THE ZEALOTS AND THE SENATOR
Federal prosecutors built a criminal case--over a technical
a state senator and his small-town bank. But the judge would have none
the October 1998
|After spending nearly eight years
under the thumbs
of federal regulators and prosecutors, Virginia state Sen.
J. Holland had his own thumbs pointed upward last April as he received
two standing ovations from colleagues in the General Assembly. He
was no longer fettered by indictment or innuendo--not only not guilty,
but found fully innocent.
"You don't know how glad I am to be here," the powerful Democrat from the tiny town of Windsor told the assembly. "For me, the alternative to being here was distinctly less attractive."
Senator Richard Holland, Sr.
Those cheers came from members of both political parties. Even during the seven months Holland and his son, Dick Jr., were under indictment for allegedly lying when they denied using their small-town bank as a cookie jar for friends, Republicans had not taken advantage of the situation. "They shouldn't." barked the 73-year-old Holland in an interview a few months after the trial "I vote with the other party as much as my own."
The senator is known for that gruff, matter-of-fact manner. And it helped bring all this on him in the first place One of a handful of the most powerful legislators in the statehouse, the short, thin, loud and gravelly voiced Holland is feisty, always ready for a fight. When he stood toe-to-toe with banking regulators and refused to back down, they took a small-time, technical situation that usually goes unchallenged and grew it into a 31-count indictment against him and his son.
Ultimately, the senator won the war - then he picked another fight this spring. The Hollands claimed the prosecution of them was "vexatious" under the Hyde Amendment, named for U.S. Rep. Henry Hyde, R.-Ill. and enacted last year to make the government pay reasonable costs and attorney fees when a case proves to be "vexatious, frivolous or in bad faith." Ruling from the bench Aug. 20, U.S. District Judge Henry Morgan agreed the prosecution was vexatious and said the government should pay. But the Hollands must hope their award for more than $570,000 withstands an appeal to the government-friendly 4th U.S. Circuit Court of Appeals at Richmond, Va.
However the facts and law come out in the first Hyde Amendment case, the backdrop is a compelling human story, and surely a cautionary tale, involving an army of government investigators tearing through Windsor, where doors often go unlocked and peanuts, corn, soybeans and the newcomer, cotton, dominate both the flat tidewater landscape and the economy What began as a loan-fraud case targeting a prominent public official and his small-town bank soon looked more like a dark farce - The Inquisition Goes to Mayberry It is a story in which a thinner version of television's Aunt Bea, a teller at the bank for 35 years, was hauled before a grand jury and badgered to the point of needing a physicians care and pills to turn jitters into sleep.
It is also the story of an institution called the Farmers Bank, set in the shadow of grain silos along Virginia Route 480, started by Sen. Holland's father in 1919 and still making loans based on friendship, character and reputation as much as on financial statements - with never a losing year, not even in the Depression, except for the recent one-year blip that came under scrutiny. At the heart of the story is a clash between a bellicose, o1d courthouse-steps politician and a bumptious new Starr lawyer at the Federal Deposit Insurance Corp. The senator ran his family's bank as he pleased and didn't cotton to out-side meddling. And the FDIC lawyer made it no secret that he wanted the senator's pelt-and, in laying out strategy in memoranda to his supervisors, put into writing what few would say and even fewer would try to defend.
Richard Fraher, the lead lawyer who was so intent on getting the senator, left his job shortly after the trial and now is a staff lawyer with the Federal Reserve Bank in Atlanta. He offered only a curt "no comment" when contacted for this story And Assistant U.S. Attorney James Metcalfe, who convinced his boss that he had a strong case, was demoted. A senior trial attorney receiving the high pay equivalent of a supervisor, though expected only to try complex cases on his own, Metcalfe was transferred to a job that seems almost cruelly named just for him, Project Exile. It is a perfunctory task, putting convicted felons found possessing firearms into prison for automatic five-year terms. Just the same, Metcalfe's boss, U.S. Attorney Helen Fahey of the Eastern District of Virginia, is going all out to defend his work and fight the Hyde Amendment claim.
In the unusually prosecution-friendly district, Fahey made a calculated judgment that would burn any and all bridges with the judge. Despite Morgan's order that no new affidavits and no grand jury materials be filed in the Hyde Act proceeding, Fahey did just that - including13 full grand jury transcripts.
During the August hearing, the judge asked for any notes, minutes or other records to back up new government affidavits attesting to its diligence in bringing the prosecution. He apparently was fishing for a copy of the "prosecution memo," standard Justice Department procedure for giving a red or green light to a case. The government declined to provide it, triggering speculation that it might include damning internal criticism of the case.
Previously, Morgan himself had put the red light on the criminal case. He threw it out in April when the government finished its presentation. The defense didn't have to call a single witness. The case had built up over seven years before the indictments, beginning in 1990. In a nutshell, the FDIC first tried to get the bank administratively for violating laws governing a series of so-called nominee loans to one borrower. When the Hollands fought and proved the allegations wrong, the regulators, Morgan ruled, then "ratcheted it up to charge criminal offenses."
There had been an earlier flap in which the senator himself had some construction loans the FDIC considered questionable, even though state banking officials had approved them. Ultimately, to avoid negative publicity, bank directors dropped the fight and paid the FDIC $18,000 in fines. That might have ended it, except Holland's more mild-mannered son, Dick Jr., who vacations with his wife and five children at a Christian camp and conducts Bible studies in the bank's offices, fired off an uncharacteristically snide letter with the check.
Dick Holland Jr. was president of the bank, though his father ran it as CEO and chairman. Dick Jr. now is CEO. The FDIC sanctions, the younger Holland wrote in November 1991, are "made out of fear to cover yourselves and ring up numbers to please superiors. In other words too weak to make tough decision."
He had whacked a hornets nest with a stick. Within a month, the FDIC went after the Hollands anew, sending four examiners and six assistant examiners into the Farmers flank, a virtual assault team that nearly matched the size of the bank's staff of 16 employees, which includes the janitor. The examiners logged more than700 hours, sifting through any and all loan files.
They were led by an examiner with a reputation as a "hitman,"someone expected to come back with something other than routine results. The FDIC eventually focused on a few nominee loans. In such transactions, for example, when "Mr. Smith" has reached his borrowing limit for his building project, money is loaned instead to "Mrs. Smith" and their friend "Mr. Jones," who then hand it over to Mr. Smith to do his deal. That's illegal in nationally chartered banks.
But the Farmers Bank is state chartered, and nominee loans, as long as they are secured, aren't illegal in Virginia. Much later in the investigation, the government would change theories, saying the bank exceeded the loan limit to a single borrower, though it had been for only $91,000 and for a period of only four days - which even government witnesses admitted was a common, technical violation that rarely brings civil sanctions, much less criminal prosecution.
The heart of the case, though. was perjury. It became one of those prosecutions in which the government claims the targets are guilty for having denied certain knowledge of things that, in themselves, are not illegal. The government found substance in the shadow of smoke -"all smoke and no gun," Judge Morgan would later rule.
If it weren't for the seriousness of the matter and the more than $1 million and eight years invested by the government, and if it weren't for the indignity suffered by some of the plain folks or Windsor as well as the Holland family, a lot of this tale could be called laughable. After all, the loans in question were a hoot in themselves. They were for a project to create "Hollywood East," a complex of big-time movie studios and a nearby housing development in Isle of Wight County, population 25,000, the mostly rural area that includes Windsor, population 1,025, a town with about as much intrigue and corruption as television's Mayberry The idea didn't seem so far-fetched at the time. Nearby North Carolina has enjoyed some small success with film studios, a lure for movie magnates interested in low production costs.
"It was salvation that I could stay busy in the legislature instead of feeling sorry for myself for being indicted," Holland says. Until federal banking regulators started trying to oust him from his family's bank, Holland had always stayed busy running it. He took over the bank in 1961 from his father. About 30 miles inland from Norfolk, Windsor is and feels small. Yellow ribbons went up on trees, light poles, verandas and tractors when the Hollands were under indictment. The Windsor Pharmacy had a sign out front proclaiming, "Support the Holland family." The Antioch Church held prayer meetings for them.
The bank has always been the town's hub. And the Hollands have always known most everyone and made loans based on character and family and reputation. FDIC regulators were surprised to learn that one of the bank's directors has no financial experience, that he's just a farmer. But that's the point -- he knows farm loans.
"I was struck, looking at loan files from over the years, by how they'd loaned a half-million dollars on notes no bigger than phone-message slips.," says Jeffrey Gray of Norfolk's Wilcox & Savage, which represents the bank. "There was no10 pages of fine-print boilerplate."
That's not so unusual, according to Sidney Bailey, who for 20 years was commissioner of the Virginia Bureau of Financial Institutions and for 20 years before that a national bank examiner with the Office of the Controller of Currency. "That's the case in the majority of country banks that I saw over a 40-year period," says the recently retired Bailey. And only a couple ofVirginia banks failed on his lengthy watch.
The Farmers Bank moved into a new building in the late 1980s, just a stone's throw from its original one, still on the highway that cuts through town parallel to the railroad tracks. It is a long, one-story colonial structure with 10 dormers jutting from a steep slate roof The bank is surrounded by 11 acres of open, neatly mowed lawn. The small lobby is modern, with low lighting that comforts customers worried about finances.
There was considerable discomfort in the lobby in August 1994 when FBI Special Agent Rob Patterson walked in and announced himself in a load voice, saying he was there for an investigation of the bank. Patterson achieved his dramatic impact; it startled customers and frightened employees. And it was just the beginning.
Note teller O'Neill Worrell is mannerly but still seems
after the Holllands were cleared of all charges. She sits erect in a
in Dick Holland Jr.'s office, where she was asked to come for an
Her feet are slightly forward on the floor, crossed just above the
with one foot ahead of the other. Her hands, one on top of the
rest in her lap. Worrell, a widow, has worked at the Farmers Bank
for 35 years and was ordered to appear twice before the grand jury in
that was looking at possible loan fraud. She had been very
then - not, bank lawyers say, the jangled nerves of someone hiding
but rather those of someone suffering undue pressure. She is a
at the twice weekly Bible study meetings Dick Holland Jr. holds at the
bank before opening the doors for the day's work.
Asst. U.S. Attorney
|"Mr. Metcalfe's first question
at the grand
jury was, 'why are you late?'" says Worrell, who had traveled initially
to her lawyer's office and, because of-him, was slightly delayed.
Metcalfe put her on edge, where she stayed. "And whenever he'd ask a
and I'd say, 'I don't know,' he'd get really irritated."
stress put Worrell under a physician's care and on medication.
|At trial, stress changed sides. Prosecutors and their
looked shocked when their whole case was turned against them, according
to defense lawyers. "When we walked out during a break after the
opening, someone on the prosecution said, 'So you guys are doing the
defense?'" recalls Patrick O'Donnell of Norfolk's Kaufman &
which represented Dick Holland Jr. The senator was represented by
lawyers from Richmond's Mays & Valentine, including the legendary
Roberts, a contemporary of the senator's who spins salt into cotton
for judges, and Alan Albert, once an aide to former Virginia Gov. Gerry
Lawyers for the Hollands attacked the government's case, using its own witnesses and evidence. Strategies and techniques that were supposed to snare the Holllands suddenly applied more to the government's own actions. Much of the script for this 0. Henry-like twist is written in FDIC memoranda, mostly by Fraher, a regional attorney in the Atlanta office for just five months when he began investigating the senator. Fraher went so far as to say, in one memo, that federal prosecutors would never take such a small-scale case "unless they are attracted by some non-legal consideration, such as the prominence of the respondents."
Fraher became known for his passion about the case, which came through laser clear in his sometimes playful, sometimes preachy, always aggressive memoranda. Though the theories and strategies changed many times over seven years in Fraher's memoranda, his goal remained the same. He wanted Sen. Holland out of the Farmer's Bank One memo in particular would later haunt the government, when, ironically, defense lawyers appropriated its strategy and turned government witnesses -an FBI agent, the bank examiner known as a hit-man, even Fraher himself - into stars for the defense. Fraher wrote the memo to his supervisor in June 1992, immediately after the FDIC received a letter from a woman who got one of the nominee loans in question, assuring the regulators that she had always considered it to be her loan, her responsibility. The implication was that there had been no subterfuge.
Far from getting the FDIC lawyer to rethink the guilt or innocence of the Hollands, that letter pushed Fraher to stronger tones and tactics -t he more evidence the Holllands offered up to show they were not crooks, the more Fraher tried to convince his bosses they were. He wrote in June 1992 to his superior, Rick Barringer, an FDIC review examiner: "The most effective way to attack even the most brazen liars who are acting in concert is to subpoena the lot of them, examine their stories in detail, and break each of them down with the contradictions between the various versions of the facts that each witness participant tells on different occasions. The most effective way to prove that the Hollands have engaged in dishonest conduct is to give them and their co-participants multiple opportunities to tell their story in detail under oath with an inquisitorial examiner probing the details of each account as it unfolds." Fraher mentioned the Holllandsl' "unflinching self-righteous-ness" and suggested to Barringer that "this case merits particular attention in the criminal forum, where a defendant's moral desserts are an appropriate issue." Barringer signed off on it.*
The tone had been set earlier in the FDIC administrative proceedings when Fraher did the unheard of. After considerable internal debate, he loaded a civil enforcement pleading with allegations of criminal wrongdoing. This was done "to maximize the in terrorem impact of a threat" Fraher wrote in an April 1992 memo to an FDIC review examiner, "a purely tactical decision for purposes of negotiation only, based on my perception that the respondents greatly fear the prospect of negative publicity." Fraher went on to write: "The pleading exists primarily for the purpose of showing the respondents how nasty things could get if they refuse to negotiate a settlement of the case." He ended the memo by saying that, should the FDIC have to go forward with the enforcement, the pleading could be made simpler and the criminal allegations dropped.
When Fraher was cross-examined at trial this spring, the defense used a projector to display the Black's Law Dictionary definition of in terrorem,"In terror or warning; by way of threat." The image was left on the screen long enough to burn into 12 sets of retinas in the jury box, till the judge finally said, "You can take it down now."
Judge Morgan, in his written opinion, blasted Fraher as "an overzealous bureaucrat." "More difficult to understand is the failure of the many layers of supervision between him and indictment to understand and appreciate the unreliability the government's key bit of evidence and the weakness of any other evidence of wrongdoing,". Morgan wrote.
Those layers went back seven years. After the FDIC fined the bank $18,000 in 1991, Dick Holland Jr.'s inflammatory letter accompanying the payment sparked another, investigative audit. That review ultimately led to an administrative settlement in 1993 in which Richard Sr. would step down as president of the bank. But after the bank did well on subsequent routine audits, its lawyers went around the FDIC's Atlanta office and got officials in Washington to let the senior Holland continue.
At that point, FDIC lawyer Fraher signaled the U.S. Attorney to proceed with a criminal action. On the last day of the eight-day trial, April 16, Morgan told jurors that testimony and evidence had proven the Hollands not guilty beyond reasonable doubt. "And that proof, ladies and gentlemen, came from the government witnesses."
The defense looked more like offense in its strategy of attacking the FDIC's earlier administrative proceedings as well as the federal prosecution. In one example at trial, Fraher and two bank examiners he worked with ended up pointing fingers at each other. It concerned Fraher's insistence, in a letter to the bank's lawyers handling the administrative matter, that the bank examiner's notes had been destroyed and could not be turned over to them. The bank's lawyers had been advised by a consultant that those notes would be a trove of information, some of which might help the defense. It turned out Fraher either was wrong or holding back - the notes had not been destroyed, and, soon after finally turning them over, the FDIC was eager to settle what then was an administrative matter.
Investigators claimed repeatedly that the Hollands and their employees had hidden loan records, but the examiner's notes, once handed over, showed defense lawyers that those documents indeed had been given to the FDIC. Fraher claimed at trial that he had been told by examiners the notes were destroyed, implying he heard this from one of two particular examiners. "Would it surprise you to learn that both of them testified under oath, in court, and both of them denied that they told you the documents had been destroyed?" Hunter Sims, the attorney for Dick Holland Jr., asked Fraher on cross-examination. "It would surprise me, yes sir," Fraher replied. The investigative notes made by the examiner, Edward Ostrowski, showed that he had found the loan papers in question and even noted in his report that there was no problem with them. Despite that, he later told the grand jury he had. not found the loan documents. Testifying at trial, though, Ostrowski said he not only had found them but also brought them to the attention of his supervisors.
That admission was jarring in light of the government's theory behind the case, ironic considering the framework for the charges of perjury and false statements by the Hollands. Ostrowski and lawyers from the FDIC had months to pore over the documents in question, but the Hollands had not been permitted to review them two years after the loans were made before giving sworn statements, conducted like depositions, to the FDIC. Fraher noted in a memo that he wanted their "unrefreshed" testimony. Then he nailed them for answering "I don't know" and "I don't recall" when they were asked detailed questions.
The judge apparently was amused, if testy, by the flip-flop-ping government witnesses, whose own memories seemed quite un-refreshed. During a bench conference while Fraher was on the stand, Judge Morgan asked Assistant U.S. Attorney Metcalfe, "Are you going to indict Mr. Ostrowski, too, Mr. Metcalfe?" Lawyers for the Hollands could never understand why the government had pressed so hard on the loan. 'In every strawman or nominee loan case, we found there was some kind of kickback to the bank," says Sims, who was an assistant U.S. attorney in the Norfolk office in the early 1970s before joining Kaufman & Canoles. "The Hollands didn't get a dime. If anything they helped forward the Hollywood East project so the bank would be repaid in full."
|The case wound its way through two grand juries, from1994 to 1997. In March 1997, Sims and partner Patrick O'Donnell flew on a prop-driven commuter plane 200 miles to Alexandria for a meeting with Metcalfe's boss, U.S. Attorney Fahey. They brought along a binder filled with documentation they hoped might convince her that the Hollands had committed no crimes. Fahey would not relent, not even when shown that the state's banking commissioner at the time, Bailey, had reviewed the matter and found no wrongdoing. And she was not persuaded by the fact that the Hollands had requested, and been denied, an opportunity to review their own files before giving depositions on 2-year-old loans.||
U.S. Attorney Fahey
|Metcalfe, who was running the probe in Norfolk, was present,
with a lawyer from the Justice Department's main office assigned to
with him. It seemed that Fahey's mind was made up, according to
and O'Donnell, once Metcalfe told her Bailey had said more recently
he'd been misled and had changed his view. Sims and O'Donnell
dumbstruck. They checked back with Bailey the next day and
his opinion had not changed. Sims called Fahey immediately to
her, inviting her to speak with Bailey. Fahey listened politely,
but the next day wrote Sims a letter notifying him that charges would
brought to the grand jury forthwith.
"She was courteous and asked good questions," Sims recalls. "She obviously was prepared, not just going through the motions. But I can only guess that once I left the room, she said to Metcalfe and the DOJ lawyer, 'Tell me why he's not right.' At one point Bailey was visited by Metcalfe, a Justice Department lawyer and an FDIC agent. They asked two questions that he later learned Fraher had put them up to: Did Sen. Holland approve his bureaur's budget? Did the senator carry Bailey's legislative package? Bailey gave them a lesson in Virginia civics. His banking bureau came under the State Corporation Commission, an independent, constitutional agency with its own legislative, judicial and administrative authority
Known for his measured, careful and minimalist style, Bailey grows angry discussing his run-in with Metcalfe. "My answer was no. no, no, and then that sob came back and put me under oath before the grand jury and asked me the same questions," Bailey says. He was not called as a prosecution witness.
The government's star witness was a lawyer, and he burned out like a meteor once he hit the atmosphere of the courtroom. James Sheeran, a 53-year-old bankruptcy lawyer with his head recently shaved cue ball slick, proved to be yet another in a procession of government witnesses during the trial who, not by design or intent, simply helped the defense instead. He is a former law school classmate of Metcalfe's. Metcalfe was using Sheeran to bootstrap testimony that he had hoped to get from Sheeran's clients, retired dentist Dr. Lloyd March, who developed Hollywood East, and his wife, June March. Sheeran had represented them in a state court loan collection suit brought by Farmers flank, and testimony eventually indicated that evidence the government wanted may have been fabricated by Sheeran himself. When the government argued during the Hyde Amendment hearing in August that it fell back on using Sheeran because the Marches story had turned 180 degrees on them, Judge Morgan pointed out that a full reading of the grand jury transcript showed they turned 360degrees. Metcalfe had them confused and then cherry-picked bits of testimony. Metcalfe had asked them leading, convoluted questions, which sometimes ran more than one transcript page, withs twists and turns containing hypothetical devices. Ultimately, the confused witnesses replied spouses would be only nodding affirmative gestures. It would have taken more than Sheeran's testimony to turn that around.
And Sheeran's role proved even more problematic. June March had written a letter to the FDIC in June 1992, assured the regulators that she had known all along that the nominee loan was her responsibility. She did so, she testified, after she learned her lawyer, Sheeran, had submitted false documents in the state court suit by the bank, under her name but without her knowledge. When the Hollands' defense lawyers finished cross-examining Sheeran, Morgan pounced, cross-examining the startled lawyer himself. The judge peppered Sheeran with questions about conflicts in his testimony and conflicts with his own clients, who were supposed to have been the star prosecution witnesses but had not delivered from Day One of the investigation. The judge clearly was convinced Sheeran fabricated pleadings in the suit brought by the bank. Sheeran had filed a grounds of defense for March saying she was not responsible for a particular loan because her husband, also his client, had engaged in loan fraud with the Hollands. Despite that, Sheeran would continue representing both of them and vouching for them as witnesses-in other matters. Sheeran's filing weighed heavily in the government's investigation, even after the pretrial hearing in January, in which defense lawyers poked holes in Sheeran's credibility.
At trial, Morgan threw out the key portions of Sheeran's testimony because of his various conflicts and lack of credibility. Then he threw out the case - virtually unheard of in the Eastern District of Virginia. On the so-called Rocket Docket, the government's case exploded at the launch pad. Now Morgan is trying to throw out Sheeran himself: The judge filed an ethics complaint against him with the Virginia State Bar.
In explaining to the jury his reasoning for finding the Hollands not guilty, the judge accused the prosecution of picking and choosing only what it wanted from grand jury testimony and ignoring conflicting testimony and evidence. "And I've been trying to figure out why in the world, with their track record in this court being so good, this ever happened," Morgan says. But whatever the reason, the judge says the government should pay.