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FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.
______________________________________ ) In The Matter of ) ) Robert Michael, ) FDIC 03-106eGeorge Michael, ) FDIC 03-107kIndividually and as ) institution affiliated parties of ) ) Citizens Bank and Trust Company of Chicago ) Chicago, Illinois ) (Insured State Nonmember Bank) ) ______________________________________ )
RECOMMENDED DECISION
Statement of the Case
C. RICHARD MISERENDINO, Administrative Law Judge. This case was tried in Chicago,
Illinois, on October 14-17, and 20-21, 2008, as well as on December 29, 2009.1 On October 31, 2006, the
Federal Deposit Insurance Corporation (“FDIC”) filed the Notice of Charges against Respondents, Robert
Michael and George Michael (the “Respondents” or “RobertM” and “GeorgeM”, respectively),
individually, and as institution-affiliated parties of Citizens Bank and Trust Company of Chicago (“Bank”
or “CBT”).
The Notice alleges, among other things, that the Respondents (1) directly or indirectly participated
in unsafe or unsound banking practices in connection with the Bank or business institution; (2) violated
section 22 (h) of the Federal Reserve Act, 12 U.S.C. §375(b), and Regulation O of the Board of
Governors of the Federal Reserve System (“Regulation O”), 12 C.F.R. Part 215; (3) breached their
fiduciary duties as directors of the Bank; (4) received financial gain or other benefit by reason of such
violations, practices and/or breaches of fiduciary duty; and (5) by this conduct demonstrated their personal
1 On December 29, 2009, the record was reopened and one additional day of hearing was held to give the parties an opportunity (1) to explain the inconsistency between their joint stipulations #82 and 150 and FDIC Exhs. 95, 79, 96 and 294, which were admitted into evidence and (2) to address the admissibility of FDIC Exhibits 78 and 81, which were not proffered into evidence. The Respondents, Robert Michael and George Michael, did not personally appear at the December 29 hearing, though they did appear through counsel.
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dishonesty and their willful or continuing disregard for the safety or soundness of the Bank or business
institution. The Notice further alleges that the Respondents’ acted recklessly and that their reckless
conduct was part of a pattern of misconduct and resulted in pecuniary gain or benefit to the Respondents.
The FDIC therefore seeks an order pursuant to 12 U.S.C. § 1818(e) removing the Respondents from office
and prohibiting them from further participation in the affairs of the Bank or any other financial institution
without appropriate prior written permission. The FDIC also seeks to assess a first and second tier civil
money penalty against the Respondent, RobertM, in the amount of $100,000 and a first and second tier
civil money penalty against the Respondent, GeorgeM, in the amount of $75,000. 12 U.S.C. §
1818(i)(2)(A) and (B).
The Respondents’ answer denied the material allegations of the Notice. The parties have been
afforded a full opportunity to appear, present evidence, examine and cross-examine witnesses, and file
posthearing briefs and reply briefs.
On the entire record, including my credibility determinations based on the weight of the respective
evidence, established or admitted facts, inherent probabilities, and reasonable inferences drawn from the
record as a whole, and after considering the parties’ posthearing briefs and reply briefs, I make the
following findings of fact, conclusions of law, and recommended orders.
Summary of the Facts2
I. Jurisdiction
The Bank is and has been, at all times pertinent to this proceeding, an insured State nonmember
bank, subject to Federal Deposit Insurance Act (“FDI Act”), 12 U.S.C. §§ 1811-1831y, the Rules and
Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws of the State of Illinois. (Jt. Exh. 1, Stip. 6.)
The Respondents stipulate that the FDIC is the appropriate Federal banking agency with respect to the
Bank within the meaning of section 3(q)(3) of the FDI Act, 12 U.S.C. §1813(q)(3) and that at all times
2 The complete “Findings of Fact” with citations is contained in Appendix A hereto, and is incorporated by reference herein.
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pertinent to this proceeding, Robert Michael and George Michael, each were an institution-affiliated party
within the meaning of section 3(u) of the FDI Act, 12 U.S.C. §1813(u). (Jt. Exh.1, Stip. 8.) Accordingly,
I find that the FDIC has jurisdiction over the Bank, the Respondents, and the subject matter of this
proceeding. (Jt. Exh.1, Stip. 10.)
II. Alleged Violations
A. Background
Robert and George Michael are brothers. For more than 25 years, they have acquired and managed
real estate investment properties, restaurants, and bars worth several million dollars in the Chicago,
Illinois area. ( Tr. 1441-1442, 1466.) In addition to their real estate investments, the Respondents own a
real estate sales company (i.e., Michaels Realty, Inc.), a real estate management company (i.e., R&G
Properties), a construction/renovation company (i.e., Ararat Company), and a mortgage company (i.e.,
Fair Home Mortgage). At the time of the hearing, their combined net worth was in excess of 15 million
dollars. (FDIC Exh. 235.)
One of RobertM’s life long ambitions was to own a bank. In 1999, he and GeorgeM renovated a
building they owned in Chicago into a bank facility and established a bank holding company called
Citizens Financial Corporation (“CFC”). RobertM became the president of CFC. Both Respondents
became principal stockholders of the new bank holding company. RobertM solely owned stock certificate
#2 representing 35,440 shares of CFC stock with an initial book value of $1,063,200. (Jt. Exh. 1, Stip.13-
17.) GeorgeM solely owned CFC stock certificate #3 also representing 35,440 shares of CFC stock with
an initial book value of $1,063,200. The two certificates were the largest stock certificates issued by CFC.
(Jt. Exh. 1, Stip.16.)
1. The first stock pledge
Several months before the CFC stock certificates were actually issued,3 RobertM and GeorgeM,
pledged their certificates as collateral for a personal loan from Mount Prospect National Bank (“Mount
3 CFC stock certificates #2 and #3 were not issued until March 10, 2000. (Jt. Exh. 1, Stip. 17.)
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Prospect”), Mount Prospect, Illinois. On June 14, 1999, the Respondents both signed promissory notes in
the amount of $600,000, as well as an “Agreement to Deliver Collateral.” Each of these documents
specifically identified CFC stock certificates #2 and 3 (representing 20,000 shares each) as collateral for
loan #9001.4 One year later, on June 5, 2000, the Respondents pledged their stock certificates again as
collateral to obtain a second personal loan from Mount Prospect, loan #9002 in the amount of $300,000.5
Loan #9001 was renewed on July 14, 2000. Loans #9001 and #9002 were both renewed on
December 5, 2000, and April 5, 2001. W ith each renewal, the Respondents signed a commercial pledge
agreement renewing the stock as collateral securing both loans. W ith the signing of each commercial
pledge agreement, RobertM and GeorgeM warranted and represented to Mount Prospect that they were
“the lawful owner of the Collateral free and clear of all security interests, liens, encumbrances, registered
pledges, adverse claims, and any other claims of others except as disclosed to and accepted by Lender in
writing prior to execution of this Agreement” and that they had “not, and will not, sell, assign, transfer,
encumber or otherwise dispose of any of [their individual] rights in the Collateral except as provided in
this Agreement.” (FDIC Exh. 145 at 1.)
2. The early cease and desist order
On January 31, 2000, RobertM and GeorgeM opened the Citizens Bank and Trust Company of
Chicago, as wholly owned by CFC. (FF 5.) RobertM became the chairman of the Bank’s board of
directors and GeorgeM became a director of the board. Nicholas Tanglis became the Bank’s first president
and chief executive officer. Two months later, on March 31, 2000, the Illinois Office of Banks and Real
Estate (“OBRE”) issued a report of examination identifying significant weakness in all aspects of the
Bank’s operations. (FDIC Exh. 14 at 4.) The OBRE examination prompted an FDIC examination which
resulted in the Bank receiving a composite CAMEL rating of “4” with a management component rating of
“5.” W ith respect to the management component rating, the FDIC’s report of examination stated that:
4 The proceeds of loan #9001 were escrowed until regulators granted final approval to open Citizens Bank and Trust. 5 Loan #9002 was cross-collateralized with loan 9001 by certificates # 2 and 3. It also was secured by the assignment of a note and mortgage on a property owned by the Respondents located at 2434 W . Montrose Avenue, Chicago, Ill.
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management has not followed Loan Policy guidelines, including numerous instances where President Nicholas Tanglis and Chairman Robert Michael exceeded their individual lending authorities without obtaining the appro- priate prior approvals. Compliance with applicable laws and regulations, as well as Statements of Policy, has also been weak. Several apparent violations of the Federal Reserve Board’s Regulation O resulted from inappropriate prior approvals.
(FDIC Exh. 14 at 4.)
On May 25, 2000, four months after the Bank opened, the OBRE issued a cease and desist order
citing, among other things, violations of Regulation O, including a violation of the tangible benefit rule,
because Tanglis allowed a bank customer to overdraw his account, in order to pay Tanglis the proceeds of
the loan. (FDIC Exh. 11.) The order also stated that “[t]he Bank shall not approve loans to any insiders or
their related interests without first fully disclosing said interest. For purposes of this Order, “insider” is
defined as “any officer, director, shareholder and their related business and financial interest.” (FDIC
Exh.11 at 7.)
After the cease and desist order issued, the Bank retained Joseph Gunnell, a banking consultant, to
help the Bank board address some of the issues raised in the Cease and Desist Order and to do audit work.
(Tr. 1188-1189, 1191.) The Bank also retained Benjamin Shapiro, Esquire, a former FDIC regional
counsel, to advise the Bank board of directors and Bank management on regulatory and compliance
issues. (Tr. 1362.) Soon after they began working for the Bank, Gunnell and Shapiro held a Regulation O
training session for RobertM, GeorgeM, and the board of directors covering insider loans and
transactions. (Tr. 1195, 1227.) Gunnell testified that he emphasized that if there was an insider loan, the
Board member and/or Bank officer would be required to recuse himself from voting and leave the board
room for the vote, and that the minutes would have to reflect that these steps occurred. (Tr. 1226-1228.)
B. The Harvey Hotel Transaction
In July 2000, the Harvey Hotel, a 314 room hotel located in Harvey, Illinois, was in
receivership. The hotel was losing $100,000 a month, and Financial Federal, the bank that held the
mortgage, was seeking a buyer. Bob O’Shaughnessy, president of Financial Federal, approached RobertM
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about buying the hotel, but RobertM was not interested. (Tr. 1453.) Instead, RobertM told Satish “Sunny”
Gabhawala that the hotel was for sale and that it could be purchased at a very good price. Gabhawala
suggested to RobertM that he purchase the hotel and have Gabhawala manage it, but RobertM declined.
(Tr. 373.)
Gabhawala, a native of Bombay, India, and an entrepreneur of marginal success, was
professionally and socially acquainted with RobertM. Between 1982-1995, Gabhawala owned a donut
shop, a bar, and managed a small hotel. In late 1999, he began working as an unlicensed residential
mortgage broker for Fair Home Mortgage, owned by RobertM and GeorgeM. Gabhawala eventually
became an independent mortgage broker and rented an office in the basement of the Fair Home Mortgage
building.
1. The plan to “flip”
Although RobertM was not interested in permanently owning the hotel, he recognized that there
was an opportunity to make money, if the property was purchased and “flipped” to another buyer. He
asked Gabhawala if he knew of any Indians who might be interested in buying the hotel.6 (Tr. 476-477.)
Gabhawala thought he might be able to put together an investor group to buy the Harvey Hotel. After
visiting the Harvey Hotel with RobertM, he and RobertM devised a plan to purchase and flip the property
to an investor group.7
The two discussed the amount of an initial offer. RobertM thought that because Financial Federal
was losing money, Gabhawala should offer $1.5 million for the hotel. Gabhawala was afraid that a low-
ball offer would offend the lender. Through discussion with the bank’s broker, Gabhawala learned that
Financial Federal was seeking $3 million for the hotel and that there were other interested buyers. (Tr.
6 RobertM testified that it was Gabhawala’s idea to “flip” the property. (Tr. 1477.) Gabhawala stated it was RobertM’s idea.
(Tr. 368.) In my view, who came up with the idea is of no significance. The undisputed evidence shows that from December
20, 2000, through June 27, 2001, RobertM and GeorgeM were the legal owners of the Harvey Hotel. The undisputed evidence further shows that on June 27, 2001, Harvey Hospitality LLC borrowed $2.9 million from CBT to buy the hotel from the Respondents. 7
Gabhawala testified that he did not have the money to finance the purchase of the hotel and that he told RobertM “whatever the deal we make, you will have to come up with the money.” According to Gabhawala, RobertM responded, “don’t worry about that, you just go ahead and make the deal, and I will take care of the financing.” (Tr.373.)
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374-375.) After further consultation with RobertM, Gabhawala decided to make an initial offer of $2.2
million. A final purchase price of $2.55 million was reached through negotiations. Before agreeing to the
final purchase price, however, Gabhawala phoned RobertM to make sure that the final purchase price was
acceptable and that RobertM would be able to obtain financing for that amount. (Tr. 386.) W ith the
purchase price set at $2.55 million, RobertM and Gabhawala decided that they would “flip” the property
for $3,950,000.
2. The purchase agreement
Gabhawala’s mother and brother formed a corporation called Big 2 Trading Corporation (“Big 2
Trading”) for the sole purpose of purchasing the hotel.8 (Tr. 486.) Gabhawala contacted a group of
investors (the “Patels”) from New Jersey, who toured the property and agreed to become 50% owners of
the hotel at the final sale price of $3,950,000.9 (Tr. 385.) Together, Big 2 Trading and the Patels formed
Harvey Hospitality, LLC, an entity that would later purchase and manage the hotel.
On November 14, 2000, Gabhawala, as agent to Big 2 Trading, signed a purchase agreement to
buy the Harvey Hotel for $2.55 million from W illiam Brandt, as assignee for the benefit of the creditors of
B.C. Harvey, LLC. (Jt. Exh. 1, Stip. 41; FDIC Exh. 33.) The agreement defined “the Property” to include
both real and personal property associated with the Harvey Hotel. It stated that the Seller agreed to deliver
a deed to the hotel real estate and a quitclaim deed to the personal property. (Jt. Exh. 1, Stip. 44.) The
closing was scheduled for November 30, 2000. Shortly thereafter, Big 2 Trading deposited $242,500 in
escrow with Chicago Title. The Patels contributed $125,000 toward the escrow deposit.
Gabhawala testified that he, as agent for Big 2 Trading, initially sought financing from Citizens
Bank & Trust, but RobertM told him that the Bank could not make the loan because the amount exceeded
the Bank’s legal lending limit. (Tr. 1460.) RobertM unsuccessfully attempted to find financing for Big 2
Trading at two other banks. Gabhawala tried and failed to obtain financing for Big 2 Trading at a third
bank. W ith the closing date less than two weeks away, RobertM introduced Gabhawala to James Zaring,
8 Gabhawala was neither an owner nor investor in Big 2 Trading. 9 Gabhawala did not tell the Patels that he was buying the hotel for $2.55 million.
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president of Premier Bank, who introduced Gabhawala to Vincent Ragland, president of St. Paul Federal
Bank.
Zaring and RobertM met with Ragland to lay the ground work for Big 2 Trading. Once the
introduction was made, RobertM and Gabhawala met with Ragland at the hotel so he could see the
property. (Tr. 1463-1464.) Gabhawala came away with the impression that Ragland was willing to make a
loan to Big 2 Trading. His impression was inaccurate. St. Paul Federal denied Big 2 Trading’s loan
request.
3. The $700,000 shortfall
The closing date was extended to December 13, 2000. The purchase price was increased to $2.585
million because of the delay and Big 2 Trading was notified that closing had to occur by December 20,
2000 or the escrow deposit would be forfeited. Unless the closing took place, there would be no flip, and
unless the flip took place, there would be no profit. RobertM turned to banking attorney Benjamin Shapiro
for help in finding a lender that could make a quick loan.
Shapiro suggested that RobertM contact the First Bank and Trust Company of Palatine, Illinois
(“First Bank”) for a $2.1 million loan secured by the hotel. (Tr. 405, 1366.) A meeting was arranged
between Michael W inter of First Bank and RobertM, GeorgeM, Tanglis, and Shapiro10 to layout the
Harvey Hotel transaction. RobertM testified that he told W inter that there was a contract to buy the hotel
for $2.585 million dollars, that Gabhawala had made an escrow deposit of $242,500, and that an investor
group from New Jersey was contributing another $700,000.11 (Tr. 1470.) Although RobertM testified that
he told W inter that he was requesting a $1.2 million loan for Gabhawala, he gave W inter a personal
financial statement for himself and GeorgeM.12 (Tr. 1470, 1472.) W inter verbally committed to making a
loan for $2.1 million. (Tr. 1471.) He told RobertM that he would get back to him in a few days. (Tr. 1368,
1471.)
10 Although Gabhawala recalls attending this meeting, neither RobertM, Tanglis or Shapiro recalled him being there. (Tr. 1469.) 11 RobertM repeatedly referred to Gabhawala as the purchaser, when in reality he was not. Rather, the evidence shows that Gabhawala acted as “agent” to Big 2 Trading, which was the purchaser. 12 Neither Gabhawala, Big 2 Trading, nor the Patels ever met with W inter or presented their financial statements to First Bank.
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On or about December 10, 2000, Shapiro called RobertM to tell him that W inter agreed to make a
loan, but only for $1.4 million to RobertM and GeorgeM using the hotel as collateral. (Tr. 1368, 1473-
1474.) On December 18, 2000, the Respondents, as beneficiaries under a land trust arrangement with First
Bank, authorized First Bank as trustee, to execute a secured note, mortgage, security agreement and
financing statement, in exchange for a loan in the amount of $1.4 million.13 Attorney Shapiro was listed
as the Respondents’ personal attorney on several of the closing documents. (FDIC Exh. 56 at 1; 58 at 3;
59 at 26.)
The Respondents therefore were confronted with a shortfall of $700,000. RobertM purportedly
asked Zaring if he knew of a lender who could make a $700,000 loan on short notice. RobertM testified
that Zaring told him that CB&T could make the loan. (Tr. 1479-1480.) A Bank board of directors meeting
was therefore scheduled for a December 13, 2000.14
On December 13, 2000, the CB&T board of directors met to consider making a $700,000 loan to
RobertM and GeorgeM.15 Both RobertM and GeorgeM were present at the meeting, along with Tanglis,
Shapiro, Zaring, and Gunnell. Shapiro and Zaring debated whether it was permissible for the Bank to
make a loan to Robert and George Michael. Zaring argued that the Bank could loan $600,000 to the
Respondents under Regulation O. It could lend up to $100,000 to RobertM as executive officer and up to
$500,000 to GeorgeM as a Bank director for a total of $600,000. Shapiro argued that the Bank could lend
the Respondents the total amount of $700,000. (Tr. 1480.) Zaring showed Shapiro a provision in the
regulations which supported his position. (Tr. 829 – 834; 1223 – 1225, 1234-1235.) The Bank board,
however, determined that it could not make the loan.
13 Interestingly, a Land Trust Information Sheet associated with the transaction indicates that the approximate value of the Harvey Hotel was $6 million. (FDIC Exh. 56.)14Also, on December 13, 2000, James Zaring became the president of CB&T replacing Nicholas Tanglis, who was made head of Bank investing. (Jt. Exh. 1, Stip. 5 & 6.) 15 According to the minutes of the meeting, Shapiro presented the loan proposal to fund the purchase of a hotel property involving the Michaels “as principals.” (FDIC Exh. 3 at 11.) In other words, it was not presented as a loan to Big 2 Trading orHarvey Hospitality, LLC.
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Zaring offered an alternative. He had a close colleague at United Trust Bank (“United Trust”),
John Van W inkle, who might be willing to make the loan. United Trust was a new bank operating out of a
trailer. (Tr. 842, 843.) United Trust was unwilling to underwrite a $700,000 loan secured by real estate on
such short notice. However, it would make the loan, but required more liquid collateral. (Jt. Exh. 1, Stip.
55.)
4. The United Trust loan and duplicate stock certificate #3
On December 18, 2000, United Trust issued a loan commitment to RobertM and GeorgeM in the
amount of $700,000 to be secured by 45,440 shares of CFC stock, as well as a second lien placed on the
Respondent’s Devon Avenue property. (Jt. Exh. 1, Stip. 56.) CFC stock certificates #3 and #20 for 35,440
and 10,000 shares, respectively, were identified as part of the collateral. On December 19, Zaring
informed Tanglis and RobertM that United Trust required physical possession of the stock certificates
prior to funding the loan.
CFC stock certificate #3, belonging to GeorgeM, could not be found.16 Tanglis testified that when
he told RobertM that he could not find certificate #3, which was needed to close the United Trust loan, the
decision was made to make a duplicate stock certificate #3. (Tr. 1285.) Tanglis testified that either
RobertM or Zaring told him to make a duplicate certificate. (Tr.1324.)
According to Gabhawala, he was sitting in RobertM’s office when Tanglis came to the door to tell
him that he could not find CFC stock certificate #3. Gabhawala’s unrebutted testimony is that RobertM
told Tanglis “to make another one.” (Tr. 410.) Tanglis and Anna Les, RobertM’s secretary, prepared a
duplicate stock certificate and gave it to RobertM for signature.17
16 CFC stock certificate #3 was being held as collateral by Mount Prospect Bank for loans #9001 and #9002. Both loans were renewed on December 5, 2000, less than two weeks earlier. CFC stock certificate #20 representing 10,000 shares was jointly owned by RobertM and GeorgeM. It was reissued from CFC stock certificate #10, which was sold to the Michaels on September 21, 2000, by Jim Bousis, a shareholder. Even though RobertM and GeorgeM had not paid Bousis for certificate #10, on December 20, 2000, they pledged it to United Trust as collateral for loan #30011. (Tr. 1615.)17 Duplicate CFC stock certificate #3 bore an issue date of March 10, 2000. It reflected GeorgeM as the owner of 35,440 shares of CFC stock, and had no markings indicating that it was a “duplicate.” (Jt. Exh. 1, Stip. 65-66.)
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5. December 20, 2000 – “borrow, purchase & flip”
The next day, December 20, Gabhawala accompanied RobertM and GeorgeM to the United Trust
closing, where they met Tanglis. Gabhawala credibly testified that Tanglis handed RobertM an envelope,
which he opened removing two stock certificates. (Tr. 407-408.)
RobertM and GeorgeM signed a promissory note to United Trust securing loan #30011 with
45,440 shares of CFC stock, as well as a second mortgage on Devon Avenue real estate. (Jt. Exh. 1, Stip.
59.) The promissory note contained the following representation:
OW NERSHIP AND DUTIES TOW ARD PROPERTY – I represent that I own all the Property, … . Your claim [United’s] is ahead of the claim of any other claim. Your claim to the Property is ahead of the claims of any other creditor. I agree to do whatever you require to protect your security interest and to keep your claim in the Property ahead of the claims of other creditors. I will not do anything to harm your [United’s] position.
(FDIC Exh. 71.)
They also signed a commercial pledge agreement which, among other things, warranted that they “[have]
not, and shall not, assign, transfer, encumber or otherwise dispose of any of [the Michaels’] rights in the
Collateral except as provided in this Agreement.” (FDIC Exh. 74.)
United Trust took possession of both duplicate CFC stock certificate #3 and CFC stock certificate
#20. A check in the amount of $700,000 was issued to RobertM and GeorgeM. The two, along with
Gabhawala, went to the Harvey Hotel closing.
Benjamin Shapiro, Esq. and Ariel W eissberg, Esq. participated in the preparation of the Harvey
Hotel closing documents. (Tr. 1628-32, 1643-1645.) Both attorneys were also present at the Harvey Hotel
closing. Shapiro represented RobertM and GeorgeM. W eissberg represented Big 2 Trading, Harvey
Hospitality, LLC. and the Patels. (Tr.411-412, 1373.) RobertM testified that he wanted Shapiro present
and involved in the Harvey Hospitality closing to make sure it was properly done because “we were
anticipating making it a bank loan.” (Tr.1624.)
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Three transactions occurred at this closing.18 First, the receiver (Brandt, as assignee for the benefit
of creditors of B.C. Harvey, LLC) quitclaimed the hotel personal property and deeded the hotel real
property to Big 2 Trading. Next, Big 2 Trading quitclaimed the hotel personal property to RobertM and
GeorgeM and deeded the hotel real property to a land trust of which RobertM and GeorgeM were sole
beneficiaries. (Tr. 417-418.) The Michaels and First Bank, as trustee, pledged the hotel real estate to First
Bank, the lender of the $1.4 million.19 (Jt. Exh. 1, Stips.113 and 114; FDIC Exh. 36 at 39.) Finally, the
Michaels executed two agreements, an Installment Agreement for Deed and an Asset Purchase
Agreement, transferring real and personal property to Harvey Hospitality, LLC for a total purchase price
of $3,950,000. (FDIC Exh. 42 and 43.)
The Installment Agreement for Deed, which sold the hotel real property for $2,585,000 to Harvey
Hospitality LLC, states that:
- in a November 14, 2000, Agreement to Purchase Hotel, Brandt agreed to sell real property to Big 2 or its nominee;
- as per the December 20, 2000, Installment Agreement for Deed, Big 2 Trading designates RobertM and GeorgeM as the “nominee” to purchase the real and personal property from Brandt;- as of December 20, 2000, Sellers [the Respondents] will be the owner of the legal title to the
real and personal property, which they are purchasing with purpose and intention to sell to Harvey Hospitality for $3,950,000, allocated as $2,585,000 to purchase of real property and $1,365,000 to purchase of personal property and pay fees,20 all of which is payable at final closing on April 1, 2001;
- Harvey Hospitality agrees to pay RobertM and GeorgeM monthly installments of $60,624.33 from February 1, 2001 until final closing, on April 1, 2001. (FDIC Exh. 42.) - In the event of default, the Michaels had the right to demand immediate possession of the
18 The evidence shows that the total purchase price for the hotel real and personal property was $2,582,503, however, the sum
total of the money brought to the Harvey Hotel closing by the combined buyers (i.e., RobertM and GeorgeM, Big 2 Trading, and the Patels) was $2,825,003. RobertM was asked directly at trial why the Patels overpaid in cash and how the $242,500 was handled at closing. (Tr. 1475-1477. ) He testified that the extra money was needed for working capital and improvements to the hotel. He also testified that Gabhawala received $242,500 at closing. (Tr. 1478.) His testimony on this point is unsupported.There is no documentary evidence showing that Gabhawala was paid $242,5000 at closing. There is undisputed evidence, however, showing that RobertM and GeorgeM were paid $513,542.21 at the closing as an “overdeposit to buyer.” (Tr. 1505; Jt. Exh. 1, Stip. 120.) 19 The Illinois Transfer Tax form allows for personal property to be omitted from the transfer tax calculation. (FDIC Exh. 37 at 5; Tr. 69.) Thus, a tax credit of $297,682, resulted by quitclaiming the personal property and separately deeding the real property. 20 The fees included a brokerage fee, consulting fee, and funding fee, all payable to RobertM and GeorgeM. (FDIC Exh. 43 at 2.)
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property and terminate whatever right, title or interest Harvey Hospitality had in the hotel. If Harvey Hospitality satisfied all terms of the agreement, the Michaels were required to convey a warranty deed to the hotel to Harvey Hospitality.
In addition, and even though RobertM and GeorgeM did not receive $1,365,000 for the hotel
personal property on December 20, the Respondents quitclaimed the hotel personal property to Harvey
Hospitality. (Jt. Exh.1, Stips. 125 and 126; FDIC Exh. 44.)
Lastly, on December 20, Ararat Company, which is owned by RobertM and GeorgeM, entered
into a Food Operations Lease with Harvey Hospitality. (FDIC Exh. 47.) According to the lease agreement,
which was signed by Attorney Shapiro on behalf of Ararat, the company was allowed to operate all of the
banquet facilities.
6. Harvey Hospitality defaults
On February 1, Harvey Hospitality did not pay the monthly installment of $60,624. It also failed
to pay the monthly installment due at any time thereafter. The unrebutted testimony of Gabhawala shows
that Harvey Hospitality did not pay any of the required monthly installments nor was it ever expected to
do so. (Tr. 436.) Thus, Harvey Hospitality was in monetary default under the Installment Agreement of
Deed.
In addition, Harvey Hospitality had not secured financing by April 1, and was unable to close on
that date. (Tr. 435-439.) Thus, it also was in non-monetary default, which presented a problem for the
Respondents. Unless Harvey Hospitality obtained funding to close the transaction, the Respondents would
be unable to payoff their personal loans with First Bank and United Trust, which were due June 21, 2001
and June 20, 2001, respectively. If the Respondents could not payoff the two loans, they would have to
renew them and maintain ownership of a hotel, which they never wanted. (Tr. 1451-1453.)
Although the Respondents had the right to foreclose on the Harvey Hotel, they did not do so. (Tr.
1523.) Instead, in late April 2001, Gabhawala and RobertM discussed obtaining a $2.9 million loan from
the Bank. Harvey Hospitality submitted a loan application with an interim financial statement. (Tr. 446.)
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The Bank also required personal financial statements from Gabhawala and the Patels, along with income
tax returns and an appraisal. (Tr. 447.)
7. The CBT loan approval
Even though Harvey Hospitality LLC did not pay, was not asked to pay, and was not expected to
pay the amount of $1,365,000 for the personal property that was conveyed by quitclaim deed on
December 20, 2000, it nevertheless was approved for a CBT loan in the amount of $2,900,000.
Exactly when the Harvey Hospitality loan was approved and by whom is a mystery. The board
minutes reflect that there was a board meeting on April 25. However, there is no mention of the Harvey
Hospitality loan in the April 25 board minutes. (FDIC Exh. 3 at 23-26.)
In addition, there is no record of a board meeting on May 7, 2001. However, a Loan Approval
Sheet, dated May 7, 2001, shows that the Harvey Hospitality loan was recommended for approval by
RobertM, GeorgeM, James Zaring, Nicholas Tanglis, and John Sellis. (FDIC Exh. 107.) According to
Zaring’s unrebutted testimony, the individuals who signed the Loan Approval Sheet comprised the Bank’s
“Management Loan Committee.” (Tr. 892.) In other words, because they were all directors of the Bank,
the loan effectively was approved whenever the document was signed. Thus, the evidence shows that the
Respondents approved their own loan. (Tr. 892-894.)
Bank directors Nicholas M. Duric and Kenneth M. Koziol were “not available” to sign the Loan
Approval Sheet, whenever it was discussed and/or signed by the five other directors. (FDIC Exh. 107 at
4.) Both Duric and Koziol, however, were present at the May 30, 2001, Board meeting, along with the
other five directors. (FDIC Exh. 3 at 1.) Therefore, it is more likely, than not, that the Loan Approval
Sheet was not discussed and signed at the May 30th board meeting, because Duric and Koziol were
present and available at that meeting to sign the loan approval sheet.
Under “New Business,” the May 30th board meeting minutes reflect all of the loans that were
“discussed and approved as presented” at that meeting. (See FDIC 3 at 28.) The Harvey Hospitality loan
is not among them. Nor do the minutes state that the Loan Approval Sheet was presented, discussed or
15
signed at this meeting. The question becomes when was the Harvey Hospitality loan discussed and
approved, what board members were present, and what were they told about the Harvey Hospitality loan
transaction?
Attorney Shapiro testified that the Harvey Hospitality loan was discussed at length at every board
meeting between December 2000 and the time the loan was approved. (Tr. 1376.) Shapiro emphasized
that these were “actual board meetings.” (Tr. 1377.) He recalled attending a “regular board meeting” after
May 7, 2000, when the Harvey Hospitality loan came to the board for approval. (Tr. 1378.)
He explained how he and Zaring lectured the board on the requirements of Regulation O, reviewed an
appraisal, and discussed the “flip.” (Tr. 1377-1379.) In the latter connection, he specifically recalled that
the “flip” was mentioned “at least once during the course of that meeting – of this particular meeting, at
the May 7th meeting, that it was purchased for 2.5 … So those facts were well-known to the directors who
were deciding whether to approve this loan.” (Emphasis added.) (Tr. 1381.) Shapiro further testified that
there was a “voice vote.” W hen the voice vote was taken, RobertM and GeorgeM left the room. (Tr. 1381-
1382.) After the loan was approved, the signature page of the loan approval sheet was passed around and
“the directors sitting around the table signed it probably about the same time George and Bob Michael
were coming back into the room.” (Tr. 1382.)
Attorney Shapiro did not explain how it came about that RobertM and GeorgeM signed the sheet
approving their own loan. More importantly, he did not explain why he allowed them to do so. After all,
he was retained by the Bank to ensure complete and total regulatory compliance. Attorney Shapiro also
did he explain why there is no record of an “actual board meeting” being held on May 7, 2001. Contrary
to his assertions, none of the Bank board minutes contain a single detail of the “several” discussions about
the Harvey Hospitality loan that Shapiro testified took place at actual board meetings between December
2000 and whenever the loan approval sheet was signed. Remarkably, it was Attorney Shapiro, along with
Bank consultant Joe Gunnell, who told the Bank board a few months earlier that a discussion involving
the extension of credit to an “insider” invokes the spectre of Regulation O and therefore the details of the
16
meeting must be completely reflected in the board’s minutes. In addition, the “insiders” must abstain from
discussion and voting on the loan, and the minutes must specifically reflect that they did so. The absence
of any board minutes showing that the Bank board was advised of the details of the Harvey Hospitality
loan at any time, and that the Respondents refrained from the discussion and removed themselves from
the meeting, undercuts the credibility of Shapiro’s testimony concerning what and when the Bank board
was told about the Harvey Hospitality transaction.
Zaring testified that the Harvey Hospitality loan was approved at the May 30th meeting. However,
he did not recall Shapiro being present at that meeting or for that matter at any other board meeting. (Tr.
891-892, 896-897.) W ith exception of the December 13, 2000 meeting, none of the Bank board minutes
indicate that Shapiro attended any of the actual board meetings. As Zaring pointed out, the minutes of the
Bank board meetings typically show who is present, who leaves, who returns to the meeting, and what is
discussed. (Tr. 895.) For example, the December 13 board minutes show that one director, J. Banks, was
absent, that there were several non-directors in attendance - including Attorney Shapiro and
representatives of the FDIC, and that Director Sellis arrived late and joined the meeting after the FDIC
representatives departed. (FDIC Exh. 3 at 10.) The June 27, 2001 board meeting minutes show that
representatives of the OBRE and FDIC attended the first part of the meeting. (FDIC Exh. 3 at 32-33.)
Those minutes also show that RobertM advised the board that Zaring had requested the option to purchase
CFC stock at which point:
President Zaring exited the meeting and the remaining directors discussed this matter in great detail. Given the absence of Director Kenneth Koziol the matter will be revisited in the next Board meeting for further discussion. (Emphasis added.)
(FDIC Exh. 3 at 35.)
A careful review of all the Bank board minutes shows that the same format was essentially followed
meeting after meeting after meeting. (SeeFDIC Exh. 3.) Nowhere in any of these minutes is there a
mention of what and when the Bank board was told about the Harvey Hospitality transaction or when the
Harvey Hospitality loan was approved.
17
Further, the evidence shows that after the minutes are typed and signed by the Executive
Secretary, they are attested to by the Board Chairman, RobertM, and subsequently reviewed and approved
at the next board meeting. Thus, there was ample opportunity to review and correct any omissions or
inaccuracies in the minutes. In the absence of any documentary evidence showing that Attorney Shapiro
attended any Bank board meeting after December 13, 2000, or that the details of the Harvey Hospitality
transaction was discussed during an actual board meeting, I find that Attorney Shapiro’s testimony on this
point is unconvincing.
Attorney Shapiro’s testimony in other respects was also less than completely candid. In an effort to
marginalize his role at the December 20, 2000 closing, he testified that he attended the December 20th
closing at the request of RobertM “not really to represent him, but if there were any legal issues that came
up, just to be there in case he needed a lawyer.” (Tr. 1374.) He further stated that he did not prepare any
loan documentation or closing statements and did not give any specific advice with regards to the
components of the transaction.
The evidence shows, however, that at the December 20 closing, Shapiro, as the attorney for Arafat
Corporation, signed the food and beverage “Store Lease” between Arafat and Harvey Hospitality LLC.
(FDIC Exh. 47 at 5 and 11.) In addition, and according to RobertM, Shapiro represented the Respondents
in drafting the documents related to the closing. (Tr. 1624.) Specifically, RobertM testified that he told
Shapiro “what [he] wanted him to make sure were inserted in those documents” and to make sure that
RobertM and GeorgeM were protected. (Tr. 1628-1629, 1632-1633.) RobertM testified that his attorney,
Shapiro, told him that this was accomplished. (Tr. 1628-1629.) Thus, contrary to the impression that
Shapiro sought to foster, the evidence viewed as a whole shows that he was very involved in preparing
documents related to the closing and in representing the Respondents and their business interests,
including Arafat Corporation, at the December 20th closing.21
21 The evidence also shows that Attorney Shapiro was involved on behalf of the Respondents in the FBT closing. (FDIC Exh. 56 and 58 at 3.)
18
Finally, and contrary to Shapiro’s testimony, Zaring credibly testified that RobertM and GeorgeM
did not leave the board meeting on May 30. None of the board minutes show that RobertM and GeorgeM
left the May 30th meeting at any time or more specifically at the time Zaring updated the board on the
status of the Harvey Hospitality loan. Rather, the minutes show that RobertM actively participated in the
May 30th meeting from start to finish.
RobertM testified that the financing of the Harvey Hospitality loan was in the works for a long
time. He stated that it was discussed with the Bank board repeatedly from December 2000 through May
2001. On direct examination, RobertM testified as follows:
Q. How long had the financing been in process at Citizens?
* * * * * * * * * * * * * * * (Tr. 1523.)
A. It began when Jim Zaring indicated that in his opinion the loanwas a righteous loan and we should be doing it there, and then
he formulated the syndicate of participants and all the underwriting and the backroom work that needed to be done to get that accomplished.
Q. And were there Board discussions related to the loan?
A. Repeatedly.
Q. Repeatedly from what time period to what time period?
A. It began on December 13th when the loan was originally brought to the Board for the 700,000, and they wanted to know why was there
700,000 needed, and the whole picture was disclosed to the Board. (Tr. 1524.) * * * * * * * * * * * * * * *
Q. W as the combined purchase price as defined by the Asset PurchaseAgreement and the Articles of Agreement disclosed?
A. Of course.
Q. W as it disclosed to anyone that Sunny was not going to be paying his half of the 1,400,000?
A. Everything was disclosed to the Board, because there was no reason not to. It was just conversation and elements of fact and –
(Tr. 1525.)
19
In one respect, RobertM’s testimony lends credence to the FDIC’s position that all along RobertM
intended for the Bank to fund the Harvey Hospitality loan. His assertion that the funding process began on
December 13, 2000, puts into perspective his related testimony that he wanted Attorney Shapiro present
and involved in the December 20, 2000 closing to make sure it was properly done because “we were
anticipating making it a bank loan.” (Tr.1624.)
In another respect, his testimony is internally inconsistent and conflicting. The loan under
consideration on December 13 was a personal loan of $700,000 to the Respondents. There is no evidence
that there was a loan request by Harvey Hospitality before the Board at that time. Moreover, RobertM
testified that when the board agreed at the December 13th meeting that he and GeorgeM could borrow
only $600,000 from the Bank, he decided “we are not doing it. Period.” (Tr. 1480.) Thus, the credible
evidence shows that the discussion at the December 13th meeting focused on RobertM and GeorgeM
borrowing from the Bank, and according to RobertM’s earlier testimony, the discussion ended, rather than
began, at that meeting.
In addition, RobertM’s generalized testimony that “[e]verything was disclosed to the Board” is
dubious. In a related deposition on July 19, 2005, RobertM testified under oath that he did not have any
specific recollection of whether he did or did not tell the Board about the Installment Agreement for Deed
with Sunny Gabhawala. (Tr. 1635.) In the same deposition, he was asked “W hat, if anything, did the
Board know about the original purchase price of the hotel on December 20th of 2000?” His answer was,
“I don’t recall. I don’t recall specifically what the Board knew on December 20th or what they knew prior
to the funding in June of ’01. I don’t recall specifically what they knew.” (Tr. 1637.)
Further, RobertM’s testimony about what the Board was told is uncorroborated by credible
evidence. Respondent’s expert witness, Joseph Gunnell, was present at the December 13th meeting. He
was listed on the Respondent’s witness list as expected to testify on “matters involving Harvey
Hospitality.” However, he did not corroborate RobertM’s testimony that the details of the Harvey
Hospitality transaction were discussed at that meeting. GeorgeM also attended the December 13th
20
meeting. He did not corroborate his brother’s testimony that the details of the Harvey Hospitality
transaction were discussed at the December 13 meeting or at any regular board meeting thereafter.
Director Nicholas Duric attended the Bank board meetings on December 13, 2000, April 25, 2001, and
May 30, 2001. He was listed as a witness for the Respondent, but was not called to corroborate RobertM’s
testimony of what and when the Board was told. One can reasonably presume that any of these witnesses
would be favorably disposed toward the Respondents’ position. The failure to adduce corroborating
testimony from these witnesses or to call other potentially corroborating witnesses, i.e., other Bank
directors who were not involved in the Respondents’ personal investments, taints RobertM’s credibility
concerning what and when the Board was told about the Harvey Hospitality transaction.
Nicholas Tanglis also attended the December 13th meeting. On direct examination, he testified that
there was a discussion at that meeting about whether and in what amount the Bank could loan money to
the Respondents. (Tr. 1279-1278.) He also stated that at the end of the meeting RobertM stated that he did
not want funding from the Bank. (Tr. 1281, 1282.) He did not state that the Board was told “everything”
at that meeting nor did he explain with particularity what was discussed. In response to a litany of leading
questions, Tanglis stated that the Harvey Hospitality loan was discussed before May 7, 2001, and that it
was approved after that date, but he did not state when any of those discussions occurred. (Tr. 1301-
1306.) Tanglis testified that during discussions at board meetings the “flip” or structure of the transaction
was discussed, but he could not recall the specifics of those discussions. (Tr. 1305-1306.) He stated that
Attorney Shapiro was present at a meeting after May 7 at which time the loan was approved and that
RobertM and GeorgeM left the room when the vote was taken. (Tr. 1307.) He did not recall whether the
loan approval sheet was signed at that meeting or sometime afterwards and he did not explain how or why
RobertM and GeorgeM came to sign the document.
On cross-examination, Tanglis could not recall if anyone told him prior to the loan approval that
Harvey Hospitality made no payment to the Respondents for the personal property. (Tr. 1315.) He stated
21
that he knew that the Respondents did not receive the agreed $3.9 million from Harvey Hospitality for the
hotel and personal property, but could not recall how he came to know that detail.
Tanglis’ testimony falls short of corroborating RobertM’s assertion that “everything was told to
the Bank board.” If the Harvey Hospitality loan was repeatedly discussed with the Bank board between
December 2000 and May 2001, as RobertM testified, and if everything about that transaction was
disclosed to the Bank board, one would reasonably expect Tanglis, the overseer of the Respondents’
personal investments, to have a better recollection of the details of the transaction. His testimony
concerning what the Bank board was told about the Harvey Hospitality transaction was generalized,
vague, and unpersuasive.
Notably, Tanglis testified that in the May 20, 2000, Cease and Desist Order, the Bank’s board was
admonished to keep accurate and complete minutes of their meetings. (Tr. 1300-1301.) The evidence
shows that beginning in February 21, 2001, Tanglis, as Executive Secretary, was in charge of keeping the
Bank board’s minutes, and at all times, RobertM, as Board Chairman, attested to their accuracy. Despite
RobertM’s testimony that everything was told to the board repeatedly, there is not a single solitary
reference to the Harvey Hospitality loan in the board minutes, except for the May 30, 2001 meeting
minutes. The absence of Bank board minutes reflecting what and when the board was told about the
Harvey Hospitality loan undercuts the credibility of RobertM, Attorney Shapiro, and Tanglis.
8. Commercial Debt Modification of United Trust Loan #30011
On June 1, 2001, which was one day after the May 30, 2001, board meeting, RobertM and
GeorgeM signed an agreement modifying the terms of the $700,000 United Trust loan #30011. (FDIC
Exh. 95.) The payoff date of loan #30011 was extended to October 1, 2001, and the interest rate was
changed for the extended period of June 1 through October 1. Significantly, the agreement stated:
THE BALLOON PRINCIPAL PAYMENT OF $700,000 ORIGINALLY DUE JUNE 1, 2001 UNDER THIS LOAN NUMBER 30011 IS HEREBY MODIFIED TO $100,000, W ITH THE REMAINING BALLOON PAYMENT OF $600,000 HEREBY EXTENDED TO OCTOBER 1, 2001.
(FDIC Exh. 95.)
22
According to the testimony of John Van W inkle, the former United Trust president, the Respondents
asked him to renew the $700,000 loan by extending the due date six months. Van W inkle, however,
required them to partially paydown the loan by $100,000. (Tr. 1766-1767, 1768, 1770-1771.)
Thus, the evidence shows that on or about the time that the Harvey Hospitality loan was approved,
the Respondents knew that they were not required to payoff the United Trust loan #30011 in the amount
of $700,000, plus interest from the proceeds of Harvey Hospitality loan. There is no evidence, however,
showing that the Respondents informed the Bank board of this material change.
9. The Harvey Hospitality loan closing
The Harvey Hospitality loan, which was scheduled to close on June 14, 2001, had to be postponed
because CBT did not provide sufficient funding. W hen the loan closed on June 27, 2001, CBT issued
three checks totaling $2,388,918.90 to Ticor Title in connection with the closing. Check #005016, dated
June 14, 2001, in the amount of $2,003,918.90. Check #011808, dated June 27, 2001, in the amount of
$45,000. Check #011813, dated June 27, 2001, in the amount of $340,000. (FDIC Exh. 114 at 2, 4 and 5.)
Thus, the entire loan amount of $2,900,000 was not funded by CBT.22
Ticor Title Insurance, the closing agent, issued three checks, among others, in connection with the
closing. One check #9502008429 in the amount of $1,441,387.69 was issued and used to payoff the First
Bank & Trust loan. A second check #9502008430 in the amount of $708,620.61 was issued to payoff
United Trust loan #30011. A third check #9502008426 in the amount of $55,235.25 was issued to
RobertM. (FDIC Exh. 114; 111 at 3.)
On or about June 28, check #9502008430 in the amount of $708,620.61 was tendered to United
Trust Bank. Van W inkle testified that he was expecting a check for $100,000, plus interest in accordance
with the terms of the Commercial Debt Modification Agreement. (Tr. 1809-1812, 1820-1821; FDIC
22 However, the Ticor Title Closing Statement, dated June 27, 2001, shows that in addition to $2,003,918.90, the sum of $440,000 was received from CBT for a total amount of $2,443,918.90. (FDIC Exh. 111 at 3.)
23
Exh. 95.) He stated that in order to make the transaction work in the manner intended, check
#9502008430 in the amount of $708,620.61 was deposited by United Trust Bank; $108,505.48 was
credited to the loan #30011 account; and a separate United Trust Bank cashier’s check (#010932) in the
amount of $600,000 was issued to “Robert C. Michael & George S. Michael.” (Tr. 1824; FDIC Exhs. 114
at 7, 78, 311 at 2-3, and 294 at 1.) The Respondents deposited the $600,000 check in a CBT account of
R&G Properties. (FDIC Exh. 294 at 2.) Thus, on June 28, 2001, United Trust Bank loan #30011 was paid
down by $108,505.48, leaving a remaining balance of $602,512.32 to be paid off. (Tr. 1723, 1824; FDIC
Exh. 78 and 311 at 3.)
10. United Trust loan #30011 payoff
On September 12, 2001, United Trust Bank issued loan #31555 in the amount of $700,000 to
RobertM and GeorgeM. (FDIC Exh. 79.) The “Discussion” portion of the Loan Summary sheet states:
“REFI OF LOAN ORIGINATED 12/00 AT $700M PD DOWN
TO $600M IN JUNE 01 – REFI TO FUND NEW INVESTMENT.”
(FDIC Exh. 96.)
According to the United Trust closing memo, dated September 13, 2001, the proceeds of loan
#31555 were used to payoff the balance of loan #30011 in the amount of $603,901.19. (FDIC Exh. 81.)23
In addition, United Trust issued two separate checks to the Respondents: one in the amount of $95,584.80
and the other in the amount of $264.01. (FDIC Exh. 81 at 1 and 3; FDIC Exh. 295.)
To summarize, the September 12, 2001, loan summary sheet and closing memo (FDIC Exhs. 96
and 81) when read in tandem with the Commercial Debt Modification Agreement, dated June 1, 2001,
(FDIC Exh. 95) disclose that on June 27, 2001, the Respondents used the CBT loan proceeds of
$708,620.61, to pay the modified balloon principal amount of $100,000, plus interest, which equaled
approximately $108,505.48. The very next day, June 28, United Trust paid the difference of $600,000
23 W hen John Van W inkle reviewed FDIC Exh. 81 at the December 29, 2009 hearing, he acknowledged his initials on the document and stated that they signified that he approved the transaction. (Tr. 1772-1775.) He also acknowledged his handwriting on other parts of the document. (Tr. 1821.) Van W inkle did not dispute in any way the validity or accuracy of FDIC Exh. 81.
24
($708,000 - $108,000 = $600,000) to the Respondents. (FDIC Exh. 294.) The evidence shows that the
remaining balloon principal balance of $600,000, plus interest, for loan #30011, was paid-off on
September 12, 2001, with the proceeds of loan #31555.24
11. Analysis and Findings
A §8(e) removal and prohibition order requires proof of three elements: (1) that the Respondents
engaged in misconduct which violated a law, a regulation or a final cease and desist order or gave rise to
an unsafe or unsound practice or breached a fiduciary duty; (2) that the misconduct had a prescribed
effect, that is, it resulted in a financial loss or other damage to the bank or prejudice to the bank’s
depositors or financial gain/benefit to the Respondents; and (3) that the Respondents’ misconduct
involved a certain degree of culpability, that is, it resulted from the personal dishonesty of the
Respondents or their willful or continuing disregard for the safety or soundness of a financial institution.
12 U.S.C. § 1818(e).
a. Misconduct
(1) Regulation O violations
W ith respect to the first element, the FDIC asserts first that the Respondents violated Regulation
O, 12 C.F.R. Part 215. That regulation, which is made applicable to state nonmember banks by section
18(j) of the Federal Deposit Insurance Act, 12 U.S.C. § 1828(j), and section 337.3 of the FDIC Rules and
Regulations, 12 C.F.R. § 337.3, governs the bank’s extension of credit to an executive officer, director, or
principal shareholder.25 Under the tangible economic benefit rule, an extension of credit is considered
24 The parties’ joint stipulations # 82 and 150 state that on or about June 27, 2001, the entire outstanding balance on United Trust Bank loan #30011 was paid off by Ticor Title Insurance check #9502008430 in the amount of $708,620.61. Substantial evidence in the record shows that these stipulations are inaccurate and contrary to the record as a whole. In addition, in its post-hearing brief filed on February 5, 2010, the FDIC explains why these stipulations are inaccurate and states that they should bedisregarded. I therefore reject stipulations #82 and 150 of Jt. Exh. 1. Graefenhain v. Pabst Brewing Co., 870 F.2d 1198, 1206 (7th Cir. 1989); Bloome v. Wiseman, Shaikewitz, McGivern, Wahl, Flavin & Hesi, P.C.,et al., 279 Ill. App. 3d 469, 479, 664 N.E. 2d 1125, 1132 (1996). 25 It is not disputed that (1) Regulation O and Section 22(h) of the Federal Reserve Act, 12 U.S.C. §375b, apply to the Bank; (2)at all times material herein, RobertM was an “executive officer” of the Bank, within the meaning of section 215.2(e) of Regulation O, 12 C.F.R. §215.2(e); (3) as a director, executive officer, and principal shareholder of the Bank, RobertM was an “insider” within the meaning of section 215.2(h) of Regulation O; and (4) as a director and principal shareholder of the Bank, GeorgeM was an “insider” as defined by section 215.2(h) of Regulation O. (Jt. Exh. 1, Stip. 223-226.)
25
made to an insider to the extent that the proceeds are transferred to the insider or result in a tangible
economic benefit to the insider. Specifically, §215.3(f) states:
f) Tangible economic benefit rule--(1) In general. An extension of credit isconsidered made to an insider to the extent that the proceeds are transferred to the insider or are used for the tangible economic benefit of the insider.
(2) Exception. An extension of credit is not considered made to an insider under paragraph (f)(1) of this section if: (i) The credit is extended on terms that would satisfy the standard set forth in Sec. 215.4(a) of this part for extensions of credit to insiders; and (ii) The proceeds of the extension of credit are used in a bona fide transaction
to acquire property, goods, or services from the insider.
(a) The extension of credit
The evidence shows, and the Respondents do not dispute, that they received a tangible economic
benefit from the Harvey Hospitality loan. They used $1,441,387.69 of the Harvey Hospitality loan
proceeds to payoff their First Bank & Trust loan. They used approximately $108,000 of the United Trust
check to pay down their United Trust loan #30011. The remaining balance of the $600,000 ($708,000 -
$108,000 = $600,000) was paid to the Respondents by United Trust and deposited into their R & G
Properties account. Finally, $55,235.25 of the loan proceeds were paid to RobertM at closing.
The Respondents argue, however, that they fit squarely within the exception to the tangible benefit
rule. They assert that the credit terms were substantially the same terms extended to non-insiders and that
the transaction did not involve more than the normal risk of repayment or unfavorable features. They
further assert that the extension of credit was made to a group of investors who were purchasing property
from them in a bona fide sale. The evidence viewed as a whole, however, does not support either
assertion.
The evidence shows that the transaction involved more than a “normal” risk of repayment.
Significantly, at the time the loan request was submitted for approval, Harvey Hospitality had not made a
single $60,624.33 monthly payment under the terms of the Installment Agreement of Deed. Instead, it
owed in arrears approximately $242,496. Harvey Hospitality also was in non-monetary default because it
had not secured financing to close the transaction by April 1. Finally, Harvey Hospitality had not paid nor
26
was it ever required to pay $1,365,000 for the hotel personal property. The failure to pay any money for
the personal property coupled with its double “default” status at the time the loan was approved raised a
very real risk of “nonpayment” in contravention of § 215.4(a)(ii).
Nor was the sale itself bona fide. First, there is no evidence that any of the terms and conditions of
the sale or for that matter the sale price were negotiated at arms length by the Respondents and Harvey
Hospitality. Rather, the evidence shows that the entire transaction was structured by RobertM and
Gabhawhala, with the latter serving as the agent for Big 2 Trading, but not Harvey Hospitality. In
particular, the evidence shows that the $3,950,000 sales price was determined by RobertM and
Gabhawhala before the property was actually purchased, before any renovations were made, and long
before the property was appraised. (Tr. 384-385.) The hotel, personal, and real property were purchased
for $2,582,503. In his testimony, RobertM described the condition of the hotel after he took over as
follows:
W e had to remodel the entire – the lounge was closed. W e have got a 316-room hotel and a lounge that can't sell a Bud Light, a
breakfast buffet that had been closed for five years, a snack shop that was in need of repair, equipment that was all malfunctioning, if
functioning at all, coolers that were broken, all kinds of things. There were HVAC work that needed to be done, carpets needed to be
changed -- a lot of work.
(Tr. 1509.)
RobertM also stated that it took “a task force of construction people doing everything possible to get the
place dolled up and to get it operational and functional and profitable.” (Tr. 1518-1519.)
Notwithstanding the condition of the hotel at the time of the purchase, Gabhawhala and RobertM
determined that the sales prices would be $3,950,000 or $1,367,497 more than the $2,582,503 purchase
price. Gabhawhala testified that he did not tell the Patels, who formed Harvey Hospitality LLC along with
Big 2 Trading, that Big 2 Trading was buying the hotel for $2,582,503. He simply told them that the sales
price was $3,950,000 and that the Respondents would be making some profit. (Tr. 385.) Gabhawhala
27
conceded that he did not tell his other business associates all the details because he was afraid they would
walk away.
Second, the sale price of $3,950,000 was not the actual price paid or expected to be paid. The
undisputed evidence shows that Harvey Hospitality never paid nor was it expected to pay $1,365,000 or any
part thereof to the Respondents. Yet, the Harvey Hospitality submitted a loan application using the sale price
of $3,950,000, which was relied upon by the Bank to approve the loan, even though the Respondents
knew that Harvey Hospitality was expected or required to pay the entire sales price amount.
Third, it is difficult to discern from the evidence exactly what was the actual final sales price.
According to RobertM, the sales price was reduced to $3,550,000, when the Respondents bought the
hotel, pursuant to an Amendment to Asset Purchase Agreement, dated December 20, 2000. (FDIC Exh.
52.) Yet, when the Harvey Hospitality loan request was subsequently submitted to the Bank’s directors for
approval, the total purchase price of the hotel was listed at $3,950,000. (FDIC Exh. 107 at 2.) Although
the Harvey Hospitality loan was approved for $2,900,000, it was only funded in the amount of
$2,388,918.90. In terms of the actual price paid by Harvey Hospitality, the evidence shows that Big 2
Trading made a down payment of $242,500; the amount of $557,503 in cashiers’ checks was tendered at
the closing on December 20, 2000; and the CBT loan was funded on June 27, 2001 in the amount of
$2,388,918.90. It would appear therefore that the actual price paid by Harvey Hospitality for the Harvey
Hotel was $3,185,921.90. However, on its FORM PTAX-203, Illinois Real Estate Transfer Declaration,
Harvey Hospitality listed the full actual sale price as $2,195,177.56, with no amount deducted for personal
property. (FDIC Exh. 121 at 1, 5, and 6.) The Respondents similarly reported the same amount
($2,195,178) for the sale of the hotel on their 2001 R&G Partnership tax return. (FDIC Exh. 123 at 17.)
On the CBT closing statement, the amount of $2,195,178 also appears on a line entitled, “Sale Price;
balance due under articles.” (FDIC Exh. 109.) Depending upon the evidence relied upon for a particular
date, the purchase price of the Harvey Hotel ranges from $2,195,178 - $3,950,000.
28
According to the FDIC’s expert witness, Jack Friedman, an auditor would likely determine that the
Harvey Hotel had a purchase price or “market transaction” of $2,582,503. (Tr. 84-86.) He further opined
that if the $513,548 “overdeposit” paid to the Respondents on December 20, 2000, was added to this
purchase price so it could be argued that the purchase price was $3,096,051, which almost equals the sum
of the monies paid by and on behalf of Harvey Hospitality to buy the hotel. In the final analysis, Friedman
opined that the likely purpose of the $3,950,000 contract sales price was to enable Harvey Hospitality to
qualify in the future for a larger loan than would otherwise be available. (Tr. 82-84.)
In addition, the evidence discloses that not all of the voting directors knew that Harvey Hospitality
had defaulted in payment under the Installment Agreement of Deed and that it had not paid nor was it
required to pay the sum of $1,365,000 for the hotel personal property. Tanglis could not recall whether he
was told as a Bank director that the Respondents were not going to receive $3,950,000 as set forth in the
written agreements. (Tr. 1315-1317.) Zaring testified that he did not recall being told that the Harvey
Hotel had been purchased for $2,585,000 and sold for $3,950,000. Further, there is no evidence that the
Respondents told the Bank board of directors that they were only obligated to pay $100,000, plus interest
on the United Trust loan #30011 at the time of the Harvey Hospitality closing. Instead, the evidence
discloses that up to, including, and after the Harvey Hospitality closing, the Respondents asserted and
maintained that the $708,620.61 of the CBT loan proceeds would be, and was, used to payoff United
Trust loan #30011, which is simply untrue. W hen an insider misrepresents fact to his bank in order to
influence the origination and approval of an extension of credit under the tangible economic benefit rule,
it hardly can be said that the transaction is a bona fide transaction.
Thus, based on the preponderance of evidence, I find that the Harvey Hospitality loan transaction
involved more than the normal risk of repayment and that it was not a bona fide transaction. Accordingly,
I find that the Respondents do not fit within the exception to the tangible economic benefit rule and as
such, an extension of credit was made to them within the meaning of §215.3(f).
29
(b) No prior approval of the board of directors
Section 215.4 of Regulation O sets forth the general prohibitions on extending credit to
insiders. More specifically, § 215.4(b)(1) of Regulation O requires the prior approval of the board of
directors of a bank before an extension of credit (to include the granting of a line of credit) may be made
to an insider of the bank which is in excess of $25,000 or 5 percent of the bank's unimpaired capital and
unimpaired surplus, whichever is higher. The approval must be given by a majority of the entire board of
directors of the bank. The insider who is to receive the loan must abstain directly or indirectly from that
vote. An insider’s participation in the discussion, or any attempt to influence the voting, by the board of
directors regarding an extension of credit constitutes indirect participation in the voting by the board of
directors on an extension of credit.
The evidence shows that in June 2001, 5 percent of the Bank’s unimpaired capital and unimpaired
surplus was $174,500.26 The Bank’s loan to Harvey Hospitality exceeded that amount thereby triggering
the prior approval requirements of §215.4(b)(1).
There is no evidence that the loan was approved in advance by a majority of the entire board of
directors of that bank. None of the minutes of the directors’ meetings disclose when the loan was
approved and who was present when a vote was taken. In May 2001, when the loan purportedly was
approved by the Bank’s loan committee, there were seven directors on the Bank board. Directors Duric
and Koziol did not sign the May 7 loan approval sheet. There is no evidence that either of them voted for
the loan at any other time. Assuming for argument purposes only, that RobertM and GeorgeM did not
vote for the loan, the evidence shows that only three out of seven directors voted to approve the loan:
Zaring, Tanglis, and Sellis. (FDIC Exh. 107 at 4.) Thus, the evidence shows that if, in fact, the Harvey
26
The Bank's unimpaired capital and surplus capital was $3.491 million, as reported in its March 31, 2001, Consolidated
Reports of Condition and Income, otherwise known as a "Call Report", FDIC Exh. 287 at 24. Five percent of $3.491 million is $174,550. It should be noted that on June 30, 2001, the Bank reported unimpaired capital and surplus of $3,461,000 (FDIC Exh. 288 at 27; $3,166,000 plus $295,000). Thus, as of June 30, 2001, the pre-approval requirement was triggered by a loan of $173,050, calculated as 5% of $3,461,000.
30
Hospitality loan was approved by the Bank board, it was approved by less than a majority of the entire
Bank board, whenever that occurred.
On the other hand, the credible evidence shows that RobertM and GeorgeM directly participated in
the approval of the Harvey Hospitality loan. They both signed the May 7 loan approval sheet which,
according to Zaring and Tanglis, is “the” document reflecting that the Bank directors approved the loan.
Neither RobertM nor GeorgeM explained why they signed the document, if they were not acting to
approve the loan. Their attorney, Benjamin Shapiro, did not explain why they signed the document, if they
were not approving the loan.
Likewise, RobertM and GeorgeM indirectly participated in Board discussions about the loan in
contravention of the prior approval requirement of Regulation O. The credible evidence shows that the
Respondents were present and participated in Bank Board meetings on December 13, 2000, and May 30,
2001. To the extent there was any discussion of the Harvey Hospitality loan at these meetings, or other
meetings, the Respondents should have left the meeting when those discussions occurred as Gunnell and
Shapiro instructed them to do during their Regulation O training session. However, there is no credible
evidence that the Respondents ever recused themselves and/or left any Bank board meeting on record for
any reason.
Because of the Respondents’ above-described insider conduct, the Bank board failed to comply
with the prior approval requirement of the §215.4(b)(1) of Regulation O.
(c) Knowing receipt of an unauthorized extension of credit
Section 215.5(a) of Regulation O prohibits a bank from extending credit to an executive officer,
like RobertM, in an amount exceeding $100,000. The FDIC asserts, and the evidence shows, that by
making an extension of credit to RobertM, the Bank board chairman, in an amount of $2,205,128.42, CBT
violated this section of Regulation O.
Section 215.6 of Regulation O states:
No executive officer, director, or principal shareholder of a member bank or any of its affiliates shall knowingly receive (or knowingly permit any of
31
that person's related interests to receive) from a member bank, directly or indirectly, any extension of credit not authorized under this part.
At the December 13, 2000, meeting, the Respondents were advised by Zaring, Gunnell, and
Attorney Shapiro that RobertM, as an executive officer, could not borrow more than $100,000 from the
Bank and that GeorgeM, as a director, could not borrow more than $500,000 under Regulation O. That
notwithstanding, the Respondents, RobertM and George M, knowingly received an extension of credit of
$2,205,128.42 ($1,441,387.69 + $108,505.48 + $600,000 + $55,235.25 = $2,205,128.42) vis a vis the
Harvey Hospitality loan in violation of 12 C.F.R. §215.6.
(2) Breach of fiduciary duty
In addition to violating Regulation O, the FDIC asserts that the Respondents breached their
fiduciary duty to the Bank. “Officers and directors of financial institutions are fiduciaries, who owe the
institution a duty of care and loyalty.” In the Matter of Ramon M. Candelaria, FDIC Enf. Dec. and Orders
¶5242, A-2847 (1998); In the Matter of Jess T. Simpson, OTS AP 91-6 at 10–11. The duty of care requires
directors and executive officers to act as prudent and diligent business persons in conducting the affairs of
the bank. The duty of loyalty generally prohibits them from putting their personal or business interest
above the interests of the bank and requires them to administer the affairs of the bank with candor,
personal honesty, and integrity. W here an executive officer or director places his personal interest above
that of the bank or utilizes bank resources for personal gain, the officer or director commits a serious
breach of fiduciary duty. Candelaria, at A-2847.
There is no credible evidence showing full disclosure was made to the entire Bank board of
directors concerning the Harvey Hospitality loan. Rather, the evidence shows that the Respondents placed
their own personal business interests above the interest of the Bank by directing the Bank’s officers and
directors, Zaring and Tanglis, to package together the First State Bank and United Trust loans for the
Respondents initially to acquire the hotel and then to package the CBT loan using corresponding banks so
as to exceed the Bank’s lending limits for their own personal benefit. The evidence also shows that the
Respondents failed to disclose to the other Bank directors that Harvey Hospitality LLC had defaulted
32
under the terms of the Installment Agreement, that is, Harvey Hospitality never paid and was never
expected to pay for the hotel personal property. The evidence also shows that the Respondents failed to
disclose to the other Bank directors that on the very same day that the Harvey Hotel was purchased for
$2,585,000, it was “flipped” for a sale price of $3,950,000, even though it was in deplorable condition
and required extensive renovations. In addition, the evidence shows that the Respondents failed to
disclose to the other Bank directors that the sales price of $3,950,000 was not the actual purchase price.
Finally, the Respondents failed to disclose to the other Bank directors that $708,000 of the loan proceeds
would not be used to “payoff” United Trust loan #30011 – rather a portion of those proceeds would be
used to “paydown” loan #30011 with the remaining balance to inure to the Respondents’ benefit.
In addition, and in contravention of generally accepted standards of banking operations, the
Respondents breached their duty of loyalty to the Bank by putting themselves, as well as Zaring, Tanglis,
and Attorney Shapiro, on both sides of the Harvey Hospitality transaction. The evidence shows that all
three individuals were involved in serving, advising, and guiding the Respondents with respect to their
personal investments, including Harvey Hospitality, while at the same time serving as officers and
directors, and legal advisor to the Bank. Because of their involvement with the Respondents’ personal
investments, they were involved in discussions and made privy to information which was not disclosed to
the other bank directors, thereby placing them in a position that created a conflict of interest or appearance
of a conflict of interest. The result being, once again, an impairment of the decision-making process of the
board of directors and exposing the Bank to the possibility of abnormal risk of loss.
This evidence, coupled with the expert opinions of retired Field Office Supervisor Tom W ilkes
and Assistant Regional Director David Mangian, amply demonstrates that the Respondents breached their
fiduciary duties to the Bank.
(3) Unsafe or unsound practice
The phrase "unsafe or unsound banking practices" is not specifically defined in the statute, 12
U.S.C. § 1818(b). It is well-settled, however, that an "unsafe or unsound banking practice" embraces any
33
action, or lack of action, which is contrary to generally accepted standards of banking operations which
might result in abnormal risk or loss to a banking institution or shareholder." A. Frederick Greenberg, No.
OCC AA-EC-90-45 at 77 (October 28, 1991) (“[L]oans to insiders, affiliates, and related entities are
unsafe and unsound where full disclosure of the related parties and the use of the proceeds is not made
and where those with potential benefit do not recuse themselves from voting.”), aff’d, Greenberg v. Board
of Governors of the Fed. Reserve Sys., 968 F. 2d 164, 171 (2d Cir. 1992); Greene County Bank v. FDIC,
92 F.3d 633, 636 (8th Cir. 1996); 112 Cong. Rec. 26474 (1966).
The credible evidence viewed as a whole shows that the Respondents failed to disclose to the
entire Bank board of directors their interest in the Harvey Hospitality transaction, the actual purchase
price of the Harvey Hotel, the double default by Harvey Hospitality LLC, the failure to receive any
monies from Harvey Hospitality for the hotel’s personal property, and the “paydown,” rather than the
“payoff” of the United Trust loan #30011 with CBT loan proceeds, resulting in a payment of $600,000 to
the Respondents by United Trust. Also, the credible evidence shows that the Respondents voted to
approve the Harvey Hospitality loan and participated in at least one, if not more, discussions with some of
the Bank directors concerning the loan.
The failure of the Respondent, RobertM, as an executive officer and director of the Bank, and
GeorgeM, as a director, to make full disclosure to the entire Bank board of directors and to recuse
themselves from discussions and approval of the loan is a departure from generally accepted standards of
banking operations and exposed the Bank to the possibility of abnormal risk of loss because their conduct
impaired the decision-making process of the board of directors. See Neil M. Bush, OTS AP 91-16,
1991OTS DD LEXIS 2 (April 18, 1991).
b. Effect and Culpability
The “effect” prong of Section 8(e) requires that by reason of the misconduct referred to above, the
depository institution has suffered or will probably suffer financial loss or other damage; the interests of
the institution’s depositors have been or could be prejudiced; or that the parties have received financial
34
gain or other benefit by reason of their actions. In this particular instance, the evidence rather
immediately shows the financial gain Respondents realized from their misconduct.
Proceeds of the Harvey Hospitality loan were used to payoff their loan with First Bank, pay down
their loan #30011 with United Trust Bank, and resulted in a payment of $600,000 to them from United
Trust. These facts rather clearly establish a direct financial gain as a result of Respondents’ lending
activity. The proceeds of the loan were used to pay their personal indebtedness owed to other institutions,
and resulted in a cash distribution to Respondents in the amount of $600,000. The gain to Respondents –
and the necessary “effect” of their actions is rather clear.
Likewise, their actions caused “other damage” to Citizens Bank and Trust. W hile perhaps not a
financial loss, the continued and repeated violations of lending restrictions with respect to the inside
lending exposed the Bank to heightened risk of possible regulatory action. W hile not immediately
quantifiable, this does in fact establish “other damage” to the Bank, as a result of Respondents’ violations
and breaches. For these reasons the Respondents’ conduct satisfies the “effect” standard of the
prohibition provision.
Finally, the “culpability” element requires that the actions of Respondents involve either personal
dishonesty, or demonstrate willful or continuing disregard for the safety or soundness of the bank. In my
opinion, their conduct demonstrates both personal dishonesty and willfully or continuing disregard for the
bank, as set forth below.
The evidence clearly shows that Respondents were less than forthright with the entire Bank board
of directors. They withheld material information concerning their personal involvement in the Harvey
Hospitality transaction - most notably their intended receipt of some of the loan proceeds (e.g., the
$600,000 payment by United Trust on June 28, 2001.)27 Their participation in the various discussions
with Bank directors (without divulging their personal interests in the loan), and their failure to recuse
27 To the extent that the Respondents argue that they did not know before June 28 that United Trust Bank would issue them a check in the amount of $600,000, the undisputed evidence shows that they knew before that date that they were not required to “payoff” the United Trust loan #30011, but failed to advise the Bank’s board of directors and they did nothing after June 28 toadvise the Bank board of this significant occurrence. All of which is further evidence of their less than forthright dealings with the Bank’s board.
35
themselves from voting to approve the loan constitute dishonest acts in that they establish a
“misrepresentation of facts and deliberate deception by pretense and stealth,” within the meaning of Van
Dyke v. Board of Governors of the Federal Reserve System, 876 F.2d 1377, 1379 (8th Cir. 1989).
In Hutensky v. FDIC, 82 F.3d 1234 (2nd Cir. 1996), the court found that a respondent who failed to
inform fellow board members of his personal interest in a loan acted with personal dishonesty by not
revealing this important fact. Specifically, the court noted the following:
Hutensky failed to inform the First Central and Central boards of directors of his business relationship with the parties obtaining the loans, or that the proceeds of the loans would pass to entities he controlled … Hutensky bypassed the required procedures and received the benefit of the proceeds as a result of his actions, and, therefore, his conduct demonstrated personal dishonesty.
Id at 1241.
As in Hutensky, the Respondents here failed to reveal their business interest in the Harvey
Hospitality loan, and failed to inform fellow board members of their intended receipt of the loan proceeds.
Their actions manifest a personal dishonesty, satisfying the “culpability” prong of the prohibition statute.
The same facts that demonstrate this personal dishonesty likewise establish the Respondents’
willful or continuing disregard for the safety or soundness of the bank. W illful conduct is that “which is
practiced deliberately in contemplation of the results,” whereas continuing conduct is that “which is
voluntarily engaged in over a period of time with heedless indifference to the consequences.” In the
Matter of Anonymous, FDIC Enf. Dec. ¶5069 (1986). See Also Candelaria v. FDIC, 134 F.3d 382, citing
Brickner v. FDIC, 747 F.2d 1189 (8th Cir. 1984), and Grubb v. FDIC, 34 F.3d 956 (10th Cir. 1994).
The Respondents’ conduct was deliberate and intended, satisfying the “willful” requirement. Likewise
their conduct was engaged in over a period of time, with a heedless indifference to the consequences to
the bank, satisfying the “continuing” standard. Their actions were in disregard for the safety or soundness
of the bank, as they were not motivated by the best interests of the bank, but rather, were motivated by the
financial needs of the Respondents. These obvious conflicts of interest evidence the requisite level of
culpability on the part of Respondents.
36
For all of these reasons, and based on the evidence viewed as whole, I find that the elements for a
§1818(e) removal and prohibition order have been proven. Accordingly, I recommend that an order be
issued removing the Respondent, Robert Michael, as executive officer and director, and George Michael,
as director of the Bank and prohibiting their participation, without prior regulatory approval, in any
financial institution or organization described in 12 U.S.C. § 1818(e)(7)(A).
C. Double Pledged Stock
1. The first double pledge
As explained above, CFC stock certificate #3 representing 35,440 shares was solely owned by
George Michael. On June 14, 1999, it was pledged and tendered as collateral to the Mount Prospect Bank
for loans 9001 and 9002.28 Both of these loans were renewed on December 5, 2000.
On December 20, 2000, a duplicate of CFC stock certificate #3, along with CFC stock certificate
#20, was pledged and tendered to United Trust Bank in exchange for a $700,000 loan to the Respondents,
which they needed in order to close the Harvey Hotel real estate transaction. At that time, RobertM and
GeorgeM signed a promissory note to United Trust securing loan #30011 with 45,440 shares of CFC
stock, as well as a second mortgage on real estate located at 6508 W . Devon, Chicago, IL. (Jt. Exh. 1,
Stip. 59.) As explained above, the promissory note expressly represented that there were no claims against
the collateral and that the Respondents would protect United Trust’s security interest in the stock
certificates. (FDIC Exh. 71.) The Respondents also signed a commercial pledge agreement which, among
other things, warranted that they “[have] not, and shall not, assign, transfer, encumber or otherwise
dispose of any of [the Michaels’] rights in the Collateral except as provided in this Agreement.” (FDIC
Exh. 74.)
Thus, the evidence shows that on December 20, 2000, Mount Prospect Bank held the original CFC
stock certificate #3 and United Trust held the duplicate CFC stock certificate #3.
28 At the time, RobertM and GeorgeM each owned only one CFC stock certificate. RobertM owned CFC stock certificate #2 and GeorgeM owned CFC stock certificate #3. In September 2000, RobertM and GeorgeM became joint owners of reissued CFC stock certificate #20, but did not pay for the shares until May 4, 2001. (Jt. Exh., Stip. 58; Tr. 1608-11; FDIC Exh. 2 at 2,and FDIC Exh. 241 at 2.)
37
In March 2001, Zaring unsuccessfully attempted to get United Trust to release CFC stock
certificate #3 and #20 as primary collateral for loan 30011. On March 29, 2001, however, RobertM and
GeorgeM gave United Trust a second trust on the CBT building. United Trust released its mortgage on
6508 W . Devon, but did not release the two stock certificates.
One week later, on April 5, 2001, RobertM and GeorgeM renewed their loans with Mount
Prospect Bank and signed two notes: a $600,000 note for loan 9001 and a $300,000 note for loan 9002.
(FDIC Exhs. 138 and 139.) The security for the loans did not change, i.e., CFC stock certificates #2 and
#3.
On May 4, United Trust released CFC stock certificate #20. (FDIC Exh. 93.) On June 1, 2001,
RobertM and GeorgeM signed a Commercial Debt Modification, which memorialized the substitution of
the Bank building as collateral and confirmed that CFC stock certificate #3 remained pledged to United
Trust.
2. The second double pledge
In July 2001, RobertM and GeorgeM sought a $1.5 million secured line of credit from Cole Taylor
Bank to be secured by 80,878 shares of CFC stock.. (Jt. Exh. 1, Stip. 92 and 93; FDIC Exh. 150.) On July
27, the Respondents signed a promissory note and other documentation generally describing the collateral
to be tendered as stock certificates. (FDIC Exh. 151). They also signed a commercial pledge agreement
which contained representations and warranties by the borrowers with respect to the collateral. (FDIC
Exh. 152 at 1.) Significantly, RobertM and GeorgeM warranted, among other things, that “Grantor has
not, and shall not, sell, assign, transfer, encumber or otherwise dispose of the Grantor’s rights in the
Collateral except as provided in this Agreement.” The evidence shows that Cole Taylor did not receive the
actual CFC stock certificates # 2, #3, and #24 until August 1, 2001.29 (FDIC Exh. 154 at 3.) From that
29The evidence reflects that the Respondents drew $450,000 on the Cole Taylor secured line of credit to pay down the $600,000 Mount Prospect loan #9001, thereby prompting Mount Prospect to release the original CFC stock certificates # 2 and #3. The original CFC stock certificate #3 was presented to Cole Taylor as collateral, while United Trust maintained possession of duplicate CFC stock certificate #3.
38
date forward, Cole Taylor had the original CFC stock certificate #3 and United Trust had the duplicate
stock certificate #3.
On Sept 12, 2001, United Trust originated a new loan #31555 to RobertM and GeorgeM in the
amount of $700,000. (Jt.Exh.1, Stip 83 and 84.) RobertM and GeorgeM signed a promissory note and
granted United Trust a security interest secured by CFC stock certificate #3: United Trust still had
physical possession of duplicate CFC stock certificate #3. The warranty representation made to United
Trust was therefore false because the original CFC stock certificate #3 had been pledged to Cole Taylor
two months earlier.
On February 18, 2002, RobertM and GeorgeM renewed the Cole Taylor loan by signing a
promissory note and a collateral pledge agreement. (FDIC Exhs. 156 and 157.) The same borrower
warranties and representations contained in the first collateral pledge agreement were reiterated, even
though United Trust had a duplicate CFC stock certificate #3. (FDIC Exh. 157 at 1.)
On April 1, 2002, United Trust loan #31555 matured and the full outstanding principal was due.
(FDIC Exh. 79.) An internal United Trust memo, dated April 16, 2002, discloses that United Trust was
unable to value the stock shares for collateral purpose due to a lack of financial information and, in
addition, was unable to renew the loan, pursuant to a cease and desist order imposed by the Office of
Thrift Supervision. (FDIC Exh. 84.)
By letter, dated May 23, 2002, James Carroll, Esq., writing on behalf of United Trust advised the
Respondents that the Note had not been paid and that they were in default. The letter sought repayment of
the matured unpaid $700,000 loan and stated that if payment was not made, United Trust would sell the
stock pledged as collateral. (FDIC Exh. 83.)
Three days later, on May 26, 2002, RobertM sent a reply letter stating that he was led to believe by
United Trust’s Board Chairman that the loan would be renewed once there was a “valuation of the
collateral from an independent third party.” He further stated that only after he received Carroll’s demand
letter was he advised that the loan could not be renewed. RobertM requested up to 60 days to payoff the
39
loan with a waiver of interest fees, penalties, costs and attorneys fees. He also threatened to file a lawsuit
against United Trust and its board of directors if any action was taken against him to settle the debt and
threatened to seek disciplinary action against Carroll with the State Bar. (FDIC Exh. 85 at 3.)
3. FDIC discovers the double pledges
In June 2002, as part of an ongoing FDIC examination, FDIC Field Office Supervisor Tom
W ilkes, FDIC Examiner Gina W isdom, and OBRE Examiner W alter Parks charted out the outstanding
debts of RobertM and GeorgeM, along with the security related to them. In the course of doing so, they
discovered that CFC stock certificate #3 was pledged to two different banks. The FDIC immediately
obtained a copy of the CFC stock certificate #3 at United Trust. The OBRE immediately obtained a copy
of the CFC stock certificate #3 at Cole Taylor. Upon comparing the two, the fonts were different, the font
sizes were different, and the signatures of the purported officers were different and located differently.
(Tr. 719-720; FDIC Exh. 260.)
The FDIC and OBRE coordinated the sealing of the certificates at United Trust and Cole Taylor.
W ilkes and OBRE Examiner Venetta Grant visited CBT to review the stock register book, which was
found in a drawer of RobertM’s desk or credenza. Significantly, a third version of CFC stock certificate
#3 was also found in RobertM’s office.
According to RobertM, he learned from Attorney Benjamin Shapiro that the stock certificates had
been sealed. RobertM testified that Shapiro phoned him stating that he received a call from George Barr,
president of United Trust, indicating that the FDIC had sealed the collateral envelope. (Tr. 1568.)
RobertM testified that he began looking through his bank and loan documents and realized that there
possibly was a double pledge.
4. Analysis and Findings
The removal and prohibition authority of Section 8(e)(1)(A)(ii) extends to an institution-affiliated
party that has, directly or indirectly, “engaged or participated in any unsafe or unsound practice in
connection with any insured depository institution or business institution.” 12 U.S.C. § 1818(e)(1)(A)(ii).
40
In paragraphs 90 – 93 of the Notice of Intention to Remove and Prohibit, the FDIC essentially
alleges that:
1. Respondents engaged in unsound and unsafe banking practices whenthey pledged CFC stock certificate #3 for United Trust Bank loans while the original CFC stock certificate #3 was simultaneously pledged to Mt. Prospect and then Cole Taylor Bank;
2. Respondents received financial gain or benefit from loans secured byCFC stock certificate #3 double pledge; and
3. The double pledge of duplicate CFC stock certificate #3 when Respondents knew or should have known the original CFC stock certificate #3 wassimultaneously pledged to other financial institutions demonstrated personal dishonesty, willful or continuing disregard for safety and soundness of the financial institutions.
a. Misconduct
In order to establish that the Respondents engaged in an unsafe or unsound practice, the FDIC
must show that the Respondents acted imprudently and that their imprudent act(s) posed an abnormal risk
of loss to the financial institution involved. Seidman v.OTS, 37 F.3d 911, 927 (3rd. Cir. 1994). See also,
Johnson v. OTS, 81 F.3d 195, 204 (D.C. Cir. 1996) (the “weight of case law hold[s] that ‘[t]he unsafe or
unsound provision … refers only to practices that threaten the financial integrity of the association.’”)
(1) Imprudent acts
W hether the Respondents acted intentionally or not, the undisputed evidence shows that RobertM,
acting on behalf of himself and his brother, GeorgeM, caused a duplicate CFC stock certificate #3 to be
issued and pledged as collateral to United Trust Bank for loan #30011, while the original CFC stock
certificate #3 was pledged to and held as collateral by Mt. Prospect Bank. Ample evidence exists showing
that in doing so, RobertM and GeorgeM acted imprudently. Neither of the Respondents performed a due
diligence search in December 2000 for a stock certificate purportedly worth $1,063,200. (Jt. Stip. 17.)
GeorgeM told Tanglis to check his safe deposit box, and basically brushed-off the matter by telling him if
its not there, that he did not know where it might be found. There is no evidence that RobertM checked
the stock register book or his desk drawer, where he kept his investment files: the place where in June
41
2002, the FDIC found the stock register book and a second duplicate CFC stock certificate #3. (Tr. 723-
724.)
Instead, RobertM directed Tanglis to prepare a duplicate certificate in total disregard of the
prerequisite safeguards for issuing replacement/duplicate stock certificates contained Section 5.2 Lost
Certificates of the CFC corporate by-laws. (FDIC Exh. 8 at 13-14.) Specifically, RobertM did not ask or
require GeorgeM to provide an affidavit as to the facts and circumstances concerning the absence of the
CFC stock certificate #3; he did not seek approval from the CFC board of directors to issue a duplicate
certificate; and significantly he did not require GeorgeM to furnish the corporation with a bond as
indemnity against any claim that may be made against the corporation with respect to the duplication of
CFC stock certificate #3. Neither RobertM nor GeorgeM (a CFC director) took the precaution of having
the certificate marked as a “Duplicate,” which may have alerted United Trust Bank to inquire about the
existence of the “original” stock certificate. Further, and by acting imprudently in issuing the duplicate
CFC stock certificate #3 in the manner described above, RobertM and GeorgeM also acted imprudently
by signing the United Trust commitment pledge agreement which warranted and represented that they
“[have] not, and shall not, assign, transfer, encumber or otherwise dispose of any of [the Michaels’] rights
in the Collateral except as provided in this Agreement.” (FDIC Exh. 74.)
In addition, in August 2001, RobertM acted imprudently by having the original CFC stock
certificate #3 delivered to Cole Taylor as collateral, while the duplicate CFC stock certificate #3 was
being held as collateral by United Trust. RobertM testified that he knew in March 2001 that the duplicate
CFC stock certificate #3 was being held by United Trust. (Tr. 1562-1563.) However, it was his
understanding that United Trust had released the duplicate CFC stock certificate #3 in exchange for a
second trust on the CBT building. It was also his understanding that the duplicate certificate was given to
Cole Taylor as collateral for a $1.5 million loan to RobertM and GeorgeM that was funded at the end of
July 2001. (Tr. 1567.) Part of the proceeds of the Cole Taylor loan were used to payoff the Mount
Prospect loan, thereby prompting Mount Prospect Bank to return the original CFC stock certificates #2
42
and #3 to RobertM and GeorgeM. (Tr. 1565.) According to RobertM, at that point he realized that Mt.
Prospect had been holding the original CFC stock certificate #3 that could not be found in December
2000. (Tr. 1565.) Instead of notifying Cole Taylor that it had been given a duplicate CFC stock certificate
#3, rather than the original, RobertM testified that he had the original CFC stock certificate #3, along with
the original CFC stock certificate #2, delivered to Cole Taylor. Thus, according to RobertM’s version of
what occurred, on and after August 1, 2001, Cole Taylor held both the original and duplicate CFC stock
certificates #3.
The evidence shows, however, that RobertM’s account of what occurred is not credible. United
Trust never released duplicate CFC stock certificate #3 in exchange for the second trust on the CBT
building and therefore it was not delivered to Cole Taylor. Instead, on September 12, 2001, RobertM and
GeorgeM received loan #31555 in the amount of $700,000 from United Trust. Part of the collateral was
duplicate CFC stock certificate #3, which United Trust continued to hold, and a second trust on the CBT
building. Significantly, RobertM signed a collateral receipt which specifically described the collateral as
“certificate #3 for 35,440 shares of Citizens Financial Corporation common stock.” (FDIC Exh. 98.)
RobertM and GeorgeM also signed a collateral pledge agreement warranting and representing that the
stock certificate had not been previously pledged as collateral, which was untrue. Thus, the evidence
shows that RobertM and GeorgeM acted in total disregard of the facts known to them and the warranties
that they made.
In sum, there is ample evidence showing that the Respondents act imprudently by double pledging
CFC stock certificate #3. Accordingly, I find that the FDIC has established the first prong of the unsafe or
unsound standard.
(2) Abnormal risk of loss
The evidence also shows that the Respondents’ imprudent conduct presented an “abnormal” risk
of loss to Mount Prospect Bank, United Trust Bank, and Cole Taylor Bank.
43
On December 5, 2000, the Respondents renewed Mount Prospect loan #9001 in the amount of
$600,000 and Mount Prospect loan #9002 in the amount of $300,000, both of which were collateralized
by CFC stock certificates #2 and #3. According to the promissory notes signed by the Respondents, the
loans were no longer secured by the assignment of a note and mortgage on 2434 W . Montrose Avenue.
(FDIC Exh. 136 at 1 and FDIC Exh. 137 at 1.) W hen the Respondents double pledged CFC stock
certificate #3 to United Trust on December 20, 2000, it raised questions of authenticity, priority, and
perfection of security interests in the double pledged certificate. The resolution of these questions would
more likely than not, result in litigation, thereby presenting an abnormal risk of loss to Mount Prospect
Bank.
United Trust loan #30011 in the amount of $700,000 was secured by (1) duplicate CFC stock
certificate #3; (2) original CFC stock certificate # 20 with a book value of approximately $350,000; and
(3) a second mortgage on real estate at 6508-10 W . Devon valued at $1,200,000 with a $570,000 first
mortgage, which resulted in equity of $630,000. (FDIC Exh. 88.) The evidence shows that in September
2000 the Respondents purchased stock certificate #10, which was converted to stock certificate #20, but
they did not pay for stock certificate #20 until May 2001. On March 29, 2001, when the Respondents
executed a second mortgage on the CBT building in favor of United Trust, the property remained subject
to a first mortgage in favor of Bank One. United Trust thereafter released the Devon Avenue property.
(FDIC Exh. 91.) On May 4, 2001, United Trust released stock certificate #20. (FDIC Exh. 93.) Effectively
between December 2000 and May 2001, United Trust’s collateral amounted to a stock certificate that the
Respondents had not fully purchased, a duplicate stock certificate, and a second position on real property
with a net worth that was less than the amount of the loan. Under these circumstances, and based on the
evidence viewed as a whole, a challenge to either or both stock certificates during this time period would
have presented United Trust with an abnormal risk of loss.
From May 4, 2001, until January 2003, United Trust loan #31555 was secured by duplicate
certificate #3 and a second mortgage on the CBT building. The Respondents defaulted on the loan and a
44
foreclosure action to collect the loan was filed. The combination of these factors presented an abnormal
risk of loss to United Trust.
The Cole Taylor loan in the amount of $1.5 million was secured by 45,438 shares of CFC stock in
addition to the 35,440 shares represented by original CFC stock certificate #3. The book value of the
45,438 shares was in excess of $1,063,200. However, the evidence shows that Cole Taylor Bank officer
Bryn Perna stated in a memorandum, dated August 18, 2002, that Cole Taylor was extremely concerned
about the validity of any stock pledged to her bank and demanded additional collateral from the Michaels
until all the stock pledged could be validated. (FDIC Exh. 255.) Thus, notwithstanding the additional
shares, the evidence shows that Cole Taylor expressed an enormous concern that the double stock pledge
might create an abnormal risk of loss.
Accordingly, I find that the FDIC has shown that the Respondents’ imprudent acts presented an
abnormal risk of loss to Mount Prospect Bank, United Trust Bank and Cole Taylor Bank.
b. Effect
The undisputed evidence shows, and the Respondents concede, that they received a financial
gain/benefit from the duplication and double pledge of CFC stock certificate #3. The $700,000 loan
proceeds from United Trust loan 30011 were used by the Respondents to purchase the Harvey Hotel.
RobertM and GeorgeM also received at closing a check payable to them in the amount of $513,592 as an
“overpayment” by purchasers. The evidence shows that their company, Arafat, obtained a 5-year lease to
operate the food and beverage part of the Harvey Hotel. W ith respect to the $1.5 million Cole Taylor loan,
$450,000 was used to payoff Mount Prospect loan #9001, prompting the bank to release the original CFC
stock certificate #3. The evidence also reflects that part of the Cole Taylor loan proceeds were to be used
by the Respondents to purchase and flip the property located 1071 W . Division, Chicago, IL. (FDIC Exh.
140 at 22.) The FDIC therefore has adequately proven the second element of the §8(e) removal and
prohibition requirements.
45
c. Culpability
In order to establish culpability, the FDIC must prove that the Respondent’s misconduct involved
personal dishonesty or willful or continuing disregard for the safety or soundness of the financial
institutions (i.e., Mount Prospect Bank, United Trust Bank, or Cole Taylor Bank). Personal dishonesty can
result from a party’s failure to disclose relevant, accurate or complete information, the omission of which
reflects a lack of integrity or trustworthiness. Hutensky v. FDIC, 82 F.2d 1234, 1241 (2d Cir. 1996).
"W illful disregard" means "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) (internal
quotation marks omitted). "Continuing disregard" means "conduct which has been voluntarily engaged in
over a period of time with heedless indifference to the prospective consequences." Id. at 962 (internal
quotation marks omitted).
RobertM and GeorgeM do not deny that they signed these documents thereby simultaneously
pledging the original and duplicate CFC stock certificate #3 to different banks. Nor do they deny that the
documents which they signed contain warranties and representations stating that the collateral was not
pledged elsewhere nor would it be pledged elsewhere. Rather, the Respondents first argue that they are
not culpable because they did not read what they signed and therefore they did not realize that CFC stock
certificate #3 had been double pledged – twice. The position is implausible and untenable.
First, RobertM and GeorgeM are avid real estate investors. As Enforcement Counsel points out,
they know the difference in signing a document entitled “Promissory Note” and one entitled “Commercial
Pledge Agreement” or “Irrevocable Stock Power.” The same type of documents that they repeatedly
signed again and again as they took out and/or renewed loans with Mount Prospect Bank, United Trust
Bank, and Cole Taylor, while they doubled pledged CFC stock certificate #3 as collateral. These
documents clearly identify the collateral as two certificates of 35,440 shares each of CFC stock and in
some instances noted on the very first and/or only page of the document that the collateral was
“Certificate #3” of Citizens Financial Corporation Common Stock. (Seee.g., FDIC Exhs.133; 135 at 3; 98
46
at 1; and 154.) Thus, the evidence shows that RobertM and GeorgeM had ample notice that CFC stock
certificate #3 was pledged as collateral at two banks at the same time.
Second, it is hornbook law that an individual bears the responsibility to read what they sign, and
understand what they read. In Upton, Assignee v. Tribilcock, 91 U.S. 45, 23 L.Ed. 203 (1875), Mr. Justice
Hunt on behalf of the Supreme Court stated:
"That the defendant did not read * * * was his own fault. It will not do for a man to enter into a contract, and when called upon to respond to its obligations,to say that he did not read it when he signed it, or did not know what it contained.If this were permitted, contracts would not be worth the paper on which they are written. But such is not the law. A contractor must stand by the words of his contract; and, if he will not read what he signs, he alone is responsible for hisomission." Id. at 50.
This has been the law of the land for almost 135 years. Thus, the Respondents’ position that they are not
responsible for the warranties and representations that they made because they did not read the documents
is indefensible.
The Respondents also assert that they are not culpable because they relied on Tanglis, who acted
on their behalf to arrange the Mount Prospect loan and Zaring, who acted on their behalf to arrange the
United Trust loan. Tanglis testified that he was the “liaison,” or representative of RobertM and GeorgeM
in connection with the Mount Prospect loan and in most cases all other personal loans involving the
Respondents’ real estate and business investments. (Tr. 1257, 1326.) Zaring testified that he tried to
“facilitate credit” for RobertM and GeorgeM at United Trust and other banks. (Tr. 840.) Neither
individual testified, nor does the evidence show, that they acted for or on behalf of CBT with respect to
pledge of CFC certificate #3. In other words, the evidence viewed as a whole discloses that Tanglis and
Zaring were acting as “agents” of RobertM and GeorgeM with respect to Respondents’ personal real
estate investment financing.
It is a basic tenet of agency law that the knowledge of an agent is imputed to the principal.
National Petrochemical Co. of Iran v. The M/T Stot Sheaf, 930 F. 2d 240, 244 (2d Cir. 1991). See also,
Restatement of the Law (Second) Agency 2d §9(3)(1958)(“A person has notice of a fact if his agent has
47
knowledge of the fact, reason to know it or should know it, or has been given notification of it … .”)
Tanglis did not deny knowing in March 2000 that CFC stock certificate #3 was pledged to Mount
Prospect Bank. Rather, he testified that by December 2000 he simply had forgotten about it. His
exculpatory assertion is dubious. The evidence shows that between March 10 and December 20, 2000, the
Respondents renewed Mount Prospect loan #9001 in the amount of $600,000 twice. On July 14, 2000, the
Respondents renewed the same loan by signing a promissory note which specifically identifies
“Certificate #3” as part of the collateral at the bottom of page one. In addition, on the same date, they
signed a one page Agreement To Deliver Collateral, which clearly identifies “Certificate #3” as one of the
two stock certificates being delivered. (FDIC Exh. 133.). On December 5, 2000, the Respondent renewed
loan #9001 again by signing another promissory note which also identified “Certificate #3” as part of the
collateral at the bottom of page one. (FDIC Exh. 136.)
Tanglis was also the self-described “liaison” and long-time representative of RobertM and
GeorgeM with respect to financing all their private real estate investments. (Tr. 1253-1254; FDIC Exh.
87.) Tanglis did not testify that he lacked knowledge of the content of the loan #9001 renewal documents.
The evidence viewed as a whole supports a reasonable inference that as the Respondent’s financial liaison
Tanglis knew or should have known the content of the loan #9001 renewal documents, including the
language which clearly identifies “Certificate #3” as collateral. As an agent of the Respondents, his
knowledge of matters within the scope of his agency is imputed to the Respondents.
W ith respect to Zaring, the Respondents assert that he misled them to believe that CFC stock
certificate #3 had been released by United Trust and delivered to Cole Taylor. According to RobertM,
sometime prior to July 27, 2001, Zaring told him that he had worked out an arrangement with United
Trust to replace the collateral for loan #30011 (i.e., CFC stock certificate #3 and #20) in exchange for a
second lien on the CBT building. (Tr. 1563-1564.) RobertM testified that a mortgage giving United Trust
a second lien on the CBT building was delivered to United Trust. (Tr. 1564.) It was his belief therefore
that duplicate CFC stock certificate #3 which was being held as collateral by United Trust was released
48
and delivered to Cole Taylor as part of the collateral for the $1.5 million loan. As RobertM explained,
“[w]e didn’t give them the bank building for no reason.” (Tr. 1566.)
Contrary to RobertM’s assertions, the evidence shows that a second lien on the CBT building was
given to United in exchange for the release of a second lien on 6508-10 W . Devon Avenue and the
subsequent release of CFC stock certificate #20. (FDIC Exh. 91 and 93.) Further, the Respondents knew
or should have known that CFC stock certificate #3 had not been released because on June 1, 2001, they
signed the one-page Commercial Debt Modification Agreement which indicates that loan #30011
continued to be secured by a second lien on the CBT building and 35,000 shares of CFC stock. (FDIC
Exh. 95 and 76.) On September 12, 2001, the Respondents signed an agreement securing United Trust
loan #31555 with the same the collateral. (FDIC Exh. 97.) Finally, Zaring credibly testified that when he
obtained the release of CFC stock certificate #20, he told RobertM that although he presumed United
Trust would also release CFC stock certificate #3, Van W inkle needed to get board approval in order to
release that certificate. Thus, the evidence viewed as a whole shows that RobertM and GeorgeM knew or
should have known that duplicate CFC stock certificate #3 was being held as collateral by United Trust on
loan #30011 at the same time they pledged the original stock certificate #3 to Cole Taylor.
For all of the above reasons, I find that the Respondents’ demonstrated a lack of truthfulness in
their dealing with all three banks amounting to personal dishonesty. In addition, they voluntarily acted
over a period of time with indifference to prospective consequences of their conduct which satisfies the
“continuing disregard" element of §8(e). In this connection, it is important to note that the Respondents
are not only real estate investors. They are directors of a financial institution which means that they know
or should know from first hand experience the importance of receiving accurate and verifiable information
from a borrower about collateral that is being pledged. A point which was underscored for them in the
Cease and Desist Order previously issued against CBT. (FDIC Exh. 11 at 5.)
49
D. The Galioto Loan
1. 4205 W est Irving Park, Chicago, ILL
In 2001, the Respondents owned an office building located at 4201 W est Irving Park, Chicago,
along with several other properties in a Chicago neighborhood called “Old Irving.” Sometime in July-
August 2001, George Michael was contacted by a local real estate agent, Aubrey Schwartz, who inquired
whether he would be interested in purchasing the unoccupied building next door, 4205 W est Irving Park,
for $210,000. At first GeorgeM thought it was a hoax. As an avid real estate investor and real property
manager, he knew that real estate lots in the area alone sold for far more than $200,000. He testified that a
building selling at $210,000 was “cheap, cheap, cheap, cheap, cheap.” (Tr. 1655.)
Schwartz told GeorgeM that 4205 W est Irving was owned by Bank One, which was about to begin
foreclosure proceedings on the property. On August 3, 2001, GeorgeM signed a real estate sales contract
to purchase the property for “$210,000 Cash As-Is.” (FDIC Exh. 159 at 6.) Closing was tentatively
scheduled for August 31, 2001. Bank One nevertheless gave GeorgeM the keys and access to the property
soon after he signed the contract.
The closing was delayed several months due to complications with the foreclosure proceedings.
In the meantime, GeorgeM promptly began renovation work. All new electrical, plumbing, and drywall
was installed. The entire roof was replaced. By May 2002, an estimated $100,000 in renovation work was
completed. (Tr. 1600.) GeorgeM, through the Respondent’s company, Michael Realty, rented the newly
renovated office space to two tenants.30 (FDIC Exh. 160.)
In Spring 2002, Bank One was ready to close the transaction. Instead of an outright purchase of
the property from the owners-in-default, however, the lender Bank One would transfer right, title and
interest to the note, mortgage, and assignment of rents “to an entity determined by Robert and [George
Michael]… .” (FDIC Exh. 162.) The Respondents asked to have the note, mortgage, and guaranties
assigned to their company, R&G Properties (FDIC Exh. 165.) The closing was scheduled for May 2002.
30 Michael Realty also paid the utilities on the property during the renovation.
50
W ith the assistance of CBT President James Zaring, the Respondents sought to obtain financing
through CIB Marine Bank, in W isconsin. (Tr. 929.) Zaring advised RobertM that CIB required a down
payment of 25 percent, which the Respondents were unable to pay.31
The Respondents failed to appear on the first two scheduled closing dates. As a result, the 4205
W est Irving closing had to be rescheduled a third time for May 22, 2002. The court date for the W est
Irving foreclosure proceedings was scheduled for May 30, 2002, to present a motion to substitute R&G
Properties as a party-plaintiff and to substitute an attorney. (FDIC Exh. 165.)
On May 22, the Respondents again failed to close on 4205 W est Irving. On the same date, Bank
One’s attorney, James Crowley, Esq., sent a letter to the Respondent’s attorney, Allen Titlebaum, stating:
… based on your client’s inability to close today, as well as your client’s inability to close on two prior occasions, as well as your client’s continued attempts to amend the purchase price for the sale, please be advised that Bank One hereby withdraws its offer to assign your client, its rights under the Note, Mortgage and Guarantees, which are the subject of the captioned complaint, as well as Bank One’s rights under said Complaint. Said offer is deemed null and void and of no further force and effect without further notice.
(FDIC Exh. 166.)
The Respondents therefore were on the brink of losing the time and money they had invested in 4205
W est Irving.
2. John Galioto’s Vogay Property
John Galioto managed a family owned business called “All-Stars,” a gentleman’s club in the
Chicago suburbs. He also owned three real estate properties: a house in Naperville, Illinois; a house in
Rosemont, Illinois; and a debt free house on Vogay Lane, in Northbrook, Illinois. A business
acquaintance of RobertM, Galioto and All-Stars had several deposit accounts with CB&T. Galioto also
had a personal relationship with RobertM and his secretary Anna Les. They socialized with Galioto, met
his family members, and were considered by Galioto to be his trusted friends. (Tr. 648-649, 1134-1135,
31 As discussed above, the evidence shows that at the same time, they defaulted on United Trust loan 31555 in the amount of $700,000. United Trust threatened to pursue litigation which prompted the Respondents to ask for a 4-5 week grace period to satisfy the United Trust loan.
51
1583.) According to Galioto’s unrebutted testimony, in early 2002, RobertM told him that he needed to
raise capital for the Bank. He wanted to know if Galioto had any money to deposit. Galioto told him that
he did not have any money, but he did have a piece of property on Vogay Lane which was unencumbered,
if that would help. (Tr. 528.)
A short time later, Galioto agreed to manage the food and beverage operation at the Harvey
Hospitality Hotel for the Respondents.32 W ith RobertM’s consent, Galioto planned to convert the lounge
area into a gentleman’s club called “The Flamingo W orld Class Cabaret.” (Tr. 652.) Galioto began
extensive renovations in April 2002. The renovations took about five months to complete at a cost of
approximately $700,000.
After Galioto began renovating the Harvey Hotel lounge, he sought to refinance the Naperville and
Rosemont properties with the Bank. In late May 2002, RobertM’s secretary, Anna Les asked him to come
to the Bank to sign some loan documents. Galioto testified that he assumed that the documents pertained
to the refinancing of these properties. (Tr. 532-533.)
The loan documents that Galioto was asked to sign on May 24, 2002, however, did not pertain to
the refinancing of the Naperville or Rosemont properties. Rather, Galioto signed a promissory note for
$216,000 for a CBT line of credit loan on his Vogay Lane property, a mortgage on Vogay Lane, an
assignment of rents for that property, and an agreement to provide insurance. (FDIC Exhs. 170-172, Resp.
Exh. 40.) Galioto testified that he did not read the loan documents, that some of the documents he signed
were blank, and with respect to other documents, he was given only a signature page to sign. (Tr. 532-
545.) He conceded that he foolishly signed a number of documents without knowing what he was signing.
Anna Les testified that she personally reviewed the loan documents with Galioto and that he
signed each document in her presence. (Tr. 1145-1147.) Her testimony is suspect for several reasons.
32 As explained above, Arafat Company, which was owned by the Respondents, had leased the food and beverage operation from Harvey Hospitality, LLC. RobertM earlier had asked Galioto if he was interested in taking over the food and beverage operation.
52
First, a review of her testimony shows that she spoke in general terms of what she “normally” does when
reviewing loan documents with a customer, rather than what she specifically did with Galioto. For
example, with respect to the promissory note, Les stated “W ell, I always start with page 1 and I would
definitely outline the loan amounts, the loan date … I would always go over that.” (Tr. 1147-48.)
Prompted by Respondent’s counsel to explain what she specifically did with respect to FDIC Exh. 170,
she continued stating, “This one I would have outlined, identified the principal, the loan date, … .” (Tr.
1148.) W ith respect to the assignment of rents, she likewise testified, “On this document, I would start on
page 1 … I would highlight that this is an assignment of rents between the grantor in this case, which is
John Galioto, and the bank. I would point out the legal description of the subject property. I always point
out the property address … .” (Tr. 1150.)
In addition, the date of certain documents, along with the date that Galioto signed those
documents, does not correspond with the date the document was notarized by Les. For example, the
Assignment of Rents, dated May 24, 2002, which was signed by Galioto on the same date, is notarized by
Les on May 25, 2002, at which time she nevertheless represented that “On this day before me, the
undersigned Notary Public, personally appeared John W. Galioto … .” (FDIC 172 at 8.) The same is true
of the Mortgage, dated and signed by Galioto on May 24, but notarized by Les on May 25, 2002.33 Thus,
the lack of detail and attention with respect to the notarization of these legal documents raises serious
questions as to the accuracy of Les’ testimony about the manner and detail in which she reviewed the
Vogay loan documents with Galioto.
3. The Respondents use Galioto’s Vogay credit line
Les further testified that at least one of the documents Galioto signed was a blank letterhead
template, a written authorization signed by the customer, which the Bank uses in conjunction with credit
line loans to facilitate an expeditious draw against the credit line at the customer’s request. (Tr. 1153-54,
33 The evidence shows that May 24, 2002, was the Friday of the Memorial Day weekend. May 25, 2002, was the Saturday of the Memorial Day weekend. May 28, 2002, the closing date for Vogay Lane was the Tuesday after Memorial Day. The “drop dead” closing date for 4205 W est Irving was May 30, 2002. The timing and sequence of these transactions supports a reasonable inference that the W est Irving closing was dependent on the Vogay closing.
53
1171.) She had a few of these blank authorizations signed by Galioto in her desk file. (Tr. 1172.) Les’
testimony lends credence to Galioto’s assertion that he signed documents that were blank.
According to Les, on Tuesday, May 28, 2002, Ticor Title faxed a copy of the RESPA settlement
sheet to her for the Vogay Lane closing and that on the same date, Galioto signed the document in her
presence. (Tr. 1157; FDIC Exh. 173.) Also, on May 28, Les took a blank authorization signed by Galioto,
filled in the date, the amount of $210,000, and checked a box indicating that the money should be used to
purchase a “Citizens Bank Cashiers Check.” (FDIC Exh. 174.) Les admitted that she did not personally
speak to Galioto, that he did not tell her that he wanted to draw on the credit line, and that he did not
authorize her to do so. (Tr. 1173.) Rather, she testified that Bank President James Zaring told her “we
need to draw on this check now. John called me, I know you have the authorizations.” (Tr. 1173.)
Galioto testified that he did not apply for a CBT loan secured by Vogay Lane, that he did not know
that there was a credit line on the Vogay Lane property, and that he did not authorize a draw of $210,000
on that credit line. Nor did he receive any proceeds of the $210,000 CBT loan. There is no Vogay loan
application indicating that he applied for a loan, and Les conceded that Galioto did not tell her to draw
$210,000 against the Vogay credit line. Nor are there CBT checks made payable to Galioto. (Tr. 541.)
Instead, the evidence shows that after Les filled in the authorization form, a cashier’s check
authorization was completed, and a CBT cashier’s check was drawn against the Vogay credit line in the
amount of $210,000, made payable to “Bank One.” (Tr. 1175; FDIC Exh. 175 and 176.) On the same day,
May 28, another CBT cashier’s check drawn upon an R&G Properties account was made payable to
“Bank One” in the amount of $6,079.33. Both cashiers checks were sent overnight delivery to Bank One
to purchase the note, mortgage and guaranties on 4205 W est Irving Park for the Respondents personal
benefit. (FDIC Exh. 176 at 3.) The promissory note, mortgage, and guaranties on 4205 W est Irving Park
were assigned to R&G Properties. A few days later, on June 3, 2002, the Circuit Court of Cook County,
Illinois, entered an Order substituting R & G Properties for Bank One in the foreclosure proceedings.
54
The Respondents both testified that they were planning a joint venture with Galioto to open a steak
restaurant and bar at 4205 W est Irving Park. (Tr. 1580-1589, 1668.) There is no documentary evidence to
corroborate this testimony. The evidence shows that the extensive renovations made to the property in
May 2002 were not for a restaurant or a bar. Even though the undisputed evidence shows that the
Respondents, through R & G Properties, became the owners of 4205 W est Irving Park on May 28, 2002,
they incredulously testified that Galioto bought the property on that date, and that is why Galioto had a
cashier’s check in the amount of $210,000 made payable to Bank One. (Tr. 1668-1669.)
Galioto denied that he ever owned 4205 W est Irving Park. GeorgeM admitted that Galioto was not
involved in managing the property, and that Galioto received none of the rent money, which GeorgeM
collected and deposited in the R & G Property account. (Tr. 1594-1595, 1671-1672, 1699-1701.) Thus,
the testimonies of the Respondents that Galioto purchased 4205 W est Irving Park in late May 2002 are
contradicted by the credible evidence viewed as a whole.
Instead, Galioto testified that when he decided to sell his Vogay Lane property in the August 2003,
his attorney did a title search and found the CBT mortgage. (Tr. 604.) Galioto phoned RobertM to find out
why there was a mortgage on the Vogay property. According to Galioto’s unrebutted testimony, RobertM
told him that he needed the money and apologized for not telling Galioto that he borrowed against
Galioto’s property. (Tr. 604.) Galioto told RobertM that he was planning to sell Vogay to buy another
house and therefore the Respondents had to payoff the Vogay loan. According to Galioto, RobertM
promised to payoff the Vogay loan in 4-8 weeks. RobertM did not dispute or deny any aspect of this
testimony by Galioto.
Lending further credence to Galioto’s testimony that he did not know what he was signing and that
he was unaware that he signed loan documents encumbering the Vogay property is the absence of any
CBT Board or Loan Committee minutes referencing and/or approving the Vogay loan. The evidence
shows that RobertM is listed as the loan officer on a CBT Loan Approval form, but there is no
corresponding loan application or supporting documentation and there is no record that the loan was
55
submitted and approved by either the Loan Committee or the CBT Board. (See FDIC Exh. 3 at 53-61;
FDIC Exh. 274.) Although there is a loan approval form dated, April 30, 2002, which is signed by the
Bank Board members, it states that the appraised value of the property is based on an appraisal conducted
two days later on May 2, 2002. The conflicting dates, and the lack of corroborating documentation,
supports a reasonable inference that the loan approval form was back dated. It also raises serious
questions about when the Bank Board considered the loan and what they were told.
Thus, I find that the credible evidence viewed as a whole shows that between May 24-28, 2002,
the Respondents took a credit line loan against Galioto’s Vogay Lane property without his knowledge or
consent, drew a cashier’s check in the amount of $210,000 against the credit line, made the check payable
to “Bank One” without Galioto’s authorization, and used the money to purchase the note, mortgage and
guaranties on 4205 W est Irving Road for their personal benefit.
4. The Respondents transfer 4205 W est Irving Park to Galioto
Between June 1 – October 1, 2002, the Respondents held the note, mortgage, and guaranties on
4205 W est Irving Park. They managed the property, paid the utilities, collected the rents, and deposited
the rent money into an R & G Properties account. Galioto had no involvement with 4205 W est Irving and
he credibly denied even visiting the property during this time period.
Instead, the evidence shows that Galioto was focused on renovating the Harvey Hotel lounge. He
spent most of his time and large sums of money getting the new club ready to open by October 1. (Tr.
551, 639, 1596.) At the same time, he developed a close personal friendship with RobertM, who testified
that Galioto gradually imposed on that friendship by asking for assistance in getting repair work done at
the Rosemont property and helping Galioto’s father obtain a liquor license for a restaurant he owned that
was floundering. (Tr. 1589-1590.) According to GeorgeM, Galioto owed the Respondents increasing
amounts of money for a lot of different things that were done for him. (Tr. 1674, 1597.)
According to RobertM, by October 1, the relationship between Galioto and RobertM had soured.
As RobertM testified, Galioto was experiencing tremendous personal problems, there was friction in his
56
family over issues at All-Stars, and he was pressing to get the Flamingo opened on time. (Tr. 1595-1596.)
RobertM testified Galioto “had lost any interest whatsoever in now doing Irving Park … and we had lost
interest in wanting to do anything with him.” (Tr. 1597.) The last straw came on October 4, when the
Flamingo opened for five hours and closed because the City of Harvey, Illinois, would not give Galioto a
license for an adult entertainment facility. (Tr. 650, 1597.) RobertM testified that at that point Galioto
“started the blame game, and I was done with him.” (Tr. 1597.) RobertM further stated that from that
point his efforts were concentrated on undoing the joint venture relationship. (Tr. 1598.)
RobertM’s testimony on this point is inconsistent with and most importantly is contradicted by the
Respondents’ conduct on October 1 and immediately thereafter. Although Galioto stated that “there were
many, many things going on in his life” at that point in time (Tr. 649), his unrebutted testimony is that on
October 1, in the midst of the dry run opening of the Flamingo, RobertM unexpectedly showed up at the
new club asking Galioto to sign a sublease on behalf of Flamingo Corporation with Arafat Corporation for
the Harvey Hospitality lounge area, as well as some other documents that RobertM told him needed to be
signed. (Tr. 552; Resp. Exh. 38.)34 In addition to the sublease, the evidence shows that the following
documents dated, October 1, 2002, pertaining to 4205 W est Irving Park were also signed by Galioto:
Assignment of Mortgage; Assignment of Guaranty; and Assignment of Note. (FDIC Exh. 186-189.) Thus,
contrary to RobertM’s assertions that he was “done” with Galioto by October 1 and that he wanted to
undo any joint venture relationship, the evidence shows that on or about October 1 the Respondents began
to formalize a business relationship with Galioto.35
The evidence also shows that on October 22, 2002, R & G Properties, by its attorney, Gary E.
Dienstag, Esquire, moved to substitute Galioto as plaintiff for R & G Properties in the foreclosure
proceeding. (FDIC Exh. 217.) In that motion, the Respondents asserted that by virtue of the assignments
of the mortgage, note and guaranties on October 1, “John Galioto, has succeeded to own the right title and
34 Resp. Exh. 38 is an undated Lease Rider to “lease entered into between Flamingo Corporation (Lessee) and Arafat Corporation (Lessor); dated 1 OCT 2002.” 35
Galioto testified that while he signed the above-referenced documents, he did not read them and instead simply trusted his
friend’s representation that signing the papers was merely a formality. (Tr. 552-553.) Galioto obviously did not perceive a “strain on the friendship” that RobertM testified existed.
57
interest and the said note mortgage and guarantees from Bank One National Association and should
properly be the party Plaintiff in this cause.” (FDIC Exh. 217 at 1.)
Also on October 22, Attorney Dienstag, on behalf of Galioto, moved for entry of a default and
consent judgment, which was granted on November 21, 2002.36 (FDIC Exh. 191-192.) The evidence
shows that the Respondents paid Attorney Dienstag’s fees for the foreclosure proceeding. (Tr. 1701.)
After the property was transferred to Galioto, R & G Properties continued to manage the property, pay the
utilities, obtain and pay for real property insurance, collect the rents and deposit the rents in an R & G
Properties account. (Tr. 1671-1672; FDIC Exh. 218, 219, 231-232.)
Thus, despite RobertM’s assertions that his relationship with Galioto had deteriorated and that he
was done with Galioto by October 1, the credible evidence shows that the Respondents assigned the note,
mortgage and guaranties to 4205 W est Irving Park to Galioto on October 1, substituted him as the party
plaintiff in the foreclosure proceeding and paid their attorney to obtain a default/consent judgment on
behalf of Galioto. In addition, the evidence shows that the Respondents continued to maintain dominium
and control over the 4205 W est Irving Park, managing it as their own, without any involvement
whatsoever from Galioto. Although GeorgeM testified that Galioto authorized him to manage the property
for him, the evidence shows that Galioto did not have a written agreement with R & G Properties and that
he denied that he ever verbally authorized GeorgeM to act as his agent or on his behalf.37 (Tr. 576-579; Jt.
Exh. 1, Stip. 182.) It is simply implausible that Galioto would ask or GeorgeM would agree to be
Galioto’s agent at a time, when according to RobertM, the Respondents were trying to sever any business
relationship with Galioto.
5. The Respondents buy back 4205 W est Irving at a higher price
According to Galioto, on the morning of Sunday, July 6, 2003, RobertM stopped by his house with
a real estate sales contract. Galioto testified that RobertM told him that he was in a bidding war on a piece
36 Galioto testified that he did not know, never met, and never retained Attorney Dienstag to represent him. (Tr. 570.) His testimony on this point is unrebutted and is therefore credited. 37 GeorgeM did not explain when, where and why Galioto asked him to act as his agent.
58
of property. He asked Galioto to sign the contract as a “shill” or a fake potential buyer. (Tr. 596, 598;
FDIC Exh. 193.) Galioto could not recall whether the sales contract was completely filled in. He testified
that he signed the contract as a favor to RobertM without reading it.38
The real estate sales contract that Galioto signed was for 4205 W est Irving Park. Galioto was the
seller and the Respondents were the purchasers. Galioto stated that he was unaware that he owned 4205
W est Irving Park. He also had no discussions with the Respondents about the purchase price of $400,000.
RobertM testified that he was not present when Galioto signed the contract. (Tr. 1620.) He stated
that he told GeorgeM to make a contract for $400,000 and that he did not know how the amount of
$40,000 earnest money deposit was decided. RobertM did not explain why he and GeorgeM wanted to
buy back a property, which they transferred to Galioto 10 months earlier, for almost double the amount
for which it was originally purchased.39
GeorgeM testified that RobertM told him to buy 4205 W est Irving Park from Galioto for
$400,000. (Tr. 1673.) He stated that he did not talk to Galioto. He did not explain who presented the sales
contract to Galioto for signature. (Tr. 1673-1674.) GeorgeM stated that he calculated the $40,000 earnest
money deposit based on 10 percent of the sales price, which is typical. (Tr. 1676.) He further testified that
the $40,000 was never paid to Galioto or anyone else because the Respondents believed that Galioto owed
them money for renovating the property. (Tr. 1676-1677.)
GeorgeM also testified that the Respondents obtained a loan from First Commercial Bank to
purchase 4205 W est Irving without having to fill out a loan application. (Tr. 1674.) He stated that based
on his long standing relationship with First Commercial, “if I walked through the door and asked for the
money, it was there. I didn’t have to go to the door. I just called.” (Tr. 1675.)
According to GeorgeM, Attorney John Klytta represented the Respondents at closing and Attorney
Nick Duric, a director of CBT Bank, was going to represent Galioto, but that never occurred. GeorgeM
38 Galioto testified that the date “7-9-03” which appears above his signature is not his handwriting and was added by someone else. (Tr. 597.) 39 Despite RobertM’s assertion that he was “done with him” on October 1, the evidence shows that 10 months later RobertM was still involved with Galioto and that Galioto’s borrowing relationship with CBT, which preceded and continued through the Vogay loan and W est Irving transaction, also endured the so-called “deterioration” of their rapport. (See Resp. Exh. 1.)
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testified that on the day of closing, Klytta phoned him wanting know where Galioto and Duric were. (Tr.
1678.) Although Klytta and Duric had offices in the same building owned by the Respondents, Duric and
Galioto did not show up for the closing. GeorgeM testified that he phoned Galioto placing him on a three-
way conference call with Klytta at which time Galioto told GeorgeM to sign his name to the Deed, which
he did.40 (Tr. 1679.) GeorgeM stated that Klytta had left the Deed with GeorgeM, but he did not explain
why Klytta, the closing attorney, did so.
Galioto testified that he did not know either Klytta or Duric. He claimed that neither attorney ever
represented him, that he had no conversations with them about buying or selling 4205 W est Irving Park,
and that he never authorized anyone to sign his name on the deed or the closing documents. (Tr. 601, 617,
618, 623-624.) He further testified that someone forged his signature on the HUD-1 and other closing
documents. (Tr. 607-617; FDIC Exhs. 198, 202-204, 225.)
The Respondents did not call Klytta or Duric to corroborate GeorgeM’s testimony. W hen a party
fails to call a witness who may reasonably be assumed to be favorably disposed to the party, an adverse
inference may be drawn regarding any factual question on which the witness is likely to have knowledge.
(2 W igmore, Evidence, § 272 (3d ed. 1984); U.A.W. v NLRB (Gyrodyne Co.), 459 F.2d 1329, 1338 (D.C.
Cir. 1972). The testimonies of Klytta and Duric presumably would have been favorably to the
Respondents if they had been called as witnesses. Because the Respondents failed to call either attorney as
a witness, I draw an adverse inference that they would not have corroborated GeorgeM’s testimony
regarding their respective representation roles, the authorization to sign the warranty deed, and the
preparation and signing of the settlement documents. I therefore credit Galioto’s testimony on these
points.
GeorgeM signed Galioto’s name to the deed. Klytta represented both the Respondents and Galioto
at the closing. In the preparing the settlement papers, Klytta increased the earnest money deposit from
40 Although GeorgeM admitted that he signed Galioto’s name to the Deed, the Notary certified that Galioto personally appeared before her and signed the document. (FDIC Exh. 204 at 2.) GeorgeM could not recall if the warranty deed was notarized in his presence. (Tr. 1701.)
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$40,000 to $100,000 so that Galioto would not receive more than $214,000 out of the closing. (FDIC Exh.
198.) First Commercial Bank issued check #680570 in the amount of $315,885.00 to Ticor Title Insurance
Company. Ticor Title issued check #9552073522 in the amount of $214,000.00 to John Galioto; check
#9552073523 in the amount of $66,994.31 to R & G Properties; and check #9552073521 in the amount of
$15,396.42 to George Michael. (FDIC Exh. 200.)
According to Galioto, the check he received from Ticor Title referenced “4205 W est Irving Park,”
instead of “Vogay Lane.” He called RobertM to inquire about the address and did not get a satisfactory
explanation. W hen his attorney, Ron Rosenblum called Ticor Title requesting a copy of the closing
papers, Ticor Title refused to produce them. (Tr. 605-606.) Galioto sued Ticor Title for the documents.
Afterwards, he called RobertM seeking an explanation, the conversation became heated, and their
relationship deteriorated.
6. Analysis and Findings
a. The Vogay Loan
Section 215.4(b)(1) of the Regulation O provides that:
No member bank may extend credit … to any insider of the bank or insider of its affiliates in an amount that, when aggregated with the amount of all other extensions of credit to that person and to all related interests of that person, exceeds the higher of $25,000 or 5 percent of the member bank’s unimpaired capital and unimpaired surplus, unless: (i) The extension of credit has been approved in advance by a majority of the entire board of directors of that bank; and (ii) The interested party has abstained from participating directly or indirectly in the voting.
Section 215.2(n) defines a “[r]elated interest” as “a company that is controlled by that person.”41 Under §
215.3(f), “[a]n extension of credit is considered made to an insider to the extent that the proceeds are
transferred to the insider or are used for the tangible economic benefit of the insider.”
41 Section 215.2(c)(1) defines “[c]ontrol of a company or bank” to mean “that a person directly or indirectly, or acting through or in concert with one or more persons[,] … [h]as the power to exercise a controlling influence over the management or policies of the company or bank.”
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In the present case, while the Respondents were directors of CBT, the Bank gave Galioto a
$216,000 credit line (a loan) secured by his Vogay Lane property, of which $214,000 in a cashier’s check
was drawn against the credit line without Galioto’s knowledge or authorization. The cashier’s check was
made payable to “Bank One” for the benefit of R & G Properties, an entity owned and controlled by the
Respondents. There is no evidence that the Bank’s directors were informed that $214,000 of the loan
proceeds were being used to enable R & G Properties to purchase the rights and entitlements to 4205 W est
Irving Park and/or that the Bank’s directors approved the loan for its intended purpose. The Respondents’
failure to obtain prior approval of the loan for its intended purpose violated Regulation O.42
In addition, the evidence shows that the Respondents breached their duties of loyalty and candor
that they owed to the Bank as directors. RobertM served as the loan officer for the Vogay Lane loan and
somehow circumvented the Bank’s loan approval committee by presenting the loan directly to the Bank
board. There are no minutes showing that the Vogay loan was presented to the Bank loan committee.
There are no minutes of a Board meeting showing that the details of Vogay Lane loan were ever discussed
with the Board or that the Board was told that the proceeds would be used for R & G Properties to
purchase 4205 W est Irving. Instead, the loan approval form reflects that the Respondents voted to approve
the loan, that Zaring, who directed Les to draw against the credit line and issue a cashier’s check without
Galioto’s authorization, also voted to approve the loan. The Respondents failure to properly process and
approve the loan contravenes the Bank’s loan processing procedures in violation of their duty of loyalty,
as well as §215.4(b)(1). In addition, by involving Zaring, a Bank officer and director, in a plan to place
their own personal interests above that of the Bank, the Respondents further violated their duty of loyalty.
Finally, by failing to fully disclose to the Board the fact that the proceeds of the Vogay loan were going to
be used to enable R & G Properties to acquire ownership rights and entitlements to 4205 W est Irving, the
Respondents violated their duty of candor.
42 The Respondents’ assertion that Galioto used the loan proceeds himself to purchase 4205 W est Irving as part of a “joint venture” is incredulous. There is no documentation to support that assertion. The extensive renovations to that property which were largely completed by May 2002, did not accommodate or comport with a plan to open a bar/restaurant, and Galioto credibly denied that he was involved in such a joint venture with the Respondents at that location. In any event, a joint venturewould still be a “related interest” under the control of the Respondents and subject to Regulation O.
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Based on all of the above, I find, and the evidence shows, that the Respondents violated
Regulation O, breached their fiduciary duties and in addition engaged in unsafe or unsound practices in
contravention of generally accepted standards of banking operations.
For all of these reasons, and based on the evidence viewed as a whole, I find that the elements for
a §1818(e) removal and prohibition order have been proven. Accordingly, I recommend that an order be
issued removing the Respondent, Robert Michael, as an executive officer and director of the Bank and
George Michael, as a director of the Bank, and prohibiting the participation of Respondents, without prior
regulatory approval, in any financial institution or organization described in 12 U.S.C. § 1818(e)(7)(A).
b. The First Commercial Bank loan
Under 18 U.S.C. §1014, it is unlawful for any person knowingly to make any false statements or
reports in connection with, among other things, a purchase agreement with the intent to influence in any
way any institution the accounts of which are insured by the FDIC in order to obtain a loan. The FDIC
argues, and the evidence shows, that in connection with the sales agreement for 4205 W est Irving Park,
there was no negotiation of the purchase price; there was no payment of the earnest money listed in the
sales contract; the stated (but unpaid) earnest money was arbitrarily increased to $100,000 at closing; John
Galioto did not appear for the sale; and George Michael signed John Galioto's name to the warranty deed
without authorization. In short, the FDIC argues, and the evidence shows, that the sales contract for 4205
W est Irving was a sham which the Respondents used to influence First Commercial Bank for purposes of
obtaining a loan in violation of 18 U.S.C. §1014.
However, the FDIC cannot rely on this violation of law to satisfy the first requirement of
12 U.S.C. § 1818(e)(1) because a violation of law is not alleged in the Notice of Charges. Instead,
paragraph 101 of the Notice alleges:
101. Respondents further engaged in an unsafe and unsound banking practice when, in the course of obtaining a $320,000 loan from First
Commercial Bank, they claimed that the purchase price was $400,000 when, in fact, the purchase price for the Irving Park Property was approximately $216,000. (Emphasis added.)
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For this reason, and because the issue was not fully and fairly litigated in this context during the
hearing, the FDIC cannot now assert a violation premised on a violation of law.
On the other hand, FDIC has shown that the Respondents engaged in an unsafe or unsound
practice, by showing that the Respondents’ conduct was contrary to generally accepted standards of
prudent banking operations and might result in abnormal risk of loss to First Commercial Bank. In this
connection, the evidence shows that the Respondents falsely represented the 4205 W est Irving Park sales
agreement to be a bona fide contract in order induce FCB to make a loan. The fact that such conduct is
prohibited by 18 U.S.C. §1014 is sufficient to show that their actions contravened generally accepted
standards of prudent banking operations. That evidence, coupled with the fact that the Respondents were
unable to close on 4205 W est Irving Park at least three times in May 2002 and had also defaulted on
United Trust loan #31555, sufficiently establishes that their conduct might result in abnormal risk of loss
to FCB. In addition, the evidence shows that by their personal dishonesty, the Respondents personally
benefited from the FCB loan.
For all of these reasons, and based on the evidence viewed as a whole, I find that the elements for
a §1818(e) removal and prohibition order have been proven. Accordingly, I recommend that an order be
issued removing the Respondents as executive officer and directors of the Bank and prohibiting the
participation of Respondents, without prior regulatory approval, in any financial institution or
organization described in 12 U.S.C. § 1818(e)(7)(A).
E. The Civil Money Penalty
The Notice alleges, and the FDIC argues, that the Respondents’ conduct and actions with respect
to the Harvey Hotel transaction and Galioto loan as discussed above warrants the assessment of a “first
tier” civil money penalty (CMP) and a “second tier” CMP in the amount of $100,000 for Robert Michael
and $75,000 for George Michael. 12 U.S.C. § 1818(i)(2)(A) and (B).
A first tier CMP remedy requires proof that the Respondents violated any law or regulation. A
second tier CMP requires proof of two elements: first, "misconduct," i.e., either a violation of any law or
64
regulation or final order, or breach of a fiduciary duty, or recklessly engaging in an unsafe or unsound
practice in connection with the Bank, 12 U.S.C. §1818(i)(2)(B)(i); and second, "effects," i.e., either a
pattern of misconduct, or conduct which caused or was likely to cause more than minimal loss to the
institution, or which resulted in a gain or benefit to the Respondent. 12 U.S.C. §1818(i)(2)(B)(ii). As
discussed above, the statutory requirements for assessing both a first and second tier CMP have been
proven.
W ith respect to the Harvey Hospitality loan, the evidence shows that the Respondents violated
Regulation O, breached their fiduciary duties, and engaged in reckless unsafe or unsound practices in that
the Respondents: (1) failed to make full disclosure to the entire Bank board of directors concerning the
Harvey Hospitality loan; (2) directly participated in the approval of the loan; and (3) put themselves, as
well as Bank President James Zaring, Bank Investment Director Nicholas Tanglis, and Bank counsel
Shapiro, on both sides of the Harvey Hospitality loan transaction. In addition, the Harvey Hospitality loan
was not approved by a majority of the entire board of directors: none of the minutes of the directors’
meetings disclose when the loan was approved and who was present when a vote was taken. Also, Robert
Michael, as chief executive officer, knowingly received an extension of credit in an amount exceeding
$100,000.
W ith respect to the Galioto loan proceeds, the evidence likewise shows that the Respondents: (1)
failed to make full disclosure to the entire CBT Bank board of directors concerning their involvement and
use of the Vogay loan proceeds; and (2) directly participated in the approval of the Vogay loan.
W ith respect to the First Commercial Bank loan, the evidence shows that the Respondents engaged
in an unsafe or sound practice which was contrary to generally accepted standards of prudent banking
operations and resulting in an abnormal risk of loss to First Commercial Bank.
The evidence also shows that in all three instances the Respondents received a tangible economic
benefit and that their conduct was part of a pattern of misconduct by participating in the approval of loans
for which they received a benefit, and by failing to fully disclose to the majority of the entire board
65
information material to those loans. W ith respect to the Harvey Hospitality and Vogay loans, the
Respondents failed to ensure that complete and detailed minutes of all Bank Board transactions were kept
in accordance with a prior cease and desist order.
Having determined that the assessment of a CMP is warranted in this case, the issue becomes the
dollar amount of a penalty that should be assessed. Section 8(i)(2)(A) states that an institution-affiliated
party who violates a law or regulation shall pay a First Tier penalty of not more than $5,000 per day for
each day the violation continues. According to the FDIC calculations, the Harvey Hospitality loan was on
the Bank’s books for no less than 553 days resulting in a possible penalty of $2,765,000. It further asserts
that the Vogay Lane loan was on the Bank’s books for 450 days resulting in a possible penalty of
$2,250,000. Section 8(i)(2)(B) states that an institution-affiliated party who violated subpart (A) of this
section; recklessly engages in an unsafe or unsound practice or breaches any fiduciary duty which …
results in a benefit to such party shall pay a Second Tier penalty of not more than $25,000 for each day
during which the violation, practice or breach continues. Under this provision alone, the Respondents’
possible CMP could amount to millions of dollars. In the Notice of Charges, and in its posthearing brief,
the FDIC seek a CMP of $100,000 against Robert Michael and $75,000 against George Michael.
In determining the amount of CMP that should be assessed, certain mitigating factors found at 12
U.S.C. §1818(i)(2)(G) and 12 C.F.R. §308.132(b) must be considered, to wit: (1) the size of Respondent’s
financial resources; (2) the good faith of the Respondent; (3) the gravity of the violations; (4) the history
of previous violations; and (5) such other matters as justice may require. In addition, consideration must
be given to the 13-factor analysis found in the Interagency Policy Regarding the Assessment of Civil
Money Penalties by the Federal Financial Institutions Regulatory Agencies, 45 Fed. Reg. 59,423 (Sept. 9,
1980) (“Interagency Policy”).
The evidence shows that the Respondents have substantial financial resources at their disposal
such as deposit accounts, real estate properties, bars and restaurants, and accessibility to available credit.
For example, George Michael boasted that his long-standing relationship with First Commercial Bank
66
entitled him to immediate access to funds, “if I walked through the door and asked for the money, it was
there. I didn’t have to go to the door. I just called.” (Tr. 1675.) The Respondents’ lack of good faith is
reflected by their failure to comply with Regulation O, after being counseled by their own consultants
about following proper procedures when extending credit to an insider, by their persistent use and
involvement of Bank management and personnel in carrying out their personal business investments, and
by the many inconsistencies in their hearing testimonies. W ith respect to the gravity of the violations, the
failure of the Respondents, as directors of the Bank, to make full disclosure to the entire Bank board of
directors and to recuse themselves from discussions and approval of the loan is a departure from generally
accepted standards of banking operations, which exposed the Bank to the possibility of abnormal risk of
loss because their conduct impaired the decision-making process of the board of directors. See Neil M.
Bush,OTS AP 91-16, 1991 OTS DD LEXIS 2 (April 18, 1991).
Regarding a history of previous violations, the evidence shows that the Bank was cited for
violating Regulation O, and was admonished for not keeping complete and accurate Board minutes. The
Respondents hired two consultants, Attorney Benjamin Shapiro and Consultant Joe Gunnell, who testified
that they conducted extensive training in these areas, which the Respondents chose to ignore in order to
achieve their personal investment goals.
Another matter the consideration of which justice requires is the Respondents’ penchant for using
Bank officers and management to carry out and coordinate their personal investment business placing
those individuals on both sides of a transaction with the Bank in breach of their own fiduciary duties.
Zaring and Tanglis were intimately involved in putting together the Harvey Hospitality loan transaction
and they were at the center of the double stock pledge. In addition, and according to the unrebutted
evidence, Zaring told Les to draw down $214,000 from the Galioto/Vogay credit line loan and to make a
cashier’s check for that amount payable to “Bank One” for the benefit of the Respondents. Zaring and
Tanglis held key position of trust in the Bank which the Respondents took advantage of by directing them
to carry out tasks which served the Respondents’ personal investment interests.
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Turning to the 13 mitigating factors of the Interagency Policy, factors 1 and 2 are implicated
because the evidence shows that the Respondents intentionally violated Regulation O and breached their
fiduciary duties with a disregard of the consequences to the Bank. The duration of the violations were
long term. W ith respect to factor 3, there is no evidence that the Respondents were notified of the
violations prior to the filing of the notice. W ith respect to factors 4 and 5, the evidence discloses the
Respondents were less than forthright with the FDIC about its transactions and attempted to conceal those
transactions. As noted above, the violations posed a threat of loss to the Bank by failing to disclose fully
all the information to the Bank board necessary for it to make prudent banking determinations. The degree
of harm to the public confidence was significant because it reflects the Respondents’ willingness to
disregard internal Bank rules and policies in order for them to personally benefit. The evidence shows that
the Respondents did receive a benefit from these violations. Thus, factors 6 and 7 are implicated. W ith
respect to factors 8, 9, 10, 11 and 13 there is no evidence of a history of previous violations similar to the
actions under consideration, but the Bank was issued a cease and desist order in 2000 which pointed out
that the minutes of the Board meetings required more detailed explanation of various board business. The
purpose of the cease and desist order was, in part, to prevent the violation of Regulation O that occurred in
this case. Finally, with respect to factor 13, the evidence viewed as a whole shows that the Respondents
have a tendency to violate regulation, engage in unsafe or unsound practices, and breach their fiduciary
duties.
Based on all of the foregoing, I conclude that the amount of $100,000 is an appropriate civil
money penalty to be assessed against Respondent, Robert Michael, and the amount of $75,000 is an
appropriate civil money penalty to be assessed against Respondent, George Michael.
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Conclusions of Law
A. Jurisdiction
1. The Bank is, and at all times pertinent to the allegations in this proceeding was, an insured
state nonmember bank, as that term is defined in section 3(e)(2) of the Federal Deposit
Insurance Act (“Act”), 12 U.S.C. §1813(e)(2).
2. The Bank is, and at all times pertinent to the allegations in this proceeding was, subject to the
provisions of the Act set forth in 12 U.S.C. §§1811 through 1831aa, and the FDIC’s Rules and
Regulations, 12 C.F.R. Chapter III.
3. The Bank is subject to section 22(h) of the Federal Reserve Act, as amended, 12 U.S.C.
§375(b), and Regulation O of the Board of Governors of the Federal Reserve System, 12
C.F.R. Part 215, promulgated thereunder and made applicable to insured State nonmember
banks by section 18(j) of the Act and section 337.3 of the FDIC Rules and Regulations, 12
C.F.R. §337.3.
4. The Respondent, Robert Michael, is an institution-affiliated party of the Bank as that term is
defined in section 3(u) of the Act, 12 U.S.C. §1813(u) and for purposes of sections 8(e)(7), and
8(i) of the Act, 12 U.S.C. §§1818(e)(7) and 1818(i).
5. The Respondent, George Michael, is an institution-affiliated party of the Bank as that term is
defined in section 3(u) of the Act, 12 U.S.C. §1813(u) and for purposes of sections 8(e)(7) and
8(i) of the Act, 12 U.S.C. §§1818(e)(7) and 1818(i).
6. The Respondent, Robert Michael, is an “executive officer” of the Bank as that term is defined
by section 215.2(e)(1) of Regulation O, 12 C.F. R. §215.2(e)(1).
7. The Respondent, Robert Michael, is an “insider” of the Bank as that term is defined by section
215.2(h) of Regulation O, 12 C.F. R. §215.2(h).
8. The Respondent, George Michael, is an “insider” of the Bank as that term is defined by section
215.2(h) of Regulation O, 12 C.F. R. §215.2(h).
69
9. As chairman of the bank’s board and as a director and controlling shareholder of the Bank, the
Respondent, Robert Michael, owed fiduciary duties to the Bank, its creditors, depositors, and
other shareholders.
10. As a director and controlling shareholder of the Bank, the Respondent, George Michael, owed
fiduciary duties to the Bank, its creditors, depositors, and other shareholders.
11. The FDIC is the “appropriate Federal banking agency” with respect to the Bank within the
meaning of section 3(q)(3) of the Act, 12 U.S.C. §1813(q)(3).
12. Accordingly, the FDIC has jurisdiction over the Bank, the Respondents, and the subject matter
of this proceeding.
B. Harvey Hospitality Loan
13. By reason of the Respondents’ respective acts, omissions and practices with respect to the
Bank’s Harvey Hospitality loan as fully described in the Findings of Fact at Appendix “A,” the
Respondents, Robert Michael and George Michael, have violated laws, rules, and regulations
as recited herein. 12 U.S.C. §1818(e)(1)(A)(i).
14. By reason of Respondents’ respective acts, omissions and practices with respect to the Bank’s
Harvey Hospitality loan as fully described in the foregoing findings, the Respondents, Robert
Michael and George Michael, engaged in or participated in unsafe or unsound practices in
connection with the Bank. 12 U.S.C. §1818(e)(1)(A)(ii).
15. By reason of Respondents’ respective acts, omissions and practices with respect to the Bank’s
Harvey Hospitality loan as fully described in the foregoing findings, the Respondents, Robert
Michael and George Michael, each have breached their respective fiduciary duties as directors
of the Bank. 12 U.S.C. §1818(e)(1)(A)(iii).
16. By reason of these violations, unsafe or unsound practices, and breaches of fiduciary duties,
the Respondents, Robert Michael and George Michael, each received financial gain or other
benefit. 12 U.S.C. §1818(e)(1)(B)(iii)
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17. The Respondents’ respective acts, omissions and practices with respect to the Bank’s Harvey
Hospitality loan as described in the foregoing findings, demonstrate their personal dishonesty
and willful and continuing disregard for the safety or soundness of the Bank within the
meaning of section 8(e)(1)(C)(i) and (ii), 12 U.S.C. §1818(e)(1)(C)(i) and (ii).
18. Based on the foregoing findings, the Respondents have committed a violation of law or
regulation, within the meaning of sections 8(i)(2)(A)(i) and 8(i)(2)(B)(i)(I) of the Act. 12
U.S.C. § 1818(i)(2)(A)(i) and (B)(i)(I).
19. Based on the foregoing findings, the Respondents have recklessly engaged in unsafe or
unsound practices in conducting the affairs of the Bank within the meaning of section
8(i)(2)(B)(i)(II) of the Act. 12 U.S.C. § 1818(i)(2)(B)(i)(II).
20. Based on the foregoing findings, the Respondents have breached their fiduciary duties to the
Bank within the meaning of section 8(i)(2)(B)(i)(III) of the Act. 12 U.S.C. §
1818(i)(2)(B)(i)(III).
21. Based on the foregoing findings, the Respondents’ practices constitute a pattern of misconduct
within the meaning of section 8(i)(2)(B)(ii)(I) of the Act. 12 U.S.C. § 1818(i)(2)(B)(ii)(I).
22. Based on the foregoing findings, the Respondents’ practices resulted in pecuniary gain or other
benefit to Respondents within the meaning of section 8(i)(2)(B)(ii)(III) of the Act. 12 U.S.C. §
1818(i)(2)(B)(ii)(III).
23. Based on the foregoing findings, the Respondents, Robert Michael and George Michael, have
violated section 8(e) of the Act, 12 U.S.C. § 1818(e), and are subject to the imposition of an
order removing them as institution-affiliated parties of the Bank and prohibiting their future
participation in the affairs of a federally insured financial institution or organization listed in
section 8(e)(7) of the Act, 12 U.S.C. § 1818(e)(7), without the prior written approval of the
FDIC and such other appropriate Federal banking depository institution regulatory agency.
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24. Based on the foregoing findings, the Respondents have violated section 8(i)(2) of the Act, 12
U.S.C. § 1818(i)(2), and are subject to the imposition of an order assessing a first and second
tier civil money penalty, respectively. Upon consideration of mitigating factors, a civil money
penalty against Robert Michael in the amount of $100,000 is recommended and a civil money
penalty against George Michael in the amount of $75,000 is recommended.
C. CFC Double Stock Pledge Transaction
25. By reason of their failure to ensure that their collateral was properly pledged the Respondents,
Robert Michael and George Michael, acted imprudently.
26. By reason the their imprudent acts in failing to ensure that their collateral was properly
pledged, the Respondents, Robert Michael and George Michael, posed an abnormal risk of loss
to Mount Prospect National Bank, United Trust Bank, and Cole Taylor Bank.
27. By reason of the Respondents’ Robert Michael and George Michael respective acts, omissions
and practices in connection with the double pledging of the Bank’s holding company stock
certificate, Respondent Robert Michael and Respondent George Michael received financial
gain or other benefit. 12 U.S.C. §1818(e)(1)(B)(iii).
28. The Respondents’ Robert Michael and George Michael, respective acts, omissions and
practices with respect to the double pledging of the Bank holding company stock certificate as
fully described in the foregoing findings, demonstrate from their personal dishonesty. 12
U.S.C. §1818(e)(1)(C)(i).
29. The Respondents’ Robert Michael and George Michael, respective acts, omissions and
practices with respect to the double pledging of the Bank holding company stock certificate as
fully described in the foregoing findings, demonstrate their willful and continuing disregard for
the safety and soundness of the financial institutions. 12 U.S.C. §1818(e)(1)(C)(ii).
30. Based on the foregoing findings, the Respondents, Robert Michael and George Michael, have
engaged in unsafe or unsound practices in connection with Mount Prospect National Bank,
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United Trust Bank, and Cole Taylor Bank, insured depository institutions. 12 U.S.C.
§1818(e)(1)(A)(ii).
31. Based on the foregoing findings, the Respondents, Robert Michael and George Michael, have
violated section 8(e) of the Act, 12 U.S.C. § 1818(e), and are subject to the imposition of an
order removing them as institution-affiliated parties of the Bank and prohibiting their future
participation in the affairs of a federally insured financial institution or organization listed in
section 8(e)(7) of the Act. 12 U.S.C. § 1818(e)(7), without the prior written approval of the
FDIC and such other appropriate Federal banking depository institution regulatory agency.
32. Based on the foregoing findings, the Respondents have violated section 8(i)(2) of the Act, 12
U.S.C. § 1818(i)(2), and are subject to the imposition of an order assessing a first and second
tier civil money penalty, respectively. Upon consideration of mitigating factors, a civil money
penalty against Robert Michael in the amount of $100,000 is recommended and a civil money
penalty against George Michael in the amount of $75,000 is recommended.
D. John Galioto/Vogay Nominee Loan
33. By reason of the Respondents respective acts, omissions and loan in connection with the John
Galioto Vogay loan as fully described in the foregoing findings, the Respondents, Robert
Michael and George Michael, violated laws, rules, and regulations as recited herein. 12 U.S.C.
§1818(e)(1)(A)(i).
34. By reason of the Respondents respective acts, omissions and practices in connection with the
John Galioto Vogay loan as fully described in the foregoing findings, the Respondents, Robert
Michael and George Michael, engaged in unsafe or unsound practices in connection with the
Bank within the meaning of Section 8(e)(1)(A)(ii). 12 U.S.C. §1818(e)(1)(A)(ii).
35. By reason of the Respondents respective acts, omissions and practices in connection with the
John Galioto Vogay loan as fully described in the foregoing findings, the Respondents, Robert
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Michael and George Michael, each breached their respective fiduciary duties as directors of the
Bank within the meaning of Section 8(e)(1)(A)(ii). 12 U.S.C. §1818(e)(1)(A)(iii).
36. By reason of these violations, unsafe or unsound practices, and breaches of fiduciary duties,
the Respondents, Robert Michael and George Michael, each received financial gain or other
benefit within the meaning of Section 8(e)(1)(B)(iii). 12 U.S.C. §1818(e)(1)(B)(iii)
37. The Respondents’ acts, omissions and practices with respect to the John Galioto Vogay loan as
fully described in the foregoing findings, demonstrates their personal dishonesty and their
willful and continuing disregard for the safety or soundness of the Bank within the meaning of
sections 8(e)(1)(C)(i) and (ii) of the Act. 12 U.S.C. §1818(e)(1)(C)(i) and (ii).
38. Based on the foregoing findings, the Respondents have committed a violation of law or
regulation, within the meaning of sections 8(i)(2)(A)(i) and 8(i)(2)(B)(i)(I) of the Act. 12
U.S.C. § 1818(i)(2)(A)(i) and (B)(i)(I).
39. Based on the foregoing findings, the Respondents have recklessly engaged in unsafe or
unsound practices in conducting the affairs of the Bank within the meaning of section
8(i)(2)(B)(i)(II) of the Act. 12 U.S.C. § 1818(i)(2)(B)(i)(II).
40. Based on the foregoing findings, the Respondents have breached their fiduciary duties to the
Bank within the meaning of section 8(i)(2)(B)(i)(III) of the Act. 12 U.S.C. §
1818(i)(2)(B)(i)(III).
41. Based on the foregoing findings, the Respondents’ practices constitute a pattern of misconduct
within the meaning of section 8(i)(2)(B)(ii)(I) of the Act. 12 U.S.C. § 1818(i)(2)(B)(ii)(I).
42. Based on the foregoing findings, the Respondents’ practices resulted in pecuniary gain or other
benefit to Respondents within the meaning of section 8(i)(2)(B)(ii)(III) of the Act. 12 U.S.C. §
1818(i)(2)(B)(ii)(III).
43. Based on the foregoing findings, the Respondents, Robert Michael and George Michael, have
violated section 8(e) of the Act, 12 U.S.C. § 1818(e), and are subject to the imposition of an
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order removing them as institution-affiliated parties of the Bank and prohibiting their future
participation in the affairs of a federally insured financial institution or organization listed in
section 8(e)(7) of the Act. 12 U.S.C. § 1818(e)(7), without the prior written approval of the
FDIC and such other appropriate Federal banking depository institution regulatory agency.
44. Based on the foregoing findings, the Respondents have violated section 8(i)(2) of the Act, 12
U.S.C. § 1818(i)(2), and are subject to the imposition of an order assessing a first and second
tier civil money penalty, respectively. Upon consideration of mitigating factors, a civil money
penalty against Robert Michael in the amount of $100,000 is recommended and a civil money
penalty against George Michael in the amount of $75,000 is recommended.
E. First Commercial Bank Loan
45. By reason of the Respondents’ respective acts, omissions and practices in obtaining a loan
from First Commercial Bank, secured by the 4205 W est Irving Park property, as fully
described in the foregoing findings, the Respondents, Robert Michael and George Michael,
engaged in an unsafe or unsound practice in connection with First Commercial Bank, an
insured depository institution within the meaning of Section (8)(e)(1)(A)(ii). 12 U.S.C.
§1818(e)(1)(A)(ii).
46. By reason of Respondents’ respective acts, omissions and practices in obtaining a loan from
First Commercial Bank secured by the 4205 W est Irving Park property, the Respondents,
Robert Michael and George Michael, have received financial gain or other benefit within the
meaning of Section 8(e)(1)(B)(iii). 12 U.S.C. §1818(e)(1)(B)(iii).
47. The Respondents’ respective acts, omissions and practices in obtaining a loan from First
Commercial secured by the 4205 W est Irving Park property as fully described in the foregoing
findings, demonstrates their personal dishonesty and their willful and continuing disregard for
the safety or soundness of the Bank within the meaning of section 8(e)(1)(C)(i) and (ii) of the
Act. 12 U.S.C. §1818(e)(1)(C)(i) and (ii).
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48. Based on the foregoing findings, the Respondents have recklessly engaged in unsafe or
unsound practices in conducting the affairs of the Bank within the meaning of section
8(i)(2)(B)(i)(II) of the Act, 12 U.S.C. § 1818(i)(2)(B)(i)(II).
49. Based on the foregoing findings, the Respondents’ practices resulted in pecuniary gain or other
benefit to Respondents within the meaning of section 8(i)(2)(B)(ii)(III) of the Act. 12 U.S.C. §
1818(i)(2)(B)(ii)(III).
50. Based on the foregoing findings, the Respondents, Robert Michael and George Michael, have
violated section 8(e) of the Act, 12 U.S.C. § 1818(e), and are subject to the imposition of an
order removing them as institution-affiliated parties of the Bank and prohibiting their future
participation in the affairs of a federally insured financial institution or organization listed in
section 8(e)(7) of the Act. 12 U.S.C. § 1818(e)(7), without the prior written approval of the
FDIC and such other appropriate Federal banking depository institution regulatory agency.
Recommended Orders
Pursuant to the provisions of sections 8(e) and 8(i) of the Federal Deposit Insurance Act, 12 U.S.C.
§§ 1818 (e), and 1818 (i), the undersigned recommends that the proposed orders attached hereto as
Appendix “B” be issued: (1) removing the Respondents, Robert Michael and George Michael, as
institution-affiliated parties of the Bank; (2) prohibiting the Respondents, Robert Michael and George
Michael, from future participation in the affairs of a federally insured financial institution or organization
listed in section 8(e)(7) of the Act. 12 U.S.C. § 1818(e)(7), without the prior written approval of the FDIC
and such other appropriate Federal banking depository institution regulatory agency; and (3) assessing
against the Respondent, Robert Michael, a first and second tier civil money penalty in the total sum of
$100,000, and assessing against the Respondent, George Michael, a first and second tier civil money
penalty in the total sum of $75,000.
SO ORDERED:
Dated: February 23, 2010
C. Richard Miserendino Administrative Law Judge
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APPENDIX “A”
FINDINGS OF FACT
Jurisdiction
1. Citizens Bank & Trust of Chicago (“CBT” or “the Bank”) is and has been, at all times
pertinent to this proceeding, an insured State nonmember bank, as that term is defined in
section 3(e)(2) of the Federal Deposit Insurance Act (“Act”), 12 U.S.C. §1813(e)(2).
2. The Bank is, and at all times pertinent to the allegations in this proceeding was, subject to the
provisions of the Act set forth in 12 U.S.C. §§1811-1831aa, the Rules and Regulations of the
FDIC, 12 C.F.R. Chapter III, and the laws of the State of Illinois. Jt. Exh. 1, Stip. 6.
3. Section 22(h) of the Federal Reserve Act, 12 U.S.C. §375b, and Regulation O, 12 C.F.R. Part
215, are made applicable to the Bank by section 18(j) of the Act, 12 U.S.C. §1828(j)(2), and
section 337.3(a) of the FDIC Rules and Regulations, 12 C.F.R. §337.3(a). Jt. Exh. 1, Stip. 223.
4. At all times pertinent to the charges set forth in the Notice, Respondents Robert Michael and
George Michael were “institution-affiliated parties” of CBT. Jt. Exh. 1, Stip. 8.
5. At all times pertinent to the charges herein, Respondent Robert Michael was an “executive
officer” of the Bank, within the meaning of section 215.2(e) of Regulation O, 12 C.F.R.
§215.2(e). Jt. Exh. 1, Stip. 224.
6. As a director, executive officer, and principal shareholder of the Bank, Respondent Robert
Michael was an "insider" as defined by section 215.2(h) of Regulation O. Jt. Exh. 1, Stip. 225.
7. As a director and principal shareholder of the Bank, Respondent George Michael was an
“insider” as defined by section 215.2(h) of Regulation O. Jt. Exh. 1, Stip. 226.
8. The FDIC is the “appropriate Federal banking agency” with respect to the Bank within the
meaning of section 3(q)(3) of the Act, 12 U.S.C. §1813(q)(3). Jt. Exh. 1, Stip. 9.
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9. The FDIC has jurisdiction over the Bank, the Respondents and the subject matter of this
proceeding. Jt. Exh. 1, Stip. 10.
Regulation O
10. Pursuant to Regulation O, a bank may not extend credit to an insider unless the extension of
credit is made on substantially the same terms (including interest rates and collateral) and
following credit underwriting procedures that are not less stringent than those prevailing at the
time for comparable transactions by the bank with other persons that are not insiders and the
extension of credit does not involve more than the normal risk of repayment or present other
unfavorable features. 12 C.F.R. § 215.4(a).
11. Pursuant to Regulation O, a bank may not extend credit to an insider in an amount that exceeds
the higher of $25,000 or 5 percent of the bank’s unimpaired capital and surplus, but in no event
more than $500,000, unless the extension of credit has been approved in advance by a majority
of the entire board of directors and the interested party has abstained from participating
directly or indirectly in the voting. 12 C.F.R. § 215.4(b) and § 337.3(b).
12. Section 215.5(c) of Regulation O, 12 C.F.R. §215.5(c), limits extensions of credit to any
executive officer of the Bank to $100,000, unless the purpose of the extension of credit is to
finance the education of the executive officer’s children or to finance or refinance the
purchase, construction, maintenance, or improvement of a residence of the executive officer.
12 C.F.R. §215.5(c)
13. Pursuant to the “tangible economic benefit rule”, an extension of credit is considered made to
an insider to the extent that the proceeds are transferred to the insider or are used for the
tangible economic benefit of the insider. 12 C.F.R. § 215.3(f)(1).
14. An exception to the tangible economic benefit rule provides that an extension of credit to an
insider is not considered made to the insider if: the credit is extended on terms that would
satisfy the standard of 12 C.F.R. §215.4(a) and if the proceeds of the extension of credit are
79
used in a bona fide transaction to acquire property, goods, or services from the insider. 12
C.F.R. §215.4(f)(2).
15. Section 215.6 of Regulation O, 12 C.F.R. §215.6, prohibits an insider from knowingly
receiving an extension of credit not authorized by Regulation O.
General Background
16. CBT opened for business on January 31, 2000. Jt. Exh. 1, Stip. 1.
17. The Bank is wholly owned by a one bank holding company, Citizens Financial Corporation
(“CFC”). Jt. Exh. 1, Stip. 2.
18. At all times pertinent to the matters set forth in the Notice of Charges, Respondent Robert
Michael was president of CFC. Jt. Exh. 1, Stip. 3.
19. At all times pertinent to the matters set forth in the Notice of Charges, Respondent Robert
Michael was Chairman of the Board, Director, and controlling shareholder of CBT. FDIC
Exh. 14. In such capacities Respondent Robert Michael maintained a daily presence at the
bank. Id.
20. At all times pertinent to the matters set forth in the Notice of Charges, Respondent George
Michael was a Director and controlling shareholder of CBT. FDIC Exh. 14.
21. Respondents Robert Michael and George Michael are brothers, who together own multiple real
estate ventures and business associations. They are both licensed real estate brokers for the
state of Illinois, and were founding organizers of CBT in the year 2000. They joined the
bank’s board with no prior banking experience. FDIC Exh. 14.
22. Nicholas Tanglis served as the Bank’s president from its opening until December 13, 2000. Jt.
Exh. 1, Stip. 4.
23. James Zaring was President of CBT from December 13, 2000, until June 6, 2003. Jt. Exh. 1,
Stip. 5.
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Regulatory History of CBT
24. W ithin months of opening for business, CBT drew regulatory concern. A March 27, 2000,
Illinois Office of Banks and Real Estate (“OBRE”) examination identified significant
weaknesses of the Bank.
25. On April 17, 2000, the FDIC began an examination of CBT “as of March 31, 2000” resulting
in a Report of Examination (“March 31, 2000, ROE”). FDIC Exh. 14 at 4.
26. The FDIC’s March 31, 2000, ROE stated that a primary concern of the FDIC was
“management’s unwillingness to deal with regulators in a forthright manner, abusive insider
transactions, and its inability or unwillingness to properly underwrite and document loans.”
FDIC Exh. 14 at 5.
27. The ROE found that “[a]lthough the Bank has only been opened for business since January 31,
2000, its overall condition has quickly deteriorated.” FDIC Exh. 14 at 4.
28. The ROE found that “[m]anagement and the Board have not performed their duties and
responsibilities in an acceptable manner.” FDIC Exh. 14 at 4.
29. The ROE found that management had engaged in numerous violations of existing Loan Policy,
engaged in apparent violations of Regulation O, and engaged in apparent violations of FDIC
Rules and Regulations Part 323, by not obtaining multiple appraisals prior to origination of
several real estate loans. FDIC Exh. 14 at 5, 42, 43.
30. On May 25, 2000, the Illinois Office of Banks and Real Estate (“OBRE”) issued a cease and
desist order against the Bank in which FDIC concurred. Among other things, the Bank was
ordered “to cease and desist from engaging in violations of banking laws and from conducting
the business of the Bank in an unsafe and unsound manner.” FDIC Exh. 11.
31. The OBRE Cease and Desist Order also stated that, “The Bank shall not approve loans to
any insiders or their related interests without first fully disclosing said interest. For
81
purposes of this Order, “insider” is defined “any officer, director, shareholder and their
related business and financial interests.” FDIC Exh. 11 at 7, ¶14. (Emphasis added.)
32. On or about September 5, 2000, the FDIC began a subsequent examination of CBT. At the
conclusion, the FDIC issued a Report of Examination “as of June 30, 2000,” which again cited
various violations of law, including violations of 12 C.F.R. Part 323, relating to appraisals and
violations of Regulation O, 12 C.F.R. Part 215. FDIC Exh. 16 at 20-24.
33. The Respondents, as management and directors of the Bank, have been criticized for past
regulatory violations. FDIC Exh. 14 at 10, 12-13; FDIC Exh. 15 at 8, 10-11, 20-21; FDIC
Exh. 16 at 24; FDIC Exh. 17 at 23-24; and FDIC Exh. 21 at 16.
Harvey Hotel Transaction
34. Satish “Sunny” Gabhawala, an agent for Big 2 Trading Corporation (“Big 2 Trading”), entered
into an agreement dated November 14, 2000 (“November 14 Agreement”), to purchase a hotel
located at 17040 South Halsted Street, Harvey, Illinois 60426 (the “Harvey Hotel”) from
W illiam Brandt, Jr., as assignee for the benefit of the creditors of B.C. Harvey, LLC. Jt. Exh
1, Stip. 41.
35. The November 14, 2000, Agreement recited a purchase price of $2,550,000 for “the Property”.
Jt. Exh. 1, Stip. 42.
36. The November 14, 2000, Agreement defined “the Property” to include both real and personal
property associated with the Harvey Hotel. Jt. Exh 1, Stip. 43.
37. At closing, Seller agreed to deliver a deed to the hotel real estate and a quitclaim deed to the
personal property. Jt. Exh. 1, Stip. 44.
38. The original contemplated closing date set forth in the November 14, 2000, Agreement was
November 30, 2000. Jt. Exh. 1, Stip. 45.
39. By letters dated November 30, 2000, and December 13, 2000, Big 2 Trading and Brandt
modified the November 14, 2000, Agreement to increase the earnest money deposit to a total
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of $242,500; increase the purchase price to $2,585,000; and extend the closing date to
December 20, 2000. Jt. Exh. 1, Stip. 46.
40. In early December 2000 Big 2 Trading had not obtained sufficient financing from investors or
lenders to complete the purchase of the Harvey Hotel. Jt. Exh. 1, Stip. 47.
41. In December 2000, Respondents sought a loan for $2.1 million from First Bank and Trust
Company of Illinois, Palatine, Illinois. Jt. Exh. 1, Stip. 48. They did so in order to provide Big
2 with what the Respondents characterized as “bridge loans” to afford Big 2 the opportunity to
close on the transaction. Tr. T. W ilkes, vol 6, p. 746
42. The loan from First Bank & Trust, number 2849581, was to be secured by a first mortgage on
the hotel. Jt. Exh. 1, Stip. 49.
43. On approximately December 13, 2000, First Bank & Trust informed Respondents that it was
willing to lend only $1.4 million to Respondents with the hotel as collateral. Jt. Exh. 1, Stip.
50.
44. Respondents agreed to raise the $700,000 shortfall by December 20, 2000, so that Big 2
Trading would not lose its $242,500 deposit. Jt. Exh. 1, Stip. 51.
45. James Zaring’s first day as President of the Bank was December 13, 2000. Jt. Exh. 1, Stip. 52.
46. On December 13, 2000, CBT considered a loan to Respondents in the amount of $700,000.
Respondents were advised by consultant Joe Gunnell, President Jim Zaring, and Attorney Ben
Shapiro that a loan to Robert Michael that would exceed the executive officer limits of
$100,000 and was prohibited by Regulation O. Respondents were also advised that a loan to
George Michael that exceeded the director limit of $500,000 was prohibited by Regulation O.
FDIC Exh. 3 at 10 to 11; Tr. J. Gunnell, vol. 9, p. 1223, l. 22 to 1225, l. 20 and p.1232, l. 21 to
p. 1234, l. 14; J. Zaring, vol. 6, p. 829, l. 12 to 834, l. 6.
47. The Respondents were therefore advised that the Bank could not make a $700,000 loan to
them.
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48. James Zaring had prior business dealings with Mr. John Van W inkle of United Trust Bank, the
deposits of which are insured by the Federal Deposit Insurance Corporation, and suggested that
the Respondents attempt to obtain the $700,000 from United Trust. Jt. Exh. 1, Stip. 53.
49. United Trust was unwilling to underwrite a loan secured solely by real estate within the short
time frame required for the $700,000 loan and required that the loan be supported primarily by
other, more liquid, collateral. Jt. Exh. 1, Stip. 54.
50. United Trust issued a loan commitment, dated December 18, 2000, to Respondents regarding
the $700,000 loan. Jt. Exh. 1, Stip. 55.
51. The United Trust commitment states that the loan will be secured by CFC stock in the amount
of approximately $1.3 million, and “as an abundance of caution Borrowers have offered and
Lender has accepted a second lien position” on real estate located at 6508 W . Devon, Chicago.
Jt. Exh. 1, Stip. 56.
52. On December 20, 2000, the United Trust loan #30011 in the amount of $700,000 closed. Jt.
Exh. 1, Stip. 57.
53. W hen it closed, United Trust loan #30011 was secured by CFC stock certificate #s 3 and 20
and by a second mortgage on real estate at 6508 W . Devon. Jt. Exh. 1, Stip. 58.
54. Later that day, December 20, 2000, the Respondents purchased the Harvey Hotel and all
associated personal property. Jt. Exh. 1, Stip. 111.
55. On December 20, 2000, B.C. Harvey, LLC, caused title to the Harvey Hotel real estate to be
conveyed to Big 2 Trading, as holder of the right to purchase. Jt. Exh. 1, Stip. 112.
56. On December 20, 2000, Big 2 Trading in turn conveyed title to First Bank as Trustee of land
trust number 10-2455. Jt. Exh. 1, Stip. 113.
57. Respondents’ beneficial interest in land trust number 10-2455 secured the loan the
Respondents received from First Bank. Jt. Exh. 1, Stip. 114.
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58. On December 20, 2000, BC Harvey also executed a Quitclaim Bill of Sale in favor of Big 2
covering the hotel personalty. Jt. Exh. 1, Stip. 115.
59. On December 20, 2000, Big 2 Trading executed a Quitclaim Bill of Sale to Respondents
Robert Michael and George Michael for the Harvey Hotel personalty. Jt. Exh. 1, Stip. 116.
60. The purchase price for the sale from B.C. Harvey, LLC to Big 2 Trading was $2,585,000. Jt.
Exh. 1, Stip. 117.
61. Big 2 Trading and B.C. Harvey, LLC, completed a form PTAX-203, Illinois Real Estate
Transfer Declaration, declaring the purchase price of the hotel real estate and associated
personalty to be $2,585,000. Jt. Exh. 1, Stip. 118.
62. Respondents funded the purchase of the Harvey Hotel using $700,000 in proceeds from loan
#30011 to Respondents from United Trust; $1,325,000 in net proceeds from loan #2849581 to
Respondents by the First Bank and Trust Company of Illinois; $242,500 in earnest money
provided by Big 2 Trading; and approximately $557,503 from Harvey Hospitality investors.
Jt. Exh. 1, Stip. 119.
63. Chicago Title and Trust Company check no. 1201048320 in the amount of $513,592.21 was
made out to Robert C. Michael and George S. Michael. Jt. Exh. 1, Stip. 120.
64. Robert Michael controlled disbursement of the $513,592.21. Tr. 427-430; FDIC Exh. 45 at 2
and FDIC Exh. 46 at 1.
65. Proceeds from check 1201048320, minus $9,000, were deposited into the Robert Michael and
George Michael Building Account at the Bank, account no. 9000015, on December 22, 2000.
FDIC Exh. 1, Stip. 121.
66. On December 26, 2000, $109,592.21 was transferred from the Robert Michael and George
Michael Building Account at the Bank, account no. 9000015, to CBT account 10001725, held
in the name of Harvey Hospitality LLC. Jt. Exh. 1, Stip. 122.
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67. An Asset Purchase Agreement, dated December 20, 2000, was executed by Respondents
Robert Michael and George Michael as sellers and by Suresh Patel for Harvey Hospitality,
LLC, as buyer. Jt. Exh. 1, Stip. 123.
68. The purchase price was allocated as follows: $2,585,000 for the purchase of the Harvey Hotel
real estate, and $1,365,000 for the purchase of the Harvey Hotel personal property and various
fees. A document dated December 20, 2000, styled “Amendment”, was executed by Robert
Michael and Suresh Patel and which, among other things, reduced the purchase price for the
personal property to $965,000. The parties do not agree as to the date on which this
Amendment was actually signed, or its effectiveness. Jt. Exh. 1, Stip. 124.
69. A document entitled “Amendment to Asset Purchase Agreement”, which bears the date
December 20, 2000, and which purports to adjust the purchase price of the Harvey Hotel
pursuant to the Asset Purchase Agreement and the Installment Agreement for Deed from $3.95
million to $3.55 million, was not signed on December 20, 2000, but was signed after the CBT
extended the $2.9 million loan to Harvey Hospitality in June of 2002. FDIC Exh. 52; Tr. 430 -
432.
70. At the closing on December 20, 2000, members of Harvey Hospitality, LLC signed a
“Resolution of the Members” authorizing Harvey Hospitality to execute the Asset Purchase
Agreement, the Installment Agreement for Deed and the Store Lease with Ararat Corporation.
The Resolution of the Members is silent as to any Amendment to Asset Purchase Agreement.
FDIC Exh. 304.
71. The Asset Purchase Agreement provided that the Respondents would transfer title to the hotel
personal property on the same day as receipt of payment from Harvey Hospitality. Jt. Exh. 1,
Stip. 125.
72. On December 20, 2000, Respondents quitclaimed the personal property of the Harvey Hotel to
Harvey Hospitality. Jt. Exh. 1, Stip. 126.
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73. Harvey Hospitality made no payment to Respondents for the personal property. Jt. Exh. 1,
Stip. 127.
74. On December 20, 2000, Respondents Robert Michael and George Michael as sellers, and
Harvey Hospitality, LLC (by Suresh Patel), as buyer, executed an Installment Agreement for
Deed regarding the Harvey Hotel. Jt. Exh. 1, Stip. 128.
75. The Installment Agreement for Deed recited the same sales price as set forth in the Asset
Purchase Agreement, namely, a total of $3.95 million, allocated $2.585 million to real property
and $1.365 million to personal property and for fees. Jt. Exh. 1, Stip. 129.
76. The Installment Agreement for Deed designated April 2, 2001, as the final closing date. Jt.
Exh. 1, Stip. 130.
77. The Installment Agreement for Deed stated that Harvey Hospitality was to pay Respondents a
total of $60,624.33 per month beginning on February 1, 2001, until final closing, $2,585,000 at
final closing, and the total amount required to pay all transfer taxes required by the State of
Illinois and the County of Cook. Jt. Exh. 1, Stip. 131.
78. Harvey Hospitality did not make payments according to the terms of the Installment
Agreement for Deed. Tr. 435 – 439.
79. Harvey Hospitality did not obtain financing for the purchase of the Harvey Hotel from
Respondents before April 2, 2001. Jt. Exh. 1, Stip. 132.
80. Harvey Hospitality did not complete the purchase of the Harvey Hotel from Respondents
before April 2, 2001. Jt. Exh. 1, Stip. 133.
81. Sometime prior to May 7, 2001, Harvey Hospitality sought a loan from the Bank in order to
complete the purchase of the Harvey Hotel from the Respondents. Jt. Exh. 1, Stip. 134.
82. On or about May 7, 2001, five of the seven Bank’s board of directors (including the
Respondents, Robert and George Michael) voted to approve a $2,900,000 loan to Harvey
Hospitality to complete the purchase of the Harvey Hotel. Jt. Exh. 1, Stip. 135; Tr. 893.
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83. The Loan Approval Sheet shows Directors Nicholas M. Duric and Kenneth M. Koziol as “Not
Available” and not voting. Jt. Exh. 1, Stip. 137.
84. Respondents signed the May 7, 2001, loan approval sheet for the Bank’s $2.9 million loan to
Harvey Hospitality. Jt. Exh. 1, Stip. 136; FDIC Exh. 107 at 4.
85. The May 7, 2001, loan approval sheet represented the Bank’s formal approval of the Harvey
Hospitality loan. Tr. 893.
86. The signatures on the Harvey Hospitality loan approval signify the directors that were voting
in favor of the credit presentation. FDIC Exh. 107 at 4; Tr. 893.
87. By signing the loan approval sheet, Respondents approved the loan and participated in the loan
approval for purposes of Regulation O. FDIC Exh. 107 at 4.
88. The Bank’s loan approval sheet stated that the purchase price of the Harvey Hotel was
$3,950,000 with a loan to value ratio of 73 percent. Jt. Exh. 1, Stip. 138.
89. The Bank’s loan approval sheet stated that the purpose of the loan was “to complete the
purchase of an existing operating hotel facility and provide the borrowers with the necessary
additional funds to complete further leasehold improvements.” Jt. Exh. 1, Stip. 139.
90. The loan approval sheet listed the following proposed uses of loan proceeds:
$2,100,000 Retire existing Debt
583,000 Mandated Franchisee Upgrades
100,000 Soft Costs
45,000 Existing Lease Retirement
72,000 W orking capital
Jt. Exh. 1, Stip. 140.
91. The minutes of the May 30, 2001, CBT Board of Directors meeting state the following about
the pending $2.9 million loan to Harvey Hospitality, under the caption “New Business”:
“President Zaring discussed with the Board the details of the final stage of the Harvey
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Hospitality Inn loan request and informed the Board that the closing is projected for June 15,
2001.” Jt. Exh. 1, Stip. 141.
92. The minutes of the May 30, 2001, CBT Board of Directors meeting do not disclose that the
Respondents left the meeting while the Harvey Hospitality loan was discussed or at any other
time during the meeting.
93. The $2.9 million Harvey Hospitality loan is not otherwise mentioned in the May 30, 2001,
Board minutes. Jt. Exh. 1, Stip. 142.
94. Respondent Robert Michael attested to the May 30, 2001, Board minutes. Jt. Exh. 1, Stip. 143.
95. Robert and George Michael did not actually receive the agreed $3.95 million in consideration
from Harvey Hospitality for the hotel and related personal property. Jt. Exh. 1, Stip. 144.
96. The Loan Approval sheet dated May 7, 2001, relating to the loan to Harvey Hospitality loan
contained false and misleading information concerning the loan being considered by CBT’s
Board of Directors:
The stated $3,950,000 purchase price for the Harvey Hotel was false because Harvey Hospitality did not actual pay Respondents $3,950,000 for the hotel. FDIC Exh. 107 at 2, FDIC Exh. 42; FDIC Exh. 43; Tr. 80 - 82, 84, and 87.
The stated loan to value ratio of 73% was false and misleading.
The statement that the loan to value was within the loan policy was false and misleading. FDIC Exh. 107 at 1.
The omission of the borrower’s default under the Installment Agreement for Deed was false or misleading.
The omission of any mention of Respondents’ interest in the loan proceeds was false and misleading.
Respondents’ signatures on the document gave the false and misleading impression that they had no interest in the loan proceeds.
97. Bank president and director Jim Zaring relied on the Harvey Hospitality loan approval in
reviewing the Harvey Hospitality loan. FDIC Ex. 107; Tr. 885.
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98. On or about February 3, 2003, Robert Michael signed R&G Properties IRS Form l065, "U.S.
Return of Partnership Income" for tax year 2001. Jt. Exh.1, Stip. 145.
99. Attached to the IRS Form 1065 filing by R&G Properties for tax year 2001 was IRS Form
4797, ''Sale of Business Property". Jt. Exh. 1, Stip. 146.
100. Under “Part II – Ordinary Gains and Losses”, on its 2001 IRS Form 4797, R&G Properties
reported the purchase and sale of the Harvey Hotel, located at 17040 S. Halstead. On the Form
4797, R&G Properties further reported regarding that purchase and sale:
“Cost or other basis, plus improvements and expenses of sale” of $2,195,178.
“Gross sales price” of $2,195,178.
“Gain or (loss)” of $0.
Jt. Exh. 1, Stip. 147.
101. R&G Properties is a partnership owned by Robert and George Michael, with each having a
50% interest in the partnership. FDIC Exh. 123 at 20 and FDIC Exh. 123 at 22; FDIC Exh.
233 at 80 and 82.
102. The Asset Purchase Agreement and the Installment Agreement for Deed, which purported to
establish the terms under which Respondents would sell the Harvey Hotel to Harvey
Hospitality, do not accurately reflect the substance of the purchase and sale between the
parties. FDIC Exh. 42 and 43;
Tr. 94 - 95.
103. CBT’s loan policy provided that the loan to value limit for commercial real estate loans shall
not exceed 75% of appraised value or purchase price. FDIC Exh. 10 at 46.
104. Appendix A of Part 365 of the FDIC’s Rules and Regulations, the Interagency Guidelines for
Real Estate Lending, provides that state nonmember banks should establish loan to value
guidelines that do not exceed those established in the Interagency Guidelines. The Guidelines
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state that for loans to purchase an existing property, the term “value” means “the lesser of the
actual acquisition cost or the estimate of value.” 12 C.F.R. Part 365, Appendix A.
105. An auditor would account for the transaction between Harvey Hotel and the Respondents as a
$2,585,000 transaction. Tr. 80 - 81.
106. Using either the actual transaction value of $2,585,000 as described by appraiser Jack
Friedman or the transaction value of $2,195,178 reflected in the Respondents’ R&G
Partnership tax return, the loan amount of $2,900,000 exceeded the transaction value and the
loan to value was more than 100%.
107. The loan-to-value of the Citizens $2,900,000 loan to Harvey Hospitality with a sale price of
$2,195,178 as reflected on Respondents’ R&G Partnership return is 132.10%. FDIC Exh. 107;
FDIC Exh. 123
108. At the time the board of directors considered the CBT loan to Harvey Hospitality in May of
2001, the personal property to be sold under the Asset Purchase Agreement for $1,365,000 had
already been quitclaimed to Harvey Hospitality, LLC by Respondents Robert and George
Michael, and Harvey Hospitality had not paid the $1,365,000 in consideration. FDIC Exh. 44.
109. By the time the Harvey Hospitality loan was presented to the Bank for consideration in May
2001, Harvey Hospitality was in monetary and non-monetary default under the Installment
Agreement for Deed.
110. Respondents failed to disclose to the Bank’s entire board of directors that the borrower in the
proposed Harvey Hospitality loan were in default under the Installment Agreement for Deed.
111. Because the loan to Harvey Hospitality was a business loan in excess of $1,000,000 and was
secured by real estate, an appraisal that complied with the Uniform Standards of Professional
Appraisal Practice (“USPAP”) was required. 12 C.F.R. Part 323.
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112. CBT received an appraisal from Cornerstone Appraisal to support this loan. The appraisal was
originally completed for First Bank and Trust of Illinois. FDIC Exh. 117 at 1 and FDIC Exh.
69.
113. A state nonmember bank may accept an appraisal originally obtained by another financial
services institution, but the bank must determine that the appraisal conforms to Part 323 of the
FDIC’s Rules and Regulations, 12 C.F.R. Part, 323, including the requirement that the
appraisal complies with USPAP. 12 C.F.R. § 323.5(b)(2).
114. The Cornerstone appraisal that was used to support the Citizens loan to Harvey Hospitality did
not comply with USPAP. Tr. 101 - 105.
115. The Cornerstone appraisal that was used to support the Citizens loan to Harvey Hospitality did
not have the requisite 3 years sales history of the property, required by USPAP. Tr. 102 - 105.
116. On June 1, 2001, the Respondents signed a Commercial Debt Modification Agreement for
United Trust loan #30011, which modified the balloon principal payment of $700,000
originally due June 1, 2001, to $100,000, and extended the remaining balloon payment of
$600,000 to October 1, 2001. (FDIC Exh. 95.)
117. The $2.9 million CBT loan to Harvey Hospitality ultimately closed on June 27, 2001. Jt. Exh.
1, Stip. 148.
118. At the June 27, 2001 closing, CBT loan proceeds of $2,343,918 were extended, comprised of
two checks listing a remitter of loan number 1564: a check in the amount of $2,003,918 and of
a check in the amount of $340,000. FDIC Exh. 111 at 8-9; FDIC Exh. 114; FDIC Exh. 112.
119. Respondents’ loan #2849581 from First Bank and Trust Company of Illinois was paid off with
proceeds from the $2.9 million CBT loan to Harvey Hospitality by Ticor Title Insurance check
#9502008429, in the amount of $1,441,387.69. Jt. Exh. 1, Stip. 149.
120. Respondents’ loan #30011 from United Trust Bank was paid down with proceeds from the
$2.9 million CBT loan to Harvey Hospitality. (FDIC Exh. 78, 81 and 95.)
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121. Ticor Title Insurance check #9502008430, in the amount of $708,620.61, made payable to
United Trust Bank, was deposited by United Trust. (FDIC Exh. 114 at 7.)
122. Respondent Robert Michael received $55,235.25 as “net proceeds to seller”. Jt. Exh. 1, Stip.
151.
123. On June 28, 2001, the Respondents, Robert and George Michael, received a cashier’s check
from United Trust Bank in the amount of $600,000, which was deposited in the CBT account
of R & G Properties. (FDIC Exh. 294.) The remitter on the check states “UNITED TRUST
BANK LN #30011.” (FDIC Exh. 294 at 1 and 2.)
124. The Respondents failed to disclose to the Bank’s entire Board of Directors that they intended
and/or had signed a Commercial Debt Modification Agreement with United Trust Bank which
reduced the amount due on June 1, 2001, on United Trust loan #30011 to approximately
$108,000.
125. As of March 31, 2001, the Bank’s Consolidated Report of Condition and Income “Call Report”
reported that the Bank’s unimpaired capital and unimpaired surplus equaled $3,491,000. FDIC
Exh. 287 at 24.
126. As of the March 31, 2001 Call Report, five percent of the Bank’s unimpaired capital and
surplus equaled $174,550. Id.
127. The Citizens loan to Harvey Hospitality bestowed a tangible economic benefit to Respondents
as the proceeds for this loan repaid their $1,400,000 loan to First Bank and Trust; paid down to
$600,000 the $700,000 loan #30011 to United Trust Bank – loans for which the Respondent
were personally obligated; and bestowed a tangible economic benefit of $600,000 to the
Respondents vis-à-vis United Trust cashier check #010932. (FDIC Exh. 294.)
128. The Citizens loan to Harvey Hospitality was subject to Regulation O’s prior approval limits
because it exceeded $174,550, the prior approval limits of Regulation O for the Bank at the
time. 12 C.F.R. §215.4(b) and §337.3(b).
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129. Despite their insistence to the contrary, Respondents Robert and George Michael did not
recuse themselves from the discussion of the Harvey Hospitality loan, and remained present at
the board meeting at which the loan was presented. Tr. 894 - 895; FDIC Exh. 107.
130. The minutes of the board meeting at which the loan was discussed and approved contains no
indication that Respondents recused themselves from the discussion, or removed themselves
from the room. FDIC Exh. 3 at 27-31.
131. Directors attending the meeting did not know that the borrower, Harvey Hospitality, did not
pay Respondents, as sellers, the full consideration of $3,950,000. Tr. 1316 - 1317; Tr. 1025 –
1026.
132. Director Nick Tanglis did not remember knowing or being told that the Michaels were not
going to receive the full $3,950,000 on the Harvey Hotel transaction. Tr. 1316 - 1317.
133. Had Tanglis known that the purchase price listed in the Installment Agreement for Deed and
the Asset Purchase Agreement was not being paid, he might have asked more questions or
obtained a legal opinion. Tr. 1317 - 1318.
134. Respondents could not have relied on bank officer Nick Tanglis relating to CBT’s loan to
Harvey Hospitality because Nick Tanglis did not know that the full $3.95 million purchase
price had not been paid and the Respondents did not disclose this information to him. Id.
135. Director James Zaring did not know that the Michaels were not going to receive the full
$3,950,000 on the Harvey Hotel transaction. Tr. 1025 – 1026.
136. Respondents could not have relied on CBT Bank President Jim Zaring relating to CBT’s loan
to Harvey Hospitality because Jim Zaring did not know that the full $3.95 million purchase
price had not been paid and the Respondents did not disclose this information to him. Id.
137. Consultant Joe Gunnell did not advise Respondents on the Harvey Hospitality loan at the time
the loan approval was being considered. Tr. 1223.
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138. Consultant Joe Gunnell did not know that the Respondents did not receive the full $3,950,000
on the Harvey Hotel transaction. Tr. 1219.
139. Respondents could not have relied on the advice of consultant Joe Gunnell relating to CBT’s
loan to Harvey Hospitality because Joe Gunnell did not advise them on the loan and,
moreover, Joe Gunnell did not know that the full $3.95 million purchase price had not been
paid and the Respondents did not disclose this information to him. Id.
140. Attorney Ben Shapiro, a regulatory legal adviser to the Bank, testified that he attended all of
the board meetings from December of 2000 through May of 2001, but had no recollection of
whether he was told that no one paid Robert and George Michael for the personal property
under the Asset Purchase Agreement. Tr.1414, 1397 - 1400.
141. Attorney Ben Shapiro did not recall having seen the Asset Purchase Agreement and the
Installment Agreement for Deed or being aware that the transaction split the sale of the real
estate and the personal property. Tr.1404 – 1405.
142. Attorney Ben Shapiro did not prepare the Asset Purchase Agreement (FDIC Exh. 43) for the
sale of the Harvey Hotel from Respondents to Harvey Hospitality. Tr.1409.
143. Respondents could not have relied on the advice of attorney Ben Shapiro relating to CBT’s
loan to Harvey Hospitality because Ben Shapiro did not know that the full $3.95 million
purchase price had not been paid and the Respondents did not disclose this information to him.
Id.
144. Respondents Robert and George Michael failed to disclose to the Bank and its board of
directors that they were not paid the full consideration of $3,950,000 reflected in the May 7,
2001 Harvey Hospitality approval sheet. FDIC Exh. 107; Tr. 1316 - 1317; Tr. 1025 - 1026.
145. Portions of the $2.9 million loan from CBT to Harvey Hospitality were immediately
participated out to four other financial institutions, to wit:
Cole Taylor Bank
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United Trust Bank
W infield Community Bank
Oak Lawn Bank, Oak Lawn, Illinois
Jt. Exh. 1, Stip. 152.
146. Respondents’ failure to disclose the actual purchase price of the hotel caused Citizens to
misrepresent the actual purchase price to the participating banks. Tr. 899 - 900.
147. President Jim Zaring arranged the participant banks for the Harvey Hospitality loan and he did
not tell them that the property had been purchased for $2,585,000 and resold to Harvey
Hospitality for $3,950,000. Tr. 899 - 900.
148. In November of 2000, the Bank was instructed by the regulators to ensure that the Bank’s
board of directors minutes were complete. FDIC Exh. 15 at 1-3; 15.
149. The OBRE Cease and Desist order, dated May 25, 2000, provided that no loans were to be
extended to insiders without full prior disclosure of the insider’s interest. FDIC Exh. 11 at 7,
¶14.
150. Minutes were kept of every CBT board meeting from December 13, 2000, through June 27,
2001. Tr. 897 - 898.
151. Prior to May of 2001, CBT consultant Joe Gunnell had provided training to the Respondents
and to bank personnel, which included the requirement under Regulation O of full disclosure
of an insider’s interest and notation of the disclosure and the recusal in the minutes. Tr. 1195 -
1196, 1226 - 1228. Joe Gunnell confirmed that the approval of an insider loan “has to be noted
in the minutes” and that disclosure was part of “the basics.” Tr. 1228.
152. Respondent Robert Michael attested to the contents of the minutes. FDIC Exh. 3.
153. There is no mention in the CBT board minutes of any disclosure by Respondents of their
interest in the proceeds of the Harvey Hospitality loan or the leasehold interest held by their
company Ararat in a portion of the hotel. FDIC Exh. 3.
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154. The CBT board minutes do not reflect any disclosure by the Respondents that the hotel had
been purchased out of receivership in December of 2000 for $2,585,000. FDIC Exh. 3.
155. The CBT board minutes do not reflect any disclosure by the Respondents that the Respondents
did not receive the full stated purchase price of $3,950,000 for the Harvey Hotel. FDIC Exh.
3.
156. The CBT board minutes do not reflect any disclosure by the Respondents that at the time the
Harvey Hospitality loan was under consideration by the Bank, Harvey Hospitality was in
default to Respondents under the Installment Agreement for Deed. FDIC Exh. 3.
CFC Stock Certificates
157. Ownership of CFC, the Bank’s holding company, is held by stock certificates issued by the
corporation in accordance with its corporate bylaws. Jt. Exh. 1 Stip. 11. Certain certificates
were held by Respondents Robert and George Michael, namely CFC Certificates #2 and #3
dated 3-10-2000 each representing 35,440 shares of CFC stock. Jt. Exh. 11, Stip. 13.
158. At all times relevant to the events set forth in the Notice, Certificate #2 was the only CFC
certificate owned solely by Respondent Robert Michael. Jt. Exh. 1, Stip. 14.
159. At all times relevant to the events set forth in the Notice, Certificate #3 was the only CFC
certificate owned solely by Respondent George Michael. Jt. Exh. 1, Stip. 15.
160. At all times relevant to the events set forth in the Notice, Certificate #s 2 and 3 were the two
largest certificates issued by CFC. Jt. Exh. 1, Stip. 16.
161. W hen issued on March 10, 2000, Certificate #2 and Certificate #3 each had a book value of
approximately $1,063,200. Jt. Exh.1, Stip. 17.
162. W hen Respondent George Michael received Certificate #3, he initially placed it in his safe
deposit box at the Bank. Tr.1687 - 1688.
163. In 2000 and shortly after placing Certificate #3 in his safe deposit box, Respondent George
Michael retrieved Certificate #3 from the safe deposit box at Respondent Robert Michael’s
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request and left it on Robert Michael’s desk. George Michael did not see it thereafter. Tr.1688
- 1690.
Mount Prospect Bank
164. Banks rely on the truthfulness of borrowers’ representations and warranties relating to the
collateral that they pledge or promise to pledge. Tr. 737 - 738.
165. Mount Prospect National Bank is a national bank located in Mount Prospect, Illinois (“Mount
Prospect”) the deposits of which are insured by the Federal Deposit Insurance Corporation. Jt.
Exh. 1, Stip. 18.
166. Mount Prospect loan #9001 was a $600,000 loan to Respondents Robert and George Michael
personally. Jt. Exh. 1, Stip. 19.
167. Mount Prospect loan 9001 was to be secured by a minimum of 40,000 shares of CFC stock
with a cost of $1,200,000 and a loan to cost ratio maximum of 50 percent. Jt. Exh. 1, Stip. 20.
168. Proceeds of loan 9001 were to be escrowed until regulators granted final approval for opening
of the Bank. Jt. Exh. 1, Stip. 21.
169. On July 14, 1999, Respondents Robert Michael and George Michael each signed an
"Agreement to Deliver Collateral" specifically identifying Certificate #s 2 and 3 (described as
representing 20,000 shares each); and a Promissory Note identifying the loan collateral as
Certificate #s 2 and 3 (20,000 shares each). Jt. Exh. 1, Stip. 22.
170. W hen Mount Prospect loan 9001 was extended, a Mount Prospect credit memorandum
required that the loan be secured by enough shares so that the ratio of the amount of the loan
compared to the cost of the stock— the loan to cost ratio— did not exceed a maximum of 50
percent. FDIC Exh. 140 at 1-4; Jt. Exh. 1, Stip. 20.
171. Respondents had the opportunity to review the documents they signed on July 14, 1999 in
connection with Mount. Prospect loan 9001. Tr. 1616 – 1617; 1694 - 1695.
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172. If Respondents did not read the documents they signed on July 14, 1999, in connection with
Mount Prospect loan 9001, it was by choice. Tr. 1616 – 1617; 1694 - 1695.
173. Respondents made certain representations and warranties to Mount Prospect in the documents
they signed on July 14, 1999, including: the Respondents will acquire title to the Collateral,
i.e., 40,000 shares of stock in CFC, or are the lawful owners thereof; that the Respondents hold
such Collateral free and clear of security interests, liens, encumbrances and claims by others;
and that Respondents had full authority to grant security interest in and deliver the Collateral to
Mount Prospect. FDIC Exh. 133 at 1; FDIC Exh. 142 at 1.
174. Mount Prospect loan #9002 was a $300,000 loan to Respondents Robert and George Michael
personally. Jt. Exh. 1, Stip. 23.
175. Mount Prospect loan 9002 was for the purpose of acquiring a note and mortgage from Firstar
Bank, N.A. relating to certain property at 2434 W . Montrose (in foreclosure), and it originated
on June 5, 2000. Jt. Exh. 1, Stip. 24
176. On August 2, 2001, Respondents Robert Michael and George Michael executed a mortgage,
dated July 31, 2001, on the property at 2434 W . Montrose in favor of Mount Prospect National
Bank. Jt. Exh. 1, Stip. 25.
177. Mount Prospect loans 9001 and 9002 totaled $900,000. Jt. Exh.. 1, Stip. 26.
178. To remain within Mount Prospect’s requirements, loans 9001 and 9002 had to be secured by
stock with a value of at least $1,800,000. W ith individual book values of just over $1 million,
either Certificate #2 or Certificate #3 alone would be insufficient. The combined value of the
two certificates, however, would satisfy the collateral requirements. FDIC Exh. 140 at 1-8; Jt.
Exh.1, Stip 17.
179. Mount Prospect loan 9002 was cross-collateralized with 9001 by CFC stock, and was also
secured by the assignment of note and mortgage on 2434 W . Montrose. Jt. Exh. 1, Stip. 27.
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180. On June 5, 2000, Respondents signed documents securing Mount Prospect loan 9002 with
CFC Certificate #s 2 and 3 and the assignment of note and mortgage on 2434 W . Montrose. Jt.
Exh. 1, Stip. 28.
181. On June 5, 2000, Respondents Robert Michael and George Michael each signed a Promissory
Note specifically identifying the collateral for loan 9002 as 35,440 shares of CFC stock,
represented by Certificate #3 in the name of George Michael, and 35,440 shares of CFC stock,
represented by Certificate #2 in the name of Robert Michael; and a Commercial Pledge and
Security Agreement showing as collateral "35,440.000 shares of Citizens Financial
Corporation", listed twice. Jt. Exh. 1, Stip. 29.
182. Respondents had the opportunity to review the documents they signed on June 5, 2000, in
connection with Mount Prospect loan 9002. Tr. 1616 - 1617; 1694 - 1695.
183. If Respondents did not read the documents they signed on June 5, 2000, in connection with
Mount Prospect loan 9002, it was by choice. Tr.1616 - 1617; 1694 - 1695.
184. In signing the Commercial Pledge Agreement, the Michaels made the following warranties and
representations as to certificates #2 and #3 (the collateral): 1. the Michaels are “the lawful
owner of the collateral free and clear of all security interests, liens, encumbrances, registered
pledges, adverse claims, and any other claims of others except as disclosed to and accepted by
Lender in writing prior to execution of this Agreement”; 2. the Michaels have “not, and will
not, sell assign, transfer, encumber or otherwise dispose of any of [the Michael’s] rights in the
Collateral except as provided in this Agreement.” FDIC Exh. 145 at 1.
185. Mount Prospect had physical possession of CFC Certificate #s 2 and 3 until August 1, 2001.
Jt. Exh. 1, Stip. 30.
186. Mount Prospect loan 9001 was renewed on July 14, 2000. Jt. Exh. 1, Stip. 31.
187. At the July 14, 2000, renewal, the collateral securing loan 9001 remained the same, namely
Certificate #s 2 and 3. Jt. Exh. 1, Stip. 32.
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188. On July 14, 2000, Respondent Robert Michael signed: a Promissory Note specifically
identifying the collateral for loan 9001 as 35,440 shares of CFC stock, represented by
Certificate #3 in the name of George Michael, and 35,440 shares of CFC stock, represented by
Certificate #2 in the name of Robert Michael. Jt. Exh. 1, Stip. 33.
189. The signature on the July 14, 2000, Note relating to loan 9001 is not that of Respondent
George Michael. Jt. Exh. 1, Stip. 34.
190. Respondents had the opportunity to review the documents they signed on July 14, 2000, in
connection with Mount Prospect loan 9001. Tr. 1616 – 1617; 1694 - 1695.
191. If Respondents did not read the documents they signed on July 14, 2000, in connection with
Mount Prospect loan 9001, it was by choice. Tr. 1616 – 1617; 1694 - 1695.
192. Mount Prospect loans 9001 and 9002 were renewed on December 5, 2000. Jt. Exh. 1, Stip. 35.
193. At the December 5, 2000, renewal, the stock collateral securing loans 9001 and 9002 remained
the same, namely Certificate #s 2 and 3. Jt. Exh. 1, Stip. 36.
194. On December 5, 2000, Respondents Robert Michael and George Michael each signed: a
Promissory Note specifically identifying the collateral for loan 9001 as 35,440 shares of CFC
stock, represented by Certificate #3 in the name of George Michael, and 35,440 shares of CFC
stock, represented by Certificate #2 in the name of Robert Michael; and a Promissory Note
specifically identifying the loan collateral for loan 9002 as 35,440 shares of CFC stock,
represented by Certificate #3 in the name of George Michael, and 35,440 shares of CFC stock,
represented by Certificate #2 in the name of Robert Michael. Jt. Exh. 1, Stip. 37.
195. Respondents had the opportunity to review the documents they signed on December 5, 2000,
in connection with Mt. Prospect loans 9001 and 9002. Tr. 1616 - 1617; 1694 - 1695.
196. If Respondents did not read the documents they signed on December 5, 2000, in connection
with Mt. Prospect loans 9001 and 9002, it was by choice. Tr., 1616 - 1617; 1694 - 1695.
197. Mount Prospect loans 9001 and 9002 were renewed on April 5, 2001. Jt. Exh. 1, Stip. 38.
101
198. At the April 5, 2001, renewal, the stock collateral securing loans 9001 and 9002 remained the
same, namely Certificate #s 2 and 3. Jt. Exh. 1, Stip. 39.
199. On April 5, 2001, Respondents Robert Michael and George Michael each signed: a
Promissory Note specifically identifying the collateral for loan 9001 as 35,440 shares of CFC
stock, represented by Certificate #3 in the name of George Michael, and 35,440 shares of CFC
stock, represented by Certificate #2 in the name of Robert Michael; and a Promissory Note
specifically identifying the loan collateral for loan 9002 as 35,440 shares of CFC stock,
represented by Certificate #3 in the name of George Michael, and 35,440 shares of CFC stock,
represented by Certificate #2 in the name of Robert Michael. Jt. Exh. 1, Stip. 40.
200. Respondents had the opportunity to review the documents they signed on April 5, 2001, in
connection with Mount Prospect loans 9001 and 9002. Tr. 1616 - 1617; 1694 - 1695.
201. If Respondents did not read the documents they signed on April 5, 2001, in connection with
Mount Prospect loans 9001 and 9002, it was by choice. Tr. 1616 - 1617; 1694 - 1695.
202. Respondents’ claims are not credible that they did not know what collateral they were
pledging.
203. As directors of a bank, Respondents are held to higher standards than other borrowers and are
expected to provide honest and accurate information when obtaining a loan from another bank.
Tr. 736.
204. Respondent Robert Michael expects borrowers from his Bank to be aware of what collateral is
securing their loans. Tr. 1617.
205. FDIC examiners rely on the accuracy of bank records and on the truthfulness of borrower
representations in assessing the condition of a bank. Tr. 737 – 739; 740.
102
United Trust Bank
206. Mr. Zaring had had prior business dealings with Mr. John Van W inkle of United Trust Bank,
the deposits of which are insured by the Federal Deposit Insurance Corporation, and suggested
that Respondents attempt to obtain the $700,000 loan from that institution. Jt. Exh. 1, Stip. 53.
207. United Trust was unwilling to underwrite a loan secured solely by real estate within the short
time frame required for the $700,000 loan and required that the loan be supported primarily by
other, more liquid, collateral. Jt. Exh. 1, Stip. 54.
208. United Trust issued a loan commitment dated December 18, 2000, to Respondents regarding
the $700,000 loan. Jt. Exh. 1, Stip. 55.
209. The United Trust loan commitment provides that the loan will be secured by CFC stock in the
amount of approximately $1.3 million, and "as an abundance of caution Borrowers have
offered and Lender has accepted a second lien position" on real estate located at 6508 W .
Devon, Chicago. Jt. Exh. 1, Stip. 56.
The duplication
210. Some time prior to the closing of United Trust loan #30011 on December 20, 2000, a duplicate
CFC stock Certificate #3 was created by former Bank president Nicholas Tanglis. Jt. Exh. 1,
Stip. 64.
211. The day before the December 20, 2000 closing at United Trust, Jim Zaring told Nicholas
Tanglis that United Trust insisted on having possession of the stock prior to funding the loan.
Tr. 1286 - 1287.
212. Nicholas Tanglis looked for CFC stock Certificate #3, owned by George Michael, but he could
not find it. Nick Tanglis told Robert Michael he could not find the stock certificate and Robert
Michael told him to create a duplicate. Tr. 1289 - 1291; Tr. 408 - 410.
213. The duplicate Certificate #3, like the original Certificate #3, showed Respondent George
Michael as owner. Jt. Exh. 1, Stip. 65.
103
214. The duplicate Certificate #3, like the original Certificate #3, indicated that it represented
35,440 shares of CFC stock. Jt. Exh. 1, Stip. 66.
215. The duplicate Certificate #3, like the original Certificate #3, was numbered as “3”. Jt. Exh. 1,
Stip. 67.
216. The duplicate Certificate #3, like the original Certificate #3, bore an issue date of March 10,
2000. Jt. Exh. 1, Stip. 68.
217. The duplicate Certificate #3 bore no notation or other indication that it was a duplicate. Jt.
Exh. 1, Stip. 69.
218. The original and duplicate Certificates #3 can be distinguished in at least four ways: First, the
caption “Citizens Financial Corporation” appears in larger typeface on the duplicate #3 than on
the original. Second, Robert Michael and Nicholas Tanglis each signed the duplicate above
the other’s title – Robert Michael signing above the line reading “Secretary” and Nicholas
Tanglis signing above the line reading “President”. Third, the original bears the typewritten
notation, “See Legend on Reverse Side” near the top, and the duplicate does not. Finally, the
original describes “COMMON SHARES $1.00 PAR VALUE OF Citizens Financial
Corporation”, whereas the duplicate describes “COMMON SHARES OF CITIZENS
FINANCIAL CORPORATION”. Jt. Exh. 1, Stip. 70.
219. Prior to the closing of United Trust loan #30011, Respondent Robert Michael, in his capacity
as an officer of CFC, signed the duplicate Certificate #3. Jt. Exh. 1, Stip. 71.
220. The CFC board of directors did not direct that a replacement certificate be issued to
Respondent George Michael prior to the execution of the replacement Certificate #3 by
Respondent Robert Michael. Jt. Exh. 1, Stip. 72.
221. Respondent George Michael, registered owner of Certificate #3, did not present either a
mutilated certificate or affidavit of loss to CFC or its transfer agent prior to the execution of
the replacement Certificate #3 by Respondent Robert Michael. Jt. Exh. 1, Stip. 73.
104
222. One of the greatest concerns about the lack of proper control over the stock register of a bank
or its holding company is that absent such controls, one person can issue a new stock
certificate whenever he wants to and could pledge them to any number of banks. Tr. 819.
223. Robert Michael delivered an envelope with a stock certificate to United the morning of
December 20, 2000. He had opened the envelope and reviewed the stock certificates the day
before in his office in the presence of Gabhawala. (Tr. 407 – 408.)
224. Robert Michael, having instructed Nick Tanglis to create a duplicate Certificate #3 for
pledging to United Trust, knew he was signing a duplicate when he signed it in his capacity as
officer of the holding company. Tr. 1325.
225. Robert Michael instructed Nick Tanglis to make the duplicate CFC Certificate #3. Tr. 1326.
226. Prior to the time Nick Tanglis created duplicate CFC Certificate #3, he told Robert Michael
that he had no experience in handling a stock register book. Tr. 1322 - 1323.
227. As directors, Robert and George Michael are charged with knowledge of the contents of CBT
examination reports. See e.g., FDIC Exh. 14 at 4 and FDIC Exh. 16 at 5.
228. On May 25, 2000, Robert and George Michael attended a board meeting at the office of the
OBRE to discuss 2000 regulatory findings and to receive a proposed cease and desist order.
FDIC Exh. 14 at 4.
229. As of May 25, 2000, Respondents were placed on notice of the regulators’ concerns about
Nick Tanglis’s abilities and qualifications as a banker. FDIC Exh. 14.
The double pledge
230. On December 20, 2000, the United Trust $700,000 loan closed as loan #30011. Jt. Exh. 1,
Stip. 57.
231. W hen it closed, United Trust loan #30011 was secured by CFC Certificate #s 3 and 20 and by
a second mortgage on real estate at 6508 W . Devon. Jt. Exh. 1, Stip. 58.
105
232. In September of 2000, Jim Bousis, a shareholder of CFC, offered to sell his stock to the
Michaels. On September 21, 2000, the Michaels agreed to purchase Bousis’s 10,000 shares of
stock, represented by CFC Certificate #10, for its original cost, $300,000, and they agreed to
pay for the stock within 6 months, i.e., on or before March 21, 2001. Tr. 1608 – 1609, 1610 -
1611; FDIC Exh. 2 at 2; FDIC Exh. 241 at 2.
233. CFC Certificate #20 was jointly issued to Respondents Robert and George Michael on October
24, 2000 and was in the amount of 10,000 shares. FDIC Exh. 241 at 51.
234. CFC Certificate #20, in the amount of 10,000 shares, represented the re-issuance of Certificate
#10, originally issued to James Bousis. FDIC Exh. 241 at 28-29.
235. Respondents had not paid Mr. Bousis for Certificate #20 when on December 20, 2000, they
pledged it to United Trust Bank as collateral for loan #30011. Respondents did not pay Mr.
Bousis for Certificate #10 until May 4, 2001. Tr. 1615.
236. As of December 20, 2000, the Respondents collectively held just three CFC certificates--#2, #3
and #20. FDIC Exh. 241.
237. Robert Michael and George Michael signed a Promissory Note dated December 20, 2000, to
United Trust providing that loan #30011 would be secured by 45,440 shares of Citizens stock
and a second mortgage on a multi family residential building located at 6508-10 W . Devon
valued at $1,200,000.00 with a $570,000 first mortgage. The note was also signed by John
Van W inkle for United Trust. Jt. Exh. 1, Stip. 59.
238. Robert Michael and George Michael signed a Commercial Pledge Agreement, dated December
20, 2000, granting United Trust a security interest in 45,440 shares of Citizens Financial
Corporation stock. Jt. Exh. 1, Stip. 60.
239. Robert Michael and George Michael signed a collateral receipt dated December, 20, 2000,
describing the collateral for loan #30011 as “Two Certificates, Numbers 3 and 20, for 35,440
and 10,000 shares, respectively, in Citizens Bank and Trust.” Jt. Exh. 1, Stip. 61.
106
240. Robert Michael and George Michael signed an Irrevocable Stock or Bond Power or
Entitlement Order for 35,440 shares of the 203,068 shares of stock of Citizens Financial
Corporation represented by Certificate No. 3. Jt. Exh. 1, Stip. 62.
241. Robert Michael and George Michael signed an Irrevocable Stock or Bond Power or
Entitlement Order for 10,000 shares of the 203,068 shares of stock of Citizens Financial
Corporation represented by Certificate No. 20. Jt. Exh. 1, Stip. 63.
242. The December 20, 2000 United Trust note signed by Robert and George Michael contained
various warranties or representations in the section entitled “Additional Terms of the Security
Agreement”. Included is the following representation made by Robert and George Michael
relating to the security,
OW NERSHIP AND DUTIES TOW ARD PROPERTY – I represent that I own all of the Property, … . Your claim [United’s] is ahead of the claim of any other claim. Your claim to the Property is ahead of the claims of any other creditor. I agree to do whatever you require to protect your security interest and to keep your claim in the Property ahead of the claims of other creditors. I will not do anything to harm your [United’s] position.
FDIC Exh. 71. Similar representations are set out in the United Trust Security Agreement the
Respondents signed the same day. FDIC Exh. 88 at 2.
243. The United Trust commercial pledge agreement signed by the Respondents on December 20,
2000, contained various representations and warranties. In signing the commercial pledge
agreement, the Michaels warranted that: 1. they were “the lawful owner of the Collateral free
and clear of all security interests, lines, encumbrances and claims of others except as disclosed
to and accepted by [United] in writing prior to execution of this Agreement”; 2. they had “the
full right, power and authority to enter into this Agreement and to pledge the Collateral”; 3.
they “[have] not, and shall not, sell, assign, transfer, encumber or otherwise dispose of any of
[the Michaels’] rights in the Collateral except as provided in this Agreement.” FDIC Exh. 74
at 1.
107
244. The warranties or representations made by the Respondents when they signed the December
20, 2000, United Trust note, security agreement, and Commercial Pledge agreement were false
insofar as they related to CFC Certificate #3 because the certificate was already pledged to
Mount Prospect. Jt. Exh. 1, Stip. 39.
245. If the Michaels did not read the December 20, 2000, United Trust note, security agreement,
commercial pledge agreement and other supporting documents as they signed them; they chose
not to read them. R. 1616 - 1617; 1694 - 1695.
246. The duplication and pledging of CFC stock Certificate #3 also caused the Respondents to
violate the warranties and representations that they made to Mount Prospect in the notes and
loan documents for loan 9001 and loan 9002 from Mount Prospect. The pledging of a
duplicate certificate created an adverse claim on Mount Prospect’s security and was an
assignment, transfer or disposition of the collateral already pledged to Mount Prospect. FDIC
Exh. 145 at 1.
247. By approximately December 20, 2000, United Trust had physical possession of both the
duplicate Certificate #3 and Certificate #20. Jt. Exh. 1, Stip. 74.
248. On approximately March 29, 2001, Respondents Robert Michael and George Michael
executed a second mortgage on the Citizens Bank & Trust headquarters at 5700 N. Central
Avenue, in favor of United Trust. Jt. Exh. 1, Stip. 75.
249. At the time that Respondents executed the March 29, 2001, second mortgage on the property at
5700 N. Central, the property remained subject to a first mortgage in favor of Bank One. Jt.
Exh. 1, Stip. 76.
250. On approximately March 29, 2001, United Trust released its mortgage on the property at 6508
W . Devon. Jt. Exh. 1, Stip. 77.
251. On May 4, 2001, United Trust released CFC Certificate #20 to James Zaring. Mr. Zaring
signed a collateral receipt for Certificate #20 only. Jt. Exh. 1, Stip. 78.
108
252. Respondents Robert Michael and George Michael signed a Commercial Debt Modification
Agreement dated June 1, 2001, for United Trust loan #30011. Jt. Exh 1, Stip. 79.
253. Anna Les notarized the signatures of Robert Michael and George Michael on the Commercial
Debt Modification Agreement dated June 1, 2001, for United Trust loan #30011. Jt. Exh. 1,
Stip. 80.
254. The Commercial Debt Modification Agreement for United Trust loan #30011 identified that
the loan was to be secured by a second mortgage on 5700 N. Central Avenue, Chicago, Illinois
and by 35,000 shares [sic] of Citizens Bank stock. Jt. Exh. 1, Stip. 81.
255. The Commercial Modification Agreement, dated June 1, 2001 for United Trust loan #30011
stated that, except as specifically amended in the Modification, all terms of the Prior
Obligation remained in effect. FDIC Exh. 95 at 1.
The terms of the Prior Obligation were amended as follows: the payoff date of the amount
outstanding ($600,000) was extended to October 1, 2001; the interest rate was changed for the
period June 1 through October 1; and:
THE BALLOON PRINCIPAL PAYMENT OF $700,000 ORIGINALLY DUE JUNE 1, 2001 UNDER THIS LOAN NUMBER 30011 IS HEREBY
MODIFIED TO $100,000, W ITH THE REMAINING BALLOON PAYMENT OF $600,000 HEREBY EXTENDED TO OCTOBER 1, 2001.
(FDIC Exh. 95.)
256. On or about June 27, 2001, Ticor Title Insurance Company using proceeds from the Citizens
loan to Harvey Hospitality LLC issued check #9502008430 in the amount of $708,620.61 to
payoff United Trust loan #30011. (FDIC Exh. 114.)
257. On or about June 27, 2001, United Trust loan #30011 was paid down by approximately
$108,000 out of the $708, 620.61 proceeds from the Citizens loan to Harvey Hospitality.
(FDIC Exh. 95, 78, and 82.)
109
258. On June 28, 2001, United Trust issued a cashier’s check in the amount of $600,000 to Robert
and George Michael. The remitter line references the Michaels’ loan number at United Trust,
loan #30011. FDIC Exh. 294 at 1-2.
259. The $600,000 June 28, 2001 check issued by United Trust was negotiated and deposited in the
Respondents’ partnership account, R&G Properties, at Citizens Bank. FDIC Exh. 294 at 2
The second United Trust double pledge
260. On September 12, 2001, United Trust originated loan #31555 to Respondents Robert Michael
and George Michael personally. Jt. Exh. 1, Stip. 83.
261. United Trust loan #31555 was for $700,000. Jt. Exh. 1, Stip. 84.
262. The proceeds of United Trust loan #31555 were used to payoff the balance of $603,901.19
remaining on loan #30011. (FDIC Exh. 81.)
263. In addition, on September 12, 2001, United Trust issued two checks totaling $95,848.83 to the
Respondents from the remaining proceeds of loan #31555. The larger check, in the amount of
$95,584.80, was deposited in the R&G Properties account at Citizens. FDIC Exh. 295.
264. The two September 12, 2001 checks issued by United Trust totaling $95,848.83, coupled with
the $600,000 proceeds received by the Respondents on June 28, 2001, totaled nearly $700,000.
265. United Trust loan #31555 was, like loan #30011, secured by the duplicate Certificate #3 and a
second mortgage on the property at 5700 N. Central. Jt. Exh. 1, Stip. 85.
266. Robert Michael and George Michael each signed a September 12, 2001, promissory note for
United Trust loan #31555. Jt. Exh. 1, Stip. 86.
267. The United Trust promissory noted dated September 12, 2001, stated that the borrowers
granted United Trust Bank a security interest in 35,440 shares of Citizens Financial
Corporation common stock, representing approximately 1/6 of the corporate shares
outstanding. Jt. Exh. 1, Stip. 87.
110
268. Robert Michael and George Michael each signed a security agreement dated September 12,
2001, for United Trust loan #31555. Jt. Exh. 1, Stip. 88.
269. The security agreement dated September 12, 2001 for United Trust loan #31555 stated that the
borrowers granted United Trust Bank a security interest in 35,440 shares of Citizens Financial
Corporation common stock, representing approximately 1/6 of the corporate shares
outstanding, plus the Citizens Bank and Trust Bank building located at 5700 N. Central
Avenue, Chicago, Illinois. Jt. Exh. 1, Stip. 89.
270. In signing the September 12, 2001 security agreement, the Respondents warranted to United
Trust: “Your claim to the property is ahead of the claims of other creditors. I will not do
anything to harm your position.” FDIC Exh. 80 at 2.
271. W hen the Respondents signed the September 12, 2001 United Trust security agreement, the
representations in the security agreement were false as to CFC Certificate #3 because the
original CFC Certificate #3 had been pledged to Cole Taylor Bank one month earlier. (See
below paras. 276 – 291.) Jt. Exh. 1, Stip. 100.
272. United Trust loan #31555 was due and payable on April 1, 2002. Jt. Exh. 1, Stip. 90.
273. Respondents failed to pay off United Trust loan #31555 in full on April 1, 2002. FDIC Exh.
83.
274. Before loan #31555 was paid off, United Trust filed a foreclosure action against Robert and
George Michael to collect on United Trust loan #31555. Tr. 1050.
275. Respondents paid off United Trust loan #31555 in January 2003. Jt. Exh. 1, Stip. 91.
Cole Taylor Bank
276. On July 27, 2001, Cole Taylor Bank, Chicago, Illinois, the deposits of which are insured by the
Federal Deposit Insurance Corporation, originated a $1.5 million loan, note #0076497-001, to
Respondents Robert Michael and George Michael personally. Jt. Exh. 1, Stip. 92.
111
277. Cole Taylor required that Cole Taylor loan 0076497-001 loan be secured by 80,878 shares of
CFC stock. Jt. Exh. 1, Stip. 93.
278. Respondents intended to collateralize the Cole Taylor loan with Certificate #s 2 and 3. Jt. Exh.
1, Stip. 94.
279. The July 27, 2001, Cole Taylor loan was initially secured by CFC Certificate #s 2, 3 and 24.
Jt. Exh. 1, Stip. 95.
280. W hen the Cole Taylor loan closed on July 27, 2001, Cole Taylor did not take immediate
physical possession of either certificate #2 or #3. Jt. Exh. 1, Stip. 96.
281. Approximately $450,000 of the proceeds from Cole Taylor loan 0076497-001 were used to
pay down loans 9001 and 9002 at Mount Prospect. Jt. Exh. 1, Stip. 97.
282. A Mount Prospect credit memorandum, dated July 25, 2001, concludes that Mount Prospect
believed that it was undersecured by the CFC stock and that, after substituting the proposed
real estate and receiving a pay down, Mount Prospect would be in a stronger position from a
collateral standpoint. FDIC Exh. 140 at 22.
283. Nick Tanglis picked up Certificate #s 2 and 3 from Mount Prospect on August 1, 2001. Jt.
Exh. 1, Stip. 98.
284. Tanglis acknowledged receipt of Certificate #s 2 and 3 by signing and dating copies of the
certificates which copies were retained by Mount Prospect. Jt. Exh. 1, Stip. 99.
285. Certificate #s 2 and 3 were delivered to Cole Taylor on August 1, 2001. Jt. Exh. 1, Stip. 100.
286. The $1.5 million Cole Taylor loan was renewed on February 18, 2002. At that time, the
Respondents again signed a promissory note and various pledge agreements. FDIC Exh. 156
and 157.
287. On February 18, 2002, the Respondents signed a collateral pledge agreement relating to CFC
Certificate #3 that contained various warranties and representations. In signing the
Commercial Pledge Agreement, the Respondents made the following warranties and
112
representations: 1. the Respondents are “the lawful owner of the collateral free and clear of all
security interests, liens, encumbrances, and claims of others except as disclosed to and
accepted by Lender in writing prior to execution of this Agreement”; 2. the Respondents have
“not, and will not, sell, assign, transfer, encumber or otherwise dispose of any of [the
Respondents’] rights in the Collateral except as provided in this Agreement.” FDIC Exh. 157
at 1.
288. The warranties and representations relating to CFC Certificate #3 made by the Respondents
when they signed the February 18, 2002 Cole Taylor collateral agreement were false because
although Cole Taylor had the “original” CFC Certificate #3, United Trust simultaneously had
possession of a duplicate CFC Certificate #3 pledged to secure its loan to the Respondents. Jt.
Exh. 1, Stip. 102.
289. From December 20, 2000, until on or about August 1, 2001, original CFC stock Certificate #3
and duplicate CFC stock Certificate #3 were simultaneously pledged at Mount Prospect and
United Trust, respectively. Jt. Exh. 1, Stip. 101.
290. From on or about August 1, 2001, to January 13, 2003, original CFC stock Certificate #3 and
duplicate CFC stock Certificate #3 were simultaneously pledged at Cole Taylor and United
Trust, respectively. Jt. Exh. 1, Stip. 102.
291. After learning of the existence of the double pledge of CFC Certificate #3, Cole Taylor Bank
officer Bryn Perna indicated to Robert Michael that Cole Taylor had “enormous concern” over
learning of the double pledge and had concern over the validity of any stock pledged to Cole
Taylor Bank. Cole Taylor Bank requested that Respondents pledge real estate as collateral for
the Cole Taylor loan until all pledged stock could be validated. FDIC Exh. 255.
Double Pledge – Subsequent Events
292. On or about May 6, 2002, Respondent Robert Michael, Jim Zaring and Nicholas Tanglis met
with Akram Zanayed and Haddad Akkawi of United Trust. Jt. Exh. 1, Stip. 103.
113
293. At that time, Mr. Zanayed was United's Chairman of the Board and Mr. Akkawi was a
director. Jt. Exh. 1, Stip. 104.
294. The principal topic of the May 6, 2002, meeting was a possible merger or other combination
involving Citizens Bank and United Trust, but the matter of the Respondents' loan #31555
came up briefly as well. Jt. Exh. 1, Stip. 105.
295. As of November 5, 2001, United Trust Bank was subject to a cease and desist order which,
among other things, did not allow United Trust Bank to extend loans other than 1 to 4 family
residential mortgage loans without the prior written consent of the Regional Director of the
Office of Thrift Supervision. FDIC Exh. 82 at 7.
296. Mr. Zanayed told Respondent Robert Michael at the May 6, 2002 meeting that United Trust
needed a valuation of the CFC stock in order to consider renewing the loan to the Respondents.
Tr. 1037 – 1039.
297. In May 2002, Respondents believed that Cole Taylor loan 0076497-001 was secured by
various CFC stock certificates, including Certificate #s 2 and 3. Jt. Exh. 1, Stip. 106.
298. Respondent Robert Michael claims that in May and June of 2002, he believed that United
Trust loan #31555 was not secured by any stock. Tr. 1569.
299. On May 23, 2002, United Trust (per attorney James Carroll) sent a letter to Respondents
George and Robert Michael regarding repayment of loan #31155 for $700,000. Jt. Exh. 1,
Stip. 107.
300. The second page of the May 23, 2002, letter specifically describes the collateral securing loan
#31555 as a lien on property at 5700 N. Central, and 35,440 shares of CFC. The letter
threatens to liquidate the stock if the loan is not paid. Jt. Exh. 1, Stip. 108.
301. On May 26, 2002, Respondent Robert Michael sent a response to the May 23, 2002, letter from
United Trust. Jt. Exh. 1, Stip. 109.
114
302. In his May 26, 2002 response to United Trust, Respondent Robert Michael stated that “a
$700,000 loan requires both time and diligence to fund” and he requested 60 days to complete
that task. FDIC Exh. 85 at 3.
303. On May 31, 2002, United Trust responded to Respondent Robert Michael’s May 26, 2002,
letter concerning loan #31555. Like the May 23, 2002, letter, the May 31, 2002, letter
specifically referred to the 35,440 shares of stock securing the loan. Jt. Exh. 1, Stip. 110.
304. A listing of Respondents’ loans, dated August 6, 2001, reflects that the Respondents’ loan to
United Trust was secured by stock. FDIC Exh. 237.
305. On or about January 21, 2002, Respondents each signed personal financial statements that
indicate that their loan to United Trust was secured by stock. FDIC Exh. 238 at 4 and 11.
306. The evidence supports a reasonable inference that Robert Michael responded indifferently to
the news that United Trust still held his stock, when he knew the stock to be pledged to Cole
Taylor, because he was already aware of the fact. Tr. 1569.
307. The existence of the double pledge of the stock between United Trust and Cole Taylor was
ultimately discovered by FDIC and State of Illinois regulators in June of 2002, while the
examination of Citizens Bank was still on-going. Tr. 714 - 715.
308. In June of 2002, FDIC Field Office Supervisor Tom W ilkes, with the assistance of other FDIC
and OBRE examiners, used information available to the regulators to chart out, on a white
board, the various known outstanding debts of the Michaels and the security that supported
those debts. The examiners discovered that it appeared, from the information available to
them, that one CFC stock certificate was pledged at two different institutions. Tr. 717 – 718.
309. In June of 2002, the FDIC obtained copies CFC Certificate #3 at United Trust and a state
examiner obtained a copy of CFC Certificate #3 at Cole Taylor. The two documents were
obviously different, with difference in fonts and in the placement of signatures. Tr. 719 - 720;
FDIC Exh. 260; Jt. Exh. 1, Stip. 70.
115
310. Shortly after the initial discovery of the double pledge, the FDIC and the OBRE coordinated
the sealing of the two certificates at Cole Taylor and United Trust. Tr. 721 - 723.
311. At the moment that the certificates were being sealed, FDIC Field Office Supervisor Tom
W ilkes and OBRE Examiner Venetta Grant went to Citizens to review the stock register book.
Tr. 722 - 723.
312. During his review of the stock register book, FDIC Field Supervisor Tom W ilkes found yet
another version of CFC stock Certificate #3. Tr. 723 – 724.
313. At the time Field Office Supervisor Tom W ilkes visited Citizens Bank to inspect the register,
the stock register was housed in a drawer of either the desk or credenza in Robert Michael’s
office. Tr. 800 - 801.
314. In June of 2002, when Field Office Supervisor Tom W ilkes and OBRE examiner Venetta
Grant were at CBT, Robert Michael and Jim Zaring discussed the collateral at United Trust
and the fact that stock certificates were at United Trust. Tr. 730.
315. On July 1, 2002, Respondent Robert Michael received a call from Ben Shapiro who told him
that the collateral securing the Respondents’ loan at United Trust had been sealed. Tr.1568.
316. Respondent Robert Michael described the steps he took when he learned that the regulators
had seized stock certificates at United Trust and Cole Taylor. Tr. 1568 - 1569, 1570 - 1577.
317. Respondent Robert Michael keeps copies of his bank documents and loans in his desk drawer.
Tr. 1569.
318. Copies of the United Trust documents and the Cole Taylor documents, reflecting the double
pledge, were located in Robert Michael’s desk drawer. Tr. 1568 - 1569.
319. From December 19, 2000, when the original CFC stock Certificate #3 was reported lost and
when the duplicate CFC stock Certificate #3 was created, until July 1, 2002, when Respondent
Robert Michael learned that the regulators had seized stock certificates at United Trust and
116
Cole Taylor in July of 2002, Respondent Robert Michael took no steps to locate the original
CFC stock Certificate #3.
320. After the double pledge of CFC Certificate #3 was discovered, United Trust’s loan to
Respondents was classified and United Trust’s management was unsure if the double pledged
CFC Certificate #3 provided any collateral support for the loan. Tr. 1048 - 1049.
4205 West Irving Park
321. Since prior to 2000, Respondents have owned the property at 4201 W est Irving Park, Chicago.
Jt. Exh. 1, Stip. 156.
322. The property at 4201 W est Irving Park is adjacent to the property at 4205 W est Irving Park
(“4205 W est Irving Park property”). Jt. Exh. 1, Stip. 157.
323. Respondents contemplated purchasing the 4205 W est Irving Park property, for their own
account, as early as August 2001. Jt. Exh. 1, Stip. 158.
324. Respondents intended to own the 4205 W est Irving Park property, rather than re-sell it. Tr.
1664 - 1665.
325. Respondent George Michael believed that the asking price of $210,000 for the 4205 W est
Irving Park property was very low. Tr. 1655 - 1659; FDIC Exh. 159.
326. The 4205 W est Irving Park property, however, was subject to an $89,159.18 third party
judgment lien entered in May of 2001. A proper foreclosure would extinguish the judgment
lien and permit the foreclosing owner to take title to the property free of the judgment lien.
FDIC Exh. 161 at 4 and 9.
327. On August 3, 2001, Respondents entered into a contract to purchase the 4205 W est Irving Park
property from its owners at a price of $210,000. The Respondents made a down payment of
$10,000 toward this purchase. The closing was tentatively scheduled for August 31, 2001.
FDIC Exh. 159; FDIC Exh. 206.
117
328. The closing was delayed several months due to complications with the foreclosure
proceedings. See FDIC Exh. 161 at 2; Tr. 1664 - 1666.
329. Bank One nevertheless gave the keys to the property to George Michael, who immediately
began renovating the property. Tr. 1592 -1593.
330. In August of 2001, before having any ownership interest in the property, Respondent George
Michael put the utilities for the 4205 W est Irving Park property in his name. Tr. 1662 - 1663.
331. Between August 3, 2001 and May 28, 2002, Respondents invested a substantial amount of
money renovating the 4205 W est Irving Park property. Tr. 1667
332. All new electrical, plumbing, and drywall was installed. The entire roof was replaced. By May
2002, an estimated $100,000 in renovation work was completed. Tr. 1600, 1702 -1703.
333. In August 2001, the Respondents also began collecting rent on the 4205 W est Irving Park
property. Tr. 1700.
334. On February 8, 2002, Respondents’ company Michael Realty entered a lease with Stefan
Benteler for a portion of the property at 4205 W est Irving Park. The lease term was to begin
March 1, 2002, and end February 28, 2003. Jt. Exh. 1, Stip. 164.
335. No later than May 2l, 2002, Michael Realty had an account with ComEd, account 6086176021,
covering the 4205 W est Irving Park property. Jt. Exh. 1, Stip. 165.
336. The May 21, 2002, ComEd invoice covered electrical use at the 4205 W est Irving Park
property for the period Apri1 26, 2002, through May 21, 2002. Jt. Exh. 1, Stip. 166.
337. By their own admission, Respondents maintained a continued interest in purchasing the 4205
W est Irving Park property for themselves through at least Thursday, May 23, 2002. FDIC Exh.
167.
Galioto Nominee Loan
338. John Galioto was a customer of the Bank during 2001 – 2002, as well as a personal friend of
Robert Michael. Jt. Exh. 1, Stip. 153; Tr. 648-649, 1134-1135, 1583.)
118
339. In December 2001, Galioto purchased a residential property at 2885 Vogay Lane, Northbrook,
Illinois ("Vogay property"), for $240,000 cash. Jt. Exh. 1, Stip. 155.
340. Galioto also owned other real estate properties in Rosemont and Naperville, Illinois, which he
was attempting to refinance through CBT.
341. In early 2002, Respondent Robert Michael approached John Galioto asking to borrow money.
Tr. 528 - 529.
342. John Galioto did not have cash to lend to Respondent Robert Michael but indicated that he had
the unencumbered property on Vogay, in Northbrook, which could serve as a source of funds.
Tr. 528 - 529.
343. From approximately March 2002 through approximately April 4, 2002, Respondents sought a
loan from CIB Bank, Milwaukee, for the purpose of purchasing the 4205 W est Irving Park
property. FDIC Exh. 160; FDIC Exh. 161; FDIC Exh. 273; Tr. 927 - 930. James Zaring
advised the Respondents that CIB required a down payment of 25 percent, which the
Respondents were unable to pay.
344. In approximately April of 2002, Respondent Robert Michael told Jim Zaring that Respondents
did not have the necessary funds to complete the transaction on the 4205 W est Irving Park
property. Tr. 927 - 930.
345. By letter, dated April 14, 2002, Attorney Allen Titlebaum, acting on behalf of Respondents
Robert Michael and George Michael, wrote to counsel for Bank One, confirming among other
things that Bank One would transfer all right of title and interest on the 4205 W est Irving Park
property to an entity named by Respondents and that such entity would be substituted as a
party in the foreclosure proceedings. The Respondent also had the right to place two tenants
on the premises. FDIC Exh. 162.
346. The Respondents named R & G Properties as the entity to which right of title and interest
would transfer – not John Galioto.
119
The Vogay Lane Credit Line Loan
347. Approximately two weeks after the April 14, 2002 letter from Titlebaum agreeing to R&G
Properties’ purchase of the note and mortgage, Respondent Robert Michael prepared a request
for a credit line loan approval dated April 30, 2002, seeking the Bank’s board’s approval of a
$216,000 loan to John Galioto, secured by the Vogay Property. FDIC Exh. 163.
348. By a loan approval, dated April 30, 2002, CBT approved a $216,000, one year revolving line
of credit to John Galioto, to be secured by a first mortgage on the Vogay property. Jt. Exh. 1,
Stip. 160.
349. The officer on the Vogay loan was Respondent Robert Michael. The Vogay loan was
approved by all the CBT directors, namely, Respondents Robert and George Michael; James
Zaring, Nicholas Tanglis, John Sellis and Kenneth Koziol. Jt. Exh. 1, Stip. 161.
350. Respondents did not inform the Bank’s board that they had an interest in the transaction.
FDIC Exh.163.
351. The loan approval references a May 1, 2002 appraisal (“PVS on 5/2002”) and lists an
appraised value of $270,000. The $216,000 loan secured by the Vogay property was 80% of
its appraised value. FDIC Exh. 163.
352. The Vogay property was appraised as of May 1, 2002, which was after most of the renovations
had been completed, at a value of $270,000. Jt. Exh. 1, Stip. 162; FDIC Exh. 164.
353. Although the Peterson Valuation Services (“PVS”) appraisal of the Vogay property had an “as
of” date of May 1, 2002, one page of the appraisal was printed on May 14, 2002. FDIC Exh.
164 at 3 and 13.
354. The appraisal of the Vogay property was reviewed by Brent Baum on behalf of the Bank on
May 24, 2002. Jt. Exh. 1, Stip. 163; FDIC Exh. 164.
120
355. Although the loan approval is dated April 30, 2002, the reference to the Peterson appraisal
indicates the Board’s approval occurred sometime after May 14, 2002. FDIC Exh. 163, FDIC
Exh. 164.
356. The Bank issued a commitment letter dated May 24, 2002, bearing the signature of Respondent
Robert Michael, to John Galioto regarding the $216,000 loan on Galioto’s Vogay property.
John Galioto signed the letter and dated his signature May 25, 2002. Respondent Robert
Michael signed the letter again acknowledging receipt and dating his signature May 25, 2002.
Jt. Exh. 1, Stip. 172.
357. May 24, 2002, was a Friday. May 25, 2002, was a Saturday. That weekend was Memorial
Day. May 27, Monday was Memorial Day. May 28, Tuesday, was the first business day after
Friday, May 24.
358. Although John Galioto signed the commitment letter, and note and a mortgage securing the
note with his property at Vogay Lane, dated May 24, 2002, he testified that he did not
understand he was signing credit line loan documents for a loan secured by the Vogay Lane
property. Tr. 530-535, 536-541; FDIC 171 and 172.
359. John Galioto credibly testified that he did not know that a credit line loan in the amount of
$216,000 was being extended in his name by CBT, secured by his Vogay Lane property. Tr.
541 - 542.
The Respondents Use Galioto’s Vogay Credit Line
360. On May 20, 2002, counsel for Bank One wrote to attorney Allen Titlebaum, confirming that
R&G Properties would purchase the note and mortgage on the 4205 W est Irving Park property
on May 22, 2002 for $214,340.10. FDIC Exh. 165.
361. The Respondents, however, failed to appear at the closing. FDIC Exh. 166.
362. On May 23, 2002, Bank One counsel James Crowley wrote to Allen Titlebaum, counsel for
Respondents, withdrawing an offer to sell 4205 W est Irving Park to Respondents and
121
demanding that tenants placed on the property by Respondents be removed immediately. Jt.
Exh. 1, Stip. 167; FDIC Exh. 166.
363. On May 23, 2002, Attorney Gary Dienstag wrote to Bank One counsel James Crowley to
contest Bank One’s withdrawal of its offer to sell the 4205 W est Irving Park property. The
letter was faxed to Bank One at approximately 3:17 p.m. Jt. Exh. 1, Stip. 168.
364. Attorney Dienstag was representing R&G Properties in the May 23 letter. Jt. Exh. 1, Stip. 169.
365. Attorney Dienstag was not representing John Galioto in the May 23 letter. Jt. Exh. 1, Stip.
170.
366. Attorney Dienstag’s May 23 letter asserted that Respondents had a binding agreement with
Bank One to purchase the 4205 W est Irving Park note and mortgage. Attorney Dienstag
further asserted that funds to purchase the property would be wired to Bank One first thing in
the morning (Friday, May 24.). Jt. Exh. 1, Stip. 171.
367. On Friday, May 24, 2002, the Respondents did not wire funds to Bank One for the purchase of
the note and mortgage relating to the 4205 W est Irving Park property. FDIC Exh. 168.
368. The purchase of the note and mortgage on the 4205 W est Irving Park property from Bank One
took place on the morning of Tuesday, May 28, 2002. Jt. Exh.1, Stip. 175.
369. The May 28, 2002, purchase of the note and mortgage on the 4205 W est Irving Park property
was funded by two Citizens cashier’s checks dated May 28, 2002: Check number 013635 in
the amount of $210,000, and check number 013634 in the amount of $6,079.33. Jt. Exh. 1,
Stip. 176.
370. The loan to John Galioto secured by the Vogay Lane property was funded on Tuesday, May
28, 2002, as loan #100003311 (“Vogay loan” or “loan 3311”). Jt. Exh. 1, Stip. 173.
371. A portion of the proceeds of the Vogay loan were used to purchase Citizens Bank & Trust
cashiers check no. 013635 in the amount of $210,000. Jt. Exh. 1, Stip. 174.
372. The remitter of check number 013634 was R & G Properties. Jt. Exh. 1, Stip. 177.
122
373. On May 28, 2002, George Michael provided the R & G check (check number 013634) in the
amount of $6,079.33 to complete the closing on the 4205 W est Irving Park property note and
mortgage. Tr. 1697-1699.
374. On or about May 28, 2002, Respondent George Michael accepted, on behalf of R & G
Properties, the assignment of mortgage to R & G Properties from Bank One relating to the
4205 W est Irving Park property. Jt. Exh. 1, Stip. 183; FDIC Exh. 178, 179, 180, and 181.
375. Respondents purchased the note, mortgage and related guaranties relating to the 4205 W est
Irving Park property for their partnership, R & G Properties, using the proceeds of the loan in
the name of John Galioto and collateralized by Galioto’s Vogay property. FDIC Exh. 178,
179, 180, and 181.
376. On or about June 3, 2002, R & G Properties was substituted as party plaintiff in place of Bank
One in the action to foreclose the mortgage on the 4205 W est Irving Park property. FDIC Exh.
183 at 2.
377. R&G Properties was substituted into the foreclosure action on the 4205 W est Irving Park
property as plaintiff in its own name and capacity, without any designation that R & G was
acting as agent for any person. FDIC Exh. 182.
378. On August 27, 2002, Attorney Gary Dienstag wrote to Jeff Deer, counsel for the debtors,
stating that "R & G Properties has asked me to take over the completion of the foreclosure
suit". Jt. Exh. 1, Stip. 185.
379. The August 27, 2002, letter Attorney Gary Dienstag wrote to counsel for Bank One bears no
indication that R&G Properties is acting as agent of John Galioto or that Attorney Gary
Dienstag is appearing on Galioto’s behalf rather than that of R&G Properties. FDIC Exh. 185.
380. There is no written agency agreement between R&G Properties and John Galioto regarding the
property at 4205 W est Irving Park. Jt. Exh. 1, Stip. 182.
123
381. The self-serving claims of Respondents are the only evidence in the record of an agency
between John Galioto and Respondents concerning the 4205 W est Irving property. Such
claims are insufficient as a matter of law to establish an agency relationship. Tr. 1670-1672.
382. The ostensible principal, John Galioto, denies the existence of any agency relationship with
Respondents or their interests respecting the 4205 W est Irving Park property. Tr. 576-577.
Respondents Transfer 4205 West Irving Park to Galioto
383. On or about October 1, 2002, R & G Properties assigned the note and mortgage, secured by the
4205 W est property, to John Galioto. Jt. Exh. 1, Stip. 186.
384. On or about October 1, 2002, John Galioto signed certain documents accepting the assignment
of the note, mortgage and guaranties relating to the 4205 W est Irving Park property. FDIC
Exhs. 186, 187, 188, and 189.
385. At the time he signed documents on October 1, 2002, John Galioto testified that he did not
understand that he was signing documents relating to the 4205 W est Irving Park property. Tr.,
J. Galioto, vol. 4, p. 550, l. 23 to 558, l. 13.
386. On or about October 22, 2002, John Galioto was substituted in as party plaintiff in the action to
foreclose the mortgage on the 4205 W est Irving Park property. Jt. Exh. 1, Stip. 187.
387. The Motion to Substitute and Order dated October 22, 2002, filed ostensibly on John Galioto's
behalf, were filed by Attorney Gary Dienstag. The motion papers recite assignments by R & G
Properties to John Galioto, but do not indicate that R & G Properties had been acting as agent
for John Galioto. FDIC Exh. 190, FDIC Exh. 217.
388. Attorney Gary Dienstag purportedly represented the plaintiff, John Galioto, in the foreclosure
action on the 4205 W est Irving Park property. FDIC Exh. 217.
389. John Galioto does not know who Gary Dienstag is and Gary Dienstag or the law firm of
Springer, Casey and Dienstag have never represented him. Tr. 560-561, 572.
124
390. Respondents, not John Galioto, paid Attorney Dienstag for his work on the 4205 W est Irving
Park property foreclosure. Tr. 1701.
391. Attorney Gary Dienstag never spoke to, communicated with, or billed his putative client, John
Galioto, in connection with the foreclosure action on the 4205 W est Irving Park property. Tr.,
570-572, 573-574, 575.
392. On or about November 21, 2002, the mortgage on the 4205 W est Irving Park property was
foreclosed upon, vesting legal title to the 4205 W est Irving Park property in John Galioto. Jt.
Exh. 1, Stip. 188.
393. As of January 3, 2003, Respondents Robert Michael and George Michael were not the owners
of record of either the 4205 W est Irving Park property or of the note and mortgage respecting
the 4205 W est Irving Park property. Jt. Exh. 1, Stip. 189.
394. Robert and George Michael nevertheless applied for a business policy of insurance, policy no.
93-TN-5046-6, from State Farm on the 4205 W est Irving Park property effective January 3,
2003. FDIC Exh. 218.
395. The application for State Farm policy 93-TN-5046-6 was made in the name of Robert Michael
and George Michael. Jt. Exh. 1, Stip. 190.
396. The application for State Farm policy 93-TN-5046-6 identifies Robert Michael and George
Michael as owners of the 4205 W est Irving Park property. Jt. Exh. 1, Stip. 191.
397. Respondents paid for the insurance on 4205 W est Irving Park property. FDIC Exh. 219.
398. John Galioto has never seen the 4205 W est Irving Park property and does not know if it exists.
Tr. 576-577.
399. Major renovations and rehab on the 4205 W est Irving Park property had been completed by
the time that Respondents purchased the note and mortgage in May 2002. Tr. 1702-1703.
400. On May 13, 2002, R & G Properties as "lessor" (by Respondent George Michael) signed a
lease with Mark & Nikol Margiotta for one of the two offices at 4205 W est Irving Park. The
125
term of the lease was from June 1, 2002, through May 30, 2003, and the rent was $950 per
month. FDIC Exh. 231 at 10.
401. On September 10, 2002, R & G Properties as "lessor" (by Respondent George Michael) signed
a lease with Leidy Rivera and Pablo Caicedo for one of the two offices at 4205 W . Irving Park
to use as an Herbal Life Office. The term of the lease was from October 1, 2002, to September
30, 2004, and the rent was $1,500 per month. FDIC Exh. 231 at 1.
402. On March 6, 2003, George Michael, on behalf of R & G Properties (as lessor), signed a lease
with lessee George Sirack. The lease began on July 1, 2003, and was to end on June 30, 2004.
The rent was $1,500 per month. Jt. Exh. 1, Stip. 192; FDIC Exh. 231 at 4.
403. None of the foregoing leases indicated that R & G Properties was acting in any capacity other
than as principal. FDIC Exh. 231.
404. R&G Properties collected all rents on the 4205 W est Irving Park property and did not remit
them to John Galioto. Tr. 1700-1701.
405. At all times, from August of 2001 through September 11, 2003, Respondents acted as de facto
owners of the 4205 W est Irving Park property. Tr.1662-1700.
406. Despite R & G Properties not having formal title to the 4205 W est Irving Park property until
September 11, 2003, R & G Properties’ 2003 partnership tax return shows $18,000 of rental
income on the 4205 W est Irving Park property. FDIC Exh. 204, FDIC Exh. 233 at 18.
407. Cook County property taxes for the second half of 2001 relating to the 4205 W est Irving Park
property were paid with a LaSalle Bank cashier’s check on November 1, 2002. The check was
obtained by cash. John Galioto testified that he did not pay property taxes on the 4205 W est
Irving Park property. FDIC Exh. 228; Tr. 582-583.
408. Cook County property taxes for the first half of 2002 relating to the 4205 W est Irving Park
property were paid by check #1223, dated March 3, 2003, and drawn on R & G Properties
account 10002046. Jt. Exh. 1, Stip. 221; FDIC Exh. 227 at 1 and 6.
126
409. John Galioto signed a document entitled “Automatic Transfer Authorization”, bearing the date
May 22, 2002, which directed the Bank to make the monthly loan payments on his loans –1920
(Granville) and –3311 (Vogay) via automatic transfer from G & G Leasing LLC Account
#10003085. Jt. Exh. 1, Stip. 178.
410. Transfers from G & G Leasing LLC Account #10003085 made payments on loan -1920 during
the months of May, July and August 2002. Jt. Exh. 1, Stip. 179.
411. Loan payments on loan -3311 were not made by automatic transfer from G & G Leasing LLC
Account #10003085. Jt. Exh. 1, Stip. 180.
412. Vogay loan payments were made in cash on the following dates and in the following amounts:
October 1, 2002 $1461.37
November 8, 2002 $1500.64
November 25, 2002 $1539.13
January 6, 2003 $1541.06
January 31, 2003 $1539.12
May 28, 2003 $1500.64
Jt. Exh. 1, Stip. 181.
413. John Galioto credibly testified that he never made any monthly payments on the Vogay loan.
Tr. 569.
414. John Galioto credibly testified that he never made any payments on the Vogay loan in cash or
by monthly debits from an account. Tr. 568-569, 570.
415. At or just prior to closing on the sale of the Vogay property, John Galioto learned from his
attorney that CBT had a mortgage on the Vogay property. Tr. 604.
416. After learning that CBT had a mortgage on the Vogay property, John Galioto called
Respondent Robert Michael who said that he had put a loan on the Vogay property but would
repay John Galioto in four to six weeks. Tr. 603-604, 667.
127
417. On or about August 21, 2003, John Galioto sold the Vogay property that secured CBT’s
$216,000 Galioto loan -3311. Jt. Exh. 1, Stip. 195.
418. The balance on CBT loan -3311 of approximately $215,568.20 was paid in full from the sale
proceeds. Jt. Exh. 1, Stip. 196.
The Respondents Buy Back 4205 West Irving Park
419. A document styled as “Real Estate Sales Contract” states that John Galioto, identified as seller,
agreed to sell the 4205 W est Irving Park property to Respondents Robert and George Michael,
identified as “buyers”, for $400,000. The signatures identified as those of the “buyers” bear
the date June 12, 2003, and the signature of John Galioto bears the date July 9, 2003. Jt. Exh.
1, Stip. 193.
420. The purchase price of $400,000 was not negotiated between John Galioto and R & G
Properties (the purported buyer) but instead inserted by George Michael at the direction of
Robert Michael. Tr. 1598-1599, 1620; Tr.1673.
421. The July 9, 2003, Real Estate Sales Contract forwarded by Respondent George Michael to
First Commercial Bank in July 2003 reflected an earnest money deposit of $40,000. FDIC
Exh. 193.
422. Respondents did not make a cash earnest money payment of either $40,000 or $100,000 to
John Galioto in connection with the September 11, 2003, purchase of the 4205 W est Irving
Park property. Jt. Exh. 1, Stip. 210.
423. The $40,000 or $100,000 earnest money figures were not the result of a “reconciliation of
debts” between the Respondents and John Galioto. Tr. 624.
424. John Galioto credibly testified that he did not owe Respondents any money at the time of the
July 2003 contract. Tr. 624-627, 628.
425. Respondents admitted that the $40,000 figure was not negotiated with John Galioto, but was a
standard 10% of the purchase price. Tr. 1676.
128
426. In July of 2003, Robert and/or George Michael approached First Commercial Bank, a state
nonmember bank located in Chicago, Illinois, for a loan to complete the purchase of the Irving
Park Property from Galioto. FDIC Exh. 306.
427. On July 10, 2003, Respondent George Michael faxed the signed Real Estate Sales Contract to
Matt Norkett, Executive Vice President, First Commercial Bank, Chicago, Illinois, with a
handwritten request on the cover sheet to close "4205 W . Irving, 5757 Elston, 3600 LSD".
Joint Exh. 1, Stip. 194.
428. Respondents did not inform First Commercial Bank that they had a personal relationship and
other business relationships with the seller of the 4205 W est Irving Park property, John
Galioto. Tr. 335.
429. Respondents did not inform First Commercial Bank that the $40,000 “earnest money payment”
shown on the July 9, 2003, Contract for Sale, and later, the $100,000 “earnest money” found
on the September 11, 2003, HUD-1, was not a cash payment but instead the purported
reconciliation of debts between John Galioto and Respondents. This was a material omission.
Tr. 324-326, 337-338.
430. Respondents failed to inform First Commercial Bank that the purported reconciliation of debts
between John Galioto and Respondents represented by the $40,000 and $100,000 figures
incorrectly labeled “earnest money payments” was not negotiated between the parties, but
instead was determined by Respondents unilaterally. Tr. 324-326, 337-338.
431. Respondents did not inform First Commercial Bank that there had been a series of events
between Respondents and John Galioto relating to the 4205 W est Irving Park property. This
was a material omission because First Commercial Bank loan officer Matthew Norkett would
want to know this information to ensure that the transaction was arm’s length. Tr. 334-335.
432. First Commercial Bank officer Matthew Norkett expects earnest money payment to be paid in
the form of cash or a check. Tr. 313-314.
129
433. If earnest money were a reconciliation of debt, First Commercial Bank officer Matthew
Norkett would expect to see an executed agreement between the parties. Tr. 325-326.
434. Respondents failed to inform First Commercial Bank that the billboard lease offer received by
George Michael was an offer from Fair Home Mortgage, an affiliate. This was a material
omission. Tr. 334.
435. A bank relies on a property's stated income as a material consideration in determining whether
to grant a loan and to determine the amount and pricing of the loan. Tr. 328-332.
436. The 80 percent loan-to-value ratio exceeded First Commercial's loan policy of 75 percent loan
to value. FDIC Exh. 269; Tr. 322.
437. Peterson Appraisal performed an appraisal of the 4205 W est Irving Park property dated as of
August 6, 2003. Jt. Exh. 1, Stip. 197.
438. On September 8, 2003, Peterson Appraisal forwarded its completed appraisal of the 4205 W est
Irving Park property to Matt Norkett at First Commercial Bank. Jt. Exh. 1, Stip. 204.
439. Peterson valued the 4205 W est Irving Park property at $400,000. Jt. Exh. 1, Stip. 205.
440. The Peterson appraisal omits several material adverse facts known to Respondents but not
reported to the appraiser. For example, the Peterson appraisal failed to reflect the foreclosure
on the 4205 W est Irving Park property, a transaction that had occurred in the prior three years.
To comply with the Uniform Standards of Professional Appraisal Practice (“USPAP”), an
appraisal must include a three year sales history on the property . FDIC Exh. 224 at 11;
Tr. 103-104.
441. The Peterson appraisal did not reflect the prior purchase of the note and mortgage, or the
assignments between the parties who were now representing an "arm's length" transaction
(between principal and agent no less). FDIC Exh. 224.
442. On August 5, 2003, Teresa Giannini (Vice President) of Fair Home Mortgage Co. wrote to
Respondent George Michael, a co-owner of the company, on Fair Home Mortgage Co.
130
letterhead stating Ms. Giannini’s interest in “immediately” renting the roof top sign at 4205 W .
Irving Park Road at a monthly rent of $3,000. Jt. Exh. 1, Stip. 198; FDIC Exh. 196.
443. Respondents Robert Michael and George Michael own Fair Home Mortgage Co. Jt. Exh. 1,
Stip. 199.
444. Fair Home Mortgage Co. is headquartered at 5680 N. Elston, Chicago. Jt. Exh. 1, Stip. 200.
445. Respondents’ company Michael Realty is headquartered at 5680 N. Elston. Jt. Exh. 1, Stip.
201.
446. Respondents own the building at 5680 N. Elston. Jt. Exh. 1, Stip. 202.
447. Robert Michael is the president of Fair Home Mortgage Co. and George Michael is its agent.
Jt. Exh. 1, Stip. 203.
448. The offer from Teresa Giannini on behalf of the Respondents’ company, Fair Home Mortgage,
to rent the rooftop sign at the 4205 W est Irving Park property was not a good faith, arm’s
length offer. Tr. 142-143.
449. The letter Respondent George Michael received from Ms. Giannini on behalf of Fair Home
Mortgage was provided to Peterson Appraisal in connection with Peterson’s appraisal of the
4205 W est Irving Park property. FDIC Exh. 196; FDIC Exh. 224 at 57.
450. The August 6, 2003 appraisal used the August 5, 2003 Fair Home Mortgage letter as a basis
for establishing a rental rate for the billboard. FDIC Exh. 224 at 57.
451. The Peterson appraisal’s reliance on the offer to rent the billboard made by a related entity
violated USPAP. Tr. 137-143.
452. Leidy Rivera d/b/a Herbal Life, the second floor tenant at the 4205 W est Irving Park property,
was in default on rent payments during March, April, May and June 2003. FDIC Exh. 265 at
1.
131
453. Respondents’ company, Michael Realty, sued the second floor tenant of the 4205 W est Irving
Park property, Leidy Rivera, on June 11, 2003, for past due rent and possession of the
property. FDIC Exh. 265 at 1.
454. Michael Realty obtained a judgment against Leidy Rivera on August 11, 2003. FDIC Exh. 265
at 4.
455. By September 11, 2003, when the First Commercial loan to George Michael closed, possession
of Leidy Rivera’s leasehold interest had been granted to Michael Realty. FDIC Exh. 265.
456. Even fully leased, the rental income at the 4205 W est Irving Park property was not sufficient
to cover debt service of approximately $24,000 per year. FDIC Exh. 269.
457. First Commercial considered the "DCR" [debt coverage ratio] to be "low". FDIC Exh. 269;
Tr. 323-324.
458. Respondents failed to inform First Commercial Bank that the second floor tenants of the 4205
W est Irving Park property had failed to pay rent for several months, were in default and had
been evicted. This was a material omission. Tr. 328-332.
459. The June 11, 2003 complaint against the 4205 W est Irving Park property tenants Leidy Rivera
and Pablo Caicedo was signed by George Michael. Although title to the 4205 W est Irving
Park property purportedly belonged to John Galioto, the complaint contains no allegation or
indication that Michael Realty is suing in any capacity but as principal. FDIC Exh. 265 at 1.
460. The July 11, 2003 complaint against second floor tenants Leidy Rivera and Pablo Caicedo was
signed by attorney Gary Dienstag. The complaint contains no allegation that the right to rents
or possession respecting the 4205 W est Irving Park property had been assigned to Michael
Realty by either John Galioto or R&G Properties. FDIC Exh. 265 at 1.
461. Shortly before September 11, 2003, First Commercial Bank approved a $320,000 loan to
George Michael, secured by the 4205 W est Irving Park property. Jt. Exh. 1, Stip. 206.
132
462. By check no. 68050, dated September 10, 2003, First Commercial Bank disbursed $315,885 in
loan proceeds to Ticor Title Insurance Co. “RE: Michael Loan #11603247”. Jt. Exh. 1, Stip.
207.
463. The transfer of the 4205 W est Irving Park property from John Galioto to George Michael took
place on September 11, 2003. Jt. Exh. 1, Stip. 208.
464. John Galioto was not present at the September 11, 2003 closing of the sale of the 4205 W est
Irving Park property to Respondent George Michael. Tr. 1677-1679.
465. John Galioto credibly testified that he had no knowledge of the September 11, 2003, closing at
which he ostensibly “sold” the 4205 W est Irving Park property to George Michael. Tr. 606-
608.
466. John Galioto was nominally represented at the September 11, 2003, closing by Attorney Nick
Duric. Tr. 1677-1679.
467. At no time did Nick Duric represent John Galioto in connection with any real estate
transaction. John Galioto never authorized Respondents to obtain an attorney on his behalf.
Tr. 618.
468. John Galioto has never spoken with Nick Duric concerning the 4205 W est Irving Park
property. Tr. 618-619.
469. John Galioto did not sign the warranty deed purporting to transfer title to the 4205 W est Irving
Park property from John Galioto to Respondent George Michael. Tr. 613-614.
470. Respondent George Michael signed John Galioto’s name to the warranty deed purporting to
transfer title to the 4205 W est Irving Park property from John Galioto to Respondent George
Michael. Jt. Exh. 1, Stip. 217.
471. Respondent George Michael had no written power of attorney from John Galioto authorizing
him to sign John Galioto’s name to the warranty deed purporting to transfer title to the 4205
W est Irving Park property. Jt. Exh. 1, Stip. 218.
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472. John Galioto did not give anyone a written or verbal power of attorney to sign his name to the
warranty deed purporting to transfer title to the 4205 W est Irving Park property from John
Galioto to Respondent George Michael. Tr. 623-624.
473. The September 11, 2003 warranty deed for the 4205 W est Irving Park property has a notary
signature purporting to notarize George Michael’s signature of John Galioto. FDIC Exh. 204
at 2.
474. Ticor 1099 Solicitation for Policy SC 000387120 was completed at the September 11, 2003,
sale of the 4205 W est Irving Park property. This form requires that the seller provide certain
information for federal income tax purposes. Jt. Exh. 1, Stip. 213.
475. The signature on the Ticor 1099 form is not that of John Galioto. Jt. Exh. 1, Stip. 214.
476. The address showing on the Ticor 1099 form, 5680 N. Elston, Chicago, is not that of John
Galioto. Jt. Exh. 1, Stip. 215; FDIC Exh. 203.
477. The address, 5680 N. Elston, is the address for Respondents’ companies Michael Realty and
Fair Home Mortgage Co. and Respondents own the building at 5680 N. Elston. Jt. Exh. 1,
Stips. 216 and 202; FDIC Exh. 203.
478. The signature on the Ticor Title Statement is not that of John Galioto and he did not authorize
anyone to sign on his behalf. FDIC Exh. 202; Tr. 610-611.
479. The Ticor 1099 form represents John Galioto’s Social Security number to be 346-62-1859.
That is not John Galioto’s Social Security number. Tr. 612-613; FDIC Exh. 203.
480. The signature on the Ticor closing HUD-1 statement is not that of John Galioto and he did not
authorize anyone to sign on his behalf. FDIC Exh. 198; Tr. 607.
481. The HUD-1 form for the 4205 W est Irving Park property closing reflects a purchase price of
$400,000 and an earnest money deposit of $100,000. Jt. Exh. 1, Stip. 209.
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482. Respondents did not make a cash earnest money payment of either $40,000 or $100,000 to
John Galioto in connection with the September 11, 2003, purchase of the 4205 W est Irving
Park property. Jt. Exh. 1, Stip. 210.
483. At the September 11, 2003, closing for the 4205 W est Irving Park property, Ticor Title issued:
check no. 9552073522 in the amount of $214,000, payable to John Galioto.
check no. 9552073521 in the amount of $15,396.42, payable to Respondent George Michael.
check no. 9552073523 in the amount of $66,994.31, payable to R & G Properties.
Jt. Exh. 1, Stip. 211; FDIC Exh. 198; FDIC Exh. 200 at 3-4.
484. Ticor check no. 9552073523 to R&G Properties was deposited on September 12, 2003, into
R&G’s account no. 10003911 at Citizens Bank & Trust. Jt. Exh. 1, Stip. 212.
485. The loan by First Commercial Bank to Respondent George Michael to purchase the 4205 W est
Irving Park property was secured by a first mortgage on the 4205 W est Irving Park property.
Jt. Exh. 1, Stip. 219.
486. Cook County property tax certificates for the year 2000 relating to the 4205 W est Irving Park
property were purchased by Gothic Investment Ltd., and redeemed at the September 11, 2003,
sale to George Michael. Jt. Exh. 1, Stip. 220.
487. Cook County property taxes relating to the 4205 W est Irving Park property for the first half of
2001, the second half of 2002, and 2003 through September 11, were paid at the September 11,
2003, sale to George Michael. Jt. Exh. 1, Stip. 222.
488. On September 11, 2003, Respondent George Michael signed a promissory note, assignment of
rents and mortgage on the 4205 W est Irving Park property in favor of First Commercial Bank
in connection with the $320,000 loan. FDIC Exh. 270, 271, and 272.
489. On September 11, 2003, when George Michael executed a Mortgage on the 4205 W est Irving
Park property in favor of First Commercial, he warranted that he had good and marketable
title, despite the fact that he had executed the warranty deed to himself. FDIC Exh. 271 at 5.
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490. John Galioto received the $214,000 check arising from the September 11, 2003 closing and
approximately $660 in cash from Robert Michael for the repayment of the $214,660.07 payoff
on Vogay. Tr. 605; FDIC Exh. 195.
491. Subsequent to receipt of the $214,000 check, John Galioto credibly testified that he first
became aware that the 4205 W est Irving Park property had been titled in his name. He tried,
but was not successful in obtaining information about the 4205 W est Irving Park property from
Robert Michael. Through his attorney, John Galioto contacted Ticor Title to obtain
information but was unsuccessful. Ultimately, John Galioto sued Ticor Title to obtain
information concerning the 4205 W est Irving Park property. Tr. 605-606.
492. John Galioto made no profit on his purported ownership of the 4205 W est Irving Park
property. Tr. 605; FDIC Exh. 195; FDIC Exh. 200 at 4.
493. As of March 31, 2002, the Bank’s Call Report reported that the Bank’s unimpaired capital and
unimpaired surplus equaled $5,019,000, and five percent of the Bank’s unimpaired capital and
surplus equaled $250,950. FDIC Exh. 289 at 27.
494. At the time of the May 28, 2002 loan to John Galioto which was used for the benefit of
Respondents’ partnership, R & G Properties, the loan to Harvey Hospitality of approximately
$475,000 ($2.9 million less participations) remained outstanding. FDIC Exh. 19 at 5-6.
495. The Bank’s May 28, 2002 loan in the amount of $216,000 ostensibly to John Galioto, but used
for the benefit of Respondents’ partnership, coupled with the outstanding loan to Harvey
Hospitality attributed to Respondents under the tangible economic benefit rule, exceeded five
percent of the Bank’s unimpaired capital and surplus and, therefore, was subject to the prior
approval requirement of 12 C.F.R. § 337.3(b).
496. The CBT loan to John Galioto was a nominee loan for the benefit of Respondents or their
partnership, R & G Properties, and not John Galioto.
136
497. Examiners testified that the Respondents’ actions relating to the loan purportedly to John
Galioto violated Regulation O. Tr. 1089-1091.
498. Examiners testified that the Respondents’ actions relating to the loan purportedly to John
Galioto were a breach of Respondents’ respective fiduciary duties. Tr. 1091-1092.
499. Respondents had a fiduciary duty and a responsibility under Regulation O to disclose their
interest in the loan to John Galioto at the time of the loan approval. Tr. 1091-1092.
500. Examiners testified that the Respondents’ actions relating to the loan purportedly to John
Galioto constituted an unsafe and unsound banking practice. Tr. 1091.
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Appendix B
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.
______________________________________ ) In The Matter of ) ) Robert Michael, ) FDIC 03-106eGeorge Michael, ) FDIC 03-107kIndividually and as ) institution affiliated parties of ) ) Citizens Bank and Trust Company of Chicago ) Chicago, Illinois ) (Insured State Nonmember Bank) ) ______________________________________ )
PROPOSED ORDER OF REMOVAL AND PROHIBITION
On October 31, 2006, the Federal Deposit Insurance Corporation (“FDIC”) issued a Notice of
Intention to Remove from Office and to Prohibit from Further Participation, and Notice of Assessment of
Civil Money Penalty, Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing
against Respondent Robert Michael and Respondent George Michael, individually, and as institution-
affiliated parties of Citizens Bank and Trust Company of Chicago, Chicago, Illinois (Insured State
Nonmember Bank) (the “Bank”). The Respondents filed a timely answer to the Notice.
From October 14, 2008 through October 21, 2008, a hearing was held in Chicago, Illinois, to
determine: (1) whether a permanent order should be issued to remove the Respondents from office and
prohibit the Respondents from further participation in the conduct of the affairs of the Bank and any
insured depository institution or organization enumerated in section 8(e)(7)(A) of the Federal Deposit
Insurance Act (“FDI Act”), 12 U.S.C. §1818(e)(7)(A), without the prior written permission of the FDIC
and the appropriate Federal financial institutions regulatory agency, as that term is defined in section
8(e)(7)(D) of the FDI Act, 12 U.S.C. §1818(e)(7)(D); and (2) whether the FDIC’s ORDER TO PAY
should be sustained. All parties appeared, including Respondents, and were given the opportunity to be
heard, and evidence was taken.
138
Having considered the evidence presented at said hearing and the record as a whole, and the
arguments of both parties, and the Recommended Decision issued by the presiding administrative law
judge,
Pursuant to section 8(e) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(e), it is hereby
ORDERED, that:
1. Robert Michael is hereby removed as a director and officer of the Bank, and George Michael is hereby removed as a director of the Bank; and
2. Robert Michael and George Michael are prohibited from participating and shall not participate in any manner in the conduct of the affairs of any insured depository institution, agency or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D); and
3. Robert Michael and George Michael shall not solicit, procure, transfer, attempt to transfer, vote, or attempt to vote any proxy, consent or authorization with respect to any voting rights in any financial institution, agency, or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D); and
4. Robert Michael and George Michael shall not violate any voting agreement with respect to any insured depository institution, agency, or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D); and
5. Robert Michael and George Michael shall not vote for a director, or serve or act as an institution-affiliated party, as that term is defined in section 3(u) of the FDI Act, 12 U.S.C. § 1813(u), for any insured depository institution, agency, or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D), of the FDI Act, 12 U.S.C. § 1818(e)(7)(D).
This ORDER will become effective thirty (30) days from the date of its issuance.
139
The provisions of this ORDER will remain effective and in force except in the event that, and until
such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside
by the FDIC.
IT IS SO ORDERED.
Dated at W ashington, DC, this _______ day of ___________________, 2009
__________________________ Board of Directors Federal Deposit Insurance Corporation.
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FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.
______________________________________ ) In The Matter of ) ) Robert Michael, ) FDIC 03-106eGeorge Michael, ) FDIC 03-107kIndividually and as ) institution affiliated parties of ) ) Citizens Bank and Trust Company of Chicago ) Chicago, Illinois ) (Insured State Nonmember Bank) ) ______________________________________ )
PROPOSED ORDER
ASSESSMENT OF CIVIL MONEY PENALTIES
On October 31, 2006, the Federal Deposit Insurance Corporation (“FDIC”) issued a Notice of
Intention to Remove from Office and to Prohibit from Further Participation, and Notice of Assessment of
Civil Money Penalty, Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing
against Respondent Robert Michael and Respondent George Michael, individually, and as institution-
affiliated parties of Citizens Bank and Trust Company of Chicago, Chicago, Illinois (Insured State
Nonmember Bank) (the “Bank”). The Respondents filed a timely answer to the Notice.
From October 14, 2008 through October 21, 2008, a hearing was held in Chicago, Illinois, to
determine: (1) whether a permanent order should be issued to remove the Respondents from office and
prohibit the Respondents from further participation in the conduct of the affairs of the Bank and any
insured depository institution or organization enumerated in section 8(e)(7)(A) of the Federal Deposit
Insurance Act (“FDI Act”), 12 U.S.C. §1818(e)(7)(A), without the prior written permission of the FDIC
and the appropriate Federal financial institutions regulatory agency, as that term is defined in section
8(e)(7)(D) of the FDI Act, 12 U.S.C. §1818(e)(7)(D); and (2) whether the FDIC’s ORDER TO PAY
should be sustained. All parties appeared, including Respondents, and were given the opportunity to be
heard, and evidence was taken.
141
Having considered the evidence presented at said hearing and the record as a whole, and the
arguments of both parties, and the Recommended Decision issued by the presiding administrative law
judge,
Pursuant to section 8(i) of the FDI Act, 12 U.S.C. § 1818 (i):
IT IS HEREBY ORDERED, that the Respondent, Robert Michael, be assessed a civil money
penalty in the amount of One Hundred Thousand Dollars ($100,000) and the Respondent, George
Michael, be assessed a civil money penalty in the amount of Seventy-Five Thousand Dollars ($75,000).
Remittance of the civil money penalty shall be payable to the Treasury of the United States and
delivered to the Executive Secretary of the Federal Deposit Insurance Corporation, W ashington, DC.
IT IS FURTHER ORDERED that the Respondents are prohibited from seeking or accepting
indemnification from any insured depository institution for the civil money penalty assessed and paid in
this matter.
This ORDER will become effective thirty (30) days from the date of its issuance.
The provisions of this ORDER will remain effective and in force except in the event that, and until
such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside
by the FDIC.
IT IS SO ORDERED.
Dated at W ashington, DC, this _______ day of ___________________, 2009
__________________________ Board of Directors
Federal Deposit Insurance Corporation
CERTIFICATE OF SERVICE
On February 23, 2010, I served the foregoing Recommended Decision, a Certified Index of Administrative Record, and the complete Record of Administrative Proceeding in the above matter, by electronic means upon the following:
Valerie J. Best Assistant Executive Secretary Federal Deposit Insurance Corporation 550 17th Street NW W ashington, DC 20429-9990 vbest@ fdic.gov, chammond@ fdic.gov,
And by the same method a copy of the Recommended Decision and Certified Index of Administrative Record, upon the following:
John M. Dorsey III, Esq., Timothy E. Divis, Esq., Jann L. Harley, Esq., David Beck, Esq. Navid Choudhury, Esq. A.T. Dill, Esq. Federal Deposit Insurance Corporation 550 17th Street NW W ashington, DC 20429
dorsey@ fdic.gov, tdivis@ fdic.gov, jharley@ fdic.gov, dbeck@ fdic.gov; nchoudhury@ fdic.gov;adill@ fdic.gov
W arren Lupel, Esq. Michael W eininger, Esq. Lupel W eininger LLP 30 N. LaSalle Street Suite 3520 Chicago, IL 60602wlupel@ lw-llp.com; mweininger@ lw-llp.com
Gerald J. Langan Office of Financial Institution Adjudication
3501 N. Fairfax Drive Suite D8116 Arlington, Virginia 22226-3500
ofia@ fdic.gov (e-mail), (703) 562-2762 (telephone)
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