As the fi nancial crisis persists, banks and thrifts continue to come under intense regulatory scrutiny and more exacting oversight by way of memorandums of understanding (MOUs), ceaseand- desist orders (C&Ds), formal written agreements, prompt corrective action (“PCA”) and possibly receivership. In addition to regulatory actions against institutions, the bank regulatory agencies possess numerous powers to bring enforcement actions against institutionaffi liated parties. This report is the second in a three-part series1 concerning the enforcement powers of the bank regulatory agencies which will focus on enforcement actions against institution-affi liated parties. This article will concentrate on enforcement activity by the Federal Deposit Insurance Corporation (FDIC); however, all the bank regulatory authorities have similar enforcement powers.

This article reviews actions the FDIC can take against parties whether the bank fails or not. The failure of the bank is not a prerequisite to such charges being brought. The third part of this series will focus on banks that have been put into receivership and the consequences for the offi cers, directors and stockholders of such banks.

The present fi nancial crisis has many characteristics not found in prior downturns. The wholesale downdraft in residential property values is unlike prior real estate bubble bursts, and the closing, or near closing, of the mortgage fi nancing markets probably could not have been anticipated. Bank regulators, however, voiced concerns over real estate values and concentrations for several years, particularly regarding commercial real estate lending concentrations. Community bankers, stripped of almost all market opportunities save real estate lending, fought back.2

Financial institutions affected by the downturn are now feeling signifi cant pain. Ultimately, the FDIC will start the slow but sure process of identifying responsible individual parties (“Targets”) for enforcement action. While the affected institutions are now the subject of MOUs, formal written agreements, C&Ds and/or PCA orders, there is relatively little recent experience with enforcement actions against directors and offi cers because banks have been healthy for so long. The options available to the FDIC, however, are many and draconian.

One of the key questions regarding the current banking crisis is: should responsible offi cers and directors have reasonably foreseen the scope and breadth of the downturn and backed away from real estate lending concentrations earlier? Did they ignore the earlier regulatory warnings? If so, when does the failure to do so amount to gross negligence? This assumes the Targets have not engaged in self-dealing or other breaches of fi duciary duty.

The enforcement staff of the FDIC, acting through the Division of Supervision and Consumer Affairs, will fi rst assess what occurred and why. Typically, the fi rst shot is fi red when an institution is tagged during an exam for a seriously unsafe or unsound practice, or a violation of law or a breach of fi duciary duty by an affi liate, or when prior examination criticisms go unheeded. Violations of law or breaches of fi duciary duty by offi cers or directors are a key focus. For example, a violation of Regulation O, which regulates loans to insiders, is normally a major concern, especially if it is part of a pattern. The catch-all allegation is “unsafe and unsound banking practice,” which can include virtually anything that puts the institution at inordinate risk.

The FDIC can respond to the issues pursuant to its regulatory authority, but if knowledge and intent can be proven and material loss to the FDIC deposit insurance fund can be shown, the Federal Bureau of Investigation and the U.S. Attorney’s Offi ce may become involved. Sections 1005 and 1344 of Title 18 of the U.S. Code make a number of violations of banking laws or regulations a felony. The ten-year statute of limitations makes the period of peril very lengthy. Grand juries will issue subpoenas, and indictments may follow if the loss is substantial. Criminal cases, however, almost always require the Target to have personally benefi ted in a material way. Assuming no criminal case can or will be brought, the FDIC will normally proceed civilly.