15143 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 17, 1998 22 15144 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 15145 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 15146 1 2 INDEX OF PROCEEDINGS 3 Page 4 MICHAEL CROW 5 Continued Examination by Mr. Rinaldi....15147 6 Examination by Mr. Guido................15255 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 15147 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. The hearing will come to 5 order. 6 Mr. Rinaldi, you may continue with your 7 examination of the witness. 8 9 CONTINUED EXAMINATION 10 11 Q. (BY MR. RINALDI) I think where we 12 broke the last time, Mr. Crow, we had been talking 13 about why UFG had not funded the escrow which had 14 been funded by USAT with $66 million in assets. 15 Do you recall that I asked you 16 yesterday if you knew why it was UFGI did not fund 17 the escrow? 18 A. No, sir, I really do not. 19 Q. Well, do you know why UFG didn't fund 20 the escrow? 21 A. No, I don't -- I don't know why. I 22 know that UFG had -- had limited funds; but 15148 1 factually, I don't remember why. 2 Q. As its chief financial officer, were 3 you aware at that time whether UFGI would have had 4 sufficient funds to set up the escrow arrangement 5 themselves? 6 A. I think so, but I would have to look 7 at -- I get confused as to the time frame. I 8 think they would -- 9 Q. Okay. 10 A. -- but I would have to look at the 11 financial statements as of that date to really 12 say. 13 Q. Okay. Now, do you recall that in the 14 latter part of October and the beginning of 15 November of 1988, that Mr. Jenard Gross approached 16 the UFG board and indicated to them that he wished 17 to resign his position as a director and an 18 officer of UFG? 19 A. I remember Mr. Gross resigned in late 20 1988. 21 Q. My question was: Do you remember that 22 he came to the board before that and expressed a 15149 1 desire to resign? 2 A. I don't remember that really, no, sir. 3 I remember that he certainly resigned. I don't 4 remember the exact circumstance. 5 Q. Do you recall that when he came to the 6 board and expressed an interest in resigning, that 7 he advised the board that he would like to resolve 8 the outstanding note that he had which was in 9 excess of $750,000 with UFG? 10 A. As it relates to what conversations 11 there were with the board, I don't remember. I 12 remember that the note was resolved. 13 Q. Okay. And do you know -- do you recall 14 that -- that Mr. Gross had requested that UFGI 15 absolve him for the note in exchange for the 16 severance benefits that he was entitled to receive 17 from UFGI under the June 30th, 1988 contract that 18 he had entered into with UFGI? 19 A. My recollection is that at the end of 20 the day, that's what happened. As to what 21 Mr. Gross asked for, I don't remember. 22 Q. Would you take a look at Document 15150 1 No. T8114? I believe that this document has been 2 previously admitted, although -- it's at Tab 446. 3 Now, directing your attention to the 4 third full paragraph in that document, Mr. Gross 5 writes to Art Berner of United Financial Group, 6 "As you know, I have a contract with UFG, Inc., 7 and United Savings Association of Texas which runs 8 through 1991 and has a two-year payment at 9 termination. The termination value of the 10 contract is slightly over $1,028,000. And the 11 payment until maturity -- the payments until 12 maturity are $1,071,000. In addition to this, I 13 have a note outstanding to United Financial Group, 14 Inc., for $761,250 in conjunction with the 15 purchase of 105,000 shares of stock in the 16 institution. I also have a bonus arrangement with 17 the firm which would bring about the orderly 18 liquidation of this debt as well as a payment of 19 all interest on this note." 20 Do you see that? 21 A. Yes, sir, I see that. 22 Q. Does that refresh your recollection 15151 1 that Mr. Gross, at the point in time that he 2 indicated a desire to resign from the board, 3 wished to exchange the outstanding 761,250-dollar 4 note obligation that he owed to UFGI for what he 5 calculated his purported severance benefits from 6 UFGI and USAT to be? 7 A. That -- I didn't receive this letter; 8 but certainly, that -- that paragraph indicates 9 that to me, yes, sir. 10 Q. And then in the next paragraph, he 11 said, "It would appear that United Financial Group 12 has no near-term funding requirements which it is 13 unable to meet and is, therefore, in a solvent 14 condition at this time." 15 Do you see that? 16 A. I see that. 17 Q. Do you know whether at this point in 18 time -- or do you recall whether UFGI was, in 19 fact, in a solvent position at that time? 20 A. I can't -- no, sir, I really don't. I 21 know that during this time period, we were running 22 numbers or cash flow projections as to how far in 15152 1 the future UFG could meet its obligations with and 2 without the Penn Corp. obligation, et cetera; so, 3 no. As of this specific time, I would have to see 4 the projections or the financial statements. 5 Q. Those projections would help you 6 ascertain whether, at that point in time, that 7 UFGI was solvent or insolvent, correct? 8 A. Yes, sir. 9 Q. Now, do you recall that on 10 October 31st, 1988, the board of UFGI had a 11 special meeting at which you were asked to review 12 the numbers and review Mr. Gross' representation 13 in his letter to the effect that UFGI has no 14 near-term funding? 15 A. I remember preparing some numbers as it 16 related to Mr. Gross' leaving the company but -- 17 and I -- I -- as to whether I reported that to the 18 board, I don't remember. But I certainly remember 19 running some numbers. 20 Q. Would you take a look at Exhibit T8113? 21 It immediately precedes the one you're looking at 22 now. 15153 1 MR. RINALDI: This is Tab 445, 2 Your Honor. 3 THE COURT: Which volume? 4 MR. RINALDI: It's in the same volume 5 you're looking at now. 6 THE COURT: What volume is that? 7 MR. RINALDI: It's the third volume. 8 I'm sorry. 9 THE COURT: Thank you. 10 MR. RINALDI: It's about the -- I think 11 it's the sixth document in. It's dated 12 October 31st, 1988. 13 Q. (BY MR. RINALDI) Now, Mr. Crow, do 14 you recall whether you attended this meeting or 15 not? 16 A. I don't remember, but the -- the 17 minutes indicate that I made a presentation. 18 Q. Okay. And directing your attention to 19 the fifth full paragraph, it says, "Mr. Crow began 20 by reviewing some of the factual statements made 21 in the letter." And I would suggest to you that 22 the letter in that sentence refers to the 15154 1 preceding paragraph which says, "Mr. Gross also 2 read a letter of resignation concerning his future 3 employment with UFGI. After reading this letter, 4 Mr. Gross voluntarily removed himself from the 5 meeting so that the board could discuss the Gross 6 letter." 7 Do you see that? 8 A. I see that. 9 Q. Does that appear, then, to be the 10 letter that's been marked as T8114, which is also 11 dated October 31st, 1988, that we just looked at? 12 A. I can't be sure, but that certainly 13 seems to be a reasonable conclusion. 14 Q. Then in the next sentence -- next 15 paragraph, it says, "Mr. Crow began by reviewing 16 some of the factual statements in the letter. He 17 reviewed the excess loss account tax problem. He 18 was requested to contact one or more additional 19 outside accounting and legal firms in order to 20 obtain verification of the view that the excess 21 loss account tax might be due in 1989." 22 Do you see that? 15155 1 A. I do see that. 2 Q. What was that referring to? Do you 3 recall? 4 A. I remember the -- the term "excess loss 5 tax"; but, no, sir, I really don't remember what 6 that was. 7 Q. Well, let's take a look at Exhibit 8 No. 8125. Do you recall that -- this is about -- 9 it's a memo from Arthur Berner to the board of 10 directors dated November 16th, 1988. It is about 11 six or seven documents further on in Volume 12 No. III. 13 Have you found it, sir? 14 A. I have, yes, sir. 15 Q. Now, before you take a look at that, do 16 you recall that you ultimately did prepare a 17 report regarding the question of whether UFGI had 18 no -- was able to meet its -- its funding -- I'm 19 sorry -- its near-term funding requirements as 20 represented by Mr. Gross in his letter dated 21 October 31st, 1988? 22 A. I think I did. 15156 1 Q. Now, the memo -- do you recognize 2 what's been marked as T8125? 3 A. I don't remember it. 4 Q. It starts out, "Mr. Berner reports to 5 the board" -- and you were on the board at this 6 time; is that correct? 7 A. Yes, sir, of UFG, yes, sir. 8 Q. And he reports to the board, "In 9 determining the valuation of obligations owed to 10 Mr. Jenard Gross, a number of scenarios were 11 evaluated." Then you drop down; and it says, "One 12 scenario contemplated the ultimate placing of UFGI 13 into bankruptcy within one year of the Gross 14 transaction. And then it says, "(It should be 15 noted that Gross' counsel alleges that even if 16 UFGI went into bankruptcy, Gross might be able to 17 offset his note obligation against UFGI's 18 employment obligation to Gross.)" 19 Do you see that paragraph? 20 A. I see that. 21 Q. Do you recall running a scenario that 22 contemplated the ultimate placing of UFG into 15157 1 bankruptcy within one year of the transaction? 2 A. I don't remember that. I certainly may 3 have. I just don't remember it. 4 Q. The attachment appears to be a memo 5 from you to Arthur Berner; and it's dated the day 6 before: November 15th, 1988. It talks about the 7 financial position of UFGI. Then it says, 8 "(Parent company only.)" 9 Do you see that? 10 A. I see that. 11 Q. So, you were evaluating the financial 12 position of UFGI on a stand-alone basis; is that 13 correct? 14 A. That's my interpretation, yes, sir. 15 Q. That means it didn't include any of the 16 assets or liabilities that pertained to USAT, its 17 subsidiary? 18 A. Well, let's see. 19 Q. What does it mean when it says "The 20 financial position at UFGI (parent company only)"? 21 What's your understanding? 22 A. My understanding, it would be kind of 15158 1 summarized on the attached Exhibit A. And that 2 gives United Financial Group's position as a 3 stand-alone company, and included in that is a -- 4 down in the "liabilities" section is a deficit 5 position for the investment in United Savings. 6 Q. Now, when you say "a deficit position," 7 are you talking about the stockholders' deficit 8 down there? 9 A. No, sir. It's in the "liabilities" 10 section under -- there's borrowings affiliated and 11 then unaffiliated and then it's that deficit 12 investment in USAT and it's 256,228,000. 13 Q. Okay. 14 A. And that -- that basically just says 15 that United Financial Group's investment in United 16 Savings stock is now in a deficit position. 17 Therefore, the -- basically that would indicate 18 the liabilities of the parent company only were in 19 excess of the assets. 20 Q. Does that indicate, then, that at this 21 point in time, UFGI was an insolvent institution? 22 A. Well, it would indicate that certainly 15159 1 the liabilities of the institution -- and what 2 this deficit -- this 256-million-dollar number is 3 the accumulation of all of the -- since the 4 holding company owned USAT, it would be the 5 accumulation of all the profits and losses of 6 United Savings historically. 7 So, as of this date, it was a negative 8 256 million. 9 Q. Now, you were a CPA. Right? 10 A. During this time period, correct. 11 Q. You were the chief financial officer of 12 USAT and UFG? 13 A. Yes, sir. 14 Q. Based upon your review of this 15 document, do you have an opinion of whether UFGI 16 was insolvent or not at this point in time? 17 A. As an accountant, whenever your 18 liabilities exceed your assets by that much money, 19 you know, you would certainly get a -- probably no 20 opinion from a CPA. You know, it would be similar 21 to what we looked at the other day, that the 22 opinion would read, you know, "We certainly 15160 1 question this entity as a going concern." 2 Whether it was insolvent seems to me to 3 be a legal term, and that's not something -- I 4 don't think accountants go around -- 5 Q. If you define insolvency as liabilities 6 exceeding assets, at least on that basis, they 7 would have been insolvent. Is that a fair 8 statement? 9 A. If I take the definition of insolvency 10 as liabilities exceeding assets, then certainly 11 the liabilities here exceed the assets. So, it 12 would meet that definition. 13 Q. Okay. But when Mr. Gross wrote his 14 letter to the board, he wasn't using that 15 definition of insolvency, was he? 16 MR. BLANKENSTEIN: Objection. Calls 17 for speculation by the witness. 18 MR. RINALDI: Your Honor, Mr. Gross 19 wrote a letter. He's an accountant. He can look 20 at the letter and determine whether what Mr. Gross 21 was using was an asset/liability definition of 22 insolvency or some other definition of insolvency. 15161 1 MR. BLANKENSTEIN: I don't know how 2 Mr. Crow is going to define what Mr. Gross 3 intended in a letter he wrote to someone else. 4 THE COURT: Let's get his 5 understanding. 6 Q. (BY MR. RINALDI) If you turn to 7 T8114, Mr. Gross defines "insolvency" there. He 8 says, "It would appear that UFG or United 9 Financial Group has no near-term funding 10 requirement which it is unable to meet and, 11 therefore, it is in a solvent condition at this 12 time." 13 A. I see that, yes, sir. 14 Q. Did you share or concur in Mr. Gross' 15 analysis that UFGI had no near-term funding 16 requirements which it is unable to meet? 17 A. From a reading of this letter -- and, 18 you know, I don't remember what the conversations 19 were. But just from a reading of this, it would 20 appear to me that what Mr. Gross was focusing on 21 was cash flow, the ability to make cash flow 22 payments. 15162 1 Q. All right. And on a cash flow basis, 2 did UFGI have any -- was UFGI, in your opinion, 3 insolvent? 4 A. I would have to -- 5 MR. VILLA: Objection, Your Honor. He 6 defined "insolvent" as assets greater liabilities. 7 I think he's confusing the question. 8 THE COURT: I thought that was the 9 question. 10 MR. RINALDI: I'll rephrase the 11 question. 12 Q. (BY MR. RINALDI) In your opinion, do 13 you agree with Mr. Gross that UFGI had sufficient 14 cash flow to meet its obligations at this point in 15 time? 16 A. I think so. But, again, I would have 17 to look. I know we were running cash flow 18 statements on UFGI during this time period, and I 19 would have to look at those statements to refresh 20 my memory. It's been quite a while. 21 Q. Going back to Exhibit A, you've focused 22 on the liabilities side of the balance sheet. 15163 1 Did UFGI have any cash -- I mean, any 2 assets at that point in time? 3 A. Did UFGI? 4 Q. Yeah, based on the balance sheet. 5 A. Yes, sir. 6 Q. How much did it have in assets at that 7 point? 8 A. Total assets as of September 30th were 9 27,804,000. 10 Q. And then you ran, at least as I look at 11 your memo in the preceding page, two scenarios, 12 did you not? 13 A. Back on the memo? 14 Q. Yes. November 15th. 15 Do you see that? 16 A. Okay. 17 MR. RINALDI: Your Honor, I would like 18 to move the admission of T8125. I don't believe 19 this has been previously admitted into evidence. 20 It is Mr. Berner's memo to the board with the 21 attached financial position of UFG analysis 22 attached. 15164 1 MR. VILLA: Your Honor, it's -- no 2 objection. No objection. 3 THE COURT: All right. Let me -- it's 4 supposed to be in my book. Right? 5 MR. RINALDI: Yes, it is. It would 6 be -- it's dated November 16th, 1988. I have 7 another copy I can hand up to the Court if it's 8 not in the book. 9 THE COURT: It is. Thank you. 10 Q. (BY MR. RINALDI) This is a memo that 11 you identified previously that you prepared, 12 correct? 13 A. This is the T8125? 14 Q. Yes. The second page, the attachment. 15 A. Yes, sir, I believe I did prepare this. 16 Q. And that's your signature on the "from" 17 line, correct? 18 A. It is. 19 Q. Now, in the second full paragraph, it 20 says -- well, let's just look at it. It begins, 21 "The financial position of United Financial Group, 22 Inc., at September 30th, 1988, is summarized in 15165 1 the attached Exhibit A (extracted from the 2 company's third quarter 10Q.) As you can see, the 3 company has a deficit in the stockholder equity 4 account. Liabilities of UFG (net of the deficit 5 investment in USAT) were 31.9 million and exceeded 6 the assets of the company by a slight margin 7 (total assets were 27.8 million.)" 8 Do you see that? 9 A. I see that. 10 Q. What does that mean? 11 A. Well, let me please study this just one 12 moment. I believe what that means is ignoring 13 that deficit investment in USAT of 256 million, 14 that the remaining liabilities -- let's see -- 15 would slightly exceed the assets. 16 Q. So, this would be a stand-alone 17 analysis; is that correct? 18 A. Ignoring that deficit and just taking 19 the book liabilities versus the book assets. 20 Q. Okay. Is that what you referred to 21 when you talked about stand-alone analysis or when 22 one refers to a stand-alone analysis? 15166 1 A. I'm sorry. I'm confused. You mean in 2 my paragraph here? 3 Q. No. I'm asking you: Is that what's 4 referred to in the accounting jargon as a 5 stand-alone analysis? Strike the question. I see 6 I'm confusing. 7 Based upon what's written in this 8 sentence, does it indicate that UFGI had 9 $27.8 million in assets? 10 A. It does. 11 Q. It indicated that it also had 12 $31.9 million in liabilities, correct? 13 A. It does. 14 Q. I mean, the liabilities exceeded the 15 assets by approximately $4 million at this point 16 in time? 17 A. I agree. 18 Q. Okay. Now, the next paragraph then 19 says, "However, analysis of the company's cash 20 flow shows that depending on the circumstances, 21 the company could continue in existence 22 indefinitely. The attached Exhibit 1 presents a 15167 1 cash flow analysis of the parent company only." 2 It says, "Scenario 1 of the analysis reveals that 3 UFG could continue as an ongoing entity for at 4 least ten years. Scenario 1 assumes that no 5 excess loss account tax will be required, nor will 6 the holding company be required to pay the 7 receivable owed to USAT for past tax refunds." 8 Do you see that? 9 A. I see that. 10 Q. Then if you turn to the attachment to 11 Exhibit A, which is the third document in, we see 12 what I think is commonly referred to as a -- well, 13 is that what you talk about as a pro forma or a 14 cash analysis? 15 A. That would be a cash flow projection. 16 Q. Okay. And the top tier of numbers 17 appears to be Scenario 1, does it not? 18 A. It does, yes, sir. 19 Q. It starts out -- and it states, "On 20 November and December of 1988, that the beginning 21 cash investment" -- do you see that? 22 A. I do. 15168 1 Q. And it lists, in November and December 2 of 1988, an initial cash or beginning cash 3 investment of $24,383,000. 4 Do you see that? 5 A. I see that. 6 Q. And then it projects out -- well, 7 describe for the Court what that chart then does. 8 A. Okay. The 24.3 million would be cash 9 and investments that could be converted to cash. 10 And then deducted from that, to give a pro forma 11 ending cash balance would be operating expenses; 12 and added back to that would be a projection of 13 income from the investments that were held at the 14 holding company level. 15 Q. And I notice as you go on all the way 16 through 1998, UFGI still has a cash balance well 17 in excess of $17 million. In fact, the lowest 18 that it gets to is 14,621,000 in 1995 according to 19 your cash flow projection, correct? 20 A. According to Scenario 1, yes, sir. 21 Q. So, in other words, UFGI had sufficient 22 assets in December of 1988 to have created the 15169 1 escrow and funded the escrow with $6.6 million of 2 UFGI's assets, didn't it? 3 A. Under the assumptions listed in 4 Scenario 1, I certainly agree with that statement. 5 Q. Then in Scenario 2, it's -- it assumes 6 that at some point in the future, UFGI is going to 7 have an obligation or a tax obligation. Right? 8 A. The way I read Scenario 2, it's 9 assuming USAT intercompany payment -- 10 Q. Let me ask you this: In Scenario 2, 11 does it make an assumption as to what the 12 beginning cash balance would be if UFGI had this 13 additional liability that's referred to? 14 A. In Scenario 2, if apparently the 15 so-called USAT intercompany payment was made, the 16 beginning cash balance would be 10,399,000. 17 Q. Okay. And it would continue to be a 18 positive cash balance through 1991; is that 19 correct? 20 A. Well, through 1990. 21 Q. Okay. Now, even under Scenario 2, if 22 UFGI had this liability, UFGI still had sufficient 15170 1 assets to fund the escrow agreement under the 2 terms of the UFGI employment contracts, didn't it? 3 A. The amount of that was what? 6.6 -- 4 Q. $6.6 million, sir. 5 A. Yes. In Scenario 2, UFG would have had 6 sufficient funds to pay 6.6 million. 7 Q. And going back to Scenario 1, when the 8 Federal Home Loan Bank Board came to UFGI and 9 Mr. Twomey said, "You have a net worth maintenance 10 obligation" and directed, in December of 1988, 11 that UFGI infuse capital into USAT and when he 12 suggested in March -- I'm sorry -- in May of 1988, 13 May 13th, that they should take some action with 14 respect to the net worth maintenance obligation, 15 UFGI had assets that it could have infused into 16 USAT, didn't it? 17 A. UFGI had -- had assets, yes, sir. 18 Q. And they could have been infused into 19 USAT; isn't that correct? 20 A. They could have been. 21 Q. Okay. And as late as November and 22 December 1988, those assets were 24 -- well, on 15171 1 the balance sheet, the assets show that on 2 September 30th, 1988, they were $27,804,000, 3 correct? 4 A. Yes, sir. That's what this shows. 5 Q. But UFGI declined to infuse any capital 6 into USAT; isn't that correct? 7 A. Well -- 8 Q. Is that correct? Yes or no? 9 A. Well, let me explain -- 10 Q. Did UFGI infuse capital into USAT? 11 Just yes or no. 12 A. UFGI did not infuse capital into USAT. 13 Q. Thank you. 14 MR. VILLA: Your Honor, just for a 15 point of clarification, we do all understand that 16 he's not a respondent in the net worth maintenance 17 UFGI claim. Right? 18 MR. RINALDI: I didn't suggest he was 19 one way or the other, John. 20 MR. VILLA: I want to make sure there's 21 no argument made later that we're agreeing to the 22 amendment of the Notice of Charges. He's clearly 15172 1 not a respondent in the net worth maintenance 2 claim. He's entitled to ask him the question 3 but -- 4 THE COURT: Let's proceed. 5 MR. RINALDI: If he was in any way 6 responsible for the failure and the evidence in 7 any way demonstrates -- 8 MR. VILLA: I didn't address you, 9 Mr. Rinaldi. 10 MR. RINALDI: Your Honor, if Mr. Crow 11 is responsible in some way for a loss or failure 12 to maintain the net worth of the institution -- 13 THE COURT: Just ask your next question 14 and let's move on. 15 MR. RINALDI: -- we would reserve the 16 right to amend the Notice of Charges to the extent 17 that's appropriate under the facts that come out 18 at the proceeding. And I don't feel prohibited at 19 this point in time by Mr. Villa's comment from 20 exercising that right should it appear appropriate 21 to do so at some future time. 22 MR. VILLA: Your Honor, this case has 15173 1 been in litigation for two or three years. We've 2 been in trial for most of my adult life. 3 Your Honor, at this point, to suggest they are 4 going to amend the Notice of Charges to add 5 Mr. Crow as a respondent on a new claim suggesting 6 that there's new facts that have come to their 7 attention that would justify it -- but the concept 8 that they are going to start amending the Notice 9 of Charges at this point, I would suggest, is 10 extremely untimely. 11 MR. NICKENS: Your Honor, I have a 12 further concern. The OTS has said that they would 13 not amend the Notice of Charges. Those issues 14 related to the admission of evidence and other 15 issues to be considered and that affirmative 16 representation was made in this proceeding. And 17 if they are now changing the position as stated by 18 Mr. Rinaldi that they now reserve the right, after 19 having obtained your rulings, based upon a 20 representation that they would not amend the 21 Notice of Charges, I have an objection, a very 22 fundamental objection. 15174 1 MR. STEARN: Your Honor, there's been 2 no such suggestion. Mr. Rinaldi merely repeated 3 the reservation preserving the rules. I think we 4 can move on and leave this. 5 MR. NICKENS: Where we are, Your Honor, 6 is Mr. Stearns saying that he is standing by the 7 prior representation that it is not the intention 8 of the OTS to amend the Notice of Charges. 9 MR. STEARN: We have no intention of 10 amending the Notice of Charges, Your Honor. 11 Mr. Rinaldi is so correct that should the evidence 12 so point as in any proceeding to liability, there 13 is grounds under the rules, if the Court so 14 allows, to make an amendment. We are not 15 suggesting we intend to do that. 16 THE COURT: If I have a motion, I'll 17 have to look at it. It seems to me the rules say 18 something to the effect that if the issue is tried 19 without an objection, the notice may be amended or 20 something to that effect. I don't have the rule 21 before me, and I don't feel I have a motion before 22 me. 15175 1 MR. STEARN: Your Honor, none of us do. 2 We don't have a motion. 3 MR. VILLA: Your Honor, my only point 4 was it's not without objection so we have it clear 5 on the record, say, two years from now and they 6 say I didn't object. I don't object because he's 7 a witness. I do object to the extent it involves 8 imposing new liabilities on this man. 9 THE COURT: All right. Let's move on. 10 Q. (BY MR. RINALDI) Let's move on to a 11 different subject, then, and see if we can't 12 divert ourselves with something else. 13 You testified yesterday regarding the 14 disclosure of the existence of the contracts. Do 15 you recall that? You had made some statement to 16 the effect that you believe that the contracts 17 that had been entered into by UFGI in September of 18 1987 had been fully disclosed in certain filings 19 with the Securities and Exchange Commission public 20 filings. 21 Do you recall that? 22 A. I recall saying that contracts had been 15176 1 disclosed. I'm not sure as to the exact timing. 2 Q. Okay. 3 A. But I remember the approximate 4 conversation. 5 Q. Do you recall which contracts you were 6 referring to, sir? 7 A. No, sir. I can't be specific. I was 8 trying to point out that I think the contracts 9 were attached to the Form 10K; and, you know, we 10 went through the process that I do recall of 11 Ms. Carlton gathering up all the contracts. 12 And -- and presumably, she reviewed them. That's 13 what I was trying to convey. 14 Q. Did someone recently show you a copy of 15 the 10Ks so you could review and ascertain 16 whether, in fact, copies of the UFGI contract 17 entered into in 1987 were attached? 18 A. I have seen a recent 10K, but I didn't 19 look to see whether the contract was attached or 20 not attached. 21 Q. Okay. Let's take a look at the proxy 22 statement filed by United Financial Group on 15177 1 March 30th, 1988. This appears in the first 2 volume. It's about, oh, two-thirds of the way 3 through. It's Exhibit 8036. And since it -- 4 MR. RINALDI: My records reflect this 5 has not been previously admitted; but please 6 correct me, John, if I'm wrong. Otherwise, I 7 would move its admission at this point. 8 MR. VILLA: I think it's Exhibit A3015, 9 and it has been admitted in evidence at Tab 94. 10 MR. RINALDI: March 30th is the date of 11 the document. It's a little further on, Your 12 Honor. 13 Q. (BY MR. RINALDI) These are in 14 chronological order. 15 THE COURT: What's the number in your 16 volume? 17 MR. RINALDI: 8036. T8036. Here it is 18 right here. 19 20 (Discussion held off the record.) 21 22 Q. (BY MR. RINALDI) Take a look at 15178 1 Page 9 of the proxy statement. Now, in the proxy 2 statement it makes reference to UFGI -- it's the 3 first full paragraph -- UFGI entering into a 4 contract with certain employees, and it describes 5 the terms of the contract. 6 Do you see that? 7 A. I see that first paragraph, yes, sir. 8 Q. And then in the last sentence, it talks 9 about, "In 1988, each of the employees entered 10 into substantially similar agreements with USAT 11 which becomes effective only in the event the 12 company is unable to satisfy its obligations under 13 the agreements." 14 Do you see that? 15 A. I see that. 16 Q. In fact -- I think we talked about 17 this -- under the February agreement, USAT was 18 paying the salaries of all of the senior 19 officials, weren't they? 20 A. The -- yes. The salaries were coming 21 from the USAT payroll. 22 Q. So, the statement in the proxy 15179 1 statement that in 1988, these USAT contracts only 2 became effective in the event the company was 3 unable to satisfy its obligations under the 4 agreements wasn't accurate, was it? 5 A. Well, let me read this paragraph, 6 please. 7 Q. Sure. 8 A. (Witness reviews the document.) Well, 9 it seems to me that the -- the preceding sentences 10 are talking about severance benefits. 11 Q. All right. Let's take a look at the 12 second sentence. It says -- it begins -- it's the 13 fourth line down -- "Pursuant to such 14 agreements" -- at this point, it's talking about 15 both the USAT and UFG agreement. It says, 16 "Pursuant to such agreement, the company is 17 required to maintain the employment of the 18 employee through December 31st, 1988, and to pay 19 each employee a minimum remuneration equal to no 20 less than each employee's 1987 bonus and salary." 21 Do you see that? 22 A. I do see that, yes, sir. 15180 1 Q. And during this period of time -- that 2 is, in March of 1988 -- was the company paying the 3 bonus and salary of those individuals? 4 A. During this period of time, with the 5 exception of the allocations we talked about 6 yesterday, the salaries and bonuses were being 7 paid by United Savings. 8 Q. So, the statement in the last sentence 9 that United Savings Association of Texas's 10 obligation under the agreement only becomes 11 effective in the event the company is unable to 12 satisfy the obligation under the agreements was 13 not accurate, was it? USAT was already paying the 14 salary and bonuses under those agreements, wasn't 15 it? 16 A. United Savings was clearly paying the 17 salaries and bonuses but -- you know, I certainly 18 see the words; but it seems to me that we're also 19 talking about severance benefits here. 20 Q. Okay. So, there's three different 21 benefits that we're talking about. There's the 22 salary benefit, the bonus benefit, and the 15181 1 severance benefit? 2 A. Yes, sir. 3 Q. And this last sentence simply says, "In 4 1988, each of the employees entered into 5 substantially similar agreements with USAT which 6 become effective only in the event the company is 7 unable to satisfy its obligations under the 8 agreements." 9 Do you see that? 10 A. I see that. 11 Q. But, in fact, those contracts were 12 effective, weren't they, because USAT was paying 13 the salary and also paying the bonuses, wasn't it? 14 A. Certainly, United Savings was paying 15 the salaries and the bonuses but -- 16 Q. So that to the extent -- 17 A. But to the extent -- you know, again, 18 the way I interpreted the -- the language we 19 looked at yesterday is more in terms of severance; 20 that if -- if everybody gets fired or if I got 21 fired -- I'll limit it to myself -- and United 22 Financial Group could not pay the severance for 15182 1 whatever reason, then I could fall back on the 2 USAT contract. That's -- 3 Q. But this last sentence in the proxy 4 makes no distinction between USAT's obligation to 5 pay salaries and bonuses as opposed to the 6 obligation to pay severance, does it? 7 A. No, sir, it does not. 8 Q. And ultimately, when the issue of 9 severance payments came up and the obligation was 10 incurred to fund the escrow, USAT funded the 11 escrow, didn't it? 12 A. USAT did fund the escrow. 13 Q. And UFG, even though it had assets that 14 it could have used to fund the escrow, did not do 15 so, did it? 16 A. UFG did not fund the escrow. 17 Q. Now, I realize -- well, strike that. 18 Let's go on to the next document. You 19 said that during this point in time, the 20 regulators had made inquiries about the contracts 21 and that you had turned over the contracts. And I 22 thought that -- perhaps we could sort of sharpen 15183 1 up the -- what occurred at that point in time so 2 that the record is entirely clear. Would you turn 3 to Page 806 -- I'm sorry -- Document 8069? 4 It's -- I believe it's the second document in the 5 second volume. That should help everybody. 6 T8069. 7 And I think that from here on out, we 8 will probably exclusively use Volumes II and III, 9 if that helps the readers. 10 Now, do you have Document T8069? This 11 is a letter to Jenard Gross from Neil Twomey dated 12 May the 13th, 1988. 13 Do you see that? 14 A. I do see that. 15 Q. Now, Mr. Twomey writes to Mr. Gross, 16 "In order to complete our records, please submit a 17 copy of all employment contracts between officers 18 or employees and the association or any of its 19 subsidiaries. We will be reviewing these 20 contracts for compliance with Section 563.39(a) of 21 the insurance regulation." 22 Does that refresh your recollection 15184 1 that in about May of 1988, the regulators 2 requested copies of all USAT contracts that were 3 then in existence? 4 A. No, sir, it really does not. I 5 certainly see this letter, and I'm sure that it 6 was sent to Mr. Gross. What I was referring to is 7 certainly prior to this date, I gathered up all 8 the contracts from Sandy Laurenson, Gene Stodart, 9 and a number of other people and -- as -- pursuant 10 to a request from Vivian Carlton. I did not do 11 that with Mr. Twomey. 12 So, I certainly can't say that I gave 13 anything to Mr. Twomey. 14 Q. Then, would you conclude that the 15 request to which you were responding was an 16 earlier request than this one that was made by 17 Mr. Twomey? 18 A. That's my memory. 19 Q. Okay. Let's go on. Now, could you 20 turn, then, to Document 8071? I'm sorry. Yeah, 21 8071. It will be two documents on. 22 This is a document dated May 18th, 15185 1 1988; and it comes five days after Mr. Twomey 2 makes his May 13th request to Mr. Gross. This is 3 a letter from Mr. Berner. It starts out, "United 4 Savings Association of Texas has just received 5 your letter dated May 13th, 1988, concerning 6 employment contracts between the association and 7 any of its subsidiaries or officers or employees 8 thereof." 9 Do you see that? 10 A. Yes, sir, I do. 11 Q. Then it goes on and says, "Please be 12 advised that the association has not entered into 13 employment agreements with such officers or 14 employees." 15 Do you see that? 16 A. I do see that. 17 Q. Now, we just looked at the proxy 18 statement dated March the 30th, 1988; and it 19 stated that USAT had entered into contractual 20 agreements. 21 Do you see that? 22 A. Yes, sir, I do. 15186 1 Q. And who would have prepared the proxy 2 statement that we just looked at, which is 3 Exhibit 8036? That would have been Mr. Berner, 4 correct? 5 A. Mr. Berner would have taken the lead in 6 preparing the proxy statement, yes, sir. 7 Q. So, if Mr. Berner prepared the proxy 8 statement, he must have known that USAT had 9 entered into contracts with its senior executives; 10 isn't that correct? 11 A. I -- honestly, I think we all knew. 12 Q. And yet, Mr. Berner writes to 13 Mr. Twomey, the regulatory -- the chief 14 supervisory agent for this institution; and he 15 says, "Please be advised that the association has 16 not entered into employment agreements with such 17 officers and employees." 18 Was that statement in the -- that I 19 just read to you in the May 18th, 1988 letter 20 untrue? 21 MR. VILLA: Objection, Your Honor. He 22 can ask Mr. Berner that question. This witness 15187 1 hadn't seen the document. We're kind of getting a 2 jury summation here from Mr. Rinaldi. Why doesn't 3 he just ask Mr. Berner? 4 THE COURT: Well, I think the witness 5 should have an opinion on it. Denied. 6 A. Well, I don't believe this would be 7 accurate. All I can say is, you know, it doesn't 8 jive with my memory and what appears to be in the 9 proxy; but, you know, I don't have an explanation 10 for it. Mr. Berner was -- seemed to me to be a 11 real careful guy. I don't think he was going to 12 be, you know, lying to the regulators. You know, 13 I do know that during this time period, we were 14 redoing all the contracts. So -- but that's about 15 all -- I don't know. I didn't see this. 16 Q. (BY MR. RINALDI) Do you recall, 17 Mr. Crow, that at or about the time you entered 18 into your contract with USAT in about March 2nd of 19 1988, that Mr. Berner also executed a contract 20 with USAT? 21 A. I don't really remember that, but I 22 remember -- or I think that Mr. Berner and I had 15188 1 contracts that -- that just kind of tracked along 2 with each other. In other words, when I got a 3 contract, he got about the same contract. 4 Q. Would you turn to Exhibit T8043? And 5 this should be in -- I apologize. It's back in 6 Volume I. It's about halfway through. It's dated 7 February the 11th, 1988; and it's an employment 8 contract between Arthur S. Berner and United 9 Savings Association of Texas. 10 A. Yes, sir. 11 Q. Have you located that, sir? 12 A. I have, yes, sir. 13 Q. And can you turn to the last page of 14 that document? 15 A. (Witness complies.) I see that. 16 Q. Does that appear to be Mr. Berner's 17 signature? 18 A. That appears to be Mr. Berner's 19 scratching. 20 Q. Okay. So, at the time that Mr. Berner 21 wrote to Mr. Twomey and advised him on May 18th, 22 1988, that there were no agreements between senior 15189 1 officers of USAT and the association, Mr. Berner 2 himself had a contract that he had entered into 3 with USAT several months before; is that correct? 4 A. It certainly looks like to me that 5 Mr. Berner had a contract dated February 11th, and 6 the date of the letter we looked at is May 18th. 7 And, you know, I don't have any explanation for 8 it. This one -- 9 Q. I'm not asking you for an explanation. 10 I want to verify that that refreshes your 11 recollection that he had a contract. 12 Now, let's move on to the next 13 document, sir. This will be B2211, and it's about 14 one document -- it's the next document after 15 Mr. Twomey's letter of May 18, 1988, or the letter 16 to Mr. Twomey. This is a document from Mr. Twomey 17 back to Mr. Berner -- actually, the board of 18 directors of UFG. 19 A. What was that T exhibit? 20 Q. It's B2211, the next document. 21 A. Okay. 22 Q. And this letter says that, "On 15190 1 May 13th, the supervisory agent of the Federal 2 Home Loan Bank of Dallas requested that United 3 Savings Association of Texas provide us copies of 4 each of the employment contracts between the 5 association or any of its subsidiaries and 6 officers or other employees." Then it says, "We 7 were subsequently advised by Mr. Arthur Berner 8 that no such contracts exist. However he" -- that 9 is Arthur Berner -- "indicated that employment 10 agreements do exist between UFGI and its officers 11 and/or employees. Therefore, please provide us 12 with copies of each such contract between United 13 Financial Group, Inc., and/or any of its 14 subsidiaries and the officers and other employees 15 of these entities. These should be submitted to 16 this office no later than June 6, 1988." 17 Do you see that? 18 A. Yes. 19 Q. You were a member of the board of UFG 20 when this letter was sent to the board? 21 A. I was. 22 Q. Do you recall whether this was brought 15191 1 to your attention, the fact that Mr. Twomey had 2 requested USAT contracts and that Mr. Berner had 3 advised Mr. Twomey that no USAT contracts existed? 4 A. No, sir, I don't remember that. 5 Q. So, you didn't receive a copy of this 6 letter as a member of the board? 7 A. I didn't say that. I just don't 8 remember that. I remember -- it was not unusual 9 to get requests from -- from regulators for copies 10 of contracts. And I may have seen a copy of it. 11 I just don't know. 12 MR. RINALDI: Your Honor, I would like 13 to move the admission of Exhibit B2211. 14 MR. VILLA: No objection. 15 THE COURT: Received. 16 Q. (BY MR. RINALDI) And then -- would 17 you turn now to Exhibit T8072? Do you see that? 18 It's the next document in the sequence. Again, 19 this is correspondence back and forth between 20 Mr. Berner and Mr. Twomey. And in this 21 correspondence, Mr. Berner transmits to 22 Mr. Twomey, in the first paragraph, the employment 15192 1 contracts entered into between United Financial 2 Group and yourself, Jeff Gray, Jim Jackson, Jim 3 Wolfe, Bruce Williams, and Mr. Berner. 4 Do you see that? 5 A. I do see that. 6 Q. And then in the next sentence, he says, 7 "Please be advised that in connection with the 8 FHLB Dallas request to employ a senior executive 9 officer (of which you are aware), we have 10 discussed the need for providing an employment 11 agreement to this person and other key personnel." 12 Now, when it talks about "this person," 13 is that Mr. Connell that we're referring to there? 14 A. I believe that would be Mr. Connell. 15 Q. And that's the executive officer that 16 the Bank Board requested that USAT hire to take 17 charge of the operations; is that correct? 18 A. Well, like I said, I really wasn't 19 involved in that process. But to the best of my 20 memory, the Federal Home Loan Bank said that our 21 management team was lacking of a senior savings 22 and loan type executive that would act as, like, a 15193 1 chief operating officer. 2 Q. So, the reference here is the fact that 3 they are drafting an agreement for this new 4 officer that they are trying to hire. 5 Do you see that in the first sentence? 6 And that they were discussing the need for an 7 employment agreement for this person, correct? 8 A. That's the way I interpret that 9 sentence. 10 Q. Then it goes on and says, "As a result 11 of" -- "As a result, United Savings has retained a 12 compensation consultant to review the agreements 13 and to make recommendations for improvement of the 14 current agreements. We expect a report within the 15 next three weeks; and it is, therefore, probable 16 that United Savings Association will enter into 17 employment contracts with these (and perhaps other 18 key) employees. Any such contracts will of course 19 comply fully with applicable regulations." 20 Do you see that? 21 A. I see that. 22 Q. At this point in time, when Mr. Berner 15194 1 is advising Mr. Twomey that no contracts exist 2 with USAT, in fact, USAT is going through the 3 process of developing a new process for the people 4 that already have contracts, aren't they? 5 A. Yeah. I remember that during this time 6 period, we were redoing the contracts to conform 7 to the so-called Connell-model contract. 8 Q. Okay. Okay. Now, shortly thereafter, 9 then -- I seem to have lost the page number. 10 Let's keep going then. 11 When you say you were responding to the 12 Connell contract model, what did you mean by that? 13 You made several references, and I thought maybe 14 we could clarify that. 15 A. Well, again, on the contract front, I 16 was more of a recipient, not the driver of the 17 train. That was, I suppose, Mr. Berner and the 18 legal staff. 19 But it was my understanding that around 20 mid-1988 or earlier in 1988, that it was desirable 21 to have all of the contracts at USAT and UFG 22 modeled after the one that Mr. Connell was going 15195 1 to receive which -- I didn't read them in detail, 2 but they looked pretty similar to the ones I 3 already had. There seemed to be some differences 4 in legal language. That's kind of what I 5 remember. 6 Q. So, they were going to model the 7 contract after the contract that they were going 8 to give Mr. Connell. 9 Is that your understanding? 10 A. Well, I think what happened is that our 11 existing contracts, as I understand it, in June or 12 July or some such date in mid-1988, were replaced. 13 And then everybody had the same type contracts, 14 and they were consistent with Mr. Connell's 15 contract which -- and this is just my memory -- 16 that the -- that Mr. Twomey had passed on. 17 But I certainly -- I didn't -- I did 18 not talk to Mr. Twomey. I did not give Mr. Twomey 19 the contract. I can't say what Mr. Twomey said or 20 didn't say. 21 Q. So, you don't really know whether 22 Mr. Twomey ever passed on the contract, do you? 15196 1 A. No, sir, I do not. I -- 2 Q. There's one point I wanted to clarify 3 just before we move on, and that relates to 4 Document No. 8071. This is the May 18th, 1988 5 letter from -- it's 8071 -- to Mr. Twomey from 6 Arthur Berner. The last sentence of the second 7 paragraph says, "As you are aware, United 8 Financial Group, Inc., the holding company, has 9 entered into certain employment agreements which 10 have been provided to Vivian Carlton in connection 11 with our examination." 12 Do you see that? 13 A. I do see that. 14 Q. Does that refresh your recollection 15 that the contracts that were given to Ms. Carlton 16 were, in fact, UFGI contracts and that they were 17 tendered to her at some time during a previous 18 examination? 19 A. Well, that certainly could be the case. 20 As I've tried to explain, I looked at contracts as 21 contracts. And I gathered up, just in a bundle, 22 as many as I could find or as many as I was aware 15197 1 of. And the only exception to that that I can -- 2 you know, I think Sandy Laurenson's and Gene 3 Stodart's would have been USAT. 4 Q. But they would have taken place in the 5 1986-'87 time frame, correct? Long before 1988? 6 A. I think their agreements, their letter 7 type contracts, would have been earlier in the 8 '86, '87 time frame. 9 Q. So, you have -- do you have any basis 10 upon which to believe that Ms. Carlton received 11 the contracts entered into between USAT and its 12 executive officers in February of 1988 at or about 13 the time they were entered into? 14 A. So that I make sure that I understand 15 the question, do I have any basis to say that 16 Ms. Carlton received the February 11th contracts? 17 Q. Yes, that were executed on March 2nd, 18 1988, or thereafter. 19 A. No, sir. I can't definitively say at 20 all. I don't know. 21 Q. Okay. All right. Now, let's go on to 22 Exhibit T8081, which is a little bit further on in 15198 1 the book. I think it's about four or five 2 documents further. It's a memo dated June 30th, 3 1988. 4 Have you got that, sir? 5 A. I do. 6 Q. This is a memo from Mr. Berner to 7 Charles Hurwitz, Jenard Gross, and Barry Munitz. 8 It says -- and it's in reference to a conversation 9 with Neil Twomey. 10 Was it Mr. Berner's habit to 11 memorialize important conversations and things 12 with memos to the file, that you're aware of? 13 A. That's a hard thing for me to answer, 14 but I do remember that Mr. Berner was a picky 15 lawyer. So, he wrote down or did write down a lot 16 of stuff. 17 Q. Okay. And during this time frame when 18 we're talking about qualifying for the 19 Southwest Plan, bringing in a new CEO, this 20 Mr. Connell, all of the things that were going on 21 at USAT, was there a lot of communication back and 22 forth that you were aware of between USAT and the 15199 1 Federal Home Loan Bank Board of Dallas? 2 A. I wasn't directly involved with it most 3 of the time; but I believe that during this time 4 frame that we're talking about here, that there 5 were a lot of conversations between the Home Loan 6 Bank and Mr. Berner and Mr. Gross. And after 7 Mr. Connell arrived, certainly Mr. Connell. I 8 believe there was a lot of interchange there 9 because we were trying to get into the 10 Southwest Plan and qualify and show that, you 11 know, after Connell -- Mr. Connell arrived, to 12 show that we had met our management requirements 13 and, now, we're ready to go. 14 Q. Okay. And with respect to those 15 communications, which of the members of the totem 16 pole would have been most actively involved in the 17 communications with the Federal Home Loan Bank 18 Board? 19 A. That would be the top level of the 20 totem pole: Mr. Berner -- 21 Q. You're talking about Mr. Munitz, 22 Mr. Berner, Mr. Gross? 15200 1 A. Yes. Dr. Munitz -- I left him out, but 2 he had a lot of conversations with the 3 regulatory -- well, with outsiders. I can't 4 factually say; but Dr. Munitz, Mr. Gross, and 5 Mr. Berner seemed to me to be the point people. 6 Q. And would Mr. Berner, in view of the 7 fact that he was the general counsel, be the most 8 prominent person in dealing with the regulators or 9 the Bank Board? 10 A. I would -- in terms of prominent, I 11 would assume Mr. Gross would be. 12 Q. When I say "prominent," would he be the 13 person who would be in the most daily contact with 14 the regulators? 15 A. I think in terms of the nuts and bolts 16 and items such as conversations with Mr. Twomey, 17 that Mr. Berner would have been the point person, 18 yes. 19 Q. Okay. Now, Mr. Berner writes back in 20 this memo that on June 29th, 1988, he had a 21 conversation with Neil Twomey. And he says in the 22 memo, "I told him that we were in the process of 15201 1 finalizing our offer to Larry Connell and wanted 2 to know whether or not he felt it was necessary 3 that we have Connell's employment contracts 4 approved by the Dallas bank. Neil said that 5 approval was not required but that he would 6 strongly suggest that I forward a copy to him so 7 that he could review it. If he saw a major 8 problem, he would let me know; and if he did not, 9 he would brief George Barclay on the contents." 10 Do you see that? 11 A. I see that. 12 Q. And do you see anywhere in that memo 13 that Mr. Berner mentions that he advised 14 Mr. Twomey at this point in time that contracts 15 were also going to be entered into between USAT 16 and members of the executive staff of USAT? 17 A. I don't see that, no, sir. 18 Q. Now, let's go on to Exhibit 8084; and 19 this is a document dated the very next day, 20 June 30th, 1988. And it's from -- it's to Neil 21 Twomey -- 22 MR. RINALDI: Your Honor, I would like 15202 1 to offer the last exhibit. That's T8081. It's 2 the memorandum dated June 30th, 1988, from 3 Mr. Berner to Mr. Hurwitz, Mr. Gross, and 4 Mr. Munitz. 5 MR. VILLA: No objection. 6 THE COURT: Received. 7 Q. (BY MR. RINALDI) Now, T8084, which is 8 from Neil Twomey -- from Mr. Berner to Mr. Twomey. 9 Mr. Twomey, a day after his conversation with 10 Mr. Twomey that's referenced in the prior 11 document, then writes to Mr. Twomey. It says, "As 12 discussed, I am enclosing a copy of the employment 13 contract we will be entering into with Larry 14 Connell. I would appreciate your reviewing this 15 agreement and letting me know if you see any major 16 problems." 17 Do you see that? 18 A. I see that. 19 Q. Does it indicate anywhere in there that 20 contracts were also going to be entered into with 21 the members of USAT's executive staff? 22 A. No. 15203 1 Q. Then if we go on -- 2 MR. RINALDI: This document, T8084, was 3 previously admitted, Your Honor, as Tab 467; and 4 you will have it as A11031. 5 MR. NICKENS: What was the tab number? 6 MR. RINALDI: 467. 7 Q. (BY MR. RINALDI) Now, if you would 8 turn, then, to T8086, this is your employment 9 contract with USAT. 10 Do you have that, sir? 11 A. I do. 12 Q. And what is the date of that contract, 13 sir? 14 A. The date of the contract is the first 15 day of July 1988. 16 Q. And then if you turn to the document 17 document, which is T8087, this is a similar 18 agreement entered into by Mr. Gross. 19 Do you see that? 20 A. I see that. 21 Q. And it's dated the same date? 22 A. The same date. 15204 1 Q. Do you know whether Mr. Gross, prior to 2 July 1st, 1988, had any employment contract with 3 USAT? 4 A. I think he had a contract. I don't 5 know. 6 Q. Thank you. 7 A. I don't know whether it was USAT or 8 not. 9 Q. Okay. Now -- and we looked at the 10 minutes previously of the USAT board meeting. 11 Contracts were approved with respect to a number 12 of other executive officers including Mr. Munitz, 13 Mr. Berner, Mr. Gross, and Mr. Jackson and several 14 other individuals. 15 Do you recall that? 16 A. I remember looking at the board 17 minutes. 18 Q. Okay. Now, following the execution of 19 your contract -- strike that. 20 Take a look at Exhibit T8089. This is 21 a memo again -- 22 MR. RINALDI: I notice that 15205 1 Exhibit T8087, which is the Gross contract with 2 USAT, has not been entered and I would move its 3 admission at this time, Your Honor. 4 MR. VILLA: No objection. 5 THE COURT: That's 8087? 6 MR. RINALDI: Yes, T8087. 7 THE COURT: All right. Received. 8 Q. (BY MR. RINALDI) Sir, a moment ago, I 9 asked you whether Barry Munitz had entered into a 10 contract. 11 Do you recall that? 12 A. I don't remember, but you -- I'm sure 13 you asked me that. 14 Q. Okay. Take a look at T8088. 15 A. Okay. (Witness complies.) 16 Q. Do you see that? And does that appear 17 to be a contract between USAT and Barry Munitz 18 dated July the 1st, 1988? 19 A. Yes, sir. That's the date of the 20 contract. 21 MR. RINALDI: Okay. I would move the 22 admission of Exhibit T8088 and 8089, which is the 15206 1 memo that we're turning to now. 2 MR. VILLA: Your Honor, T8088, I note 3 that it's not signed by Mr. Munitz; but we have to 4 objection. 5 THE COURT: Received. 6 Q. (BY MR. RINALDI) T8089, the next 7 document in the sequence, is a memorandum to 8 Charles Hurwitz, Barry Munitz, Jenard Gross, and 9 Mike Crow from Arthur Berner. 10 Do you see that? 11 A. I do. 12 Q. Now, I'm confused. Maybe you can 13 clarify one of the points of confusion. 14 Mr. Hurwitz resigned as a director of UFGI on 15 February 11th. Do you remember we read that 16 minute? On the same date that Mr. Berner came 17 onto the board, Mr. Hurwitz resigned. 18 Do you recall that? 19 A. I don't remember, but I certainly 20 accept that. 21 Q. Now, if he was no longer on the board 22 of UFGI, did Mr. Hurwitz nonetheless still 15207 1 participate in the activities of USAT and UFGI? 2 A. Well, I remember -- you know, I can't 3 be specific; but I remember Mr. Hurwitz 4 participating somewhat after he went off the 5 board. 6 Q. After he went off the board, did his 7 involvement in the affairs of UFGI and USAT change 8 at all? 9 A. Well -- 10 Q. I mean, other than being an official 11 member of the board? 12 A. It's very difficult for me to give 13 specific dates. But as I remember Mr. Hurwitz' 14 participation, he was more involved with the 15 organization and the stuff that I was aware of in 16 the '84, '85, '86 time frame. And then in '87 and 17 '88, he seemed to be less involved. He was 18 worrying about whatever else he was doing. 19 Q. Nevertheless, at this point in time, 20 Mr. Berner seems to be providing copies of his 21 memorandum regarding his discussions with the 22 regulators to Mr. Hurwitz; and it seems to be 15208 1 fairly regular. We see a memo earlier on in June, 2 and now we see another one in July. 3 Do you see that? 4 A. I see, yes, that Mr. Hurwitz is one of 5 the people that the memo went to. 6 Q. During this time frame, he continued to 7 be informed about what was going on at USAT and 8 UFG? 9 A. I guess -- I guess so. He got this 10 memo. 11 Q. All right. Let's take a look at the 12 memo very briefly. It says, "On July 5th, Jenard 13 Gross and I met with the Federal Home Loan Bank of 14 Dallas. Present at the meeting were George 15 Barclay, Jim Satterfield, Danny Thomas, Neil 16 Twomey, and Ginger Baugh. Jenard Gross began the 17 meeting by explaining that we had made an offer to 18 Larry Connell. We had forwarded a contract to him 19 and he had indicated that he would sign it and 20 return it to us within the next day or so. 21 Mr. Barclay asked whether or not the Dallas bank 22 needed to approve the contract, and he was told by 15209 1 Mr. Twomey and Mr. Thomas that they did not have 2 to approve it." 3 Do you see that? 4 A. I do. 5 Q. It appears from this memo that as of 6 July 6, 1988, Mr. Connell had not accepted 7 employment -- as of July 5th anyway, hadn't 8 accepted employment with USAT? 9 A. Looks like he had not accepted a 10 position. 11 Q. So, he would have come to work there 12 shortly after the date of this memo, correct? 13 A. That's the way I would read it. 14 Q. Okay. Then the last sentence says, 15 "I," meaning Mr. Berner, "mentioned in the meeting 16 that I had forwarded a copy of the contract to 17 Neil Twomey. Neil stated that since he had been 18 out of the office for the last few days, he had 19 not gone through his in-box and, therefore, had 20 not reviewed the contract." 21 Do you see that? 22 A. I see that. 15210 1 Q. So that as of the date of this meeting, 2 July 5th, 1988, Mr. Twomey hadn't even seen the 3 Connell-model contract, had he? 4 A. It would appear from this paragraph 5 that Mr. Twomey certainly hadn't reviewed the 6 contract. 7 Q. Okay. And you and the other members of 8 the board -- I'm sorry -- the other executives of 9 USAT had entered into contracts on July 1st, 10 1988 -- had executed those contracts four days 11 before the beginning of this meeting, hadn't you? 12 A. Well, let me go back to those 13 contracts, please. 14 Q. I think one of them is the 15 immediately-preceding document. It's the one to 16 Mr. Barry Munitz? 17 A. Okay. (Witness reviews the documents.) 18 Well, I'll just focus on the one that is mine. 19 Q. Yes. 20 A. T8086. It's dated July 1st, 1988; but 21 it's not executed. And -- I mean -- 22 Q. Is it your testimony that you didn't 15211 1 execute this on July 1st, 1986 -- 1988? 2 A. I don't remember when I executed it. I 3 mean, we saw -- we saw the other, I guess 4 yesterday, that I signed a contract a week, two 5 weeks later after the date of it. I just don't 6 know. 7 Q. Do you have any reason to believe that 8 you did not execute the contract on July 1st, 9 1988, the date that appears on the face of the 10 contract? 11 A. No. I don't have any reason to believe 12 I did or didn't sign it then. 13 Q. Thank you. 14 A. I don't know what date I signed it. 15 Q. Okay. Now, in this memo dated 16 July the 6th, 1988, at which Mr. Berner and 17 Mr. Gross advised Mr. Barclay, Mr. Satterfield, 18 Mr. Thomas, Mr. Twomey, and Ms. Baugh that they 19 are entering into a contract with Mr. Connell, do 20 you see anywhere in this discussion that's 21 memorialized in Mr. Berner's memo the fact that 22 executive officers of USAT were going to enter 15212 1 into or had entered into contracts with USAT? 2 A. Well, I haven't read the memo; but I'll 3 certainly be willing to, if it's acceptable, take 4 your word for it. 5 Q. If there is a reference, I'm sure your 6 counsel will bring that to my attention if I've 7 missed it. I'm not infallible. 8 MR. RINALDI: Perhaps we should take 9 the morning break here. I have two or three other 10 areas of examination of the witness, and I think 11 I'll probably finish in another 40 minutes or so. 12 THE COURT: All right. We'll take a 13 short recess. 14 15 (Whereupon, a short break was taken 16 from 10:31 a.m. to 10:54 a.m.) 17 18 THE COURT: Be seated, please. We'll 19 be back on the record. 20 Mr. Rinaldi, you may continue with your 21 examination. 22 MR. RINALDI: Thank you, sir. 15213 1 Q. (BY MR. RINALDI) Mr. Crow, you had 2 testified at some time earlier that before 3 finalizing -- or during the preparation of the 4 contracts that were entered into by UFG and USAT 5 in June and July 1st, 1988, that USAT or -- strike 6 that -- UFG had obtained the services of a 7 consultant to assist in the drafting of the 8 contract. 9 Do you recall that? 10 A. Yes, sir. 11 Q. Would you take a look at what's been 12 marked as Exhibit T8067? This is a letter dated 13 May the 5th, 1988. And it's the last document in 14 Volume I. It's to Mr. Berner from an individual 15 named Mark K. Gordon. 16 Do you see that? 17 A. Yes, sir, I do. 18 Q. Now, who was Mr. Gordon? Do you 19 recall? 20 A. I don't know. I'm -- just from reading 21 the document, I'm assuming he was an official with 22 Hewitt & Associates. 15214 1 Q. Do you recall having participated in an 2 interview with Mr. Gordon at some time in 1988? 3 A. I remember it was either Hewitt or 4 Wyatt or perhaps both of those firms interviewed 5 the -- I believe most all of the executive VP and 6 above type people. So, yes, I remember -- I can't 7 specifically remember whether it was Mr. Hewitt, 8 but it was one of the officials of those 9 consulting firms. 10 Q. Now, in the first paragraph of that 11 letter, it reads, "Enclosed is a revised draft of 12 the employment contract that is marked to show the 13 changes that were made by Phil Billard of our 14 legal group. James Whatley mentioned it's 15 important to have the contract reviewed by United 16 Financial Group's legal counsel, and we certainly 17 agree. Our work is not intended to constitute 18 legal advice or supersede the need for such 19 advice." 20 Were you aware that your consultant had 21 advised UFGI that the employment contracts should 22 be reviewed by legal counsel before being executed 15215 1 by the individual executives? 2 A. To the best of my knowledge, no, I 3 would not have been aware of this. 4 Q. Now, in the second page, in the third 5 bullet point down at the bottom, they are talking 6 about instances of good reason for the executive 7 to terminate his employment, and they have 8 provided some proposed language. And it indicates 9 in the second-to-the-last sentence in that 10 paragraph, "We believe that attorneys familiar 11 with both the situation of UFG and the regulatory 12 environment and special laws applicable to such 13 financial institutions should provide input in 14 drafting such a provision." 15 Do you see that? 16 A. I see that. 17 Q. Do you know whether Mr. Berner ever 18 sought the assistance of attorneys familiar with 19 the situation of UFG and the regulatory 20 environment and special laws applicable to such 21 financial institutions before finalizing the 22 contracts? 15216 1 A. Factually, I can't say. I know that -- 2 well, I say I know. I think I know that 3 Mr. Berner talked with Arnold & Porter and 4 Kirkpatrick & Lockhart and a number of outside law 5 firms. Certainly, Mayor, Day & Caldwell. 6 As to what he talked to them about 7 related to these contracts, I don't know. 8 Q. Okay. Would you turn to Document 8074? 9 This is the -- it's in the second binder; and 10 it's, like, the sixth or seventh document in. 11 It's previously been admitted as Tab 432. 12 Are you there, sir? 13 A. I am. 14 Q. Now, this is a -- "Funding and securing 15 non-qualified benefits" is the title and it's to 16 United Financial Group, Inc. and it's dated 17 July the 7th, 1988. 18 Do you recall receiving a copy of this 19 funding and securing non-qualified benefits report 20 from Hewitt & Associates? 21 A. No, sir, I don't remember receiving 22 this. 15217 1 MR. NICKENS: Your Honor, for the 2 record, I believe he said July 7th; and the 3 document is dated June 7th. 4 MR. RINALDI: I beg your pardon. Thank 5 you for correcting me. 6 Q. (BY MR. RINALDI) Turning now to the 7 seventh page of the document where it talks about 8 letters of credit, do you see that? 9 A. I see that. 10 Q. The first sentence says, "Using a 11 letter of credit to guarantee the payment of 12 unfunded deferred compensation appears to be very 13 similar to using a surety bond for this purpose. 14 The main purpose is a bank rather than an 15 insurance company is providing the guarantee if a 16 letter of credit is used." 17 Do you see that? 18 A. I see that. 19 Q. And in this paragraph, Hewitt is 20 talking about the letter of credit mechanism that 21 was ultimately incorporated into the USAT 22 contracts, correct? 15218 1 A. I'm not familiar with the report, so -- 2 I mean, I certainly see the section "letter of 3 credit"; and I have -- I really don't have any 4 knowledge of it other than what's here. 5 Q. Does it appear that Hewitt, in this 6 report, was talking about using a letter of credit 7 as a mechanism for guaranteeing deferred 8 compensation? 9 A. It appears so to me, yes. 10 Q. And then on Page 11, Hewitt also talks 11 about using a taxable trust. 12 Do you see that? 13 A. Yes, sir, I see the section that says a 14 non-exempt or taxable trust can be used to pay 15 non-qualified benefits. 16 Q. So -- and ultimately, the final USAT 17 contract and the final UFG contract that you 18 received a month or so later contained a severance 19 provision; and the severance benefits were to be 20 secured by either a letter of creditor a trust. 21 Do you recall that? 22 A. I do. 15219 1 Q. And both of those mechanisms are 2 discussed in this memo by Hewitt; is that correct? 3 A. They appear to be. 4 Q. Now, turn to the first page of the 5 document text. It says -- about this material. 6 It says, "United Financial Group has asked Hewitt 7 & Associates to review alternative approaches to 8 fund and secure executive severance arrangements 9 outlined in individual employment contracts. This 10 material presents several possible vehicles for 11 consideration." 12 Do you see that? 13 A. I see that. 14 Q. And it indicates that Hewitt was 15 advising UFG on mechanisms for funding the 16 severance benefit; is that correct? 17 A. That's the way I read it, yes, sir. 18 Q. Now, the next sentence reads as 19 follows: "Before acting on any of these 20 approaches, Hewitt & Associates suggest that UFG 21 check with outside legal counsel to make sure any 22 funding arrangements do not violate federal or 15220 1 state banking laws regarding unsafe and unsound 2 practices." 3 Do you see that? 4 MR. NICKENS: Your Honor, he missread 5 the provision. It was "any funded arrangements," 6 not "funding arrangements." It says "or," not 7 "and." 8 Q. (BY MR. RINALDI) With those 9 corrections, do you see the provision I just read? 10 A. I do. 11 Q. To your knowledge, did UFG contact any 12 outside legal counsel to make sure any funded 13 arrangements under the USAT or the UFG contracts 14 did not violate federal or state banking laws 15 regarding unsafe or unsound practices? 16 A. I don't have direct knowledge of that. 17 But like I said, we had the law firms that I 18 mentioned and Mayor, Day & Caldwell crawling all 19 over us. But the direct answer to your question 20 is: I don't know. 21 Q. Okay. Now, let me direct your 22 attention to Exhibit T8048. And this is a 15221 1 document that's back in Volume I; and it's dated 2 March the 25th, 1988. It's Tab 417. And this is 3 a memo or a memorandum to Arthur S. Berner, 4 Esquire, executive vice president, and general 5 counsel from Thomas M. Leahey, Kirkpatrick & 6 Lockhart. And it references employment contracts. 7 Do you see that? 8 A. I see that. 9 MR. RINALDI: Your Honor, we would move 10 the admission of 8048 -- okay. It's in as 417. 11 Q. (BY MR. RINALDI) And Mr. Thomas 12 Leahey was the attorney from Kirkpatrick & 13 Lockhart that I believe you referenced just a 14 moment ago; is that correct? 15 A. That's my memory, yes, sir. 16 Q. Is it also your memory that Mr. Leahey 17 provided advice on regulatory and savings and loan 18 matters to Mr. Berner? 19 A. Yes, I think he was a regulatory 20 lawyer. 21 Q. Take a look at this first sentence. It 22 says, "United Savings Association of Texas 15222 1 (United) has employment contracts with various 2 senior officers. The contracts (with which we are 3 not familiar) provide for termination benefits 4 under various circumstances including voluntary 5 resignation. The contracts also include certain 6 terms required by the regulators of the Federal 7 Savings and Loan Insurance Corporation (FSLIC), 8 specifically 12CFR, Section 563.39 (copy attached) 9 which provides for such contracts to be terminated 10 in certain events, including upon the granting of 11 FSLIC assistance to the institution involved 12 unless FSLIC otherwise determines." 13 Do you see that? 14 A. I see that. 15 Q. Did Mr. Berner ever advise you that he 16 had contacted Mr. Leahey to obtain regulatory 17 advice regarding the effect or regarding what's 18 discussed here in this first sentence? 19 A. No, sir. Mr. Berner didn't advise me 20 of that. But like we've discussed before, I 21 wasn't plugged into that process; so, it wouldn't 22 have been unusual for him not to advise me of 15223 1 that. 2 Q. This goes on and says, "You have asked 3 for a summary of what our experience has been with 4 regard to" -- and the third item that Mr. Berner 5 inquired about is "whether FSLIC would seek to 6 recover benefits paid under such a contract in 7 connection with termination of employment shortly 8 prior to a grant of FSLIC assistance." 9 Do you see that? 10 A. I see that. 11 Q. Okay. And then if you turn to Page 3, 12 Mr. Leahey addresses that question for Mr. Berner. 13 He says, "FSLIC recovery of termination 14 payments" -- 15 MR. KEETON: Your Honor, can't we at 16 least let the document speak for itself? We're 17 back to reading minutes on end, on end, on end. 18 THE COURT: Can you ask your question 19 without reading extensively from a document that's 20 in the record? 21 MR. RINALDI: Certainly. 22 Q. (BY MR. RINALDI) Certainly. Would 15224 1 you read the next paragraph, sir? 2 A. Yes, sir. To myself? 3 Q. Yes. 4 A. Okay. (Witness reviews the document.) 5 I've read the paragraph. 6 Q. And in the paragraph, it discusses a 7 case in which contracts which provided for 8 severance benefits and were adopted less than four 9 months before FSLIC was appointed receiver for the 10 association at the time when the association was 11 losing money -- 12 MR. KEETON: Objection to the form of 13 the question. All he's doing is paraphrasing what 14 the man just read. I want a question, please. 15 MR. RINALDI: You'll get a question, 16 sir. 17 Q. (BY MR. RINALDI) Did Mr. Berner ever 18 advise you about the Bass case or the fact that 19 there had been a judicial determination that 20 employment agreements similar to those which were 21 being entered into by USAT and UFG had been 22 determined in the Bass litigation to be an unsafe 15225 1 and unsound practice? 2 MR. VILLA: Your Honor, I'll object to 3 the characterization in an attempt to equate the 4 employment agreements in a case he's never read. 5 THE COURT: That's a pretty big 6 question. I'll sustain the objection. 7 Q. (BY MR. RINALDI) Sir, did Mr. Berner 8 ever tell you that there had been litigation in 9 which a Court had ruled that a severance agreement 10 that had been entered into under the circumstances 11 described in this paragraph constituted an unsafe 12 or unsound practice? 13 A. I don't remember that but -- that's my 14 answer, is I don't remember. Well, I just don't 15 remember. 16 Q. Now, before USAT was -- or FSLIC was 17 appointed as receiver for USAT, USAT's net worth 18 had been declining steadily and, in fact, had gone 19 to a negative net worth sometime in about July 20 1988, had it not? 21 A. I believe so. 22 Q. And during that period of time, 1988, 15226 1 or the period six months prior to the entry into 2 the agreements with USAT, just like Unity Savings 3 of Chicago, USAT had been losing money, hadn't it? 4 A. United or USAT, during the year 1988, 5 was losing money in terms of net income loss. 6 Q. And Mr. Berner never advised you that 7 by entering into the contract with USAT, you could 8 be engaging in an unsafe or unsound banking 9 practice? 10 A. I don't remember that conversation. I 11 certainly didn't think we were. 12 Q. Now -- 13 A. I mean, that's -- my answer is in terms 14 of my knowledge, I certainly didn't think it was 15 an unsafe and unsound banking practice. 16 Q. Okay. But I think we established 17 earlier that you're not an expert on banking 18 regulations, are you? 19 A. I certainly am not. 20 Q. And in that regard, you always relied 21 upon Mr. Berner and the advice of outside counsel, 22 didn't you? 15227 1 A. I relied upon Mr. Berner and the advice 2 of outside counsel, and I relied on common sense. 3 I just didn't blindly follow what the lawyers said 4 but -- I mean, there's a "common sense" approach 5 to things; and then there's also, you know, 6 precedents. You look at the contracts that had 7 been reviewed by the regulatory authorities 8 before. 9 Q. So, the answer to my question is you 10 relied upon Mr. Berner and outside counsel, among 11 other things; is that correct? 12 A. Among other things, yes. 13 Q. Now, would you turn to Exhibit T81111? 14 This is in the third volume, and it's the fifth 15 document in. It is a letter that's previously 16 been admitted as Tab 444; and it is a letter to 17 the board of United Savings Association of Texas 18 dated October 27th, 1988. And it's from Mr. Neil 19 Twomey. 20 Do you see that? 21 A. I do see that letter. 22 Q. And would you read the first paragraph 15228 1 of that letter? 2 A. To myself? 3 Q. Yes. 4 A. Okay. (Witness reviews the document.) 5 Q. Have you read it, sir? 6 A. Yes, sir, I have. 7 Q. Did Mr. Berner or anyone else at USAT, 8 at or about October 27th, 1988, ever advise you 9 that the Federal Home Loan Bank Board had taken 10 the position that because the employment contract 11 that you had entered into with USAT provided for, 12 in their opinion, excessive compensation and 13 severance payments and because they were executed 14 at a time when United was approaching or had 15 actually reported insolvency, that entering into 16 those contracts constituted an unsafe and unsound 17 banking practice? 18 A. I don't remember those type words. I 19 certainly might have been advised of that. I'm 20 not denying that I wasn't. I just don't recall 21 the words as they appear in this paragraph. But I 22 do remember -- I believe during this time frame, 15229 1 certain of the pages in the contracts were 2 substituted to attempt to meet with the 3 regulators' concerns. And I believe we removed 4 money from escrow and that sort of thing to meet 5 the concerns. 6 Q. Okay. And it indicates in the third 7 line of that document that Mr. Berner expressed 8 the same concern regarding safety and sound 9 necessary with respect to Mr. Larry Connell's 10 so-called "model contract"; is that correct? 11 MR. VILLA: You mean Mr. Twomey. 12 Q. (BY MR. RINALDI) That Mr. Twomey 13 expressed concern with not only your contract and 14 the other executives but also the contract of 15 Mr. Connell. 16 Do you see that? 17 A. Well, that Mr. Connell's contract is 18 thrown in with everyone else's as being 19 criticized. I do see that. 20 Q. And then you mentioned that you 21 recalled that after Mr. Connell brought this 22 information to the attention of the board, that 15230 1 the board then took some action. 2 What is it you recall that the board 3 did? 4 MR. VILLA: Excuse me. Did you mean 5 Mr. Berner brought it to the board or Mr. Twomey 6 or Mr. Connell? 7 Q. (BY MR. RINALDI) I meant that once 8 Mr. Berner brought to his attention the existence 9 of this letter from Mr. Twomey, that the board of 10 USAT took some action. 11 Do you recall you just a moment ago 12 referred to that? 13 A. Yes, sir. 14 Q. And you indicated that they did 15 something to -- I thought you said remove money 16 from escrow. 17 Do you recall that? 18 A. If my memory is correct, there were 19 certain pages modified in the contracts that we -- 20 all of the participants certainly agreed to and 21 that escrow moneys were removed for the contract 22 people, I believe, and put back into USAT funds. 15231 1 Q. Okay. Why don't you turn to T8117? 2 And maybe we can sharpen this up a little. This 3 is the minutes of the board of directors meeting 4 of United Savings Association of Texas dated 5 November 7th, 1988. And it appears in this same 6 book, about three documents further on. And 7 specifically turning to Page 3, there is a 8 discussion there in the third full paragraph that 9 the Federal Home Loan Bank Board were (sic) 10 concerned about money being placed in escrow 11 pursuant to the contracts. 12 Do you see that? 13 A. I do. 14 Q. And you were present at this meeting, 15 were you not, when this was discussed? 16 A. Yes, sir. 17 Q. Okay. And after the Bank Board 18 expressed its concern about the money being placed 19 in escrow, it indicates on the next page in the 20 second full paragraph -- it states, "Further 21 resolved that such officers and directors are 22 hereby authorized and directed to remove all 15232 1 moneys" -- I'm sorry. Strike that. 2 In the first "resolved" clause it 3 refers to the fact that the appropriate officers 4 and directors are directed to remove the money 5 from escrow. 6 Do you see that? 7 A. Now, which is it? 8 Q. The first "resolved" paragraph. Do you 9 see that? 10 A. I see, yes, sir, that it's -- that the 11 officers were directed to remove all moneys in 12 escrow held by First City which was placed in the 13 bank pursuant to the terms of employment 14 agreements. 15 Q. Okay. And those -- that's the 16 $6.6 million we saw yesterday that had been placed 17 into that escrow account, correct? 18 A. I believe that would be the severance 19 benefits. 20 Q. Okay. And to the best of your 21 recollection, then, as a result of Mr. Twomey 22 directing the board or raising concerns to the 15233 1 board regarding the safety and soundness of the 2 contracts, the $6.6 million was removed from 3 escrow and placed back into USAT; is that correct? 4 A. I believe, yeah, that's consistent with 5 the documents we've reviewed. 6 Q. Okay. 7 A. I don't -- you know, in terms of an 8 independent memory as to exactly why it was done, 9 I can't say that. But it's consistent with the 10 documentation. 11 Q. Okay. And do you recall that 12 Mr. Twomey also raised a concern vis-a-vis the 13 executive bonus and the moneys that we discussed 14 yesterday that were placed into a trust? 15 A. Yes, sir. 16 Q. Okay. And as a result of Mr. Twomey 17 raising those concerns at the November meeting, 18 did the board then direct that those moneys be 19 removed from the trust and returned to USAT? 20 A. That appears to be the second "Further 21 Resolved" on Page 4. 22 Q. Okay. That's consistent with your 15234 1 recollection of what occurred; is that correct? 2 A. Let me think just a minute. (Short 3 pause) I remember -- I remember the funds coming 4 back out of Texas Commerce and -- yes, I do 5 remember those funds coming back out. My memory 6 is a bit muddled in terms of the details. It 7 seems like we -- 8 Q. Now, turning your attention, then, to 9 Exhibit T8120 which is about three documents 10 further on, this is the one we saw that has the 11 allocation numbers in it. 12 Do you see that document? 13 A. I do. 14 Q. And in the first numbered paragraph, it 15 states, "All moneys previously put into escrow for 16 payment of senior executives' employment bonus 17 plan and as security for such executives' 18 severance benefits are in the process of being and 19 will be removed from escrow and returned to the 20 association." 21 Do you see that? 22 A. I see that. 15235 1 Q. Is it your recollection, then, that 2 USAT caused both the moneys that were placed in 3 escrow from the severance benefits and the 4 additional moneys that had been placed in trust to 5 fund the executive bonus, that they begin the 6 process of removing those moneys and replacing 7 them at USAT? 8 A. Yes, sir. I remember those moneys 9 coming back to USAT. The thing that bothers me a 10 bit is as it relates to that Texas Commerce part 11 of it, it seems like we tried to put the money 12 back into Texas Commerce and -- but that's -- 13 that's my memory. 14 Q. Do you recall that because you had 15 entered into an irrevocable trust with Texas 16 Commerce, that Texas Commerce was reluctant to 17 return the money to USAT? 18 A. I remember we got into a -- a dialogue 19 with the Texas Commerce trust department, and I do 20 remember that the contract people signed a waiver 21 of their rights under this bonus plan to -- and 22 delivered it to Texas Commerce and -- and Texas 15236 1 Commerce said, "Well, we see what you've signed," 2 but I think they said, "We're going to keep the 3 money anyway." 4 Q. Now, do you recall that subsequent 5 to -- the letter we've just looked at -- strike 6 that. 7 Would you turn to T8138? 8 A. (Witness complies.) 9 Q. This is a memo to the board of 10 directors of USAT. It's from Neil Twomey, and 11 it's a little bit further on in the same volume. 12 It's dated December the 15th, 1988. And 13 Mr. Twomey writes to the board of directors, "This 14 will serve to notify you that we consider the 15 contemplated payment of funds under the 1988 16 executive bonus plan to those employees who are 17 entitled to benefits pursuant to the employment 18 contracts with United Savings Association of Texas 19 and/or United Financial Group, Inc., to be an 20 unsafe and unsound practice. We therefore take 21 supervisory objection to the following bonus 22 payments." And then Mr. Twomey lists the six 15237 1 people whose bonus payments they object to, and 2 they include yourself and Mr. Berner and 3 Mr. Munitz. 4 Do you see that, sir? 5 A. I do see that. 6 Q. And do you recall that there came a 7 time in December of 1988 when you learned that 8 Mr. Twomey had taken the position that the -- the 9 executive bonus program was an unsafe and unsound 10 practice? 11 A. I really don't -- I don't remember 12 that. I had resigned from the board of UFG, I 13 believe, a little before this; so, I don't 14 remember it. I certainly might have seen it. I 15 don't -- but I don't have a memory of it, no. 16 Q. Now, do you recall yesterday, we had a 17 discussion about the subject of change of control? 18 A. Yes, sir, I do. 19 Q. And you indicated that because there 20 had been a change of control in the directors 21 of -- I don't want to paraphrase anything because 22 I don't want to misrepresent what you say. So, 15238 1 why don't we do this. Why don't we turn to 2 Exhibit T8046, which is Book 1. And it's about 3 half the way through. 4 And this is the memorandum I showed you 5 written by you to Jenard Gross on March the 22nd, 6 1988. Okay? 7 A. Yes, sir. 8 Q. Before we get to that, yesterday, we 9 talked about the original USAT contract was dated 10 February 11th, 1988; but then we saw that there 11 was a copy of a blank contract submitted to you on 12 March the 2nd, 1988, by Mr. Berner. 13 Do you recall that? 14 A. I remember it was some date after -- 15 I'll certainly accept that it was March 2nd. 16 Q. Do you recall that -- do you recall 17 whether the other individuals who executed 18 contracts for -- with USAT also executed them on 19 or after March the 2nd, 1988? 20 A. Factually, I wouldn't know what they 21 did. I would assume we all got the contracts 22 about the same time and, presumably, unless 15239 1 somebody was out of town, would have executed them 2 about the same time. 3 Q. Let me hand you a copy of three 4 different exhibits. These are Exhibit B2058, 5 Exhibit B2059, and Exhibit B2061. And I'll hand 6 up copies to the Court, as well. 7 MR. VILLA: Are these in evidence? 8 MR. RINALDI: They are not in evidence. 9 THE COURT: Do you have two copies for 10 me? 11 MR. RINALDI: Yes, I do. I believe 12 they are B2058, B2059, and B2061. We'll also 13 include in that B2062. Here are two copies for 14 the Court. 15 Q. (BY MR. RINALDI) Now, would you take 16 a look at those four documents? 17 MR. VILLA: Your Honor, if we may have 18 a moment to get ourselves aligned here. 19 THE COURT: Okay. 20 Q. (BY MR. RINALDI) Now, I just want you 21 to look at the cover page -- 22 MR. VILLA: Your Honor, we have one 15240 1 copy of one of four exhibits. 2 THE COURT: All right. Can you hold it 3 a few minutes? 4 MR. RINALDI: I'm not going to ask a 5 question yet. 6 7 (Discussion held off the record.) 8 9 Q. (BY MR. RINALDI) Have you had a 10 chance to look at these, sir? 11 A. I've looked at the cover memo of all 12 four. 13 Q. Okay. Now, starting with B2058, this 14 is a memo from Arthur Berner to Bruce Williams 15 dated March the 2nd, 1988. And in this, 16 Mr. Berner says to Mr. Williams, "Attached is your 17 employment agreement for United Savings 18 Association of Texas. Please sign the agreement 19 and return it to me by Friday, March the 4th, 20 1988." 21 Do you see that? 22 A. I see that. 15241 1 Q. So, it would appear that Mr. Williams 2 received the copy of his contract for execution on 3 the same date that you received yours; is that 4 correct? 5 A. I would assume so, yes, sir. 6 Q. And then there's Exhibit B2059. It's a 7 similar memorandum. This one goes to James Wolfe, 8 it appears that Mr. Wolfe also received his 9 contract agreement with USAT on or about May -- 10 March 2nd; is that fair? 11 A. Yes, sir. 12 Q. And the same memo -- this is B2061 -- 13 was submitted to J.J. Gray, Jr. And it appears 14 that his was submitted to him on or about 15 March 2nd, 1988. And finally, there's one to 16 James N. Jackson. 17 Do you see that? 18 A. Yes, sir. 19 Q. Exhibit B2062? 20 A. Yes, sir. 21 Q. His contract was given to him for 22 execution on March 2nd, 1988. 15242 1 Now, sir, would you agree with me that 2 if Mr. Williams, Mr. Wolfe, Mr. Gray, and 3 Mr. Jackson didn't receive a copy of their 4 contract for their execution until March the 2nd, 5 1988, that they also could not have executed their 6 agreements and returned them to USAT until 7 March the 2nd, 1988, or sometime after that? 8 A. I would agree with that. 9 Q. Okay. 10 MR. RINALDI: Now, I would like to move 11 into evidence, Your Honor, B2058, B2059, B2061, 12 and B2062. 13 MR. VILLA: No objection. 14 THE COURT: Received. 15 Q. (BY MR. RINALDI) Now, let's go back 16 to your memo dated March the 22nd, 1988. This is 17 Exhibit T8046. 18 Do you see that? 19 A. I do. 20 Q. This memo is approximately 20 days 21 after those contracts were submitted to yourself 22 and the other members of the executive staff, 15243 1 correct? 2 A. It appears so, yes. 3 Q. Now, you say in the first sentence 4 there, "With the resignation of three directors 5 subsequent to the February 11th, 1988 board 6 meeting, a change of control has occurred under 7 the definition in the employment contracts entered 8 into by six executives." 9 Do you see that? 10 A. I do. 11 Q. Okay. And what was the change in 12 control that had occurred that caused this change 13 of -- or what had caused the change of control to 14 occur, as you understood it? 15 A. I'm not sure I can describe it 16 precisely, but there were -- there was language in 17 the contract that if the makeup of the board of 18 directors -- in other words, a number of directors 19 quit during some certain time period, if it 20 reached a certain number of directors, then a 21 change of control would -- would be -- that would 22 be a definition of change of control. 15244 1 Q. Okay. 2 A. And that's my memory. It may -- I'm 3 sure the language says it a bit differently. 4 Q. Right. And in your memo, you state 5 that you thought that the change of control had 6 been triggered by virtue of three directors 7 resigning after the February 11th meeting, 8 correct? 9 A. That was -- as best I recall, that was 10 my personal opinion that I was sharing with 11 Mr. Gross. I was certainly -- I don't believe 12 that I took that opinion so-called "public" with 13 Mr. Wolfe and Mr. Williams who worked for me. 14 Q. Now, do you know who the directors were 15 that resigned that caused the triggering of the 16 agreement? 17 A. I don't remember, no, sir. 18 Q. Okay. Well, let's take a look at the 19 first document in this volume. It's T8003. And 20 in particular, I would like to direct your 21 attention to the second page of the document. 22 This has previously been admitted as Tab 399. 15245 1 Have you had a chance to look at the 2 second page of that document? 3 A. Where it lists the directors? 4 Q. Yes. Now, this is the first document 5 in the first book. 6 Do you see that? 7 A. I see that, yes, sir. 8 Q. And the second page lists the directors 9 of United Financial Group and their terms or their 10 tenure. 11 Do you see that? 12 A. I do. 13 Q. And can you identify from the list 14 which of the directors had resigned after the 15 April -- I mean the February 11th meeting that was 16 referenced in your memo dated T8046? (sic) 17 A. After the February 11th period, it 18 would have been, according to the schedule, Burton 19 Borman, date resigned: 2/19/88. Mr. Hurwitz is 20 just listed as 2/88. I don't know what that -- 21 the exact date is. 22 Q. Actually, we know that he resigned on 15246 1 February 11th because you recall that was the date 2 that Mr. Berner was appointed and it was at the 3 same meeting? 4 A. Okay. You asked after that -- so, he 5 would not be counted. 6 Q. Right. 7 A. So, it would be Mr. Burton Borman. 8 Ed H. Keltner resigned March 2nd, 1988. And 9 Mr. Stephen Silverman resigned 2/19/88. And that 10 appears to be all that would meet that criteria. 11 Q. Let me hand you a copy now of 12 Exhibit B2057. This is the resignation letter of 13 Mr. Edward Keltner. And I believe that 14 Mr. Keltner was the last of the three directors 15 that you identified, last in time to resign, 16 correct? 17 A. In terms of the date, yes, sir. 18 Q. And in the third full paragraph of this 19 memo by Mr. Keltner dated March 2nd, 1988, the 20 paragraph says, "I, therefore, resign as a member 21 of the board of directors of United Financial 22 Group, Inc., and United Savings of association and 15247 1 each of the committees of such companies upon 2 which I am now serving effective immediately." 3 Do you see that? 4 A. I see that. 5 Q. So that as of March 3rd, 1988, all of 6 the directors that you refer to in your memo of 7 T8046 -- 8 MR. VILLA: March 3rd or March 2nd? 9 MR. RINALDI: I'm sorry. What is your 10 question, John? 11 MR. VILLA: You meant March 2nd, 1988? 12 MR. RINALDI: I'll just rephrase the 13 question. 14 Q. (BY MR. RINALDI) So that as of 15 March 2nd, 1988, all of the directors whom you 16 refer to in your memo of March 22nd, 1988, had 17 resigned from the board of USAT and UFG; is that 18 correct? 19 A. I agree. 20 Q. So that there were no director 21 resignations after March the 2nd, 1988? 22 A. Between March 2nd and March 22nd? 15248 1 Q. Yes. 2 A. No, sir, there don't appear to be any. 3 Q. And on March the 2nd, 1988, you hadn't 4 yet executed your contract, had you? 5 A. Based on these letters, it doesn't 6 appear that I had. 7 Q. So, in other words, there was no change 8 of control -- I'm sorry -- there was no 9 resignation of any director that would have 10 triggered a change of control after the time you 11 executed your contract, was there? 12 A. Well, I would agree that -- assuming I 13 got my contract about the same time these guys 14 did -- 15 Q. Uh-huh. 16 A. -- so I would have had to have signed 17 my contract after March 2nd, I would agree that no 18 directors resigned after that date. 19 Q. So that if there was a change of 20 control caused by the resignation of the 21 directors, that change of control occurred before 22 you signed your employment contract, didn't it? 15249 1 MR. VILLA: Your Honor, there's a 2 three-day mailing rule in just about every 3 jurisdiction that I know of. What we're doing is 4 trying to suggest this witness got this document 5 instantly and knew it. 6 MR. RINALDI: Your Honor, that's 7 appropriate for redirect. Now, this is what I 8 oppose about Mr. Villa. 9 THE COURT: All right. Let's have the 10 question. Let's not get personal here. 11 Q. (BY MR. RINALDI) Prior to your 12 executing the contract, the resignation of the 13 three directors that you referenced in your memo 14 had already occurred; isn't that correct? 15 A. Well, assuming that I signed my 16 contract after March 2nd, it appears that all of 17 the directors would have resigned. 18 Q. So that if their resignation, in fact, 19 was a legal change of control -- and I understand 20 you're not a lawyer. But just assume for purposes 21 of my question if it was a legal change of 22 control, that change of control occurred before 15250 1 either you or Mr. Gray or Mr. Williams or 2 Mr. Jackson entered into your employment 3 agreements with USAT? 4 A. Before we signed these contracts that 5 we referred to here. 6 Q. Okay. And you're referring to now the 7 exhibits which are attached to B2060? 8 A. The USAT contract dated May -- excuse 9 me -- the 11th of February. 10 Q. Those are the contracts that are 11 attached to B2058, B2059, B2061, and B2060. Okay. 12 Sir, I just have one further document 13 that I need to show you; and it appears to be 14 lost. 15 MR. RINALDI: I would offer into 16 evidence B2057. I'm handing up to the Court a 17 copy of T8160; and I'll give Brendan a copy, a 18 copy for you, and a copy for the witness. 19 This is Exhibit T8160. It has not been 20 previously admitted. 21 Q. (BY MR. RINALDI) Do you recognize 22 this document, sir? 15251 1 MR. VILLA: Your Honor, I don't object 2 to Exhibit B2057. 3 THE COURT: All right. Received. 4 Q. (BY MR. RINALDI) Do you recognize 5 this document, sir? 6 A. These appear to be my -- portions of my 7 income tax returns and W-2 statements. 8 Q. Okay. 9 MR. RINALDI: Now, I would move the 10 admission of Exhibit T8160, Your Honor. 11 MR. VILLA: No objection. 12 THE COURT: Received. 13 Q. (BY MR. RINALDI) Now, directing your 14 attention to Crow No. 0802, can you tell me what 15 your -- what entity you received income from in 16 the year 1984? 17 A. (Witness reviews the document.) United 18 Savings Association of Texas. 19 Q. And they are the ones that filed the 20 W-2 which reflects your income, correct? 21 A. That is correct. 22 Q. And what was the amount of your total 15252 1 income in 1984 that you received from USAT? 2 A. Block 10, which is wages, tips, and 3 compensation, is $93,578. 4 Q. Now, who paid your salary or your wages 5 in 1995 (sic) for the work that you did with 6 respect to USAT? 7 MR. VILLA: In 1985, sir? 8 MR. RINALDI: Yes, 1985. 9 Q. (BY MR. RINALDI) That's reflected, I 10 believe, on Crow 0800. 11 A. That is United Savings Association of 12 Texas. 13 Q. And what was the amount of income that 14 you reported having received from them in 1985? 15 A. Well, there appears to be two. The 16 larger amount is 143,975; and then there's a 17 smaller amount that is $1,917. 18 Q. So that, in total, you received 19 slightly over $145,000 -- 20 A. Yes, sir. 21 Q. -- in 1985? And then in 1986, which is 22 Crow 798 and 99, how much did you receive in 15253 1 compensation from USAT or UFG? 2 A. It appears in 1986 that total wages are 3 144,882. 4 Q. And which entity paid those? 5 A. USAT, United Savings. 6 Q. So, now -- it went -- and then in 1986, 7 your wages were 144,882; is that correct? 8 A. That is correct. 9 Q. And then in 1987, who paid you for your 10 services at USAT and UFG? 11 A. United Savings. 12 Q. And by this time, your total wages had 13 gone up to $249,170 for the year 1987; is that 14 correct? 15 A. I see that. 16 Q. Is that correct? 17 A. That is correct. 18 Q. And then for the year 1988, can you 19 tell who paid your wages for the work that you 20 performed for USAT and UFG? 21 A. In the year 1988, I have two. The 22 United Savings Association of Texas paid 454,209; 15254 1 and then the United Financial Group paid -- well, 2 it's listed as non-employee compensation of 3 12,000. 4 Q. So that in the year 1988, the lion's 5 share of your salary was paid by USAT? 6 A. Was paid by USAT. 7 MR. RINALDI: I have no further 8 questions for the witness, Your Honor. 9 THE COURT: All right. We'll adjourn 10 until 1:30. 11 12 (Whereupon, a lunch break was taken 13 from 11:52 a.m. to 1:27 p.m.) 14 15 THE COURT: Be seated, please. 16 We'll be back on the record. I believe 17 Mr. Rinaldi had completed his examination of the 18 witness, and Mr. Guido is going to begin? 19 MR. GUIDO: Yes, Your Honor. 20 THE COURT: And your area of 21 examination is going to be what? 22 MR. GUIDO: Basically, the areas that I 15255 1 covered with Mr. Huebsch, Your Honor, which would 2 basically be the wholesale strategy of the 3 institution, mortgage-backed securities, the gains 4 trading, the high-yield bonds, and the equity 5 arbitrage. 6 THE COURT: All right. 7 MR. GUIDO: And then the results of 8 those activities. 9 THE COURT: And I assume you're not 10 going to be using the exhibits that Mr. Rinaldi 11 used. 12 MR. GUIDO: No. The compensation 13 exhibits, Your Honor, I'm not going to be. 14 THE COURT: All right. You may begin. 15 16 EXAMINATION 17 18 MR. GUIDO: At the outset, Your Honor, 19 I'd like to have the witness take a look at 20 Exhibits A10546, A10560, A10561. Those are 21 Tabs 171, 174, and 175. 22 Q. (BY MR. GUIDO) Mr. Crow, good 15256 1 afternoon. 2 A. Good afternoon. 3 Q. The -- I'd like to direct your 4 attention to Exhibit A10546, which is a memorandum 5 of October 25th, 1984, from Gerald Williams to the 6 executive committee which was composed at that 7 time of Mr. Bentley, Mr. Hurwitz, Mr. Munitz, and 8 Mr. Whatley. 9 Did you assist Mr. Williams in 10 preparing this memorandum? 11 A. I don't remember doing that. 12 Q. Was this memorandum prepared after you 13 had arrived at USAT? 14 A. Yes, sir, it was. 15 Q. And what was your first task at USAT? 16 A. The first task really is somewhat 17 described in his first point there: Operations. 18 And my first task really was the -- the company 19 had a material weakness, or the association had a 20 material weakness in internal control from the 21 prior year's audit. And my number one priority 22 was to correct that condition. 15257 1 Q. Well, this says, under "operations," 2 "The back office situation with USAT is in much 3 worse shape than any of us realized. Everyone 4 understood the impact of introducing a new 5 computer system, but this has not turned out to be 6 our most pressing concern. The big problem is the 7 company's inefficiency and total disarray of our 8 own files and missing documents that are 9 fundamental to the business. It has taken an 10 extraordinary amount of time by second- and 11 third-level managers to clean house that will 12 continue into 1985." 13 Do you see that? 14 A. I see that. 15 Q. Now, is that a statement that you agree 16 with with the condition of the books and records 17 at the time you arrived? 18 A. Certainly, any time you have a 19 so-called material weakness in internal control 20 and you have two incompatible computer systems, I 21 would agree overall that the situation in terms of 22 operations and administration is very problematic. 15258 1 But, you know, I can't -- that's pretty much my 2 answer. 3 Q. Now, take a look at the second page of 4 the memorandum. 5 Do you see where it talks about, under 6 "net income," and it has this chart under 7 September? 8 Do you see that? 9 A. I do. 10 Q. And can you tell us what the balance 11 sheet looked like at USAT from that -- in 12 September of 1984? 13 A. Well, from this schedule, just reading 14 from the schedule -- it's not a full balance 15 sheet, but it gives the total earning assets as 16 being 2.973 billion. 17 Q. Okay. And what does it show the net 18 interest margin to be on those assets? 19 A. The net interest -- excuse me. Let me 20 study this just one minute, please. (Witness 21 reviews the document.) 22 This schedule would indicate the net 15259 1 interest margin of the total earning assets to be 2 1.50 percent. 3 Q. What does "net interest margin" mean? 4 A. Net interest margin means, to me, net 5 interest income divided by earning assets. 6 Q. Does it mean the difference between the 7 cost of funds and the funds earned? 8 A. Well, the way I would use the term 9 would be net interest income divided by total 10 earning assets; and that's -- 11 Q. Well, if you take the net interest 12 income, see it over in the far right-hand corner? 13 A. Yes, sir. 14 Q. 9.9. Do you see that? 15 A. I do. 16 Q. And if you divide that by 2.9, what do 17 you get? 18 A. I do not have a calculator. I'm not -- 19 if it's 1.50, I don't disagree with that. 20 Q. Can you tell what the earnings is (sic) 21 as a percentage of assets when you take the total 22 income minus total cost of funds from this chart? 15260 1 A. It appears like the total earning 2 assets are earning 9.9 million as indicated by 3 this chart, and you would deduct 5.0 million to 4 derive at net interest income of 4.9 million. 5 Q. Okay. And if you divide 4.9 million by 6 the total earning assets of 2.973, what do you end 7 up with? 8 A. Well, if somebody's got a calculator, 9 I'll divide it out. 10 Q. Is it somewhere around 1.5 percent? 11 A. If -- I will accept that, sir, if 12 that's the way it divides out. 13 Q. Okay. It's approximately 1.5 percent, 14 isn't it? 15 A. Just eyeballing it, it looks like it's 16 in that ballpark. 17 Q. So that that is -- the net interest 18 margin is the percentage earned on assets after 19 you take out the expenses. Right? 20 A. For the cost of carry, yes, sir. 21 Q. Thank you. 22 Now, do you see the section on 15261 1 strategic redirect at the top? 2 A. I do. 3 Q. It says, "While we have concentrated on 4 the potential sale of half our branches during 5 1984, other changes have been taking place. We 6 intend to become a mortgage banking operation in 7 1985 instead of a portfolio lender." 8 Do you see that? 9 A. I do. 10 Q. Do you know what that refers to: 11 Mortgage banking operation in 1985? 12 A. I can't really -- I don't know what 13 Mr. Williams meant by that. I can tell you what 14 I -- what I think it means. 15 Q. Okay. What do you understand it to 16 mean? 17 A. A mortgage banking operation would be 18 more where you make loans and you immediately sell 19 those loans out, and you're still generated -- 20 excuse me -- you're still generating single-family 21 home loans, but you're selling those out into the 22 secondary market. And typically, you keep the 15262 1 loan servicing. 2 Q. So that this is basically to become an 3 originator of mortgages and sell those mortgages 4 in some way in the secondary market. Right? 5 A. My interpretation of a, quote, mortgage 6 banking operation would involve that process, yes. 7 Q. And then see where it says "In 8 addition, consumer lending would be curtailed and 9 construction lending would be limited to only a 10 few important builders." 11 Do you see that? 12 A. I see that. 13 Q. Do you recall Mr. Williams making those 14 proposals in October or the end of 1984? 15 A. No, sir, I don't. I can say -- I 16 can't -- it was certainly early on during my 17 tenure at United, and it certainly may have been 18 during this time period. I do remember that 19 consumer lending was curtailed; and, in fact, we 20 tried to sell our consumer loan portfolio but did 21 not consummate that transaction. 22 Q. And do you recall early on that you 15263 1 attempted to be a mortgage banking operation? 2 A. I can't say that I do remember that. 3 Q. Okay. 4 A. That reported to Mr. Williams, and I 5 tended to be focused on the internal control-type 6 stuff at that time. 7 Q. Okay. When did you shift your focus on 8 the internal control sorts of things? 9 A. My shift started pretty much Day 1 when 10 I started at United. 11 Q. Okay. And what are you talking about 12 shifting to when you talk about shifting from 13 your -- let's say the back office operations type 14 focus? 15 A. Oh, well, perhaps I misspoke. I viewed 16 them to be very much linked. If you have a 17 material weakness in internal control, it is 18 oftentimes caused by or consistent with back 19 office problems as was described in -- somewhat in 20 the operation section. 21 So, in order to fix the material 22 weakness in internal control, you have to address 15264 1 the operations part. 2 Q. Well, at the outset, you were focused 3 on internal controls in the back office operation. 4 Is that a fair assessment of your role? 5 A. I agree with that. 6 Q. When did your role shift from those two 7 functions to more focused on investment policy? 8 A. Well, my role as it relates to 9 investments certainly shifted after Mr. Williams 10 left, I believe, in 1986, late 1986. 11 Q. Prior to that, did you serve on the 12 asset/liability committee? 13 A. I think I did, yes. Oh, I know I 14 served on the asset/liability committee. I'm just 15 stammering around as to the dates. 16 Q. Okay. 17 A. But absolutely, I served on the 18 asset/liability committee. 19 Q. And did you serve on the 20 asset/liability committee from the date it was 21 first created? 22 A. I think so. 15265 1 Q. What was the function of the 2 asset/liability committee? 3 A. The asset/liability committee, as I 4 viewed it, was a subordinate committee to the 5 investment committee. And it was more of a 6 working-type committee, the objective of which was 7 to bring the investment people and the funding 8 people like Jim Jackson, who was over the money 9 desk, and some financial analysis-type people 10 together to talk about things like asset/liability 11 management and those sorts of things. 12 Q. Risk control? 13 A. We certainly, as I recall, talked about 14 our -- the association's gap position, interest 15 rate risk position. 16 Q. And how to manage that interest rate 17 risk position? 18 A. I recall that -- well, certainly, I 19 think -- I get confused as to where we did what 20 and what committee, but I believe we talked 21 about -- there was something called the Sendero 22 asset/liability model. And I believe that was 15266 1 presented as part of this asset/liability 2 committee. 3 Q. Put the Sendero model aside for a 4 minute. 5 A. Okay. 6 MR. VILLA: Excuse me. I couldn't hear 7 your question. 8 Q. (BY MR. GUIDO) Put the Sendero model 9 aside for a meant. I just want to focus on 10 interest rate risk management. At the outset, was 11 the role of the committee to do an analysis of 12 interest rates to ascertain in the committee's 13 best interest what the likely direction of 14 interest rates was? 15 A. I don't -- could you please repeat that 16 question? 17 Q. Was one of the functions of the 18 committee to take a look at all available 19 information and to ascertain what the likely 20 direction of interest rates would be? 21 A. I don't -- I think -- I don't know 22 quite how to answer that question. We certainly 15267 1 talked about the level of interest rates and how 2 they might go up or down and in terms of interest 3 rate forecast. But I would view that in terms of 4 making any -- you know, assumptions would be more 5 of an investment committee type exercise, but I 6 want to be clear that certainly we talked about 7 what interest rates might do during the 8 asset/liability committee. And I'm certainly sure 9 that was discussed. 10 Q. Was one of the functions of the 11 asset/liability committee to give the 12 asset/liability committee's views to the 13 investment committee on the likely direction of 14 interest rates? 15 A. I'll answer like this. We may have 16 given our views; but to be blunt, I'm not at all 17 sure that many of the members of the investment 18 committee would look to the people that were on 19 the asset/liability committee to have any great 20 crystal ball in terms of interest rate outlook. 21 That was done principally, for example -- we would 22 have -- in the investment committee, we would have 15268 1 economists talk to us over the speakerphone about 2 what their views were in terms of interest rate 3 outlook. 4 Q. Who sat on the asset/liability 5 committee besides yourself? 6 A. Bruce Williams, Jim Jackson, Ron 7 Huebsch, Joe Phillips. I believe Doug Hansen. 8 Q. Now, which of you also sat on the 9 investment committee? 10 A. Myself, Bruce Williams, Ron Huebsch, 11 probably Joe Phillips. On the A/L committee, I 12 think -- I'm not positive, but I think Kurt 13 Schwenkel was on that committee. 14 Q. Was there an overlap between the 15 membership of the asset/liability committee and 16 the investment committee when it was formed? 17 A. Yes, sir. There were some common 18 members. 19 Q. Now, take a look at Exhibit A10560. 20 This is a memorandum from you, Charles Hurwitz, 21 Barry Munitz, Jenard Gross, and Gerry Williams. 22 It says, "Attached is a draft of the notes from 15269 1 our meeting this past weekend." And then it says, 2 "United Financial Group mission statement," which 3 is the second page of the document. And then the 4 third page of the document is "United Financial 5 Group summary strategic planning, weekend of 6 4/26/85." 7 Do you see that? 8 A. Yes, sir, I see this. 9 Q. Why were you the person that prepared 10 this document? 11 A. Because I was the lowest-ranking person 12 there, and the lowest man on the totem pole tended 13 to have to take -- or, you know, write down what 14 was going on or was kind of the -- the "fetch it 15 person," so to speak. 16 Q. Were the people that were at that 17 meeting the four individuals listed in your cover 18 memo of May 1st, 1985, plus yourself? 19 A. Oh, at that meeting? To the best of my 20 recollection, all of these individuals were. 21 Q. Including yourself? 22 A. Yes, sir, right. 15270 1 Q. Anyone else? 2 A. There may have been a presentation 3 or -- I'm not sure you'd call it a presentation, 4 but a discussion by David Neurenburg. 5 Q. And who was David Neurenburg? 6 A. I may have the wrong strategic planning 7 committee. But in any case, Mr. Neurenburg was 8 a -- we had hired him as -- or I say "we." I 9 think Dr. Munitz had hired him as a consultant. 10 And my interface with Mr. Neurenburg was during a 11 strategic planning committee where he made or had 12 a discussion of loan servicing. And we talked 13 about whether United's loan servicing was 14 efficient and should -- you know, what our 15 strategy should be. And it was the -- that's what 16 it was. 17 Q. At this meeting, was there a discussion 18 about strategic direction, shift in strategic 19 direction at USAT? 20 A. I'm not sure of your word "shift," but 21 certainly we talked about strategic direction. 22 Q. Well, remember the memo, the 15271 1 October 25th, 1984 memo from Gerald Williams? 2 A. Yes, sir. 3 Q. He basically was talking about a 4 mortgage banking operation? 5 A. Yes, sir. 6 Q. Now, take a look at this mission 7 statement. It sets out the mission for 8 United Financial Group. 9 Do you see that? 10 A. I see that. 11 Q. It says, "Activities to be 12 retained/expanded are," and then it has a list of 13 activities. Right? 14 A. I see that, yes, sir. 15 Q. And one of those, it says "Real estate 16 and real estate joint ventures essentially the 17 same function we have today." 18 Do you see that? 19 A. Yes. 20 Q. Then it says "Merchant banking finance 21 activities with profit participation on the part 22 of United." 15272 1 Do you see that? 2 A. I see that. 3 Q. Now, do you know what that refers to? 4 What type of activity? 5 A. Well, an example of that, I believe, 6 would be Weingarten Realty, if I'm not mistaken. 7 Q. Okay. 8 A. That was a -- merchant banking was a 9 term that was used, and I was always a little 10 confused as to what all was included in that 11 activity. 12 Q. That's an activity that didn't exist 13 prior to May 1st, 1985; is that right? 14 A. Factually, I don't know. I'm -- I'm 15 just not aware of any, quote, merchant banking 16 activities, whatever it was. 17 Q. Okay. "Venture capital investment 18 startup situations," what does that refer to? 19 A. That was a function that Terry Dorsey 20 ended up heading up, and it was investments in 21 startup-type operations. They tended to be small 22 investments. 15273 1 Q. Do you have any examples of those? 2 A. I can't -- I think one of the names 3 that sticks into my mind is Pancratech, which 4 made -- I think it made medicine pumps to -- for 5 people that had cancer. 6 Q. Do you remember an entity called 7 Houstonian? 8 A. Certainly. 9 Q. What was that? Was that a merchant 10 banking or venture capital? 11 A. Well -- I don't know how to classify 12 that. 13 Q. What was it? 14 A. Well, the Houstonian was a -- was and 15 is a big hotel, and it's a fairly good-sized piece 16 of property surrounding the hotel, and it's on the 17 west side of Houston. 18 Q. Do you recall whether or not there was 19 any investment in a taxi cab company? 20 A. I do remember that, yes, sir. 21 Q. What was -- was that a venture capital 22 or merchant banking activity? 15274 1 A. I would personally -- well, I don't 2 know. 3 Q. Then see the reference to "marketable 4 securities, investment in non-hostile takeover 5 situations that offer the potential of significant 6 returns." 7 Do you see that? 8 A. I see that. 9 Q. What does that refer to? 10 A. I would take this to mean equity 11 arbitrage. 12 Q. And then it says, "Investments in fixed 13 and floating rate investments for a spread." 14 What do you take that to mean? 15 A. I believe that could be -- that would 16 be both -- well, I'm not sure exactly what this is 17 referring to. But certainly, that could be 18 high-yield bonds and mortgage-backed securities. 19 Q. And then it says, "Commercial 20 construction lending would involve financial 21 commercial construction projects which would 22 include a profit participation for United." 15275 1 Do you see that? 2 A. I do see that. 3 Q. What type of activities does that refer 4 to that are different than the first item: Real 5 estate and real estate joint ventures? 6 A. I don't know. 7 Q. Now -- do you know what it refers to? 8 A. Well, I'm familiar with construction 9 lending or construction lending -- 10 Q. What would be examples of that? It 11 says "commercial construction lending." 12 A. Yes, sir. I'm just speculating, but I 13 would assume -- 14 Q. Please don't speculate. 15 A. Okay. I really don't know. 16 Q. Now, look back under the marketable 17 securities. It says, "Investment in non-hostile 18 takeover situations that offer the potential of 19 significant returns." 20 Do you see that? 21 A. I see that. 22 Q. Why does it say "non-hostile takeover 15276 1 situations"? 2 A. To the best of my memory, it was 3 decided that United -- or it would be recommended 4 that United be involved in true equity arbitrage 5 but would not get into a Castle & Cooke-type 6 situation. 7 Q. Now, what do you mean by "a Castle & 8 Cooke-type situation"? 9 A. Well, I don't know a great deal about 10 that because it was -- I think that investment had 11 occurred before I came to United. But I was aware 12 of it, you know, certainly after I came on board. 13 And the firm, Castle & Cooke, didn't like the 14 investment that had been made in its company; and 15 there was significant adverse publicity. Or when 16 I say "adverse publicity," it was publicity. 17 Whether it was adverse or not, I don't know. 18 But in any case, it was very visible. 19 As opposed to equity arbitrage where you're 20 investing in securities after a merger's been 21 announced and you're just trying to earn that 22 extra spread. 15277 1 Q. Well, take a look at -- so, you mean by 2 "non-hostile" that there isn't litigation or an 3 objection by the acquiring entity to the takeover 4 effort. 5 Is that what you mean? 6 A. (Witness reviews the document.) That 7 would certainly include non-hostile, yeah. That, 8 I guess, we wanted -- or that the committee wanted 9 to avoid hostility or hostile-type situations. 10 Q. Now, look at the five people who were 11 at that meeting. 12 Who of those had ever had any 13 experience in merchant -- or real estate and real 14 estate joint ventures? 15 A. Well, I can't -- I would assume 16 Mr. Gross, but I don't know that for a fact. 17 Q. Anyone else? 18 A. And I knew that Mr. Hurwitz had been 19 involved -- or I say I knew. I think Mr. Hurwitz 20 had been involved in some real estate projects in 21 the past. 22 Q. What about merchant banking? 15278 1 A. Merchant banking, I don't know. 2 Q. What about venture capital investment 3 in startup situations? 4 A. I don't know. 5 Q. What about marketable securities, 6 investment in non-hostile takeover situations? 7 A. In terms of, like, portfolio 8 management? 9 Q. Uh-huh. 10 A. I don't know that any of the 11 individuals there, of my knowledge, had been 12 actual portfolio managers. A number of us -- and 13 I'll just speak to what I know. Both Gerald 14 Williams and I had sat on the First City National 15 Bank investment committee. But in terms of a 16 direct portfolio management responsibility, we had 17 none. 18 As to the other three gentlemen, I 19 can't factually say. 20 Q. When you sat on that committee at the 21 bank, did it engage in any equity arbitrage? 22 A. Oh, no, sir, it did not. 15279 1 Q. Now -- then it says "Investments in 2 fixed and floating rate investments for a spread," 3 which you said included high-yield bonds and 4 mortgage-backed securities portfolios. 5 Had any of these people ever invested 6 in high-yield bonds before? 7 A. I don't know. 8 Q. Had you ever overseen a portfolio of 9 investment high-yield bonds before? 10 A. I hadn't. 11 Q. Had any of them, to your knowledge? 12 A. I don't -- I'm quite sure 13 Mr. Gerry Williams hadn't; but the other three, I 14 can't say. 15 Q. What about mortgage-backed securities 16 portfolios? 17 A. Well, that's kind of a tough one 18 because it was so new, mortgage-backed securities. 19 But to my knowledge, I had not overseen a 20 portfolio of mortgage-backed securities; and I 21 don't know that any of the other people had or 22 hadn't. 15280 1 Q. How many years prior to that had you 2 worked with Mr. Williams, Gerry Williams? 3 A. I had worked with Mr. Williams for 4 roughly 12 years at First City Bank Corporation 5 and First City National Bank. 6 Q. Had he ever overseen the management of 7 a mortgage-backed security portfolio? 8 A. Not to my knowledge. 9 Q. Now, I'd like to move to the next 10 exhibit, which is A10561, which are the minutes of 11 the board of directors meeting of May 16th, 1985. 12 That's at Tab 175. 13 It says, "A regular meeting of the 14 board of directors of United Savings Association 15 of Texas was held at 10:00 a.m. on May 16th," and 16 it lists the place. 17 Then it says on the -- in the third 18 paragraph, "Mr. Crow reviewed the financial 19 statements for the association as of the end of 20 the quarter." 21 Do you see that? 22 A. I do see that. 15281 1 Q. Was it your responsibility to make the 2 presentations with regard to the financial 3 statements that were reported to the board at each 4 of the board meetings? 5 A. Certainly, that was my responsibility 6 for sure after Gerald Williams left the company. 7 And prior to that, I oftentimes did it. But from 8 time to time, Mr. Williams performed that function 9 himself. 10 Q. Did you regularly attend the board of 11 directors meetings at USAT? 12 A. Yes, sir, I did. Yes, especially 13 after -- I think in the real early -- my memory is 14 during my early tenure at United in early 1984, I 15 didn't. But at some point, I started attending 16 the meetings and typically would make a financial 17 presentation. 18 Q. Okay. Do you recall when you would 19 typically attend the meetings? Starting when? 20 A. I would -- I'm guessing, but I would 21 guess that it was certainly by mid-1984. 22 Q. Now, let me direct your attention to 15282 1 the Page 6 of the minutes. Do you see the third 2 paragraph? It says, "Mr. Hurwitz briefed the 3 board on the recent planning meeting with 4 Bain & Company regarding the profitability of the 5 association"? Is that making reference to the 6 meeting that's referred to in your memo of May 1, 7 1985, Exhibit A10560? 8 A. I believe it is. 9 Q. And is the reference to Bain & Company 10 that it's referring to here your reference to 11 David Neurenburg being at that meeting? 12 A. It is. 13 Q. Now, do you recall the discussion at 14 the board meeting about Mr. Hurwitz' report on the 15 recent planning meeting with Bain & Company? 16 A. No, sir, I do not. 17 Q. Then look at the third full paragraph. 18 It says, "Mr. Crow showed several slides which 19 compared income from 1984, the fourth quarter of 20 1984, and the first quarter of 1985. The 21 association lost 6.4 million in '84 when the 22 impact of the branch sale was eliminated and 15283 1 5 million in the first quarter of 1984. Mr. Crow 2 also displayed a proposed mission statement for 3 the association which reflected the conclusions 4 reached in the Austin meeting. Under this mission 5 statement, the association would divest itself of 6 most of its transaction-related business and 7 concentrate on real estate and joint venture, 8 residential mortgage originations to be sold in 9 the secondary market, commercial construction 10 lending, other type of merchant banking 11 activities, real estate syndications for special 12 situations, venture capital investments, and the 13 creation of investment funds from 14 deposit-gathering activities of other financing 15 techniques." 16 Do you see that? 17 A. I see that. 18 Q. Is that making reference to your 19 memo -- the mission statement that's attached to 20 your memorandum of May 1, 1985, Exhibit A10560? 21 A. I can't be sure, but I'm -- it 22 certainly would seem to be a safe assumption. 15284 1 Q. Now, were investments made in equity 2 arbitrage transactions at USAT when you were 3 there? 4 A. In equity arbitrage transactions? 5 Q. Uh-huh. 6 A. Yes, sir. 7 Q. Were investments made in high-yield 8 bonds when you were there? 9 A. Yes, sir. 10 Q. And were investments made in 11 mortgage-backed securities when you were there? 12 A. Yes, sir. 13 Q. I'd like to show you another packet of 14 materials, if I may, which deal with the 15 high-yield bonds that we asked Mr. Phillips about. 16 MR. VILLA: Excuse me. Could you give 17 us the tab numbers? It takes us a minute to find 18 them. 19 MR. GUIDO: Oh, sure. 20 MR. VILLA: Or the exhibit numbers. 21 MR. GUIDO: It's Tab 160 through 165, I 22 think. So, we're going to be talking about now 15285 1 Tab 160, B535 (sic); Tab 161, B536 (sic); Tab 162, 2 B370; Tab 164, B398; Tab 165, B400; Tab 163, B370 3 (sic). 4 MR. VILLA: The numbers don't seem to 5 match with our tabs. Could you read them off 6 again? 7 MR. GUIDO: 160 through 163, and they 8 are B355, B356, B370, B371. Let's use those four. 9 MR. VILLA: Thank you. 10 Q. (BY MR. GUIDO) Have you had an 11 opportunity to review those documents, Mr. Crow? 12 A. I've started, yes, sir. 13 Q. Well, look at the document that's 14 Exhibit B355, 160. It says -- it's to Mr. L.A. 15 Anderson. It says, "Dear Andy, as a follow-up to 16 our letter of July 5 and your discussion with Jim 17 Pledger earlier this week regarding our request 18 for approval of investment and certain corporate 19 debt securities, we have revised the master list 20 to include 13 securities which we would consider 21 for possible purchase." 22 Do you see that? 15286 1 A. I see that. 2 Q. This letter is dated July 23rd, 1984. 3 Do you see that? 4 A. I see that. 5 Q. And do you see that list of entities 6 there? 7 A. It starts with Southmark Corporation? 8 Q. Yes. 9 A. Yes, sir, I do. 10 Q. Now, who was it that initiated these 11 purchases? 12 A. I believe Joe Phillips. You know, 13 that's -- to the best of my recollection, that was 14 a Joe Phillips endeavor. 15 Q. Well, look at -- why don't you take a 16 look at Tab 163, B371. It's a memo from Joe 17 Phillips to Gerald Williams dated September 24, 18 1984. It says, "Purpose: To document my review 19 of holdings of high-yield fixed-income securities 20 held by the association upon my arrival." 21 Take a look at that list. That says 22 Occidental Petroleum on Page 2, MDC Corporation, 15287 1 Mesa Petroleum, Coastal Corporation, Kaufman & 2 Broad, Continental Illinois, and LTV. 3 Do you see that? 4 A. I see that, yes, sir. 5 Q. And who initiated those purchases? 6 A. I really don't know. I would assume, 7 if Mr. Phillips hadn't have been there, that it 8 would be Mr. Huebsch. 9 Q. Who started the -- or initiated the 10 investments in high-yield bonds at USAT? 11 A. I don't know. 12 Q. Did you submit a letter through counsel 13 to counsel for the FDIC in response to questions 14 that were submitted to you by FDIC's counsel? 15 MR. VILLA: Your Honor, I think it's 16 probably appropriate to raise an issue here. In 17 the OTS exhibits, they marked as an exhibit a 18 letter that had been submitted by Mr. Crow's prior 19 counsel in the course of settlement discussions 20 that his prior counsel had with the FDIC. 21 We objected to this because settlement 22 discussions and statements made during settlement 15288 1 discussions are not admissible in court. 2 Now, I don't know how the OTS got their 3 hands on the letter; but we made the objection at 4 the outset. I don't believe it is appropriate -- 5 and I have never seen it done in a case -- that 6 settlement discussions and letters between lawyers 7 and federal agencies are introduced or used to 8 impeach people. Indeed, that's the reason you 9 have settlement discussions, to try to avoid 10 litigation. 11 I can see that Mr. Guido has in his 12 hand the very exhibit that we objected to at the 13 outset. I believe it is inappropriate to start 14 the process of bringing in letters from lawyers to 15 the FDIC in furtherance of settlement to inject in 16 this record as a basis for the Court's decision. 17 I think it will introduce clear error and starts 18 us off on a road where it has no end as we're 19 going to get back and forth as to what the FDIC 20 said and what the FDIC didn't say and what his 21 prior lawyer said and didn't say. 22 So, I would object to this entire line 15289 1 of questioning. I don't think it's appropriate. 2 I don't think it's proper for the Court to take 3 into consideration settlement discussions. 4 MR. GUIDO: Your Honor, I'd like to 5 read into the record the beginning paragraphs -- 6 not the substance of the letter, but the beginning 7 paragraphs of the letter and the concluding 8 paragraph of the letter because I think that it 9 will address that question. 10 I have asked the FDIC whether or not 11 this was pursuant to settlement discussions and 12 have been informed it was not pursuant to 13 settlement discussions. I haven't heard Mr. Villa 14 allege that it was pursuant to settlement 15 discussions. 16 In either case -- 17 THE COURT: I thought that's what he 18 just said. 19 MR. GUIDO: No. He said that we were 20 starting down that road, Your Honor. 21 MR. VILLA: No. I said if we open up 22 the road toward starting to have everybody talk 15290 1 about settlement discussions, then we are going to 2 go down a road that has no end to it. That's what 3 I said. 4 MR. GUIDO: Well, Your Honor, this 5 issue is going to come up again. I'm right now 6 discussing this document. There are a number of 7 issues here that we might as well begin to 8 explore, as Mr. Villa points out. 9 I would like to know, first of all, 10 whether or not he's alleging that this document 11 was part of settlement discussions to which he's 12 making reference to the Federal Rules of Evidence 13 because it's my understanding it is not a document 14 that was part of any settlement discussions. And 15 I'd like to read into the record the first 16 paragraph and the last paragraphs of the letter, 17 which doesn't get into the substance, and I think 18 sheds light on that issue, Your Honor. But I do 19 not believe that Mr. Villa has yet said that this 20 document was part of any settlement discussions. 21 I've been told and I heard Mr. Villa say, well, 22 he's concerned about going down this road or 15291 1 starting down this road. 2 I want to know whether or not you're 3 alleging that this is protected by any Federal 4 Rule of Evidence and what the Federal Rule of 5 Evidence is and why you think it's covered. I 6 think it's appropriate for you to make your 7 objection and state the legal basis for it so I 8 can respond to it. 9 MR. VILLA: You know, I guess I'm more 10 opaque than I think. In my old age, I think I 11 actually made my point. I thought this was part 12 of settlement discussions. We take the position 13 it is part of settlement discussions. It's under 14 settlement discussions under Rule 408 under the 15 Federal Rules of Evidence. 408 says, 16 "evidence" -- it has a preamble to it. Then it 17 has a provision in the middle of Rule 408 that 18 says, "Evidence of conduct or statements made in 19 compromised negotiations is, likewise, not 20 admissible." That's the rule of evidence. 21 And the line at the end of the letter, 22 which I'm sure you're going to read, but I'll read 15292 1 it, too, because if you want to know what my 2 position is, I'll tell you. At the end of the 3 letter by a prior law firm that represented 4 Mr. Crow is, "We hope that Mr. Crow's efforts thus 5 far have contributed to an early resolution of 6 this matter and we await your input as to whether 7 the FDIC is willing to continue working with 8 Mr. Crow towards that end." 9 Now, that's settlement discussions. I 10 mean, I can't think of any other way it could be 11 construed other than settlement discussions. And 12 it's -- it is a statement made during settlement 13 discussions by lawyers hired to try to settle the 14 case for Mr. Crow. That's my position. If I 15 could be any plainer, I would. 16 MR. GUIDO: I'd like to read the 17 first -- beginning of the letter. It says, "Dear 18 Greg and Tom" -- Greg Markel, Tom Manick, Davis, 19 Markle & Edwards, re: FDIC. "Thank you for your 20 letter posing initial questions for Michael Crow. 21 We have discussed these questions in detail with 22 Mr. Crow, and his answers to them are as follows." 15293 1 And then it just lists the answers. 2 The FDIC was merely asking questions of 3 Mr. Crow. He responded to those questions, Your 4 Honor. He may have wanted the FDIC to forego 5 granting an action against him, but there were no 6 settlement negotiations pending at this time. 7 Second, Your Honor, is that Mr. Villa 8 has submitted a number of letters to the FDIC 9 subsequent to this point in time which, in them, 10 expressly state that they are part of settlement 11 negotiations. There's another problem with those 12 because it turns out those letters were given to 13 the respondents' expert to opine on whether or not 14 they had breached their fiduciary duties here. 15 So, there's a question of whether or 16 not there's a waiver with regard to it. This 17 letter was not included with those that were 18 submitted to the expert. We believe that we are 19 entitled to ask the expert when we get to that 20 point, Your Honor, whether or not he had this 21 letter in his possession when he opined on whether 22 or not the individuals abused their fiduciary 15294 1 duties, which I think is what his opinion is 2 about, Your Honor. 3 We believe that, one, this isn't a 4 document that is covered by any settlement 5 negotiations because counsel knows that if they 6 are going to do so, they site the Federal Rules of 7 Evidence when they do so. It was not cited here, 8 Your Honor. 9 Second of all is Mr. Villa, in the 10 letters which he does cite, it turns out all of 11 those letters were given to respondents' expert 12 who has filed an opinion stating that he based his 13 opinion on those communications. 14 We believe under those circumstances, 15 if there is any privilege which applies to this or 16 to any of Mr. Villa's communications, it's been 17 waived by the respondents. 18 Your Honor, under our rules, the 19 Federal Rules of Evidence, exclusionary rules of 20 evidence are not directly applicable. The Court, 21 in administrative proceedings, has applied those 22 rules in the past, but it is applying those rules 15295 1 in an attempt to get at the underlying veracity of 2 the testimony of the witnesses before it. 3 We believe in these circumstances when 4 the privilege wasn't claimed here in this 5 letter -- Mr. Villa knows how to claim the 6 privilege and did so in the communications that he 7 made. These -- this is a response to questions 8 that were put to Mr. Crow. It was not stated in 9 the letter to Mr. Crow's counsel that any 10 negotiations were undertaken. The questions were 11 not posed in that context. They were posed in the 12 context of the FDIC doing an investigation, Your 13 Honor. 14 And we believe, under those 15 circumstances, the privilege doesn't apply and, 16 two, it's been waived. And we believe that this 17 evidence is very, very important, particularly in 18 light of the beginning of this witness' testimony, 19 Your Honor. 20 THE COURT: Do we have the 21 communication that this is a response to -- 22 MR. GUIDO: I do not have the 15296 1 communication that this is a response to, Your 2 Honor -- I have the response and we can get that 3 communication if you want, plus we can get either 4 an affidavit or testimony from the FDIC lawyers to 5 the effect that there were no settlement 6 negotiations and I'm perfectly willing to put the 7 issue off if you would like to see that 8 communication and that affidavit. 9 MR. VILLA: Yes, Your Honor. I'd like 10 to cross-examine those lawyers since I have met 11 with them and set up these discussions. I happen 12 to have fairly clear idea of what happened, and 13 I'm prepared to bring in such -- a number of 14 people on the FDIC side who, I think, will confirm 15 that they were all settlement negotiations. But I 16 agree with Mr. Guido. It's probably appropriate 17 to put it off. I just don't -- you know, he talks 18 about all these documents he wants to get into. 19 These are the -- what we're talking about. These 20 are letters from lawyers, i.e., me, to the FDIC in 21 attempt to settle the case. And when he says 22 these are the things he wants to put in the 15297 1 record, these go back six years, I think, in the 2 course of the discussions. 3 So, as I say, we've got a big case to 4 try. This man has been deposed on, I don't know, 5 750,000 pages. He's been deposed on multiple 6 days. They have got plenty of statements by him. 7 Let's try this case, not the question of whether 8 some lawyer did or did not make a mistake in a 9 letter that he sent six years ago in the course of 10 settlement discussions. I suggest that's a very, 11 very treacherous path to start down. 12 THE COURT: You refer to the rules that 13 apply. Our rules specifically, the agency's 14 rules, do exclude settlement negotiations. 15 MR. GUIDO: Your Honor, our rules 16 incorporate the rules under the common law or the 17 Federal Rules of Procedure. Our rules, I don't 18 think -- I may be incorrect. They may have 19 something expressly on settlement negotiations. 20 I'm just assuming for purposes of 21 argument that that is the rule in our proceedings, 22 Your Honor. I'm -- we also have a rule that says 15298 1 the exclusionary rules of evidence -- and that 2 being one of them -- are not necessarily binding 3 if the evidence is highly relevant and important 4 to the veracity of witnesses. We believe that 5 that exception is what's applicable here. But 6 putting that aside, Your Honor, we believe, one, 7 that this correspondence isn't covered by any 8 privilege and, as Mr. Villa very well knows, that 9 his letters have been submitted which clearly say 10 that he anticipated them to be covered by a 11 privilege, have been submitted to the expert that 12 they are relying upon in this case to solicit that 13 expert's opinion. 14 So, under -- and that that opinion has 15 been produced as an expert report is going to be 16 submitted in this court, Your Honor. Under those 17 circumstances -- and Mr. Pratt is the expert. 18 Under those circumstances, Your Honor, I don't 19 think that Mr. Villa can have it both ways, that 20 he can, you know, use that to effect the testimony 21 of an expert witness, his submissions, including 22 this one, as well, Your Honor, and then, two, is 15299 1 not give the expert this document, although give 2 the expert all of those that Mr. Villa has written 3 explaining the respondents' view of the facts in 4 this case and now claim that somehow the OTS 5 cannot use his previous submissions and this 6 submission, as well, Your Honor. 7 We think that it's clearly been waived 8 if it's been given to an expert to have the expert 9 opine and give its opinion -- his opinion, Mr. 10 Pratt's opinion, to this court, Your Honor. 11 MR. VILLA: Your Honor, 12CFR 509.15, I 12 recall, Your Honor, that says that no settlement 13 offer or proposal or any subsequent negotiations 14 or resolution is admissible as evidence in any 15 proceeding. And I submit that that simply echoes 16 the general principle of American jurisprudence, 17 that people ought to be able to have settlement 18 discussions without it being thrown in their face. 19 So, Your Honor, on the issue of 20 Mr. Pratt, I'll be happy to address that issue 21 when the time comes. I submit with respect to 22 this particular document that it ought not to be 15300 1 introduced now. If they want to call Mr. Manick 2 who, as I recall, was the person at the FDIC who 3 was involved in this, I'm sure that we'll be able 4 to bring the lawyers from the Carrington, Coleman 5 law firm, we can have a mini-trial on this issue, 6 and it will be very amusing; but I suspect that 7 this is not the way we ought to go. But at least 8 for these purposes it ought not to be introduced, 9 ought not to be used for cross-examination of the 10 witness. It introduces clear error into this 11 proceeding. 12 THE COURT: Well, I'm not going to 13 allow it at this moment. I'm not sure what 14 purpose is served by deferring it, but I'm just 15 not prepared to make a ruling on the basis of what 16 I've heard here. I don't know how we want to 17 handle it. It looks like it would be a factual 18 question whether the parties considered this to be 19 settlement negotiations. And I'm not prepared to 20 say, based on what I've heard. 21 MR. GUIDO: Your Honor, I think that 22 one of the ways that probably would be a good way 15301 1 to start is for people to submit affidavits to 2 that effect and then you can determine that 3 question. 4 I think it's also perfectly appropriate 5 at this point in time to address the waiver issue, 6 Your Honor, and we will submit the experts' 7 documentation to show that the expert has looked 8 at all of the documents that Mr. Villa is claiming 9 are privileged by settlement negotiation 10 privilege. I don't believe that anyone can claim 11 a privilege to a document if they have given it to 12 an expert to opine on whether or not people abuse 13 their fiduciary responsibilities -- 14 THE COURT: Well, are you trying to get 15 into those documents now? 16 MR. GUIDO: Not now, Your Honor. This 17 is the only document that I'm addressing at this 18 point in time, Your Honor. And -- 19 THE COURT: I suppose it would be 20 possible to waive it to some documents and not 21 others. 22 MR. GUIDO: Well, we seem to -- it 15302 1 seems to me, Your Honor, if that expert is relying 2 upon Mr. Villa's rendition of the facts as he puts 3 on behalf of the witnesses into a statement that's 4 relied upon by that expert witness, I can clearly 5 cross-examine the witness about what the witness 6 did not see, Your Honor, which is also within the 7 same category of settlement negotiations. 8 Mr. Villa's already read the rule, and 9 it talks about a series of discussions that are 10 called settlement discussions. It doesn't seem to 11 me that the respondents can have it both ways, 12 call some things settlement negotiations, other 13 things not, waive it with regard to some, and 14 waive it -- and not waive it without the others, 15 Your Honor. 16 So, it seems to me that by waiving it 17 with the bulk of the settlement negotiations or 18 what have been characterized as settlement 19 negotiations, it clearly is a waiver with regard 20 to a document that isn't even characterized as 21 settlement negotiations. 22 But I'm perfectly willing to put that 15303 1 aside for the time being. 2 THE COURT: All right. Let's put it 3 aside. 4 MR. GUIDO: I'm going to ask the 5 witness about whether he authorized somebody to 6 make a statement for him and whether or not he 7 made a statement that is contrary to his testimony 8 today, however, Your Honor. 9 MR. VILLA: I suggest we just put that 10 whole portion of it off. 11 THE COURT: Well, if you're relying on 12 that statement as to your examination, if we're 13 going to defer it, let's defer it in its entirety. 14 I mean, I don't want to halfway go and then say 15 we'll leave the balance for a later time. Let's 16 just lay the whole thing aside. 17 MR. GUIDO: All right, Your Honor. I'm 18 perfectly willing to do whatever you want. This 19 is an issue, and I think that it's an issue -- 20 THE COURT: Part of it is to pursue 21 this matter and your suggestion of affidavits 22 might be a beginning. 15304 1 MR. GUIDO: Well, I would suggest that 2 by next Friday that we submit affidavits with 3 regard to this document and all the documentation 4 for Your Honor to make a ruling on this issue so 5 that we can address it as quickly as possible. 6 MR. VILLA: Your Honor, I just want 7 to -- we're dealing with this letter, or are we 8 going to deal with all the issues? 9 MR. GUIDO: I think we should deal with 10 all of the issues. 11 MR. VILLA: Well, then let's hear what 12 they have got to say. We're responding to their 13 arguments. If they want to submit by next Friday, 14 give us a week to respond to it so -- we're going 15 to have to contact the people involved and see 16 their briefs and their affidavits and we'll 17 respond in a week. It's kind of hard to do while 18 you're in trial, but I'd be happy to expedite 19 that. 20 So, with respect to both the letter 21 that's being used -- offered today or offered for 22 use today and the submissions that Williams and 15305 1 Connolly made under the privilege of settlement 2 discussions, communications, if that's agreeable 3 to you. I don't want to press you, Mr. Guido. If 4 you want to take ten days or two weeks, that's 5 fine, or one week. We'd like seven days after 6 you've completed your filing, and we'll file a 7 response and we'll get on with it. 8 Is that okay? 9 MR. GUIDO: We'll file a motion within, 10 you know, a week to ten days and Mr. Villa will 11 respond within seven days of when we file, Your 12 Honor. That's perfectly acceptable to us. 13 THE COURT: Well, let's not leave it a 14 week or ten days. Let's set a date. You said 15 next Friday. 16 MR. GUIDO: I said -- we will do that. 17 THE COURT: And he will submit a 18 response by the following Friday. 19 MR. GUIDO: That's very fine, Your 20 Honor. 21 MR. VILLA: Thank you, Your Honor. 22 Q. (BY MR. GUIDO) How long did 15306 1 Mr. Huebsch work for Mr. Hurwitz at the time that 2 the initial purchases were made that are referred 3 to in Exhibit B371? 4 A. Factually, I don't know. But I think 5 it was quite some time, like several years. 6 Q. Who managed the high-yield bond 7 portfolio prior to Joe Phillips arriving at USAT? 8 A. Well, sir, you're asking me questions 9 that I really don't know the answer to. I can 10 tell you what I think. 11 Q. Well, what do you mean you can tell me 12 what you think but you don't know? What do you 13 mean by that distinction? 14 A. What I mean is if you want a definitive 15 answer, I don't know. I can tell you, by the 16 process of elimination, that there's only a few 17 people that could have managed it. 18 Q. Well, who are those people that you 19 believe only could have managed the portfolio 20 prior to Joe Phillips' arrival? 21 A. Well, I believe that would be 22 Mr. Huebsch, and probably with the assistance of 15307 1 Mr. Hurwitz? 2 Q. Now, who managed the mortgage-backed 3 security -- excuse me -- the equity arbitrage 4 portfolio at USAT? 5 A. Mr. Huebsch, Ron Huebsch. 6 Q. Did he do it with anyone's assistance? 7 A. Ron had some assistants, Clint Carlson 8 and another couple of people, yes, sir. 9 Q. Did Mr. Huebsch have the authority to 10 make investments in the high-yield bond portfolio 11 prior to getting express authority for particular 12 investments from the investment committee? 13 MR. VILLA: Are you saying high-yield 14 bond -- you're just switching back and forth. 15 MR. GUIDO: I'm sorry. Equity 16 arbitrage. 17 MR. VILLA: Okay. 18 A. Could you repeat that question? 19 Q. (BY MR. GUIDO) Did Mr. Huebsch have 20 the authority to make investments in equity 21 arbitrage transactions prior to obtaining approval 22 from the investment committee for those particular 15308 1 investments? 2 A. My memory is that Mr. Huebsch had 3 position limits, and his business was such that he 4 didn't go ask the investment committee, "Can I 5 invest in Security A and can I invest in Security 6 B?" He did it. In other words, he would invest 7 in those securities and then report to the 8 investment committee subsequently what he had 9 done. That's -- 10 Q. Now -- 11 A. That's my memory. 12 Q. Look at the minutes of the board 13 meeting in A10561. 14 MR. VILLA: 10561? 15 Q. (BY MR. GUIDO) The minutes of the 16 board meeting again. The May 16th -- the last 17 paragraph of the minutes. Look at the last 18 paragraph. It says, "Mr. Keltner asked about 19 regulatory compliance." This is with regard to 20 your mission statement. "And Mr. Hurwitz stated 21 that the association will maintain 60 percent of 22 its assets in mortgage or mortgage-related 15309 1 investments which will qualify the institution as 2 a savings and loan association." 3 Was the 60 percent thrift test one of 4 the limitations that affected the size of the 5 equity arbitrage portfolio? 6 A. That 60 percent limitation was a 7 requirement, I think, all thrifts had to meet or 8 they would run into some big tax problems. But 9 please repeat that last question. 10 Q. Was the 60 percent thrift test one of 11 the regulations that affected the size of the 12 equity arbitrage portfolio at USAT? 13 A. I believe it would be. 14 Q. Okay. Was the 60 percent thrift test 15 one of the regulations that affected the size of 16 the high-yield bond portfolio at USAT? 17 A. I believe it would be. 18 Q. Okay. And why is that? 19 A. Well, as best I can answer your 20 question, if you've got a thrift that is a million 21 dollars and 60 percent of it -- or excuse me -- a 22 billion dollars and 60 percent of that is 15310 1 600 million -- so you could have 400 million of 2 non-mortgage-type assets, if that became 3 200 million, then you could increase the size of 4 the non-mortgage-type assets. I think, just 5 mathematically, that's the way it works. 6 Q. Now, after May of 1985, May 16th of 7 1985, did USAT close down or sell branches that 8 were used to originate mortgages? 9 A. We sold branches, and I think some of 10 those branches had mortgage loan origination 11 operations in them. My memory is most of them did 12 not, but that could be wrong. 13 Q. Starting in May of 1985, what were the 14 primary assets that USAT relied upon to satisfy 15 the 60 percent thrift test? 16 A. Well, that would have to be home loans, 17 single-family residential loans, mortgage-backed 18 securities and, quite frankly, I'm not sure 19 whether some of the construction and commercial 20 loans would count or wouldn't count. They may or 21 may not. 22 Q. In terms of the percentage of assets 15311 1 that satisfied the 60 percent thrift test, what 2 were the mortgage-backed securities share of that 3 starting in 1985 running through 1988? 4 A. I can't quote specific examples or 5 specific numbers; but in terms of magnitude, 6 mortgage-backed securities were increasing as a 7 percentage. And since the conditions were so 8 horrible in single-family residential home loans, 9 they were decreasing. So, the percentage, I 10 strongly suspect, would be going up each year. 11 Q. The percentage of the thrift-qualifying 12 assets. Is that what you mean? 13 A. The percentage of mortgage-backs to the 14 total of thrift-qualifying assets. 15 Q. Now, who was it that suggested the 16 purchase of mortgage-backed securities at the 17 outset at USAT? 18 A. It seemed like it was all of us. And 19 by that, I mean there were -- as best I can answer 20 the question, there were the strategic planning 21 committee meetings and then we had several 22 presentations by investment banking firms and, 15312 1 finally, we had a presentation by the firm of 2 Salomon Brothers. And I don't remember one person 3 saying, "Well, let's go do this." It was more of 4 a consensus-type decision. It seemed like 5 everybody was on board with that decision. 6 Q. Now, who were the members of the 7 strategic planning committee again? 8 A. That, I believe, was Gerry Williams. 9 Well, Jenard Gross, if he were there. 10 Mr. Hurwitz, Barry Munitz, and myself. I always 11 attended the meeting. I don't know that I was an 12 official member. I certainly might have been. 13 And then I think Bruce Williams was a member; but 14 I'm, again, not sure of that. 15 Q. Okay. And at some time, did Doug 16 Hansen become a member of that committee? 17 A. He certainly attended, and Doug's 18 status was kind of like mine. I'm assuming Doug 19 was a member. He came to the meetings and 20 participated. 21 Q. And like you, he kept minutes or notes 22 of those meetings which he circulated to the other 15313 1 members of the committee, did he not? 2 A. I'm totally confident he did. He wrote 3 down many, many things. 4 Q. Now, let's look at the initial equity 5 arbitrage transactions and I want to direct your 6 attention to Tab 605, which is B560; Tab 606, 7 which is B270; Tab 607, which is B577; Tab 608, 8 which is B587; Tab 609, which is B594; Tab 610, 9 which is B607; Tab 611, which is B632; Tab 612, 10 which is B656; Tab 613, which is B667; Tab 614, 11 which is B674; Tab 615, which is B688; Tab 616, 12 which is B796; Tab 617, which is B817; Tab 618, 13 which is B817 -- I'm not so sure I just didn't 14 repeat myself. The earlier one was 816. Tab 618 15 is 817. Tab 619, which is B866. 16 THE COURT: All right. We'll take a 17 short recess. 18 19 (Whereupon a short break was taken from 20 2:51 p.m. to 3:25 p.m.) 21 22 THE COURT: Be seated, please. 15314 1 MR. VILLA: Your Honor, very briefly, 2 on a scheduling matter, I don't know if this has 3 to be on the record, but we have a lot of people 4 from Washington. And if they -- I don't know what 5 the Court's intention is, how late you're planning 6 to go today, and I don't want to interrupt any 7 portion of Mr. Guido examination if he's in the 8 middle of something; but if the Court found a 9 convenient breaking point at 4:00 o'clock today, 10 it would mean a substantial difference in terms of 11 when people get home to see their families. 12 THE COURT: Do you have a response to 13 that, Mr. Guido? 14 MR. GUIDO: Your Honor, I mean, I can 15 adjust my questioning in any way. And I also am 16 going home for my medical problem. I have 17 something I have to do tomorrow. 18 THE COURT: All right. We'll adjourn 19 at 4:00 o'clock. And while we're on that, I'll 20 set 10:00 o'clock for the beginning on Monday. 21 MR. VILLA: Thank you. 22 MR. GUIDO: Thank you. 15315 1 Q. (BY MR. GUIDO) All right. I'd like 2 to direct your attention to Tab 605, B -- 3 Exhibit B560, I think, is the exhibit number. 4 Do you have that document in front of 5 you? 6 A. Yes, sir, I do. 7 Q. And take a look at the second page of 8 the -- I think it's the second page, the list of 9 the purchases of securities. 10 Do you see that? 11 A. Yes, sir, I do. 12 Q. And do you see where it lists Nabisco 13 Brands common and AMF common stock purchases? 14 Do you see that? 15 A. I see Nabisco Brands common. And what 16 was the other one, please, sir? 17 Q. AMF. It's right under Nabisco Brands, 18 at least on my copy. 19 A. Oh, yes, sir, I do see that. 20 Q. Do you see that? 21 A. I do. 22 Q. Now, this is June 1985. 15316 1 Do you see that? 2 A. I do, sir. 3 Q. Do you recall whether or not the equity 4 arbitrage transactions started within a month and 5 a half after the board meeting of May 16th of 1985 6 in which the wholesale strategy or your mission 7 statement was discussed with the board? 8 A. I don't -- I don't really remember the 9 exact timing as to when it started on a big basis 10 or on any basis. I just don't -- I can't peg a 11 time frame for you. 12 Q. Well, let's take a look at another 13 document, which is 60 -- Tab 606, B570. Now we're 14 jumping ahead to August of nineteen-eighty -- or 15 July of 1985. This is an August 6th letter, B570. 16 And it's to Mr. Phillips. It says, "In response 17 to your July 30 letter, we have no objections to 18 the following non-liquidity purchases." 19 And then it lists a number of 20 purchases, all of which look like they are common 21 stock purchases, does it not? 22 A. Well, I can't tell that. I see that 15317 1 Nabisco Brands common and AMF common is listed as 2 common. 3 Q. Take a look at Tab 607, B577. Maybe 4 that will help. There, it lists some purchases 5 for July of 1985. 6 Do you see those? 7 A. Yes, sir. Let me read the -- 8 Q. Okay. It says, "Purchases AMF common, 9 Nabisco common, Searle common, ABC common, Storer 10 common, Mary Kay common." 11 Do you see those? 12 THE COURT: Which exhibit are you 13 looking at, Mr. Guido? 14 MR. GUIDO: We're looking at 15 Exhibit B577. It's Tab 607. 16 A. What was your question again, please? 17 Q. (BY MR. GUIDO) Do you see those 18 listings of common stock purchases listed under 19 July? 20 A. I see AMF, Nabisco, Searle, ABC, 21 Storer, and Mary Kay common as listed. 22 Q. Now, take a look at Tab 609, B594. 15318 1 This is transmitting the transactions for the 2 month of August. It's -- the letter is dated 3 September 28th, and it says that it's -- during 4 the month of August the association did certain 5 things. And it lists a number of purchases there, 6 as well. 7 Do you see that? 8 A. Of common, yes, I see that. 9 Q. Of common stock. Storer Broadcasting, 10 Mary Kay Cosmetics, American Broadcasting, Levi 11 Strauss, Nabisco, United Energy Res., Pearle 12 Health, Trans World Air, UniRoyal, SCOA 13 Industries, Mary Kay, and Multimedia. 14 Do you see that? 15 A. I see that. 16 Q. And then the next document I'd like to 17 direct your attention to is Tab 610. I'm sorry. 18 Tab 611. Excuse me. B632, which lists a number 19 of purchases, as well. 20 MR. EISENHART: Your Honor, I'm not 21 sure for what purpose Mr. Guido is going through 22 this exercise but I think, for the record, it 15319 1 should be noted that in each of the lists that 2 he's referred to there's also lists of bonds, as 3 well as the common stock. 4 MR. GUIDO: Your Honor, I think that 5 the record -- I agree with that, Your Honor. 6 THE COURT: Well, if these are in, why 7 do we need to read these lists? 8 MR. GUIDO: Your Honor, I was just 9 trying to make the record clear. I'm going to ask 10 a question when I get through the end of the year 11 1985. 12 Q. (BY MR. GUIDO) Mr. Crow, in terms of 13 speeding things up, let me just direct your 14 attention to certain documents -- Tab 611, which 15 I've just directed your attention to, that lists 16 purchases of common stock along with high-yield 17 bonds, does it not? 18 A. I see that. 19 Q. And then look at the Exhibit B667, 20 which is Tab 613. That talks about purchases for 21 the month of October, and that also lists some 22 purchases of common stock along with high-yield 15320 1 bonds. 2 Do you see that? 3 A. I do. 4 Q. And then the -- let's jump ahead to a 5 letter, Tab 616, B796. That makes mention of both 6 November and December, and it has the lists for 7 November and December. And it lists some 8 high-yield common stock purchases for November as 9 well as high-yield bonds. 10 Do you see that list? 11 A. I see the list, and it's got some 12 common stock purchases on it. 13 Q. And then look at December. It has some 14 common stock, and it has some bonds attached to 15 that, as well. (Energy, RES, earlier) Do you see 16 that? 17 A. Yes, sir. 18 Q. Okay. Now, do you see on that December 19 list that it makes mention of Pacific Lumber 20 common stock? Do you see that? 21 A. Mr. Guido, mine is somewhat illegible. 22 Q. So is mine. It's the seventh entry 15321 1 down. 2 Do you see that? It says "Pacific 3 Lumber." 4 A. I do see "Pacific Lumber common." 5 Q. Okay. Do you recall who it was that 6 initiated that purchase? 7 A. No, sir, I don't know. 8 Q. Now, look at the previous page for 9 November. 10 Do you see where it says "Amsted 11 common," the second entry? 12 A. I'll take your word for it that's what 13 it says, yes, sir. 14 Q. And remember I asked you about AMF 15 earlier? 16 A. I don't really, but go ahead. 17 Q. Assume that I asked you that question. 18 Okay? 19 A. Okay. I'll assume you asked me a 20 question about AMF. 21 Q. Okay. Now, those three companies, did 22 you know or do you know whether MAXXAM or 15322 1 MAXXAM-related companies had filed 13Ds to 2 purchase stock in those companies? 3 A. No, sir. I certainly know that Pacific 4 Lumber Company was taken over by MAXXAM. But in 5 terms of the others, of AMF, no, sir, I'm not 6 aware of that. 7 Q. Do you recall any discussions about 8 whether or not those purchases of stock violated 9 the terms of the mission statement that you 10 testified about preparing on May 1st or 11 thereabouts, which is Exhibit No. A10560, had been 12 violated? 13 A. That we would engage in equity 14 arbitrage? 15 Q. Well, it says "marketable securities." 16 If you look at A10560, remember it said 17 "Marketable securities, investment in non-hostile 18 take over situations"? 19 A. Yes, sir. 20 Q. Were there any discussions about 21 whether or not that criteria had been violated by 22 the purchases of those three categories of common 15323 1 stock: AMF, Amsted, or Pacific Lumber? 2 A. No, sir, I can't. I note that on many 3 of the cover memos it states that the common 4 stocks were generally purchased to effectively 5 create bonds and exchange offers at lower prices, 6 high-yield bonds. The -- 7 Q. Which letter are you referring to? 8 A. I was referring, excuse me, to the 9 January 17th, 1986 letter. And I think the rest 10 of them have pretty much the same language. 11 Q. What does that refer to? Do you know? 12 A. Well -- 13 Q. I think that -- let me read the whole 14 paragraph. On January 17th, 1986, Exhibit B796, 15 is this the paragraph you're referring to: "The 16 common stocks were generally purchased to 17 effectively create the bonds received and exchange 18 offers at lower prices, higher yields. The 19 resolution of common stock positions by tender, 20 exchange, or sale are reflected in the Enclosures 21 1 and 2." Okay? 22 A. Okay. 15324 1 Q. Do you know what that refers to? 2 A. Well, I know that related to high-yield 3 bonds, it seemed to me oftentimes you would get 4 warrants to purchase stock. And it seems to me 5 that's what some of this -- these common stock 6 purchases are. So, I'm not -- I'm not disputing 7 that they are equity arbitrage-type investments, 8 but I just don't know. 9 Q. Are you saying that the Pacific Lumber 10 stock that's referred to here were warrants that 11 accompanied high-yield bonds that were purchased 12 by USAT? 13 A. No, sir. I'm saying as it relates 14 specifically to Pacific Lumber Company, I have no 15 idea. I don't know. 16 Q. Okay. So, you're not making a 17 suggestion that USAT bought high-yield bonds that 18 were issued to purchase Pacific Lumber common 19 stock? 20 A. No, sir. I'm making no such 21 suggestion. 22 Q. All right. Do you know how it came 15325 1 about that USAT purchased common stock of Pacific 2 Lumber? 3 A. No, sir, I do not. 4 Q. Do you know whether or not that was 5 after MAXXAM or MAXXAM-related entities had filed 6 a 13D on Pacific Lumber? 7 A. I do not. 8 Q. Do you know whether or not that was 9 before or after Pacific Lumber had sued MAXXAM 10 alleging, among other things, that the 13D that 11 had been filed was inaccurate? 12 A. No, sir, I don't. 13 Q. Now, I'd like to direct your attention 14 to some other documents that deal with equity 15 arbitrage. And the first document I'd like to 16 direct your attention to is a letter dated 17 May 27th, 1987, which is at T4374, which is 18 Tab 1348. 19 Have you ever seen that letter before? 20 A. Yes, sir, I have. 21 Q. And when did you see that letter? 22 A. I think I've seen it in the last couple 15326 1 of days. 2 Q. And what was the context in which you 3 saw that letter? 4 A. It was shown to me by my counsel. I 5 thought it was one of the letters I was supposed 6 to look at or one of the exhibits I was supposed 7 to look at. 8 Q. Your counsel showed you documents that 9 I had listed so that you could review them and be 10 prepared so that we could move more quickly in 11 this proceeding. Right? 12 A. They had indicated to me that you had 13 certain documents that you were going to want me 14 to review, yes, sir. 15 Q. And you reviewed this document? 16 A. I didn't really read it. I remember -- 17 I remember the Transcontinental Services Group 18 transaction kind of vaguely; but I do remember 19 that, yes, sir. 20 Q. What do you remember about the 21 Transcontinental Services Group transaction? 22 A. Well, what I remembered -- and the 15327 1 reason it stuck in my mind -- is it was an 2 investment having to do with, I believe, a British 3 company. And since it was a British company, I 4 was -- it was unusual in terms of settlement of 5 the trade. And I remember being concerned that we 6 make sure we got all our paperwork done right, 7 that we, in fact, have ownership to the securities 8 and we get the trade settled correctly because it 9 was -- and it wasn't the normal you'd just buy a 10 regular bond or regular stock like you do in this 11 country. So, it was a bit unusual. That's why it 12 sticks in my mind. 13 Q. Do you recall having any discussions 14 with anyone about who the principal officer was of 15 Transcontinental Services Group? 16 A. Not -- I don't remember that from this 17 time, no. 18 Q. Do you see the cc's on that letter, the 19 copy, where it says "copies to"? 20 A. To Mister -- 21 Q. CC. 22 A. Oh, for the original letter? 15328 1 Q. Yeah, the original letter. 2 A. Yes, sir. 3 Q. Mr. Stanley Cohen and Vincent Caruso. 4 Do you know who Mr. Stanley Cohen was? 5 A. No, sir. 6 Q. Was he a partner at Ezra Levin at the 7 Kramer, Levin law firm? 8 A. I don't know. I remember -- I think I 9 met Mr. Levin, but I don't remember -- I don't 10 remember Mr. Cohen. 11 Q. Did you ever learn that 12 Transcontinental Services Group had also purchased 13 Pacific Lumber stock at about the same time that 14 USAT had made its purchases in 1985? 15 A. No, sir, I didn't know that. 16 Q. Did you know that a MAXXAM-related 17 entity had owned shares in Transcontinental 18 Services Group? 19 A. I don't remember knowing that. If 20 you're asking me what I remember back then, I 21 certainly don't remember that. Whether I knew it 22 then, I don't know. 15329 1 Q. Putting aside your discussions with 2 counsel -- 3 A. Okay. Yes, sir. 4 Q. Putting your discussions with counsel 5 aside, do you know today whether or not 6 Transcontinental Services Group shares had been 7 owned by MAXXAM-related entities? 8 A. No, sir. 9 Q. Have you reviewed any documents at my 10 request that indicated to you that shares of 11 Transcontinental Services Group were owned by 12 MAXXAM-related entities? 13 A. Well, if I did, I've forgotten it. You 14 mean at your request over the last few days? 15 Q. Uh-huh. 16 A. It doesn't ring a bell, no, sir. 17 Q. Okay. I'd like to show you another 18 document, which is at Tab 1347. It's CT1072. I'd 19 like to direct your attention to the first page of 20 that -- the second page of that document. The 21 first page has the exhibit number, and says 22 "General MAXXAM Group, Inc." which looks like the 15330 1 tab on a file folder, and then it has a 2 prospectus. The first page says "MAXXAM Group, 3 Inc." And it's a document -- if you look in the 4 far left-hand corner -- dated May 21, 1985. And 5 it's a prospectus for MAXXAM Group, Inc. 6 Do you know what MAXXAM Group, Inc. 7 was? 8 A. Yes, sir. MAXXAM Group, Inc. is a big 9 company that presently owns part of Kaiser 10 Aluminum and, I believe, all of Pacific Lumber 11 Company. 12 Q. Okay. And is it an entity that Charles 13 Hurwitz and Federated either directly or 14 indirectly own controlling shares of the voting 15 stock -- voting rights of the entity? 16 A. I'm aware that Mr. Hurwitz owns a big 17 chunk of MAXXAM. As to how much or whether it's a 18 controlling interest, I don't know. 19 Q. Look at Page 9 of the document at the 20 top. It says, "Transcontinental Services Group. 21 On November 9, 1984, the company purchased in a 22 private offering 3,469,540 shares of 15331 1 Transcontinental Services Group, NV, a Netherlands 2 Antilles corporation (Transcontinental), and 3 warrants to purchase 100,000 shares of 4 Transcontinental at 1.40 (UK) per share at various 5 dates through 1992." 6 Do you see that? 7 A. I see that. 8 Q. Now, go back and take a look at the 9 T4374 document that has your handwritten notes on 10 it. 11 Do you see that? 12 A. Yes, sir. 13 Q. Do you know from whom USAT purchased 14 the Transcontinental Services Group shares? 15 A. No, sir, I really don't. 16 Q. Do you know who purchased the shares on 17 USAT's behalf? 18 A. I recall it being discussed by either 19 or both Mr. Hurwitz or -- and Mr. Huebsch. 20 Q. Being discussed with you? 21 A. With the investment committee, I 22 believe. 15332 1 Q. This memorandum from you to Bruce 2 Williams and Art Berner -- do you see that? 3 A. I do. 4 Q. It says, "I was informed by Jim Paulin 5 this morning that Charles had committed for UFC to 6 purchase $990,000 more of TSG Holdings." 7 Do you see that? 8 A. I see that. 9 Q. Who's the Charles that's referred to 10 there? 11 A. That must be Mr. Hurwitz. 12 Q. Okay. And then it says, "Art, please 13 get in the investment committee minutes." 14 The investment committee had not met 15 when you first learned from Jim Paulin that 16 additional shares had been purchased, had it? 17 A. Well, from memory, I can't tell you. 18 But the words "more," when it says to purchase 19 990,000 more of TSG Holdings, it could be the -- 20 and I don't know, but it could be the investment 21 committee had approved we can go up to such a 22 level but I don't know that for a fact, sir. I 15333 1 mean, that would not be uncommon. 2 Q. I'd like you to take a look at Tab 3 1317, which I think is the correct -- 4 A. And Mr. Guido? 5 Q. Pardon? 6 A. Can I amplify that last answer? 7 Q. Please. 8 A. In this, I guess, rather embarrassing 9 note that I wrote to Bruce Williams, it says, 10 quote, "Please get this thing straight from a 11 records standpoint or at least document that it is 12 screwed up. I understand we don't have all of the 13 shares from our last purchase of TSG." 14 So, that would indicate to me we had -- 15 we had purchased it before and this was just a 16 tag-on. 17 Q. And is it your testimony that the 18 investment committee had approved the initial 19 purchase that's referred to in the typewritten 20 portion of that letter dated May 27 at 21 Exhibit T4374? 22 A. It's my testimony that I remember it 15334 1 certainly being discussed in some official form. 2 And as I've tried to explain, I get these meetings 3 mixed up. I'm quite sure it was the investment 4 committee, but I can't positively testify to that. 5 Q. Now, look at A1445. Would you read 6 into the record what that says about the purchase 7 of TSG shares? 8 A. Yes, sir. It says -- this is May 27th, 9 1987. It's a special meeting of the investment 10 committee held on May 27th, 1987. "All members of 11 the committee were present. A discussion of the 12 possible acquisition of additional shares of 13 Transcontinental Services Group, NV, was held 14 among the members of the committee. After full 15 discussion, it was determined to acquire an 16 additional 300,000 shares at a price of 3.30 per 17 share. There being no further business to come 18 before the committee, the meeting was adjourned." 19 Q. Okay. It says "possible acquisition of 20 additional shares," does it not? 21 A. It does. 22 Q. Do you know whether or not that was 15335 1 written in response to your memorandum to Bruce 2 Williams and Art Berner on the May 27th, 1987 3 letter: T4374? 4 A. I can't be sure, but -- you know, I 5 don't know for sure, but it certainly may be. 6 Q. Before or after your note to Art 7 Berner? 8 A. I don't know. It would appear to me 9 that it would be that this note would be before. 10 Q. Okay. T4374, your handwritten note, 11 would be before the minutes that are A1445? 12 A. That would be my logical conclusion. 13 Q. How can the committee discuss a 14 possible acquisition of something that's already 15 occurred? 16 A. Well, I've tried to give you all -- 17 about all I know, Mr. Guido. As I recall, there 18 was a discussion of this transaction prior to any 19 purchase. And from the -- the note that I 20 indicated down to Bruce Williams, apparently we 21 had purchased shares of this company prior to 22 that. I mean, it's possible it's an exception. I 15336 1 just don't know. 2 Q. Okay. Now, I'd like to show you a 3 document, which is T4419, which has not been 4 admitted into the record. It's a one-page 5 document dated November 27th, 1987. It's a memo 6 from Arthur Berner to Jenard Gross dated 7 November 27th, 1987. It's regarding the trading 8 desk. 9 It says, "In connection with 10 preparation for the Marcus Schloss depositions, I 11 have learned that our trading desk also conducts 12 all of the investment activities for Federated, 13 MCO, Pacific Lumber, Federated profit sharing 14 plan, et cetera. In this connection, I would like 15 to know whether, one, any of these other entities 16 provide compensation to our investment people." 17 Do you see that? 18 A. I see that, yes, sir. 19 Q. And then Item 3 is: "Is there any 20 allocation of rent, expenses, et cetera, 21 attributable to these entities?" 22 Do you see that? 15337 1 A. I see that. 2 Q. Was this the first time that issue came 3 up? 4 A. I remember working with -- whenever the 5 bonus-type arrangements were done for the equity 6 arbitrage people, that what I recall is that it 7 was recognized that they -- that they did work for 8 other portfolios including United and that there 9 was an allocation -- in other words, as I 10 remembered, Mr. Huebsch obviously, if he was going 11 to get, say, a 100,000-dollar bonus, just to use a 12 number, that that would be allocated based on a 13 percentage of the portfolio or some such 14 allocation. 15 Q. Did that first come up in 1988? 16 A. I think it was prior to that, but I 17 can't be sure. 18 Q. Was Mr. Huebsch managing equity 19 arbitrage portfolios for Federated, MCO, Pacific 20 Lumber, and Federated profit-sharing plan? 21 A. I don't know whether it was all of 22 these companies listed, but my memory is that 15338 1 Mr. Huebsch was managing equity arbitrage 2 portfolios for other companies, if my memory is 3 correct. 4 Q. Do you recall the examiners raising a 5 question subsequent to November 27th, 1987, about 6 the lack of proper allocation between MCO-related 7 entities and UFG-related entities of the cost 8 associated with the equity arbitrage trading 9 operation? 10 A. No, sir, I don't remember that. 11 Q. Now, let's take a look at the last 12 paragraph of the letter. It says, "I have also 13 become informed that the investment department 14 does trading for its own account." 15 Do you see that? 16 A. I do. 17 Q. Do you recall that issue coming up? 18 A. No, sir, I don't. I don't know what 19 that means. 20 MR. GUIDO: I have no further questions 21 on this area, Your Honor. I'm going to move into 22 the mortgage-backed security area. And the 15339 1 document that I'm going to start with will 2 probably take questions that will go beyond a half 3 an hour to 45 minutes. 4 THE COURT: All right. Are you 5 offering T4419? 6 MR. GUIDO: Yes, Your Honor, I do. 7 MR. VILLA: No objection. 8 THE COURT: All right. We'll adjourn 9 until Monday morning. 10 11 (Whereupon at 3:50 p.m. 12 the proceedings were recessed.) 13 14 15 16 17 18 19 20 21 22 15340 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 17th 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 15341 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 17th 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