Uwbk 5-18-2012 Fdics Cross Motion For Summary Judgement

Case 1:11-cv-00408-ABJ Document 100
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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA ____________________________________ UNITED WESTERN BANK, ) ) Plaintiff, ) v. ) C.A. No. 11-cv-408 (ABJ) ) OFFICE OF THE COMPTROLLER OF ) THE CURRENCY, et al. ) ) Defendants. ) DEFENDANTS MOTION FOR SUMMARY JUDGMENT Pursuant to Fed. R. Civ. P. 56, and for the reasons set forth in their accompanying memorandum of points and authorities, Defendants the Office of the Comptroller of the Currency and Thomas J. Curry, Comptroller of the Currency, respectfully move for summary judgment with respect to the claim asserted by Plaintiff United Western Bank in this action. Date: May 18, 2012 Respectfully submitted, Julie L. Williams, Chief Counsel Daniel P. Stipano, Deputy Chief Counsel Horace G. Sneed, (MI Bar No. P33434) Director, Litigation Division Gregory F. Taylor, Assistant Director, Litigation Division DC Bar No. 417096 /s/Christopher A. Sterbenz Christopher A. Sterbenz, Counsel, Litigation Division DC Bar No. 437722 250 E Street, S.W. Washington, D.C. 20219 Telephone: (202) 927-9124 Facsimile: (202) 874-5279 christopher.sterbenz@occ.treas.gov Attorneys for Office of the Comptroller of the Currency and Comptroller Thomas J. Curry
Case 1:11-cv-00408-ABJ Document 100
CERTIFICATE OF SERVICE I hereby certify that on May 18, 2012, I filed the foregoing motion for summary judgment, together with a memorandum of points and authorities and a statement of facts with references to the administrative record, on the Courts electronic filing system. To the best of my knowledge all counsel of record will receive service thereby. /s/Christopher A. Sterbenz
Case 1:11-cv-00408-ABJ Document 100-1
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA ____________________________________ UNITED WESTERN BANK, ) ) Plaintiff, ) v. ) C.A. No. 11-cv-408 (ABJ) ) OFFICE OF THE COMPTROLLER OF ) THE CURRENCY, et al. ) ) Defendants. )
DEFENDANTS MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF THEIR MOTION FOR SUMMARY JUDGMENT AND IN OPPOSITION TO PLAINTIFFS MOTION FOR SUMMARY JUDGMENT
TABLE OF CONTENTS INTRODUCTION ...........................................................................................................................1 BACKGROUND .............................................................................................................................3 I. STATUTORY AND REGULATORY BACKGROUND ...........................................3 A. Prudential Supervision of Federal Savings Associations ......................................3 B. Prompt Corrective Action.......................................................................................4 C. Receivership Decisions ..........................................................................................6 SCOPE AND STANDARD OF REVIEW ......................................................................................7 ARGUMENT .................................................................................................................................10 I. THE ADMINISTRATIVE RECORD DEMONSTRATES THAT UWB WAS UNDERCAPITALIZED AND PRESENTED AN UNACCEPTABLY HIGH RISK OF AN UNCONTROLLED COLLAPSE DUE TO LIQUDITY ISSUES .......................................................................................................................10 A. The Bank Declines Into an Unsafe and Unsound Condition ...............................10 B. The Banks Efforts to Recapitalize Are Unsuccessful ........................................16 C. The Bank Enters Its Final Crisis ...........................................................................18 1. The Banks Descent to Undercapitalized Status Triggers the Statutory Requirement that the Bank File a Capital Restoration Plan ..........................20 2. Institutional Depositors Begin to Flee the Bank ............................................21 D. OTS Denies the Banks Application to Purchase Legent, as Well as its Capital Restoration Plan ...................................................................................................23 E. The Acting Director Appoints the FDIC as Receiver for the Bank .....................24
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II.
THE ADMINISTRATIVE RECORD SUPPORTS THE ACTING DIRECTORS DETERMINATIONS WITH RESPECT TO EACH OF THE THREE GROUNDS FOR RECEIVERSHIP .............................................................26 A. The Administrative Record Contains Sufficient Information to Support the Acting Directors Opinion that the Bank Was Likely to Be Unable to Meet Its Depositors Demands and Other Obligations in the Normal Course of Business When it Was Closed ............................................................................................26 B. The Administrative Record Contains Sufficient Information to Support the Acting Directors Opinion that the Bank Was Undercapitalized and Had Failed to Submit a Capital Restoration Plan Acceptable to OTS When it Was Closed ..................................................................................................................27 C. The Administrative Record Contains Sufficient Information to Support the Acting Directors Opinion that the Bank Was in an Unsafe and Unsound Condition When It Was Closed ...........................................................................29
III.
PLAINTIFFS MOTION FOR SUMMARY JUDGMENT SHOULD BE DENIED ..............................................................................................................30 A. The OTS Did Not Arbitrarily and Capriciously Deny UWBs CRP....................31 1 2 PCA Does Not Grant a Bank Forty Five Days to Submit a CRP ...................31 The OTSs Rejection of the Plan Was Appropriate .......................................33
B. The OTS Did Not Imagine the Liquidity Threat ...............................................34 C. The Bank Was in an Unsafe and Unsound Condition ..........................................37 CONCLUSION .............................................................................................................................40
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TABLE OF AUTHORITIES CASES Biscayne Fed. Sav. & Loan Assn v. Fed. Home Loan Bank Bd., 720 F. 2d 1499 (11th Cir. 1983) ...................................................................................... 7, 8 Bowman Transp. Inc. v. Arkansas-Best Freight Sys., Inc., 419 U.S. 281 (1974) ............................................................................................................ 8 Camp v. Pitts, 411 U.S. 138 (1973) ............................................................................................................ 8 Dorris v. FDIC, 1994 U.S. Dist. LEXIS 19939 (D.D.C. Oct. 27, 1994)..................................................... 33 Environmental Defense Fund v. Costle, 657 F.2d 275 (D.C. Cir. 1981) ........................................................................................ 8, 9 Fidelity Sav. & Loan Assn v. Fed. Home Loan Bank Bd., 689 F.2d 830 (9th Cir. 1982) ............................................................................................... 9 First Natl Bank & Trust v. Dept. of the Treasury, 63 F.2d 894 (9th Cir. 1995) ............................................................................................. 8, 9 Franklin Sav. Assn v. Office of Thrift Supervision, 934 F.2d 1127 (10th Cir. 1991) ............................................... 7, 8, 9, 26, 30, 34, 37, 38, 39 Gibraltar Sav. v. Ryan, 772 F. Supp. 1290 (D.D.C. 1991) ....................................................................................... 8 Guaranty Sav. & Loan Assn v. Fed. Home Loan Bank Bd., 794 F.2d 1339 (8th Cir. 1986) ......................................................................................... 8, 9 Gulf State Utils. Co. v.FPC, 518 F.2d 450 (D.C. Cir. 1975) .......................................................................................... 33 In re Subpoena Served Upon the Comptroller of the Currency, 967 F.2d 630 (D.C. Cir. 1992) ........................................................................................ 3, 4 James Madison, Ltd. v. Ludwig, 82 F.3d 1085 (D.C. Cir. 1996) .................................................................................. 8, 9, 26 James Madison, Ltd. v. Ludwig, 868 F. Supp. 3 (D.D.C. 1994) ............................................................... 3, 23, 30, 33, 34, 38 iv
National Fuel Gas Supply Corp. v. FERC, 811 F.2d 1563 (D.C. Cir. 1987) ........................................................................................ 33 North Carolina v. FERC, 112 F.3d 1175 (D.C. Cir. 1997) ........................................................................................ 32 Rhoades v. Casey, 196 F.3d 592 (5th Cir. 1999) ............................................................................................. 20 Riordan v. SEC, 627 F.3d 1230 (D.C. Cir. 2010) ........................................................................................ 32 San Luis Obispo Mothers for Peace v. Nuclear Regulatory Comn., 789 F.2d 26 (D.C. Cir. 1986)(en banc) ........................................................................... 8, 9 San Marino Sav. & Loan Assn v. Fed. Home Loan Bank Bd., 605 F. Supp. 502 (C.D. Cal. 1984) ..................................................................................... 9 Sunshine State Bank v. FDIC, 783 F.2d 1580 (11th Cir. 1986) ......................................................................................... 33 United States v. Philadelphia Natl Bank, 374 U.S. 321 (1963) ............................................................................................................ 4 Woods v. Fed. Home Loan Bank Bd., 826 F.2d 1400 (5th Cir. 1987) ......................................................................................... 8, 9
FEDERAL STATUTES 12 U.S.C. 1461 ............................................................................................................................. 6 12 U.S.C. 1463(a)(1) .................................................................................................................... 3 12 U.S.C. 1464 ........................................................................................................................... 30 12 U.S.C. 1464(a)(2) .................................................................................................................... 3 12 U.S.C. 1464(d)(2)(A) .................................................................................................... 1, 6, 25 12 U.S.C. 1464(d)(2)(B) ........................................................................................................ 7, 25 12 U.S.C. 1818 ........................................................................................................................... 30 12 U.S.C. 1818(b) ...................................................................................................................... 15
12 U.S.C. 1818(h) ...................................................................................................................... 20 12 U.S.C. 1818(i) ....................................................................................................................... 20 12 U.S.C. 1821(c)(5) ................................................................................................................ 1, 6 12 U.S.C. 1821(c)(5)(C) .......................................................................................................... 1, 7 12 U.S.C. 1821(c)(5)(F) ..................................................................................................... 1, 7, 37 12 U.S.C. 1821(c)(5)(K)(iii) .......................................................................................... 1, 6, 7, 27 12 U.S.C. 1831i.......................................................................................................................... 33 12 U.S.C. 1831o ........................................................................................................................... 4 12 U.S.C. 1831o(b) .................................................................................................................. 1, 7 12 U.S.C. 1831o(c)(2) .................................................................................................................. 5 12 U.S.C. 1831o(e)(2) ............................................................................................................ 5, 20 12 U.S.C. 1831o(e)(2)(C) ...................................................................................................... 6, 27 12 U.S.C. 1831o(e)(2)(C)(i)(II) ........................................................................................... 20, 21 12 U.S.C. 1831o(e)(2)(C)(i)(III) .......................................................................................... 20, 21 12 U.S.C. 1831o(e)(2)(D)(i) .................................................................................................. 5, 31 12 U.S.C. 5414(a)(2)(B) .............................................................................................................. 1 Pub. L. No. 101-73, 103 Stat 183 (1989) ........................................................................................ 6
CODE OF FEDERAL REGULATIONS 12 C.F.R. 559.11 ........................................................................................................................ 18 12 C.F.R. 563, Subpart H ........................................................................................................... 15 12 C.F.R. 565.4(b) ........................................................................................................................ 5 12 C.F.R. 565.5(a)...................................................................................................................... 31
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FEDERAL REGISTER 78 Fed. Reg. 48950 (Aug. 9, 2011)................................................................................................. 5
LEGISLATIVE HISTORY H.R. Rep. No. 102-330 (1991) ........................................................................................................ 4
OTHER AUTHORITIES LCvR 7(h)(2) .................................................................................................................................. 2 OTS Examination Handbook ........................................................................................................ 10
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APPENDIX OF ACRONYMS
ALLL CAMELS CRP ETC FDIC FDICIA FINRA FIRREA LTC MBS MOU MSCS OCC OCC SOF OTS PCA UWB
Allowance for Loan and Lease Losses Capital, Assets, Management, Earnings, Liquidity, Sensitivity to interest rate risk Capital Restoration Plan Equity Trust Company Federal Deposit Insurance Corporation Federal Deposit Insurance Corporation Improvement Act of 1991 Financial Industry Regulatory Authority Financial Institutions Reform, Recovery and Enforcement Act of 1989 Lincoln Trust Company Mortgage-Backed Securities Memorandum of Understanding Matrix Settlement and Clearing Services Office of the Comptroller of the Currency Office of the Comptroller of the Currency Statement of Facts Office of Thrift Supervision Prompt Corrective Action United Western Bank
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INTRODUCTION Congress granted the Director of the Office of Thrift Supervision (OTS) the authority to appoint a receiver for any insured savings association if the Director determines, in the Directors discretion, that 1 or more of the grounds specified in section 1821(c)(5) of [Title 12] exists. 12 U.S.C. 1464(d)(2)(A). On January 21, 2011, after an extensive examination of the Banks operations, books and records OTS Acting Director John E. Bowman (Acting Director)1 determined that the factual record before him supported three separate statutory grounds for the appointment of the Federal Deposit Insurance Corporation (FDIC) as receiver for United Western Bank, (the Bank, UWB, or Plaintiff). The Acting Director concluded: UWB was in an unsafe or unsound condition to transact business (12 U.S.C. 1821(c)(5)(C)); UWB was likely to be unable to pay its obligations or meet its depositors demands in the normal course of business (12 U.S.C. 1821(c)(5)(F)); and UWB was undercapitalized (as defined in 12 U.S.C. 1831o(b)), and had failed to submit a capital restoration plan acceptable to the OTS (12 U.S.C. 1821(c)(5)(K)(iii)).
Administrative Record (AR) 2. As set forth below, the Acting Directors decision to appoint a receiver for UWB was a proper exercise of the Acting Directors discretion under the statute and is fully supported by the Administrative Record.2 The Acting Directors decision to appoint a receiver for UWB was not,
The Dodd-Frank Wall Street Reform and Consumer Protection Act merged the OTS into the Office of the Comptroller of the Currency (OCC) and transferred supervision of federal savings associations to the OCC. Since this case was pending as of the transfer date, the OCC and the Comptroller of the Currency were substituted as successor parties-in-interest to the OTS and its Acting Director. 12 U.S.C. 5414(a)(2)(B). The brief describes actions taken before the transfer date and, therefore, refers to the activities of the OTS and the Acting Director. 2 The OCC has previously filed the Administrative Record with the Court. The material facts relevant to this case, along with appropriate citations to the Administrative Record, are set (footnote continues on next page)
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as Plaintiff suggests, the result of a sudden dissatisfaction on the part of OTS with respect to the Banks business model. Nor was UWB, as Plaintiff contends, a viable institution that held significant capital and faced no risk of failing.3 Rather, as reflected in the Administrative Record, the Acting Directors decision to appoint a receiver was a wholly appropriate response to an institution that (1) was undercapitalized and did not appear to have a credible prospect of recapitalizing in the near term, and (2) as a result of its capital problems, presented an unacceptably high risk of an uncontrolled collapse due to liquidity issues. In challenging the Acting Directors decision to appoint a receiver for UWB, the Plaintiff tenders three arguments. First, Plaintiff contends that the capital restoration plan (CRP) submitted by UWB a plan premised in part on the OTS waiving the requirement that the Bank meet and maintain safe levels of capital was unreasonably rejected by the OTS notwithstanding the agencys well-considered objections. Second, Plaintiff argues that the OTS imagined UWBs liquidity issues a set of very real problems that the OTS concluded were caused by the Banks inability to maintain acceptable levels of capital and exacerbated by UWBs over-reliance on large institutional deposits for its liquidity. Third, the Bank disagrees with the OTSs assessment that the bank was operating in an unsafe and unsound manner, despite the fact that UWBs losses continued to mount, capital levels continued to decline, and the deposit structure put in place by Bank management left it exposed to a depositor run as conditions deteriorated.
forth in the Defendants Statement of Material Facts (OCC SOF), submitted contemporaneously with this memorandum pursuant to LCvR 7(h)(2). Memorandum in Support of United Western Banks Motion for Summary Judgment (Pl.s Mem.) at 1.
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As set forth below, the Court should conclude that plaintiffs objections to the [OTSs] examination are, in reality, simply disagreement regarding the choices made by [agency] personnel in examining and analyzing the bank[]. James Madison, Ltd. v. Ludwig, 868 F. Supp. 3, 9 (D.D.C. 1994), affd, 82 F.3d 1085 (D.C. Cir. 1996), cert. denied, 519 U.S. 1077 (1997). In each instance, the decision by the OTS was fully supported on the factual record and constituted an appropriate exercise of the Acting Directors statutory discretion. The OCC respectfully submits that, given the deteriorating conditions at UWB and the lack of an acceptable plan to recapitalize the bank in the near term, the Administrative Record fully supports the decision by the OTS to appoint a receiver for UWB. BACKGROUND I. STATUTORY AND REGULATORY BACKGROUND A. Prudential Supervision of Federal Savings Associations Plaintiff was a savings association chartered by the OTS pursuant to 12 U.S.C. 1464(a)(2). OTS was the prudential banking regulator for the institutions it chartered and, as such, was charged by Congress with responsibility for the examination, safe and sound operation, and regulation of savings associations including UWB. 12 U.S.C. 1463(a)(1). Because the Bank operated with the guarantee of the full-faith and credit of the United States for repayment of its insured deposits, the role of prudential banking regulator requires a level of governmental scrutiny and supervision not present in other industries. As the United States Court of Appeals for the District of Columbia Circuit has aptly described it, bank safety and soundness supervision is an iterative process of comment by the regulators and response by the bank . [B]ank examiners concern themselves with all manner of a bank's affairs: Not only the classification of assets and the review of financial transactions, but also the adequacy of security systems and of internal reporting requirements, and even the quality of managerial personnel are of concern to the examiners. 3
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In re Subpoena Served Upon the Comptroller of the Currency, 967 F.2d 630, 633-34 (D.C. Cir. 1992). See generally, United States v. Philadelphia Natl Bank, 374 U.S. 321, 329 (1963) (But perhaps the most effective weapon of federal regulation of banking is the broad visitorial power of federal bank examiners.). B. Prompt Corrective Action In 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 (the FDICIA), a portion of which was later codified at 12 U.S.C. 1831o, and is commonly known as the Prompt Corrective Action (PCA) statute. PCA was intended to reduce losses to the FDIC as insurer, mandating a series of corrective actions by prudential bank regulators when the condition of a bank begins to deteriorate. The comprehensive statutory PCA requirements reflect a Congressional judgment that is premised on the realization, based on the experience of many savings and loan resolutions, that the longer an insolvent insured depository institution is allowed to remain open, the more it will ultimately cost to resolve the institution. Therefore, regulatory discretion to allow an insolvent institution to remain open is narrowed, and a system of tripwires and timetables is established to guide the regulators in how to handle a failing or insolvent institution. H.R. Rep. No. 102-330 (1991), reprinted in 1991 U.S.C.C.A.N. 1916-17. One of the primary concepts in PCA is that specific regulatory responses are triggered when a banks capital falls below certain specified levels. Section 1831o divides bank capital levels into five different categories, ranging from well capitalized to critically undercapitalized. Congress directed each federal banking agency to establish by regulation specific capital levels for each PCA capital classification. 12 U.S.C. 1831o(c)(2). For OTSregulated institutions, the capital levels were as follows: Well capitalized means that the institution is not subject to certain institutionspecific capital requirements and has a total risk-based capital ratio of 10% or 4
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higher, has a Tier 1 risk-based capital ratio of 6.0% or higher, and a leverage ratio of 5.0% or higher. Adequately capitalized means that the institution has a total risk-based capital ratio of 8% or higher, has a Tier 1 risk-based capital ratio of 4.0% or higher, and has a leverage ratio of 4.0% or higher. Undercapitalized means that the institution has a total risk-based capital ratio of less than 8.0%, has a Tier 1 risk-based capital ratio of less than 4.0%, or has a leverage ratio of less than 4%. Significantly undercapitalized means that the institution has a total risk-based capital ratio of less than 6.0%, has a Tier 1 risk-based capital ratio of less than 3.0%, or has a leverage ratio of less than 3%. Critically undercapitalized means that the institution has a ratio of tangible equity to total assets that is equal to or less than 2.0%.
12 C.F.R. 565.4(b).4 When a regulated bank falls from adequately capitalized to undercapitalized, as Plaintiff did here, the regulatory scheme requires several things to happen. First, the bank must submit a CRP to the prudential regulator. 12 U.S.C. 1831o(e)(2). The statute requires the institution to submit its CRP not later than 45 days after the institution becomes undercapitalized. 12 U.S.C. 1831o(e)(2)(D)(i). Congress decreed that the prudential regulator shall not accept a capital restoration plan unless the plan is based on realistic assumptions, and is likely to succeed in restoring the institutions capital. 12 U.S.C. 1831o(e)(2)(C). The regulators are also instructed not to accept a CRP if it would appreciably increase the risk (including credit risk, interest-rate risk, and other types of risk) to which the institution is
The citations to OTS regulations throughout the brief are to the version that was in effect prior to the merger of the OTS into the OCC on July 21, 2011. To facilitate the OCCs enforcement and administration of former OTS rules and to make appropriate changes to these rules to reflect OCC supervision of federal savings associations as of the transfer date, the OCC republished OTS regulations found in Chapter V of Title 12 of the Code of Federal Regulations in Chapter I of Title 12 of the Code of Federal Regulations. 76 Fed. Reg. 48950 (Aug. 9, 2011). 5
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exposed. Id. If the reviewing agency determines that a banks CRP is not acceptable, then receivership of the bank is explicitly authorized by statute. 12 U.S.C. 1821(c)(5)(K)(iii). Another important consequence that flows from an insured depository institutions fall to PCA undercapitalized status is the statutory bar preventing these banks on from accepting employee benefit plan deposits. 12 U.S.C. 1821(a)(1)(D)(ii). As the Receivership Order noted, the Banks fall to undercapitalized status in the quarter before its receivership meant that certain large institutional depositors were statutorily required to, and in fact did, withdraw their deposits from the Bank. AR 5. See, infra at 21. See also OCC SOF 93. C. Receivership Decisions The OTS was created by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Pub. L. No. 101-73, 103 Stat. 183-553 (1989), the provisions of which were codified at 12 U.S.C. 1461 et seq. Among the powers accorded to the agency under FIRREA, Congress vested the Director of OTS with the authority to appoint a receiver for any insured savings association if the Director determines, in the Directors discretion, that 1 or more of the grounds specified in [12 U.S.C. 1821(c)(5)] exists. 12 U.S.C. 1464(d)(2)(A). Of the twelve separate bases for the appointment of a receiver set forth in 12 U.S.C. 1821(c)(5), the three at issue in this case are: The determination that UWB was in an unsafe or unsound condition to transact business (12 U.S.C. 1821(c)(5)(C)); The determination that UWB was likely to be unable to pay its obligations or meet its depositors demands in the normal course of business (12 U.S.C. 1821(c)(5)(F)); and The determination that UWB was undercapitalized (as defined in 12 U.S.C. 1831o(b)), and had failed to submit a capital restoration plan acceptable to the OTS (12 U.S.C. 1821(c)(5)(K)(iii)).
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FIRREA expressly places the decision whether to appoint a receiver for an OTSchartered institution within the discretion of the Director. FIRREA establishes that the determination of whether the statutory grounds to appoint a [receiver] exist lies in the province of the director's opinion. Franklin Sav. Assn v. Office of Thrift Supervision, 934 F.2d 1127, 1137 (10th Cir. 1991), cert. denied, 503 U.S. 937 (1992)(emphasis in original). See 12 U.S.C. 1464(d)(2)(B) (the Director shall have exclusive power and jurisdiction to appoint a receiver for a federal savings association if in the opinion of the Director any ground for the appointment of a conservator or receiver exists).5 Congress comprehensive statutory scheme contemplates that the OTS Director will act promptly in appointing a [receiver] once he is of the opinion that a statutory ground exists. Franklin Savings, 934 F.2d at 1137. SCOPE AND STANDARD OF REVIEW In a case challenging the appointment of a receiver, both the scope and the standard of review are limited. The sole issue for the Court is whether there were sufficient facts before the Acting Director, when he acted, on which he could reasonably have concluded that at least one of the statutory grounds for the appointment of a receiver existed. Biscayne Fed. Sav. & Loan Assn v. Fed. Home Loan Bank Bd., 720 F.2d 1499, 1503 (11th Cir. 1983), cert. denied, 467 U.S. 1215 (1984); Franklin Savings, 934 F.2d at 1148. The scope of review in an action challenging the appointment of a receiver is limited to the administrative record that the decision maker considered and relied upon at the time he or she acted. James Madison, Ltd. v. Ludwig, 82 F. 3d 1085, 1095 (D.C. Cir. 1995); Franklin Savings, 934 F. 2d at 1138-42; Woods v. Fed. Home Loan Bank Bd., 826 F.2d 1400, 1406-09 (5th Cir. 1987), cert. denied, 485 U.S. 959 (1988);
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This provision was amended effective July 21, 2011 to substitute appropriate Federal banking agency for the Director.
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Guaranty Sav. & Loan Ass'n v. Fed. Home Loan Bank Bd., 794 F.2d 1339, 1341-43 (8th Cir. 1986); Gibraltar Sav. v. Ryan, 772 F. Supp. 1290, 1293 (D.D.C. 1991); see also, First Natl Bank & Trust v. Dept. of the Treasury, 63 F.3d 894, 897-98 (9th Cir. 1995), cert. denied, 517 U.S. 1233 (1996). The standard of review for the Acting Directors decision to appoint a receiver for UWB is whether the Acting Director acted in an arbitrary or capricious manner. See Camp v. Pitts, 411 U.S. 138, 142 (1973); Franklin Savings, 934 F.2d at 1142; Woods, 826 F.2d at 1408-09; Guaranty, 794 F.2d at 1342; Gibraltar, 772 F. Supp. at 1292. As the Court of Appeals has stated, the arbitrary and capricious standard of review is highly deferential to the agency, presuming the agencys action to be valid. Environmental Defense Fund v. Costle, 657 F.2d 275, 283 (D.C. Cir. 1981). District courts that are called upon to review a decision to appoint a receiver for a depository institution do not resolve factual issues, but operate instead as appellate courts resolving legal questions. Like appellate courts, district courts do not duplicate agency factfinding efforts. Instead, they address a predominantly legal issue: Did the agency articulate a rational connection between the facts found and the choice made? James Madison, 82 F.3d at 1096, quoting Bowman Transp. Inc. v. Arkansas-Best Freight Sys. Inc., 419 U.S. 281 (1974)(citations omitted). The party challenging the agency action bears the burden of proof. San Luis Obispo Mothers for Peace v. Nuclear Regulatory Comn., 789 F.2d 26, 37 (D.C. Cir.) (en banc), cert. denied, 479 U.S. 923 (1986); Guaranty, 794 F.2d. at 1342. Moreover, the courts are precluded from substituting their judgments for those of the agency. Franklin Savings, 934 F.2d at 1142; Woods, 826 F.2d at 1409; San Luis Obispo, 789 F.2d at 37; Environmental Defense Fund, 657 F.2d at 283; see also, First 8
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Natl Bank, 63 F.3d at 899. Rather, the agencys decision must be affirmed if there is a rational basis for it. Environmental Defense Fund, 657 F.2d at 283; Franklin Savings, 934 F.2d at 1139, 1149; San Marino Sav. & Loan Ass'n v. Fed. Home Loan Bank Bd., 605 F. Supp. 502, 508 (C.D. Cal. 1984). See also James Madison, 82 F.3d at 1098-99. In determining whether a rational basis exists in the record for the appointment of a receiver, the Court must accord great weight and substantial deference to the Acting Directors findings regarding the Banks financial condition. See Franklin Savings, 934 F.2d at 1141; Fidelity Sav. & Loan Assn v. Fed. Home Loan Bank Bd., 689 F.2d 803, 808 (9th Cir. 1982), cert. denied, 461 U.S. 914 (1983); San Marino, 605 F. Supp. at 509. In sum, the OTS action must be sustained if the administrative record contains sufficient information for the Acting Director, exercising his expert judgment, to have rationally concluded that any one of the three grounds contained in the Receivership Order existed when he signed it. As shown below, the information in the administrative record supports all three grounds for appointing the FDIC as receiver.
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ARGUMENT I. THE ADMINISTRATIVE RECORD DEMONSTRATES THAT UWB WAS UNDERCAPITALIZED AND PRESENTED AN UNACCEPTABLY HIGH RISK OF AN UNCONTROLLED COLLAPSE DUE TO LIQUDITY ISSUES A. The Bank Declines Into an Unsafe and Unsound Condition
In October 2007, OTS began a comprehensive examination of the Bank, covering all aspects of its operations and based upon financial data the Bank supplied OTS as of June 30, 2007. At the time of the exam and at all times relevant to the case, the Bank was a whollyowned subsidiary of United Western Bancorp, Inc., (the Holding Company or Bancorp). At the time of the 2007 exam, the OTS warned the Bank that it had concentrations of risky construction and nonresidential land loans, as well as mortgage-backed securities (MBS) that were not guaranteed by any federal agency or chartered instrumentality. Significantly, in light of future events, OTS also warned the Bank of the concentration risk presented by its institutional deposits, with just four institutional entities representing 73% of the Banks total deposits. OCC SOF 1-5. As of June 30, 2007, the Bank had a 14.38% Total Risk-Based capital ratio and a 13.69% Tier 1 (Core) capital ratio.6 Id. 2. Because of the various concentration risks, and because OTS found that the Banks capital was in the process of declining, OTS directed the Bank in the 2007
Capital absorbs losses, promotes public confidence, and provides protection to depositors and the FDIC insurance fund. OTS Examination Handbook at 120.1. http://files.ots.treas.gov/422017.pdf (accessed May 7, 2012). Capital provides a financial cushion that can allow a bank to continue operating during periods of losses or other adverse conditions. Id.
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examination to maintain a prudent level of capital above the well capitalized level.7 Id. 7 (emphasis added). The examiners gave the Bank a composite rating of 2 on a scale of 1 to 5, with 1 the highest possible rating and 5 the lowest.8 On March 30, 2009, OTSs examiners commenced another comprehensive examination of the Bank, utilizing financial data reported by the Bank as of December 31, 2008. The examiners found that the Banks year-end capital ratios had significantly declined to a level just above the threshold to be considered well capitalized. During the course of the 2009 exam, the Bank reported its capital levels as of June 30, 2009, showing still further deterioration.9 Capital was steadily declining, and the Banks outstanding portfolio of loans at risk of not being fully repaid with interest (classified assets) was steadily increasing. The Banks concentrated portfolio of MBS assets was losing value and its classified assets had nearly tripled, from $25.2 million on June 30, 2007 to $70.3 million as of March 31, 2009. OCC SOF 8-12. After discovering that the Banks concentration in institutional deposits had reached 87% of total deposits, the examiners repeated their earlier warnings about the risky nature of this concentration and warned the Bank that termination of one or more of the larger institutional
The Bank also informed the examiners that UWB had changed its business strategy in late 2005 to move away from reliance upon institutional depositors to collecting deposits through a community branch network. OCC SOF 6. The Bank did not follow through with this strategy. As of the date of receivership in 2011, nearly 70% of its deposits were associated with only four depositors, almost identical to the 2007 figure. Id. 107.
8
The federal banking regulatory agencies rate banks Capital, Assets, Management, Earnings, Liquidity, and Sensitivity (CAMELS) on a scale of 1 to 5 with 1 being the highest rating, as well as a composite rating reflecting the overall condition. See OCC SOF 3 n.3.
9
As of June 30, 2009, the Bank reported Total Risk-Based and Tier 1 (Core) capital ratios of 10.17% and 9.07%, respectively. OCC SOF 28. As noted above, in the 2007 Examination, those ratios had been 14.38% and 13.69%, respectively. Id. 2.
11
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deposit relationships could place UWB in a precarious liquidity position, as it may not be able to find replacement funding on reasonable terms. OCC SOF 14. OTS completed the 2009 Report of Examination on August 4, 2009, and the Bank was downgraded to a composite CAMELS 3 rating.10 A key portion of the Report was a directive to the Bank to raise its capital to safe levels.11 The Bank was required to meet and maintain a Total Risk-Based capital ratio to at least 12% and a Tier 1 (Core) capital ratio to at least 8% not later than December 31, 2009. OCC SOF 15. Just as OTS issued the 2009 Report, the Banks reported earnings collapsed. For the quarter ending June 30, 2009 the Bank reported to OTS that it had lost over $29 million. The following two quarters saw losses totaling over $42 million, with the Bank losing a total of over $69 million on the year. OCC SOF 19-22. By the end of 2009, the Bank had not only failed
10
Institutions with a composite 3 rating exhibit some degree of supervisory concern in one or more component areas. These financial institutions exhibit a combination of weaknesses that may range from moderate to severe; however, the magnitude of the deficiencies generally will not cause a component to be rated more severely than 4. Management may lack the ability or willingness to effectively address weaknesses within appropriate time frames. Financial institutions in this group generally are less capable of withstanding business fluctuations and are more vulnerable to outside influences than those institutions rated a composite 1 or 2. Additionally, these financial institutions may be in significant noncompliance with laws and regulations. Risk management practices may be less than satisfactory relative to the institutions size, complexity, and risk profile. These financial institutions require more than normal supervision, which may include formal or informal enforcement actions. Failure appears unlikely, however, given the overall strength and financial capacity of these institutions. OCC SOF 16 n.6.
11
In 2008 and in 2009 the Holding Company downstreamed capital into the Bank. In 2008 the Bancorp sold off assets and injected approximately $37.5 million cash into the Bank. In 2009 the Holding Company floated a stock offering on the NASDAQ capital market, raising approximately $81 million, of which $61 million was injected as capital into the Bank. However, because of the mounting levels of losses and classified assets at the Bank, these funds were quickly used up and failed to stem the decline in the Banks capital levels. OCC SOF 2426. Because of its dwindling stock price and mounting losses, thereafter the Bancorp was unable to go back to the public markets to seek more capital in a standard capital raise. Id. 60.
12
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to meet and maintain the safe 12% and 8% capital levels required by the 2009 Examination, its capital cushion had fallen even further, despite the Holding Companys injection of capital into UWB. OCC SOF 23-26. As of year-end 2009, the Banks Total Risk-Based and Tier 1 (Core) capital ratios had fallen to 10.07% and 8.81% respectively, just above the well capitalized level. OCC SOF 30. The Banks 2009 record of losses and dwindling capital led to an informal enforcement action. The Bank and the OTS signed a Memorandum of Understanding (MOU) on December 10, 2009, wherein the Bank committed to raising its capital levels to the safe 12% and 8% levels not later than June 30, 2010.12 OCC SOF 31-34. OTS examiners commenced a limited examination at the Bank on January 11, 2010, which concluded on April 28, 2010. During the examination, they discovered irregularities with the Banks accounting for the valuation of its MBS portfolio. OCC SOF 42-44. In addition, the examiners found that the Banks classified assets were increasing, primarily due to the Banks concentration in risky construction and land loans that OTS had been warning the Bank about since 2007. OCC SOF 4, 45. The OTSs earlier concerns regarding the Banks overreliance upon institutional deposits carried over to this examination as well. The examiners discovered that the deposit concentration had not been addressed, and that almost 80% of the Banks deposits were concentrated in institutional depositors, with a single depositor - Equity Trust
12
The Bank also committed to reduce its classified assets. The MOU required the Bank to reduce its ratio of classified assets to Tier 1 (Core) capital plus allowances for loan and lease lossess (ALLL) to not more than 25% by December 31, 2010. But instead of reducing its levels of bad loans, the Bank saw them mushroom. As of September 30, 2008 the Banks classified assets stood at $25 million. As of September 30, 2009 this figure had reached $143 million. On September 30, 2010, the figure was $348 million, or 200% of the Banks Tier 1 (Core) capital plus ALLL. OCC SOF 33.
13
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Company (ETC) - accounting for 46% of the Banks deposits. The amount of deposits in the Bank attributed to ETC had almost doubled between 2007 and the end of 2009. Id. 41. The examiners concluded that the Banks combination of increasing losses, dwindling capital, and continuing concentration in institutional deposits was putting UWB at risk of failure. On February 11, 2010, the Bank was informed that it was downgraded to a composite CAMELS 4 rating, the next-to-lowest level, meaning that [f]ailure is a distinct possibility if the problems and weaknesses are not satisfactorily addressed and resolved.13 OCC SOF 46 (emphasis added). OTS repeated the receivership warning to the Bank two months later, when it wrote to the Bank, warning that the Banks concentration in institutional deposits put the bank at risk of liquidity failure should one or more of its institutional depositors depart. OCC SOF 14, 47. Despite repeated admonitions to raise capital and reduce its level of classified assets, throughout 2010 the Banks level of capital continued to dwindle and its level of classified assets continued to increase. The Bank reported negative earnings in 2010 with its losses exceeding $82 million. OCC SOF 50-54 (capital); 104 (classified assets); 35-39 (losses). As of March 31, 2010, the Bank was no longer well capitalized; its Total Risk-Based capital ratio of
13
Institutions with a composite 4 rating generally exhibit unsafe and unsound practices or conditions. There are serious financial or managerial deficiencies that result in unsatisfactory performance. The problems range from severe to critically deficient. The weaknesses and problems are not being satisfactorily addressed or resolved by the board of directors and management. Financial institutions in this group generally are not capable of withstanding business fluctuations. There may be significant noncompliance with laws and regulations. Risk management practices are generally unacceptable relative to the institutions size, complexity, and risk profile. Close supervisory attention is required, which means, in most cases, formal enforcement action is necessary to address the problems. Institutions in this group pose a risk to the deposit insurance fund. Failure is a distinct possibility if the problems and weaknesses are not satisfactorily addressed and resolved. OCC SOF 46.
14
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9.02% as of that date meant that the Bank was now considered only adequately capitalized. Id. 50. The Banks decline to adequately capitalized status and its continuing inability to raise its capital levels pursuant to the directives contained in the 2009 Examination and 2009 MOU meant that a formal enforcement action was necessary. On June 25, 2010, the Bank consented to the issuance of a formal Cease and Desist Order (C&D Order or Consent Order), the most severe enforcement action that the OTS could take against UWB. OCC SOF 55-58. See 12 U.S.C. 1818(b). The C&D Order found that the Bank had been engaged in unsafe and unsound banking practices that resulted in deteriorating asset quality, ineffective risk management practices, inadequate oversight and supervision of the lending function, and inadequate liquidity planning. OCC SOF 57. The Order placed a number of binding legal requirements on the Bank to address its unsafe or unsound practices and deteriorating condition: Paragraph 3 of the C&D Order required the Bank to meet and maintain safe capital levels, including a Total Risk-Based Capital Ratio of 12% and a Tier 1 (Core) capital ratio of 8% beginning June 30, 2010. Paragraph 19 required the Bank not to directly or indirectly make, invest in, purchase, or commit to make or purchase new construction or land loans without prior written non-objection by the OTS Regional Director. Paragraph 26 restricted growth in total Bank assets to an amount not greater than the net interest credited on deposit liabilities during the prior quarter, without prior written notice of non-objection of the OTS Regional Director.14 Paragraph 27 required the Bank to comply with prior notification requirements for changes in directors and Senior Executive Officers of the Bank described in 12 C.F.R. 563, Subpart H.
On a banks balance sheet, its assets must be equal to its liabilities plus capital. Consequently, the limitation on UWBs growth in assets also served to limit the extent to which its deposit liabilities could grow.
14
15
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Paragraph 29 prevented the Bank from entering into, renewing, extending, or revising any arrangement for compensation or benefits for any Senior Executive Officer or director of the Bank without prior OTS approval.
OCC SOF 58. At no point in time did the Bank comply with the most important of these requirements: the provision to meet and maintain a safe capital level. Instead, throughout 2010 the Banks losses continued to mount and its capital continued to dissipate. At the end of the quarter ending September 30, 2010, the Bank reported its 2010 losses had already reached almost $69 million, about equal to its total losses for the whole of the previous year. OCC SOF 38. As of the same date, the Bank also became undercapitalized for PCA purposes, as its Total Risk-Based capital ratio fell below the 8% adequately capitalized cutoff, with the Banks ratio at only 7.80%. As of September 30, 2010, the Banks Tier 1 (Core) capital ratio was 6.53%. Id. 52. B. The Banks Efforts to Recapitalize Are Unsuccessful
With the Bank weighed down with non-performing assets, beset with sinking capital levels, and facing a potential liquidity crisis if one or more of its large institutional depositors withdrew their deposits, UWB and its parent company were required to look for sources of additional capital to bolster the Bank. Despite repeated assurances to the OTS that an infusion was imminent,15 the Bank was unable to put together a viable transaction. Ultimately, the Holding Company and the Bank devised a complex and ultimately unsuccessful private-placement recapitalization plan involving private equity funds. On
15
The Bank and its parent repeatedly promised throughout 2010 that they were on the verge of raising capital. See, e.g., OCC SOF 68 (May 12, 2010 promise of a $125 million capital raise to close not later than June 30, 2010); 69 (June 10, 2010 promise of closing in the near future); 70 (July 2, 2010 promise of capital to be committed by August 9, 2010 and transaction to close September 10, 2010); 71 (September 16, 2010 promise of a $200 to $250 million capital raise not later than September 27, 2010).
16
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October 28, 2010, the Holding Company entered into an investment agreement (Investment Agreement) with Lovell Minnick Equity Partners, Oak Hill Capital Partners, and Henry C. Duques (collectively Anchor Investors). Instead of a $200 million to $250 million capital raise as the Bank had previously promised to OTS, the Investment Agreement provided that the Anchor Investors would contribute only $103 million, all of which was contingent upon meeting a large number of written conditions prior to or at the time of closing.16 Among these conditions was a requirement for the Bank to obtain still more investors who would contribute at least another $97 million and no more than $102 million to the deal.17 OCC SOF 61. More important from the perspective of whether the OTS could approve the plan were the Investment Agreements other contingencies: conditions precedent to the consummation of the recapitalization that hinged on the agencys willingness to waive a number of the important safety and soundness provisions contained in the Cease and Desist Order that had been issued just four months before. In order for the Investment Agreement to be consummated, it would be necessary for the OTS to waive paragraphs 3, 19, 26, 27, and 29 of the C&D Order.18 OCC SOF 62. In addition, the required OTS waiver of the asset growth restrictions contained in 26 of the
16
A provision of the Investment Agreement prohibited the Bank from seeking other capital raising opportunities, locking UWB in and making the October 28, 2010 agreement the only hope the Bank had of raising capital. AR 1028-29.
17
Amidst many promises and missed deadlines by the Bank and Holding Company, these additional investors never materialized. See generally OCC SOF 72-78.
18
As previously noted, 3 of the Consent Order required the Bank to meet and maintain safe capital level ratios of 12% and 8%, 19 prevented the making any new construction or land loans without prior OTS consent, 26 prevented the Bank from growing its asset size materially larger without prior OTS consent, 27 prevented the Bank from changing its directors or senior managers without prior notification to OTS, and 29 prevented the Bank from entering into any new or changing any old compensation arrangements for senior executives or directors without prior OTS approval. OCC SOF 58.
17
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C&D Order was to be accompanied by agency approval of a business plan that would further increase the size of the Banks institutional deposits and would expand the asset size of the Bank by approximately 75%, from $2 billion to $3.5 billion. OCC SOF 63, 91. Finally, the Investment Agreement included another condition precedent: a requirement that the OTS, the FDIC, and the Financial Industry Regulatory Authority (FINRA) approve the Banks purchase of a brokerage firm, Legent Clearing, LLC (Legent), and its addition to the Bank as an operating subsidiary.19 Regulatory approval for this acquisition was necessary pursuant to 12 U.S.C 1828(m). See also 12 C.F.R. 559.11. Legents majority owner was Henry Duques, one of the Anchor Investors. OCC SOF 96 n.32. Guy Gibson, a former Plaintiff in this case as well as a Director of the Bank, was the founder of Legent and a member of Legents Board of Directors while the Bank was engaged in negotiations to purchase the money-losing brokerage. Id. C. The Bank Enters its Final Crisis
In late 2010, the combination of the Banks continuing losses, mounting classified assets, declining capital, inability to obtain investors willing to recapitalize the Bank, and insistence on a continuing concentration in institutional deposits led to a liquidity crisis that resulted in the failure of the Bank. Less than a month after signing its Investment Agreement, the Bank met with OTS staff in Washington, D.C. to discuss UWBs recapitalization efforts. At the meeting, the Bank
19
Legent was an unprofitable broker dealer that had been the subject of public disciplinary enforcement actions by FINRA. This included failure to have an effective anti-money laundering program, failure to file Suspicious Activity Reports for suspected money laundering, as well as for allowing itself to be used as a vehicle by known penny stock fraudsters. OCC SOF 96. In addition to losing money every year between 2008 and 2010, Legent also lost its largest customer in the Spring of 2010, which represented 68% of its accounts. Id. 95.
18
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outlined the various concessions and approvals that it required from the OTS and the other regulators if the Bank was to satisfy the conditions precedent imposed by the Anchor Investors in the Investment Agreement. The Bank also outlined the modifications to the Cease and Desist Order that were necessary in order to obtain the investment, which included: (1) a waiver of the Orders requirement that the Bank meet and maintain safe capital ratios of 12% and 8%; (2) permission to resume the high-risk land and construction lending programs that had already resulted in massive losses for the Bank; and (3) relaxation of the asset growth provisions of the Order, to allow the Bank to rapidly grow from about $2 billion to well over $3.5 billion in a short period. OCC SOF 64 The Banks presentation confirmed for the examiners that UWB was unwilling to comply with the terms of the C&D Order that it had consented to in June 2010, the provisions of which were necessary to ensure the safe and sound operation of the Bank.20 Id. UWB also insisted that the OTS and FDIC promptly approve the Banks purchase of Legent. Id. In order to clarify the Banks position on revisions to the C&D Order and its acquisition of Legent, the OTS Regional Director asked the Bank to identify which provisions of the Investment Agreements conditions precedent were must-haves and which were nice-tohave. Id. 65. The Bank responded by letter that the must have provisions included a waiver of the Consent Orders requirement to meet and maintain safe capital levels of 12% and 8%, as well as approval of the Legent purchase. Id. 66. The Banks letter represented that the Anchor Investors might be willing to waive other conditions precedent to the Investment Agreement.
20
During the presentation, UWB noted that it still had not obtained the additional investors and had no binding agreements from parties able to invest the additional $100 million as required by the Investment Agreement. The Bank promised OTS that the missing investors would be promptly obtained and that recapitalization would be ready to proceed not later than December 31, 2010. AR 1157. Like all the Banks other promises of swift recapitalization, this commitment was not met.
19
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However, none of these assurances was provided to OTS by the Anchor Investors themselves. Id. Indeed, in subsequent filings made to the OTS, the proposed investors themselves all explicitly reaffirmed their insistence that the agency waive all the C&D Order provisions as contemplated in the October 28, 2010 Investment Agreement.21 While reserving judgment on the questionable Legent purchase, the OTSs Regional Director wrote back to the Bank on December 3, 2010, informing UWB that the OTS would not entertain the Banks demand to waive the meet and maintain safe capital provision of the C&D Order. OCC SOF 67. Thus, the Bank was again on notice that it was required to comply with the capital provisions of the Consent Order.22 Nevertheless, the Bank continued to insist that it be relieved of its obligation to meet and maintain safe capital levels. 1. The Banks Descent to Undercapitalized Status Triggers the Statutory Requirement that the Bank File a Capital Restoration Plan The Bank became undercapitalized for PCA purposes on September 30, 2010. This status was disclosed to investors by the Bancorp in a filing with the Securities and Exchange Commission on December 14, 2010. OCC SOF 52. The PCA statute, 12 U.S.C. 1831o(e)(2), requires an undercapitalized bank to provide its regulator with a capital restoration plan based upon realistic assumptions, that will be likely to restore the failing institutions capital without
21
See, e.g., OCC SOF 77.
22
While the Bank now attempts to describe the C&D Order as arbitrary and capricious in support of its motion for summary judgment, this issue is not before the Court. Congress has withdrawn jurisdiction for any district court to consider, either directly or collaterally, a challenge to a cease and order issued under 12 U.S.C. 1818. 12 U.S.C. 1818(h) and (i). Rhoades v. Casey, 196 F.3d 592, 597 (5th Cir. 1999), cert. denied, 531 U.S. 924 (2000) (district court does not have jurisdiction to affect by injunction or otherwise the enforcement of any order, or to review, modify, suspend, terminate or set aside any order issued by OTS). In executing its consent to the C&D Order, the Bank explicitly waived all right of judicial review. OCC SOF 56.
20
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appreciably increasing the risks to which the bank is exposed. 12 U.S.C. 1831o(e)(2)(C)(i)(II)(III). The Bank submitted its CRP to the OTS on December 20, 2010. The plan was largely a recapitulation of the Investment Agreement of October 28, 2010. Notably, UWB repeated its insistence that OTS promptly approve the purchase of the money-losing Legent Clearing as an operating subsidiary of the Bank, requested again that it be relieved of the responsibility to meet and maintain the safe capital ratios of 12% and 8% as required by the C&D Order, and submitted a revised business plan that would violate the asset-growth restrictions of the C&D Order by growing assets from approximately $2.1 billion as of year-end 2010 to almost $3.5 billion by 2013. Finally, the Banks CRP projected continued reliance upon institutional deposits, the very concentration that posed the most imminent risk to the Bank. OCC SOF 91-92. 2. Institutional Depositors Begin to Flee the Bank
On December 20, 2010, OTS examiners commenced a limited examination of the Bank. Two days later they completed their review and concluded that given the Banks unsatisfactory liquidity position, its undercapitalized status greatly raised the level of risk. The examiners concluded that withdrawal of institutional deposits was likely, in part because of the statutory restriction against undercapitalized banks holding employee benefit plan deposits. OCC SOF 93. The examiners fears were fully justified. Two large institutional depositors, Matrix Settlement and Clearing Services (MSCS) and CPI, began to pull their combined $215 million of deposits from the Bank on December 20, 2010, a process that continued over the next several days. OCC SOF 82.
21
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On December 22, 2010, as MSCS and CPI were withdrawing their deposits, UWB approached another large institutional depositor, Lincoln Trust Company (LTC), and asked it not to withdraw its funds. The Bank procured a short-term forbearance from LTC, which pledged to hold off on withdrawing its funds on deposit until January 31, 2011, subject to the specific condition that the Bank would return to well capitalized status as of that date. LTC also reserved its right to withdraw its funds sooner if the Banks capital position worsened. OCC SOF 83. The Banks largest institutional depositor, Equity Trust Company, had previously given UWB notice that it would withdraw its funds if the Bank did not recapitalize by December 31, 2010. Id. 84. The Bank also was able to convince ETC to refrain from immediately withdrawing its deposits. Two days before ETC was set to leave, it gave the Bank a final shortterm forbearance until February 15, 2011. ETC informed the Bank that this was an absolute outside date for recapitalization, after which ETC would withdraw its deposits. Id. ETCs $697 million in deposits at the Bank on the date of the receivership exceeded the entire liquidity of the Bank. Id. In the midst of the withdrawals of institutional deposits, on December 29, 2010, OTS downgraded UWB to a composite CAMELS rating of 5, the lowest possible rating.23 Id. 94. As this Court observed in a previous receivership challenge case, a rating of 5 means that an Institutions with a composite 5 rating exhibit extremely unsafe and unsound practices or conditions; exhibit a critically deficient performance; often contain inadequate risk management practices relative to the institutions size, complexity, and risk profile; and are of the greatest supervisory concern. The volume and severity of the problems are beyond managements ability or willingness to control or correct. Immediate outside financial or other assistance is needed in order for the financial institution to be viable. Ongoing supervisory attention is necessary. Institutions in this group pose a significant risk to the deposit insurance fund and failure is highly probable. OCC SOF 94 n.29.
23
22
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institution has an extremely high short-term probability of failure in the near term, and that an immediate infusion of capital is required. James Madison, 868 F. Supp. at 4. D. OTS Denies the Banks Application to Purchase Legent, as Well as its Capital Restoration Plan By letter dated January 18, 2011, the OTS denied the Banks application to purchase Legent. By separate letter sent the same day, the OTS rejected the capital restoration plan. The OTS determined that the Legent application was objectionable on multiple grounds. First, Legents unsatisfactory enforcement record, with multiple, serious, and recent FINRA disciplinary violations, made the institution an inappropriate subsidiary for a federally-insured bank. OCC SOF 96. Second, OTS determined that Legent was an unprofitable business that had been losing money for three consecutive years, and had recently lost its largest customer which represented 68% of its accounts. The OTS, therefore, objected to the incorporation of this money-losing brokerage into a money-losing bank. Id. 95. Third, the purchase of Legent and placement of all its institutional deposits in the Bank would exacerbate, rather than alleviate, the Banks already high concentration of institutional deposits that was the foundation of the severe liquidity risks facing UWB. Id. 98. Because the purchase of Legent and its incorporation into the Bank was a must-have condition for the Investment Agreement and the Banks CRP, the denial of the Legent application meant that the Banks entire recapitalization transaction could not go forward.24 Id. The Bank had previously explained that each step is predicated upon consummation of the
24
The Administrative Record shows that UWB also failed to obtain the approval of either FINRA or the FDIC for the Legent purchase, approvals which were necessary for the transaction to take place. OCC SOF 98.
23
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others, and the failure to consummate any step will adversely impact the Recapitalization Transaction. Id. 67 n.23. On the same date as OTS denied the application to purchase Legent, the OTSs Regional Director denied the Banks capital restoration plan. Id. 99-102. While the denial of the CRP was premised on a number of grounds, the most salient points for the denial are25: The CRP was premised on the October 28, 2010 Investment Agreement that required the Bank to obtain $100 million in commitments from additional investors beyond the $100 million from Anchor Investors. Three months after the Investment Agreement was signed, no additional investors had been found, and thus it was unrealistic to assume that the required investors would be immediately forthcoming; The CRP required OTS to waive various provisions of the Cease and Desist Order, including the one requiring the Bank to meet and maintain safe capital ratios of 12% and 8% and another restricting asset growth. The CRP incorrectly assumed that OTS would waive these provisions, even though their compliance was mandated by the C&D Order issued in June 2010; The CRP was premised upon the Banks proposal to increase its institutional deposits from $1.2 billion to $1.8 billion, an unacceptable increase in risk for the Bank; And finally, the CRP was dependent upon the purchase of Legent as an operating subsidiary of the Bank, an acquisition that the OTS had already denied.
See AR 4124-4125. E. The Acting Director Appoints the FDIC as Receiver for the Bank After denial of the Legent purchase and rejection of UWBs capital restoration plan, OTS field staff submitted a supervisory recommendation (S-Memo) to the agencys Deputy Director, recommending that UWB be placed into receivership. The S-Memo was signed on
25
While summarized at OCC SOF 99-102, the actual denial is found at AR 4123-27 and the staffs analyses of the various provisions of the CRP are found at AR 4129-37, 4158-59, and 4175-76.
24
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January 19, 2011.26 OCC SOF 103-109. The 29-page memorandum, with 100 exhibits, outlined in specific detail the supervisory history and condition of the Bank. The S-Memo was endorsed by the Deputy Director the next day.27 Id. 103. On January 20, 2011, the Acting Chief Counsel for the OTS signed the L-Memo, opining to the Acting Director that, as a matter of law, three separate grounds for receivership existed. Id. 110-113. On Friday, January 21, 2011, being fully advised by his staff, the Acting Director determined that in his opinion there were three separate legal grounds to place the Bank into receivership.28 Id. 114-116. Based on the record before him, the Acting Director appointed the FDIC as receiver for the Bank.
26
Plaintiff cites to a Problem Bank Memo dated June 29, 2010, authored by an examiner and financial analyst, as proof of that the OTS had already determined to appoint a receiver for UWB prior to January of 2011. Pl.s Mem. at 12. This is simply not the case. While the opinion and eventual recommendation of field staff regarding UWBs condition and prospects was certainly considered by the Acting Director, the statute enacted by Congress required that the final decision whether or not to appoint a receiver for UWB rested with him alone. 12 U.S.C. 1464(d)(2)(A)-(B). The Administrative Record reflects that the Acting Directors decision to appoint a receiver was reached in January 21, 2011, and not before. AR 8. The Problem Bank Memo merely captures the contemporaneous concerns of the field staff regarding the institution as well as their frank assessment of the Bank for the benefit of OTSs management; it does not reflect the Acting Directors final decision or that a particular outcome was pre-ordained.
27
The fact that the FDIC Board of Directors voted on November 9, 2010 to make preparations for a possible receivership is of little moment. See Pl.s Mem. at 16. As the FDIC itself explained to the Court, it must prepare to receive many failing banks. Making preparations in case a bank fails is not tantamount to a decision to place a bank into receivership. Many banks in troubled condition take effective remedial measures and avoid failure. See FDICs Reply to Response to Notice of In Camera Production of Documents, Docket No. 79 at 7.
28
Having received notice that a receivership was imminent, on January 21, 2011, the Bank attempted to forestall the appointment by submitting to OTS a number of non-binding expressions of interest from investors who might be interested in the Bank. One of these expressions was from an alleged Cayman Islands hedge fund operating out of a post office box. OCC SOF 77-78. OTS staff carefully reviewed the Banks various submissions and concluded that their submission did not change the supervisory recommendation for receivership. Id. 78. 25
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II.
THE ADMINISTRATIVE RECORD SUPPORTS THE ACTING DIRECTORS DETERMINATION WITH RESPECT TO EACH OF THE THREE GROUNDS FOR RECEIVERSHIP The sole question before the Court is whether the Administrative Record supports the
conclusion that the Acting Director had a rational basis to exercise his statutory discretion to appoint a receiver for United Western Bank. James Madison, 82 F.3d at 1096; Franklin Savings, 934 F.2d at 1139. The OCC respectfully submits that the Administrative Record fully supports the decision by the Acting Director to appoint a receiver for UWB. A. The Administrative Record Contains Sufficient Information to Support the Acting Directors Opinion that the Bank Was Likely to Be Unable to Meet Its Depositors Demands and Other Obligations in the Normal Course of Business When it Was Closed
One ground upon which the Acting Director acted on January 21, 2011 to appoint a receiver was his determination that the Bank was likely to be unable to meet its depositors demands and other obligations in the normal course of business. AR 6-7. As set forth in the Administrative Record, institutional depositors, including MSCS and CPI, had already begun to pull their deposits out of the Bank in December 2010. OCC SOF 82. Two additional institutional depositors, LTC and ETC, gave the Bank notice that they would only maintain their deposits in the Bank until January 31 and February 15, 2011, respectively. Both of these depositors had executed short-term forbearances that were expressly predicated on the Banks immediate recapitalization, an event which, based upon Banks failed efforts over the prior six months, the OTS reasonably concluded had no realistic chance of occurring in the near term. Id. 83-84. The Banks liquidity position was insufficient to meet the outflows that the OTS determined were likely to occur after the failure of the recapitalization efforts. The Banks own
26
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estimate of its total liquidity at the time of receivership was approximately $416 million.29 Id. 81. LTCs deposits as of January 2011 totaled $136 million. Id. 83. ETCs deposits totaled $697 million. Id. 84. Given the facts set forth in the Administrative Record, the Acting Director reasonably concluded that the Banks total available liquidity was insufficient to permit UWB to meet the anticipated withdrawals of $848 million in institutional deposits that were likely to occur as a result of the Banks inability to successfully recapitalize. B. The Administrative Record Contains Sufficient Information to Support the Acting Directors Opinion that the Bank Was Undercapitalized and Had Failed to Submit a Capital Restoration Plan Acceptable to OTS When it Was Closed
A second ground upon which the Acting Director acted on January 21, 2011 to appoint a receiver was that the Bank was undercapitalized and that it had failed to submit an acceptable capital restoration plan to the OTS. AR 7. As explained above, to be approved under the statute a CRP must be based on realistic assumptions and must be likely to succeed in restoring the institutions capital. 12 U.S.C. 1831o(e)(2)(C). The statute also instructs regulators that they may not accept any CRP if it would appreciably increase the risk (including credit risk, interestrate risk, and other types of risk) to which the institution is exposed. Id. If the reviewing agency determines that a banks CRP is not acceptable, then receivership of the bank is explicitly authorized by statute. 12 U.S.C. 1821(c)(5)(K)(iii). The Administrative Record fully supports
29
The Bank also alleged that it was theoretically possible that it could obtain $137 million in additional liquidity from another source. AR 5. However, the Acting Director reasonably concluded that the Banks total possible liquidity of $553 million was still substantially outweighed by the $848 million in withdrawals that the institutional depositors had indicated would be promptly forthcoming. Id. 27
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the Acting Directors conclusion that the CRP submitted by the Bank failed both statutory requirements. The CRP was not based on realistic assumptions, nor was it likely to succeed in restoring the Banks capital. In short, the CRP was not viable. The CRP was premised on obtaining regulatory approval from not only the OTS but also FINRA and the FDIC, approvals which the Bank failed to obtain. The OTSs own denial of the Legent purchase was based on several supervisory objections to the acquisition. First, Legent had a negative recent history of discipline by its primary regulator for its ineffective anti-money laundering procedures and for allowing known penny stock fraudsters to utilize its services. Second, the OTS concluded that Legents history of negative earnings and recent loss of its largest customer (accounting for 68% of its accounts) made it an inappropriate purchase for the money-losing Bank. Third, the incorporation of Legents institutional deposits into the Bank would have exacerbated, rather than reduced, the Banks concentration risk in institutional deposits. The Bank had also failed to obtain the necessary written commitments from investors to recapitalize the Bank. The CRP was premised on the October 28, 2010 Investment Agreement that required the Bank to obtain about $100 million in commitments from additional investors beyond an initial $103 million from Anchor Investors. Three months after the Investment Agreement was signed, no additional investors had materialized, and thus it was unrealistic to assume that the additional investors would be immediately forthcoming. OCC SOF 99. The OTS also reasonably concluded that the preconditions imposed by the Anchor Investors notably the waiver of regulatory conditions imposed by OTS due to the Banks operational troubles would have increased the level of risk to which UWB was exposed. For example, the Banks CRP required OTS to waive the requirement that the Bank meet and
28
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maintain safe capital ratios of not less than 12% Total Risk-Based and 8% Tier 1 (Core) capital, levels necessary in order for the Bank to operate in a safe and sound manner and that the OTS had required of the Bank since 2009. Consequently, the CRP would have freed the bank to operate with an unsafe and unsound level of capital. The Banks CRP also required the OTS to waive the Cease and Desist Orders restrictions that limited the institutions growth. The plan projected ballooning the Banks balance sheet from about $2 billion at year end 2010 to nearly $3.5 billion by year end 2013, a level of growth that would have been reckless. The CRP was also premised upon the Bank increasing its institutional deposits from $1.2 billion to $1.8 billion the wrong direction for this concentration to go given the Banks increased exposure to liquidity risk. Taken together, the OTS reasonably concluded that the Banks documented history of writing risky land and construction loans, purchasing risky mortgage-backed securities, and very high concentration of deposits in a small number of institutional depositors meant that the CRP would have increased, rather than decreased, the risks to which the institution was exposed, contrary to the requirements of 12 U.S.C. 1831o(e)(2)(C)(i)(III) (barring regulators from accepting any CRP which would appreciably increase a banks exposure to risk). C. The Administrative Record Contains Sufficient Information to Support the Acting Directors Opinion that the Bank Was in an Unsafe and Unsound Condition When It Was Closed The final basis for receivership was that the Bank was in an unsafe and unsound condition. AR 6. An unsafe and unsound condition is one that, in the regulatory agencys
29
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judgment, presents an unacceptable risk for the banks depositors or the FDICs Deposit Insurance Fund.30 Franklin Savings, 934 F.2d at 1145. With respect to this ground, the Acting Director determined that an unacceptable risk existed because: (a) the Bank was unprofitable, it had an excessive amount of classified assets, and it had insufficient capital with no realistic expectation that it would raise capital in the foreseeable future; and (b) the Bank relied on four institutional depositors for nearly 70 percent of its deposits, the second largest of those depositors was in the process of withdrawing its funds, and the largest and fourth largest of those depositors had the ability to withdraw their funds quickly and had reason to do so. AR 2-7. As discussed above, the Administrative Record amply supports such a finding the Bank had been unprofitable for almost two years, its capital had eroded, there was no credible recapitalization plan on the horizon, and the institution was facing a devastating liquidity failure. III. PLAINTIFFS MOTION FOR SUMMARY JUDGMENT SHOULD BE DENIED In challenging the Acting Directors decision to appoint a receiver for UWB, the Plaintiff tenders three arguments. First, it contends that the capital restoration plan submitted by UWB, a plan premised on, inter alia, the OTS waiving the requirement that the bank meet and maintain
30
Plaintiff attempts to argue that the OTS applied the wrong standard when it concluded that UWB was in an unsafe and unsound condition. Pls Mem. at 39. All Plaintiffs cited cases involve challenges to banking enforcement actions under 12 U.S.C. 1818. This is not an enforcement case, but rather a receivership challenge case arising under 12 U.S.C. 1464. Moreover, while OCC does not concede the point, see James Madison, 868 F. Supp. at 15 (deferring to the regulators judgment as to the condition of a bank prior to receivership), Plaintiffs formulation of the standard under enforcement cases does not advance their cause. Even using its formulation of the test, that an unsafe or unsound condition is one that presents a reasonably foreseeable undue risk to the institution, the Court may readily conclude that it was more than reasonably foreseeable that the problems at UWB could result in the undue risk of a devastating liquidity shortfall. Indeed, as reflected in the Administrative Record, large institutional depositors were already in the process of leaving the bank due to its undercapitalized status. See OCC SOF 82-84.
30
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safe levels of capital, should have been acceptable to the OTS notwithstanding the agencys objections. Second it argues that the OTS imagined the banks liquidity problems, despite the contrary evidence contained in the Administrative Record. Third, it disagrees with the OTSs assessment that the bank was in an unsafe and unsound condition, despite the facts that the Banks capital levels continued to decline, its losses continued to mount, and the deposit structure put in place by Bank management left it exposed to a depositor run as conditions deteriorated. None of the Plaintiffs arguments has merit. A. The OTS Did Not Arbitrarily and Capriciously Deny UWBs CRP
Parsing through the rhetoric, Plaintiff argues that OTS arbitrarily and capriciously denied the Banks CRP for two reasons. First, it argues that the OTS unreasonably demanded that the Bank produce a plan within seven days. Pl.s Mem. at 26. Second, it argues that the reasons tendered by the OTS for the rejection of the CRP do not pass muster. Id. at 29. Neither contention is correct. 1. PCA Does Not Grant a Bank Forty Five Days to Submit a CRP As a threshold issue, Plaintiff argues that the Bank was not allowed a reasonable time to submit its CRP, and that a reasonable time to submit a CRP pursuant to PCA is generally 45 days. This is simply incorrect. As set forth in the statute, an institution is not granted 45 days under the statute, but rather a plan must be filed not later than 45 days after the institution becomes undercapitalized. 12 U.S.C. 1831o(e)(2)(D)(i) (emphasis added). A regulator may reasonably shorten the time where, as is the case here, the condition of the bank mandates quick action. See 12 C.F.R. 565.5(a)(agency has the discretion to shorten the period if OTS notifies the savings association in writing that the plan is to be filed within a different period.). Indeed, the threatened liquidity issues at the bank and the threat of an uncontrolled collapse reasonably
31
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prompted the OTS to mandate the Bank submit its CRP by December 20, 2010.31 OCC SOF 90. Moreover, the Court should conclude that the requirement to file a CRP in seven days presented no novel or unfair burden for UWB. The Bank had been working on its recapitalization since at least June 2010 and efforts to find additional investors had been ongoing. Indeed, the basis for their plan (from the Banks perspective) was in place on October 28, 2010, and the CRP that was submitted re-incorporated that Investment Agreement. OCC SOF 91. Plaintiff fails to articulate precisely how the preparation of their CRP was negatively affected by the allegedly short time frame or how the deadline prejudiced the Bank. The Banks brief fails to demonstrate how its CRP would have been different or how the Acting Directors receivership decision would have been altered if there had been a different deadline for the CRPs submission. See, e.g., North Carolina v. FERC, 112 F.3d 1175, 1191 (D.C. Cir. 1997), cert. denied, 552 U.S. 1108 (1998)(harmless error when petitioner failed to demonstrate how administrative proceeding would have rendered a different result without minor computational errors); Riordan v. SEC, 627 F.3d 1230, 1233 (D.C. Cir. 2010)(harmless error when petitioner failed to demonstrate that wrongly-excluded evidence would have changed administrative agencys determination). The Bank filed its CRP in a timely fashion. If it needed more time or had anything to add, nothing in the statute or regulation forbade submission of an amended CRP. OCC SOF 92. OTS did not render an immediate decision on the CRP. Rather, it considered the CRP for almost
31
The Banks largest institutional depositor, Equity Trust Company, previously notified the Bank that it would withdraw its funds from UWB if it did not recapitalize by December 31, 2010. OCC SOF 84. ETC did not extend this deadline until December 29, 2010. Id. 32
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a month, giving the Bank more than sufficient time to make any additional arguments or submit any additional evidence it might have wished to provide the agency. Id. 2. The OTSs Rejection of the Plan Was Appropriate As discussed previously, the OTSs decision to ultimately reject the Banks CRP was hardly arbitrary and capricious. The OTSs decision was fully articulated on the record, and backed up by facts. As the Court has previously observed, reviewing courts should give deference to regulatory determinations by banking agencies where, as is the case here, the agency is called upon to use its technical expertise to make a judgment or prediction about an institutions prospects and future performance: Although the courts are by no means a rubber stamp for agency actions, there are particular situations in which the court should give certain deference to an agencys decision because of the courts lack of knowledge and expertise. Deference is particularly appropriate where the question of interpretation is a technical one. National Fuel Gas Supply Corp. v. Federal Energy Regulatory Commission, 258 U.S. App. D.C. 374, 811 F.2d 1563, 1570 (D.C. Cir. 1987) (citing Gulf State Utils. Co. v. Federal Power Commissioner, 171 U.S. App. D.C. 57, 518 F.2d 450, 457 (D.C. Cir. 1975)). The case at bar is a prime example of when a court should give a substantial amount of deference to the reviewing agency. As the record shows, this case involves a great deal of facts and financial analysis of plaintiff's performance. Furthermore, this case is not based solely on an analysis of plaintiff's past performance but a prediction of his future performance as well. Courts have found that deference especially should be paid to the agency in the case of technical expertise and informed predictions about the likely course of future events. Sunshine State Bank v. Federal Deposit Ins. Corp., 783 F.2d 1580, 1582 (11th Cir. 1986). Dorris v. FDIC, 1994 U.S. Dist. LEXIS 19939, *16 - 17 (D.D.C. Oct. 27, 1994) (review of the denial of an application under 12 U.S.C. 1831i). The practical application of this deferential standard was demonstrated in James Madison where the Court explained that simply disagreeing with the choices and assessments made by agency personnel in examining and analyzing a bank is not sufficient to overturn a decision to 33
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appoint a receiver.32 The decision to appoint a receiver is entitled to great deference from this court and the presumption of the correctness of the agencys determination is even stronger where Congress has charged an agency with complex analytical responsibilities and the duty to make predictive judgments. Id. at 8 (citing Franklin Savings, 934 F.2d at 1147-48). At bottom, Plaintiffs arguments regarding the OTSs decision to deny the Banks recapitalization plan amount to little more than disagreement with the choices and assessments made by OTS personnel in examining and analyzing the CRP submitted by the Bank. As discussed above, the Administrative Record amply supports the OTSs decisions the Bank had been unprofitable for some time, its capital had eroded, there was no credible recapitalization plan on the horizon, and the institution was facing a potentially devastating liquidity problem. B. The OTS Did Not Imagine the Liquidity Threat The Court may quickly dispose of Plaintiffs arguments that the OTS imagined that the Banks reliance upon a few large institutional depositors posed an immediate threat to the viability of UWB. The threat was very real, and the OTSs concerns regarding the Banks deposit concentration was of long standing.
32
The Courts articulation of the showing that would be necessary to support a colorable case is high: Certainly, if there were evidence that the OCC specifically set out to find the [banks] insolvent and place them in receivership, regardless of their true financial state, this court would intervene. Or, if it appeared that OCC examiners had been derelict in their duties, classifying loans at whim and pulling numbers out of the air rather than actually examining bank records and performing necessary calculations, relief would be granted. However, plaintiffs objections to the OCCs examination are, in reality, simply disagreements regarding the choices made by OCC personnel in examining and analyzing the banks. James Madison, 868 F. Supp. at 9. 34
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As a threshold issue, Plaintiffs contention that the OTS suddenly reversed its policy regarding the Banks institutional deposit concentration for no discernible reason, see Pl.s Mem. at 35, is simply incorrect. The Administrative Record shows OTS raised its concern over this concentration in the 2007 examination, warning the Bank regarding its concentration risk in its institutional deposits, with just four institutional entities constituting 73% of the Banks total deposits. OCC SOF 1-5. When the OTSs 2009 Examination of UWB revealed that the Banks concentration in institutional deposits had reached 87% of total deposits, it prompted the OTS to warn that termination of one or more of the larger institutional deposit relationships could place UWB in a precarious liquidity position, as it may not be able to find replacement funding on reasonable terms. OCC SOF 14. These warnings identified real and presently existing risks that ultimately would be realized.33 More importantly, the Court should conclude that the Administrative Record amply supports the OTSs conclusion that the Banks descent to undercapitalized status exposed UWB to an increased liquidity risk should one or more of the large institutional depositors leave the bank. As the facts unfolded in late December of 2010, the Administrative Record supports the conclusion that the examiners fears were fully justified.34 As discussed previously, two
33
The Administrative Record shows that in 2007 the Bank planned to move away from a risky concentration in institutional deposits to a more stable business model based on branch deposits from its local area. OCC SOF 6. This did not occur.
34
In letters to the NASDAQ stock exchange in late 2010, the Holding Company itself raised the specter of a liquidity crisis at the Bank. As the exchange explained in its reply letter of December 2, 2010: Due to its weakened financial status, the Bank has experienced a decline in deposits, and it believes that unless it resolves its difficulties in the near-term, additional depositors may move their funds elsewhere, further weakening the financial (footnote continues on next page) 35
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large institutional depositors, MSCS and CPI, began to pull their combined $215 million of deposits from the Bank on December 20, 2010, a process which continued over the next several days. OCC SOF 82. On December 22, 2010, as MSCS and CPI were withdrawing their funds, UWB scrambled to persuade another large institutional depositor, Lincoln Trust Company, to keep its funds at the Bank.35 The Bank procured a short-term forbearance from LTC, which pledged to hold off on withdrawing its funds on deposit until January 31, 2011, subject to the specific condition that the Bank would return to well capitalized status as of that date. LTC also reserved its right to withdraw its funds sooner if the Banks capital position worsened. OCC SOF 83. The Bank also had to convince Equity Trust Company to not immediately withdraw its deposits, and was able to only temporarily forestall its departure. ETC had previously given the Bank notice that it would withdraw its funds if the Bank did not recapitalize by December 31, condition of both the Company and the Bank. The cumulative effect has been to erode the Companys equity account and to materially and adversely affect the Banks compliance with applicable banking regulations. Consequently, pursuant to Cease and Desist Orders (the Orders), the banking regulators have imposed stringent enforcement actions requiring the Company and the Bank to raise additional capital in the near term or face additional regulatory actions. Thus far the Company has been unable to raise the capital required under the Orders The Company also expects that at the end of the current year, the Bank will fall below the level required to be adequately capitalized As a result, the Bank would be unable to hold certain deposits (that currently account for over 75% of its total deposits) and would face a liquidity crisis that it believes would lead to the regulator recommending the seizure of the Bank, resulting in the liquidation of the Company. AR 2457-245; OCC SOF 63.
35
LTC, with $136 million in the Bank, advertised to its clients that it would deposit their funds only in well capitalized depository institutions. Id. 83.
36
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2010. OCC SOF 84. Two days before ETC was set to leave, the depositor gave the Bank a final short-term forbearance until February 15, 2011. The Bank was told by ETC that this was an absolute outside date after which ETC would withdraw its deposits. Id. ETCs $697 million in deposits at the Bank on the date of the receivership exceeded the entire liquidity of the Bank. Id. In short, the Court should conclude that the Acting Directors determination that there was a serious liquidity problem at the bank was neither arbitrary nor capricious, but was fully supported by the facts set forth in the Administrative Record.36 The facts show that the large institutional depositors upon which UWB relied were withdrawing their deposits or, at best, temporarily refraining from leaving the bank subject to the institution being recapitalized. Given the size and concentration of the deposits at issue, the Acting Director reasonably concluded that the Bank faced significant liquidity risk unless the Bank was immediately recapitalized. This was an event that had no reasonable possibility of occurring. OCC SOF 98-102. C. The Bank Was in an Unsafe and Unsound Condition Finally, the Plaintiff takes issue with the Acting Directors conclusion that the Bank was in an unsafe and unsound condition when it was closed. Pl.s Mem. at 41-43. Between 2009 and the date of receivership, the Bank lost at least $152 million. OCC SOF 18-22 (2009), 35-39 (2010). From 2009 to 2010, the Banks Total Risk-Based and Tier 1 (Core) capital ratios fell
36
The Plaintiff suggests that that the OTS was required to stand aside until the Bank was actually unable to meet its depositors demands for withdrawal of their funds. Pl.s Mem. at 1. To the contrary, the receivership statute required OTS to place UWB into receivership once the Acting Director determined that the institution was likely to be unable to pay its obligations or meet its depositors demands in the normal course of business. 12 U.S.C. 1821(c)(5)(F). Instead of waiting for the Bank to actually fail as a result of a depositor run, the statutory scheme recognized that liquidity may suddenly disappear. Franklin Savings, 934 F.2d at 1137. This fact, amongst others, required the Acting Director to be vigilant and responsive and to act promptly once a statutory ground for receivership exists. Id. 37
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from 10.55% and 9.68% to 7.80% and 6.53%, respectively. Id. 9 (beginning of 2009), 52 (September 30, 2010). In its capital restoration plan submitted December 20, 2010, the Bank projected its capital ratios as of year end would decline still further, to only 6.4% and 5.0%. OCC SOF 54. Despite these facts, the Bank mischaracterizes its condition at the time of its closure as relatively well-capitalized, see Pl.s Mem. at 2, a standard absent from the regulatory standards set forth in the statutes and regulations. Likewise, prior to the time of its closure, the amounts of bad loans and sub-investment grade mortgage-backed securities on the Banks books had reached an unsafe and unsound level. As of September 30, 2010, the Banks non-performing assets stood at $348.2 million, more than double the Tier 1 (Core) capital remaining in the Bank. OCC SOF 33. By way of comparison, the Banks amount of non-performing assets on September 30, 2008 stood at a much more modest $25 million. Id. The Banks concentration in institutional deposits, the threatened withdrawal of which sparked the Banks final crisis, was at 70% of total deposits, a level little changed from years earlier when the Banks capital was at a much higher level. This also constituted an unsafe and unsound condition and, when coupled with the institutional depositors ability to promptly withdraw their funds, posed an imminent peril to the Bank. OCC SOF 107. The Plaintiff, however, concludes that the only problem was its regulators unduly narrow view of the Banks capital prospects. Pl.s Mem. at 43. Like the Plaintiffs in the Franklin Savings and James Madison cases, the Plaintiffs position here is simply a reflection of its disagreement with the OTSs conclusions about the Banks financial state. See Franklin Savings, 934 F.2d at 1145, James Madison, 868 F. Supp. at 9 (strong disagreement with another's decision-making process does not by itself render that process arbitrary and capricious.). The Acting Director, relying on the documentation of the Banks problems
38
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provided through several examinations of the Bank, determined that the combination of the Banks massive and continuing losses, depleted level of capital, excessive concentration in institutional deposits, excessive level of classified assets, and proven inability to quickly raise capital left the Bank in an unsafe and unsound condition to transact business. AR 6. This expert conclusion is not to be disturbed by a reviewing court unless it transgresses the bounds of reason. Franklin Savings, 934 F.2d at 1147. Nothing cited by the Plaintiff in its submission to the Court comes close to meeting that standard.
39
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CONCLUSION For the reasons set forth above, OCC respectfully requests that the Court grant its motion for summary judgment, deny Plaintiffs motion for summary judgment, and enter a final judgment in favor of the Defendants. Date: May 18, 2012 Respectfully submitted, Julie L. Williams, Chief Counsel Daniel P. Stipano, Deputy Chief Counsel Horace G. Sneed, (MI Bar No. P33434) Director, Litigation Division Gregory F. Taylor, Assistant Director, Litigation Division DC Bar No. 417096 /s/Christopher A. Sterbenz Christopher A. Sterbenz, Counsel, Litigation Division DC Bar No. 437722 250 E Street, S.W. Washington, D.C. 20219 Telephone: (202) 927-9124 Facsimile: (202) 874-5279 christopher.sterbenz@occ.treas.gov Attorneys for Office of the Comptroller of the Currency and Comptroller Thomas J. Curry
40
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA ____________________________________ UNITED WESTERN BANK, ) ) Plaintiff, ) v. ) C.A. No. 11-cv-408 (ABJ) ) OFFICE OF THE COMPTROLLER OF ) THE CURRENCY, et al. ) ) Defendants. ) DEFENDANTS STATEMENT OF FACTS WITH REFERENCES TO THE ADMINISTRATIVE RECORD Pursuant to LCivR 7(h)(2), Defendants Office of the Comptroller of the Currency (OCC) and Thomas J. Curry, Comptroller of the Currency, hereby submit the following statement of facts, with appropriate citations to the Administrative Record.1
The Local Civil Rules recognize that the normal summary judgment procedures requiring the filing of a statement of undisputed material facts is not applicable in cases, such as this one, where review is based on an administrative record. LCvR7(h)(2); Comment to LCvR 7(h)(2). This is so because the court is not called upon to determine whether there is a genuine issue of material fact, but rather to test the agency action against the administrative record. Comment to LCvR 7(h)(2); accord Stuttering Found. Of Am. v. Springer, 498 F. Supp. 2d 203, 207 (D.D.C. 2007) (it is the role of the agency to resolve factual issues to arrive at a decision that is supported by the administrative record, whereas the function of the district court is to determine whether or not as a matter of law the evidence in the administrative record permitted the agency to make the decision it did.)(citation omitted). Accordingly, in record review cases, motions for summary judgment and oppositions thereto shall include a statement of facts with references to the record. LCvR 7(h)(2). Because it is clear from the Local Rules that the Court is not called upon to determine whether there is a genuine dispute of material fact in this record review case, the Defendants do not respond seriatim to Plaintiffs characterizations of fact contained within the body of its memorandum of points and authorities. However, to the extent that a response is required, the Defendants dispute Plaintiffs facts to the extent that they are inconsistent with Defendants Statement of Facts set forth below and/or the Administrative Record.
October 2007: OTS conducts a comprehensive examination of the Bank 1. On October 15, 2007, the Office of Thrift Supervision (OTS) commenced a
regular comprehensive examination (2007 Examination) of United Western Bank (UWB or the Bank) based on financial data for the Bank as of June 30, 2007. AR 51. At all times relevant to this case, the Bank was a wholly-owned subsidiary of United Western Bancorp, Inc. (the Holding Company or Bancorp). AR 55. 2. As described in the 2007 Examination, as of June 30, 2007, the Bank had 14.38%
Total Risk-Based capital ratio and a 13.69% Tier 1 (Core) capital ratio. AR 60.2 3. The OTS examiners concluded that, during the period covered by the
examination, the Banks overall operations were satisfactory.3 AR 55-58. 4. However, the examiners also noted that the Bank had concentration risks in its
construction and nonresidential real estate loans, mortgage backed securities (MBS) that were not guaranteed by any federal agency or federally chartered instrumentality (also known as non2
UWB was required to electronically file quarterly statements known as Thrift Financial Reports (TFRs), that contained significant financial information about the Banks assets, earnings, and operations for the particular quarter. See generally 12 C.F.R. 562 (2010). Compilations of financial data reported by the Bank on its TFRs are reprinted in the Administrative Record. AR 864-900, 2473-2509.
3
The federal banking regulatory agencies rate banks Capital, Assets, Management, Earnings, Liquidity, and Sensitivity (CAMELS) on a scale of 1 to 5 with 1 being the highest rating. At the conclusion of the 2007 examination, each of the Banks CAMELS factors was rated a 2, and the Banks overall composite rating was also a 2. AR 55. Institutions with a composite 2 rating are fundamentally sound. For a financial institution to receive this rating, generally no component rating should be more severe than 3. Only moderate weaknesses are present and are well within the board of directors and managements capabilities and willingness to correct. These financial institutions are stable and are capable of withstanding business fluctuations. These financial institutions are in substantial compliance with laws and regulations. Overall risk management practices are satisfactory relative to the institutions size, complexity, and risk profile. There are no material supervisory concerns and, as a result, the supervisory response is informal and limited. AR 100.
agency MBS or private label MBS) and in institutional deposits. Over 32% of the Banks assets were concentrated in various mortgage-backed and collateralized mortgage obligations, compared to only 5.42% for its peer group. AR. 56, 62, 64-67, 81. 5. As of the time of the 2007 Examination, 73% of the Banks deposit base was
concentrated in just four institutional depositors. AR 81. Equity Trust Company (ETC) was the largest institutional depositor, with $461.8 million on deposit at the Bank. Id. 6. The Banks management represented to OTS that, under a new community
banking strategy, the Bank was committed to reduce its concentration in institutional deposits and would replace them with retail deposits from the local area. AR 55, 81. The Bank also represented to the examiners the concentration in mortgage securities was to be significantly reduced as a part of its new community strategy. AR 83. 7. The examination found that the Banks capital was declining and, in light of the
Banks concentration risks in institutional deposits and its investments in mortgage securities, the examiners instructed management to maintain a prudent level of capital above the well capitalized levels of FDICIA.4 AR 60, 62 (emphasis added). March 2009: OTS begins a comprehensive examination of the Bank 8. On March 30, 2009, OTS commenced a regular comprehensive examination of
the Bank based on financial data as of December 31, 2008. The report was completed on August 4, 2009. AR 130.
4
FDICIA is the Federal Deposit Insurance Corporation Improvement Act of 1991, P.L. 102-242, 105 Stat. 2236, codified in part at 12 U.S.C 1831o. This is also sometimes referred to as the Prompt Corrective Action (PCA) statute. FDICIA delegated to the federal banking agencies the responsibility for establishing specific capital classification levels for federally insured depository institutions. 12 U.S.C. 1831o(c). OTSs regulation implementing this section for its institutions was found at 12 C.F.R. 565.4.
9.
As of December 31, 2008, the Banks Total Risk-Based capital ratio was 10.55%
(down from 14.38% in the 2007 Examination), and the Tier 1 (Core) capital ratio was 9.68% (down from 13.69%). AR 142. 10. During the course of the 2009 Examination, the Bank reported its first quarter
numbers for the period ending March 31, 2009. The Banks Total Risk-Based capital ratio declined again, to 10.45%, and the Tier 1 (Core) capital ratio declined to 9.60%. AR 142. 11. The examiners found that the Banks capital level was less than satisfactory as it
does not fully support the banks risk profile. AR 141. They also concluded that the Banks declining asset quality coupled with concentrations in higher-risk loan types and non-agency MBS pose[d] a continuing threat to the banks capital position. Id. 12. The examiners found that existing substantial adverse economic conditions had a
deleterious affect on the Bank, materially increasing its risk profile. AR 135, 146. They also identified serious weaknesses in the Banks loan underwriting for the banks high-risk construction and land loan programs. AR 148. These weaknesses, combined with the adverse economic environment, led to a large increase in the amount of loans at risk of not being fully repaid with interest or on a timely basis (classified assets). Classified assets increased from $25.2 million as of June 30, 2007 to $70.3 million as of March 31, 2009. This represented 34.7 percent of the Banks Tier 1 (Core) capital and allowance for lease and loan losses (ALLL) as of March 31, 2009.5 AR 135, 146, 149. 13. With respect to the concentration of institutional deposits noted in the 2007 exam,
OTS once again raised concerns about the Banks continuing dependence on a limited number of
The banking agencies provide for three classifications of troubled assets for which an institution must provide either ALLL or specific reserves. See 12 C.F.R. 560.160 (2010). 4
large institutional depositors. AR 159-61. As of March 31, 2009, almost 87% of the Banks deposits were from institutional sources. AR 160. ETC, the largest institutional depositor, had increased its deposits to $501.3 million, an increase of almost $40 million since the previous examination. Id. 14. The examiners warned the Bank that termination of one or more of the larger
institutional deposit relationships could place UWB in a precarious liquidity position, as it may not be able to find replacement funding on reasonable terms. AR 161. The examiners also warned that downgrades in the Banks mortgage backed securities would compound this liquidity risk. Id. 15. Based on the Banks risk profile, increasing level of classified assets, and
deteriorating balance sheet, the 2009 Examination required the Bank to increase its capital ratios by the end of 2009 to safe levels that adequately support the Banks risk profile, including a Total Risk-Based capital ratio not less than 12.0% and a Tier 1 (Core) capital ratio not less than 8.0%. AR 139. 16. The examiners downgraded the Banks CAMELS composite rating from a 2 in
the previous examination to a 3.6 AR 134.
Institutions with a composite 3 rating exhibit some degree of supervisory concern in one or more component areas. These financial institutions exhibit a combination of weaknesses that may range from moderate to severe; however, the magnitude of the deficiencies generally will not cause a component to be rated more severely than 4. Management may lack the ability or willingness to effectively address weaknesses within appropriate time frames. Financial institutions in this group generally are less capable of withstanding business fluctuations and are more vulnerable to outside influences than those institutions rated a composite 1 or 2. Additionally, these financial institutions may be in significant noncompliance with laws and regulations. Risk management practices may be less than satisfactory relative to the institutions size, complexity, and risk profile. These financial institutions require more than normal supervision, which may include formal or informal enforcement actions. Failure appears (footnote continues on next page) 5
17.
The Bank had a statutory right to appeal this ratings downgrade, as well as any
material supervisory determination of the OTS, to the agencys independent ombudsman. 12 U.S.C. 4806. The Bank did not administratively appeal this downgrade, nor did it appeal any other downgrade or material supervisory determination at any time relevant to this case. See, e.g., AR 1356, 2093. June 2009: UWB begins to sustain catastrophic losses 18. In the three quarters ending September 30, 2008, December 31, 2008, and March
31, 2009, the Bank had reported modest earnings of $1.86 million, $3.29 million, and $2.35 million, respectively. AR 2475. 19. UWBs earnings collapsed beginning in the quarter ending June 30, 2009, when
the Bank reported to OTS that it had lost $29.32 million. AR 2475. Thereafter, the Bank never again reported a profitable quarter. Id. See also AR 866. 20. For the quarter ending September 30, 2009, the Bank reported a loss of $6.43
million. AR 2475. 21. For the quarter ending December 31, 2009, the Bank reported a loss of $35.96
million. AR 866. 22. For the whole of calendar year 2009, the Bank reported total losses of $69.36
million. AR 30. 2008-2009: The Holding Company attempts to raise the Banks capital levels 23. The Holding Company was well aware of the problems besetting its subsidiary
Bank and was itself a subject of examination by the OTS. AR 103, 194.
unlikely, however, given the overall strength and financial capacity of these institutions. AR 191. 6
24.
In the fourth quarter of 2008 and the first quarter of 2009, the Holding Company
downstreamed $21.0 million to the Bank as capital contributions. AR 143, 211. In the second quarter of 2009, the Holding Company sold off assets and contributed another $16.5 million in capital to UWB. AR 144. 25. In September 2009 the Holding Company completed a capital raise of $81.7
million, issuing new stock through the NASDAQ capital market. $61.2 million of this amount was downstreamed to the Bank as capital. AR 144-45, 2334. 26. However, because of the continuing losses at the Bank, all these capital
contributions were quickly overwhelmed; by the end of 2009 the Bank had been unable to raise its Total Risk-Based and Tier 1 (Core) capital ratios to the safe 12% and 8% levels directed by the OTS in the 2009 Examination. AR 139. The Bank, in fact, never subsequently met these standards at any time before the receivership. August-December 2009: The Bank fails to achieve required capital levels 27. As noted, in the 2009 Examination Report, which was issued just as the Banks
cascade of losses began, the Total Risk-Based and Tier 1 (Core) capital ratios for the Bank were 10.45%, and 9.60% respectively, as of March 31, 2009. AR 142. The 2009 Examination was mailed to the Bank on August 4, 2009. AR 130. 28. For the quarter ending June 30, 2009, the Bank reported Total Risk-Based and
Tier 1 (Core) capital ratios of 10.17% and 9.07%, respectively. AR 2474 29. For the quarter ending September 30, 2009, in the wake of the capital injections
from the Holding Company outlined above, the Bank reported slightly increased Total RiskBased and Tier 1 (Core) capital ratios of 11.07% and 9.82%, respectively. AR 2474. This was still short of the requirement outlined in the 2009 Examination. AR 139.
30.
By the end of 2009, the Banks capital level had again begun to decline. As of
December 31, 2009, the Bank reported Total Risk-Based and Tier 1 (Core) capital ratios of 10.07% and 8.81%, respectively.7 December 2009: The Bank voluntarily enters into a Memorandum of Understanding with OTS 31. On December 10, 2009 the OTS and the Bank entered into a written
Memorandum of Understanding, (MOU). AR 220-234. 32. The Bank recognized that the MOU was intended to remedy unsafe and unsound
practices and supervisory concerns and deficiencies set forth in the full-scope examination of 2009. AR 220. The first and most important of these corrective action provisions was an agreement that the banks insufficient capital position would be addressed in a written capital plan which would ensure the bank would meet and maintain by June 30, 2010 a Total RiskBased capital ratio of 12% and a Tier 1 (Core) capital ratio of 8%. Id. 33. The Bank also agreed to take steps necessary reduce its classified assets.
Specifically, the MOU required the Bank to reduce UWBs ratio of classified assets to Tier One (Core) Capital plus ALLL to twenty five percent (25%) by December 31, 2010.8 34. The Banks entry into the MOU was voluntary and the Banks board explicitly
resolved that it was in the best interest of the Bank to do so. AR 234. The Holding Company
7
Subsequent revision to the Banks accounting for losses on its portfolio of mortgagebacked securities reduced these ratios still further. AR 256.
8
Instead of declining to 25%, the Banks ratio of classified assets to Tier 1 (Core) capital subsequently exploded. As of September 30, 2010 it stood at 206.56%. AR 29. A year earlier it had been 55.61%. Two years earlier the ratio was 14.46%. Id. In gross dollar terms, as of September 30, 2008, September 30, 2009, and September 30, 2010, Banks non-performing assets stood at $25 million, $143.1 million, and $348.2 million. Id.
entered into a similar MOU (AR 237-248), which was also voluntary and in the best interest of the Holding Company. AR 249. January-December 2010: UWBs catastrophic losses continue 35. Throughout 2010, the Bank continued to report massive losses to the OTS. For
the quarter ending March 31, 2010, the Bank reported total losses of $21.02 million. AR 30, 866. 36. For the quarter ending June 30, 2010, the Bank reported total losses of $11.15
million. AR 30, 866. 37. For the quarter ending September 30, 2010, the Bank reported total losses of
$36.66 million. AR 30, 866. 38. For the nine months from January 1 through September 30, 2010, the Bank
reported its losses at $68.82 million, almost equal to its total losses for 2009. AR 30. 39. The Banks own projections did not foresee a return to profitability in 2010. In its
Capital Restoration Plan submitted to the OTS on December 20, 2010, discussed infra, the Bank estimated that it would lose $13.79 million for the final three months of 2010. AR 1492. Thus, the Banks losses for 2010 totaled at least $82 million. Id. January 2010: OTS begins a limited examination of the Bank 40. On January 11, 2010, OTS field staff commenced a limited examination of the
Bank. The examination was concluded on April 28, 2010. AR 255. 41. The examiners found that, that while some reduction in institutional deposits had
been made, the Bank had a heightened liquidity risk, in large part because it still depended on
Filed 05/18/12 Page 10 of 37
institutional depositors for 78% of its deposits and that Equity Trust Company, alone, accounted for almost 46% of all the Banks deposits. AR 255, 263-64.10 42. The examination report also noted that the Banks processes for monitoring its
mortgage backed securities portfolio were inadequate. AR 256-57. In particular, the examiners found that the Banks use of certain reports and application of a five-year cut off to the results of those reports to determine the extent to which MBS were Other Than Temporarily Impaired (OTTI) did not adequately reflect the credit risk in the securities.11 AR 257. The examiners were concerned because the methodology employed by the Bank ignored the growing delinquencies and the increasing lag between delinquencies and defaults. Id. OTSs examiners estimated the Banks total OTTI credit losses on MBS at $21.7 million. AR 257-58. 43. The Bank used a new and different method for calculating that loss, which
method involved using a time cut off of three years, and concluded that there was an OTTI credit loss of $21 million. AR 258. The examination report noted that OTS did not analyze the new method the Bank used to calculate OTTI, and specifically reserved judgment on the use of a time period cut off to the results generated by the model. Id. 44. Because the resulting OTTI credit losses obtained from the model previously used
by the Bank, without a time truncation, and the Banks new model, with the Banks applying a
10
On December 31, 2009, institutional depositor ETC had $933.85 million at the Bank. AR 264. This was almost double the amount it had on deposit in 2007, when the Bank had committed to the OTS that it would reduce its institutional deposits. AR 57, 81.
11
Banks may hold mortgage-backed securities as investments until those securities reach their maturity. However, if, in the interim, the value of those securities becomes other than temporarily impaired, the bank must charge the credit portion of the impairment against earnings and the remainder of the impairment is recognized in other comprehensive income, a subset of stockholders equity. AR 1368-70. 10
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time truncation, were comparable in that instance ($21.7 million versus $21 million), OTS did not object to the Banks new OTTI figure. AR 258. See also AR 289-90. 45. With respect to classified assets, the examination found they increased materially
in the nine months since the March 2009 examination. AR 258. The examination concluded that classified assets, other than those classified because of OTTI issues, constituted $158.7 million or 64 percent of Tier 1 (Core) capital plus ALLL. AR 259. The examination report noted that the increase in classified assets was primarily due to increases in the Banks portfolio of nonperforming construction and land loans. Id. February 2010: UWB downgraded and notified of its troubled condition 46. While the limited examination was in progress and based on information already
obtained, on February 11, 2010 the examiners met with the Banks management and orally informed them that the Banks composite CAMELS rating was reduced to a 4, the next to lowest rating. AR 269. On March 4, 2010, the Bank was informed in writing of the downgrade, and informed that it was in troubled condition. AR 275-76; see also 12 C.F.R. 563.555.12 April 2010: Bank notified of results of limited examination and warned again of possible failure
12
Institutions with a composite 4 rating generally exhibit unsafe and unsound practices or conditions. There are serious financial or managerial deficiencies that result in unsatisfactory performance. The problems range from severe to critically deficient. The weaknesses and problems are not being satisfactorily addressed or resolved by the board of directors and management. Financial institutions in this group generally are not capable of withstanding business fluctuations. There may be significant noncompliance with laws and regulations. Risk management practices are generally unacceptable relative to the institutions size, complexity, and risk profile. Close supervisory attention is required, which means, in most cases, formal enforcement action is necessary to address the problems. Institutions in this group pose a risk to the deposit insurance fund. Failure is a distinct possibility if the problems and weaknesses are not satisfactorily addressed and resolved. AR 275-276.
11
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47.
The Bank was notified in detail of the results of the limited examination by means
of a letter sent April 28, 2010. AR 267-269.13 OTS notified the Bank that its Sensitivity rating was downgraded to 3 and all other CAMELS components were rated 4. AR 267. The Banks assets included $210 million in noninvestment grade MBS. AR 268. The letter stated that, in the future, the Bank could not disregard selective portions of the output of the model the Bank chooses to use to measure OTTI in its MBS. AR 268. See also 42-44, supra. The examiners required a large portion of the Banks portfolio of mortgage-backed securities to be re-classified as substandard and concluded that classified assets were unacceptably high. OTS further expressed concern that the Bank would be unable to meet the capital requirement set out in the December 2009, MOU and reiterated the need for more capital than the minimum required to be well capitalized under the relevant regulations. Id. The Bank was also informed that in view of its significant concentration in institutional deposits and attendant risk of withdrawal of these funds due to declining capital levels, it was at risk of failure for insufficient liquidity. Id. at 267. The Bank was specifically urged to consider all strategic alternatives available, including the possible sale, merger, or self-liquidation of United Western. Id.14
13
The Banks internal documents show that the Bank was aware of these OTS findings. AR 1349, 1352. But see Plaintiffs Memorandum in Support of its Motion for Summary Judgment (Pl.s Mem.) at 11, n.18.
14
OTS noted an additional, prospective concern; that the FDIC might deem the institutional deposits to be brokered. AR 267. Such a determination, if it constituted a final agency action, would have exacerbated the Banks liquidity problems. See 12 U.S.C. 1831f (banks not deemed well capitalized may not accept brokered deposits, except that adequately capitalized banks may accept brokered deposits if the FDIC grants a waiver); 12 C.F.R. 337.6. On May 24, 2010, the FDIC made such a preliminary determination. AR 369. However, while the bank and the FDIC had extensive communications concerning the issue, the FDIC did not finally resolve the matter prior to the receivership appointment. AR 360-80, 772-73, 853, 175467, 1817. Moreover, the FDIC agreed that during its consideration of the matter, the Bank could (footnote continues on next page) 12
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May 2010: The Holding Company commits to recapitalize the Bank no later than June 30, 2010 48. OTSs warnings of possible receivership prompted the Bank and Holding
Company to seek investors to recapitalize the Bank. On May 12, 2010, the Holding Company made a presentation to OTS. AR 1779. At the presentation Bancorp assured OTS that it had identified investors and executed non-disclosure agreements as part of a projected $125 million equity investment. Bancorp estimated the closing date would be June 30, 2010. AR 1789. This was the date the Bank was required to be recapitalized under the MOU. AR 220. 49. The Bancorp failed to deliver the proposed transaction. AR 865.
January-December 2010: The Bank becomes undercapitalized 50. Throughout the events of 2010 described herein, the Banks capital levels
continued to drop. For the quarter ending March 31, 2010, the Bank reported Total Risk-Based and Tier 1 (Core) capital ratios of 9.18% and 7.91%, respectively. AR 865. With the Banks Total Risk-Based capital ratio falling below 10%, UWB was now only adequately capitalized for Prompt Corrective Action purposes and was no longer well capitalized. 12 C.F.R. 565.4 (2010). 51. For the quarter ending June 30, 2010, the Bank reported Total Risk-Based and
Tier 1 (Core) capital ratios of 9.02% and 7.75%, respectively. AR 865.
continue to accept, renew and roll over deposits provided by the institutional depositors. AR 1841.
13
Filed 05/18/12 Page 14 of 37
52.
For the quarter ending September 30, 2010, the Bank reported Total Risk-Based
and Tier 1 (Core) capital ratios of 7.80% and 6.53%, respectively.15 With the Banks Total RiskBased capital ratio below 8%, it fell to undercapitalized status. 12 C.F.R. 565.4. 53. On January 5, 2011, the Bank submitted to OTS a form captioned United
Western Bank Consolidated Capital Ratios. AR 47, 1769. In that submission, the Bank again reported itself as undercapitalized. Its Total Risk-Based capital ratio fell to 7.11% on November 30, 2010. 12 C.F.R. 565.4 (2010). 54. In its Capital Restoration Plan submitted to the OTS on December 20, 2010,
discussed supra, the Bank submitted a projection that its Total Risk-Based capital ratio would fall to 6.4% and its Tier 1 (Core) capital ratio would fall to 5.0%. AR 1491 (December 31, 2010 projection). June 2010: UWB consents to issuance of a Cease and Desist Order 55. On June 25, 2010, the Bank consented and stipulated to the entry of an Order to
Cease and Desist (C&D Order or Consent Order).17 AR 553-74. The Consent Order
15
The Banks initial September 30, 2010 TFR reported that the Banks Total Risk Based capital ratio was above 8%, leaving it adequately capitalized for Prompt Corrective Action purposes. However, the Banks initial report omitted OTTI losses in its MBS portfolio. See, e.g., 42-44, supra. The Bank and OTS field staff engaged in a lengthy colloquy over the proper accounting for the losses, with the bank stating that the TFR should recognize $10.5 million in losses and the OTS examiners and accounting staff finding the correct loss figure to be $16.3 million. AR 1332-1354, 1359-1365. In the end, OTS directed the Bank to refile its TFR to reflect $16.3 million in OTTI. AR 1355, 2092. The Bank was given an opportunity to administratively appeal this determination pursuant to OTS Thrift Bulletin 68b. AR 1356, 2093. It waived its right of appeal and voluntarily refiled the TFR with the correct losses on December 6, 2010. UWB wrote to the FDIC on December 9, 2010, confirming that its Total risk-based ratio had fallen to 7.80%, below the required 8.0% as a result of a regulatory directive. AR 1437. The Bancorp also announced its acquiescence to this change and reported the Bank undercapitalized for PCA purposes as of September 30, 2010 in an 8-K public filing with the SEC on December 14, 2010: http://www.sec.gov/Archives/edgar/data/944725/000094472510000024/form8k.htm (accessed April 24, 2012).
14
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required, inter alia, the Bank meet and maintain a Tier 1 (Core) capital ratio of at least 8% and a Total Risk-Based capital ratio of a least 12% by June 30, 2010. AR 554. The Consent Order further required the Bank to submit a comprehensive capital plan for achieving compliance with the Orders capital measures. AR 553-54. In addition, the Consent Order required submission of a contingency plan for the prompt merger with or acquisition of the Bank by another insured entity or its holding company or the voluntary dissolution of the Bank. AR 556. 56. The Banks consent to issuance of the C&D Order was voluntary. The Bank
executed a written stipulation consenting to issuance of the C&D Order, signed by all members of the Banks Board of Directors. AR 572-574. The Bank knowingly and explicitly waived its rights to service of a notice of charges for issuance of the Order, its right to an administrative hearing on the charges, and any right of judicial review. AR 570. 57. The stipulations finding of fact concluded that the Bank has (a) engaged in
unsafe or unsound banking practices that resulted in deteriorating asset quality, ineffective risk management practices, inadequate oversight and supervision of the lending function, and inadequate liquidity planning at the [Bank]; and (b) violated laws and regulations regarding transactions with affiliates (12 C.F.R. 563.41) and loans to one borrower (12 C.F.R. 560.93). AR 569. 58. The Cease and Desist Orders included a number of provisions: * Paragraph 3 required the Bank to meet by June 30, 2010 and thereafter maintain safe Total Risk Based and Tier 1 (Core) Capital ratios of at least 12% and 8% respectively; AR 554;
17
Also effective June 25, 2010, the Holding Company consented to a C&D Order requiring, among other things, that the Holding Company ensure the Banks compliance with the terms of the Banks consent Order. AR 580. 15
Filed 05/18/12 Page 16 of 37
Paragraph 19 forbade the Bank from making any more construction or land loans without previously obtaining OTS approval; AR 560;
Paragraph 26 limited the Banks growth of its total assets during any quarter to an amount equal to credited net interest, without previously obtaining OTS approval; AR 562;
Paragraph 27 required the Bank to notify OTS prior to any changes of directors or senior executive officers of the Bank; AR 562;
Paragraph 29 forbade the Bank from entering into any new or altering any old contractual arrangement relating to compensation or benefits for any senior executive officer of director of the Bank without giving OTS advance notice; AR 562-63.
October-November 2010: The Bank proposes a complex recapitalization plan that includes relieving the Bank of its responsibility to comply with key requirements of the Cease and Desist Order 59. In 2009, the Holding Company went to the NASDAQ stock market to raise
capital, issuing approximately 20 million shares of stock at a price of $4 a share, which resulted in approximately $80 million in new capital, the bulk of which was downstreamed to the Bank. See 25, supra. 60. The catastrophic losses incurred by the Bank in the year following that capital
raise led the Holding Companys share price to drop to under $1 per share. NASDAQ eventually proposed to de-list the Holding Company, foreclosing any realistic possibility that the Holding Company could raise capital by conducting another public offering. AR 856.
16
Filed 05/18/12 Page 17 of 37
61.
As a result of its inability to access the public markets, the Holding Company and
Bank devised a complex private-placement recapitalization plan. On October 28, 2010, the Holding Company entered into an investment agreement (Investment Agreement) with Lovell Minnick Equity Partners, Oak Hill Capital Partners, and Henry C. Duques (collectively, Anchor Investors). AR 980. Instead of a $200 million to $250 million capital raise previously proposed by the Bank to OTS (AR 1809), the Investment Agreement provided that the Anchor Investors would contribute only $103 million, all of which was contingent a large number of written conditions being met prior to or at the time of closing. AR 981-85. Included among these conditions was a requirement for the Bank to obtain still more investors who would contribute at least another $97 million and no more than $102 million to the deal. AR 983 (N). 62. The entire Investment Agreement was also subject to conditions precedent
requiring the OTS to waive several provisions of the Cease and Desist Order, see 58, supra, that the Bank had consented to in June 2010: (C)(x) the restrictions set forth in (i) paragraphs 3 , 19, 26, 27, and 29 of the Order to Cease and Desist between the Office of Thrift Supervision (OTS) and United Western Bank dated June 25, 2010 shall each have been terminated. AR 981. 63. Other very important material conditions precedent included: all Governmental
Approvals required to have been obtained at or prior to the Closing Date in connection with the execution, delivery or performance of this Agreement and the consummation of the transactions contemplated hereby shall have been obtained and shall be in full force and effect.18 AR 981;
18
For example, the Bank was required to apply to both the Financial Industry Regulatory Authority (FINRA) and the FDIC for permission to purchase Legent. AR 1169. There is no record of either FINRA or the FDIC approving the Legent purchase before the receivership date. AR 27, n.7.
17
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(E)(i) the closing of the acquisition of Legent Clearing LLC as an operating subsidiary of the Bank19 AR 982; (J) the Bank shall have received from OTS a written non-objection letter with respect to the Banks modified Business Plan, which plan shall be reasonably acceptable to such Lead Anchor Investor and submitted to the OTS for review after the date of this Agreement20; AR 983; (K) the Company shall have received the approval of the NASDAQ Stock Market (NASDAQ) to issue the Securities without the approval of the Companys stockholders in reliance on Rule 5635(f) of the NASDAQ Stock Market Listing Rules and such NASDAQ Approval shall be in full force and effect;21 AR 983; and finally the Investment Agreement was dependent upon Bancorp obtaining additional investors to round out the $200 million transaction.22 AR 26 n.4, 983 (N). 64. On November 17, 2010, the Bank and Holding Company made a presentation to
the OTS regarding the proposed recapitalization transaction. AR 1154. In particular, the presentation focused on a number of actions that the Bank required OTS take, including wholesale revisions to the Cease and Desist Order that had been issued on June 25, 2010. AR 1170. The Bank insisted, inter alia, that OTS waive the meet and maintain capital provisions of the Consent Order. Id. At the time of the meeting, the Bank was not in compliance with the
19
Because the Bank proposed Legent to be an operating subsidiary of an FDIC-insured depository institution, an application to and approval by the OTS was required. 12 U.S.C. 1828(m); 12 C.F.R. 559.11. AR 4119. FDIC and FINRA approval was also required. AR 1169. Discussion of the OTSs denial of the Legent acquisition is discussed infra, 95-98.
20
The Banks modified business plan was incorporated into the capital restoration plan the Bank submitted to OTS on December 20, 2010, discussed infra, 88-92.
21
The Holding Company received this approval on December 2, 2010. AR 2457. The NASDAQ granted the approval because the Bancorp warned of an impending liquidity failure at the Bank if approval was not forthcoming. Id.
22
As set forth, infra, 72-77, these additional investors never materialized. 18
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meet-and-maintain capital provisions of the C&D Order and was undercapitalized. AR 865. In addition to its requirement that it be allowed to operate with insufficient capital, the Bank also insisted OTS allow the Bank to rapidly grow its assets, see AR 1163, 1170, creating an even greater risk to the FDICs Deposit Insurance Fund. The presentation also requested that OTS immediately approve the Banks proposed purchase of Legent Clearing, a money losing brokerage firm with an unsatisfactory history of money laundering and penny stock fraud. AR 1165 (November 17, 2010 insistence); AR 3159-3177 (FINRA enforcement). See also 96, infra. 65. After the November 17, 2010 briefing, OTS solicited the Bank to discuss its
various requirements in order to distinguish must haves in the Investment Agreement from nice to have provisions that could be altered. AR 1181. 66. In a letter dated November 29, 2010, UWB continued to insist that OTS must,
inter alia, agree to the approve the acquisition of Legent Clearing LLC as an operating subsidiary of UWB. AR 1181. UWB also stated a must have condition would be the deletion of the meet and maintain language of paragraph 3 of the UWB Cease and Desist Order that would allow the Bank to operate with less than the safe 12% and 8% capital levels required in the Order. Id. The Bank claimed that the Anchor Investors were willing to waive a number of conditions, but no written waivers were included with that communication nor were they subsequently forthcoming from the Anchor Investors Id. See also AR 32. 67. Four days later the OTS informed the Bank that while the agency would reserve
judgment on the other elements of the Investment Agreement, it would not delete the meet and maintain requirement of the Consent Order. AR 1192. In all subsequent dealings with the OTS, neither the Bank nor its proposed investors dropped the Investment Agreements
19
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requirement that the meet and maintain provision of the Consent Order be rescinded. See, e.g., AR 1476 (Banks December 20, 2010 request for waiver of the meet and maintain language as set forth in the Investment Agreement) 4198, 4201, 4207, 4210, 4221 (subsequent communications from possible investors stating their interest is contingent on the Investment Agreements terms). Ultimately the communications from the Holding Company, the Bank, and investors, showed that unless OTS was willing to agree to change the C&D Order to permit the Bank operate with less capital than the OTS determined was required, allowed the Bank to bring Legent into UWB as an operating subsidiary, and allowed the Bank to engage in rapid growth of its balance sheet, there would be no recapitalization.23 Id. The Bank maintained this positions subsequently. See also AR 1483-1501 (business plan submitted by Bank December 20, 2010 seeking waiver of meet and maintain language, purchase of Legent, and 75% growth in balance sheet by 2013). The Bank never sought recapitalization that would accord with the requirements of the Consent Order and assure its future safe and sound condition. 2010-2011: Repeated assurances that the Bank was on the cusp of recapitalization prove false 68. The Investment Agreement was neither the first nor the last time the Bank
proposed an unrealistic recapitalization plan to its regulators. As noted, on May 12, 2010 the Bank had previously assured its regulators that it was on the cusp of recapitalizing the Bank not later than June 30, 2010, supra 48-49. As the Bank spiraled downward throughout 2010 and
23
This was not the first time the Bank made such a warning. In a letter dated November 5, 2010, the Bank represented that all of the Banks proposals were interdependent, writing that each step is predicated upon consummation of the others, and the failure to consummate any step will adversely impact the Recapitalization Transaction. AR 1109.
20
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into 2011, the Bank repeatedly stated that it was on the verge of raising capital in a matter of days and then failed to deliver. 69. On June 10, 2010, the Bank wrote to the FDIC stating that the Holding Company
had retained Goldman Sachs & Company in March 2010 for capital raising purposes, and that it expects to consummate a capital raising transaction in the near future. AR 691. No transaction was consummated. 70. On July 2, 2010, the Bank assured OTS that capital would be committed by
August 9, 2010 and that a transaction would close by September 10, 2010. AR 609. The Bank did not follow through on its claim. 71. After the Bank missed its September 10 deadline, on September 16, 2010 the
Holding Company represented to the OTS that four participants would enter into a $200 million to $250 million capital raise with term sheets expected by September 27, 2010. AR 1809. This deadline also came and went. 72. Finally, on October 28, 2010 the Bank entered into the Investment Agreement
outlined above. But the Banks promises to obtain the necessary additional investors repeatedly proved hollow. On November 5, 2010, the Bank told OTS that Goldman Sachs would raise the additional $97 to $102 million for the Investment Agreement within 30 days, or on or about December 5, 2010. AR 1112. The Bank did not raise further capital by that date. 73. On November 17, 2010, the Holding Company projected completion of the
remaining Investment Agreement private placement by the end of November, and closing the full $200-$205 million capital raise not later than December 31, 2010. AR 1822, 1825. Yet again, this assurance proved false.
21
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74.
At another point in its November 17, 2010 presentation, the Bancorp assured the
OTS and the FDIC that it was ready to inject[] into the Bank $83.2 million in fourth quarter 2010. AR 1830.24 This promise, like all others, went unfulfilled. 75. In still another promise, on November 24, 2010, the Bank stated that the
recapitalization continues to make progress and is scheduled to close no later than December 31, 2010. AR 1177. Yet again, the Banks failed to deliver. 76. On December 29, 2010, the Bank told the OTS that an entity called Olympus
Partners was to make a firm investment commitment of $46.8 million within one week. AR 26, n.4, 1749. This never occurred. The Bank later claimed Olympus has committed to approximately $50 million investment (sic) in the Bank and that the entity was finalizing a letter of intent. AR 4192. Like so many previous representations from the Bank, this turned out to be false. Nothing from Olympus was ever provided to OTS. AR 26, n.4. 77. After all the previous deadlines identified by the Bank for completion of a capital
injection had come and passed without result, on January 21, 2011, the date of the receivership, the Bank produced a number of expressions of interest from purported investors, including one from alleged Cayman Islands hedge fund that operated out of a post office box, and another in the form of a faxed letter from an investor who failed to disclose any fixed address at all. AR 4198, 4201, 4207, 4210, 4221. All of these virtually identically-worded submissions were by their own terms, expressly non-binding and were made on terms substantially the same as the
24
If Bancorps Anchor Investors had actually contributed $103 million in capital to Bancorp on October 28, 2010, there would have been no serious impediment to the injection of $83.2 million into the Bank during the fourth quarter of 2010. The fact is that the Anchor Investors contingent promises to contribute capital, which they would do if - and only if - a large number of disparate events occurred, were no more reliable than the Banks many previous promises that recapitalization was just a short period away. AR 1830. 22
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terms set forth in the Investment Agreement of October 28, 2010 (which by its own terms required OTS to take a grant a number of unacceptable supervisory concessions, including approval of the Legent purchase and waiver of the meet and maintain capital provisions of the Cease and Desist Order). All of the expressions of interest submitted by the Bank disclaimed any binding effect: this letter of intent does not constitute a legally binding offer or commitment on the part of the Investor. Id. 78. On January 21, 2011, even were OTS to have concluded that the Banks
investors non-binding letters of intent were actually the same as cash, the Bank was still short of the amount necessary to complete its Investment Agreements $200 million requirement. AR 4198 ($10 million); AR 4201 ($17.5 million); AR 4207 ($50.83 million); AR 4210 ($18.80 million); AR 4221 ($50.83 million). These totaled only $147.96 million.25 December 2010-January 2011: As the Bank slid toward collapse, its unsafe and unsound concentration in institutional deposits increased the Banks liquidity risk 79. Since 2007, the OTS had warned the Bank that its reliance upon a handful of
institutional depositors ran an unacceptable risk of a liquidity crisis should its capital dwindle to an unsafe or unsound level and one or more of those depositors choose to withdraw their deposits on short notice. AR 62 (2007 Comprehensive Examination), 161 (2009 Comprehensive Examination), AR 267 (letter transmitting results of 2010 Limited Examination). 80. The Banks losses and dwindling capital levels in 2009 and 2010, outlined above,
left the bank undercapitalized and relying on forebearance by its institutional depositors, who
25
The OTS carefully considered the submissions made by the Bank and concluded, among other things, that their non-binding nature as mere expressions of interest did not change the supervisory recommendation in favor of receivership. AR 4227-4229 (memorandum of January 21, 2011). 23
Filed 05/18/12 Page 24 of 37
could otherwise exercise their rights to withdraw their deposits from the Bank. This constituted an unsafe and unsound condition. AR 31. The institutional investors were able, once the bank fell below adequately capitalized, to withdraw their funds immediately, and some began to withdraw funds beginning in December 2010, while others gave the Bank only short-term forbearances lasting a matter of days. See 82-84, infra. 81. In December 2010, after the Bank reported itself undercapitalized as of
September 30, 2010, the relationships of the large institutional depositors to the Bank and avoidance of a classic bank run became the regulators primary concern. AR 30. OTS worked with the Bank to immediately take a number of protective measures to bolster available liquidity. AR 36-39, 1738. Of the Banks total deposit base of approximately $1.6 billion immediately prior to the closure, $1.073 billion was concentrated in four institutional depositors. AR 32 (January 13, 2011). The banks own estimate of its liquidity on that date was only $416 million. AR 39. 82. Matrix Settlement and Clearing Services (MSCS) was the first institutional
depositor to leave. Six days after the Bancorp publicly announced the Bank was undercapitalized, the Bank informed OTS that MSCS was withdrawing post haste its funds on deposit from the Bank. AR 2242. MSCS withdrew $29 million on December 20, 2010, $50 million on December 21, and that it would withdraw an additional $105.9 million over the next number of days. Id. MSCS represented approximately 10% of the banks deposits, and most of its funds on deposit were ultimately withdrawn prior to the receivership. AR 35. One week prior to the receivership, approximately $14.4 million from MSCS was still on deposit.26 AR 32.
26
On December 22, 2010 the Bank also informed OTS that another institutional depositor, CPI, was withdrawing approximately $30.4 million as expeditiously as possible. AR 2243. 24
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83.
Lincoln Trust Company (LTC), another institutional depositor, had
approximately $136 million on deposit at the Bank. AR 34. LTC informed its customers that their deposits will be placed only with well capitalized depository institutions. AR 34. The depository agreement between the Bank and LTC specifically gave LTC the right to withdraw its deposits from the Bank once the Bank ceases to meet the definition of well capitalized as that term is specifically defined in 12 CFR 565.4(b)(1)(ii). AR 1947. This agreement was set to terminate on February 1, 2011 and was never renewed. AR 1556. On December 22, 2010, as MSCS was in the midst of withdrawing its institutional deposits, the Bank solicited LTC not to follow suit. AR 1947. LTC gave the Bank a short-term forbearance letter agreeing not to withdraw funds so long as the Bank was very close to securing capital. Id. LTC specifically warned the Bank that if the Bank did not return to well capitalized status by January 31, 2011 or if the banks capital situation worsens, it would withdraw its depositors funds. Id. As described herein, as well as in the S-Memo signed on January 19, 2011, at the time of receivership there was no reasonably foreseeable expectation that the Bank would secure capital and become well capitalized by January 31, 2011. AR 34-35. Thus, OTS concluded the risk of departure of LTCs funds presented an unacceptable liquidity risk to the Bank. AR 35. 84. Equity Trust Company (ETC) presented the largest single institutional depositor
risk to the Bank. AR 32. In 2007, ETC had approximately $461.8 million on deposit at the Bank. AR 81. By 2009 this figure had grown to $501.3 million. AR 160. At the time of receivership, ETCs Institutional Deposits totaled $697 million, or 44% of the deposits at the Bank, substantially exceeding the total liquidity of the Bank. AR 32. ETCs depositor agreement allowed it to terminate its relationship with UWB in the event the Bank was less than adequately capitalized. AR 33. In an agreement with the Bank dated October 26, 2010, ETC
25
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stated that it would not exercise this right until, inter alia, the Banks $200 million Investment Agreement was consummated or not later than December 31, 2010. AR 33, 1945. On December 29, 2010, ETC gave the Bank a short-term forbearance until February 15, 2011. ETCs forbearance related that this was an absolute outside date.27 AR 1945. Thus, the OTS reasonably concluded that the risk of departure of ETCs funds presented an unacceptable liquidity risk to the Bank. AR 34. 85. The final large Institutional Depositor at the Bank was Legent Clearing, with
approximately $225 million on deposit at the Bank. AR 32. OTS concluded that Legents institutional deposits were not likely to depart in the near term and did not constitute an immediate liquidity risk. AR 35. 86. Between the institutional depositors MSCS, LTC, and ETC, the OTS concluded
that an outflow totaling $848 million was likely to occur in the near term following January 21, 2011. AR 40, n.31. The Bank reported available liquidity of $416 million on January 16, 2011, with the possibility of an additional $137 million in available liquidity from Legent Clearing. AR 39. OTS reasonably concluded that the Banks liquidity was likely to be insufficient to allow the Institution to meet its operating liquidity needs. AR 40. December 2010: FDIC requests the Bank consent to marketing of the institution to potential buyers in case of receivership 87. As the Banks final crisis unfolded, UWB should have been aware of the
likelihood of receivership absent an immediate infusion of capital. The FDIC solicited the Bank to adopt a marketing resolution, a means by which the FDIC may market a potentially failing
27
This extension was predicated on the Banks claim that it is very close to securing capital. AR 1945. Again, as described herein and in the S-Memo, the Bank had no realistic chance of raising capital or consummating the Investment Agreement. AR 33-34.
26
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bank to potential buyers before a receivership. On December 9, 2010, the Bank denied the request and assured the FDIC, inter alia, that no institutional depositors were likely to withdraw their funds. AR 1438. The Banks assurance was proven wrong eleven days later when institutional depositor MSCS began withdrawing its funds post haste. AR 2242. December 2010: The Banks undercapitalized status required it to submit a Capital Restoration Plan 88. On December 13, 2010, OTS informed the Bank that it was: (a) undercapitalized;
(b) subject to certain prompt corrective action restrictions; and (c) required to submit a capital restoration plan (CRP) by December 20, 2010. AR 1441-43. 89. A CRP is required by statute when a bank becomes undercapitalized. 12 U.S.C.
1831o(e)(2). UWB reported that it had become undercapitalized on September 30, 2010 by submitting an amended TFR filing on December 8, 2010. AR 1441. 90. Congress set 45 days as the maximum amount of time a regulator should grant a
Bank to submit a CRP after it becomes undercapitalized. 12 U.S.C. 1831o(e)(2)(D)(i). OTSs implementing regulations track the statute, setting 45 days as the maximum amount of time the agency may give a bank to respond to a CRP requirement. 12 C.F.R. 565.5(a)(1). In this case, OTS shortened the time for submission of the CRP to seven days because of the Banks unsafe and unsound condition.28 AR 1441. The Bank had previously stipulated to the existence of unsafe or unsound practices at the Bank when it consented to the June 24, 2010 C&D Order. AR 553, 1. The Bank did not ask OTS for an enlargement of time to file its CRP. AR 1473.
28
For example, institutional depositor ETC had indicated it would withdraw its deposits not later than December 31, 2010. It was not until December 29, 2010 that ETC gave the Bank a final short-term forbearance to the Bank staying its withdrawal. AR 1945. ETCs funds on deposit exceeded the entire liquidity available to the Bank. See 84 supra.
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91.
The Banks CRP was essentially a recapitulation and incorporation of the pending
Investment Agreement of October 28, 2010. AR 1475-78. The Bank renewed its request that the OTS promptly approve the incorporation of Legent Clearing LLC as the Banks operating subsidiary. AR 1476, 1. The Bank also requested that the OTS waive the meet and maintain capital provisions of the Cease and Desist Order. AR 1476, 3. The Bank also submitted a revised Bank business plan that again would drastically expand the assets of the Bank from approximately $2.1 billion at year-end 2010 to 3.46 billion by year-end 2013, again in violation of the asset growth restrictions in the June 24, 2010 Cease and Desist Order. AR 1500. Finally, the plan also projected continued reliance on institutional deposits through at least December 2013. AR 1491, 1507, 1512. 92. The Bank timely filed its CRP on December 20, 2010. Id. At no time subsequent
to the filing of its CRP did the Bank submit an amendment to the plan. Id. Nothing in OTSs regulation on CRPs forbids a Bank from either requesting an extension of time or from submitting a supplement to an already submitted plan. 12 C.F.R. 565.5 (2010). OTS did not render a final decision on the Banks CRP until almost a month later, giving the Bank adequate time to make any amendments or changes to its CRP it may have deemed necessary. AR 4123. December 2010: UWB is downgraded to a composite 5, the lowest rating 93. On December 20, 2010, OTS examiners commenced a limited examination of the
Bank. Two days later they completed their review, concluding, inter alia, that with its unsatisfactory liquidity position United Western Banks Undercapitalized status greatly raises the level of risk at the Institution. AR 1729. The examination also concluded that the undercapitalized status of the Bank prevented it by law from maintaining deposits on behalf of employee benefit plans. See 12 U.S.C. 1821(a)(1)(D)(ii). Finally, the examiners made note of
28
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the Banks mounting losses on loans and its lack of prospects to augment its capital level through earnings. AR 1730. 94. The Bank was notified of its downgrade to a composite 5 CAMELS rating, the
lowest level, in a letter dated December 29, 2010.29 AR 1727. January 2011: OTS denies the Banks application to purchase and incorporate Legent as an operating subsidiary 95. On January 18, 2011, the OTS issued a decision denying the Banks operating
subsidiary application to bring Legent into the Bank. AR 4119-21. Approval of that application was necessary for the Bank to acquire Legent as a subsidiary. 12 U.S.C. 1828(m); 12 C.F.R. 559.3(a)(1), 559.11. In addition, the Banks application was subject to approval of a number of other regulators, and none of these approvals was obtained by the Bank. AR 2541. In denying the application OTS found that Legent had experienced substantial financial difficulties during the past several years. AR 2535-2542 (OTS analysis of proposed Legent transaction), 4120, 4233-34, 4239. The Banks submissions to OTS also demonstrated that Legent was consistently losing money.30 AR 2539, 2541, 3675, 3682, 3812, 3833, 4120.
29
Institutions with a composite 5 rating exhibit extremely unsafe and unsound practices or conditions; exhibit a critically deficient performance; often contain inadequate risk management practices relative to the institutions size, complexity, and risk profile; and are of the greatest supervisory concern. The volume and severity of the problems are beyond managements ability or willingness to control or correct. Immediate outside financial or other assistance is needed in order for the financial institution to be viable. Ongoing supervisory attention is necessary. Institutions in this group pose a significant risk to the deposit insurance fund and failure is highly probable. AR 100 (emphasis added).
30
Legent incurred losses of $1.4 million, $8.4 million, and $2.9 million for its fiscal years ended June 30, 2008, June 30, 2009, and fiscal year-to-date April 30, 2010, respectively. AR 2539. Compounding this history of losses, in the spring of 2010, Legent lost its largest customer, Trade King, which accounted for 68% of its accounts. AR 434, 440, 2541, 2735-36, 2762, 3031, 3932.
29
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96.
The OTS also concluded that Legent had an unsatisfactory regulatory record over
an extended period of time, including recent, serious public enforcement actions taken against the firm by FINRA, its primary regulator (as well as the National Association of Securities Dealers, its prececessor).31 AR 2540-2541, 4120; see also AR 3151-3152 (2010, routing violations), 3183-3190 (2004, inaccurate transaction reporting); 3192-99 (2005, failure to safeguard customer funds and inaccurate transaction reporting); 3480-96, 3632, 3858, 4234, 4239-40. These documented enforcement problems raised significant safety and soundness issues and supervisory concerns about the proposed operating subsidiary and were key to OTSs decision to deny the application.32 AR 4120. 97. Finally, OTS found that the Bank already had significant concentration risk in
institutional deposits and that the acquisition of Legent would increase the Banks concentration in this type of deposit. AR 2539-2540, 4120. OTS concluded that this presented a significant liquidity risk that was unacceptable from a safety and soundness prospective in light of the Banks asset quality problems. Id. Finally, OTS determined that the Bank anticipated
31
In 2009 Legent was fined $350,000 by its primary regulator, FINRA, for violations including allowing suspected money laundering to take place, failing to file Suspicious Activity Reports, failure to have an effective anti-money laundering program, and allowing Legent to be used as a vehicle by known penny stock fraudsters. AR 3159-3177.
32
Legents unsatisfactory disciplinary record was not a single isolated instance but was part of a long-term track record of institutional mis-, mal-, and non-feasance that continued apace even after the receivership of UWB. On September 1, 2011 Legent was disciplined yet again by FINRA, and fined another $200,000. http://disciplinaryactions.finra.org/viewDocument.aspx?DocNb=21610 (accessed April 24, 2012). Legent was founded in 2002 by UWB director Guy A. Gibson. He remained on the board of directors of its holding company until 2010 and was on the boards of both Legent and the Bank when the Bank was negotiating to buy Legent. AR 2536 In 2005 Gibson sold most but not all of Legent to an entity controlled by Henry C. Duques. Id. Duques is also one of the Anchor Investors in the Investment Agreement for the Bank. AR 980. All of Legents various public disciplinary actions occurred while Gibson either owned Legent or served on the board of its holding company. 30
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significant increases in its assets. Id. However, the Banks growth was restricted by the Consent C&D Order and, if otherwise permitted, the projected growth entailed further increasing reliance on institutional deposits. Id. In conclusion, OTS found that the application was objectionable on safety and soundness grounds and presented significant supervisory concerns. AR 4119-21. 98. Because the Legent purchase was a must have condition of the Investment
Agreement for recapitalization, AR 1181, denial of the application meant that the Banks complex private-placement recapitalization transaction would not be possible. AR 982, (E). In addition to OTSs explicit disapproval of the application to purchase Legent, the Bank also failed to obtain the approval of either FINRA or the FDIC, which also doomed the entire recapitalization transaction. AR 27, n.7. January 2011: OTS denies the Banks business and capital restoration plans 99. On January 18, 2011, OTS denied the Banks CRP and rejected the Banks
proposed business plan, which was a subpart of the CRP. AR 4123-27. OTS noted that the CRP was predicated on the assumption that the Investment Agreement with the Anchor Investors would come to fruition. AR 4123-24. However, for that to occur, approximately $100 million had to be raised from other investors. AR 4124, 4129. Because the Bank and Holding Company had not provided OTS with any letters of intent or investment agreements from other investors, OTS considered the CRPs assumption that they would raise $200 million by January 31, 2011, to be overly optimistic. Id. 100. Moreover, OTS found a number of additional conditions precedent to the
recapitalization transaction were also unlikely to occur. As one example, the Banks application to purchase Legent, which was a must-have centerpiece of the Investment Agreement, was denied the same day as the OTS issued its decision on the CRP. AR 4124-25, 4130-31, 4135.
31
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Furthermore, while the CRP envisioned that only some of those conditions actually had to be met, the absence of any support for that assumption, including the absence of any written waivers by the Anchor Investors to the mandatory provisions of the Investment Agreement, led OTS to conclude that it was unreasonable to assume that the agreement would be consummated. AR 4125, 4131-32. 101. Finally, OTS rejected the CRP because the Holding Company did not provide an
acceptable guarantee for that plan. AR 4125-26, 4136. OTS noted that unacceptable provisions of the guarantee submitted by the Holding Company included: (a) a provision terminating the guarantee any time the Holding Company ceased to control the Bank; and (b) a restriction limiting the guarantee to only those matters under the control of the Holding Company. AR 4126, 4136. OTS found that those provisions improperly limited the scope and duration of the statutorily required guarantee. Id. 102. OTS also objected to the proposed business plan included in the CRP because of
that plans continued reliance on an excessive concentration of institutional deposits as well as unreasonable growth. AR 4126-27, 4135-36, 4158. January 19, 2011: Supervisory recommendation for receivership 103. On January 19, 2011, OTSs Western Regional Director sent the OTS Deputy
Director in Washington a memorandum (S-Memo), with 100 exhibits, setting forth the relevant supervisory history and concerns, and recommending the appointment of a receiver for the Bank. AR 21-49. The Deputy Director endorsed the recommendation to the next day. AR 21. 104. The S-Memo recognized that the Banks condition was negatively impacted by
the economic crisis that began in 2007. AR 23. The memo noted that beginning in the last quarter of 2008, rating agencies had downgraded the Banks non-agency mortgage-backed
32
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securities. Id. The Banks asset quality had declined with classified assets, including classified MBS, increasing significantly from 84.35 percent of core capital and ALLL at September 30, 2008, to 200.2 percent of core capital and ALLL at September 30, 2010. AR 29. The S-Memo concluded that the Banks poor asset quality contributed to an unsafe and unsound condition. Id. 105. The S-Memo noted that the Bank was undercapitalized, with a 7.8% Total Risk-
based capital ratio and a 6.2% Tier 1 (core) capital ratio as of September 30, 2010. AR 22, 2425. The S-Memo further stated that the Bank had negative net income of $69.359 million for the year ending December 31, 2009 and negative $68.819 million in the first nine months of 2010. AR 22, 30. 106. The S-Memo concluded that without a capital infusion large enough to permit
disposition of problem loans and securities, it was unlikely that the Bank could become profitable in the near term. Id. The S-Memo also concluded that the Bank was unlikely to obtain that capital, because a number of key conditions precedent to closing the Investment Agreement would not be met. AR 26-28. 107. With regard to liquidity, the S-Memo noted that the Bank was dependent on four
institutional depositors, ETC, MSCS, LTC and Legent, for almost 70 percent of all deposits, and that one of those four, MSCS, was in the process of withdrawing its deposits. AR 31-32, 35. The S-Memo also concluded that both ETC and LTC could withdraw their deposits and had given indications that they were likely to do so, if the Holding Companys plan to recapitalize did not come to fruition. AR 32-35. Finally, the S-Memo analyzed the Banks liquidity and found that it had insufficient liquid assets to continue normal operations and redeem most of ETCs and LTCs deposits over a short time frame. AR 36-40. The S-Memo concluded that the Banks continued reliance on institutional deposits was unsafe and unsound, and because the
33
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recapitalization was unlikely to occur, the likely result was a liquidity failure (i.e. the Banks available sources of funds were smaller than the anticipated outflow of institutional deposits). AR 34, 36-37, 39-40. 108. With respect to the Banks CRP, the S-Memo noted that OTS had required the
plan to be prepared quickly because the institution was in an unsafe and unsound condition. AR 28. The S-Memo concluded that the CRP contained many unsupported and unrealistic assumptions about the success of the Holding Companys capital raising effort. Id. The SMemo also noted that the proposed business plan provided with the CRP failed to appropriately address the Banks liquidity issues and envisioned excessive growth. Id. Finally, the S-Memo concluded that the Holding Company had not provided an adequate guarantee for the CRPs performance. Id. 109. The S-Memo concluded that the Bank was in an unsafe and unsound condition
and was poised to become unable to pay its obligations or meet its depositors demands in the normal course of business. AR 21, 41-42. The memorandum also concluded that the Bank was undercapitalized and had failed to provide an acceptable CRP. AR 21, 42. January 20, 2011: Legal opinion on sufficiency of grounds for receivership 110. On January 20, 2011, OTSs Acting Chief Counsel reviewed the supervisory
recommendation for receivership and authored a legal opinion on the grounds (L-Memo), which was provided to the Acting Director. AR 10-19. 111. The L-Memo agreed with the S-Memos conclusion that the Bank had an unsafe
and unsound concentration in institutional deposits. The Banks weak capital position and significant asset problems, as well as its long history of losses, rendered it vulnerable to a significant outflow of deposits with minimal notice, and without adequate liquidity to meet the
34
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demand. The L-Memo concluded that the severity of this situation represented an unsafe or unsound condition to transact business, and that appointment of a receiver was legally warranted. AR 17. 112. In a liquidity ground directly related to the conclusions set forth in 111, the L-
Memo opined that the Acting Director could appoint a receiver for the Bank if the institution is likely to be unable to pay its obligations or meet its depositors demands in the normal course of business. The Acting Chief Counsel concluded that the supervisory determination that all but one of the Banks major institutional depositors were poised to withdraw their funds, for which the Bank lacked adequate liquidity, was an adequate legal basis to for appointment of a receiver. AR 18. 113. Finally, the Acting Chief Counsel found an adequate legal basis to conclude that
the Bank was undercapitalized and that it had failed to submit a capital restoration plan acceptable to the OTS. Based on the facts and circumstances more fully described in the decisional documents outlining the agencys rejection of the CRP, the Acting Chief Counsel opined to the Acting Director that this failure constituted an adequate legal ground to appoint a receiver. AR 18-19. January 21, 2011: Receivership order signed 114. On January 21, 2011, after careful and thorough evaluation of the Banks
condition found in the Administrative Record, the Acting Director of OTS signed an Order appointing the FDIC as the Banks receiver. AR 2-8. The Acting Director determined that the Bank: (a) had a high ratio of classified assets to capital and reserves; (b) had significant operating losses; and (c) was undercapitalized. AR 2-4.
35
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115.
In addition, the Acting Director found that the Banks recapitalization plan was
unlikely to succeed because many of the precedent conditions to its consummation would not be fulfilled. AR 3-4. Furthermore, the Acting Director found that the Bank had a very high concentration of deposits from only four institutional depositors and that a significant amount of those deposits could be quickly withdrawn. AR 4-5. He also found that one of the four institutional depositors was in the process of withdrawing its deposits. AR 5. Moreover, the Acting Director concluded that two of the remaining institutional depositors provided the bulk of the deposits and those depositors had indicated that they were maintaining their deposits at the Bank because they believed the Bank would be recapitalized in the near future. Id. Because the Bank was unlikely to successfully recapitalize in the near future, the Acting Director found the risk of withdrawals unacceptable. Id. He also found that the Bank did not have sufficient liquidity to satisfy such withdrawals along with its other operations. Id. 116. The Acting Director concluded that the Bank was in an unsafe and unsound
condition because of its potential severe liquidity strain, an excessive amount of classified assets, continuing significant operating losses, insufficient capital, and no realistic prospects for raising capital in the short term. AR 6. In addition, he concluded that it was likely that more institutional deposits would be withdrawn in the near term than the Bank could redeem and also meet its other obligations. AR 6-7. The Acting Director also concluded that the Bank had not provided an acceptable recapitalization plan. AR 7. Accordingly, he determined that three separate statutory grounds for such an appointment were present: the Bank was in an unsafe and unsound condition to transact business, 12 U.S.C.
1821(c)(5)(C);
36
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the Bank was likely to be unable to pay its obligations or meet its depositors
demands in the normal course of business, 12 U.S.C. 1821(c)(5)(F); and the Bank was undercapitalized, as defined in 12 U.S.C. 1831o(b), and failed to
submit a capital restoration plan acceptable to the agency within the time prescribed under section 1831o(e)(2)(D), 12 U.S.C. 1821(c)(5)(K)(iii). AR 2. Date: May 18, 2012 Respectfully submitted, Julie L. Williams, Chief Counsel Daniel P. Stipano, Deputy Chief Counsel Horace G. Sneed, (MI Bar No. P33434) Director, Litigation Division Gregory F. Taylor, Assistant Director, Litigation Division DC Bar No. 417096 /s/Christopher A. Sterbenz Christopher A. Sterbenz, Counsel, Litigation Division DC Bar No. 437722 250 E Street, S.W. Washington, D.C. 20219 Telephone: (202) 927-9124 Facsimile: (202) 874-5279 christopher.sterbenz@occ.treas.gov Attorneys for Office of the Comptroller of the Currency and Comptroller Thomas J. Curry
37

Uwbk 5-18-2012 Fdics Cross Motion For Summary Judgement

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FEDERAL REGISTER 78 Fed. Reg. 48950 (Aug. 9, 2011)................................................................................................. 5

LEGISLATIVE HISTORY H.R. Rep. No. 102-330 (1991) ........................................................................................................ 4

OTHER AUTHORITIES LCvR 7(h)(2) .................................................................................................................................. 2 OTS Examination Handbook ........................................................................................................ 10

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See, e.g., OCC SOF 77.

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