Loumiet v. Office of the Comptroller of Currency

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 6, 2011 Decided July 12, 2011

No. 10-1288

CARLOS LOUMIET,

PETITIONER

v.

OFFICE OF THE COMPTROLLER OF THE CURRENCY,

RESPONDENT

On Petition for Review of an Order

of the Department of Treasury

Alan G. Greer argued the cause for petitioner. With him

on the briefs was Eric M. Sodhi.

Douglas B. Jordan, Attorney, Office of the Comptroller

of the Currency, argued the cause for respondent. With him

on the brief were Horace G. Sneed, Director of Litigation,

and Allen H. Denson, Attorney.

2

Before: HENDERSON, BROWN and KAVANAUGH, Circuit

Judges.

Opinion for the Court filed by Circuit Judge BROWN.

BROWN, Circuit Judge: Carlos Loumiet appeals a final

decision and order of the Office of the Comptroller of the

Currency (“Comptroller”) requiring him to bear the costs of

his own defense in an underlying administrative proceeding in

which he prevailed. We reverse that decision, finding the

Comptroller was not “substantially justified” in bringing the

underlying administrative proceedings against Loumiet, and

therefore Loumiet is entitled to attorney’s fees under the

Equal Access to Justice Act, 5 U.S.C. § 504. We remand for

the Comptroller to calculate the amount of those fees.

I

In 1998, Hamilton Bank (“Bank”) engaged in “adjusted

price trades” or “ratio swaps,” a type of bank and securities

fraud when used to conceal losses in which financial

instruments are sold at face value even though the instruments

are actually worth far less. In this case, Hamilton invested

$22M in Russian debt instruments, which subsequently lost

value in the summer of 1998. See United States v. Masferrer,

514 F.3d 1158, 1160 (11th Cir. 2008) (describing the Bank’s

fraudulent transactions). To conceal the loss, the Bank

swapped the Russian debt instruments for other financial

instruments. Id. General accounting rules require such swaps

to be accounted for as related transactions. Id. By not doing

so, the Bank made it appear as if it “managed to sell its

Russian assets at face value, thereby hiding their highly

discounted sales prices.” Id.

3

The Comptroller discovered the Bank’s ratio swaps and,

in April 2000, issued a temporary cease-and-desist order

requiring the Bank to take remedial measures. The Bank’s

Audit Committee retained an outside law firm, Greenberg

Traurig, LLP (“Greenberg”), to conduct an independent

investigation of the alleged fraud. Greenberg, led by

Loumiet, who was a partner at the firm at the time, reviewed

the pertinent documents, conducted personal interviews of

Bank executives, and ultimately issued a report to the Bank’s

Audit Committee on November 15, 2000 (“November

Report”). The November Report found “no convincing

evidence” to establish Bank executives “intentionally misled”

Deloitte and Touche (“Deloitte”), the Bank’s outside

accounting auditor, or the Bank’s own Audit Committee. See

Loumiet, OCC-AA-EC-06-102 (July 20, 2010) (initial EAJA

Decision), reprinted in Joint Appendix (“J.A.”) 1868.

Nevertheless, the Bank restated its public financial

statements, believing the November Report provided a

sufficient basis to conclude the swaps should have been

accounted for as related transactions.

In January 2001, the Comptroller sent Greenberg a letter

in response to the November Report. The letter indicated the

Comptroller had taken the statement of an individual who had

participated in the swap transactions (i.e. a counter-party) as

part of its on-going investigation of the Bank. According to

the Comptroller, the statement contradicted the November

Report. The Comptroller also notified Greenberg orally of six

red flags indicating the Bank had engaged in adjusted price

trades. As a result, Greenberg drafted a second report, which

it provided to the Bank’s Audit Committee in March 2001

(“March Report”). The March Report found the counter-

party’s statement was consistent with statements made by

Bank executives during Greenberg’s initial independent

investigation. The March Report also concluded the

4

Comptroller’s red flags did not alter the previous conclusions

of the November Report.

The Comptroller issued its own report alleging

wrongdoing at the Bank (“Comptroller Report”). As a result

of the OCC Report, the Bank shut down. Three Bank

executives entered into consent orders with the Comptroller,

barring each from participating in the affairs of a federally

insured bank in the future. Greenberg also entered into a

consent order, agreeing to pay $750,000 in fines. Finally, the

Comptroller closed the Bank and appointed the Federal

Deposit Insurance Corporation as its receiver.

Several years later, the Comptroller’s Enforcement and

Compliance Division (“Division”) invoked the Financial

Institutions Reform, Recovery, and Enforcement Act

(“FIRREA”) of 1989, Pub. L. No. 101-73, 102 Stat. 183

(codified in scattered sections of Title 12 of the U.S. Code),

and initiated an administrative proceeding against Loumiet.

The Division alleged Loumiet was an “institution-affiliated

party” (“IAP”), who, in participating in Greenberg’s

independent investigation of the Bank, had “knowingly or

recklessly . . . breach[ed his] fiduciary duty,” and as a result

“caused . . . a significant adverse effect on” the Bank. 12

U.S.C. § 1813(u)(4). The Division sought to assess a

$250,000 monetary penalty against Loumiet, among other

sanctions. After a three week bench trial, an Administrative

Law Judge (“ALJ”) recommended dismissal of the Division’s

claims (“ALJ FIRREA Decision”). Loumiet¸ OCC-AA-EC-

06-102 (June 17, 2008), reprinted in J.A. 950. The

Comptroller reviewed the ALJ’s recommendation

(“Comptroller FIRREA Decision”) and agreed dismissal was

appropriate, but “largely rejected” the “reasoning and

conclusions” in the ALJ FIRREA Decision. Loumiet, OCC-

AA-EC-06-102 at 17 (July 27, 2009), reprinted in J.A. 1043.

5

Following the Comptroller FIRREA Decision, Loumiet

filed an EAJA application seeking attorney’s fees for his

defense in the agency FIRREA adjudication. An ALJ

recommended denying Loumiet’s application (“ALJ EAJA

Decision”), concluding that the Division’s position in the

underlying agency proceeding was “substantially

justified . . . in both law and fact” and therefore Loumiet was

not entitled to attorney’s fees. Loumiet, OCC-AA-EC-06-102

at 7 (July 20, 2010). Because neither party sought review by

the Comptroller, the ALJ’s recommendation became the final

decision of the Comptroller. 31 C.F.R. § 6.15. Reviewing

that decision for substantial evidence, see 5 U.S.C.

§ 504(c)(2) (specifying the standard of review); Kuhns v. Bd.

of Governors of Fed. Reserve Sys., 930 F.2d 39, 41 (D.C. Cir.

1991) (reviewing agency’s EAJA decision for substantial

evidence); we reverse and remand for further considerations

consistent with this opinion.

II

The EAJA provides: “An agency that conducts an

adversary adjudication shall award, to a prevailing party . . .

fees and other expenses incurred by that party in connection

with that proceeding, unless the adjudicative officer of the

agency finds that the position of the agency was substantially

justified or that special circumstances make an award unjust.”

5 U.S.C. § 504(a)(1). The Comptroller, who bore the burden

in the EAJA proceeding before the ALJ of demonstrating the

Division’s position was substantially justified, see F.J.

Vollmer Co., Inc. v. Magaw, 102 F.3d 591, 595 (D.C. Cir.

1996), concedes Loumiet was a “prevailing party” under the

EAJA. Thus, Loumiet is entitled to attorney’s fees unless the

“administrative record, as a whole, which is made in the

adversary adjudication,” 5 U.S.C. § 504(a)(1), shows the

Division’s position in the underlying agency FIRREA

6

adjudication was “justified in substance or in the main.”

Pierce v. Underwood, 487 U.S. 552, 565 (1988).

A

The Division claimed the Bank Audit Committee

engaged Loumiet to provide services to the Bank, and

Loumiet’s conduct in providing those services met all the

elements necessary to establish him as an IAP. FIRREA

defines an IAP to include:

Any independent contractor (including any

attorney, appraiser, or accountant) who

knowingly or recklessly participates in—(A)

any violation of any law or regulation; (B) any

breach of fiduciary duty; or (C) any unsafe or

unsound practice, which caused or is likely to

cause more than a minimal financial loss to, or

a significant adverse effect on, the insured

depository institution.

12 U.S.C. § 1813(u)(4). The Comptroller FIRREA Decision

found the administrative record “lack[ed] sufficient evidence

that the two reports prepared by Mr. Loumiet caused, or were

likely to cause, harm to the [B]ank that satisfies the ‘effect’

requirement . . . .” In other words, the Division could not

show that the November or March Reports caused “more than

a minimal financial loss to, or a significant adverse effect on,”

the Bank. 12 U.S.C. § 1813(u)(4). The ALJ EAJA Decision,

nevertheless, found the Division’s litigation position

“supported by a variety of highly-qualified expert witnesses,”

“stood a reasonable chance of succeeding on the merits,” and

“represented a good-faith and credible interpretation of law.”

Loumiet, OCC-AA-EC-06-102 at 7 (July 20, 2010), reprinted

in J.A. 1873.

7

To justify the ALJ EAJA Decision, the Comptroller now

argues the November Report and the March Report falsely

exonerated Bank executives, and as a result, the Bank’s Audit

Committee failed to replace “at least one of the Bank’s senior

officers.” Resp’t’s Br. at 29. Said differently, the

Comptroller alleges the harm caused by Loumiet’s conduct

was the continued employment of the Bank’s executives. In

support, the Comptroller relies upon the expert report of

Charles Rardin, a bank examiner with the Comptroller.

Rardin’s report stated that “the [November and March]

Reports led the Bank to retain the dishonest officers. In

particular, the Reports gave the officers the shield of a large

law firm’s exoneration from wrongdoing, which protected the

officers regardless of whether others at the Bank knew the

Reports were false. Retaining dishonest senior executive

officers is likely to harm a bank.” Loumiet, AA-EC-06-102 at

18 (July 31, 2007) (expert witness report), reprinted in J.A.

676. Rardin’s report also says “the [November and March]

Reports facilitated the perpetuation of the Bank’s inaccurate

public financial statements.” Id. at 7.

Section 1813(u)(4) requires that an IAP cause harm to the

Bank itself. Thus, showing the November and March Reports

exonerated Bank executives is not sufficient to qualify

Loumiet as an IAP, without some evidence linking the

continued employment of the Bank executives to a significant

adverse effect on the Bank. The administrative record is

noticeably devoid of such evidence. There is no evidence the

continued employment of Bank executives after the

November and March Reports caused reputational harm to the

Bank, impacted the internal culture of the Bank, or created

any other effect on the Bank. Even Rardin’s report is

unhelpful. It says only that retaining the Bank executives

would “likely” harm the Bank. It is true that demonstrating

the continued employment of Bank executives “is likely to

8

cause harm,” 12 U.S.C. § 1813(u)(4), could be sufficient to

classify Loumiet as an IAP (and thus to show substantial

justification under the EAJA). But the Agency’s evidence

here—a conditional statement from an Agency examiner that

some unspecified harm may result—falls short of the

necessary quantum of proof. Because Rardin’s statement was

both vague and unsubstantiated, it does not demonstrate the

Division’s litigating position was justified, let alone

“substantially” so. In addition, Rardin’s reliance on the

Bank’s “inaccurate public financial statements” is a red

herring, as the Bank promptly revised its public financial

statement as a result of the November Report. Thus, the Bank

executives’ continued employment did not delay the

restatement.

The Comptroller offers a cornucopia of alternative

arguments. None merit much consideration. First, the

Comptroller argues the Bank did not obtain its money’s worth

from Greenberg’s independent investigation. But this is not

the type of “financial loss” or adverse effect § 1813(u)(4)

contemplates. Cf. Lindquist & Vennum v. FDIC, 103 F.3d

1409, 1419–21 (8th Cir. 1997) (refusing to enforce an order

of the FDIC requiring a law firm to refund the fees it

charged). The focus of § 1813(u)(4) is on independent

contractors “conducting the affairs of” the Bank, Grant

Thornton, LLP v. Office of Comptroller of Currency, 514 F.3d

1328, 1331–32 (D.C. Cir. 2008) (quoting 12 U.S.C.

§ 1818(i)(2)(B)(i)(II)), such as an attorney who provides “oral

and written advice” that a particular investment was in the

Bank’s best interest. See, e.g., Cavallari v. Office of

Comptroller of Currency, 57 F.3d 137, 142 (2d Cir. 1995). In

that case, the “financial loss” or “significant adverse effect”

on the bank is the lost value of its investment, not the value of

services furnished by independent contractors investigating

bank affairs after the suspect transaction occurred. Indeed,

9

the Comptroller’s approach would vitiate the “significant

adverse effect” requirement altogether, as § 1813(u)(4)

presumes an independent contractual relationship, such as that

of a lawyer, appraiser or accountant. And, according to the

Comptroller, any such relationship could result in the

necessary harm if the work did not end well.

Second, the Comptroller argues the Bank made a $15M

loan that caused significant harm. But there is no record

evidence of the loan’s causation. Consequently, it is

impossible to determine whether Loumiet’s alleged

misconduct indirectly caused the loan to be made.

Finally, the Comptroller argues the Division’s litigating

position is substantially justified because the legal issue

presented is novel. The Comptroller cites in support Hill v.

Gould, 555 F.3d 1003, 1008 (D.C. Cir. 2009), a case in which

this court affirmed the denial of a fee award because the

agency “took a reasonable approach to [a] relatively unsettled

area of administrative law.” The Comptroller argues the

“effects” prong of § 1813(u)(4) is a similarly unsettled area of

law because only one court of appeals had addressed the

provision when the Division filed its Notice of Charges

against Loumiet in the underlying administrative FIRREA

adjudication. See Cavallari, 57 F.3d at 142. But whether the

November or March Reports “adversely affected” the Bank is

not a legal issue. And, to the extent that issue incidentally

involves questions of law, those questions focus on causation,

a topic that can hardly be described as novel. Cf. Palsgraf v.

Long Island R. Co., 248 N.Y. 339 (1928).

B

A few lingering issues remain. In order to receive

attorney’s fees under the EAJA, a prevailing party must have

10

previously “incurred” the fees. In addition, the EAJA

provides that “attorney or agent fees shall not be awarded in

excess of $125 per hour unless the agency determines by

regulation that an increase in the cost of living or a special

factor . . . justifies a higher fee.” 5 U.S.C. § 504(b)(1)(A).

Loumiet argues he incurred all the attorney’s fees he requests,

even though Greenberg advanced a portion of the fees.

Loumiet also contends he may be reimbursed for fees in

excess of the $125 per hour cap because of changes in the

cost of living. The ALJ EAJA Decision did not address these

issues. Rather than do so here, we remand for the

Comptroller to consider these issues in the first instance. See

Singleton v. Wulff, 428 U.S. 106, 120 (1976) (“It is the

general rule, of course, that a federal appellate court does not

consider an issue not passed upon below.”).

III

The Division brought an administrative proceeding

against Loumiet, alleging he was an IAP under FIRREA and

subject to a monetary fine. That case was dismissed on the

merits because the evidence in the record did not establish a

“significant adverse effect” on the Bank. 12 U.S.C.

§ 1813(u)(4). Nor does the evidence in the record establish

that the Division was “substantially justified” under the EAJA

to bring the underlying agency proceeding against Loumiet. 5

U.S.C. § 504(a)(1). No evidence supports an inference that

the Bank suffered any “adverse effect” from the continued

employment of Bank executives after the November and

March Reports; nor does evidence support an inference of

“adverse effect” from any other theory presented by the

Comptroller. See Taucher v. Brown-Hruska, 396 F.3d 1168,

1173 (D.C. Cir. 2005) (requiring “a reasonable basis both in

law and fact” to satisfy the EAJA’s substantial justification

11

standard). As a result, we grant the petition for review and

remand.

So ordered.