Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-12-01416/USCOURTS-caDC-12-01416-0/pdf.json

Parties Involved:
Comptroller of the Currency
Respondent
Lawrence Dodge
Petitioner

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 10, 2014 Decided March 7, 2014

No. 12-1416

LAWRENCE DODGE,

PETITIONER

v.

COMPTROLLER OF THE CURRENCY,

RESPONDENT

On Petition for Review of an Order of the 

Office of the Comptroller of the Currency

Erik M. Andersen argued the cause for petitioner. On the

briefs was Thomas L. Vincent.

Gabriel A. Hindin, Attorney, Office of the Comptroller of

the Currency, argued the cause for respondent. With him on the

brief were Horace G. Sneed and Douglas B. Jordan, Attorneys.

Before: ROGERS, Circuit Judge, and WILLIAMS and

SENTELLE, Senior Circuit Judges.

Opinion for the court by Circuit Judge ROGERS.

ROGERS, Circuit Judge: Prior to 2006, the American

Sterling Bank, a federally insured savings bank, had received

high composite ratings by the Office of Thrift Supervision

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(“OTS”). By April 2007, however, the OTS had become

concerned about the Bank’s declining capital reserves. Several

transactions reported as capital in the Bank’s quarterly financial

reports to the OTS over six consecutive reporting periods

through June 2008 led to enforcement proceedings. On

September 17, 2012, the Comptroller of the Currency found that

Lawrence Dodge, as the Chief Executive Officer and a director

of the Bank, had engaged in a pattern of willfully

misrepresenting the Bank’s capital reserves to the OTS and the

Bank’s board of directors, and he issued orders prohibiting

Dodge from participating in the affairs of any federally insured

financial institution and assessing a civil penalty of one million

dollars. Dodge petitions for review, contending principally that

he could not have knowingly violated accounting standards

because they were evolving at the time and his later infusions of

cash into the Bank render the prohibition and penalty

unjustified. For the following reasons, we deny the petition for

review.

I.

The Federal Deposit Insurance Act (“FDI Act”) authorizes

the entry of a prohibition order barring future “participation . . .

in the conduct of the affairs of anyinsured depository institution”

when the appropriate federal banking agency finds that a party

affiliated with an insured institution (1) violated “any law or

regulation,” “engaged or participated in any unsafe or unsound

practice,” or breached a fiduciary duty; (2) that either causes the

bank to “suffer[] or . . . probably suffer financial loss or other

damage,” prejudices or could prejudice depositors’ interests, or

gives the party “financial gain or other benefit;” and (3) that

“involves personal dishonesty . . . or . . . demonstrates willful or

continuing disregard . . . for the safety or soundness of [the

bank].” 12 U.S.C. § 1818(e)(1). These three prongs of the

prohibition action are known respectively as “misconduct,”

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“effects,” and “culpability.” See Proffitt v. FDIC, 200 F.3d 855,

862 (D.C. Cir. 2000). For each prong, any one of multiple

alternative grounds can support an adverse finding. An order of

prohibition is supportable upon proof of each prong so long as

the misconduct creates a “reasonably foreseeable” risk to the

financial institution. Kaplan v. OTS, 104 F.3d 417, 421 (D.C.

Cir. 1997); see Kim v. OTS, 40 F.3d 1050, 1054 (9th Cir. 1994). 

Additionally, a civil monetary penalty (of not more than $25,000

for each day the violation continues) may be entered for violating

laws, regulations, or other requirements, “recklessly engag[ing]

in an unsafe or unsound practice,” or breaching a fiduciary duty,

when that action is “part of a pattern of misconduct,” or “causes

or is likely to cause more than a minimal loss to [the bank],” or

“results in pecuniary gain or other benefit to such party.” 12

U.S.C. § 1818(i)(2)(B). 

The FDI Act authorizes federal officials to take “prompt

corrective action” in order “to resolve the problems of insured

depository institutions at the least possible long-term loss to the

Deposit Insurance Fund.” 12 U.S.C. §1831o(a)(1). It defines

five capital categories for insured banks ranging from “well

capitalized” to “critically undercapitalized.” Id. § 1831o(b). The

OTS regulations, in turn, require “[e]ach savings association and

its affiliates [to] maintain accurate and complete records of all

business transactions.” 12 C.F.R. § 562.1(b)(1) (recodified as

§ 162.1(b)(1)). “Such records shall support and be readily 1

 Under Title III of the Dodd-Frank Wall Street Reform

1

and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376

(2010), functions of the OTS related to federal savings associations

were transferred to the Comptroller of the Currency, effective July

21, 2011. See 12 U.S.C. §§ 5412(b)(2)(B), 5414(a)(2)(B). Upon

transfer, the OTS regulations were recodifed. In this opinion we

cite the regulations as they were codified during the events at issue,

noting the recodified number within parentheses.

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reconcilable to any regulatory reports submitted to the OTS and

financial reports prepared in accordance with [Generally

Accepted Accounting Principles (GAAP)].” Id.; see also id.

§ 563.180(a) (recodified as § 163.180(a)). The financial reports

must conform to “the GAAP that best reflects the underlying

economic substance of the transaction at issue” as well as “safe

and sound practices contained in OTS regulations, bulletins,

examination handbooks and instructions to regulatory reports.” 

Id. § 562.2(b) (recodified as § 162.2(b)). Of relevance here,

§ 562.2(b) incorporates the guidance for contributing capital

contained in Section 110.16 of the OTS Examination Handbook,

which provides that savings associations may accept without

limit capital contributions in the form of “Cash[,] Cash

Equivalents[,] Other high quality, marketable assets provided

they are otherwise permissible for the savings association . . .

[or] other forms of contributed capital if the association receives

prior OTS Regional Director approval.” The regulations warn

that “[n]o savings association or [affiliated person] shall

knowingly . . . [m]ake any written or oral statement to the [OTS]

or to an agent . . . of the [OTS] that is false or misleading with

respect to any material fact or omits to state a material fact

concerning any matter within the jurisdiction of the [OTS].” 12

C.F.R. § 563.180(b)(1) (recodified at § 163.180(b)(1)); see also

18 U.S.C. § 1005. 

The enforcement proceeding against Dodge involved four

transactions reported as contributions to Bank capital that the

OTS alleged failed to comply with GAAP or regulatory

requirements. By December 2006, the Bank’s capital reserves

had declined to “adequately capitalized.” In response to the

OTS’s request, the Bank’s holding company, American Sterling

Corporation, of which Dodge was CEO and an 85% shareholder,

adopted a resolution on April 25, 2007, stating that it would

“take appropriate steps to assure [the Bank] meets or exceeds the

. . . required capital ratios in order to remain well capitalized at

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the end of each regulatory financial reporting period.” The ALJ

found that between April 2007 and May 2008, the holding

company and the Bank made four contributions that the Bank

reported as capital: 

• California Republican Party (“CRP”) Loan

Participation. In 2006, the holding company made an

unsecured $3 million loan to the CRP using $3 million

supplied by Dodge personally. When the CRP failed to

repay the loan at maturity on February 9, 2007, the due

date was extended to June 30, 2007. Meanwhile, in

April, 2007, the holding company contributed a $2

million participation in the CRP loan to the Bank’s

capital account for the purpose of increasing the Bank’s

capital levels. When the CRP again failed to pay on

June 30, Dodge extended the maturity date several

times, to March 17, 2008, at which point the holding

company conveyed the note back to Dodge, who paid

nothing in exchange and forgave the loan on June 6,

2008. The Bank informed the OTS that it had received

a loan participation due in June 2007, but never

disclosed the loan’s prior or subsequent extensions or

its forgiveness. Dodge admitted he caused the Bank’s

financial reports to the OTS for March 31, 2007, and all

subsequent reports through the second quarter of 2008

to reflect the $2 million as capital. 

• Millennium Gate Foundation (“MGF”) Loan

Purchase. In 2001, Dodge proposed and the Bank’s

board approved a $400,000 loan to MGF, and Dodge

personally guaranteed repayment. When the loan was

not repaid, the Bank charged it off in 2004 and Dodge

failed to perform on his guarantee. In April 2007, the

Bank transferred the charged-off promissory note to its

holding company and reported an inter-company

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receivable from the holding company for $400,000 in

the Bank’s capital account, effective March 31, 2007. 

The Bank recorded $265,000 as added capital from the

loan purchase. The MGF loan file contained no

documentation supporting a receivable or the holding

company’s obligation to pay the Bank. A Bank officer

informed the OTS that the holding company had

purchased a $400,000 charged-off loan from the Bank,

resulting in $265,000 being added to capital. The Bank

directors understood the Bank would receive the

$400,000 in cash, but that did not happen prior to June

30, 2008. Nonetheless, Dodge caused the $265,000 to

be included as capital in the Bank’s reports to the OTS

over the six reporting periods at issue. 

• 9800 Muirlands/Inter-Company Receivables. On

January 16 and February 12, 2008, a Bank officer, at

Dodge’s direction, reported $470,000 and $280,000 on

the Bank’s books as capital contributions from the

holding company and corresponding inter-company

receivables from the holding company. Both

contributions were backdated to December 31, 2007,

for the purpose of making the Bank appear “well

capitalized,” and were reported to the OTS in the

Bank’s financial reports for the fourth quarter of 2007

and the first quarter of 2008. Dodge told the OTS and

senior Bank managers that the total $750,000 was

attributed to the holding company’s expected sale of a

commercial property known as 9800 Muirlands. As of

December 31, 2007, there was no executed agreement

or note between the holding company and the Bank

regarding an obligation to pay the Bank $750,000 upon

the sale of 9800 Muirlands. Nor had a contract for the

property sale been executed by January 16 or February

12, 2008, when the receivables were reported as capital,

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and no sale had occurred by June 2008. 

• Mountain View Pipeline Income. In 2008, the Bank’s

executive management team, including Dodge,

considered a proposal to service mortgage loans owned

by Mountain View Capital. A member of the

management team estimated the potential fee income at

$706,949. The management team instructed a Bank

employee to report the potential income stream as

income on the Bank’s books even though the Bank had

no written agreement with Mountain View to service

the loans. The “income” was effective May 5, 2008,

and backdated to April 30, 2008. In December 2008,

upon learning from Dodge that there was “confusion”

whether an agreement with Mountain View existed, and

because the income had been reported for the second

and third quarters of 2008, the Bank’s board of

directors decided to hire an outside auditor to determine

the proper treatment under GAAP; the auditor

concluded the revenue should not have been reported in

the Bank’s financial reports to the OTS as income. 

During the OTS examination beginning June 30, 2008, the

OTS ordered the Bank to reverse the first three contributions,

totaling $3,015,000. As a result, and with the addition of other

write-downs largely associated with the Bank’s heavy portfolio

of mortgages, the Bank became “critically undercapitalized” in

the summer of 2008. On August 11 and 13, 2008, Dodge caused

approximately $12 million in capital to be infused in the Bank

through loans obtained by a holding company subsidiary. On

August 20, 2008, the OTS issued a cease and desist order

requiring the Bank to meet increased capital levels by September

12. Although Dodge obtained an additional $7.5 million from

the holding company, the Bank failed to meet the capitalization

requirements of the cease and desist order. On April 17, 2009,

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the OTS placed the Bank in receivership. 

On June 25, 2010, the OTS issued a Notice of Intention to

Prohibit and Notice of Assessment of a Civil Money Penalty

(“OTS Notice”) against Dodge. Following an evidentiary

hearing, an Administrative Law Judge (“ALJ”) issued a

recommended decision on November 1, 2011. Although

concluding that Dodge’s actions were not the actual cause of the

failure of the Bank, the ALJ found that for approximately

fourteen months, or six OTS reporting periods, Dodge committed

“serious” violations of regulatory reporting requirements,

prohibitions on false banking statements, and the requirement

that only “well-capitalized” institutions accept “brokered”

deposits, and that as the Bank’s CEO and a board member acted

knowingly and recklessly in disregarding risks to the Bank. The

ALJ recommended that the Comptroller, see supra note 1, enter

an order of prohibition against Dodge and an order assessing a

civil monetary penalty of $1 million, rather than the $2.5 million

proposed in the OTS Notice. Dodge filed exceptions. On

September 17, 2012, the Comptroller adopted the ALJ’s

Recommended Decision as “well reasoned and supported by a

preponderance of the evidence,” Decision at 10 (citing

Steadman v. SEC, 450 U.S. 91, 104 (1981) (citing the

Administrative Procedure Act, 5 U.S.C. § 556(d))), denied

Dodge’s exceptions, and entered the recommended orders. 

Dodge petitions for review.

II.

Dodge seeks dismissal of the Comptroller’s decision and

orders on the grounds of legal error in relying on later-developed

standards in the OTS New Directions Bulletin of 2009 when

there were no clear standards at the relevant times, and in

applying a “should have known” scienter standard in findings

that required a more demanding level of scienter. He also seeks

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dismissal because of the “lack of substantial evidence to support

any finding of likely harm, or culpable scienter, or personal

gain.” Pet’rs Br. at 31. In his view, the analytical errors

stemmed from the Comptroller’s failure to acknowledge the

commitment of the holding company to back the Bank, the

comparatively small risk to the Bank and its depositors caused by

any accounting mistakes, and his initiation of discussions with an

OTS examiner and infusion of more than $17 million into the

Bank all of which, he maintains, makes clear his good

intentions and his lack of culpability. 

The enforcement proceeding reveals the parties’ divergent

views about relevant events. Dodge sees himself as a victim of

overzealous enforcement efforts during a time of changing

standards on what qualified as a capital contribution when no

financial harm to the Bank in fact occurred and he acted to shore

up the Bank’s capital reserves, ultimately infusing, he asserts,

more money in the Bank from the holding company than was

legally required. See id. at 30 32. In the absence of explicit

objection by the OTS to the three non-cash contributions, he

views his intentions as honorable and lawful, but for the delay in

replacing the receivables with cash. The Comptroller, on the

other hand, views Dodge’s manipulation of the Bank’s capital

accounts to be plainly contrary to established requirements in a

way that could have caused financial harm or other damage to

the Bank and did compromise the OTS’s ability to take prompt

corrective action. To the extent Dodge now urges the court to

reweigh the evidence, the court’s role in reviewing his challenges

to the Comptroller’s decision and orders is more limited. 

The court must affirm the Comptroller’s decision unless it

is “arbitrary, capricious, an abuse of discretion, or otherwise not

in accordance with law.” Proffitt, 200 F.3d at 860 (quoting 5

U.S.C. § 706(2)(A)). Although the court owes no deference to

the Comptroller’s interpretation of 12 U.S.C. § 1818 under

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Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc.,

467 U.S. 837 (1984), because several agencies administer the

provision, see Proffitt, 200 F.3d at 863 n.7; Wachtel v. OTS, 982

F.2d 581, 585 (D.C. Cir. 1993), and the court therefore “must

decide for [itself] the best reading,” Miller v. Clinton, 687 F.3d

1332, 1342 (D.C. Cir. 2012) (citation omitted), the court will

accord the Comptroller’s viewsthe weight due from their “power

to persuade,” Skidmore v. Swift &Co., 323 U.S. 134, 140 (1944). 

Cf. MBIA Ins. Corp. v. FDIC, 708 F.3d 234, 240 (D.C. Cir.

2013) (citation omitted); Miller, 687 F.3d at 1342 n.11 (citation

omitted). The Comptroller’s findings of fact are final if

supported by substantial evidence in the record as a whole. See

Proffitt, 200 F.3d at 860; see also Universal Camera Corp. v.

NLRB, 340 U.S. 474, 477 (1951).

We conclude Dodge has failed to show that the stringent

statutory requirements for an order of prohibition were not met.

A.

The “misconduct” prong of § 1818(e)(1)(A) maybe satisfied

by a finding of violation of law or regulation, unsafe or unsound

practices, or breach of fiduciary duty. Although the Comptroller

found that Dodge committed misconduct on all three grounds, it

suffices that the court upholds the misconduct finding on the

basis that Dodge engaged in unsafe or unsound practices, id.

§ 1818(e)(1)(A)(ii). See, e.g., Landry v. FDIC, 204 F.3d 1125,

1138 (D.C. Cir. 2000). An unsafe or unsound practice is “one

that posed a ‘reasonably foreseeable’ ‘undue risk to the

institution.’” Id. (quoting Kaplan, 104 F.3d at 421). There was

substantial evidence that Dodge’s repeated reporting of certain

contributions as qualifying capital “threaten[ed] the financial

integrity of the [Bank],” Johnson v. OTS, 81 F.3d 195, 204 (D.C.

Cir. 1996) (citation and internal quotation mark omitted), by

making it appear better capitalized than it was and therefore

delaying OTS intervention. See ALJ Recommended Decision

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(Nov. 1, 2011) (“ALJ Rec. Dec.”) at 32 33. 

 Adequate capital provides a “cushion” against potential

bank losses. Nw. Nat’l Bank, Fayetteville, Ark. v. OCC, 917 F.2d

1111, 1115 (8th Cir. 1990). As this court recounted in Transohio

Savings Bank v. OTS, 967 F.2d 598, 603 04 (D.C. Cir. 1992), in

the wake of the savings and loan crisis, Congress enacted the

Financial Institutions Reform, Recovery, and Enforcement Act

(“FIRREA”), Pub. L. No. 101-73, 103 Stat. 183 (1989), which

required “all savings associations” to meet or exceed uniformly

applicable minimum capital levels to be established by the OTS. 

See 12 U.S.C. §§ 1464(s)-(t)(1)(A). According to the

Conference Report, these new capital requirements would

“provide the self-restraint necessary to limit risk-taking by

Federally insured savings associations” and “protec[t] the deposit

insurance fund by providing a cushion against losses if the

institution’s condition deteriorates.” H.R. CONF. REP. NO.

101-222, at 404 (1989). 

Experts within and independent of the OTS testified that

Dodge’s accounting practices did not conform to GAAP. The

OTS offered the testimony of a Bank officer and CPA as an

expert in GAAP and regulatory accounting; he testified that the

contributions were inconsistent with accounting principles

because they were not “cash, cash equivalents, or other high

quality, marketable assets” as required under OTS Examination

Handbook § 110.16, and he agreed that GAAP prohibited

reporting as capital “a receivable evidenced by an unsecured note

from a third party.” Hearing Tr. at 573 (Mar. 9, 2011). Similarly

qualified experts, an OTS senior policy accountant and the

Bank’s outside auditor hired by the Bank’s board of directors,

offered opinions to the same effect. See id. at 635 36, 658 60

(Patricia Hildebrand); 685 89 (Anthony Coble); see also ALJ

Rec. Dec. at 23 24. Dodge’s own expert witness agreed that the

recording of the CRP loan did not comport with regulatory

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requirements and “was potentially” a violation of GAAP. 

Hearing Tr. at 956, 965 (Leonard Lyons). And he agreed that the

Bank’s failure to settle the 9800 Muirlands receivables before

filing its quarterly financial report with the OTS violated GAAP,

as did the reporting of unrealized Mountain View income. See

id. at 963, 965. 

Dodge was well aware of the OTS concerns about

maintaining adequate Bank capital levels, as the holding

company’s April 2007 resolution illustrates. Moreover, Dodge

conceded before the ALJ that two of the four challenged

contributions the receivables from the 9800 Muirlands

property sale that never occurred and the Mountain View fee

income as the result of an agreement that was never reached 

violated “in various technical ways” either GAAP or regulatory

accounting principles at the time they were reported on the

Bank’s books as capital. See Dodge Brief in Support of

Proposed Findings of Fact and Conclusions of Law at 6 & n.4

(June 2, 2011). With regard to the CRP loan participation and

the MGF receivable, Dodge acknowledged that the contributions

eventually fell out of compliance with GAAP and regulatory

accounting principles when they were not repaid or received

within a reasonable time. See id.; see also Petr’s Br. at 50; Reply

Br. at 17. By recording receivables for funds that the holding

company had no documented obligation to provide and

prematurely recording income from a potential Mountain View

agreement, Dodge disregarded the Bank’s need to have adequate

available capital. 2

 Even were the court to consider documents of which 2

Dodge requests the court take judicial notice, the relevant

documents do not call into question the conclusion that Dodge’s

practices were unsafe or unsound. The Treasury Department’s

Inspector General audit report, which addressed the backdating of

capital contributions at other banks, indicates that the OTS

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Furthermore, substantial evidence showed that Dodge’s

conduct in reporting the challenged contributions as capital was

intended to and had the effect of misleading regulators about the

Bank’s capital condition. The Bank’s chief financial officer and

senior vice president testified that Dodge caused the Bank to

record the 9800 Muirlands receivables as capital when he knew

that they did not reflect actual capital in the Bank’s possession

and was warned that the recording of income from anticipated

Mountain View fees was “very aggressive” and might be

challenged under GAAP. See Hearing Tr. at 512 (Group CFO

Ron Dearden) (Mar. 9, 2011). Three contributions were

backdated to the end of financial reporting periods in order to

make the Bank appear well-capitalized. Dodge acknowledged

that the $400,000 MGF receivable did not reflect the transfer of

cash from the holding company to the Bank until after the OTS

ordered the holding companyto replace the receivables with cash

disregarded standards in the period leading up to the 2007–08

financial crisis, but it does not suggest that requirements before the

crisis allowed the Bank’s challenged accounting practices; rather

the audit report states that backdating capital contributions “is not in

accordance with [GAAP] and allows for misleading financial

reporting.” OFFICE OF INSPECTOR GENERAL, DEP’T OF TREASURY,

OIG-09-037, SAFETY AND SOUNDNESS: OTS INVOLVEMENT WITH

BACKDATED CAPITAL CONTRIBUTIONS BY THRIFTS, at 2 (2009). 

The Financial Accounting Standards Board Emerging Issues Task

Force Abstract 85-1, issued in 1985, states that “reporting [a] note

as an asset is generally not appropriate, except in very limited

circumstances when there is substantial evidence of ability and

intent to pay within a reasonably short period of time.” Dodge

maintains that he believed the challenged contributions at least

initially satisfied that standard, and that the New Directions Bulletin

imposed a more demanding standard, but neither the MGF nor the

9800 Muirlands receivables were backed by a note or other

evidence of the Bank’s legal entitlement to the funds reported as

Bank capital.

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in June 2008. He also acknowledged during the OTS

enforcement investigations that the 9800 Muirlands receivables

were reported as capital because the Bank needed $750,000 to

meet the statutory and regulatory capital requirements. And he

withheld material information from the Bank’s board and the

OTS that hindered their ability to address risks to the Bank’s

stability. See Section II.C, infra. 

Dodge’s conduct thus undermined the Bank’s safety and

soundness. The misleading quarterly reports over six reporting

periods delayed “prompt corrective action” by regulatory

officials pursuant to 12 U.S.C. § 1831o. Because Dodge caused

the Bank to report the challenged contributions as capital, the

Bank was able to appear well-capitalized and accept brokered

deposits when it otherwise could not have done so, see 12 U.S.C.

§ 1831f(a); the OTS concluded those deposits contributed to the

Bank’s potential liquidity crisis in August 2008. OTS Regional

Director Gary Scott testified that the Bank’s practices

jeopardized the Bank’s safety and soundness, furthersupporting

the Comptroller’s conclusion that Dodge’s reporting of nonqualifying contributions as capital exposed the Bank to a

reasonably foreseeable undue risk of loss and constituted an

unsafe or unsound practice. 

B.

The “effects” prong may be satisfied by a finding that “by

reason of” the misconduct, the bank “has suffered or will

probably suffer financial loss or other damage; the interests of

the insured depositoryinstitution’s depositors have been or could

be prejudiced; or such party has received financial gain or other

benefit.” 12 U.S.C. § 1818(e)(1)(B). It is satisfied by evidence

of either potential or actual loss to the financial institution, and

the exact amount of harm need not be proven. See Pharaon v.

Bd. of Governors of the Fed. Reserve Sys., 135 F.3d 148, 157

(D.C. Cir. 1998); Proffitt, 200 F.3d at 863. Substantial evidence

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supports the Comptroller’s findings that depositors could be

prejudiced and that Dodge derived a financial benefit. 12 U.S.C.

§ 1818(e)(1)(B)(ii), (iii). We do not rely on the Comptroller’s

puzzling conclusion that Dodge met § 1818(e)(1)(B)(i) because

he “could have caused the [B]ank” financial harm. Decision at

8.

Contrary to Dodge’s view, regulators’ heightened concern

for the Bank and its low capital levels show that the risk of a

liquidity crisis in August 2008 could have prejudiced depositors

and was not merely hypothetical. The OTS deemed the risk of

a liquidity crisis sufficiently serious to have FDIC officials

standing by during early August to take the Bank into

receivership if the need arose. The Bank’s core capital ratio was

1.6% and its risk-based capital level was 3.1%, levels low

enough to make it “critically undercapitalized” under OTS

regulations. See 12 C.F.R. §§ 565.4(b), 565.2. The Bank’s

outstanding brokered deposits increased its capital obligations,

contributing to the risk of a liquidity crisis. Absent the

challenged capital contributions the Bank would not have

appeared well-capitalized in the months before August 2008,

when regulators could have required corrective action. See 12

U.S.C. § 1831o(a)(2). The potential liquidity crisis could have

prejudiced depositors by compromising the Bank’s ability to

meet its obligations to them.

Dodge fails to show the Comptroller unreasonably rejected

his argument that the risk of prejudice was slight because the

holding company always had cash on hand to back up the Bank’s

capital account. The Comptroller noted, contrary to Dodge’s

assertion, that the ALJ had not ignored his argument, but rather

had concluded the holding company funds were not actually

available to the Bank. Dodge testified in response to the

question why, if the holding company had so much cash, it was

not transferred to the Bank’s capital account when the OTS

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informed the Bank it needed more capital that the cash was

being used for other business purposes and “[w]e felt we needed

to keep other credit that we had at the moment.” ALJ Rec. Dec.

at 40 (quoting Hearing Tr. at 451). The Comptroller reasonably

pointed out a “clear inconsistency” in Dodge’s position that the

holding company’s deposits were Bank capital: “If [Dodge] truly

regarded the deposits to be capital, he did not need to make the

three Non-Cash Capital Contributions.” Decision at 11. In the

Comptroller’s view, “it should be obvious even to someone

without much banking experience that deposits in the name of

others, a bank liability, cannot be considered cash or a cash

equivalent qualifying as bank capital, as asset,” id., and no

witness testified otherwise. Furthermore, Dodge’s infusions of

cash into the Bank in August and September 2008 could only

mitigate after the fact the risk of a liquidity crisis and prejudice

to depositors. To the extent Dodge suggests that at the time the

challenged contributions were recorded as capital, rather than in

hindsight, harm to the Bank or its depositors was not reasonably

foreseeable, the record evidence supports a contrary conclusion. 

By reporting the challenged contributions as capital, Dodge

avoided alerting the OTS examiners that the Bank lacked

sufficient capital to survive a potential liquidity crisis, thus

delaying any OTS-ordered corrective actions, and (even if it was

not his intent) enabled the Bank to accept brokered deposits. 

Dodge also maintains that he did not financially benefit from

his actions in reporting the challenged contributions as Bank

capital because the mere availability of capital to use for other

purposes is not a benefit and ultimately he suffered substantial

financial loss when he caused the holding company to infuse

millions into the bank. But the Comptroller could reasonably

conclude that the availability of the cash deposits for use in other

business opportunities was a benefit to Dodge: “In effect . . . by

contributing ineligible assets to the Bank’s capital accounts, [he]

absolved himself from the obligation to inject actual capital into

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17

the Bank.” Decision at 15. Dodge’s gain or benefit is analogous

to that upheld in De la Fuente II v. FDIC, 332 F.3d 1208,

1223 25 (9th Cir. 2003), where a financial benefit was found to

have accrued when De la Fuente substituted inferior collateral

for superior collateral on loans and was thereby relieved of

having to infuse capital into the bank, allowing him to use funds

for his own benefit. The financial losses Dodge cites occurred

only after the OTS ordered the Bank to reverse three non-cash

contributions and to increase its capital reserves and the Bank

was put in receivership; his infusions of cash in August and

September 2008 do not eliminate the benefit he received earlier,

during the six financial reporting periods. The cases on which

Dodge relies are unhelpful to him. In Wachtel, 982 F.2d at 583,

586, and Rapaport v. OTS, 59 F.3d 212, 216 17 (D.C. Cir.

1995), the issue was proof of “unjust enrichment,” a precondition

to requiring restitution under 12 U.S.C. § 1818(b) and a more

demanding standard than “financial gain or other benefit” under

§ 1818(e). 

C.

The “culpability” prong may be satisfied by a finding of

personal dishonesty or “willful or continuing disregard . . . for

the safety or soundness of” the bank. 12 U.S.C. § 1818(e)(1)(C). 

The Comptroller found that Dodge’s conduct demonstrated

dishonesty as well as willful or continuing disregard, and both

findings are supported by substantial evidence. 

The personal dishonesty element of § 1818(e) is satisfied

when a person disguises wrongdoing from the institution’s board

and regulators, see Landry, 204 F.3d at 1139 40, or fails to

disclose material information, see Greenberg v. Bd. of Governors

of the Fed. Reserve Sys., 968 F.2d 164, 171 (2d. Cir. 1992); see

also Van Dyke v. Bd. of Governors of the Fed. Reserve Sys., 876

F.2d 1377, 1379 (8th Cir. 1989). Both the personal dishonesty

and willful or continuous disregard elements “require some

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showing of scienter.” Landry, 204 F.3d at 1139 (citing Kim, 40

F.3d at 1054 55). “[W]illful disregard” is shown by “deliberate

conduct which exposed the bank to abnormal risk of loss or harm

contrary to prudent banking practices,” Grubb v. FDIC, 34 F.3d

956, 961 62 (10th Cir. 1994), and “continuing disregard”

requires conduct “over a period of time with heedless

indifference to the prospective consequences,” id. at 962

(citations and internal quotation marks omitted). 

Dodge challenges the culpability finding for lack of

substantial evidence on the grounds that the capital accounting

standards were unclear and he reasonably believed the

challenged contributions were proper, in part because the OTS

did not object. Substantial evidence supports the finding that

Dodge demonstrated personal dishonesty by withholding

material information from the Bank’s board of directors and the

OTS regarding whether and when the reported capital would

result in cash available to the Bank. Dodge informed the board

and the OTS that the CRP loan participation was due in June

2007, but he did not inform either that he had personally

extended and ultimately forgiven the loan, rendering it valueless

to the Bank. In early 2008, during his negotiations for the sale

of the 9800 Muirlands property, Dodge directed that anticipated

proceeds from the sale be reported as capital when he knew there

was no contract of sale. Similarly, Dodge knew no agreement

had been reached with Mountain View Capital when the fee

income was reported as Bank capital in May 2008, but he kept

the Bank’s board in the dark about whether an agreement had

ever existed for the Bank to refinance those mortgages,

responding at the December 2008 board meeting that there was

“confusion” over whether there was an agreement and he thought

treatment of the Mountain View portfolio was consistent with

other “lead” lists. Dodge also did not update the OTS when the

reported contributions failed to produce qualifying capital for the

Bank. Dodge does not dispute that the challenged contributions

remained in quarterly financial reports for multiple reporting

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19

periods, even after the CRP loan was extended multiple times or

the two anticipated agreements failed to materialize. His failure

to disclose material information misled the Bank’s board and the

OTS and suffices to show personal dishonesty.

The lack of clarity in accounting standards that Dodge

claimed existed in 2007 and 2008 has no bearing on his

culpability for the failure to make these disclosures to the Bank

board or the OTS. Similarly, the OTS’s lack of objection to

Dodge’s reporting of the CRP loan participation or the MGF

receivable as capital does not undermine the substantial evidence

supporting the finding of personal dishonesty. There is no

evidence that the OTS expressly approved of the challenged

contributions, and because Dodge kept the OTS in the dark about

the CRP loan’s extension and ultimate forgiveness, even

assuming tacit approval by the OTS would suffice, it would not

have been fully informed.

Given the record evidence that Dodge directed the Bank to

report contributions as capital that were unlikely to produce cash

for the Bank, knowing that the OTS would have no reason to

doubt that the Bank was well-capitalized and take corrective

action, the Comptroller properly found that Dodge knowingly

exposed the Bank and its depositors to substantial risk,

demonstrating “willful” disregard for the Bank’s safety and

soundness. See De La Fuente II, 332 F.3d at 1223 24. That he

did so on multiple occasions over six reporting periods, at times

in the face of disagreement by other board members,

demonstrates “continuing disregard” as well. The Comptroller

recognized that Dodge’s manipulation of the capital account

“knowingly disregard[ed] the risk that the amount of legitimate

or qualifying capital might be insufficient to meet the

considerable losses the Bank was experiencing.” Decision at 16. 

Dodge’s argument that “he stood behind his commitment to [the

Bank] not just for the $3.1 million in challenged transactions, but

for millions more[,] misses the point . . . [that he] failed to

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20

reverse the non-qualifying contributions to capital until ordered

to do so by the OTS on July 24, 2008.” Id. (citation and internal

quotation marks omitted). His prior inaction amounted to a

willful or continuing disregard for the capital reserves required

to ensure the Bank’s financial soundness. See id.

Dodge’s objection that the Comptroller and the ALJ erred as

a matter of law in applying a “should have known” or negligence

standard in making culpability and certain misconduct findings

fares no better. The ALJ based the finding of personal

dishonesty on Dodge’s withholding of material information from

the Bank board and the OTS. He also found that Dodge had

knowingly ignored risks over multiple reporting periods,

“demonstrat[ing] a continuing and willful disregard for the safety

and soundness of [the Bank].” ALJ Rec. Dec. at 42 43. To the

extent the ALJ and Comptroller stated that Dodge “should have

known” of risks or accounting standards, they were analyzing

elements that do not require heightened scienter, such as the

conceded violation of regulatory reporting standards, the breach

of fiduciary duty, or the probability of loss to the bank or

depositors. See id. at 30, 34; Decision at 11. When finding that

Dodge demonstrated personal dishonesty or acted with willful or

continuing disregard for risks, both found the required scienter.

See Decision at 16; ALJ Rec. Dec. at 41 43. 

 

 III.

The requirements to impose a second-tier civil monetary

penalty are similar to the criteria for an order of prohibition. The

only new misconduct element under 12 U.S.C. § 1818(i)(2)(B)

requires evidence of “reckless” engagement in unsafe or unsound

practices. The Comptroller may satisfy the effects prong on any

of the following grounds: that the misconduct was “part of a

pattern of misconduct,” that it “causes or is likely to cause more

than a minimal loss” to the Bank, or that it “results in pecuniary

gain or other benefit.” 12 U.S.C. § 1818(i)(2)(B)(ii). The court

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will not overturn a civil monetary penalty unless it is either

“unwarranted in law or . . . without justification in fact.”

Pharaon, 135 F.3d at 155 (citation omitted) (ellipsis in original). 

Dodge’s challenges to the civil monetary penalty largely repeat

his objections to the order of prohibition and fail to show

grounds for reversal of the penalty. 

The Comptroller noted that all three elements of the

misconduct prong of § 1818(i)(2)(B) had been established, even

though it was only necessary to establish one, and that the effects

prong was also established, including a pattern of misconduct

sufficient to warrant the second tier penalty. See Decision at 17. 

Nonetheless, the Comptroller concluded, given the mitigating

factors found by the ALJ (Dodge’s “lack of previous violations,

his prompt replacement of the disputed contributions in the

capital account with cash, his infusion of new capital, his

cooperation with OTS’s efforts to sell the Bank”), that the

recommended $1 million penalty, rather than the $2.5 million

requested by the OTS, was supported by the record. Id. at 18.

There was substantial evidence supporting the findings that

Dodge acted recklessly, for the same reasons his conduct

demonstrated willful or continuing disregard under the

culpability prong of § 1818(e); that his pecuniary gain was

shown by the opportunity to use money unencumbered by the

Bank; and that Dodge’s repeated reporting, over multiple OTS

reporting periods, of receivables to which the Bank had no legal

entitlement or which were otherwise inadequate as Bank capital

shows a pattern of misconduct. In view of the court’s deferential

review of sanctions imposed by an implementing agency for

statutory or regulatory violations, see Pharaon, 135 F.3d at 155,

we are unpersuaded, for the reasons addressed in Part II, by

Dodge’s contentions that the Comptroller’s civil penalty was

“unwarranted in law or . . . without justification in fact,” id. 

Accordingly, we deny the petition for review.

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