Pharaon v. Board of Governors of Federal Reserve System

• Decision Date: 17 April 1998
• Docket Number: No. 97-1114,97-1114
• Citation: 328 U.S. App. D.C. 349,135 F.3d 148
• Parties: Ghaith R. PHARAON, Petitioner, v. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 148

135 F.3d 148

328 U.S.App.D.C. 349

Ghaith R. PHARAON, Petitioner, v. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Respondent.

No. 97-1114.

United States Court of Appeals District of Columbia Circuit.

Argued Dec. 8, 1997.

Decided Feb. 10, 1998.

As Amended April 17, 1998.

Rehearing Denied April 17, 1998.

On Petition for Review of an Order of the Federal Reserve System.

Richard F. Lawler, Greenwich, CT, argued the cause for petitioner. With him on the briefs were Philip M. Smith and John C. Canoni, New York City.

Stephen H. Meyer, Senior Attorney, Board of Governors of the Federal Reserve System, argued the cause for respondent. With him on the brief were James V. Mattingly, Jr., DC, General Counsel, Richard M. Ashton, DC, Associate General Counsel, and Katherine H. Wheatley, Assistant General Counsel. Douglas B. Jordan, Senior Counsel, entered an appearance.

Before: GINSBURG, HENDERSON and TATEL, Circuit Judges.

Opinion for the Court by Circuit Judge TATEL.

TATEL, Circuit Judge:

Petitioner challenges the conclusion of the Board of Governors of the Federal Reserve System that he participated in violations of the Bank Holding Company Act by the Bank of Credit and Commerce International. He also challenges the Board's decision to fine him thirty-seven million dollars and bar him permanently from the U.S. banking industry. Because substantial evidence supports the Board's findings of fact and because petitioner's challenges to the Board's procedures, conclusions of law, and choice of sanctions lack merit, we affirm.

I

Section 3(a) of the Bank Holding Company Act makes it unlawful for a company to become a bank holding company without approval of the Board of Governors. 12 U.S.C. § 1842(a)(1)(1994). In a September 1991 Notice of Assessment, the Board charged petitioner Ghaith R. Pharaon, a prominent Saudi Arabian businessman and major shareholder in the Bank of Credit and Commerce International ("BCCI"), with participating in a scheme through which BCCI, using Pharaon as an undisclosed "nominee" or front, secretly acquired control of Independence Bank, a medium-sized California lender, in violation of section 3(a) of the Act. According to the Board, the scheme was intended to solve two problems BCCI faced in the mid-1980's: accumulated losses of over a billion dollars and pressure from Luxembourg, BCCI's nominal home country, to find a new country capable of regulating an institution operating in nearly seventy nations. Ownership of Independence would solve the first problem by generating profits for BCCI and the second by laying the groundwork for transferring BCCI's oversight to U.S. banking agencies. Pharaon's participation in the scheme, the Board asserted, allowed BCCI to mask its control of Independence from federal regulators, preventing them from obtaining an accurate view of Independence's true management and resources. The Board charged that from 1985, when BCCI secretly purchased Independence, until 1991, when bank regulators from several countries seized BCCI, BCCI controlled Independence, infusing capital into the bank, approving selection of its directors, and actively participating in its management.

In addition to charging Pharaon with participating in BCCI's section 3(a) violation, the Notice of Assessment charged that during the period BCCI secretly controlled Independence, the annual reports (known as Y-7s) that BCCI was required to submit to the Board as a foreign bank with U.S. branches, see id. § 3106(a), concealed its control of the bank in violation of section 5(c) of the Act, id. § 1844(c), and its implementing regulation, Regulation Y, 12 C.F.R. § 225.5 (1997). The Notice held Pharaon responsible for BCCI's violations under the Act's individual liability provision, section 8(b), 12 U.S.C. § 1847(b), and proposed a thirty-seven million dollar civil penalty. Considering Pharaon "institutional[ly]-affiliated" with BCCI under 12 U.S.C. § 1813(u), the Notice also sought an order of prohibition pursuant to section 8(e) of the Federal Deposit Insurance Act, id. § 1818(e)(1), permanently barring him from participating in the affairs of any federally insured depository.

Shortly after the Board issued its Notice, a federal grand jury sitting in Washington, D.C., indicted Pharaon for criminal offenses relating to BCCI's purchase of Independence. The following year, another federal grand jury, this one sitting in Miami, Florida, and a state grand jury in New York, each indicted Pharaon in connection with his larger involvement with BCCI. Bench warrants for Pharaon's arrest were issued in connection with the Washington and Miami indictments. Pharaon responded to neither.

In the meantime, from his home in Saudi Arabia and acting through U.S. counsel, Pharaon answered the Board's Notice of Assessment, denying all charges and requesting a hearing. Citing Pharaon's decision to remain beyond the reach of federal prosecutors and relying on fugitive disentitlement, a doctrine allowing courts to sanction parties where their fugitive status has "some connection" to the proceeding, Daccarett-Ghia v. Commissioner, 70 F.3d 621, 624 (D.C.Cir.1995), the Administrative Law Judge recommended ruling summarily for the Board. In a 1994 decision, the Board declined to adopt the ALJ's recommendation, rejecting the use of fugitive disentitlement because Pharaon's physical presence was unnecessary to a hearing, because the Board had no responsibility to vindicate any affront to the courts that had indicted Pharaon, and because any judgment against Pharaon could be satisfied from his frozen assets. The Board made clear, however, that on remand the ALJ could use his "express and implicit procedural powers" to ensure that Pharaon's fugitive status not disrupt the proceedings.

Following a nineteen-day hearing, the ALJ issued a recommended decision finding in favor of the Board and approving the penalties sought in the Notice of Assessment. Filing 179 pages of exceptions challenging virtually all of the ALJ's findings of fact and conclusions of law, Pharaon appealed to the Board. Board enforcement counsel also appealed, arguing that the ALJ should have imposed the maximum statutory penalty of $111.5 million (calculated by totaling the days each violation had been outstanding at the time the Board issued the Notice--8299 days--and assessing a penalty of $1000 for each day prior to August 10, 1989, when Congress amended the Act to increase its penalties, and $25,000 per day thereafter, see Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub.L. No. 101-73, § 907(j)(2), 103 Stat. 183, 475 (1989) ("FIRREA") (codified at 12 U.S.C. § 1847(b)(1))). The Board adopted the ALJ's recommended decision.

Pharaon now petitions for review. Applying the standards set forth in the Administrative Procedure Act, see 12 U.S.C. §§ 1818(h), 1847(b)(3) (APA applies to penalty assessment hearings under the Bank Holding Company Act), we will set aside the Board's factual findings only if unsupported by substantial evidence on the record as a whole, 5 U.S.C. § 706(2)(E) (1994); we will set aside the Board's legal conclusions only if "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," id. § 706(2)(A).

II

We begin with Pharaon's challenges to the Board's finding that BCCI violated the Bank Holding Company Act. The Act makes it "unlawful, except with the prior approval of the Board, ... for any action to be taken that causes any company to become a bank holding company." 12 U.S.C. § 1842(a). A company becomes a bank holding company if, among other things, "(A) the company directly or indirectly ... owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the bank or company; [or] (B) the company controls in any manner the election of a majority of the directors or trustees of the bank or company." Id. § 1841(a)(2)(A)-(B). The Act provides for bank holding companies to file periodic reports with the Board to facilitate Board oversight. Id. § 1844(c); 12 C.F.R. § 225.5. Finding that BCCI controlled more than twenty-five percent of Independence's voting stock, as well as the election of a majority of its directors, the Board concluded that BCCI had become a holding company within the meaning of both subsections (A) and (B) and that it concealed its unlawful control by filing Y-7s that flatly denied controlling any U.S. banks.

For its subsection (A) finding, the Board relied primarily on a May 17, 1985, agreement between Pharaon and the International Credit and Investment Company (Overseas) Ltd. ("ICIC"), a BCCI-controlled company. Titled "Acquisition of Shares of Independence Bank," and signed by Pharaon and Swaleh Naqvi, BCCI's then-second-in-command, the agreement provides in relevant part as follows:

1. [Pharaon and ICIC] have agreed to acquire 100% of shares capital of the Bank (the said shares) from the present shareholders thereof....

2. All the said shares of the Bank on their purchase as aforesaid shall be transferred to and held in the name of [Pharaon] but only 15% of the said shares of the Bank will be held by [Pharaon] as beneficial owner thereof.

3. For the balance of 85% of the said shares of the Bank, ICIC shall have the right to purchase them at their cost price from [Pharaon] either in its own name or in the name or names of its nominee or nominees and, till [sic] such purchase is effected and the shares transferred to the name of ICIC and/or its nominee or nominees, [Pharaon] will hold them in a fiduciary capacity for ICIC.

4. ICIC will provide funds to, or otherwise procure a loan for [Pharaon] of the cost of 85% of the said shares of the Bank and in consideration of the premises mentioned in 3 above, ICIC will itself pay or discharge all interest, costs, charges, commission and/or expenses of and incidental to the said loan and repayment thereof and hold [Pharaon] indemnified and harmless in respect thereof.

...