Burke v. Board of Governors of Federal Reserve System
| Decision Date | 31 July 1991 |
| Docket Number | No. 90-9509,90-9509 |
| Parties | Daniel M. BURKE, M. Joseph Burke, John P. Burke, John A. Edmiston, and Don C. Davis, Petitioners, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Robert M. Vinton, Vinton, Slivka & Panasci, Denver, Colo., and Don C. Davis, pro se (Richard P. Slivka and Scott M. Tarbox, Vinton, Slivka & Panasci, Denver, Colo., and John A. Edmiston, pro se, with him on the briefs), for petitioners.
Douglas B. Jordan (Stuart M. Gerson, Asst. Atty. Gen., Civ. Div., U.S. Dept. of Justice, Washington, D.C.; James V. Mattingly, Jr., Gen. Counsel; and Richard M. Ashton, Associate Gen. Counsel, with him on the briefs), Senior Atty., Bd. of Governors of the Federal Reserve System, for the respondent. Ann Marie Kohlligian, of counsel.
Before TACHA and SETH, Circuit Judges, and BRATTON, District Judge. *
Petitioners-appellants Daniel Burke, Joseph Burke, John Burke, John Edmiston, and pro se appellant Don Davis appeal a final decision of the Board of Governors of the Federal Reserve System (the Board) imposing civil money penalties pursuant to section 8(i)(2) of the Federal Deposit Insurance Act (FDI Act), 12 U.S.C. Sec. 1818(i)(2), and section 8(b)(1) of the Bank Holding Company Act of 1956, 12 U.S.C. Sec. 1847(b)(1). 1 The civil money penalties are based on noncompliance with four cease and desist orders (C & Ds) issued by the Board against the petitioners in their individual and official capacities. On appeal, the petitioners argue: (1) the agency violated proper procedure and due process by denying the petitioners' request for severance, failing to recognize the petitioners' compliance with the C & Ds, and assessing civil money penalties; (2) the agency's action subjected them to double jeopardy; (3) the agency violated due process by denying the petitioners' right to testify and assert their fifth amendment privilege; and (4) the agency engaged in improper ex parte communications. Davis also asserts agency officials violated federal law by obtaining and sharing documents relating to his bank account. We exercise jurisdiction under 12 U.S.C. Secs. 504(d) and 1818(h)(2) and affirm.
During the 1980s, the petitioners were involved as directors, officers, and shareholders in several Wyoming financial institutions: EVCO, Inc. (EVCO) and Stockgrowers State Bank Company (SSBC), bank holding companies; Stockgrowers State Bank (SSB), a wholly owned subsidiary of SSBC; Guarantee Federal Bank (GFB), a federal savings bank; and Wyoming Financial Services (WFS), an umbrella company organized to market banking services.
From 1983 to mid-1984, these financial institutions engaged in unsafe and unsound insider transactions and business practices. The acquisition funding of EVCO was obtained from SSB and GFB, and some of those funds were diverted to Davis and his business associate, Robert Anderson. EVCO and SSBC issued subordinated debentures of $7,500,000 to GFB and preferred stock of $500,000 to "Powder River", a subsidiary of GFS, resulting in 33.6% and 53.7% equity investments in EVCO and SSBC respectively. The holding companies also transferred $475,000 each to WFS in exchange for options to acquire fifty percent of the outstanding shares of WFS stock. EVCO and SSBC entered into "management consulting contracts" with WFS that required payment of $300,000 a year. SSBC paid Davis and Anderson quarterly consulting fees of $4,500 without a written contract or any other documents showing services performed. Finally, both bank holding companies paid the Burkes and Edmiston directors' fees regardless of their attendance at directors' meetings.
In June 1985, the Federal Reserve Bank of Kansas City (Reserve Bank) issued four C & Ds designed to correct the financial affairs of EVCO and SSBC. Two C & Ds are applicable to EVCO and SSBC. An individual C & D relating to EVCO is binding on Edmiston, Daniel Burke, Joseph Burke, and John Burke and another relating to SSBC is binding on Daniel Burke, Joseph Burke, Davis, and Edmiston. The EVCO and SSBC C & Ds require the petitioners to submit plans for divestment of investment options in WFS by August 15, 1985 and to divest by September 30, 1985. The EVCO C & D prohibits any increases in EVCO debt without prior written approval, and the SSBC C & D prohibits payment of the expenses of any insider without prior written approval. The individual C & Ds include the following provisions describing the petitioners' obligation to submit and comply with plans regarding reimbursement:
2. By August 15, 1985 [the petitioners] shall ["jointly"--SSBC] submit a written plan to the Reserve Bank to reimburse or repay [EVCO or SSBC respectively] by September 30, 1985 for the following [enumerated amounts];
3. The Reserve Bank may comment on each plan within 30 days of receipt. [The petitioners] shall make all changes in the plans required by the Reserve Bank within 15 days of receipt of Reserve Bank's comments, and [the petitioners] shall then fully comply with the approved plans.
During the course of the agency's investigation of the petitioners' business affairs, the Reserve Bank requested information relating to Davis' personal banking transactions from other state and federal agencies.
The first proposal for reimbursement the petitioners submitted on August 23, 1985 planned to use proceeds from a "multimillion dollar loan" to purchase the WFS option from EVCO and fund the petitioners' reimbursement of EVCO. The Reserve Bank rejected that submission as inadequate. The Reserve Bank rejected the second proposal submitted two months later because it contained insufficient information to determine financial feasibility. The third proposal submitted in September 1986 concerned only partial reimbursement of EVCO and proposed transactions that potentially violated affiliate lending restrictions of the Federal Reserve Act, 12 U.S.C. Secs. 371c to 371c-1. The petitioners never completed the 1986 proposal and did not submit alternative proposals.
In August 1987, the Board sought civil money penalties for the petitioners' failure to comply with the C & Ds. A pre-hearing conference was held by an administrative law judge (ALJ), during which Edmiston requested a separate hearing. At that time the Burkes stated they had no preference regarding severance. The ALJ denied Edmiston's request, explaining the actions derived from the "same web of related facts, transactions, individuals, and institutions." Later during the administrative hearing, the Burkes moved for severance. The ALJ also denied this request.
At the administrative hearing, the petitioners were given an opportunity to testify. The petitioners requested a ruling by the ALJ that cross-examination of them would be limited to issues raised in direct examination. The ALJ refused to make such a ruling because the petitioners had not been restricted in the cross-examination of the Board's witnesses. Without the protection of such a ruling, Daniel Burke and Davis declined to take the stand.
After considering all the evidence, the ALJ ruled the petitioners had not complied with the C & Ds. Civil money penalties of $600,000 were assessed against each petitioner. These amounts were reduced from the proposed penalties of $1,568,728 against Daniel and Joseph Burke and Edmiston, $936,514 against John Burke, and $736,713 against Davis. Penalties of $10,000 and $5,000 were assessed against two other defendants, James Sperry and Lyle Lake, who are not parties to this appeal. While the Board was reviewing the ALJ's findings, counsel from the agency's legal division issued a legal memorandum to the Board. Although the memorandum was made available to the petitioners, much of it was redacted on grounds of attorney client privilege. The Board reviewed the administrative record and adopted the ALJ's recommended decision and findings of fact and law.
While the Reserve Bank was seeking civil remedies, federal regulators also were considering criminal charges against the petitioners. The Reserve Bank did not discuss with the petitioners the fact the agency already had made criminal referrals on some of them. These criminal referrals ultimately led to a twenty-one count criminal indictment against the petitioners, a guilty plea to one felony count by Edmiston, and convictions on eleven and fourteen counts for Daniel Burke and Davis respectively. The criminal convictions are currently on appeal before this court.
Our review of the Board's assessment of civil money damages is governed by section 706 of the Administrative Procedure Act (APA). In reviewing this action, we are limited to determining whether the agency substantially complied with statutory and regulatory procedures, whether substantial evidence supports its factual determinations, and whether its action was an abuse of discretion. 5 U.S.C. Sec. 706(2)(A), (2)(D), (2)(E); Markair v. Civil Aeronautics Bd., 744 F.2d 1383, 1385 (9th Cir.1984).
The petitioners argue the ALJ abused his discretion by refusing to sever their hearing. The procedural regulations governing the conduct of administrative hearings do not specifically address severance. However, the regulations provide that failure to file exceptions to the rulings of the ALJ within fifteen days of serving the recommended decision and findings waives an objection. 12 C.F.R. Sec. 263.12(b) (1991). An objection not raised with the agency within the time limits is precluded from appellate review except in exceptional cases when injustice will result. Hormel v. Helvering, 312 U.S. 552, 557, 61 S.Ct. 719, 721, 85 L.Ed. 1037 (1941); Director, Office of Worker's Compensation Programs v. Quarto Mining Co., 901 F.2d 532, 536 (6th Cir.1990); American Maritime Ass'n v. United States, 766 F.2d 545, 566 n. 30 (D.C.Cir.198...
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