15 had served at Houston for some time that you left
16 academia and went into the private sector; is that
17 correct?
18 A. Yes, sir.
19 Q. Now, prior to your entry into the
20 private sector, had you had any educational or
21 professional experience in the area of finance?
22 A. I didn't have educational experience.
25056
1 I was serving -- for example, when I was a
2 chancellor at the University of Houston, I was a
3 member of the Charter Bank board here in Houston.
4 I had consulted with several corporate boards on
5 questions, mostly of board evaluation, chief
6 executive evaluation, compensation, but not -- I
7 think what you would mean by traditional finance.
8 That wasn't my degree and wasn't my
9 responsibility.
10 Q. Now, when you say you had consulted
11 with respect to boards, what was the nature of the
12 consulting work that you had done for boards?
13 A. Basically, I would be brought in -- it
14 started more with colleagues and universities; and
15 then I met, from those colleagues and
16 universities, boards members who were corporate
17 executives and wanted the same kind of advice and
18 experience in their corporate setting. So, it
19 would be interviewing board members, interviewing
20 executives, talking about the administrative
21 process there, did they feel the right people were
22 in place, did they feel the decision-making
25057
1 process was timely, were they getting information
2 that they wanted.
3 Often if a chief executive was leaving,
4 I would give some guidance on the search process
5 for finding a new person.
6 Q. In connection with this consulting, you
7 were basically a consultant to the process of how
8 information disseminated within an organization?
9 A. I think it wouldn't have been all types
10 of information. It would have been much more
11 questions of governance, leadership. On the
12 academic side, much more complicated because there
13 were search processes; and many of them would be
14 media covered.
15 On the private side, it was much less
16 likely to be complex. Again, it would be what
17 kind of person are we looking for, what sort of
18 person do the other management people feel are
19 important to bring in, how do you check
20 references.
21 I think it surprised me and still does
22 how relatively undeveloped some of those processes
25058
1 are at many complex organizations. So, it would
2 have been basically that category.
3 Q. Now, you were doing this consulting
4 work at the same time as you were serving in your
5 position at Houston?
6 A. Well, most -- I was. In most instances
7 on the "not for profit" side with colleagues and
8 universities, it really would have been pro bono
9 work; or they would have paid my expenses back and
10 forth to help them. It was clear to the
11 University of Houston there was an advantage as
12 part of our networking and getting that done. If
13 I went and talked to a corporate board, it would
14 have been because either a member of my University
15 of Houston board members or alumni board had asked
16 if I could come and spend the day with them and
17 talk about their interests and their priorities,
18 originally while I was at the University of
19 Illinois and then at the University of Houston.
20 Q. And the corporate entities that you
21 would have consulted with were non-profit?
22 A. No, no. The corporate would have been
25059
1 for profit; and other colleagues and universities,
2 symphony, museum, Salvation Army would have been
3 on the "not for profit" side.
4 Q. Were you paid for this consultancy
5 work, or was it all pro bono?
6 A. On the "not for profit" side, it would
7 have been expenses. On the profit side, probably
8 it would have been somewhere between pro bono and
9 a favor. I would say on a rare occasion where it
10 was really coming in from the outside and looking
11 at a corporate bond situation, I would have been
12 paid as a daily consultant.
13 Q. And was this a -- an enterprise that
14 you would engage in periodically, or did you have
15 sort of a thriving practice of consulting with
16 corporations and non-profit corporations?
17 A. I think it was clearly on the engaged
18 periodically, not thriving practice side.
19 Q. Do you recall some of the corporate
20 enterprises that you would have consulted with?
21 A. One of the places that I wound up
22 spending a fair amount of time on and off -- and I
25060
1 couldn't give you the exact time because when I
2 left the University of Houston, I shifted
3 relationships with them as well -- was with
4 Charter Bank.
5 Q. What was the nature of your --
6 A. There I spent a fair amount of time
7 interviewing key executives, helping with
8 transition in leadership at a number -- they were
9 going through a transformation and expansion so
10 that I was involved in both the evaluation, I
11 think, in one or more cases, the letting go of,
12 and in one or more cases, the bringing in of the
13 key management team and working with the chief
14 executive officer on identification of new
15 directors and how the board was working.
16 Q. What was Charter Bank?
17 A. It was a basic commercial bank here in
18 Houston.
19 Q. And when would you have done this work
20 for Charter Bank?
21 A. It would have been on and off between
22 the second half of the Seventies into the first
25061
1 half of the Eighties.
2 Q. Did you continue to do the work for
3 Charter Bank once you had become involved with
4 MCO?
5 A. Well, this is a while ago; and so, I'm
6 trying to -- what I remember, Mr. Rinaldi, vaguely
7 is when I went to MCO and Federated and took a
8 seat on the United Financial Group board, there
9 was a question about whether I could be both a
10 Charter Bank board member and a United Financial
11 Group board member. And I think ultimately there
12 was a legal opinion that I had to leave the
13 Charter Bank board. And so, I vaguely remember
14 that shift.
15 I can't tell you the exact time or the
16 nature of it. But it would have been -- I'm
17 fairly confident it was in that time period.
18 Q. Well, you indicated that there did come
19 a point in time when you joined the board of MCO.
20 Is that what you were referring to?
21 A. Well, I was mentioning specifically the
22 board of United Financial Group, but it would have
25062
1 come at the same time that I joined MCO and I was
2 on the board of MCO.
3 Q. All right. How was it that you came to
4 be involved with MCO and United Financial Group?
5 A. I'll try to keep it short, and you tell
6 me if you need more. Basically, for a year or two
7 before 1982 -- 1982 in the summer would have been
8 when the shift occurred -- for a variety of
9 reasons, most of them tied to being the chancellor
10 of the University of Houston, I had regular
11 conversation with people on the corporate side of
12 life in Houston. With many of them, I would argue
13 rather strongly about whether it was harder to run
14 a university or run a corporation. And amongst
15 the people with whom I would have that debate was
16 Charles Hurwitz. And toward -- probably going
17 into the late part of '81 into '82, that
18 conversation was more serious. I had always
19 thought that I could be a more effective
20 administrator in the "not for profit" sector if I
21 had a feel in a more direct way with what was
22 happening on the other side of the table.
25063
1 Frankly, I was also getting a little tired of
2 having my board members tell me if I ever made an
3 honest living and earned a payroll, I would
4 understand what they were up to.
5 I had the opportunity of talking to
6 Mr. Hurwitz and doing just that when his business
7 situation changed in '82, and that's when I
8 shifted over.
9 Q. How was it that you had known
10 Mr. Hurwitz prior to 1982?
11 A. Our spouses knew each other. So, we
12 would play tennis from time to time, the four of
13 us, and have a meal. I also -- in 1980, I had
14 been the victim of an armed robbery in my house
15 with some guests when my life was threatened and
16 they tried to set the house on fire. And as a
17 result of that, I was doing a lot of speech making
18 around the city about safety and public visibility
19 and wound up talking to him after a meeting at
20 some point about this issue.
21 So, a variety of different settings
22 brought us together. Plus, I also think at some
25064
1 point I was hoping to get some money from him for
2 the University of Houston.
3 Q. And how long, prior to your going to
4 work with Mr. Hurwitz at UFG and MAXXAM, had you
5 known him?
6 A. I'm going to say two or three years. I
7 could be off by a year, but I don't think by much
8 more than that.
9 Q. You said you played tennis with him and
10 met with him socially?
11 A. Yes.
12 Q. Was that a fairly frequent occurrence?
13 A. No. I don't play tennis fairly
14 frequently, period. So, if it was once every
15 three or four months, in that period, probably --
16 that's probably a fair characterization.
17 Q. And how about the dinners?
18 A. Likewise. I included both of those
19 together.
20 Q. And did you also attend social
21 functions with Mr. Hurwitz and his wife?
22 A. I suspect only at this -- Houston, I'm
25065
1 reminded again today, is in some ways still a
2 pretty small town maybe just compared to
3 Los Angeles. I was chair of the Houston Grand
4 Opera board at that time, doing an awful lot of
5 basic work, again trying to bring the community
6 together for the University of Houston. So, I'm
7 sure that I would see him at those events. His
8 wife particularly was active in fund raising for
9 them.
10 Q. Now, I take it from your comments,
11 then, that there came a time when Mr. Hurwitz
12 suggested to you that there might be a place for
13 you at MCO?
14 A. Yes, sir.
15 Q. Tell us how that came about.
16 A. Well, I think it was related to this
17 ongoing debate about the relative challenge of
18 running a corporation and running a university.
19 And his presentation to me over -- was probably in
20 the six months or so before the shift occurred;
21 so, it would have been late '81 into '82. The
22 challenge was basically if I thought it was so
25066
1 much easier to do the corporate side, why didn't I
2 actually accept the challenge. We were very
3 different. Our backgrounds are very different.
4 Our areas of expertise are very different.
5 Essentially, what he said to me was "I know how to
6 do the financial side. I understand the deal
7 making and the fiscal transactions. It's not
8 something I would lean on you on."
9 I said that was a good thing. My
10 experience, in turn, was where he had much less
11 experience and much less desire to be, which was
12 the people, the searching process, the strategic
13 planning.
14 His suggestion to me was that -- I
15 believe it was just at the time he was getting not
16 just more involved with just United but also
17 Simplicity Patterns, that it was more than he
18 could handle himself. Would I consider coming on
19 board to take that non-physical side of the
20 responsibility.
21 Q. You said he was competent to handle the
22 financial side and he understood deals.
25067
1 Do you recall that?
2 A. Yes. That was my feel. When you
3 looked at both of us, if you were going to divide
4 up those responsibilities, it seemed pretty clear
5 to me on the financial and deal making side, you
6 would look to him; and on the people and
7 processing side, you would look to me.
8 Q. So, then you went to work at MCO, did
9 you not?
10 A. I took the presidency at -- roughly, it
11 would have been the same time that I became
12 president of Federated Development Company,
13 vice chairman of then called MCO, now MAXXAM, and
14 soon after that I was also a board member at
15 United Financial Group and United Savings.
16 Q. And was it your understanding that you
17 were going to handle the people and personnel side
18 of UFG?
19 A. Gosh, no. At that point, I was just
20 going on the board of UFG. There was an
21 administration and management team in place. The
22 UFG relationship at that time was just as a board
25068
1 member.
2 Q. Well, now, you said that Mr. Hurwitz
3 wanted you to come in and do some people side
4 or -- and he was competent to handle the deals and
5 the financial side.
6 What institutions were you making
7 reference to?
8 A. I was making reference to Federated
9 Development, to MCO, and to -- in that stage, to
10 Simplicity Patterns.
11 Q. Did you then -- what was the position
12 that you held at Federated?
13 A. I was the president of Federated
14 Development.
15 Q. And how many employees did Federated
16 Development Company have? This is 1982.
17 A. 1982? I think at that time, there was
18 a reinsurance company and some real estate. I'm
19 going to say 10 to 15. I could be off. It would
20 be on that order of magnitude. Federated was not
21 a large, complicated company at that time.
22 Q. Did your duties at Federated occupy
25069
1 your full time?
2 A. No.
3 Q. What percentage of your time would have
4 been devoted to Federated?
5 A. It would have really depended upon
6 the -- literally the month, the time of year. I
7 was spending a fair amount of time on the MCO
8 side, which was larger and -- much larger and more
9 complicated at that time. They had real estate
10 and gas and oil, geothermal, some other pieces.
11 So, it would have -- and probably for some time,
12 to come -- would have been divided literally on
13 timing the challenge, he or Bill Leone who was the
14 president of MCO would ask me to look at a certain
15 situation and I would shift or pick that piece up.
16 Q. Now, were you an employee of both MCO
17 and Federated at this point in time?
18 A. Yes, sir.
19 Q. And you received a salary from
20 Federated and another one from MCO?
21 A. I believe that it was -- that they
22 would again, depending upon the percentage of my
25070
1 time there, allocate it between them. But at one
2 time or another, I was probably paid by both of
3 them.
4 Q. And in addition to that, you worked as
5 a -- you were -- had a position with Simplicity
6 Patterns?
7 A. I was a board -- that was just as a
8 board member. But from time to time as a board
9 member, since they were just changing ownership as
10 the Hurwitz group became the majority
11 shareholders, I was spending some time there as a
12 board member talking to people about the
13 transition, listening to the process.
14 So, it would have taken some time; but
15 I would not have been paid by Simplicity other
16 than as a director.
17 Q. Okay. And at the point that you --
18 that we're talking about here, did there come a
19 point in time when you became a member of the
20 board of United Financial Group?
21 A. Yes, sir.
22 Q. Okay. Can you tell the Court how that
25071
1 came about?
2 A. It would have about roughly, I think,
3 still in the 1982 period, so close to when I came
4 to Federated and to MCO. And I was asked by
5 Mr. Hurwitz and I think also Mr. Kozmetsky -- I
6 had known Mr. Kozmetsky. He was just finishing
7 his term as the dean of business at the University
8 of Texas. He and I had worked together while at
9 the University of Houston.
10 I was asked by MCO to assume a board
11 seat or I was in invited by MCO and by United
12 Financial Group. It's been a while. It's right
13 in that time period when I took that board seat.
14 Q. Well, you said a moment ago that
15 Mr. Hurwitz had asked you to sit on the board at
16 UFG.
17 A. I'm not sure I said that. If I did,
18 what I meant to say was the companies, both
19 Federated and MCO, where he was the chief
20 executive officer, both of them, those companies,
21 asked me, invited me -- the board invited me
22 because, ultimately, since it was a publicly held
25072
1 company, I had to be approved by the shareholders.
2 I was basically trying to answer your question of
3 when did I go on the board.
4 Q. My question to you is: Were it not for
5 the fact that Mr. Hurwitz was the controlling
6 shareholder of MCO and the controlling shareholder
7 of Federated, do you -- you would never have been
8 asked to sit on the board of UFG, would you?
9 A. Well, I would like to believe they
10 would have seen my quality individually; but I
11 think that's absolutely right.
12 Q. In fact, it's the fact that Mr. Hurwitz
13 was involved in the ownership of those companies
14 that you were put on the board, isn't it?
15 A. Yes, sir.
16 Q. And the very purpose of you being on
17 the board is so that you could represent the
18 interests of MCO and Federated, correct?
19 A. No, I'm not sure that that's right
20 because I took my board position very seriously
21 once I was there.
22 Q. When you sat on the board, was it your
25073
1 practice then to report back to Mr. Hurwitz, who
2 was a substantial shareholder in UFG, the
3 goings-on on the UFG board?
4 MR. KEETON: I object to the form.
5 Mr. Hurwitz wasn't a substantial shareholder.
6 MR. RINALDI: Strike that.
7 Q. (BY MR. RINALDI) Was it your practice
8 to report back to Mr. Hurwitz, whose companies
9 held substantial amounts of stock in UFG? Was it
10 your practice to report back to Mr. Hurwitz about
11 what was going on on UFG's board?
12 A. I really didn't have to do that because
13 Mr. Hurwitz was on UFG's board.
14 Q. Was he always on the board throughout
15 the period of time that you were on the board?
16 A. Up until about February of 1988, yes,
17 sir.
18 Q. So that when you went to the UFG board,
19 he was already there?
20 A. He was either already there or he came
21 roughly at the same period of time. He was
22 certainly there virtually all the time that I was
25074
1 there up until roughly February of '88.
2 Q. Now, when he appointed you to the
3 board --
4 MR. KEETON: I object to the form.
5 Mr. Hurwitz didn't appoint him to the board.
6 Q. (BY MR. RINALDI) When you became a
7 member of the board of United Financial Group, did
8 you have any discussion with Mr. Hurwitz as to how
9 Federated and MCO had come to acquire an interest
10 in United Financial Group?
11 A. I'm sure that I did. I can recall at
12 least one conversation; and I suspect that there
13 were others, yes, sir.
14 Q. Can you tell us what Mr. Hurwitz might
15 have told you about the reasons for Federated and
16 MCO acquiring an interest in United Financial
17 Group?
18 A. Well, the two pieces that I recall
19 were -- I believe that at one point, he thought
20 that someone else was about to buy the company.
21 And it's a long time back, but I -- Mr. Ludwig --
22 I think it was Mr. Ludwig -- was going to buy the
25075
1 company or made an offer to buy the company.
2 At first, Mr. Hurwitz' interest was in
3 buying stock basically in an arbitration, assuming
4 that he was buying it and then would sell it
5 fairly quickly. Once we got into the
6 conversation, the other was that he believed that
7 there was value. For whatever reason, he wound up
8 as the chair of two companies with a reasonable
9 amount of stock in the holding company, that he
10 believed that there was a solid economic future
11 for that institution.
12 Q. And did you ever discuss with
13 Mr. Hurwitz what he meant by a solid economic
14 future for the institution?
15 A. Well, more than at that initial period,
16 I'm assuming you mean, yes.
17 Q. What was it about UFG that Mr. Hurwitz
18 found so -- to be an interesting investment
19 opportunity?
20 A. Well, I think in general, since his own
21 background was financial, he felt that he
22 understood financial institutions. I sensed that
25076
1 there was more than passing commitment because it
2 was a Texas-based institution and he was a
3 Texas-raised person whereas MCO was basically
4 headquartered in California, that it was an
5 opportunity where economic conditions were
6 beginning to change. And he always struck me as a
7 person who was challenged by the opportunity to be
8 involved in a transformation and be able to be
9 just that much sharper and more creative and
10 thoughtful. And it seemed like for all of those
11 reasons -- I'm not saying this was just a 1982
12 conversation -- this was something of interest to
13 him.
14 Q. You say financial conditions were
15 changing. Were they changing for the better or
16 for the worse?
17 A. Well, I can't say specifically into
18 '82; but clearly in the '82, '3, '4 period in
19 Texas, they were beginning to change for the
20 worse.
21 Q. And Mr. Hurwitz saw this as an
22 opportunity to become involved in a savings and
25077
1 loan during a period when there was adverse
2 financial conditions?
3 A. Yes, sir.
4 Q. And why was he interested, as you
5 understood it, in getting involved in an
6 institution during adverse economic conditions?
7 A. Well, my experience in general is --
8 and I'm thinking about several of my current board
9 members as well --
10 Q. Well, I don't want you to guess. What
11 I want to know is what was your understanding
12 based on your conversations with Mr. Hurwitz.
13 A. Well, literally to that question, I
14 would have to answer I really don't know.
15 Q. So, he never explained to you why it
16 was in a downturn in the economy he was interested
17 in becoming involved in a savings and loan?
18 A. I think the general comment regarded
19 opportunity.
20 Q. And did he ever describe for you what
21 "opportunity" meant from his perspective?
22 A. Situations that many people consider
25078
1 overly complicated and headed for difficulty are
2 often perceived by other people as opportunities.
3 Q. Now, you mentioned a moment ago that
4 Mr. Hurwitz had acquired an interest in UFG as
5 part of an arbitrage.
6 Was that your word?
7 A. Yes, it was my word. I said I thought.
8 It's going back a long way. There is a
9 recollection somewhere in there of a purchase that
10 was supposed to close but didn't close.
11 Q. Was Mr. Hurwitz, through MCO and
12 Federated, involved in arbitrage in about 1982
13 when you became a member of the board of those
14 enterprises?
15 A. I don't remember what else he might
16 have been doing. I was just coming on board and
17 learning my way. I don't know.
18 Q. After you got on the board, did you
19 determine that, in fact, Mr. Hurwitz was involved
20 in arbitrage activity?
21 A. I just don't remember.
22 Q. Do you remember a fellow by the name of
25079
1 Mr. Huebsch?
2 A. Yes, sir. Ron Huebsch.
3 Q. Ron, right.
4 Did Mr. Huebsch manage an arbitrage
5 portfolio for Federated or MCO that you recall?
6 A. I think he ultimately was involved with
7 an arbitrage portfolio. I don't know the timing
8 of it.
9 Q. Did Mr. Hurwitz ever indicate to you
10 that he thought by entering into or by acquiring
11 an interest in United Financial Group, that one of
12 the potential benefits is that it could be used in
13 connection with his arbitrage activities?
14 A. Not to my recollection, no, sir.
15 Q. Now, when -- after you became a member
16 of the board of UFG, do you recall that one of the
17 first things that arose was the question of
18 whether -- I'm sorry -- the board of MCO -- strike
19 that.
20 Did you go on the boards of both MCO
21 and UFG at about the same time?
22 A. Roughly the same time.
25080
1 Q. Shortly after going onto the board of
2 MCO, do you recall that Mr. Hurwitz advised the
3 board that he thought it was useful for MCO to
4 acquire a larger interest in United Financial
5 Group?
6 A. Well, I don't know about the word
7 "useful"; but right in that time period, there was
8 discussion at the MCO board about achieving the
9 ability to buy a larger portion of the stock of
10 United Financial Group, yes, sir.
11 Q. Now, I know you were new to the board
12 at that point in time. But when those kinds of
13 proposals came before the board of MCO, was it the
14 practice of the board members to discuss the
15 potential acquisition of new stock?
16 A. That was -- as those would have been my
17 first couple of meetings, but it's certainly my
18 impression.
19 Q. And at those meetings, what were the
20 reasons that you recall that MCO was discussing
21 acquiring additional shares of United Financial
22 Group?
25081
1 A. Well, that's a long time. I don't
2 remember a great degree of specifics. I recall
3 generally comments about the state of the Texas
4 economy and belief in the potential of this
5 particular institution.
6 Q. And what was the basis for your belief
7 in the potential of this institution? I take it
8 by that, you mean UFG?
9 A. Yes. I don't think I referred to my
10 own belief. I was just coming in. I think you
11 asked me to try to characterize what I remembered
12 of their conversation.
13 Q. Now, would you take a look at the first
14 document in the book before you? And to
15 facilitate things, we've arrayed the documents in
16 order. And I'd ask you to take a look at what's
17 been previously marked as Exhibit T1012. It's
18 Tab 38. This is the board of directors meeting
19 minutes for September 16th, 1982.
20 Now, do you recognize this document,
21 sir? It's a heavily-redacted copy of the board
22 minutes of September 16th, 1982, of MCO Holdings.
25082
1 Do you see that?
2 A. Yes, I do, yes.
3 Q. And I think if you turn to about the
4 fourth or fifth page of the document, OW009360, it
5 makes reference to the fact that -- that Dr. Barry
6 Munitz has been invited to join the board of UFG.
7 Do you see that?
8 A. I do.
9 Q. Was this the first board meeting you
10 attended of MCO?
11 A. I might have attended an earlier
12 meeting, possibly as a guest. I think it's the
13 first meeting I would have attended as an official
14 member of the MCO board.
15 Q. Now, the first sentence there says,
16 "The chairman" -- was the chairman Mr. Hurwitz?
17 A. Yes, sir.
18 Q. It says, "The chairman next reported
19 that Federated Development Company (Federated) had
20 recently purchased shares of United Financial
21 Group, Inc., a Texas-based savings and loan."
22 Do you see that?
25083
1 A. I do.
2 Q. And do you know why -- you were also on
3 the board of Federated. Do you know why Federated
4 had acquired shares of UFG?
5 A. I don't at this point know anything
6 more than or different from my answer to your
7 question about the MCO motivation. I don't recall
8 anything distinct.
9 Q. In the next sentence, it talks about
10 "Mr. Hurwitz indicated that based upon his review
11 of UFG, it presented an interesting investment
12 opportunity to the corporation." And I think it
13 refers to United Financial Group.
14 Do you see that?
15 A. I do.
16 Q. Do you recall why Mr. Hurwitz thought
17 that United Financial Group was an interesting
18 investment opportunity?
19 A. Beyond my earlier answer, I don't.
20 Q. Okay. And at this meeting, I believe
21 it indicates that a vote was taken for MCO to
22 acquire up to 10 percent of the outstanding stock
25084
1 of United Financial Group.
2 Do you see that under the first
3 "resolve" paragraph down there?
4 A. Yes.
5 Q. So, at this point in time, do you
6 recall how much stock Federated owned in United
7 Financial Group?
8 A. No, I don't. Not at that point in
9 time, no.
10 Q. But MCO was going to acquire up to
11 10 percent themselves; is that correct?
12 A. That looks to be what this resolution
13 says, yes, sir.
14 Q. But you have no independent
15 recollection of that meeting other than that you
16 were there?
17 A. Oh, I remember the meeting. I just
18 would not have been able to recall the specific
19 number.
20 Q. Now, did there come a time when a
21 decision was made by MCO that it was going to
22 increase its ownership of United Financial Group
25085
1 to up to 24.9 percent of the outstanding shares of
2 UFG?
3 A. I think that -- I don't remember the
4 mix between the companies; but there came a time
5 when the reporting group, which would have been
6 both MCO and Federated and I believe also
7 Dr. Kozmetsky, collectively were going up to 24.9
8 or not past 24.9. I don't remember the exact
9 number, but I do remember the barrier.
10 Q. And the majority of those shares --
11 although you said Dr. Kozmetsky, who sat on the
12 board of MCO -- is that accurate?
13 A. That is accurate.
14 Q. And was he trustee, also, of Federated?
15 A. He was at that time.
16 Q. What was his relationship to
17 Mr. Hurwitz?
18 A. He was -- as I mentioned earlier, he
19 had been the dean of the business school at the
20 University of Texas for about 16 years. He was a
21 trustee of Federated. Mr. Hurwitz was a trustee,
22 I believe, as early as that time of the Kozmetsky
25086
1 Family Foundation.
2 Q. And so, between Mr. Kozmetsky,
3 Federated, and MCO, they had acquired close to
4 24.9 percent of the shares of UFG?
5 A. At some point.
6 Q. Okay. Now, we see that on September
7 the 16th, 1982, MCO is going to acquire up to
8 10 percent of the shares. And now we see that the
9 holdings between MCO and Federated are going to go
10 up to 24.9 percent.
11 Do you recall any discussions during
12 this period of time --
13 MR. VILLA: Excuse me, sir.
14 A. I'm sorry. I didn't see that second --
15 MR. VILLA: Are you referencing a
16 document?
17 Q. (BY MR. RINALDI) I'm sorry. I thought
18 I had asked you did there come a time when MCO and
19 Federated determined that they wanted to go up to
20 24.9 percent and you had said "yes."
21 A. I was simply saying -- I just didn't
22 see that.
25087
1 Q. I'm sorry. My question to you is:
2 After -- at about the point in time that you
3 recall that MCO and Federated was going to
4 increase their holdings along with Mr. Kozmetsky
5 to 24.9 percent of UFG, do you recall any meetings
6 of the board at which the increased ownership of
7 MCO and Federated were discussed?
8 A. Which board?
9 Q. Either board, Federated or MCO.
10 A. Other than or in addition to this
11 meeting -- in addition to the September meeting?
12 Q. Yes.
13 A. I just want to be sure I'm following
14 you.
15 Q. At the September meeting, MCO had made
16 an initial decision to go up to 10 percent?
17 A. Correct.
18 Q. At that point in time, Federated owned
19 some shares, as well?
20 A. Correct.
21 Q. Collectively, do you recall how much
22 their ownership interest was?
25088
1 A. No.
2 Q. There came a time when they decided to
3 go up to 24.9 percent along with Mr. Kozmetsky,
4 correct?
5 A. Yes.
6 Q. Do you recall attending any meeting of
7 the board where the subject of going up to
8 24.9 percent was discussed?
9 A. I couldn't point you to the specific
10 date, but I'm fairly comfortable that there were
11 subsequent board conversations about the
12 ownership.
13 Q. Okay. And as a result of those board
14 conversations, they would have been both at the
15 Federated and the MCO level?
16 A. The conversations would have been at
17 both places. I'm not sure ultimately the actions
18 were, yes.
19 Q. Okay. As a result of your
20 participating in those board meetings, did you
21 come to an understanding as to why MCO and
22 Federated were interested in acquiring up to
25089
1 24.9 percent of the outstanding shares of UFG?
2 A. My sense was that it was consistent
3 with the sentence that you had read out, that it
4 wasn't a change of direction or feeling but that
5 it was this same perception of an interest
6 investment opportunity.
7 Q. And what does an interesting investment
8 opportunity mean to you?
9 A. Value. The chance to strengthen --
10 since they were -- this was a publicly held
11 company, both MCO -- actually Federated as well at
12 that time so you had three publicly held
13 companies.
14 An interesting investment opportunity
15 means to me a set of circumstances where value can
16 be enhanced for shareholders and owners.
17 Q. Okay. Did you understand that
18 Federated and MCO were going to participate in any
19 way in enhancing the value of UFG for the
20 shareholders?
21 A. I think my sense was that whenever you
22 have thoughtful and strong shareholders, you have
25090
1 a chance to further enhance value.
2 Q. And did you view MCO and Federated as
3 thoughtful and strong shareholders?
4 A. I did.
5 Q. And did their thoughtful and strong
6 views represent the views of Mr. Hurwitz?
7 A. I don't know. I suppose again it would
8 depend on the issue and the time.
9 Q. Let me ask you this: If Mr. Hurwitz
10 had said to the board of Federated, "I think UFG
11 is a bad investment and I don't think that we
12 should be involved in further investments of UFG,"
13 in your experience, would MCO or Federated have
14 gone forward and acquired additional shares of
15 UFG?
16 A. Well, you just switched companies on
17 me. If you meant to say if Mr. Hurwitz had said
18 one thing to the board of Federated, would MCO and
19 Federated have done something, I've lost your
20 track.
21 Q. Well, let's take them one at a time.
22 Was Mr. Hurwitz the controlling
25091
1 shareholder of MCO?
2 A. I don't know. I don't recall at
3 that -- what the division of share ownership was
4 at MCO at that time.
5 Q. Would he have been the largest single
6 shareholder?
7 A. I don't know.
8 Q. Did he wield a great deal of influence
9 in terms of board decisions?
10 A. He was the chief executive officer; and
11 in my experience, the chief executive officer of
12 any company wields meaningful influence.
13 Q. And if Mr. Hurwitz had gone to the
14 board of UFG -- of MCO and had indicated to the
15 board of MCO "I don't think we should acquire any
16 more shares of UFG," in your experience, would the
17 board have acceded to Mr. Hurwitz' views?
18 A. I don't know around that specific
19 instance. But if the question is were they always
20 of one mind, the answer is not at all.
21 Q. I understand that they weren't always
22 of one mind. But if Mr. Hurwitz was of one mind,
25092
1 would Mr. Hurwitz generally get his way on the MCO
2 board if he wanted something done?
3 A. Mr. Hurwitz was usually of one mind.
4 We'll start there. I think the MCO board, during
5 the years I was on it, had some very strong, very
6 opinionated, thoughtful, and experienced people.
7 And we would argue about critical issues. Often
8 his view would prevail, but periodically it would
9 not.
10 Q. Okay. Was the same true with respect
11 to Federated?
12 A. I think a little less true at Federated
13 because there was a much smaller board and he was
14 a much, in my recollection, larger proportional
15 shareholder of Federated. And then, ultimately,
16 it was privately owned.
17 Q. So, with all these strong personalities
18 on the MCO board, if any proposal were made to the
19 board, it would have been well-discussed, would it
20 not?
21 A. My sense is it would have been
22 well-discussed.
25093
1 Q. Okay. Take a look at the next document
2 that's dated December 15th, 1982. This is the
3 board of directors meeting for -- for MCO, and
4 it's approximately two months later.
5 MR. NICKENS: We need some numbers.
6 MR. RINALDI: It's T1032, and it's
7 Tab 40.
8 Q. (BY MR. RINALDI) And if you'll turn to
9 the second page in, take a moment to read that
10 paragraph; and then I have a couple of questions I
11 want to ask you about it.
12 A. This is Page 3 on the top -- called
13 Page 3 in the document?
14 Q. It says Page 3, and that is the -- I
15 believe to be -- again, this is one of those
16 heavily-redacted versions. But I'm interested in
17 the material that's contained on Page 3.
18 A. Okay. (Witness reviews the document.)
19 Okay.
20 Q. Now, this makes reference to a merger
21 of First American Financial of Texas and United
22 Financial Group.
25094
1 Do you see that?
2 A. I do.
3 Q. Do you recall that there came a time
4 when a proposed merger was proposed? And I think
5 actually in the middle of the paragraph, it makes
6 note of the fact that Mr. Munitz had noted that
7 UFG and First American Financial had entered into
8 a definitive agreement for the merger.
9 Do you see that?
10 A. Yes, sir.
11 Q. What do you recall of that?
12 A. Basically as it's described here, that
13 these were two thrift institutions of some
14 strength in Texas, some represented in different
15 areas in the state, if I'm remembering correctly;
16 that a proposal was made to put the two
17 institutions together with UFGI as the surviving
18 entity and that that was ultimately approved, that
19 merger was ultimately approved.
20 Q. In about the middle of the page, it
21 indicates that on December 15th, 1982, UFG -- I
22 mean MCO and Federated jointly owned about
25095
1 19 percent of the aggregate of UFG common stock.
2 Do you see that?
3 A. I do.
4 Q. Then it indicates that as a result of
5 the merger, that MCO had the opportunity to
6 acquire additional shares and the potential to
7 increase its ownership to 24.9 percent.
8 Do you see that?
9 A. Yeah. Less than 24.9.
10 Q. Right. How much less than are we
11 talking about? 24.7 or --
12 A. All I know is what it says here. I was
13 simply saying that it said "owned less than 24.9."
14 Q. Do you recall that there was a reason
15 for not exceeding the 24.9 percent level?
16 A. Yes, sir.
17 Q. Okay. Would you explain to the Court
18 what that reason was?
19 A. My recollection is that at past
20 24.9 percent, there was a different definition of
21 a savings and loan holding company with
22 implications, amongst other things, for net worth
25096
1 maintenance.
2 Q. And ultimately, the resolution at the
3 bottom of the page of these minutes indicates that
4 the corporation was going to enter into a -- well,
5 Mr. Hurwitz had proposed at the top of the page
6 that the corporation purchase 603,448 shares of
7 common stock of First American Financial.
8 Do you see that?
9 A. I do.
10 Q. And as consistent with the
11 recommendation of the chairman, at the bottom
12 there's a resolution adopting the recommendation
13 of the chairman.
14 Do you see that?
15 A. I see Mr. Rosenberg making the motion,
16 and it's being adopted unanimously.
17 Q. So, ultimately, MCO decided -- after
18 considering the idea, they went ahead and voted to
19 acquire less than 24.9 percent of the outstanding
20 shares of UFG, correct?
21 A. Well, I think the resolution said what
22 they voted to do was purchase the 603,448 shares.
25097
1 Q. If the merger were to go forward, those
2 shares would then be converted; and they would end
3 up with approximately 24.9 percent of the
4 outstanding shares?
5 A. No, I don't see that it said -- I don't
6 see any reference of the number. In the text that
7 you asked me to read, it said on the one hand that
8 they might continue to collectively own less than
9 24.9. But it's not clear to me immediately upon
10 conversion of the 603, 448 what percentage they
11 would own.
12 Q. Maybe I'm getting ahead of myself.
13 At this particular board meeting, do
14 you recall any discussion by Mr. Hurwitz as to the
15 reasons why he was interested in obtaining a
16 larger interest in UFG or at least any discussions
17 other than what you've previously related?
18 A. More intense versions of what I had
19 previously related.
20 Q. It was an interest investment
21 opportunity?
22 A. Well, I think you see a reference here
25098
1 to the financial condition of First American
2 Financial, analysis of their business activities.
3 It would continue in that same direction, yes,
4 sir.
5 Q. Now, you indicated to me that
6 Mr. Hurwitz viewed himself as being very competent
7 in the area of financial deals and the operations
8 of corporations.
9 MR. KEETON: Your Honor, I'm going to
10 object. It may be that Mr. Hurwitz does. What
11 Dr. Munitz testified was that he thought
12 Mr. Hurwitz was competent in deals and finance,
13 not that Mr. Hurwitz walks around saying "I'm
14 competent in it."
15 Q. (BY MR. RINALDI) Perhaps I misspoke.
16 Did Mr. Hurwitz tell you when he hired you that he
17 felt he was competent to do the deals and the
18 financial side of the transactions?
19 A. I think what I was saying or trying to
20 convey was basically that distinction from my
21 perspective but not disagreed to by him. But it
22 was basically my reflection that there was a nice
25099
1 synergy in terms of the different areas of
2 expertise we had.
3 Q. Okay. And do you recall whether the
4 merger went through with First American and UFG?
5 A. I believe it did.
6 Q. As a consequence of that, do you recall
7 that the ownership of shares of MCO and Federated
8 in UFG increased?
9 A. I don't know -- I suspect that it
10 increased. Again, I don't know the exact numbers.
11 But I recall that it went through and that, over
12 time, there was that movement toward 24.9 percent.
13 Q. And take a look at the next document in
14 your book, which is T1036. And I believe that
15 this is a new document.
16 MR. RINALDI: Has T1036 not been
17 entered before? If we don't have a copy, then I
18 will simply skip on and --
19 Q. (BY MR. RINALDI) Do you recall,
20 however, that there came a point in time when MCO
21 and Federated ultimately reached a level where
22 they could no longer acquire additional shares of
25100
1 UFG without becoming a holding company?
2 A. I think it was MCO, Federated, and
3 Dr. Kozmetsky altogether were close enough for us
4 to then submit an application to move past that
5 period.
6 Q. Okay. And did Dr. Kozmetsky own a
7 substantial block of stock in UFG, or was it a
8 fairly small one relative to Federated and MCO?
9 A. It was substantial to me. It probably
10 wasn't that substantial to Dr. Kozmetsky.
11 Relatively speaking, it might have been a couple
12 of percentage points.
13 Q. It probably would have been substantial
14 to most of the people in this room, I take it; but
15 it may not have been much to Dr. Kozmetsky. Okay.
16 And you indicated that there came a
17 point in time when the decision was made to file a
18 holding company application?
19 A. Yes, sir.
20 Q. And that would have been filed with the
21 Federal Home Loan Bank Board?
22 A. Yes, sir.
25101
1 Q. Now, prior to that time, what had been
2 your involvement with UFG? You had simply been a
3 board member and sat in on board meetings or --
4 A. Tell me again that time.
5 Q. The filing is actually on June 29th,
6 1983. If you want, you can turn to the next page
7 in your book; and everybody else can grab the
8 document. It's T4040. It's Tab 13.
9 Does this appear to be the application
10 to become a holding company that you just made
11 reference to? It's a cover letter --
12 A. Other than the fact that I don't know
13 why it's not signed, but it's -- it seems to be
14 the cover letter to the application.
15 Q. Okay. And then attached to the cover
16 letter is an application or what is referenced as
17 an application H-(e)-1.
18 Do you see that?
19 A. I do.
20 Q. And it purports to be an application
21 for approval of acquisition of one insured
22 institution directly or indirectly by a company
25102
1 other than a savings and loan holding company.
2 Does this appear to be the holding
3 company application that you were referring to?
4 A. I have no reason to believe that it is
5 not.
6 Q. Well, it's filed by MCO and Federated;
7 and it's with respect to UFG and United Savings
8 Association of Texas.
9 Do you see that?
10 A. I do.
11 Q. Okay. Now, prior to the filing of this
12 document on June 29th, 1983, had your involvement
13 with UFG simply been that of a director?
14 A. I was still -- I was by then a director
15 of both UFGI and USAT. So, I was a director of
16 both of those institutions. I want to be sure
17 that's clear.
18 And I also --
19 Q. Continue.
20 A. I was just going to -- I think the
21 specific question was was my relationship any
22 different. And it was somewhat to the extent that
25103
1 with the merger, I was again given some of the
2 experience I had described to you earlier when you
3 were asking me about my background. I was helping
4 out in conversations regarding the aftermath of
5 the merger, the personnel issues, consolidation,
6 the branches, the evaluation of personnel, the
7 evolution of this newly-merged board where people
8 hadn't been board members together. So, by then,
9 the merger into the post-H-(e)-1 application, my
10 relationship to the institution was getting more
11 complex.
12 Q. Do you recall about when the merger
13 would have occurred, you arrived there -- it had
14 not occurred in December of 1982. And by June of
15 1983, the holding company application has been
16 approved. I take it the merger is somewhere in
17 there?
18 A. I mean, you know, I don't. I don't
19 know -- I can't tell you now the date.
20 Q. I'm not trying to hide the ball. I
21 just don't have enough copies of the exhibit to
22 pass out to people.
25104
1 A. I don't know whether it's before or
2 after, post-merger.
3 MR. KEETON: Just for clarity,
4 Mr. Rinaldi, you said the holding company
5 application had been approved by June of '83.
6 MR. RINALDI: I'm sorry. If I said
7 that, thank you for your correction.
8 Q. (BY MR. RINALDI) The filing of the
9 holding company application was June 29, 1983?
10 A. I don't recall the date of the merger.
11 Q. You said you took on new duties to
12 assist, and whenever that merger date is isn't
13 particularly important for my purposes.
14 What I would like to know is: How did
15 your duties change? Strike that.
16 Before we get to that, when you went on
17 the UFG board, did you also go on the USAT board?
18 A. I believe so.
19 Q. That would have been back in September
20 of 1982?
21 A. Roughly in that period.
22 Q. Now, had you had any prior experience
25105
1 with savings and loans?
2 A. I believe that as part of the Charter
3 Bank board responsibility, there had been
4 interaction with savings and loans in Texas. I
5 had not been a director or an officer of a savings
6 and loan before that.
7 Q. So, now you are a director of UFG, a
8 director of USAT. You are also a trustee of
9 Federated, a director of MCO, and then you are
10 also president of MCO?
11 A. No. I'm vice chairman of MCO and
12 president of Federated.
13 Q. And president of Federated. Okay.
14 And is the vice chairman an officerial
15 position at MCO?
16 A. I believe that it was.
17 Q. But at this point in time, you did not
18 have a position as an officer or an employee of
19 UFG or USAT?
20 A. That is correct.
21 Q. Now, moving forward to the June 29th,
22 1983 date that the holding company application was
25106
1 filed, did you still occupy those positions that
2 we've just identified; or had your positions
3 changed at all?
4 A. No. The positions you identified were
5 accurate for that date.
6 Q. Now, take a look at the application or
7 the cover letter of the application. And if you
8 look at the second paragraph, it makes reference
9 to the fact that MCO and Federated currently own
10 approximately 22.3 percent and 10 percent
11 respectively of the outstanding shares --
12 A. I think 12 and 10.
13 Q. Right. So, they would have had a total
14 of 22.3. Right?
15 A. That's what it says.
16 Q. And whatever shares that were owned to
17 take you up to the 24-plus level would have been
18 those of Mr. Kozmetsky?
19 A. Yes, sir.
20 Q. Okay. Now, if you go down further in
21 the paragraph, it indicates that MCO was
22 interested in owning approximately 25 percent of
25107
1 the outstanding shares and Federated would retain
2 approximately 10 percent of the outstanding
3 shares.
4 Do you see that?
5 A. I do.
6 Q. So, as a result of this application, do
7 you recall that Federated and MCO were requesting
8 permission from the Bank Board to acquire up to
9 35 percent of the outstanding shares of UFG?
10 A. I'm not sure about result, but what I
11 recall is what you've just pointed me to, that
12 they were requesting permission under the
13 appropriate circumstances to go to 25 plus 10.
14 Q. Okay. Now, prior to the application
15 being filed by Richard Marlin on behalf of
16 Federated and MCO, did the board approve the
17 filing of the holding company application, the
18 board of MCO?
19 A. The board of MCO? I don't remember.
20 Q. Well, is that the kind of action that
21 Mr. Marlin or the officers of MCO and Federated
22 could have taken without board approval?
25108
1 A. Well, Mr. Bressler, who's referred to
2 on the -- in the application as one of the contact
3 points, was the general counsel of MCO. I just
4 don't remember the specific timing, discussion,
5 and approval.
6 Q. Okay. Now, if you turn to the third
7 page of this document, it indicates that you were
8 one of the individuals who received a copy of the
9 letter, although it says "without exhibit."
10 Do you see that?
11 A. Yes.
12 Q. Okay. Now, do you recall, prior to
13 filing the application, any discussions with
14 Mr. Hurwitz regarding the reasons why MCO and
15 Federated were now seeking to acquire up to 25 --
16 35 percent collectively of UFG?
17 A. Those to which I had referred earlier
18 basically.
19 Q. Just still was an interesting
20 investment opportunity given the financial
21 circumstances in Texas?
22 A. Well -- and as I said, the conditions
25109
1 around it. It would have been, I suspect, a
2 longer conversation. It was characterized that
3 way because that was the characterization in the
4 minutes. But it would have been basically of the
5 sort that I had mentioned earlier.
6 Q. And based on those conversations, did
7 you formulate any clearer understanding of why it
8 is Mr. Hurwitz felt that this was a -- an
9 interesting investment opportunity?
10 A. Well, again, the circumstances that I
11 had referred to.
12 Q. Those being?
13 A. Economic conditions, financial
14 complexity, quality of leadership, potential
15 quality of leadership, Texas location, the role of
16 savings and loans, all of those.
17 Q. And did he have any discussions with
18 you regarding his plans with respect to the
19 operations of UFG were the holding company
20 application to be approved?
21 A. Well, I think the application was
22 basically to increase his shares as a shareholder.
25110
1 And, of course, he and I were both directors of
2 UFGI; so, I'm not sure what even conversation
3 about his plans for the operation of UFGI would
4 have meant.
5 Q. So, it was your understanding that
6 Mr. Hurwitz had no interest in being involved in
7 the operation of UFG. He just wanted to benefit
8 from the increase in the value of the shares?
9 A. Well, I don't think I said that he had
10 no interest. I think what I said was that I
11 didn't recall conversations about his plans for
12 operation.
13 Q. Did you understand that as a result of
14 Mr. Hurwitz and -- or MCO and Federated acquiring
15 up to 35 percent of the shares of UFG, that
16 Mr. Hurwitz contemplated taking a more active role
17 in the operation of UFG and USAT?
18 A. No, not necessarily.
19 Q. So, you had no understanding one way or
20 the other?
21 A. I basically -- my understanding in
22 looking at the application when it was originally
25111
1 put together was there was a desire to have a
2 larger portion of the outstanding shares.
3 Q. And you don't recall ever having any
4 conversation with Mr. Hurwitz as to why he wanted
5 to acquire, through Federated and MCO, a larger
6 percentage of the ownership of UFG?
7 A. I think that was the earlier question
8 that I answered. I thought the last question was
9 about his direct operational responsibility at
10 UFGI. Maybe I misunderstood you.
11 Q. Well, maybe I misunderstood you, sir.
12 When you discussed with him -- did you
13 have any discussions with him regarding the
14 holding company application?
15 A. Not that I recall specifically
16 regarding the application, other than the question
17 that I had mentioned earlier to the Court
18 regarding the question of its implications if it
19 were approved.
20 Q. So, you did discuss that with
21 Mr. Hurwitz, the implications if the holding
22 company application were approved?
25112
1 A. Yes.
2 Q. What were the nature of those
3 conversations?
4 A. Basically, they dealt with the net
5 worth maintenance requirements of a savings and
6 loan holding company.
7 Q. And prior to filing the holding company
8 application, were you aware that in order to
9 acquire more than 25 percent of the outstanding
10 shares of a savings and loan, a net worth
11 maintenance obligation might be imposed by the
12 Bank Board?
13 A. Might be imposed. I was aware that it
14 might be imposed, yes, sir.
15 Q. And you had discussions with
16 Mr. Hurwitz about that; is that correct?
17 A. Yes, sir.
18 Q. And what were the nature of those
19 discussions that you recall?
20 A. I think basically they were "I hope
21 you're also aware that if this application is
22 approved, the Bank Board might insist upon a net
25113
1 worth maintenance guarantee."
2 Q. Did he seem to be fully knowledgeable
3 with the fact that such a condition could be
4 imposed upon MCO and Federated as a condition of
5 their acquiring over 25 percent of the outstanding
6 shares of UFG?
7 A. It seemed to me that he was.
8 Q. Now, take a look at -- in the holding
9 company application, would you turn, please, to
10 Page 37? I think it's OW010501.
11 A. Okay.
12 Q. And if you look at the -- toward the
13 bottom of the page, it talks about MCO and
14 Federated believe that the financial services
15 industry is entering into a period of rapid
16 growth.
17 Do you see that?
18 A. Yes.
19 Q. And further down in that sentence, the
20 statement appears -- and this is the sixth line
21 from the bottom of the page. It says, "UFG and
22 USAT will benefit from MCO and Federated's
25114
1 experience in real estate development and sales as
2 well as MCO and Federated's investment expertise
3 in the financial markets."
4 Do you see that?
5 A. Yes.
6 Q. What was your understanding of what was
7 meant by that, that UFG and USAT would benefit
8 from MCO and Federated's expertise -- investment
9 expertise in the financial markets?
10 A. I'm not sure I can comment specifically
11 on that sentence. I haven't seen that for a long,
12 long time.
13 Q. Let me ask you this: As a director of
14 MCO and Federated, did you understand that MCO and
15 Federated had investment expertise in the
16 financial markets?
17 A. In 1983 when this was filed, in looking
18 at the materials, I'm assuming that I would have
19 understood that.
20 Q. And what was the nature of that
21 expertise, sir?
22 A. Well, Federated Development had a
25115
1 reinsurance company. You had earlier mentioned
2 Mr. Huebsch, who was one participant in the
3 investments related to that company. MCO had both
4 complex real estate and energy activities and
5 financial people there. And they also had access
6 to other types of expertise that weren't
7 necessarily employed by those two companies at the
8 moment but were knowledgeable consultants and
9 advisors depending upon the issue and the timing.
10 Q. I'm focusing principally, though, not
11 on the real estate side but the expertise in
12 investment --
13 A. That was the question I was answering.
14 Q. MCO and Federated at this point in
15 time, were they involved in a lot of activity and
16 investments in the financial markets?
17 A. Again, I don't know what "a lot of"
18 would mean.
19 Q. Were they involved in activities in
20 investments in financial markets?
21 A. Yes.
22 Q. What were the nature of those
25116
1 activities?
2 A. Well, I think again -- I'm sorry.
3 Federated Development had a reinsurance company,
4 which basically is in the business of insurance on
5 the one side and the financial investment
6 management of its portfolio.
7 Q. Okay.
8 A. So, basically, that is an investment
9 activity.
10 Q. And how about MCO?
11 A. MCO, I would have to go back and
12 rethink all the pieces of current activities
13 there. So, I ought not to comment right now as to
14 specifically what they were doing then.
15 Q. Then in the next sentence, it says,
16 "MCO and Federated also anticipate that they will
17 be able to facilitate access to the capital
18 markets."
19 Do you see that?
20 A. Yes, I do see that.
21 Q. Did MCO and Federated have any special
22 access to the capital markets as you understood
25117
1 it?
2 A. I'm not sure what "special access"
3 would mean. I didn't see --
4 Q. Would they -- I'm referring here to the
5 statement that says that they would anticipate
6 that they will be able to facilitate access to
7 capital markets.
8 What did you understand that to mean,
9 sir?
10 A. I'm not really certain right now what
11 specifically that referred to.
12 Q. All right. As a result of filing the
13 application, do you recall that the Federal Home
14 Loan Bank Board indicated that if they were to
15 grant the holding company application, that it
16 would be subject to certain conditions?
17 A. Yes, sir.
18 Q. And do you recall receiving a letter
19 from Jearlene Miller at the Federal Home Loan Bank
20 Board to that effect?
21 A. I don't know who it -- I recall the
22 company receiving a letter from someone at the
25118
1 Bank Board.
2 Q. Okay. As a result of that, do you
3 recall writing a letter back to them discussing
4 the subject of the conditions that the Bank Board
5 had proposed might be imposed if the holding
6 company application were approved?
7 A. Well, either I or a lawyer for the
8 company.
9 Q. Okay. Take a look at the next document
10 in your book, which is T1044 at Tab 4. And this
11 is -- I'm sorry. Tab 14. Take a moment to just
12 look at this letter, and then I have a couple of
13 questions for you.
14 A. (Witness reviews the document.)
15 Q. Now, is that your signature that
16 appears on the last page, sir?
17 A. Yes, I believe it is.
18 Q. Okay. And do you recall sending this
19 letter to Ms. Jearlene Miller?
20 A. No, but I have no reason to question
21 whether it was sent. I just don't recall at this
22 moment that particular letter.
25119
1 Q. Sure. Now, after the holding company
2 application was filed, did you become the
3 principal person involved with dealing with the
4 Federal Home Loan Bank Board regarding the holding
5 company application?
6 A. Well, I was one of the key people.
7 Several others, lawyers included -- and this
8 letter I think clearly drafted by a lawyer --
9 would have been in that group, as well. But I was
10 one of the people more involved in the
11 conversation than most others.
12 Q. Well, at Federated Development Company,
13 were you the person that would have had the most
14 knowledge about the holding company application
15 process?
16 A. Other than the lawyers, yes.
17 Q. Fine.
18 And were the lawyers in-house, or were
19 they outside lawyers?
20 A. At Federated, they were outside
21 lawyers. At MCO, they were outside and inside.
22 Q. Okay. And at MCO, would you have been
25120
1 the principal contact person with respect to -- to
2 the holding company application?
3 A. Probably in that same sense, joined by
4 the lawyers, and that MCO -- since there were more
5 people and a more complex range of people, others
6 would have been involved, as well.
7 Q. And it indicates here in this letter
8 that you were advised by the Bank Board that they
9 were -- that that -- you state in the letter, "You
10 have informally indicated to us that the
11 acquisition portion of the H-(e)-1 application
12 would meet the conditions of Section 584.4(g)."
13 Do you see that?
14 A. Where are you?
15 Q. This is in the second full paragraph.
16 A. On the first page?
17 Q. First page, yeah.
18 A. Okay.
19 Q. Then it goes on and says, "Subsection 4
20 would require MCO and Federated to ensure that
21 USAT meet the minimum statutory reserve and net
22 worth requirements applicable to institutions
25121
1 insured for 20 years or more as set out in 563.13
2 of the regulations and were necessary to infuse
3 their pro rata portion of additional equity
4 capital in a form satisfactory to the supervisory
5 agent and sufficient to effect the compliance with
6 the requirements."
7 Do you see that?
8 A. I do.
9 Q. And what did you understand was the
10 condition that you had been advised would be
11 imposed if the holding company application were
12 granted, at least as regards Roman Numeral IV
13 there?
14 A. Well, the timing is again a little
15 uncertain in my mind. I know there was some
16 communication before a formal Bank Board
17 resolution and -- some considerable communication
18 subsequent to a formal Bank Board resolution. I
19 have a feeling that this exchange occurred before
20 the formal Bank Board resolution. I could be
21 wrong.
22 But I understood in general the
25122
1 reference, again, to be back to the net worth
2 maintenance requirements by some calculation.
3 Q. And it talks about a pro rata portion
4 of additional equity. Did you understand that if
5 you owned 35 percent of the shares of the thrift
6 or its holding company, that you would be
7 obligated to maintain its capital or 35 percent of
8 its capital?
9 A. I understood that that was one possible
10 interpretation and that it was fraught with
11 difficulty as to how one calculated that pro rata
12 portion at any one time.
13 Q. I notice on the next page, you make a
14 proposal of sorts under A and B there.
15 Do you see that?
16 A. Yeah.
17 Q. And can you explain to me what -- well,
18 do you recall making this proposal back to the
19 Bank Board?
20 A. Well, I'm not sure -- I haven't seen
21 what this is a response to. I don't know if it's
22 back to the Bank Board. As I said earlier, I
25123
1 don't know the sequence of letters. I recall the
2 general conversation about a possible pro rata or
3 other type of less than 100 percent net worth
4 requirement.
5 Q. And it's saying here under B that "MCO
6 and Federated will, where necessary, undertake to
7 infuse their pro rata portion of additional equity
8 capital sufficient to effect compliance with
9 requirements but only in the event that MCO or
10 Federated shall directly or indirectly acquire or
11 obtain control of more than 50 percent of the
12 stock"?
13 Do you see that?
14 A. I do see that.
15 Q. Were you suggesting to the Bank Board
16 that there would be no net worth obligation unless
17 MCO and Federated acquired more than 50 percent?
18 A. Again, this is a lawyer letter that I
19 haven't seen for almost exactly 15 years. So,
20 I -- I really can't say much more than what the
21 paragraph says.
22 Q. And even though these things were
25124
1 written by lawyers, you consulted with the
2 lawyers, didn't you?
3 A. Oh, I signed the letter and take
4 responsibility for it.
5 Q. Right. You understood at the time that
6 you signed the letter what it meant, correct?
7 A. Yes. I believe that in those past
8 15 years, there would have been a lot of
9 conversation that went into the writing of this
10 letter. I just can't recall now the specific
11 implications beyond this paragraph.
12 Q. Now, you indicated that there did come
13 a time when the Bank Board approved the
14 application.
15 Do you recall that?
16 A. Yes, I do recall an approval by the
17 Bank Board.
18 Q. And turn to the next document.
19 THE COURT: Mr. Rinaldi, we'll adjourn
20 until 9:00 tomorrow.
21 MR. RINALDI: Thank you.
22
25125
1 (Whereupon at 4:50 p.m.
2 the proceedings were recessed.)
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25126
1 STATE OF TEXAS
COUNTY OF HARRIS
2
REPORTER'S CERTIFICATION
3 TO THE TRIAL PROCEEDINGS
4 I, Marcy Clark, the undersigned Certified
5 Shorthand Reporter in and for the State of Texas,
6 certify that the facts stated in the foregoing
7 pages are true and correct to the best of my ability.
8 I further certify that I am neither
9 attorney nor counsel for, related to nor employed
10 by, any of the parties to the action in which this
11 testimony was taken and, further, I am not a
12 relative or employee of any counsel employed by
13 the parties hereto, or financially interested in
14 the action.
15 SUBSCRIBED AND SWORN TO under my hand
16 and seal of office on this the 6th day of October,
17 1998.
18 ____________________________
MARCY CLARK, CSR
19 Certified Shorthand Reporter
In and for the State of Texas
20 Certification No. 4935
Expiration Date: 12-31-99
21 .
22 .
25127
1 STATE OF TEXAS
COUNTY OF HARRIS
2
REPORTER'S CERTIFICATION
3 TO THE TRIAL PROCEEDINGS
4 I, Shauna Foreman, the undersigned
5 Certified Shorthand Reporter in and for the
6 State of Texas, certify that the facts stated
7 in the foregoing pages are true and correct
8 to the best of my ability.
9 I further certify that I am neither
10 attorney nor counsel for, related to nor employed
11 by, any of the parties to the action in which this
12 testimony was taken and, further, I am not a
13 relative or employee of any counsel employed by
14 the parties hereto, or financially interested in
15 the action.
16 SUBSCRIBED AND SWORN TO under my hand
17 and seal of office on this the 6th day of October,
18 1998.
19 _____________________________
SHAUNA FOREMAN, CSR
20 Certified Shorthand Reporter
In and for the State of Texas
21 Certification No. 3786
Expiration Date: 12-31-98
22