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Case 1:11-cv-00408-ABJ Document 107

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA ____________________________________ UNITED WESTERN BANK, ) ) Plaintiff, ) v. ) C.A. No. 11-cv-408 (ABJ) ) OFFICE OF THE COMPTROLLER OF ) THE CURRENCY, et al. ) ) Defendants. ) DEFENDANTS REPLY IN SUPPORT OF THEIR MOTION FOR SUMMARY JUDGMENT INTRODUCTION On January 21, 2011, the Acting Director of the Office of Thrift Supervision (OTS) signed OTS Order 2011-05 (Receivership Order), appointing the Federal Deposit Insurance Corporation (FDIC) as receiver for Plaintiff United Western Bank (UWB or the Bank). Based upon a thorough consideration of the relevant facts, and after assessing UWBs condition and prospects, the Acting Director concluded that three separate grounds1 existed for the appointment of a receiver: UWB was in an unsafe or unsound condition to transact business (12 U.S.C. 1821(c)(5)(C)); UWB was likely to be unable to pay its obligations or meet its depositors demands in the normal course of business (12 U.S.C. 1821(c)(5)(F)); and

Contrary to Plaintiffs assertion, see Plaintiffs memorandum of points and authorities in opposition to Defendants motion for summary judgment filed June 8, 2012 (Pl.s Opp.) at 28, the applicable statute requires that the Acting Directors decision to appoint a receiver is to be sustained by the Court if 1 or more of the grounds specified in [Title 12] section 1821(c)(5) exists. 12 U.S.C. 1464(d)(2)(A). The statute does not require that all grounds be sustained.

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UWB was undercapitalized (as defined in 12 U.S.C. 1831o(b)), and had failed to submit a capital restoration plan acceptable to the OTS (12 U.S.C. 1821(c)(5)(K)(iii)).

Administrative Record (AR) 2. Plaintiffs challenge to these determinations relies upon two fundamental arguments. First, Plaintiff contends that the OTSs determination that the Bank was likely to face a severe liquidity shortfall in the near term was incorrect. Second, Plaintiff contends that the OTS should have accepted UWBs capital restoration plan (CRP). Neither argument has merit. As set forth more fully below, Plaintiffs contention that the OTSs concerns regarding the Banks liquidity position were nothing more than paranoia2 are belied by the detailed, factbased analysis the agency conducted regarding the financial position of the Bank, see AR 21-40, (S-Memo analysis of the Banks assets, capital, and liquidity at the time of receivership). The conclusions reached by the OTS regarding UWBs liquidity echo the Plaintiffs holding companys own statements3 regarding this issue prior to the failure. Further, the Court should readily reject Plaintiffs arguments that the OTS was compelled to accept a capital restoration plan from UWB that: 1) required the OTS to waive key portions of a pre-existing regulatory order that was designed to ensure that the Bank would operate in a safe and sound manner; 2) did not include binding commitments from potential investors;4 3) would perpetuate (rather than

Pl.s Opp. at 3, 12.

AR 2457-59 (NASDAQ letter detailing holding companys claims of an impending liquidity crisis at UWB).

Plaintiff repeats its earlier error of equating non-binding expressions of interest from potential investors with actual cash. Defendants addressed this claim in their earlier submission to the Court. See, e.g. Defendants memorandum of points and authorities (Defs. Mem) submitted on May 18, 2012 at 19 n.20, 25 n.28. See also Defendants Statement of Facts (OCC SOF) 77-78 (citing 4198, 4201, 4207, 4210, 4221). Plaintiff compounds this error by (footnote continues on next page) 2

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end) the Banks dependence upon large institutional deposits for liquidity; and 4) was premised upon the purchase of an unprofitable brokerage firm with an unsatisfactory regulatory history. Plaintiffs factual and legal assertions regarding the capital restoration plan submitted to OTS are unsupported by the Administrative Record that was before the Acting Director, defy common sense, and are inconsistent with the requirements of applicable law. I. THE ACTING DIRECTORS FINDINGS REGARDING THE BANKS PRECARIOUS FINANCIAL POSITION MUST BE SUSTAINED The Plaintiff expends much effort in its opposition disputing the Acting Directors conclusions regarding the financial condition of the Bank at the time it was placed into receivership. Pl.s Opp. at 4-12. The essence of Plaintiffs attempt to discount the OTSs conclusion that UWB was on the brink of a crippling exodus of institutional depositors an exodus of sufficient magnitude that it would render the bank illiquid is that some of those depositors were contractually bound to stay put.5 Plaintiff attempts to buttress its argument by

asserting that the Banks unsupported representation regarding a possible investment of $50 million by an unknown entity known as Olympus Partners fulfilled the subscription requirements of the banks capitalization agreement. See Pl.s Opp. at 20 (citing AR 4192, banks last minute letter to OTS seeking to avoid receivership). No expression of interest, letter of intent, or other document was ever received by the OTS from Olympus Partners. OCC SOF 76 (citing AR 26 n.4, 1749).

Plaintiff disputes the level of its impaired assets in 2010, claiming that the agency overstated the number of problem assets at the Bank and arguing that in 2007 the OTS was perfectly comfortable with these assets. Pl.s Opp. at 27 n.28. This argument fails to recognize the fundamental fact that, like the health of the nations financial sector, UWBs financial condition did not remain static between 2007 and 2011. The Plaintiffs assertion is rebutted by the long downward slide in its financial position between 2007 and its closure. See OCC SOF 18-22 (catastrophic losses commencing in 2009)(citing AR 30, 866, 2475), 35-39 (catastrophic losses continue throughout 2010)(citing AR 30, 866, 1492). See also AR 29 (SMemos analysis of Banks declining asset quality). Further rebutting Plaintiffs claim, at the end of the third quarter of 2010, the Bank itself reported on its Thrift Financial Report (TFR) that its total classified and nonperforming assets as of September 30, 2010 stood at $352.16 million, or a ratio of 206.56% (more than double) of its remaining capital plus allowances for loan and lease losses (ALLL)). AR 865. This is an extraordinarily high level, more than five (footnote continues on next page) 3

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asserting that, even if UWB experienced permissible deposit run-off (i.e., the institutional depositors agreed with the UWBs assessment that they possessed only a limited right to remove their deposits from the Bank), UWB had access to other sources of liquidity. Plaintiffs submission is contradicted not only by the detailed, fact-based analysis the agency conducted regarding the financial position of the Bank, see AR 21-40, but also the contemporaneous warning by the Plaintiffs holding company that an impending liquidity crisis at the Bank could result in the appointment of a receiver. AR 2457-59 (detailing holding companys letters to NASDAQ). The OTSs analysis, which was conducted on a depositor-bydepositor basis and is contained in the Administrative Record, provides a strong factual basis upon which the Acting Director could rationally conclude that UWB was facing a likely liquidity meltdown, and that receivership was an appropriate and necessary response in order to avert an uncontrolled collapse of the Bank. 12 U.S.C. 1821(c)(5)(F). A. The Administrative Record Supports The Acting Directors Conclusion That The Institutional Depositors Were Likely To Leave The Court should conclude that the Administrative Record provides a rational basis for the Acting Director to conclude that major institutional depositors were poised to withdraw their funds from the bank, sparking a liquidity crisis. The OTSs analysis was synthesized in the part of the Administrative Record known as the S-Memo, the supervisory memorandum prepared by OTS staff to advise the Acting Director regarding the condition of the institution. As set forth below, OTSs examination staff advised and the Acting Director concluded that, while the times higher than the 41.33% level of the Banks peer group. Id. As the Court may review from UWBs report on its TFR, the Banks ratio on this count nearly quadrupled from 55.61% only a year earlier. Id. Despite Plaintiffs adamant denials, the Administrative Record clearly contains substantial evidence demonstrating that there was serious and accelerating asset deterioration at UWB.

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depositor agreements for each specific institutional depositor were not without some ambiguity, it was reasonable to conclude that there was no practical impediment to UWBs institutional depositors withdrawing their funds from the Bank in the near term. This conclusion was based in part on statements made by the Bank to OTS examiners. 1. The Acting Director Considered the Circumstances Surrounding the Potential Departure of Each of the Big Institutional Depositors The Administrative Record reflects that the Acting Director assessed the likelihood that each of the remaining large institutional depositors would leave the Bank absent a successful recapitalization transaction. The first, Matrix Settlement and Clearing Services (MSCS), had $14.4 million on deposit at the Bank. AR 32. MSCSs depositor agreement stated that its funds placed in the Bank were generally qualified employee benefit plan participant funds held in a fiduciary capacity by a custodian or other third parties. AR 35. As Plaintiff admits in its opposition, the Banks status as undercapitalized6 prevented UWB from continuing to accept employee benefit plan deposits. See 12 U.S.C. 1821(a)(1)(D)(iii)(II). AR 35. By the date of receivership, MSCS had in fact already ordered Plaintiff to redeem all of its deposits. Id. Despite the fact that the depositor agreement controlling MSCSs institutional deposit relationship with the Bank purportedly required MSCS to provide UWB with not less than 60 days notice before withdrawing its funds on deposit, AR 1976 (subparagraph (c)), on December

Plaintiff now claims MSCS was forced by OTS to withdraw its deposits because the Bank was rendered undercapitalized via an unnecessary OTTI charge, Pl.s Opp. at 8, n.7, see also Pls Opp. at 7, n. 5. Plaintiff presents no basis upon which to conclude that the OTTI charge was unnecessary. See OCC SOF 42-44, 52 n.14 (citing AR 256-58, 267, 289-90, 360-80, 369, 772-73, 853, 1368-70, 1754-67, 1817, 1841). On December 28, 2010, the Bank provided a different and more accurate reason for MSCSs action, explaining that MSCSs deposits were being withdrawn in order to comply with applicable law. AR 1554 n.2. As a prudential regulator, OTS required the Bank and its depositors to adhere to the requirement of the statute, which protects beneficiaries of employee benefit plans from having their custodians imprudently invest their funds in less than adequately capitalized banks.

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20, 2010, MSCS ordered the Bank to deliver all its funds immediately. MSCS had approximately $215 million7 in institutional deposits at UWB as of that date. AR 2242. Notwithstanding the 60 day notice provision, the Bank redeemed most of MSCSs funds on demand. As of the date of closing, less than thirty days after MSCS made its demand for the return of its deposits, only $14.4 million of MSCSs funds remained on deposit. AR 35. The next institutional depositor, Lincoln Trust Company (LTC), had $136.3 million on deposit at the Bank. AR 32. Its depositor agreement with the Bank stated that LTC provided custodial and related services to employee benefit plan, individual benefit plans and other qualified plan accounts. AR 34. See also AR 506 (2010 legal opinion from Banks counsel describing LTCs employee benefit plan account model). The issues with LTCs deposits remaining at the Bank were two-fold. First, the S-Memo concluded that the statutory bar on undercapitalized institutions accepting employee benefit plan deposits could also require LTCs deposits to be withdrawn from the Bank, as had been the case with MSCS. AR 35 n.17. Second, LTC had informed its customers that their deposits would only be placed with well-capitalized depository institutions, so that UWBs undercapitalized status meant that for LTC to honor those representations it was required to pull its deposits. AR 34. Indeed, on December 22, 2010, LTC issued a short-term forbearance to UWB stating that it had the right to terminate its depositor agreement but that it would not immediately withdraw its funds conditioned upon the Banks return to well-capitalized status by January 31, 2011.8 The S7

This includes about $30 million which was withdrawn at by institutional depositor CPI at the same time. See Defs. Mem. at 21. CPIs depositor agreement is not contained in the Administrative Record.

OTS denied the UWBs CRP, which was the basis for the proposed recapitalization, on January 18, 2011. AR 42. Regardless of OTSs decision on the CRP, the Bank failed to raise the capital necessary to complete any transaction within the time period required by LTCs (footnote continues on next page) 6

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Memo counseled, and the Acting Director concluded on January 21, 2011, that, given the failure of recapitalization and associated conditions, there was an unacceptable risk that LTC would withdraw its deposits from the Bank with minimal notice in the near future. AR 35 (S-Memo), 5 (Receivership Order). The third depositor, Equity Trust Company (ETC), had $696.9 million in institutional deposits at the Bank. These deposits consisted of a large number of self-directed IRAs and, as was the case with the other institutional depositors, employee benefit plans subject to the statutory restriction. AR 32. In an effort to get around restrictions on brokered deposits,9 the Bank repeatedly represented to the FDIC that ETCs funds on deposit were placed as a plan administrator or an investment adviser in connection with a pension plan or other employee benefit plan performing managerial functions with respect to the plan. Id. See also AR 1914 (ETC depositor agreement showing ETCs deposits at the Bank as coming from employee benefit plans). If the Banks representations to the FDIC were accurate, then ETCs institutional deposits would be subject to the same statutory bar as those from MSCS. AR 34 n.16. The SMemo concluded that the Bank had failed to present satisfactory evidence that it is currently

forbearance letter. There was no evidence the Bank would be well capitalized by January 31, 2011.

Federal law precludes less than well capitalized depository institutions from accepting brokered deposits. 12 U.S.C. 1831f. The FDIC (but not the prudential regulators, such as OTS or OCC) may provide adequately capitalized institutions a waiver from this requirement. 12 U.S.C. 1821f(c). On November 5, 2010, the FDIC determined that the institutional depositors funds at UWB were subject to the brokered deposit restriction. AR 37-38. The Bank filed a waiver request with the FDIC on January 4, 2011. AR 1754. Because the Bank was undercapitalized as of that date, the FDIC could not have granted the Banks waiver request. 12 U.S.C. 1831f(c). This appeal was not resolved before the January 21, 2011 receivership. AR 37-38.

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complying with this law with respect to ETCs employee benefit plan deposits.10 Id. Like LTC, ETC gave the Bank only a short-term forbearance regarding the withdrawal of their deposits, which explicitly depended on the short-term consummation of the Banks capitalraising plan. AR 33. The S-Memo counseled, and the Acting Director concluded, that there was an unacceptable risk that ETC would terminate its depositor agreement and withdraw approximately $697 million in deposits once it becomes clear that the [Banks] present attempts to raise capital will be unsuccessful. AR 34 (S-Memo); 5 (Receivership Order). 2. The Banks Arguments that Neither LTC Nor ETC Could Withdraw Their Clients Funds Are Contradicted By the Agreements and the Experience of What Actually Happened at the Bank The Bank expends much energy in its brief variously arguing that neither LTC nor ETC could nor would immediately withdraw their clients funds from UWB because of the depositors loyalty to the Bank and restrictions contained in the depositor agreements. See Pl.s Opp. at 9-13. These arguments are not supported by the Administrative Record.

The S-Memo references and the Administrative Record contains the Banks submissions to the FDIC arguing that ETCs deposits could not be counted as brokered thus escaping the statutory bar on adequately capitalized banks accepting brokered deposits, 12 U.S.C. 1831f, because ETCs institutional deposits were actually employee benefit plan deposits. AR 34 n.16. See also AR 360-367 (Banks letter to FDIC seeking brokered deposit waiver request); 371-374 (FDIC analysis showing Bank described ETC deposits as coming from employee benefit plans); 390-391 (2010 Bank white paper describing employee benefit plan deposits); 506 (2010 legal opinion of Banks counsel denying ETC deposits should be counted as brokered because they are actually employee benefit plan deposits); 512 (ETC depositor agreement listing its deposits as employee benefit plan deposits). On the other hand, the Banks late-2010 submissions to OTS advanced precisely the opposite claim, asserting that almost all ETCs deposits were not employee benefit plan deposits and thus were not subject to 12 U.S.C. 1821(a)(1)(D)(ii). AR 34 n.16. The S-Memo concluded that the Banks contradictory explanations regarding its employee plan deposits rendered the issue unclear. Id. The question was not resolved because the Acting Director determined that ETCs representation that it would only maintain funds in the Bank pending the unsuccessful recapitalization transaction meant that, regardless of whether the deposits were covered by the statute, there was an unacceptable risk that ETCs deposits would be withdrawn in the near term. AR 5.

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With respect to UWBs claims that ETC and LTC intended to remain at the Bank regardless of the January 18, 2011 disapproval of the capital restoration plan, see Pl. Opp. at 11, the factual foundation for these arguments relies only upon unsupported representations contained in Plaintiffs own last-minute submissions to the OTS. AR 4190 (UWB letter of January 19, 2011), AR 4192 (UWB letter of January 20, 2011) and AR 4218 (email of Banks counsel of January 21, 2011). Missing is any such assurance from the depositors themselves that they intended to remain at the Bank beyond the final deadlines for recapitalization that LTC and ETC had previously set. Plaintiffs arguments ultimately require the Acting Director (and the Court) to accept the Banks unsupported assurances regarding this important issue while ignoring the depositors own previous written forbearance agreements that expressly required the Bank to be recapitalized by a date certain; i.e. no later than January 31 for LTC and February 15 for ETC. See, e.g., AR 33 (final date for termination of the ETC Depositor Agreement was February 15, 2011); 35 (noting LTCs forbearance extending to January 31, 2011). Given the Banks history of failing to deliver on promises made to its primary regulator, see, inter alia, OCC SOF 6 (2007 promise to adopt a new business model that moved away from institutional deposits)(citing AR 55, 81, 83); 33 (2009 promise to reduce level of classified assets)(citing AR 220-34); 48 (2010 promise to complete recapitalization of Bank not later than June 30, 2010)(citing AR 1779, 1789). OTS rationally discounted these last-minute representations by the Bank. With regard to Plaintiffs arguments that the depositor agreement with ETC prevented it from withdrawing its funds,11 Pl.s Opp. at 10-11, they are directly controverted by

Plaintiff admits that LTC could withdraw all of its remaining funds on short order. Pl.s Opp. at 10.

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contemporaneous documents and information contained in the Administrative Record. For example, having observed MSCS pulling its $215 million in deposits on demand with no regard to the 60 day notice requirement contained in MSCSs depositor agreement OTS examiners urgently consulted with the Bank regarding UWBs vulnerability to a depositor run by LTC and ETC, monitoring the financial status of the institution daily. Given the review of the entire financial situation of the Bank, the examiners reasonably concluded that there was no bar to any of the remaining institutional depositors leaving the Bank in short order.12 AR 12-14, 33, 41-42. The OTS concluded that ETC had the ability to withdraw $150 million on demand and the remainder of its clients funds in rapid fashion a conclusion that was shared with the Bank, which did not disagree with the OTSs analysis. See AR 33 (describing ETCs depositor agreements, recognizing that at a minimum ETC may withdraw $150 million on demand, and concluding that ETC had a right to withdraw all its clients funds in a rapid fashion). See also AR 1534-51 (OTSs December 21, 2010 directive to the Bank regarding its liquidity contingency plan, outlining, particularly at 1548-49, the ability of ETC to withdraw deposits on short notice); 1555-56 (Banks reply, which does not contradict the OTSs conclusions notably the Banks response failed to raise the structured, six-month withdrawal limitation). AR 33 n.14. At best, the scenario painted by Plaintiff with respect to ETCs and LTCs rights to withdraw their funds only delays the inevitable depositor exodus and liquidity crisis by a handful

Plaintiff points to the 2007 report of examination (RoE) to support its claim that ETC could only withdraw one-sixth of its deposits per month for six months. See Pl.s Opp. at 13 (citing AR 82). The same page of the RoE stated that MSCS was also required to give 60 days advance notice to the Bank before withdrawing its deposits. As described above, MSCS ordered withdrawal of $215 million on December 20, 2010 without giving the Bank any advance notice. This showed that the Banks representations regarding limitations on depositors withdrawing their deposits were unreliable. Moreover, the ETC depositor agreement was altered two years after the 2007 RoE. The altered depositor agreement allowed ETC to withdraw its deposits on only 10 days notice. AR 1917 (11 of 2009 ETC depositor agreement). See also AR 33 n.14. 10

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of days. By contrast, the holding companys contemporaneous views (as expressed to NASDAQ in November 2010) regarding the liquidity situation at the Bank and the likely outcome could not be clearer or more at odds with the position taken by Plaintiff in this case: Due to its weakened financial status, the Bank has experienced a decline in deposits, and it believes that unless it resolves its difficulties in the nearterm, additional depositors may move their funds elsewhere, further weakening the financial condition of both the Company and the Bank. The cumulative effect has been to erode the Companys equity account and to materially and adversely affect the Banks compliance with applicable banking regulations. Consequently, pursuant to Cease and Desist Orders (the Orders), the banking regulators have imposed stringent enforcement actions requiring the Company and the Bank to raise additional capital in the near term or face additional regulatory actions. Thus far the Company has been unable to raise the capital required under the Orders The Company also expects that at the end of the current year, the Bank will fall below the level required to be adequately capitalized As a result, the Bank would be unable to hold certain deposits (that currently account for over 75% of its total deposits) and would face a liquidity crisis that it believes would lead to the regulator recommending the seizure of the Bank, resulting in the liquidation of the Company. AR 2457-245 (emphasis added).13

Plaintiff cites to isolated comments in periodic Problem Bank Memos authored by Examiner Walter Santos and Financial Analyst Steve Harris to support the Banks various claims that 1) on January 4, 2011 there was no risk of an immediate depositor run; 2) the decision to place the bank into receivership was reached in June 2010; and 3) the OTS did not consider the Banks capital restoration plan because the FDIC identified January 7, 2011 as a date of possible receivership. Pl.s Opp. at 3, 4, 15 n.16, 17 n.18. The opinions of Mr. Santos and Mr. Harris regarding the likelihood of institutional deposits remaining were expressly conditioned upon the immediate recapitalization of the Bank. See, e.g., Defs. Mem. at 16-18, 23-24. Defendants addressed the second contention in their previous brief, Defs. Mem. at 25 n.26, demonstrating that neither Mr. Santos nor Mr. Harris had the ability to make the decision to place the bank in receivership in June 2010. That decision was reserved by statute to the Acting Director only, who made that decision on January 21, 2011. AR 8. The Administrative Record reflects that neither Mr. Santos nor Mr. Harris made the decision to deny the Plaintiffs capital restoration plan. As field staffers who perform the first analysis of most submissions from regulated banks, they expressed a negative opinion of most elements of the Banks unrealistic CRP, and their Problem Bank Memo does suggest that they would recommend the CRPs denial. Further staff analysis of the CRP and the ultimate decision (footnote continues on next page) 11

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3. The Acting Director Reasonably Concluded that the Bank Could Not Sustain an $848 Million Outflow of Institutional Deposits The Court need not linger over Plaintiffs contention that it possessed sufficient liquid funds to cover $848 million in depositor withdrawals. Pl.s Opp. at 12-13. The Bank itself reported on January 13, 2011 that it possessed only $416 million in liquidity, with the possibility of a further $137 million from Legent. AR 5. See also AR 1912 (liquidity analysis submitted by Bank on January 13, 2011 showing only $398.5 million in total cash per general ledger plus $17.8 million line of credit available from the Federal Home Loan Bank of Topeka (FHLBTopeka), totaling approximately $416 million total liquidity). In addition to funding extraordinary withdrawals from institutional depositors, the Bank required an additional $50 million in liquidity to cover its day-to-day operations. AR 38. The examiners preparing the SMemo properly accounted for all potential sources of liquidity available to the Bank, with citations to the documents present in the Administrative Record, and concluded that UWB lacked

not to approve the CRP, however, were performed by other OTS personnel. See, e.g. AR 41234127 (decision by Regional Director Philip A. Gerbick). See also AR 4129-4137 (January 18, 2011 CRP analysis and recommendation from Assistant Director Nicholas Dyer, concurrence of Regional Deputy Director Gary A. Scott, legal concurrence by Regional Counsel James A. Hendriksen). The index of relevant documents to Mr. Dyers CRP recommendation further contradicts Plaintiffs claim, see Pl.s Opp. at 17 n.18, that the decision on the CRP was reached weeks earlier. For example, the index shows the analysis incorporated and utilized the Banks own submissions dated as late as January 11, 2011. AR 4138. Finally, the reference in the Problem Bank Memo to FDICs tentative placement of UWB on its receivership calendar for January 7, 2011 is of little import. Given the magnitude of its responsibilities when it is appointed as receiver, the FDIC makes tentative preparations to act as receiver for many problem banks in anticipation of a potential failure. This does not mean that any final decision has been made or is preordained. See Defs. Mem. at 25 n. 27. Indeed, the FDIC informed the Bank in December 2010 that a receivership may occur. See OCC SOF 87 (citing AR 1438).


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the ability to raise $848 million in liquidity to fund the withdrawal of institutional deposits.14 AR 38-40. The S-Memos expert analysis of the Banks financial situation, which was based in large part on the Banks own representations to OTS examiners, contradicts the Plaintiffs bald claim that there was no dire liquidity or capital problem at UWB. Pl.s Opp. at 3. Indeed, the presumption of the correctness of an agency's determination is even stronger where Congress has charged an agency with complex analytical responsibilities and the duty to make predictive judgments. James Madison, Ltd. v. Ludwig, 868 F. Supp. 3, 14 (D.D.C. 1994)(citing Franklin Sav. Assn v. Office of Thrift Supervision, 934 F.2d 1127, 1147-48 (10th Cir. 1991)). As the Tenth Circuit held in Franklin Savings, agency determinations regarding the Plaintiffs financial status and future prospects at the time of the receivership should not be set aside by the reviewing court unless the findings transgress the bounds of reason. Franklin Savings, 934 F.2d at 1148. The facts contained in the Administrative Record provided the Acting Director with ample basis to conclude that, in his judgment, UWB was likely to be unable to pay its obligations or meet its depositors demands in the normal course of business, a conclusion that is worthy of the Courts deference.15


Plaintiff asks the Court to credit its claim that in the event of a depositor run it would be able to secure liquidity from soliciting deposits via the QwickRate system and seeking loan advances from FHLB-Topeka. See Pl.s Opp. at 13. At the time of its closing, the Bank had already drawn down virtually its entire $465.8 million line of credit at FHLB-Topeka; a mere $17.8 million remained. AR 38, 1912. Because it had pledged essentially all its salable assets to FHLB-Topeka, the Bank also no longer had a line of credit with the Federal Reserve. AR 38. The OTSs liquidity analysis already credited the Bank with $268 million in QwickRate deposits. Id. See also AR 1912. The examiners reasonably concluded that the Plaintiffs sources of liquidity were maxed out.

United States v. Morgenthau, 85 F.2d 811, 814 (D.C. Cir.), cert. denied, 299 U.S. 605 (1936) (Comptrollers valuation of assets leading to a determination of insolvency is a matter of judgment and discretion and the court will not substitute its judgment for the judgment of the (footnote continues on next page) 13

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realistic opportunity to recapitalize the Bank, Pl.s Opp. at p. 18, and argues that the OTS should have been compelled to accept the capital restoration plan from UWB notwithstanding the serious flaws that the OTS examiners had identified. The Court should conclude that OTS properly determined that UWB was undercapitalized and had failed to submit a capital restoration plan acceptable to the OTS, 12 U.S.C. 1821(c)(5)(K)(iii). As discussed in detail in the Defendants opening brief, it was Plaintiffs own intransigence regarding the terms of the recapitalization plan and the lack of commitments from investors that ultimately resulted in the CRP being rejected by OTS. Defs. Mem. at 20-21, 23-24, 27-29, 33-34. The OTS reasonably refused to agree to the terms of a recapitalization plan that, in the end, would have increased rather than abated the risk to the FDICs deposit insurance fund. 12 U.S.C. 1831o(e)(2)(C) (prudential regulators required not to accept a CRP if it would appreciably increase the risk (including credit risk, interest-rate risk, and other types of risk) to which the institution is exposed.). A. The OTS Reasonably Declined To Revise Its Cease and Desist Order In many ways the tenor of Plaintiffs argument that the OTS unreasonably declined to accept its CRP crystallizes the essence of the dispute before the Court. In attempting to craft an

Comptroller unless it appears by convincing proof that the Comptroller's action is plainly arbitrary, and made in bad faith.); Guaranty Sav. Assn v. Fed. Home Loan Bank Bd., 794 F.2d 1339, 1343 (8th Cir. 1986) (reviewing courts may not substitute its own judgment unless it is manifest that such conclusions are a clear error of judgment.); Sunshine State Bank, 783 F.2d at 1584 (reviewing courts must give substantial deference to bank examiners expertise unless they are arbitrary or capricious or outside a zone of reasonableness). 14

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acceptable capital restoration plan, the Bank adopted a dismissive attitude toward the OTSs prudential concerns regarding the condition and direction of the bank going forward. Plaintiff still maintains that it was reasonable for the Bank to expect certain conditions of the Cease and Desist Order would be waived at the time of closing of the Recapitalization Transaction, Pl.s Opp. at 22, specifically taking the OTS to task for not being willing to waive the important meet and maintain safe capital provisions of the 2010 Cease and Desist Order.16 Defendant submits that it was UWBs entrenched position on this point, as well as others, which confirms the reasonableness of OTSs conclusion that the Bank would not drop this demand and that, as a result, the Investor Agreement that was at the heart of the Banks CRP could not be accepted because the CRP would not meet statutory requirements. The OTSs conclusion that the Bank would not drop its demand that the OTS waive the meet and maintain capital provision in the Cease and Desist order is manifestly clear in the Administrative Record. The waiver of the meet and maintain provision in the 2010 Cease and Desist Order was a precondition to the investors agreeing to commit to the recapitalization transaction contained in the Investment Agreement. In its discussions with the OTS the Bank represented that, while its investors might be willing to waive other conditions precedent to the Investment Agreement, waiver of this provision was deemed to be a must have by the Bank. OCC SOF 65-66 (citing AR 32, 1181). Indeed, in subsequent filings made to the OTS, the Anchor Investors all explicitly reaffirmed their insistence that the agency waive all the C&D Order provisions as contemplated in the October 28, 2010 Investment Agreement. None of the Anchor Investors ever submitted a

The Consent Order required UWB to meet and maintain safe capital ratios of 12% and 8%. OCC SOF 55 (citing AR 554).


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written waiver of any of the conditions precedent of the Investment Agreement and, indeed, they continued to insist in writing that the terms of the October 28, 2010 Investment Agreement would control without waiver or modification. OCC SOF 77 (citing AR 4198, 4201, 4207, 4210, 4221). Nor did the Bank ever provide its written commitment to waive this requirement. In short, the OTS reasonably concluded that the Banks demand that the OTS waive the meet and maintain safe capital provision of the Cease and Desist Order had not been withdrawn, and in the absence of a new investment agreement or written waivers by the Anchor Investors to the mandatory provisions of the Investment Agreement, the OTS reasonably concluded that the investors would not consummate the Investment Agreement. AR 4125, 4131-32. Moreover, it was wholly appropriate for the OTS to insist that the meet and maintain safe capital and other provisions in the 2010 Cease and Desist Order remain in place. The provisions of the Consent Order were necessary given the Banks unsafe and unsound banking practices that resulted in deteriorating asset quality, ineffective risk management practices, inadequate oversight and supervision of the lending function, and inadequate liquidity planning. AR 569. It is the responsibility of the prudential regulator, and not its troubled banks, to determine when and how the terms of a Cease and Desist Order may be modified or waived.18


Plaintiffs indirect attack on the terms of the 2010 Cease and Desist Order comes despite the Bank having waived its right to all judicial review of the Order. AR 570. Outside of the direct review process for enforcement proceedings provided for in 12 U.S.C. 1818, Congress has removed jurisdiction to affect, review, modify, terminate, or suspend any final cease and desist order, such as the one in this case. 12 U.S.C. 1818(i). Board of Governors of the Fed. Reserve Sys.v. MCorp Financial, Inc., 502 U.S. 32 (1991); Ridder v. Office of Thrift Supervision, 146 F.3d 1045 (D.C. Cir. 1998); Henry v. Office of Thrift Supervision, 43 F.3d 507 (10th Cir. 1994); Rhoades v. Casey, 193 F.3d 592 (5th Cir. 1999).


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The Cease and Desist Order formalized the OTSs long-standing19 requirement that the Bank not only meet, but thereafter maintain, safe capital ratios of 12% and 8%.20 OCC SOF 58 (citing AR 554, 560, 562-63). The Bank was also prohibited from engaging in any further land or construction loans without first obtaining OTS approval. Id. These risky loans had contributed to the Banks 2009 losses of $69 million and 2010 losses of at least $83 million, OCC SOF 22 (2009 losses)(citing AR 30), 39 (2010 losses)(citing AR 1492). By the end of 2010 the Bank had exhausted the bulk of its remaining capital; as noted above the amount of classified and nonperforming assets was already double the remaining capital and allowance for loan and lease losses at the Bank. AR 865. The C&D Order also prohibited the Bank from increasing its assets without obtaining prior OTS approval. OCC SOF 58 (citing AR 562). At no point in time did the Bank comply with the C&D Orders requirement that it meet and maintain a safe capital level. Instead, throughout 2010 the Banks losses continued to mount and its capital continued to dissipate. Prompt Corrective Action provisions require a regulator to reject a CRP if it appreciably increase[s] the risk (including credit risk, interest-rate risk, and other types of risk) to which the institution is exposed. 12 U.S.C. 1831o(e)(2)(C). Even if the recapitalization had taken place it made little sense for the OTS to excuse UWB from the capital

This explicit capital requirement was a part of the memorandum of understanding with OTS that the Bank voluntarily entered into in December 2009. OCC SOF 31-34 (citing AR 220-34).

Plaintiff ridicules the OTSs belief that a simple infusion of capital would not solve the problems at the Bank. Pl.s Opp. at p. 19 n.21. The OTSs opinion was correct, and was based on the recent history of the Bank. As the Defendants have previously explained to the Court, see Defs. Mem. at 12 n.11 (see OCC SOF 24-26 (citing AR 139, 143-45, 211, 2334)), the Bancorp did a simple infusion of capital into the Bank in 2009 but UWB proceeded with its other unsafe and unsound activities, including high risk land and construction lending in the middle of a real estate downturn. This 2009 capital infusion was quickly used up by the Banks continuing and mounting operating losses, and the Banks condition continued to deteriorate. The OTSs refusal to rely on the Banks promise of more of the same was reasonable.


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levels mandated in the Cease and Desist order; the Banks recapitalization plan was intended to rapidly expand the banks balance sheet from $2 billion to $3.5 billion, increasing the risk to the FDICs deposit insurance fund, and was based on a resumption of high-risk land and construction lending programs that had helped lead to massive losses for the Bank. OCC SOF 22 (citing AR 30), 39 (citing AR 1492). B. OTS Reasonably Concluded UWB Had No Intention of Dropping its Demands to Acquire Legent Clearing One of the other must have conditions imposed by UWB as a prerequisite for the execution of its CRP21 was that the OTS must approve the Banks application to purchase the unprofitable Legent Clearing and incorporate it into the Bank as an operating subsidiary. The Bank suggests the OTSs denial of its Legent acquisition supports its argument to overturn the receivership. Pl.s Opp. at p. 23. Defendants described the Banks proposed purchase of the money-losing Legent in their previous submission to the Court. See Defs. Mem. at 18-19, 2324, 28. See also OCC SOF 95-98 (citing AR 27 n.7, 434, 440, 980, 982, 1181, 2535-42, 273536, 2762, 3031, 3151-52, 3159-77, 3183-90, 3192-99, 3480-96, 3632, 3675, 3682, 3812, 3833, 3858, 3932, 4119-20, 4233-34, 4239-40). As with OTSs other decisions, the January 18, 2011 decision to deny the Banks application to acquire Legent was reasonable. The denial was based on several sound reasons: 1) Legent was an unprofitable entity with a lengthy history of losses; 2) Legent recently lost its largest customer accounting for 68% of its accounts; 3) the addition of Legents institutional deposits to the Bank would have exacerbated, rather than reduced, the problematic concentration in institutional deposits; and finally 4) Legent had a long and negative history of enforcement

See OCC SOF 65-66 (citing AR 32, 1181).


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actions taken against it by the Financial Industry Regulatory Authority (FINRA). See, e.g., Defs. Mem. at 23-24. The Bank does not address the substance of these findings by OTS.22 Instead, it now argues that the Court should substitute the judgment of the Banks outside investors involved in the Recapitalization Transaction who felt that it was an attractive investment, Pl.s Opp. at 23, for that of UWBs primary regulator. While the parties to a transaction appropriately consider the financial gain23 they may receive from a business deal, OTS was charged by regulation to conduct an analysis of the Legent transaction to determine whether or not it would present supervisory, legal, or safety and soundness concerns. AR 2539 (citing 12 C.F.R. Plaintiff claims that the OTSs review of the Legent purchase relied upon inflammatory, unsubstantiated allegations about the brokerages disciplinary history. Pl.s Opp. at p. 23, n.26. To the contrary, the OTSs analysis of Legent relied upon final published disciplinary actions rendered against Legent by FINRA. See, e.g., AR 3159-3177 (Aug. 31, 2009 FINRA enforcement action fining Legent $350,000 for, among other things, allowing its services to be utilized by: 1) Franklin Ross, Inc., a company with a documented history of serious anti-money laundering infractions; 2) Salomon Grey Financial Corp. and Kyle Rowe, whom the Securities and Exchange Commission had charged with securities fraud and whom the FINRA had expelled from the securities industry for anti-money laundering and other serious supervisory violations; and 3) Blackwell Donaldson & Co., which had been subject to repeated final disciplinary violations related to penny stock transactions and anti-money laundering deficiencies. Legent was also found guilty by FINRA of failing to have an effective program to prevent money laundering and of failure to file suspicious activity reports for numerous suspicious penny stock transactions). This particular FINRA disciplinary decision was not the only one involving the money-losing Legent. See also OCC SOF 96 (collecting FINRA enforcement decisions)(citing AR 2536, 2540-41, 3151-52, 3183-90, 3192-99, 3480-96, 3632, 3858, 4120, 4234, 4239-40).


The Administrative Record reflects that Legent was owned at the time of receivership by a company owned by Henry Duques, one of the Banks outside investors. Guy Gibson, a director of the Bank and its holding company and a former plaintiff in this action, was the founder of Legent and negotiated the Banks purchase of Legent while he was simultaneously serving on the boards of Legent, the Bank, and the holding company. Gibson sold his ownership stake in Legent to Duques for an undisclosed sum after they negotiated UWBs purchase of Legent. AR 2536. The Administrative Record shows that the Bank was to pay Duques approximately $15.7 million in cash and stock and provide $18 million in debt forgiveness, AR 2537, although the company had lost $12.7 million from 2008 through 2010 and then subsequently lost its largest customer, accounting for two-thirds of its accounts. AR 2539, 2541.


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559.1(a)).24 The Legent purchase was disapproved by OTS because of precisely these factors. OCC SOF 95-98.25 The Court must sustain the considered and rational opinions of the agency reflected in the Administrative Record. Franklin Savings, 934 F.2d at 1142.


The Legent purchase was also required to be approved by both the FDIC and FINRA. Plaintiff obtained the approval of neither. OCC SOF 98 (AR 27 n.7, 982, 1181).

Plaintiff hypothesizes, based on a sentence contained in one of its last-minute letters before the receivership, that its holding company could have purchased Legent instead. Pl.s Opp. at 23-24 (citing AR 4192, Jan. 20, 2011 letter from UWB to OTS). This hypothetical transaction was never formally submitted to OTS, the Bancorp never entered into a contract to purchase Legent, never filed an application with OTS to accomplish the revised transaction, and never sought or received the approvals of either FDIC or FINRA to have Bancorp purchase Legent. It was reasonable for the OTS to base its decision on the transaction the Bank actually submitted, see OCC SOF 59-67 (citing AR 26 n.4, 27 n.7, 32, 856, 865, 980-85, 1154, 1163, 1165, 1169-70, 1181, 1192, 1476, 1483-1501, 1809, 2457, 3159-77, 4198, 4201, 4207, 4210, 4221) rather than on speculation on what might have been done to recapitalize the Bank.


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CONCLUSION For the reasons set forth both here and in OCCs previous memorandum of points and authorities in support of its motion for summary judgment and in opposition to Plaintiffs motion for summary judgment, Defendants respectfully request the Court enter final judgment in their favor and against the Plaintiff. Date: June 15, 2012 Respectfully submitted, Julie L. Williams, Chief Counsel Daniel P. Stipano, Deputy Chief Counsel Horace G. Sneed, (MI Bar No. P33434) Director, Litigation Division Gregory F. Taylor, Assistant Director, Litigation Division DC Bar No. 417096 /s/Christopher A. Sterbenz Christopher A. Sterbenz, Counsel, Litigation Division DC Bar No. 437722 250 E Street, S.W. Washington, D.C. 20219 Telephone: (202) 927-9124 Facsimile: (202) 874-5279 Attorneys for Office of the Comptroller of the Currency and Comptroller Thomas J. Curry CERTIFICATE OF SERVICE I hereby certify that on June 15, 2012 I filed the foregoing on the Courts electronic filing system. To the best of my knowledge all counsel of record will receive service thereby. /s/Christopher A. Sterbenz