25788 1 UNITED STATES OF AMERICA BEFORE THE 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVINGS ASSOCIATION OF ) 5 TEXAS, Houston, Texas, and ) ) 6 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 7 and Loan Holding Company ) ) OTS Order 8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 9 Loan Holding Company ) Dec. 26, 1995 ) 10 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 11 ) CHARLES E. HURWITZ, ) 12 Institution-Affiliated Party ) and Present and Former Director ) 13 of United Savings Association ) of Texas, United Financial Group,) 14 and/or MAXXAM, Inc.; and ) ) 15 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 16 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 17 of United Savings Association of ) Texas, United Financial Group, ) 18 and/or MAXXAM, Inc., ) ) 19 Respondents. ) 20 21 TRIAL PROCEEDINGS FOR OCTOBER 13, 1998 22 25789 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire Special Enforcement Counsel 4 PAUL LEIMAN, Esquire SCOTT SCHWARTZ, Esquire 5 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire 6 and BRYAN VEIS, Esquire of: Office of Thrift Supervision 7 Department of the Treasury 1700 G Street, N.W. 8 Washington, D.C. 20552 (202) 906-7395 9 ON BEHALF OF RESPONDENT MAXXAM, INC.: 10 FRANK J. EISENHART, Esquire 11 of: Dechert, Price & Rhoads 1500 K Street, N.W. 12 Washington, D.C. 20005-1208 (202) 626-3306 13 DALE A. HEAD (in-house) 14 Managing Counsel MAXXAM, Inc. 15 5847 San Felipe, Suite 2600 Houston, Texas 77057 16 (713) 267-3668 17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire 19 KATHLEEN KOPP, Esquire of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 25790 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire 3 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 4 Houston, Texas 77002 (713) 654-7608 5 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN, Esquire 7 MARK A. PERRY, Esquire of: Gibson, Dunn & Crutcher 8 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5303 9 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire MARY CLARK, Esquire 12 PAUL DUEFFERT, Esquire of: Williams & Connolly 13 725 Twelfth Street, N.W. Washington, D.C. 20005 14 (202) 434-5000 15 OTS COURT: 16 HONORABLE ARTHUR L. SHIPE Administrative Law Judge 17 Office of Financial Institutions Adjudication 1700 G Street, N.W., 6th Floor 18 Washington, D.C. 20552 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR 21 Ms. Shauna Foreman, CSR 22 . 25791 1 2 INDEX OF PROCEEDINGS 3 Page 4 CHARLES HURWITZ 5 Examination by Mr. Rinaldi..............25793 6 . 7 . 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 25792 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Rinaldi, do you have a witness? 6 MR. RINALDI: We do, Your Honor. We 7 would call as our next witness Charles Hurwitz. 8 THE COURT: Would you take the oath, 9 please? 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 25793 1 CHARLES HURWITZ, 2 was called as a witness and, having been first 3 duly sworn, testified as follows: 4 EXAMINATION 5 6 THE COURT: Be seated, please. 7 Q. (BY MR. RINALDI) Good morning, sir. 8 Would you state your full name for the record, 9 sir. 10 A. My name is Charles Edwin Hurwitz. 11 Q. Now, Mr. Hurwitz, can you just briefly 12 describe for the Court your educational 13 background? 14 A. Yes. I went to elementary school, 15 junior high school, and high school in Kilgore, 16 Texas; and then I went to the University of 17 Oklahoma and got a degree in business 18 administration. 19 Q. And when did you graduate from the 20 University of Oklahoma in business administration? 21 A. 1962. 22 Q. Now, following your graduation from 25794 1 Oklahoma, did you continue to take any further 2 educational courses; or was that the end of your 3 formal education? 4 A. Well, I went through a training school 5 at an investment banking firm. I don't know if 6 you can consider that formal education. 7 Q. What investment banking firm was that? 8 A. That was Bache and Company. 9 Q. And after you left the University of 10 Oklahoma, can you describe just briefly for the 11 Court your work experience? 12 A. Yes. After -- I went to the Army after 13 that, and then I was married. And I went to work 14 in New York for Bache and Company, which at the 15 time was the second largest investment banking 16 firm. It's currently known as Prudential or 17 Prudential-Bache. 18 Then I lived in San Antonio. They 19 moved me there, to San Antonio, Texas. And I 20 lived there for several years. I moved to 21 Houston, and I started my own mutual fund. And 22 I've lived in Houston ever since. That was in 25795 1 1968. 2 Do you want me to go through some 3 chronology of business? Is that your question? 4 Q. That would be helpful so we have a 5 little bit of background. Let me go back to 6 Prudential-Bache. 7 What was the nature of your employment 8 there when you began with Prudential-Bache? 9 A. I went through a training program in 10 New York for security analysis and sales. 11 Q. And what was your first position with 12 them? 13 A. I was an account executive in their San 14 Antonio office? 15 Q. And you were basically selling 16 securities to -- 17 A. Yes. 18 Q. -- private individuals? 19 A. Individuals and institutions, yes. 20 Q. And for approximately how long did you 21 remain in that position? 22 A. Several years. 25796 1 Q. And then you indicated that there came 2 a point in time when you moved to Houston? 3 A. Yes. 4 Q. Was that still with Bache and Company? 5 A. No. That was on my own. 6 Q. And you moved to Houston, and you 7 stated that you had started a mutual fund. 8 Do you recall that? 9 A. Yes. 10 Q. What was the nature of the mutual fund 11 that you started? 12 A. Well, it was an open-end mutual fund; 13 and it was underwritten by many security firms. 14 Q. What was the nature of the investments 15 that the mutual fund made? 16 A. Common stocks investments. 17 Q. And your position in the mutual fund? 18 A. I was the chairman and chief executive 19 officer. 20 Q. Were you also responsible for doing any 21 of the investment decisions with respect to the 22 mutual fund? 25797 1 A. Yes. 2 Q. How large was the fund? 3 A. It started out about $70 million. And 4 then there were other mutual funds involved, and 5 it grew larger. 6 Q. And how many employees worked for the 7 mutual fund? 8 A. Oh, this is a guess. I would say maybe 9 20, 25. 10 Q. Were you one of the principal security 11 analysts? 12 A. Well, I don't know that I was a 13 principal security analyst; but I did analyze 14 securities, yes. 15 Q. Now, how long did you continue in the 16 capacity as operating a mutual fund? 17 A. The mutual fund was sold several years 18 later, and we bought a company called Federated 19 Development Company. And that was a New York 20 Stock Exchange company. 21 Q. Now, you indicated that you sold the 22 mutual fund and that we bought Federated 25798 1 Development Company. Who was "we"? 2 A. Well, it was a management company 3 called Summit Management and Research. There were 4 shareholders in that. That's who "we" is. 5 Q. And were you a shareholder in Summit 6 Management and Research? 7 A. Yes. 8 Q. And were you the controlling 9 shareholder of Summit Management and Research at 10 this point? 11 A. Yes. 12 Q. Did Summit Management and Resources 13 (sic) then acquire a controlling interest in 14 Federated Development Company? 15 A. It did. 16 Q. So that you controlled Summit 17 Management, and Summit Management had a 18 controlling interest in Federated? 19 A. That's correct. 20 Q. Okay. Did -- and after you acquired 21 Federated, did you continue to be employed in any 22 capacity with respect to Federated? 25799 1 A. Yes. I was the chief executive officer 2 and chairman of the board. 3 Q. And Federated still exists today, does 4 it not? 5 A. It does, yes. 6 Q. And since its acquisition which would 7 have been in the early Seventies through the 8 present, have you continued to be the CEO and 9 chairman? 10 A. Yes. 11 Q. And at this -- since its acquisition 12 through the present, have you continued at all 13 times to be the controlling shareholder of 14 Federated? 15 A. That's correct. 16 Q. Now, did there come a point in time 17 when the nature of -- well, Federated was a 18 publicly-traded company, was it not? 19 A. Yes. 20 Q. Did there come a point in time when 21 Federated's structure changed? 22 A. Well, I don't know exactly what you 25800 1 mean by "structure change." 2 Q. Well, is it still a publicly-traded 3 company? 4 A. No. It's a private company. 5 Q. And when was it taken private? 6 A. Oh, I think it was taken private in 7 nineteen -- I think in the early 1980s sometime. 8 Q. Now, we're going to be talking today 9 about a point in time when Federated or at least 10 Federated's subsidiary, Federated Insurance, 11 acquires an interest in United Financial Group. 12 So, if you fix that point in time, did Federated 13 go private prior to or after it started to acquire 14 an interest in United Financial Group? 15 A. I think afterwards, but it could have 16 been -- it was about that time. I can't tell you 17 as I sit here today exactly when that was. 18 Q. And at present, do you -- you continue 19 to hold a controlling interest in Federated; is 20 that correct? 21 A. Well, as I mentioned, Federated is a 22 private company; and it's owned by myself and my 25801 1 family. 2 Q. Now, it's a New York business trust; is 3 that correct? 4 A. Yes. 5 Q. And are you also a trustee in addition 6 to being the chairman and the CEO? 7 A. Yes. I guess I am. It's a private 8 company. I don't know -- I suspect I'm still a 9 trustee, yeah. 10 Q. Who are some of the other trustees, 11 sir? 12 A. I don't know even know today. I think 13 it's just maybe my family since it's a private 14 company. 15 Q. Now, after you acquired Federated 16 Trust -- I mean Federated Development Company, did 17 you hold any other positions or any other jobs? 18 A. You mean after that? 19 Q. Yes. 20 A. Yes. I was -- I've actually held a lot 21 of jobs, I guess. I was at one time the chairman 22 of the board of McCullough Oil. I was a director 25802 1 of Horizon Corporation. I believe I was a 2 director of Maryland Realty. I was a director of 3 Simplicity Pattern. I was a director of Pacific 4 Lumber Company, Kaiser Aluminum, United Financial 5 Group; and I'm sure there are some subsidiary 6 companies of that -- of those companies that I'm 7 leaving out. I'll try to think of them. 8 Q. Let's just start with Horizon. Was 9 Horizon an entity that was partially owned by 10 Federated Development Company? 11 A. No. It was an entity that was at one 12 time partially owned by McCullough Oil. 13 McCullough Oil, when -- it sold its oil business 14 and later became MCO Holdings. It was just a 15 different name. And it had a position and 16 acquired 100 percent of Horizon at some point in 17 time. 18 Q. Now, what about Maryland Realty? What 19 was the relationship, if any, of Maryland Realty 20 to Federated Development Company? 21 A. I think Federated Development had a 22 position in it. No. I think that was MCO 25803 1 Holdings. And it was -- it was purchased 2 100 percent. Both Horizon and Maryland Realty 3 were real estate companies. 4 Q. Now, just so we understand where all 5 the pieces fit together, there came a time when 6 Federated Development Company acquired an interest 7 in McCullough Oil; is that correct? 8 A. That's correct. 9 Q. And McCullough Oil -- as a result of 10 Federated acquiring an interest in McCullough Oil, 11 did you then become the director of McCullough 12 Oil? 13 A. Well, I became a director. 14 Q. Okay. 15 A. There was more than -- there were a lot 16 of directors. 17 Q. I understand that. But as a 18 consequence of Federated acquiring an interest in 19 McCullough Oil, you then became a director of 20 McCullough Oil? 21 A. Yes. It was later, but eventually I 22 did become a director. 25804 1 Q. And did you hold any position as an 2 officer of McCullough Oil? 3 A. Yes. At a much later date, I did. 4 Q. And McCullough Oil later you indicated 5 changed its name to MCO Holdings? 6 A. Yes. 7 Q. Did you become an officer of MCO 8 Holdings? 9 A. I did. I was the chief executive 10 officer at a later date. 11 Q. And were you also chairman of the 12 board? 13 A. Yes. 14 Q. Now, approximately what point in time 15 did Federated Development Company acquire its 16 interest in McCullough Oil? 17 A. Oh, it was sometime in the -- maybe the 18 mid-1970s. 19 Q. When did McCullough Oil then become MCO 20 Holdings? 21 A. Maybe the late Seventies. I'm not sure 22 of the time. 25805 1 Q. Would it have been in that period of 2 time that you became the director and chief 3 executive officer of MCO Holdings? 4 A. I think I became a director maybe a 5 year or so after we had bought a position in it, 6 but Dr. Kozmetsky and Ezra Levin became directors 7 before I did. They were on the board. 8 Q. And were Dr. Kozmetsky and Ezra Levin 9 also associated with Federated Development 10 Corporation? 11 A. Yes. They were on the board at that 12 time. 13 Q. And as a result of Federated acquiring 14 an interest in McCullough Oil, Dr. Kozmetsky 15 and -- is it Dr. Kozmetsky? 16 A. (Witness nods head affirmatively.) 17 Q. Yes -- and Mr. Levin went on the board 18 of MCO; is that correct? 19 A. Yes. They were directors. 20 Q. Now, you also indicated that you were a 21 director of Simplicity Pattern. 22 What was Simplicity Pattern? 25806 1 A. Simplicity Pattern is a company that 2 makes primarily ladies' patterns. And it was a 3 New York Stock Exchange company, and it had other 4 investments and a lot of cash in it. It was a 5 very interesting company. It's a company that -- 6 where home economics is not as popular as it once 7 was. It's a business that the market had shrunk 8 substantially. There's nothing wrong with that. 9 It's like being in the buggy whip business if 10 you're the last one that makes buggy whips. There 11 were several companies left. There was a company 12 called McCall and a company called Vogue that made 13 patterns. Simplicity was, by far, the largest. 14 Q. How did you become affiliated with 15 Simplicity Patterns, sir? 16 A. How did I become an affiliate? 17 Q. How did you become affiliated with 18 Simplicity Patterns? 19 A. Excuse me. Sorry. MCO Holdings had 20 bought a large position. I think it was close to 21 40 percent. It was a block of stock for sale that 22 was owned by a person in England by a guy named 25807 1 Graham Lacy. We bought that block of stock. We, 2 being MCO Holdings, had purchased that stock from 3 this fellow. 4 Q. And as a consequence of your having 5 acquired a 40 percent interest through MCO 6 Holdings, you went on the board of Simplicity 7 Patterns? 8 A. Yes. 9 Q. Did you hold any position as a director 10 of Simplicity Patterns? I mean as an officer? 11 A. I did. At a later date, I became the 12 chief executive officer. 13 Q. And the chairman of the board? 14 A. And I think chairman of the board, yes. 15 Q. Now, you also indicated that you were a 16 director of Pacific Lumber. 17 A. Yes. 18 Q. What were the -- how is it that you 19 became the director of Pacific Lumber? 20 A. There was a purchase of 100 percent of 21 Pacific Lumber, and there was a brief period of 22 time -- I haven't been on the board there for 25808 1 years even though we own 100 percent of the 2 company today, even though I haven't been on the 3 board in years -- that I was a director. 4 Q. Have you been on the board of MCO 5 Holdings acquiring a controlling interest in 6 Pacific Lumber? 7 A. As I stated, we bought 100 percent of 8 it. I'm trying to remember the exact date I went 9 on the board of it. When there was an 10 announcement and there was a unanimous decision of 11 the board of directors of Pacific Lumber that 12 there would be a merger, there's a time frame that 13 I went on the board with a lot of other directors 14 from people from San Francisco. So, the answer is 15 yes. I mean, it had to do with the -- a merger 16 agreement that was signed that we were buying 17 100 percent of Pacific Lumber. In fact, we did. 18 Q. And that appears to have been a pattern 19 with respect to the acquisitions by MCO Holdings, 20 Inc.; that whenever MCO acquired a substantial 21 interest in a company, you went on the board of 22 the company. 25809 1 Is that a fair statement? 2 A. No, it's not a fair statement. 3 Q. Were there any companies that MCO 4 Holdings acquired that you didn't go on the board 5 of? 6 A. Not that acquired. We had substantial 7 holdings in a lot of companies that I didn't go on 8 the board of. 9 Q. When you say "substantial holdings," 10 what percentage are you talking about? 11 A. At the time, I think we owned maybe 12 6 percent of McCullough Oil when I went on the 13 board. And there were a lot of companies that we 14 owned 15, 20, 25 percent of over the years that I 15 didn't go on the board of. 16 Q. I would like to take a look at 17 Exhibit A3011 and just ask you a couple of 18 questions that track what we've just been 19 discussing. 20 This is the notice of the annual -- 21 this would be Tab 75. This is the notice of the 22 annual meeting of shareholders dated May 30th, 25810 1 1984. And if you would turn -- and this is for 2 United Financial Group, Inc. And if you'll turn 3 to the -- Page 2 of that document. 4 MR. EISENHART: Your Honor, I believe 5 the tab number is 715 for the record. 6 THE COURT: Thank you. 7 MR. RINALDI: I'm sorry. 715, yes. 8 Q. (BY MR. RINALDI) Directing your 9 attention to Page 2 and Footnote 2 -- 10 A. Is this the May 30, 1984 -- 11 Q. Yes. 12 A. Okay. 13 Q. And on numbered Page 2, it indicates 14 certain stock ownership of United Financial Group. 15 Do you see that? 16 A. I do. 17 Q. And in Footnote 2, it talks about that 18 "Mr. Hurwitz, together with members of his family, 19 beneficially owned a majority of the voting shares 20 of Federated Development Company." 21 Do you see that? 22 A. I do. 25811 1 Q. And you had owned, along with members 2 of your family, a majority of those shares since 3 the Seventies? 4 A. Yes, I think that's correct. 5 Q. And then it -- in the next paragraph 6 below, in Paragraph 3, it talks about "Federated 7 owned an interest in MCO." 8 Do you see that? 9 A. I see that. 10 Q. And it indicates that "Federated had an 11 aggregate of approximately 59.8 percent of the 12 total voting power of MCO." 13 Do you see that? 14 A. 59.8 percent, is that what you said? 15 Q. Yes, of the total voting power of MCO. 16 A. Yes. 17 Q. When did Federated acquire 18 approximately the majority of the voting shares or 19 the voting power of MCO? 20 A. I think what happened is that over the 21 years -- at this point in time, the stock market 22 had gone down. And I think that the ownership was 25812 1 raised by MCO Holdings or McCullough Oil which, at 2 some point, there was a name change. Most of that 3 was by the company purchasing its own shares, MCO 4 Holdings. There may have been some purchases of 5 Federated and McCullough. 6 Q. By 1984, it says you owned a majority 7 of the voting shares of MCO. 8 Had you owned a majority of the voting 9 shares of MCO for some time, or Federated? 10 A. Did I own the voting shares of 11 Federated or McCullough? 12 Q. Did Federated own a majority of the 13 shares of MCO for some time prior to 1984? 14 A. I believe that to be the case, yes. 15 Q. And would it have owned a majority of 16 the shares in the late Eighties -- I mean -- 17 sorry -- the late Seventies? 18 A. I don't know when those transactions 19 happened. It's certainly possible. 20 Q. But by this point in time, Federated is 21 a controlling -- has a controlling interest in the 22 voting shares of MCO, correct? 25813 1 A. Well, it says here that we owned an 2 aggregate of approximately 59.8 percent of the 3 total voting power. 4 Q. Okay. And by this point in time, both 5 Federated and MCO had acquired an interest jointly 6 in United Financial Group, correct? 7 A. Yes. 8 Q. And at the top of the page, I see that 9 Federated by 1984 owned 9.9 percent and MCO owned 10 13.6 percent. 11 Do you see that? 12 A. Yes. 13 Q. Now, at this point, Federated and MCO 14 were the two largest shareholders of United 15 Financial Group, were they not? 16 A. Yes. In this document, I think it has 17 to list any 5 percent holder or more. 18 Q. And there are no individuals or 19 entities that own more than 5 percent? 20 A. That's correct. 21 Q. Now, I notice it lists all directors 22 and executives as owning 27.2 percent; but that 25814 1 would have included the shares owned by MCO and 2 Federated; is that correct? I think if you turn 3 to the next page, in Footnote 5, there's an 4 explanation to that effect. 5 A. Well, that certainly could have been. 6 Q. So that the number of -- 7 A. This is the aggregate, right. 8 Q. So that the 27.2 percent owned by 9 directors and executives would -- the majority of 10 that would be composed of shares owned by 11 Federated and MCO, correct? 12 A. Well, looks like, you know, 22 percent 13 of it or so is out of the 27, yes. 14 Q. Okay. Now, what I would like to do 15 now, sir, is focus on the issue of, well, 16 Federated's original acquisition of United 17 Financial Group shares. 18 First of all, let me ask you this: 19 What was Federated Reinsurance Corporation? 20 A. It was a wholly-owned subsidiary of 21 Federated Development Company. 22 Q. And were you a member of the board of 25815 1 Federated Reinsurance Corporation? 2 A. I just don't recall. It was a 3 wholly-owned subsidiary and I could have been and 4 there's a possibility that I was. 5 Q. Did there come a time in about 1982, 6 '81 or '82, when Federated Reinsurance Corporation 7 obtained an interest in United Financial Group? 8 A. Yes. 9 Q. Okay. Can you describe for the Court 10 the circumstances under which Federated 11 Reinsurance Corporation first acquired an interest 12 in United Financial Group? 13 A. Yes. I think it was sometime in mid to 14 late 1981, and there was an announcement in the 15 Houston papers that said that a gentleman named 16 Daniel Ludwig, which at the time was supposedly 17 the richest man in the world, was buying the 18 savings and loan part of United Financial Group. 19 It was called United Savings of Texas. And the 20 holding company, United Financial Group, was going 21 to be left with a piece of property called 22 Eastchase; and it was a piece of property between 25816 1 Dallas and Fort Worth that was for some reason in 2 the holding company. I don't know why it was in 3 the holding company, but it was there. And it was 4 going to have cash. 5 And Mr. Ludwig at the time was 6 acquiring other savings and loans around the 7 country. And I believe this is before they had 8 banking laws that you could go across state lines. 9 And so, he was evidently buying individual savings 10 and loans. It looked to me like it was a very 11 attractive company in the fact that it was going 12 to have this cash and this piece of property. I 13 remember calling people in the Dallas/Fort Worth 14 area and asking about it, and I remember going to 15 see the property myself. I thought it was -- it 16 was an attractive property, and I thought the fact 17 that Mr. Ludwig was purchasing the savings and 18 loan made the -- United Financial an interesting 19 company, and it was very cheap. And so, I bought 20 some shares in it. 21 Q. Now, you say you bought some shares in 22 it. In your deposition, do you recall testifying 25817 1 that, originally, Federated Reinsurance 2 Corporation acquired slightly under 5 percent of 3 the outstanding shares of United Financial Group? 4 A. Well, we made filings at that time. I 5 can't tell you exactly how many shares we bought 6 at that time. 7 Q. You don't recall testifying previously 8 that it was slightly under 5 percent? 9 A. It certainly could have been. 10 Q. Now, after you acquired this interest 11 in United Financial Group, what happened to 12 Mr. Ludwig's proposal to acquire the savings and 13 loan portion of United Financial Group? 14 A. It was announced that he had cancelled 15 his purchase; so, it obviously didn't go through. 16 Q. And you were still left with a 17 5 percent interest or less in United Financial 18 Group? 19 A. Yes, whatever we owned at the time. We 20 didn't sell any. 21 Q. Okay. Well, just to see if we can 22 refresh your recollection on that so that -- I'm 25818 1 handing you a copy of your deposition, and I will 2 give copies to the Court. 3 Would you take a look at Page 31 of 4 your deposition which was taken on June 29th, 5 1995. And specifically at the top of Page 31, do 6 you see that? 7 A. I do see that. 8 Q. Line 1, Question: "Now, initially, how 9 large a position did you take in UFG?" 10 And then answer: "Again, this is going 11 back many years, but I think it was slightly under 12 5 percent." 13 Do you see that? 14 A. I do see that. 15 Q. Does that refresh your recollection, 16 sir, that it was slightly under 5 percent, your 17 original ownership? 18 A. No. 19 Q. It doesn't refresh it? 20 A. It doesn't. 21 Q. Well -- 22 A. I would make the same statement again. 25819 1 Going back many years -- 2 Q. Well, what was the significance of 3 slightly under 5 percent in terms of acquiring an 4 interest in a public corporation, sir? 5 A. Well, when you go over 5 percent, there 6 is a disclosure you have to file with the SEC that 7 you own more than 5 percent. There are other 8 disclosure items, too. If you own $15 million 9 worth, you have to file things. This is very 10 consistent with what I'm saying today. I mean, it 11 could have been 7 or 8 percent. It could have 12 been 3 or 4 percent. I don't recall. I mean, we 13 have the documents here. It's pretty easy to look 14 it up. 15 Q. Now, did there come a time after 16 Mr. Ludwig's attempt to acquire -- or his 17 announcement to acquire the savings and loan and 18 then the ultimate failure of that to occur that 19 Federated Reinsurance Corporation acquired 20 additional shares of United Financial Group? 21 A. Yes. 22 Q. Okay. And if you'll take a look at 25820 1 Tab 1, it's T1001. It's Exhibit T1001. 2 Now, this is a letter that's written to 3 the Federal Home Loan Bank Board by a Richard 4 Marlin. 5 Who was Mr. Marlin, sir? 6 A. He was a partner of Kramer, Levin, 7 Nessen, Kamin & Soll. 8 Q. And did Mr. Marlin perform legal 9 services for Federated Reinsurance Corporation? 10 A. He did. 11 Q. And the Levin that you've just 12 mentioned in Kramer, Levin, Nessen, Kamin & Soll 13 was on the board of -- was a trustee of Federated, 14 correct? 15 A. Yes. 16 Q. Was Mr. Levin also on the board of MCO? 17 A. Yes, he was. 18 Q. Okay. And now, after you originally 19 acquired the 5 percent interest in -- or what you 20 think to the best of your recollection was 21 slightly less than 5 percent interest in United 22 Financial Group, did you subsequently determine 25821 1 that Federated Reinsurance Corporation would 2 acquire additional shares of UFG? 3 A. Yes. 4 Q. Now, it indicates here in Mr. Levin's 5 letter to the Federal Home Loan Bank Board that 6 Federated Reinsurance Corporation owned 7 8.2 percent of the outstanding shares. 8 Do you see that? 9 A. I see that. 10 Q. Okay. Did Federated Reinsurance 11 Corporation decide that it wanted to acquire a 12 greater interest in UFG after the Ludwig deal fell 13 through? 14 A. Well, it certainly made this filing 15 that we would have the flexibility if, in fact, we 16 decided to do that, yes. 17 Q. In connection with that, had you now 18 changed your mind that you weren't just interested 19 in the real estate? 20 A. Well, as I mentioned before, the 21 transaction that Mr. Ludwig had announced had 22 fallen through. And so, now this was a savings 25822 1 and loan primarily. 2 Q. Well, that's what I mean. And the 3 savings and loan would have represented the 4 substantial -- the most substantial asset of UFG 5 at this point in time, did it not? 6 A. Yes. 7 Q. And the real estate that you were 8 seeking to acquire would have been a relatively 9 small asset in comparison to the savings and loan. 10 Is that fair? 11 A. Yes, that's right. 12 Q. So, I guess my question to you is: Had 13 your objectives changed at this point in time? 14 A. Well, I think the options had changed 15 at this time. And we were looking and seeing if 16 this was something that we would like to buy more 17 shares, and we were seeking the approval to do so. 18 Q. When you say "the options had changed," 19 what was the attractiveness at this time of 20 acquiring more shares of UFG if it was no longer 21 just a real estate deal? 22 A. Well, the savings and loan -- I was 25823 1 very optimistic about the Texas and Houston 2 economy on a long-term basis and thought that this 3 may be a very attractive company to -- to make an 4 investment in because of its holdings, extensive 5 holdings, and its ability to participate in the 6 Southwest economic boom. 7 Q. Now, it indicates here that FedRe would 8 like to increase its holdings to between 10 and 9 20 percent of the outstanding shares of UFG. 10 Do you see that? 11 A. I do. 12 Q. Did you understand at that time that 13 that would make you, by far, the largest 14 shareholder of UFG? 15 A. I'm certain that I did at that time. I 16 can't tell you today that that's the case. 17 Q. Now, prior to sending this letter, 18 Mr. Levin would have -- I'm sorry -- Mr. Marlin 19 would have discussed filing this kind of letter 20 with the Federal Home Loan Bank Board with you, 21 would he not? 22 A. Well, it's not clear. He certainly 25824 1 could have. But we had a lot of people that were 2 dealing with Mr. Marlin; and so, I can't tell you 3 that that's the case. I certainly wouldn't deny 4 that that's the case. 5 Q. Well, let me just see if I understand 6 something. You were the chief executive officer 7 and the chairman of Federated, correct? 8 A. That's correct. 9 Q. And Federated Reinsurance Corporation 10 was a wholly-owned subsidiary that now was about 11 to increase its ownership in United Financial 12 Group, correct? 13 A. Yes. 14 Q. And you originally were the individual 15 who brought the potential investment of United 16 Financial Group to Federated Reinsurance 17 Corporation, weren't you? 18 A. Yes. 19 Q. And you were the one that wanted to 20 acquire the real estate, weren't you? 21 A. That's correct. 22 Q. And now a decision is made to go above 25825 1 the 5 percent level that you originally invested 2 in and to go up to 10 to 20 percent. And are you 3 telling me now, sir, that you weren't involved in 4 that decision? 5 A. I didn't say that. 6 Q. Okay. 7 A. You asked me if I had seen this 8 document that Mr. Marlin had written. I thought 9 that was the question. And I can't tell you that 10 I have seen this document. I think everything you 11 said is correct. I don't know at the time that I 12 read this document. 13 Q. I'm not so much concerned about the 14 document as the representation in the document 15 that FedRe would like to increase its investment 16 in UFG to be 10 and 20 percent of the outstanding 17 shares. Mr. Marlin has made a representation to 18 the Federal Home Loan Bank Board in that regard. 19 My question to you is: Did you discuss 20 Mr. Marlin making that representation to the Bank 21 Board before Mr. Marlin wrote the letter? 22 A. Well, someone certainly did from 25826 1 Federated. I mean, he just didn't make it up. 2 Q. And he wouldn't have been in a position 3 to send that letter unless it had been approved 4 that Federated wanted to acquire between 10 and 5 20 percent of the outstanding shares of UFG. 6 Isn't that fair to say? 7 A. That's fair. 8 Q. And you would have participated in that 9 decision, correct? 10 A. I'm certain that I did. 11 Q. Now, in the first paragraph, the 12 indented paragraph, it states that "A person shall 13 be presumed to acquire the power to direct the 14 management of policies of an insured institution 15 whenever the person will acquire power to vote 16 10 percent or more of any class of voting 17 securities of the institution." 18 Do you see that? 19 A. I do. 20 Q. Did you understand at this point in 21 time that if Federated Reinsurance Corporation 22 acquired between 10 and 20 percent of the 25827 1 outstanding shares of UFG, that it would be 2 presumed to have acquired the power to direct the 3 management and policies of UFG? 4 A. Well, I don't know. I mean, what my 5 understanding was and is is that we had to have 6 approval to go over a certain level; and that 7 level may have been 10 percent. And the thing 8 that I was obviously very conscious of, as well as 9 everybody in our company, was the net worth 10 maintenance which was 24.9 percent or over. And 11 certainly we had all the regulatory lawyers all 12 over the country looking at these things and 13 giving us good advice. So, I'm certain that this 14 was good legal advice that we had. We had a 15 fellow named Barry Munitz that followed this 16 closely, along with in-house counsel and a lot of 17 regulatory lawyers. 18 Q. And you're telling me now, sir, that 19 before you would acquire more than 25 percent of 20 outstanding shares of UFG, you acquired -- you 21 obtained advice of counsel as to whether -- as to 22 the impact of acquiring over 25 percent of the 25828 1 shares? 2 A. Sure. 3 Q. And each time that UFG -- I mean MCO 4 acquired an additional interest in UFG, is it your 5 testimony that you obtained advice of counsel? 6 A. Yes. I mean, this thing was virtually 7 lawyered to death each time we did anything. It's 8 a regulated industry, and we used the best 9 lawyers. 10 Q. And it's your testimony here that any 11 interest in UFG that you acquired that might have 12 potentially taken you above the 25 percent 13 ownership level was done with the express advice 14 of counsel? 15 A. I don't know that that's the right word 16 or not, but certainly it was very lawyered. 17 Q. Well, let's go on then, sir. 18 A. See, we would never do that. 19 Q. I'm sorry. You would never do what? 20 A. We would never go above the 25 percent. 21 Q. Well, we'll get to that in a moment; 22 and we can talk some more about that. 25829 1 Now, if you look at the bottom of the 2 page -- I'm sorry. 3 Now, at the bottom of Page 2 of 4 Exhibit T1001, it states -- the last sentence that 5 carries over onto Page 3 is where I'm reading 6 from, sir. "FedRe is investing in UFG not with a 7 view towards controlling the management of the 8 savings and loan institution" -- 9 A. I'm sorry. I don't see that. Excuse 10 me. Tell me again where it is. 11 Q. The last sentence on Page 2 that 12 carries over to Page 3. 13 A. Okay. Thanks. 14 Q. "FedRe is investing in UFG not with a 15 view towards controlling management of the savings 16 and loan institution but, rather, with the hope of 17 benefiting from UFG's intended disposition of 18 United Savings. And FedRe has so advised UFG's 19 management." 20 Do you see that? 21 A. I do. 22 Q. What does that refer to, sir? 25830 1 A. We thought at the time that they were 2 selling the savings and loan. 3 Q. Well, by this point in time, the Ludwig 4 deal had fallen through, correct? 5 A. I don't know the date that it had 6 fallen through. It may or may not have. 7 Q. Why were you acquiring between 10 and 8 20 percent of the thrift if the Ludwig deal -- I'm 9 sorry -- of UFG if the Ludwig deal hadn't fallen 10 through at this point? 11 A. If it hadn't fallen through? 12 Q. Yes. 13 A. To invest in the savings and loan. 14 Q. Here it says you're not interested in 15 investing in the savings and loan. 16 A. Well, then, it hasn't fallen through at 17 that time, then, I suspect. 18 THE COURT: Mr. Rinaldi, I think you 19 misspoke. You said that it says that they are not 20 interested in investing. I don't believe that's 21 what it says. 22 MR. RINALDI: I'm sorry. I said what? 25831 1 THE COURT: That FedRe is not 2 interested in investing, I think you said. 3 MR. RINALDI: FedRe is -- oh, I'm 4 sorry. "FedRe is investing in UFG not with a view 5 towards controlling the management of the savings 6 and loan institution but, rather, with the hope of 7 benefiting from UFG's disposition of United 8 Savings. FedRe has so advised UFG's management." 9 Is that what you were referring to? 10 THE COURT: Yes. I think you said "not 11 interested in investing" rather than "interested 12 in controlling." 13 Q. (BY MR. RINALDI) Now, the next sentence 14 says "FedRe does not intend to acquire or exercise 15 control over UFG but, rather, intends to assume a 16 passive role generally supportive of present 17 management." 18 Do you see that? 19 A. I do. 20 Q. Was it your intention at this point in 21 time to play no role in the ongoing management of 22 UFG? 25832 1 A. You know, I can't go back all these 2 years; but I'm sure that this was written 3 properly. 4 Q. Did there come a time, then, when that 5 intention changed? 6 A. Yes. 7 Q. What caused that intention to change, 8 sir? 9 A. I think what caused it to change is 10 when the Ludwig transaction fell through and we 11 got permission to purchase more shares and did, in 12 fact, purchase more shares. 13 Q. Now, it indicates here in the last 14 sentence at the top of Page 3 in the first 15 paragraph, top of Page 3, "FedRe does not have 16 representation on the UFG board of directors." 17 Do you see that? 18 A. Tell me where that is again, please. 19 Q. It's in the last sentence in the 20 carryover paragraph on Page 3 of T1001. 21 A. The last sentence? (Witness reviews 22 the document.) 25833 1 Q. "Furthermore, Kaneb and UFG's 2 management own an estimated 9.4 percent of UFG 3 shares; and Federated does not have representation 4 on the UFG board of directors." 5 Do you see that? 6 A. Yes, I see that. 7 Q. Now, did there come a time when UFG -- 8 sorry -- FedRe requested representation on the 9 board of UFG? 10 A. I think that's the case, yes. 11 Q. Okay. And how did that come about, 12 sir? 13 A. I think it came about that -- I don't 14 know the date; but at some point in time, we had 15 purchased -- "we" being Federated and possibly MCO 16 Holdings at the time -- a larger position. We had 17 someone that we thought would be an outstanding 18 candidate for the board, Dr. Barry Munitz, which I 19 think has been in front of this Court. And I 20 suggested to the management, that being Sonny 21 Bentley and Jim Coles -- I think they were the 22 then chairman and president -- whether that makes 25834 1 sense. And Barry had known some other people on 2 the board, and I think that they had invited him 3 to go on the board of directors. 4 Q. Now, you say that you suggested it. 5 Was it your intention that Mr. Munitz would be in 6 a position to keep you informed of what was going 7 on at USAT and UFG? 8 A. Well, I think it was the intention -- a 9 lot of times when you own a large position in a 10 company, people have representation on the board; 11 and Barry would have been and was a good candidate 12 for that and a good director. 13 Q. And you considered that the position 14 that you held to be a large position on the board 15 of UFG? 16 A. I think it's -- at some point in time 17 here, I think we were the largest shareholder, 18 yes. 19 Q. Let's take a look at T1003, and maybe 20 we can sharpen up just how large a shareholder you 21 were. This is a response to Mr. Marlin's letter 22 that was sent by D. James Croft from the Federal 25835 1 Home Loan Bank Board on March the 30th, 1982. And 2 this is in response to his request attempting to 3 rebut the presumption that if Federated or 4 Federated Reinsurance Corporation acquired in 5 excess of 10 percent of UFG, it would not have 6 acquired -- it should not be presumed that they 7 acquired the power to direct the management and 8 policies of UFG. 9 Now, in the last paragraph, the Federal 10 Home Loan Bank Board responds to Mr. Marlin's 11 inquiry by saying, "After review and consideration 12 of this information, the Office of Examinations 13 and Supervision has decided that the presumption 14 herein referred to has not been rebutted." 15 Do you see that? 16 A. I do. 17 Q. It says, "According to your letter, 18 FedRe intends to acquire between 10 and 20 percent 19 of the outstanding of the common stock of United 20 Financial. Ownership of 10 to 20 percent of these 21 shares would exceed the percentage owned by any 22 other stockholder. If the ownership were 20 25836 1 percent, it would exceed by 300 percent the 2 percentage owned by the next largest stockholder." 3 Do you see that? 4 A. I do. 5 Q. Did you understand at the time that by 6 acquiring 20 percent of United Financial Group, 7 that you were going to own -- that your ownership 8 would exceed 300 percent of the percentage owned 9 by the next largest stockholder? 10 A. That's what it says. 11 Q. Is that your understanding at the time? 12 A. Well, I don't know that I read it at 13 the time; but I see what it says. 14 Q. In your experience, sir, as an 15 investor, if one owns a 20 percent interest in an 16 enterprise and that's 300 percent larger than the 17 next percentage shareholder, does that give them 18 significant input into the operations and 19 management of the institution? 20 A. It all depends. 21 Q. And what does it depend on, sir? 22 A. It depend on many factors. It depends 25837 1 on who the board of directors are. This doesn't 2 stop other shareholders from buying 20 percent or 3 10 percent. This was a publicly-held company. 4 Q. On the next page over, the Federal Home 5 Loan Bank Board concludes in the first sentence, 6 "Therefore, we have concluded that FedRe would 7 acquire power to direct the management and 8 policies (emphasis added) of United Financial if 9 between 10 and 20 percent of its outstanding stock 10 were acquired by FedRe." 11 Do you see that? 12 A. I see that. 13 Q. I take it, then, you don't agree with 14 the statement that's made there by the Federal 15 Home Loan Bank? 16 A. I agree that's what it says, but I can 17 tell you in the real world that that's not 18 necessarily right. 19 Q. So, you disagree that -- 20 A. I didn't say I disagree. 21 Q. Well, I'm asking you -- 22 A. I didn't either agree or disagree. You 25838 1 can't make that flat statement and it's correct. 2 Just because it's here doesn't mean it's right. 3 Q. Now, as a consequence of having been 4 denied -- having failed to rebut the presumption 5 in the last sentence there, Mr. Croft writes to 6 Mr. Marlin and says, "Accordingly, we have 7 determined that the acquisition of 10 percent or 8 more of the outstanding common stock of United 9 Financial by FedRe would require prior written 10 notice in accordance with Section 563.18-2(c) of 11 the insurance regulations." 12 Do you see that? 13 MR. NICKENS: Your Honor, in light of 14 reading accordingly, I think it should be made a 15 part of the record what wasn't read. FedRe's 16 intention not to exercise power could change if, 17 for example, the intended disposition of United 18 Savings by United Financial does not materialize 19 or if FedRe decides for any other reason to direct 20 the management and policies of United Financial." 21 That's the response to the word "accordingly." 22 THE COURT: Okay. 25839 1 Q. (BY MR. RINALDI) As a result of FedRe 2 receiving this letter, was a notice filed with the 3 Federal Home Loan Bank Board of FedRe's intention 4 to acquire in excess of 10 percent of the 5 outstanding shares of UFG? 6 A. I don't recall at this time. 7 Q. Take a look at what's been marked as 8 T1004. 9 A. Am I supposed to keep all these up 10 here? 11 Q. You may. You can't take them home with 12 you, but -- I'm sure that Mr. Keeton would be 13 happy to provide you with a copy should you need 14 one. 15 Now, this is a letter dated 16 approximately two days after the letter received 17 by Mr. Marlin from Mr. Croft. And in this letter, 18 Mr. Marlin then writes to the Bank Board, giving 19 the Bank Board notice that -- of FedRe's intention 20 to acquire 24.9 percent -- up to 24.9 percent of 21 outstanding shares of UFG. 22 Now, if you look at the first full 25840 1 paragraph in T1001, the intention was to acquire 2 between 10 and 20 percent; and now the indication 3 is that you want to acquire up to 24.9 percent. 4 Do you see that? 5 A. I do. 6 Q. Now, had something changed between 7 February 1982 and April 1982 that caused MCO 8 and -- I'm sorry -- Federated Reinsurance 9 Corporation to now want to acquire right up to the 10 limit of the maximum amount of shares it could 11 acquire without going over 25 percent? 12 A. I don't remember why we had said that 13 we could buy up another 4.9 percent. I'm sure it 14 was flexibility. 15 Q. What do you mean by "flexibility," sir? 16 A. Maybe we wanted to buy 24.9 instead of 17 20 percent if the stock was available. 18 Q. That's what I mean. If you were going 19 now from 20 to 24.9, had you come to any 20 conclusion regarding what your desires were with 21 respect to the management and operation of UFG? 22 A. You know, again, this is in April of 25841 1 1982; and I can't possibly tell you why that had 2 happened. But in looking at this, my guess is -- 3 probably educated guess is it's just a matter of 4 flexibility, that when asking for approval to go 5 to 24.9 rather than 20. 6 Q. Now, earlier in February of 1982, you 7 had represented to the Federal Home Loan Bank 8 Board that it was your intention to assume a 9 passive role generally supportive of present 10 management. 11 Had your intentions changed at all that 12 caused you to go to 24.9 percent? 13 A. I don't recall. You have to 14 understand -- and I know you do -- that the 15 company had changed pretty dramatically. Before, 16 it was going to be a company that had some cash in 17 it and a piece of property, an attractive piece of 18 property. And now, it was a company that didn't 19 have the cash and owned a savings and loan. So, 20 it was a pretty dramatic change of events there 21 which had nothing to do with us, by the way. 22 Q. I understand that. 25842 1 By the time you made a decision to file 2 this notice to go up to 24.9 percent, it's your 3 recollection that the Ludwig deal had fallen 4 through? 5 A. You know, I don't recall those dates. 6 Q. Well, is it possible, then, at this 7 point you were still just looking to buy a piece 8 of real estate? 9 MR. KEETON: Is it possible that 10 Mr. Rinaldi might just want to tell us all, since 11 everybody else knows it fell through, and just 12 clear it up instead of all this fencing around? 13 He knows it to the day. 14 MR. RINALDI: In fact, I don't. 15 MR. KEETON: Well, how about 16 March 25th, '82? 17 MR. RINALDI: Thank you. 18 Q. (BY MR. RINALDI) Does that refresh your 19 recollection as to when this fell through? 20 Let me ask you this: If Mr. Keeton has 21 represented that it was March 25th, 1982, would 22 you have any reason to doubt that? 25843 1 A. I would never doubt my counsel. We're 2 under oath here? 3 MR. KEETON: I got an exhibit, too, 4 Your Honor. It's in this record. Thank you, 5 Mr. Hurwitz. 6 Q. (BY MR. RINALDI) If, in fact, his 7 representation is correct, by the time you filed 8 this notice to acquire up to 24.9 percent of the 9 outstanding shares of UFG, you knew that UFG was 10 going to be something more than just a real estate 11 investment, correct? 12 A. It appears that's the case. 13 Q. And at this point in time, was there 14 some reason why you, as an investor, wanted to 15 acquire a savings and loan? 16 A. Well, again, I think maybe I can answer 17 your other questions since Mr. Keeton has advised 18 us that this document is in April and the other 19 was March. If you're not a savings and loan, I 20 don't think there are any requirements to the 21 24.9. 22 So, now, being a savings and loan, 25844 1 there are different requirements. So, if they had 2 sold the savings and loan, it would have just been 3 a public company without those limitations on it. 4 So, that's probably the difference. 5 Q. I understand that. But I guess what 6 I'm trying to focus on is at this point in time, 7 you know that UFG is going to be a savings and 8 loan. And is there some reason why, in light of 9 that fact, you now want to acquire additional 10 shares of UFG since it's not the investment you 11 originally thought it was going to be? 12 A. Well, obviously, we looked at it; and 13 it's something we wanted to have the flexibility 14 to invest in. And we asked for those approvals. 15 Q. Now, take a look at T1008. Now, this 16 is a letter back to Mr. Marlin from Mr. Croft in 17 which Mr. Croft indicates that the Federal Savings 18 and Loan Insurance Corporation does not intend to 19 disapprove the proposed acquisition by Federated 20 Development Corporation and its wholly-owned 21 subsidiary of Federated Reinsurance Corporation of 22 United Financial Group. 25845 1 Do you see that? 2 A. I do. 3 Q. So, after you received this -- well, 4 let me ask you this: Is this the kind of document 5 that Mr. Marlin would have passed along to you to 6 advise you that, by the way, the regulators have 7 said they don't disapprove of our acquiring over 8 10 percent of the shares of UFG? 9 A. You know, I can't tell you that. 10 Certainly Mr. Marlin, as an attorney, would have 11 given the information to someone in our firm. I 12 can't tell you that he gave it to me. I can't 13 tell you that he didn't. 14 Q. As the chief executive officer of 15 Federated and the person that had an interest in 16 acquiring shares of UFG, this is information that 17 would have been provided to you by someone on your 18 staff? 19 A. I suspect that's right. 20 Q. Now, after May 6th, 1982, do you recall 21 that UFG then -- I'm sorry -- MCO commenced to 22 acquire additional shares of UFG? 25846 1 A. I remember that MCO -- I don't know if 2 "commenced" is the right word. 3 Q. I'm sorry. Federated. I misspoke. 4 Did Federated then, pursuant to the approval of 5 the Bank Board or the FSLIC not to object, then 6 proceed to acquire additional shares of UFG? 7 A. I believe that's the case. 8 Q. Now, would you take a look at the -- 9 oh, strike that. 10 Now, did there come a point in time 11 when you as the CEO and chairman of Federated and 12 as the CEO and Federated (sic) of MCO decided that 13 it would be useful for MCO to also acquire shares 14 of UFG? 15 A. Well, I don't want to sound like 16 President Clinton here; but what does "useful" 17 mean? I don't know. 18 Q. Well, did there come a time when you 19 decided that it would be a good idea for MCO to 20 acquire some shares of UFG in addition to which 21 Federated already had? 22 A. I think the board of directors of MCO 25847 1 Holdings determined that it would to be an 2 attractive investment. 3 Q. And prior to the board making that 4 determination, had you reached some conclusion in 5 that regard? 6 A. At some point, I thought it was a good 7 investment, yes. 8 Q. And, in fact, you were the one that 9 took the investment to the board of MCO and 10 presented it to them, weren't you? 11 A. I certainly could have. I don't recall 12 it, but -- 13 Q. And -- 14 A. -- it's very possible. 15 Q. Why was it that you thought that this 16 was a good investment for MCO? 17 A. MCO was at that time primarily in the 18 real estate business, had some good expertise in 19 real estate. This was a large owner of Houston 20 real estate, Southwest real estate, direct 21 purchases of real estate and joint ventures and 22 mortgages. It looked, again, like a very 25848 1 attractive way of investing in the Southwest. And 2 I guess you have to understand at least my 3 philosophy and the philosophy of MCO which was at 4 the time and is today, and that is to make 5 long-term investments and see these investments 6 through good times and bad times. 7 Q. I guess my question, though, is 8 somewhat different. 9 Federated had real estate enterprises 10 as well, did they not? 11 A. They did, yes. 12 Q. And Federated has now applied to the 13 FSLIC. The FSLIC has said, "You may acquire up to 14 24.9 percent of the outstanding shares of UFG." 15 And you then go to MCO and recommend that MCO 16 acquire an interest in UFG. 17 And I guess my question to you is: Why 18 didn't Federated just acquire the additional 19 shares of UFG? 20 A. Well, I don't want to get hung up on 21 language here; but I think you're off base when 22 you keep using the word "recommended." I can't 25849 1 say that that's the case. I can go and say that 2 this is an investment that Federated has made and 3 I think it's attractive. And the board of MCO was 4 made up of extraordinarily capable people who 5 could make their own decisions. I did think it 6 was attractive and something that I certainly 7 would have voted for. The answer to your question 8 directly, they were in the business. They had 9 excess funds. There was a carpet opportunity that 10 they found attractive, and I wanted to make it 11 available to them if, in fact, they wanted to 12 invest in it. 13 Q. Well, you indicated that MCO had excess 14 funds; is that correct? 15 A. Yes. 16 Q. Okay. Federated was not in a position 17 at this point in time to acquire additional shares 18 of UFG? 19 A. I think Federated had funds, as well. 20 Q. But for -- you decided that you just 21 wanted to present this investment to the MCO board 22 for their consideration? 25850 1 A. Yes. 2 Q. Would you take a look at what's been 3 marked as T1012? It's Tab 38. 4 A. (Witness reviews the document.) 5 Q. Let me just ask you a couple of 6 questions before we start looking at the MCO 7 Holdings materials and the minutes that I've just 8 handed you. 9 As the CEO and chairman of Federated, 10 did you participate in all major policy decisions 11 of Federated? 12 A. I guess people would differ on what are 13 major. Did I generally know what was going on? 14 Yes. 15 Q. Did you participate in all strategic 16 decisions that were made by Federated with respect 17 to its direction and investments? 18 A. Again, I guess it's a matter of 19 magnitude; but, generally, I would say that I knew 20 what was happening. 21 Q. You say you knew what was happening. 22 How many employees worked for Federated? Was it a 25851 1 fairly large staff? 2 A. Oh, I don't know the number at that 3 time, but I would -- 4 Q. We're talking now in the '82 time 5 frame. 6 A. It wasn't large. 7 Q. As the CEO, you would have been aware 8 of most things that were going on? 9 A. That's what I testified to. 10 Q. Would Federated have made any kind of 11 investment decisions of any significance without 12 your being involved? 13 A. You know, they made investments in the 14 stock market and things like that that I certainly 15 wasn't aware of on a day-to-day basis. 16 Q. If they were going to acquire in excess 17 of 10 percent of the holdings of an enterprise, 18 that's something you would have been aware of, 19 correct? 20 A. Yes, I would have. 21 Q. Now, what about with respect to MCO? 22 You also were the chief executive officer and the 25852 1 chairman of MCO, correct? 2 A. Yes. 3 Q. And did you participate in the major 4 policy decisions at MCO? 5 A. I would say so. 6 Q. And did you participate in the 7 strategic decisions regarding investments at MCO? 8 A. In general, I would. I remember the 9 time that we were -- we bid on a company called 10 AVCO Financials, large real estate holdings in 11 southern California. And it was extensive, and I 12 was aware of it. I didn't go look at the 13 properties and things like that. 14 Q. Did you disapprove of what MCO was 15 doing? 16 A. No. I approved in general with what 17 they were looking at and what they were doing. 18 Q. When MCO was contemplating making an 19 investment to acquire a -- shares of the 20 corporation, say, 10 percent ownership, is that 21 something you would have looked at and done a due 22 diligence on yourself? 25853 1 A. I certainly would have been aware of 2 it, yes. 3 Q. Would you have actually looked at the 4 financials and studied the proposal? 5 A. Most likely, or certainly I was well 6 briefed on it. 7 Q. When you say "well briefed," who would 8 you have relied upon in this period to brief you 9 on the financials of a proposed investment in, 10 say, excess of 10 percent of the corporate 11 enterprise? 12 A. Well, there's a lot more to making 13 investments than just the financials: What 14 business they are in or the growth prospects, how 15 they are positioned. You know, many companies, 16 their balance sheets don't come close to 17 reflecting their true value, both up and down. 18 So, it depends on what kind of company 19 it is. At the time, the president of MCO Holdings 20 was a gentleman named Bill Leone; and I had 21 tremendous confidence in Bill Leone in certain 22 areas. And he would inform me or Paul Schwartz or 25854 1 Jim Iaco, Barry Munitz. 2 Q. Now, Mr. Leone was an operational 3 person, was he not? 4 A. Yes. 5 Q. So, he wouldn't have been the person 6 that would have been looking at the financials of 7 the corporation, would he? 8 A. Yes, he would. 9 Q. He would? 10 A. Yes. 11 Q. When I say "operational" or use that 12 term, you used "me" on one occasion. What did you 13 understand that to mean? 14 A. He ran things on the day-to-day basis, 15 but he certainly understood financials very well. 16 Q. Okay. And what about Mr. Munitz? 17 Where did he fit into all of that? 18 A. Well, he was the key part of the 19 management team; and he did a lot of the people 20 type business that we were in. And Barry is a 21 very intuitive -- a very smart person, and I would 22 rely on Barry for a lot of things. 25855 1 Q. Okay. Now, you say he was part of the 2 management team. We're talking about the 3 management team of Federated or of MCO or both? 4 A. I thought you were talking about both. 5 Both is the answer. 6 Q. Okay. And what were the kinds of 7 things you relied upon from Mr. Munitz? 8 A. Well, we would have situations where we 9 needed zoning issues or -- just as an example, and 10 Barry would work up a plan of how to solve that 11 problem. And I would rely on him heavily for 12 that. He was very competent. 13 Q. I'm sorry. I didn't mean to interrupt 14 you. 15 A. No. I just said he was competent. 16 Q. Oh, certainly. And who was Mr. Iaco? 17 A. He was the -- at that time, the chief 18 financial officer. 19 Q. And chief financial officer of MCO and 20 Federated? 21 A. MCO Holdings. 22 Q. And if one were contemplating the 25856 1 acquisition of a corporation or an interest in a 2 corporation, what would you have relied upon 3 Mr. Iaco to do? 4 A. Well, Mr. Iaco -- I should tell you 5 today he is the chief financial officer of Mission 6 Energy. That's a multi-billion-dollar company, 7 very successful. What he's doing there is mostly 8 merger and acquisition work. I thought he was a 9 very good financial person and a good strategic 10 thinker. 11 Q. When you say "a strategic thinker," you 12 mean he would be looking at corporations to see if 13 they fit into MCO's plans? 14 A. Well, it certainly could be that. But 15 any other company we may have been interested, he 16 would see strategically how you place it, what you 17 do with it. When we bought Simplicity Pattern, as 18 I told you, the pattern basis a buggy whip 19 business. What do we do with it? We brought a 20 fellow named David Lerner in, which is a great 21 strategist; and he's the chairman of Market 22 Research Corporation of America. Dave Lerner and 25857 1 George Kozmetsky and I tried to figure out a 2 way -- the problem with the pattern basis, the 3 inventories are so large and so expensive. And 4 so, we tried to make a change; and we did some 5 very revolutionary things that had a major impact 6 to the company. That is, if your wife went into a 7 store and wanted a particular pattern, that she 8 could get it off of a computer and that then, say, 9 she was a size 4 and, like, number -- whatever 10 this T1012 and that, they could print the pattern 11 right there for her rather than the store keeping 12 it in inventory. That's what I'm talking about, 13 strategic type thinking. 14 Q. How about Paul Schwartz? Who was he? 15 A. Paul Schwartz -- today, he is the 16 president of MAXXAM. He was the financial officer 17 then. Paul Schwartz was the -- he was the 18 youngest chief financial officer of Sally Mae, 19 which as we know is a multi-billion-dollar 20 company, quasi government company. I met Paul 21 because the President of the United States had put 22 Dr. Kozmetsky on the board of Sally Mae, and 25858 1 George thought so highly of him that we -- we 2 hired Paul. 3 Q. And what function did Paul play at MCO 4 as part of the MCO team? 5 A. He was a financial officer. I can't 6 tell you back then what his exact title was. I 7 don't remember. 8 Q. Did he perform financial analysis for 9 you? 10 A. Yes. 11 Q. And who did he report to? 12 A. He reported directly to Bill Leone. 13 Q. Did he also report to Mr. Munitz on 14 special projects? 15 A. Certainly could have. 16 Q. If you gave him a special project, 17 would he report directly to you or to Dr. Munitz? 18 A. Well, we have a pretty informal 19 organization. I think that if we were working on 20 something together, he wouldn't have to go through 21 someone else to talk to me. 22 Q. Now, in 1982, you were located in 25859 1 Houston, were you not? 2 A. Yes. 3 Q. And so was Dr. Munitz, correct? 4 A. Yes. 5 Q. But MCO's headquarters would have been 6 in California? 7 A. Yes. 8 Q. So, Mr. Leone and Mr. Schwartz would 9 have been in California? 10 A. That's correct. 11 Q. Did Mr. Munitz become a contingency 12 duty to assist with the communications between you 13 and the people in California? 14 A. I communicate pretty well by myself. 15 Q. I understand that. 16 If one were unable to reach you or for 17 some reason wanted to get something to your 18 attention, would they go through Dr. Munitz? 19 A. They certainly could. 20 Q. Was that unusual? 21 A. I don't know. I mean, if someone 22 wanted to talk to me from Los Angeles, they would 25860 1 call me. 2 Q. Now, take a look at what's been marked 3 as -- as the next exhibit, which is T1012. And 4 this is the minutes of the board of directors 5 meeting of September 16, 1982. And it indicates 6 here that you reported that Federated Development 7 had recently purchased shares in United Financial 8 Group. 9 Do you see that? I'm sorry. I'm 10 looking at Page 6, which is the only unredacted 11 page. 12 A. Looks like a government document. 13 Q. Now -- actually, this is one of yours. 14 A. I know. I said it looks like one. 15 Q. It starts that -- this is the MCO board 16 meeting and "The chairman next reported that 17 Federated Development Corporation (Federated) had 18 recently purchased shares in United Financial 19 Group." 20 Then it goes on and talks about 21 Dr. Munitz has been invited to join the board of 22 UFG? 25861 1 A. Yes. 2 Q. Was it through your influence that 3 Dr. Munitz was placed on the board of UFG? 4 A. I wouldn't say through my influence. 5 Q. Well, as a result of the fact that 6 Federated owned a block of shares of UFG, is that 7 the reason that Dr. Munitz was placed on the 8 board? 9 A. It certainly didn't hurt. I can't -- 10 you know, I had mentioned before that I had gone 11 to see Mr. Bentley and Mr. Coles and asked them if 12 it made sense to have Barry Munitz on the board. 13 Q. So, then, it was through at least your 14 efforts that Mr. Munitz went on the board? 15 A. Well, I certainly suggested it, as I 16 stated earlier. 17 Q. And you suggested it to Mr. Coles and 18 to Mr. Bentley? 19 A. Yes. 20 Q. And they were then on the board of UFG? 21 A. Well, Bentley was chairman; and Coles 22 was president. 25862 1 Q. Now, do you recall whether Mr. or 2 Dr. Munitz went on the board of USAT at the same 3 time? 4 A. I don't recall. 5 Q. Did you discuss that with Mr. Bentley 6 and Mr. Coles, putting Mr. Munitz on the board of 7 USAT? 8 A. I don't recall. 9 Q. Do you recall subsequent to this time 10 having a discussion with Mr. Bentley and Mr. Coles 11 about Mr. Munitz going on the board of USAT, as 12 well? 13 A. I don't. 14 Q. Do you recall that Mr. Munitz went on 15 the board of USAT? 16 A. I think it was in maybe 1983, maybe 17 1982. 18 Q. And you didn't request -- make a 19 request to anyone that Mr. Munitz be placed on the 20 board of USAT? 21 A. Not that I recall. 22 Q. Now, you then -- the minutes then 25863 1 report that "Mr. Hurwitz indicated that based on 2 his review of UFG, it presented an interesting 3 investment opportunity." 4 What did you mean by that? 5 A. Just what I said before. I mean, I was 6 and am an optimist about Houston and the 7 Southwest. And this was a great way to 8 participate in this great growth that we had and 9 will continue to have. 10 Q. And I notice, then, as a result of your 11 presenting this interesting investment opportunity 12 to the board, the board then voted for MCO to 13 acquire 10 percent of the -- up to 10 percent of 14 the outstanding shares of United Financial Group. 15 Do you see that? 16 A. Yes. 17 Q. Now, turn to the next page, Page 7, and 18 it talks about "resolved." "Resolved further that 19 the corporation enter into a loan agreement and 20 call agreement between the corporation and 21 Federated Development Company." 22 Do you see that? 25864 1 A. I do. 2 Q. And it's a -- that was supposed to be 3 with respect to the possible purchase by Federated 4 of UFG common stock. 5 Do you recall what that's making 6 reference to, sir? 7 A. You know, I think what it was -- again, 8 this is a long time ago. But I think what 9 happened during this period of time is that MCO 10 was going to make an application to purchase up to 11 X percent. So, it didn't have the regulatory 12 approval. And if stock became available -- now, 13 you have to remember, there's only 8 million 14 shares of that stock outstanding; so, it's pretty 15 thinly traded. If stock became available and 16 Federated had approval, that Federated could buy 17 it; and if and only if and when MCO got approval, 18 it could then purchase those shares. I believe 19 that's what it was. 20 Q. Would you take a look at Exhibits T1015 21 and T1014? I believe that 1015 has not been 22 admitted but T1014 is at Tab 9. 25865 1 MR. RINALDI: Is that correct, Terri? 2 Q. (BY MR. RINALDI) So, 1015, which is the 3 letter, has not been admitted. 4 Sir, would you take a look first at 5 T1015 and take a moment to look at that and then 6 look at the fifth page at the signature and tell 7 me if that's yours. 8 A. (Witness reviews the document.) Well, 9 before I read it, that's my signature; and that's 10 Bill Leone's signature. 11 Q. Mr. Leone was signing this letter on 12 behalf of MCO Holdings, and you were signing on 13 behalf of Federated? 14 A. That's correct. 15 Q. And the letter in its first paragraph 16 says it's to set forth the understanding with 17 respect to the call option being granted by 18 Federated Development Corporation to MCO Holdings 19 for certain shares of common stock without par 20 value of United Financial Group, Inc. 21 Do you recall what the purpose of this 22 letter was which purported to give a call option 25866 1 to MCO? 2 A. I think I just explained it a moment 3 ago. 4 Q. When you say you explained it a moment 5 ago -- 6 A. I think I answered your question. 7 Q. What was the answer? 8 A. The answer was as I recall at this 9 time, that MCO Holdings was going to get approval 10 from the regulatory body to own shares. And while 11 that process was happening, that if, in fact, 12 Federated bought shares and if, in fact, MCO 13 Holdings, in fact, got the necessary approvals, 14 that they could call the shares from Federated. 15 Q. And in connection with that, is it your 16 recollection that Federated -- I mean MCO was 17 going to loan the money to Federated to purchase 18 those shares? 19 A. Yes. 20 Q. And is the next document, which is 21 T1014 -- 22 MR. RINALDI: Your Honor, I would move 25867 1 the admission of T1015. 2 MR. KEETON: No objection. 3 THE COURT: Received. 4 Q. (BY MR. RINALDI) Is the next document 5 then the loan agreement with respect to -- between 6 MCO Holdings and Federated? 7 A. (Witness reviews the document.) If you 8 want me to sit here and read this, I guess I can. 9 Is that what you would like for me to do? 10 Q. I would like for you to tell me if that 11 appears to be your signature. 12 A. Yes. 13 Q. And this is the loan agreement that's 14 referenced in T1015? 15 A. It is my signature; and it looks like 16 it's Dr. Leone's signature, as well. 17 Q. So that I understand how the -- how the 18 process was going to work, on behalf of Federated, 19 you executed a loan agreement whereby MCO was 20 going to lend money to Federated, correct? 21 A. For the purchase of shares, right. 22 Q. And then after Federated purchased 25868 1 those shares, Federated gave, on the same date, an 2 option back to MCO to call the shares? 3 A. If, in fact, they got the necessary 4 approval. 5 Q. And take a look at T1025, and maybe 6 this will -- 7 A. I'm sorry. What? 8 Q. T1025 and T -- 9 THE COURT: Mr. Rinaldi, we'll take a 10 short recess. 11 12 (Whereupon, a short break was taken 13 from 10:36 a.m. to 10:57 a.m.) 14 15 THE COURT: Be seated, please. We'll 16 be back on the record. 17 Mr. Rinaldi, you may continue. 18 Q. (BY MR. RINALDI) I believe you should 19 have a copy of T1025 before you. I think this 20 is -- or it's being handed to you. 21 MR. RINALDI: It's Tab 10, is it? I'm 22 sorry. It's not admitted; so, I'm having a copy 25869 1 handed up to the Court. 2 Q. (BY MR. RINALDI) I'll ask you to take a 3 look at this and tell me if you recognize it. 4 A. Here it is. Okay. (Witness reviews 5 the document.) Is the question do I recognize it? 6 Q. Yes. It has your notarized signature, 7 I believe, on the third page? 8 A. It does, indeed; and it looks like my 9 signature. 10 Q. Do you recognize what this document is 11 or purports to be? 12 A. Based on what we were just talking 13 about, I think what this is is a loan that's going 14 from MCO Holdings to Federated Development Company 15 under the call option that we discussed. I think 16 that's what this is. 17 Q. And on the third page of the document, 18 you're obligating Federated to the promissory 19 note, correct, in the amount of $45,000? 20 A. Yes. 21 Q. And then on the first page, it 22 indicates that the proceeds of the loan were used 25870 1 to purchase 10,000 shares of United Financial 2 Group stock? 3 A. Yes. 4 Q. Okay. And let me just ask you: Before 5 we broke, you made reference to the fact that at 6 this point in time, the shares of UFG were rather 7 thinly traded. 8 Do you recall that? 9 A. I do. 10 Q. I think you made reference to the fact 11 that there were only 8 million shares outstanding? 12 A. I think that's correct. 13 Q. How were the UFG shares traded? Was it 14 over the NASDAQ market? 15 A. Yes. 16 Q. And were there several entities that 17 helped make a market in UFG shares that you were 18 aware of? 19 A. I'm sure there were. I'm not aware of 20 them. 21 Q. Drexel Burnham Lambert, were they one 22 of the market makers of UFG shares? 25871 1 A. I have no idea. 2 Q. Did Federated acquire its shares of UFG 3 from Drexel Burnham Lambert during this period of 4 time? 5 A. I have no idea. 6 Q. You say you have no idea. Who would 7 have been responsible for purchasing the shares at 8 Federated once Federated received the loan from 9 MCO? 10 A. Ron Huebsch. 11 Q. Do you know whether Federated ever told 12 Drexel Burnham Lambert that it was interested in 13 acquiring up to 24.9 percent of the outstanding 14 shares of UFG? 15 A. Not that I know of. 16 Q. And you never had a discussion with 17 anyone during this period of time from Drexel 18 Burnham Lambert advising them of Federated's 19 intention to acquire shares of UFG? 20 A. That's correct. 21 Q. Would it surprise you if the majority 22 of the shares that were purchased by Federated of 25872 1 UFG were purchased through Drexel? 2 MR. NICKENS: Does he mean through 3 Drexel as a broker or some other basis? 4 Q. (BY MR. RINALDI) Purchased from Drexel. 5 A. You mean as a market maker? 6 Q. Yeah. 7 A. It wouldn't surprise me if we didn't 8 buy any shares from Drexel. 9 Q. Now, take a look at -- 10 MR. RINALDI: I move the admission of 11 T1025, Your Honor. 12 MR. KEETON: No objection. 13 THE COURT: Received. 14 Mr. Rinaldi, is 1014 in? 15 MR. RINALDI: I don't -- let me just 16 look. 1014, I believe it's in as Tab 9. 17 THE COURT: Thank you. 18 MR. RINALDI: T1015 was not in, and I 19 believe I moved its admission. 20 THE COURT: All right. Thank you. 21 Q. (BY MR. RINALDI) Would you take a look 22 at T1026? Now, you had made reference to the fact 25873 1 that MCO did not have approval from the FSLIC to 2 acquire over 10 percent of the outstanding shares 3 of UFG. 4 Do you recall that? 5 A. No. I think what I said is that at the 6 time, that they did not have the approval, 7 whatever approval was needed. I don't think I 8 said 10 percent of any number. 9 Q. Okay. And T1026 is a letter to Richard 10 Marlin from Mr. James Croft again at the FSLIC in 11 which he states that the Federal Savings and Loan 12 Insurance Corporation does not intend to 13 disapprove the proposed acquisition by MCO 14 Holdings Inc. of controlling United Financial 15 Group, Inc. 16 Do you see that? 17 A. I see that. 18 Q. Now, is this the kind of letter that 19 would have been transmitted to you by Mr. Marlin? 20 A. You know, as I stated earlier, I have 21 no idea whether he gave me this letter or not. 22 Q. Let me ask you this: You were involved 25874 1 in the original suggestion to MCO or presentation 2 at the board meeting to MCO that it acquire shares 3 of UFG, correct? 4 A. That's what I stated. 5 Q. Okay. And then subsequent to that, you 6 executed a call option on behalf of Federated 7 whereby Federated agreed to give a call to MCO for 8 any shares that it acquired of UFG, correct? 9 A. That's correct. 10 Q. And then subsequent -- on that same 11 day, you exercised -- you executed a loan 12 agreement whereby MCO agreed to loan money to 13 Federated for the purposes of acquiring UFG 14 shares, correct? 15 A. Was it the same date? 16 Q. It was. 17 A. Okay. 18 Q. And finally, we see in Exhibit T1025 19 that we just looked at that you have executed a 20 promissory note on behalf of Federated whereby 21 Federated agrees to pay MCO for $45,000 that MCO 22 loaned Federated to purchase 10,000 shares of UFG. 25875 1 Do you recall that document? 2 A. Yes. 3 Q. So, throughout this process, you have 4 been involved in the process by which MCO and 5 Federated were acquiring shares indirectly for the 6 benefit of MCO, correct? 7 A. No. 8 Q. Okay. When you say "no," you mean -- 9 A. We were buying them for Federated, and 10 only if MCO got the necessary approvals would MCO 11 own the shares. 12 Q. And now you get the necessary approvals 13 in T1026. 14 Do you see that? 15 A. Yes. 16 MR. RINALDI: Your Honor, I would move 17 the admission of T1026. I'm sorry. 1026 -- I'm 18 sorry. There is a confusion here. I'm told T1026 19 is in at Tab 10; is that correct? 20 MR. NICKENS: Yes. 21 MR. RINALDI: And T1025 is not in? 22 MR. KEETON: You just got it in. 25876 1 MR. RINALDI: Fine. I'm sorry. 2 Q. (BY MR. RINALDI) Now, after the FSLIC 3 approved Federated -- I mean MCO's acquisition of 4 control of United Financial Group, Inc. on March 5 the 24th, 1982, did MCO commence to purchase 6 directly shares of UFG? 7 A. I don't recall that. 8 Q. Okay. Take a look at Exhibit T1043. 9 MR. RINALDI: I believe this is a new 10 document, Your Honor, although I would swear that 11 it was previously used in this proceeding. But 12 I'm told that this will show up on the computer. 13 Do you have a tab for this? No. 14 Q. (BY MR. RINALDI) Would you take a look 15 at this document, sir? 16 A. (Witness reviews the document.) 17 Q. Now, who was Mr. Lazard? 18 A. He was a financial officer of MCO 19 Holdings. 20 Q. And Mr. F.A. Latronica? 21 A. I think he worked for him. 22 Q. And this is an interoffice memorandum 25877 1 from MCO Holdings, Inc.; is that correct? 2 A. Yes. 3 Q. And are all of the people that are cc'd 4 over there employees of MCO? 5 A. I believe that's the case. 6 MR. RINALDI: Your Honor, I would move 7 the admission of T1043. 8 MR. KEETON: No objection. 9 THE COURT: Received. 10 Q. (BY MR. RINALDI) It purports to attach 11 an updated status of UFG -- United Financial 12 Group, Inc. stock purchased through June 30, 1983. 13 Do you see that? 14 A. Yes. 15 Q. Now, if you turn to the first full page 16 of the document which bears the -- of the 17 attachment which bears the Bates stamp 18 No. OW008952, it lists a number of purchases of 19 stock of UFG that were made between 12/30/1982 and 20 6/29/1983. 21 Do you see that? 22 A. I do. 25878 1 Q. And these are purchases of UFG shares 2 by MCO Holdings, Inc. 3 Do you see that? 4 A. Yes. 5 Q. And with the exception of -- well, who 6 was Rotan/Mosle? 7 A. Rotan/Mosle is the largest stock 8 brokerage firm in Texas. 9 Q. With the exception of approximately 10 33,000 shares that were purchased through 11 Rotan/Mosle, all of the rest of the purchases 12 between 11/30/28 and 6/29/83 were made through 13 Drexel. 14 Do you see that? 15 A. I see 70,000 shares bought through Bear 16 Stearns. 17 Q. Well, are you looking at the same page 18 I am? It's OW008952. 19 A. Yes. 20 Q. And these are shares of UFG that are 21 purchased by MCO, correct? 22 A. Yes. 25879 1 Q. I believe the next page refers to MCO's 2 purchase of First American Financial of Texas. 3 Do you see that? 4 A. Yes. 5 Q. So, they would be different shares, 6 correct? 7 A. Yes. 8 Q. Okay. Now, what I'm trying to focus in 9 on is the purchases of shares by MCO of UFG shares 10 after November 24th, 1982, which is the date that 11 the FSLIC approved or -- I'm sorry -- indicated 12 that it did not intend to disapprove MCO's 13 acquisition of control of United Financial Group. 14 Do you see that? 15 A. Yes. 16 Q. We looked at that document. And on the 17 24th, that was sent to Mr. Marlin. And then we 18 see on the 30th, MCO begins to purchase shares of 19 UFG. 20 Do you see that? 21 A. Yes. 22 Q. Now, at this point in time, did MCO 25880 1 inform Drexel of its interest to acquire up to 2 24.9 percent of the outstanding shares of UFG? 3 A. I told you before, I have no idea. It 4 was a public document. I guess they could have 5 read it. What does that have to do with this? 6 Q. Well, I'm just asking you: Did you 7 have any discussions with anyone at Drexel to 8 advise them of your interest in acquiring up to 9 24.9 percent of the outstanding shares of UFG? 10 A. I told you that I did not have any 11 knowledge of that, no. 12 Q. But this document would reflect that 13 the substantial majority of these shares acquired 14 by MCO between -- of UFG between November 1982 and 15 June 1983 were through Drexel, correct? 16 A. Well, I assume they were a market 17 maker. 18 MR. KEETON: Wait a minute. That's not 19 right. Those First American shares and then the 20 Bear Stearns shares and the AFC shares -- 21 MR. RINALDI: You know, Mr. Keeton, I 22 asked him whether the shares acquired by UFG 25881 1 from -- of UFG by MCO. Now, if you wish to go 2 through the shares of First American, that's 3 certainly appropriate for you to do on redirect or 4 cross-examination. But I'm asking him: Did MCO 5 purchase UFG shares? My understanding is he said, 6 "Yes, they did." 7 THE WITNESS: Right. 8 MR. RINALDI: And it would indicate 9 that the substantial majority of the shares of UFG 10 that were purchased by MCO between 11/30/1982 and 11 6/29/1983 were through Drexel. 12 Q. (BY MR. RINALDI) Is that a fair 13 statement, sir? 14 A. That's a fair statement. 15 Q. Now, Mr. Keeton raised the point that 16 there were First American Financial of Texas stock 17 purchased. 18 What was First American Financial of 19 Texas, sir? Do you recall? 20 A. Yes. It was a savings and loan holding 21 company in Texas. 22 Q. And did there come a time when UFG was 25882 1 contemplating a merger with First American 2 Financial of Texas? 3 A. Yes, there was a merger. 4 Q. And in connection with that merger, did 5 MCO purchase a block of First American Financial 6 of Texas shares? 7 A. Yes. 8 Q. Do you recall how that purchase of the 9 shares of First American Financial of Texas came 10 about? 11 A. Yes. There's a company called American 12 Financial Corp. in Cincinnati, Ohio, a gentleman 13 named Carl Lender. He was the chairman of that 14 company, and it was in their proxy that he owned 15 that block of stock. I called him -- this was 16 after an announcement had been made of the merger. 17 I asked him would he sell the shares and at what 18 price. And after going back and forth a little 19 bit, we ended up buying the shares. 20 Q. And if you take a look at the previous 21 exhibit that we just looked at, the second page 22 which Mr. Keeton brought to our attention, if you 25883 1 run your finger down the side, it indicates "AFC" 2 and -- do you see where that is? 3 A. I do. 4 Q. Then you go over, and it says 12/23/82. 5 The settlement date: 12/27/82. 6 Do you see that? 7 A. I do. 8 Q. And it indicates that there were 9 603,448 shares acquired from First American 10 Financial of Texas from Mr. Lender; is that 11 correct? 12 A. Yes. 13 Q. That was a total purchase price of, it 14 looks to be, 2,640,085? 15 A. Yes. 16 Q. Now, take a look at Exhibit T1032, sir. 17 And turn to the last page and tell me if that's 18 your signature that appears there in the minutes 19 on the board of directors. 20 A. Yes. 21 Q. And is this the board meeting at which 22 you reported to MCO the opportunity to purchase 25884 1 the shares from Mr. Lender? 2 A. It appears to be. 3 Q. Now, at this point in time, First 4 American Financial was planning a merger, is that 5 correct, with -- 6 A. Yes. 7 Q. And by acquiring First American 8 Financial shares when the merger took place, that 9 would provide you with shares that would be 10 convertible into United Financial Group shares? 11 A. I don't know about convertible. 12 Exchanged for shares. 13 Q. Okay. I'm sorry. I used an 14 inarticulate term. 15 A. Yes. 16 Q. Is it fair to say that the purpose for 17 acquiring the First American Financial of Texas 18 shares was to acquire an interest that would later 19 be converted into United Financial Group shares? 20 A. Yes. As I stated, I believe at that 21 time that a merger had been announced and a 22 certain exchange ratio. 25885 1 Q. And according to this, it states about 2 half -- well, about a quarter of the way down in 3 the paragraph, it says, "Dr. Munitz noted that on 4 August 27th, 1982, First American Financial of 5 Texas and United Financial Group entered into a 6 definitive agreement for the merger." 7 Dr. Munitz, by this point, has been on 8 the board of UFG for several months. Do you see 9 that? 10 A. (Witness nods head affirmatively.) 11 Q. Did you have regular conversations with 12 Dr. Munitz regarding the operations of UFG? 13 A. I'm certain that I did. 14 Q. Was it Dr. Munitz that brought to your 15 attention the fact that there was going to be a 16 merger of First American Financial of Texas? 17 A. It was publicly announced. I don't 18 know how I got my information. 19 Q. However you learned it, then you went 20 to Mr. Lender and offered to buy the shares; is 21 that correct? 22 A. Yes. I know before I ever got 25886 1 involved, they -- Jim Coles and Sonny Bentley had 2 worked on this merger for some period of time. 3 Q. Now, as you go down the page further, 4 it indicates that the corporation and Federated 5 Development Company, Inc. (Federated) currently 6 owned 19 percent in the aggregate of UFG common 7 stock. Then it says that if the merger takes 8 place, that you would -- Federated and MCO would 9 collectively own less than 24.9 percent. 10 Do you see that? 11 A. I do. 12 Q. And after -- let me ask you this: Did 13 you recommend, then, to the board that they 14 approve the purchase of this block of First 15 American Financial shares of Texas? 16 A. Well, I don't know that I recommended 17 it. I certainly was in favor of it. 18 Q. So, you were a proponent? 19 A. Absolutely. 20 Q. And they went along or agreed with you? 21 A. They did. They agreed to purchase it. 22 I don't know if they agreed with me, but they 25887 1 agreed to purchase it. 2 Q. Okay. And then -- now, take a look at 3 Exhibit T1036. 4 Did there come a time following the 5 merger that UFG then converted its shares of First 6 American Financial into shares of United Financial 7 Group? 8 A. Yes. 9 Q. And does this appear to be the board 10 minutes -- when I say "this," I mean T1036. Does 11 this appear to be the board minutes of MCO, board 12 meeting on March 21st, 1983, at which the 13 conversion of those shares was approved? 14 A. (Witness reviews the document.) 15 Q. Or the exchange, I suppose, to be more 16 precise. 17 A. No, I understand. I would say that it 18 looks that way. 19 Q. Okay. Now -- and I notice that as a 20 result of the conversion, it says on the first 21 page, "If the merger is consummated as planned, 22 UFG will be the surviving entity and the 25888 1 corporation and Federated Development Company will 2 hold approximately 24.9 percent of the outstanding 3 common stock of UFG." 4 Do you see that? It's on the first 5 page -- I mean -- not the first page. The 6 preceding page that has the Bates stamp -- that 7 is, the first page. It's OMX15561. 8 Do you see where it indicates that 9 Federated and MCO would acquire -- 10 A. I see that. That doesn't look right to 11 me because Federated wouldn't own 24.9 percent. 12 Q. Well, it says "the corporation." In 13 this case, the corporation refers to MCO. 14 Do you see that? 15 A. The surviving entity and the 16 corporation and Federated Development will own 17 approximately 24.9 -- I see that. I'm assuming 18 "the corporation" means MCO Holdings. 19 Q. Okay. 20 A. Yes, I see that. 21 Q. Now, what was your understanding as to 22 the 24.9 percent number? Why was it desirable to 25889 1 stay below the 25 percent figure? 2 A. Well, it's -- it's pretty simple math. 3 If you own below 25 percent is one test. And 4 above 25 percent, if you have the net worth 5 maintenance, you have 100 percent liability. I 6 remember one time that I was in 7 Washington, D.C. -- I think it was in late 1987, 8 and I had a few minutes. And I went to the Home 9 Loan Bank Board, and I asked if any of the 10 directors were there. And a fellow named Danny 11 Wall was in. I think he was chairman at the time. 12 It was lunchtime, and he was having a sandwich at 13 his desk. And I went in and visited with him 14 about net worth maintenance. I said, you know, 15 "To me, it seems kind of silly that you'll never 16 get anybody with any substance to sign the -- to 17 go over 24.9 percent without your approval. Why 18 would anybody take 100 percent liability?" 19 He said, "No one would. The only 20 people who ever sign such a thing like that is the 21 people with no money." 22 And he proceeded to ask if I would like 25890 1 to do American Savings, which was later bought by 2 Bob Bass in Fort Worth, Texas. We talked about 3 that; but we'll get into that, I'm sure. That was 4 in the Southwest Plan. 5 Q. Now, sir, when you acquired up to 6 24.9 percent of the outstanding shares of UFG, you 7 were aware, were you not, of the regulatory 8 limitations that would be imposed upon MCO and 9 Federated were they to exceed the 25 percent 10 level? 11 A. Yes. I think this says "approximately 12 24.9." It doesn't say "24.9." 13 Q. Well, after you acquired approximately 14 24.9 percent of the outstanding shares of UFG, do 15 you recall that an application was made to the 16 Federal Home Loan Bank, an H-(e)-1 application for 17 approval of a proposed acquisition by MCO of 18 additional shares of common stock of UFG -- 19 A. I do. 20 Q. -- up to 35 percent? 21 A. Excuse me. 22 Q. Do you recall that? 25891 1 A. I do. 2 Q. Now, was that something you discussed 3 in advance with Mr. Munitz or members of your 4 staff? 5 A. Yes. 6 Q. And what was at this point the reason 7 why MCO and Federated wanted to acquire up to 8 35 percent of the outstanding shares of UFG? 9 A. Well, as I stated earlier, I think at 10 that time the merger was about to happen or had 11 happened; and it needed -- any financial 12 institution needs more equity. And we wanted to 13 supply more equity to the institution, and we 14 thought this was a wonderful investment 15 opportunity. 16 Q. I'm sorry. What was a wonderful 17 investment opportunity? 18 A. To own more stock in United Financial. 19 Q. But if you went out and bought shares 20 on the open market, how would that infuse equity 21 into -- 22 A. Later, we bought preferred stock that 25892 1 went directly into the company. It doesn't say 2 you have to buy shares directly in the market to 3 get to 24.9. You could have a rights offering. 4 There's a lot of things you could do. 5 Q. So -- but I believe in your -- 6 A. I don't think it's limited to buying 7 shares -- that's one way of doing it -- in the 8 open market. I think you could buy shares from 9 the company, as well. 10 Q. Well -- but take a look at the second 11 paragraph. I'm sorry. Let's take a look at the 12 application, see if that may -- is this the -- 13 yeah. This is T4040, Tab 13. 14 A. Well, the fact is that we bought 15 preferred shares that went directly into the 16 company later. So, I mean, that's the answer. I 17 mean, we did that. We invested some $10 million 18 of equity into the company. 19 Q. Well, we'll get to that; but I want to 20 sort of try to -- to hone in on what was going on 21 at this point. It says, "During the next" -- do 22 you see the second full paragraph of Tab 13, 25893 1 T4040? It says, "MCO and Federated currently own 2 12.3 and 10 percent respectively of the 3 outstanding shares or an aggregate of 4 approximately 22.3 percent of the outstanding 5 shares. During the next 12 months, MCO proposes 6 to acquire additional shares in the open market or 7 otherwise." 8 Do you see that? 9 A. I do. 10 Q. And so, the "otherwise" refers to your 11 intention to issue -- to acquire preferred shares; 12 is that correct? 13 A. I didn't say it was an intention. I 14 just said it's something that could happen, which 15 did happen. 16 Q. Well, at this point, did you 17 contemplate purchasing shares in the open market? 18 A. I have no idea. I mean, we were going 19 to do nothing unless we had assurances that it 20 wouldn't trigger this net worth maintenance. It's 21 something we would never do. 22 Q. Now, turn to Page 37 and I have a 25894 1 couple of questions that I would like to ask you 2 about. 3 A. In this particular document? 4 Q. Yeah. It would be OW010501. Now, let 5 me just ask you this: As the chief executive 6 officer of UFG, did you approve of Mr. Marlin 7 filing this application on behalf of MCO and 8 Federated? 9 A. I can't tell you that. I don't know 10 that. 11 Q. You don't know that? You mean 12 Mr. Marlin just went off and filed this thing on 13 his own? 14 A. No, but that doesn't mean I read it 15 before he filed it either. 16 Q. Now, wouldn't Mr. Marlin have discussed 17 with you the application? 18 A. He would have discussed with people in 19 our organization this, that's correct. 20 Q. Wouldn't he also have reflected the 21 thinking of you and the organization regarding the 22 proposal? 25895 1 A. Well, I don't know what this particular 2 document says; so, I don't know that. 3 Q. Well, Mr. Marlin would have made every 4 effort to accurately represent the intentions of 5 the corporation to the Federal Home Loan Bank, 6 wouldn't he? 7 A. I'm certain of that. 8 Q. You don't recall as you sit here today 9 whether you discussed with Mr. Marlin your 10 intentions or the intentions of MCO with respect 11 to the acquisition of shares? 12 A. I would say the chances are very remote 13 that I did that, but it's certainly possible. And 14 I certainly had discussions with people inside the 15 company. 16 Q. And who would you have had those 17 discussions with? Barry Munitz? 18 A. Certainly Barry Munitz would have been 19 a person -- 20 Q. In fact, Barry Munitz was the guy that 21 handled issues related to the net worth 22 maintenance issue, didn't he? 25896 1 A. Barry was certainly very much involved 2 in that, yes. 3 Q. And with respect to the H-(e)-1 4 application, was he also involved in the process 5 of the filing? 6 A. I seem to believe he was, yeah. 7 Q. And I notice that if you look on the 8 third page, a copy of it was sent to both you and 9 Mr. Munitz, correct? 10 A. Let me see. That's on the third page? 11 Q. Yes. 12 MR. NICKENS: A copy of the letter? 13 MR. RINALDI: Yes. 14 Q. (BY MR. RINALDI) So, you were aware, 15 were you not, that the letter was being sent to 16 the Federal Home Loan Bank Board? 17 A. (Witness reviews the document.) Well, 18 I don't see my name on here. If you could help me 19 out a little bit. 20 Q. If you look at the third page -- I 21 thought I saw -- under "Howard Bressler," it says 22 "blind copy." It says "Charles Hurwitz." 25897 1 Do you see that? 2 A. I'm sorry. I don't. 3 Q. Perhaps you're not looking at the cover 4 letter. 5 A. Okay. 6 Q. Are you looking at the -- 7 A. Oh, okay. Oh, yes. Sorry. I was 8 looking inside the document. I see "blind copy, 9 Charles Hurwitz," yes. 10 Q. Okay. Now, take a look at Page 37. 11 And if you go down about halfway down, a little 12 over halfway down in the paragraph to the -- about 13 the 11th line down, there's a sentence that begins 14 "MCO and Federated believed." 15 Do you see that? 16 A. Yes. 17 Q. It says, "MCO and Federated believed 18 that the financial services industry is entering 19 into a period of rapid growth, diversification, 20 and change." 21 Do you see that? 22 A. I do. 25898 1 Q. Were you aware that the asset capital 2 ratio for savings and loans was 33 to 1? 3 A. No, I don't think I've ever heard that 4 number before. 5 Q. Well, did you understand that by 6 acquiring a savings and loan, that you could take 7 advantage of substantial leverage? 8 A. Well, I don't believe that I would want 9 to take advantage of anything. 10 Q. Well, did you understand that by making 11 a 3 percent investment in a savings and loan, that 12 you could acquire a much larger investment in the 13 savings and loan? 14 A. No, I don't think I ever thought about 15 that. 16 Q. What does it mean when it says "MCO and 17 Federated believe that the financial services 18 industry is entering into a period of rapid 19 growth, diversification, and change"? 20 A. Well, in fact, that was -- that is 21 exactly what has happened. 22 Q. And in your own words, what did that 25899 1 mean? 2 A. Well, I mean, just like what's 3 happening in the world today with all the mergers 4 and the diversification that's going on in the 5 financial industry. I mean, it has changed ever 6 since the early Eighties and even before. There 7 has been a lot of diversification in it and a 8 tremendous amount of change and a lot of growth in 9 it, an enormous amount of growth in it. 10 Q. At this point in time, were you aware 11 that the Garn-St. Germain statute had been passed 12 that expanded the types of activities in which 13 S&Ls could engage? 14 A. I don't know if I did or not at that 15 time. 16 Q. You say you don't know if you did or 17 not at that time? 18 A. Right. I mean, I later learned about 19 that, that change; but I can't tell you at this 20 time that I was familiar with that. I would doubt 21 that I was, but it's possible. 22 Q. And what did you understand was the 25900 1 effect of Garn-St. Germain upon the types of 2 activities that S&Ls could engage in? 3 A. I think it added a lot more flexibility 4 to the type of investments that a savings and loan 5 could make. It's a larger diversification. 6 Q. Did you discuss that with others at MCO 7 and Federated, that S&Ls had expanded investment 8 powers? 9 A. I don't know if I did or not. 10 Q. Was that a factor in your own mind that 11 made UFG, because of its 100 percent ownership of 12 USAT, an attractive investment? 13 A. No. 14 Q. So that when you acquired the interest 15 in UFG, you had no interest in the expanded 16 investment powers of the subsidiary entity? 17 A. I think those powers, they kind of 18 evolved. All of this thing evolved over a period 19 of time. There's clearly no master plan here. 20 Q. Were you aware that S&Ls could, under 21 the expanded legislation, invest in common stock? 22 A. At some point in time, I became aware 25901 1 of that, yes. 2 Q. When would you have become aware of 3 that? 4 A. Well, I don't know. I couldn't tell 5 you. 6 Q. And were you -- 7 A. I think they could have always 8 invested. It's a question of how much. 9 Q. Were you also aware that an S&L could 10 purchase high-yield bonds? 11 A. I don't know that I knew that at this 12 time. 13 Q. Did you believe that by -- 14 A. I doubt that I did. I think I learned 15 that quite a bit later. 16 Q. When you say "quite a bit" -- 17 A. Well, within a year or so later. 18 Q. So, while the H-(e)-1 application was 19 still pending? 20 A. When was the application filed? 21 Q. You have it in front of you. It was 22 filed on the 29th of June 1983. 25902 1 A. You know, I don't know that I ever 2 thought about that, what their investment powers 3 were. 4 Q. But there did come a time when you 5 became very much aware of their investment powers, 6 did you not? 7 A. I wouldn't say very much aware. I 8 became aware. Is very much aware more than aware? 9 Q. And as a result of that awareness, you 10 made certain proposals regarding the future 11 investment activities of UFG, did you not? 12 A. I would say that that's a misstatement. 13 Q. Now, the next statement on that same 14 page says, "MCO and Federated's investment in UFG 15 will enable them to participate in an increasingly 16 diversified financial interest -- diversified 17 financial services industry." 18 How did you anticipate that MCO and 19 Federated would participate through the ownership 20 of UFG and USAT in an increasingly diversified 21 financial services industry? 22 A. Well, if I own 1 percent of Chrysler, 25903 1 then I get to participate in 1 percent of their 2 prosperity. 3 Q. And if you own 24.9 percent of UFG, 4 then you get to participate in 24.9 percent of 5 their prosperity? 6 A. You got it. 7 Q. So, this was just an equity investment 8 as far as you were concerned? 9 A. That's what it was. 10 Q. Other than as an equity investment, did 11 you perceive any other benefits from MCO and 12 Federated's participation in the ownership of UFG? 13 A. Well, what do you -- I don't know what 14 "benefits" means. Did I get a yacht? No. Did I 15 get a car? No. Did they pay any of my expenses? 16 No. Did I get any other perks? No. 17 Q. Did you perceive it as assisting you, 18 potentially, in other activities that MCO and 19 Federated might then have been engaged in? 20 A. No. 21 Q. Now -- I'm just now trying to figure 22 out what these sentences here mean in the H-(e)-1 25904 1 application as you understood it. 2 It says then, "UFG and USAT will 3 benefit from MCO and Federated's experience in 4 real estate development sales as well as MCO and 5 Federated's investment expertise in the financial 6 markets." 7 Do you see that? 8 A. I do. 9 Q. What expertise did MCO and Federated 10 have in the financial markets at this time? 11 A. Well, we had -- with Ron Huebsch and 12 others, we had developed a pretty -- and to some 13 degree myself -- a pretty good expertise in 14 investing, I would say. 15 Q. And Mr. Huebsch was a specialist in 16 equity arbitrage, was he not? 17 A. Well, you have to look at Mr. Huebsch's 18 history. Mr. Huebsch is an attorney by education. 19 When I first met Mr. Huebsch, he was the president 20 of Fairfield Mutual Fund, which is an open-end 21 mutual fund which had the best record that year of 22 any open-end mutual fund. So, that was not equity 25905 1 arbitrage. Mr. Huebsch knew a lot about the bond 2 markets. He knew a lot about investing in 3 general. So, I wouldn't -- certainly, he knows a 4 lot about equity arbitrage. 5 Q. And he ultimately did become involved 6 in equity arbitrage with respect to USAT, did he 7 not? 8 A. That's correct. 9 Q. Now, did -- it indicates here that UFG 10 and USAT would benefit from Federated's experience 11 in the financial markets. 12 Did Federated and MCO also have 13 experience in the high-yield bond market? 14 A. Certainly we understood it. We had 15 bought high-yield bonds from time to time. 16 Q. And was that one of the areas that -- 17 of experience that you anticipated USAT and UFG 18 would benefit from as a result of Federated's 19 expanded involvement in UFG and USAT? 20 A. I can't tell you that. I don't know. 21 Q. So, you don't know what this is 22 referring to when Mr. Marlin writes this in the 25906 1 H-(e)-1 application? 2 A. Well, I think I do. It's just that we 3 had inside the company, I think, a lot of 4 expertise in real estate and investing. 5 Q. And investing, we're talking about 6 stock? 7 A. All kinds of investing. 8 Q. High-yield bonds? 9 A. Pretty successful people. 10 Q. Were you pretty knowledgeable in the 11 area of mortgage-backed securities, as well? 12 A. I wasn't, no. 13 Q. Did you have anybody within the company 14 who was knowledgeable on that subject? 15 A. Oh, maybe Ron Huebsch had some 16 knowledge on it. 17 Q. Is that what's being contemplated here 18 in this application? 19 A. I don't think anything was 20 contemplated. I think it's just the ability -- 21 Q. I'm trying to understand what the 22 representation is to the Bank Board. 25907 1 A. Just flexibility. 2 Q. Just flexibility? Okay. Now, at the 3 bottom of the page, it says, "MCO and Federated 4 also anticipate that they will be able to 5 facilitate access to the capital markets." 6 What was that referring to? 7 A. I think just what it says. We were 8 pretty well-known in Wall Street and continue to 9 be, and we have a lot of availability to the 10 capital markets. 11 Q. And were there any particular 12 Wall Street firms that you did most of your 13 business with? 14 A. Well, we did a lot of business -- 15 United Financial did a lot of business with 16 Goldman Sachs, Salomon Brothers, Lehman. 17 Q. Not United Financial. I'm talking 18 about MCO and Federated. 19 A. And MCO and Federated. Bear Stearns. 20 I would say most of the firms. Merrill Lynch. 21 Q. Did you do a lot of business with 22 Drexel Burnham Lambert? 25908 1 A. Did a lot of business with Drexel 2 Burnham. 3 Q. More so than the others? 4 A. Depends on the time frame. We did a 5 lot of business with a lot of people over the 6 years. We tried to do -- we try to keep all of 7 our avenues open in Wall Street and do a pretty 8 good job at that. 9 Q. I don't want to get too deeply into 10 that because I think Mr. Guido has some further 11 questions on that. 12 A. One would hope. 13 Q. As a result of filing the H-(e)-1 14 application, did you subsequently learn that, in 15 fact, the Bank Board did take the position that it 16 would require a net worth maintenance commitment 17 in order for Federated and MCO to exceed the 18 25 percent -- if it exceeded the 25 percent 19 ownership? 20 A. I never understood it; but it mentioned 21 something about pro rata, which they never could 22 explain. And we never knew what it meant, but it 25909 1 didn't matter because we wouldn't accept it. 2 Q. Would you take a look at -- 3 THE COURT: Mr. Rinaldi, were you going 4 to offer T1036? 5 MR. RINALDI: Yes, Your Honor. I'm 6 sorry. 7 MR. KEETON: No objection, Your Honor. 8 THE COURT: Received. 9 Q. (BY MR. RINALDI) Now, once the H-(e)-1 10 application was filed, what was the role of 11 Mr. Munitz with respect to the net worth 12 maintenance obligation or issue? 13 MR. EISENHART: Your Honor, Mr. Rinaldi 14 has handed the witness a document; and the witness 15 is reading it. And none of the rest of us are 16 clued in at this point on what the document is. 17 THE COURT: Would you identify the 18 document? 19 MR. RINALDI: It's Tab 14, T1044. 20 THE COURT: What's the exhibit number? 21 MR. RINALDI: It's Exhibit T1044, 22 Tab 14. 25910 1 THE COURT: Thank you. 2 Q. (BY MR. RINALDI) Did Mr. Munitz take on 3 any special role with respect to the net worth 4 maintenance issue that we've been talking about? 5 A. Well, I don't know about special role. 6 As I testified earlier, Dr. Munitz was certainly 7 involved in the H-(e)-1 process and all the 8 regulatory filings that we had. 9 Q. Well, do you recall in your deposition 10 identifying him as the point person with respect 11 to net worth maintenance issues? 12 A. I don't recall that in my deposition. 13 I certainly wouldn't -- I think that he certainly 14 was the point man or one of the point people. 15 Q. For Federated and MCO? 16 A. Yes. 17 Q. And in that regard, did he report 18 directly to you on the progress with respect to 19 the net worth maintenance issue? 20 A. Well, when you say reported directly to 21 me, I mean, we would talk about it. He would keep 22 everybody informed. Clearly, he would talk to 25911 1 Dr. Leone. He would talk to the board of 2 directors about this. 3 Q. What was Dr. Leone's involvement in the 4 net worth maintenance condition? 5 A. Well, he was president, as you know, of 6 MCO Holdings. And it was -- it would have been 7 disastrous to have a net worth maintenance 8 obligation for MCO. It would put them out of 9 business. 10 Q. If that's the case, then it was 11 important for you as the chief executive officer, 12 as well, was it not? 13 A. Absolutely. 14 Q. And you occupied the office next to 15 Mr. Munitz during this period of time, did you 16 not? 17 A. I did. 18 Q. And he kept you regularly apprised as 19 to what was going on, didn't he? 20 A. I assume he did. 21 Q. And you took a very personal interest 22 in the progress of those discussions, didn't you? 25912 1 A. Well, I would say so. 2 Q. Did there come a point in time that you 3 recall that the Bank Board approved the H-(e)-1 4 application? 5 A. I think so, yes. 6 Q. And prior to its approval, do you 7 recall that there had been informal discussions 8 with or there had been, quote, "discussions" of 9 some sort with the Federal Home Loan Bank of 10 Dallas regarding the net worth condition? 11 A. I don't recall that. 12 Q. Take a look at T1044. And you 13 mentioned the pro rata requirement; that is, that 14 MCO maintain a pro rata portion of additional 15 equity capital in -- or infuse additional equity 16 capital in a pro rata amount into USAT in the 17 event that they acquired control of UFG. 18 Do you recall we discussed that? 19 A. I do. 20 Q. And that issue had come up, had it not, 21 long before the actual approval of the net 22 worth -- of the H-(e)-1 application? 25913 1 A. I don't recall that. 2 Q. Do you recall Mr. Munitz discussing -- 3 well, take a look at T1044. Do you recall having 4 seen this document before? 5 A. I do not. 6 Q. Okay. But it -- is this the kind of 7 communication that Mr. Munitz would have brought 8 to your attention or advised you about as it 9 pertained to the net worth commitment? 10 A. Well, I don't -- I notice I'm not 11 copied on the document here. But, I mean, he 12 could have given me this exact piece of paper. 13 Q. But he did keep you apprised of what 14 was going on? 15 A. He did. 16 Q. Take a look, then, at T1059. This is 17 Tab 15. 18 Now, this is the actual cover letter 19 that was sent to Mr. Bressler at MCO Holdings from 20 Charles Denson, the supervisory agent, with a copy 21 of the Resolution No. 84-712 attached which is 22 dated September 6th, 1984. 25914 1 Did you receive a copy of this? 2 A. Not that I recall. 3 Q. Now, take a look at Paragraph 4. 4 A. On the front page? 5 Q. I'm sorry. It's the third page into 6 the document, OMX22878. And read that paragraph 7 to yourself. 8 A. (Witness reviews the document.) 878? 9 Q. 878, that's correct. 10 A. No. 5? 11 Q. It's No. 4. It's Page 2, 84-712. 12 A. "For as long" -- 13 Q. Yes. Read that to yourself. 14 A. What does that say there? 15 Q. "Directly or indirectly." 16 A. (Witness reviews the document.) 17 Q. Have you had a chance to look at that? 18 A. I read it, yes. 19 Q. Does that appear to be the condition -- 20 the net worth condition that you described a 21 moment ago; that is, if you -- if MCO and 22 Federated acquired up to 50 percent of the 25915 1 outstanding shares of UFG, they would have a 2 pro rata obligation to maintain the net worth up 3 to the amount of shares that they owned? 4 A. I see that, yes. 5 Q. And then there's a second part to it 6 that says, "If applicants acquire additional 7 voting shares of UFG, directly or indirectly, such 8 that their aggregate holdings voting shares of UFG 9 exceeds 50 percent of the outstanding voting 10 shares of UFG, applicants shall contribute 11 100 percent of any additional capital that may be 12 required." 13 Do you see that? 14 A. Yes, I do. 15 Q. That's the 100 percent requirement you 16 spoke of earlier, correct? 17 A. Yes. 18 Q. That's what you understood was the 19 condition that was being imposed as a condition of 20 the holding company application? 21 A. I'm not sure I can sit here and say 22 that today, but that's in general what I remember. 25916 1 Q. Now, on the first page of the 2 resolution, OMX2877, do you recall that it -- that 3 the resolution originally required that the 4 proposed acquisition would be consummated within 5 120 days? 6 A. Are you asking me if I recall that? 7 Q. Yes. 8 A. No, I don't. 9 Q. Do you recall that there was a temporal 10 limit placed upon the time during which MCO and 11 Federated could acquire the shares? 12 A. Well, what I recall is that we had 13 numerous of these applications. And I can't tell 14 you if that's because they had terminated or 15 because there was some little change. But I know 16 that there were more than one. I think there were 17 three or four or five of these H-(e)-1 18 applications. Maybe it's because 120 days ran 19 out. 20 Q. Okay. But you don't recall that there 21 would be an extension of the 120-day period 22 periodically? 25917 1 A. I recall that there were extensions. I 2 don't recall if the 120 days -- and I don't recall 3 if the extensions had something to do with maybe 4 some change in the application. That, I don't 5 recall. 6 Q. Well, do you recall that periodically 7 Mr. Munitz would come to you and say, "We're still 8 working on the deal, and we need more time. We're 9 going to seek an extension"? 10 A. You know, I recall that Barry would 11 come in and visit with me about this and say that, 12 you know, we're not there and he would give me an 13 update on it. And I do know we -- filed for 14 extensions, I think, is the right word. 15 Q. Now who was William Eckland? 16 A. He was an attorney. 17 Q. And do you recall that Mr. Eckland was 18 involved in the negotiations or the discussions of 19 the Federal Home Loan Bank Board regarding the net 20 worth conditions imposed under Paragraph 4 of 21 Resolution 74-172? 22 A. I don't think I ever knew Mr. Eckland 25918 1 directly. That's not to say I didn't talk to him. 2 I may have. I don't remember meeting him. But I 3 know that he was one of the regulatory lawyers 4 that worked on this. 5 Q. He would have worked with Mr. Munitz; 6 is that correct? 7 A. He would have worked with Mr. Munitz. 8 The general counsel of MCO Holdings was a 9 gentleman named Howard Bressler, and I know that 10 Paul Schwartz worked on it. We had a lot of 11 lawyers. Not as many as we have today. 12 Q. Take a look at T1113. It's Tab 68. 13 A. (Witness reviews the document.) What 14 was the page? I'm sorry. 15 Q. I haven't given you the page yet. This 16 is a letter to Julie Williams, and it's signed by 17 Mr. Eckland. It doesn't indicate that you 18 received a copy, but I do have a couple of 19 questions I wanted to ask you about it. 20 A. Okay. 21 Q. Take a look at Page 2. And if you look 22 at the second sentence in the first full paragraph 25919 1 there, it starts off by saying, "Holding company 2 would be interested in discussing the possibility 3 of being relieved of any obligation to maintain 4 the regulatory net worth of United under 5 circumstances where its ownership interest in UFG 6 does not exceed 50 percent of UFG's voting stock." 7 Do you see that? 8 A. I do. 9 Q. And were you aware that Mr. Eckland and 10 Mr. Munitz were proposing to the Federal Home Loan 11 Bank Board that UFG -- I mean that if MCO and 12 Federated acquired less than 50 percent of the 13 outstanding shares of UFG, they were trying to 14 obtain a mechanism where they would not have a net 15 worth maintenance obligation? 16 A. I can't tell you that I remember that 17 today. 18 Q. Let's run down to the beginning of the 19 next paragraph. It says -- it talks about "As 20 discussed in greater detail below, holding company 21 requests a modification to the net worth 22 maintenance provision in the order so that the 25920 1 holding company would not be obligated to infuse 2 capital to maintain the net worth of United unless 3 and until holding company acquires control of 4 greater than 50 percent of UFG's outstanding 5 voting stock." 6 Do you see that? 7 A. I see that. 8 Q. Do you recall discussing with 9 Mr. Munitz that a net worth maintenance obligation 10 would not be objectionable so long as it only took 11 effect if MCO and Federated acquired over 50 of 12 the outstanding shares of UFG? 13 A. I do not recall that. 14 Q. Now, if you would skip down to the last 15 sentence on that page, it says, "In exchange for 16 obtaining a waiver of the net worth maintenance 17 commitment when its ownership interest in UFG does 18 not exceed 50 percent, holding company would agree 19 to raise 40 million of capital for United within 20 18 months following the date on which holding 21 company acquires control of UFG." 22 Do you see that? 25921 1 A. I do. 2 Q. Do you recall that -- discussing with 3 Mr. Munitz -- that if the Bank Board were willing 4 to waive the obligation to maintain the net worth 5 of UFG, except in the instance when MCO and 6 Federated acquired more than 50 percent of the 7 outstanding shares, that MCO and Federated would 8 commit themselves to raising $40 million in 9 capital for United? 10 A. The question is? 11 Q. Do you recall discussing that concept 12 with Mr. Munitz? 13 A. I do not recall it as I sit here today. 14 Q. Do you recall that as a result of these 15 conversations with the Bank Board, that, in fact, 16 UFG -- I'm sorry -- MCO and Federated undertook to 17 raise capital through a subordinated debt 18 offering? 19 A. Yes. 20 Q. And how did that come about, sir? 21 A. The company -- we talked about 22 raising -- I think it started at 50 million; but 25922 1 it got up to $100 million of capital notes for the 2 savings and loan, which counted as equity. 3 Q. Okay. Now, you started off by saying 4 "the company." What were you referring to when 5 you said "the company"? 6 A. Talking about United Financial Group. 7 Q. Okay. And explain to me what it is you 8 recall regarding this waiver in exchange for the 9 holding company agreeing to raise 40 million. 10 A. I told you, I don't recall that. 11 Q. Now -- well, you do recall that there 12 was going to be 50 million and then 100 million, 13 correct? 14 A. No. We may be talking about different 15 things. 16 Q. Well, tell me what you were talking 17 about. 18 A. There was a time when there was a 19 proposal to put in capital notes that started at 20 50 million and went to 75, up to $100 million of 21 new capital into the S&L which was going to be 22 raised. 25923 1 Q. When you say "put in capital notes," 2 what do you mean by that? 3 A. United Financial Group would issue 4 capital notes to the tune of $100 million which 5 would count as equity that would go down to the 6 S&L. 7 Q. Now, what role would MCO and Federated 8 have played were those capital notes issued? 9 A. We were told at the time that the only 10 way they could place those notes is if we were a 11 purchaser of some percent of those notes. That's 12 why the investing public would buy them. Times 13 were bad. Times were bad in all financial 14 institutions in the country at that time. They 15 were very bad in Texas. And as you know, every 16 financial institution over $500 million failed in 17 the State of Texas. 18 You do know that, don't you? 19 Q. Am I the one asking questions, or are 20 you? 21 A. I just want to make sure you know that. 22 That's a very important thing. 25924 1 Q. Now, sir, you indicated that in answer 2 to the question that you were told that the only 3 way you could raise money issuing these capital 4 notes was if MCO and a Federated participated? 5 A. That's what we were told by the 6 underwriters, that they couldn't sell the bonds 7 unless they could go to Wall Street and say that 8 people like ourselves, shareholders, were willing 9 to invest along with the public. And if we were 10 to put in -- and I think the number was 11 10 percent. In this case, if there was a 12 hundred-million-dollar issue and we were to invest 13 $10 million of the hundred million, that they 14 would raise the zero. So, that would infuse 15 $100 million of new capital into the savings and 16 loan. 17 Q. Who was the underwriter that told you 18 this? 19 A. Drexel Burnham Lambert. 20 Q. How was it that UFG -- were the notes 21 going be to be issued by USAT or UFG? 22 A. You know, I don't know. 25925 1 Q. And how was it that UFG and USAT came 2 to be involved with Drexel as the underwriter? 3 A. Well, they only represented about 4 75 percent of the market for those capital notes 5 at the time. They had just totally recapitalized 6 the Mellon Bank, and they were very successful. 7 So, they were the dominant player. 8 Q. So, you went to Drexel Burnham Lambert; 9 and you asked Drexel if they would do a capital 10 note offering for USAT or UFG? 11 A. Well -- are you saying did I do that? 12 Q. Yes. 13 A. No, I doubt that I did that. Were they 14 approached? They were approached by someone to 15 see if, in fact, they had an interest in doing 16 that. As I recall, what happened is that they 17 said that yes, they thought they could raise up to 18 $100 million if, in fact, MCO were to invest 19 $10 million. That's how I remember it. Again, 20 this is a long time ago. 21 Q. But you don't recall that it was -- 22 that you approached Drexel and asked them -- 25926 1 A. Did I personally? 2 Q. Yes. 3 A. No, I don't recall that. 4 THE COURT: Mr. Rinaldi, we'll adjourn 5 until 1:30. 6 7 (Whereupon, a lunch break was taken 8 from 12:04 p.m. to 1:35 p.m.) 9 10 THE COURT: Be seated, please. We'll 11 be back on the record. 12 Mr. Rinaldi, you may continue with your 13 examination. 14 MR. RINALDI: Thank you, Your Honor. 15 Q. (BY MR. RINALDI) Mr. Hurwitz, I put 16 before you Exhibit T4040. This is the H-(e)-1 17 application, and I have one question I wanted to 18 ask you about the application that I had passed 19 over. 20 If you would open document T4040, which 21 is Tab 13, and take a look at Page 28 or 27, 28, 22 and 29. Now, this purports to -- 27, 28, and 29. 25927 1 This purports to list the management of United 2 Financial Group starting on Page 27, and it goes 3 over. And I see on 28, it indicates that -- that 4 you are a member of the board of directors of 5 United Financial Group by June of 1983. 6 Do you see that? 7 A. I do. 8 Q. Okay. What were the circumstances 9 under which you became a director of UFG, sir? 10 A. As we talked about earlier, there was a 11 merger of Houston First and United Financial 12 Group. 13 Q. Uh-huh. 14 A. And I was asked to go on the board of 15 Houston First Financial, I believe, by a Mary 16 Grigsby, which was president; and I did go on the 17 board. Mary later became a member of the Home 18 Loan Bank Board in Washington, as you may recall. 19 And on the merged companies, they took the boards 20 of both companies on the merged companies; and 21 they became all members of the new combined 22 company. 25928 1 Q. Now, when you went on the board of 2 First American, had you approached Mr. Lender and 3 asked him if Federated or MCO could have 4 representation on the First American board? 5 A. Well, I don't remember the timing; but 6 I think that we had already talked to Mr. Lender 7 about buying his shares. Again, this was, you 8 know, an announced transaction; and it took a long 9 time to consummate it. 10 Q. In connection with acquiring those 11 shares, did you then request that members -- I 12 mean that MCO be represented and placed on the 13 board of First American? 14 A. No. As I remember it, when this 15 happened, to the best of my memory, Mary Grigsby 16 asked me if I would like to go on the board. 17 Q. Now, what about Dr. George Kozmetsky? 18 Did he also go on the board of First American? 19 A. He did. 20 Q. And that was at the same time? 21 A. Yes. 22 Q. And were the circumstances surrounding 25929 1 his going on the board the same as yours? 2 A. Yes, I believe they were. 3 Q. He was also requested by Ms. Grigsby? 4 A. I think that Mary had invited George, 5 as well. 6 Q. Now, I think when we broke, we were 7 looking at Exhibit T1113, which is Tab 68. And 8 this is the letter dated January 31st, 1986, from 9 Mr. Eckland to Julie Williams. 10 THE COURT: What's that number again, 11 Mr. Rinaldi? 12 MR. RINALDI: It's T1113. 13 Q. (BY MR. RINALDI) This is the last 14 document we were looking at before we broke. You 15 should have it in one of the folders before you. 16 And this is the letter in which MCO 17 writes to the Federal Home Loan Bank Board and 18 proposes that in return for a waiver of the net 19 worth maintenance condition up to a 50 percent 20 ownership level, that they would -- that MCO and 21 Federated would commit to raising $40 million in 22 capital for United within 18 months. 25930 1 Do you recall that? 2 A. I do. I recall reading it before the 3 break, yes. 4 Q. Okay. And was the idea of issuing a 5 capital note and MCO putting a portion of -- or 6 purchasing a portion of that note so that it could 7 infuse capital into United, was that an idea that 8 was originated by MCO? 9 A. I don't know the answer to that. 10 Q. Well, it is proposed, however, in the 11 letter to Ms. Williams, is it not, by MCO and 12 Federated? 13 A. Yeah. I didn't see where it said 14 "capital note" in this before, but I didn't read 15 it real closely. I thought what it said was it 16 proposed to either invest or have invested 17 $40 million. I don't remember the form. Let's 18 see. It says "of capital." It doesn't say 19 anything about "capital notes." 20 Q. And -- but you did testify that you 21 recalled that at about this point in time, a 22 proposal was made to issue subordinated notes by 25931 1 United? 2 A. I think what I said, there came a 3 time -- and I believe it was in 1987 -- the idea 4 that capital notes could be obtained up to 5 $100 million. I don't recall that's the same as 6 this because the 40 million and the 100 million, 7 there's not a sync there. 8 Q. Well, do you recall that in connection 9 with MCO and Federated writing this letter to 10 Julie Williams on January 31st, '86, that at about 11 the same time, you approached Drexel Burnham 12 Lambert and asked them if they would issue the 13 capital notes on behalf of United? 14 A. Well, I think I just mentioned I 15 thought it was 1987. And I told you I don't 16 recall approaching Drexel Burnham. 17 Q. But it wouldn't surprise you if you 18 had? 19 I'm sorry. Did you answer? 20 A. I answered the question to the best of 21 my knowledge that I don't recall that. 22 Q. Take a look at T9020. It's Tab -- I 25932 1 don't believe there is a tab. This is a new 2 document. 3 Would you take a moment to read that? 4 A. Yes. (Witness reviews the document.) 5 Q. Have you had a chance to read it? 6 A. Yes. 7 Q. And the first -- this is a memo by -- 8 do you recognize the handwriting there of Mike 9 Crow? 10 A. Well, I see it says "M. Crow"; so, I'm 11 assuming that's Michael Crow. 12 Q. And as the CEO of -- as the chairman of 13 UFG, you frequently received memos from Mr. Crow, 14 did you not? 15 A. I did receive memos from Mr. Crow. 16 Q. And does that appear to be his 17 handwriting? 18 A. Well, I don't think that I have seen 19 his handwriting in years. I wouldn't be surprised 20 if that's his handwriting. 21 Q. This is a memo to Jenard Gross and 22 Gerry Williams. It says, "For your information. 25933 1 Mr. Hurwitz was discussing a potential capital 2 note issue with Drexel and asked that one of their 3 representatives contact me." 4 Do you recall that at or about 5 January 26, 1986, you had had discussions with 6 Drexel regarding a potential capital note issue? 7 A. Well, I don't know how the court of law 8 works. But I've answered this question three or 9 four times, and my answer is the same. 10 Now, if you want to ask me again, I'll 11 be glad to answer it again. 12 Q. Your answer is you don't recall 13 discussing that with anyone from Drexel? 14 A. Absolutely. I've said that. I 15 probably discussed it with a lot of investment 16 banking firms. We were trying to figure out how 17 to get capital into the savings and loan. 18 Q. Now, it indicates here that you asked a 19 representative of Drexel to contact United. 20 Do you see that? 21 A. I see that. 22 Q. Now, then, in the next sentence -- you, 25934 1 I take it, have no recollection of having asked 2 Drexel to have someone contact United? 3 A. Not only that, I have no recollection 4 of who David Kenney is. 5 Q. Okay. Now, do you know whether, as a 6 consequence of -- do you know whether Mr. Kenney 7 ever went to United for the purpose of reviewing 8 United and the feasibility of a capital note 9 issuance and its strengths and detriments? 10 A. I don't. I do know there was a 11 proposal made by Drexel Burnham; so, someone did 12 some work at some point in time. Could have been 13 Mr. Kenney. Could have been someone else. 14 Q. You've never met Mr. Kenney? 15 A. To my knowledge, I've never met 16 Mr. Kenney. 17 Q. But you do know someone would have gone 18 from United in order to review the United capital 19 note issue? 20 A. I'm assuming they wouldn't request a 21 proposal to raise money unless they had a lot of 22 knowledge. 25935 1 Q. In your experience in dealing with 2 entities like Drexel prior to issuing a capital 3 note of this nature, they would go to the 4 institution or the entity and conduct a review? 5 A. Yes. 6 Q. So, that would be standard operating 7 procedure before issuing a capital note or 8 underwriting a capital note, correct? 9 A. Absolutely, yes. 10 MR. RINALDI: Your Honor, I would move 11 the admission of T9020. 12 MR. KEETON: No objection. 13 THE COURT: Received. 14 Q. (BY MR. RINALDI) Now, sir, you 15 indicated that in 1987, you thought that there had 16 been an attempt to issue a capital note. 17 Do you recall any discussions with 18 yourself and other persons at United regarding the 19 issuance of a capital note in 1986? 20 A. I think I said that I thought it was 21 1987 that there were some discussions. This shows 22 January of 1986. 25936 1 Q. Okay. Now, would you take a look at -- 2 well, let me ask you a couple of questions about 3 this. 4 Do you recall who you would have had 5 the discussions with regarding the capital note at 6 United or at USAT? 7 A. It would have been the senior 8 management. 9 Q. And who would that have included? 10 A. Well, at that time, I guess Gerry 11 Williams, Jenard Gross, Michael Crow. 12 Q. And given the fact that it would have 13 involved a public offering or filing of a -- of 14 capital or public offering of capital notes, would 15 legal counsel for USAT have been involved? 16 A. At some point, they would have been 17 involved. 18 Q. And who would that have been? 19 A. Art Berner was the general counsel. 20 Q. Now, since the issuance of the capital 21 note -- well, let me just ask you this: One of 22 the reasons for issuing the capital note was to -- 25937 1 as a -- was as a mechanism to obtain a waiver of 2 MCO and Federated's net worth obligation, wasn't 3 it? 4 A. I don't recall that. I don't think 5 that's correct. Could have been. 6 Q. Do you recall that as a condition of 7 MCO and Federated purchasing up to $10 million of 8 the capital note, they required that the Federal 9 Home Loan Bank Board waive the net worth condition 10 with respect to MCO and Federated? 11 A. The way I remember it -- and, again, 12 it's a long time ago. But I remember it as -- 13 that Wall Street said they thought they could 14 raise $100 million if we were to purchase 15 10 million of it. And that was a requirement, I 16 think, that Wall Street had on us. 17 Q. Sir, would you take a look at 18 Exhibit T1118. This is Tab 1643. And take a 19 moment to review that document, if you will; and 20 then I have a couple of questions. 21 A. (Witness reviews the document.) Okay. 22 Q. Directing your attention to the first 25938 1 paragraph there, first of all, do you recognize 2 this memorandum? 3 A. No. 4 Q. Did Mr. Berner, as counsel for USAT, 5 frequently send memoranda to you? 6 A. Yes. 7 Q. Now, it recounts a meeting with members 8 of the Federal Home Loan Bank of Dallas; and in 9 the second sentence, in the first paragraph, it 10 says, "We discussed the interaction of MCO 11 Federated net worth guarantee question with the 12 proposed capital note transaction." 13 Do you see that? 14 A. I do. 15 Q. Does that refresh your recollection 16 that the note transaction was connected to the 17 question of the proposed capital note -- I mean 18 the proposed net worth maintenance condition? 19 A. Well, I think in the fourth paragraph, 20 it says, "We told them that Drexel had informed us 21 that in view of the poor reception Texas S&Ls were 22 receiving in the marketplace, they did not believe 25939 1 they could do a capital note public offering 2 unless MCO Federated had a more direct control 3 relationship." And then it goes on to say that 4 they had to put in $10 million. This is how I 5 remember it. 6 Q. Let's look at the second paragraph and 7 see if this is how you remember it. It says, "We 8 told them" -- that is, Mr. Berner told the 9 regulators -- "that we believe MCO-Federated was 10 willing to contribute up to 10 million to the 11 equity of USAT but only upon the condition that 12 they could acquire in excess of 25 percent of the 13 stock of UFG without a net worth guarantee." 14 Do you see that? 15 A. Yes. 16 Q. Was that your understanding of the 17 condition that was placed upon MCO and Federated's 18 proposal to infuse $10 million through the 19 purchase of capital notes? 20 A. Well, as I mentioned to you, I don't 21 recall this memo. But way back in my mind 22 somewhere, in March of 1986, I remember being 25940 1 informed that they couldn't sell the capital note 2 unless we had an investment. And if we had an 3 investment, we had to get clearance from the 4 regulators to go over 25 percent; and I think 5 that's pretty consistent with what this says. And 6 we didn't get that. We got it but only with the 7 net worth maintenance guarantee provision, which 8 of course we wouldn't accept. No one would accept 9 that. 10 Q. Wait. If you were to purchase a 11 capital note, that wasn't going to put you over 12 25 percent, was it? 13 A. No. We would have to invest 14 $10 million in the capital note. I don't know if 15 the capital note counted as equity since the 16 capital note, as I understand it, did count as 17 equity in the S&L from accounting. 18 Q. Wasn't it subordinated debt? 19 A. Well, it's a capital note. I don't 20 know how the regulators would count that because 21 it is equity, counted as equity on the balance 22 sheet of the S&L, as I understand it. 25941 1 Q. So, it's your testimony that you 2 thought you couldn't invest the $10 million in 3 subordinated debt unless you first had a waiver 4 from the Federal Home Loan Bank? 5 A. As I understand it -- and, again, this 6 is, you know, way back. They wanted us to put in 7 $10 million and buy the capital notes on the 8 thing. And I believe that we had to have some 9 type of approval to do that. 10 Q. Now, you said "they wanted us." Who is 11 "they"? 12 A. The underwriters said they couldn't 13 sell the capital notes unless we were an investor, 14 and I think that we had to have some type of 15 approval to do that. At any rate, we weren't 16 willing to do it unless we could get a waiver to 17 the net worth maintenance obligation. 18 Q. So, this investment of $10 million in 19 equity in USAT would have had the effect of 20 waiving the net worth requirement? Is that fair? 21 A. Well, I don't know technically if 22 that's right. 25942 1 Q. Strike that. That's an in artful 2 question. 3 Was it your understanding that MCO and 4 Federated would only be willing to invest 5 $10 million in equity if they could obtain a 6 waiver of the net worth guarantee? 7 A. I don't recall that. I mean, what I 8 recall, I think, is what I stated. 9 Q. Okay. 10 MR. EISENHART: Your Honor, 11 Mr. Rinaldi's phrasing his questions now in terms 12 of a waiver. He has referred the witness to only 13 the second paragraph on that page which talks 14 about a waiver if they could acquire in excess of 15 25 percent. However, the next paragraph which he 16 hasn't pointed the witness to, the third 17 paragraph, talks about a modified net worth 18 maintenance requirement in the event they go over 19 50 percent. So, it's clear from the memo that 20 they were never proposing a total waiver. 21 MR. RINALDI: See, Your Honor, it 22 strikes me that it's my direct-examination. If I 25943 1 choose to ask him the question or not is my 2 business. If Mr. Eisenhart wants to go into those 3 subjects on redirect or cross-examination, I have 4 no objection to that. But I'm simply asking him 5 the question of was it his understanding that MCO 6 and Federated were not willing to put $10 million 7 into a capital note unless they could have a 8 waiver of the net worth condition, at least up to 9 50 percent ownership. 10 MR. KEETON: That question would have 11 been proper, Your Honor. That's not what he asked 12 him. 13 Q. (BY MR. RINALDI) Was that your 14 understanding, sir? 15 A. I gave you my understanding to the best 16 I can recollect things back in 1986. 17 Q. And wouldn't the best -- let me ask you 18 this: If your recollection is at odds or is in 19 any way different from what appears in the 20 subordinated debt application, would you defer to 21 what's described in the subordinated debt 22 application? 25944 1 A. I don't know that I could do that. 2 Q. Now, it says here that -- you pointed 3 me to Paragraph 3; and it says that "We also told 4 them" -- the regulators -- "that Drexel had 5 informed us that in view of the poor reception 6 Texas S&Ls are receiving in the marketplace, they 7 did not believe they could do a capital note 8 public offering unless MCO and Federated had a 9 more direct control relationship." 10 What do you understand Mr. Berner means 11 there by "a more direct control relationship"? 12 A. I don't know. You would have to ask 13 Mr. Berner. 14 Q. Did you understand that Drexel had 15 advised MCO that unless MCO controlled a greater 16 portion of the shares of UFG, that it would be 17 difficult for -- and had a more direct control 18 relationship, that it would be difficult for 19 Drexel to place the notes? 20 A. I'm not sure what it means. 21 Q. Were you interested in obtaining a more 22 direct control relationship of UFG and USAT at 25945 1 this point in time? 2 A. Well, we were interested in purchasing 3 more shares, which is what the H-(e)-1 application 4 said. 5 Q. By the purchase of those more shares, 6 was it your expectation that you would obtain a 7 more direct control relationship over USAT and 8 UFG? 9 A. Not necessarily. 10 Q. When you say "not necessarily," you 11 mean that was one possible result? 12 A. There were a lot of possible results. 13 I don't even remember this document. How can I 14 tell you what was meant back then? 15 Q. Now, at this point in time, how would 16 you characterize your role with respect to the 17 negotiations or the discussions with the Federal 18 Home Loan Bank Board regarding the continuing 19 discussion of the net worth condition? 20 A. I'm not sure that I ever met with the 21 Home Loan Bank Board on this. That's not to say 22 that I couldn't have been at a meeting, but I 25946 1 don't recall one. 2 Q. Well, notwithstanding the fact that you 3 weren't at meetings with them, did you -- were you 4 directly involved in the discussions at MCO and 5 Federated as to what steps or proposals MCO and 6 Federated should take with respect to the net 7 worth obligation discussions? 8 A. Certainly, I was kept advised; but it 9 wasn't a daily or weekly kind of thing. I mean, 10 when somebody had something to say that was 11 important, I'm certain that they would talk to me 12 about it. 13 Q. But you weren't, as you recall it, 14 playing a direct role in exploring mechanisms for 15 resolving the net worth issue? 16 A. Well, I don't know what "a direct role" 17 means. 18 Q. Would you take a look at Exhibit T1120? 19 I believe this is -- 20 MR. RINALDI: Is this another new 21 document? I'm handing a couple copies up to the 22 Court. 25947 1 Q. (BY MR. RINALDI) Would you take a look 2 at -- this is the minutes of the board of 3 directors meeting of March 27, 1986. And this 4 would have occurred approximately a week after 5 Mr. Berner wrote his memo to you. 6 And if you would, turn to the last page 7 and tell me if that's your signature that appears 8 on the last page. 9 A. Yes. 10 Q. It says on the first page, "All 11 directors were present at the meeting except 12 George Kozmetsky," so, presumably, you were there? 13 A. Yes. 14 Q. And, in fact, if we turn to 15 Page OMX23224, it indicates that the chairman, 16 whom I take to be you, made a presentation to the 17 board. 18 Do you see that? 19 A. I do see that. 20 Q. Okay. And if you drop down to about 21 the third sentence, about halfway through the 22 paragraph, it says, "The chairman indicated that 25948 1 he was continuing to explore the possibility of 2 obtaining concessions from the Federal Home Loan 3 Bank Board with respect to required guarantees of 4 the net worth of the financial institution arising 5 out of the corporation's then status as a holding 6 company under the applicable regulations." 7 Do you see that? 8 A. I do. 9 Q. And were you then discussing the 10 potential capital note issue that had been 11 proposed in January and that Mister -- that had 12 been proposed in January by Mr. Eckland and is 13 later discussed in Mr. Berner's memo of 14 March 20th, 1986? 15 A. I don't know. 16 Q. You don't recall? 17 A. No. 18 Q. Now, it says, "The chairman reported 19 that a valuable management team had been formed at 20 UFG." 21 Do you see that? 22 A. Yes. 25949 1 Q. How was that team formed? 2 A. Well, it came about as kind of an 3 evolution kind of thing. A fellow named Gerry 4 Williams joined the company. Gerry had been the 5 executive vice president and chief financial 6 officer of, I believe, the largest bank holding 7 company in Texas: First City Financial. A fellow 8 named Mike Crow came on as chief financial 9 officer. Jim Wolfe, Art Berner, Jenard Gross, and 10 others. 11 Q. So, that's what you were referring to 12 as a valuable management team? 13 A. Yes. 14 Q. Did that include Barry Munitz? 15 A. And Barry Munitz. 16 Q. Can you describe for me what 17 Dr. Munitz' role was at USAT? 18 A. Well, Barry was certainly involved in 19 strategic-type decisions. He was involved in 20 putting together a management team at United 21 Financial. He was also a coordinator, I think, 22 between United and the regulators and then other 25950 1 things; but I think those were some of his 2 principal roles. 3 Q. Do you recall what positions he held at 4 USAT? 5 A. I believe that he was chairman of the 6 executive committee of USAT. 7 Q. And in that capacity, did he keep you 8 apprised of what was going on at USAT? 9 A. Well, I don't know what you mean by 10 keeping me apprised of what went on. I was a 11 director of the holding company; and, you know, I 12 would talk to Barry on a regular basis. 13 Q. And as a director of the holding 14 company, you would have taken an interest in what 15 was going on at the principal subsidiary, wouldn't 16 you? 17 A. Yes. 18 Q. In fact, you did take an interest in 19 what went on at the principal subsidiary, didn't 20 you? 21 A. I did. 22 Q. I'm handing you a copy of Exhibit B938. 25951 1 I believe this is a new document. This is a memo 2 from Art Berner to you and Barry Munitz, Jenard 3 Gross, Gerry Williams, and Mike Crow dated 4 April 17th, 1986. 5 MR. KEETON: This is a new, new -- this 6 has not even been pulled. It's not on our list. 7 No copies for my table? 8 MR. RINALDI: I do have copies. I'm 9 sorry. 10 11 (Discussion held off the record.) 12 13 MR. RINALDI: J.C., did Ken give you 14 this as part of his list? Because he told me he 15 had. 16 MR. NICKENS: I think that's -- 17 THE COURT: We'll be off the record for 18 a moment. 19 20 (Discussion held off the record.) 21 22 THE COURT: All right. We'll be back 25952 1 on the record. 2 Mr. Rinaldi, you may continue. 3 MR. RINALDI: Thank you, Your Honor. 4 Q. (BY MR. RINALDI) Have you had a chance 5 to take a look at what's been previously marked as 6 Exhibit B938? 7 A. I'm reading it now, yes. 8 Q. I'm particularly interested in the 9 paragraph numbered 3 on the second page which 10 makes reference to the capital notes. 11 A. Okay. 12 Q. Now, it says here at the beginning of 13 the first paragraph, "We have had a series of 14 meetings with Drexel and their counsel in 15 finalizing the offering circular for the public 16 capital notes offering and the application which 17 would go to the Federal Home Loan Bank Board. I 18 would expect that the application will be filed 19 within the next week and the offering will be 20 finalized shortly thereafter." 21 Do you recall whether DBL helped with 22 the preparation of the offering circular for USAT? 25953 1 A. I wouldn't know. 2 MR. RINALDI: Your Honor, I would move 3 the admission of B938. 4 MR. KEETON: No objection. 5 THE COURT: Received. 6 Q. (BY MR. RINALDI) Now, you had 7 indicated, sir, that there came a time when the 8 size of the offering circular was increased. 9 Do you recall that? 10 A. I do. 11 Q. Do you recall the reasons for 12 increasing the offering circular? 13 A. I don't. 14 Q. Do you recall any discussions regarding 15 the question of whether increasing the offering 16 circular would make available to USAT more 17 operating capital? 18 A. Well, I mean, 100 million is more than 19 50 million. 20 Q. Do you recall any discussions that it 21 would be useful for USAT to have more operating 22 capital and, thus, a larger capital note? 25954 1 A. Well, I think that at that time that 2 the savings and loan was capital starved. 3 Q. And by this time, you're talking about 4 the middle of 1986? 5 A. Yeah. I mean, capital is a valuable 6 thing when you're in a recession or, in this case 7 in Texas, almost a depression. 8 Q. Take a look at T9021. This is another 9 one of Mr. Berner's memos. And this one is dated 10 a slightly later date, several months later, in 11 June 1986. I'm sorry. This is Mr. Crow's memo. 12 I apologize. It looked like a Mr. Berner memo. 13 And this, again, is a memo that's 14 addressed to you and Mr. Munitz and Jenard Gross 15 and G.R. Williams. 16 Now, in the first sentence, Mr. Crow 17 says, "We've been advised by Drexel that the 18 capital note issue amounting to 75 million could 19 be executed instead of a 50-million-dollar issue." 20 Do you see that? 21 A. I do. 22 Q. Did you have any discussions with 25955 1 Drexel about increasing the size of the capital 2 note issue above the 50-million-dollar mark? 3 A. No, not that I recall. 4 Q. And it's -- you testified earlier, I 5 think, that you thought that the number had been 6 raised to 75 million and that, ultimately, it was 7 raised, yet again, to 100 million? 8 A. Yes. 9 Q. And then Mr. Crow, in the first 10 paragraph, the last sentence, says, "I recommend 11 we increase the size of the issue to 75 million 12 for the following reasons." Then it says, "One, 13 we should obtain as much of this type capital as 14 we can when the window is open." 15 Do you see that? 16 A. I do. 17 Q. What did you understand Mr. Crow was -- 18 meant by that statement? 19 A. Well, I can only speculate what he 20 meant. 21 Q. Well, you apparently received this 22 document. 25956 1 A. I did. 2 Q. Did you have some understanding of what 3 he was writing to you about at this point in time? 4 A. Well, I can again just speculate as to 5 what that meant. 6 Q. Well, was it your view that USAT should 7 take advantage of the opportunity to infuse as 8 much of this type of capital as it could into the 9 institution? 10 A. I thought that this was a memo from 11 Mike Crow to me. 12 Q. Yes. 13 A. That's his suggestion, I believe. 14 Q. I understand that. 15 Did you share his view? 16 A. Oh, I don't remember whether I did or 17 not. 18 Q. And then in Paragraph 3, it talks about 19 a safety buffer; and he recommends it because it 20 would provide a safety buffer given the remote 21 possibility that a large extraordinary reserve may 22 be needed in the future. "Should such an event 25957 1 transpire and we did not have a significant safety 2 buffer, we might fall below regulatory net worth. 3 Such an occurrence could severely limit our 4 business operations." 5 Do you recall discussing with people at 6 USAT the possibility that an extraordinary reserve 7 might be needed in the future? 8 A. I don't. 9 Q. Do you recall that there had been at or 10 about this point in time an examination of USAT 11 that had begun? 12 A. I wouldn't have been aware of that. 13 Q. Do you recall that shortly after the 14 examination was begun, it was brought to the 15 attention of the officers and directors of USAT 16 that the examiner, Vivian Carlton, felt that USAT 17 was failing its net worth capital in about June of 18 1986? 19 A. Is that a question? 20 Q. Yes. 21 A. I may have known that. I don't recall 22 it now. 25958 1 Q. Did you, as a -- the chief -- or you 2 were the chairman of the board of UFG? 3 A. I was. 4 Q. At this time, were you the chief 5 executive officer, as well? 6 A. No. 7 Q. As the chairman of UFG, did you feel 8 that its principal subsidiary needed a safety 9 buffer at this time? 10 A. I don't recall. 11 Q. Now, the last sentence there reads that 12 there was the potential that USAT might fall below 13 regulatory net worth. And then the last sentence 14 says, "Such an occurrence would severely limit our 15 business operations." 16 Do you see that? 17 A. Yes. 18 Q. Do you know what that's making 19 reference to? 20 A. It's hard to expound on what it means. 21 It's what it says, business operations. 22 Q. Did you understand that if USAT fell 25959 1 below its minimum net worth requirement, that it 2 could be severely limited in its ability to invest 3 in high-yield bonds? 4 A. I would assume that it would severely 5 limit everything. It says "business operations," 6 plural. 7 Q. And did you understand at the time that 8 if it failed its minimum capital requirements, it 9 could limit severely the ability of USAT to invest 10 in high-yield bonds? 11 A. Well, I don't know that I focused on 12 that. 13 Q. When you say you don't know if you 14 focused on that, did you have any understanding of 15 what impact it might have on USAT if USAT failed 16 its net worth requirement? 17 A. Yes. 18 Q. And what was your understanding of that 19 impact, sir? 20 A. That it would limit business 21 operations. 22 Q. And, specifically, did you have any 25960 1 idea how it would limit its business operations? 2 A. I assume it would cut down on 3 everything that United Financial was currently 4 doing. 5 Q. And what was United Financial currently 6 doing as you recall it at that point in time? 7 A. Well, I don't know. It was making 8 mortgage loans. It was making investments. It 9 was issuing CDs. 10 Q. Do you recall that it was involved in 11 equity arbitrage? 12 A. Equity arbitrage. 13 Q. That was something it was doing through 14 Mr. Huebsch? 15 A. You bet. 16 Q. Did you understand that that could be 17 severely limited? 18 A. Well, I certainly didn't focus in on 19 that. 20 Q. It was also engaged in a 21 mortgage-backed security risk-controlled 22 arbitrage, was it not? 25961 1 A. Yes. 2 Q. Did you understand that that could be 3 severely limited in the event that it failed its 4 capital requirement? 5 A. Well, having never done this before, 6 I've answered it to the best of my ability. I 7 said I assume it's all business operations. So, 8 if those were business operations, I'm assuming it 9 would affect it. 10 Q. Now, the last sentence on this memo 11 says, "The principal disadvantage of increasing 12 the size of the capital note are the added 13 interest expense." 14 Do you see that? 15 A. Yes, I do. 16 Q. Then Mr. Crow on the last page as an 17 attachment includes a document that is 000231. 18 That's US000231. 19 Do you see that? 20 A. I do. 21 Q. Now, it indicates here that the excess 22 net worth above the required level at the 25962 1 present -- that is, as of June 17th, 1986 -- was 2 $13 million. 3 Do you see that? 4 A. I see that. 5 Q. And so, by entering into the capital 6 note transaction, if there were a 7 50-million-dollar infusion then, the pro forma 8 amount, if you include the 50-million-dollar 9 infusion, it would increase capital to 63 million. 10 Do you see that? 11 A. I do. 12 Q. If you did the deal for 75 million, it 13 would increase capital to 88 million, correct? 14 A. That's what it says. 15 Q. As he said, there was a down side to 16 it, wasn't there? The down side was you were 17 going to have to pay interest on all that debt, 18 correct? 19 A. That's what it says. 20 Q. Do you know what this calculation is 21 that appears below where it says "capital note 22 size" and then "assumed rate" and "annual interest 25963 1 expense"? 2 A. Well, I can just read it. 3 Q. Yeah. 4 A. Do you want me to read it? 5 Q. If you can tell me what it refers to. 6 A. It says the size of the note, 7 50 million and 75 million. Assumed rate at 12 and 8 a half percent. Annual interest expense is 9 6,250,000 on 50 million and 9,380,000 on 10 75 million. 11 Q. So, if you infuse the $50 million in 12 the issuance of capital notes and the notes were 13 at a -- in the amount of $50 million, if the 14 assumed rate of interest was 12 and a half 15 percent, he's simply saying you're going to have 16 to have $6,250,000 in earnings, isn't he, to 17 offset the cost of the note? 18 A. It says that's the cost, annual 19 interest expense. 20 Q. And in order to achieve that, it talks 21 about, in the next sentence, incremental asset 22 growth needed to offset capital note interest. 25964 1 Do you see that? 2 A. I see that. 3 Q. It says that at a 3 percent spread -- 4 do you know what that makes reference to. 5 A. I think it means if you can make a 6 3 percent spread -- I'm not sure. I shouldn't 7 speculate. 8 Q. They are talking about the spread 9 between the amount you earn on your investment and 10 the cost of your assets or your money, correct? 11 A. Well, I think that's what it means; but 12 I'm -- maybe it means something else. 13 Q. And at a 1 percent spread, if you had a 14 6 -- a 50-million-dollar note, you would have to 15 have $625 million invested at a 1 percent spread 16 in order to earn the $6 and a quarter million in 17 interest to pay for the note, correct? 18 A. I'm not saying that's correct, but that 19 may be what it means. 20 Q. So, you don't understand what his chart 21 means there? 22 A. Well, I would be speculating. 25965 1 MR. RINALDI: Your Honor, I would move 2 the admission of T9021. 3 MR. KEETON: No objection. 4 THE COURT: Received. 5 Q. (BY MR. RINALDI) This is Exhibit A1236. 6 It, again, is a new document. Now, these are the 7 minutes of United Savings Association of Texas 8 dated April 28th, 1986. 9 Do you recall whether USAT ultimately 10 voted to approve the issuance of the capital 11 notes? 12 A. Well, I'm not on the executive 13 committee or the board of this company; and I 14 don't see where it says I was there at the 15 meeting, nor do I remember this document. 16 Q. Well, do you recall whether the board 17 of USAT approved the issuance of a 18 50-million-dollar capital note? 19 A. I don't recall. 20 Q. Now, if you take a look at the second 21 paragraph, it indicates that Mr. Gross stated that 22 the purpose of the meeting was to review the 25966 1 issuance of the capital notes. 2 Do you see that? 3 A. Yes. 4 Q. And then it indicates it was 5 unanimously adopted by the members of the 6 executive committee who were present at the 7 meeting. 8 Do you see that? 9 A. I do. 10 Q. Do you recall that, thereafter, a -- 11 and then there's a resolution saying that the 12 notes should be issued by USAT. 13 Do you recall that it was USAT that was 14 going to issue the notes rather than UFG, sir? 15 A. I think I stated earlier I didn't know. 16 Q. And do you recall whether ultimately 17 USAT then filed an application with the Federal 18 Home Loan Bank of Dallas for approval or for their 19 approval to issue the subordinated debt? 20 A. I don't know. 21 MR. RINALDI: Your Honor, I would move 22 the admission of A1236, the minutes of USAT dated 25967 1 April 28th, 1986. 2 MR. KEETON: No objection. 3 THE COURT: Received. 4 Q. (BY MR. RINALDI) Now, earlier you had 5 testified that Drexel had advised you that they 6 thought that the only way they could issue the 7 notes was through -- if MCO had taken a position 8 with respect to purchasing a portion of the 9 subordinated debt. 10 Do you recall that? 11 A. I remember stating that I thought that 12 that had been brought to my attention. It may 13 have been that the -- you know, at the 100 million 14 or 75 million range. 15 Q. Do you recall that United Financial 16 Group requested that Drexel provide them with a 17 letter regarding Drexel's views with respect to 18 the marketability of the notes? 19 A. I don't recall that. 20 Q. Would you take a look at what's been 21 previously marked as B1208. And I think this has 22 previously been admitted as Tab 1815. This is a 25968 1 letter from Art Berner to William Eckland. 2 Now, Mr. Eckland was the attorney that 3 was assisting with respect to the net worth 4 maintenance condition, correct? 5 A. Well, I think -- you know, I get the 6 feeling sometimes you're trying to trick me here. 7 Q. Well, do you recall that earlier we saw 8 a letter sent to Julie Williams -- 9 A. Well, I remember that. Let me just 10 finish my question (sic) here. I told you that I 11 had never met Mr. Eckland, to my knowledge, and he 12 was a regulatory attorney that we used. 13 Q. When you say "we," you're referring to 14 whom? 15 A. I'm referring to United Financial. And 16 possibly Barry may have used him in some other 17 role. I don't know. 18 Q. And, in fact, earlier I did show you a 19 letter in which Mr. Eckland had written to Julie 20 Williams on behalf of MCO and Federated. 21 Do you recall that? 22 A. I do. 25969 1 Q. It was Exhibit T1113. It's a letter to 2 Julie Williams dated January 31st, 1986. 3 A. T33 -- 4 Q. No. T1113. It's there in the pile in 5 front of you, if you want to take a look at it. 6 Do you recall that Mr. Eckland at that 7 point was representing MCO and Federated? 8 A. I do. 9 Q. Okay. Now, it indicates on 10 Exhibit B1208 that Mr. Eckland had requested -- it 11 says, "I believe that you have requested Drexel to 12 prepare the enclosed letter." 13 Do you see that? 14 A. I do. 15 Q. Do you know whether MCO, through its 16 counsel or through Mr. Munitz or Mr. Eckland, 17 requested that Drexel prepare the attached letter 18 that's attached to B1208? 19 A. I don't. 20 Q. Was that ever discussed with you, the 21 potential for Drexel preparing a letter to send to 22 the regulators? 25970 1 A. Rings no bells with me. 2 Q. Okay. Now, you did recite, however, at 3 the beginning of your testimony the fact that you 4 had an understanding of Drexel's view regarding 5 the marketing considerations with respect to the 6 senior subordinated notes, did you not? 7 A. I did. 8 Q. You said you understood that it was 9 Drexel's view that if MCO and Federated -- that 10 unless MCO and Federated were willing to invest 11 some $10 million or 10 percent -- I think was the 12 number you used -- in the subordinated notes, it 13 would be difficult to place those notes. 14 Do you recall that? 15 A. That's how I remember. But, again, it 16 was a long time ago. 17 Q. And if you take a look at the third -- 18 I mean the second paragraph, it talks -- Drexel 19 writes and says, "We also understand that United 20 Savings of Texas cannot issue the notes prior to 21 obtaining the approval of the Federal Home Loan 22 Bank Board of the pending H-(e)1 (holding company 25971 1 application) filed by MCO Holdings, Inc. and 2 Federated Development, since we understand that 3 MCO intends to purchase 10 million principal 4 amount of the notes upon closing of the 5 transaction." 6 Do you know what Drexel is referring to 7 there? 8 A. I don't. 9 Q. Was MCO intending to purchase 10 $10 million of the notes if it did not receive 11 some kind of concession with respect to the net 12 worth commitment from the Federal Home Loan Bank 13 Board? 14 A. You know, I can't recall right now 15 whether they were or not. 16 Q. Now, do you know whether ultimately 17 this letter was submitted by MCO's counsel or on 18 behalf of MCO to the Federal Home Loan Bank Board? 19 A. I don't know. 20 Q. And in the letter -- that is, in the 21 attachment to B1208 -- Drexel Burnham is urging 22 the Federal Home Loan Bank Board to approve at 25972 1 least a partial waiver of the net worth condition 2 so that MCO could participate in the purchase of 3 the sub debt, correct? 4 A. I think that's what it says, yes. 5 Q. Did you ask Drexel to write the letter 6 to help resolve the net worth maintenance 7 condition? 8 A. No. 9 Q. Did someone else at MCO ask them to do 10 that? 11 A. I don't know. I'm not familiar with 12 it. 13 Q. Did Barry Munitz? Do you know? I 14 guess you've answered that question, and I've 15 asked it again. 16 A. Thank you very much. 17 Q. I'll withdraw the question. 18 A. I'll be glad to answer it again if 19 you'd like. 20 Q. Take a look at Exhibit B1186. Do you 21 know who Mr. Brian G. Vooght is? 22 A. I don't. 25973 1 Q. But he's with the Federal Home Loan 2 Bank, correct? 3 A. Well, it appears that's the case. 4 There was a letter written to him in care of the 5 Federal Home Loan Bank Board in Washington. 6 Q. And Mr. Eckland, who we've established 7 was one of the attorneys working for MCO and 8 Federated on net worth condition, sends him a 9 letter that states, "As promised, please find 10 enclosed a copy of a letter by Drexel Burnham 11 Lambert, Incorporated, explaining the role of MCO 12 Holdings, Inc. and Federated Development Company 13 in connection with the proposed sale of 14 subordinated notes by United Savings Association." 15 Do you see that? 16 A. I see that. 17 Q. And then this was sent to Mr. Barry 18 Munitz. Did Barry Munitz ever tell you that he 19 had requested that Drexel prepare a letter 20 regarding marketing considerations, this letter 21 that's attached to B1186 for submission on the 22 Federal Home Loan Bank Board? 25974 1 A. I'm not familiar with the letter. 2 Q. We've just looked at the letter. 3 A. I know. I mean, the answer is "no." 4 Q. So, that wasn't one of the things he 5 conveyed to you? 6 A. There was a lot of things he conveyed. 7 It wasn't in writing. I'm not familiar with that 8 document. 9 Q. The only point I'm trying to make or 10 the question I'm trying to ask you is -- it would 11 appear that Drexel, at the request of Mr. Eckland, 12 prepared a letter that subsequently Mr. Eckland 13 submitted to the Bank Board. And it would appear 14 that the letter is urging the Bank Board to make 15 some concession with respect to MCO and Federated 16 and the net worth condition. 17 Is that a reasonable characterization? 18 A. Well, it's certainly a 19 characterization. I'm not saying it's 20 unreasonable; but I think that you could look at 21 it in other ways, too. I mean, it could have been 22 that what Mr. Eckland was trying to do was 25975 1 expedite the capital notes offering for the 2 company; and the requirement was that this 3 underwriter had said that they wanted, in this 4 particular case, MCO to make an investment and 5 they were apprising them of that. Maybe that's 6 what it took to make the investment. 7 Q. And you're speculating now, correct? 8 A. Well, I'm -- what are you doing? 9 Q. I'm asking you: Did you have any 10 discussion with Mr. Barry Munitz -- 11 A. I've answered that question. And 12 you're speculating, and you said is that what was 13 meant by that. And I'm giving you some other 14 things it could mean. I told you I didn't know 15 what it meant. 16 Q. Okay. Then the only question I was 17 trying to get at is that that letter was being 18 requested from Drexel Burnham Lambert on behalf of 19 MCO and being submitted to the Bank Board; is that 20 correct? 21 MR. KEETON: Your Honor, I'm going to 22 object. He's asking for the tenth time. The 25976 1 exhibit we just introduced, B1208, the first page 2 says that Mr. Eckland had been in touch apparently 3 as far as Mr. Berner knew with the examiners, had 4 discussions, and that they have asked for the 5 letter, the examiners. 6 Q. (BY MR. RINALDI) Sir, did there come a 7 time when it became apparent that the negotiation 8 or the discussions that had been engaged in by MCO 9 and Federated were not going to be fruitful; that 10 is, the discussions with respect to the net worth 11 obligation? 12 A. Were not going to be fruitful. 13 Q. Well, strike that. 14 MR. RINALDI: Your Honor, I move the 15 admission of B1186. 16 MR. KEETON: No objection. 17 THE COURT: Received. 18 Q. (BY MR. RINALDI) Well, there had been 19 a -- the Bank Board has issued Resolution 74-712 20 which authorized MCO and Federated to acquire up 21 to 35 percent of the outstanding shares of UFG. 22 Do you remember we talked about that 25977 1 earlier and that, periodically, the 120-day period 2 that had been initially established for acquiring 3 the shares had been extended? Did there come a 4 time when MCO and Federated decided that they 5 wanted to no longer go forward with respect to 6 meeting the net worth condition under the holding 7 company application? 8 A. Well, there came a time that we didn't 9 ask for an extension of the approval. Is that 10 what you mean by that? 11 Q. Yes. 12 A. Okay. 13 Q. And prior to -- take a look at what's 14 been marked as T1140. This is Tab 102. 15 Now, do you recognize this document, 16 sir? 17 A. I don't. 18 Q. Now, it does make reference to the fact 19 that -- again, this is a letter sent by 20 Mr. Eckland, the regulatory attorney that was 21 dealing in these matters on behalf of Federated 22 and MCO. 25978 1 Do you recall that? 2 A. I do. 3 Q. He indicates that he's writing to 4 confirm that Federated Development Company and MCO 5 had decided not to request further extensions of 6 the effective date of the approval received from 7 the Federal Home Loan Bank Board Resolution 8 No. 84-712. 9 Do you see that? 10 A. Yes. 11 Q. And prior to MCO and Federated not 12 seeking further extensions, were there discussions 13 that you participated in on whether those further 14 extensions should be sought? 15 A. I don't recall. 16 Q. Do you recall the reasons why Federated 17 and MCO decided to not seek further extensions? 18 A. I think I remember that. 19 Q. And what was that? 20 A. I think what it was, at the time that 21 this three plus years had taken plus at a great 22 deal of expense where we had attempted to put in 25979 1 what I would call a material amount of money into 2 the savings and loan or in other forms of 3 financing and -- to no avail. The Southwest Plan 4 was coming up then, and we were going to bid on 5 that. I had a memorandum at or about that time 6 from Art Berner which was the general counsel of 7 United Financial informing me that Neil Twomey had 8 told him that if we wanted to be successful in the 9 Southwest Plan, that it would be better if I 10 distance myself from the savings and loan. And 11 so, what I did is I got off the board shortly 12 thereafter to distance myself. 13 You know, it's -- it's hard to imagine 14 how much time, effort, and money goes into the 15 Southwest Plan. I mean, we spent a fortune of 16 money in financing costs and just human time; and 17 we were very busy during this period preparing for 18 the Southwest Plan. And we were told at the time 19 that we were on -- on what was referred to as the 20 "good guy list." There was a good guy list and a 21 list that you couldn't bid on. We were on the 22 good guy list. We went to this enormous effort to 25980 1 bid. And I remember getting a phone call from Tom 2 Lykos, and I was in San Francisco. We had 3 purchased Kaiser Aluminum then which was a large 4 transaction with a bunch of wonderful people. Tom 5 Lykos called me up and said, "Mr. Hurwitz, I want 6 to inform you that you are not the high bidder. 7 Would you like to change your bid?" 8 I said, "Mr. Lykos, could you give me 9 an idea of the magnitude that it would take to 10 change my bid to be a successful winner?" 11 And he said, "No." 12 I said, "Well, in that case, this is a 13 very good bid that we made; and we're going to let 14 it stand." 15 And he said, "I'm going to send you a 16 letter," which he did, "asking you that in the 17 next" -- I forgot how many days -- 45 days or 18 something, "to bid on some other savings and 19 loans." 20 Q. Mr. Hurwitz? 21 A. Years later, I found out that we bid 22 $100 million more -- 25981 1 Q. Mr. Hurwitz, I don't want -- 2 A. Can I finish my statement? 3 Q. I just want you to understand. 4 Mr. Guido and I have tried to divide up the 5 examination in discrete subject areas. If you 6 start down the road into a subject area about 7 which I have no involvement, I'm placed in the 8 unfortunate position of either not being able to 9 examine you with respect to those issues or, if I 10 do, then foreclosing Mr. Guido's examination. 11 My question was a very simple one: Did 12 there come a point in time when you decided not to 13 renew the extensions? That was the only question 14 I was asking. I think you'll have plenty of 15 opportunities to get into other subjects beyond 16 that. 17 My only question was: Did there come a 18 point in time when you decided not to extend the 19 application? I just don't want to start slopping 20 over into areas that might foreclose my co-counsel 21 from going into other examinations. 22 So, with that admonition -- 25982 1 A. Mr. Rinaldi, what I was trying to do 2 was explain to the judge and yourself why what 3 happened happened; and it deserves an explanation. 4 And if you would like for me to make it at another 5 point in time, I just want to have the opportunity 6 to tell the judge and for the record to know what 7 happened, how I was mislead and how I was lied to 8 by the Government. And it's important. 9 Q. I think it's important if you think 10 it's material and relevant to this proceeding. 11 All I was trying to do is focus this into a 12 particular area that's germane to what it is I'm 13 doing here. And certainly as the way this 14 procedure has been managed by the Court, once we 15 are finished, your counsel will have an 16 opportunity to cross or direct examine you -- 17 THE COURT: All right. Mr. Rinaldi, I 18 think your question has been answered. Let's have 19 another question. 20 MR. RINALDI: Okay. Fine. 21 Your Honor, let me move on to a 22 different area. 25983 1 Q. (BY MR. RINALDI) Sir, the H-(e)1 2 application was filed on June 29th, 1983. I 3 showed that to you earlier. It's Exhibit T4040, I 4 believe. I simply say that as a point of 5 reference for my next line of examination. Okay? 6 Now, once the holding company 7 application was filed, did MCO and Federated take 8 immediate steps to develop structures to acquire 9 additional shares of USAT at some time in the 10 future? 11 A. Again, you'll have to help me out with 12 what you mean by "develop structures." 13 Q. Would you take a look at what's been 14 marked as T1041? That's Tab 58. Now, earlier -- 15 if you would read that for a moment. 16 A. (Witness reviews the document.) 17 Q. Now, this is a memo to Barry Munitz 18 from Roni Fischer with a CC to Paul Schwartz; and 19 the subject is structure of future acquisition of 20 UFG shares. 21 Do you see that? 22 A. I do. 25984 1 Q. Did you direct Barry Munitz or Paul 2 Schwartz to explore structures for future 3 acquisitions of UFG shares? 4 A. Well, I don't think that I directed 5 anybody to do anything. There was a conversation: 6 Is there a legal way to own more economic interest 7 in United Financial? And that's why we filed the 8 H-(e)1 application. That's why we did the 9 preferred stock. The answer is: Are there legal 10 ways to have more economic interest? So, if 11 that's your question, the answer to that is "yes." 12 Q. Did you ask Mr. Schwartz to explore 13 those, sir? 14 A. I can't tell you that I asked 15 Mr. Schwartz to do that. 16 Q. Did you ask Mr. Munitz to explore 17 those? 18 A. I can't tell you that. I don't know. 19 Q. When you say you don't know, you don't 20 recall whether you asked them or whether someone 21 else asked them? 22 A. I don't recall. I don't recall that I 25985 1 asked them. 2 Q. Who did Mr. Munitz work for at MCO and 3 Federated? 4 A. Well, he worked for different people at 5 different companies. At Federated, I would say 6 that he reported to me. At MCO, he reported to -- 7 depending on what he was doing, he reported to 8 myself and a fellow named Dr. Leone which I think 9 I told you before was the president. 10 Q. Was it your understanding after the 11 H-(e)1 application was filed that Mr. Munitz was 12 going to explore structures for the future 13 acquisition of UFG shares? 14 A. Apparently, he did. 15 Q. Well, did you understand that that's 16 what he was going to do? 17 A. I can't tell you back then that I knew 18 that. 19 Q. Did you understand that Mr. Schwartz 20 was going to be exploring structures for future 21 acquisition of UFG shares? 22 A. I don't remember that. 25986 1 Q. Do you recall who Roni Fischer was? 2 A. Vaguely. I think Roni Fischer worked 3 for Paul Schwartz. 4 Q. And was she a -- some kind of analyst 5 or what? 6 A. I think that's right, yes, sir. 7 Q. Then in the second paragraph of the 8 memo -- well, strike that. 9 The first paragraph talks about 10 Mr. Schwartz -- "At Mr. Schwartz' request, 11 Ms. Fischer is forwarding copies of a structure 12 which we might -- by which we might acquire 13 additional shares of United Financial Group at 14 some future time." 15 Do you see that? 16 A. I do. 17 Q. And then it goes on and says, "A copy 18 of the enclosed analysis was previously sent to 19 Richard Marlin at Kramer, Levin, Nessen, Kamin & 20 Frankel who feels relatively comfortable with this 21 concept." 22 Do you see that? 25987 1 A. I do. 2 Q. Do you know why these structures were 3 being sent to Mr. Marlin? 4 A. I'm sure to have some lawyer bless the 5 structure. 6 Q. But you don't know what the structure 7 was that's being referred to here? 8 A. I don't. 9 Q. Now, did there come a time when United 10 Financial Group decided to issue preferred shares? 11 A. Yes. 12 Q. And you've made reference to that on 13 several occasions here today, have you not? 14 A. I have. 15 Q. And how did the subject of preferred 16 shares first come up for UFG's issuance of 17 preferred shares? 18 A. I don't recall. 19 Q. Did MCO raise the subject as a 20 mechanism whereby MCO could obtain a greater 21 ownership interest in UFG? 22 A. Well, it served two purposes. It put 25988 1 new equity into the -- I think it went into the 2 savings and loan, but it could have gone to the 3 holding company. 4 Q. And what do you recall? 5 A. I recall that -- that Goldman Sachs was 6 retained to work on the structure of how to put 7 new money into -- and I'm sorry. I don't remember 8 whether it was the holding company or the savings 9 and loan. And it was some $10 plus million on a 10 convertible non-voting security which wouldn't 11 trigger the 24.9 percent rule of net worth 12 maintenance. And such a structure was a rights 13 offering which, of course, means that any 14 shareholder has the right to subscribe to those 15 shares; in this case, a preferred stock that was 16 convertible, I think it was, to shares of common 17 for the preferred. And by setting it up that way 18 as a non-voting security, it did not trigger the 19 net worth maintenance. And I do believe that MCO 20 and Federated bought the great majority of those 21 shares of the rights offering. A fairness opinion 22 was issued by Goldman Sachs. I believe it was -- 25989 1 I'm pretty sure it was Goldman Sachs. 2 Q. Now, you said that the preferred shares 3 were structured so that they would be convertible 4 at some future date, correct? 5 A. That's my understanding. 6 Q. And the idea was to set up the 7 acquisition of preferred shares which would not 8 cause UFG -- I mean MCO and Federated to exceed 9 the 25 percent common share ownership threshold, 10 correct? 11 A. Yes. 12 Q. And was it MCO and Federated that 13 proposed this structure to UFG? 14 A. Most likely. 15 Q. Okay. And would you take a look at 16 A1092? Let's see if we can't sort of pin down 17 some of the details on this. It should be the 18 document in front of you, sir. 19 A. I'm sorry. Which one? 20 Q. A1092, and it should be Tab 127. And 21 in particular, if you would look at Page 4 of 7, 22 there's a discussion of a rights offering in about 25990 1 the middle of the page after the paragraph that 2 says "resolved." 3 A. Is that Page 6? 4 Q. It's Page 4 of 7. It appears at 5 CN104659, and it's Page 8. So -- 6 A. Okay. 7 Q. Sometimes these documents are 8 confusing. And if you look at the paragraph after 9 the first "resolved" clause where it talks about 10 "The board discussed the proposed rights 11 offering." 12 A. Yes. 13 Q. Was this proposed rights offering one 14 of the structures that Mr. Schwartz came up with? 15 A. I don't know. 16 Q. And -- 17 A. But I got the Goldman Sachs right. 18 Q. And it indicates here that an S1 19 registration statement was received and that the 20 transaction would involve 750,000 shares of 21 C convertible preferred stock. 22 Do you see that? 25991 1 A. I do. 2 Q. And then it goes on and says, "All 3 stockholders will be entitled to purchase their 4 pro rata portion of shares plus a supplemental 5 subscription of shares equal to their pro rata 6 portion." 7 What was that referring to? 8 A. That's a preferred stock option. 9 Q. Then it says, "Shares not acquired 10 pursuant to the offering to stockholders will be 11 acquired pursuant to a purchase agreement between 12 the company and Federated Development Company or 13 an affiliate thereof." 14 Do you see that? 15 A. I do. Can I just make a point on this? 16 Q. Sure. 17 A. In my 30-some-odd years of fooling 18 around in the securities industry, I've never seen 19 an underwriting -- a rights offering, any 20 underwritten where the underwriter didn't receive 21 a fee. We were the underwriters. Goldman Sachs 22 issued the fairness opinion. I would just like to 25992 1 go on record here that I know of never -- any one 2 of these existing where the person standing there 3 with the basket willing to assure the success of 4 the rights offering didn't get a fee. 5 Q. And just so I understand, at this 6 point, MCO and Federated owned almost -- well, 7 slightly less than 24.9 percent of outstanding 8 shares of UFG, did they not? 9 A. That's correct. But they act as the 10 backstop of this rights offering. 11 Q. And as a consequence of that, MCO and 12 Federated were considered affiliated parties of 13 USAT and UFG, were they not? 14 A. I don't know whether affiliated parties 15 is -- 16 Q. Well, it would have been an affiliated 17 party transaction, would it not? 18 A. Why? 19 Q. Were you aware that it would have 20 violated the federal regulations for MCO and 21 Federated to have received a fee in connection 22 with this? 25993 1 A. No. 2 Q. Is it possible that Federated and MCO 3 didn't receive a fee? 4 A. I don't think it is possible that 5 that's right. I remember making a very big point 6 that we wouldn't do that. 7 Q. Now, under this proposal, any shares 8 that weren't subscribed to of that 750,000 shares 9 were going to be purchased by Federated and MCO, 10 correct? 11 A. Correct. 12 Q. So, in advance of the rights offering 13 even being presented to UFG, it had to have been 14 approved by MCO and Federated, correct? 15 A. I would assume so. 16 Q. You were the CEO and chairman of both 17 of those entities, were you not? 18 A. Yes. 19 Q. And did you approve of this prior to -- 20 A. What are you going to do? Show me some 21 minutes that approves it a day later or something? 22 Q. No. I'm just asking you: Did you 25994 1 approve this in advance of USAT -- 2 A. In advance. I assume it was an 3 approved transaction. 4 Q. Well, I think you made the point, sir, 5 that this transaction could not have been done 6 unless Federated and MCO had agreed to, in effect, 7 underwrite the transaction by agreeing to take all 8 the shares, correct? 9 A. Well, it's apparent that the fact that 10 I -- I think it ended up being 90-some-odd percent 11 of the offering would have been a dismal failure 12 unless there was someone standing there to buy the 13 shares, even though it was offered to all 14 shareholders. 15 Q. And why is it that MCO and Federated 16 had such a desire to obtain the C preferred shares 17 when, apparently, none of the other shareholders 18 of UFG shared that desire? 19 A. Well, I'm trying to figure another way 20 of answering that question. I've answered it at 21 least 20 times. We thought that United Financial 22 was a wonderful opportunity in a wonderful part of 25995 1 the country to invest in. If you would like me 2 to, I would be glad to expound on why. I've 3 already done it, but I will do it again. 4 Q. Did you believe by acquiring the 5 C preferred shares that this would provide an 6 opportunity to acquire an additional ownership 7 interest in the future of UFG? 8 A. As I stated, these shares were 9 convertible; but they had to have approval of the 10 Home Loan Bank Board to make them voting shares. 11 And if we didn't get the approval, then we would 12 have to sell them because we were not going to go 13 above the 24.9 percent. 14 Q. And you were a leading proponent, were 15 you not, of MCO and Federated acquiring these 16 shares? 17 A. I'm certain that I voted in favor of 18 it. 19 Q. And take a look at T1051. 20 THE COURT: Mr. Rinaldi, we'll take a 21 short recess. 22 25996 1 (Whereupon, a short break was taken 2 from 3:04 p.m. to 3:24 p.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Mr. Rinaldi, you may continue. 7 MR. RINALDI: Thank you, Your Honor. 8 Q. (BY MR. RINALDI) Mr. Hurwitz, I would 9 like you to take a look at T1051, which is Tab -- 10 it has not previously been admitted; and so, I'm 11 handing up several copies to the Court. 12 Following UFG's -- or the action of the 13 board of UFG approving the rights offering, MCO 14 and Federated ultimately did subscribe to the 15 purchase of a number of preferred shares of UFG, 16 did it not? 17 A. Yes. 18 Q. And if you take a look at this 19 document, these are -- do you recognize these 20 letters? 21 A. I have no reason to believe that they 22 are not correct. 25997 1 Q. And the second one is signed on behalf 2 of MCO by you? 3 A. Well, I have -- the second one is 4 Federated. The first one I have, MCO, is signed 5 by me, yes. And the second one is signed by James 6 Paulin, Federated Development. 7 Q. Okay. And together these two rights 8 offerings -- that is, the second document which is 9 dated May 10th, 1984 -- is sent to United 10 Financial Group. And it indicates that MCO is 11 subscribing to 453,000 shares of the preferred 12 stock, correct? 13 A. Yes. 14 Q. That's the one signed by you. And then 15 this next document, the third in this series, is a 16 letter dated May 10th, 1984, signed on behalf of 17 Federated Development Company by James Paulin. 18 And he is subscribing to 302,000 shares, correct? 19 A. Yes. 20 Q. Would Mr. Paulin have first obtained 21 authorization from you before exercising this 22 rights offering? 25998 1 A. I'm sure he would have. 2 MR. RINALDI: Your Honor, I would move 3 the admission of T1051. 4 MR. EISENHART: I believe it's already 5 in, Your Honor. 6 THE COURT: Yes, it's already in. 7 MR. RINALDI: Okay. Then I guess we 8 don't have to admit it. 9 Q. (BY MR. RINALDI) Now, let me direct 10 your attention to T1053. This is Tab 59. Do you 11 recall that after you executed the rights offering 12 on behalf of MCO, the board on June 12th, 1984, 13 approved the rights offering? 14 A. I see that. This is where you were 15 coming from before. Got you. 16 Q. Now, I notice that Federated subscribed 17 to 302,000 shares and MCO subscribed to 453,000 18 shares and that jointly they subscribed to 755,000 19 shares. 20 Did MCO then agree to take over the 21 responsibility for Federated's subscription 22 rights? Do you recall? 25999 1 A. No. Whatever it says in here. 2 Q. But the minutes of MCO Holdings 3 indicate that MCO Holdings will subscribe for the 4 full 755,000. Do you see that? It's on Page 4 of 5 the minutes. 6 A. (Witness reviews the document.) I see 7 that. 8 Q. Do you recall why it is that MCO 9 subscribed for all of the preferred C shares, 10 including the ones that had been previously 11 subscribed to by Federated? 12 A. I believe that Federated bought shares. 13 I know they did. 14 Q. Well, does it appear here that MCO -- 15 it says, "Mr. Hurwitz also reported that the 16 corporation had an opportunity to acquire up to a 17 total of 755,000 subscription rights to the 18 corresponding number of shares of newly issued 19 Series C convertible preferred stock." 20 Do you see that? 21 A. It says "had an opportunity." 22 Q. Right. And it indicates that the cost 26000 1 of those shares would be $10,577,000. 2 Do you see that? 3 A. I do. 4 Q. Then if you turn the page, it says, 5 "Resolved that certain individuals shall execute 6 and deliver on behalf of the corporation an 7 executed subscription order form representing up 8 to 755,000 shares." 9 Do you see that? 10 A. I see that. 11 Q. Do you know why it was that MCO 12 originally only subscribed to 453,000 shares? 13 A. Well, it says "up to." It doesn't say 14 it's going to buy the 755,000 shares. It says it 15 has the right to buy up to that. 16 Q. Do you recall how many they bought up 17 to? 18 A. I can tell you on this document that it 19 says 453,000. So, I'm assuming 453 and 302 is the 20 right number. 21 Q. 755? 22 A. Right. 26001 1 Q. So, did MCO then end up with all of the 2 preferred shares? 3 A. Well, it says here that they ended up 4 with 453,000 shares. 5 Q. By "here," you're referring to T1051? 6 A. Yes. 7 Q. Okay. And so, the board of MCO then 8 would have approved the acquisition of the 9 C shares after the subscription had been entered 10 into by you on May the 10th. Right? 11 A. It appears to be the case. Again, it 12 says "up to." It doesn't say that they will 13 acquire that many shares. 14 Q. I understand that. But you subscribed 15 to the shares on May 10th, 1984; and then the 16 board approved your actions on June the 12th, 17 1984? 18 A. Happens all the time. Right. 19 Q. And you recommended that the board 20 approve the acquisition of the subscription 21 rights, correct? 22 A. Normally, I wouldn't be so picky. I 26002 1 certainly voted in favor of it. 2 Q. I'm not being picky. 3 A. Well, you are because before you tried 4 to trick me with the minutes before or after. I 5 was fortunate enough to pick it up. I normally 6 don't think that way. I'm trying to be careful 7 with every word that's said here. 8 Q. Sir, I'm asking you about the -- 9 A. Well, you asked me two things. You 10 came in and said isn't it true that the company 11 bought up the 755,000 shares. And I don't 12 remember, to answer your question. This document 13 says it's 453,000 shares. I know that Federated 14 subscribed to rights. So, I'm assuming that this 15 says you can acquire up to and that means you're 16 not acquiring the whole 755,000 shares. It says 17 "representing up to." 18 Q. And I was just trying to clarify, sir, 19 whether MCO had only acquired 455,000 shares or -- 20 I'm sorry -- 453,000 shares or whether it had 21 acquired some greater number up to 755,000 shares. 22 And I believe your answer is you don't recall. Is 26003 1 that fair? 2 A. I don't recall. 3 Q. Okay. Now, I was pointing your -- 4 directing your attention to the last line in the 5 first full paragraph, Page 4 of the minutes, which 6 says, "Mr. Hurwitz recommended to the board that 7 the corporation approve the acquisition of such 8 rights." 9 Do you see that on Page 4? 10 A. (Witness reviews the document.) 11 Q. It's the last sentence in the first 12 paragraph there. 13 A. I do see that. 14 Q. Okay. Do you recall recommending to 15 the board that they approve the acquisition of 16 such rights? 17 A. I don't recall that, but I certainly 18 could have. I don't doubt for a moment that I 19 didn't. 20 Q. You wouldn't doubt the accuracy of the 21 minutes, would you? 22 A. No. 26004 1 Q. And you approved the minutes at some 2 subsequent date; and they are signed on the last 3 page, are they not? 4 A. Yes. 5 Q. Okay. Now, prior to entering into 6 these application -- I mean prior to acquiring 7 these preferred shares, had you inquired of the 8 Federal Home Loan Bank Board to determine whether, 9 in the event that the preferred shares were 10 acquired by MCO and if they were not immediately 11 convertible to the underlying common, whether they 12 would be considered to be a holding of the 13 underlying common of MCO? 14 A. I don't know. 15 Q. You understand what I'm asking? 16 A. I think I understand. 17 Q. Did you write a letter to the Federal 18 Home Loan Bank Board to inquire as to whether if 19 you acquired the C preferred, whether that would 20 trigger or would put you over the 25 percent 21 threshold? 22 A. Well, the only thing I know for sure is 26005 1 that we had the best possible lawyers that made it 2 right. Other than that, I can't tell you, if we 3 wrote or a letter or didn't write a letter or 4 whether it was sent to Washington or Dallas or 5 where. 6 Q. Did there come a time when you recall 7 that MCO decided to contact the Federal Home Loan 8 Bank Board to determine whether the preferred 9 shares which were not immediately convertible to 10 underlying common would be considered to be a 11 holding of underlying common of UFG? 12 A. I don't know that. 13 Q. Would you take a look at Exhibit B1493. 14 It's Tab 1648. This is again another memo that's 15 written by Mr. Berner, and it's to you and to 16 Barry Munitz. 17 What, if any, involvement did 18 Mr. Munitz have in the preferred share offering 19 that you recall? 20 A. Well, I think we established earlier 21 that Dr. Munitz was involved in any transaction 22 like this that would affect the regulators. 26006 1 Q. Now, do you recall asking Mr. Berner to 2 contact the Federal Home Loan Bank Board in order 3 to determine what their position would be with 4 respect to preferred stock that's not immediately 5 convertible to underlying common? 6 A. No. 7 Q. Have you had an opportunity to read 8 this memo? 9 A. I have. 10 Q. And do you recall discussing this 11 subject with Mr. Berner? 12 A. No. 13 Q. Do you recall discussing it with 14 Mr. Munitz? 15 A. No. 16 Q. Now, did there come a time when the 17 preferred shares were going to be subject to 18 conversion? 19 A. I believe so. 20 Q. And if you reached the point in time 21 that they were converted to common shares, what 22 was your understanding of the impact that would 26007 1 have on MCO and Federated? 2 A. Well, it was my understanding if, in 3 fact, they were converted without the approval of 4 the Home Loan Bank Board for the net worth 5 guarantee exemption that we had asked for, that we 6 would have been over the 25 percent and, 7 therefore, subject to the net worth maintenance. 8 Q. And did you then ask Mr. Munitz to try 9 to come up with a solution to the problem that was 10 presented by the pending conversion of the 11 C preferred shares? 12 A. I'm not sure why you phrase these 13 questions -- I'm sure there's a reason for the way 14 you do it. 15 No, I didn't ask Dr. Munitz to do 16 anything like that. Dr. Munitz knew it was coming 17 up; and the solution, I think, was to get some 18 kind of extension from the Home Loan Bank Board 19 where this would not be a problem. And it's my 20 belief that that was obtained. 21 Q. And did you discuss this with 22 Dr. Munitz and Mr. Berner? 26008 1 A. I don't recall discussing it with them. 2 Q. So, you don't recall any discussions 3 associated with the memo marked as B1493 that I've 4 just shown you? 5 A. That's correct. 6 Q. Do you recall that, ultimately, the 7 solution that was reached was to convert the 8 shares to a new class of D preferred shares that 9 would not be convertible until a later date and 10 time? 11 A. I think that's right. I think that the 12 preferred shares that were issued were C preferred 13 because there were already two outstanding 14 preferred issues. I think that's right. So, it 15 was -- it went to D. 16 Q. And so, is it your recollection that by 17 converting it to the D preferred, it put off the 18 date of conversion? 19 A. I think that's correct. I'm not 20 100 percent sure that D is right, but I think it 21 may be. 22 Q. Now, we've gone through this C 26009 1 preferred share discussion for the last 20 or 30 2 minutes; and I just would like to sort of recap. 3 You initially, as a director of UFG, voted to 4 approve the rights offering, correct? 5 A. That's correct. 6 Q. And at the time you voted to approve 7 the rights offering, you knew that as a condition 8 of that rights offering, MCO and Federated were 9 obligated to buy any of the unsubscribed shares, 10 correct? 11 A. I think that's correct. 12 Q. And as a director and the chief 13 executive officer of MCO, you would have 14 participated in that decision at MCO to agree to 15 purchase any unsubscribed shares, correct? 16 A. Yes. We acted as the underwriter. 17 Q. And once the agreement -- I mean the 18 rights offering was put forth by UFG, you executed 19 the subscription agreement on behalf of the MCO 20 board, did you not? 21 A. I think that's correct. Is that the 22 one I just -- just signed? 26010 1 Q. Yes. And at the subsequent meeting, 2 you recommended on June 12th, 1984, that MCO 3 approve the subscription rights, correct? 4 A. That's what the minutes say, yes. 5 Q. And later, you were at least apprised 6 and involved in the conversion of the C to D 7 preferred? 8 A. I was certainly aware, yes. 9 Q. And you agreed with it? 10 A. It beat the alternative. 11 Q. Is it fair to say that you were 12 involved in all of the major decisions at MCO and 13 Federated regarding the acquisition of the C 14 preferred shares of UFG? 15 A. Well, I guess I don't know what that 16 entails. If you would like to tell me everything 17 it entails, I would be glad to tell you what parts 18 that I knew something about. 19 Q. Well, you were involved in all of the 20 actions -- 21 A. Well, you asked me some other questions 22 that I didn't know anything about. So, I assume 26011 1 that -- here we go again -- you're trying to catch 2 me on one of these little things -- 3 Q. Well, I'm not trying to catch you on 4 anything. 5 As chairman and CEO of Federated, were 6 you involved in the decision to obtain the C 7 preferred shares? 8 A. I was involved in some of these 9 decisions, yes. 10 Q. And we've gone through at least some of 11 those decisions that you were involved in. 12 A. The ones we have gone through, I have 13 answered affirmatively to. 14 Q. Was there any other aspect of the 15 transaction that you were involved in? 16 A. Well, I think you had asked me earlier 17 some question, was I familiar with the fact that 18 we had asked for some approvals. And I told you I 19 was not aware of that, so -- 20 Q. I would like to shift now to another 21 subject matter. 22 In addition to the -- and the reason 26012 1 for obtaining the C preferred was that was one of 2 the mechanisms or structures whereby MCO and 3 Federated could obtain an interest by which it 4 could, in the future, obtain additional common 5 shares of UFG, correct? 6 A. Only if approved by the Home Loan Bank 7 Board. 8 Q. Okay. 9 A. That's a big "if" there. 10 Q. When you say "if approved," the 11 conversion didn't have to be approved. All that 12 had to be approved was a satisfactory resolution 13 of the net worth condition, correct? 14 A. That's correct because, at that time, I 15 believe that we did have other type of approvals. 16 Q. But you did not want to acquire 17 additional common shares and for MCO or Federated 18 to be treated as a holding company unless you had 19 achieved a satisfactory resolution of the net 20 worth condition? 21 A. Would not. 22 Q. Now, sir, directing your attention to 26013 1 Exhibit B -- I'm sorry -- Exhibit T1061. This is 2 Tab 62. 3 Now, take a moment to look at the 4 document -- in particular, the first page -- and 5 then the term sheet that appears on the second 6 page. And then I have some questions for you. 7 A. (Witness reviews the document.) Okay. 8 Q. Now, it indicates in the upper 9 right-hand corner that a copy of this was sent to 10 Charles Hurwitz from Paul Schwartz. 11 Do you see that? 12 A. I see that. 13 Q. Was the transaction that's described 14 under the term sheet one of the structures that 15 Mr. Schwartz was trying to develop in order for 16 MCO to acquire shares of UFG at some future date? 17 A. I can't answer that. You would have to 18 ask Mr. Schwartz. 19 Q. Okay. Well, Mr. Schwartz sent this to 20 you, did he not? 21 A. It says that he sent it to me. 22 Q. Do you have any reason to believe that 26014 1 you didn't receive a copy of this? 2 A. No, but I don't remember the document. 3 Q. Now, it states on the second page under 4 the term sheet that EF Hutton or EFH will sell a 5 call to MCO and MCO will grant a put on EFH 6 covering the shares exercisable on an all-or-none 7 basis. 8 Do you see that? 9 A. Yes, I do. 10 Q. Do you recall discussing with 11 Mr. Schwartz a structure whereby EF Hutton would 12 acquire shares of UFG and then sell a call to MCO 13 and that MCO would grant a put to EF Hutton? 14 A. I don't. 15 Q. As you sit here today, what is your 16 understanding of why this proposal was structured 17 as a call backed up by a put? 18 A. Well, I told you that I'm not familiar 19 with this. I don't know who Michael Mendelson is 20 at EF Hutton, and I'm not familiar with the 21 document. 22 Q. Now, the first sentence of the document 26015 1 says, "585,000 shares of United Financial Group 2 common stock under security." 3 Do you see that? 4 A. I do. 5 Q. It says, "7.2 percent of outstanding." 6 Then it goes on and it says, "The proposed 7 transaction." It says, "Subject to execution of a 8 simultaneous agreement (the agreement) between MCO 9 Holdings, Inc. (MCO) and EF Hutton & Company, Inc. 10 (EFH) under the terms proposed below, EFH will 11 purchase the shares at 8.25 per share (purchase 12 price) from Drexel Burnham & Lambert, Inc. 13 (Drexel)." 14 Do you see that? 15 A. I do. 16 Q. Were you aware at this point in time 17 that Drexel Burnham Lambert had assumed a position 18 of 585,000 shares of United Financial Group? 19 A. Well, I certainly was aware that they 20 had a large position. I don't know if I knew that 21 they had that number of shares. In their filings, 22 I read it. 26016 1 Q. And their filings were with -- 2 A. The SEC. 3 Q. And those would have been submitted 4 to -- to the -- UFG? 5 A. Well, they would have been submitted to 6 the Government of which -- the Securities and 7 Exchange Commission of which UFG would have been 8 sent a copy of it, also. In United Financial 9 Group's proxy statement, there certainly would be 10 mention of that. I think there may be some other 11 filings, as well. There may be some loan filings 12 and some 8K filings, as well. 13 Q. Are you familiar with the Schedule 13G? 14 A. A little bit. 15 Q. What is your understanding of the 16 Schedule 13G? 17 A. Maybe a 13G -- is that the one where 18 after you own more than 5 percent and you increase 19 your holdings by 1 percent, you have to have a new 20 filing? 21 Q. I'm not the securities expert. I'm 22 asking you what your understanding is. Do you -- 26017 1 let me show you a copy of what's -- did you 2 understand that Drexel Burnham Lambert, as a 3 result of acquiring shares of UFG in excess of 5 4 percent, was required to file a 13G with the 5 Securities and Exchange Commission? 6 A. I believe there is -- you have to file 7 a 13D; but maybe they file a 13G, as well. 8 Q. Now, you indicated that in the UFG 9 proxy statement, they would have included a 10 statement with respect to Drexel's ownership. 11 I've handed you a copy of what's been previously 12 marked as Tab 194. It's A3012. This is the 13 notice of annual meeting of stockholders to be 14 held on April 30th, 1985. It's filed by UFG. 15 Do you see that? 16 A. I do. 17 Q. And as a director of UFG, you would 18 have received a copy of this, would you not? 19 A. I would have. 20 Q. And directing your attention to 21 Paragraph 5 on Page 3, it's the page marked UFG 22 08749. 26018 1 A. I'm sorry. What page? 2 Q. 08749. 3 A. Okay. 4 Q. If you look at Paragraph 5, it 5 describes Drexel's ownership. 6 Do you see that? It indicates that 7 Drexel owns 585,371 shares of common stock of UFG. 8 Do you see that? 9 A. I do. 10 Q. Then it makes reference that on 11 February 13th, they filed a 13G. 12 Do you see that? 13 A. I do. 14 Q. And this document is dated March the 15 22nd, 1985; that is, the proxy statement. 16 Do you see that? 17 A. Yes. 18 Q. So, you would have known at or about 19 March the 22nd, 1985, that Drexel had a 20 substantial interest in UFG shares; is that 21 correct? 22 A. Well, I don't know about that date; but 26019 1 certainly in that time frame, it seems reasonable 2 to guess that we would have been informed of that. 3 Q. Okay. And if we take a look at the 4 next document, this appears to be the 13G that's 5 referred to in Paragraph 5 of Exhibit -- I mean in 6 Footnote 5 on Page 3 of Exhibit A3012. And I 7 think you'll notice it has the date February 13th, 8 1985. 9 Do you see that? 10 A. I do. 11 Q. And if you look at the 13G, it has the 12 same number of shares: 585,371 shares? 13 A. Right. 14 Q. So, it would appear that UFG received a 15 copy of -- I'm sorry. This is T1063 that I'm 16 looking at, and it's Tab 42. 17 That's the 13G that's been filed by 18 Drexel Burnham Lambert regarding its ownership of 19 United Financial Group of Texas common shares, 20 correct? 21 A. Yes. 22 Q. So, at least by February the 13th, 26020 1 1985, UFG had learned of Drexel's ownership of 2 7.2 percent of the outstanding shares of UFG. 3 Do you see that? 4 A. I see it says 7.1 percent. 5 Q. 7.1. You're correct. 6 A. To answer your question, yes. 7 Q. How -- if Drexel didn't file its 13G 8 until February 13th, 1985, how was it that 9 Mr. Schwartz and MCO were aware on January 17th, 10 1985, of Drexel's ownership of 585,000 shares of 11 United Financial Group common stock? 12 A. Well, I think that anytime you go over 13 5 percent, you must file I think it's a 13D with 14 the Securities and Exchange Commission. 15 Q. And have you ever seen a 13D that was 16 filed by Drexel prior to this date? 17 A. I wouldn't remember that. 18 Q. So, you were aware by the end of 19 1985 -- '84 and the beginning of 1985 that Drexel 20 had a substantial position in UFG shares; is that 21 correct? 22 A. Apparently. February of 1985, yeah. 26021 1 Q. Well -- but I'm looking at the 2 EF Hutton letter that's -- 3 A. That, I don't know. I told you I 4 wasn't familiar with that letter. 5 Q. Well, Mr. Schwartz was aware of it, 6 wasn't he? 7 A. Well, I'm sure Mr. Schwartz knows a lot 8 of things I don't know. 9 Q. Well, Mr. Schwartz works for MCO, does 10 he not? 11 A. Yeah, he sure does. 12 Q. And did you ever have any discussions 13 with people at Drexel at or about this point in 14 time that they had acquired a substantial position 15 in UFG shares? 16 A. No. 17 Q. So, this was just totally serendipitous 18 that Drexel had acquired these shares? 19 A. Tell me, what does that mean, 20 "serendipitous"? 21 Q. It means it was just by total 22 coincidence. 26022 1 A. That they bought the shares by total 2 coincidence? 3 Q. Had you had no discussions with Drexel 4 Burnham Lambert regarding the acquisition of 5 shares of UFG? 6 A. Did I have any discussion with them? 7 Q. Yes. 8 A. No. 9 Q. Did anyone at MCO that you are aware of 10 have any discussions prior to 1985 with Drexel 11 Burnham Lambert regarding Drexel's acquisition of 12 shares of UFG? 13 A. Not that I'm aware of. 14 Q. Do you know if Mr. Schwartz had any 15 discussions with Drexel? 16 A. I told you not that I'm aware of. 17 Q. To the best of your knowledge, no one 18 at MCO was aware of the fact that Drexel had 19 assumed a position of 7.2 percent of the 20 outstanding shares of UFG? 21 A. I don't know that. That isn't what you 22 asked. You sit and you twist and turn and ask all 26023 1 these different questions with different 2 directions and different angles. If you ask me a 3 question, I will answer it. 4 Q. I'm asking you to the best of your 5 knowledge -- 6 A. I've answered it three or four times. 7 THE COURT: Let's get the question. 8 Q. (BY MR. RINALDI) No one at Drexel was 9 aware of UFG's ownership -- I'm sorry -- no one 10 at -- strike that. 11 To the best of your knowledge, prior to 12 1985, no one at MCO was aware of Drexel's 13 ownership of 7.2 percent of the outstanding shares 14 of UFG? 15 A. Not to my knowledge. 16 Q. And you didn't ask Drexel to acquire 17 those shares to assist you with the takeover or 18 with respect to the future acquisition of those 19 shares of UFG? 20 A. Well, I've answered that three or four 21 times. 22 Q. And the answer is? 26024 1 A. The answer is "no." 2 Q. Okay. Now, you said that you thought 3 that perhaps Drexel had filed a 13D. 4 Are you aware that brokers file Form 5 13Gs annually? 6 A. Well, I didn't say that. I did not say 7 that. 8 Q. Well, you suggested that they might. 9 A. I didn't suggest that. I told you it's 10 my -- I'm not a lawyer at all. Okay? It's my 11 understanding when you go over 5 percent, you file 12 what's called a 13D. That's my understanding of 13 how things work. If brokerage firms have another 14 form or something like that, I'm not aware of 15 that. I didn't say they did. I didn't say they 16 didn't. 17 I told you to my knowledge, if MAXXAM 18 goes out and buys a 5 percent position in XYZ 19 Company, it files a 13D. 20 Q. You're not aware of the practices of 21 brokers who file 13Gs annually in lieu of filing 22 the Form 13D? 26025 1 A. I'm not aware of that. 2 Q. When you learned that Drexel had 3 acquired a 7.2 percent interest in the common 4 shares of UFG, what was your reaction? 5 A. I don't know that I had a reaction. 6 Q. Did you contact Drexel and ask them 7 what their intentions were with respect to the 8 acquisition of those shares? 9 A. Not that I recall. 10 Q. Did you ask them whether they would 11 be -- did you contact them and ask them whether 12 they would be interested in entering into an 13 option arrangement with MCO along the lines 14 proposed in the EF Hutton letter that I've just 15 shown you? 16 A. Not that I recall. 17 Q. When you say not that you recall, does 18 that mean you might have done it; you just don't 19 recall? 20 A. I've answered it the best that I can. 21 Q. Do you know whether Mr. Schwartz ever 22 contacted Drexel and asked them whether they would 26026 1 be interested in entering into an option 2 arrangement? 3 A. We did a put/call arrangement with 4 Drexel Burnham, and there had to be some 5 conversations there. Paul Schwartz led those 6 negotiations. I'm assuming they didn't do it by 7 osmosis. 8 Q. My question is: Do you know how it was 9 that Mr. Schwartz was aware of Drexel's ownership 10 prior to Drexel having filed its 13G? 11 A. I don't know. 12 Q. Now, you indicated that Mr. Schwartz 13 negotiated -- and I don't want to put words in 14 your mouth -- but he negotiated an option 15 arrangement with Drexel. 16 Did you not say that a moment ago in 17 response to a question? 18 A. I think I did. 19 Q. Okay. Now, how did you first learn 20 that Mr. Schwartz was negotiating an option with 21 Drexel? 22 A. I'm sure that he told me or Barry 26027 1 Munitz told me or Bill Leone told me. 2 Q. Would it have been at or about the time 3 this EF Hutton letter was sent to you? 4 A. I don't recall. 5 Q. Now, when Mr. Schwartz told you about 6 the option, did he describe to you that this was a 7 structure that he had come up with whereby MCO 8 could acquire UFG shares that wouldn't cause them 9 to go over the 25 percent threshold? 10 A. I don't know. I don't remember what he 11 told me. 12 Q. Do you have any recollection of your 13 conversations with Mr. Schwartz regarding this? 14 A. I don't. 15 Q. Now, Mr. Schwartz worked for Mr. Leone, 16 correct? 17 A. Yes. 18 Q. Now, when the subject of the option 19 arrangement with Drexel came up, did Mr. Schwartz 20 then report to you on his negotiations? 21 A. He certainly could have and I'm sure he 22 kept Dr. Leone aware and I'm sure that he kept 26028 1 Barry Munitz aware. 2 Q. And they would have reported to you? 3 A. I don't know reported, but I think 4 people would have been aware if such a negotiation 5 was at any serious level. 6 Q. Now, during the course of the 7 negotiations by Mr. Schwartz that you recall, did 8 he from time to time discuss with you any of the 9 terms of the put/call options? 10 A. He certainly could have. I don't 11 recall, but he may have. 12 Q. Do you recall that, ultimately, the 13 option arrangement was entered into with Drexel? 14 A. I do. 15 Q. And do you recall that MCO agreed to 16 pay a premium for shares of UFG under the 17 arrangement? 18 A. Well, I've never seen an option where 19 there wasn't a premium. 20 Q. And how do you normally arrive at those 21 premiums, sir? 22 A. Well, there's a lot of ways. It 26029 1 depends on the volatility of the stock. It 2 depends on the trading volume, and it depends on 3 the length of the option period. 4 Q. And at MCO, who would have been 5 authorized to approve or -- an option price for 6 shares to be purchased in the future pursuant to 7 an option with Drexel? 8 A. The board of directors. 9 Q. And in the course of the negotiations, 10 who would have provided guidance to Mr. Schwartz 11 on what would be an appropriate price for the 12 option? 13 A. Well, I don't recall; but I'm satisfied 14 that he had a lot of contact with all the people I 15 had mentioned earlier, that being Dr. Leone, 16 myself, Barry Munitz, Jim Iaco. 17 Q. Well, he had contact with them. Did he 18 have the discretion to set the option price? 19 A. No. 20 Q. Who would have set that? 21 A. The board of directors. 22 Q. Well, they ultimately would have 26030 1 approved it. But during the course of the 2 negotiation, who would have given him guidance to 3 what would be an appropriate number? 4 A. I don't know because I don't remember 5 things happening there. I'm assuming the way 6 things work in the organization -- it's that 7 people negotiate the best transaction that they 8 can and they bring it to the board and the board 9 decides whether they want to do it or not want to 10 do it or send them back to negotiate more. 11 Q. Do you recall sending Mr. Schwartz back 12 to negotiate more? 13 A. I don't remember. 14 Q. As you sit here today, you have no 15 recollection of any negotiation associated with 16 the put/call option? 17 A. I don't. 18 Q. Now, why was the transaction structured 19 in the form that it was, as a call option backed 20 up by a put option, sir? 21 A. Well, what we wanted from our 22 standpoint was the ability to have all of the up 26031 1 side and own the shares at a fixed price. That's 2 what a call option is all about. 3 And I think you have to go back in 4 history and look at all the things that we have 5 discussed today, of how we filed H-(e)1 6 applications to own more shares, how we executed a 7 preferred stock, how we were going to do a capital 8 note and put money in the company. 9 So, I mean, there's a huge pattern here 10 of several things. One is how to own more 11 economics in something that we thought was a very 12 attractive investment. And so, this was another 13 way of the lawyers -- and everything we do is 14 overlawyered, as you can tell -- is overlawyered 15 to make sure that we don't violate -- this is a 16 regulated industry -- that we don't violate any of 17 the regulations, yet have more economics. 18 So, this was a wonderful way of having 19 what turned out to be 300,000 shares of stock at a 20 fixed price in a fixed time period. I think that 21 the board was enthusiastic about this. 22 Q. Now, you indicated that you could lock 26032 1 in an up side number. 2 A. Well, I didn't say that. 3 Q. What were you referring to? 4 A. When I meant was you get all of the up 5 side. 6 Q. What do you mean by that? 7 A. Well, let's say that the option price 8 is whatever it was, $8.50, and the stock is 30. 9 You own the stock at $8.50. You don't share the 10 difference between 8.50 and 30. 11 Q. And when you structured the transaction 12 as a call backed up by a put, what happens on the 13 down side of the transaction? 14 A. That the company that owns the shares 15 can put them to us. 16 Q. And so, in the event that the company 17 that owns the shares puts them to you, if the 18 shares go down in value, you bear the risk of that 19 loss, don't you? 20 A. Yes. 21 Q. So, you had all the down side risk, as 22 well? 26033 1 A. We had the down side, but the -- we 2 thought the risk was on the person who owned the 3 shares because they got no up side. 4 Q. Well -- but they got a premium, didn't 5 they? 6 A. Well, of course. They have cost of 7 money, cost of carry. All you have to do is read 8 the Wall Street Journal every day and see that all 9 options have a premium. 10 Q. That was a substantial premium that was 11 being paid, wasn't it? 12 A. Premiums are based on, as I mentioned 13 to you, volatility, liquidity, all kinds of -- a 14 lot of things. 15 Q. When we talk about a premium, we're 16 talking about paying a per share price that's 17 above the market price, correct? 18 A. Sure. 19 Q. And in addition to that, there was also 20 a cash premium that was paid to Drexel just to do 21 the deal, wasn't there? 22 A. Yes. That's the way options work. 26034 1 Q. Now, when you learned -- I'm sorry. 2 When Mr. Munitz learned of Drexel's 3 ownership of 7.2 percent of the outstanding shares 4 of UFG, did he come to you and express some -- did 5 he come to you and ask you about it? 6 A. I don't recall. 7 Q. Do you recall having a discussion with 8 Mr. Munitz and telling Mr. Munitz that MCO was not 9 a part of any group with Drexel? 10 A. No. 11 Q. So, if the testimony of Mr. Munitz was 12 to the effect that such a conversation occurred, 13 you wouldn't dispute it in any way? 14 MR. KEETON: Your Honor, I thought we 15 crossed this bridge twice the other day, reading 16 one witness' testimony to another witness and 17 asking for comments. I object. 18 THE COURT: Well, he hasn't read it. 19 He's just asking him. 20 MR. KEETON: Well, that's a difference 21 without a distinction, I believe, Your Honor. 22 MR. RINALDI: Your Honor, I believe 26035 1 that we're talking about respondents here. 2 Mr. Munitz was testifying previously about a 3 conversation he had with Mr. Hurwitz. I think I'm 4 entitled to probe Mr. Hurwitz' memory regarding 5 whether he recalls that conversation occurring. 6 MR. KEETON: Your Honor, Mr. Guido 7 tried to create this respondent's exception to the 8 Rules of Evidence. That doesn't work. The fact 9 that somebody is a respondent doesn't change the 10 Rules of Evidence. He's asked this man his 11 recollection, and he's asked Dr. Munitz his 12 answer. That's the way it is. 13 THE COURT: All right. I'll sustain 14 the objection. 15 Q. (BY MR. RINALDI) You have no 16 recollection of telling Dr. Munitz that MCO and 17 Federated were not part of the group with Drexel? 18 A. No. 19 Q. And you have no recollection of 20 Dr. Munitz ever raising the subject of Drexel's 21 ownership of 7.2 percent of the shares of UFG with 22 you? 26036 1 A. No. 2 Q. Do you recall Dr. Munitz advising you 3 that you had to be careful not to go over the 4 25 percent threshold when he learned of Drexel's 5 ownership of 7.2 percent of the shares of UFG? 6 A. No. 7 Q. Now, after you learned -- strike that. 8 To the best of your recollection, did 9 you learn that Drexel had a 7.2 percent ownership 10 of UFG shares at or about the time of the proxy 11 statement of UFG that I showed you? 12 A. I don't recall. 13 Q. Was it your practice as a director to 14 review the proxy statements? 15 A. Yes. 16 Q. And if you'd take a look at 17 Exhibit A3012, which is Tab 194, on the third page 18 of that document it identifies the interest of 19 Federated and MCO. And immediately after that, it 20 talks about Drexel's ownership interest. 21 Do you see that? 22 A. I do. 26037 1 Q. Okay. 2 A. You mean on No. 5? 3 Q. I'm talking about the second page of 4 the proxy statement. It's UFG08748. 5 A. Yes. I see it. 6 Q. Is that something you would have 7 reviewed as a director; that is, the ownership 8 interest of persons with over 5 percent ownership 9 of common shares? 10 A. Well, I'm certain that I read the proxy 11 material. 12 Q. Well -- so, you would have known at or 13 about the time that the proxy statement came out 14 that Drexel had an ownership interest, would you 15 not? 16 A. Apparently so. 17 Q. Now, did it come to your attention that 18 Drexel was continuing to acquire shares of UFG 19 throughout 1985? 20 A. Well, I don't know when; but it -- I do 21 know that they bought more shares. I don't recall 22 at this time how many more. 26038 1 Q. And was it your understanding that 2 those shares were purchased after Mr. Schwartz had 3 entered into negotiations for the put/call option? 4 A. I don't recall. 5 Q. Do you recall that -- whether 6 Mr. Schwartz had told Drexel that UFG -- I mean 7 MCO would enter into an option arrangement for as 8 many shares as Drexel could acquire? 9 A. I don't know what he told them. You 10 would have to ask Mr. Schwartz. 11 Q. Now, during the course of these 12 negotiations with Drexel, is that the kind of 13 thing that Mr. Schwartz would have kept you 14 currently advised of? 15 A. Well, I think I've answered that 16 several times. Do you want me to answer it again? 17 Q. Sure. Give it a try. 18 A. Okay. I'm satisfied that I was aware 19 of it and that he kept other people aware. He 20 kept Dr. Leone aware, I'm sure. He kept Jim Iaco 21 aware and Barry Munitz aware. 22 Q. So, when the subject of the put/call 26039 1 option came up at the board of directors meeting 2 on September 18, 1985, of MCO, it was not 3 something that came as a surprise to you? 4 A. That's correct. 5 Q. Now, would you take a look at the 6 minutes which are Tab 26, T1085. 7 A. (Witness reviews the document.) 8 Q. Now, are these the minutes of the board 9 meeting where the Drexel option was approved? 10 A. It looks that way, yes. 11 Q. Now, was this the first time that you 12 had used a put/call option in order to acquire 13 shares of an enterprise? 14 A. Oh, I don't know. I would have to 15 think about that. 16 Q. In fact, hadn't you quite recently 17 attempted to use a put/call option just like this 18 in your efforts to -- with respect to Pacific 19 Lumber? 20 A. I don't think so, no. I mean, we were 21 talking about a put/call arrangement which never 22 happened. 26040 1 Q. Well, who was Jefferies and Company, 2 sir? 3 A. It was a major investment banking firm. 4 Q. And, in fact, you had approached 5 Jefferies and Company while you were in the 6 process of trying to take over Pacific Lumber and 7 asked them to enter into a put/call arrangement, 8 hadn't you? 9 A. No. 10 Q. What do you recall of that, sir? 11 A. Well, I recall that we had a discussion 12 with Jefferies and Company and that -- on a 13 put/call and it wasn't like this at all, I don't 14 think, and it never happened. So -- we have a lot 15 of discussions with a lot of people and some 16 happen and some don't. 17 Q. Okay. I'm handing you a copy of 18 A14117. This is a new document. And in 19 connection with the -- well, what was the purpose 20 of entering into a put/call option with Jefferies 21 and Company, sir? 22 A. Well, this is a very long time ago; and 26041 1 I would really have to refresh my memory of this. 2 Q. Do you recall that you had approached 3 Jefferies and that you had told them that if they 4 could accumulate a block of shares of Pacific 5 Lumber, that you were interesting in entering into 6 an option arrangement? 7 A. Well, it's a different situation. This 8 has to do with the Hart-Scott-Rodino filings, and 9 it has to do with purchases of over $15 million. 10 And it's for, I think, a very short-term option, 11 quite a bit different than what we were talking 12 about here. But, again, I would have to refresh 13 my memory. I haven't read this or seen this 14 document in a good number of years. 15 Q. Well, do you recall that there was a 16 Congressional investigation that looked into this 17 very subject and that in connection with that 18 investigation, you submitted written testimony to 19 the Subcommittee on Oversights and Investigation? 20 A. I don't remember that. That I gave a 21 written statement? I don't know that I remember 22 that. I may have. Is that here? 26042 1 Q. I -- strike that. It may be that it's 2 just a statement that was read into the record by 3 you. Take a look at Pages 22 through 27. 4 A. Okay. 5 Q. Do you see that? 6 MR. KEETON: Your Honor, might we 7 inquire, first of all, what's all this going 8 towards that's relevant to our case? I fail to 9 see any of the relevancy other than just stirring 10 this up and putting this into the record. 11 MR. RINALDI: Your Honor, I think this 12 is relevant to the question of how the option 13 arrangement was entered into. I just have a 14 couple of very short questions to ask him, and it 15 relates to an identical option that was entered 16 into at almost the same point in time as the 17 option here in question. 18 MR. KEETON: I've heard here one, the 19 option that Mr. Rinaldi is talking about wasn't 20 entered into. I've heard the witness say it's not 21 the same. And he has one or two little questions, 22 and yet we have five pages out of a Congressional 26043 1 hearing. I object to this whole way of 2 proceeding, Your Honor. Why doesn't he just ask 3 his little questions, if he dares. 4 THE COURT: What's your question now, 5 Mr. Rinaldi? 6 Q. (BY MR. RINALDI) Sir, would you take a 7 look at Page 25 of the testimony that you gave 8 before the Senate -- I'm sorry -- the Subcommittee 9 on Oversights and Investigation. 10 Does this appear to be the testimony 11 that you gave before the Hearing on Oversights and 12 Investigation? 13 A. I don't know. 14 MR. RINALDI: I would move the 15 admission of A14117, Your Honor. 16 MR. KEETON: I absolutely object, 17 Your Honor. It doesn't belong in this record. If 18 he's using this to refresh this witness' 19 recollection or establish something, he can do 20 that. This doesn't go into this record. 21 MR. RINALDI: This is a statement of a 22 party proponent regarding the subject of a 26044 1 put/call option and his motivation for entering 2 into that option and how it was entered into. It 3 was entered into three months before the option 4 with Drexel Burnham Lambert was entered into, and 5 I think it's very germane because it reflects upon 6 the mannerism in which these kinds of options were 7 entered into by MCO. 8 MR. KEETON: After one year and five 9 days, now we're going to open another case. I 10 object. He does not need this in the record. 11 THE COURT: I'm not necessarily saying 12 it's the same option. But I say it's relevant, 13 and I'll receive the document. It is a statement 14 of the witness. 15 Q. (BY MR. RINALDI) Sir, directing your 16 attention to Page 25. And if you go down to the 17 third full paragraph, it starts, "In early 18 August 1985, I had discussions with Jefferies and 19 Company concerning the possibility of entering 20 into a put/call option agreement with Jefferies 21 for the purchase of a block of approximately 22 500,000 shares of Pacific Lumber stock." 26045 1 Is that an accurate statement? 2 A. I believe it is. 3 Q. Then it goes on and says, "I learned 4 from them for the first time of this option 5 technique when Jefferies and Minstar used it in 6 the AMF transaction in which MAXXAM had been an 7 unsuccessful bidder. We were advised by our 8 attorneys that MAXXAM could, consistent with the 9 Hart-Scott-Rodino Act, enter into a Minstar type 10 option agreement for the purchase of an additional 11 block of Pacific Lumber shares." 12 Is that accurate? 13 A. I believe it is. 14 Q. What were you referring to when you 15 made that statement, sir? 16 A. Just what it says. 17 Q. What does it mean? 18 A. It means that in order to buy more than 19 $15 million worth of securities, that you have to 20 have Hart-Scott-Rodino approval which takes some 21 30 days to get normally. 22 Q. So, you were going to enter into a 26046 1 put/call option where the shares would be 2 purchased by a third party and they would hold 3 those shares and then after -- 4 A. No, that's not what it says; and it's 5 not anywhere near the same option. If you're 6 telling the Court it's the same type of option, 7 I'm going to show you why it's not even close and 8 why it wasn't executed. This option at Drexel was 9 for two and a half years, and this option we're 10 talking about is for like 45 days -- 11 Q. It serves the same purpose, doesn't it? 12 MR. KEETON: Let the witness finish. 13 He's answering what's different. Let him answer. 14 A. It's totally different. Everything is 15 different about it. You know, one is to go over 16 25 percent and to get net worth maintenance. The 17 other is Hart-Scott-Rodino which means is there 18 any antitrust problem. There is guaranteed no 19 antitrust problem in a lumber company. We weren't 20 in the lumber business. This is a put/call that 21 had been successfully used by other people in 22 other transactions and is for a very short period 26047 1 of time. 2 Q. (BY MR. RINALDI) Would you explain to 3 me how the put/call was going to work with respect 4 to Jefferies? Jefferies was going to purchase the 5 shares; is that correct? 6 A. They owned the shares. 7 Q. They were going to acquire the shares 8 if they didn't own them, correct? 9 A. They did own the shares. It's not 10 whether they were going to. They owned the 11 shares. 12 Q. Okay. Take a look at the next 13 paragraph, sir. It says, "I therefore told 14 Jefferies that if he could accumulate a block of 15 approximately half a million shares of Pacific 16 Lumber stock, we were interested in entering into 17 this type of an option arrangement subject to an 18 agreement when the time came on the price and 19 other terms of sale." 20 Do you see that? 21 A. Yes. 22 Q. Did that refresh your recollection that 26048 1 Mr. Jefferies didn't own the shares? 2 A. He did own the shares at the time we 3 were going to enter into a put/call agreement. 4 Q. Prior to entering into the put/call 5 agreement, it says you approached Mr. Jefferies 6 and you told him if he could accumulate the 7 shares, you would enter into the agreement subject 8 to agreement on price and other terms of sale? 9 A. Subject to a lot of agreements, yes. 10 Q. Mr. Jefferies then went out and 11 acquired half a million shares of Pacific Lumber; 12 is that correct? 13 A. That's correct. 14 Q. After they had acquired the shares, 15 Mr. Jefferies then negotiated with you to try to 16 enter into a put/call arrangement? 17 A. That's correct. 18 Q. And you were in agreement on the 19 put/call arrangement except that Mr. Jefferies 20 said he wouldn't enter into it unless you agreed. 21 It wasn't for purposes of expediting a takeover 22 attempt? 26049 1 A. Mr. Jefferies didn't do that, but his 2 attorney had a standard form. It said if we had 3 any intentions of a takeover within a certain 4 number of days, that they couldn't do it. So, we 5 did not enter into a put/call agreement. 6 Q. But the reason you were proposing to 7 enter into the put/call agreement was so that 8 Mr. Jefferies could obtain shares and submit them 9 to a put/call option whereby you could later 10 acquire them? 11 A. Well, it never happened. 12 Q. That was the purpose for the 13 negotiation, was it not? 14 A. Well, you know, you said about four, 15 five different things here; and two or three of 16 them are dramatically wrong. 17 Q. Tell me what was wrong. 18 A. You said it's the same put and call. 19 It's not. It's not even remotely the same put and 20 call arrangement. We can go through this thing 21 and pick it apart, if you like. 22 It's totally different, for a totally 26050 1 different purpose. It had been done before and 2 established. How you can sit here and make these 3 statements and not back them up is beyond me. 4 Q. You approached Jefferies, did you not; 5 and you asked Jefferies to accumulate a block of 6 shares, did you not? 7 A. That is not what happened. 8 Q. This is your testimony. It says, "I 9 therefore told Jefferies that if he could 10 accumulate a block" -- 11 A. That's different than what you just 12 said. 13 Q. Did you tell Jefferies that if 14 Jefferies could accumulate a block of 15 approximately half a million shares of Pacific 16 Lumber, that you were interested in entering into 17 an option arrangement? 18 A. I did. 19 Q. And in this case, sir, did you approach 20 Drexel Burnham Lambert; and did you tell Drexel 21 Burnham Lambert that if they could accumulate a 22 block of shares of UFG, that you were interested 26051 1 in entering into a put/call option? 2 A. No. 3 Q. Did anyone at MCO do that? 4 A. No. 5 Q. In other words, Drexel acquired the 6 shares totally independent of any urging of MCO? 7 A. That's correct. 8 MR. RINALDI: Your Honor, I would move 9 the admission of A14117 as the admission of a 10 party proponent. 11 MR. KEETON: Whatever purpose it 12 served, he filled in by the questions. If this is 13 going in, this case is going to have a whole lot 14 more evidence in it. 15 THE COURT: I think I've already 16 received it. 17 MR. KEETON: I still object. This is 18 like putting a deposition in, Your Honor. 19 THE COURT: Well, we have the witness 20 here. He can be asked about anything that's in 21 there. It's his statement. 22 MR. KEETON: I agree with that. It's 26052 1 the statement itself that has a lot of other 2 extraneous materials that I'm objecting to. 3 THE COURT: If it's extraneous, it has 4 no relevance. 5 MR. KEETON: Thank you. 6 Q. (BY MR. RINALDI) Now, the -- sir, take 7 a look at the minutes that I showed you a while 8 ago, T1085, which is Tab 26. 9 A. Right. Got it. 10 Q. And it indicates here that the option 11 agreement was going to be for approximately 12 300,000 shares of common stock of UFG. 13 Do you see that? 14 A. Where is that? 15 Q. It's on Page -- 16 A. Yes. Yes, I see it. 17 Q. -- OW009567. 18 A. Just a second. 19 Q. I'm sorry. 20 A. Tell me -- 21 Q. You're on the page there. Take a 22 moment to read that, would you, please. Just that 26053 1 first sentence that describes the transaction. 2 A. (Witness reviews the document.) All 3 right. 4 Q. Now, when the option was first 5 presented to the board, do you recall that it was 6 initially proposed that the option be done for 7 790,459 shares? 8 A. I certainly remember it was a lot more 9 than 300,000. 10 Q. And take a look at Exhibit T1088. This 11 is a letter written by Cahill Gordon to the 12 NASDAQ. And it indicates on the front page that 13 apparently this was sent to your attorney, Richard 14 Marlin. 15 Do you see there's a fax on the front 16 page? 17 A. I do. 18 Q. And the letter which is signed by 19 Mr. Mack, who was the attorney for Drexel Burnham 20 Lambert, writes in the first full page that he's 21 writing on behalf of Drexel to request approval 22 for a proposed option transaction between DBL and 26054 1 MCO involving a block of 790,450,000 shares of 2 common stock. 3 Do you see that? 4 A. I do. 5 Q. Does that refresh your recollection as 6 to the size of the block of stock being referred 7 to? 8 A. It sounds right. 9 Q. Now, do you recall that back in March 10 when the proxy statement was filed which is 11 A3012 -- that's Tab 194 -- that Drexel's ownership 12 was only 585,000 shares? Do you recall that? 13 A. I do. 14 Q. Did MCO or did Mr. Schwartz tell Drexel 15 that if they acquired additional shares of UFG 16 shares over and above the 585,000 shares, that MCO 17 would be agreeable to purchasing them under an 18 option arrangement? 19 A. Not that I'm aware of. 20 Q. Were you aware that Drexel was 21 acquiring additional shares after April of 1985 -- 22 A. No. 26055 1 Q. -- for purposes of transferring or 2 optioning to MCO? 3 A. No. 4 Q. And you had no discussions with Drexel 5 about their increasing their share ownership? 6 A. That's correct. 7 Q. Now, when the subject of the put/call 8 option came up, do you recall raising the issue 9 with Mr. Munitz that -- do you recall discussing 10 with Mr. Munitz the question of whether regulatory 11 approval would be needed in order to go forward 12 with this transaction? 13 A. I don't recall. 14 Q. Were you concerned when the subject of 15 the put/call option came up that it could 16 potentially put you over the 25 percent limit? 17 A. Well, I would say "concerned" is the 18 wrong word. As we discussed all day today, we 19 wanted to certainly make sure that we didn't 20 violate that. Everyone was aware of that; in 21 particular, Dr. Munitz. 22 Q. Did Mister -- do you recall having any 26056 1 discussions with Dr. Munitz where he assured you 2 that there was no problem with structuring the 3 transaction in this fashion? 4 A. Well, do I specifically remember that 5 conversation? I would say I do not, but he would 6 have been certain of that or he would have told me 7 differently. 8 Q. Prior to entering into the put/call 9 option, did MCO or Federated seek the approval of 10 the regulators? 11 A. I wouldn't know. 12 Q. Did you seek an opinion from the 13 regulators that if the shares were acquired under 14 the structure of a put/call option, that it would 15 not cause MCO or Federated to go over the 16 25 percent ownership threshold of UFG common 17 stock? 18 A. I think I've testified several times 19 today that I did not get involved in that kind of 20 detail, but we certainly had great lawyers and 21 great people working on that. 22 Q. Now, I notice that the option 26057 1 arrangement has a letter of credit associated with 2 it. 3 Do you recall that? 4 A. I believe that to be the case. 5 Q. What was the purpose of the letter of 6 credit as you understood it? 7 A. Well, it was -- if the stock was ever 8 put to us, that they would be assured that they 9 would get paid. 10 Q. So that it would eliminate any risk of 11 MAXXAM's inability to pay at some future time? 12 A. Well, I don't know that that makes any 13 difference because MAXXAM was certainly good for 14 the money; and it had its full faith and credit 15 behind it anyway. 16 Q. Well, if it didn't make any difference, 17 why was it that the letter of credit was made part 18 of the put/call option? 19 A. Because I'm satisfied that was part of 20 the negotiation, like every negotiation. 21 Q. And so, it's your understanding that 22 that was required by Drexel in order to enter into 26058 1 the transaction? 2 A. I'm satisfied that was part of the 3 negotiation. 4 Q. Well, what does that mean, you're 5 satisfied that -- would that have been something 6 Mr. Schwartz would propose for the protection of 7 MAXXAM? 8 A. I'll ask him. 9 Q. Well, no. 10 I mean, why was a letter of credit put 11 into this transaction -- 12 A. Because a letter of credit is better 13 than no letter of credit. Two is better than one. 14 I mean, that's why. But it didn't matter because 15 MCO's credit was good. I'm satisfied that any 16 time in the negotiation, if you can get more -- 17 and probably Mr. Schwartz got something on the 18 other side. I wasn't part of the negotiations, 19 but that's what it came out to be. 20 Q. Well, you weren't part of the 21 negotiation; but Mr. Schwartz reported to you on 22 it, didn't he? 26059 1 A. He did. 2 Q. And there's a non-refundable premium of 3 $683,147 with respect to this transaction. That's 4 at Page 2 of the option. 5 So, MCO was agreeing to pay over $2 a 6 share? 7 A. Do I have a copy of the option? 8 Q. It's attached to the minutes of 9 December 17, 1985. 10 A. Okay. 11 Q. If you look at Page 2, it indicates 12 that there is a non-refundable premium of $683,147 13 that's being paid in the form of a cashier's 14 check. 15 A. I see that. 16 Q. So, MAXXAM was ready to pay over $2 a 17 share as a non-refundable premium in order to 18 acquire the option, correct? 19 A. Yes. 20 Q. Now, the option price for the 300,000 21 shares is slightly over $8 a share. Do you 22 recall, were UFG shares trading at or anywhere 26060 1 near $8 a share at this point in time? 2 A. Well, I don't know; but I would doubt 3 it because there has to be a premium. But I don't 4 know what they were trading for at that time. 5 Q. Now, after the option arrangement was 6 entered into -- and you voted to approve the 7 option, correct? 8 A. I did. I think -- I would guess that 9 everybody voted unanimous approval. 10 Q. Now, after the option arrangement was 11 entered into, do you recall that it became 12 necessary to extend the option for an additional 13 period of time? 14 A. I do. 15 Q. And why was that, sir? 16 A. Because we hadn't had satisfaction on 17 negotiating with the Federal Home Loan Bank Board 18 on the net worth maintenance. 19 Q. And so, when it came time to exercise 20 the options, that the shares had been put to you 21 by Drexel, there was the risk that you might go 22 over the 25 percent threshold? 26061 1 A. Well, we wouldn't have because we would 2 have sold the shares rather than accept them. 3 Q. Take a look at A14116. This is a brand 4 new document. 5 Now, who was -- there's a cover letter 6 from Byron Wade to Howard Sobel. 7 Who is Mr. Wade? 8 A. Assistant general counsel at this time. 9 Q. And it indicates that -- in the second 10 paragraph that there is enclosed a second 11 amendment to the stock option agreement and 12 agreement. 13 Do you see that? 14 A. I see that. 15 MR. KEETON: Mr. Rinaldi, could you 16 hold up a second? That wasn't on the pull list. 17 Some of us, at least, don't have that. 18 MR. RINALDI: I think I may have -- 19 THE COURT: We'll adjourn until 9:00 20 tomorrow. 21 (Whereupon at 4:44 p.m. 22 the proceedings were recessed.) 26062 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Marcy Clark, the undersigned Certified 5 Shorthand Reporter in and for the State of Texas, 6 certify that the facts stated in the foregoing 7 pages are true and correct to the best of my ability. 8 I further certify that I am neither 9 attorney nor counsel for, related to nor employed 10 by, any of the parties to the action in which this 11 testimony was taken and, further, I am not a 12 relative or employee of any counsel employed by 13 the parties hereto, or financially interested in 14 the action. 15 SUBSCRIBED AND SWORN TO under my hand 16 and seal of office on this the 13th day of 17 October, 1998. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-99 21 . 22 . 26063 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Shauna Foreman, the undersigned 5 Certified Shorthand Reporter in and for the 6 State of Texas, certify that the facts stated 7 in the foregoing pages are true and correct 8 to the best of my ability. 9 I further certify that I am neither 10 attorney nor counsel for, related to nor employed 11 by, any of the parties to the action in which this 12 testimony was taken and, further, I am not a 13 relative or employee of any counsel employed by 14 the parties hereto, or financially interested in 15 the action. 16 SUBSCRIBED AND SWORN TO under my hand 17 and seal of office on this the 13th day of 18 October, 1998. 19 _____________________________ SHAUNA FOREMAN, CSR 20 Certified Shorthand Reporter In and for the State of Texas 21 Certification No. 3786 Expiration Date: 12-31-98 22