STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
CARIBANK CORPORATION, )
)
Petitioner, )
)
vs. ) CASE NO. 82-613
)
DEPARTMENT OF BANKING AND )
FINANCE, )
)
Respondent. )
)
HEARING OFFICER'S REPORT
THIS MATTER came on for hearing in Tallahassee, Florida, before the Division of Administrative Hearings and its duly appointed Hearing Officer, R.
Carpenter, on July 12, through July 20, and October 18 through 22, 1982. The parties were represented by:
APPEARANCES
For Petitioner: Joseph C. Jacobs, Esquire
Dean Bunch, Esquire Post Office Box 1170
Tallahassee, Florida 32302
Robert L. Shevin, Esquire AmeriFirst Building, Suite 3050
1 South East 3rd Avenue Miami, Florida 33131
For Respondent: Carl Morstadt, Esquire
Elsa Lopez Whitehurst, Esquire Frank Wollett, Esquire William Reeves, Esquire Office of General Counsel
Department of Banking and Finance The Capitol
Tallahassee, Florida 32301
The case arose on Petitioner Caribank Corporation's application for Certificate of Approval to Purchase or Acquire the majority stock of an existing bank, The Dania Bank, which was filed with the Respondent, June 18, 1981. The Respondent petitioned for a public hearing, and the matter was referred by it to the Division of Administrative Hearings, for the conducting of a formal hearing pursuant to Section 120.57(1), Florida Statutes.
The issue presented for determination is whether or not Petitioner should be granted permission to acquire the stock of The Dania Bank, a state chartered bank located in Dania, Broward County, Florida. The parties submitted proposed findings of fact and conclusions of law. To the extent these proposed findings
have not been adopted or otherwise incorporated herein, they have been rejected as irrelevant or unsupported by the evidence.
FINDINGS OF FACT
Caribank, N.A. ("Caribank"), was acquired by J. J. Gonzalez Gorrondona, Jr. ("Gorrondona Jr.") and George Childs, Jr. ("Childs") in May, 1977, and Dania Bank was acquired by these individuals through a tender offer in April, 1978.
Caribank Corporation, the Applicant herein, is a bank holding company that now owns more than 99 percent of the stock of Caribank.
Gorrondona Jr. owns 90 percent of Caribank Corporation and Childs owns
10 percent.
Caribank Corporation was originally named Banconac Shares, Inc. when it was established in November, 1977. Its name was changed to Caribank Corporation on June 5, 1979.
Banconac is a name used by many subsidiaries of the Banco National de Descuento ("BND"), a Venezuelan private commercial bank, a majority of the stock of which was formerly owned by Gorrondona Jr. and his father, J. J. Gonzalez Gorrondona, Sr. ("Gorrondona Sr."). It is derived from the name Banco National de Descuento and is used in Venezuela to signify business owned by the BND directly or indirectly. The use of the name Banconac in the Applicant's former name was not explained by the Applicant although Gorrondona Jr.'s testimony established that BND funds were not used to purchase Caribank.
Gorrondona Jr. owns approximately 90 percent of Dania Bank and Childs owns approximately 10 percent of the Dania Bank, a state chartered bank. Approximately .3 percent is owned by shareholders who did not surrender their shares.
Martin L. Wyneken ("Wyneken") is President and chief executive officer of both the Dania Bank in Broward County and of the Caribank in Coral Gables, Dade County.
Childs is Chairman of the Board of the Dania Bank and Caribank, and President, Treasurer and a Director of Caribank Corporation.
Policies of Caribank and Dania Bank are established through frequent conferences between Childs and Wyneken.
Wyneken has a very close working relationship with Childs.
Gorrondona, Jr. has the power to remove Wyneken and Childs.
Childs comes to Florida about three times per month to confer with Wyneken.
In these above-mentioned discussions, Childs is the spokesman for the "capital."
Owning 90 percent of the stock of the Dania Bank provides Gorrondona, Jr. with authority concerning the management and policies of the bank.
Directors of the Dania Bank are selected by the shareholders.
Gorrondona, Jr. and Childs have not taken any dividends as shareholders of Dania Bank or Caribank, despite the substantial earnings of these banks.
Dania Bank and Caribank centralize their operations as much as possible with two separate corporations.
Dania Bank and Caribank trade employees back and forth and bill each other through an elaborate accounting system.
Thad R. Chamberlain, a director of Caribank Corporation, is executive director of the Banco Suramericano de Desarollo, a Panamanian bank in which Gorrondona, Jr. owns a controlling interest.
This is an application pursuant to the Florida Banking Code, Section 658.28, Florida Statutes, for permission to acquire control of Dania Bank by Caribank Corporation. This change in control is sought in order to facilitate a merger of Caribank and Dania Bank.
The merger is desired to facilitate the expansion of branch banking, the development of an international department and the development of subsidiaries in such areas as leasing, mortgage financing, and small business investment (S.B.I.C.). The combined capital of Caribank, of approximately $4 million, and the Dania Bank, of $16 million, is expected to facilitate the establishment of subsidiaries.
Dania and Caribank are, according to their Chief Executive Officer, Wyneken, "aggressive" banks and there exists a policy of increasing total assets from $265 million at the end of June, 1982, to $500 million by the end of 1985; there is also an aggressive program for subsidiaries.
The merged bank plans to spend more on advertising in Dade County. Caribank at its present size cannot justify an increase in advertising expenditures.
If this application is approved and a merger subsequently occurs, management expects that there will be benefit on the deposit side since assertedly better use will be able to be made of the money deposited.
The Caribank/Dania Bank management has an ambitious program of branch banking. Gorrondona, Jr. and Childs have asked that Dania and Caribank branch into the counties as quickly as possible. Management would like to concentrate branching efforts in Dade County, but their capital at Caribank is so much smaller that it must rely on the Dania Bank for all kinds of assistance. Denial of this application and the failure to merge would restrict expansion in Dade County.
The Caribank/Dania Bank management hope that the merged bank will become a large chain bank. The Chief Executive Officer of the two banks testified that to become a large chain bank "[W]e need every bit of help we can get, and that is why we need this consolidation."
According to Childs, merger is expected to allow a "substantial increase in the capital base of all the subsidiaries which we have established or intend in the future to establish."
A merger is expected to follow immediately upon the granting of the application. If the application were approved and for some reason the merger did not occur, Applicant would seek to change the name of the Dania Bank to Caribank to get the maximum effect out of their advertising dollars. It is further expected that if the application for change in control is granted, the two banks could file a consolidated tax return with an annual tax saving of approximately $64,000.
From the above findings, it can reasonably be inferred that this application is made to facilitate a program of rapid expansion and establishment of subsidiaries, and if the application is granted, it can be expected that rapid expansion and development of subsidiaries will be more likely to occur.
George Childs, Jr., started Banac Management, Inc. ("Banac") for Gorrondona, Jr. seven and a half years ago and was president of the corporation at the time of the intervention of the BND (discussed below).
Banca is a BND subsidiary located in New York City. At the time of the intervention it was acting as a representative of the BND and its subsidiaries to obtain credit lines.
Prior to the intervention, Gorrondona, Jr. was involved in the affairs of Banac. He visited Banac in New York six to seven times per year. He was a member of the Banac Board of Directors from 1975 to 1979.
The BND was founded in 1954 by Dr. Jose Joaquin Gonzalez Gorrondona, Sr., who is the father of Gonzalez Gorrondona, Jr., the ninety percent (90 percent) owner of the Petitioner, Caribank Corporation, and the subject bank, The Dania Bank. Dr. Gonzalez Gorrondona, Sr. does not now, nor has he ever had any interest in, nor involvement with, Caribank Corporation, The Dania Bank or Caribank, N.A.
Since its beginning, the BND had a steady growth until, at the time of the intervention of the bank by the government on December 7, 1978, it was the largest privately owned (nongovernmental) bank in Venezuela with the largest amount of private deposits, 6.3 billion Bolivars (1 Bolivar equals about 0.25 in
U.S currency).
Gorrondona, Jr. began working at the bank in 1958, worked throughout his early years, and continued to work full-time for the bank after receiving his doctoral degree in economics from the Catholic University in Venezuela with a doctoral thesis in economic planning.
During his education, Gorrondona, Jr. studied such subjects as Monetary Theory, History of Financial Institutions, Operation of Financial Institutions, and Public Finance. His interest in economics began early in his life because Dr. Gonzalez Gorrondona, Sr. was the founder of the School of Economics in Venezuela, having been the founder of the Venezuelan Economic Council and the representative of Venezuela at the Bretton Woods meeting in 1943 at which the International Monetary Fund was founded.
After graduation, Gorrondona, Jr. continued to study, taking courses in management such as Management by Objective, Computer Science, Systems Analysis, and other courses which would enable him to perform as a manager of a financial institution.
Gorrondona, Jr. worked in many phases of the management of the bank, until in 1974, he became president in charge, which means that he was the chief executive officer in the absence of his father. He never drew a salary.
By the time of the BND intervention, the stock interest of Gorrondona, Jr. was worth between $350 and $700 million dollars. As an outcome of the intervention, Gorrondona, Jr. lost between $150 and $200 million dollars in the worth of the BND stock which was owned by him.
By the time of the intervention, the BND had grown to a bank which included approximately 60 branches, primarily in urban areas of Venezuela. The BND also owned several profitable subsidiaries, including Crenca, a financial society which was able to engage in financial transactions forbidden for commercial banks; Credimatico, which was the owner of a Master Charge franchise in Venezuela which had a market share of twenty-five percent of the credit card sales in the country; Arrendarca, a leasing and factoring company; and Almacendadora Caracas, a bonded warehouse company owning bonded warehouses in several cities in Venezuela. The BND also owned Servimatico, which dealt mainly with consumer credit and financed appliance and other small consumer purchases. Each of these subsidiaries was profitable to the bank and assisted the bank in paying dividends which had been declared each year, since 1973.
Beginning prior to 1977, the BND was required to send its minutes of Board meetings to the Superintendent of Banks because there had been detected, as a result of special inspection, a tendency toward concentration of credit. In 1978, BND was the only bank required to send minutes of Board meetings to the Superintendent.
At a majority of the meetings of the Board of the Central Bank of Venezuela ("CBV") during the last six months of 1978, there was an agenda item entitled "BND." During this time, employees of the Superintendent and the CBV were at the BND carrying out studies to see in what way or ways the BND's financial soundness could be improved.
In August of 1978, the Superintendent of Banks wrote to the Minister of Finance about the situation of the BND. The letter notes that credits of Bs. 2,553.8 million were concentrated in 130 companies, that directors of these companies were in turn, directors of the bank, that there was a disproportion between the amount of these credits and the net worth of the borrower, that renewals were made even after delay in payment and that the credits were extended without analysis of the balance sheet.
In September, 1973, the BND was prohibited from distributing dividends by the Superintendent of Banks because it would have adversely affected the liquidity of the BND.
In November of 1978, the BND asked the Venezuelan Government for special financial aid in the amount of Bs. 600 million. The BND proposed that it be made the subject of a "private intervention" during the period of time such advance was outstanding.
On December 6, 1978, the CBV excluded the BND from the Clearing House effective December 7, 1978, by vote of its Board.
The CBV, the equivalent of the U.S. Federal Reserve, is a public institution of the Republic of Venezuela, but is considered independent. Eight
members of its Board of Directors and its President are appointed by the government. Six members are appointed on recommendation of the private sector.
The CBV, through its credit functions, provides credit assistance to banks and credit institutions in Venezuela. Through its operations, it seeks to safeguard the solvency and liquidity of Venezuela's banking system.
A Clearing House to settle accounts between banks is operated by the CBV. When bank customers draw and deposit checks, credits and debits between banks are created that have to be reconciled on a daily basis. Venezuelan banks are required by law to maintain a deposit account at the CBV in order to settle such accounts. If after reconciliation, a bank owes money to other banks, its CBV account is debited to cover the debt. If after reconciliation, a bank is owed money, its account is credited.
If a bank does not have enough on deposit to cover its debts, it can present to the CBV cash or checks or payment orders against other banks in sufficient amount. It can also present funds obtained outside the country. Finally, it can obtain funds by rediscounting commercial paper at the CBV.
Rediscount consists of endorsing eligible commercial paper to the CBV in return for payment. Eligible paper, for example, must mature within 360 days and be adequately secured so that there is assurance as to its liquidity or
self-liquidating nature. Thus, medium or long-term loans do not normally give rise to eligible paper.
The decision to exclude the BND from the Clearing House was reached on December 5 and 6, 1978. Prior to this time, BND had had repeated difficulties converting its debts at the Clearing House. On December 5, the CBV Board authorized the exclusion of the BND in principle subject to discussion with the Venezuelan Government. At the time, the BND did not have commercial paper considered eligible by the CBV to receive credit assistance from the CBV. The situation was examined again on December 6 by the CBV to see if there were new elements or new alternatives. On December 6, 1978, the BND was overdrawn at the Clearing House to the extent of being unable to make good in its negative balance of approximately Bs. 100 million. It was decided there were no new elements or alternatives, and accordingly, the President of the CBV wrote to the Venezuelan Minister of Finance to let him know (1) that the BND had a deficit in its legal reserve requirement (see below); and (2) that the CBV Board had decided to exclude the BND from the Clearing House effective December 7, 1978.
Prior to the exclusion of the BND from the Clearing House, the CBV Board considered the possibility of extending extraordinary credit assistance to the BND. The Board concluded that such assistance would be in violation of Article 45 of the law governing the CBV. That article provides:
"Article 45. - In exceptional cases and with the favorable vote of the six members of its Board of Directors, the Banco Central de Venezuela may, in order to insure the due liquidity of a bank or credit institution in transitory difficulties, provide it with funds for a period not to exceed ninety days, which may be extended for an equal term at the Bank's discretion, secured by other assets of said bank or credit institution, different from those listed in the previous article.
"Loans may in no event be made to a bank or credit institution if the trans- itory difficulties it faces are due, in
the Board's opinion, after having consulted with the Bank Regulatory Commission, to the poor management or inadequate investment of its resources."
In the case of the BND, the CBV Board concluded extraordinary credit assistance would be illegal because BND's liquidity problems were not "transitory" but rather structural, permanent and progressive, because the liquidity problems of the BND were due to improper investment of its resources, and because its funds were invested in operations that were insecure or lacking in guarantees, which reflected bad banking management.
Under the rules and regulations of the Clearing House, the exclusion of the BND was mandatory.
On the evening of December 6, 1978, a meeting was held at the Presidential Palace attended by the President of Venezuela, the Minister of Finance, other ministers involved in the financial sector, some of the board members of the CBV and the Superintendent of Banks. The stated purpose of the meeting was to inform the President of the Republic about the BND situation.
The meeting lasted three hours. There was a discussion as to whether there was any alternative to the one proposed by the CBV. It was concluded that there was no alternative. The President of the Republic instructed the Minister of Finance and the President of CBV to hold a meeting the following morning to inform the banking community that the BND had been excluded from the Clearing House and that the government had decided to intervene the BND. The decision to intervene was unanimous.
Two major events which contributed to the liquidity crisis which allowed the government to intervene the BND, were the result of actions by the government itself.
The first of these actions was the substantial withdrawal of public funds from the BND. Between November 30 and December 6, over 100 million dollars was withdrawn by the government agencies from the BND. Withdrawals averaged 20 million dollars per day with a high of 30 million dollars on December 6.
These daily balances were reported by the Comptroller of the bank to Gorrondona, Jr. on a twice daily basis during these days.
No testimony, either from a witness or in the form of an exhibit, was ever introduced to contradict Gorrondona, Jr.'s testimony concerning these substantial withdrawals during the week prior to the intervention.
The second action which was taken by the government injurious to the BND was the refusal to accept commercial paper for rediscount.
Gorrondona, Jr.'s unrebutted testimony established that the same paper which was denied rediscount by the Central Bank on December 6 was granted rediscount on December 30 and during the period of time after the intervention.
Gorrondona, Jr.'s testimony established that it would have been impossible to change the loan portfolio within such a short period of time and therefore of necessity it was the same loan portfolio which was granted rediscount after the intervention which had been denied rediscount during the week prior to the intervention.
Gorrondona, Jr. further testified that the December 7, 1978, hand- written balance sheet, contained in Petitioner's Exhibit 70, the Intervenor's January 12, 1979, report, was a consolidated balance sheet including all 60 of the BND's branches. Therefore, the balance sheet was prepared by employees of the intervenor during the period between December 7, 1978 and January 12, 1979.
On the issue of loans eligible for rediscount on December 7, Mr. Gabledone, Respondent's witness, using Respondent's Exhibit 70, stated that if the figures in Exhibit 70 were correct, the BND had 3.663 billion Bolivars eligible for rediscount on December 7, and that "the BND would have been able to obtain a large amount of rediscounts, or large amounts that would be eligible for rediscounts."
In part, a result of the withdrawal of government funds, the failure of the government to repay its loans and overdrafts, and the denial of rediscount by the Central Bank of BND commercial paper, the BND had a deficit at the Central Clearing House on December 6 of 100 million Bolivars.
Article 166 of the General Banking Law of Venezuela provides: "Whenever a bank or credit institute, subject
to the Provisions of this Act, faces a preca- rious situation which might entail an eventual detriment to its depositors or creditors, or endanger the banking system in general, or when infringing repeatedly (the provisions of) this Act, or those of the Central Bank of Venezuela Statute or the Regulations of either or both, or any Resolution adopted by the Executive Branch, the Superintendent of Banks or of the Central Bank of Venezuela, then the Executive Branch shall empower the Superintendent of Banks or any other individual it may deem com- petent to place the Bank or Credit Institute
in Receivership. The Receiver may agree with the Central Bank of Venezuela on the course of action to be taken for the respective bank's or credit institute's redress, its eventual reorganization or liquidation, which shall become mandatory for the respective financial house. But he shall, without exception, pre- pare, within a period not exceeding thirty days as from the date or resolution decreeing the receivership, a complete and itemized report concerning the legitimacy of the respective intervention and submit it to
the Executive Branch.
By Resolution 2296 issued December 7, 1978, the Minister of Finance of Venezuela intervened the BND.
Intervention is an uncommon occurrence and the law contemplates it will occur only when a financial institution is in danger.
The decision to intervene the BND could have been appealed to the Supreme Court of Venezuela. No appeal was taken.
Neither Gorrondona, Sr. or Jr. or any other shareholder filed suit to block or overturn the intervention, although they had lawyers in Venezuela and Gorrondona, Sr. was in Venezuela.
The BND is still under intervention.
On march 31, 1979, the Superintendent of Banks of Venezuela issued its Annual Report for the year 1978 ("Superintendent's Report"). The Report contains an extensive discussion of the BND and the reasons for its intervention.
The Superintendent's Report states the following:
In 1977 and 1978, a decrease in the rate
of growth of the Venezuelan economy together with unbalanced financial management at the BND whose key feature was credit over- expansion, especially as regarded credits
to companies connected to the bank, placed the BND in a non-liquidity crisis to be- come increasingly notorious.
The BND was the object of special attention by the Bank Regulatory Commission because over the 5 years preceding the intervention several violations of the General Law on Banks and other Credit Institutions had been detected.
The BND had repeated insufficiency of the reserve requirement, a problem from which the bank chronically suffered.
The BND was twice fined the maximum amount for illegal credits extended (1) to the Banco Suramericano de Desarollo ("BSD"), a Panamanian bank in which Gorrondona Jr.
owns 80 percent of the shares, and (2) Crenca, a BND subsidiary, in violation of Article
153 of the Banking Law.
Certain credits regarded by the BND as agricultural were not properly classified as agricultural.
As of March 31, 1978, Bs. 2,553.8 million of bank loans were concentrated in 130 customers (the "Specially Classified Companies"). Directors of these companies were also bank directors. Credits were granted to these companies easily, then were renewed frequently and even when over- due, balance sheets for some of these credits did not exist and most of the credits were unsecured.
The minutes provided by the BND to the Superintendent of Banks were not identical to those recorded in the BND's minute book, including that innumerable credit operations with subsidiaries had been omitted from the provided minutes.
BND employees failed to cooperate with the Superintendency in providing requested in- formation. An official memorandum was sent to the BND president about this matter, ordering him to rectify this situation.
Irregularities in the BND's legal reserve led to numerous notices to the BND president as well as to the levying of several fines.
Until December 12, 1978, the BND received
224 memoranda concerning shortages in the legal reserve requirement and was fined
32 times for such legal reserve requirement deficiencies. The average weekly shortage in the legal reserve requirement through- out 1978 was Bs. 124 million.
An audit conducted as of September 30, 1978, showed that the estimated loss on the loans to the Specially Classified Companies was Bs. 632.9 million. The estimated loss on other credits in the bank Portfolio was 35.7 million. The reserve for Portfolio Contin- gencies was Bs. 12 million.
On January 12, 1979, the BND Intervenor, Tinco, made a report 1/ to the Minister of Finance pursuant to Article 166 of the General Banking Law of Venezuela. The Report describes the reasons for intervention.
The Intervenor's Report states the following:
During the first eleven months of 1978 the BND increased its Invested Assets by Bs. 1.0789 billion while in that same period deposits increased only Bs. 183 million. The imbalance was partially covered by rediscounts. By November 30, 1978, the BND had rediscounts of Bs. 485.4 million,
which is 32.7 percent of all commercial bank re- discounts for that period.
Many of the documents submitted to the Central Bank for rediscounts were rejected by it since they did not comply with the requirements for eligible paper.
Credit restrictions were imposed on the BND by other banks.
The BND's failure to make timely remittance of funds to correspondents resulted in their not honoring checks and refusing to open let- ters of credit.
In 1975-78 the BND had a chronic shortage in its legal reserve requirement.
The BND had a shortage in the legal reserve in 38 of 48 weeks during the first 11 months of 1978.
The BND's reserve shortage stabilized during the months of September 1978 through November 1978 at over Bs. 100 million and reached Bs.
169 million in the last week of November.
Prior to the intervention the BND was twice fined Bs. 30,000 for having granted illegal credits to the BSD, the Panamanian bank owned by Gorrondona Jr., and to Crenca. Even after the fines, the illegality was not corrected. In the case of the BSD the credit at the time of the fine through a time deposit was Bs. 657 million. At the time the BND was inter- vened, this deposit had not been reduced
at all.
In late November and early December of 1978 the situation grew more serious as the BND's negative balances at the Clearing House in- creased, and the BND had difficulty sub- mitting documents eligible for rediscount by the CBV. Questions from abroad about the BND's situation became more insistent.
When the BND was unable to make good on its negative balance at the Clearing House
on December 6, the BND was expelled as of December
7 in compliance with Article 11 of the pertinent Rules and Regulations. Thereupon the BND
was intervened pursuant to Article 166.
There were large withdrawals after the intervention and instructions were given that teller windows would not close as long as there were clients present.
As of December 7, 1978 loans placed with affiliates (companies owned totally or partially by the BND) totaled more than Bs. 1.302 billion.
Loans placed in 93 companies with which important shareholders, directors or executive officers of either the BND or its affiliates were directly or indirectly associated totaled Bs. 1.739 billion. Other credits were as of the date of the Intervenor's Report are still under study.
On October 14, 1976, five vice-presidents of the BND, including the vice-president of Credit, the First Vice- President-Treasurer, the Vice- President-Comptroller, the Vice- President of Branches and Agencies, and Jaime Benitez ("Benitez") Vice-President for Banking Services, wrote a confidential memorandum to Gorrondona, Sr. and Gorrondona, Jr. in order to emphasize deficiencies and problems within the BND and to present recommendations. As summarized by Benitez, who testified at the hearing in this matter on July 16, 1982, the principal problem was a high concentration of credits in a group of businesses. These credits were not paid as they matured. This created a deficiency in cash flow and caused liquidity problems. There were also deficits in the legal reserve requirement. Accounting procedures were not being
correctly applied and there was a problem of overdrafts. The memorandum recommended: (1) a change in credit policy even though this would limit the expansion program; (2) affiliated and related companies should start paying their debts; (3) concentration of credit should be eliminated; and (4) internal controls aid internal procedures should be improved. Benitez' testimony established that as a whole, recommedations were not carried out and deficiencies were not eliminated.
The Memorandum of October 14, 1976, stated that:
"The Office of the First Vice-President for the Treasury has repeatedly voiced to the highest authorities in the institution its opinion regarding the excessive placements with Group Companies and has gone as far as to file a written report with the President and the Acting President. In spite of the fact that, on account of its position, it must authorize almost all of the overdrafts and/or charges to the accounts
of Group companies, it acknowledges the need to put an end to this practice. This question
has been the subject of repeated discussions with the President and the Acting President, who are the only authorities empowered to put an end to this situation.
The Memorandum of October 14, 1976, identified a number of problems then existing at the BND. It stated that there existed problems of:
"1. High credit concentration (approximately
60 percent of the entire credit portfolio is placed with 1.4 percent of the total number of clients) in Group companies or companies directly or in- directly tied and/or related to it. We mean
by this those companies or natural persons in the organization created by the highest ex- ecutive level or under instructions from it, who are organized with high Group officials, Bank officers or trusted persons, both as regards the holding and representation of
their shares and their administrative or Director offices. These companies were expedited by
said high levels or under orders from them, given through high Bank officers."
"2. Non-payment by said companies due to con- stant renewals, without partial [the translation of "abonos parciales" should be "partial pay- ment" in the sense of "amortization"] or in- terest payments."
"3. Credits to Group companies, above the legal limits, which are authorized or ordered by the highest officials."
"4. Interest documented as promissory notes that accumulates above and beyond the credits originally granted."
"5. Excessive number of permanent overdrafts with the National Government, governmental de-
pendencies and especially and in an increasing fashion, with Group companies or companies directly tied or related thereto."
"6. Overdrafts and collateral obligations in overseas banks due to the financing com- mitment and ever increasing requirements of Group companies or companies directly or indirectly tied or related thereto, which render the institution vulnerable to possible changes in the financial market."
"7. Constant use of the Bank's own credit resources for the financing of Group companies directly or indirectly tied or associated there- to, whether they be already in existence or some of the ones that are constantly being created for expanionist purposes and whose activities represent a medium or long-term investment,
at loggerheads with the soundness of commercial banking (Treasury Commission: see the material submitted at the meetings and on the minutes)"
"8. Exclusion from the List ratified by the Board of Directors of certain operations of Group's companies and of companies directly
or indirectly tied or related thereto, following longstanding instructions from high officers, who, in turn, received them from the highest levels."
"9. Credits to companies whose balance sheets do not justify the amounts of said loans,
mainly Group companies, and which credits
are authorized or ordered by the highest levels." "10. Accounting omission of operations-especially
guarantees and bonds-conducted from the Group com- panies under order from the highest levels."
"11. Excessive financial burden due to the payment of surtaxes and commissions on deposits."
"12. Increase in expenses through outlays that are not compatible with the normal management
of the Bank."
"13. Insufficient income generation, In relation to portfolio volume, which causes the interest account to be affected by amounts equal to the yield said portfolio should generate. Therefore, an insufficient amount in the account Interest Collected in Advance due to the drain it has been withstanding."
"14. Inconsistency in the Reserve Requirements position due to a weak treasury and the continuous negative balances at the Clearing House."
"15. Unbridled personnel growth at all levels, which has brought about an evident bueaucratization of Bank functions."
"16. Ignorance of normal communication channels and of approved bonus norms and procedures."
One of the signers of the memorandum of October 14, 1976, Santiago Rodriquez Marcano, was made an Assistant to the President of BND after the
memorandum was sent, but he left after a few months saying that he did not receive the necessary cooperation in his new position.
Gorrondona, Jr. testified that in 1978, BND was facing a "serious . .
. liquidity crisis" and "had very little liquidity."
Gorrondona, Jr.'s testimony established that he made his fortune in real estate.
Gonzalez' testimony indicated that in 1978 the BND faced liquidity problems, a "liquidity crisis" which even with government assistance would have continued until the end of 1979.
Benitez' testimony indicated that the BND was in serious trouble at the time of intervention and that the primary cause was credit concentration and the lack of payment upon maturity.
Romero's testimony indicated that at the time of intervention the BND had the following problems in the area of credits or loans:
A substantial part was concentrated in real estate activities.
A lot of the business that had received credits from the bank was related indirectly with directors and executives of the bank.
Some businesses received credits for amounts that went over what the law allows.
The credits were not sufficiently col- lateralized or guaranteed.
Some of these credits had a maturity of more than one year which is illegal for a commercial bank.
Gabaldon's testimony established that while he has been President of the BND many adjustments had to be made to correct the accounts of the BND as they existed at the time of intervention; that the BND Board had decided to make an appropriate footnote reservation in the BND financial statements calling attention to the possibility of future adjustments which might result from investigations and analyses of the BND's accounts prior to the intervention.
Gabaldon's testimony, based on his study of BND records, established that at the time of intervention is some cases the loans to subsidiary companies were paying interest but in a majority of the cases they were not doing so but rather the BND would increase the amount of the debt to cover the amount of the interest due. At the time of intervention, approximately 12 to 15 percent of the BND loan portfolio consisted of loans to these subsidiary companies.
Alejandro Guevara Chacin's ("Guevara Chacin") testimony established that the minutes of the BND sent to the Superintendent compared with the minute books of the bank revealed that many operations were omitted. Guevara Chacin supervised the comparison.
Juan Ramirez' ("Ramirez"), the present Superintendent of Banks of Venezuela, testimony indicated that there were many reasons for the intervention of the BND and any one of them, if put together with or alongside the others, was enough to support the decision.
Benitez' testimony indicated that the basic principle of the banking business is diversification; in other words, to place loans with diverse or different customers.
Childs' testimony indicated that renewal of loans without payment of interest is bad banking practice.
Childs' testimony indicated that loans to corporations in which directors have an equity interest should be secured and at arms length.
Wyneken's testimony indicated that there are reserve requirements in the United States and violation is not a trivial matter.
The testimony of Guevara Chacin, Eenitez, Lopez-Romero and Ramirez established that one of the BND's major problems under Gorrondona, Jr. was repeated deficiencies in the BND's legal reserve.
After the intervention, there was a run on the BND.
Between June 30, 1978, and December 31, 1978, deposits from the public decreased by Bs. 2.1 billion and most of this decrease occurred between December 7, 1978, and December 31, 1978.
In the six months following the intervention government deposits at the BND went from Bs. .6 to Bs. 2.7 billion. These deposits permitted the BND to cover withdrawals.
Gorrondona, Jr. left Venezuela for a two week period on November 17, 1978, and a detention order was issued on November 24 which would have resulted in arrest had he had been in the country.
In Venezuela, the subject of a detention order is immediately arrested and is held without any opportunity for posting bail until the detention order is resolved. The detention order was based upon an allegation that Gorrondona, Jr. had been involved in a company which had committed a security violation more than five years prior to the detention order.
Petitioner contends that the charges against him, which resulted in the detention order, were politically motivated. This order kept Gorrondona, Jr. out of the country during the intervention, and was eventually dismissed. The Court, in dismissing the charges, stated:
It then follows from the aforesaid, that it would -- clearly result in an injustice to assign any criminal liability to persons who are not even members of the Board when the presumed irregularities may have been committed.
The period leading up to the intervention of the BND was also the period immediately prior to the national election which was held on December 3, 1978. In the elections in 1974, Gorrondona, Jr. had contributed 9 million dollars to the unsuccessful opponent of President Perez. In the election of 1978, Gorrondona, Jr. had contributed over 1 million dollars to the opponent of President Perez's party, the Accion Demicratico (AD) party. Venezuelan laws do not restrict the size of campaign contributions.
Gorrondona, Jr. returned to Venezuela in June, 1979.
At that time Gonzalez recommended to Gorrondona, Jr. that he go to court to prove his innocence. In June, 1979, Gorrondona, Jr. and Sr. initiated a noticia criminis proceeding in a Venezuelan Penal Court of First Instance.
There are three ways to initiate a criminal proceeding in Venezuela: denunciation (a person makes a charge that a crime may have been committed), accusation (a person makes a charge that a particular person may have committed a crime), and noticia criminis (the court takes notice that a crime may have been committed). In Venezuela, the courts may call witnesses and thereby take investigative initiative.
The noticia criminis proceeding is based on the obligation of a Venezuelan court to investigate a possible crime of which it has notice from whatever source. In the case of the noticia criminis proceeding initiated by Gorrondona, Jr. and Sr., the court was called on to determine if the BND administrators had participated in the commission of any crime while they were serving as such. In other words, the purpose of the noticia criminis proceeding initiated by Gorrondona, Jr. and Sr. was to determine if during the period of time in which they were administering the bank they committed an act that would or could be considered criminal in Venezuela.
The word used by Gonzalez in describing the noticia criminis determination was "delito," which the interpreter testified means crime.
The decision of the Court of First Instance in the noticia criminis proceeding was to terminate the summary investigation pursuant to Article 206 of the criminal code for criminal trials. The court found there was no evidence of crime. In other words, the determination of the judge in the noticia criminis proceeding was to end the criminal investigation because the facts presented were not of a criminal nature.
With regard to the violation of banking laws described in the Superintendent's Report and the Intervenor's Report, the Court said "[a]s is clearly appreciated from these provisions, none establishes penal sanctions and although they constitute a violation of juridical regulations and comprise sanctions, same have no other character than an administrative one. The appellate court said, "this Superior Court considers that lack of maintenance of reserves in such proportion and manner as established in Articles 20, 21, and
163 of the General Act governing Banks and other Credit Institutes, is object of a sanction under Article 170 of the said law consisting of a fine to be applied by the Superintendent of Banks.
Efforts to collect the loans made by the BND prior to intervention:
On February 28, 1980, the BND entered into an agreement with Gorrondona, Sr. and Gonzalez regarding the loans to certain debtors of the BND ("February 28, 1980 Agreement"). All these loans were made prior to the intervention.
The February 28, 1980 Agreement fixed the amount of the debt to the BND of the ap- proximately 180 companies specified therein at Bs. 4.038 billion. It specified that the BND would accept in payment of this debt
the amount of Bs. 3.388 billion. It specified that payment would be made within one year.
It specified that during that year no actions would be commenced to compel payment of this debt.
Gorrondona, Sr. and Gonzalez signed the February 28, 1980 Agreement either as business brokers for the companies specified therein
or as representatives of such companies.
According to Gorrondona, Jr. all the debtor companies obligated themselves jointly, and any collateral posted by one could be used to satisfy the debts of the other.
Paragraph 15 of the February 28, 1980 Agree- ment specifies certain responsibilities assumed by Gorrondona, Sr. and Gonzalez.
"We, JOSE JOAQUIN GONZALES GORRONDONA, a
Venezuelan citizen, of legal age, of this domicile, the bearer of identity card number 30.580; and DIOGENES Jr. GONZALES HURTADO,
a Venezuelan citizen, of legal age, of this domicile, the bearer of identity card number 1.193.753, state that acting as business brokers for THE DEBTORS by virtue of the already noted common interests, personally and jointly and severally in behalf of all of THE DEBTORS undertake to accept and comply with the present agreement in all of its parts. Therefore, and to preserve the fullness of its effects, we undertake to have those debtor companies whose Articles of Incorporation or By-Laws forbid or limit the granting or posting of guarantees or securities, amend them as needed in order
to allow for the profferred guarantees; we likewise undertake to have them grant their consent lawfully and execute the present in- strument within the term of thirty (30) days, and to execute any other documents, as re- quired, that may be necessary for the per- formance thereof.
As of the present, the loans of the com- panies specified in the February 28, 1980 Agreement have not been paid in full. The amount remaining to be paid, exclusive of interest, is either approximately 2.8 bil- lion B's or 2.1 billion B's depending on whether the loans compromised in the February 28, 1980 Agreement (the difference between Bs. 4.038 billion and Bs. 3.388 billion) are treated as paid.
Such unpaid loans as of this time are neither principal nor interest. At this time the BND's total loan portfolio is approximately Bs.
6.2 billion. Whether the figure of Bs.
2.1 or Bs. 2.8 billion is used for the amount of these unpaid loans, these frozen
loans from prior to the intervention represent a substantial portion of the BND loan port- folio. These loans to related or Specially Classified Companies are in addition to the approximately Bs. 900 million in loans to subsidiary or affiliated companies that are not paying interest or amortizing principal.
There is no evidence that Gorrondona, Sr. or Gonzalez were coerced into signing the February 28, 1980 Agreement. The Agreement was negotiated over an extended period of
time. Gonzalez has testified that he signed the February 28, 1980 Agreement in order to assist the rehabilitation of BND and that Gorrondona, Sr. signed in the same spirit. Both men initialed each page when they signed it. Gorrondona, Jr. has testified that it is his position that the agreement is invalid
in parts because he did not sign it.
The BND has negotiated with Gorrondona, Jr. concerning the performance of the February 28, 1980 Agreement and the debts owed by the Specially Classified Companies. Such
negotiations have not been successful. Under the February 28, 1980 Agreement, suits could not be filed for one year. When the agree- ment was not performed, the administration
of Borjas pursued negotiations with Gorrondona, Jr. and, when Gabaldon became President of BND in August, 1981, he continued negotiations with Gorrondona, Jr. No suits have been filed against Gorrondona, Sr. or Gonzalez personally on account of the February 28, 1980 Agreement. The BND has very recently started to file suits against some of the debtors.
Gorrondona, Sr.'s signing of the Agreement of February 28, 1980, Gorrondona, Jr.'s partici- pation in negotiations with respect to the performance thereof, together with the state- ments made in Memorandum of October 14, 1976 and described above concerning loans made prior to intervention to companies owned directly or indirectly by owners of the BND, corroborates the finding of the Intervenor that prior to intervention a substantial amount of loans were made to companies in which officers and directors of the BND had an interest. The inability to collect these loans corroborates the conclusion of the
Superintendent and Intervenor that these loans were not adequately collateralized and
were made in amounts in excess of what prudent credit practices would dictate based on the companies' balance sheets.
Transfer of ownership of the BND:
In the days following the intervention, members of the national government of Venezuela, including the Minister of Finance, met with Gorrondona, Sr. The possible liquidation of the BND and the possible transfer of ownership were discussed.
On February 8, 1979, agreements were
signed providing for the sale of 65 percent of the BND's shares to the Corporation Venezolana de Fomento ("CVF") . Sixteen shareholders, including Gorrondona, Sr., signed these agreements. They covered
the shares owned by both Gorrondona, Sr. and Jr. The February 8, 1979 Agreement set a minimum price of Bs. 1 per share. The Agreement provided that the actual price would be set by the Superintendent of Banks prior to July 31, 1979. The price was to be fixed based on the book value of the BND and its subsidiaries as of December 31, 1978 less the uncollect- ible loans in its portfolio.
At the time of intervention the losses on the BND loan portfolio exceeded the capital and reserve of the bank. Under Venezuelan law, when a bank has lost more than 25 per- cent of its capital, the stockholders are required to replace it. Accordingly, had
they not sold their shares, the former owners of the BND would have had to make a capital contribution to the BND. As it is, the new owners of the shares have replaced the lost capital of the BND.
Gorrondona, Jr., Borjas, the then President of the BND, and the Planning Minister of Venezuela met between June and November, 1979, to discuss the price for the BND shares and repayment of debts owed by the Specially Classified Companies. As a result of this meeting, an agreement was signed on December 21, 1979, regarding the fixing of the price of the stock and the negotiation of the re- payment of loans made to the Specially Clas- sified Companies.
In February, 1980, two agreements were signed finalizing the sale of the BND shares to the CVF. One of these agreements (Respondent's Exhibit 82) was with the parties that had signed the February 8, 1979 Agreement. Re- spondent's Exhibit 82 was signed by Gorrondona Sr. and Gonzalez among others. In paragraph First it recites that:
"In execution of the agreement reached in the Third clause of the sales contracts for Banco
National de Descuento, C.A. shares, sub- scribed between C.V.F. and THE SELLERS and dated February 8, 1979, the Bank Examiner through Official Notices Nos. HSE-200- 3860 and HSE-200-3992, dated July 31
and August 7, 1979, respectively, ad- dressed to the Banco National de Descuento, C.A., determined losses in the Credit Portfolio of said Institution reaching
an amount of ONE THOUSAND ONE HUNDRED AND EIGHTY SIX MILLION AND SEVEN [TOS (hundred)
omitted in translation] THOUSAND BOLIVARS (Bs. 1,186,700,000.00) and therefore ordered the pertinent adjustments to the BANCO NACIONAL DE DESCUENTO C.A.'s Balance Sheet
as of December 31, 1978."
In paragraph Second it recites:
"Due to the adjustments referred to in the previous Clause, and pursuant to the agree- ment between the parties listed in the con- tracts entered into on February 8, 1979, the Book value of the sold shares resulted in
an amount less than One Bolivar (Bs. 1.00) per share, wherefore 'THE SELLERS' have, pursuant to the provisions of the Third Clause of the aforementioned contracts, agreed to accept the amount of One Bolivar (Bs. 1.00) per share, as the sale price for the shares sold."
In paragraph Third it recites:
"Lastly, 'THE SELLERS' state for the record that what they declare herein completely invalidates any statement or claim made by them, their agents, attorneys or represent- ative regarding any questions on the validity of the agreements executed on February 8, 1979, whose contents they are aware of, and which they execute in a final and definite manner through this document."
There is no claim made in the record that the signers of Respondent's Exhibit 82 were coerced in their decision to execute that agreement.
The other agreement of February 1980 regard- ing the transfer of shares of the BND (Respon- dent's Exhibit 81) was with shareholders who had not signed the February 8, 1979 Agreement.
That agreement also fixed the sales price at 1 B per share. As recited therein, it used as the amount of the losses the Bs.
649 million figure established by the Minister of Finance pursuant to the appeal taken November 30, 1979, rather than the Bs. 1.186 billion figure established by the Superinten- dent of Banks prior to the appeal. This established that whether the Bs. 1.186 bil- lion or the Bs. 649 million figure is used
for the amount of the losses, the shares of
the BND had at most a nominal value of 1 B on December 31, 1978.
Property in Venezuela cannot lawfully be taken by the Government without compensation. If it is taken for less than a fair price, the aggrieved person can go to court to seek a fair price. The judiciary in Venezuela is independent.
No lawsuit has yet been filed to obtain ad- ditional compensation for the shares of
the BND transferred to the new owners. Recently an "administrative letter" was sent regarding additional compensation for the shares. Nothing in Venezuelan law precluded its being sent earlier.
The evidence in the record does not support a finding that the government of Venezuela coerced the owners of the BND to sell their shares or that such shares were sold at
less than a fair price. As alleged by Petitioner.
SUMMARY FINDINGS
The decision to intervene the BND was, in part, politically motivated as evidenced by the timing of the intervention, the withdrawal of substantial government deposits immediately prior to intervention and the decision to refuse recognition of previously accepted commercial paper for rediscount. This is not to conclude, however, that the continuing liquidity problems of the BND were caused by the government.
The reasons for the liquidity crisis experienced by the BND in 1978 had existed since at least 1976, and were identified in internal memoranda as well as Superintendent of Banks' and Intervenor's reports.
The liquidity crisis experienced by the BND in 1978 and the intervention of the BND by the Venezuelan Government have at the present time a somewhat adverse effect on the reputation of Gorrondona, Jr. with respect to his qualifications as a banker. There is no evidence of any deficiency in his character or integrity.
The education and business experience of Gorrondona, Jr. tend to establish his qualifications. However, his role as President-in-Charge of the BND during the liquidity crisis and intervention reflects adversely on those qualifications.
No witness was called by the Banking Department or the Applicant on the question whether the practices that gave rise to the intervention constitute unsound banking practices. Those practices have been identified in the findings herein and include concentration of credit in the loans to the Specially Classified Companies, the renewal of loans to subsidiary companies though those loans were not paying interest, repeated violation of legal reserve requirements, failure to comply with the laws relating to agricultural loans, and failure to disclose to regulatory authorities that the minutes submitted for review by those authorities were not the same as the minutes in the books of the bank.
LEGAL CONCLUSIONS AND RULINGS
Subsection 120.57(1)(b) 12, Florida Statutes, provides:
In applications for a license or mergers pursuant to title XXXVIII which are referred by the agency to the division for hearing pursuant to this section, the hearing officer shall complete and submit to the agency and to all parties a written report consisting
of findings of fact and rulings on evidentiary matters. The agency shall allow each party
at least 10 days in which to submit written exceptions to the report.
Subsection 120.52(7), Florida Statutes, defines "license" as
[a] franchise, permit, certificate, registration, charter, or similar form of authorization required by law, but it does not include a license required pri-
marily for revenue purposes when issuance of the license is merely a ministerial act.
Subsection 658.28(1), Florida Statutes, provides in part:
(1) In any case in which a person or a group of persons, proposes to purchase or acquire a controlling interest in any state bank or state trust company and thereby to change the control of that bank or trust company, each person shall first make ap-
plication to the department for a certificate of approval of such proposed change of control of the bank or trust company. . .
The above provisions of Chapter 120 establish the Hearing Officer's report procedure for license applications under Florida banking laws. This is an application for a certificate of approval which is a form of license application within the meaning of that term as used and defined in Chapter 120. Therefore, no recommended order will be issued.
Subsection 658.28(1), Florida Statutes, provides in part: [T]he department shall issue a certificate
of approval only after it has made an investi- gation and determined that the proposed new owner or owners of the interest are qualified by character, experience, and financial responsibility to
control and operate the bank and trust company in a legal and proper manner and that the interests of the other stockholders, if any, and the depositors and creditors of the bank or trust company and the interests of the public generally will not be jeopardized by the proposed change in ownership, controlling interest, or management.
The above provision necessitates Respondent's investigation of Gorrondona, Jr.'s banking experience. Thus, the history of the BND and his role in the management of that institution are relevant to Respondent's investigation and to this proceeding. Petitioner's objection to such evidence is hereby overruled.
FILED this 28th day of December, 1982, in Tallahassee, Florida.
R. T. CARPENTER, Hearing Officer Division of Administrative Hearings The Oakland Building
2009 Apalachee Parkway
Tallahassee, Florida 32301
(904) 488-9675
Filed with the Clerk of the Division of Administrative Hearings this 28th day of December, 1982.
ENDNOTE
1/ Throughout the Translation of the Intervenor's Report and certain other translations, the Intervenor is frequently referred to as auditor, the intervention as the audit, and the act of intervening as auditing.
COPIES FURNISHED:
Carl B. Morstadt, Esquire Assistant General Counsel Office of the Comptroller The Capitol, Suite 1301 Tallahassee, Florida 32301
Joseph C. Jacobs, Esquire
ERVIN, VARN, JACOBS, ODOM & KITCHEN
305 South Gadsden Street Tallahassee, Florida 32301
The Honorable Gerald Lewis Comptroller
Department of Banking and Finance The Capitol
Tallahassee, Florida 32301
| Issue Date | Proceedings |
|---|---|
| Dec. 28, 1982 | Recommended Order sent out. CASE CLOSED. |
| Issue Date | Document | Summary |
|---|---|---|
| Dec. 28, 1982 | Recommended Order | Petitioner is not entitled to acquire all stock of another bank without background investigation of shareholder with questionable credentials. |
SECURITY BANK OF MACCLENNY vs. DEPARTMENT OF BANKING AND FINANCE, 82-000613 (1982)
DEPARTMENT OF BANKING AND FINANCE vs. MELVIN HABER, 82-000613 (1982)
RICHARD ERIC WATTS vs DEPARTMENT OF BANKING AND FINANCE, 82-000613 (1982)
IN RE: NEW RIVER BANK AND 1ST UNITED BANK (CONSOLIDATION/APPLICATION) vs *, 82-000613 (1982)
