good morning i may have please the court my name is matt powell and i represent the petitioner here california pacific bank understand i have fifteen minutes for argument i would like to reserve three minutes for please the question that this court will be asked to decide is whether the f d i c can be used as an internal manual as though it had the force and effect of law in order to find that california pacific bank violated the bank secrecy act as i will explain the f d i c was able to exploit the vague provisions of the b s a by finding the procedures in the internal manual that the bank chose not to implement constituted violations of the b s a i will also explain that the f d i c elevated its internal manual over the united states code the f d i c took the position that the bank was required to follow the directives in its internal manual despite being advised by the department of justice and the f b i that it should not disclose any aspect of the ongoing investigation however i would prefer to use my time to answer the questions the court has about the appeal let me ask you because it seems like in your briefing thank i guess isn't that manual entitled to it to deference are you asking us to ignore the manual completely what's your give me your best argument why we wouldn't give at least as ski the other well reasoned treatise but the fact that the bank chose not to follow specific procedures that are set forth in this four hundred plus page f f i see manual does not demonstrate in the bank violated the bank secrecy act admittedly this is information that the bank can look at the regulators can look at but what the f b i says he did here was to look at procedures in this four hundred plus page manual the bank chose not to implement find violations of the essay rather than looking at what the bank was actually doing and had been doing for years that was sufficient to satisfy all four pillars of the b s a and if the i c found that manual to help create its own b s a policy manual and it is undisputed that the bank's independent examiner jungle of all doe considered the guidance in the be in the f f i c manual but the fact that they consider this is guidance does not mean that their failure to adopt particular provisions rises to a violation of the laws again this is a four hundred page manual it has numerous provisions in there and the bank looked at some of those procedures that the bank secrecy act is what controls and that the the manual provides guidance as to how you comply with that act the manual certainly provides guidance but it doesn't say that the bank secrecy act in itself is relatively short it consists of four sentences and therefore you can't take the f e c manual and say that's what it means it's guidance you have to look at what the bank is doing customer using that definition there it's undisputed that the bank knew its customers and performed numerous procedures to make sure that it understood its customers those procedures constitute what the f f small bank it has two hundred customers five hundred active deposit accounts every day the bank looted every transaction going through those deposit accounts it reviewed those transactions against the background of knowing that most of its depositors over eighty percent also had credit through the bank they were borrowers so when you evaluate whether the banks complying with the b s a you customers of the bank for years and the bank was intimately familiar with what they were doing and the nature of their business and all of the information that the f b i s examiner said the bank didn't have it in fact happened it just didn't have it in the way the f d i c said it should have had it and more importantly that information was not documented in a de deposit files that the positive files themselves did not so we were view for substantial evidence for your honor ordinarily i would concede that would be the standard but in this case the question is substantial evidence of what substantial evidence that the bank complied with the bank secrecy act or substantial evidence that the bank complied with the f f i see man you also against that background and we we've argued this is you have to evaluate the bias that was manifested throughout this investigation prior to beginning the examination of the f d i c had determined that it would find violations of the b s a during the course of the examination the f d i c disregarded evidence demonstrating that the bank was complying with the b s a in favor of finding procedures in the f f i see manual that they did not adopt but we've pointed to the memo that was prepared mocking management of the bank that has racist overtones to it and then finally at the end of the examination the bank changed the basis i'm sorry i apologize the f b i sea change the basis for finding that the bank failed to file a suspicious activity report in order to find a violation the b s a so paul under ordinary circumstances  evaluating this particular regulatory investigation and the board's determination following that regulatory investigation that the question would be is it supported by substantial evidence in this case i believe the answer is no because says that generally bias and regulatory investigation does not rise to broad due process violation in this case it does because we had jennifer had the bias in the regulators at the l j and in the board decided that bias was not sufficient to const to due process violation but then the entire decision of the l j and it later the board is based on the fact that we have to d rises to a two level due process violation and i'm just trying to figure out what's your authority for that other than your logic your honor we look long and hard i cannot find a case that said that this is something i think it's going to be somewhat of a matter of first impression that can you have a situation where there's demonstrated bias where the regulators are not determining whether the banks complied with the regulations but with their own manual and then turning around and saying you have to give such deference to the bank examiners that whatever they've decided that is sufficient to find violations so when you have those two aspects of this under those circumstances we contend that here the bias of a regulator then rise to the level of a due process violation because the for all intents and purposes the administrative law judge and then the board found that they were the final adjudicators what they decided controlled council was there any significance to the fact that regulators made certain recommendations about the bank secrecy act procedures and other earlier exam reporting apparently those were not their recommendations i think the significance your honor is that in the first examination examination two thousand and ten the f d i c examiners found that the b s a program at the bank was generally adequate it's been made a number of recommendations to improve the bank secrecy act the bank implemented all of those regulations except one most of those regular recommendations were implemented to the satisfaction the f a risk assessment evaluation for the bank and the third provision that the bank should aggregate account information over three months only as to the third provision to the bank ultimately decide this is something we don't feel we need to do because we have some procedures in place to do or sufficient in fact there are more extensive than what this would give us this goes back to this review of these batch reports these are reports about like this  apologize about three inches thick and the the bank goes through those every day looking at every transactions not just the line employees it's the officers as the risk assessment form what happened there is the bank undertook to  implement the recommendation made by the f d a i see it revised the form it attempted to automate the form and attempted to make it better at the end of the day the customer risk assessment form was satisfactory to the bank independent examiner jones of although it was sad and the bank was satisfied that it would achieve the recommendations from the f d i c the f d i c came in and disagreed said you know you've done it this way that really doesn't satisfy us that doesn't mean there's a violation the bank secrecy act as to the banks looks like a run out of time celebrating the bank hold only decided that it was a low risk bank because it knew its customers so well let me just give you one example and there's a several that i just want to see what you do with this example it seems like it was in two thousand and eleven after being i guess told to revise the risk assessment  form mr chee only identified one new customer as high risk director and he shifted the rating scale to make it easier to rate a new customer as low or medium risk seem to be you know contrary to the recommendation in the f b i seized two thousand and ten report what's your response to i mean there are number of these i mean  one happens to be under internal controls correction or the response to that is that most of the customers the bank had were longstanding customers had been customers for years they were borrowers they were subject to extensive evaluation and review on a routine basis as the bank would renew credit and so what mr cheat a real distinction here is at what point is the fact this is a long standing customer come into play for some of the new customers that they didn't have before they were rated high risk seem to be out of time but only one new customer was rated higher risk because that was the only new customer the other customers dynasty won tech they had been customers for years good morning your honour's and may it please the court i am joseph brooks from the f b i sees appellate litigation unit the question that was asked in the opening brief by my friend on the other side is what happened between two thousand and ten exam and two thousand and twelve exam and the answer is a lot and i think taking a quick look at it answers a lot of the questions that may have been raised by this case the first thing that happened of course is that there were three corrective actions that were not only recommended by the f b i see in order for the banks compliance plan to be in compliance but were agreed to were great to be done by the bank however none of those were done the corrective risk ratings the overall risk assessment you count monitoring over time and importantly as to each one of issue there's no bias issue there's no misuse of the f f i e c manual moving along we have the failure to document information and collect information for the deposit accounts and the response to that is well the information is in the loan file this is what i think is commonly recognized as a dog ate my homework argument however the evidence is clear in this case the dog didn't eat the homework what happened here is that first of all despite the claims of my brother to the to the opposite the evidence was clear the preponderance of evidence was found by the a l j that the existence of these loan files where the fact that they had the information missing from the deposit files was not communicated to the f d i c examiners and you can find that in the record at volume t that were prepared just for the hearing and even those alone files had information missing that was required to be on them beyond that it is undisputed that the overwhelming majority of the loan files had no information at all about b s a site visits and interestingly enough the requirement that information be in the deposit files was stated in the bank's own b s a manual again no issue about f f i e c manual no issue about fair notice no issue about bias the independent testing deficiencies that came up after the first exam before the second one as pointed out in our satisfactory and more importantly and you can go to the record at vine to eat for thirty four to thirty five on this the a l j found that the critical problem here was that miss valda was in a dual role she was serving both as a consultant and an auditor and there was a conflict there you don't need the f f i see manual to tell you that that's a conflict again no bias no due process issue the next thing that happened is that not one but three new b s a administrators were appointed after the first exam and before the second one and the most recent appointment at the time of the exam was mr allan she and he was found to be unqualified and critically he wasn't found to be on qualified based on something in the f f i e c manual the primary evidence as conceded in the opening brief it forty was the testimony of the bank's own consultant and in addition to that it was the conduct of the b s a administrator in changing the risk assessment form and changing the overall risk form in failing to aggregate accounts to view them and in failing to make sure that the documents that belonged in deposit files were there a final thing that happened was that the training was found to be inadequate but that was also a new development because the basis of the primary basis for the training being in adequate was the in adequate trainer the b s a administrator there are also some other issues there i want trouble you with the wrong answers and tests and such the bottom line is there was nothing in this case that required use of the f f i n c manual there is no principle or war or practice that was imposed here on the bank by the f b i say in the course of this exam that is not also included in the bank's own f f i d c manual and as i pointed out most of these things are apparent anyway counsel curious about your your reaction to this idea of you rely on woodley and magic value potato shippers or the concept that an agency manual can be used to clarify statutory obligations in those situations all over it's only one agency involved in putting that manual together here you have a collaborative effort with the f d i c the board of governors several other federal and state agencies that put together the f f c given that  does it make a difference that this is an effort of lots of different agencies as opposed to one i don't know what your honor if anything i'd expect that the guidance would be better i mean a lot of these federal agencies act in a cooperative there it's not like a pan of play a federal agencies these are all financial regulatory agencies the federal reserve for example the f d i c they both regulate banks they just regulate different banks they have different responsibilities so i don't think that implicates it at all but i go back to my earlier point yes if i see is largely irrelevant to this case if i see manual because again the b s a magical which by the way was prepared by the same this vaal that we've been talking about the b s a manual incorporates much of the f f i e c manual but importantly incorporates all of the provisions that could conceivably be at issue here so i don't think i don't think that that would change the picture at all and your reference to the excuse me the woodley case i mean what's very interesting about that case is what this court said oh about about the provider reimbursement manual hundreds of pages long and it was an issue there this court said that even though the eight c f a conceded that the regulation at issue there was quote susceptible to misinterpretation and to subjective decisions unquote this court rejected a vagueness challenge because fair notice was given by quote the regulations the case law and the provider reimbursement manual or point here is a simple one we're not saying that because there was a manual everything is fine but we're saying is the reliance on the manual cannot in and of itself as has been alleged to be a violation of due process and we say that because this court when it has looked at the existence of these manuals has consistently found that it is a factor that mitigates against finding vagueness and what's absent from anything that's been submitted to this court and anything quite frankly that we've seen is any case that even suggests let alone holds otherwise the only other issue is with respect to the suspicious activity reports we'd largely rely on the brief for that because there are sensitive matters but if the court has any questions i'll be happy to respond to them and if the court has any questions about any other aspects of the case i'd be happy to respond to them i do have one question five may is there any you know his temples present that address in the context of the substantial evidence test the significance of a bank not following advice from the on the same regulators or advice in a prior report or not for the living up to to something they don't really are agreed to do your honor i haven't seen any case like that the closest thing that i've seen in the course of working on this case is of course that issue wasn't directly raised though it's an interesting use the closely i've seen is the magic valley potato case and in that case the court found of that the regulation about whether potatoes should or shouldn't be rated us number one the regulation itself certainly was important but the court found there were two other factors that were important in support of this court's holding that there was fair notice there one was the existence of an instructional manual and the second was a presentation that was made in information that was communicated to the potato shipper during a plant visit that cases just like this clase in the sense that you had an instructional manual there like we have here and b that instructional manuals and instruction manual for the examiners and inspectors at the potato plant the f f i d c manual here similarly is a manual for conducting examinations and a magic valley potato the combination of the manual and the information that was communicated to the plant operators to the plants president during a visit by the department of agriculture inspectors that information was found also critical by this court in terms of communicating what was required and what subsequently happened was notwithstanding the fact that the inspectors would visited the plant said based on this instructional manual based on how we interpret and apply it these potatoes not us number one they went forward and shipped them anyway and this court said there vagueness challenge did not save them from the penalties that were assessed and that's about the closest thing i've seen to the question your honour's asked ok thank you honor once again i began by and by in the court to ask any questions that may have i may also be out of time and i'm happy i'm happy to say your answer questions there's no more questions than thank you very much ok