Congress Should Hold Hearings on FDIC Abuse of Citizens

#267 October 1999

Congress Should Hold Hearings on FDIC Abuse of Citizens
by Amy Ridenour

Innocent until proven guilty, right?

That's what it says in civics textbooks. But in the real world, sometimes government officials want you to be guilty. If that happens, even if you are innocent, you can be in big trouble.

Take the cases of Charles Hurwitz of Texas and Glen Garrett of Missouri.

In Hurwitz's case, the government wanted valuable land owned by Hurwitz's company. Hurwitz was willing to sell, but as the land carried a high fair-market value, it was expensively priced. Rather than buy the land in an honest transaction, the government sued Hurwitz's business over an unrelated regulatory matter under the jurisdiction of the U.S. Federal Deposit Insurance Corporation (FDIC). Essentially, the government said: Give us the land; we'll settle the suit.

In other words, blackmail.

On that day, the Founding Fathers rolled over in their graves.

Internal documents show that the land-confiscation scheme, unconstitutional though it was, had the approval of government officials as high as the White House. On March 21, 1995, then White House Chief of Staff Leon Panetta, in fact, wrote a letter on White House stationery endorsing this scheme, saying, "Budgetary constraints have made it impractical to acquire such an expensive tract of land through outright federal purchase."1

Even more chillingly, after a federal judge forced the FDIC, over its protests - including an appeal to another court,2 to make public some of the FDIC's internal documents, it became clear that the FDIC knew perfectly well that it had little chance of proving Hurwitz guilty. Although FDIC policy prohibits the agency from pursuing cases unless it is "more than likely to succeed," in its zeal to acquire the land, the FDIC ignored its own policies and proceeded with a suit it knew lacked merit.3

Hurwitz refused to be blackmailed, but he did fully cooperate with investigators4 and he sold the government the land for a price lower than its value. The banking agencies were not grateful. Instead, the FDIC continued its case against Hurwitz in a federal court, where the government is unlikely to win. It also opened a "second front" against Hurwitz by way of an internal government Office of Thrift Supervision (OTS) regulatory hearing, paid for by the FDIC, where Hurwitz's rights are limited and where his guilt will be determined by administrators paid by the prosecutors.

According to the journal of the American Bar Association, the proceedings in this chamber are so greatly in the government's favor that one of the administrative judges has never once ruled against the government.5

Reportedly, the government hopes to force Hurwitz to surrender some additional land that was not included in the sale. A federal district judge called the case a "manipulation of the court system."6

So far, Hurwitz and his companies have spent over $20 million in this case7 and taxpayer expenditures are similar.8

The Oxford English Dictionary refers to the infamous "Star Chamber" as a court whose "rules of procedure... rendered it a powerful instrument in the hands of a sovereign or ministry desirous of using it for tyranny."9

We like to think we've come far since the 15th-17th century Star Chamber, but we obviously have not.

The story of small-town Missouri banker Glen Garrett is different, but no less alarming to those who believe that Americans who are innocent of any crime have the right not to be hounded by their government.

Garrett was the subject of an anonymous, ill-founded and false accusation of dishonesty against him made to the state bank examiners, who passed them on to the FDIC. It was later shown that the false charges were made by one of Garrett's business competitors, hardly an objective source.

The FDIC began an exhaustive investigation that would eventually take almost a decade to resolve. Despite finding insufficient evidence of any wrongdoing, the FDIC was undeterred. Worse, an FDIC senior management official demonstrated extreme bias, saying, "Glen Garrett should be castrated."

Rather than find proof of wrongdoing by Garrett, however, the FDIC racked up an impressive list of wrongdoing of its own. Among them:

* An FDIC official asked an officer of Garrett's bank to lie about the investigation. When the officer refused and the bank complained to the FDIC, no action was taken.

* During the investigation, a government official told another banker false derogatory information about Garrett's personal confidential financial affairs. It is a violation of criminal statues for government bank examiners to release personal financial information they learn during a bank examination to another banker. Again, no action was taken.

* The FDIC attempted to incite a U.S. Attorney to bring a criminal indictment against Garrett by sending the U.S. Attorney a written referral which contained numerous false and unsubstantiated allegations against Garrett, which the FDIC labeled as "facts," not "allegations" or "suspicions." The FDIC has conceded that they made false allegations.

* During a hearing Garrett subpoenaed two FDIC officials to testify about their knowledge of the case. In a blatant attempt to subvert Garrett's rights in court, the FDIC responded by sending letters to its own employees threatening them with criminal prosecution if they testified.

In the end, and after Garrett was forced to spend almost $2 million to defend against the false FDIC allegations, the FDIC decided to withdraw and dismiss (with extreme prejudice, which means they can never resurrect the charges again) all charges it made against Garrett, thus totally vindicating him of all wrongdoing. But even here, the FDIC required one last tribute from Garrett: he had to pledge not to sue the FDIC for wrongful prosecution.10

On October 11, Federal Reserve Chairman Alan Greenspan delivered a major speech to the annual convention of the American Bankers Association on the need for changes in the banking regulation system, but he said not one word about the urgent need to correct abuses like these.11 This was wrong.

One of Thomas Jefferson's complaints about the British government in the Declaration of Independence was that King George III had "depriv[ed] us in many cases, of the benefits of trial by jury." The Declaration of Independence retains a powerful resonance because it speaks of timeless, universal truths. The regulatory process should never be used as a substitute for objective adjudication by an impartial tribunal.

Our government today needs to reaffirm its commitment to these truths, which remain as important today as they were to our citizenry in 1776. Congress should hold hearings to look into these events, and develop policies to prevent future such abuses.

Footnotes:
1 Bob Sablatura, "Redwoods, Not Red Ink, May Have Motivated FDIC Against Hurwitz; Documents Show Agency May Have Tried to Hide Truth in Pursuing Suit Against Financier," Houston Chronicle, July 19, 1998, p. A1.

2 Sablatura, p. A1.

3 Sablatura, p. A1.

4 Letter of U.S. House of Representatives Majority Whip Tom DeLay to The Honorable Donna A. Tranoue, Chairman, Federal Deposit Insurance Corporation, and Mr. Gaston L. Gianni, Jr., Inspector General, Federal Deposit Insurance Corporation, February 3, 1999.

5 Terry Carter, "Banking and Fear," ABA Journal, July 1999.

6 United States District Judge Lynn N. Hughes, "Opinion on Dismissal of The Office of Thrift Supervision," Federal Deposit Insurance Corporation and Office of Thrift Supervision v. Charles E. Hurwitz, U.S. District Court, Southern District of Texas, Civil Action H-95-3956, October 23, 1997.

7 Sablatura, p. A1.

8 Quoted in "Charles Hurwitz is No Sap," by Kathryn Jones, Texas Monthly Biz, June 1999, Charles Hurwitz estimates the combined expenditures of Hurwitz and his companies and the government at $50 million.

9 The Oxford English Dictionary, Oxford University Press, 1971.

10 Information about the story of Glen Garrett was obtained from the following sources, among others: Terry Carter, "Banking on Fear," ABA Journal, July 1999; Interviews with Stephens B. Woodrough, legal counsel for Glen Garrett and former FDIC litigator, conducted in September and October 1999; Woodrough, Stephens B., "The Abuse of Regulatory Power - A New and Powerful Antidote," (unpublished); Prepared testimony by Stephens B. Woodrough before the Small Business Administration Regulatory Enforcement Fairness Board, St. Louis, Missouri, June 8, 1998; Testimony of Paul G. Fritts, former FDIC Executive Director of Supervision and Resolutions before the Small Business Administration Regulatory Enforcement Fairness Board, St. Louis, Missouri, June 8, 1998.

11 Prepared text of speech delivered by U.S. Federal Reserve Chairman Alan Greenspan to the American Bankers Association in Phoenix, Arizona, on October 11, 1999.

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Amy Ridenour is president of The National Center for Public Policy Research.