While insider abuse doesn't get as many headlines today as it did five years ago, a recent enforcement action against a Massachussetts bank shows it hasn't disappeared.

In an agreement signed last month, federal and state regulators criticized $142 million-asset Northern Bancorp of Woburn for conflicts of interest and violations of insider-lending rules.

The charges against the bank were not made public, but the written agreement released by the Federal Reserve Bank of Boston suggests that the transgressions were widespread within the bank.

Particularly noteworthy in the informal action was the requirement that the bank appoint enough outside directors to ensure that they make up a majority of the board.

"That's fairly dramatic," said George Freibert, president of Professional Bank Services Inc., a Louisville firm that deals with director issues. "It's been our experience that when a regulator insists on bringing in more outside directors that they have a significant concern."

The bank, which is privately held, has a 13-member board, at least four of whom are members of the James J. Mawn family. Mr. Mawn is president of the bank, a post previously held by Thomas M. Mawn Jr.

Officials at the bank could did not return phone calls seeking comment.

The case underscores the problems that small, closely held community banks can run into when their boards become dominated by family members or other close associates. Such a board makeup can lead to a breakdown in proper board oversight and an atmosphere conducive to insider abuse, analysts said.

"These things have not really been issues for the past two or three years, so it's interesting to see something like this come up," said Gerard S. Cassidy, analyst at Hancock Institutional Equity Services in Portland, Maine. "Community banks bump up against these regulations more so than the bigger banks, so extra care has to be taken."

The agreement, which was mandated by both the Massachusetts bank commissioners' office and the Boston Fed, requires the bank to review all transactions since June 30, 1993, between it and Robert L. McCrensky, a director, Mr. Mawn, and other insiders.

It demands the bank to cease and correct all violations of sections 23A and 23B of the Federal Reserve Act, which refer to restrictions on transactions with affiliates. The company's only subsidiary is Northern Bank and Trust Co., a state bank founded by a group dominated by the Mawn family in 1960.

The action also requires the bank to submit a new conflict-of-interest policy to regulators and conduct a review of senior management, focusing on the "qualifications of each senior executive officer, and the ability of that person to perform competently his or her assigned duties."

The number of such Fed actions has declined markedly in recent years. Written agreements - less serious than cease-and-desist orders or prohibitions - climbed to 103 in 1992, but were cut in half the next year and fell to just 34 in 1994, according to the Federal Reserve.

"Five years ago, when we were in dire straits and we had serious financial problems, these cases tended to proliferate," said Thomas E. Cimeno, senior vice president at the Boston Fed. "But banking conditions are strong now so there are very few of these insider cases."

Other regulators said infractions could be somewhat common today at community banks, particularly privately held ones. But they become visible only when their financial condition sours.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.