XI. RESPONDENTS ENGAGED IN UNSAFE AND UNSOUND LENDING PRACTICES A. APPLICABLE STATUTES AND REGULATIONS 249. At all relevant times, insured institutions were required to maintain safe and sound management and pursue financial policies that were safe and consistent with economical home financing and the purposes of insurance of accounts. Former 12 U.S.C. § 1730(e)(1) and 12 C.F.R. § 563.17(a) (1983-88). 250. At all relevant times, for all loans to be secured by real estate assets, insured institutions were required to obtain, inter alia: (a) a signed application; (b) one or more written appraisals in accordance with FHLBB Memorandum R-41b (³FHLBB Mem. R-41b²); and (c) either a signed financial statement of the applicant that met FHLBB policies or a written credit report on the applicant. 12 C.F.R. § 563.17-1(c)(1)(1983-88). 251. At all relevant times, insured institutions were required to maintain complete, accurate, and reliable books and records of all transactions. 12 C.F.R. § 563.17-1(c) (1983-1988). 252. At all relevant times, directors of a thrift institution had a duty of care and loyalty to the institution. The duty of care include[d] the responsibility of the directors to . . . oversee the activities of the institution by attending director's meetings; to require that adequate and reliable information [was provided] upon which they [could] make decisions; to carefully review the documentation which is provided; to make the necessary policy decisions upon which the management is to operate the institution; to monitor the activities that are delegated to the officers of the institution to insure that the board of directors' policies are being carried out; and to establish controls to assure themselves that the institution is being operated in a safe and sound manner and in compliance with law and regulations. Minimum written [loan] underwriting standards must be established and adhered to. Policy should require high-risk or unusual loans to be presented to the board for final approval. The institution's capabilities and the risks involved should be carefully assessed to insure that the institution has adequate resources to engage in the proposed activity and the return merits and [sic] risk undertaken. . . . Loan policies should be made not only with the institution's capabilities and community's needs in mind, but with the responsibility of the institution to operate in a safe and sound manner. Memorandum No. R-62 (FHLBB May 8, 1985).(³FHLBB Mem. R-62²) B. RELEVANT FACTS 1. INTRODUCTION AND BACKGROUND 253. In the autumn of 1984, the real estate market in Texas was softening, and in certain locations, e.g., Houston, the effects of a weakened market were pronounced. 254. In October 1984, Respondents knew or should have known of the impact of the market decline on USAT's real estate investment and lending program. USAT had engaged in a high risk strategy of making 100% loans and funding interest payments on real estate projects in which borrower-developers had no equity. Respondents knew or should have known that, as a consequence, the chances for large losses for USAT had increased substantially. 255. Respondents knew or should have known that as early as October 1984, 27% of all USAT's construction loans and 10% of all its installment loans were delinquent; a large number of USAT's single family residential and construction borrowers were in bankruptcy or delinquent. Moreover, Respondents knew as of October 1984 that USAT's ³scheduled² items had risen to $153.7 million -- more than 100% of USAT's net worth, and knew or should have known that the real estate owned portfolio had increased 250%, from $12 million to $30 million in 1984. 256. In February 1985, USAT's outside auditors advised the Respondents that USAT had encountered a rapidly escalating trend of loan delinquencies and related foreclosures in the last half of 1984 and that the trend, coupled with decreasing values in certain real estate markets, required a higher level of loss reserves to be applied to loans and real estate. 257. USAT's outside auditors further informed the Respondents that USAT's management had failed to establish formal procedures to review such investments and to document loss reserves of this magnitude. As early as October 1984, Respondents knew or should have known, and therefore recklessly disregarded that serious critical flaws ranged from missing original documents to completely unlocatable files. 258. The Form 10-Q filed with the Securities and Exchange Commission (³SEC²) for the quarter ending March 31, 1985, shows that Respondents knew that UFG, USAT's holding company, had a net loss for the quarter of $7.7 million as a result of operations (a decrease of $10.7 million from net income of $3.0 million for the same period in 1984). The Form 10-Q filed with the SEC for the quarter ended June 30, 1985, shows that Respondents knew that net income for UFG had declined by 75% over the prior year's corresponding quarter and that the net loss of $6.5 million for the six months ended June 30, 1985 represented a decrease of $14 million from the net income of $7.5 million for the same period in 1984. Respondents knew or recklessly disregarded that this deteriorating financial condition was attributable to the weakened housing and real estate markets in Houston and in most of Texas, which had caused significant increases in foreclosures and nonaccruing loans as described above. 259. Notwithstanding their knowledge, in or about October 1984, Respondents adopted a strategy to engage in large commercial real estate investments to generate large quick profits and make USAT a ³major player² in Texas real estate. 260. Respondents, ambitions for USAT to become a ³major player² in Texas real estate like its competitors -- University Savings, Gibraltar Savings, First Texas of Dallas and San Antonio Savings -- resulted in a more than 400% increase in land development loans by USAT from the end of 1983 ($71.2 million) to the end of 1986 ($298.5 million). 2. REAL ESTATE TRANSACTIONS ILLUSTRATIVE OF RESPONDENTS' RECKLESS REAL ESTATE LENDING AND INVESTMENT PRACTICES a. THE PARK 410 TRANSACTION i. INITIAL FUNDING 261. In 1985, at the latest, and thereafter, at the direction of Respondents, USAT aggressively sought, selected, and approved costly, high-profile real estate investments and loans. For example, USAT's investment in real estate more than doubled in eighteen months, jumping from $169.5 million at December 31, 1984 to $366.2 million at June 30, 1986. 262. During the fall of 1984, USAT attempted to purchase property known as Park 410 in San Antonio. Because the area in which the property was located had for several years been of interest to developers, many single and mixed use office, commercial, retail, or residential tracts and developments existed near the Park 410 tract in various stages of partial completion. Nevertheless, Respondents concluded that Park 410's large size and location made it the type of ³high-profile² project that Respondents wanted as investments for USAT. 263. The Park 410 West tract was owned by a partnership -- consisting of Alamo Savings (³Alamo²) and two developers known as Park 410 West, Ltd. (³Alamo Partnership²) -- who had purchased the property in 1982 for $13,426,416. 264. On October 10, 1984, the Alamo Partnership offered to sell the Park 410 tract to USAT for $42.5 million, with 75% seller-financing on a non-recourse basis. In response, USAT counter-offered to purchase the property for $38 million, 80% non-recourse seller-financed. 265. USAT retained Stanley Rosenberg as its legal counsel for the purpose of finalizing the transaction with the Alamo Partnership. Rosenberg was a shareholder of UFG, a borrower from USAT, a shareholder and director of MCO, and a long-time friend and business associate of Respondent Hurwitz. However, on November 20, 1984, the Alamo Partnership returned, unexecuted, USAT's letter of intent. During this period, Gulf Management Resources, Inc. (³GMR²), a client of Rosenberg's law partner, Kenneth Gindy, was conducting negotiations with the Alamo Partnership to purchase the property. 266. The Alamo Partnership decided to sell the property to GMR, and soon thereafter, Rosenberg became GMR's 50% partner or joint venturer in Park 410 West JV (³Park 410 JV²), the entity formed by GMR to purchase the property. The Alamo Partnership ultimately sold the property to the Park 410 JV for $39 million, with nonrecourse, 100% seller-financing. The sale closed on March 29, 1985. 267. As a joint venturer in Park 410 JV, Rosenberg was required to advance 50% of the potential aggregate $65 million in costs for acquisition, development, and holding the property, (as projected by GMR, the joint venture's managing partner). On March 28, 1985, the day before the closing between the Alamo Partnership and Park 410 JV, Respondents Hurwitz, Gross, Crow, Munitz, Federated, and MAXXAM caused USAT to accept a proposal from Rosenberg to acquire one-half of Rosenberg's 50% interest in Park 410 JV in exchange for USAT's agreement to pay all of Rosenberg's financial obligations to the Park 410 JV, without limitation. Rosenberg, in turn, agreed to repay USAT his ratable share of the costs associated with the Park 410 JV out of any profits disbursed to him from Park 410 JV. As a consequence, USAT could be obligated to advance more than $30 million on account of its one-quarter interest, $15 million on its own behalf and $15 million on behalf of Rosenberg. 268. Investments in projects such as Park 410 were, according to USAT policies, the responsibility of USAT's Real Estate Investment Committee (³REIC²), which included Respondent Gross, among others. The REIC's authority was limited to $2.5 million without prior approval by the Board of Directors. Respondents Hurwitz, Gross, Munitz, and Crow actively participated in the decision committing USAT to the Park 410 JV investment. The actual written approval was signed by Respondent Gross among others and the deal was never presented to the Board of Directors, notwithstanding the $2.5 million limitation on the REIC's investment authority. 269. USAT's investment decision regarding the Park 410 JV was made with little or no independent due diligence by Respondents Hurwitz, Gross, Munitz, and Crow, who actively participated in meetings and decision-making concerning this investment. In fact, the only information available on the project were unsubstantiated, aggressively optimistic profit projections prepared by GMR, (i.e., Rosenberg's client and partner, which stood to benefit substantially from USAT's investment and commitment to provide future funding), and an utterly and patently defective forecast of future value. At the time, the development plans were incomplete and there had been no feasibility studies for the project. 270. In the fall of 1985, the Park 410 JV had sought unsuccessfully to obtain a $77.8 million loan to pay off its acquisition debt (due in early 1986), to provide funds for development, and to pay the holding costs of the project (taxes, interest, etc.) from lenders other than USAT. When the Park 410 JV failed to obtain such a loan from other lenders, it turned to USAT for assistance. ii. THE RESPONDENTS' DECISION TO MAKE THE $80 MILLION LOAN 271. Respondents Hurwitz, Gross, Crow, Munitz, Federated, and MAXXAM caused USAT, on or about April 16, 1986, to make the largest loan in its history: an $80 million acquisition and development loan for the Park 410 project, secured by the property. 272. Months before USAT made this loan, market conditions had clearly turned negative. By October 1985, six months before USAT approved and closed the $80 million loan to the Park 410 West JV, it was a matter of public knowledge that San Antonio had more than a two-year supply of office space. In December 1985, San Antonio¹s major newspaper carried the headline ³Real estate boom city turns to bust,² and reported ³Overbuilding of offices, retail, apartments and lost financing lead to plenty of foreclosures.² Further, by the time USAT closed the loan to the Park 410 West JV in April 1986, the posted price for West Texas Intermediate Crude Oil had dropped almost 50%, to $15.00 per barrel from $28.00 per barrel. The decline in crude oil prices further aggravated the decline in the Texas real estate market. 273. The Senior Loan Committee (³SLC²), which had been delegated authority by the Board of Directors of USAT to make loans up to $70 million, approved the loan on March 17, 1986. Because of the limit on the SLC's lending authority, the SLC, including Respondents Gross and Crow, approved the loan for only $70 million and conditioned the remaining loan amount upon receiving Board approval. 274. When the SLC approved the loan with Respondents Hurwitz, Gross, and Crow in attendance, it had not received an appraisal. Instead, the SLC based its analysis and approval on the borrower's (GMR's) unwarranted and insupportable sales projections and on a preliminary oral statement of value from an appraiser whose office was in Houston and who had no apparent prior experience in San Antonio. GMR's projections assumed sales of more than 65 acres per year, a rate of absorption even higher than its projection of a year earlier and assumed sales at higher prices not reflective of the decline in the market. Further, in his ³preliminary² valuation concluding that the market value of the Park 410 property was between $86-$90 million -- 6-1/2 times the August 1983 purchase price and more than twice the previous year's purchase price -- the Houston appraiser provided an ³as developed² figure for the property rather than an ³as is² value of the property as required by FHLBB Mem. R-41b. 275. Following his preliminary valuation, the appraiser sent a written ³appraisal² or value estimate to USAT two days after the SLC approved the loan. It was inadequate and failed to comply with the requirements of 12 C.F.R. § 563.17-1 and FHLBB Mem. R-41b. For example, the appraisal applied an unsupported discount rate, it failed to account appropriately for various expenses, including developer's profit, and was not self-contained. The appraisal relied upon stale, year-old comparables from a much stronger real estate market, failed to quantify or explain adjustments to comparables, failed to consider the impact of the glut of similar projects in the area, and failed to utilize all three approaches to value required by FHLBB Mem. R-41b, and failed to explain why they were omitted. 276. The Park 410 loan closed on April 17, 1986 with USAT making an initial advance of $45.6 million. Three weeks later, on May 8, 1986, USAT's Board of Directors, with Hurwitz, Crow, Gross, and Munitz in attendance, approved the loan. The material provided to the Board -- consisting only of the conclusory five-page write-up prepared by the SLC and principally using the borrower's data-- was only a cursory analysis. There was no presentation or discussion of the loan prior to Board approval. Only one director of USAT (an outside director) voted against the loan -- because of his concerns about the concentration of funds in single, very large loans such as the Park 410 loan. 277. The terms of the Park 410 loan exposed USAT to significantly greater risk than USAT had been subject to under the initial Park 410 JV. The loan was nonrecourse to the borrower, and the guarantees were for only 25% of the principal balance. The guarantees took effect only after foreclosure and the declaration of a deficiency. Moreover, although the guarantors arranged for $10 million in letters of credit as security for the loan, they were allowed to credit their personal guarantees for any amounts drawn against those letters of credit. The effect of this procedure was to reduce -- dollar for dollar--the actual amounts of the personal guarantees. 278. Respondents caused USAT to fail to adequately analyze the project's feasibility and to insist upon adequate collateral and other security for the repayment of the Park 410 loan. Respondents also caused USAT to make improper disbursements from the loan proceeds, including a $400,000 ³loan fee² to Rosenberg and a management fee to Rosenberg of $62,500 at closing and $75,000 per year thereafter that was undisclosed in the loan closing documents. Respondents, in all, caused USAT to pay Rosenberg more than half a million dollars for facilitating USAT's making of this $80 million high risk, unsafe and unsound loan. b. NORWOOD/UNITED-PARK JV--TRANSACTION 279. Shortly after making the Park 410 loan, USAT engaged in another large unsafe and unsound transaction totalling $39 million -- including a $30 million loan by USAT (³Norwood Loan²) and a $9.4 million infusion of capital by a subsidiary wholly owned by USAT (³Norwood Investment²). The principal purposes of the Norwood Transaction were to acquire roughly 00 acres of undeveloped Austin, Texas property that was already subject to a non-performing USAT loan (³Original Norwood Loan²) and to fund development costs. Respondents Hurwitz, Gross, Crow, Munitz, Federated, and MAXXAM caused USAT to engage in the Norwood Transaction, including the Norwood Loan and the Norwood Investment. 280. The Norwood Loan was approved on June 2, 1986 by the SLC, including Respondents Gross and Crow, with the prior approval of Respondent Hurwitz, among others. The joint venture to which the Norwood Loan was made was known as Norwood/United Park JV (³Norwood/United²), a partnership between Norwood Properties -- whose principals were Frank Krasovec and Jeffrey Minch and United Financial Corporation (³UFC²), a subsidiary of USAT. The Norwood Investment, a $9.4 million capital infusion, was approved on June 2, 1986 by the Real Estate Investment Committee, including Respondents Gross and Crow, and with the prior approval of Respondent Hurwitz, among others. 281. Subsequently, on July 29, 1986, USAT funded $13.8 million of the $30 million Norwood Loan in order to purchase troubled real estate in Austin, Texas that already secured USAT's non-performing Original Norwood Loan. In fact, the Original Norwood Loan had been made to a venture that included the principals of Norwood Properties. Further, the Original Norwood Loan had been extended twice and would have been reported as a delinquent loan and classified as a scheduled item had USAT not formed and financed (by making a $9.4 million cash equity contribution) Norwood/United. 282. The Norwood/United Transaction proved disastrous for USAT and UFC. The project was a total failure -- no lots were ever sold. More than a year after USAT was placed in receivership by the FDIC, USAT foreclosed its lien on 94.713 acres in or about August 1990 but lost its interest in 4.714 acres when the first lender on that tract foreclosed its lien. The loss sustained by USAT and UFC exceeded $27 million. 283. The Original Norwood Loan was fully guaranteed by Stephen Block and Thomas Gordon -- purported net worth totaling approximately $38.8 million -- as well as by the general partners of Norwood Properties, Frank Krasovec and Jeffrey Minch --purported net worth of approximately $13 million. Without regard to the prior four borrowers full guarantee on the Original Norwood Loan, (and their cumulative purported net worth of $51.8 million), the SLC, including Respondents Gross and Crow approved an exception to USAT's internal operating policy requiring full guarantees. Thus, borrowers Frank Krasovec and Jeffrey Minch were only required to guarantee 25% of the principal of the $30 million Norwood Loan, plus 100% of the interest. 284. As a practical matter, the guarantees of Krasovec and Minch were of dubious value and could not be relied upon as a reliable source of repayment for the Norwood Loan in any case. At the time of the loan application, Krasovec and Minch submitted unverified and unaudited financial statements dated January 6, 1986 and October 1, 1985 respectively. Of Krasovec's stated net worth of $13.45 million, only $507,000 was in cash. The remainder of Krasovec's listed net worth consisted of notes receivable, partnership interests, personal residences, and convertible debentures and stock in various communications companies. By the same token, Minch's financial statement showed $37,902 in unrestricted cash, and almost $1 million in partnership interests. Because virtually all of the assets listed by Krasovec and Minch were private interests and non-publicly traded securities, they were not readily subject to any form of reliable market valuation. Thus, given the absence of independent valuations of their assets, the financial statements of Krasovec and Minch were unreliable and could not be counted on to support a guaranty for loan repayment. Further, the fact that the financial statements filed by Krasovec and Minch in 1988 do not even list the $30 million USAT loan as a contingent liability is an indication that the joint venture partners never viewed their guarantee as a binding obligation. 285. In addition to the guarantors¹ ability and financial wherewithal being unreliable, the Norwood/United Agreement provided that the personal guarantees would be extinguished if UFC terminated the joint venture -- as it was allowed to do -- if the project failed to generate $10 million in sales by January 28, 1988. Ordinarily, one purpose of a guarantee is to serve as a source of full or partial repayment in the event a borrower fails to meet its obligation. However, in the Norwood Loan the guarantee was structured in such a way that the guarantors would be released if the project was a failure. 286. The appraisal relied on by USAT in approving the $30 million Norwood/United Loan was seriously flawed because it substantially overstated the value of the collateral property and because it significantly understated the time within which the property would be sold, i.e., the absorption period. Specifically, notwithstanding the pronounced decline in the Texas real estate market, Rex Bolin and Associates, Inc. appraised the Norwood collateral property as of June 5, 1986 as having a value of $46 million with an estimated absorption period of three years. By way of contrast, just two years earlier, Bolin had appraised the same property at only $28.8 million, $17.2 million less based on an estimated absorption period of seven years, four years less. 287. It is not surprising that the USAT Senior Loan Committee, including Respondents Gross and Crow, failed to question the glaring inconsistencies in the appraisal values or absorption periods. The Norwood Loan Appraisal was a sham. USAT, through David R. Graham, its Norwood Loan underwriter--and a veteran member of the Senior Loan Committee and a USAT senior vice-president and vice-president of UFC-- stated in a May 8, 1986 letter to Jeffrey Minch of Norwood Properties that Minch should instruct the appraiser, Rex Bolin, that ³he needs to try and arrive at a R41b value of $47,000,000+ if at all possible.² In this regard, Mr. Graham states that he has ³attached copies of the language we need to see in a R41b appraisal as well as a list of the areas we hear the federal examiners have concentrated on in their reviews.² Further, concerning the attached information and language, Mr. Graham states, ³this information should be helpful in Rex's preparation of the appraisal; however, if he has any questions, have him call me.² 288. The $30 million Norwood/United Transaction was a speculative real estate investment disguised as a loan transaction. As a practical matter, the only source of repayment would have been the successful-development and sale of the collateral property. Neither Krasovec nor Minch contributed any equity to the Norwood/United JV, and all interest and fees were to be funded from loan proceeds, including an ongoing $22,000 per month management fee paid to Norwood Properties to oversee the Norwood project. While in theory the guarantors had some financial liability, this minimal obligation vanished if the project was unsuccessful and USAT wanted to terminate the Norwood/United JV. By calling this investment a ³loan,² Respondents Hurwitz, Gross, Munitz, and Crow, among others, avoided presenting this investment to USAT's Board of Directors; further, calling it a ³loan² allowed USAT to book the loan fees -- a 3% origination fee for the first three years and a 1% fee for each subsequent extension -- and interest -- the prime rate plus 2% floating, payable monthly--as income. Further, the Norwood Transaction allowed USAT to avoid reporting the Original Norwood Loan as a non-performing loan in its reports to the regulators, thereby concealing the true financial condition of the Institution. C. TWELFTH CLAIM FOR RELIEF: RESPONDENTS CAUSED UNSAFE AND UNSOUND INVESTMENTS AND LOANS TO BE MADE (Respondents MAXXAM, Federated, Hurwitz, Gross, Crow, and Munitz) 289. OTS repeats and incorporates the allegations set forth in paragraphs 1 to 288 above. 290. Respondents engaged in unsafe and unsound practices and/or violated applicable regulations in approving the Park 410 JV Loan and/or Investment and the Norwood/United Park JV Transaction and in having, inter alia: 1. Failed to properly underwrite the Loans and/or Investments by relying upon inadequate documentation and information; 2. Relied upon inadequate and flawed appraisals which failed to comply with FHLBB Mem. R-41b; 3. Failed to comply with applicable rules and regulations relating to safe and sound practices, including 12 C.F.R. § 563.17(a), 563.17-1(c)(1), and FHLBB Mem. R-62, and relevant statutory provisions, including 12 U.S. C. § 1730 (e) (1) ; and 4. Approved and caused disbursements to be made on the Park 410 JV Loan and Investment and the Norwood/United Park JV Transaction prior to review and approval by the USAT board of directors. 291. Respondents caused USAT, including the REIC and the SLC, to engage in unsafe and unsound lending and investment practices in approving the investments and/or loans regarding the Park 410 and Norwood properties, in that they, inter alia: 1. Failed to maintain and/or adhere to adequate underwriting standards; 2. Failed to establish appropriate policies to assure that loans or investments were made in a safe and sound manner and in compliance with applicable rules and regulations; 3. Failed to adequately monitor lending activities of the REIC and/or the SLC; 4. Failed to establish adequate controls to assure compliance with safe and sound lending practices; 5. Abdicated lending decisions to committees or officers who had inadequate experience, training or ability to approve loans by USAT or commit USAT to transactions; 6. Delegated excessive lending authority to individuals who were inadequately qualified to approve loans by USAT or to commit USAT to transactions or investments of the magnitude permissible under such delegation; 7. Approved and ratified the Park 410 Loan and/or Investment and the Norwood/United Park JV Transaction, and disbursements therefrom based upon inadequate documentation and information; and 8. Failed to assure that the Park 410 Loan and/or Investment and the Norwood/United Park JV Transaction closed in accordance with 12 C.F.R. § 563.17-1(c)(1), FHLBB Mem. R-62, and in a safe and sound manner. 292. As a consequence of Respondents' failures as set forth above, USAT was caused to enter into the Park 410 and Norwood/United Park JV Transactions which were unsafe and unsound as well as violations of applicable laws, rules and regulations.