13392 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 JULY 8, 1998 22 13393 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 (Not present) 6 and BRYAN VEIS, Esquire (Not Present) 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 16 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 13394 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 . 13395 1 2 INDEX OF PROCEEDINGS 3 4 RON HUEBSCH 5 Examination by Mr. Guido................13397 6 . 7 . 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 13396 1 P-R-O-C-E-E-D-I-N-G-S 2 (10:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. Are there any 5 preliminary matters? 6 MR. GUIDO: No, Your Honor. 7 THE COURT: All right. We'll proceed 8 with the OTS's witness. 9 MR. GUIDO: Your Honor, at this point 10 in time, we would like to call Respondent 11 Mr. Huebsch to the stand. 12 THE COURT: Would you take the oath, 13 please. 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 13397 1 RON HUEBSCH, 2 was called as a witness and, having been first 3 duly sworn, testified as follows: 4 5 THE COURT: Be seated, please. 6 MR. GUIDO: Mr. Guido. 7 MR. GUIDO: Thank you, Your Honor. 8 9 EXAMINATION 10 11 Q. (BY MR. GUIDO) Would you please state 12 your full name for the record. 13 A. Ronald Huebsch. 14 Q. I think we met before; is that correct? 15 A. Right. I think -- in deposition, I 16 believe. 17 Q. And you were deposed by the OTS how 18 many times? 19 A. Once, I believe. 20 Q. And at that deposition, were you asked 21 questions with regard to documents that you had 22 reviewed prior to the deposition? 13398 1 A. I believe there was some talk, chatter 2 amongst you and the Williams & Connolly lawyers. 3 Q. Do you recall reviewing documents that 4 had been submitted by the respondents to the 5 Federal Deposit Insurance Corporation? 6 A. I don't understand the question. 7 Q. Have you had an opportunity to review 8 your deposition prior to your testimony today? 9 A. Yes, I have. 10 Q. Did you notice in there that you were 11 asked questions about documents that you had 12 reviewed prior to that deposition? 13 A. Right, yes. 14 Q. And you recall one of the sets of 15 documents that you were asked about were documents 16 that you had in your possession in that 17 deposition? 18 A. Right. In my briefcase, as I recall, 19 right. 20 Q. And in that briefcase, did you testify 21 that you had documents that had been submitted by 22 the respondents to the Federal Deposit Insurance 13399 1 Corporation? 2 A. The respondents in this case? 3 Q. Yes. 4 A. I don't remember. 5 Q. Do you recall testifying that you had 6 documents in your possession -- 7 A. I had documents, yes. 8 Q. -- that had been prepared by Williams & 9 Connolly and had been submitted to the Federal 10 Deposit Insurance Corporation? 11 A. There were -- as I recall it, I had 12 notes on conversations that I had with Williams & 13 Connolly in that briefcase. 14 Q. Do you recall that you had copies of 15 letters from Williams & Connolly to the FDIC 16 regarding issues that are at issue in this 17 proceeding? 18 A. I may have had letters. I don't 19 recall. I may have had letters from Williams & 20 Connolly to me about issues in this case. I may 21 have, yes. 22 Q. What about letters from Williams & 13400 1 Connolly to lawyers for the FDIC? Had you 2 reviewed those? 3 A. I don't think I recall that. 4 Q. Have you reviewed any materials in 5 preparation for your testimony today? 6 A. Yes, I have. 7 Q. And what did you review? 8 A. I reviewed other people's testimonies, 9 statements by expert witnesses, things like that. 10 Q. Did you review the testimony of 11 Mr. Phillips? 12 A. Yes, I did. 13 Q. Did you review the testimony of Sandra 14 Laurenson? 15 A. Yes, I did. 16 Q. Did you review the testimony of Bruce 17 Williams? 18 A. That, I did not review. 19 Q. Okay. Did you review the testimony of 20 Gerald Williams? 21 A. No, I did not. 22 Q. Now, when you refer to testimony, are 13401 1 you referring to testimony in this proceeding? 2 A. Yes. 3 Q. Did you review any deposition 4 transcripts? 5 A. Only my own. 6 Q. Did you review any documents that I 7 designated as likely documents that I would ask 8 you questions about? 9 A. Yes. I reviewed some of those. 10 Q. Okay. When were those provided to you? 11 A. Yesterday. 12 Q. Now, can you tell us a little bit about 13 your educational background? 14 A. Well, I went to Harvard College, 15 Columbia Law School, and then went in the 16 investment business. 17 Q. Did you major in anything in particular 18 at Harvard College? 19 A. History. 20 Q. And then you went to Columbia Law 21 School? 22 A. Yes. 13402 1 Q. You received a JD degree? 2 A. No. I think a -- I think they were 3 LLB. 4 Q. LLMs at the time or LLBs? 5 A. They were LLBs. This is way back. 6 LLB. 7 Q. Some of us go back to LLBs. 8 Now, what did you do after you 9 graduated from law school? 10 A. I went into the investment business and 11 worked for a firm, Dominic & Dominic. 12 Q. And what years was that? 13 A. This was the last Fifties, probably 14 1959ish. 15 Q. Now -- and how long did you stay there? 16 A. I stayed there about two years. 17 Q. And then where did you go? 18 A. I went to Fairmont Advisory Service 19 which was an investment advisory. 20 Q. And how long were you there? 21 A. I was there from the early 60s, 22 probably like '61 to '69. 13403 1 Q. And what were your responsibilities 2 there? 3 A. Portfolio management, securities 4 research. 5 Q. And after that, where did you go? 6 A. In 1969, I went with Summit Management 7 and Research, which was a manager of mutual funds 8 and private accounts. 9 Q. Who were the principals of Summit? 10 A. Charles Hurwitz was one of the 11 principals. Sheldon Oster was another one. 12 Q. And you were there from '69 until when? 13 A. '69 until, like, '71. 14 Q. And then where did you go? 15 A. In '71, I went to MS Smithers & 16 Company, which is a broker underwriting firm in 17 New York City. 18 Q. And what were your responsibilities 19 there? 20 A. I was director of investment strategy. 21 Q. And what did that entail? 22 A. That entailed, for example, finding out 13404 1 which industrial groups' stocks might be doing the 2 best in the market, relevant market performance of 3 different groups, things like that. 4 Q. And who were the principals of that 5 company? 6 A. Well, the Smithers family was still 7 involved. A fellow named Art Lewis was the 8 president and, I believe, the biggest stockholder. 9 Q. Was Charles Hurwitz involved? 10 A. No, he was not. 11 Q. Was the Summit entity still in 12 existence? 13 A. Summit Management, I believe, was sold 14 and was not -- if it was in existence, I don't 15 think he owned any others after -- 16 Q. What do you mean "he"? 17 A. Charles Hurwitz. 18 Q. Now, did you have any business 19 relationships with him when you were at the 20 Smithers Company? 21 A. Smithers Company, no, I didn't. 22 Q. And how long did you stay there? 13405 1 A. Until about 1973 or '4. 2 Q. And then where did you go? 3 A. Then I went with Federated Reinsurance. 4 Well, I'm sorry. Not Federated Reinsurance. 5 Probably Federated Development, which was a 6 Charles Hurwitz company. 7 Q. Now, at that point in time, Federated 8 Reinsurance, did it exist? 9 A. You know, we were involved with an 10 insurance company that later became Federated 11 Reinsurance. 12 Q. What was the name of the insurance 13 company? 14 A. I believe it was something like Excess 15 and Treaty Reinsurance, something like that. 16 Q. Had any complaints been filed against 17 you during the period of time prior to joining 18 Federated Development as an employee? 19 A. No complaints. 20 Q. Were any -- 21 A. These are legal complaints? 22 Q. Right. Were any administrative 13406 1 complaints filed? 2 A. No. 3 Q. Were any administrative complaints 4 brought against any of the principals that you 5 were involved with prior to joining Federated? 6 A. I believe one SEC action that some of 7 the companies and Mr. Hurwitz were involved -- 8 Q. Which company? 9 A. One of the companies in which 10 Mr. Hurwitz was involved. I don't know which one. 11 Q. Was that a company you were involved 12 with? 13 A. You know, I don't believe so; but I 14 don't know for sure. 15 Q. Did you testify? 16 A. Yes, I testified. 17 Q. And was that in response to a subpoena 18 from the SEC? 19 A. Yes. 20 Q. Was it an investigation by the SEC? 21 A. It was some kind of investigation by 22 the SEC. I don't know the proper name for the 13407 1 investigation. 2 Q. Now, you say that in about 1976, you 3 went to Federated Development? 4 A. No. It would be like 1974. 5 Q. About 1974. And what were your 6 responsibilities at Federated Development when you 7 first joined? 8 A. Portfolio management. 9 Q. And what was the portfolio at the time? 10 A. Well, it was an insurance company 11 portfolio primarily. 12 Q. And what was in the portfolio? 13 A. Well, there were stocks and bonds, 14 preferred stocks, convertibles. 15 Q. Common stocks? 16 A. Common stocks as well, yes. 17 Q. Corporate bonds? 18 A. Yes. 19 Q. US Treasury bonds? 20 A. Some. Or maybe not Treasury bonds. 21 There were some Treasury securities. 22 Q. Were any of the securities or bonds 13408 1 denominated high-yield bonds? 2 A. No. There may have been. I don't 3 recall, but there was not a big emphasis on 4 high-yield bonds. 5 Q. And how long did you stay working with 6 Federated Development as a portfolio manager? 7 A. Well, I probably -- I have stayed 8 there -- 9 Q. Are you there today? 10 A. -- until today, yeah. 11 Q. Okay. 12 A. Maybe not Federated Development, but 13 various companies within the Federated-MAXXAM 14 group of companies. 15 Q. What are the Federated-MAXXAM group of 16 companies? 17 A. Well, my primary concern, the companies 18 that I would see in my work would be MAXXAM, 19 MAXXAM Group, Federated Development. Those are 20 the three primary companies that I have been 21 involved with. 22 From time to time, there have been 13409 1 other companies, but mainly with these three. 2 Q. Was MCO Holdings one of the -- 3 A. MCO Holdings was a predecessor company 4 to MAXXAM. 5 Q. Okay. And was the -- was MAXXAM, as it 6 exists today, a successor to any other entities 7 besides MCO Holdings? 8 A. Excuse me? 9 Q. Is it a successor to any other entities 10 besides MCO Holdings? 11 A. I don't know. It may be. I don't 12 know. 13 Q. Now, what has been your responsibility 14 in your work for MAXXAM, MAXXAM Group I think is 15 what you said, and Federated Development. What 16 has been your responsibilities? 17 A. My principal responsibility is 18 portfolio management. 19 Q. Okay. And what are the portfolios 20 today that you manage? 21 A. Today, there are merger risk arb 22 portfolios. 13410 1 Q. And in 1984, what were the portfolios 2 that you managed for the MAXXAM Group entities, 3 MAXXAM Group-Federated Development entities? 4 A. I really don't remember 1984. 5 Q. How about '85? 6 A. They were becoming arbitrage portfolios 7 in the 1985 time frame. 8 Q. And 1986? 9 A. They were probably active arbitrage 10 portfolios. 11 Q. And '87? 12 A. The same. 13 Q. And '88? 14 A. The same. 15 Q. And did they have any other securities 16 besides equity arbitrage portfolios in the '85 17 through '88 time period? 18 A. They may well have. That was not my 19 responsibility. 20 Q. Well, do you know? 21 A. I can't recall the other securities 22 they owned. 13411 1 Q. Did they own high-yield bonds? 2 A. They may have. 3 Q. But you don't know? 4 A. They probably did from time to time, 5 but I don't know whether they were involved with 6 them on a continuing basis. 7 Q. Do you recall me asking you those 8 questions about the high-yield bond portfolio at 9 the MAXXAM-Federated Group entities in your 10 deposition? 11 A. I recall something about it. 12 Q. Do you recall what your answer was? 13 A. No. 14 Q. Were they significant portfolios? 15 A. Significant to what? 16 Q. In comparison to the equity arbitrage 17 portfolio in terms of size. 18 A. I would think the equity arbitrage 19 portion of the overall holdings was bigger than 20 their other holdings. 21 Q. Were the other holdings approximately 22 10 percent of the equity arbitrage? 13412 1 A. I just -- I just don't know. I just 2 don't know. 3 Q. Now, did you manage any high-yield bond 4 portfolio for Federated or MAXXAM Group? 5 A. No. 6 Q. Did you manage any -- were there any 7 other investment managers at MAXXAM or Federated 8 during the '84-'88 time period besides yourself? 9 A. There weren't to my knowledge. There 10 were not. 11 Q. Would it be fair to conclude that if 12 there was a high-yield bond portfolio that was 13 managed at MAXXAM Group and Federated between '85 14 and '88, you would have been the person involved? 15 A. I don't know. 16 Q. You don't know? 17 A. I don't know whether I would be 18 involved or not. I had plenty to do in those 19 years. 20 Q. Pardon? 21 A. I had plenty of work to do in those 22 years. 13413 1 Q. Now, you became an employee of USAT at 2 some point in time, did you not? 3 A. That's right. 4 Q. And when did you become an employee of 5 USAT? 6 A. I believe it was sometime in the middle 7 to end of 1984. 8 Q. Are you sure it wasn't February 1985? 9 A. I don't -- I don't know. 10 Q. I would like to show you Exhibit A1090, 11 which is Tab 125. It is the minutes of the board 12 of directors of United Savings Association of 13 Texas. 14 A. (Witness reviews the document.) 15 Q. These are the minutes of the board of 16 directors of United Savings Association that 17 established the -- on Page 4, there's a resolution 18 that sets out, "The following individuals are 19 hereby elected officers of the association." And 20 then it goes on for a number of pages listing 21 people who are officers. 22 That doesn't reflect that you were an 13414 1 officer as of that time, does it, Mr. Huebsch? 2 A. It doesn't leap out at me. Page 4? 3 Q. Starting on Page 4, Page 4 through the 4 various lists of individuals. 5 A. No, I don't see my name. 6 Q. Now, I would like to hand you 7 Exhibit A1110, which is at Tab 133, which are the 8 minutes of the board of directors of United 9 Savings Association of February 13th -- excuse me. 10 I'll leave that here. 11 MR. GUIDO: Your Honor, I think to 12 speed the process up, I'll give everybody the 13 various tab numbers and exhibit numbers now that 14 I'm going to be using with this line of 15 questioning. 16 THE COURT: We need the exhibit 17 numbers, also. 18 MR. GUIDO: The first one, Your Honor, 19 is A1102, which are the minutes of the board of 20 directors of United Savings Association of 21 February 14th, 1985. The second is A1110, which 22 is the document I just showed the witness, which 13415 1 are the minutes of the board of directors of 2 United Savings Association of February 13, 1986. 3 The third is A1124, which is the February 19th, 4 1987 minutes of the board of directors meeting of 5 United Financial Group. And the -- those are the 6 three. 7 Two of those -- one of those documents 8 has already been introduced: A1110, Your Honor. 9 Two of them have not, and I have copies of them 10 here: A1102 and -- 11 MR. NICKENS: It's in at Tab 128. 12 MR. GUIDO: Oh, is it? 13 Q. (BY MR. GUIDO) I would like you, 14 Mr. Huebsch, to take a look at Exhibit A1102 -- 15 A. All right. 16 Q. -- which are the minutes of the board 17 of directors of United Savings Association of 18 Texas for February 14th, 1987. And I direct your 19 attention to -- 20 A. 1985. 21 Q. '85. Excuse me. I direct your 22 attention to Page 4 of the document which has a 13416 1 resolution similar to the resolution of 1984 which 2 says, "Resolve that the following individuals are 3 hereby elected officers of the association." And 4 then it lists through the next three -- three 5 pages the officers of that institution. 6 And on the second page, do you see 7 under "investments," it has you listed as a 8 vice president? 9 A. Right. I see it on Page 5. 10 Q. Then I would like to direct your 11 attention to the Document A1110 that I put in 12 front of you in the folder. That is the minutes 13 of the board of directors of United Savings 14 Association of Texas of February 13, 1986. And it 15 has on the third page "election of officers." 16 "Resolved that the following individuals are 17 hereby elected officers of the association." And 18 then it has -- on Page 4 under "investments," it 19 has you listed, this time as executive 20 vice president. 21 Do you see that? 22 A. Yes, I see that. 13417 1 Q. Prior to becoming a vice president in 2 1985, did you hold any other title at USAT? 3 A. Title, no, not that I'm aware of. 4 Q. Now, I would like to direct your 5 attention to Exhibit A1124, which are the minutes 6 of the board of directors of United Financial 7 Group dated February 19th, 1987. 8 MR. GUIDO: This, Your Honor, has not 9 been introduced. I would like to move the 10 admission of Exhibit A1124, which are the minutes 11 of the board of directors of United Financial 12 Group, February 19th, 1987. And attached to it 13 are the minutes of the board of directors of 14 United Savings Association of Texas as part of 15 that packet of exhibits. 16 MR. VILLA: No objection. 17 THE COURT: Received. 18 Q. (BY MR. GUIDO) I would like to direct 19 your attention to the portion of the exhibit that 20 starts on Bates stamp -- if you look in the far 21 right-hand corner, Mr. Huebsch -- US3003191. I'm 22 sorry. 13418 1 A. I don't have that. 2 Q. Do you see that? 3 A. Yeah. 4 Q. It's about halfway into the packet. 5 That says, "Minutes of meeting of the board of 6 directors of United Savings Association of Texas 7 of February 19th, 1987." And if you go to Page 3 8 of that set of minutes, which is Bates stamped 9 US3003193, it says "election of officers." Again, 10 it says, "Are hereby elected officers of the 11 association." If you flip over to Page 4 of those 12 minutes, which is at US3003194, you see under 13 "investments," it has you, Ronald E. Huebsch, 14 listed as executive vice president? 15 A. That's right. 16 Q. And then it has Sandra Laurenson, 17 senior vice president? 18 A. Right. 19 Q. Clint Carlson as assistant 20 vice president and Lauren Jordan as assistant 21 vice president? 22 A. I see those four names. 13419 1 Q. And then prior to February of 1985, 2 were you an officer of United Savings Association 3 of Texas? 4 A. It does not appear so. 5 Q. Now, did you hold any position with 6 United Savings Association of Texas prior to 7 February of 1985? 8 A. I don't really know. I did work for 9 them. I mean, I did work; but I don't know 10 whether -- where I was on the table of the 11 organizations. 12 Q. There are no minutes of the board of 13 directors that indicate that you're an officer of 14 United Savings Association? 15 A. That's apparent. 16 Q. Have you seen any minutes in your 17 review of anything? Because I haven't. 18 A. I haven't. 19 Q. So, prior to February of 1985, you were 20 not an officer of USAT? 21 A. That's true. 22 Q. But you said that you did work on its 13420 1 behalf? 2 A. Yes. 3 Q. Who asked you to do that work? 4 A. Jerry Williams, Charles Hurwitz, people 5 like that. 6 Q. Were you an officer of Federated 7 Development? 8 A. That, I do not recall. I just don't 9 know whether I was or not. 10 Q. Who paid you? 11 MR. NICKENS: Could we get what time 12 period, Your Honor? 13 Q. (BY MR. GUIDO) 1984. Prior to 14 February 15th, 1985. 15 A. I believe I was being paid by 16 Federated. Well, hold it. All during this 17 period, I was being -- this period, '84 through 18 '88, I was getting paid by Federated. 19 Q. Okay. Now -- 20 A. I may have been also being paid by USAT 21 in the latter half, but I don't know that for 22 sure. Or they might have had some, you know, deal 13421 1 with Federated to each pay a portion of my salary. 2 I just don't know. 3 Q. But the paychecks came from Federated 4 as far as you recall? 5 A. There was always a paycheck from 6 Federated. 7 Q. And at some point in time, did 8 paychecks start arriving from USAT? 9 A. Yes, they did. 10 Q. Was that after -- 11 A. But I can't -- I don't know quite when 12 that happened. 13 Q. Now, prior to becoming an officer of 14 USAT in 1985, February of 1985, what did you do on 15 USAT's behalf? 16 A. The -- one of the first things I did 17 was to request -- was to search out and find 18 somebody who might be capable of managing 19 fixed-income investments. 20 Q. Was that person that you eventually 21 hired Joe Phillips? 22 A. That's right. 13422 1 Q. And you mean, by fixed-income 2 investments, high-yield bonds? 3 A. High-yield bonds. 4 Q. Anything else? 5 A. Well, fixed income would be all sorts 6 of debt instruments: Bonds, notes. 7 Q. Okay. Was -- were you asked to find 8 someone to manage a high-yield bond portfolio? 9 A. I thought that would be -- it was 10 thought that would be one of his -- we thought 11 that would be one of his first jobs. 12 Q. So that that was something that you did 13 on behalf of USAT? 14 A. That's an example, right. 15 Q. What else? 16 A. We did some -- in the latter half of 17 '84, we did some, you know, planning work on 18 mortgage-backs. We started to think about equity 19 arbitrage which were not necessarily initiated in 20 '84, but the background work was started then. 21 Q. Anything else? 22 A. We talked about getting a trading 13423 1 facility, a trading room. 2 Q. Anything else? 3 A. There are probably other things. Those 4 are the ones I recall. 5 Q. Did you purchase high-yield bonds on 6 behalf of USAT at the time? 7 A. We did purchase some high-yield bonds. 8 Q. When you say "we," who are you talking 9 about? 10 A. Well, the association. 11 Q. The association bought some high-yield 12 bonds? 13 A. Yes, that's right. 14 Q. Okay. Who did the research to select 15 the bonds? 16 A. I did some of the research. 17 Q. Who else? 18 A. We would -- we would see -- they were 19 mainly floating rate notes. And I would, you 20 know, get a list of them; and I would chat with 21 people like Mr. Hurwitz and Jerry Williams if they 22 had any, you know, idea or merits of these 13424 1 credits. You know, I would check the credits 2 myself. And we would, you know, reach a consensus 3 on which ones we thought were the better. 4 Q. Who actually asked you to research the 5 potential investment in high-yield bonds? 6 A. Mr. Hurwitz asked me to do that. 7 Q. And did Mr. Hurwitz indicate to you at 8 the time what size of a portfolio that he had in 9 mind? 10 A. No. I had no idea. 11 Q. Now, with regard to the planning work 12 for mortgage-backed securities that you did in 13 early 1985, did Mr. Hurwitz also ask you to do 14 that? 15 A. Yes. Well, this was -- by that time, 16 it was, you know, more than Mr. Hurwitz. There 17 was -- Mr. Williams was in on these things, 18 getting his -- he was contributing to these. He 19 was -- he was helping out in this effort, too. 20 Q. What about the equity arbitrage? Did 21 Mr. Hurwitz also ask you to begin exploring 22 investments in inequity arbitrage? 13425 1 A. Yes, he asked me to start exploring. 2 Q. With regard to creating a trading 3 facility, did Mr. Hurwitz also ask you to begin 4 planning to create a trading facility? 5 A. That was Mr. Hurwitz and Mr. Williams. 6 Q. Now, you -- subsequent to February of 7 1985, you held other positions at USAT, did you 8 not? 9 A. I don't remember. I thought this was 10 it. 11 Q. I would like to direct your attention 12 to a document that is the minutes of the board of 13 directors of United Financial Group, May 8th, 14 1986, and that is A1112, and also the minutes of 15 the board of directors of United Savings 16 Association of Texas at the same date, May 8th, 17 1986, which is A1113. 18 19 (Discussion held off the record.) 20 21 MR. GUIDO: Your Honor, I move the 22 admission of Exhibit A1112 and A1113. 13426 1 THE COURT: We're showing A1113 in as 2 T7587. 3 MR. GUIDO: Okay. That's 1113 as T -- 4 THE COURT: 7587. 5 MR. VILLA: Your Honor, is that Tab 655 6 according to -- 7 THE COURT: We don't have the tab. 8 MR. NICKENS: Our records, Your Honor, 9 indicate it is at Tab 655 so that people reading 10 this record will have all three references. 11 MR. GUIDO: 1112 has not been admitted? 12 We move the admission of A1112, Your Honor. 13 MR. VILLA: No objection, Your Honor. 14 THE COURT: Received. 15 Q. (BY MR. GUIDO) Now, I would like to 16 direct your attention to A1112, which is the 17 minutes of United Financial Group of May 8th, 18 1986. 19 Do you see on the first page, it makes 20 mention of an investment committee? And it says, 21 "The investment committee shall be established 22 consisting of the following persons." And then it 13427 1 lists Mr. Gross, Mr. Williams, Mr. Crow, Bruce 2 Williams, yourself, Joe Phillips, and Art Berner 3 as the secretary. 4 Do you see that? 5 A. Yes, I do see that. 6 Q. The second document which is -- A1113 7 which has been admitted at Tab 655 and it is T -- 8 I missed the -- 9 MR. SCHWARTZ: 7587. 10 Q. (BY MR. GUIDO) It's 7587, Exhibit 7587. 11 That also lists an investment committee on the 12 second page of USAT. And it says, "An investment 13 committee shall be established consisting of the 14 following persons: Barry Munitz, Jenard Gross, 15 Gerald Williams, Michael Crow, Bruce Williams, 16 yourself, Joe Phillips, and Art Berner, 17 secretary." 18 Do you see that? 19 A. Yes, I see that. 20 Q. Does that refresh your recollection 21 that you served as a member of UFG and USAT 22 investment committees? 13428 1 A. Yes, that does. 2 Q. That indicates as of May 8th, 1986, 3 there was an investment committee. Those are the 4 first mention that we find of an investment 5 committee at USAT. 6 MR. NICKENS: Your Honor, I object to 7 that testimony. There are, in fact, no minutes 8 prior to this time. So, for Mr. Guido to say this 9 is the first mention of an investment committee 10 which is patently wrong, I object to it. 11 MR. GUIDO: I'm sorry. I misspoke, 12 Your Honor. This is the first written mention of 13 the creation of an investment committee. My 14 question was to lead to the point that Mr. Nickens 15 was just making. 16 Q. (BY MR. GUIDO) This is the first 17 creation of an investment committee in the minutes 18 of the board of directors that we've been able to 19 find. There are minutes that pre-date this time 20 period; and I was wondering how the investment 21 committee operated prior to its formal creation, 22 if you know. 13429 1 A. Well, are there minutes? 2 Q. There are minutes of the investment 3 committee, I think, that start sometime in April. 4 A. If I had those, I could probably answer 5 your question better. 6 Q. Let me take you back to the point where 7 there are no minutes, then. Prior to April, okay, 8 of 1985 -- 9 A. Right. 10 Q. Okay. Prior to April of 1985, how were 11 investment decisions made at USAT? 12 MR. VILLA: Excuse me. Did you mean 13 April of 1986? 14 MR. GUIDO: April of 1986. Excuse me. 15 MR. VILLA: It's confusing enough. 16 MR. GUIDO: Okay. I'm sorry. 17 A. The -- if an idea -- Mr. Phillips or 18 myself came up with an idea, we would talk to 19 senior management about it. These would be 20 probably, though I'm not sure, all members of the 21 executive committee. So, I think we had, you 22 know, an investment department and then senior 13430 1 management and then the executive committee. I 2 think that's -- if there were large transactions, 3 I would assume the board approved them. I 4 wouldn't -- I wouldn't know past, you know, 5 explaining it to senior management like 6 Mr. Williams and Mr. Gross and people like that. 7 Q. (BY MR. GUIDO) Mr. Hurwitz? 8 A. Mr. Hurwitz if he were around. 9 Q. Now, with regard to other committees, 10 do you recall serving on any other committees? 11 A. I believe I served on the 12 asset/liability committee. 13 Q. What was the function of the 14 asset/liability committee? 15 A. The asset/liability committee, as I 16 understand it, was a place to get the people who 17 invested the money, worked on the asset side, 18 together with the people on the liability side who 19 raised the money and to, you know, make sure we 20 were talking about the same things so far as the 21 level of interest rates. We wouldn't want to 22 raise money at a higher rate than we could invest 13431 1 it, problems like that. 2 Q. And you didn't want to invest it at a 3 lower rate than you had borrowed it at? 4 A. That's right. 5 Q. So, that was -- 6 A. It was an attempt to get those two 7 sides of the savings and loan together talking. 8 Q. Now, I would like to show you a 9 document that's been marked as Exhibit B3925. 10 It's a memorandum dated April 28th, 1986; and it 11 is at Tab 1294. It's a memo from Michael Crow to 12 a list of individuals. 13 A. (Witness reviews the document.) 14 Q. That's a memo from Mike Crow to Charles 15 Hurwitz, Jenard Gross, Barry Munitz, Gerald 16 Williams, yourself, Jeff Gray, Bruce Williams, Art 17 Berner, and Jim Jackson. It says, "The first 18 meeting of the strategic planning committee will 19 be on Friday, May 2nd, in the conference room next 20 to Genard's office." 21 Do you see that? 22 A. Yes, I do. 13432 1 Q. Do you recall serving on that strategic 2 planning committee? 3 A. No, I do not recall serving on that 4 committee. 5 Q. Do you recall the existence of the 6 strategic planning committee? 7 A. I heard there was one. 8 Q. And when did you hear that there was 9 one? 10 A. I can't -- can't tell you when I heard 11 it. 12 Q. Before or after USAT was placed in 13 receivership? 14 A. Before. 15 Q. And so, you heard of it -- 16 A. I heard of it. 17 Q. -- during the period of time that it 18 was in existence or some period of time in its 19 existence? 20 A. I heard of it between '84 and '88, yes. 21 Q. Okay. And in what context did you hear 22 about it? 13433 1 A. I just heard that there was one. I 2 don't -- I don't even know whether I attended this 3 meeting. 4 Q. Do you know whether or not the 5 investment committee was obligated to report to 6 the strategic planning committee under USAT's 7 structure? 8 A. I do not know whether it was. 9 Q. Had you heard that it had? 10 A. I'm just blank on that. 11 Q. Okay. Did anyone ever, in the 12 investment committee meetings which you attended, 13 indicate that this strategic planning committee 14 had made a decision and wanted the investment 15 planning committee to implement that decision? 16 A. They may have, but I don't recall it 17 specifically. 18 Q. Now, I would like to turn to the 19 high-yield bond portfolio, if I may, at this point 20 in time. 21 MR. GUIDO: At this point in time, 22 Your Honor, I'm going to ask the witness some 13434 1 questions about a series of documents dealing with 2 the high-yield bonds. And those are -- I'll read 3 off the tab numbers as well as the exhibit 4 numbers -- Tab 160, which is B355; Tab 161, which 5 is B356; Tab 162, which is B3720; Tab 164, which 6 is B398; Tab 165, which is B405; Tab 163, which is 7 B371; Tab 173, which is -- Tab 173, which is 8 Exhibit T4061. 9 MR. VILLA: Mr. Guido, B3720 or 370? 10 MR. GUIDO: 370 is what I have. Did I 11 say 3720? 12 MR. VILLA: I think you said 3720. 13 Q. (BY MR. GUIDO) I would like to direct 14 your attention to the first document that's in the 15 packet. 16 A. The top folder here? 17 Q. Yes. It's Exhibit B355 at the bottom 18 of the first page of the document, and it's a 19 two-page letter. 20 A. Yes, I see it. 21 Q. Pardon? 22 A. Yes, I have it right here. 13435 1 Q. Now, this is dated July 23rd, 1984. 2 It's a letter from Mr. Bentley, the chairman of 3 the board of USAT, to Mr. L.A. Anderson, deputy 4 commissioner, Texas Savings and Loan Department. 5 It says, "As a follow-up to our letter of July 5 6 and your discussion with Jim Pledger earlier this 7 week regarding our request for approval of 8 investment in certain corporate debt securities, 9 we have revised the master list to include 13 10 securities which we would consider for possible 11 purchase. We currently intend to make aggregate 12 investments of approximately 25 million, but will 13 not purchase more than 5 percent of any one 14 outstanding issue. We hereby request approval for 15 the following securities." And it lists 13 16 securities there. 17 Do you see that? 18 A. Yes, I have it right here. 19 Q. Did you do the research to identify 20 those 13 securities? 21 A. Yes. 22 Q. Okay. Was that done at Mr. Hurwitz's 13436 1 request? 2 A. Well, I think it was done at 3 Mr. Hurwitz's and Mr. Williams' and the other 4 senior management. 5 Q. Now, at that time, did you do any 6 research for Federated or MAXXAM Group or any of 7 those entities with regard to potential purchases 8 of high-yield bonds? 9 A. I do not recall that I did. 10 Q. Now, it says, "We currently intend to 11 make aggregate investments of approximately 12 $25 million." 13 Do you see that? 14 A. I see that. 15 Q. Do you recall that being the target 16 figure? 17 A. I didn't recall it before; but this 18 appears to be a target figure, right. 19 Q. You don't have any independent 20 recollection other than reading it in this letter? 21 A. No, I don't. 22 Q. It also says, "Will not purchase more 13437 1 than 5 percent of any one outstanding issue." 2 Do you see that? 3 A. I see that. 4 Q. Do you recall that there had been a 5 limit set at the time, a 5 percent limit? 6 A. Obviously. This would suggest that 7 there is a limit. 8 Q. Independent of reading this, do you 9 have any independent recollection of that? 10 A. No, I don't. 11 Q. Do you know who -- who established the 12 25-million-dollar limit? 13 A. I don't know specifically who. It 14 would probably be somebody in treasury. I mean, 15 we would have to have the money to buy these 16 things; and they would be the people to supply the 17 money. 18 Q. Now, let's move on to the next 19 document, which is the letter back from the 20 commissioner, deputy commissioner, to Mr. Bentley 21 responding to the -- to that letter. 22 Do you recall any discussions about 13438 1 obtaining the approval of the Texas Savings and 2 Loan Department for these investments that are 3 listed on Exhibit B355? 4 A. I don't recall being part of any 5 discussion. That was a legal problem that I 6 didn't deal with. 7 Q. Pardon? 8 A. I didn't deal with legal problems. It 9 was obvious they -- 10 Q. Do you recall having any discussions 11 with anyone about the need to get the approval of 12 the Texas Savings and Loan Department to make 13 investments in high-yield bonds at the time? 14 A. No, I wasn't part of that. 15 Q. So, no one ever discussed that issue 16 with you? 17 A. No. 18 Q. Then let's go to Exhibit B370. This is 19 a letter from the deputy commissioner, 20 L.A. Anderson, to Mr. Bentley dated December 20, 21 1984. And it says, "Confirming our September 20, 22 1984 telephone conversation, the Department offers 13439 1 no objections to the association's 2 5-million-dollar purchase of a nonliquidity 3 investment in Kaufman and Broad senior 4 subordinated exchangeable variable rate notes." 5 Do you see that? 6 A. I see that. 7 Q. Did you do the research to identify 8 that investment? 9 A. I believe Mr. Phillips was on board by 10 then; but I may have. But I more than likely -- 11 if he were aboard by then, he would have done the 12 research on Kaufman and Broad. 13 Q. Then look at Tab 164, which is B39A. 14 A. Okay. 15 Q. This is a letter from Mr. Bentley to 16 Mr. L.L. Bowman, I think is what it says, 17 Commissioner of Texas Savings and Loan Department. 18 And this has as copies J. Phillips, G. Williams, 19 and Jim Pledger. 20 Do you see that? 21 A. Yeah, I see the copies to them. 22 Q. Now, this was clearly after 13440 1 Mr. Phillips had joined USAT? 2 A. Uh-huh, yes. 3 Q. Okay. Now -- and it lists a number 4 of -- in the third page, it lists a number of 5 entities which investments were made in prior to 6 the date of this letter: December 6th, 1984. And 7 it lists some of the entities that I mentioned on 8 Exhibit B355, which is the first document that I 9 showed you. 10 A. Uh-huh, those 13, right. 11 Q. Pardon? Yeah, the 13 -- 12 A. The list of 13, right. 13 Q. Did you also do the research on the 14 purchases of the instruments that are listed on 15 the third page of Exhibit B398? 16 A. No. I probably would not have done the 17 research on the -- certainly not on the fixed 18 rate. Do you see those -- 19 Q. Uh-huh. 20 A. -- on the bottom there? That would be 21 Mr. Phillips' bailiwick. I may have done some of 22 the research on these older names. 13441 1 Q. Who did Mr. Phillips report to when he 2 first joined USAT? 3 A. He reported to me. 4 Q. Then I would like to direct your 5 attention to Exhibit B405, which is at Tab 165, 6 which I think is the next in the packet. 7 A. I go to B371. 8 Q. Okay. We'll skip that, and we'll go to 9 B371. 10 A. Okay. 11 Q. This is a memorandum from Joe Phillips 12 to Gerald Williams dated September 24, 1984. And 13 it says -- "investment in high-yield bonds" is the 14 reference. It says, "Enclosed, investment 15 summaries." And it says, "Purpose: To document 16 my review of holdings of high-yield fixed-income 17 securities held by the association upon my 18 arrival." Then on Page 2, it lists a number of 19 investments: Occidental Petroleum Corporation, 20 MDC Corporation, Mesa Petroleum, Coastal Corp., 21 Kaufman and Broad, Continental Illinois, and LTV 22 Corporation? 13442 1 A. I see those. 2 Q. Are those the entities for which you 3 did the research? 4 A. I believe some of those are on that 5 list of 13 on the July letter to Mr. Anderson. 6 Q. Which is at Tab 160, B355? 7 A. B355, right. 8 Q. So, those are -- 9 A. Let me see if I can -- well, we have 10 Mesa that lines up; and Occidental lines up. 11 Q. MDC is on there? 12 A. Yes. MDC is No. 6. 13 Q. Coastal Corporation is on there? 14 A. That is what I was looking for. You 15 know, I don't see Coastal on that list of 13. 16 Q. Continental Illinois? 17 A. No. 18 Q. LTV? 19 A. No, I don't see LTV. 20 Q. Now, Joe Phillips says these were 21 purchased prior to him joining USAT. Did you do 22 the research for the investments in those three 13443 1 entities, securities? 2 A. If they were purchased before he got 3 there, then I did them. Now, I remember -- 4 Q. Pardon? 5 A. Particularly Continental. I believe I 6 did that. 7 Q. I would like to direct your attention 8 to the document that has been marked as -- T4061, 9 I think, is the next document that you have in a 10 folder there, Tab 173. 11 A. Yes, I have that. 12 Q. You indicated that one of the things 13 that you were asked to do prior to becoming an 14 officer in February of 1985 at USAT was to look at 15 the -- how to structure an investment facility, I 16 think is the term that you used. 17 Do you recall that? 18 A. Yes, I recall that. 19 Q. Now, this is a memorandum from you to 20 Gerald Williams dated March 29, 1984 -- 21 A. Right. 22 Q. -- with regard to a investment 13444 1 facility. 2 Do you recall preparing that document? 3 A. Yes, I prepared this document. 4 Q. Okay. And is this a document that you 5 prepared in response to a request by Mr. Hurwitz 6 and Mr. Williams? 7 A. Yes. 8 Q. Now, what was it that led you to 9 recommend the creation of a centralized trading 10 and investment facility for USAT? 11 A. Well, I thought it would be the best 12 way to handle the trading transactions. 13 Q. Now, what was it about the way USAT was 14 managing its investments at the time that led you 15 to conclude that it needed a centralized trading 16 and investment facility? 17 A. Well, I don't think they had any 18 facility. 19 Q. Were they doing any trading in 20 securities as of March 29, '84? 21 A. Well, I think it was just in 22 probably -- I keep forgetting his name. Dave 13445 1 Barrett, I think, was probably doing it on the top 2 of his desk. 3 Q. What was he trading in? 4 A. I think they had mortgage-backs. 5 Q. Was he a treasurer? 6 A. He was, I believe, the treasurer and 7 chief financial officer. 8 Q. Was he managing essentially a liquidity 9 portfolio to meet the liquidity requirements? 10 A. He probably -- I just don't know, but I 11 was -- I would assume that he did the investment 12 portfolio and the liquidity portfolio if we're -- 13 liquidity portfolio if we're talking about the 14 same thing. 15 Q. What do you understand "liquidity 16 portfolio" to mean? 17 A. Liquidity portfolio was the -- sort of 18 the insurance fund in case they were run on the 19 bank and was made up of very short-term high 20 quality instruments. I think the maximum maturity 21 could only be three years out so that you can -- 22 you know, if you had an emergency, you could sell 13446 1 it in a minute and provide instantaneously funds 2 for emergency. 3 Q. Was he investing in any equity 4 arbitrage transactions? 5 A. I don't believe so. 6 Q. Was he investing in any high-yield 7 bonds? 8 A. Not that I know of. 9 Q. Was he investing in any derivatives of 10 mortgage-backed securities? 11 A. Derivatives of mortgage-backed 12 securities or just derivatives? 13 Q. No. Derivatives of mortgage-backed 14 securities. 15 A. Not that I know of. 16 Q. Now, did -- your recommendation with 17 regard to an investment committee, did that 18 include investments in equity arbitrage? Is that 19 what was contemplated? 20 MR. VILLA: Investment committee or 21 investment facility? 22 MR. GUIDO: Investment facility. I'm 13447 1 sorry. 2 A. I don't believe I was thinking of that 3 at this time. 4 Q. (BY MR. GUIDO) What were you thinking? 5 A. It was sort of -- this was -- I thought 6 it was planned broad enough that it would include 7 almost anything, but I didn't have any specifics 8 in mind. 9 Q. You didn't have any specifics in terms 10 of types of investments in mind? 11 A. No. This was just a general plan. 12 Q. Now, I would like to show you a 13 document that's dated November 14th, 1985, from 14 Joe Phillips and yourself to Jenard Gross. It's 15 Exhibit B654. It's a two-page document. It says, 16 "Subject: Summary of investment activity results 17 enclosure. Selected investment results." 18 THE COURT: Mr. Guido, we'll take a 19 short recess. 20 MR. GUIDO: Yes, Your Honor. 21 22 . 13448 1 (Whereupon a short break was taken.) 2 3 THE COURT: Be seated, please. We'll 4 be back on the record. Mr. Guido, you may 5 continue. 6 MR. GUIDO: Thank you, Your Honor. 7 Q. (BY MR. GUIDO) Before we go to the 8 document that I had shown you, I would like to 9 show you a document that's been marked as Twomey 10 Exhibit 21. It's at Tab 941. (sic) It is a 11 letter from Art Berner to Neil Twomey dated 12 August 29th, 1986. Tab 91. 13 MR. NICKENS: I thought you said 941. 14 MR. GUIDO: It's the Art Berner to Neil 15 Twomey, August 29, 1986. And it has attached to 16 it United Association's business plan, Your Honor. 17 THE COURT: Does it have an exhibit 18 number? 19 MR. GUIDO: The file copy is Twomey 21 20 is what it's listed as. 21 THE COURT: Well, that's not an exhibit 22 number, though. 13449 1 MR. GUIDO: I think there were some 2 numbers that were designated in that way, 3 Your Honor. It appears on our admitted exhibit 4 list as Twomey 21, Your Honor. 5 THE COURT: That sounds like a 6 deposition number. 7 MR. GUIDO: It was, Your Honor. It was 8 originally the exhibit number from the deposition; 9 but I think the people, when they were doing the 10 real estate section, put it in as Twomey 21. 11 THE COURT: We'll be off the record for 12 a moment. 13 14 (Discussion held off the record.) 15 16 THE COURT: We'll be back on the 17 record. All right. We have Exhibit 21. 18 Q. (BY MR. GUIDO) Mr. Huebsch, I would 19 like to show you the document that's at Tab 91 20 as -- Twomey 21 is the exhibit number, which is 21 the business -- the cover letter from Art Berner 22 to Mr. Twomey. It's enclosing United Savings 13450 1 Association's business plan. And I would like to 2 direct your attention to the imaging number 3 OW150686, which is about 20 pages from the rear of 4 the document. It has a page number of 14 on 5 the -- on the document. It's a copy of your 6 resume that was submitted to Mr. Twomey as part of 7 the business plan. 8 A. (Witness reviews the document.) 9 Q. Have you had an opportunity to review 10 that document? 11 A. I'm reading. Just Page 14? 12 Q. Just Page 14. 13 A. Okay. 14 Q. Do you see where it says "present 15 business affiliations"? It says, "April 1974 to 16 present: Portfolio manager of Federated 17 Development Company, Houston, Texas"? 18 A. Yes. 19 Q. Is that accurate? 20 A. Well, it should be, like, you know, 21 MAXXAM-Federated. 22 Q. Then it says, "February 1985 to 13451 1 present: Vice president, investments, United 2 Savings Association of Texas, Houston, Texas"? 3 MR. NICKENS: Your Honor, it says 4 "executive vice president." 5 A. What -- are we talking "present"? I 6 don't know. 7 Q. (BY MR. GUIDO) "Executive vice 8 present", do you see that? 9 A. Yeah. 10 Q. Does that mean executive 11 vice president? 12 A. I would guess it does mean that. 13 Q. And it says "February 1985 to present." 14 Do you see that? 15 A. I see that. 16 Q. Does that refresh your recollection of 17 whether you were an employee or an officer of USAT 18 prior to February of 1985? 19 MR. NICKENS: Your Honor, the question 20 is employee or officer? 21 MR. GUIDO: Yes. 22 A. Well, it looks like I was an officer 13452 1 from February 1985 onward. 2 Q. (BY MR. GUIDO) Were you ever anything 3 other than an officer of USAT at the time that you 4 were employed by USAT? 5 A. I just -- I just don't know. This 6 should probably say MAXXAM-Federated. 7 Q. Now, I would like to direct your 8 attention back to the exhibit that you were just 9 looking at before the break, which is 10 Exhibit B654. 11 A. Yes, I have it. 12 Q. Have you had an opportunity to review 13 this document prior to your testimony today? 14 A. I don't believe I have. 15 Q. Do you recognize the document as a 16 document that you and Joe Phillips prepared on or 17 about November 14th, 1985? 18 A. You know, I don't remember preparing 19 it; but obviously, it says -- it has my name on 20 it, so -- 21 Q. Now, I would like to direct your 22 attention to the text of the memo. It says, 13453 1 "Purpose: To respond to your request for certain 2 investment results, year-to-date." It says, 3 "Background. I received a request through 4 Dr. Munitz's office to summarize investment 5 activity year-to-date specifically regarding 6 high-yield bonds, mortgages, liquidity and common 7 stock." Point 3, "Discussion: The enclosure 8 lists are estimates of realized gains from various 9 securities categories as well as statistics 10 relating to matched portfolio and preliminary 11 structure of the finance subsidiary." 12 Do you see those sentences? 13 A. Yes, I see that sentence. 14 Q. "Realized gains shown here may differ 15 from performance report results at any given 16 moment due to the different cut-off dates, 17 accounting for discount/premium amortization and 18 commissions, but will typically align over short 19 periods of time." 20 Do you see that? 21 A. Yes. 22 Q. It goes on, "The finance subsidiary is 13454 1 shown in round millions since final settlements 2 are not yet complete. The new United matched 3 portfolio is also summarized and implied annual 4 spread income estimated." 5 Do you see that? 6 A. Yes, I do. 7 Q. Does that refresh your recollection 8 that you were asked by Dr. Munitz to prepare a 9 summary of the investment activities and results 10 at USAT at the end of 1985? 11 A. Well, I still don't remember it; but 12 obviously, I did. 13 Q. Do you have any reason to dispute the 14 accuracy of this memorandum? 15 A. I haven't read it all the way through, 16 and I have no way to check the numbers. 17 MR. GUIDO: I would like to offer B654 18 into evidence, Your Honor. 19 MR. VILLA: No objection. 20 THE COURT: Received. 21 Q. (BY MR. GUIDO) Now, it talks about -- 22 see the second page? It talks about selected 13455 1 investment results. 2 Do you see that? 3 A. Yes, I'm sure. 4 Q. It says, "Realized gains, various 5 categories, gain on sale, high-yield corporate 6 bonds. Source: Department records." 7 Do you see that? 8 A. Right. 9 Q. Then it has next to it "$8,520,510." 10 Do you see that? 11 A. I see that number. 12 Q. What does the reference department of 13 records refer to? Do you know? 14 A. You know, I don't know what it refers 15 to. 16 Q. Was there an investment department as 17 of November 14th, 1985? 18 A. There was. 19 Q. Did it maintain records? 20 A. That, I don't know. I don't know 21 whether it retained records, you know, separate 22 from treasury or ledger. I don't know. 13456 1 Q. Now, in 1985, were sales made out of 2 the high-yield bond portfolio in order to generate 3 gains to bolster profits and net worth? 4 A. I can't tell whether these gains were 5 for any other purpose than, you know, just good 6 portfolio management. I can't tell from this. 7 Q. That wasn't my question. 8 A. What? 9 Q. That wasn't my question. 10 My question was: Were sales made of 11 the high-yield bond portfolio at USAT in order to 12 generate gains to bolster profits and net worth? 13 A. From time to time, such gains were 14 taken. 15 Q. That wasn't my question. 16 A. I don't -- okay. 17 Q. My question was: Were sales made out 18 of the high-yield bond portfolio at USAT in 1985 19 in order to generate gains and bolster profits and 20 net worth? 21 A. They may have. 22 Q. What do you mean "they may have"? 13457 1 A. I can't tell from this whether these 2 gains were -- this 8 million -- 3 8-and-a-half-million-dollar figure were such 4 gains. Some of this may well have been from -- 5 these gains may have been from, you know, just 6 normal portfolio management. 7 Q. Mr. Huebsch, I didn't ask you about 8 these particular gains. Okay? I asked you: In 9 1985, were sales made out of USAT's high-yield 10 bond portfolio in order to generate gains to 11 bolster profits and net worth? 12 A. There may have been. 13 Q. What do you mean "there may have been"? 14 A. I mean, there may well have been. I 15 don't -- I don't remember specifically, but I know 16 from time to time that gains were taken. 17 Q. For the purpose of taking gains to 18 bolster profits and net worth? 19 A. Right. 20 Q. In 1985? 21 A. I don't know whether it was 1985. It 22 may well have been. 13458 1 Q. Now, let's move to the next set of 2 documents. 3 MR. GUIDO: These are, Your Honor, 4 exhibits -- it's Tab 565, Your Honor, which is 5 Exhibit T4192; Tab 566, which is T4302; Tab 567, 6 which is Exhibit T4251; Tab 564, which is 7 Exhibit A5017; Tab 883, which is Exhibit 5028. 8 THE COURT: You may continue. 9 Q. (BY MR. GUIDO) I would like to direct 10 your attention to T4302, which is the second 11 document in the -- Tab 566. This is a memorandum 12 from Mike Crow to Bruce Williams dated 13 November 13, 1986. It says, "We had a discussion 14 at the investment committee on selling junk bonds 15 for profits for purposes of quarterly earnings. 16 Ron Huebsch made an impassioned plea to get the 17 word now if we are going to need a lot of profits 18 because the market is favorable right now to 19 getting out of some bonds, taking a profit, and 20 having a chance of getting back into some good 21 yielding stuff. He is absolutely correct. GRW 22 and I stated that we would need, quote, 'major 13459 1 amounts of profits,' close quote, because we 2 cannot depend on such things as a branch sale, 3 loan servicing sale, and consumer loan sale to 4 pull us out of the fire. Charles asked to see 5 some projections on the quarter prior to making a 6 definitive decision. Would you start pulling 7 together what you think the quarter will look like 8 without extraordinary gains? It should be macro 9 in nature and should not be an elaborate exercise, 10 and in my opinion, should not take more than about 11 an hour (at least, that is the kind of effort I am 12 envisioning)." 13 Do you see that? 14 A. Yes, I see that. 15 Q. Do you recall a discussion in the 16 investment committee on selling junk bonds for 17 profits for purposes of quarterly earnings? 18 A. No, I don't recall it; but it may well 19 have come up, reading this. 20 Q. Were sales made out of the high-yield 21 bond portfolio at USAT in 1986 for purposes of 22 generating profits to bolster net worth? 13460 1 A. From time to time, profits were taken. 2 Q. That wasn't my question, Mr. Huebsch. 3 I said -- 4 A. Well, from time to time, profits were 5 made -- profits were taken to, I guess -- you 6 know, I don't know the net worth. I don't know -- 7 I don't know what happened to the profits. That's 8 my problem. We were told to take profits. Now, 9 whether those -- what those did -- how those 10 flowed through the association, I don't know. 11 Q. Okay. 12 A. They may have been to cancel losses. 13 They may have flowed directly to profits. I just 14 don't know. But you're correct, we were asked 15 from time to time when there were profits 16 available to be taken. 17 Q. When profits are taken as a general 18 matter in the sale of an investment security, what 19 impact does it have on net worth? 20 A. It should increase it. 21 Q. All right. Now, in 1986, were sales 22 made out of USAT's high-yield bond portfolio in 13461 1 order to generate profits to bolster net worth? 2 A. There may well have been. 3 Q. That wasn't my question. I mean, do 4 you know? 5 A. I don't know. 6 MR. KEETON: Your Honor, I have two 7 comments. One, could Mr. Guido speak up? This 8 isn't a private version. No. 2, he keeps saying, 9 "That isn't my question." That's the Court's 10 prerogative. It's not the questioner's 11 prerogative. 12 THE COURT: I think we've had the 13 answer now. He says he doesn't know. So, let's 14 move on. 15 Q. (BY MR. GUIDO) Take a look at the next 16 document, which is Exhibit T4192, Tab 565. It's a 17 memo from Mike Crow to Jenard Gross and Jerry 18 Williams dated April 24, 1986. It says, "In the 19 spirit of 'bad news to the top,' this is something 20 I am sure you are aware of; but I thought I would 21 remind you. It appears that several of the gains 22 that we had counted on to bolster second quarter 13462 1 profits may be deferred/not occur." 2 Do you see that? 3 A. Uh-huh. (Witness nods head 4 affirmatively.) 5 Q. When I asked you the question which you 6 said it may be but you didn't know with regard to 7 net worth, I asked you: Were sales made out of 8 the high-yield bonds for a certain purpose? Okay? 9 Now, let me rephrase the question for you. 10 THE COURT: Would you keep your voice 11 up, Mr. Guido? 12 MR. GUIDO: I'm sorry. 13 Q. (BY MR. GUIDO) Were sales made out of 14 the high-yield bond portfolio at USAT to bolster 15 quarterly profits? 16 A. From time to time, there were. 17 Q. Now, I would like to direct your 18 attention to Tab 564, which is A5017. It should 19 be the next document in that stack. 20 A. We're through with this? 21 Q. We're finished with that document. 22 A. Okay. This one goes on the bottom, I 13463 1 guess. 2 Q. Exhibit A5017 at Tab 564 is United 3 Financial Group's performance report for 4 December 1986. I would like to direct your 5 attention to the section of the report -- I think 6 it's DJ, which is about halfway into the packet. 7 It says, "United Financial Group, Inc. - Gain on 8 sale of investment securities, December 31, 1986." 9 A. (Witness reviews the document.) You'll 10 have to help me out, Mr. Guido. I'm lost here. 11 Q. Do you see the chart that's headed 12 "Gain on sale of investment securities, 13 December 31, 1986"? 14 A. Yes, I see the title. 15 Q. Okay. Now, do you see, under "USAT," 16 the listing of securities starting with Colt 17 Industries? 18 A. Right. 19 Q. And then it goes down through, if you 20 read down, through Marc IV Industries. 21 Do you see that? 22 A. Right. 13464 1 Q. Are those high-yield bonds? 2 A. Let me check. They would appear to be. 3 Q. Then take a look down -- 4 THE COURT: Excuse me. You've got 5 Treasury notes in there. Are they considered 6 high-yield bonds? 7 MR. GUIDO: No. That's why I stopped 8 at Marc IV Industries, Your Honor. My question 9 was: Do those appear in that list to be 10 high-yield bonds? 11 Q. (BY MR. GUIDO) Now, I would like to 12 direct your attention to the chart in the bottom 13 half of the page. It says "year-to-date." 14 Do you see that? 15 A. Yes, I've got that. 16 Q. And you'll notice that that's reporting 17 the gains that were made on various months on the 18 sale of investment securities, including 19 high-yield bonds. 20 Do you see that? 21 A. Yes. 22 Q. And it shows in March a figure of 13465 1 $31 million in gains. 2 Do you see that? 3 A. Yes. 4 Q. And it shows, in June, a gain of 5 $9,302,000. 6 Do you see that? 7 A. Yes. 8 Q. And then in September, it shows a gain 9 of 14,504,000. 10 Do you see that? 11 A. Right. 12 Q. And then in November, it says 13 8,860,000. 14 Do you see that? 15 A. Yes, I do. 16 Q. December shows 14,498,000. 17 Do you see that? 18 A. Yes, I do. 19 Q. My question is: Were sales made out of 20 the high-yield bond portfolio in 1986 in order to 21 generate quarterly profits? 22 MR. EISENHART: Your Honor, I would 13466 1 object to the question unless counsel makes it 2 clear that he intends to include in that question 3 the numbers he just read. It's not at all clear. 4 He reads a set of numbers and asks an open-ended 5 question like that. It's very confusing to the 6 witness and to the record. 7 THE COURT: Are these gains, are they 8 related to the securities that are set forth above 9 or -- 10 MR. GUIDO: Mr. Huebsch? 11 THE WITNESS: I think they include -- 12 the figures above, Your Honor, are for the month 13 of December. There was -- also, I note that there 14 was a gain on some Freddie Macs here, too. 15 MR. GUIDO: Right. 16 THE WITNESS: But there may be profits 17 from other sectors in these year-to-date numbers. 18 Q. (BY MR. GUIDO) I gave you the chart so 19 that you could see what the pattern of gains was 20 over the year, Mr. Huebsch. 21 Do you see a pattern in the 22 year-to-date figures on gain on sale of investment 13467 1 securities? 2 A. Well, they seem to be high in March, 3 June, September, and December. 4 Q. Okay. My question was, sticking just 5 with high-yield bonds: Were sales made at -- 6 A. I can't tell whether these are -- these 7 gains are just high -- 8 Q. Well, obviously, they are investment 9 securities. They are not only high-yield bonds, 10 are they not? 11 A. Right. 12 Q. I mean, that's clear. 13 A. Okay. 14 Q. You can read this chart; and you can 15 ascertain that, can't you? 16 A. I'm with you. 17 Q. All right. Thank you. And I hope 18 Mr. Eisenhart is with me. 19 Now, my question for you is: Were 20 gains or were sales made out of the high-yield 21 bond portfolio in 1986 in order to generate 22 quarterly profits? 13468 1 MR. VILLA: Your Honor, I'll object. 2 He's really asked this question maybe 12 times. 3 He said, "From time to time, yes." And we're 4 asking a witness to recall specific quarters 5 12 years ago. I honestly believe that this 6 question has been asked and answered to the 7 witness' full extent. So, I object. 8 THE COURT: Well, maybe this will 9 refresh his recollection. Can you answer based on 10 this chart here? 11 THE WITNESS: You know, I'm just not 12 familiar with it that I can say that. There is a 13 pattern. That's all I can say. 14 Q. (BY MR. GUIDO) Well, okay, Mr. Huebsch. 15 Let's take a look at Tab 567, T4251. What is that 16 document talking about, Mr. Huebsch? 17 A. It's gains will be needed. 18 Q. Needed for what? 19 A. Quarterly earnings. 20 Q. Wasn't I just asking you a question 21 about taking gains to bolster quarterly profits? 22 A. Right. 13469 1 Q. Aren't those two and the same thing? 2 A. Yes. 3 Q. And look at T4251 on the second page, 4 the document you have in front of you. 5 A. (Witness complies.) 6 Q. Do you see where it says, "Gains to 7 alleviate deficit"? 8 A. Right. 9 Q. "Junk bonds, $6 million." 10 Do you see that? 11 A. Uh-huh. (Witness nods head 12 affirmatively.) 13 Q. Now, my question for you is: Were 14 sales made out of the high-yield bond portfolio in 15 1986 in order to generate quarterly profits or 16 earnings? 17 A. All I can say is, as I recall, from 18 time to time, bonds were sold for profits to 19 help -- to create gains. 20 Q. Okay. Now, I would like to direct your 21 attention to another set of documents. 22 MR. GUIDO: Your Honor, this set of 13470 1 documents are Tab 232, which is B1042; Tab 468, 2 which is Exhibit A10690; Tab 1010, which is 3 Exhibit B2785; Tab 910, which is Exhibit B1410; 4 Tab 633, which is Exhibit B1023; Tab 569, which is 5 Exhibit T4320. 6 THE COURT: Wait a minute. Say that 7 one again. 8 MR. GUIDO: The last one, Your Honor, 9 Tab 569, which is Exhibit T4320. And Tab 886, 10 which is Exhibit T4422. 11 12 (Long pause.) 13 14 MR. GUIDO: Thank you, Your Honor. 15 Q. (BY MR. GUIDO) I would like to direct 16 your attention to Exhibit B1042. Have you had a 17 chance to review that while we've been pulling the 18 documents together? 19 A. Yeah, I've read the letter. 20 Q. Now, in the second -- this is a memo 21 from Jonathan Scott to Neil Twomey dated 22 June 12th, 1986. "On Tuesday, June 10th, 1986, 13471 1 Terry Smith and I met with Michael Crow, Bruce 2 Williams, Joe Phillips, and Art Berner of United 3 Savings to discuss their corporate bond 4 portfolio." 5 Do you see that? 6 A. Yes, I see that. 7 Q. Did you ever have any meetings with any 8 representatives from the Federal Home Loan Bank of 9 Dallas to discuss the high-yield bond portfolio? 10 A. I don't recall ever having -- I had a 11 meeting with them, I believe, on equity arbitrage. 12 Q. But you never attended any meetings to 13 discuss high-yield bonds with them? 14 A. It might have been a meeting where 15 everybody spoke about their different sectors: 16 MBS, junk bonds. One of those kind of meetings. 17 Q. Now, look at the second paragraph. It 18 says, "In September of 1984, United conceived the 19 strategy of purchasing less than investment-grade 20 corporate debentures (B and BB rated bonds) 21 financed with term deposits issued through 22 brokers. The idea behind the strategy was to have 13472 1 a dedicated portfolio of bonds duration matched 2 with the term deposits to achieve a 200 basis 3 point spread." 4 Do you see that? 5 A. Yes, I do. 6 Q. Do you remember I showed you the 7 investment results in 1985 in response to 8 Mr. Munitz's question today? 9 A. Yes. I don't remember them 10 specifically. 11 Q. Now, do you see this 200 basis point 12 spread figure here? 13 A. Right. 14 Q. Was that the target range that you had 15 for the spread in high-yield bonds when you first 16 created the portfolio? 17 MR. VILLA: Objection as to what the 18 time period is when he first created the 19 portfolio. We've talked about two different time 20 periods: June, July 1984 and now this is 21 September 1984 that this refers to. 22 MR. GUIDO: I missed the last part. 13473 1 September -- 2 MR. VILLA: The reference in the text 3 is to September of 1984, and you started off your 4 questioning of Mr. Huebsch about the portfolio of 5 variable rate junk bonds that started in July of 6 1984. So, I think your question is ambiguous with 7 respect to that. 8 MR. GUIDO: I'm asking when he 9 initiated the portfolio. 10 MR. VILLA: Which portfolio? 11 MR. GUIDO: When he created the 12 high-yield bond portfolio. 13 MR. VILLA: I object on the grounds of 14 ambiguous. 15 THE COURT: Restate your question. 16 Q. (BY MR. GUIDO) When did you first 17 create the high-yield bond portfolio at USAT, 18 Mr. Huebsch? 19 A. Are you talking about the floating rate 20 note? 21 Q. Start with that. 22 A. That was in the summer. 13474 1 Q. Summer of 1984? 2 A. Right. 3 Q. Did you have a target range in terms of 4 a yield spread at that point in time? 5 A. No. 6 Q. Okay. Now, the fixed rates were 7 created? 8 A. Fixed rates, right. 9 Q. When were they put on? 10 A. Probably later on in '84. 11 Q. Now, when you put those on, did you 12 have a target spread? 13 A. I don't recall that there was a target 14 spread. I know there was an attractive spread. I 15 can't remember specifically what it was. 16 Q. Let me hand you Exhibit B654 and ask 17 you whether or not that refreshes your 18 recollection of the target that you had in '84 19 when you put the fixed rate portfolio on. 20 A. (Witness reviews the document.) Where 21 in this memo are you -- 22 Q. Take a look at the second page. 13475 1 A. Yeah. 2 Q. See where it says, "Corporate bonds, 3 matched spread to retail CD rate"? 4 A. I see. Okay. 5 Q. Is that referring to fixed rate 6 high-yield bonds? 7 A. Corporate bonds match would, yes. 8 Q. That refers to a 238 basis point 9 target, does it not? 10 MR. VILLA: Objection. I couldn't hear 11 the last word. 12 Q. (BY MR. GUIDO) 238 basis points target, 13 does it not? 14 MR. EISENHART: I think the memo talks 15 about results, not targets. 16 THE COURT: Yeah. Let's clarify that. 17 Q. (BY MR. GUIDO) Is that talking about an 18 estimate, or is it talking about results? 19 A. I'm going back to the first page. 20 These numbers should be used as approximations in 21 order of magnitude. 22 Q. Okay. 13476 1 A. I -- I can't vouch for their accuracy. 2 Q. I didn't ask you whether you could 3 vouch for the accuracy. I'm asking you whether or 4 not this is a target for results at the time. 5 A. I don't recall that there was a target. 6 I can't recall whether that's the target. 7 Q. Now, let's go back to Exhibit B1042. 8 A. Right. 9 Q. Pick up in that paragraph. "The term 10 CDs financing this portfolio range from 7- to 11 10-year straight coupons to 6- to 12-year zeros 12 with a total all-in cost of 11.6 percent." 13 Do you see that? 14 A. Yes. 15 Q. "While the portfolio does require 16 certain adjustments to keep the durations matched, 17 the management of the bond portfolio does not 18 involve bond swapping to pick up yields or 19 premature selling to capture capital gains 20 currently unrealized. In as much as the emphasis 21 of the portfolio is on maintaining the spread, any 22 unrealized gains or losses on the bonds themselves 13477 1 are not of significant concern to United because 2 (in theory) an offsetting gain or loss in the term 3 deposits should exist." 4 Do you see that? 5 A. Uh-huh. (Witness nods head 6 affirmatively.) 7 Q. Does that mean that sales had been made 8 out of the high-yield bond portfolio at USAT in 9 order to generate quarterly earnings? 10 A. I don't think it says that. I'm not 11 clear on what premature selling is. 12 Q. That wasn't my question. 13 A. Okay. 14 Q. Now, I would like to direct your 15 attention to Tab 568, A10690. It says, "From 16 Michael Crow to Art Berner, November 7, 1986. 17 Please arrange to have the attached policy adopted 18 at the investment committee. We have been advised 19 by Peat Marwick that we need to put 'on the 20 record' our policy as it relates to junk bonds to 21 avoid marked-to-market treatment." 22 Do you see that? 13478 1 A. Yes. 2 Q. Have you reviewed this document before? 3 A. I don't recall. 4 Q. It says on the second page, "It is the 5 policy of United Savings Association of Texas to 6 invest in corporate debt securities as market 7 opportunities exist. The objective of such 8 investments is to spread income over an extended 9 period of time. In general, the portfolio will be 10 match funded with long-term CDs. Sales of such 11 securities will be executed from time to time as 12 changes in the credit quality of a particular 13 security exists, an opportunity to upgrade credit 14 with a similar yield is present, to adjust the 15 portfolio for industry exposure, and other 16 appropriate reasons as may be approved by the 17 investment committee. The corporate bond 18 portfolio is not a trading account however, and 19 should not be managed as a trading vehicle. 20 Accordingly, it is the policy of the association 21 to record investments at cost and establish 22 reserves against known or probable losses in the 13479 1 portfolio. The portfolio will not be marked to 2 market on a periodic basis since it is not a 3 trading account." 4 Do you see that? 5 A. Uh-huh. (Witness nods head 6 affirmatively.) 7 Q. Does that say that high-yield bonds 8 will be sold out of the USAT portfolio in order to 9 generate gains for quarterly profits? 10 A. It doesn't say that specifically. 11 Q. Now, I would like to direct your 12 attention to Tab 1010, which is B2785. This is a 13 handwritten note from the work papers of 14 Peat Marwick on an interview that they had with 15 Bruce Williams. 16 Do you know who Bruce Williams was? 17 A. Yes. He was the treasurer of the 18 company. 19 Q. It says, "Williams informed me," in the 20 second paragraph, "that such an account," 21 referring to a trading account, "was not 22 established because they believed that they were 13480 1 not currently trading the junk bonds. In fact, 2 the association does not have a bond trader; but 3 they are in the process of attempting to hire a 4 trader. He stated that subsequent to hiring a 5 bond trader, that the" -- I can't read that -- 6 "would revisit the concept of the trading 7 account." 8 Do you see that? 9 A. Yes. 10 Q. Is that consistent with the sale of 11 high-yield bonds out of USAT's portfolio in order 12 to generate quarterly profits? 13 MR. EISENHART: I object to the 14 question. It makes no sense. He's talking about 15 apples and oranges. 16 MR. GUIDO: I'll rephrase the question. 17 Q. (BY MR. GUIDO) Does that say that USAT 18 will make sales out of its high-yield bond 19 portfolio in order to generate quarterly profits? 20 A. I don't think it says that, but I'm -- 21 I'm having trouble -- I can't reread this thing. 22 I'm sorry. 13481 1 Q. Do you want me to read it to you again? 2 A. Yeah, slowly. 3 MR. VILLA: Your Honor, we'll stipulate 4 that it doesn't say the words in Mr. Guido's 5 questions. I think the questions are really 6 argumentative. He asks in his mantra whether 7 written documents state that. The question is 8 argumentative, and I suggest he move on. 9 MR. GUIDO: I gather that Mr. Villa is 10 stipulating that it does not state what he has 11 characterized as my mantra. I'll move on. 12 THE COURT: All right. Let's move on. 13 Q. (BY MR. GUIDO) I would like to move to 14 the next document. It's Tab 910. It is 15 Exhibit B1410. This is a memo from Joe Parsons of 16 Peat, Marwick, Mitchell to Mike Crow dated 17 January 5th, 1987. And it has references at the 18 bottom, "response from USAT to the memorandum." 19 Mr. Parsons has testified that the attachments to 20 this are the responses that were provided to 21 Peat Marwick in response to questions that they 22 raised about investment versus trading in 13482 1 high-yield bonds and mortgage-backed securities 2 portfolios. 3 I would like to direct your question -- 4 MR. VILLA: Objection to the question. 5 Object to characterizing prior testimony. 6 THE COURT: What is your question, 7 Mr. Guido? 8 Q. (BY MR. GUIDO) My question is -- if you 9 turn to KPMG 024410, Mr. Huebsch. 10 A. 02441 -- 11 Q. 17. 12 A. Yes, I'm here. 13 Q. It says, "High-yield corporate 14 securities, statement of strategies and 15 objectives." 16 Do you see that? 17 A. Right. I've got it. 18 Q. Then it says under "investment 19 portfolio" -- do you see that? 20 A. Right. 21 Q. -- "The objective of the portfolio will 22 be to invest in a diversified group of corporate 13483 1 debt securities which will generate a long-term 2 positive net interest spread over the life of the 3 investment. The securities will be funded with a 4 combination of short- and long-term liability 5 sources which will maximize the net interest 6 spread while maintaining prudent interest rate 7 risk exposure." 8 A. Yes. 9 Q. "It is management's intent to hold each 10 security on a long-term basis; however, sales of 11 such securities may be executed from time to time 12 to: Manage interest rate risk exposure, upgrade 13 credit quality, manage industry exposure and 14 diversification, manage individual corporate 15 security issuer exposure, meet the association's 16 cash liquidity requirements, meet tax planning 17 objectives, maximize security value in 18 anticipation of early calls or redemptions, meet 19 other appropriate requirements that may be 20 approved by the investment committee consistent 21 with generating an ongoing net interest spread." 22 Do you see that? 13484 1 A. Uh-huh. (Witness nods head 2 affirmatively.) 3 Q. Does that say that sales will be made 4 out of USAT's high-yield bond portfolio in order 5 to generate quarterly profits? 6 A. No, it doesn't say that. 7 Q. Now, I would like to direct your 8 attention to the next document in that packet, 9 which is T4320. It's Tab 569. I'm sorry for the 10 difficulty in reading it; so, I will read to you 11 the portions that I want to direct your attention 12 to. 13 A. I'm afraid you'll have to. 14 Q. Okay. This is a memorandum from 15 Doug Hansen to Charles Hurwitz, Jenard Gross, 16 Barry Munitz, Jerry Williams, Mike Crow, Art 17 Berner, and Bruce Williams regarding strategic 18 planning committee notes, December 17th, 1986. 19 And No. 8 is the one that I would like to direct 20 your attention to. It says, "High-yield bonds. 21 In quarter 1987, we should grow with high-yield 22 bonds 250 million phased-in. Need to look at" 13485 1 something "and CD zeros. Need to decide duration 2 of funding. Economic spread to date has been 328 3 basis points. This has been reduced to 238 on an 4 accounting basis due to profit taking." 5 Do you see that? 6 A. Yes. 7 Q. Do you recall that during the period of 8 time up until December of 1986, that the yield on 9 the high-yield bond, the spread yield on the 10 high-yield bond portfolio had declined because of 11 profit taking out of the portfolio? 12 A. No, I don't -- I haven't seen these 13 numbers. 14 Q. When did Mr. Stodart come aboard to 15 manage the high-yield bond portfolio? 16 A. I'm thinking maybe in the spring of 17 '87. 18 Q. April of '87, would that be about 19 right? 20 A. Well, April is really spring, middle 21 spring. 22 Q. And would you dispute his testimony if 13486 1 he said that the spread on the high-yield bond -- 2 MR. KEETON: Your Honor, you don't 3 cross-examine the witness with the testimony of 4 another, particularly when that other has not even 5 been in this courtroom yet. 6 MR. GUIDO: Your Honor, I think I'm 7 entitled to ask the question. 8 MR. VILLA: If he wants to bring 9 Mr. Stodart in, he can do that. As a matter of 10 fact, we didn't have Mr. Huebsch testify because 11 we were supposed to have Mr. Stodart testify 12 first. 13 THE COURT: I think he can answer it in 14 another matter. What does it matter what 15 Mr. Stodart might say. Let's get this witness' 16 knowledge of the matter. 17 Q. (BY MR. GUIDO) Do you know what the net 18 spread on the high-yield bond portfolio was when 19 Mr. Stodart took over in the spring of 1987? 20 A. No, I don't know. 21 Q. Do you know that it was significantly 22 less than the target that you had set for that 13487 1 portfolio? 2 A. I didn't even know we set a target. 3 Q. Now, who did Mr. Phillips report to? 4 A. Me. 5 Q. Okay. And did he keep you informed of 6 the performance of his high-yield bond portfolio? 7 A. Yeah. He would keep me generally up to 8 date as he would keep everybody up to date. 9 Q. Did -- after he left, who managed the 10 high-yield bond portfolio? 11 A. Well, there was an interregnum. (sic) 12 And what happened was I was asked to manage it 13 with the assistance of Terry Dorsey until 14 Dr. Terry Dorsey got up to speed on junk bonds. 15 He was an analyst and a very capable guy. 16 So, I was in the picture for, I don't 17 know, three or four months until people felt that 18 Dr. Dorsey was capable of taking over. 19 Q. Now, did anyone else manage that 20 portfolio prior to Mr. Stodart coming aboard and 21 Mr. Phillips leaving? 22 A. Well, I think gradually Dr. Dorsey took 13488 1 over the reigns because it was recognized that I 2 had other things to do and I was just an interim 3 guy. 4 Q. Did he report to you? Mr. Dorsey. 5 A. I think initially he did. But 6 gradually, he took over; and then he reported to 7 the investment committee. 8 Q. Now, were you a member of the 9 investment committee? 10 A. Yes, I was. 11 Q. Did you regularly attend the investment 12 committee meetings? 13 A. Yes, I did. 14 Q. Now, I would like to direct your 15 attention to -- 16 THE COURT: We'll adjourn until 17 2:00 o'clock. 18 19 (Lunch break.) 20 21 THE COURT: Be seated, please. We'll 22 be back on the record. Mr. Guido, you may 13489 1 continue with your examination of the witness. 2 MR. GUIDO: Thank you, Your Honor. 3 Q. (BY MR. GUIDO) At this time, I would 4 like to show you a document that we've marked as 5 Exhibit A10593, which is a memorandum from Jenard 6 Gross to Gerald Williams dated January 6, 1986. 7 And it's a reference, performance report on Ron 8 Huebsch. 9 MR. GUIDO: I would like to move the 10 admission of A10593, Your Honor. 11 MR. VILLA: No objection. 12 THE COURT: Received. 13 Q. (BY MR. GUIDO) When we broke, I was 14 asking you some questions about the effect of 15 making sales out of the high-yield bond portfolio 16 on yield. And I wanted to direct your attention 17 to this document which says, "I would say" -- this 18 is Jenard Gross writing to Gerald Williams. "I 19 would say that he would have had a better return 20 on investment had we not taken profits during the 21 year, which had the net effect of reducing his 22 spread." 13490 1 Do you see that sentence? 2 A. Yes, I do see it. 3 Q. Does that refresh your recollection 4 that the sales out of the high-yield bond 5 portfolios to generate profits had the effect of 6 reducing the net interest spread on that 7 portfolio? 8 A. This could very well have happened. I 9 don't have the numbers they have. 10 Q. Okay. You don't have any reason to 11 dispute the accuracy of the statement in this 12 memorandum? 13 A. (Witness shakes head negatively.) It 14 could have happened, yeah. It could be the case. 15 I was -- 16 Q. Now, I would like to direct your 17 attention now to two documents that are at 18 Tab 282, which is Exhibit B1742, and Tab 283, 19 which is Exhibit B18 -- 1864. 20 MR. GUIDO: B1742 -- I may have already 21 identified the document for the Court in my 22 initial stack. 13491 1 Q. (BY MR. GUIDO) 1742 is a letter dated 2 September 9th, 1987, from Mr. Neil Twomey to Art 3 Berner. And Exhibit B1864 is dated November 24th, 4 1987. It's a letter from William Jacobs, 5 vice president Pru-Bache Capital Funding, to the 6 Federal Home Loan Bank of Dallas. 7 Do you recall that the Federal Home 8 Loan Bank had raised questions about the 9 high-yield bond portfolio at USAT and had 10 requested that there be a review of that 11 portfolio? 12 A. No, I don't recall that. They wouldn't 13 come to me on regulatory or dealings with 14 regulators. 15 Q. So -- you were the executive 16 vice president for investments, were you not? 17 A. Right. 18 Q. And you're telling me that when a 19 regulatory issue came up, no one came and 20 consulted you about those issues? 21 A. Well, it would come into the -- our 22 legal counsel. 13492 1 Q. And if a question was raised about the 2 management of the investment portfolios, it was 3 never brought to your attention? 4 A. It might have been. It might have 5 been. 6 Q. Do you recall that there were questions 7 raised by the Federal Home Loan Bank regulators 8 regarding the high-yield bond portfolio at USAT? 9 A. No, I don't recall. 10 Q. Would you please review Document B1742. 11 A. (Witness complies.) Okay. 12 Q. Does that refresh your recollection 13 that there were questions that were raised 14 regarding the high-yield bond portfolio at USAT by 15 the Federal Home Loan Bank of Dallas? 16 A. You know, frankly, I was unaware that 17 they were raising questions about it. As far as I 18 could determine, it was well-managed. 19 Q. So, you don't -- did you participate in 20 any meetings with any outside reviewers to review 21 the high-yield bond portfolio of USAT? 22 A. No, I didn't. 13493 1 Q. Did you meet with any representatives 2 of Merrill Lynch capital markets? 3 A. I don't believe I did. 4 Q. Did you meet with any representatives 5 from Pru-Bache Capital Funding? 6 A. I don't believe I did. 7 Q. Was the high-yield bond portfolio that 8 was managed by Joe Phillips something that was in 9 your realm of responsibilities? 10 A. I had general responsibility to 11 monitor. 12 Q. But you don't recall -- 13 A. I would think that on these dates, 14 Mr. Phillips had left. 15 Q. And who was the manager at these times? 16 A. Mr. Stodart. 17 Q. And did Mr. Stodart -- who did he 18 report to? 19 A. Mr. Stodart probably reported up the 20 chain to Jenard Gross at that time. He was a 21 member of the investment committee. 22 Q. He didn't report to you? 13494 1 A. No. 2 Q. So that the high-yield bond portfolio 3 was not, in September, within your responsibility? 4 A. Not in September of '87. I -- as we 5 discussed this morning, I was in there on an 6 interregnum (sic) basis, four or five months, the 7 end of '86, in the very beginning until Dr. Dorsey 8 felt confident enough to take it over himself. 9 That was, you know, end of '86 and beginning of 10 '87 with Dr. Dorsey. 11 Q. In 1987, were you a member of the 12 investment committee? 13 A. Yes, I was. 14 Q. And as a member of the investment 15 committee, do you recall any discussions about the 16 need to have an outside reviewer come and look at 17 the high-yield bond portfolio? 18 A. No, I don't remember that. 19 Q. You don't recall as a member of the 20 investment committee any questions coming up 21 regarding the management of the high-yield bond 22 portfolio at USAT by the regulators? 13495 1 A. No. I wasn't aware of that concern. 2 Q. Is this the first time you've ever 3 heard that there was an outside review by 4 Pru-Bache of the high-yield bond portfolio of 5 USAT? 6 A. Is this the first time -- 7 Q. That you've heard of this. 8 A. No. I saw these documents. 9 Q. When did you see these documents? 10 A. Late yesterday. 11 Q. Did you attempt, between yesterday and 12 today, to ascertain what the basis was for the 13 reason for Pru-Bache's review? 14 A. No, I don't know their -- no. I don't 15 know the Dallas bank's concern. I don't know what 16 the concern is. 17 Q. Did you see the document that's Tab 282 18 yesterday? 19 A. I don't know whether I saw this 20 yesterday. I believe I saw this yesterday. 21 (Indicating) 22 Q. "This" being the Pru-Bache document? 13496 1 A. Yeah. 2 Q. And that is at Tab 283, B1864? 3 A. That's right, yeah. 4 Q. Now, I asked you questions about two 5 documents; and I would like you to take a look at 6 both of those documents again, if I might. The 7 first one is Tab 566. It's Exhibit 4302. And the 8 second is Tab 568, which is A10690. 9 A. (Witness reviews the documents.) 10 Q. The first one is T4302 -- do you see 11 that -- dated November 13, 1986, from Mike Crow to 12 Bruce Williams. 13 A. Yes, I see that. 14 Q. And the second one is dated 15 November 7th, 1986. That's A10690. That's from 16 Mike Crow to Art Berner. 17 A. Right. I see that. 18 Q. Now, is the policy in A10690 consistent 19 with the statement in T4302 that the investment 20 committee had a discussion of selling junk bonds 21 for profits for purposes of quarterly earnings? 22 A. Exhibit A10690 doesn't have -- doesn't 13497 1 use -- doesn't say anything about selling bonds 2 for profits, though profits may result from some 3 of these documents. 4 Q. But it doesn't say anything about 5 selling bonds for profits? 6 A. No. 7 Q. Now, I would like to -- I gave you an 8 excerpt from your deposition transcript to go back 9 to some questions. It's Page 1 and 2 and 3 of 10 your deposition that you gave, the cover page and 11 the appearances and table of contents, and then 12 Pages 80 through 85 of your testimony and then the 13 certificate, 130, and the reporter's certificate 14 attached to it. 15 This really goes to my line of 16 questions that I had for you about the purchase of 17 high-yield bonds at Federated and MCO that I asked 18 you about earlier. I would like you to review 19 your testimony in your deposition, and I would 20 like to ask you a couple of questions about that 21 testimony. 22 Specifically, I would like to direct 13498 1 your attention to Page 84 of that testimony. I've 2 included the entire colloquy on this subject 3 matter for completeness, and I want to direct your 4 attention to Page 84. 5 A. (Witness reviews the document.) I 6 would have to begin back at the end of Page 83, I 7 guess. (Witness reviews the document.) I've read 8 the end of Page 83 and Page 84. 9 Q. I have two questions for you. One is: 10 Did MCO and Federated make very few investments in 11 junk bonds? 12 A. As far as I know, that is correct. 13 Q. And did MCO and Federated make very few 14 investments in mortgage-backed securities? 15 A. That is correct, as far as I know. 16 MR. GUIDO: Now, I would like to move 17 on to another topic, Your Honor. 18 Q. (BY MR. GUIDO) My questions to this 19 point have involved basically the high-yield bond 20 portfolio at USAT. I'm now going to focus on 21 questions regarding an entity called United 22 Mortgage Finance which was established at the end 13499 1 of '85 and then collapsed at about the same point 2 in time. 3 MR. GUIDO: The documents that I'm 4 going to use for the beginning of this 5 questioning, Your Honor, are Tab 852, which is 6 A10567; Tab 853, which is A10576; Tab 854, which 7 is A10585; Tab 555, which is A5008; Tab 1295, 8 which is A1590, Your Honor. 9 Thank you, Your Honor. 10 Q. (BY MR. GUIDO) I would like to direct 11 your attention to Tab 852, which is 12 Exhibit A10567. This is a memorandum dated 13 August 21, 1985, from Michael Crow to Bruce 14 Williams. It says, "Here is an excellent 15 opportunity for us. In early September, we need 16 to put together a slide show (we want to spend 17 some money and get some sexy looking slides) for 18 Mr. Hurwitz as to why we cannot make money at 19 United Savings. Specifically, we need to build 20 off the product line profitability report as of 21 June 30 and explain to Charles more clearly why 22 our profitability is impaired by such things as 13500 1 goodwill amortization, below market rate mortgage 2 loans, et cetera. Also, we want to point out 3 where we are making money. Prior to getting with 4 Charles, we would have a rehearsal type affair 5 with Barry Munitz and Jenard Gross." 6 Do you see that? 7 A. Yes, I do. 8 Q. Is it your understanding that 9 profitability was impaired by such things as 10 goodwill, amortization, and below market rate 11 mortgage loans in the middle of 1985? 12 A. No, I would not have known that. 13 Q. Why would you not have known that? 14 A. Well, I wasn't privy to, you know, the 15 numbers on the whole association or the accounting 16 or what the accounting used like goodwill 17 amortization. I had no idea what the amount of 18 that was. 19 Q. Did you ever hear any discussions about 20 a drag on the institution because of goodwill? 21 A. A drag? 22 Q. Uh-huh. The term "drag," D-R-A-G. 13501 1 A. The term "drag," no. 2 Q. Did you ever hear any discussions about 3 the problems of profitability of the association? 4 A. You know, I knew times were tough; but 5 I -- I wouldn't know -- I just didn't have the 6 numbers to know how profitable the institution as 7 a whole was at any particular time. 8 Q. Now, you were the executive 9 vice president of investments. Right? 10 A. Right. 11 Q. And what do you believe your 12 responsibilities were as executive vice president 13 of investments? 14 A. To make money. 15 Q. And was it also to be responsive to the 16 regulatory concerns of the regulatory bodies? 17 A. We had a very fine legal staff; and I 18 used them to tell me, you know, if we were doing 19 anything wrong. If I was doing anything wrong 20 investmentwise, I'm sure our very competent legal 21 staff would have come in and tapped me on the 22 shoulder and said, "Let's have a talk about this." 13502 1 Q. You did make sales out of the 2 high-yield bond portfolio in order to generate 3 profits, did you not? 4 A. Yes. 5 Q. Did you ever ask anybody whether or not 6 that was appropriate? 7 A. You know, I assumed it was all right 8 because it came up in the investment committee as 9 it was noted in one of these previous documents. 10 And, of course, we have -- our legal people are on 11 the investment committee. So, if they were going 12 to say something, they had a great opportunity 13 there to say something. 14 Q. Did you participate in the preparation 15 of any business plans for the association? 16 A. No, I didn't. 17 Q. So, the business plan that I showed 18 you, that August 1986 business plan, you didn't 19 have any role in its preparation? 20 A. No. 21 Q. Did anyone come around and ask you for 22 information when they prepared any filings to the 13503 1 regulators? 2 A. I don't believe so. I mean, our -- 3 everything I did or Joe did or Gene Stodart did 4 was right there. The numbers were right there 5 every day. I mean -- could I take a moment here? 6 Q. Sure. 7 A. For the equity risk arbitrage, the 8 focus was on a mark-to-market portfolio, marked to 9 market daily. 10 THE COURT: Excuse me. I can't hear 11 you, sir. 12 THE WITNESS: It was marked to market 13 daily, the equity risk arbitrage portfolio. And 14 those numbers were on my work station every 15 morning, and they were distributed to most of the 16 people in higher management. 17 Q. (BY MR. GUIDO) Well, let's go through 18 the people's experience in higher management. 19 Charles Hurwitz, did he have any 20 previous experience in mortgage-backed securities 21 before you started purchasing them at USAT? 22 A. No, I don't believe he did. 13504 1 Q. Did he have any experience in 2 purchasing high-yield bonds before you started 3 purchasing them at USAT? 4 A. Yes, he would know about high-yield 5 bonds. 6 Q. Did he know about equity arbitrage? 7 A. Yes, he would know about that. 8 Q. Let's take Gerald Williams. Did Gerald 9 Williams have any previous experience in 10 high-yield bonds before you purchased them at 11 USAT? 12 A. I don't know. 13 Q. Did he have any prior experience in 14 equity arbitrage? 15 A. I doubt whether he did. 16 Q. Did he have any prior experience with 17 mortgage-backed securities portfolios? 18 A. There, I'm not sure. I would guess he 19 did, but I don't know. I don't know his 20 experience. 21 Q. Let's take Jenard Gross. Had he had 22 any prior experience with high-yield bond 13505 1 portfolios? 2 A. That, I don't know. 3 Q. What about mortgage-backed securities? 4 A. I don't know that either. 5 Q. What about the equity arbitrage? 6 A. I don't know whether he had experience 7 with equity arbitrage. 8 Q. How many of the people that were on the 9 investment committee, besides you and Joe 10 Phillips, had any prior experience in managing an 11 investment portfolio? 12 A. Well, it depends on what time you're 13 talking about. Certainly, Gene Stodart and Sandy 14 Laurenson did. 15 Q. Now, did Gerald Williams? 16 A. Did he actually manage a portfolio? I 17 don't know. I don't know. 18 Q. Do you doubt it? 19 A. I don't know. 20 Q. What about Jenard Gross? 21 A. He may have experience. I just don't 22 know. 13506 1 Q. What about Barry Munitz? 2 A. I don't know. 3 Q. Now -- but you didn't participate in 4 preparing any business plans for USAT to be 5 submitted to the regulators? 6 A. No, I don't. 7 Q. I would like to show you Tab 91, Twomey 8 Exhibit 21. And I would like to direct your 9 attention to Page -- Pages -- Page 4 where it 10 refers to a structured arbitrage program in that 11 document. 12 A. (Witness reviews the document.) Yes. 13 I've read it quickly, yes. 14 Q. Did you assist in the preparation of 15 that entry under "structured arbitrage program"? 16 A. I don't believe so. 17 Q. Let me show you another page. Look at 18 Item 9 under "investments in equity securities." 19 MR. VILLA: What page is that? 20 MR. GUIDO: Page 33. 21 A. (Witness reviews the document.) Yes, 22 I've read it quickly. 13507 1 Q. (BY MR. GUIDO) Did you participate in 2 the preparation of any of those entries under 3 Item 9? 4 A. No, I wouldn't have been involved in 5 the setup of the CMO except to the extent that -- 6 Q. Could you please speak up? People are 7 having a hard time hearing. 8 A. The extent that I would participate 9 would have been in buying the -- helping Joe 10 Phillips purchase the collateral for these 11 financial subs. 12 Q. The CMO subs? Is that what you're 13 referring to? 14 A. Or in the DARTs. 15 Q. But you didn't participate in the 16 preparation of any of those sections? 17 A. No. 18 Q. Now, I would like to turn your 19 attention to Tab 853, which is A10576. Remember I 20 asked you a number of questions about whether or 21 not sales were made out of the high-yield bond 22 portfolio to generate profits? Do you recall 13508 1 those questions -- 2 A. Yes, I do. 3 Q. -- referred to as a mantra by your 4 counsel? 5 Now, I would like to ask you a few more 6 questions. And that is that with regard to making 7 sales for purposes of generating profits, isn't it 8 true that when the sales are made and they impact 9 profits in the financial statements of an entity, 10 they impact the net worth of the entity? 11 A. One would think so, yes. 12 Q. Okay. So, when you responded to my 13 question when I asked you the question combining 14 profits and net worth, what was it about the 15 question that made it difficult for you to answer? 16 A. Well, I just -- if you have -- I didn't 17 know what the profits -- profits of the bond 18 portfolio? 19 Q. Uh-huh. 20 A. I mean, did it trickle directly down 21 all the way down to net worth? I don't know how 22 many losses there were, you know, paired off 13509 1 against those profits. That was my only -- that's 2 was my concern. 3 Q. So, it was the term -- 4 A. They don't necessarily flow directly to 5 net worth and increase net worth dollar for dollar 6 because there are many other things happening. 7 Q. But they do impact net worth? 8 A. They do impact net worth, yes. 9 Q. Pardon? 10 A. They do. 11 Q. So, you weren't disputing that when I 12 was asking you questions? 13 A. No. 14 Q. Now, I would like to direct your 15 attention to Tab 853, which is A10576. I'm going 16 to show you a series of documents, and then I'm 17 going to ask you some questions. 18 The first one is this document. I 19 would like to direct your attention to Page 1 of 20 the document. It says it's from Mike Crow to 21 Jenard Gross, October 29, 1985. "Response to 22 notes, October 14th, 1985. Item 3, our net worth 13510 1 requirement for regulatory purposes is measured 2 against USAT regulatory figures. At August 31, 3 regulatory net worth was 184 million. As a 4 percent of assets, that amounted to 43 percent and 5 was in excess of the required net worth by 6 $44 million." 7 Do you see that? 8 A. Yes, I do. 9 Q. Now, I want to turn your attention to 10 the next document, which is Tab 854, A10585. That 11 is a memo dated November 26, 1985, from Bruce 12 Williams to G.R. Williams, Gerald Williams. And I 13 want to direct your attention to Page 4 of that 14 report. 15 Do you see Page 4? 16 A. Yeah, I've got it. 17 Q. See under "net worth," October 31? It 18 shows regulatory net worth 180,104 required net 19 worth 157,892 and then excess net worth of 22.212? 20 A. Yes, I see that. 21 Q. That shows a decline from 4.4 million 22 in excess regulatory net worth to 2.2 -- .212 in 13511 1 excess regulatory net worth, does it not? 2 A. Can you go through that -- 3 MR. RINALDI: I think you misspoke. 4 THE COURT: Let's try it again. 5 Q. (BY MR. GUIDO) Does it show that the 6 excess required regulatory net worth, the excess 7 of required regulatory net worth declined from 8 44 million to 22.12 million? 9 A. Those are the numbers that I'm looking 10 at right now. 11 Q. Now, the second document that I've 12 shown you, the October, 1985 performance report 13 from Bruce Williams to G.R. Williams, did you 14 never receive copies of these performance reports? 15 A. I guess I received copies of the 16 performance reports. 17 Q. So, it wasn't that you didn't have 18 available to you the performance of the entire 19 institution. It's just that you don't recall 20 looking at them? 21 A. Well, no, I don't -- you know, I did 22 look at them. I didn't know, you know, how they 13512 1 were composed. 2 Q. Did you attend any board meetings of 3 USAT? 4 A. I think I was at one with -- when a 5 group of the portfolio managers came in and made a 6 presentation on, you know, how our particular 7 segments of the portfolio worked. 8 Q. Okay. You only attended one? 9 A. Well, it was part of one. 10 Q. Any others? 11 A. No. 12 Q. Now, I would like to direct your 13 attention to Tab 555, which is A -- Exhibit A5008. 14 It's a performance report for November 1985. 15 A. Okay. Hold on. Could you give me 16 those numbers again, please? 17 Q. Yes. It's Tab 555. It's A5008. I 18 direct your -- this is the performance report for 19 November 1985, and I direct your attention again 20 to Page 4 of that -- that document. 21 A. (Witness complies.) Here I am. 22 Q. All right. Now, see under "net worth," 13513 1 it says, "Regulatory limit of 163"? 2 A. Right. 3 Q. "USAT 11/30: 180, and available 4 capacity: 17"? 5 A. Right. 6 Q. Does that show an additional decline in 7 excess regulatory net worth from 44 to 22 to 17? 8 A. What does "available capacity" mean? 9 Q. I don't know. You received -- 10 A. I don't know either. 11 Q. Well, if you take the two figures 12 before it, the regulatory limit is 163, USAT, 13 11/30? 14 A. If this number means the same as this 15 number as the same as this number, there is a 16 decline. 17 Q. So, if it means excess net worth, it 18 means that there's a decline. Right? 19 A. Right. 20 Q. Thank you. 21 Now, I would like to direct your 22 attention to the document that's Tab 1295, which 13514 1 is A1590, which is a packet of materials from a 2 November 17th, 1985 strategic planning committee 3 meeting. I specifically want to direct your 4 attention -- if you look at the Bates stamp 5 numbers at the bottom right-hand corner of the 6 document, you will find a number US-3008018 on the 7 first page. 8 A. Right. 9 Q. I want to direct your attention to the 10 packet of handwritten notes that are included in 11 that starting with 8028. 12 A. 8028. Here I am. 13 Q. Okay. 14 A. Okay. 15 Q. Now, I want to direct your attention to 16 the top of 8033. 17 A. We're moving from 8028 to -- 18 Q. Yeah. I'm just walking you very 19 quickly through this packet. 20 A. Okay. We're moving to 8033. 21 Q. See at the top, it says, "Fourth 22 quarter '85 at about 1.5 million. May report a 13515 1 loss for the year." 2 Do you see that? 3 A. I see that. Right. 4 Q. Does that appear to be a target? 5 MR. VILLA: Objection, Your Honor. It 6 really calls for total speculation. I don't think 7 there's any evidence that this witness ever saw 8 this document or that this is his handwriting. It 9 just calls for speculation from this witness 10 asking him if something appears to be a target. 11 THE COURT: Sustained. 12 Q. (BY MR. GUIDO) Do you know whether or 13 not there was a target for profits for the fourth 14 quarter of 1985? 15 A. I don't know whether there was a 16 target. 17 Q. Do you know whether or not there were 18 targets for profits at any time at USAT? 19 A. No. I wouldn't be in the spot to know 20 that. It just was not my bailiwick. 21 Q. Do you remember the memo that I showed 22 you where you -- that in the investment committee, 13516 1 the question came up of looking for profits to 2 bolster quarterly earnings? 3 A. Yeah. Do you know remember what number 4 that was? 5 Q. It was 4320. 6 A. I don't have it. 7 Q. You remember that. Right? And that 8 indicated the investment committee, there were 9 discussions about taking profits to bolster 10 quarterly earnings. 11 Do you recall that? 12 A. Right, right. 13 Q. So, were those done to reach some sort 14 of a target? 15 A. They may have, but I had nothing to do 16 with the target. I mean, I don't know whether 17 there was a target. I just -- I wouldn't know 18 about that. 19 Q. Well, were you asked -- 20 A. I didn't set targets. I was just -- I 21 was trying to make money. 22 Q. You didn't have any targets? 13517 1 A. Well, I had my own personal targets 2 about making money but not how much profit there 3 should be for the quarter. 4 Q. Well, I mean, you were part of an 5 institution. Right? 6 A. Yeah, I was. 7 Q. And the investments were a very sizable 8 part of that institution, were they not? 9 A. Right. And I tried my best to work on 10 those investments and produce income. 11 Q. But you don't recall anybody setting 12 targets for you? 13 A. I don't recall people setting targets. 14 Q. Do you recall whether or not anybody 15 attempted to structure transactions in such a way 16 as to maximize accounting profits? 17 A. Have you got an example of that? 18 Q. No. I just want to know whether or not 19 you know. 20 A. Structured -- 21 Q. Yeah, whether they structured a 22 transaction in such a way as to generate 13518 1 accounting profits. 2 A. I can imagine I know how to do that. 3 Q. You did it, didn't you? 4 A. I did it in an equity arb portfolio 5 because it was a mark-to-market; and every day if 6 they had given more money to that portfolio, we 7 could have gotten more -- 8 Q. Did you ever structure a transaction 9 outside of the equity arb portfolio in such a way 10 as to maximize the accounting profits? 11 A. I did not, no. 12 Q. You did not. 13 Now, I would like to turn to another 14 packet of materials, which is the USAT Mortgage 15 Finance materials. And I would like to direct 16 your attention to T570, which is Exhibit A10574. 17 THE COURT: Would you repeat that, 18 please? 19 MR. GUIDO: Yes. Tab 570 at A10574; 20 Tab 501, which is A1619; Tab 502, which is 21 Exhibit A1620; Tab 503, which is Exhibit A1621; 22 Tab 131, which is Exhibit A1108; Tab 504, which is 13519 1 A1622; Tab 505, which is Exhibit A1623; Tab 585, 2 which is Exhibit B690; Tab 1131, which is 3 Exhibit A10582; and then a document that has not 4 been introduced into the record as of yet from 5 what I can ascertain, which is T4166. Then 6 Tab 1133, which is A13008. And then Tab 860, 7 which is A10609. 8 Thank you, Your Honor. 9 Q. (BY MR. GUIDO) I would like to direct 10 your attention to Tab 570, which is A10574. It's 11 a memo from Mike Crow to Gerald Williams dated 12 October 24th, 1985. This is a memorandum which 13 discusses the financing sub update. 14 Have you had an opportunity to review 15 that document? 16 A. I've read it quickly, yes. 17 Q. Does this document, to your 18 recollection, refer to the entity that eventually 19 became known as USAT Mortgage Finance? 20 A. I believe it is. 21 Q. And what was the concept for the entity 22 USAT Mortgage Finance? How was it -- what was its 13520 1 investment to consist of? 2 A. Mortgage-backs with accompanying 3 hedges. 4 Q. Now, were those mortgage-backed 5 securities to be funded with reverse repurchase 6 agreements? 7 A. I don't know. I haven't read it that 8 closely. 9 Q. You said that they were to be hedged. 10 Were they to be hedged with swap agreements? 11 A. I don't know whether with swaps or caps 12 or what. 13 Q. Okay. Well, why don't we -- 14 A. Well -- 15 Q. Pardon? 16 A. It says -- I don't know. Yes, there is 17 a swap and collar. 18 Q. Let's take a look -- maybe it will help 19 you if we go to Tab 5018 which is the second 20 document in the packet, A1619. These are the 21 minutes of the asset/liability committee of 22 October 25th, 1985; and the date of memo is 13521 1 October 29th, 1985. 2 Do you see that? 3 A. Right. 4 Q. Now, is this the asset/liability 5 committee you said you sat on? 6 A. Right. 7 Q. And -- 8 A. Appears to be. 9 Q. And it has a memo to Mike Crow, Joe 10 Phillips, Ron Huebsch, Jim Jackson, from Bruce 11 Williams? 12 A. Right. 13 Q. "Item No. 2, creation of financing 14 subsidiary. It was agreed it would be in our best 15 interest to move ahead with establishing a new 16 finance subsidiary. The mortgage-backed 17 securities would be purchased in USAT and passed 18 to the new subsidiary. The MBS would be funded 19 with reverse repos and hedged with swaps, caps, 20 and/or collars. An initial application to the 21 Federal Home Loan Bank would request permission 22 for up to 500 million in securities. A final 13522 1 decision as to the security volume to be placed in 2 the subsidiary and actual hedging device used was 3 to be determined Monday, October 28th, at the 4 scheduled executive committee meeting." 5 Do you see that? 6 A. Yes, I see that. 7 Q. Does that refresh your recollection of 8 what the assets and liabilities were -- 9 A. It does refresh my recollection. 10 Q. And is it your recollection that USAT 11 Mortgage Finance held $500 million worth of 12 mortgage-backed securities? 13 A. I don't know whether it finally did 14 when it was set up. Just reading here, it was 15 requesting permission for 500 million. 16 Q. So, is it your recollection that those 17 mortgage-backed securities that were in the USAT 18 Mortgage Finance entity or subsidiary were 19 financed with reverse repurchase agreements? 20 A. That was the plan, what this indicates. 21 Q. Okay. Was it your understanding that 22 that's what happened? 13523 1 A. I don't know if that's what happened, 2 but it was the plan. 3 Q. And is it your understanding that 4 they -- the interest rate risk was hedged with 5 swap agreements? 6 A. According to the plan, it looks like 7 they were going to use swaps, caps, and collars; 8 and it hadn't been determined yet. 9 Q. Have you ever reviewed any documents 10 pertaining to the creation and the collapse of 11 USAT Mortgage Finance prior to your testimony 12 today? 13 A. Just yesterday with these sort of 14 things. 15 Q. And were one of those sets of documents 16 that you reviewed memoranda by Joe Phillips to the 17 file explaining what happened with USAT Mortgage 18 Finance? 19 A. I may have read that. I don't 20 immediately recall, but I may have. 21 Q. Let's start -- let's look at Tab 502, 22 A1620. I'll direct your attention -- this is the 13524 1 asset/liability committee minutes for November 21, 2 1985. The date of the memorandum is November 6, 3 1985, from Bruce Williams to Mike Crow, Joe 4 Phillips, you, and Jim Jackson. 5 A. Right. 6 Q. Now, look at Item No. 2, "Liquidity." 7 "With the reduction in equity arbitrage activities 8 (to a volume of 100 to 110 million) and Jim 9 Jackson's money deposit inflows, excess liquidity 10 was developing. It was agreed R. Huebsch and 11 J. Phillips would proceed with initially investing 12 50 million in mortgage-backed securities with caps 13 or collars. These securities would then be 14 liquidated or used as collateral on reverse repos 15 to generate cash for the branch sales." 16 Do you see that? 17 A. Uh-huh. (Witness nods head 18 affirmatively.) 19 Q. Can you tell us a little bit about how 20 the asset/liability committee meetings worked? 21 Who brought ideas to the committee? 22 A. I think anybody could. The asset side 13525 1 guys, the liability side guys, or Mike Crow was 2 sort of in the middle of the two sides. 3 Q. Well, take this entry. How did the 4 committee know that excess liquidity was 5 developing? 6 A. They probably could see it in the 7 Treasury building up. 8 Q. What do you mean in the Treasury 9 building up? 10 A. Well, I mean, they could see their 11 uncommitted cash buildup on their ledger. 12 Q. It says, "Agreed R. Huebsch and 13 J. Phillips would proceed with initially 14 investing." 15 Do you see that? 16 A. Yes, I see that. 17 Q. Now, how did that idea -- how would an 18 idea like that get to the committee? 19 A. It was probably proposed by one of 20 these five people. 21 Q. Now, when the committee made a 22 decision, it was agreed to do something like that, 13526 1 did it have to go anywhere else to get approval? 2 A. I don't know. The question in my mind 3 is whether they had to go to the investment 4 committee on an item like this. I just -- I just 5 don't know. 6 Q. Well, this is November 1985. 7 A. Okay. 8 Q. Okay. This isn't after April of 1986. 9 A. So, there was no investment committee. 10 Q. The earliest minutes we had found were 11 in April. 12 A. Well, then, it would probably -- I 13 don't know the authority over the asset/liability 14 committee, but I would guess that this would have 15 to go to the executive committee then. I don't 16 know. I don't know for sure. 17 Q. You don't know? 18 A. No. 19 Q. You don't recall? 20 A. No, I don't recall. 21 Q. Okay. Did you ever know? I mean, was 22 there some sort of set of procedures? 13527 1 A. I may have known. I just -- I don't 2 know now. 3 Q. Okay. Then it goes on, "A discussion 4 of M. Crow's short-term tactical planning memo 5 concluded that we needed to stay flexible in terms 6 of year-end planning. We have an opportunity to 7 add up to 400 million in liability growth by 8 12/31/85, but this needs to be managed closely 9 given the current unknown status of the branch 10 sales and financing subsidiary." 11 Do you see that? 12 A. I see that. 13 Q. The reference to financing subsidiary, 14 is that USAT Mortgage Finance? 15 A. It could be. I don't know for sure. 16 Q. Now, let's take a look at Tab 503, 17 which is A1621. This is the asset/liability 18 committee meeting of November 8th, 1985, dated 19 November 12th, 1985, from Bruce Williams to Mike 20 Crow, Joe Phillips, Charles Patterson, Ron 21 Huebsch, Jim Jackson, and Doug Hansen. 22 First of all, who was Charles 13528 1 Patterson? 2 A. Charles Patterson was the fellow in 3 charge of mortgage origination. 4 Q. Okay. And who was Jim Jackson? 5 A. Jim Jackson was head of funds, raising 6 funds. 7 Q. He was the money desk? 8 A. Money desk. And I think, eventually, 9 he took -- his responsibility included money desk 10 and branches. 11 Q. Okay. And Doug Hansen? 12 A. He was Jenard Gross' assistant. 13 Q. Okay. Now, look at Item No. 2. It 14 says, "Liquidity. Currently, USAT is temporarily 15 very liquid largely due to the pending formation 16 of the finance subsidiary. These funds along with 17 borrowings from FHLB will be used to purchase the 18 mortgage-backed securities which will be passed to 19 the subsidiary." 20 Do you see that? 21 A. Right. 22 Q. Then dropping down two paragraphs, it 13529 1 says, "R. Huebsch was given approval to invest an 2 additional 15 million of UFG's liquidity in 3 risk-controlled equity arbitrage investments to 4 150 million from 110 million." 5 Do you see that? 6 A. Right. 7 Q. Does that refresh your recollection 8 that the asset/liability committee had the 9 authority to authorize certain investments? 10 A. Well, it could authorize them. It 11 probably had to get -- you know, when they mention 12 400 million, the numbers like that, obviously, 13 they had to go to the executive committee. They 14 couldn't walk around investment -- raising the 15 equity for 40 million. I don't know whether that 16 was in their authorization or not, their 17 authorization without going to the executive 18 committee. There had to be some limit to what the 19 asset/liability committee could authorize. There 20 had to be some dollar limit. 21 Q. What do you mean "there has to be"? 22 A. Well, I mean, it was sort of a low 13530 1 level committee. I mean, it was below the 2 executive committee, below the board -- 3 Q. So, you're just surmising -- 4 MR. VILLA: Okay. Let him finish his 5 answer. He was still talking. 6 A. I'm surmising that they are not going 7 to allow a committee at this level to, you know, 8 invest four, $500 million. 9 Q. (BY MR. GUIDO) Let's move to Item 10 No. 3, financing subsidiary. "A filing with the 11 Federal Home Loan Bank to establish a financing 12 subsidiary with 500 million of securities has been 13 requested (which is up from the $300 million 14 previously reported). It was projected that the 15 securities should be settled in stages next week 16 and completed by Friday." 17 Do you see that? 18 A. Yes, I see that. 19 Q. Maybe this will help explain part of 20 your surmising. Let's move to the next document, 21 which is Tab 131. It's Exhibit A1108. I want to 22 direct your attention to Page 2 of that document, 13531 1 which is the minutes of November 14th, 1985, the 2 board of directors of the United Savings 3 Association of Texas. It says, "The regular 4 meeting of the board of directors of United 5 Savings Association of Texas was held at 6 10:00 a.m. on November 14th, 1985, in the 6th 7 floor conference room of the association's offices 8 at 10333 Harwin, Houston, Texas 77036, due notice 9 having been given." It goes into who the 10 attendees are. 11 And I want to direct your attention to 12 the second page of the memorandum. See where it 13 says, "On motion by Dr. Munitz and seconded by 14 Mr. Williams, the following resolutions were 15 unanimously adopted"? 16 A. Yes. 17 Q. You see, "One, whereas: The executive 18 committee of the board of directors of the 19 association has deemed it to be in the best 20 interests of United Savings Association of Texas 21 to establish a finance subsidiary which has been 22 named United Mortgage Finance, Inc." 13532 1 Do you see that? 2 A. Yes. 3 Q. Then it goes on and it says, "Whereas: 4 In order to qualify United Mortgage Finance to do 5 business in the State of Texas, as required by the 6 Texas Business Corporation Act, it is necessary to 7 change the name to USAT Mortgage Finance, Inc. 8 (the corporation)." 9 Do you see that? 10 A. Yes, I do. 11 Q. "Now, therefore, be it resolved: That 12 the certificate of incorporation of United 13 Mortgage Finance, Inc. be amended by changing 14 first article thereof so that, as amended, said 15 article shall be and read as follows: Quote, 16 'First: The name of the corporation is USAT 17 Mortgage Finance, Inc.,' close quote; and resolved 18 further: That any and all actions taken to date 19 by the proper officers of both the association and 20 of USAT Mortgage Finance, Inc. to effect such 21 amendment to the certificate of incorporation of 22 the corporation, and to cause such amendment to be 13533 1 filed in the Office of the Secretary of the State 2 of Delaware are hereby ratified, confirmed and 3 adopted." 4 Do you see that? 5 A. I see that. 6 Q. Then it goes on and discusses the 7 financing, the transfer of funds to that entity. 8 Do you see that? 9 A. Issuance of stock and deposit of 10 $6 million, yes. 11 THE COURT: What's your question, 12 Mr. Guido? 13 Q. (BY MR. GUIDO) Does it anywhere say 14 that USAT Mortgage Finance is authorized to 15 purchase $500 million worth of mortgage-backed 16 securities in that resolution? 17 A. I don't see that specific amount in 18 here. 19 Q. Okay. It does contain a resolution 20 ratifying any of the action of the officers of the 21 association however, does it not? 22 A. It says that any actions that have been 13534 1 taken to date. 2 Q. Now, I would like to move on to 3 Tab 504, which is Exhibit A1622. I'll direct your 4 attention to Item No. 3 as well here. This is the 5 asset/liability committee meeting of 6 November 15th, 1985. The date of the memorandum 7 is November 20, 1985. And it's from Bruce 8 Williams to Mike Crow, Joe Phillips, Charles 9 Patterson, Ron Huebsch, Jim Jackson, and 10 Doug Hansen. Item No. 3 says "Financing sub. The 11 securities in USAT Mortgage Finance were expected 12 to be settled today. The final interest rate swap 13 documentation had not been completed pending 14 details of the final securities to be used in the 15 transaction. The final swap agreement was to be 16 completed before November 22, the expected date of 17 a final regulatory ruling on the financing sub." 18 Do you see that? 19 A. I see that. 20 Q. Do you recall what the expected date of 21 final regulatory ruling to the financing sub 22 refers to? 13535 1 A. No, I don't know what that means. 2 Q. It says, "Total securities in the 3 subsidiary were expected to be $500 million." 4 Do you see that? 5 A. I see that, yes. 6 Q. Now, let's turn to Tab 505, which is 7 A1623. I direct your attention to Item No. 2 8 there. This is the asset/liability committee 9 meeting of November 22, 1985. The date: 10 December 2nd, 1985. A memo from Bruce Williams to 11 Mike Crow, Joe Phillips, Charles Patterson, Ron 12 Huebsch, Jim Jackson, Doug Hansen. It says in 13 Item No. 2, "Year-end tactical planning. The 14 committee will continue to closely monitor USAT's 15 year-end balance sheet position. The goal at year 16 end would be to show the largest balance possible 17 to use as a base for future growth. The final 18 year-end figure will depend on our regulatory net 19 worth at that date (which will be a function of 20 both earnings and scheduled items). The growth at 21 year end will likely come in the form of temporary 22 investment in Treasury securities funded with 13536 1 reverse repos." 2 Do you see that? 3 A. Yes, I see that. 4 Q. Do you know what that refers to? 5 A. What the -- what I'm getting from it is 6 it's how the association is going to be situated 7 financially at year end. 8 Q. What do you mean "situated"? In terms 9 of size? 10 A. Size and capital. 11 Q. Okay. What is the significance of size 12 for the association, or what was it at the time? 13 A. I believe it wanted to grow. 14 Q. And were there limitations on growth? 15 A. I would guess there were. 16 Q. But do you know? 17 A. No, I don't know specifically what the 18 limitations on growth were. 19 Q. Now, I would like to direct your 20 attention to Tab 585, which is B690. Have you 21 ever seen Exhibit B690 before? 22 A. No. I don't think I've ever seen this 13537 1 before. 2 Q. Was this shown to you in the last 3 couple of days? 4 A. No, I don't think I saw this one. 5 Q. Let me direct your attention to the 6 next document, which is Tab 1131, which is A10582. 7 This is a memo from Jim Wolfe to Mike Crow dated 8 November 8th, 1985. 9 Do you know who Jim Wolfe was? 10 A. He was, like, the head accountant. 11 Q. Was he the person in charge of making 12 sure that the entity stayed within whatever its 13 regulatory numerical parameters were? 14 A. Well, I think he was the one who 15 supplied the figures to the people who were 16 supposed to keep it within those parameters. 17 Q. And take a look at the -- the section 18 that says "maximum allowed growth." 19 Do you see that? 20 A. That's in the first paragraph. 21 Q. I guess it is in the first paragraph. 22 Do you see where it says "maximum allowed growth:" 13538 1 in the middle of the page, almost right at the 2 middle of the page? 3 A. Okay. Okay. I got you. 4 Q. Do you see where it says "12/31/85" and 5 it says "$4,860,000,000"? 6 A. I see that number. 7 Q. Do you see that Footnote 4? Take a 8 look at that on the second page. "As permitted in 9 the November 1, 1985 Federal Home Loan Bank Board 10 letter, Exhibit C." 11 A. Right. 12 Q. And Exhibit C is a letter to Gerald 13 Williams from the Federal Home Loan Bank Board. 14 At least, my copy only has the first page of the 15 letter. 16 A. It's a letter to Mr. Williams? 17 Q. Uh-huh. 18 A. I've got one page of that, also. 19 Q. Okay. But it shows 4.68 -- it says 20 million, but I presume it means billion. 21 A. I don't -- 22 Q. It's in the last paragraph. 13539 1 A. Okay. In the very last line, yeah. 2 Q. Look at Exhibit B -- do you have an 3 Exhibit B? 4 A. Yeah. That's very -- 5 Q. It's difficult to read, but see the 6 indented Paragraph 1? 7 A. Yeah. 8 Q. It says, "The institutional liabilities 9 at December 31, '85, shall not exceed 4.624" -- 10 A. Right. I see that. 11 Q. Okay. Now, do you recall in the 12 discussions of USAT Mortgage Finance that you had 13 the question of liability growth coming up? 14 A. If I did, it would be, you know, in a 15 very general way because I really wasn't focused 16 on that regulatory requirement. 17 Q. All right. Let me -- let's take a look 18 at Exhibit T4160, which is Tab 1132. It should be 19 the next folder in front of you. 20 This is a memorandum dated 21 January 16th, 1986. And it's headed "United 22 Savings Association of Texas - Ideas on profit 13540 1 improvement/stripping of balance sheet project." 2 It has various items there, and I want to direct 3 your attention to Item No. 4. 4 It says, "financing subsidiary." Do 5 you see that entry? 6 A. I see that. Right. 7 Q. And it says, "Financing subsidiary 8 (163 million which was set up in late 1985) - This 9 subsidiary will become a non-qualifying sub at the 10 first adjustment period of the reverse repurchase 11 agreement (unless some lawyer figures out a 12 miraculous way to keep this from happening, which 13 is unlikely). Therefore, this subsidiary should 14 be shoved back up into United Savings Association 15 and retained (that is, the assets and liabilities) 16 since it has an attractive spread of 1.06 and is a 17 profit contributor." 18 A. Because it's a what? 19 Q. A profit contributor. "In essence, 20 this will take the place of our artificial buildup 21 at year end 1985 of the 200 million of treasuries 22 which were placed on the books. Further, this 13541 1 will allow for the issuance of a full hundred 2 billion of CMOs and still have a comfortable 3 margin on the 30 percent financing sub 4 limitation." 5 MR. NICKENS: Your Honor, for the 6 record, I believe it says 1.0 billion. 7 MR. GUIDO: I'm sorry. 1.06. 8 THE COURT: Thank you. 9 MR. NICKENS: I don't know where the 10 percent came from. My copy says 1.0 billion of 11 CMOs, not 100 billion. 12 MR. GUIDO: 1.0 billion. I'm sorry. 13 Q. (BY MR. GUIDO) Now, does that refresh 14 your recollection that the liability growth was a 15 question with regard to the United Mortgage 16 Finance? 17 A. Well, what I am gaining from this is 18 that -- that, apparently, the financing sub is not 19 going to be allowed regulatorywise. 20 Q. But other than reading this memorandum, 21 do you have any independent recollection of 22 liability growth being an issue with USAT Mortgage 13542 1 Finance at the time? 2 A. Liability growth was a regulatory term, 3 and it really wasn't in my bailiwick. 4 Q. Now -- 5 THE COURT: We'll take a short recess. 6 7 (Whereupon a short break was taken.) 8 9 THE COURT: Be seated, please. Back on 10 the record. 11 MR. GUIDO: Thank you, Your Honor. 12 THE COURT: Mr. Guido. 13 Q. (BY MR. GUIDO) I think you testified 14 that the question of liability growth -- 15 A. Right. 16 Q. -- wasn't an issue that was within your 17 scope of responsibility, I think, is what you 18 testified to? 19 A. That's right. 20 Q. Now, you sat on the asset/liability 21 committee, did you not? 22 A. Right. 13543 1 Q. And the asset/liability committee 2 either made a decision or made a recommendation 3 for this $500 million of the association's assets. 4 Right? 5 A. Right. 6 Q. And what do you think the 7 responsibilities are of an officer of an 8 institution when it's making decisions of that 9 magnitude with regard to whether or not it's in 10 compliance with applicable regulatory provisions? 11 A. Well, I think -- I think you've 12 suggested the answer to that, is that it was a 13 sufficiently large institution where we had to 14 have, you know, some experts in the regulatory 15 side. We had to have experts on the funding side, 16 and we had to have experts on the purchasing of 17 assets side. And I, Joe Phillips, myself, Gene 18 Stodart, were focused on the assets, getting the 19 best assets available to populate, you know, these 20 programs. That's -- that was our specialization. 21 Q. Did you ever ask, you know, "I'm going 22 to put on $500 million worth of mortgage-backed 13544 1 securities. Am I going to violate growth 2 limitations?" 3 A. As I said before, we had a fine legal 4 team. Jim Pledger eventually came. Art Berner. 5 These are the people -- these people were good 6 lawyers, and we relied on them. 7 Q. But Jim Pledger and Art Berner weren't 8 on the asset/liability committee, were they? 9 A. Well, this item, as we saw, this 10 500-million-dollar program, went on to the board; 11 and there are lawyers on the board. Any item that 12 big would be, obviously, checked by our legal 13 staff. 14 Q. I'm trying to understand what you 15 understand your responsibilities to be. I mean, 16 you don't view it as your responsibility to ask 17 questions of whether or not something is legal or 18 not legal? 19 A. Well, if I saw something that I thought 20 was blatantly, you know, illegal, I would ask the 21 legal department. 22 Q. Well, we just looked at some 13545 1 memoranda -- 2 A. Right. 3 Q. -- asset/liability committee memoranda 4 that talk about this subsidiary in relationship to 5 liability growth issues. Right? 6 A. Right. 7 Q. Now, what did you do to ascertain for 8 yourself that this entity was in compliance or not 9 in compliance with liability growth regulations? 10 A. I didn't do anything. This -- because 11 this was a sizable transaction, I took confidence 12 that the legal department had looked into it. 13 Q. Is there any indication in the 14 asset/liability committee minutes that we looked 15 at that indicated that the asset/liability 16 committee got an opinion from the lawyers? 17 A. Not that I can see in those notes. But 18 obviously, the formation of it was -- as we saw in 19 the board of directors meetings, it was carefully 20 drawn legal language. 21 Q. I would like to show you a document 22 that we -- that's been marked as Exhibit B697, 13546 1 which is a memorandum from Jenard Gross to Mike 2 Crow, Ron Huebsch, Charles Hurwitz, Barry Munitz, 3 Joe Phillips, and Jerry Williams. 4 A. (Witness reviews the document.) 5 MR. GUIDO: I would like to move the 6 admission of Exhibit B697, Your Honor. 7 MR. VILLA: No objection. 8 THE COURT: Received. Have you read 9 the memo, Mr. Huebsch? 10 THE WITNESS: Yes, I've read it 11 quickly. 12 THE COURT: Do you have a question, 13 Mr. Guido? 14 MR. GUIDO: Yes, Your Honor. 15 Q. (BY MR. GUIDO) Have you seen this 16 document before? 17 A. Yes. 18 Q. When did you see this document? 19 A. I believe I saw it yesterday. 20 Q. Now, did you review it yesterday? 21 A. Well, I read it. I read it yesterday. 22 Q. And you've read it now? 13547 1 A. I've read it now. Right. 2 Q. Now, it says, "Based on my 3 conversations with Ron Huebsch and Joe Phillips 4 today" -- this is December 15th, 1985 -- "I think 5 where we finally wound up on this 6 500-million-dollar sub is as follows." And then 7 it goes on from there. I have a couple of 8 questions about this sentence. 9 Did the conversation that's referred to 10 there take place? 11 A. Yes. 12 Q. And is this in reference to the 13 500 million of USAT Mortgage Finance that we've 14 been talking about? 15 A. That's what it appears. 16 Q. It says, "They are going to end up 17 retaining the Salomon swaps, the Morgan asset, and 18 the Drexel flex repos to the extent of about 19 $150 million." 20 Do you see that? 21 A. Yes, I see that. 22 Q. Did you and Joe Phillips make that 13548 1 decision? 2 A. No. 3 Q. Who made that decision? 4 A. Well, I don't know; but it's -- it is 5 probably, more than anything else, an accounting 6 decision on how much you could retain of it. 7 Q. Well, it says, "They are going to end 8 up retaining the Salomon swaps, the Morgan assets, 9 and the Drexel flex repos to the extent of about 10 $150 million." It doesn't say the accounting 11 department directed them to do it, does it? 12 A. No, but I feel like that's implicit in 13 this. 14 Q. Why do you feel that's implicit. It 15 doesn't say anything about accounting in here? 16 A. The point is we had to go and get 17 direction. Apparently, what's implicit in here 18 was that this subsidiary was not allowed. 19 Q. There's nothing implicit in here about 20 that. 21 A. Then I'm off track. 22 Q. This doesn't say anything about 13549 1 anything dealing with regulations, does it? This 2 memo. 3 A. No, but I think it's implicit in it. 4 Q. Well, is it implicit? It doesn't say 5 anything to the effect about any regulations, does 6 it? 7 A. I don't see it explicitly, so... 8 Q. Now, it says in the next sentence, 9 "They are going to end up liquidating the 10 remaining assets which are going to generate an 11 income of about $11 million this year." 12 Is that the accounting consideration 13 that you're referring to? 14 A. No. 15 THE COURT: Can we determine who "they" 16 are? I'm not sure -- 17 Q. (BY MR. GUIDO) Who is the "they"? 18 A. They -- "they" are apparently myself 19 and Joe Phillips. 20 Q. Okay. "They are going to end up 21 liquidating the remaining assets which are going 22 to generate in income of about $11 million this 13550 1 year." Right? 2 A. I see that. 3 Q. "They are going to reverse the swaps 4 and keep them intact and let them run off over the 5 period that they currently show, which is up from 6 87 to 91". 7 Do you see that? 8 A. I see that. 9 Q. What does 87 to 91 refer to? Number of 10 months? 11 A. That, I can't tell. I can't -- I don't 12 know what those two numbers mean. 13 Q. Or is it from the year 1987 to the year 14 1991? 15 A. That could be the duration of the 16 swaps. I don't know. Could be. I don't know. 17 Q. Well, it talks about a period; so, it 18 must mean duration, does it not? 19 A. You know, I don't know. It could be 20 they are -- you know, it gives me the impression 21 that something is extending from 87 to 91; but I 22 don't think it's -- 13551 1 Q. From the year '87 to the year '91? 2 A. I don't think that would make sense. 3 It may mean that, but I don't -- I don't know. 4 Q. It says, "They are going to reverse the 5 swaps and keep them intact and let them run off 6 over the period." 7 Do you see that? 8 A. Uh-huh. (Witness nods head 9 affirmatively.) 10 Q. What does that mean? They are going to 11 keep the swaps -- keep them intact, yet reverse 12 them. What does that mean? 13 A. I believe -- I just -- I don't know 14 what that -- I don't know what that means; but 15 apparently, they were retained. 16 Q. So, how were they reversed if they were 17 retained? 18 A. They were -- I -- this may be the 19 instance when some mirror swaps were used. I 20 don't know. 21 Q. It was an instance where mirror swaps 22 were used, wasn't it, Mr. Huebsch? 13552 1 A. It may be. 2 Q. And you came up with that idea, didn't 3 you? 4 A. No, I didn't come up with that. 5 Q. Who came up with that idea? 6 A. I have no idea. 7 Q. But you didn't? 8 A. I didn't, no. 9 Q. Now, you said the "they" that's being 10 referred to is you and Joe Phillips? 11 A. Yes. 12 Q. It says, "They are going to reverse the 13 swaps and keep them intact." 14 A. Right. 15 Q. Who does it refer to other than you or 16 Joe Phillips or you and Joe Phillips? 17 A. That's -- that's -- 18 Q. Did Joe Phillips come up with the idea? 19 A. He may have. 20 Q. Did you approve the idea? 21 A. I didn't find it objectionable, but 22 it's not necessarily, you know -- you know, the 13553 1 finance part, you know, might have come up -- 2 Q. You were the executive vice president 3 for investments, were you not? 4 A. Right. 5 Q. Joe Phillips reported to you. Right? 6 A. Right. 7 Q. This is a portfolio that Joe Phillips 8 put on under your supervision. Right? 9 A. Right. 10 Q. And it was approved by the 11 asset/liability committee that you sat on. Right? 12 A. Right, and by the board. 13 Q. And recommended to the board by the 14 asset/liability committee that you sat on. Right? 15 A. And the board okayed it. 16 Q. And these mirror swaps were put on? 17 A. Right. 18 Q. And either you or Joe Phillips came up 19 with the idea. Right? 20 A. I don't know. 21 Q. You don't know? 22 A. I don't know. I can't say that. I 13554 1 just don't know. 2 Q. But you approved or didn't object to 3 them. Right? 4 A. I didn't object to them, no. 5 Q. And what was the effect of selling the 6 mortgage-backed securities for an 7 11-million-dollar profit, retaining the swaps, and 8 putting a mirror swap on? 9 A. You took 11 million into income. 10 Q. Uh-huh. And deferred the losses. 11 Right? 12 A. And the losses were -- if this is what 13 finally happened, which I don't know -- I don't 14 know whether this -- they were deferred. 15 Q. Did you ever look at any of Joe 16 Phillips' memos on the files of what happened? 17 A. I have seen them. I don't recall them 18 right now. 19 Q. Did you see them within the last couple 20 of days? 21 A. I may have. I don't remember them. 22 Q. Okay. Do you have any reason to 13555 1 dispute the fact that the mortgage-backed 2 securities were sold, the swaps were retained, and 3 a mirror swap was put on? 4 A. I don't have any reason to dispute 5 that. 6 Q. Okay. And if this memo is correct, 7 what was the effect of that transaction? 8 A. If this memo is correct, 11 million in 9 income would have been shown; and the swaps -- the 10 plus or minus on the swaps would be deferred. 11 Q. So, would -- 12 A. Or would be amortized, isn't it? 13 Q. Okay. Amortized over the life of the 14 swap? 15 A. Right. 16 Q. Okay. So, what it would show was a 17 profit on one side and a deferral of the losses on 18 the other. Right? 19 A. Right. 20 Q. Now, is that a transaction designed to 21 generate an accounting gain? 22 A. That, I have no idea. That, I have no 13556 1 idea. 2 Q. Why not? 3 A. I think everybody from USAT's point of 4 view would have been very happy if the whole 5 amount of this 500 million had just stayed on the 6 books and there was no need to unravel it. I 7 think that was the game plan as I knew it. 8 So, the fact that it had to partially 9 unwound was a disappointment. 10 Q. Did anybody express disappointment? 11 A. Well, I'm sure they did. 12 Q. Well, does this memo indicate anybody 13 expressing disappointment? 14 A. No, but I think that's unfair. You 15 know, I think this was a well-thought-out 16 transaction. It just didn't happen to be 17 complete. 18 MR. VILLA: Objection. Let him finish. 19 THE COURT: Continue. 20 A. It was a well-thought-out transaction 21 that just, for some regulatory reason, could not 22 be completed. Therefore, it had to be unwound. 13557 1 Q. (BY MR. GUIDO) Does this memorandum 2 make mention of any regulatory reason? 3 A. I think it's implicit. As I read this, 4 I believe it's implicit. There's a regulatory 5 theme in here that's implicit. 6 Q. You see a regulatory theme in this 7 memorandum? 8 MR. VILLA: Objection. Asked and 9 answered three times. 10 THE COURT: Sustained. 11 Q. (BY MR. GUIDO) Where in this memorandum 12 do you see a reference to regulatory issue? 13 MR. VILLA: Objection. 14 THE COURT: Sustained. 15 Q. (BY MR. GUIDO) Did this transaction, as 16 you and Joe Phillips structured it, result in 17 creating an artificial accounting gain? 18 A. It created a profit. 19 Q. And deferred a loss? 20 A. The part on the swaps was deferred. 21 Right. 22 Q. Do you remember when I asked you 13558 1 earlier had you ever structured a transaction in 2 order to generate an accounting gain? 3 A. Yes, you asked me that. 4 Q. Well, what was your answer? 5 A. That I was never a party to that. 6 Q. Is this transaction a transaction that 7 generated an accounting gain? 8 A. It is a transaction that generated a 9 profit. 10 Q. And was that profit an accounting gain, 11 not an economic gain? 12 A. It is, but the intent -- there was 13 never an intent to create a profit by the start of 14 this program and the formation of this financial 15 subsidiary. That was not the intent. 16 Q. Was that because interest rates hadn't 17 dropped until the time you decided to sell out of 18 that portfolio? 19 A. The drop in interest rates would have 20 helped the asset side of this transaction, yes. 21 Q. It was the drop in interest rates that 22 created the 11-million-dollar profit, wasn't it? 13559 1 A. I see it another way. I see it that 2 the subsidiary was disallowed and it had to be 3 reduced in size. 4 Q. Who told you that? 5 A. Well, I see here that $500 million was 6 put in, the size of the thing; and I see it was 7 reduced. 8 Q. Who told you that? 9 A. It says that here. 10 Q. Did Mary Clark tell you that? 11 A. Who? 12 Q. Mary Clark. Did Mary Clark tell you 13 that that subsidiary was collapsed for a 14 regulatory reason? 15 A. She may have, but I read it from Andrew 16 Carron. 17 Q. Andrew Carron told you. Was he there 18 at the time? 19 A. I read it from his -- the literature. 20 I read about it. 21 Q. The literature that you read. What 22 literature did you read that told you that? 13560 1 A. I believe Andrew Carron. 2 Q. Was he there at the time? 3 A. No. 4 Q. Who is Andrew Carron? 5 A. He's an expert witness. 6 Q. For whom? 7 A. For the respondents. 8 Q. So, you don't know other than Andrew 9 Carron and Mary Clark? 10 A. Well, I've chatted with, you know, our 11 legal team about this. 12 Q. And they told you -- 13 MR. VILLA: Objection. Your Honor, 14 object to him asking questions of discussions with 15 counsel. 16 MR. GUIDO: Your Honor, I don't think 17 that facts coming from lawyers going to witnesses 18 are protected by any privilege imaginable. 19 MR. VILLA: I believe that all 20 statements from a lawyer and his clients are 21 privileged. If he would like to ask the basis of 22 his discussions other than with counsel, I think 13561 1 it's appropriate. Your Honor, I am not going to 2 allow him to ask these questions without making an 3 objection because it encroaches attorney/client 4 privilege. 5 THE COURT: I'm sustaining the 6 objection. 7 MR. GUIDO: The OTS takes the position 8 if that fact statement comes to a witness from a 9 lawyer, we are entitled to understand how the 10 witness learned that fact. If the witness learned 11 the answer to that from the lawyer, we are 12 entitled to that answer. There is nothing that 13 protects that communication. It's legal advice 14 from a lawyer to a witness. It's facts from a 15 witness to a lawyer that are protected by the 16 attorney/client privilege. 17 THE COURT: You're assuming we can 18 separate facts from an opinion. I think it's the 19 communication that's protected. I'm not going to 20 get into the distinction. 21 Q. (BY MR. GUIDO) Now, other than your 22 communications with your counsel and other than 13562 1 from Mr. Carron, did you learn why the subsidiary 2 was collapsed in any other way? 3 A. Well, I heard something at the time 4 that it was legally -- it wasn't going to fly and 5 it had to be collapsed. 6 Q. Did you hear at the time that it 7 wasn't -- that its liabilities weren't going to be 8 excluded from the liability growth calculation? 9 A. That, I don't recall. 10 Q. Okay. 11 A. That, I don't recall. 12 Q. But did you, after you heard that, 13 attempt to ascertain whether the liability growth 14 regulation was the regulation that required the 15 disposition of the $350 million worth of 16 mortgage-backed securities out of USAT Mortgage 17 Finance? 18 A. I don't think I asked that specific 19 question. 20 Q. Did you ever attempt to ascertain 21 whether or not it was correct that there was a 22 regulatory reason for disposing of the 13563 1 $350 million? 2 A. No. I relied on, you know, our legal 3 people to, you know, tell us and make the judgment 4 whether it was legal or illegal. 5 Q. Why didn't you just dispose of the 6 swaps along with the $350 million? 7 A. I cannot tell you. I do not know. 8 Q. Well, this says, "They are going to 9 reverse the swaps and keep them intact." You said 10 that the "they" refers to you and Joe Phillips. 11 Right? 12 A. Uh-huh. (Witness nods head 13 affirmatively.) 14 Q. Why did you do that. Why didn't you 15 just sell the swaps? 16 A. I have no good answer for that. I 17 don't know why we didn't sell the swaps. 18 Q. Did you not sell the swaps because you 19 needed the $11 million worth of profit? 20 A. I didn't need the $11 million. 21 Q. USAT needed the $11 million? 22 A. The people here knew better than I do 13564 1 whether USAT needed the $11 million. 2 Q. Did they tell you that USAT could use 3 the $11 million profit? 4 A. USAT could always use money. 5 Q. That's not what I asked you, 6 Mr. Huebsch. I said: Did they tell you USAT 7 could use the $11 million profit? 8 A. I don't recall them telling me that 9 specifically. 10 Q. Do you recall them telling you that 11 generally? 12 A. No, I don't. It was not something that 13 came up. 14 Q. The rest of the memorandum shows an 15 analysis of the impact of the $11 million gained 16 on the sale of those mortgage-backed securities on 17 the profit of the institution, doesn't it? 18 A. Yes. 19 Q. Okay. Now, my question for you is: Do 20 you recall whether or not anyone told you that the 21 $11 million would be beneficial to the 22 institution's profit picture? 13565 1 A. I don't recall anybody saying that. 2 Q. This last paragraph here, did you 3 discuss that at all with Mr. Gross? 4 A. No, I did not. 5 Q. It says, "So, if we take the 6 $11 million of income this year, figure the branch 7 sale goes through which gives us another 7 and a 8 half million. That is about $18.5 million. If we 9 have lost 4 and a half million in October and 10 November and lose another 2 and a half in 11 December, that would be a total of 7 million." 12 Right? 13 A. Right. 14 Q. "That includes no loan loss for the 15 quarter. So, let's say that it's another 16 4 million, which would be $11 million." Right? 17 A. Right. 18 Q. "Then suppose we brought the loan loss 19 reserve back up to where it was at the end of the 20 year. It would be another 4 million. That gets 21 you up to 15 million. That would then put us in 22 the situation of having about a 2-million or 13566 1 2-and-a-half-million profit in the fourth quarter, 2 which is about where we would like to be." 3 Do you see that? 4 A. Yeah, I see that. 5 Q. Was it your understanding at the time 6 that that was a target for profits for the fourth 7 quarter of 1984? 8 A. It was not my understanding at all. 9 Q. Why wasn't it your understanding? 10 A. Because I just don't know any of these 11 numbers. 12 Q. You don't know any of this? 13 A. For example, the loan loss -- I mean, 14 loan losses were so remote from what I was doing, 15 I had no way of factoring them into anything I 16 did. I mean -- 17 Q. Do you remember Exhibit 4302, the 18 September 1986 memo regarding the investment 19 committee meeting in which you were asked about 20 generating profits of a certain amount out of the 21 high-yield bond portfolio? 22 A. Right. I remember that, yes. 13567 1 Q. And that made mention of things like 2 branch sales, loan loss reserves, and that sort of 3 things. You sat in on the investment committee in 4 which that was discussed, did you not? 5 A. Yes. It was not -- these things were 6 mentioned in the investment committee tangential. 7 We didn't talk very much, if at all, about loan 8 losses or branch sales. That was entirely out of 9 our, you know, view. They might have been 10 mentioned; but nobody, you know -- they were 11 cited, and that's all. 12 Q. Of the $4.6 billion worth of assets 13 that USAT had at December 31, 1985, what 14 percentage of that were mortgage-backed 15 securities, equity arbitrage, and high-yield 16 bonds? 17 A. I don't know. 18 Q. 50 percent? 19 MR. VILLA: Objection. He already 20 answered he didn't know. 21 Q. (BY MR. GUIDO) Do you have any 22 approximate idea? 13568 1 A. You know, they were substantial; but I 2 don't know a percentage. I don't know. 3 Q. Those activities which were 4 substantial, did they also have a substantial 5 impact on the profit of the institution? 6 A. I'm sure they did. 7 Q. Okay. And did they also have the 8 effect of offsetting losses from other portions of 9 the portfolio? 10 A. They probably did, sure. 11 Q. Were you interested in what the losses 12 were on the other side of the portfolio so you 13 could ascertain what profits you had to generate 14 from the side you were responsible for? 15 A. No. My thinking didn't run along those 16 lines. 17 Q. Why not? 18 A. My thinking ran along optimizing 19 profits from the assets that I was overlooking. 20 Q. I would like to direct your attention 21 to T4166, the fourth quarter and total 1985 22 performance to the board of directors dated 13569 1 February 7th, 1986. Attention: Charles Hurwitz 2 and Jenard Gross. 3 MR. GUIDO: I move the admission of 4 T4166, Your Honor. 5 MR. NICKENS: Your Honor, if I've 6 counted correctly, there are at least four copies 7 here of the same document. So, I'm not quite sure 8 what's being offered. I don't think it's 9 necessary to burden the record with four copies of 10 the same document. In addition to that, there are 11 some handwritten documents that are on the 12 documents by the nature that I believe are the 13 counsel for FDIC or OTS. 14 THE COURT: The copy I have doesn't 15 have any. T4166 has no -- no notes. 16 MR. NICKENS: Maybe we should 17 determine, Your Honor -- my copy of T4166 starts 18 out with an imaging number of 102447 and goes 19 beyond imaging numbers. If we could just 20 determine what copy is the official record. 21 THE COURT: Well, the copy that I have 22 has a Bates number US001113 through 16. 13570 1 MR. GUIDO: And it has a Xerox copy of 2 an exhibit sticker. 3 MR. BLANKENSTEIN: That's not a 4 complete document. 5 MR. NICKENS: 13 through what, 6 Your Honor? 36? 7 THE COURT: 113 through 116. But I 8 find that the same document is in as A5010, which 9 is a much thicker document; but it includes the 10 part that we're looking at here. 11 MR. GUIDO: I don't have the tab number 12 of 5010, Your Honor. 13 MR. NICKENS: We can find it. Just a 14 second. 15 MR. GUIDO: We couldn't find that 16 rendition of the document. 17 MR. NICKENS: Tab 557. 18 MR. GUIDO: Your Honor, I'll use 5010. 19 We could not find it in the admitted documents. I 20 withdraw the offer of T4166. 21 Q. (BY MR. GUIDO) I would like to direct 22 your attention to the first page of A5010. If you 13571 1 take a look at the profit net income figures on 2 the chart at the bottom of the page under the 3 fourth quarter. 4 A. Right. 5 Q. See where it says, "Actual net income: 6 $1.8 million for the fourth quarter"? 7 A. Actual, right. 8 Q. 1.8 million? 9 A. Right. I got it. 10 Q. And I would like to direct your 11 attention to Page 3 of the document. It says 12 "non-interest income." 13 A. Net interest income? 14 Q. Non-interest income. 15 A. Non-interest income. Okay. 16 Q. "The gains on sales of securities 17 totaled 21 million in the fourth quarter, 18 reflected sales of the nonmortgage-backed 19 securities, 12,504,000; corporate securities, 20 6,223,000; liquidity securities, 2,509,000 for a 21 total of 21,236 -- 21,236,000." 22 Do you see that in the second 13572 1 paragraph? 2 A. I see that. 3 Q. Then it says, "The gains on 4 mortgage-backed securities sales were largely 5 produced by the liquidation of 35 million of 6 the -- 350 million of 500 million financing 7 subsidiary established in late November. The 8 liquidation was required due to new regulations 9 adopted after the subsidiary was established which 10 excluded it from qualifying as a financing 11 subsidiary." 12 Do you see that? 13 A. Yes, I see that. 14 Q. Is that what you're referring to when 15 you're referring to the regulatory change that 16 required the sale of the mortgage-backed 17 securities? 18 A. Yes, that's right. 19 Q. Do you know whether that statement is 20 true or false? 21 A. I don't know whether it was true or 22 false. 13573 1 Q. Do you know today whether it is true or 2 false? 3 A. I'm not sure. 4 Q. Pardon? 5 A. I don't know whether it's absolutely 6 true or absolutely false. I have no idea. 7 Q. Who would be the person who would be 8 able to tell us whether that statement is true or 9 false? 10 A. Well, the general counsel. 11 Q. Who was that? 12 A. It was either -- I forget their tenure, 13 but either Jim Pledger or Art Berner. 14 Q. If it had something to do with the 15 liability growth calculation, who would be able to 16 tell us whether it was true or false? 17 A. Well, we might have to get the 18 accounting department in there, too. 19 Q. Who did the accounting department 20 report to? 21 A. I believe Bruce Williams, Mike Crow. 22 Q. Who did Bruce Williams report to? 13574 1 A. I guess Mike Crow. 2 Q. Okay. So, Art Berner or Mike Crow 3 might be able to tell us? 4 MR. VILLA: Objection, Your Honor. 5 Misstates the record. You know the general 6 counsel of USAT during this time period was 7 Mr. Pledger. 8 A. I said either -- I forget their, you 9 know, tenure there, when Jim Pledger left and Art 10 Berner came on board. 11 Q. (BY MR. GUIDO) Who did Jim Pledger 12 report to? 13 A. Well, he was general counsel. I don't 14 know. CEO or president. 15 Q. Was Art Berner counsel of UFG at the 16 time? 17 A. You know, I think there was an overlap 18 when both of them were there; but I think -- my 19 understanding was that Art Berner took over 20 general counsel when Jim Pledger left, the office 21 of general counsel. 22 Q. Do you know how Art Berner became 13575 1 general counsel of UFG? 2 A. No, I don't know. 3 Q. Do you know who asked him to become 4 general counsel of UFG? 5 A. No, I don't know who asked him. 6 Q. Do you know who referred him to UFG? 7 A. No, I don't know who referred him. 8 Q. Now, I would like to direct your 9 attention to three documents that were prepared by 10 Mr. Phillips. 11 MR. GUIDO: They are Tab 571, which is 12 Exhibit A10594, Your Honor; Tab 586, which is 13 Exhibit B819, Your Honor; and Tab 584, which is 14 Exhibit B492. 15 Q. (BY MR. GUIDO) I would like you to take 16 a look at those three documents. 17 A. (Witness reviews the documents.) 18 THE COURT: Which exhibit are we 19 focused on right now? 20 MR. GUIDO: Your Honor, I'm going to 21 ask him a question about all three of them. 22 THE COURT: Well, I think only 13576 1 Exhibit B819 is in evidence. We don't have the 2 others. 3 MR. GUIDO: Let me check that, 4 Your Honor. I have 10594 as Tab 571 in the 5 record. That's the January 10th memorandum. And 6 then I have B819, which is the Rick Millinor 7 typewritten rendition of the handwritten notes at 8 Tab 586. And then I have B892, which is the third 9 document, March 25th, 1986, in as Tab 584. 10 MR. NICKENS: Your Honor, I think the 11 confusion was partly anyway that Mr. Guido said 12 B492 when he meant B892. 13 MR. GUIDO: I'm sorry. 14 THE COURT: Is there a B492? 15 MR. GUIDO: No, I'm sorry. It's B892, 16 Your Honor. I misspoke. 17 THE COURT: All right. Proceed. 18 Q. (BY MR. GUIDO) Now, on the second 19 document, the document which is the Rick Millinor 20 typewritten rendition, I'm only directing your 21 attention to the -- you don't need to reread it, 22 but attached to it is the January 10th, '86 memo 13577 1 to the file from Joe Phillips at the very end of 2 the packet, which is the same as the first one. 3 I'm only giving it to you so you have the full set 4 of information? 5 A. Oh, okay. The last page. 6 Q. That's the same as the exhibit you just 7 read, which is A10594, that page. 8 A. I'm lost. 9 Q. I showed you A10594 which is the first 10 document that you read. 11 A. All right. 12 Q. Have you reviewed A10594? 13 A. Yeah, I read it, you know, here. I 14 have trouble with this. 15 Q. With Page 2? 16 A. Yeah. 17 Q. You can't read a portion of Page 2? 18 A. That's right. 19 Q. Okay. Now, B819 -- 20 A. Yes. 21 Q. -- that's another copy of the first 22 page of A10594, is it not? 13578 1 A. It appears to be done by a different 2 typewriter. 3 Q. It's just a different copy. 4 A. It looks like the same. 5 Q. Okay. And then B892, I would like you 6 to take a look at that. 7 A. (Witness reviews the document.) Yeah, 8 I've read it. 9 Q. Okay. Now, let's just focus on A10594, 10 which is to the far left of your table there. 11 A. This one? 12 Q. That one. 13 A. So, we have three that we're looking 14 at? 15 Q. Three documents, two of which are 16 identical other than A10594 has a page attached to 17 it which B819 does not. 18 A. Okay. 19 Q. Now, you testified that regulatory 20 issues weren't within your scope of 21 responsibility. Right? 22 A. That's right. 13579 1 Q. Who did Joe Phillips report to? 2 A. He reported to me. 3 Q. He's discussing regulatory requirements 4 in this memorandum, is he not? 5 A. Right. I mean, this memorandum 6 discusses that. 7 Q. Yeah. Why? If it wasn't within your 8 scope of responsibility, he reported to you, why 9 is he writing a memorandum describing what the 10 consequences of regulations are? 11 A. Are we sure he's writing? 12 Q. He testified that he wrote it. What do 13 you notice on that that makes you question whether 14 or not he wrote this memorandum? 15 A. The JLW. 16 Q. What's that? 17 A. It's probably Wolfe. It could be 18 anybody named JLW, but there was a Jim Wolfe that 19 worked there. 20 Q. Did Joe Phillips discuss this 21 memorandum with you before he prepared them? 22 A. I don't know whether he prepared them. 13580 1 Q. Well, before he initialed them? 2 A. He may have. I don't remember. 3 Q. You don't recall? 4 A. No. 5 Q. Okay. 6 A. As I -- I don't know whether these 7 were -- whether I got these. They were addressed 8 to his file. This is apparently something he had 9 Wolfe write so that he, Joe Phillips, could stick 10 in his files. This is going to Joe Phillips' 11 files. 12 Q. Going to the file. It doesn't say what 13 file, does it? 14 A. No, it doesn't say what file. 15 Q. It says "file." Why do you assume it's 16 Joe Phillips' file? 17 A. Well, Joe -- it's from Joe to file. I 18 assume he's putting it in his own file. 19 Q. Did he discuss with you the need to 20 write a memorandum to the file? 21 A. Well, we still don't know whether he 22 wrote it. Maybe he had Wolfe write it for him. 13581 1 Q. Did you discuss with him his need to 2 initial a memorandum -- 3 A. No. 4 Q. -- that he put in his files regarding 5 the transactions? 6 A. I didn't discuss this with him. 7 Q. He never raised it with you? 8 A. He may have. I just don't remember 9 this. 10 Q. So, it's not that it didn't happen. 11 You just don't remember? 12 A. That's right. 13 Q. Now, when you said that the question of 14 regulatory compliance wasn't within your scope of 15 responsibility, have you recalled whether or not 16 you had discussed these memoranda with Joe 17 Phillips? 18 A. I don't recall discussing these 19 memoranda with Joe Phillips. 20 Q. But when you testified that it wasn't 21 within your scope of responsibility to determine 22 whether or not something complied or didn't comply 13582 1 with regulatory requirements such as liability 2 growth, you were basing your answer on a lack of 3 knowledge? 4 MR. VILLA: Objection. He can't 5 possibly understand that question. 6 Q. (BY MR. GUIDO) Were you basing it on a 7 lack of knowledge? 8 A. Could you give me the question in some 9 other form, Mr. Guido? 10 Q. You testified earlier that it wasn't 11 your responsibility to ascertain whether or not 12 something complied with regulations or not. Okay? 13 A. Yes, I did. 14 Q. And this memoranda to the file, 15 initialed by Joe Phillips who worked for you, says 16 that the reason why USAT Mortgage Finance was 17 partially collapsed and the mirror swaps were put 18 on was because USAT didn't want to violate the 19 liability growth regulations. Right? 20 A. That's what this says. 21 Q. You don't recall whether or not he 22 discussed the memoranda with you? 13583 1 A. No, I don't. 2 Q. You don't know whether or not you 3 addressed the question of whether or not the 4 liability growth regulation had been complied with 5 or not complied with by the holding of the 6 mortgage-backed securities financed by reverse 7 repos? 8 A. No, I did not question him. 9 Q. You don't know whether it's true or 10 false whether or not the liability growth 11 regulation was what prompted the sale of the 12 mortgage-backed securities out of USAT Mortgage 13 Finance? 14 A. From what I'm reading here, it 15 apparently did violate it; but I don't know 16 myself. 17 Q. You don't know whether that's a true or 18 false statement, do you? 19 A. That's right. 20 Q. I would like to direct your attention 21 back to A10502. 10582. Excuse me. 22 . 13584 1 (Discussion held off the record.) 2 3 Q. (BY MR. GUIDO) Now, take a look at the 4 Jim Wolfe memo which is 10582. Do you see where 5 it says, "Maximum allowed growth, 3/31/86: 6 4,752,000,000" -- 7 A. No. I have -- 3/31/86, I have 8 4 billion 752. 9 Q. Right. And do you see in January -- 10 look at Exhibit 4160, Tab 1132. 11 A. (Witness complies.) 12 Q. That's the "stripping the balance 13 sheet" memorandum. 14 Do you see that? 15 A. Yes. 16 Q. I'll direct your attention to Item 17 No. 4 on that. It's the next-to-the-last 18 sentence. It says, "In essence, this will take 19 the place of our artificial buildup at year end 20 1985 of the 200 million of treasuries which were 21 placed on the books." 22 A. Right. 13585 1 Q. The $350 million worth of 2 mortgage-backed securities that were sold out of 3 USAT Mortgage Finance, do you recall that? 4 A. Uh-huh. (Witness nods head 5 affirmatively.) 6 Q. They were sold at December -- prior to 7 December 31, 1985. Right? 8 A. I believe so, yes. 9 Q. Okay. So that there were $150 million 10 of mortgage-backed securities of USAT Mortgage 11 Finance that were included in the liability figure 12 as of 12/31/85; is that correct? 13 A. Well, in this paragraph, I'm reading 14 163 million. 15 Q. Okay. 16 A. But I don't know -- 17 Q. 163, 150, just for -- there were 18 $150 million within the liability growth of USAT 19 at December 31, 1985? 20 MR. NICKENS: Is the question asking 21 the witness whether or not this 163 was included 22 in the liability growth at year-end 1985? 13586 1 THE COURT: For whom? 2 MR. NICKENS: I understood that to be 3 the question. He's asking him whether some amount 4 was included in the liability growth calculation 5 at year-end. 6 THE COURT: For USAT? 7 MR. NICKENS: Yeah. 8 MR. GUIDO: I'll rephrase the question, 9 Your Honor. 10 THE COURT: All right. 11 Q. (BY MR. GUIDO) The $350 million in 12 mortgage-backed securities that were sold out of 13 USAT Mortgage Finance were sold in December of 14 1985. Right? 15 A. Yes. 16 Q. So, there was $150 million still left 17 over. Right? 18 A. Yes. 19 Q. Now, that left -- was that $150 million 20 included within the liabilities of USAT at 21 December 31, 1985? 22 A. That, I don't know. 13587 1 Q. If it were -- 2 A. If it were -- 3 Q. Assume it was. All right? It's 4 $350 million that you have to find a place to put 5 under the liability growth regulations. Right? 6 A. Well, you just told me the 350 was 7 sold. 8 Q. That's right. I understand that. If 9 you kept it, you would have had to have found a 10 place for it. Right? 11 A. Yes, if you kept them. 12 Q. If you had kept them, you would have 13 had to have found a place for them? 14 A. Right. 15 Q. Given that you had $200 million worth 16 of artificial buildup at year end, which 17 Exhibit T4160 says you have -- right? 18 A. Yeah. 19 Q. -- and a growth figure at 3/31/86 of 20 4.752 billion, okay, it means you did not have to 21 sell all of the $350 million because of the 22 liability growth regulations, does it not, if 13588 1 those figures are correct? 2 A. You know, I don't know. 3 Q. You don't know? 4 A. I just -- 5 Q. Did anyone ever ask you whether or not 6 it was necessary to sell the $350 million worth of 7 mortgage-backed securities in order to meet the 8 liability growth regulations? 9 A. No. It never came up. We were told to 10 sell down this -- a portion of the -- 11 Q. The portfolio? 12 A. Yeah. 13 Q. So, it wasn't you in this memo that we 14 just looked at that makes reference to "they"? It 15 wasn't you and Joe Phillips that decided to sell 16 down the 350 million? 17 A. We wouldn't know the number. Joe 18 Phillips and I were involved in the sale of the 19 assets. Somebody would have had to tell us how 20 much to sell down. 21 Q. You were also involved -- 22 A. Somebody who was calculating -- 13589 1 somebody like this person who was the scorekeeper 2 on liability growth. 3 Q. Did anyone tell you to put on the 4 mirror swap? 5 A. I just don't know. I just don't know. 6 I -- that was probably -- as I'm reading here, I 7 guess it could have been used as a general swap. 8 I don't know. I don't know who told us to put on 9 the mirror swap. 10 Q. Well, the memo that Jenard Gross wrote 11 reflecting his conversation with you doesn't make 12 any mention of a general swap, does it? 13 A. I didn't see it in that memo. 14 Q. It just says that you and Joe Phillips 15 decided to keep the swaps and put on a reverse 16 swap? 17 MR. VILLA: Objection. Misstates the 18 memo. It doesn't say it was a decision of 19 Mr. Phillips and Mr. Huebsch. 20 Q. (BY MR. GUIDO) Exhibit B697. 21 A. We were told how much to sell down and 22 what to do with the swap, to keep the swap or 13590 1 neutralize it or -- 2 Q. Were you told how much to sell down, or 3 were you told how much profits you needed to 4 generate at quarter's end? 5 A. I don't know. My guess would be that 6 the bigger -- the bigger of the two worries was 7 regulatory concern with liability growth. That's 8 a guess on my part. I don't know. 9 Q. Do you recall we went through the 10 excess net worth discussion and how the excess net 11 worth was declining? 12 A. I remember those numbers, yes. 13 Q. Do you remember the last number at 14 November 30th was $17 million? 15 A. Yes. 16 Q. And the profit from the mortgage-backed 17 securities that were sold were somewhere around 18 12, I think, is what we discussed? 19 MR. NICKENS: Your Honor, that number 20 was not discussed. The number 11 appears in the 21 document as well as the number 9 which is 22 handwritten in there. The number 12 is not 13591 1 discussed in these documents. I think it's quite 2 evident that this witness does not have personal 3 knowledge of those numbers, and we've sort of 4 reached the end of this discussion. 5 MR. GUIDO: Your Honor, I don't think 6 I've reached the end of my questions. 7 THE COURT: All right. We'll adjourn 8 until 9:00 tomorrow. 9 MR. VILLA: Your Honor, there was an 10 implication left that me or members of my law firm 11 had told Mr. Huebsch that the -- that the USAT -- 12 United Mortgage Finance subsidiary had been 13 dissolved because of regulatory reasons. And I 14 think that Mr. Guido probably -- Mr. Huebsch on 15 the stand didn't remember this; but subsequent to 16 that, Mr. Guido identified four documents -- 17 T4160, B690, T4166, and B892 -- all of which were 18 contemporaneous documents which address that 19 issue. I don't want it to be left in the air that 20 we're somehow coaching the witnesses to say things 21 when, in fact, the documents in the record 22 contemporaneously address the same issues. 13592 1 MR. GUIDO: Your Honor, on behalf of 2 myself, if a lawyer is telling a witness a fact 3 and the witness -- it was that he got the fact 4 from the lawyer, I believe it is relevant to 5 whether or not the witness is accurately recalling 6 the facts as they occurred at the time. 7 THE COURT: All right. I don't want to 8 base this record on communications among counsel 9 and their clients. 10 We'll adjourn until 9:00 o'clock 11 tomorrow morning. 12 13 (Whereupon at 4:57 p.m. 14 the proceedings were recessed.) 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 13593 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Marcy Clark, the undersigned Certified 5 Shorthand Reporter in and for the State of Texas, 6 certify that the facts stated in the foregoing 7 pages are true and correct to the best of my ability. 8 I further certify that I am neither 9 attorney nor counsel for, related to nor employed 10 by, any of the parties to the action in which this 11 testimony was taken and, further, I am not a 12 relative or employee of any counsel employed by 13 the parties hereto, or financially interested in 14 the action. 15 SUBSCRIBED AND SWORN TO under my hand 16 and seal of office on this the 8th day of July, 17 1998. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-99 21 . 22 . 13594 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Shauna Foreman, the undersigned 5 Certified Shorthand Reporter in and for the 6 State of Texas, certify that the facts stated 7 in the foregoing pages are true and correct 8 to the best of my ability. 9 I further certify that I am neither 10 attorney nor counsel for, related to nor employed 11 by, any of the parties to the action in which this 12 testimony was taken and, further, I am not a 13 relative or employee of any counsel employed by 14 the parties hereto, or financially interested in 15 the action. 16 SUBSCRIBED AND SWORN TO under my hand 17 and seal of office on this the 8th day of July, 18 1998. 19 _____________________________ SHAUNA FOREMAN, CSR 20 Certified Shorthand Reporter In and for the State of Texas 21 Certification No. 3786 Expiration Date: 12-31-98 22