Appendix — Cousin v. Office of Thrift Supervision

A-]

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Nos. 1680, 297—August Term, 1994

(Argued: June 23, 1995 Decided: January 3, 199¢

Docket Nos. 94-4206. 94-6070

MICHAEL COUSIN

OFFICE OF THRIFT SUPERVISION

Department of Treasury,

Before:

KEARSE, ALTIMARI and PARKER

( irciti jude

Appeal from denial of declaratory judgment seeking

dismissal of temporary suspension and prohibition and

petition for review of Final Decision and Order of the

Acting Director of the Office of Thrift Supervi

Department of the Treasury (Jonathan L. Fiechter), pro-

hibiting Cousin from further participating in any manner,

in the conduct of the affairs of any banking institution

regulated by the Office of Thrift. Supervision.

Petition for review of Final Decision and Order is

DENIED. Appeal of denial of declaratory judgment is

DISMISSED as moot

RAMSEY CLARK, New York, New York

(Lawrence Schilling, New York, New

York, on the brief), for petitioner.

GERALDINE R. GENNET, Office of the Chief

Counsel, Office of Thrift Supervision,

Washington, D.C. (Carolyn B. Lieber-

man, Thomas J. Segal, Elizabeth R.

Moore, Dirk S. Roberts, Office of the

Chief Counsel, Office of Thsift Super-

vision, Washington, D.C., on the brief),

for respondent.

ALTIMARI, Circuit Judge:

Petitioner Michael Cousin (“Cousin”) seeks review of

a Final Decision and Order of the Acting Director

(“AD”), Jonathan L. Fiechter, of the Office of Thrift

Supervision (“OTS”), Department of the Treasury, pro-

hibiting Cousin from further participating in any manner,

in the conduct of the affairs of any banking institution

regulated by the Office of Thrift Supervision. Cousin’s

permanent prohibition made final a temporary suspen-

sion and prohibition which had previously been issued

eee nN OL LA ALLL LLL AA ALAA A —— -. eeeOeee

A-3

by the OTS, the issuance of which Cousin had appealed

before this Court. Cousin now argues that 1) the proce-

dure by which the OTS issued a permanent prohibition

against Cousin violated his due process rights under the

Fifth Amendment to the United States Constitution; 2)

the Final Decision and Order was not supported by

substantial evidence on the record; and 3) the AD

improperly denied Cousin’s defense of entrapment and

outrageous government misconduct. Because we find

Cousin’s arguments to lack merit, we deny his petition

for review of the OTS’s Final Decision and Order. We

further dismiss Cousin’s appeal concerning the tempo

rary suspension and prohibition as moot

BACKGROUND

A. Procedural History

On August 8, 1990, Cousin, then-chairman of the

Board and chief executive officer of Cross County Fed-

eral Savings Bank (“County Federal” or “Bank” ), was

charged in federal court with several counts of bribery.

The OTS was informed of the charges and, two days

later, issued a temporary suspension and prohibition

from participation in the affairs of County Federal. After

an administrative hearing on March 1, 1991, the tem-

porary suspension and prohibition was continued until

final disposition of the criminal charges pending against

Cousin.

Cousin then sought to have the criminal indictment

against him dropped in federal court, asserting that he

was neither physically nor mentally fit to stand trial. The

district court agreed to dismiss the indictment against

Cousin because he was not physically capable of stand-

A-4

ing trial; however, included in the order dismissing the

charges against Cousin, dated May 25, 1992, was lan-

guage—agreed to by Cousin’s attorney—to the effect

that the dismissal of the indictment did not amount to a

dismissal on the merits. See Cousin v. Office of Thrift

Supervision, 840 F. Supp. 8, 9-10 (E.D.N.Y. 1993). The

language was specifically included in the order to ensure

that the dismissal was not construed as requiring the dis-

continuation of the OTS’s temporary suspension and pro-

hibition against Cousin. /d. at 11.

Upon dismissal of the indictment for health reasons,

Cousin underwent a remarkable recovery and informed

the OTS that he was sufficiently physically and mentally

fit to reenter the banking world. Despite the explicit lan-

guage in the order dismissing his indictment, Cousin

thereafter sought a declaratory judgment in the district

court stating that his indictment had been dismissed on

its merits and that, as a matter of law, the OTS tempo-

rary suspension was required to be lifted. /d. at 8. In

light of the language in the order dismissing his indict-

ment—language which Cousin himself had agreed

upon—the district court dismissed Cousin’s suit on

waiver grounds. /d. at 11. Cousin then appealed the dis-

trict court’s dismissal of his action.

On May 13, 1993, the OTS instituted a proceeding to

permanently prohibit Cousin from further participating

in any manner, in the conduct of the affairs of any bank-

ing institution regulated by the OTS. In support of the

permanent prohibition, Cousin was charged with bribery

and aiding and abetting bribery. He responded to the

OTS claims and asserted a number of affirmative

defenses, focusing primarily upon entrapment. A hearing

of the claims was held before Administrative Law Judge

(“ALJ”) Walter J. Alprin between September 13 and 15,

na

N

%

¥

A-5

1993. On March 31, 1994, the ALJ issued his recom-

mended decision and order, disqualifying Cousin from

further participation in any federally insured banking

institution. By Order dated October 11, 1994, the AD

accepted some of the ALJ’s findings, rejected others,

and issued a permanent prohibition against Cousin’s fur-

ther participation in the banking industry.

Cousin now petitions for review of the Final Decision

and Order of the AD. Because Cousin’s previous appeal

is necessarily resolved by this petition for review of the

superseding Final Decision and Order, that appeal was

referred to this panel by order of the Court on December

30, 1994, and is resolved below.

B. The ALJ's Recommended Decision and Order

1. Findings of Fact

In his March 31, 1994, recommended ruling, ALJ

Alprin made the following specific factual findings.

While investigating criminal activities unrelated

to Cousin, IRS Special Agent Kevin McLaughlin

(“McLaughlin”) subpoenaed Cousin’s bank records in

late 1986. In response to the subpoena, Cousin contacted

McLaughlin and suggested that he was willing to meet

with him and voluntarily produce everything subpoenaed

by the government. At a meeting with McLaughlin on

May 27, 1987, Cousin offered to make a monetary con-

tribution to the charity of McLaughlin’s choice.

McLaughlin took Cousin’s offer to be an attempt at

bribery. After discussing this conversation with his supe-

riors at the IRS, McLaughlin was directed to engage in

an undercover operation to determine if Cousin would

follow through with his offered bribe. Cousin did,

A-6

in fact, follow through with his promise; on June 9,

1987, in his office at County Federal, Cousin gave

McLaughlin $1,750 in cash and a silver bar.

In an effort to determine if Cousin would engage in

further bribery, the IRS served a grand jury subpoena on

All Queens Tudor Realty, Inc., an organization in which

Cousin had a financial interest. Cousin again met with

McLaughlin in his office at the bank, on February 10,

1988, and offered to pay him if he would quash the

subpoena. On February 18, 1988, Cousin invited

McLaughlin to his office, where he gave the IRS agent

$6,500.

A short time later, Cousin conceived of a scheme in

which McLaughlin could receive additional bribes.

According to McLaughlin’s testimony, Cousin suggested

that he “could give me some information on some indi-

viduals, that I could open up a case, and then he could

arrange for them to pay me money to kill that case that

I had opened up.” In furtherance of his plan, Cousin

arranged for an associate of his, Max Fodera (“Fodera”),

to act as an intermediary in the bribery scheme. On May

11, 1988, Cousin acquired the bank files of Joan and

John Parlante, who he believed to be engaged in tax eva-

sion. Cousin informed McLaughlin of his hunch, which

he based upon the fact that the Parlantes made their

mortgage payments in cash and under-reported their

income. To assist McLaughlin in acquiring a subpoena

of the Parlantes’ files, Cousin provided him with the

Parlantes’ social security numbers, business names,

location of houses and business, and salaries. At the time

that Cousin revealed this confidential bank information,

he had no authority to do so, nor did County Federal

inform the Parlantes that the information had been

revealed.

L, ow tite Cana

A-7

On August 15, 1988, a subpoena was served upon

Cousin for the Parlantes’ bank files and the Parlantes

were notified of the pending tax investigation. Mrs.

Parlante instructed Cousin to provide any and all infor-

mation the IRS requested. Cousin, however, informed

Mrs. Parlante that he knew she could bribe McLaughlin

into dropping the investigation. Mrs. Parlante resisted

the idea. A short time later, however—after a second

grand jury subpoena had been served upon the Parlantes

requesting information about their business—Mr.

Parlante met with Cousin to discuss the possibility of

arranging a bribe. Cousin instructed Mr. Parlante on how

to bribe McLaughlin, using Fodera as an intermediary,

which Mr. Parlante did on October 20, 1988, paying

McLaughlin $25,000 to have the IRS investigation

ended.

2. Applicable Law

Under the Financial Institutions Reform, Recovery and

Enforcement Act of 1989 (““FIRREA”), P.L. No. 101-73,

103 Stat. 183 (1989), the OTS has the authority to apply

the remedies established under FIRREA to actions taken

prior to 1989. See In re Keating, OTS Order No. AP 91-

20 at 17-23 (May 11, 1991), 1991 WL 540752, *9, *13

n.8 (O.T.S.). In doing so, the OTS must apply the stan-

dard for liability established at the time of the conduct.

Id. Because the conduct in the case at hand occurred in

1987 and 1988, it is necessary to apply pre-FIRREA law.

Specifically, pursuant to 12 U.S.C. § 1464(d)(4)(A)

(1982) (for current provision, see, 12 U.S.C. § 1818(e)

(1994)), the OTS may bar an officer from future partic-

ipation in the affairs of a federally insured banking insti-

tution if it finds that the officer has:

A-8

[1] committed any violation of law, rule, or regu-

lation. ..,or

has engaged or participated in any unsafe or

unsound practice in connection with the asso-

ciation, or

has committed or engaged in any act, omission,

or practice which constitutes a breach of his

fiduciary duty as such director or officer,

and

[2] the Board determines that the association has

suffered or will probably suffer substantial

financial loss or other damage[,] or

that the interests of its savings account holders

could be seriously prejudiced by reason of such

violation or practice or breach of fiduciary

duty, or

that the director or officer has received finan-

cial gain by reason of such violation or practice

or breach of fiduciary duty,

and

[3] that such violation or practice or breach of

fiduciary duty is one involving personal dis-

honesty on the part of such director or officer,

or

a willful or continuing disregard for the safety

or soundness of the association.

12 U.S.C. § 1464(d)(4)(A) (1982) (emphasis and format

added). These three sub-sections of § 1464(d)(4) have

come to be known as the (1) “misconduct,” (2) “effect,”

and (3) “culpability” prongs of the prohibition test. See

Oberstar v. Federal Deposit Insurance Corporation, 987

inhi wa Stn igi ee lhe ella

A-9

F.2d 494, 500 (8th Cir. 1993) (construing 12 U.S.C.

§ 1818(e)).

In the administrative hearing against Cousin, the

application of § 1464(d)(4) focused upon two counts of

wrongdoing: Count I concerned Cousin’s bribery of

McLaughlin in 1987 and 1988 and Count II addressed

Cousin’s disclosure of confidential bank information as

part of his aiding and abetting in the bribery of

McLaughlin in 1988.

3. Count I: Bribery

As to Count I, the ALJ found that Part (1) was met by

Cousin’s bribery, which was a violation of the law.

While Cousin argued that the OTS must show a breach

of law related to the banking industry, the ALJ deter-

mined that the breach of any law was sufficient so long

as it had “a specific nexus to direct repercussions in

banking depository institutions.” The ALJ determined

that the 1987 bribery charge was not supported by a pre-

ponderance of the evidence, but that the 1988 bribery

charge was. In his defense, Cousin asserted that the 1988

bribe was a result of entrapment. The ALJ rejected

Cousin’s claim, pointing out that the government was

responsible for initiating virtually none of the contacts

with Cousin leading up to the bribe. Thus, the ALJ

determined that because Cousin had “violated a law,” the

misconduct prong was met.

Despite finding that Cousin’s Count I constituted a

violation of the law meeting the requirements of Part (1),

the ALJ determined that the OTS could not establish the

requisite “effects” of Part (2). Under the financial loss

provision of the effects prong, the OTS was required to

demonstrate that, as a result of Cousin’s criminal act, his

financial institution “has suffered or will probably suf-

A-10

fer substantial financial loss.” (emphasis added). While

the ALJ found that the institution might suffer some

loss, it did not find the potential for substantial loss as

required by the pre-FIRREA law (§ 1818(e)(1)(B)(i)—

FIRREA’s effects prong—requires only that the institu-

tion will probably suffer “loss” not “substantial loss”).

Therefore, the ALJ held that the effects prong was not

met and Count I was insufficient to justify permanently

barring Cousin from conducting the affairs of any fed-

erally insured banking institution.

Finally, as to Part (3), the ALJ determined that in

order to sustain a permanent prohibition, Cousin must

have acted in a manner that “evidence[d] willful or con-

tinuing disregard for the safety or soundness of [County

Federal] itself.” While the ALJ found Cousin to have

demonstrated personal dishonesty, he found the partic-

ular dishonesty in Count I did not impact upon the bank-

ing institution or upon Cousin’s dealings with the

institution. Thus, the OTS failed to meet the culpability

prong with respect to Count I as well.

4. Count II: Aiding and Abetting Bribery

As to Count II, the ALJ determined that Cousin’s

actions violated all three subparts of the misconduct

prong; the revelation of confidential bank information

for the sake of aiding and abetting bribery 1) was a vio-

lation of law with a nexus to the banking institution, 2)

was an unsafe and unsound practice, and 3) was a breach

of fiduciary duty. The ALJ found that the OTS had

shown by a preponderance of the evidence that Cousin

had aided and abetted in the Parlantes’ act of bribery.

Looking to the record of the House hearing on the Finan-

cial Institution Supervisory Act of 1966, the ALJ con-

cluded that Cousin had committed an unsafe and

acy IEA TORE a tC apt PLN TA. ace Ug ELS RR SL RE Ss.

A-11

unsound practice when he misused his position in the

Bank by revealing confidential information which he

obtained through his position. of authority. See also

Right to Financial Privacy Act, 12 U.S.C. $§ 3401 et.

seq. (1988) (conditions for providing government offi-

cials with customer’s financial records). Furthermore,

the same revelation of confidential information

amounted to a breach of Cousin’s fiduciary duty to the

Parlantes, County Federal customers.

As to Part (2), the ALJ determined that “the disclosure

and misuse of confidential bank information is integrally

related to [Cousin] and his position at [County Fed-

eral].” In light of the testimony presented at the hearing,

the ALJ concluded that the revelation of confidential

information was a sufficiently gross breach of Cousin’s

responsibilities as Bank president that an exodus of cus-

tomers might result; such an exodus would amount to

substantial harm, meeting the mandates of Part (2).

Finally, the ALJ found that Cousin met the culpability

prong when he not only acted dishonestly, but when his

dishonesty demonstrated a “willful and continuing

disregard for the safety and soundness of (County

Federal].” According'y, all of the requirements for pre-

FIRREA removal under 12 U.S.C. § 1464(d)(4) were met

by Cousin’s actions. The ALJ recommended Cousin’s

removal and prohibition from further participation in the

affairs of any federally insured financial institution.

C. The AD’s Decision and Order

Despite reaching the same conclusion as the ALJ—

namely, that Cousin should be permanently barred from

participating in the affairs of any federally insured insti-

tution—the AD disagreed with the ALJ on a number of

counts. The AD accepted the ALJ’s finding of facts, as

A-12

recited above, in their entirety. However, when pertinent

to his evaluation of the law, the AD made additional fac-

tual determinations.

|. Count]: Bribery

Despite the ALJ’s determination that there was insuf-

ficient evidence to support a finding that Cousin’s activ-

ities in 1987 amounted to bribery, the AD held that there

was clear evidence on the record, albeit circumstantial,

to support such a finding. The AD determined that there

was sufficient evidence to show by a preponderance of

the evidence that Cousin, 1) corruptly, 2) gave $1,750

and a silver bar, 3) to McLaughlin, a government offi-

cial, 4) in order to induce him into quashing the sub-

poena. See 18 U.S.C. § 201(b)(1)(C) (1988) (elements of

bribery); United States v. Gallo, 863 F.2d 185, 189 (2d

Cir. 1988) (same), cert. denied, 489 U.S. 1083 (1989).

The AD drew further support for his determination from

the fact that Cousin presented no witnesses on his behalf

and did not testify in order to rebut the bribery charge.

See Office of Thrift Supervision v. Lopez, 960 F.2d 958,

965 (11th Cir. 1992) (adverse inference may be drawn

from failure to testify on own behalf). In addition, the

AD found that there was sufficient evidence to demon-

Strate that Cousin had illegally offered a federal official

a gratuity. See 18 U.S.C. § 201(c)(1)(A) (elements of

illicit gratuity). As to these offenses, the AD rejected

Cousin’s entrapment defense and his assertion that the

OTS was limited to punishing violations of banking law.

With respect to the effects prong, the AD rejected the

ALJ's conclusion that there was insufficient evidence of

potential substantial harm to the bank's depositors from

Cousin’s wrongdoing. The AD held that the harm to the

bank need only be potentially substantial, see Jn re

Anonymous, FDIC Docket No. FDIC-84-86g (July 30,

1984); that substantiality requirement was met, accord-

ing to the AD, by 1) the serious risk of harm to County

Federal’s reputation from its director’s actions, and 2)

the inevitable damage to the credibility of the bank offi-

cial (Cousin) with the OTS and the resultant interference

with the regulatory process that could potentially arise.

Accordingly, the AD found that Cousin’s actions satis-

fied Part (2) of the test.

Finally, in keeping with his finding as to the inten-

tional illegality of Cousin’s actions charged in Count I,

the AD determined that those actions demonstrated “per-

sonal dishonesty” on the part of Cousin. Moreover, the

AD rejected the ALJ’s conclusion that the personal

dishonesty charged need necessarily relate to banking

activity; rather, the AD held that the OTS need only

demonstrate that the individual charged has engaged

in some activity which displays dishonesty. Thus, the

AD concluded that Count I was sufficient to justify

Cousin’s prohibition and removal from engaging in

banking activity.

2. Count Il: Aiding and Abetting Bribery

As to Count II, the AD concluded:

The Acting Director affirms the ALJ’s conclusions

concerning Respondent’s liability under Count

Il. Because, however, the ALJ’s analysis regard-

ing the second and third elements of the removal/

prohibition analysis imposes standards not required

by the statute, the Acting Director does not adopt

his analysis.

Despite rejecting the ALJ’s analysis, the AD accepted

the ALJ’s conclusion that Cousin’s actions amounted to

A-14

aiding and abetting the bribery of a federal official in

violation of federal law. See 18 U.S.C. §§ 2(a) (aiding

and abetting) and 201(b)(1)(C) (bribery); United States

v. Menesses, 962 F.2d 420, 427 (Sth Cir. 1992); United

States v. Shulman, 624 F.2d 384, 387-88 (2d Cir. 1980).

With respect to Part (2), the AD determined that Cousin

had put depositors in danger of “serious prejudice” and,

therefore, it was unnecessary to consider the ALJ's

determination that the bank faced potential substantial

harm as a result of Cousin’s actions. Because the mis-

conduct at issue in Count II involved the “use of confi-

dential customer information to orchestrate and assist

the commission of criminal activity,” the AD determined

that it was even more detrimental to the interests of the

depositors than was the activity alleged in Count I. The

AD concluded that “[dJepositors are entitled to trust the

management of depository institutions to spend their

time. . . furthering the interests of the association, not

committing illegal acts. . . . [B]y virtue of [Cousin’s]

misconduct, the interests of Cross County depositors

could be seriously prejudiced.”

With respect to Part (3), as discussed above, the AD

determined that Cousin had demonstrated personal dis-

honesty. In addition, the AD found that Cousin orches-

trated a bribery scheme over several months and that

such behavior constituted “willful and continuing dis-

regard for the safety and soundness of [the Bank].” See

12 U.S.C. § 1464(d)(4)(A) (1982). Accordingly, Count II

met all the requirements for prohibition and the AD

ordered that Cousin be removed from his office at

County Federal, and be prohibited from further partic-

ipation in any manner, in the conduct of the affairs of

any institution regulated by OTS.

;

;

:

2

‘,

FY

ia

D. The Appeal

Cousin now petitions for review of the AD’s decision

Specifically, Cousin asserts that 1) the AD’s exercise of

his “absolute discretion” violated Cousin’s right to due

process, 2) the AD’s decision was not supported by sub

stantial evidence, and 3) the AD and ALJ improperly

excluded important evidence on entrapment and outra

geous government conduct

DISCUSSION

In reviewing final orders of the OTS, the factual deter

minations of AD must be accepted if supported by sub

stantial evidence on the record. See Seidman v. Office of

Thrift Supervision, 37 F.3d 911, 924 (3d Cir. 1994). We

review the AD’s legal interpretations de novo. See 1/85

Ave. of Americas Assocs. v. Resolution Trust Corp., 22

F.3d 494, 497 (2d Cir. 1994) (deference under Chevron

U.S.A. Inc. v. Natural Resources Defense Council, Inc.,

467 U.S. 837 (1984), inappropriate when statute admin

istered by several agencies); Wachtel v. Office of Thrift

Supervision, 982 F.2d 581, 585 (D.C. Cir. 1993) (same)

1. Due Process

Cousin asserts that the process by which he was pe

manently barred from running a federally regulated bank

violated his Fifth Amendment right to due process

According to Cousin,

[ijn the most extreme delegation of discretion yet,

arising from the savings and loan scandal which

cost Americans many tens of billions of dollars

Congress placed arbitrary power in the form of near

absolute discretion in the Director of OTS. How

A-16

well such absolute power served the public and the

S & L industry is indicated by the tragedy which

befell both on the OTS’s watch.

Specifically, Cousin argues that his due process rights

were violated by the mixing of investigatory, prosecu-

torial, and adjudicative functions by the OTS. According

to Cousin, the AD acted with impermissible bias when

he “arbitrarily reversed the ALJ on virtually every find-

ing and ruling [the ALJ] made.” Moreover, Cousin sug-

gests that it is clear from the face of the AD’s Final

Order that the OTS had a “vendetta” against him that

dictated the outcome of the hearing.

The administrative process by which Cousin was

disciplined was mandated by statute and entirely

constitutional. While the AD had authority over the

investigative, prosecutorial and adjudicative functions

performed by his agency, and while he also had absolute

discretion to accept or reject the ALJ’s recommended

findings of fact and rulings of law when arriving at his

Final Order, such combined functions and adjudicatory

discretion fall well within the mandates of the Fifth

Amendment. See Withrow v. Larkin, 421 U.S. 35, 57-58

(1975) (risk of prejudice from joint functions of admin-

istrative agency does not rise to level of due process vio-

lation). See also Keating v. Office of Thrift Supervision,

45 F.3d 322, 327-28 (9th Cir.) (OTS procedure permis-

sible), cert. denied, 116 S.Ct. 94 (1995); Seidman, 37

F.3d at 924-26 (same).

Cousin asserts that the AD’s exercise of his discretion

demonstrated bias and was therefore a violation of his

due process rights. See, e.g., Seidman, 37 F.3d at 924. In

support of this contention, Cousin points to the numer-

ous adverse findings made by the AD, particularly those

A-17

rejecting the recommended ruling of the ALJ. Despite

Cousin’s protestations, except his general insistence that

the AD’s Final Order demonstrates bias on its face,

Cousin cannot point to a single factor indicating the

ADs bias against him. As is clear from our discussion of

the substance of the Final Order below, there is no merit

to Cousin’s claim that the AD’s findings of fact and con-

clusions of law demonstrate bias. The process by which

Cousin was barred from future participation in any fed-

erally insured banking institution was statutorily man-

dated and entirely constitutional. See, generally,

Seidman, 37 F.3d at 924-26.

2. Substantiality of Evidence

Cousin asserts that the AD’s Final Order is not sup-

ported by substantial evidence on the record. The lack of

factual support for the AD’s prohibition order, according

to Cousin, is particularly clear from the AD’s arbitrary

rejection of the ALJ’s factual determinations and con-

clusions of law. Cousin contends that neither Count I nor

Count II of the AD’s Final Order is sufficient to justify

his prohibition from the banking industry. Because we

find that the AD’s Order was amply supported by

Cousin’s illegal actions under Count II, we need not

address Count I

A. Misconduct

The AD determined that, as to Count II, Cousin vio-

lated all three subparts of the misconduct prong—Cousin

violated a law, engaged in an unsafe or unsound banking

practice, and breached his fiduciary duties as a director

of the Bank. See 12 U.S.C. § 1464(d)(4)(A) (1982)

Specifically, the AD ruled that there was sufficient evi-

dence to prove that Cousin had aided and abetted in the

A-18

bribery of a government official; that such aiding and

abetting, which involved the revelation of confidential

bank information, constituted a breach of his fiduciary

duty as bank president; and, that Cousin’s criminal activ-

ity, which implicated another bank employee and bank

customers, amounted to an unsafe or unsound banking

practice.

Cousin contends that the OTS does not have the

authority to punish him for an alleged crime, when the

indictment for that crime had been voluntarily dismissed

by the government. Not only does Cousin argue that

there is insufficient evidence to support a determination

that he aided and abetted in the bribery of a government

official (as is demonstrated by the dismissal of the

indictment), Cousin asserts that even if he did commit

such a crime, § 1464(d)(4) does not allow a prohibition

order to be founded upon non-banking related violations

of the law. The AD erred as a matter of law, according to

Cousin, when he rejected the ALJ’s proper determination

that such predicate violations of the law need at least

have some nexus to the banking industry.

Upon a review of the record, we find that there was

ample evidence to support the conclusion arrived at by

both the AD and ALJ, that Cousin aided and abetted in

an illegal bribe. The testimony of Agent McLaughlin,

Mr. Parlante, and Max Fodera makes clear that Cousin

conceived of a scheme in which he assisted a govern-

ment official in the investigation of the potential finan-

cial improprieties of County Federal bank customers so

that he might ultimately orchestrate the bribery of that

government official. As the AD concluded, while “it is

unclear precisely what motivated [Cousin] to perpetrate

his illegal scheme, it is clear that. . . . [Cousin’s] pur-

pose in providing confidential customer information to

A-19

McLaughlin was to facilitate a bribery scheme.” Because

the AD’s conclusion was fully supported by the record,

we find that the misconduct prong has been met.

It is disingenuous and contemptible for Cousin to

assert that the AD erred in finding a violation of the law

where the criminal indictment concerning the same mat-

ter had been voluntarily dismissed by the government.

Cousin himself sought the dismissal of the criminal

indictment for health reasons. While the government

ultimately acquiesced and dismissed the indictment, it

did so only on the condition that language preserving the

proceedings before the OTS be included in the dismissal.

Not only was Cousin aware of this language and its

intended purpose, but the language ultimately adopted

was approved by his attorney. Cousin should be grateful

for his miraculous recovery which he now asserts makes

him sufficiently fit to run a banking institution, and

thankful that he is not facing reinstated criminal charges.

This Court will not, however, give credence to such a

wrongheaded and inequitable argument.

Finally, the AD’s determination that the misconduct

prong may be met by violations of any law, banking-

related or otherwise, is clearly supported by the statute.

The plain language of the statute empowers the regula-

tory authority to prohibit a bank director from further

participating in the conduct of the affairs of any regu-

lated banking institution if that officer “has committed

any violation of law. . . .” 12 U.S.C. § 1464(d)(4)(A)

(1982); see Himes v. Shalala, 999 F.2d 684, 688 (2d Cir.

1993) (court must effectuate plain meaning of statute).

Had Congress intended for only banking-related viola-

tions to trigger § 1464(d)(4), it could have limited the

language of the misconduct prong accordingly. See, e.g.,

12 U.S.C. § 1829 (1989) (“any person who has been con-

A-20

victed of any criminal offense involving dishonesty or a

breach of trust may not participate. . . in the conduct

of the affairs of any insured depository institution”)

(emphasis added). The AD properly determined that

Congress intended no such limitation.

Because the AD’s determination that Cousin aided and

abetted in the bribery of a federal official is fully sup-

ported by the record, the misconduct prong is met. We

need not, therefore, address Cousin’s objections to the

AD’s alternative findings concerning breach of fiduciary

duty and unsafe or unsound business practices.

B. Effects

Cousin also argues that the AD failed to support, with

substantial evidence, his finding that Cousin’s actions

had harmful effects meeting the requirements of Part (2).

Pointing to the fact that, since his indictment for bribery,

County Federal has suffered no actual loss nor experi-

enced an exodus of depositors, Cousin contends that the

AD could not possibly find the requisite harmful effects

of Cousin’s alleged wrongdoing.

Despite Cousin’s contentions, however, the AD stated:

[I reject] the argument that the “effects” test

requires more immediate or direct impact upon the

association than establishment of the possibility of

serious prejudice to the interests of the institution’s

depositors. Congress simply did not draft section

1464 to impose such a requirement.

The plain language of the statute makes clear that the

AD’s interpretation is proper. Section 1464(d)(4)(A)

requires that the “interests of [the Bank’s] savings

account holders could be seriously prejudiced by reason

ik Bl he er ea, ge ‘

of such violation. . . .” (emphasis added). In light

of this language, it would be irrational to require actual

and immediate prejudice before a prohibition order

may issue. See In re Anonymous, FDIC Docket

No. FDIC-84-86g (regulation ineffective if regulator is

unable to anticipate injury to depositors and act in

advance of harmful impact); Van Dyke v. Bd. of Gover-

nors of Fed. Reserve Sys., 876 F.2d 1377, 1380 (8th Cir.

1989) (“we think it unrealistic. . . to suggest the Board

is powerless to respond to an officer’s [wrongdoing]

until actual harm to the Bank occurs”). The AD need

only show sufficient evidence on the record to demon-

strate the possibility of serious prejudice resulting from

Cousin’s illegal activities for the effects prong to be met.

In support of his finding of potential serious prejudice,

the AD points to two factors: 1) Cousin’s illegality could

potentially injure depositor confidence in County Fed-

eral and lead to an exodus of depositors; and 2) Cousin’s

illicit conduct injured his credibility with the banking

regulatory authority (namely the OTS), thus impairing

his ability to effectively represent the Bank’s interests.

Both of these propositions were fully supported by the

testimony of Michael Simone, an Assistant Director for

the OTS in its Northeast Region. While we think that

basing an effects determination on Cousin’s credibility

with the OTS alone would be insufficient, the AD’s

determination that there was a possibility of serious prej-

udice from the combination of the two factors cited

above is appropriate and supported by substantial

evidence.

C. Culpability

Cousin also challenges the AD’s determination that

Part (3) was met by his alleged wrongdoing. Cousin

A-22

points to the ALJ’s conclusion that “the third prong of

the statute ... clearly intend[s] the Respondent’s

actions to relate to the financial institution directly, and

not merely indirectly or in some peripheral manner.”

Contrary to the ALJ’s interpretation of the statute, the

AD determined that there need only be some knowing

act of “personal dishonesty” to meet the requirements of

the culpability prong. As the AD notes, while the second

subcategory of Part (3) explicitly requires misconduct

directed at the association, see 12 U.S.C. § 1464(d)(4)(A)

(1982) (“willful or continuing disregard for the safety or

soundness of the association”), no such requirement

exists with respect to “such violation[s]. . . involving

personal dishonesty,” id. Accordingly, the OTS need

only demonstrate “a degree of culpability well beyond

mere negligence.” Kim, 40 F.3d 1050, 1054 (9th Cir.

1984). The evidence of Cousin’s bribery and breaches of

confidentiality clearly support such a finding of inten-

tional wrongdoing.

3. Entrapment and Outrageous Government Misconduct

Finally, Cousin argues that the AD improperly

excluded evidence concerning the allegedly outrageous

government conduct to which Cousin had been subjected

and incorrectly denied his entrapment defense as a mat-

ter of law. We note only that the evidence credited by the

ALJ and AD clearly established that Cousin conceived

of the bribery scheme of his own volition and presented

it, unsolicited, to Agent McLaughlin. Under such cir-

cumstances, Cousin’s entrapment defense—regardless of

the outrageous government conduct Cousin asserts—

necessarily fails as a matter of law. See Jacobson v.

United States, 503 U.S. 540, 549 (1992) (“the prosecu-

tion must prove beyond reasonable doubt that the defen-

Na 1S Dita REAR PI EET he ge

dant was disposed to commit the criminal act prior to

first being approached by Government agents”).

CONCLUSION

The AD’s prohibition order was fully supported by the

evidence on the record and is proper as a matter of law.

Accordingly, Cousin’s petition for review of the final

decision and order of the AD is denied. Because the

OTS’s Final Decision and Order stands, Cousin’s appeal

concerning the temporary suspension and prohibition is

dismissed as moot.

UNITED STATES OF AMERICA

before the

OFFICE OF THRIFT SUPERVISION

DEPARTMENT OF THE TREASURY

IN THE MATTER OF:

CASE NO. OTS AP 93-38

MICHAEL COUSIN, DATED: MAY 13, 1993

a Person Participating in the OTS ORDER NO. AP 94-48

Conduct of the Affairs of Cross DATED: OCTOBER 11, 1994

County Federal Savings Bank,

Queens, New York

DECISION AND ORDER

A25

TABLE OF CONTENTS

lo ine te 1 ae ace ee pail

I. INTRODUCTION AND SUMMARY OF

CONCLUSIONS

i ERE ig coe ore Se a

A. Description of the Charges and

Summary of Administrative Proceedings . . .

1. The Prior Suspension Order

and Related Proceedings

ee ee eee

2. The Instant Proceedings

eee ee @

B. Summary of the ALJ’s Recommended

Decision

C. Exceptions to the Recommended Decision

Rt 2!” 5 Oe een ec 8

A. The 1987 Bribe

eo. en ee Se eS eae eee & Be

B. The 1988 Bribe

72S 8-2. 6. £2 eto. 8 © 6-8 @ th 6b S

C. The Aiding and Abetting of a Bribe in 1988 ...

IV. ISSUES

V. DISCUSSION

B. Count I: Respondent’s 1987 & 1988 Bribe

of a Federal Official

1. Misconduct

Se ee 2 6 Os 6: Oo 66-6 8 6 6 ahs

a Oe te ee oe ee i ce

2 eS ee SOS. ee eS 6 Se eS: 8 SOO ee

a ee Ae ee o eee Oe 264 6 Ce S86 8.8 4-6 & 6 SO

—— 8 8 6 2S 0-6 6 6 6 66 8 6 6 0 6 6 6 6 6 @

®esee@eeea4eaeeeeeeeeee

=? .2: 6 .e'< 6.9: 88 67 ¢ 6 oe 2S

“ee

A26

i. The Bribery Charge ....... a

ii. The Illegal Gratuity Charge .

b. The 1988 Conduct .......... 27

c. Respondent's Defenses to the

Violations of Law . er 28

Effect of Respondent's Misconduct on

the Association ........ ; 3]

3. Respondent's Culpability .. 39

C. Count II: Respondent's Aiding and Abetting

the Bribery of a Federal Official 41

1. Musconduct : 4]

a. Respondent Violated the Law 4]

b. Respondent's Defenses to the

Violations of Law .. 43

c. Respondent Committed an Unsafe or

Unsound Banking Practice .. 43

d. Respondent Breached his Fiduciary

Duties to the Association ...... 46

2. Effects of Respondent's Misconduct on

the Association .... ' 47

3. Respondent's Culpability ~ 48

D. RESPONDENT'S REMAINING EXCEPTIONS 50

E. RESPONDENT'S REQUEST FOR ORAL

REPUTE bucesecdes nee (ene .

bo ie ee eg in Ne RE EE

ORDER

A28

DECISION

I. INTRODUCTION AND SUMMARY OF CONCLUSION

This case arises from a criminal indictment on multiple

counts of bribery and conspiracy brought in 1990 against Michael

Cousin ("Respondent"), former chief executive officer and

chairman of the board of directors of Cross County Federal

Savings Bank, Queens, New York ("Cross County” or the

Association’). As a result of Respondent’s arrest, the Office of

Thrift Supervision ("OTS") issued an order on August 10, 1990,

suspending Respondent from his positions with Cross County.

Due to Respondent's incapacity to stand trial, the criminal

indictment was later dismissed without prejudice. A condition of

the dismissal, negotiated with Respondent, specified that the

dismissal did not affect the pending OTS suspension order.

The OTS thereafter instituted this action, secking an

order of permanent removal and prohibition against Respondent

based on two counts: (1) for bribing a federal official in 1987 and

1988 and (2) for aiding and abetting a bribe of a federal official

in 1988. Respondent used his position with, and the facilities of,

Cross County to commit a bribery offense, set up a bank

customers to engage in illegal activities and induce a member of

Cross County's Board of Directors to commit a criminal act. All

of these activities could seriously prejudice the interests of the

depositors, and all evidence personal dishonesty.

The gravity of Respondent's misconduct was precisely

what concerned Congress when it provided that an individual

convicted of certain types of criminal offenses should be

automatically prohibited from the banking industry. Here, on the

grounds of physical incapacity, Respondent was able to avoid trial

on the merits in a criminal forum. The allegations have been

adjudicated in this administrative proceeding, however. The

Acting Director concludes that Respondent’s misconduct

demonstrating personal dishonesty was established by a

preponderance of the evidence. The Acting Director also

concludes that such misconduct could seriously prejudice the

interests of Cross County's depositors. Accordingly, the sanction

ew a

A29

of removal and prohibition is appropriately ordered here pursuant

to 12 U.S.C. Sec 1464(d)(4)(A) (1982) and 12 US.C. Sex

1818(e) (Supp. v 1993)

Il. BACKGROUND

A. DESCRIPTION OF THE CHARGES AND

SUMMARY OF ADMINISTRATIVE

PROCEEDINGS

1. The Prior Suspension Order And Related Proceedings

Respondent was charged on August 8, 1990, with multiple

counts of bribery. Cousin v, OTS, 840 F.Supp. 8, 9 (E.D.N.Y

1993). On August 10, 1990, after the OTS learned of

Respondent’s arrest, the District Director of the New York

District office of the OTS issued and served upon Respondent a

Notice of Suspension and Prohibition from Participation in

Association Affairs under 12 U.S.C. Sec. 1818(g)(1), suspending

Respondent from his positions with Cross County and prohibiting

him from further participation in any manner in the conduct of

the affairs of Cross County. Id. On September 9, 1990, a grand

jury indicted Respondent on eight counts of bribery and

conspiracy. Id

Pursuant to Respondent's request, an administrative

hearing on the suspension was conducted on March 1. 1991. The

President Officer subsequently issued a Recommended Decision

that the Director continue the suspension and prohibition until

final disposition of the criminal case. The Director of OTS

adopted this recommendation on July 15, 1991. OTS AP 91-42

On May 25, 1992, the criminal indictment was dismissed

at Respondent's motion on the ground that he was not physically

capable of standing trial. Cousin, 840 F.Supp. at 9. The OTS

requested and obtained language in the dismissal order that the

dismissal "does not constitute a final disposition of the indictment

for purposes of 12 U.S.C. Sec. 1818(g), [and] is not a dismissal on

the merits.” Id. at 10. Respondent stated at the time that he had

no objection to this provision. Id.

A30

In February 1993, Respondent filed a civil action in

federal district court for the Eastern District of New York against

the OTS seeking a declaratory judgment that the OTS suspension

order had been terminated as a matter of law by the district

court's dismissal of the indictment. See Cousin v. Office of Thrift

Supervision, Civ. No. 93-0548 (EHN). In dismissing

Respondent's suit, the district court concluded that Respondent -

having negotiated the language of the dismissal -- waived his

right to have the suspension order jerminate when the criminal

charges against him were dismissed. ! Cousin, 840 F Supp. at 11.

Accordingly, the suspension order remains in effect.“

2. The Instant Proceeding

On May 13, 1993, Enforcement instituted the instant

removal and prohibition proceeding against Respondent. The

Notice of Charges alleges three incidents, under two independent

counts, giving rise to the enforcement action. These three events

also served as the basis for Respondent's arrest and criminal

indictment in 1990. Count I charges that on two occasions in

1987 and 1988 Respondent bribed an IRS agent to terminate a

grand jury investigation while on bank premises and using bank

facilities. Count II charges that Respondent aided and abetted

the crime of bribery, by disclosing confidential information

| That action is presently on appeal before the U.S. Court

of Appeals for the Second Circuit. Cousin v. OTS, Dkt. No. 94-

6070 (argued September 14, 1994).

2 ‘The district court also noted that Respondent has recourse

under 12 U.S.C. Sec. 1818(g) to apply to the OTS for

reinstatement. 840 F.Supp. at 11. By letter dated September 30,

1992, Respondent requested, through counsel, acknowledgment

by the OTS that the suspension order terminated by virtue of the

dismissal. By letter dated November 25, 1992, the OTS notified

Respondent that it considered the suspension order to continue

in effect

A311

concerning the affairs of Cross County customers to an IRS agent

in orchestrating a bribe of the agent by Cross County customers.

Respondent answered the charges on June 2, 1993, and

asserted six affirmative defenses. Respondent also requested a

private hearing. This request was Opposed by Enforcement and

denied by the Acting Director on August 6, 1993.

On July 18, 1993, Respondent moved to dismiss this

proceeding. Enforcement opposed the motion and on August 9,

1993, the ALJ denied the request.

On September 13-15, 1993, a hearing was held in New

York City, New York before the ALJ. At the hearing,

Enforcement argued that Respondent also committed the

additional offense of giving an illegal gratuity to a federal official

in 1987. The parties filed post-hearing proposed findings of fact,

conclusions of law, memoranda of law, briefs and reply briefs

The ALJ issued a Recommended Decision and Order on

March 31, 1994. Both parties filed exceptions thereto as well as

additional memoranda and replies. On June 27, 1994, the parties

were notified that the ALJ’s Recommended Decision had been

Submitted to the Acting Director for final decision. On

September 26, 1994, the Acting Director extended the deadline

lor issuing the final decision to October 11. 1994 OTS Order

No. Ap 94-43

B. Summary of the ALJ’s Recommended Decision

The ALJ determined that Enforcement had not sustained

its burden of proof under Count I for several reasons. First, he

found that the evidence was insufficient to conclude that

Respondent violated any law in 1987. Second, while he

determined that Respondent’s 1988 activity violated the anti-

bribery statute, the ALJ concluded generally that Enforcement

did not prove that the actual or potential loss or harm caused by

Cousin’s activities to the institution was “substantial”, or that the

interests of the depositors could be seriously prejudiced in light

of the existence of federal deposit insurance. The ALJ also

A32

concluded that Respondent’s acts -- while evidencing personal

dishonesty -- were not directed towards the Association. Nor did

the ALJ find that Respondent acted with willful or continuing

disregard for the safety or soundness of Cross County. Thus, the

ALJ did not recommend removal or prohibition on Count I.

On Count II, however, the ALJ found against

Respondent. The ALJ concluded that Respondent’s involvement

in the Cross County customers’s bribe of an IRS agent

constituted: a) a violation of law, per 18 U.S.C. Sec. 2 (treating

aiders and abettors as principals); b) an unsafe and unsound

banking practice; and c) a breach of fiduciary duty to Cross

County. The ALJ also determined that the disclosure and misuse

of confidential bank information was integrally related to

Respondent’s position at Cross County, and conclude that the

Association suffered or will probably suffer substantial financial

loss or other damage. Similarly, he concluded that Respondent's

display of personal dishonesty was sufficient to warrant removal

and prohibition because Respondent's misconduct related to

activities concerned with the Association and that Respondent

acted with willful and continuing disregard for the safety and

soundness of the Association.

c. Exception to the Recommended Decision

Respondent has entered exceptions to most of the ALJ's

Recommended Decision, reasserting arguments he raised before

the ALJ. Respondent raises a number of factual exceptions, but

the only significant one is his claim that he did not offer to pay

the IRS agent to terminate the IRS investigation in 1988 or aid

and abet the commission of bribery in 1988. Respondent also

raises several evidentiary issues, summarized as follows: (1) that

he was not permitted to adequately cross-examine witnesses on

matters relating to the grand jury, IRS matters or his entrapment

defense; (2) that certain discovery requests were improperly

denied, including a request for issuance of a subpoena to the

IRS; and (3) that OTS’s expert testimony should not be accorded

any deference. Finally, Respondent asserts a number of legal

arguments, essentially denying that the elements for removal

and/or prohibition have been met and claiming that Respondent

A33

was entrapped and is the victim of government misconduct.

Enforcement excepted to the ALJ’s Recommended

Decision concerning Count I. First, Enforcement took exception

to several factual issues relating to details concerning the bribes.

Second, Enforcement excepted to the ALJ"s standard for removal

and prohibition to the extent that the ALJ's interpreted each

element to require Respondent's misconduct to be integrally

related to the Association. Enforcement also argued that the

ALJ, having failed to accord appropriate deference to the OTS’s

expert testimony, improperly concluded that there was insufficient

evidence of actual or potential prejudice to the interests of the

depositors.

iil. FINDINGS OF FACT

The Acting Director generally accepts the facts relied on

by the ALJ in his Recommended Decision. The Acting Director

believes, however, that the record reflects additional facts

relevant to a determination of this action. These facts are

included in the following discussion of the three incidents giving

rise to this proceeding.

A. The 1987 Bribe

The events underlying the bribery charge commenced in

late 1986 or early 1987, when Kevin McLaughlin ("McLaughlin"),

a Special Agent with the Internal Revenue Service ("IRS")

Criminal Investigation Division, served a grand jury subpoena on

European American Bank ("EAB") for records relating to

Respondent. Respondent was contacted by EAB and thereafter

initiated a meeting with McLaughlin in February 1987 to review

documents at Cross County responsive to the EAB subpoena.

When McLaughlin began to question Respoudent about the

documents, Respondent terminated the meeting on the grounds

that he desired legal representation.

Several months later, Respondent called McLaughlin,

complained of the cost of retaining an attorney and inquired

whether it was necessary to do so. Respondent mentioned that

A34

he donated a lot of money to charity, and offered to donate

money to McLaughlin’s favorite charity. Because McLaughlin

believed that Respondent had offered him a bribe, he reported

the incident to the U.S. Attorney’s office and his supervisors, who

directed him to enter into an undercover operation to accept any

bribes offered by Respondent. All of Respondent’s conversations

with McLaughlin thereafter were monitored by means of a

recording device.

On May 27, 1987, at Respondent’s request, McLaughlin

met with Respondent at Cross County. Respondent told

McLaughlin that he did not need an attorney and that he would

give McLaughlin half the money that it would have cost to retain

an attorney. He also inquired whether McLaughlin "had a tape

on" and later stated, "I hope#ou ain’t taping it" and "you're not

taping what we did,” asking McLaughlin to raise his right hand to

swear to it. (OTS Exhibit 1 at 6; 13).

On June 8, 1987, Respondent telephoned McLaughlin to

schedule a meeting. McLaughlin asked if they "still got a deal"

and Respondent replied, "of course." (OTS Exhibit 2 at 3). The

next day, Respondent and McLaughlin met in Respondent’s

office at Cross County. During the meeting, Respondent

inquired how McLaughlin knew his telephone weren't

wiretapped. Respondent gave McLaughlin $1,750 in cash in an

envelop and a Swiss silver bullion bar. When McLaughlin started

to count the money, Respondent cautioned him to put it away.

B. The 1988 Bribe

In 1988, a grand jury subpoena was served on All Queens

Tudor Realty ("AQTR"), located in Queens, New York, an entity

in which Respondent had a financial interest. Within days after

service of the subpoena, Respondent tried to contact

McLaughlin.

On February 10, 1988 McLaughlin and Respondent,

meeting at Cross County, discussed the subpoena issued to

AQTR. McLaughlin understood that Respondent wanted the

agent to "kill" the investigation of AQTR and "make the

Subpoena go away" in return for $5,000 from Respondent and

another party. (Transcript Vol. I at 96-97; OTS Exhibit 13).

McLaughlin understood that Respondent would pay him $5,000

because Respondent used hand signals, indicated that figure and

then wrote the amount on a piece of paper. Respondent and

McLaughlin agreed to meet the following week to effectuate the

payment to McLaughlin and later scheduled that meeting for

February 18, 1988, at Cross County.

The meeting on February 18, took place in Respondent's

office at Cross County. Respondent gave McLaughlin an

envelope with $6,500° and repeatedly told McLaughlin he

“wanted this stopped" and didn’t “want to hear" anymore about

the investigation (OTS Exhibit 5 at 9). McLaughlin understood

from the discussion that Respondent wanted McLaughlin to "kill

the investigation" and that Respondent "didn’t want to be

bothered with it anymore." (Transcript Vol. I at 101, 103, 105,

106, 108).

C. The Aiding and Abetting of a Bribe in 1988

In March of April 1988, Respondent -- on his own

initiative -- contacted McLaughlin and scheduled a meeting on

April 26, 1988. They met at Cross County and proceeded to a

restaurant for lunch. During their meeting, Respondent

suggested that McLaughlin open an investigation of certain Cross

County customers for possible federal tax evasion and

-Respondent would arrange for the customers to bribe

McLaughlin to close the _ investigation. According to

Respondent’s plan, Respondent would provide McLaughlin

sufficient information on these individuals to enable McLaughlin

to commence an investigation of them. Then, Respondent would

arrange for the individuals to bribe McLaughlin to "kill" the case.

(Transcript Vol. I at 109-10; OTS Exhibit 6). Respondent

3 Respondent originally told McLaughlin that Respondent

was paying $5,000 and his partner in AQTR the remaining

$1,500; however, Respondent later admitted to McLaughlin that

it was all Respondent’s money.

A36

arranged for Max Fodera ("Fodera"), a friend of Respondent's

and a member of the Cross County Board of Directors, to serve

as an intermediary in Respondent’s scheme. As part of his

undercover operation, McLaughlin agreed to Respondent's plan.

At a meeting at Cross County on May 11, 1988 at

Respondent’s request, Respondent identified the individuals he

mentioned on April 26, 1988, as a Mr. and Mrs. Parlante. John

and Joan Parlante were borrowers who had obtained a mortgage

from Cross County on their personal residences through

Respondent. McLaughlin identified the information he would

need about the Parlantes to open in investigation. Respondent

thereafter provided McLaughlin with the Parlantes’ social security

numbers and information concerning the location of houses,

business, and income as reported on their Cross County mortgage

application.

In August 1988, McLaughlin served a grand jury subpoena

on Cross County for the Parlantes’ bank records, and McLaughlin

and Respondent then discussed how they would proceed with the

investigation of the Parlantes. McLaughlin testified that, during

a meeting at Cross County, he and Respondent also considered

"how to go about it, when to subpoena them, whether I should

wait or do it sooner, do it later .. How we should proceed."

(Transcript Vol. I at 128). Subsequent to this mecting,

Respondent advised McLaughlin that Respondent believed the

Parlantes would pay $425,000 bribe to McLaughlin.

Thereafter, at Respondent’s direction, Fodera advised the

Parlantes that Cross County had received a subpoena for the

Parlantes’ bank records. Fodera also told the Parlantes that they

“were in a lot of trouble;" that Respondent wanted to talk with

them; and that Respondent could “take care of everything."

(Transcript Vol. II at 414). Following Fodera’s meeting with the

Parlantes, Respondent informed McLaughlin that the Parlantes

were very concerned about the subpoena and Respondent

advised McLaughlin that McLaughlin “will have some winner

there." (OTS Exhibit 8 at 3, 8; Transcript Vol. I at 130).

Approximately one week later, Fodera advised the

- -

A37

Parlantes that Respondent wanted to talk with John Parlante at

Cross County. John Parlante was not inclined to meet with

Respondent but Mrs. Parlante agreed to meet with Respondent

at Cross County. At that meeting, Respondent advised Mrs.

Parlante that Cross County had been served with a subpoena and

that the bank would have to give all the information Cross

County maintained on the Parlantes to the IRS agent. Mrs.

Parlante told Respondent that he should provide any information

the IRS requested in the subpoena.

Respondent advised Mrs. Parlante that he had previous

problems with the IRS, that the agent identified on the subpoena

for the Parlantes’ records was the same agent responsible for

Respondent’s case, and that Respondent "knew how to deal with

this agent." (Transcript Vol. II at 382). Respondent further

explained that the IRS agent would take a bribe and that "you

have to bribe the agent.” Id. Mrs. Parlante initially opposed any

bribe plan and Respondent, disturbed with her resistance, told

Fodera and Mrs. Parlante that he did not want to deal with her

anymore and that he wanted to schedule a meeting with her

husband at Cross County.

On September 26, 1988, Respondent and McLaughlin

discussed when McLaughlin should serve the subpoenas on the

Parlantes at their place of business. Respondent told

McLaughlin that Respondent was dispatching Fodera to meet

with the Parlantes the next day and that McLaughlin should delay

serving the subpoenas until after Fodera met with them. Fodera

was instructed to tell the Parlantes that Respondent knew

McLaughlin. On the following day, Respondent telephoned

McLaughlin and advised him that Fodera had met with the

Parlantes and that Mrs. Parlante was concerned, but that her

husband was not. McLaughlin and Respondent then agreed on

the date and time that McLaughlin would serve the subpoena on

the Parlantes.

As advised by Respondent and in furtherance of the plan

conceived by Respondent, McLaughlin served a subpoena on the

Parlantes at their place of business. John Pariante instructed

McLaughlin to leave and to contact the Parlantes’ lawyer. Mr.

A38

Parlante then decided to meet with Respondent after his wife

relayed Respondent’s assertions that Respondent knew the agent

and that "he could be taken case of." (Transcript Vol. II at 416).

John Parlante later met with Respondent at Cross

County. During the meeting Respondent informed Mr. Parlante

that Respondent knew McLaughlin from past investigations.

Respondent also advised Mr. Parlante that McLaughlin would

accept a bribe to terminate the IRS mvestigation of the Parlantes.

Respondent encouraged Mr. Parlante to pay McLaughlin to

terminate the investigation and gave Parlante specific instructions

on how to effectuate the bribe, including use of a code phrase to

signal that McLaughlin and Mr. Parlante could continue their

discussions in private.

Respondent and McLaughlin thereafter spoke on the

phone to discuss the subpoena involving the Parlantes and the

possibility of payments from the Parlantes. Respondent also gave

McLaughlin instructions on how to accept the payment from

John Parlante, including instructions "to be careful what [he] said

with him" and not to leave any evidence of a bribe amount on

paper. (Transcript Vol. I at 146-148). On October 20, 1988,

McLaughlin met with Mr. and Mrs. Parlante to discuss the IRS

subpoenas. During the meeting, John Parlante, following

Respondent’s specific ir.structions, offered to pay McLaughlin

$25,000 in cash to terminate the IRS investigation of the

Parlantes. At the same meeting, Mr. Parlante paid McLaughlin

$20,000 in cash. On October 27, 1988, Mr. Pariante paid

McLaughlin an additional $5,000 in cash to terminate the IRS

investigation.

Following the October 20, 1988, payment by the

Parlantes, McLaughlin spoke bv phone with Respondent on

several occasions. Respondent was advised by McLaughlin of the

payment by the Parlantes and encourage McLaughlin to ask the

Parlantes for more money. He took credit for advising John

Parlante how to effectuate the bribe, stating, "I coached him

everything that he did to you today." (OTS Exhibit 12 at 14).

Respondent also encouraged McLaughlin to pay Fodera $2,500

in cash for Fodera’s role in obtaining the payment from the

F

i

E

A39

Parlantes.

On November 2, 1988, McLaughlin telephoned

Respondent and agreed to meet Respondent and Fodera. At the

meeting, Respondent, Fodera and McLaughlin discussed the

Parlante payment, and McLaughlin paid $2,500 to Fodera.

IV. ISSUES

This proceeding raises severai issues, including: (1)

whether the violation of a criminal statute may serve as the basis

for a removal and prohibition order under 12 U.S.C. Sec.

1464(d)(4)(A) and if so, whether the evidence adduced in this

action demonstrates a violation of law; (2) to what extent the

“violation of law" provision in the removal and prohibition statute

requires misconduct relating to the specific institution; and (3)

whether the ALJ properly interpreted the phrase “that the

interest of [the] savings account holders could be seriously

prejudiced by reason of such violation . . . .," and properly

evaluated Enforcement’s evidence of potential or actual prejudice

based on Respondent’s 1990 arrest and indictment.

V. DISCUSSION

A. Statutory Background

The OTS’s authority to bring this action against

Respondent is founded on provisions existing both prior to the

enactment of, as well as those included in, the Financial

Institutions Reform, Recovery and Enforcement Act of 1989 .

("FIRREA"), P.L. No. 101-73, 103 Stet. 183 (1989).4 The:

current version of the removal and prohibition statute appears in

section 8(e) of the Federal Deposit Insurance act ("FDIA"), 12

U.S.C. Sec. 1818(e) (Supp. v. 1993). The remedies established by

FIRREA may be applied to conduct that occurred before the

4 The OTS is the “appropriate Federal banking agency" with

regard to Cross County and Cousin. 12 U.S.C. Sec. Sec. 1813(q),

1818(1)(3).

A40

Statute was passed, but the substantive standards for judging

Respondent's conduct are those found in the law in effect during

the time of the conduct complained of, that is, former 12 U.S.C.

Sec. 1464(d)(4)(A) (1982). See In re Keating, OTS order No.

AP 91-20 (May 11, 1991) at 17-23; In re O'Keeffe, OTS order

No. AP 90-661 (April 26, 1990) at 13-15.

Before turning to the analysis of the removal and

prohibition charges at issue, the Acting Director notes that the

statutory scheme for removal and prohibition involves additional

provisions necessary for an understanding for this proceeding.

The provisions appear in the enforcement statutes applicable to

the agency existing both before and after the enactment of

FIRREA.

Under section 8(g)(1)(A) of the FDIA, an institution-

affiliated party charged with (1) a crime involving dishonesty or

a breach of trust which is punishable by imprisonment for a term

exceeding one year under state or federal law, or (2) a criminal

violation of certain enumerated provisions of Titles 18 or 31 of

the United States Code, may be summarily suspended and/or

prohibited by the OTS if the agency determines that such

individual's continued service or participation may pose a threat

to the interests of the depositors or may threaten to impair publig

confidence in the association. 12 U.S.C. Sec. 1818(g)(1)(A).

Such suspension or prohibition remains in effect until the final

disposition of the charge or until terminated by the agency. 12

U.S.C. Sec. 1818(g)(1)(B).

Similarly, if an institution-affiliated party is convicted of

a crime involving dishonesty or a breach of trust which is

punishable by imprisonment for a term exceeding one year under

state or federal law, the OTS, upon a finding that continued

service or participation by the individual may pose a threat to the

> The institution-affiliated party may request a hearing after

the issuance of the notice of suspension or prohibition. 12 U.S.C.

Sec. 1818(g)(3)

A4l

interests of the association's depositors or may threaten to impair

public confidence in the association, may issue without prior

hearing, an order of removal or prohibition. 12 U.S.C. Sec.

1818(g)(1)(C)(i). In the event of a conviction for a violation of

the enumerated provisions of Titles 18 and 31, the agency is

required to order summarily the individual's removal or

prohibition. 12 U.S.C. Sec. 1818(g)(1)(C)(ii).

The statute also provides that the fact that an individual

is found not guilty of the charge, or the charge is otherwise

disposed of, does not preclude the OTS from thereafter

instituting a proceeding seeking the individuals’s permanent

removal and prohibition under section 8(e) of the FDIA. 12

U.S.C. Sec. 1818(g)(1)(D)(ii).

For conduct that occurred prior to the passage of the

FIRREA, the OTS is authorized to issue a removal and

prohibition order where an officer or director has, in pertinent

part:

(a) committed any violation of law or regulation;

or

(b) engaged or participated in an unsafe or

unsound practice in connection with the

institution; or

(c) committed or engaged in any act, omission, or

practice which constitutes a breach of his

fiduciary duty as such officer or director.

;

|

© The statute authorizes a post-order hearing at the request

of the individual. 12 U.S.C. Sec. 1818(g)(3)

y Substantially similar provisions were in effect pre-FIRREA

under 12 U.S.C. Sec. 1464(d)(5).

A42

Second, as a result of such misconduct, the institution

must either:

(a) have suffered or will probably suffer

substantial financial loss or other damage, or

(b) the interests of its savings account holders

could be seriously prejudiced by reason of the

misconduct; or

(c) respondent received financial gain from the

misconduct.

Finally, the misconduct must evidence either:

(a) personal dishonesty on the part of

respondent; or

(b) a willful or continuing disregard for the safety

or soundness of the institution.

12 U.S.C. Sec. 1464(d)(4)(A) (1982)(repealed).8 The first

8 The current standard for removal and prohibition is set

forth in 12 U.S.C. Sec. 1818(e). In most respects it is similar,

although not identical, to the standard contained in sec.

1464(d)(4)(A).

Section 1818(e)(1) presently provides that the appropriate

federal banking agency may serve a notice of removal/prohibition

whenever it determines that any (I) institution-affiliated party has,

directly or indirectly, (a) violated (1) any law or regulation; (2)

any cease-and-desist order which has become final; (3) any

condition imposed in writing by the appropriate Federal banking

agency in connection with the grant of any application or other

request by such depository institution; or (4) any written

agreement between such depository institution and such agency;

(b) engaged or participated in any unsafe or unsound practice in

connection with any insured depository institution or business

institution; or (c) committed or engaged in any act, omission, or

A43

element identifies three independent types of misconduct, the

latter two of which contemplate misconduct relating directly to

the institution at issue. The second element identifies three

alternative effects of the misconduct, including potential serious

harm to the association. Finally, the last element identifies two

separate aspects of culpability, the latter of which relates to the

subject institution. These three categories of requirements may

be referred to respectively as "misconduct," “effects” and

culpability." See Oberstar v. FDIC, 987 F.2d 494, 500 (8th Cir.

1993) (construing substantially identical language in 12 U.S.C.

Sec. 1818(e)).

B. Count I: Respondent’s 1987 and 1988 Bribes of a

Federal Official

1. Misconduct

a The 1987 Conduct

i The Bribery Charge

With regard to the first clement, the underlying

misconduct, Enforcement charged that Respondent twice bribed

McLaughlin in 1987 and 1988 in violation of 18 U.S.C. Sec.

201(b)(1)(C). Section 201(b)(1)(C) imposes criminal penalties on

whoever:

practice which constitutes a breach of such party's fiduciary duty;

(II) by reason of such violation. Practice or breach, (a) such

insured depository institution or business institution has suffered

or will probably suffer financial loss or other damage; (b) the

interests of the insured depository institution's depositors have

been or could be prejudiced: or (c) such party has received

financial gain or other benefit: and (III) such violation, practice

or breach either involves personal dishonesty on the part of such

party or demonstrates willful or continuing disregard by such

party for the safety or soundness of such insured depository

institution or business institution. 12 U.S.C. Sec. 1818(e)( 1).

A44

(1) directly or indirectly, corruptly gives, offers or

promises anything of value to any public official

or person who has been selected to be a public

official, or offers or promises any public official or

person selected to be a public official to give

anything of value to any other person or entity,

with intent -- ...

(c) to induce such public official or such person

selected to be a public official to do or omit to do

any act in violation of the lawful duty of such

official or person; . ..

18 U.S.C. Sec. 201(b)(1)(C). See United States v. Gallo, 863

F.2d 185, 189 (2d Cir. 1988), cert. denied, 489 U.S. 1083 (1989)

(bribery has been committed where something of value is offered

or promised with intent to influence any official act). A bribe is

distinguishable from an otherwise lawful expenditure to foster

goodwill insofar as a bribe is made with "criminal intent that the

benefit be received by the official as a guid pro quo for some

official act, pattern of acts, or agreement to act favorably to the

donor when necessary.” United States v. Head, 641 F.2d 174,

180 (4th Cir. 1981), quoting United States v, Arthur, 544 F.2d

730, 735 (4th Cir. 1976).

The element of criminal or "corrupt" intent that must be

proved for a bribe is a higher degree of intent than that which is

required under the provision that prohibits illegal gratuities.

United States v. Hsich Hui Mei Chen, 754 F.2d 817, 822 (9th

Cir.), cert. denied, 471 U.S. 1139 (1985), citi ited States v.

Strand, 574 F.2d 993, 995 (9th Cir. 1978).” A defendant’s

awareness of the illegality of the transaction is evidence of

corrupt intent. Id.

The Acting Director rejects the ALJ's conclusion that the

9 Section V.B.1.a.ii infra discusses the lesser included offense

of giving an “illegal gratuity."

— ee

A45

evidence fails to establish that Respondent violated 18 U.S.C.

Sec.201(b)(1)(c). While the evidence concerning the 1987 bribe

is largely circumstantial, it is nonetheless clear that Respondent

paid McLaughlin to terminate the IRS investigation in 1987. The

evidence meets each of the four elements of a bribe -- (i)

corruptly (ii) giving something of value (iii) to a government

official (iv) to induce the official to act or omit to act in violation

of his lawful duty. Respondent gave something of value -- $1,750

in cash, as well as a bar of silver bullion -- to McLaughlin, a

government official.

Additionally, the evidence in the record, and

Respondent's failure to rebut such evidence, also demonstrates

that Respondent acted with the intent to induce McLaughlin to

breach his lawful duty."” Respondent's statement to

McLaughlin -- an IRS agent with whom he had no previous

dealings -- that Respondent did not need an attorney and that he

would give McLaughlin half the money that it would have cost

10 The evidence relating to the bribery charge is primarily

based on McLaughlin's testimony and transcripts of the taped

conversations between McLaughlin and Respondent. The ALJ

found McLaughlin to be a credible witness. R.D. at 13 n.7.

Given the ALJ's first-hand observations of the witness’ demeanor,

the Acting Director defers to the ALJ’s determination.

Respondent failed to provide any witnesses on his own

behalf, including himself. The Acting Director is entitled to draw

an adverse inference from Respondent’s failure to testify on his

own behalf. See Director oO ift ision Vv. Zz

960 F.2d 958, 965 (11th Cir. 1992); N. Simms Organ & Co. v.

Securities and Exchange Commission, 293 F.2d 78, 80-81 (2d Cir.

1961), cert. denied, 368 U.S. 968 (1962).

The Acting Director also notes that Respondent's

repeated factual cites in his pleadings to the "totality of the

evidence” is neither probative nor illuminating and fails to

comport with the requirements of specificity set forth in 12

C.F.R. Sec. 509.39(b).

A46

for an attorney, and his later affirmative response to

McLaughlin’s question whether they "still got a deal," admit of

only one interpretation: Respondent wanted McLaughlin not to

execute the subpoena, as McLaughlin’s duty required him to do.

The next day, Respondent gave an envelope full of money to

McLaughlin. It was McLaughlin’s uncontroverted testimony that

he comprehended that Respondent’s offer to donate money to

McLaughlin’s favorite charity (instead of retaining an attorney)

was in exchange for abandoning the subpoena. Indeed,

Respondent understood that he had offered McLaughlin a bribe,

as he later admitted to John Parlante that he had previously

bribed McLaughlin and advised John Parlante that “you have to"

bribe the agent. (Transcript Vol. II at 417).

Further, Respondent’s repeated efforts to conceal his

communications with McLaughlin establish that he acted

corruptly. Respondent was careful not to express the terms of

the bribe more clearly, given his oft-stated concerns that the IRS

might be surreptitiously recording his conversations with

McLaughlin. Similarly, Respondent cautioned McLaughlin to not

count the money in the envelope openly. Respondent's concerns

and attempts to avoid surveillance demonstrate that he was aware

of the illegal nature of his actions and was acting corruptly.

Respondent provides no_ creditable, alternative

explanation of his behavior and the Acting Director is unable to

discern one. The only apparent purpose was to obtain favorable

treatment from McLaughlin in the course of the IRS

investigation. Based on a preponderance of the evidence, the

Acting Director concludes that Respondent believed he would

not need an attorney because he would be able to successfull;

bribe McLaughlin; that the giving of money to McLaughlin was

an effort to terminate the IRS inquiry; that the “deal”

Respondent negotiated was the classic quid pro quo contemplated

by section 201(b)(1)(C) and that Respondent acted corruptly.

The ALJ’s statement that the evidence was insufficient to

find a violation of law for the 1987 conduct appears to be based

largely upon the weight he gave to the testimony of Ronald

Fanelli ("Fanelli"), McLaughlin’s supervisor. Fanelli testified that

A47

: he believed the evidence was "iffy" to support a criminal

: prosecution based on the bribery statute. Although it is unclear

i whether the ALJ was relying on Fanelli’s legal or factual

: conclusions, or both, the ALJ’s determination is flawed for

several reasods.

First, the ALJ should not have relied on Fanelli’s legal

conclusions because, other than expert testimony, it is

inappropriate to take evidence on the legal significance of

particular facts. Here, Fanelli was not called to provide expert

testimony on whether a criminal prosecution could be sustained

against Respondent. Moreover, since Fanelli was discussing the

possibility of criminal prosecution, the ALJ wrongfully applied the

standard of proof required by a criminal proceeding -- beyond a

reasonable doubt -- to a civil administrative action, which only

requires a preponderance of the evidence.

Second, as a factual matter, Fanelli’s individual opinion

that the evidence was "iffy" to support a criminal bribery

prosecution is wholly irrelevant because Respondent was in fact

ultimately charged and indicted by a grand jury for bribery on

these facts. Furthermore, Fanelli’s opinion is not direct evidence

of what transpired.

To the extent the ALJ's finding of insufficient evidence

of a bribe in 1987 was based on evidence other than Fanelli’s

testimony, the Recommended Decision does not identify such

evidence. Based on the Acting Director's independent review of

the evidence, summarized above, he concludes that it was error

for the ALJ to determine that no bribe had occurred, and that

the evidence is compelling that Responden: bribed McLaughlin

in 1987.

ii. The Illegal Gratuity Charge

The evidence also demonstrates that Respondent

committed the additional offense of offering a federal official an

A48

illegal gratuity in 1987.1! Section 201(c)(1)(A) imposes criminal

penalties on whoever:

directly or indirectly gives, offers or promises

anything of value to any public official, former

public official or person selected to be a public

official for or because of any official act

performed or to be performed by such public

official, former public official or person selected

to be such public official.

18 U.S.C. Sec. 201(c)(1)(A). Unlike bribery, the crime does not

require corrupt intent. United States v. Strand, 574 F.2d at 995.

The Acting Director concludes that Respondent violated

section 201(c)(1)(A) as well. There are essentially three

elements of the offense of giving an illegal gratuity: (i) the giving

of something of value (ii) to a government official (iii) for or

because of an official act. The first two elements are clear. It is

undisputed that Respondent gave something of value -- $1750 in

cash and the bar of silver bullion -- to McLaughlin, a government

official.

1 Although not alleged in the Notice of Charges, at hearing

Enforcement offered evidence that Respondent's conduct also

violated the section of the statute prohibiting the giving of an

illegal gratuity. Under 12 C.F.R. Sec. 509.20(b), the Notice is

automatically amended to encompass the proof at hearing.

Enforcement’s alternative argument that if the misconduct in

June 1987 did not constitute a bribe, it did constitute an illegal

gratuity, was not challenged at the hearing. Rule 20(b) states

"[w]hen issues not raised in the notice or answer are tried at the

hearing by express or implied consent of the parties, they will be

treated in all respects as if they had been raised in the notice or

answer, and no formal amendments are required." See

Recommended Decision at 16 n.12.. The ALJ correctly

determined that the pleadings are deemed to conform to the

proof offered at hearing.

A49

All of the record evidence indicates that Respondent did

so because of an official act McLaughlin was to perform --

execution of the subpoena. Prior to service of the EAB

subpoena, McLaughlin and Respondent were not friends or even

acquaintances. The interaction between Respondent and

McLaughlin arose solely as a result of the IRS’s investigation.

After a handful of contacts -- ail concerning Respondent’s

compliance with the investigation -- Respondent suddenly gave

McLaughlin a substantial amount of cash. McLaughlin was not

entitled to these gifts in the course of his duties as an IRS agent.

The elements of an illegal gratuity have thus been proven.

Again, based on his independent review of the evidence, the

Acting Director concludes that it was error for the ALJ to

determine that no illegal gratuity had been given, and that the

evidence demonstrates that Respondent provided McLaughlin

with an illegal gratuity. !

b. The 1988 Conduct

Respondent again violated the anti-bribery statute in

1988 in his attempts to circumvent the subpoena issued to

AQTR. In a meeting at Cross County, Respondent gave

McLaughlin an envelope with $6,500! and repeatedly told

12 The Acting Director rejects the ALJ’s deference to

Fanelli’s testimony on this element as well, in light of the

infirmities discussed above.. Furthermore, Fanelli did not opine

specificaliy on whether Respondent’s conduct constituted the

giving of an illegal gratuity, other than to indicate that in his

opinion Respondent’s conduct was more in the nature of an

illegal gratuity than a bribe.

13 Respondent originally told McLaughlin that Respondent

was paying $5,000 and his partner in AQTR the remaining

$1,500; however, Respondent later admitted to McLaughlin that

it was all Respondent’s money.

ASO

McLaughlin he "wanted this stopped" and "didn’t want to hear

anymore" about the investigation. McLaughlin understood from

the discussion that Respondent wanted McLaughlin to "kill the

investigation” and that Respondent “didn’t want to be bothered

with it anymore." It was McLaughlin’s official duty to pursue the

investigation and compliance with the subpoena.

Under the standards discussed above -- corruptly giving

something of value to a government official to induce a violation

of the official’s duty -- the evidence demonstrates that

Respondent gave McLaughlin $6,500 to terminate the

investigation attendant to the AQTR subpoena. As Respondent

did so, he took steps to communicate the proposed amount of the

bribe in a concealed manner, that is, corruptly. From these facts,

the Acting Director finds that Respondent violated 18 U.S.C. sec.

201(b)(1)(C).

The evidence also demonstrates that Respondent thereby

committed the additional offense of giving an illegal gratuity to

a government official. Respondent gave $6,500 to McLaughlin

for the stated purpose of "stopping" the investigation. The Acting

Director thus finds that Respondent violated 18 U.S.C. sec.

201(c)(1)(A) as well.

c. Respondent’s Defenses to the Violations of Law

The Acting Director rejects Respondent's argument that

the statute is intended to reach violations of banking law only,

and that this case raises this as a question of first impression.

It is a well settled principle of statutory construction that

the plain language of the statute controls its interpretation. See

American Tobacco Co. v. Patterson, 456 U.S. 63, 68 (1982). This

statute provides expressly that removal and/or prohibition may be

predicated in part on “any violation of law, rule OF regulation..."

12 U.S.C. Sec. 1464(d)(4)(A) (emphasis added). !4 By its plain

14 The post-FIRREA version of section 1818(e) contains

identical language; accordingly, this reasoning applies to the

Statute as amended by FIRREA as well.

AS1

language, the scope of this provision is not limited to violations

of banking-related laws.

Had Congress intended to so limit the reach of this

provision to only certain types of offenses, it could have easily

done so. Indeed, Congress had, prior to the enactment of

FIRREA, provided for the prohibition of bank officials who had

been convicted of crimes involving dishonesty or a breach of

trust. pec 12 U.S.C. Sec. 1464(d)(12)(B); 12 U.S.C. Sec. 1229

(1982)"" Congress has since enumerated additional specific

types of crimes thai would subject an institution-affiliated party

to suspension, removal or prohibition. See 12 U.S.C. Sec.

1818(e)(2). It is thus clear that when Congress wanted to limit

particular suspension or removal provisions based on certain types

of misconduct, it identified such misconduct specifically.

The Acting Director does not sit as a criminal tribunal

competent to order criminal sanctions and here, no criminal

penalties are sought or imposed. The OTS, however, is

statutorily empowered to impose a remedy pursuant to Sec.

1464(d)(4) and Sec. 1818(e), which permit the Acting Director to

order removal and/or prohibition based upon any violation of law,

whether civil or criminal. Accordingly, the violation of a criminal

statute -- albeit evaluated under civil standards for a civil remedy

~- May serve as the basis for a removal and prohibition order

under 12 U.S.C. Sec. 1464(d)(4)(A). See Van Dyke v. Board f

IS As discussed below, of course, Respondent's violation of

law could seriously prejudice the interests of Cross County’s

depositors and thus satisfies the "effects" test of section

1464(d)(4)(A).

16 The first statutory provision applied solely to Savings and

loans; the latter applied to banks. See also 12 U.S.C. Sec.

1464(d)(4)(C)(suspension or removal/prohibition for violations of

the Depository Institutions Management Interlocks Act).

AS2

Governors of the Federal Reserve System, 876 F.2d 1377 (8th

Cir. 1989)(bank president removed under 12 U.S.C. Sec.

1818(€)(1) based on check kiting violation under 18 U.S.C. Sec.

1344).

The Acting Director also rejects Respondent’s claim that

he was entrapped into committing bribery. A valid entrapment

defense contemplates: (1) inducement by law enforcement

officers and (2) lack of predisposition by the defendant to commit

the crime. See e.g., Matthews v. United States, 485 U.S. 58, 63

(1988). Respondent has not established either element here.

While the government may use undercover operations to

enforce the law, it may not "originate a criminal design, implant

in an innocent person’s mind the disposition to commit the act,

and then induce the commission of the crime so the government

may prosecute." See Jacobson v. United States, U.S. , 112

S.Ct. 1535, 118 L.Ed.2d 174, 184 (1992). The record is clear that

the idea to bribe McLaughlin originated with Respondent, not

with McLaughlin. Here, the chain of events was commenced by

the proper issuance of a subpoena. It was Respondent’s

improper response to that subpoena, ie., the bribe overture to

McLaughlin, that caused the IRS to conduct the undercover

operation. As part of such operation, McLaughlin agreed to

Respondent’s plan. McLaughlin did not initially solicit, propose,

initiate, broach or suggest that he would be amenable to

accepting a bribe. See United States v. Dunn, 779 F.2d 157, 158

(2d Cir. 1985). The record does not reflect that Respondent

lacked predisposition, or was induced by McLaughlin, to commit

17 The Acting Director’s findings do not expose Respondent

to additional criminal liability. Clearly, the Acting Director’s

findings herein could not be used against Respondent in a

criminal proceeding because of the different standards of proof.

See e.g., United States v. Konovsky, 202 F.2d 721 (9th Cir. 1953).

In any event, the statute of limitations has apparently

expired on most if not all of the crimine! claims filed against

Respondent. Cousin, 840 F.Supp. at 11.

A53

the crime as the entire bribery scheme was caused by his design

and overtures.

Finally, Respondent claims that he was the victim of

Outrageous government conduct. Having considered the

submissions of the parties and the ALJ’s Recommended Decision

on this point, the Acting Director dismisses this claim as baseless.

2. Effects of Respondent’s Misconduct on the

Association

The ALJ found generally that Enforcement did not prove

the "effects" requirement because he concluded the testimony of

Michael Simone ("Simone"), an Assistant Director in the OTS

Northeast Region, was insufficient to show that the actual or

potential harm caused by Respondent’s activities to the institution

was "substantial.”! Although it is unclear whether the ALJ was

focusing on financial loss or other harm, the record reflects

sufficient evidence that by virtue of Respondent’s attempted

bribes, the interests of the depositors could be seriously

prejudiced.

An interpretation of this provision must commence with

the plain language of the statute. See American Tobacco Co.,

456 U.S. at 68. This prong of the second element requires that

the "interests of [the depositors] could be seriously prejudiced.:

12 U.S.C. sec. 1464(d)(4)(A)(emphasis added). ! Congress, by

18 The Acting Director notes that the ALJ did not fail to

credit Simone’s testimony, nor did he find it outweighed by other

witnesses’ testimony. Accordingly, in assessing Simone’s

testimony, the Acting Director believes it is a straightforward

matter to compare the testimony and the supporting evidence to

the appropriate legal standard.

19 The corresponding post-FIRREA statute reads: "the

interests of the depositors have been or could be prejudiced.” 12

U.S.C. Sec. 1818(e)(1)(B).

AS4

including the word "could," clearly intended that the statute reach

not only immediate but also potential harm. As the Federal

Deposit Insurance Corporation ("FDIC") noted in the context of

a proceeding to uphold a suspension order:

Were it otherwise, the [FDIC] would have to wait

until loss or damage to a bank or its depositors

had occurred, or confidence had been impaired, and

would not be able to act to prevent such loss or damage,

or impairment of confidence. Such would be ineffective

regulation and was not the intention of Congress.

In re Anonymous, FDIC Docket No. FDIC-84-86g (July 30,

1984), reprinted in FDIC Enforcement Decisions and Orders,

Vol. 1 (bound) para 5027 (Prentice Hall). Accord Van Dyke v.

Board of Gov. of the Fed. Reserve, 876 F.2d at 1377 (banking

agencies are not powerless to respond to official's illegal activity

until actual harm to institution occurs). Cf. Saratoga Savings and

Loan v. Federal Home Loan Bank Board, 879 F.2d 689, 693 (9th

Cir. 1989)(cease-and-desist provision of statute was intended to

authorize federal Banking agencies to curtail abuses before they

harm institution).

The removal and prohibition provision does not identify

specifically what constitutes "serious prejudice" to the interests of

the depositors. As a matter of statutory interpretation, “serions

prejudice” must contemplate something in addition to “substantial

financial loss or other damage"“" or the second element of this

provision would be redundant. Such an interpretation is

inconsistent with the principle that statutes should be read to give

meaning to each independent statutory provision. See, ¢.g.,

United States v. Nordic Village, =» ~U.S.__, 112 S.Ct. 1011,

1015, 117 L.Ed.2d 181 (1992).

20 ‘This alternative element of the "effects" test appears in

Sec. 1464(d)(4)(A). Section 1818(e) is identical except it omits

the word “substantial.”

se ntl? te dah da

ASS

The Acting Director notes that the FDIC has indicated

that "serious prejudice" to the interests of the depositors may be

caused by inter alia, engaging in conduct that harms the

reputation of the institution, causing loss of confidence to

depositors, among others. See In re James G. Welk, FDIC

Docket No. 91-20le (October 13, 1992),

reprinted in FDIC.

Enforcement Decisions and Orders, Vol. 1, para 5186 (Prentice

Hall). The Acting Director similarly concludes that Congress,

intending this section to have broad coverage, drafted the phrase

to include conduct whose consequences, even if not immediate,

could seriously harm the financial institution or its depositors.

That is, conduct that injures the reputation of the institution or

that otherwise would persuade a depositor that his or her funds

were subject to a substantial risk is conduct within the "serious

prejudice" standard, even if an immediate dollar effect cannot be

quantified.

Enforcement’s evidence satisfies this standard in two

respects. First, Simone’s testimony established that Respondent's

conduct harmed the institution’s reputation, with the potential for

serious risk to the interests of the depositors. OTS officials, such

as Simone, possess the requisite expertise and familiarity with the

thrift industry to make such predictive judgments. See Franklin

Savings Ass’n v. Director, Office of Thrift Supervision, 934 F.2d

1127, 1146 (10th Cir. 1991), cert. denied, U.S. , 112S.Ct.

1475 (1992).*!

21 “Administrative agencies are afforded wide deference in

predicting the likelihood of future events." Michigan Pub. Power

vy. Federal Energy Regulatory Comm'n, 963 F.2d 1574,

1580 (D.C. Cir. 1992). Evidence reflecting the basis for the

OTS'’s predictive judgment concerning the potential for harm to

the Association is entitled to weight as a matter particularly

within the expertise of the agency.

The Acting Director finds Respondent's citation to

United States v. Sette, 334 F.2d 267 (2d Cir. 1964) inapposite, as

Sette involved expert testimony by the same agents who

conducted the investigation; was rendered prior to the adoption

of the Federal Rules of Evidence; and did not involve an

A56

Here, the misconduct involved bribery, which arose as an

illegal response to a legitimate law enforcement inquiry. Simone

testified that serious charges like bribery against a bank officer

have a significant impact on public confidence in financial

institutions, and that depositors have concerns about leaving

money in an institution where questions have been raised

regarding that institution’s management -- particularly where, as

here, Respondent committed the unlawful conduct on the

Association’s premises. A loss in public confidence could result

in a run on the institution and losses to the association and

ultimately to the deposit insurance fund. As the FDIC has noted:

Ordinary bank customers «sid the general public

must be able to view a bank’s vice president and

director as a trustworthy person without doubt or

uncertainty. Where charges of dishonesty and the

submission of false statements involving money

have been preferred [sic] by a Grand Jury against

a bank official there is an obvious potential for

doubt and uncertainty. Such may impair public

confidence and damage a bank. It is not too

much to require that a bank’s officers and

directors be above suspicion.

In re Anonymous, FDIC Docket No. FDIC-84-86g (July 30,

1984), reprinted in FDIC Enforcement Decisions and Orders,

Vol. 1, para.5027 (Prentice Hall). Moreover, as Simone testified,

criminal conduct by banking officials damages the public's

perception of the integrity of the entire banking system, because

customers tend to relate what happens at one institution to all

other types of institutions.

Second, Respondent’s illegal conduct damages the bank

official’s credibility with its regulator and interferes with the

federal regulatory process, with the consequence that no

depositor can be confident that his or her deposits enjoy the

safeguards the regulatory system provides. (Transcript Vol. II at

adjudicatory proceeding such as this.

AS7

487). The need for honest and accurate communications between

a thrift and its regulator is paramount to the proper operation of

the industry. See 12 C.F.R. Sec. 563.180(b); OTS Statement

reprinted in Federal Guide, para

36,485 (November 18, 1992) [hereinafter "Statement of Directors

and Officers Responsibilities"]. Effective communication is

seriously jeopardized by the efforts of an association's chief

executive officers to obstruct a lawful government inquiry. In this

case, the evidence is compelling that Respondent intended to do

exactly that. In the Acting Director's judgment, Respondent's

interference with a lawful IRS investigation could destroy

whatever confidence depositors might have that Respondent

would communicate with regulators with the requisite candor.

Their deposits would be subject to a substantially greater risk

than at an institution where the management cooperated with

government oversight. This prejudice to the interests of the

depositors is underscored where, as here, Respondent was directly

running the Association and illegal activities attribyted to him

could have a significant impact on Cross County.“* Thus, the

interests of Cross County’s depositors could be seriously

prejudiced by Respondent's wrongful acts.

Accordingly, the Acting Director concludes that the ALJ

erred when he found the Enforcement had not met the "effects"

test for Count I. Simone’s testimony was sufficient to show that

the potential effect of Respondent's unlawful conduct could

seriously prejudice the depositors’ interests. Additionally, it is

clear to the Acting Director that an officer and director who

undertakes to impede a government investigation erodes the

confidence that depositors are entitled to have in the institution,

and threatens the kind of honest and accurate communications

that regulators require.

The presence or absence of demonstrable significant loss

is not dispositive since this element also encompasses potential

22 Respondent himself contended that "Cross County is the

lengthened shadow of Michael Cousin.” Answer at pg. 4.

AS8

serious harm. In fact, where the statutory scheme is operating

most efficiently, wrongdoers may be removed before they cause

losses to the association and the federal insurance fund. Here

Respondent was suspended before his misconduct was permitted

to cause an immediate financial loss to the Association, on the

grounds that the attendant loss of public confidence in the

management of Cross County would, if left unremedied,

ultimately result in detriment to the institution and to some

extent the industry as a whole.

There is some evidence that significant loss would have

resulted from Respondent's misconduct. During the period 198-

1992, the Association had generally experienced an increase in

assets and deposits. During the period June-December 1990,

which includes the time when Respondent was arrested and

suspended in August 1990, Cross County experienced a decline

in assets in the amount of $900,000 and a decline in deposits in

the amount of $350,000. (Transcript Vol. III at 685-686).

Respondent presented no evidence to rebut the inference that

this sudden decline was due to the publicity surrounding the

charges lodge against Respondent. It was reasonable to expect

that had Respondent not been suspended at that point, the

deterioration of public confidence in the Association would have

been more severe and the withdrawals could have been

significant. The fact that the statutory scheme was effective in

this instance, Le., that it prevented substantial financial loss or

other damage to the Association by the immediate suspension of

Respondent, does not counsel permitting Respondent to continue

his association with the institution.

The ALJ erroneously concluded that "serious prejudice"

to the interests of depositor could not be demonstrated in light

of the existence of federal deposit insurance, which is intended

to protect deposits up to a designated amount in the event the

institution becomes insolvent. Federal deposit insurance,

however, existed in 1966 when Congress amended section 1464

to include removal and/or prohibition authority. Following the

ALJ's logic, “serious prejudice" to the interests of the depositors

could thus never be proven. Surely the statute should not be

interpreted to render the amendment meaningless. See Montana

AS9

Vv » 472 U.S. 237, 249-

50 (1985). Accordingly, the Acting Director concludes that the

existence of deposit insurance does not eliminate the possibility

of "serious prejudice."

The Acting Director rejects the argument that the

"effects" test requires more immediate or direct impact upon the

association than establishment of the possibility of serious

prejudice to the interests of the institution's depositors. Congress

simply did not draft section 1464 to impose such a requirement.

Moreover -- and contrary to Respondent's assertions --

bank officials who have engaged in illegal activities not directed

at the association with which they were employed have been

relieved of their responsibilities under analogous statutory

provisions. See, e¢.g., In re Anonymous, FDIC Docket No. FDIC-

84-86 (July 30, 1984), i fe) nt isio

and Orders, Vol. 1 para 5027 (Prentice Hall)(suspension order

based on criminal indictment for personal income tax evasion);

Van Dyke, 876 F.2d 1377 (removal and prohibition order based

on Official’s participation in criminal check kiting scheme

involving his and another institution).

3. Respondent’s Culpability

The Acting Director also concludes that Respondent’s

illegal conduct involves "personal dishonesty." _ Personal

dishonesty encompasses a broad range of conduct, including

"disposition to lie, cheat[,] or defraud: untrustworthiness; lack of

integrity; . . . misrepresentation of facts and deliberate deception

by pretense and Stealth[;]. . . for] want of fairness and

[straightforwardness].". Van Dyke, 876 F.2d at 1379. See also

Financial Institutions Supervisory and Insurance Act of 1966:

Hearing on S.3158 and $.3695 Before the Committee on Bankin

and Currency, House of Representatives, 89th Cong., 2d Sess. 53

(1966) (statement of Chairman Horne and Kenneth E. Scott,

General Counsel of the Federal Home Loan Bank

Board)("personal dishonesty” encompasses primarily, but not

exclusively, conduct actionable under state and federal criminal

Statutes).

A60

Bribery of a government official demonstrates, among

other things, a lack of integrity. As discussed above, banking

officials are placed in a position of trust and responsibility over

the finances and affairs of their depositors and customers.

Respondent's attempts to illegally thwart a law enforcement

investigation demonstrate untrustworthiness and a want of

integrity. See Van Dyke, 876 F.2d 1377. The Acting Director

concludes that such activity evidences "personal dishonesty" under

12 U.S.C. sec. 1464(d)(4)(A).

The ALJ concluded that the “personal dishonesty"

element must be related to activities concerning the association,

and determined that in this case it was not. The ALJ erred in

concluding that the statutory requirement of "personal dishonesty”

was not met here. His requirement that the misconduct must

evidence personal dishonesty towards the association is not

founded in the statute. While the latter prong of this element (as

well as other aspects of the removal and prohibition statute)

contemplates misconduci directed at the association,“ the

former does not. The Acting Director defers to the plain

language of sec. 1464(d)(4)(A) and interprets “personal

dishonesty” as not limited to conduct directed at the association.

C. Count II: Respondent’s Aiding and Abetting the Bribery of

a Federal Official

The Acting Director affirms the ALJ’s conclusions

concerning Respondent’s liability under Count II. Because,

however, the ALJ’s analysis regarding the second and third

elements of the removal/prohibition analysis imposes standards

not required by the statute, the Acting Director does not adopt

his analysis.

23 The alternative prong focuses on a “willful or continuing

disregard for the safety or soundness” of the institution. 12

U.S.C. Sec. 1464(d)(4)(A).

A6l

1. Misconduct

The Acting Director finds that Respondent is culpable on

each independent section of the misconduct element.

A. Respondent violated the law

Respondent violated the law by aiding and abetting the

Parlante bribe of McLaughlin. Under 18 U.S.C. Sec. 2(a),

"[w]hoever commits and offense against the United States, or

aids, abets, counsels, commands, induces or procures its

commission, is punishable as a principal.” Liability as an aider

and abettor will lie where one has associated himself with a

criminal venture, participated in the venture, and sought by his

action to make the venture succeed. See United States v.

Menesses, 962 F.2d 420, 427 (Sth Cir. 1992), citing Nye & Nissen

v. United States, 336 U.S. 613 (1949); United States v. Teffera,

985 F.2d 1082, 1086 (D.C. Cir. 1993).

The record demonstrates that John Parlante gave

McLaughlin $25,000 in cash to stop the IRS investigation. John

Parlante testified that he has pled guilty to a charge of bribery,

and Fodera pled guilty to aiding and abetting the bribery of a

public official. The Acting Director concludes that the evidence

established that John Parlante committed bribery of McLaughlin

and that Respondent aided and abetted the Parlantes’ bribe. It

was Respondent who suggested the plan whereby the Parlantes

would bribe McLaughlin. Respondent gave McLaughlin

confidential information concerning the Parlantes. Respondent

arranged for Fodera to serve as an intermediary in the bribery

scheme. Respondent plotted with McLaughlin on numerous

occasions "how to go about it, when to subpoena them, whether

I should wait or do it sooner, do it later ...how we should

proceed." (Transcript Vol. 1 at 128). Respondent advised Joan

Parlante to offer a bribe to McLaughlin. Respondent instructed

John Parlante on how to offer a bribe and instructed McLaughlin

on how to accept it. Respondent encouraged McLaughlin to ask

the Parlantes for more money and encourage McLaughlin to pay

Fodera $2,500 in cash for Fodera’s role in the bribery scheme.

The record reflects that Respondent conceived and

A62

developed the bribery scheme. Afterwards, he was an active

participant in its execution and worked diligently toward its

success. While it is unclear precisely what motivated Respondent

to perpetrate his illegal scheme, it is clear that Respondent was

not motivated by a patriotic desire to report suspected income tax

evasion because it would not have been necessary to commit a

crime merely in order to report one. Nor did Respondent notify

the Association or the OTS of his suspicions. The record shows

that Respondent’s purpose in providing confidential customer

information to McLaughlin was to facilitate a bribery scheme.

The Acting Director thus finds that substantial evidence

demonstrates that Respondent committed a violation of law

within the meaning of 12 U.S.C. sec. 1464(d)(4)(A).

b. Respondent’s Defenses to the Vioiations of Law

For the reasons discussed above, the Acting Director

rejects Respondent’s argument that the statute does not reach

criminal violations of non-banking laws; that this case raises a

question of first impression; and that Respondent was entrapped,

and was the victim of government misconduct.

c. Respondent Committed an Unsafe or Unsound

Banking Practice

Respondent's actions also constitute an unsafe or unsound

practice. An unsafe or unsound practice is understood to have:

a central meaning which can and must be applied

to constantly changing factual circumstances.

Generally speaking, an “unsafe or unsound

practice" embraces any action, or lack of action

with is contrary to generally accepted standards of

prudent operation, the possible consequences of

which, if continue would be loss or damage to an

institution, its shareholders, or the agencies

administering the insurance fund.

Financia! Institutions Supervisory Act of 1966: Hearings on

S.3158 Before the House Committee on Banking and Currency,

A63

89th Cong., 2d Sess. at 49-50 (1966)(statement of Chairman

Horne), ci Vv

Treasury, 568 F.2d 610, 611 (8th Cir. 1978).

a ise, OTS Order No. Ap 94-23 at 29

n.47 (May 17, 1994)(appeal pending); ,

OTS Order No. AP 93-85 at 34-35 (October 22, 1993)(appeal

pending).

The evidence in this proceeding establishes that

Respondent abused his official position at Cross County to obtain

and improperly disclose confidential information from Cross

County’s files on the Parlantes, Exposing the Association to

abnormal risk of loss or damage.“ It is reasonable to expect

that bank customers will cease to conduct business with an

association that improperly publicizes confidential customers data.

As discussed above, withdrawal of deposits may cause a run on

the association which could in turn endanger the federal deposit

insurance fund. By his misconduct, Respondent put the interests

of the depositors and the insurance fund at risk.

Indeed, Congress enacted a statute with the express

purpose of protecting the confidentiality of bank customers. See

Right to Financial Privacy Act, 12 U.S.C. Sec.Sec. 3401 et seg.

("RFPA"). The RFPA permits release of personal financial

records to the federal government only in accordance with its

terms. Generally, the RFPA requires that customers notice be

given when a federal agency solicits an individual’s records from

a financial institution.” Respondent disregarded the

24 As with the "effects" test, it is significant that Congress did

not require proof of actual loss but rather intended the statute to

address the risk of, or potential for, loss.

25 The RFPA further requires such individuals to be given

opportunity to oppose the government's request for information.

There are a number of enumerated exceptions to these

requirements, including disclosure pursuant to a subpoena or

court order respecting grand jury proceedings, 12 U.S.C. Sec.

3413(i), or an administrative subpoena issued by an administrative

A64

requirements of RFPA in providing the Parlantes’ financial

information to McLaughlin. Respondent's disclosure does not

fall within the exceptions identified in the statute. Respondent

did not provide the information to McLaughlin in April 1988 in

response to an administrative subpoena, search warrant or judicial

subpoena. Nor did Respondent provide the information pursuant

to a lawful investigation directed at Cross County. Moreover, the

Parlantes neither consented to nor authorized the disclosure of

such information Consequently, the Acting Director accepts the

conclusion of the ALJ that the violation of a law designed to

protect bank customers is an unsafe or unsound practice.

The evidence on Count II also establishes that it was

Respondent, the chief executive officer of the institution, who

hatched the complicated bribery scheme and who drew Fodera,

a director, and the Parlantes, bank customers, into it. The

instigation of an unlawful scheme by the head of an insured

institution and his efforts to involve another director and bank

customers is exceptionally imprudent. The weaknesses in

management that such conduct reveals poses an abundant risk of

loss to the institution. For this reason as well, the Acting

Director concludes that Respondent committed an unsafe or

unsound practice.

Repeated violations of law constitute an unsafe or

unsound banking practice. See, e.g., In the Matter of Ronald

J.Grubb, FDIC Docket Nos. FDIC-88-282k and FDIC-89-1le

(August 25, 1992), reprinted in FDIC Enforcement Decisions and

Orders, Vol. 1 para 5181 (Prentice Hall). Here, Respondent’s

misconduct escalated over time in 1987 and 1988, culminating in

the Parlantes’ bribe. Respondent’s misuse of his official position

and his disregard for the proper use of bank information also

violated prudent standards of operation and were unsafe and

unsound. Furthermore, Respondent -- who essentially controlled

Cross County -- endangered the institution by placing his personal

interests before the interests of the depositors. By his

law judge. 12 U.S.C. Sec. 3413(f).

A65

misconduct, Respondent put the interests of the depositors and

the insurance fund at risk. The Acting Director thus concludes

that Respondent’s activities under Count II constituted an unsafe

or unsound banking practice.

d. Respondent Breached his Fiduciary Duties to the

Association

Officers and directors of an insured depository institution

owe fiduciary duties to that association. See, ¢.g., Bowerman v.

Hamner, 250 U.S. 504, 510 (1919); Briggs v. Spaulding, 141 U.S.

132, 146, 152 (1891); Brickner v ._ Ins. Corp., 747

F.2d 1198, 1202 (8th Cir. 1984); In re Neil Bush, OTS Order No.

AP 91-16 (April 18, 1991). Officers and directors of thrifts must

discharge duties owed to depositors, shareholders and creditors

of the institutions they serve, and comply with federal and state

Statute, rules and regulations. Statement of Directors and

Officers Responsibilities at para. 36,485.

Respondent's fiduciary duties include the duty of loyalty

and duty of care. Id. The duty of care requires officers and

directors to act as prudent and diligent business persons in

conducting the affairs of insured institutions. Id. Respondent

violated his fiduciary duty of care by ignoring the interests of

depositors when he illegally disclosed confidential information to

further a bribery scheme, drew a director and customers into his

scheme and committed unlawful acts.

The duty of loyalty requires officers and directors to

administer the affairs of the institution with candor, personal

honesty and integrity. Id. Respondent violated his duty of loyalty

because the entire bribery arrangement with McLaughlin was "set

up so that [Respondent] would benefit, for whatever reason he

thought was necessary, at the expense of the institution, and that

expenses being the business of the institution going forward."

(Transcript Vol. II at 501). Respondent endangered the

institution by placing his personal interests in the success of his

illegal scheme before the interests of the depositors.

Accordingly, the Acting Director concludes that

A66

Respondent committed violations of law, engaged in an unsafe or

unsound practice and breached his fiduciary duties to Cross

County by orchestrating and participating in a scheme to bribe a

government official.

2. Effects of Respondent’s Misconduct on the Association

The ALJ also determined that the disclosure and misuse

of confidential bank information was integrally related to

Respondent’s position at Cross County, and concluded that the

Association suffered or will probably suffer substantia! financial

loss or other damage. The Acting Director does not reach this

prong because the alternative prong, contemplating the possibility

of "serious prejudice’ to the interests of the depositors, has been

met here.

The adverse effects upon Cross County resulting from

Respondent’s misuses of bank records to orchestrate a bribery

scheme are even more detrimental than those effects accruing

from the conduct charged under Count I. Here, the misconduct

involved use of confidential customer information to orchestrate

and assist the commission of criminal activity. In addition,

Respondent encouraged another member of Cross County’s

Board of Directors to engage in such activity.

Depositors are entitled to trust the management of

depository institutions to spend their time in the office furthering

the interests of the association, not committing illegal acts. The

Acting Director finds that by virtue of Respondent’s misconduct,

the interests of Cross County depositors could be seriously

prejudiced.

3. Respondent’s Culpability

The Acting Director accepts the conclusion of the ALJ

26 The ALJ did not make findings or conclusions under the

"serious prejudice" standard on Count II.

ND SE SOAS Oe SOY CEOS ELE. SE

Eo eS eee ee

A67

that Respondent’s aiding and abetting of a bribe involves

"personal dishonesty." Here, Respondent believed that he had

successfully bribed McLaughlin twice. Emboldened by his

apparent success, Respondent concocted the scheme whereby the

Parlantes would bribe McLaughlin. Orchestration of a scheme to

bribe a government official demonstrates, among other things, a

lack of integrity. Moreover, Respondent lied to Cross County

customers about the circumstances surrounding the IRS subpoena

and counseled Fodera, a Board member, to not only lie to the

Parlantes as well, but also to accept part of the bribe. As

discussed above, banking officials are placed in a position of trust

and responsibility over the finances of their depositors and

customers. Respondent has demonstrated untrustworthiness and

a want of integrity in abusing his official position and violating

the RFPA as part of a large illegal scheme to engineer a bribe by

Cross County customers. See Van Dyke, 876 F.2d 1377. The

Acting Director concludes that such activity evidences "personal

dishonesty” under 12 U.S.C. Sec. 1464(d)(4)(A).

The ALJ concluded that Respondent’s activities

demonstrated "personal dishonesty." He construed the statute,

however, to require a demonstration of personal dishonesty

directed towards the Association. As discussed above, this

requirement is not founded in the statute.

The ALJ also found that Respondent demonstrated a

willful and continuing disregard for the safety and soundness of

Cross County because he ignored the proper affairs of the

institution in pursuing his own illegal objectives and, as a result,

exposed Cross County to serious risks that could threaten the

safety and soundness of the institution. Based on the record, the

Acting Director concludes that Respondent’s orchestration of the

Parlantes’ bribe was intentional and continued over a period of

months -- furthering the misconduct that Respondent commenced

in 1987. Therefore, the evidence also supports a finding of willful

and continuing disregard for the safety and soundness of Cross

County. The Acting Director finds that each alternative prong of

the culpability element of 12 U.S.C. Sec. 1464(d)(4)(A) has been

met for Count II.

A68

D. Respondent's Remaining Exceptions

Respondent has asserted various discovery and evidentiary

exceptions, as well as exceptions raised carlicr by means of

affirmative defenses. Having carefully considered the rulings of

the ALJ and the submissions of the parties, the Acting Director

rejects these exceptions.

All other exceptions lodged by the partics and not

otherwise addressed herein are denied.

E. Respondent's Request for Oral Argument

In Respondent's May 10, 1994 cover letter transmitting

his exceptions, he requests oral argument before the Acting

Director pursuant to 12 C.F.R. Sec. 509.40(b). Enforcement

opposes this request. Under Rule 40(b) of the Rules of Practice

and Procedure, the Director has the discretion to order and hear

oral argument.

A party seeking oral argument, however, has the burden

of demonstrating good cause for such argument and establishing

that arguments cannot be adequately presented in writing. Upon

consideration of Respondent's request for oral argument, the

Acting Director finds that: (1) the factual and legal arguments are

fully set forth in the parties’ written submission; (2) the Acting

Director will not be aided in deciding this matter by oral

argument; (3) Respondent will not be prejudiced by the lack of

oral argument; and (4) Respondent has not shown good cause for

oral argument. Therefore, the Acting Director declines to

exercise his discretion under Rule 40(b) and denies Respondent's

request for oral argument.

VL CONCLUSION

Based on the record with regard to Count I, the Acting

Director finds that Respondent: (i) committed violations of law

in bribing an agent of the IRS in 1987 and 1988; (ii) as a result

of these violations, the interests of the Association's depositors

could be seriously prejudiced; (iii) such violations evidence

A69

personal dishonesty. Based on the record with regard to Count

II, the Acting Director finds that Respondent: (i) committed a

violation of law in aiding and abetting and additional bribe of an

IRS agent in 1988, breached his fiduciary duty to the Association

and committed unsafe or unsound banking practices by disclosing

confidential customer information; (ii) as a result of this

misconduct, the interests of the Association's depositors could be

seriously prejudiced; and (iii) such misconduct evidenced personal

dishonesty and willful and continuing disregard for the safety and

soundness of the Association. Accordingly, the Acting Director

issues herein a final order removing Respondent from his former -

positions with Cross County and prohibiting further participation

by Respondent in any manner in the conduct of the affairs of any

insured depository institution.

ORDER

Upon consideration of the entire record in this matter,

including the Recommended Decision of the Administrative Law

Judge, the exceptions and replies to exceptions filed by the

parties, and for the reasons set forth in the accompanying

Decision:

The Acting Director, pursuant to his authority under

Section 5(d)(1)(A) of the Home Owners’ Loan Act, 12 U.S.C.

Sec. 1464(d)(1)(A)(Supp. v 1993), and Section 8(e) of the

Federal Deposit Insurance Act, 12 U.S.C. Sec. 1818(e)(Supp. v.

1993), and former Section 1464(d)(4) of the Home Owners’ Loan

Act of 1933, 12 U.S.C. Sec. 1464(d)(4)( 1982), finds that Michael

Cousin (“Cousin” or "Respondent”), in his former capacity as the

Chief Executive Officer and Chairman of the Board of Directors

of Cross County Federal Savings Bank, Queens, New York

(“Cross County”), a federal Savings association, was an institution-

affiliated party participating in the conduct of the affairs of Cross

County who violated laws, engaged in unsafe or unsound

practices in connection with Cross County and committed acts

and practices which constitute breaches of his fiduciary duty as a

director and officer, and as a result of Cousin’s violations, unsafe

or unsound practices, and breaches of fiduciary duty, the interests

of Cross County's depositors could be scriously prejudiced.

A70

These vioiations, unsafe or unsound practices, and breaches of

fiduciary duty involved personal dishonesty on the part of Cousin

and demonstrate willful and continuing disregard for the safety

and soundness of Cross County. Accordingly, grounds exist to

issue an order removing Cousin from office and prohibiting

Cousin from any further participation in the conduct of the

affairs of Cross County and the other institutions and entities

listed in 12 U.S.C. Sec. 1818(e)(7).

Respondent filed, pursuant to 12 C.F.R. Sec. 40(b), a

request for oral argument before the Acting Director. Upon

consideration of Respondent’s request for oral argument, the

Acting Director finds that: (1) the factual and legal arguments are

fully set forth in the parties’ written submissions; (2) the Acting

Director will not be aided in deciding this matter by oral

argument; (3) Respondent will not be prejudiced by the lack of

oral argument; and (4) Respondent has not established good

cause for oral argument.

IT IS THEREFORE HEREBY ORDERED:

1. Cousin is removed from office and prohibited from

further participation in any manner, in the conduct of the affairs

of Cross County pursuant to 12 U.S.C. sec. 1818(e);

2. While this Order is in effect, Cousin may not continue

or commence to hold any office in, or participate in any manner

in the conduct of the affairs of, any institution or entity listed in

12 U.S.C. sec. 1818(e)(7)(A);

3. Conduct prohibited by this Order includes the conduct

specified under 12 U.S.C. sec. 1818(e)(6);

4. This Order is subject to the provisions of 12 U.S.C.

sec. 1818(j);

5. The provisions of this Order are effective upon the

expiration of thirty (30) days after the date of service of this

Order upon Cousin and shall remain effective and enforceable,

except to the extent that, and until such time as, any provisions

A71

of this Order shall have been Stayed, modified, terminated, or set

aside by action of the Acting Director or a reviewing court, or in

accordance with 12 U.S.C. sec. 1818(e)(7)(B). Respondent is

hereby notified that he has the right to appeal this Decision and

Order within thirty (30 days) after service of such Decision and

Order under 12 U.S.C. sec. 1818(h);

6. Respondent's request for oral argument is denied; and

7. The Order Continuing Suspension and Prohibition

issued against Cousin, pursuant to 12 U.S.C. sec. 1818(g), on July

15, 1991 (OTS AP 91-42), will continue until the effective date

of this Order, at which time the Order Continuing Suspension

and Prohibition shall terminate.

DATED: October 11, 1994

THE OFFICE OF THRIFT SUPERVISION

By: [s/

Jonathan L. Fichter

Acting Director

UNITED STATES OF AMERICA

OFFICE OF THRIFT SUPERVISION

DEPARTMENT OF THE TREASURY

IN THE MATTER OF Docket No.

OTS-AP-93-38

MICHAEL COUSIN, a Person

Participating in the Conduct of

the Affairs Bank, MIDDLE VILLAGE,

QUEENS, NEW YORK

RECOMMENDED DECISION

OF REMOVAL AND PROHIBITION

APPEARANCES:

On Behalf of the Office of Thrift Supervision:

Richard Shapiro, Esq.

Lance Cassak, Esq.

Jersey City, New Jersey

On « vhalf of Respondent:

Ramsey Clark, Esq.

Lawrence W. Schilling, Esq.

New York, New York

BEFORE:

Walter J. Alprin

Administrative Law Judge

Office of Financial Institution

Adjudication

Washington, D.C.

A73

TABLE OF CONTENTS

I. PROCEDURAL HISTORY AND

RECOMMENDATION

II. FINDINGS OF FACT

A.

B.

Cc.

D. DISCLOSURE OF CONFIDENTIAL

INFORMATION

. MISCONDUCT:

VIOLATION OF LAW

a) Discussion of 1987

Bribery Charge

b) Illegal Gratuity Under

Sec.201(c)(1)(A)

c) Discussion of 1988

Bribery Charge

d) Entrapment Defense

IV.

A74

3. CULPABILITY vis.cex wa cnavvesntacs 25

C. COUNT EE is cccédudendee howe ken eee 27

1. MISCONDUCT: VIOLATION OF LAW,

UNSAFE OR UNSOUND PRACTICE AND

BREACH OF FIDUCIARY DUTY ........ 27

&) VindROR CE EMM cc ciscdicnesecsecsss 27

b) Disclosing Confidential

Bank IMGOTGnOhIOR 2.0 csc se secceccccsscoses

c) Unsafe or Unsound Practice ......... 31

d) Breach of Fiduciary Duty ........... 32

S. CHAP AMEED cand stbweceeesececs 34

CONCLUGRIN GE EAAW kee ccdecsteavccess 34

RECOMMENDED DECISION .............. 36

PROPOGE) CHAE i dicen cecicnsesebestec 37

CERTIPICAIS GF GeV as ccbscccsecsveess 39

A75

I. PROCEDURAL HISTORY AND RECOMMENDATION

On May 13, 1993, to continue an Order of Suspension

previously imposed, the Office of Thrift Supervision ("OTS") filed

and served a Notice of Charges initiating a Removal and

Prohibition action against Respondent Michael Cousin ("Cousin"

or "Respondent"), a Direct and Chief Executive Officer of Cross

County Federal Savings Bank (“Cross County" or "Bank"), of

Middle Village, Queens, New York, pursuant to its authority

under 12 U.S.C. $1464(d)(4)(1982), hereinafter referred to as

such section number without date of enactment, or as the "pre-

FIRREA statute," superseded by $1818(e). On June 2, 1993,

Respondent filed an answer to the Notice.

The Notice cites three incidents which give rise to this

action. First, in Charge I, the Notice alleges that in 1987,

Respondent bribed an Internal Revenue Service ("IRS") Agent

in an attempt to terminate a grand jury investigation. Second,

also in Charge I, Respondent is charged with bribing the same

IRS Agent in the winter of 1988, in an attempt to unlawfully

quash a grand jury document subpoena on a real estate entity in

which Respondent had a financial interest. Third, in Charge I,

Respondent is charged with disclosing to the same IRS Agent

confidential financial information in the spring of 1988, regarding

two bank customers for the purposes of arranging a bribe to that

Agent.

Respondent alleges three main affirmative defenses --

first, that he was entrapped by the agent; second, that

government misconduct during the bribery investigation vitiated

the charge; and third, the OTS initiated the charges as a means

to continue harassment of the Respondent.

On August 6, 1993, the Acting Director of OTS denied

Respondent's request for a private hearing. On August 9, 1993,

the undersigned denied Respondent's Motion to Dismiss the

proceeding. A public administrative hearing was held on the

Notice of Charges from September 13 through 15, 1993, inclusive,

in New York, New York.

This Recommended Decision will hold that as to Charge

I, Enforcement Counsel have submitted a preponderance of

evidence that Respondent engaged in the second misconduct

alleged, but not the effect and culpability statutorily required for

removal and prohibition; that as to Charge II, Enforcement

Counsel have submitted a preponderance of evidence that

Respondent engaged in the misconduct alleged, which resulted in

the effect and from the culpability statutorily requiring that

Respondent be removed and prohibited from further

participation in the affairs of federally insured financial

institutions; and finally, presenting the Acting Director a with a

recommendation for an Order of such relief.

Il. FINDINGS OF FACT

A. JURISDICTION AND PARTIES

1. Respondent was Chairman of the Board of Directors

and Chief Executive Officer of Cross County from approximately

January 20, 1958, until August 14, 1990. (Answer para. 9.)" He

maintained an office at Cross County in his official capacity as

chairman and CEO (Answer para. 11). At all times relevant to

the events set forth in the Notice of Charges, Respondent was a

director and officer within the meaning of 12 U.S.C. §1464(d)(A).

2. At all times relevant to this action, Cross County was

a federally-chartered savings and loan association or federal

savings bank whose deposits were subject to federal deposit

insurance. (Answer §10).

1 Citations to the record of this proceeding shall be as

follows:

Answer to Notice: Answer para.

Exhibits: OTS Ex. ___ or R.Ex.

Hearing Transcript: TR.

EE

A77

3. As of August 9, 1989, pursuant to Section 3(g) of the

Federal Deposit Insurance Act ("FDIA"), as amended 12 U.S.C.

Sec. 1813(g), the OTS succeeded to the interests of Federal

Home Loan Bank Board ("FHLBB") as regulatory agency with

respect to the supervision and regulation of all savings

associations. Accordingly, OTS is the appropriate Federal

banking agency with regard to Cross County and persons

participating in the conduct of the affairs of the Bank.

B. 1987 BRIBERY CHARGE

4. In 1986, IRS Special Agent Kevin McLaughlin

("McLaughlin") served a grand jury subpoena on European

American Bank ("EAB"), another financial institution located in

Middle Village, New York, requesting records relating to

Respondent. The purpose of the subpoena was to obtain records

from EAB to ascertain whether there was any information

regarding subjects of a pending grand jury investigation, in which

Respondent was neither a target nor a subject. (TR 180-181,

183, 196, 213.)

5. Respondent contacted McLaughlin in January of 1987,

because he understood it was McLaughlin who had served the

subpoena. Respondent claimed he could save the government

money by showing McLaughlin the documents sought in the

subpoena without having EAB produce the material. (TR 61.)

Respondent arranged a meeting at the Bank for McLaughlin to

review the documents.

6. On May 27, 1987, Respondent and McLaughlin met

at Respondent’s office in the Bank. Respondent said that he

made many charitable contributions of money, and he then

offered to contribute money to McLaughlin’s favorite charity.

(TR 63-64.)

7. McLaughlin met with his superiors at the IRS and

advised them that he believed Respondent had offered him a

bribe. McLaughlin’s superiors directed him to enter into an

undercover relationship with Respondent and to accept any bribe

offered. (TR 64-65.)

8. On June 9, 1987, in a meeting at Bank, Respondent

paid McLaughlin $1,750 in cash and gave him a Swiss silver

bullion bar. (TR 86-87.)

Cc 1988 BRIBERY CHARGE

9. On February 5, 1988, an IRS representative served a

grand jury subpoena duces tecum on All Queens Tudor Realty,

Inc. ("All Queens"), which was located in Queens, New York.

(TR 87) At the time the subpoena was served, Respondent

purportedly had an undisclosed financial interest in All Queens.

One of the reasons for serving the subpoena was to see how

Respondent would react. (TR 555.)

10. On February 10, 1988, McLaughlin met with

Respondent in his office at the Bank. During this meeting,

Respondent asked McLaughlin to unlawfully quash the subpoena.

(TR 96-97: OTS Ex. 13.) Respondent offered to pay the agent

to terminate the IRS investigation of All Queens Tudor Realty.

(TR 96-98).

11. On February 18, 1988, in Respondent's office at

Bank, Respondent gave McLaughlin $6,500. (TR 100; OTS Ex.

5, at 9).

D. DISCLOSURE OF CONFIDENTIAL INFORMATION

12. On April 26, 1988, during a meeting between

Respondent and McLaughlin in Respondent’s automobile on the

way to a local restaurant, and during lunch, Respondent

suggested that he “could give [McLaughlin] some information on

some individuals, that I could open up a case, and then he could

arrange for them to pay me money to kill that case that I had

opened up." Without providing the names of the persons,

Respondent "said they were bad people, and that if we looked

into them and opened an investigation, we could probably find

something, and then he'd be able to arrange [for] them to pay me

4

A79

money to kill the investigation." (TR 109-110). Respondent also

Suggested that Max Fodera, a member of the Board of Directors

at Bank, would be willing to act as an intermediary in arranging

a payoff from the bank customers to McLaughlin to terminate

any IRS investigation of such customers. (TR 114).

13. On May 11. 1988, at the Bank, Respondent asked

McLaughlin what information he would need for the above

scheme, had the Parlantes’ Bank files delivered to himself, and

told McLaughlin the social security numbers, business names,

location of houses and business, and salaries, of bank customers

Joan and John Parlante as reported on their mortgage

application. (TR 116-118). Respondent disclosed that the

Parlantes held two $475,000 mortgages at the Bank, that they

made their monthly mortgage payments in cash, and that the

couple under-reported their incomes on federal tax returns.

14. At the time the information was revealed to

McLaughlin, neither of the Parlantes had given their consent for

the disclosure of their dealings with the Bank, and no one from

Cross County had ever advised the Parlantes that the Bank

disclosed confidential information to the government regarding

them. (TR 379, 413-4).

15. On August 15, 1988, as suggested by Respondent,

McLaughlin served a grand jury subpoena on Respondent at the

Bank for the Parlantes’ bank records. (TR 128).

16. Mrs. Parlante told Respondent that he should

provide any information requested in the subpoena. (TR 381).

Respondent concealed from Mrs. Parlante that he had already

disclosed the information to McLaughin. Respondent advised her

that McLaughlin could be bribed, and when she resisted this

Suggestion, Respondent said he would not deal with her in the

future and that he would meet with her husband instead. (TR

382).

17. .On September 24, 1988, the Parlantes were

personally served with grand jury subpoenas which requested,

inter alia, the books and records of Cobra Gun Skin, and Lite-

Tek International, two separate businesses owned by the

Parlantes.

18. Respondent met with John Parlante ("Parlante") in

his office at the Bank to discuss the IRS investigation of the

Parlantes. Respondent advised Parlante that McLaughlin would

accept a bribe to terminate the investigation, and then proceeded

to instruct him in how to offer the bribe. (TR 614-17). During

October of 1988, Respondent advised McLaughlin on how to

negotiate and accept payments from the Parlantes. On October

20, 1988, McLaughlin met with Parlante to discuss the IRS

subpoenas. At this time, Parlante offered to provides

McLaughlin with free gun holsters from their business, but

eventually agreed to pay $25,000 in cash to terminate the IRS

investigation. McLaughlin received $20,000 in cash from

Parlante, and one week later received the additional $5,000 in

cash.

19. Respondent told McLaughlin that Max Fodera should

receive at least $2,500 as a fee or commission for having assisted

in the bribery. (TR 157-58).

E. SUSPENSION

20. Respondent was arrested in August 1990. On August

10, 1990, the Director of the New York District office of OTS,

pursuant to 12 U.S.C. §1818(g)(1), recommended Respondent’s

suspension from office. After an internal informal hearing not

within the jurisdiction of the Administrative Procedure Act, the

OTS’ Director issued a Notice of Suspension of Respondent, as

an institution-affiliated party charged with a felony, from

participation in the affairs of a financial institution, effectively

suspending Respondent from his position with Cross County.

(OTS Ex. 9)

21. On May 25, 1992, the criminal indictment against

Respondent was dismissed due to Respondent’s ill health. The

dismissal specified that it had no effect on administrative

proceedings, and the OTS Suspension Order remains in effect.

Ii. ADDITIONAL FACTS AND DISCUSSION OF LAW

A. STATUTORY OVERVIEW

OTS initiated this action for conduct that occurred in

1987 and 1988, pursuant to its authority under Section 5(d)( 1)(A)

of the Home Owners’ Loan Act of 1933 ("HOLA"), 12 U.S.C.

$1464(d)(1)(A), as amended by Section 301 of the Financial

Institutions Reform, Recovery, and Enforcement Act of 1989

("FIRREA") (Pub.L.No. 101-73, 101 Stat. 183 (August 9, 1989)),

and the pre-FIRREA version of Section 5(d)(4) of the HOLA

(12 U.S.C. $1464(d)(4)), and Section 8(e) of the Federal Deposit

Insurance Act ("FDIA"), 12 U.S.C. $1818(e). Banking regulatory

agencies are authorized to remove officers and directors from an

insured bank and to prohibit their future participation in the

affairs of a federally insured financial institution. Pursuant to

$1464(d)(4) covering conduct prior to 1989 and pre-FIRREA, a

removal and/or a prohibition order can be issued whenever there

is a finding that an officer or director has:

(A) violated a law or regulation, or engaged or

participated in an unsafe or unsound banking

practice or breached his fiduciary duties as a

director or officer with respect to that bank:

and

(B) asa result of the violation, practice or breach, the

institution has suffered or will suffer substantial

financial loss or other damage or the interests of

the institutions’s depositors have been or could be

seriously prejudiced or the director or officer has

received financial gain from the misconduct:

and

(C) the misconduct evidence personal dishonesty on

the part of the director or officer or demonstrates

a willful or continuing disregard for the safety and

soundness of the institution.

Accordingly, in order to impose the removal or prohibition, the

OTS must establish each of the following three criteria;

“misconduct,” th¢ “effect” of such misconduct, and the "culpability"

of Respondent.

B. COUNT I

The first count of the notice focuses on Respondent's two

alleged bribes of McLaughlin in 1987 and in 1988. The first issue

is whether Respondent’s misconduct entails a violation of law.

1. Violation of Law

The charges allege that Respondent violated a statute,

Title 18 of the United States Code, dealing with criminal acts, by

bribing McLaughlin. Respondent disputes the application of this

charge to the pre-FIRREA 12 U.S.C. §1464(d)(4)(A), currently

12 U.S.C. $1818(e)(1), arguing that to support prohibition from

further participation in the affairs of a federally insured

institution, the "statute" allegedly violated must specifically relate

to federally insured institutions. There is no reported decision or

other authority to support such an argument. However, it is

believed by the undersigned that the specific terms of the pre and

post-FIRREA prohibition statutes make clear that they refer to

violation of any law by reason of which an “insured depository

institution or business institution has suffered or will probably

suffer financial loss or other damage," or “the interests of the

insured depository institution’s depositors have been or could be

prejudiced,” 12 U.S.C. $1464(d)(4)(A), 12 U.S.C. $1818(e)(1).

See, also, 12 U.S.C. $1818(g)(1) as to suspension for the mere

indictment, even prior to conviction, of having committed any

felony. Thus the universe of statutes and violations applicable is

2 Oberstar v. FDIC, 987 F.2d 494 (8th Cir. 1993).

limited to those not necessarily specifically referring, but having

a specific nexus to direct repercussions in banking depository

institutions.

OTS charges that Respondent twice bribed McLaughlin

in violation of 18 U.S.C. $201(b)(1)(c). The statute provides in

pertinent part that a person is guilty of bribery if he or she:

(1) directly or indirectly, corruptly giver, offers or

promises anything of vaiue to any public official

or person who has been selected to be a public

official, or offers or promises any public official or

any person who has been selected to be a public

official to give anything of value to any other

person or entity, with intent-

* * >

(c) to induce such public official or such person who

has been selected to be a public official to do or

omit to do any act in violation of the lawful duty

of such official or person;

Thus, bribery has been defined as the voluntary giving or

receiving of anything of value in corrupt payment for an official

act completed or to be completed. (12 Am Jur 2d §3). A bribe

requires the intent to influence an official in the performance of

his or her duties, and entails a corrupt intent and an offer of

something of value to influence the action or non-action.-

A showing of a corrupt intent is a requirement of the

violation. “Congress enacted [18 U.S.C.] §201(b) to provide a

broad deterrent against attempted corruption of public officials

by means of bribes. The focus of this section is upon the briber’s

intent to corrupt, not upon prevention per se, of the briber’s

ultimate ends, or upon the bribed individual’s ability to effect a

3 United States v. Hsieh Hui Mei Chen, 754 F.2d 817, 822

(9th Cir. 1985), cert. denied, 471 U-S. 1139, 105 S.Ct. 2684

(1988).

A84

result."4 In short, "[p]roof of bribery requires proof that the

payer acted corruptly with the intent of influencing any official

act, influencing a public official to defraud the govesnment, or to

do or omit an act in violation of his official duties."~ There must

be specific intent to induce a public official to act in a particular

way.

a) Discussion of 1987 Bribery Charge

McLaughlin is the primary government witness to testify

about the alleged bribes in 1987." In late 1986, McLaughlin

served a grand jury subpoena on Furopean American Bank for

records of Respondent's account.” After Respondent received

4 United States v. Gjieli, 717 F.2d 968, 976 (6th Cir. 1983),

cert. denied, 465 U.S. 1101.

> United States v. Muldoon, 931 F.2d 282, 287 (4th Cir.

1991).

© United States v. Irwin, 354 F.2d 192, 196 (2d Cir. 1965),

cert. denied, 383 U.S. 967, 86 S.Ct. 1272 (1966); United States

v. Kim, 738 F.Supp. 1002, 1003 (E.D.Va. 1990).

7 Respondent attempted to discredit the credibility of

McLaughlin’s testimony throughout. The inconsistencies in

McLaughlin’s testimony, however, were few in number immaterial

to the issues herein, and insufficient to counter the undersigned’s

observance of the witness’ demeanor in testifying, which was

considered overall as straightforward and truthful.

8 At the administrative hearing, witnesses and counsel were

careful not to reveal details of the ongoing investigation so as to

preserve its confidentiality. The specific nature of the criminal

case is unknown to the undersigned and is not necessary to prove

the requisite elements in the administrative matter.

A85

notice of the subpoena from EAB, he contacted McLaughlin and

offered to "save the government money” by showing him the

records in his possession at Cross County rather than having EAB

produce the documents. McLaughlin then met Respondent, for

the first time, in February 1987, at Cross County.

In spite of having initiated the meeting, Respondent

refused to answer any questions without the presence of an

attorney. In April 1987, the second contact between the two men

occurred. Respondent telephoned McLaughlin and asked

whether it was necessary to obtain an attorney since it was

expensive to do so. (TR. 63). McLaughlin testified that he did

not tell Respondent that he should not obtain counsel, but the

evidence suggests that he did indicate to Respondent, directly or

indirectly, that he did not need counsel. (TR. 221-224).

At this meeting, Respondent told McLaughlin that he

often gave charitable contributions of money and "he could even

give to my favorite charity.” (TR. 63). McLaughlin understood

the remark to be intended as an overture to a bribe and advised

his superiors and the U.S. Attorney's Office of the conversation.

(TR. 65). After meeting with his superiors, it was decided that

future copversations with Respondent would be surreptitiously

recorded.

On May 27, 1987, McLaughlin and Respondent met in a

conference room at the Bank to discuss the grand jury subpoena

to EAB and they later went to lunch together. McLaughlin

9 The transcripts of recorded conversations between Agent

McLaughlin and Respondent have been redacted pursuant to an

agreement by the government and criminal defense counsel. (TR

74). OTS Enforcement Counsel! represented that “the agreement

was that only certain transcripts would be introduced at (the

criminal) trial, and those transcripts would be reacted to remove

information regarding other individuals.” (TR 75).

A86

testified that twice that day, 10 mespondent offered to pay the

agent half of $3,500, the money "saved" in not obtaining an

attorney to monitor the sessions in which he would respond to

McLaughlin’s direct questions. (TR. 79-80). On June 9, 1987, in

another meeting with both men at the Bank, Respondent gave

McLaughlin $1,750 in cash, and a Swiss silver bullion bar. The

facts of this incident are not in dispute.** The question is

whether the act was a bribe or a gratuity, and the answer hinges

on Respondent's intent.

Consideration of the circumstances of the transaction will

be of assistance. McLaughlin first met Respondent on the Bank’s

premises to review documents sought in response to a grand jury

subpoena. The subpoena was directed at another bank, EAB,

seeking Respondent's bank account records relating to an

ongoing investigation involving other individuals. Respondent

was not the target of the investigation and the subpoena was not

served on him. However, the solicitation by Respondent to

provide McLaughlin with the information from his own files,

rather than having the subpoena responded to by EAB, in

addition to the payment of money and silver, is evidence that

Respondent was attempting to have McLaughlin "do or omit to

do" an act "in violation of (McLaughlin’s) lawful duty" to execute

the subpoena and obtain information from EAB, and thus

constituted a bribe to a public official.

The testimony of Agent Ronald Fanelli of the Internal

Security Division of the Internal Revenue Service, however, was

to the contrary. He was responsible for monitoring the taped

conversations between Respondent and McLaughlin and the

debriefings afterwards. Agent Fanelli has investigated about 80

to 100 cases, and has the experience to determine when there is

sufficient evidence to refer a matter for criminal prosecution.

10 The first instance is not clear on the audio tape recording.

il Respondent did not present any witnesses at hearing to

deny the charges.

a ioaeciaieitibliieiiemanaaeeineasiil

A8&7

Agent Fanelli testified that "[bJased on the facts, as they had

been related to me, Mr. Cousin’s initial payment fell more in the

area of a gratuity; and that, if I recall specifically, he did not ask

McLaughlin to do anything. And therefore, going ahead with a

prosecution on a bribe, under those circumstances, would be very

iffy, at best, if in fact it was only a gratuity.” (TR. 284-285). In

view of this testimony, the undersigned finds that there is not a

preponderance of evidence proving an intent of Respondent's to

offer a bribe to a public official.

b) [legal Gratuity Under §201(c)(1)(A)

OTS argues in the alternative that even if the above-

mentioned facts do not give rise to a bribe under 18 U.S.C.

$201(b)(1)(c), Respondent still is guilty of an illegal gratuity in

violation of 18 U.S.C. §201(c)(1)(A). Therefore, OTS

Enforcement counsel asserts that a “violation of law", one of

three alternative requirements for the misconduct prong of the

removal and prohibition standard, has still bsen met whether

characterized as a bribe or an illegal gratuity. !

Section 201(c)(1)(A) states in pertinent part that:

12 OTs enforcement counsel maintain that since Respondent

did not challenge the government’s alternative argument of

“illegal gratuity” at hearing, pursuant to applicable rules governing

the proceeding the Notice is automatically amended to encompass

the proof at hearing. The Rules of Practice and Procedure

applicable to this proceeding, cited directly above, "Amendments

to conform to the evidence," provides that "when issues not raised

in the notice are tried at the hearing by the express or implied

consent of the parties, they will be treated in all respects as if

they had been raised in the notice or answer, and no formal

amendments are required." Though some may consider such rule

to be inequitable, the undersigned, and the parties, are bound by

it. Accordingly, the Notice is automatically amended to include

OTS’ alternative argument of "illegal gratuity.”

A88

Whoever... directly or indirectly gives,

offers, or promises anything of value to any public

official... for or because of any official act

performed or to be performed by such public

Official...shall be fined under this title or

imprisoned...

The standard for proving violations of a bribe and an

illegal gratuity are the same with the important exception that ng

proof of a corrupt intent is necessary for an illegal gratuity."

While Agent Fanelli did not specifically apply his expertise to the

issue an unlawful gratuity, he did indicate he would not have

considered the payment to be prosecutable under the

circumstances, and the undersigned will defer to his expertise.

The record is thus insufficient to support a finding that

Respondent “violated a law" under 12 U.S.C. §1464(d)(4) with

respect to the portion of Charge I relating to the 1987 incident.

The next chronological issue is whether Respondent violated a

law with respect to the 1988 bribery charge.

c. Discussion of 1988 Bribery Charge

In the first week of February 1988, an IRS Agent other

than McLaughlin served a grand jury subpoena on All Queens

Tudor Realty ("All Queens") in Queens, New York. At the time

the subpoena was served, the IRS knew that Respondent had a

financial interest in the entity.

Within a week after service of the subpoena, Respondent

telephone McLaughlin, who returned Respondent's call.

McLaughlin used a pay phone to call Respondent at Cross

County. During the ensuing conversation, Respondent implied

that since the subpoena had been issued from McLaughlin's

office at the IRS he might know the Agent who served the

13 United States v. Kim, 738 F.Supp. 1002, 1003 (1990) and

United States v. Strand, 574 F.2d 993, 995 (9th Cir. 1978).

A89

subpoena, and the fMcLaughlin might be able to help Respondent

and his associate “" at All Queens with the subpoena. (OTS Ex.

4 at 8 - end). During this conversation, McLaughlin pointedly

asked Respondent whether he could get something in return for

helping. (OTS Ex. at 14). Respondent told McLaughlin that he

should know better than to even have to ask, implying that the

agent would be compensated for his efforts. Inconsistent with

the clandestine tone of the conversation is Respondent's repeated

assertions that the investigation would not reveal any wrongdoing

because none occurred. (OTS Ex. 4 at 11, 13 and 18).

Respondent then arranged for a meeting in person to discuss the

new subpoena. (TR. 90-92).

On February 10, 1988, McLaughlin met Respondent in

the conference room in Cross County to discuss the subpoena

served on All Queens. (TR. 95-96). It was agreed that

McLaughlin would try to terminate the grand jury subpoena in

return for money. On February 18, 1988, McLaughlin and

Respondent met at Bank. At this meeting, Respondent handed

McLaughlin an envelope containing $6,500 in cash. (TR. 100-

103; OTS Exh. 5 at 9-12). Pursuant to earlier conversations, the

source of the money was to have been from both Respondent

and his associate at All Queens, but Respondent admitted that all

the money came from him. (TR 100). During this conversation

and after the exchange of money, Respondent repeatedly told

McLaughlin that he wanted the investigation of All Queens to

stop. (TR. Vol. I at 103-104, 106 and 109).

In this instance, unlike in the 1987 alleged bribery

incident discussed above, there is clear evidentiary support for a

charge of bribery. The elements of a corrupt payment to a public

14 The associate’s name is not mentioned in the record but

the person manages the All Queens business. It is clear from the

transcripts of the recorded conversations that Respondent is

worried about the strain of the grand jury subpoena on this

person, who had recently been released form the hospital. (OTS

Ex. 4).

A90

official to do or fail to do an act in violation of the official’s duty,

are all present. Respondent paid McLaughlin $6,500 in cash in

exchange for having the agent terminate the grand jury subpoena

served on All Queens. Accordingly, Respondent bribed

McLaughlin in violation of 18 U.S.C. §201(b)(1)(c).

d. Entrapment Defense

Respondent does not dispute that he paid McLaughlin

$6,500 but argues that he was induced or entrapped into doing

so. Entrapment is an affirmative defense which excuses a

defendant from griminal liability for crimes induced by agent or

police conduct. !

Entrapment has been defined as the inducement of one

to commit a crime not contemplated for the purpose of instituting

a criminal prosecution. (21 Am Jur 2d §202). The defense

consists of two elements -- inducement by law enforcement

officers, and the lack of predisposition by the defendant to

commit the violation.!© A person who would not have

committed the violation but for the actions or inducements of the

law enforcement officer has been entrapped. However, where

law enforcement officers merely afford an opportunity for a

person to violate the law, and the offender acts of his or her own

volition, no entrapment has occurred. Predisposition is defined

as a "defendant’s inclination to engage in the illegal activity for

which he has been charged, i.e. that he is ready and willing to

15 The undersigned did not analyze the entrapment defense

with respect to the 1987 bribery charge since the record did not

support a finding of a violation. The asserted defense was

therefore moot and needed no comment. Unlike the 1987

incident, the 1988 bribery charge is supported by the evidence

and an analysis of the defense is necessary.

16 Mathews v. United States, 485 U.S. 58, 108 S.Ct. 883, 886

(1988); United States v. Fadel, 844 F.2d 1425 (10th Cir. 1988).

i taciciaieiiniieiiiaeaiiiattll

commit the crime."!7

In the case at hand, Respondent was Chairman of the

Board and Chief Executive Officer of Cross County unti! August

14, 1990, for more than thirty years. There is no evidence of

previous offers by Respondent to bribe an official, or evidence of

any criminal wrongdoing by Respondent whatsoever prior to the

incident in 1987 already discussed.

Respondent argues that the IRS did not have a legitimate

purpose in serving the grand jury subpoena on All Queens other

than to solicit the service of Respondent as informer regarding an

ongoing criminal case targeting other individuals. The purpose

of this second subpoena is not fully explored in the record, but

regardless of the purpose, the record clearly indicates that it was

Respondent who contacted McLaughlin in regard to engaging in

unlawful act, and not McLaughlin who contacted Respondent.

At worst, issuing and serving the subpoena alone would be no

more than offering an opportunity to Respondent, and is

insufficjent to constitute inducing Respondent to offer a

bribe.!© While McLaughlin did ask in the preliminary

telephone conversation whether there was “something in it" for

him, the Respondent answered that McLaughlin should have

known that such a question was not necessary, evidencing that

Respondent needed no inducement and was fully

predispositioned to commit bribery.

McLaughlin repeatedly testified that he did not initiate

telephone conversations with Respondent during their

relationship but instead waited for Respondent to contact him, or

returned Respondent’s calls. (TR. 117) Although attempts were

'7 United States v. Ortiz, 804 F.2d 1161, 1165 (10th Cir.

1986).

18 The All Queens subpoena was not served by McLaughlin

nor was McLaughlin’s name mentioned on the subpoena.

A92

made on cross-examination to impeach the agent with respect to

who initiated the telephone calls, the effort was not successful.

(TR. 169-172). The record indicates that Respondent initiated

virtually all of the telephone calls and meetings with the agent.

Accordingly, Respondent acted on his own volition and was not

induced by McLaughlin.

Respondent also claims outrageous government

misconduct in the wire surveillance by McLaughlin and in the

conduct of the government during the investigation. Though as

dictum in United States v. Russell, 411 U.S. 423, 431-32 (1973),

the Court stated that "we may some day be presented with a

situation in which the conduct of law enforcement agents is so

outrageous that due process principles would absolutely bar the

government from invoking judicial processes to obtain a

conviction..., a defendant seeking dismissal of an indictment on

this basis must establish that the police conduct is shocking to the

universal sense of justice,"! There is no evidence to support

Respondent's assertion of outrageous government misconduct.

In virtually all instances, telephone contacts were initiated by

Respondent either directly reaching McLaughlin, or leaving a

message for McLaughlin to return the call.

For purposes of the removal and prohibition standard in

this case, 12 U.S.C. §$1464(d)(4), it is here determined that

Respondent "violated a law."

2. Effects

Respondent’s misconduct with respect to Count I of the

Notice, his violation of a criminal statue by bribery must have a

proscribed effect ont he institution in order ‘o meet the

prohibition and removal standard. OTS must prove that as a

result of Respondent’s misconduct the institution "has suffered or

19 United States v. Fadel, 844 F.2d 1425, 1429 FN3, (10th

Cir. 1988) and cases cited therein.

A93

probably will suffer substantial2? financial loss or other

damages" to the institution, or may seriously prejudice the

interests of its depositors.

Michael Simone, Assistant Director II of the OTS

Northeastern Region, testified regarding the harm to the

institution. In his view, news of Respondent’s indictment for

bribery undermined public confidence in Cross County, and

further, had a significant impact on the financial integrity of the

entire banking system. (TR. 485). The loss to the insti

This text is long and has been trimmed here. Open the source document for the complete record.