Lincoln's management concluded that it had been the victim of massive illegal and harmful disclosures of confidential information by the FHLBB and, in July 1987, filed a lawsuit in the United States District Court for the District of Columbia against the FHLBB and its employees seeking to enjoin any further unlawful disclosures of Lincoln's confidential business information. Shortly thereafter, Lincoln was informed that the FHLBB wanted to discuss the issues raised in the complaint and such a meeting took place on July 23, 1987, attended by counsel for Lincoln and various FHLBB officials. The FHLBB officials represented that FHLBB's Inspector General's Office was investigating the disclosures, that the investigation was being accelerated and that no further disclosures would occur. As an apparent result of these meetings, however, the ERC69/ initiated an investigation of ACC's and Lincoln's allegations. In response to those assurances, Lincoln dismissed its complaint without prejudice.

Despite those representations and assurances, additional newspaper articles continued to appear which contained highly sensitive, confidential, and frequently inaccurate information concerning Lincoln that could only have come from FHLBB sources. Among those disclosures were a September 28, 1987 article in National Thrift News,70/ and a re-edited version of the Regardie's article which appeared in the September 1987 edition of the Arizona Trend. 717 Lincoln sued the Arizona Trend for libel in connection with this article and, as part of the settlement, the Arizona Trend printed, in effect, a retraction, and provided to Lincoln a copy of the leaked FHLBB report on which the article was based. All of these incomplete, inaccurate, and sensitive disclosures, however, had an extremely damaging effect on Lincoln and its business opportunities, operations and relationships, as well as on the price of ACC stock, and exacerbated the drain on management's time and energy.

In response to the leaks and resulting damage to Lincoln, Lincoln again prepared a complaint against the FHLBB and the FHLB-SP and advised FHLBB officials that it intended to file a

697

70/

711

The ERC was comprised of Darrel Dochow, Executive Director of the FALBB Office of Regulatory Affairs, Jordan Luke, General Counsel of the FHLBB, George M. Barclay, President of the Federal Home Loan Bank of Dallas, Rosemary Stewart, Director of the FELBB Office of Enforcement and Karl A. Hoyle, FHLB8 Executive Director of Public Affairs.

"Money and Politics," National Thrift News, September 28,
1987 at 2.

Binstein, M., "Renegade vs. Regulator, An Exclusive Look at an S&L on the Brink," Arizona Trend, September 1987 at 66.

second lawsuit. Again the FHLBB requested that Lincoln not file the suit and that Lincoln meet to resolve both the leaks and other

issues arising out of the FHLB-SF's thirteen month examination of Lincoln. Lincoln agreed to forego filing the complaint and to negotiate with the FHLBB. These negotiations led to the execution of the MOU on May 20, 1988.

The FHLBB's execution of the MOU was premised upon findings made by the ERC and reflected in a memorandum to the FHLBB dated April 30, 1988, which was recently released to the press by FHLBB Chairman M. Danny Wall. The ERC investigated ACC's and Lincoln's allegations that there had been a "systematic attempt to destroy Lincoln by FHLBB employees and "a series of leaks of negative confidential information, an unusually lengthy and detailed examination, and allegedly overzealous supervisory actions and strident statements by (FHLBB] members, employees and agents about -737 Lincoln's 'illegal' actions and imminent demise." In that memorandum, the ERC described its four "primary factual conclusions":

727

737

First, present facts available to the ERC
indicate that Lincoln is not insolvent now and
will not necessarily be insolvent in the
future. Second, there are many significant
disagreements among experienced, competent,
and thoughtful individuals about the soundness
of, and risks involved in, Lincoln's
operations. Third, Lincoln and the Agency
Functions Group at the FHL Bank of

San Francisco presently have a seriously
adversarial relationship that prevents normal

While the PHLBB repeatedly represented to Lincoln that the
allegations regarding leaks of confidential information were
being investigated, PHLBB General Counsel, Jordan Luke
stated, at the meeting of the ERC on February 22, 1988 that
"[t]here have been leaks, but I have never heard anyone
attempt to find an overall pattern to the leaks, as to who
might be the source of them." Minutes of ERC Meeting,
February 22, 1988, filed with the House Banking Committee by
William K. Black in connection with his testimony on
October 26, 1989.

See

In considering these charges, the ERC was aware that PHL88
member Roger Martin believed the FHLBB "needed to settle this
case." When asked why, Martin said, "Because I have seen
Lincoln's hard evidence and you would lose the lawsuit."
Memorandum of Conference Call Meeting, February 16, 1988,
4:05 p.m. (PST) among members of the PHLBB and FHLB-SP
(including Messrs. Hoyle, Dochow, Luke and Barclay, members
of the ERC) at page 20.

69

supervisory communications. And, fourth,
there have been repeated leaks of confidential
Bank Board information that have damaged
Lincoln's reputation and possibly its business
opportunities. Accordingly, the ERC believes
that this is a unique situation that justifies
a unique resolution, which, under these
circumstances, should not be viewed as a
precedent for other unhappy institutions to
shop for their supervisors (emphasis in
original).

The deliberations of the ERC in arriving at these conclusions have now been made public, with the minutes of its meetings filed as exhibits to the testimony of William K. Black before the House Banking Committee on October 26, 1989. It is interesting to note, in light of recent testimony suggesting that the 1986 Report formed a clear and incontrovertible basis for conservatorship as early as 1987, that the members of the ERC expressed significant reservations about such a conclusion and, additionally, expressed serious concerns about the lawfulness of conduct by the regulators during the period of the examination. In discussing Lincoln's securities portfolio, for example, Steve Hershkowitz from the PHLB-SP Office of Enforcement, commented that (Lincoln's managers] are traders that have a history of making money. Pillsbury [counsel for the FHLB-SP] was looking for securities losses but did not find them last summer, not even unrecognized mark-to-market losses. It would be hard to bring an enforcement case against Lincoln. It would be hard_tqfind an accounting expert who would say Lincoln was wrong.-747 Kevin O'Connell from the Office of Regulatory Policy, Oversight and Supervision, commented, in connection with a discussion on Lincoln's accounting for real estate projects, that "Lincoln's practices are aggressive but defensible. He also noted in the same meeting, that the examination may have been too aggressive on junk bonds. 757 Stewart stated it most plainly in her testimony before the House Banking Committee on November 21, 1989:

747

751

It is interesting that Mr. Hershkowitz would make such a comment even though FHLB-SP had already hired Kenneth Leventhal & Co. for the purpose of determining that "Lincoln was wrong. One cannot help but wonder whether Kenneth Leventhal & Co. took Mr. Hershkowitz's opinion as a direct challenge.

The foregoing excerpts are taken from the minutes of a meeting of the ERC on February 22, 1988 filed as exhibits to the testimony of William K. Black before with the House Banking Committee.

The truth is that the May 1st, 1987 memorandum
and the 1986 exam, which had just been delivered
one month before, were not did not contain

sufficient evidence to support a conservatorship

or receivership.

In his testimony the same day, Dochow supported her statement and explained

You normally took a conservatorship action only
when the institution was near insolvency, moving
towards insolvency or you could document insider
abuse such as that substantial dissipation of
assets was occurring. None of that was

documented at this point in time (emphasis
added).

The ERC also discussed at that meeting the substantial

evidence that staff or members of the FHLBB had made unlawful leaks to the press of confidential information. Rosemary Stewart commented that "the first significant leak occurred in December 1986 ... I was advised that Chairman Gray had made disclosures to the press on advice of General Counsel Harry Quillian." William Black related a story describing his briefing of Senator William Proxmire's aide, Kenneth McLean, with respect to preliminary Lincoln examination results suggesting adjustments of $615.4 million. He stated I never spoke to the press except to confirm, at Gray's direction, the $613.4 number. He speculated that the original leaks came from McLean. He heard the number ($615.4 million] and no sooner had I returned (from briefing him] to the Bank Board but the Wall Street Journal was on the telephone seeking confirmation of the number. Erickson stated that he was able to determine that [the leaks] all came from one draft, prepared in December 1986, of the Statement of Supervisory Concerns, which according to their discussions, had been circulated only at the ORA in Washington, D.C. Stewart, at the March 14, 1988 meeting of the ERC, summed up her recommendation that the Office of Enforcement

was in favor of Lincoln's transfer out of
the 11th District in order to address the
seriously adversarial relationship that
has developed with the FHLBank and to
compensate, in an indirect manner, for
the leaks of FHLBB information that has
injured Lincoln's operations and

opportunities. . . . [Lincoln] has been
the subject of unprecedented leaks of

confidential bank board information
(emphasis in original).

71

It therefore should not be surprising to anyone that the FHLBB accepted the ERC's recommendation which questioned the validity of the 1986 Examination and sought to resolve not only the issues raised in that examination, but also the issues of possible criminal conduct which exposed the regulators to serious and extensive liability for their actions.

The MOU was designed to resolve all issues raised in the 1986 examination and in related negotiations with ORPOS and obligated the ORA (rather than the FHLB-SF) to conduct a new examination of Lincoln that would not "rehash the findings in or transactions, procedures or events covered by, the 1986 Examination.. The MOU also obligated both parties to make every effort in good faith to promptly resolve any issues raised in the new examination, and... work together to discuss such issues at the earliest practicable time and to develop procedures to resolve them reasonably and expeditiously. Pursuant to the MOU, ACC contributed $10 million in cash to Lincoln's regulatory capital by purchasing preferred stock and Lincoln agreed to take additional steps to increase its regulatory capital. Darrel W: Dochow, a member of the ERC, signed the MOU and became Lincoln's Acting Principal Supervisory Agent and the individual responsible for supervising the new examination of Lincoln.

In a letter to Lincoln's Board of Directors, also dated
May 20, 1988, the Director of the Office of Enforcement of the
PHLBB advised, "in clarification of the Memorandum of
Understanding and Agreement" that:

Based upon the findings made in the 1986
Examination and the information presently
known to the FHLB-SF and ORPOS, PSLIC and the
PHLBB have no present intention to refer any
matter to, or to request any other government
agency to take any action, involving Lincoln
or its parents, affiliates, officers,
directors, employees or agents.

The execution of the MOU, which Lincoln, apparently mistakenly, believed to be a good faith effort by the FHLBB and ORA to resolve the disputes that had arisen from the FHLBB's regulatory abuses admitted by the FHLBB's own ERC, formed the basis for still more regulatory enmity. The Washington Post, for example, reported, on June 10, 1988, that

Federal bank regulators are said to be angered by decision by savings and loan regulators to transfer government supervision of a California S&L that had complained it was treated unfairly..........