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Testimony of Charles Hurwitz at OTS Trial, 10-13-98
Testimony of Charles Hurwitz at OTS Trial, 10-13-98
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
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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?
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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