IV. INTRODUCTION AND SUMMARY OF CHARGES 19. In 1982, MCO and Federated, assisted by Drexel, began to acquire shares of UFG, the holding company of USAT, with the intention of obtaining control of UFG and USAT. By June 1983, MCO, Federated, Hurwitz and Kozmetsky, acting in concert, had purchased nearly 25% of the shares of UFG, and on June 29, 1983 filed an Application H (e) -1 with the FHLBB for approval to obtain control of UFG through the proposed purchase of an additional 10% of UFG's shares. 20. In December 1984, the FHLBB issued a resolution approving the application of MCO and Federated to obtain up to 35% of the shares of UFG on the condition that MCO and Federated agree to infuse additional capital into USAT, in proportion to their ownership of UFG, as might become necessary in the future to maintain the net worth of USAT at the level required by applicable regulations, once MCO and Federated held more than 25% of UFG capital stock. MCO and Federated attempted unsuccessfully for over three years to have this condition of the resolution modified by the FHLBB so as to limit their obligation to maintain the capital levels of USAT. 21. MCO, Federated and Hurwitz, acting in concert with Drexel, thereafter acquired additional shares of UFG. 22. Under the arrangement, Drexel purchased an additional 790,459 shares of UFG (9.7% of the outstanding stock of UFG). On December 24, 1985, Drexel sold MCO a call option to acquire a portion of the shares of UFG owned by Drexel. In the event MCO declined to exercise the call option, MCO agreed to give Drexel an option to put the shares to MCO. As part of the December 24, 1985 transaction, MCO delivered a letter of credit to ensure MCO's performance. Initially, the parties contemplated that the put-call option would cover the full 790,459 shares of UFG that Drexel had acquired to assist MCO between July 1983 and December 1985. Because of constraints upon Drexel's ability to write simultaneous put and call options on all of the shares, however, the put-call option transaction was ultimately limited to 300,000 shares of UFG and the put arrangement took the form of an agreement to grant the put to Drexel upon the expiration of the call. Drexel continued to hold the remaining 490,459 shares for MCO's benefit. 23. MCO assumed the preponderant economic risk associated with ownership of the 300,000 optioned shares and, in effect, paid a premium of more than 50% of the purchase price of the shares. In addition, the 490,459 shares held by Drexel, which was acting in concert with MCO, count toward the group's control of UFG. Consequently, after the transaction, MCO, Federated, Hurwitz, and Drexel owned or controlled over 25% of the outstanding shares of UFG. Accordingly, they were obligated to maintain the minimum regulatory capital of USAT. 24. UFG, as the owner of 100% of the outstanding shares of USAT, had a similar obligation to maintain the capital of USAT. In the case of UFG the obligation was imposed by a resolution of the FHLBB entered on April 29, 1983 approving UFG's merger with another savings and loan holding company and a stipulation executed by UFG pursuant to the resolution. 25. The Respondents began to restructure USAT almost immediately after taking control of the institution with Drexel's assistance. By 1986, the Respondents had transformed it from a traditional savings and loan association into a vehicle for speculative, highly-leveraged, high-risk investments, and as explained below, in low-grade-corporate bonds (Òjunk bondsÓ) and in mortgage-backed securities (ÒMBS'sÓ) and their derivatives. 26. Between 1984 and 1988, USAT purchased over $1.5 billion of Drexel junk bonds and other Drexel-brokered securities. Because Drexel had acted in concert with MCO, Federated, and Hurwitz to obtain control of UFG and USAT, the purchases of these securities from Drexel were prohibited affiliated person transactions in violation of applicable regulations. 27. The restructuring of USAT resulted in lower income from operations and caused it to become dependent upon extraordinary income from sales of assets to maintain its stated net worth and to continue as a vehicle to finance the takeover activities of the Respondents. These investment practices adopted as part of the restructuring imposed significant risks to USAT and UFG. 28. In order to maintain the appearance of substantial net worth (when, in fact, USAT's net worth failed to meet the minimum regulatory requirements), avoid contributing capital to USAT to maintain its net worth pursuant to the FHLBB condition, stave off regulatory intervention, and maintain USAT as a purchaser and trader of Drexel-underwritten junk bonds, the Respondents engaged in unsafe and unsound practices and violations of numerous regulations, which are the subject of this Notice of Charges. 29. The Respondents caused USAT to divest itself of many of its branches and traditional loans and utilized the proceeds to speculate in mortgage-backed securities in a manner that increased the risk of loss to USAT dramatically. In order to conceal the additional risks to USAT, the Respondents made misrepresentations to the federal regulators that USAT's portfolio of MBS's was a fully-hedged investment portfolio, rather than a speculative trading portfolio. In order to create the appearance of a fully hedged portfolio, and thereby minimize the required amount of regulatory capital, the Respondents engaged in sham transfers of MBS's between USAT and a subsidiary. Those transfers concealed both the risks to USAT from the portfolio and USAT's violations of regulations governing the growth of its liabilities and the amount of its direct investments, and created a false appearance of compliance with the minimum regulatory capital requirements. 30. In addition, the Respondents caused USAT to engage in unsafe and unsound lending practices and real estate investments. 31. Finally, when it became apparent that they could no longer conceal that USAT failed its minimum capital requirements, the Respondents caused UFG and USAT to enter into employment agreements with exorbitant, illegal, unsafe and unsound severance provisions for the benefit of certain of the Individual Respondents. After USAT was found to be insolvent and placed in receivership, Respondents caused UFG to fund the payment of benefits under the severance provisions, and Respondents Munitz, Berner, Crow, and Gross were unjustly enriched by their receipt of such payments. 32. In November 1988, less than five years after Drexel, Hurwitz, Federated, MCO, and Kozmetsky gained control of UFG and USAT, USAT was required to execute a supervisory agreement with FSLIC. On December 30, 1988, USAT was placed in receivership, with FSLIC acting as receivers Immediately thereafter, USAT's deposit liabilities were assumed by, and substantially all of its assets were transferred to, a new federally chartered savings bank. The loss to the insurance fund exceeded $1.6 billion, of which more than $200 million is attributable to the MBS transactions and more than $50 million to the real estate loans that are the subject of this Notice of Charges. 33. Hurwitz, MAXXAM (as successor to MCO), Federated, and UFG contributed no assets to maintain the net worth of USAT in accordance with their obligations under the resolutions issued by the FHLBB.