Central Nat. Bank of Mattoon v. U.S. Dept. of Treasury

• Decision Date: 16 October 1990
• Docket Number: No. 89-3219,89-3219
• Citation: 912 F.2d 897
• Parties: CENTRAL NATIONAL BANK OF MATTOON, Petitioner, v. UNITED STATES DEPARTMENT OF TREASURY, Respondent.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 897

912 F.2d 897

59 USLW 2198

CENTRAL NATIONAL BANK OF MATTOON, Petitioner, v. UNITED STATES DEPARTMENT OF TREASURY, Respondent.

No. 89-3219.

United States Court of Appeals Seventh Circuit.

Argued June 14, 1990.

Decided Aug. 29, 1990.

Rehearing and Rehearing En Banc Denied

Oct. 16, 1990.

Robert B. Hoemeke, Joseph J. Trad, Eric D. Paulsrud, Lewis, Rice & Fingersh, St. Louis, Mo., for petitioner.

Jon D. Hartman, Carol M. Connelly, Comptroller of the Currency, Enforcement & Compliance Div., Washington, D.C., for respondent.

Before POSNER, FLAUM, and KANNE, Circuit Judges.

POSNER, Circuit Judge.

Central National Bank is one of two national banks in Mattoon, a town of 20,000 in downstate Illinois. After an investigation of the bank's trust department, the Comptroller of the Currency, who regulates national banks, issued in 1987 a notice of intent to revoke the bank's permission to provide trust services to its customers. The notice was issued pursuant to 12 U.S.C. Sec. 92a(k), which authorizes the Comptroller, upon notice and hearing, to revoke trust powers that the bank has "unlawfully or unsoundly exercised." After a hearing before an administrative law judge, the judge found that the bank had committed many violations of the Comptroller's regulations and engaged in many imprudent practices, but decided that it would be enough to order the bank to cease and desist. On review of the administrative law judge's order the Comptroller upheld the judge's findings, but considering the remedy imposed too weak revoked the bank's trust powers. The bank asks us to set aside the Comptroller's order. 12 U.S.C. Sec. 1818(h)(2). We can do that only if the Comptroller has violated a statute or regulation, made findings of fact unsupported by substantial evidence, or exercised his judgment in an arbitrary, which is to say unreasonable, fashion. Id.; 5 U.S.C. Secs. 706(2)(A), (E); Larimore v. Conover, 775 F.2d 890, 895-96 (7th Cir.1985), reversed en banc on other grounds, 789 F.2d 1244 (7th Cir.1986). These precepts apply to choice of remedy, id.; del Junco v. Conover, 682 F.2d 1338, 1340 (9th Cir.1982); First National Bank v. Comptroller of Currency, 697 F.2d 674, 680 (5th Cir.1983)--in spades, as we shall see.

At oral argument the lawyer for the bank surprised us by asking us to expel a reporter for a Mattoon newspaper whom the lawyer had spotted upon entering the courtroom. After giving counsel for both sides an opportunity to address the motion, we huddled briefly and denied it. The bank had earlier moved to seal the record, and we had granted that motion, but the motion had said nothing about conducting the oral argument in secrecy. A party who wants such extraordinary (albeit not completely unprecedented, Application of United States, 427 F.2d 639, 641 (9th Cir.1970)) relief must ask for it in advance of argument, not only to give the other party fair warning and the bench an opportunity for due deliberation but also to give the press--which may be the only adversary of the request for secrecy--a chance to be heard. Globe Newspaper Co. v. Superior Court, 457 U.S. 596, 609 n. 25, 102 S.Ct. 2613, 2621 n. 25, 73 L.Ed.2d 248 (1982); Gannett Co. v. DePasquale, 443 U.S. 368, 401, 99 S.Ct. 2898, 2916, 61 L.Ed.2d 608 (1979) (concurring opinion). Perhaps the lawyer was surprised that a reporter would want to attend the argument, but he should not have been.

Even if the motion to close oral argument had been timely, it would not have been granted. The bank's interest in secrecy would have had to be weighed against the interest of the press, as the representative (albeit self-appointed) of the public, in access to judicial proceedings. The proceeding before the Comptroller, the decisions of the administrative law judge and of the Comptroller, and the briefs in this court have all been secret, so that if the oral argument were also secret the public would have no inkling of the Comptroller's findings or the contents of its order until we issued our opinion--and not even then, if the bank asked us to seal it and we acceded to that request too. The bank is concerned that public knowledge of these things may impair its standing with its customers. Indeed it may, but perhaps it should, for it is information material to the decision whether to do business with the bank. The private and the social interest in secrecy must not be confused. An individual, or, as here, a firm or other institution, may be injured by disclosure of a disreputable fact about it, such as a record of crime or incompetence. But the very revelation that injures it may be useful to others, the potential transactors with it; so the net social value of the information, when the interests of all who are affected by it are summed, may be positive. Evaluated socially in this manner, the bank's interest in keeping the bad news about its management secret is meager in relation to the claims of a free press for access to governmental proceedings. Joy v. North, 692 F.2d 880, 894 (2d Cir.1982); Brown & Williamson Tobacco Corp. v. FTC, 710 F.2d 1165, 1180 (6th Cir.1983); cf. In re Knoxville News-Sentinel Co., 723 F.2d 470, 477 (6th Cir.1983). The sealing of the record strikes the balance between the competing interests as favorably to the bank as could be thought proper, if not more so.

The case might stand differently if the Comptroller, or the Federal Deposit Insurance Corporation, which insures deposits in national (as in other insured) banks, was asking for secrecy. The history of bank "runs" could be thought to argue for controlling public access to information about disciplinary proceedings against banks. But the proper entity to make such an argument is a banking agency. No such agency has stepped forward to support the bank's desire to exclude the press from the argument of the appeal. Indeed, the Comptroller's lawyer refused to support the bank's motion. (An article duly appeared, on the front page of the local newspaper, the day after the argument. Hagen, Appellate Court Hears CNB Case, Mattoon Journal Gazette, June 15, 1990.)

We turn to the merits of the petition for review. The bank does not deny that it has engaged in improper practices in its trust department, but pleads a variety of mitigating circumstances. The improper practices not only are numerous but also reach back many years and were only partly corrected in previous remedial proceedings that resulted in the entry and subsequent dissolution of a cease and desist order in the early 1980s. The improprieties range in gravity from the technical (failure to comply with certain reporting requirements) through the mild (minor violations of the terms of trust instruments) to the grave (deliberately overvaluing securities in one of the bank's common trust funds, the consequence being to overcharge customers for units of the fund). The bank has very little to say in rebuttal to these charges, and nothing worth discussing. It trains all its guns on the alleged impropriety that precipitated the Comptroller's decision to order the bank to shut down its trust department--the purchase in 1985 of 20,000 shares of Eagle Bancorporation for a common trust fund administered by the bank's trust department.

The purchase price of $220,000 constituted more than 20 percent of the assets of the common trust fund. To finance the purchase, Malcolm O'Neill, the bank's trust officer, sold blue-chip stocks and bonds held in the common trust fund. Eagle was a modest (net worth of $14 million), unlisted company owning small, unlisted banks and seeking to acquire more of these; its stock was narrowly held and thinly traded. The president and (indirectly) principal stockholder of the Central National Bank of Mattoon, James Singer, owned stock in Eagle, as did another director of the bank and O'Neill himself. In addition, as O'Neill well knew, Eagle was trying to acquire another bank of which Singer was a major owner.

The Eagle shareholder from whom O'Neill had purchased the 20,000 shares for Central National Bank's common trust fund agreed in writing to repurchase the stock within one year, upon demand, at a price slightly above the bank's purchase price. Within that year an attempt by Eagle to raise money by a new offering of stock failed, and O'Neill belatedly began to worry about the prudence of the bank's investment. But he unaccountably failed to exercise his option to sell the stock back to the seller. He claims to have made an oral demand, which--assuming he did make it--was ignored. He made no effort to follow up with a written demand. So far as appears, the stock remains in the bank's portfolio to this day, having paid during this period a single dividend of $1,500.

The imprudence of the investment does not lie in the fact that Eagle is not a blue chip. It is a myth that prudent investing requires limiting one's portfolio to the stocks or other securities of the strongest companies, the companies least likely to go broke. The prices of the stocks of weak companies are bid down in the market until those stocks yield the same risk-adjusted expected return as the stocks of the strongest companies; otherwise no one would hold stock in a weak company--the prices of such stock would fall to zero. The risk to which we have just referred is the volatility of the stock in relation to the market, or in other words the stock's sensitivity to market swings. This "market risk," what finance theorists call "beta," is different from insolvency risk--that is, how weak the company is. But like insolvency risk, it is compensated risk, since most investors (including most beneficiaries of trusts) are risk averse and therefore demand a premium to hold a security that has an above-average market risk. The prices of stocks with high market risk are bid down accordingly to compensate investors for holding the stock.

But the proposition that the price of a stock that involves above-average insolvency risk or above-average...