25128
1 UNITED STATES OF AMERICA
BEFORE THE
2 OFFICE OF THRIFT SUPERVISION
DEPARTMENT OF THE TREASURY
3
In the Matter of: )
4 )
UNITED SAVINGS ASSOCIATION OF )
5 TEXAS, Houston, Texas, and )
)
6 UNITED FINANCIAL GROUP, INC., )
Houston, Texas, a Savings )
7 and Loan Holding Company )
) OTS Order
8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40
a Diversified Savings and ) Date:
9 Loan Holding Company ) Dec. 26, 1995
)
10 FEDERATED DEVELOPMENT CO., )
a New York Business Trust, )
11 )
CHARLES E. HURWITZ, )
12 Institution-Affiliated Party )
and Present and Former Director )
13 of United Savings Association )
of Texas, United Financial Group,)
14 and/or MAXXAM, Inc.; and )
)
15 BARRY A. MUNITZ, JENARD M. GROSS,)
ARTHUR S. BERNER, RONALD HUEBSCH,)
16 and MICHAEL CROW, Present and )
Former Directors and/or Officers )
17 of United Savings Association of )
Texas, United Financial Group, )
18 and/or MAXXAM, Inc., )
)
19 Respondents. )
20
21 TRIAL PROCEEDINGS FOR OCTOBER 7, 1998
22
25129
1 A-P-P-E-A-R-A-N-C-E-S
2 ON BEHALF OF THE AGENCY:
3 KENNETH J. GUIDO, Esquire
Special Enforcement Counsel
4 PAUL LEIMAN, Esquire
SCOTT SCHWARTZ, Esquire
5 BRUCE RINALDI, Esquire
RICHARD STEARNS, Esquire
6 and BRYAN VEIS, Esquire
of: Office of Thrift Supervision
7 Department of the Treasury
1700 G Street, N.W.
8 Washington, D.C. 20552
(202) 906-7395
9
ON BEHALF OF RESPONDENT MAXXAM, INC.:
10
FRANK J. EISENHART, Esquire
11 of: Dechert, Price & Rhoads
1500 K Street, N.W.
12 Washington, D.C. 20005-1208
(202) 626-3306
13
DALE A. HEAD (in-house)
14 Managing Counsel
MAXXAM, Inc.
15 5847 San Felipe, Suite 2600
Houston, Texas 77057
16 (713) 267-3668
17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND
CHARLES HURWITZ:
18
RICHARD P. KEETON, Esquire
19 KATHLEEN KOPP, Esquire
of: Mayor, Day, Caldwell & Keeton
20 1900 NationsBank Center, 700 Louisiana
Houston, Texas 77002
21 (713) 225-7013
22
25130
1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO.,
CHARLES HURWITZ, AND MAXXAM, INC.:
2
JACKS C. NICKENS, Esquire
3 of: Clements, O'Neill, Pierce & Nickens
1000 Louisiana Street, Suite 1800
4 Houston, Texas 77002
(713) 654-7608
5
ON BEHALF OF JENARD M. GROSS:
6
PAUL BLANKENSTEIN, Esquire
7 MARK A. PERRY, Esquire
of: Gibson, Dunn & Crutcher
8 1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5303
9 (202) 955-8500
10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH:
11 JOHN K. VILLA, Esquire
MARY CLARK, Esquire
12 PAUL DUEFFERT, Esquire
of: Williams & Connolly
13 725 Twelfth Street, N.W.
Washington, D.C. 20005
14 (202) 434-5000
15 OTS COURT:
16 HONORABLE ARTHUR L. SHIPE
Administrative Law Judge
17 Office of Financial Institutions Adjudication
1700 G Street, N.W., 6th Floor
18 Washington, D.C. 20552
Jerry Langdon, Judge Shipe's Clerk
19
REPORTED BY:
20
Ms. Marcy Clark, CSR
21 Ms. Shauna Foreman, CSR
22
25131
1 INDEX OF PROCEEDINGS
2
Page
3 BARRY MUNITZ
4 Continued Examination by Mr. Rinaldi....25132
5 Examination by Mr. Guido................25424
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25132
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, you may continue with your
6 examination of the witness.
7 MR. RINALDI: Thank you, Your Honor.
8
9 CONTINUED EXAMINATION
10
11 Q. (BY MR. RINALDI) Dr. Munitz,
12 yesterday we talked about briefly how you first
13 came to be retained at UFG, and there was a
14 discussion back and forth about what Mr. Hurwitz
15 may have told you at the time that he hired you.
16 Do you recall that?
17 A. I do.
18 Q. And there was some question as to
19 whether he had indicated to you that he thought he
20 could handle the investment side or whether you
21 had just sort of inferred that from the
22 conversation.
25133
1 Do you recall that?
2 A. I remember the topic, yeah.
3 Q. Okay. Would you take a look at your
4 deposition and see if we can't sharpen up your
5 recollection on this one? This is the deposition
6 that's the first one in the binder, and perhaps we
7 could hand one up to the Court. This would be the
8 deposition that was taken in Washington on
9 June 8th, 1995. And in particular, I'd like to
10 turn your attention to Page 29 of the deposition.
11 And if we begin at Line 15, I believe this is you
12 testifying.
13 You state on Line 15 of Page 29, "One
14 of the people with whom I would have had this
15 argument for probably a couple of years was
16 Charles Hurwitz. And in the early Eighties, he
17 basically came to me one weekend and said, 'If you
18 really believe this and you think you're so smart,
19 why don't you try to do it for a while? I have
20 just gotten involved in two different business
21 ventures that are making my life more complicated
22 than I thought they would. I can handle the
25134
1 business side and the deal-making side in the
2 financial transactions; but I'm going to need
3 somebody -- and it might be you -- to help me on
4 the people process political side of the house.'"
5 Do you see that?
6 A. Yes.
7 Q. Does that refresh your recollection
8 that Mr. Hurwitz was the one that told you that he
9 could handle the business side and the deal-making
10 side and the financial transactions?
11 A. Yes. I mean, I see what it says, yes.
12 Q. And is that consistent now with your
13 recollection that he told you that?
14 A. Well, it's basically consistent with
15 the assumption that I made. I can't say, again,
16 specifically precisely what was said by whom; but
17 it's consistent with conceptually what I was
18 trying to say yesterday, I believe so, yes.
19 Q. I see. But your testimony is accurate
20 in the deposition, is it not, when you stated that
21 Mr. Hurwitz had said that to you?
22 A. Yes.
25135
1 Q. Okay. And after Mr. Hurwitz told you
2 that, after he told you that he could handle the
3 business side and deal-making side in the
4 financial transactions, in fact, in your
5 experience at MCO, did Mr. Hurwitz handle the deal
6 side in the business transactions?
7 A. At MCO in his relationship to me, yes,
8 absolutely.
9 Q. And was the same true at Federated?
10 A. Yes.
11 Q. And was the same true at
12 United Financial Group, sir?
13 A. No, not necessarily.
14 Q. When you say "not necessarily," what do
15 you mean by that?
16 A. Well, several things. First of all,
17 unlike at Federated and relatively so at MCO,
18 there were a bunch of other people who were also
19 very skilled on the financial transaction side at
20 United. And second of all, Mr. Hurwitz was the
21 chief executive officer of both Federated and MCO
22 and he was not the chief executive officer of
25136
1 either United Savings or United Financial Group.
2 Q. Well, let me ask you this then. Was he
3 involved in the business side and deal-making side
4 in the financial transactions at UFG?
5 A. He was from time to time. He was the
6 chairman of the board there. And in this quote, I
7 believe I was referring more to the question, as I
8 mentioned yesterday, of MCO and Federated and, for
9 a while, Simplicity Patterns.
10 Q. Yes. But he does talk about a couple
11 of companies, does he not?
12 A. This is not him talking. This is me
13 talking.
14 Q. But you're paraphrasing what you
15 recalled of your conversation with him, aren't
16 you?
17 A. That's precisely what I'm doing. I'm
18 paraphrasing.
19 Q. Right. I understand that. But you
20 didn't mean to tell me at this deposition that he
21 didn't say those things, did you?
22 A. No, not at all.
25137
1 Q. And he comes to you and he says, "I've
2 just gotten involved in two different business
3 ventures." And one of those business ventures was
4 the one that you talked about, wasn't it, that was
5 UFG that he acquired through a leveraged buyout --
6 I'm sorry -- that he acquired through an
7 arbitrage?
8 A. Well, let me go backwards. If you sort
9 of stop halfway through, one of the two activities
10 about which he was talking was the savings and
11 loan. The other was Simplicity Patterns.
12 Q. Okay. So, we can agree that when he
13 talks about -- when you make reference to, on
14 Page 19, to two different business ventures, one
15 of them was UFG/USAT? We're talking about
16 Line 19 --
17 A. I'm sorry. Line 19.
18 Q. 19 and 20 on Page 29. Do you see that?
19 A. Yes.
20 Q. Okay. And then he goes on and he says,
21 "I can handle the business side and the
22 deal-making side in the financial transactions."
25138
1 So, in the very next line, first he
2 talks about UFG and USAT and then he talks about
3 handling the business side and the deal making.
4 Do you see that?
5 A. Well, yes. You're quoting me
6 paraphrasing him. So, I just want to be sure
7 we're clear as to who's speaking here.
8 Q. I understand that. But does it not
9 indicate that with respect to the two different
10 business ventures that he contemplated you being
11 involved in, that he thought that he could handle
12 the business side and deal-making side in the
13 financial transactions?
14 A. What I took him to be saying was "To
15 the extent to which we will be involved -- MCO,
16 Federated, whatever -- I can be comfortable on the
17 financial and the deal-making side. I need some
18 help on the people side."
19 Q. Was Mr. Hurwitz a hands-on guy when it
20 came to managing the affairs of MCO and Federated?
21 A. In my definition of hands-on guy, no.
22 Q. Was he involved in all major policy
25139
1 making and strategic decisions at MCO and
2 Federated?
3 A. At Federated, probably yes. Not all.
4 I can think of one major example where he was not.
5 At MCO, less so.
6 Q. Could you turn to Page 62 of your
7 deposition at Page 22?
8 A. I'm sorry. Line 22?
9 Q. Line 22, Page 62 of the same
10 deposition. And this is the one that was taken on
11 June 8th, 1995. The question starts on Line 20.
12 It says, "How would you describe his involvement
13 in the operation of Federated and MCO?"
14 And your answer is, "He was the chief
15 executive officer of both those entities and at
16 Federated with less than a handful of employees.
17 But in both instances as chief executive officer
18 ultimately responsible in the middle of the
19 shaping of all major policy and certainly in the
20 middle of deciding all major choices."
21 Question, "So, he was very hands-on in
22 terms of decisions made at Federated and MCO?"
25140
1 "I'm going to say again -- I may do
2 this more -- you missed the introduction of how I
3 spent most of my professional life; so, I'm going
4 to -- very hands-on in terms of major strategic
5 decisions."
6 Do you see that?
7 A. Yes, sir.
8 Q. Does that accurately describe
9 Mr. Hurwitz' involvement with respect to Federated
10 and MCO?
11 A. Well, can you go down two more lines?
12 I believe --
13 Q. Certainly. It goes on and says, "Now,
14 in the MCO case, for example, Bill Leone is
15 president and operating officer and LA, not very
16 hands-on in terms of the implementation of those
17 decisions or the day-to-day operation of the
18 company but not major strategic but" -- I take it
19 that's no major strategic decisions --
20 A. I think it should be "not many."
21 Q. Pardon?
22 A. I think it's not -- that it's not --
25141
1 instead of no but not -- they dropped the word
2 "many."
3 Q. I see. "Not many major strategic
4 decisions would have been made at either of those
5 entities without his being in the middle of them";
6 is that correct?
7 A. Yes.
8 Q. And that's an accurate representation
9 of his involvement MCO and Federated?
10 A. I believe so.
11 Q. And with respect to MCO and Federated's
12 involvement in the acquisition of UFG, he would
13 have been in the middle of that, correct?
14 A. Yes, sir.
15 Q. Now, yesterday when we broke off, we
16 were talking about the period of time prior to --
17 after the application to become a holding company
18 had been filed which I believe was on June 29th,
19 1983, and the actual approval of that application.
20 And I believe you said that after the
21 original application had been filed, almost
22 immediately there were some negotiations over a
25142
1 net worth maintenance condition.
2 Do you recall that?
3 A. Yes, sir.
4 Q. And we looked at a letter that you had
5 sent to Ms. Jearlene Miller yesterday where the
6 question of the net worth maintenance condition
7 that might be imposed on MCO was discussed.
8 Do you recall that?
9 A. Yeah. Do you want me back there?
10 Q. No. I just want to sort of get you on
11 the same place where I am.
12 A. Yeah.
13 Q. After you had these preliminary
14 discussions regarding a net worth maintenance
15 commitment but prior to the actual approval by the
16 board, did the board -- I'm sorry. Prior to the
17 actual approval by the Federal Home Loan Bank
18 Board, do you recall that there came a time when
19 the application to become a holding company was
20 approved by the Bank Board?
21 A. I'm not sure what you mean by "prior to
22 the approval." I do recall there was a time when
25143
1 the Bank Board approved the application.
2 Q. Okay. And there were some negotiations
3 regarding the commitment prior to that, and then
4 were there negotiations also after the commitment,
5 the holding company application was approved?
6 A. Yes, sir.
7 Q. Okay. Now, let's take a look at
8 Exhibit T1059.
9 A. Back in the other book?
10 Q. Yes, please. But keep that one close
11 by because we'll be going back to it periodically.
12 A. Okay.
13 Q. And if you'll look at T1059 at Tab 15.
14 Do you recognize this document?
15 A. Yes, sir.
16 Q. Okay. And a copy of this was sent to
17 you by Mr. Bressler?
18 A. Yes.
19 Q. Okay. And who was Mr. Bressler again?
20 A. Howard Bressler was the general counsel
21 of MCO Holdings.
22 Q. Okay. And attached to it is the
25144
1 Federal Home Loan Bank Board order, I guess,
2 Resolution 84-712 that pertains to the holding
3 company application?
4 A. Yes, sir.
5 Q. Is that correct?
6 A. Yeah.
7 Q. And if you look at Paragraph 4, do you
8 recall that ultimately the Bank Board granted the
9 application and that pursuant to the application,
10 it did impose a form of net worth obligation as a
11 condition of MCO becoming a holding company?
12 A. Yes.
13 Q. Okay. And Paragraph 4 is the condition
14 that they imposed; is that correct?
15 A. That's what it looks to be, yes.
16 Q. Okay. Let's move on, then, to the next
17 document in the book. Well, before we leave that,
18 was there a time constraint that was placed upon
19 MCO for purposes of completing the acquisition of
20 the additional shares? Because I notice if you
21 look on Page OMX22877 -- and this is the second
22 page of the document and the first page of the
25145
1 resolution -- Paragraph 1 says, "The proposed
2 acquisition shall be consummated within 120 days
3 after the date of the resolution."
4 Do you see that?
5 A. Yes, I do.
6 Q. Okay. So, there was a time limit, was
7 there not?
8 A. Seems so, yes.
9 Q. Okay. Do you recall that that time
10 limit was then extended on a number of occasions?
11 A. Yes.
12 Q. Okay. What was the process by which
13 that time limit was extended, if you recall?
14 A. I recall basically someone -- usually
15 either I or one of the inside or outside legal
16 counsels -- would request of the Bank Board or
17 their counsel an extension, and the extension was
18 granted.
19 Q. And so -- and those extensions were
20 granted every four months or so?
21 A. Somewhere between every -- either the
22 cycle was 90 or 120 days, in my recollection.
25146
1 Q. So, there would be three or four times
2 a year you would have to extend the period in
3 which you could acquire the additional shares; is
4 that correct?
5 A. I think so.
6 Q. And do you recall how long the
7 negotiations went on before the matter was
8 terminated?
9 A. Well, if this resolution, December of
10 '84, and I believe the final decision was made not
11 to continue that exchange two years or a little
12 bit more later.
13 Q. Okay. Well, we'll fix that probably a
14 little more definitively as we get to some later
15 documents.
16 But it's fair to say that three or four
17 times a year, you would have to contact the
18 Federal Home Loan Bank of Dallas and request an
19 extension?
20 A. Well, again, I don't know how
21 frequently; and I don't know whether it was Dallas
22 or Washington. But it is fair to say that there
25147
1 were periodic extensions.
2 Q. Okay. Well, take a look at T1079. And
3 this is, I believe, one of the communications that
4 you had with the Federal Home Loan Bank of Dallas.
5 Now, let me just ask you: After the
6 holding company application was approved on the
7 condition that MCO agreed to a net worth
8 maintenance obligation, did negotiations commence
9 with the Federal Home Loan Bank Board regarding a
10 modification of that condition?
11 A. Conversations, negotiations. I don't
12 know technically what you would call them. But
13 yes, conversations began; and that was the topic.
14 Q. Okay. And I don't want to testify
15 here; so, I would prefer for you to characterize
16 them and not for me. And if they weren't
17 negotiations, that's fine. But whatever
18 characterization you want to put on them, how
19 would you characterize them?
20 A. Ongoing conversation, exploration.
21 Q. And what was the nature of these
22 ongoing conversations and explorations?
25148
1 A. I think it was basically -- you had
2 pointed out the earlier paragraph regarding the
3 net worth maintenance requirement. It was
4 basically characterized by exchange as to whether
5 there were other ways to interpret the net worth
6 maintenance obligation. I believe there had been
7 one or two instances fairly in that time period
8 where different interpretations had been made by
9 the Bank Board for other companies. And our
10 lawyers were exploring whether similar kinds of
11 adjustments and reshaping were possible.
12 Q. And were the negotiations with
13 Washington or with the Federal Home Loan Bank of
14 Dallas?
15 A. I think both from time to time.
16 Q. Okay. Do you recall that the Federal
17 Home Loan Bank of Dallas did not have the
18 authority to grant a waiver or an exception with
19 respect to the net worth condition and that the
20 negotiations had to be done through Washington?
21 A. No, I don't recall that now.
22 Q. Okay. Now, who was the lead person at
25149
1 MCO and Federated regarding the negotiation or the
2 discussions with the Federal Home Loan Bank of
3 Dallas and the Federal Home Loan Bank Board
4 regarding the modification of the net worth
5 maintenance obligation?
6 A. If you allow me the -- I would have
7 been basically the lead person, if that definition
8 is conversation, conveying of perspective, asking
9 a question. I would have been playing that role
10 counseled by and pretty much directed by lawyers
11 to MCO and Federated internally and externally.
12 Q. And do you recall in your deposition
13 you basically testified you were the key person
14 with respect to that issue at MCO and Federated?
15 A. Well, I don't recall that. But if I
16 did, that would have been consistent with what I
17 just said.
18 Q. And in that regard, you reported
19 directly to Mr. Hurwitz on the progress of these
20 negotiations or discussions, did you not?
21 A. Yes, sir.
22 Q. And Mr. Hurwitz was actively interested
25150
1 in the outcome of those discussions, was he not?
2 A. I think that's a good phrase, yes, sir.
3 Q. And just so I understand, you and
4 Mr. Hurwitz officed in the same suite, did you
5 not?
6 A. On the same -- depending -- we were in
7 different buildings during that time period. But
8 in all of those buildings, we would have been on
9 the same floor in the same general area.
10 Q. Well, did there come a time when you
11 and Mr. Hurwitz were in adjacent offices?
12 A. Yeah. Adjacent offices, yes. I was
13 just -- I don't know what the same suite is, but
14 our offices were next to each other. I just want
15 to be sure --
16 Q. I wasn't suggesting that you were in
17 the same office together. You are not a
18 government employee. But in any event --
19 A. Thankfully.
20 Q. So, at what point in time did you and
21 Mr. Hurwitz begin to office in adjacent offices?
22 A. The whole -- from the -- in the
25151
1 different buildings that we were in during the
2 period 1982 to 1991 really, from the time I
3 started to the till I left, we would have always
4 been in offices that were either next to each
5 other or across from each other or fairly close
6 down the hall.
7 Q. And were you in daily communication
8 with Mr. Hurwitz?
9 A. When we were both in Houston or when we
10 were both in California, yes.
11 Q. And so, you would keep him currently
12 apprised of what was going on with the net worth
13 maintenance obligation discussions?
14 A. Yes.
15 Q. Now, turn to -- well, let me just ask
16 you: Exhibit T1079 is a letter to Mr. Louis Roy.
17 Do you see that?
18 A. I do.
19 Q. And in the first paragraph, it says,
20 "After our last visit, I had promised to bring you
21 up to date regarding the extended approval time
22 for the H(e)1 application. There are two events
25152
1 which directly affect our timetable at the moment,
2 both of them which you probably have considered
3 knowledge -- have considerable knowledge about."
4 Were you advising Mr. Roy of the
5 progress of your discussions in Washington? Is
6 that what this refers to?
7 A. It looks like it's an update both about
8 conversations in Washington and conversations at
9 MCO and Federated.
10 Q. Okay. And it says in the next
11 paragraph, "After further conversation with Norm
12 Raiden and Eric Himmel in Washington, it's clear
13 that some change in the policy will be forthcoming
14 regarding the guarantee of net worth for a savings
15 and loan holding company."
16 Do you see that?
17 A. I do.
18 Q. So, you were advising Mr. Roy of what
19 your discussions had been in Washington.
20 Do you see that?
21 A. Yes.
22 Q. Okay. Does that refresh your
25153
1 recollection that, in fact, it was Washington that
2 had to make an exception to the net worth
3 maintenance condition?
4 A. I wasn't questioning it. It's just
5 that in writing -- I mean, I was writing to
6 Dallas; so, I'm just not sure who was the
7 authority and who was the advisor. I just assumed
8 I was talking to both.
9 Q. And Mr. Raiden was whom? Do you
10 recall?
11 A. I believe at that time he was the
12 general counsel of the home loan Bank Board.
13 Q. So, you were discussing the net worth
14 maintenance issue with the highest legal officer
15 of the Federal Home Loan Bank Board at this time;
16 is that correct?
17 A. Well, if by "you," you mean either I or
18 other people who were representing us -- it says
19 "after further conversation." It's not clear to
20 me whether that was my conversation or somebody's.
21 But yes, somebody was in conversation with the
22 highest legal officer of the Bank Board.
25154
1 Q. Well, you made a number of trips to
2 Washington, did you not --
3 A. Yes.
4 Q. -- to discuss this?
5 A. Yes.
6 Q. And you also visited face-to-face with
7 Mr. Lou Roy?
8 A. Yes.
9 Q. And was there also a Mr. Green that was
10 involved in these negotiations for the Federal
11 Home Loan Bank of Dallas?
12 A. The name sounds familiar, but I don't
13 know which meetings he was in.
14 Q. And approximately how many times had
15 you gone to Washington, that you recall, to
16 discuss the net worth condition?
17 A. I really don't remember how many.
18 Q. Do you recall that in your deposition,
19 you indicated that you had had face-to-face
20 conversations in Washington and Dallas on that
21 subject probably half a dozen times?
22 A. Well, I don't recall that. But if I
25155
1 said that, then that would have been right.
2 Q. But that's not inconsistent with your
3 recollection here today?
4 A. Correct.
5 Q. Okay. Now, who is the principal person
6 other than Mr. Raiden that you would have been
7 discussing the net worth maintenance obligation
8 with in Washington?
9 A. The only other name -- well, actually,
10 the only other two names that come to mind are --
11 and I don't know whether it would have been the
12 same time period or if I have them right -- are
13 Julie Williams and Mary Grigsby.
14 Q. Okay. And if you take a look at the
15 next document, which is T1109, it appears at
16 Tab 67. This is a letter that was sent by
17 Mr. Eckland to Julie Williams, and it appears that
18 a copy of the letter was then sent to you, as well
19 as to Mr. Arendes and Mr. Roy.
20 Do you see that?
21 A. Yes.
22 Q. And Mr. Roy was the Federal Home Loan
25156
1 Bank person who you had -- who was referenced on
2 the previous document.
3 Do you see that?
4 A. I do.
5 Q. Was Mr. Eckland the individual, the
6 outside attorney, that was principally involved in
7 the discussions of the net worth maintenance
8 condition modification?
9 A. He was one of them.
10 Q. Okay. Who was the other or who were
11 the others?
12 A. Well, there were others at different
13 points in time. And again, I don't remember who
14 they were. There were lawyers at Kramer, Levin:
15 Richard Marlin is one name, Ezra Levin. There
16 were other -- there was someone named Dan Goldberg
17 who at some point was involved in some of this
18 conversation. Leonard Volin, who was one of his
19 associates. There were -- we were keeping a fair
20 number of lawyers employed.
21 Q. Okay. And on December 3rd, 1985, when
22 this letter was sent to Ms. Williams by
25157
1 Mr. Eckland, you were actively discussing the
2 subject of modifying the net worth maintenance
3 condition with the Federal Home Loan Bank of
4 Washington, were you not?
5 A. Yes. Yes, sir.
6 Q. Okay. And then turn to the next
7 document in the book, which is another letter of
8 January 31st, 1986. This is T1113, and it's
9 Tab 68. And this represents -- it says in the
10 first sentence -- again, it's a letter to
11 Ms. Williams, and it's from Mr. Eckland. And
12 again, I believe that there are copies to yourself
13 and a host of other people. And this references
14 back to the letter dated December 3rd that we just
15 looked at.
16 Do you see that?
17 A. Yes.
18 Q. Is it fair to say that throughout the
19 month of December 1985 and into January 1986, you
20 and Mr. Eckland on behalf of MCO and Federated
21 were actively involved in discussions with the
22 Federal Home Loan Bank of Dallas -- of Washington
25158
1 or Bank Board regarding the net worth maintenance
2 condition?
3 A. Somewhere in that group -- and I think
4 it's fair to say -- I don't know what "throughout
5 the month" means, but it's fair to say that there
6 was regular conversation.
7 Q. Let's go on to the next document.
8 Do you recall that there came a point
9 in time when the issue arose of whether MCO could
10 put equity into USAT by purchasing subordinated
11 debt?
12 A. Yes.
13 Q. Okay. And what do you recall of that,
14 sir?
15 A. I remember general conversation about
16 strengthening the capital position of UFGI. One
17 of the strategies being discussed during a certain
18 point of time was the issuance of subordinated
19 debt, and some conversation linked to that
20 possibility as to whether one of the purchasers of
21 that debt could be or should be MCO.
22 Q. And do you recall that the proposal
25159
1 included that MCO would purchase $10 million worth
2 of the subordinated debt in lieu of having a net
3 worth maintenance commitment?
4 A. That detail, I don't remember.
5 Q. Do you recall whose idea it was to
6 first propose the issuance of subordinated notes
7 by USAT? Was --
8 A. No. And I don't even know whether they
9 would have been USAT or UFG subordinated notes.
10 But in either case, I don't remember who would
11 have raised it. I thought it would have been
12 UFGI.
13 Q. In fact, wasn't that a proposal that
14 was made by MCO so that MCO could purchase the
15 notes and then use that equity purchase or that
16 equity infusion in lieu of the net worth
17 maintenance obligation?
18 A. Boy, I just -- I just don't remember.
19 I don't know who would have raised it first.
20 Q. Why don't you take a look at
21 Exhibit T1118, which is Tab 1643. This purports
22 to be a memo that Mr. Berner wrote to you and
25160
1 Mr. Hurwitz and Mr. Gross and Mr. Gerry Williams.
2 Do you see that?
3 A. Yes.
4 Q. And it indicates that Mr. Berner, on
5 March 19th, had had a conversation with Neil
6 Twomey, Ginger Baugh, and Jim Halverson.
7 Now, who were those three people? Do
8 you recall?
9 A. Bob Pozen at that time was one of our
10 lawyers. I don't know who Jim Halverson is. Neil
11 Twomey, I believe I saw yesterday and worked for
12 the Bank Board in Dallas. And I think
13 Ginger Baugh worked with or for Neil Twomey.
14 Q. Okay. And if you'll read the memo
15 just -- it's not a very long one. The next
16 paragraph, it says, "We told them that we believed
17 MCO/Federated was willing to contribute up to
18 10 million to the equity of USAT but only upon the
19 condition that they could acquire in excess of
20 25 percent of the stock without a net worth
21 guarantee."
22 Do you see that?
25161
1 A. Yes, I do.
2 Q. Now, do you recall that that, in fact,
3 was the position that MCO had taken, that they
4 would purchase up to $10 million of the equity of
5 USAT but only on the condition that they could
6 acquire in excess of 25 percent of the stock of
7 UFG without a net worth guarantee?
8 A. I recall it only by reading it here.
9 As you can see, I wasn't even clear if that was
10 USAT or UFGI equity. So, I recall it by reading
11 it; but I don't independently recall it.
12 Q. But you were the key person at MCO that
13 would have known the details of these discussions
14 regarding the net worth commitment, correct?
15 A. I would have been the key person on the
16 net worth commitment side. I wouldn't necessarily
17 have been the key person on the issuance of the
18 equity to USAT or UFGI. I certainly would have
19 been involved in both, and I was addressed in the
20 memo.
21 Q. Right. And the purpose of issuing the
22 subordinated debt is to -- is to find a formula or
25162
1 a mechanism for getting the Federal Home Loan Bank
2 of Dallas to waive the net worth condition,
3 correct?
4 A. I'm not sure that that was correct.
5 Not remembering the details, it's not clear to me
6 that the purpose of issuing the debt was to allow
7 them to meet the net worth condition. It might
8 have been very much the other way around, that if
9 they were going to issue the debt, was one
10 possible way of responding to the net worth
11 maintenance guarantee participating in that debt
12 issue?
13 Q. Okay. And if the ultimate sub debt
14 application that was provided to the Bank Board
15 states that the subordinated debt would not be
16 issued unless there was a waiver of the net worth
17 condition, would you defer then to what's
18 contained in the subordinated debt application?
19 MR. VILLA: Could we just see the
20 document? We're making a lot of representations
21 to a witness about events from 13 years ago.
22 MR. RINALDI: Well, I think the
25163
1 document will speak for itself. It's in evidence,
2 and I think because of the limited time frame we
3 have with the witness, it's probably beneficial
4 for us to move along.
5 MR. VILLA: Thank you.
6 Q. (BY MR. RINALDI) Now, directing your
7 attention to the third paragraph, it says --
8 Mr. Berner writes to you that "We were also told
9 that Drexel had informed us that in view of the
10 poor reception Texas S&Ls were receiving in the
11 marketplace, they did not believe they could do a
12 capital note public offering unless MCO had a more
13 direct control relationship."
14 Do you see that?
15 A. In the fourth paragraph, yeah.
16 Q. What did you -- do you recall that
17 there were discussions regarding the issuance of
18 subordinated debt with Drexel?
19 A. No.
20 Q. You weren't involved in that?
21 A. I didn't say that. I just said I
22 didn't recall -- as I said earlier, I recall
25164
1 conversations about the subordinated debt. I
2 don't recall the specific reference to Drexel.
3 Q. Do you recall any discussions that
4 related to the question of it being desirable that
5 MCO and Federated have a more direct control
6 relationship of UFG and USAT?
7 A. Well, you lost me.
8 Q. If you look at what it says there, it
9 says, "Drexel had informed us that to do a capital
10 note public offering, MCO -- it would be helpful
11 to have MCO and Federated to have a more direct
12 control relationship."
13 Do you see that thought expressed in
14 that paragraph?
15 A. I see the sentence in the memo. I just
16 don't know what it means.
17 Q. But you have no recollection of that;
18 is that correct, sir?
19 A. I have no recollection of that.
20 Q. And you were the key person involved in
21 the negotiations with respect to the net worth
22 maintenance condition, correct?
25165
1 A. 12 to 14 years and two complicated jobs
2 ago, yes.
3 Q. Okay. What I'm trying to ascertain,
4 sir, is: Will you be the person most
5 knowledgeable on this subject? And if, in fact,
6 you were the person that was involved in that
7 activity and you have no recollection, then that's
8 fine. I'm not trying to in any way be critical of
9 the fact that you can't recall each item of fact
10 that occurred then.
11 Now, did the negotiations continue on
12 after 1986 or this period in 1986?
13 A. I think -- I'm not sure. They ended at
14 a certain point. I'm not sure when they ended.
15 But up until that point, they continued.
16 Q. Okay. And do you recall that
17 periodically, the board of MCO received updates on
18 the status of the negotiations?
19 A. I don't recall it. I'm assuming that
20 there were some regular updates.
21 Q. Okay. Take a look at tab -- wait a
22 second. It should be Tab 1120 in your book. This
25166
1 has not been admitted as a document yet; so, I'll
2 hand two copies up to the Court.
3 MR. RINALDI: Do you have copies, John?
4 MR. VILLA: I do.
5 Q. (BY MR. RINALDI) These are the
6 minutes of MCO Holdings' board of directors of
7 March 27th, 1986. And this comes barely a week
8 after the subordinated debt discussion that
9 Mr. Hurwitz -- I'm sorry -- Mr. Berner has with
10 people from the Federal Home Loan Bank of Dallas.
11 Do you see that?
12 A. Yes.
13 Q. Okay. And turning your attention to
14 what's Bates marked as OMX23224, do you recognize
15 these as minutes of the MCO board?
16 A. It certainly looks like it.
17 Q. Okay. And if you turn to the last
18 page, do you recognize those signatures? Is that
19 yours?
20 A. Yes.
21 Q. And Mr. Hurwitz'?
22 A. Yes, it is.
25167
1 MR. RINALDI: Your Honor, I'd move the
2 admission of T1120.
3 MR. VILLA: No objection, Your Honor.
4 THE COURT: Received.
5 Q. (BY MR. RINALDI) Now, in the first
6 sentence there, it states, "The chairman reported
7 that a valuable management team had been formed at
8 UFG."
9 How was the management team at UFG
10 formed?
11 A. Well, let's see. March 27, '86. So,
12 by then, Mr. Williams was there. Mr. Gross was
13 there. Mr. Berner, I believe, was there.
14 So, basically, it would have been a
15 series of appointments combined with a series of
16 people who were already there forming a leadership
17 team.
18 Q. And you had been hired or retained by
19 Mr. Hurwitz for the express purpose of dealing
20 with people-type issues; isn't that correct?
21 A. In general, yes.
22 Q. And in general, that included hiring of
25168
1 the appropriate people that you needed in order to
2 make the businesses run, correct?
3 A. Yes.
4 Q. So, were you involved, then, in the
5 process by which all of these new people you just
6 identified were brought into UFG?
7 A. I don't know -- well, for the ones I
8 mentioned as all, yes.
9 Q. And that was Mr. Williams, Mr. Gross --
10 A. Mr. Berner.
11 Q. How about Mr. Crow?
12 A. Less so because by then, Mr. Williams
13 was there.
14 Q. And so, you were directly involved in
15 at least the first three and partially in
16 Mr. Crow's hiring by UFG and USAT?
17 A. Right.
18 Q. And what generally was Mr. Hurwitz'
19 involvement with respect to the hiring of those
20 individuals?
21 A. It would have depended on which one
22 because it would have greatly depended on what
25169
1 their area of expertise was and what we were
2 hiring them for. I think by this time,
3 Mr. Hurwitz was chair of the holding company
4 board. So, in general, he would have been
5 interested in the top leadership role. I'm not
6 sure he had much involvement in Mr. Berner's
7 hiring, for example. He would have been more
8 knowledgeable about Mr. Gross, relatively
9 knowledgeable about Mr. Williams, and probably
10 relatively uninvolved about Mr. Crow.
11 Q. If Mr. Hurwitz had not thought very
12 highly of a potential candidate -- say, perhaps,
13 Mr. Williams or Mr. Gross -- would they have been
14 hired?
15 A. Oh, in some areas, absolutely.
16 Depending on the functional area, if it was an
17 area where he didn't have much knowledge and for
18 some reason he didn't think much of them, if a lot
19 of other people knowledgeable in that area did,
20 there was no question that we would have hired
21 them, at least not to me.
22 Q. If Mr. Hurwitz had opposed the hiring
25170
1 of a particular individual because he felt that
2 they weren't qualified in a particular area that
3 he was knowledgeable about, is it likely that they
4 would have been hired?
5 A. Where he was knowledgeable, it's less
6 likely.
7 Q. Now, it goes on and says in this same
8 paragraph that "The chairman indicated that he
9 believed that the corporation's application to
10 become a holding -- application to the Federal
11 Home Loan Bank Board for permission to extend the
12 date within which to consummate the acquisition of
13 additional shares of UFG up to 50 percent would be
14 granted for an additional 90 days until June 30th,
15 1986."
16 Do you see that?
17 A. I do.
18 Q. Now, each time that the extensions were
19 granted, did you discuss that with Mr. Hurwitz,
20 whether it was desirable to go ahead with an
21 extension?
22 A. Each time, I'm not sure. But in
25171
1 general, yes.
2 Q. Okay. And then it says, "The chairman
3 indicated that he was continuing to explore the
4 possibilities of obtaining concessions from the
5 Federal Home Loan Bank Board with respect to the
6 required guarantees of the net worth of the
7 financial institution arising out of the
8 corporation's then status as a holding company
9 under the applicable regulations."
10 Do you see that?
11 A. Yes, I do.
12 Q. And when he says that he was continuing
13 to explore, that exploration was taking place
14 through you and the attorneys?
15 A. And the attorneys, yes.
16 Q. Did Mr. Hurwitz directly participate in
17 any of those discussions, that you recall, with
18 the Bank Board?
19 A. I don't recall any.
20 Q. Now, turn to the next document, which
21 is T1140. And it's Tab 102. And I believe that
22 this will probably fix the date when the
25172
1 negotiation or the discussions finally ended.
2 Do you see that -- do you recognize
3 this document? It's sent to Mr. Twomey. You
4 received a copy, and it's from William Eckland.
5 A. Yes.
6 Q. And it indicates there that Mr. Eckland
7 is advising Mr. Twomey that Federated Development
8 Company/MCO, Inc. have decided not to request any
9 further extensions to the effective date of the
10 approval received in the Federal Home Loan Bank
11 Board Resolution No. 84712.
12 Is this then the effective end of the
13 period in which the discussions were held with the
14 Bank Board for modifying the net worth condition?
15 A. Well, it's the end of that chapter
16 because, as you'll see later on, it says, "We
17 anticipate submitting a new application in the
18 near future." So, it wasn't the end of the end.
19 It was the end of that part of the beginning.
20 Q. Do you recall whether any further
21 application was ever submitted by MCO and
22 Federated to renew its application to become a
25173
1 holding company?
2 A. If I have the technical definition
3 right, yes.
4 Q. You believe there was one?
5 A. I do.
6 Q. Okay. Now, let me ask you, sir: The
7 negotiations began sometime before the -- or the
8 discussions -- I don't want to mischaracterize
9 anything. The discussions with the Bank Board
10 began even prior to the approval of the resolution
11 by the Bank Board, correct?
12 A. Well, you mean the Jearlene Miller
13 letter?
14 Q. Yes, that's correct. But the Bank
15 Board approves the resolution in December of 1984?
16 A. Right.
17 Q. Do you recall that?
18 A. Uh-huh. (Witness nods head
19 affirmatively.)
20 Q. And those discussions then, did they
21 continue on from December of 1984 through 1987
22 regarding the net worth commitment?
25174
1 A. It sure looks like it, yeah.
2 Q. Okay. And periodically, every two,
3 three -- I mean, every three or four months, you
4 would have been in contact with the Bank Board?
5 A. Periodically, yes.
6 Q. And you made a number of trips back to
7 Washington, did you not, to discuss the net worth
8 commitment with Julie Williams and people on her
9 staff?
10 A. Yes, sir.
11 Q. And in addition to that, you had
12 ongoing conversations with people in the Federal
13 Home Loan Bank of Dallas, correct?
14 A. At least keeping them -- on this topic?
15 Q. Yes.
16 A. At least keeping them informed or vice
17 versa.
18 Q. Okay. Now, at or about the time the
19 application to become a holding company was filed,
20 which I will tell you -- we don't have to go back
21 and look at it -- was June 29th, 1983, MCO and
22 Federated immediately began plans to acquire
25175
1 additional shares of UFG, did they not?
2 A. Well, I don't know again what
3 "immediately began plans" -- certainly having
4 filed the application, they were going through
5 conversations that said "if it's approved and if
6 the conditions of the approval are satisfactory,
7 then we should know what we do from there."
8 Q. Okay. And, in fact, they were looking
9 at ways of acquiring shares or obtaining interests
10 in shares that they could acquire in the future in
11 the event that the application were approved, were
12 they not?
13 MR. KEETON: I object to the form.
14 He's used "acquire" in two different senses there
15 and, therefore, I object to the form of the
16 question.
17 Q. (BY MR. RINALDI) If you understand
18 the question, you can answer.
19 THE COURT: Restate the question,
20 please.
21 Q. (BY MR. RINALDI) Almost immediately
22 after filing the H(e)-1 application, MCO and
25176
1 Federated began to look at structures by which
2 they might acquire additional shares of
3 United Financial Group stock at some future time,
4 did they not?
5 A. Well, I don't know what "structures"
6 might mean. I think what I said earlier was that
7 because they assumed that the application would be
8 approved and they hoped that the conditions around
9 the approval were satisfactory, they were in
10 ongoing conversation about what would happen when
11 it was approved.
12 Q. And, in fact, they were looking at
13 structures by which they could obtain an interest
14 in shares even prior to the actual approval?
15 A. I don't know about -- again, I'm
16 only -- not certain about the definition of
17 "structures" and the timing.
18 Q. All right. Well, let's take a look at
19 Exhibit T1041, which is Tab 58. Now, this is a
20 memo that was sent to you by Roni Fischer with a
21 copy to Mr. Schwartz.
22 Now, Ms. Fischer was an analyst that
25177
1 worked for Mr. Schwartz, was she not?
2 A. Actually, I thought it was a he. So,
3 that will give you some sense of -- I don't know.
4 Q. I took her deposition, and she
5 definitely was not a he.
6 A. There are many things I'll question.
7 That I accept from you.
8 Q. Now, who was Paul Schwartz?
9 A. At that time, he would have been, I
10 think, one of the senior officers of MCO,
11 basically in the analytical and strategic planning
12 area.
13 Q. And he assisted Mr. Hurwitz, did he
14 not, in analyzing potential investments?
15 A. Yes.
16 Q. And he worked directly with Mr. Hurwitz
17 on projects?
18 A. Yes.
19 Q. And Ms. Fischer worked for
20 Mr. Schwartz, did she not?
21 A. Again, I don't remember her. So, I'm
22 assuming that's correct.
25178
1 Q. And the subject of this memo which is
2 dated the same day which the net worth -- I mean
3 the holding company application was filed -- is
4 "structure for future acquisition of UFG shares."
5 Do you see that?
6 A. Yes.
7 Q. Do you recall receiving this memo?
8 A. No, I don't. I mean, seeing it here,
9 it rings a bell. I don't -- I would not have
10 independently remembered receiving it.
11 Q. Well, do you recall that at or about
12 the same time the H(e)-1 application was filed
13 that MCO's staff began to consider its structure
14 for future acquisition of UFG shares?
15 A. Well, I didn't remember the timing.
16 But having been refreshed by this memo, yes.
17 Q. And after the H(e)-1 application had
18 been approved, do you recall that Mr. Schwartz
19 began to develop structures by which MCO could
20 acquire additional shares of UFG through the
21 issuance of an option arrangement?
22 A. I remember Mr. Schwartz looking at
25179
1 different alternatives, and I believe that one of
2 them involved ultimately -- well, one of them
3 ultimately involved an option arrangement with
4 Drexel Burnham. I don't know if there were
5 others.
6 Q. Okay. Now, take a look at what's been
7 marked as T1061. It's Tab 62. It's the next
8 document in your book.
9 A. Okay.
10 Q. And this is a letter from Mr. Schwartz
11 to E.F. Hutton. And --
12 A. Looks to be the other way around.
13 Q. I'm sorry. From E.F. Hutton to
14 Mr. Schwartz. Thank you. And it indicates that
15 there was a copy -- telecopy to Mr. Hurwitz from
16 Mr. Schwartz. However, I don't see that there was
17 a copy sent to you.
18 Now, on the next page, it indicates
19 that -- a reference to 585,000 shares of
20 United Financial Group common stock. And then if
21 you go down, it indicates that -- under "purchase
22 transaction," it says, "E.F. Hutton will purchase
25180
1 the shares at $8.25 per share (purchase price from
2 Drexel Burnham Lambert)."
3 A. I don't see that.
4 Q. It's under "proposed transaction."
5 It's on the second page of the document.
6 A. Okay. I've got it.
7 Q. And it first talks about 585,000
8 shares, and then it talks about E.F. Hutton
9 purchasing the shares from Drexel.
10 Do you see that?
11 A. I do.
12 Q. And then further down, it says
13 "Agreement terms: E.F. Hutton will sell a call to
14 MCO and MCO will grant a put to E.F. Hutton
15 covering the shares exercisable on an all-or-none
16 basis."
17 Do you see that?
18 A. I do.
19 Q. Do you recall that at or about the
20 beginning of 1985 there were discussions with E.F.
21 Hutton and Drexel whereby MCO was going to obtain
22 a call option backed up with a put?
25181
1 A. I don't -- as you pointed out, I'm not
2 copied here. I don't recall any conversation with
3 E.F. Hutton.
4 Q. Okay. And at this point in time, was
5 Mr. Schwartz still in California?
6 A. Yeah. You mean living in California?
7 Yes.
8 Q. And he worked in California?
9 A. Yes.
10 Q. But you did communicate with him
11 frequently, did you not?
12 A. Yes.
13 Q. But Mr. Schwartz, to the best of your
14 recollection, didn't advise you that these efforts
15 were underway in order to acquire shares through
16 an option?
17 A. I simply don't remember either
18 receiving this or any conversation about
19 E.F. Hutton.
20 Q. Okay. Now, it indicates there that
21 Drexel Burnham Lambert owned 585,000 shares of UFG
22 which was 7.2 percent of the outstanding shares.
25182
1 As a director of --
2 A. Wait. Show me where you are.
3 Q. I'm at the top of the second page. It
4 says "585,000 shares of UFG common stock,
5 7.2 percent of outstanding."
6 A. Yes. But where does it say that Drexel
7 Burnham owned it?
8 Q. It says -- if you go down in the next
9 paragraph, it says "E.F. Hutton will purchase the
10 shares," okay, "per share from Drexel Burnham
11 Lambert, Inc."
12 If E.F. Hutton was going to purchase
13 the shares from Drexel, doesn't that indicate that
14 Drexel owned them?
15 A. Again, I'm just -- I've never seen this
16 before. I've seen Paul from time to time play
17 with all sorts of hypothetical alternatives. So,
18 I just don't know whether this is describing an
19 actual situation or a theoretical scenario.
20 Q. But it did come to your attention as a
21 director of USAT and UFG, that is, that Drexel
22 owned a substantial position in UFG stock, did it
25183
1 not?
2 A. At some point, yes.
3 Q. Okay. And do you recall at what point
4 that would have been?
5 A. No.
6 Q. Now, as a director of UFG, you reviewed
7 UFG's proxy statements before they went out, did
8 you not?
9 A. Well, I don't know if I always reviewed
10 them before they went out; but I -- I certainly
11 looked at them as a director, yes.
12 Q. Well, why don't you take a look at the
13 transcript of your testimony at Page 99, Lines 5
14 through 16, and see if we can sharpen up the
15 question of when you would have learned that the
16 Drexel --
17 A. Tell me again the page.
18 Q. Page 99, Lines 5 through 16.
19 A. Okay.
20 Q. And the question I read -- I asked you
21 was, "Based on that, can you try to identify
22 approximately the point in time when you would
25184
1 have reviewed the proxy of UFGI and determined
2 that Drexel had a position in UFGI?"
3 Answer, "The closest I could get to it,
4 if we could pick the date of the spring '85 annual
5 UFGI meeting and assume that the draft proxy would
6 have been six weeks or so prior to because you
7 would have had to review the draft and then get
8 the final report mailed and the proxy statements.
9 So, it would have been roughly six weeks before
10 whatever the spring '85 annual UFGI meeting was."
11 Do you see that?
12 A. Yes.
13 Q. And if you at the next document in your
14 book, it's A3012, Tab 194. This is the 1985 proxy
15 statement, and it indicates that --
16 A. Wait. Tell me again where you are.
17 Q. The next document in your book.
18 A. I'm sorry. Two documents.
19 Q. I skipped one just to move this thing
20 along.
21 A. Where do you want me?
22 Q. The proxy statement, which is two
25185
1 documents ahead. It should be A3012, Tab 194.
2 A. Okay.
3 Q. And is that the proxy statement you
4 were making reference to?
5 A. Looks like it.
6 Q. Okay. So, six weeks before that would
7 have put you sometime in the middle of March,
8 correct?
9 A. Right. Six weeks before April 30,
10 yeah.
11 Q. And if you look at the third page of
12 the document, it indicates that, in fact, on
13 Page 2 -- this is UFG08748 -- in fact, Drexel
14 Burnham Lambert did own 585,371 shares of UFG and
15 that they represented 7.2 percent of the
16 outstanding shares.
17 Do you see that?
18 A. I do.
19 Q. When you learned that Drexel owned
20 what -- well, let me ask you this: That was a
21 substantial number of shares, was it not, given
22 the pattern of ownership with respect to the other
25186
1 outstanding shares of UFG?
2 A. Well, it was substantial enough to be
3 reported in the proxy by the requirements for
4 guidelines. So, again, it depends on your
5 definition of "substantial." But it was enough to
6 be reported here.
7 Q. Well, let me ask you this: Who owned
8 more shares than Drexel Burnham Lambert?
9 MR. KEETON: I object to the question
10 just because are we wasting time here? We've just
11 taken 20 minutes to establish something that 30
12 seconds of one question with that deposition
13 reference could establish. He's going to ask who
14 had more shares. Now, we all know the answer to
15 that. Why is he asking that, Your Honor?
16 THE COURT: Well --
17 Q. (BY MR. RINALDI) In fact, didn't
18 MCO --
19 MR. RINALDI: I'll just make the
20 leading question, sir.
21 Q. (BY MR. RINALDI) Didn't MCO and
22 Federated have had more shares than Drexel?
25187
1 A. I'm looking at the page -- having been
2 given the document, if you look at Page 2 of the
3 document you asked me to look at, there are the
4 numbers for the people --
5 Q. Correct?
6 A. -- who had to report.
7 Q. And it indicates there that MCO had
8 13.5 percent and Federated had 9.8 percent of
9 common shares and that Drexel was the third
10 largest owner of the common shares of UFG, were
11 they not?
12 A. Other than this officers and directors
13 as a group, yes.
14 Q. Well, I understand; but those as a
15 group did not individually own any more than
16 Drexel, did they?
17 A. I don't know that.
18 Q. Well, it would have been reported if
19 they individually owned more, wouldn't it?
20 A. Well, if that were the requirement, I'm
21 sure it would have been, yeah.
22 Q. Now, what was your reaction when you
25188
1 learned that Drexel was -- had a position that
2 large in the ownership of UFG?
3 A. I don't know how to characterize it.
4 It was information.
5 Q. I understand that. But when you
6 learned that information, did you react in any way
7 or take any -- let me ask you this: When you
8 learned that information, in fact, didn't you go
9 to Mr. Hurwitz and ask Mr. Hurwitz what he knew
10 about Drexel's ownership of UFG?
11 A. I might have.
12 Q. Take a look at the transcript of your
13 testimony. It's at Page 99, Line 24. And it's
14 through -- and it states at the bottom, question,
15 "When you learned of the DBL ownership in February
16 or so of 1985, what did you do? Did you ask any
17 questions, have any conversations with anyone?"
18 Answer, "I don't know exactly. In some
19 ways, soon after I inquired of my colleagues as to
20 whether this was at MCO Holdings. I can't tell
21 you exactly to whom I talked or not because
22 obviously at that time Drexel was involved in a
25189
1 wide range of activities across the country and it
2 was the name that was on a lot of people's lists,
3 and it was a company with MCO Holdings and
4 Federated. But particularly, MCO Holdings did
5 other business. So, I would have asked, 'What
6 does this mean and is everybody clear as to
7 related transactions?' Again, my blinders would
8 have been in this in any way -- is this any anyway
9 relevant to the ongoing conversations? I'm trying
10 to stay close to with the regulators and the
11 lawyers on our own application."
12 Do you see that?
13 A. Yeah.
14 Q. So, who would you have raised the
15 subject of Drexel with?
16 A. My colleagues.
17 Q. Okay. And would your colleagues have
18 included Mr. Hurwitz?
19 A. Probably.
20 Q. And Mr. Schwartz?
21 A. Probably.
22 Q. And did you receive any assurance from
25190
1 them regarding the Drexel ownership?
2 A. As to what? Assurance about what?
3 Q. Well, you had asked them did they know
4 anything about Drexel's ownership.
5 A. Right.
6 Q. Why were you asking them questions
7 about that?
8 A. I think for the reason that you had
9 raised. You look at the proxy. It's a meaningful
10 shareholder. I would have said, "What do you know
11 about this?" And as I mentioned here, my focus
12 would have been, "We've got an application
13 pending. We've got to be very careful about
14 whether or not we're a savings and loan holding
15 company." Basically, that would have been my
16 question.
17 Q. Well -- but you also make reference to
18 the fact that it was -- that MCO Holdings and
19 Federated, but particularly MCO Holdings, did a
20 lot of business -- did other business with Drexel.
21 Do you see that?
22 A. Uh-huh. (Witness nods head
25191
1 affirmatively.)
2 Q. And then you again say, "Since they
3 were doing other work with us."
4 Were you concerned that there was some
5 tie-in between Drexel and MCO's ownership of the
6 shares of UFG?
7 A. Concerned? No.
8 Q. Did it occur to you at that time, sir,
9 that they might be acting in concert, as a group
10 acquiring shares of UFG together?
11 A. No.
12 Q. That never occurred to you?
13 A. Again, this is a long time afterwards.
14 My question would not have been whether it was in
15 concert or any other particular thing. My concern
16 would have been "Are you watching carefully the
17 guidelines, the regulatory expectations so that we
18 don't move into an area we don't want to be in?"
19 Whether -- whoever it was and wherever it was. I
20 would have asked the same thing if Dr. Kozmetsky
21 suddenly had 7.2 percent.
22 Q. Well, if Dr. Kozmetsky had 7.2 percent,
25192
1 you would have been over the 25 percent threshold,
2 wouldn't you?
3 A. That's my point.
4 Q. Yeah. So, you were concerned that
5 perhaps Drexel was acquiring these shares somehow
6 in conjunction with MCO and that might put them
7 over the threshold, weren't you?
8 A. No. I just wanted to be sure that in
9 no way with anyone at any time were we
10 inadvertently misstating my sense of what we were
11 doing in my conversations about being a savings
12 and loan holding company, whoever it was, wherever
13 it was.
14 Q. In fact, you thought that Drexel was
15 acting as a group along with MCO and Federated and
16 Mr. Kozmetsky, didn't you?
17 A. You really mean to ask me that?
18 Q. Yes, I do, sir.
19 A. No.
20 Q. And didn't you ask Mr. Hurwitz that
21 very question?
22 A. Did I ask him whether they were acting
25193
1 as a group?
2 Q. Yes.
3 A. I really -- I don't remember ever
4 asking him that specifically.
5 Q. Did Mr. Hurwitz tell you that they
6 weren't a group?
7 A. It's not an exchange that I recall
8 having.
9 Q. Okay. Let's look at the next page
10 then, sir.
11 A. Of?
12 Q. The deposition. Page 101. It says,
13 Line 7, "Did you discuss this" -- and this being
14 the Drexel ownership -- "with Charles Hurwitz"?
15 "Yes."
16 "What was his reaction?"
17 "Basically, that is it was not
18 something that was putting me at risk in terms of
19 my disclosures regarding the relationship and that
20 it was not to be reported as a group and didn't
21 have to be reported as a group."
22 Question, "And did he indicate to you
25194
1 that he was aware that Drexel had taken a position
2 in UFGI, or was he surprised at that revelation?"
3 Answer, "I didn't discern surprise.
4 But frankly -- and I don't think I would have
5 asked, 'Did you know this?' I would have assumed
6 that he knew this."
7 Why would you assume that Mr. Hurwitz
8 would have known about the Drexel ownership of UFG
9 stock?
10 A. I suspect basically because as one of
11 the other major shareholding companies of which he
12 was the chief executive and because we were doing
13 other business -- "we" being MCO -- I don't know
14 about Federated -- with Drexel, I would have made
15 that assumption had any investment banking firm
16 emerged as a more than 5 percent shareholder.
17 Q. And what was the nature of the other
18 business that MCO and Federated was doing with
19 Drexel at this point in time?
20 A. Remind me again what this point in time
21 is.
22 Q. It's 1985. It's March, April of '85.
25195
1 A. So, spring of '85, there would have
2 been some conversation, I think, about Pacific
3 Lumber. I'm not sure. I think Pacific Lumber is
4 roughly in that period of time.
5 Q. And what was Pacific Lumber, sir?
6 A. Pacific Lumber was and is a lumber
7 company located not far from the Humboldt campus
8 of California State University, as I unhappily
9 discovered, and was basically in the lumber
10 business. It had been -- it had changed ownership
11 ultimately in that period when MCO purchased
12 100 percent of its ownership.
13 Q. And was Drexel involved in MCO's
14 purchase of Pacific Lumber?
15 A. Yes.
16 Q. How were they involved, sir?
17 A. I believe that they played a
18 substantial role in the financing of the
19 transaction.
20 Q. In fact, they were responsible for
21 arranging for almost all of the financing for the
22 transaction, weren't they?
25196
1 A. I don't -- again, I don't know the
2 definition of "almost all." But as I said, I
3 believe that they were substantially involved.
4 Q. And you were a director of MCO,
5 correct?
6 A. Yes.
7 Q. So, you would have been intimately
8 familiar with what was going on with respect to
9 the Pacific Lumber acquisition?
10 A. Well, I'm not necessarily -- I would
11 have been familiar, not intimately familiar.
12 Q. As familiar as a director is about
13 matters that go on at a corporation of which he's
14 a director?
15 A. I think that's fair.
16 Q. And when you saw that Drexel was
17 acquiring shares or had acquired 7.2 percent of
18 UFG, you had this discussion then with Mr. Hurwitz
19 regarding the issue of whether they were part of a
20 group?
21 A. Well, basically, as reflected in the
22 deposition, is the exchange that I would have had.
25197
1 It seems -- again, this is three years earlier
2 than it is now. But that -- as you show me the
3 text, that seems like an accurate description of
4 our exchange.
5 Q. And do you recall that ultimately, MCO
6 did enter into an agreement by which MCO acquired
7 an option to acquire shares from Drexel Burnham
8 Lambert and the shares they had the option to
9 acquire were UFG shares?
10 A. Basically, yes.
11 Q. Okay. Now, turn to page -- to two
12 documents ahead. It's T1085. It's Tab 26.
13 A. Tell me again. 108 --
14 Q. 1085, Tab 26. And turn to the last
15 page of that document and tell me if that's
16 your -- not the last page, but the end of the
17 minutes.
18 Does that appear to be your signature
19 that appear in the minutes?
20 A. Yes.
21 Q. Okay. Now, turn now to the fourth page
22 of the minutes of the December 17th, 1985 meeting.
25198
1 And at the -- on the fourth page, it talks about
2 Mr. Schwartz reporting on an option agreement
3 regarding United Financial Group, Inc.'s stock.
4 Do you see that?
5 A. Yes.
6 Q. And just read that top paragraph there,
7 and then I have a couple of questions I wanted to
8 ask you about.
9 A. Okay. Read it aloud or just --
10 Q. No. Just read it to yourself.
11 A. (Witness reviews the document.) Okay.
12 Q. Now, it indicates here that
13 Mr. Schwartz had reported to the board on the
14 option arrangement.
15 Did you come to find out that
16 Mr. Schwartz was the individual at MCO who was
17 responsible for negotiating the option agreement
18 between Drexel and MCO?
19 A. It seemed to me he was primarily the
20 person responsible.
21 Q. And was this the first time that you
22 had learned of the option agreement at the board
25199
1 meeting?
2 A. Well, again, I can't talk specifically
3 to the timing. But at some point, I would have
4 been involved by Mr. Schwartz in the conversation
5 as relates, as I mentioned earlier, to the
6 implications for the net worth maintenance and
7 savings and loan holding company question. But I
8 just don't remember the intersection between that
9 and this date.
10 Q. Okay. But you would have been aware
11 that Mr. Schwartz was negotiating this thing?
12 A. At some point, Mr. Schwartz made me
13 aware when he specifically raised this question.
14 Q. And did Mr. Schwartz, in connection
15 with that conversation, ever ask you, "Can you
16 check with the regulators and find out whether if
17 we enter into this kind of option arrangement it
18 will affect the net worth condition?"
19 A. At some point, I had exchange with
20 regulators; but it's probably more likely at that
21 stage, at that early stage, he would have asked me
22 to check with the attorneys.
25200
1 Q. But you don't recall specifically going
2 to Ms. Williams or someone on her staff and
3 saying, "Look, we're thinking about entering into
4 this option agreement with Drexel with a put on
5 the end of it to give us the shares back. If we
6 do that, is that going to impact our position as a
7 holding company?"
8 You don't recall having that
9 discussion?
10 A. I don't recall that discussion, no.
11 Q. Do you recall a conversation, anything
12 similar to that, where you went to Ms. Williams or
13 her staff and described the potential transaction
14 that you were contemplating entering into?
15 A. No, I don't recall that conversation.
16 Q. Okay. And why -- did you understand as
17 a director of MCO why it was that MCO was entering
18 into this put/call option arrangement that's
19 described on Page 4 of the December 17th, 1985
20 minutes of the MCO Holdings?
21 A. Well, you had described some pieces of
22 it earlier. It was at least a combination of the
25201
1 soundness of the investment opportunity overall --
2 that is, the belief in the future of
3 United Financial Group, Inc. -- and trying to be
4 prepared for the time when -- by now, the Bank
5 Board resolution on the holding company would have
6 been approved. We would have been in conversation
7 about the modification of the net worth
8 maintenance requirement. So, we would have been
9 in conversation as to how we prepared within the
10 appropriate guidelines to take that step to at
11 least 35 percent when we got the approval to do
12 so.
13 Q. And as the person responsible for the
14 net worth obligation or the net worth condition,
15 you were acutely aware of the fact that MCO did
16 not want to take any steps that would cause it to
17 go over the 25 percent threshold until it had
18 negotiated a satisfactory net worth condition;
19 isn't that correct?
20 A. That would have been the statement I
21 made to Paul Schwartz.
22 Q. And you advised Mr. Schwartz that "You
25202
1 need to be very careful, that whatever you do,
2 that you don't cause us to go over that
3 threshold," didn't you?
4 A. Again, I most likely did. I have a
5 vague -- I can't tell you exactly when I did it,
6 but that exchange is fairly clear in my mind.
7 Q. So, Mr. Schwartz knew to a certainty
8 that there was a risk associated with acquiring
9 these shares --
10 A. Well, now you've --
11 Q. -- through an option? He knew that --
12 strike that.
13 A. I don't think that's what I said.
14 Q. Strike that. So, Mr. Schwartz knew
15 that if additional shares were acquired by UFG,
16 that there was a potential --
17 A. Did you mean by UFG?
18 Q. I'm sorry. By MCO, that he had to be
19 concerned about the question of whether those
20 shares would constitute shares that would count
21 towards the 25 percent ownership, correct?
22 MR. VILLA: Just to make sure, did you
25203
1 mean acquired or under the option? You've been
2 talking about the option and now you've just
3 changed to acquired. I don't know whether you're
4 misspeaking or whether that's what you intended to
5 ask.
6 MR. RINALDI: I intended to ask the
7 question that I asked.
8 MR. VILLA: I'm sorry, sir.
9 MR. EISENHART: Well, Your Honor, I had
10 the same objection to the question. It seems to
11 me he's now slipping from a concrete discussion of
12 the option agreement to a hypothetical about an
13 acquisition. I think he needs to make that clear
14 to the witness.
15 Q. (BY MR. RINALDI) Sir, when you spoke
16 to Mr. Schwartz, Mr. Schwartz understood that if
17 any actions were taken by MCO to acquire an
18 additional interest in shares, be it an option, be
19 it preferred shares, be it whatever kind of
20 interest, he had to be concerned as to whether
21 that additional interest would count towards the
22 25 percent threshold?
25204
1 A. I can't testify as to what Mr. Schwartz
2 knew. I can tell you that I would have said to
3 him in whatever structure is ultimately
4 transacted -- and I certainly as a director would
5 have said here, "Are we comfortable that in this
6 structure, we are sensitive to what the lawyers
7 are telling us about the savings and loan holding
8 company issue?" I can't tell you that I know
9 Mr. Schwartz knew that with a certainty. I can
10 tell you pretty comfortably what I would have
11 said.
12 Q. And you would have conveyed that
13 thought to him in your discussions with him,
14 correct?
15 A. Yes.
16 Q. And Mr. Schwartz is an extremely
17 intelligent man, is he not?
18 A. He certainly is in my perception, yes.
19 Q. Yes. And he would have understood, in
20 all likelihood, what you were telling him, would
21 he not?
22 A. Well, I've known Mr. Schwartz a long
25205
1 time; and I find him very intelligent. He does
2 surprise me from time to time as to what he
3 understands. I know what I say.
4 Q. Thank you, sir.
5 Did you have a similar kind of
6 discussion with Mr. Hurwitz? Would you have also
7 advised him that "we need to be very careful"?
8 A. Yes.
9 Q. Now, do you recall that after the
10 transaction had been entered into, you wrote a
11 letter to Mr. Bowman of the Texas Savings and Loan
12 Department?
13 A. "The transaction" meaning the Drexel
14 Burnham option?
15 Q. Well, yes. And I'm sorry. I'm talking
16 about -- did the board approve entering into the
17 put/call option with Drexel?
18 A. Yes, sir. It seems -- this description
19 here, yes.
20 Q. Okay. And the description of what they
21 did is contained in these minutes, as you
22 understood it?
25206
1 A. Yes, sir.
2 Q. And do you recall that they were paying
3 a substantial premium to Drexel in order to obtain
4 the option?
5 A. I don't remember at this point what --
6 if there was a premium or what it was. I just --
7 looking at these minutes, I recall that a
8 transaction was approved by the board.
9 Q. Okay. Did you -- were you aware that
10 they were paying $683,147 as a premium to acquire
11 the option? MCO was paying that to Drexel. Did
12 you know that?
13 A. Did I know that that number to the
14 dollar was the number now?
15 Q. Yes. Did you know it at the time?
16 A. I'm assuming that I did.
17 Q. Well, I notice that the option is
18 attached to the minutes.
19 Would you have had an opportunity to
20 review the option prior to approval of the
21 minutes?
22 A. Probably would have, yes.
25207
1 Q. Now, what was -- there was a letter of
2 credit, was there not, associated with the option?
3 Do you recall that?
4 A. I don't -- I don't recall.
5 Q. You don't recall that there was a
6 mechanism by which Drexel could be assured that if
7 the option were exercised, they would be paid?
8 A. I just don't remember the details of
9 the transaction at this point.
10 Q. Okay. Let's take a look at
11 Exhibit T10155. It's Tab 34. And this is the --
12 a letter that you signed but presumably was
13 drafted by counsel that goes to Mr. L.L. Bowman,
14 III, the commissioner of the Texas Savings and
15 Loan Department. This is dated January 25th,
16 1986. Take a look at that.
17 THE COURT: Could we have the exhibit
18 number again?
19 MR. RINALDI: I'm sorry. It's T10155,
20 Tab 34.
21 MR. EISENHART: Your Honor, I think
22 he's misstating it. I think it's A10155.
25208
1 A. Okay.
2 Q. (BY MR. RINALDI) Was there a reason
3 that you waited until after the transaction had
4 closed to write to Mr. Bowman and seek the
5 approval of the Texas Savings and Loan Commission?
6 A. Well, as you just pointed out, it's a
7 letter drafted by an attorney and I would have
8 been following the timing, the sequence, and the
9 language that was basically counseled to me by our
10 lawyers.
11 Q. Well, I understand that. But I guess
12 my question to you is: In this letter, you're
13 concerned that by acquiring the shares that under
14 the Texas Savings and Loan regulations, that might
15 constitute a change of control. And you're asking
16 that Mr. Bowman