FDIC continues to be hyper-aggressive in using lawsuits to punish adversaries whether the agency has a case or not

 

 

 

By Dwight Haskins.

 

Sadly, not much has changed at the FDIC. The 600 pound gorilla is still fond of throwing its weight around and uses its 300 strong legal division to abuse and intimidate those who get in its way.

The following articles show the FDIC has been hyper-aggressive in using lawsuits to punish adversaries whether the agency has a case or not. However, this case also shows what a lucrative the “revolving door” is for ex bank regulators. Hurwitz hired former FDIC chairman,William Isaac.Hurwitz additionally hired two other former high-ranking banking regulators-John Douglas, former General Counsel of the FDIC, to represent him in FDIC v. Hurwitz and former Federal Home Loan Bank Board (OTS’s predecessor) Chief Enforcement Officer Rosemary Stewart to perform as an expert witness in OTS v. USAT et al. Much of the S&L debacle of the 1980’s occurred under Stewart’s watch, prompting analysts to call the S&L scandals “Rosemary’s Baby.”

The following are excerpts from the ruling on August 23, 2005 against the FDIC by Judge Lynn N. Hughes of the U.S. Southern District of Texas.

“Introduction

This is a cautionary tale where the emperor has new clothes — a bandit’s mask. The Federal Deposit Insurance Corporation sought to hold Charles Hurwitz individually responsible for all losses at United Savings, even though he had no obligation to the thrift or the government. Unable to focus its claims and unwilling to disclose its records in this suit — one that it brought — the FDIC surreptitiously paid another agency to bring a parallel administrative claim against Hurwitz, several companies, and other people. Later — much later — the FDIC dismissed its claims here.Hurwitz and two companies have asked that they recover their costs of defending the suit. They will recover their costs because the record revealscorrupt individuals within a corrupt agency with corrupt influences on it, bringing this litigation.

The FDIC maintains that it had a solid case; that it exercised only its independent regulatory judgment; that it did not participate in extra-agency proposals or deals; and that it was promptly and thoroughly candid in this and the regulatory action. The facts are otherwise. An extensive record — produced at substantial expense and by repeated court compulsion — reveals a regulatory scheme that slipped into self-absorbed, extra-legal, politically motivated trampling of citizens and the law.

The record includes (a) memoranda sent to as well as received from environmental groups; (b) notes of telephone calls between the FDIC and these groups; (c) minutes of conferences among FDIC staff, its counsel, and greens; (d) e-mails discussing a debt-for-nature swap, including adjustments to the dollar amount of the United Savings’s claims to reflect the value of the timber; (e) letters from Congress; (f) minutes of regular meetings of green groups, congressional staff, and other executive-branch staff; (g) recalcitrance in disclosure; (h) its squelching its inspector-general investigation; and (i) behavior at depositions that ranged from manipulative evasiveness to plain perjury.

The record reveals that the FDIC attacked Hurwitz in a perverse combination of personal and political hostility. The personal part was political, too, since it was derived from the bureaucrats’ and their like-thinking co-conspirators’ appreciation of a successful entrepreneur as the personification of what they opposed in America. As individuals they are free to think and act as they wish, but as agents of the government they are constrained by their particular bureau’s statutory mandate and the Constitution’s restriction on personal, partial, and irregular government.

When the government invokes the authority of the judiciary, it is obliged to follow the rules. This is called equal justice under law.

The FDIC’s documents contradict its protestations of independence, the merit of its suit, and the legality of the arrangement with OTS. The FDIC was refractory about disclosing its internal documents because they demonstrate, beyond question, that it became a tool in a political guerrilla war at the behest of interest groups and the administration. These outsiders, in fact, shaped this case, including the damage “calculation.” The FDIC knew that it had no authority to pay the OTS for the other action. Despite these realities, the FDIC persisted in its expensive, abusive litigation for a decade.

The public, through this court, has devoted substantial resources to this case. On sanctions alone, the court held a two-day hearing and has scrutinized the pleadings and exhibits totaling approximately io,000 pages. It has also reviewed the rest of the record. The court concludes that the FDIC has lied to Charles Hurwitz, the public, and this court. Over the past ten years, the suit here and in Washington — has cost the taxpayers in whose name these people acted tens of millions of dollars. Naturally, the agencies cost the defendants millions, too. Hurwitz is not content with the torture stopping. He has sought compensation.

The lawyers — retained as well as employed — whose acts are described in this opinion have violated standards of the bar in things from simple lack of candor to the court all the way to false testimony. These lawyers were agents — high or low — of the American people. As lawyers and as public officers, one phrase describes them: breach of faith. The lawyers have persisted in taking wholly false positions on the facts and law. Sometimes a client does not tell a lawyer the truth, but here the FDIC’s parades of lawyers knew the facts — the absence of fact. When a lawyer makes arguments that are disconnected from both the facts that he knows and the law, the reason is either gross incompetence, dishonesty, or both. Sanctions is the answer.

The court will acquiesce in not sanctioning the lawyers individually. In part, it will abstain in the expectation that licensing authorities and public integrity officers will meet their responsibilities.

Inherent Power.

Courts govern their own affairs.’ When parties exploit the judicial process, a court may sanction conduct beyond the reach of other rules.’ When a party engages in sanctionable conduct, the court may shift the entirety of an aggrieved party’s expenses to the offending party.

The FDIC says that the court may exercise this power only when a party commits fraud on the court. It says that it has not, despite its buying another agency, scheming with special-interest groups, federal agencies, congressional representatives, and the Administration, bringing meritless suits in two courts for an amount it could not explain, and lying about it all. It is hard to conceive how much more egregious the FDIC’s conduct should have been to merit sanctions under the FDIC’s view of the court’s power.

The FDIC admits that it “made no effort whatsoever to obtain discovery, take depositions or otherwise prosecute its claims before this Court” and that its suit here was a “protective one.”‘ Suits are not place holders. No private litigant would be able to bring identical actions in different courts. In addition, plaintiffs must pursue cases that they bring or suffer the consequences. The government — despite its conduct to the contrary — is not above the law.

The FDIC says that this court has no authority to sanction it for the OTS action and that the administrative case was not an issue before this court. The FDIC, however, made that case the business of this court by amending its complaint and making its recovery here derivative of the administrative claim. In addition, the OTS suit was not separate. The FDIC bought OTS, dictated what claims OTS would bring, and exploited both forums to make Hurwitz feel pain. OTS’s participation in the FDIC’s case was critical. It is well established that the court may sanction a party for abuses occurring beyond the courtroom…Although much of the FDIC’s conduct merits punishment, the sanctions that are imposed are only done as an equitable adjustment of the burden of this misbegotten case.

A. Conduct.

The FDIC’s improper purpose in suing Hurwitz is objectively ascertainable. The agency wanted to placate environmentalists and politicians, not redress the failure of the thrift. The court agrees with the observation of Congressman John T. Doolittle of California: “This case is government corruption at its worst.”

Besides suing for an improper purpose, the FDIC’s sanctionable conduct includes:
Filing imaginary claims, unfounded in law and fact. Objectively and subjectively, the FDIC sued in bad faith;

Suing despite its extensive investigation that concluded that Hurwitz was not guilty of actionable conduct;
Engaging in abusive investigation that in at least one instance involved an FDIC attorney asking a witness to “rethink” his testimony to avoid a personal suit;
Pursuing this case — in the face of its and its internal and external lawyers’ opinions about the lack of merit — either to extort environmental concessions or appease those in and out of government who wanted those concessions or even simply to look like it was doing something about a large loss;
Trying to delay the case at each opportunity;
Failing to pursue its claims and seek meaningful discovery;

Trying to thwart nearly all depositions of its officials;
Repeatedly obstructing documentary discovery, playing a shell game with its own, the OTS’s, and United Savings’s documents, hiding documents, withholding documents based on unfounded or waived privileges, disobeying discovery orders, and lying to the court; •
Trying to avoid dismissal on the merits by amending its complaint and leaving only an unripe — but equally bad — claim;
Suing here first and then instigating, paying for, and supervising — and hiding its role in — a second proceeding that covered identical facts as the case here and would have given the FDIC the recovery;
Trying to hide its illegal arrangement; and

Engaging in an open war of attrition…”

MAXXAM Awarded Over $72 Million In Lawsuit Against FDIC

On August 24, 2006, Judge Lynn N. Hughes, United States District Court for the Southern District of Texas, ordered that the Federal Deposit Insurance Corporation (FDIC) pay MAXXAM Inc. over $72 million dollars in sanctions as measured by legal and other expenses incurred during its 10-year legal battle against the regulatory agency. The judgment represents the largest sanction against the Federal government and incorporated MAXXAM’s requests that MAXXAM be reimbursed its reasonable costs and attorney’s fees.
At the time, J. Kent Friedman, General Counsel of MAXXAM, stated “The ruling is appropriate because the FDIC wasted taxpayer dollars by pursuing politically motivated litigation that it knew was meritless. The actions by the FDIC represent illegal and shameful government behavior and this is now the second federal judge who has determined that.” MAXXAM filed a motion to sanction the FDIC for filing a lawsuit that the FDIC’s own legal division’s internal analysis concluded had “at least a 70 percent” chance of failing on pretrial motions and, if it survived, the chances of prevailing on the merits were “marginal at best.”

The FDIC’s standards call for at least a 50 percent chance of success before initiating legal action. The FDIC ignored that standard and proceeded with a frivolous lawsuit anyway. Judge Hughes stated in his ruling, “By now, Hurwitz has spent nearly twenty years defending himself against the government. This court cannot restore completely the damage that this case has done to him personally.

It can, however, make the government pay for its betrayal of the public trust, its vindictive political assault on a private citizen, and part of the economic loss that it has caused him.” In addition to the FDIC lawsuit, the FDIC paid millions to the Office of Thrift Supervision (“OTS”) for the OTS to initiate an administrative action against MAXXAM, Charles Hurwitz and others. The OTS’ litigation commenced in December 1995 seeking approximately $821M in restitution and civil money penalties. The OTS action was essentially a second lawsuit by the FDIC. It had the effect of transferring the FDIC’s unlimited financial resources to the OTS in order to finance the longest and most expensive trial in the history of the OTS lasting 110 trial days (including 100 for the OTS to present its case) spread over more than two years.

OTS Administrative Law Judge Arthur Shipe issued a 230-page decision in September 2001 in which he recommended that all charges against MAXXAM and Mr. Hurwitz be dismissed. In the wake of Judge Shipe’s opinion, the OTS settled with MAXXAM and Mr. Hurwitz in October 2002 for $206,000; the respondents made no admission of wrongdoing. The settlement allowed MAXXAM and Mr. Hurwitz to cease further legal expenditures on their defense in a fashion that represented a clear victory. It also caused the FDIC to drop its related lawsuit against Mr. Hurwitz in November 2002.

“I am pleased by the ruling of the Court and feel redeemed not only for myself but for the company and our employees. This ruling puts to rest a very long process of defending ourselves against a government agency’s erroneous claims and the subsequent pursuit to hold them accountable,” Charles E. Hurwitz, Chairman and CEO of MAXXAM, said at the time. “This pursuit is something no individual should be subjected to. Fortunately, we had the resources to fight the case and prevail and are now ready to move on.”
MAXXAM Contributes to Elected Officials Who Then Try to Curtail S&L Trials

May 1, 2000 Contact: Darryl Cherney, Environmentally Sound Promotions 707/923-4949. www.jailhurwitz.com. Documentation available upon request.

Charles Hurwitz, Chairman of MAXXAM, Inc. and controlling officer of a Texas savings and loan that failed in 1988, made campaign contributions to elected officials who then pressured banking regulators to curtail court actions against him. In an emerging scandal reminiscent of the Keating Five, House of Representative members Peter King (D-NY), Tom Delay (R-TX), and Ken Bentsen (D-TX) all received significant contributions from MAXXAM, according to Federal Elections Commission records. Senator Kit “Junk” Bond (R-MO) and former Federal Deposit Insurance Corporation (FDIC) Chairman William Isaac joined the three congressmen in a coordinated attack on banking regulators from the Office of Thrift Supervision (OTS) and the FDIC. The Hurwitz Five–King, Delay, Bentsen, Bond and Isaac–are attempting to intimidate regulators to prevent the very last of the S&L trials from reaching conclusions.

The FDIC and the OTS filed separate court actions in 1995 against corporate raider Charles Hurwitz. The OTS action named MAXXAM Corp. and various subsidiaries as additional defendants. The OTS administrative law hearing concluded this year and currently awaits Judge Arthur Shipe’s recommendation. Director of the OTS, Ellen Seidman, will review the judge’s recommendation and issue a final determination. OTS lawyers are asking for a ruling that MAXXAM and Hurwitz pay $832 million in restitution for their roles in the $1.6 billion failure in of United Savings Association of Texas (USAT).

Newly-released documents obtained under the Freedom of Information Actreveal that each of the Hurwitz Five wrote menacing letters to either theFDIC or the OTS on behalf of Hurwitz.In the case of former FDIC Chair William Isaac, the tone was hysterical. The emergence of Isaac is particularly disturbing to taxpayer advocates, environmentalists and steelworkers who have battled Hurwitz over the last fifteen years. Isaac, a super-lobbyist who runs the Secura Group, provides current FDIC Chair, Donna Tanoue with an ominous example of the revolving door between the public and private sector. His very presence signals that the lush life awaits banking regulators if they play their cards right while in public office.

This improper contact heightens concerns that the FDIC or OTS may settle out of court for pennies on the dollar, allowing Hurwitz to escape serious penalty. Hurwitz additionally hired two other former high-ranking banking regulators–John Douglas, former General Counsel of the FDIC, to represent him in FDIC v. Hurwitz and former Federal Home Loan Bank Board (OTS’s predecessor) Chief Enforcement Officer Rosemary Stewart to perform as an expert witness in OTS v. USAT et al. Much of the S&L debacle of the 1980’s occurred under Stewart’s watch, prompting analysts to call the S&L scandals “Rosemary’s Baby.”
Hurwitz and MAXXAM bankrupted USAT while profiting from its failure. Using the S&L’s plundered assets, Hurwitz leveraged junk bond acquisitions of Pacific Lumber and Kaiser Aluminum using notorious criminal broker, Michael Milken, to engineer the deals. Activists have been calling for assett seizure disgorgement of MAXXAM’s ill-gotten gains, and criminal charges to be pursued against Hurwitz..
Contributions referenced above were made as follows according to www.tray.com: * Charles Hurwitz donated $1000 each to Reps. King and Bentsen (1999). * MAXXAM Properties Pres. James Noteware donated $1000 to Rep. Delay (’99). * MAXXAM-connected Sallie Mae PAC donated $9500 to Rep. Delay. (98-99). (Dr. Barry Munitz, CEO of the failed S&L, MAXXAM’s VP for 9 years and Hurwitz’s former co-defendant sits on the Sallie Mae Holding Co. Board and himself contributed $4000 to the Sallie Mae PAC). * William Diefenderfer, MAXXAM Lobbyist and Board member of Sallie Mae Holding, contributed $1000 to Sen. Bond (1998). * William Isaac contributed $1000 to American Bankers Association PAC who in turn contributed $3000 to Rep. King. Isaac is a member of the American Bankers Assoc. and a columnist for American Banker.

Faces In The News Hurwitz Hands Off At MaxxamRuthie Ackerman,06.04.07, 1:00 AM ET

To put it lightly, the last few decades haven’t been kind to Charles Hurwitz.

Now the daddy of controversial business battles is ceding a measure of control of his conglomerate Maxxam to his son Shawn, who will assume the post of president. The elder Hurwitz will remain CEO and chairman of the board.

Hurwitz, 66, is arguably handing over a sinking ship, with the Friday announcement coming two weeks after the company, which has interests in logging, real estate and horseracing, reported a wider first-quarter net loss of $12.3 million, or $2.33 a share, on $28.7 million in revenue.

In the mid-1980s, the Texas-born corporate raider earned a spot on the list of the most vilified businessmen of the last quarter century when he bought Pacific Lumber, owner of the majority of privately held old-growth redwood forests in the U.S., and the company promptly filed papers showing it intended to harvest them.

Stopping the logging became a cause celebre for the environmental movement, and in the media glare that followed, Hurwitz was cast in the role of arch villain. A Web site called jailhurwitz.com was started. Hurwitz was physically assaulted. Woody Harrelson was arrested at a demonstration. And Julia “Butterfly” Hill gained national attention for the cause when she spent two years living in a 200-foot-tall redwood she named “Luna.” Eventually, she paid Maxxam $50,000 to spare the tree.

In 1999, the dispute was settled when Pacific Lumber sold 5,600 acres of redwoods to the state and federal governments for more than $360 million. The deal also called for logging restrictions to preserve the 200,000 acres that weren’t purchased.

However, Hurwitz was still embroiled in a bizarrely related dispute with the Federal Deposit Insurance Corporation. The FDIC filed suit against him in 1995, blaming him for the $1.6 billion collapse of United Savings of Texas in 1988. Hurwitz had owned a quarter of the bank’s parent company, United Financial Group.

In a 2005 ruling in Hurwitz’ favor, a federal court said that the government had brought the suit to engineer a financial loss for the businessman that would force him to give up the redwood forests.

Hurwitz was awarded $72 million by the court in the largest penalty ever assessed against a federal agency.

Hurwitz may have won in court, but the once-feared corporate raider’s business fortunes have been unarguably diminished.

On Jan. 20, Pacific Lumber filed for bankruptcy, blaming strict regulations for unfairly limiting its logging profits.

Hurwitz got in more hot water in California on Feb. 21, when he was placed in handcuffs at the Arcata/Eureka airport after trying to go through the commercial passenger gate. When Hurwitz was stopped, he allegedly had some words with the sheriff’s deputy who was called by an airline employee.

It was also revealed in April that two former California state forestry officials sued Pacific Lumber Co. in December, alleging that the company didn’t live up to the deal it struck with the state over the redwoods, essentially defrauding the state of California out of tens of millions of dollars.

Hopefully, Shawn Hurwitz will have better luck than his father.

The elder Hurwitz has tangled with the authorities throughout his career. After forming a small brokerage and investment company, he bought Summit Insurance Co. of New York in 1970, only to be sued shortly afterward by the Securities and Exchange Commission for allegedly manipulating Summit stock. He got off, but Summit went bankrupt shortly thereafter and was liquidated in 1975.

Hurwitz was then charged by the acting insurance superintendent of New York with insurance fraud for improperly shuttling funds between holding companies. He settled for $400,000.

He took control of McCulloch Oil Co. in 1980, renaming it MCO Holdings. Simplicity Pattern Co. was his next move, and after taking cash out of its pension plan and selling its assets, he renamed the company Maxxam.

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A brief history of how the FDIC throws its weight around…

Driven to New Directions

As the economy improved in the 1990s, far fewer banks and thrifts were in distress, but there was a lag of two or three years before downsizing of the regulatory machinery began. In 1995 the RTC, by sunset provision, handed its matters over to the FDIC and closed shop. And at about that time, the handful of banking regulatory agencies, particularly the FDIC, began scaling back enforcement actions and lawsuits for the most basic of reasons–a better economy and fewer troubled banks and thrifts.

Around then Ricki Tigert Helfer came in as FDIC chairwoman and set about cutting the staff by 36 percent. And tried to rein in the regulators. She brought in William Kroener, an experienced lawyer in the field from Davis, Polk & Wardwell, as general counsel.

 

They inherited a legal staff of 1,300 lawyers, which included those brought over from the defunct Resolution Trust Corp. Of the total, 160 lawyers handled professional liability suits against officers and directors, as well as lawyers and accountants. (Now there are reportedly just 19 of them.) Helfer and Kroener instituted tighter reviews of proposed cases, and winnowed out many of those inherited from the rtc. Kroener points to one in which the targets put a $200,000 offer on the table and the agency declined, dropping the case instead, “because it had no merit.”


Early on Kroener even instituted an open-door policy in response to complaints he was hearing from lawyers who felt their clients were being pursued unjustly and unfairly. But he and Helfer had taken over an agency that was, in many ways, a staff-driven freight train. Apparently, in the face of reductions in force and fewer good cases, some felt the need to justify their jobs by making cases when they shouldn’t have.


One apparent example came to light in a federal criminal trial involving a prominent state senator in Virginia and his son, who own and run a small-town bank. (See “The Zealots and the Senator,” ABA Journal, Oct. 1998, page 60.) U.S. District Judge Henry Morgan threw out the case as soon as the prosecution completed its presentation.

In February he ordered the Department of Justice and the FDIC to pay the defendants $570,000 to cover their legal fees and costs because the prosecution was “vexatious.”

That judgment was the first successful one under the so-called Hyde Amendment of 1997 that calls for the government to pay when a case proves to be “vexatious, frivolous or in bad faith.” The judge found that the FDIC had gotten the U.S. attorney to pursue a criminal matter based on evidence that hadn’t been strong enough for the agency’s initial civil complaints through administrative proceedings. He ordered the FDIC to pay a third because the two agencies acted “in concert.”


The judge found so many dirty tricks involved that he noted some evidence that the FDIC might have been even more than vexatious and acted in bad faith. The FDIC regional counsel pushing the case wrote several memoranda that came back to haunt him in court. In one, he said the DOJ wouldn’t take such a case built on a minor technical violation, except that the target, owner of a small-town bank, also was a well-known state senator. At one point–a fact not brought out in trial or noted by the judge–a witness called before FDIC counsel for a sworn statement became spooked by the questions. He said he wanted to have his lawyer present. He was cajoled into not doing so.


“[Y]ou are not a focus of the investigation; that means you are not affiliated as a director and officer, somebody managing the bank,” the witness was told by then-FDIC regional counsel John J. Rubin from the Atlanta office.

“We do not have jurisdiction over you.” What Rubin did not say was that just three months earlier the FDIC had named the witness as a target in a criminal referral to the U.S. attorney. Judge Morgan determined that the FDIC wanted to punish the bankers, not regulate them, and blasted as inexperienced the regional counsel, Richard Fraher, who pushed the case as “an overzealous bureaucrat.”


“More difficult to understand,” the judge wrote in his opinion, “is the failure of the many layers of supervision between [Fraher] and indictment to understand and appreciate the unreliability [of the government’s key bit of evidence] and the weakness of any other evidence of wrongdoing.”

The judge was pointing a finger directly at a culture of abuse in the agency. It was the way, in too many instances, the business of regulating banks and thrifts was conducted. The reasons are many and complex. They go back decades. They resulted from good people working with bad law and bad people working with good law.


“I don’t blame them for taking that first look at me,” says Glen Garrett, the blue-jeaned banker in small-town Missouri. “But there came a time early on when they knew better. And they didn’t stop.”

Reining in the Regulators


Judges blast banking agencies for ‘bad faith,’ overzealousness in numerous cases.
Banking regulators have handled thousands of cases since the savings-and-loan and banking crises of the 1980s. They point to a high winning percentage not only with the two administrative law judges in the Office of Financial Institution Adjudication–a process criticized by defense lawyers who say the aljs rule almost always for the government–but also in the federal courts.

“We have a very high success rate in the appeals courts, and I attribute that not to the fact that the bench is predisposed to decide in our favor, but instead to the fact that we do our cases carefully, we craft our arguments carefully,” said William Kroener III, general counsel at the time for the Federal Deposit Insurance Corp.


Critics respond that the FDIC has lost two hugely significant cases in the U.S. Supreme Court that prevent it from using federal common law instead of state law, particularly concerning the statute of limitations and standard of care. O’Melveny & Myers v. FDIC, 512 U.S. 79 (1994); and Atherton v. FDIC, 519 U.S. 213 (1997). And administrative appeals go straight to the federal appellate courts based solely on the administrative record –a record built in a review system some critics claim is corrupt by design.

The FDIC also has pulled some cases from federal District Courts, or revived them after losing, by paying the Office of Thrift Supervision to handle them administratively. Doing so avoids juries, and stricter rules and procedures as well as a stricter statute of limitations–and puts the cases before the friendly ALJs.

“It all has an Alice-in-Wonderland quality,” says banking lawyer Arthur Leibold.


The banking agencies have recovered a lot of money from crooks and grossly negligent directors, officers and professionals such as lawyers and accountants who managed the affairs of thrifts and banks.

But critics contend that the regulators, having already rooted out the bulk of the past wrongdoing, have aggressively pursued borderline, questionable cases–sometimes against innocents–to justify their continued existence. In reality, there is no practical way to determine how many actual innocents settled by paying money, in sums both small and huge, and agreed to leave the banking industry, just to walk away from the burdens of cases that never should have been brought.

* * * * *
Early Pattern in Minnesota When Paul Oberstar tried to buy a troubled bank in Minnesota, the FDIC moved to prohibit him from doing so. The sanction was backed by an administrative law judge’s recommended decision that said Oberstar “lacks the competence and integrity to have a controlling voice in a troubled bank” because he used a proxy. But the 8th U.S. Circuit Court of Appeals ruled that the FDIC was wrong when it determined Oberstar had improperly taken control of the bank through a proxy from the previous controlling shareholder, who had been imprisoned for fraud. Oberstar v. FDIC, 987 F.2d 494 (1993).


The appeals court also accused the FDIC of abuse and harassment for tacking on a $125,000 civil money penalty against Oberstar just five days after he appealed the administrative ruling. The appeals court noted that the money penalty was improper because “we had acquired jurisdiction. Although the agency gave the [civil money penalty] a different docket number, that was but a thinly disguised attempt to avoid the jurisdiction of this court.”


In a footnote, the appellate court stated: “We are concerned this is not an isolated occurrence.” It cited another case from the 5th Circuit in which it had ruled that an increased penalty by the FDIC after judicial remand “looks to us uncomfortably like judicial vindictiveness.”


One ALJ Slams the FDICDuring 40 days of hearings before an administrative law judge, the FDIC kept changing its allegations against Beverly Orloski for her work as head of the mortgage department at Bay Bank Valley Trust in Massachusetts. They left out the one that fit best, her lawyer says. She probably was guilty of a bad romance. The FDIC didn’t back off of its attempt to prohibit her from ever working again in the banking industry until Judge Arthur L. Shipe issued a 237-page recommended decision that accused the agency of manufacturing the case against her. In the Matter of Jeffrey Adams, FDIC 93-91e.


Several others named in the action, including a commercial loan officer who was Orloski’s boyfriend, settled with the agency. But Orloski fought back. Soon after the ALJ’s unusually lengthy recommended decision, the FDIC entered a single-sentence dismissal order. That meant it wouldn’t have to send the ALJ’s decision along with its yearly report to Congress. The agency agreed to pay Orloski’s fees and costs for the three-year battle in an arrangement based on the Equal Access to Justice Act guidelines.

“I’ve never tried a matter in such crazy circumstances,” says Thomas A. Kenefick III, Orloski’s attorney. “We had 40 days of hearings in which you’d go for two weeks then break for a month. You have to learn it all over again.”


But even that was made more difficult, he says, because when testimony and evidence would prove Orloski did no wrong, “They’d just shift the rules.” The administrative law judge put it this way: “The precise allegations against [Orloski] evolved during the course of the proceeding in response to the evidence presented by [her] in her defense and other matters.”

The ALJ accused the agency of using its proposed findings of fact to “screen from view” evidence that favored Orloski, and noted that “some of the witnesses [bank officers and staff] in this proceeding strained their credibility by being overly helpful to the FDIC and unduly hostile to [Orloski].” Not only should Orloski not be banned from banking, Shipe wrote, she would “on the contrary, be a highly valuable and trustworthy employee to any such employer.”


The FDIC’s general counsel at the time, Kroener, said of the now-closed case, “That’s the only instance where the ALJ said, ‘You guys didn’t prove it, no way, not at all.’ ” Several defense lawyers disagree. They say there are other cases in which that particular ALJ found in favor of individuals, though never in favor of financial institutions themselves.


Making Rules and a ScapegoatA former chief economist at the Federal Home Loan Bank Board spent a lot of money over several years defending himself against what a federal appeals court decided was in reality “a back-handed way” by the Office of Thrift Supervision to create a new rule. Kaplan v. OTS, 104 F.3d 417 (D.C. Cir., 1997). Donald Kaplan was on the boards of both the Enstar Group holding company and its subsidiary, American Savings & Loan Association. When a decision that involved the two boards led to a huge loss to the thrift, the OTS brought administrative actions against Kaplan and others.


The OTS, successor to Kaplan’s former employer, the FHLBB, sought to remove him from both boards and demanded $500,000 in restitution and a $183,600 civil money penalty. While there was no rule against being on two related boards, the OTS arguments implied as much. Administrative Law Judge Shipe’s recommended decision called for dismissal of the charges against Kaplan, but the OTS’ acting director rejected it.


The appeals court determined that the acting director’s decision, “although based on unreasonable judgments which could be characterized as arbitrary and capricious, is probably better described as lacking substantial evidence–in our view any evidence.” The court said the OTS “has made Kaplan something of a scapegoat.”

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