CHICAGO (CN) - Two Chicago brothers, former owners and directors of Citizens Bank and Trust Company, cannot dodge Federal Deposit Insurance Corporation sanctions for engaging in unsafe banking practices, the 7th Circuit ruled.
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Robert and George Michael helped open Citizens Bank in 2000. The bank immediately drew notice of the FDIC and Illinois Office of Banks and Real Estate, which discovered improper insider transactions, failure to document and record transactions, poor lending practices, and other administrative shortcomings.
In response to a cease-and-desist order from the regulatory commissions, Citizens Bank replaced its president and hired a former FDIC regional counsel to provide regulatory advice.
Because of these changes, Judge John Tinder wrote, "Citizens Bank's CAMEL rating - a bank-rating system designed to measure a bank's soundness - eventually improved, but the Michaels' questionable practices did not."
In 2006, the FDIC charged the Michaels with violations of federal lending regulations, breaches of fiduciary duty, and unsafe practices.
Following a six-days hearing, the testimony of 17 witnesses, and a 143-page summary of its findings, the FDIC issued a prohibition order effectively barring Robert and George Michael from the banking industry. The brothers were also ordered to pay "modest" sanctions of $100,000 and $75,000, respectively.
On appeal, the 7th Circuit affirmed the sanctions.
"The Michaels take great pains to explain the convoluted, overlapping, and seemingly oblique transactions that gave rise to the FDIC Board's removal order. What seems to be lost on the Michaels in this appeal is that we afford great deference to the trier of fact when making credibility determinations and weighing conflicting evidence... That is not our role as an appellate court," Tinder wrote.
The Michaels' trouble stemmed from several real estate transactions in the early 2000s. The brothers engaged in real estate speculation through two companies, Michael Realty and R&G Properties.
Though FDIC "Regulation O" limits the amount of money a bank can lend insiders, the Michaels convinced the Citizens Bank Board to approve almost $3 million in loans to a buyer of the Harvey Hotel, a property they owned, possibly by failing to alert the board to their interests in the transactions. The Michaels earned $55,000 from the property.
In addition, the Michaels allegedly double-pledged a stock certificate, worth 35,440 shares of Citizens Bank valued at approximately $1 million, to two other banks as security for real estate loans. The fraud was discovered by FDIC regulators in 2002.
The FDIC also sought sanctions for the Michael brothers for using misleading techniques to secure financing for a property in West Irving Park.
"Respondents exploited their positions as Bank directors, deliberately overstated the value of assets, and concealed their true financial interest to entice lenders and investors to fund their business ventures," the three-judge panel determined.
The FDIC Board's conclusion that the Michaels had committed the alleged improprieties had a rational basis and was not arbitrary, the 7th Circuit determined, affirming the sanctions.
"We have no difficulty concluding that substantial evidence in the record supports a finding that the Michaels violated their statutory and fiduciary duties," Tinder concluded.
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