You may think of the Federal Deposit Insurance Corporation’s (FDIC) as the friendly folks who insure your money at the bank.
Or you may think of the FDIC as the regulator that deals with failed banks.
You probably do not think of the FDIC as an agency to fear.
The criminal prosecutions of Craig On and Michael Davis are a sobering reminder that the FDIC’s Office of the Inspector General (OIG) should not be dismissed out of hand. The FDIC’s OIG has been expanding its reach in recent years.
These days, your clients should be prepared for the very real possibility that a criminal prosecution may follow an FDIC investigation.
A few recent cases demonstrate this trend, including one against a “Real Housewife” of New Jersey.
The Case Against Craig On
Craig On is the former manager of United Commercial Bank (UCB). Mr. On was recently arrested following an investigation by the FDIC’s OIG. The criminal information charges Mr. On with conspiracy to make a materially false and misleading statement to an accountant, under 18 U.S.C. § 371. He faces up to five years in prison.
Mr. On was the CFO of UCB during this alleged conspiracy. Unfortunately for him, Mr. On took the reins in October 2008. He then faced the nearly insurmountable task of ensuring his company survived the global financial meltdown.
On November 6, 2009, UCB was taken over by the FDIC. The Troubled Asset Relief Program (TARP) provided approximately $297 million in federal funds to UCB to help it survive the crisis.
According to the information, Mr. On conspired with others to make UCB appear to perform much better than it actually had been. They allegedly issued materially false financial statements, lied in emails and letters to their accountants, and filed a fraudulent SEC Form 10-K.
These measures supposedly made UCB look like it would be able to collect on a much higher percentage of its outstanding loans than it would actually be able to.
During an investigation by FDIC OIG (along with the Special Inspector General of the TARP), Mr. On’s alleged wrongdoing was discovered. The criminal case then followed.
(Given that this case is proceeding under an information—rather than an indictment—it seems likely that Mr. On will plead guilty. But the docket for this case has no indication of a plea.)
Other Recent FDIC-OIG Cases
Mr. On, however, is not alone. Michael Davis was also indicted following an FDIC OIG investigation.
Mr. Davis’ indictment states that while he was president of the Premier Community Bank of the Emerald Coast, Mr. Davis defrauded his own bank, Bank of America, and Beach Community Bank.
Mr. Davis allegedly took money and property from the three banks by organizing a number of fraudulent short sales and real estate closings.
And who was the agency that conducted most of the investigation in Mr. Davis’ case? None other than the FDIC’s OIG.
And, if these cases aren’t enough, it was an investigation by FDIC OIG agents that helped bring notorious criminal mastermind Teresa Giudice to her knees.
She and her husband recently pleaded guilty to various bank fraud-related offenses.
If that name sounds familiar, it’s because you (sadly, like me) have spent a few hours destroying brain cells watching The Real Housewives of New Jersey.
I’d like those hours back but I’m gratified that my binge-watching bad reality TV has come to bear in a blog post.
FDIC’s Powerful OIG
Given these types of recent cases, white-collar counsel would be doing her clients a disservice if she downplays the FDIC OIG (or any OIG) as a potential threat.
The FDIC’s investigative branch has experienced an enormous surge in its importance over the last decade. The FDIC’s Office of Inspector General (OIG) owes its expansion in large part to the federal bailout of the financial sector.
In 2008, President Bush instituted the TARP, which enabled the federal government to purchase assets from struggling banks. The financial institutions that accepted TARP dollars then fell under the jurisdiction of FDIC investigators.
To add to this expanding jurisdiction, FDIC’s OIG has a relatively broad investigatory license.
According to the FDIC, OIG investigators are tasked with
prevent[ing], detect[ing], and investigat[ing] [criminal] . . or otherwise prohibited activity
that would threaten the FDIC and its programs.
For example, one of the FDIC’s goals in 2013 was to
Investigate and assist in prosecuting Bank Secrecy Act violations, money laundering, terrorist financing, fraud, and other financial crimes in FDIC-insured institutions
In discharging this responsibility, investigators have a number of duties. They look into concealed assets that individuals may put away to avoid paying debts they owe to the FDIC. Investigators also scrutinize business practices and transactions to identify fraud by FDIC contractors and fraud in the buying and selling of FDIC assets.
Finally, the FDIC can draw on the resources of a number of other formidable institutional players. It enjoys reciprocal relationships with the DOJ, FBI, Federal OIG, and various federal and state law enforcement agencies and can liaise with their agent to carry out its inquiries.
In short, the FDIC’s OIG has become a formidable investigative body with far reaching power and clients should take its investigations very seriously.
Don’t underestimate it.