Legal experts say punishment meted out to a Maine bank for selling fraudulently documented loans to Freddie Mac was particularly severe for so small an institution.

First National Bank of Bar Harbor, a five-branch bank with $115 million in assets, will have to pay a $1 million fine - one-10th of its capital. In addition, the chief executive and most of the 11-member board were forced to resign as part of the settlement of criminal and civil charges resulting from a four-year investigation by the Maine U.S. attorney.

Three employees agreed to resign along with the CEO and seven of his fellow directors.

"$1 million is a pretty good portion of their capital," said Raymond J. Gustini, a lawyer with Sher, Jeremy, Peabody & Brown in Washington. "It's also pretty rare to take a massive swipe like that at an entire board of directors."

Peter Reilly, the ousted chief executive, could not be reached for comment.

"We've looked at other cases like this, and we would say that (the settlement terms) were unusual," said Timothy Healy, senior vice president and acting chief executive.

According to the settlement, executives and employees were aware of the fraud, but none of the nonexecutive directors knew of or were involved in it. The settlement states, however, that the directors "recklessly disregarded their responsibility" to know about it.

In agreeing to the terms of the settlement, the bank sought to end the legal haze that's been hanging over the bank for five years.

"This situation has been a dark cloud over the bank," Mr. Healy said. "And it's time to move forward."

According to the U.S. attorney's office, from 1988 through 1991, the bank resolved problem loans by making mortgages to troubled borrowers, then selling the mortgages to Freddie Mac. In effect, said U.S. Attorney Jay P. McCloskey, the bank tried to shift the risk of bad credits from itself to Freddie Mac, formally the Federal Home Loan Mortgage Corp.

He also alleged that among the nonconforming mortgages sold to Freddie Mac were those of several directors. The government charged the bank falsified the documentation on the loans to induce the sale to the secondary-market agency.

Mr. Healy said the bank's former chief of residential lending, Thomas Clark, resigned in March after pleading guilty to fraud. Mr. Clark, who could not be reached for comment, hasn't been sentenced yet.

Freddie Mac did not take a loss on the loans, according to Joan Ferenczy, manager of the agency's fraud investigations unit.

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