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


In the Matter of: )
4 )
5 TEXAS, Houston, Texas, and )
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
a New York Business Trust, )
11 )
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 )
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. )





1 A-P-P-E-A-R-A-N-C-E-S


Special Enforcement Counsel
4 PAUL LEIMAN, 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
11 of: Dechert, Price & Rhoads
1500 K Street, N.W.
12 Washington, D.C. 20005-1208
(202) 626-3306
DALE A. HEAD (in-house)
14 Managing Counsel
15 5847 San Felipe, Suite 2600
Houston, Texas 77057
16 (713) 267-3668

of: Mayor, Day, Caldwell & Keeton
20 1900 NationsBank Center, 700 Louisiana
Houston, Texas 77002
21 (713) 225-7013



3 of: Clements, O'Neill, Pierce & Nickens
1000 Louisiana Street, Suite 1800
4 Houston, Texas 77002
(713) 654-7608
7 MARK A. PERRY, Esquire
of: Gibson, Dunn & Crutcher
8 1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5303
9 (202) 955-8500


11 JOHN K. VILLA, Esquire
of: Williams & Connolly
13 725 Twelfth Street, N.W.
Washington, D.C. 20005
14 (202) 434-5000


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
Ms. Marcy Clark, CSR
21 Ms. Shauna Foreman, CSR

22 .




Examination by Mr. Rinaldi..............25793
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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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2 was called as a witness and, having been first

3 duly sworn, testified as follows:


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


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


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.


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?


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


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?


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


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


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


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


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.


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.


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?


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


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


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.


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,


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.


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


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?


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


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


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


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


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


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.


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


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


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


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


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


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


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


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


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



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.


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?


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?


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?


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.)


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


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


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


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


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


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.


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


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


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.


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?


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,


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.


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?


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


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


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


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?


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


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


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?


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


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.


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


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


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


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


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


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?


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.


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


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


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?


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.


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


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


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


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.


12 (Whereupon, a short break was taken

13 from 10:36 a.m. to 10:57 a.m.)


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


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


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?


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


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


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


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.


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.


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


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.


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.


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


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


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."


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


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


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


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.


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


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


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


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


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


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?


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


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,


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


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?


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?


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."


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.


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


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


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


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.


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,


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


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


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


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.


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?


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


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.


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


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?


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?


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.


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


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.


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?


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


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


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


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?


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


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.


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.


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.


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 --


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.


7 (Whereupon, a lunch break was taken

8 from 12:04 p.m. to 1:35 p.m.)


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.


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.


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


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.


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


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


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.


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,


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.


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.


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 --


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


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


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


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.


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.


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


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?


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


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


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.


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


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.


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


1 things; but I think those were some of his

2 principal roles.

3 Q. Do you recall what positions he held at


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.


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.


11 (Discussion held off the record.)


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.


20 (Discussion held off the record.)


22 THE COURT: All right. We'll be back


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?


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?


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


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.


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


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.


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


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


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?


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


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


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.


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.


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


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


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


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.


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?


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


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


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.


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?


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


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


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


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.


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


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


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 --


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 --


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.


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.


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


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.


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?


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


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 --


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


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?


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


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?


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


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


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


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.



1 (Whereupon, a short break was taken

2 from 3:04 p.m. to 3:24 p.m.)


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.


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?


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


20 Did MCO then agree to take over the

21 responsibility for Federated's subscription

22 rights? Do you recall?


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


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.


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


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


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.


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


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.


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


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?


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


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?


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


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


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


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


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


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.


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 --


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.


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


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,


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.


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.


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


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?


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?


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


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


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


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


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


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


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


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?


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.


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


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?


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.


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.


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


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.


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


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?


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


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


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."


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


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


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


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


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?


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


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


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


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


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


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.


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


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


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


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


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?


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


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?


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.)



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 ____________________________
19 Certified Shorthand Reporter
In and for the State of Texas
20 Certification No. 4935
Expiration Date: 12-31-99
21 .

22 .



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 _____________________________
20 Certified Shorthand Reporter
In and for the State of Texas
21 Certification No. 3786
Expiration Date: 12-31-98

Continue with Hurwitz Testimony , Oct. 14, 1998
OTS vs MAXXAM Trial Testimonies

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