On December 26, 1995, the U.S. Treasury Office of Thrift Supervision ("OTS") issued a Notice of Charges against Maxxam, Inc., Federated Development Co., Charles E. Hurwitz, and other individuals, to obtain restitution for losses caused by their alleged violations of federal law in connection with the failure of United Savings Association of Texas. (In the Matter of United Savings Association of Texas, OTS Order Ní AP95-40.) Respondents have denied all material allegations. A hearing on the charges is now set for July 1997.


OTS has the statutory authority to issue temporary asset preservation orders pending the hearing, freezing the assets of the Respondents including the Maxxam Corporation, to prevent dissipation, but it has not yet taken this important enforcement step. This memorandum discusses the legal and factual basis for issuance of a temporary asset preservation order, and urges the OTS to issue such an order immediately.


While the basis for the order is purely financial and the government's goal would be to preserve Respondents' ability to meet an eventual judgment, it is worth noting in passing that an asset preservation order may also forestall imminent logging threats to the Headwaters Forest, an asset of Maxxam's wholly owned subsidiary, Pacific Lumber, at least until the actual financial impact of those operations can be evaluated.


1. Legal Background


In the wake of the savings and loan scandal, Congress created the Office of Thrift Supervision and gave it significant new powers under legislation known as "FIRREA", a sweeping 1989 revision of the former regulatory and enforcement structure for thrift institutions. Among OTS' new enforcement powers is the power to issue cease and desist orders (including asset preservation orders -- commonly called asset freeze orders) after an administrative hearing, and to issue temporary cease and desist orders, including asset freeze orders, without a hearing. Such proceedings are initiated by filing a Notice of Charges, as was done here.


2. Parties


United Savings Association of Texas ("USAT") was a wholly owned subsidiary of United Financial Group ("UFG"). According to OTS, Maxxam (and its predecessor, MCO Holdings Inc.) and Federated Development Co. ("Federated") were controlling shareholders of UFG Federated was also a controlling shareholder of Maxxam.



Charles E. Hurwitz is a controlling shareholder of Federated and is Chairman of the Board and Chief Executive Officer of both Federated and Maxxam. He was also a Director and Executive Officer of United Financial Group, and, according to the OTS Notice of Charges and a related federal court lawsuit filed against him in August 1995 by the Federal Deposit Insurance Corporation ("FDIC"), a de facto controlling person of USAT.


Barry Munitz, also named as a Respondent in the OTS Notice, is current chancellor of the California State University system. As an officer and director of several of the subject companies during key time periods, Munitz was arguably Hurwitz' right-hand man in controlling USAT's activities.


Also central to the OTS' charges, and to the FDIC's case, is Drexel Burnham Lambert, Michael Milken's notorious investment banking firm that dominated the market for ")unk'' bonds in the 1980s. Though not named as a Respondent in the OTS Notice of Charges, Drexel is alleged to be a key participant in the activities by Maxxam and Hurwitz that brought down USAT. Certain of the allegations central to the gcvernment's case against Maxxam and Hurwitz were first outlined in FDIC v. Milken, a case that ultimately resulted in Milken paying $600 million to the FDIC in settlement of its various claims.


3. Maxxam's Corporate History


In the early 1980s, Maxxam, then known as MCO Holdings, Inc., acquired Simplicity Pattern Corporation. Through a complex series of mergers and reorganizations, Simplicity divested its actual pattern-making operations and changed its name, emerging as Maxxam Group Inc. ("MGI"), then a subsidiary of MCO. After another round of mergers and name changes in the mid-1980s, MCO was renamed Maxxam, which wholly owns MGI. MGI in turn owns Maxxam's operating forest products companies, including Pacific Lumber. Maxxam's other two primary divisions are Kaiser Aluminum (in which Maxxam held a 62% interest at year-end 1995), and Maxxam Properties, a company dedicated to real estate development and speculation.


Pacific Lumber is Maxxam's most widely known and most controversial component. Maxxam acquired Pacific Lumber in 1985 using approximately $850 million of debt financing arranged by Drexel Burnham Lambert. At the time, Maxxam's own net worth was only about $100 million Below, the memorandum describes this acquisition, and Drexel's prior involvement with Maxxam, in greater detail. For more than ten years, both the mechanics of Maxxam's acquisition of Pacific Lumber and Pacific Lumber's subsequent timber practices, have been the subject of considerable litigation, press attention, and public outcry. Among other things, it appears that in its effort to acquire Pacific Lumber, Maxxam benefited from Pacific Lumber stock purchases by Ivan Boesky and Boyd Jefferies--both of whom were subsequently indicted for federal securities law violations



4. Charges Against Maxxam Hurwitz


In section III of the main text of this memorandum, "Description of OTS Charges Against Hurwitz and Maxxam," we outline in substantial detail the OTS' massive Notice of Charges (a document 140 pages long, containing 13 separate claims for relief. The main charging allegations are summarized as follows:








5. OTS' Authority to Issue Asset Preservation Orders


Under FIRREA, the OTS may issue temporary cease and desist orders, including orders to preserve assets, at any time pending a hearing on permanent cease and desist proceedings. No hearing is required before issuance of temporary cease and desist orders. Both permanent and temporary cease and desist orders may include mandatory provisions to prevent further wrongdoing or to remedy past wrongdoing. In other words, the power of the OTS to issue a temporary asset preservation order goes far beyond merely preserving the status quo. Courts have upheld the decisions of the OTS when it has issued temporary remedial orders, including orders to pay money, or to post bond in lieu of paying money.


The OTS authority extends beyond the thrift institutions themselves, and applies to "institution-affiliated parties," individuals and entities deemed by law to have played a role in the operation (and failure) of the thrift. From the statutory definition of institution-affiliated parties, from case law, and from OTS' own allegations, it is absolutely clear that Maxxam and Hurwitz are institution-affiliated parties of USAT,.


The OTS can issue its orders even after the regulated institution has closed. Courts have upheld temporary with affirmative provisions against former officers and directors of defunct thrift institutions on many occasions. The legal argument in support of OTS authority appears in section IV of the main text of the memorandum.


6. Compelling Reasons to Issue Asset Preservation Orders Here


An asset preservation order should issue here because the assets of Maxxam and Hurwitz may be in immediate jeopardy.


From our review of Maxxam's financial statements and SEC filings, it appears that on its books, Maxxam is grossly over-leveraged and that its shareholders essentially have no equity. Based on Maxxam's own financial statements, the total value of Maxxam's liabilities, including contingent obligations, appears to exceed the value of its assets. Further, we suspect, based on those statements, that the value of certain of Maxxam's assets is overstated at least slightly, and certain liabilities and contingent liabilities are significantly understated. Also, the OTS should consider the fact that Maxxam, through its Kaiser subsidiary, has, for the last several years, consistently expanded its investments outside of the United States, including investments in China. Maxxam's most valuable corporate assets increasingly lie overseas, invested in Maxxam's aluminum processing operations. We believe that the longer the OTS waits to move against Maxxam, the less likely it is that Maxxam will have U.S-based assets available to satisfy any ultimate restitution order.


Maxxam's marginal book valuation is of particular concern because the actual misconduct alleged by OTS in the Notice of Charges includes material misrepresentations on the part of Mr. Hurwitz and his associates regarding the financial condition of an institution under their control, as does the misconduct alleged in a parallel complaint filed by the FDIC against Mr. Hurwitz exclusively. In a parallel proceeding against Mr. Hurwitz filed by the FDIC on August 2, 1995 the FDIC states: "Hurwitz and his colleagues covered up the true state of the Association by a pattern of deceptive financial reporting and balance sheet manipulation. Gains were taken on certain securities transactions, while losses were left imbedded in the portfolio; . . . losses on real estate investments were repeatedly understated..." (Complaint in FDIC v. Hurwitz, par. 16) Although Hurwitz has denied all material allegations in the Complaint and Respondents have denied all material allegations in the Notice of Charges, in the absence of a final adjudication in their favor (which, in our opinion, is very unlikely), based on these allegations in the complaint and those in the Notice of Charges there are substantial reasons to believe that there is a real risk of dissipation.


Nor is the veracity of other elements of Maxxam's current management beyond reproach: ruling on the accuracy of Maxxam subsidiary Pacific Lumber's' record keeping in a non-financial arena, U.S. District Court Judge Louis C Bechtle, in his findings in Marbled Murrelet v. Pacific Lumber indicated that Pacific Lumber Intentionally understated the number of endangered sea-birds detected on its property in an effort to forestall regulatory intervention in its logging operations. All of this suggests that Maxxam's balance sheet must be subject to the highest level of scrutiny.


Current logging plans of Maxxam's subsidiary, the Pacific Lumber Company (Pacific Lumber or PALCO) lead to heightened concern. Since the takeover, PALCO's timber assets have been liquidated at an alarming rate (both in terms of environmental consequences and in terms of the long-term sustainability of the company), in part to service the heavy burden of junk bond debt incurred in the takeover. Until recently, PALCO's most valuable assets, its stands of virgin oldgrowth redwood, have, however, been largely immune. Plans now have been announced to log in the heart of PALCO's virgin groves and in nearby residual oldgrowth stands, removing individual trees that are worth between $30,000 and $100,000 after passing through PALCO's mills1. As OTS' complex case wends through the judicial system, there is a very real possibility that these extremely valuable assets will be liquidated and dissipated before a final resolution is reached.


Issuance of a temporary asset preservation order will expedite resolution of all issues and accelerate the process of judicial review. No compelling reasons exist not to issue a temporary asset preservation order. Should the charges against Maxxam not be sustained, the order would be lifted within a few months. On the other hand, if, as we believe is likely, the OTS' charges against Maxxam and Hurwitz are sustained, a temporary asset preservation order will preserve Maxxam's assets pending full restitution by Maxxam and Hurwitz to the taxpayers.


Many of the discussion sections below are prefaced with key excerpts from the OTS Notice of Charges. Even without the explanatory material that follows, we believe that these excerpts present a compelling case for issuance of a temporary asset preservation order against Maxxam and Hurwitz.



1An Individual old-growth redwood tree is estimated to be worth about 830.000 at the sawmill. The same tree is worth about $100,000 as lumber at a retail lumber yard. Since PALCO operates its own mill. the value of old-growth logs to the company would fall within this range.