MEMORANDUM Comptroller of the Currency Washington, DC 20219 To Mr. John E. Shockey, Chief Counsel From Chief Counsel Robert B. Serino, flection of intorcorant Date September 1, 1977 Subject Elements necessary for successful prosecution of overdraft cases as misapplication, $656 Questions Presented What are the prerequisites for convicting bank officials of misapplication of funds, 18 U.S.C. $656, in cases where customers have overdrawn their accounts? What factual situations have satisfied those prerequisites? Discussion Once it has been established that there is a guilty officer, director or person connected in any capacity with a national bank, it must be shown that there is a wilful misapplication. Intent An overdraft may be legal or criminal depending on the intent of the person committing it, inferred from surrounding circumstances shown by the evidence. U. S. v. Heinze, 161 F. 425 (2d Cir. 1908). The existence of such intent cannot be inferred from the mere existence of such an overdraft or check kiting scheme. U. S. v. Giordano, 489 F. 2d 327 (2d Cir. 1973). In Giordana the Second Circuit found that intent to injure the bank in a check kiting case existed if the bank officer knew that misapplication exposed the bank to the risk of losing funds and the bank officer concealed the misapplication. The court noted that the natural consequences of the kiting scheme was to put the bank in jeopardy. The intent to defraud was shown by the fact that the bank officers permitted the overdrawn checks to be treated as cash to conceal the check kiting scheme. In U. S. V. Boedker, 389 F. Supp. 360 (M.D. Pa. 1974), the defendant was found to have intended to injure the bank of which he was president by borrowing the overdrafts of a corporate customer of which he was a director and shareholder. The intent was inferred from the fact that the defendant knew the customer had insufficient funds and was further supported by the defendant's knowledge, as a director of the corporate customer, that it was unable to cover the shortage in the account. The court noted that a jury could conclude, based on the defendant's financial interest in the customer, that the defendant had motive to act against the bank's interests. The Tenth Circuit in Swingle v. U. S., 389 F.2d 222 (10th Cir. 1968) concluded that the defendant satisfied the requisite intent from the fact that the overdrawn checks were held without posting each day and were never recorded in appropriate books. In U. S. v. Matsinger, 191 F.2d 1014 (3d Cir. 1954) the circuit court remanded the case to determine whether the defendant satisfied the intent requirement, but held that a misapplication in an overdraft situation must be more than a mere bookkeeping transfer and must involve an actual conversion of the bank's money. Willful misapplication The Boedker court concluded that a bank official may still be acting wilfully even though he neither knows or intends that his actions violate the law. The following facts of this case were sufficient to conclude willfulness on the defendant's part: (1) that defendant instructed subordinates to handle these overdrafts differently; (2) that the handling of the overdrafts rendered the bank liable for them despite the customer's history of overdrafts; (3) that defendant informed the customer's president that the bank would honor the checks despite insufficient funds; (4) that defendant did not inform the board of directors of this arrangement; (5) that defendant had substantial interest in the customer. Boedker is unique in that discussion of wilful misapplication is distinct from that of intent. In most other cases involving overdrafts as violation of $656, the two prerequisites are discussed together and the facts proving wilfulness also prove intent. In U. S. v. Boedker, 389 F. Supp. 360 (M.D. Pa. 1974) the court indicated that while it is not uncommon for a bank to retain an NSF check when it is reasonably certain that the amount of the check can be collected, it is not a common practice to retain NSF checks when the account holder has a history of NSF checks. The court in Boedker stated that "given what had to be the precarious financial situation of [the account holder] the natural result of the defendant's honoring [the account holder's] overdrafts was to injure and defraud the bank. Id. at 364. " Payment of interest is a factor that can be weighed to determine if there is intent. Id. Chairman ST GERMAIN. I conclude by stating, Mr. Hendersonincidentally, Mr. Henderson, do you have an opinion on NOW accounts? I am very serious. We start the hearings tomorrow. I will let you be the leadoff witness. Are you for or against NOW accounts, as you understand it? Mr. HENDERSON. I have no opinion. Chairman ST GERMAIN. The reason I ask is when I look at the overdrafts, it seems to me in this overdraft situation at Calhoun, during that campaign, there was a unique type of NOW account developed, of a brand-new type. If Mr. Lance were to stay on, I am wondering if he would come out in favor of NOW accounts. The subcommittee will be in recess until tomorrow morning at 10, room 2222, and we will have hearings on NOW accounts opening. Gentlemen, as I stated earlier, we may well have to call on you again, and we appreciate your assistance today. Thank you. [The following are written questions submitted by members of the subcommittee to the witnesses, along with the replies:] [In addition, following are questions from Chairman St Germain to nine banks in regard to correspondent relationships along with the replies:] As you are aware, Members of the Subcommittee indicated in our hearings on September 6 that we would have follow-up questions to your appearance. 1. You were at the Calhoun First National Bank when the apparent violations of law regarding the Campbell and campaign matters occurred. Please provide the Subcommittee with your own accounting of the events involving these referrals including the dates you became aware of violations, the dates the F.B.I., the Comptroller of the Currency's examiners, and the U. S. Attorney were informed of these violations, and the dates of and content of any discussions you had with any of the above agencies regarding the violations. 2. Your bank signed an agreement with the Comptroller of the Currency's Office on December 2, 1975. Please inform the Subcommittee on what date your bank was informed, if ever, that the Comptroller's office had made a criminal referral to the Justice Department regarding several matters found in the bank in 1975. Was the bank kept informed of the various steps of this criminal referral, did you know which possible violations were being handled by the Justice Department in Washington and which were being handled by the U. S. Attorney in Atlanta? 3. An Assistant U. S. Attorney in Atlanta has testified, under oath, to a Senate Committee that he caused a subpoena to be served on your bank for certain books and records in September of 1976 and that he was informed that the records were not at your bank. Please provide the Subcommittee with a copy of your response to the U. S. Attorney's office in Atlanta. Mr. Y. A. Henderson, Jr. -2 September 20, 1977 4. In the December 2, 1975 agreement you signed with the Comptroller's Office, Article 14 provided: "The BANK shall reduce loans to 70% or less of total deposits." Please inform the Subcommittee what the ratio of loans to deposits was at that time. 5. Article 13 of the same agreement provided: "The BANK shall, with all due diligence, reduce its dependency on borrowed funds of all types, as well as on volatile liabilities." Please inform the Subcommittee of the nature of the Comptroller's concern in this regard. Because of ongoing legislative and oversight hearings, your earliest response would be appreciated. FJStG:mLr Sincerely, For any J. St Germain |