16481 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 27, 1998 22 16482 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 16483 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 . 16484 1 2 INDEX OF PROCEEDINGS 3 4 MICHAEL CROW 5 Further Examination by Mr. Rinaldi......16485 6 Further Examination by Mr. Guido........16609 7 . 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 16485 1 P-R-O-C-E-E-D-I-N-G-S 2 (10:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Unless there are other matters, we will 6 have redirect by Mr. Rinaldi. 7 MR. RINALDI: Thank you, Your Honor. 8 9 FURTHER EXAMINATION 10 11 Q. (BY MR. RINALDI) Good morning, 12 Mr. Crow. 13 A. Good morning. 14 Q. Hope you've had a nice restful weekend, 15 ready to go down the homestretch. 16 Last week when you testified, we 17 discussed the issue of allocating salaries between 18 USAT and UFG. 19 Do you recall that testimony? 20 A. Yes, sir, I do. 21 Q. And in connection with that, you had 22 indicated that at some point in time in the latter 16486 1 part of 1988 there had been a chargeback. 2 Can you just describe for us again when 3 you mean by a chargeback? 4 A. A chargeback would be setting up a 5 receivable on the books of -- of USAT and a 6 payable on the books of United Financial Group. 7 And the net effect is going to have -- you know, 8 getting through all the accounting would be a 9 reduction in the compensation expense of United 10 Savings and an addition to the compensation 11 expense of United Financial Group. 12 Q. So, there's a debit, then, that appears 13 on UFG's side of the ledger; is that right? 14 A. Let's see. Net/net in terms of the 15 expense, yes, sir. 16 Q. So, in effect, UFG has a debt or an 17 obligation to pay USAT its proportionate share of 18 the salaries; is that correct? 19 A. That -- the net effect of the 20 chargeback would be that, yes, sir. 21 Q. Okay. So, UFG then had an 22 obligation -- and I think your belief was that 16487 1 that obligation for the salaries or its portion of 2 the salaries was $290,863.77. 3 Do you recall that? 4 A. I remember it, right. About 290, yes, 5 sir. 6 Q. Let me hand you a copy of what was 7 previously marked as Exhibit B2646. And your 8 counsel asked you if you had seen any 9 documentation relating to the allocation issue, 10 and you said you had and that you believed there 11 had been a chargeback. And then you testified 12 regarding the contents of this document. 13 Do you remember that? 14 A. I do, yes, sir. 15 Q. Now, what is the date of the document 16 that you're looking at, which is Exhibit B2646? 17 A. The date is -- the process date is 18 December 23rd, '88. 19 Q. Now, what does the process date mean? 20 A. You know, I really don't -- I would say 21 that's the date that this report was run. And it 22 looks -- you know, it looks to me that we're 16488 1 talking about, for the most part, transactions, 2 just flipping through here -- and it's been a long 3 time since I've dealt with this type stuff. Looks 4 like we're talking about transactions having to 5 do, you know, November 1st through November 30th, 6 '88. 7 Q. Let me ask you about the document. The 8 first page of the document appears to be the 9 financial management system of United Financial 10 Group, and it's one page long. It has the number 11 851 down in the lower right-hand corner, correct? 12 A. Let's see. 851. I haven't quite got 13 there. 14 Q. Sure. It's got a little number 851 15 down in this corner or the Bates stamp CN335109. 16 Do you see that? 17 A. Yes, sir. 18 Q. And then the remainder of the document 19 is from the financial management system of United 20 Savings Association of Texas; is that correct? 21 A. Well, the next two pages look like they 22 are USAT; and then we get back into United 16489 1 Financial Group. 2 Q. Yes, you're right. 3 A. Then the last page is United Savings, 4 yes, sir. 5 Q. Okay. Now, when you look at the USAT 6 pages -- that is -- you said that -- those are 7 CN334564 and 334565. You indicated that when you 8 looked at this document, it appeared to you that 9 the salary -- the number $290,863.77 represented 10 the allocation amount that was being allocated to 11 USAT from UFG. 12 Do you recall that? 13 A. Yes, sir, I do. 14 Q. Okay. Now, how do you come to the 15 conclusion that that is what that entry 16 represented? 17 A. What I did is I basically took the 18 percentages that -- and you had this open -- 19 Q. You're referring now to Exhibit T8120, 20 and this is the letter from Mr. Berner to Neil 21 Twomey dated 11/7/88? 22 A. That is correct. 16490 1 Q. That's what you're referring to now? 2 A. Yes, sir. I took those percentages 3 where Mr. Berner committed to Mr. Twomey that we 4 would allocate those percentages of salaries from 5 USAT to United Financial Group. And then I took 6 the salaries, I believe, off the -- they were the 7 schedules that had to do -- it was, like, April of 8 '88 where we had the 25 percent bonus and where 9 the salary and bonus was rolled in together to 10 generate a new salary. Those are the schedules 11 where I got the salary numbers from. 12 Q. You're referring, then, to 13 Exhibit T8055 which is the salary adjustments of 14 April the 4th, 1988? They would be in Volume I. 15 A. Okay. Let me see. (Witness reviews 16 the document.) 17 Q. It's very near the bottom. It's about 18 seven or eight documents in from the end. 19 A. Okay. Let's see. Yes, sir. Yeah, 20 that's where I got the -- the salary numbers from. 21 Q. And you concluded that the $290,863.77 22 looked about right; is that correct? 16491 1 A. Yes, sir. I didn't come up exact. I 2 think I came up, using one method -- and the 3 problem was you didn't know exactly or I didn't 4 know or I didn't go to that detail exactly when 5 Mr. Gross left and exactly when Mr. Connell came, 6 et cetera. But I came up with a number of, like, 7 295,000 or 294,000, somewhere in that area; but it 8 was real close. 9 Q. Now -- and the allocations you used are 10 the numbers that are in T8120; is that correct? 11 A. Yes, sir, that is correct. 12 Q. Now, in T8120, it indicates that 13 Mr. Berner, in the first paragraph, had a meeting 14 on November the 3rd with Mr. Connell -- that 15 Mr. Berner had a meeting with Mr. Twomey. 16 Do you see that? 17 A. Yes, sir. 18 Q. Did Mr. Berner tell you that Mr. Twomey 19 had expressed a concern prior to sending this 20 letter that the salaries of UFG were being paid by 21 USAT? 22 A. I really -- I just don't remember 16492 1 whether he did or didn't. You know, what I 2 remember, being an accountant -- and the thing 3 that I probably would have been involved in were 4 these allocation numbers. 5 Q. Okay. But is it reasonable to assume, 6 then, that Mr. Twomey raised some sort of issue 7 regarding allocation because Mr. Berner then 8 writes back to him, "These are the amounts we're 9 going to allocate"? 10 Do you see that? 11 A. Yes, sir, I do see that. I think this 12 memo -- wasn't this -- this correspondence from 13 Mr. Berner to Mr. Twomey -- 14 Q. Yes. 15 A. -- is in response to a letter that 16 Mr. Twomey, I believe, had sent to either the 17 board or Mr. Berner raising concerns about a 18 number of issues. 19 Q. One of those concerned, it would appear 20 from this letter, was the issue of USAT paying 21 salaries of persons who were working for UFG. Is 22 that a fair statement? 16493 1 A. Yes, sir. I would have to look at the 2 prior letter, but I'll -- if that's the case, 3 certainly. 4 Q. And the allocations that are 5 actually -- in the letter, it states in the last 6 sentence before the actual allocations, "Thus, the 7 following percentage of key personnel time is 8 being allocated to UFGI. USAT will receive credit 9 for any expenditures paid by it to such executives 10 during 1988." 11 Do you see that? 12 A. I do. 13 Q. So, this entry, the credit which 14 appears in Exhibit B2646, was a credit that was 15 initiated as a result of Mr. Twomey's raising a 16 concern; is that correct? 17 MR. VILLA: Your Honor, I object. He 18 asked him to assume that Mr. Berner's letter was 19 in reaction to Mr. Twomey. Then he referred 20 him -- got him to testify erroneously that this 21 issue was raised in the October 27, 1988 letter. 22 And now he's asked him to say that all of these 16494 1 are as a result of Mr. Twomey. It's speculation 2 piled upon misinformation and now calls for utter 3 guess work by this witness. I mean, he doesn't 4 know, and that's why this record gets so 5 cluttered. 6 I object. He's asking for speculation 7 when he's already elicited the fact that the 8 witness doesn't know what Mr. Twomey said to 9 Mr. Berner. 10 Q. (BY MR. RINALDI) I'll ask a slightly 11 different question then. 12 The allocations that are made in 13 Exhibit B2646 were not made until after Mr. Berner 14 wrote his letter to Mr. Twomey saying that the 15 allocations would be made; isn't that correct? 16 A. That is the way I would read this 17 document, yes, sir. 18 Q. Have you seen any other documentation 19 dated prior to November 7th, 1988, that indicates 20 that any time prior to November 7, 1988, the 21 salaries of the individuals listed in Exhibit 8120 22 on the first page there were allocated between 16495 1 USAT and UFG prior to November 7, 1988? 2 A. No, sir. I have not seen any such 3 documentation. I haven't looked; but I don't 4 remember it, no. 5 Q. To the best of your knowledge, then, 6 were all of the salaries of those individuals paid 7 by USAT to the extent they were working for USAT 8 in 1984? 9 A. Well, I don't -- if we're talking about 10 prior years, I don't remember -- in direct answer 11 to your question, I think that all of these 12 individuals, to the extent they were working in 13 1984, would be paid by United Savings out of the 14 USAT payroll. 15 Q. And you don't know whether any 16 allocation was made in either '84, '85, '86, or 17 '87? 18 A. I do not. I don't remember whether we 19 did or didn't. 20 Q. Now, in response to your question, if 21 you look at Exhibit T8050, which is right in front 22 of you in this other book, how much was the salary 16496 1 that was being paid to Barry Munitz? 2 A. 8050? 3 Q. Yeah. It's the list of salaries. 4 A. That's 8055. 5 Q. I'm sorry. 8055. 6 A. Okay. Barry Munitz, I believe, was 7 original base 240; '87 bonus, 156; new base, 8 396,000. 9 Q. Now, on the next page of Exhibit T8120, 10 it states that 100 percent of Mr. Munitz' salary 11 was allocated to UFG. So, for the year, that 12 would have been, if I'm not mistaken, $396,000, 13 correct? 14 A. Ignoring timing -- 15 Q. Well, when you say "ignoring timing" -- 16 A. Well, you know, assuming he got -- his 17 salary was 396,000 on January 1st of '88 and it 18 was the same at the end of the year, yes, sir, I 19 would agree with that statement. 20 Q. And that's a considerably greater 21 number than the 290,000 that appears in the United 22 Financial financial management system statement 16497 1 which indicates a credit of only 290,000. 2 Do you see that? 3 A. I do. I think that Dr. Munitz' salary 4 was paid directly by UFG, but I'm -- I'm -- that's 5 what I kind of remember. 6 Q. All right. Well, take a look at the 7 last document in Volume III. These are the 8 documents we looked at the other day which are the 9 compensation -- 10 A. Okay. 11 Q. This is Exhibit No. T8034. It's got a 12 cover letter from Mr. Villa to myself; and I 13 believe, if you look there, you'll see that -- 14 let's see if I can find one. Barry Munitz 15 appears, on Page 11, to have received a payroll 16 payment from United Savings Association of Texas 17 for $121,420.50. 18 Do you see that? 19 A. Let's see. It's on Page 11? 20 Q. Yeah. 21 A. Okay. I'm sorry. 22 Q. If you turn to Page 17, it indicates 16498 1 that, on the Post-It slip, that that was a bonus 2 paid to Mr. Munitz on 1/4/88. 3 Do you see that? 4 A. I do, yes, sir. 5 Q. Then I believe if we go through the 6 process again, you'll find that. Does that 7 refresh your recollection, then, that Mr. Munitz' 8 salary and bonus payments came from United Savings 9 Association of Texas payroll? 10 A. Well, this -- this check certainly 11 appears to be drawn on United Savings Association, 12 but my memory is that -- that Dr. Munitz' 13 compensation was carried by United Financial 14 Group. 15 Q. Well, when you say "carried by United 16 Financial Group," you mean, by that, USAT paid him 17 and then there was a chargeback? 18 A. It could be. I just don't remember 19 factually how that was handled. 20 Q. Now, when you look at that 21 290,000-dollar number there, it consists of four 22 separate entries, does it not? 16499 1 A. Which schedule are we on? 2 Q. I'm looking now at Page 2646. 3 MR. VILLA: Which document are you on, 4 sir? 5 MR. RINALDI: Exhibit B2646. 6 MR. VILLA: I thought you said 7 Page 2646. 8 Q. (BY MR. RINALDI) On the first page, 9 that is -- it is CN334564. There's an entry of -- 10 a credit of 75 or, I believe, 636,000 -- 11 $75,636.86? 12 THE COURT: Mr. Rinaldi, where are you? 13 What's your page number? 14 MR. RINALDI: I'm on Exhibit B2646. 15 THE COURT: Page? 16 MR. RINALDI: Page CN334564. And at 17 the bottom of that page, there is a credit of 70 18 something thousand and then -- and it says 19 "compensation." And then it goes over and on the 20 next page, there's $166,469.11 and there's two 21 smaller entries below that. Those four items then 22 all add up to the 290,000. 16500 1 Do you see that? 2 A. If you've added them up, I'll take your 3 word for it. 4 Q. Well, I didn't add them up. This is 5 the document. 6 A. Okay. 7 Q. I mean, is that how the number is 8 achieved in the document? 9 MR. VILLA: Could you read those 10 numbers off again? Did you say 168 and 28 and 20? 11 MR. RINALDI: Right here. Your copy is 12 far better than mine. Your copy is much better. 13 It's $75,636.86. Then there is -- is that 168 -- 14 MR. VILLA: I don't know. 15 MR. RINALDI: -- 469.11. Then 16 28,752.34 and $20,005.46. 17 Q. (BY MR. RINALDI) Do you see those four 18 entries, sir? 19 A. Yes, sir, I do. 20 Q. Do you know what those four entries 21 refer to? 22 A. No, sir, I do not. 16501 1 Q. Do they include the bonuses, the 2 special bonuses, that 290,000-dollar figure, 3 according to your calculation? 4 A. Excuse me. You mean the executive 5 bonus? 6 Q. It's referred to as the executive or 7 special bonus. 8 A. That 25 percent portion? 9 Q. That's correct. 10 A. I think it does, yes. 11 Q. Does it include the bonuses that were 12 paid in 1988 for 1987? 13 A. I think so, yes, sir. 14 Q. Does it include, then, basic salary, as 15 well? 16 A. I think basically where we were back 17 on -- where I got the salary numbers would have 18 included the original base plus the '87 bonus. 19 So, I would have picked that up for sure. 20 Q. But then there was an '87 bonus paid on 21 January the 4th, 1988. Then there was a bonus 22 rolled into the base salary which increased the 16502 1 base salary by the amount of the bonus. 2 My question is: Does that number 3 include the bonus that was paid on January 4th, 4 1988, as well as the additional bonus amount that 5 was rolled into the base salary on April the 4th, 6 1988? 7 A. Could you ask that again? I'm getting 8 a bit confused. Go ahead and ask that again, 9 please. 10 Q. The testimony has been that there was a 11 bonus paid in 1988 for the year 1987. In your 12 case, you received a bonus of $115,000 on or about 13 January 4th, 1988. 14 Do you recall that? 15 A. I do. 16 Q. Okay. And then there was a salary 17 increase; and your original base salary would have 18 been $171,000. I'm sorry. Yes. And it was 19 increased by $109,000 to $280,656. 20 Do you see that? 21 A. I do, yes, sir. 22 Q. And at the same time, you received, on 16503 1 April the 4th or April the 5th, 1988, a 2 27,250-dollar bonus. 3 My question to you is: Does this 4 number, as you computed it -- does that include -- 5 the '87 bonus paid in '88, does that include also 6 the salary plus the salary increase paid on 7 April the 4th, 1988? And does it also include the 8 special bonus that you received on April 4th, 9 1988? 10 A. It includes the special bonus, and it 11 includes the -- the new base off of this schedule, 12 8055. 13 Q. Uh-huh. 14 A. But I can't say that I went back and 15 included -- if that should have been included -- 16 the -- in my case, I guess it was, what, 115,000? 17 Q. I believe it was 109. 18 A. 109. I can't say that I went back and 19 included that because, you know, that was for '87 20 work. That wasn't -- yeah, I can't say that I did 21 that, no, sir. 22 Q. But it was paid in 1988. And as we saw 16504 1 from Mr. Munitz' payroll check, it came out of 2 USAT's payroll, correct? 3 A. Yes, sir. It was paid, you know -- it 4 was paid out of USAT. So, what I included was 5 the -- the original base plus the '87 bonus to get 6 a new base. I'm sure that I included the 7 25 percent bonus that was paid in April of 1988, 8 but I can't -- I don't think that I went back and 9 then, you know, re-added the January 4th, '88 10 amount that was paid on a cash basis to these 11 figures to arrive at that 290. 12 Q. And you didn't include the salary that 13 was paid by USAT to Mr. Munitz? 14 A. I certainly didn't include Mr. Munitz, 15 no, sir, because I'm pretty sure I've seen 16 somewhere in this mass of paper that Dr. Munitz' 17 pay was carried by UFG. 18 Q. I see. Well, do you recall that 19 Dr. Munitz' bonus, his executive bonus, was paid 20 for by USAT? 21 MR. VILLA: Your Honor, I'm objecting 22 to the word "paid" here. We're in a semantic 16505 1 problem between the witness and the questioner 2 where we're trying to trick the witness into 3 making a statement. I think he's made it clear on 4 the record what the recollection is. 5 Now the question is whether we can slip 6 a "paid" here or "payroll" through. I object. 7 It's repetitive questioning, and it's ambiguous. 8 Q. (BY MR. RINALDI) Would you take a look 9 at the payroll checks that we saw? 10 A. Which exhibit was that? 11 Q. 8034. It's the last document in the 12 third volume. Would you take a look at 13 Exhibit 32? 14 MR. VILLA: Exhibit 32? 15 MR. RINALDI: I mean Page 32. 16 MR. VILLA: Mine aren't paginated, sir. 17 A. The C00, whatever, 32? 18 Q. (BY MR. RINALDI) Yes. 19 A. I'm there. 20 Q. Does the first check appear to be a 21 check drawn on United Savings Association of 22 Texas' payroll account dated on April 5 of 1988? 16506 1 A. Yes, sir. 2 Q. And it indicates that the purpose of 3 that check was a 39,000-dollar bonus, correct? 4 A. Yes, sir. 5 Q. And a 39,000-dollar retro which appears 6 to be the retroactive bonus that was also granted 7 on April 5th, 1988. 8 Do you see that? 9 A. Yes, sir. 10 Q. Does that refresh your recollection 11 that Dr. Munitz' salary was paid out of United 12 Savings Association of Texas' payroll account? 13 A. Well, certainly, it appears that this 14 was paid out of that payroll account. And we -- 15 you know, I'm -- I guess, in response to your 16 question, my memory is that Dr. Munitz' 17 compensation is that we -- that that was carried 18 as an expense on the books of UFG. And so, maybe 19 it was paid out of USAT and there were 20 chargebacks. 21 Q. But you didn't find a chargeback? 22 A. No, sir. I didn't look for that, no, 16507 1 sir. 2 Q. Okay. Now, going back to your 3 chargeback which is referenced in Exhibit 2646, 4 was the UFG charge and the USAT credit ever netted 5 out into some reconciliation? 6 A. In terms of a big cash type transfer? 7 Q. Yes. 8 A. I really didn't go that far. Let's 9 see. Let me -- I did see some big -- bear with me 10 just one minute, please. 11 Q. Well, let me ask you this. The 12 processing date on this is 12/23/88. That's 13 approximately a week before the institution went 14 into receivership? 15 A. Yes, sir. 16 Q. As of that date, there had been no 17 reconciliation, had there? 18 A. I don't understand that question. 19 Q. Well, can you tell by looking at this 20 document whether, in fact, the charge -- the UFG 21 charge and the USAT credit had been netted out? 22 A. Let me look at this just a minute. 16508 1 Q. Okay. 2 A. I'll try. It's been a long time. 3 (Witness reviews the document.) 4 Well, on the very last page of this set 5 of general ledger stuff, that is the general 6 ledger of United Savings Association of Texas. 7 And down about two-thirds of the way -- 8 Q. The last page I have is the United 9 Financial Group. Wait. I'm sorry. I stand 10 corrected. 11 MR. VILLA: Would you give the Bates 12 number, sir? 13 THE WITNESS: It is CN333892. 14 Q. (BY MR. RINALDI) Yeah. 15 A. And if you would look down, oh, a 16 little over halfway down the page, the amount I 17 read is, like, 1,887,783. And it says "debt check 18 from UFG." 19 Then if you look on the -- on the 20 immediately-preceding page, about a third of the 21 way down the page -- that is a United Financial 22 Group general ledger sheet, and that's CN335089 -- 16509 1 you see the same number, 1 million 8 something or 2 other, 887,783. It says "AP check distribution 3 auto" and -- I can't testify certainly with 4 certainty at all, but it appears to me that's 5 where there would be the settling up. 6 Q. But you don't know if the settling up 7 included the 290,000? 8 A. No, sir, I can't say that at all for 9 sure. But that would be the normal way -- the 10 normal way you do the intercompany type stuff is 11 you would have a number of items where UFG would 12 owe USAT and vice versa, and there would be a cash 13 settlement to settle up. And in order to verify 14 that that 290 was included in that, you would 15 really have to dig into the financial records. I 16 didn't do that. 17 Q. Okay. Now, your counsel showed you a 18 copy of your September 9th, 1987 compensation 19 agreement; and I believe it's -- it's A -- it's in 20 a packet of documents -- A11032. Why don't you 21 take a look at this? I think I've tagged the 22 pages where your compensation exhibit appears. 16510 1 A. (Witness reviews the document.) 2 Q. Let's see if I can find my copy. Now, 3 I apologize because, apparently, these pages have 4 been paginated backwards; but we work with what we 5 have. 6 During the latter part of 1987, what 7 was your base salary that was being paid to you by 8 USAT? 9 A. Gosh, I don't know. Help me out here. 10 Q. Well, if you turn to the third page of 11 the 16 pages -- I think it's actually tagged in 12 your copy -- you'll see that there is a thing that 13 says "salary." 14 Do you see that? 15 A. Yes, sir, I do. 16 Q. Now, this document is an agreement 17 between you and UFG dated September the 9th, 1987. 18 Do you see that? 19 A. Yes, sir, I do. 20 Q. Okay. And at that time, the salary 21 figure that was included in the UFG contract was 22 171,656. 16511 1 Do you see that? 2 A. I do, yes, sir. 3 Q. Now, would that have also been the 4 salary that was being paid to you by USAT at that 5 same point in time? 6 A. Well, the USAT, as we've talked about, 7 paid the salary. 8 Q. And it would have been that amount: 9 171 -- 10 A. 656. 11 Q. -- 656? 12 A. Yes, sir, I believe so. 13 Q. What was the purpose of entering into 14 the contract with UFG approving a salary payment 15 of 171,656 if it was already being paid for by 16 USAT? 17 A. Mr. Rinaldi, I don't know. I mean, I 18 don't -- you know, as I've tried to explain, I get 19 confused, you know, between the contracts and, you 20 know, when the contracts occurred as to which 21 company they occurred from. You know, I wasn't 22 involved in why a contract was signed by one 16512 1 company versus the other. So, just the short 2 answer is I don't know. 3 Q. Would you take a look at the 4 Page OW12841? 5 A. 128421. 6 Q. I'm sorry. I have O28415. I'm sorry. 7 Do you recall whether this contract had 8 a change of control provision in it? 9 A. I thought -- and just from my memory -- 10 and I guess I'd better read it. But just from my 11 memory, all of our contracts had a change of 12 control, if I'm remembering correctly. 13 Q. Well -- and if that change of control 14 provision had been triggered, what was the 15 obligation of UFG to the employee, as you recall? 16 A. From my memory, the -- the severance 17 had always been two times annual compensation, and 18 then I think there were some -- something to do 19 with the performance unit plan. But basically, 20 you know, what stuck in my mind is two times 21 annual compensation. 22 Q. And that was not just your base salary. 16513 1 It would have been the minimum guaranteed bonus 2 that appears in this as well, correct? 3 A. Yes, sir. 4 Q. And I believe in this contract, if we 5 take a look at Paragraph 5B, that bonus was a 6 minimum of $62,000. 7 Do you see that? 8 A. Let's see. What page -- I saw that 9 number awhile ago here. 10 Which page is that, Mr. Rinaldi? 11 Q. Well, since I'm operating on the good 12 version as opposed to the -- I believe it's right 13 there. (Indicating.) 14 A. Yes, sir, I do see that. That is 15 the -- 62,000 is the minimum bonus. 16 Q. So, your severance benefit would have 17 been 171 plus 62, which would have gotten you up 18 to 233 and then twice that, which would have been 19 over $460,000; is that correct? 20 A. That's my memory of kind of how it 21 worked. I think there was something thrown in for 22 the performance unit plan, but I would have to 16514 1 read about that. I'm not sure about that. 2 Q. But the obligation to pay that 3 severance benefit was the obligation of United 4 Financial Group under this 9/9/87 contract, was it 5 not? 6 A. Yes, sir. That was -- the contract was 7 with UFG. 8 Q. Did you understand that USAT had any 9 obligation to pay any severance to you at this 10 point in time in the event that your employment 11 was terminated for any reason? 12 A. I think that -- you know, I don't 13 remember it from the time; but I think that we 14 have established that as of this date, that the 15 only contract was the UFG contract -- 16 Q. So -- 17 A. -- and that there was not one with 18 USAT. 19 Q. So, if there were a change of control 20 and that severance benefit were triggered as a 21 result of the change of control, that was the 22 obligation of UFG, was it not? 16515 1 A. Yes, sir. 2 Q. Okay. Now, yesterday, we talked about 3 the stock option plans -- I'm sorry -- yesterday. 4 Several days ago, Mr. Villa asked you about stock 5 option plans and the PUP and so forth. I have a 6 couple of questions in that area. 7 When you joined USAT, you felt that it 8 was an opportunity for you to move ahead, didn't 9 you? 10 A. Yes, sir. 11 Q. And one of the incentives that was 12 offered to you to join USAT and UFG was the 13 opportunity to share an equity interest in UFG's 14 success; is that correct? 15 A. Via the stock option plans, yes. I 16 viewed the stock option plans as a valuable 17 incentive, yes, sir. 18 Q. And you understood at the time that 19 what you were doing is opting for stock options 20 that, if you were unsuccessful, might have no 21 value and, if you were successful, could be 22 extremely valuable; is that correct? 16516 1 A. I would certainly agree that any stock 2 options you get in any company, I think the 3 employee, you know, views them as valuable and 4 certainly realizes if the company becomes a -- 5 Dale Computer, they were going to be extremely 6 valuable; and that if the company, you know, was 7 swept away with the rest of the banks and thrifts, 8 it would be of little value. 9 Q. And we see people at Home Depot now, 10 secretaries, who started at the beginning and are 11 now multimillionaires? 12 A. I don't know about Home Depot, but I 13 think it would be safe with Dale Computer. 14 Q. And so, you were opting to receive 15 options, hoping that if the company were 16 successful, that you would make a substantial 17 amount of money from those options, correct? 18 A. That was certainly my hope. 19 Q. But conversely, you were fully aware 20 when you took those options that if the company 21 wasn't successful, they wouldn't be worth 22 anything; isn't that correct? 16517 1 A. Well, I wouldn't be quite that strong. 2 It's fair to say that I was well aware that the 3 options weren't any type of guarantee. Gerry 4 Williams, my boss, never -- you know, it just 5 wasn't a guarantee. It was an incentive. 6 Q. And you knew that the PUP plan was 7 exactly the same way, didn't you? 8 A. The PUP plan? 9 Q. Performance unit plan. 10 A. Yes, sir. I realized that that was not 11 a guarantee, as well. It was just an incentive 12 to -- you know, those two plans I looked at as 13 exciting opportunities that, you know, if you stay 14 around, you do a good job, you might make some 15 money. 16 Q. And you knew that under the PUP plan, 17 unless the book value of UFG grew at a rate of 18 7 and a half percent per year, you weren't going 19 to get anything out of that plan, were you? 20 A. I don't remember exactly, but I'm sure 21 that I knew that at the time because I would 22 have -- you know, I would have read that plan. I 16518 1 remember the number 15. But if it was 7 and a 2 half -- that's fine. I'm sure I would have read 3 the plan at the time, Mr. Rinaldi. 4 Q. Well, the plans are all described in 5 the various proxy statements; and I don't want to 6 put words in your mouth. But you do recall that 7 unless the company -- the net worth of the company 8 or the book value of the company increased by 9 certain amounts, that the PUP plan would have no 10 value? 11 A. Yes, sir, I remember that. 12 Q. Now, do you recall that the PUP plan 13 only applied as to six employees including 14 Mr. Gross, Mr. Munitz, Mr. Berner, and Mr. Crow in 15 March of 1988? 16 A. I remember that it was a limit -- it 17 was a relatively small number. As to who was in 18 it, quite -- you know, my memory is that I knew 19 that Gerry Williams was in it, and I was in it. 20 And I assumed that Gerry's bosses were in it; but 21 past that, I'm not sure I knew. I knew it was 22 kind of a small number. 16519 1 Q. On Page 10 of the 1988 proxy statement 2 which is T8036, the following sentence appears. 3 It says, "As of March 18th, 1988, six employees, 4 including Messrs. Gross, Munitz, Berner, and Crow 5 have been awarded units under the performance 6 plan. But since its inception, no distributions 7 have been made to any participants." 8 Is that consistent with your 9 recollection that there were only six participants 10 that had been awarded units? 11 A. Yes, sir. I knew it was a small 12 number. I'm sure it was six if that's what we had 13 in that proxy statement. 14 Q. Now, you knew that at UFG and USAT, 15 salaries were merit-based, didn't you? 16 A. Well -- could you -- that salaries were 17 merit-based? You mean salary increases? 18 Q. Yes. 19 A. Yes, sir. 20 Q. And unless one performed, then there 21 was -- and there was performance, one didn't get a 22 salary increase, did they? 16520 1 A. Well, that's the general overriding 2 principle. I remember instances where people's 3 salaries were adjusted for market realities, 4 certainly, and other factors. But the overriding 5 principle was that when you -- on salary managers, 6 as best I remember it, it was merit-based. 7 Then you had some other -- you know, if 8 a guy was really good and he was going to leave 9 and make $20,000 more and you looked at it and you 10 said, "Well, it's going to cost me $30,000 more to 11 replace him, then even though he may not be a 12 barn-burner in terms of performance, we certainly 13 may bend that rule." 14 Q. And you testified, I think, in response 15 to one of Mr. Villa's questions that you 16 understood that if you, as the chief financial 17 officer, didn't perform, that you weren't going to 18 be around long. 19 Do you remember that? 20 A. I don't know whether I said that; but I 21 certainly remember that Mr. Williams and Mr. Gross 22 were pretty demanding, direct people. 16521 1 Q. So, you understood that in the absence 2 of performance, salary increases may not be 3 available to executives of USAT and UFG, didn't 4 you? 5 A. Yeah. I think if you did, you know, 6 just as a general proposition -- ignoring market 7 realities and ignoring that, you know, there may 8 be others reasons to give people raises, that if 9 you did a crummy job, then you wouldn't get a 10 raise. And if you continued to be a crummy -- you 11 know, do a crummy job, you wouldn't be around, 12 period. 13 Q. But you also understood that if the 14 company wasn't doing well, that there might not be 15 merit increases as well, didn't you? 16 A. No, sir, I can't agree with that 17 statement. 18 Q. Well, do you recall writing -- that I 19 showed you a memo last week when we first examined 20 you on the subject of compensation. And 21 Mr. Berner transmitted a memo to you, and it came 22 back. And he was talking about salary increases 16522 1 for executives and other people? 2 A. Right. 3 Q. Your comment on the front -- 4 MR. VILLA: Excuse me. Give us the 5 exhibit number. 6 MR. RINALDI: It's T8023. 7 Q. (BY MR. RINALDI) And you said words to 8 the effect that "If things are looking bleak, we 9 should pass on merit increases." Right? 10 A. Right. 11 Q. So, you understood that if the company 12 didn't perform and if things looked bleak, salary 13 increases might not occur; isn't that correct? 14 A. That's -- I'll -- you know, I don't 15 have the document in front of me, but I remember 16 the word "bleak." What I've tried to convey is I 17 really don't know what I was thinking at the time. 18 But just a reading of it, it seemed like we were 19 talking about the timing of salary increases; and 20 it seemed like we were talking about 21 self-restraint. But I've got to tell you if five 22 or, you know, one or three or four of my people 16523 1 had come to me and said, you know, "We've got a 2 job offer to go here or there or, you know, we're 3 real concerned about our jobs," that rule would 4 have been bent pretty harshly if I had had 5 anything to say about it. 6 Q. Well, take a look at T8023 just for a 7 moment, which is in Volume No. I. That's this 8 volume right here. 9 A. Okay. 10 Q. That's dated October the 30th? 11 A. Yes, sir. 12 Q. 1987. And I believe that at that point 13 in time, I asked you whether, in October of 1987, 14 things looked bleak. 15 Do you recall that? 16 A. I remember you asking me that question, 17 yes, sir. 18 Q. And I think you indicated that, yes, 19 they did look bleak? 20 A. Yeah. That was right after the stock 21 market crash; so, I think it was pretty bleak. 22 Q. And at that point in time, you may 16524 1 recall Mr. Berner had written you only the day 2 before or several days before advising you that it 3 appeared as if USAT was going to fail its minimum 4 capital requirement. 5 Do you remember that? 6 A. That's the following -- the draft memo 7 that -- oh, yes, I do remember that. 8 Q. It's the immediately-preceding 9 document. 10 A. Yes, sir, I do remember that. 11 Q. Okay. So, it wasn't until after 12 Mr. Berner had -- strike that. 13 Now, prior to receiving Mr. Berner's 14 memorandum which is T8022, UFG and USAT had been 15 experiencing considerable difficulty, hadn't they? 16 A. Yes, sir. 17 Q. And I believe your counsel asked you 18 the following question -- 19 MR. VILLA: Could you give us the pages 20 on that? 21 MR. RINALDI: Sure. It's on 1604 of 22 the transcript. I will give the witness a copy 16525 1 and hand two copies up to the Court. Here's a 2 copy for you. 3 MR. VILLA: Well -- 4 MR. RINALDI: I just have the two 5 pages. 6 Q. (BY MR. RINALDI) On Page 1604 -- 7 THE COURT: Page 1604? 8 MR. RINALDI: 16004. I apologize, 9 Your Honor. 10 Q. (BY MR. RINALDI) I believe that what we 11 were talking about was an exhibit dated in May 12 1987. And Mr. Villa asked you the question on 13 Line 10 of Page 16004, QUESTION: "Now, sir, was 14 there any attempt to hide from the federal 15 regulators the fact that United was trying 16 desperately to stay alive?" 17 ANSWER: "No, sir. No, sir. Not at 18 all." 19 Do you see that? 20 A. Yes, sir. 21 Q. This is in reference to a May 1987 22 document. Did you share Mr. Villa's 16526 1 characterization that in May of 1987, United was 2 trying desperately to stay alive? 3 A. Let's see. Could you re-ask that 4 question? 5 Q. Well, this is in reference to this 6 blowup document. This document is dated May 29, 7 1987. It talks about "We sold all the above-water 8 assets and so forth." 9 Then Mr. Villa asked you the question. 10 He said that -- that I just read to you. He says, 11 "There was no attempt to hide the fact that United 12 was trying desperately to say alive?" 13 And you said, "No, we didn't try to 14 hide that fact." 15 My question for you is: Was United, in 16 about May of 1987, trying desperately to stay 17 alive? 18 A. That's the date of this? 19 Q. Yes. 20 A. Yes, sir. 21 Q. So the problems experienced by USAT and 22 UFG didn't just arise out of the stock market 16527 1 crash in October of 1988, did they? 2 A. Oh, no. 3 MR. VILLA: Stock market crash in 4 October of 1987? 5 A. '87, right. 6 Q. (BY MR. RINALDI) They had persisted for 7 some period of time, hadn't they, sir? 8 A. Certainly from -- I don't know the 9 exact time frames. But ignoring the stock market 10 crash, prior to that the -- the cost of carry on 11 non-performing real estate, nonaccruing loans, and 12 the goodwill amortization was, you know -- was 13 choking the organization down. And all the stock 14 market crash did, that was just one more smack in 15 the head; but yes, sir. 16 Q. And you, as one of the executive 17 officers, in the middle of 1987 became very 18 concerned about the future viability of UFG, 19 didn't you? 20 A. I think that's a fair statement, yes, 21 sir. 22 Q. And it was as a result of your concern 16528 1 over the viability of UFG and USAT that you went 2 to Mr. Gross and to Mr. Munitz and to Mr. Berner 3 and requested that you be given an employment 4 contract by UFG; isn't that correct? 5 A. I don't know that I did that 6 individually. I don't deny that. I mean, I just 7 don't have a clear memory of that. I remember 8 there were a number of people, you know, certainly 9 that were concerned about security. 10 Q. Take a look at Exhibit T8054. This is 11 the memo dated March 31st, 1988. It's by 12 Mr. Berner. It's privileged and confidential 13 attorney work product, and it is to the files. 14 A. (Witness reviews the document.) 15 Q. Do you have that, sir? 16 A. Yes, sir, I do. 17 Q. Now, if you go down to the second 18 paragraph, it talks about, as you just related a 19 moment ago, that a number of senior executives 20 became concerned about UFG and the association. 21 Do you see that? 22 A. I do, yes, sir. 16529 1 Q. And then there was a meeting, it 2 references, of Mr. Munitz and Mr. Gross and the 3 executives. 4 Do you recall attending a meeting with 5 Mr. Gross and Mr. Munitz where you expressed your 6 concerns about the viability of UFG and USAT? 7 A. I don't recall specific -- a specific 8 meeting, but I recall -- yes, definitely. I don't 9 have any reason to discount this rendition of what 10 happened. 11 Q. And as a result of that meeting, 12 ultimately you and other senior executives entered 13 into employment contracts on September the 9th, 14 1987 with UFG; is that correct? 15 THE COURT: Would you restate that, 16 Mr. Rinaldi? 17 A. This is dated March 31st, 1988. 18 Q. (BY MR. RINALDI) Well, look at the next 19 sentence. After the meeting, it says, "It was 20 decided at that time that an employment contract 21 would be appropriate." 22 Do you see that? 16530 1 A. Yes, sir, I do. 2 Q. So, this meeting that's being discussed 3 here would have been sometime before the UFG 4 employment contract was entered into on 5 September the 9th, 1987. 6 Is that a fair statement? 7 A. This meeting, I -- since the memo is 8 dated March 31st, '88, definitely -- well, could 9 you repeat that? I'm confused. 10 Q. Well, it says here there was a meeting; 11 and following the meeting, it says, "It was 12 decided at that time that an employment contract 13 would be appropriate. I was requested to draft an 14 employment contract and submit it to Mr. Munitz 15 for review. I drafted the agreement and, after 16 his review, distributed it to the compensation 17 committee which at that time consisted of 18 Messrs. Keltner, Silverman and Whatley." 19 Do you see that? 20 A. Yes, sir, I do. 21 Q. "Thereafter, a contract was entered 22 into between executive officers of USAT and UFG." 16531 1 A. Well, the reason I'm a bit confused 2 or -- is that it appears to me that this 3 memorandum has to do with the change of control. 4 Q. We'll get to that. 5 A. But that's what this memo relates to. 6 Q. Okay. But let's turn the page. 7 A. Okay. 8 Q. At the top of the page, following on, 9 it says, "They presented the employment agreements 10 to the board of directors in September of 1987, 11 and the board unanimously approved entering into 12 the agreements." 13 Do you see that? 14 A. I do, yes, sir. 15 Q. We're talking about the UFG agreements 16 that were entered into September 9th, 1987, 17 correct? 18 A. Well, let me read the memo, if I could, 19 or read part of the memo. 20 Q. Sure. 21 A. (Witness reviews the document.) 22 Could you re-ask that last question, 16532 1 please? 2 Q. Does it appear that sometime before 3 September 9th, 1987, you and other members of the 4 senior executive staff of USAT and UFG were very 5 concerned about the future viability of USAT and 6 UFG? 7 A. That's what this memo seems to reflect, 8 yes, sir; and I have no reason to dispute it. 9 Q. Well, is it consistent with your 10 recollection of what was going on at that time? 11 A. I remember -- yeah. I remember 12 having -- you know, talking primarily with 13 Barry -- I don't remember Jenard so much -- but 14 Barry about concerns about security. We were 15 concerned about it. 16 Q. When you say "concerns about security," 17 what do you mean? 18 A. That, you know, my employees and myself 19 were concerned about job security, concerned about 20 that sort of thing. 21 Q. You mean that UFG would go out of 22 business or USAT would go into receivership and 16533 1 you would lose your job? 2 A. I guess, ultimately, that's the most 3 radical way to put it; but yeah, sure. 4 Q. And this concern manifested itself with 5 you sometime prior to September the 9th, 1987, 6 correct? 7 A. I can't remember exactly, but that's 8 what this memo seems to indicate. So, I don't 9 dispute that at all. 10 Q. And the regulation that the parties 11 came up with was to enter into an employment 12 contract that would guarantee two years' severance 13 pay if you were terminated, correct? 14 A. I do remember that, yes, sir. 15 Q. And that was an obligation that was to 16 be undertaken by United Financial Group, correct? 17 A. Under the September contracts, yes, 18 sir. 19 Q. Now, the condition of USAT and UFG 20 after you entered into that contract continued to 21 worsen, did it not? 22 A. Yes, sir. 16534 1 Q. Had the stock market crash? 2 A. In October of '87, yes. 3 Q. But quite apart from the stock market 4 crash, there was -- the general condition with 5 respect to non-performing real estate was also 6 worsening, wasn't it? 7 A. Yes, sir. As best I remember -- and I 8 don't have the numbers in front of me; but, yes, I 9 think it continued to worsen. 10 Q. And by the end of the year, UFG's 11 annual report reported that they were failing 12 their minimum capital requirement. 13 Do you recall that? 14 A. As of the end of '87? 15 Q. Yes. 16 A. Yes, sir, I do remember that. 17 Q. And that's something that you were very 18 much aware of as chief financial officer? 19 A. That's correct. 20 THE COURT: We'll take a short recess. 21 22 . 16535 1 (Whereupon, a short break was taken 2 from 11:09 a.m. to 11:29 a.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Mr. Rinaldi, you may continue. 7 MR. RINALDI: Thank you, Your Honor. 8 Q. (BY MR. RINALDI) Mr. Crow, I've taken 9 the liberty of opening your exhibit there to 10 Exhibit T8049. This is the special meeting of the 11 board of directors of United Savings Association 12 of Texas. 13 A. Okay. 14 Q. And I've turned to the page which has 15 the number OW054327. This is the statement that 16 relates to the capital position of USAT as of 17 December 31st, 1987. 18 Do you see that? 19 A. Yes, sir, I do. 20 Q. Does this refresh your recollection 21 that as of December 31st, 1987, the association 22 calculated its capital as being $53,659,000 below 16536 1 its minimum capital requirement? 2 A. Yes, sir. 3 Q. Now, looking at that, can you tell what 4 the GAAP capital was as of December 31st, 1987, as 5 computed by the association and the examiners? 6 A. The Generally-Accepted Accounting 7 Principles capital? 8 Q. Yeah. 9 A. Well, let's see. I don't think that 10 would be on this page. Maybe I'm mistaken. 11 Q. I don't know. Is that it on the first 12 line? It seems obliterated. I wasn't sure. 13 A. Generally, no. I think we could find 14 GAAP capital in the balance sheet. 15 Q. Okay. 16 A. Here's -- on Page -- well, we really 17 would have to look at the balance sheet as of that 18 date. 19 Q. Okay. Well, let's move on because -- 20 but in any event, the minimum regulatory capital 21 at this date and time was -- they were below it by 22 $53 million by their calculation and 112 million 16537 1 by the examiner's calculation? 2 A. Yes, sir, that's correct. 3 Q. And that's as of December 31st, 1987. 4 Do you see that? 5 A. I do, yes, sir. 6 Q. Now, after December 31st, 1987, a 1987 7 bonus was awarded to the -- at USAT and UFG, was 8 it not? 9 A. That was paid in early 1988? 10 Q. That's correct. 11 A. Yes, sir. 12 Q. And you were the person that authorized 13 that bonus, weren't you, or authorized the 14 payments in early January 1987? 15 MR. VILLA: You probably mean early 16 January 1988. 17 MR. RINALDI: '88. I'm sorry. 18 Q. (BY MR. RINALDI) Take a look at the 19 last exhibit in Binder III which is -- is 20 Mr. Villa's letter to me dated August 18th, 1987, 21 with a number of documents attached. It's T8034. 22 And look at the -- what would be Bates stamp 16538 1 C00000009. 2 A. Okay. (Witness reviews the document.) 3 Yes. 4 Q. Okay. 5 A. I see that. I want to make clear that 6 when you say I authorized the bonus, I -- 7 Q. Let me strike that. 8 You indicated that you approved the 9 bonus payment? 10 A. That would have been the sheet that we 11 sent over to payroll, and I think there would have 12 been something probably -- typically, that would 13 be signed by Mr. Gross, as well. You know, that 14 would come down from the compensation committee 15 and then Mr. Gross. And then typically, the 16 payroll department would look for my signature as 17 well as Mr. Gross'; but I don't see Mr. Gross' 18 here. 19 Q. And this indicates that on 20 January the 4th, 1988, you approved payroll to pay 21 over a million and a half dollars in bonuses to 22 employees of USAT; is that correct? 16539 1 A. That is correct. 2 Q. And at that point in time, USAT was 3 failing its minimum regulatory capital requirement 4 by over $50 million by your own reckoning? 5 A. That is correct. 6 Q. And if you look at those bonuses, of 7 that total 1.5 million, it would appear that over 8 600,000 went to Mr. Gross, Mr. Crow, Mr. Berner, 9 and Mr. Munitz. 10 Is that fair? 11 A. If you've added them up, it's fair. 12 Q. Well, that would be approximately -- 13 THE COURT: Mr. Rinaldi, haven't we 14 been over this material before? It sounds 15 familiar. 16 MR. RINALDI: I'm moving on. It was 17 just those two questions, Your Honor. 18 Q. (BY MR. RINALDI) Now -- 19 A. It -- go ahead, Mr. Rinaldi. I'm 20 sorry. 21 Q. Okay. Now, there came a time in 22 February of 1988 that you entered into a contract 16540 1 with USAT, as well. 2 Do you recall that? 3 A. Yes, sir, I do. 4 Q. And do you recall that a question was 5 asked to you about a memo that related to not 6 mentioning to the regulators that you were 7 projecting $100 million in -- in further losses by 8 USAT and UFG in 1988? 9 A. Yes, sir, I remember that, that note to 10 Mr. Gross. 11 Q. Right. And Mr. Villa asked you at that 12 point in time, you know, what it was or what the 13 rationale was of why you didn't tell the 14 regulators at the February -- well, let's take a 15 look at it. It's T4476; and it's dated 16 February the 4th, 1988. It's in the first binder. 17 It's February the 4th. So, it would be in the 18 order of events. 19 I believe that's it right there. 20 (Indicating) 21 A. Okay. Thank you. 22 Q. Now -- now, I believe what you said 16541 1 was -- well, you were going to submit a 2 forbearance application; and that number would be 3 included in the forbearance application. 4 Do you recall that? 5 MR. VILLA: Objection. That 6 mischaracterizes his answer. 7 Q. (BY MR. RINALDI) Can you tell me what 8 it is you think you did say, sir? 9 A. Yes, sir. What I tried to say -- I'm 10 not particularly articulate. But what I tried to 11 say is that, you know, I don't remember this note; 12 but I -- from reading it, whenever you have a 13 budget or a plan, until the board of directors 14 approves it, it should not be shown to outsiders 15 because the board basically is the ultimate boss. 16 And just because Mike Crow and even Jenard Gross 17 puts a budget and plan together, it doesn't mean 18 the board is going to approve it. They may say, 19 "You guys are crazy. You're not going to hire 50 20 new people and go back and redo it." 21 So, I think my thought process was 22 probably, you know, it's just inappropriate to 16542 1 show the budget until the board approves it to 2 credit analysts, examiners, or anybody else. It's 3 kind of like a half-completed worksheet. And I 4 think, you know, I do remember that we put it in 5 the forbearance -- I guess the capital forbearance 6 application. 7 Q. Let me show you what's been previously 8 marked as Exhibit B2020. This is the capital 9 forbearance application, and I believe Mr. Villa 10 pointed you to Page 25 or 26 in this document. 11 A. Okay. 12 Q. But it indicates that this capital 13 forbearance was filed on February the 14th, 1988. 14 Do you see that? 15 A. Yes, sir. February 16th, isn't it? 16 Q. I'm sorry. I apologize. 17 And at that time, you disclosed in the 18 forbearance application that you were projecting 19 substantial losses, did you not? 20 A. Yes, sir. 21 Q. And what was the number that appears in 22 the forbearance application? 16543 1 A. I think it's done on a quarterly basis, 2 and it's 105 to $115 million for the year. 3 Q. And ultimately, the board -- 4 ultimately, the board approved the forbearance 5 application on February 11th, 1988, with a 6 submission at the board meeting of that date. 7 That appears at Exhibit T8039. 8 Do you see that? It should be two 9 exhibits beyond the one you were looking at. 10 A. Okay. Yes, sir. What section is that? 11 Q. And if you turn, I think, to Page 26, 12 in the middle of the page, it talks about a draft 13 of the forbearance application was approved. 14 Do you see that? 15 A. I do, yes, sir. 16 Q. So, in other words, after it was 17 approved by the board on February the 11th, on 18 February the 16th, five days later, the 19 application was submitted to the regulators; and 20 at that time, you advised the regulators that you 21 were projecting losses of $105 million? 22 A. Yes, sir. 16544 1 Q. What happened at the February 11th 2 meeting of the board? What was the only other 3 major thing on the board's agenda that day? 4 MR. VILLA: Your Honor, by his own 5 estimation, he's just pointed to Page 26 of the 6 minutes. I think it's a little unfair unless he 7 wants the witness to read 26 pages. 8 THE COURT: All right. What is your -- 9 why don't you restate your question? You said 10 "next page." What is the next page? 11 Q. (BY MR. RINALDI) Page 26 of 12 Exhibit T8039. 13 A. Okay. I'm on Page 26. 14 Q. And after the -- at the meeting on 15 February the 11th, USAT considered giving 16 employment contracts to its executives, did it 17 not? 18 A. Oh, that's Page 27. I'm sorry. I was 19 on the wrong page. 20 Q. Do you see that? 21 A. Yes, sir. Where it starts out 22 "Mr. Berner discussed in detail," yes, sir, I do. 16545 1 Q. So, at the time that you were 2 discussing those contracts on February the 11th, 3 you hadn't yet advised the Federal Home Loan Bank 4 Board examiners or supervisory staff that you were 5 projecting 105 million in losses for the year 6 1988, had you? 7 A. I think, factually, that's correct. 8 But I might point out, Mr. Rinaldi, that at this 9 meeting -- I mean, we weren't trying to hide 10 anything. This was all done on top of the table. 11 At the meeting, Ms. Vivian Carlton was there from 12 the Federal Home Loan Bank and John Cottingham. 13 Ms. Carlton was pretty well-versed in our 14 financials. And in 1987, I think we had lost, it 15 seems to me, about $100 million -- 16 Q. But you didn't tell the Bank Board -- 17 A. Please let me finish. I think that 18 Ms. Carlton -- you know, she can testify on her 19 own behalf; but if you just lost over $100 million 20 the prior year and, you know, nothing -- there had 21 been no miraculous turnaround, I'm sure 22 Ms. Carlton must have had some idea of what -- you 16546 1 know, she wouldn't have known the exact number at 2 all; but she would have known that things were 3 still looking bleak, you know. We've used that 4 word. But no. Factually, we did not tell her or 5 tell the Federal Home Loan Bank prior to this 6 discussion on Page 27. 7 Q. Now, the discussion on Page 27, the 8 second full paragraph, it says, "It was noted that 9 the contracts were identical to contracts entered 10 with UFG," and then it says, "would only be 11 effective if UFG could not perform under such 12 contracts." 13 Do you see that? 14 A. I do. 15 Q. Was it your recollection that the 16 regulators were told that if a contract were 17 entered into with USAT, it would only be a back-up 18 to existing contracts with UFG? 19 A. I didn't tell them that, if that's your 20 question. I don't know. 21 Q. But that's what the minutes reflect 22 they were told? 16547 1 A. The minutes reflect that, and they were 2 there. So -- but factually, no, sir, I didn't 3 have any such discussion with them. 4 Q. Was a copy of one of the contracts 5 given to the regulators at that time for them to 6 review? 7 A. At this meeting? 8 Q. Yes. 9 A. I have no idea. I don't know. 10 Q. Why don't you look at the previous 11 document, and maybe that will help us. It's 12 T8038. And if you look at -- do you have T8038? 13 A. Yes, sir, I do. 14 Q. This is the compensation committee 15 meeting of the same day -- 16 A. Okay. Yes, sir. 17 Q. -- at which the compensation committee 18 recommended contracts for yourself and five other 19 people. 20 Do you see that? 21 A. Yes, sir, I do. 22 Q. And then immediately below it, it says, 16548 1 "Mr. Berner was requested to prepare such 2 contracts and to present them to the board for 3 approval." 4 Do you see that? 5 A. I do. 6 Q. So, would you assume from that entry in 7 the compensation committee minutes that the 8 contracts had not yet been prepared on 9 February the 11th, 1988? 10 MR. VILLA: Excuse me, sir. Which 11 document are you reading from? 12 MR. RINALDI: The compensation 13 committee minutes which are T8038. 14 MR. VILLA: And the page? 15 MR. RINALDI: They are Tab 411. It's 16 the front page. It's the third paragraph. 17 MR. VILLA: Well, in fairness to the 18 witness, he should read the line that says, 19 "Mr. Berner presented a draft copy of an 20 employment agreement which was discussed in 21 detail." In fairness to the witness, Mr. Rinaldi, 22 shouldn't you have read him that? 16549 1 MR. RINALDI: Well, I think you read 2 him that. 3 Q. (BY MR. RINALDI) Was a copy of the 4 contract presented to the regulators at the 5 February 11th board meeting? 6 A. I don't know. 7 Q. And, in fact, the final contracts 8 weren't even prepared and executed, as we've 9 determined, until March the 4th, 1988; isn't that 10 correct? Isn't that what you testified to your 11 counsel the other day? 12 A. I don't know whether they would have 13 been prepared, but I guess if I said they were 14 executed on about March 4th -- 15 Q. Or sometime between March the 2nd when 16 you received the memo from Mr. Berner and 17 March the 4th -- 18 A. I think they were executed between 19 those two dates. As to when Mr. Berner actually 20 prepared them, I don't have any knowledge. 21 Q. Why was a second contract required on 22 February 11th, 1988? 16550 1 MR. VILLA: Objection, Your Honor. 2 Asked and answered. 3 A. I don't know. 4 THE COURT: Denied. Next question. 5 Q. (BY MR. RINALDI) Can we look at 6 Exhibit T8054? This is Mr. Berner's memo again, 7 and perhaps that can shed some light on the 8 subject. 9 A. Okay. (Witness reviews the document.) 10 Q. Now, take a look at the third full 11 paragraph down. After the UFG contract was 12 entered into in September of 1987, it indicates 13 here that in January '88, senior executive 14 officers expressed additional concern about UFGI's 15 viability. 16 Do you see that? 17 A. No, sir. I'm a little lost. Where -- 18 Q. Okay. It's imaging stamp OW035557. 19 A. My imaging -- oh, I'm on that page. 20 Yes, sir. 21 Q. Do you see that? 22 A. Which paragraph? 16551 1 Q. It's the second full paragraph that 2 begins with the words "in January." 3 A. Yes, sir. 4 Q. And it says here that in January, there 5 again was concern raised about the viability of 6 UFGI. 7 Do you see that? 8 A. Yes, sir, I do see that. 9 Q. And were you among the people, the 10 executive officers, that were concerned about 11 UFGI's viability in January of 1988? 12 A. Mr. Rinaldi, I don't know. I'm -- I'm 13 not trying to be cute. It's just I -- in terms of 14 a specific date and when I expressed concern or 15 didn't express concern, I just don't know. This 16 was a memo that Mr. Berner wrote relating some 17 events; and, you know, I've never seen it before. 18 And I don't know what discussions he was talking 19 about. 20 Q. Well, it says, "It appeared at that 21 time in January 1988" -- "It appeared at that time 22 as if the debts of UFG would not be repaid since 16552 1 it was possible UFG would have to pull all of its 2 equity into USAT." 3 Do you see that? 4 A. I do see that. 5 Q. Did you share that concern at or about 6 this point in time: Early 1988? 7 A. I don't know whether I did or didn't. 8 Q. Okay. 9 A. I know, you know, at some point in time 10 when we were talking about paying off the 11 Penn Corp debt, certainly there was -- there was 12 so much money in the cupboard; and if we paid off 13 the Penn Corp debt, that left a relatively small 14 amount at UFG. So, I certainly have a memory of 15 those discussions and, you know, focusing on UFG's 16 cash position at that time. But as to this 17 specific thought or time frame, I don't know. 18 Q. Now, the next sentence goes on and 19 says, "Since USAT could not dividend additional 20 cash to UFGI, it appears as if, over a long period 21 of time, unless there was a significant change in 22 circumstances, UFGI would not be viable." The 16553 1 next paragraphs reads, "Therefore, it was 2 recommended to the USAT compensation committee 3 which, at the time, consisted of Messrs. Whatley, 4 Silverman, and Keltner that a back-up employment 5 agreement be entered into among executive officers 6 of USAT and UFG." 7 Do you see that? 8 A. Yes. 9 Q. Does that refresh your recollection 10 that the reason why it was proposed that 11 employment contracts be entered into in February 12 of 1988 was that executives of USAT and UFG were 13 concerned that UFG would not be viable and would 14 not be able to fulfill its obligation under the 15 September 9th, 1988 contracts? 16 A. No, sir, it doesn't refresh my 17 recollection. I just simply -- now, I've tried to 18 explain that I -- you know, to my knowledge, I 19 never attended a compensation committee in my 20 life. You know, this wasn't something -- you 21 know, I tried to be responsible; but it wasn't 22 something that I was involved in. You know, I got 16554 1 the contracts and I certainly read them and there 2 would be pages substituted back and forth. But 3 I've tried to convey that, you know, it just -- I 4 didn't focus on, "Gee, this is a USAT contract and 5 not a UFG contract. I wonder why." You know, it 6 was -- I signed the contract, sent it back, and 7 went back to work. 8 Q. Would you take a look at Exhibit A1140? 9 This is the minutes of the United Financial Group 10 board of directors meeting of February 11th, 1988. 11 I believe this was shown to you by your counsel -- 12 A. Okay. 13 Q. -- last Friday or last Thursday. 14 Do you have that document? 15 MR. VILLA: A1140? 16 MR. RINALDI: Uh-huh. Tell you what. 17 I'll just give everybody copies. 18 MR. VILLA: Thank you. 19 MR. RINALDI: Your Honor, I just have 20 one question I want to ask about this. 21 Q. (BY MR. RINALDI) Would you turn to the 22 last page of the document? I'm sorry. To Page 8 16555 1 of the document. And it's got Roman numeral XVI. 2 Do you see that? 3 A. "Resolved that effective 4 February 11" -- 5 Q. Yeah. Just read that to yourself. 6 A. Okay. Just the first paragraph? 7 Q. Yes. 8 A. (Witness reviews the document.) If 9 you're going to ask me questions on it, I had 10 better read it again because it sounds like a 11 bunch of legal -- (Witness reviews the document.) 12 Okay. I've read that paragraph. 13 Q. And then there's an Exhibit A attached 14 that lists a bunch of benefits provided by UFGI. 15 Do you see that? 16 A. Yes, sir, I do. 17 Q. What does that paragraph refer to, that 18 resolution? 19 A. I guess it refers to Exhibit A. 20 Q. Well, did all of -- did USAT assume 21 responsibility for various benefit programs 22 offered by UFG at or about February the 11th, 16556 1 1988? 2 A. I don't know. You know, I've read this 3 paragraph -- 4 Q. And you have no independent 5 recollection of that? 6 A. -- three times now, and I don't -- 7 it's, you know, legal mumbo-jumbo to me. 8 Q. So, I should ask Mr. Berner what that 9 means since, in all likelihood, he wrote it? 10 A. He would -- since he's an attorney, he 11 would be much more adept at interpreting what that 12 says than me. 13 Q. Okay. Now, last week, your attorney 14 asked you some questions about a change of control 15 that had occurred. 16 Do you recall that? 17 A. Yes, sir, I do. 18 Q. And he went through a calendar that 19 showed when people had resigned. And I had 20 previously shown you the first document in 21 Volume I which is the director's list. And on the 22 second page, I pointed out to you that 16557 1 Mr. Borman -- 2 MR. VILLA: Excuse me. We don't have 3 the same volumes as you. If you could just give 4 us the exhibit numbers. 5 MR. RINALDI: It would be T80003. This 6 is just the directors list. 7 Q. (BY MR. RINALDI) I pointed out to you 8 that Mr. Borman had resigned on 2/19/88. 9 Do you see that? 10 A. I do see that, yes, sir. 11 Q. Then we have Mr. Keltner resigning 12 on -- I'm sorry -- Mr. Silverman resigning on 13 2/29/88. 14 Do you see that? 15 A. Yes, sir, I do. 16 Q. And then Mr. Keltner resigned on 17 3/2/88. There was a question of whether you 18 actually learned of Mr. Keltner resigning at the 19 time you signed your contract. 20 Do you remember that? 21 A. Yes, sir, I do. 22 Q. Were you aware at the time you signed 16558 1 your contract with USAT that Mr. Silverman and 2 Mr. Burton Borman had resigned some -- over two 3 weeks prior to your entering into that arrangement 4 with USAT? 5 A. I can't say for sure, but I probably 6 would have been aware of that. I don't remember. 7 Q. As you sit here today, it was the 8 resignation of Mr. Keltner that would have been 9 the triggering event of the change of control? 10 A. I don't know. 11 Q. Okay. But there was a change of 12 control, and it was triggered by the resignation 13 of those three individuals; is that correct? 14 A. You know, what I remember -- if you're 15 asking me what I remember at the time -- I 16 remember after Jeff Gray's, you know, drawing it 17 to people's attention, I went into my office; and 18 I started counting directors. And, you know, just 19 from a layman's reading of the contract, it 20 appeared, you know, "Holy whatever. Gee, maybe 21 he's right." And as to whose name it was, whether 22 it was Mr. Keltner's or whoever, I don't remember. 16559 1 Q. And I believe your counsel gave you a 2 copy of Mr. Gray's letter the other day, which was 3 Exhibit B22 -- 2082. And I've just handed you 4 another copy of that. 5 Is this about the time that you learned 6 that Mr. Gray believed that the contract had been 7 triggered by the resignation of one or more 8 directors? 9 A. I think it would have been prior to 10 that. You know, I think this was kind of -- I 11 think Jeff was talking -- Jeff Gray was talking to 12 other people -- Mr. Wolfe and Mr. Williams and 13 others -- prior to the March 16th date. But, yes, 14 it was roughly in this time frame. 15 Q. Okay. 16 A. The prior week or so. 17 Q. Now, you had at that time two 18 contracts, one with UFG and one with USAT. 19 What was your understanding as to which 20 of the two contracts had been triggered by the 21 resignations? 22 A. The factual answer is I don't remember. 16560 1 I've got a strong suspicion. I didn't focus on 2 it. 3 Q. Let me ask you this: Did Mr. Gray 4 indicate in his letter which contract had been 5 triggered? 6 A. He addresses his letter to United 7 Financial Group, Inc.; and I don't see in the text 8 where he says it. But since he addressed it to 9 United Financial Group, Inc., you know, I guess he 10 was claiming under the UFG contract; but I can't 11 say. 12 Q. It says, "Please refer to the 13 employment agreement dated September 9, 1987." 14 Do you see that? 15 A. Yes. And he addressed it to UFG. So, 16 I think it's a safe assumption that we're talking 17 about the UFG contract here. 18 Q. Well, let's take a look at Mr. Berner's 19 memo again because maybe that will clarify things. 20 This is Tab 403. It's T8054; and it's dated 21 March 31, 1988. 22 And I think if you look about the 16561 1 fourth page in -- I'll get you the number -- it's 2 OW035558. 3 Do you see that? 4 A. Yes, sir. 5 Q. If you look at the next-to-the-last 6 paragraph, the last sentence has a parenthetical 7 there. 8 Do you see that? 9 A. Yes, sir, I see that. 10 Q. And it's -- well, the paragraph talks 11 about a triggering of the employment contracts by 12 the change of control. Then it says, "(It should 13 be noted that at the USAT level, the agreement 14 would not be triggered.)" 15 Do you see that? 16 A. I do. 17 Q. Does that refresh your recollection 18 that the contract -- the change of control 19 provisions that were triggered by the resignation 20 of directors were the change of control provisions 21 that were in the UFG contract of September 9, 22 1987? 16562 1 A. Well, it doesn't refresh my 2 recollection; but, you know, based on Mr. Gray's 3 letter, it's to UFG. You know, I just don't have 4 any -- if you're asking me what I remember, I 5 don't know. I do not remember. 6 Q. Okay. Now, you proposed a solution to 7 the change of control, did you not? 8 A. In my letter to Mr. Gross, I believe 9 that I did, yes, sir. 10 Q. And let's take a look at that so that I 11 don't misrepresent anything. I believe that that 12 is Exhibit T8046. And it's a memo dated the 22nd 13 of March 1988. 14 Did I give you the wrong -- 15 A. It's 8046. 16 Q. Okay. I sometimes -- let me see if I 17 can find my copy of it. 18 So, you made a -- first of all, you 19 referenced the fact that there had been a change 20 of control triggered by directors resigning. 21 Right? 22 A. Yes, sir, I did. 16563 1 Q. And that would, then, make reference to 2 the change of control that's referred to by 3 Mr. Gray in Exhibit B2082; is that correct? 4 A. I think we were talking about the same 5 change of control, yes, sir. 6 Q. Okay. And your suggestion was, first, 7 that -- in Paragraph 2 -- that effective 8 January 1st, 1988, the '87 bonuses would be rolled 9 into the '88 compensation, correct? We went 10 through all of this? 11 A. Yes, sir, I see that. 12 Q. And then you also suggested that the 13 contracts should be reconfigured which, I believe, 14 appears at the third paragraph? 15 A. Yes, sir, I see that. 16 Q. And by "reconfiguration," I think you 17 meant you needed to clarify the change of control 18 provision in the future, correct? 19 A. Yeah, that -- well, basically, that -- 20 to reconfigure the contracts such that the 21 executive would be eligible to collect only if he 22 were terminated by the company. 16564 1 Q. And those reconfigured contracts would 2 also, then, take into account the higher salary 3 levels that are proposed in the paragraph above 4 it, correct? 5 A. That is correct. 6 Q. All right. And then the third thing 7 that you proposed is that there be a bonus of some 8 sort, and it's described in the first paragraph in 9 order to make up for the loss of the value 10 associated with the performance unit plan. 11 Do you see that? 12 A. The four-year performance -- yes, sir, 13 I do see that. 14 Q. And it talks about a 25 percent 15 pay-out, and you make a recommendation as to how 16 to treat that issue. 17 Do you see that? 18 A. Yes, sir, I do. 19 Q. And is that sort of to provide an 20 additional bonus for the loss of the performance 21 unit plan? 22 A. Well, I don't think so. 16565 1 Q. Okay. Then let's go on. Your other 2 proposal, then, on the back page was that you 3 secure whatever benefits are available under the 4 reconfigured contract with a letter of credit, 5 correct? 6 A. Yes, sir. 7 Q. Okay. And then if we turn to 8053, 8 which is just a few pages on, we see that this is 9 the memo dated March the 31st, 1988, from 10 Mr. Berner to Mr. Whatley, Mr. Gross, and 11 Mr. Munitz which is the action that was ultimately 12 undertaken by the compensation committee. 13 Do you see that? 14 A. I do. I have that. 15 Q. And in Paragraph 2, they adopted your 16 recommendation that the current salaries be 17 changed and increased by the amount of the '87 18 bonus paid in '88. 19 Do you see that? 20 A. Let's see. I see that, yes. 21 Q. And in addition, they actually made it 22 retroactive just as you had proposed in the 16566 1 March 22nd, 1988 memo? 2 A. Let's see. If I proposed that, yes, I 3 guess I would agree. 4 Q. Okay. And then they -- in Paragraph 6, 5 it says, "We'll provide for amended employment 6 contracts." 7 Do you see that? 8 A. Yes, sir, I do. 9 Q. And they were for the purpose of 10 clarifying the change of control provision. 11 Right? 12 A. Yes, sir. 13 Q. So, again, they followed your 14 suggestion in that regard. And then they talk 15 about -- 16 A. Well -- well, I guess, you know, we 17 were all -- that was the whole objective of all of 18 this, is to -- is to make a change of control -- 19 you know, in my words, it was like you didn't have 20 a change of control unless you were terminated; 21 you know, other events and you were terminated. 22 And you know, if -- they are talking about some -- 16567 1 again, some different wording, but whatever. 2 Q. Okay. And then I see that in 3 Paragraphs 4 and 5, in order to compensate for the 4 PUP or the performance unit plan, they authorized 5 an executive bonus plan? 6 MR. VILLA: Objection. That isn't what 7 it says. You can characterize it how you like, 8 but there is no relationship between performance 9 unit plan and that in 4 and 5. I think you're 10 mischaracterizing the document. 11 MR. RINALDI: I'm sorry. I thought 12 there was a reference to the performance plan in 13 here. I stand corrected if there's not one. 14 Q. (BY MR. RINALDI) In any event, there 15 was a special bonus? 16 A. There was a special bonus. 17 Q. Is it your recollection that that was 18 in recognition of the fact that there would be no 19 performance unit plan payments? 20 A. No, sir. I don't remember that level 21 of detail. And then the reason I stumbled around 22 on the -- you know, when we were talking about my 16568 1 memo with the performance unit plan, my memo to 2 Mr. Gross, I thought that the employment contracts 3 said -- it was part of your severance. In other 4 words, if the employment contract was triggered, 5 that part of that PUP program you're referring to 6 would be triggered. And that's what I was -- 7 that's why I stumbled a bit there. 8 Q. Okay. 9 A. And I don't know whether this relates 10 to the performance unit plan at all. 11 Q. And we've seen within a number of days 12 that by April the 5th, 1988, the salary increases 13 and the bonuses were approved by Mr. Gross. 14 Do you recall when we went through that 15 the last time? 16 A. I remember the schedule, and if you say 17 it was -- I don't remember the date, but that's -- 18 I don't -- if it's April 5th, I'll certainly 19 accept that. 20 Q. And all of these things were done that 21 we've just discussed: The salary increase. 22 Right? 16569 1 A. Yes, sir. 2 Q. The retroactivity to January the 1st, 3 the new bonus, and the restructuring of the 4 contract in order to address the change of control 5 issue, correct? 6 A. Could you run those by me again, 7 please? 8 Q. There had been a change of control 9 triggered by the resignation of certain directors? 10 A. Okay. Yes, sir. 11 Q. And then you, on March the 22nd, made a 12 proposal as to how to deal with that change of 13 control. And your proposal included increasing 14 the salaries, making it retroactive; providing 15 some kind of bonus; and later, they gave a 16 different kind of bonus; and thirdly, that new 17 employment contracts be entered into, correct? 18 A. Yes, sir. 19 Q. And that was the solution you had 20 proposed be paid to deal with the change of 21 control? 22 A. Yes, sir. 16570 1 Q. Okay. And then on March the 31st, 2 1988, the compensation committee adopts a 3 proposal. And pursuant to the proposal, they 4 increase salaries, make them retroactive, and they 5 enter into a new employment contract and they 6 provide a special bonus. 7 Do you see that? 8 A. Let's see. Yes, sir, I do. 9 Q. And these salary increases and bonus 10 change and new employment contract were undertaken 11 to deal with the change of control problem that 12 Mr. Gray had raised; isn't that true? 13 A. Yes, sir, I believe it is. 14 Q. Okay. 15 A. To the best of my knowledge, you know, 16 the best of what I've seen -- again, I warn 17 everybody. I never attended a compensation 18 committee. So, what they thought, I don't -- you 19 know, I'm just reading along with you. 20 Q. So, in other words, UFG had a problem 21 that had manifested itself by virtue of the change 22 of control; and it was brought to the attention of 16571 1 the executives of USAT and UFG by Mr. Gray, 2 correct? 3 A. Well, I think I would put it more like 4 United had a problem. 5 Q. Why did United have a problem? 6 A. Well, I just -- you know, again, I 7 looked at the world as United consolidated. And 8 maybe if Mr. Jackson or Mr. Gray or Mr. Wolfe or 9 myself, you know, float out the door, then I think 10 all United has a problem. UFG, United Savings, 11 United consolidated, however you want to look at 12 it. 13 Q. And in order to correct the problem 14 associated with the change of control that was 15 identified by Mr. Gray, United Savings Association 16 of Texas gave salary increases, did they not? 17 A. I think we have established that, yes, 18 there were salary adjustments made to roll the 19 bonus into the salary. 20 Q. And that was done by United? 21 A. And that we've certainly seen that 22 United Savings paid the salaries. 16572 1 Q. And United agreed to enter into future 2 contracts at those higher salary levels that are 3 indicated -- that were approved by Mr. Gross on 4 April the 5th? 5 A. Yes. After that, we had dual 6 contracts; and then in June, we had -- or some 7 later date, we had some more contracts that were 8 the "Connell model" contract. And, you know, 9 so -- yes, sir. 10 Q. Okay. And -- I'm sorry. I lost my 11 train of thought. 12 A. I've been having that problem, too, 13 Mr. Rinaldi. 14 Q. So -- and as a result of those -- 15 entering into those contracts, it cost USAT 16 $2.5 million, didn't it? Strike that. 17 As a result of increasing the salaries 18 and awarding the bonuses that are reflected in the 19 March 31st, 1988 memo which is T8053, it cost USAT 20 $2.5 million; isn't that correct? 21 A. Is that what the numbers add up to? 22 Q. Well, do you recall that I showed you a 16573 1 document the other day which is T8168? And it's 2 about two, three, four, five, six -- about eight 3 documents further on. It's a memo from Mr. Gross 4 to Mr. Crow dated April 28, 1988. 5 A. And that's in Volume II? 6 Q. Same document. 7 A. Okay. 8 Q. Do you recall I showed you that 9 document? 10 A. Let's see. Well, this is -- no. This 11 is Jenard's performance report. 12 Q. Yes, and the second paragraph talks 13 about -- 14 A. Okay. 15 Q. I guess we're talking about -- do you 16 see that? 17 A. Yes, sir. 18 Q. And Mr. Gross indicates that as a 19 result of the salary increases and the bonuses, it 20 was going to cost USAT $2.5 million. 21 Do you see that? 22 A. Yes, sir, I do. 16574 1 Q. So, in other words, in order to resolve 2 the change of control problem raised by Mr. Gray, 3 USAT approved employment benefits in the form of 4 salary and bonuses that cost USAT $2.5 million, 5 correct? 6 A. That would have increased -- assuming 7 that 2.5-million-dollar number is right, unless, 8 you know, whatever the number is, it would have 9 been a sizable figure, that expenses would go up 10 by $2.5 million and, you know, on the plus side 11 you would keep people. 12 Q. Okay. And in the next -- 13 A. But just in terms of a direct answer to 14 your question, yes, sir, that indicates that 15 operating expenses would go up by that amount. 16 Q. And those increases in operating 17 expenses were incurred by USAT? 18 A. Yeah. Probably with rare exception, if 19 any, but yes, sir. 20 Q. And an increase in operating expenses 21 were for the purpose of resolving Mr. Gray's 22 problem of change of control? 16575 1 A. Certainly, that seemed to be the 2 triggering event. As to whether the compensation 3 committee considered, you know, other factors, I 4 don't know. You know, it might have been -- you 5 know, it seemed to me that this special bonus 6 program we were talking about was to provide some 7 "golden handcuff" type stuff to keep people around 8 during a very difficult period of time. 9 Q. Did you need a set of golden handcuffs 10 to stick around? 11 A. I can't say what was in my mind there. 12 I was probably -- you know, I was -- I thought we 13 were going to be restructured. As to whether I 14 would have left or not, I can't say. 15 Q. Did Jenard Gross need a set of golden 16 handcuffs to stick around? 17 A. I have never figured out what Jenard 18 needed; so, I don't know. 19 Q. You decided to hitch your wagon to UFG 20 back in 1985. And consistent with that, you 21 purchased 10,000 shares of United Financial Group 22 stock at a total cost to you of $72,500. 16576 1 Do you recall that? 2 A. I do. 3 Q. And at the same point in time, 4 Mr. Jenard Gross purchased 105,000 shares of UFG 5 at a total cost of him in excess of $762,000. 6 Do you recall that? 7 A. I don't know what -- I know Mr. Gross' 8 number was a lot bigger than mine. 9 Q. How did those purchases come about? 10 Did someone come to you and say, "How would you 11 like to buy some shares?" 12 MR. VILLA: Your Honor, I think this 13 goes a little beyond my examination. The witness 14 has been on the stand two weeks. At some point, 15 maybe we could just limit it to my examination. 16 Mr. Rinaldi is going off into areas about what 17 Mr. Gross was interested in. Really, can we let 18 the man go back to work at some point in time in 19 his career? 20 MR. RINALDI: Your Honor, he asked him 21 questions about golden handcuffs. I'm trying to 22 establish that these people had enormous debt. If 16577 1 they left at any time voluntarily, they were going 2 to be on the hook for enormous debt. I think it's 3 fair to ask what was the source of the debt. 4 THE COURT: All right. Why don't you 5 make your point? 6 MR. RINALDI: Fine. 7 A. Could you repeat that question, please? 8 Q. (BY MR. RINALDI) Did someone come to 9 you and offer to provide you shares of UFG to 10 invest in? 11 A. I'll limit it to myself because I have 12 no idea of Mr. Gross' arrangement. 13 Q. Who came to you? 14 A. Gerry Williams came to me and said, 15 "We've got an opportunity to invest in UFG stock, 16 and the company is willing to make a loan in order 17 to purchase that stock." And so, that's how that 18 came about. 19 Q. And when they came to you with that 20 offer, no one told you that if the stock went down 21 in value, they were going to forgive the note, did 22 they? 16578 1 A. I don't believe Mr. Williams ever said 2 that, no. You know, factually, I don't 3 remember -- I've told you about all I remember 4 about the meeting, but -- 5 Q. But you believed that if you left UFG 6 voluntarily at any point in time, you were going 7 to have to pay UFG -- pay off the note that you 8 owed to UFG, weren't you? 9 A. I would have to read the note, 10 Mr. Rinaldi. If that's what the note says, I 11 won't dispute that. I just -- you know, I don't 12 remember. I remember at some point, there came a 13 time where there was a bonus arrangement that -- 14 these aren't the right words but "If I got fired, 15 the note would be extinguished." 16 Q. If you voluntarily resigned from UFG, 17 you owned them $72,500, didn't you? 18 A. If that's what the note says, yes, sir. 19 Q. Well, let's take a look, then, at the 20 bonus agreement. It's T8060. It's about three 21 documents back, I think, in your book. It would 22 be right here. And you became concerned at some 16579 1 point in time about whether you were going to have 2 to pay that note, didn't you? 3 MR. VILLA: I don't have the note here. 4 MR. RINALDI: It's the bonus agreement. 5 MR. VILLA: You asked him what the note 6 said, and you handed him the bonus agreement. Now 7 you're referring to the note. 8 Do you have the note? 9 MR. RINALDI: I think I'm conducting 10 the examination, John. 11 MR. VILLA: I wonder about that 12 sometimes, sir. 13 THE COURT: All right. Let's move on 14 now. 15 MR. VILLA: Your Honor, if he asks him 16 about the note and hands him a bonus agreement, 17 it's misleading. 18 MR. RINALDI: Your Honor, he was the 19 one that brought up the question of whether he had 20 an agreement; and I said let's take a look at the 21 agreement. I wasn't the one that even raised it. 22 THE COURT: What's your question, 16580 1 Mr. Rinaldi? 2 Q. (BY MR. RINALDI) You entered into an 3 agreement which is Exhibit T8060. It's a bonus 4 agreement, correct? 5 A. Yes, sir. 6 Q. And at or about April 25th, 1988, you 7 were concerned that if UFG failed, that you would 8 have an outstanding obligation to them in the 9 amount of $72,500, weren't you? 10 A. Yeah. I remember the bonus agreement, 11 and I remember some -- I think correspondence back 12 and forth or maybe not coming back from Mr. Gross. 13 But I wrote Mr. Gross I was concerned about the 14 recapitalization and that if a new owner took over 15 United, who knows whether they would honor the 16 agreement that I had or not to service the note. 17 Q. And so, you entered into this bonus 18 arrangement in April of 1988 whereby you got three 19 separate bonuses. 20 Do you see in this paragraph there's a 21 minimum bonus that was partially to pay off the 22 note? 16581 1 A. Yes, sir. 2 Q. And then there was an extraordinary 3 bonus that at the end of four years, UFG would pay 4 off the entire note? 5 A. Yes, sir. 6 Q. And then finally in Paragraph 7, there 7 was an additional bonus that provided for the 8 payment of interest on the note. 9 Do you see that? 10 A. Yes, sir, I do. 11 Q. Okay. And so, as long as you remained 12 at UFGI, they were going to pay a minimum bonus to 13 pay off the note, and then they were going to pay 14 an extraordinary bonus at some point in the future 15 to pay off anything owing on December 31, 1993. 16 And finally, they were going to pick up all the 17 interest on the note. Right? 18 A. I got that last part. After this -- 19 the date of this agreement, they would pick up the 20 interest. 21 What were the prior parts of the 22 question? I apologize. 16582 1 Q. Well, my question to you is: As long 2 as you continued to work for UFG, they would 3 continue to make payments towards paying off the 4 note and paying the interest on the note; is that 5 fair? 6 A. That is correct. 7 MR. VILLA: I'll object, Your Honor. 8 On my redirect, I'll bring out the legal 9 significance of it, but I -- 10 Q. (BY MR. RINALDI) If you were to quit at 11 this point in time, though, there was an 12 obligation owed to UFG? 13 A. I guess if I -- well -- 14 Q. Was your obligation limited to 15 returning the stock? 16 A. I would have to carefully read this. I 17 know that there was "change of control" language 18 here on Page 154882; and that's what, you know, 19 really -- as my memory is -- is what I was 20 focusing in on. 21 Q. Okay. Well, then, let's go to 22 Mr. Gross. 16583 1 Do you recall when you testified the 2 last time that Mr. Gross, when he resigned, was 3 very much concerned about paying off his note 4 which, as you stated, was a much more substantial 5 amount? 6 A. I don't -- I can't say what Mr. Gross 7 was concerned about. I remember the way the 8 final -- at the end of the day that, as best I 9 remember -- and I may be using the wrong words 10 here -- that Mr. Gross' obligation under the note 11 was extinguished in return for his contract 12 rights. 13 Q. Right. 14 A. And then that is kind of what I 15 remember. Now, whether that's the legal way to 16 put it, I don't know. 17 Q. And you don't know legally what would 18 have happened if Mr. Gross had similarly 19 voluntarily resigned from USAT -- I mean from UFG? 20 You don't know what the legal 21 implications would have been regarding the 22 enforcement of his note? 16584 1 A. No, sir, I don't. 2 Q. And you don't know what the legal 3 implications would have been regarding the 4 enforcement of your note? 5 A. No, sir, I do not. 6 Q. So, in your mind, that wasn't an 7 incentive to stay at UFGI from your perspective? 8 A. The fact that the note was being paid 9 off over a period of time? 10 Q. Yes, sir, and that if you were to leave 11 UFGI, you may have some potential obligation to 12 pay the note yourself. 13 A. If you're asking me what I remember, I 14 don't remember thinking about it as an incentive. 15 I remember thinking about an incentive was, you 16 know, that you had an employment contract that 17 appeared to give you some security and that if you 18 were canned, you got two years' worth of severance 19 and that, you know, we had a salary and we had a 20 bonus. And the prior incentives that we had, the 21 stock options plan and the performance unit plan, 22 you know, I wish those would have had value in 16585 1 1987, 1988. But by that time, they had very 2 little, if any, value. 3 Q. Okay. Now, after the change of control 4 occurred that was referenced by Mr. Gray in his 5 letter and after that -- the new salary increases 6 were approved and the bonus was approved, there 7 came a time in June of 1988 when USAT entered into 8 new employment contracts, correct? 9 A. Yes, sir. 10 Q. And those new employment contracts were 11 the contracts that were being referenced back on 12 May 30th, 1988, that were going to be 13 reconfigured? 14 MR. VILLA: I believe you mean 15 March 30th. 16 MR. RINALDI: March 30th. I'm sorry. 17 A. The June contracts, using my words and 18 my memory, is that those were to -- my 19 understanding was that those were to conform to 20 the Connell model contracts. 21 Q. (BY MR. RINALDI) We're going to get to 22 the "Connell model" contract in a minute. 16586 1 The question I have for you is: You 2 had made a proposal on March 22, 1988, that the 3 contracts with senior executives be reformed. And 4 then there was a meeting of the compensation 5 committee that's memorialized in a memo dated 6 March the 31st, 1988, at which the compensation 7 committee approved entering into new contracts at 8 a higher salary level. 9 Do you recall that? 10 A. To roll the bonus into the salary. 11 Q. Right. And if we look, in fact, that's 12 exactly what happened because if you take a look 13 at T8055, your salary went from 171 to $280,656. 14 Correct? 15 A. That is correct, the new base, because 16 basically, you are taking the original base plus 17 the '87 bonus to arrive at a new base, yes, sir. 18 Q. And then if we take a look at the new 19 contract you entered into with USAT -- I believe 20 that was Exhibit T8086, and that's about 21 two-thirds of the way through Volume II. 22 If you take a look at that and we look 16587 1 at the salary -- it's on Page 3 -- it's 280,656, 2 correct? It's Paragraph 5 at the bottom of Page 3 3 of Exhibit T8086. 4 A. Yes, sir, it is. 5 Q. So, in other words, the salary that you 6 were given pursuant to the new USAT contract was 7 the very salary that had been approved back on 8 March the 31st, 1988, by the compensation 9 committee? 10 A. Yes. 11 Q. And that salary approval was in 12 response to Mr. Gray's complaint that there had 13 been a change of control, correct? 14 A. The reason I'm having trouble here, 15 certainly I -- you know, we've gone through all of 16 this. Mr. Gray's letter certainly was a big deal, 17 and it caused the compensation committee to meet 18 and deliberate and do whatever they did. As to 19 whether there were other reasons they changed, you 20 know, their -- roll the bonus into the original 21 base, I don't know. It certainly appears to me 22 that was a pretty big reason. 16588 1 Q. Now, you had mentioned the Connell 2 model -- 3 THE COURT: Mr. Rinaldi, how much more 4 do you have? 5 MR. RINALDI: Probably about 15, 20 6 minutes. 7 THE COURT: We'll adjourn until 8 2:00 o'clock. 9 10 (Whereupon, a lunch break was taken 11 from 12:33 p.m. to 2:03 p.m.) 12 13 THE COURT: Be seated, please. 14 We'll be back on the record. 15 Mr. Rinaldi. 16 MR. RINALDI: Thank you, Your Honor. 17 Q. (BY MR. RINALDI) Mr. Crow, I believe 18 toward the end of the morning, you had 19 indicated -- made a reference to something you 20 called the Connell model, and I believe there's 21 some discussion of the Connell model in your 22 redirect by Mister -- or your cross-examination by 16589 1 Mr. Villa. 2 Did Mr. Berner ever tell you that 3 Mr. Twomey, the supervisory agent, had told 4 Mr. Berner that he had approved Larry Connell's 5 contract? 6 A. Could you repeat that, please? 7 Q. Did Mr. Berner ever tell you that 8 Mr. Twomey had approved Larry Connell's contract? 9 A. Not that I remember. 10 Q. Okay. So, when you say you thought 11 yours was like the Connell model, you were 12 inferring Mr. Twomey had approved it because there 13 was no immediate response after the contract was 14 submitted to Mr. Twomey? 15 A. As best I remember, yes, sir, I think 16 that is a fair characterization. 17 Q. But Mr. Berner never told you that 18 Mr. Twomey, in fact, approved the contract? 19 A. Had expressly approved the contract? 20 Q. That's correct. 21 A. I don't remember that, no, sir. 22 Q. And there did come a time on 16590 1 October 27, 1988, that Mr. Twomey wrote a letter 2 to Mr. Berner expressly stating that he disagreed 3 with the contract. 4 Do you recall that? 5 A. I remember it was a letter that 6 Mr. Twomey sent that was critical of a number of 7 items related to the contracts of Mr. Connell and 8 myself and basically all the contracts, yes, sir. 9 Q. And if you take a look at T8111, which 10 is in front of you at this time -- I believe it's 11 Tab 444 -- does that appear to be the letter that 12 Mr. Twomey sent in which he criticizes the 13 contracts entered into? 14 A. Yes, sir. This is the letter that -- 15 that I kind of remember -- 16 Q. Okay. 17 A. -- or that I did remember, yes, sir. 18 Q. All right. And in that document, in 19 the third line down, he expressly criticizes the 20 contract entered into with Lawrence Connell, 21 didn't he? 22 A. Yes, sir. 16591 1 Q. And further down, he even criticizes 2 the contract entered into with Dominic Bruno, 3 didn't he? 4 A. Yes, sir. 5 Q. And this letter arrived on 6 October 27th; and that was approximately four 7 weeks, was it not, after USAT set up the escrow 8 with $6.6 million to fund the severance benefits? 9 A. I get my dates mixed up; but if that's 10 the fact, I certainly accept that. 11 Q. Well, if you'll take a look at what's 12 been previously marked as Exhibit T8106, about 13 four documents prior to that, this is a letter 14 dated October 3rd, 1988, to Mr. Munitz from 15 Mr. Gross. 16 Do you see that? 17 A. Yes, sir, I do. 18 Q. And it's dated October the 3rd. And it 19 states there that -- that the obligations under 20 the USAT contract had been secured by the creation 21 of a 6.6-million-dollar escrow. 22 Do you see that? 16592 1 A. Yes, sir, I do. 2 Q. And that was on October the 3rd, 3 correct? 4 A. The letter is dated October 3rd, yes. 5 Q. And on October the 27th, Mr. Twomey 6 wrote and said that those kinds of arrangements 7 were unsafe and unsound, didn't he? 8 A. Related to the escrow or -- I'm 9 assuming you're right. I haven't read 10 Mr. Twomey's letter in some time. 11 Q. Well, he indicated that the employment 12 contracts which required USAT to escrow or set 13 money aside to fund the severance benefits were 14 unsafe and unsound, didn't he? 15 A. What section is that in? I'm not 16 disputing you. I just don't -- 17 Q. It says, "These contracts" -- the last 18 sentence in the first paragraph, "Further, because 19 these contracts provide for excessive compensation 20 and severance payments, their execution at a time 21 when United was approaching or had actually 22 reported insolvency represented an unsafe an 16593 1 unsound practice by the board of directors and 2 senior management of United," correct? 3 A. I do see that, yes, sir. 4 Q. So, within approximately three, three 5 and a half weeks of funding the severance 6 benefits, Mr. Twomey then writes and says those 7 contracts are unsafe and unsound which provide for 8 severance benefits. 9 Do you see that? 10 A. I do see that, yes, sir. 11 Q. Okay. Now, you indicated that later, 12 you agreed to withdraw the money that had been set 13 aside in the escrow to fund the severance 14 arrangement by signing a waiver. 15 Do you recall that? 16 A. I remember that as it relates to the 17 75 percent bonus plan. As to how we got the money 18 back on the 6.6 million, I'm a bit confused on 19 that. 20 Q. But you do recall that the $6.6 million 21 was ultimately taken out of the escrow and 22 returned to USAT? 16594 1 A. That's my memory, yes. 2 Q. And that was as a result of Mr. Twomey 3 having raised his concerns regarding the creation 4 of that escrow. 5 Is that consistent with your 6 recollection? 7 A. Yes, sir. I mean, I remember we took a 8 number of actions in response to Mr. Twomey's 9 letter. 10 Q. Okay. Now, when your counsel asked you 11 about that waiver, you said you were asked/told to 12 sign the waivers. 13 Do you remember having said that? 14 A. I don't remember it, but that's pretty 15 much reflective of my memory. 16 Q. Okay. Who asked or told you to sign 17 the waiver? 18 A. I think -- I can't -- I think it was a 19 combination of Mister -- of Dr. Munitz and 20 Mr. Berner, but I -- and I'm a bit hazy on that; 21 so, I want to be careful. 22 Q. Do you recall why they wanted you to 16595 1 sign the waiver? 2 A. Because we wanted -- you know, my 3 memory is -- and whether it -- it's been a long 4 time ago. But my memory is that we still thought 5 we were perceived to be good guys and we wanted to 6 be part of the Southwest Plan and we knew we 7 needed to be restructured and move on down the 8 road. And if -- and this is my memory. If these 9 contract arrangements had created some difficulty 10 with Mr. Twomey, that we wanted to correct them. 11 I mean, that's my memory. 12 Q. And was it your understanding at that 13 time that if you did not correct that, that it 14 would jeopardize USAT's potentially participating 15 in the Southwest Plan? 16 A. That's about -- I can't say that, but 17 I -- I guess if the -- I can't say what I really 18 knew or what I thought then. But, you know, 19 looking back, if -- if the -- if the officials at 20 the Federal Home Loan Bank hated you, then your 21 idea -- or the potential of being in the 22 Southwest Plan was pretty slim to none. 16596 1 Q. So, you agreed to sign the waiver in 2 the hopes that it would result in your future 3 employment with whatever entity survived after 4 USAT's receivership? 5 A. I agreed to sign the waivers -- I can't 6 exactly remember my exact reasoning. I remember 7 that things were moving pretty fast during this 8 time frame. It was clear from this letter -- when 9 I read the letter, it was, like, you know, "Well, 10 I can't" -- it was, like, "Whoa," this is a little 11 different tone than -- than I was accustomed to. 12 And, yes, I thought United was going to be 13 restructured; and I wanted to be a part of that. 14 Q. Now, after United failed or went into 15 receivership and after you were terminated with 16 respect to your employment at United, Mr. Villa 17 asked you a number of questions regarding the 18 efforts you took to -- to recover severance 19 benefits from United Financial Group. 20 Do you recall that? 21 A. Yes, sir, I do. 22 Q. And I believe you testified that you 16597 1 recovered in severance benefits a negotiated sum 2 that was slightly over $140,000. 3 Do you recall that? 4 A. Yes, sir, I do. 5 Q. And you were seeking to recover 6 severance benefits that you felt you were entitled 7 to under the contract that you had entered into 8 with UFGI in June of 1988; is that correct? 9 A. Yes, sir. I was -- well, let me put it 10 like this. I was seeking to recover, under 11 contract, benefits, I think, related to UFGI; and 12 it was the last contract I had. And if that was 13 June, that's fine. 14 Q. Okay. Well, do you recall that both 15 the last UFG and USAT contracts that you entered 16 into were entered at the end of June and the 17 beginning of July? 18 A. I think I looked at those last week -- 19 Q. Okay. 20 A. -- during my testimony, yes, sir. 21 Q. And if you look at Exhibit 22 -- B2264, 22 which is in the second volume -- and it's about 16598 1 the sixth document in. (Indicating) 2 A. Okay. Thank you. 3 Q. That's Mr. Gross' -- yeah. And this 4 appears to be the form of contract you entered 5 into with UFG. And is it your recollection, then, 6 that you were seeking to enforce the severance 7 provisions pursuant to this contract which you 8 entered into on June the 30th, 1988, with UFGI? 9 A. Yes, sir, presuming there's no contract 10 after that -- and I'll take your word for it. But 11 I was just -- I think I was trying to claim my 12 severance benefits under the last contract, which, 13 you know, I haven't seen any contract dated after 14 this -- the last day of June of 1988. 15 Q. And at the time that you entered into 16 that contract with UFGI, do you recall that the 17 second quarter financial results indicated that 18 USAT was -- had a capital deficit of $163 million? 19 A. I don't remember that; but if that's 20 the record, I certainly accept that. 21 Q. And do you also recall that at that 22 point, there was a 78-million-dollar shareholder 16599 1 deficit with respect to UFG? 2 A. I don't remember that; but if that's 3 the -- if that's the case, Mr. Rinaldi, I'll 4 certainly accept your figures. 5 Q. Well, take a look at T8095. It's about 6 four or five documents further on, and it's the 7 second quarter 1988 performance report. 8 A. Okay. 9 Q. And if you'll turn to the last page, it 10 indicates the stockholder deficit of $78,987,000. 11 Do you see that? 12 A. Yes, sir. 13 Q. And that was on June 30th, 1988. 14 Do you see that? 15 A. I do, yes, sir. 16 Q. And on that date, you signed a new 17 contract with UFGI; is that correct? 18 A. Well, I would have signed it sometime 19 after that date; but it -- I guess I would have 20 actually executed it in early July sometime. 21 Q. Okay. And in early July, if you turn 22 to the third page of that document, the -- 16600 1 A. Of the contract? 2 Q. No. The third page of the second 3 quarter 1988 performance report which is T8095. 4 A. Okay. 5 Q. Does it not indicate that USAT, on 6 June 30th, 1988, was failing its capital 7 requirement by $163 million? 8 9 (Discussion held off the record.) 10 11 Q. (BY MR. RINALDI) T8095 is the document. 12 A. Oh, okay. 13 Q. So, that would be this document right 14 here. (Indicating) 15 A. Okay. Yes, sir. It appears from this 16 document that as of June 30th, that USAT reported 17 regulatory capital of 86 million, which was 18 163 million below the minimum regulatory capital 19 requirement. 20 Q. And as a director of UFGI, you approved 21 those employment contracts at a point in time when 22 UFGI had negative shareholder equity and USAT was 16601 1 failing its minimum capital requirements by 2 $163 million; is that correct? 3 A. Whenever we voted on these contracts, 4 of course, we abstained from our own contract; but 5 we voted for the rest of the contracts, so, yes. 6 Q. So, you voted for Mr. Gross and 7 Mr. Berner and Mr. Munitz' contracts, correct -- 8 A. Yes, sir -- 9 Q. -- as well as -- 10 A. -- to the best of my recollection, if 11 that's what the minutes reflect. 12 Q. Okay. As a director of UFGI, do you 13 recall receiving the letter from Mr. Twomey on 14 May the 13th, 1988, directing that UFGI take some 15 action with respect to its net worth obligation? 16 A. I don't really remember it, no, sir. I 17 don't have an independent memory of it, no, sir. 18 Q. But you do know as you sit here today 19 that no action was taken by UFGI to infuse capital 20 into USAT? 21 A. That's my -- yes, sir. I know that. 22 Q. Now, you testified earlier -- at least 16602 1 we looked at documents earlier that showed that on 2 January 1, 1988, your base salary -- just your 3 base salary with USAT was $171,000. 4 Do you recall that? 5 A. That number sounds awfully familiar, 6 yes, sir. 7 Q. And just a moment ago, you testified 8 that after your termination, you recovered from 9 UFGI $142 million approximately -- 10 A. I wish I would have. 11 Q. Pardon? 12 A. No. You said 142 million. 13 Q. I'm sorry. Thousand dollars in 14 severance benefits from UFGI. 15 Do you recall that? 16 A. Yes, sir. It was -- it was slightly 17 over -- I think it was $142,000. 18 Q. And in addition to that, UFGI forgave 19 the note which had a face value of $72,500, 20 correct? 21 A. I think -- I don't know what the 22 technical term was but -- whether it was a 16603 1 forgiveness or an extinguishment or whatever, but 2 I didn't have to pay the note. 3 Q. So, you received from UFGI a total of 4 200 and approximately $14,000 in either severance 5 benefits or debt forgiveness in 1989? 6 A. Well, I remember the $142,000. The 7 140,000 was real money, and then a couple of 8 thousand was to pay lawyers. The 72,000, I would 9 express it a bit differently and say that I was no 10 longer liable under that note. 11 Q. And I said total cash payments and debt 12 forgiveness totaling over $210,000, correct? 13 A. If I add the 142 plus the 72, I get the 14 number you're referring to -- 15 Q. And that would have -- I'm sorry. 16 A. Go ahead. 17 Q. And that was in addition to any base 18 salary that you had been paid in 1988 by USAT? 19 A. Yes, sir. Those were -- certainly, the 20 140,000 was a severance payment. 21 Q. Okay. And then from USAT in 1988, over 22 and above your base salary, you received on 16604 1 June the 4th, 1988, a 115,000-dollar bonus, did 2 you not? 3 MR. VILLA: January 4th, sir? 4 MR. RINALDI: January 4th, yes. 5 A. Yes. I think in early January. And if 6 it was January 4th, that's fine. I received 7 115,000 for 1987 -- the 1987 bonus. 8 Q. (BY MR. RINALDI) And that was paid four 9 days after December 31st, 1987, at which point in 10 time USAT was failing its minimum capital 11 requirement by over $50 million according to the 12 estimates of USAT and by over $100 million 13 according to the estimates of the examiners. 14 Do you recall that? 15 A. I don't recall those numbers, but I -- 16 if those are the numbers, I certainly accept your 17 numbers, Mr. Rinaldi. 18 Q. Okay. And then after that, you also 19 received another 109,000-dollar salary increase on 20 or about April the 5th, 1988. This is when the 21 bonus was rolled into your salary. 22 Do you recall that? 16605 1 A. I remember the bonus being added to the 2 salary, and I would express it a bit differently. 3 That after that roll-in and you reach the higher 4 number, you would take that higher number of 5 salary plus bonus; and I would receive one-twelfth 6 of that every month. 7 Q. And you received one-twelfth of that 8 every month retroactively from January the 1st, 9 1988, all the way through December 30th, 1988. 10 Correct? 11 A. I don't remember it to be retroactive; 12 but if it was Mr. Rinaldi, I'm sure you've checked 13 it. I accept that. 14 Q. So that if, in fact, you did receive it 15 for the full 12 months, you would have received 16 over and above your original base salary an 17 additional $109,000 in 1988; is that correct? 18 A. Let's see. I'm getting a bit confused 19 here. The 109,000 was -- I've got the 115,000. 20 That was my bonus that was paid on January 4th or 21 5th. 22 Q. Then if you take a look at -- and then 16606 1 your base salary is increased on April the 5th, 2 1988. And if you look at T8055, which is the 3 salary adjustments, it indicates it was increased 4 by $109,000, correct? 5 A. It certainly does, yes, sir. 6 MR. VILLA: I think the problem is when 7 you say "original base salary," we don't know 8 which original base salary you're working off of. 9 MR. RINALDI: It says he had an 10 original base salary of 171,656. It says 11 "original base" at the top of the page: 171 -- 12 A. 171,656. 13 Q. (BY MR. RINALDI) That was your salary 14 at the beginning of January 1988, wasn't it? 15 A. I believe so, yes, sir. 16 Q. So -- and then, finally, if you turn to 17 the next page, you received as a pro rata bonus 18 the first 25 percent which was $27,250? 19 A. Yes, sir, I did. 20 Q. So, in 1988, you received $115,000 in 21 bonus, the '87 bonus paid in '88, $109,000 in 22 salary increases, and $27,500 in a special bonus. 16607 1 Okay? 2 A. Yes. 3 Q. So that comes, I think, if I've done 4 the math correctly, to over $250,000; is that 5 fair? 6 A. If you've done the math correctly, it 7 sounds like it adds up. 8 Q. And subsequent to that, you recovered 9 an additional $220,000 in either debt forgiveness 10 or severance from UFGI, correct? 11 A. Well, I -- you know, as we discussed, I 12 would characterize that -- after I left USAT and 13 UFGI, I would characterize it a bit differently. 14 I think we're talking about semantics here. 15 Q. And all of those payments were made 16 after USAT had failed its minimum capital 17 requirement, correct? 18 A. I'm a bit confused as to the time 19 frame; but if you've checked it, Mr. Rinaldi, I'll 20 take your word for it. 21 Q. Remember when we showed you the -- 22 A. Yes, sir. I remember we were below our 16608 1 net worth, yes, sir. I have no reason to doubt 2 that what you're saying is true. 3 Q. And after you USAT failed its minimum 4 net capital requirement, UFGI took no steps to 5 infuse -- strike that -- did not infuse any 6 capital into USAT, did they? 7 A. I don't remember UFGI infusing any 8 capital in USAT, no, sir. 9 Q. Thank you. 10 MR. RINALDI: I have no further 11 questions. 12 13 (Discussion held off the record.) 14 15 THE COURT: We'll be off the record. 16 17 (Discussion held off the record.) 18 19 THE COURT: Mr. Guido, you may 20 redirect. 21 22 FURTHER EXAMINATION 16609 1 2 Q. (BY MR. GUIDO) Mr. Crow, do you 3 remember being asked about your testimony in the 4 dispute between the FDIC and Mr. Bruno regarding 5 his contract? 6 A. Yes, sir, I do. 7 Q. And do you recall that your testimony 8 was that -- in this proceeding was that you 9 testified that he had -- that you didn't see any 10 reference in the board of directors minutes to 11 his -- a contract with him. Right? 12 A. Yes, sir. 13 Q. And, also, that you testified that you 14 thought you had the authority when you entered 15 into the agreement with Mr. Bruno. 16 Do you recall that? 17 A. Yes, sir. I remember being asked a 18 series of questions in that proceeding as to who I 19 got my authority from, and I believe -- to the 20 best of my memory, I believe I said that I would 21 run it by Mr. Gross and Dr. Munitz and had 22 probably run it by Mr. Berner. 16610 1 Q. Now, do you recall that your testimony 2 was that you didn't see anything in that contract 3 on direct -- or in the board of directors minutes 4 approving that contract on direct-examination by 5 the FDIC lawyers? 6 A. Yeah. I didn't see anything in the 7 board of directors minutes that -- you know, they 8 kept asking me, "Do you see anything specifically 9 approving Mr. Bruno's contract?" And I didn't 10 find anything. 11 Q. All right. Did you testify that you 12 didn't see anything in the contract in direct 13 testimony in that proceeding? 14 A. I don't understand your question. 15 Q. Well, you testified in this proceeding 16 that you didn't understand why Mr. Bruno thought 17 you had testified disingenuously or falsely in the 18 contract dispute with him. 19 Do you recall your testimony with 20 regard to that? 21 A. I was -- yes. What I was trying to 22 convey is I didn't know why Mr. Bruno felt that I 16611 1 had lied in his proceeding. 2 Q. And is it a fact that it wasn't until 3 cross-examination by his lawyers of you in that 4 proceeding that you admitted that you thought you 5 had the authority to sign the contract? 6 A. I don't know. I didn't review it in 7 the detail you're asking me. If anybody had asked 8 me to start with, I didn't -- I mean, I made it as 9 a matter of practice. If I'm going to enter into 10 a letter agreement extending a multi-year 11 employment arrangement, I'm certainly going to get 12 the approval of Mr. Gross and, typically, 13 Dr. Munitz; and that would be run by Mr. Berner, 14 as well. And what -- it certainly may have come 15 up during the trial on redirect. I just don't 16 remember. 17 Q. Okay. Were you trying to mislead this 18 Court on what had transpired in that proceeding 19 when you responded to Mr. Villa's questions about 20 what happened in the Bruno proceeding? 21 A. No, sir, I was not. I guess -- you 22 know, I would be glad to go through that testimony 16612 1 line by line. I mean, I told the truth in the 2 Bruno matter at the time. I remembered what I had 3 said to start with, and I went back and reread it. 4 And it's no -- you know, it's no different. If 5 you can find in the minutes where it says the 6 board approved that contract, you know, fine. 7 Q. That wasn't my question. 8 I would like to direct your attention 9 to B1996, which is an article dated February 6th, 10 1998, which counsel showed you on direct. It's 11 dated February 6th, 1998. 12 MR. NICKENS: My copy indicates it 13 wasn't offered. 14 MR. GUIDO: I'm sorry. We found it, 15 Your Honor. 16 Q. (BY MR. GUIDO) It's a Houston Chronicle 17 article that your counsel referred you to. He 18 asked you whether or not the quote in there -- 19 THE COURT: Mr. Guido, let's identify 20 the document. 21 MR. GUIDO: It's B1996. It's Houston 22 Chronicle article dated Saturday, February 6th, 16613 1 1998, Your Honor. 2 THE COURT: Thank you. 3 Q. (BY MR. GUIDO) It says, "'We think we 4 will certainly be an acquirer,' said Michael Crow, 5 the company's chief financial officer." 6 A. Yes, sir. 7 Q. Were you one of the sources for the 8 information in that article certainly as it 9 relates to the numbers in terms of the -- a 10 quarterly loss and that sort of thing? 11 A. We would have turned out a little 12 numerical table. So, in that sense, I would have 13 been the source. As to the rest of it, I don't 14 know. 15 Q. What about the sentence that says, "The 16 fourth quarter loss wipes out United Financial 17 stockholders' equity. But the capital ratios of 18 United Savings remains above regulatory minimums 19 because of 196 million in preferred stock on its 20 books. Its regulatory capital - the key measure 21 of thrift health - remains well above federal 22 minimums at 3.43 percent." 16614 1 Were you the source of that 2 information? 3 A. I don't think I would have -- I don't 4 think I would have said that, Mr. Guido. 5 Typically, as I recall how it worked is that -- we 6 would turn out a press release, and that press 7 release is probably in the records of United. And 8 that press release would be reviewed by the 9 accountants and the lawyers or Peat Marwick and 10 Mayor Day, to make sure that we weren't stepping 11 in a mine field. And typically, the newspapers 12 would take a press release; and then they would 13 get a quote here or a quote there from, you know, 14 typically the CEO but, obviously, in some cases, 15 myself, the CFO. 16 Q. So, you don't know whether or not that 17 paragraph is accurate or inaccurate? 18 A. No, sir, I do not. 19 Q. All right. Let's -- you were asked 20 some questions about T4422, which is your 21 memorandum dated December 10th, 1987, at Tab 886 22 by your counsel. 16615 1 Do you recall being asked questions 2 about that? 3 A. Let's see. (Witness reviews the 4 document.) 5 Yes, sir. Either you or Mr. Villa 6 asked me some questions about that. 7 Q. Well, do you recall you were asked some 8 questions of whether or not the document 9 accurately reflected the events that it recorded 10 in there? 11 Do you recall those questions? 12 A. No, sir, I really don't. 13 Q. Do you recall testifying that you tend 14 to be rather pessimistic and particularly at this 15 point in time, December 10th, 1987, because of 16 what had happened in the stock market crash? 17 A. If you say -- yes. I remember saying 18 something to that effect, yes. 19 Q. Were you trying to suggest that your 20 recordation of the results of the wholesale 21 strategy which you described as having been 22 disappointing was, on reflection, inaccurate and 16616 1 it, in fact, wasn't the wholesale strategy but it 2 was the stock market that caused those 3 disappointing results that you report on Page 2 of 4 Exhibit 4422? 5 A. No, sir, I wasn't -- I don't understand 6 the word you used, but I -- I wasn't trying to 7 imply that the stock market crash affected many of 8 the items listed. Certainly, it affected equity 9 arbitrage and, to a great extent, affected the 10 junk bond area. But I don't see how it would have 11 affected many of the other items listed on this 12 page. 13 Q. What about the mortgage-backed 14 securities? 15 A. I think the -- the stock market crash, 16 you know, certainly would have affected the mark 17 to market. Exactly how, I can't reconstruct. But 18 I remember after the stock market crash, the 19 markets were gyrating quite a bit. 20 Q. So, are you basically saying that the 21 results here with regard to high-yield bonds, 22 equity arbitrage, and mortgage-backed securities 16617 1 are attributable on reflection now to the stock 2 market crash and not to USAT's management of its 3 wholesale strategy? 4 A. I don't think I've said that, 5 Mr. Guido. 6 Q. So, you're not saying that? 7 A. No, sir. 8 Q. I would like to show you Tab 885, which 9 is Exhibit 4403. It's a memo from Bruce Williams 10 to the strategic planning committee dated 11 October 14th, 1987. 12 A. (Witness reviews the document.) 13 Q. Have you seen T4403 before? 14 A. If -- I haven't seen this and certainly 15 not recently, to my memory. I'm, you know, fairly 16 confident I probably got it at the time. But, no, 17 I don't remember seeing this either in deposition 18 or preparation for this review; but, you know, I 19 just don't remember. 20 Q. Do you have any reason to dispute the 21 accuracy of the memorandum? 22 A. I can't, you know, validate it one way 16618 1 or the other. You know, Bruce was -- I think very 2 highly of Bruce Williams. He does careful work. 3 Q. Does this document basically support 4 the conclusions that you reached in T4422 with 5 regard to mortgage-backed securities, high-yield 6 bonds, and corporate securities? 7 A. I don't know. I mean, I would have to 8 take, you know, 20 minutes with a calculator and 9 sit down and study them both and compare them. 10 Q. Well, it shows mark-to-market 11 adjustments; and I think it says as of -- interest 12 rate levels of mid-September, which is a month or 13 more before the stock market crash. 14 Do you see that? 15 A. Uh-huh, yes, sir. 16 Q. I'm not asking whether or not the 17 numbers are identical. I'm asking you in terms of 18 the general conclusions that you reached with 19 regard to mortgage-backed securities, equity 20 arbitrage, and high-yield bonds that it generally 21 seems to confirm your conclusions in T4422? 22 A. You'll have to help me a bit, 16619 1 Mr. Guido. It seems to me we're comparing apples 2 and bananas because it looks like that Bruce 3 Williams is kind of comparing a UFG mark to market 4 versus something Smith Breeden had done at an 5 earlier period. And as best I can, you know, look 6 at it with a quick reconstruction, I'm looking at 7 mark-to-market values as well as life-to-date net 8 interest and that sort of thing. So, you know, 9 they are in the same family; but I don't know that 10 they are comparable. 11 Q. Well, with regard to the mark to 12 market, are they consistent or inconsistent with 13 regard to equity arbitrage, mortgage-backed 14 securities, and high-yield bonds? 15 A. Well, help me out a little here. 16 Q. Well, you're the accountant, Mr. Crow. 17 You were the CFO. I'm just asking you a question. 18 MR. VILLA: Your Honor, he said he 19 hasn't read it in a long time. If Mr. Guido would 20 like to help him and direct him to the portions of 21 it. He's been a very cooperative witness. 22 THE COURT: Well, these documents are 16620 1 in evidence. I don't know why this would be an 2 issue. 3 MR. GUIDO: I just asked him whether or 4 not -- with regard to the mark to market for the 5 high-yield bonds, mortgage-backed securities, and 6 equity arbitrage -- whether or not they were 7 consistent or inconsistent in terms of the 8 analysis for mark to market. 9 MR. NICKENS: The witness has indicated 10 it's not a simple question. A quick review of 11 Exhibit 4403 doesn't even show a breakout of 12 equity arbitrage and high-yield bonds. 13 A. Let me give you an example, Mr. Guido. 14 The first one I looked at to try to respond to 15 your question is junk bonds. And on Page 2 of my 16 memo, I quote, you know, the results, et cetera. 17 I don't give a mark-to-market number. And Bruce 18 Williams is focusing on mark to market. 19 So, I don't -- you know, I'm trying to 20 be responsive to your questions; but I don't know 21 how to compare the two. I guess the answer is I 22 don't know. 16621 1 Q. (BY MR. GUIDO) Okay. That's fine. 2 That's fine. 3 Now, take a look at T4422 again. 4 A. Okay. Yes, sir. 5 Q. Remember your counsel asked you a 6 number of questions about the 12/31/1983 10K with 7 regard to foreclosed property, GAAP, and various 8 questions? 9 Do you recall that? 10 A. I do, yes, sir. 11 Q. Now, you -- in your memory, T4422, do 12 you use year-end 1983 or year-end 1984 as the 13 beginning of your analysis of the results of the 14 wholesale strategy? 15 A. (Witness reviews the document.) 16 I don't know. If you could point me to 17 a -- 18 Q. Take a look at the first paragraph. 19 A. Okay. 20 Q. On Page 2 where it says, "United 21 Savings Association of Texas strategic profile 22 background." It says, "As a result of 16622 1 deliberations during the year 1983 and the 2 successful year-end 1984 branch sale which created 3 significant capital." 4 Do you see that? 5 A. Uh-huh. 6 Q. Does that indicate that you're using, 7 as the beginning point, 12/31/984 to do the 8 analysis? 9 A. No, sir. It doesn't indicate that to 10 me because I, you know, certainly considered the 11 branch sale to be part of the wholesale strategy. 12 So, I can't factually say which year end I would 13 have been using. 14 Q. Well, let's read the next sentence, 15 Mr. Crow. It says, "These activities included 16 equities, junk bonds, MBS, Bank United, real 17 estate merchant banking/lending, venture capital, 18 et cetera." Then it says, "United appeared to be 19 positioned to take advantage of the wholesale 20 strategy due to" -- and then it talks about a 21 number of things. Right? 22 A. Yes, sir, I see that. 16623 1 Q. Weren't those the conditions at 2 12/31/1984 and not 12/31/1983? 3 A. Let's see. (Witness reviews the 4 document.) 5 Well, in the last paragraph after those 6 bullet points, it says, "After this analysis, 7 United embarked on a wholesale strategy. Total 8 assets at year-end 1984 were 3.9 billion." So, 9 just reading this, you know, I don't know. I 10 would have to study it; but reading this, it looks 11 like year-end 1984. 12 Q. Okay. Now, do you have any reason to 13 dispute the accuracy of the conclusions that you 14 reached with regard to the position -- the 15 financial position United was in at 12/31/84 as 16 you described in that background section? 17 A. I'm not aware that any of them are 18 wrong. I haven't, you know -- it hasn't been 19 drawn to my attention that any of them are 20 incorrect. 21 Q. So, you're not saying that any of that 22 is incorrect in your testimony either on direct or 16624 1 cross-examination so far in this proceeding? 2 A. No, sir. 3 Q. Okay. Now, let's turn to another 4 subject, and that's the USAT Mortgage Finance. 5 Do you recall that? 6 A. Okay. 7 Q. I would like you to take a look at 8 B649, which is at Tab 1436, and B819, which is at 9 Tab 586, and A10582, which is at Tab 1141. 10 A. (Witness reviews the documents.) 11 Q. Starting with B819, which is at 12 Tab 586. 13 A. This is the Jim Wolfe memo. 14 Q. No. It's B819 at Tab 586. It's the 15 Rick Millinor handwritten memorandum dated 16 January 31, 1986. 17 Do you see that? 18 A. Yes, sir, I do. 19 Q. Now, do you see the first paragraph 20 that says, "As discussed in a memo from Joe 21 Phillips dated 1/10/86, United sold some 22 mortgage-backed securities in 1985 that were 16625 1 included in the interest rate swap program." 2 Do you see that? 3 A. Yes, sir, I do. 4 Q. "The securities were sold at a gain and 5 were sold only because United had to unwind a 6 single-purpose subsidiary that didn't meet with 7 regulatory approval." 8 Do you see that? 9 A. I do. 10 Q. And then flip over to the last page of 11 that exhibit, and it talks about it's the 12 January 10th memo from Joe Phillips to the file. 13 A. Okay. 14 Q. See where the first paragraph says, "In 15 November '85, 500 million in mortgage-backed 16 securities were acquired and funded by reverse 17 repurchase agreements. Also, interest rate swaps, 18 caps, and collars totaling 535 million were put 19 into place to limit our exposure to interest rate 20 risks." 21 Do you see that? 22 A. Yes, sir. 16626 1 Q. Then it says, "The original purpose of 2 the transaction was to provide an income stream 3 through a hedged arbitrage transaction to avoid 4 violation of the growth regulation within the 5 association." 6 Do you see that? 7 A. Yes, sir. 8 Q. And then it goes on, "USAT Mortgage 9 Finance, Inc. was formed as a wholly-owned finance 10 subsidiary of the association." Then it says that 11 it was collapsed, okay, because of change in 12 regulation. 13 Do you see that? 14 A. Where it starts "subsequent to"? 15 Q. Yes. It says, "Such amendment 16 disqualified USAT Mortgage Finance, Inc. as a 17 finance subsidiary and, accordingly, such 18 liability growth would have put the association in 19 violation of the growth regulation for the quarter 20 ended March 31, 1986." 21 Do you see that? 22 A. I do, yes, sir. 16627 1 Q. Does that say anywhere that the 2 combining of USAT Mortgage Finance -- collapsing 3 USAT Mortgage Finance into USAT would have 4 violated the net worth requirements? 5 A. No, sir. I don't see those words. 6 Q. All right. Is it your testimony that 7 the liability growth regulation was the regulation 8 that prompted the writing of Mr. Phillips' 9 memorandum? 10 MR. NICKENS: Your Honor, the question 11 is what caused Mr. Phillips to write the 12 memorandum? 13 MR. GUIDO: I'll rephrase the question, 14 Your Honor. 15 Q. (BY MR. GUIDO) Anywhere in this 16 memorandum does it say net worth was the reason 17 why USAT Mortgage Finance assets were sold? 18 A. No, sir, I don't see it. 19 Q. When you testified with regard to net 20 worth questions from Mr. Nickens with regard to 21 USAT Mortgage Finance, were you trying to suggest 22 that the net worth requirements were the reason 16628 1 why the assets were sold out of USAT Mortgage 2 Finance instead of being brought back into USAT? 3 A. I don't remember that at all. 4 Q. Okay. That's not your testimony? 5 A. No, sir. My testimony, as best I tried 6 to explain it, is that the -- USAT Mortgage 7 Finance, the sub, was collapsed because it was 8 established for -- to meet a business objective, 9 and that was to put on a block of assets to create 10 spread income in anticipation of some regulations, 11 proposed regulations; and they would be exempt 12 from inclusion in liability growth. In other 13 words, they wouldn't be consolidated. 14 And the final regulations, as they came 15 out, basically made it, at the end of the day, to 16 where they would be consolidated for purposes of 17 liability growth either at December 31st or at 18 March 31st or some such date. In other words, the 19 sub was established for one purpose; and it no 20 longer met its purpose. That's why it was 21 collapsed. 22 Q. Well, when you did your planning, your 16629 1 tactical planning memorandum, and you looked at 2 the options, had you concluded that USAT could 3 have absorbed the assets of USAT Mortgage Finance 4 and not violated the liability growth regulations? 5 MR. NICKENS: Your Honor, which 6 tactical planning memo is he referring to? There 7 are three. 8 Q. (BY MR. GUIDO) Take a look -- 9 A. Just from off the top of my head, I 10 think in an earlier version of the tactical 11 planning memo, I did conclude that. But, you 12 know, we were talking about, I think, at least 13 three versions of this. And as time marched on, 14 we took other steps and put on other assets, et 15 cetera. 16 Q. Well, did your views of the riskiness 17 or the aggressiveness of your interpretation of 18 the regulations ever change from the time you 19 wrote that October 14th memorandum that you 20 testified about on direct? 21 A. Could you repeat that question? 22 Q. Did your views of the aggressiveness of 16630 1 your interpretation of the regulations on 2 October 14th ever change between that date and 3 December 31 of 1985? 4 MR. NICKENS: Your Honor, the date of 5 the memo is October 24, not October 14. 6 MR. GUIDO: October 24. Excuse me, 7 Your Honor. 8 A. I really don't -- I don't know. 9 Q. (BY MR. GUIDO) Now, as of November 6th, 10 which is the date of B649, had you concluded that 11 you -- if USAT Mortgage Finance didn't qualify as 12 a financing subsidiary, that you could have 13 absorbed USAT Mortgage Finance into USAT and not 14 violated the liability growth regulations? 15 A. Let's see. (Witness reviews the 16 document.) This is the November 8th rendition, 17 Mr. Guido? 18 Q. Uh-huh. 19 A. Let me study this just a bit. (Witness 20 reviews the document.) 21 Just isolating in on the November 8th 22 document? 16631 1 Q. Yes, 649. 2 A. It appears that that's addressed 3 under 2, and then you would have to go over to the 4 far right-hand column. And you would assume, 5 quote, "If we fail test in No. 1" -- in other 6 words, the sub does not meet its purpose -- 7 Q. Uh-huh. 8 A. -- it says -- it appears that I'm 9 addressing that there. And it looks like as of 10 this date, what I was thinking or what's on the 11 sheet is growth allowed was 456 million and, 12 quote, "growth from failed financing sub, 13 500 million." So, we would have to reduce 14 $44 million. 15 Q. Now, the Joe Phillips memo of 16 January 10th says that the date for measuring 17 liability growth is March 31 of 1986. 18 Do you see that? 19 A. Yes, sir, I do. 20 Q. What was the growth that was allowed 21 between 12/31/85 and 3/31/86? 22 A. I don't know. You probably have a 16632 1 document that you're going to show me. 2 Q. I probably do, Mr. Crow; and it's 3 A10582, which is at Tab 1131. 4 Does that answer my question? 5 A. Okay. (Witness reviews the document.) 6 I'm not sure it does, Mr. Guido. It 7 probably gets close because it looks like this is 8 a memo from Jim Wolfe to me, which I don't 9 remember. But it looks like Mr. Wolfe, in this 10 table of all these numbers in the middle here -- 11 Q. Uh-huh. 12 A. -- it looks like he's saying "maximum 13 growth allowed," and he uses, as a base, 12/31/85. 14 And that number of 4,680,000 was the maximum we 15 could have grown to. And we ended up not growing 16 to that level because, you know, we had passed 17 that board resolution that we weren't going to go 18 past it. So, you had to come in under -- in other 19 words, our actual 12/31/85 liabilities is under 20 4,680,000. 21 Q. What's the allowed growth, the minimum 22 allowed growth, using Jim Wolfe's memo to you 16633 1 between 12/31/85 and 3/31/86? 2 MR. NICKENS: Your Honor, he must mean 3 maximum allowed growth. 4 THE COURT: All right. Restate it, 5 please. 6 Q. (BY MR. GUIDO) The minimum allowed 7 growth -- 8 THE COURT: I thought it was maximum. 9 Q. (BY MR. GUIDO) Well, the maximum 10 growth, assuming that the assets at 12/31/85 were 11 4.68 billion, Mr. Crow. 12 A. Assuming that the liabilities were 13 4,680,000,000 as of year end, which they 14 weren't -- but assuming that, I believe, as 15 reading the schedule, it says that we could have 16 grown by 72 million for the quarter to 3/31/86 or 17 528 million on a consecutive quarter basis. 18 Q. Okay. But 72 million -- let's just 19 take that figure. 20 A. Okay. 21 Q. That's the growth figure, assuming that 22 you were at 4.68 at year-end 12/31/85. 16634 1 Is that greater than the 2 44-million-dollar deficit that you show in your 3 planning memo: Exhibit B649? 4 A. That is a bigger number, yes, sir. 5 Q. As of 11/8/1985, you had run the 6 numbers and concluded that USAT Mortgage Finance 7 could be absorbed into USAT if it didn't qualify 8 as a financing subsidiary? 9 MR. NICKENS: Your Honor, that is not 10 what that series of questions and answer shows. 11 THE COURT: Well, let's have the 12 witness tell us. 13 A. Could you repeat that question, 14 Mr. Guido? 15 Q. (BY MR. GUIDO) You had concluded as of 16 November 8th, 1985, that if 3/31/86 was the 17 triggering date for liability growth, okay, that 18 USAT Mortgage Finance assets could have been 19 absorbed by USAT and not violated the liability 20 growth regulations? 21 A. No, sir, I couldn't go that far. I 22 couldn't -- I don't know that I would have 16635 1 concluded that. 2 Q. Why not? 3 A. Well, because it seems to me that, you 4 know, we've got several problems here. One is on 5 the November 8th, 1985 document, I say "growth 6 allowed, 456 million." I must have had some basis 7 to come up with that. And then I say "growth from 8 failed sub, 500 million." And so, that would 9 indicate to me that I would have concluded that we 10 didn't have enough room. 11 Q. Well, are those figures -- 12 A. And then in Mr. Wolfe's memo, you know, 13 it -- he's talking about not -- you know, he's 14 talking about the maximum allowable growth as of 15 12/31/85. And as I've testified to, the actual 16 number was below that by about -- I think over 17 $100 million. 18 Q. You mean the actual growth that 19 occurred? 20 A. The actual liabilities as of 12/31/85. 21 Q. Were $100 million below the 4.680? 22 A. Right. And so, I guess the fair answer 16636 1 to your question is, you know, taking it in a 2 broader context, you know, you look at these 3 decision trees and there's a lot of stuff going 4 on. So, I don't know what I would have concluded 5 as of these dates. 6 Q. Well, the decision tree that you made 7 in November 8th, 1985, each of the subparts 8 subsumed all of the other subparts, did it not? 9 A. It seemed to, yes. 10 Q. And where did you get the figure 456 11 for growth allowed? 12 A. I have no earthly idea. 13 Q. Why don't you take a look at 14 Mr. Wolfe's memo to you dated the same date? Take 15 a look at the quarter growth for 12/31/85. 16 A. Okay. 17 Q. That's 456. Right? 18 A. Yes, sir. 19 Q. So, is the 456 growth allowed figure 20 that you used in your decision tree memorandum the 21 growth as allowed up to 12/31/85? 22 A. Assuming we hit the maximum of 16637 1 4,680,000, I guess so. 2 Q. And there's another 72 million that 3 Mr. Crow says is available going between 12/31/85 4 and 3/31/86? 5 A. That Mr. Wolfe says, yes, sir. 6 Q. If the effective date was 3/31/86, USAT 7 Mortgage Finance, being absorbed into USAT, would 8 not have violated the liability growth 9 regulations, would it? 10 MR. NICKENS: Your Honor, I have to 11 object. That is not what those memos and what 12 that question and answer show. He's asking him to 13 summarize it, and he's doing it inaccurately. 14 MR. GUIDO: Your Honor, I'm not going 15 to change my question. I think the question 16 naturally flows from these two documents. 17 MR. NICKENS: The liability growth had 18 to be met by quarter. He's put in a hypothetical 19 that's contrary to the regulation and then asking 20 him whether, given that hypothetical, it would 21 satisfy the regulation by changing the regulation. 22 Now, you know, any of us could do that. But that 16638 1 isn't a fair question to this witness or to any 2 other witness. 3 MR. GUIDO: Your Honor -- 4 MR. KEETON: Your Honor, could we ask 5 Mr. Guido to both speak up, enunciate clearly, and 6 slow down a little bit? 7 THE COURT: All right. Do you 8 understand the question, Mr. Crow? 9 THE WITNESS: No, sir. I'm a bit 10 confused. 11 THE COURT: All right. Restate it. 12 Q. (BY MR. GUIDO) Let me ask you a very 13 simple question. 14 THE COURT: Speak a little louder. 15 MR. KEETON: He leans over and 16 whispers. It's like he's in a room by himself. 17 MR. GUIDO: Excuse me, Your Honor. 18 Q. (BY MR. GUIDO) I'm not a shouting kind 19 of person, Mr. Crow; and I apologize to you and 20 Mr. Keeton. 21 Would, based on everything that you've 22 seen -- 16639 1 THE COURT: That's not very loud. 2 MR. KEETON: Should I sit in your lap 3 or you want to speak up or back up? And the Court 4 can order that. 5 THE COURT: All right. I think you can 6 speak a little louder. 7 MR. GUIDO: I'm sorry. 8 Q. (BY MR. GUIDO) Did you and the other 9 managers at USAT collapse USAT Mortgage Finance by 10 selling off $350 million worth of its assets 11 because if it had not done so, it would have 12 violated the liability growth regulations? 13 A. I think in -- you know, looking at 14 everything I've looked at, Mr. Guido, if we had 15 turned the world upside down and attempted to keep 16 all these mortgage-backed securities, we probably 17 could have done so. I can't testify to that for 18 sure. But I think, you know, it goes back to what 19 I remember. I remember we set up the sub for the 20 business purpose of putting on a block of assets 21 to create spread income that would be exempt from 22 the liability growth regulations. 16640 1 Whenever we got Mr. Pledger's memo, it 2 became apparent that that just wasn't going to 3 work, that the regulations came out different than 4 what we thought they were going to. We made a 5 business decision to collapse the sub. And I 6 can't sit here and tell you, Mr. Guido, that if I 7 had been given general quarters' orders to turn 8 the world upside down and keep all these 9 mortgage-backs, that we couldn't have done it. 10 I'll bet you I could have done it, but I can't say 11 that for sure. 12 Q. Okay. 13 A. That's the best answer I can give. 14 Q. Okay. Now, let's look at Exhibit B377, 15 which is at Tab 342, which is the Salomon Brothers 16 study. 17 A. Yes, sir. 18 THE COURT: We'll take a short recess. 19 20 (Whereupon, a short break was taken 21 from 3:16 p.m. to 3:39 p.m.) 22 16641 1 THE COURT: Be seated, please. We'll 2 be back on the record. 3 Mr. Guido, you may continue. Are you 4 going to be able to finish this evening? 5 MR. GUIDO: I'm going to try, 6 Your Honor. I'm going to try and finish before 7 the end of the day. 8 THE COURT: Very good. Proceed. 9 Q. (BY MR. GUIDO) Mr. Crow, you said 10 that -- you made reference to turning the world 11 upside down. 12 Do you recall that testimony before we 13 broke? 14 A. Yes, sir. 15 Q. What did you refer to when you referred 16 to turning the world upside down? 17 A. What I was referring to is when I had 18 received orders that we were going to keep all 19 these mortgage-backed securities period, we could 20 have sold other securities and, you know, that 21 sort of thing. 22 Q. Now, have you ever gone back to look to 16642 1 see what was in the portfolio that could have been 2 disposed of? 3 A. No, I have not. 4 Q. So, you don't know the extent to what 5 you would have to have done when you testified you 6 could have turned the world upside down? 7 A. No, sir. I haven't really looked. 8 Q. Let's go to B377, the Salomon Brothers 9 study that Mr. Nickens asked you some questions 10 about. I just have a few clarifying questions for 11 you. 12 Take a look at the Bates stamp 3042 13 which are the last four numbers of the Bates 14 stamps on that page if you would, sir. 15 MR. NICKENS: I'm sorry. I missed the 16 number. 17 Q. (BY MR. GUIDO) 3042, which is the 18 reference to high coupon mortgage securities which 19 is the last paragraph on CN253042 and the first 20 full paragraph on the next page, CN253043, that 21 Mr. Nickens asked you to look at. 22 A. Yes, sir. Okay. 16643 1 Q. Do you remember Mr. Nickens asked you 2 about high-yield -- high coupon mortgage 3 securities being a good short-term investment 4 alternative? Do you recall that? 5 A. That -- not exactly; but that appears 6 to be what Salomon Brothers is talking about here, 7 yes, sir. 8 Q. Now, these high coupon mortgage 9 securities that are referred to in this paragraph, 10 these are mortgage securities that have already 11 gone through an interest rate cycle where interest 12 rates have gone down once, are they not? 13 A. I had better read it because I'm not -- 14 (Witness reviews the documents.) 15 I don't see that in the analysis. 16 Q. Well, are these mortgage-backed 17 securities where the prepayment rates have already 18 increased because of the decline in interest 19 rates? 20 A. Well, the -- I think what you were 21 referring to would be high coupon mortgage-backed 22 securities that were highly seasoned that had 16644 1 already been through a prepay cycle, and I don't 2 know that they are talking about that here. 3 Q. But it says -- in the second sentence 4 at the bottom of 3042, it says, "Prepayment rates 5 of these securities has declined as borrowers have 6 refinanced their loans with lower mortgage rates." 7 Right? 8 A. Yes, sir, I see that. 9 Q. This is talking about high coupon 10 mortgage securities where interest rates have 11 already dropped. Right? 12 A. These mortgage-backed securities would 13 be higher than the current coupon certainly. 14 Q. Now, what -- do you know what it refers 15 to when it says they would be used as short-term 16 investments? 17 A. I think I do, yes, sir. 18 Q. What do you think that refers to? 19 A. Typically, high coupon mortgage-backed 20 securities are going to prepay faster than current 21 coupon mortgage-backed securities or discounts; 22 and so, therefore, their average life is going to 16645 1 be shorter. 2 Q. So, that's what that refers to? 3 A. If they are talking about -- yeah. I 4 mean, just generically, high coupon 5 mortgage-backed securities have a shorter average 6 life than discount mortgage-backed securities. 7 Q. Are these mortgage-backed securities 8 where the increase in prepayment rates have 9 already been factored into the price of the 10 security? 11 A. Yes. And you could say that statement 12 that the price of both premium and discount 13 mortgage-backed securities, a prepayment rate 14 would be factored into the price of that security, 15 yes, sir. 16 Q. Now, those where the prepayments have 17 increased as this memorandum indicates, are those 18 mortgage-backed securities that typically sell at 19 a discount? 20 A. I'm not following your -- you mean the 21 premium of the high coupon? 22 Q. It says -- 16646 1 A. Where does that -- 2 Q. This says, "High coupon mortgage 3 securities." Right. It says, "Prepayment of 4 these securities have declined as borrowers 5 refinance their loans at lower mortgage rates." 6 Right? 7 A. I'm not quite with you. I see the 8 caption "High coupon mortgage-backed securities." 9 The second sentence -- 10 Q. Okay. It says, "Prepayment rates." 11 A. Yes, sir, I see that. 12 Q. And I think it says "because interest 13 rates have declined." Right? 14 A. I'll -- it says, "As borrowers 15 refinance their loans at lower mortgage rates," 16 yes. 17 Q. And isn't it the case that when 18 interest rates go down and borrowers refinance 19 because of increased prepayments, that the 20 prepayments have the effect of depressing the 21 price of the security? 22 A. If -- well, let me put it like this. I 16647 1 would answer it -- partially, I would agree with 2 that statement. If you had a -- if the current 3 mortgage rate, let's say, is 10 percent and you 4 have a mortgage-backed pool that is 15 percent, 5 that's clearly above the current rate. So, you 6 expect prepayments to be pretty fast. But that 7 15 percent mortgage-back is still going to trade 8 at a premium. But the expected higher prepayments 9 would tend to depress the price relative to a 10 Treasury security certainly because there's an 11 option involved. 12 Q. Okay. All right. 13 A. And -- and that, you know, we get -- 14 that's convexity type stuff. 15 Q. These paragraphs here under "high 16 coupon mortgage securities" that Mr. Nickens had 17 you read, can you tell whether or not those are 18 seasoned or unseasoned mortgage-backed securities? 19 A. I didn't see where it said that, 20 Mr. Guido. I didn't see that, no, sir. 21 Q. Okay. That's all I'm asking you. 22 Now, look at 3028 which is another page 16648 1 that Mr. Nickens asked you to look at: CN253028. 2 See where it says "Mortgage securities, Ginnie Mae 3 223F-current coupon"? 4 Do you see that? 5 A. Yes, sir, I do. 6 Q. And then it has a 10-year average life. 7 Do you see that? 8 A. I do. 9 Q. And what does "the average life" refer 10 to? 11 A. The average life, I believe, is the 12 average amount of time it takes you to get your 13 principal back. It does not consider interest. 14 It's just the average amount of time it takes you 15 to get your principal back. 16 Q. Duration? 17 A. They're -- it's not the same as 18 duration at all, but they are -- you know, they 19 are in -- I would call them cousins. 20 Q. Years for duration, and average life is 21 an approximation -- is a term for duration? 22 A. I used average life because even with a 16649 1 lot of sophisticated money managers, actually, 2 they look at both figures. If you look at a 3 Bloomberg screen which is kind of the gold 4 standard in terms of looking at bonds, they will 5 give you average life and duration. And average 6 life gives you a real good idea of the average 7 amount of time you're going to get your principal 8 back, and duration gives you a real good idea of 9 the price sensitivity of that security. 10 Q. And then for the others, Fannie Mae 8s, 11 Freddie Mac 8s, there's a nine-year average life 12 and 9.1. 13 Do you see that? 14 A. I see that. 15 Q. Are those all assuming that interest 16 rates stay constant? 17 A. Well, I don't know. 18 Q. Okay. Now, let me ask you another 19 question. See where it says "Ginnie Mae 223F 20 current coupon"? 21 A. Yes, sir. 22 Q. Do you know whether or not those are 16650 1 seasoned or unseasoned securities? 2 A. I can't tell from this table, no, sir. 3 Q. Okay. Now, let's look at 3030. It's 4 another page that Mr. Nickens asked you about. 5 Now, it doesn't talk about average life; but it 6 actually talks about duration. 7 Do you see that? 8 A. I do. 9 Q. See where it says "Ginnie Mae 223F, 5.6 10 years, Freddie Mac 8s, 4.8"? 11 A. Yes, sir. 12 Q. Do you know whether or not that 13 duration is calculated based on the interest rates 14 remaining the same as they are at the date of this 15 memorandum? 16 A. I really don't know, but generally -- 17 no, I really don't know. 18 Q. Isn't it generally that when you see a 19 chart like this, this is assuming that interest 20 rates remain unchanged? 21 A. Generally, when you see a -- a chart, 22 they would have had to assume one prepayment rate 16651 1 to derive duration and average life. 2 Q. Okay. 3 A. And that one prepayment rate, 4 presumably, would be one interest rate scenario. 5 Q. Okay. 6 A. But I can't -- 7 Q. So -- 8 A. It's been too long for me to -- 9 Q. Neither 3028 or 3029, the average yield 10 or the duration, tell you what these prepayments 11 would do for these securities if interest rates 12 changed, do they? 13 A. These tables, no, sir. There's no 14 stress test or anything like that on these tables, 15 no, sir. 16 Q. Okay. Now, let's look at your 17 memorandum dated May 1st, 1986. It's B963. 18 MR. NICKENS: What's the tab number? 19 MR. GUIDO: Tab 1434. 20 Q. (BY MR. GUIDO) Do you have that 21 document in front of you? 22 A. Yes, sir, I do. 16652 1 Q. Do you remember Mr. Nickens asked you 2 some questions about the second page of the 3 document which was US3015347 which had 4 Smith Breeden & Associates' figures in one column 5 and Morgan Stanley's in the other, Smith Breeden 6 as of 4/12 and Morgan Stanley as of 3/18? 7 A. Yes, sir. 8 Q. Where did you get those figures? 9 A. I can't be sure. I can give you a real 10 good guess, that during this time frame, the big 11 brokerage firms put out weekly or -- weekly-type 12 research reports or they might have been monthly 13 and they would have included prepayment rate 14 projections. And as to Smith Breeden, I'm sure 15 that I've got it from some Smith Breeden 16 publication. 17 Q. Did you talk to Smith Breeden? 18 A. To specifically get these figures? 19 Q. Yeah. 20 A. I don't know. If you're asking me can 21 I really identify specifically where I got that 22 last column, no, sir, I cannot. Certainly, I 16653 1 talked to Smith Breeden quite often and read their 2 research stuff. 3 Q. Are these to be the first year's 4 prepayment rates? 5 A. For what, Mr. Guido? 6 Q. For both of them: Morgan Stanley and 7 Smith Breeden. 8 A. I think we were looking at the CMOs, 9 and the CMOs were already outstanding. And I 10 think we were -- you know, the CMOs had a certain 11 pricing speed when they were issued. And as we've 12 discussed, conditions change; and so, the pricing 13 or the CPRs may be at significant difference than 14 the pricing speed. So, as best I remember, that's 15 what this exercise was. 16 Q. Was this one-year prepayment speeds? 17 A. Well, let me -- the Morgan Stanley 18 thing seems to be attached. (Witness reviews the 19 document.) 20 Typically, when you see prepaid 21 projections, I think it -- it's more than one 22 year. 16654 1 Q. Do you know what -- making reference to 2 the Morgan Stanley chart, it's attached as 3 US3015350. Right? 4 A. Yes, sir, I was looking at that. 5 Q. And that's where you got your 6 prepayment figures for Morgan Stanley? 7 A. Let's see. Let me look -- eyeball a 8 few of them here. They look to be pretty similar, 9 yes. I would have gotten them either from this 10 chart or a chart very similar to this, yes, sir. 11 Q. And do you know whether or not these 12 are prepayment rates that are annualized for the 13 first year? 14 MR. NICKENS: Your Honor, I don't 15 understand the question. CPR is a measure of one 16 year. It is, by definition, one year. And so, I 17 don't -- is he asking whether they try to go for 18 the entire life of the security? I just don't 19 understand the question. 20 Q. (BY MR. GUIDO) Is this the projected 21 prepayment rate for the year after the date that 22 you have: 4/18/1986? 16655 1 A. I can't say for sure, Mr. Guido; but I 2 would think that that's what that would be. 3 Q. Okay. 4 A. But I -- the correct answer from my 5 memory is I don't know. I just don't know. 6 Q. So, you don't know? 7 A. No, sir. 8 Q. Did you ever know? 9 A. I probably knew, yes, sir. 10 Q. And is it your recollection that the 11 best guess is that it's the next year's 12 prepayments? 13 A. Well, constant prepay rate is an annual 14 figure. It's like what we're seeing in the first 15 line. You're saying that those Fannie Mae 10 and 16 a halfs are going to prepay at 11 percent per 17 year. So -- and then in the second year -- in 18 other words, you're going to pay 11 percent of the 19 50 million down in the first year; and you're 20 going to pay 11 percent of the 89 percent that's 21 left during the second year, et cetera. But, you 22 know, in the real world, what happens is, you 16656 1 know, for booking purposes, we looked at these 2 things on a quarterly basis because Morgan Stanley 3 probably said, "Well, our best estimate of 4 Fannie Mae 10 and a halfs in terms of constant 5 prepay rate is 11 percent as of April 18th"; but 6 by September, their prepay projection might have 7 been 18 percent. 8 Q. So, this is typically a one-year 9 projection when you see a figure like this? 10 A. Constant prepay rate is based on an 11 annualized prepay rate. 12 Q. Okay. So, it's a projection out a 13 year? 14 MR. NICKENS: Your Honor, I just don't 15 understand the question. It's like you're saying, 16 "I'm going 70 miles an hour. What is your speed 17 going to be for the next year?" It's the speed. 18 It's not subject to that kind of question. It 19 doesn't measure that kind of thing. 20 Q. (BY MR. GUIDO) Is the constant 21 prepayment rate as of 4/18, right, on your chart? 22 A. Yes, sir. 16657 1 Q. And is that Morgan Stanley's best guess 2 of what the prepayment rates will be for the next 3 year? That's all I'm asking you. 4 A. Yes, sir. If -- you know, if we could 5 freeze frame this in time, the way it would work 6 is that -- taking the first example or the second 7 one would be easier, the hundred million of 8 Fannie Mae 11s -- the first year, 14 percent of 9 that principal would repay in the first year. In 10 the second year, 14 percent of 86 million would 11 prepay and so forth. 12 Q. Okay. 13 A. And so, it's -- it's -- it's expressed 14 in terms of an annualized number. 15 Q. Okay. Now, I would like you to take a 16 look at Exhibit A13004, which is at Tab 1121. 17 Before I do so, I want you to look 18 again at Exhibit B963, the same chart, the 19 Smith Breeden Associates chart there. You 20 testified that -- and you say in your memo that 21 Smith Breeden's figures are dramatically different 22 than the prepayments of Morgan Stanley. 16658 1 Do you see that? 2 A. I don't -- I remember that. 3 Q. You remember testifying to that. 4 Right? 5 A. Yes, sir. I remember that their prepay 6 rates were higher than the big Wall Street 7 dealers' research departments. 8 Q. Now, did you have Smith Breeden do an 9 analysis of the CMOs for you? 10 A. Yeah. As best I remember, we engaged 11 them to look at the CMOs and then to look at the 12 overall interest rate risk of the association or 13 of the company. And then we, later on, used them 14 for some consulting work having to do with 15 specific transactions. 16 Q. Well, I would like you to take a look 17 at A13004, which is the Smith Breeden analysis of 18 that portfolio. 19 Do you recognize that as their analysis 20 of the portfolio? 21 A. (Witness reviews the document.) 22 MR. NICKENS: This is the analysis of 16659 1 the CMO offering. 2 MR. GUIDO: That's correct, the CMO 3 offering: A13004. 4 A. Yes, sir. This appears to be the CMO 5 analysis that -- 6 Q. (BY MR. GUIDO) And this is as of 7 June 30th. Right? 8 A. Yes, sir. 9 Q. Okay. Which is two and -- maybe two 10 and a half months after the figures in B963. 11 Right? 12 A. That is correct. 13 Q. So, there's a time difference? 14 A. Yes, sir. 15 Q. Assuming that time difference, look at 16 the figures for the first year for CMO Series 1 at 17 the Bates stamp 001651 on Exhibit A13004. 18 Do you see the average figure of 19 15 percent -- 20 A. Yes, sir, I do. 21 Q. -- for one year? 22 A. I do. 16660 1 Q. All right. That corresponds with 2 Morgan Stanley's figure at 4/18, does it not? 3 A. Uh-huh. 4 Q. Now, look at the average one year for 5 Series 2. That's 10.2. 6 Do you see that figure in the 7 Smith Breeden analysis? 8 A. (Witness reviews the document.) Oh, I 9 do. I'm sorry. Yes, sir, I do. 10 Q. And the Morgan Stanley figure is 10.5, 11 and the one-year Smith Breeden is 10.2. 12 Do you see that? 13 A. I do. 14 Q. And then look at Series 3. The 15 weighted average of Morgan Stanley is 5.5, and the 16 Smith Breeden is 5.75. 17 Do you see that? 18 A. I do. 19 Q. Those figures are dramatically 20 different than the figures you have on 21 Smith Breeden & Associates 4/21. 22 Do you see that? 16661 1 A. Yes, sir, I do. 2 Q. Do you know why that is? 3 A. No, sir, I do not. 4 Q. Are your figures for Smith Breeden in 5 your memo dated May 1st, 1986, figures which you 6 ever discussed with Smith Breeden? 7 A. I just don't remember, Mr. Guido, 8 whether I discussed them or not. 9 Q. All right. 10 A. I suspect that I did, but I can't -- I 11 just can't remember. 12 Q. Do you have any explanation for the 13 difference? 14 A. No, sir, I don't. 15 Q. Okay. Now, I would like to direct your 16 attention to Tab 187 which is A10649. It's your 17 memorandum summarizing the Smith Breeden 18 presentation. 19 A. Do I have that? 20 Q. It's Tab 187. I'm sorry. I have it. 21 Do you remember Mr. Nickens directed 22 your attention to the page that dealt with the -- 16662 1 which dealt with the mortgage-backed security 2 portfolio, and he directed your attention to the 3 1.9-billion-dollar figure. 4 Do you recall that? 5 A. Yes, sir, I do. 6 Q. Okay. Would you flip to that page? 7 A. (Witness complies.) Right. 8 Q. That's at US37274. Now, you said that 9 that figure probably included the CMOs. 10 Do you recall that? 11 A. I don't remember saying that, no, sir. 12 I certainly may have. 13 Q. Do you recall questions about the 14 composition of the 1.9 book value? 15 A. Yes, sir. I remember we talked about 16 whether this would be bigger than Joe's portfolio; 17 and certainly, it would be bigger than Joe's 18 portfolio. It looks like it -- you know, it may 19 be on a macro basis; and by that, I mean it may 20 include all mortgage-backs. 21 Q. And that includes the CMOs. Right? 22 A. Yeah. The only reason I'm squirming a 16663 1 little bit on that one is the CMOs were kind of an 2 off balance sheet transaction. 3 Q. Uh-huh. 4 A. And if I'm remembering correctly, all 5 you had on your balance sheet was the little 6 residual. 7 Q. Uh-huh. 8 A. If I could look at a balance sheet at 9 about this time, I could probably tell you. 10 Q. So, at that point in time, you don't 11 know whether or not the CMOs were included in this 12 or not. Right? 13 A. I can't say for sure, no. 14 Q. Okay. And why were they off balance 15 sheet? 16 A. Well, the -- there were a fairly 17 complex set of rules back in those days -- and 18 they may still even be in existence today -- that 19 if you issued in a subsidiary a series of bonds 20 called CMOs and they were collateralized with 21 mortgage-backed securities and they were a totally 22 sealed system -- and by that, I mean they were put 16664 1 with a trustee -- and as the mortgage-backed 2 securities paid down that flowed directly through 3 to the CMOs and that transaction was deemed -- I 4 forget the technical language, but it wasn't GAAP 5 to put that on your balance sheet. In other 6 words, you didn't have to blow up your balance 7 sheet for both the assets and the liabilities. 8 Q. Who assumed the risk of prepayments in 9 the CMO? USAT or the purchasers of the CMOs? 10 A. Both. 11 Q. Both? 12 A. Yes, sir. 13 Q. And how was that divided up? 14 A. I really can't answer that because that 15 gets into some real complex type stuff because 16 you -- you -- if you're the purchaser of the CMO 17 and you bought that CMO at a premium, let's say, 18 and prepayments were real fast, you were sad. If 19 they were real slow, you were -- generally 20 speaking, you were happy if you bought a high 21 coupon at a premium. And so, that's a CMO holders 22 side; and then USAT held the residual side. 16665 1 Q. Now, when you had Smith Breeden do its 2 analysis, did you have them do an analysis of 3 USAT's interest rate risk caused by prepayments or 4 the holders of the CMOs? 5 A. I would say we must have had them do 6 USAT's interest rate risk. 7 Q. So that these charts here, starting 8 with the one at US3007269, is assessing USAT's 9 risk for its portion of the mortgage-backed 10 securities that were collateral for the CMO. 11 Is that an accurate statement? 12 A. Let me look at this just one moment. 13 It's been a long time. (Witness reviews the 14 document.) 15 I think focusing on this chart, I do 16 have a vague memory of this, that they were 17 looking at USAT's residual -- 18 Q. Okay. 19 A. -- and they were evaluating -- we had 20 asked Goldman Sachs to also look at our CMOs; and 21 they were evaluating, I think, the Goldman Sachs 22 proposal as to whether, you know, to buy some 16666 1 strip mortgages and maybe that would make some 2 sense. I think that's what's going on here. 3 Q. Mr. Crow, would you please confine your 4 answers to explaining your response to my 5 question? I think we know about the Goldman Sachs 6 study. 7 I would like to direct your attention 8 to Paragraph 2 where it says, "Smith Breeden has 9 analyzed two specific areas of United's business: 10 Our present CMOs and our structured arbitrage 11 program." 12 Do you see that? 13 A. Yes, sir, I see that. 14 Q. What does "structured arbitrage" mean 15 to you? 16 A. Structured arbitrage would include 17 Joe's portfolio. It would include, you know, 18 certainly things like the sub that was collapsed 19 and it might include some others items but I'm not 20 sure. 21 Q. Let's look at B3945 which Mr. Nickens 22 had you take a look at the other day. That is a 16667 1 memorandum -- a draft memorandum dated 2 November 21, 1986, at Tab 1433. 3 Do you remember Mr. Nickens asking you 4 about that document? 5 A. I think I remember somebody asking me 6 about this. I can't separate all the lawyers. 7 Q. Okay. There are many of us, Mr. Crow. 8 A. Yes, sir. I'm painfully aware of that. 9 Q. Now, US3000504 is the page where 10 Mr. Nickens directed your attention. 11 Do you see that? 12 A. I do, yes, sir. 13 Q. Now, in your memorandum, which is dated 14 July 3rd, 1986, which is next to your right hand 15 there -- you have it flipped open there -- 16 A. Okay. 17 Q. -- which makes reference to the 18 structured arbitrage program in the second 19 paragraph. 20 A. Okay, yes, sir. 21 Q. Now, is included within structured 22 arbitrage the investments portfolio of 756,822,000 16668 1 that's referred to in Bruce Williams' 2 Exhibit B3945? 3 A. I don't know. 4 Q. Were -- do you see all of the MBSs that 5 are listed there on Page 504 of Exhibit B3945? 6 A. Yes, sir, I do. 7 Q. Those are all mortgage-backed 8 securities, are they not, that are held by USAT as 9 of that date. Right? 10 A. Correct. 11 Q. And they are things called USAT 12 treasury, DARTs, investments, and Series E bonds. 13 Right? 14 A. That is correct. 15 Q. And then if you drop down, do you 16 see -- under "impact of hedges," do you see that 17 figure there of 974,350,000? 18 Do you see that? 19 A. Yes, sir. 20 Q. Now, does that refer to the swaps that 21 USAT had on its books at the time? 22 A. I'm sure that part of that is swaps. 16669 1 As to whether there's other things in there, I 2 don't know. 3 Q. Okay. Look under the "MBSs." It says 4 "1,127,000." 5 Do you see that? 6 A. Yes, sir, I do. 7 Q. Were any of those portfolios that are 8 listed under "MBSs" portfolios that USAT was not 9 hedging the interest rate risk for? 10 A. I really don't know, Mr. Guido. I 11 don't remember us hedging the -- some of these 12 portfolios, but I -- you know, I could be 13 mistaken. 14 Q. Well, if your 12/31/1986 10K said that 15 you were hedging your portfolios, do you have any 16 reason to dispute the accuracy of that 10K? 17 MR. NICKENS: Your Honor, I would 18 object. If he's going to ask him what's in the 19 10K, he ought to show him the 10K; or he ought to 20 ask him the question apart from the 10K. If he 21 wants to say, you know, "Let me make the 22 assumption that you said such-and-such at some 16670 1 point in time." But to refer him to the 10K 2 without showing him the 10K, we don't know what 3 else may be said there. 4 THE COURT: Well, I thought the 5 question was does he know anything that's 6 erroneous on the 10K. 7 MR. NICKENS: Yes, Your Honor, but we 8 don't have the 10K in front of us. 9 THE COURT: I know. 10 THE WITNESS: Answer? 11 THE COURT: Yes. 12 A. I'm not aware of anything erroneous in 13 the 10K, but I think the 10K would take -- it's 14 an -- it's a document that is SEC-driven that 15 would be on a macro basis. And by that, I mean it 16 looks like all of these portfolios -- Joe's 17 portfolios and United MBS and Sandy's portfolio 18 and all that -- it just -- when you're at the 10K 19 level, you don't care. You're looking at total. 20 Sometimes it's difficult without some reconciling 21 schedules and stuff to get from 10K numbers back 22 to performance report type numbers or these type 16671 1 figures. 2 Q. (BY MR. GUIDO) Did you participate in 3 preparing the text for 10Ks that were submitted by 4 UFG at the time you were its CFO? 5 A. As the text of the 10K? 6 Q. Yeah. 7 A. Yes, sir. I did participate in certain 8 sections of that, yes, sir. 9 Q. Did you ever put anything in there 10 knowing it to be false? 11 A. No, sir. Mr. Guido, I didn't knowingly 12 make a false statement to the SEC. 13 Q. I think you testified that you 14 understood that those 10Ks were also filed with 15 the Federal Home Loan Bank Board. 16 Do you recall that testimony? 17 A. Yes, sir. 18 Q. Now, I would like to ask you some 19 questions about these portfolios in relationship 20 to questions that I asked you the other day. 21 Do you recall that I asked you whether 22 sales were made out of the mortgage-backed 16672 1 securities portfolio to generate gains to bolster 2 quarterly profits? 3 A. I remember those questions, yes, sir. 4 Q. And do you recall that you testified 5 that your answer was "yes"? 6 A. I do remember that. 7 Q. Okay. Now, let's look at these 8 portfolios here. Okay? Under USAT treasury, were 9 sales made out of the USAT treasury 10 mortgage-backed securities portfolio to generate 11 gains to bolster quarterly profits? 12 A. That -- without some help on 13 documentation, I can't say because if you get into 14 specific portfolios, you know, it's kind of like 15 these contracts we were talking about awhile back. 16 I know that gains were made for purposes -- or 17 sales were made for purposes of taking gains for 18 profits. But if you ask me about a particular 19 portfolio, I don't know. I just don't know. 20 Q. You just don't know? 21 A. No, sir. 22 Q. Okay. Do you remember -- let me take 16673 1 you to the next -- DARTs. It says $125 million 2 worth of DARTs. 3 Do you know whether or not gains were 4 taken out of the DARTs portfolio by sales of 5 mortgage-backed securities to bolster quarterly 6 profits? 7 A. Same answer, Mr. Guido. I just -- I 8 don't know. 9 Q. Now, with regard to -- 10 A. I'm sure -- let me be clear. I 11 certainly probably knew at the time. 12 Q. But you don't know today? 13 A. No, sir. 14 Q. Okay. Now, under "investments," do you 15 see that 756 million? 16 A. Yes, sir. 17 Q. Were sales made out of the investments 18 portfolio to generate gains to bolster quarterly 19 profits? 20 A. I just -- when we get to the specific 21 portfolios, I just -- I don't know. 22 Q. Well, let's take a look, then, at the 16674 1 last page of this memorandum: US3000510. 2 Do you see that? 3 A. Yes, sir. 4 Q. It says -- do you see where it says 5 "investments"? 6 A. These are the little bitty numbers? 7 Q. Yeah, the little bitty numbers there. 8 A. Which section do you want -- 9 Q. Under the section that says "sales." 10 Do you see that at the top? 11 A. Yes, I do see the sales. 12 Q. Do you see "sales" under "investments" 13 of 524,146,000? 14 MR. NICKENS: Your Honor, I'm lost. 15 Which column are we looking at? 16 MR. GUIDO: Look under "investments" 17 and look under "face value." 18 Q. (BY MR. GUIDO) Do you see that? 19 A. I haven't found it yet, Mr. Guido. I'm 20 looking. Oh, I see the 524 million, yes, sir. 21 Q. Okay. 524,146,000 of sales. Right? 22 A. I do see that number. 16675 1 Q. Now, drop down under -- look under 2 "purchases." 3 Do you see that? 4 A. Yes, sir, I do. 5 Q. And you see under "total investments," 6 the face value is 655 million, some thousands? 7 A. I do. I see that number. 8 Q. And do you recall Mr. Nickens asked you 9 some questions about whether or not you could 10 infer whether or not sales were made out of the 11 mortgage-backed securities portfolios in order to 12 generate gains? 13 Do you recall that? 14 A. I do. We looked at various investment 15 committee-attached schedules, yes, sir. 16 Q. Can you infer anything from this? 17 MR. NICKENS: Infer as to what, 18 Your Honor? Anything? 19 MR. GUIDO: Whether or not these sales 20 were made for the purposes of generating gains. 21 THE COURT: All right. Do you 22 understand that? 16676 1 THE WITNESS: I understand the 2 question, yes, sir. Let me look at this just a 3 minute. 4 A. (Witness reviews the document.) Well, 5 I see a column that says "realized gain of 6 7,362,000." 7 Q. (BY MR. GUIDO) Do you infer from that 8 that the purposes of these transactions were to 9 generate gains to bolster profits? 10 A. I couldn't go that far, no, sir. 11 Q. Why couldn't you go that far? What's 12 wrong with that question that you can't answer 13 "yes" or "no"? 14 MR. NICKENS: Your Honor, I would 15 object to that. When the witness is supposed to 16 tell Mr. Guido what's wrong with the question, 17 that cannot be a proper question. 18 MR. GUIDO: I'll restate the question, 19 Your Honor. I think the witness knows what the 20 question is and can answer it. 21 THE COURT: Well, let's make a record 22 of what the question is. 16677 1 Q. (BY MR. GUIDO) Mr. Crow, why can't you 2 infer what the purpose of those transactions were 3 that generated gains? 4 MR. EISENHART: Your Honor, can 5 Mr. Guido keep his voice up? Even I can't hear 6 him now. 7 Q. (BY MR. GUIDO) Mr. Crow, why can't you 8 ascertain the purposes of those transactions from 9 that document? 10 A. Okay. I guess I'll contrast it with 11 the schedules that Mr. Nickens was showing me and 12 I think that you showed me that were the weekly 13 kind of series of investment committee minutes. 14 And it listed transactions, and it said accounting 15 gain. You know, it said the accounting gain. 16 And just kind of remembering how things 17 worked, you know, we had the weekly investment 18 committee; and we talked about transactions and 19 transactions were booked. And I was -- I was kind 20 of familiar with those schedules. So, I felt a 21 bit more comfortable in, you know, stepping out on 22 a limb and saying, "Well, in absence of any other 16678 1 information, looks like these were taken for the 2 purpose of accounting gains." 3 But this schedule, I'm not familiar 4 with it. I can -- you know, it's -- I don't know 5 what it is. I don't know what context it is. So, 6 I just don't know. 7 Q. All right. Now, those schedules that 8 Mr. Nickens showed you, he showed you that column, 9 "accounting gains"? 10 A. Yes, sir. 11 Q. Are you telling us that we can infer 12 from that column that gains were made out of those 13 portfolios described in those documents for 14 purposes of bolstering quarterly profits? 15 A. I'm -- what I was trying to convey to 16 Mr. Nickens and everyone is that, certainly, if 17 you see that type of schedule and you have no 18 other information, you just see "accounting gain," 19 I can see how you would conclude that. 20 Now, you know, if you're -- and, 21 certainly, if it were important to you, you would 22 go check it out further. There could be other 16679 1 reasons on those schedules for swaps to increase 2 yield or whatever that might involve an accounting 3 gain that had nothing to do with quarterly 4 profits. 5 Q. During the period of time -- I think 6 we're talking about October through April, I 7 think, of -- October 1986 through April of 1987 is 8 the time period covered by those schedules that 9 Mr. Nickens showed you. 10 Was USAT making sales out of its 11 mortgage-backed securities portfolios for the 12 purposes of generating gains to bolster profits? 13 A. Well, if you compress me to a time 14 frame, I would have to relook at all those 15 schedules. But if you allow me to just answer 16 more generically, that certainly we were taking 17 gains out of our mortgage-backed securities 18 portfolio to bolster profits. But if -- you know, 19 if we're focusing in on this little time window, 20 you know, I get -- I've looked at so many 21 schedules, I don't even remember the dates of what 22 Mr. Nickens showed me, sir. I apologize, but I 16680 1 don't. 2 Q. Do you recall the rolldown that Joe 3 Phillips did -- 4 A. Yes, sir. 5 Q. -- if the beginning of 1986? 6 A. Yes, sir. 7 Q. Were those sales made to generate gains 8 to bolster profits? 9 A. The rolldown? 10 Q. Yeah. 11 A. No, sir. Excuse me? 12 Q. The answer is, "No, sir"? Is that what 13 you said? 14 A. Yes, sir. The answer is, "No." 15 Q. Now, what did you learn -- when did you 16 learn that you could recognize gains out of the 17 sales of mortgage-backed securities to bolster 18 profits? 19 A. Well, I would put it a bit differently. 20 We learned that we had to restate earnings. It 21 wasn't a happy event to me. And that would have 22 been sometime in the -- sometime, I believe, in 16681 1 the second quarter, the late second quarter of 2 that year. Might have been in July, but at some 3 time in that time frame. We had been through the 4 restatement and that -- you know, it was certainly 5 not something that -- I thought our accounting 6 treatment to defer the gains was the right thing 7 to do. Initially Peat Marwick agreed, and then it 8 was reversed. 9 Q. Now, do you recall the sales to 10 increase the yield in the mortgage-backed 11 securities portfolio? 12 A. So-called value trades? 13 Q. Yes. 14 A. Yes, sir. 15 Q. Do you recall those trades? 16 A. I don't -- I mean, I recall the 17 subject; and I've seen examples of those, yes, 18 sir. 19 Q. Okay. Now, the documents that we've 20 seen showed that the value trades stopped sometime 21 in May or June of 1987. 22 Do you recall that the value trades 16682 1 ceased around May and June of 1987? 2 A. No, sir. But I -- if that's what the 3 record shows, I certainly don't dispute it. 4 Q. Do you recall that the value trades 5 stopped occurring at USAT at a certain point in 6 time? 7 A. No. I don't remember that, no, sir. 8 Q. Okay. 9 A. I mean, I'm not -- I just don't 10 remember whether it did or didn't. 11 Q. Okay. Now, when you looked at the 12 various schedules that Mr. Nickens showed you of 13 various excerpts from the investment committees, 14 you said an auditor could infer from that that 15 sales were made out of the mortgage-backed 16 securities portfolios to generate gains to bolster 17 quarterly profits. 18 Do you recall that? 19 A. Yes. I think what you would do -- I 20 don't know exactly how I stated it. But what an 21 auditor would do is he would take all of those 22 schedules and all of those references to taking 16683 1 profits; and they would, you know, put them in a 2 stack and go dig into them, look at them. 3 Q. Now, do you recall that you testified 4 that the auditors didn't require you to mark the 5 portfolio to market? 6 A. Yes, sir, I remember that. 7 Q. Okay. And you recall you said it 8 wasn't even a close call? 9 A. I don't remember that being a close 10 call, no, sir. 11 Q. Okay. 12 A. I do not. Or I'll put it like this. I 13 don't remember having any heated discussions with 14 the accountants, you know, where we're taking one 15 position and they are taking another position on 16 that subject. I remember certainly us talking 17 about it but -- but no. 18 Q. Now, you looked at a number of 19 schedules; and you said from that, the auditors 20 could infer what the purposes of the 21 mortgage-backed securities was. 22 Do you recall that? 16684 1 A. Well, I -- what I was trying to convey 2 is they would take all those schedules that 3 Mr. Nickens showed me, all those references to 4 taking gains, and they would go talk to people and 5 they would look at documentation and basically 6 say, you know, "What's going on?" 7 Q. And, in fact, they did that, didn't 8 they? 9 A. There's no doubt in my mind that they 10 did that. 11 Q. Did you tell them at any time that USAT 12 was making sales out of its mortgage-backed 13 securities portfolios in order to generate gains 14 to bolster profits? 15 A. I am not sure that I used those words, 16 Mr. Guido; but I certainly told the auditors that 17 we were making sales out of various portfolios, 18 including mortgage-backs, in order to bolster 19 earnings, yes, sir. 20 Q. To bolster earnings? 21 A. Yes, sir. 22 Q. Okay. And they didn't require you to 16685 1 mark the portfolio to market in 1986? 2 A. No, sir. 3 Q. Is that because the market value was at 4 least as great as the book value? 5 A. No. I don't think that had anything to 6 do with it. 7 Q. You don't? 8 A. No, sir. 9 Q. Well -- 10 A. I think the -- if the accountants had 11 determined that the portfolio -- in order to reach 12 the conclusion that the portfolio would have been 13 mark to market, you would have had to jump to the 14 conclusion that it was a trading portfolio. And 15 if they jumped to that conclusion, I think, bam, 16 it would have been marked to market. 17 Q. Well, have you ever heard of the 18 concept of materiality that auditors apply to 19 financial statements? 20 A. Certainly. 21 Q. Can you tell the Court what that means? 22 A. It means that the accountants and 16686 1 auditors look at things in the context of the 2 size, numbers. In other words, if -- if you're 3 looking at an income statement that has gross 4 revenues of $4 billion or asset size of 7 billion, 5 there can be technical violations and exceptions 6 to rules in a minor amount that are just passed. 7 I mean, that's the real world. That happens. You 8 know, organizations, accountants, and people don't 9 always follow the letter of the rules at all 10 times; and that's what materiality is to me. 11 Q. So, it means that even if the auditors 12 disagree in terms of the applicable accounting 13 principle, that the results are immaterial in 14 terms of the impact on the financial statements? 15 Is that a fair characterization of your 16 testimony? 17 A. I don't remember as it relates to this 18 issue. I don't think that if they had concluded 19 that the portfolio or portfolios was trading, 20 Mr. Guido, that that would be construed as 21 immaterial. No, sir. That is -- if they had 22 concluded that it should be marked to market 16687 1 because it was a trading portfolio, that would be 2 a material event; and it wouldn't just be passed 3 as immaterial. 4 Q. In terms of the financial impact, if it 5 turns out -- let's say market value was the same 6 as cost. 7 A. In this case, I don't -- I believe -- 8 if they had concluded it was a trading portfolio, 9 just in this hypothetical world, I think they 10 would have -- you know, in our footnote to our 11 financials and our presentations, we would have 12 had to say, "This is a trading portfolio, and it's 13 going to be accounted for on a mark-to-market 14 basis" because, obviously, mark to market depends 15 on the level of interest rates basically. And so, 16 they couldn't just say, "Well, gee. This is 17 immaterial at year end now because interest rates 18 are -- are such that our book value and market 19 value is exactly equal." But who knows what they 20 are going to be at the end of the first quarter. 21 Q. Aren't the financial statements 22 historical? 16688 1 A. Yes, sir. 2 Q. As of the date that they are prepared. 3 Right? 4 A. That is correct. 5 Q. Now, I want you to look at B4065, which 6 is a packet of materials that were the minutes of 7 November 1986 fourth quarter; and they are in the 8 work papers of Peat Marwick. I want to direct 9 your attention to -- 10 MR. NICKENS: Your Honor, could we have 11 a reference? Is there a tab number? 12 MR. GUIDO: Tab 1006. 13 Q. (BY MR. GUIDO) I would like to direct 14 your attention to KPMG 035576 which says, "Minutes 15 of a meeting of the board of directors of United 16 Savings Association of Texas, November 13th, 17 1986." 18 Now, this is in a packet of materials 19 that are in the work papers; and it's -- if you 20 look at the first page, it says it's 1/19/87 on 21 the very first page of the exhibit. It's -- 22 Mister -- 16689 1 A. The minutes of the board of 2 November 13th, '86? 3 Q. Those are in the packet of materials, 4 if you go back to the first page of the packet, 5 which is January 19, 1987. 6 A. Yeah. I see the KPMG stamp down there 7 which means they had their hands on it. 8 Q. I think you testified that you provided 9 or someone at USAT would provide Peat Marwick with 10 the minutes as part of the documentation for 11 Peat Marwick to look at in its course of auditing 12 USAT's financial statements, correct? 13 A. Yes, sir. 14 Q. Now, let's take a look at those board 15 of directors minutes at KPMG 035576. 16 A. Okay. 17 Q. That says the minutes of the board of 18 directors on November 13. Then turn to Page 2. 19 It says, "Resolved, it is deemed to be in the best 20 interests of the association to undertake trading 21 activities related to the mortgage-backed 22 securities investment portfolio trading operation 16690 1 from time to time in order to reduce the net 2 interest rate exposure of the association." 3 Did that authorize -- that resolution, 4 which then it goes on, and it talks about the 5 resolution in Exhibit A and directs your attention 6 to the resolution which is at 035582. 7 Do you see where it says, "It shall be 8 the policy of United Savings Association of Texas 9 to undertake trading activities related to the 10 mortgage-backed securities investment portfolio 11 trading operation from time to time in order to 12 reduce the net interest rate exposure of the 13 association." 14 Do you see that? 15 A. Yes, sir, I do. 16 Q. Does that authorize sales to be made 17 out of the mortgage-backed securities portfolio in 18 order to generate gains to bolster profits? 19 A. No, sir. I don't see that anywhere. 20 Q. Okay. Can anyone infer from that that 21 the management of USAT was authorized to engage in 22 such transactions? 16691 1 MR. NICKENS: Your Honor, I must object 2 to the question of whether anyone can infer. It 3 could not be relevant information. 4 Q. (BY MR. GUIDO) Well, could an auditor 5 infer from that? 6 A. If you limit me just to this paragraph, 7 you know, where it says "resolved" and then -- 8 let's see. Let me look at this statement here 9 right quick. (Witness reviews the document.) 10 No, sir. I don't see any authorization 11 to take profits in the areas you've directed me 12 to. 13 Q. Now, I would like to show you 14 Exhibit B1281, which is Tab 389. This is a 15 memorandum from Art Berner to Bruce Williams dated 16 October 22 -- Bruce Williams and others with a 17 copy to you, among others, dated October 22nd, 18 1986. 19 Do you see it has a draft of that 20 policy that we just read from the November 13th 21 investment committee minutes? 22 A. Yes, sir, I do. 16692 1 Q. Do you see the cover memo from Art 2 Berner? 3 A. Let's see. (Witness reviews the 4 document.) Yes, sir, I see the cover memo. 5 Q. And does the cover memo indicate that 6 he's recommending it be adopted because of 7 regulatory requirements for FSLIC-insured 8 institutions? 9 A. Yes, sir. I see that, related to 10 financial options transactions; but yes, sir, I 11 see that. 12 Q. But the language of the resolution 13 isn't limited to financial options transactions, 14 is it? 15 A. It does not appear to be, no. 16 Q. Now, I would like to direct your 17 attention to your memorandum dated January 12th, 18 1987, from -- to Bruce Williams. It's at Tab 897, 19 which is A10716. 20 Do you recall me asking you some 21 questions about that on direct? 22 A. Yes, sir. I remember the Joe Parsons 16693 1 memo. 2 Q. Okay. 3 A. Somebody asking me some questions about 4 that. 5 Q. Now, if you look at Page 2 of the Joe 6 Parsons memo, this is making reference to the 7 investment committee minutes of November 12th 8 dealing with high-yield bonds. 9 Do you see that? 10 A. What -- it's on Page 2 of Joe 11 Parsons' -- 12 Q. Page 2. 13 A. Okay. 14 Q. See the first full paragraph says, 15 "Such stated policy does appear to state United's 16 intent? 17 A. Yes, I see that paragraph. 18 Q. And it's making reference to the 19 minutes of the investment committee of November 12 20 in which it adopts a policy that -- with regard to 21 investing in high-yield bonds. 22 Do you see that? 16694 1 A. I don't see the November 12th; but he 2 certainly is commenting on a policy, yes, sir. 3 Q. Look at the very first line of Page 2. 4 "United's intent in the minutes of the investment 5 committee of November 12, 1986" on Page 2, the 6 first line, Page 2 of the Joe Phillips memo. 7 Do you see that? 8 A. I do see that, yes, sir. 9 Q. Okay. Now, I would like to show you 10 Exhibit A10690, which is at Tab 568 which is your 11 memo of November 7th, 1986, to Art Berner. That's 12 recommending by you that Art Berner had the 13 attached policy adopted by the investment 14 committee because of a request of Peat Marwick? 15 A. Yes, sir. 16 Q. Okay. Now, let's go to Tab 897 again, 17 back to the Joe Parsons memo, A10716. It goes on 18 in that paragraph, "Such stated policy does appear 19 to state United's intent." 20 Do you see that? 21 A. I do. 22 Q. Then it says in the second sentence, 16695 1 "We have also reviewed certain of the minutes of 2 the investment committee which describe purchases 3 and trades with approvals thereof but also noted 4 that the minutes did not include descriptions of 5 the objectives and specific strategies." 6 Do you see that? 7 A. I do see that. 8 Q. Now, you indicated that when you 9 reviewed the minutes, that you could infer what 10 the purposes of the transactions were. 11 Do you recall that testimony? 12 A. Well, again, what I was trying to say 13 is that I don't remember exactly what words I 14 used; but in reviewing the documents that we went 15 over attached to the investment committee minutes 16 that Mr. Nickens showed me that had accounting 17 gain on them, that would certainly -- you know, if 18 you were an auditor, an accountant, you would take 19 those, put them in a stack, and you would go look 20 into it. And if -- but if you gave me a test and 21 all I had was that piece of paper and it had 22 accounting gain on it and one of the answers that 16696 1 I couldn't give was "I don't know," then I guess I 2 would have to say the purpose was to take an 3 accounting gain. But I can't -- you know, I'm not 4 saying definitively. 5 Q. Joe Parson was the manager in charge of 6 this audit, was he not? 7 A. Yes, sir. 8 Q. This is what he says in the next 9 paragraph. "We believe that in order to conclude 10 as to the appropriateness of the accounting 11 treatment for the junk bond and mortgage-backed 12 securities portfolios, that we must understand the 13 objective and strategy which was used at the time 14 of purchase and trades of the securities." 15 Do you see that? 16 A. I do. 17 Q. It says, "Without such documentation, 18 it is impossible to conclude whether trades were 19 made for the purpose of short-term gains or for 20 other valid purposes consistent with an investment 21 portfolio." 22 Do you see that? 16697 1 A. I do, yes, sir. 2 Q. And did you not then prepare statements 3 of, I think, policies and objectives that you 4 provided to Peat Marwick? 5 A. I know we addressed Joe Parsons' memo 6 in various ways. And certainly, one of the ways 7 probably involved statements of policies, yes, 8 sir. 9 Q. I would like to show you -- 10 A. Because Mr. Parsons, in his memo, is 11 getting to the heart of the test as to whether 12 something is a trading portfolio or an investment 13 portfolio. 14 Q. Okay. And doesn't he ask you in that 15 memorandum on the last page, "PM's 16 recommendations. In order to document the 17 propriety of the accounting treatment for the junk 18 bond and mortgage-backed securities portfolios, we 19 would recommend a clear statement of strategy and 20 intent for both the investment and trading 21 portfolios be developed. Such statement should be 22 retrospective for activities which has occurred to 16698 1 date and incorporate those concerns as would be 2 appropriate as presented above and prospective for 3 future activities." 4 Do you see that recommendation? 5 A. I do, yes, sir. 6 Q. And didn't you then adopt high-yield 7 bond policies in Exhibit B -- that are shown in 8 Exhibit B1410 which are attached to Peat Marwick's 9 work papers as their view of your response to that 10 recommendation? 11 A. Okay. (Witness reviews the document.) 12 I guess this must have been one of the things that 13 we did, yes, sir. 14 Q. And that was your response. Right? 15 A. I'm not sure it was our total response; 16 but it apparently was one of the responses, yes. 17 Q. Now, both of these documents -- I asked 18 you whether or not those documents authorized the 19 sale of mortgage-backed securities or high-yield 20 bonds to generate gains to bolster profits, and 21 your answer was "no." 22 A. I didn't see those, no, sir. 16699 1 Q. Okay. Now, your communications with 2 the accountants didn't stop there. On 3 January 28th, 1987, Jim Wolfe writes to Joe 4 Parsons -- it's in the work papers at 5 Exhibit B1452, Tab 894, with a copy to you. 6 A. Let's see. Which is -- have I got 7 that, Mr. Guido? 8 MR. GUIDO: I have Tab 894. I think it 9 could be -- it's 898. 10 Q. (BY MR. GUIDO) Do you have B1452 in 11 front of you? 12 A. I do, yes, sir. 13 Q. This says from Jim Wolfe, "Based on our 14 meeting of January 23rd to discuss various issues 15 involving the hedging activities of United MBS 16 Corporation, it is apparent to me that there exist 17 several issues that are still open or are subject 18 to interpretation such as treatment of the Ginnie 19 Mae puts and correlations." Then it says, "After 20 having read the United MBS statement of purpose 21 accounting guidelines, there is some discussions, 22 L, regarding the activities of the subsidiary. I 16700 1 feel comfortable that you understand United's 2 business and the economic objectives of such 3 company." 4 Do you see that? 5 A. I do, yes, sir. 6 Q. Now I would like to show you the 7 document that's been marked as Exhibit B1455, 8 which is a Joe Parsons memo to the work papers of 9 January 29th, 1987. It's at Tab 893, I think. 10 MR. NICKENS: 899. 11 MR. GUIDO: 899. 12 Q. (BY MR. GUIDO) This is a memo from Joe 13 Parsons to the files or the work papers referring 14 to that January 23rd meeting. 15 Do you see at the top, it says, "PM 16 representatives Barry Tiedt and myself met with 17 Jim Wolfe, Bruce Williams, and Russ McCann to 18 discuss the hedge program and related accounted 19 treatment. Sandra Laurenson joined the meeting 20 after it had started." 21 Do you see that? 22 A. I do, yes, sir. 16701 1 Q. Look at Page 2 of that document. 2 Mr. Parsons is recording what transpired at that 3 meeting. "What is the expectation that the MBS 4 will be traded? Under what circumstances would 5 the MBS be traded? Note: I thought that it was 6 important to establish that the MBS would not be 7 traded or at least that there would be minimal 8 trading activity. If the MBS were to be traded, 9 it would appear that the hedge positions should be 10 considered to be speculative." Then it says, 11 "Laurenson stated that the MBS would not be traded 12 under any circumstances." 13 Looking at those two documents, do 14 either of those tell the auditors that the 15 mortgage-backed securities out of USAT Mortgage 16 Finance would be sold to generate gains to bolster 17 profits? 18 MR. NICKENS: Your Honor, he just asked 19 about USAT Mortgage Finance, which was a 20 subsidiary back in 1985; and we're talking about 21 United MBS which had a completely different and 22 separate hedging program. 16702 1 MR. GUIDO: It's obvious I misspoke, 2 Your Honor. 3 Q. (BY MR. GUIDO) My question is with 4 regard to United MBS, Mr. Crow. 5 A. Could you repeat that question, please? 6 Q. Do either of these documents tell the 7 auditors that sales were being made out of the 8 mortgage-backed security portfolio held by United 9 MBS to generate gains to bolster profits? 10 A. No, sir. I don't see any such 11 language. This one we're talking about -- this 12 particular Joe Parsons memo we're talking about, 13 the -- that FASB 80 stuff, I think, and, you know, 14 the correlation analyses and so forth. But no. 15 In terms of your question, I don't see that. 16 THE COURT: Mr. Guido, I thought we 17 were going to have an early -- 18 MR. GUIDO: I thought we were, too, 19 Your Honor. It's taking much longer. I may have 20 half an hour, Your Honor. The witness was asked 21 some questions about representations to the 22 regulators, as well; and I feel it's necessary to 16703 1 ask them questions about that. 2 THE COURT: You better line your 3 questions up so we can finish him in half an hour 4 tomorrow morning. 5 MR. GUIDO: Thank you, Your Honor. 6 THE COURT: We'll adjourn until 7 tomorrow at 9:00 o'clock. 8 9 (Whereupon at 5:05 p.m. 10 the proceedings were recessed.) 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 16704 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 27th 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 . 16705 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 27th 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