14643 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 15, 1998 22 14644 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire Special Enforcement Counsel 4 PAUL LEIMAN, Esquire SCOTT SCHWARTZ, Esquire 5 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire 6 and BRYAN VEIS, Esquire of: Office of Thrift Supervision 7 Department of the Treasury 1700 G Street, N.W. 8 Washington, D.C. 20552 (202) 906-7395 9 ON BEHALF OF RESPONDENT MAXXAM, INC.: 10 FRANK J. EISENHART, Esquire 11 of: Dechert, Price & Rhoads 1500 K Street, N.W. 12 Washington, D.C. 20005-1208 (202) 626-3306 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 14645 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 . 14646 1 2 INDEX OF PROCEEDINGS 3 Page 4 MICHAEL CROW 5 Continued Examination by Mr. Schwartz...14647 6 Examination by Mr. Rinaldi..............14740 7 . 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 14647 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. We'll 4 be back on the record. 5 Mr. Schwartz, you may continue. 6 MR. SCHWARTZ: Thank you, Your Honor. 7 8 CONTINUED EXAMINATION 9 10 Q. (BY MR. SCHWARTZ) Mr. Crow, I was 11 thinking last night about your comment that 12 Krasovec and Minch brought what was called sweat 13 equity to the Norwood transaction, and I asked you 14 if that had any cash value and you indicated had 15 it didn't. 16 Do you recall that? 17 A. I do recall us talking about sweat 18 equity, yes, sir. 19 Q. You don't recall -- 20 A. It wouldn't create cash. 21 Q. I'm curious. If Ken Guido had come to 22 you in 1986 asking for a 30-million-dollar loan 14648 1 and offered you his sweat equity and a guarantee 2 of the loan amount, would you have approved that 3 loan? 4 A. Well, that's a pretty tough 5 hypothetical. Assuming Mr. Guido had been a very, 6 very successful developer and -- to give an 7 example, let's say the property was worth 8 25 million presently and Mr. Guido's efforts in 9 perhaps rezoning the profit could get the value of 10 that property up to 35 million. Then while cash 11 is not involved, clearly, the value of that 12 property goes up. 13 Q. What was Mister -- 14 A. So -- 15 MR. VILLA: Excuse me. You asked the 16 question. He ought to be able to answer it. 17 Q. (BY MR. SCHWARTZ) Please. 18 A. So, it seems to me that clearly would 19 make that loan a more secure loan. 20 Q. At the time of the Norwood loan, 21 however, you didn't have an appraisal, did you? 22 A. I don't -- at the time of the Norwood 14649 1 investment, I don't remember whether we had an 2 appraisal or not. 3 Q. If you recall, the appraisal that we 4 looked at was dated July 22nd and the loan was 5 approved June 2nd. 6 Do you recall that? 7 A. I recall there was a time delay, yes. 8 Q. And what was Mr. Krasovec and 9 Mr. Minch's background and experience in 10 developing projects, multi-use projects like this? 11 A. I really don't remember. If we can 12 look at some documents, I'll try to remember 13 but -- 14 Q. But you don't know whether -- you don't 15 recall now whether they had any experience 16 whatsoever in developing malls or shopping centers 17 or multi-use sites? 18 A. Other than I remember they were 19 experienced. As to the nature of their 20 experience, I can't be more specific than that. 21 And I'm -- you know, let me be clear. I'm not 22 sure what I knew during this time period. I may 14650 1 or may not have known their experience. 2 Q. Do you recall the meeting of the senior 3 loan committee at which the Park 410 loan was 4 approved? 5 A. I recall -- I recall the Park 410 loan 6 being approved, and it's difficult for me to 7 remember specific meetings. But I certainly 8 remember that it was approved, and I was a 9 participant in that. 10 Q. Who made the presentation on the 11 Park 410 loan? 12 A. David Graham. 13 Q. Did Mr. Gross make any presentation on 14 the loan? 15 A. Not that I recall. Mr. Gross was 16 certainly involved in the process. 17 Q. How was he involved in the process, 18 sir? 19 A. Well, to the best of my recollection, 20 Mr. Gross acted as -- seemed to be the chairman or 21 the leader of the loan committee. 22 Q. Do you recall your deposition on June 14651 1 5th, 1995? 2 A. I remember I had a deposition in 1995, 3 yes. 4 Q. And do you recall being asked questions 5 about Park 410? 6 A. I'm sure I was, yes. 7 Q. And concerning the Park 410 8 presentation, do you recall your stating, quote, 9 "I believe I was on the loan committee" -- 10 MR. VILLA: Excuse me. 11 MR. NICKENS: Could we have a page and 12 line? 13 MR. VILLA: And would you also show the 14 witness the context in which it comes up? 15 Ordinarily, that's what you do. 16 MR. SCHWARTZ: I don't have an extra 17 copy of it. I'll be happy to show him mine. 18 We'll do this in a moment, Your Honor. 19 20 (Discussion held off the record.) 21 22 MR. SCHWARTZ: Excuse me, Your Honor. 14652 1 THE COURT: We'll be off the record. 2 MR. SCHWARTZ: Thank you, Your Honor. 3 4 (Discussion held off the record.) 5 6 THE COURT: Back on the record. 7 MR. SCHWARTZ: Thank you, Your Honor. 8 Q. (BY MR. SCHWARTZ) Exhibit T7670, 9 Tab 674. Is that the senior loan committee 10 approval of the Park 410 loan? 11 A. Yes, it is. It's the loan committee 12 approval dated, oh, March 17th, 1996 (sic). 13 Q. 1986? 14 A. That is correct. 15 Q. And is that your signature on the 16 second-to-the-last page? 17 A. It is. 18 Q. So, that indicates your approval of 19 the -- of extending this loan, correct? 20 A. Yes. 21 Q. Exhibit T7667 or A1649 at Tab 653. 22 Exhibit A1649 or Tab 653 is the agenda for that 14653 1 March 17th, 1986 meeting, correct? 2 A. Yes, sir, it is. 3 Q. And if you look on the second page, 4 there were five items discussed at that meeting, 5 correct? 6 A. Yes, sir. 7 Q. Those minutes indicate that the meeting 8 opened at 9:04 a.m. and adjourned at 10:13 a.m. 9 Right? 10 A. I see that, yes. 11 Q. So, the meeting lasted 69 minutes, 12 correct? 13 A. That is correct. 14 Q. Do you recall what portion of those 69 15 minutes were spent discussing an appraisal of the 16 Park 410 property? 17 A. No, sir. I don't recall the specific 18 meeting; so, no, I have no basis to say. 19 Q. Well, do you recall if any portion of 20 that meeting was spent discussing a market 21 feasibility study? 22 A. No, not of this specific meeting. I 14654 1 can't say. I just don't know. 2 Q. That meeting agenda also indicates that 3 Charles Hurwitz was present at the meeting. 4 Right? 5 A. Yes. 6 Q. Do you recall Mr. Hurwitz discussing 7 anything about Park 410 or the borrowers for 8 Park 410? 9 A. At this specific meeting, no, sir, I 10 don't recall that. 11 Q. What about at any time? 12 A. I remember Mr. Hurwitz discussing 13 Park 410, I think, in terms of disclosing that he 14 knew Mr. Rosenberg. 15 Q. At what point in time? 16 A. I can't be specific. I don't know. It 17 was sometime during this nineteen-eighty -- you 18 know, late '85, '86 time frame. 19 Q. Do you recall if Mr. Hurwitz was 20 supportive of this loan? 21 A. No, I really don't. I really do not. 22 I might expand that answer a bit and say that my 14655 1 memory or recollection is that most of the people 2 at United -- or I can't think of any -- were 3 enthusiastic about the Park 410 loan. 4 Q. Does that include Mr. Hurwitz? 5 A. Yes. I would -- I mean, I don't 6 remember -- I'll put it like this. I don't 7 remember anyone saying, "Gee, we think this is a 8 horrible deal. We shouldn't do it." And I 9 think -- you know, I think I would remember that 10 sort of thing. 11 Q. The first item discussed indicates 12 "There was approval of an 80-million-dollar loan 13 to Park 410 West Joint Venture on 427 plus acres. 14 Terms and conditions are shown on the attached 15 senior loan committee sheet." 16 Do you see that? 17 A. I see that. 18 Q. Now, you did support making that loan, 19 correct? 20 A. Yes. 21 Q. Do you recall USAT ever making a loan 22 this large? 14656 1 A. No. 2 Q. Do you recall if you ever disapproved a 3 loan at United? 4 A. I don't recall that, no. I don't 5 recall whether I did or didn't. 6 Q. Exhibit T7084, Tab 709. Let me go back 7 a moment and ask you -- I asked you if you ever 8 approved -- disapproved a loan. 9 What -- are you aware that this loan 10 was the single largest loan United ever made? 11 A. I am aware of that, yes. 12 Q. Were you aware of that then? 13 A. I don't see really recall, but I can't 14 imagine that I wasn't aware of it. But I can't 15 specifically say. 16 Q. What was the typical size loan that you 17 recall United making back then? 18 A. I don't -- I don't remember because, 19 you know, we'd get into single-family residentials 20 and small commercials and then loans like Norwood. 21 So, it's hard for me to say what a typical loan 22 would be, but it's clear that the Park 410 loan 14657 1 was larger than most. 2 Q. Than all? 3 A. It's the largest that I'm aware of that 4 United made. 5 Q. Okay. Turning now to Exhibit T7084. 6 You see this appraisal is dated March 19th, 1986, 7 correct? 8 A. I see that. 9 Q. And the meeting approving the Park 410 10 loan is dated March 17th, 1986, correct? 11 A. I see that. 12 Q. So, the meeting was held on March 17th, 13 and you got a package sometime before that. You 14 described earlier the packages that you received 15 with the -- before the senior loan committee 16 meetings? 17 A. Yes, sir. 18 Q. You have no reason to believe, then, 19 that this appraisal was received before the 20 meeting, correct? 21 A. I don't have any basis to say one way 22 or the other. It's clearly -- the transmittal 14658 1 letter is dated March 19th, and the loan committee 2 met on March 17th. 3 Q. Was it the policy of United to approve 4 loans without having appraisals in the files? 5 A. I don't know specifically what the 6 policy would be there. In order to really dig 7 into this, I mean, it would seem to me that on the 8 loan approval sheet, it says "terms and conditions 9 as shown in the attached senior loan committee 10 sheet." You would have to look -- I mean, I don't 11 know. It could be the loan was approved subject 12 to receipt of an appraisal. 13 Q. You looked at Exhibit 7670, which is 14 the loan approval. 15 Is that the sheet that you're referring 16 to? 17 A. Whatever sheet is attached to 18 Exhibit A1649. 19 Q. I'm looking at Exhibit 7670, which is 20 the loan committee approval that you signed 21 approving this loan March 17th, 1986. 22 A. 7670? 14659 1 Q. Do you want me to help you? 2 A. Yes, please. Okay. Thanks. 3 Q. If you would turn to Page 3 down at the 4 bottom, do you see it says "appraisal"? 5 A. I do see that. 6 Q. It says, Edward B. Schulz is presently 7 completing a detailed R-41B appraisal which will 8 indicate a present discounted economic value 9 between 86 million and $90 million." 10 Now, that indicates, does it not, that 11 the appraisal, the written appraisal, was not in 12 United's possession at the time the loan was 13 approved, correct? 14 A. At this time, that certainly indicates 15 that. I don't remember that, but that's what this 16 page says. 17 Q. And you said you don't know what the 18 policy of United was with respect to receiving a 19 written appraisal prior to approving loans? 20 A. No, sir. I really don't. I don't know 21 whether I knew then. I probably did. I just 22 don't know. 14660 1 Q. Do you think it's important that United 2 have a written appraisal in its possession before 3 approving a loan, and certainly one of 4 80-million-dollar size? 5 A. Well, certainly, I think, you know, the 6 loan committee would rather have the appraisal on 7 the table than not. But I'm not sure that -- you 8 know, business conditions and transactions were 9 negotiated, and I'm not sure that was always 10 practical. I just -- and here, I'm somewhat 11 speculating. I don't really remember that. 12 Q. Do you recall anyone saying, "We don't 13 have this appraisal yet. Let's wait and see what 14 it says before approving the loan"? 15 A. I don't remember that, no. 16 Q. Do you recall any discussion at the 17 senior loan committee of a property called Alamo 18 Downs, which was another project in the area of 19 Park 410? 20 A. No, sir. 21 Q. If you look at -- skip that. 22 Do you recall any discussion at the 14661 1 senior loan committee of a project called Big 2 Country on about 4,000 acres near Park 410 that 3 was under development? 4 A. I don't remember that. 5 Q. I asked you earlier if you recalled who 6 made the presentation on Park 410. You said 7 Mr. Graham. I asked you if Mr. Gross also 8 participated in the presentation, and I wasn't 9 quite clear of your answer. I believe you said 10 that Mr. Gross participated in the extent of his 11 heading the meeting? 12 A. Yes. Typically, Mr. Gross would 13 participate. And in what my memory is on the 14 Park 410 project in particular is that Mr. Graham 15 took the lead in presenting the project but that 16 Mr. Gross had been involved. And I believe -- I 17 have a vague memory that Mr. Gross took a field 18 trip to the property. And so, I -- you know, I 19 can't recall specifics, but I'd be shocked if 20 Mr. Gross didn't have some comments. 21 Q. You say you recall that Mr. Gross was 22 involved. 14662 1 Was he involved at the senior loan 2 committee meeting, or was he involved just in the 3 Park 410 deal generally? 4 A. I believe -- my observation was -- is 5 that Mr. Gross was involved with Mr. Graham and 6 the real estate people in doing some of the due 7 diligence as it relates to the Park 410. 8 Q. And what about at the senior loan 9 committee meeting? 10 A. Would you please repeat that question? 11 I'm sorry. 12 Q. Mr. Gross' involvement at the senior 13 loan committee meeting discussing Park 410. 14 Do you recall him doing or saying 15 anything at the senior loan committee meeting 16 regarding Park 410 approval? 17 A. I don't have a -- I can't really 18 remember exactly what he said or didn't say. 19 Q. Do you recall whether he said anything 20 at the senior loan committee regarding Park 410? 21 A. I can't -- no. If we're talking about 22 at just strictly the senior loan committee, quite 14663 1 frankly, I can't recall if Mr. Gross said anything 2 or, for that matter, if -- I'm just making -- I'm 3 trying to make some reasonable assumptions on a 4 vague memory. 5 I can't recall that Mr. Graham said 6 anything specifically. But just knowing how it 7 worked, I'd fall out of my chair if Mr. Graham or 8 Mr. Gross didn't say something, I mean, from 9 amazement. 10 Q. Do you recall ever speaking at a senior 11 loan committee meeting? 12 A. I made it -- well, let me answer it 13 this way. I made it a practice to speak at 14 meetings I went to. As to a specific meeting, you 15 know, when we go this far back, I can't really say 16 that I did. 17 Q. Well, this was an 80-million-dollar -- 18 it was the largest loan that the institution ever 19 made. 20 Do you recall anything that occurred at 21 the meeting approving it? 22 A. Well, my memory is hazy; and I perhaps 14664 1 get confused between a specific meeting and other 2 meetings. But I do remember Mr. Graham making 3 presentations on the Park 410 project, and I do 4 remember it being discussed and I do remember 5 Mr. Gross speaking and others speaking. But when 6 you limit me to a March 17th, 1986 meeting -- 7 Q. That's the meeting where the Park 410 8 loan was approved. 9 A. The loan was finally approved, and I 10 think we -- I think they -- it was discussed at 11 several prior meetings. If you limit me to that 12 one meeting, it's -- I just simply can't say who 13 talked and certainly who said what. I -- 14 Q. What about any of the prior meetings 15 that you were referring to? 16 A. In general, they would be characterized 17 like I said, that typically Mr. Graham would 18 talk -- 19 Q. I'm sorry. I'm speaking specifically 20 about Park 410. You just said that you don't 21 recall specifically a March 17th, 1986 meeting 22 discussing Park 410 but that there were other 14665 1 meetings discussing Park 410. 2 A. That's correct. 3 Q. And do you recall anyone saying 4 anything about Park 410 at any of those meetings? 5 A. I remember Mr. Graham making 6 presentations concerning Park 410. I remember 7 other members of the committee talking and 8 discussing it. I have a vague memory that I 9 believe a group, including Graham and Childress, I 10 think Mr. Gross but I'm not sure, went to view the 11 property in San Antonio and perhaps talked to 12 other people. 13 But that's -- you know, it's been a 14 long time and that's kind of what I remember. 15 Q. Do you recall Mr. Gross or Mr. Graham 16 or anyone else discussing Crown Meadows or Crown 17 Meadows West, another project in the area 18 comprised of more than 200 acres? 19 A. That name does not register with me, 20 no, sir. 21 Q. How about Northwest Crossroads, a 22 project that's 341 acres large? 14666 1 A. For whatever reason, that name sounds 2 familiar. In what context, I have -- I really 3 don't know and certainly don't know who discussed 4 it. And let me be clear when I say that. The 5 name you just mentioned rings a bell, but it could 6 be in St. Louis for all I know. 7 Q. As you sit here today, do you recall 8 any discussion, any debate, probing, analysis, 9 anything at all concerning whether an 10 80-million-dollar loan to Park 410 was a wise 11 decision? 12 A. Yes, sir. 13 MR. VILLA: Beyond what he's already 14 said? 15 MR. SCHWARTZ: I don't recall him 16 saying anything about the debate or discussion of 17 it. 18 THE COURT: Well, I think he was going 19 to give us an answer. Proceed. 20 A. Yes, sir. What I remember is that 21 there were numerous meetings, some senior loan 22 committee meetings that the Park 410 loan was 14667 1 typically presented by Mr. Graham with schedules 2 and backup and a site map and that sort of thing. 3 And it was discussed, and I remember people 4 discussing it. And I remember Mr. Gross talking 5 about it. But as to a specific meeting, I just 6 can't go beyond that. 7 Q. (BY MR. SCHWARTZ) Do you recall the 8 substance of any one of those comments regarding 9 Park 410? 10 A. As to a specific element as to whether 11 it was good or bad? Is that what we're talking 12 about, substance? 13 Q. I'll take that. 14 A. No, I really don't. I remember -- the 15 only thing that sticks in my mind there that might 16 have to do with, you know, a specific element was 17 the 10-million-dollar letter of credit. 18 Q. Why does that stick in your mind? 19 A. Because $10 million being put up by the 20 borrowers is -- seemed to me to be a big deal. 21 Q. Why did they put up $10 million? 22 A. I don't really remember. I can only 14668 1 speculate. I'm assuming it was -- I'm assuming it 2 was a negotiated transaction, and I'm sure if -- 3 they would rather not have put up the $10 million. 4 I mean, I have no doubt of that. It was probably 5 negotiated, and I'm assuming that was a demand by 6 United Savings. 7 Q. That 10-million-dollar letter of 8 credit, that was collateral put up by the 9 borrowers, correct? 10 A. It was a 10-million-dollar letter of 11 credit. 12 Q. Is that collateral? 13 A. Beyond saying it's a 10-million-dollar 14 letter of credit, that's about all I can say. As 15 I understand it, if certain conditions aren't met, 16 then what it means to me -- and again here, we're 17 in an area where I'm not a lawyer -- but it means 18 if you don't do what you're supposed to, the other 19 guy gets 10 million bucks. 20 Q. What's collateral, sir? 21 A. Collateral can be property. It can be 22 a house. It can be an automobile. 14669 1 Q. Letter of credit? 2 A. Legally, I don't know. 3 Q. You don't know whether a letter of 4 credit is collateral. 5 Is that your statement? 6 A. Right. I really don't know. I've 7 tried to tell you it seemed to me that the 8 property would be the collateral, and then there's 9 a 10-million-dollar letter of credit. And if the 10 borrowers don't perform, then the lender gets 11 $10 million. Now, that's my vague memory. 12 Q. What's the difference between that and 13 collateral? 14 MR. VILLA: Objection, Your Honor. 15 We're really getting into semantics. The witness 16 has told us what he knows. Maybe Mr. Schwartz can 17 tell us what "collateral" means in his question, 18 and the witness is not a lawyer. 19 THE COURT: All right. I'll sustain 20 it. 21 Q. (BY MR. SCHWARTZ) Exhibit T7127, 22 Tab 710. Do you recall ever seeing that document 14670 1 before? It's the Tremar analysis of -- market 2 analysis for Park 410? 3 A. I don't know. The name Tremar elicits 4 a response in my memory. As to whether I saw this 5 specific analysis, I don't -- I don't know. 6 Q. So, you don't remember if this is one 7 of the documents that you perhaps flipped through 8 when you got the package of materials concerning 9 the Park 410 loan? 10 A. No, sir, I don't. 11 Q. Do you recall what portion of the 12 senior loan committee meetings concerning Park 410 13 was discussed -- was spent discussing the 14 financial credit-worthiness of the borrowers? 15 A. In general or as it relates 16 specifically to Park 410? 17 Q. Park 410. 18 A. No, I really don't recall that. Let me 19 be more clear. I'm -- my memory is obviously hazy 20 going this far back, but I remember that being 21 more of a discussion, for example, in the Norwood 22 situation we were talking about yesterday where 14671 1 there were personal guaranties and the people's 2 balance sheets and that sort of thing. 3 Q. Prior to the 1986 approval of the 4 80-million-dollar loan to Park 410, United became 5 a silent partner with Mr. Rosenberg, correct? 6 MR. VILLA: Objection. I don't 7 understand the word "silent partner." 8 MR. SCHWARTZ: I'll strike that. 9 Q. (BY MR. SCHWARTZ) Became a partner with 10 Mr. Rosenberg on the Park 410 project; is that 11 correct? 12 A. I don't remember that from this time 13 period. I've reviewed -- you know, my first 14 memory of, quote, "Park 410," is the Park 410 15 loan. Now, I've reviewed documents recently that 16 clearly United was a partner with Mr. Rosenberg 17 related to the Park 410 project. 18 Q. Do you recall Mr. Graham being involved 19 with the property for about a year or so prior to 20 the Park 410 loan being made? 21 A. Again, I don't remember that 22 independently, but I've reviewed documents 14672 1 recently that indicates that's certainly the case. 2 Q. Exhibit A1643, Tab 159. This is the 3 March 18, 1985 approval by the real estate 4 investment committee concerning Park 410. 5 Do you recall this document, ever 6 seeing this document before? 7 A. I've seen it recently. I don't 8 remember it from the time period. 9 Q. I'm sorry. I don't recall if you 10 answered this earlier. 11 Did you know at the time that the 12 Park 410 loan was approved that Mr. Hurwitz was a 13 friend of Mr. Rosenberg? 14 A. Yes. 15 Q. Now, you didn't sign this approval, 16 correct? 17 A. My name isn't back there, no. 18 Q. Would you have received a copy of it 19 soon after the meeting was held or something like 20 that? Was there any routing to you of the 21 documents, loan approvals or real estate 22 investment approvals? 14673 1 A. Specifically, I don't remember; but as 2 a general practice, I and Mr. Wolfe would, for 3 accounting purposes, certainly. 4 Q. Get what? You and Mr. Wolfe would get 5 what? 6 A. Would get either this specific document 7 or something similar to it outlining the elements 8 of the deal. 9 Q. Do you recall at any point being 10 notified or told that the real estate investment 11 committee had approved this particular 12 transaction? 13 A. I don't remember that specifically, but 14 we would -- no, I don't remember that. 15 Q. And I take it from your prior answers 16 that you don't recall whether your failure to sign 17 this particular approval indicates that you 18 disapproved of the loan or were just not at that 19 meeting? 20 A. Well, the answer to your question is, 21 no, I really don't know. It's peculiar that only 22 Mr. Graham signed this document. So, I don't know 14674 1 what that means. 2 MR. SCHWARTZ: Mr. Dueffert, I thought 3 that there had been a substitution made of a 4 signed copy. 5 MR. NICKENS: Would you look at the 6 next page and see if there is another signature 7 page? 8 THE COURT: We've had a couple of 9 exhibits identified, and one copy is unsigned or 10 only signed by Graham. There's another copy 11 signed by other people. 12 THE WITNESS: Okay. Yes. I just 13 didn't -- I had the one that was signed only by 14 Mr. Graham. 15 MR. SCHWARTZ: Your Honor, 16 Mr. Eisenhart has provided me a copy of an exhibit 17 which doesn't have an exhibit number on it. I'm 18 just going to hand write it on here and substitute 19 it for the witness. 20 THE COURT: It's A1643. All right. 21 MR. EISENHART: It's under the tab, 22 Your Honor, in my binder were both documents. 14675 1 THE COURT: We have both documents, 2 too. 3 MR. SCHWARTZ: I'm just going to hand 4 it to the witness so it's in the witness' copy, as 5 well. 6 Q. (BY MR. SCHWARTZ) Looking at these two 7 documents -- actually, I have a question about 8 about comparing the two. 9 When the package was sent to you before 10 a -- before the committee meeting, would the 11 person -- would Mr. Graham, who you indicated -- 12 or someone on his staff who prepared that 13 document -- would Mr. Graham sign it before it 14 went to the full committee? 15 A. Well, as to whether I would have 16 received this specific set of -- package of 17 documents as you're describing, I don't -- I don't 18 know, don't remember. Certainly, it was our 19 general practice on larger transactions to -- or 20 it was oftentimes the practice to do that. 21 Q. To do what? 22 A. To send a package of materials to loan 14676 1 committee members prior to the meeting. 2 Q. That's not my question. Let me see if 3 I can state it more clearly. 4 Was it the practice of Mr. Graham to 5 send the members of the committee a copy of the 6 approval form that was already signed by him 7 before the senior loan committee meetings were 8 held? 9 A. I don't remember that, no. 10 Q. Do you have any explanation at all as 11 to why these two versions of the same document -- 12 one contains Mr. Graham's signature only and the 13 other contains the signatures of the rest of the 14 members other than yourself? 15 A. No, sir, I don't. 16 MR. SCHWARTZ: Your Honor, I'm going to 17 request that both versions of the document be 18 maintained in the Court's file. 19 THE COURT: Well, I think if you're 20 going to keep them both, they should be separately 21 identified so that we don't have kind of a 22 floating identity. 14677 1 MR. SCHWARTZ: Can we identify it as 2 A1643A, the one that was signed by Mr. Graham 3 alone? 4 THE COURT: Yes. 5 MR. EISENHART: Your Honor, it may be 6 easier to mark the one that's signed by multiple 7 people as 1643A. The one that's signed by 8 Mr. Graham alone is already marked as 1643. 9 THE COURT: Well, we'll have them both 10 marked, then. The one that -- they may have 11 different imaging numbers. The one that's in is 12 A1643 with the signatures runs from OW215318 to 13 384 -- 381, I'm sorry, to 15381 to 15384. 14 MR. SCHWARTZ: Is that what shall 15 remain? A1643? 16 THE COURT: Yes. 17 MR. SCHWARTZ: And then the one from 18 Mr. Eisenhart that's labeled 14161973 through 19 OW19 -- excuse me -- OW16976 as A1643A? 20 THE COURT: Very well. 21 Q. (BY MR. SCHWARTZ) On the first page 22 under "ownership" of the exhibit -- do you see it? 14678 1 It says under "Ownership," "USAT/UFC will enter 2 into a partnership with Stanley Rosenberg in which 3 each partner shall share 50/50 in both the profits 4 and losses; Mr. Rosenberg shall be personally 5 responsible for his share of the losses. United 6 shall be responsible for the cash requirements 7 during the next two years and shall be allocated a 8 major of the potential tax losses." 9 Do you see that? 10 A. I see that. 11 MR. VILLA: Was that "personally 12 liable" or "personally responsible"? 13 MR. SCHWARTZ: I read "Mr. Rosenberg 14 shall be personally liable." 15 MR. VILLA: Thank you. 16 Q. (BY MR. SCHWARTZ) Do you see that? 17 A. Yes, I see that. 18 Q. What does it mean that United shall be 19 responsible for the cash requirements during the 20 next two years? 21 A. Well, if you're asking me what I knew 22 back then, I don't know. I can attempt to read 14679 1 through this document and come up with an answer. 2 Q. Well, I'll help you. Would you turn to 3 the second page? And do you see under the section 4 that says "purchase terms"? 5 A. Yes, sir. 6 Q. The second-to-the-last sentence of that 7 paragraph says that "USAT shall provide the 8 2-million-dollar letter of credit for the 9 Rosenberg/USAT share of this obligation." That 10 means that United pays Rosenberg's expenses for 11 the letter of credit. Right? 12 A. Well, I see that. It's -- I get 13 confused. In the first paragraph under "purchase 14 terms," the purchase price is 39.5 million. And 15 then in the second sentence, it says, "The whole 16 of the price is separated into three non-recourse 17 purchase money notes payable two years after 18 closing. The purchase money note to Alamo is to 19 be secured which by irrevocable letters of credit 20 totaling 4 million. The others require no down 21 payments. USAT shall provide the 2-million-dollar 22 LC for the Rosenberg/USAT share of this 14680 1 obligation." 2 I guess as I sit here today reading 3 this, it's a bit confusing as to what exactly 4 United/UFC is responsible for. 5 Q. You just don't recall? 6 A. No. I certainly don't recall. And 7 everything I was trying to come up with -- by 8 reading the document, a reasonable answer. But I 9 don't -- in terms of my actual knowledge or memory 10 back then, that certainly I don't know. 11 Q. On the third page under "comments" down 12 at the bottom, No. 2, it says, "The present 13 appraisal on an-as basis is $72,550,000." 14 What's an as-is appraisal? 15 A. My understanding -- and again, I'm not 16 in any way, shape, form, or fashion an appraisal 17 expert. But my understanding, "as-is" would mean 18 the property as it sits today. And contrasted 19 with as-developed would be after it's zoned, 20 streets and sewers are put in, that sort of thing. 21 Q. So, as-developed is after the streets 22 and sewers and infrastructure have been put in? 14681 1 Is that your understanding? 2 A. That's my understanding. But, you 3 know, if you look at a development loan, you would 4 have a piece of property that would be appraised 5 like it sits. And then after all of the 6 development work is done, zoning, streets, sewers, 7 whatever other improvements, the property 8 presumably would be worth a lot more. 9 Q. Did you ever see this 72-million-dollar 10 appraisal? 11 A. I don't remember whether I did or did 12 not. 13 Q. So, you don't know whether you read it? 14 A. No, sir, I do not know. 15 Q. Do you recall in your time at USAT ever 16 reading an appraisal? 17 A. I have a vague memory of looking at 18 appraisals. And typically what I would do is look 19 at a very summary -- and when I say "summary," I'd 20 look at the number and see, you know, maybe the 21 first few, you know, summary factors. But in 22 terms of reading the appraisal and getting down 14682 1 into the details, no, sir, I did not do that. 2 Q. Well, let's look at the appraisal that 3 I gave you earlier: Exhibit -- I believe it was 4 7084 at Tab 709. 5 Using that appraisal as an example, 6 what are the pages that you would look at 7 typically? You referred to the page that marked 8 the value of the property. 9 A. Yes, sir. And again, my -- we're going 10 back here quite a few years, and we're in an area 11 that I'm not an expert on at all. 12 But from my fuzzy memory, typically, 13 what I would do, if -- is look at the first page 14 where it says the $80 million. 15 Q. 88 million? 16 A. Or 88 million. Excuse me. I misread 17 that. 18 Q. That's the page -- my copy -- I don't 19 know if it's the same Bates number -- US. Does it 20 have a Bates number? 21 A. US5887. 22 Q. Okay. 14683 1 A. I might look at 5888. 2 Q. That's the table of contents. 3 A. Oh, I'm sorry. That is -- I'm looking 4 at "summary of salient data." 5 Q. That's 5889? 6 A. Okay. I misread that. Then I would 7 typically look at 5891 and 5892. And I'm being a 8 bit hypothetical here. And in terms of the 9 details, that would be -- certainly I would rely 10 on our investment staff to review that. 11 Q. By "investment staff," you mean 12 Mr. Graham's staff? Mr. Graham? 13 A. Mr. Graham and Childress and their 14 people and the people underneath them. 15 Q. And that was your typical practice? Is 16 that -- that you recall today? 17 A. As best I can recall, yes, sir. 18 Q. On the next page under No. 3, it 19 indicates "Mr. Rosenberg is very high on this 20 tract." 21 MR. VILLA: Excuse me. Which page are 22 we on? 14684 1 MR. SCHWARTZ: I'm sorry. The next 2 page of the real estate investment committee 3 approval. 4 A. Of March 18th? 5 Q. (BY MR. SCHWARTZ) Yes, of 1985. It's 6 A1643. Do you see that? 7 A. I do not see that. Where are we at, 8 please? 9 Q. At the very top of Page 4. 10 A. Yes, I see that. 11 Q. It says, "Mr. Rosenberg is very high on 12 this tract." 13 Do you see that? 14 A. I do see that. 15 Q. Was it the practice to base loans on 16 how high the borrower is on a piece of property? 17 A. Well, I think the borrower, I think we 18 could assume, was typically always pretty high on 19 a piece of property. I mean, that's my generic 20 assumption. 21 Q. So, why is it relevant enough that 22 Mr. Rosenberg is high on this tract that it be 14685 1 placed into the real estate investment committee 2 approval? 3 MR. VILLA: Objection, Your Honor. 4 There is no evidence that he drafted this 5 document. As a matter of fact, it's the one 6 document he's showed him that he hasn't signed. 7 It calls for pure speculation. 8 MR. SCHWARTZ: If he knows, Your Honor. 9 THE COURT: All right. If you know. 10 A. Without just -- I don't remember. I 11 certainly can speculate, if that is what is 12 wanted. 13 Q. (BY MR. SCHWARTZ) Is Mr. Rosenberg's 14 excitement about the piece of property in any way 15 relevant to whether the investment should be made? 16 A. Well, I get a bit confused as to -- if 17 I should be talking about what I really remember, 18 the answer is I simply don't know. I can make a 19 logical deduction after reviewing documents and 20 looking at this. 21 Q. Okay. And based on the documents that 22 you've looked at, can you think of any reason why 14686 1 the borrower's excitement about the piece of 2 property would be relevant enough to stick into 3 the approval document? 4 A. Well, the reason that I can think of is 5 that from the documents I've reviewed, Mr. Graham 6 and Childress had worked with Rosenberg for a 7 number of years prior to this related to 8 San Antonio type real estate projects. And his 9 firm had done a lot of work with United on those, 10 I'm assuming, various projects. 11 And so, again, I'm speculating; but I'm 12 assuming it was felt that Mr. Rosenberg's opinion 13 was of value. He certainly would presumably know 14 quite a lot about San Antonio real estate. 15 Q. Exhibit T7106. Strike that. 16 What do you know about Mr. Rosenberg's 17 knowledge of San Antonio real estate, or what did 18 you know at the time? 19 A. Nothing directly. 20 Q. Exhibit T7106, Tab 921. Exhibit T7106 21 is a March 28th, 1985 letter to Mr. Rosenberg from 22 Mr. Graham. 14687 1 Have you ever seen this document 2 before? 3 A. I've seen it recently, yes; but I don't 4 remember it from the time. I'm not sure I would 5 have received it. 6 Q. In the second paragraph -- I'm sorry -- 7 the Paragraph No. 2. It says, "United Savings 8 Association will advance all moneys or arrange all 9 letters of credit required for the acquisition, 10 holding, and development of the property which are 11 to be -- which are required to be provided by 12 Rosenberg under the terms of the attached joint 13 venture agreement." 14 Do you see that? 15 A. I see that. 16 Q. Does that indicate to you that United 17 was paying Mr. Rosenberg's expenses in connection 18 with the Park 410 transaction? 19 A. Other than what it says here, I don't 20 know. 21 Q. Who is Chuck Doolittle? 22 A. Chuck Doolittle was an accountant CPA 14688 1 that reported to Jim Wolfe, the controller. 2 Q. And he reported to you, in turn? 3 A. And Jim Wolfe reported to me, yes, sir. 4 Q. Exhibit T7663. Do you recall ever 5 sending this November 4th, 1985 -- excuse me -- 6 receiving this November 4th, 1985 memorandum from 7 Chuck Doolittle? 8 A. I don't remember it at the time. I've 9 seen this document recently. 10 Q. Is there any question in your mind that 11 you received it? 12 A. I have no reason to believe I wouldn't 13 have. I just simply don't know. 14 MR. SCHWARTZ: Your Honor, I offer 15 Exhibit T7663. 16 MR. VILLA: No objection. 17 THE COURT: Received. 18 Q. (BY MR. SCHWARTZ) Do you have any 19 recollection of discussing this issue of direct 20 investment with Mr. Doolittle? 21 A. Not this specific discussion, but I 22 discussed direct investments with Mr. Doolittle 14689 1 and others. It was a -- it was a fairly common 2 topic of discussion. 3 Q. Do you recall discussing this 4 particular memo or this issue of direct 5 investments with anyone? 6 A. No, sir. I don't remember the memo. 7 Q. It says at the top of the first page, 8 "Mike, as we discussed on Tuesday, October 29, I 9 believe that the direct investment calculation at 10 September 30 as previously reported included some 11 items that should not have been included. In our 12 calculation, we included total liabilities of 13 certain real estate projects as our direct 14 investment. In actuality, our liability is 15 limited in each of these projects." 16 Do you see that? 17 A. I see that. 18 Q. Then if you turn to the second page, 19 there is a reference to Park 410 West. 20 Do you see that? 21 A. I see that. 22 Q. And then there is a reference to Note 2 14690 1 down at the bottom which says, "Under the Park 410 2 joint venture agreement, we are severally liable 3 for only our 25 percent ownership in the project 4 and cannot be held liable for the entire debt of 5 the venture. The revised figure above represents 6 25 percent of the original total outstanding 7 debt." 8 Does that refresh your recollection as 9 to whether you discussed this issue with anyone? 10 A. No, sir, it really does not. 11 Q. Did you ever review the joint venture 12 agreement? 13 A. I don't know whether I personally 14 reviewed the joint venture agreement. I can say 15 that, as I've said, I recently saw this document. 16 And I believe there's another document where I 17 asked Mr. Wolfe to check into this particular 18 document because it -- the changes are quite 19 dramatic. 20 Q. I'm sorry. You said -- I thought you 21 said that you don't recall this particular 22 document or discussing it with anyone. 14691 1 A. Okay. What I was attempting to say or 2 perhaps didn't say clearly is I don't remember 3 this from the time, 1985. But I clearly have seen 4 this document in the last few days. 5 Q. And you just said that you recall 6 sending a memo to Mr. Wolfe asking him to look 7 into that issue. 8 A. Okay. Let me be more clear. I don't 9 remember that transmission either, but I've seen 10 that document. And basically, it says "ask 11 Mr. Wolfe to please investigate this memo or 12 investigate the numbers in this memo." 13 Q. But you don't recall that from the time 14 period. 15 Is that what your testimony is? 16 A. That's correct. Yeah. I don't recall 17 talking about it or this memo or the other memo 18 from the time period. 19 Q. Exhibit B3822, Tab 637. That's a copy 20 of the same letter to Mr. Rosenberg with the 21 attachment of the joint venture agreement. If 22 you'd take a look at the joint venture agreement, 14692 1 does that refresh your recollection as to whether 2 you ever took a look at the joint venture 3 agreement back in the 1985 time period or 1986 4 time period? 5 A. No, sir. I just don't remember. 6 Q. Do you recall ever discussing the terms 7 of the joint venture agreement with an attorney? 8 A. I don't remember that. 9 Q. Do you recall any discussion of 10 Mr. Doolittle's conclusion that United's liability 11 was several and not joint and several? 12 A. No, sir, I don't, like I -- I just 13 don't remember this memo; so, I don't remember the 14 discussions we had then. 15 Q. Do you know whether the corrections 16 that Mr. Doolittle addresses in his memorandum, 17 Exhibit T7663, were ever made on the books of 18 United? 19 A. From my memory back at this time in 20 nineteen -- 21 Q. As you sit here today, do you know 22 that? 14693 1 A. No, sir, I do not know that. 2 Q. And you don't recall from back then 3 either? 4 A. No, sir. 5 Q. Do you know -- strike that. 6 7578, which is at Tab 1142. 7 THE COURT: Is that T7578? 8 MR. SCHWARTZ: Well, there's two 9 versions in the file, Your Honor. There's T7578, 10 and there is A1301A or 13014. 11 12 (Discussion held off the record.) 13 14 MR. SCHWARTZ: It's A13014, Your Honor, 15 Tab 1112. 16 Q. (BY MR. SCHWARTZ) This exhibit is a 17 January 15th, 1986 memorandum from Jenard Gross. 18 Copies were sent to you, Mr. Doolittle, Ron 19 Huebsch, Charles Hurwitz, Barry Munitz, Bruce 20 Williams, Gerald Williams, and Jim Wolfe. 21 Do you recall receiving this memo? 22 A. No, sir, I do not. 14694 1 Q. In the first sentence of the second 2 paragraph, it states, "As of January 10, 1986, we 3 were down to less than $3 million of latitude in 4 the federal direct investment limitation as far as 5 USAT was concerned." 6 Do you see that? 7 A. I see that. 8 Q. Do you have any recollection of 9 discussion concerning this issue? 10 A. Not specifically. But again, I -- 11 certainly the direct investment limitation was a 12 common topic of discussion. But in terms of the 13 specific conversation or -- no, sir, I don't 14 remember. 15 Q. Do you know what the impact of the 16 direct investment limitation -- do you know what 17 the impact is of the direct investment limitation 18 on United's net worth calculations? 19 A. No, I really -- I don't remember. I 20 certainly made -- I feel fairly confident I knew 21 then, but I don't remember as I sit here today. 22 Q. Do you know what happens to the 14695 1 institution's regulatory capital requirement if 2 the institution exceeds its direct investment 3 limitation? 4 A. If it -- specifically, no. I know 5 that -- and I'm not quite sure if it had to do 6 with net worth. It certainly may have. But I 7 knew it wasn't good if we -- if we went over the 8 direct investment limitation. 9 Q. When you say "it wasn't good," what do 10 you mean? 11 A. That -- well, that you get yelled at. 12 I mean, I -- that's -- I mean, these limitations 13 were fairly serious. And whenever you exceeded 14 one of them, it wasn't just an, "oh, that's okay" 15 type deal. 16 Q. And you would want to avoid being 17 yelled at. Is that what you would recall? 18 A. I attempted to avoid that, yes, sir. 19 Q. Now, during the time that this memo was 20 being distributed and discussed, United was 21 negotiating the loan on Park 410, correct? If you 22 looked earlier, we saw the March 1985 approval of 14696 1 the joint venture with Mr. Rosenberg and -- the 2 partnership with Mr. Rosenberg, and we looked 3 earlier at the 1986 approval of the loan. 4 Do you have any recollection that 5 during this period of time, the terms of the loan 6 were being discussed? 7 A. No. The March 17th, '86 -- I guess the 8 approval of the loan -- 9 Q. Which exhibit are you looking at? 10 A. Excuse me. I'm looking at A1649. 11 Q. Okay, sir. 12 A. I'm aware that there were discussions 13 certainly prior to March 17th, 1986 about the 14 Park 410 loan. As to how far back that went, I 15 can't really say. 16 Q. Exhibit T7065 at Tab 651. This is a 17 December 30, 1985 memorandum from David Graham to 18 Charles Hurwitz, Jenard Gross, and Gerald 19 Williams. 20 Have you ever seen this document 21 before? 22 A. I think I reviewed it last night. 14697 1 Prior to that, no, sir. 2 Q. You don't recall whether you received 3 it at or around December of 1985? 4 A. No, I don't remember receiving it. 5 Q. Was Mr. Hurwitz on the senior loan 6 committee? 7 A. I don't think he was. 8 Q. Do you have any -- do you have any 9 explanation for why a memorandum like this would 10 be sent to Mr. Hurwitz rather than to the members 11 of the senior loan committee discussing the 12 negotiations over the loan of the -- on Park 410? 13 A. No, sir, I really don't know. I mean, 14 to be more clear, I mean -- to be blunt, Mr. Gross 15 and Gerry Williams and Mr. Hurwitz didn't -- I 16 mean, they kept me informed about the things I 17 needed to be kept informed of with, but they 18 didn't tell me what they were doing at all times. 19 So, I -- you know, Mr. Gross certainly didn't 20 check his calendar with me. So, I don't -- 21 Q. I'm sorry. What question were you 22 answering, sir? 14698 1 A. As to whether I had knowledge of, you 2 know, why Mr. Hurwitz was being -- was at a member 3 of this meeting. 4 Q. Why Mr. Hurwitz was at a member of this 5 meeting? 6 A. I think I misspoke. I think you asked 7 me do I have any knowledge as to why Mr. Hurwitz 8 would be at this meeting. 9 Q. No. My question was, sir: Do you have 10 any reason why Mr. Graham would send this 11 memorandum to Mr. Hurwitz, Mr. Gross, or 12 Mr. Williams -- and Mr. Williams rather than to 13 the members of the senior loan committee, who were 14 the people responsible for the terms of the loan 15 to Park 410? 16 A. I don't know. 17 Q. Do you know whether Mr. Hurwitz brought 18 the Park 410 loan or transaction to United? 19 A. From my memory back then, I guess I 20 can't factually say. My earliest memory is that 21 it was a David Graham project, and Graham and 22 Childress had been kind of spearheading that 14699 1 effort. As to how they got ahold of it, I don't 2 know. 3 Q. If you look at Item No. 1 on this 4 memorandum, T7065, it says, "They would like some 5 relief on the fees; in essence, a reduction on the 6 3 percent origination fee and the 1 percent 7 renewal fee." 8 Do you see that? 9 A. Yes, sir, I see that. 10 Q. If you look again at Exhibit T7670, 11 which is the March 17th, 1986 approval by the 12 senior loan committee -- that's at Tab 654 -- do 13 you have that? T7670. 14 A. (Witness reviews the document.) Yes, 15 sir. Thank you. 16 Q. Do you have that now? 17 A. I do. 18 Q. On Page 2, it indicates that the loan 19 extension fees were one half percent, which is 20 less than the 1 percent extension fees in 21 Mr. Graham's memo of December 30th, 1985, that was 22 sent to Mr. Hurwitz, Mr. Gross, and Mr. Williams. 14700 1 Right? 2 A. I see that. 3 Q. Do you have any recollection of 4 discussion within the senior loan committee of 5 reducing the fees on the Park 410 extensions? 6 A. No, sir. I don't remember that. 7 Q. And you don't recall Mr. Hurwitz 8 participating in any aspect of that? 9 A. Of the fee -- no, sir, I don't have -- 10 Q. Or anything of the structure of the 11 loan. 12 A. Well, I -- no, not specifically. 13 I'm -- 14 Q. Generally. 15 A. Well, generally, Mr. Hurwitz attended 16 some of the loan committee meetings. I don't 17 recall specifically any discussion, but I would -- 18 maybe I shouldn't assume, but I assume he said 19 something. But I really don't remember anything. 20 Q. If you turn to the third page of the 21 approval, 7670, at the bottom of the page under 22 "appraisal," do you see that? 14701 1 A. Yes, sir, I see that. 2 Q. It says "Borrowers project sales 3 through 1990 and cash payoffs through 1992. The 4 projected sales total $123,448,000. With our 5 shares of profits projected to be $9.7 million 6 plus/minus." 7 Do you see that? 8 A. Yes, sir, I see that. 9 Q. Was it the practice of the senior loan 10 committee to rely on borrowers' estimates of 11 profit? 12 A. I really don't remember specifically 13 whether we did or didn't rely on them. It would 14 appear to me reasonable that that would be one 15 factor you would look at, but certainly you would 16 do your own analysis. 17 Q. Well, what did you do to check the 18 borrowers' representations? 19 A. I can't remember whether I did -- 20 whether I did anything. So, I don't know. 21 Q. Did you just accept them as true? 22 A. I don't remember this kind of detail; 14702 1 so, I don't remember whether I accepted it or 2 didn't accept it. 3 Q. Looking down further, there is a 4 calculation of loan to value ratio. 5 Do you see that? 6 A. Yes, sir, I do. 7 Q. Whose idea was it to add the, quote, 8 "value of collateral," close quote, to the 9 estimated appraisal amount to come up with a loan 10 to value ratio? 11 A. I don't know. 12 Q. Is that $10 million that's referenced 13 there the 10-million-dollar letter of credit that 14 you were referring to earlier that you couldn't 15 identify as whether or not it was collateral? 16 A. The $10 million does appear to be the 17 letter of credit. 18 Q. And it's listed here as collateral, 19 correct? 20 A. That's what this schedule says, yes. 21 Q. Does this refresh your recollection 22 that the $10 million was collateral? 14703 1 A. No, sir. It really does not. 2 Q. Do you recall any discussion of 3 requiring the borrowers to put the $10 million in 4 as equity into the project? 5 A. No. I remember -- I remember -- 6 basically, what I remember is the final 7 conclusion, that there were $10 million in letters 8 of credit. And I have a hazy memory of, you 9 know -- they would rather have put nothing in, but 10 it -- I believe it was somewhat of a negotiated 11 type deal. 12 Q. But you don't have any reason to 13 dispute what's on this approval that you signed 14 indicating that that was collateral, correct? 15 A. I signed the document, and I see that 16 it -- I see the numbers you've indicated. 17 Q. Does it indicate that the borrowers put 18 up any equity in the Park 410 project? 19 A. Well -- 20 Q. Other than perhaps sweat equity? 21 A. I guess that I'm a bit confused. But 22 it would seem to me that a 10-million-dollar 14704 1 letter of credit -- maybe it's not legal equity, 2 but it certainly seems to be equity to me. 3 Q. Did you discuss that with any of the 4 attorneys? 5 A. I don't remember whether I did or 6 didn't. 7 Q. Can you show me anywhere on that 8 document where it indicates that the $10 million 9 was an equity investment by the borrowers? 10 MR. VILLA: Your Honor, this is a 11 little argumentative with the witness. I mean, 12 he's told Mr. Schwartz what he thinks the 13 $10 million is and what role he played in it. 14 He's just arguing with the witness now, Your 15 Honor. 16 THE COURT: Sustained. 17 Q. (BY MR. SCHWARTZ) Do you recall there 18 ever being a question about whether United could 19 loan above appraised value? 20 A. No, sir, I don't. 21 Q. Exhibit T7588, please. 22 MR. SCHWARTZ: We're having copies made 14705 1 of that, Your Honor. 2 Q. (BY MR. SCHWARTZ) Exhibit T7609, 3 Tab 634. Do you recall ever seeing this appraisal 4 before? It's dated August 13, 1985, by 5 Love & Dugger on the Park 410 property. 6 A. I don't remember seeing this. 7 Q. I see you're looking through it. Is 8 that refreshing your recollection at all? 9 A. I'm trying to refresh my recollection, 10 but I just -- this doesn't look familiar to me. 11 Q. If United and Mr. Rosenberg were 12 partners on the joint venture in 1985 and this 13 appraisal was conducted in 1985, would you expect 14 United to receive a copy of it? 15 A. I don't know for a fact, but that would 16 seem reasonable. 17 Q. Exhibit 7586, T7586. Excuse me. It's 18 A1112, Tab 1307. 19 20 (Discussion held off the record.) 21 22 MR. VILLA: T7586? 14706 1 MR. SCHWARTZ: A1112, I think. 2 Tab 1307. 3 Q. (BY MR. SCHWARTZ) This is a May 18 -- 4 minutes of the May 18th, 1986 board of directors 5 meeting where Charles Hurwitz and you and Burton 6 Borman, Arthur Berner, and James Pledger were 7 present. 8 Do you see that? 9 A. I see Berner, Pledger, and myself. I 10 don't see Mr. Hurwitz' name. But I think he was 11 chairman of UFG; so, I'm assuming he was there. 12 Q. This is a meeting of the board of 13 directors of USAT, but -- 14 MR. NICKENS: Your Honor, the 15 minutes -- 16 A. It's a meeting of United Financial 17 Group, I believe. 18 Q. (BY MR. SCHWARTZ) Okay. I am looking 19 at -- 20 21 (Discussion held off the record.) 22 14707 1 MR. SCHWARTZ: Can we go off the record 2 for a moment? 3 THE COURT: We'll be off the record. 4 MR. SCHWARTZ: Thank you. 5 6 (Discussion held off the record.) 7 8 MR. SCHWARTZ: T7587. 9 Q. (BY MR. SCHWARTZ) Does that refresh 10 your recollection that Mr. Hurwitz and yourself 11 and those other individuals were at the meeting? 12 A. I don't remember the meeting, but 13 that's -- the minutes certainly indicate that 14 Mr. Hurwitz and myself, among others, were there. 15 Q. The document that I got confused with 16 refers to a joint meeting -- that's A1112 -- 17 refers to a joint meeting of the board of 18 directors of United Financial and United Savings 19 Association of Texas on May 8th, 1986. And that's 20 just USAT at 7587. 21 Was the meeting held at the same time? 22 A. Oftentimes, there were joint meetings; 14708 1 and, you know, I'm a bit hazy as to how it was 2 done. But I think since there were many of the 3 same players and a lot of the directors were from 4 out of town, there would be a USAT meeting and 5 then it would stop and then they would take up UFG 6 business or vice versa. I may have it switched. 7 Q. And you said it was your recollection 8 that Mr. Hurwitz was chairman of UFG? 9 A. That's my recollection, yes, sir. 10 Q. Can you think of any reason why 11 Mr. Hurwitz would not be there for the UFG portion 12 of the meeting and be there for the USAT portion 13 of the meeting? 14 A. I would think he would definitely be 15 there at the UFG portion, and this indicates he 16 was there for the USAT portion. 17 Q. And if you turn to Page 5 of 7587, I 18 believe it is, there is discussion there 19 concerning Park 410, correct? 20 A. Yes, there is. 21 Q. Do you recall discussing anything about 22 Park 410 at this meeting? 14709 1 A. No, sir. I don't remember this 2 specific meeting. 3 Q. Do you recall any discussion at this 4 meeting of the board of directors concerning 5 Park 410? 6 A. No, sir, not as to this specific 7 meeting, no. 8 Q. Just to be clear, Dr. Munitz who made 9 the motion, and Mr. Duckett who seconded it, they 10 were not members of the USAT senior loan 11 committee, correct? 12 A. Mr. Duckett definitely was not. And I 13 don't think Dr. Munitz was, but I'm not positive. 14 Q. Do you recall Dr. Munitz ever attending 15 meetings of the senior loan committee? 16 A. I don't remember that. I mean, 17 Dr. Munitz attended meetings from time to time. 18 And as we talked about yesterday, I attended a lot 19 of meetings and it's been a lot of years ago. So, 20 I certainly won't say he never attended one. He 21 certainly may have. 22 Q. Do you recall Mr. Hurwitz making any 14710 1 comments on Park 410 at this meeting of the board 2 of directors? 3 A. No, sir. I don't remember the meeting; 4 so, I can't remember who said what. 5 Q. So, you don't even recall if a 6 presentation at all was made? 7 A. Specifically, no. I'm -- from reading 8 the minutes, I would certainly assume there was a 9 presentation but -- 10 Q. Well, do you recall anything about 11 Mr. Winters making an objection to the loan at 12 that meeting? 13 A. I've reviewed documents recently 14 that -- I don't have an independent memory of 15 that, but I -- yes, that he objected to the -- I 16 believe on the basis of the size of the loan. 17 Q. But you don't recall any comment at all 18 during the meeting that you were at? 19 A. No, sir, not as to a specific comment 20 or discussion or presentation. You know, it was 21 the common practice that when something showed up 22 in the minutes that typically there would be a 14711 1 presentation or discussion about it. But beyond 2 that, I can't say. 3 Q. And I take it you don't recall at the 4 meeting of the senior loan committee in March of 5 1986 any discussion whatsoever about the size of 6 the loan exceeding the senior loan committee's 7 authorization? 8 A. Well, now, I do remember that it was 9 discussed that the limit was 70 million. 10 Q. You recall that from the senior loan 11 committee meeting in 1986? 12 A. Well, it's very difficult for me to 13 recall what -- or remember what I recall from an 14 independent memory back in '86 and what I've 15 learned from review of documents. But I can tell 16 you that I remember or I know that there was a 17 discussion that the limit on the delegated loan 18 authority was, like, 70 million for the senior 19 loan committee and that, therefore, a 10 million 20 piece would have to be approved by the full board. 21 Q. When I asked you earlier about whether 22 there was any discussion of the substance of 14712 1 anything to do with the Park 410 loan, you said 2 you just could not recall anything. 3 Is this something new? 4 MR. VILLA: Objection. That's a 5 mischaracterization of his answer. He's talked 6 about San Antonio, Sea World. He's talked about a 7 number of things about this over the past day or 8 so. It's a mischaracterization of his answer, and 9 he's arguing with the witness. 10 MR. SCHWARTZ: Your Honor, it's not a 11 mischaracterization of the witness. What I was 12 asking him -- 13 THE COURT: All right. What's your 14 question? 15 MR. SCHWARTZ: The question is at 16 the -- at the senior loan committee meeting of 17 March 1986, I had asked him earlier whether at 18 that meeting he recalled any discussion of 19 anything of substance, of anything to do with the 20 Park 410 loan, and he said that he could not 21 recall anything. 22 What Mr. Villa is referring to is other 14713 1 conversations that he indicates that he recalled 2 over the course of time. 3 THE COURT: And your question is? 4 MR. SCHWARTZ: My pending question is: 5 He just now indicates he recalls discussion of 6 the -- of the senior loan committees authority at 7 that meeting. 8 MR. NICKENS: Your Honor, that's not 9 what he said. At the earlier -- 10 MR. SCHWARTZ: Okay. Why don't we get 11 an answer to the question, Your Honor, rather than 12 have Mr. Nickens tell the what witness what his 13 testimony was? Why don't we get an answer to the 14 question? 15 MR. NICKENS: I'd like to respond to 16 the speech that was just made which was a 17 mischaracterization of his prior testimony. 18 What -- 19 MR. SCHWARTZ: Your Honor, I ask that 20 the witness be excused while this discussion goes 21 on, and I'd like to get an answer to the question 22 that's unrefreshed by Mr. Nickens. 14714 1 THE COURT: I'm going to deny the 2 objection. You posed the question, and we'll take 3 the answer. 4 MR. SCHWARTZ: Thank you, Your Honor. 5 A. Could you repeat the question? 6 Q. (BY MR. SCHWARTZ) Yes. I asked you 7 earlier if you recalled anything of the substance 8 of the discussion of the meeting of March 1986, 9 and you indicated that you did not recall 10 anything. 11 MR. KEETON: I object to the form of 12 the question with all the preamble, Your Honor. 13 THE COURT: All right. Why don't you 14 just ask the question? 15 Q. (BY MR. SCHWARTZ) I asked you earlier 16 if you recalled anything of the discussion of the 17 March 1986 senior loan committee, and you 18 indicated that you did not. 19 MR. KEETON: I object to the form of 20 the question with the preamble, Your Honor. 21 THE COURT: All right. 22 Well, is that correct? 14715 1 THE WITNESS: What I was attempting to 2 say as it relates to this specific loan committee 3 meeting, I don't remember what was discussed in 4 terms of specifics. I do remember quite a lot 5 about the Park 410 loan, where it was, what was 6 involved, letters of credit, et cetera. And I 7 remember that it was an issue that the loan size 8 was $80 million and that the authority of the loan 9 committee was only 70 million and that, therefore, 10 10 million would have to go to the board of 11 directors. Where that discussion took place, I 12 don't know. It very -- it very well might have 13 occurred at the senior loan committee. I just -- 14 I can't be precise, with all of these committee 15 meetings that I attended and the passage of time, 16 when a particular discussion occurred. 17 Q. (BY MR. SCHWARTZ) What do you recall 18 being -- never mind. Strike that. 19 THE COURT: We'll take a short recess. 20 21 (Whereupon a short break was taken from 22 10:40 a.m. to 11:10 a.m.) 14716 1 2 THE COURT: Be seated, please. We'll 3 be back on the record. 4 Mr. Schwartz, you may continue. 5 Q. (BY MR. SCHWARTZ) Exhibit T7588, do you 6 recall that memorandum? 7 A. No, sir, I do not. It certainly is my 8 handwriting. 9 MR. SCHWARTZ: Your Honor, I move the 10 admission of Exhibit T7588. 11 MR. VILLA: No objection. 12 THE COURT: Received. 13 Q. (BY MR. SCHWARTZ) Would you read it 14 into the record, please? 15 A. "Jenard/David Graham. Per Jim Pledger: 16 Per regulatory -- for regulatory purposes, we can 17 make a loan above appraised value. The file needs 18 to indicate that $XX portion of the loan is 19 supported by appraisal real estate" -- 20 Q. Is that "praised" or "appraisal"? Can 21 you not make it out? 22 A. It appears to me to be "praised real 14717 1 estate." 2 Q. Okay. 3 A. "And $YY is a general commercial loan. 4 $YY cannot exceed 15 percent of USAT's net worth," 5 signed by me, dated 5/29/86. 6 Q. What was the purpose of this memo to 7 Mr. Gross and Mr. Graham? 8 A. I don't remember the memo, so -- I 9 don't know. 10 Q. You don't recall whether it had 11 anything to do with the Park 410 transaction? 12 A. No, I don't. 13 Q. And do you recall Mr. Graham or 14 Mr. Gross asking you to find out this kind of 15 information? 16 A. No. I don't remember specifically. It 17 wouldn't have been unusual, although, typically, 18 they would go directly to Mr. Pledger. But for 19 whatever reason, maybe I just happened to be there 20 and Mr. Gross and/or Mr. Graham asked me to do it. 21 And so, I apparently went and talked to 22 Mr. Pledger, who was our general counsel. 14718 1 Q. Exhibit B2570, Tab 1100. Do you recall 2 receiving this November 29th, 1988 memorandum from 3 Mr. Seidman? 4 A. No, sir, I do not. 5 Q. Who was Mr. Seidman? 6 A. I don't really remember him. I've seen 7 documents recently that he was in the -- either in 8 the real estate area or some attorney working with 9 us. I -- certainly, at this time, I don't 10 remember who he was. 11 Q. Do you recall any discussion of the 12 status of Park 410 in this time frame and 13 discussing options that United had on whether the 14 loan went into default? 15 A. Not really specific discussions, no. I 16 remember that Park 410 certainly was the topic of 17 conversation. As to what was discussed and by 18 whom and when, I don't remember. 19 Q. So, then, you don't -- I take it you 20 don't recall whether you supported any one of 21 those options on Pages 2 and 3? 22 A. No, sir, I do not. 14719 1 Q. We're through with that document. 2 Do you recall yesterday I asked you 3 some questions about the 10Qs. We looked at the 4 10Q for the period ending March 30, nineteen 5 eighty -- March 31, 1985, and there was discussion 6 of the real estate conditions in the Houston and 7 Brownsville area? 8 A. I do remember that. 9 Q. And I asked you if that refreshed your 10 recollection concerning a weakening in the real 11 estate market, principally in the Houston and 12 Brownsville areas. 13 Do you recall that? 14 A. I remember you asking me that, and then 15 there was a subsequent 10Q that the language had 16 been changed to Houston -- 17 Q. That's correct. 18 A. -- and Texas. 19 Q. That's correct. In response to my 20 question on the March 31st, 1985 10Q -- 21 MR. SCHWARTZ: Counsel, I'm referring 22 to Page 14536 of the transcript of the 14720 1 administrative hearing at Line 14 through 19. 2 Q. (BY MR. SCHWARTZ) Do you recall 3 stating, "Well, I can't remember" -- the question: 4 "And in the beginning of 1985, were you concerned 5 about a weakening in the real estate market, 6 principally in the Houston and Brownsville areas?" 7 MR. VILLA: Can you give me the page 8 again? 9 MR. SCHWARTZ: 14536. 10 MR. VILLA: And the line? 11 MR. SCHWARTZ: 14. 12 Q. (BY MR. SCHWARTZ) And your answer, sir, 13 was, "Well, I can't remember exactly during this 14 period what I was concerned about." Do you recall 15 that? 16 MR. VILLA: We don't have the same page 17 and line cites. 18 THE COURT: We'll be off the record for 19 a minute. 20 21 (Discussion held off the record.) 22 14721 1 THE COURT: Back on the record. 2 Q. (BY MR. SCHWARTZ) And your answer was, 3 "Well, I can't remember exactly during this time 4 period what I was concerned about." 5 Do you recall that? 6 A. What was the -- would you repeat that 7 question? 8 Q. The question: "And in the beginning of 9 1985" -- this was in reference to the statement in 10 the 10Q -- "were you concerned about a weakening 11 in the real estate market, principally in the 12 Houston and Brownsville areas?" 13 Answer: "I can't remember exactly 14 during that time period what I was concerned 15 about." 16 A. I can't remember that, yes. 17 Q. Do you recall -- 18 MR. SCHWARTZ: Counsel, I'm looking at 19 the June 5th, 1995 administrative deposition at 20 Page 69. 21 A. Page 69? 22 Q. (BY MR. SCHWARTZ) Yes, sir. And 14722 1 specifically looking at Lines -- starting at 2 Line 9, question: "Do you remember being asked 3 this question in reference to the March 31, 1985 4 10Q?" Would you summarize for me what's intended 5 by this paragraph? And the paragraph referred to 6 is the same one we looked at yesterday. 7 Answer: "Basically, it was to construe 8 to the reader that we lost money, $10 million or 9 so. Well, $7 million this year and $10 million 10 last year. And it reflected the results from 11 problem real estate and not" -- well, I think all 12 that's mentioned here are problem real estate 13 related to adverse economic conditions. 14 Question: "Does this refresh your 15 memory with regard to the real estate market in 16 Texas and particularly with regard to Houston and 17 Brownsville for the quarter ended March 31, 1985?" 18 Answer: "I was aware the conditions 19 were very bad." 20 Does that refresh your recollection? 21 A. If I could, let me look at this for 22 just a minute. 14723 1 Q. Certainly. 2 A. I don't remember saying that, but I'm 3 sure I did. What was your question again? 4 Q. Does it refresh your recollection 5 concerning the conditions in Texas at that time 6 period? 7 MR. VILLA: Excuse me. I think the 8 question he responded to is about the conditions 9 in Houston and Brownsville, what you just read 10 him. 11 MR. SCHWARTZ: Yes, sir. 12 Q. (BY MR. SCHWARTZ) Houston and 13 Brownsville. With that correction, does it 14 refresh your recollection? 15 A. Well, I -- in general, I was aware that 16 in the mid-Eighties, that conditions were bad in 17 Houston and, you know, much of Texas. 18 Q. Do you recall yesterday -- I think your 19 copy would be 14536 -- mine is 14538 -- of the 20 transcript from yesterday at Line 13, the question 21 beginning: "Was it your understanding?" 22 MR. VILLA: Okay. 14724 1 Q. (BY MR. SCHWARTZ) This is in reference 2 to Exhibit T7568, which was the June 1985 10Q. 3 A. Okay. 4 Q. I asked you: "Was it your 5 understanding that by mid-1985, the problems with 6 respect to weakening housing and real estate 7 markets in Houston had spread to the entire 8 state?" 9 And you answered, "No, I don't recall. 10 I see that is written on this document, and it's 11 different from the prior document. But as to my 12 memory of why the language was changed, I don't 13 know." 14 Would you turn in the deposition 15 transcript to Page 70? And there is a discussion 16 starting on Line 13 of the June '85 10Q. 17 Do you see that? 18 A. Page 70, Line 13? 19 Q. Yes, sir. 20 A. Yes, sir. 21 Q. And you were asked with respect to that 22 paragraph concerning Houston and most of Texas, 14725 1 question: "All right. What does this say?" 2 Answer: "It basically" -- what it says 3 is that United lost money because -- what this 4 paragraph is, because of the cost of carry -- 5 A. Excuse me. I'm not with you. On 6 Page 70, Line 13. 7 Q. Line 13 is where it's identifying the 8 June 1985 10Q. And then jumping down to 9 Line 20 -- 10 A. I'm sorry. My line 13 says, Question: 11 "So, this would have been then for April 12 through" -- 13 Q. Turn the page back to Page 69, sir. If 14 you would look at the question beginning on 15 Line 22, there's discussion of the 10Q for the 16 quarter ending June of 1985. 17 A. All right. "Finally, Mr. Crow," is 18 that -- 19 Q. All right. "Finally, Mr. Crow," yes. 20 There is discussion there concerning -- the 21 attorney, I believe, was Mr. Leiman identifying 22 for you the 10Q ending June of 1985, and he asked 14726 1 you to read that same paragraph we read yesterday 2 concerning the economic conditions in Houston. 3 And in this document, it had been changed to most 4 of Texas. 5 Do you recall that? 6 A. No, sir. I'm a bit lost here. It -- 7 my Line 22 says, "All right. Finally, Mr. Crow, I 8 would like to look at Exhibit 20. I would like to 9 ask you -- once again, would this particular 10 Exhibit 20, which is a Form 10Q from the quarter 11 ended June 1985, have been filed with the SEC 12 without your approval?" 13 Answer: "No." 14 Q. Correct. 15 A. Okay. 16 Q. Then he says, "All right. With regard 17 to this particular exhibit, I would like you to 18 take a look at the page Bates stamp 1189 in that 19 particular document he showed you at the 20 deposition. Under 'Results of operations,' do you 21 see that? 22 A. I see that. 14727 1 Q. That's a reference to the same 2 paragraph that we looked at yesterday concerning 3 results of operations in June of '85 10Q where it 4 discussed the economic conditions in Houston and 5 most of Texas? 6 A. Okay. 7 Q. Does that refresh your recollection 8 that -- when we talked about this yesterday? 9 A. I remember us talking about it 10 yesterday, yes. 11 Q. And in the deposition, Mr. Leiman asked 12 you to read that paragraph to yourself; and then 13 he asked you at Line 20 on Page 70, Question: 14 "All right. What does this say?" 15 Answer: "It basically -- what it says 16 is that United lost" -- are you with me now? 17 A. I am. 18 Q. What it says is that United lost money 19 because -- what this paragraph says is because of 20 the cost of carry on problem real estate with 21 non-accrued loans and REO and the related 22 provision for loan losses during that quarter. 14728 1 Question at the top of Page 71, "With 2 regard to the real estate markets and Houston and 3 most of Texas, what does it say?" 4 Answer: "It says they were very 5 unfavorable and weak." 6 Question: "Is that your recollection?" 7 Answer: "Yes, sir." 8 Does that refresh your recollection 9 concerning your knowledge at the time in 1985 and 10 '86? 11 A. Not really. 12 Q. 1985. Excuse me. It goes on to say -- 13 strike that. 14 A. To be clear, my recollection was that 15 conditions in Houston were weak. But to make 16 finite distinctions as to how far that expanded 17 going back to 1985, I can't remember. 18 Q. Well, sir, do you have any questions to 19 doubt -- were you under oath at the time that you 20 gave this deposition? 21 A. Certainly. 22 Q. So, do you have any question to doubt 14729 1 that your answer at the time was truthful? 2 A. I certainly try to be truthful at all 3 times. 4 Q. And this was closer in time after the 5 events than today is certainly; isn't that true? 6 A. This deposition would have been closer 7 in time. 8 Q. Your memory probably would have been 9 better back then; is that right? 10 A. As time goes on, your memory fades, 11 that is correct. 12 Q. Do you recall I asked you earlier about 13 discussions at the senior loan committee meeting 14 at which the Park 410 loan was approved and I 15 asked you who made the presentation and you said 16 you believe Mr. Graham did and you didn't 17 recall -- correct me if I'm wrong -- whether 18 Mr. Gross made any part of the presentation? 19 A. That is my memory. 20 Q. Do you recall Mr. Gross asking any 21 questions concerning the Park 410 transaction? 22 A. Specifically as it relates to that 14730 1 meeting, as I sit here today, no, I can't recall 2 what Mr. Gross said. I would be exceedingly 3 surprised if he said nothing. I'm sure he talked. 4 Q. Okay. Would you turn to Page 49 of 5 that transcript? 6 MR. SCHWARTZ: Counsel, I'm referring 7 to Line -- starting at Line 8. 8 Q. (BY MR. SCHWARTZ) Do you see that: 9 "All right"? 10 A. Yes, sir. 11 Q. Question: "All right. Moving through 12 1985 into 1986 -- well, let me ask you this: Do 13 you remember at any time ever hearing about a real 14 estate project by the name of Park 410 West?" 15 Answer: "Yes, right. It's very 16 viable." 17 Question: "Did you have an opportunity 18 to evaluate that?" 19 Answer: I believe I was on the loan 20 committee at the time or the real estate committee 21 at the time that was approved, yes. And I have 22 vague recollections of discussion or presentations 14731 1 being made by -- I believe it was David Graham or 2 Jenard being -- or Mr. Gross being involved in 3 discussions as to whether it was a -- you know, 4 how close this would be to Sea World and all this 5 other -- you know, it was a viable piece of 6 property in San Antonio." 7 Does that refresh your recollection 8 about this presentation in the March 1986 meeting? 9 A. No, sir, it doesn't. I have reviewed 10 the overall context, but it doesn't seem to me to 11 be at all inconsistent because I do -- it seems 12 like we're focusing in on one meeting. And it's 13 hard for me to remember who said what at a 14 particular meeting. I certainly remember 15 Mr. Graham being the lead person on the 16 presentation. And I'm certainly aware that 17 Mr. Gross discussed the project. Whether it was 18 at that particular meeting we talked about, I 19 don't know. 20 Q. Do you recall me asking you earlier 21 today about the size of loans that were typical 22 that United was making? 14732 1 A. Yes, sir. 2 Q. And you said that you couldn't put a 3 dollar figure on it? 4 A. Yes, sir. 5 Q. I refer you to Page 52 of that 6 transcript starting at Line 5. Question: "Do you 7 remember USAT ever having issued a loan or made a 8 loan that was as large as this?" 9 Answer: "I don't recall that, no." 10 Then moving down to Line 14 -- let me 11 continue reading after that. Question on Line 8: 12 "Ever having made any kind of loan this big?" 13 Answer: "No, I don't recall that." 14 Question: "What about a real estate 15 investment this size?" 16 Answer: "I don't -- I just don't 17 recall. I mean, 80 million. If your question is, 18 'Is it a big deal, big investment or big loan,' 19 absolutely." 20 Question: "It was absolutely a big 21 loan." 22 Answer: "It was absolutely big." 14733 1 Question: "How do you mean that?" 2 Answer: "Well, in terms of your usual 3 mode of operation." 4 Question: "What was your usual mode of 5 operation?" 6 Answer: "Home loans, 10-million-dollar 7 deals, stuff like that." 8 Does that refresh your recollection 9 about the size of typical loans United was making 10 at the time? 11 A. No, sir, not at all. As I understood 12 your earlier question today, it seemed you were 13 wanting me to put some type of an average on the 14 typical deal that we did; and I can't do that. 15 What I was trying to convey to Mr. Leiman is we 16 made home loans, "10-million-dollar deals," quote, 17 stuff like that; and I was trying to convey that 18 certainly $80 million was a big loan. But in 19 terms of an average, I have never attempted to do 20 that. 21 Q. So, is the 10-million-dollar number a 22 number that is more typical of the loans that 14734 1 United was making? 2 MR. VILLA: More typical than 80? 3 MR. SCHWARTZ: More typical of the 4 loans United was making. 5 THE COURT: More typical than what? 6 Q. (BY MR. SCHWARTZ) Is $10 million more 7 typical of the size of the loans United was 8 making? 9 THE COURT: You're using the word 10 "more." What are you comparing? 11 MR. SCHWARTZ: I'm trying to get a fix 12 of his recollection of the typical size of the 13 loans United was making. 14 THE COURT: Do you understand the 15 question? 16 THE WITNESS: Not really. 17 Q. (BY MR. SCHWARTZ) In regard to the 18 statement in the transcript that you just looked 19 at with reference to the $10 million, what is that 20 referring to? 21 A. What I was trying to do is give 22 Mr. Leiman a sense of the type of things we did 14735 1 which ranged from home loans which, obviously, 2 would be 100,000, 150,000, 10-million-dollar 3 deals, and stuff like that. And it was 4 something -- I didn't attempt to arrive at a 5 mathematical average. I don't have any memory of 6 our, quote, "typical deal size." If Mr. Leiman 7 had followed up, I would have been at the same 8 point I am now: Lost. 9 To me, a typical loan size implies 10 that -- that we're looking for some type of 11 average or median or mean, and I don't know. 12 Q. Well, did you rely on other people for 13 your information regarding this -- regarding the 14 Park 410 West loan? 15 A. Certainly. 16 Q. Who? 17 A. Well, I relied on the real estate 18 staff: Mr. Childress, Mr. Graham, their staff 19 people. I relied on Mr. Gross' expertise as a 20 member of the senior loan committee. I relied on 21 other members of the senior loan committee that 22 had direct real estate experience. 14736 1 Q. Do you recall whether Mr. Gross was 2 active in questioning the package on this 3 particular loan? 4 A. The package that we discussed, the 5 approval document and any attachments to it. 6 MR. VILLA: Objection, Your Honor. 7 It's repetitive questioning. He's already 8 answered that question twice; the last time, about 9 seven minutes ago. 10 THE COURT: One more time. 11 A. I don't remember the discussions 12 specifically in that senior loan committee. 13 Q. (BY MR. SCHWARTZ) Would you take a look 14 at -- I'm sorry. 15 A. I remember that Mr. Gross was certainly 16 involved in the Park 410 loan, and Mr. Gross was a 17 very thorough and inquisitive person. But that's 18 about as far as I can go. Factually, I just don't 19 remember what was discussed in that loan 20 committee. 21 Q. But you recall he was active, 22 particularly in Park 410? 14737 1 A. I remember that Mr. Gross certainly was 2 involved in Park 410 -- 3 Q. Active, sir? 4 MR. VILLA: I object. The distinction 5 between "active" and "involved" escapes me. 6 Perhaps he could explain the difference between 7 the terms to the witness. 8 MR. SCHWARTZ: I'm using the witness' 9 own words from his deposition. He described 10 Mr. Gross' participation as active. I'm using his 11 own definition of the word. 12 THE COURT: Maybe we should go to his 13 deposition then. 14 THE WITNESS: Okay. 15 MR. SCHWARTZ: I'm sorry, Your Honor? 16 THE COURT: Maybe we should go to his 17 deposition. 18 Q. (BY MR. SCHWARTZ) Question: "Did you 19 rely on other people for your information 20 regarding this particular loan: Park 410 West?" 21 Answer: "Well, as a member of the 22 senior loan committee, there was a package 14738 1 submitted by Mr. Graham and others by the real 2 estate department on the property and the 3 feasibility project, et cetera. Mr. Gross was 4 active in questioning that package and kind of 5 checking it out, so to speak." 6 Question: "Mr. Gross, is that who you 7 said?" 8 Answer: "Yes, sir, right." 9 Now, I ask you again: Was Mr. Gross 10 active in the discussion on Park 410? 11 A. He was -- I don't -- perhaps I'm 12 incorrect, but I don't see that we're talking 13 specifically in this deposition about a particular 14 senior loan committee meeting. But certainly, 15 Mr. Gross was involved -- I guess he was active. 16 That's a relative term. But Mr. Gross, when he 17 got interested in something -- and Mr. Gross was 18 interested in real estate -- he was fairly 19 intense. 20 MR. SCHWARTZ: Give me just a moment, 21 Your Honor. 22 THE COURT: All right. 14739 1 MR. SCHWARTZ: That's all that I have, 2 Your Honor. Mr. Rinaldi has some questions on the 3 compensation issues. 4 MR. RINALDI: Your Honor, I keep on 5 wracking my brain and trying to figure out a way 6 to manage the documents that seem to come in in 7 large numbers. I'm going to follow on a process 8 that Mr. Guido has somewhat adopted at the outset 9 of this. 10 I have questions that largely deal with 11 the financial condition of UFG and USAT and the 12 compensational claims in the notice of charges and 13 they are all incorporated or the ones that I would 14 be using with respect to this witness and several 15 subsequent witnesses in three binders. What I 16 would like to do is pass up to the Court and to 17 the witness the three binders. Some of these 18 documents -- indeed, most of them -- are ones that 19 have already been admitted through prior 20 witnesses, Mr. Dermody, and principally through 21 Mr. Whatley, who you may recall was the sole 22 member of the compensation committee in 1988. 14740 1 Some of them, you will be familiar with; but a 2 good number of them I will be admitting through 3 this witness. I hope it expedites the process. 4 5 EXAMINATION 6 7 Q. (BY MR. RINALDI) Mr. Crow, I'm Bruce 8 Rinaldi. I believe we met on at least one or two 9 prior occasions in your deposition. As I said, I 10 will be asking you a series of questions 11 principally relating to the subject party of 12 compensation claims. 13 Yesterday when Mr. Schwartz was going 14 through your qualifications and the positions you 15 held, I believe you indicated that there came a 16 point in time when you became a director of United 17 Financial Group. 18 Do you recall that? 19 A. Yes, sir. 20 Q. Approximately what point in time did 21 that occur? 22 A. February of 1988. 14741 1 Q. Do you remember the date in February 2 when it occurred? 3 A. No, sir, I do not. 4 Q. And can you describe for the Court the 5 circumstances under which you became a director? 6 A. Yes, sir. I was -- I had an employment 7 contract that basically stated if asked to be a 8 director, I would serve as a director. And as 9 best I recall, Dr. Munitz came to me and asked me 10 to go on the board of directors of United 11 Financial Group. 12 Q. And you say you had an employment 13 contract. Who was that contract with? 14 A. Well, I'm aware that I had employment 15 contracts with both United Savings Association and 16 United Financial Group certainly in late 1988. 17 Q. Well, we'll get to those contracts. 18 But in February of 1988, when you were asked by 19 Dr. Munitz to serve on the UFG board, you 20 indicated that you thought that it was a condition 21 of an employment contract. 22 My question is: Which employment 14742 1 contract specifically required that you serve on 2 the UFG board, if asked to do so? 3 A. I believe that was the United Financial 4 Group employment agreement. 5 Q. And do you recall approximately when 6 that contract was entered into? 7 A. I think that was, like, late 1987: 8 September, October, somewhere along that time 9 frame. It may be November. 10 Q. Now, what -- did you have a discussion 11 with Mr. Munitz at the time he asked you to serve 12 on the board? 13 A. I remember a discussion, yes. 14 Q. Can you relate for the Court the 15 substance of the discussion to the extent you 16 recall? 17 A. To the extent I recall, it wasn't much 18 of a discussion. It was, "Congratulations. 19 You're on the board of United Financial Group," 20 or, "We're going to move that you be elected to 21 the board of United Financial Group." 22 A lot of the outside directors, I 14743 1 believe, had resigned. And there was a -- my 2 memory is that there was a need for directors. 3 That's kind of the crux of the conversation. 4 Q. Do you recall what precipitated the 5 resignation of the outside directors in February 6 of 1988 or during that time period generally? 7 A. The best I remember, directors had been 8 resigning piecemeal kind of throughout the time 9 period; and I really don't know the reasons. 10 Q. Was one of the directors who resigned 11 in the February 1988 time frame Charles Hurwitz? 12 A. I remember Mr. Hurwitz resigned. I 13 don't remember the exact time period. 14 Q. Did you have any discussion with 15 Mr. Hurwitz regarding his resignation from the UFG 16 board? 17 A. Not that I remember. 18 Q. Did Mr. Hurwitz request that you serve 19 on the UFG board? 20 A. No, I don't remember that. I believe 21 my discussion as it relates to that was with -- 22 with, I believe, Dr. Munitz. And I believe at the 14744 1 same time I was asked to serve, Mr. Art Berner was 2 asked to serve. So, I probably talked to Berner, 3 as well. 4 Q. Was there anyone else who was asked to 5 serve at that point in time? 6 A. Not that I remember. 7 Q. Do you recall the name Paul Schwartz? 8 A. Yes, sir. 9 Q. Do you recall whether Mr. Schwartz was 10 asked to serve at the same time? 11 A. I remember Mr. Schwartz was a director 12 in the '88 or late '88 time frame. I don't 13 remember when Mr. Schwartz went on the board. 14 Q. And who was Mr. Schwartz? 15 A. Mr. Schwartz was, at that time, the 16 financial analysis type guy for MCO, I believe. 17 Q. And do you know how Mr. Schwartz, who 18 was a financial officer of MCO, came to be 19 appointed to the board of UFG? 20 A. I didn't -- he was a financial analysis 21 type guy. I'm not -- I don't think he was CFO -- 22 but I may be mistaken -- of MCO. But no, sir, I 14745 1 don't know how he came to be on board. 2 Q. Did you ever discuss with him how his 3 appointment came about? 4 A. Not that I remember, no. 5 Q. Now, at the time you were appointed to 6 the board, did you own any shares of United 7 Financial Group? 8 MR. VILLA: Objection. I don't think 9 he said he was appointed. I think he said he was 10 going to be elected to the board, not appointed. 11 Q. (BY MR. RINALDI) Well, your counsel has 12 raised an objection? 13 MR. VILLA: You're misstating his 14 answer. He said he was told by Dr. Munitz that he 15 was going to be elected to the board, not that he 16 was going to be appointed to the board. You're 17 starting all these questions that are misleading 18 to the witness by inserting another word in there. 19 I object. It mischaracterizes his testimony. 20 MR. RINALDI: I wouldn't want to 21 mislead the witness. 22 Q. (BY MR. RINALDI) What precisely did 14746 1 Mr. Munitz tell you? 2 A. Precisely, I can't say. I don't 3 remember precisely. I've tried to convey as best 4 I can what was said. And I'm sure my conveyance 5 of that wasn't precise. I don't remember precise 6 conversations that many years ago. 7 Q. Did he tell you that you had been 8 selected to be on the board? 9 A. I don't remember those words. 10 Q. Did he tell you that you had been 11 appointed to be on the board? 12 A. I don't remember. I just don't 13 remember. 14 Q. So, he just told you that you were 15 going to be on the board. Is that a fair 16 characterization? 17 A. I think that's a -- you know, as best I 18 remember, that's correct. 19 Q. Did you feel you had any choice in the 20 matter? 21 A. I didn't push the issue, but I did go 22 back and look at my employment contract. And it 14747 1 was pretty clear in my mind that I didn't have a 2 choice. But in all fairness, I don't believe that 3 I challenged the issue. 4 Q. Well, why don't you take a look at the 5 first binder at Document B1743. This is a -- an 6 employment contract dated September 1987 between 7 United Financial Group and Michael R. Crow. These 8 are in chronological order, and I believe they are 9 tabbed. So, it should be -- 10 11 (Whereupon Mr. Rinaldi handed the 12 witness the document.) 13 14 A. Okay. Thank you. 15 Q. (BY MR. RINALDI) Okay. Now, it appears 16 that, in fact, there are two copies in here. If 17 you would turn to Page 16 of the document -- 18 THE COURT: Would you give that exhibit 19 number again, please? 20 MR. RINALDI: Sure. It's B1743. It's 21 dated September the 9th, 1987; and it's the -- 22 about the eighth document into the binder. 14748 1 Q. (BY MR. RINALDI) While you're taking a 2 look at that, Mr. Crow, can you point out to me 3 where it indicates in this document where you were 4 required to serve on the UFG board if asked? 5 A. Well, I would have to kind of read it. 6 That's my memory. 7 Q. Well, in order to move this process 8 along, I would ask you at the recess to take a 9 closer look at this; and perhaps in the afternoon, 10 we can go back to this issue. 11 Let me ask you, if you look at Page 16 12 of the document: Does that appear to be your 13 signature? 14 A. Yes, sir, it is. 15 Q. Does this then appear to be the 16 contract of employment that you made reference to 17 that you entered into with United Financial Group? 18 A. Yes, sir, it is. 19 Q. Okay. And pursuant to the terms of 20 this contract on Page 2, the contract was to run 21 for a little over a year until December 31st, 22 1988; is that correct? 14749 1 A. That is correct. 2 Q. And under the terms of the contract, 3 you were going to receive a base salary, which is 4 Paragraph 5 on Page 3, of $171,656 per anum. 5 Do you see that? 6 A. I see that. 7 Q. I see below that there is a bonus 8 provision. And it states, "B, Bonus: During the 9 period of executive's employment hereunder, the 10 company shall pay to the executive an annual bonus 11 to be paid in January of each year subsequent to 12 the year such bonus is earned in an amount no less 13 than $62,000 (the minimum bonus equal to the 14 amount executive received as a bonus in January 15 1987 for executive's efforts in 1986.)" 16 Do you see that? 17 A. I see that. 18 Q. In 1986, did you receive a bonus of 19 $62,000? 20 A. I don't remember, but I believe that's 21 what this indicates. 22 Q. Now, prior to entering into this 14750 1 contract with UFG on September the 9th, 1987, did 2 you have any other contractual relationship or any 3 other contractual documents with respect to UFG? 4 MR. VILLA: Objection. You meant the 5 latter question. Right? Written contracts? 6 MR. RINALDI: Yes, a written contract. 7 A. No, I didn't have a written contract 8 prior to this. 9 Q. (BY MR. RINALDI) When you first became 10 a -- an employee of USAT and UFG, did you have a 11 written contract with either USAT or UFG? We're 12 talking about 1984, the beginning of '84. 13 A. No, sir, I didn't have a written 14 contract. I believe that I received some type of 15 written offer letter from Gerald Williams 16 outlining the terms of my employment, but I didn't 17 consider that to be a contract. 18 Q. And that offer letter, did it have a 19 term of employment for a period of years? 20 A. I doubt it seriously. 21 Q. Do you recall what your salary was when 22 you first commenced working at the institution? 14751 1 A. I think it was $85,000; but I could 2 be -- it might have been 95. I just -- it was in 3 that range. 4 Q. Okay. And would your answers be the 5 same -- strike that. 6 Did you have a written contract with 7 UFG at 1984? 8 A. No, sir. 9 Q. Did you have any kind of a letter of 10 commitment from UFG of the nature that you 11 referenced with respect to USAT? 12 A. Well, other than this offer letter 13 which outlined the basic terms of the offer and 14 kind of what my title would be and what my duties 15 would be, no, other than that. 16 Q. Now, you said the offer letter came 17 from Gerald Williams? 18 A. Yes, sir. 19 Q. And Mr. Williams was an officer of 20 United Savings Association of Texas? 21 A. Yes. He was president. 22 Q. Did he extend the letter in his 14752 1 capacity as an officer or as president of USAT, to 2 the best of your recollection? 3 A. I don't know. I just got the letter, 4 and I don't know in what capacity he extended it. 5 Q. Now, after you began working at USAT, 6 who paid your salary? 7 A. United Savings. 8 Q. And was that in 1984 when you began? 9 A. Yes, sir. 10 Q. And in 1984, United Savings paid your 11 salary? 12 A. Yes, sir. 13 Q. And then in 1985, did they continue to 14 employ you and pay your salary? 15 A. Yes, sir. 16 Q. And that continued that way all the way 17 through until you were terminated by United 18 Savings Association of Texas? 19 A. I believe, yes, that I was always 20 directly paid by United Savings. 21 Q. What do you mean by "directly paid by 22 United Savings"? 14753 1 A. Well, I think in the latter period, 2 1988 or so, there were some allocations, 3 charge-backs to United Financial Group for a 4 portion of the compensation. But in terms of the 5 paycheck I got, it was from United Savings. 6 Q. And we'll get to those allocations 7 later. But as you sit here today, do you know, in 8 fact, whether any allocations were ever made? 9 A. Well, I've reviewed some documentation. 10 In terms of memory, no, I don't know in fact. 11 Q. In 1984, was any allocation made 12 between USAT and UFG? 13 A. I don't know. 14 Q. In 1985, was any allocation made 15 between USAT and UFG of your salary? 16 A. I don't know. 17 Q. In 1986, was any allocation made? 18 A. I don't know. 19 Q. In 1987, was any allocation made 20 between UFG and USAT? 21 A. I don't know. 22 Q. And during that entire period of time 14754 1 from 1984 through 1987, isn't it, in fact, true 2 that all of your salary was paid by USAT? 3 A. All my salaries were -- all my salary 4 was paid by USAT, and I don't know whether there 5 was or wasn't an allocation during that time 6 period. 7 Q. Well, now, you were the chief financial 8 officer during this period of both USAT and UFG; 9 isn't that correct? 10 A. That is correct. 11 Q. And isn't the question of allocating 12 funds between the two entities a subject that 13 would have come within your purview as the chief 14 financial officer? 15 A. It would have run through either my 16 direct office or someone that reported to me. 17 Q. And your testimony here today is that 18 you, even though you were the CFO, have no 19 knowledge as to whether any of your salary between 20 1984 and 1987 was allocated to UFG? 21 A. My testimony is I don't remember 22 whether it was or was not. 14755 1 Q. Now, you indicated that you thought in 2 1988, there may have been an allocation; is that 3 correct? 4 A. That is correct. 5 Q. And then you indicated that you had 6 looked at some documents? 7 A. Yes, sir. 8 Q. When did you look at those documents? 9 A. Oh, those have been over the last few 10 months. 11 Q. Okay. And where did you acquire those 12 documents from? 13 A. I don't have any documents myself; so, 14 I acquired them from my attorneys. And they were 15 all Bates-stamped type documents. 16 Q. Okay. And what was the nature of the 17 documents that you looked at? 18 A. Well, I believe I looked at memorandum; 19 and I believe I looked at general ledgers. 20 Q. And what period of time did you look at 21 the general ledgers for? 22 A. The best of my memory is that it was 14756 1 1988, but I could be wrong there. Maybe it was 2 1987. I just... 3 Q. Okay. And based on your review of the 4 general ledgers, in the year 1988, was any portion 5 of your salary paid by USAT allocated to UFG? 6 A. It certainly appeared so. 7 Q. And did UFG then pay USAT for the 8 portion of the salary which was allocated to them? 9 A. Well, the -- and I would have to look 10 at the documents again to refresh my memory. But 11 just from memory, it appeared that there was a 12 receivable and a payable set up and a reduction in 13 compensation expense at the USAT level. 14 And in terms of an exchange of cash or 15 writing checks, et cetera, I don't remember going 16 that far. 17 Q. Okay. And what period of time did this 18 allocation cover during the year 1988, sir? 19 A. I don't remember. And like I say, 20 it -- I'm a bit -- I looked at a lot of documents. 21 So, for all I know, we might be talking about 22 1987. I think it was 1988, but I'm not positive. 14757 1 Q. And you indicated that -- okay. And 2 what were the nature of the documents that you 3 looked at? You saw general ledger entries. Is 4 that what you said? 5 A. I saw general ledgers, general ledger 6 pages, and memorandum. 7 Q. Would you take a look at the exhibits 8 in Volume III? 9 THE COURT: Mr. Rinaldi, we'll adjourn 10 until 1:30. 11 12 (Whereupon, a lunch break was taken 13 from 12:05 p.m. to 1:30 p.m.) 14 15 THE COURT: Be seated, please. We'll 16 be back on the record. Mr. Rinaldi, you may 17 continue with your examination. 18 MR. VILLA: Your Honor, one thing. 19 There was a question that was pending over the 20 lunch break that the respondent was asked to look 21 up as to whether paragraph -- 22 MR. RINALDI: John, I will get to that 14758 1 in the course of my examination. 2 MR. VILLA: I thought you asked him to 3 do it over the examination. 4 MR. RINALDI: I will get to that in the 5 course of my examination. 6 Q. (BY MR. RINALDI) Mr. Crow, before 7 lunch, you had indicated that you had reviewed 8 some documents regarding this question of 9 allocation. What is it you understand we're 10 talking about when we talk about allocation? 11 A. The documents that I reviewed related 12 to either '87 or '88. 13 Q. Okay. Well, I'm asking for 14 specifically -- when we talk about allocation, 15 we're talking about an individual or executive 16 officers of USAT performing services for UFG and 17 then, as a consequence of their performance, some 18 portion of their executive salary being allocated 19 to that work and then, as a consequence, UFG would 20 then have an obligation to transfer payment back 21 to USAT. 22 Is that a fair characterization of what 14759 1 we're talking about here? 2 A. Yes. 3 Q. Okay. Now, directing your attention to 4 what's been marked as Exhibit 81 20. Is this one 5 of the documents that you saw -- 6 MR. VILLA: Excuse me. Did you say 7 A120? 8 MR. RINALDI: No. T8120. It's at 9 Tab 449. It has been previously admitted in this 10 proceeding. 11 Q. (BY MR. RINALDI) Is this one of the 12 documents that you were referring to when you said 13 you had seen documentation regarding the issue of 14 allocating salaries? 15 A. Yes, sir, it is. 16 Q. Okay. Now, the first sentence of that 17 letter -- it's from Arthur Berner. Mr. Berner was 18 the general counsel, was he, of USAT? 19 A. That is correct. 20 Q. He is writing on USAT letterhead to 21 Neil Twomey. Who was Mr. Twomey? 22 A. Mr. Twomey was our, I believe, 14760 1 principal supervisory agent. 2 Q. Okay. And he says in the first 3 sentence, "Dear Neil, the attached document is in 4 response to the meeting held on November 3rd, 5 1988, at the offices of the Federal Home Loan Bank 6 Board of Dallas among Messrs. Connell and myself 7 and representatives of the Dallas bank, including 8 yourself. 9 Do you see that? 10 A. "Including." Yes, sir, I do. 11 Q. Okay. And it goes on to say wherein 12 you requested further information concerning 13 employment contracts entered into by United 14 Financial Group and United Savings Association of 15 Texas with certain senior executive personnel. 16 Did it come to your attention at this 17 point in time that Mr. Twomey had requested 18 information on the allocation of salaries between 19 USAT and UFG? 20 A. In terms of a memory, I remember 21 Mr. Berner, I believe, asked me to have myself and 22 my people, which would have been Jim Wolfe and 14761 1 Bruce Williams, to come up with an allocation of 2 the approximate time that we spent on UFG matters. 3 And that's -- and I have a recollection that it 4 was having to do with something about a discussion 5 with somebody at the Dallas Home Loan Bank. 6 Q. Now, I notice at the bottom of the 7 page, there are then set forth allocations of time 8 for Mr. Gross, yourself, Mr. Wolfe, and 9 Mr. Berner, Mr. Bruce Williams, and Lawrence 10 Connell. 11 Do you know how those allocations were 12 arrived at? 13 A. I don't remember. 14 Q. Well, you indicated that you did recall 15 that Mr. Berner came to you and asked you to give 16 him some information regarding the allocation of 17 time. 18 A. Yes, I do recall that. 19 Q. Now, as a consequence of his request, 20 did you and Mr. Wolfe attempt to allocate the time 21 you had spent in 1988 between USAT and UFG? 22 A. Yes, sir. We would have -- myself and 14762 1 Mr. Wolfe and Mr. Bruce Williams would have 2 attempted to be responsive to the request. 3 Q. Okay. 4 A. I just can't recall the methodology or 5 how we did it. 6 Q. Okay. But does this letter then 7 refresh your recollection as to the approximate 8 point in time when the allocation issue first 9 arose? 10 A. I don't know that this is the first 11 arising of that issue. It certainly indicates 12 that as of this date, it certainly had become an 13 issue. 14 Q. Well -- 15 A. And prior to that, I just -- I don't 16 remember. 17 Q. But you indicated that your 18 recollection was that Mr. Berner came to you 19 because he had had a conversation with someone at 20 the Federal Home Loan Bank Board that had raised a 21 question about allocation; is that correct? 22 A. Well, that Mr. Berner had come to me 14763 1 asking for allocations from myself, Wolfe, and 2 Williams and that it had something to do with a 3 discussion with the Federal Home Loan Bank. 4 Whether, you know, the Dallas Home Loan Bank 5 initiated it or, for whatever reason, the legal 6 staff had, I don't remember; and I'm not -- I 7 don't know that I would have known at the time. 8 Q. Now, prior to your discussion with 9 Mr. Berner that you've just recounted, had USAT 10 ever attempted to allocate the salaries between 11 its employees and those of UFG? 12 A. I don't remember. You know, in terms 13 of the number of employees, I remember some 14 allocations; and my memory, I have to caution the 15 Court, could be faulty. But I remember 16 allocations related to perhaps Dr. Munitz in some 17 of the early years. 18 Q. Let's just stick with your salary. Had 19 there ever been any allocation of your salary that 20 you're aware of between USAT and UFG prior to this 21 conversation with Mr. Berner that was in response 22 to a discussion with the regulators? 14764 1 A. Not that I remember, no. 2 Q. So, would you conclude, then, based 3 upon this letter which sets out these allocations, 4 that the allocation that you're referring to 5 occurred sometime in the November period of 1988? 6 A. Related to the year 1988, I would 7 conclude, yes, that the -- the actual allocation 8 would -- you know, as best I recall, it occurred, 9 like, in the fourth quarter. 10 Q. Okay. Now, numbered Paragraph 2 of 11 document 8120 states, "All salaries and other 12 executive agreements for senior executives who 13 spend a portion of their time on behalf of United 14 Financial Group, Inc. (independent and exclusive 15 of work for USAT) are being allocated to and paid 16 by United Financial Group, Inc. Thus, the 17 following percentages of key executive personnel 18 time is being allocated to UFGI. USAT will 19 receive credit for any expenditures paid by it to 20 such executives during 1988." 21 Do you see that? 22 A. Yes, sir, I see that. 14765 1 Q. Now, prior to November, had USAT 2 received credit for any expenditures paid by it to 3 such executives during 1988, to your knowledge? 4 A. To my knowledge, no. 5 Q. So, this was the first time the issue 6 had come up; and it came up in the context of the 7 regulators questioning the allocation? 8 A. I don't know whether it's the first 9 time the issue came up, no, sir. I can't say 10 that. 11 Q. Well, do you have any independent 12 recollection of it ever coming up at a prior point 13 in time? 14 A. Not that I'm aware of, with the 15 exception of the earlier allocation of -- and my 16 memory is of, like, Dr. Munitz' compensation. 17 Q. Now, directing your attention then -- 18 strike that. 19 And subsequent to Mr. Berner writing 20 this letter, did the -- the salaries that had been 21 allocated to UFG, were those transferred back to 22 USAT in the form of some sort of credit? 14766 1 A. In terms of a memory, factually, I 2 don't remember. I've reviewed documents recently 3 that indicate that such a transfer did, in fact, 4 occur. 5 Q. And what documents did you review? 6 A. As best I remember, it was general 7 ledger type documents. 8 Q. And when did that transfer occur? 9 A. I don't remember. I remember that it 10 was late -- I was going to say late 1987 or late 11 1988. So, I'll accept that it was probably late 12 1988. 13 Q. Now, if one wanted to verify that 14 information, how would one go about doing that? 15 A. You would take the general ledgers of 16 United Financial Group and United Savings and look 17 at the entries. 18 Q. Okay. And how would I find the entry 19 that would evidence this transfer? How would it 20 appear in the journal entries? 21 A. Well, as best I recall, you know -- and 22 I've reviewed a lot of documents for this, 14767 1 attempting to get up to speed for the testimony -- 2 you would look at USAT compensation expense. 3 There would have been a deduction of USAT 4 compensation expense of some number. And then you 5 would find that same number over on the UFG 6 general ledger as a payable to USAT -- United 7 Savings. 8 Q. And did you find such entries? 9 A. Yes. 10 Q. And did the entries indicate whether 11 they pertained to the salaries that had been paid 12 by USAT for Jenard Gross? 13 A. I didn't verify the actual individuals. 14 Q. Okay. 15 A. I mean, to be clear, I didn't do a 16 detailed review and calculate all the numbers out 17 and add them up and say, "That's exactly the 18 number." 19 Q. Well, I'm just curious to know: Could 20 you tell from what you looked at whether Jenard 21 Gross' -- 15 percent of Jenard Gross' salary was 22 paid by UFG in 1988 by virtue of a journal entry 14768 1 and an intercompany transfer? 2 A. From the -- from the document I looked 3 at, I can't say specifically that Jenard Gross' -- 4 15 percent of his compensation was in there. 5 Q. Okay. 6 A. I think you would have to go a bit 7 further and go back to the journal vouchers 8 supporting those entries. 9 Q. Now, with respect to your salary of 10 25 percent, would your answer be the same? 11 A. Yes, sir. 12 Q. And I take it your answer would be the 13 same as to all the other individuals that are down 14 here? 15 A. Yes, sir. 16 Q. Okay. Now, you indicated that you 17 thought that there was some sort of transfer or 18 allocation with respect to Mr. Munitz that had 19 occurred earlier. 20 A. I've got a very vague memory of that, 21 yes, sir. 22 Q. Why don't you turn to the next page. 14769 1 That's numbered Paragraph 3, and this is Document 2 No. T 8120. It says, "As previously noted, you 3 should be further aware that 100 percent of the 4 salary and bonus of Dr. Munitz has always been 5 paid by UFG; and USAT has no obligation for these 6 expenditures." 7 Do you see that? 8 A. Yes, I see that. 9 Q. Do you know in years prior to 1988, had 10 there been an intercompany transfer causing UFG to 11 pay for 100 percent of Mr. Munitz' salary? 12 A. No, sir, I don't know that. And as 13 I -- as I tried to say, the memory is vague. 14 Taking a literal reading of this, it says 15 Dr. Munitz' salary has always been paid by UFG; 16 so, perhaps my vague memory is incorrect. 17 Q. You mean you read this sentence to 18 suggest that he was on the, quote, UFG payroll? 19 A. Well, all I -- I didn't write this 20 memo, and I didn't receive it. But sitting here 21 today, it says, "Dr. Munitz has always been paid 22 for by UFG and USAT has no obligation for any of 14770 1 these expenditures." I -- I'm not sure what that 2 means. It could be that he was on the USAT 3 payroll -- because that's where all of our payroll 4 systems were -- and we just reimbursed 100 percent 5 for his salary. 6 Q. Now, Mr. Berner who wrote this, in your 7 experience, was he a precise person when he wrote 8 memos and things? 9 A. Mr. Berner was -- in my experience, he 10 was a careful, conscientious officer. 11 Q. Are you familiar with the term "fly 12 specker," one who is very conscientious about 13 detail? 14 A. He was a picky lawyer. I remember 15 that. 16 Q. So, you would expect that if something 17 was in this memo and it was put in there by 18 Mr. Berner regarding Mr. Munitz, that it would be 19 accurate? 20 A. I have no basis to say. I can say that 21 I had confidence in Mr. Berner's ability. He was 22 a conscientious person. He was a -- appeared to 14771 1 me to certainly be a competent attorney. 2 Q. Okay. 3 A. You know, I'm not saying Mr. Berner was 4 perfect, just like I'm not perfect. We all make 5 misstatements and mistakes. 6 Q. Now, earlier in our examination, before 7 we broke for lunch, you had identified 8 Exhibit B1743 as an employment agreement that you 9 had entered into previously with UFG on or about 10 September the 9th, 1987. 11 MR. RINALDI: And I don't believe that 12 this document has been previously admitted into 13 evidence, Your Honor. I would move its admission. 14 MR. VILLA: Your Honor, this document, 15 I think, was admitted into evidence in a group of 16 documents in connection with, I believe, 17 Mr. Dermody's deposition. There was a stack of 18 contracts that all had Vivian Carlton's initials 19 on them. This was introduced at that time. We 20 have this already in the record once, but I don't 21 object to the document. I do think it is in a 22 packet of contract documents that came out of the 14772 1 work papers of the Federal Home Loan Bank Board. 2 MR. RINALDI: Well, then, that would 3 have been a different document, I take it. 4 THE COURT: All right. 5 MR. VILLA: No objection. 6 THE COURT: Received. 7 Q. (BY MR. RINALDI) Sir, I had asked -- 8 you had testified earlier that you felt that -- 9 well, first, let me ask you: Pursuant to this 10 agreement, you had said that you felt obligated to 11 serve on the board at UFG when you were tabbed by 12 Mr. Munitz and I think I asked you where it 13 provides that. If you would take a look at -- I 14 believe it's on Page 6, it says "offices." 15 Do you see that? 16 MR. VILLA: Page 5. 17 A. Yeah, Paragraph 6. 18 Q. (BY MR. RINALDI) It says, "The 19 executive agrees to serve, if elected or appointed 20 thereto, as a director of the company and any of 21 its subsidiaries and in one or more executive 22 offices of any of the company's subsidiaries, 14773 1 provided that the executive is indemnified for 2 serving in any and all such capacities on a basis 3 no less favorable than is currently provided by 4 the company's charter and bylaws and applicable 5 state law." 6 Do you see that? 7 A. Yes, sir. 8 Q. That's the provision under which you 9 agreed to serve as a director of UFG, isn't it? 10 A. Yes, sir, it is. 11 Q. So, you believed at that point in time 12 in February of 1988 that you, in fact, had a valid 13 and binding contract with UFG, didn't you? 14 A. I did, yes. 15 Q. Now, pursuant to that contract, it 16 provided in Paragraph 1 -- I'm sorry -- 17 Paragraph 5 as we saw earlier that UFG was going 18 to pay you a salary of $171,656 per anum." 19 Do you see that? 20 A. Which paragraph was that, please? 21 Q. It's Paragraph 5 on Page 3. 22 A. Yes, sir. 14774 1 Q. Did UFG ever pay you a salary of 2 $171,656 per anum following the execution of this 3 contract? 4 A. No. I believe I was always paid 5 directly by United Savings. 6 Q. And below that, it says, "Bonus during 7 the period of executives the annual bonus to be 8 paid in January of each year subsequent to the 9 year such bonus is earned in the amount of no less 10 than $62,000 (the minimum bonus equal to the 11 amount executive received as a bonus in January 12 1987 for executive's efforts in 1986)." 13 Did you ever receive a bonus in 1987 14 from UFG in the amount of $62,000? 15 A. No, sir. 16 Q. And in 1987, after the execution of 17 this contract, at any point in time, did UFG pay 18 you a bonus or a minimum bonus in that amount? 19 A. No, sir. 20 Q. So, even though UFG never paid you the 21 salary they had agreed to pay you and never paid 22 you the bonus that you had agreed to, you still 14775 1 felt bound by the terms of the contract; is that 2 correct? 3 A. Yes, sir. 4 Q. And so, when they asked you to serve as 5 director, you did; is that right? 6 A. That is correct. 7 Q. Now, you made an estimate as to the 8 allocation of your time in the earlier document 9 that we looked at; and I'm just wondering, could 10 you describe for us -- I know Scott went through 11 some stuff that you did, but I wanted to ask you 12 about a generally -- your duties at USAT. 13 Did you have any duties that related to 14 the preparation of public reports or -- 15 A. At USAT, typically the only reporting 16 to outside entities would be the regulatory 17 authorities. 18 Q. Okay. And what would be the nature of 19 the reports that you would provide to the 20 regulatory authorities? 21 A. That would be the quarterly and, at 22 some point, it might have been monthly -- the 14776 1 thrift financial report that gave all the balance 2 sheet and income statement items. I believe we 3 reported monthly the purchases and sales of 4 high-yield bonds and the -- 5 Q. I don't want to go into anything about 6 high-yield bonds here. I want to be very careful 7 not to cover any areas that Mr. Guido will get 8 into. 9 A. Okay. There were various other 10 reports, financial type reports having to do with 11 branch sale applications, business plans, 12 liability growth applications, that sort of thing 13 are the kind of numbers where we would be 14 reporting to the Home Loan Bank. 15 Q. So, do you recall that in 1985, that 16 there had been a -- that UFG had -- I'm sorry -- 17 that the Federal Home Loan Bank advised USAT that 18 they believed that USAT had violated its liability 19 growth limitations? 20 A. I do remember that. 21 Q. And in connection with that alleged 22 violation, were there any documents that were 14777 1 submitted or reports that were submitted to the 2 Federal Home Loan Bank of Dallas by USAT? Do you 3 recall that they submitted a growth plan? 4 A. I recall a liability growth plan -- I 5 think that was the proper word for it -- was 6 submitted at some point in this time frame: '85, 7 '86. 8 Q. And as the chief financial officer of 9 USAT, did you play any role in putting that 10 together? 11 A. Typically, in these type of 12 applications, I would play a role in the numerical 13 portions of those reports. 14 Q. Would you just describe for the Court 15 what your role would have been? 16 A. Typically -- not always but typically, 17 if there were regulatory filing or application, 18 the -- either myself personally or the financial 19 area under my direction would prepare schedules to 20 go in the application. 21 Q. Now, in addition to the schedules, did 22 you review the text of those applications such as 14778 1 the liability growth application for accuracy and 2 completeness? 3 A. I reviewed some of the applications. 4 As it relates specifically to the liability growth 5 application, I don't remember. I have a vague 6 memory that that was -- Jerry Williams kind of 7 took that by the horns and told me to go off and 8 handle the computers. 9 Q. Okay. And do you recall that there 10 also was filed an application to exceed the direct 11 investment limits in the latter part of 1985 and 12 that was pending in the beginning of 1986? 13 A. I have a vague memory of that. That 14 certainly sounds reasonable to -- going into my 15 head. I can't quote when it was or -- 16 Q. Do you recall that in connection with 17 either of those applications, whether a growth 18 plan for 1985 was submitted to the Federal Home 19 Loan Bank Board by USAT? 20 A. Well, I would think, as part of the 21 liability growth application, some type of growth 22 plan would be incorporated in that. 14779 1 Q. Do you recall whether a business plan 2 for 1985 was also included? 3 A. I don't remember. 4 Q. You have no recollection of having 5 participated in preparing a business plan for 6 submission to the Federal Home Loan Bank Board in 7 the latter part of 1985? 8 A. If you limit it to -- I remember growth 9 plans being submitted to the Federal Home Loan 10 Bank; but as to that specific time frame, no. It 11 certainly -- it certainly may have been that time 12 frame. 13 Q. All right. Now, you indicated that 14 those -- that things like the thrift financial 15 report and these kinds of reports were submitted 16 periodically to the Federal Home Loan Bank Board. 17 USAT didn't make any public filings, did they? 18 A. No, not as it relates to SEC type 19 reporting. The only public data that I recall 20 would be -- we had a little fold-out balance sheet 21 at the association, I believe, that was available 22 for the public and -- 14780 1 Q. I was thinking more along the lines of 2 securities filings. 3 A. No. That would have been at the United 4 Financial Group level. 5 Q. And you were also the chief financial 6 officer of United Financial Group at this point in 7 time? 8 A. Correct. 9 Q. And we're talking now about the end of 10 1985 -- 11 A. Correct. 12 Q. -- through 1988? 13 Now, during that period of time, did 14 you participate in -- what were the kinds of 15 public filings with the SEC that you would 16 participate in? 17 A. The SEC would have involved certainly 18 10Ks and 10Qs. And then, in addition to that, we 19 had various registration type statements that were 20 prepared in conjunction with, I believe, the sale 21 of CMO type securities and the sale of Dutch 22 auction rate preferred securities, that sort of 14781 1 thing. 2 Q. And did you also assist in the 3 preparation of proxy statements for United 4 Financial Group? 5 A. The proxy statements were more -- more 6 of a legal -- fell over into Mr. Berner's area. I 7 think I had some role in that, but that was -- 8 that doesn't come to mind as being something that 9 I was looked to to lead the charge on. 10 Q. How about annual reports for UFG? 11 A. Annual reports, certainly we were 12 deeply involved in that. 13 Q. And an annual report usually contains, 14 what, an auditor's report at the end; and you 15 would have been involved in dealing with the 16 auditors on the annual report? 17 A. Yes. 18 Q. And to the extent, then, that any of 19 these public filings had financial information in 20 them, what would be the nature of your involvement 21 in the preparation of that information? 22 A. To the -- in the public filings, the 14782 1 nature of my involvement would have been -- in 2 some areas, I would have been personally involved. 3 And then in many areas, I would have been 4 reviewing the work of others. 5 Q. Is it fair to say that as the chief 6 financial officer, you were ultimately responsible 7 for the final product that went into all of those 8 public filings to the extent it related to 9 financial information? 10 A. I don't know what the -- what the 11 legal -- 12 Q. I'm not talking about the legal -- 13 A. -- definition is. 14 Q. That was within the purview of your 15 employment? 16 MR. VILLA: Objection. Let him answer 17 the question. He's tried to answer it twice. 18 A. I was aware that if public filings, 19 like, the annual report were seriously botched up, 20 then the CFO was responsible and probably the CEO; 21 but I'm not sure as to, you know, legal 22 definitions. 14783 1 Q. (BY MR. RINALDI) I wasn't really 2 addressing it to the legal question. I was 3 asking: Within your function as the chief 4 financial officer, was it your responsibility to 5 see that these got prepared, that they were as 6 accurate as you could make them, and that they 7 were submitted for submission to the SEC? 8 A. Yes. And I might add that basically on 9 that, myself and Mr. Berner kind of shared that 10 responsibility. 11 Q. Okay. And Mr. Berner had a background 12 in securities law, did he not? 13 A. He was a securities lawyer. 14 Q. Did Mr. Berner have a background in 15 bank or thrift regulatory affairs? 16 A. I don't know. 17 Q. Now, in addition to the reports that 18 were filed, did you also have any responsibility 19 for reporting on the financial condition of USAT 20 and UFG to the respective boards? 21 A. Yes, I did. 22 Q. Can you just describe in your own words 14784 1 what those responsibilities were and what kinds of 2 reports you would submit to the boards? 3 A. To the boards, we would -- and 4 certainly from 1986 on or the time after Jerry 5 Williams left, my responsibility was to prepare a 6 summary performance report which consisted of a 7 balance sheet, income statement. I believe there 8 was a regulatory compliance statement and a little 9 performance summary memo. And that was sent to 10 the board of directors in the mail prior to the 11 board meeting. And then as each board meeting 12 occurred, I would review the financial performance 13 for that month or the quarter. Excuse me. 14 Q. You anticipated my next question. 15 With what frequency did the boards of 16 UFG and USAT meet? 17 A. I don't remember. 18 Q. Well, you indicated that you provided 19 quarterly reports to the board members. 20 A. If I did, I misspoke. Actually, I 21 believe I sent those reports on a monthly basis. 22 Whether there was a board meeting or not. 14785 1 Q. So, every month, a member of the USAT 2 board would get a packet of information that would 3 update them on the financial condition of the 4 institution? 5 A. That's my memory, yes. 6 Q. And it would contain that material that 7 you described? 8 A. Balance sheet, income statement, and I 9 believe we had a regulatory compliance statement 10 in there and, plus, a cover performance type memo. 11 Q. Now, with respect to the regulatory 12 compliance statement, what kind of information did 13 that contain? 14 A. Certainly, I remember that it contained 15 our capital position versus required regulatory 16 net worth. I believe it had items such as direct 17 investment limitations. I believe it had 18 liability growth limitations, that sort of thing. 19 Q. Now, you made reference to it having 20 information regarding capital requirements. 21 A. Yes, sir. 22 Q. What -- was that, in your mind, an 14786 1 important aspect of the financial materials that 2 were presented to the board each month? 3 A. Yes, sir. 4 Q. Okay. And why was that? 5 A. Well, I -- I had had a banking 6 background and certainly realized that thrifts, as 7 well as banks, had a minimum net worth 8 requirement; and that was important -- if you fell 9 below your minimum net worth requirement, it 10 wasn't good. 11 Q. And people at USAT were very concerned 12 during the period of 1985 and '86 and '87 and '88 13 about meeting their net worth requirement, weren't 14 they? 15 A. I recall from -- I mean, it's a 16 common -- we were concerned about it at First 17 City. We were concerned about it at United. 18 Certainly, your net worth position versus your net 19 worth requirement is a -- yes, it's something that 20 you keep your eye on. 21 Q. And what was your understanding would 22 occur if UFG -- if USAT fell below that net worth 14787 1 requirement? 2 A. Well, if you fell below your minimum 3 net worth requirement, my memory back then was 4 that there were certain other reporting 5 requirements that could be put in place. There 6 were certain restrictions that could be put in 7 place and limitations that could be put in place 8 at the discretion, I believe, of the regulatory 9 authorities. 10 Q. When you're talking about limitations, 11 did you -- can you give us an example of what your 12 understanding was of the kinds of limitations? 13 A. No, sir, I really can't. That's about 14 the extent of my knowledge. I knew that there 15 were sections in the regulations themselves that 16 kind of outlined the -- what would happen if you 17 fell below your minimum net worth. 18 But in terms of recalling them today, I 19 certainly can't -- 20 Q. I'm not asking you to go through the 21 all regs. What I'm kind of curious about is 22 generally what your understanding was of what 14788 1 might -- what kinds of limits might be placed upon 2 a thrift if, for some reason, they didn't meet 3 their capital requirement. 4 A. Well, my memory is -- and whether it's 5 accurate, I won't guarantee. But my memory is 6 there was a limitation on the amount of broker CDs 7 that could be issued by the thrift, and I believe 8 there was a limitation on growth. And those are 9 the only two that come to mind. And I really felt 10 like in that area, you know, I kind of depended on 11 the legal staff to keep us apprised of what 12 happens. 13 Q. And initially, that would have been 14 what? Mr. Pledger? 15 A. Initially, Mr. Pledger, yes. 16 Q. And Mr. Pledger was very much versed in 17 regulatory affairs of thrifts, was he not? 18 A. I viewed Mr. Pledger to be pretty 19 specialized in regulatory law. 20 Q. Now, Mr. Pledger left at some time in 21 the mid part of 1986, did he not? 22 A. Yes. Mr. Pledger became Texas Savings 14789 1 and Loan Commissioner or the head of the State 2 Savings and Loan organization. 3 Q. So, he would have been a very 4 knowledgeable guy on thrift regulation if he 5 qualified to become the head of the Texas S&Ls. 6 Is that a fair statement? 7 A. I viewed Mr. Pledger to be a good 8 attorney, yes. 9 Q. Now, once he left, did USAT hire an 10 attorney to fill his role as regulatory counsel? 11 A. Mr. Berner was the -- was the general 12 counsel, and I know Mr. Berner had attorneys that 13 worked for him. As to how he split those 14 responsibilities up, I don't know. 15 Q. Did you perceive Mr. Berner to have -- 16 to be as knowledgeable about regulatory affairs as 17 Mr. Pledger had been? 18 A. Well, I didn't think about it, I guess. 19 Q. Now -- 20 A. I mean, to be more precise, it was -- 21 we went through this morning, I had a lot of 22 responsibilities and was pretty busy and was 14790 1 working from 7:00 to 7:30; and Mr. Berner reported 2 to Mr. Gross. And so, I didn't quite frankly 3 didn't -- didn't agonize or worry about that. 4 Q. Now, periodically -- I'm sorry. At 5 each of the board meetings, I think you testified 6 you would -- after Gerald Williams left -- would 7 provide a report to the USAT board on the 8 financial condition of the institution. Is that a 9 fair statement? 10 A. Yes, sir. 11 Q. And the same would be true with respect 12 to the UFG board? 13 A. Yes, sir. 14 Q. Okay. Now, was it your practice -- I 15 mean, was it the practice of the institution for 16 you to attend all board meetings or regularly 17 scheduled board meetings? 18 A. I seemed to -- I seemed to attend most 19 all of the board meetings after Mr. Williams left, 20 and there would be times -- there were a few 21 occasions where I was asked not to come to the 22 board meeting at all, and then there would be 14791 1 other times where I would be asked to leave the 2 board meeting for whatever reason. 3 Q. In the normal course of events, would 4 you stay through an entire board meeting? 5 A. Generally, that would be, you know, the 6 typical practice. 7 Q. Now, did there come a point in time in 8 the beginning of 1987 when the regulators brought 9 to your attention the fact that USAT was, in their 10 opinion, failing their -- its minimum capital 11 requirements? 12 A. Yes. 13 Q. And what do you recall of that? 14 A. I remember I thought the date was from 15 mid-1986 forward, pretty much. The examiner, 16 Ms. Carlton, felt that the association was below 17 its minimum net worth requirement, and the -- the 18 association or management felt that we were 19 below -- excuse me -- above the minimum net worth 20 requirement. And the difference in the two 21 positions, as best I recall, had to do with a 22 specific versus general reserve designation. 14792 1 Q. And you said you thought it was as 2 early as 1986. 3 Do you recall that the examination 4 began in the spring of 1986? 5 A. I don't recall that. I remember -- I 6 certainly don't dispute that. 7 Q. And after the examination had begun, 8 did Ms. Carlton approach you and indicate to you 9 or the board members or someone at USAT that she 10 felt that they were below their minimum capital 11 requirement? 12 Did she approach you orally rather than 13 writing a letter or anything? 14 A. No, I don't think so. At least, I 15 don't remember that. I remember that coming more 16 in the form of a letter. 17 Q. And this would have been a letter from 18 Ms. Carlton, or would it have come from someone in 19 the supervision of the Federal Home Loan Bank 20 Board of Dallas office? 21 A. You know, I really don't know. I -- my 22 memory is hazy on that, and I -- I mean, 14793 1 Ms. Carlton certainly could have told us that 2 verbally or told Mr. Gross that. I just don't 3 know. 4 Q. Was it your experience that as 5 examinations proceeded, that there were informal 6 conversations between the examiners and the 7 officers of the institution regarding the findings 8 of the examiners? 9 A. Typically, yes. 10 Q. So, it's not like they complete the 11 examination and, all of a sudden, drop a bomb on 12 you. 13 They would talk to you about what they 14 were finding as they went along; is that correct? 15 A. I think, generally, it's like an audit. 16 You kind of know pretty much what the criticisms 17 are. From time to time, there were surprises; but 18 typically, you pretty well have an idea. 19 Q. Was Ms. Carlton, in her examination in 20 1986 that we're talking about, critical of the 21 manner in which USAT was being operated? 22 A. I don't remember that. That's a pretty 14794 1 all encompassing term. Just as a technical 2 matter, I've never seen an examination report that 3 isn't critical. I mean, that's just the nature of 4 examinations. Certain things are going to be 5 criticized. 6 Q. Well, you indicated that there came a 7 point in time when you recall that the association 8 received a letter from the Bank Board advising 9 them that the Bank Board thought they had failed 10 their net worth requirement. 11 Do you recall that? 12 A. Received a letter from somebody, I 13 believe. 14 Q. And was a copy of that letter then made 15 available to you as the chief financial officer? 16 A. I don't remember the circumstances. I 17 don't remember. Typically, that letter would have 18 gone to the chief executive officer; and I don't 19 remember when I received it and under what 20 circumstance. The normal practice -- I can tell 21 you the normal practice. 22 Q. Yeah. That would be helpful. 14795 1 A. I don't remember specifically, but the 2 normal practice would be -- I believe Mr. Gross 3 was the CEO, and he certainly would have probably 4 distributed that to -- to a number of the key 5 officers. 6 Q. And was -- as you recall, at any rate, 7 was USAT invited to respond to these letters? 8 A. I think that's -- I don't remember 9 specifically; but I think that's the normal 10 procedure, that -- that you get a letter giving 11 the results of the examination and then typically 12 the regulatory authorities expected an answer back 13 by some reasonable date. 14 Q. Would you take a look at the sixth or 15 seventh document in Volume I? This would be 16 Document T8104, which has been previously admitted 17 at Tab -- at Tab 795. I'm also advised that it's 18 T8014. 19 20 (Discussion held off the record.) 21 22 Q. (BY MR. RINALDI) This is a two-page 14796 1 letter dated April 16th, 1987, from Daniel A. 2 Thomas, the senior supervisory agent of the 3 Federal Home Loan Bank of Dallas, to the board of 4 directors of United Savings Association of Texas. 5 Does this appear to be the letter that 6 we have been talking about for the last five or so 7 minutes? 8 A. Let me -- yes, it is. 9 Q. Okay. And directing your attention to 10 the -- the fourth full paragraph that begins with 11 the words "As calculated," it states, "As 12 calculated by Examiner Carlton, United failed to 13 meet its net worth requirement as of June 30th, 14 1986; but 10.5 million or 46 percent of net worth 15 with the additional adjustments to net worth for 16 specific reserves totaling 3.9 million requested 17 during the examination, United's net worth as of 18 June 30th, 1986, was 14.4 million below the 19 required amount. The deficit amount totaled 20 63 percent of the net worth." 21 Do you see that? 22 A. I see that. 14797 1 Q. And I believe you testified that United 2 took exception to the findings of Ms. Carlton at 3 the time of the examination. 4 A. Yes, sir. I believe that's mentioned 5 in the next paragraph. 6 Q. And it goes on and says, "Specifically, 7 management has" -- and the second sentence of the 8 next paragraph has -- 9 MR. VILLA: Your Honor, I object. He 10 skipped over a sentence for reasons that I haven't 11 figured out yet. 12 MR. RINALDI: I was trying to move this 13 along; but John, if you want to take extra time, I 14 will. 15 "We acknowledge management's comments 16 in subsequent correspondence refuting the 17 calculation of the net worth requirement based 18 primarily on the examiner's calculation of the 19 contingency factor." 20 Q. (BY MR. RINALDI) "Specifically, 21 management has protested, (1), the inclusion of 22 the 140 million in Couch Mortgage Company loans as 14798 1 scheduled items; (2), the classification of 2 36.8 million of investment real estate as real 3 estate owned; (3), the classification of 4 25.8 million in condominium unit loans in the 5 Warwick Towers as non-conforming loans to 6 facilitate; and (4), the substandard 7 classification of 94.3 million in loans due to the 8 well-defined weaknesses or because they were 9 slow." 10 Are those -- 11 MR. RINALDI: I'll continue to read the 12 paragraph, if you would like, John. I just wanted 13 to ask -- 14 THE COURT: Pose your question, 15 Mr. Rinaldi. 16 Q. (BY MR. RINALDI) Are those the 17 objections that had been raised by the -- by USAT 18 with respect to the findings of Ms. Carlton? 19 A. I don't really remember all of the 20 objections. I certainly don't dispute. This 21 appears to be a listing of those objections. 22 Q. Okay. Do you recall, were the issues 14799 1 that are identified in this paragraph that I've 2 just read, were they resolved fairly quickly? 3 A. My memory is that they were not -- that 4 there continued to be a disagreement between 5 management and the regulatory authorities as to 6 whether we did or did not meet our minimum net 7 worth requirement. 8 Q. And that dispute lasted all the way 9 until the institution closed, did it not? 10 A. Well, I don't know. I believe the 11 way -- I can just tell you from my memory. Soon 12 after the October 1987 stock market crash, which 13 created some losses at United, it seemed to me to 14 become somewhat of an academic argument. 15 Q. But it would be fair to say that the 16 issue -- 17 A. That management agreed we failed to 18 meet our minimum net worth requirement. In, you 19 know, late '87, early '88, sometime in that time 20 frame. 21 Q. It's fair to say that at least April 6, 22 1987, and the latter part of 1987, these issues 14800 1 were never resolved and that USAT continued to 2 dispute the question of the fact of whether or not 3 they had fallen below their minimum requirement? 4 A. I can't factually say that I remember 5 specifically. It could be some of these issues 6 were resolved. I remember that, to the best of my 7 recollection, there was always that -- here's the 8 regulator's numbers, and here's our interpretation 9 of the numbers and, I believe, he reported that on 10 the regulatory compliance report. 11 Q. Okay. Now, one of the issues that was 12 in dispute was the -- well, the first item there, 13 the inclusion of 140 million in Couch Mortgage 14 Company loans as scheduled items, is that what you 15 were referring to earlier about a dispute over 16 scheduled versus unscheduled items? 17 MR. VILLA: Objection. It 18 mischaracterizes his testimony. I think he was 19 talking about reserves, not scheduled items. 20 Q. (BY MR. RINALDI) I'll stand corrected. 21 You made a reference to reserves? 22 A. Yes, sir. 14801 1 Q. Was -- that reference to reserves, did 2 that relate to the question of the Couch Mortgage 3 Company loans? 4 A. It -- I don't know. It may have. I 5 remember there were certain reserves that the 6 association viewed as general which, from my 7 memory going that far back, could be included as 8 net worth. And so, it may have related to some of 9 these items. 10 Q. Do you recall that general reserves 11 could be included in net worth and specific 12 reserves could not? 13 A. That's what I recall; but, again, you 14 know, my -- just off -- from my memory, that's a 15 correct statement. 16 Q. Okay. Well, then maybe we can clarify 17 that and move on. Let's flip ahead a little bit 18 to Document T8022. T8022 -- I'm sorry. T8024 19 that should be. It's Tab 398, and it is the 20 United Financial Group consolidated statement of 21 operations dated October 31st, 1987. 22 Now, is this a document that you would 14802 1 have been responsible for the preparation of? 2 A. It would have been prepared in the 3 controller's department which reported to 4 Mr. Wolfe. He reported to me. 5 Q. Is this the kind of information that 6 was presented periodically to the board regarding 7 the finances of the institution? 8 A. Yes. This is one of the schedules that 9 would be presented to the board of UFG. 10 Q. Okay. Let's just look at the second 11 page because I think it makes reference there to a 12 discussion of net worth requirement. 13 Do you see that? 14 A. Yes, sir, I do. 15 Q. Is this the kind of information that 16 you would regularly provide to the board on the 17 subject of regulatory compliance? 18 A. Yes, sir. 19 Q. And it starts off at the top -- it says 20 "net worth requirement" and then it talks about a 21 base factor and it puts in a number of additions. 22 And then there's a subtraction there for maturity 14803 1 matching credits. 2 Do you see that? 3 A. I do, yes, sir. 4 Q. Do you recall what the maturity 5 matching credits were? 6 A. I recall in general what they were, 7 yes. 8 Q. Okay. What, in general, do you recall 9 they were? 10 A. Maturity matching credit was a 11 regulation or rule that came along about this time 12 period or shortly before that gave associations a 13 credit for their capital calculation if the -- if 14 they had their assets and liabilities more -- more 15 matched in terms of interest rate sensitivity. 16 And it got back to the old gap position. If -- 17 typically, a thrift had many more intrasensitive 18 liabilities than it had intrasensitive assets. 19 And to the extent you could close that gap, you've 20 got capital credit in effect. 21 Q. And it would appear here that on 22 October 31st, 1987, USAT was -- as it calculated 14804 1 it -- was entitled to claim a credit for maturity 2 matching credits of $101 million. 3 Do you see that? 4 A. Yes, I see that. 5 Q. And so, that maturity matching credit, 6 as a result of reducing the gap, reduced the 7 amount of minimum capital requirement of USAT, did 8 it not? 9 A. It certainly reduced the minimum net 10 worth requirement. 11 Q. The next line below says that the 12 minimum net worth as of October 31st, 1987, of 13 USAT was $183,249,000. 14 Do you see that? 15 A. I see that. 16 Q. And if they had not had a maturity 17 matching credit, then the minimum net worth 18 requirement for USAT would have been approximately 19 $100 million greater; is that correct? 20 A. Ignoring the maturity matching credit, 21 the minimum net worth requirement would be, just 22 looking at this schedule, roughly $284 million. 14805 1 Q. So that from USAT's point of view, 2 compliance with its minimum net worth -- I mean 3 the maturity matching credit was a critical factor 4 with respect to its compliance with its minimum 5 net worth requirement in October 1987? 6 A. It certainly was an important factor 7 that we paid attention to. I think it was an 8 important factor to most all thrifts. It just 9 became part of the capital calculation that was in 10 existence at the time. So, certainly, it was 11 important. 12 Q. And if your gap relationship had gotten 13 out of whack and you hadn't been entitled to 14 maturity matching credit, USAT would have failed 15 its minimum net worth requirement rather 16 dramatically in October of 1987; is that correct? 17 A. If there had been -- just looking at 18 this isolated example and assuming we could have 19 done nothing else, like sell assets or shrink the 20 balance sheet or whatever -- but just looking at 21 this, if you take the maturity matching credit 22 out, certainly there would be no excess net worth. 14806 1 Q. And they would have failed their 2 minimum net worth requirement? 3 A. That's the way I would read this 4 schedule, yes, sir. 5 Q. Okay. Now, the calculation that's done 6 here by USAT has several footnotes in it, and I 7 thought maybe you could help us decipher what 8 those refer to. The first one reads, "Per federal 9 regulations, the required net worth the 10 association must meet is the immediate preceding 11 quarter and calculated requirement. Therefore, to 12 determine the October compliance, the actual net 13 worth was compared to the September quarter end 14 requirement of 183,249,000." 15 Do you see that? 16 A. Yes, sir, I see that. 17 Q. Do you recall what that was referring 18 to? 19 A. Let's see. Let me think about that 20 just a minute. (Witness reviews the document.) I 21 think what this means is that, technically, the 22 association had to meet its regulatory net worth 14807 1 requirement on a quarterly basis each quarter. 2 But we were attempting to track it -- to my 3 knowledge, we had always tracked it on a monthly 4 basis. So, it -- as best I can tell from reading 5 this, each succeeding month's, quote, "actual net 6 worth," was compared to the minimum net worth 7 requirement as of the end of the preceding 8 quarter. 9 Q. So that the September quarter 10 requirement had been $183,249,000; is that right? 11 A. That's the way I read this, yes, sir. 12 Q. Now, the second footnote says, "Pending 13 final resolution with the regulators, there are 14 94.7 million of disputed assets which have not 15 been included in scheduled items by the 16 association. Should the regulator's position 17 prevail, the association's capital requirement 18 would increase by an additional 18.9 million. The 19 94.7 million is composed of the following:" And 20 then it lists four different projects. One of 21 them is the Couch loans and the Chapel Creek and 22 Norwood/United Park and Home Craft. 14808 1 Do you see that? 2 A. I see that. 3 Q. And it indicates that the capital 4 requirement would be increased by an additional 5 18.9 million. What's your understanding of what 6 that paragraph is saying? 7 A. Well, I don't remember it. I can 8 attempt to read the schedule and give my 9 interpretation today. My interpretation is that 10 if management loses all of these arguments on the 11 items listed here, that the association's capital 12 requirement would be increased by 18.9 million. 13 Q. And if you look above, it says that the 14 excess -- the actual net worth of the institution 15 as you computed it was 196 -- $196,246,000. 16 Do you see that? 17 A. Yes. 18 Q. Below that, it says, "Excess net 19 worth." It was computed at $12,997 dollars. 20 Do you see that? 21 A. Yes, sir. 22 Q. And what do you understand the excess 14809 1 net worth to be? 2 A. The excess net worth as listed on the 3 schedule is 12,997,000. 4 Q. And what do you understand that to 5 mean: "Excess net worth"? 6 A. What I would understand that to mean 7 would be the actual net worth minus the minimum 8 required regulatory net worth. 9 Q. So, it's the amount by which USAT was 10 exceeding its minimum net worth requirement in 11 October of 1987? 12 A. Agreed. 13 Q. Okay. Now, if USAT had been required 14 by the regulators -- that is, if the regulators 15 had prevailed in their arguments and required to 16 take an additional 18.9 million, how would that 17 have affected USAT's net worth compliance? 18 A. Well, what I would do is take the 19 18.9 million and add it to the 18 3 million. 20 Q. Okay. That gives you approximately, 21 what, 202 million? 22 A. Yes, sir. 202 million. 14810 1 Q. Then means that USAT at that point only 2 had $196,246,000 in actual net worth which would 3 have been out of capital compliance by 4 approximately $6 million. Is that fair? 5 A. It would mean certainly that under 6 these circumstances, that the actual net worth 7 would be below the minimum required net worth by 8 $6 million or so. 9 Q. Okay. And then if you look at the last 10 footnote, it indicates that the regulators were 11 suggesting that an even further adjustment should 12 be made to the actual net worth of USAT. It 13 states, "Included in the net worth is 13.2 million 14 of general reserves as originally determined by 15 the regulators which they now believe might be 16 specific reserves. Actual net worth would 17 decrease by this amount retroactive to June 30th 18 1986, if the regulator's revised position does not 19 change." 20 Do you see that? 21 A. I see that. 22 Q. So, if their position didn't change, 14811 1 that would have reduced or -- the actual net worth 2 of the institution by an additional $13.2 million. 3 Is that fair? 4 A. That's the way I read this, yes, sir. 5 Q. And it would have increased the -- the 6 net worth deficit of USAT? 7 A. Yes, sir, it would. 8 Q. And it would have run it up to around 9 $20 million; is that correct? 10 A. 19 to 20 million. 11 Q. Okay. All right. And this was 12 something -- a kind of cloud that USAT was 13 operating under from April of 1987 all the way 14 through October of '87? 15 A. I'm not sure about the exact dates; but 16 certainly, I remember all of these being in the 17 performance reports for quite some time. And, you 18 know, that's kind of why we reported it, that -- 19 so that everybody kind of knew where we were. 20 MR. VILLA: Your Honor, I'll object to 21 the word "cloud." I mean, he's talked about the 22 effect of the stock market crash in the middle of 14812 1 October. Now by using an ambiguous word like 2 "cloud," Mr. Rinaldi has spread out the effect of 3 this retrospectively before the stock market crash 4 all the way to April. I think the question is 5 ambiguous. 6 THE COURT: Well, I think the record 7 will reflect what the figures are. Let's move on. 8 Q. (BY MR. RINALDI) I'm sorry. Does 9 this -- 10 A. Let me be a bit more precise. I 11 perhaps have confused things. I don't know about 12 the prior months; but certainly in October of '87, 13 we had the stock market crash. And I'm sure we 14 lost money that month, but the figures we went 15 through would be good for October. And as I 16 remember this type of schedule and the 17 reconciliation and the communication to everyone, 18 that our net worth requirement was viewed 19 differently by management and the regulators was 20 on the record for everyone to see. 21 Q. Well -- and I wasn't suggesting that it 22 was hidden. I was simply trying to ascertain 14813 1 whether, in fact, there had been a dispute with 2 the regulators since the date of the regulator's 3 letter in April of 1987 and whether that dispute 4 had continued on through October 31st, 1987. And 5 I take it from your answers that, yes, it's your 6 recollection it had continued? 7 A. My recollection is that -- that those 8 disputes, they pretty much continued. There might 9 have been some of them that were agreed to one way 10 or the other. But overall, just on a macro basis, 11 it's my recollection that they did continue. 12 Q. Now, if you would turn to the first 13 page of this document at T8024, it indicates the 14 performance of UFG on a consolidated basis. Can 15 you explain to us what that means when it says 16 "consolidated basis"? 17 A. Yes, sir. United Financial Group, Inc. 18 consolidated basis would take United Savings and 19 all of -- there were a couple of little subs at 20 United Financial Group that didn't amount to much. 21 It would be the top level total consisting almost 22 entirely of United Savings. 14814 1 Q. And as we look down at the year-to-date 2 performance and we get to the bottom, it indicates 3 that there had been a net income or loss in this 4 case of $101,886,000 dollars. 5 Do you see that? 6 A. I see that. 7 Q. And that would have been the actual 8 year-to-date losses that had been suffered by UFG 9 on a consolidated basis in its operations; is that 10 correct? 11 A. That's -- the total bottom-line net 12 loss is $102 million. 13 Q. And would most of those losses have 14 been losses which occurred in its principal 15 subsidiary, which was USAT? 16 A. Yes, sir. 17 Q. And I notice in the next column over, 18 it looks at the budgeted year-to-date performance; 19 and you were somewhat below the budgeted 20 year-to-date performance of $3.9 million? 21 A. We missed it a little bit. 22 Q. Okay. 14815 1 A. Primarily, I might add that this 2 October 31st obviously is right after the October 3 stock market crash and UFG, for the month, lost 4 $59 million. 5 Q. That 59 is reflected as the actual loss 6 over in the far left-hand column; is that correct? 7 A. Yes, sir. That would be included in 8 the 101,886,000-dollar loss. 9 Q. So, if I take out the stock market 10 crash, their performance for the year prior to the 11 crash had been about a negative 44 million; is 12 that correct? 13 A. Yes, sir. 14 Q. So, even prior to the stock market 15 crash, USAT had been losing money in its 16 operations on a fairly steady basis in the year 17 1987? 18 A. That's consistent with my memory. 19 Q. Okay. And in your memory, were those 20 losses accelerating? I mean, I see the prior 21 month indicates that in September, they lost 22 15 million? 14816 1 A. Let's see. 2 Q. Do you see the third column over? 3 A. Yes, sir, I do. 4 Q. Is it your recollection that the losses 5 were accelerating as you moved further into the 6 year towards September and October? 7 A. I can't be that precise. I remember 8 that the bottom line or net income performance 9 deteriorated certainly from '86 to '87 and, I 10 think, to '88. That's my memory anyway. 11 Q. And then if you turn to the last page 12 of this document, how did that -- all of that 13 impact the stockholders' equity which is at the 14 bottom of the page of UFG? 15 A. Stockholders' equity as of 16 October 31st, 1987, was in a deficit position of 17 7,960,000. 18 Q. Now, prior to the preparation of this 19 report, you were aware that there was a problem. 20 Right? 21 A. (Witness nods head affirmatively.) 22 Q. And, in fact, Mr. Berner had circulated 14817 1 a memo to that effect. 2 Do you recall that? 3 A. I don't remember it from then. I've 4 seen a memo recently that Mr. Berner circulated. 5 Q. And if you flip back in the book, I 6 think two documents, you'll come to a memorandum 7 that's dated October 29th, 1986. 8 MR. VILLA: Your Honor, we don't have 9 the same book that you-all do. So, you have to 10 start off by giving us the T numbers. 11 MR. RINALDI: It's T8022. 12 MR. VILLA: Thank you. 13 MR. RINALDI: And -- 14 MR. NICKENS: Tab 396. 15 Q. (BY MR. RINALDI) Why don't you take a 16 moment to look at that, sir? 17 A. (Witness reviews the document) 18 Q. Now, the memorandum which is entitled 19 "Privileged and confidential" is addressed to 20 Charles Hurwitz, Barry Munitz, Jenard Gross, Mike 21 Crow, Jim Wolfe, and Bruce Williams; and it comes 22 from Arthur Berner. It's dated October 29th, 14818 1 1987. 2 Do you recall, was this shortly after 3 the stock market crash that you referred to? 4 A. I believe it was, yes. 5 Q. And do you recall, was USAT involved in 6 investments which were affected adversely by the 7 crash in the stock market? 8 A. I believe, from my memory, equity 9 arbitrage was negatively affected by the stock 10 market crash; and then -- it didn't hit the bottom 11 line. But certainly, some of our high-yield bonds 12 were affected in mark-to-market; but that's 13 another issue. 14 Q. Okay. Well, I don't want to get into 15 anything in specific detail with respect to either 16 the junk bonds because I'm sure that Mr. Guido 17 will want to address that issue with you. So, 18 let's just move on here. 19 The document states that, "Based on 20 current estimates, it appears as if United will 21 fail to meet its minimum regulatory net worth at 22 October 31st, 1987." 14819 1 Do you see that? 2 A. I see that. 3 Q. It says, "Pursuant to 4 Section 56313(b)(8) of the Federal Home Loan Bank 5 Board regulations, quote, an institution shall 6 calculate its minimum regulatory capital 7 requirements as of the end of each calendar 8 quarter and shall maintain regulatory capital in 9 an amount not less than the minimum requirement so 10 calculated from the end of the quarter for which 11 the minimum requirement was calculated to the end 12 of the next succeeding year." 13 THE COURT: I don't think you read that 14 right. 15 MR. NICKENS: It says "calendar 16 quarter." 17 MR. RINALDI: I'm sorry. 18 Q. (BY MR. RINALDI) And do you recall 19 receiving this memorandum and being -- strike 20 that. 21 Mr. Berner would not have normally had 22 the information regarding a failure of net worth 14820 1 available to him in his operation as chief 2 counsel, would he? 3 A. I don't know. 4 Q. Well, did he calculate the regulatory 5 compliance of the institution? 6 A. Oh, in terms of calculating the 7 numbers? 8 Q. Yes. 9 A. No. Typically that would come out of 10 the financial area. 11 Q. And they would have advised you or 12 alerted you of a potential failure of regulatory 13 capital requirements? 14 A. Yes, sir. 15 Q. Do you recall, then, did you pass this 16 information on to Mr. Berner for his use? 17 A. Well, I'm not -- I can't really 18 remember, but I -- anybody that was aware or alert 19 knew that -- knew basically where our minimum net 20 worth requirement was versus the actual net worth, 21 and they knew that the stock market values had 22 gone down precipitously. And I don't know the 14821 1 exact timing of the investment committee; but it 2 would have been reported in the investment 3 committee that, you know, we had suffered losses. 4 So, I'm not sure whether I directly told 5 Mr. Berner or Mr. Berner just logically concluded 6 that. 7 Q. Well, is it fair to say that around 8 USAT, people were aware of the net worth condition 9 of the institution and were aware of the market 10 factors that might impact it adversely? 11 A. Certainly, the -- a number of the 12 executive VPs and above would have been, yes, sir. 13 Q. And I take it you would include in that 14 group the individuals who are named in this memo? 15 A. Yes, sir, I would. 16 THE COURT: We'll take a short recess. 17 18 (Whereupon, a short break was taken 19 from 3:03 p.m. to 3:27 p.m.) 20 21 THE COURT: We'll be back on the 22 record. 14822 1 Mr. Rinaldi, you may continue. 2 MR. RINALDI: Thank you, Your Honor. 3 Q. (BY MR. RINALDI) I believe when we 4 stopped, we were looking at Document T8022. This 5 is the memo from Mr. Berner dated October 29, 6 1987. Now, Mr. Berner in the memo goes on and 7 discusses some of the limitations that can be 8 placed upon the institution as a result of a 9 failure to comply with minimum net worth. 10 I'm directing your attention 11 specifically to the third full paragraph. It 12 states Section 563.13(d) sets forth the powers of 13 the Federal Home Loan Bank Board in the event an 14 insured institution fails to meet its regulatory 15 minimum capital requirements. These include 16 requiring the institution to -- and it lists ten 17 items. 18 Directing your attention to Item 8, it 19 indicates that, among other things, the Federal 20 Home Loan Bank Board could limit operational 21 expenses to specified limits. 22 Were you aware that a failure of the 14823 1 capital requirements could result in a limitation 2 of -- of operational expenditures? 3 A. I don't remember what I was aware of at 4 this time. I see that I'm a recipient of this 5 memo; so, I -- I'm sure I read the memo. 6 Q. Okay. But prior to receiving this 7 memo, did you have any understanding as to the -- 8 the fact that the Federal Home Loan Bank Board 9 could place limitations upon USAT's operational 10 expenditures in the event that it failed its net 11 worth requirement? 12 A. I just don't remember. 13 Q. And it goes down further and says, "In 14 addition, while an institution is in 15 non-compliance, it will not be able to" -- and 16 No. 4 indicates "establish a finance subsidiary, 17 transfer assets to an existing finance subsidiary, 18 or issue additional securities through an 19 operating subsidiary without prior PSA approval 20 (Section 563.13-2)." 21 Do you see that? 22 A. I see that. 14824 1 Q. Were you aware that those limitations 2 existed as well as a result of non-compliance? 3 A. Prior to the receipt of this memo? 4 Q. Yes. 5 A. No, sir. I don't know whether I was 6 aware of that or not. 7 Q. No. 5 indicates that they could not 8 make any direct investments without PSA approval. 9 Was that something you understood USAT would not 10 be able to do without approval in the event of 11 non-compliance? 12 A. I don't remember whether I knew or 13 didn't know. 14 Q. If USAT had fallen out of capital 15 compliance as Mr. Berner says may be the case, 16 would that -- and if, as a result of falling out 17 of capital compliance, it couldn't engage in 18 direct investments, would that have impacted 19 USAT's operations? 20 A. Well, to -- you mean to cut out all, 21 quote, "direct investments"? 22 Q. Yeah. 14825 1 A. Yes. 2 Q. Okay. And what impact would it have 3 had? 4 A. Well, I believe that equity arbitrage 5 was a direct investment, if I'm not mistaken. I 6 mean, I could be wrong. 7 Q. Did they have any other direct 8 investments? 9 A. I recall that UFC, United Financial 10 Corp., which was the vehicle that was used to do a 11 lot of the joint venture land development type 12 projects, those were direct investments. 13 Q. And so, if USAT had failed to meet its 14 minimum capital requirements and could not engage 15 in direct investments, it would have impacted the 16 manner in which USAT could have carried out its 17 business. 18 Is that a fair statement? 19 A. Well, if it -- certainly, if -- if an 20 authority had come to United and said, "Get rid of 21 all your direct investments," absolutely, it would 22 have an impact. 14826 1 Q. Well -- but here, this talks about that 2 you can't make any new direct investments without 3 PSA approval. 4 Do you see that? 5 A. Yes, sir, I do see that. 6 Q. Would it have limited areas of business 7 that USAT was presently engaged in at that time? 8 A. I think so. 9 Q. And that would include things like 10 equity arbitrage and some of the direct 11 investments in the area of United Financial 12 Corporation? 13 A. Yes, sir. And, again, I think equity 14 arbitrage was a direct investment. I'm not 15 100 percent positive. 16 Q. Okay. I understand. I just want your 17 understanding. 18 A. Yes, sir. 19 Q. I know that you're not a regulatory 20 lawyer. 21 It indicates, in No. 7, that as a 22 consequence of non-compliance, that they would not 14827 1 be able to separate any brokered deposits if the 2 amount of such deposits together with the total 3 amount of all other brokered deposits would exceed 4 5 percent of the total deposits (Section 563.4). 5 Do you see that? 6 A. I see that. 7 Q. Did USAT rely on a source of brokered 8 deposits as a source of funds? 9 A. Yes, sir. 10 Q. Do you know if it had in excess of 11 5 percent brokered deposits at this point in time? 12 A. I don't know, but I strongly suspect 13 that it did because brokered deposits funded the 14 high-yield bonds because of the matched funding 15 situation. And I believe we used other brokered 16 deposits because -- simply because of the Texas 17 premium, it oftentimes was cheaper. 18 So, my answer is I think that it 19 exceeded 5 percent; but I'm not sure. 20 Q. Okay. So that if a limitation had been 21 placed on the brokered deposits of 5 percent, it 22 could have impacted the business of USAT? 14828 1 A. Yes, sir. 2 Q. Okay. Now, did the condition of USAT 3 and its parent, UFG, continue to deteriorate, 4 financially speaking, after this October 29th memo 5 was written by Mr. Berner? 6 A. I guess the correct answer is I don't 7 know. I remember -- I believe the stock market 8 improved somewhat, and I believe equity arbitrage 9 improved a bit. Clearly, my memory is that in 10 1988, the performance of net income or net loss 11 was certainly significant. So, I guess -- you 12 know, it's hard for me to be precise as to a date. 13 Q. Well, why don't you look at what's been 14 previously admitted as -- previously marked as 15 T8033. 16 MR. RINALDI: This was admitted, 17 Your Honor, at Tab 402. 18 Q. (BY MR. RINALDI) It is the annual 19 report of United Financial Group dated 12/31/87. 20 I think it's about six or seven documents further 21 on in the binder, and it's a fairly thick 22 document. It consists of some 60, 68 pages. 14829 1 Do you see that? 2 A. Yes, sir. I see the UFG 1987 annual 3 report. 4 Q. All right. Well, then, let's take a 5 look at -- and if you turn to Page 68, it 6 indicates that it's a document that you would have 7 signed off on. 8 Do you see that? 9 A. Yes, sir, I see that signature block. 10 Q. Okay. You were, at that time, the 11 senior vice president and chief financial officer 12 and director of UFG. And this would have been 13 signed on March 28th, 1988. 14 Do you see that? 15 A. Yes, sir. 16 Q. So that by the time this document 17 actually gets filed, you had actually become a 18 director; is that correct? 19 A. That is correct. 20 Q. But the financial information in this 21 document is through the end of 1987, which would 22 be December 31st, 1987? 14830 1 A. That's correct. 2 Q. Okay. Now, directing your attention to 3 the second page of the document -- it's a 4 two-sided document. It's got H0658 is the Bates 5 stamp number at the bottom of the page. There is 6 a snapshot of the financial highlights. 7 Do you see that? 8 A. I see that. 9 Q. Okay. And it appears from the 10 financial highlights that the institution now has 11 experienced a stockholder equity deficit of 12 $118 million. 13 Do you see that? 14 A. Well, that's -- the net loss of 15 117,980? 16 Q. Yes. 17 A. Yes. That would be the net loss for 18 the year. And the common stockholder's equity 19 deficit, the very last number, would be negative 20 41,903,000. 21 Q. And so, does that indicate that in 22 October at the -- at October 31st, I believe, the 14831 1 net income was a loss of 102 million. 2 Do you remember when we looked at that? 3 A. I remember it was around that. 4 Q. So that by the end of the year, UFG's 5 financial statement had indicated a further loss 6 of some $16 million over what had occurred at the 7 end of October; is that correct? 8 A. Roughly. 9 Q. Okay. And, again, the stockholder's 10 equity was a deficit of almost $42 million; is 11 that correct? 12 A. As of year-end 1987, that's correct. 13 Q. Okay. And if you'll look over on the 14 next page, the management letter, and you go down 15 to the third paragraph, I think it even discusses 16 what you mentioned earlier. It talks about the 17 stock market crash. 18 Do you see that? 19 A. I see that. 20 Q. It says, "Meanwhile, the stock market 21 downturn on October 19th, 1987, resulted in a 22 sharp decrease in the profitability of the 14832 1 company's marketable equity securities trading 2 portfolio. The company recorded a loss of 3 118 million or $14.53 a share for 1987. This loss 4 resulted primarily from loans and other losses and 5 from the costs associated with non-performing 6 assets." 7 Do you see that? 8 A. Yes. 9 Q. Is that consistent with your 10 recollection of the financial condition of UFG at 11 or about the end of 1987? 12 A. Well, my independent memory is that it 13 was certainly a loss year. I don't remember the 14 exact numbers, but I -- I have no reason to 15 dispute these figures at all. 16 Q. Okay. And both USAT and, of course, 17 its parent, UFG, whose financials were indicated 18 here, were both doing equally poorly? 19 A. USAT would pretty well tracked UFG 20 because it -- UFG's largest asset by far was USAT. 21 Q. Okay. Now, would you turn then to 22 Page 2 of the -- numbered Page 2, which is Bates 14833 1 stamped H0664. And under "current condition," it 2 discusses there the fact that the regulators had 3 determined that as a result of their examination, 4 that they had -- that they concluded that USAT was 5 failing its net worth requirement. 6 Do you see that? 7 A. Yes. In the second paragraph? 8 Q. Yes. 9 A. Yes, I see that. 10 Q. And going back to the first paragraph, 11 it indicates that the association also agreed with 12 that -- the findings of the examiner, that it had 13 failed its minimum net worth capital requirement 14 as of September 30th and December 31st, 1987. 15 Do you see that? It's the last 16 sentence in the first paragraph. 17 A. Okay. Yes, sir, I see. 18 Q. And as the chief financial officer, did 19 you agree with that assessment, that as of 20 September 30th and December 31st, 1987, USAT was 21 failing its minimum net worth requirement? 22 A. I don't remember exactly what I 14834 1 thought, but I certainly have no reason to dispute 2 what this page says. 3 Q. And then the next paragraph talks about 4 the consequences that we discussed earlier such as 5 net worth failure. Then it goes on and talks 6 about the association filing an application for 7 forbearance with the Federal Home Loan Bank of 8 Dallas. 9 Do you see that? 10 A. I do. 11 Q. What is a forbearance application, sir? 12 A. Well, I know we filed one; and I'm not 13 sure I can really define it. 14 Q. Let's go down to the last full 15 paragraph on the page. It reads as follows: 16 "UFG, in connection with its becoming a holding 17 company, agreed to maintain USAT's capital above 18 the minimum requirement level established by the 19 FSLIC. UFG has not been requested to provide 20 additional capital to USAT; but, if requested, UFG 21 currently does not have sufficient assets to 22 contribute to maintain USAT above its minimum 14835 1 capital requirements." 2 Do you see that sentence? 3 A. I do see that. 4 Q. And do you recall that UFG had, at a 5 prior period in time, entered into an agreement 6 with the Federal Home Loan Bank Board whereby it 7 stipulated that if, in the future, USAT fell below 8 its minimum capital requirement, UFG would infuse 9 capital into USAT? 10 A. No, sir, I don't -- I don't remember 11 that, or I wouldn't -- I don't believe I was 12 involved in that. 13 Q. Well, as the chief financial officer, 14 though, is that a fact that you would have been 15 aware of in connection with the operation of the 16 institution? 17 A. I don't know. I can answer it this 18 way. Factually, I don't remember what I knew and 19 when I knew it. I certainly participated in the 20 preparation of this document. 21 Q. Let me hand you a copy of what's been 22 previously marked as Exhibit T2005, and it's been 14836 1 admitted as Tab 116. 2 MR. RINALDI: And since it's not in the 3 books, if the Court would like a copy of that. 4 (Discussion held off the record.) 5 6 Q. (BY MR. RINALDI) Now, what I would like 7 for you to do is, first, on the front page of the 8 cover letter, just to expedite things, it's a 9 letter to the Federal Home Loan Bank from 10 Mr. James Pledger. And I believe you testified 11 earlier that Mr. Pledger was the general counsel 12 for USAT at about the time you arrived there; is 13 that correct? 14 A. That's correct. 15 Q. Okay. And he writes to Ms. Kato. And 16 if you look at the fourth paragraph down, it 17 indicates that he has enclosed a stipulation by 18 United Financial Group, Inc. regarding the 19 maintenance of net worth of United Savings. 20 Do you see that? 21 A. I see that. 22 Q. And then if you turn to the last or the 14837 1 next-to-the-last page, there is a stipulation or a 2 signed affidavit and the individual who signs it 3 is C.E. Bentley. I believe Mr. Bentley was the 4 chairman of United Financial Group at the time you 5 became involved with that entity; is that correct? 6 A. I believe that's correct, yes. 7 Q. Okay. And the affidavit signed by 8 Mr. Bentley says -- let me read it for you. It 9 says, "I, C.E. Bentley, chairman of United 10 Financial Group, do hereby stipulate that as long 11 as United Financial, Inc. controls United Savings 12 Association of Texas, it will cause the net worth 13 of United Savings to be maintained at a level 14 consistent with that required by 563.13(b) of the 15 rules and regulations for insurance and in effect 16 of institutions insured 20 years or longer and, as 17 necessary, will infuse sufficient additional 18 equity capital in the form satisfactory to the 19 supervisory agent to effect complete compliance 20 with such requirement." 21 MR. NICKENS: Your Honor, he added the 22 word "complete." I mean, he just added it. 14838 1 MR. RINALDI: I'm sorry. 2 A. I must have a different copy. 3 Q. (BY MR. RINALDI) Perhaps you're looking 4 at the last page. This is the next-to-the-last 5 page I read from. (Reviewing) Well, you have a 6 better copy. 7 A. Okay. 8 Q. It's readable. 9 A. Okay. 10 Q. No, it isn't. It would appear that the 11 order of pagination is -- let me ask you this: Do 12 you recall ever having seen this affidavit while 13 you were the CFO of United Financial Group, Inc.? 14 A. No, sir. 15 Q. During your tenure as a CFO of United 16 Financial, Inc., did you have any discussions 17 regarding United's obligation to infuse capital 18 into USAT? And what I would like to do is limit 19 that for the period up to the end of 1987. 20 A. I can't recall any discussions -- 21 you've limited me. I certainly remember 22 discussions in 1988 or, excuse me, whenever the 14839 1 Penn Corp. debt payoff occurred. That's more when 2 I remember that discussion occurring. 3 Q. Well, then, what are your recollections 4 of the discussions that were had on this subject 5 after the end of 1987 and into the year 1988? 6 A. My memory is hazy without documents; 7 but as best I recall, management asked for 8 permission to pay off at the holding company level 9 at a deep discount some Penn Corp. related debt. 10 And it -- that's kind of what I remember about it. 11 And if we used most all of the money at the 12 holding company to pay off the Penn Corp. debt, 13 then the cupboard was pretty bear in terms of 14 funds if we received a request to inject capital 15 into United Savings. 16 Q. With respect to that Penn Corp. debt, 17 you did file an application with the Federal Home 18 Loan Bank of Dallas for permission to pay off that 19 debt at a deep discount, did you not? 20 A. I remember there was an application. 21 Q. Was that ultimately approved? 22 A. I believe it was. 14840 1 Q. I'll show you some documents later 2 about the Penn Corp. debt. In connection with 3 that, do you recall whether the issue arose of 4 whether UFG had an obligation to maintain the net 5 worth of USAT? 6 A. I remember, I didn't focus on legally 7 whether the -- you know, whether there was a legal 8 obligation to inject capital there or not. I was 9 looking more at the numbers. And if we paid off 10 the Penn Corp. debt, there wasn't going to be the 11 numbers to inject much capital in USAT. 12 Q. Okay. At the end of 1987, if UFG had 13 to infuse capital into USAT, it would have been 14 hard-pressed to have infused capital under such an 15 agreement. 16 Is that a fair statement? 17 A. Is that after the Penn Corp. debt? 18 Q. No. This is before the Penn Corp. 19 debt. This is at the time of the annual report 20 that we're looking at right now. 21 A. Well, assuming that -- 22 Q. In effect, I think that's what it says 14841 1 in the last paragraph that I just read to you. 2 A. Yeah. I think basically there was 3 limited funds at the holding company level. 4 Q. But the holding company did have funds 5 still available to it that it ultimately was able 6 to use to pay off the Penn Corp. debt? 7 A. That is correct. 8 Q. And do you recall what the source of 9 those funds were that were used to pay off the 10 Penn Corp. debt? 11 A. Well, I recall that when I arrived at 12 United, the holding company had some funds. Where 13 that came from, I don't know. I probably -- I may 14 have known at the time, and I recall that a -- I 15 think it was subsequent to the Independent 16 American branch sale that a dividend was paid from 17 USAT to UFG. And that was -- I think those two 18 items, the money it had to start with and then the 19 dividend from USAT and then I think some money was 20 actually made in the form of equity arbitrage at 21 the holding company level. 22 Q. The money that you said was paid in the 14842 1 form of a dividend, do you recall that that money 2 was generated as a result of branch sales at the 3 end of 1984? 4 A. Well, that's my memory; but, again, I 5 want to caution the Court. I could be incorrect. 6 I just -- 7 Q. Your memory is that it was as a result 8 of branch sales? 9 A. My memory is that we had had a good 10 year and -- at the USAT level and the dividend was 11 paid. But that was fairly early in my tenure at 12 United, and I had my nose buried in accounting 13 records and computer conversions. 14 So, I wasn't -- that was pretty much 15 handled by Mr. Bentley and Mr. Williams. 16 Q. Now, if you would turn to Page 39 of 17 the annual report, that's an auditor's report 18 there. I had a couple of questions that I wanted 19 to ask you about the auditor's report. 20 Now, the auditor's report is dated 21 February 5th 1988, even though the annual report 22 isn't dated until March the 28th, 1988? 14843 1 A. I see that. 2 Q. In the auditor's report, the third full 3 paragraph says, "As more fully discussed in 4 Note 14, the company's principal subsidiary, 5 United Savings Association of Texas (USAT) is 6 subject to certain minimum regulatory capital 7 requirements which were not met at December 31st, 8 1987. Accordingly, USAT filed a request for 9 capital forbearance with the Federal Home Loan 10 Bank of Dallas. USAT's ability to continue as a 11 going concern is dependent upon regulatory 12 forbearance and achieving a profitable level of 13 operations." 14 Do you see that? 15 A. I see that. 16 Q. It says, "The company's ability to 17 continue as a going concern is also dependent on 18 UFGI's ability to meet its obligations to certain 19 creditors and preferred stockholders as described 20 in Note 14 which may not be possible if the 21 company is required to contribute capital to 22 USAT." 14844 1 Do you see that? 2 A. I see that. 3 Q. And were you aware of the contents of 4 the auditor's report prior to February 5th, 1988? 5 I mean, what was the process? 6 A. I can't say that I was specifically 7 aware, but I would be -- I would be almost -- 8 I'm -- I would have to say that I'm sure that I 9 was aware. 10 Q. I mean, the auditors were on site. 11 They were going through your books and records. 12 They came up with preliminary conclusions, and 13 those preliminary conclusions would have been 14 discussed with you at least as the chief financial 15 officer. 16 Is that a fair statement? 17 A. That's a fair statement. 18 Q. So, when, on February 5th, 1988, they 19 gave you the auditor's report, the things in the 20 auditor's report didn't come as a great surprise 21 to you. 22 Is that reasonable? 14845 1 A. That would be correct. 2 Q. Okay. Now, is this -- what kind of 3 auditor's opinion letter is this that's attached 4 to -- to -- to the auditor's report? 5 A. It's a -- I don't know the technical -- 6 I don't remember the technical term. It's 7 basically a so-called going concern type opinion 8 which -- which is, if I remember correctly, one 9 step from about as -- I think there's another step 10 in degree that says the company is in such -- in 11 essence, it says, "The company is in such bad 12 shape that we can't render any opinion. So, this 13 was definitely not a clean audit opinion; and it 14 put the reader on notice that the company's 15 ability to continue as a going concern was 16 questionable. 17 Q. Okay. And did you share the auditor's 18 view that the company's ability to continue as a 19 going concern was questionable at the end of 1987 20 and the beginning of 1988? 21 A. Well, I would put it a bit differently. 22 Of course, the auditors have to look at the facts 14846 1 and figures; and they can't base their opinions on 2 much of anything else. I had the opinion that we 3 were going to be restructured in some type of a 4 Southwest Plan type recapitalization. So, I was a 5 bit more optimistic. 6 Q. In the event that restructure did not 7 occur, did you have any confidence that UFGI would 8 have the ability to continue as a going concern? 9 A. Without the ability -- I'll answer it 10 this way: Without the ability to have a Southwest 11 Plan type restructuring or some other type of 12 recapitalization, I -- I -- I don't believe I 13 could have seen any way that it would continue as 14 a going concern. 15 Q. Okay. Now, you indicate that you were 16 hopeful of the possible Southwest plan 17 participation. 18 Can you tell us what your understanding 19 was of what the Southwest Plan would mean? 20 A. I wasn't the point man on that; so, my 21 information is somewhat secondhand. And it's 22 faded by the ravages of time on my memory. But my 14847 1 understanding was that there were programs where 2 what was perceived to be better-managed thrifts -- 3 which, at that time, I was under the perception 4 that the regulators thought we were one of the 5 better-managed thrifts -- would take over one or 6 more problem thrifts. That's one area. Then 7 there was another area that occurred certainly in 8 late 1988 where new ownership would come in with 9 the assistance of regulatory capital injection and 10 the organization would be recapitalized. 11 Then I remember there was also an idea 12 of a -- some type of -- I believe it was called 13 FATA real estate proposal that would be some form 14 of recapitalization. 15 So, there were certainly -- in this 16 time frame, there were all of these 17 recapitalization opportunities that were out 18 there. 19 Q. And all of those recapitalization 20 opportunities depended upon some infusion of 21 capital from the Federal Government, didn't they? 22 A. I don't remember. But certainly, it's 14848 1 fair to say that that was the dominant -- the 2 dominant feeling or the dominant thought. I think 3 there was a few recapitalization plans that were 4 around that would not have involved the Federal 5 Government but -- 6 Q. Did you understand that the 7 Southwest Plan would involve participation by the 8 Federal Government by guaranteeing losses or 9 infusing capital in some way into the surviving 10 institutions? 11 A. I was aware that the, quote, "official 12 Southwest Plan would involve the Federal 13 Government, absolutely. 14 Q. Okay. I would like you to now turn 15 further into the book. I think it's the -- about 16 the fifth document from the end. This is 17 Exhibit T8049. It's Tab 905. And it is the 18 minutes of the special meeting of the board of 19 directors of USAT dated March the 30th, 1988, 20 and -- do you have it? It's Tab 405. 21 Did there come a time when -- strike 22 that. 14849 1 Do you recall that within the latter 2 part of 1987, the Federal Home Loan Bank Board 3 began a second examination of United Savings 4 Association? When I say "second," I don't mean 5 there were only two. We've talked about one in 6 '86, right, and there's a letter in April of 1987 7 I've shown you regarding the results of that 8 examination? 9 A. Right. 10 Q. Do you recall, subsequent to receiving 11 that letter, that the bank board initiated another 12 examination in the latter part of 1987? 13 A. I don't remember the exact time frame; 14 but I remember that after the exam, we talked 15 about -- as of, I guess, June 30th of '86, there 16 were several exams just in '87 and seems to me in 17 '88. 18 Q. Okay. And do you recall that at some 19 point in time after the commencement of the 20 examination in the latter part of 1987, that the 21 board of USAT met with the regulators and the 22 examiners to discuss the net worth condition of 14850 1 USAT? 2 A. I don't -- I don't remember that. I 3 see these minutes in front of me. 4 Q. And the minutes indicates in the third 5 line that a Mr. Michael Crow attended the meeting 6 or the special meeting of the board of directors 7 of USAT. 8 Do you see that? 9 A. Yes, sir, I do. 10 Q. And in the third full paragraph, it 11 says, "Mr. Gross stated that the purpose of the 12 meeting was to hear the final field examiner's 13 results of the Federal Home Loan Bank of Dallas's 14 1987 examination. He requested" -- well, I don't 15 to read on any further than that. 16 Do you remember attending a meeting at 17 which the final results of the 1987 examination 18 were discussed? 19 A. I really don't. I remember attending a 20 board meeting where there were a number of 21 representatives from the Home Loan Bank there. 22 So -- 14851 1 Q. Do you recall who Mr. Danny Thomas was? 2 A. I believe Mr. Thomas was -- was 3 Mr. Twomey's boss. 4 Q. Do you recall Mr. Twomey? 5 A. Yes, sir. 6 Q. Did you, on occasion, have an 7 opportunity to talk to Mr. Twomey? 8 A. Yes, I did. 9 Q. He was the principal supervisory agent 10 with respect to USAT? 11 A. That is correct. 12 Q. Okay. And Mr. Twomey would, from time 13 to time, visit you at USAT? 14 A. Yes. Most of our contact was -- most 15 of my contact was with Ginger Baugh or Vivian 16 Carlton. I would certainly talk with them from 17 time to time. 18 Q. Now, you say your contact was with 19 Ginger Baugh. Was the contact face-to-face or by 20 telephone? 21 A. Oftentimes, it was by telephone. 22 Q. Okay. Now, it indicates here that 14852 1 Ms. Carlton presented an agenda and attachments 2 which Mr. Gross ordered attached to the minutes of 3 the meeting. 4 Do you see that? 5 A. Yes, sir, I do. 6 Q. Okay. And if you would look at the 7 fourth -- fifth page of the document which is 8 OW054327, it is an attachment which purports to 9 set out the capital circumstances with respect to 10 USAT; and it's got the same kind of calculation 11 that we've seen previously calculating its 12 capital. 13 Do you see that? 14 A. Yes. 15 Q. On the one side, there's the 16 association; and then on the right-hand column, it 17 talks about the examiners. 18 Do you see that? 19 A. I see that. 20 Q. Okay. And toward the bottom of the 21 page, there is an entry. It says, "Deficit 22 minimum regulatory capital requirement." 14853 1 Do you see that? 2 A. I see that. 3 Q. And it indicates there that the 4 examiners believe that the deficit of USAT at or 5 about December 31st, 1987, was 112 $551. 6 Do you see that? 7 A. I see that. 8 Q. Was there still a dispute going on 9 between USAT and the examiners regarding the size 10 of USAT's capital deficit? 11 A. Well, I don't know. This -- this 12 schedule certainly reports different numbers, but 13 they are both deficit positions. 14 Q. And it indicates that the association 15 at this point -- and this point being 16 March 30th -- apparently was calculating its own 17 deficit as $53,659,000; is that correct? 18 A. That's the way I read this schedule, 19 yes, sir. 20 Q. Do you recall the actual preparation of 21 this schedule by the finance department at USAT? 22 A. No, sir, I do not. 14854 1 Q. Do you have any reason to dispute that 2 this was, in fact, the association's calculation 3 of its deficit regulatory capital on or about 4 December 31st, 1987? 5 A. No, sir, I don't have any reason to 6 dispute that. I just don't know. 7 Q. Now, after the meeting with the 8 regulators on March the 30th, the financial 9 circumstances with respect to USAT and UFG 10 continued to deteriorate, did they not, sir? 11 A. You mean into the year 1988? 12 Q. Well, yes. Further into the year as 13 the year went on, did the losses continue to mount 14 and did the financial condition of the institution 15 and the company and the association both continue 16 to go downhill? 17 A. My memory is that as 1988 progressed. 18 That losses mounted. That's my memory. The 19 numbers are, you know -- if you can give me some 20 schedules, I'll try to be more precise. 21 Q. And all this time, we've been talking 22 about minimum regulatory capital. So, what we're 14855 1 really talking about with USAT is that they still 2 had some capital left. It's just they were below 3 the amount that the regulators said they should 4 have. 5 Is that a fair statement? 6 A. Let's see. Yes, sir. I believe this 7 schedule shows total regulatory capital per the 8 association of 197 million and, per the examiners, 9 138 million, I believe. 10 Q. Right. And you're looking, again, at 11 Exhibit T8049; and that's Page OW053427. USAT 12 still had capital at the end of 1987, didn't it? 13 A. It had regulatory capital. 14 Q. Okay. And thank you for being precise. 15 Did there come a time when the 16 regulatory capital became negative? 17 A. Certainly, by the end of 1988, after 18 all of the big sales of securities and all of 19 that, I believe so. 20 Q. Okay. Well, do you recall that, in 21 fact, the regulatory capital went negative 22 sometime in July of 1989 -- I mean '88? 14856 1 A. No, sir, I don't recall that 2 independently. 3 Q. All right. Would you take a look at 4 Volume II and turn to the -- 5 MR. VILLA: What's the T number? 6 MR. RINALDI: It's about the sixth 7 document from the back. It's T8095. And I 8 believe it's previously been admitted at Tab 439. 9 Q. (BY MR. RINALDI) Now, can you describe 10 for the -- do you recognize this document, sir? 11 A. Yes, sir. This appears to be the -- 12 the summary performance report that we would send 13 to the board of directors. It would not be the 14 full performance report, but it would be that 15 summary. 16 Q. Okay. And this is the kind of thing 17 that you would send out every month to the board 18 of directors, correct? 19 A. That is correct. 20 Q. And if you turn to the third page -- I 21 guess it's actually Page 4 -- it would appear that 22 the numbering sequence is off, but the Bates 14857 1 stamps at the bottom are sequential. I see. The 2 pages are just out of order. 3 If you turn to the third page in where 4 it talks about regulatory compliance, Page 4, it's 5 UFG-J2613. 6 Do you see that? 7 A. Yes, sir, I do. 8 Q. And there is then a regulatory 9 compliance discussion there. And it states that, 10 in the first sentence, "The association recorded a 11 62.5-million-dollar regulatory loss for the second 12 quarter. The loss recorded at the association 13 level does not include the Penn Corp. gain which 14 occurred at the holding company level." 15 Do you see that? 16 A. I see that. 17 Q. And then it goes on and says, "Based on 18 the examination report issued by the Federal Home 19 Loan Bank of Dallas which was received in the 20 third quarter of 1988, USAT has failed to meet its 21 minimum regulatory capital requirement since 22 September 30th, 1987. USAT reported regulatory 14858 1 capital of 87 million on June 30th, 1988, which 2 was 163.1 million below the minimum regulatory 3 capital requirement. As a result of the 4 examination report and a transfer of certain 5 general reserves to the specific reserves, USAT's 6 regulatory capital as of July 31st, 1988, was 7 negative $86 million. 8 Now, what does it mean when you have 9 negative capital, sir? 10 A. Well, negative capital means that on a 11 book basis, non-mark-to-market, your liabilities 12 exceed your assets. 13 Q. And it indicates here that that point 14 was reached sometime in the month of July. 15 Is that accurate? 16 A. That's the way I read that, yes. 17 Q. Over on June 30th, 1988, at the end of 18 the -- the preceding month, while it had not gone 19 negative, it indicates here that USAT had failed 20 its minimum regulatory capital requirement by 21 163.1 million. 22 Do you see that? 14859 1 A. Yes, I do see that. 2 Q. And if it had $86 million in capital at 3 the end of June and negative $86 million at the 4 end of July, am I correct in assuming that it 5 would have lost something on the magnitude of 6 $94 million in the month of July? 7 A. Well, I don't know that we could make 8 that assumption because it -- it -- because the 9 sentence that says, quote, "As a result of the 10 examination report and a transfer of certain 11 general reserves to specific reserves, USAT's 12 regulatory capital, as of July 31st, 1988, was 13 negative 86 million." So -- 14 Q. Why isn't my statement accurate? 15 A. I'm not sure. Your statement may be 16 accurate, but I'm not sure all those things would 17 run through the income statement. 18 Q. Okay. But the assets of USAT as 19 reflected in this report declined from 86 million 20 to a negative 86 million after certain write-downs 21 had been taken during the month of July 1988. 22 Is that fair? 14860 1 A. Well, I would -- we'll arrive at the 2 same conclusion, but I would term it as the 3 June 30th book assets exceeded book liabilities by 4 86 million dollars. 5 Q. Right. 6 A. And by July 31st, book assets were 7 below book liabilities by 86 million. 8 Q. So, book assets would have declined in 9 value during that period of time, $94 plus 10 million? 11 A. Yeah, or liabilities might have shifted 12 around. I just don't know. 13 Q. Okay. How would you state that -- 14 phrase that statement, then, the change in 15 $94 million? 16 A. Well, I would -- my phraseology, 17 reading from the information on this schedule, is 18 that as of July 31st, the negative net worth -- 19 the negative USAT regulatory capital was 20 86 million. And the same number at June 30th was 21 $86 million positive. 22 Q. And at June 30th, even that 86 million 14861 1 was $163 million below the regulatory requirement; 2 is that correct? 3 A. I agree. 4 Q. Okay. Now, throughout the period 5 between the end of 1987 and the date of this 6 document we've just looked at, which is 7 August 23rd, 1988, did you continue to be 8 concerned about the viability of UFG as a going 9 concern? 10 A. Well, it's hard for me to remember what 11 I was concerned about during this time period; but 12 I -- I would answer it like this. Factually, I 13 don't remember what I thought at that time; but I 14 can't imagine that I wasn't concerned. 15 Q. And do you recall from time to time 16 discussing the question of whether USAT and UFG 17 were even going to be viable with other members of 18 senior management? 19 A. Most of our discussions were related to 20 Southwest Plan type discussions, and it wasn't -- 21 I guess we didn't have big meetings talking about 22 the viability of United without some type of 14862 1 restructuring. I'm not sure that's responsive to 2 your question, but I don't -- 3 Q. Let me ask you this: Do you recall 4 that at the beginning of nineteen -- in about 5 February of 1988, making projections regarding the 6 future financial condition of USAT and UFG? 7 A. I think we did make -- oh, we made 8 financial projections all the time. So, it's 9 difficult for me to be precise as to a date. Now, 10 I know we made -- I think we made projections as 11 part of our capital forbearance plan. 12 Q. Do you recall that in about February of 13 1988, you projected that in addition to the 14 118-million-dollar loss that had been suffered by 15 UFG in 1987, that you were projecting an 16 additional 100-million-dollar loss in 1988? 17 A. No, sir. I don't recall that 18 specifically. I don't dispute that. 19 Q. Do you recall discussing that with 20 Mr. Gross? 21 A. No, sir. I may have. If you can give 22 me a projection or something -- I simply don't 14863 1 remember those numbers you're giving me. 2 Q. Okay. 3 A. But I'll say that I often discussed 4 with Mr. Gross projections of our financial 5 performance. 6 Q. And in that period of time, in 7 February, you would have been projecting 8 continuing losses for UFG and USAT; isn't that 9 correct? 10 A. From my memory, absolutely. 11 Q. So, the only thing you don't recall is 12 what the actual magnitude of those discussions 13 might have been. 14 Is that fair? 15 A. That is correct. I think without any 16 recapitalization or restructuring, we would have 17 been projecting future losses. 18 Q. And in addition to talking to 19 Mr. Berner, did you also have discussions with 20 people like Mr. Jackson or Mr. Berner, Mr. Wolfe 21 regarding the viability of UFG and whether it 22 would survive as a corporation in the spring of 14864 1 1988? 2 A. I don't remember specific discussions. 3 I talked to the people you mentioned all the time, 4 I mean, just as a matter of course of business. 5 Mr. Jackson was pretty much in charge of our 6 funding operation; so, he and I had a number of 7 discussions about the effect bad publicity would 8 have on our deposit-raising capacity and our repo 9 lines and that sort of thing. So -- 10 Q. Would you take a look at what's been 11 previously marked as T8054? This is Tab 403. 12 This is a memorandum, and it will be in the first 13 book. It's the next -- I think it's two pages in 14 from the end. It's a memorandum from a Mr. Arthur 15 Berner to -- to files. It's dated March the 31st, 16 1988. 17 Have you found the document, sir? 18 A. The memo from Mr. Berner to 19 Mr. Whatley, Gross -- 20 Q. No, it's 8054. 21 A. I apologize. 22 Q. So, it will be the next document. 14865 1 A. Yes. 2 Q. But you are correct. There are two 3 with the same date. 4 Now, directing your attention to the 5 second full paragraph, the second sentence of that 6 paragraph reads as follows: "A number of meetings 7 with Barry Munitz and Jenard" -- "At a number of 8 meetings with Barry Munitz and Jenard Gross, these 9 executives (Messrs. Crow, Jackson, Berner, Wolfe 10 and Williams) discussed their concerns for the 11 ongoing viability of the association." 12 Do you see that? 13 A. Yes, sir, I see that. 14 Q. Now, do you recall having meetings with 15 Barry Munitz and Jenard Gross where you expressed 16 concerns about the ongoing viability of USAT at or 17 about March 31st, 1988? 18 A. I don't have a specific recollection of 19 that, but I certainly don't dispute that it 20 happened. 21 Q. Okay. And if you turn to the third 22 full page, it states -- it's got a Bates stamp at 14866 1 the bottom: OW035557. And directing your 2 attention to the second full paragraph, it states, 3 "In January 1985 -- 4 MR. VILLA: '88. 5 Q. (BY MR. RINALDI) '88. "In January 6 1988, the senior executive officers became 7 concerned over UFGI's viability. It appeared at 8 that time as if the debts of UFGI would not be 9 repaid since it was possible UFGI would have to 10 put all of its equity into USAT. Moreover, the 11 UFGI debts were in excess of 55 million at a time 12 when UFGI had assets (other than its ownership of 13 USAT) of approximately 35 million in cash. Since 14 USAT could not dividend additional cash to UFGI, 15 it appeared as if, over a long period of time, 16 unless there was a significant change in 17 circumstances, UFGI would not be viable." 18 Do you see that? 19 A. Yes, sir, I see that. 20 Q. Is that an accurate description of the 21 circumstances financially of UFGI in January 1988? 22 A. I don't know. You know, I don't 14867 1 believe I've seen this before. 2 Q. Now, it says, "Senior executive 3 officers became concerned over UFGI's viability." 4 You were a senior executive officer of 5 UFGI and USAT, were you not? 6 A. Well, I was -- it depends -- well, I 7 was a senior executive vice president of USAT and 8 senior VP of UFG. So, I would certainly be on the 9 totem pole up there; but there was certainly a 10 layer above me. 11 Q. Well, I understand that. But would you 12 consider yourself as being a member of the senior 13 executive officers at UFGI and USAT? 14 A. I was recharacterizing it as -- myself, 15 Berner, and Jackson would be members of senior 16 management. 17 Q. Well, how would you -- let's start with 18 the pecking order then. I mean, who would be at 19 the top of the totem pole, as you say? Would that 20 be Barry Munitz or Mr. Gross? 21 A. Well, as -- well, as I recall it, I 22 believe you would have Mr. Crow, Dr. Munitz; and 14868 1 then you would have under them -- and I believe -- 2 I don't know whether Mr. Connell was here at that 3 time. 4 Q. Just take as a given that Mr. Connell 5 doesn't arrive for several months. 6 A. Okay. Whenever Mr. Connell arrives, he 7 would be up there at the top. Then underneath on 8 the next layer, you would have had me, Berner, Jim 9 Jackson, Jeff Gray, the head of real estate, 10 whoever that was at the time. And I probably left 11 out some people, but that's kind of the order of 12 magnitude or kind of what I was trying to convey. 13 Q. Now, what did Mister -- 14 A. Then on this totem pole, I suppose Jim 15 Wolfe and Bruce Williams would be the next layer. 16 Q. Now, you indicated that Barry Munitz 17 and Mr. Gross would be at the upper echelon of 18 your sort of list of executives. 19 A. Well, that's my words. That was my 20 perception. I mean, certainly, as I said 21 yesterday, I viewed Jenard Gross as the boss. 22 Q. Was Barry -- 14869 1 A. Certainly, I was well aware he was 2 above me. 3 Q. Was Barry Munitz the boss, too? 4 A. Well, I viewed Barry as a person that 5 definitely had a bigger title than I did. 6 Q. What was Barry's title? 7 A. I think it was -- I think it was 8 something like vice chairman. And if -- you know, 9 he would be in the -- he was always in the big -- 10 well, you know, I think he was vice chairman. 11 Q. He was always in the big office, or 12 what were you about to say? 13 A. I think his office was bigger than 14 mine, as a matter of fact. 15 Q. Okay. Now, Mr. Gross was the chief 16 executive officer? 17 A. Yes, sir. 18 Q. And we sort of know what chief 19 executive officers do. 20 What did Barry Munitz do? 21 A. Well, he didn't -- that's a very 22 difficult question to ask or to answer because, 14870 1 for that matter, I didn't go ask Mr. Gross what he 2 did. 3 Q. But you know what a chief executive 4 officer does, don't you? 5 A. Sure. He tells people what to do, and 6 they go do it. 7 Q. Okay. 8 A. And Dr. Munitz, I believe, from my 9 observation, he had a lot of liaison with board 10 members. Dr. Munitz was involved in strategic 11 planning issues. I would deal with Dr. Munitz on 12 quite a lot of compensation issues. I would deal 13 with Dr. Munitz on hiring and firing type issues. 14 And if I had a problem or an issue that I wanted 15 to talk about and it was the type of issue that 16 Mr. Gross, you know, typically wasn't interested 17 in talking about, I would go talk to Dr. Munitz 18 about it. So, he was -- 19 Q. What kinds of things would Mr. Gross 20 not be interested in talking about? Did he have a 21 particular focus at the institution? 22 A. Well, Mr. Gross was a very busy guy. 14871 1 And if he's working on, you know, some real estate 2 work-out deals or some REO problems or this or 3 that, I'm not going to -- my practice wasn't going 4 to go pester Mr. Gross over some personnel issue. 5 So, I would go to Barry Munitz. I mean, there 6 was -- I'm not trying to be evasive or secretive 7 about this. It was just something that we had in 8 this organization. It seemed to work okay as far 9 as I was concerned. 10 Q. Now, you said that Mr. Munitz or 11 Dr. Munitz was frequently a liaison with board 12 members? 13 A. That seemed to be -- that was my 14 observation. 15 Q. Was he particularly close to any 16 particular members of the UFGI board? 17 A. Well, I don't know. I believe, 18 certainly, Dr. Munitz knew Mr. Hurwitz. 19 Q. In fact, he was an officer of MCO, 20 wasn't he? 21 A. Was -- Mr. Hurwitz? 22 Q. Dr. Munitz. 14872 1 A. Oh, Dr. Munitz. My memory is that he 2 was an officer of Federated Development, but I may 3 be incorrect there. 4 Q. It's more likely I am. 5 A. He might have been an officer of MCO. 6 I just don't know. 7 Q. Was he a director of MCO? 8 A. I don't know. 9 Q. And what was Federated? 10 A. Federated was a -- it was a company; 11 and whether -- again, this is a hazy memory. 12 Whether it's accurate or not, I don't know. But 13 it seemed to have more real estate related assets. 14 Q. And do you know who the principal 15 shareholder was or the controlling shareholder of 16 Federated was? 17 A. I don't know whether it was controlling 18 or not, but I believe Mr. Hurwitz owned a good 19 deal of Federated. 20 Q. Okay. 21 A. I'm just a little hazy as about who 22 owned what and all that stuff. 14873 1 Q. I'm just trying to get a sense of the 2 various upper management at USAT. 3 A. Yes, sir. And I left out one thing. 4 Dr. Munitz was -- was -- I worked with him on the 5 strategic planning type stuff. 6 Q. Okay. You know, I -- I would love to 7 ask you about strategic planning, but I believe 8 that's probably an issue that Mr. Guido would like 9 to get into. So, I will pass on that subject. 10 Continuing with the document we've been 11 looking at, there's one other thing I wanted to 12 show you. This is the memorandum dated 13 March 31st, 1988, of Arthur Berner. It's T8054. 14 If you turn to the next-to-the-last page, 15 OW035559. And it's talking in the second 16 paragraph, "We discussed a number of possible 17 solutions. At the time these solutions were being 18 discussed, it was also clear that United Savings 19 Association of Texas would not have to be -- would 20 have to be receiving some form of supervisory 21 agreement: FSLIC assistance or capital infusion. 22 It was also evident that UFGI, without the 14874 1 assistance, might not be a viable entity." 2 Now, did you share those views that are 3 expressed in that paragraph by Mr. Berner? 4 A. My memory is that not -- it's difficult 5 for me to say as of March 31st, I shared that 6 view. But my view certainly was in the mid-1988 7 time frame, that without or maybe earlier than 8 that -- I just don't remember what I thought and 9 when I thought it. But I was of the opinion that 10 without some type of capital infusion, new 11 investor, or governmental assistance, that United 12 was not a viable entity. 13 Q. You had mentioned the subject of the 14 Penn Corp. debt restructuring. Who was Jack 15 Hughes? 16 A. He was one of the top executives, I 17 believe, for -- I think the name of the company 18 was PennCo, which was a company, I believe, that 19 had a required Penn Corp. I may be -- I got the 20 name of the company wrong. He was one of the top 21 people at Penn Corp. 22 Q. Now, UFG and USAT were going downhill 14875 1 financially as we've described here. Did there 2 come a point in time when you contacted Jack 3 Hughes to advise him of the uncertain financial 4 future of USAT and UFG? 5 A. I remember talking with Mr. Hughes 6 related to the potential payoff of the Penn Corp. 7 debt. 8 Q. And do you recall advising Mr. Hughes 9 that -- that USAT was in serious financial 10 condition and offering to satisfy his debt for a 11 small payment by UFG? 12 A. I don't remember exactly what I -- what 13 I told Mr. Hughes. I remember the substance of 14 our discussion was how would he -- how would they 15 feel about taking a deep discount in satisfaction 16 of the debt obligations. 17 Q. Do you recall telling Mr. Hughes that 18 you were concerned that the regulators would 19 request a capital injection at the savings and 20 loan level from UFG? 21 A. I just don't remember what I told 22 Mr. Hughes. 14876 1 Q. All right. Would you take a look at 2 what's been marked previously as T2011? 3 MR. RINALDI: This is a new document, 4 Your Honor; and so, it does not have a tab number. 5 It is a memo to Charles Hurwitz, Jenard Gross, 6 Barry Munitz, and Art Berner dated December 11, 7 1987. 8 MR. BLANKENSTEIN: I think the correct 9 pronunciation of Mr. Gross' name is Jenard, not 10 Jenard; and the record should so reflect. 11 THE COURT: Which book is that in? 12 MR. RINALDI: It's in the first book, 13 and it's about halfway through. In fact, it's the 14 document that precedes the United Financial Group 15 annual report. 16 THE COURT: The exhibit number again, 17 please? 18 MR. RINALDI: It's the -- it's T80 -- 19 T2011; and it's just before the annual report, 20 which is in the middle of the first book. It's 21 dated December 11th, 1987. 22 Q. (BY MR. RINALDI) Have you had a chance 14877 1 to look at the document, sir? 2 A. Yes, sir, I have. 3 Q. Okay. It states in the first full 4 paragraph, "I discussed with Jack Hughes our 5 proposal that Penn Corp. accept 4 million for 6 satisfaction of their claims against UFG in the 7 form of debt and a small amount of redeemable 8 preferred stock." 9 Do you see that? 10 A. I see that. 11 Q. How large was the Penn Corp. debt that 12 you were going to satisfy with the payment of this 13 $4 million? 14 A. I don't remember. It was a -- I just 15 don't remember. 16 Q. Do you have any sense of the magnitude 17 of it? 18 A. It was significantly bigger than 19 4 million. 20 Q. The next sentence says, "I explained to 21 Jack that we were concerned that the regulators 22 would request a capital injection at the savings 14878 1 and loan level from UFG (especially since the cash 2 at UFG was a result of a dividend from USAT which 3 the regulators do not like)." 4 Do you see that? 5 MR. NICKENS: It says "regulators did 6 not like." 7 A. Yes, sir, I see that. 8 Q. (BY MR. RINALDI) Now, what does the 9 reference there to requesting a capital injection 10 at the savings and loan level refer to? 11 A. Well, I don't -- I don't remember this 12 document. I remember the conversation. But 13 interpreting it today -- 14 Q. Well, let me ask you a couple of 15 questions. 16 Is this your signature that appears on 17 the document? 18 A. Yes, it is. 19 Q. Okay. And you have no reason to doubt 20 that you prepared this document, do you? 21 A. I believe I did prepare it. 22 MR. RINALDI: Your Honor, I would move 14879 1 the admission of T2011. 2 Q. (BY MR. RINALDI) Does this refresh your 3 recollection -- 4 MR. VILLA: No objection. 5 THE COURT: Received. 6 Q. (BY MR. RINALDI) Does this refresh your 7 recollection that you were aware in December of 8 1987 that UFG had a net worth obligation and could 9 be called upon by the regulators to infuse capital 10 into USAT? 11 A. Well, I guess this in conjunction with 12 the financial statement we looked at awhile ago 13 would indicate there was that potential 14 obligation. 15 Q. And was that a concern that the other 16 members to whom this -- the other members of 17 senior management to whom this memorandum is 18 addressed had been discussed with you? 19 A. I think there was a concern along the 20 lines of -- if we were requested to put capital 21 from UFG to USAT and, as a result, didn't have -- 22 basically, didn't have any cash left at the 14880 1 holding company level, we would obviously default 2 on the Penn Corp. debt, which would create a 3 foreclosure. And I think that was going to create 4 a change of control which would then have messed 5 up our net operating loss carry-forward which 6 totaled somewhere along the magnitude of 7 $150 million. And I could be off on the number, 8 but it was a big NOL. And our thinking -- I'm not 9 sure when this thinking came up; but certainly in 10 '88, the thinking was that that NOL might have 11 some value to a potential owner. And so, it was 12 desirable not to -- not to have it extinguished if 13 possible. 14 Q. Okay. Is the answer, then, to my 15 question that there was concern that the Bank 16 Board might demand that UFG infuse capital into 17 USAT? 18 A. Sure. 19 Q. And that concern was one which -- 20 A. Please. And I think the concern was, 21 you know, related to the issue I tried to discuss. 22 Q. I understand. And that concern had 14881 1 manifested itself as early as December 11th, 1987; 2 is that correct? 3 A. Well, whatever the date of those 4 financials we looked at awhile ago. We discussed 5 the -- the auditor's opinion. 6 Q. Oh, that would have been the annual 7 report for 1987 which is dated, I think, 8 March 28th, 1988. And I think the auditor's 9 report, if my memory serves me correctly, is 10 February 5th, 1988. 11 So, it would have been in that time 12 frame? 13 A. Yeah. In the time frame of, you know, 14 late -- well, certainly 1988. 15 THE COURT: Mr. Rinaldi, we'll adjourn 16 until 9:00 tomorrow. 17 18 (Whereupon at 4:52 p.m. 19 the proceedings were recessed.) 20 . 21 . 22 . 14882 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 15th 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 . 14883 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 15th 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