I1B NO STAFF ALLOCATED - 4 - 2 -2/-1 c V c V c-I c-i 1-1] -13 00] -5 -3/+10 NO DISPARITY MEMPVIS DIVISION 5U 246 11 141 (36] lB 121 4 2 1 I 1 I I I I 1 0-11 -3 - 1 V I U `MD-TENNESSEE `N/A *N/A `N/A *6/A `N/A *1 *1 *0 *0 a-I c-I cAD-TENNESSEE `N/A `N/A `N/A `N/A `N/A *1 `V *1 *1 * V `+1 MIAMI DIVISION 74 147 lB 26 16] 9 16] B 110] 12 6/10 4 2 3 I 2 1-21 -4 1-B] -10 -3 I -B `SD-FLORIDA Page 4 PAGENO="0786" STAFF REQUESTED FEE CASES Fending Cases Resolution FBI DIVISION Open Inactive Period Maior Total Maior Total (iooths) * USAD DISTRICT FBI Asst. US Support ith~ JIHIL. 7 FBI/USAT STAFF AL L SCAT ED DISPARITY BETWEEN REQUESTED STAFF AND FINAL ALLOCATION FBI Asst. US Support ~&HIo ~ili~ JflIL FBI/USAO FBI Asst. US Support ftT!HIL ~i~L ~!L FBI/USAD MILWAUKEE DIVISION aWD-WI5CONSIN `ED-WISCONSIN MINNEAPOLIS DIVISION `D-MINNESITA `D-NTRTN DAKOTA `I-SOUTH DAKOTA 4B 134 V 0 0 `N/V `N/A `N/A `N/A 87 151 31 NB 24 `69 `ill `N/A `N/A `24 * 9 ` 20 aN/A `N/A `24 a 9 a 25 `N/A `N/A `24 NO STAFF REQUESTED WI B 3 6 1 N/A `2 aN/A `U `N/A `1 `H/A NO STAFF ALLOCATED 5 4 2 I 5 ,3 `4 `1 `1 *0 `0 NT DISPARITY 1-11 -3 +1 -4/+5 0+1 `C/I `+1 `C/B `-I `C/I MOBILE DIVISION `SD-ALABAMA `ND-ALABAMA NEWARK DIVISION `D-NEW JERSEY NEW HAVEN DIVISION `I-CONNECTICUT 28 W7 V 0 V `N/A `40 `N/A `27 59 ISV 2 16 12 II 157 V 15 IUI 6 NO STAFF REQUESTED 191 12 131 4 ° 3 V V 0 U 2 1 / 3 ND STAFF VLLTCATED 3 I 3 / NI STAFF ALLOCATED NT DISPARITY I-WI -9 1-21 -3 0 V / +1 0 V -2 -1 I -3 NEW ORLEANS DIVISIIN 81 195 43 110 3W 1131 17 171 9 S / 6 12 7 5 I B 1-11 -S 101 -2 V / +2 `ED-LOUISIANA `ND-LOUISIANA `MD-LOUISIANA `25 `41 `15 `92 `75 a2B `15 `20 `B `60 `40 `10 *24 `3W `24 `4 `3 `2 `2 `3 `I `3 `2 `2 `4 `2 *2 a-l a-I a V `+2 `-1 `+1 NEW YORK DIVISION 149 3B4 110 175 12 151 10 191 12 V I B 10 6 4 I B U 1-31 -W +4 / V `SD-NEW YORK `El-NEW YORK `119 * 30 `309 a 7S aSS oSS `131 a 44 `12 `12 * `B `4 `6 `2 `3 `3 `4 `4 a-S a-I 0-2 `+2 Page PAGENO="0787" FEE CASES Pending Cases Resolution FBI DIVISION Open Inactive Period Naior Total Naior Total (months) * USAD DISTRICT STAFFREIUESTED . STAFFALLOCATED 010PARITYBETWEENREOUESTEDSTAFF AND FINAL ALLOCATION FBI Asst US j~ Support ~ff FBI Asst. US ~ Support FRI As5t. US Support ~ ~aff FBI/USAO FBI/)J000 FRI/USAD NORFOLK DIVISION `ED-VIRGINIA OKLAHOMA CITY DIV. `ED-OKLAHOMA `ND-OKLAHOMA `ND-OKLAHOMA OMAHA DIVISION `ND-IOWA `SD-IOWA SD-NEBRASKA 9 25 0 0 0 104 145 7 11 24 `15 ` 17 `3 `3 SN/A `20 * 26 `0 `0 SN/A `69 `102 `4 `B SN/A 73 126 15 25 12 `28 `40 `B * B `12 `14 `23 *6 `10 `N/A `31 `63 `1 * 7 ` 6 NO STAFF REOUESTED 6 6 3/ 7 `1 *2 `1 *1 `4 `4 3 2 0 I 0 `I `0 *1 NO STAFF ALLOCATED tO 5 4 I 6 `0 *0 `0 `0 *5 *6 4 2 2 I 2 *1 `1 *0 `0 `1 `1 ND DISPARITY + 4 - 1 +11-1 `-1 `-2 `-1 `-1 `+1 *+~ + 1 0 +21+2 ` 0 `+8 ` 0 * ` 0 `+1 PHILADELPHIA DIVISION `ED-PENNSYLVANIA `ND-PENNSYLVANIA `0-NEW JERSEY a PHOENIX DIVISION `0-ARIZONA PITTSBURGH DIVISION `AD-PENNSYLVANIA `ND-WEST VIRGINIA `SD-WEST VIRGINIA 56 173 tO 22 12 `38 `125 `9 `20 `12 ` 9 * 32 *0 ` 0 ` 0 * 9 * 16 `1 ` 2 * 1 33 75 0 0 24 53 123 18 lB 18 `N/A `N/A `18 `18 `lB `N/A `H/A * 0 * 0 * 0 `N/A `N/A ` 0 ` 0 ` 0 (11 3 Ill 2 0 I 0 `2 *0 `o a (21 5 021 4 2/3 2 3 2 I 0 `2 `0 `1 1 1 1 I 1 `1 *1 `0 *0 a `0 a 6 3 3 I 4 ND STAFF ALLOCATED 101 -2 (01 -l +1/+1 `-1 `+1 ` 0 ` 0 ` o a a o a 0+41 +1 (+11 -l +1 I +1 ~ - 2 - 3 -2 1 0 `-2 a 0 *-i PORTLAND DIVISION 14 28 0 2 `0-OREGON 24 3 2 3 I 0 NO STAFF ALLOCATED -3 `-2 -3/0 Page 6 PAGENO="0788" FBI DIVISION * USAO DISTRICT F&E CASES STAFF REQUESTED STAFF ALLOCATED OISFARITYBETWEENREGUESTEOSTAFF AND FINAL ALLOCATION Pending Open Cases Inactive Resolution Penod FBI ~ Asst. US Support ~ FBI Rest. US ~ -~ Support J~ FBI Nest. US Support Maior Total Maior Total (.onths) FBI/USAO FBI/USAO FBI/USAO RICHMOND DIVISION `ED-VIRGINIA `NI-VIRGINIA SACRAMENTO DIVISION `ED-CALIFORNIA ST. LOUIS DIVISION `El-MISSOURI 15 36 9 12 12 *10 `13 `9 `12 `12 *5 `23 `V `V `12 54 15T 18 50 24 34 52 8 26 24 131 4 2 1 I I *2 `I *0 `0 (51 8 121 4 1/4 3 2 2/I NO STAFF ALLOCATED I 1 I I 1 HO STAFF ALLOCATED 1-31 -4 - 2 -l I -1 ,-2 `-1 a V `V 1-41 -7 I-lI -3 V 1-3 - 3 - 2 -2/ -l SALT LAKE CITV DIV. `0-UTAH SAN ANTONIO DIVISION `ND-TEXAU `SO-TEURS ` SAN DIEGO DIVISION `SD-CALIFORNIA 16 25 3 8 9 109 192 54 97 48 `89 `152 `H/A `N/V `48 `20 * 40 `N/V `N/A `48 39 107 32 42 24 1 I V I I 1240 28 17] 8 24/14 *6 `12' *2 * ` 2' 141 5 04] 5 6/4 NO STAFF ALLOCATED 8 5 4/25 *5 ` `7 *0 `18 ND STAFF ALLOCATED - I - I A/ -I 1-161 -20 1-21 -3 -PU I C/D `-1 ` `C/I `-2 `C/I 1-41 -5 (-4) -5 -6 I -4 SAN FRANCISCO DIVISION `ND-CALIFORNIA 121 382 22 44 N/A 180 10 140 5 3 I 0 4 3 3 I 4 1-41 -6 I-lI -2 0 I +4 SAN JUAN ODAISION `D-FUERTO RICO 27 104 15 66 12 3 0 I I 0 NO STAFF ALLOCATED -3 V -l I V SAVANNAH DIVISION `SI-GEORGIA 6 24 0 0 0 ND STAFF REQUESTED A) STAFF ALLOCATED NO DISPARITY Page 7 PAGENO="0789" FBI DIVISION USAO DISTRICT FEE CASES STAFF REQUESTED STAFF ALLOCATED DISPARITVBETAEENREQIJESTEOSTAFF AND FINAL ALLOCATION Pending Cases Open Inactive Najor Total Naior Total Resolution ~od ionths) FBI Asst. US ~ Jfl~ Support j~ * FBI/USAO FBI Vsst. US ~ ~ Support J~ff FBI/VSAO FBI Asst. US Support ~ j~y~ J~ff FBI/USAO SEATTLE DIVISION `WO-WASAINSTON *EO-WASHIN6TON SPRINSFIELO DIVISION `CO-ILLINOIS `SD-ILLINOIS TANPA DIVISION *90-FLORIDA S 79 142 27 33 18 *73 `130 IN/A `N/A `N/A * 6 * 12 `N/A `N/A SN/A 37 104 0 V 2 `28 *t9 *12 * 9 *35 `12 45 72 29 3D 27 3 2 9 I 5 `2 *5 *0 *0 B 4 V I 5 *2 *3 `2 `2 5 3 ` 3 I 3 3 2 1 I 2 `2 `0 NO STAFF ALLOCATED 1 3' 1 I 4 ` V V -8 I -3 *0 4-3 *0 ` V - 8 - 4 V I -5 `-2 *-2 `-2 - 4 0' -2 I C/O WASNINSTON, DC OIV. *0-DISTRICT IF COLUNBIA 16 54 0 I 0 NO STAFF REQUESTED NO STAFF ALLOCATED NO DISPARITY Page 8 PAGENO="0790" \ 1~B3X.37 (p9427) TEXT ~Fz~CDNO~t39 PP HO ~ i,iJ~3 Zh~ JJJJJ P 1.1i472 MAR 89 ~31 Dr..~iER (3G-22~55) (P) TO OARECTO~ F~sI/iRIORITY/ UNCLAS - S - CIiO~ O~ ~t' I.-~REk~ - ~ ~ ~&~1 UNCLAS - ~:--~. ~ ..-~- ~ s.LL~. //)21~// .,...-.%~ PASS: FINANCIAL CRIMES UNIT, WHITE COLLAR CRIMES SECTION, CID.~ ~ * *~* SS?S~ SUBJECT: BANK FAILURE/FRAUD AND EMBEZZLEMENT RESOURCE: . ~ ~i~EO: CO~ MARCH J., 1989. - .~4SZ .~..,. RE FBIHQ TELETYPE TO ALL FIELD OFFICES, DATED MARCH 3 1989. .~SE~LiL:~T TO EXTL:~SIVE ~LSCUSSIONS .-JITH U. S. ATTORNEY -S MICHAEL 1. NORTON, DISTRICT OF COLORADO, AND U. S. ATTORNEY S ~ -~i1 RICHARD A.. STACY, DISTRICT OF WYOMING; SAC, DENVER IS PROVIDING TriL ~ RESPONSES TO QUESTIONS RELATING TO BANK FRAUD TASK * *.. * *. .- -. .S 786 5; PAGENO="0791" 787 LAGE TV~O DE DN 0509 UNCLAS ~`Ox~?Lc%t~' `~L~ 7k~ PAGENO="0871" 867 PAGENO="0872" LLi~4 T1J~ 868 ~4'A~LI PAGENO="0873" 869 ~* PAGENO="0874" 870 APPENDIX 3.-FEDERAL RESERVE BOARD'S MAY 7, 1990, SUBMISSION OF ANSWERS AND DOCUMENTATION, REQUESTED BY THE SUBCOMMITTEE BOARD OF GOVERNONS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, 0. C. 20551 May 7, 1990 ALAN GREENSPAN The Honorable Doug Barnard, Jr. Chairnan ~, Connerce, Consuner, and Monetary `~ 1 Affairs Subcommittee - Committee on Government Operations ~ House of Representatives LTAP~y~ ~ CC' `Ti Washington, D.C. 20515 Dear Mr. Chairman: I an enclosing the answers to the questions you raised in your letter of March 23 concerning the supervisory and enforcenent efforts of the Federal Reserve in responding to unsafe and unsound practices and other misconduct by financial institutions. Also included is the requested information on the Federal Reserve's implementation of the Title IX provisions of the Federal Financial Institutions Reform, Recovery and Enforcement Act of 1989. If I can be of further assistance, please let me know. Enclosure PAGENO="0875" 871 STAFF RESPONSES TO MARCH 23, 1990 QUESTIONS FROM THE HOUSE COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE RELATING TO CRIMINAL MISCONDUCT AND INSIDER ABUSE AND THE FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF 1989 A. Nature and extent of activity in state member banks and bank holding co's Question: 1. For each of the years 1987--1989, please specify the numbers of SM banks and separately bank holding companies (and subsidiaries) in which supervisory problems, abuse, or misconduct was identified (i.e. resulted in a formal enforcement action or a criminal referral) and for each number indicate the number of such banks or holding companies which subsequently failed. (The use of civil enforcement actions and criminal referrals to determine this data is consistent with the way that the FDIC and the OTS have provided data to the subcommittee; should the Board, however, be unable to provide this data or want to suggest a different method, the Board staff can contact subcommittee counsel to discuss this further.) Response: We have attached, as Appendix I, tables showing the requested information. Question: 2. Please provide updated data on the (a) number of criminal referrals, (b) the number of state member banks (SM banks) and bank holding companies, and (C) the total estimated annual dollar losses from these referrals, made during 1987, 1988, and 1989, updating information provided to the subcommittee in 1987. Response: Appendix II provides the requested information. It is important to note that (1) the Federal Reserve's recordkeeping system records Criminal Referral Forms by the number of individuals or entities reported on the Forms, rather than the number of Forms submitted to us (e.g., one Criminal Referral Form PAGENO="0876" 872 2 can report the suspected criminal activities of three individuals and, for the purposes of Appendix II, this is listed as three referrals); and (2) the column headed "Total Reported Suspected Losses" merely aggregates the amounts reported by all filers of the Criminal Referral Forms, and there has been no independent verification of the amount of the suspected loss in any case by the Federal Reserve, the FBI, the U.S. Secret Service, a U.S. Attorney's Office or the Justice Department. Question: 3. Please describe any recent different discernible trends or patterns of fraud or misconduct, including schemes and areas of the country most affected. Response: There have been no noticeable trends or patterns of fraud or criminal misconduct that have developed with respect to financial institutions supervised by the Federal Reserve. Our review of Criminal Referral Forms submitted to the Federal Reserve over the past two years reveals that suspected misconduct or criminal abuse continues to be associated more with noninsiders (e.g., borrowers and depositors) than with insiders, such as officers, directors, employees, tellers or shareholders. The most common offenses by noninsiders involve credit card fraud, check fraud, check forgery, check kiting and false statements. The most common offenses by insiders reported on the Criminal Referral Form involve false statements, self-dealing and embezzlement. PAGENO="0877" 873 We note that the number of Criminal Referral Forms reporting~ suspected violations of the Bank Secrecy Act or other money laundering-type offenses increased significantly between 1988 and 1989.1 In 1988, the Federal Reserve received 127 Criminal Referral Forms for such violations or offenses; and, in 1989, this number increased to 461. This increase was due principally to the modification of the Criminal Referral Form in March 1988, and an added awareness of suspicious conduct that might constitute money laundering.2 B. Implementation of FIRREA `pay" provisions and FRB manpower levels: Question: 1. (a) Please report on the impact on the Federal Reserve System (FRS) of the "pay" and "comparability" provisions in FIRREA (which have directly affected other banking agencies, indirectly affecting the FES); and (b) describe (i) actual percentage salary and pay differential increases since August 9, 1989, (ii) the impact on retaining experienced personnel, if known, and (iii) any problems with these FIRREA provisions or their implementation by other agencies. 1Criminal Referral Forms involving suspected violations of the Bank Secrecy Act and money laundering activities are forwarded to the U.S. Customs Service and the Internal Revenue Service, as well as to the FBI and the appropriate U.S. Attorney' s Office. 2Prior to the modification to the Criminal Referral Form by all of the Federal financial institutions supervisory agencies, there was some confusion regarding the use of the Form to report suspected criminal offenses that did not result in losses to the reporting financial institution, such as a violation of the Bank Secrecy Act. Now, the agencies' Criminal Referral Forms explicitly state that violations of the Bank Secrecy Act and other money laundering-type offenses have to be reported on the Form, notwithstanding the fact that the reporting institution has suffered no loss. PAGENO="0878" 874 4 Response: B.1.(a): Although the Federal Reserve is not covered by the pay provisions of FIRREA, we are sensitive to the provisions in the law that require comparability among the other Federal financial institutions supervisory agencies who are subject to the legislation. To this end, the Board has taken a number of steps to exchange Federal Reserve salary and benefits information with the other supervisory agencies' human resource departments. Both prior to and after the enactment of FIRREA, Board staff who are responsible for the human resource professionals within the Federal Reserve met with their counterparts at the agencies covered by FIRREA. The purpose of these meetings was to exchange data and compare salary and benefits information on a current and future basis. After the legislation was enacted, Board staff continued to meet with these agencies to exchange salary and benefits data and to develop systems for the collection and distribution of these data. In addition, the Federal Reserve has offered its assistance and professional advice on how to conduct salary surveys and develop salary structures. We recently initiated the first meeting with the directors of personnel at the other Federal financial institutions supervisory agencies and laid the framework for providing sensitive, confidential information on the salaries of executive level positions. PAGENO="0879" 875 S By way of background, we note that the Federal Reserve began to develop new compensation and performance evaluation programs in May 1988 for its Washington, D.C. staff and fully implemented its new compensation system in January 1990. This system is designed to be a market-based, performance appreciative one. It provides for structure adjustments based on the results of a salary survey conducted annually by the Board's Human Resources Management Division. Salaries are then adjusted using the-concept of performance pay. Under the current system, there is no general pay increase or longevity incre8se for white collar and officer level employees. This system, which is similar to the ones used for many years by the Federal Reserve Banks, was put into effect prior to the enactment of FIRREA. Under the Federal Reserve's compensation program, each Federal Reserve Bank is delegated the authority, with appropriate Board of Governors' oversight, to establish its own salary structures and salaries that are competitive within each of its local markets. For the most part, market competitors are private sector companies. Recently, however, a number of Federal Reserve Banks have been impacted by the compensation arrangements adopted by the 0CC and FDIC, which granted across-the-board increases. B.l.(b)(i): From August 9, 1989 to date, average salary for the Board's white collar employees rose approximately 10 percent as the result of (1) the full implementation of the PAGENO="0880" 876 6 Board's new pay system on January 1, 1990, and (2) the first merit pay increases being granted to the Board's employees, which also took effect on January 1, 1990. All future salary increases will depend upon the results of the salary surveys that are conducted annually and budgetary affordability. B.l.(b)(ii): It is too early to tell precisely the effects of the Board's new compensation program on turnover and retention, but early indications are that turnover was lower in 1989 than in the previous year. The turnover rate for 1989 was 10.3 percent, compared to 11.1 percent in 1988. The first quarter turnover rate for 1989 was 2.3 percent compared to 1.7 percent for the first quarter of 1990. Recently, a trend has been developing of past employees contacting us about the possibility of returning to the Board. B.1.(b)(iii): Although it is too soon to draw significant conclusions, to date, the Federal Reserve has not experienced major System-wide problems with the pay provisions of FIRREA. However, the other Federal financial institutions supervisory agencies subject to the FIRREA pay comparability provisions have not yet developed their new salary and benefit programs, and it is possible that we may be impacted by their new programs. PAGENO="0881" 877 7 Question: 2. Please provide updated data on examiner and supervisor personnel levels at year end 1988 and 1989, including turnover and new hires. Response: Federal Reserve Bank Staff Levels: As of December 31: 1988 1989 Officer 132 131 Field Examination Staff 974 960 All Non-officer Professionals 1,383 1,391 New Hires All Non-officer Professionals 251 232 Field Examination Staff 176 152 Turnover--Field Examination Staff 10.7% 16.1% C. Supervision and civil and regulatory enforcement: Question: 1. Supervision: Describe any changes in the Board's examination frequency policy, since 1987. (No response is required if there are none.) Response: There have been no recent changes in the Federal Reserve's examination. frequency policies. We have attached, as Appendix III, a copy of the Board's October 7, 1985 statement concerning enhanced supervision of State member banks and bank holding companies, which describes the increased frequency of PAGENO="0882" 878 8 examinations and inspections. Since October 1985, the Federal Reserve has been following the examination and inspection frequency schedules set forth in its guidelines. Question: 2. Regulatory enforcement: a. Set forth the (i) numbers of final formal and informal Federal Reserve System civil enforcement orders for 1988 and 1989, broken down in the same manner as in the subcommittee's 11/19/87, hearing record, and (ii) the amounts of CMP assessments, CMP5 actually recovered, and also restitutions in connection with enforcement orders, for these two years. Response: Appendix IV provides the information requested in subsection (i) of this Question. In response to subsection (ii), we note that in 1989 the Federal Reserve assessed civil money penalties of $3,590,000 as the result of the completion of administrative proceedings or the issuance of consent orders. In 1989, the Federal Reserve collected and transferred to the U.S. Treasury the sum of $2,240,000, which represented both the full payment of some 1989 civil money penalties or the scheduled partial payment of some individuals' civil money penalties that were assessed in 1989 or in prior years. In 1988, the Federal Reserve assessed civil money penalties of $55,000 and collected $40,000, which was transferred to the U.S. Treasury. PAGENO="0883" 879 9 In 1988 and 1989, the Federal Reserve did not issue any orders requiring restitution. Question: b. Describe the FRB's efforts to recover CMPs, including lawsuits filed, and also the specific efforts to recover the $3 million plus CMP5 from seven officials of Evco, Inc. and Stockgrowers State Bank. Response: The Federal Reserve has generally been successful in collecting most final civil money penalty assessments or, in the alternative, arranging payment schedules at the time of the Board's issuance of consent assessment orders. To date, most payments schedules are being complied with fully. With regard to those individuals who do not pay their final civil money penalty assessments, Board staff, in compliance with the provisions of the Federal Deposit Insurance Act, as amended by FIRREA, generally forwards the matter to the appropriate U.S. Attorney for the initiation of collection proceedings. Board staff is now actively working with five U.S. Attorneys' Offices in order to collect over $200,000 in fines that have not been paid over the last several years. In all of these cases, the U.S. Attorney's Office and the Justice Department have been cooperative and have initiated whatever legal proceedings are necessary in their attempt to collect final civil money penalty assessments. PAGENO="0884" 880 10 Concerning the Federal Reserve's recent enforcement actions against seven individuals associated with the EVCO/Stockgrowers case, we note that, at the conclusion of a very lengthy and complex contested proceeding, the Board, on January 26, 1990, assessed civil money penalties of $600,000 each against five individuals and penalties of $10,000 and $5,000 against two others. The five $600,000 civil money penalty assessments are final, but the individuals have appealed the Board's assessment orders to a Federal court of appeals. Accordingly, the Federal Reserve cannot initiate any collection efforts, through the Justice Department, until the individuals' appellate rights have been exhausted. The aforementioned $5,000 and $10,000 fines have not been paid or appealed; and they are, therefore, final. The Federal Reserve has recently referred the matter to the U.S. Attorney in Wyoming for the initiation of collection efforts. Question: 3. Results of FIRREA Title IX implementation: a. List and then describe each of the Board's interpretations and application of the new regulatory enforcement provisions, including all proposed and actual policy statements, guidelines, and regulations--especially (although not exclusively) with regard to FIRREA sections 904, 907, 910, 913, 914, 916, 917, and 918, and provide copies of any such. Response: We have attached, as Appendix V, the Federal Reserve's August 17, 1989 SR letter concerning the provisions of Title IX PAGENO="0885" 881 11 of FIRREA referred to in this Question.3 The SR letter describes the relevant enforcement provisions of FIRREA. We note that the Federal Deposit Insurance Corporation, Office of Thrift Supervision, and Office of the Comptroller of the Currency responded to questions similar to this inquiry when they testified before the Committee on March 15, 1990 and submitted comprehensive written materials in connection therewith. Board staff has reviewed those agencies' descriptions of the various sections of Title IX of FIRREA, as well as their interpretations and descriptions of the implementation procedures for the various sections of Title IX; and we found that their submissions accurately describe the Federal Reserve's positions regarding the civil enforcement provisions of Title IX. This results from the fact that the staffs of the Board and the other Federal financial institutions supervisory agencies have been working together to develop these uniform interpretations and implementation procedures for the civil enforcement provisions of Title IX of FIRREA since the date of its enactment.4 3"SR" letters are used by the staff of the Board's Division of Banking Supervision and Regulation to disseminate information to the Federal Reserve Banks, to convey policy, and, generally, to ensure that the Federal Reserve Banks are aware of all current matters of interest to the Federal Reserve System. This SR letter was publicly disseminated. 4For the Committee's convenient reference, we have attached, as Appendix VI, copies of the Federal Deposit Insurance Corporation's and the Office of Thrift Supervision's responses to this Question. We have also attached, as Appendix VII, a copy of the recently issued proposed Board regulation implementing the officer and director review and disapproval provisions of section PAGENO="0886" 882 12 Question: b. Describe any problems, uncertainties, or concerns, with regard to any provision in Title IX or its application. Response: Again, the staffs of the Board and the other Federal financiallinstitutions supervisory agencies have been working together to identify problems associated with the new enforcement provisions set forth in Title IX of FIRREA. We share the concerns expressed in the other agencies' submissions, and we note that the Federal Reserve also has concerns about: (1) The 30-day time period granted to the Board and the other agencies to review and then, if necessary, disapprove the hiring of senior executive officers or the appointment of directors to troubled and certain other financial institutions under section 914 of FIRREA. This section of FIRREA does not authorize the extension of the 30-day period in any manner; and, due to problems associated with obtaining information from law enforcement agencies within the short timeframe, it is often difficult to meet the requirements of this new law. We believe that consideration needs to be given to amending the statutory requirements originally set forth in section 914 to include a 914 of FIRREA. This is the only regulation required by a provision of Title IX of FIRREA to be issued as of this date. For the Committee's information, we have attached, as Appendix VIII, copies of recently issued final enforcement orders, which were made public pursuant to the requirements of section 913 of FIRREA. PAGENO="0887" 883. 13 discretionary one-time extension of the 30-day time period, as can be done in connection with the notice and review requirements of the Change in Bank Control Act. (2) Due to a drafting error in section 902 of Title IX of FIRREA, the enhancement of the Board's enforcement powers over foreign financial institutions, including its power to take cease and desist action for violations of the Bank Secrecy Act by foreign institutions doing business in the United States and by individuals associated with such institutions, could not be codified. This matter has been brought to the attention of the Committee's staff; and, with their assistance, a correction has been included in pending House legislation relating to money laundering activities, the Depository Institution Money laundering Amendments of 1990 (H.R. 3848). In the event that legislation is not passed, further corrective action needs to be taken in order to enable the Board to address this most important area. E. Criminal enforcement efforts: Question: 1. Please discuss the adequacy of Justice Department investigative and prosecutorial resources and efforts; and identify any areas in the country where the FRS has egcountered delays within the Justice Department or other problems? PAGENO="0888" 884 14 Response: With tens of thousands of Criminal Referral Forms being submitted to the FBI, the Offices of the U.S. Attorneys, and the Department of Justice each year by insured depository institutions, bank and thrift holding companies and subsidiaries of such companies, as well as by the Federal financial institutions supervisory agencies, the Nation's criminal investigation and prosecution agencies have been overwhelmed with reports of criminal abuse and misconduct. It is clear that the Justice Department, through the FBI, the Offices of the U.S. Attorneys end the Criminal Division's Fraud Section, has been unable to handle every criminal referral (or even every significant referral) submitted by bank and thrift organizations and the regulators. The level of personpower and related resources needed to address adequately all, or even a major portion of, referrals is, in all likelihood, unattainable given current Federal budget restraints. The increase in Justice Department resources--in the $50 to $75 million range per year-- granted by FIRREA will enable that agency to address a considerably larger number of criminal referrals; but, a substantial number still will not be handled. Notwithstanding the Justice Department's resource limitations, we have found that, to date, the Justice Department has very adequately used its limited resources to address the matters of interest to the Federal Reserve in all regions of the PAGENO="0889" 885 15 country. Working through the interagency Bank Fraud Enforcement Working Group and the numerous local bank fraud working groups, the Justice Department has solicited the input of the Federal Reserve and the other regulatory agencies and has responded satisfactorily to the concerns expressed by this agency over the past five years. Question: 2. List (in an appendix) each local law enforcement (bank fraud) task force/working group, and identify for each the FRS's representative ( 5). Response: We have attached, as Appendix IX , a listing of all local bank fraud working groups known to the Federal Reserve as of April 27, 1990. Appendix IX describes, inter alia, the lead contact person for each local working group, the Federal Reserve contact person, the agencies that comprise each group and recent accomplishments of the local working groups. Question: 3. (a) Report on the FRS's successes and failures in obtaining both the U.S. Attorneys' cooperation in requesting, and also the court's cooperation in imposing, restitution, civil money penalties, and removals from SM banks at time of sentencing in criminal cases, including identifying, if possible, those districts where the FRS has not been successful; and (b) provide any overall figures on the amount of such restitution, if available. PAGENO="0890" 886 16 Response: Over the past two years, U.S. Attorneys' Offices have been very cooperative with respect to the investigation and prosecution of complex criminal activities involving State member banks and bank holding companies that were of particular interest to the Federal Reserve due to the egregious nature of criminal misconduct--especially by insiders. We can report no instance where a Federal prosecutor has been uncooperative regarding a criminal law enforcement matter of importance to the Federal Reserve. As described below, we have encountered problems associated with the courts' imposition of appropriate sentences and restitution orders. With the assistance of Federal Reserve examiners who were assigned to provide expert help to the FBI and U.S. Attorneys' Offices, the Justice Department has successfully prosecuted several major cases involving State member banks, bank holding companies, and foreign financial institutions subject to the Federal Reserve's supervisory jurisdiction. These have included Messrs. Davis and Burke in the EVCO/Stockgrowers case, Mr. Sanchez in the Trust Bank of Hialeah case, Mr. Knox and Ms. Neavill in the Idaho State Bank case, and the BCCI organization. In the BCCI matter, the staff of the Office of the U.S. Attorney for the Middle District of Florida (Tampa) worked very PAGENO="0891" 887 17 well with the Federal Reserve, and, as a result, the criminal sanction imposed on the organization, for the first time, incorporated the provisions of the Cease and Desist Order issued by the Board of Governors against BCCI and its subsidiary holding companies. In addition to the imposition of a criminal fine, the court made BCCI's compliance with the Board's Cease and Desist Order a condition of its probation. In the EVCO/Stockgrowers case, the Federal Reserve provided significant assistance to the Federal prosecutors during both the investigatory and prosecution stages of this most complex case. In addition, at the request of the prosecutors, the Federal Reserve delayed the initiation and prosecution of its administrative civil money penalty, removal and prohibition actions against the defendants in the case (and other associated individuals) in order to permit the Government to focus all of its attention on the criminal prosecution of the offenders. Subsequent to the convictions of the defendants in the EVCO/Stockgrowers case, the Board completed its administrative actions and issued four permanent removal and prohibition orders and civil money penalty assessments of $600,000 against each of the five principal wrongdoers. With respect to the Idaho State Bank case, the U.S. Attorney for the District of Idaho recently completed the successful prosecution of the two principal officers and directors of the bank, and sentencing of the individuals is scheduled to take place on July 12, 1990. Since these PAGENO="0892" 888 18 individuals were found guilty on 32 felony counts, we hope that the court will impose terms of incarceration and order restitution. The staff of the Federal Reserve Bank of San Francisco is now in the process of preparing letters to the Federal judge handling the Idaho State Bank case. The letters will describe the Federal Reserve~s interest in the case and our expectations concerning the court's imposition-of appropriate terms of incarceration and restitution orders. In the Trust Bank case, the U.S. Attorney for the Southern District of Florida (Miami) dedicated extensive resources to the prosecution of Mr. Sanchez who, for all practical purposes, ~singlehandedly caused the failure of a State member bank through his corrupt practices. Notwithstanding the outstanding efforts of the FBI, the U.S. Attorneys' Offices and the Justice Department over the past several years, we have been very disappointed with respect to the courts' handling of two of the aforementioned cases. In the EVCO/Stockgrowers and the Trust Bank cases, the Federal judges presiding in the cases did not impose any significant terms of incarceration or restitution in amounts that even approached the level of funds taken from the financial institutions by the offenders.5 In the Trust Bank case, the court, after Mr. Sanchez 5Both of these cases involved criminal activities that occurred before the effective date of the Federal sentencing guidelines. Accordingly, the courts were not bound to impose the stricter sentences called for by the guidelines. PAGENO="0893" 889 19 pleaded guilty to a number of felony charges, imposed a term of incarceration of only 15 months and ordered restitution in the amount of $500,000. Mr. Sanchez was charged, in a well documented incident, with taking at least $600,000 in cash from the bank in an attache case prior to its failure. Moreover, in a letter to the Federal judge handling the Trust Bank case we brought to the attention of the court, prior to Mr. Sanchez's sentencing, the fact that he has failed to pay his civil money penalty of $20,000. We had hoped the court would have given greater weight to these facts. With respect to the EVCO/Stockgrowers matter, after a four month trial and convictions on almost all counts of multi-count indictments, the court imposed jail terms of only four and six years against Messrs. Burke and Davis, respectively, and ordered no restitution. The Government had shown that Mr. Davis had personally and unlawfully received at least $7.9 million from his fraudulent schemes and that his schemes had caused losses of at least $20 million from two banks and bank holding companies and a thrift association. Again, we had hoped that the court would have given greater weight to these factors. With regard to consent orders of removal and prohibition, the Federal Reserve, like the other Federal financIal institutions supervisory agencies, has been working with the Justice Department and the Offices of the U.S. Attorneys to ensure that, in all appropriate cases, the model Plea PAGENO="0894" 890 20 Agreement is used in connection with all plea arrangements and that the agencies' consent orders of removal and prohibition are issued at the time of sentencing. In 1989, one order of removal and prohibition was issued in cooperation with a U.S. Attorney's Office at the time of the execution of a plea agreement. At the present time, several consent orders of removal and prohibition are being negotiated around the country, and one was executed during the week of April 9, 1990. We expect that as more U.S. Attorney's Offices become familiar with the provisions of the model Plea Agreement, we will see an increase in the number of consent removal and prohibition orders issued in connection with plea arrangements in criminal matters involving financial institutions. Last, we note that we do not have any available information concerning the amount of restitution ordered by the courts in connection with criminal prosecutions of cases involving State member banks and bank holding companies. Attachments PAGENO="0895" 891 Appendix I STATE MEMBER BANKS Formal Criminal Enforcement 1 Referrals Actions Failed 1987 182 10 8 1988 129 17 13 1989 280 13 * 6 BANK HOLDING COMPANIES 2 Formal Criminal Enforcement 3 Referrals Actions Deregistered 1987 16 17 10 1988 12 25 11 1989 29 4 2 1State member banks that made criminal referrals or were the subject of criminal referrals or formal enforcement actions, which subsequently failed, are listed. 2The statistics listed in this table do not include criminal referrals or formal enforcement actions involving foreign financial institutions subject to the Federal Reserve's jurisdiction. In 1989, almost 40 percent of all Federel Reserve formal enforcement actions against holding companies involved foreign companies, their subsidiaries, branches and agencies. 3Bank holding companies that made criminal referrals or were the subject of criminal referrals or formal enforcement actions, which subsequently were deregistered on account of the failure of their subsidiary banks or the foreclosure on their subsidiary banks' stock, are listed. PAGENO="0896" TOTAL # OF TOTAL # OF CRIM. REPORTED BHCs REF. SUSPECTED ______ ______________ FILING / FILED LOSSES 16/51 $140,526,612 12/44 $336,313,750 29/77 $239,905,720 1Since some criminal referrals involve foreign entities, such as branches and agencies of foreign banks in the United States, and Edge Act corporations and information concerning these referrals is not included in this table, the totals in this column do not reflect the mathematical sum of the referrals involving State member banks and bank holding companies. 892 Appendix II TOTAL1 #OF CRIM. REF. FILED TOTAL #OF # OF CRIM. SMB5 REF. FILING / FILED 1987 3,318 182/3,243 1988 1,421 129/ 754 1989 3,080 280/2,946 PAGENO="0897" 893 Appendix III FEDERAL RESERVE. press release For imediate release October 7, 1985 The Federal Reserve Board today announced two policies to strengthen Reserve Bank supervision of state member banks and bank holding companies. The poli:ies generally increase the frequency of Federal Reserve examinati;ns of state member banks and inspections of bank holding companies and st~engthen the procedures for reporting deficiencies to bank management and boards of directors. The board's action was taken in light of developments and trends within the banking system over the past several years. The policies announced today are aimed at two broad supervisory areas: -- The early identification of problems in banking organizations through more freqi~ent and in-depth on-site examinations: -- T'e correction of weaknesses through more frequent and clearer comrm.~nications between bank supervisors and boards of directors. In addition, the Board has identified the foll~ing areas in which steps to strengthen the supervisory process are being consIdered and where action will be taken if appropriate and necessary. These areas are: -- The prevention of supervisory problems in banking organizations through tightened prudential standards; -- Improved coordination and cooperation with other Federal and state banking departments, and; 30-830 0 - 90 - 29 PAGENO="0898" 894 2- Strengthened examination staffs and improved examiner training programs. The first policy announced today provides for a general increase in the frequency of examinations of state member banks and inspection of bank holding con~anies. In general the policy provides that: -- Bank organizations for which the Federal Reserve is primary supervisor will be examined or inspected at least annually; The largest organizations and those with significant problems will be examined or inspected semi-annually; -~ As an exception to the general rule, small NshelP holding con~anies with no known problems and low levels of debt relative to the book value of their subsidiary bank's stock are to be Inspected on a more limited basis. The second policy strengthens and formalizes current practices for cocnim~nlcating the findings of examinations and inspections to bank management and boards of directors when significant problems exist. This policy: -~ Establishes specific criteria for determining which examination findings require follow-up meetings with boards of directors and sets out guidelines for such meetings; -- Requires that, in addition to providing a complete examination or inspection report to the bank or bank holding company, a written summary of findings be sent to the bank or bank holding company for distribution to each director; PAGENO="0899" * 895 -3- -- Requires that senior Reserve Bank officials become more Involved in presenting examination findings to boards of directors. The policies are effective Imedlately, with Initial implementation expected January 1, 1986. The Board's letter to Reserve Bank Presidents and Its two policy statements are attached. -0- Attachments PAGENO="0900" 896 BOARD OF GOVERNORS or THE FEDERAL RESERVE SYSTEM 2: WASHINGTON, 0. C. 20551 f.% ~. TO: The PRESIDENT OF ALL FEDERAL RESERVE BANKS AND THE OFFICERS IN CHARGE OF BRANCHES The Board of Governors has approved two new policies for Federal Reserve Banks to follow in supervising state member banks and bank holding companies (see Attachments A and and B). The first sets down guidelines that increase the required fre- quency of examinations of state member banks and of inspections of bank holding companies, except for certain relatively small bank holding companies. The policy also calls for the Federal Reserve Banks to increase their involvement in examinations! inspections of larger organizations and weaker organizations and to place greater reliance on state banking agencies for the examination! inspection of smaller, healthy organizations, to the extent the states are willing to assume and have the resources to take on these responsibilities. The second policy, designed to formalize and strengthen longstanding practice, provides instructions for communicating the findings of examinations/inspections to the management and boards of directors of organizations with significant problems. The policy requires Reserve Bank officials to meet with the management and directors of organizations when an examination or inspection has revealed that the organization has significant problems. The policy also requires Reserve Banks to provide each member of the board of directors of such organizations with a summary report of the examination/inspection findings. Specifi- cations for the form and general control of these reports are outlined in the policy. Both policies have common objectives: (a) to help pre- vent the development of or intensification of problems at banking organizations; and (b) to enhance the effectiveness of the Federal Reserve in identifying and dealing with problems that develop nonetheless. PAGENO="0901" 89!~ -2- Implementation of these policies is targeted to commence no later than January 1, 1986. Due to the potential impact on staff resources in certain Districts, however, the Board recognizes that some time may be required before complete implementation of the examination/inspection frequency policy is obtained. The attached policy statement on frequency of examina- tions of state member banks and inspections of bank holding com- panies supersedes outstanding Federal Reserve System statements of policy pertaining 3 this specific subject contained in parts of F.R.R.S. 3-1531 (S-2441) and F.R.R.S. 3-1532 (s-2444). Simi- larly, the attached policy statement on communicating examination/ inspection findings to management and dIrectors supersedes the pertinent parts of Supervision and Regulation letters 75-288 and 79-512. Sincerely yours, (signed) William W. Wiles William W. Wiles Secretary PAGENO="0902" 898 Attachment A POLICY FOR FREQUENCY AND SCOPE OF EXAMINATIONS OF STATE MEMBER BANKS AND INSPECTIONS OF BANK HOLDING COMPANIES This policy calls for a general increase in the fre- quency of examinations of state member banks and inspections of bank holding companies. The objectives sought are (a) to help prevent the development of problems at banking institutions and (b) to make more effective the Federal Reserve's ability to identify and resolve problems that develop nonetheless. The policy requires that, in general, banking organi- zations for which the Federal Reserve is primary supervisor are to be examined/inspected at least annually, with the largest of such organizations and those with significant problems to be examined/Inspected semi-annually. As an exception to the general rule, small ~she11 holding companies with no known problems and low levels of debt relative to the book value of their subsidiary bank's stock may be inspected on a much more limited basis. Tables presenting these frequency and scope requirements are attached. Federal Reserve Banks are to intensify their involve- ment in the examination/inspection of large organizations and those with significant problems. Greater reliance is to be placed on state examinations/inspections in the case of smaller organizations. If a state lacks the resources to conduct ex- aminations/inspections in accordance with the specifications of this policy or is unwilling to do so, or, in the case of holding companies, lacks authority, the Federal Reserve Banks will conduct the examinations/Inspections to the extent needed to meet the specifications. 1/ In addition, if a state member bank or bank holding company Tndicates its wish to be examined/inspected by its Federal Reserve Bank, that wish should be honored. 1/ It is suggested that Reserve Banks will need to exercise some flexibility when implementing the examination requirements in order to achieve operational efficiencies and appropriate coordi nation with state banking departments. PAGENO="0903" 899 -2- REQUIREMENTS FOR STATE MEMBER BANK EXAMINATIONS No Identified Problems or Special Characteristics Multinational state member banks and all others with assets greater than $10 billion will be subject to a full-scope examination annually. In addition, a limited-scope or targeted examination1! should be scheduled annually for each of these banks. If, however, a bankss financial condition is judged to be clearly satisfactory--based on its last full-scope examination, the findings of the Federal Reserve's surveillance system2! and other sources of information--the Reserve Bank may waive the limited- scope or targeted examination. Each of the required examinations should be conducted by the Federal Reserve Bank independently or jointly with the state; these banks should no longer be examined under an Alternate Year Examination Program (AEP). Banks with total assets between $500 million and $10 billion will be subject to an annual full-scope examination to be conducted either by the Federal Reserve Bank independently or jointly with the state, or by the state alone on an every-other year basis under an AEP. Limited-scope or targeted examinations, between annual full-scope examinations, are to be conducted, if deemed necessary by the Reserve Bank. Banks with assets between $100 million and $500 million must also be examined annually on a full-scope basis. Such examinations by the state in two out of every three years will be acceptable under an AEP. Additional limited-scope or targeted examinations will be conducted when deemed necessary by the Reserve Bank. 1! A limited-scope examination will review all areas of activity covered by a full-scope examination, but less Intensively. Targeted examinations will focus intensively on one or two activities. ~j Refers to the Federal Financial Institutions Examination Council approved Uniform Bank Surveillance Screen for use by the bank regulatory agencies to identify on an early warning basis those banks in need of special supervisory attention, PAGENO="0904" 900 -3- Banks with assets of less than $100 million are also to be subject to an annual full-scope examination. It will be acceptable for the Reserve Bank to limit its involvement in such examinations to once every four years, If the state conducts annual examinations under an AEP in the other three years. Additional limited-scope or targeted examinations will be conducted when deemed necessary by the Reserve Bank. Banks Requiring Special Supervisory Attention Banks receiving a CAMEL 1/ composIte rating of 4 or 5 on an examination must be examined on a twice-a-year basis thereafter until the problem Is resolved; at least one of these two must be a full-scope examination. If a bank has total assets in excess of $500 million, both examinations must be conducted by Its Federal Reserve Bank, independently or jointly with the state. If a bank has total assets of less than $500 million, an examination conducted independertt-l-y by the state on an every other-time basis will be acceptable. All banks rated a CAMEL composite 3 on their last exami- nation are to have an annual full-scope examination conducted by the Federal Reserve, independently or jointly with the state. In addition, a limited-scope or targeted examination of composite 3-rated banks with total assets greater than $500 million must be conducted during the year by the Federal Reserve, Independently or jointly with the state. Banks With Special Characteristics State chartered banks applying for membership in the Federal Reserve System are to receive a full-scope examination by the Federal Reserve before membership is granted. Particular att.ention is to be given in these examinations to the quality of assets and the adequacy of capital. Similarly, a full-scope examination by the Federal Reserve, independently or jointly with the state, will be required within 12 months following (1) the for~mation of a de novo state member bank or (2) the change in control of a state member bank. Banks which in the judgment of the Reserve Bank fail the surveillance screen or which the Reserve Bank, on the basis of other information, has reason to believe may have signi- ficant problems, are to receive an in-depth, off-site review to determine whether an on-site examination should be conducted by the Federal Reserve, independently or Jointly with the state. 1/ CAMEL refers to the rating system used by the federal super- - visory agencies to assess the financial condition of commer- cial banks (F.R.R.S. 3-1575). - PAGENO="0905" 901 -4- REQUIREMENTS FOR BANK HOLDING COMPANY INSPECTIONS Bank Holding Companies With No Identified Problems or Special Characteristics Multinational bank holding companies and all others with consolidated assets over $10 billion are to receive a full- scope inspection annually to be coordinated with the examination of the lead bank to the extent possible. Although the inspection of the holding company and the examination of the lead bank need not be commenced simultaneously, they should overlap and rely on financial statements as of the same date, if possible, in order to facilitate the analysis and the pre- sentation of findings to management and directors. A limited- scope or targeted inspection of these companies is also to be conducted between the annual full-scope inspections, the precise timing to be determined by off-site surveillance reports and by opportunities to coordinate with the examination of the lead bank. The requirement for a limited-scope or targeted inspection may be waived by the ReserveBank if, on the basis of the findings of the last full-scope inspection and of the sur- veillance system, the institution Is judged to be in satisfactory condition. Complex bank holding companies (defined as companies with nonbank subsidiaries that extend a material amount of credit or companies whose parent has a material amount of debt outstand- ing to the general public) with consolidated assets between $500 million and $10 billion receive a full-scope inspection annually. Noncomplex "shell' organizations in this size group are to receive a limited-scope inspection every two years. These Inspections should be conducted, to the extent possible, in coordination with the examination of the lead bank. All bank holding companies in this size group should be subject to additional limited-scope or targeted inspections when the Reserve Bank has information that suggests the institution may be developing significant problems. Complex bank holding companies with consolidated assets between $150 million and $500 million are to receive an annual full-scope inspection. Noncomplex shell bank holding companies in this size group are to receive a limited-scope inspection on a once in three year basis. Inspection frequency for bank holding companies with consolidated assets of less than $150 million is to be determined by their structural characteristics and their debt levels. Com- plex bank holding companies are to receive a full-scope inspection every other year. Noncomplex shell companies with parent debt exceeding the book value of the stock of the company's bank PAGENO="0906" 902 -5- (or banks) should be inspected every other year. These inspections may be either full-scope, limited-scope or targeted as deemed appropriate. Noncomplex shell companies (with consolidated assets less than $150 million) with a ratio of parent debt to the book value of the stock of the company's bank (or banks) of less than 100 percent will be inspected on a sample basis: a 20 percent sample will be drawn of companies with a ratio between 75 to 100 percent for inspection each year; a 10 percent sample will be drawn of companies with a ratio below 75 percent for inspection each year. These inspections may be either full-scope, limited- scope or targeted as deemed necessary. (NOTE: Companies that received a BOPEC1/ composite rating of 3, 4, or 5 or failed a surveillance screen will not be Included In the population from which samples are to be drawn and should be inspected in accordance with the frequency requirements set forth below.) In addition to the above inspection requirements, in the case of companies with less than $150 million In consolidated assets, primary federal and state bank supervisors are to be asked to review, during their examination of a bank, any significant dealings between the bank and the holding company and to report such findings along with any other relevant information on the health of the organization to the Federal Reserve. (A short form will be provided to make such reports to the Federal Reserve.) The Federal Reserve Banks will review this and other Information to determine whether an Inspection of the holding company should be conducted. Further, the Federal Reserve will be prepared to inspect any of these small bank holding companies--as well as any larger holding company--at the request of the bank's primary supervi sor. Bank Holding Companies Requiring Special Supervisory Attention Inspection frequency of bank holding companies requir- ing special supervisory attention is to be determined by both the size and complexity of the organization. The most intensive frequency requirements are directed at bank holding companies rated BOPEC composite 4 or 5, or whose lead bank subsidiary has been rated CAMEL composite 4 or 5. All bank holding companies so rated with consolidated assets over $500 million are to receive an annual full-scope inspection anda limited-scope or targeted Inspection during the Interval between full-scope inspections. The same requirements apply to complex bank holding companies with assets between $150 million and $500 million. To the extent possible, Inspections of these 4 and 5 rated bank holding 1/ BOPEC refers to the Federal Reserve's rating system for bank - holding companies (F.R.R.S. 4-865). PAGENO="0907" 903 -6- companies are to be coordinated with the examination of the lead bank subsidiary. Noncomplex bank holding companies with assets of $500 million or less are to receive an annual inspection whose scope may be determined by the Reserve Bank based upon the nature of the companies' problems.1! Complex holding companies with assets under $150 million are to receive a full-scope inspection annually. Bank holding companies rated composite 3 with consoli- dated assets over $500 million are subject to the same requirements as those rated 4 or 5. Bank holding companies with consolidated assets between $150 million and $500 million with complex structures are to receive an annual full-scope inspection; those with noncomplex structures are to receive an annual Inspection, the scope of which is to be determined by the Reserve Bank. Complex bank holding companies with assets under $150 should receive a full-scope inspection annually; noncomplex bank holding companies with assets less than $150 million are to be inspected every other - year. The type of inspection for these small noncomplex companies may be determined by the Reserve Bank.!! Bank Holding Companies with Special Characteristics Bank holding companies formed to acquire an existing bank are to be inspected to determine their compliance with Federal Reserve regulation and the extent to which they have fulfilled commitments the Board of Governors required of the organization In approving its application. Such Inspections should be conducted between the 6th and 18th month after the acquisition; ~theIr scope is to be determined by the Reserve Bank. If. information available to the Reserve Bank--the most recent examination of the bank, the most recent FR Y-6 and FR Y-9 reports from the holding company and other pertinent information-- Indicate that (a) the condition of the bank and bank holding company Is satisfactory, (b) the bank holding company is fulfilling Its commitments to the Board of Governors, and (c) the ratio of the parent's debt to the book value of the subsidiary bank (or banks) is less than 75 percent then, at the Reserve Bank's discretion the inspection may be delayed as long as 36 months after the formation. Moreover, the requirement for an Inspection may be 1! Reserve ~Banks may, under appropriate circumstances, enlist the ~assIstance of the primary bank regulator In conducting these inspections. PAGENO="0908" 904 -7- waived in the case of a bank holding company whose bank subsidary has less than $50 million in total assets, if in the Reserve Bank's judgment, (a) the holding company's financial condition is satisfactory, and its commitments to the Board of Governors are being fulfilled, and (b) the ratio of the holding company's debt to the book value of the subsidiary bank (or banks) is less than 75 percent. Bank holding companies that have undergone a change in control an~ de novo bank holding companies organized to acquire de novo banks, are to receive a full-scope inspection within 12 months following the change in control or formation. A limited- scope or targeted inspection may be conducted in lieu of the full- scope inspection, if, In the judgment of the Reserve Bank, the financial condition of the holding company appears satisfactory. In those cases where bank holding companies fail the surveillance screen or where other information suggests the company has experienced an adverse development, an in-depth off site review will be made to determine the need for a limited- scope or targeted inspection. PAGENO="0909" IMbLL I FREQUENCY AND SCOPE OF EXAMINATIONS OF STATE MEMBER BANKS Asset Size $10 billion + $500 mm - $10 billion $100 m - $500 mu Less than $100 mm ~ating 1 or 2 Full-scope required annually (FR or Joint), Limited-scope or targeted presumed annually (FR or Joint), Full-scope required annually (FR, Joint or AEP on basis of every other year). Limited-scope or targeted when needed, Full-scope required annually (FR,Jolnt or AEP on basis of every three years). Limited- scope or targeted when needed. Full-scope required annually (FR,Joint or AEP on basis of every four years). Limited- scope or targeted when needed. 3 Full-scope required annually (FR or Joint), Annual limited-scope or targeted also required (FR or Joint), Full-scope .requi red annually (FR or Joint). Limited-scope or targeted when needed. 4 or 5. Exam required every six months, one must be full-scope, one may be limited-scope or targeted. (Both must be FR or Joint.) Exam required every six months, one must be full-scope,.one may be limited-scope or targeted. (At least one must be FR or Joint.) Special Characteristics: 1. New member banks: full-scope FR exam required before membership granted. 2. Change in control or de nOvo member bank: full-scope FR exam required within 12 months. 3. Banks that fail surveillance screen or for which other significant adverse information is received: triggers in-depth, off-site review to determine need for examination to be conducted by FR or jointly with state. Notes: 1. A full-scope examination covers all areas of interest to the Federal Reserve in depth; a limited-scope examination will review all areas of activity covered by a full-scope examination, but less intensively; targeted examinations will focus intensively on one or two activities. 2. The Alternate-year Examination Program (AEP) provides for Federal Reserve and state examinations of state member banks on alternating periods. 3. Joint examinations are conducted by the Federal Reserve and the state, simultaneously, with one joint report being prepared. Sc ci PAGENO="0910" TABLE 2 FREQUENCY AND SCOPE OF INSPECTIONS OF BANK HOLDING COMPANIES Special Characteristics: 1. BHCs formed to acquire going concerns: inspection to be conducted between the 6th and 18th months of operation; or within 36 months under specific conditions; or waived if under $50 mu with specific conditions. 2. Change in control or de novo BHCs: inspection required within 12 months. 3. BHCs that fail surveillance screen or for which other significant adverse information is received: triggers in- depth off-site review to evaluate need for limited-scope or targeted inspection. Motes: 1. A full-scope inspection covers all areas of interest to the Federal Reserve in depth; a limited-scope inspection will review all areas of activity covered by a full-scope inspection, but less intensively; targeted inspections will focus intensively on one or two activities. 2. A complex BHC is defined as one with material credit-extending nonbank subsidiaries or debt outstanding to the general public. A noncocuplex BHC is one without credit-extending subsidiaries and without public debt. 3. The frequency of inspection of noncomplex `she1l~ BHCs that are rated BOPEC 1 or 2 is based upon the ratio of parent debt to the book value of the bank's stock: a) if over 100 percent--inspect every other year; b) if 75-100 percent--inspect a 20 percent sample each year; c) less than 75 percent--inspect a 10 percent sample each year. 4. For small noncomplex BHC's, Reserve Banks should explore the possibility, under appropriate circumstances, of enlisting the assistance of the primary bank regulator in conductinq the inspection. mm~ing or 2 Comolex Full-scope reP- quired annually. Additional limited-scope or targeted presumed annually. Asset Size $10 billion + $500 uum to $10 billion $150 m - $500 m Less than $150 m Full-scope re- quired annually Limited-scope or targeted when neMeL Complex iimi too-scope required every two years. Additional limited- scope or targeted when needed. Noncomolex Conmiex ~ee Note *; Noncomplex Limited- scope required every 3 years. Full-scope required annually. Full-scope required every other year. Full-scope required annually. One limited-scope or targeted also required annually. See Mote #3 4 or 5 inspection required annually, may be limited- scope or CJIPnOCA.1 Full-scope inspection required annually. Inspection required every other year. rull-scope required annually; one limited-scope or targeted also required annually. Inspection requi red annually. Full-scope inspection required annually. Inspection requi red annually. PAGENO="0911" 907 Attachment B POLICY FOR COMMUNICATING PROBLEMS OF SUPERVISORY CONCERN TO MANAGEMENT AND BOARDS OF DIRECTORS Previously, Federal Reserve examiners and other desig- nated personnel have held a meeting with a banking organization's management and board of directors after an examination or inspection if it is a large organization or if the examination/inspection revealed that the organization had significant problems. In addition, a copy of the examination/ inspection findings has been provided to every bank examined and bank holding company inspected for review by its management and members of Its board. That policy is now being modified for the purpose of formalizing and strength- ening these traditional Federal Reserve practices for communicating the findings of examinations and inspections to the management and boards of directors of banking organizations. The new policy establishes specific criteria for determin- Ing which examination/inspection findings require follow-up meetings with boards of directors and presents guidelines for the conduct of these meetings. It also Introduces the requirements that a written summary of examination findings--separate from the complete examination or Inspection report--be distributed to each director and that senior Reserve Bank officials become more involved in communicating and presenting examination/inspec- tion findings to the boards of directors. It is intended that these initiatives will ensure that each director of a state member bank or a bank holding company considered to be a `problem" organization or identified as having a significant weakness, will clearly understand the nature and dimension of their organization's problems and the responsibilities of its board of directors to correct them. MEETINGS WITH DIRECTORS The decision to hold a meeting with the board of directors at the conclusion of a state member bank examination or a bank holding company inspection is to be determined on the basis of the organization's financial condition, its size, the type of examination/inspection conducted and other factors which, in the judgment of the Reserve Bank, indicate the need for such a meeting. To the extent possible, meetings with the board of directors of state member banks should include representatives of the state banking department. Where appropriate, meetings with the boards of bank holding companies may be held jointly with the meeting of the lead bank subsidiary's board of directors and the banks primary federal or state bank supervisor. PAGENO="0912" 908 -2- Criteria For Conducting Meetings Conditi on A meeting with the board of directors is to be held at the conclusion of any full-scope examination or Inspection in which a statemernber bank is rated CAMEL composite 4 or 5 or a bank holding company is rated BOPEC composite 4 or 5. Such meetings are also required if an organization is rated composite 3 and its condition appears to be deteriorating or has shown little Improvement since a previous examination/inspection In which it received a composite 3 rating. 1/ A meeting should also be held with all these organizations following a limited-scope or targeted examination/inspection, if deemed appropriate and desirable by the Reserve Bank. Size A meeting will be required at the conclusion of a full- scope examination/inspection of all multinational organizations and major regional organizations with assets in excess of $5 billion. Reserve Banks also are encouraged to conduct such meetings at the conclusion of a full-scope examination! inspection of regional institutions with assets in excess of $1 billion, Guidelines for Meetings It is understood that meetings with boards of directors will have to be tailored to meet the needs of each specific situa- tion. In general, meetings with the full board are to be pre- ferred, but In certain cases the Reserve Bank may determine that a meeting wit'i a committee of the board of directors, such as executive or audit committees, will serve adequately, In all cases, however, the written summary of examination/inspection findings is to be provided to each member of an organization's board of directors. 1/ Reserve Banks also are encouraged to hold a meeting at the conclusion of a full-scope examination/inspection of an organization with assets greater than $500 million rated composIte 2, if its condition appears to be deteriorating and those rated composite 3 even if showing some improvement. PAGENO="0913" 909 -3.. The Reserve Bank's presentation to the board should ordinarily be chaired by a Reserve Bank official, with the examination staff in attendance. The larger the organization or more serious its problem, the more senior should be the Federal Reserve official. In general, Reserve Bank presidents are expected to become directly involved in the supervision of multinational organizations and regional institutions with over $5 billion in assets that have been rated composite 3, 4 or 5. The president ordinarily will meet with the board of directors and may become involved, in other ways, the precise nature of which to depend on the situation. A meeting with the board of directors should include a formal, structured presentation containing a clear statement that an institution is considered a "problems Institution 1/ or about to become a problem institution if existing condTtions deteriorate. Use of slides, other visual aids, and hard copy handouts are encouraged. Information should also be presented on financial trends and peer group comparisons. The presentation should make clear the nature of problems uncovered, such as: o Deficiencies In capital, asset quality, earnings, or liquidity; o Violations of law; o Inadequacies in policies, practices and reporting systems necessary for the proper administration of the organization; o Lack of well documented lending, collection, investment and liability management policies; o Failure of management in addressing previously discussed deficiencies; o Lack of reporting systems sufficient to keep senior management and the board of directors fully informed; o Failure of the board of directors to participate in the active management of the organization. 1/ As has been long standing Federal Reserve practice, the exact - numeric rating assigned in the examination/inspection is not to be disclosed. PAGENO="0914" 910 Appendix IV STATE MEMBER BANKS 1) Informa~L Enforcement Actions 1988 50 1989 72 2) WAs 1988 13 1989 11 3) C&Ds 1988 4 1989 1 4) cMPs 1988 0 1989 1 5) Removals, Suspensions and Prohibitions 1988 N/A 1989 N/A TOTAL 152. 1For the purposes of our response to this Question, we included memorandums of understanding, corporate or board resolutions, and imposed quarterly and monthly reporting requirements, which are all forms of informal enforcement actions. PAGENO="0915" 911 INSTITUTIONS1 INDIVIDUALS TOTAL2 1) Informa~ Enforcement Actions 1988 163 0 163 1989 229 0 229 2) WAs 1988 31 6 37 1989 14 0 14 3) C&Ds4 1988 8 18 26 1989 13 0 13 4) ~MPs 1988 0 6 6 1989 3 5 8 5) Removals, Suspensions and Prohibitions 1988 N/A 16 16 1989 N/A 5 5 TOTAL 461 56 517 1"Institutions' include State member banks, bank holding companies, and foreign financial institutions. ~he total number of actions do not include orders of investigation issued by the Board pursuant to the Federal Deposit Insurance Act and the Bank Holding Company Act. 3For the purposes of our response to this Question, we included memorandums of understanding, corporate or board resolutions, and imposed quarterly and monthly reporting requirements, which are all forms of informal enforcement actions. do not include 3 Temporary Cease and Desist Orders issued in 1988 and 2 Temporary Cease and Desist Orders issued in 1989. PAGENO="0916" 912 CIVIL MONEY PENALTIES INSTITUTIONS1 INDIVIDUALS TOTAL 1988 1989 1988 1989 -$1,000 0 0 0 0 0 $1,001 - $2,500 0 0 0 0 0 $2,501 - $5,000 0 0 0 1 1 $5,001 - 2 $10,000 0 1 5 0 6 $10,001 - $15,000 0 0 0 0 0 $15,001 - $20,000 0 0 0 0 0 Over 3 $20,000 0 2 1 4 7 TOTAL 0 3 6 ~5 14 1"Institutions" include State member banks and foreign financial institutions. 2One individual paid 50 percent of an assessment. 3One individual made a partial payment and will make payments according to an agreed-upon payment schedule that will bear a rate of interest. Three individuals were assessed, but have not yet paid. PAGENO="0917" 913 BOARD OF GOVERNORS crmc Appendix V FEDERAL RESERVE SYSTEM ~ W*R~ING1aN. 0. C. 20111 SR 89-17 (FIS) August 17, 1989 TO T~ OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANX Subject: The Enforcement Provisions and Other Related Sections of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") Background The provisions of Title IX of FIRREA grant the Board of Governors, as well as the other federal financial institutions supervisory agencies, numerous new or enhanced enforcement powers over financial institutions and individuals associated with them. The staff of the Enforcement Section is in the process of preparing a training program in order to familiarize the staffs of the Federal Reserve Banks with these new or enhanced powers. However, prior to the presentation of that program, we want to bring to your attention, in a very basic manner, some of the provisions of Title IX that will affect the enforcement activities of the Federal Reserve System iu~ediately upon the effective date of FIRREA. Each of the provisions that will be described below will be discussed in greater detail during the course of the training program. The Provisions of Title IX of FIRREA In brief outline, the new or enhanced enforcement powers granted, under FIRREA, to the Board of Governors and the- new responsibilities of banking organizations (and individuals associated with1them) that are supervised by the Federal Reserve are as follows: (1) In order to simplify the numerous and lengthy references to "directors, officers, employee., agents and persons participating in the conduct of the affairs of a financial institution" contained in the enforcement statutes and to expand the banking agencies' jurisdiction over individuals associated with financial institutions, the term "institution-affiliated party" is substituted in the law eanh time there is a reference 1To the extent possible, the description Of the provisions of Title IX of FIRREA will follow the sequence of the sections in Title IX. They are not being listed in any order of importance. PAGENO="0918" 914 to one of the aforementioned individuals. Thus, the Board has enforcement powers, such as cease and desist, removal, prohibition and civil money penalty assessment authority, now over certain financial institutions and institution-affiliated parties. In addition, the term "institution-affiliated party" ~has been expanded to include attorneys, appraisers, and accountants, as well as other independent contractors, who participate in any law or regulation violation, any breach of fiduciary duty or any unsafe or unsound practice that causes (or is likely to cause) more than a minimal financial loss ~o, or a significant adverse effect. on, a financial institution. In this manner, the Board has added responsibilities for monitoring and addressing through enforcement actions, where necessary, the activities of whole new categories of persons who work with or for financial institutions subject to our regulatory jurisdiction. (2) The power to suspend and remove an institution-affiliated party who has been indicted (section 8(g) of the Federal Deposit Insurance Act (the "FDI Act")) from a state member bank has been expanded so that it now covers institution-affiliated parties associated with bank holding companies, nonbank subsidiaries of bank holding companies and foreign entities subject to th. Board's jurisdiction, such as Edge Act corporations, and certain branches and agencies. In addition, the Board's general power to suspend, remove and permanently prohibit an institution-affiliated party from a state member bank or bank hol'ding:~company (section 8(e) of the FDI Act) was expanded to cover individuals associated with the foreign entities described above, provided that the activities that give rise to the bases. for the suspension, removal, or permanent prohibition action took place in the United States. (3) The requirement that the Board initiate a cease' and desist action against a state member bank when recurrent violations of the Bank Secrecy Act and internal control deficiencies relating to compliance with that Act are uncovered 2The Board is also authorized to issue regulations further defining which individuals should be considered as institution-affiliated parties due to their participation in the conduct of the affairs of an institution. Similarly, the Board can make a determination whether a person is an institution-affiliated party due to his or her participation in the conduct of the affairs of an institution on a case-by-case basis. PAGENO="0919" 915 (section 8(s)7of the FDI Act) has been expanded to cover the same institutions described in paragraph 2 above. (4) When the Board issues a cease and desist order or a Federal Reserve Bank executes a written agreement, they may not only order the institution to "cease and desist" from its illegal activities or unsafe or unsound practices, but they can, under the law (sections 8(b) and (c) of the PD! Act), also order the entity or individual to take "affirmative action" to correct the conditions resulting from its violations or practices. Under FIRREA, the term "affirmative action" has been clarified to~ include certain enumerated powers. These now include the power to order (~) restitution or reimbursement in those instances where there was unjust enrichment or a reckless disregard for the law, (b) restrictions on growth, (~) the disposal of a loan or other asset, (d) the rescission of an agreement or a contract, and (a) the employment of a qualified officer or employee at a financial institution, who may be, at the option of the Board, subject to approval by the Federal Reserve. Under the Board's cease and desist and temporary cease and desist powers (sections 8(b) and (C) of the PD! Act), we can also now issue an order (or execute a written agreement) that places "limitations on the activities or functions" of a financial institution or an institution~affiliated party. (5) The grounds for the issuance of a temporary order to cease and desist (section 8(C) of the PD! Act) have been modified to reduce somewhat the burden on the Board. This was done by replacing the term "substantial financial loss" with the term "significant financial loss" and eliminating the modifying word "seriously" from the term "seriously prejudice the interests of the" bank's depositors. The Board now needs to determine, among other statutory factors needed in order to initiate a temporary cease and desist action, that the institution's or individual's unsafe or unsound practice or law or regulation violation is likely to cause "significant financial loss" to the institution or "prejudice" the interests of the bank's depositors. The statutory bases for the issuance of a temporary cease and desist order were also expended to authorize the issuance of such an order if the Board determines that a financial institution's books and records are so incomplete that the financial condition of the institution or the purpose for a transaction cannot be determined. (6) The statutory language relating to the removal and suspension of an institution~affiliated party (sctions 8(e)(l) and (2) of the FDI Act) have been merged and simplified. Now, the statutory bases are the same whether the Board removes or suspends an individual from an institution based on conduct at his or her present employer or based on conduct at the individual's prior place of employment. In addition, the PAGENO="0920" 916 necessity for determining that an individual's conduct caused "substantial" financial loss or "seriously" prejudiced the bank's depositors has been eliminated by the deletion of the terms "substantial" and "seriously". Title Ix of FIRREA also contains a provision that makes one banking agency's suspension, removal or prohibition order universally effective against the individual subject to the * order. That is, in the event that the Board removes an individual from a state member bank, that individual cannot work for any other financial institution that is subject to the * regulatory jurisdiction of the federal financial institutions supervisory agencies without prior approval of the agency that issued the order in the first place and the regulator of the new employer institution. Violations by any individual of his or her suspension, removal or prohibition order (e.g., the removed individual goes to work for another financial institution without the requisite agency approvals) are now punishable as a felony, with ~a potential fine of up to $1 million and a prison term of up to five years (section 8(j) of the FDI Act). A provision of Title IX of FIRREA that modifies the Board's suspension, removal and prohibition powers contemplates the issuance of a suspension, removal or prohibition order against a "corporation, firm, or other business enterprise" in addition to the issuance of such an order against an institution-affiliated party. (7) Title IX of FIRREA addresses the Stoddard problem relating to jurisdiction for removal and prohibition actions in the event that an individual leaves a financial institution prior to the initiation of the action. Now, with respect to all formal enforcement actions that the Board can take-- including cease and desist, removal, prohibition and civil money penalty assessment--the law provides that the resignation, termination of employment or separation caused by the closing of an institution will not affect the Board's enforcement powers over an individual, provided that any notice (such as a notice of intent to remove from office and of prohibition) is served on an individual before the end of a six-year period starting when he or she left the financial institution, regardless of whether or not such date occurs before, ~n or after the date of the enactment into law of FIRREA. 3The Stoddard problem related solely to jurisdiction for removal and prohibition actions. There was never any question that the banking agencies retained civil money penalty assessment jurisdiction over individuals when they left an institution prior to the date that they were served with a notice. PAGENO="0921" 917 -5- Under this provision of FIRREA, the Board basically retains enforcement jurisdiction over any institution-affiliated party that leaves an institution, voluntarily or involuntarily, so long as we initiate our cease and desist, removal, prohibition or civil money penalty assessment action within six years of the individual's departure from the institution. (8) Title IX of FIRREA includes many changes to the Board's Civil money penalty assessment authority. The statutory bases for the assessment of fines were expanded and the amounts of the potential penalties were increased. Civil money penalties4can now be assessed for a any violation of law or regulation, (b) any violation of a final cease and desist, temporary cease and desist, suspension, removal or prohibition order, (C) any violation of a condition imposed in writing by the Board in connection with the granting of an application or other request, and (d) any violation of a written agreement. The amounts of the potential fines vary. The Board can assess a fine of up to $5,000 per day for any of the violations described in the aforementioned paragraph. A fine of up to $25,000 per day can be assessed for any violation set forth above, if the violator (ó.g., the financial institution or the institution-affiliated party) recklessly engages in an unsafe or unsound practice in conducting the affairs of the institution, or an individual breaches his or her fiduciary duty, where such violation, practice or breach is part of a pattern of misconduct, causes or is likely to cause more than a minimal loss or results in pecuniary gain or other benefit for the violator. A civil money penalty of up to $1 million per day can be assessed for any violation described in the paragraph above, if the violator knowingly comitted the violation, knowingly engaged in the unsafe or unsound practice, or knowingly breached his or her fiduciary duty, and, in so doing, knowingly or recklessly caused a substantial lose to the financial institution or received substantial pecuniary gain or other bn*fit. Title IX of FIRREA also provides that the Board may seek to collect unpaid final civil money penalty assessments itself through a civil action in a U.S. District Court, rather than refer the collection matter to the Department of Justice, as was requird by the previous version of the law. 4Note that this provision is very broad. The violation of a~y law or regulation that is applicable to.a financial Thititution or an institution-affiliatd party subject to the Board's jurisdiction can expos. the institution or the individual to a potential civil money penalty. PAGENO="0922" 918 -6* The modified civil money penalty assessment provisions of Title IX of FIRREA apply with respect to conduct engaged in by any person after the date of enactment of FIRREA. There is an exception however--the increased maximum penalties of $5,000 and $25,000 per day may apply to conduct engaged in before the date of.enactment if the conduct is not already subje~tto a notice issued by the Board and the conduct occurred after the completion of the last report oT~xamination of the institution (which examination took place before the effective date of FIRREA). (9) violations of the Change in Bank Control Act can now be addressed through the same type of civil money penalty assessment proceedings that are used for all other penalty actions. That is, the requirement that an institution or individual assessed a fine for a violation of the Change in Bank Control Act be granted a full scale trial in a U.S. District Court has been eliminated. (10) The criminal penalties for violations of the Bank Holding Company Act (the "BHC Act0) were increased to $100,000 per day and to $1 million per day in the event that the violations involved an intent to deceive, defraud or profit significantly. violations of the DEC Act, which do not rise to the level of criminal offenses, can be addressed through ~ivil money penalty assessments of not more than $25,000 per day. (11) Section 19 of the FDI Act, which prohibits an individual who has been convicted of a felony involving dishonesty or a breach of trust from working for an insured bank without the Federal Deposit Insurance Corporation's approval, has been amended to increase the potential fine for a knowing violation of the section to $1 million per day or five years imprisonment. Title IX of FIRREA also provides that the criminal penalty will apply to both the individual who is employed without the appropriate approval and to the employing institution. (12) The Bank Protection Act is amended by FIRREA to eliminate the requirement that financial institutions file periodic reports concerning the installation, maintenance and operation of security devices and procedures. (13) Title IX of FIRREA adds new provisions authorizing civil money fines for the submission of inaccurate, false or misleading Call Reports and reports required by the DEC Act and 5There is an inconsistency between the Board's authority to assess fines of up to $1 million per day for violations of any law or regulation and this $25,000 limitation on the amount of fines under the BEC Act. PAGENO="0923" 919 -7- Regulation ! of the-Board of Governors. In the event that a financial institution maintains procedures that are reasonably adapted to avoid inadvertent errors and an institution unintentionally fails to publish any report or submits any false or misleading report or information or is minimally late with the report, it could be assessed a fine of up to $2,000 per day. The financial institution has the burden of proving that the error was inadvertent under these circumstances. In the event that the error was not inadvertent, a penalty of up to $20,000 per day can be assessed for all false or misleading reports or information submitted to the Board. If the submission was done in a knowing manner or with reckless disregard for the law, a fine of up to $1 million or one percent of the institution's assets can be assessed for each day of the violation. Civil money penalties for the submission of late, inaccurate, false or misleading reports or information to the Board relate only to conduct engaged in after the effective date of FIRREA. (14) Title IX of FIRREA requires that the Board publtsh and make publicly available any final order issued with respect to any administrative enforcement proceeding initiated by the Board, as well as any modification or termination of such an order. Publication of final enforcement orders can only be delayed if the Board makes a determination, in writing, that the publication of any final order would seriously threaten the safety or soundness of an insured depository institution. In the event that the Board can make such a determination, the publication of the final order can be delayed for a "reasonable time". (15) upon the effective date of FIRREA, each insured depository institution that was chartered within the last two years, all financial institutions that have undergone a change in- control within the last two years, all financial institutions that are not in compliance with the minimum capital adequacy guidelines or regulations of its federal regulator, and each financial institution that is in an otherwise troubled condition must provide 30-days prior written notice to its appropriate federal regulator before the institution can add an individugl to its board of directors or employ a senior executive officer. 6Ths banking agencies are required to issue regulations defining th. terms "troubled condition" and "senior executive officer" for th. purposes of this law. The Comittee report accompanying FIRREA admonishes the agencies that they should not interpret the term "senior executive officer" in too limited a manner. That is, it should include more than just th. president and chief executive officer. The banking agencies can also issue ~Footnots Continued) PAGENO="0924" 920 -8- The Board, and the other federal financial institutions supervisory agencies, have a 30-day period within which to review each individual's competence, experience, character and int.grity~ and, in the event that they are not acceptable, the Board or the other agencies, where appropriate, can issue a notice of disapproval of an individual. (16) The federal financial institutions supervisory agencies are required to hire a pool of administrative law judges and to develop uniform rules of procedures for all administrative proceedings within 18 months of enactment of FIRREA. (17) The aforementioned agencies are required to establish a task force to study the desirability and feasibility of delegating investigatory and enforcement authority to their regional and district offices and banks. The task force's report is due by September 30, 1990. (18) The Board, as well as the other banking agencies, will be required to submit an annual report to Congress detailing, inter alia, ~ the number of formal and informal enforcementiEEio~i~Tnitiated and completed in the past year, (b) the amount of civil money penalty assessments and the amount of unpaid fines, (C) a general description of the Board's enforcement activities, especially those related to unsafe and unsound practices and insider abuse and misconduct, Cd) the number of criminal referrals submitted to the Department of Justice, (~) the status of certain criminal referrals, and (f) the recoimnendations of the Board concerning additional legislation and resources. (19) Title IX of FIRREA reduces the correction period afforded to an insured depository institution subject to a termination of federal deposit insurance proceeding initiated by the Federal Deposit Insurance Corporation to 30 days from 120 days. The Federal Deposit Insurance Corporation is also authorized to issue a temporary suspension of deposit insurance order in the event that it determines, after consultation with the Board or the Office of the Comptroller of the Currency, where applicabl., that an insured depository institution has no tangible capital under the capital adequacy guidelines or regulations of the banking agencies. (20) All insured depository institutions that have engaged an independent auditor's services within the past two years an required to transmit to the institution's auditor (5) a copy of the institution's most recent report of condition, (b) a copy of the institution's most recent report of examination, (C) (Footnote Continued) regulations defining under what extraordinary circumstances the 30-day notice period can be waived. PAGENO="0925" a copy of any memorandum of understanding or written agreement in effect during the period of the audit, and Cd) a report on any other federal or state enforcement actions against the institution or any institution-affiliated party. (21) Title IX of FIRREA contains a "whistleblower" protection provision. Under this provision, no insured depository institution may discharge or discriminate against an employee because he or she provided information to a banking agency or to the United States Attorney General (e.g., the Department of Justice, a U.S. Attorney's Office or the Federal Bureau of Investigation) about a possible law violation by the institution-or one of its officers, directors or employees. In the event that an institution does discharge or discriminate against such an employee, he or she may sue the institution in U.S. District Court, and the individual must also file a copy of his or her lawsuit with the appropriate banking agency. (22) The federal financial institutions supervisory agencies may, with the concurrence of the United States Attorney General, pay a reward for the provision of information that leads to the recovery of a civil money penalty of in excess of $50,000 (or the forfeiture of property in-excess of such an amount). The reward may not exceed 25 percent of the fine or forfeitur. or $100,000, whichever is less. Summary As described above, Title IX of FIRREA contains numerous new or enhanced enforc.ment powers, as well several significant new responsibilities for the Board and the financial institutions that it supervises. While all of these powers and responsibilities are important, we believe that the following enforcement action-related provisions of Title IX should be highlighted for your staff on an expedited basis since they will become effective as of the date of enactment of FIRREA: (1) All nsw final enforcement orders will have to be made public. (2) All new directors and senior executive officers (and possibly all promotions to the senior executive officer level) at financial institutions that were chartered within the last two years (if the institutions are state member banks), underwent a change in control within the last two years, have inadequat, capital levels, or are otherwise in a troubled condition will have to file a notice form with the Board and await a 30-day review period before they can be appointed to the board of directors or retained as a senior executive officer. (3) The enforcement powers of the Board are applicable to a broader range of individuals who are associated with the financial institutions that the Board supervises--these include attorneys, appraisers, and accountants. PAGENO="0926" 922 - (4) The Board's removal and prohibition powers have been clarified in order to enable the continuation (or initiation) of such actions ag~dnat persons who have left the financ.ial institvtiona chete they ci~agc~d in wrongdoing or who were associated with railed state member banks or defunct bank holding companies. (5) Cease and desist orders and written agreements can contain provisions requiring the employment of qualified officers rand employees, who can be subject to the prior approval of the Federal Raserve, and they can also contain provisions that place limitations on the functions and activities of an institution or an institution-affiliated party. (6) The bases for the assessment of civil money penalties has been greatly expanded to cover, inter alia, all violations of law and regulation. (7) The potential civil~money penalty assessment against a financial institution or an institution-affiliated party has been increased subatantially--up to $1 million a day under some circumstances. In the event that you have any questions concerning the new or enhanced enforcement powers of the Board, please contact me at (202) 452-2620. Herbert A. Biern Assistant Director PAGENO="0927" 923 SUBCOMMITTEE NOTE: APPENDIX VI, REFERENCED IN THE FEDERAL RESERVE' S BOARD'S LETTER, CONTAINS RESPONSES FROM THE FDIC AND THE OTS CONCERNING TITLE IX (ENFORCEMENT PROVISIONS), WHICH WERE INCLUDED IN THEIR WRITTEN TESTIMONY, AND IS THEREFORE NOT REPRINTED HERE. SUBCOMMITTEE NOTE: APPENDIX VII, REFERENCED IN THE FEDERAL RESERVE' S BOARD'S LETTER, CONTAINS THE PROPOSED BOARD RULE IMPLEMENTING SECTION 914 OF THE FIRREA ("AGENCY DISAPPROVAL OF DIRECTORS AND SENIOR EXECUTIVE OFFICERS OF CERTAIN DEPOSITOR INSTITUTIONS"), [REGULATION Y; DOCKET NO. R-0686], HAS BEEN PRINTED IN THE FEDERAL REGISTER, AND IS THEREFORE NOT REPRINTED HERE. (IT IS AVAILABLE FOR REVIEW IN THE SUBCOMMITTEE'S OFFICE.) SUBCOMMITTEE NOTE: APPENDIX VIII, REFERENCED IN THE FEDERAL RESERVE'S BOARD' S LETTER, CONTAINS THE FINAL ENFORCEMENT ORDERS ISSUED AGAINST TEE NATIONAL BANK OF GREECE & MORTGAGE BANK OF GREECE (WITH ATTACHMENTS), THE BANK OF NEW ENGLAND CORPORATION, BANK DAGANG NEGARA (JAKARTA, INDONESIA, AND LOS ANGELES AGENCY), AND BEN CAMPBELL (FORMER OFFICERS AND DIRECTOR OF FLOWER MOUND BANK, TEXAS). THIS MATERIAL HAS NOT BEEN PRINTED IN THIS TRANSCRIPT BUT CAN BE OBTAINED DIRECTLY FROM THE FEDERAL RESERVE BOARD OR REVIEWED IN THE SUBCOMMITTEE'S OFFICE. PAGENO="0928" 924 Appendix IX LOCAL BANK FRAUD WORKING GROUPS [AS REPORTED BY THE FEDERAL RESERVE SYSTEM] Federal Reserve Bank of Boston Membersh I p FRB of Boston - Thomas E. Cimeno, Jr. U.S. Attorney 0CC OTS, Boston FDIC FBI IRS/C1D U.S. Secret Service Contact Thomas E. Cimeno, Jr. Senior Vice President Federal Reserve Bank of Boston 600 Atlantic Avenue Boston, MA 02106 Accomplishments o Seminar for bank examiners on banking crimes. Federal Reserve Bank of New York Membership FRB of New York - Thomas C. U.S. Attorney, S.D.NY U.S. Attorney, D.NJ OTS, New York FBI, New York IRS/Cl D Manhattan District Attorney NY State Banking Department Contact Bernadette P1cc in inn I Office of Thrift Supervision One World Trade Center Floor 103 New York, NY 10048 Baxter, Jr. U.S. Attorney, E.D.NY 0CC FD I C FBI, New Jersey New Jersey Attorney General NJ Department of Banking PAGENO="0929" 925 -2-- Accomplishments o Created a clearinghouse for information to be shared among the participants of the working group. Federal Reserve Bank of Philadelphia Membership - Philadelphia Group FRB of Phi iadeiphia - Michaei E. Coiilns U.S. Attorney U.S. Customs Service U.S. Postal Service U.S. Secret Service FBI iRS/CID 0CC FDIC OTS, Pittsburgh PA Department of Banking Contact Gary S. Glazer, Assistant United States Attorney Eastern District of Pennsylvania 3310 UnIted States Courthouse 601 Market Street Philadelphia, PA 19106 Accomplishments o U.S. Attorney's Office sponsored a training program on financial Institution fraud. Federal Reserve Bank of Cleveland No group has been estabiished, but there have been discussions regarding formation of a group with: Ann Rowland, Assistant United States Attorney Northern District of Ohio 1404 E. 9th Street, Suite 500 Cleveland, OH 44114-1748. Federal Reserve Bank of Richmond No groups have been established, but there have been discussions regarding formation of groups in Richmond, Vlrglnlaand Baltimore, Maryland. 30-830 0 - 90 - 30 PAGENO="0930" 926 -3- Federal Reserve Bank of Atlanta Membership - Miami Group FRB of Atlanta - Marion P. Rivers, iii FDIC 0CC OTS, Atlanta FBI Florida Dept. of Banking FDIC, Dept. of Liquidation FDIC, Washington Representative Contact Edward F. X. Gilbride, Esq. FDIC 1700 G. Street, N.W. Washington, D.C. 20552 Accomplishments o Prioritized bank fraud cases for U.S. Attorney. o One day training program for U.S. Attorney's Office and FBI in Miami. Federal Reserve Bank of Chicago Membership - Chicago Group, ~Bank Regulators' Forum~ FRB of Chicago u.s. Postal Service U.S. Attorney FBI 0CC OTS, Chicago FUIC illinois Commissioner of Bank and Trust Cos. Contact Joseph C. Tomaino, Postal inspector U.S. Postal Service Chicago, IL 60669 - Accompi ishments o Facilitated coordination between reguiators and law enforcement. o Successfully incorporated Order of Permanent Prohibition issued by Board of Governors into plea agreement. PAGENO="0931" 927 -4- Membership - Springfield, IL Group, `Financial institutions Regulations and Enforcement Group (FIRE)" FRB of Chicago U.S. Postal Service U.S. Attorney FBI 0CC 0TS, Chicago FDIC Illinois Commissioner of Bank and Trust Cos. Contact L. Lee Smith, Assistant United States Attorney Central District of Illinois Post Office Box 375 Springfield, IL 62705 Accomplishments o The group has only recently been formed. Future Groups o Discussions are under way In Indianapolis, Indiana and Milwaukee, Wisconsin regarding formation of working groups In these'citles. Federal Reserve Bank of Minneapolis No working groups have been estabi ished. Federal Reserve Bank of Kansas City Membership - Northern District of Oklahoma, Tulsa, Oklahoma FRB of Kansas city - Stephen McBride, Robert Toler U.S. Attorney IRS/C1D FBI FSLIC FD1C Division of Liquidation FSLIC Liquidation 0CC NCUA State Bank Commissioner OTS, Topeka Contact The Honorable Tony M. Graham United States Attorney 3600 U.S. Courthouse 333 West Fourth Street Tulsa, OK 74103 PAGENO="0932" 928 -5-- Accompi ishments o Prioritized bank fraud cases and discussed documentation requirements for prosecuting cases. o Establishing data base for all individuals who are suspected of bank fraud. Membership - District of Nebraska, Omaha, Nebraska FRB of Kansas City - Stephen McBride U.S. Attorney FDIC Nebraska State Police Nebraska Dept. of Banking Nebraska Attorney General U.S. Postal Service 0CC OTS, Topeka iRS/CID U.S. Secret Service NCUA Contact The Honorable Ronald D. Lahners United States Attorney Post Office Box 1228, DTS Omaha, NE 68101 Accomplishments o Prioritized bank fraud cases. Membership - District of Kansas, Wichita. Kansas FRB of Kansas City - Stephen McBride or Wilmer Uiiman U.S. Attorney, Wichita U.S. Attorney, Topeka FBi 0CC FDIC OTS, Topeka Kansas Attorney General Kansas Banking Dept. Kansas Bureau of investigation Kansas Dept. of Credit Unions Contact The Honorable Benjamin L. Burgess, Jr. United States Attorney 306 U.S. Courthouse 401 North Market Street Wichita, Kansas 67202 - PAGENO="0933" 929 -6- Accomplishments o Fast track letters have been sent to financial I nst I tut Ions. o Prioritized bank fraud cases. Membership - District of Colorado, Denver, Colorado FRB of Kansas City - John Yorke u.s. Attorney 0CC FDIC OTS, Topeka FBI iRS/CiD U.S. Secret Service U.S. Postal Service Colorado Attorney General Colorado Banking Dept. Contact The Honorable Michael J. Norton United States Attorney 1961 Stout Street, Suite 1200 Denver, CO 80283 Accomplishments o Fast track letters have been sent to financial Inst I tut Ions. Membership - District of New Mexico, Albuquerque, New Mexico FRB of Kansas City - Stephen McBride FRB of Dallas - Dean A. Pankonlen U.S. Attorney 0CC FD1C OTS, Dallas FBI IRS/CID U.S. Secret Service U.S. Postal Service New Mexico Attorney General New Mexico Banking Dept. Contact The Honorable William L. Lutz United States Attorney Post Office Box 607 Albuquerque, NM 87103 PAGENO="0934" 930 -7- Accomplishments o Fast track letters have been sent to financial Institutions. Federal Reserve Bank of Dallas Membership - Northern District of Texas, Dallas, Texas FRB of Dallas - Dean A. Pankonien U.S. Attorney U.S. Department of Justice FBI U.S. Secret Service occ OTS, Dallas FDIC lRS/CID U.S. Postal Service contact Richard A. Flshkln U.S. Department of Justice 1801 Lamar Street Dallas, TX 75202 Accomplishments o Use of plea bargain provisions that require signing of prohibition orders with the appropriate regulatory agency. Membership - Southern District of Texas, Houston, Texas FRB of Dallas - Dean A. Pankonien U.S. Attorney U.S. Department of Justice FBI U.S. Secret Service occ OTS, Daiias FDIC Contact Albert T. Ratiiff, Assistant United States Attorney P.O. Box 61129 Houston, TX 77208 Accomplishments o Fast track program has been implemented. PAGENO="0935" 931 -8- Membership - District of New~ Mexico, Albuquerque, New Mexico (See Federal Reserve Bank of Kansas City) Federal Reserve Bank of San Francisco - Membership - Central District of California FRB of San Francisco - Robert Johnson U.S. Attorney FBi iRS/C1D 0CC FDIC RTC 0TS, San Francisco CA Dept. of Savings and Loans Contact Teree A. Bowers, Assistant United States Attorney United States Courthouse 312 North Spring Street Los Angeles, CA 90012 Accomplishments o Purpose statement of working group has been produced. o Agencies have the opportunity to request priority hand I Ing of cases. Membership - Northern District of California, San Francisco, California FRB of San Francisco - Merle E. Borchert FBI 0CC FDIC OTS, San Francisco CA Dept. of Savings and Loans California Attorney General Contact No one has been designated. Accomplishments o Two day training program for 30 staff members of the seven participating agencies. PAGENO="0936" 932 APPENDIX 4.-Th~c~ STATE SUPERVISORY AGENT'S REPORTS AND OTHER MATERIAL CONCERNING UNIVERSAL SAVINGS ASSOCIATION, HOUSTON, TX TO THE HOUSE SUBCOMMITTEE ON COMMERCE, CONSUMER & MONETARY AFFAIRS A CHRONOLOGY OF EVENTS LEADING TO THE INVESTIGATION OF UNIVERSAL SAVINGS ASSOCIATION HOUSTON, TEXAS KENTON R. FICKES, JR. 6510 LAS BRISAS HOUSTON, TEXAS 77083 PAGENO="0937" 933 TEXAS SAVINGS & LOAN DEPARTMENT SUPERVISORY AGENT PROGRAM In May 1977 the Texas Savings & Loan Act was amended to allow the Savings & Loan Commissioner to place a state chartered savings association under voluntary supervisory control" when the asso- ciation was being operated in an unsafe or unsound manner or when the association was insolvent or about to become insolvent. Typically the association Board of Directors agreed to sign an agreement restricting their activities or to allow a Supervisory Agent to be placed in the institution on a full-time or part-time basis. In cases where an association would refuse to enter into a voluntary agreement, the Commissioner would inform the Board of Directors of the association in question that a hearing would be held to review the condition of the association. This action would usually bring about the signing of the voluntary agreement. Most Supervisory cases in 1977 - 1983 were the result of an institution becoming insolvent due to a deterioration in positive interest spreads - the basic `lending long and borrowering short' problem which the Garn-St Germain Act was to correct through expanded investment powers. Most of these Supervisory cases were typically resolved through a "Supervisory Merger and Acquisiton' of the insolvent institution by a more healthy institution somewhat like the Southwest Plan. At the height of the Texas thrift crisis the Savings & Loan Department had over forty agents in place. Some agents had as many as three insitutions under some form of supervision. For most of the four and one-half years that I was an agent, I usually had at least two institutions under my supervision. I have had seven institutions under my supervision and in my opinion the supervisory agent program has saved several millions of dollars for the taxpayers. When the FDIC moved into action last year under the Presidents new plan to solve the thrift crisis, many of the FDIC personnel were surprised to find many of the institutions already under some form of control. UNIVERSAL SAVINGS ASSOCIATION BACKGROUND Universal Savings was chartered in 1969 as Universal Savings Association of Jacinto City (a small community East of Houston). For many years Universal served the needs of the cities of Jacinto City, Galena Park, Pasadena and far east Houston provid- ing funds for home mortgages and consumer goods. In 1984 as part of a change of control, Universal became Universal Savings PAGENO="0938" 934 Association of Houston. The new principal owners of the associa- tion after this change of control were the following: Name Shares Occupation Clarence F. Kendall 50,000 Attorney Roy Barringer 11,000 Lumber Business E. R. Baylor 4,310 Veternarian Tom L. Godwin 4,310 Veternarian G. Ray Miller 32,000 Investor E. Wayne Smith 10,000 Unknown Kenny Wamble 4,310 Insurance James D. Purdom 38,088 Association President Martin L. Schehin 37,007 Veternarian (Became Association Chairman) Michael Blanchard 4,660 Association Sr. V.P. Robert A. Hargrave 8,621 Electrical Contractor (Schehins Cousin) Gary Hester 8,621 Service Corporation Vice President Edward Taylor 8,621 Paving Contractor The above ownership is not all inclusive but includes the principal operators of the association and those most responsible for the damage to the institution. In April 1985 the association went through another change of control with Schehin, Purdom, Blanchard, Hargrave and Taylor owning control of the Association. At all times, Schehin, Purdom and Blanchard where officers and directors. Hargrave was a highly paid consultant for the the associations service corporation and Taylor was a major borrower. All of these individual were the principal users of the various toys of the association - Boats, Airplanes, Condo's and Beach Houses, Hunting Leases and various women on the association payroll or expense accounts. When I first arrived at Universal in April of 1987, the association had already been under supervision with a resident Supervisory Agent in place as of November 1986. Prior to the placement of our Supervisory Agent the association had been under a State Supervisory Agreement since February 1986. This agreement limited the ability of the association to conduct many 2 PAGENO="0939" 935 ~--a~tivities including the origination of loans. On January 15, 1987 the association became subject to a FHLBB Consent Agreement which placed additional restrictions on Universal. Upon my entry into the association, it appeared that a certain amount of suspected fraud had occured within the institution perpetrated by both insiders and borrowers. In the months while the association was under the supervision of the former agent, the association had been allowed to run out of control with virtually no collection efforts on delinquent loans. Moreover, the officers and directors were continiung to spend large sums of money on expenses and "perks" which should have been dis- continued. Numerous red flags" had appeared priorto my arrival in various litigation matters which indicated fraudlent activity on the part of many borrowers. Some of these borrowers included attorneys with whom the association owners had substantial involvement. Allegations surrounding nominee relationships in loans and allegations of kickbacks were coming out in civil litigation. To my knowledge, none of this activity was investigated by the attorneys or by the former supervisory agent. The pricipal law firm of the association was Jenkins and Gilchrest of whom I am sure you have heard of. REMOVAL OF OFFICERS AND DIRECTORS It was obvious to the then Deputy Savings & Loan Commissioner, L.A. - Anderson (now deceased) and to the Savings & Loan Com- missioner, Lin Bowman that the removal of the officers and direc- tors had become necessary. Mr. David Bradley who at that time was the associations Supervisory Agent with the Federal Home Loan Bank of Dallas (FHLB) was aware that corrective action was needed, but he indicated to me that grounds for removal were necessary and that our former ~agent Bruss Billingsley had failed to provide any information which could be used for that purpose. 1 immediately set out to conduct an investigation concerning the affairs of the owners and officers of Universal who were still working within the association in order that the FHLB would have the information necessary to bring about a removal, of those individuals. This report was completed at the end of May 1987 and forwarded to Mr. Bradley of the FHLB. A copy of that report is included with this letter. The principal officers and owners were directed to come to Dallas for a meeting on June 2, 1987 where they were asked to sign removal orders. This meeting was conducted by Mr. Bradley and by Mr. Peter Frandsen'whO was then with the FHLBB Office of Enforce- ment. Mr. Frandsen is-now with the Department of Justice. On June 5, 1987 Mr. Bradley and his analysist Mr. David Friemuth came to the administrative offices of Universal in Houston and met with Mr. Paul Giddens who was the President of the Associa- tion. Mr. Giddens was formerly with Meridian Savings of Arling- PAGENO="0940" 936 ton Texas and prior to Meridian, Mr. Giddens was a Senior Vice President with Vernon Savings in Dallas. In this meeting Mr. Bradley asked Mr. Giddens for his resignation. Mr. Giddens departed the Association within one hour after this meeting. THE NETWORK During the Summer and Fall of 1987 we continued our investiga- tion into over 200 loan transactions. In addition to our review of loan records we conducted public record searches to determine common ownership or linked ownership of partnerships and corpora- tions. Much of our work was aided by other State Supervisory Agents around the state who were in other institutions. They were able to provide information on other transactions which involved the same borrowers many of whom were owners of other institutions. By the end of October 1987 we had determined that Universal Savings and its owners were involved in Quid Pro Quo transactions which involved over fifteen other banks and savings associations and their respective owners. Those institutions are as follows: Sunbelt Savings - Dallas, Texas Independent American Savings - Dallas, Texas Meridian Savings, Arlington - Texas (Between Dallas & Fort Worth) First Metropiex Savings - Irving, Texas North Park Savings - Dallas, Texas Majestic Savings - Dallas, Texas Sentry Savings - (Siaton) Lubbock, Texas Charter Savings - Corpus Christi Liberty Bank - Houston, Texas Park 45 National Bank - Spring, Texas Ranchers Savings - Johnston City, Texas First Federal Savings of Laredo - Laredo, Texas Merit Banc Savings - Sisbey Texas (Main office in Houston) Texas Banc Savings - Conroe Texas First City Savings - Irving Texas Waller County National Bank - Wailer, Texas American Savings - Lake Jackson, Texas Goiiad Savings - Goiiad, Texas (Name change to Union Savings) Republic Bank Garland - Garland, Texas Home Federal Savings - Deming, New Mexico STATE PROSECUTION In August 1987 the Texas Savings & Loan Department received word that Governor Clements wanted the department to forward copies of all criminal referrals to local District Attorney's located in the area of the involved institutions. As part of this process, we hired a local criminal attorney to review selected transac- tions to determine if they warranted a referral. We also dis- cussed how much information we could disclose in the referral without violating the Right to Financial Privacy Act. 4 PAGENO="0941" 937 The attorney which we hired concured with our opinion as to bank fraud in most of the transactions and made some suggestions as to other information which we needed to document our cases. He then reviewed each of our referrals and prepared case reviews as to violations of state law. These case reviews were then presented to the localHarris County District Attorney. No action has ever been taken by the Harris County District Attorney's office to my knowledge. REQUIRED NOTICE TO AGENCIES - FHLBB FORM 366 Federal Home Loan Bank Board (FHLBB'~and FSLIC regulations re- quire all institutions to report any suspected fraudlent transac- tion to the FBI, the nearest U. S. Attorney's office, the Federal Home Loan Bank, and the FHLBB Office of Enforcement. On October 29, 1987 I forwarded ten Criminal Referrals to the Federal Home Loan Bank Board Office of Enforcement in Washington. On November 19, 1987 I forwarded seventeen Criminal Referrals to the local offices of the FBI and the U.S. Attorney in Houston and an additional seven referrals to the FHLBB Office of Enforcement in Washington. In Mid October of 1987 I learned that the DallasTask Force was using IRS revenue agents in the review of transactions under investigation. I discussed this situation with John Mitchell of the Dallas Bank who was assigned to investigations. Mr. Mitchell told me that it might be a good idea to contact the IRS to see if they were interested. I had already determined that in some of the transactions where land flips had occured that the oppor- tunity existed that some of the particpants might not have paid any income taxes on their short-term capital gains. In late October I contacted the Internal Revenue Service Criminal Investigation Division in Houston and subsequently met with Mr. David Sargent who was then a Special Agent and has since become a Group Manager. Mr. Sargent and I discussed the situation at Universal. A few months later it would become obvious that Mr. Sargent already had knowledge of who some of the individuals were that were involved with Universal Savings. In early December 1987 I discussed involving the IRS with our General Counsel in Austin who agreed that if I felt that income tax evasion was involved in any of the transactions that it should be reported. On December 22, 1987 I forwarded 21 criminal referrals to the IRS-CID. The week between Christmas and New Years I arranged a meeting at our offices with the FBI and the IRS-CID. The US Attorney's office declined to attend. Our meeting was conducted on January 7, 1988. The following individuals attended: Ken Fickes, Supervisory Agent, Texas Savings & Loan Dept. Jim King, Special Agent in Charge of Fraud Section, FBI Phil Taylor, Special Agent, FBI 5 PAGENO="0942" 938 Robert Dulem, Special Agent IRS-CID David McDermott, Special Agent/Group Manager, IRS-CID, David Sargent, Special Agent, IRS-CID. The above meeting began at approximately 10:00 AM and ended around 3:00 PM. Of greatest concern to both agencies was the integrity of the files at Universal and the possibility of the files becoming `trashed' upon receivership. David Sargent stated that he had worked a bank case a few years previous and the FDIC liquidators closed the bank in the middle of their investigation. After the bank was closed it took them several weeks to obtain possession of all of the bank records. Jim King stated that in his experience, after a receivership the records become difficult to work with because there is no way to determine what records were present at the time the crime occured or was discovered and what had been added or removed later by a receiver. He said that this often became a problem later in trial because the defendants always allege that the documents were present at the time the transaction occured and that they should not be held accountable for documents lost by careless receivers or employees. It was decided that some effort on the part of the Universal Staff would be required to preserve the records in a manner which would be useful to investigators after a receivership. We determined the best way to accomplish this was to establish a set of certified documents as of a date certain on each suspect transaction and have them centrally located under a security system. During the above meeting, Mr. King stressed that he had limited resources and that many of our transactions with the largest losses were complicated paper transactions and that many of our easy cases were too small to warrent taking agents off of other cases at the present time, unless we had witnesses who had direct knowledge of the events which had occured. Mr. King left us with the impression that he was not really interested in Universal and that it would be a long time before his staff could get to our case. When the meeting concluded, Mr. Mc Dermott informed us that the IRS was still interested in our case. To my surprise, in mid February I was contacted by the FBI. On February 22 and 23, 1988 I met with FBI Special Agent Ken Hayes concerning our referrals. From March 1 through April 30 I made several follow-up calls with Agent Hayes on the phone. He in- dicated that they had other priorities at the moment and could not devote any time to Universal at the time. Our dialogue with the IRS-CID continued for several weeks and on April 25, 1988 I held another meeting with Dave Sargent, Bob Dulem, and Dave McDermott with IRS-CID. During this meeting we discussed our progress in copying and securing files and dis- cussed the possibility of a grand jury investigation. Our PAGENO="0943" 939 greatest concern was possession of records for our internal use and the custody issue concerning grand jury records. In at least one case of a Dallas area thrift, the records were left with the institution and space was provided for investigators at the institution to work on the records. It was decided that we would attempt to work out a similar situation at Universal since we had available space in our office building. During the above meeting we learned that the IRS-CID would be investigating potential income tax evasion and that any bank fraud discovered during the course of their investigation would be turned over to the US Attorney for their use in other investigations or for prosecution. In mid May we were contacted by David Sargent and told that we would be able to keep our records and they would use our certi- fied copies which had been made and also utilize our extra office space for his people. We began preparing a location on the second floor of our building which was vacant. We provided a security system, telephones, furniture, a cop~'ing machine, a personal computer, filing cabinets, and coffee service. On June 26, 1988 I was contacted by Ms. Ellen Rodriquez with IRS- CID and informed that a Federal Grand Jury Subpoena had been prepared and would be delivered in few days. On June 28, 1988 I was contacted by FBI Special Agent Ron Davenport. He informed me that the FBI had opened our investigation again and the he had been assigned the case. I informed him that we expected a Grand Jury Subpoena at any moment from the IRS and that he would have to coordinate his effort with them as it was my understanding that the IRS would also be investigating bank fraud. He stated that it was the FBI's job to investigate bank fraud and that the IRS was not responsible for that type of investigation. I informed agent Davenport that we would fully cooperate with his agency but that before we could turn over any records to him that I would need to discuss the matter with Assistant US Attorney John Smith. After a brief discussion with Mr. Smith I contacted Agent Davenport and we agreed to meet the following afternoon. Shortly after my conversation with Agent Davenport, IRS-CID Special Agent Ellen Rodriquez arrived at Universal and served us with our Federal Grand Jury Subpoena. When we were served our subpoena we noticed that it was dated June 21, 1988. It became obvious to us that the FBI had found out about the subponea and had decided to move back into action on the Universal case. The subpoena covered all records of Universal from January 1, 1983 through the date it was issued. During the month of July we learned that Agent Davenport would be allowed to work on the case with the IRD-CID agents and had been placed on the 6e list for disclosure purposes. In mid August the IRS-CID agents and Agent Davenport took-up residence in the offices at Universal Savings. Almost immediately we began the task of going over the many transactions on which referrals had PAGENO="0944" 940 been filed. Additionally, we began the task of acquiring additional accounting detail such as deposit slips, wire transfer requests, and copies of checks. At the end of October, Grand Jury Subponeas were delivered to several individuals, corporations, banks and savings & loans. I do not have direct knowledge of who received suponeas, but based on my knowledge of the number of referrals and the named individuals, partnerships, corporations, etc., I would estimate that over two hundred suponeas were involved. Shortly after the subponeas went out, the former Chairman of the Board of Universal, M. L. Schehin was arrested for assaulting federal officers. It seems that that the IRS-CID and the FBI has placed several potential targets under survellance in order to ensure that records would not disappear. Mr. Schehin was ulti- mately tried and his trial ended in a hung jury. He later plead guilty to a lesser charge and received three years probation and a fine. By the end of 1988 Universal had filed fifty-four criminal referrals. It is my understanding that Universal has more referrals than any other institution in Houston and possible in Texas. The losses due to fraud in these referrals are as small as $10,000.00 to over $4,000,000.00. Allegations concern the following: Money Laundering, nominee loans, misallocations, bank bribery, racketeering, conspiracy to defraud, and income tax evasion. PARALLEL CIVIL PROCEEDINGS Parallel to the above criminal investigation, Universal had a significant amount of civil discovery occuring in many lawsuits. By the end of September 1987 we were already aggressively pursuing all delinquent borrowers in some manner, usually through the court system since many would refuse to make arrangements for some sort of repayment. Of critical importance was discovery on each loan transaction as well as the ultimate destination of any loan proceeds which were not properly used as funded. In many cases we were able to track most funds to the personal accounts of the borrowers. Much of this discovery ceased upon the entry of the FDIC representatives in March 1989. In May 1988 we filed a civil RICO suit against one of Universal's largest borrowers and his known associates as well as the former owners and officers of Universal. Almost immediately, the three principal owners of Universal took Chapter 7 bankruptcy. As a result of the bankruptcies, civil discovery in this lawsuit came to a halt. We have obtained judgements against two of these owners through the bankruptcy courts totalling over $40 million. One individual, H. L. Schehin, continues to battle us in court. 8 PAGENO="0945" 941 In addition to the above lawsuit, Universal has several other major law suits which involve civil RICO charges, both as against borrowers, and against the association by borrowers. As you can imagine, for almost every attempted foreclosure on a property, we have had some form of lender liability lawsuit filed against the Association. Or in the alternative, we have had some form of "Failure of Consideration" argument in suits on unsecured loans or diversion of loan proceeds at the request of or with the permission of a loan officer or senior officer with Universal. Most of these "diversions" of course were not documented as being approved. Of greatest importance in our civil discovery were depositions of defendants. Depositions and all documents taken in civil dis- covery were immediately turned over to the IRS-CID and the FBI for use in their work. I know from my experience in litigation that depositions can often be used for purposes of impeachment in both the civil and criminal venues and often prove helpful in each. We have found depositions taken of our borrowers by other lenders who have made them loans, and have found them useful in determining how a series of loans were related or tied together. Much of our civil discovery has been useful in the bankruptcies of Universal's former owners as well as the borrowers themselves. FDIC/RTC INVOLVEMENT On March 9, 1989, the FDIC as managing agent for the FSLIC took over Universal Savings as Conservator. On the first day of Conservatorship, representatives of the IRS-CID met with the Managing Agent and explained the custody of the records of Universal Savings and the procedures for using those records. In late March, additional representatives of the FDIC came into Universal to review records to determine the value of certain assets. At the time of their entry into Universal, I personally explained the procedures for the use of any files of Universal. The person in charge of the asset review team was Mr. Jerry Bumbalo and he informed me that they were "Agents of the U. S. Government" and that they would not be bound by the terms underwhich the records could be used. While I was out of the office, Mr. Bumbalo's team proceeded to use the records without following established proce- dures and breached the chain of custody of the Grand Jury re- cords. It took our employees several days to inventory and restore the records to their normal sequence. As a result of Mr. Bumbalo's actions, he received a Special Audience' with the IRS- CID who explained the procedures that his team would follow in reviewing our records. Although the representatives of the FDIC (and now the RTC) seem interested in obtaining judgements against borrowers, there seems to be little interest in obtaining any civil discovery by which to enforce the judgement.s against assets which have been hidden. Most major borrowers including former thrift owners, will not be PAGENO="0946" 942 so foolish to have easily discoverable assets such as land holdings. They will have converted their assets into cash, or transfered ownership of land or other real estate into the hands of nominees or into family trusts. The FDIC and the RTC have significant power over borrowers claims in court when it comes to obtaining judgements, but the judge- ments are useless unless recovery is attempted. The use of post judgement depositions and discovery must be utilizied where possible especially with high profile borrowers and thrift operators. I am aware that the RTC is conducting searches for cash assets at institutions under its control as well as the control of the FDIC, but this is not a complete solution to finding hidden wealth. In my experience, chasing through a financial institutions records is a piecemeal approach to following the money. Their is no substitute for having a borrower come forth in civil discovery with his financial records, especially if under a court order to produce those records. I am sure that many people feelthat if a borrower or thrift operator is indicted for a crime, then what is the point of getting a judgement or obtaining recovery against a judgement. Well, obtaining an indictment is not the same as having someone in jail. It's a long road from indictment to trial and ultimate conviction. Additionally, it might be helpful if the government in it's criminal case could show that the defendant "caused harm" to the institution. What better way to show harm than to have a judgement against the borrrower. - CURRENT SITUATION AT UNIVERSAL The IRS/CID and the FBI moved out of Universal's offices the first week of June. It is my understanding that the FBI is acting on its own now without the full cooperation of the IRS. The current FBI agent assigned to Universal is relatively green" when it comes to white collar crime investigations. One transac- tion that I have followed for the last two years has been ex- plained to this agent by the IRS and by me, but he still has some trouble understanding it completely, despite his accounting ex- perience. I have enclosed a copy of the criminal referral for your review as well as a chart which I have competed. I ceased being the State Supervisory Agent for the association on May 24, 1990 when the association went through a `pass through" receivership. Mr. John Lame, the RTC Managing Agent told me that I could continue as employee of the association and that he wanted me to write a narrative description of all of the knowledge that I had of the association and it's involvement with other institutions around the state. Additionally, he informed me that I was not to work with the IRS/CID and FBI agents any longer. This last directive of Mr. Lames seemed totally out of line since I am essentially a Grand Jury witness and have been 10 PAGENO="0947" 943 needed to help explain certain transactions and turnover documents gained through civil discovery. On June 14, 1990 Mr. Lame terminated my employment with the association even though he assured me that I could continue to be an employee until final resolution of the association. The association went through receivership on June 22 and it's deposits and some assets were sold to Channelview Bank of Channelview, Texas. All employees have been retained as tem- porary employees of Channelview Bank including an association officer who is the subject of a Criminal Referral filed by the RTC. Channelview is being reimbursed for this cost by the RTC. I had hoped that I would be present when the Association was acquired in order that I would have an opportunity to become an employee of the acquirer. 11 PAGENO="0948" 944 H. L. SCHEHIN, TRUSTEE 71 ACRE TRACT SALE TO BANNER, INC. (SENTRY SAVINGS) GENERAL BACKGROUND In February 1986, a partnership, -`consisting of M. L. Schehin, James Purdom, Robert Hargrave, and Michael Blanchard, sold 71 acres of land in White Settlement (near Fort Worth, Texas) to Banner, Inc. Banner was a wholly-owned subsidiary of Sentry Savings Association of Slaton, Texas (with headquarters located in Lubbock, Texas). Records obtained in the bankruptcy of M. L. Schehin from Meridian Savings Arlington, Texas indicate that the sale was conducted for the account of TCJV, Inc. rather than a partnership (see below). In return for Banner's purchase of the above land, Schehin, Purdom, Blanchard and others at Universal Savings obligated Universal to participate in several "Quid Pro Quo" transactions which served no economic purpose to Universal, benefited Sentry to some degree and defrauded both institutions for the benefit of the owners of the respective institutions. An accounting of those transactions follows below. CHRONOLOGY On July 10, 1985, a partnership consisting of M. L. Schehin, James Purdom, Robert Hargrave and Michael Blanchard acquired 71 acres of raw land in White Settlement, Texas (just West of Fort Worth). Majestic Savings Association in Dallas provided the financing in the form of a $5.7 million loan. Participants in the Majestic loan were First Metroplex Savings, First City Sav- ings, and Ranchers Savings. Universal had other relationships with these associations and their owners. At the time of this purchase, Schehin, Purdom and Blanchard were either officers or directors of Universal Savings Association ("USA") and/or First Universal Service Corporation (FUSC), a wholly-owned subsidiary of Universal. Robert Hargrave was a consultant with FUSC and Schehin's cousin. Prior to the above, in June 1985, Universal granted a fourth-lien wrap note to the South Arlington Associates Joint Venture for $550,000.00. A partner in this venture was C. J. "Joe" Smith who was then Senior Vice President of Majestic Savings. A review of the file indicates that these funds went to the venture partners and was nothing more than a "Quid Pro Quo" transaction to entice Majestic to fund Schehin's loan. The records of Universal indicate that Association Vice President San Pillion was the loan officer for South Arlington Associates Joint Venture during 1986. PAGENO="0949" 945 Addit~~lty~~jn August 1987 i~wa~~g~rned that M. L. Schehin had obligated Ur~iversal/FUSC to particf~ate in a project created by Majestic known as the Downs At Hillcrest in Dallas. Majestic made demand upon Universal to desolve the partnership. Universal had no record of participating in the partnership although Universal's records indicated that it had been considered. A copy of an agreement signed by Schehin was forwarded to Universal by Majestic, however no record of this agreement existed at Universal. Universal had a significant involvement with the owners of Sentry Savings and with borrowers of Sentry at the time of the purchase of the 71 acre tract and prior to the sale of the tract to Banner. The following is a brief summary of those relationships: Universal Loan Commitments Issued: Commitment ~, Issued 12 Amount Funded 7/10/84 Contempo Contract Corp. $1,200,000 Yes Morris Olquin, Gary 4/8/86 McMillan, & Jerry Powell (1) 40-85 Rochester Investments (2) 480,000 Yes 4/2/85 44-85 Paul Rochester Investments 2,000,000 No 126-85 Three Commitments to Sentry 3,000,000 Yes Savings to Purchase loans made to Rochester 143-S5 Paul Rochester - To purchase 950,000 Yes a Universal REO 162-85 Barry Gillingwater, Co. (3) 4,000,000 No 170-85 Amarillo Coulter Road Roy Ryan & Jerry Powell 3,500,000 No (1) Powell was a 55% owner of Sentry Savings (2) Rochester was a major borrower of Sentry and Universal (3) Barry Gillingwater has been convicted of defrauding Sentry Savings and was given a three year sentence. Paul Rochester Investment Company and other Rochester Companies and partnerships involved Robert Bowden and Walter L. Fagan. Fagan was a borrower and "consultant" at Universal during this time period. In addition to the above commitments, on November 8, 1984 a loan was made to Paul Rochester Investment Company for the purchase of The Chevy Chase Apartments in Austin. The seller was Joe Russo PAGENO="0950" 946 of Houston who was also the owner of Ameriway Savings in Houston. The loan amount was $1,875,000.00 and the term was for sixty days. An extension was granted on January 7, 1985 until March 7, 1 985. On the day previous to the above transaction (November 7) TCJV, Inc. (Schehin, Purdom, Blanchard, & Hargrave) purchased an 89 acre tract of land in Galveston County, Texas from Wells Stewart the former Chairman of Stewart Title Company for approximately $4 million and immediately sold (flipped) the land to Paul Rochester Investment Company - Central for approximately $4.5 million. It is believed that TCJV, Inc. made a profit of approximately $300,000.00 from this sale. The closing agent for this transac- tion was Commonwealth Land Title Company - Rudy Groom Escrow Agent. The commitment above issued in July 1984 for the benefit of Messers Olquin, McMillian and Powell was renewed and extended several times. A review of the Universal credit file indicates that all three gentlemen were to guarantee the loan when funded to Contempo Contract Corp. Mr. Jerry Powell was President of Contempo. The Contempo commitment was funded on April 8, 1986 but the note and deed of trust are dated February 20, 1986. The earnest money contract between Banner, Inc. (Sentry) and M. L. Schehin is dated February 14, 1986 with fundings on March 24 and May 7, 1986. A letter dated February 12, 1986 signed by Universal Vice President San Pillion and Messers Powell, Olquin and McMillan changes the borrower name from Contempo to Olquin and McMillan - Mr. Powell had been dropped as a quarantor. When the Contempo commitment funded, it paid off a previous loan at Home Federal Savings & Loan of Deming, New Mexico. A review of the file indicates that the loan at Home Federal was guaran- teed by Olquin, McMillan and Powell and was delinquent. Home Federal had a previous relationship with Universal at this time. They. had purchased a $2,000,000.00 particpation interest in the ~Remington Apartments located in Killeen, Texas. The reason for the change in the borrower status of Powell cannot be found in the file. It is believed that he was dropped as a guarantor for the -sole purpose of~ in~uc.ing him to help Schehin, etal. in their sale of the 71 acre tract. The records of Univer- sal Savings indicate that Association Vice President San Pillion was the loan officer for this committment and actually issued the committment. A review of the Amarillo Coulter Road, Inc. committment file also indicate Ms. Pillion was the loan officer on this loan as well. In February 1986, the Schehin partnership sold the 71 acre acre tract to Banner, Inc. in Lubbock, Texas. Banner was a wholly owned subsidiary of Sentry Savings. The sales price of the property was $10,200,000.00 which generated an approximate $4,000,000 profit to the Schehin partnership. PAGENO="0951" 947 It is~ believed that as an inducement for Sentry to buy the 71 acre tract, Schehin agreed to buy real estate owned from Sentry and Banner. The properties consisted of the following: Sixteen partially completed condo units in Horseshoe Bay, north of Austin, Texas. The sales price was $2.8 million with $800,000 in cash paid as a down payment and a Sentry loan for $2 million. The $800,000 cash came from the sale proceeds of the 71 acre purchase; Townhouses known as the Windsong properties located in Dallas County. The sales price was approximately $897,000 with $397,000 in cash paid as a down payment and closing costs and a new loan with Sentry for $500,000. The $397,000 came from the sale proceeds of the 71 acre purchase; The purchase of $1,180,000 in delinquent notes from Sentry savings with cash; Max Webb, then a partner of FUSC in several real estate developments, was asked by Schehin to act as a nominee borrower in the condo purchase. In conversations with Webb, he is unclear as to the reason Schehin could not sign for himself. Webb stated to Universal officers that he went to Sentry in Lubbock with Schehin and others, including Rudy Groom, who acted as closing and escrow agent. Webb has stated that he "waited outside" while negotiations were finalized and was only asked to join the meeting when he was needed to sign the loan papers. Additionally, Webb stated that the Sentry officers present in those negotiations and loan closing knew that he (Webb) was only a nominee for Schehin. And, in fact, Schehin gave Sentry a copy of the letter to Webb that stated that Webb was a nominee for Schehin. The purchase of the Windsong properties was conducted through Malcolm Wells as the nominee for Schehin also. In a 1987 State Court case styled Sentry Savings Association vs. Malcolm Wells, Mr. Wells counter-claimed in that lawsuit the he was acting as M. L. Schehins "nominee" and attached a copy of his indemnity agreement signed by M. L. Schehin to his court pleading. At the time of Mr. Wells participation in this transaction, he was also a borrower at Universal Savings. The exchange of cash for the delinquent loans was conducted through an entity known as RJH, Inc. This entity was incor- porated just prior to the conveyance of these notes by Charles Botschen, an attorney and an associate of Rudy M. Groom. The loans acquired were secured by oil and gas leases, an oil drilling rig and a commercial office building in Lubbock, Texas. The person who signed the documents for RJH and who is believed to be the only officer of RJH is Vernon Daniels, a former Universal borrower and consultant and close personal friend of M. L. Schehin and Rudy Groom. PAGENO="0952" 948 The initial funding for this entire transaction began on March 23, 1986 with a wire transfer of $2,000,000.00 to Commonwealth Land Title Company - Rudy M. Groom Escrow Agent to an account at Univeral Savings. Subsequent to this transfer, $1,890,000.00 was wire transfered to an account styled TCJV, Inc. at Park 45 National Bank in Spring, Texas. The owners of TCJV, Inc. according to financial statements, Secretary of State records, and abandoned records at Universal Savings, are M. L. Schehin, James Purdom, Robert Hargrave and Michael Blanchard. The registered agent is Rudy M. Groom. A second disbursement occured on May 7, 1986 of $2,496,190.00 from Sentry via wire transfer to the Commonwealth Land Title Company - Rudy Groom Escrow Agent account at Universal Savings to the attention of Association Vice President San Pillion. From Grooms account a check was written to N. L. Schehin in the same amount as the wire transfer and it was deposited to the account of TCJV. Inc. at Park 45 National. On May 8, 1986, M. L. Schehin wrote a check from the TCJV, Inc. account at Park 45 National in the amount of $1,180,000.00 payable to RJH, Corp. and this check was deposited at Park 45 National Bank. Universal Savings has had substantial litigation with Vernon Daniels concerning the fraudlent convveyance of an oil well. The oil well in question was owned by First Universal Service Corporation and was conveyed by M. L. Schehin to Daniels forno consideration. This transaction was not disclosed on the books and records of the Service Corporation. During the course of discovery in that litigation, Universal had learned of the above transfer of funds to RJH but Mr. Daniels claimed not to have been involved with the use of the account of RJH for the first two months of it's existence. According to Daniels, during the first two months that the account was opened the only person who had access to the RJH account was Charles Botschen. According to Daniels, the funds that were deposited into the RJH account were wired back to Sentry for the purchase of the delinquent notes. The delinquent notes purchased by RJH, Corp, were executed by either James R. Alexander or Western & Southern Corporation (W&S). W&S was owned by Alexander, Paul Rochester, Walter Fagan, Robert Bowden, Robert Lochner and potentially by Jerry Powell. Records obtained from Sentry through civil discovery indicate that Banner and Sentry had an ownership position in W&S. Rochester, Fagan, Bowden and Lochner all had loans with Universal and with Sentry. Universal is presently suing~ N. L. Schehin in his bankruptcy to bar discharge of Universal's claims against him. In the dis- covery involved with that litigation, Universal has learned that in addition to the above transactions, an additional transaction occured -which involved Schehin, Sentry and Charter Savings. As part of the above transaction, Schehin purchased from PAGENO="0953" 949 Sentry/Banner a property commonly referred to as the Austin 101 or the Panther Street property. This was approximately nine acres of land located at Panther Street and Lamar Ave. in Austin, Texas. At one time, Sentry had an appraisal on this property in the amount of $4,200,000.00 which is approximately the amount that they had invested in the property. Documents obtained from Sentry indicate that Sentry obtained a letter from~the appraiser recertifing the value at $4.2 million. According to Ms. Teresa Caswell who was employed by Sentry and who participated in these `transactions, Mr. Schehin was to take this property out of Sentry and obtain financing elsewhere. Mr. Schehin approached Charter Savings of Corpus Christi, Texas who would only finance $2.5 million of the purchase amount'. Sentry made a second and third lien on this property in the amount of $2,005,000.00 which basically took them out of their own proper- ty. One million of this amount was funded when the the Charter loan closed in April, and the additional amount was "funded" in late May. THE END RESULT OF THE TRANSACTION The 71 acre transaction started February 14, 1986 with the ilign- ing of the earnest money contract and was completed in June 1986. It is believed that throughout the entire transaction, Rudy M. Groom and his associates acted as a conduit to give the appear- ance that all of the transactions were seperate transactions in order to avoid regulatory scrutiny. If the sale were completed on the basis of a simple exchange of assets and a cash outlay, the underlying values of the assets could be challenged, es- pecially with the case of the delinquent notes totalling $1,180,000. The use of cash coming back through what appeared to be an unrelated conduit gave the appearance of propriety to the transactions. Records obtained by the RTC from Park 45 National Bank for the TCJV, Inc. account show checks written to Schehin, Purdom, Blanchard and Hargrave for amounts in excess of $200,000.00 each. Additionally, a check was written to Ms. Pillion in the amount of $5,000.00. When asked abount the check written to her, Ms. Pillion stated that she received the funds as compensation for assisting Schehin, etal. in the transaction. She also stated that she had failed to report this money on her income tax return for 1986. She stated that she had to file an amended return in early 1989 to correct this problem (after the IRS investigation began). PAGENO="0954" H, L. OC000IN TRUSTEE TM RAMMER, INS. 31 Mc. ORMUT AUSTIN 101 PROPERTY (PANTHER STREET - AUSTIN) SALE TO H. L. SCHEHIN ON APRIL 30 1906 52, 500, oôo .00 NOTES SUNSEQUENTLY FORECLOSED NO NJ)), INC. WELLS OPERATED NY CMV OPERATING (Veroos Diem). MARCN 23, 19MM O 2 000 000 WIRED TO COMMONWEALTR LANI( TIIIE CO. RUDY GROOM, ESCROW ACCOONT A1~ UNI(IERSAL SAVINGS A550. $1,090,000.00 WIRED TO TCJV ACCOUNT RESULT OF TRANSACTION 1. Schehio gets $1.8 mu in Rash. 2. Schehis gets oil A gas leases H drilling rig 3. Sentry assuses the note at Majestic Saciogs for 55 oil. 4. Sentry rids itself of 59.3 eli of REO in default with oo loss (March 23, 19H6) - - > $2 MILLION DOWNPAYHENT Jo SC))E))IN FINANCES PURCHASE AT C))ARTER SAVINGS. S2,500,00.OO 02 395,450.00 -------- (Sale proceeds) 700.00 ToE EOC))ANGE OP ASSETS MAO WORN °NOHINOE° FOR M. L. SC)(E))IN, TRUSTEE Marc), 20, l9M6 PURCHASE OF CAPE T000ACE CONDOS 2 MILLION "NEW" LOAN FRON SENTRY SRO3 987.00 DOOR PAYMENT FROM RANIER, INC. P))RC))ASE PONDS HALCOLR WELLS "NOMINEE FOR 0. L. SC)(E)81H TRUSTEE Se teober a 19MG PURCHASE OF WINDSOIS PROPERTIES $500 000 "NEW LOAN" FROM SENTRY $397,060.00 DOWN FAY8)ENT A ESCROWS MAY 7, 1986 WIRE TRANSFER OF 5 2,496,190 TO ONIVRSAL SAVINGS ASSOCIATION FURThER CREDIT TO COMMONWEALTH LAND TITLE CO. RUDY 5. OROOM ESCROW AGENT ACCOUNT NO. IN-1LO028-M MC. (VERNON DANIELS) MAY H, 19R6 ChECK PAOANLE TO 0. L. SC))EOIN, TRUSTEE S2,49c M86.W0 C))ECE DEPOSITED PAGENO="0955" 951 SOUTH ARLINGTON ASSOCIATES JOINT VENTURE South Arlington Associates Joint Venture ("SAAJV") was a venture created by Charles E. Belew, C. J. "Joe' Smith and Clifford Dale Schaffer. Belew is a Dallas real estate broker, Smith was President of Majestic Savings until it was placed into an FSLIC receivership in 1988 and Schaffer was owner and President cf Sunbelt Asset Management Cc.rpc'rat ion. Sunbelt has nc direct ties tc: Sunbelt Savings on the surface but who knows. Universal Savings made SAAJV a fourth lien wrap loan as follows: Lien 4 Lien 3 Lien 2 Li~n 1 Universal Savings loan to South Arlington Associates : June 4, 1985 for $1,560,000 Loan from Sherwood Blount to South Arlington Associates I on March 27, 1985 in the amount of $1,199,136.70. Loan from Freedom Financial to Sherwood Blount c.n March 27, 1985 in the amount of $975, 000.00. Loan from Spindlet.:'p Savings to Freedom Financial on March 27, 1985 in the amount of $963,865.00. A review cf the file indicates that the initial contact for this i:::an was made in early Mar':h of 1985 or possible in late February cf that same year. During this time M. L. Schehin and others ass::.: iated wi~h Universal were negotiating with Majestic Savings (Smith's assot'iatiorL) for a $5.4 million loan on a property in North Fort W~th. Schehin's loan was funded on July 9, 1985. The loan to SAAJV was funded on June 4, 1985 and the settlement statement indicates the following disbursements: $ 100,000.00 to Sherwood Blount as Principal $ 363,810.00 to Sunbelt Asset Management Corp. (Sháffers Company) PAGENO="0956" 952 A review of the file indi':ates that the sales price of the subject property was $3.00 per square foot on approximately 11 acres of land for an indicated price cf approximately $l,4~0,00O. The contract between SAAJV and SIcunt called for a down payment cf 257.. which would have been approximately the same amount as the ~um paid to Sunbelt Asset Management Corp. for a payoff on an "Unsecured Lien" Universal's note was in the -amount cf s1,56o,ooc:~ and $501,995.00 was disbursed to the title company for funding. The lc'an appears tc' h'ave been `:`ver funded since the underlying liens total- ed $1, 199,000 and c'ver funded in the amount of approximately $ 1 64, 000. 00. PAGENO="0957" APPENDIX 5.-FBI's MAY 23, 1990, SUBMISSION OF RESPONSES, REQUESTED BY SUBCOMMITTEE To SUPPLEMENT THE RECORD U.S. Department of Justice Federal Bureau of Investigation Ofliceofthe Director Washington. D.C. 20535 May 23, 1990 RECEIVED Honorable Doug Barnard, Jr. nit Chairman `,,vI. Subcommittee on Commerce, Consumer and Monetary Affairs COMMERCECONSUMERAND Committee on Government Operations MONETARYAFFAIRS SUBCOMMITTEE House of Representatives Washington, D.C. 20515 Dear Mr. Chairman: In your letter dated April 18, 1990, you requested responses to several follow-up questions from Associate Deputy Director Revell's testimony at your March 20th hearing on financial institution fraud and embezzlement matters. I have attached our responses to those questions. Your continuing support of the FBI in your oversight of bank fraud matters is greatly appreciated. Director Enclosure (953) PAGENO="0958" 954 A. Additional Data on fraud and embezzlement referrals ai~---~ matters 1. According to the March 14th testimony, as of late February 1990, there were approximately 21,150 referrals and complaints alleging financial institution F&E, which were currently unaddressed. Please (a) specify. the exact total and (b) break this data down, showing for each FBI division total numbers of Ci) all such referrals and (ii) such referrals by loss categories. CATEGORIES Under $25,000 $25,000 to $99,999 $100,000 to $499,999 $500,000 to $999,999 $1 million and over TOTAL SAVINGS ASSOCIATIONS 5950 667 160 47 CREDIT UNIONS _____ 354 42 27 151 4 202 3 234 430 21,147 FIELD DIVISION ALBANY ALBUQUERQUE ANCHORAGE ATLANTA BALTIMORE BIRMINGHAM BOSTON BUFFALO CHARLOTTE CHICAGO CINCINNATI CLEVELAND COLUMBIA 24 3 193 442 69 3 0 57 0 87 0 132 (a) Number of Unaddresséd Referrals and Complaints As of February 1990 BANKS 11,342 1,780 389 TOTAL 17,646 2,489 576 169 6,993 62 13,724 (b) (i) NUMBER OF UNADDRESSED REFERRALS AND COMPLAINTS BY FBI DIVISION AS OF FEBRUARY 1990 TOTAL UNADDRESSED 0 PAGENO="0959" 955 FIELD DIVISION TOTAL UNADDRESSED DALLAS 26 DENVER 2 DETROIT 0 EL PASO 29 HONOLULU 0 HOUSTON I 205 INDIANAPOLIS 0 JACKSON 12 JACKSONVILLE 3 KANSAS CITY 78 KNOXVILLE 0 LAS VEGAS 0 LITTLE ROCK 0 LOS ANGELES 16,424 LOUISVILLE 0 MEMPHIS 150 MIAMI 17 MILWAUKEE 4 MINNEAPOLIS 0 MOBILE 0 NEW HAVEN 0 NEW ORLEANS 3 NEW YORK 1,785 NEWARK 611 NORFOLK 0 OKLAHOMA CITY 0 OMAHA 0 PHILADELPHIA 9 PHOENIX 72 PITTSBURGH 0 PORTLAND 0 RICHMOND 89 SACRAMENTO 0 SALT LAKE CITY 0 SAN ANTONIO 20 SAN DIEGO 0 SAN FRANCISCO 0 SAN JUAN 111 SEATTLE 476 SPRINGFIELD 0 ST LOUIS 1 TAMPA 10 WMFO 0 Total 21,147 -2- PAGENO="0960" 956 UNADDRESSED SAVINGS AND LOAN REFERRALS AND COMPLAINTS BY FIELD DIVISION BY LOSS CATEGORY AS OF FEBRUARY 1990 $0 $25,000 $100,000 $500,000 to to to to $1 million FIELD OFFICE $24,999 $99,999 $499,999 $999,999 and over Albany 0 0 0 0 0 Albuquerque 14 0 0 0 0 Anchorage 0 0 0 0 1 Atlanta 24 1 0 0 0 Baltimore 41 0 0 0 0 Birmingham 2 0 0 0 0 Boston 0 0 0 0 0~ Buffalo 0 0 0 0 0 Charlotte 13 1 1 1 13 Chicago 0 0 0 0 0 Cincinnati 28 1 0 0 0 Cleveland 0 0 0 0 0 Columbia 12 0 0 0 0 Dallas 0 3 1 1 2 Denver 0 0 0 0 0 Detroit 0 0 0 0 0 ElPaso 4 1 0 0 0 Honolulu 0 0 0 0 0 Houston 16 4 12 5 15 Indianapolis 0 0 0 0 0 Jackson 3 0 0 0 0 Jacksonville 0 0 1 0 0 Kansas City 6 0 0 0 2 Knoxville 0 0 0 0 0 LasVegas 0 0 0 0 0 Little Rock 0 0 0 0 0 Los Angeles 5549 617 68 9 11 Louisville 0 0 0 0 0 Memphis 9 0 0 0 0 Miami 0 1 3 0 3 Milwaukee 1 0 0 0 0 Minneapolis 0 0 0 0 0 Mobile 0 0 0 0 0 NewHaven 0 0 0 0 0 Newark 167 2 1 9 96 New Orleans 0 0 1 0 0 New York 14 21 70 22 24 Norfolk 0 0 0 0 0 Oklahoma City 0 0 0 0 0 Omaha 0 0 0 0 0 Philadelphia 0 0 0 0 0 Phoenix 8 2 0 0 2 Pittsburgh 0 0 0 0 0 Portland 0 0 0 0 0 -3- PAGENO="0961" 957 UNADDRESSED SAVINGS AND LOAN REFERRALS AND COMPLAINTS BY FIELD DIVISION BY LOSS CATEGORY AS OF FEBRUARY 1990 $0 $25,000 $100,000 $500,000 to to to to $1 million FIELD OFFICE $24,999 $99,999 $499,999 $999,999 and over~ Richmond 5 0 0 0 .0 Sacramento 0 0 0 0 0 Salt Lake City 0 0 0 0 0 SanAntonio 0 5 2 0 0 BanDiego 0 0 0 0 0 San Francisco 0 0 0 0 0 SanJuan 25 6 0 0 0 Seattle 9 1 0 0 0 Springfield 0 0 0 0 0 St.LoUiS 0 0 0 0 0 Tampa 0 1 0 0 0 WMFO 0 0 0 0 0 Total 5950 667 160 47 169 UNADDRESSED BANK REFERRALS AND COMPLAINTS BY FIELD DIVISION BY LOSS CATEGORY AS OF FEBRUARY 1990 $0 $25,000 $100,000 $500,000 to to to to $1 million FIELD OFFICE $24,999 $99,999 $499,999 $999,9!9 and over Albany 0 0 0 0 0 Albuquerque 8 1 0 0 0 Anchorage 0 0 1 0 1 Atlanta 162 6 0 0 0 Baltimore 388 0 0 0 0 Birmingham 56 0 0 0 0 Boston 0 2 1 0 0 Buffalo 0 0 0 0 0 Charlotte 14 3 6 0 1 Chicago 0 0 0 0 0 Cincinnati 55 1 0 0 0 Cleveland 0 0 0 0 0 Columbia 112 1 0 0 0 Dallas 0 10 7 1 1 Denver 2 0 0 0 0 Detroit 0 0 0 0 0 ElPaso 20 1 0 2 0 -4- 30-830 0 - 90 - 31 PAGENO="0962" 958 UNADDRESSED SAVINGS AND LOAN REFERRALS AND COMPLAINTS BY FIELD DIVISION BY LOSS CATEGORY AS OF FEBRUARY 1990 $25,000 $100,000 to to FIELD OFFICE ______ $99,999 ~ _______ Richmond 0 0 Sacramento 0 0 Salt Lake City 0 0 San Antonio 5 2 San Diego 0 0 San Francisco 0 0 San Juan 6 0 Seattle 1 0 Springfield 0 0 St. Louis 0 0 Tampa 1 0 WMFO 0 0 Total 667 160 $0 to $24,999 5 0 0 0 0 0 25 9 0 0 0 0 5950 $500,000 to _$9 99,999 0 0 0 0 0 0 0 0 0 0 0 0 47 $1 million and over 0 0 0 0 0 0 0 0 0 0 0 0 169 UNADDRESSED BANK REFERRALS AND COMPLAINTS BY FIELD DIVISION BY LOSS CATEGORY AS OF FEBRUARY 1990 $0 $25,000 $100,000 $500,000 to to to to $1 million FIELD OFFICE $24,999 $99,999 $499,999 $999,999 and over Albany 0 0 0 0 0 Albuquerque 8 1 0 0 0 . Anchorage 0 0 1 0 1 Atlanta 162 6 0 0 0 Baltimore 388 0 0 0 0 Birmingham 56 0 0 0 0 Boston 0 2 1 0 0 Buffalo 0 0 0 0 0 Charlotte 14 3 6 0 1 Chicago 0 0 0 0 0 Cincinnati 55 1 0 0 0 Cleveland 0 0 0 0 0 Columbia 112 1 0 0 0 Dallas 0 10 7 1 1 Denver 2 0 0 0 0 Detroit 0 0 0 0 0 ElPaso 20 1 0. 2 0 -4- PAGENO="0963" 959 UNADDRESSED BANK REFERRALS AND COMPLAINTS BY FIELD DIVISION BY LOSS CATEGORY AS OF FEBRUARY 1990 $0 $25,000 $100,000 $500,000 to to to to $1 million FIELD OFFICE $24,999 $99,999 $499,999 $999,999 and over Honolulu 0 0 0 0 0 Houston 100 3 27 5 14 Indianapolis 0 0 0 0 0 Jackson 9 0 0 0 0 Jacksonville 1 0 1 0 0 Kansas City 55 6 6 0 1 Knoxville 0 0 0 0 0 LasVegas 0 0 0 0 0 Little Rock 0 0 0 0 0 Los Angeles 8762 974 86 12 9 Louisville 0 0 0 0 0 Memphis 123 8 1 0 0 Miami 0 3 1 4 2 Milwaukee 3 0 0 0 0 Minneapolis 0 0 0 0 0 Mobile 0 0 0 0 0 NewHaven 0 0 0 0 0 Newark 320 9 0 0 0 New Orleans 0 0 0 0 0 New York 496 710 236 126 32 Norfolk 0 0 0 0 0 Oklahoma City 0 0 0 0 0 Omaha 0 0 0 0 0 Philadelphia 5 3 1 0 0 Phoenix 53 4 1 0 0 Pittsburgh 0 0 0 0 0 Portland 0 0 0 0 0 Richmond 73 2 8 0 0 Sacramento 0 0 0 0 0 Salt Lake City 0 0 0 0 0 San Antonio 0 11 2 0 0 SanDiego 0 0 0 0 0 San Francisco 0 0 0 0 0 SanJuan 69 9 2 0 0 Seattle 456 7 1 0 0 Springfield 0 0 0 0 0 St.Louis 0 0 0 0 0 Tampa 0 6 1 1 1 wMPO 0 0 0 0 0 TOTAL 11,342 1,780 389 151 62 -5-- PAGENO="0964" 960 UNADDRESSED CREDIT UNION REFERRALS AND COMPLAINTS BY FIELD DIVISION BY LOSS CATEGORY AS OF FEBRUARY 1990 $0 $25,000 $100,000 $500,000 to to to to $1 million FIELD OFFICE $24,999 $99,999 $499,999 $999,999 and over Albany 0 0 0 0 0 Albuquerque 1 0 0 0 0 Anchorage 0 0 0 0 0 Atlanta 0 0 0 0 0 Baltimore 13 0 0 0 0 Birmingham 11 0 0 0 0 Boston 0 0 0 0 0 Buffalo 0 0 0 0 0 Charlotte 3 0 0 0 1 Chicago 0 0 0 0 0 Cincinnati 2 0 0 0 0 Cleveland 0 0 0 0 0 Columbia 6 0 1 0 0 Dallas 0 0 0 0 0. Denver .0 0 0 0 0 Detroit 0 0 0 0 0 ElPaso 1 0 0 0 0 Honolulu 0 0 0 0 0 Houston 4 0 0 0 0 Indianapolis 0 0 0 0 0 Jackson 0 0 0 0 0 Jacksonville 0 0 0 0 0 KansasCity 1 1 0 0 0 Knoxville 0 0 0 0 0 LasVegas 0 0 0 0 0 Little Rock 0 0 0 0 0 Los Angeles 292 31 3 1 0 Louisville 0 0 0 0 0 Memphis 8 1 0 0 0 Miami 0 0 0 0 . 0 Milwaukee 0 0 0 0 0 Minneapolis 0 0 0 0 0 Mobile 0 0 0 0 0 NewHaven 0 0 0 0 0 Newark 6 1 0 0 0 New Orleans 0 0 2 0 0 NewYork 1 7 21 3 2 Norfolk 0 0 0 0 0 Oklahoma City 0 0 0 0 0 Omaha 0 0 0 0 0 Philadelphia 0 0 0 0 0 -6- PAGENO="0965" 961 UNADDRESSED CREDIT UNION REFERRALS AND COMPLAINTS BY FIELD DIVISION BY LOSS CATEGORY AS OF FEBRUARY 1990 $0 $25,000 $100,000 $500,000 to to to to $1 million FIELD OFFICE $24,999 $99,999 $499,999 $999,999 and over Phoenix 1 1 0 0 0 Pittsburgh 0 0 0 0 0 Portland 0 0 0 O~ 0 Richmond 1 0 0 0 0 Sacramento 0 0 0 0 0 Salt Lake City 0 0 0 0 0 SanAntonio 0 0 0 0 0 SanDiego 0 0 0 0 0 San Francisco 0 0 0 0 0 SanJuan 0 0 0 0 0 Seattle 2 0 0 0 0 Springfield 0 0 0 0 0 St.Louis 1 0 0 0 0 Tampa 0 0 0 0 0 WMPO 0 0 0 0 0 TOTAL 354 42 27 4 3 -7- PAGENO="0966" 962 A. 2. we are specifically requesting that the overall data on total numbers of pending FBI F&E matters, provided to the subcommittee on March 14, be broken down for each FBI division, as follows: Please specify (a) the number of pending open financial institution F&E matters with losses (i) from $25,000 to $99,999, (ii) from $100,000 to $499,999, (iii) from $500,000 to $999,999, and (iv) $1 million and over; and (b) the number of pending failed institutions as to which there is an FBI investigation (breaking down the 530 figure). PENDING SAVINGS AND LOAN INVESTIGATIONS - BY FBI DIVISION AS OF FEBRUARY 1990 $25,000 $100,000 $500,000 TO TO TO $1 MILLION FBI DIVISION $99,999 $499,999 $999,999 AND OVER ALBANY 4 6 2 0 ALBUQUERQUE 6 1 1 4 ANCHORAGE 0 0 0 0 ATLANTA 7 2 6 5 BALTIMORE 1 2 0 0 BIRMINGHAM 3 5 0 1 BOSTON 8 8 2 5 BUFFALO 0 0 0 0 CHARLOTTE 12 2 0 2 CHICAGO 12 4 1 10 CINCINNATI 3 2 1 1 CLEVELAND 3 3 1 1 COLUMBIA 5 4 0 0 DALLAS 13 18 4 57 DENVER 5 7 1 12 DETROIT 5 6 0 1 ELPASO 4 3 3 4 HONOLULU 4 3 0 0 HOUSTON 5 15 1 25 INDIANAPOLIS 3 0 0 0 JACKSON 6 2 0 5 JACKSONVILLE 3 2 1 5 KANSAS CITY 9 4 0 4 KNOXVILLE 1 2 1 0 LASVEGAS 0 3 0 0 LITTLEROCK 2 3 3 9 LOS ANGELES 10 27 15 36 LOUISVILLE 3 0 0 2 MEMPHIS 5 1 0 3 MIAMI 8 7 3 12 MILWAUKEE 3 2 0 2 MINNEAPOLIS 4 2 " 8 -8- PAGENO="0967" 963 4 0 10 7 5 0 1 3 2 1 1 3 2 14 1 20 2 1 4 8 1 2 4 3 245 0 0 3 3 2 2 1 2 2 0 2 0 0 2 1 4 1 6 1 0 1 1 3 1 84 5 0 9 5 7 1 10 5 3 7 0 3 1 8 2 22 1 13 1 3 0 1 3 1 325 FBI DIVISION MOBILE NEW HAVEN NEW ORLEANS NEW YORK NEWARK NORFOLK OKLAHOMA CITY OMAHA PHILADELPHIA PHOENIX PITTSBURGH PORTLAND RICHMOND SACRAMENTO SALT LAKE CITY SAN ANTONIO SAN DIEGO SAN FRANCISCO SAN JUAN SEATTLE SPRINGFIELD ST. LOUIS TAMPA WMFO Total FBI DIVISION ALBANY ALBUQUERQUE ANCHORAGE ATLANTA BALTIMORE BIRMINGHAM BOSTON BUFFALO CHARLOTTE CHICAGO CINCINNATI CLEVELAND COLUMBIA $25,000 $100,000 $500,000 TO TO TO $1 MILLION $99,999 $499,999 $999.999 AND OVER 3 1 3 6 4 1 4 3 6 3 5 1 0 5 4 8 0 9 1 3 4 0 4 2 237 PENDING BANK INVESTIGATIONS BY FBI DIVISION AS OF FEBRUARY 1990 $25,000 $100,000 $500,000 TO TO TO $1 MILLION $99.999 $499,999 $999,999 AND OVER 34 15 9 7 18 3 2 0 2 1 4 8 68 48 13 9 41 21 7 5 22 14 1 1 48 46 10 27 26 6 5 3 49 32 5 12 97 64 15 18 25 17 1 8 38 16 6 4 37 12 3 5 -9- PAGENO="0968" 964 $25,000 $100,000 $500,000 TO TO TO $1 MILLION FBI DIVISION $99,999 $499,999 $999,999 AND OVER_ DALLAS 78 77 22 55 DENVER 42 38 6 20 DETROIT 68 26 2 6 ELPASO 6 5 1 4 HONOLULU 3 7 0 0 HOUSTON 47 13 2 12 INDIANAPOLIS 43 31 8 4 JACKSON 17 10 0 1 JACKSONVILLE 28 20 10 5 KANSAS CITY 28 30 5 15 KNOXVILLE 24 11 0 3 LAS VEGAS 21 6 1 1 LITTLE ROCK 18 5 2 5 LOS ANGELES 50 66 28 58 LOUISVILLE 21 13 2 7 MEMPHIS 34 22 3 11 MIAMI 43 47 7 19 MILWAUKEE 37 19 4 3 MINNEAPOLIS 39 53 8 10 MOBILE 10 4 2 1 NEWHAVEN 49 29 5 8 NEW ORLEANS 37 35 8 23 NEW YORK 98 54 15 54 NEWARK 44 35 8 18 NORFOLK 7 6 0 0 OKLAHOMA CITY 51 43 8 22 OMAHA 27 39 7 11 PHILADELPHIA 71 39 10 14 PHOENIX 5 22 4 8 PITTSBURGH 29 24 3 4 PORTLAND 13 5 2 2 RICHMOND 22 8 1 2 SACRAMENTO 21 5 2 6 SALTLAKECITY 18 9 8 5 SAN ANTONIO 43 50 8 19 SANDIEGO 11 2 2 4 SAN FRANCISCO 52 30 13 19 SANJUAN 9 7 1 6 SEATTLE 27 28 7 14 SPRINGFIELD 38 28 4 3 ST. LOUIS 12 12 1 5 TAMPA 24 33 4 8 WMFO 40 9 4 7 Total 1910 1350 319 609 -10- PAGENO="0969" 965 PENDING CREDIT UNION INVESTIGATIONS BY FBI DIVISION AS OF FEBRUARY 1990 $25,000 $100,000 $500,000 TO TO TO $1 MILLION FBI DIVISION $99,999 $499,999 $999,999 AND OVER ALBANY 4 1 0 0 ALBUQUERQUE 1 0 0 0 ANCHORAGE 0 0 0 0 ATLANTA 5 0 0 0 BALTIMORE 3 1 0 0 BIRMINGHAM 3 0 0 0 BOSTON 2 0 2 0 BUFFALO 5 0 0 0 CHARLOTTE 5 2 0 0 CHICAGO 5 0 1 0 CINCINNATI 5 1 0 0 CLEVELAND 2 0 1 0 COLUMBIA 2 0 0 0 DALLAS 3 2 1 0 DENVER 6 2 1 0 DETROIT 6 4 1 0 ELPASO 1 1 0 0 HONOLULU 1 0 2 0 HOUSTON 1 1 0 0 INDIANAPOLIS 1 1 0 0 JACKSON 2 0 0 0 JACKSONVILLE 1 0 0 0 KANSASCITY 3 2 0 0 KNOXVILLE 0 0 0 0 LASVEGAS 1 0 0 0 LITTLE ROCK 0 1 0 0 LOS ANGELES 3 :5 0 0 LOUISVILLE 0 1 0 2 MEMPHIS 1 0 0 0 MIAMI 0 1 1 MILWAUKEE 3 1 0 MINNEAPOLIS 0 1 0 MOBILE 1 2 0 NEWHAVEN 3 1 1 NEW ORLEANS 4 5 0 NEWYORK 0 3 1 NEWARK 4 3 0 NORFOLK 2 1 0 OKLAHOMA CITY 1 1 0 OMAHA 6 2 0 PHILADELPHIA 2 3 0 PHOENIX 1 2 0 PITTSBURGH 3 2 0 PORTLAND 2 0 0 -*11- PAGENO="0970" 966 $25,000 $100,000 $500,000 TO TO TO $1 MILLION FBI DIVISION $99,999 $499,999 $999,999 AND OVER RICHMOND ~O 1 0 0 SACRAMENTO 1 2 0 0 SALTL~KECITY 4 2 0 0 SANANTONIO 2 0 0 2 SANDIEGO 1 0 0 0 SAN FRANCISCO 8 0 5 0 SANJUAN 0 0 0 0 SEATTLE 2 2 0 0 SPRINGFIELD 5 3, 0 0 ST.LOUIS 0 1 0 0 TAMPA 1 2 1 0 WMFO 4 .1 0 0 Total 132 67 18 10 -12- PAGENO="0971" 967 A.2.(b) NUMBER OF FAILED FINANCIAL INSTITUTION INVESTIGATIONS BY FBI DIVISION AS OF FEBRUARY 1990 SAVINGS & CREDIT FIELD DIVISION BANKS LOANS UNIONS TOTAL ALBANY 0 0 0 0 ALBUQUERQUE 0 1 0 1 ANCHORAGE 8 1 2 11 ATLANTA 0 1 0 1 BALTIMORE 0 1 0 1 BIRMINGHAM 0 1 0 1 BOSTON 2 0 0 2 BUFFALO 0 0 0 0 CHARLOTTE 0 2 0 2 CHICAGO 2 7 3 12 CINCINNATI 0 1 0 1 CLEVELAND 1 1 0 2 COLUMBIA 0 1 0 1 DALLAS 43 49 0 92 DENVER 19 10 1 30 DETROIT 1 0 0 1 ELPASO 1 4 0 5 HONOLULU 0 0 0 0 HOUSTON 27 27 0 54 INDIANAPOLIS 0 0 0 0 JACKSON 1 1 0 2 JACKSONVILLE 1 0 0 1 KANSAS CITY 13 5 0 18 KNOXVILLE 13 0 0 13 LASVEGAS 0 0 0 0 LITTLE ROCK 0 5 0 5 LOS ANGELES 3 27 0 30 LOUISVILLE 2 1 0 3 MEMPHIS 3 2 0 5 MIAMI 5 7 0 12 MILWAUKEE 1 1 0 2 MINNEAPOLIS 15 2 0 17 MOBILE 1 1 0 2 NEWHAVEN 1 0 1 2 NEW ORLEANS 20 13 3 36 NEWYORK 5 1 3 9 NEWARK 3 1 0 4 NORFOLK 1 0 0 1 OKLAHOMA CITY 26 6 0 32 OMAHA 15 7 0 22 PHILADELPHIA 0 3 3 6 PHOENIX 2 4 0 6 PITTSBURGH .0 0 1 1 -13-- PAGENO="0972" 968 NUMBER OF FAILED FINANCIAL INSTITUTION INVESTIGATIONS SAVINGS & CREDIT FIELD DIVISION BANKS LOANS UNIONS TOTAL PORTLAND 0 3 0 3 RICHNOND 0 0 0 0 SACRAMENTO 1 6 1 8 SALTLAKECITY 1 1 0 2 SAN ANTONIO 26 21 0 47 SANDIEGO 1 1 0 2 SAN FRANCISCO 0 1 0 1 SANJUAN 3 0 0 3 SEATTLE 1 2 1 3 SPRINGFIELD 4 0 0 4 ST.LOUIS 0 1 0 1 TAMPA 4 4 1 9 WMFO 0 0 0 0 TOTAL 276 234 20 530 -14- PAGENO="0973" 969 A. 3. Closely related, because the data on page 1 of the FBI'S appendix concerning numbers of F&E investigations in various dollar loss categories did not include investigations of failed institutions, could the FBI break down the failed institution investigations~by the same dollar loss categories? If so, we would appreciate. such a breakdown. If not, is it possible to state that most of these investigations involve losses over a certain dollar loss amount, such as $250,000, $500,000 or $1 million? NUMBER OF FAILED Fi~NANCiAL' INSTITUTIONS INVESTIGATIONS BY CATEGORY AS OF FEBRUARY 1990 SAVINGS CREDIT CATEGORIES ASSOCIATIONS BANKS UNIONS TOTAL $0 to $99,999 2 13 4 19 $100,000 to $499,999 10 55 9 74 $500,000 to $999,999 14 27 2 43 $1 million and over 208 181 5 394 TOTAL 234 276 20 530 -15- PAGENO="0974" 970 B.l. Additional data on DAWY5 and funds recuired to hire FBI personnel: - 1. On page 6 of appendix to Mr. Revell's testimony, the FBI provided data on total direct agent work years (DAWY5) expended in the investigation of financial institution F&E matters for fiscal years 1988 and 1989, and the first quarter of Fl 1990 and broke this data down for the 25 FBI divisions with the largest number of $100,000 (or more) pending matters, which we had requested. We would like the FBI to revise and expand that list to include ~fl of the 59 FBI divisions (an additional 34 FBI divisions), showing as to each the sane categories of data provided for the 25 FBI divisions. The FBI, as of February 1990, has 56 field divisions, as a result of the consolidations of three small field divisions into larger field divisions. TOTAL PENDING CASES DAWYs EXPENDED IN CASES LOSSES OVER WITH LOSSES OVER FIELD DIVISION ~$l0O,OOO Sioo,000 1988 1989 1ST OTR 90 ALBANY 40 2.0 1.9 .7 ALBUQUERQUE 11 * 8 1 * 3 * 7 ANCHORAGE 13 1 * 0 2 * 1 .7 ATLANTA 83 3.6 4.6 2.0 BALTIMORE 36 3.8 4.3 1.6 BIRMINGHAM 22 1.0 1.1 .7 BOSTON 100 5.2 6.4 2.1 BUFFALO 14 1.8 1.0 .3 CHARLOTTE 55 3.2 6.4 2.0 CHICAGO 113 7.3 7.9 3.1 CINCINNATI 31 3.9 2.8 .8 CLEVELAND 32 4.7 6.2 1.4 COLUMBIA 24 2.0 2.7 .7 DALLAS 236 39.5 40.5 10.6 DENVER 87 4.2 4.4 1.4 DETROIT 46 3.5 4.7 1.7 EL PASO 21 2.9 2.2 .7 HONOLULU 12 .7 .5 .1 HOUSTON 69 13.9 11.0 3.3 INDIANAPOLIS 44 2.2 2.3 .8 JACKSON 18 2.0 2.3 .5 JACKSONVILLE 43 3.2 3.9 1.5 KANSAS CITY 60 5.5 4.7 1.3 -16- PAGENO="0975" 971 TOTAL PENDING CASES DAWY5 EXPENDED IN CASES LOSSES OVER WITH LOSSES OVER FIELD DIVISION $100,000 $100,000 1988 1989 1ST QTR 90 KNOXVILLE 17 3.5 1.7 .5 LAS VEGAS 11 1.2 1.0 .4 LITTLE ROCK 28 4.5 5.7 1.9 LOS ANGELES 235 32.5 33.2 8.7 LOUISVILLE 27 2.3 2.2 .9 MEMPHIS 40 3.5 3.1 1.2 MIAMI 97 8.4 8.8 2.6 MILWAUKEE 31 2.7 3.8 .9 MINNEAPOLIS 82 5.3 9.0 2.2 MOBILE 18 1.3 1.7 .6 NEW HAVEN 44 2.0 2.8 1.1 NEW ORLEANS 93 9.7 6.5 1.7 NEW YORK 144 13.0 18.2 5.7 NEWARK 78 6.2 5.6 2.4 NORFOLK 10 1.0 .9 .7 OKLAHOMA CITY 86 6.2 5.6 2.3 OMAHA 70 3.4 4.1 1.3 PHILADELPHIA 74 5.0 5.9 2.1 PHOENIX 45 2.7 3.2 1.2 PITTSBURGH 37 3.1 2.8 .4 PORTLAND 15 2.8 2.6 .4 RICHMOND 15 .7 .7 .6 SACRAMENTO 39 2 * 9 3.5 1.1 SALT LAKE CITY 28 2.9 2.9 1.0 SAN ANTONIO 125 5.0 5.6 2.2 SAN DIEGO 12 1.9 1.6 .3 SAN FRANCISCO 87 9.6 8.7 3.3 SAN JUAN 20 1.9 2.0 .3 SEATTLE 62 4.5 5.8 1.5 SPRINGFIELD 40 3.2 2.5 .7 ST. LOUIS 23 2.0 2.9 .9 TAMPA 58 5.4 6.6 1.7 WMFO 26 1.5 2.2 .9 TOTAL 3,027 279.70 298.60 92.4 * * DAWY utilization during the first quarter of FY 1990 was at an overall annualized rate of 369.6 DAWYS. -17- PAGENO="0976" 972 B.2.a: The work papers disclose (1) that, taking into account program decreases sought by 0MB, the proposed additional staff workyears for the white-collar crime program is 45, significantly less than the 110 proposed workyears set forth in the chart (attached to page 10 of the appendix) and also (2) that the budget authority even for the 110 workyears is approximately $2.4 million less than set forth in the same appendix chart. Please resolve or explain these discrepancies. In compliance with the Administration's targeted budget levels for 1991, white-collar crime would be cut by 44 Special Agents and 21 general support workyears for a reduction total of 65 workyears. This reduction partially offsets the proposed 110 workyear enhancement, leaving a net increase of 45 workyears. The budget authority in the appendix attached to page 10 only includes personnel-related costs associated with the requested enhancements; however, when workyears were reduced to meet proposed budget deficit reductions, funding associated with the reduced workyears in the amount of $3,255,000 was also decreased. The FBI's 1991 budget request for white-collar crime includes $803,000 for payments to cooperating witnesses. It should be noted that for the entire white-collar crime decision unit that in 1991, program increases totaled $12,416,000 in funding, are offset by the reduction of $3,255,000 to meet targeted budget deficit levels established by the Administration resulting in a net increase of $9,166,000 for the white-collar crime decision unit. PAGENO="0977" 973 8.2. b. (1): Out analysis indicates that, in order to hire 42 Agents with only 10 workyears allocated, on average, almost all of the Agents will have to be hired at the beginning of the last quarter of FY 1991 and that the same is basically true of support staff. Is this an accurate analysis? If not, please explain how these positions will be limited to approximately 25 percent of the workyear for each position. The analysis is accurate. The higher lapse rate between positions and workyears is due to the FBI's absorption of costs associated with the increased administratively uncontrollable overtime resulting from the passage of Public Law 101-173. As a result, the FBI will have fewer Agent workyears in 1991 even though the number of positions will increase. This situation will require a shift in hiring and the conducting of new Agent training so that the FBI can be at the higher position level by the end of 1991 but not exceed its budget authority. B.2.b.(2): If Congress agrees to the 0MB proposed decrease of 65 positions for a net increase of only 45 workyears for the FBI's white-collar crime program, by how much does the FBI preliminarily plan to reduce the proposed staff workyears and dollars for the fraud and embezzlement subprogram? If the Congress does agree to the 0MB-proposed decrease of 65 positions for the white-collar crime program, the bank fraud and embezzlement subprogram will be reduced by eight Agent and three general support positions and $558,000. Coupled with the program increase of 42 Agent and 26 general support positions and $1,798,000, there is a net enhancement of 34 Agent positions, 23 general support positions and $1,240,000 for the bank fraud and embezzlement subprogram. PAGENO="0978" 974 B.3. In response to a question by Congressman Hastert on March 14th, Mr. Revell testified that the FBI had diverted 50 or more Agents from other white-collar crime areas during 1989 to increase the number of Agents for bank and S&L fraud and embezzlement cases. From which white-collar-crime subprograms were these Agents reallocated? (Please specify numbers of Agents diverted by subprogram.) Prior to 1989, were there any other such diversions and reallocations in the white-collar crime program? If so, please describe them, providing numbers of Agents so diverted and identifying the subprograms. Initially forty-nine Agents were diverted from other -areas of the Financial Crimes Subprogram, Government Fraud Subprogram, and Public Corruption Subprogram to address bank fraud and embezzlement matters. Subsequently 45 of these positions were funded by reprogramming funds from the FBI's budget for equipment. Even though workyears were diverted, the FBI does not break out the number of Agents diverted from one subprogram to another within the White-Collar Crime Program (WCCP). The Special Agents in Charge of the FBI field office are given the flexibility to dedicate personnel resources within the WCCP, as necessary to meet the investigative needs of each field office in addressing white-collar crime problems within its geographical territory. Prior to 1989, there were similar diversions and reallocations among White-Collar Crime Subprograms to meet the -needs of the FBI in addressing major white-collar crime problems, such as defense procurement fraud, environmental crimes and law enforcement corruption, as well as the dedication of additional resources to address financial institution fraud and embezzlement matters. No separate accounting has been maintained of these diversions and reallocations. PAGENO="0979" 975 B.4. Please set forth the estimated dollar costs to fund for a full year (a) the additional 224 FBI Agents and 130 fBI support staff requested by FBI division offices during the March 1989 survey but not provided in the December 1989 allocation and separately (b) the 201 Agents and 100 accounting technicians actually allocated in December 1989. (a) The estimated dollar costs to fund the 224 Agents and 130 support staff requested during the March 1989 survey is $42,196,000. (b) See attached Chart. In order to fully fund, the 454 positions, the FBI requires an additional $23,753,964. PAGENO="0980" 976 FIFI - Crosswalk - 1990 Original Amount Received: 236 Agents, 118 general support and 100 accounting technicians $25,039,000. / Sequestration: 38 Agents and 27 general support $3,054,000. Remainder: (post sequestration) 198 Agents, 91 general support and 100 accounting technicians and $21,985, 000. What $21,985,000 Will Fund: 153 Agents, 92 general support and 100 accounting technicians. To fund an additional 45 Agents: $2,340,000 was reprogrammed from equipment. to provide 198 Agents, 92 general support and 100 accounting - * technicians. Total Funding Required: 236 Agents x 148,153 = 118 gen. suppt. x 45,442 = 100 Acct. Tech x 77,527 = __________ The FBI in 1990 has $21,985,000 + 2,340,000 ____________ Required: $34,964,108 5,362,156 7.752.700 $48,078,964 = (24.325,000) $23,753,964 PAGENO="0981" 977 C. FBI arrest and conviction data available to the Federal banking agencies: 1. Please provide any documentation which describes the FBI central identification files, the information which can be available to Executive branch agencies (including the Federal banking agencies, and the procedures necessary for agency access and retrieval of that information. The FBI Identification Division is the repository of fingerprint cards submitted by local, state and Federal law enforcement agencies. A very small percentage of the data is collected from Federal law enforcement agencies. An automated name index has been created as a result of the submission of these fingerprint cards. The FBI Records Management Division (RND) is the repository of documents collected as a result of FBI investigative and administrative activity which have been submitted to FBI Headquarters. Names within such documents are marked for inclusion in an index to facilitate subsequent retrieval in compliance with existing policy. The FBI is the only organization authorized direct access to the automated index maintained by RND. Each Executive Branch agency must submit written name check requests to RMD for information in the FBI central records system, pursuant to a memorandum of understanding between the agency and the FBI. If a review of the FBI central records system reveals derogatory information of a criminal nature pertaining to the subject of the Name Check request, a synopsis is prepared in the form of a letterhead memorandum outlining all pertinent details of the FBI investigation and that information is provided to the requesting agency. This includes arrest and conviction data for the subject of the name check request, if the FBI's central records system reflects a prior arrest and/or conviction. -22- PAGENO="0982" 978 C. 2. Prior to August 9, 1989 (the enactment of FIRREA) did each of the banking agencies routinely initiate the procedures -necessary to obtain such information from FBI central files in connection with change in control applications or for other purposes? If not, what information was occasionally requested and in what format? Have these practices changed after the enactment of PIRREA, and, if so, how? The Records Management Division (RND) routinely receives manual input name check requests from the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation, the Federal Hone Loan Bank Board (now the Office of Thrift Supervision), and the Export-Import Bank. The specific reason for each request would only be known at the time of the request if designated on the input form. As a result RND has no way to determine if any of the name checks received were in connection with "change in control" applications or for other purposes. If the request results in a "No Record" response the input form is passed back to the contributing agency without further recordation within the FBI. If information is disseminated, the original documents in FBI files must be - annotated with appropriate comments as to~the dissemination being made. The policy and guidelines regarding the response to name checks from the above-noted agencies have not changed for several years. -23- PAGENO="0983" 979 C. 3. The banking agencies have recently complained about their inability to readily obtain data from the FBI'S Field Office Management B~rstem (P01MB) at FBI divisions, while indicating that P01MB is the answer to routinely uncovering criminal enforcement information on numerous financial institution insiders, in lieu of developing a comprehensive interagency (Federal banking agency) data bank. Please explain the limitations on P01MB, and indicate whether the system was designed to regularly provide such information to the banking agencies on numerous prospective or actual institution insiders, and if not, explain the problems in doing so. The FBI should feel free to expand its response beyond these specific questions, as the subcommittee does require a much better understanding of both FOIMS and the central files systems and their possible uses and limitations. The Field Office Information Management System (FOIMS) was developed to provide all organizational levels of the FBI, including FBI Headquarters, all field offices, resident agencies and Legal Attaches, with nationwide computer technology-based capabilities to assist in the collection, collation, analysis, coordination, and dissemination of both investigative and administrative information relative to criminal and intelligence investigations and administrative operations. FOIMS was not designed to provide information to outside agencies. However, one function of FOIMS is the indexing of the names of subjects of FBI investigations for information retrieval purposes. In this regard, FOIMS does contain the names of subjects of FBI investigations relating to financial fraud. The Privacy Act prohibits disclosure of personal information with certain exceptions, to any person or other agency unless specifically authorized in writing by the person to whom the record pertains. However, information from FBI files may be disseminated as a proper "routine use" without the subject's authorization to any Federal Executive Branch agency to the extent the information is relevant to an authorized function of such agency. The Privacy Act requires that a record be made of any information disseminated to other agencies and the record be maintained for at least five years or the life of the file, whichever is longer, following the disclosure. Under Executive Order 10450 the FBI established the National Name Check Program at FBIHQ to respond to name check request from Executive Branch agencies. In order to centrally process these requests and conduct a search of the FBI's central -24- PAGENO="0984" 980 records system, the bank supervisory agencies have been requested to coordinate the4r name check requests through the Records Management Division at FBIHQ. Much of the information contained in FOIMS is derived fron ongoing FBI investigations. Release of such information routinely can jeopardize the successful outcome of those investigations or possibly place Agent's lives in danger. This information nay also be protected by rule 6(e) of the Federal Rules of Criminal Procedure or court order. Therefore, when information contained in the central records system of the FBI indicates an ongoing investigation is being conducted, the Records Management Division must send a communication to the field office conducting the investigation to determine whether or not the subject of the investigation is identical to the subject of the name check request. If the field office determines they are identical, the field office must discuss the release of any information concerning the pending investigation with the appropriate Assistant United States Attorney to seek authority to release such information to an Executive Branch agency. The procedure of- seeking authorization to release information related to pending investigations lengthens the time to process the name check request and increases the cost of the process. -25- PAGENO="0985" 981 D. Role of accounting firms in detectina and reporting suspected criminality: Mr. Revell testified that for Federally insured financial institutions "the accounting firma themselves will have to come up with some mechanism to not only give additional training, but to giv, additional incentives to their auditors for this purpose." (Page 151, unedited transcript.) We would like Mr. Revell to elaborate on this statement, including describing any incentives and training programs which he has in mind. Mr. Revell is Chairman of the Integrity/Law Enforcement Committee (1/LEC) of the President's Council on Integrity and Efficiency. The 1/LEC has, as one of its projects, the training of Government auditors in detecting illegal acts. This project was developed as a training program for Government auditors highlighting their role in investigations and bringing to their attention certain indicators of fraud which they should be alert to while conducting audits. The preparation and presentation of this training is a joint effort by the Department of Energy, Office of Inspector General, and the FBI, under the auspices of the 1/LEC. Several presentations of four-hour and six-hour courses have been completed with more anticipated in the future. At the request of representatives from private sector accounting firms, efforts are being made to adapt the course for presentation to auditors in the private sector. Routine incentives, such as promotional considerations, monetary rewards, and peer recognition should be considered in seeking to motivate private sector auditors in this area. PAGENO="0986" APPENDIX 6.-FDIC's JUNE 11, 1990, NOTE TO SUBCOMMITTEE COUNSEL AND FDIC's JUNE 12, 1990, SUBMISSION OF RESPONSES AND MATERIAL, REQUESTED BY SUBCOMMITTEE To SUPPLEMENT THE RECORD Federal Deposit Insurance Corporation Alice C. Goodman Deputy Director Office of Legislative Affairs June 11, 1990 Steve - You also requested figures on actual recoveries from criminal restitution orders. From 1987 to date, the F~deral Deposit Insurance Corporation has recovered approximately $25,000 from FDIC-insured banks. From 1987 to present, recoveries for FSLIC institutions are approximately $15 - $16 million. $5 - $6 million of assets are frozen. These figures for criminal restitution recoveries are approximate, because monies are paid directly to probation offices. The Conflicts and Criminal Restitution Section of our Legal Division is currently developing methods to collect information on criminal restitution payments. Alice RECEIVED JUN 1 5 1990 COMMERCE, CONSUMER AND MONETARYAFFAIRS SUBCOMMITTEE (982) PAGENO="0987" 983 FEDERALDEPOSITINSURANCECORPORATION, Washi~gto~.OC 20429 OFFICE OF THE CHAIRMAN June 12, 1990 RECEIVED JU~I 1 ~ 1990 COMMERCE, CONSUMER AND MONETARYAFFAIRS SUBCOMMITTEE Dear Mr. Chairman: Enclosed is the Federal Deposit Insurance Corporation staff's response to your follow-up questions concerning our March 15 testimony on the Corporation's examination, supervisory, enforcement and monetary recovery efforts. We trust this information is responsive to your request. Please contact us if we can be of further assistance. With best wishes. Sincerely, () fI~ (/~/1 ç~~( QI >~4~~-~- ~-~` L. William Seidman Chairman Honorable Doug Barnard, Jr. Chairman Subcommittee on Commerce, Consumer, and Monetary Affairs Committee on Government Operations House of Representatives Washington, D.C. 20515 Enclosures PAGENO="0988" 984 RESPONSE TO CHAIRMAN BARNARD FOLLOW-UP QUESTIONS TO MARCH 15 TESTIMONY 1. FDIC's authority to promulgate an audit rule: (a) Does the FDIC have the authority to promulgate a rule requiring state-chartered nonmember banks to undergo a regular external audit? (b) Does the FDIC have authority to require such audits of all FDIC-insured banks, whether or not the FDIC is the primary Federal regulator? The FDIC has the following authority to require independent audits of banks: * We have express authority to require insured state nonmember banks that are registered under the Securities Exchange Act of 1934 to have periodic independent audits. * We have authority to require external audits as a condition to granting federal deposit insurance, where necessary. * We have ad hoc authority to include provisions requiring external audits in individual cease-and-desist orders. * There are no specific provisions in the Federal Deposit Insurance Act authorizing the FDIC to require insured state chartered nonmeiriber banks to employ independent auditors to conduct external audits. Thus, we have no express authority to require independent audits of non-registered state chartered nonmember banks through a regulation of general applicability. However, we believe that we have implied authority to require external audits generally. Nevertheless, we have not chosen to invoke this authority, nor has it been tested; therefore, our authority in this area remains unclear at this time. Our authority to require external audits of all FDIC-insured banks, regardless of their primary Federal regulator, is also unclear. However, the FDIC has strongly urged state nonmember banks to have annual independent external audits. (See Appendix A.) 2. FDIC's practice concerning submissions to the FBI of fingerprints of new controlling shareholders, senior executive officers, and directors: We have determined that the only way that the FBI can run a comprehensive check on an individual's arrest and conviction record is to obtain fingerprints. a. Does the FDIC obtain fingerprints from all individuals (i) who acquire state-chartered NM Banks, under the change-of- control statute or otherwise, or (ii) who are required to give notice to the FDIC under FIRREA's section 914? If not (as to one or both of these categories), why not? Applicants or acquiring parties with no past bank involvement, or those who are unknown to the regional office, and all applicants for Section 19 exemptions are required to PAGENO="0989" 985 -2- submit fingerprint cards in order that FBI identification checks nay be requested. However, under the FDIC's internal delegation of authority procedures regarding the change-of-control statute and FIRREA's Section 914, our Regional Directors nay use discretion in whether or not to request FBI identification checks (fingerprints) on persons who are well known to, and well regarded by, the regional office, through previous bank affiliations. In addition, they must have a demonstrated record of integrity in banking or other business affiliations. Attached are two memoranda to our Regional Directors that serve as guidelines on the subject. (See Appendix B.) b. What are the OCC's and the Federal Reserve's practices and policies for each of these categories of individuals, and how do they vary from the FDIC's? We have every reason to believe that our policy is similar to the other bank regulatory agencies since we work with them on an interagency basis to develop policies. However, we are not familiar with the specifics of their policies with regard to FBI background checks. 3. Data clarification: On page 3 of the FDIC's March 15 "Addendum to Testimony". the FDIC specified the numbers of SNM banks in which misconduct was identified and, of these, the number which failed. The addendum sets forth two tables, the first showing numbers of banks as to which enforcement actions were taken against insiders and the second showing the same data for banks as to which there was a criminal referral involving insiders. If possible, could the FDIC indicate the overlap. indicating numbers of banks (and also failures) where there was both such an enforcement action and a referral. The following duplications occurred within groups for each year:~ * In 1987, three banks are listed for having both civil enforcement and criminal referral actions against insiders. One bank in this duplication is a closed bank. * In 1988, eight banks are listed for having both civil enforcement and criminal referral actions against insiders. One bank in this duplication is a closed bank. * In 1989, seven banks are listed for having both civil enforcement and criminal referral actions against insiders. Two banks in this duplication are closed banks. If civil enforcement and criminal referral actions are interfaced for the entire three-year period and not grouped according to year, then 32 duplications arise, of which ten represent closed banks. The reason for this increase is that referrals are more numerous than civil enforcement actions and, in actuality, usually precede civil enforcement actions. PAGENO="0990" 986 -3- 4. Explanation and elaboration on FDIC's suggestions for improvements: On pages 30 and 31 of the "Addendum to Testimony". the FDIC briefly sets forth three general areas of improvement which would be helpful, two of which may require legislation. We would appreciate some elaboration on each of these proposed improvements and also suggestions for legislation, where such would be helpful. In responding, please answer the following questions: a. Will the FBI's proposed new system of providing case numbers for referrals as to which it has an investigation completely overcome the difficulty the FDIC encounters in determing the status of criminal investigations, or, if not, is further action needed? A case number system may assist in identifying a particular referral that is `the subject of a status inquiry by the FDIC, but it will not' in~and-of-itself be a total solution. The FDIC has~forwarded numerous criminal referrals to the Department of Justice that the agency believes relate to significant violations of criminal law. However, often long periods of time pass with no response or contact by the U.S. Attorney's Office or the FBI. This raises concerns that we may not have provided sufficient information concerning the conduct which we believe constitutes the violation. To some extent the local law enforcement working groups provide some outlet for these concerns through the development of a relationship. with the FBI and local U.S. Attorney's Office. The Interagency Bank Fraud Working Group is working to develop a means by which the referring agency can be apprised of important developments in the progress of the investigation and prosecution of major referrals. b. (i) To lustify a legislative initiative clarifying that providing documents to a Federal grand lury does not waive any privileges applying them, please briefly summarize any court cases (whether or not published) which have addressed this issue. See Appendix C attached. b. (ii) Under what circumstances does the FDIC turn material over to a grand lury, together with an assertion of privilege, and under what circumstances does it refuse to turn over privileged material? The FDIC often conducts contemporaneous investigations for purposes of determining whether a bond claim, a Directors and Officer's suit, or other professional liability actions should be filed, or whether other receivership litigation should be initiated. These investigations often involve both in-house and outside counsel who communicate with knowledgeable FDIC - liquidation or supervision personnel as -to matters that may PAGENO="0991" 987 -4 involve the str~ngths or weaknesses of a particular matter, legal theories that nay or nay not ultimately be utilized, the potential tactical approach that may be utilized in a particular case, etc. These communications nay be in writing or they nay be oral. In addition, the FDIC frequently inherits ongoing litigation of a failed institution. These cases nay involve extensive files of communications with lawyers representing the institution dealing with all aspects of the litigation. The ~DIC may also find it necessary to communicate with the. institution's counsel in order to make judgments related to whether or not to continue with the litigation, and whether to retain the institution's former litigation counsel. All of these types of communications may involve attorney-client privilege and attorney work-product materials. In many cases, the scope of grand jury subpoenas is quite broad and frequently such privileged materials may fall within the scope of the subpoena. Since some of these documents may involve discussions of the litigation strategy or a candid assessment of the strengths and weaknesses of ongoing civil litigation, they are withheld under claims of privilege in the civil litigation. Disclosure to a grand jury could create serious problems for the FDIC in protecting such materials from disclosure in such civil cases. Therefore, before any potentially harmful privileged documents are disclosed to a grand jury, we make an effort to determine whether they are really needed by the U.S. Attorney or are simply swept up by the subpoena unnecessarily. If the Assistant U.S. Attorney handling the case determines that the privileged documents are necessary to the criminal investigation and prosecution, then the production of these documents is always accompanied by a letter stating that they are being produced only because they are compelled by the grand jury subpoena but that the FDIC does not waive any applicable privileges as to any civil litigation. b. (iii) And, how frequently has the FDIC refused to produce material, asserting such a privilege, during the last year? The FDIC has produced documents under a specific reservation of claims of privilege on several occasions during the past year. In-so-f ar as we are aware, no documents that an Assistant U.S. Attorney has determined are critical to a criminal investigation and prosecution have been withheld. This is, in part, because discussions with Assistant U.S. Attorneys have narrowed the scope of grand jury subpoenas to exclude FDIC or failed institution documents that are subject to attorney-client and work-product claims in civil cases. PAGENO="0992" 988 -5- c. Explain the proposal for giving "increased authority" to the Justice Department to share information with the banking agencies, including the kinds of information at issue and the specific authority needed. Our reference to "increased authority" to the Justice Department to share information with the banking agencies was directed at the perennial difficulties posed by restrictive construction of the grand jury secrecy provisions contained in Rule 6 of the Federal Rules of Criminal Procedure. It is not uncommon for us to be required to duplicate an investigation already conducted by the Department of Justice in the context of grand jury proceedings. Duplication problems are most common in cases involving fraud claims against officers, employees and customers of insured institutions or FDIC objections to discharges in bankruptcy, but they can arise in other contexts as well. The problem is compounded by the fact that the sanctions attending violations of Rule 6 give personnel of the Department of Justice a perfectly understandable incentive to err on the side of caution in assessing whether specific materials fall within the grand jury secrecy provisions. Section 964 of FIRREA provided some relief for these concerns. This provision allows an attorney for the government to apply for an order permitting disclosure to identified employees of a bank regulatory agency of those matters occurring before a grand jury conducting an investigation of a banking law violation. However, the court may grant such an order only on a showing of "substantial need." The legislative history interpreting "substantial need" sets out Congress' intention that while an order should not be denied solely because alternate means for obtaining the information are available (i.e. duplicate investigation), it should not be issued for mere convenience or simple relevance to matters within the jurisdiction of the agency. Thus, while partially rejecting the rationale of the Supreme Court in deciding United States v. Sells Engineering, 463 U.S. 418 (1963) and United States v. Baggott, 463 U.S. 476 (1963), FIRREA perpetuated the concept that grand jury secrecy, standing alone and without elaboration, was a sufficient basis to continue to force substantial and indefinite duplication in investigations of banking violations. We believe the "substantial need" test can and should be relaxed in the vast majority of cases in which an indicted defendant has been tried or the term of the grand jury has expired and the investigation has ended. In this context, we note that control over improper dissemination of material having continuing sensitivity still exists due to the discretion of the Department of Justice to seek or not seek disclosure, the discretion of the court to issue or not issue a disclosure order and the professional judgement of the attorneys for the banking agencies. PAGENO="0993" 989 -6- We recognize, of course, that in many cases the concerns underlying the historic secrecy of grand jury secrecy will survive the ultimate trial or the expiration of the grand jury. For this reason, we would be surprised if the Department of Justice did not often refuse to seek disclosure orders from the courts because the material presented to the grand jury continued to be sensitive. However, we do not believe the Department of Justice should be deterred from seeking such an order in the circumstances described above simply because the order rests on the convenience of the banking agency. Attachments 30-830 0 - 90 - 32 PAGENO="0994" 990 APPENDIX A fl~*FSRELEASE ~FOR~IMMEDIATE RELEASE PR-210-88 (11-16-88) FDIC ISSUES POLICY STATEMENT URGING BANKS TO OBTAIN ANNUAL INDEPENDENT EXTERNAL AUDIT The Board of Directors of the Federal Deposit Insurance Corporation today adopted a new policy statement that strongly encourages all state nonmember banks to adopt an annual independent external auditing program. The final policy statement, proposed by the agency on April 13, 1988, also suggests that all state nonmember banks establish an audit committee composed entirely of outside directors. In issuing the policy statement, the FDIC noted that a strong internal auditing function, combined with an annual external auditing program performed by an independent auditor, substantially lessens the risk that potentially serious problems in a bank will go undetected. The FDIC Board stated: `The large number of financial institutions experiencing financial difficulties as a result of fraud, insider abuse and mismanagement in recent years has made an external auditing program even more important.' Under the new policy statement, the FDIC: o recommends that annual external auditing programs be performed by either Independent public accountants or other qualified independent parties; o notes that although an external audit Is not mandatory, a bank with an annual independent audit of Its financial statements would generally be considered to have a satisfactory external auditing program; (more) FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St., NW., Washington, D.C. 20429 * 2028986996 PAGENO="0995" 991 o suggests that banks send copies of external auditors' reports to the appropriate FDIC regional office as soon as possible after receipt of the report; and ~o reiterates its expectation for newly insured banks to obtain an outside audit for at least the first three years after deposit insurance is granted. Additionally, if a bank's audit committee or board of directors decides not to have an independent public accountant perform an annual audit of the bank's financial statements, the reasons for the committee's or board's decision to use one of the acceptable alternatives or to have no external auditing program should be documented in its minutes. In response to comments, the FDIC's new policy statement now includes an appendix containing definitions of terms used in the statement. The full text of the new policy statement is attached. Attachment Distribution: Insured Nonmember Banks (Commercial and Mutual) PAGENO="0996" 992 Statement of Policy Regarding Independent External Auditing Programs of State Nonmember Banks 1. In view of its interest in the financial soundness of banks and the banking system, the FDIC believes that a strong internal auditing function combined with a well-planned external auditing program]) substantially lessens the risk that a bank will not detect potentially serious problems. An external auditing program is a set of procedures designed to test and evaluate high risk areas of a bank's business which are performed by an independefit auditor who may or may not be a public accountant. The failure to detect and correct potentially serious problems increases the risk a bank poses to the FDIC's insurance fund. A strong internal auditing function establishes the proper control environment and promotes accuracy and efficiency in a bank's operations. An external auditing program complements this function by providing an objective outside view of the bank's operations. 2. Regardless of the strength of a bank's internal auditing procedures, the FDIC believes that an external auditing program should be considered by a bank's board of directors as part of the cost of operating a bank in a safe and sound manner. An external auditing program assists the bank's board of directors in safeguarding assets and identifying risks inherent in its operation. In addition, an external auditing program may tend to assist directors in the event of litigation on whether an institution's board has exercised reasonable care in protecting the assets of the bank. Thus, the FDIC urges all state nonmember banks to establish and maintain a sound external auditing program. 3. The FOIC strongly encourages the board of directors of each state nonmember bank to establish an ~j~dit committee consisting, if possible, entirely of outside directors. The audit committee or board of directors of each state nonmember bank generally should analyze the extent of the external auditing coverage needed by the bank annually. They should determine whether the bank's needs will best be met by an j~jj of its financial statements or by an acceptable alternative (described in paragraphs 8 and 9 below). When selecting the scope of the planned external auditing program for the year, the committee or board should ensure that the program will provide sufficient substantive external coverage of the bank's risk areas and any other areas of potential concern, such as compliance with applicable laws and regulations. 1, Terms defined in Appendix A are underlined the first time they appear in this statement of policy. PAGENO="0997" 993 If not, additional external auditing procedures conducted by an independent auditor may be appropriate for a specific year or several years to cover particularly high risk areas of the bank. The decisions resulting from these deliberations should be recorded in the committee's or board's minutes. 4. If the audit committee or board of directors of a bank, after due consideration, determines not to engage an independent public accountant to conduct an annual audit of the bank's financial statements (or whose parent holding company's~conmolidated financial statements are not audited), the reasons for the committee's or board's conclusion to use one of the acceptable alternatives or to have no external auditing program should be documented in its minutes. In the evaluation, the committee or boardgenerally should consider not only the cost of an annual audit of the bank's financial statements, but also the potential benefits. 5. A review of both a bank's internal and external auditing programs has been and will continue to be a part of the FDIC's examination procedures. FDIC examiners will review the natureof each bank's external auditing program in conjunction with the risk areas perceived in that particular bank's business and operations, and they will exercise their judgment and discretion in evaluating the adequacy of a bank's external auditing program. Examiners will not automatically comment negatively to the board of directors of a bank with an otherwise satisfactory external auditing program merely because it does not engage an independent public accountant to perform an audit of its financial statements. ~u~it by an Independent Public Accoun.taiit 6. The FDIC strongly encourages each state nonmember bank to adopt an external auditing program that includes an annual audit of its financial statements by an independent public accountant. A bank that does so would generally be considered to have a satisfactory external auditing program. An external audit of a bank's financial statements benefits management by assisting in the establishment of the accounting and operating policies, internal controls, internal auditing programs, and management information systems necessary to ensure the fair presentation of these statements. An audit also assists boards of directors in fulfilling their fiduciary responsibilities and provides them greater assurance that financial reports are accurate and provide adequate disclosure. 7. An audit of a bank's financial statements performed by the independent public accountant as of a quarter-end date when the Reports of Condition and Income are prepared is preferable and would permit the bank to use the audited financial statements in the preparation and/or subsequent review of those reports. A bank may also find it more cost effective to be audited during accounting firms' less busy periods. The independent public accountant chosen should be experienced in auditing banks and knowledgeable about banking regulations in order to provide the bank with the most effective service. -2- PAGENO="0998" 994 Alternatives to an Audit by a Public Accountant 8. The FDIC recognizes that a bank's audit committee or board of directors may determine that the external auditing program that will best meet its individual needs for that particular year will be other than an audit of its financial statements by an independent public accountant. The committee or boafd, after a full review of alternative and/or supplemental approaches for an adequate independent external auditing program, may decide on a well-planned directors' examination, an independent analysis of internal controls or other areas, a report on the balance sheet, or specified auditing procedures by an independent auditor. If the bank has an outside auditing firm that is simply obtaining confirmations of deposits and loans, for example, the committee or board should normally expand the scope of the auditing work performed to include additional procedures to test the bank's high risk areas. 9. Nonaccounting firms with bank auditing experience and expertise that are Independent of the bank are available in some geographic locations. They may provide acceptable directors' examinations, analyses, or specified auditing work at a reasonable cost. In some instances, these firms' services include nonauditing work which enables them to provide suggestions on compliance issues and operational efficiencies. Depending upon the expertise of the firm and the scope of the engagement, these nonaccounting firms may be an appropriate choice for an external auditing program. Newly Insured Banks 10. The FDIC believes that an adequate external auditing program performed by an independent auditor should be an integral part of the safe and sound management of a bank. Thus, applicants for deposit insurance coverage after the effective date of this statement of policy will generally be expected to commit their bank to obtain an audit of their financial statements by an independent public accountant annually for at least the first three years after deposit insurance coverage is granted.ZI The FDIC may determine on a case-by-case basis that an independent audit of financial statements is unnecessary where an applicant can demonstrate that the benefits derived from 2/ Operating non-FDIC insured Institutions should also note that the FDIC expects, unless waived in writing by the FDIC, any applicant for insurance with more than $50 million in assets to have an audit of its financial statements prior to submitting an application, and requests that a copy of the auditor's report be Included as part of the application. The FDIC may require such an audit, on a case-by-case basis, for applicants with assets of $50 million or less. Refer to the June 9, 1987 Statement of Policy Regarding Applications for Federal Deposit Insurance by Operating Non-FDtC Insured Institutions, as amended June 24, 1987. 3. PAGENO="0999" 995 such an external audit will be substantially provided by other outside sources, or where the applicant is owned by another company and will undergo an audit performed by an Independent public accounting firm as part of an audit of the consolidated financial statements of its parent company. Notification and Submission of Reporti 11. Whether currently or newly Insured, the FDIC requests each state nonmember bank that undergoes any external auditing work, regardless of the scope of the work, to furnish a copy of any reports by the public accountant or other external auditor, including any management letters, to the appropriate FDIC regional office as soon as possible after their receipt by the bank. 12. In addition, the FDIC requests each bank to promptly notify the appropriate FDIC regional office when any public accountant or other external auditor is initially engaged to perform external auditing procedures and when a change in its accountant or auditor occurs. Holding Company Subsidiaries 13. When the audit committee or board of directors of any state nonmember bank owned by another company (such as a bank holding company) considers its external auditing program, it may find it appropriate to express the scope of its program in terms of the bank's relationship to the consolidated group. No section of this statement of policy is intended to imply that any state nonmember bank owned by another company is expected to obtain a separate audit of the financial statements of the individual bank. Where the state nonmember bank is directly or indirectly included in the audit of the consolidated financial statements of its parent company performed by an independent public accounting firm, the state nonmember bank may send one copy of the comparable reports by the public accountant or notification of the change in accountants for the consolidated company to the appropriate regional director. If several banks supervised by the same FDIC regional office are owned by one parent company, a single copy of each report applicable to the consolidated company may be submitted to the regional office on behalf of all of the affiliated banks. Troubled Banks 14. An annual independent external auditing program complements both the FDIC's supervisory process and bank internal auditing programs by further identifying or clarifying issues of potential concern or exposure. It can also greatly aid management in taking corrective action, particularly when weaknesses are detected in internal control or management information systems. For these reasons, an annual audit of bank financial statements performed by an independent public accounting firm or, if more appropriate, specified auditing procedures will be a condition of future enforcement actions, when deemed necessary, or if it appears that any of the following conditions may exist: (a) internal controls and internal auditing procedures ar( inadequate; -4- PAGENO="1000" 996 (b) the directorate is generally uninformed in the area of internal controls; (c) there is evidence of insider abuse; (d) there are known or suspected defalcations; (e) there is known or suspected criminal activity; (f) it Is probable that director liability for losses exists; (f) direct verification is warranted; and/or (g) questionable transactions with affiliates have occurred. ~5. Such an enforcement action may also require that (a) the bank provide to the appropriate FDIC regional office a copy of the auditor's report and any management letter received from the auditor promptly after the completion of any auditing work and that (b) the bank notify the regional office in advance of the time and date of any meeting between management and the auditor at which any auditing findings are to be presented so that a representative of the FDIC may be present if the FDIC so chooses. By order of the Board of Directors. Dated at Washington, D.C. this 16th day of November , 1988. FEDERAL DEPOSIT INSURANCE CORPORATION `Hoyle L. I%ebinson ExecUtive Secretary (SEAL) -5- PAGENO="1001" 997 APPENDIX A DEFINITIONS Au.~il. An examination of the financial statements, accounting records, and other supporting evidence of a bank performed by an independent certified or licensed public accountant in accordance with generally accepted auditing standards and of sufficient scope to enable the auditor to express an opinion on the bank's financial statements as to their presentation in accordance with generally accepted accounting principles (GAAP). Audit Committee. A committee of the board of directors, consisting, if possible, entirely of outside directors. To the extent possible, members of the committee should be knowledgeable about accounting and auditing. They should be responsible for reviewing and approving the bank's internal and external auditing programs or recommending adoption of these programs to the full board. Both the internal auditor and the external auditor should have unrestricted access to the audit committee without the need for any prior management knowledge or approval. Other duties of the audit committee should include reviewing the independence of the external auditor annually, being consulted by management when it seeks a second opinion on an accounting issue, overseeing the quarterly regulatory reporting process, and reporting its findings periodically to the full board of directors. Pirectors' Examination. A review by an independent third party that has been authorized by the bank's board of directors and is performed in accordance with the board's analysis of potential risk areas. Certain procedures may also be required as a result of state law. A directors' examination consisting solely of such procedures as cash counts and confirmations of loans and deposits would not normally be considered a well-planned directors' examination. (Sometimes directors' examinations are similar to so-called "engagement audits" or "operational audits." Nevertheless, no widely accepted national standards exist for the specific procedures that must be performed in directors' examinations or these "audits.") External Auditing Program. The performance of procedures to test and evaluate high risk areas of a bank's business by an independent auditor, who may or may not be a public accountant, sufficient for the auditor to be able to express an opinion on the financial statements or to report on the results of the procedures performed. Financial statements. The statements of financial position, income, cash flows (changes in financial position), and changes in shareholders equity together with related notes. Independent. No certified public accountant, public accountant, or other auditor will be recognized as independent who is not in fact independent. (Reference is made to Section 335.604 of the FDIC Rules and Regu1ation~ for the complete definition of the term "independent.") PAGENO="1002" 998 Outside Directors. Members of a bank's board of directors who are not officers, employees, or principal stockholders of the bank, its subsidiaries, or its affiliates, and do not have any material business dealings with the bank, its subsidiaries, or its affiliates. ~u~]Jc Kccountant. A certified public accountant or licensed public accountant who is duly registered and in good standing as such underthe laws of the place of his/her residence or principal office, who is licensed by the accounting regulatory authority of his/her state, and who possesses a permit to practice public accountancy. Report on the Balance Sheet. An examination of the balance sheet, accounting records, and other supporting evidence performed by an independent certified or licensed public accountant in accordance with generally accepted auditing standards. *Risk Areas. The risk areas are those particular activities of a specific bank that expose the bank to potential losses if problems were to exist and go undetected. The highest risk areas in banks generally include, but are not necessarily limited to, the valuation or collectibility of loans (including the reasonableness of the allowance for loan losses), Investments, and repossessed and foreclosed collateral; internal controls; and insider transactions. -7- PAGENO="1003" 999 APPENDIX B Cluaitics*an ~ OMsion of SupervisiOr ~ MEMORANDUM SYSTEM _________ TO: As'ociate Directors Regional Directors Deputy Regional Dir1 FROM: Paul C. FrittsQ ~ Director SUBJECT:: Change in Senior Executive Officer pr Board of Directors I. Purpoae. To provide information concerning amendments to Parts 303 and 308~ relative to processing 30-day advance notices of addition of a dirsetor or employment of a senior executive officer. 2. Background. On December 5. 1989. the Board of Directors adopted Section 303.14 and Subpart L of Part 308. These regulations address the filing of a notice, by affected banks, of the addition of any individual to the directorate or the employment of any senior executive officer and set forth the procedures and standards for processing such notices. (Copy attached.) Section 303.14 and Subpart L~of Part 308 are the implementing regulations for Section 914 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (`FIRRLA), enacted on August 9, 1989, which added Section 32 to the FDI Act requiring that any insured state nonmeaber bank which (1) has been chartered less than two years. (2) has undergone a change of control within the preceding two years. or (3) is not in compliance with the applicable minimum capital requirements or is otherwise considered in a troubled condition must notify the Corporation of th. addition of any individual to the directorate or the employment of any senior executive officer 30.days in advance of that individual's association with the institution. In assessing such a notice, the Corporation shall consider the competence. experience, character and integrity of the indivi&al and shall issue a notice of disapproval if any of these factors indicate that th. association of the individual with the institution would not be in the bast interest of the depositors or the public. 3. General Provisions. Filing of a notice will be applicable for all changes in the directorate and for employment of a chief executive officer for the specified categories of banks. Form FDIC 6810/01 (copy attached) is to be used to collect the necessary information to evaluate the Notice. (Note chat form FDIC 6200/06 (Financial Report) is an attachment to this form.) ~`ht1. the notice must be filed by the FOIC 1212104(10-5*) PAGENO="1004" 1000 bank, Cbs subject individual must certify to th. validity of the infO~tiOfl by si~j~1 the form aM may provide information of a confidenti~ nature directly to the FDIC. The bank subeitting th. notice must be advised of ~ ~ of acceptance ~ the notice and that if the Corporation does not disapprcy,e the request within 30 days from that dat., the individual may coe.enc. servic, with the bank. As the 30-day period during which the Corporation may issue a notice of disapproval comeenc., upon acceptance of the notice, only a completed notice should be accepted. The acceptance date is to be the date a completed notice is received in the regional office. If a notice is incomplete, the applicant should imeediately be so notified end should be advised of the information necessary for th. notice to be accepted. Upon acceptance of a notice, coents shall be solicited from the other depository in. tituti.,n regulatory authorities *- Office of the Comptroller of the Currency, Federal Reserve System, Office of Thrift Supervision and appropriate state authority. If the individual indicates notices filed or involvement with depository institution.. in another FDIC region, coents should also be colicited from the appropriate regional director. Due to the restricted time frame in which action must be taken, telephonic notification may be must appropriate. The individual's competence and experience should be evaluated in relation to the position to be held in the bank and in relation to any special ne.ds of the bank, especially if it is in a troubled condition. Greater emphasis should be placed on the individual's qualifications to serve in the capacity requested and less on financial condition, as the individual may not be acquiring ownership interest in the institution. However, review of financial information is considered valuable as it relates to, or reflects on, the individual's integrity and character. If an individual is serving, or has recently served, as director or senior executive officer of another insured institution, information available from other regulatory agencies or from reports of examination may be utilized to ivaluate the request. Procedures for background checks and fingerprint cards. as set forth in Transmittal Ito. 87-106 (lackgrowid Checks on Individuals 6-4-87) may be used. If an individual is well-Iniovo to, and well-regarded by. the Regional Office, the collection of biographical and financial information may be deemed urmecessary and may be abbreviated or waived at the discretion of the Regional Director. Correspondence tranemitting the Corporation's disapproval or Intent not to disapprove the request should be provided to both the bank end the individual. Where the regional director has no objection, the appropriate parties may be advised, prier to expiration of the 30-day period, of the Corporation's intent not to disapprove the individual's association with the bank and that service may cosnce t.ediately. In special situations and for good reason, the 30-day period may be permitted to expire without a letter to the bank~ The notice of intent not to disapprove may be in a format similar to that associated with a notice of acquisition of control. itotification of a disapproval should be sent to both the individual and the bank by way of certified mail with return receipt requested and should contain the information specified in Section 308.96(a). It is anticipated thatthe notice of disapproval~ will be in a form similar to that used in disapproval of a notice of acquisition of control and that such notice will be drafted by the region's legal representative. PAGENO="1005" Waiver of the p~r otice requirement is automatically granted in the case of election of a new ~ir~ctor at the shareholders meeting with the stipulation that a completed notic~ be filed within 48 hours of the election. A regional director, in-~is di~cretion, may waive the prior notice requirements upon receipt of am approp~iate petition if it is found that delay in the individual's associat4on with the bank as a director and/or a senior executive officer could be harmdul to the bank or the public interest. However, extreme caution should be exer~ised in granting such waiver as the FDIC has only thirty days from date of the w~iver to issue a notice of disapproval. Therefore, before gra~ting a waive~\, provision should be made for the filing of the completed notice within ~~i8 hours (parallels the 48 hours provided by regulation for filing upon election\of a director at a shareholders meeting) so that appropriate review may be\accoaPlished. If an appeal is filed, the\request should be acknowledged, reviewed in the regional office and forwarded to Washington with the regional director's recommendation. A copy of ~he initial action, including the notice of disapproval, the initial req~iest and the sUmmary of investigation should accompany the regional direc~or's recommendation. For purposes of the tracking system and st~ary of investigation forms, the appeal should be treated as a "reconsideration' application\ Use of the attached summary fo~m is effective immediately and a copy of the form should accompany each Noti\ce whether action is taken at the regional leve1~ pursuant to delegated authority\or the Notice is forwarded to Washington for action. The form is generally â~lf.explanatory and requires only brief responses. Any issues, as well 45 justification for the final action, should be covered in the "Comments' sec$on. Coents for a disapproval should set forth the specific reasons for thk disapproval and should contain sufficient detail to support the action. If~ applicable, s~ary form comments should specifically address the reason fo~ permitting the time period to expire and justification for abbreviating or e~iminating the background check. Notices will be tracked on the Appli~ation5 Tracking System under a separate `application type" and a new screen ~ill be created for this purpose. However, until the new screen is available, p1~eace enter the notices as miscellaneous applications (OTHER). In "Trensactiot\ Description' on Screen 4, include the following information: "MANAGF~(ENT CHANGE" followed by the individual's name and the capacity in which the individuAl wishes to serve. Distribution of the paperwork for final actions is to be th~ same as that for other applications acted upon pursuant to delegated authori~y. The proposed tracking system screen is attached so that you are aware\of required information. A copy of this screen should be completed for each ~otics and forwarded to Washington along with other paperwork. When the ~ew screen becomes available you will begin using it end Washington Office staff\will be responsible for converting the existing actions in the miscellaneous c~tegory to the proper screen. Photocopies of Form 6810/01, the "summary fob" and the proposed tracking system screen may be utilized until further n~cice. 4. Delegation of Authority. Associate direct~rs, regional directors and deputy regional directors are hereby authorized\to act pursuant to the authority delegated in Section 303.14(e). \\ PAGENO="1006" 1002 -4. 5. Reeooneibi1ity~and Action. Please advise appropriate a~b.rs of your staff of the in.for.ation and procedures contained herein. 6. Eff.cti~ Dati: The regulation and these procedures vii]. becoae effective upon pubiic*~ion of the regulation in the Federal Register, Publication is scheduled for December 27, 1989. Attachments Transmittal No. 89-175 PAGENO="1007" 1003 FDC iiD~,~ (I~3~ FEDERAL DEPOSIT INSURANCE CORPORATION CERTiFiED COPY OF RESOLUTION OF BOARD OF DIRECTORS I ~(QyJe .:L,..Ro.bi.n.s.on , Ex'~cutive Secretary of the Federal Deposit Insurance Corporation, do hereby certify that the attached is a true and correct copy of a resolution duly adopted at a meeting of the Board of Directors of said Corporation, regularly called and held on the fifth day of. December , i~9 , at which a quorum was present, and that the same has not been amended or rescinded and is now in full force and efftct. IN WITNESS WHEREOF, 1 have hereunto subscribed my name and caused the seal (SEAL) of the Corporation to be affixed hereto, in the City of Washington and District of 48002 Columbia, this...5t.h day of....Pe~rther I 9.89.... E~ccutivc Scert'tary Federal Dcposzs Insurame Corporation. PAGENO="1008" 1004 RE~LUT~ WHEREAS, Section 32 of the rederal Deposit Insurance Act ("FDI Act") (to be codified at 12 U.S.C. l$31i), as added by Section 914 of the Financial~ Institutions Rsfora, Recovery, and Enforcement Act of 1989, requires that in certain circu~stanceg an insured depository institution iust notify the appropriate federal banking agency of the proposed addition of any individual to its board of directors or of its eiployaent of any individual as a senior executive officer: and WHZREAS, Section 32 of the PD! Act requires each appropriate federal banking agency to prescribe regulations defining relevant ter~s; and WHEREAS, the Faderal Deposit Insurance Corporation ("FDIC") has general ruls3akinq authority to carry out the purposes of the FDI Act; and WPfl!i~!, tha Board of Directors of the PDIC ("Board") has dstsraiasd that regulations which set out procedures and define relevant tsraa in iaplsaentation of Section 32 of ths PDI Act should ho issued; and PAGENO="1009" 1005 WHEREAS, ti~ Boa:ci has datersined that the reguittions should be issued as final rules or, acre specifically, as an interiaU1i with a request for comments for a 60-day period; and WHEREAS, the Board has determined that it is advisable to delegate the authority to act on the provisicns of these regulations and Section 32 of the FDI Act to the Director of the Division of Supervision and, where confirmed in writing, to an Associate Director of the Division of Supervision or to the Regional Director (Supervision) or the Deputy Regional Director (Supervision) of the region in which an insured depository institution submitting the required notice is located. HOW, THEREFORE, BE IT RESOLVED, that the Board does hereby amend Title 12 of the Code of Federal Regulations by effecting certain changes to Parts 303 and 308 thereof substantially as set forth in the attached notice documents. BE IT FURTHER RESOLVED, that the Board directs the Executive Secretary of the FDIC to cause to be published in the Federal Register, in foam satisfactory to the Gneral Counsel of the FDIC, t~ attached amendments to Parts 303 and 308 of the FDIC rules and regulations. 2 PAGENO="1010" 1006 C 6 174-01) FEDERAL DEPOSIT INSURANCE CORPORATION 12 C.F.R. Part 303 RIN 3064-ABO2 Applications, Requests, Submittals, Delegations of Authority, a~d Notices of Acquisition of Control AGENCY: Federal Deposit Insurance Corporation ("FDIC"). ACTION: Interim rule with request for comments. STJ!NARY: This interim rule implements ~ 914 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") by adding a new section, ~ 303.14, to 12 CYR Part 303. Section 303.14 requires insured nonmeab*r banks which fall within specified categories to file a notice with the FDIC prior to adding or replacing a member of the board of directors or employing or changing the responsibilities of an individual to a position ma a s.nicr executive officer. The FDIC may disapprove any proØs.d board member or senior executive officer whose service is not considered to be in the best interests of the depositors of the insured nonmember bank or the public. PAGENO="1011" 1007 53040 Federal Register I Vol. 54, No; 247 / Wednesday, December 27, 1989 / Rules and Regulations The FDIC is implementing section 914 by means of an interim rule, and insured nonmember banka are expected to comply beginning on the date of the mice publication in the Federal Register. Comment is requeoted for 00 daya after publication. however and. changea, aa warranted. will be made in the interim rule; and a final rule will then be adopted. The FDIC plans to afford the partiea involved an opportunity to preaenl viewa in three instancea in wbich the propoaed addition or change is diaapproved. Those procedures are being publiahed in the Federal Register eimultaneouoly with this rule and will be contained in 12 CFR part 308, subpart L. Issues Comment ia invited on any of the iaaues deacribed below,aa well aa on any other iasuea related to the regulation; 1. Definit ion of senior executive officer. The term "aenior executive officer" is defined to include any individual wbo exercises oignificanl influence over, or participatea in, major policymaking decisions of an inaured nonmember bank, without regard to title, salary, or compenoation. Certain positions, listed in generic form, are automatically covered. The term "senior executive officer" also includes employees of an entity, auth as a conaulting firm, bired to perform the functions of pooitiano covered by the regulation. 2. Definition of troubled condition. The term `troubled condition" is defined to include all banks assigned a compoalte rating by the FDIC of 4 or S under the Uniform Financial Inatitutiona Rating Syatem. The term alan covere banks subject to either a cease and deaiat order or proceeding involving either the FDIC or the appropriate state banking authority, a capital directive iaaued by either the appropriate state banking authority or the FDIC, ore proceeding for termination or euepeneion of depoeit insurance initiated by the FDIC (that ia voluntary terminations are not inctuded). Inatead of including all insured nonmember. banks subject to a written agreement, the FDIC bee decided to limit the regolation'e coverage to banks under a written agreement ieoued by the FDIC or the eppropriate State banking authority that requires ectioo to improve or maintain the bank'e safety and eoundneoe. The term "troubled condition" eleo includes e bank that is informed in ~writing, based one visitation, examination, or a mport of condition For the reasons eel forth in the DATES: Effective; December 27,1889. preamble, 7 CFR part 959 is amended as Comments: Comments must be follows; received on or before February 26, 1990. ADDREaSEa Send comments to Hoyle L PART 959-ONtONS GROWN IN SOUTH TEXAS Robinson, Executive Secretary, Federal Deposit Insurance Corporation. 550 17th 1. The euthority citation fur 7 CFR Street, NW., Washington. DC 20429. part 959 continues to read as follows; Comments may be band delivered to. Room 6097 on business days between Aetherity: Sees. 1-9,48 Stat 31, as emended; 7 u.s.c. 911-e74. 8;30 a.m. and 5p.m. Comments may also be inopected in Room 6097 between 8;30 IA new 8 959.230 is added to read as em. and 5p.m. on business days. (FAX follows; number (202j 347-2773 or 2775) Neon: This eeciee preecribee the annual FOR FURTHER INFORMATION CONTACt expenses and eeeeeemeet rate end will eotbe KerIR. tcrichbaum. Chief, Special published in the Cede ef Federal Reeulatiene. Situations end Applications Section- 5959.239 Expenses end eeeeaement rete. Review Section ll, Division of Expenses of $378,980 by the South Supervision, (202) 898-0758; Roger A. Texas Onion Committee are authorized Hood. Assistant General Counsel Legal end en assessment rate 0(50.055 per 53' Division (202) 896-3681: Nancy L Alper, pound container or equivalent quantity Senior Attorney, Legal Division (202) of regulated onions is established for the 898-3720, FDIC, 550 17th Street, NW., flecal.period ending july 31,2990 Washington. DC 20429. Unexpended hinds maybe carried over SUPPLEMENTARY INFORMATIOPO Diecuaeion Subccmmittee Notice: zctuaff~ister notice Bockground has been substituted for imic' ~ On August 9, 1969 President Bush signed FIRREA. Public Law No.101-73, pre-publication version--the - 103 Stat 183 (1989), into law. FIRREA same language is used in both, amended the Federal Deposit Insurance as the notice has fewer pages. Act ("FDI Act") in a number of ways; among which was the addition of a new FEDERAL DEPOSIT INSURANCE section 3210 the FDI Act by section 914 CORPORATION - of FIRREA, Public Law No.101-73, eec. 914, Stat 183,484-485 (1989) (lobe 12 CFR Part 303 codified at 12 U.S.C. 1831i). The FDIC is amending part 303 of ite regulations RIN 3984-A902 ("Applications, Requests, Submiltals, Delegations of Authority, and Notices of Appttcattona, Requests, Submtttale, Acquioition of Coniml"j by adding a Detegatlone of Authority, and Notices new § 303.14 to establish notice and of Acqutatelon of Control application requirements which would AoaNcr Federal Deposit Insurance implement the provisions deathbed Corporation ("FDIC"). above. ACTIOPc Interim rule with request for Section 914 requires specified comments. categories of insured nonmember banks to fusniah the FDIC with at lead 30 days EUMMARt This interim rule implements notice before adding any individual to section 914 of the Financial instiintiona the board of direcinre or employing any Reform, Recovery, and Enforcement Act individual ee a senior executive officer. of 1989 ("FIRR.EA") by adding e new An insured nonmember bank is covered section. 5 303.14. loll CFR parl 303. by the notice requiremenl if the bank (1) Section 303.14 requires insured Has been chartered ieee than two yeara, nonmember banks which fail within (2) has undergone a change in control specified calegorieslo ifie e notice with within the preceding two years, or (3) is the FDIC prior to adding or replacing a not in cumpliance with the minimum member of the board of direclorsor capital requirements eppliceble toll or employing or changing the is otherwiee ina "troubled condition." reeponoibilities of an individual to a cc determined on the basis of the bank's position as a senior executive officer. most recent report of condition orreport The FDIC may disapprove any proposed of examination or inspection. Section board member or senior executive 914 also prohibits the bank from adding officer wbose service is not considered the individual to the board, or employing lobe in the best interests of the the individual as a senior executive depositoro of the insured nonmember officer, If the FDIC ieeuea a notice of bank or the public. disapprove).. PAGENO="1012" 1008 Federal l~egister I VoL 54, No. 247 I Wednesday, December 27, 1989 I Rules and Regulations 53041 that it has been designated as in executives officers or directors which change in control less than two years "troubled condition" for purposes of this occur after a change in the control of a before the effective date, is covered by regulation.A memorandum of parent when those changes are pursuant the notice requirement until the two understanding based on safety and to either section 7(j) of the Fill Act, year period after that event has elapsed. soundness concerns will be considered section 3 of the Bank Holding Company For example, a bank chartered in March to fall within this provision. Act, or section 10 of the Home Owners' 1989 would remain covered until March 3. Prior Notice Requiremeni There Loan Act (the Savings and Loan Holding 1991, and therefore a notice would have are three categories of aituations in Company Act). The term "parent" of tube filed for any addition to the board which insured nonmember banks must course covers any parent at the time of or any employment of a senior executive files notice of intent to adds director or the change in the insured nonmember officer effected prior to March 1991. employ anenior executive officer. The bank, whether or not the parent was Similarly, a bank that underwent a first categoryexists when a bank has technically the parent at the time of the change in control in March 1959 would been chartered for lens thatrtwo years. change in control. For instance, if a be covered by the rule as a result of the The second category exists when a bank holding company is formed or change in control until March 1991. or any of its parents has, within the purchased, and an insured nonmember 5. Miscellaneous, The regulation has preceding two years, undergone a bank becomes a subsidiary, changes in been drafted so that all changes in change in control requiring a notice to the insured nonmember bank are senior executive officers in state- be filed under section 7(j) of the FDI Act, covered for the two-year period after the licensed insured branches or foreign 12 U.S.C 1817(j), or under the FDIC'8 parent's change in control. banks are covered, but changes in either implementing regulation. (This statutory An additional issue is whether section senior executive officers or board provision is commonly known as the 914's notice requirement covering the members in the foreign bank parent are Change in Bank Control Act; although "employment of any individual as a not. Although section 914 does not the provision now covers "insured senior executive officer" includeo specify the exclusion of these changes in depository.institutions" and not just -~ promotions and lateral transfers to that the foreign bank parent, the FDIC "insured banks," the title of the pooition~The FDIC believes that it does, believes that the exclusion is provision was not formally changed by and therefore the rule requires a notice reasonable. Comment on this point is FIRREA.) The second category also whenever there is a "change in specifically invited. covers the situation when any of the responsibilities" of any individual The rule does not cover "advisory bank's parents has undergone a resulting in his or her asoumption of a directors." The definition for this term is transaction subject to section 3 of the senior executive officer position. With patterned after the one in Federal Banking Holding Company Act or respect to section 914's coverage of the Reserve Re"ulation 0, 12 CFR 215.2(c). section 10sf the Home Owners' Loan "proposed addition of any individual to Act, or to the regulations implementing the board of directors," the rule covers Adoption Without Notice and Comment those statutes. The third category exists not only increases in board membership, and Reason for Immediate Effective when a bank is not in compliance with but also replacements of board members Date applicable minimum capital and the filling of vacancies on the board. The FDIC had determined that there is requirements, imposed either by 12 CFR The prior notice requirement can be good cause for adopting this rule part 325 or other regulatory action of the waived upon petition to the appropriate immediately upon publication in the FDIC or the appropriate state banking regional director, If delay could harm the Federal Register without prior notice authority, or is otherwise in a "troubled bank or the public interest, The and comment or a delayed effective condition." as discussed above, regulation notes the specific date, Waiting to adopt a regulation until Except for the second condition, the circumstance in which directors are after notice and comment is contrary to conditions are eelf.explanatory. elected at a shareholders' meeting. Even the public interest. Section 914 requires Paragraph (a)(2) of section 914 refers to though prior notice is waived, the the FDIC to review the competence a "change in control" in the generic information will have to be submitted experience, character, and integrity of sense and Is not confined to those within 48 hours of the waiver. Thus, all an individual proposed for a position as changes of control subject to the section parties who have any reason to believe a director or senior executive officer of 7(j) of the FDI Act. The F'DIC believes, that a change or addition covered by the certain insured nonmember banks. This that the use of the term in the generic statute or the regulation is forthcoming requirement is intended to enhance the sense indicates that Congress intended should assemble the informatisn prior to safety and soundness of the banldng that changes other than those under the addition or change. system. For this reason, Congress section 7(j) of the FDI Act should be Since the filing required is by the decided to make the requirement covered. Support for this position is bank, but the information relates to the effective immediately upon the signing founded in the fact that, at paragraph individual, the individual must certify to of FIRREA on August 9, 1989. Without (dffl) of section 214, information to be the validity of the information; the an immediately effective rule, the FDIC submitted in specifically that required - individual has the option, with the cannot perform its statutorily-mandated by section 7(j)(6) of the FDI Act. It is - concurrence of the bask, of forwarding responsibilities thus creating a risk to reasonable that Congress would have, this data to the FDIC under separate the safety and soundness of the banking correspondingly, referred to that statute cover, system. Any increased risk to the here if it had so intended. Further, it is 4. Effective dote. This rule is effective banking system is contrary to the public logical that the primary federal on the day it is published in the Federal interest. supervisor of the bank should be Register. Thus, every bank chartered or R t Ft `bill An I informed if there are changes in the subject to a change in control after the ry y is control of a parent which elicit effective date of this rule must comply Because no notice of proposed corresponding management changes in with the rule's notice requirement for a rulemaking is required under section 553 the bank which the Federal supervisor period of two years. Additionally, a of the Administrative Procedure Act or regulates. Accordingly, the FDIC has bank that is less than two years old on any other law, the Regulatory Flexibility elected to cover changes in senior the effective date, or that underwent a Act (5 U.S.C. 901-612) does not apply. In PAGENO="1013" 1009 53042 Federal Register I Vol. 54. No. 247 1 Wednesday. December 27, 1989 / Rules and Re~julatiOfl5 addition. pureuant to the FDIC's branch of a foreign bank), chief (U) The insured nonmember bank has etatement of policy on the drafting of operating officer, chief financial officer, undergone a transaction subject to regulations. it has been determined that chief lending officer, or chief investment section 3 of the Bank Holding Company a cost-benefit analysie. including a smell officer. The term also includes Act or section 10 of the Home Owners bank impact etatement, is not required. employees of entities retained by en Loan Act or regulations issued pursuant Insured nonmember bank to perform to either of thoee statutes; List of Subjects In 12 CFR Part 303 such functions In the insured (3) The insured nonmember bank is Administrative practice and nonznember bank, when such firm is not in compliance with the minimum procedure, Authority delegations hired In lieu of directly hiring the capital requirements applicable to it and (Government agencies) Bank deposit Individuals. which are imposed by 12 CFR part 325 insurance, Banks, banking, Insured (4) The term "troubled condition" or by other regulatory action of the FDIC depository institutions. Savings means any insured nonmember bank or the appropriate state banking associations. thab authority-, or In consideration of the foregoing, the (I) Has been assigned a composite (4) The Insured nonmember bank is FDIC hereby amends part 303 of title 12 rating by the FDIC of 4 or Sunder the otherwise in a troubled condition. of the Code of Federal Regulations to UniformFinancial Institutions Rating In the case of the addition of a member add new 8303.14 as follows: System. or. In the case of an insured of the board of directors or a change in state-licensed branch of a foreign bank senior executive officer in a foreign PART 303-APPUCATIONS, ("State branch"), an equivalent rating bank having an insured State branch, REQUESTS, SUBMITTALS, (u) Is subject to a proceeding initiated the notice requirement shall not apply to DELEGATiONS OF AUTHORITY, AND by the FDIC for termination or such additions and changes in the NOTICES OF ACQUISITION OF suspension of deposit insurance; foreign bank parent, but only to changes CONTROL (iii) Is subject to a written agreement In senior executive officers in the State 1. The authority citation for part 303 ~ which requires action to improve or branch. The notice requirement also maintain the safety end soundness of does not apply in the case of en revised to read as follows: the Institution and which is issued by advisory director who is not elected by Authority: 12 U.S.C. 378,1813.1815.1816 either the FDIC or by the appropriate the shareholders of the bank or any of 1817(i). 1818,1819 I"Seventh" and "Tenth"], state banking authority, a cease and its parents. who is not authorized to 1825,1828; Pub. L. No. 101-73. seC. 914,103 desist orderissued by either the FDIC or vote on matters before the board of Stat. 183,484-485 (1989) (12U.S.C. 18310 15 the appropriate state banking authority, directors, and who provides solely U.S.C. 1807. a cease and desist order or proceeding general policy advice to the board of 2. Section 303.13 Is reserved as initiated by either the FDIC or the directors. follows: appropriate state banking authority, ore (c)Proceduresfornotice of proposed 303.13 IReserved] capital directive issued by either the change in Dfrector or Senior Executive FDIC or the appropriate state banking Officer-(1~ Filing and acceptance. 3. Section 303.14 is added to read as authority; or Notices shall be filed with the follows: (iv) Is Informed in writing by the appropriate regional director and shall 8303.14 ctssng. in sniorexecutive regional director (Division of contain information pertaining to the ofticr or board of directors. Supervision) of the region in which the competence. experience, character, or (a) Definitions. For the purposes of institution is located ("appropriate integrity of the individual with respect this section: regional director") or his or her to whom the notice is submitted, as (1) The term "individual" means any designee, based one visitation, prescribed in the designated FDIC form, natural person, as well as any other examination. or report of condition. that subject to the authority of the regional entity and/or its employees substituted it has been designated a "troubled director or his or her designee to require for such natural person. institution" for the purposes of 8303.14. additional information. Each individual (2) The term "Insured nonmember (`b) Prior Notice Requirement. An on whose behalf the notice is filed must bank" means any bank, including any Insured nonmember bank shall give the attest to the validity of the information foreign bank having an Insured branch FDIC written notice at least 30 dsys filed which pertains to that individual. the deposits of which are Insured in prior to the effective date of any At the option of the individual, the accordance with the provisions of the addition orreplacement of a memberof Information maybe forwarded to the Federal Deposit Insurance Act, which is the board of directors (or a member of regional direcior by the individual; not a member of the Federal Reserve the board of trustees in an Insured however, in such cases, the insured System. The term does not include any nonmemberbank held in a mutual form nonmember bank must file a notice-to institution chartered by the Comptroller of ownership) or the employment or that effect. The 30-daynotice period will of the Currency, any branch licensed by change in responsibilities of any begin to run on the date all reqUired the Comptroller of the Currency. any individual to a position as a senior information is received by the District bank, or any federal savings executive officer ifi appropriate regional director. The bank bank. ` (1)The bank has been chartered or submitting the notice shall be notified of (3) The term "senior executive officer" the insured state branch has been -- the date onwhich all such required means any individual who exercises licensed less than two years; information is received and the notice is significant influence over, or (2) Within the two years preceding the accepted for processing. participates in, major policymaking proposed addition or employment (2) Waiver of priornotice decisions of an insured nonmember (I) The insured nonmember bank or requirement-(i) Procedure for bank, without regard to title, salary, or any of its parents has undergone a obtaining. Parties may petition the compensation. The term includes, but is change in control which required a appropriate regional director fore not limited to, the following positions: notice under section 7(j) of the Federal waiver of the prior notice required under president, chief executive officer, chief Deposit Insurance Act or reguiations this section. Waiver may be granted if it managing official (in en insured state issued pursuant to that statute; or is found that delay could harm the bank PAGENO="1014" 1010 Feder~l Register / VoL 54, No. 247 I Wedne~doy, December 27, 1989 / Ru1~s end Re~ilationa - 53043 or the public interest. Any waiver shall 12 CFR Part 308 Procedures ("part 308"). which governs not affect the authority of the FDIC to the FDIC's administrative proceedings, RIN 309441302 by edding a new subpart, Subpart L. issue a notice of disapproval within 30 dayt of the waiver. Rules of Practice and Procedure Subpsrt L provides rules and procedurea (ii) Election of directors. In the case of for notices filed pursuant to section 914 the election of a new member of the AGENCY: Federal Deposit Insurance of FIRREA. The FD1C is implementing board of directors at a meeting of the Corporation. section 914 by means of an interim rule, shareholders of an insured nonmember ACTION: Interim nile with request for and insured nonmember banks are bank, such waiver is hereby granted, but comments. expected to comply beginning on the dale of the nile's publication in the a completed notice must be filed with SUMMARY The Federal Deposit Federal Register. Comment is requested the appropriate regional director withsn insurance Corporation ("FDIC") is for 60 days after publication, however, 48 hours of the election, publishing an interim role with a request and, changes, as warranted, will be (3) Notice of isfent not to disopprove. for comments to add Subpart L sf12 made in the interim nile and a f'mal mie A proposed director or senior executive CFR part 308. This Subpart constitutes will then be adopted. officer may begin service before the an amendment 1012 CFR part 308, Rules expiration of the 30-day period if the of Practiáe and Procedures, which L Discussion FDIC notifies the bank and the govern the conduct of administrative On August 9, 1989 President Bush individual in writing of the FDIC's proceedings before the FDIC. Subpart L signed into law the Financial intention not to disapprove the proposed was created in order to set forth the institutions Reform, Recovery and addition or employment, rights that an individual or a state Enforoement Act sf1989 ("FiRREA"), (4) Commencement of service. A nonmember bank may sxeroiss and Public Law No, 191-73,101 Stat 183 proposed senior executive officer or procedures which must be foliowed ~ : (1989). FiRREA amended the Federal director may begin service upon the responding to a Notice of Disapproval~ Deposit insurance Act ("FDI Act") in a expiration of the 30-day period following issued by the FDIC pursuant to section number of ways, one of which was the acceptance of a complete notice, unless 914 of the Financial institutions Reform, addition of a new section 32 to the FDI the FDIC issues a notice of disapproval Recovery, and Enforoement Act of 1989 Act, added pursuant to section 914 of before the end of the 30-day period. ("FIRREA"). Pub. L No. 101-73, 103 Stat. FIRREA, Public Law No.191-73, sec. (d)Notice of disopprovol The FDIC 183 (1989) The FDIC may issue a Notice 914,193 Stat 183,484-485(1989) (to be may disapprove the individual's serving of Disapproval in response to a Notice codified at 12 USC. 18311). The FDIC is as a director or senior executive officer filed by an insured stats nonmember amending part 308 of its Rules of - liii f'mds that the competence. bask, pursuant to section 914 of Practice and Procedures, 12 CFR part experience, character, or integrity of the FIRREA. notifying the FDIC of its intent 308, by including Subpart L which sets individual with respect to whom a to add or replace a member of the board forth the rights that an individual or a notice under this section is submitted of directors of a state nonmember bank, state nonmember bank may exercise indicates that It would not be in the best or employ or change the responsibilities and procedures which must be foliowed interests of the depositors of the bank or of an individual to a position of senior when the FDIC issues a Notice of in the best interests of the public to executive officer of such a bask. The Disapproval pursuant to section 914 of permit the individual lobe employed by, purpose of Subpart L of the FDIC's Rules or associated with, the bask. The notice of Practice and Procedures, 12 CFR part Section 914 requires specified of disapproval will advise the parties of 308, is to provide for the efficient and categories of insured nonroember banks their rights of appeaL just banding of Notices of Disapproval to fumish the FDIC with at least 30 days (e) Delegotions. The authority to issue which must be med pursuant to section notice before adding any individual to notices of disapproval or notices of 914 of FIRREA. the board of directors or employing any intent nulls disapprove undur this DATES: Effective: December 27,1989. individual as a senior executive officer, sectioiz to grant walvers of the prior Comments: Comments must be An insured nonmember bank is covered notice requirement to determine the received on or before February 26, 1990. by the notice requirement if the bask: (1) informational adequacy of a notice: to ADDRESSEE Comments should be sent Has been chartered less than two years, designate an insured nonmember bask to Office of the Executive Secretary, 6th (2) has undergone a change in control as a "troubled institution": and Is floor, Federal Deposit insurance witlsin the preceding two yearo, or.(3) is determine when the 30-day period Corporation, 550 17th Street, ~ nut in compliance with the minimum begins to ron is delegated Is the Director Washington, DC 2042R Attention: capital requirements applicable to it or of the Division of Supervision, and. Robert Faldman, Deputy Executive is otherwise in a "troubled condition," where confirmed in writing by the Secretary. Comments maybe hand as determined on the basis of the bask's Director, Is an Associate Director of the delivered to room 6108 on business days most recent report of condition or report Division of Supervision or the regional between 8:30 am. and 5pm, Comments of examination or inspection. Section director (Division of Supervision) or will be available for inspection and 914 also prohibits the bask from adding ~deputy regional director (Division of photocopying at that addrdsa between the individual to the board, or employing Supervision). 8:30 am. and 5pm. on business days. - the individual as a senisr executive By Ordersf the Based afDirectses. ~ FURTHER INFORMAT1ON COPITAC'fl officer, if the FDIC issues a notice of Nancy L Alper, Senior Attorney, disapproval. Dated at Waahisgtse. DC. this 5th day sf Compliance and Enforcement Section, ~ Section.by.Ssction Summary and December. ~um Legal Division, 550 17th Street, NW., FederalDepsoit Insurance Carparatiso. Washington. DC 20429, telephone 202/ Discussion Hayts I., gsb'msos. s98'3725. ` Section 308.94 sets forth the scope of ExcesSive Secretory. SUPPLEMENTARY INFORMATIOPO This subpart L It sets forth under what (FR Dec. 88-28534 filed i2-2a-aa: 8:45am) nstice of the interim rule amends 12 CFR conditions an institution must file a awsa case sna~as-e - part 308, Rules of Practice and - Notice of Change in Senior Executive PAGENO="1015" 1011 33044 Federal Register I Vol. 54, No. 247 / Wednesday, December 27,1989/ Rules and Regulations Officer or Director ("Notice of Change in relevant and material documents end Insured depository Institution, Notice of Position") and states what change in argument is made on the record. The disapproval, Senior executive officer, position would have to occur to trigger a presiding officer is authorized to take or Savings associations, Troubled section 32 filing, cause to be taken depositions of condition. Section 308.95 of subpart L sets forth unavailable witnesses pursuant to guidelines for when the Board of 308.9s(b)(O). For the reasons set out in the Directors of the FUIC ("Board") or ita At the request of the applicant or preamble, part 308 of title l2of the Code designee may issue a Notice of FDIC enforcement staff, under of Federal Regulations is amended as Disapproval of en individual on whose 398.98(i~)(7) the record may remain follows: behalf an insured state nonmember open for an additional five days PART 308-RULES OF PRAC'IlCE AND bank ("state bank") has filed a Notice of following the hearing for additional PROCEDURE - Change in Position pursuant to section submissions. Once the record has 32. Those criteria include, inter oiia, that dosed. the presiding officer must make 1;The authority citation for part 308 is the individual's competence, experience, his or her recommendations pursuant to revised to read as fellows: character, or integrity indicate that it 308.98(b)(8) to the Board or its Autho~,' 12 USC. 1818,1972. Pub. L 101- would not be in the best interests of the designee within fifteen days. The Board 73,5cc. 914.103 Stat. 183,484-485(1980)112 depositors of the stats bank to permit of Directors or its designee will issue a U.S.C.1531i); 15 USC. 7iw'~ 5 USC. 504. the individual lobe employed by or decision and order within forty-five associated with the state bank or that it days. 2. A new subpart L, consisting of would not be in the best interests of the Il 308.94 through 308.98, is added to public to permit the individual to be 132. Regulatory Factors read as follows: employed by such a bank. A. Adopfion Without Notice and Subpart L-.Prscedures end Standards Section 308.98b of subpart L provides Comment and Reason for Imnsediate Applicable tea Notice of Change in Sesisr that the Notice of Disapproval mustbe Ef~ctve Dote Executive Officeror Director Pursuant to served upon the state bank and the Section32 of the Act - individual whs isa candidate for The FDIC has determined that there is director or senior executive officer and good cause for adopting this rule Sec. that the Notice of Disapproval must ediateb' upon publication in the 305.94 SCOPe. stats the relevant considerations for the Federal Register without prior notice 398.95 Grounds for disapproval of notice. 308.56 Procedures where notice of disapproval. The Notice of Disapproval and comment or a delayed effective disapproval issued pursuant to 1308.14. must also set forth that the individual or date. Waiting to adopt a regulation until ~ Dmisian on appeal. the bank may file an appeal from the afternstice and comment is contrary to 305.95 Hearing. Notice of Disapproval within fifteen the public interest. Section 914 of days from the receipt of the Notice of FIRREA requires the FDIC to review the Subpart L-Procedures and Standards Disapproval and must specify what competence, experience, character, and Applicable to a Notice of Change in additional information must be provided integrity of an individual proposed for a Senior Executive Officer or Director. by the petitioner. The appeal must be position as a director or senior Pursuant to Section 32 of the Act writing and filed in the appropriate executive officer of certain insured state Regional Office. The appeal must set nonmember banks. This requirement is 135594 SCops. forth the reasons why the FDIC should intended to enhance the safety and The rules and procedures set forth in review its decision and other evidence soundness of the banking system. For this subpart shall apply to the notice that was not presented at the time of this reason. Congress decided to make filed by a state nonmember bank * filing the Notice of Change in Position, the requirement effective immediately pursuant to section 32 of the Act, 12 A determination on an appeal must be upon the signing of FIRREA on August 9, U.S.C. 1831i. for the consent of the FDIC rendered within thirty days from receipt 1989. Without an immediately effective to add to or replace an individual on the of the appeal. Where an appeal is rule, the FDIC cannot perform its board of directors, or to employ any denied. 308.97(c) requires that the statutorily.mandated responsibilities, individual as a senior executive officer individual be notified of the relevant thus creating a risk to the safety and or change the responsibilities of any considerations for the denial and be soundness of the banking eystem. Any individual to a position of senior advised that the applicant may request increased risk to the banking system is executive officer where the bank: an oral hearing within fifteen days from contrary to the public interest. (a) Has been chartered for less than two years or the insured state branch the receipt of the denial. Should the B. R1ate~_~bilinni~is has been licensed forleos than two petitioner not receive a decision denying the appeal within thirty days, then he Because no notice of proposed years: may file a request for a hearing within rulemaking is required under section 553 (b) Has undergone a change in control fifteen days from the date of expiration of the Administrative Procedure Act or within the preceding two years: or of the thirty.day period. The request for any otherlaw. the Regulatory Flexibility (c) Is riot in compliancewith the a hearing pursuant to 308.97(s) must Act (5 U.S.C. 601-612). does not apply. In minimum capital requirement applicable set forth the relief desired and the addition. pursuant to the FDIC's to it or is otherwise ina troubled grounds for requesting that relieL statement of policy on drafting. condition as determined by the FDICon SectIon 308.98 of subpart L accords an regulations. it has been determined that the basis of such institution's most individual the opportunity for an oral a cost-benefit analysis, including a email recentreport of condition or report of hearing. The hearing is conceived as an bank impact statement, is not required. examination or Inspection. informal proceeding where, under* 308.98(b)(5), a presiding officer I~a~ Of Subjects in 12 CFR Part 308 1308.95 QroundsfardiuPProvsl of determines whether to allow the Administrative practice and presentation of witnesses. Pursuant to procedure, Banks, Banking. Bank deposit The Board or its designee may issues * 308.98(b)(4) no discovery is perssitted insurance, Authority delegations notice of disapproval with respect to a ttowever, an applicant may introduce (Government agencies), Director, notice submitted by a state nonmembes' PAGENO="1016" bank pursuant to section 32 of the Act, 12 U.S.C. 1831i, where: (a) The competence, experience, character, or integrity of the individual with respect to whom such notice is submitted indicates that it would not be in the beat interests of the depositors of the state nonmember bank to permit the individual to be employed by or associated with such bank: or (b) The competence, experience, character, or integrity of the individual with respect to whom such notice is submitted indicates that it would not be in the beat interests of the public to permit the individual to be employed by, or associated with, the slate nonmember bank, § 308.96 Procedsres where notice of disapproval Issued pursuastto § 303.14. (a) The Notice of Disapproval shall be served upon the insured state nonmember bank and the candidate for director or senior executive officer. The Notice of Disapproval shall: (1) Summarize or cite the relevant considerations specified in 308.95; (2) Shall inform the individual and the bank that an appeal of the disapproval may be filed within fifteen days of receipt of the Notice of Disapproval: and (3) Shall specify what additional information, if any, must be contained in the appeaL (b) The appeal must be filed al the appropriate Regional Office. (c) The appeal must be in writing and should: (1) Specify the reasons why the FDIC should review its disapproval: and (2) Set forth relevant, substantive and material documents that for gsod cause were not previously sal forth in the Notice required lobe filed pursuant to section 32 of the Act. 308.97 DecIsion on appeal. (a) Within thirty days of receipl of the appeal, the Director, and where confirmed in writing by the Director, an associate director, shall notify the bank and or individual filing the appeal (hereafter "petitioner") of the FDIC'a decision on appeal. (b) lithe decision is to approve the notice, the bank and the individual involved shall be as notified. (c) A denial of the appeal pursuant to section 32sf the Act shall: (1) Inform the petitioner that a written request for a hearing, stating the relief desired and the grounds therefor, may be filed with the Executive Secretary within fifteen days after the receipt of the denial: and (2) Summarize or cite the relevant considerations specified in § 308.95. (d) Ifs decision is not rendered within thirty days, the petitioner may file a request for a hearing within fifteen days from the date of expiration. §308,98 HearIng, (a) Hearing dates. The Executive Secretary shall order a hearing to be commenced within thirty days after receipt of a request for a hearing filed pursuant to 1 308.97. Upon request of the petitioner or the FDIC, the presiding officer or the Executive Secretary may order a later hearing date. (b) Hearing procedure. (1) The hearing shall be held in Washington, DC or at another designated place, before a presiding officer designated by the Executive Secretary. (2) The provisions of fi 308.08,308.10, 308.14 and 308.18 of subpart B of this part shall apply to hearings held pursuant to this section. but except as expressly provided in this subpart L, the balance of subpartB of this part shall not apply to such hearings. (3) The petitioner may appear at the hearing and shall have the ri8ht to introduce relevant and material documents and make an oral presentation. Members of the FDIC enforcement staff may attend the hearing and participate as a party. (4) There shall be no discovery in proceedings under this subpart L (5) At the discretion of the presiding officer, witnesses may be presented within specified time limits, provided that a list of witnesses is furnished to the presiding officer and to all other parties prior to the hearing. Witnesses shall be sworn, unless otherwise directed by the presiding officer. The presiding officer may ask questions of any witness. Each party shall hsve the opportunity to cross.examine any witness presented by an opposing party. The transcript of the proceedings shall be furnished, uponrequest and payment of the coat thereof, to the petitioner afforded the hearing. (8) In the course of or in connection with any hearing under this subsection. the presiding officer shall have the power to administer oaths and affirmations, to take or cause to be taken depositions of unavailable witnesses, and to issue, revoke, quash, or modify aubpoenaa and aubpoenaa duces tecum. Where the presentation of witnesses is permitted, the presiding officer may require the attendance of witnesses from any state, territory, or other place subject to the jurisdiction of the United Slates at any location where the proceeding Is being conducted. Witness fees shall be paid in accordance with 1 308.18 of subpart B of this part. (7) Upon the request of the applicant afforded the hearing, or the members of the FDIC enforcement staff, the record shall remain open for five business days following the hearing for the parties to make additional submissions to the record. (8) The presiding officer shall make recommendations to the Board or its designee, where possible, within fifteen days after the last day for the parties to submit additions to the record. (9) The presiding officer shall forward his or her recommendation to the Executive Secretary who shall promptly certify the entire record, including the recommendation to the Board or its designee. The Executive Secretary's certification shall close the record. (c) Written submissions in lies of hearing. The petitioner may in writing waive a hearing and elect to have the matter determined on the basis of written submissions. (d) Failure to request or appear at hearing. Failure to request a hearing shall constitute a waiver of the opportunity for a hearing, Failure to appear at a hearing in person or through an authorized representative shall constitute a waiver of hearing. If a hearing is waived, the order shall be final and unappealable, and shall remain in full force and effect. (e) Decision by Board or its designee. Within forty-five days following the Executive Secretary's certification of the record to the Board or its designee, the Board or its designee shall notify the affected individual whether the denial of the notice will be continued, terminated, or otherwise modified. The notification shall state the basis for any c~eciaion of the Board or its designee that is adverse to the petitioner. The Board or its designee shall promptly rescinder modify the denial where the decision as favorable to the petitioner. By order of the Board of Directors. * Dated at Washington, DC, this 5th day af December, issg. Federal Depenit Inaurance Corporation. Hoyle L Robinson, Executive Secretory. [FR Dun. 59-25O3SFiled 12-25-es, 8.45 am] mwen coca srisxi.a 1012 Federal Register I Vol. 54, No. 247 I Wednesday, December 27, 1989 / Rules and Regulations 53045 PAGENO="1017" 1013 Cisssiflcation Num~i'' Division of Bank Supervision 6700 (I) MEMO RAN D U M SYSTEM ~une licen Quincy. 6753 ID Notice ~ Reg~ona1 Directors FROM: Paul C. Fritt Director SUBJECT: Background Checks on duals 1. Purpose. To update procedures for making background checks on individuals involved in applications for federal deposit insurance, notices of acquisition of control. and Section 19 cases. 2. ~cj5Lround. On October 17, 1986. Congress passed the Anti-Drug Abuse Act of 1986 and, on October 27, 1986. the President signed the Act into law. This Act requires. in part. that upon receiving a notice of acquisition of control. the Corporation shall conduct an investigation of the competence. experience. integrity and financial ability of each person named in a notice of acquisition of control and make an independent determination of the accuracy and completeness of any information required of such person. Upon completion of the investigation, a written report of the findings shall be prepared which will become a record of the agency. Subsequently. on February 1. 1987. the Federal Bureau of Investigation ("FBI") changed its procedures relating to identification checks on individuals to require fingerprints of the individual to be investigated in order to access the FBI's data base. Because of these developments, procedures for conducting background checks on individuals ~nvolved in notices of acquisition of control and applications for federal deposit insurance and Section 19 exemptions are being updated. 3. FBI Name and Identification Ch~ck3. Two types of background checks ha'ie been requested routinely of the FBI. Name checks involve a search of FBI records for any investigation by that agency of the individual named. Identification checks are searches of arrest records of the individual named with any U.S., state, or local law enforcement agency. Procedures outlined in Transmittal *32 dated February 10. 1984 (copy attached) concerning requests for FBI name checks are unchanged. Information contained in that memorandum relating to FBI identification checks is herein updated. As of February l.,1987. the FBI established a policy that identification checks by the Corporation include not only data currently provided but also fingerprints of the individuals involved. Because of the additional burden of this requirement. these checks will not be requested routinely on all directors, principal officers or shareholders who own 5% or more of a bank's stock in connection with applications for federal deposit insurance or for a1 acquiring parties in a notice of acquisition of control. The Regional Director may use discretion in requesting FBI identification checks on persons Transmittal No. 87-106 PAGENO="1018" 1014 who are known to the regional office through previous banking affiliations and have a demonstrated record of integrity in mar.k:rtg or other business affiliations. -Applicants or acquiring parties with no past bank involvement or those who are unknown to the regional office and all aDpI~cants for Section 1 exemptiOnS will be required to submit fingerprint cards ~n order that FBI identification checks -may be req~es:ed. Providing fingerprints will be the responsibility of tr.e appi~car.t or acquiring party. `here the Regional Director concludes i3 :dentif~cat~on cnecks nay be om~tted, the reasoning and facts behind such concusior,s ~houd be well doc~ented. When the regional oEf~ce determ~r.es ~fr.o will be required to provide the:r fingerprints~ these ?ersor.3 will be not~f~ed in writing. ~ot~fication shell provide suggested locations such as a law enforcement office or post bff~ce convenient to the person in~.'olved where fir.gerprint~ng services are ava~able and shall convey a reasonable tine period for fingerprint cards to be returned to the regional office. Acceptable fingerprint cards can be provided by the Special Activities Section (DBS) or by the fingerprinting authority. \.The completed cards will be forwarded to the regional office which in turn will forward these cards to the Special Activities Section along with the request for an FBI identification check. Procedures currently used for requesting identification checks will remain in effect. 4. U.S. CustornsServiceChecks. Because of the emphasis placed by the Anti-Drug Abuse Act of 1986 on ir'.vestigating for possible currency transaction reporting violations, routine checks with the U.S. Customs Service will be required on all acquiring parties involved in a notice of -acquisition of control, all directors. principal officers or shareholders who own 5% or more of a bank's stock involved in an application for federal deposit insurance, and all applicants for exemption under Section 19. Requests shall be forwarded to the Special Activities Section and will include a completed background check form (FDIC 6700/01) and a cover memorandum stating the date of the request, the name and location of the bank, the type of application or action. and the names of individuals for whom background checks are requested. 5. Checks with Other Agencies. Transmittal *117 dated July 26, 1983 (copy attached) sets forth procedures for initiating special background checks through the Special Activities Section. The procedures outline I in that memorandum remain in effect and the agencies listed continue to be available for special background checks when needed. 6. Information Available from State Authorities. Each regional office is encouraged to develop a list of information sources from state authorities located within its jurisdiction. Attached is a listing of possible state contacts which may be utilized. These are (a) Corporate, which maintains records such as Articles of Incorporation, names and addresses of directors, officers and incorporators. notices of merger or consolidation, capitalization, and in some instances annual reports; (b) Securities, which generally would maintain prospectuses of stock offerings made within the state; Cc) Insurance, which would keep financial reports on insurance companies and records of investigations of companies or agents; and Cd) Uniform Commercial Code, which would have documents indicating borrowings against assets. Contact with any state agency will be at the discretion of the Regional Director. PAGENO="1019" 1015 -3- 7. Library~esources. The FDtC Library has at least two sources of background information on individuals or Companies. First, Dun and Bradstreet reports contain historical and ~ographical information on companies and professional corporations and the piinci~eis of those businesses. Second. major regional and national newspaDers and publications can be searched for articles on individuals or comoar.~es. If ir.formation from the library is desired. please contact thin McNamara a: e:~tension 7435 or eona:d Samowitz at e: