Decision and Order, John W. Johnson, Jr., Robert L. Johnson - OCC

Decision and Order, John W. Johnson, Jr., Robert L. Johnson - OCC

L._.--__ / I UNITED STATES OF ARRRICA Before The OFFICE OF TRRIFT SUPERVISION DEPARTMRNT OF THE TREASURY In the Matter of JOHN W. JOHNSON, JR. Pre...

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L._.--__

/

I

UNITED

STATES OF ARRRICA Before The OFFICE OF TRRIFT SUPERVISION DEPARTMRNT OF THE TREASURY In the Matter of JOHN W. JOHNSON, JR. President and Chairman of the Board of Directors,

i

ROBERT L. JOHNSON, Director, Vice President and Chief Financial Officer,.

;

;

Case No. OTS AP 93-53 Dated: June 18, 1993 OTS Order No. AP 95-17 Dated: March 16, 1995

and R. TERRY TAUNTON, Director, of i Charter Federal Savings and Loan Association, West Point, Georgia

;

1 DECISION

AND ORDRR

OF

TABLE

I.

INTRODUCTION AND SUMMARY

II. BACKGROUND A.

III.

OF CONCLUSIONS

Description of the Charges and Summary of Administrative Proceedings ...............................

B.

Summary

C.

Exceptions

FINDINGS

of the AI.J*s Recommended to the Recommended

Decision

Decision

..................

..............................................

B.

ConversionApplication

...9

.................................

..16 ..18 ..18

..................................

..2 1

Grounds

for Cease

and Desist

1.

Unsafe

or Unsound

2.

Breach

of Fiduciary

3.

4.

-i

Banking

Practice

..2 2

..............

..2 2

Violation of the Reasonable Expense Provision of the Voluntary Supervisory Conversion ...................................... Regulation

..3 0

Respondents'

Duty

...................

..2 7

Grounds 1.

Order

.......................

Additional

Defenses

................

..3 1

a.

Payment of Appeal Costs ....................

..3 1

b.

Administrative Procedure Act/Due Process Claims .....................................

..3 2

...............................

..3 4

..............................

..3 5

c. D.

.....................

Regulatory Background ................................

B. StatutoryBackground C.

.

.

................................................

DISCUSSION

.

.

OF FACT ...........................................

Charter's

.

...............

A. Background

A.

-.___-

. . . . . . . . . . . . . . . . . . . . . ..l

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...2

C. Post-DenialExpenses IV.

CONTENTS

Ratification

forRestitution

Calculation

of Amount of Restitution..

..........

I

I

..3 9

--

E.

Civilmoneypenalty

F. Respondents'

against

JOhnSOn

.................. ..4 0

Request for Oral Argument

............... ..4 1

V. CONCLUSION ...............................................

...4 1

ORDER

_.--

-

I

I

--

DECISION I.

INTRODUC!l'IONAND SUMMARY OF CONCLUSIONS This

case

presents

a transaction personal

benefit

Respondents

son)

other

name

of

-- John

(Johnson's and

in the

to

Federal

Home

Charter

Federal

W. Johnson,

Loan

appeal

Bank

Savings

conversion.

Because

against)

other

insiders

and not

concludes

that

been

duty,

Director

and

to

civil

money

in

benefit

pursue

a

the

advised

Bank

Board's

and

other

Director

the Acting relief

practice,

of 12 C.F.R.

Georgia

supervisory

Respondents

at

has

the

a breach

) 563b.31.

restitution

Director

--

them)

after

Point,

the

post-denial

in this

against

attorneys

to reverse

to make

three

or "FRLBB*')' denied

charter's

to

the

L. Johnson

voluntary

and unsound

The Acting penalties

the

relief

West

or its depositors,

Respondents

of $139,039.

any

of

Board"

for

Respondents)

claims

means

"Bank

a violation

in the amount impose

other

was an unsafe

orders

settled

intended

to

case,

(collectively,

(which

of

decision

expense

fiduciary

Acting

activities

to Charter the

institution's of

the appeal

have

this

but

(11Johnson4q), Robert

engage

to

may pursue

association

In

since and

a director

and Loan Association's,

application

would

Jr.

Board.(the

([email protected]")

decision

savings

Taunton

(who have an

of when

director.

and R. Terry

pursue

and

of the

the

directors

decided

the question

The

to Charter

determined

not

proceeding.

1

The Bank Board is the predecessor agency to the Office of The OTS is the "appropriate Federal Thrift Supervision ("OTSV*). 12 U.S.C. banking agency" with regard to Charter and Respondents. 1818(i)(3). 0 1813(q),

___~

7

i

I

I

--

2 II.

BACKGROUND A. Description Proceedings On

June

Federal

18,

Deposit

Institutions No.

(1988

II

of

Money

engaged

in

Charter's

an

continuing

Board's

supervisory conduct

constituted The

Respondents, Respondent amount

as well Johnson

a

cease

as restitution also

was

and

and

alleged duty

and

filed

Desist

The

they

and

Notice

authorized

a reversal for that and

money

a

% 56333.31 and

a

of the

voluntary

Respondents' a conflict

desist

a civil

(i)

of Assessment

order

to or reimbursement

assessed

On

filed

a timely

January

19,

administrative

hearing

Administrative

Law Judge

proposed

---

also

Pub. L.

0 1818(b)

when

application

of fiduciary

sought

of 1989,

12 C.F.R.

to seek

the

of

against

of Charter.

penalty

in the

of $306,000.

hearing.

and

of expenses

a breach

Act

(VVNotice*').

practice

Charter's

(i) of

by the Financial

to Cease

violated

unsound

and

and Notice

Johnson

The Notice

Notice

Respondents a

of

conversion.

interest.

Respondents

payment

denial

8(b)

(V'Enforcement*l)

for an Order

against

and

of Administrative

(12 U.S.C.

Enforcement

Respondents

unsafe

sections

("FIRREA")

against

that the three

to

Summary

and Enforcement

OTS

Penalty

and

(**FDIA1*), as amended

and Rearing

Restitution

Bank

183

1990),

to Direct

alleged

Act

Recovery,

103 Stat.

of Charges

Civil

pursuant

Insurance

& Supp.

Notice

1993,

Reform,

101-73,

charges

of the

reply

findings

of

was

answer

1994, held

to the Notice

through in

LaGrange,

(llAIJ*r). The

fact,

conclusions

January

parties of

law,

and 26,

Georgia filed

requested 1994,

an

before

an

post-hearing

memoranda

of

I

I

law,

briefs.

Ti

--

3 The ALJ 1994.

15,

Both

additional were

issued

a Recommended

parties

memoranda

notified

submitted

the

to the Acting

the

Acting

Final

Decision

filed

and Order

for

extended to March

17,

well

had

decision.

deadline

1995.

been

On March

for

OTS

as

the parties

Decision

final the

as

9, 1994,

Recommended

Director

on September

thereto

On December

AU's

Director

and Order

exceptions

and replies.

that

1995,

Decision

9,

issuing

Order

No.

the

AR

95-

12. B.

Summary

The

ALJ

cease

and

concluded

desist

$139,039. assessed

of the Altos

In

make

addition,

the

ALJ

money

practices, 9 563b.31

appeal

the

denial

characterized

of

bank

and

the

Respondents

had been

advised

by

appeal

of

qualified counsel the

supervisory with

and Rank

conversion

evidence

71

indicating

huge

for a voluntary

Board's

that

AIJ

application that

that

supervisory

denial was

Respondents

likelihood of

of

should

be

or unsound

of

of 12

funds

conversion,

benefits The

the

a

amount

and a violation

by the regulators

others

unsafe

by Respondents

3.

to

of $133,920.

supervisory

at

the

expenditure

personal

Decision

advised

duty

subject

Johnson

committed

Charter's

voluntary

harvest

Recommended

Charter

amount

be in

that

of fiduciary

as "an attempt

expense."

that

_--

to

found

that Respondents

of

should

restitution

in the

in approving

the AIJ the

penalty

breaches

Decision

Respondents

and

The AL3 concluded

C.F.R.

that

order,

a civil

banking

Recommended

to gain at

were

at

which control

the

bank's

determined

that

it was unlikely conversion of

success

Charter's

remote

to

and on

voluntary

best.

seeking

Coupled control

I

I

of

--

4

the

Association,

that

substantially

from

concluded

Respondents

practice

that and

The

incurred

voluntary

over

conversion

a

was

low.

well

Sank

in general

incur

whether

alternatively,

forced

that

direction

were

the

the

unreasonable

5 563b.31.

Accordingly,

for a cease

and

In relief were

assessing under

of the

was Respondents

-i

the

OTS

by requiring

the

voluntary

-- instead

by

been

enriched of

defrayed

operating

ability

of

potential prudent

at

an or

costs,

costs

or,

The

AL3

Respondents'

violated

12 C.F.R.

the requirements

satisfied. was

entitled

the AY Charter

supervisory

of Charter

a

Charter's

the burden.

that

with

expressed

the

Charter

that

supervisory

without

determined

$?1818(b)(6),

expense

the

and thus Respondents

had

During

institution's

to bear

incurred

12 U.S.C.

unjustly

connection

in determining

institution

order

requires

personnel

that

acguirors

the ALY

whether

the

expenses

to consider the

in

the

conversion

voluntary

determined

expenses

desist

because

violated

which

supervisory

conversion

is a factor

as

concluded

ALJ

B 56333.31,

Charter's

AI.7

or unsound

supervisory

be @*reasonable.**

of

the

to Charter.

association

Board

amount

The

to

injury

savings

conversion

the

expenses

association

as

by

an unsafe

Respondents

voluntary

benefit

conversion,

duties

that

12 C.F.R.

personally

committed

fiduciary

the

at

attempt,

concerns

had both

of

would

supervisory

determined

supervisory

conversion

income

voluntary

further

codified

expenses

Respondents

their

provision

regulation

actual

a

breached

ALJ

expense

_--

and

found

to

affirmative

that Respondents

to bear

virtually

conversion,

-- who would

have

where

all it

benefitted

I

I

--

5 significantly

from

same

the

reasons,

reckless

restitution

ALJ

arrived

difference amount

charges

against

The

causing denial a

total

account

expense

that

OTS) other

Respondents

regulation. in the

amount

expert,

of

by

expenses

which

and money

paid

directors

pursuant

the

to

with

determined

$L39,039.

The

calculating

the

of $258,715

(the

AL7

to Charter

For the acted

He thus

amount

post-conversion

Charter's

conversion.

concluded

via

was

settlement

settlement

of

agreements

$119,676).2 ALJ

also

penalty

caused

concluded

restitutional

total

by

supervisory

appropriate

the

by the

(totalling

money

was

between

unrefuted

also

of the

at

offered

voluntary

ALJ

disregard

that

the

a

recommended

based

on

violation

the

of

institution

$372,000,

adjustments

appropriate

net

his law

conclusion and

prior

money

and

to

his

bear

the

second

factors, should

fiduciary cost

the AL7

civil

Johnson duty

of the

by

post-

at $1000

After

be

tier

Respondent

of violation

adjustments.

penalty

a

that

372 days

and mitigating

civil

of

breached

to pursue

He calculated

expenses. of

assessment

taking

for into

determined

the

$133,920.

2

While the ALJ opined that the costs of litigating an administrative proceeding might be appropriately assessed in some cases, he decided that Enforcement's litigation costs should not be The ALJ assessed against the Respondents in this proceeding. public addressed through that these matters be suggested Enforcement has not excepted to this portion of the rulemaking. Director accepts the and the Acting Decision, Recommended recommendation of the AL7 not to assess litigation costs herein.

---

-

;

l

I

--

6 C.

Exceptions

Respondents

excepted

and conclusions. conclusion

to the Recommended to virtually

In particular,

that Respondents

consummation

of a voluntary

evidenced

by,

valuation

finding

association's

among

stock, evidence

necessarily

encompasses

they charge:

supervisory things,

on

the

as well

Respondents'

all of the ALJ's

a "windfall"

upon

conversion was in error, as

the ALI's

market

value

as his refusal

on valuation:

findings

(1) that the [email protected]

would have obtained

other

based

Decision

failure

to

of

converting

the

to admit

make

certain

a

of

(2) that the right to appeal

the payment of the costs of the appeal;

(3)

numerous factual and legal arguments including, among other things, mootness,

reliance on advice of counsel, ratification,

partial release; and (4) constitutional connection witness

with

testimony

Enforcement

penalty

assessed

increased of

and

a

w

Ravv,

OTS

Johnson,

Enforcement

No.

AP

used by the ALI, and the AU's

In addition,

Enforcement

0~s

between

reduction of the civil money arguing

that

it

should

established

92-148

takes exception

factors to reduce the starting

penalty,

communications

with the guidelines Order

money

in

advisor.

excepted to the AU's against

and statutory violations

of the civil

alleged

in accordance

Specifically, amount

assessment

and the ALI's attorney

Enforcement

Matter

the

and full or

(December

be

in In the 4,

1992).

to the per day starting

netting

of the aggravating

amount of the civil money penalty.

argues

that the AW

made an arithmetic

error in his own calculations in the amount of $111,600.

7 III.

FINDINGS A.

Background

Charter that

OF FACT

is a federally

maintains

Georgia.

its principal

Johnson

President

chartered

was

the

place

mutual

savings

of business

Chairman

of the

association

in West

Board

of

Point,

Directors,

and General Counsel, Robert Johnson was a Vice President

and Director,

and Taunton was a director of Charter at all relevant

times.3 In December 1984, Charter sold a substantial consisting

of low-yielding,

loan portfolio

fixed rate mortgages

-- which

Charter to record a loss in excess of $5 million. Accepted

Accounting

insolvent

Principles

by $3.5 million.

able to meet

Despite

its regulatory

position

1984

in stock

("FHLMC"), Home

Loan

Thereafter, amounts

through

Bank

1988,

of

with

3 Respondents B 1813(u).

requirements

Charter Home

an initial

Atlanta

was

rendered

Charter

except

acquired

was

for the

a

substantial

Loan Mortgage

Corporation

dividend

the Federal

("FHLB-Atlanta")

Charter began accumulating

and by January

Charter

30, 1985.'

of the Federal

commencing

caused

Under Generally

this insolvency,

capital

fiscal year ending September From

("GAAPn),

--

from of

3580

shares.

FHLMC stock in significant

1, 1988, Charter held 150,000 shares.

are institution-affiliated

parties.

12 U.S.C.

’ Charter was GAAP insolvent from at least December 28, 1988 On or about September 1989, Charter through August 3, 1989. corrected its GAAP insolvency.

8 At

that

such that stock.

time,

thrifts

During

and others Freddie

trading 1989,

stock

end,

13,

which

class

of freely

FHLMC

Mac

and

stock.=

a

Freddie

per share. value

which,

have

5

shares

stock

were

to own FHLMC Robert

Johnson

restrictions

Bank

approved

Board,

sitting

a resolution

acquire

the

FHLMC

authorized

stockholders

were

1988,

contribution to

FHLMC

of

on the

$7 per

the

cost

of the removal FHLMC

stock

insolvent

four

share

new

had

stock been

holdings

Charter

To that offer

of a new stock

of existing

FHLMC

existing split,

FHLMC Charter

Mac

million

stock.

shares

of approximately

of $20

restrictions,

increased

liquidated,

1,

preferred

of the trading

on a GAAP

1988,

basis

January

shares

Freddie

one

of

certain

exchange

of

stock

approximately

lifted

an

share

board

stock.

participating

for

at an average

By August 30, of FHLMC stock.

offered

for each

the

effective FHLHC

four-for-one

stock

Charter's FHLMC

the

held

so that

senior

as

that

could

As a result

been

the trading

investor

stock,

of

Johnson,

stock,

Charter

if the

would

the

stockl') in exchange

its

Mac

to have

transferable

cash

Afterwards,

of 1988,

FHLMC

permitted

on FHLMC

Pursuant

exchanged

the

FHLMC,

30,

under

stock

the summer

1988,

interested

August

("Freddie

entities

on

lifted.

restrictions

on

restrictions

the primary

actively

of the

any

trading

or about

On July directors

were

worked

Mac

the

Charter

to a level no

longer

basis.

held

approximately

250,000

9

B.

Charter's

conversion application

In early 1988, while Respondents were seeking to eliminate the trading restrictions on the Freddie Mac stock, Respondents were also considering a voluntary supervisory conversion of Charter.6 Charter hired the law firm of Huggins and Associates to provide advice and representation in connection with a proposed voluntary supervisory conversion of Charter, including preparation of the necessary application materials. Immediately before

the

trading

restriction

was

lifted,

Charter's counsel requested that FHLB-Atlanta permit Charter to convert by means of a voluntary supervisory conversion, proposing that the institution be purchased by Johnson "and others" for an amount to be determined upon the results of an appraisal of the association.'

FHLB-Atlanta responded on August 2, 1988, that

Charter did not qualify for a voluntary supervisory conversion because: (1) the institution was not actually insolvent, and (2) taken as a whole, the conversion would not be in the best interests of Charter's members.

Because the Freddie Mac stock then had a

market value in excess of $9 million, and a voluntary supervisory conversion would deprive the account holders of their interest in the association, the

FHLB-Atlanta concluded that

supervisory conversion would be inequitable.

a voluntary

By letter dated

6 The requirements for a voluntary supervisory conversion are set forth below at section V. A. Such a transaction, which is designed to infuse capital into a failing institution, requires no appraisal of the institution. 7

The record does not reflect that such appraisal was performed.

10 August 24, 1988, after their services had been terminated, the Huggins firm informed Johnson that it believed Charter had other conversion options which would be "much more palatable to the regulatory authorities and will enjoy much quicker approval and processing." (GX 3). In or about August 1988, Johnson retained Ronald Snider ([email protected]') of the law firm Miller, Hamilton, Snider & odom of Mobile, Alabama to advise whether Charter should continue to pursue a voluntary supervisory conversion.

The Miller

firm advised

Charter that they believed that the FHLB-Atlanta's position was incorrect.

On September 15, 1988, Respondents and Charter's other

directors authorized Snider to pursue a voluntary supervisory conversion and file an application thereto on Charter's behalf.a On December 28, 1988, Charter filed an application with the Bank Board in Washington to convert via a voluntary supervisory conversion.

The application proposed that Charter would sell

90,000 shares to insiders, including Respondents, at $50 per share for a total purchase price of $4.5 million.

At

that time,

Charter's Freddie Mac stock was worth approximately $48 million. Respondents and the other insiders intended to sell the appreciated Freddie Mac stock if the conversion application was a Around this time Snider and his firm became involved in an effort to have legislation passed by Congress to enable Charter to convert by means of a voluntary supervisory conversion without consideration of Charter's large FHLMC portfolio. On October 22, 1988, the U.S. Senate issued Senate Resolution 514 that expressed the view that a GAAP insolvent institution should be permitted to convert by means of a voluntary supervisory conversion "without regard to any factors relating to the appreciation in market valueI' of FHIW stock.

11 and

approved, investments

and

Respondents Bank

stock

with

mortgage-backed

their

"higher

yielding

[email protected]

other

insiders

purchase

(SX

3

had arranged

of Charter's

stock,

loans,

at

5256).

for Colonial

using

Charter's

as collateral. After

comment

the

application

letters

propriety Charter

of filed

conversion

some

the

and Charter's

to finance

stock

the

replace

to

Charter

the

application:

the

purpose

fourth

the

amendments

amendment

issued

concerns

effectively

filed,

supervisory changes

to

incorporated

conversion.

Johnson

the

conversion.

substantive

in a standard

three

about

to the voluntary

which

was

Board

supervisory

no. 4 made

proposal afforded

Bank

serious

voluntary

amendment

conversion

of the protections

filed,

expressing

proposed

five separate

original

before

was

Shortly

explained

his

in a letter: Let me make it clear. I am not interested in a conversion merely for the sake of a conversion. We must maintain control of the My family's contribution to Association. Charter must be fairly recognized. If a conversion is on such basis that we would be better off to remain a mutual, we will remain a mutual. The proposal outlined in the attached memo is our final step. There is no room left for compromise. If this doesn't work, we will either sue the Board or remain a mutual.

(GX 8 at 4106)(emphasis plan,

Charter

(for

a

proposed

total

supervisory

of

added). to raise

150,000

conversion

Pursuant to the amended the

shares)

regulations

offering and, did

price

although

conversion

to $7.5 the

not so require,

million

voluntary proposed

to

12 open

up

amended and

the

offering

plan,

35%

65% would

several

depositor each

would

have

could

accounts

purchase

without

of the

Johnson stock

conversion

to pay 35%

2.5%

all

shares

had

remaining,

shares. 10%

of

and

each

first

purchase

be permitted

If such

insiders there

to The

would were

shares

to

9.9%

to be offered.

the

no

from their

offered

would

stock

period:

must

purchases.

to be would

20

functionally

funds

stock

that

least

the offering

was

20 day

and Taunton total

at

and

for subscriptions

stock

Johnson

individual

offering,

buy

to withdraw

provided

unsubscribed

to

which

of the

of the

directors,

no

Moreover,

for their

of the

also

plan,

of the total

days,

depositors

to the

the

were to be constrained

in payment

and Robert

plan

3.25%

20

Under

depositors.

shares

to be offered:

amended

by

offered

amended

expiration

to allow

approximately

purchased

members.9

of $lOOO.'"

for

to the

acquire

unsubscribed

than

price

penalty

purchase

the

purchase

open

prior

was made

the directors,

to

be

other

fact that checks

In contrast,

able

more

to

remain

by the

of the total

to the

an aggregate

cleared

provision

Charter's

would

Under

wishing

only

shortened

stock

offered

respects.

for

of

individual depositor purchases

member

shares,

all

of the

be

However, in

to

be

still

would

be

an MOP.

' This revision was apparently undertaken in response to Bank Board staff's concerns that given the unrealized value of the Freddie Mac stock, it would have been inequitable to exclude the depositors from participation in the conversion. 10

This provision was later revised by Amendment No. 5 to permit each depositor to acquire only 10 shares for minimum of $500, and be allowed to purchase up to 5% of the total offering.

_--

I

I

--

I

13 If shares

continued

(John W. Johnson Johnson)

would

to be available,

Johnson

III and Curti M. Johnson

be permitted

family members

-- sons of Respondent

to each purchase

up to 7.1% of the

Thereafter, Johnson and Robert Johnson would

total shares offered.

each be allowed to purchase 28.29% of the remaining and five of the remaining remaining

shares,

amendment

to

to purchase

30,

1989,

the

voluntary

Mac

stock

opened

Because

of this increase,

that did not appear

and a Charter

that

Charter

supervisory

the

day

filed

conversion

trading

at

employee shares. its

final

application,

$71.50

there was a substantial

on Charter's

7.14% of the

.29% of the remaining

the. date

Freddie

On August

could purchase

and the other director

each would be entitled on June

directors

shares: Taunton

per

share.

unrealized

gain

balance sheet.

3, 3.989, the Bank Board issued Resolution

2215 denying Charter's voluntary supervisory conversion

NO. 89-

application

on the grounds that: Charter had a positive equity; the transaction was not in the best interests of, and presented

the possibility

injury to, the institution,

and the FSLIC: the

its account holders

Bank Board was unable to issue a tax certification transaction:

and

the

financial

condition

and

acquirers

was such that the proposed transaction

Charter's

financial

stability

interest of Charter,

on the proposed

integrity

the public

of

the

might jeopardize

and was not in the best

its depositors,

of

financial

or the FSLIC.

On August 24, 1989, the Miller firm prepared a memorandum that concluded, of

the

for a number of reasons, that should Charter seek review

Bank

Board's

decision

in

the

Eleventh

.

Circuit,

the

14 likelihood Miller

of

firm

success

recommended

On September the

board

to

directors

were

memo."'

Charter's

appeal

should

decided

same

reconsideration

in

conversion.

board

held

light

and

of

reviewed

resolved

counsel

the

be pursued

and that

the board

the

meeting

denial

of

and Charter's of the

Johnson

to

1989,

an appeal.

a copy

that

30,

a special

Respondents

general

the

other

August

be

24

delegated

determine would

of

whether

support

him

an

if he

an appeal. 11, 1989,

day,

not pursue

directors

Charter's

to pursue

the

Charter

with

On August

remote.

options

provided

On September On

that

discuss

supervisory

as

be

5, Charter's

voluntary

authority

would

Johnson

Charter's

with

filed

outside

the OTS.

the petition

counsel

OTS later

filed

denied

for review.

a

request

for

the reconsideration

request. At that substantially telephone notes

that

time,

Respondents

exceeded

conversation he

informed

$7.5

million.

with OTS

believed

OTS

staff

Charter's

In a memorandum

staff

in

October

appraised

value

documenting 1989,

a

Johnson

that:

a standard conversion simply did not conform, I then was not practical for our situation. ran through the scenario where if we had an appraisal the appraisal would be at least some $35 to $40 million. We would then have to raise another $35 to $40 million and that was just completely out of the question in this area.

" Johnson also concluded in a memorandum 1989, that the prospects for a successful 1imited.l' (SX 28).

dated September 5, appeal were "very

15 (SX-33

at

7013).

application,

Snider

that

agree

Charter

for the OTS's letter

the

(by letter

dated

to acquire

approval

dated

responded

Following

11,

the agency

the voluntary

On December and on behalf

an insolvent

1989,

would

supervisory

10,

Chief

directors,

proposed

conversion.

Counsel

of

By

the

OTS

approval

the proposed

as individual

brief

the

in exchange

to recommend

under

of

1989)

institution

be unable

fil.ed their

denial

supervisory

the

conversion

26, Charter's

of Charter,

Board's

November

of the voluntary

December

that

Bank

of

terms. petitioners

in the Eleventh

Circuit

appeal. On

February

Charter

filed

Charter

held

the

two

The

that

pursue

at

which

it

approve

the

pursuit

of the

not cent

proxy

tabulated of the

the

Special

expenses

May were

25, cast

in

by

that

in

(the

Federal The

of

vote Board

continue

approving

on of to

"Conversion")

ago, to

and date

depositor

Approximately

favor

therewith

the

should

18 months

(SX 39 at 2). 1990.

direct

conversion

Charter

supervisory

its members

Federal

after

application,

connection

(1) to

approximately

Conversion." until

filed

Charter

incurred

year

on the voluntary

Meeting:

supervisory

one

conversion

is requesting

whether

undertook

votes

approximately

supervisory

statement

Federal

voluntary

first

1990,

of the depositors

regarding

the

9,

voluntary

"Charter

issues

Directors

and

a vote

conversion. states

8

(2) to in

the

vote

was

ninety-seven pursuit

per

of the

16 voluntary

supervisory

expenses

incurred

On

October

Board's

2,

denial

FSLIC.

the

received

only

assets

Fed,

1990).

approved

the likely

The

$7.5 more

discouraged

depositor

benefit

the

be consummated

in

$50

Charter, Ass'n

concluded

payment

structure

of

borrowed

Board would

would

with

have

faced also

conversion

found

to

the

that

the

insiders

acquisition

repaid

had have

The Court

and the other

the 1569

institution

further

to be

and

conversion,

proposed

of,

F.2d

Bank

proposed

the

Court

as the money,

the

912

Charter

Charter

in

of the Respondents

with

members

of its assets. of

Bank

interests

OTS ,

an

the

on the grounds

if the

for

and

participation The

v.

that

exchange

depletion

stability

upheld

its

conversion,

million,

insiders.

Charter's

Circuit application

Loan

supervisory

the

condition

jeopardize

as Charter's

not be in the best

to,

d

Court

than

that

financial

injury

post-conversion

of

would

million

determined

Eleventh

conversion

Sa V.

voluntary

worth

the

conversion

potential

Charter

(11th Cir.

1990,

of Charter's

presented

as well

therewith.'*

that the proposed and

conversion

through

might was

to

expected

profits. C. On more raised

Post-Denial than

questions

one

Expenses

occasion

concerning

in 1989, the

OTS

expenses

supervisory Charter

personnel incurred

in

12 The OTS reviewed Charter's proxy statement before it was The proxy statement disseminated but did not attend the meeting. did not reflect that Charter's counsel had advised against supervisory conversion appealing the denial of the voluntary Nor did the proxy statement separately identify the application. expenses incurred to seek a reversal of the Bank Board's denial of the application.

17 connection to

with

Charter

expressed

dated her

expenses

and

income.

The

cost the

of the

of

May

its

letter

were

that:

Agent

had

Charter's and firm

September of King,

Russell

on the

appeal.

Agent in

By letter

Deborah

conversion

the

association's

Bank

Board

conversion

Beals related

operating

believed

should

of

Nina8

Beals

costs, out

Nina8

ended

expenses

has

that

be

the

shared

by

the

in response

to

that the "expenses

for

prepared

and

Company, was

and

period certified

of which

a principal,

May

31,

1989,

the

to

the that

(SX-10

points the

WC. these

at 2708). and

OTS~s

incurred

(GX 26 at the

31,

board

group.*' these

audit

dated

related

informed

of hand."

and 1990 reports

May

repeats

1990,

("Ninas")

1989

Examination,

by the acquiring

rendered

year-end 30,

in

Examination

gotten

of

12 months

$427,277

be shared

in both the

Report the

Deborah

agreement,

appeal

that

repeated

"[f]or

about the conversion the

effect

1989

incurred

Report

Johnson's

increase

supervisory

The

should

1990

the

group.

institution

The

and

Supervisory

the

reports

concerns

Supervisory

attempt

1989,

over

voluntary

states

expenses

31,

negative

examination.

1989,

conversion

concerns

acquiring These

the

notes

concerns

in pursuing

12-13)." September by

the

Respondents' reflects

30,

1989

accounting accountant

that

Charter

13

Charter has recouped some of these Since that time, expenses. Payments received by Charter from other directors pursuant to settlement agreements with OTS in this case total The only evidence of a payment by Respondents reflected $119,676. in the record is a payment by Johnson in the amount of $12,400 for an amicus brief filed with the Eleventh Circuit, although this expense is not included in the various calculations of the conversion-related expenses paid by Charter.

---

I

--

18 incurred

$320,971

voluntary

supervisory

request,

Ninas

expenses.

m

1990,

costs

the

supervisory

A stock

conversion

Regulatory savings

form

12 U.S.C. codified

of

At

the

1, 1989

September expert

through

30,

of $297,931.

Board's application.

30,

in the

amount

the

expenses

These

September for

1990

of

Charter's

expenses

Some

denial

of the

conversion-related

calculated

to reflect

of

post-denial

services

incurred

included before

Charter's

expenses

the

but

voluntary

total

$39,216.

at12

conversions

at

C.F.R.

1571

and Part

to obtain The will

general

may

in accordance

5 1464(i)(l)

conversion.

the

Background

association

only

associations

F.2d

Bank

denial

DISCUSSION A.

and

through

appear

the

conversion-related

in the amount

calculation

after

IV.

August

the

after

application.

breakdown

Enforcement's

conversion

paid

a From

1, 1989

$333,472.

in this

prepared

calculated

August

expenses

conversion

FiX 52.

Ninas

period

in conversion

(2).

the

public.*'

The OTS's

written

the

Charter

a

Fed.

mutual issued

form by the

conversion

all mutual

consent

prior is

to

and

a

OTS.

savings

to effecting "ensure

association, Sav.

to

regulations,

require

regulations

converting

omitted).

from

regulations

563b et sea.,

of

benefit

(citations

with

the OTS's

purpose

convert

Loan

its

that

members

Ass'n,

912

19

Subpart A addresses standard conversions.'4

Among

other

things, these regulations specifically address the interests of the account holders.

For example, the regulations require that after

the OTS approves the conversion plan, it shall be submitted to a special meeting of the members.

If a majority of the total

outstanding votes of the association's members approve the plan, it can be implemented. &$R 12 C.F.R. 0 563b.6(e) (1989). The account holders

are

also

given

preferential

institution's conversion to stock form.

participation m

in

the

12 C.F.R. 0 563b.3

(1989). Under the conversion plan, each eligible account holder is required to

receive non-transferrable subscription rights

to

purchase the association's newly issued capital stock before it is offered to the general public. &

12 C.F.R % 563b.J(c)(2) (1989).

Further, each savings association upon conversion must provide for a liquidation account equal to its pre-conversion net worth for the benefit of eligible account holders. w

12 C.F.R. 5 563b.3(f)(l)

and (2) (1989).15 The OTS regulations also impose Value restrictions on the sales price of the newly issued stock and the amount of stock that 14

This proceeding involves the regulations in effect at the time Charter completed its application for a voluntary supervisory conversion. The conversion rules have been amended since then but not in any way that would gain Charter's application a more favorable response. l5 The purpose of the liquidation account is to provide former mutual account holders with a priority claim equal to the institution's pre-conversion liquidation value on the association's assets if, after conversion, the institution should be liquidated. 12 C.F.R. B 563b.J(f)(2) (1989).

20

any one person regulations

or group of persons can acquire.

require that the converting

sell capital

stock

market

value

as determined

C.F.R.

8 563b.3(c)(l)

addition, associate

the

Specifically,

association

will issue and

in an amount equal to its estimated by an independent

(1989);

regulations

12 C.F.R.

provide

EI~ forma

valuation.

0 563b.7

generally

that

the

m

12

(1989).

In

no

person

or group of persons acting in concert may subscribe

or for

or purchase more than five percent of the total offering of shares. &2

12 C.F.R.

5 563b.3(c)(7). (1989).16

A voluntary provide

comparable

supervisory benefits

conversion, and

by

protections

contrast, to

Thus, the accountholders

own nothing

not

accountholders

because it is based on the premise that the institution worth."

does

has no real

of value which must

l6 For this purpose, members of the converting association's board of directors are not deemed to be associates or a group 12 acting in concert solely as a result of their board membership. C.F.R. 5 563b.3(c)(8)(1989). Purchases by directors and officers and their associates are subject to an aggregate limitation of between twenty-five percent and thirty-five percent of the total number of shares being issued in the conversion, depending on the size of the association. u. 17 There is also a middle ground of conversions, known as Subpart D of the regulations provide modified conversions. A modified conversion guidelines for modified conversions. generally is available to an institution that fails to meet its 12 C.F.R. 0 56333.35 (1989). In regulatory capital requirements. the substantive and procedural rights a modified conversion, granted to members in mutual insured institutions converting under Subpart A may be restricted in order to meet the needs of an insured institution whose financial condition has deteriorated such that a standard conversion which would raise sufficient capital to enable the institution to achieve a solid capital base is not Modified conversions may be effected without the feasible. la. sales of conversion stock must be at an approval of members, aggregate price in excess of the BIG ti market value of the institution as determined by an independent appraiser, and members' preemptive rights are limited. I.&

21 be protected: the only value is the capital to be infused by persons willing to buy stock in the institution. Accordingly, in order for a FSLIC-insured institution to qualify for a voluntary supervisory conversion, both (1) the institution's liabilities must exceed its assets under GAAP on a going concern basis and (2) the converted institution must be a viable entity under P 563b.26. &8 12 C.F.R. 8 563b.24 (1989). Under I 563b.26, a converting FSLICinsured institution is a

"viable entity"

if the prospective

acguiror infuses sufficient capital, as defined by the regulation, and the transaction taken as a whole is in the best interests of, and does not present the potential of injury to, the converting institution, its depositors and the FSLIC.

The members of the

institution "have no rights of approval or participation in the voluntary supervisory conversion, or to the continuance of any legal or beneficial ownership interest in the converted institution or savings bank," 12 C.F.R. 0 563b.21 (1989), unlike depositors participating in a standard conversion.

No appraisal of the

institution is required. B.

Statutory Background Under 12 U.S.C. 5 1818(b)(l), the OTS may issue a cease-

and-desist order if an institution-affiliated party has engaged in proscribed conduct including: engaging in an unsafe or unsound practice

in

conducting

the

business of

the

association: or

violating a law, rule or regulation, or conditions imposed in writing or written agreements with the agency. The OTS may require

_’

I

22 the

institution-affiliated

violation

or practice

conditions

party

and

to

from

(6).

The

make

the

discussed

are met.

also

take

such

other

may

order

12 U.S.C. as

desist

action

from

the

to correct

the

or practice.

12 U.S.C.

an institution-affiliated

or

provide

against

action

and

affirmative

restitution or guarantee

cease

violation

OTS

indemnification, below,

to

and to take

resulting

$1818(b)(l)

party

loss,

reimbursement,

if certain

standards,

91818(b)(6)(A).

it deems

The

appropriate.

OTS

may

12 U.S.C.

51818(b)(6)(F). C.

Grounds 1.

The

unsound

Unsafe

Acting

directing Charter's

for a Cease

the

Association

banking

understood

Desist

or Unsound

Director

voluntary

and

Ranking

finds to

practice.

Practice

that

fund

supervisory

Order

Respondents'

actions

in

the

post-denial

pursuit

of

conversion

constitute

an unsafe

or

practice

is

An

unsafe

or

unsound

to have: a central meaning which can and must be applied to constantly factual changing circumstances. Generally speaking, an "unsafe or unsound practice" embraces any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance fund.

Financial B efore

Institutions

the House

Sess.

49-50

Nat'1

Rank

Suoervisorv

Committee

0n

(1966)(statement of

Cir,. 1978)(per

Eden

V.

curiam).

mna of

mt.

of Snn

Act of 1966 : Hearinas and Currency Chairman Treasurv,

&j~

In

I

Horne), 568 the

F.2d

matter

89th cited 610, of

on S. 3158 Cong.,

26

J,Q First 611

(8th

Lone2

and

23 Saldise,

OTS

pendinq

&

matter

of

1993), 18,

Order w.

aff'd,

courts

extent

U.S.

the

Court

259,

of

which

of

NO.

No.

(May

94-1449

AP

17,

(D.C.

93-85

1994)

aooea2

Cir.);

at

34-35

slip

op.

generally

appeals they

an

appear

imprudent

activity

condition

of

Appeals

for

the

a

D

the

(October

22,

(9th Cir.

Jan.

adopted

this

Fifth

Sav.

8 Loan

Ass'n

"an

institution

v. Federal

1981),

abnormal

risk

is considered.

cert. to

must

Home

shown

has

have The

required

Lo-k

'Ia

soundness." Boa&,

458 U.S.

03&

to

association.

financial V.

Seidman

over

degree,

financial

denieQ,

the

be

Circuit

on an associationls

(5th Cir.

to some

savings

effect

264

have

to differ

direct

Elsewhere,

1121

stability"

37 F. 3d 911,

651

(1982). of

the

928

(3d

1994). Accordingly,

action,

the

in

Acting

prudent

and

determining

Director

then,

the

considers,

if it was

not,

safety

and

first, whether

soundness

whether an

of

the

abnormal

an

action risk

of

followed. First,

require, in

29 n.47

v. OTS, No. 93-70902,

financial

Gulf Federal

loss

OTS,

Order

although to

reasonabLy

was

OTS

at

1995).

affected

Cir.

v.

Keatinq

articulation,

F.2d

AP 94-23

moez

Keatinq,

The

the

No.

among

light

capital United

"generally

of of

all

the

States,

documentation

other

accepted

things,

the

that

and

poor

of

directors

take

circumstances

institution. 917 F.2d

standards

1111, capital

&&, 1115 was

then

prudent

reasonable

known,

e.cr., Forthwest (8th Cir. unsafe

1990) and

operation"

to

steps,

protect

Nat'1

Bank

(inadequate

unsound

the v.

loan

condition);

24 c F

s

N t'l

64

(8th Cir.

policies

,

1990

that

capital); F.2d

B

1580,

(11th

classified

loans

to

reserves);

ust

Nat'1

or

and

illegal, m

In this

was

whether

in

issues

facing

overall

value

other

of Eden,

of

question

continue light

the

Respondents:

value

261%

Colp,, to

diminished a loan

and

(excessive capital

that

of

783

permit

capital

611

of

were

is improper

repayment,

is

at 928-29.

facts

Respondents

the then

the

Bank

application

voluntary

supervisory

for

There an

supervisory

of several

after

conversion

known.

prospects

of a voluntary

spacifically

advised

against

the

appeal

remote.

Johnson

also

knew

conversion

equity

probability

pursue

aware

Ins.

at

lending

to

unsound

F.2d

making

of a voluntary

were

and

supervisory

the

rise

57,

two

and

the

appeal

conversion.

facts

supervisory

were

At

as to the appeal conversion

versus

of conversion.

With regard

In addition,

568

facing

to

of

to

total

that

the

37 F.3d the

of

to maintain

DeDOSit

(unsafe

Indeed,. simply

Respondents

forms

Federal

practices

to Charter

as to the

loans

581%

of the voluntary to

conversion,

and

Bank

m,

denial

the time,

above

other

case,

v.

1986)

Cir.

regardless

imprudent.

Board's

Bank

rise

and unsound).

practice

classified

State

1581

unsafe

and unsound

permitted

Sunshine

compensation

I

(unsafe

911 F.2d

the were

directors excessive

to the appeal, because

its

Charter's chance

that the prospects had

been

if borne

warned by the

were that

of

attorney

had

success

was

"very the

institution

limited."

costs

of the

alone.

I I

I

I

25 The voluntary optimal

means

supervisory

of

conversion

infusing

capital

was not the only or the

into

Charter.18

It

can

reasonably be inferred from Johnson's letter (GX S), his memorandum (SX 33) and other evidence

of the directors'

voluntary

supervisory

conversion

that

voluntary

supervisory

conversion

would

regulatory

requirements,

such

preferences

and an appraisal

as those

requirement,

consideration

of the

Respondents

knew

not

the

detailed

stock

purchase

entail

limiting

that

a

that would apply to other

forms of conversion. The Sank Board had denied the voluntary supervisory application

for several reasons, including the fact that it was not

in the best interests

of Charter or its accountholders.

Rank Board's decision was of course not dispositive whether

to pursue

have considered

reversal

of that decision,

at that point whether

support the view that a voluntary best interest of Charter The Respondents determined

conversion

record

is,

could

of the question

Respondents

should

there was some evidence

supervisory

conversion

to

was in the

and its depositors. devoid

however,

reasonably

to support

While the

have

an appeal

of

any

believed

at

evidence

that

the

they

and other post-denial

time

activities

that those activities were in the best interests of the institution and its accountholders.

One of

have

an

been

reasonable 18

sufficient: prospect

two pieces

informed

of success

of information

opinion

that

on appeal or evidence

there

would was

presented

a to

Before Charter filed its brief on appeal, Johnson was advised (and told the other directors) that the regulators were more likely to approve a standard conversion.

26 the

board

that

from

the

perspective

depositors,

a voluntary

other

of conversion.

forms

record

evidence

supervisory from

the

of

supervisory

that

conversion

institution's

point

was

was present

directors

remained

institution

conversion

Neither

the

the

the

form

that Respondents were aware of information

that

institution

but would

was

be offered

worth

for 67.5

of

approximately

million

$35

voluntary

the

that to

record

indicated

$40

in the voluntary

is no

conversion

TO the contrary,

indicates the

a

its

to the

There

why

preferred

of view.

superior

here.

considered

and

million,

supervisory

conversion. Respondents provided

a

conversion would and

have

good was

capital

investment

FSLIC;

and

(4)

depositors

because

issued

the

the

to

that

pursue

neither

had

some

supervisory of

expenditure a

also

voluntary

these

for

depositors:

the

conversion

could it

not

is

true

of Charter's supervisory

(3)

65% of the that

in

the

some

opportunity (the

offer capital

and

the

of the to

shares

capital that

the

to participate and

support

on continued

conversion

it

voluntary

new

first

any

the

form,

detrimental

arguments)

conversion factors

in stock

be

purchase

third

limited

because

association:

resulted

and

2)

inure to the benefit

would

have

(the second

have

voluntary

arguments), notion

would

would

proposed

to operate

in

While

conversion.

Charter

the

would

the depositors

coming

in

invested

conversion

conversion

depositors

be

the

of the association

institution

allegedly

supervisory into

interests

for the

would

(1)

opportunity

in the best

capital

in

that:

investment

be beneficial new

argued

was

fourth for

the

attempts prudent.

,’

27 Respondents that had

knew

that

the

regulator8

been

excessive,

providing were

at the time

lead

voluntary for the

and

that

that

Board

basis

to

believe

a reversal

forms

either

of the

Bank

have

institution.

No

such

factual

to Charter

--

been

prudent there

Respondents'

Board's

decision mean8 is

already --

that

material

remote,

conversion

application,

conversion was a superior

supervisory

of

benefits

might

Charter's

were

expenditures

superior

conduct

denied

on appeal

conversion

alternative

Respondents'

to

of success

and probably

the Bank

factual

would

believed

comparable,

available.

some

the chances

if, were

efforts or

that

a

I ,

of conversion in the

record,

however.j9 Second, arising

as

from

voluntary

directly result risk

whether

Respondents

of

out

was

of loss 2. As the

on

was

an

decision the was

imprudent

A loss

decision;

risk

to continue facts

remote

Expenditure8

capital.

abnormal

and on

of

loss

seeking

a

are

that

that

Charter's

the

actually a fortiori,

appeal occurred

the

came a8 a

an abnormal

present.

Breach OTS

appeal

poor.

of Charter's

of Respondents'

was

conversion,

success

position

there

1 imprudent

supervisory

probability earning8

to

of Fiduciary

explained

nearly

Duty four

year8

ago,

19 The Acting Director note8 that Respondents attempted to offer s ~g& evidence in the form of a 1994 report from Donald Kaplan (and related testimony) that the voluntary supervisory Although the Acting Director believes conversion was appropriate. it may have been error to exclude this evidence on the issue of such s QQ& evidence is fiduciary breach, M note 21 m, irrelevant to the issue of whether Respondents exercised prudence in directing Charter to continue pursuit of a Voluntary 8UperVisOry conversion.

/ I I

28

[a] fundamental component of the fiduciary duties of directors in every jurisdiction . . . is that directors owe a duty of loyalty to the institution they serve. This duty prohibits directors from engaging in transactions that involve conflicts of interest with the institution. When faced with divided loyalties, directors must demonstrate both their good faith and the inherent fairness to the corporation of transactions in which they have a financial, business or other personal interest. In re Rush, No. ERC-90-30,

at 13-14

(April 10, 1991)

(footnote

omitted). In this case, the decision involves

divided

substantial system

of

Charter

loyalty.2o

benefit

foot the bill expenses

The evidence stood

to gain

not

other

regulatory

nothing

conversion Johnson's

forms

and

from a voluntary

judgment

it is reasonable 20

of conversion

were

these

an appraisal

and given

is that it conversion

of conversion.

likely

a greater Since

in

to them.

method

depositors.

a

having

of dollars

however,

more

gain

Thus

supervisory

from a different

and to produce

its

required

of thousands

was an immediate benefit

to

relief

stock, under a

available.

as to the institution,

approval

institution

stood

unappraised

otherwise

for hundreds

that could not be derived Indeed,

post-denial

Respondents

from purchasing

preferences

post-denial

to pursue

to receive

benefit other

for the forms

of

(at the very least)

that Charter was worth close to $30 million, to infer that these other

forms of conversion

The ALI's Recommended Decision discusses the breach of fiduciary duty issue in terms of Respondents' self-interest interests of the for the best superseding their concern that issue involves the duty of association. In substance, loyalty, and the discussion of breach of fiduciary duty herein is limited to the duty of loyalty.

:

*

29

would have generated a greater capital infusion to Charter. This scenario was, of course, not attractive to Respondents, since it would have required them to invest more capital in order to maintain their desired control. Where, as here, there is divided loyalty, Respondents bear the burden of proving both the good faith of their decision and the ultimate fairness to the institution of that decision. Peooer v. Litton, 308 U.S. 295, 306, 310-11 (1939); wner Pearson, 545 F. Supp. 549, 558 (M.D. Fla. 1982); m,

&S v.

m.

Respondents have not done so; the record evidence is that their decision was not in good faith.

Charter's attorney advised

Charter's board against the appeal. went

Respondents nevertheless

forward on that and other fronts, believing that the

voluntary supervisory conversion was maintain

control.

They

pursued

necessary

this

for them to

course

though,

if

successful, it would have resulted in a $7.5 million offering for an unappraised institution holding tens of millions of dollars of Freddie Mac

stock that Respondent Johnson believed had

appraised value

of

"at

least

some

$35

to

$40

an

million.11

Accordingly, the Acting Director concludes that Respondents' decision to have Charter expend its capital to obtain approval for

a

voluntary

supervisory conversion that

would

benefit

Respondents personally but not Charter represented a breach of their duty of loyalty." 21 On the issue of the fairness to Charter, the Acting Director notes that it probably was error to exclude the report and related testimony of Respondent's expert witness, Donald Kaplan.

i

.

.

30 3. Violation of the Voluntary Supervisory The

expense

conversion

in

voluntary does

part

be

of

codified

that

supervisory

not define

must

provision

regulation,

requires

Reasonable Conversion the

at

expenses

incurred

conversion

with

voluntary

12 C.F.R.

% 563b.31

in

to

the

(1989),22

connection

accordingly,

reference

of the

supervisory

be "reasonable."

'qreasonableness;'1

assessed

Expense Provision Regulation

with

a

The provision %-easonablenessn

surrounding

facts

and

circumstances. As practices Charter

the

and breach to devote

identifiable cannot fully

preceding

be

benefit

below,

1990,

in light

Charter

had

of for

spent

its capital the

an operating

and

unsound

Respondents

to activities

institution.

This

fact

unsafe

shows,

expense.

approximately

expenses. of the

of

duty

as a reasonable

Charter

conversion-related disturbing

of fiduciary

part

justified

discussion

Such

that

had

no

expenditures

As discussed

$258,000

expenditure

caused

more

in post-denial is particularly

that

as of the year-end

loss

of

$1,497,000.23

June

30,

Given

the

It is arguable that such evidence ney have been relevant to the issue of fairness to the institution. But see Federal Deoosit Ins. tanlpv Coru. ("evidetceSon the'is787e ",f ~~~~~er13',ar~~~:laP~~an,',",";io,"~~~ fair and reasonable to the bank must be viewed in the time frame in Because the which the directors were making their decisions*). record is plain that Respondents acted in bad faith, it is unnecessary to reach the fairness issue. 22

This

provision

is

currently

codified

at

12

C.F.R.

563b.32. 23 This intermittent levels.

amount did not include gains realized from Charter's sale of Freddie Mac stock to maintain its capital

0

31 absence

of

voluntary

any

supervisory

conversion), Acting were

benefit

as well

Director

Charter

conversion as Charter's

concludes

that

arising

uniquely

(as opposed weak

to

operating

the

from

other

the

types

of

performance,

institution's

the

expenditures

unreasonable. 4.

Respondents'

Respondents findings

and

Respondents charged,

other

I.990

(3) with

Final

supervisory

right

to have

the

constitutional s and

conversion

bear solely

the on

doctrine.

24

costs a

(3) the

and Charter's

These

claim

Payment that

thereof.

In

of cases

cases stand

support decided

and

at most

costs

of in

preparation in February, a

voluntary

incurred therewith. Costs

not

its

First

Charter

Respondents

the

for the

of

permit

thereof, under

also

violations

is deprived will

that

have

pay

vote

of Appeal

OTS

claim

pursue

expenses

Charter

if the

to

AIJ1s

right to appeal

statutory

depositor

decision

the

they

Charter

communication6

to appeal

line

a windfall,z4

and

m

of

their

(1) Charter's

Respondents'

right

to

that:

a.

Amendment

addition

all

things,

alleged

Respondents

virtually

enjoyed

Decision;

ratified

In

Defenses

have

encompasses

appeal:

of this

not

Additional to

conclusions.

among

connection

excepted

would

necessarily the

to

to rely

Noerr-Penninaton

proposition

that

Whether the ALJ correctly found a V1windfallll is not dispositive here. What is clear is that the voluntary supervisory conversion afforded unique benefits to Respondents -- which they understood at the time -- but no corresponding benefit to Charter.

32 petitions

to the government

grounds.

This case, of course, presents

Respondents'

authority

unclear

Respondents

that

belongs to Charter.

is

may not be challenged

irrelevant

no antitrust

here.

personally

on antitrust

may

issues so

Moreover,

assert

a

it

is

right

that

Further, even assuming that Respondents

have

a colorable First Amendment claim -- and their failure to cite to relevant authority the government

are subject to reasonable

restrictions. appropriate were might

some have

Charter's

been

.case,

basis

rather

than

interests

the

or that

appeal

of

OTS's

These

that

the Administrative

was

are

functions

in

to pay

entirely duty

to

associations. Procedure

Act/Due

for either the Chief to participate

drafting of the Acting Director's final decision. and advocacy

appeal

supervisory

Congressionally-mandated

or any one who works under her,

of adjudicatory

the

conversion,

constraints

claim that it is error

been

-- i.e., if there

-- or if they had been willing

b. Administrative Process Claims

Counsel,

have

voluntary

the safety and soundness of savings

Respondents

might

either

the

form

to

time, place and manner

acted prudently

another

themselves.

given

the

for believing

succe6sful

appeal

reasonable

this

had the directors

best

the

protect

In

factual

conversion,

for

suggests that they do not -- all petitions

is mandated

in the

The separation by I 5(c) of

Procedure Act ("APA"), which provides in part:

(d) . . . An employee or agent engaged in the investigative or prosecuting performance of functions for an agency in a case may not, in that or a factually related case, participate or advise in the decision, recommended decision, or agency

33 review pursuant to section 557 of this title, except as witness or counsel in public proceedings. This subsection does not apply -(A) in determining applications for initial licenses; (B) to proceedings involving the validity or application of rates, facilities, or practices of public utilities or carriers; or (C) to the agency or a member or members of the body comprising the agency. . . . 5 U.S.C. B 554(d).

Thus, agency employees, other than the

Acting Directorzs,may not-participate in the adjudication of a formal enforcement proceeding if they have

participated in

investigating or prosecuting that case or a factually related case.26 That standard has been met in this case and Respondents* exceptions are thus denied."

None of the lawyers involved in

25 By express exception, the prohibition does not apply to the head of the agency who must oversee and administer all functions of the agency. m 5 U.S.C. 0 554(d)(C): m ~J&Q Federal Trad Comm'n v Ci d rella Car er & Finj,&.inaSchools. Inc ., 404 F.2: 1308, 13i5 (D".c9Cir. 196:). 26

Following the plain language of this provision, the prohibition extends only to the combination of functions in the same person in the same or a factually related case. &,8 Au Yi Lau v. United States INS, 555 F.2d 1036, 1043 (D.C. Cir. 1977); Grolier. Inc. Federal Trade C mm'D 615 F.2d 1215, 1220 (9th Cir. 1980), s;emand, 699 F.2d 98: (9th Cir. 1983), e. denied, 464 U.S. 891 (1983). 27

The separation of functions doctrine has due process implications as well. a uow v. Lara 421 U.S. 35 (1975). The standard for establishing a due procask violation is high, however. There must be a demonstration that the particular facts and circumstances "foreclose fair and effective consideration at a subsequent adversary hearing," or "that the risk of unfairness is intolerably high." Withrow, 421 U.S. at 58. Respondents have made no such showing here.

34 advising

the

participated this

Acting

in any manner

alleged

also

.9?~oartg advisor.

parties,

it appears

the

timing

of

The

record

does

prejudiced the

raise

After that

not

509.9.

satisfied

of the

oral

made

conference

review the

The

February

had

or prosecution

its

request

call

with

whether

The

the

decisions under

of

permissible

Enforcement

and

the

filed

papers

however,

that

such

that

there

was

communication

does

proceeding.

Acting

in

that

writing

the

involved requests. were

delay

that

not appear

to go

&S

Director

and notes

by

requests

any

12 C.F.R.

disfavors Enforcement

or

an

the AI_J's

in question document

either

in

a

0

such should

telephone

have

Ratification argued

of its board

that

constitute not

of

corporate

had

a mutual

law

full

depositor

a ratification

of directors.

that

the

previously

accountholders

provided

concerning

Respondents.

OTS has

general

objection

with

the

8 and 9, 1990,

appeal.'

that

Decision

compliance

communications

Respondents

of

adjudicatory

C.

to

Final

communication

or

Nevertheless,

unilateral

between

indicate,

Respondents.

merits

a similar

Enforcement's

ultimately

have

the

in the investigation

communication

attorney

to

on

case. Respondents

not

Director

association

The Acting

disclosure

has

on

of the decision

occasion

principles,

votes

to

consider

may

ratify

Director

notes

a ratification been

made

to

is the

35 shareholders's and provided that the decision to law or public policy.29

Neither condition

The proxy

statement

concerning

the appeal or other post-denial

such material

fails to disclose

Acting

Director

accountholders

not

does

ever

believe

information

activities,

including

legal advice that the

of success. that

be permitted

may

has been met here.

substantive

facts as Charter's counsel's

appeal had only a remote possibility

is not one contrary

to

Moreover,

the

shareholders

ratify

an

or

unsafe

or

when

a

unsound practice.30 D.

Grounds

Restitution

for Restitution is

respondent

acts

regulation

or an agency

enrichment.

m

the

law,

in reckless

disregard

order,

remedy

either

for the

law, applicable

or when

disregard

exists

when:

for or plain indifference

applicable

regulations

has been

(1) a party

unjust

acts

with

to the requirements

or agency

party was, or with reasonable diligence, and (2) there

there

18 U.S.C. 81818(b)(6)(A).

Reckless clear neglect

available

an

order

of which

of the

should have been aware:

is a risk of loss or harm or other damage arising

'a &R First Trust Savinas B k v. Iow 98 F.2d 416, 427 (8th Cir.), ~&?denied,~yO5 29 m &oft. UC. uth 2 A.2d 1938), aff'd, 5 A.2d 5C13~'(D:l.;939).

Wis ns'n Br idae Co,, v"oS.1650 (1938).

225, 245-46

(Del. Ct. Ch.

3o The statutory grant of authority to the Director to provide by regulation for the organization, operation and regulation of in accordance with principles of federal savings associations, safety and soundness, m 12 U.S.C. I 1464(a), overrides any argument that there might be a common law ability by depositors to approve unsafe or unsound practices.

,

:

I

36

from

the

conduct

such

that

the

party

knows

it,

or

it

obvious that the party should have been aware of it. 8 1818(b)(6)(A);

In thematter

X$&&a

slip op. (9th Cir. Jan. 18, 1995); u

1418 (9th Cir. 1994), petition

Although

breaching

UnjUst

14

unjust

a

legal

enrichment. (Jan. 26, gBDea1

90-4009

has

the agency's

obligation

in

v. OTS, 29 F.3d

been

3462

m

to

obtain capital

11p1p.

January

as

a

personal

constitutes

OTS Order No. AP 95-06 at

re Raoaoort;, OTS a

discussed

cases do make clear that

of an institution's

e

at 27, aff'd

not

order

$&= Ql re Chris-,

1995):

(D.C. Cir.)(argued

OTS Order No.

for cert. filed, 63 U.S.L.W.

enrichment

at the expense

(1993),

re Simosoq,

94-953).

in OTS cases,

frequently

benefit

v. OTS, No. 93-70902,

(Nov. 18, 1992), order aff'd, Simoson

(Nov. 23, 1994)(No.

12 U.S.C.

of Xeatinq, OTS Order No. AP 93-85

at 34-35 (October 22, 1993), w,

AP 92-123

is so

WOrt

Order v.

31, 1995); u

OT&

re A&i&

sub nom._ Akin v. OTS,

No.

AP

No.

93-95

93-1811

OTS Order No.

950 F.2d 1180

(5th

cir. 1992). The facts in this case demonstrate both reckless disregard and unjust enrichment. result

Unjust enrichment

of the violations

loyalty and the expense benefit: post-denial necessarily

free legal relief

of safety regulation,

services that

the institution.

occurred

and soundness,

benefit

an appeal themselves

The institution

I

the duty of

the Respondents

in pursuing

would

because, as a

received

a

and other but

bore virtually

not all

?I-----

37 of the

casts

unjustly

of Respondents'

conduct :

breach of the duty of loyalty were

reckless

directors,

because

to

position

of Charter.

director

may not place

convert

Respondents'

was

to

it was

a greater

from this

disregard

fundamental

preserve

his interests

for

obligation the

of the

them,

as

and

capital

knowledge

that a

ahead of the institution. or reckless,

they were aware of the other

and of the fact that these other forms would

benefit

recklessness Charter's

reflects,

and

in considering

health

It is equally fundamental

as the evidence

depleted

(both reflecting

doing so was particularly. egregious,

forms of conversion bring

were

unsafe and unsound practice

to know that their primary

whether

because,

Respondents

enriched.

In addition, Respondents*

law)

thus,

to Charter. was obvious:

capital

and

The risk of loss arising the post-denial

were

not

likely

expenses

ever

to

be

recovered. Similarly, violation of the expense regulation clear neglect because Respondents excessive obvious, paid known

conversion

what

of

While

expenses, for benefit,

claim

expense

was

may

had to be

could

"reasonable" be

not have

under

not

mitigated

must be considered

I

by

these

difficult

it is not difficult to understand

when

about

was also

activities

that they

"reasonableness"

in the abstract,

substantial potential

The risk of this violation

costs.

Respondents

amount

circumstances. delineate

had been warned expressly

since the costs of the post-denial

by Charter.

represented

at

least

unreasonable.

IT-----

to that the

38

The evidence with

neglect

requirement

further demonstrates

for

and

indifference

that Respondents

to

of the expense regulation.

the

acted

"reasonableness*'

Respondents

had adequate

notice of this issue, insofar as Charter was warned

in May, 1989

by OTS

supervisory

excessive

if

Respondents not

have

personnel

borne

by

the

cannot plausibly

known

that

that

institution assert

Charter's

light of the admission madsby

OTS considered

the expenses

alone.

Moreover,

they did not know or could

expenses

Johnson

were

unreasonable,

in response to supervisory

concerns that the appeal expenses had "gotten out of hand." Respondents expenses

had

were

been

put

improper

Respondents comfort denial

that

to justify

that

OTS

thought

those expenses.

The record

that they did or ever attempted

could

not personally

expenses.

legal

(without

unlikely

to bring an enforcement counsel's

reasoning

opinion

be

The Acting

opinion

to do so.

charged

Director

with

post-

rejects

this

seek to rely on a lawyer's

or action

explicitly

citation) to recoup is

that

OTS

was

such losses.

qualified

on

point: [W]e believe it is doubtful that the OTS would be successful in holding you or the other directors personally responsible for fees paid by the institution. However, we have not and could not give you an unqualified opinion that that result could not occur. (RX 33).

the

to bear alone, they had, at

defense to the extent that Respondents

Moreover,

the

Once

claim they relied on the advice of counsel for

they

conversion

notice

for Charter

the least, an obligation does not demonstrate

on

in

this

All other

exceptions

not otherwise

addressed

herein

are

denied. 1.

Calculation

The evidence other post-denial Enforcement's

of expenditures

activities

Respondents'

post-denial produced

expert

expenses

an

categories actually

exhibit of

perform

showing

memorandum

(RR

of

Charter's

Johnson

expert's is cursory

total

by

several did

not

(Tr. 1125-28.)

(Tr. 1127), and the dated

to Paula Emmerson, (RX

(CX

He also

witness

however.

Johnson

papers

down

This

is a memorandum

work

that

-- $333,472.

broken

52.)

by Robert

of his work

classifications

September

located

53,

and does not explain

pp.

4,

among the

3-4).

the meaning

The of the

or how they were made, nor does Robert Johnson's

offer any further explanation.

The AL3 resolved

this issue by selecting

offered

by

an

offered

by

Enforcement's

43-44.3'

all

determined

expenses

the classifications,

1992, from Robert Respondents'

witness

activities.

evidence

testimony

and somewhat sparse.

calculated

actually were higher

That task was performed only

by Charter on its appeal and

is conflicting

witness

expert

of Restitution

legal expenses, arriving at a total of $297,931.

post-denial 15.)

of Amount

Based

expert,

on

the

i.e.,

the

$258,715

expert). evidence

the lower total

(after

Recommended

available,

this

adjustment Decision

is the

at most

" This amount is derived from OTS's total of $297,931, minus expenses incurred prior to but paid after the Bank Board's denial of Charter's application. See RX 58. The Acting Director accepts the ALJ's recommendation to subtract this amount from the OTS's calculation, for a total of $258,715.

40 reasonable approach, and the Acting Director will adopt it.3z E.

Civil money penalty against Johnson

In his discretion, the Acting Director declines to order the assessment of a civil money penalty in this proceeding. Based on the facts presented, it is the Acting Director's purpose to have Charter reimbursed for the expenses that Respondents wrongfully caused the institution to incur. Any funds received pursuant to the assessment of a civil money penalty would not go 32

The Acting Director considered an alternative approach, adopting what might be considered the most reliable parts of Robert Johnson's September 4 memorandum, cursory and unsworn as it is. However, this approach would have resulted in an even greater restitution amount. Specifically, the September 4 memorandum suggeststhatcertain expenditures were not related to the imprudent pursuit of the voluntary supervisory conversion after denial by the Bank Board, The Acting Director would have been willing to credit those categories if it seemed clear that the expenditure did not relate to the voluntary supervisory conversion and to deduct those items from the total presented by Respondents' expert. Categories whose meaning was uncertain -- and as to which Respondents chose to offer no explanatory evidence -- would not have been so credited. Accordingly, the Acting Director would not have required reimbursement for four categories: Wash Sales," which appears to deal with a separate issue about the recording of gains from sales since this category appears to of FHLMC stock: '*Resolution/FOIA,** be a legitimate inquiry about how the Bank Board reached its decision: "Appeal Memo" because the directors were entitled to legal advice on whether to appeal (indeed, they imprudently ignored this advice): and Wutual Holding Company," since this appears to be a transaction suggested by the regulator. As to all other categories in RX 52, however, there is no evidentiary basis on which to conclude that these expenditures were not related to the imprudent effort to overturn the Sank Board's denial of the voluntary supervisory conversion application. The total of the-four credited categories is $36,406, and deducted from the total of $333,472 in RX 52, this would produce a Subtracting the restitution already paid, total of $296,986. $119,676, this approach would result in a restitution award of $177,310, almost $40,000 more than what the Acting Director orders today.

41 to Charter but to the U.S. Treasury. The

Acting

supervisory

Director

believes

that

Respondents'

Respondents Director.

Under

Procedure,

it

is

a1818(i)(2)(J).

unnecessary

standpoint to impose a penalty that would

the goal in this case of making F.

12 U.S.C.

Request

40(b)

a

not further

Charter whole. for Oral Argument

have also requested Rule

from

of

oral argument

the

Rules

of

before the

Practice

and

the Director has the discretion to order and hear oral

argument. A

party

demonstrating arguments

argument

has

the

burden

good cause for such argument and establishing

cannot

consideration Acting

oral

seeking

Director

be

adequately

of Respondents' finds that:

presented request

in

writing.

for oral

of that Upon

argument,

the

(1) the factual and legal arguments

are fully set forth in the parties' written submissions:

(2) the

Acting Director will not be aided in deciding this matter by oral argument:

(3) Respondents

oral argument; oral

argument.

and (4) Respondents Therefore,

exercise his discretion request VI.

will not be prejudiced

the

by the lack of

have not shown good cause for Acting

Director

declines

to

under Rule 40(b) and denies Respondents'

for oral argument.

CONCLUSION For the reasons set forth above, the Acting Director will

issue

an order

statutory Charter

directing

and regulatory

Respondents violations,

in the amount of $139,039.

to cease

and desist

and to pay restitution

from to

ORDER

Upon consideration of the entire record in this matter, including the Recommended Decision of the Administrative Law Judge, the exceptions and replies to exceptions filed by the parties, and for the reasons set forth in the accompanying Decision: The Acting Director, pursuant to his authority under 12 U.S.C. 5 1818(b) (1988 & Supp. II 1990), finds that John W. Johnson, Jr., Robert L. Johnson, and R. Terry Taunton (collectively, Respondents), in their capacities respectively as President and Chairman of the Board of Directors, as Director and Vice President, and as Director, of Charter Federal Savings and Loan Association of West Point, Georgia, (*'CharteP) a federal savings association, were institution-affiliated parties of Charter who violated laws and regulations, engaged in unsafe and unsound practices, and committed acts and practices which constitute breaches of fiduciary duty to Charter, in conjunction with which they were each unjustly enriched and Charter suffered financial loss in connection with these violations and practices, and the violations and practices involved reckless disregard for the law and applicable regulations. Accordingly, grounds exist to issue a cease and desist order requiring affirmative action to correct or remedy conditions resulting from these violation or practices. Upon consideration of Respondents' request for oral argument, the Acting Director finds that: (1) the factual and

2 legal

arguments

submissions; deciding

are

(2) the

this

not

1. acts,

lack

of oral

good

cause

2.

and

Order

restitution for each 3.

Respondents

day

after

The

provisions

individual

the date

of

and until

such

stayed,

and time

Director

U.S.C.

81818(e)(7)(B).

the

(30) days U.S.C.

right

named

5 1818(h);

service

and

the

$139,039,

2 of this and

are

Respondents

except

court,

Respondents

aside

Order

are

Decision

hereby and

and

by

after

that,

shall

action

have

of the

with

notified within

Order

as

shall

extent

Order

Order

and

apply

effective

or in accordance

Decision

of such

interest

(30) days

as to the

of this

or set

pay

plus

Order

upon

date

hereafter;

Respondents

terminated

in any

effective

of thirty

this

not

or unsound

severally

1 and

any provisions

to appeal

engaging

expiration

or a reviewing

after

after

jointly

of paragraphs

as,

will

or regulations:

days

enforceable,

modified,

Acting

have

of law

days

of this

in

(4) Respondents

from

unsafe

(10) business

the

and

desist

of

upon

service

effective

and

involving

shall

of the

be aided

argument.

in the amount

ten

to each

argument;

(10) business

to Charter

separately to each

ten

not

written

ORDERED:

cease

of violations

parties'

(3) Respondents

for oral

HEREBY

shall

will

argument;

or practices

Within

of this

been

IS THERIIFORE

in the

Director

by the

Respondents

practices,

forth

by oral

omissions,

remain

Acting

established IT

set

matter

be prejudiced have

fully

under

12

that

they

thirty 12

and

I

I

I

3

4.

Respondents'

request for oral argument

is denied.

THE OFFICE OF THRIFT

SUPERVISION

CERTIFICATE

OF SERVICE

I hereby certify that on this 16th of the foregoing OTS Order No. AP 95-17 and first class mail on the following: Bv Hand

day was

of March, 1995, a copy served by hand delivery

Delivery

Stephen E. Hart, Esquire Charles H. Fitzpatrick, Esquire Timothy P. Leary, Esquire Gerard S. Poliquin, Esquire Office of Thrift Supervision 17.00 G Street, N. W. 20552 Washington, D. C.

Bv First

Class

Mail

Larry M. Berkow, Esquire Reuben B. Robertson, III, Esquire Ingersoll and Bloch 1401 Sixteenth Street, N. W. 20036 Washington, D. C.

Melba H. McCannon For the Secretary Office of Thrift Supervision