16009 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 23, 1998 22 16010 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 16011 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 16012 1 2 INDEX OF PROCEEDINGS 3 Page 4 MICHAEL CROW 5 Continued Examination by Mr. Villa......16013 6 Examination by Mr. Nickens..............16196 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 16013 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. Be 4 seated, please. We're back on the record. 5 Mr. Villa, you may continue with your 6 examination. 7 MR. VILLA: Thank you, Your Honor. 8 9 CONTINUED EXAMINATION 10 11 Q. (BY MR. VILLA) Mr. Crow, I'm going to 12 ask you some questions about the compensation 13 related claims against you. 14 The OTS has alleged in its Claim No. 13 15 that you have engaged in unsafe and unsound 16 practices in connection with bonuses, settlement, 17 and severance packages to be paid to the employees 18 and officers of USAT. 19 You're aware of that, aren't you, sir? 20 A. Yes, I am. 21 Q. Are you an expert in compensation 22 practices under the federal regulation, sir, 16014 1 governing thrifts? 2 A. No, sir, I'm not. 3 Q. Sir, looking pack at your five-year 4 tenure at USAT, what would you say was the single 5 most important factor in your mind in determining 6 whether or not a compensation practice or an 7 employment contract was acceptable under the 8 federal regulations? 9 A. If you limit me to one item, I would 10 say past practices. If a -- for example, in the 11 area of employment contracts, if I entered into an 12 employment contract that was somewhat similar to 13 contracts that had been entered into in the past 14 and had been disclosed and attached to 10Ks and 15 that sort of thing or proxies, whatever it is, and 16 they have not been criticized as being unsafe and 17 unsound, I guess in my mind, that would be the 18 single most important thing. 19 Q. Now, there are other things you would 20 look at, as well. Right, sir? 21 A. Yes. 22 Q. Or you'd consider, as well? 16015 1 A. Oh, sure, yes, sir. 2 Q. And part of them would be advice from 3 the legal staff; isn't that right? 4 A. Yes. And I guess just, you know, 5 depending on -- I would assume the compensation 6 committee would be looking at those -- you know, 7 using reasonable business judgment, certainly 8 advice from the legal staff and, you know, this -- 9 just kind of common sense, just common business 10 sense. I'm not a lawyer, but -- and I don't have 11 a technical definition of what unsafe and unsound 12 is, but I've got a good idea of the smell test. 13 And, you know, looking at what various consultants 14 might say. And I know, you know, we had 15 consultants in that worked with the compensation 16 committee on compensation and contracts and that 17 sort of thing. 18 Q. Okay. Well, we'll get to those in the 19 course. But let's look first at the history of 20 United's contracts. 21 Now, you remember Joe Phillips. Right, 22 sir? 16016 1 A. I do. 2 Q. And do you remember when he left United 3 Savings? 4 A. I really -- I really don't. Around -- 5 Q. Do you remember which year he left? 6 A. 1986. 7 Q. That's about right. I think the record 8 in this case would establish he left sometime in 9 the second half of 1986. 10 A. Okay. 11 Q. We've got another book of exhibits for 12 you and copies for the -- of the new exhibits for 13 the Office of Thrift Supervision, and this will 14 assist you as we walk through it. 15 Now, Mr. Phillips had been the 16 portfolio manager for junk bonds and 17 mortgage-backed securities; is that right, sir? 18 A. That is correct. 19 Q. And USAT had to replace him when he 20 left? 21 A. Excuse me? 22 Q. USAT had to replace him when he left? 16017 1 A. That is correct. 2 Q. Now, do you recall, sir, what 3 Mr. Phillips' salary was in the year before he 4 left? 5 A. Seemed to me it was about -- around 6 100,000. I'm not sure I knew exactly -- 7 Q. Well, why don't you look at 8 Exhibit B1409, which is in evidence at Tab 1313, 9 and the middle of the first -- the middle of the 10 second paragraph. 11 Do you see that? 12 A. Yes, I do. 13 Q. And does it say there, "Joe Phillips 14 left a base year of $75,000"? 15 A. Yes, sir, I too see that. 16 Q. Now, does that refresh your 17 recollection that his base salary at the time he 18 departed was about $75,000? 19 A. Yes, I guess he must have made 75,000. 20 Q. But he might have made a bonus in 21 addition to the 75,000; isn't that right? 22 A. That's correct. 16018 1 Q. And that's perhaps how you got the 2 100-thousand-dollar number in your mind? 3 A. Right. 4 Q. Okay. Now, were you asked to 5 participate in the search process to find a 6 replacement for the manager of the mortgage-backed 7 securities and junk bond portfolios? 8 A. Yes, sir, I was. 9 Q. And tell me how you went about doing 10 that. 11 A. I called -- I had some friends at the 12 various investment banking firms, and I remember 13 specifically a guy named Clay LeBar at First 14 Boston and then a couple of other guys at other 15 firms and basically just asked them a question of 16 where does -- for example, "Where does First 17 Boston hire mortgage-back/hedging experts or those 18 type people?" And they gave me the name of 19 several headhunters. And several of them gave me 20 the same name, and it was Higby Associates. 21 And so, I called Higby Associates. And 22 a guy named Gary Straight was their representative 16019 1 there. And that's how -- how I approached that 2 process. And Mr. Straight came in and we engaged 3 him to perform a search. 4 Q. What would he do then? Would he 5 collect resumes and send them to you or bring in 6 candidates, or would you fly to New York and 7 interview them? How would it work? 8 A. No. Typically, it would work -- 9 Mr. Straight would interview the -- he first came 10 to Houston and interviewed a number of us to kind 11 of get a feel for the management and what we were 12 looking for in terms of qualifications and kind of 13 the personalities, I believe, is how he explained 14 it to me. 15 And then Mr. Straight would interview 16 the candidate, you know, maybe at his location in 17 Connecticut or he may fly to wherever the 18 candidate was. If that candidate passed the first 19 interview with Mr. Straight, Mr. Straight would 20 attach his resume and then write a little cover 21 letter to me outlining the qualifications of the 22 candidate and kind of what the candidate's strong 16020 1 point -- as best I remember, strong points and 2 weak points were and a rough area of how much the 3 candidate wanted in terms of compensation. 4 Q. I see. Would you take a look at the 5 next document, which is B1486? 6 Let me ask you if you can identify 7 that? 8 A. Yes, sir. This would be one of the 9 examples that I just mentioned where Mr. Straight 10 is reporting back to me a potential candidate. 11 Q. And in this case, it's a man named 12 Mr. Baldwin; is that right? 13 A. Yes. 14 Q. And Mr. Baldwin wasn't hired. Right? 15 A. No, he was not. 16 MR. VILLA: Your Honor, I move B1486 17 into evidence. 18 MR. GUIDO: No objection, Your Honor. 19 THE COURT: Received. 20 Q. (BY MR. VILLA) Now, is this letter 21 typical of the letters that Higby would send you? 22 A. Yes, it was. They would be in -- they 16021 1 were in different formats, but this is -- from my 2 memory -- is pretty typical. 3 Q. Now -- 4 A. Most of the time, he would attach a 5 resume. But for whatever reason, I guess he did 6 it more in prose in this area. 7 Q. Let me direct your attention to Point 3 8 on Page 2 of the letter. 9 Do you see that, sir? 10 A. Yes, sir, I do. 11 Q. And is that what you just described to 12 us, the type of salary demands that people would 13 make? 14 A. Yes, sir. 15 Q. And this says, quote, "Would require 16 two-year contract which guarantees close to 17 seven-figure range in total compensation." 18 Do you see that, sir? 19 A. I see that. 20 Q. Now, so, Mr. Baldwin was in this 21 instance demanding a two-year contract with 22 guarantees of nearly $1 million. 16022 1 Would that be right? 2 A. Yes, sir. 3 Q. Were other candidates -- and you dealt 4 with a number of different candidates that came 5 in; isn't that right? 6 A. A number of different prospective 7 candidates. Some of them didn't -- you know, we 8 just didn't bring in; but then there were a number 9 of candidates we actually brought to Houston and 10 interviewed, yes. 11 Q. And you met with them from time to time 12 during their interview process; is that right? 13 A. That is correct. 14 Q. Were other candidates demanding 15 multi-year contracts, as well? 16 A. Yes, they were. 17 Q. Were they demanding guaranteed 18 compensation not tied to the financial performance 19 of USAT? 20 A. Not all, but typical -- that was the 21 typical demand. 22 Q. Did they -- what reasons did they give 16023 1 you for their demands in these conversations? And 2 now we're talking about the period late 1986 to, 3 say, mid-1987. 4 A. Well, the reasons, just generally -- I 5 can't remember the specific reasons of each 6 individual candidate. But just generically, it 7 was the condition of Texas savings and loans and 8 the perception that they were under intense 9 pressure. And, for example, this Mr. Baldwin was 10 leaving -- potentially was leaving Citicorp 11 Investment Management, which was a very, very 12 substantial firm. And to come to a Texas thrift, 13 they wanted some guarantees and assurances. 14 Q. Some security. Right? 15 A. That's correct. 16 Q. And did they explain you to why they 17 didn't want to link their compensation to the 18 financial performance of USAT? 19 A. Because of the same reason. The 20 concern about the viability of Texas thrifts in 21 general, not -- I don't remember that it was a -- 22 it was a feeling of United in particular. It was 16024 1 just -- and, you know, I would have probably felt 2 the same way if I were with Citicorp in New York, 3 which is, you know, one of the biggest banks in 4 the world, maybe the biggest at that time, to come 5 to any thrift in Texas, I personally would have 6 wanted -- it would have had to be a pretty secure 7 arrangement. 8 Q. But all the people didn't come from 9 Citicorp, did they, sir? 10 A. No, sir. 11 Q. They came from all different places, 12 including we saw Mr. Dominic Bruno came from 13 another thrift in Philadelphia; is that right? 14 A. He did, that's correct. 15 Q. So, you were recruiting not just from 16 the Citicorps of the world but from the entire 17 pool of qualified candidates. Right? 18 A. Right. The ones I can remember -- you 19 know, we interviewed a guy from a money management 20 firm in Boston. Actually had him down here. Of 21 course, we interviewed Ms. Laurenson who worked 22 for Salomon Brothers. 16025 1 Q. Okay. We'll get to each one of those 2 in turn. 3 Were the salaries these people were 4 asking higher than United had been customarily 5 paying for those positions? 6 A. Yes. 7 Q. Now, you eventually hired managers for 8 both the mortgage-back and high-yield bond 9 portfolios; is that correct? 10 A. That is correct. 11 Q. And you were involved in the process of 12 hiring Ms. Laurenson, as you've just started to 13 tell us. Right? 14 A. Yes, sir, I was. 15 Q. Let me show you what's been previously 16 admitted as -- it's Exhibit B1158, and it's been 17 admitted already as Tab 371. 18 Can you look at that and tell me if you 19 recognize that document? 20 A. Yes, sir, I do. 21 Q. And what is it? 22 A. That is my offer letter -- that's what 16026 1 I called the first offer letter to Ms. Laurenson 2 where Sandy had come in, interviewed for the job, 3 and we were offering her a job. And this was my 4 letter to her documenting that offer. 5 Q. And you were involved in the 6 preparation of this offer; is that right, sir? 7 A. I was, yes, sir. 8 Q. Now, can you tell me by looking at this 9 offer what salary and bonus USAT was offering 10 Ms. Laurenson? 11 A. In the second paragraph, it looks like 12 we were offering Ms. Laurenson $100,000 per year, 13 and this was in August of '86. And we were 14 committing to adjust that salary in January of 15 '87. Then we were going to give her a 16 25,000-dollar so-called sign-on bonus and then a 17 guaranteed bonus of $50,000 plus some stock 18 options, 5,000 shares of stock. 19 Q. Do you see anywhere in this letter 20 where you're offering Ms. Laurenson a multi-year 21 term? It's not in there, is it, sir? 22 A. I don't see it, no, sir. 16027 1 Q. And do you see anyplace in here where 2 you're offering to secure Ms. Laurenson's benefit 3 with a letter of credit if she requested it? 4 A. Oh, no. That's not in there, I know. 5 Q. Do you recall whether Ms. Laurenson 6 accepted this offer? 7 A. No, sir, she did not. 8 Q. Okay. Let me ask you to turn to the 9 next exhibit, which is A11032, which is in 10 evidence as Tab 483. And we're going to turn to 11 Ms. Laurenson's contract, which is at page -- if 12 you look at those little Bates stamp numbers -- 13 128423. 483, A11032. Let me direct your 14 attention -- 15 THE COURT: Mr. Villa, I'm having 16 trouble. A11032, I just have one sheet. And the 17 next one is something about Bruno. 18 MR. VILLA: Yes, Your Honor. A11032 is 19 a composite exhibit, and includes a number of 20 employment contracts that were reviewed by Vivian 21 Carlton. 22 THE COURT: Okay. Is that the page 16028 1 that we're on? 2 MR. VILLA: So, if you go to the page 3 in that exhibit, 128423, there should be a 4 contract for Ms. Laurenson. 5 Q. (BY MR. VILLA) Do you see 6 Ms. Laurenson's contract, sir? 7 A. I do. I see her letter agreement, yes, 8 sir. 9 Q. And if you look at Paragraph No. 7 on 10 Page 2, do you see your name over Paragraph No. 7 11 where there's been a correction? 12 A. Yes, sir, I do. 13 Q. Okay. And is that an indication that 14 you were involved in the negotiation of 15 Ms. Laurenson's contract? 16 A. It is. 17 Q. And do you recall being involved in the 18 negotiation of her contract? 19 A. I sure do. 20 Q. Now, this contract is signed by Gerald 21 Williams. Right? 22 A. It is. 16029 1 Q. And was he -- there came a time when 2 Mr. Williams left United? 3 A. Yes, sir. I believe that was right at 4 the end of 1986. 5 Q. I see. Okay. 6 Now, can you tell from looking at 7 Ms. Laurenson's contract the term of the contract? 8 And I might direct your attention to Paragraph 2 9 in her contract. 10 A. Yes, sir. It appears to be two-year. 11 Q. It would run from whenever she joined 12 through the years 1987 and 1988. Right? 13 A. That is correct. 14 Q. So, it would be about two years and 15 three months, perhaps? 16 A. Yes. 17 Q. And can you determine -- if I might 18 direct your attention to Paragraph 5 -- what her 19 compensation was? 20 A. Yes, sir. It was over -- basically, 21 United agrees that your salary plus bonus for 22 the -- for a two-year period will be no less than 16030 1 $600,000. 2 Q. So, it's no less than $300,000 a year; 3 isn't that right, sir? 4 A. That is correct. 5 Q. Now, I might direct your attention to 6 Paragraph No. 6 and ask you whether there was 7 anything in the way of guarantees or security for 8 these payments that was provided for in her letter 9 agreement? 10 A. Yes, sir. We agreed to provide 11 security in a manner acceptable to Ms. Laurenson. 12 Q. Can you tell us, sir, why the final 13 contract that Ms. Laurenson executed was different 14 from the offer that you made? 15 A. Ms. Laurenson rejected the first 16 employment offer and, through the headhunter -- I 17 forget the exact words, but it was to the effect 18 of, you know, she just rejected it and she would 19 have to have different terms and conditions in 20 order to come to United. 21 Q. And she was ultimately hired under 22 these terms and became the mortgage-backed 16031 1 securities portfolio manager; isn't that right, 2 sir? 3 A. That is correct. 4 Q. Now, the other half of Joe Phillips' 5 job at the time he left was junk bonds, right, as 6 manager of the junk bonds? 7 A. That is correct. 8 Q. And who was eventually hired to take 9 over those responsibilities? 10 A. Gene Stodart. 11 Q. And were you involved in the 12 negotiation of Mr. Stodart's contract? 13 A. Yes, I was. 14 Q. Let me ask you to turn to the next 15 exhibit, which is Exhibits B1548. 16 And can you identify that document for 17 me, sir? 18 A. Yes, sir. This is the cover letter 19 from Gary Straight to myself, and then it has 20 attached Gene Stodart's resume. 21 MR. VILLA: I'd like to move that into 22 evidence, Your Honor. 16032 1 MR. GUIDO: No objection, Your Honor. 2 THE COURT: Received. 3 Q. (BY MR. VILLA) Now, do you recall the 4 final employment contract that Mr. Stodart 5 executed? 6 A. No, sir, I really do not. 7 Q. Well, let's go back a couple of 8 exhibits to that big exhibit, which is A11032, 9 Tab 483, that big composite exhibit we looked at. 10 And that was the exhibit in which we had 11 Ms. Laurenson's contract. 12 A. Okay. 13 Q. I'd like to direct your attention to 14 Bates page -- in that large exhibit -- 128458. 15 Do you see that, sir? 16 A. I do. 17 Q. Now, can you identify this document for 18 me? 19 A. Yes, sir. This is my written offer 20 letter or letter agreement with Mr. Stodart in 21 which Mr. Stodart agreed to these terms with some 22 modifications that are handwritten down here. 16033 1 Q. And are those your initials at the end 2 of the letter on these modifications, the written 3 modifications on Page 2? 4 A. Yes, sir, they are. 5 Q. Now, I noticed that Gerry Williams 6 didn't sign this letter. 7 Is that because you had taken over some 8 of his responsibilities at this point? 9 A. Yes, sir. After Mr. Williams left, I 10 took on some additional duties. 11 Q. Now, were you directly involved in the 12 negotiations with Mr. Stodart? 13 A. Yes, I was. 14 Q. Okay. Can you tell by looking at the 15 contract what the term of this contract is? I 16 might direct your attention to the fourth 17 paragraph. 18 A. (Witness reviews the document.) Looks 19 like it would take it through year end 1988. 20 Q. So, it would be going from April 1987 21 to year end 1988, about 20 months; is that right? 22 A. That is correct. 16034 1 Q. Is there a guaranteed bonus in this 2 contract, sir? 3 A. Yes, there is. 4 Q. And what is it? 5 A. That the bonus level would be at least 6 50 percent of the salary for both 1987 and 1988. 7 Q. Does the contract say anything about 8 securing these bonuses or salaries? And I might 9 direct your attention to the handwritten note at 10 the end of the document, the first of the two. 11 A. Yes, sir, it does. I think we tried to 12 get by without that; but Mr. Stodart, you know -- 13 he didn't -- my memory is he wouldn't accept it 14 without this type language. 15 Q. And the language -- and I'll read it. 16 It says, "Letter of credit will be issued at my 17 request to secure guaranty of salary and bonus." 18 Right? 19 A. That is correct. 20 Q. And you initialed that? 21 A. I did. 22 Q. And he insisted on it in order to come 16035 1 to United; is that right? 2 A. That's my -- that's the way -- that's 3 my memory, yes, sir. 4 Q. And that's why it wasn't in your 5 original draft letter, is that you were trying to 6 get by without it? 7 A. Yeah. You know, we didn't want to do 8 that and, you know, didn't want to unless you had 9 to. 10 Q. Now, let's look at Mr. Stodart's 11 compensation. I direct your attention to the 12 third paragraph. 13 Do you see that? 14 A. I do. 15 Q. Now, can you tell what his starting 16 salary is going to be? 17 A. 150,000. And then he -- he received a 18 sign-on bonus of 57,500, and then his starting 19 salary was 150,000. 20 Q. And he got a guaranteed bonus of at 21 least 50 percent of his salary. Right? 22 A. That is correct. 16036 1 Q. You're the accountant; but by my 2 lights, it appears that his salary for the first 3 year would be about $225,000 at minimum and go to 4 250 for the second year. 5 Does that sound about right? 6 A. About right, yes, sir. 7 Q. So, looking back over this series of 8 events, when Mr. Phillips left, he was making 9 between 75 and $100,000 and he was replaced by two 10 individuals who, together, demanded and received 11 in excess of $500,000 a year? 12 A. Per year, yes. 13 Q. And they demanded multi-year contracts? 14 A. They did. 15 Q. They demanded guaranteed bonuses; is 16 that right? 17 A. They did. 18 Q. Did they demand security for the 19 contracts in the form of letters of credit or 20 other guarantees if they exercised that option? 21 A. Yes, sir. 22 Q. And you were involved in the decisions 16037 1 about what terms to offer these employees, weren't 2 you, sir? 3 A. I was. 4 Q. What was the rationale behind giving 5 these new recruits the written contracts with 6 these terms in it? 7 A. The rationale was that we wanted to 8 have qualified people running the portfolios and 9 conditions were just changing. As Texas thrifts 10 got under more and more pressure, the demands went 11 up. You know, perhaps if we had employed these 12 same people in 1984, it would have been a 13 different story. But we were dealing in 1987. 14 Q. You were the chief financial officer, 15 weren't you, sir? 16 A. Yes, sir. 17 Q. You're sensitive to the costs involved 18 in replacing existing management; is that right? 19 A. Yes, sir. 20 Q. What was your observation about the 21 cost to USAT of replacing management beginning in, 22 say, late 1986 and going forward? 16038 1 A. In terms of -- well, you're talking 2 about just the pure salary expense numbers? 3 Q. Let's start with just the pure salary 4 expense numbers. 5 A. Well, typically, if someone left that 6 was -- that was good and they were in a key area, 7 it would -- it was going to cost more to replace 8 them, significantly more. 9 Q. And that was, as you've told us, 10 because of the condition of Texas thrifts? 11 A. Yes. 12 Q. Now, were there also fees that USAT 13 would have to pay to the headhunters for bringing 14 in new people? 15 A. Yes, sir. 16 Q. Do you have any sense as to the size of 17 headhunter fees? 18 A. I don't remember what we paid 19 Mr. Straight. I know that it was some -- I think 20 it was some percentage of their first year's 21 salary, but I'm not sure. 22 Q. I see. 16039 1 A. It was -- it was a pretty handsome fee. 2 I remember that. 3 Q. Did senior management have to devote a 4 substantial period of time to the process of 5 reviewing the applications, meeting and 6 interviewing the applicants? 7 A. Yes. We brought several people in for 8 both the mortgage-back position and the junk bond 9 position, and I would set up the interview 10 schedule and they would go through the interview 11 process. So, that took time. You know, it wasn't 12 like the internal control stuff, but it certainly 13 took time. 14 Q. Was replacing employees who left a 15 potential disruption to the operations of the 16 association? 17 A. Absolutely, because -- you know, let's 18 say you've got a good person in a job that -- and 19 they have been doing that job for a year or two. 20 They know what's going on. They know how to work 21 the systems and they know how, you know, just how 22 things worked at United. And whenever that person 16040 1 left, you know, you had to fill in some way until 2 you got a new incumbent in that position. And 3 even when you got a new incumbent in that 4 position, it takes -- it just takes people a while 5 to figure out the intricacies of how things work 6 and, you know, how -- how personalities are, how 7 management works, how to read Mr. Gross' memos, 8 and stuff like that. It just -- to, you know, 9 assimilate into the company. 10 Q. What was the reaction of the existing 11 management team to the fact that, for example, 12 Mr. Stodart and Ms. Laurenson had received 13 contracts with these types of terms in it? 14 A. Well, I think of the existing -- 15 Q. The existing management. Did it have 16 an impact on their morale? Did it have any impact 17 on their demands? 18 A. Yeah. There was some agitation of, you 19 know, "Gee, these new people are coming in, 20 getting security." It was primarily the security 21 issue. And, you know, it was felt that during 22 this time, security was becoming pretty important. 16041 1 Q. Well, were you concerned about losing 2 people in the financial division, for example? 3 A. I certainly was. 4 Q. And who, in particular? 5 A. The primary people I was concerned 6 about losing, the principals, would be Jim Wolfe 7 and Bruce Williams. And, you know, secondary to 8 that, I was concerned about a number of people 9 underneath them like Chuck Doolittle, Ron Carlson, 10 those type people. 11 Q. Let me ask you to look back at Exhibit 12 A11032 one more time. Well, it's probably not the 13 last time. And I'm going to ask you to look at 14 Page 128422. Now, 128407. I'm sorry. 15 Now, sir, there's some unfortunate 16 pagination in this exhibit. The first page of it 17 is the first page of your UFG contract. 18 Do you see that? 19 A. I do see that. 20 Q. It says Page 1 of 16? 21 A. Yes, I see that. 22 Q. Then if you look at the next page, it 16042 1 says Page 16 of 16. 2 Do you see that? 3 A. I do. 4 Q. Then it starts working backwards for 5 the next 15 pages all the way to the front? 6 A. Yes, sir. 7 Q. But you do recall, sir, that you had a 8 contract with United Financial Group. Right? 9 A. Yes. I -- you know, I didn't remember 10 the exact date; but I remember that in '87 and 11 '88, I had a series of contracts. But yes, 12 this -- this is one of them, yes. 13 Q. Do you know, sir, why your contract -- 14 the first contract you signed was with 15 United Financial Group as opposed to United 16 Savings Association of Texas? 17 A. No, sir, I do not. 18 Q. Were you the only employee or officer 19 to receive a contract at that time? 20 A. No. I think there was a group of 21 the -- group of people that got these. 22 Q. Now, this document is dated in 16043 1 September of 1987. Right? 2 A. Yes, sir. 3 Q. Were you on the compensation committee 4 of USAT or UFG at that time? 5 A. No, sir. 6 Q. Or at any time, were you on the 7 compensation committee? 8 A. No, sir, I wasn't on the committee and 9 I don't -- I never attended one of the meetings. 10 So, I wasn't involved. 11 Q. Were you on the board of directors of 12 UFG or USAT at the time? 13 A. At this time, no. I was never on the 14 board of USAT at any time, and then I was on the 15 board of UFG. But that was later in 1988. 16 Q. Now, sir, did offering contracts to 17 some senior officers of USAT in the fall of 1987 18 make sense to you as a manager? 19 A. It certainly did to me. 20 Q. Tell me why. 21 A. Well, we -- I think we had good people. 22 We had a good staff. And during that time period, 16044 1 my impression was that the regulators thought we 2 had a good staff. So, it seemed to me to be 3 important to hold that staff together because 4 if -- as people left, it was going to cost a whole 5 lot more to replace them. 6 Q. Let me direct your attention to the 7 next exhibit, which is A1552. The minutes of the 8 compensation committee of September 9, 1987. 9 Do you see those, sir? 10 A. Yes, sir, I do. 11 Q. And these would have been -- this is 12 the same time as your contract, same date as your 13 contract we just saw. Right? 14 A. I guess it's the same date. I'll take 15 your word for it. 16 Q. You can trust me. 17 A. Okay. You're a lawyer. 18 Q. Right. 19 MR. VILLA: Your Honor, I move 20 Exhibit A1552 into evidence. 21 MR. GUIDO: No objection, Your Honor. 22 THE COURT: Received. 16045 1 MR. RINALDI: I would just object to 2 the last question because it's misleading. He's 3 previously testified that his contract was 4 executed sometime in March, notwithstanding the 5 fact that it has an earlier execution date. 6 So, just to make the record clear, what 7 he's referring to is a contract that bears the 8 date February 11 that was executed sometime later 9 in March. 10 MR. VILLA: If we want to excuse the 11 witness, I think you've got the contracts mixed 12 up. You're talking about the USAT contract. 13 MR. RINALDI: Excuse me. Yes. 14 Q. (BY MR. VILLA) Trust this lawyer, 15 sir. Don't get confused by alien lawyers. Okay? 16 The contract I just showed you was the 17 September 9, 1987 UFG contract. And these are the 18 UFG compensation committee minutes related to that 19 contract? 20 A. Yes, sir. 21 Q. Okay. 22 A. Okay. 16046 1 MR. VILLA: Sorry, Your Honor. Did you 2 receive it into evidence? 3 THE COURT: Yes. I don't believe I 4 did, but I will. 5 MR. VILLA: Thank you, Your Honor. 6 MR. GUIDO: No objection. 7 Q. (BY MR. VILLA) Let me direct your 8 attention to the third -- fourth full paragraph of 9 the document. 10 Do you see that, sir? 11 A. About -- that starts with 12 "Mr. Silverman"? 13 Q. Yes. And do you know who Mr. Silverman 14 was? 15 A. Mr. Silverman was one of the directors, 16 and I believe he was -- yes, I remember 17 Mr. Silverman. 18 Q. I'm not going to read the entire 19 analysis of the compensation committee, but I'd 20 like to read a few sentences to you and ask you 21 whether that was the view that you had as a 22 manager of United as to the necessity of 16047 1 contracts. This is referring to Mr. Silverman. 2 It says, "He noted that as a director, it was 3 important to maintain the quality of key 4 executives that were currently with the 5 association. He also noted it would be less 6 expensive to maintain these people than to have 7 them leave for other opportunities and for the 8 company to have to spend a lot of downtime as well 9 as fees for finding capable people. It was also 10 noted that any person who came to work at United 11 at this time would probably require at least the 12 same, if not more, extensive employment 13 contracts." 14 Do you see that, sir? 15 A. I do. 16 Q. And was that the logic that the 17 management of United was -- had in their minds in 18 the fall of 1987? 19 A. It's the logic that I had in my mind. 20 I can't -- I can't say what the compensation 21 committee had in their mind, but it seems to 22 indicate that. 16048 1 Q. Let me direct your attention, sir, to 2 the next document, which is Exhibit A1133. And 3 this is the September 9, 1987 United Financial 4 Group board minutes. 5 Do you see that? 6 A. I do. 7 MR. VILLA: I'd like to move them into 8 evidence, Your Honor. 9 MR. GUIDO: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MR. VILLA) You were -- look at 12 the first paragraph. You were present at this 13 meeting? 14 A. Yes, sir, I was. 15 Q. But you were not a director. You were 16 simply present in your capacity as an officer. 17 Right? 18 A. Right. And I -- typically I attended 19 these board meetings to give a financial 20 presentation described in, like, Paragraph 4. 21 Q. Now, I'm not going to go through it in 22 detail; but if you look at the bottom of Page 1 16049 1 and the top of Page 2 of these meeting minutes, do 2 you see where Mr. Whatley has expressed the views 3 of the compensation committee as to the necessity 4 of these contracts? 5 A. Yes, sir, I do. 6 Q. Now -- and do you see, also, that there 7 is no dissension from the board with respect to 8 the adoption of these contracts. Right? 9 A. That's correct. I don't remember any, 10 and I don't see any noted here. 11 Q. Now, let's go back to the contract 12 again. Let me reflect for a minute on this -- on 13 the decision here. The decision to give the 14 contracts that we've talked about, your first UFG 15 contract in September of 1987, was the decision of 16 the exception committee to offer it to you. 17 Right? 18 A. That is correct. 19 Q. You didn't make the decision. It was 20 the committee of independent directors who made 21 the decision to extend the contracts to the UFG 22 officers. Right? 16050 1 A. That is correct. 2 Q. And it was approved by the UFG board on 3 September 9, 1987. Right? That's what we just 4 looked at. 5 A. Okay. Yeah. I didn't know whether 6 they approved it or just -- it was reported to 7 them. But if they -- 8 Q. And, sir -- and you weren't on the 9 board either. Right? 10 A. No, I was not. 11 Q. Let's go back and look at Paragraph 5A 12 of your contract. Now, in this unfortunately 13 paginated contract -- it's Exhibit A11032. It's 14 Tab 483. And let's look at Page 128421. 15 Do you see that, sir? 16 A. I do. 17 Q. Now, let's just look quickly to see 18 whether the contract that you were offered in 19 September of 1987 raised your salary. 20 A. Okay. 21 Q. Can you take a look at Paragraph 5A and 22 determine from that whether or not the contract 16051 1 had the effect of raising your salary, sir? 2 A. Okay. (Witness reviews the document.) 3 No, sir, it did not. It basically gives the 4 number 171,656 per anum. And then it says "equal 5 to the salary as of the date of this agreement." 6 Q. Okay. And let's look down at 5B, which 7 is the bonus. 8 Do you see that, sir? 9 A. I do. 10 Q. Can you see whether your bonus has been 11 increased by -- through this contract? 12 A. No, sir. It gives the amount, $62,000, 13 and then it basically says, in parentheses, it's 14 the same bonus as received in January of 1987. 15 Q. So, again, this is just a, shall we 16 say, memorialization of your existing salary; 17 isn't that right, sir? 18 A. Of my existing exception. 19 Q. Salary and bonus? 20 A. Yes, sir. 21 Q. I stand corrected. 22 It didn't increase or decrease it. 16052 1 Right? 2 A. No, sir. 3 Q. Now, so far, we've only talked about -- 4 and you've just brought it up. 5 We've only talked about salary and 6 bonus; isn't that right, sir? 7 A. That's correct. 8 Q. Were there other components to your 9 compensation package, whether or not reflected in 10 your employment contract? 11 A. Yes, sir, there were. 12 Q. And did it include stock options? 13 A. Yes. 14 Q. And did it include something called the 15 performance unit plan? 16 A. Yes. 17 Q. Let's look first at stock options. In 18 your early years at United, did you regard your 19 stock options as an important part of your 20 compensation? 21 A. Yes, I did. 22 Q. And why? 16053 1 A. Well, I viewed -- when I came to 2 United, I viewed it as an opportunity to go to a; 3 financial institution that was going to grow and 4 hopefully prosper and was getting in on the ground 5 floor and I had options to purchase common stock 6 at the then-current price. 7 So, if the company did well, the price 8 would go up and it would be a wealth builder. 9 Q. Sir, did the stock options also 10 encourage you and other employees to remain with 11 the same employer? 12 A. Yes, because there was a vesting 13 period. I forget what that vesting period was, 14 but you had to -- the way I remember it, if you 15 got an option, say, in January -- and I do 16 remember that I received options, I think, on -- 17 pretty much on Day 1 of coming to United. That if 18 for whatever reason the stock price tripled, I 19 couldn't just leave two months later and collect. 20 It was a vesting period that, you know, gave you 21 an incentive to stay long-term. 22 Q. And so, if you left, you lost the right 16054 1 to exercise the options that had not yet vested; 2 is that right? 3 A. That is correct. 4 Q. And are stocks one of the ways, in your 5 experience, that companies maintain their 6 employees and employment for an extended period of 7 time? 8 A. On a long-term basis, yes, sir. 9 Q. Did there come a time when the value of 10 your stock options as a component of your total 11 compensation package went down? 12 A. Yes, sir. 13 Q. Can you explain why the value of the 14 stock options diminished? 15 A. Well, the -- clearly by 1988, the stock 16 price had fallen radically. As I remember, during 17 the '84 time frame, it was, like, $8 a share and 18 it would float around to maybe 10 bucks a share. 19 But by 1988, I remember it being down very, very 20 low. And so, it was significantly below the 21 option price. And on top of that, you know, in 22 the later days, it became apparent we were going 16055 1 to be restructured under some format. And under 2 typical restructuring, the current equity owners 3 or option holders get very little, if anything. 4 Q. Now, sir, let's focus on the time 5 period in mid-1987. You've talked about what the 6 stock price was in 1984 and the fact that by the 7 time it reached 1988, it had declined very, very 8 substantially. 9 Do you recall, sir, whether by, say, 10 the second or third quarter of 1987, you had a 11 view that your options were as valuable, for 12 example, as the day when you joined United? 13 A. It's safe to say -- I don't remember 14 the numbers, but definitely it's safe to say that 15 I viewed them to be more valuable in the 1984 time 16 frame than the 1987 time frame. 17 Q. And what effect did the drop in the 18 stock price and the diminishment of the value of 19 your options have on your incentive to remain 20 employed by USAT and UFG? 21 A. Well, as a practical matter, I just, 22 you know -- I mean, I didn't agonize over it. I 16056 1 just set it aside in my head. It was -- the stock 2 options were a non-issue. You just -- they went 3 on the back burner. 4 Q. They were a non-issue because they 5 became worthless; isn't that right, sir? 6 A. In my mind, yes. 7 Q. Now, tell us in very general terms what 8 the performance unit plan was. 9 A. The performance unit plan was a -- it 10 was, like, a four- to five-year type plan that I 11 believe if United Financial Group -- I may be -- 12 I'm almost positive it was UFG targets met certain 13 return on equity targets, that each year you were 14 awarded something called performance units. 15 And net/net bottom line, what it meant 16 to me is that if the company did well over that 17 time period and the employee stayed with the 18 company, at the end, which I think was, like, year 19 end 1987 or maybe 1988, you were awarded a sizable 20 check. 21 Q. Can you give the Court some idea of 22 what the size of the potential return was to you 16057 1 under the performance unit plan? 2 A. It was a lot of money to me. It seemed 3 to me it was either four or $500,000. And I may 4 be off, but it was in that magnitude. 5 Q. So, if the -- if UFG had met its 6 financial goals over this four-year time period 7 and you remained employed by UFG at the end of the 8 time period, you would be entitled to a very 9 substantial payout; isn't that right? 10 A. That is correct. 11 Q. By the third quarter or so of 1987 -- 12 strike that. 13 So, at least in the early years when 14 you joined United, the performance unit plan was 15 an incentive for you to remain employed. 16 Would you agree with that? 17 A. Oh, absolutely. 18 Q. And did you see it as a significant 19 part of your overall compensation? 20 A. Yes, sir. It's not something I thought 21 about every day. It's -- you know, I was pretty 22 busy. But it was something that was in the back 16058 1 of my mind that, you know, I was really too busy 2 to philosophize, but -- 3 Q. You don't count your chickens until 4 they are hatched, do you? 5 A. Well, no. No. I knew that it was -- 6 the potential was there, and I was pretty happy 7 about that and pretty excited about it, about both 8 the options and the performance unit plan. But I 9 knew that that was -- you know, it was a long-term 10 incentive deal and that was down the road and if I 11 didn't get the internal control stuff fixed, there 12 wasn't going to be any long-term for me. 13 Q. Now, by the middle of 1987, sir, do you 14 recall whether you could determine if UFG would 15 meet its goals under the performance unit plan? 16 A. The middle of what year? 17 Q. 1987. 18 A. The middle of 1987, I can't -- I can't 19 quote chapter and verse, but I -- my memory is 20 that it appeared to be almost impossible to meet 21 those goals. 22 Q. And so, if you didn't meet those goals 16059 1 under the -- if UFG didn't meet the goals under 2 the performance unit plan, the value of your 3 ultimate recovery went to zero; is that right? 4 A. Yes, sir. 5 Q. What effect did that have on your 6 incentive to remain employed by USAT and UFG, the 7 fact that the performance unit plan had diminished 8 or had vanished in value? 9 A. Well, it's like the options. I 10 didn't -- I didn't agonize over it. I just, you 11 know, kind of put it over in the back burner and 12 kind of forgot about it because it was a -- you 13 know, it was a non-event. To me, it was a 14 non-event by that time. It had been -- in the 15 early years, it had been an exciting potential. 16 But by this time, it was, you know, worthless or 17 virtually worthless. 18 Q. Were you alone in being in the 19 situation of a person who had a significant aspect 20 of their compensation in both the performance unit 21 plan and the stock options? 22 A. Oh, no. I think there were a lot -- or 16060 1 a number of other people in the same -- same 2 category, same boat. 3 Q. Now, Gerry Williams left in January of 4 '87; is that right, sir? 5 A. He did. 6 Q. Or December of 1986, I think -- right 7 about year end 1986? 8 A. Right about year end, yes, sir. 9 Q. And he was a CPA like you? 10 A. Yes. 11 Q. Was anyone hired specifically to 12 replace Mr. Williams prior to Larry Connell 13 joining USAT in July of 1988? 14 A. No, sir. 15 Q. What happened to Gerry Williams' duties 16 from January of 1987 until mid-1988 when Larry 17 Connell came on, during that 18-month period? 18 A. They were kind of divided up among the 19 various people that were there, including myself. 20 Q. Did, for example, personnel or human 21 resources, whatever they call it, report to you? 22 A. Yes, sir. 16061 1 Q. And is that why we saw you were signing 2 Mr. Stodart's contract but you didn't sign 3 Ms. Laurenson's contract? 4 A. Well, I'm not sure that's true. I 5 wouldn't quite agree with that. I think we -- I 6 think Mr. Williams signed Ms. Laurenson's contract 7 just because we were trying to woo her and pursue 8 her and he had a bigger title than I did. 9 Q. Did you get an increase in your title 10 when Mr. Williams left? 11 A. Yes, sir. It became -- it went from 12 executive vice president to senior executive 13 vice president. 14 Q. And did the MBS and junk bond portfolio 15 managers now report to you for administrative 16 purposes? 17 A. That is correct. 18 Q. So, would it be safe to say that your 19 duties and responsibilities significantly 20 increased at the time that Mr. Williams left? 21 A. Yes, sir. You know, certainly -- there 22 was no doubt about that. I think prior to that 16062 1 time, Mr. Gross, who was the CEO -- if there were 2 an administrative problem or, you know, some -- 3 something messy administrative problem or 4 something, Mr. Gross would assign Mr. Williams to 5 it. And after Mr. Williams left, then I got the 6 droppings. Mr. Gross would assign those projects 7 to me. And it's -- you know, I'm not -- I mean, 8 the CEO was there to be the CEO, not to chase down 9 the fact that -- you know, all the operational 10 problems and stuff that -- you know, bad stuff 11 that just happens in a big financial institution, 12 you know, just silly stuff sometimes. 13 Q. Let me show you what's been marked as 14 Exhibit B1727. It's a memo to you from Jim Wolfe 15 dated August 12, 1987. 16 Do you see that, sir? 17 A. Yes, sir, I do. 18 MR. VILLA: I'd like to move it into 19 evidence, Your Honor. 20 MR. GUIDO: No objection, Your Honor. 21 THE COURT: Received. 22 Q. (BY MR. VILLA) I'd like to direct 16063 1 your attention to the final paragraph of the memo 2 and particularly the line that says, quote, 3 "Therefore, in view of the integral part that 4 Chuck plays and in consideration of the 5 detrimental effect which USAT's financial results 6 had on one's perception of the future, I think it 7 is necessary and prudent that we take care of 8 Chuck." 9 Do you see that, sir? 10 A. I do. 11 Q. And do you recall the concern about 12 keeping employees reaching down to people like 13 Chuck Doolittle, as well? 14 A. Yes, sir. 15 Q. And was it necessary during this time 16 period to raise people's salaries in order to keep 17 them? 18 A. Yes, it was. 19 Q. And is this one example of that? 20 A. Oh, yeah. 21 Q. Now, let me direct your attention to 22 the next exhibit. But before I do, let me ask 16064 1 you, sir, do you recall in general terms USAT's 2 financial condition by the end of October 1987? 3 A. Yes, sir. By the end of October of 4 1987, we had had the stock market crash and equity 5 arbitrage which had been a stellar performer up 6 until that point. We lost a lot of money during 7 October and, of course, in later -- in the later 8 time period, we gained it back. But as of the end 9 of October, the financial condition of United was 10 pretty crummy. It -- you know, it just -- any 11 major financial indicator you wanted to look at 12 was -- was pretty crummy. 13 Q. And during this time, there was still 14 substantial turmoil in the equity and bond 15 markets. 16 Do you recall that, sir? 17 A. Yes. I remember after the stock market 18 crash, both the bond and the stock market was -- 19 and I focused more on the bond market, but it was 20 gyrating and very volatile and very uneasy. 21 Q. A substantial amount of United's assets 22 were in the equity arbitrage that would move along 16065 1 with the stock market; isn't that right? 2 A. Yes, sir, yes. And it was a direct -- 3 as opposed to the bond portfolios that weren't 4 mark-to-market, the equity arbitrage was a 5 mark-to-market portfolio. So, it hit bottom in 6 capital just, bam, right away. 7 Q. Now, let me show you -- direct your 8 attention now to the memo that is in front of you 9 which is T8022. It's Mr. Berner's memo, and it's 10 Tab 396. I think Mr. Rinaldi showed you this one. 11 I'm not going to ask you to -- I'm not 12 going to go through line -- a line with this memo. 13 But you have reviewed this memo both, I think, for 14 Mr. Rinaldi in his examination and in preparation 15 for your testimony. And in looking at the 16 paragraphs of this memo, they impose potential 17 restrictions on USAT if USAT fell below its 18 regulatory minimum net-worth limits. 19 Do you see anything in the list about 20 prohibiting USAT from modifying the compensation 21 arrangements with its officers or employees? 22 A. No, sir. From my prior review -- and 16066 1 I've seen this in the last couple of days -- I 2 didn't see anything. 3 Q. And this was the memo that Mr. Berner 4 reviewed -- circulated to senior management to 5 tell senior management about the different 6 restrictions that may be put on USAT; is that 7 right, sir? 8 A. Yes, sir, it is. 9 Q. Now, I think your attention was 10 directed to Paragraph 8 on the top of Page 2. Do 11 you see that, "limit operational expenditures to 12 specified limits"? 13 Do you see that? 14 A. I do. 15 Q. Do you interpret that as restricting 16 the -- any particular compensation practice or 17 bonus arrangements or the entry into contracts of 18 any sort? 19 A. No, I really don't. You know, 20 that's -- that seems to me to be kind of -- a kind 21 of catch-all phrase. And if they wanted to limit 22 operating or operational expenditures, I'm sure we 16067 1 would have been given guidance to that effect. 2 Q. You can't tell from the fact that it's 3 possible to limit -- the limits on operational 4 expenditures would be imposed to determine whether 5 they will be imposed or what the limits would be; 6 isn't that right, sir? 7 A. That is correct. 8 Q. Let me direct your attention now to the 9 next exhibit, which I think Mr. Rinaldi also 10 showed you which is T8023. And it's in evidence 11 as Tab 408. 12 MR. GUIDO: What's the tab number 13 again? 14 MR. VILLA: 408. 15 Q. (BY MR. VILLA) Now, this is the 16 exchange of memoranda between you and Mr. Berner 17 regarding the question of whether or not salaries 18 should be adjusted for certain senior managers. 19 Do you see that, sir? 20 A. I do. 21 Q. And you put a handwritten note on that. 22 Do you see your handwritten note? 16068 1 A. Yes, sir, I do. 2 Q. And to save time, I'm not going to go 3 through and reread everything in this document 4 that you were shown before. But let me ask you, 5 sir, by looking at these two documents, can you 6 tell us what decision you and Mr. Berner were 7 grappling with in October of 1987? 8 A. As it relates to the October 30th memo? 9 Q. Yes, sir. 10 A. Yes. I really can't construct or 11 reconstruct what was in my mind at this time when 12 I wrote that note, but it appears to me that 13 Mr. Berner and I are talking about the timing of 14 compensation or the timing of raises, possibly 15 getting everybody on the June 30th, 1988 time 16 frame for employees making over a certain amount. 17 And then I'm talking in the note, if things look 18 bleak, we pass on raises which I guess means we 19 don't get raises. 20 Q. Okay. 21 A. But I can't tell you what was in my 22 mind when I wrote that. 16069 1 Q. You can't recall what your precise 2 thinking was on any particular day on any 3 particular memo, and I understand that. 4 A. Right. 5 Q. But let me ask you this question: Can 6 you tell from looking at this exchange between you 7 and Art Berner whether you believed at the time 8 you wrote this memo that raising salaries or 9 changing compensation or paying bonuses was 10 prohibited by the regulations? 11 A. No, sir. I don't think -- you know, 12 the memo that I just looked at from Art Berner 13 about all these things that are prohibited is 14 October 29th, and Berner sends me this memo 15 October 30th. And if we thought it was 16 prohibited, I don't think he would have sent me 17 this letter, nor do I think I would have responded 18 to it in this manner. I mean, it would have been 19 kind of a nonsensical discussion. 20 Q. Why would it have been a nonsensical 21 discussion? 22 A. Well, it's hard for me to explain. But 16070 1 if -- if you're -- I mean, I'll put it like this. 2 If -- when I was a child and I wanted a new motor 3 scooter and my dad said, "You cannot have a motor 4 scooter, period. You're prohibited from having a 5 motor scooter," then I wouldn't be talking to one 6 of my buddies the next day as to whether -- can I 7 get a motor scooter this week or can I get it six 8 months later? I mean, it would have been, "My dad 9 said I wasn't going to get a motor scooter." So, 10 I mean, I might have been wishing; but that's -- 11 Q. I think I understand, sir. Thank you. 12 Do you -- 13 A. It's kind of hard to explain. It just 14 seems to me that if we had known it was 15 prohibited, this exchange here is silly. 16 Q. Do you recall, sir, being involved in 17 the hiring of Dominic Bruno? 18 A. Yes, sir, I do. 19 Q. And I'm going to ask you to look again 20 at Exhibit A11032, which is the one -- about the 21 fifth one from the front, fifth exhibit from the 22 front, that big package. 16071 1 A. Okay. 2 Q. And the second page in should be the 3 contract of Mr. Bruno, OW128381. 4 A. Yes, sir. 5 Q. And directing your attention to the 6 second page of that exhibit, did you sign this 7 agreement with Mr. Bruno? 8 A. Yes, sir, I did. 9 Q. And is that also your initials which 10 appear on the first Page next to the handwritten 11 modification? 12 A. Yes, sir, it is. 13 Q. Now, looking back at the letter 14 contract, can you tell what the length of the 15 contract is? Perhaps I should direct your 16 attention to the fourth full paragraph. 17 A. It looks like it takes it through -- if 18 I'm reading it correctly, it would take it through 19 year end 1989. 20 Q. So, it would be just short of two 21 years. Right? 22 A. Yes, sir. 16072 1 Q. And the amount of his salary? If I 2 might direct your attention to the third 3 paragraph. 4 A. That was $150,000. 5 Q. Now, does he have a bonus arrangement? 6 You might look at the end of the third full 7 paragraph. 8 A. Yes, sir. It's -- he was guaranteed a 9 bonus level of at least 50 percent of that salary. 10 Q. And is there an option -- under this 11 contract, can his benefits be secured in anyway? 12 A. I remember the words -- oh, yes. At 13 the top of Page 2, "It is also understood that at 14 your option, United will securitize the assured 15 salary and bonus agreements by letter of credit." 16 Q. Now, while we're discussing Mr. Bruno's 17 contract, let me ask you whether you recall that 18 you were called to testify in a suit by Mr. Bruno 19 on his employment contract. 20 A. Yes, sir, I do. 21 Q. And Mr. Bruno has testified in this 22 court under examination by the OTS that you lied 16073 1 at the trial and that you denied that Mr. Bruno 2 had a contract with USAT. 3 Do you recall reading that testimony, 4 sir? 5 A. I certainly read it several times. 6 Q. You read Mr. Bruno's testimony? 7 A. Yes, sir, I did. 8 Q. Did you testify at Mr. Bruno's trial 9 that he didn't have a contract with USAT? 10 A. No, sir, I did not. 11 Q. What did you testify at his trial? 12 A. I went back and -- well, I knew I 13 hadn't lied at the trial. I knew that was a bunch 14 of malarkey. So, I went back and read what I had 15 said. And basically, the questions I was asked in 16 the trial were: "Did the board of directors 17 approve Mr. Bruno's contract?" 18 And I said, "I don't remember that they 19 did approve it." 20 I was asked to look at minutes and "Do 21 you see anywhere in the minutes where Mr. Bruno's 22 contract was approved?" 16074 1 And that is -- seems to me the 2 substance of what I was asked. Seems like there 3 was one other area -- 4 Q. Well, that's enough. 5 A. Okay. 6 MR. VILLA: Your Honor, I'd like to 7 offer into evidence the next exhibit, which is 8 B4260. 9 A. Oh, I remember what that other area is. 10 Q. (BY MR. VILLA) What is it, sir? 11 A. I was asked if I had the authority to 12 enter into Mr. Bruno's contract, and I testified 13 that, "Well, I had received approval from 14 Mr. Gross and Dr. Munitz and I believe I had run 15 it by the legal -- our general counsel for my 16 approval." And that's what I testified to. 17 MR. VILLA: Your Honor, rather than -- 18 the OTS has opened up this issue, and I think it's 19 probably not productive to have people try to 20 testify to what they testified to six years ago. 21 So, we've procured the actual 22 transcript of the entire trial and we'd like to 16075 1 offer it into evidence here. And we can then 2 determine whether, as Mr. Bruno has said, Mr. Crow 3 lied or whether, as we believe the transcript will 4 very clearly demonstrate, Mr. Crow told the truth. 5 I'd like to offer 4260. We gave it to 6 the OTS yesterday. 7 MR. GUIDO: No objection, Your Honor. 8 THE COURT: Received. 9 Q. (BY MR. VILLA) Now, sir, Mr. Bruno 10 also testified that the Court in -- here in Texas 11 rejected your testimony as un truthful or 12 something to that effect. I don't want to 13 mischaracterize his testimony. 14 Do you remember seeing that? 15 A. I remember reading the judge's opinion. 16 Q. And let me ask you to look at the next 17 exhibit, 4262. 18 MR. GUIDO: What was the number? 19 MR. VILLA: It's B4262. We gave it to 20 you-all yesterday. 21 Q. (BY MR. VILLA) Is that the judge's 22 opinion that you had referred to, sir? 16076 1 A. Yes, sir, it is. 2 MR. VILLA: Your Honor, I move B4262 3 into evidence. 4 MR. GUIDO: No objection, Your Honor. 5 THE COURT: Received. 6 Q. (BY MR. VILLA) Now, Mr. Crow, this 7 exhibit, the big exhibit that we're looking at, 8 483, which is the one in the front, which includes 9 the contracts of Ms. Laurenson, Mr. Stodart, 10 Mr. Bruno, as well as all the UFG contracts. Do 11 you remember seeing that? We've turned to it now 12 four or five times. 13 A. Yes, I do. 14 Q. And it has initials "VC" that 15 identifies VC at the bottom of the number of the 16 pages. 17 Do you see that, sir? 18 A. Yes, sir. 19 Q. Do you know Vivian Carlton? 20 A. Yes, sir, I do. 21 Q. And who is she? 22 A. She was the examiner that conducted 16077 1 most of our examinations, the head examiner. 2 Q. Called "examiner in charge." Right? 3 A. Yes, sir. 4 Q. Do you know of your own knowledge 5 whether Vivian Carlton collected the employment 6 contracts of -- let's just start with the 7 employment contracts in this package. 8 A. I can't factually say whether it was 9 these employment contracts, Mr. Villa. I 10 remember -- 11 Q. Well, tell us what you recall about -- 12 A. Oh, okay. 13 Q. -- about the collection of employment 14 contracts. 15 A. I remember at some point in time -- and 16 again, here, I apologize but I just -- this is 17 just a stream of time to me. 18 But I remember Ms. Carlton making the 19 request to gather up all of the employment 20 contracts, and I remember having specifically the 21 Laurenson -- I'm not sure it was Bruno. 22 Laurenson, Stodart, all these contracts in my 16078 1 arms, and putting them down on a table pursuant to 2 Vivian's request. And I'm not sure I got all the 3 contracts. I presume Berner gathered up some of 4 them. But, you know, I went to my guys and said, 5 "give me" -- you know, "let's go take a copy of 6 your contract," and that's what we did. 7 Q. Did you ever hear any criticism from 8 Ms. Carlton of the contracts of the USAT officers 9 that they were multi-year contracts, that they had 10 guaranteed bonuses, that they could be secured by 11 letters of credit, or for any other reason? 12 MR. RINALDI: Objection, Your Honor. I 13 believe he's indicated that for the USAT officers. 14 These are UFG contracts. I've looked through this 15 packet. There's not a USAT contract in here with 16 respect to the individual executives with the 17 exception of Mister -- Ms. Laurenson and 18 Mr. Stodart -- 19 MR. VILLA: And Mr. Bruno. 20 MR. RINALDI: -- and Mr. Bruno, who did 21 have contracts with USAT, the rest were with UFG. 22 So, I think to ask that question in that fashion, 16079 1 it's terribly confusing. He ought to go through 2 each of these or ask "With respect to the UFG 3 contracts, were any questions raised? With 4 respect to the USAT contracts, were any raised?" 5 MR. VILLA: That's fine. I mean, in 6 point of fact, we've talked about four contracts. 7 Three of them were with United Savings Association 8 of Texas, as he's now recognized. I can't imagine 9 how the question was misleading, but I'll take 10 Mr. Rinaldi's -- 11 MR. RINALDI: That's not accurate 12 either because you talked about the contracts that 13 were entered on September 9th, 1987. There, in 14 fact, were contracts entered with about six people 15 at that point in time and you put into the record 16 the minutes that show that. 17 MR. VILLA: I'll be happy to ask 18 Mr. Rinaldi's question. It's an even better one. 19 Q. (BY MR. VILLA) Sir, did you ever hear 20 any criticism from Ms. Carlton of the contracts of 21 the USAT officers or the UFG officers that they 22 were multi-year contracts, that they had 16080 1 guaranteed bonuses, and that they could be secured 2 by letters of credit or for any other reason? 3 A. No, sir, I did not. 4 Q. And you never -- did you ever see any 5 statement or criticisms from her in writing that 6 these provisions were unsafe or unsound? 7 A. No, sir, I did not. 8 Q. How did the fact that Ms. Carlton -- 9 that you personally knew that Ms. Carlton had 10 asked for, collected, and reviewed these contracts 11 and never criticized them for being unsafe and 12 unsound affect your thinking as to whether 13 contracts with this or similar provisions were 14 regulatory violations? 15 A. Well, the reality is it -- it probably, 16 you know, didn't affect my thinking because I 17 didn't think it was an issue. I mean, I just 18 didn't think we were hiding anything or we were 19 doing anything wrong. And if I did think about 20 it, I would -- I guess I would think, well, if the 21 head examiner got all the contracts and red flags 22 and sirens don't go off, you know, it would just 16081 1 continue my belief that -- it just wasn't an issue 2 to me. It just didn't seem like we were doing 3 anything wrong. I didn't perceive that it was a 4 regulatory problem. And certainly, if the -- if 5 the examiners look at it, that would make me feel 6 better. 7 Q. Let me show you, sir, the next 8 document. It's already been admitted at Tab 404. 9 It's Exhibit T4476. 10 Do you recognize your signature at the 11 bottom of this document, sir? 12 A. Yes, sir, I do. 13 Q. Now, in here, you refer to something 14 that's called a profit plan? 15 A. Yes, sir. 16 Q. Can you tell us what a profit plan is? 17 A. That's the annual financial plan or 18 budget. 19 Q. Why, Mr. Crow, would you not want to 20 show regulators or any outside third party the 21 profit plan until the board of directors had 22 reviewed and approved it? 16082 1 A. Because it had been my understanding in 2 my training from early days at First City through 3 this date that a budget or a profit plan is not a 4 budget -- not an approved budget until the board 5 of directors says it is. And management can have 6 their own ideas of what is going to happen and 7 what they want to do or the goals for the next 8 year; but until the board puts the stamp of 9 approval on it, it's not an approved budget as far 10 as I'm concerned. 11 Q. And so, if it's not an approved budget, 12 you don't want to disclose it to third parties. 13 Right? 14 A. That's correct. 15 Q. Now, you refer in the last sentence of 16 the first paragraph to the -- you say, quote, "I 17 would rather wait and show them our 1988 loss 18 within the context of the overall forbearance 19 plan," close quote. 20 Do you see that, sir? 21 A. I do. 22 Q. Now, sir, let me ask you to turn to the 16083 1 next exhibit, which is B2020. 2 MR. VILLA: Mr. Rinaldi, do you have 3 another number for the capital forbearance plan? 4 I have a feeling that it's in evidence under 5 another number. 6 MR. RINALDI: I don't think I put the 7 forbearance plan in. 8 MR. VILLA: I may be wrong. I stand 9 corrected. 10 Q. (BY MR. VILLA) Let me ask you, sir, 11 to look at Exhibit B2020. 12 Can you identify that for us? 13 A. Yes, sir. That is a capital 14 forbearance plan that we filed with the Federal 15 Home Loan Bank. 16 MR. VILLA: I move that into evidence, 17 Your Honor. 18 MR. GUIDO: Just one minute, Your 19 Honor. (Reviews the document.) No objection, 20 Your Honor. 21 THE COURT: Received. 22 Q. (BY MR. VILLA) Now, sir, you referred 16084 1 in your note to the fact that you would rather 2 tell the regulators of your projected 1988 loss in 3 the capital forbearance plan. 4 Do you remember that? 5 A. I do. 6 Q. And is this the capital forbearance 7 plan that United filed? 8 A. It must be, yes, sir. 9 Q. And the board of directors meeting 10 that's referred to in your note was going to be on 11 February 11th. 12 Do you remember seeing that? 13 A. Yes, sir, I'm looking at that. 14 Q. And the date of this capital 15 forbearance plan is February 16, 1988. Right? 16 A. Yes, sir, that is correct. 17 Q. Now, I'd like to direct your attention 18 to Page 25 of the capital forbearance plan and 19 I'll give you the Bates stamp number as OWO -- or 20 OW091246. 21 Do you see that? 22 A. I do. 16085 1 Q. And I know it's hard to read, but can 2 you look at the net operating income number -- 3 that's about the fourth line from the bottom -- 4 projections for the year 1988? 5 A. It looks like they are broken into 6 quarterly figures, and it looks to me that it's 7 about 27 or 28-million-dollar loss per quarter. 8 Q. So, within five days after the meeting 9 with the -- that's referred to in your first note, 10 USAT filed its capital forbearance plan which, in 11 fact, projected an operating loss for the year 12 1988 of about $110 million; isn't that right, sir? 13 A. In that neighborhood. 105 to 14 110 million. 15 Q. Now, sir, let's go back and talk 16 briefly about the February 11, 1988 USAT board 17 meeting. I believe that you told us that there 18 was a board meeting at which some examiners were 19 present. 20 Do you recall that, sir? 21 A. That was not uncommon, yes, sir. 22 Q. Let me direct your attention to the 16086 1 next exhibit, which is Exhibit A1141 in evidence 2 at Tab 99. 3 Do you have that before you, sir? 4 A. I do, yes, sir. 5 Q. And is this the USAT board of directors 6 meeting of February 11th, 1988? 7 A. Yes, sir. This appears to be the 8 minutes of that meeting. 9 Q. And you were present. And if you look 10 at the first paragraph, Ms. Carlton and 11 Mr. Cottingham were present; is that correct? 12 A. That is correct. 13 Q. And if you -- let me direct your 14 attention to Page 27 of the minutes which bears 15 Bates stamp number US3002787. 16 A. Yes, sir, I'm there. 17 Q. And is that a discussion of the entry 18 into certain USAT contracts? 19 A. Yes, sir, it is. 20 Q. Now, Mr. Rinaldi asked you a number of 21 questions about whether UFG or USAT was paying the 22 salaries and bonuses for the officers covered by 16087 1 the various sets of contracts. 2 Do you recall that, sir? 3 A. Yes, sir, I do. 4 Q. Which entity actually issued the 5 payroll checks to individuals who were jointly 6 employed by UFG and USAT? 7 A. United Savings. 8 Q. And do you know whether the examiners 9 were aware of that fact? 10 A. Well, I think they must have been aware 11 of it. 12 Q. Did they review your financial -- for 13 example, your payroll records? 14 A. Well, in a lot of the examination 15 reports I've seen, there have been a listing of 16 salaries. And I'm -- I can't factually say that 17 they reviewed our payroll system, but I'm 18 presuming they must have gotten those salaries 19 from our payroll records. 20 Q. They didn't say, "Mike Crow, zero 21 dollars. Art Berner, zero dollars" like that, did 22 they? I mean, they actually had your accurate 16088 1 salary down, didn't they? 2 A. Oh, yes, sir. Right. 3 Q. Now, does the fact that USAT issued the 4 payroll check mean that USAT necessarily bore 5 100 percent of the expense related to the 6 employee's compensation? 7 A. No, sir. 8 Q. And why not? 9 A. Well, in 1988, I remember there were 10 chargebacks that United Savings would receive a 11 credit or reduction in compensation expense for a 12 portion of the salaries of selected individuals. 13 And I was one of them. 14 MR. VILLA: Your Honor, I'm about to go 15 into a new document. 16 THE COURT: All right. We'll take a 17 short recess. 18 MR. VILLA: Thank you. 19 20 (Whereupon, a short break was taken 21 from 10:35 a.m. to 10:56 a.m.) 22 16089 1 THE COURT: Be seated, please. We'll 2 be back on the record. 3 Mr. Villa, you may continue. 4 MR. VILLA: Thank you, Your Honor. 5 Q. (BY MR. VILLA) Mr. Crow, I'd like to 6 show you what's been marked as Exhibit B1996. 7 It's an article dated February 6th, 1988, from the 8 Houston Chronicle. 9 Do you see that before you, sir? 10 A. Yes, sir, I do. 11 Q. Let me direct your attention to the 12 middle of the second paragraph, where it quotes 13 you. 14 Do you see that? 15 A. Yes, sir, I do. 16 Q. And the date is February 6, 1988? 17 A. Right. 18 MR. VILLA: Your Honor, I move this 19 into evidence. 20 MR. GUIDO: No objection, Your Honor. 21 THE COURT: Received. 22 Q. (BY MR. VILLA) The quote that's 16090 1 attributed to you is, "We think we will certainly 2 be an acquirer." 3 Do you see that, sir? 4 A. I certainly do. 5 Q. And I believe this is in reference to 6 other smaller institutions in Texas. 7 Do you see that? 8 A. That is correct. 9 Q. What does it mean to be an acquirer 10 either in the informal plan or later to what's 11 called the Southwest Plan? 12 A. During this time frame, there were 13 proposed programs by the regulators, as I 14 understood it, that larger -- what were considered 15 to be better-managed thrifts would take over the 16 management of a package of perhaps five or six 17 smaller thrifts and would become responsible for 18 their management. 19 Q. And does this reflect your belief at 20 this time that USAT was going to be one of the 21 acquiring thrifts? 22 A. Yes, sir, it does. 16091 1 Q. Does the fact that you believe that 2 USAT would be an acquirer increase the need to 3 retain senior management? 4 A. Yes, sir, because I think that a -- one 5 of the important considerations in being an 6 acquirer is the presence of good management in the 7 opinion of the regulators. 8 Q. And in your judgment, what would have 9 happened to your likelihood of being an acquirer 10 if more of your management left, of your current 11 management left the employment of USAT? 12 A. It would have gone down or become 13 nonexistent in terms of a probability. 14 Q. So, in February of 1988, did you think 15 USAT was going to survive in some form? 16 A. Yes, sir, I did. 17 Q. And one of the forms might have been 18 through an -- going through something called the 19 Southwest Plan or a similar plan? 20 A. Right. 21 Q. And that's what's described here? 22 A. That is correct. 16092 1 Q. Now, I believe if you turn to the next 2 exhibit, I believe you told Mr. Rinaldi that there 3 came a time when you went on the board of 4 directors of United Financial Group? 5 A. Yes, sir. 6 Q. And let me show you what's been marked 7 as A1140. It's the UFG, United Financial Group, 8 board of directors meeting minutes of February 11, 9 1988. 10 Do you have those before you, sir? 11 A. I do. 12 Q. And if you look at the fifth paragraph 13 down -- 14 MR. VILLA: Your Honor, I move this 15 into evidence. I don't believe they have been 16 previously admitted. 17 MR. GUIDO: No objection, Your Honor. 18 THE COURT: Received. 19 Q. (BY MR. VILLA) And if you look at the 20 fifth paragraph down, is that the description of 21 your going on the board of United Financial Group? 22 A. Yes, sir, it is. 16093 1 Q. And prior to that time, you hadn't been 2 on the board of either the association or the 3 holding company. Right? 4 A. That is correct. 5 Q. By the way, did you seek election to 6 the board? 7 A. No, sir, I did not. 8 Q. Why did you take the position? 9 A. Dr. Munitz -- as best I recall, 10 Dr. Munitz came to me and said, "congratulations. 11 You're going to go on the board of directors of 12 United Financial Group." And I was aware that it 13 was a condition in my employment contract. So, it 14 was a -- to the best of my recollection, it was 15 pretty brief discussion, just pretty much like 16 that. 17 Q. Now, after -- there -- after you -- 18 strike that. 19 After you joined the board of United 20 Financial Group in February of 1988, there were 21 resignations from the board; isn't that right? 22 A. That's correct. 16094 1 Q. And, in fact, there had been 2 resignations prior to that time, as well? 3 A. That is correct, as well. 4 Q. Let me ask you to look at what's been 5 marked as Exhibit A1145. It's the minutes to be 6 adopted by unanimous consent of United Financial 7 Group dated March 9, 1988. 8 Do you have those before you, sir? 9 A. Yes, sir, I do. 10 MR. VILLA: I'd like to move those into 11 evidence, Your Honor. 12 MR. GUIDO: No objection, Your Honor. 13 THE COURT: Received. 14 MR. GUIDO: We'd like the record to 15 show that the only copy in the record is signed by 16 Arthur Berner, however. 17 Q. (BY MR. VILLA) Did the composition of 18 the board change after you had joined the board? 19 A. Yes, sir, it did. 20 Q. And if you look at the third paragraph, 21 I suppose, or entry on this document, you'll see 22 that there are the resignations of Mr. Burton 16095 1 Borman, Mr. Stephen Silverman, and Mr. Edward 2 Keltner. 3 Do you see that, sir? 4 A. I see that. 5 Q. Now, I'd like to put up for you a 6 calendar of the year and month, March 1988 so we 7 can track through as best we can and reconstruct 8 the events of that month. 9 A. Okay. 10 Q. Because you were asked by Mr. Rinaldi 11 some questions about the Keltner resignation and 12 the memorandum that Mr. Berner had sent you. 13 A. Okay. 14 Q. I may walk over there to point things 15 out to you, but I think we can probably follow it. 16 Now, sir, let's start off with the 17 fact -- if you look at Exhibit B -- we probably 18 all remember it because of the comment about the 19 mailing rule. But if you look at Exhibit B2057, 20 which is in evidence as tab -- I don't have the 21 tab number. 22 MR. VILLA: Do you have the tab number 16096 1 of the Keltner letter? 2 3 (Discussion held off the record.) 4 5 MR. VILLA: We show it in evidence as 6 1384A, the letter from Mr. Keltner resigning from 7 the board to Mr. Gross. 8 MR. GUIDO: What's the exhibit number? 9 MR. VILLA: It's B2057, and I think 10 it's Tab 1384A. 11 Q. (BY MR. VILLA) You have that, and I 12 think you've previously seen it. That's a letter 13 from Mr. Keltner dated March 2nd, 1988, to -- 14 which is Wednesday, March 2nd. Right? 15 A. Yes, sir. I have the letter in front 16 of me. 17 Q. And that's his resignation from the 18 board of directors, and it's going to 19 Mr. Jenard Gross. Right? 20 A. It is. 21 Q. Now, the next document we have seen is 22 Exhibit B2060, which is the memorandum from Art 16097 1 Berner to you dated March 2nd, 1988, as well, 2 asking you on this date, March 2nd, to execute the 3 February 11, 1988 USAT contracts and return them 4 to Mr. Berner by March 4. Right? 5 A. Yes, sir. 6 Q. So, March 2nd and March 4th. 7 Let's start off with the question of 8 when -- with respect to the Keltner letter, did 9 you know that that letter was coming? 10 A. No, sir, I did not. 11 Q. Did you know that -- do you have any 12 reason to believe that you did not sign and return 13 the contracts to Mr. Berner, as he had requested, 14 by March 4th? 15 A. No, I don't have any reason to believe 16 that at all. 17 Q. Did you know at the time that you 18 signed the contracts that Mr. Keltner had resigned 19 from United Financial Group? 20 A. No. I don't believe I would have known 21 that. 22 Q. Eventually, you did hear that 16098 1 Mr. Keltner had resigned, didn't you, sir? 2 A. Certainly. 3 Q. When you heard that Mr. Keltner had 4 resigned, did you immediately realize that 5 Mr. Keltner's resignation may trigger the change 6 of control in the UFG contracts? 7 A. No, sir. I don't remember thinking 8 about it. 9 Q. Who was the first person that made you 10 aware of that issue, or how did that issue come to 11 your attention? 12 A. Jeff Gray, who was an executive 13 vice president at United, brought that to my 14 attention; and that's how I became aware of it. 15 Q. Did -- when Mr. Gray brought to your 16 attention the interpretation of the contract and 17 the effect that Mr. Keltner's resignation may have 18 on the contract, on the change of control 19 provisions in the contract, did it come as a 20 surprise to you? 21 A. Yes, it did. 22 Q. Was there a period of time after 16099 1 Mr. Gray brought that to your attention -- and I 2 think you've talked about that in your direct 3 examination -- in which Mr. Gray was talking to 4 other employees of USAT or UFG or both to try to 5 get them to join with him in making a claim that a 6 change of control occurred? 7 A. Yes. And it -- when I say Mr. Gray 8 brought it to my attention, I -- it was brought to 9 my attention through Jim Wolfe and Bruce Williams 10 because Mr. Gray had been talking with them. And 11 Mr. Gray, I believe, talked to me, as well. 12 Q. Now, sir, Mr. Gray -- strike that. 13 Do you recall whether Mr. Gray was ever 14 able to gather any support from the other 15 employees to join with him in sending a letter 16 claiming that a change of control occurred? 17 A. I think the only letter that actually 18 was sent was by Mr. Gray, but he was certainly -- 19 my memory is he was out talking it up, and I was 20 concerned about a couple of my employees. 21 Q. Okay. Now, if you'll look in the 22 files, the next exhibit, which is B2082 which is 16100 1 in evidence at Tab 463, is the letter from 2 Mr. Gray. 3 Do you see that? 4 A. Yes, sir, I do. 5 Q. And that's dated March 16th. Right? 6 A. Yes, sir, it is. 7 Q. Now, can you tell me from looking at 8 this when you believe it first came to your 9 attention that a change of control may have 10 occurred because of Mr. Keltner's resignation? 11 A. I believe that after the Jeff Gray 12 discussions or talking with other people, that 13 most likely occurred, you know, the prior week, 14 like the 7th. 15 Q. So, the week of the 7th is when you 16 believe that Mr. Gray was conducting these 17 discussions with your subordinate officers, trying 18 to get them to join in his letter claiming a 19 change of control? 20 A. I think so. 21 Q. And he was unable to do that? 22 A. That is correct. 16101 1 Q. And so, he ultimately sent his letter 2 on the 16th? 3 A. Yes. I see his letter dated the 16th. 4 Q. Now, sir, do you have any recollection 5 that at the time that the USAT contracts were 6 signed there was any idea in your mind or that of 7 the other people that you were talking to that was 8 expressed to you that a change of control may have 9 already occurred under the old UFG contracts? 10 A. No, sir, not at all. 11 Q. In fact, when Mr. Gray asserted that 12 interpretation for the first time, what was the 13 reaction of USAT's and UFG's management? Did they 14 agree with that interpretation, or did they 15 dispute it? 16 A. I believe that Mr. Berner and 17 Dr. Munitz disputed that interpretation. 18 Q. Let me direct -- 19 A. And -- 20 Q. I'm sorry. Had you completed your 21 answer? 22 A. Yes. And I didn't -- you know, it 16102 1 was -- you know, I got the annual report out and, 2 you know, after Gray brought it up, counted it, 3 counted the directors that had left, et cetera. 4 And I could see how, under an interpretation, it 5 certainly would be a change of control. 6 Q. Now, let me ask you to turn to the next 7 document, which is the March 22, 1988 memorandum 8 you wrote to Mr. Gross. And that is 9 Exhibit T8046, and it is Tab 1372. 10 Do you have that in front of you? 11 A. Yes, sir, I do. 12 Q. And you drafted this memorandum, didn't 13 you, sir? 14 A. Yes, sir, I did. 15 Q. What concerns did you have at the time 16 that you drafted this memorandum? 17 A. Well, my direct concerns were that 18 Mr. Wolfe and Mr. Williams, Bruce Williams, 19 were -- you know, there was still the talking 20 about the Jeff Gray letter. They had come to me, 21 and we had all talked about it. And I, you know, 22 basically said, "Well, let's just keep our cool." 16103 1 You know, I didn't think that's what the 2 contract's intended to be. I, you know, wasn't a 3 lawyer in terms of what it really meant. And what 4 was in my mind was retaining the management 5 structure because if people started following 6 Mr. Gray's example, we would have a mass exodus. 7 Q. So, let me direct your attention to the 8 second paragraph of your memo. You say, "There is 9 a need to restructure the employment contracts." 10 Do you see that, sir? 11 A. Yes, I do. 12 Q. And is that the need you just told us 13 about, the need to restructure the contracts -- 14 well, strike that question. 15 What was the need to restructure the 16 contracts? 17 A. The need, in my mind, was to get rid of 18 that condition that, you know, would be a change 19 of control and to -- you know, the overall need 20 from a non-technical standpoint was just to keep 21 the management staff. 22 Q. And how would changing the contracts 16104 1 help you keep the management staff? 2 A. Well, I was concerned -- and I think 3 others were concerned -- that there might be other 4 people follow Mr. Gray's example. 5 Q. And by offering them an alternative 6 contract, they may decide not to follow his 7 example. Right? 8 A. Exactly. 9 Q. And that's why you drafted the 10 memorandum of March 22nd; is that right, sir? 11 A. That is correct. 12 Q. Now, what would have happened to the 13 finance division of USAT and UFG if Bruce Williams 14 and Jim Wolfe had left? 15 A. If those two individuals had left, it 16 would take a lot of money to replace them just 17 as -- you know, on the simple level. There would 18 have been some major -- pretty major disruption 19 until replacements could be hired. And during 20 this time period -- you know, we're talking about 21 1988. Thrifts were -- if 1987 was a pressure year 22 for thrifts, 1988 had become a pressure cooker in 16105 1 terms of credit lines, skittishness of depositors, 2 and so forth. And if the treasurer of the company 3 and the controller of the company walk out the 4 door, that leaves a pretty -- it sends a pretty 5 bad message to people like credit analysts on Wall 6 Street for repo lines and stuff like that. And we 7 had Dutch auction rate preferred stock outstanding 8 that rolled over via Dutch auction every 49 days. 9 And as Texas thrifts became more and more under 10 pressure, I think eventually as it got horrible, 11 you know, later on, we had a Dutch auction rate 12 preferred that -- you know, where the auction 13 actually, quote, fails. And so, your rate that 14 you have to pay goes sky high. 15 And so, it was a pretty nervous time, 16 that you wanted to maintain stability. 17 Q. Now, in addition to some of the people 18 we've talked about, did Jim Jackson have a 19 contract? 20 Do you recall? 21 A. I think Jim Jackson did. 22 Q. And who was Jim Jackson? We really 16106 1 haven't talked about him too much. 2 A. Jackson was the head of funding, and he 3 was over all the branch system. And in my mind, 4 probably more importantly, was head of the money 5 desk that -- where we raised a major part of our 6 deposits and was the primary contact with brokers 7 in terms of brokerage deposits. 8 And Jackson, you know, since the 9 funding -- when you get into a real precarious or 10 nervous situation, your funding becomes critical. 11 And we didn't want to lose Jackson, for sure. 12 Q. Did you have a contract? 13 A. Yes, sir. 14 Q. You had a UFG contract, didn't you, 15 sir? 16 A. Oh, sure. 17 Q. You could have made a similar claim for 18 severance under your UFG contract, couldn't you? 19 A. Technically, I could have, yes, sir. 20 Q. Did you? 21 A. No, sir. 22 Q. Why not? 16107 1 A. I thought -- you know, despite my 2 half-empty glass approach to the world, I thought 3 we were going to be restructured, recapitalized. 4 I thought the regulators thought we were good 5 guys. We were a big thrift that was going to take 6 over other thrifts or be restructured in some 7 orderly manner. And so, to me, that had a great 8 appeal. 9 And it just seemed -- you know, if I 10 would have left, that sends a pretty nasty message 11 to Wall Street credit people, Dutch auction rate 12 preferred type issues, and people that are 13 extending credit lines. That's not good. 14 Q. Well, can you tell us what you think 15 would have happened if the senior executive 16 vice president and chief financial officer had 17 taken whatever hundreds of thousands of dollars in 18 severance benefits that you were entitled to and 19 walked out the door? Can you tell us what you 20 think would have happened to United? 21 A. Well, it's hard to speculate. It's 22 hard for me to speculate. I guarantee you -- I 16108 1 can almost guarantee one thing, that about ten 2 credit analysts from Wall Street would be in our 3 offices, in United's offices within a couple of 4 days basically saying, "What's going on?" And I 5 think the -- you know, there might have been some 6 skittishness in the -- on the deposit side. But 7 it's -- you know, it's impossible for me to 8 speculate beyond that. 9 Q. The consequences would have been severe 10 to the association. 11 Would you agree with that? 12 A. I think so, yes, sir. 13 Q. And ultimately, you decided not to make 14 a claim on your severance, make a claim of change 15 of control, and you continued working at United, 16 didn't you, sir? 17 A. Yes, sir, I did. 18 Q. Now, in your memo, you talked about the 19 restructuring of the contracts. 20 Do you remember we just looked at your 21 March 22nd memo? 22 A. Yes, sir. 16109 1 Q. Do you know whether United undertook to 2 restructure the contracts? 3 A. Yes, sir, they did. 4 MR. RINALDI: Your Honor, I'd just like 5 some clarification from counsel. He promised us 6 at the beginning that he would distinguish between 7 United and UFG, and I'm a little confused here 8 because there are different sets of contracts. 9 And it would be helpful if he could distinguish 10 between the two entities. 11 THE COURT: All right. 12 Q. (BY MR. VILLA) Mr. Crow, I think you 13 responded in answers to some of Mr. Rinaldi's 14 questions that you have a hard time distinguishing 15 between the two sets of contracts; is that right? 16 A. That's exactly -- 17 Q. When I ask you a question like that, I 18 use the word "contracts" because of your prior 19 answers. If it turns out that in response to my 20 question you remember one as opposed to the other, 21 would you tell me that, sir? 22 A. Yes, sir, I will. 16110 1 Q. Now, sir, do you recall that United 2 undertook at some point to restructure the 3 employment contracts? 4 A. Yes, sir, I do remember that. 5 Q. And do you remember whether United 6 sought any outside help from any independent 7 consultant? 8 A. I wasn't directly involved if that 9 because that was the compensation committee, but I 10 think they engaged either Hewitt or -- Hewitt 11 Associates and/or the Wyatt Company, one of those 12 two. 13 Q. And do you know whether -- do you know 14 which one came first, whether it was Hewitt or 15 Wyatt? 16 A. No, sir. I don't remember. 17 Q. And you don't know exactly what task 18 they performed; is that right? 19 A. No, sir. I wasn't involved in giving 20 their charter. I did see a bit of their report, I 21 think -- of one of the reports related to my 22 compensation. 16111 1 Q. What do you recall of that? 2 A. That they -- their opinion was that my 3 compensation was in line with peer groups, the 4 peer group. 5 Q. So, you were mostly interested in 6 checking whether your own compensation was 7 appropriate. Right? 8 A. Sure. I -- you know, I wasn't 9 responsible for -- I had my -- you know, 10 basically, we were pretty busy; and I worried 11 about what I was responsible for, not what the 12 compensation committee was responsible for. 13 Q. Now, we've talked about the concern 14 that United had and you had as a manager about 15 losing people during this crucial time. Right? 16 A. Yes, sir. 17 Q. And United restructured these contracts 18 in ways that I think were described to you by 19 Mr. Rinaldi in his examination. 20 Do you remember that, rolling the '87 21 bonus into the '88 salary and setting up an 22 executive bonus plan where you get 25 percent now 16112 1 and you hold 75 percent for the following year? 2 Do you remember that, sir? 3 A. Yes, sir, I do. 4 Q. Let me ask you to look at 5 Exhibit T8055, which is in evidence as Tab 422. 6 Do you see that, sir? 7 A. Yes, sir, I do. 8 Q. And the first two pages are the salary 9 adjustments that we've talked about over the 10 course of your examination. Right? 11 A. Yes, sir. 12 Q. And that's where you take the '87 bonus 13 and you roll it into the '88 salary so it's now 14 being essentially spread out and paid in 12 15 monthly payments. Right? 16 A. That is correct. 17 Q. And the second -- and the third and 18 fourth page is called pro rata bonuses, which are 19 what we call the 25/75 percent bonus plan; isn't 20 that right, sir? 21 A. That is correct. 22 Q. Now, sir, when United implemented these 16113 1 plans, did they restrict it only to the top five 2 or six people? 3 A. No, sir, not at all. 4 Q. They extended it to all the people on 5 these lists, didn't they, sir? 6 A. Yes, sir. 7 Q. And I didn't count them, but it looks 8 like about 40 people on each list. 9 A. It's a fairly lengthy list, yes, sir. 10 Q. And why did United extend these plans 11 to all of the personnel here? 12 A. Well, because -- and I -- you know, I 13 certainly totally shared this opinion. It did no 14 good at all to retain the very top people and have 15 your -- your good first-line and second-line 16 supervisors and management fritter away because 17 that's a hollow shell. So, we wanted to retain 18 basically our good people because if -- you know, 19 for example, if we were going to take over other 20 institutions, as just one example, then people 21 like Nancy Hodgins and, you know, Ron Carlson and 22 Jacque McCombs, et cetera, and Linda Rich which 16114 1 was kind of in the guts of the operations area, 2 they were going to be people we were going to be 3 heavily depending upon to pull this off. I mean, 4 they were pretty critical. 5 Q. So, the purpose of this program was to 6 keep people at United. Right? 7 A. Absolutely. 8 Q. And it didn't just extend to the senior 9 people. It extended down 40 people into the 10 organization, didn't it, sir? 11 A. Yes, sir, it did. 12 Q. Now, we've talked about the 13 restructuring of the, quote, "contracts." And 14 there are two contracts. One of them is the 15 United Financial Group contract, and the other one 16 is the United Savings Association of Texas 17 contracts that were executed in about mid-1988. 18 Do you remember that, sir? 19 A. Yes, sir, I do. 20 Q. Let me ask you to take a look at the 21 two contracts. The first one is B2264, which is 22 the United Financial Group contract, and it's 16115 1 dated June 30, 1988. 2 Do you see that, sir? 3 A. Yes, sir. 4 Q. And that's in evidence as Tab 1367. 5 And the second one is the United Savings 6 Association of Texas contract, which is dated 7 July 1, 1988, and it is Exhibit B4221. 8 Do you have those before you, sir? 9 A. I do. 10 Q. And 4221, which is the United Savings 11 Association of Texas contract, you've executed on 12 Page 30. Right? 13 A. Yes, sir, I have. 14 MR. VILLA: Your Honor, I move B4221 15 into evidence. 16 MR. GUIDO: No objection, Your Honor. 17 THE COURT: Received. 18 Q. (BY MR. VILLA) Now, do you -- let me 19 show you -- we know what the dates of the 20 contracts are: June 30th and July 1. Right? 21 A. Yes, sir. 22 Q. Let me show you what's been marked as 16116 1 B2306. It's a memorandum from Arthur Berner to 2 Jenard Gross, Barry Munitz, you, and a number of 3 others. 4 Do you see that, sir? 5 A. Yes, sir. 6 Q. It's dated July 12, 1988? 7 A. Yes, sir. 8 Q. I'd like you -- 9 MR. VILLA: Your Honor, I move B2306 10 into evidence. 11 MR. RINALDI: No objection, Your Honor. 12 THE COURT: Received. 13 Q. (BY MR. VILLA) I'd like you to look 14 at the cover memo from Mr. Berner to you and 15 others. 16 Do you see that? 17 A. Yes, sir, I do. 18 Q. The memo to you is dated July 12th, and 19 the last sentence of the cover memo says. "I need 20 to have your signed agreements received by 21 July 15, 1988." 22 Do you see that, sir? 16117 1 A. I do. 2 Q. Can you determine from that when you 3 believe you executed these two contracts that we 4 just looked at, the June 30th and July 1st 5 contracts for United Financial Group and USAT? 6 A. Sometime between July 12th and 7 July 15th. 8 Q. Do you know why Mr. Berner waited two 9 weeks after the board approved these contracts to 10 send the contracts to you for execution? 11 A. I think -- I have a vague memory that 12 he was waiting for some type of approval. 13 Q. Is it unusual -- was that in connection 14 with the Connell contract that we talked about 15 earlier? 16 A. Yeah, yeah. I -- these contracts were 17 supposed to be modeled after the Connell contract, 18 what I call the Connell model. And I think that 19 that was sent to the regulatory authorities. Who 20 and how, I don't know. But -- 21 Q. Is it unusual, sir, to date employment 22 contracts to the beginning or the end of a 16118 1 quarter? I mean, these are -- we can see and your 2 testimony is that these were signed between 3 July 12th and July 15th. And the contracts are 4 dated June 30 and July 1. 5 My question to you is: Is it unusual 6 to have contracts dated at the beginning or the 7 end of a quarter? 8 A. No, sir. It would be done for 9 convenience purposes, for payroll, or personnel 10 record purposes. It's just -- it's just cleaner 11 to have stuff at the end or beginning of a month 12 or quarter, stuff like that, as opposed to a date 13 like July 13th. 14 Q. Would you have signed the June 30 and 15 July 1 UFG and USAT contracts if you believed that 16 the regulators thought that the form of the 17 contract was objectionable? 18 A. No, sir, I would not. 19 Q. We're going to see a letter from 20 Mr. Twomey in October of 1988 criticizing the 21 contracts. And my question is: Do you recall 22 between the dates in mid-year -- that is to say, 16119 1 around July 1st, 1988 -- between July 1st, 1988, 2 and October when Mr. Twomey sends a letter 3 criticizing the contracts, do you recall any 4 regulator criticizing the contracts to you either 5 in writing or orally? 6 A. I don't remember any criticism at all. 7 It's -- if there were any, I certainly wasn't 8 aware of it. And Art and -- Art Berner and 9 Jenard Gross, if they received criticism or -- 10 they were pretty good about communicating it. 11 Q. Do you recall whether the examiners 12 were complaining about some aspect of management 13 of United during this time period? And we're 14 talking about 1988. 15 A. Yes, sir. I remember -- well, I 16 remember a couple of criticisms. And one was the 17 Connell -- getting a person like Mr. Connell in. 18 Q. The examiners wanted a new person -- 19 A. Wanted, yes, a savings and loan type 20 executive. And then secondly, we were criticized 21 for excessive turnover in management and 22 directors. 16120 1 Q. And one of the effects of these two new 2 contracts would be to reduce turnover of 3 management, wouldn't it, sir? 4 A. It would certainly -- yes, that 5 would -- 6 Q. It may? 7 A. Yes. 8 Q. It was at least directed toward that? 9 A. Yes. That would be certainly one of 10 the primary objectives of the contracts, I would 11 think. 12 Q. Let me direct your attention to the 13 next document, which is in the next book. It's 14 A6022, Tab 468. And it's the nineteen-eighty -- 15 it's the July 28, 1988 letter from the Federal 16 Home Loan Bank of Dallas signed by Neil Twomey 17 enclosing the examination report. 18 MR. RINALDI: Which examination is it, 19 John? 20 MR. VILLA: This is the November 16, 21 1987 examination. 22 Q. (BY MR. VILLA) Do you have that 16121 1 before you, sir? 2 A. Yes, sir, I do. 3 Q. I believe it's in evidence at Tab 468. 4 Let me direct your attention to the -- do you 5 recall that when the examination was complete, the 6 supervisory agents would review it and then they 7 would put their own comments as to their own 8 concerns in what was called a supervisory letter 9 and send that along with the examination? 10 A. Yes, sir. There would be a summary 11 letter, right. 12 Q. And that's the letter that we're 13 looking at here, isn't it, sir? 14 A. Yes, sir, it is. 15 Q. In connection with the examination that 16 was conducted in late 1987 and through the first 17 quarter or so of 1988? 18 A. Right. And it would be addressed to 19 the board of directors, which is this letter. 20 Q. Let me direct your attention to the 21 first substantive paragraph and the first line in 22 the supervisory letter. 16122 1 Do you see that, sir? 2 A. "The examiners have noted"? 3 Q. Yes. 4 A. Yes, sir, I do. 5 Q. It says, quote, "The examiners have 6 noted in the report the continuing turnover in 7 management and directors since the last federal 8 examination as of May 27, 1986." Right? 9 A. Yes, sir. 10 Q. And that's the concern that you had 11 just referred to, that the examiners were 12 expressing to you to try to slow down turnover of 13 management and directors. Right? 14 A. That is correct. 15 Q. Now, let me show you the next document, 16 which is a memo you wrote on September 9, 1988, 17 which is Exhibit B2398. 18 Do you have that before you, sir? 19 A. Yes, sir, I do. 20 Q. And did you write that document? 21 A. Yes, sir, I did. 22 MR. VILLA: I move it into evidence, 16123 1 Your Honor. 2 MR. RINALDI: No objection, Your Honor. 3 THE COURT: Received. 4 Q. (BY MR. VILLA) Now, can you tell me 5 essentially what this relates to? We won't read 6 the whole document because I'm sure the Court will 7 have an opportunity to read it later. 8 Just tell us in general what it relates 9 to. 10 A. Yes, sir. It related to -- I had a 11 bonus agreement related to a stock loan. I 12 believe the stock purchase was back in '84 or so, 13 and I had a bonus arrangement related to that 14 that, in essence, said if I were fired, that the 15 loan would be extinguished. I wouldn't be liable 16 under the loan. 17 And the nature of this letter was that 18 in September of 1988, it was obvious to everyone 19 we were going to be restructured or recapitalized 20 in some such manner. And I was concerned that the 21 new owners, whoever they might be, you know, would 22 not honor the agreement, basically, is kind of the 16124 1 crux of what this amounts to. 2 Q. So, you were looking for a way to 3 protect yourself if the new owners came in and 4 wouldn't honor the prior agreements. 5 Is that essentially right? 6 A. That is correct. 7 Q. Now, let me ask you: The stock that 8 you bought that was secured by the stock loan, do 9 you remember roughly how much it was? 10 A. I think it was -- well, it was 10,000 11 shares; and I think the amount was, like, 72 or 12 three thousand dollars. 13 Q. Now, apart from the house you live in 14 which is an apartment, right, or a condominium? 15 A. It's a condominium, yes, sir. 16 Q. Apart from the condominium apartment 17 that you live in, did you have any larger single 18 investment than your stock ownership in UFG that 19 you've just described here? 20 A. During this time, certainly not, no. 21 So -- you know, it was a sizable amount of money 22 to me. 16125 1 Q. $70,000 was -- putting aside your home, 2 what portion of your net worth do you think that 3 would have been? 4 A. During that time period, I would guess 5 20, 25 percent. 6 Q. By the way, sir, was this bonus 7 agreement that we've talked about, the underlying 8 bonus agreement, not this memo, was it any secret? 9 A. No, sir. It was disclosed in our 10 financials. I think in our 10Ks, and I think in 11 the proxy. I may be mistaken on that. And I 12 believe -- I'm not positive, but I think this was 13 sent to the regulatory authorities, as well, both 14 myself and Mr. Gross'. Mr. Gross had a similar -- 15 I don't know that it was exactly, but he had a 16 similar type loan. 17 Q. Let me -- and when you say the 10K, you 18 mean the 1987 10K which would have been filed in 19 March of 1988? 20 A. I'm not sure which 10K, but I remember 21 seeing it in one of them, yes, sir. 22 Q. And you remember actually seeing the 16126 1 exhibit to the 10K which was your stock bonus 2 agreement? 3 A. Oh, yes, sir. 4 Q. Let me direct your attention to the 5 next document, which is a letter dated June 1, 6 1988, from Art Berner to Neil Twomey. 7 Do you see that? 8 A. Yes, sir, I do. 9 Q. And let me direct your attention to the 10 third paragraph. Oh, I'm sorry. It's B2218. 11 It's in evidence as Tab 484. 12 Do you see that before you, sir? 13 A. Yes, sir, I do. 14 Q. You just referred to the fact that you 15 believe that your stock bonus agreements or 16 special bonus arrangements, however they were 17 called, were sent to the regulators. 18 Do you remember that? 19 A. I do. 20 Q. And is this paragraph that says, quote, 21 "At your request, I have enclosed copies of the 22 special bonus arrangements entered into between 16127 1 United Financial Group, Inc. and Messrs. Gross and 2 Crow relating to a note from each of them," close 3 quote. 4 Is that what you were referring to, 5 sir? 6 A. Yes, sir. 7 Q. Let me show you, Mr. Crow, what's been 8 marked as Exhibit A1156. It's the minutes of the 9 board of directors of United Savings Association 10 of Texas dated September 8, 1988. 11 Do you see that? 12 A. Yes, sir, I do. 13 Q. And if you look at the last page of the 14 minutes, you were there. You can see that you 15 made a presentation. 16 A. Yes. I made the financial 17 presentation. 18 Q. Okay. 19 MR. VILLA: Your Honor, I move A1156 20 into evidence. 21 MR. GUIDO: No objection. 22 THE COURT: Received. 16128 1 Q. (BY MR. VILLA) Now, sir, it's 2 somewhat difficult to recall the sequence of 3 events going back ten years. But let me ask you: 4 By looking at this document, and particularly Page 5 2 -- and you have reviewed this before, I believe. 6 Right? 7 A. Yes, sir, I have. 8 Q. In preparation for your testimony. And 9 I'm going to direct your attention to -- starting 10 in the middle of the second page where it says, 11 "Mr. Gross stated the next item of business was 12 discussion of the payment of the 1988 executive 13 bonuses." 14 Do you see that? 15 A. Yes, sir, I do. 16 Q. And in the middle of Paragraph B, in 17 the middle of the "further resolved" paragraph, 18 it's got "B," and it's a resolution of the -- of 19 USAT to, quote, "Accelerate payment of amounts 20 held in trust with respect to each plan 21 participant who is an employee of the company as 22 of September 15th, 1988, without regard to the 16129 1 condition contained in the plan which requires 2 each participant to stay -- which requires each 3 participant to be in the employ of the company 4 through January 1, 1989, in order to be entitled 5 to such payment which condition is hereby waived." 6 Do you see that? 7 A. I do. 8 Q. Now, we talked about the executive 9 bonus plan that had the effect of payment of 10 25 percent of the bonus in, I think, April of 11 1988. Right? 12 A. That is correct. 13 Q. And 75 percent of the bonus was put 14 into a trust to be held so if the people worked 15 through the end of the year 1988 and into 1989, 16 they would be entitled to the other 75 percent. 17 Right? 18 A. Right. 19 Q. And that was a form of golden 20 handcuffs. 21 Would you agree with that? 22 A. That is correct. 16130 1 Q. Now, in this action, the board of 2 directors is dissolving that trust and directing 3 payouts of the executive bonuses to the 4 individuals in September rather than in January; 5 isn't that right? 6 A. That's -- yes, sir, it is. 7 Q. Do you remember what was happening in 8 September of 1988 that prompted the board of 9 directors to think that the golden handcuffs was 10 no longer necessary and that the executive bonus 11 should be paid out at that point? 12 A. My memory is that it was thought that 13 United was part of the Southwest Plan and that the 14 staff could be assured of having jobs and 15 management could be assured of having jobs. I 16 can't give you chapter and verse, but that's the 17 crux of it. 18 Q. There was a Southwest Plan deal in the 19 final stages of negotiation in September, wasn't 20 there, sir? 21 A. Yeah. And, you know, it kind of 22 filtered down to me that, you know, we made it. 16131 1 It's a done deal. Whether that was accurate or 2 not, I don't know. 3 Q. Apparently, the board thought it was 4 accurate because they then moved to dissolve the 5 bonus plan and pay out the moneys. Right? 6 A. That was my understanding, yes, sir. 7 Q. Now, sir, I'd like to direct your 8 attention to the first paragraph of this memo -- 9 I'm sorry -- the meeting minutes. 10 Do you see that? 11 A. Yes, sir, I do. 12 Q. It says, "Present at the meeting were 13 Neil Twomey, Marc Dunn, and Ms. Donna Guthrie 14 representing the Federal Home Loan Bank of Dallas 15 and Ms. Brenda Bese and Ms. Diane Buckshnis 16 representing the Federal Home Loan Bank of Dallas 17 examiners." 18 Do you see that? 19 A. I do. 20 Q. Did any of the examiners or regulators 21 present at this meeting, to your recollection, 22 express surprise or dismay about the fact that 16132 1 there was a bonus plan and trust and, in fact, the 2 money was being taken out of the bonus plan and 3 trust? 4 A. No, sir. And I think I would have 5 remembered that. No, sir, I don't remember any 6 such thing. 7 Q. Now, the Southwest Plan deal that was 8 being negotiated in September of 1988 ultimately 9 fell through, didn't it, sir? 10 A. Yes, it did. 11 Q. And so, what did United do with the 12 money? 13 A. Well, we tried to give it back to the 14 trustee and, you know, we had -- I was over -- it 15 was -- I was over the human resources and 16 personnel area, and Fran Dean was directly 17 responsible. And she had all these checks and 18 then I called her and said, "Well, don't give out 19 the checks." 20 "Well, what do you want me to do with 21 them?" 22 "Well, put them in a safe." 16133 1 And so, she put them in a safe and then 2 we tried to give them -- I think we gave the money 3 back to Texas Commerce is what it ended up being. 4 Q. Okay. So, the money was taken out of 5 Texas Commerce pursuant to this September 8th 6 meeting. It came into the offices of United 7 Savings, and then it was put back in Texas 8 Commerce; is that right? 9 A. That is correct. 10 Q. And ultimately -- and we'll see this 11 happen over time, that Texas Commerce Bank was the 12 trust -- was the litigation that happened in 1989 13 and beyond over the amount in that trust. Right? 14 A. That is correct. 15 Q. Did you think, sir, in September of 16 1988, that there was any secret or that you -- or 17 that USAT was doing anything wrong by having this 18 money in a trust at Texas Commerce Bank or by 19 paying it out of the trust? 20 A. Well, no. It certainly wasn't a 21 secret. I mean, it was -- there was no secret to 22 it, period. 16134 1 Q. There were, in fact, five regulators in 2 the room when this issue was discussed and the 3 moneys were authorized to be paid out. Right? 4 A. That's correct. 5 Q. Let me direct your attention to the 6 next document, which is Exhibit B2487. And it's 7 Tab 98. It's a letter from Neil Twomey to the 8 board of directors of United Savings Association 9 of Texas dated October 27, 1988. 10 You know, I hate to say this; but we're 11 going to go back a document. 12 A. Okay. 13 Q. I'd like you to look at Exhibit 1158, 14 A1158, which is in evidence at Tab 443. Well, I 15 think the difference is -- I'm advised that the 16 exhibit, Tab 443, are the minutes of October 4, 17 1988, but they don't have the attachment, which is 18 the USAT 1988 arbitrage reward bonus plan. I'll 19 be happy to take the arbitrage reward bonus plan 20 off this document as it's not relevant to my 21 questioning. And we can still use this document. 22 MR. VILLA: Is that acceptable to 16135 1 you-all? 2 MR. GUIDO: What's the document that's 3 in the record? 4 MR. VILLA: Pardon? The document in 5 the record is T8108. It's a copy of the minutes 6 of October 4, 1988. 7 MR. GUIDO: Why don't we just make this 8 A1158A as we have done in the past? 9 THE COURT: We don't have an 1158 in 10 the record. 11 MR. VILLA: I think we should make it 12 Tab 443A. 13 MR. GUIDO: The document -- the 14 document that's in the record is T8108, Your 15 Honor. 16 THE COURT: I know. 17 MR. GUIDO: So -- I thought it was 18 under the same number. I think we should just 19 proceed with the document and have this new 20 document introduced into the record. 21 MR. VILLA: Okay, Your Honor. If 22 that's acceptable, I'll honor this document. 16136 1 We'll have some duplication. 2 THE COURT: A1158, you're offering? 3 MR. VILLA: Yes, sir. 4 THE COURT: Received. 5 MR. GUIDO: No objection, Your Honor. 6 Q. (BY MR. VILLA) Now, sir, we talked 7 about the process -- you talked about the story 8 about Fran Dean receiving all the checks and then 9 redepositing the checks. 10 Do you remember that? 11 A. Yes, sir. 12 Q. And when the -- when the Southwest Plan 13 deal fell through. Right? 14 A. That is correct. 15 Q. And if you take a look at the 16 October 4, 1988 minutes before you, do you see on 17 the last page a discussion of the employment 18 contracts and the escrow? 19 A. Yes, sir, I do. 20 Q. And would this have been about the time 21 that the money would have gone back in? 22 A. Let's see. Let me -- let me read this 16137 1 paragraph. (Witness reviews the document.) 2 Yes, sir. This is putting the money 3 back into the trust. 4 MR. RINALDI: Are we on UFGD429? 5 MR. VILLA: You have a different Bates 6 stamp, but my Bates stamp -- it would be Page 6 of 7 the document. 8 MR. RINALDI: And we're talking about 9 the last paragraph? 10 MR. VILLA: I believe so, yes. 11 Q. (BY MR. VILLA) And this would have 12 been about that time, sir? 13 A. Yes, sir. 14 Q. Now, let's go to the October 27, 1988 15 letter that I previously have shown you which is 16 the letter from Mr. Twomey to the board of 17 directors of United Savings Association of Texas. 18 Do you see that? 19 A. Yes, sir, I do. 20 MR. RINALDI: I'm sorry. Which 21 exhibit, John? 22 MR. VILLA: It's Exhibit B2487, and 16138 1 it's Tab 98. It's the Twomey letter. 2 Q. (BY MR. VILLA) When you received this 3 document, sir, this letter from Mr. Twomey, did it 4 come as a surprise to you? 5 A. I was flabbergasted. 6 Q. What was the reaction of the UFG 7 management and -- I'm sorry -- the reaction of the 8 management of UFG and USAT to Mr. Twomey's 9 criticism, as far as you could tell? 10 A. I think we tried to -- I think we tried 11 to do what Mr. Twomey wanted done. I mean, I 12 think management was extremely surprised. I know 13 I personally was very surprised by it, and I 14 believe that we -- steps were taken to try to 15 abide by the directives. 16 Q. Let me direct your attention to the 17 next document, which is Exhibit T8120 and in 18 evidence at Tab 449. And it's Mr. Berner's letter 19 to Neil Twomey. 20 Do you have that, sir? 21 A. Yes, sir, I do. 22 Q. And when you said that -- 16139 1 MR. VILLA: Give Mr. Rinaldi a moment 2 to -- 3 MR. RINALDI: I'm sorry. Which letter 4 are we talking about now? 5 MR. VILLA: It's the November 1988 6 letter from Mr. Berner to Mr. Twomey. 7 MR. RINALDI: This is the one referring 8 to the dissolving the bonuses? 9 MR. VILLA: No, sir. This is 10 Tab 8120 -- oh, yes. That's one of the issues, 11 yes, sir. Tab 8120 -- I'm sorry -- exhibit -- 12 it's Exhibit T8120, and it's Tab 98. No. 13 Tab 449. I've spent too much time in the 14 courtroom with my colleague, Mr. Guido. 15 MR. GUIDO: Thank you for the 16 compliment. 17 Q. (BY MR. VILLA) Now, sir, you told us 18 that United's management -- and that's both USAT 19 and UFG I use in this term or the management of 20 both of them -- attempted to respond to 21 Mr. Twomey's criticisms. Right? 22 A. Yes, sir. 16140 1 Q. And is this letter of November 7, 1988, 2 one step in that response? 3 A. Yes, sir, it is. 4 Q. Let me direct your attention to the 5 paragraph numbered one on the first page. 6 Do you see that? 7 A. Yes, sir. 8 Q. It says, "All moneys previously put 9 into escrow for payment, senior executive employee 10 bonus plan, and as security for such executive 11 severance benefits are in the process of being and 12 will be removed from escrow and returned to the 13 association. This should be completed within a 14 week." 15 Do you see that, sir? 16 A. Yes, sir, I do. 17 Q. Now, do you recall, sir, that the 18 senior management of the association -- that is to 19 say people even higher on the totem pole -- asked 20 that all people or all officers who had entered 21 into these -- or who were beneficiaries of 22 these -- strike that. 16141 1 Do you recall, sir, that there came a 2 time right about early November 1988 when you were 3 asked to execute waivers and releases and other 4 legal documents authorizing the banks that held 5 the money for your severance benefits and the 6 money for your executive bonus to return that 7 money to United? 8 Do you remember that, sir? 9 A. Yes, sir. I remember being told to do 10 that. 11 Q. You were told to execute releases and 12 waivers to effectuate the return of the money? 13 A. Yes, sir. 14 Q. And you didn't -- I'm sorry. 15 A. I would put it "ask/told" to do it. 16 Q. Well, let's take a look at the next 17 exhibit, which is B4222. And we might as well 18 hand out B4223, as well. 19 Do you see those, sir? 20 A. Yes, sir, I do. 21 Q. And B4222 is a packet of -- I don't 22 know what we want to call them. They are 16142 1 agreements that relate to the severance benefits 2 and the moneys being held by First City Bank? 3 A. Yes, sir. 4 Q. And about three pages into it is one of 5 the agreements that you executed to allow for your 6 severance benefits from First City Bank to be 7 returned to United; isn't that right? 8 A. Yes, sir. 9 Q. And that's your signature on the 10 document? 11 A. It certainly is. 12 Q. And it's dated November 7, 1988, the 13 same day as Mr. Berner's letter? 14 A. Yes, sir. 15 MR. VILLA: Your Honor, I move 4222 16 into evidence. 17 MR. RINALDI: No objection, Your Honor. 18 Q. (BY MR. VILLA) Now, let's look at the 19 next exhibit, which is Exhibit B4223. 20 Do you see that? 21 A. Yes, sir. 22 Q. And is that a packet of agreements also 16143 1 dated November 7, 1988, that relate to the bonus 2 moneys, the bonus moneys that had been bouncing 3 back and forth? 4 A. That's the Texas Commerce bonus moneys? 5 Q. Yes, sir. 6 A. Yes, sir, I do see that. 7 Q. Okay. And if you look at the third 8 page in, is that an agreement that you signed 9 dated November 7, 1988, authorizing the return of 10 the bonus moneys that are then being held by -- 11 for you by Texas Commerce Bank? 12 A. It is. 13 MR. VILLA: Your Honor, I move 4223 14 into evidence. 15 MR. GUIDO: No objection, Your Honor. 16 THE COURT: All right. Received. And 17 I didn't receive B4222. That is also received. 18 Q. (BY MR. VILLA) Now, do you recall, 19 sir, that there were some problems in getting the 20 money back from Texas Commerce Bank the second 21 time? 22 A. Yes, sir, I do. 16144 1 Q. And First City sent back the severance 2 moneys. Right? 3 A. They did. 4 Q. But Texas Commerce Bank balked at 5 returning them the second time. 6 Do you remember that, sir? 7 A. Yes, sir, I do. 8 Q. And do you recall that you were asked 9 from time to time to execute additional documents 10 to try to induce Texas Commerce Bank to give back 11 the bonus moneys? 12 A. Yeah. I remember talking to them and 13 cajoling and sending them more legal-type 14 documents to give back the money. 15 Q. Let me show you what's been marked as 16 Exhibit B4224. It's the next document in there. 17 Do you see that? 18 A. Yes, sir. 19 Q. And is that the -- I'm sorry. 20 Can you tell us what that is? 21 A. That's a letter to Lynne Shannon, who 22 was the trust officer related to this matter, from 16145 1 me. I haven't read the letter in a long time, but 2 I think I'm saying, "Please give us the money 3 back." 4 Q. And you're enclosing, if you look at 5 the first two pages after the letter, something 6 called a written memorandum of disclaimer and 7 renunciation. 8 Do you see that? 9 A. Yes, sir. 10 Q. Pretty legal, huh? 11 A. That was pretty legal. 12 Q. And you executed it on the second page. 13 Right? 14 A. Yes, sir, I did. 15 MR. VILLA: Your Honor, I move B4224 16 into evidence. 17 MR. RINALDI: No objection, Your Honor. 18 THE COURT: Received. 19 Q. (BY MR. VILLA) Do you know, sir, 20 whether USAT got the money back from Texas 21 Commerce Bank before the receivership? 22 A. I don't think Texas Commerce would ever 16146 1 give the money back, no. 2 Q. And do you recall that that was the 3 money that was ultimately involved in litigation 4 over the proceeds of the Texas Commerce Bank trust 5 or escrow? 6 A. Oh, yes, sir. I remember that. 7 Q. And a number of the employees were able 8 to recover their moneys from trust, weren't they, 9 sir? 10 A. Yes, sir. 11 Q. But you weren't; isn't that right? 12 A. That is correct. 13 Q. You got zero? 14 A. Zero. 15 THE COURT: We'll recess until 1:30. 16 17 (Whereupon, a lunch break was taken 18 from 12:08 p.m. to 1:35 p.m.) 19 20 THE COURT: Be seated, please. We'll 21 be back on the record. 22 Mr. Villa, you may continue. 16147 1 MR. VILLA: Thank you. 2 Q. (BY MR. VILLA) Mr. Crow, when we 3 broke, we were talking about various waivers and 4 releases that you had signed in connection with 5 the bonus amounts or moneys that were being held 6 by Texas Commerce Bank. 7 Do you remember that, sir? 8 A. Yes, sir, I do. 9 Q. And you said that you had signed a 10 number of them, and we had seen a couple in the 11 record already. Right? 12 A. Yes, sir. 13 Q. And we also talked about the litigation 14 involving the Texas Commerce Bank moneys being 15 held in trust and the fact that you lost. Right? 16 A. That is correct. 17 Q. Do you recall why you lost? 18 A. As best -- I don't remember all the 19 technical reasons; but in layman's terms, it was 20 because I signed a release of the funds. 21 Q. It was because of the releases and 22 waivers that we have just introduced into the 16148 1 record that you weren't able to recover on the 2 moneys held by Texas Commerce Bank; isn't that 3 right, sir? 4 A. That is correct. 5 Q. And do you recall whether the junior 6 officers were able to recover their money? 7 A. Yes, sir. All of the -- to my memory, 8 all of the officers that had not signed the 9 releases and waivers did, in fact, collect their 10 money. 11 Q. So, senior management just asked you 12 and Mr. Berner and a couple of other people to 13 execute these waivers and releases, and 14 ultimately, they were the reason that you didn't 15 get the money under the bonus plan. Right? 16 A. That is correct. 17 Q. And everybody else did? 18 A. All of the -- the more-junior people 19 did, yes, sir. 20 Q. We saw that list of about 40 people? 21 A. Yes, sir. 22 Q. Okay. Now, let me ask you, in Book 2 16149 1 there, to look back at Exhibit T8120, which is 2 about halfway through the book. It's Mr. Berner's 3 letter of November 7, 1988, responding to Neil 4 Twomey. 5 Do you see that, sir? 6 A. Yes, sir, I do. 7 Q. Would you look at the Entry No. 2, 8 Paragraph No. 2 on that document, sir? 9 A. Yes, sir. 10 Q. On the first page. Can you explain to 11 the Court what that refers to? 12 A. That refers to charging back a portion 13 of the compensation or salaries to 14 United Financial Group. In other words, United 15 Savings would get a credit for that portion of the 16 expense and United Financial Group would take 17 the -- have the charge. 18 Q. So, the person -- the individual's 19 services are allocated between the two employers 20 and, since United Savings had paid all the money 21 to that point, there was a redistribution or 22 reallocation of the money between the two. 16150 1 Is that what you're saying? 2 A. Right. Explained another way, in my 3 case, the allocation was 25 percent. So, after 4 the allocation, 75 percent of my compensation or 5 salary would be paid by United Savings and 6 25 percent would be paid by United Financial 7 Group. 8 Q. Now, sir, do you believe that that 9 allocation was ever implemented and the moneys 10 transferred between the companies? 11 A. Yes, sir, I do. 12 Q. Let me ask you to look at 13 Exhibit B2646, which should be the next -- well, 14 it's actually a couple of documents down. 15 Do you see that, sir? 16 A. Yes, sir. 17 Q. Can you tell the Court what that is? 18 A. These are general ledger pages from 19 both United Savings and United Financial Group. 20 Q. And while you were employed by United 21 Savings and United Financial Group, did you work 22 with the general ledger? 16151 1 A. I worked with it from time to time. It 2 wasn't an every day event, but certainly from time 3 to time. 4 Q. And you would have had an opportunity 5 to review these documents before today; is that 6 right, sir? 7 A. I have. 8 MR. VILLA: Your Honor, I move B2646 9 into evidence. 10 MR. GUIDO: No objection, Your Honor. 11 THE COURT: Received. 12 Q. (BY MR. VILLA) Now, sir, I'd like you 13 to please take a moment and review these pages. 14 And from taking a look at them, can you tell 15 whether the reimbursement that's referred to in 16 Mr. Berner's November 7 letter was accomplished? 17 A. Yes, sir, I can. 18 Q. And would you tell the Court how -- and 19 I didn't mark the pages; so, if you'll tell him -- 20 if you'll tell the Court roughly on what page and 21 about how far down the entry is. 22 A. Yes, sir. If -- the best way probably 16152 1 to explain it is to start on Page 3 of this 2 general ledger package. And Page 3 is the United 3 Savings Association of Texas general ledger sheet. 4 And if you would focus on the far right-hand 5 column where it says "balance," and we have the 6 first entry is employees -- excuse me -- is 7 "compensation - employees." And the total there 8 is 13,432,992. 9 Then if you drop down, the next figure 10 there that appears is a deduction from United 11 Savings in "compensation - employees," and that's 12 an expense account, in the amount of 290,863. And 13 you can see -- 14 Q. 863.77? 15 A. That is correct. 16 Q. And it says "CR" next to it? 17 A. And that's a credit. Therefore, it is 18 reducing United Savings' employee compensation 19 expense. And now if we could just keep in mind 20 that 290,000-dollar number and move back to 21 Page 1, this is a United Financial Group general 22 ledger page. And again, if you would focus 16153 1 approximately halfway down the page, you'll find 2 that 290,000-dollar 863.77 figure. And if you'll 3 look over to the left, the caption, it says "AP, 4 United Savings Association of Texas." And "AP" 5 means accounts payable. So, that is the transfer. 6 Q. Can you give us the simple answer now? 7 A. I thought that was simple. 8 Q. Okay. 9 A. Basically, it's -- in this type 10 transaction, you're reducing United Savings' 11 compensation expenses or, you know, just using -- 12 it's the salary expenses. You're reducing it by 13 290,000. And it's being reduced because of a 14 transfer or a payable set up on the books of 15 United Financial Group. 16 So, basically, you're transferring an 17 expense from United Savings to United Financial 18 Group. That's the simple explanation. 19 Q. And there are a number of other 20 intercompany transactions between the companies 21 that would be netted out at year end? 22 A. That's correct. 16154 1 Q. And this would be one that would be 2 taken into consideration? 3 A. That is correct. 4 Q. Assuming there weren't a receivership 5 and all other intervening events that might affect 6 it. Right? 7 A. That's correct. 8 Q. But as far as the management of United 9 affecting such a transfer, this is the way you 10 would do it; is that right? 11 A. Oh, absolutely. 12 Q. Now, how do you know that the $290,000 13 is related to the salary numbers that we saw on 14 Mr. Berner's letter of November 7th? 15 A. Which exhibit was that, Mr. Villa? 16 Q. That is 8120. T8120, Tab 449. 17 A. I -- what I did is I took the salary 18 figures for the various people listed here -- 19 Jenard Gross, Michael Crow, Arthur Berner, et 20 cetera -- and applied the percentages and I came 21 up with a number that approximates that 290,000. 22 It is not exact, and I believe the reason it's not 16155 1 exact is I don't know exactly when, for example, 2 Mr. Connell arrived at United. It wasn't on 3 January 1st. And I don't -- I didn't know when to 4 start taking out Mr. Gross' compensation because I 5 think he left the association. 6 So, there's little glitches there; but 7 the number was so close and the entry is of such 8 that I'm highly confident that that's what it is. 9 Q. Now, let me ask you to direct your 10 attention to a document that's already in evidence 11 which is the -- at T8117. And it's been admitted 12 at Tab 447. It is the USAT board minutes of 13 November 7 of 1988. 14 Do you have that in front of you, sir? 15 A. Yes, I do. 16 Q. I'd like to direct your attention to 17 Page 3 of that document. And the entry -- the 18 second entry from the bottom, the "further 19 resolved," do you see that? 20 A. Yes, sir. 21 Q. It says, quote, "Further resolved that 22 the board of directors does hereby approve the 16156 1 retention of the Wyatt Company to prepare a report 2 relating to the compensation levels of the 3 association's key executive employees." 4 Now, you had previously told us 5 about -- you had previously mentioned the Wyatt 6 Company. Do you remember that? 7 A. Yes, sir, I do. 8 Q. Why did USAT hire the Wyatt Company in 9 the time period of November 4, 1988? 10 A. I believe it was subsequent to 11 Mr. Twomey's letter that was received sometime in 12 October that we looked at this morning. And the 13 best of my memory is the Wyatt Company was hired 14 to take another look at our compensation 15 practices. I remembered that -- I believe it was 16 Hewitt -- the consulting firm of Hewitt, if I've 17 got the name correctly, had been previously hired. 18 And I believe now, it was to get a second opinion, 19 if you will. 20 Q. Do you recall, sir, what conclusions 21 Wyatt reached with respect to your particular 22 compensation? 16157 1 A. I saw my sheet or the -- the section 2 that dealt with CFOs, and they concluded that it 3 was well within the market norm. 4 Q. Did there come a time, Mr. Crow, when 5 you resigned from the board of directors of 6 United Financial Group? 7 A. Yes. 8 Q. Let me show you what's been marked as 9 Exhibit B2593. 10 Do you see that document, sir? 11 A. Yes, sir, I do. 12 Q. Is that your notice of resignation? 13 A. Yes, it is. 14 MR. VILLA: I move B2593 into evidence. 15 MR. GUIDO: No objection. 16 THE COURT: Received. 17 Q. (BY MR. VILLA) In the second sentence 18 of the first paragraph, it says, quote, "This 19 action results from an untenable conflict of 20 interest situation between the interests of UFG, 21 United Savings Association of Texas (USAT) and my 22 possible future employment by the new owners of 16158 1 USAT." 2 Do you see that, sir? 3 A. I do. 4 Q. Did you believe in early December 1988 5 that they were -- that you were going to be 6 employed by the, quote, "new owners of USAT"? 7 A. Yes, sir, I did. 8 Q. Who did you expect the new owners of 9 USAT to be? 10 A. Ranieri Wilson. 11 Q. And that's Mr. Ranieri who's been 12 referred to in this courtroom? 13 A. Yes, sir. 14 Q. And they ended up being the new owners 15 of USAT; isn't that right? 16 A. That is correct. 17 Q. What led you to believe, Mr. Crow, that 18 Ranieri Wilson -- in this period in December, the 19 first half of December of 1988, what led you to 20 believe that Ranieri Wilson were going to be the 21 new owners of USAT? 22 A. I don't remember who told me that, but 16159 1 it was -- it was becoming ultimately very obvious 2 to me in that a number of people from Ranieri 3 Wilson were at United's offices. I attended a 4 number of meetings with representatives of Ranieri 5 Wilson and the Federal Home Loan Bank, and we were 6 undergoing transactions or executing transactions 7 that were suggested by Ranieri Wilson. And at 8 this time, we were under a consent agreement; so, 9 whenever someone like Mr. Twomey approved it, we 10 did it. 11 And that's -- that was my net 12 conclusion as to why Ranieri Wilson was going to 13 take over. And I'm sure somebody told me that. I 14 just don't remember who and when. 15 Q. Well, why don't you explain to the 16 Court why it is that Ranieri Wilson's impact on 17 United's transactions in December of 1988 would be 18 a conflict of interest with your position as the 19 director of UFGI? 20 A. Well, we were selling fairly large 21 blocks of bonds and liquidating some -- as I 22 recall, if I'm not mistaken, some fairly good -- 16160 1 significant hedge positions on, it seemed to me, 2 almost a fire sale basis. And basically, some of 3 the transactions -- they were very large. They 4 were large blocks. I remember at least one 5 transaction that was done on -- at a very tight 6 time frame -- in other words, very short notice -- 7 using one broker. And whenever you liquidate a 8 large block of bonds and you give a broker an 9 exclusive, in my opinion, that's an invitation to 10 not get the best price that's achievable in the 11 market, to say the least. And so, that was Issue 12 No. 1. 13 And then I had a concern, you know, 14 from UFG's standpoint whether it was even 15 desirable to sell what we were selling in the 16 first place. You know, were conditions right to 17 be selling it? Did we need to sell it? So, it 18 seemed to me I couldn't -- you know, during this 19 time frame, my mind was like, "Well, can I be 20 working, in effect, for the new owners of United 21 Savings and executing orders for, you know, on 22 behalf of the Federal Home Loan Bank and be a 16161 1 director of UFG at the same time?" And I 2 concluded I couldn't. 3 Q. Would you explain to us again why you 4 felt that you were obliged to follow any 5 directions that came directly or indirectly from 6 Ranieri Wilson? 7 A. I was -- why? Because typically, the 8 meetings -- well, it wasn't always; but 9 oftentimes, the meetings would be with a 10 representative of the Federal Home Loan Bank 11 sitting at the meeting. And Ranieri Wilson would 12 make a suggestion. And, you know, I always tried 13 to make sure that I had authorization -- I didn't 14 look to Ranieri Wilson to give me my marching 15 orders. I looked to the Federal Home Loan Bank. 16 But it seemed to me it was going from Ranieri 17 Wilson to the Federal Home Loan Bank and then to 18 me. 19 Q. And why were you obliged, in your 20 judgment, to follow the directions of Mr. Twomey 21 from the Federal Home Loan Bank of Dallas to 22 execute transactions? 16162 1 A. I believe we were -- at this time, we 2 were under a consent agreement. And I'm not an 3 attorney, but basically, I think that means you do 4 what they say, period. 5 Q. Let me direct your attention to the 6 next document, which is Exhibit B2610, which is in 7 evidence at Tab 1283. 8 Do you see that, sir? 9 A. Yes, sir, I do. 10 Q. Now, does this memorandum describe one 11 of the meetings that we were talking -- that you 12 just described to the Court where Ranieri Wilson 13 made a suggestion and then Mr. Twomey directed, in 14 effect, that USAT conduct the transaction? 15 A. Yes, it does. 16 Q. Who, in your judgment, would benefit 17 from a large -- from selling large amounts of 18 USAT's assets, particularly assets which may not 19 be covered by an assistance agreement? 20 A. I didn't understand all the mechanics, 21 but I had assumed that that would be the new 22 owners: Ranieri Wilson. 16163 1 Q. And who would suffer the losses if 2 these transactions were executed in a way that was 3 not commercially reasonable or incurred additional 4 damages to USAT? 5 A. That would be the old owners of United 6 Savings: Namely, United Financial Group. And I 7 might add, you know, in -- I was somewhat -- I 8 don't know whether paranoid is the process or the 9 proper word; but in one paragraph here, I say, 10 quote -- and it's on the second page. I remember 11 this pretty vividly. Specifically, "I," meaning 12 Mike Crow, "requested that two gentlemen from the 13 Home Loan Bank take responsibility for ensuring 14 that the prices obtained for the securities were 15 reasonable. Mr. Twomey, after some consultation 16 with Mr. Scott, agreed that some type of oversight 17 arrangement by the Federal Home Loan Bank would be 18 arranged" because I -- you know, I was kind of 19 concerned that if you give a broker an exclusive 20 arrangement and you liquidate a large block of 21 securities, you're asking to get your head taken 22 off. 16164 1 Q. Now, I may be wrong. But does this 2 memo describe -- describes one transaction, 3 doesn't it? Is this the $1.2 billion in 4 mortgage-backs? 5 A. Let's see. I think it is the 1 -- 6 yeah. This is approximately 1.2 billion. 7 Q. Okay. Sir, were you employed by the 8 new owners once USAT was taken over? 9 A. No, sir. 10 Q. What happened to you? 11 A. I received a notice of termination by 12 the regulators on December 30th. I was home ill. 13 So, I got fired over the telephone and then they 14 delivered a letter to my house. 15 Q. What actions, if any, did you take in 16 response to the fact that you had been fired from 17 USAT? 18 A. I basically was pretty sad for a while, 19 and then I made a claim under my employment 20 contract to United Financial Group. 21 Q. And did you also make a claim under 22 your stock loan agreement? 16165 1 A. I did, yes, sir. Under both 2 agreements. 3 Q. Okay. Let me direct your attention to 4 what's been marked as Exhibit B2689. 5 What is that document, sir? 6 A. This is my notification to Dr. Barry 7 Munitz that I was making claim under the stock 8 bonus arrangement to have my stock loan 9 extinguished. 10 MR. VILLA: Your Honor, I move B2689 11 into evidence. 12 MR. GUIDO: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MR. VILLA) Let me ask you to turn 15 to the next document, which is B2700, 16 Exhibit B2700. 17 Do you see that? 18 A. Yes, sir, I do. 19 Q. And what is that, Mr. Crow? 20 A. This is my agreement with Art Berner, 21 representing United Financial Group, agreeing to 22 extinguish the debt in return for all rights to 16166 1 the stock. 2 Q. And did you execute that? 3 A. Yes, sir, I did. 4 MR. VILLA: Your Honor, I move 5 Exhibit B2700 into evidence. 6 MR. GUIDO: No objection, Your Honor. 7 THE COURT: Received. 8 Q. (BY MR. VILLA) Now, sir, I notice 9 that the letter is addressed to you at Montrose 10 Apartment 20D. 11 Do you see that? 12 A. Yes, sir. 13 Q. Did you have an office at -- strike 14 that. 15 After you were terminated from USAT, 16 were you given an office and a secretary and 17 duties to perform? 18 A. No, sir. 19 Q. And you made a demand -- I'm sorry. 20 Before we do that, let's look at the next exhibit, 21 which is Exhibit B2889. 22 Now, sir, did there come a time after 16167 1 you were released from your stock loan that an 2 issue arose with the Internal Revenue Service as 3 to whether or not the release of the stock loan 4 should be deemed as income to you? 5 A. Yes, sir, there sure did. 6 Q. And was that issue negotiated between 7 you and the Internal Revenue Service and your 8 agents over a period of a year or two? 9 A. Yes, sir, it was. 10 Q. And did they finally reach a 11 resolution, sir? 12 A. They did. 13 Q. And what was the resolution? 14 A. That I didn't owe any tax on that 15 because basically, as best I understood it, they 16 deemed it not to be income. 17 Q. And is that reflected in what's been 18 shown here as Exhibit B2889? Is that the last 19 letter that you recall in that exchange? 20 A. It is. 21 MR. VILLA: Your Honor, I move B2889 22 into evidence. 16168 1 MR. GUIDO: No objection, Your Honor. 2 THE COURT: Received. 3 Q. (BY MR. VILLA) I was starting to 4 explore with you your office situation after 5 June -- after January 1, 1989. And I think you 6 told us you didn't have an office, you didn't have 7 a secretary. You no longer had any duties to 8 perform; is that right? 9 A. That is correct. 10 Q. Let me show you what's been marked as 11 B2688, the next document. It's a memorandum from 12 you to Barry Munitz, the CEO of United Financial 13 Group dated January 4, 1989. 14 What is that, sir? 15 A. That is my letter to Dr. Munitz 16 basically claiming my rights under the employment 17 agreement. 18 Q. And this is the employment agreement 19 with United Financial Group? 20 A. That is correct. 21 MR. VILLA: Your Honor, I move B2688 22 into evidence. 16169 1 MR. GUIDO: No objection, Your Honor. 2 THE COURT: Received. 3 Q. (BY MR. VILLA) Mr. Crow, did you 4 consider this to be a voluntary termination? 5 A. Well, I suppose I could have done 6 nothing and, you know, stayed around and see if I 7 got fired by United Financial Group; but instead, 8 I just elected to exercise my rights under the 9 employment agreement because, as a matter of fact, 10 I had no duties, no office. So, it seemed like 11 there was no point. So, I opted to take this 12 route. 13 Q. So, you voluntarily asserted your 14 rights under the employment agreement; is that 15 right, sir? 16 A. Yes, sir. 17 Q. And under this document, I see that 18 you're claiming $606,000 in severance and, I 19 believe $81,000, if you look at the next page, in 20 bonus. 21 Do you see that? 22 A. Yes, sir, I do. 16170 1 Q. So, that's -- I'm a lawyer, not an 2 accountant, but that's approaching $690,000. 3 Right? 4 A. Right. 5 Q. Let me ask you to look at 6 Exhibit B2701, which is a separation agreement 7 dated January 19, 1989. 8 Do you have that before you, sir? 9 A. I do. 10 Q. And it bears your signature; is that 11 right? 12 A. Yes, it does. 13 MR. VILLA: Move B2701 into evidence. 14 MR. GUIDO: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MR. VILLA) Now, sir, do you 17 recall what the general structure was of this 18 agreement? 19 A. Yes, sir. I negotiated with, I 20 believe, Dr. Munitz and Mr. Berner a separation 21 arrangement where I would receive some funds and 22 it would be mitigated when I found a job. I don't 16171 1 remember the exact numbers, but that was the crux 2 of it. 3 Q. I notice this copy of the agreement 4 bears your signature but no signature for UFG. 5 Do you recall whether this agreement 6 was ever consummated? 7 A. It was not. 8 Q. Do you know why? 9 A. I was -- yes. It was not approved by 10 the regulatory authorities. 11 Q. I'm going to show you what's been 12 marked as B -- Exhibit B2724. It's a letter dated 13 February 6, 1989, from Clarence Meyer to Arthur 14 Berner. 15 Do you see that, sir? 16 A. Yes, sir, I do. 17 Q. And was Mr. Meyer your lawyer during 18 that time period? 19 A. He was. 20 MR. VILLA: Your Honor, I move B2724 21 into evidence. 22 MR. GUIDO: No objection, Your Honor. 16172 1 THE COURT: Received. 2 Q. (BY MR. VILLA) Now, sir, you told us 3 that your settlement, your proposed settlement 4 that we just saw, had been rejected by the 5 regulatory authorities is what you understood. 6 Let me direct your attention to the 7 second and third paragraphs of Mr. Meyer's letter 8 and ask you -- particularly, the last sentence of 9 the third paragraph where it says, "In as much as 10 the separation agreements have not been accepted 11 or agreed to by either the United Financial Group, 12 Inc. or the FSLIC, it would appear that any 13 agreements should be deferred until all parties 14 concur." 15 Do you see that, sir? 16 A. I do. 17 Q. And is that consistent with your 18 recollection that United Financial Group wouldn't 19 enter into a separation agreement with you unless 20 FSLIC concurred? 21 A. That's consistent with my memory, yes. 22 Q. Now, I notice that you've hired a 16173 1 lawyer at this point: Mr. Meyer. 2 Why did you retain counsel? 3 A. Because I felt like I had a valid 4 contract and had certainly been separated. My 5 employment had been terminated, and I felt like I 6 was entitled to severance benefits. And I was -- 7 you know, basically, the people at 8 United Financial Group, it was pretty arm's length 9 negotiation. It wasn't buddy-buddy. 10 Q. In fact, you sued United Financial 11 Group, didn't you, sir? 12 A. Yes, sir. 13 Q. Or actually, it was an arbitration. 14 Right? 15 A. It was an arbitration, yes, sir. 16 Q. And let's look at the next exhibit. 17 This is B2739. 18 Can you tell me what B2739 is, sir? 19 A. I believe that this is a letter from 20 Ms. Jacobs who -- or Ms. Jacob, who was in the 21 Clarence Meyer law firm, to the American 22 Arbitration Association, basically making a demand 16174 1 for arbitration on the contract. 2 Q. And attached to it is the actual 3 demand. Right? 4 A. Yes, it is. 5 Q. And basically, a demand for arbitration 6 is the same thing as a complaint in a lawsuit. 7 Do you understand that, sir? 8 A. I don't quite understand that, but I 9 knew it was fundamentally the same thing, that 10 you're going to go argue with a bunch of lawyers, 11 yes, sir. 12 MR. VILLA: I move Exhibit B2739 into 13 evidence. 14 MR. GUIDO: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MR. VILLA) So, now, you're 17 initiating formal proceedings against 18 United Financial Group; is that right, sir? 19 A. That is correct. 20 Q. And the negotiations begin between your 21 attorney and Mr. Berner. Right? 22 A. That is correct. 16175 1 Q. Let me ask you to look at B2759, which 2 is the next document. This is a letter from 3 Martha Jacob to Mr. Berner dated April 7, 1989. 4 Right? 5 A. It is. 6 Q. And it's -- at that point, Ms. Jacob 7 was acting as your attorney? 8 A. That is correct. It was the same law 9 firm. Martha Jacob was just one of the attorneys 10 at Clarence Meyer's law firm. 11 MR. VILLA: Your Honor, I move B2759 12 into evidence. 13 MR. GUIDO: No objection, Your Honor. 14 THE COURT: Received. 15 Q. (BY MR. VILLA) Now, if you take a 16 look at the second page of this letter, Ms. Jacob 17 is turning town an offer of $100,000 from 18 Mr. Berner; is that right? 19 A. That is correct. 20 Q. And do you recall, sir, that there was 21 an offer from United Financial Group of $100,000 22 which was turned down? 16176 1 A. Yes, I do. 2 Q. I see on that second page, a "CC" for 3 you, Mr. Crow, in Tulsa, Oklahoma? 4 A. Yes, sir. 5 Q. And at that point, had you secured a 6 new job and moved to Tulsa? 7 A. Yes, sir, I had. 8 Q. And that was the job you told 9 Mr. Schwartz, I believe, about in your -- or 10 perhaps Mr. Rinaldi -- in your earlier 11 questioning. Right? 12 A. That is correct. 13 Q. Would you look at the next document, 14 which is Exhibit B2762. It's a letter dated 15 April 11, 1989, from Ms. Jacob to Mr. Berner 16 again. 17 Is this further negotiations between 18 the lawyers? 19 A. Yes, sir, it is. 20 Q. And in this letter -- I'm sorry. 21 MR. VILLA: I move B2762 into evidence. 22 MR. GUIDO: No objection, Your Honor. 16177 1 THE COURT: Received. 2 Q. (BY MR. VILLA) And in this letter, 3 you're expressing a willingness -- she's 4 expressing a willingness as your agent to accept 5 $375,000 plus attorneys' fees for your severance. 6 Right? 7 A. That is correct. 8 Q. Severance and bonus, I suppose, since I 9 think you probably are alleging both of them. 10 A. Right. 11 Q. And your demand was 688,000, and here 12 your lawyer is saying that she's willing to accept 13 377,000; is that right? 14 A. That's correct. 15 Q. Now, do you remember a man named Currie 16 Bechtel from Hutcheson & Grundy? 17 A. Vividly. 18 Q. Pardon? 19 A. Vividly. 20 Q. And Mr. Bechtel -- who did Mr. Bechtel 21 represent? 22 A. The -- I believe he was an attorney for 16178 1 the FSLIC, and I think he's one of the people that 2 was involved in my termination and subsequent -- 3 making an appointment to go pick up my personal 4 effects at United Savings and that sort of thing. 5 Q. Let me show you what's been marked as 6 B2780. 7 Do you see that, sir? 8 A. Yes, I do. 9 Q. And is this a letter from your lawyer 10 to Mr. Bechtel with a copy to you and 11 Mr. Williams? 12 A. Yes, it is. 13 MR. VILLA: I move B2780 into evidence. 14 MR. GUIDO: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MR. VILLA) So, at some point, did 17 your lawyer begin negotiating directly with the 18 FSLIC over what would be an acceptable severance 19 payment for you? 20 A. That is -- that was my understanding. 21 Q. And, in fact, in this letter of 22 June 2nd, 1989, there is a statement at the 16179 1 beginning of the third paragraph with respect to 2 six months' salary or $140,000. Right? 3 A. Yes, sir. 4 Q. And do you recall, sir, what your 5 ultimate severance payment was from UFG? 6 A. I believe it was very close to this 7 figure. As I recall, it was six months' salary 8 plus my attorneys' fees. 9 Q. The attorneys' fees you incurred in the 10 arbitration case? 11 A. Yes, sir. 12 Q. I'd like you to look at the next 13 document, which is Exhibit T8156. It's in 14 evidence as Tab 457. 15 MR. VILLA: Mr. Langdon, can you tell 16 me whether I offered B2780? 17 MR. LANGDON: Uh-huh. 18 MR. VILLA: And it was received? 19 MR. LANGDON: Uh-huh. 20 MR. VILLA: Thank you. 21 Q. (BY MR. VILLA) Now, sir, I'd like you 22 to look at the second page of this exhibit. And 16180 1 does this show the amounts received by various 2 former officers of UFG and USAT under their 3 contracts? 4 A. Yes, sir, it does. 5 Q. And your percentage is 21.7 percent? 6 A. It is. 7 Q. And it seems to be generally in line 8 with that of all the others; isn't that right, 9 sir? 10 A. Yes, in percentage terms, certainly. 11 Q. And the amount paid is $142,528? 12 A. That is correct. 13 Q. And that's consistent with the 14 negotiations between your lawyer and Mr. Bechtel 15 representing the FSLIC. Right? 16 A. The numbers are -- yeah. They are the 17 same. Basically, it -- 140,000 is mentioned, and 18 then I'm assuming the difference is attorneys 19 fees. 20 Q. And the last part of that exhibit is, 21 in fact, the agreement and release, isn't it, sir? 22 A. Yes, it is. 16181 1 Q. So, was it your understanding, sir, at 2 the time you received the $142,000 under this 3 agreement, that your agreement had been approved 4 by the FSLIC? 5 A. Yes, sir. 6 Q. And was it also your understanding that 7 the FSLIC had vetoed an earlier agreement and 8 that's why you didn't get the agreement you saw 9 January of 1989? 10 A. Yes. 11 Q. And many of the other former employees 12 are in the same situation: Mr. Williams, Bruce 13 Williams, Jeff Gray, Jim Wolfe, Jim Jackson, Gene 14 Stodart. 15 We saw them all. Right? 16 A. That is correct. 17 Q. Your percentage is no different than 18 theirs, is it? 19 A. No, it is not. 20 Q. And you had to file an arbitration 21 action in order to get it, didn't you, sir? 22 A. I did. 16182 1 Q. Now, sir, just so we understand how 2 much you received after the termination by the 3 FSLIC at the end of 1988, you got zero dollars 4 under the executive bonus plan. Right? 5 A. That is correct. 6 Q. And that's because you had executed the 7 waivers that you had been asked to execute. 8 Right? 9 A. That's correct. 10 Q. And I show you -- if you look at the 11 next exhibit, it's Exhibit B3808. 12 Do you see that, sir? 13 A. Yes, I do. 14 Q. And is that the decision of the court 15 that you had previously referred to that gave all 16 of the other employees except the senior people 17 that signed their waivers the money under the 18 executive bonus plan but denied you yours? 19 A. Yes, sir, that is. 20 MR. VILLA: I move B3808 into evidence. 21 MR. GUIDO: No objection, Your Honor. 22 THE COURT: Received. 16183 1 Q. (BY MR. VILLA) So, you got zero under 2 the executive bonus plan as we've just seen. 3 Right? 4 A. That is correct. 5 Q. On your severance payments, you got 6 $142,000, which was six months' salary, that you 7 had to file an arbitration in order to recover. 8 Right? 9 A. That is correct. 10 Q. And in the arbitration, it was your 11 understanding that the FSLIC approved the payment. 12 Is that also right? 13 A. That was my understanding, yes, sir. 14 Q. And you were treated no differently 15 than the other former employees. Right? 16 A. That is correct. 17 Q. And you were released from your stock 18 loan of about $72,000; is that right? 19 A. That is correct. 20 Q. And the Internal Revenue Service, after 21 reviewing it, concluded that that wasn't even 22 income to you; isn't that right? 16184 1 A. That's correct. 2 Q. Mr. Crow, you heard Mr. Rinaldi ask you 3 a number of questions about your income for the 4 years 1984 through 1988. 5 Do you recall that, sir? 6 A. Yes, sir, I do. 7 Q. And you had -- right at the end of your 8 examination, he had you read off your W-2 income 9 year after year. Right? 10 A. Yes, sir. 11 Q. And it began -- your W-2 income showed 12 for the year 1984 that your income was $95,000. 13 Right? 14 A. I remember that, yes. 15 Q. And I may get the number wrong, but the 16 year -- the income for the year on the W-2 for 17 1988 was about $450,000. 18 Do you remember that, sir? 19 A. In round numbers, I remember it was 20 around 450, yes, sir. 21 Q. So, if you looked at the W-2, it looked 22 like your income went up 500 percent or 16185 1 thereabouts. Right? 2 A. Yes, sir. 3 Q. Now, sir, does the W-2 reflect the 4 amount of income that you received during a given 5 year or the amount of income that you earned 6 during the given year? 7 A. It represents the cash receipts only. 8 It's just a cash receipt-type document. 9 Q. Were those numbers different at USAT, 10 the amount that you received as compared to the 11 amount that you earned for a year's work? 12 A. Absolutely. 13 Q. And how? Explain to the Court. 14 A. Well, using 1984 as an example, well, 15 what happened is whenever you earned a bonus 16 during the year, the bonus was typically paid in 17 the first business day of the following year, 18 typically January 2nd. 19 So, using 1984 as an example, I think I 20 received a salary of 95,000 and received a bonus 21 January 2nd or so of 50,000, and that's the way it 22 worked. And I think in the proxy statement, we 16186 1 used the total compensation number. 2 Q. So, if you looked at your W-2 income 3 for the year 1984, it would show 95,000. Right? 4 A. That is correct. 5 Q. But if you wanted to see what you had 6 been paid for services in 1984, it would be 7 145,000; is that right? 8 A. That is correct. 9 Q. And when you look at the proxy 10 statements, they show the 145,000-dollar number, 11 don't they, sir? 12 A. That's correct. 13 Q. And you confirmed that before you 14 testified. Right? 15 A. I did. 16 Q. Let's go to the other end, the year 17 1988. 18 Do you recall that you received a bonus 19 in early 1988 for 1987 work? Do you remember 20 that, sir? 21 A. I do. 22 Q. And do you remember what the amount of 16187 1 the bonus was? 2 A. $115,000. 3 Q. So, let's assume that your 1988 W-2 4 shows income of about $450,000 from USAT. 5 A. Okay. 6 Q. If I wanted to figure out how much you 7 actually earned during the year 1988, how would I 8 do that? 9 A. You would take the 450,000 and deduct 10 the 115,000 because the 115,000 relates to 1987. 11 Q. Right. That was your bonus for '87 12 that had been paid in early '88, isn't it, sir? 13 A. That's correct. 14 Q. So, if you wanted to compare apples to 15 apples and look at how much you actually earned in 16 cash compensation between 1984 and 1988, it would 17 go from $145,000 to $335,000 over a five-year 18 period; isn't that right, sir? 19 A. That is correct. 20 Q. And does that seem more in line with 21 your recollection than the 500 percent increase 22 that you might conclude by looking just at the 16188 1 W-2s? 2 A. Oh, yeah. 3 Q. And, in fact, as you've pointed out, in 4 UFG's public filings and its proxy statements, it 5 would reflect the actual earnings, not the W-2 6 receipts; isn't that right? 7 A. Absolutely. 8 Q. Now, sir, over that five-year period, 9 to what extent did your duties and 10 responsibilities increase? 11 A. They increased -- from the day I came 12 to United till the day I walked out of United, 13 they increased dramatically. 14 Q. Were there any qualitative increases 15 in, for example, early 1987? 16 A. In terms of title, Mr. Villa? 17 Q. Title, responsibility, additional 18 duties. 19 A. Oh, yes. After Mr. Williams left, my 20 titles, at some point thereupon, became senior 21 executive vice president and I assumed 22 responsibility for the human resources function 16189 1 and basically became Mr. Gross' -- you know, up 2 until this time, Mr. Gross had relied upon 3 Gerry Williams, I think, to handle all of the 4 administrative fire drills, if you will. 5 After Mr. Williams left, I became that 6 person. And, of course, compared to the earlier 7 years, I had responsibility for the 8 mortgage-backed securities, the high-yield bonds, 9 and, you know, as we've discussed in this 10 testimony, during the interim, tacked on the 11 computer department, tacked on savings operations. 12 For a while, loan operations. And, you know, 13 we're talking about -- in savings operations and 14 loan operations, you're talking about 100 plus 15 employees in those two departments. 16 Q. So, over that five-year period, your 17 salary went up from 145 to 335 and your 18 responsibilities increased substantially. 19 Is that fair? 20 A. That is correct. 21 Q. Now, did the other aspects of your 22 compensation go down? For example, the stock 16190 1 option agreement and the performance unit plan 2 between '84 and '88? 3 A. Oh, sure. During the early years, in 4 just '84, '85, the stock options were viewed to be 5 valuable and a potential wealth builder, and the 6 performance unit plan was in the same category. 7 And both of those features, both the performance 8 unit plan and both the stock option plan, had 9 vesting periods. So, it locked you into the 10 company and basically provided a longer-term 11 incentive to stay with the firm. 12 And during the latter part of the year, 13 of my tenure at United, certainly by 1988, both of 14 those features were worthless. 15 Q. Taking into consideration or account 16 both your increased responsibilities and the 17 elimination of these other aspects of your 18 compensation over that five-year period, did you 19 believe that your compensation was unreasonable? 20 A. No, sir. 21 Q. Was it reviewed by two outside 22 consultants? 16191 1 A. Yes, sir. 2 Q. And to your knowledge, did they 3 criticize it as being excessive? 4 A. No, sir. 5 Q. Finally, Mr. Crow, did you set your own 6 salary? 7 A. I never had the pleasure of doing that, 8 Mr. Villa, no, sir. My salary was set by my 9 supervisor and, I'm sure, eventually reviewed in 10 the process of the compensation committee 11 structure. 12 Q. Now, Mr. Crow, what do you understand 13 the term "golden handcuffs" to mean? 14 A. "Golden handcuffs" to me means it's an 15 incentive for a potential reward out in the 16 future. And it typically has a vesting period so 17 that if an employee or an officer leaves before 18 it's vested, you get nothing. And the objective, 19 of course, is to keep people around, keep officers 20 on board. 21 Q. Is there any reason or reasons that 22 USAT or UFG would need golden handcuffs in 1987 16192 1 and 1988 as compared to the time period before 2 that, '84 through '86? 3 A. Absolutely. 4 Q. And what are those reasons? 5 A. Well, the first -- I mean, the reason 6 really is the -- you know, insecurity about the 7 condition of Texas thrifts. I mean, just extreme 8 insecurity and -- number one. 9 And number two, during those latter 10 periods many of the -- of the senior staff were 11 taking on additional responsibility from 12 Gerry Williams, you know, after Mr. Williams had 13 left. 14 Q. And what was the value of the 15 performance unit plan and the stock options in the 16 later years? 17 A. Fundamentally, zero. 18 Q. And had those -- what significance did 19 they have as an incentive for people to stay while 20 they had substantial value? 21 A. While they had value, it was -- it was 22 viewed to be a pretty big deal. I mean, it -- it 16193 1 was -- it was certainly something of value and 2 would make you think long and hard about leaving 3 United for another opportunity. 4 Q. Mr. Crow, would it be fair to say that 5 prior to your being discharged at USAT by the 6 federal regulators, you viewed yourself as a 7 professional banker? 8 A. Yes, sir, I did. I had -- I had been 9 in -- between First City and United, I had 17 10 years of my experience there. 11 Q. And at the age of 35, you were the 12 youngest executive vice president and CFO in the 13 history of First City? 14 A. Yes, sir. 15 Q. Mr. Rinaldi asked you about your 16 discussion with Neil Twomey and the effect that it 17 had on your career. 18 Do you remember that, sir? 19 A. I do. 20 Q. Would you tell us in your own words 21 what you thought when you put the phone down after 22 talking to Neil Twomey? 16194 1 A. Well, I guess what I thought is that -- 2 that my career with a depository institution was 3 over. 4 Q. And why? 5 A. Well, I felt like I -- certainly a new 6 employer would call the Federal Home Loan Bank or 7 Mr. Twomey, and I felt like that I wouldn't get a 8 good report, so to speak. He would be critical. 9 And I didn't want to embarrass either a new 10 employer or myself, and that -- that was my 11 reasoning. 12 Q. And since that day ten years ago or 13 nine years and some months ago, have you ever 14 taken a position with another bank or thrift or 15 federally-insured financial institution? 16 A. No, sir. 17 MR. VILLA: Thank you. I have no more 18 questions. 19 THE COURT: Thank you, Mr. Villa. 20 Do any of the other respondents have 21 questions? 22 MR. NICKENS: Yes, Your Honor. I will 16195 1 have some questions. 2 THE COURT: Mr. Nickens, how long do 3 you think you're going to be? 4 MR. NICKENS: Your Honor, my 5 examination will go into sometime around the break 6 tomorrow morning. 7 THE COURT: All right. Let's take a 8 short recess. 9 10 (Whereupon, a short break was taken 11 from 2:34 p.m. to 2:57 p.m.) 12 13 THE COURT: Be seated, please. We'll 14 be back on the record. 15 Mr. Nickens, you may examine the 16 witness. 17 MR. NICKENS: Thank you, Your Honor. 18 19 20 21 22 16196 1 2 EXAMINATION 3 4 Q. (BY MR. NICKENS) Mr. Crow, for the 5 past seven days or so, you've been testifying 6 about events that occurred anywhere from 10 to 14 7 years ago. And I'm going to be asking you to 8 focus your attention primarily on the issues 9 Mr. Guido asked you about in direct dealing with 10 the investment portfolios at United Savings. 11 Is that okay? 12 A. Yes, sir. 13 Q. Tell the Court in a general way what 14 your -- how you would describe your recollection 15 of these events somewhat over a decade ago. 16 A. In terms of mortgage-backed securities? 17 Q. Just generally, sir, what you can 18 remember. I'm not asking you about the events, 19 but how you would characterize your recollection 20 after all these years? 21 A. My recollection over all these years 22 is -- in some areas is fairly good. If I were 16197 1 involved with the project or I was responsible for 2 it or something really bad happened about it or 3 something really good happened about it, if I were 4 not directly involved with it and I just attended 5 meetings and was not responsible for it, I tend to 6 not remember those sort of things. 7 Q. How many times have you been deposed 8 with regard to the issues that have been raised in 9 this matter? 10 A. I've had two depositions with the OTS 11 and one interview. 12 Q. And in each of those instances, did you 13 review documents prior to your testimony? 14 A. Yes, I did. 15 Q. And you have reviewed documents that 16 the enforcement has provided to you prior to your 17 testimony over the last week and a half or so? 18 A. Yes, sir, I have. 19 Q. And you've looked and reviewed 20 documents that are concerning areas that I told 21 you I might ask you about, have you not? 22 A. I have. 16198 1 Q. And how would you -- how do you go 2 about separating the information that you can 3 recall from so long ago from the information that 4 you have been provided through these -- through 5 the depositions and the reviews prior to that? 6 A. It's -- well, it's kind of back to my 7 first answer. It's -- it's almost humanly 8 impossible because at least my mind, you know, I 9 learn things. And it's kind of -- it's difficult 10 for me to say "I knew it" and I knew it at what 11 time, at what time period. You know, there could 12 have been an instance where I learned something or 13 reviewed it in the early Nineties or in 14 preparation for a deposition. And now I know it, 15 and it carries me back to the events, you know, 16 during the mid-Eighties when I was at United. 17 There's some events -- certainly the 18 Independent American branch sale was a very 19 notable event. And I remember that fairly 20 distinctly. 21 Q. I'm not going to ask you any questions 22 about that, Mr. Crow. 16199 1 A. Why not? 2 Q. Well, with that understanding, will you 3 be willing to try to help us develop some 4 information that the Court might want to consider 5 about the investment portfolios? 6 A. Yes, sir. 7 Q. Now, USAT, of course, did invest in 8 mortgage-backed securities while you were there, 9 did they not? 10 A. Yes, sir. 11 Q. And was that part of it -- part of the 12 wholesale plan as you understood it? That is, to 13 invest in mortgage-backed securities. 14 A. Yes. 15 Q. What, as you perceived it, were the -- 16 if any, the advantages of mortgage-backed 17 securities as opposed to the traditional business 18 of making whole loans? 19 A. Well, they were numerous. First, there 20 was diversification. Basically, to me, a 21 mortgage-backed security is just a government 22 guarantee wrapper around a bunch of home loans. 16200 1 So, they are real close in terms of the 2 fundamental nature of them. But the first 3 advantage is you get away from credit risk because 4 it's a government agency guarantee either by 5 Ginnie Mae, which is full faith and credit, or 6 some other agency. 7 Second, they are highly liquid. You 8 can buy and sell mortgage-backed securities within 9 a matter of 15 minutes. And typically, within an 10 hour, you can have five bids on a pool of 11 mortgage-backed securities whereas whole loans are 12 much, much less liquid. 13 Diversification was a very big deal 14 back in the time period of United because it was 15 desirable to diversify loans away from Texas 16 because Texas loans had so many problems as we've 17 discussed in this -- this proceeding. And so, it 18 was desirable to have loans from all over the 19 country because prepayment rates differ within 20 certain regions. 21 And another thing that was very, very 22 real is mortgage-backed securities are very easily 16201 1 financeable. You can use them for reverse 2 repurchase agreements and they can become -- this 3 is an oversimplification, but they are almost 4 self-funding type assets whereas whole loans are 5 much, much more difficult. And mortgage-backs can 6 be used as collateral for almost any type of thing 7 I can think of. 8 So, those -- I'm sure there are more 9 reasons, but -- 10 Q. Did USAT own mortgage-backed securities 11 for a variety of purposes? 12 A. Yes. 13 Q. And in a variety of portfolios? 14 A. Yes. 15 Q. Could you tell the Court, as best you 16 recall, what some of those portfolios were in 17 which USAT, over your five-year tenure, owned 18 mortgage-backed securities? 19 A. Yes, sir. There were general 20 mortgage-backed securities that were just held in 21 I think -- when I arrived at United that was just 22 the typical -- held in the treasury portfolio for 16202 1 general purposes just for the interest income, as 2 best I recall, not hedged in any manner. I may -- 3 you know, that's my memory. 4 Then second, there was Joe's portfolio 5 and we've certainly talked about that enough. 6 Q. No. I'm going to ask you some more 7 questions about that, Mr. Crow. 8 A. I'm looking forward to that. 9 Then there were -- there was Sandy's 10 portfolio, which was the big mortgage-backed 11 securities sub that Sandy Laurenson managed. 12 Then there was Dutch auction rate 13 preferred stock subsidiaries, and those were 14 separate subsidiaries that were rated triple A. 15 And the assets in those subsidiaries were 16 mortgage-backed securities, and the liabilities 17 were preferred stock issues that rolled over in 18 terms of repricing every 49 days. And it was 19 typically a real cheap source of funds. 20 And then there were CMO subsidiaries, 21 and I think the CMOs were off balance sheet except 22 that the residual, in effect, was held by United. 16203 1 And a CMO issuance was -- basically, we would buy 2 a block of mortgage-backed securities and bond 3 would be issued to the outside -- to the public, 4 and the collateral for those bonds would be that 5 block of mortgage-backed securities. Those were 6 held by a trustee. And so, it was a sealed 7 system, if you will. That's something that we 8 didn't manage, so to speak. We did look at 9 hedging the residual from time to time. 10 Those are the primary ones that I 11 remember, unless I've left out some. 12 Q. Well, may I remind you perhaps about 13 the cash flow bonds and how mortgage-backed 14 securities might have related to those? 15 A. Yes, sir. Yes. The cash flow bonds -- 16 I believe that we discussed whenever you sell 17 branches, it's an unusual transaction in that when 18 you sell something, you've got to pay the other 19 guy in some form. Either you've got to write a 20 check or give him some type of consideration. So, 21 we used a cash flow bond. And certain series of 22 those cash flow bonds were collateralized by 16204 1 mortgage-backed securities. And other series of 2 cash flow bonds, I believe, were collateralized by 3 whole loans. 4 Q. Now, did your -- did USAT's 5 ownership -- the amount of ownership of 6 mortgage-backed securities in these various 7 portfolios and various uses vary over time? 8 A. Yes, it did. 9 Q. Now, assuming that you don't remember 10 the exact amounts at any one given time, how would 11 you determine the amount of MBS, mortgage-backed 12 securities, owned by USAT in any one of these 13 given portfolios at a given time, if that became 14 important? 15 A. If that became important, you would 16 have to dig into the financial records of USAT. 17 You would look at performance reports. You would 18 look at, perhaps, some of the general ledgers, if 19 there were separate subsidiaries. And those are 20 the two things that come to my mind. 21 Q. Now, did these portfolios have 22 different purposes or objectives? 16205 1 A. Yes, sir. 2 Q. And were they managed in accordance 3 with those differing purposes or objectives? 4 A. Yes, sir. 5 Q. Let me ask you to focus, if we can, on 6 a subject you brought up about Joe's portfolio. 7 A. Okay. 8 Q. When you used the term "Joe's 9 portfolio," what do you mean? What are you 10 referring to? 11 A. What I refer to as Joe's portfolio is 12 an original investment, I believe in like 1985, of 13 roughly $500 million, and we've described the 14 structure with interest rate swaps. And then I 15 believe, in my mind, about $150 million was added 16 to Joe's portfolio that were -- was the remnants 17 of the collapse of that subsidiary that was 18 established and collapsed. 19 Q. USAT Mortgage Finance? 20 A. Yes, sir. And then I believe there was 21 about another 100 million or so added to Joe's 22 portfolio. So, that's what, in my mind, I 16206 1 consider to be Joe's portfolio. 2 Q. Now, who -- I want to ask you an 3 obvious question. 4 Who managed Joe's portfolio? 5 A. Joe. 6 Q. Joe Phillips, that is? 7 A. Yes. Joe Phillips. 8 Q. Now, did Mr. Phillips have 9 responsibility for other mortgage-backed 10 securities portfolios at USAT? 11 A. I really -- I don't know, Mr. Nickens. 12 I -- it could be during those days, the early days 13 of United, we might have had the general 14 mortgage-backed portfolio still handled by David 15 Barrett in the treasury department. I just -- I'm 16 not clear. But those weren't big numbers. 17 Q. Were any of the other mortgage-backed 18 securities portfolios arbitrage programs like 19 Joe's portfolio? 20 A. No. 21 Q. How would you compare -- and you're 22 including in Joe's portfolio the remnants of USAT 16207 1 Mortgage Finance? 2 A. Yes, sir. 3 Q. Because I believe the record will 4 establish that was a very similar type of 5 investment? 6 A. Yes. As I recall, it was very, very 7 similar. 8 Q. Now, how would you compare those two 9 with United MBS and the program that was set up 10 when Sandy Laurenson was hired? 11 A. Well, it was quite different in that 12 the so-called Joe's portfolio was -- the 13 instruments used to hedge interest rate risk were 14 interest rate swaps. And during those time 15 periods, there was an attempt made to have a rough 16 duration match. 17 Sandy's portfolio, on the other hand, 18 was in my mind a bit more sophisticated in that it 19 was a variety of hedging instruments. 20 Ms. Laurenson used a variety of hedges. And, of 21 course, we've got to keep in mind during this time 22 period that mortgage-backed securities were 16208 1 relatively new. I think started in the early 2 Eighties, if I'm not mistaken. And so, as time 3 moved on, just different methods were used. 4 Q. Now, you mentioned that the objectives 5 of some of the other mortgage-backed securities 6 portfolios may have differed from that of Joe's 7 portfolio? 8 A. That is correct. 9 Q. Now, what was the investment objective, 10 as you understood it, of Joe's portfolio? 11 A. To create a stream of net interest 12 income; so, it was a spread portfolio. 13 Q. As opposed to a total return portfolio? 14 A. Yes, sir. 15 Q. How did that affect the accounting for 16 Joe's portfolio, for example? 17 A. Well, in a spread portfolio, the 18 investments are accounted for at cost and not 19 marked to market. And the associated macro hedges 20 that are -- that are clearly macro hedges are 21 accounted for as -- just as the cash payments are 22 received and paid. And they are not marked to 16209 1 market either. 2 Q. Now, how did the objective of Joe's 3 portfolio as an arbitrage or spread income 4 arbitrage affect its management, affect the way it 5 was managed? 6 A. I don't quite understand your question, 7 Mr. Nickens. 8 Q. Well, would there be a difference in 9 the way you would manage a total return portfolio, 10 for example, as opposed to the portfolio such as 11 you have described known as Joe's portfolio? 12 A. Oh, yes. They would be -- the 13 management of them in my mind would be quite 14 radically different because in a total return 15 portfolio, you would be marking to market 16 certainly on a quarterly basis, most of the time 17 on a monthly basis. And there would be an extreme 18 effort to, you know, protect your asset values. 19 You know, you're not looking necessarily at spread 20 income. You're looking for total return, flipping 21 in and out of securities, trading. 22 Q. Now, with -- were the objectives and 16210 1 management of Joe's portfolio, as you have 2 described it, communicated to the bank regulators? 3 A. Yes, sir. 4 Q. Let me ask you to, in that connection, 5 look at a document, A10568 -- which I'll get for 6 you -- which is at Tab 177. Mr. Farley will get 7 it for you. 8 Mr. Crow, when you get a chance to look 9 at this, I believe, if we've got our ducks in a 10 row here, that will be the September 19th, 1985 11 growth plan. 12 A. Yes, sir, I see that. 13 Q. And would you turn to Page 2 of the 14 growth plan. And do you see there a program for 15 matching maturities and controlling interest rate 16 risk? 17 A. Yes, I do. 18 Q. I'd just ask you to read to yourself -- 19 and we can do so at the same time -- the first two 20 paragraphs under that section. 21 A. Okay. (Witness reviews the document.) 22 Okay. 16211 1 Q. Mr. Crow, is that description there a 2 description of Joe's portfolio? 3 A. Yes, it is. 4 Q. Is it a description of the other 5 mortgage-backed securities owned for different 6 purposes and at different times at United? 7 A. No, it is not. 8 Q. Let me ask you to turn over, if you 9 might, to Page -- it's marked on mine as FBS00158. 10 It's Page 6 of the document. 11 A. Okay. 12 Q. And if you'd read the second paragraph 13 on the second page. And my question is: Is that 14 also a description of Joe's portfolio? 15 A. (Witness reviews the document.) Yes, 16 it is. Yeah. I remember Joe's original portfolio 17 to be, you know, right at $500 million. And that 18 describes the portfolio. 19 Q. And it references some liability 20 sources that are described on Page 4 of the 21 document? 22 A. Yes, sir. 16212 1 Q. And if you turn back to Page 4, you see 2 reverse repurchase agreements at Salomon Brothers, 3 Drexel Burnham, and PaineWebber totaling, as of 4 6/30/85, about $465 million? 5 A. Right. 6 Q. And was that Joe's portfolio? 7 A. Yes. That was used to fund Joe's asset 8 side of his portfolio. 9 Q. Okay. Now, before we leave this 10 document, Mr. Crow, and despite the fact that 11 we're talking about Joe's portfolio, let me ask 12 you to look over at page -- numbered Page 4 of the 13 document, toward the bottom of the page, called 14 "corporate securities portfolio." 15 A. Okay. 16 Q. Do you see that? 17 A. Yes, sir. 18 Q. I'd ask you to just read aloud, if you 19 would, for the record, the last paragraph on 20 Page 4. 21 A. Where it starts "in addition"? 22 Q. Yes, sir. 16213 1 A. "In addition to the net interest margin 2 benefit provided by the corporate securities 3 portfolio, from time to time opportunities exist 4 for gains on sales of selected securities. 5 Through the six months ended June 30th, 1985, 6 gains on sales of corporate securities totaled 4.4 7 million." 8 Q. Now, this paragraph related to the junk 9 bond portfolio? 10 A. Yes, sir. 11 Q. Which was also described in this 12 document that you sent to the federal regulators 13 in September of 1985? 14 A. That's correct. 15 Q. Now, was there any secret at any point 16 in time, to your knowledge, about sales from the 17 junk bond portfolio for the purpose of taking 18 gains? 19 A. No, sir. 20 Q. Let me ask you, in that connection, to 21 look over at Page 7 of the United Savings 22 Association growth plan and, in particular, 16214 1 Footnote, information you communicated to the 2 federal regulators. 3 A. Okay. 4 Q. Would you read that into the record? 5 A. Yes, sir. Footnote 1 says, "Projected 6 net income of 10 million. Includes 7.9 million of 7 income for the months of July and August and 8 projected income of 2.1 million for September. 9 Made up largely of anticipated gains on the sales 10 of securities and real estate." 11 Q. Now, you briefly have described and 12 have looked here about the structure of Joe's 13 portfolio. 14 Did you have any responsibility for 15 choosing the assets that went into Joe's 16 portfolio? 17 A. No, sir. 18 Q. Now, did you have any responsibility 19 for the decisions about how to use the swaps or 20 other hedging instruments? 21 A. No, sir. 22 Q. Did you make any decisions about the 16215 1 amount of the swaps? 2 A. No, sir. 3 Q. Did you make any decision about the 4 degree of hedging that was to -- that was used for 5 Joe's portfolio? 6 A. No, sir. 7 Q. Now, in fact, Joe's portfolio was 8 hedged -- the amount of the -- the notional amount 9 of the swaps was about equal to the amount of the 10 assets, face amount? 11 A. That's my recollection, yes, sir. 12 Q. And is that what was known as being 13 fully hedged at that point in time? 14 A. During those times, that was called, 15 quote, "fully hedged." 16 Q. Now, did being fully hedged in this 17 sense have a cost? 18 A. Yes. 19 Q. What was that cost? 20 A. Well, the -- the cost reduced your 21 spread. I'm not sure I'm being responsive to your 22 question, but the ultimate extreme would be if you 16216 1 didn't do any hedging at all, in a normal yield 2 curve environment, you typically would have a 3 spread between the mortgage-backed securities 4 yields and the reverse repo rate of, I would guess 5 in those times, probably 250 basis points. 6 Q. Now, the swap -- I'm sorry, Mr. Crow. 7 The swaps would protect you against 8 rising rates to some degree, wouldn't they? 9 A. Yes. The swaps were designed to 10 protect against rising rates. 11 Q. Protected you and your cost of funding 12 against rising rates? 13 A. That is correct. 14 Q. But what was the cost associated with 15 getting that protection if rates declined? 16 A. You got no benefit whatsoever if rates 17 declined because your funding cost rate was fixed. 18 Q. Now, what was the -- if I can put it 19 this way -- prevailing wisdom with regard to the 20 structure of Joe's portfolio and other 21 risk-controlled arbitrages as to how they would 22 respond to changes in interest rates? 16217 1 A. The prevailing wisdom during those time 2 periods that I remember is that the arbitrage 3 would perform well within a certain range of 4 interest rates. And during those time periods, 5 most all of the big brokerage firms had prepaid 6 projections that were rather modest or low CPR 7 numbers compared to -- 8 Q. Do you recall what that range of 9 interest rate movements was or what people 10 generally looked at in terms of the -- what was 11 called the durability of the spread? 12 A. As best I remember, it was like 150 to 13 200 basis points up or down. In other words, the 14 total, if you used 200 basis points, the total 15 would be a 400 basis point spread there. 16 Q. Now, did you make any decisions about 17 when to buy or sell any of the securities in Joe's 18 portfolio, at least prior to being on the -- the 19 mortgage-backed securities trading committee? 20 A. No, sir. 21 Q. Who made those decisions? 22 A. Joe Phillips. 16218 1 Q. Who made the decisions that I've asked 2 you about concerning the amount of hedging, the 3 amount of assets, the amount of swaps, that sort 4 of thing? 5 A. Mr. Phillips actually purchased the -- 6 the securities and arranged for the hedges. 7 Q. Were the assets and liabilities or the 8 swaps in conjunction with reverse repos and the 9 assets duration matched? 10 A. Yes. 11 Q. Now, was that considered to be good or 12 bad? 13 A. That was considered to be good because 14 the traditional thrift model had, going back to 15 '81, '82, had really suffered pretty badly from a 16 wide GAAP position. 17 Q. And what was the relationship between 18 this duration match and duration -- we'll get into 19 this a little bit later -- was a measure of price 20 volatility or price elasticity? 21 A. Yes. 22 Q. And the notion was that in a perfect 16219 1 world, as interest rates changed, the price of one 2 would go up by about the amount the price of the 3 other went down? 4 A. In a perfect world, yes. 5 Q. That's the idea of duration match? 6 A. Right. 7 Q. Now, how did that idea relate to the 8 objective of the portfolio as a spread portfolio? 9 A. I always viewed the interest rate swap 10 certainly would protect us in terms of -- you 11 know, it fixed the interest rate we paid. And as 12 we understood the prevailing wisdom of the time, 13 the mortgage-backed securities duration would be 14 relatively stable within a range of interest 15 rates. 16 Q. And was that duration match an integral 17 part of the spread objective? 18 A. Yes, sir. 19 Q. Now, Mr. Crow, if you had wanted to 20 speculate on the value of -- the changes in value 21 of mortgage-backed securities in relationship to 22 changes in interest rates -- 16220 1 A. Yes, sir. 2 Q. If your purpose had been to speculate 3 as opposed to create a spread income, would you 4 have bought any hedges? 5 A. Not at all. I probably wouldn't have 6 bought mortgage-backs either. 7 Q. Well, okay. 8 A. We're probably -- 9 Q. But the context tof the question is 10 imagine speculating on mortgage-backs. Okay? You 11 would have thought -- there would have been things 12 out there that were more volatile. 13 Is that what you're telling us? 14 A. Yeah. If you wanted to speculate, you 15 would buy securities that had no option to them at 16 all, which would have been the longest treasury 17 you could buy. And if you wanted to really get 18 wild, you'd go with zero coupon treasury, which 19 would have an extremely long duration. But 20 limiting it to mortgage-backs, I would have -- if 21 I were to speculate, I would buy mortgage-backed 22 securities and not hedge them and the spread would 16221 1 be enormous. 2 Q. Now, Mr. Phillips, at least as to the 3 original Joe's portfolio, chose to use swaps as 4 opposed to other potential hedging instruments; is 5 that correct? 6 A. That is correct. 7 Q. And among those other instruments were 8 things called caps and collars? 9 A. Yes, sir. 10 Q. This may be a little bit late in the 11 proceeding for this, but could you explain to the 12 Court your understanding of a cap? 13 A. An interest rate cap has a term like a 14 time period of typically, like, you know, let's 15 say five years. And you pay a fee for that cap. 16 That goes on your books as an asset. And the cap 17 has a strike price. And let's say prevailing 18 interest rates today are 10 percent. And so, you 19 would buy a cap at 11 percent. And if interest 20 rates, typically the short-term LIBOR rate or 21 whatever the cap is attached to, goes to 11 and a 22 quarter percent, then you get paid that one 16222 1 quarter. And so, it provides a ceiling on your 2 interest expense rate; and that's an example of a 3 cap. 4 Q. Now, how does -- let's pause there. 5 How does that differ from the function of a swap? 6 I mean, how would you compare them? 7 A. A swap is -- I mean, they are somewhat 8 similar. A swap is -- there's no fee to pay; so, 9 I don't believe there is an asset or liability on 10 the books. It's kind of an off balance sheet 11 deal. But it's a contract for an exchange of 12 interest payments. And the typical swap that a 13 thrift entered into would -- I would agree to pay 14 a counter-party, such as the Federal Home Loan 15 Bank, a fixed rate and I would receive variable 16 rate. And that would have a term to it, again, of 17 like, typically five to ten years. 18 And so, the difference is the swap 19 fixes the fixed rate period. You know what it is. 20 The cap, you only get paid until you 21 reach that strike price. 22 Q. If interest rates move up at all with 16223 1 the swaps, you would begin to get payments? Move 2 up half a point? 3 A. Depending -- 4 Q. Depending upon the structure of the 5 swap? 6 A. Yeah. If interest rates move up, 7 you're paying fixed and you're receiving variable. 8 So, that variable portion you're receiving would 9 go up. 10 Q. And with the cap, you don't receive any 11 payments until you've reached the strike price? 12 A. That is correct. 13 Q. And to lower that strike price closer 14 to the current rates, you've got to pay more of a 15 premium? 16 A. Exactly, yeah. Exactly. 17 Q. Now, how about a collar? Tell us your 18 understanding of a collar. 19 A. A collar is a hybrid type -- I just 20 consider it to be kind of a weird cap. You've got 21 the upper band or the upper strike price just like 22 a cap, functions just like it. And then you've 16224 1 got a lower floor. And if interest rates go down 2 below that floor, then, in our case, United would 3 have to pay. 4 And the reason we -- an institution 5 would enter into a floor like United is it would 6 lower that cost of the cap. In other words, caps 7 can be expensive. So, if you enter into a collar, 8 it lowers the net cost of the cap. And, of 9 course, thrifts generally -- you know, just the 10 general structure of a thrift, they are more 11 concerned about rising interest rates or were 12 during this time period about rising interest 13 rates than falling interest rates. 14 Q. Somebody would pay United in that 15 situation to enter into a floor, correct? 16 A. That's correct. 17 Q. And then you could use that money to 18 help finance the cost that you had to pay for the 19 cap? 20 A. Exactly, yeah. 21 Q. Now, I want to talk to you a few 22 minutes about the accounting treatment for Joe's 16225 1 portfolio. 2 Now, you were more intimately involved 3 in that part of it than in the management of the 4 portfolio itself? 5 A. Yes, sir, I was. 6 Q. Now, what was the accounting treatment 7 for -- that USAT followed and that was typical for 8 the time with regard to the transactions in the 9 risk-controlled arbitrage known as Joe's 10 portfolio? 11 A. During that time period, there were 12 only two categories of investments. There were 13 trading -- there was trading account, and then 14 there was an investment account, period. That was 15 the two categories. And Joe's portfolio was 16 clearly an investment account, and it was recorded 17 at cost. And the premium or discount was 18 amortized over the life of the security, and it 19 was not marked to market. However, in our 20 financial statements, we disclosed the 21 mark-to-market either in the footnotes or on the 22 face of the balance sheet. 16226 1 Q. Well, when we get around to the 2 rolldown which occurred in the early part of 1986, 3 what was the accounting treatment that USAT 4 followed for the transactions that occurred as a 5 part of the rolldown? 6 A. As a part of the rolldown, the 7 treatment that we followed was a deferral of 8 the -- interest rates had fallen dramatically. 9 So, the value of those bond had gone up. So, 10 typically, you had capital gains when you sold 11 them. 12 And so, we created -- so, gains were 13 created. And we felt like the proper 14 accounting -- and Peat Marwick agreed with us -- 15 is that you would defer that gain, which in my 16 mind is -- let's use an example of, let's say, 17 $10 million was created as a real gain and it was 18 placed over here in an account. If we reinvested 19 in another security that had a proposed life, a 20 projected life, of ten years, we would take 21 one-tenth of that 10-million-dollar gain into 22 income each year. And the net effect of all that 16227 1 stuff or that explanation was that it tended to 2 hold the yield up on the assets that were 3 reinvested into it. 4 Q. And was that -- 5 A. And maintain the integrity of the 6 spread. 7 Q. And was that the rationale for the 8 accounting treatment chosen for the rolldown of 9 Joe's portfolio? 10 A. Yes, it was. 11 Q. Now, let me ask you to assume that you 12 simply decided, for whatever reason, to make a 13 sale of a security out of Joe's portfolio. And 14 you didn't replace it with another security. 15 How would that transaction have been 16 treated with regard to your accounting policies? 17 A. It would -- if you just made a sale and 18 didn't replace it, you would record the gain or 19 loss and that would be it. Move on. 20 Q. Now, how were the swaps -- or let me 21 put it -- you mentioned that the swaps were what 22 you called a macro hedge? 16228 1 A. Yes, sir. 2 Q. And how did you distinguish that from a 3 micro hedge? 4 A. A micro hedge is specifically 5 identified to either an asset or a liability, and 6 there are a fairly complex set of rules that 7 govern micro hedges. And one of the examples is 8 you have to do periodic correlation analyses to 9 show that the hedge is correlated to the 10 instrument being hedged, and that meant that you 11 deferred any gains or losses. And so, it was 12 quite different. 13 The only micro hedges that we employed 14 that I remember were in Sandy's portfolio. 15 Certainly in Joe's portfolio, those were all 16 accounted for as a macro hedge which meant -- you 17 know, it certainly was not a mark-to-market issue. 18 Q. Well, now, was the swap an asset or a 19 liability? 20 A. I -- that's a rather difficult question 21 to answer because it's -- I guess if -- it's a 22 contractual arrangement to do an exchange of 16229 1 payments, and it's my understanding or my 2 recollection that it wasn't recorded on the 3 balance sheet as either. 4 Q. In other words, it was -- it was 5 neither an asset nor a liability, and that's what 6 you meant when you said it was off balance sheet? 7 A. Off balance sheet, yes, sir. 8 Q. It's not some kind of offshore account? 9 A. No. 10 Q. It simply meant that it did not -- was 11 not reflected on your balance sheet? 12 A. Right. 13 Q. Now, let's -- 14 A. And as distinguished because, you know, 15 in accounting terms -- and I think in accounting 16 terms -- when you buy a cap, you've got to write a 17 check and pay a guy money. And as an accountant, 18 whenever you put money out, you've got to record 19 either an asset or something, an expense. 20 And on an interest rate swap, 21 typically, as I remember, you didn't write a 22 check. We may have to post collateral, but that's 16230 1 a different issue. 2 Q. Well, let's see if we can illustrate 3 for the Court what would be the effect if that 4 were the case; that is, if it were not off balance 5 sheet. And let me just ask you to assume, 6 Mr. Crow, that you enter into an interest rate 7 swap with a notional amount of $100 million. 8 A. Okay. 9 Q. Now, the fact of the matter is you 10 don't have to pay anything for that, do you, 11 except perhaps to put up collateral? 12 A. That is correct. 13 Q. And if you could enter that on your 14 books as an asset or a liability, what effect 15 would that have on your -- on the books? 16 A. Well, I guess if you -- if you entered 17 it as an asset or liability, it would certainly 18 make you bigger. You'd have a larger size. And 19 maybe I'm being a bit dense, but that's the only 20 thing I can think of. 21 Q. Okay. 22 A. I don't think it would be -- you know, 16231 1 if it were treated, it probably would be treated 2 similar to the -- you know, we're in a 3 hypothetical world here, but I don't think it 4 would be mark-to-market or anything like that. 5 Q. Okay. Let me ask you to -- if we can 6 follow-up on this, just -- let's assume we've got 7 100-million-dollar notional amount swap. 8 A. Okay. 9 Q. And interest rates move up. 10 A. Right. 11 Q. And you have the right, because of the 12 difference between the fixed rate and the floating 13 rate, let's just say, to receive $1 million per 14 month on the swap. And that will be true over the 15 life of the swap as long as interest rates remain 16 the same, correct? 17 A. Right. 18 Q. Now, I want you to assume that the 19 right to receive that $1 million a month has a 20 market value of $10 million. 21 A. Okay. 22 Q. Okay? 16232 1 A. Right. 2 Q. Now, how would you account for that 3 situation? You have now what undoubtedly is a 4 contract that has a market value of $10 million 5 for which you receive $1 million a month until 6 interest rates change. 7 How would that be accounted for? Would 8 you now have an asset or a liability on your 9 books, and how would you account for that payment? 10 A. I don't believe, unless you disposed of 11 that swap, no matter whether it was an asset or a 12 liability, I don't believe anything would happen. 13 If you disposed of it, then certainly you would 14 have a gain or loss. 15 Q. If you went out and sold it and got 16 $10 million, you'd have to record that gain on 17 your books? 18 A. Absolutely. 19 Q. But as long as you didn't sell it, you 20 would record neither -- you would not record 21 anything as an asset or liability. Right? 22 A. Yeah. There would be no asset or 16233 1 liability adjustment. 2 Q. Now, what about the million-dollar 3 payment as you receive it each month? 4 A. That would be recorded as -- I guess in 5 our case -- either income or reduction of expense. 6 Q. Was the accounting treatment for swaps 7 that you followed reviewed and approved by 8 Peat Marwick? 9 A. Absolutely. 10 Q. I want to show you some documents, if 11 we might, Mr. Crow, concerning that accounting 12 treatment. And I'm going to ask you to look at 13 Exhibit B1331, which has not yet been admitted; 14 Exhibit B735, which is found at Tab 1014; 15 Exhibit B1048, which is at Tab 998; Exhibit B1381, 16 which has not been admitted; and Exhibit B4203, 17 which has not been admitted. 18 Do you have those five documents in 19 front of you, Mr. Crow? 20 A. I do, yes, sir. 21 Q. Okay. Let's talk initially, if we can, 22 about Exhibit B735 at Tab 1014, which has been, by 16234 1 virtue of that designation, received into 2 evidence. 3 A. Okay. 4 Q. Now, do these look like accounting work 5 papers to you, Mr. Crow? 6 A. Yes, sir. This looks like a 7 Peat Marwick audit program. 8 Q. And what is the time frame of the audit 9 as indicated on this -- these work papers? 10 A. December 31st, 1985. 11 Q. Now -- and tell the Court what it is 12 dealing with as reflected on the second page of 13 the exhibit. 14 A. On the second page, it appears we're 15 dealing -- that Peat Marwick was dealing with 16 interest expense and testing the various interest 17 expense items. And then got into interest expense 18 on savings capital. 19 Q. Let me ask you to look over at No. 9 on 20 Page KPMG USAT 004. 21 Do you have that? 22 A. Yes, sir, I do. 16235 1 Q. Now, could you read for the record and 2 for the Court what was recorded in the work papers 3 of Peat Marwick with regard to the accounting 4 treatment for the swaps that you had? Can you 5 read it? 6 A. Yes. Am I on the right document, 7 Mr. Nickens? 8 Q. Well, let's make sure. Yes. It's 9 right here. 10 A. Okay. Which section, Mr. Nickens? 11 Q. Paragraph No. 9. 12 A. Oh, I apologize. No. 9 says, "The 13 association has locked in long-term rates by 14 obtaining rate swaps equal to certain reverse 15 repos. Although the association refers to the 16 swaps as, quote, 'hedges,' end quote, they are not 17 considered to be hedges for accounting purposes. 18 The gain/loss associated with the hedge is netted 19 against the interest expense for financial 20 statement purposes." 21 Q. And is that how you were treating your 22 swaps on your books at the end of 1985? 16236 1 A. Yes, sir, it is. 2 Q. And do you know -- or do you have -- 3 from whom would Peat Marwick receive information 4 as to how you were treating the swaps? 5 A. They would receive that from our books 6 and records and discussions with the -- you know, 7 basically, they would talk to myself and Mr. Wolfe 8 and the various people underneath us. And then 9 they would go do an investigation by looking at 10 our detailed records. 11 Q. Well, now, Mr. Crow, how is it that you 12 call these things hedges but the accountants said 13 they were not hedges? 14 A. Well, when we refer to something as a 15 hedge, I never saw an inconsistency. The 16 accountants termed it a, quote, "macro hedge" for 17 internal tracking report purposes. That was very, 18 very common during that time frame. 19 Q. Well, do I understand that if it was a 20 macro hedge, for accounting purposes it wasn't 21 deemed a hedge at all? 22 A. That is -- yes, that's what this says. 16237 1 Q. Now, in general, was it desirable or 2 something people sought out, to get hedge 3 accounting qualifications? 4 A. For certain types of financial 5 instruments, yes. 6 Q. Now, did this advice that you received 7 as reflected in Exhibit B735 from Peat Marwick 8 ever change -- 9 MR. GUIDO: Objection to the 10 characterization of the document, Your Honor. The 11 document does not contain advice. It just says 12 "internal working paper" that indicates a 13 conclusion reached by the accountant. It does not 14 contain any advice, Your Honor. 15 MR. NICKENS: I'll rephrase the 16 question. We're going to get to that, Your Honor. 17 Q. (BY MR. NICKENS) Did the information 18 as described in Exhibit B735, Mr. Crow, ever 19 change, to your knowledge, with regard to the 20 treatment, the accounting treatment, for swaps 21 while you were at USAT? 22 A. No, sir. 16238 1 Q. Now, let me ask you to look at the 2 document that has been labeled B1048, which is at 3 Tab 998. 4 A. Yes, sir. 5 Q. This is a memorandum from Mr. Williams, 6 Bruce Williams, to Jenard Gross and Gerry Williams 7 dated June 18th, 1986, that came from the work 8 papers of Peat Marwick? 9 A. Yes, sir. 10 Q. Now, do you see -- we're talking about 11 swaps, but let's pause for a moment. There on the 12 first page, there is a category "gain on sale of 13 securities." 14 A. Let's see. Is that in the -- 15 Q. It's under "non-interest income," about 16 the fourth item. 17 A. I do. I see that. 18 Q. And you indicate that you have a 19 planned amount and an actual amount of 20 year-to-date. 21 A. That's correct. 22 Q. Now, why did you -- why did you put 16239 1 that on your financial reporting documents? 2 A. Well, I reconfigured our -- earlier in 3 1985, I reconfigured our income statement 4 consistent with GAAP and just the way we reported 5 things so that the reader could more clearly see 6 what was going on in terms of core -- what I call 7 core earnings. 8 THE COURT: I believe you said '85. 9 THE WITNESS: Oh, yes, sir. I 10 performed that project in '85 that I reconfigured 11 the financial statements. 12 THE COURT: All right. 13 A. And this is just part of that. 14 Q. (BY MR. NICKENS) And let me ask you 15 to look at the second page of Exhibit B1048. And 16 I'm just going to ask you to read to yourself the 17 first paragraph under "net interest income," 18 Mr. Crow. 19 A. (Witness reviews the document.) Yes, 20 sir. 21 Q. Now, do you see a reference there to 22 unmatched swap volumes? 16240 1 A. I do see that. 2 Q. Now, with regard to the accounting 3 treatment for your swaps, did it matter whether 4 they were matched or unmatched as to how they were 5 treated for accounting purposes? 6 A. Oh, not at all. They -- they didn't 7 look at what the swaps were attached to. They 8 weren't attached to anything. They were macro 9 hedges. And as we saw, they -- the accountants 10 viewed them as, in effect, not hedges. 11 Q. Now, the question is -- here's a 12 reference to unmatched swaps. Right? 13 A. Yes, sir. 14 Q. Were they treated differently in any 15 way for accounting purposes than those that were, 16 quote, "matched"? 17 A. No, sir. The treatment was the same. 18 Q. Now, do you see on the Exhibit B1048, 19 the notation out to the right of the paragraph I 20 asked you to read, in very small letters, it looks 21 like a number 2? It's the same document, right 22 here. 16241 1 A. I see No. 2, yes. You want me to 2 read -- what was that question, Mr. Nickens? 3 Q. Well, I haven't gotten to it yet. But 4 would you go to the last page of the document and 5 see if you see the corresponding note in the 6 handwriting of the accountant? 7 A. Yes, sir, I do. 8 Q. Okay. And can you read that for the 9 Court and record: Footnote No. 2 opposite the 10 paragraph dealing with unmatched swap volumes? 11 A. Yes, sir, I will try. 12 Q. Okay. 13 A. I believe it says, "Per discussion with 14 Jim Wolfe, no hedges or swaps was" -- I can't 15 quite make out that word. 16 Q. Does that look like either "removed" or 17 "reserved"? 18 A. Or "unwound" maybe. 19 Q. Could be. 20 A. The excess hedging -- the, quote, 21 "excess hedging position refers to the amount of 22 swaps in new" -- 16242 1 Q. "Excess" perhaps? 2 A. -- "in excess of MBS. The excess was 3 reduced due to an increase of MBS. Explanation 4 appears reasonable." 5 Q. And then it's initialed by Mr. Parsons? 6 A. Yes, sir. 7 Q. Now -- so, after having reviewed this 8 unmatched swap position, did Peat Marwick change 9 their advice in any way to you about your 10 accounting treatment for swaps? 11 A. Oh, no, not at all. They -- they 12 would -- this is -- my memory is pretty typical. 13 The accountants would always read our performance 14 reports to kind of get a good idea of what was 15 going on. And sometimes, for internal tracking 16 purposes, we would do things a little differently. 17 And they would always try to reconcile those. 18 Q. Okay. Now, let me -- 19 A. So, this is part of that process. 20 Q. Let me ask you to look at 21 Exhibit B1331. 22 16243 1 (Discussion held off the record.) 2 3 Q. (BY MR. NICKENS) Mr. Crow, the 4 exhibit I was going to ask you about is already in 5 the record as a different number. So, I would ask 6 you to take a look at that. 7 Now, from your experience as an 8 accountant, what is Exhibit A13039? 9 A. That is an accounting work paper/memo, 10 and up in the top right-hand section of the memo, 11 you would have the various -- the person that 12 prepared the memo would initial it and then it 13 would have various reviews. 14 Q. Now, let's -- this is a discussion 15 about interest rate swaps at the end of the year 16 1986? 17 A. Yes, sir, it is. 18 Q. Now, I'm going to ask you just to read 19 a couple of paragraphs just so that we'll have the 20 record. 21 A. Okay. 22 Q. And the first one I'd ask you to look 16244 1 at for the Court and the record is under 2 "discussion" on the first page. 3 A. Yes, sir. 4 Q. And maybe I can try, if you could read 5 along, and if I missread this in any way, stop me. 6 A. Sure. 7 Q. "USAT entered into the swap agreements 8 as a" -- and there is a very small word that I 9 believe is "macro hedge" -- "on their variable 10 interest rates they were paying on their debt 11 (reverse repos). USAT wanted to guard against the 12 possibility that interest rates would rise on 13 their variable rate debt but would remain the same 14 on their fixed rate asset." 15 Do you see that? 16 A. I do. 17 Q. And was that consistent with your 18 recollection of the purpose, generally, of USAT's 19 ownership of swaps? 20 A. Yes, sir. 21 Q. Or entering into swaps? 22 A. Entering into swaps. 16245 1 Q. Now, let me ask you to look over at the 2 paragraph on the next page -- actually, it's the 3 next -- it's the third page at the top under 4 "accounting treatment continued." 5 A. Okay. 6 Q. And again, I'll try to read it because 7 Ms. Clark has had it typed out for me. Okay? But 8 if I don't read it right, stop me. 9 A. Okay. 10 Q. "USAT does not account for the interest 11 rate swaps under hedge (deferral) accounting." 12 Do you see that up there at the top? 13 A. I do, yes, sir. 14 Q. "All income and expense resulting from 15 the swap is recognized currently. Treatment is 16 consistent with prior period. Appears proper." 17 A. Yeah. 18 Q. And then it's initialed. 19 A. Yes. 20 Q. Now, what was deferral accounting in 21 this context, Mr. Crow? 22 A. The deferral accounting that I've been 16246 1 exposed to had to do with future and not swaps. 2 But deferral accounting, basically, on futures 3 contracts, you defer the gain or loss on the 4 futures and it's -- you know, you have to go 5 through all the correlation analyses and that sort 6 of thing. 7 Q. Now, that term "appears proper," do you 8 see that? 9 A. Yes, sir. 10 Q. What does that indicate to you? 11 A. That there was agreement. I don't 12 remember ever really having much disagreement on 13 the -- with the accountants in this area at all. 14 Q. Okay. Now, let me ask you to look at 15 B4203, which is KPMG 060215. 16 Do you have that document in front of 17 you? It's a one-page document. 18 A. I do, yes, sir. 19 Q. And what is the title of the document? 20 A. It's a memo "Re: Interest rate swaps, 21 12/31/86," I believe, or is that '88? 22 Q. Look at my copy. 16247 1 A. That's '88. 2 Q. So, two years later, Peat Marwick is 3 examining your swap position once again. Right? 4 A. Yes, sir. 5 Q. Now, I want to ask you to read the 6 paragraph under "discussion." 7 A. Okay. Read it aloud for the Court? 8 Q. No. I think you could -- that's 9 printed, right? You could just read that to 10 yourself. 11 A. Okay. Yes, sir, I've read that. 12 Q. Is that -- 13 MR. NICKENS: Your Honor, we offer 14 B4203. 15 MR. GUIDO: No objection, Your Honor. 16 THE COURT: Received. 17 Q. (BY MR. NICKENS) Under "discussion," 18 is that essentially the same description as we saw 19 in the prior document in 1986? 20 A. Yes, sir, it is. 21 Q. Now, let's look if we can to -- in the 22 middle of the page there, you say -- you see an 16248 1 item that says "United is party to two swaps"? 2 A. Let's see. Yes, sir. 3 Q. And why don't you -- read that into the 4 record, if you might, Mr. Crow. 5 A. "United is party to two swaps where 6 they paid variable and receive fixed. These were 7 entered into to offset another swap." 8 Q. Was that what we had called in this 9 proceeding and in your examination the mirror 10 swap? 11 A. Yes, sir, it is. 12 Q. That arose after the collapse of United 13 Mortgage Finance or USAT Mortgage Finance? 14 A. Yes, sir, it is. 15 Q. Now -- and immediately thereafter, 16 there is a paragraph dealing with accounting 17 treatment? 18 A. Yes, sir. 19 Q. Now, why don't you read for us just the 20 last three sentences that starts out "USAT does 21 not account." 22 A. Okay. 16249 1 Q. It's after the underlying -- 2 A. Yes, sir. It says, "USAT does not" -- 3 and "not" is underlined on my copy -- "account for 4 the interest rate swaps using hedge accounting. 5 Financial statement presentation of all income and 6 expense resulting from the swap is consistent with 7 prior years. Appears proper." 8 Q. Is that exactly the same advice that 9 you had received in 1986 with regard to the 10 accounting treatment for your swaps? 11 MR. GUIDO: Objection. There is no 12 evidence that there was any advice given. There 13 is a memo in an internal work paper, Your Honor. 14 Mr. Nickens is again mischaracterizing the 15 testimony and I believe deliberately, Your Honor. 16 MR. NICKENS: It is deliberate, Your 17 Honor. I confess to that. But let me try to fix 18 it. 19 Q. (BY MR. NICKENS) Did you regard the 20 statement "appears proper" as being advice from 21 your accountants after they had reviewed your 22 books and records? 16250 1 A. Well, sure. I mean, it's -- as -- 2 absolutely. 3 Q. Now -- 4 A. I mean, we talked about -- I mean, in 5 the real world, we talked to the accountants all 6 the time. And if there were a problem, we talked 7 about it. And this just was not a problem area. 8 Q. Now, with your -- that understanding, 9 Mr. Crow, was this the same advice that USAT had 10 received two years ago in 1986 with regard to the 11 accounting treatment for their swaps? 12 A. Yes, sir. 13 Q. And that was after a specific review of 14 all of the swaps, including the mirror swaps? 15 A. Yes, sir. Yeah. I remember the -- my 16 main memory of the swaps, quote, "subject of the 17 swaps" was we got -- I wanted to make very sure 18 Peat Marwick was knee deep in the mirror swap. We 19 had concluded it was not a determination very 20 firmly, but I wanted to make sure I got some 21 expert outside advice. 22 Q. Okay. Let me, for the record, refer 16251 1 you to Exhibit 1381. 2 MR. NICKENS: Your Honor, we offer 3 Exhibit 1381. I'm sorry. B1381. 4 THE COURT: Received. 5 Q. (BY MR. NICKENS) And Mr. Crow, if 6 you'd just turn to the last page and confirm for 7 us that there is another discussion there of -- in 8 Paragraph 9 as we had seen earlier about your 9 treatment of swaps. 10 MR. GUIDO: Is this B1381? 11 MR. NICKENS: It is. 12 MR. GUIDO: And Paragraph 9? 13 MR. NICKENS: Very last page. Excuse 14 me. I apologize. It's the next-to-the-last page 15 under -- the top paragraph under "auditing 16 procedures." 17 A. Oh, yes, sir. Okay. 18 MR. GUIDO: Is that a 9? 19 MR. NICKENS: I thought so, but perhaps 20 I'm -- I believe it is a 9. I'm basing that on 21 the fact that the last entry on the prior page is 22 8. 16252 1 Q. (BY MR. NICKENS) The number is 2 immaterial, Mr. Crow. We're just trying to 3 identify it. 4 Have you had a chance to read that 5 paragraph? 6 A. Yes, I have. 7 Q. Now, is that precisely the same 8 language that we had read in the earlier 9 documentation as to the earlier treatment of 10 hedges? 11 A. It's precisely the same or extremely 12 close. The substance is definitely the same. 13 Q. And they are not considered to be 14 hedges for accounting purposes? 15 MR. GUIDO: Your Honor, the copy that I 16 have is not legible on the last two lines. If the 17 witness -- and I think -- will read the paragraph 18 into the record as he understands it, I think it 19 will make for a much clearer record. 20 MR. NICKENS: I have no objection to 21 that, Your Honor. We'll do the best we can. 22 A. Okay. 16253 1 Q. (BY MR. NICKENS) Mr. Crow. 2 A. "The association has locked in 3 long-term rates by obtaining rate swaps equal to 4 certain reverse repos. Although the association 5 refers to the swaps as, quote, 'hedges,' they are 6 not considered to be hedges for accounting 7 purposes. They" -- 8 Q. Perhaps "the payments associated with 9 the hedge"? 10 A. Yeah. "The payments associated with 11 the hedge" -- 12 MR. GUIDO: Objection. I think that 13 counsel has just put words in the witness' mouth. 14 My rendition does not say that, Your Honor. 15 THE COURT: What does your -- 16 MR. GUIDO: It says "gain/loss." 17 THE COURT: I think Mr. Guido is -- 18 MR. NICKENS: I think he's correct. I 19 stand corrected. And I'm -- okay. 20 A. Okay. "The" -- whatever that is -- 21 "associated with the hedge is netted against the 22 interest expense for financial statement 16254 1 purposes." 2 Q. (BY MR. NICKENS) Now -- and that's 3 the same language or close to the same language 4 that you had received before? 5 A. Yes, sir. 6 Q. And during all this time frame covered 7 by these documents, '85 through 1988, you received 8 the same advice from Peat Marwick as to the 9 treatment of your hedges -- as treatment of your 10 swaps? 11 A. Of interest rate swaps, yes, sir. 12 Q. And that was they were not hedges for 13 accounting purposes, right? 14 A. Right. 15 Q. And were not mark-to-market? 16 A. Right. I remember the term "macro 17 hedge," but that just meant to me a macro hedge. 18 I guess it meant to them it wasn't a hedge at all. 19 Q. But in any event, it was not to be 20 marked to market? 21 A. That's correct. 22 Q. And it didn't matter whether they were 16255 1 matched or unmatched? 2 A. That is correct. 3 Q. Now, with regard to this exhibit, what 4 is the significance of those two little columns or 5 the two columns of whatever size to the right of 6 that language? 7 A. This is an audit work program that the 8 partner in charge of the audit would prepare and 9 approve. And then there are two columns, period 10 of exam, and it would just indicate that a 11 progress report or, in one case here, it says 12 "done" and then the last column is the initial of 13 the auditor that's doing the work. 14 Q. In other words, it was prepared by one 15 accountant and reviewed by one or two others for 16 its correctness? 17 A. That's the way it works; but quite 18 honestly, I don't read these columns that way. 19 Q. Well, if you look at the top, do you 20 see -- do you see -- look at the top of the page 21 we just read, do you see there two sets of 22 initials? 16256 1 A. Oh, yes, at the top, absolutely. 2 Q. And what does that indicate? 3 A. That indicates the auditor that had 4 reviewed this document. 5 Q. Now, let me turn to a subject other 6 than the accounting treatment for swaps, Mr. Crow. 7 And I'd like to turn to the question of the 8 various portfolios at United Savings that used or 9 had assigned to them mortgage-backed securities. 10 And for that purpose, I'm going to ask you to ask 11 you to look at a series of documents: 12 Exhibit B500, which is at Tab 583; Exhibit A1590, 13 which is at Tab 1295; Exhibit A13005, which is at 14 Tab 1122; Exhibit B982, which is at Tab 1305; and 15 Exhibit T4310, which is at Tab 188; and finally 16 Exhibit B3945, which has not -- is not now in the 17 record. 18 Mr. Crow, do you have Exhibit B500 in 19 front of you? 20 A. I do. 21 Q. And do you see that as a chart entitled 22 "USAT Mortgage Arbitrage"? 16257 1 A. Yes, sir, I do. 2 Q. And if you look down there, can you 3 confirm for us that that is the original Joe's 4 portfolio as it stood as of the date of this 5 memorandum? 6 A. Let me look at this just one minute. 7 I believe it is. 8 THE COURT: What's the date of the 9 memorandum? 10 MR. NICKENS: Your Honor, I'm going to 11 get to that. There is no date on the memorandum. 12 It appears to be dated from another document we're 13 going to come to in March of '86. 14 A. And the reason for my conclusion there, 15 Mr. Nickens, is it's got Joe Phillips' name on it 16 and I added the -- roughly, the numbers seem add 17 up to about what I know is Joe's portfolio. 18 Q. (BY MR. NICKENS) And if you look at 19 the settlement date on each of these documents, it 20 is in the April, May, and June of '85 time frame? 21 A. Yes, sir. 22 Q. And was that the time frame that Joe's 16258 1 portfolio was put together? 2 A. I think so. 3 Q. Now -- and you mentioned the amounts. 4 You're looking at the amounts of the swaps and the 5 reverse repos? 6 A. That is correct. 7 Q. Now, what is the significance, 8 Mr. Crow, of these RC numbers? 9 A. That is a responsibility center 10 number -- or I called them cost center numbers -- 11 and it -- that's what they were. 12 Q. What were they used for in terms of -- 13 at USAT? 14 A. Typically for performance tracking 15 purposes. 16 Q. And were, in this case, these RC 17 numbers running 7411, 7412, 13, 14, 15, and 7416 18 USAT RC numbers? 19 A. I think the 7000 series were all USAT, 20 yes. 21 Q. With regard to the swaps that -- 22 associated here with each of these RC numbers, 16259 1 were those micro or macro swaps? 2 A. All of the swaps we had were macro 3 swaps. 4 Q. Now, why would they be assigned as they 5 are here to these RC numbers? 6 A. Well, if I were the portfolio manager, 7 I might choose to keep track of things in any 8 number of ways. And it would not be -- you know, 9 I wasn't the portfolio manager; but if I were, I 10 probably would take the swaps associated with 11 certain reverse repos and perhaps try and keep 12 track of them that way. It's just a different 13 objective. And, you know, that's the way I would 14 look at it probably if I were the portfolio 15 manager. 16 Q. Let me ask you to look at a document. 17 It's B4217 at Tab 1160. And I think I failed to 18 mention it earlier. 19 MR. GUIDO: 1160 tab number? 20 MR. NICKENS: 1160, correct. 21 Q. (BY MR. NICKENS) Do you have 1160 in 22 front of you, Mr. Crow? 16260 1 A. I do, yes, sir. 2 Q. And if you just thumb through there, 3 can you confirm for us that these are some work 4 papers to reflect the transfer of debit and credit 5 items into these various RC numbers? 6 A. Yes, sir. I've traced through the 7 first three of them, and the numbers seem to 8 agree -- the two worksheets seem to agree in terms 9 of numbers. 10 Q. And if you look over at the page with 11 the Bates No. CN054757, which is about four pages 12 from the end, is that a copy of the same sheet we 13 were just looking at, B500, except that there's 14 some handwritten notes? 15 A. Yeah. There's some notations down at 16 the very bottom. Other than that, it looks like 17 the same schedule. 18 Q. And do you see a date on the 19 Page CN054757? 20 A. I see up at the right-hand, it looks 21 like 3/1/8, but I don't have the -- after the 8, 22 it's not -- I don't have anything. 16261 1 Q. Look at the first -- the second page of 2 Exhibit B4217 and see if your copy has a date that 3 you can read. 4 A. Let's see. The second page? 5 Q. Second page from the very beginning. 6 A. Oh, okay. Yes, sir. 7 MR. GUIDO: Do these have the CN Bates 8 stamp numbers on them? 9 MR. NICKENS: Yes, we do. 10 MR. GUIDO: Could we please use those 11 numbers? 12 MR. NICKENS: The page I was 13 referencing is CN054725, which reflects a date of 14 March 3rd, 1986, Mr. Crow. 15 A. Yes, sir, I see that. 16 Q. (BY MR. NICKENS) And if you turn the 17 page from the schedule that we were looking at to 18 CN054758, do you see that document is dated, as 19 well? 20 A. Yes. That's dated 4/9/86. 21 Q. And would it be your opinion that 22 CN054757 and Exhibit B500 reflect Joe's portfolio 16262 1 as it stood in March of 1986? 2 A. Certainly looks that way to me, yes, 3 sir. 4 Q. Now, let me ask you to look over to the 5 last page of Exhibit B4217. 6 A. What was that now? 7 Q. It is identified as -- in the record as 8 CN054760. 9 A. Okay. I'm there. 10 Q. Now, do you see some more 11 mortgage-backed securities reflected there in 12 different RC numbers? 13 A. Yes, sir, I do. 14 Q. And under RC 1700, how much -- what is 15 the face amount of the reverse repos reflected 16 there? 17 A. The face amount is 124,136,000. 18 Q. And the swap amount? 19 A. 125 million. 20 Q. Now, was this a part of the original 21 Joe's portfolio? 22 A. Well -- 16263 1 Q. And look at those settlement dates, if 2 that might help you. 3 A. Oh, okay. I don't think this would be 4 part of the original Joe's portfolio, no. 5 Q. Because those settlement dates are more 6 in the time frame of USAT Mortgage Finance, 7 correct? 8 A. Yes, it is. 9 Q. Now, if you look down at RC 1800, what 10 is it designated as? 11 A. USAT Mortgage Finance. 12 Q. And what is the approximate -- what is 13 the amount of the reverse repos and the swaps? 14 A. The reverse repos is 159,857,000, and 15 the amount of the swaps appears to be 16 $180 million. 17 Q. And finally, under RC 7200 -- 18 A. Yes, sir. 19 Q. -- you have an amount of swaps of just 20 under $100 million? 21 A. Yes. 99.35 million. 22 Q. Now, is this part of the indication of 16264 1 USAT's ownership of mortgage-backed securities in 2 other portfolios? 3 A. Yes, sir, other than what I'm calling 4 Joe's original portfolio, yes, sir. 5 Q. And if one wanted to determine the 6 performance, for example, of Joe's portfolio, one 7 would have to go back to these RC numbers and 8 track what happened to the securities and how the 9 portfolio performed? 10 A. Yes, sir. 11 Q. Would it be appropriate, if you were 12 trying to judge the performance of Joe's portfolio 13 as it was originally set up, to look at all of 14 USAT's mortgage-backed securities in all of its 15 portfolios? 16 A. To make a judgment on Joe's portfolio? 17 Q. Yes, sir. 18 A. No, sir. That would not be 19 appropriate. 20 Q. And why is that? 21 A. Well, that would be mixing apples and 22 oranges and bananas. And I don't know that you 16265 1 would get much of a conclusion as to the 2 performance of Joe's portfolio. 3 Q. Now, is it true that for certain 4 purposes, USAT did mix all of these 5 mortgage-backed securities ownerships into 6 different units? 7 A. Oh, sure. There were occasions that I 8 can remember -- you know, just two right off the 9 top of my head. When we did the Sendero 10 asset/liability modeling, I think we just -- you 11 know, it didn't matter. We were looking at the 12 institution as a whole. So, they were dumped in 13 as a total, I think. And then for -- certainly 14 for SEC reporting purposes, I mean, it was just 15 total numbers. 16 Q. To your way of thinking, Mr. Crow, 17 would it be appropriate if you were trying to look 18 at Joe's portfolio to look at those documents 19 where all of it is put together to judge Joe's 20 portfolio -- the performance of Joe's portfolio? 21 A. You mean the totals? 22 Q. Yes, sir, from these other -- where you 16266 1 used it for other purposes and combined the 2 mortgage-backed securities for other purposes. 3 A. I don't think you could reach a 4 judgment as to whether -- as to how it had 5 performed. 6 Q. Let me give you some examples of that, 7 if we might. If you could look at Exhibit A1590. 8 This document is already in the record, Mr. Crow, 9 and is the notes of November 17th, 1985, of the 10 1986 strategic planning meeting that bear 11 Mr. Williams' initials, which Mr. Guido asked you 12 about earlier in the proceeding. 13 Do you have that in front of you? 14 A. Yes, sir. 15 Q. Let me ask you to look over at 16 Page US3008022. 17 A. Yes, sir. 18 Q. And do you see there at the top of the 19 page under "MBS hedged and other"? 20 A. Yes, sir. 21 Q. That it indicates that in September of 22 1985, the institution owned $471 million of 16267 1 unhedged MBS? 2 A. Yes, sir. 3 Q. And then you see "hedged 590"? 4 A. Right. 5 Q. And would you conclude that somewhere 6 in that 590 is Joe's portfolio? 7 A. That would be -- yes, that would be 8 consistent with my memory, that Joe's portfolio 9 started out at 500 -- you know, roughly 10 500 million and then we had these various 11 increments added on at later periods. But as of 12 this date, yes, it would be included in that 13 number. 14 Q. And it's included in the hedged number 15 because Joe's portfolio -- 16 A. Was hedged. 17 Q. -- was hedged, even though we found 18 the accountants told us that it didn't qualify for 19 hedge accounting treatment? 20 A. That's correct. 21 Q. And if one were to try to study the 22 performance of Joe's portfolio, one would have to 16268 1 go back through here and figure out what portion 2 of it is Joe's portfolio. Right? 3 A. Yes, sir. You would have to take -- 4 just isolating in on the 590 million. 5 Q. And if you took the 471 and just threw 6 it in, you would end up with -- the likelihood is 7 you would end up with not very good results, would 8 you? 9 A. Well, yes, sir. Yeah. I would want to 10 take the 590 million and break that down and 11 determine exactly what was Joe's portfolio and 12 analyze that to reach an evaluation. I certainly 13 wouldn't add those two numbers together and start 14 analyzing. 15 Q. And if one were looking at the sales of 16 mortgage-backed securities to determine whether or 17 not they came from Joe's portfolio, could -- and 18 you looked at sales, for example, of this 19 471 million of unhedged -- 20 A. Yes, sir. 21 Q. -- would that give you reliable 22 results if you're looking at the sales from Joe's 16269 1 portfolio? 2 A. If you were just trying to find out 3 what sales had been made out of Joe's portfolio? 4 Q. Yes, sir. 5 A. No, sir. That would not give you 6 reliable results. 7 MR. NICKENS: Your Honor, I don't know. 8 It's around 4:30. I can continue or we could -- 9 THE COURT: All right. We'll adjourn 10 until 9:00 o'clock. 11 12 (Whereupon at 4:31 p.m. 13 the proceedings were recessed.) 14 15 16 17 18 19 20 21 22 16270 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 23rd 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 16271 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 23rd 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