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FERNAND J. ST GERMAIN, RICHAIRMAN
HORY I. REUSS, WIS.
HENRY GONZALEZ, TOX.
JOSCH G. MINISM, NJ.
RMK ANNUNZIO. ILL.
AHREN I MITCHELL MO.
WALTER C. FAUNTROY, O.C.
STEPHEN L. NEAL, N.C.
JERRY M, PATTERSON, CALIF.
JAMES J. BLANCHARD, MICH,
CARROLL HUBBARO, JR., KY.
JOHN J. LACALCE, N.Y.
DAVID W. EVANS, INO.
NOAMAN E D'AMOURS, N.M.
STANLEY N. LUNDINE, N.Y.
MARY ROSE OAKAR, OHIO
JIM MATTOX, TEX.
BRUCE . VENTO, MINN,
DOUG BARNARD, JR, GA.
ROACRT GARCIA, N.Y.
MIKE

LOWRY. WASH.
CHARLES L. SCHUMER, N.Y.
BARNCY FRANK, MASS.
BIL PATMAN, TEX.
WILLIAM J. COYNE PA.
STENY H. HOYER, MO.

L. WILLIAM STANTON, OHIO
CHALMERS WYLIL OHIO
STEWART B. MCKINNEY, CONN
GEORGE HANSEN, IDAHO
HENRY J. HYDE, ILL

LEACH, IOWA
THOMAS D. CVANS, JR., DEL
RON PAUL, TUK.
UD BOTHUNC. ARK.
NORMAN D. SHUMWAY, CALIF.
STAN PAARIS, VA.
ED WEBER, OHIO
BILL MCCOLLUM, NA.
GREGORY W. CARMAN, N.Y.
GEORGE C. WORTURY. N.Y.
MARGC ROUKEMA, NJ.
DILL LOWCRY, CALP.
JAMES K. COYNE, PA.
DOUGLAS K. BERLUTER, NOIR.
225

NINETY-SEVENTH CONGRESS

2129 RAYBURN HOUSE OFFICE BUILDING

WASHINGTON, D.C. 20515

FOR RELEASE: THURSDAY AM'S
DECEMBER 23, 1982

WASHINGTON, D.C., Dec. 22 Chairman Fernand J. St Germain of the
House Banking, Finance and Urban Affairs Committee today released a report
by the General Accounting Office finding that there was a violation of the
National Consumer Cooperative Bank's conflict of interest regulations in a

$5.2 million loan to the Dunbar Housing Cooperative in New York.

The conflict involved Frances J. Levenson, who served simultaneously as a member of the board of directors of the National Consumer Cooperative

Bank and as an officer of the New York Bank for Savings which held the first

mortgage on the property and whose officers controlled the cooperative.

The General Accounting Office, however, found the cooperative was an eligible co-op borrower from the National Consumer Cooperative Bank despite the fact that no tenant-members were involved in the cooperative at the time

the loan was approved on December 15, 1980. The GAO thus upheld the Bank's
contention that the NCCB Act empowered the institution to dispense loans to

"embryonic" cooperatives lacking members so long as the charter of the
cooperative provided for ultimate member control and ownership.

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23-148 0_83_-29

"While Mrs. Levenson has since left the board, it is essential that

the Co-op Bank immediately review its procedures and determine that there is

a tight wall drawn between the direct and indirect interests of board members

and their responsibilities as officials of the Bank," Mr. St Germain said.

"A lending institution, dependent on the confidence of its shareholders

and the public, cannot afford the appearance of conflict in its operations."

Mr. St Germain said the Banking Committee will review the adequacy of the Co-op Bank's procedures on conflicts of interest during a general oversight hearing early in the next Congress. The General Accounting Office is conducting a general audit of the bank at this time and will be reporting

to the Committee on its findings next year.

The General Accounting Office on the conflict of interest issue stated,

in part:

Our information indicates that Frances Levenson, while a vice-President of NYB and a member of NCCB's Board of Directors, was a participant in the arrangements leading up to the issuance of the $5.2 million loan for the Dunbar Apart.nents. Initially, Ms. Levenson submitted a "preliminary request" to David Jameson, Vice-President, NCCB, by correspondence dated October 31, 1980, soliciting NCCB's participation in a "permanent mortgage loan on the Dunbar Apartments. Furthermore, contact occurred between Ms. Levenson and Debra Yogodzinski, an attorney at NCCB, during the period between December 15, 1980, and March 5, 1981. This contact apparently consisted of discussions on whether NCCB received the documents needed to determine whether Dunbar No. I was a cooperative eligible to receive financial assistance from NCCB. Frances Levenson and Charles Billand, Vice-President, NCCB, also had some conversations relative to the Dunbar loan between March 5, 1981, (the date the NCCB-Dunbar loan commitment was issued) and July 2, 1981, when the loan transaction was settled. while we are not aware of the substance of these discussions, both parties have informed NCCB's General counsel in writing that they conducted no negotiations concerning the terms and conditions of the loan. Finally, the minutes of the December 15, 1980, meeting of the NCCB Board of Directors, which indicate the Board approved the Dunbar loan, also show that, while Frances Levenson was present at this meeting, she was not present during discussion nor did she cast a vote on the Dunbar loan. She was also present but did not participate in the closing of the loan transaction when final negotiations relative to the NYB-NCCB participation agreement took place.

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In our view, Frances Levenson's association with the Dunbar loan transaction from the time it was submitted until the closing of the loan, and her contacts with NCCB employees during negotiation of the loan, constituted a violation of sections 5 and 7(a) of NCCB's conflict of interest rules. We view the NCCB Rule in section 7(a) as requiring Ms. Levenson to have withdrawn completely from the NCCB-NYB Dunbar loan transaction.

"As in the case of the FHA insured loans discussed in the December 11 decision of NCCB's General Counsel's Office, Ms. Levenson was dealing with an NCCB employee to arrange a loan beneficial to both NYB and NCCB. her letter of October 31, 1980, clearly indicates NYB had a considerable investment in the Apartments, that it was in financial trouble and that $6 million was necessary to bring the property back to acceptable standards. NCCB participation would provide needed capitalization for the Dunbar Apartments to upgrade and protect NYB's investment in the property. Thus, it could appear that Ms. Levenson was using her position as a member of NCCB's Board of Directors to arrange a loan for the Dunbar Apartments, and that her actions were motivated by the desire for private gain for NYB, the organization with which she is associated.

"Finally, discussions about a financial transaction between regular NCCB employees and a member of NCCB's Board of Directors who also is a senior officer of an organization that would benefit from the transaction constitutes a departure from sections 5(a)(2) and 5(a)(6) of NCCB's conflict of interest rules. Such discussions place NCCB employees in an actual or apparent conflict of interest situation: that of giving preferential treatment to the Board member, thereby adversely affecting the public's confidence in the integrity of NCCB. While in fact no such preferential treatment may exist, and we have no evidence that any did, such activities by NCCB employees nonetheless are proscribed by NCCB'S conflict of interest rules.

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This is in response to your request for our opinion on several legal issues concerning a loan by the National Consumer Cooperative Bank (NCCB) to the Dunbar No. 1 Cooperative Housing Corporation.

As discussed in detail hereafter, we conclude that Dunbar No. 1 was legally eligible to receive the NCCB loan. At the same time, there were violations of the NCCB conflict of interest rules in connection with the Dunbar loan.

BACKGROUND

The National Consumer Cooperative Bank Act, Pub. L. No. 95-351 (approved August 20, 1978), 92 Stat. 499, 12 U.S.C. S 3001 et. seg., created the NCCB to encourage the development of new and existing cooperatives that would be eligible for specialized credit and technical assistance from NCCB and to encourage broad-based ownership, control, and active participation by members in eligible cooperatives. 12 U.S.C. S 3011. NCCB is governed by a Board of Directors consisting of 15 members, three of whom are appointed by the President with the advice and consent of the Senate. The remaining members of the Board must be elected by the holders of various classes of stock. 12 U.S.C. S 3013. NCCB is authorized to make and service loans, commitments for credit, and guarantees; to furnish financially related services and technical assistance; and to participate with one or more other financial institutions in loans or guarantees. 12 U.S.C. S 3012(13).

In October 1980, Frances Levenson, a Vice-President of the New York Bank for Savings (NYB), and a member of the Board of Directors of NCCB, submitted a written "preliminary

request' to NCCB Vice-President David Jameson soliciting NCCB's participation in a permanent mortgage loan for the Dunbar Apartments. The Dunbar Apartments, a 536 unit apartment complex, was originally operated as a cooperative but was acquired by private investors in 1947, when NYB became the mortgagee.

Between 1975 and 1980, the Dunbar Apartments suffered considerable deterioration and deferred maintenance; in 1978 NYB acquired ownership in lieu of foreclosure on the mortgage loan.

Incident to this request, 'the Dunbar No. 1 Cooperative Housing Corporation was incorporated as a not-for-profit cooperative housing corporation under the laws of New York. The purposes of Dunbar No. 1 include the acquisition of all or part of the Dunbar Apartments in order to make them available to shareholders as a residential property. The incorpora'cors of Dunbar No. 1 were members of a law firm contacted by NYB's legal counsel to represent tenants of the Dunbar Apartments.

On December 15, 1980; the Board of Directors of NCCB approved a $5.2 million loan to Dunbar No. 1. On March 19, 1981, Dunbar No. 1 accepted the $5.2 million loan and, thereafter, purchased NCCB stock. On July 2, 1981, the NCCB disbursed a portion of the $5.2 million loan to Dunbar No. 1. At the same time, the Dunbar Apartments were sold to Seventh Avenue, Inc., a New York corporation organized and whollyowned by NYB. on the same day, ownership of the Apartments was sold to Dunbar No. 1. Furthermore, incident to the Dunbar transaction, NYB acquired 100 shares of Seventh Avenue, Inc., and Seventh Avenue acquired 10 shares of Dunbar No. 1. We are informed that Francis McIver, an Assistant VicePresident of NYB, was at that time the President of Seventh Avenue Inc., and also President of Dunbar No. 1.

While the information before us suggests that there was some tenant interest in the formation of a cooperative for the Dunbar Apartments, no tenants were directly involved in the formation, or had any ownership interest in, Dunbar No. 1 at the time NCCB made the loan to Dunbar No. 1.

1

Subsequently, ownership was transferred to a neighborhoodbased partnership, the Robin-Dunbar Corporation, but the mortgage was retained by NYB.

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