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Reply of Glen Garrett to Special
of FDIC Inspector General
MEMORANDUM TO: The File [NOTE]
FROM: Stephens B. Woodrough
DATE: July 30, 2001
SUBJECT: FDIC Inspector General Report (Glen Garrett)
Robert L. Clarke, former Comptroller of the Currency, recently forwarded a copy of the attached FDIC Inspector General Report ("FDIC Report")1 dated September 29, 2000 to our attention with the wry comment: "To no one's surprise, the FDIC has concluded that nothing improper was done in connection with the 1991 FDIC examination [of First State Bank of Purdy] and subsequent FDIC enforcement actions against Glen Garrett." Mr. Clarke is a modest man.2 The purpose of this memorandum is to assess the accuracy and completeness of the FDIC Report.
In the interests of clarity and overall continuity, this assessment will follow the same organizational structure of the FDIC Report and will use the same headings used in the FDIC Report. The methodology will first quote the questioned or central findings and conclusions in the FDIC Report, and then provide a narrative analysis of such findings and conclusions with appropriate supporting references to the documentary exhibits and sworn testimony received into evidence at the administrative hearing of the enforcement action instituted against Glen Garrett.
Where appropriate, supporting footnote references will refer to a particular page in one of the numbered documentary exhibits offered by Glen Garrett ("Garrett") as Respondent [Respondent Exhibit ("RX at __")] and admitted to the evidentiary record of the enforcement proceeding conducted between March of 1996 and March of 1999 when the case was finally settled. References may also be made to a specific page in a numbered exhibit offered by FDIC [FDIC Exhibit ("FX at __")] admitted to the same record. Finally, supporting footnote references will also be made to the recorded hearing transcript ("Tr. at __") of the sworn testimony of various witnesses who testified at that hearing. All of these materials are available to the general public.
Summary of Matter
In brief, in the matter of Glen Garrett, who is the chief executive officer, a director and 100 percent shareholder of First State Bank, Purdy, Missouri, FDIC identified an apparent violation of Regulation O, Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks, during an examination of the institution in 1991 and recommended enforcement actions be taken.3 Regulation O prohibits the extension of credit to any insider of a bank or insider of its affiliates unless the extension of credit meets certain requirements.
Garrett has never been a A100 percent shareholder" of First State Bank of Purdy, Purdy, Missouri ("Bank"). The opening sentence of the FDIC Report, therefore, is erroneous. It is also characteristically indicative of a marked and persistent cavalier attitude of the FDIC regarding the manner in which the agency has discharged its responsibilities regarding Garrett vis-à-vis the importance and need for factual accuracy.4 In 1991, Garrett and his wife owned 98.5% of Purdy Bancshares, Inc., which owned 100% of the stock of the Bank.5 Today, Garrett and his wife own 100% of the stock of Purdy Bancshares, Inc.
While it is true that the 1991 FDIC Examination Report cited violations of Regulation O, all of the cited violations in that examination report were later determined by the FDIC to be erroneous.6 The FDIC never made any attempt to require that the Bank "correct" any of the violations of Regulation O cited in the 1991 FDIC Examination Report; nor did the FDIC ever attempt to impose any type of sanction or penalty against the Bank or Garrett for such violations.7
The "Background" discussion in the FDIC Report fails to make any reference to one of the most significant events pertaining to the eight-year regulatory dispute between Garrett and that FDIC, and which spawned the agency's intensive investigation and persecution of Garrett. Based upon unfounded allegations by an anonymous informant,8 the FDIC conducted a special inquiry directed against Garrett during an examination of the Bank in September of 1991 to determine whether the dishonest activities alleged by the informant had merit.9
The  FDIC examination report gave management of the bank a poor rating for unsafe and unsound practices in large part due to the failure to disclose certain nominee loans involving Mr. Garrett. [Footnote omitted.]10
The FDIC Report is again factually incorrect. There was never any allegation (or even a suggestion) in the 1991 FDIC Examination Report that there was a "failure to disclose certain nominee loans involving Garrett." All six disputed loans11 were fully and openly documented on the books and records of the Bank. They were never hidden; nor was any effort ever made by anyone at any time to try and conceal such loans from review by anyone, including examiners from both the Missouri Division of Finance ("State") and FDIC. More importantly, however, it has never been established, as inferred by the FDIC Report, that the disputed loans were in fact nominee or straw party loans. Although such charges were made by the FDIC, they were never proven.12 The FDIC Report, therefore, continues to minimize the importance of factual accuracy by characterizing the loans in question as nominee loans without qualification. Such statement is incorrect, and is nothing more than a biased opinion.
In April 1993, FDIC sent a letter of notification to Mr. Garrett informing him that the FDIC was considering an enforcement action against him for his role in the nominee loans.
The cited excerpt in the FDIC Report is factually incorrect and grossly misleading. Again, the report makes an unqualified reference to Garrett's "role in the nominee loans" as though there were uncontested and/or proven facts which demonstrated that A nominee" loans were made and that Garrett had a "role" in making such loans. Such "facts" simply do not exist. Further, the characterization of the April 1993 letter to Garrett is factually incorrect. The FDIC letter was much more than a simple "notification" that the agency was "considering an enforcement action" against him.
First, the letter, which was dated April 22, 1993, did not indicate that the FDIC was in the process of reviewing and evaluating the appropriateness or need for regulatory enforcement action, or that the agency was otherwise engaged in the process of "considering" the initiation of such an action against Garrett. Second, the referenced letter made it clear that the FDIC had already made the decision to initiate formal action against Garrett.13 The most flagrant factual misrepresentation and inaccuracy, however, lies in the direct suggestion that the FDIC letter of April 1993 informed Garrett of the reason the agency intended to take action against him. Contrary to the explicit factual statement in the FDIC Report that the April 1993 letter informed Garrett that the contemplated enforcement action was for "his role in the nominee loans," the plain fact of the matter is that the FDIC letter did nothing of the kind. There is absolutely no reference of any kind in either the FDIC letter or any of the documents enclosed therewith which indicates that the contemplated FDIC removal action against Garrett was predicated upon Garrett's activities pertaining to the disputed transactions alleged to be nominee loans.14
[A]fter reading [Mr. Garrett's] response to the April 1993 letter, [the FDIC] entered into settlement negotiations and agreed to consider a personal Cease and Desist Order and Civil Money Penalty (CMP) In February 1995, the Kansas City Regional Director sent a memorandum to the Director, Division of Supervision (DOS), recommending the issuance of a CMP against Mr. Garrett. This memorandum included a CMP matrix which scored the severity of the violation and quantified a monetary range.
The FDIC Report is blatantly misleading. It fails to mention that the referenced "settlement negotiations" occurred between May and December of 1993 and were comprised solely of tentative discussions between FDIC representatives in the Kansas City Regional Office and Garrett's attorney, Ralph Mock.15 The FDIC never prepared or submitted a proposed "personal Cease and Desist Order and Civil Money Penalty against Garrett" at anytime during calendar year 1993. Such actions were not proposed until February 18, 1994 when Garrett was unrepresented by counsel.16 The most egregious omission in the cited portion of the FDIC Report is the vacuum of information regarding the events that transpired in the transition period between the discussions with Mr. Mock in the latter months of 1993 to the civil money penalty enforcement action that the FDIC Kansas City Regional Office proposed in February of 1995.
The referenced "CMP matrix" in the FDIC Report was attached to a recommendation by the FDIC Kansas City Regional Director in February of 1995;17 however, what the FDIC Report fails to mention is that such matrix was originally prepared a year earlier in February of 1994 to support the issuance of a proposed civil money penalty order against Garrett.18 Contrary to the inference in the FDIC Report, the CMP matrix was not prepared in 1995. The most critical (and flagrant) factual omission in the FDIC Report, however, is that the referenced February 1995 recommendation for a civil money penalty was part of an attempt by the FDIC and Garrett to reach a negotiated settlement. Thus, such recommendation was not an accurate reflection of the primary regulatory objective sought by the FDIC. It was nothing more that a recommendation to support the issuance of a civil money penalty consent order for $5,000 that had been negotiated by Garrett and FDIC representatives in the Kansas City Regional Office in the preceding months.19
In this same context, the FDIC Report makes a deliberate and brazen attempt to mislead the reader into an erroneous factual conclusion. It does so by conveying the impression that during the period between May of 1993 and February of 1995, the FDIC was primarily interested in and was only attempting to negotiate the issuance of a civil money penalty order. Such impression or conclusion is absolutely false.
There are extensive records of events that occurred between May of 1993 and February of 1995 which demonstrate very clearly that the primary interest and objective of the FDIC was not the issuance of a civil money penalty order, but a permanent order of removal and prohibition banning Garrett from the banking business for the remainder of his life. There were no less than four internal FDIC memorandums written between May of 1993 and June of 1994, including two that were written in 1994, which specifically state that the FDIC was pursuing the issuance of a permanent order of removal against Garrett.20 This same aggressive regulatory attitude was reiterated on July 13, 1994 when the FDIC forwarded a proposed "Notice of Intention to Remove From Office and to Prohibit From Further Participation" to be issued against Garrett.21 The FDIC Review Examiner responsible for the general administrative oversight of the proposed enforcement action against Garrett testified that the FDIC was actively pursuing the issuance of a removal order until at least "late August of 1994."22 Accordingly, it is both disingenuous and deceptive for the FDIC Report to suggest that the FDIC was merely seeking the issuance of a civil money penalty against Garrett during the period between May of 1993 and February of 1995.23
Although a personal Cease and Desist Order and a CMP were negotiated and a preliminary agreement was reached on a CMP, agreement was not reached on the settlement language. In May 1995, Garrett withdrew his settlement offer.
Such statements convey a picture of events which is completely false. The first sentence has reference to verbal discussions that were conducted periodically between the FDIC and Garrett=s deceased counsel (Ralph Mock) between May and December of 1993. Those discussions allegedly concerned the feasibility and possible issuance of a personal cease and desist order and a civil money penalty of $10,00 against Garrett. As stated previously, Garrett never agreed to consent to such orders, and there is no evidence that Mr. Mock agreed to recommend that Garrett agree to consent to such orders.24 The second sentence has reference to an entirely different proposal that was discussed in 1995. Contrary to the direct suggestion in the FDIC Report, there is no connection between the discussions in 1993 and those in 1995.
The referenced May 1995 withdrawal of a settlement offer by Garrett in the FDIC Report pertains to a letter dated May 19, 199525 that Garrett addressed in response to a letter he received from the FDIC dated May 16, 1995 which advised that the FDIC Washington Office had rejected a settlement agreement that had been negotiated and executed by Garrett and FDIC representatives in the FDIC Kansas City Regional Office. The May 1995 letter contains the following "time-line" of events leading up to Garrett=s "withdrawal" which are not reflected in the FDIC Report:
Following our retainer and involvement in the case in April of 1994, we submitted a very comprehensive and detailed written report26 (with supporting bank records and sworn affidavits attached)27 to the FDIC on May 26, 1994, requesting that the FDIC reconsider the allegations against Mr. Garrett in the light of new evidence and certain legal arguments and conclusions regarding the circumstances under which the loans in question were made. On July 13, 1994, you28 responded with the sweeping observation that our report "glosses over the gravity of Glen Garrett's conduct" and forwarded a proposed formal "Notice of Intention to Remove From Office and to Prohibit From Further Participation" to be issued against Mr. Garrett unless he agreed to a settlement.29 After continuing settlement negotiations, a consent agreement for the issuance of a civil money penalty of $5,000 against Mr. Garrett was finally agreed upon in lieu of the proposed removal order. The implementing settlement documents were originally submitted to the FDIC [Washington Office] on September 21, 1994, and (after further discussions) were resubmitted to the FDIC [Washington Office] on January 10, 1995. You subsequently executed the consent agreement on January 30, 1995, and forwarded it along with the proposed order to the FDIC Washington Office on February 9, 1995 with a favorable recommendation from FDIC Kansas City Regional Office.30
The proposed settlement was then reviewed by staff representatives of the FDIC Legal Division and the Division of Supervision in Washington for the next several months. We were advised informally earlier this week that the executed consent agreement and proposed order had been cleared for any legal objection by the FDIC Legal Division in Washington and forwarded to the FDIC Division of Supervision for final action, which was generally expected to occur. We were therefore genuinely stunned to learn [in your letter of May 16, 1995] that it was later rejected. If we understood you correctly, the FDIC Division of Supervision has not rejected the proposed order because of any legal problem or deficiency, but because it might be perceived unfairly and misunderstood by the public as an improper use of regulatory power by the FDIC. In short, the FDIC has rejected the settlement based upon a fear that an unacceptable (and politically unpopular) conclusion might be drawn from a negative inference that might be made from the terms of the proposed settlement order. Aside from the surprising candor of such an explanation (a political fear based upon a double supposition involving a negative inference), we are even more amazed that it required several months for the FDIC to develop it!
As indicated, Garrett and the FDIC had entered into a "Stipulation and Consent Agreement for the Issuance of an Order to Pay a Civil Money Penalty" which was executed by an authorized FDIC representative in the FDIC Kansas City Regional Office on January 30, 1995 and forwarded to the FDIC Washington Office for review and approval on February 9, 1995.31 Notwithstanding favorable recommendations by the FDIC Kansas City Regional Director, the FDIC Kansas City Regional Counsel, and the FDIC Assistant General Counsel for Enforcement in the FDIC Legal Division in Washington, the FDIC Director of Supervision in Washington rejected the agreement. None of the foregoing events are reflected in the "Background" section of the FDIC Report.
In September 1995, the FDIC issued a Notice of Assessment of Civil Money Penalty and the formal administrative hearing process began. The Notice was amended later to add claims that the same loan transactions constituted breaches of fiduciary duty [by Garrett]. The hearing began on March 18, 1996.
The FDIC Report continues to disregard the importance of truth and accuracy through the devices of interposition32 and omission. The FDIC Report fails to mention that all of the charges in the "Notice of Assessment for Civil Money Penalty" issued in September 1995 are verbatim replicas of the allegations in the draft "Notice of Intention to Remove from Office and to Prohibit From Further Participation" forwarded to Garrett by the FDIC on July 13, 1994.33 The only difference between the two Notices is the legal caption. One is styled as a civil money penalty action while the other is styled as a removal and prohibition action.34 The FDIC Report also fails to mention that all of the charges in both Notices were predicated totally upon the alleged violations of Regulation O that were cited in the 1991 FDIC Examination Report. In short, the FDIC had put "all of its eggs in one basket" by seeking a civil money penalty against Garrett for alleged violations of Regulation O.
But the FDIC had a problem which is also omitted from the FDIC Report. In October of 1994,35 the General Counsel of the Board of Governors of the Federal Reserve System issued and published two letter opinions which indicated very clearly that Garrett had not violated any of the requirements and limitations of Regulation O in effect in 1989 and 1990 when the disputed loans in question were made.36 In an effort to counteract the effect of the letter opinions issued by the General Counsel of the Federal Reserve Board, the FDIC Legal Division decided to amend the Notice of Assessment for a Civil Money Penalty.37
The amended charges were filed on April 8, 1996 and alleged that Garrett breached his fiduciary duties. If proven, such charges would authorize the assessment of a so-called "Second Tier" civil money penalty of $25,000 for each breach of duty.38 The FDIC enforcement policies and procedures regarding the assessment of civil money penalties that were in effect in 1996 required that a civil money penalty matrix, or a separate memorandum covering the same criteria reflected in the matrix, must be completed in order to demonstrate the appropriateness of the imposition of a penalty at such level and the amount of such penalty.39 The FDIC Report does not indicate that the FDIC never prepared a penalty matrix or separate memorandum to justify the assessment of a "Second Tier" civil money penalty against Garrett. In short, the FDIC Report fails to mention that the agency violated its own internal policies and procedures when it amended the charges against Garrett to provide for the assessment of a "Second Tier" civil money penalty. The FDIC Report should have recognized that the action of amending the charges against Garrett on April 8, 1996 was illegal40 and contravened the established policies and procedures of the FDIC in effect at that time.
FDIC and Mr. Garrett reached a settlement in March 1999 which resulted in an 8(b) [sic] personal Cease and Desist Order requiring Mr. Garrett to disclose any interest he may have in any future loan or extension of credit approved or made by the bank, but did not require payment of a CMP.
The FDIC Report is technically correct, but it hides the central truth of the settlement, namely, the complete vindication of Garrett vis-à-vis the charged violations of law and breaches of fiduciary duty. The FDIC Report also obscures several significant aspects of the settlement. The FDIC Report fails to mention the fact that the order issued against Garrett to settle the action was unprecedented in the 65-year history of the agency. Even though the order was issued pursuant to section 8(b) of the Federal Deposit Insurance Act which authorizes the FDIC to issue cease and desist orders, the phrase "cease and desist" never appears in the settlement order issued against Garrett. That order does not require Garrett to cease and desist from doing anything.41 Further, the settlement order does not contain a single finding or determination by the agency that Garrett violated any law, rule or regulation (including Regulation O), or that Garrett engaged or participated in any course of conduct that constituted a breach of his fiduciary duties, as charged by the FDIC.42 Further, and perhaps most significant, the settlement order issued by the FDIC not only "dismissed, with prejudice," all of the charges against Garrett, it also formally "withdrew" such charges.43 Finally, the settlement order acknowledges that Garrett charged the FDIC with prejudicial misconduct.44 Even though the inclusion of such provisions in a personal cease and desist order issued by consent was unprecedented, they were not mentioned in the FDIC Report.45
The most extraordinary aspect of the settlement order which is not discernable from the FDIC Report is the fact that the order only contains a single affirmative action requirement that was never in dispute. The only requirement in the order is that Garrett comply with the disclosure requirements contained in section 215.5(d)(1) of Regulation O46 which was not applicable to Garrett or the Bank in 1989 and 1990 when the disputed loans in question were made.47 In effect, therefore, the settlement order is comparable to being ordered by a traffic court to comply with a speed limit which was not in effect when the alleged offender was first charged with speeding. Stated differently, the settlement order does nothing more than require Garrett to comply with a regulation the agency had never charged him with violating. The FDIC Report totally fails to convey the bizarre nature of such an ending to a dispute that consumed (wasted?) thousands of man-hours and millions of dollars over an eight year period.
The OIG [FDIC Office of Inspector General] received a letter from the National Ombudsman, Small Business & Agriculture Regulatory Enforcement Ombudsman, U.S. Small Business Administration (SBA) on July 1, 1998, identifying the allegations made by Mr. Glen Garrett and requesting an inquiry. ... FDIC responded to the SBA Ombudsman inquiry [even] though FDIC takes [sic] the position that because the enforcement action was [instituted] against Mr. Garrett, an individual, and not against a small business, the SBA does not have jurisdiction over the action.
At the time of the [SBA Ombudsman] request, the administrative hearing was ongoing and included the allegations [of regulatory misconduct] made by Mr. Garrett, [and] the OIG deferred addressing them until the completion of the hearing as [sic] the OIG's practice is not to interfere with ongoing litigation.
The FDIC Report totally misrepresents the chronology of events pertaining to the inquiry made by the National Ombudsman for the SBA Regulatory Enforcement Fairness Board as well as the FDIC responses to such inquiry.
In a letter dated February 22, 1999 (and contrary to the FDIC Report), the FDIC General Counsel conceded to the National Ombudsman of the SBA Regulatory Enforcement Fairness Board that the SBA National Ombudsman has jurisdiction to monitor regulatory enforcement fairness issues involving financial institutions subject to the supervisory authority of the FDIC.48 It should be noted that the FDIC General Counsel's letter was published in an Appendix to the 1999 Annual Report of the SBA National Ombudsman to Congress. Unfortunately, such letter also included an intentional falsehood when the FDIC General Counsel advised the SBA National Ombudsman and Congress as follows:
Following initiation of enforcement action [by the FDIC], small banks may address their concerns through the hearing process, directly to the FDIC, to the FDIC's Office of Inspector General, or to the FDIC's Ombudsman. Indeed, few, if any, other federal regulatory agencies communicate so extensively with potential targets of enforcement actions.
The cited statement makes the unmistakable assertion that the named target of a regulatory enforcement action initiated by the FDIC has the option of addressing their "concerns" regarding such action to either the FDIC Inspector General or to the FDIC Ombudsman. In making such statement, the FDIC General Counsel made the direct suggestion to the SBA National Ombudsman and Congress that the FDIC Inspector General and/or the FDIC Ombudsman stand ready to provide responsive assistance to the target of a regulatory enforcement action initiated by the FDIC. Such suggestion is flat wrong and tantamount to a deliberate lie designed to mislead. Regrettably, the deception was ignored in the FDIC Report.
Notwithstanding the foregoing declaration by the FDIC General Counsel, the FDIC Ombudsman and the FDIC Inspector General both refused to become involved with or to take any action in connection with specific allegations of serious regulatory misconduct by FDIC personnel in respect of the FDIC enforcement action initiated against Garrett.49 By letter dated September 9, 1998, the FDIC Ombudsman informed Garrett that due to certain limitations imposed on the operations of that office, an investigation of the allegations of regulatory misconduct could not be conducted by the FDIC Ombudsman.50 Specifically, the FDIC Ombudsman advised Garrett:
[I]t has always been the policy of the Office of the Ombudsman not to undertake or become involved in the merits of matters involved in litigation or formal grievance processes. ... Moreover, if the issues presented ... assert violations of law or claims of fraud, waste or abuse, our policy is to refer them to the FDIC Office of the Inspector General for appropriate handling. This would, indeed, appear to be the case concerning the [allegations of regulatory misconduct in question.] In particular, [such allegations indicate] that the FDIC "suppressed" or "destroyed" evidence...and that examiners violated the policies and procedures written by the FDIC concerning bank examinations. Because of their nature, those claims have now been referred to the FDIC Office of Inspector General.
By letter dated September 29, 1998,51 Garrett was advised by a representative of the FDIC Inspector General that no action would be taken in respect of the allegations of fraud and regulatory misconduct that had been made in the inquiries forwarded by the SBA National Ombudsman to the FDIC Chairman.52 Accordingly, there is a clear record of correspondence pertaining to the allegations of regulatory abuse and misconduct by the FDIC in the Garrett enforcement action. Such record shows that serious concerns regarding such allegations of regulatory misconduct were first forwarded to the FDIC Chairman by the SBA National Ombudsman; such concerns were then forwarded by the FDIC Chairman to the FDIC General Counsel, who then referred them to the Office of the FDIC Ombudsman, who in turn referred them to the FDIC Inspector General, who declined to take any action until more than four (4) years had elapsed after being notified of such abuses and regulatory misconduct because of the pendency of the Garrett enforcement proceeding. Such bureaucratic "paper-pushing" and ineptitude betrays the shameful hollowness of the FDIC General Counsel's statement to the SBA National Ombudsman and Congress on February 22, 1999 that persons who are targeted by the FDIC in a regulatory enforcement action can "voice their concerns" regarding the prosecution of such actions to the FDIC Inspector General.
The freedom of a targeted person to express a concern regarding a regulatory enforcement action initiated by the FDIC has never been the issue. The central problem has been (and is) the languid attitude and insipid unresponsiveness of the FDIC to such expressed concerns. The FDIC Ombudsman and Inspector General perform certain worthwhile functions and responsibilities. But the clear and unassailable fact remains that they do not respond in any meaningful or effective manner to targeted persons who have expressed serious concerns (including documented concerns such as a falsified criminal referral) regarding regulatory misconduct in respect of enforcement actions that have been initiated by the FDIC. The FDIC Report totally fails to mention the foregoing historical record of correspondence involving the SBA National Ombudsman, the FDIC Chairman, the FDIC General Counsel, the FDIC Ombudsman and the FDIC Inspector General, or to make any assessment regarding the accuracy of representations made by FDIC officials or the rationality and purpose of policies followed.
OBJECTIVE, SCOPE, AND METHODOLOGY
Our objective was to determine whether the allegations [of regulatory abuse and FDIC misconduct] made by Mr. Garrett had merit. To do so, we reviewed the administrative hearing transcript as [sic] it contained discussion by Mr. Garrett's attorney on each of the allegations and examples of FDIC actions that, in his view, supported the allegations. Furthermore, the transcript contained testimony by FDIC employees implicated by the allegations, bank employees, and the three borrowers of the loans in question. [Accordingly,] we decided to rely [primarily] on the transcript ...53
All of the cited reasons in the FDIC Report for its primary reliance upon the hearing record in the administrative action against Garrett are self-serving excuses to justify the decision of the FDIC Inspector General to rely solely upon documentary information54 and not conduct any type of independent investigation by interviewing witnesses.55 For example, the cited reasons of a "more contemporary record" and a record of "ensured veracity" are totally transparent when compared to a record comprised of sworn statements of witnesses56 that could have been compiled by the FDIC Inspector General between April and August of 2000 when the investigation for the FDIC Report was conducted.
Similarly, the cited reason of relying upon the testimony of "FDIC employees implicated by the allegations" is duplicitous on its face vis-à-vis the need for veracity and credibility. In this same context, the cited reasoning regarding the use of the testimony of bank employees and borrowers of the disputed loans is largely irrelevant to any investigative inquiry focused on the alleged regulatory abuses and misconduct.57 Accordingly, it must be recognized and concluded that the rationalization in the FDIC Report for primary (if not total) reliance upon documentary information to the exclusion of any personal interview of anyone who may (or may not) have testified at the administrative hearing is nothing more than a labored contrivance.58
A. Examiners ignored and suppressed evidence regarding Mr. Garrett.
During the hearing, Mr. Garrett=s attorney provided four examples of information of information alleged to have been ignored and suppressed by FDIC examiners. He believed that if the FDIC considered this information, it would have cleared [Garret] of alleged wrongdoing.
The FDIC Report fails to cite at least one other series of related instances that were alleged to reflect an effort by FDIC to suppress evidence. The then Assistant Regional Director of the FDIC Kansas City Regional Office admitted59 that he was responsible for suggesting that the Office of the FDIC Executive Secretary address letters to former FDIC examiners who had been subpoenaed to provide sworn testimony on behalf of Garrett at the administrative hearing. Such letters were highly intimidating and essentially threatened such persons with criminal prosecution if they decided to testify at the hearing on behalf of Garrett.60
The FDIC Report totally misses the point regarding the reason for Garrett's objection to the efforts of FDIC to suppress evidence. It is not based upon any type of belief that due consideration of such regulatory misconduct by the FDIC would have served to "clear" Garrett of his alleged wrongdoing, as contended in the FDIC Report. On the contrary, Garrett's purpose in introducing evidence at the hearing that FDIC representatives suppressed material, exculpatory evidence which was favorable to Garrett, was to demonstrate to the presiding administrative law judge that the FDIC acted in bad faith by engaging in arbitrary and capricious misconduct that was prejudicial to Garrett. Such evidence was admitted to the hearing record (over the objection of the FDIC) to support one or more of the "affirmative defenses" raised by Garrett in his Answer and Amended Answer.61
Garrett further believes that if the FDIC Inspector General finds credible evidence which supports his contention that the FDIC engaged in arbitrary and capricious activities designed to suppress material information pertaining to the issues in dispute,62 a factual basis would then be established for an investigative finding that the FDIC acted in bad faith, or otherwise engaged in regulatory misconduct that was prejudicial to Garrett.63
B. The FDIC ignored a power of attorney.
Mr. Garrett claimed that the FDIC ignored a power of attorney that permitted him to endorse two checks for loan proceeds for his son. FDIC had concluded that Mr. Garrett had improperly endorsed the checks because the signature on the checks did not match his son's signature card and they resembled Mr. Garrett's writing.
The FDIC Report is wrong again. First, it fails to recognize that the FDIC examiners questioned the signatures on the promissory notes to Garrett's son, not just the loan proceeds checks for those loans. Second, and most importantly, the FDIC Report fails to grasp the significance of the failure of the FDIC examiners to recognize the existence of a power of attorney from Garrett's son. Garrett has never argued that the FDIC should have treated the loans to Garrett's son as though the FDIC examiners had, in fact, made a personal review of the power of attorney document itself.64 There has never been an issue or contention by Garrett that the FDIC acted in error or in bad faith by raising the question of signature deficiencies on the loans to Garret's son. Rather, the primary focus of Garret's objection is centered of the abject failure of the FDIC to take any cognizance of the fact that there were clear evidentiary indicators that a power of attorney may have been executed by Garrett's son authorizing his father to execute his signature.
The FDIC examiners repeatedly ignored factual (even though inconclusive) indicators that Garrett had been given a power of attorney. What were the "indicators" of the possible existence of a power of attorney? The Bank's President provided detailed sworn testimony regarding a special occasion when she was specifically approached and questioned by the FDIC examiners during the course of the 1991 FDIC examination of the Bank. She testified that she recalled her belief at the time that the examiners wanted to test her knowledge of the signature of Garret's son and possibly set a "trap" to induce her to tell the examiners that the signatures on the notes and loan proceeds checks were made by Garrett's son. The Bank's President testified that she immediately recognized the signatures as being made by Garrett and so informed the examiners. In the same breath, she advised the FDIC examiners that Garrett had a power of attorney from his son, and that the signatures question were made by Garrett under such power of attorney.
The Bank's President also testified that the FDIC examiners appeared to accept her explanation and did not request to see a copy of the power of attorney. Nevertheless, she also informed the FDIC examiners where the power of attorney was stored65 if they wanted to review it.66 The FDIC examiners did not make any further inquiry about the matter during the 1991 FDIC examination of the Bank.
The most compelling and reliable "indicator" of the existence of a power of attorney from Garrett's son to his father is an explicit written reference to the document contained in a Report of Examination of the Bank dated July 13, 1992 prepared by the Missouri Division of Finance ("1992 State Report of Examination").67 The first page of the confidential "Supervisory Section" of the 1992 State Report of Examination of the Bank contains the following comment by the State Examiner-in-Charge of that report:
We traced proceeds of several questionable loans and reviewed Glen and Sharon Garrett's deposit accounts with the bank. Although nothing adverse was discovered, three lines should continue to be reviewed for insider abuse: [names of borrowers omitted; see, fn. 131, infra]. These lines are indirectly related to Chairman Garrett, through his son [name omitted]. It was discovered during the examination that Chairman Garrett has a power of attorney for his son; however, no unfavorable documentation was found. [Emphasis added.]68
Garrett has never argued that the FDIC examiners were derelict in their responsibilities for not believing or for not placing a higher level of credibility on such indicators; however, Garrett believes very strongly that the FDIC acted in bad faith by suppressing the existence of such indicators from their supervisors and (most significantly) from the U.S. Attorney in a formal "Report of Apparent Crime" prepared by FDIC examiners which included specific comments suggesting that Garrett forged the signatures of Garret's son on the loan documents pertaining to the Bank's loans to Garret's son. The FDIC examiners told the U.S. Attorney:
[Garrett son's] signature found on deposit signature cards does not appear to be the same signature found on loans numbered 734861 and 736120. The signature on the loan documents more closely resembles that of Glen Garrett's signature.69
Garrett vigorously contends that the FDIC examiners acted in bad faith when they deliberately suppressed evidence (viz., the detailed explanatory statements provided by both the President and Head Bookkeeper of the Bank)70 which indicated the possible existence of a power of attorney from Garret's son that would explain the signature discrepancy noted in the criminal irregularity report sent by the FDIC to the U.S. Attorney.
Finally, it is important to understand that Garrett does not argue or take the position that the FDIC examiners should not have made the cited comment regarding the questioned signatures on the loans to Garrett's son. Such comments were proper under the circumstances - particularly since the FDIC examiners had not actually received any hard evidence that fully explained the discrepancy.71 Rather, Garrett argues that the FDIC examiners demonstrated more than poor judgment when they deliberately suppressed their knowledge of factual information (albeit unverified with tangible proof) that would serve to fully explain the discrepancy if such information proved to be true. The FDIC examiners should have included a comment in the criminal irregularity report to the U.S. Attorney to the effect that they had received unverified information from two apparently credible officers in the Bank72 which (if true and verified by further investigation) would explain the discrepancy.
C. FDIC ignored borrower affidavits.
Mr. Garrett claimed that the FDIC ignored borrower affidavits provided by Mr. Garret=s attorney in 1992 that stated pre-existing debts existed between Mr. Garrett and the borrowers and that the loan proceeds were being used to pay these debts...The testimony did not establish that FDIC willfully ignored and suppressed evidence regarding the nature of the loans.
The FDIC Report continues to state serious factual inaccuracies. First, the borrower affidavits in question73 were not provided to the FDIC in 1992.74 They were submitted to the FDIC on May 26, 1994.75 Second, the affidavits executed in 1992 were not submitted to the FDIC by Garrett=s attorney; they were submitted by the Bank's President.76 Third, the 1992 affidavits did not state that the borrowers used the proceeds of their loans to repay debts owed to Garrett. Fourth, Garrett has never alleged that the FDIC "willfully ignored" the affidavits. Fifth, Garrett has never claimed that the FDIC "suppressed evidence regarding the nature of the loans."77
The FDIC Report essentially argues that since there were inconsistencies between some of the statements in the borrower affidavits and "information that had been gathered [by FDIC] during the [1991 FDIC] examination,"78 and because the alleged pre-existing debts owed to Garrett were not documented, the FDIC did not give much (if any) weight to the affidavits. Garrett does not dispute such prerogative of the FDIC. As mentioned, while Garrett disagrees with the FDIC decision to discount the evidentiary value of the affidavits, Garrett has never alleged that the FDIC "willfully ignored" or "suppressed" such affidavits.
FDIC reviewed the affidavits and officials testified that because of inconsistencies between them and the information that FDIC examiners had gathered during the examination,79 they had concluded that the affidavits were insufficient to show that insider abuse had not occurred. [Emphasis added.]
The emphasized portion of the foregoing excerpt from the FDIC Report is instructive and graphically illustrates the twisted regulatory attitude or "mind set" that permeated the persecution of Garrett by the FDIC. In addition, it also reflects a subliminal characteristic of excessive prosecutorial zeal by requiring the accused to prove lack of guilt. The FDIC Report adopts the same flawed thesis as the FDIC Senior Review Examiner who testified at the hearing regarding the significance of the information developed by OCC national bank examiners which showed that one of the alleged nominee borrowers used his own funds to repay his loans to the Bank. His testimony was that such evidence was essentially discounted by the FDIC since it did not disprove the possibility of a secret cash payment to the borrower by Garrett.80 The plain and unassailable fact of the matter is that it is absolutely impossible to document or otherwise prove by any type of physical evidence that a surreptitious event did not occur.
The FDIC Report makes the same fundamental error when it adopts the premise that the purpose of the borrower affidavits was to prove a negative, namely, that "insider abuse had not occurred." The FDIC Report clearly adopts the biased precept that Garrett, having been accused of insider abuse in respect of the alleged nominee loans, was guilty of the charge and that it was therefore incumbent upon Garrett to prove the negative, namely, that "insider abuse had not occurred." Such thinking, of course, it totally wrong.81 The sole purpose of the borrower affidavits was to provide evidence that the six loans in question satisfied all of the characteristics of bona fide loan transactions, including the pivotal characteristic regarding the named borrower=s acknowledged legal responsibility to repay the loans.82
D. Information gathered by the OCC at the request of FDIC was not sent to the FDIC= s Washington Office
Mr. Garrett=s attorney alleged that information gathered by the OCC at the request of FDIC was not sent to the FDIC=s Washington office. Further, had this information been sent to Washington, Mr. Garrett=s attorney believed Washington would have concluded that Garrett did not provide the funds to repay three of the six loans questioned by the FDIC. Specifically, the information showed the results of OCC account tracing at a national bank where the funds originated to repay the loans. The information showed that the OCC could not prove or disprove that Garrett provided funds to repay the loans. ... The FDIC did not ignore or suppress the OCC information, but believed the information obtained from tracing was inconclusive and did not establish Mr. Garrett=s guilt or innocence.
The FDIC Report accurately identifies the information in question, namely, an investigative report prepared by an OCC examiner which indicated that all of the funds used by one of the alleged nominee borrowers to repay his loans at the Bank were obtained by the borrower from loans he obtained at a national bank, and that such loans at the national bank were repaid by the borrower with funds received from a relative and businesses owned by the borrower.83 In addition, the FDIC Report accurately concludes that the OCC investigative report was not sent to the FDIC Washington Office. Nevertheless, the FDIC Report demonstrates a remarkable ineptitude regarding an understanding of the legal significance of the information in question and Garrett=s argument regarding the suppression of exculpatory evidence.
In view of the significance of the subject matter, it is important to appreciate the degree of detail reflected in the investigative summary of the OCC report. The subpart styled "Conclusion" in the OCC investigation report states:
There was no evidence that Glen Garrett repaid the loan at CNB [Commerce National Bank]. All principal and interest payments [on the loans made by CNB to [name of alleged nominee borrower omitted; see, fn.133, infra.] were [made by checks] drawn on accounts at state banks. Therefore, I was unable to ascertain if Garrett was involved in those accounts, or was the source of funds to those accounts.84 All accounts were associated with [name of borrower omitted] as either a relative [name of borrower omitted], or a business interest [as detailed below under "Supporting Facts"].
[Name of borrower omitted] borrowed $25,000 from CNB on October 28, 1991. The purpose of the loan, as stated on the note, was business expenses. Proceeds were disbursed by Cashier's Check No. 73552, and used to payoff a loan to [name of borrower omitted] at a nearby state bank [First State Bank of Purdy].
On February 4, 1992, [name of borrower omitted] repaid $8,045 principal and $583 interest with a check made out to him, drawn on [name of account omitted] account at Pleasant Hope State Bank. [Name of borrower omitted] and business partner [name of partner omitted] signed the check, [name of business omitted] is one of [name of borrower omitted] several businesses, along with [name of business omitted] of Newton County.
On April 28, 1992, the note matured, and was rewritten for $17,266 with $233 in interest paid The note was signed by [name of borrower omitted] only, [name of wife of borrower omitted] was not on the note. Due to the size, I did not trace the origination of the interest payment [of $233].
On August 31, 1992, $17,725 principal and interest was paid in full from a DDA account opened the same day. The account was opened with four checks made out to [name of borrower omitted], totaling $18,073. The four checks are listed below.
$10,000 from [name of relative
of borrower omitted] UMB of Monett
2,738 from [name of business owned by borrower omitted] UMB of Monett
2,668 from [business owned by borrower omitted] Pleasant Hope Bank
The significance of the information reflected in the OCC investigative report is not that it proves that Garrett was not the source of funds used by the alleged nominee borrower to repay his loans.85 Garrett has never argued that the OCC report proves the negative, namely, that Garrett was not the source of funds for the repayment of the named borrower's loans. Rather, Garrett has always argued that the crucial significance of the information in the OCC report lies in the positive conclusions it supports, namely, that the alleged nominee borrower repaid his loans with funds withdrawn from checking accounts owned by businesses owned by such person, and that all of the deposits made into those checking accounts were made by businesses or a relative of his. The key factual question that needs to be answered is whether the named borrower, who is suspected of being a nominee or straw party, used his own funds to repay the loans that were made to him.86 The information and supporting documentation contained in the OCC report in question clearly answers that question in the affirmative.
Garrett argues that the information and detailed documentation contained in the OCC investigative report should have been forwarded (or at the least, mentioned) in the recommendation sent by the FDIC Kansas City Regional Director on June 19, 1995 to the FDIC Washington Office for the assessment of a civil money penalty against Garrett based upon the alleged nominee loans.87 The FDIC Kansas City Regional Office acted arbitrarily and in bad faith when it suppressed that information and misled the FDIC Washington Office into the mistaken belief (as stated in the recommendation) that there was insufficient documentation to "verify" the contentions in the sworn affidavit of the alleged nominee borrower that he used his own funds to repay his loans at the Bank and that he was therefore the "true" borrower regarding such loans.88
FDIC suppressed examination information in the KCRO and did not follow normal policies and procedures by communicating with Washington
Mr. Garrett=s attorney alleged that the FDIC suppressed examination information in the KCRO [Kansas City Regional Office] and did not follow normal policies and procedures by communication with Washington. Specifically, he alleged that the KCRO did not forward a recommendation for a Cease and Desist order dated November 21, 1991 to Washington.
The FDIC Report is both confusing and erroneous. The first sentence cited above states that Garrett alleged that "examination information" was suppressed; the second sentence states that a "recommendation" was suppressed. Since the FDIC Report does not make any supporting reference to the administrative hearing record, it is impossible to decipher its meaning as to exactly what records were alleged to have been suppressed. While it is true that the former FDIC Assistant Regional Director of the Kansas City Regional Office was questioned89 about an apparent discrepancy regarding the distribution of a recommendation made on November 21, 1991 by FDIC Examiner-in-Charge of the 1991 FDIC examination of the Bank for the issuance of a cease and desist order against the Bank,90 the hearing record does not show that Garrett made any allegation or charge that the FDIC Kansas City Regional Office "suppressed" such recommendation, or that such office "suppressed" bank "examination information."
The FDIC made false statements in a written report to the U.S. Attorney
Mr. Garrett=s attorney provided two examples during the hearing, on which significant amount of testimony was given, of these alleged false statements by FDIC examiners.91 He believed that FDIC had made these statements to entice the U.S. Attorney to criminally prosecute Mr. Garrett. A false statement is defined as a statement knowingly false, or made recklessly without honest belief in its truth, and with purpose to mislead or deceive.92
The first alleged false statement was that Mr. Garrett caused the bank [to sustain] an estimated $200,000 loss from overbilling [sic] backhoe work used in the construction of the First State Bank=s new bank building.
The second alleged false statement was that Mr. Garrett repaid some of the six alleged insider loans.
The FDIC Report is dead wrong. At the outset, it is curious that the FDIC Report limited itself to only two of the statements made in the FDIC criminal referral that Garrett alleged were false.93 Garrett alleged that six false factual statements were made in the FDIC criminal referral. Accordingly, the discussion of the two statements reviewed in the FDIC Report will be evaluated in addition to the other four false statements that were omitted from the FDIC Report.
The FDIC Report engages in an extended discussion of the statement of fact in the FDIC criminal referral that the "known amount of loss" to the Bank was "estimated [at] $200,000."94 Virtually all of the discussion in the FDIC Report is focused upon the FDIC examiner=s reasons and basis of the estimated figure of $200,000. The FDIC Report again misses the point. While Garrett strongly disagrees with the basis of the stated estimate, the issue is not whether the FDIC examiner=s estimate or opinion of the dollar amount of loss is accurate. The issue is whether there was, in fact, a "known loss" to the Bank, not whether the estimated dollar amount of loss was accurate or reasonably based. The FDIC criminal referral states without equivocation that the Bank incurred a "known loss" estimated to be $200,000. Such statement had absolutely no foundation in fact and was, in fact, false.
The best "proof" of the falsity of the statement that the Bank sustained a "known loss" of approximately (estimated) $200,000 is the 1991 FDIC Report of Examination of the Bank which was completed at about the same time the FDIC criminal referral was completed.95 The 1991 FDIC Examination Report does not include any finding or reference to the fact that the Bank sustained a "known loss" of approximately $200,000. If, in fact, the FDIC examiners had determined that the Bank had actually sustained a known loss of such an amount, there would have been an appropriate finding and discussion in the 1991 FDIC Report of Examination (RX 17) regarding the impact of such a loss upon the financial condition of the Bank. The 1991 FDIC Report of Examination does not include any such finding or discussion. In the absence of any such finding or discussion in the 1991 FDIC Report of Examination, it must be concluded that the FDIC examiners were not, in fact, aware of any "known loss" in the approximate or estimated amount of $200,000. Such statement of fact in the FDIC criminal referral was therefore false.96
The FDIC criminal referral includes the factual averment that Garrett made "restitution" to the Bank in the amount of $117,000 with the statement: "Garrett paid [off] some of the nominee loans."97 In this instance, the FDIC Report accurately finds and concludes that the FDIC examiner=s statement was not factual, but was merely an "inference" or an opinion based upon assumptions. The FDIC Inspector General consoles himself with the conclusion that the FDIC examiner=s inference "did not appear to be unreasonable" under the circumstances.98 Again, the FDIC Inspector General misses the point. The issue is not whether the FDIC examiner=s inference or assumption was reasonable, but whether the statement he made in the FDIC criminal referral was factually accurate. Given the clear determination in the FDIC Report and the sworn testimony of the responsible FDIC examiner that the statement was not factual or accurate, it must be concluded that Garrett=s contention is validated.99
Although they are ignored in the FDIC Report, the FDIC criminal referral also includes the following unqualified factual statements: (1) a criminal violation (defalcation) in the amount of $500,000 had occurred,100 (2) Garrett falsified a loan application at another bank,101 (3) Garrett forged the borrower=s signature on two of the alleged nominee loans,102 and (4) Garrett sold collateral out of trust that was pledged to secure a loan at another bank.103 Except for limited questioning pertaining to the calculation of the amount of the total violation ($500,000), Garrett was not permitted to raise questions regarding the factual basis of such statements at the administrative hearing. Nevertheless, Garrett believes very strongly that such statements were not factual or truthful, and that they were nothing more than voiced suspicions.104
The FDIC violated federal law in enlisting the aid of examiners at the Office of the Comptroller of the Currency
FDIC continued to investigate Mr. Garrett after the 1991 [FDIC] examination [of the Bank], and in 1994, an FDIC examiner requested the OCC to perform loan research at a national bank. Mr. Garrett=s attorney alleged that the FDIC violated the Right to Financial Privacy Act when obtaining information on one of the [alleged nominee] borrowers and Mr. Garrett from an OCC-supervised institution.
The FDIC Report is wrong again. First, the FDIC requested that the OCC conduct an inquiry that was far more comprehensive that a mere "loan search." Second, Garrett has never alleged that the FDIC violated the Right to Financial Privacy Act ("RFPA") when it obtained "information on...Garrett from an OCC-supervised institution."105 Third, Garrett has never contended that the FDIC violated RFPA, but that the OCC violated that statute when the OCC examiner requested and obtained "customer information" regarding one of the alleged nominee borrowers from the national bank that had such information without notifying the customer. The issue is not whether the OCC and FDIC are prohibited by RFPA from sharing and exchanging information. The issue is whether the OCC violated RFPA by responding to the FDIC request. Garrett=s criticism, therefore, was the demonstrated willingness of the FDIC to ask a sister agency to risk violating Federal law to further the ends of the FDIC.
It appears that the FDIC examiner who was instructed to contact the OCC by the FDIC Kansas City Regional Office also had reservations regarding the propriety of asking the OCC to access records containing "customer information," as defined in RFPA. Such information may not be accessed without the customer=s consent. The FDIC examiner work-papers clearly show a marked degree of concern in asking the OCC to examine the borrower=s deposit accounts at the national bank. 106
The FDIC, in violation of federal law, made false statements to another bank in order to damage Mr. Garrett
Mr. Garrett and his attorney alleged that the FDIC falsely informed another bank that Mr. Garrett had sold cattle without the bank=s permission that had been pledged as collateral for a loan. Furthermore, they alleged that disclosure of this information was done in violation of Title 18, Crimes and Criminal Procedure, and was done to damage Mr. Garrett=s credit.
The FDIC Report could not be more wrong. Garrett has never alleged that the FDIC "falsely informed another bank" about anything. The FDIC Report continues to demonstrate a severely confused understanding of the evidence and testimony in the hearing record.
The following is a summary of the regulatory misconduct charged by Garrett in respect of the allegation that Garrett had sold cattle (which had been pledged as collateral on a loan at another bank) out of trust. First, it was undisputed that during the course of the 1991 FDIC examination of the Bank, the Springfield District Office Supervisor of the Missouri Division of Finance ("State Supervisor") was actively involved in obtaining and sharing information with the FDIC examiners who were conducting the FDIC examination of the Bank.107 The State Supervisor and the FDIC Examiner-in-Charge of the 1991 FDIC examination of the Bank ("1991 FDIC EIC") both testified that the State Supervisor made periodic contacts with the FDIC examiners to share information regarding the progress of the 1991 FDIC examination of the Bank, which was largely devoted to a special investigation of Garrett.108
Garrett does not allege that such activities were improper. On the contrary, Garrett believes that because of the de facto symbiotic working relationship between the State Supervisor and the 1991 FDIC EIC during the 1991 FDIC examination of the Bank, the FDIC and Missouri Division of Finance were essentially conducting a "Joint Examination" of the Bank in 1991. Regardless of whatever "label" is assigned, the undisputed fact is that a very close working relationship existed between the State Supervisor and the 1991 FDIC EIC during the 1991 FDIC examination of the Bank. There were even occasions where the State Supervisor visited other area banks to obtain credit and loan information regarding Garrett which the State Supervisor then conveyed to the 1991 FDIC EIC and/or one of the other FDIC examiners assisting in the 1991 FDIC examination of the Bank.
During the course of the 1991 FDIC examination, the FDIC examiners began compiling information for inclusion into a criminal referral report to the U.S. Attorney.109 In early October FDIC examiners discovered (after conducting tracing procedures) that several large deposits were made to Garrett=s account which were comprised of the proceeds of the sale of cattle. The FDIC examiners knew (based upon their prior experience in examining the Empire Bank in Springfield, Missouri) that Garrett had a large line of credit at that bank secured by cattle. The FDIC examiners therefore suspected that Garrett had sold the pledged cattle out of trust in violation of law and included such violation in the criminal referral that was being prepared. 110
On or about October 15, 1991,111 the State Supervisor made a telephone call to a senior executive officer at the Empire Bank in Springfield, Missouri, and informed that officer that he (the State Supervisor) had information which indicated that Garrett had (or may have) sold the cattle pledged to secure Garrett=s loan at Empire Bank.112 Garrett contends that the State Supervisor committed a felony when he did that; the State Supervisor knowingly provided information derived from an examination of the Bank (viz., the information compiled by FDIC examiners regarding Garrett=s sale of cattle ) to an officer of the Empire Bank.
Garrett has never taken the position that the FDIC examiners asked the State Supervisor to contact the Empire Bank with the sold cattle information, or that the FDIC was otherwise instrumental in the criminal conduct of the State Supervisor. Garrett has only alleged that the State Supervisor committed a serious crime when he deliberately disclosed bank examination information he received from FDIC examiners to an officer of the Empire Bank. 113
The FDIC asked an employee [of the Bank] to lie
Mr. Garrett and his attorney alleged that a FDIC examiner asked a cashier of the First State Bank of Purdy to lie to Mr. Garrett about her research activities carried out to assist FDIC examiners during the [1991 FDIC] examination.
The testimony [at the administrative hearing] did not show that the FDIC examiner asked the bank cashier to lie. Rather, it showed that the examiner had asked that the research activities and results remain confidential.
The FDIC Report is almost correct. First the Bank employee involved was not the Bank=s Cashier; she was the Banks=s Head Bookkeeper.114 Nevertheless, the FDIC Report is otherwise accurate in describing the circumstances of the incident. As stated in the FDIC Report, the FDIC examiner requested that the Bank employee not tell Garrett what she was doing in her assistance work with the examiners if she were asked by Garrett. The employee testified that since she was sure Garrett would make inquiry, the FDIC request had put her in a position where she would be forced to lie, which she was unwilling to do.115 The Bank employee eventually solved her dilemma by simply going directly to Garrett, and telling him what she was doing to assist the FDIC examiners.116
Upon further consideration of the matter, Garrett recognizes the occasional need for FDIC examiners to work in a confidential environment and can appreciate how either the Bank employee or the FDIC examiner who made the request for confidentiality may have misunderstood or misread the situation. Accordingly, Garrett withdraws this allegation.117
The FDIC in pursuing the matter did not take into account economic conditions
Mr. Garrett reported that he has paid over $1.5 Million defending himself against FDIC [charges] which he and his attorney believe constitutes punishment. They questioned the $25,000 civil money penalty FDIC was seeking from Mr. Garrett given the costs already incurred by Mr. Garrett.
[T]he MEP118 does not state that a respondent s legal costs incurred in an administrative action must be considered. Further, the CMP matrix does not include legal costs as an element to be considered in determining the amount of a penalty to be assessed.
Notwithstanding a strong temptation to decline to "dignify" the cited excerpt of the FDIC Report with comment, it must be said that such passage confirms the mindless, bureaucratic attitude of the agency and its obvious preference of placing a higher premium on officially promulgated policies than on fundamental precepts of common sense and sound judgment.
If the FDIC Report is to be believed, logic and consistency would require the conclusion that the reverse corollary is equally true. In other words, since there is no explicit proscription in the FDIC Division of Supervision Manual of Examination Policies which states that the FDIC must take into account the economic and human resource expense associated with the initiation and prosecution of an administrative enforcement action, it would not be an objectionable business practice or operating policy for the FDIC Director of the Division of Supervision to issue a directive requiring all FDIC Regional Directors to abandon or disregard the principle of discretion and sound judgment in recommending such actions to the Washington Office. In essence, such directive would require the institution of a civil money penalty enforcement action whenever it was determined that a violation of law occurred. We think not. Indeed, the FDIC Division of Supervision has a published policy regarding the assessment of civil money penalties which cautions against a mechanical approach of using the civil money penalty power and expressly provides that discretionary sound judgment must be applied in such actions.119 The inherent (and obvious) weakness of the position advanced by FDIC Report, therefore, is that it contradicts both common sense and promulgated FDIC policy. By any rational standard, it is impossible to justify the expenditure of millions of dollars and thousands of man-hours120 over an eight-year period for the purpose of imposing a single penalty order of $25,000. Put more simply, such action is more than imprudent or foolish; it is idiotic.121
The enforcement actions do not serve a legitimate regulatory purpose
FDIC Report and Analysis
The FDIC Report responds to this "allegation" by providing a detailed chronology of events (three single-spaced typewritten pages), beginning with the findings of violations of Regulation O in the 1991 FDIC Report of Examination of the Bank in September of that year, and ending with the issuance of the Amended Notice of Assessment of Civil Money Penalty issued against Garrett in April of 1996. Although there are several errors and omissions in that chronology, it would not serve any useful purpose to review them here since the entire exercise reflected in the FDIC Report is pointless. The FDIC Report essentially advances the thesis that since the action against Garrett was conducted in accordance with all applicable laws, rules, regulations, procedures, and policies of the FDIC,122 and since there were numerous instances where the case was subjected to various levels of review within the agency at both the regional office and Washington office, it must follow that the action against Garrett served a legitimate regulatory purpose. It is difficult to argue with or convince a moron, and no attempt to do so will be made here. Instead, we will consolidate our analysis of this "allegation" with that of the last "allegation," discussed below.
The enforcement procedures and tactics were undertaken by individuals, not as a matter of agency policy, but rather because of personal animus to Mr. Garrett
Mr. Garrett and his attorney alleged that the FDIC went above and beyond bank examination and enforcement action policies and had a personal vendetta against Mr. Garrett as evidenced by various acts of bad faith...Mr. Garrett=s attorney asserted at least seven examples of FDIC=s alleged bad faith during the administrative hearing. Three of the seven examples have already been discussed, as [sic] they were the same as allegations 2,4, and 5. Two of the seven examples, namely the examiner-in-charge=s failure to initially prepare a CMP Matrix and FDIC=s pursuit of enforcement actions with no regulatory purpose, were discussed as part of allegation 7. ... We discuss the remaining two examples [FDIC downgrading of supervisory ratings assigned in the 1991 State Examination Report, and the use of an "epithet" by an unidentified "FDIC employee"] below.123
The FDIC Report totally misconstrues the nature and effect of the examples of regulatory misconduct and abuse alleged by Garrett. Contrary to the averment in the FDIC Report, all seven of the actions questioned by Garrett were not cited by Garrett as "examples of bad faith." On the contrary, Garrett argued that the questioned actions were illustrations of one of three categories regulatory misconduct by the FDIC: (1) actions that were arbitrary or capricious, (2) actions taken not to serve a legitimate regulatory purpose, but to further a personal or non-governmental objective, or (3) actions undertaken in bad faith.124 It is evident that the FDIC Inspector General does not have an understanding of the fact that there are basic and important differences between the three categories of misconduct. They are not all the same. For example, an arbitrary or capricious action is not necessarily undertaken in bad faith, or for a non-governmental purpose. Similarly; an action taken bad faith is not necessarily undertaken for a non-governmental purpose; and an action undertaken for a non-governmental purpose in not necessarily arbitrary or capricious, or taken in bad faith. Each category is separate and distinct from the other.
This section of the FDIC Report identifies the following seven FDIC actions that were alleged by Garrett to constitute regulatory misconduct: (1) false statements of fact in a criminal referral sent to the U.S. Attorney, (2) unauthorized criminal disclosure of bank examination information to an officer of another bank (by a State examiner, not FDIC), (3) instructing a Bank employee to lie to Garrett, (4) failure to prepare a CMP matrix or written memorandum addressing the 13 FFIEC factors in accordance with prescribed policies and procedures set forth in the FDIC Division of Supervision Manual of Examination Policies and Directives to FDIC Regional Directors, (5) the initiation and conduct of a regulatory enforcement action that does not serve a legitimate regulatory purpose, (6) the downgrade of supervisory ratings of the Bank assigned in an examination report conducted and prepared by the Missouri Division of Finance, (7) the use of an "epithet" by an employee of the FDIC to describe an intended effect regarding the use of the FDIC statutory enforcement powers.
As indicated in the discussion analysis of "Allegation 7," above, Garrett views the charges of conducting an enforcement action for a non-governmental purpose (i.e., without a legitimate bank regulatory purpose) and utilizing the enforcement powers of the FDIC to further a personal animus or dislike of the targeted banker as synonymous. They are one and the same in the case of the FDIC action instituted against Garrett. Accordingly, this section of the FDIC Report identifies five actions alleged by Garrett to constitute abusive regulatory misconduct by the FDIC and one action that constituted regulatory misconduct by the Missouri Division of Finance.125
Only items (6) and (7),above, remain to be discussed. With regard to the FDIC downgrade of the supervisory ratings assigned in the 1991 Report of Examination of the Bank prepared by the Missouri Division of Finance, the FDIC Report again fails to grasp the gravamen of Garrett=s objection. As mentioned previously (and again contrary to the averment in the FDIC Report), Garrett has never predicated his objection to the FDIC downgrade action on personal bias or animus against Garrett. Rather, Garrett=s contention has always been that the FDIC downgrade action was not reasonably founded upon fact and was therefore prohibited arbitrary agency action. The hearing record is replete with testimony126 and documentary evidence127 which clearly demonstrated that the FDIC downgrade action was arbitrary and taken to provide an ostensible "excuse" for the agency to re-examine the Bank on an accelerated basis.128 Garrett believes (but cannot prove) that the FDIC downgrade actions were directed by the Assistant Regional Director in the Kansas City Regional Office who was responsible for engaging in regulatory misconduct based upon a personal dislike of Garrett, discussed below.
Notwithstanding the self-serving rhetoric in the FDIC Report,129 the most compelling and graphic illustration of FDIC regulatory misconduct predicated upon personal animus against Garrett occurred in October of 1991 - at the very beginning of the eight-year nightmare endured by Garrett. The conduct in question will certainly stand as one of the most outrageous displays of arrogance by a senior FDIC management official that has ever been recorded in the history of the agency. It occurred on October 25, 1991, which was a little more than three weeks after the 1991 FDIC examination of the Bank first started. By such date, the 1991 FDIC EIC had completed a preliminary written assessment of the findings and conclusions of the examination, and had made a list of recommendations regarding the nature and scope of the regulatory response of the FDIC to such findings and conclusions.130
Due to the aggravated circumstances of the situation,131 FDIC examination procedures required that the 1991 FDIC EIC forward a "call-in" memorandum by facsimile to the FDIC Kansas City Regional Office summarizing his findings and recommendations, and to wait for confirmation instructions. The 1991 FDIC EIC made the following recommendations in his report to the Kansas City Regional Office: (1) the issuance of a formal report of apparent crime to the U.S. Attorney, (2) the issuance of an order of removal from office and prohibition from further participation against Glen Garrett, (3) the issuance of a civil money penalty against Glen Garrett, and (4) the issuance of a cease and desist order against the Bank, which were forwarded to the FDIC Kansas City Regional Office by facsimile from the Bank on October 25, 1991.132
According to the sworn testimony of the 1991 FDIC EIC, a senior FDIC management official in the Kansas City Regional Office with the title of Key Review Examiner133 called the 1991 FDIC EIC at the Bank, informing him that his findings and recommendations had been reviewed and discussed by senior regional staff representatives of the FDIC Division of Supervision, and related the results of that review with the following comment:
We've read your memo. We all agree that Mr. Garrett should be castrated.134
Aside from the appallingly insensitive and contemptuous nature of such a comment, it nevertheless provides a chillingly accurate portrayal of the extreme degree of prejudicial bias and personal animus against Mr. Garrett that existed in 1991 and which would continue to emanate from the FDIC Kansas City Regional Office over the ensuing eight years.135
Some might argue that the cited offensive comment by the FDIC management official136 was an aberration, or a once-in-a-lifetime event. Incredible as it might seem, such was not the case for this particular FDIC management official. The barnyard metaphor he used to describe the intended effect of utilizing the FDIC statutory enforcement powers against Garrett was one of his favorites. There was convincing evidence offered at the administrative hearing which indicated that the same FDIC management official had personally used the exactly the same metaphor several months earlier in 1991 to describe the collective attitude of senior FDIC management officials in the FDIC Kansas City Regional Office toward the FDIC examiner, who would later be assigned to serve as the Examiner-in-Charge of the 1991 FDIC examination of the Bank (hereinafter referred to as the "targeted FDIC examiner").137
The FDIC Field Office Supervisor of the Springfield, Missouri Field Office testified that on or about August 8, 1991, he received a telephone call from the Assistant Regional Director in the FDIC Kansas City Regional Office regarding a prior request the Assistant Regional Director had made for a performance evaluation of the targeted FDIC examiner. The FDIC Field Office Supervisor testified that he had previously submitted the requested performance evaluation to the Kansas City Regional Office; that he had assigned satisfactory ratings in all performance categories; and that the FDIC Assistant Regional Director made more than one call back to the Field Office Supervisor, advising that the performance evaluation he submitted to the Kansas City Regional Office had been "lost."138 It was apparent to the Field Office Supervisor that the Assistant Regional Director was upset with the fact that the previously submitted performance evaluation of the targeted FDIC examiner included favorable ratings in all performance areas, and that the stated need to prepare another performance evaluation by the Assistant Regional Director was tantamount to a request for an evaluation that included unsatisfactory ratings notwithstanding the satisfactory de facto performance of the targeted examiner. It was at this juncture that the FDIC Assistant Regional Director "reminded" the FDIC Field Office Supervisor:
I guess you know at least six people up here [in the FDIC Kansas City Regional Office] would like to cut [the targeted FDIC examiner's] balls out. 139
The FDIC Field Office Supervisor was so stunned by the statement that he decided to prepare a written note to the himself detailing exactly what was said and the historical context in which the cited statement was made.140 He testified that he prepared the note to protect himself in case there was ever a question regarding the true author of the ratings that were assigned in the final performance evaluation of the targeted FDIC examiner.141
Given the unique (albeit shockingly disgusting) nature of the repeated specific reference to the male anatomy, and given the fact that such references were made in official business communications involving an identifiable Assistant Regional Director who was assigned to the FDIC Kansas City Regional Office in 1991, there is little (if any) reasonable doubt that the cited offensive statements were, in fact, made by such FDIC Assistant Regional Director. As indicated previously,142 the FDIC Report irresponsibly minimizes and dismisses the statement made during the 1991 FDIC examination of the Bank based upon the testimony of a participant who stated he could not recall making such statement or hearing it in the first instance from the FDIC Assistant Regional Director.143 Even worse, however, is the obsequious failure of the FDIC Report to take any notice of the recorded incident of serious misconduct by the FDIC Assistant Regional Director involving the FDIC Field Office Supervisor.144
On the other hand, Bob Clarke's comment noted at the outset of this assessment may prove to be the most durable and prescient of all. In retrospect, what he really said was: "To anyone who is genuinely familiar with the FDIC Inspector General=s complacent attitude toward conducting bona fide comprehensive investigative inquiries into the de facto manner and the means that are employed by the FDIC Division of Supervision to achieve an end-result sought, it will not be a surprise that the FDIC Inspector General found that there was nothing improper regarding any aspect of the FDIC enforcement action conducted against Glen Garrett. There was nothing wrong with anything that was done in the Garrett case, and there would not be any objection or criticism if the FDIC Division of Supervision decided to duplicate the effort." Sad, but true.
The FDIC enforcement action conducted against Glen Garrett is totally unprecedented in the annals of legitimate bank supervision. For a period of eight years, the FDIC allowed and/or perpetrated a process that was contrary to law and human decency by engaging in a deliberate course of action that included willful and prejudicial misconduct, and which was essentially designed to intimidate and threaten a small community banker with the ultimate hope of prevailing by attrition. The plain, indisputable fact of the matter is that the FDIC enforcement action against Glen Garrett was not pursued for a legitimate governmental or regulatory purpose. Rather, the statutory enforcement powers of the FDIC were abused to implement the personal agenda of a shallow-minded, vindictive bureaucrat who was determined to satiate his personal dislike of Glen Garrett by continuing to persecute him for eight years, regardless of cost in either dollars or human resources and notwithstanding the lack of any upside benefit to the FDIC. In his own words, the FDIC enforcement powers provided in section 8 of the Federal Deposit Insurance Act were used in an attempt to "castrate" Glen Garrett. Congress must have had a different purpose in mind when it granted such powers to the FDIC.
The lead editorial titled "Federal Malpractice" and published in the March 23, 1999 edition of The Kansas City Star summed it up best:
Because of deposit insurance, it=s important that bankers maintain a healthy fear of regulators...But who regulates the regulators?
For southwest Missouri banker Glen Garrett, the answer to that question remains unclear. Garrett spent $2 million of his own money fighting a case by the Federal Deposit Insurance Corporation, which hounded him relentlessly for eight years over what amounted to a technical violation resulting in no loss to his bank.
[The Garrett] case should prompt congressional hearings. That makes sense. The FDIC acted with complete lack of perspective. Last March, an agency spokesman even told a Star reporter that it mattered little whether Garrett's methods resulted in any lost bank money. Excuse us, but if banks never incurred losses from inappropriate risks, the FDIC would be out of a job. . . At a congressional hearing lawmakers should begin by directing the FDIC to determine how much public money it spent hounding a small-town banker for no apparent reason. Then they should ask the agency to explain whether or not those losses matter.145 [Emphasis in the original.]
Exhibit A FDIC Inspector General Report
dated September 29, 2000 regarding allegations of regulatory misconduct
by FDIC in Garrett enforcement action, and letter to Senator Christopher
S. (A Kit" ) Bond dated October 3, 2000 forwarding same. See, fn.1.
Exhibit B Memorandum to File from Stephens
B. Woodrough, Counsel for Glen Garrett, dated February 3, 2000, assessing
the accuracy and completeness of FDIC letter reports to Senator Christopher
S. ("Kit" ) Bond dated November 29, 1999 and December 6, 1999. See, fn.1.
Exhibit C Letter from Stephens B. Woodrough,
Counsel for Glen Garrett, dated May 19, 1995, to FDIC Senior Attorney
Stephen H. Stiller, withdrawing prior offer of settlement following
rejection of such offer by FDIC. See, fn.23 and fn.25.
Exhibit D RX 71 - Documentary exhibit that
was offered by Glen Garrett (but not admitted) at the administrative
hearing, displaying the content of seven video slides presented at
the hearing that show the intrinsic relationship between the charges
in a criminal referral by FDIC and the FDIC charges against Garrett.
Exhibit E Letter from Stephens B. Woodrough,
Counsel to Glen Garrett, dated April 6, 1999, to FDIC Senior Attorney
Stephen H. Stiller, forwarding letter opinion of General Counsel of
Federal Reserve Board dated December 10, 1998. See, fn.36.
Exhibit H Extract of hearing transcript
of testimony of the FDIC Examiner-in-Charge of the 1991 FDIC examination
of the First State Bank of Purdy regarding a statement by a senior
management official in the FDIC Kansas City Regional Office that reflected
extreme prejudice and personal animus against Glen Garrett. See, fn.134.
Exhibit I Extract of hearing transcript
of testimony of the FDIC Springfield Field Office Supervisor regarding
a statement by a senior management official in the FDIC Kansas City
Regional Office which confirmed such official's propensity to use an
epithet that reflected extreme prejudice and personal animus against
Glen Garrett. See, fn.139.
1. The FDIC Report is attached as "Exhibit A" and essentially focuses on the eight grievances Glen Garrett filed in June of 1998 with the Small Business Association National Ombudsman of the Regulatory Enforcement Fairness Board ("SBA National Ombudsman"). [The Office of SBA National Ombudsman was created following the enactment of the Small Business Regulatory and Enforcement Fairness Act ("SBREFA") in 1996.] The FDIC Report also references a "related request" from Senator Bond dated November 9, 1999, and states that the FDIC Inspector General responded to Senator Bond in a separate report dated April 5, 2000. [Glen Garrett was not provided with and we have not seen a copy of that report.] The FDIC Report fails to mention two earlier written responses from the FDIC to Senator Bond. On November 23, 1999, the FDIC Inspector General addressed a report to Senator Bond responding to a letter dated November 9, 1999 from Senator Bond, and on December 6, 1999, FDIC Chairman Tanoue sent a follow-up letter to Senator Bond, forwarding a copy of a nine-page report prepared by the FDIC Legal Division which was titled, "Response to an Inquiry from The Honorable Christopher Bond." We critiqued the accuracy of both FDIC responses to Senator Bond in a memorandum to the File dated February 3, 2000. A copy of that memorandum (without the attachments referenced therein) is attached as "Exhibit B."
2. Other, less discriminating, observers might well characterize the FDIC Report as a comprehensive whitewash embellished by factual inaccuracies, half-truths, and self-serving rhetoric.
3. The FDIC Report does not discuss or even mention that the FDIC Examiner-in-Charge of the 1991 FDIC examination of the Bank recommended multiple regulatory actions, including: (1) the issuance of a formal report of apparent criminal conduct to the U.S. Attorney, (2) the issuance of an order of removal and prohibition from further participation in banking, (3) the issuance of a civil money penalty order, and (4) the issuance of a cease and desist order against the Bank. See, RX 4, RX 56, RX 14, RX 15 and RX 16.
4. The sad irony is that this same attitude of the agency to settle for mediocrity and willingness to "getting it almost right" was instrumental and contributed heavily to the eight-year regulatory nightmare that Garrett was subjected to by the FDIC between 1991 and 1999.
5. RX 17 at 23.
6. It is believed that the FDIC agreed with our legal analysis of such violations, as reflected in a letter report Garrett addressed to the Assistant Regional Director of the FDIC Kansas City Regional Office dated May 26, 1994. That letter report is part of RX 38 and appears at pages 18-27. Our analysis of the alleged violations was subsequently confirmed by the General Counsel of the Federal Reserve Board in letter opinions he issued and published on October 21, 1994. RX 39 and RX 40. The FDIC has never disputed the contention that all of the cited violations of Regulation O in the 1991 FDIC Examination Report of the Bank are wrong.
7. In June of 1992, the Bank consented to the issuance of a cease and desist order under section 8 (b) of the Federal Deposit Insurance Act based upon the results of the 1991 FDIC Examination Report. Although the Order contained a standard provision requiring the Bank to correct the violations of law cited in the 1991 FDIC Examination Report, the Bank ignored the requirement for the cited violations of Regulation O, and the FDIC never made any attempt to enforce that requirement of the order as to such alleged violations of Regulation O.
8. The informant was later identified as the then President and Chief Executive Officer of United Missouri Bank at Monett ("UMB Monet"), a local competitor of the Bank. RX 57 at 2. During an examination of UMB Monet by the Missouri Division of Finance in March of 1991, the informant approached the State examiner-in-charge with A confidential" information regarding Garrett and the Bank. Following a promise of anonymity, the informant furnished the State examiners with a multitude of unsubstantiated rumors, outright fabrications, defamatory falsehoods, and strong inferences of dishonest conduct by Garrett in connection with the construction of a new main office building for the Bank in Monett and loans involving more than a dozen named customers of the Bank. Because of the flagrant defamatory nature of such statements and the resulting damage they inflicted upon Garrett over the ensuing years, Garrett instituted a multi-million dollar civil action for damages in Springfield, Missouri against the informant and his employer, United Missouri Bank, National Association ["UMB, N.A."]. A jury trial of that action was set to commence on July 9, 2001; however, such trial was continued at the request of UMB, N.A. A new jury trial date has been set for July 22, 2002 in Springfield, Missouri.
9. The special FDIC investigation of Garrett prompted several unusual circumstances regarding the conduct of the 1991 FDIC examination of the Bank. First, the examination was conducted on a "surprise" basis contrary to the agency's normal practice of providing advance notice. Second, the examination was conducted less than 6 months following a full-scope examination by the Missouri Division of Finance (which resulted in a satisfactory composite supervisory rating of "2"), which was contrary to the normal practice of allowing about a year to lapse between examinations. Third, the special investigation of Garrett consumed a severely disproportionate percentage of the total resources committed by the FDIC to the examination. For example, the 1991 FDIC Examination Report shows that a total of 361 man-hours were spent assessing the quality of the Bank's loan portfolio, but that a total of 389 man-hours were spent conducting an investigation of the allegations made by the informant at UMB Monett. The investigation of the allegations of the informant at UMB Monett (RX 57) appears in the confidential "Supervisory Section" of the 1991 FDIC Examination Report under the heading "Special Activities." RX 17 at 22.
10. The omitted footnote mistakenly defines the disputed nominee loans as loans that were "taken out by other borrowers and used for the benefit of Mr. Garrett." As a general proposition, it should be noted that most borrowers apply for and obtain loans from banks for the purpose of paying an obligation owed to another person or entity. Thus, the borrower's act of transferring the proceeds of a loan for the use and benefit of a third party is a normal and proper consequence of borrowing. Such transfer does not result in a "nominee" loan. Receipt of the "use and benefit" of the proceeds of a loan, therefore, is not determinative of "nominee" status. Rather, the central feature of a nominee loan lies in the underlying intention of the named borrower vis-à-vis the obligation to repay the loan. A nominee or straw party loan is marked by the fact that the named borrower has no intention to repay the lending bank. Indeed, the FDIC Board of Directors has announced that the essential litmus test of determining whether a nominee loan has been made is the determination that the purported nominee or named borrower denied any legal responsibility to repay the debt. Conversely, the status of "nominee" loan will not occur where there is a determination that the named borrower acknowledged liability for the loan by providing the funds used to repay the loan. See, In the Matter of Ramon M. Candelaria, FDIC Enf. Dec. &5242 (1997). The FDIC Report misleads the reader to the conclusion that Garrett's receipt of the benefit of the disputed loans was improper and that such receipt tainted the loan as a "nominee" loan. It was neither. The only impropriety formally alleged by the FDIC regarding the disputed loans was Garrett's failure to voluntarily inform the Bank's board of directors that he had received the proceeds of such loans. Garrett has never denied that he received the proceeds of the loans which had been made by other officers of the Bank in the ordinary course of business so that the borrowers could repay sums they owed to Garrett. The FDIC charged that Garrett had a legally enforceable duty to inform the Bank's board of directors that he received the use and benefit of the proceeds of the six loans in question; Garrett disputed such charge. [In 1989 and 1990 when the disputed loans were made, Regulation O did not require that Garrett make any type of disclosure to the board. Two years after the loans in question were made, Regulation O was amended in 1992 to require that any officer who receives the proceeds of a loan made by the Bank (regardless of the circumstances) must inform the board of directors of such fact. See, section 215.5(d)(1) of Regulation O, 12 C.F.R. ' 215.5(d)(1).]
11. The entire dispute between the FDIC and Garrett was centered on six loans made over a period of 18 months in 1989 and 1990 to three different borrowers that totaled $137,000. [Such basic, undisputed statistical facts are inexplicably omitted from the FDIC Report.] The largest loan was $30,000. All of the loans were made by the Bank in the ordinary course of business to creditworthy borrowers, and all of the loans were repaid in full by such borrowers with funds that they owned. Prior to the issuance of formal charges against Garrett, each of the borrowers executed two sworn affidavits wherein they stated, inter alia, that they applied for a loan from the Bank in order to pay a debt they owed to Garrett; that they never asked for or suggested that Garrett intercede on their behalf in obtaining approval of their request for credit; that they did not ask for or receive from the Bank any special or favorable terms of credit; that they were legally obligated personally to repay the loans; and that they used their own funds to repay their loans from the Bank. See, RX 11A at 4-6, RX 35, RX 36 and RX 37. Notwithstanding intense FDIC cross-examination of each of the three alleged nominee borrowers, the FDIC was unable to elicit any testimony which undercut any of those precepts. The FDIC, therefore, totally failed to provide the requisite proof of the allegation that the disputed loans were nominee or straw party loans. The reason was elegantly simple: the undisputed evidence showed they were regular loans made in the ordinary course of business to creditworthy borrowers that were repaid in full by the named borrowers.
13. RX 26. The April 22, 1993 letter forwarded a draft "Stipulation and Consent to the Issuance of an Order of Removal from Office and Prohibition from Further Participation" and a draft "Order of Removal from Office and Prohibition from Further Participation" attached thereto. The FDIC letter states that a meeting will be scheduled in the near future with Garrett to discuss the execution of the documents, and that Garrett will be contacted by an FDIC representative regarding the scheduling of such meeting. There is no indication that the FDIC is merely "considering" regulatory action, and there is no indication of the factual basis of the action contemplated by the FDIC. A proposed "Notice of Charges" was not included with the draft stipulation and proposed removal order.
15. Mr. Mock died in December of 1993. We were not retained as counsel to Garrett until early April of 1994. Immediately thereafter, a meeting with senior FDIC representatives was scheduled to review the status of the removal order against Garrett that had been proposed by the FDIC in its letter of April 22, 1993 and the ensuing discussions between Mr. Mock and the FDIC relating to such proposal. That meeting occurred on April 19, 1994 in the FDIC Kansas City Regional Office. RX 38 at 18.
16. On February 8, 1994, the FDIC sent a facsimile to Garrett forwarding a proposed cease and desist order against the Bank. RX 29. On February 18, 1994, the FDIC proposed the issuance of a personal cease and desist order and the issuance of an order to pay a civil money penalty against Garrett. RX 30. The first proposed order would have prohibited the Bank from making any type of loan or extension of credit to Garrett (regardless of the terms or conditions of such credit), would have required that any future non-credit transactions between Garrett (or any of his related interests) and the Bank satisfy certain requirements. The second proposed included similar restrictions, but also would have required Garrett to pay a civil money penalty of $10,000. Garrett had never agreed to consent to either order. The FDIC never produced a single document showing that Garrett and/or his former attorney (Ralph Mock) agreed to consent to the issuance of either order.
17. The memorandum is dated February 9, 1995. RX 43 at 1. The CMP matrix is RX 64 and was prepared by the Kansas City Regional Office, not by a field examiner as required by FDIC enforcement policies and procedures. See, fn.39, infra, and the accompanying text.
18. The proposed civil money penalty (RX 30) was sent to Garrett on February 18, 1994 by the FDIC Kansas City Regional Director as part of a proposed settlement offer. See, fn.16. FDIC enforcement policies procedures (RX 49) require that before a proposal for the issuance of a civil money penalty order can be made, a matrix or separate memorandum must be prepared assessing 13 factors prescribed by the Federal Financial Institutions Examination Council ("FFIEC"). See, fn.39, infra. The CMP matrix referenced in the FDIC Report was originally prepared to satisfy that requirement for the order proposed in 1994, not 1995. In effect, the FDIC used the same CMP matrix on three separate occasions: (1) it was first used to support the civil money penalty proposed in February of 1994 (RX 30); (2) it was used to support the civil money penalty proposed in February of 1995 (RX 43); and (3) it was used to support the final recommendation for a civil money penalty (RX 45) made on June 19, 1995.
20. The four referenced internal memorandums comprise RX 27. They are dated May 20, 1993; December 7, 1993; June 15, 1994; and June 30, 1994. See also, RX 34 at 8.
21. RX 38 at 3-17. The transmittal letter from the FDIC Kansas City Regional Office states in part: "Your letter of May 26, 1994 [RX 38 at 18-27] glosses over the gravity of Glen Garrett's conduct which forms the basis for the FDIC's proposed enforcement action under section 8(e) of the Federal Deposit Insurance Act [for the issuance of an order removing him from office and banning him from banking permanently]..."
22. The FDIC Kansas City Senior Review Examiner responsible for the administrative oversight of the Garrett action so testified. Tr. at 3708-09. [The name of the person is not identified in deference to the privacy interests of the individual involved. See, fn.133, infra.]
23. Again, the recommendation for a civil money penalty by the FDIC Kansas City Regional Director on February 9, 1995 (RX 43) was made for the purpose of implementing a negotiated settlement for the voluntary payment of a penalty of $5,000 by Garrett. Although Garrett and the FDIC Kansas City Regional Office had entered into a settlement agreement whereby Garrett agreed to pay the penalty subject to certain terms and conditions, the settlement was rejected by the FDIC Washington Office on or about May 15, 1995.
25. Since that letter is not part of the evidentiary record of the enforcement proceeding instituted against Garrett, a copy is attached as "Exhibit C." The letter withdraws a settlement offer that had been fully agreed upon by both Garrett and representatives of the FDIC Kansas City Regional Office (including the Regional Director and the Regional Counsel) wherein Garrett agreed to consent to the issuance of an order requiring him to pay a civil money penalty of $5,000, subject to certain standard conditions and the approval of the FDIC Washington Office. Notwithstanding an approval of the settlement package by the FDIC Legal Division in Washington, the FDIC Director of the Division of Supervision declined to ratify the settlement agreement. Accordingly, Garrett had no other choice than to withdraw his offer to consent to pay a civil money penalty.
26. RX 38 at 18-27.
27. RX 35, RX 36 and RX 37.
28. The person addressed is the FDIC Attorney in the Kansas City Regional Office who was primarily responsible for all negotiations and contacts with Garrett (through his counsel) regarding the legal disposition of the regulatory dispute between Garrett and the FDIC. The same FDIC Attorney also served as lead trial counsel for the FDIC at the formal enforcement proceeding instituted against Garrett after settlement negotiations collapsed with the rejection of a settlement agreement by the FDIC Washington Office in May of 1995.
29. RX 38 at 1-17.
30. RX 43.
32. For example, based upon the stated sequencing of events, the FDIC Report indicates that the hearing began on March 18, 1996 after the FDIC amended the charges to include breaches of fiduciary duty. But that is incorrect. The FDIC sought to amend its charges against Garrett on the date the hearing first began on March 18, 1996. The unexpected ploy resulted in a continuance of the hearing. See, Tr. at 1-70. Three weeks later, the FDIC issued totally new charges against Garrett in an Amended Notice of Assessment filed on April 8, 1996. Garrett filed an Amended Answer denying the new charges on April 18, 1996, and the hearing resumed on April 22, 1996.
34. It is evident that the FDIC had a single-minded purpose, namely, to impose a sanction for certain events and conduct involving Garrett which the agency construed as either criminal or warranting punishment of some kind. It did not matter what sanction was imposed; it only mattered that Garrett be punished. This is painfully evident when a systematic comparison is made of the findings and conclusions regarding Garrett=s alleged misconduct in the 1991 FDIC Examination Report (RX 17 at 4, 21 and 23; RX 71 at 1-2) with the following: (1) the charges of misconduct reflected in the recommendations of the Examiner-in-Charge of the 1991 FDIC examination for the initiation of removal and civil money penalty actions against Garrett (RX 15, RX 16; RX 38 at 3-17; RX 71 at 4-6); (2) the suspected irregularities outlined by the FDIC in its criminal referral to the U.S. Attorney in March of 1992 (RX 56; RX 71 at 3); and (3) the identical charges made by the FDIC in the civil money penalty actions initiated on September 8, 1995 [First Notice of Assessment - First Tier Penalty] and April 8, 1996 [Amended Notice - Second Tier Penalty] that was litigated (RX 71 at 6). Exactly the same allegations of wrongdoing run throughout all of the foregoing documents. In effect, therefore, the FDIC used its enforcement powers to prosecute Garrett for the suspected criminal misconduct it had sent to the U.S. Attorney after the U.S. Attorney declined to take any action against Garrett. See, Tr. at 4706-33 and RX 71 at 1-7. [RX 71 is a composite exhibit which shows the content of a series of seven video slides that were shown to the Court during the course of our opening statement at the hearing. Since that documentary exhibit was not admitted to the evidentiary hearing record, it is attached as "Exhibit D."]
35. This was almost a full year prior to the issuance of formal charges [First Notice of Assessment - First Tier Penalty] against Garrett on September 8, 1995 based solely upon alleged violations of Regulation O.
36. The letter opinions were issued on October 21, 1994. RX 39 and RX 40. Regulation O was promulgated by the Board of Governors of the Federal Reserve System. Congress has vested that agency with the primary responsibility of making authoritative interpretations regarding the meaning and applicability of the regulation. In this regard, the FDIC was forced to issue a letter opinion on October 28, 1994 (RX 41 at 1-2) which reversed two prior letter opinion it had addressed to Garrett (RX 41 at 16-17 and 25-26) that were inconsistent with one of the letter opinions (RX 40) published by the General Counsel of the Federal Reserve Board on October 21, 1994. [On December 10, 1998, the General Counsel of the Federal Reserve Board issued and published an advisory opinion which specifically concluded that Regulation O is not applicable to a loan made to the son of an insider of the lending bank for the purpose of refinancing a personal loan made by the insider to his son. The opinion used the same reasoning employed in the 1994 opinion at RX 40. A copy of the 1998 opinion was forwarded to the FDIC on April 6, 1999 after the FDIC had finally dismissed all charges against Garrett the month before. Copies of the 1998 Federal Reserve opinion and covering transmittal letter are attached as "Exhibit E."]
37. The original charges against Garrett were issued by the FDIC Director of the Division of Supervision pursuant to a written delegation of authority from the FDIC Board of Directors to issue charges for the assessment of a civil money penalty. The amended FDIC charges were made by the FDIC Legal Division which did not have any such delegation of authority from the FDIC Board of Directors. The FDIC Report totally ignores the obvious jurisdictional issue. Query: Did the FDIC Inspector General even recognize the existence of such issue?
38. The original FDIC charges only sought to impose a so-called "First Tier" penalty against Garrett which does not require any showing by the FDIC of culpability or awareness on the part of the alleged wrongdoer. The assessment of a "Second Tier" penalty, however, requires a showing of culpability or recklessness on the part of the alleged offender. Nevertheless, the FDIC did not seek to impose a higher penalty against Garrett as a result of the amended charges. The FDIC merely wanted to establish a new legal theory upon which it could prevail since there was serious doubt the original theory (based solely upon violations of Regulation O that the General Counsel of the Federal Reserve had expressed a contrary opinion) would pass judicial muster in a litigated proceeding.
39. RX 49 at 14-16 and 18-24. E.g., "Examiners are instructed to address each of the 13 points of the interagency policy statement [of the Federal Financial Institutions Examination Council ("FFIEC")] in either a separate memorandum to the Regional Director or as a supplement to the Supervisory Section [of the examination report]." RX 49 at 16. The FFIEC policy statement is FX 6. The CMP matrix is used to evaluate and score the 13 FFIEC factors, which were promulgated in 1980 to assess the statutory factor concerning the "gravity" of the violations for which a civil money penalty is to be imposed. The FDIC Manual of Examination Policies states: "To facilitate evaluation of the gravity of such violation(s) the [FFIEC] policy statement sets forth the following factors which must be considered in determining whether civil money penalties should be imposed..." [Emphasis added.] RX 49 at 14. Thus, FDIC procedures mandate a review and written assessment of the 13 FFIEC factors. In the absence of a separate memorandum that addresses each of the 13 FFIEC factors, a CMP matrix must be completed since the basic function of the CMP matrix is to evaluate and score the 13 FFIEC factors.
40. The Amended Notice of Assessment was a product of the FDIC Legal Division which did not have delegated authority from the FDIC Board of Directors to issue charges for the assessment of a civil money penalty under section 8(i) of the Federal Deposit Insurance Act. See, fn.37, supra, and the accompanying text.
41. The phrase "cease and desist" is not even in the descriptive caption of the settlement order. Garrett insisted that the words "cease and desist" not be used in the settlement order, and the FDIC agreed. Copies of the stipulation agreement, settlement order, and transmittal letter from the FDIC are attached as "Exhibit F."
42. Although such findings and conclusions are standard "boilerplate" in all cease and desist order issued by consent pursuant to section 8(b) of the Federal Deposit Insurance Act, Garrett refused to consent to the issuance of any order issued by FDIC that contained any such findings or conclusions. The FDIC therefore agreed to their deletion from the final settlement order.
43. Garrett insisted upon inclusion of a provision in the settlement order which states that the FDIC also withdrew all charges (even though the order also provides that all such charges were dismissed, with prejudice) in order to demonstrate that such charges should never been made in the first place. Again, the FDIC agreed.
44. Even though the FDIC denied engaging in any misconduct, it deserves mentioning that the FDIC had never agreed previously to include such a provision in a consent order issued by the agency under section 8(b) of the Federal Deposit Insurance Act.
45. Perhaps the most unprecedented aspect of the settlement order lies in the fact that it is the only consent order issued pursuant to section 8(b) of the Federal Deposit Insurance Act that has ever been issued by the FDIC (or any other Federal bank regulatory agency) prior to the conclusion of a bitterly contested evidentiary hearing that had commenced three years earlier.
46. Beginning in May of 1992 when it became effective, that section of Regulation O requires that in any instance where Garrett receives or has any interest in the proceeds of a loan made by the Bank, he must inform the board of directors of the Bank in a timely manner that he has received or has an interest in such loan proceeds. Garrett has never violated that regulation; nor has the FDIC ever charged Garrett with violating that regulation.
47. The provisions of section 215.5(d)(1) of Regulation O did not apply to Garrett or the Bank until May of 1992, which was almost two years after Garrett= s alleged misconduct of failing to inform the Bank=s board of directors that he received the proceeds and benefit of the disputed loans in question. See, end of fn.10, supra.
48. Copies of the referenced letter and our letter of April 30, 1999 to the FDIC General Counsel regarding the statements made therein are attached as "Exhibit G." The FDIC General Counsel stated: "The FDIC has conceded the jurisdiction of your office ..." Such concession followed two earlier letters the FDIC General Counsel had addressed to the SBA National Ombudsman (dated May 27 and July 21, 1998) wherein he made impassioned arguments denying that the SBA National Ombudsman had such jurisdiction to review the enforcement action against Garrett for the reason cited in the FDIC Report. It is readily apparent that the FDIC Report attempts to conceal the admission made by the FDIC General Counsel regarding the jurisdiction and authority of the SBA National Ombudsman to review FDIC enforcement actions. [The FDIC General Counsel never responded to or acknowledged our letter, accusing him of lying to the SBA Ombudsman, also discussed in text following this note.]
49. The allegations of regulatory misconduct were first brought to the attention of the FDIC in a letter dated May 6, 1998 from the SBA National Ombudsman to the FDIC Chairman. The SBA inquiry incorporated most of the allegations of regulatory misconduct contained in a complaint filed by Garrett with the SBA National Ombudsman on April 10 and 22,1998 and included: (1) the suppression of material exculpatory evidence which contradicted the FDIC charges against Garrett, (2) instructions by senior management officials to FDIC examiners to adversely classify certain loans in the Bank without regard to the actual credit quality of such assets, (3) instructions by FDIC examiners to a senior officer of the Bank to lie to Garrett in his capacity as chief executive officer, (4) the falsification of statements of material fact in an official written report to the U.S. Attorney to mislead and fraudulently induce the conduct a criminal investigation of Garrett who had been targeted by FDIC management officials for administrative sanctions under section 8 of the Federal Deposit Insurance Act, (5) the initiation and conduct of an administrative enforcement action for the improper and non-governmental purpose, (6) the utilization of the examination resources of the Office of the Comptroller of the Currency by the FDIC in violation of the Right to Financial Privacy Act, (7) the improper utilization of the FDIC examination powers to further a criminal law enforcement purpose, viz., establishment of a criminal motive, and (8) the utilization of the examination authority for the purpose of gathering evidence in support of anticipated litigation. On May 6, June 23, and July 6, 1998, the SBA National Ombudsman addressed letter inquiries to the FDIC Chairman raising the foregoing issues and forwarding comprehensive documentary materials that supported the allegations of regulatory misconduct, including a copy of a criminal referral report made by the FDIC to the U.S. Attorney that contained false statements to mislead and fraudulently induce the U.S. Attorney to direct the conduct of an extensive criminal investigation of Garrett.
50. In an ironic twist, it should be noted that the allegations of regulatory abuse and misconduct had been referred to the FDIC Ombudsman by the FDIC General Counsel himself. In a letter dated July 21, 1998, the FDIC General Counsel advised the SBA National Ombudsman:
I have forwarded [the documented allegations of regulatory misconduct forwarded to the FDIC Chairman by the SBA National Ombudsman in letters dated May 6, June 23, and July 6, 1998] to the FDIC=s Ombudsman who has statutory jurisdiction, pursuant to 12 U.S.C. ' 4806(d)(2), to address individual party=s problems with the regulatory activities of the FDIC.
Maybe so, but the FDIC Ombudsman clearly had a very different opinion of his jurisdiction and refused to take any action in the matter. The key point of the matter is that the refusal of the FDIC Ombudsman to become involved, as reflected in the letter from the FDIC Ombudsman to Garrett dated September 9, 1998, a copy of which was sent to the FDIC General Counsel, flatly contradicted the FDIC General Counsel= s letter of February 22, 1999 to the SBA National Ombudsman. Such evidence appears to further support the resolute and calculated nature of the lie told by the FDIC General Counsel to the SBA National Ombudsman and Congress. See, fn.48, supra, and the accompanying text.
51. A copy of this letter was sent to the FDIC General Counsel five months before the General Counsel=s letter of February 22, 1999, which falsely advised the SBA National Ombudsman and Congress that the FDIC Inspector General is available to provide responsive assistance to anyone who is the target of a regulatory enforcement action initiated by the FDIC. Again, such evidence appears to further reinforce the conclusion that the FDIC General Counsel must have been cognizant of the falsity of his representation to the SBA National Ombudsman and Congress regarding the policy of the FDIC Inspector General.
52. As indicated in the FDIC Report, the cited reason was a policy of the FDIC Inspector General not to conduct any type of investigative inquiry if the allegations of regulatory abuse and misconduct are also part of the dispute in a pending administrative enforcement action in litigation. The FDIC Report, however, fails to make any attempt to justify or explain the need or purpose of such a policy. Stated differently, the FDIC Inspector General, who prepared the FDIC Report, fails to make any assessment of the rationality of the policy used to justify a refusal to conduct an investigative inquiry into allegations of regulatory abuse and misconduct by FDIC examiners until more than four years after such abuses and misconduct were documented and brought to the attention of the FDIC Inspector General. The resulting flaw in the FDIC Report is obvious. The FDIC Inspector General=s policy places form over substance by subordinating the integrity of the supervisory work process performed by FDIC examiners to the process of adjudicating disputed factual and legal issues. Such subordination is totally unnecessary and erroneously subsumes that the adjudicatory process will be compromised or otherwise adversely affected if the opposite conclusion is adopted. The plain fact of the matter is that there is no conflict between the orderly adjudication of the disputed issues in accordance with legal principles of due process, and the conduct of an independent investigation by the FDIC Inspector General into the question of whether or not regulatory abuse and misconduct occurred. The key caveat, of course, is that the results of any such investigation by the FDIC Inspector General cannot be made available to the parties or otherwise used in the litigated proceeding. So long as the investigation conducted by the FDIC Inspector General remains truly "independent" and totally divorced from the adjudicatory process, there is no conflict. Under such circumstances, any investigation conducted by the FDIC Inspector General is for the sole benefit and internal use of the FDIC in its corporate capacity as a federal regulatory instrumentality. Unfortunately, the FDIC Report never comes close to addressing the issue.
53. The FDIC Report continues by citing three additional reasons for relying upon the hearing transcript: (1) the transcript provided "detailed and comprehensive coverage of the allegations and related evidence," (2) the transcript provided a "more contemporaneous record," and (3) the transcript is comprised of "testimony given under oath" thus ensuring its "veracity."
54. It is assumed that the reference to the "hearing transcript" includes all of the documentary exhibits that were admitted to the evidentiary hearing record by the presiding administrative law judge. The total volume of the administrative hearing record exceeds 20,000 pages, including over 200 documentary exhibits offered by the FDIC and Garrett - many of which exceeded 100 pages in length. There is absolutely no indication of any kind in the FDIC Report that the person(s) responsible for its preparation had any familiarity with the content of such a large and unwieldy record. The best indication of this is the failure of the FDIC Report to include a single citation or reference to the hearing record that was ostensibly relied upon. There are no specific references to any of the documentary exhibits; nor is there any cited reference to the transcript regarding any of the sworn testimony provided by the 24 witnesses who testified in the case. In short, while the FDIC Report may profess that the hearing record was reviewed and relied upon, there is nothing in the report itself that corroborates such statement. In view of the obvious bias reflected therein, the FDIC Report appears to be nothing more than a compilation of interviews with the attorneys who represented the FDIC at the hearing and/or with FDIC personnel who testified in support of the FDIC charges against Garrett, including those who recommended that the FDIC initiate and prosecute an enforcement action against Garrett.
55. The term "witness" is used in the sense of designating persons with personal knowledge of events and circumstances pertaining to the case, and not to persons who actually testified at the hearing. There are numerous persons both within and outside of the FDIC who have such personal knowledge and who did not testify. If conducted properly, such interviews could have provided valued insights from different perspectives that might have served to either substantiate (or refute) the recorded testimony of witnesses who testified at the hearing. For example, one of the allegations of regulatory misconduct is that instructions were given to the FDIC examiners during the course of 1991 FDIC examination of the Bank by a senior management official in the FDIC Kansas City Regional Office to adversely classify the loans that the FDIC suspected were nominee or "straw-party" loans regardless of the actual asset quality of such loans. The FDIC Examiner-in-Charge of the 1991 FDIC examination testified that such an instruction was given by a named FDIC official in the Kansas City Regional Office (Tr. at 9692-94; 9696-99); however, the named official denied giving such an instruction (Tr. at 5263-64). Another FDIC examiner who assisted at the 1991 FDIC examination testified that he prepared an examination work-paper (RX 5 at 5) which indicates the questioned instruction was given ("Apparent nominee loans to [names omitted; see, fn.133, infra]...These three lines need to be classified adversely."), but denied receiving the directive from the FDIC Kansas City Regional Office. Tr. at 1436. On the other hand, he later acknowledged that he received the instruction from the Examiner-in-Charge. Tr. at 1439-41. It would have been easy for the FDIC Inspector General to determine the truth of the matter by interviewing some of the other FDIC examiners detailed to the 1991 FDIC examination of the Bank. Unfortunately, the FDIC Report did not rely upon such sources of information.
57. The sole exception is the testimony of the Bank=s Head Bookkeeper regarding the allegation that FDIC examiners requested that she lie to Garrett. But even in that instance, there is no reason (except perhaps laziness or an indifference to truth) for the FDIC Inspector General not to conduct a sworn interview with that person. Further, it is important to recognize that the conduct of a personal interview by the FDIC Inspector General would not have been limited by the rules of evidence that may have otherwise limited the scope of such person= s testimony at the administrative hearing.
58. Some might also argue that reliance on such a limited source of factual information was the result of a political decision to reach a predetermined result that exonerated the FDIC. In this regard, only about 20% of the FDIC employees, who were personally involved in either the conduct or review of the FDIC examinations of the Bank conducted between 1989 and 1995, including supervisory personnel in the FDIC Kansas City Regional Office, were called as witnesses at the administrative hearing. By excluding the other 80% of such persons as an investigative source of reliable information, the FDIC Inspector General imposed a significant and limiting caveat upon the depth of the FDIC Report. Further, the FDIC Report totally ignored the obvious need for factual information from representatives of the Office of the Comptroller of the Currency ("OCC") in respect of the alleged abuse involving the FDIC solicitation of OCC national bank examiners to obtain private (and protected) customer information from a national bank for use by the FDIC in the Garrett action. No OCC representative testified at the administrative hearing, and only a very limited amount of documentary information from the OCC was admitted into the evidentiary hearing record. E.g., RX 58 at 6.
60. The intimidating letters were dated December 6 and 16, 1996. RX 76 and RX 80. A sound legal argument can be made that the actions of the FDIC official responsible for such letters bordered dangerously close to obstruction of justice. Such person knew (or should have known) that the persons addressed had been subpoenaed to testify and were therefore exempt from the proscriptions outlined in the letters warning of possible criminal prosecution. In effect, the FDIC knowingly (or recklessly) misled witnesses who had been subpoenaed to testify on behalf of Garrett into a mistaken belief that they risked criminal prosecution if they responded to such subpoenas and provided truthful testimony. The timing of the letters is also significant and was designed to have maximum emotional impact. Both were received within a few days of the scheduled testimony of the witness even though the FDIC had been notified at least a year earlier that such persons were scheduled witnesses for Garrett. The FDIC motive in addressing such letters was not to implement the law (as ostensibly indicated in the letters), but to prevent (through deception, fear and outright intimidation) duly subpoenaed witnesses from telling the truth on behalf of Garrett. The presiding administrative law judge was equally unnerved by the letters and specifically requested (ordered) the FDIC to issue a clarifying letter authorizing the subpoenaed testimony without fear of criminal prosecution. See, RX 76A.
61. On three separate occasions, the FDIC filed lengthy motions and made extensive oral arguments to the presiding administrative law judge to strike the "affirmative defenses" raised by Garrett. Such defenses alleged that the FDIC acted in bad faith, took actions that were arbitrary and capricious, and engaged in other similar types of prejudicial misconduct. In every instance, the FDIC effort was rejected by the Court. Thus, Garrett offered evidence at the hearing concerning the suppression of exculpatory evidence by the FDIC for the purpose of sustaining his burden of proof regarding such "affirmative defenses," and not for the purpose of furthering a belief that it would "clear" Garrett, as contended by the FDIC Report.
62. Such issues, of course, would also include the availability and credibility of witnesses who are scheduled to testify on behalf of parties to the dispute.
63. As stated previously (fn.52, supra), such an investigative finding by the FDIC Inspector General would not be available to anyone outside of the FDIC, including any party in litigation with the FDIC. The investigative finding of the FDIC Inspector General would only be used internally within the agency to "clean house" and undertake the necessary measures to eliminate the activities found to be abusive and the result of misconduct and to prevent their recurrence in the future.
64. On the other hand, if the FDIC examiners truly believed in the course of the 1991 FDIC examination of the Bank that the two loans to Garret=s son had been forged and that the endorsements on the loan proceeds checks were also forged, the question raised is why the FDIC examiners failed to make any notation in the examination work-papers treating them as "fictitious" loans subject to immediate charged-off. [The loans were repaid by Garrett=s son during the 1991 FDIC examination of the Bank.] More importantly, if such loans were in fact forgeries, an appropriate notification would have to have been made to the Bank=s bonding company upon being notified of a potentially dishonest act by the Bank= s chief executive officer. The Bank was never asked by the FDIC examiners during the 1991 FDIC examination of the Bank to notify its bonding company of a possible dishonest act (forgery) by Garrett. Indeed, such matters were not even mentioned by any of the FDIC or State representatives at a meeting with the Bank=s board of directors at the conclusion of the 1991 FDIC examination on November 5, 1991. Further, the FDIC examiners never confronted Garrett with their suspicion regarding the authenticity of the signatures on the Garret=s son notes and loan proceeds checks. In short, the official work activities of the FDIC examiners following their discovery of the signature discrepancies do not support the thesis that the FDIC examiners, in fact, believed that Garrett had forged the signatures on the Garret=s son loans.
65. As noted in the FDIC Report, the Bank=s President informed the FDIC examiners that powers of attorney were stored in an area which was separate (and more secure) that the location of the Bank=s credit files. Such testimony was corroborated by the Bank=s Head Bookkeeper. Tr. 5139-40. Interestingly, the FDIC examiners never requested that they be shown a copy of the power of attorney. The FDIC Report goes to great lengths to justify the expectation of FDIC examiners that all papers pertaining to a given loan will be stored in the loan file. That is not the issue. The issue is whether the FDIC examiners were informed of the existence of a power of attorney, not where the document should or should not have been stored, or where FDIC examiners can reasonably expect to find such documents. The undisputed testimony is that the FDIC examiners were informed of the fact that a power of attorney existed by a senior officer of the Bank who had personal knowledge of the document. It is also undisputed that the FDIC examiners never requested to see a copy of the document after being informed of its existence.
66. The testimony of the Bank=s President regarding the existence of a power of attorney is very detailed and graphic. It is also somewhat melodramatic vis-à-vis a perceived attempt by the FDIC examiners to "trap" her into a statement that the questioned signatures were genuine. Tr. 11403-10.
67. RX 20.
68. RX 20 at 6. The FDIC Report glosses over and essentially dismisses this evidence. After noting that Garrett=s son also testified that he gave Garrett the power of attorney in 1988, the FDIC Report concludes its evaluation of such testimony and the statement by the State Examiner-in-Charge of the 1992 State examination of the Bank with the observation: "The power of attorney was not produced at the hearing." The FDIC Inspector General totally misses the point. The question is not whether the FDIC examiners were obligated to give full faith and credit to the statements of the Bank=s President, Head Bookkeeper, and State Examiner-in-Charge, but whether the FDIC examiners were obligated to take some degree of cognizance of the existence of such indicators vis-à-vis their work-papers regarding their investigative activities pertaining to the loans to Garret=s son during the 1991 FDIC examination of the Bank; their comments in the FDIC examination report regarding the loans to Garrett=s son; their communications with their supervisors regarding the loans to Garrett=s son; and their statements to the U.S. Attorney regarding the genuineness of the signatures on the loans to Garrett=s son. The FDIC examiners failed at every turn to make any mention of the fact that they had encountered clear indications of the possible existence of a power of attorney that would easily explain the apparent signature discrepancies on the loan documents pertaining to Garrett=s son.
69. RX 57 at 16 and 18.
70. The finding in the 1992 State Report of Examination of the Bank regarding the discovery of a power of attorney did not exist at the time the FDIC sent its criminal referral to the U.S. Attorney questioning the genuineness of the signatures on the loans to Garrett=s son. Nevertheless, the FDIC failed to take any type of follow-up action after it received and reviewed the finding in the 1992 State Examination Report of the Bank regarding the discovery of a power of attorney, including a notice to the U.S. Attorney regarding the statements in the FDIC criminal referral (which had been forwarded to the U.S. Attorney only 4 months earlier) pertaining to the signatures on the loans to Garrett=s son. Tr. at 2810-12.
71. The FDIC examiners certainly had the opportunity to further investigate and verify (or belie) the information they received from the Bank=s officers regarding the existence of a power of attorney. However, except for their obligation to perform their duties as FDIC examiners (see e.g., fn.64, supra), they are not obligated to conduct such further investigation. FDIC examiners are not qualified to conduct investigations for criminal law enforcement purposes, and Garrett does not argue to the contrary. Again, the failure of the FDIC examiners to verify the existence of the power of attorney, or the failure of Garrett to produce it at the hearing are not the issues.
72. There is no logical reason not to accept the statements of the Bank=s President and Head Bookkeeper at face value. Neither had any apparent motive to risk the rather severe consequences of lying to Federal bank examiners making official examination-related inquiries, and both willingly engaged in personal, eye contact discussions with the examiners with calm and collected candor.
73. RX 35, RX 36 and RX 37.
74. Each of the alleged nominee borrowers executed two sworn affidavits - one in 1992 and the other in 1994. The affidavits submitted in 1992 were very brief and only stated that their loans at the Bank were genuine and that they acknowledged their legal obligation to repay the Bank. RX 11A at 4-6 and FX 120 at 766-68. The affidavits submitted in 1994 reaffirmed the statements in the 1992 affidavits, but were much more detailed and comprehensive. Garrett relied primarily on the affidavits submitted to the FDIC in 1994.
76. RX 11A at 1-3 and FX 120 at 763-65.
77. It is hard to find two other sentences in the FDIC Report with as many factual errors.
78. The FDIC Report does not give any indication of the nature of such inconsistencies or their gravity. Were there serious and material discrepancies, or were the alleged inconsistencies technical and relatively inconsequential? Were the borrowers questioned about the alleged discrepancies at the administrative hearing? Were any of the inconsistencies explained by the borrowers in their sworn testimony - on either direct examination by Garrett, or under cross-examination by the FDIC? The FDIC Report does not answer any of those questions.
79. Which examination - the one conducted in 1991, 1992, 1993 or 1994?
81. It is also typically indicative of a very biased regulatory attitude, which presumes the targeted offender has the burden of proving that the agency=s findings and conclusions are wrong. Such an attitude, if left unchecked, will inevitably lead to arrogance and a subconscious contempt for anyone who might dare question an action taken by the agency. Congress did not establish the FDIC as an autocracy.
82. See, fn.10, supra, and accompanying text. The Candelaria decision was announced by the FDIC Board of Directors in 1997, which was about three years after the borrower affidavits were submitted to the FDIC. Nevertheless, Garrett recognized the critical importance of emphasizing and documenting the legal obligation of the named borrower to repay the Bank. Indeed, it was Garrett who asked at a meeting with senior FDIC representatives in the Kansas City Regional Office in April of 1994 whether the FDIC examiners had made any effort to trace the source of funds that were used to repay the six disputed loans. [The 1991 FDIC Examination Report of the Bank showed that exhaustive tracing efforts had been made by FDIC examiners to document the usage and flow of the proceeds of the loans. Garrett essentially asked whether tracing efforts had been made in the opposite direction to determine who actually repaid the loans.] The FDIC answered that no such effort had been made; however, as soon as that meeting concluded, FDIC examiners were instructed to conduct such tracing. Those efforts are well documented in the hearing record. RX 32, RX 33 and RX 58. See also, fn.83, infra, and the accompanying text.
83. The investigative report is dated April 25, 1994. RX 58 at 5-6. Unfortunately, only the first two pages of the report were copied by Garrett and offered into evidence. The covering page of the report (RX 58 at 5) shows that it was styled as "[Name of borrower omitted; see, fn.133, infra]/Glen Garrett - Nominee Loan Research" and was comprised of nine subparts. The only subpart that was copied was the "Conclusion." RX 58 at 6. It is estimated that the remaining eight (8) subparts of the OCC report consumed approximately twenty pages. Those subparts were identified on the covering page of the report as follows: "B -Current Customer Profile," "C - Original $25,000 Note," "D - Loan History on $25,000 Note," "E - $8,628 Payment," "F - $17,266 Real Estate Note," "G - Loan History on Real Estate Note," "H - Deposit Statement [dated] 8-31-92," and "I - Funds to Open Demand Deposit Account." The sole purpose of the OCC report was to identify the source of funds that were used by one of the alleged nominee borrowers to repay his loans at the national bank, since he had used the proceeds of those loans to repay his loans at the Bank. The FDIC examiner work-papers (RX 58 at 1 through 4) confirmed the testimony of the Senior FDIC Review Examiner in the Kansas City Regional Office that the OCC report was prepared following a meeting with Garrett and his attorneys in the FDIC Kansas City Regional Office on April 19, 1994. The FDIC Review Examiner admitted that, as of the date of that meeting, the FDIC did not know if the named borrower or Garrett provided the funds to repay the three suspected nominee loans to such borrower. Immediately following the meeting with Garrett, the Senior FDIC Review Examiner contacted an FDIC examiner in the field and instructed the examiner to contact the OCC and request that the named borrower=s accounts at the national bank be audited to determine if Garrett provided any funds to the borrower which enabled him to repay his loans at the national bank, which in turn had been used to repay his loans at the Bank. Tr. at 2730-33, 3609, 3625-28.
84. The FDIC examiners, however, had access to those accounts. The checking accounts in question were maintained by businesses owned by the alleged nominee borrower at the United Missouri Bank of Monet and the Pleasant Hope Bank. [A relative of the named borrower also maintained a deposit account at the United Missouri Bank of Monet.] FDIC examiners conducted a special review of the alleged nominee=s business account at United Missouri Bank at Monett, and could not find any information linking Garrett to deposits in that account. RX 33. Unfortunately, the administrative hearing record does not indicate whether FDIC examiners conducted a similar review of the alleged nominee=s business account at the Pleasant Hope Bank. On the other hand, the FDIC examiner who prepared a special summary report (RX 33) for the Senior FDIC Review Examiner who initiated the inquiry into the named borrower=s accounts appears to concede that the business interest of such person identified in the OCC investigative report was a legitimate business owned by the alleged nominee borrower. RX 33 at 3.
85. The fundamental flaw in the FDIC Report is its failure to recognize that tenet. Instead, the FDIC (and the FDIC Report) are focused on the question of whether the information in the OCC report conclusively demonstrates that Garrett did not provide the funds used by the alleged nominee borrower to repay his loans. [To a certain extent, the examiner who prepared the OCC investigative report in question appears to have adopted a similar approach, as evidenced by the "negative" conclusion in the opening sentence: "There is no evidence that Glen Garrett repaid [the alleged nominee=s] loan at CNB." (RX 58 at 6)] In this regard, it is important to recognize that it would be impossible for any investigative report (regardless of its scope and comprehensiveness) to conclusively prove the negative that Garrett did not provide the funds used by the alleged nominee to repay his loans. Why? Because, as cynically noted at the administrative hearing by the Senior FDIC Review Examiner who ordered the OCC investigative report, Garrett could have supplied the borrower with a secret cash payment that was used by such person to repay his loans. Tr. at 3676-79. Since it is impossible for any investigative report to disprove the existence of a secret cash payment, it is obvious that the FDIC had intended to use the information in the OCC investigative report if it showed that Garrett provided the funds used to repay the alleged nominee=s loans. On the other hand, if the OCC report showed that there was no documentation or evidence which identified Garrett as a source of funds for the alleged nominee, the FDIC could disregard it because there was always the possibility of a secret cash payment by Garrett! Such reasoning is conveniently accommodating. It is also naive and moronic.
86. As noted previously (fn.10, supra), the FDIC Board of Directors itself has focused of this question as being determinative of whether or not a nominee or straw party loan has been made. If the named borrower acknowledges liability to repay the loan (as shown by the sworn affidavits signed by the alleged nominee borrower in 1992 and 1994) and if there is evidence that the named borrower used his own funds to repay the loan (as shown by the OCC investigative report and accompanying documentation), the questioned loan will not be deemed a nominee or straw party loan. In the Matter of Ramon M. Candelaria, FDIC Enf. Dec. & 5242 (1997).
87. The recommendation is RX 45. The June 1995 recommendation was made shortly after the FDIC Director of Supervision in Washington rejected a settlement agreement that had been negotiated and executed between Garrett and representatives of the FDIC Kansas City Regional Office. See, fns.17, 23 and 25, supra, and the accompanying text. The June 1995 recommendation includes a comprehensive historical discussion of the dispute between FDIC and Garrett, including Garrett=s submission on May 26, 1994 (RX 38 at 18 through 27) and the sworn affidavits of the alleged nominee borrowers (RX 45 at 3, Ex. C). In this regard, the recommendation states: "The affidavits of the nominee borrowers state they were the true borrowers in the transactions. Nonetheless, sufficient documentation necessary to verify Garrett=s and the nominee=s [sic] version of events has yet to be furnished." Such statement is false and grossly misled the FDIC Washington Office. The OCC investigative report (RX 58 at 6) and the special FDIC examiner report (RX 33) regarding half of the loans in question included a significant amount of reliable documentary information which clearly demonstrated that one of the alleged nominee borrowers used his own funds to repay his loans at the Bank. Such information, along with the supporting documentation developed by the OCC examiner, was deliberately omitted from the FDIC Kansas City Regional Director=s recommendation to the FDIC Washington Office. In short, it was suppressed. The reason it was suppressed is that it supported Garrett=s contention that all three loans to one of the alleged nominee borrowers were genuine, bona fide loans. As a result of the FDIC Kansas City Regional Office action, the reviewing officials in the FDIC Washington Office (including representatives in the Legal Division) were never informed of the fact that credible documentary evidence had been developed by a sister regulatory agency, which showed that half of the loans in question were genuine. Such action was arbitrary and capricious, and demonstrated bad faith by the FDIC Kansas City Regional Office.
88. The deception was critical to the determined effort of the FDIC Kansas City Regional Office to punish Garrett with the issuance of an enforcement order assessing a civil money penalty since the Kansas City Regional Director did not have delegated authority to issue formal charges against Garrett for the imposition of such an order. Such charges could only be made by the FDIC Washington Office.
89. Tr. at 8677 and 8679-90.
90. The recommendation in question is RX 14.
91. The FDIC Report makes repeated references to "Mr. Garrett=s attorney" as though the various arguments and contentions discussed in the FDIC Report were personal and/or somehow divorced from Garrett who was the principal party being represented in the litigated dispute between Garrett and the FDIC. We have deferred comment in the hope that such references would end; however, such is not the case. In our view, the obvious inability (or refusal) of the FDIC Report to separate or distinguish between actions that are personal and those undertaken as an advocate on behalf of a party litigant betrays a belief within the FDIC (or at least by the persons responsible for the preparation of the FDIC Report) that there is a need to "personalize" the FDIC Report by rebuking the attorney rather than responding to the various arguments made by the party litigant through the attorney acting as advocate. Professional advocates who represent adverse party litigants perform their responsibilities in a manner that allows for both to engage in passionate (and often heated) arguments in support of opposite positions with mutual respect of each other without resorting to "personalizing" their differing views. Unfortunately, the FDIC Report fails to rise to that level and standard of professionalism.
92. Such is the legal definition of an actionable defamatory statement for which a claim for damages may be made if there is a resulting harm or injury caused by such statements. Garrett has never limited his contention to defamatory statements. Rather, Garrett=s argument is based upon the plain meaning of the phrase "false statement," namely, a statement of fact which is not true. Nothing more. The issues of whether such statements were made "knowingly," or "recklessly," or "without regard to their truth," or "with intent to deceive or mislead" are separate and totally independent of the threshold issue of whether or not the statements were "false." A lack of culpability or wrongful intent on the part of the person making a given statement is not determinative of that statement=s truth or factual accuracy. While Garrett believes very strongly that certain FDIC representatives acted with culpability and wrongful intent, that is not the primary issue. The sole inquiry here is whether the statements in the FDIC criminal referral were factually accurate and truthful. Garrett contends that they were not, and that they were nothing more than suspicions or opinions proffered as factual statements.
93. The FDIC Report appears to base the limitation upon the "two examples" of false statements alleged by Garrett that were the subject of a "significant amount of testimony" at the administrative hearing. Such limitation is artificial and actually contravenes the stated objective in the FDIC Report of responding to the allegations of regulatory abuses and misconduct made by Garrett to the SBA National Ombudsman of the Regulatory Enforcement Fairness Board. As indicated in the FDIC Report, Garrett alleged in his complaint to the SBA National Ombudsman that the FDIC made at least six false statements in a criminal referral to the U.S. Attorney.
94. Such is the statement of fact in the FDIC criminal referral. RX 56 at 5.
95. The 1991 FDIC Examination Report (RX 17) was sent to the Bank by the FDIC in a letter dated January 27, 1992. RX 17A. During the last week of the 1991 FDIC Examination of the Bank, the FDIC provided a draft of the criminal referral (RX 56A) to the Missouri Division of Finance with a request that the State forward it to the U.S. Attorney, which in itself was a very rare and unusual circumstance. The State complied with the FDIC request and forwarded the draft criminal referral compiled by the FDIC to the U.S. Attorney on November 15, 1991 (RX 12, RX 12A; FX 114), which was almost two weeks prior to the conclusion of the 1991 FDIC Examination of the Bank. RX 17 at 22. The evidence is conflicting regarding the date on which the FDIC criminal referral was forwarded to the U.S. Attorney. The referral itself is dated November 15, 1991 (RX 56 at 5); however, a Missouri Division of Finance date stamp on the covering page shows that it was "Received" on March 10, 1992. In special pleadings filed by the parties regarding the admissibility of the FDIC criminal referral, the FDIC averred that it was forwarded to the U.S. Attorney on March 5, 1992. There were no substantive differences between the draft criminal referral forwarded by the State and the referral that was submitted to the U.S. Attorney by the FDIC.
96. The FDIC Report claims that there was a "significant amount of testimony given" regarding the basis for the "known loss" statement. The administrative hearing record contradicts such claim. There was more argument than testimony. Following an objection by FDIC counsel to questions regarding the estimated loss of $200,000 and the lack of any reference to such a loss in the 1991 FDIC Report of Examination of the Bank, the hearing record shows an extremely extended colloquy of arguments between FDIC and Garrett, a threatened interlocutory appeal by the FDIC regarding certain rulings by the presiding administrative law judge regarding the admissibility of testimony concerning such questions, and a request for an interim adjournment by FDIC. See e.g., Tr. at 3302-32.
97. RX 56 at 5. The stated amount of restitution alleged to have been paid by Garrett ($117,000) accounts for all but one (not just "some") of the alleged nominee loans. The FDIC Report fails to note such fact.
98. Garrett does not agree. The FDIC did not have a single shred of evidence in 1991, which showed that Garrett had repaid five of the six loans in question. In his sworn testimony at the administrative hearing, the FDIC Examiner-in-Charge of the 1991 FDIC examination of the Bank, who was also primarily responsible for the content and preparation of the FDIC criminal referral, admitted under oath that he did not have any evidence to support the factual statement in the FDIC criminal referral that Garrett paid off all but one of the alleged nominee loans, and that he merely assumed that Garrett had repaid such loans. Tr. at 10035-36. See also, RX 58 at 5-6.
100. RX 56 at 1. The FDIC criminal referral shows the amount of the violation as "$500;" however, it was undisputed that this was a typographical error, and that the intended figure was "$500,000." It was also undisputed by all FDIC examiner personnel who were questioned about the basis for the figure that they did not know how or upon what basis it was calculated.
101. RX 56 at 8 and 33.
102. RX 56 at 16 and 18.
103. RX 56 at 33.
104. The most damaging statements in the criminal referral were those pertaining the amount of loss sustained by the Bank and the amount paid by Garrett as "restitution" vis-à-vis the charge that the six disputed credits were nominee loans. At the hearing, the FDIC never disputed the fact that the Bank never sustained any amount of financial loss (much less the $200,000 specified in the criminal referral), or the fact that there was absolutely no evidence which indicated that Garrett repaid any of the loans in question. On the contrary, and as discussed previously (fn.87, supra.), the FDIC had (but suppressed) evidence received from the OCC which showed that half of the alleged nominee loans were repaid by the named borrower, and that there was "no evidence" which linked Garrett to the repayment of those loans. RX 58 at 6. Finally, it should be noted that none of the 153 documentary exhibits that were attached to the FDIC criminal referral substantiated any of the statements challenged by Garrett. FX 120.
105. There is no evidence in the hearing record that the OCC examiners obtained any information regarding Garrett=s banking relationships with any national bank.
106. See, RX 58 at 2. The examiner=s handwritten notation, "Should they [the OCC] be looking into deposit accounts [of the national bank customer] also?" has been crossed out, along with a parallel notation to "Call" the FDIC Review Examiner in the FDIC Kansas City Regional Office who instructed that the OCC inquiry be conducted. One interpretation is that the FDIC examiner shared the same concern as Garrett, but that he was overruled after making a call to the FDIC Review Examiner in the Kansas City Regional Office.
107. The State Supervisor was the same person who was provided with allegations by the informant at UMB Monett that Garrett had engaged in insider abuse and other misconduct at the Bank, and who participated in the March 1991 State examination of the Bank to investigate such allegations. The State Supervisor shared the information he had received from the informant (RX 57) with the FDIC examiners and was interested in staying informed of any developments as the FDIC continued the investigation of Garrett which actually started when the State conducted its examination of the Bank in March of 1991.
108. The confidential "Supervisory Section" of the 1991 FDIC Examination Report of the Bank clearly shows that a disproportionate number of man-hours were spent investigating the allegations of insider abuse and misconduct provided to the State Supervisor by the informant at UMB Monett. RX 17 at 22. See also, fn.9, supra, and the accompanying text, and fn.120, infra.
109. The FDIC examiner work-papers indicate that preparation of the criminal referral began in mid-October of 1991, which was about two weeks after the 1991 FDIC examination of the Bank started. RX 4 at 1.
110. Unfortunately, the FDIC examiners characterized their suspicions as fact in the FDIC criminal referral. ("A review of the deposit accounts of Glen Garrett reveal he has sold livestock believed pledged to Empire Bank to pay debt elsewhere.") RX 56 at 33. As stated previously, Garrett contends that such statement of fact was false. The FDIC examiners simply assumed that the cattle Garrett sold were the same cattle Garrett had pledged as collateral. Accordingly, the stated "belief" in the FDIC criminal referral was, in fact, nothing more than an unfounded "possibility." Attached to the FDIC criminal referral were copies of four checks that were deposited to Garrett=s account that were paid to Garrett for cattle that he had sold; however, none of the checks contained any information that connected the sale transactions with Empire Bank.
111. Tr. at 1457-58 and 6290.
112. Tr. at 2088-93. Even though he testified that he could not recall the source of his information (Tr. at 2088), the State Supervisor must have received the information regarding the alleged cattle sale from FDIC examiners. Where else? The State Supervisor was in close daily contact with the FDIC examiners, and the FDIC examiners had determined that the cattle sale was a violation of law to be reported to the U.S. Attorney. Again, there was nothing improper in the disclosure of that information by the FDIC examiners to the State Supervisor. The problem occurred when the State Supervisor passed the information on to an officer at the Empire Bank.
113. There is conflicting evidence regarding who initiated the call. See, Tr. at 6289-90. However, on cross-examination, the State Supervisor repeatedly acknowledged and admitted that he initiated the call. Tr. at 2088-93. It is significant that the State Supervisor initiated the contact with the Empire Bank. The decision to volunteer information is indicative of a purpose or motive. Garrett believes the primary motive was to harm his business reputation and relationship with Empire Bank, rather than to help that bank. There are three possible scenarios to discern such motive: (1) if the State Supervisor believed that the information he received from the FDIC examiners was true, his disclosure of that information would not have helped Empire Bank if the pledged cattle, in fact, had been sold; (2) if the State Supervisor believed that the information he received from the FDIC examiners was true, his disclosure of that information would not have helped Empire Bank if the pledged cattle, in fact, had not been sold; and (3) if the State Supervisor did not believe that the information he received from the FDIC examiners was true, his disclosure of information he believed was false would be considered malicious per se, regardless of whether or not the pledged cattle had been sold. Accordingly, Garrett believes the State Supervisor=s motive for contacting the Empire Bank was to damage Garrett= s relationship with Empire Bank. Interestingly, the State Supervisor was promoted to the top executive position of the Missouri Division of Finance in 1999.
114. Tr. at 5099.
115. Tr. at 5127.
116. Garrett=s response was indicative of his level of apprehension regarding the intensity of the FDIC examination into his financial affairs (as related to him by the intimidated Bank employee) vis-à-vis a need to hide anything; he simply instructed her to continue cooperating with the FDIC examiners. Tr. at 5128-29.
117. In doing so, Garrett suggests that the FDIC adopt reasonable screening procedures to avoid placing employees of examined banks who are requested to perform work on a confidential basis in the same dilemma faced by the Bank= s Head Bookkeeper. Before engaging such persons in confidential work activities, the employee should be asked if they could do so without jeopardizing their current working relationships with other employees of the examined bank. In the present case, the request for confidentiality was not made until the employee had already performed a substantial amount of work for the FDIC examiners.
118. The reference is to the FDIC Division of Supervision Manual of Examination Policies.
119. RX 49 at 18. ("It is emphasized, however, that the [CMP] matrix is to be viewed as an aid in the CMP determination process and that it is not intended to be a substitute for sound supervisory judgment.") The FDIC Report ignores that guidance. Sound judgment is always required where options are present.
120. Included in this estimate is the time spent by the following who were associated or had some involvement with the FDIC enforcement action against Garrett at one time or another between 1991 and 1999:
10 Bank employees, including 3 former employees
6 Bank directors, excluding the Bank= s President (included as Bank employee)
6 lawyers hired by Garrett
6 experts hired by Garrett (who testified or were scheduled to testify at the hearing)
6 FDIC lawyers (3 in Kansas City office, and 4 in Washington office)
14 FDIC examiners (4 in Springfield office, 6 in Kansas City office, and 4 in Washington)
4 paralegal assistants (2 assisting Garrett, and 2 assisting FDIC)
1 OCC examiner
6 State examiners (3 in Springfield office, and 2 in Jefferson City office)
1 State attorney (Jefferson City office)
4 employees of Empire Bank
3 court reporters
3 employees of the Office of Financial Institutions Adjudication
3 FDIC employees in the Office of the Executive Secretary
2 FDIC employees in the Office of the Chairman
121. This is particularly true where (as in the Garrett case) there was no loss or damage of any kind to the Bank; there was no pecuniary gain to or unjust enrichment of Garrett; and the alleged wrongdoing (viz., failing to inform the board of Garrett= s receipt of the proceeds of the disputed loans) would not have changed anything if had not occurred in the first instance. All of the Bank=s directors who testified at the hearing, indicated that Garrett=s disclosure regarding his receipt of the proceeds of the disputed loans at the time such loans were made would not have changed anything. Tr. at 4018-20, 4158, 4386 and 4542-43. The Bank=s President, who was also a member of the Bank=s board of directors, was the loan officer on all but one of the questioned loans and was well aware of the fact that the proceeds of the loans were deposited into Garrett=s account shortly after the loans had been made. She was the person who made such deposits after she received the endorsed loan proceeds checks from Garrett with his request that they be deposited into his account. Accordingly, it is obvious that Garrett=s disclosure to her as a director that he received the proceeds of the loans would have been meaningless; she already knew it.
122. Garrett does not agree with that premise; however, such disagreement is meaningless vis-à-vis the question of whether a legitimate regulatory purpose was being served in respect of the FDIC=s prosecution of Garrett between 1991 and 1999. The fact that the agency may have followed all of the rules and policies pertaining to the initiation and conduct of an enforcement action against Garrett does not answer and is totally distinct from the underlying issue of whether such action served a legitimate regulatory purpose. The FDIC Report is totally blind to the distinction between following the rules for their intended use and using the rules to further an improper purpose.
123. It is not clear from the FDIC Report why all seven of the cited examples are discussed under the topical heading of "procedures and tactics that were undertaken ...because of a personal animus" toward Garrett. While Garrett has contended that some of the cited actions were motivated by personal animosity, that is not true for all of the cited illustrations. For example, Garrett has never alleged that the false statements of fact in the FDIC criminal referral to the U.S. Attorney (Allegation 2 in the FDIC Report) were made because of any personal animus. Such statements were wrong because they were totally unsupported in fact and therefore arbitrary, not because of a personal dislike of Garrett. Similarly, Garrett has never charged that the FDIC instruction to the Bank=s Head Bookkeeper (Allegation 5 in the FDIC Report) was motivated by personal animosity. The same is true regarding the FDIC action concerning its downgrade of the supervisory ratings assigned in a report of examination of the Bank conducted in March of 1991 by the Missouri Division of Finance. As indicated in the text following this note, such action was wrong because it was unsupported in fact and therefore arbitrary, not because of any dislike of Garrett.
124. The FDIC is prohibited from engaging in all three categories of conduct, and all are legal grounds for the reversal and vacation of any final decision and order based upon such conduct.
125. Actually, the hearing record shows that Garrett raised more than the listed acts of alleged regulatory misconduct addressed in this section of the FDIC Report. In addition to the five listed in the text, Garrett alleged that the following actions also constituted prejudicial regulatory misconduct by the FDIC: (1) suppressing material exculpatory documentary evidence that was reliable and competently assembled by the OCC, (2) intimidating fact witnesses who were duly subpoenaed by Garrett to testify at the hearing by falsely informing such witnesses that they risked criminal prosecution if they testify on behalf of Garrett, and (3) instructing FDIC examiners to adversely classify certain loans in the Bank without regard to the actual credit quality of such assets. Thus, the final tally of actions that Garrett alleged constituted abusive regulatory misconduct by the FDIC is eight.
126. See e.g., Tr. at 5518-25, 5684-86, 5738-48 and 5752-58.
127. The most dramatic piece of documentary evidence is a handwritten note addressed to the Commissioner of the Missouri Division of Finance by one of his senior assistants regarding the FDIC downgrades of supervisory ratings assigned by State examiners. The note advises the Missouri Commissioner that the FDIC downgrade action illustrated "harsh ratings" by the FDIC, and cites two specific examples: (1) an unsatisfactory supervisory rating of "3" regarding the capital adequacy of the Bank even though the ratio of the Bank=s total capital to total assets is 7% [which would normally justify a satisfactory rating of "2"], and (2) an unsatisfactory rating of "3" regarding the earnings of the Bank even though the Bank=s earnings (net of provisions for loan loss reserves) equaled 1.28% of the Bank= s total assets [which would normally justify a rating of "2" or possibly a "1."] The note concludes with the following comments: "I think we are going to have a real problem on consistent State and FDIC ratings. They [FDIC] have definitely slanted this." [Emphasis added.] RX 25 at 4. See also, Tr. at 5752-58.
128. The FDIC Report makes a special effort to point out that the FDIC downgrade action did not actually change the State=s ratings, and that the FDIC action was only for the internal use of the agency. Garrett has never contended otherwise. On the contrary, Garrett has always argued that both FDIC downgrade actions [the same thing happened in respect of the 1992 State examination of the Bank] were done to facilitate a need to comply with internal procedural requirements of the agency. In 1991, the purpose of the downgrade action was to justify an accelerated examination of the Bank by the FDIC following a State examination in the same year which assigned a composite supervisory rating of "2"; in 1992, the purpose of the FDIC downgrade action was to warrant keeping the Bank on the agency=s internal "Problem Bank" list to justify continued intensive regulatory pressure on Garrett, who by that time was also the target of a criminal investigation being conducted by the FBI based upon the criminal referral prepared by the FDIC in 1991. See, fn.95, supra.
129. The FDIC Report conceals the shocking and contemptible nature of the FDIC misconduct by labeling it as an unidentified "epithet" used by an unidentified "FDIC employee." After noting that the person who allegedly made the statement testified that he could not recall doing so, the FDIC Report dismisses the charge with the simple statement that the FDIC Inspector General was unable to otherwise "substantiate the use of the epithet by the FDIC employee." If, as stated at the outset of the FDIC Report, the FDIC Inspector General limited the sources of factual information relied upon in the report to documentary materials (i.e., the transcript of the hearing record, the documentary exhibits offered the hearing by FDIC and Garrett, and other related FDIC records and files), it would have been impossible to "substantiate" the alleged incident. Does the FDIC Inspector General really believe that a verbal communication between senior FDIC examiners which employs an embarrassing and disgustingly crude epithet to describe a purpose for using the FDIC statutory enforcement powers against Garrett will be recorded and preserved for posterity in an FDIC file? The FDIC Report plays the reader for a fool with such high-minded rhetoric.
130. Such findings and recommendations are in RX 4 at 1, which is referred to as a "call-in memo" by FDIC examiners. The handwritten memorandum by the 1991 FDIC EIC was sent to the FDIC Regional Office in Kansas City by facsimile for review by the Key Review Examiner, the Assistant Regional Director, and either the Deputy Regional Director or the Regional director (or possibly both) due to the severity of the composite supervisory rating of "4" and the multiplicity of recommended regulatory actions. Tr. at 9508-09 and 9513.
131. The recommendations of 1991 FDIC EIC included a supervisory rating of "5" regarding the quality of the Bank=s management (the lowest and worst possible rating) based entirely upon the suspicion that Garrett had totally corrupted the Bank=s management (including the Bank=s President) vis-à-vis all of the irregularities alleged in a FDIC criminal referral which was then being prepared. In addition, and largely because of the supervisory rating of "5" on the Bank=s management, the overall composite supervisory rating of the Bank was reduced to "4" from a rating of "2" assigned by the Missouri Division of Finance six months earlier.
132. RX 4 at 1. See also, RX 56 (the criminal referral), RX 14 (the recommendation for a cease and desist order against the Bank), RX 15 (the recommendation for a removal order against Garrett), and RX 16 (the recommendation for a civil money penalty order against Garrett. [The 1991 FDIC EIC essentially admitted that he recommended a civil money penalty order without preparing a CMP matrix or a separate memorandum addressing each of the 13 FFIEC factors, as prescribed in the promulgated policies and procedures of the FDIC Division of Supervision. Tr. at 10072.] RX 49 at 2-9, 14-16 and 18-20. See also, fns.18 and 39, supra.
133. The person who called worked under the direct supervision of the Assistant Regional Director of the FDIC Kansas City Region. [The names of these persons as well as most of all of the other persons referred to in this assessment have not been identified in deference to their right to privacy vis-à-vis the likely publication and distribution of this assessment. While Garrett is somewhat bitter toward the informant at UMB Monett and the person who served as Assistant Regional Director in the FDIC Kansas City Regional Office in 1991, who Garrett believes was largely responsible for the agency=s eight-year pursuit of a punitive order against him, such resentment does not warrant an invasion of their (or any else=s) privacy by using their individual names here.]
134. In light of the reprehensible and culpable nature of the comment, an extract of the sworn testimony of the 1991 FDIC EIC is attached as "Exhibit H" which shows the context in which the statement was made, and which identifies the persons in the Kansas City Regional Office who were collectively referred to in the statement as "we." [The transcript identifies such persons by their names; however, they are only identified here by their positions in the FDIC Kansas City Regional Office at the time the statement was made. See, fn.133, supra.]
135. An emphatic and explicit personal dislike of Garrett was expressed by the Assistant Regional Director of the FDIC Kansas City Regional Office at a meeting of the Bank=s Board of Directors in the FDIC Kansas City Regional Office in mid-June of 1992. The purpose of the meeting was to discuss the execution of a stipulation agreement for the issuance of a cease and desist order against the Bank on a consent basis. During the course of that meeting, the discussion turned to the FDIC=s suspicions concerning Garrett=s construction of the Bank=s new building. Although not so stated at the meeting, the FDIC suspected that Garrett had engineered an elaborate embezzlement scheme which enabled him to steal several hundred thousand dollars from the Bank, using the construction of the new building (which he was engaged in personally as the general contractor) as a covering screen. Such suspicion and other suspected irregularities had been detailed in a criminal referral (RX 56) the FDIC had forwarded to the U.S. Attorney four months earlier in March of that year. After Garrett attempted to explain his role in the construction of the Bank (and denying any wrongdoing), the FDIC Assistant Regional Director faced Garrett and made the statement, "Mr. Garrett, I don= t trust you, and I don= t like you," or words to that effect. [Such dialogue is not in the hearing record, but could have been confirmed by the FDIC Inspector General if information sources other that documentary materials were used to prepare the FDIC Report.] In a more dramatic gesture, the FDIC Assistant Regional Director also informed Garrett at the same meeting that the FDIC had forwarded a criminal referral on his son to the U.S. Attorney earlier that month. Tr. at 3374-78. The FDIC had forwarded a criminal referral on Garrett=s son on June 5, 1992 (FX 119); however, Garrett was not informed about the FDIC criminal referral regarding his suspected criminal activities. It is extremely rare for the FDIC to inform a family member (in this case, the father) of a person who is the subject of a criminal irregularity report that such referral has been prepared and forwarded to the U.S. Attorney - particularly where the referral itself has been forwarded only recently. Such radical action by the FDIC Assistant Regional Director was unquestionably designed to intimidate and traumatize Garrett personally. Based upon these highly unorthodox events alone, there was absolutely no doubt in the minds of every Bank director who attended the meeting that the FDIC Assistant Regional Director had a deep and visceral personal animus against Garrett. The real tragedy, however, is that the FDIC Inspector General has chosen to ignore the antics of the FDIC Assistant Regional Director who blatantly engaged in such misconduct. See also, fn.60, supra.
136. The referenced "FDIC management official" is the person who served as Assistant Regional Director of the FDIC Kansas City Regional Office in 1991. The cited testimony of the 1991 FDIC EIC shows that the Key Review Examiner in the FDIC Kansas City Regional Office is the person who actually made the offensive statement regarding Garrett. Nevertheless, Garrett believes that such statement was made originally by (and is attributable to) the Assistant Regional Director of the FDIC Kansas City Regional Office in his discussions with other senior FDIC management officials in the Kansas City Regional Office regarding the findings and recommendations of the 1991 FDIC EIC (RX 4). Two reasons support that belief. First, the Assistant Regional Director was the immediate supervisor of the Key Review Examiner, who acknowledged the outspoken opinion of his supervisor (who was probably in the room with the Key Review Examiner at the time) by repeating such opinion in his conversation with the 1991 FDIC EIC. Second, and more convincing, there is undisputed testimony and documentary evidence in the hearing record which shows that the Assistant Regional Director personally used precisely the same epithet several months earlier in a call to the FDIC Springfield Field Office Supervisor. [See text following this note.] Assuming that the use of such epithet is not part of the daily business lexicon of most FDIC personnel, attribution of the cited incident in October 1991 to the Assistant Regional Director is more than accidental coincidence.
137. The targeted FDIC examiner had lost favor with the Assistant Regional Director because the examiner had "blown the whistle" on some questionable transactions involving the then FDIC Regional Director for the Kansas City Regional Office, who was a strong supporter and personal friend of the Assistant Regional Director. As a result of the examiner=s action, an internal FDIC investigation was conducted, which eventually led to the reassignment of the Regional Director. The Assistant Regional Director, having lost his personal friend and mentor in the FDIC Kansas City Regional Office, subsequently decided to "even the score" and made multiple requests to the Supervisor of the FDIC Springfield Field Office where the targeted FDIC examiner was assigned. With the benefit of hindsight, the Field Office Supervisor interpreted such actions as a request that he prepare an adverse performance evaluation of the targeted FDIC examiner notwithstanding the examiner=s satisfactory performance of his duties. As indicated in the text following this note, the FDIC Field Office Supervisor declined to assign falsified ratings and submitted an evaluation that accurately reflected the satisfactory performance of the targeted FDIC examiner. The receipt of that evaluation by the Assistant Regional Director triggered a final phone call on August 8, 1991.
138. The FDIC Field Office Supervisor interpreted the repeated advice of the Assistant Regional Director as "code" for a request for a performance evaluation that included unsatisfactory ratings and adverse criticisms of the targeted FDIC examiner, notwithstanding the fact that such ratings were not warranted by the examiner= s actual performance. RX 79 at 1. To his credit, the FDIC Field Office Supervisor refused to do so.
139. In the same vein as fn.134, supra, an extract of the sworn testimony of the FDIC Springfield Field Office Supervisor regarding the cited statement of the FDIC Assistant Regional Director and the circumstances that triggered it is attached as "Exhibit I."
140. The handwritten file note is RX 79.
141. As reflected in his sworn testimony (Tr. at 9037-57) and written file note (RX 79), the FDIC Field Office Supervisor followed instructions of the Assistant Regional Director and prepared another performance evaluation of the targeted FDIC examiner; however, he again assigned satisfactory ratings in all performance categories based upon his personal observation of the examiner=s performance. After that performance evaluation was submitted to the Kansas City Regional Office for review by the Assistant Regional Director, it was returned to the FDIC Field Office for delivery to the targeted FDIC examiner, and included numerous adverse performance ratings and extensive criticisms that were not, in fact, made by the Field Office Supervisor.
143. Notably, the FDIC Key Review Examiner did not deny making the questioned statement. He only stated that he had no recollection of making it, or even talking with the FDIC Examiner-in-Charge of the 1991 FDIC examination. Tr. at 5250-52, 5357 and 5360-63. Unfortunately, the FDIC Inspector General was content with such response and concluded that the FDIC Examiner-in-Charge of the 1991 FDIC examination of the Bank created the incident out of thin air. Such a scenario is simply not plausible in view of all of the surrounding circumstances and context within which the statements were made.
144. The referenced incident of serious misconduct can be characterized as the application of undue pressure upon a subordinate employee through intimidation and other means (including the use of lies and crude barnyard metaphors) to convince such subordinate employee to violate his legal and ethical responsibilities as the FDIC Springfield Field Office Supervisor by preparing a written performance evaluation of an FDIC examiner assigned to the FDIC Springfield Field Office which falsely portrays the actual performance of that examiner. In essence, the FDIC Assistant Regional Director requested that the Field Office Supervisor prepare and submit a falsified official business record for filing in the FDIC Kansas City Regional Office. Again, and notwithstanding the fact that such misconduct was documented (RX 79) and the subject of graphic sworn testimony of the affected FDIC Field Office Supervisor (Tr. at 9037-48), the FDIC Inspector General totally ignored the incident. Most objective observers recognize such a response by its real names: cover-up and whitewash.
145. This was the second lead editorial published by The Kansas City Star that raised serious questions of public policy concerning the FDIC enforcement action against Glen Garrett. The first editorial ["Bank Examiners Out of Control"] was published on Sunday, March 22, 1998. Copies of both editorials are attached as "Exhibit J." The editorial opinions published in the Star (along with a comprehensive front-page news article covering a large part of the early history of the case that was also published on Sunday, March 22, 1998) generated public sentiment favorable to Glen Garrett which resulted in a significant number of inquiries to the Star questioning the tactics and enforcement policies of the FDIC. The publicity provided by the Star and several other news organizations in 1998 was instrumental in finally convincing the FDIC in March of 1999 to withdraw and dismiss all charges of wrongdoing against Glen Garrett, thus vindicating one of the most courageous and principled community bankers in America. Glen Garrett hails from the "Show Me" State of Missouri. He has certainly done that; he has demonstrated to the banking community at large that backbone and character still count.
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Last revised: June 1, 2012.