Table of Contents

The Office of Investigations (OI) is responsible for carrying out the investigative mission of the OIG. Staffed with agents in Washington, D.C., Atlanta, Dallas, and Chicago, OI conducts investigations of alleged criminal or otherwise prohibited activities impacting the FDIC and its programs. As is the case with most OIG offices, OI agents exercise full law enforcement powers as special deputy marshals, under a blanket deputation agreement with the Department of Justice. This will soon change, as a result of the November 2002 passage of the Homeland Security Act, which provides statutory law enforcement authority for certain OIGs, including the FDIC OIG. This statutory authority will take effect at the end of May 2003. In the interim, our office has been working with the other affected OIGs to develop a collective memorandum of understanding establishing an external review process to ensure that proper safeguards and management procedures are implemented in each affected OIG.

OI's main focus is on investigating criminal activity that may harm or threaten to harm the operations or the integrity of the FDIC and its programs. In pursuing these cases our goal, in part, is to bring a halt to the fraudulent conduct under investigation, protect the FDIC and other victims from further harm, and assist the FDIC in recovery of its losses. Another consideration in dedicating resources to these cases is the need to pursue appropriate criminal penalties not only to punish the offender but to deter others from participating in similar crimes.

Joint Efforts

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The OIG works closely with U.S. Attorney's Offices throughout the country in attempting to bring to justice individuals who have defrauded the FDIC. The prosecutive skills and outstanding direction provided by Assistant United States Attorneys with whom we work are critical to our success. The results we are reporting for the last 6 months reflect the efforts of U.S. Attorney's Offices in the District of Massachusetts, the Southern District of Iowa, the Southern District of West Virginia, the Northern District of Alabama, the Northern District of Texas, the Western District of Texas, the Central District of California, the Northern District of Georgia, the District of South Carolina, the District of Minnesota, the District of Colorado, the Eastern District of Pennsylvania, the Northern District of Mississippi, the Northern District of New Jersey, the Middle District of Florida, the Northern District of California, the District of Connecticut, the Northern District of Illinois, and the Eastern District of Michigan.

Support and cooperation among other law enforcement agencies is also a key ingredient for success in the investigative community. We frequently "partner" with the Federal Bureau of Investigation (FBI), the Internal Revenue Service (IRS), Secret Service, and other law enforcement agencies in conducting investigations of joint interest.

Results

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Over the last 6 months OI opened 15 new cases and closed 26 cases, leaving 102 cases underway at the end of the period. Our work during the period led to indictments or criminal charges against 13 individuals and convictions of 14 defendants. Criminal charges remained pending against 14 individuals as of the end of the reporting period. Fines, restitution, and recoveries stemming from our cases totaled almost $26,196,885. The following are highlights of some of the results from our investigative activity over the last 6 months.

Fraud Arising at or Impacting Financial Institutions
Owners of Construction Company Convicted on Charges of Defrauding Community Bank of Blountsville, Alabama
On October 30, 2002, a jury in the U.S. District Court for the Northern District of Alabama returned guilty verdicts on all three counts of an indictment charging the two owners and their company, Morgan City Construction, with bank fraud and conspiracy to commit bank fraud.

Two individuals fraudulently submitted invoices for constructing a bank branch office and never completed the project.

At trial, the government presented evidence showing that between December 1997 and July 2000 the couple used Morgan City Construction, which they owned and operated, to submit invoices for construction work purportedly performed for Community Bank, an FDIC-regulated bank located in Blountsville, Alabama. Prosecutors alleged during the trial that some of the invoices were for work that was never performed and other invoices were for personal construction work performed for the bank's chief executive officer, his relatives, and the bank's vice president of construction and maintenance. Evidence was also presented to show that the records of the bank were falsified to reflect that the work was completed at the bank's facilities.

The charges against the defendants included a forfeiture claim seeking any property derived from the fraud scheme. Although the government alleged the couple received a total of approximately $1,685,000 as a result of the fraud scheme, the jury decided in separate deliberations that they only netted $178,500 in illicit proceeds.

The investigation of suspected fraud involving Community Bank is being conducted by agents from the FDIC OIG, FBI, and IRS. Prosecution of the case is being handled by trial attorneys from the Department of Justice, Washington, D.C.

Former Chief Executive Officer of the Failed Bank of Falkner Pleads Guilty and Is Sentenced to Felony Charges of Making False Entries to Deceive FDIC Examiners and Money Laundering
On February 6, 2003, the former Chief Executive Officer of the Bank of Falkner Mississippi, was sentenced in U.S. District Court for the Northern District of Mississippi to serve 2 years in prison to be followed by 5 years' probation and ordered to pay the FDIC restitution of $15,284,348.

The former Chief Executive Officer's sentencing follows his prior plea of guilty in October 2002 to two counts of making false entries in the books and records of the bank with the "intent to deceive the FDIC and its agents and examiners" and one count of money laundering. One of the counts was based on a scheme through which he issued $4,824,660 in nominee loans to certain bank customers who were above their legal lending limits. Another count involved a scheme where he caused a bank employee to record advances of $3,642,686 on existing loans and to misapply those advances to other customers' accounts to conceal overdrafts from the FDIC examiners. The money laundering charge to which he pled guilty was based on his helping a bank customer disguise the nature, location, source, and ownership of $1,709,497 the customer had on deposit with the bank.

The prosecution of the former Chief Executive Officer was handled by the U.S. Attorney's Office for the Northern District of Mississippi and was based on an investigation conducted jointly by the FDIC OIG and the FBI that was initiated to examine the circumstances leading to the bank's failure in September 2000.

Former Officer of the Institution for Savings Is Sentenced for Misapplying Funds
On October 29, 2002, a former officer of the Institution for Savings (IFS) of Newburyport, Massachusetts, was sentenced in the U.S. District Court for the District of Massachusetts for misapplying the funds of the institution. She was sentenced to 15 months' imprisonment to be followed by 3 years of supervised release. She was also ordered to pay restitution in the amount of $141,156.

As described in our last semiannual report, in July 2002, the U.S. District Court for the District of Massachusetts accepted a plea of guilty by the former officer of the IFS to 59 counts of misapplying a total of approximately $162,000 of funds between February 1997 and March 2002 by negotiating her personal checks at IFS and then removing them from the bundle of items that IFS was sending to the Federal Reserve Bank for processing. Later, when the missing amounts were reported back to IFS, she would make entries in the books and records of IFS to conceal them.

The former officer used at least $40,000 of the funds she took from IFS as a down payment when she purchased a home. At the sentencing she was also ordered to forfeit the proceeds from the sale of the home, which totaled approximately $21,000.

The investigation of this case was conducted jointly by agents of the FDIC OIG and the FBI, and the prosecution was handled by the United States Attorney's Office for the District of Massachusetts.

Former Officials of Jasper State Bank Plead Guilty to Charges of Bank Fraud, Misapplication of Funds, and False Statements
In March 2003, two former officials of Jasper State Bank pled guilty in the U.S. District Court for the District of Minnesota to criminal charges relating to a bank fraud scheme. Specifically, the former director and executive vice president of the bank pled guilty to bank fraud, misapplication of funds, and making false entries in the bank's records, and the former head teller pled guilty to one count of bank fraud. Both defendants had previously been indicted on similar charges in January 2003.

The former executive vice president of the bank and his brother-in-law were each 50 percent owners of the bank. As the executive vice president, he had extensive authority, served as a loan officer, and had unrestricted access to the bank's computer system. When entering his guilty plea, he admitted that between July 2000 and March 2002, he misapplied funds belonging to the bank by granting over $800,000 in loans to nominee borrowers to disguise the true beneficiary of the loan proceeds. He also admitted that he made false entries in the books and records of the bank to conceal the loans, altered supporting loan documents, directed the manipulation of records pertaining to delinquent loans, and engaged in the falsification of vehicle inventory reports.

The former head teller admitted to aiding and abetting the executive vice president by making false entries in the records of the bank. Specifically, she admitted to making delinquent loan accounts current and to routinely falsifying inventory reports that were submitted to obtain loans from the bank by a company of which she was a part owner.

Jasper State Bank is a $23 million bank located in rural Jasper, Minnesota, which has a population of less than 600. The bank incurred total losses of approximately $2.7 million as a result of the loans originated by the defendants, well in excess of the $2.4 million in the bank's capital and reserves, causing it to become insolvent. The bank was saved from failure by the injection of $3 million in capital from two investors.

The investigation that led to the prosecutions was conducted jointly by agents from the FDIC OIG and the FBI. The case is being prosecuted by the U.S. Attorney's Office for the District of Minnesota.

Owner of Company Providing Automated Teller Machine Services Convicted and Sentenced in Fraud Scheme that Cost the FDIC $9 Million
On January 14, 2003, the owner of several Texas companies, including an armored car company and a company that owns and operates automated teller machines (ATMs) was sentenced in U.S. District Court, District of Colorado, Denver, Colorado, to a total of 70 months' imprisonment, to be followed by 5 years of supervised release. He was also ordered to pay a special assessment of $4,300 to the court and restitution to the FDIC in the amount of $9,284,457.

Following a 2-week trial in July 2002, the defendant was found guilty on all 46 counts of an indictment charging him with bank fraud, wire fraud, and money laundering for implementing a scheme to defraud the failed BestBank, Boulder, Colorado, and Pueblo Bank and Trust Company, Pueblo, Colorado, which acquired the insured deposits of the failed institution from the FDIC. The scheme ultimately cost the FDIC over $9 million.

Prior to this sentencing, the defendant's motion for acquittal on three of the counts was granted based on the judge's finding that there was a lack of intent on his part sufficient for the jury to have found him guilty of money laundering.

The OIG's investigation, conducted jointly with the FBI, established that the defendant used his companies to divert bank funds designated to stock ATMs to accounts that he controlled. He ultimately used the diverted funds for business and related expenses rather than returning them to the bank.

Bookkeeper Indicted for Bank Fraud and Money Laundering
On February 11, 2003, a bookkeeper was indicted by a federal grand jury in the District of Minnesota on charges of bank fraud and money laundering. The indictment alleges that the defendant and others unnamed in the indictment executed a scheme to defraud the former Town & Country Bank of Almelund (Minnesota). Specifically, the defendant, who worked for a customer of the bank, is alleged to have received $41,000 for signing 10 false loans that were obtained from the bank between March 1997 and June 1999, and had a total face value of $371,000. When the bank failed, the FDIC had to charge off $267,000 in principal loss that was outstanding on the loans.

This case is being investigated jointly by the FDIC OIG and the IRS Criminal Investigations Division and is being prosecuted by the U.S. Attorney's Office for the District of Minnesota.

Vehicles Purchased with Proceeds of Suspected Check-Kiting Scheme Seized and Sold
As a part of an ongoing investigation that the OIG is conducting jointly with the FBI, three vehicles that were purchased with proceeds from a suspected check-kiting scheme at the former Universal Federal Savings Bank (UFSB), Chicago, Illinois, were seized during the reporting period and subsequently sold, with the proceeds going to the FDIC. The FDIC Division of Resolutions and Receiverships is also assisting in the investigation.

A 2003 Mercedes Benz SL500 and a 2002 Lexus LX470 were seized from a former customer of the bank, and a 2002 BMW 325xi that was purchased by the same customer was seized from the former Chief Operations Officer at UFSB. The FDIC closed UFSB in June 2002 as a result of the depletion of the institution's funds that were diverted as a part of the suspected check-kiting scheme. The vehicles were subsequently sold and the proceeds, which totaled $164,500, were returned to the FDIC as partial reimbursement of the costs to the insurance fund attributable to the failure of UFSB.

Management and Sale of FDIC-Owned Assets
Contractors Plead Guilty to Indictment Charging Them with Conspiracy and Submitting False Statements to the FDIC
On February 11, 2003, two principals of an FDIC contractor pled guilty in the U.S. District Court for the Middle District of Florida. One of the contractors pled guilty to one count of a four-count indictment that had been returned by a federal grand jury in April 2001 charging her with conspiracy and making false statements to the FDIC. On February 14, 2003, her business associate, who was also charged in the same indictment, pled guilty to one count of the indictment.

As we previously reported, the indictment against the two individuals charged them with submitting three false invoices and bogus support documentation to the FDIC on behalf of Golden Ocala Golf Course Partners. These documents purported that Golden Ocala Golf Course Partners, a contractor hired by the FDIC, had paid a nonexistent company $240,000 for environmental remediation work that was actually performed by other companies at a total cost of $51,376. Based on this false documentation, the FDIC reimbursed the partnership $150,000 for expenses.

The investigation and prosecution of these two individuals was initiated by the Department of Justice and the OIG based upon allegations contained in a civil complaint filed by a private citizen under the False Claims Act. In September 2000, one of the partners entered into an agreement whereby he agreed to pay the government $300,000 to settle the civil complaint.

Former Employee of Contract Asset Manager Pleads Guilty to Theft of Government Funds
On December 5, 2002, a former employee of a company hired by the Resolution Trust Corporation (RTC) to manage assets was sentenced in the U.S. District Court for the Western District of Texas to 12 months of confinement and was ordered to pay restitution in the amount of $257,593. The sentencing follows his prior plea of guilty in September 2002 to a one-count information charging him with theft of funds belonging to the FDIC.

As we reported in our last semiannual report, the FDIC OIG initiated an investigation based on a referral from the Division of Resolutions and Receiverships indicating that the asset manager may have been engaged in self-dealing in the sale of at least one asset. The investigation disclosed that the defendant used his position with the contractor to negotiate and sell FDIC assets to entities with which he had undisclosed agreements to collect additional payments and fees. To hide his conflicting interests in the sale of assets, he arranged with his wife and one of his associates to form two companies for the sole purpose of purchasing properties from the portfolio of properties he was responsible for managing for the RTC/FDIC. Properties sold to these companies were re-sold shortly thereafter for a higher amount. In addition, the defendant also collected additional fees and payments during the sale of the assets.

Through his self-dealings, the defendant received approximately $700,000 in kickbacks and caused the FDIC and asset management company losses of approximately $1.2 million. In her capacity as the designated owner of one of the companies, the defendant's wife has settled a civil suit filed against her by the asset management company for $541,000, which represents the financial gain realized by that company as a result of self-dealings. The asset management company, in turn, remitted these settlement funds to the FDIC. The asset management company has also received an "Arbitration Award" against the asset specialist for

• actual damages of $631,256,
  
  
• punitive damages of $150,000,
  
  
• arbitration costs/expenses of $12,900,
  
  
• prejudgment interest on actual damages of $111,121, and
  
  
• post-judgment interest of 10 percent per annum on the entire award.
  
  

This investigation was conducted jointly with the FBI, and the criminal prosecution is being pursued by the U.S. Attorney's Office for the Western District of Texas.

Restitution and Other Debt Owed the FDIC
Debtor Indicted for Providing False Financial Information
On January 30, 2003, a debtor was indicted by a federal grand jury in the Eastern District of Pennsylvania on four counts of making false statements to the former RTC.

According to the indictment, from July 1990 through March 1993, the debtor was negotiating with the former RTC to resolve his outstanding obligations as a result of loans he guaranteed with Gold Coast Federal Savings Bank, Plantation, Florida (Gold Coast), and Atlantic Financial Savings, FA, Bala Cynwyd, Pennsylvania (Atlantic Financial). The defendant was a personal guarantor on 11 loans from Gold Coast with a book value of approximately $6.67 million and on 4 loans from Atlantic Financial with a book value of approximately $3.93 million. The loans became the responsibility of the former RTC as a result of the failure of those institutions.

The indictment alleges that in February 1993, the debtor knowingly made false statements to the RTC in that he falsely reported on a financial statement and in a financial affidavit submitted to the former RTC that he did not own and control securities of value when, in fact, he owned and controlled approximately $157,311 in Jefferson Bank stock. The indictment also charged him with falsely reporting in the financial affidavit that he received nothing from the sale of a Wilmington, Delaware, apartment complex, when the debtor had actually received at least $125,000 from the sale. According to the indictment, he concealed his ownership of the Jefferson Bank stock and the proceeds from the sale of the apartment complex by transferring them to a trust account purportedly established for the benefit of his son.

FDIC Debtor and His Girlfriend Indicted for Concealing Assets from the FDIC and Making False Statements to the Government
On October 31, 2002, a federal grand jury in Hartford, Connecticut, indicted two defendants in connection with an alleged scheme to conceal assets to avoid payment of $2.7 million in restitution. One of the defendants owes the restitution to the FDIC as a result of his prior conviction in 1996 on bank fraud charges. He is charged in the subject indictment with one count of concealing assets and four counts of making false statements. His girlfriend is charged with aiding and assisting him in the concealment of assets.

An FDIC debtor attempted to conceal this property from the FDIC by transferring ownership to his girlfriend.

With respect to the concealment of assets, the indictment alleges that between June 1999 and August 2002, the defendant conducted four real estate transactions so that all the financial and land records showed his girlfriend as the sole owner. In fact, he arranged for the purchase and finance of the properties, used his funds to improve the properties, and shared in the profits upon sale of two of the properties. His girlfriend is accused of using her bank accounts to assist him to conceal his involvement in these transactions.

One of the false statement charges alleges that he submitted false information to the Financial Litigation Unit of the U.S. Attorney's Office relating to a $100,000 government bond he received pursuant to a divorce settlement. The other three false statement counts pertain to information he submitted to the U.S. Probation Office indicating that his solely owned businesses had not conducted any transactions for years. The indictment alleges that, in reality, those companies were doing substantial business and that substantial sums of money had passed through the checking accounts of the corporations.

FDIC Debtor Arrested on Charges of Wire Fraud
An FDIC debtor, who is believed to maintain a residence in Alamos, Mexico, was arrested in La Quinta, California, on October 22, 2002, by agents of the FDIC OIG and FBI on wire fraud charges related to his promised development of Country Club of the Desert in La Quinta.

According to an affidavit filed in support of an arrest warrant, the debtor began doing business as Equity Funding Corporation (EFC) in September 1996. He controlled the money and made business decisions related to EFC as well as numerous limited liability companies and limited partnerships related to EFC. After raising capital and assembling land under several limited partnerships, he established Country Club Properties, LP (CCP) for the purpose of developing a 54-hole golf course and residential development called Country Club of the Desert. Investors who eventually gave the individual nearly $20 million were told that all money invested would go toward the development of Country Club of the Desert. While he did develop a golf course, he diverted a substantial portion of investor money from CCP, through EFC, to his own accounts for his personal use and benefit.

From approximately mid-1997 until November 2001, when the investors had him replaced, the debtor allegedly diverted approximately $3.4 million from CCP for his personal use and spent it on two planes, a yacht, and various residential and investment properties in California and Mexico. The defendant was charged with wire fraud, a felony offense which carries a maximum possible sentence of 5 years in prison and a $250,000 fine.

This case is the result of a joint investigation by the FBI and the FDIC OIG.

Strawbuyer in Debt Fraud Scheme Pleads Guilty to Conspiracy to Defraud the FDIC
On February 6, 2003, a financial facilitator pled guilty in U.S. District Court for the Eastern District of Michigan to a one-count criminal information charging him with conspiring to defraud the FDIC. The defendant is a former employee of the RTC who opened his own company, EJM & Associates Inc., after leaving the government.

According to the information to which he pled guilty, the defendant conspired with two Michigan businessmen who defaulted on two loans in March 1993 totaling $4.2 million that they had obtained from First Federal Savings Bank and Trust of Pontiac, Michigan. When First Federal Savings Bank failed, the loans were taken over by the RTC and later the FDIC, and the FDIC decided to sell them in a public auction. As alleged in the information, the businessmen wired a total of approximately $2.5 million to the defendant in April 1998 to buy the two delinquent loans, which by then had a $5.6 million payoff value. The defendant bought the loans for $2 million, kept the remaining approximate $500,000, and transferred the loans to an intermediary, who subsequently transferred them back to the original debtors. As a part of the transaction, the defendant certified that he was not representing the two original debtors.

Purportedly, the businessmen hoped that by cleaning up their financial problems related to loans, they would be more likely to receive approval from the Michigan Gaming Control Board to become 40-percent stakeholders in a Michigan casino. According to a news article regarding the alleged conspiracy, the two businessmen and their wives were ultimately forced to sell their stake in the casino in August 2000 because the gaming board found problems in their financial background and would not license the casino if they were involved. The board never disclosed the problem. The couples sold their interest for $275 million.

As a part of his plea agreement with the government, the defendant is cooperating in the ongoing investigation. The investigation was conducted jointly by the agents of the FDIC OIG, the IRS, and the FBI. Prosecution of the case is being pursued by the U.S. Attorney's Office for the Eastern District of Michigan.

Misrepresentations Regarding FDIC Insurance or Affiliation
Securities Dealer Pleads Guilty to Selling Unregistered Securities, Fraud, and Theft
On October 31, 2002, a securities dealer pled guilty in the Superior Court of California, Riverside County, to an amended complaint charging him with selling unregistered securities, fraud, and theft.

Sample advertisement misrepresenting FDIC insurance coverage for Jeffco CDs.

As reported in our last semiannual report, the subject was arrested on similar charges by agents of the FDIC OIG and the Riverside County (California) District Attorney's Office on October 7, 2002. The subject, doing business as Jeffco Financial Services, was licensed to sell securities through San Clemente Services, Inc., another company involved in the sale of brokered certificates of deposit. Relying on information they were provided regarding FDIC insurance coverage, investment yields, fees, and commissions, investors purchased approximately 1,241 certificates of deposit totaling $67,390,735 from Jeffco Financial Services. The felony complaint to which the subject pled guilty lists the names of 59 individuals or entities to whom he offered or sold unregistered securities which are described in the complaint as "investment contracts in the form of interests in custodialized certificates of deposit." He also pled guilty to making misrepresentations regarding "annual average yield," theft of property exceeding $2.5 million in value, and participating in a pattern of felony conduct involving the taking of more than $500,000.

The OIG investigation was initiated based on a referral by the Division of Supervision and Consumer Protection of information obtained during the examination of a bank indicating irregularities in deposits the bank had placed with San Clemente Services. The prosecution of the case is being handled by the Riverside County District Attorney's Office.

Employee Activities
Former FDIC Employee Pleads Guilty and Is Sentenced for Theft
On February 28, 2003, a former Print Shop Supervisor at the FDIC's Virginia Square facility was sentenced in the State Court for the Commonwealth of Virginia to 12 months' imprisonment, all suspended, and 12 months' supervisory probation.

In December 2002, the defendant entered a guilty plea to violating Virginia's felony statute prohibiting theft of cable services. In February 2002, the OIG received information from the Division of Administration regarding the possible sale of cable television converter boxes by the former FDIC employee. The OIG and Arlington County Police worked with a confidential informant to contact the former employee for the purpose of purchasing cable boxes. Based on the joint investigation, the former employee was arrested and charged with possession of stolen property.

Sentencing
Witness Is Sentenced for Theft of Government Funds
On October 17, 2002, a witness who had been interviewed as a part of an OIG investigation into alleged concealment of assets was sentenced in the U.S. District Court for the District of Massachusetts to theft of government funds. The witness had been previously indicted and pled guilty for receiving approximately $45,000 in Social Security disability benefits to which he was not entitled.

As previously reported, the witness was contacted as a part of an OIG investigation because of his affiliation with a suspect who was allegedly concealing assets to avoid paying $5 million in restitution he owed the FDIC resulting from his conviction on bank fraud charges in 1991. Because of apparent false information provided by the witness in an affidavit, additional investigation was conducted disclosing that he had been continuing to receive Social Security disability benefits to which he was not entitled.

Former Bank Board Members of Hartford-Carlisle Savings Bank Sentenced for Bank Fraud
On March 27, 2003, two brothers, both of whom were former board members of the now defunct Hartford- Carlisle Savings Bank (HCSB), Carlisle, Iowa, were sentenced in U.S. District Court for the Southern District of Iowa. One of the brothers was sentenced to 5 days' incarceration, 5 years' probation, and ordered to pay restitution to the FDIC in the amount of $201,441. The other brother was sentenced to 4 days' incarceration, 5 years' probation, and ordered to pay restitution to the FDIC in the amount of $226,614.

In September 2002, the two brothers entered guilty pleas to bank fraud for making or causing to be made false statements to the Federal Reserve Bank in connection with an application to acquire the stock of HCSB. HCSB was an FDIC-regulated institution that was closed on January 14, 2000, by the Iowa Division of Banking. Subsequently, the FDIC OIG and the FBI conducted a joint investigation regarding suspected illegal activities that led to HCSB's closure. The U.S. Attorney's Office for the Southern District of Iowa has handled prosecution of this case.

In addition to the prosecutions of the two brothers, the investigation has also resulted in a guilty plea by a third brother, who was the former president of HCSB, to four counts of making false entries in the records of HCSB and four counts of making false statements. He is currently awaiting sentencing on those charges.

Woman Sentenced to Over 14 Years in Prison for Theft of Keystone-Related Assets
On February 18, 2003, a woman was sentenced in the U.S. District Court for the Southern District of West Virginia to 14 years and 7 months in prison for violations of federal law arising from a scheme to obtain property and other assets owned by the former senior executive vice president and chief operating officer (COO) of the First National Bank of Keystone (West Virginia). The former senior executive vice president and COO is currently in prison serving sentences in excess of 27 years as a result of her convictions for obstruction of an examination of the bank, bank fraud, money laundering, embezzlement, mail fraud, and conspiracy. She has also been ordered to pay in excess of $818 million in restitution. As a part of the prosecution of the cases against the former senior executive vice president and COO, an injunction was obtained by the government to protect the value of assets that might be used to satisfy any judgement obtained by the FDIC against her.

The woman sentenced more recently, previously a convicted felon, was once a prison inmate with the former senior executive vice president and COO. Upon her release from prison, she participated in a scheme to fraudulently obtain some of the assets that had been frozen by the injunction and resell them to individuals in four states, collecting in excess of $170,000. As a part of the scheme, she falsified a document that contained a facsimile of the signature of a United States District Court Judge, which she used to obtain possession of some of the property. Included among the assets she illegally obtained were firearms, classic automobiles, Harley-Davidson motorcycles, a pontoon boat, a ski boat, sports utility vehicles, a tractor, and various other types of vehicles and farm equipment. She was also convicted and sentenced for being in possession of 17 handguns formerly belonging to the former senior executive vice president and COO's family.

Other
Man Who Posed as "FDIC Inspector" Is Sentenced for Fraudulent Use of Bank Routing and Account Numbers
On January 29, 2003, a man who had posed as an "inspector" with the FDIC was sentenced in the U.S. District Court for the Northern District of Texas to 5 years' probation and 90 consecutive days of home confinement with electronic monitoring. The sentencing was based on his prior plea agreement with the United States Attorney's Office whereby he pled guilty to one count of fraudulent use of an access device.

The OIG investigation that resulted in the prosecution of the defendant was initiated based upon a referral from a case manager in the former Division of Supervision who reported that he had received two phone calls from businesses located at Preston Forest Village shopping center. Both callers said that a man representing himself as an "inspector" with the FDIC had asked to look at their credit card machines and merchant account statements. The investigation disclosed the individual was a man who was employed at the time by a company that sells credit card processing services and payment systems to small businesses. Upon learning of his misrepresenting himself as an FDIC inspector, the company terminated his employment.

Further OIG investigation of his related activities disclosed that the defendant had been employed as a collection representative by The Associates National Bank, Irving, Texas, and, as such, had access to the bank routing and account numbers of the bank's credit card clients. In February 2001, he opened an account at Chase Manhattan Bank, Irving, Texas. He then falsely made 10 checks totaling approximately $7,062 using the bank account numbers of clients of The Associates National Bank and deposited the checks into his account at Chase Manhattan Bank.

Table of Contents

The OIG has now nearly completed its downsizing and reorganization efforts and is streamlined, stabilized, and well positioned to help the Corporation address the major challenges it faces. As we reported in our last semiannual report, the OIG dramatically downsized and reorganized. During this period it completed its reorganization, combining the Office of Management and Policy and Office of Policy Analysis and Congressional Relations to create an Office of Management and Congressional Relations. This office provides business support for the OIG, including financial resources, human resources, and information technology support, and coordinates OIG policy development, policy analyses, and congressional relations. The OIG also established the position of Senior Communications Manager in the Immediate Office of the Inspector General.

As discussed earlier in this report, having identified the most significant Management and Performance Challenges currently facing the FDIC and having communicated those to the Corporation, the OIG's main work is focused on addressing them. We continue to pursue audits, evaluations, investigations, and other reviews that address these challenges.

Strategic Planning and Reporting

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During the reporting period, and as also discussed in the Management and Performance Challenges section of this semiannual report, we acknowledged the Corporation's substantial effort and accomplishment in preparing its first consolidated annual report, which integrates the Chief Financial Officers Act Report, the Government Performance and Results Act Performance Report, and the Annual Report. We believe this initiative represents a significant step in improved accountability and reporting.

The OIG has also continued to work to improve the quality of our goals, objectives, and performance measures by making strategic changes that align our planning reporting requirements more closely with our budget process and reporting requirements of the Inspector General Act. During this period, we issued our 2003 Performance Plan, covering the period October 1, 2002 through September 30, 2003. This plan represents the first full year of conversion from a calendar year to the federal fiscal year ending September 30. The change to a typical government fiscal year will enable our performance planning to be better integrated with our appropriation budgeting and our semiannual reporting to the Congress as prescribed in the Inspector General Act.

Our performance plan includes an updated strategic framework with improved linkages to the FDIC Strategic Plan, OIG Human Capital Strategic Plan, Office of Audits' Assignment Plan, and the OIG-identified Management and Performance Challenges facing the FDIC. The updated performance plan reflects the OIG's emphasis on adding value to the Corporation through our core mission activities of audits, evaluations, and investigations; improving communications with our stakeholders; aligning human resources to support the OIG mission; and managing our resources effectively.

Lien Nguyen is working in the OIG's Information Assurance audit group as part of the Scholarship for Service program.

Continued Focus on Human Capital

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During this reporting period the OIG turned to the operational and human capital-related challenges that inevitably resulted from the recent dramatic reduction in our workforce. As reported in our last semiannual report, the OIG issued a Human Capital Strategic Plan to align and integrate our human resource policies and practices with the OIG mission, which is also a new strategic goal in our 2003 Performance Plan. The Human Capital Strategic Plan features four objectives designed to increase the value of our people and the performance capacity of the OIG and sustain a high-performance organization. The objectives relate to (1) workforce analysis, (2) competency investments, (3) leadership development, and (4) sustaining a high-performance organization.

Of particular note during this period, the OIG initiated two key efforts under our Human Capital Strategic Plan, identification of key staff competencies needed to perform our work and development of a business knowledge inventory system. These two efforts form the underpinnings for other parts of our plan that relate to making human capital investments in training, professional development, and recruitment. The identified core competencies and associated behaviors will be used to revise performance criteria consistent with those competencies and identify areas where development or training might be necessary. The other ongoing key project, The Business Knowledge Inventory System, will ultimately enable the OIG to create a database of the collective business knowledge of all OIG employees and determine where our office may have gaps between the knowledge we need to perform our current and future audit, evaluation, and investigation work and the knowledge we collectively possess. We will address the identified gaps with training, developmental assignments, recruitment, or contracting, depending on the circumstances. Our intent is to ensure that the OIG will have the expertise necessary to carry out our strategic and performance plans and successfully conduct work related to the Management and Performance Challenges facing the Corporation.

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Organization Chart
Title	Name	Telephone
Inspector General	Gaston L. Gianni Jr.	202-416-2026
Deputy Inspector General	Patricia M. Black	202-416-2474
Counsel to the Inspector General	Fred W. Gibson	202-416-2917
Assistant Inspector General for Audits	Russell A. Rau	202-416-2543
Deputy Asst. Inspector General for Audits	Stephen Beard	202-416-4217
Deputy Asst. Inspector General for Audits	Sharon Smith	202-416-2430
Assistant Inspector General for Investigations	Samuel Holland	202-416-2912
Assistant Inspector General for Management and Congressional Relations	Rex Simmons	202-416-2483
Assistant Inspector General for Quality Assurance and Oversight	Robert L. McGregor	202-416-2501

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FDIC Inspector General Involvement in IG Community As Vice Chair of the President's Council on Integrity and Efficiency (PCIE), the Inspector General chaired monthly Council meetings and welcomed guest speakers from the Office of Management and Budget, U.S. General Accounting Office (GAO), the Administration, and individual OIGs to discuss issues related to the Inspector General community. He spearheaded efforts to commemorate the upcoming 25th anniversary of the Inspector General Act. He also continued a variety of initiatives, including preparing the PCIE and the Executive Council on Integrity and Efficiency (ECIE) A Progress Report to the President, assisting with the annual PCIE/ECIE conference and awards program, and representing the PCIE as a speaker in various conferences, meetings, and foreign visitor programs. As the FDIC Inspector General, he met monthly with other federal regulatory Inspectors General to address matters of mutual concern. He also met and discussed with GAO representatives the various governmentwide issues and projects affecting the FDIC as well as the OIG.

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Reader's Guide to Inspector General Act Reporting Terms

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What Happens When Auditors Identify Monetary Benefits?
Our experience has found that the reporting terminology outlined in the Inspector General Act of 1978, as amended, often confuses people. To lessen such confusion and place these terms in proper context, we present the following discussion:

The Inspector General Act defines the terminology and establishes the reporting requirements for the identification and disposition of questioned costs in audit reports. To understand how this process works, it is helpful to know the key terms and how they relate to each other.

The first step in the process is when the audit report identifying questioned costs^# is issued to FDIC management. Auditors question costs because of an alleged violation of a provision of a law, regulation, contract, grant, cooperative agreement, or other agreement or document governing the expenditure of funds. In addition, a questioned cost may be a finding in which, at the time of the audit, a cost is not supported by adequate documentation; or, a finding that the expenditure of funds for the intended purpose is unnecessary or unreasonable.

The next step in the process is for FDIC management to make a decision about the questioned costs. The Inspector General Act describes a "management decision" as the final decision issued by management after evaluation of the finding(s) and recommendation(s) included in an audit report, including actions deemed to be necessary. In the case of questioned costs, this management decision must specifically address the questioned costs by either disallowing or not disallowing these costs. A "disallowed cost," according to the Inspector General Act, is a questioned cost that management, in a management decision, has sustained or agreed should not be charged to the government.

Once management has disallowed a cost and, in effect, sustained the auditor's questioned costs, the last step in the process takes place which culminates in the "final action." As defined in the Inspector General Act, final action is the completion of all actions that management has determined, via the management decision process, are necessary to resolve the findings and recommendations included in an audit report. In the case of disallowed costs, management will typically evaluate factors beyond the conditions in the audit report, such as qualitative judgements of value received or the cost to litigate, and decide whether it is in the Corporation's best interest to pursue recovery of the disallowed costs. The Corporation is responsible for reporting the disposition of the disallowed costs, the amounts recovered, and amounts not recovered.

Except for a few key differences, the process for reports with recommendations that funds be put to better use is generally the same as the process for reports with questioned costs. The audit report recommends an action that will result in funds to be used more efficiently rather than identifying amounts that may need to be eventually recovered. Consequently, the management decisions and final actions address the implementation of the recommended actions and not the disallowance or recovery of costs.

^#It is important to note that the OIG does not always expect 100 percent recovery of all costs questioned.

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Appendix I: Statistical Information Required by the Inspector General Act of 1978, as amended

Table I.1: Significant Recommendations from Previous Semiannual Reports on Which Corrective Actions Have Not Been Completed

Management Action in Process: (16 recommendations from 6 reports)
Management is in the process of implementing the corrective action plan, which may include modifications to policies, procedures, systems or controls; issues involving monetary collection; and settlement negotiations in process.

Litigation: (19 recommendations from 2 reports, $5.7 million)
Each case has been filed and is considered "in litigation." The Legal Division will be the final determinant for all items so categorized.

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Congratulations to Award Recipients

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Two Members of the OIG Staff Receive FDIC Awards
We are proud of two staff members from the Office of Inspector General's Office of Audits who received recognition at the Corporation's Annual Awards Ceremony on March 12, 2003.

Pictured left to right: G. Gianni, S. Smith, S. Beard, M. Lombardi, R. Rau

Mike Lombardi was recognized as part of the Risk Management Examination Process Redesign 2 (MERIT) Team that received the Chairman's Excellence Award for Group/Team Contributions.

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Pictured left to right: FDIC Chairman Powell, M. Galvin, G. Gianni

Monte Galvin received the Nancy K. Rector Public Service Award for her dedicated involvement over the past 3 years with Habitat for Humanity.

Inspector General Receives Association of Government Accountants' Distinguished Federal Leadership Award

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Inspector General Gianni received the Association of Government Accountants' (AGA) Distinguished Federal Leadership Award. This award formally recognizes elected or Presidentially appointed federal officials who exemplify and promote excellence in government management and have demonstrated outstanding leadership in enhancing sound financial management legislation, regulations, practices, policies, and systems. The AGA award acknowledged the Inspector General's 38-year federal career dedicated to promoting economy, efficiency, effectiveness, and integrity throughout government.

Inspector General receives AGA award from Bill Anderson, National President.

OIG Recognizes Staff

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David H. Loewenstein
David retired after more than 13 years of dedicated service to the Federal Deposit Insurance Corporation and over 25 years of federal service. An FDIC Board Resolution signed by FDIC Chairman Donald E. Powell was presented to David in honor of his retirement. During the banking crisis, David worked to improve the operations of the Corporation, particularly in the area of receivership management for failed institutions. He played a key role in the OIG during and after the FDIC's merger with the Resolution Trust Corporation. His efforts in establishing a new function within the OIG enabled our office to more effectively meet its responsibility to interact with the Congress.

David's career also included service at the Federal Home Loan Bank Board OIG, where he focused management attention on significant issues and helped establish a highly effective OIG. Throughout his career he also worked unselfishly with charitable and social causes, including work on behalf of high-risk youth.

Naomi Pully
Naomi's 25-year government career included service at the FDIC, Department of the Treasury, Federal Mediation and Conciliation Service, Federal Home Loan Bank Board, and Office of Thrift Supervision. At the FDIC OIG, Naomi provided valuable administrative support to the Office of Audits. She participated actively in the International Association of Administrative Professionals and served as 1999-2000 President for the District of Columbia Chapter, a commitment that earned her the Distinguished Chapter President's Award.

Shelia Straughn
After more than 20 years of federal service, Shelia retired from the FDIC. Her career began at the U.S. Department of Housing and Urban Development and later included positions with the D.C. Government Superior Court, the Department of Justice Immigration and Naturalization Service, and the FDIC. She provided valuable administrative support to the OIG, contributed greatly to programs for Administrative Professionals Week and related activities, and helped with the FDIC OIG Diversity Action Plan.

Sandra Harding
Sandra retired after more than 20 years of federal service. Her career included working in the Offices of Inspector General of the FDIC, Department of Defense, and Federal Home Loan Bank Board. As a Senior Audit Specialist, she was responsible for conducting audits of corporate programs in the supervision and compliance divisions of the FDIC. Her efforts resulted in recommendations to improve the efficiency and effectiveness of FDIC operations and help ensure the safety and soundness of the nation's banking system.

Josef Bartos
Josef retired after more than 11 years of federal service. He distinguished himself through his work in developing the OIG's major information systems. Other notable achievements included his efforts on the OIG's Y2K Readiness Project and assistance to OIG staff with their computer and information needs. Overall, Josef's keen analytical skills, database expertise, and extensive computer knowledge served to enhance OIG operations and effectiveness.

Gloria Hill
The OIG salutes Gloria Hill who was recalled to active duty in the Naval Reserve in early March 2003.

For additional information about the IG community, visit www.ignet.gov

The Office of Inspector General (OIG) Hotline is a convenient mechanism that employees, contractors, and others can use to report instances of suspected fraud, waste, abuse, and mismanagement within the FDIC and its contractor operations. The OIG maintains a toll-free, nationwide Hotline (1-800-964-FDIC), electronic mail address (IGhotline@FDIC.gov), and a postal mailing address. The Hotline is designed to make it easy for employees and contractors to join with the OIG in its efforts to prevent fraud, waste, abuse, and mismanagement that could threaten the success of FDIC programs or operations.

To learn more about the FDIC OIG and for complete copies of audits and evaluation reports discussed in this Semiannual Report, visit our homepage: http://www.fdic.gov/oig