16706 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 28, 1998 22 16707 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 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 16708 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 16709 1 2 INDEX OF PROCEEDINGS 3 Page 4 MICHAEL CROW 5 Continued Examination by Mr. Guido......16710 6 Continued Examination by Mr. Villa......16734 7 Continued Examination by Mr. Nickens....16759 8 Continued Examination by Mr. Rinaldi....16786 9 Continued Examination by Mr. Guido......16795 10 VIVIAN CARLTON 11 Examination by Mr. Veis.................16809 12 13 14 15 16 17 18 19 20 21 22 16710 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Guido, do you have some more 6 redirect? 7 MR. GUIDO: Yes, Your Honor. 8 THE COURT: About half an hour? 9 MR. GUIDO: Yes, Your Honor. 10 THE COURT: All right. Proceed. 11 12 CONTINUED EXAMINATION 13 14 Q. (BY MR. GUIDO) I'd like to show you 15 Tab 633, which is B1023, which is a document that 16 you were asked about by your counsel. It's a memo 17 dated June 2nd, 1986 to the files. 18 This is reporting a meeting of May 21. 19 Do you see that? 20 A. Yes, sir, I do. 21 Q. And do you recall your counsel asking 22 you some questions about this document? 16711 1 A. Yes, sir. 2 Q. When did the rolldown of Joe's 3 portfolio have to be restated? 4 A. I believe that was in mid-1986, and 5 I -- it was somewhere along the time frame of May, 6 June, July of 1986, I believe. 7 Q. Okay. Was the -- was it the June 30 -- 8 did the issue come up with regard to the June 30, 9 1986 financials? 10 A. I can't -- I can't be more specific 11 than that. I remember Peat Marwick generally came 12 in at periodic times during the year, and I don't 13 remember, you know, exactly when it was. But I'm 14 quite confident it was, you know, May, June, July 15 of 1986. 16 Q. Okay. In the rolldown, you were 17 deferring the gains on the mortgage-backed 18 securities, were you not? 19 A. Yes, sir. 20 Q. Until the restatement in the June 30, 21 1986 financials? 22 A. Yes, sir. And we had to go back and 16712 1 restate the first quarter of '86. 2 Q. So, take a look at Page 2 of the 3 memorandum, which says, "According to Mr. Crow, 4 income from securities transactions should not be 5 considered extraordinary as United has made them a 6 part of its ordinary operations." 7 As of May 21st, you hadn't filed any 8 financial statements where you recognized gains on 9 the sales of risk-controlled arbitrage, had you? 10 A. As of May 21st, no. I believe we would 11 still have been using the deferral method of 12 accounting. 13 Q. So, your reference -- 14 A. As it relates to mortgage-backed 15 securities. 16 Q. So, your reference to securities 17 transactions in the sentence doesn't relate to 18 risk -- sales of mortgage-backed securities out of 19 a risk-controlled arbitrage, does it? 20 A. I wouldn't think so. 21 Q. Okay. Now, let's go to the next 22 document. 16713 1 A. I would think it would be high-yield 2 bonds and then mortgage-backs outside of Joe's 3 portfolio during this time frame. 4 Q. What about common stock? 5 A. Well, common stock, the equity arb 6 portfolio was mark-to-market anyway. So, whether 7 it was sold or not, it would flow into our profit 8 statements. 9 Q. And so, the income from securities 10 transactions in common stock was part of your 11 ordinary operations as of May 21, 1986, wasn't it? 12 A. I think so, and I think -- you know, I 13 think the gain on sale, you know, sales of junk 14 bond, and sales of other securities was part of 15 our ordinary operations. 16 Q. Let me show you another document. 17 A. Okay. 18 Q. It's Exhibit B1042. It's dated 19 June 12. It's from Jonathan Scott to Neil Twomey, 20 and it's regarding a meeting of June 10th that 21 Jonathan Scott and Terry Smith had with Mike Crow, 22 Bruce Williams, Joe Phillips, and Art Berner. 16714 1 That's June 12th. Look at the second paragraph. 2 It says -- see where it says "in September of 3 1984"? 4 A. Yes, sir, I do. 5 Q. Then drop down. It's making reference 6 to high-yield bonds in that paragraph. Right? 7 A. Yes, sir. 8 Q. Okay. This whole meeting was about 9 high-yield bonds, wasn't it? 10 A. I believe, given the participants, I 11 think so, yes, sir. 12 Q. See where it says -- the line starts 13 "Cost at 11.6 percent"? 14 A. I do. 15 Q. Okay. It says, "While the portfolio 16 does require certain adjustments to keep the 17 durations matched, the management of the bond 18 portfolio does not involve bond swapping to pick 19 up yields for premature selling to capture capital 20 gains currently unrealized." 21 Do you see that? 22 A. I do, yes, sir. 16715 1 Q. Does that refresh your recollection 2 that in your conversations of June 2nd -- whether 3 or not you were discussing the sales of high-yield 4 bonds to generate gains? 5 A. No. It really doesn't. I -- the 6 wording -- the way this is worded seems to me to 7 be kind of weird because, you know, clearly, we 8 were -- we were doing these things. In other 9 words, we were -- we would have been swapping 10 bonds to pick up yield. And if you take a literal 11 reading of, quote, "premature selling," that means 12 to me you're never going to sell anything. It's 13 just going to mature. And we knew, and I suppose 14 Mr. Scott knew, that that wasn't the way we were 15 operating. But -- and my point is we were sending 16 monthly purchases and sales of junk bonds to the 17 state and federal regulators. And, clearly, there 18 were sales. 19 Q. I'm just asking you about this 20 memorandum. 21 A. Okay. 22 Q. With regard to this memorandum, does 16716 1 that refresh your recollection of what you were 2 addressing in the meeting of May 21, 1986? 3 A. No, sir, it really does not. 4 Q. Now, I would like to direct your 5 attention to Tab 888, which is A1235, and that's 6 your restructuring proposal that your counsel 7 asked you about. It's dated May 29th, 1987. 8 Do you see that? 9 A. Yes, sir, I do. 10 Q. And the -- did you participate in the 11 preparation of this document? 12 A. Yes, sir, I did. 13 Q. Okay. Is this a draft? 14 A. I don't know whether this is the draft 15 or the final. I don't know. 16 Q. Okay. Do you know -- do you know who 17 else worked with you on this document? 18 A. I remember Jim Wolfe worked with me on 19 this, and I think Mr. Berner. Those are the three 20 that I remember. I know that Wolfe and I worked 21 on it. As to who else -- and I think there were 22 more. But who else, I can't peg it specifically. 16717 1 Q. Did you provide it to anyone at the 2 Federal Home Loan Bank? 3 A. Did I give it to them? 4 Q. Uh-huh. 5 A. I don't have a memory of that, no, sir. 6 I just don't remember, say, mailing this or 7 handing it to Mr. Twomey, no, sir, I don't 8 remember that. 9 Q. Do you know who did? 10 A. No, sir. 11 Q. Do you know when it was given to 12 Mr. Twomey? 13 A. No, sir. 14 Q. Do you know whether it was given to 15 Mr. Twomey? 16 A. I can't say from my own personal 17 knowledge. No, sir, I can't say. 18 Q. So, you don't know when, you don't know 19 whether it was a draft, and you don't know who, if 20 it was given to Mr. Twomey? 21 A. That's correct. 22 Q. Okay. Now, do you recall drafting this 16718 1 document? 2 A. I remember working on this because it 3 was a so-called new code. And during this time 4 frame, we were working on several potential 5 restructurings where we would spin off real estate 6 to get it off the balance sheet of the 7 association. 8 Q. Well, let's take a look at the -- a 9 couple of the references in here, starting with 10 the second paragraph. Do you see where it says, 11 "Throughout 1986 and the first quarter of 1987, 12 interest rates were generally declining. During 13 this interest rate decline, USAT was able to 14 generate substantial gains on sales of corporate 15 investment and mortgage-backed securities." 16 Do you know whether the reference to 17 mortgage-backed securities makes reference to 18 gains from sales of mortgage-backed securities out 19 of the risk-controlled arbitrage program? 20 A. No, sir, I don't know as to, you know, 21 which particular portfolio. I just don't know. 22 Q. And in the -- the third line from the 16719 1 top, do you see where it says "securities gains" 2 there? 3 A. Up in the first paragraph? 4 Q. Yeah, in the first paragraph. See 5 where it says "securities gains"? 6 A. I do, yes, sir. 7 Q. Do you know whether or not that is 8 referring to gains from sales of mortgage-backed 9 securities as part of a risk-controlled arbitrage 10 program? 11 A. No, sir. As to limiting it to that 12 particular portfolio, I just don't know. 13 Q. The -- when you drafted the document, 14 did you have any discussions about the need to 15 include the information that you had available to 16 you on the unrealized losses in your 17 mortgage-backed security portfolio at that time? 18 A. Well, let me be clear. I said -- I 19 tried to say that I worked on the document. I'm 20 not taking credit for drafting this thing, but 21 I -- I did -- certainly, I worked on it. But with 22 that clarification, no, sir, I don't remember 16720 1 us -- I don't remember it being a consideration 2 that we would include the mark-to-market on our 3 bond portfolios because -- you know, I haven't 4 reread this thing, but it seemed to me that we 5 were trying to present a conceptual framework for 6 a spin-off of real estate, problem real estate, 7 REO, scheduled items, that sort of thing. And 8 that was the main objective. And, you know, we 9 were talking, I think, with the Federal Home Loan 10 Bank. But as I've testified, I can't say that I 11 certainly handed it to them. And I remember 12 talking with brokerage firms about this type of 13 thing. 14 Q. Well, was the purpose of the memorandum 15 or the restructuring proposal to create a 16 healthier USAT so that it could survive 17 financially? 18 A. I think -- as best I remember it, yes. 19 Q. Okay. And that this was an effort to 20 persuade the Federal Home Loan Bank to participate 21 in the series of transactions or authorize a 22 series of transactions to achieve that objective, 16721 1 was it not? 2 A. I get a little -- my memory gets a 3 little clouded there. I mean, I -- it -- I would 4 have to reread this, and I don't whether we were 5 trying to, quote, "persuade the Federal Home Loan 6 Bank" or not. 7 What I remember is working with the 8 investment banking houses to find some way to make 9 this type of proposal -- 10 Q. No, I understand. I'm not asking you 11 about the investment banking houses. I'm asking 12 about the Federal Home Loan Bank. 13 A. No, sir. 14 Q. I'd like to show you A1441, which is 15 Tab 368, which are the minutes of the investment 16 committee of May 5th, 1987. And I'll direct your 17 attention to the very last page, which is one of 18 those sensitivity analyses. 19 I'm looking at US35707. I'm sorry. 20 Mine may be in a different order than yours. 21 Would you take a look at 5707? 22 A. Yes, sir. 16722 1 Q. Do you see that sensitivity analysis? 2 A. Yes, sir, I do. 3 Q. What does that show that the 4 mark-to-market, with unchanged interest rate, of 5 the mortgage-backed securities portfolio to be? 6 A. It shows, just looking at the asset 7 side of the mortgage-backed securities and related 8 securities, a negative 151,951,000, and that 9 excludes the hedges mark-to-market. 10 Q. Okay. And when you add the hedges 11 mark-to-market, what does it show? 12 A. The total number is 197,699.7 negative. 13 Q. And those are -- that was information 14 that was available to you at the time that you 15 prepared the May 29th restructuring proposal, 16 Exhibit A12235? 17 A. Certainly, we would have known about 18 the mark-to-market, yes, sir. 19 Q. I'd like to show you Tab 1283, which is 20 Exhibit B2610. This is a document that your 21 counsel showed you, as well. 22 Now, do you recall you testified about 16723 1 what you thought might be a conflict of interest 2 between your position on the UFG board and at 3 USAT. Right? 4 A. Yes, sir. 5 Q. And you ended up resigning from the UFG 6 board. Is that what happened? 7 A. In early December of that year. 8 Q. Okay. And did you continue working for 9 USAT? 10 A. I did, and I continued as CFO of UFG, 11 as well. 12 Q. Now, with regard to -- how long did you 13 remain employed at USAT? 14 A. Till December 30th of '88. 15 Q. Were any sales made out of the 16 mortgage-backed securities portfolio during the 17 time that you were there, from the date of this 18 memorandum? 19 A. Oh, from the date of this memorandum 20 forward? 21 Q. Uh-huh. 22 A. I don't know. 16724 1 Q. Were any sales made out of the 2 mortgage-backed securities portfolio after you 3 left USAT, that you know of? 4 A. I would have no knowledge one way or 5 the other because after I left, I didn't know what 6 was going on at United Savings. 7 Q. Do you know what the decision-making 8 structure was for the disposal of mortgage-backed 9 securities, if they were made, after you left 10 USAT? 11 A. No, sir. I would have no knowledge of 12 that. 13 Q. Do you know what the prices, if 14 mortgage-backed securities were sold, was in 15 relationship to the market at the time? 16 A. After I left United? 17 Q. Uh-huh. 18 A. No, sir, I have to knowledge. 19 Q. Did you participate in the disposal of 20 any swaps or mortgage-backed securities out of the 21 USAT portfolio prior to the date of this 22 memorandum? 16725 1 A. I think so, yes, sir. I remember we 2 disposed of some hedges. I do remember that. 3 Q. At whose direction was that? 4 A. I don't remember. 5 Q. Who executed those transactions on 6 behalf of USAT? 7 A. The actual execution would have been 8 the trader. That probably would have been, during 9 this time frame, Mr. Bruno. 10 Q. Did you participate in a decision with 11 him on how much to sell the swaps for? 12 A. As I remember, there wasn't much of a 13 decision. I think we were -- it wasn't like the 14 investment committee or Mr. Bruno and I decided 15 that it would be a good idea to sell swaps. We -- 16 my memory is somebody told us to sell the swaps. 17 We were under a consent agreement. And as to my 18 participation in what the prices we received to 19 get out of the contracts, no, sir, I didn't -- I 20 didn't get involved in that exact level of detail, 21 no, sir. 22 Q. Did Ranieri Wilson have any role in the 16726 1 disposition of those swaps that you said Dominic 2 Bruno sold prior to December 19th? 3 A. I don't remember them involved in that 4 process. I just don't remember. 5 Q. Now, we've gone through a number of the 6 accounting issues; and I'd like to ask you some 7 summary questions -- 8 A. Okay. 9 Q. -- about that. 10 You testified that sales were made out 11 of the mortgage-backed securities portfolio and 12 you recognized gains for accounting purposes. 13 Do you recall that testimony? 14 A. I do, yes. 15 Q. And you also testified that there -- 16 you knew that there were losses on the hedge sides 17 of those transactions at the time you recognized 18 the gains from those portfolios. 19 Do you recall that testimony? 20 A. That the mark-to-market on the hedges 21 would -- or on the swaps would be -- would be 22 negative, yes, I'm sure I realized that. 16727 1 Q. Was this information that was available 2 to the other members of the investment committee? 3 A. Yes, sir, it is. 4 Q. Was it information that was available 5 to the members of the strategic planning 6 committee? 7 A. I would say so, yes, sir. Yes, sir. 8 Q. Did the membership of those committees 9 include Jenard Gross, Barry Munitz, Charles 10 Hurwitz, and Art Berner? 11 A. The strategic planning committee, yes. 12 In terms of the investment committee, I'm not 13 sure -- I don't think Dr. Munitz was on the 14 investment committee, and I don't think 15 Mr. Hurwitz was. But, you know, whatever the 16 record reflects is -- 17 Q. Did they attend meetings of the 18 investment committee? 19 A. From time to time, certainly 20 Mr. Hurwitz did. From time to time, as to 21 Dr. Munitz, my independent memory is that it was 22 pretty infrequent that he attended the investment 16728 1 committee. 2 Q. Were performance reports sent to 3 Mr. Hurwitz? 4 A. Yes, sir. 5 Q. And were they sent to Dr. Munitz? 6 A. Yes, sir. 7 Q. Were investment committee minutes sent 8 to Dr. Munitz? 9 A. I don't know. Mr. Berner distributed 10 the investment committee minutes; so, I can't 11 answer that. 12 Q. Were they distributed to the members of 13 the board of directors? 14 A. The investment committee minutes? 15 Q. Uh-huh. 16 A. I don't know. 17 Q. Were they distributed to Charles 18 Hurwitz? 19 A. I don't know because that was -- 20 Mr. Berner was kind of the secretary of the 21 investment committee. So, he is the one that 22 distributed that paperwork. 16729 1 Q. I'd like to show you a portion of 2 the -- your testimony in this proceeding, and it's 3 the cover page for the trial proceedings of 4 July 24th, 1988, and the Mini-Scripts that include 5 Pages 15911 and 15912. 6 Do you recall that your counsel asked 7 you questions regarding what your responsibilities 8 were at First City Bank Corporation? 9 A. Yes, sir. 10 Q. And that you -- you were asked whether 11 or not in that job, did you have an opportunity to 12 look at the balance sheets of a number of banks at 13 15910. Right? 14 A. Yes, sir, I remember those questions. 15 Q. And you said yes, you did, and then 16 elaborated. And then you're asked in 15911, 17 "QUESTION: And through the job, would you learn 18 how, for example, investment portfolios were 19 handled by other banks?" 20 Do you see that? 21 A. Yes, sir. 22 Q. And you said, "Yes, I would." 16730 1 Then you were asked, "QUESTION: And 2 how other banks booked income?" 3 And you said, "Yes." 4 Do you see that? 5 A. Yes, sir, I do. 6 Q. Then you were asked, "In fact, those 7 were all essential to your understanding of 8 whether or not First City ought to purchase such a 9 bank; isn't that right?" 10 A. Yes, sir. 11 Q. Then you say, "ANSWER: Yes. As part 12 of the purchase investigation, what you were 13 really looking to were any -- obviously, any bad 14 loans." 15 Was part of your responsibility to do 16 the examination to look for bad loans? 17 A. No, sir. What I was trying to convey 18 there is I would be part of a purchase 19 investigation team. And during that time period, 20 I would head up what was called the general 21 accounting and investment in general type area. 22 And then a guy named Moody Graham, who had been an 16731 1 old bank examiner, headed up the loan review 2 process. He -- 3 Q. So, then, in terms of looking for bad 4 loans, that was someone else's responsibility? 5 A. Yes, sir. 6 Q. You didn't mean to say that was your 7 responsibility? 8 A. Oh, no, sir. I wouldn't -- I would not 9 be qualified to do that. 10 Q. Okay. And your responsibility was to 11 look at the accounting side to see whether or not 12 the books and records were kept properly? 13 A. I would look at the accounting side, 14 and I remember -- you know, I was supposed to look 15 for things like physical facilities, kind of go 16 out and look at the branches. And if they were in 17 horrendous shape, that might be some major 18 remodeling expenses. 19 I would say that I was more of a 20 generalist. But certainly we were looking for -- 21 I'd still call, it you know, "funny money" type 22 accounting where a bank would artificially pump up 16732 1 their earnings to look good. 2 Q. What do you mean by "artificially pump 3 up their earnings to look good"? 4 A. Unload -- you know, some of these banks 5 were rather small, and they were not audited by 6 national CPA firms. So, you didn't have the seal 7 of Peat Marwick or Arthur Andersen or somebody 8 like that on them. And they would unload every 9 fee they could think of into income, sell 10 everything they could think of to book, you know, 11 a yearly profit, just various ways of, you know, 12 artificially inflating your income during a 13 certain period. 14 Q. What's an artificial inflation of 15 income mean to you? 16 A. It would mean to me moving outside the 17 area of generally-accepted accounting principles, 18 and you would want to look for extraordinary-type 19 items. 20 Q. Would it include taking advantage of 21 anomalies in accounting principles? 22 A. During this time period, I would have 16733 1 been trying to look -- you know, we were looking 2 not only for accounting principles; but the 3 purpose was to look at more of a core earnings, 4 what were the core earnings of the bank. So, 5 sure, yeah. I'd look through that. 6 Q. And were you looking to ascertain what 7 the economic reality was behind the recorded 8 transactions? 9 A. My -- you know, my ultimate objective 10 would have been to give the top management of 11 First City some comfort as to what -- after input 12 from the loan side, some comfort as to the real 13 core earnings of that bank were and what might be 14 reasonable to expect in the future. 15 Q. So, that's what you meant when you made 16 reference in your testimony to "funny money" type 17 accounting? 18 A. Yes, sir. I've seen some "funny money" 19 type accounting in my time. 20 MR. GUIDO: No further questions, Your 21 Honor. 22 THE COURT: Thank you. 16734 1 Do the respondents have recross? 2 MR. VILLA: Yes, Your Honor. I think I 3 can do it from here. I probably have about ten 4 minutes. 5 THE COURT: Proceed, Mr. Villa. 6 7 CONTINUED EXAMINATION 8 9 Q. (BY MR. VILLA) Mr. Crow, let me just 10 show you this document that Mr. Guido asked you 11 about and that I asked you about. 12 MR. GUIDO: A12235? 13 MR. VILLA: Yes. 14 Q. (BY MR. VILLA) This is A12235, which 15 is the restructuring memo. 16 Do you see that, sir? 17 A. I do, yes, sir. 18 Q. Now, I noticed when I looked at it 19 there, there is a line here that says -- I notice 20 in the draft of this, you say that there are gains 21 from the sale of mortgage-backed securities here. 22 A. Yes, sir. 16735 1 Q. And other securities. And when you 2 look at this, you've only -- you dropped out the 3 word "loans." 4 Do you see that? 5 A. Yes, I do. 6 Q. Can you explain to me what "loans" 7 means in the context of this analysis? 8 A. "Loans" would include loans and 9 mortgage-backed securities. 10 Q. And why would you include the word -- 11 why would you include mortgage-backed securities 12 in the term "loans" during this time period? 13 A. During this time period, it was -- it 14 was not uncommon -- I think if you look at some of 15 the prior financial statements -- that in savings 16 and loans during the early years, mortgage-backed 17 securities were classified as loans because it was 18 viewed as -- they are really loans wrapped 19 around -- that had been wrapped by a 20 government-guaranteed agency. 21 Q. So, when you dropped out of your 22 quarterly earnings, the extraordinary -- or gains 16736 1 from the sales of investment securities, you have 2 a separate line for loans to show that you've 3 dropped out the mortgage-backed sales; is that 4 right, sir? The gains from the sales of 5 mortgage-backs. 6 A. Mortgage-backs, yes. In a later time 7 frame, we segregated mortgage-backs. This 8 category, "loans," includes mortgage-backs and 9 loans. 10 Q. Now, secondly, you were asked some 11 questions by Mr. Guido about the testimony of 12 Dominic -- from the Dominic Bruno trial. 13 Do you remember that? 14 A. I do, yes, sir. 15 Q. And he asked you whether some of your 16 answers -- I can't remember the exact words, but 17 the essence of it was did you answer some 18 questions on cross-examination or give some 19 information or evidence on cross-examination that 20 you hadn't given on direct. 21 Do you remember that, sir? 22 A. I do, yes, sir. 16737 1 Q. Do you control in a courtroom, sir, who 2 asks you questions and what questions they ask 3 you? 4 A. No, sir, I cannot control that. 5 Q. So, when you answered in your 6 direct-examination in the Bruno trial, did you 7 answer truthfully? 8 A. Yes, sir. 9 Q. And did you answer responsively? 10 A. Yes, sir. 11 Q. And when you answered in 12 cross-examination, did you also answer truthfully 13 and responsively, sir? 14 A. Yes, sir. 15 Q. We provided the testimony of -- your 16 testimony in the case to the OTS. 17 Did they show you anything in your 18 testimony that was untruthful, sir? 19 A. No, sir. No one has shown me anything 20 in that testimony that's untruthful. 21 Q. And there -- was there anything -- 22 A. Because it's not there. 16738 1 Q. Was there anything in that testimony 2 that was untruthful? 3 A. No, sir. 4 Q. Now, Mr. Rinaldi showed you a series 5 of -- or asked you a series of questions about 6 Dr. Munitz' salary, and he asked whether the 7 salary was paid by USAT or UFG. 8 Do you remember that? 9 A. I do, yes, sir. 10 Q. And he showed you a number of checks 11 and other materials that showed that the checks 12 were cut from the USAT payroll account. 13 Do you recall that, as well, sir? 14 A. I do. I remember that. 15 Q. Now, does the fact that the checks are 16 cut from the USAT payroll account mean that the 17 ultimate expense is borne by USAT? 18 A. No, sir. 19 Q. Let me show you what's been marked as 20 Exhibit T8034. It's Tab 479. And if you'll turn 21 to -- this is the exhibit that Mr. Rinaldi 22 questioned you about. It's a letter that I sent 16739 1 to Mr. Rinaldi with a number of documents. 2 A. Yes, sir. 3 Q. And I direct your attention to the page 4 that ends in the number 8. 5 A. Yes, sir. I'm there. 6 Q. Is this one of the payroll accounts for 7 Mister -- payroll materials for Mister -- for 8 Dr. Munitz? 9 A. Yes, sir. This is a personnel payroll 10 change of status form where his -- apparently, his 11 compensation is being adjusted. 12 Q. Now, sir, do you see in the upper 13 right-hand corner what department Dr. Munitz is 14 in? 15 A. Yes, sir. 16 Q. And what is that, sir? 17 A. That is UFG. 18 Q. And what does that tell you, sir, about 19 who was going to bear the ultimate expense of his 20 salary, sir? 21 A. United Financial Group. 22 Q. Now -- and that's consistent with your 16740 1 independent recollection; is that right? 2 A. Yes, sir. I remember that -- that 3 United Financial Group bore the expense of 4 Dr. Munitz' salary or compensation. That's my 5 memory. 6 Q. Now, Mr. Crow, Mr. Rinaldi asked you a 7 number of questions about how you derived -- do 8 you remember we looked at that chart, the chart 9 which was the general ledger of United Savings 10 Association of Texas and United Financial Group? 11 A. Yes, sir. 12 Q. And there was a 291,000-dollar 13 intercorporate transfer. 14 Do you remember that, sir? 15 A. I remember it was 290 or 91,000, 16 somewhere. 17 Q. I'm not an accountant; so, I tend to 18 rough things out. So, it was about 291,000 to my 19 recollection. 20 A. Okay. 21 Q. And he asked you how you derived that. 22 Do you remember that? 16741 1 A. Yes, sir. 2 Q. Now, actually, prior to his testimony, 3 prior to him asking those questions to you on 4 Monday morning, you'd gone back, over the weekend, 5 and actually derived it by hand, hadn't you, sir? 6 A. Yes, sir. 7 Q. And you had it in the courtroom if he 8 asked for it, and I'm going to show you a copy of 9 this. We've given a copy to Mr. Rinaldi this 10 morning. 11 MR. VILLA: I gave it to Mr. Veis, and 12 I give you two copies. We've marked it 13 arbitrarily as Exhibit B4000 since I didn't know 14 what the next number was. 15 MR. GUIDO: No objection. 16 THE COURT: Well, it hasn't been 17 offered; but if there is no objection -- are you 18 offering it? 19 MR. VILLA: Yes, Your Honor. 20 THE COURT: Received. 21 Q. (BY MR. VILLA) Sir, is this the chart 22 that you did that helped you reconstruct your 16742 1 belief that the 290- or 291,000-dollar transfer 2 was very close to the number that you derived by 3 taking the salaries and the executive bonuses of 4 the individuals reflected on Mr. Berner's letter 5 and multiplying them by the percentages on 6 Mr. Berner's letter. Right? 7 A. Yes, sir, it is. 8 Q. And there's some ambiguity in your mind 9 about what exact date they would have cut off 10 Mr. Gross' salary because he left sometime in 11 November of 1988. Right? 12 A. That is correct. 13 Q. And you arbitrarily cut the November 14 salary in half, and that's how you came up with 15 these numbers; isn't that right? 16 A. That is correct. 17 Q. And the number -- and the number you 18 came up to was $293,482. Right? 19 A. That's correct. 20 Q. And that's within 1 percent of the 21 number that we ultimately -- you're the 22 accountant. 16743 1 A. Yes, it's about -- 2 Q. It's pretty close to the number that's 3 in the transcript; isn't that correct, sir? 4 A. That is correct. 5 Q. Let's look at Exhibit B2646, which is 6 the transfers, the ledger page that we were 7 talking about it's Tab 1418. 8 MR. VILLA: I have an extra copy. 9 MR. GUIDO: Thank you. 10 Q. (BY MR. VILLA) Now, you have the 11 advantage on me. You have my copy. So, I'm going 12 to ask you to take a look at the back of this. 13 And we talked -- I think Mr. Rinaldi asked you a 14 number of questions as to whether or not the 15 transfer had actually occurred. 16 Do you remember that, sir? 17 A. I do, yes, sir. 18 Q. And whether the check had actually been 19 cut? 20 A. Yes, sir. 21 Q. Now, let me direct your attention -- 22 and you referred him to the last couple of pages 16744 1 of the exhibit. Right? 2 A. Yes, sir. 3 Q. Can you look at the last couple of 4 pages in the exhibit and explain what the terms 5 "check distribution auto" mean on the -- I think 6 the second-to-the-last page and then -- I think 7 it's on the last page where it says "Dep check 8 from UFG"? And maybe you can tell us the page 9 numbers by the Bates stamp and about how far down 10 they are on the page so that the Court can follow. 11 A. Yes, sir. I guess starting with the -- 12 let's see. Let me look at this just one minute. 13 (Witness reviews the document.) 14 If we could, it would probably be 15 easier to just start on the very last page, which 16 is CN333892. And a little over halfway down the 17 page, you see a number that's 1,887,783 and the -- 18 to the left of that series of numbers is some 19 words. And it says "7110 dep check from UFG." 20 And I would conclude that means deposit check from 21 UFG. 22 Then if you keep that 1,887,000 number 16745 1 kind of in your mind and turn to the immediately 2 preceding page, which is CN335089, you see the 3 same number. And I apologize. The last page we 4 looked at was a United Savings general ledger 5 sheet. This page we're looking at is now a 6 United Financial Group ledger sheet. And we 7 see -- oh, it's about a fifth of the way down the 8 page, "AP check distribution." And then you 9 see -- you know, that means that a check was 10 written on United Savings' bank account. 11 Q. So, would this indicate to you that a 12 physical check was cut and -- from one of the 13 companies and deposited in the account of the 14 other? 15 A. In the amount of 1,887,000, yes, sir. 16 MR. EISENHART: Your Honor, I don't 17 know if Mr. Crow misspoke. I heard him say "check 18 cut on United Savings' bank account. I'm not sure 19 that's what he meant. 20 A. I apologize. I probably did misspeak. 21 I meant to say that it was cut on United Financial 22 Group's. 16746 1 Q. (BY MR. VILLA) Right. And it was 2 deposited in United Savings? 3 A. Deposited by United Savings, yes, sir. 4 Q. I see. Thank you. 5 Now, sir, do you remember Mr. Rinaldi 6 and I had an exchange in the courtroom when we 7 talked about the compensation committee minutes 8 of -- let me just finish that up. 9 You can't do the intermediate steps 10 between that $291,000 and the check that's 11 actually deposited so that you could prove that 12 the $291,000 was taken into account in the year 13 end netting for the check between UFG to USAT, can 14 you, sir? 15 A. No, sir. I -- I could not. 16 Q. But that's ordinarily the practice of 17 the companies at the end of the year is to net all 18 these things out and then to write a check? 19 A. That's correct. 20 Q. Now, Mr. Rinaldi and I had a discussion 21 about the February 11, 1988 compensation committee 22 meeting, and he read you a portion of the minutes 16747 1 of the meeting and -- which might have been read 2 in isolation -- to suggest that there were no 3 employment contracts in existence on February 11, 4 1988. And consequently, the examiners couldn't 5 have seen them when they came -- when Ms. Carlton 6 and Mr. Cottingham came to the meeting. 7 Do you remember that? 8 A. Yes, sir, I do. 9 Q. And I got up and I read another portion 10 that suggested that the contracts were available 11 and actually being discussed at the compensation 12 committee meeting. 13 Do you remember that, as well, sir? 14 A. Yes, sir, I do. 15 Q. I'm going to ask you to look at 16 Exhibit B2060, which is in evidence at Tab 1371. 17 This is the March 2nd, 1988 cover memo from Art 18 Berner to Mike Crow enclosing a copy of the 19 contract. 20 Now, this is the contract that we were 21 talking about, the February 11, 1988 USAT 22 contract. Right, sir? 16748 1 A. It is, yes, sir. 2 Q. Now, let me just ask you to turn to the 3 last page of the contract and take a look at the 4 word processing codes. 5 Do you see the word processing codes on 6 the contract, sir? 7 A. Yes, sir, I do. 8 Q. And can you tell me by looking at the 9 word processing code when you think the form of 10 this contract was prepared? 11 A. It appears to me 01/27/88 so that that 12 would be January 27th of 1988. 13 Q. So, would it be your conclusion by 14 looking at that that the contract was available at 15 the time of the board meeting that the examiners 16 attended where the USAT contracts were discussed? 17 A. Yes. It must have been typed on the 18 27th of January. 19 Q. Now, you're not saying from your own 20 recollection that this contract was handed out to 21 Ms. Carlton and Mr. Cottingham, are you, sir? 22 A. No, sir. I don't -- I just don't have 16749 1 any memory of that. 2 Q. But it couldn't be fair to suggest that 3 the contract wasn't in existence to be handed out, 4 would it, sir? 5 A. No, sir. 6 Q. Now, Mr. Rinaldi asked you a series of 7 questions about whether the series of events 8 involving the executive bonus plan, the new 9 contracts, and the other actions after March 30, 10 1988, were as a result of a problem that UFG had 11 as indicated by the letter of Mr. Gray. 12 Do you remember that, sir? 13 A. Yes, sir, I do. 14 Q. Now, Mr. Crow, if Jeff Gray and three 15 or four other senior executives, key executives, 16 had resigned, would it have been a problem only 17 for UFG? 18 A. No. I tried to explain that it would 19 have been a problem for United. And when I say 20 United, it would have been a problem certainly for 21 UFG; but it would have been a problem for United 22 Savings, absolutely. A big problem. 16750 1 Q. And the problem for United Savings 2 during that time was broader than the problem that 3 just Mr. Gray raised; isn't that right, sir? 4 A. That is correct. 5 Q. And the concern had to do with 6 retaining a number of the senior and, indeed, some 7 of the junior officers; isn't that also right? 8 A. Yeah. I mean, I remember specifically 9 being concerned about -- you know, I think I 10 talked about these first-line supervisors. You 11 know, the reality of the world was if 30 of your 12 first-line supervisors leave and you've got, you 13 know, your senior management up there, you've got 14 somewhat of a hollow shell. 15 Q. And that's why the executive bonus plan 16 that we saw and the rolling the bonuses into base 17 salary didn't just apply to Jeff Gray, did it, 18 sir? 19 A. It did not, right. 20 Q. And it didn't just apply to five or six 21 senior managers, did it, sir? 22 A. It did not. 16751 1 Q. And it applied to all of the people -- 2 and I won't take you back to those charts, but 3 they were -- we saw, what, 40 names or more on 4 each one of those charts? 5 A. I'd say 35 -- 30 to 40 names. 6 Q. Now, Mr. Rinaldi went to some length to 7 point out to you that you received, for example, 8 severance moneys, $140,000 in severance moneys at 9 the time -- actually, it was in the time 1989, but 10 the suggestion was that the severance was all 11 received from an institution that was insolvent or 12 was going to be insolvent or something along those 13 lines. 14 Do you remember that line of 15 questioning, sir? 16 A. About the 140,000-dollar severance? 17 Q. Right. 18 A. Yes, sir, I do. 19 Q. Now, sir, to your recollection, was 20 your receipt of that 140,000 -- $142,000, was it 21 only -- was it approved by the FSLIC? 22 A. I thought it was, yes, sir. 16752 1 Q. And that was because of the 2 negotiations -- the three-party negotiations we 3 saw between UFG, the FSLIC's lawyers, Mr. Bechtel, 4 right? 5 A. Right. 6 Q. And your lawyer; isn't that right? 7 A. That's correct. 8 Q. Finally, sir -- may not be finally, but 9 I think it's finally. 10 Mr. Rinaldi showed you the October 27, 11 1988 letter from Neil Twomey raising complaints 12 about the contracts. 13 Do you remember that, sir? 14 A. Yes, sir, I do. 15 Q. And he then showed you the October 3rd, 16 1988 letter from Mister -- or memo from, I think, 17 Dr. Munitz to Mr. Gross or from Mr. Gross to 18 Dr. Munitz saying that the severance moneys had 19 just been placed into trust at First City Bank. 20 Do you remember that, sir? 21 A. The severance money, yes. 22 Q. And one might draw from that exchange 16753 1 that Neil Twomey had acted promptly, within three 2 weeks of the time that the money was deposited. 3 One might draw that from that exchange. 4 Right? 5 A. Yes, sir. 6 Q. In fact, Mr. Twomey had known of the 7 existence of -- and let me show you A1156, which 8 is an exhibit in evidence at Tab 1413. This is 9 the September 8, 1988 USAT board minutes that we 10 previously looked at. Right? 11 A. Yes, sir. 12 Q. And this is the board minutes where the 13 executive bonus plan is discussed; isn't that 14 right, sir? 15 A. Yes, sir, it is. 16 Q. So, in fact, Mr. Twomey would have 17 known about the executive bonus plan not for three 18 weeks but for seven or eight weeks; isn't that 19 right? 20 A. Yes, sir. It indicates that Mr. Twomey 21 was at this meeting, yes, sir. 22 Q. Okay. Let me show you a new exhibit 16754 1 that hasn't been introduced. It's the letter of 2 Larry Connell. It's -- I'm sorry -- the contract 3 of Larry Connell. We've had a lot of talk about 4 Mr. Connell's famous contract, and now we're going 5 to see it. Exhibit B2279. I think we've given -- 6 it's been previously -- the subject of much 7 discussion, but I gave a copy of it to Mr. Veis 8 this morning to give to Mr. Rinaldi. 9 Now, do you recall that we talked about 10 the fact that Mr. Connell's contract -- 11 MR. VILLA: Oh, Your Honor, I move 12 B2279 into evidence. 13 MR. GUIDO: No objection. 14 THE COURT: Received. 15 Q. (BY MR. VILLA) Do you recall we 16 talked at great deal about the fact that 17 Mr. Connell's contract was submitted to the 18 regulators on or about July 1st, 1988? 19 A. Yes, sir. 20 Q. And the regulator that it was sent to, 21 I think we've all discussed, is Mr. Twomey. 22 Do you recall that being talked about? 16755 1 A. I do, yes, sir. 2 Q. Now, sir, I'd like to direct your 3 attention to paragraph -- I'm sorry -- Page 19 and 4 20 of Mr. Connell's contract. 5 Do you see that? 6 A. Yes. Where it's talking about the 7 security for the -- 8 Q. Yes. If you look at the top of little 9 "I" on Page 19 of the contract, do you see the 10 reference to the letter of credit? 11 A. Yes, sir, I do. 12 Q. It says "securitize Mr. Connell's 13 rights," or some of them, under the contract. 14 We're not going to go through the contract line by 15 line. 16 Do you see that, sir? 17 A. I do, yes, sir. 18 Q. Now, if you flip to the bottom -- flip 19 to 20 and look at the bottom of Page 20. 20 Do you see that? 21 A. Where it starts "if during"? 22 Q. Yes. 16756 1 A. Yes, I do. 2 Q. And do you see the reference to the 3 trust account that's in parentheses about two 4 lines from the bottom? 5 A. Yes, I do. 6 Q. So, assuming that Mr. Twomey got this 7 contract and he took the time to read it, he would 8 have known on July 1st, 1988, that rights under 9 these contracts were going to be secured by 10 letters of credit or trust accounts, wouldn't he, 11 sir? 12 A. Certainly in early July, absolutely. 13 Q. So, it wouldn't be fair to suggest that 14 he just found out about it three weeks prior to 15 his letter of October 27th, would it, sir? 16 A. Wouldn't seem to be fair to me. 17 Q. And, in fact, you know that 18 Mr. Connell's contract is essentially identical to 19 yours. Right? 20 A. I believe it is, yes. I think all the 21 contracts were -- 22 MR. RINALDI: Your Honor, I'm going to 16757 1 object to the characterization of that because 2 they are not identical. We know that his contract 3 says UFG will pay all of the expenses under the 4 contract unless UFG can't pay. There's nothing in 5 Mr. Connell's contract about that. 6 MR. VILLA: That's even better, Your 7 Honor. I like that question. May I follow up on 8 Mr. Rinaldi's objection? 9 THE COURT: Yes, you may. 10 Q. (BY MR. VILLA) Mr. Connell's contract 11 puts USAT right on the line, doesn't it? There's 12 no suggestion in Mr. Connell's contract that UFG 13 may be the person -- may be the company that 14 actually pays, is there, sir? 15 A. Factually, I haven't reviewed that. If 16 you could point me to -- 17 Q. That's okay. We'll review it when -- 18 A. If both and you Mr. Rinaldi agree to 19 that, then certainly I will agree to that. Both 20 of you have read them, I'm sure. 21 Q. Okay. So -- and the fact that 22 Mr. Connell's contract had been sent to the 16758 1 regulators and it had included references to a 2 letter of credit and a bonus -- I'm sorry -- a 3 letter of credit and a trust account were some of 4 the things that you relied upon in accepting the 5 contracts of USAT and UFG in mid-1988; isn't that 6 right, sir? 7 A. Absolutely. You know, when I -- maybe 8 I -- I may have said "identical," but it was my 9 understanding just from my memory that the last 10 contracts I got were modeled after the Connell 11 contract, which I thought had been passed on by 12 the regulators. 13 MR. VILLA: I don't have any further 14 questions. Thank you. 15 MR. NICKENS: Your Honor, I have some 16 questions. 17 THE COURT: Mr. Nickens. 18 MR. NICKENS: Thank you. 19 20 21 22 16759 1 2 CONTINUED EXAMINATION 3 4 Q. (BY MR. NICKENS) Mr. Crow, you've 5 been on the stand now for nearly ten days, and 6 I -- and the 23 years or 24 years I've been doing 7 this, that's a new record and I'm going to try to 8 keep this as brief as possible without inviting 9 everybody to watch the clock as I ask my 10 questions. 11 But yesterday, you were asked some 12 questions concerning your -- the communications 13 between USAT and Peat Marwick. 14 Do you recall that? 15 A. Yes, sir, I do. 16 Q. I'd like to focus your attention on 17 that one subject. In connection with those 18 questions by Mr. Guido, he showed you some 19 documents that dealt with the accounting issue of 20 investment versus trading as it related to junk 21 bonds, did he not? 22 A. Yes, sir. 16760 1 Q. And he showed you some documents in 2 connection with that examination with that same 3 issue as it related to mortgage-backed securities, 4 did he not? 5 A. Yes, sir. 6 Q. And he showed you some documents 7 relating to the issue as to FASB 80 and certain 8 hedging programs that were planned for part of 9 United MBS, did he not? 10 A. I remember that, yes. 11 Q. Now, are those issues, in your mind, 12 Mr. Crow, analytically separate? 13 A. Certainly, the FASB 80 type issues and 14 the hedge accounting should be segregated from the 15 others. I mean, because that's a different issue. 16 Q. But yesterday, we went from document to 17 document, back and forth between those issues, did 18 we not? 19 A. Yes, sir, we did. 20 Q. Okay. Now, let's see if we can 21 separate those out and see how they may differ or 22 how they may be the same. 16761 1 When Sandy Laurenson came to USAT, did 2 she bring an idea concerning the hedging of 3 mortgage-backed securities that had not previously 4 been used at USAT? 5 A. Yes, she did. 6 Q. And what was -- that involved the use 7 of futures and options to hedge mortgage-backed 8 securities? 9 A. It did, yes, sir. 10 Q. And was the use of that in United MBS 11 only? 12 A. I believe it was, yes. 13 Q. And was it, in fact, only part of 14 United MBS? 15 A. Yes. There was part of United MBS that 16 was not so-called macro hedged. 17 Q. And we've gone over the differences 18 between a micro hedge and a macro hedge. Right? 19 A. Yes, sir, we have. 20 Q. And the other MBS, to the extent that 21 it was hedged, was macro hedged and not micro 22 hedged like this one portion of United MBS? 16762 1 A. That is correct. 2 Q. And to the extent it was micro hedged, 3 you were seeking, under FASB 80, hedge accounting 4 treatment? 5 A. Yes, we were. 6 Q. And how did that make it different from 7 the rest of the MBS that United Savings owned? 8 A. Well, to get hedge accounting treatment 9 under FASB 80, there's a fairly complex set of 10 rules that you have to follow. And you have to 11 be, in my words, a little bit more careful. On a 12 macro hedge, it's just there. You don't have to 13 do much with it in terms of the complexity of 14 accounting. 15 But if you're dealing with a micro 16 hedge that is deferral accounting, you've got to 17 do things like correlation analysis and that sort 18 of thing; and you can't be going in there and just 19 willy-nilly doing transactions for other purposes. 20 You've got to be careful to maintain the integrity 21 of that micro hedge. 22 Q. Now, I want to bring you back to the 16763 1 issue of investment versus trading as it related 2 to the portfolios that you had outside of this one 3 that was micro hedged within United MBS. Okay? 4 A. Okay. 5 Q. And I'd like for you to look first at 6 Tab 343, Exhibit A1412, which are the minutes of 7 the investment committee of United Financial Group 8 and United Savings Association of Texas dated 9 October 8th, 1986. And Mr. Crow, I'm going to try 10 to go through them chronologically to get a 11 picture of what was going on and how those two 12 issues may have interrelated or not related. 13 A. Sure. 14 Q. If you would, look over at the second 15 page of Exhibit A1412 at Page 4908. 16 A. Okay. 17 Q. And do you see there at the top of the 18 page a discussion about a proposal for a trading 19 policy presented by Ms. Laurenson? 20 A. I do, yes, sir. 21 Q. And that proposal was fully discussed 22 and unanimously approved as indicated by the 16764 1 investment committee minutes? 2 A. Yes, it is. 3 Q. Now, if you turn over to Page Bates 4 No. 4917, is that the trading policy that was 5 adopted on October 8th by the investment 6 committee? 7 A. Yes, sir, it certainly appears to be. 8 Q. And it indicates in the fourth line 9 that trading operations would occur from time to 10 time in order to, quote, "enhance the 11 profitability of the association"? 12 A. Yes, sir, I see that. 13 Q. And let me ask you to look at Exhibit 14 A1117, which are the minutes of the special 15 meeting of the board of directors of United 16 Savings Association dated October 14th, 1986. 17 Do you have that in front of you? 18 A. I do, yes, sir. 19 Q. And that was approximately one week 20 after this meeting of the investment committee? 21 A. Yes, it is. 22 MR. NICKENS: Your Honor, we offer 16765 1 A1117. 2 MR. GUIDO: No objection, Your Honor. 3 THE COURT: Received. 4 Q. (BY MR. NICKENS) And let me ask you 5 to look at the second page of Exhibit A1117 at 6 US3003164, the last two paragraphs of the page, 7 Mr. Crow. And do you see the resolution was 8 adopted by the board of directors with regard to 9 trading activity from time to time in the 10 mortgage-backed securities portfolios to enhance 11 the profitability of the association? 12 A. Yes, sir. I see that. 13 Q. And that related to the association as 14 a whole, correct? 15 A. Yes, sir. 16 Q. Now, Mr. Guido showed you yesterday a 17 document I want you to look at Tab 389, which is 18 Exhibit B1281. 19 Mr. Crow, do you see this is a memo 20 from Mr. Berner to Mr. Williams, Ms. Laurenson, 21 and Mr. Jacobson? 22 A. Yes, sir, I do. 16766 1 Q. And he is discussing the possible use 2 of financial options transactions? 3 A. Yes. 4 Q. And that there were some special 5 regulations dealing with those particular kinds of 6 securities? 7 A. Yes, sir. 8 Q. And he notes in the fifth paragraph 9 that the board of directors had recently adopted 10 Sandy's policy at their -- and that there was a 11 meeting scheduled for November 13th. 12 Do you see that? 13 A. Yes, I do. 14 Q. Now, were financial futures or options 15 used to hedge assets at USAT other than in United 16 MBS as we have -- or part of United MBS as you 17 have just testified to? 18 A. No, sir. The only time I remember them 19 being used at all would be a portion of United 20 MBS. 21 Q. And if we look over to the second page 22 of Exhibit B1281, what does it say at the top of 16767 1 the page? 2 A. It says -- the handwritten part? 3 Q. Yes, sir. 4 A. It says, "Rough draft of policy 5 required by FHLBB," Federal Home Loan Bank Board. 6 It meets the something -- 7 Q. Personnel? 8 A. "Personnel designation limit 9 designation and transaction desk something 10 requirement." 11 Q. The word seems to go off the page there 12 or we don't have it. Right? 13 A. I can't make it out, no. 14 Q. And the language used here in reference 15 to the Federal Home Loan Bank Board was in order 16 to reduce the net interest rate exposure of the 17 association. 18 Do you see that? It's underlined on 19 this copy. 20 A. I do see that, yes, sir. 21 Q. And if you turn over to the next page, 22 there is a copy of the -- apparently of the 16768 1 regulations. And in Paragraph 5B on the left side 2 there at the top, again it's underlined, do you 3 see that very same language? 4 A. Yes. It's to reduce its net interest 5 rate risk exposure as provided in this paragraph. 6 Yes, I do. 7 Q. So, it was anticipated that you were 8 going to be using futures; and Mr. Berner, the 9 lawyer, was making sure that the association's 10 minutes reflected the requirements of the Bank 11 Board? 12 A. Yes, sir, it appears so. 13 Q. Now -- and that use of futures was 14 limited to United MBS? 15 A. It was. 16 Q. Now, let me ask you to look over at a 17 document that Mr. Guido went over with you 18 yesterday and I believe I originally asked you 19 about. It's Exhibit B4065 at Tab 1006. 20 Do you have that, Mr. Crow? 21 A. I do, yes, sir. 22 Q. If you could look over at KPMG 35576. 16769 1 Do you find there the minutes that -- of the 2 meeting that Mr. Berner had referenced in his 3 memorandum, the November 13th, 1986 meeting? 4 A. Yes, sir. 5 Q. And let me ask you to turn to the 6 second page. And do you see there that there was 7 a resolution adopting the policy regarding 8 mortgage-backed securities trading that Mr. Berner 9 had rewritten as we have just seen? 10 A. The first "resolved" on that page? 11 Q. Yes, sir. 12 A. Yes, sir, I do see that. 13 Q. And you can see the policy itself over 14 at Page 35582? 15 A. I do see that, yes, sir. 16 Q. Now, let me ask you to come back to 17 Page 35577. And would you read for the Court and 18 the record the paragraph that -- at the top of the 19 page, prior to this resolution, that starts out, 20 "Mr. Gross"? 21 A. Yes, sir. It says, "Mr. Gross stated 22 that it was appropriate at this time to approve 16770 1 certain resolutions previously presented to the 2 board of directors. He noted that the resolutions 3 concerned certain procedures governing the trading 4 activity of the association's mortgage-backed 5 securities subsidiary." 6 Q. Let me ask you to stop there. 7 A. Okay. 8 Q. Other than the DARTs and AMPs, did USAT 9 have any subsidiary dealing with mortgage-backed 10 securities other than United MBS? 11 A. Other than the DARTs and AMPs and, I 12 guess -- I don't know whether CMOs -- no, sir. 13 Q. Is it clear to you that the adoption of 14 this provision was directed toward the fact that a 15 portion of United MBS was going to be using 16 futures unlike the institution had used in the 17 past? 18 A. I would draw that conclusion, yes, sir. 19 Q. Now, do you know whether or not the 20 policies adopted on October 8th were superseded? 21 A. I don't know. 22 Q. Do you know what the effect, if any, 16771 1 would be for the adoption of this policy relating 2 to United MBS would have on the policy of 3 October 8th? 4 A. No, sir, I don't. 5 Q. Do you know -- well, now, trading in 6 the other portfolio -- well, let me ask you this: 7 Trading in the other portfolios did occur after 8 this date, did it not? 9 A. Certainly. 10 Q. And I mean by that mortgage-backed 11 securities were sold for the purposes of 12 recognizing gains. 13 A. Just in other portfolios in general? 14 Q. Yes, sir. 15 A. Yes, sir, I feel safe in saying that, 16 absolutely. 17 Q. But you're unable to trace those back 18 to specific portfolios? 19 A. Right. If you asked me which 20 portfolio, I don't know. But just as a global 21 statement, certainly I can answer affirmatively. 22 Q. And was there an internal audit -- in 16772 1 addition to Peat Marwick, was there an internal 2 audit function at USAT? 3 A. Yes, sir. 4 Q. And was one of its functions to 5 determine whether or not your trading activity and 6 other activities fit the policies and objectives 7 that had been set out by the board of directors of 8 the investment committee? 9 A. Yes, sir. 10 Q. Was that one of the specific things 11 that they were asked to look into on a regular 12 basis? 13 A. I -- I don't have a clear memory of 14 that, but I strongly suspect it would be. Then we 15 had, you know -- more clear in my mind was the 16 treasury department was responsible for monitoring 17 adherence to policy. And if they saw that we had 18 blown a position limit or something, they were to 19 bring that to the attention of the top of the 20 totem pole. 21 Q. Now, yesterday, Mr. Guido asked you 22 about a document; and it is at -- it's 16773 1 Exhibit B1455, Tab 899. Now, this is the document 2 Mr. Guido referred you to the second page where it 3 stated that "Laurenson stated that the MBS would 4 not be traded under any circumstances." 5 Do you see that? 6 A. Let's see. (Witness reviews the 7 document.) 8 Q. Well, without looking at it, do you 9 recall that he asked you -- 10 A. I remember that statement being read to 11 me. 12 Q. And if you look at the first page, what 13 was being discussed when that representation was 14 recorded? 15 A. Hedge accounting. 16 Q. And was that having to do with this 17 part of United MBS that was using micro hedging? 18 A. Yes, sir, because we're talking about 19 Ginnie Mae put options and that sort of thing, 20 yes, sir. 21 Q. Eurodollar futures? 22 A. I haven't found that, but I -- I think 16774 1 it's clear this meeting was talking about micro 2 hedging. 3 Q. And Peat Marwick was having to pass on 4 whether that portion of United MBS was going to 5 qualify for hedge accounting? 6 A. That is correct. 7 Q. And that is an issue separate and apart 8 from the investment versus trading issue that 9 related to other MBS portfolios? 10 A. It certainly is in my mind, yes, sir. 11 Q. And sir, do you know whether or not 12 there was any trading thereafter in that portion 13 of United MBS that is referenced by 14 Ms. Laurenson's comment? 15 A. In the portion of the portfolio that is 16 micro hedged? 17 Q. Yes, sir. 18 A. I don't know. 19 Q. How would you go about finding out, 20 Mr. Crow? If one wanted to really know whether 21 there had been any trading in that portion of the 22 portfolio related to the comment that she made as 16775 1 recorded here by Peat Marwick, how would we find 2 it out? 3 A. The process would be -- if I were doing 4 it, I would start with performance report. I 5 would try to find the performance report work 6 papers. And since this is a separate subsidiary, 7 you've got the advantage of -- you could go all 8 the way back to its general ledger. And 9 certainly, that general ledger is going to have 10 supporting documentation for the entries that flow 11 into that. 12 So, in this particular case, I suspect 13 it could be reconstructed with some degree of 14 precision. 15 Q. Now, let me ask you to look at 16 Exhibit B1410, which can be found at Tab 910. 17 This is also a document Mr. Guido asked you about. 18 MR. GUIDO: What's the tab? 19 MR. NICKENS: Tab 910. 20 Q. (BY MR. NICKENS) Mr. Crow, before we 21 leave that subject, do you read Ms. Laurenson's 22 comment as recorded by Peat Marwick as relating to 16776 1 all mortgage-backed portfolios? 2 A. No, sir. I read the comment relating 3 to the portion of the portfolio that was going to 4 be micro hedged. 5 Q. And indeed, there were transactions in 6 the other mortgage-backed securities thereafter as 7 observed by Peat Marwick? 8 A. Yes. Just -- in other portfolios, 9 certainly. 10 Q. And as reflected in the investment 11 committee minutes that I went over with you last 12 week, in the investment committee minutes? 13 A. Yes. There were other sales. 14 Q. Now, coming back to the question of 15 investment versus trading, do you have 16 Exhibit B1410 in front of you? 17 A. Yes, sir, I do. 18 Q. And this was Mr. Parsons' memo dealing 19 with investment versus trading on January 5, 1987? 20 A. Yes, sir. 21 Q. Now, yesterday, Mr. Guido asked you 22 about the policy that had been adopted in 16777 1 November. 2 Do you recall that? 3 A. The one to reduce interest rate risk? 4 Q. Yes, sir. 5 A. Yes, sir. 6 Q. And he asked you, if I'm not mistaken, 7 whether or not that was adopted in response to 8 Mr. Parsons' memorandum? 9 A. Yes, sir, I remember that. 10 Q. Now, Mr. Parsons' memorandum comes 11 after the adoption of that policy, does it not? 12 November 13th, 1986. 13 A. Yes, sir, it sure does. 14 Q. And if we look at Mr. Parsons' 15 memorandum, we can, in fact, see what was adopted 16 in response to his questions, can't we? 17 A. Yes, sir. 18 Q. And it is reflected at Page KPMG 2417, 19 18 with regard to high-yield bonds, and 20 Pages 24421 and 22 with regard to mortgage-backed 21 securities. 22 Do you see that? 16778 1 A. I do, yes, sir. 2 Q. And do you see anywhere in here -- 3 well, there is an indication here of the various 4 reasons that you would sell the securities despite 5 the fact that you had acquired them for investment 6 purposes. Right? 7 A. Like in the middle of 24417? 8 Q. Yes, sir, with regard to high-yield 9 bonds. 10 A. Yes, sir. There's various reasons, 11 potential reasons, given. 12 Q. And this was the response to 13 Mr. Parsons' memo and not the memorandum that 14 you -- that was discussed yesterday that you were 15 asked about by Mr. Guido? 16 A. I believe so. 17 Q. And this reflected that it was your 18 intent, although intent to hold for the long-term, 19 that there were a variety of reasons in which you 20 might find it necessary to sell the security; is 21 that right, Mr. Crow? 22 A. That is correct. There's a number of 16779 1 reasons listed there. 2 Q. And let me ask you to look at the -- 3 the work papers. 4 Does this indicate that these very 5 items were reviewed by Peat Marwick in February of 6 1987? And where you see that would be -- you see 7 that it's attached to work papers? 8 A. Yes, it is. It's -- I guess they were 9 looking at the year end numbers, and the date 10 appears to be 2/3 -- and it's cut off -- eighty 11 something. 12 Q. And those were the various -- we went 13 over this, and I don't want to do this again. We 14 went over this earlier with various exhibits from 15 the work papers, showing that in the year end 16 audit and in the first quarter audits of 1987, 17 Peat Marwick noted the sales activity you had in 18 your high-yield bond portfolio and your 19 mortgage-backed securities portfolio? 20 A. Yes, sir, I remember that. 21 Q. And they never required you to mark 22 those portfolios to market, did they? 16780 1 A. No, sir, they did not. 2 Q. Now, with regard to the issue about 3 hedge accounting, let me ask you to look at one 4 final document. Excuse me. Documents -- Tab 898, 5 which is Exhibit B1452 and Exhibit B4154 at 6 Tab 1015. 7 Do you have Exhibit B1452, Mr. Crow? 8 A. Yes, sir, I do. 9 Q. And do you see there that that is 10 dealing with that hedge accounting issue, FASB 80, 11 for that portion of United MBS? 12 A. Let's see. (Witness reviews the 13 document.) This -- the first -- I've got a memo 14 from Jim Wolfe to Joe Parsons. 15 Q. Yes, sir. January 28th, '87, "Re: 16 Accounting issues relative to United MBS 17 Corporation." 18 A. Yes, sir. 19 Q. And it references a meeting of 20 January 23rd? 21 A. Oh, yes. I see where it it's 22 discussing hedging activities. 16781 1 Q. And it mentions the Ginnie Mae puts and 2 correlation? 3 A. Yes, sir. 4 Q. And let me ask you to look at 5 Exhibit B4154, which is a memo from Mr. Parsons to 6 the file dated March 6th, 1987. 7 A. Yes, sir. 8 Q. And he's referring specifically to the 9 use of futures and future options to hedge United 10 MBS? 11 A. Yes, sir. He's talking about hedges 12 here. 13 Q. And it indicates in the second 14 paragraph that this is the first structured hedge 15 program entered into by United? 16 A. Yes, sir, I see that. 17 Q. Now, of course, United had -- United 18 had entered into Joe's portfolio and USAT Mortgage 19 Finance all prior to this time, correct? 20 A. Absolutely. 21 Q. But for accounting purposes, this was 22 regarded as the first structured hedge program. 16782 1 Right? 2 A. Yes, sir. 3 Q. And it is the only one that United ever 4 sought to get hedge accounting treatment on 5 through the way it was structured? 6 A. That is correct. 7 Q. And the accounting treatment of this, 8 indicated in the third paragraph, went to Bob 9 Mills? 10 A. Yes, sir. 11 Q. Do you know who Mr. Mills was? 12 A. No, I don't remember Mr. mills. 13 Q. Mr. Crow, did you, to the best of your 14 ability, account for the various portfolios at 15 United in an appropriate way? 16 A. Yes, sir. 17 Q. Did you withhold any information 18 concerning the management of those portfolios from 19 the auditors in doing their job of looking over 20 your shoulder as to the accounting treatment? 21 A. No, sir. 22 Q. To this day, do you believe that the 16783 1 accounting treatment that you adopted for USAT at 2 that time followed the accounting rules in 3 existence at the time? 4 A. Yes, I do. 5 Q. And were those accounting rules for 6 United MBS and relating to this one portion of it 7 different than those for the rest of USAT and its 8 mortgage-backed securities portfolios? 9 A. Yes, sir. The accounting rules related 10 to the -- that portion that was micro hedged were 11 quite different than everything else, yes, sir. 12 MR. NICKENS: That's all I have, Your 13 Honor. 14 THE COURT: I have one question with 15 regard to Exhibit 1117, the resolution that was 16 adopted there on the second page. 17 THE WITNESS: Yes, sir. Let me -- 18 let's see. Let me find that. Okay. Yes, sir. 19 THE COURT: Did I understand that that 20 relates to the general mortgage-backed securities 21 portfolios, or was that tailored to the micro 22 hedged portfolio. 16784 1 THE WITNESS: Let me -- which page is 2 this on, sir? 3 THE COURT: It's US3003164. 4 THE WITNESS: Okay. (Witness reviews 5 the document.) This resolution on 3164, where 6 it -- the objective was to -- "trading operation 7 from time to time in order to enhance the 8 profitability of the association," that was more 9 of a macro all-encompassing statement, not 10 specifically related to the micro hedged 11 portfolio. 12 THE COURT: But the table that follows 13 on the next page is part of that resolution. 14 THE WITNESS: The -- where it starts 15 with reverse repos, et cetera? 16 THE COURT: Yes. 17 THE WITNESS: Well, let's see. Yes, 18 sir. It looks like what we're doing here is we're 19 putting position limits on the various levels, the 20 various portfolios. 21 THE COURT: And some of them would 22 relate to the micro hedging, would they not? 16785 1 Futures, options on futures. 2 THE WITNESS: I see that. Yes, sir, I 3 see that. Options on futures. The limit was put 4 on at 500 million. 5 THE COURT: All right. Thank you. 6 THE WITNESS: Yes, sir. 7 Q. (BY MR. NICKENS) And it was one month 8 later that the second policy statement was adopted 9 by the board of directors? That is, approximately 10 one month, November 13th? 11 A. That is correct. The way I read it is 12 that Mr. Berner noted that the regulations 13 required some special language if you're going to 14 engage in futures and options, that sort of thing. 15 MR. NICKENS: That's all I have, Your 16 Honor. Thank you. 17 THE COURT: Mr. Blankenstein, do you 18 have any questions? 19 MR. BLANKENSTEIN: No, sir. 20 THE COURT: Mr. Eisenhart? 21 MR. EISENHART: None, Your Honor. 22 THE COURT: We'll take a short recess. 16786 1 (Whereupon, a short break was taken 2 from 10:36 a.m. to 10:59 a.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Mr. Rinaldi, you have a brief redirect? 7 MR. RINALDI: Very brief, Your Honor. 8 9 CONTINUED EXAMINATION 10 11 Q. (BY MR. RINALDI) Mr. Crow, could you 12 take a look at Exhibit B2646 just to clarify one 13 thing? That's this document that your counsel 14 showed you. 15 A. Okay. The general -- let's see. Help 16 me here. 17 Q. You were just shown it this morning. 18 Here it is. 19 A. Okay. Yes, sir. 20 Q. Now, do you recall that your counsel 21 pointed you to a number on the last page that was 22 $1,887,000 approximately? 16787 1 A. Yes, sir. 2 Q. And he then asked you whether, in fact, 3 a check had been issued by USAT to UFG in that 4 amount. 5 Do you recall that? 6 A. A check by UFG to USAT, yes, sir. 7 Q. Okay. And then we had discussed 8 yesterday that there was, in your opinion, about 9 $290,000 in compensation that had been credited 10 from USAT -- I mean UFG to USAT. 11 Do you recall that? 12 A. Yes, sir, I do. 13 Q. Now, you weren't suggesting this 14 morning, were you, that the $290,000 that was 15 credited or appears to be credited to USAT from 16 UFG was actually part of that 1.8-million-dollar 17 payment that's on the last page, were you? 18 A. I would assume that it is, but I have 19 no way to prove that. 20 Q. Okay. Well, would you take a look, 21 then, at the last page and look at that payment? 22 What was the posted date of that 16788 1 payment, sir? 2 A. Let's see. (Witness reviews the 3 document.) Where do you see that? 4 Q. Do you see at the top, it says 5 "PSDTDTE." 6 Is that not the posted date? 7 A. Yes, sir. 8 Q. And that payment appears to have been 9 posted on 11/2/88, correct? 10 A. That's the date there, yes, sir. 11 Q. Okay. Then turn two pages back to 12 where the credit is and tell me what the posted 13 date on the credit was. 14 A. Let's see. Two pages back? 15 Q. Uh-huh. That's CN334565. 16 Do you see the posted date on the 17 credit? 18 A. Of the 290? 19 Q. Yes. 20 A. The posted date there is 11/18/88. 21 Q. So, the credit didn't come until 22 approximately 16 days after the check that you 16789 1 pointed out on the last page; is that correct? 2 A. That appears to be correct. 3 Q. Is it fair to assume, then, sir, that 4 that 1.8-million-dollar payment did not include 5 the 290,000? 6 A. I'm not sure that's fair to assume 7 that, Mr. Rinaldi. It's certainly different. I 8 certainly see your point. 9 Q. But you don't know the answer, then, 10 sir? 11 A. No, sir, I do not know the answer. 12 Q. Now, you remember your counsel gave you 13 this sort of quick calculation that you did. 14 Just so it's clear, the only thing you 15 included in this calculation were base salaries 16 for Mr. Gross, Mr. Crow, Mr. Berber, Mr. Wolfe, 17 Mr. Bruce Williams, and Mr. Larry Connell, and 18 then their allocated portion of the bonus? 19 A. Yes. That would be the base salary 20 that included, I think, the bonus that had been 21 rolled in. 22 Q. Okay. But what you didn't include in 16790 1 this was the 1987 bonus that was paid by USAT to 2 these individuals in 1988; is that correct? 3 A. That is correct. 4 Q. And you also did not include in this 5 calculation any allocation which would have 6 pertained to Mr. Munitz, whose annual salary at 7 that point in time was in excess of $300,000, 8 correct? 9 A. No, I certainly didn't include anything 10 about Mr. Munitz. 11 Q. Okay. Now -- 12 A. I think when I prepared this, I was 13 looking more at -- instead of -- we looked at it 14 as when earned. But your point is correct. 15 Q. Okay. Now, would you take a look at 16 Document B2279? This is the Larry Connell 17 contract. And would you look at Page 20 which 18 your counsel directed you to? 19 A. Yes, sir. 20 Q. Now, it indicates there that a trust 21 would be established for the benefit of the 22 executive. And in this case, the executive was 16791 1 Larry Connell, correct? 2 A. That it -- yes. It starts out that we 3 would obtain a letter of credit. And I haven't 4 read it; but if that wouldn't work, then a trust 5 would be established, yes, sir. 6 Q. Does it say in this document that 7 trusts were going to be created for any other 8 executives besides Mr. Connell? 9 A. No, sir. I'm sure this document only 10 relates to Mr. Connell because it's his contract. 11 Q. Okay. Now, finally, do you recall that 12 your counsel showed you some September 8th, 1988 13 minutes of USAT? It's A1156. 14 A. Yes, sir. 15 Q. And at that meeting, they discussed the 16 executive bonus. 17 Do you recall that? 18 A. I don't quite recall that, but -- I 19 remember looking at this. 20 Q. And Mr. Twomey was at this meeting, 21 wasn't he? 22 A. Mr. Twomey was at this meeting. 16792 1 Q. And your counsel then suggested that, 2 well, Mr. Twomey was fully aware of the executive 3 bonus. 4 Do you remember that? 5 A. Let's see. If that was the line of 6 questioning, yes, sir. 7 Q. Okay. Let me ask you this: Do you 8 recall, sir, did Mr. Twomey oppose the executive 9 bonus for anyone other than the highly-compensated 10 senior executives of USAT? 11 A. In -- you mean in the letter that 12 Mr. Twomey sent in late October? 13 Q. Yes. 14 A. My recollection is Mr. Twomey only 15 addressed himself to the executive management 16 area. 17 Q. Okay. And would you take a look at -- 18 first, I'd like you to take a look at the minutes 19 of November the 7th, 1988. This is A1163. This 20 is the board of directors minutes of USAT at which 21 the -- 22 MR. VILLA: Do you have a number for 16793 1 that? 2 MR. RINALDI: It's T8117 is our number, 3 and I believe the number is Trial Exhibit 447. 4 That's tab number. And it's -- it was admitted 5 previously as A1165. 6 Q. (BY MR. RINALDI) These are the 7 minutes of the board of directors meeting where I 8 believe the compensation issue was discussed. 9 Do you recall that, sir? 10 A. I don't recall that, but I see a 11 reference to that on one of these pages. 12 Q. Right. In the second full paragraph in 13 the middle of the page, it talks about Mr. Twomey. 14 Do you see that? 15 A. On Page 4 of the document? 16 Q. Yes. 17 A. Yes, sir, I do. 18 Q. It says, "Mr. Twomey, on behalf of the 19 Federal Home Loan Bank of Dallas, stated that he 20 was predisposed to keeping such bonuses -- bonus 21 moneys for the mid-level people but that he would 22 have to review this matter further." 16794 1 Does that refresh your recollection 2 that Mr. Twomey did not oppose paying the 3 executive bonuses that were so-called golden 4 handcuffs to mid-level people? 5 A. No, sir. I don't -- in terms of what 6 happened at this meeting, I don't remember. But I 7 certainly see what this statement says. 8 Q. Okay. And would you then take a look 9 at Exhibit -- and this is the last one I'll show 10 you -- Exhibit T88138. This is the letter that 11 Mr. Twomey later then sent to the board of 12 directors of USAT regarding the executive bonuses. 13 MR. VILLA: Excuse me. Could you give 14 us the tab number? 15 MR. RINALDI: I'm sorry. It should be 16 454. 17 Q. (BY MR. RINALDI) Do you see that? 18 A. Yes, sir, I do. 19 Q. And the only bonuses that Mr. Twomey 20 took exception to were the bonuses that were paid 21 to yourself, Mr. Berner, Mr. Jackson, Mr. Munitz, 22 Mr. Gray, Mr. Williams, and Mr. Wolfe. 16795 1 Do you see that? 2 A. I do see that, yes, sir. 3 Q. And all of the other bonuses to 4 mid-level employees were not -- he took no 5 exception to, did he? 6 A. Are not -- I don't see them mentioned 7 in this letter, no, sir. 8 MR. RINALDI: No further questions. 9 THE COURT: Mr. Guido. 10 MR. GUIDO: I only have a few 11 questions, Your Honor, and it pertains to the 12 resolutions with regard to USAT Mortgage Finance 13 policy. 14 15 CONTINUED EXAMINATION 16 17 Q. (BY MR. GUIDO) Mr. Nickens and I both 18 asked you questions about that policy, and the 19 judge asked you a question about that policy. 20 MR. NICKENS: Your Honor, for the -- 21 Q. (BY MR. GUIDO) Do you recall those 22 questions? 16796 1 MR. NICKENS: For the record, he said 2 USAT Mortgage Finance. I'm sure he meant United 3 MBS. 4 A. Yes, sir, I remember that. 5 Q. (BY MR. GUIDO) And about the policy. 6 And I'd like you to take a look again at the 7 policies. I think you had looked at A1117, which 8 are the minutes of the board of directors of 9 October 14th? 10 A. My housekeeping isn't very good up 11 here, Mr. Guido. 12 Q. Well, here. Let me give you my copy. 13 A. Okay. 14 Q. Do you remember the resolution that was 15 discussed there, and Mr. Nickens directed your 16 attention to Mr. Gross' reference to the 17 resolution at the beginning. 18 Do you recall that? 19 A. Yes, sir, I do. 20 Q. And then do you have in front of you 21 B4065, 1006, which is this big packet of minutes? 22 And I want you to turn to KPMG 035582. 16797 1 A. Okay. 2 Q. Now, both of those are addressing 3 mortgage-backed securities trading. Right? 4 A. Yes, sir. 5 Q. Now, what was the total size of USAT's 6 MBS portfolios on a consolidated basis? 7 A. I don't -- I don't know during this 8 time frame. 9 Q. Well, take a look at the portfolios 10 that are described in each of those attachments. 11 Aren't those describing the identical 12 portfolio or portfolios, plural? 13 A. Yes. These give the position limits of 14 the various portfolios or of the -- you know, they 15 are not all portfolios. Like clearly on 16 mortgage-backs, it says the maximum par position 17 would be 2,250,000,000. 18 Q. Now, I mean, the documents -- the 19 resolutions themselves or the policies themselves, 20 including the description of the portfolios, are 21 identical in all respects other than for the 22 phrase "in order to" -- in one case it says 16798 1 "reduce the interest race exposure of the 2 association" and the other says "to enhance the 3 profitability of the association." Right? 4 A. Yes, sir. I believe that is the change 5 in the language. 6 Q. In all other respects, those two 7 resolutions are identical? 8 A. I haven't compared them; but I'll take 9 your word for that, yes, sir. 10 Q. Now, in response to Mr. Nickens' 11 questions, were you suggesting to the Court that 12 those two policies dealt with something different? 13 A. What I was trying to convey to the 14 Court is that we had the original policy where 15 it -- you know, the language, instead of "control 16 interest rate risk," it was "to enhance 17 profitability" or words to that effect, was 18 adopted by the investment committee and then 19 adopted by the board. And then a few weeks later 20 or a month or so later, another policy was 21 adopted. 22 And my reconstruction of this, from the 16799 1 documentation, is that Mr. Berner -- this had been 2 the first time that United had been kind of 3 engaged in futures and options type contracts. 4 And then Mr. Berner noted something in the 5 regulations that we needed to include in the 6 policy. 7 So, you know, it looks like that's what 8 happened. 9 Q. Well, was the policy that's adopted in 10 the November board meeting an amendment of that 11 that was adopted in the October board meeting? 12 A. It's different. As to whether it's an 13 amendment, I don't know. 14 Q. So, you don't know whether or not it's 15 an amendment and it's adopting the -- "to reduce 16 the net interest rate exposure of the association" 17 in lieu of "to enhance the profitability of the 18 association"? 19 A. No, sir. I can't answer whether -- you 20 know, I don't have any memory or any knowledge of 21 whether the original policy was still in effect 22 and this policy was adopted in addition to it or 16800 1 this policy superseded the first one. I just 2 don't know. 3 Q. Have you ever looked at subsequent 4 minutes of the board of directors or board packets 5 to ascertain whether the November policy to reduce 6 the interest rate exposure was adopted as an 7 amendment to the October "to enhance the 8 profitability" policy? 9 A. I have not, no, sir. 10 Q. I'd like to show you exhibit -- this is 11 a board packet -- A1128, which I have taken the 12 resolutions that were discussed at that board 13 packet out of it and marked it as A1128A. 14 15 (Discussion held off the record.) 16 17 MR. GUIDO: The packet that I 18 distributed is 1128A, Your Honor, which is the 19 second of the two documents that I'd like the 20 witness to look at. So, the board packet is 21 A1125A, which is the board packet of 22 February 18th, 1987. A1128A is May 7th, 1987 16801 1 board packet, which includes the minutes of the 2 February board meeting which those resolutions 3 were adopted that are referred to. 4 Q. (BY MR. GUIDO) So, let's go through 5 the two documents. 6 MR. GUIDO: Before I do so, Your Honor, 7 I'd like to admit A1125A which are the -- which is 8 the board packet for the February 18th, 1987 board 9 meeting of United Savings Association of Texas. 10 And then the second is A1128A, which is a board 11 packet of May 7th, 1987, Your Honor. 12 Q. (BY MR. GUIDO) And the first document 13 I'd like you to take a look at, Mr. Crow, is -- 14 I'm sorry. 15 MR. NICKENS: Based upon what -- are 16 the original documents in? 17 MR. GUIDO: The original documents are 18 not in. 19 MR. NICKENS: Based upon the 20 representation that he has pulled everything that 21 might be relevant to this issue, I have no 22 objection to it. We'll check the complete 16802 1 document at a later time. 2 THE COURT: All right. Received. 3 MR. VILLA: Your Honor, I would like to 4 make a point. We have several counsel at the 5 table. If they could make copies for everybody 6 else, they could make more than one copy that we 7 could pass around during the examination. 8 MR. GUIDO: Your Honor, I had assumed 9 that the documents were already in the record and, 10 during the break, I didn't have time to make 11 copies of this. The whole document was 2 to 12 3 inches thick, Your Honor. If counsel wants to 13 take time to have copies made, but I think that 14 the -- it's pretty straightforward what we're 15 dealing with. 16 THE COURT: Well, you're supposed to 17 furnish copies to the other side. 18 MR. GUIDO: I just furnished copies to 19 the other side. 20 MR. EISENHART: Your Honor, I have been 21 complaining about this since the start of this 22 trial. When Mr. Stearns was here last week, I 16803 1 said to them -- I said, "Look. There are five of 2 us over here. There have been five of us since 3 Day 1 of the trial. I'm going to have to take 4 this up with the Court if you're not going to do 5 it." Mr. Stearns ordered them to make five copies 6 if they were going to present documents. I gather 7 as soon as Mr. Stearns left, he's gone back to his 8 old ways. This is not a new issue. 9 MR. GUIDO: Your Honor, I didn't know I 10 was ordered by anyone to produce five copies. I'm 11 sorry. 12 THE COURT: Well, you're required by 13 the Rules to furnish the other side copies of all 14 your exhibits. 15 MR. GUIDO: Yes, Your Honor. And they 16 have copies of these exhibits. We have supplied 17 copies of -- in fact, all parties have copies of 18 A1128, Your Honor. I just reduced the size of the 19 document so that it has the -- only the pertinent 20 parts of the document that are relevant. 21 THE COURT: But A1128 and A1125 are not 22 in evidence. 16804 1 MR. GUIDO: No, they are not, but they 2 have previously been provided. Those were the 3 joint documents that were produced by the 4 respondents pursuant to an agreement between the 5 parties, Your Honor. 6 THE COURT: All right. Well, I'd like 7 to proceed; but I think in the future, when you 8 make an exhibit, you offer an exhibit, all counsel 9 on the other side should be furnished a copy. 10 MR. GUIDO: Your Honor, I apologize to 11 the Court for that in this case. It was an issue 12 that I never believed was going to come up, and I 13 didn't have time to prepare copies for everybody. 14 THE COURT: All right. Let's proceed. 15 Q. (BY MR. GUIDO) I'd like to direct 16 your attention to the February 18 board minutes, 17 A1125A. 18 While we've had this colloquy, have you 19 had an opportunity to review that document? 20 A. No, sir. I'm sorry. I was listening. 21 Q. You were listening intently. 22 Now, take a look at -- see -- take a 16805 1 look at the Bates stamp K003335. It says, 2 "Summary of resolutions of the board of directors 3 of United Savings Association of Texas." 4 Do you see that? 5 A. Yes, sir, I do. 6 Q. Okay. Then look at Item 17 on the next 7 page, K5336. See, that says, "This resolution 8 adopts the association's policy regarding 9 mortgage-backed securities trading as amended." 10 A. Yes, sir, I see that. 11 Q. And then flip to the very last page, 12 which is K005361. That says at the top of the 13 page -- do you see it -- "United Savings 14 Association of Texas policy regarding 15 mortgage-backed securities trading as amended." 16 Do you see that? 17 A. I do see that. 18 Q. Then it has the same portfolio 19 description that we've been discussing. Right? 20 A. It certainly does. 21 Q. Does that refresh your recollection 22 that the November policy was adopted by the board 16806 1 was an amendment to the October policy? 2 A. It appears that it has, yes. 3 Q. And then the minutes of that meeting 4 were included in the board packet at Exhibit 5 A1128A. 6 Do you see that? 7 A. Yes, sir. 8 Q. And that is the minutes of 9 February 19th, 1987, which were included in the 10 May 7th board packet. And I direct your attention 11 to Page 24 of that or K -- the Bates stamp K5603. 12 Do you see the "resolved" there? 13 A. Yes, sir, I do. 14 Q. And it says, "The policy... trading 15 operation from time to time, in order to reduce 16 the net interest rate exposure of the 17 association"? 18 A. Yes, sir, I see that. 19 Q. Mr. Crow, there weren't two policies, 20 one for United MBS and one for USAT, were there? 21 A. I think as it relates to what we're 22 talking about here, it must be that this -- the 16807 1 board must have taken -- this must be an amended 2 policy. 3 Q. So, it's essentially adopted as the 4 policy for USAT and its subsidiaries, the policy, 5 that it can trade in order to reduce the net 6 interest rate exposure of the association? 7 A. That's the way it appears to read to 8 me. 9 MR. GUIDO: No further questions, Your 10 Honor. 11 THE COURT: Thank you, Mr. Crow. You 12 may step down. 13 THE WITNESS: Thank you. 14 THE COURT: Who is the next witness? 15 MR. GUIDO: Vivian Carlton, Your Honor. 16 And Mr. Bryan Veis will be doing the examination. 17 It will take us a few minutes to clean off so we 18 can proceed. 19 THE COURT: All right. Well, maybe we 20 should adjourn early and come back early. 21 MR. GUIDO: I'm sorry? 22 THE COURT: I said perhaps we should 16808 1 adjourn early and come back at 1:00. 2 MR. GUIDO: That would be a good idea, 3 Your Honor. 4 THE COURT: We'll adjourn until 1:00. 5 6 (Whereupon, a lunch break was taken 7 from 11:25 a.m. to 1:04 p.m.) 8 9 THE COURT: Be seated, please. The 10 hearing will come to order. 11 Mr. Veis. 12 MR. VEIS: Good afternoon, Your Honor. 13 The OTS calls Vivian Carlton. 14 15 VIVIAN CARLTON, 16 17 called as a witness and having been first duly 18 sworn, testified as follows: 19 20 21 22 16809 1 2 EXAMINATION 3 4 Q. (BY MR. VEIS) Good afternoon, 5 Ms. Carlton. 6 A. Good afternoon. 7 Q. Would you please state your name for 8 the record? 9 A. My name is Vivian Earl Carlton. 10 Q. What's your address, Ms. Carlton? 11 A. 1007 Wayne Avenue, Duncanville, Texas. 12 Q. And who is your current employer? 13 A. Department of Treasury, OTS. 14 Q. Ms. Carlton, could you please tell us 15 when you received your college degree? 16 A. I received my college degree -- I have 17 an associate degree from Mary Holmes Junior 18 College in 1972. I have a BS degree from Alabama 19 State University, Montgomery Alabama, 1974. 20 Q. When was -- what was your major in 21 college? 22 A. I majored in accounting, minored in 16810 1 management. 2 Q. Could you please describe for the Court 3 your professional employment following your 4 graduation from college? 5 A. Okay. I commenced my work, first job 6 with US Forest Services in Hot Springs, Arkansas. 7 I was an accountant there. My second career was 8 with the Department of Energy as an auditor. 9 Q. Going back for a second, what years did 10 you work for the Forest Service in Arkansas? 11 A. I worked for the Forest Service in 1975 12 and 1976. 13 Q. And when did you begin to work for the 14 Department of Energy? 15 A. In 1976. 16 Q. And how long did you work there? 17 A. From 1976 to 1980. 18 Q. What was your job with the -- or what 19 were your duties with the Department of Energy? 20 A. With the Department of Energy, I 21 audited major oil companies here in Texas, 22 reconciling financial statements, and working 16811 1 through the embargo period of oil losses and sales 2 back in 1980. 3 Q. Did there come a time when you were 4 employed with the Federal Home Loan Bank Board? 5 A. In 1981, I started my employment with 6 the Federal Home Loan Bank Board. 7 Q. What was your first position? 8 A. As an examiner. 9 Q. Were you at an entrance level at that 10 point or some other level? 11 A. I came on from the Department of Energy 12 at the GS-9 level, which is really not the entry 13 level, intermediate level. 14 Q. Intermediate level? 15 A. Yes. 16 Q. Do you recall? Why was that? 17 A. I was GS-11, which was a senior level 18 at the prior agency that I came from. 19 Q. Now, how long did you remain in the 20 position of examiner? 21 A. I remained an examiner until 1991. 22 Q. During that period, how many 16812 1 examinations did you take part in? 2 A. Oh, it was over 38 exams that I 3 conducted during that time. 4 Q. Now, did there come a time when you 5 began to act as examiner-in-charge of examinations 6 of savings associations? 7 A. I did my first as examiner-in-charge 8 after six months of employment. 9 Q. And that was in 1982, then? 10 A. Approximately, yes. 11 Q. And how many examinations, if you 12 recall, had you done before doing your first 13 examiner-in-charge assignment? 14 A. I had done maybe 12 to 15 exams at that 15 time. 16 Q. Now, did you ever, in the course of 17 your employment with the Federal Home Loan Bank 18 Board, act as conservator of a savings 19 association? 20 A. Yes, I did. 21 Q. And when was that? 22 A. That was in 1983, '84. 16813 1 Q. What association was that? 2 A. Investor Savings in Houston, Texas. 3 Q. And what did you do as conservator of 4 Investor Savings? 5 A. As conservator, I was in charge of the 6 oversight and management of the institution, the 7 daily operations of the institution, completing 8 the regulatory requirement reports, and 9 maintaining the institution in a stable condition 10 until it could be placed under receivership under 11 FSLIC. 12 Q. Was Investor Savings, in fact, 13 liquidated? 14 A. Yes, it was. 15 Q. How long after -- I'm sorry. How long 16 did you remain as conservator? 17 A. I was there for approximately 18 18 months. 19 Q. How large was Investor Savings? 20 A. It was less than 40 million in assets. 21 Q. What kind of association was it in 22 terms of its assets? 16814 1 A. Basically dealt in real estate, 2 single-family lending. 3 Q. What were the reasons for its failure? 4 A. The managing officers had engaged in 5 fraud and mismanaged the assets of the 6 institution. 7 Q. And what was the condition of its books 8 and records? 9 A. The books and records were in total 10 disarray. The accountants had all left when we 11 got there. Basically, I had clerks that were 12 following handwritten procedures and trying to 13 balance the books and trying to fill out the 14 financial reports. 15 Q. Now, after the liquidation of Investor 16 Savings, what was your next assignment? 17 A. After that assignment, I went to -- I 18 think it was another small institution. 19 Q. Did there come a time when you 20 participated in programs other than examinations? 21 A. Yes. 22 Q. And what were those? 16815 1 A. I entered into -- let's see. In '94, 2 '95, entered into a management development 3 program. 4 Q. Did you say '94 and '95 or '84? 5 A. It was '84. '84 and '85. Entered into 6 a management development program. 7 Q. Could you describe that, please? 8 A. That program was a program in which you 9 were selected to participate in the oversight of 10 the examination process by spending a detail in 11 another region of the organization and also going 12 to Washington D.C. and assisting with the director 13 of the agency at the D.C. level, seeing 14 institutions placed into conservatorship and what 15 other responsibilities that were assigned. 16 Q. Now, which region did you go to for 17 your -- the first part of that assignment? 18 A. To the Atlanta region. 19 Q. How long did that last? 20 A. I was over there approximately six 21 months. 22 Q. What was your position? 16816 1 A. I worked in the position that we had 2 back then as analyst. 3 Q. And did you assist anyone? 4 A. I assisted the supervisory agents 5 Q. Now, as to the Washington, D.C. 6 component of that program, who did you work for in 7 Washington? 8 A. His name was Joe Arendes. He was head 9 of the agency at that time. 10 Q. Now, following the management 11 development program, what sort of work did you do 12 for Federal Home Loan Bank Board? 13 A. Following that, I went into basically 14 reviewing large thrifts at that time. And I also 15 went into a resident examining program. 16 Q. Let's look at the large thrifts first. 17 Can you tell us which large thrifts you 18 were involved in examining? 19 A. I had reviewed -- went into University 20 Savings, San Jacinto Savings. 21 Q. Have you ever been involved in placing 22 institutions in receivership? 16817 1 A. Yes, I have. 2 Q. And which institutions are those? 3 A. I was participating in placing Investor 4 Savings into receivership, Bank Plus into 5 receivership, and Commonwealth was another one. 6 Q. Where was Bank Plus located? 7 A. It was located in Houston, Texas. 8 Q. Do you have any certifications from the 9 thrift regulatory authorities? 10 A. Yes. Federal thrift regulator is a 11 certification for examiners. 12 Q. Now, did there ever come a time when 13 you became a resident examiner? I think you 14 mentioned that earlier. 15 A. Yes, I did. 16 Q. And when was that? 17 A. That was '89 and 1991. 18 Q. And can you describe, please, what a 19 resident examiner does? 20 A. That was a program that was created 21 after the Southwest Plan in which in order to 22 monitor the organization of those institutions 16818 1 that had acquired several institutions, one person 2 was placed at the institution to be there on site 3 in order to attend all management executive 4 meetings and ensure that the foundations for those 5 institutions from policies and procedures and 6 establishing strategies or making sure that you 7 had adequate staff, competent management was 8 hired. You went through that process of the 9 structure and reported back to supervision the 10 status of that activity. 11 Q. Now, which institution or institutions 12 were you a resident examiner at? 13 A. Height Savings and Pacific Southwest 14 Bank. 15 Q. So, there were two of them? 16 A. Yes. 17 Q. And was it First Height Savings, you 18 said? 19 A. Yes. 20 Q. And how long were you there? 21 A. I was there approximately a year and 22 approximately a year at Pacific Southwest Bank. 16819 1 Q. Now, was it common for an examiner to 2 be a resident examiner at more than one 3 institution? 4 A. It was only a few of us. I was maybe 5 one of two that were at two institutions. 6 Q. Now, while you were working on site at 7 the bank, did you attend meetings -- 8 A. Yes, we did. 9 Q. -- as a resident examiner? 10 A. Yes. 11 Q. And what meetings did you attend? 12 A. We attended all board meetings, 13 strategy meetings, major committee meetings, and 14 team staff meetings that they conducted. 15 Q. And did you also act as examiner charge 16 for the examination of those institutions? 17 A. Yes, I did. 18 Q. Have you received any other 19 certifications besides the federal thrift 20 regulator certification? 21 A. I'm a certified fraud examiner. 22 Q. How does one become a certified fraud 16820 1 examiner? 2 A. That certification is afforded to 3 individuals that either, through their experience 4 or training dealing with fraud cases, identifying 5 fraud situations, or you submit an application 6 providing those experience labels citing examples 7 of the cases that you have dealt with. That 8 knowledge is analyzed along with your experience 9 and education level in a certification. You're 10 accepted into the organization. 11 Q. Now, is that a government organization? 12 A. It's both private and government 13 members. 14 Q. Who are the members of that 15 organization? 16 A. You basically have a combination of 17 individuals with F.B.I., U.S. attorney, financial 18 banking industry, and accounting backgrounds. 19 Q. Now, what is your present position? 20 A. I'm currently a field manager. 21 Q. And how long have you held that 22 position? 16821 1 A. I've been there since 1991? 2 Q. And that's with the Office of Thrift 3 Supervision? 4 A. Yes, it is. 5 Q. So, I take it, then, that you began 6 your employment with the Federal Home Loan Bank 7 Board. 8 Did you then become an employee of the 9 Federal Home Loan Bank of Dallas? 10 A. Yes. 11 Q. And that was -- and you remained an 12 examiner at all times then? 13 A. Right. 14 Q. And then you later became an employee 15 of the Office of Thrift Supervision? 16 A. That's correct. 17 Q. Now, what are your responsibilities as 18 a field manager for OTS? 19 A. As a field manager, I have a caseload 20 of approximately 18 institutions for the State of 21 New Mexico, Oklahoma, and Texas. My 22 responsibilities are to oversee the examinations 16822 1 of those thrifts, to provide input into any 2 application processes that those institutions may 3 engage in, to conduct the examinations of the 4 institution and its holding companies on an annual 5 or whatever the matrix is required for those 6 institutions. I have a staff of approximately 7 eight individuals that I'm responsible for as 8 administration, monitor those institutions and any 9 trends and activities that may take place in 10 between the examinations. 11 Q. Do you have any role in recommending 12 supervisory actions? 13 A. After each examination, a decision is 14 made as to the proper regulatory supervisory 15 action that should take place, be it a supervisory 16 agreement, a directive, civil money penalties, or 17 whatever we feel is desired for the violations 18 that are noted and the rating assigned. 19 Q. Now, you said you were a field manager. 20 Now, is the position of field manager today the 21 same as the position that was called field manager 22 in the 1980s? 16823 1 A. No, it's not. 2 Q. Could you explain the difference, 3 please? 4 A. In the 1980s, the organization was 5 broken down by regions. We had a Dallas region, a 6 Houston region. Within the Houston region, you 7 had a field manager, and you had two levels of 8 management over that field manager position. You 9 had an area director and the field manager that 10 reported to Dallas. 11 Supervision and examination was 12 separate departments at that time, one being 13 within the Bank of Dallas where the other 14 organization was in the Federal Home Loan Bank 15 Board. And under the Bank of Dallas, you had your 16 supervisory agents and the president of the bank 17 at that time. 18 Q. Now, how did your functions compare to 19 those of the area director and the field manager 20 of the Eighties? 21 A. In -- currently, we have an 22 organization in which you have -- the field 16824 1 manager now covers -- the positions of the SA and 2 area director is all combined into one position 3 where, back in the Eighties, you had approximately 4 15 field managers. We currently -- this area may 5 have four field managers. You have one level of 6 management over me which is area director. We no 7 longer use "supervisory agent" as a title. That 8 person reports to David Bradley, who is the deputy 9 director, and he reports to Fred Casteel, who's 10 the regional director. 11 Q. Now, in the 1980s, there was a position 12 called supervisory analyst; is that correct? 13 A. Yes. 14 Q. Is there an equivalent position today? 15 A. We have a position called office 16 examiner that's equivalent to the in the Eighties. 17 Q. And do you have an office examiner who 18 works for you? 19 A. Yes, I do. 20 Q. Now, are you a specialist in any 21 examination area? 22 A. No, I'm not. 16825 1 Q. Does the Dallas region have 2 specialists? 3 A. Yes, they have. 4 Q. Did the Dallas region have specialists 5 in 1986? 6 A. No, they did not. 7 Q. Did they have specialists in 1987? 8 A. No, they did not. 9 Q. I'd like to address briefly the 10 mechanics of the examination process, Ms. Carlton, 11 particularly as it relates to the mid-1980s. 12 Was there a document that was sent to 13 the institution prior to the examination 14 commencing in the 1980s? 15 A. Yes, it was. 16 Q. What was that called? 17 A. Called it a pre-examination kit -- we 18 called it PERK for short. 19 Q. And what does that document contain? 20 A. That document contains an announcement 21 to the institution of the time that an examination 22 is scheduled to commence, it provides a list of 16826 1 data that we need in order to conduct the exam 2 based on a specific time period. It will tell the 3 approximate number of examiners that will be 4 coming and ask them to provide adequate space, 5 including whatever data lines we may need. 6 Q. Now, what sort of information did the 7 PERK package request in the 1980s? 8 A. It starts with providing lists of the 9 current positions, organization charts, financial 10 information on the thrift as of a stub period plus 11 all quarter. Back then, it may have been monthly 12 or semi-annual reports since the previous 13 examination. You provide the trial balance. You 14 provide salary information on all the officers and 15 directors of the institution, usually from the VP 16 level up. It asks for salary information on -- it 17 asks for loans outstanding to officers, directors. 18 And you break the bank down by each department, 19 and you ask for information, subtrial ledgers that 20 would be for consumer loans, commercial loans, 21 real estate loans. You have documentation also 22 for your subsidiaries of finance subs that they 16827 1 may have. It's kind of a start-up list, basic 2 information in any area that the bank would engage 3 in. 4 Q. And is that information supposed to be 5 available when examiners come to the institution? 6 A. Yes. 7 Q. And what use do the examiners make of 8 that information? 9 A. The examiner-in-charge takes that 10 information upon entrance to the institution and 11 divide it by the assistants that they have in 12 order to conduct the difference phases of the 13 review -- of the exam. 14 Q. Is there also a document called a scope 15 memorandum? 16 A. Yes. 17 Q. What does that memorandum involve? 18 A. A scope memorandum is a document in 19 which you outline the procedures that the 20 examination should follow. It's done in 21 combination with the field manager and the 22 examiner-in-charge. It's sent out along with the 16828 1 assignment. The examiner-in-charge would take 2 that document and, as they go through the exam, 3 for the first one or two weeks, they would 4 determine if there are other items that need to be 5 added to that list of items that were provided. 6 In some cases, it includes special audit or review 7 requests if, due to monitoring process, something 8 has been identified as a critical area of review 9 between examinations. 10 Q. What about areas that were left 11 unresolved in the prior examination? Is that 12 addressed? 13 A. Those will be included in that, or 14 either that document will be attached to the 15 memorandum or the EIC will be made aware that 16 there is additional information that's left over 17 from the previous exam that should be reviewed. 18 Q. Is it common to have unresolved issues 19 after an examination? 20 A. You usually don't have unresolved 21 issues or that many unresolved issues from one 22 exam to the next exam. 16829 1 Q. Let me ask you now about the actual 2 role of the examiner in conducting an examination 3 of the savings association. 4 What is the examiner's responsibility? 5 A. The examiner's responsibility is to go 6 into an institution, review the basic operating 7 areas of that institution, determine the financial 8 condition of the institution, identify risks that 9 may be inherent within the portfolio that could 10 cause any adverse conditions to the institution or 11 to the capital or the viability of that 12 institution. 13 Q. Do you determine whether the 14 institution's operated in accordance with its 15 policies and procedures? 16 A. Yes. And the regulations, both federal 17 and state, according to whatever the charter is. 18 Q. Do you look at the staffing and 19 operation of the institution? 20 A. Yes. We do what we call a top-down 21 approach where we start with the board of 22 directors. The board members ultimately are 16830 1 charged with the responsibility of making sure 2 that they have a competent experienced staff. 3 From that level, we move to make sure that all 4 levels of management, including middle management 5 and lower management, are also experienced in that 6 you have adequate staff in all departments and all 7 levels. 8 Q. Are there particular programs that 9 examiners use in conducting an examination? 10 A. Yes. With each examination, we have 11 standard programs that are used -- for the 12 institution itself. You have different programs 13 that are used for the subsidiaries and currently 14 for holding company examinations. Those programs 15 include minimum requirements that are required for 16 you to follow. You can have Phase 1, Phase 2 17 based on the findings of the examination. They 18 outline items that you should look for, including 19 cites of regulatory regulations that are part of 20 that program. 21 Q. Has that been the case since the 1980s 22 through today? 16831 1 A. Yes, it has. 2 Q. Have the examination programs changed 3 over time? 4 A. Yes, they have. 5 Q. Now, were state examiners -- where 6 state examiners are conducting a simultaneous 7 examination program, do you use their work? 8 A. It's according to the type of exam that 9 we are conducting. We will -- in some cases, we 10 split the work so that we -- we try to reduce as 11 much duplication as we can. And we will accept 12 their reviews and follow through with making out 13 standards on whatever review that they are doing. 14 Typically, they have to issue their own report. 15 So, we do have some duplication in which they will 16 review the information to the standards that they 17 have requirements, and we will review -- I will 18 work to the standards that we have to abide by. 19 Q. Now, after the PERK package information 20 has been examined, how do examiners get further 21 information from the institution? 22 A. Through requests from the institution. 16832 1 Q. And what is the general relationship 2 between examiners and management of the 3 institution? 4 A. Usually, in large institutions in most 5 cases, you have what you call a liaison person 6 that will serve as the go-between between the 7 examiners and management. Typically, we start off 8 with a meeting with executive management and the 9 department heads in which the examiners are 10 introduced to those individuals. And we both 11 disclose the responsibilities of each person as 12 far as examiners. Management discloses the 13 responsible individuals responsible for major 14 operation areas. 15 Q. Is the relationship between management 16 and examiners supposed to be a cooperative one? 17 A. Yes. 18 Q. I take it, then, it's not supposed to 19 be an adversarial relationship; is that correct? 20 A. Usually, you have a cooperative rapport 21 with management. 22 Q. Now, how are issues raised and 16833 1 addressed with management? 2 A. It's handled in several ways. The main 3 area in which we handle exceptions, we have what 4 we call an exception report. That's a document in 5 which we cite violations. If there are issues 6 that we may not have all the information, we will 7 provide it in writing to them on that document. 8 That gives them the opportunity to address what 9 has been presented to them, provide additional 10 information, or let us know if, for some reason, 11 the opinions that have been raised on whatever 12 decision -- the situation may be, whether we are 13 accurate or not accurate or totally misleading in 14 the facts that we may have gathered. 15 Q. Now, what if it doesn't rise to the 16 level of an exception? What if you just have a 17 question? What do you usually do? 18 A. We can go to individuals within the -- 19 who's responsible for that area and ask them 20 questions. 21 Q. So, in general, you have access to any 22 individual in the institution? 16834 1 A. Most cases. 2 Q. Do you ever ask management to describe 3 problems of their institution to you during the 4 examination process? 5 A. All the time. 6 Q. And how do you do that? 7 A. We have management meetings. We call 8 them status meetings which we have with management 9 in which at so many weeks within the exam, we will 10 go to management and disclose the status of the 11 findings that we have at that time. If we have 12 issues, as they arise, we try to present those to 13 management on an ongoing basis and ask for 14 feedback or additional information or support for 15 whatever those findings or violations may be at 16 that time. 17 Q. Do you ever ask management whether 18 there are troublesome areas that you have not yet 19 found? 20 A. Usually, when you -- either in the 21 commencement of the exam, you have what you call 22 an entrance meeting. During that meeting, 16835 1 management does what you call a status meeting and 2 he will provide to you a meeting in which he 3 addresses the activity that has taken place at the 4 institution between -- since the previous 5 examination. And he will at that time disclose 6 whatever matters that he feels are significant at 7 that time. And usually, at the end of the exam, 8 in that we have cutoff periods in which we may cut 9 off the review of the exam, we will have another 10 meeting in which we will ask the president or 11 individual to address any other issues that may 12 have taken place during the exam or within the 13 recent time period before we leave. 14 Q. Now, you mentioned exceptions. Can you 15 describe exactly what an exception is? 16 A. An example of an exception is if you 17 review a loan and you have missing appraisal 18 reports or documentation, we would cite the loan 19 number and the borrower, say, name and state and 20 the review of the file, if this information was 21 missing, please explain this information or why it 22 was omitted as an example. 16836 1 Q. Is the institution required to respond 2 to an exception? 3 A. Yes, they are. 4 Q. And how do they do that? 5 A. They provide written response to the 6 exceptions. At the end of the examination, all 7 exceptions are collected and the president will 8 sign off or managing officer will sign off on 9 receipt of those documents. 10 Q. Now, you also prepare reports of 11 examination; is that correct? 12 A. Yes, we do. 13 Q. When is that done? 14 A. That's done at the end of the 15 examination. 16 Q. Is there ever an occasion where you 17 prepare a report prior to the end of the 18 examination? 19 A. We prepare interim reports during 20 examinations. 21 Q. When do you do that? 22 A. After you have been in an institution 16837 1 over 60 days or when you find significant activity 2 or violations that you rule material or adverse to 3 the institution, we are required or were required 4 to file interim reports. 5 Q. Now, if something is included in an 6 interim report, is it required to be included in 7 the final report of the examination? 8 A. No, it is not. 9 Q. So, the fact then that in the final 10 report of an examination a particular area is not 11 mentioned where it was in an interim examination 12 does not mean that the area is no longer a 13 problem. 14 Is that what you're telling me? 15 A. Correct. The interim reports were 16 designed for the supervisory agent or the 17 supervisory department to have a tool in order to 18 take action on prior to completion of a final 19 report if that examination is taking a long time. 20 Q. Now, when you prepare a report of 21 examination, speaking now of the final report of 22 examination, do you also assign a rating to the 16838 1 institution? 2 A. Yes, we do. 3 Q. And could you explain briefly what that 4 entails? 5 A. We have -- the examination is broken 6 down. Back in the Eighties, we had what you 7 called MACRO ratings; and that meant management, 8 asset quality, capital operations, and risk 9 management. 10 The rating today is called CAMELS and 11 it's capital, asset quality, management, earnings, 12 liquidity, and sensitivity, which each one of 13 those acronyms is assigning a numerical rating 14 ranging from 1 to 5 with 5 being the worst rating 15 you can receive. A 5 rating institution is 16 usually an institution that is insolvent and ready 17 to be placed into receivership. A 1 rated 18 institution is an institution with basically 19 well-run, no major exceptions, no major 20 violations, adequate staff, proper policies and 21 procedures, more than adequate capital, and a 22 well -- a management team that is perceived to be 16839 1 competent and the operations reflect that 2 experience level. 3 Q. I gather then 2, 3, and 4 are somewhere 4 between the extremes; is that right? 5 A. Right. 6 Q. Now, does the report of examination 7 address the management response to the exceptions 8 prepared by the examiners? 9 A. Yes. In cases where management 10 disagree with citings of violations or comments, 11 that's typically reflected into that -- that 12 report by stating that management disagrees. 13 Q. Now, once the report has been compiled 14 and the examiner-in-charge has assigned a rating 15 to each of the areas of review, is there also an 16 overall rating? 17 A. Yes, there is. We call it a composite 18 rating. 19 Q. Now, once that's been done, to whom is 20 the report submitted, or was it submitted in the 21 1980s? 22 A. The examiner-in-charge completes an 16840 1 exam and recommends a rating. That rating is then 2 assigned -- sent to the field manager. The field 3 manager reviews it and assesses the rating. Back 4 in '86, it would then go to the area director, and 5 that area director would confirm and assign the 6 rating from the field which would be from the 7 examination. Then report, back in the Eighties, 8 went to the supervisory agent and the agent would 9 assign a rating that could either agree or differ 10 from the examination rating. 11 So, you had about three levels of 12 rating evaluation that was done on the rating 13 system at different levels. 14 Q. I take it then the field manager could 15 disagree with the examiner-in-charge? 16 A. Yes. We have a process in which each 17 level can disagree with the other level, and it 18 should be documented in some form. The examiner 19 should be notified if ratings are changed or if 20 there is a difference of opinion. 21 Q. Now, when you say "document," do you 22 mean the reasons for the change should be 16841 1 documented? 2 A. Right. 3 Q. And that's at each level? 4 A. Yes. 5 Q. Now, based upon the reporting and the 6 rating, does the supervisory arm of the agency 7 take any action? 8 A. Yes, they do. 9 Q. And what is that? 10 A. If you have a 3 or worse rating, 11 typically it requires some type of action. It 12 could be -- it would range from a supervisory 13 agreement, which -- or a directive. A directive 14 is a written document less stringent than a 15 supervisory agreement. It can be a C&D order, a 16 prohibition of removing it. A supervisory action 17 that is taken is based on the severity of the 18 violations that are cited. 19 Q. Now, when an examiner is at an 20 institution, does the examiner approve or 21 disapprove of transactions undertaken by the 22 institution? 16842 1 A. No. 2 Q. Does the examiner have any such 3 authority? 4 A. No. 5 Q. Who, if anyone, does? 6 A. The management and board of the 7 institution. 8 Q. Is there anyone in the regulatory 9 agency that has authority? 10 A. The only time a regulator would approve 11 or disapprove is if the institution is under a 12 supervisory agreement and they have certain 13 mandates in which management is required to seek 14 prior regulatory approval before entering into any 15 type of transaction, then the regulator at that 16 time will provide either no objection or approval 17 of a typical situation. That may be a part of a 18 supervisory agreement. 19 Q. Are there also transactions for which 20 an application is required? 21 A. Yes. 22 Q. Would a supervisory agent or other 16843 1 supervisory personnel approve or disapprove 2 transactions pursuant to an application? 3 A. Yes, they would. 4 Q. Now, do examiners attend board of 5 directors meetings at institutions they are 6 examining? 7 A. Yes. 8 Q. What is their role in attending board 9 of directors meetings at savings institutions? 10 A. We will randomly identify one meeting 11 that we would like to attend to observe the 12 operations of the meeting and to observe who is 13 making decisions in the meeting in order to use 14 that as a part of our assessment of the 15 capabilities and competence of the management. 16 Q. Do examiners speak at those meetings? 17 A. We may provide feedback on the status 18 of the exam, but we do not enter into the 19 decision-making process of the institution. 20 Q. Do you ever voice opinions on the 21 decision-making process of the board meeting that 22 you're attending? 16844 1 A. No. 2 Q. Where, if anywhere, do examiners 3 express their opinions? 4 A. In the examination reports and 5 exceptions or requests that we need data. 6 Q. I'd like to turn now to the examination 7 staff in the early 1980s. 8 Could you describe the size and 9 experience level of the Federal Home Loan Bank 10 Board examination staff beginning in roughly 1982? 11 A. In 1982, the staff was basically junior 12 examiners. We were limited in number for the 13 region and for the area. We did not have 14 sufficient -- we were understaffed at the time in 15 the early Eighties. 16 Q. Were there other reasons besides the 17 numerical limitations? 18 A. The main reason we were understaffed is 19 that you had regular changes in the regulations 20 and institutions had been allowed to grow and to 21 engage in different activities that banks were 22 traditionally only allowed to engage in. 16845 1 Based on that, we had not hired 2 sufficient staff in order to keep up with the 3 growth of the industry at that time. 4 Q. Were you able to hire sufficient staff? 5 A. Not to have them on and trained in 6 order to conduct the work at the time that we 7 needed to in order to get around to the exams of 8 the institutions that were either failing or 9 having at various operations. 10 Q. Was there any difficulty in attracting 11 new examiners to come into the agency? 12 A. Yes. 13 Q. Why was that? 14 A. Through the recruiting process, you 15 just didn't find available individuals with the 16 experience level that was needed at that time. 17 Q. Did salary levels have anything to do 18 with that? 19 A. The salaries are low compared to the 20 private industry. 21 Q. Now, you said the thrift industry had 22 changed beginning in, roughly, 1982. 16846 1 Could you describe, in terms of the 2 size of, institutions how that worked? 3 A. We had maybe four to ten institutions 4 that may have had assets over a billion. The 5 majority of the institutions were small, less than 6 500 million in asset size back then. 7 Q. And how did that change? 8 A. Once you had the Southwest Plan 9 established, you had a -- smaller institutions 10 were consolidated into -- and created larger 11 institutions by asset base. 12 Q. Now, before you get to the Southwest 13 Plan -- is that not 1988? 14 A. That would have been the latter -- yes, 15 the latter part of the Eighties. 16 Q. But beginning when we're talking about 17 the industry changed because they could do 18 different sorts of transactions than they had 19 previously -- 20 A. Yes. 21 Q. Could you describe that, please? 22 A. Due to Garn-St. Germain Act, regulatory 16847 1 institutions were allowed to get -- enter into 2 commercial real estate development-type lending. 3 They were able to attract accounts other than your 4 traditional check and passbook accounts. 5 So, on both sides of the balance sheet, 6 institutions were allowed to diversify into other 7 areas other than your typical single-family 8 lending that was traditionally the lending of 9 thrifts and savings and loans. 10 Q. What kind of assets were they investing 11 in? 12 A. You had the major commercial lending: 13 Development, apartment; development, big land; 14 development-type lending. 15 Q. What about securities? 16 A. You had very few institutions at that 17 time that was engaged in securities. 18 Q. And did that change? 19 A. Not really. You still had -- I would 20 say 50 to 75 percent of the portfolio was not 21 heavily involved in any type of real estate 22 securities. 16848 1 MR. EISENHART: May we know what time 2 period the witness is talking about here? I'm 3 lost. 4 MR. VEIS: We're talking about the 5 period following the passage of Garn-St. Germain 6 in 1982. 7 MR. EISENHART: Thank you, Your Honor. 8 A. Back in the early Eighties, you may 9 have had four or five institutions that may have 10 had a portfolio of some type of investment 11 securities. 12 Q. (BY MR. VEIS) Now, when institutions 13 began to invest in investment securities, was 14 there a problem with respect to the examination of 15 those institutions? 16 A. We did not have a staff at that time 17 that was experienced or trained to the level to 18 review most of the securities areas. 19 Q. So, when a new area of business opened 20 up, you had to train examiners in that new area; 21 is that correct? 22 A. Right. And typically, our training 16849 1 precedes activity. 2 Q. Now, was there also a growth in broker 3 deposits in that period of time? 4 A. Typically in the early Eighties, once 5 an institution reached a financial level, they 6 could not attract deposits either at a level -- or 7 due to their financial condition, could not bring 8 in deposits. They would resort to brokered funds 9 as a quick and fast means of generating cash. 10 Q. Ms. Carlton, did you review any 11 documents to prepare for your testimony today? 12 A. Yes, I did. 13 Q. What did you review? 14 A. I reviewed boxes of examination work 15 papers from 1986 through 1988. 16 Q. And did that relate to two examinations 17 of United Savings Association of Texas? 18 A. Yes, it did. 19 Q. Which examinations were those? 20 A. Examination commencing May of 1986 and 21 another examination that commenced in November of 22 '87. 16850 1 Q. Ms. Carlton, I'm handing you a document 2 that has been marked as Exhibit T8142. It 3 purports to be an S memorandum recommendation for 4 the appointment of receiver and Federal Savings 5 and Loan Insurance Corporation assistant 6 resolution with respect to United Savings 7 Association of Texas. 8 Have you ever seen that document 9 before? 10 A. Yes, I have. 11 Q. Now, did you have any part in writing 12 it? 13 A. No, I did not. 14 Q. Can you explain to us what an S 15 memorandum is? 16 A. An S memorandum, the "S" is for 17 supervisory memorandum. This memorandum is used 18 by the supervisory staff, and it is a collected 19 document that chronologically puts into place the 20 activity of an institution from its background 21 information. It includes -- and the supervisory 22 history meaning any action that has taken place 16851 1 with the examination. It also includes a record 2 of reports, examination reports, that have taken 3 place, any significant, material activity that has 4 taken place. And it also can include any 5 outstanding application that may be outstanding 6 that would be made a part of the decision-making 7 process, in doing monitoring and taking any 8 supervisory action on that thrift that's involved. 9 MR. VILLA: Your Honor, I would note 10 for the record that this is the memorandum itself 11 with an index to the exhibits to the memorandum 12 and does not include those exhibits. Ms. Clark 13 and I have had several discussions on that 14 subject. I believe she'll have something to say 15 here momentarily, but I move the admission of 16 Exhibit T8142. 17 MS. CLARK: Your Honor, we're not sure 18 why they are offering this document through 19 Ms. Carlton. I think, based on the date of the 20 document, it's clear she did not have any role in 21 creating it and she has confirmed that on the 22 stand this morning. But we do not object to the 16852 1 admission of the document so long as it's not 2 being admitted for the truth of the matters 3 asserted. 4 Ms. Carlton, at least with respect to 5 this S memo, it is a document which is put 6 together after the regulators have decided to put 7 the institution into receivership and to turn it 8 over to new ownership. It contains many 9 conclusory assertions concerning this or that 10 thing is unsafe and unsound. And we do not think 11 that this document should be a substitute for 12 proof of the allegations in this proceeding. It 13 was not provided to the respondents at the time it 14 was written. They had no opportunity to respond 15 to it. 16 So, if it is being offered as just part 17 of the history, part of the chronology, but not 18 for the truth of the matters asserted, we have no 19 objection. But we would object to it being a 20 substitute in any way for the proof of the 21 allegations in this complaint. Mr. Twomey, who 22 was involved in creating this document, will be 16853 1 here within the next couple of weeks and he can 2 certainly testify as to his views of these 3 matters. But this document, I do not think, 4 should be used as a substitute for proof. 5 MR. VEIS: Well, Your Honor, if I might 6 address those objections. 7 In the first instance, it is an 8 official supervisory document. And it is 9 admissible independent of whatever use or whatever 10 questioning I may ask of Ms. Carlson under the 11 rules of procedure that govern this proceeding. 12 It is admissible with or without a sponsoring 13 witness. We have identified it as such, and I 14 think on that basis alone it is admissible. 15 Now, Ms. Carlton seems -- I'm sorry -- 16 Ms. Clark seems to be addressing some sort of 17 hearsay objection to the Court. I don't think 18 that's appropriate at this point. 19 Now, in terms of the use I intend to 20 make of this, I intend to ask Ms. Carlton some 21 questions with respect to statements in this 22 S memorandum regarding examinations she conducted 16854 1 and matters with which she is familiar. I don't 2 believe that should be a problem. She's here to 3 be asked about it, on cross-examination, Ms. Clark 4 can ask questions on it. 5 THE COURT: Well, I can't say that it's 6 received without any evidentiary weight, but it 7 would seem to suggest -- it seems to me that it 8 should be received for whatever weight it may 9 have. If it contains erroneous assertions and 10 that sort of thing, you'll be given an opportunity 11 to point that out. But I think the exhibit's 12 receivable for whatever weight that it may have. 13 MS. CLARK: Your Honor, technically, it 14 is not an authentic document. It is clearly an 15 incomplete document. It does not have the -- it 16 did not come out of the record of the agency in 17 this form. It's missing all of the exhibits. We 18 were not intending to make that technical 19 objection or to stand on it. But this document, 20 the role that it plays in the process, it's very 21 similar to a complaint. It would be like having 22 the OTS draft a complaint, put it in the records 16855 1 of the agency, and then offer it because it came 2 out of the records of the agency. This particular 3 document is not part of the ongoing supervisory 4 process in the same sense that many of the other 5 documents we have dealt with is, and we think it 6 would be highly inappropriate to -- if they have 7 failed of proof in some point in their case to put 8 the S memo in and say, you know, "This is proof in 9 support of that." 10 They should be required to prove their 11 case and not to use this document as a substitute 12 for proof. That's the point we're making. 13 MR. EISENHART: Your Honor, my -- the 14 only observation I have with respect to what Your 15 Honor just said is Mr. Veis or his colleagues at 16 OTS representing to us at this point that they are 17 going to call Mr. Twomey and the other more senior 18 people at the Federal Home Loan Bank Board who 19 presumably could address the things that are in 20 this memo because it seems to me if they are not 21 prepared to make that representation that the 22 document's coming in and, as it seems, we really 16856 1 can't cross-examine Ms. Carlton about it, then I 2 do think it would be a problem. 3 MR. VEIS: Well, Your Honor, in the 4 first instance -- Mr. Rinaldi. 5 MR. RINALDI: Your Honor, let me say 6 Mr. Eisenhart knows full well that we intend to 7 call Mr. Twomey. We listed him on the witness 8 list. We have intended to call him for some 9 considerable time. He was deposed by these people 10 for four days. Yes, we do intend to call 11 Mr. Twomey. 12 MR. VEIS: In addition, Your Honor, to 13 the extent that Ms. Clark believes this is 14 incomplete, we are attempting -- I thought we had 15 resolved this last week. We were attempting to 16 resolve her questions with respect to the 17 particular attachments. We believe -- 18 THE COURT: Are they missing, or are 19 they unavailable? 20 MR. VEIS: I was told by our paralegal 21 staff that they are not missing. They are quite 22 voluminous. They would fill at least one of these 16857 1 boxes here, and much of what is in them is not 2 particularly germane to issues in this case. 3 Now, two of the exhibits are the 4 reports of examination from May 27, 1986, and 5 November 16, 1987. Those, in fact, I'll be 6 submitting as exhibits separately. I think it 7 would be unwieldy to submit that as both a bulk 8 exhibit with all the exhibits attached. 9 To the extent that I don't introduce 10 attachments to this memorandum, they are available 11 to the respondents and if they believe they are 12 germane to issues that are raised in this case, I 13 am certainly not going to object to their 14 introducing them themselves and using them to 15 cross-examine any witness that we bring on or 16 examine other witnesses that they may bring on in 17 their case in chief. 18 I think that the argument that should 19 be excluded because it's incomplete just doesn't 20 hold water. 21 MS. CLARK: Your Honor, as I indicated, 22 the document is not self-authenticating because it 16858 1 is not the document that came from the official 2 records. And as far as I can tell, the actual 3 exhibits have not yet been located. The ones that 4 were identified to us on their face are not those 5 exhibits, but that's not our objection to this 6 document. 7 We don't object to putting it in the 8 record as part of the history and allowing 9 Ms. Carlton to comment in whatever way she wants. 10 The objection really goes to the fairness of 11 bringing in a document that's essentially like a 12 complaint and using that to prove the truth of the 13 matters asserted. 14 That's our objection. To the extent 15 you want to proceed with allowing her to be 16 questioned about it, I think that's -- I'm not 17 sure what the reason for her being the one to 18 sponsor the document is, but we don't object on 19 that ground. 20 THE COURT: Well, I don't see that 21 everything it says is irrefutable, but it does 22 seem to me it's a statement by a responsible 16859 1 person and that it has some prima facia 2 credibility to it. I don't see that it's the 3 final word on everything, but I think it's 4 received both for whatever weight it may have. 5 I'll receive the document. 6 MR. KEETON: Your Honor, I would like 7 to register my objection to the hearsay in the 8 document because, even based on Your Honor's 9 statement, I don't know what parts you may or may 10 not give prima facia weight to. But there's 11 hearsay all through it. Mr. Wood or whoever wrote 12 this is not even here. The fact of the document 13 and the fact that the recommendation is one thing, 14 but this document contains virtually a summary 15 from the regulatory agency's viewpoint of evidence 16 we're hearing here. And I don't want this 17 document used to counter-weight the actual 18 evidence that's coming in here by people with 19 knowledge. This document doesn't have any 20 knowledge; so, I object to its admission. 21 THE COURT: Well, if we have better 22 evidence that contradicts this, then we'll rely on 16860 1 the best evidence that we can find. But this 2 document is receivable for whatever weight that it 3 bears. 4 MR. KEETON: I understand, Your Honor. 5 But I don't understand why it's my obligation to 6 bring evidence when there's incompetent evidence 7 coming in and being admitted. Now, I don't think 8 Your Honor has actually admitted the hearsay, but 9 I just want the record to be clear I'm objecting 10 to the hearsay. 11 MR. VEIS: Well, Your Honor -- 12 THE COURT: I received the document. 13 MS. CLARK: Your Honor, if the document 14 is going to be received, even though it is not 15 an -- it is not a complete document, would you at 16 least order the agency to promptly provide us with 17 the actual official S memo with the official 18 exhibits out of the records? What we've been 19 given are completely jumbled. They are, on their 20 face, not the right exhibits. 21 So, would you order them -- 22 THE COURT: That thought had gone 16861 1 through my mind. I receive it subject to the 2 availability to the respondents of the attachments 3 that -- 4 MR. VEIS: Well, Your Honor -- 5 THE COURT: -- are referred to here. 6 They should be at least made available to the 7 respondents. And I thought you said -- 8 MR. VEIS: Your Honor, I absolutely 9 agree. And earlier -- I'm sorry -- last week, I 10 provided to Ms. Clark a list of what was -- what I 11 was given as the inclusive Bates numbers of each 12 exhibit that is attached to the S memorandum in 13 the official file. 14 Ms. Clark informed me a few minutes 15 before we began the proceeding that she didn't 16 believe that those Bates numbers matched the 17 documents. I asked her if she could provide more 18 specific information so that I could have the 19 paralegal staff in Washington review it. And if 20 the numbers need to be corrected or if some 21 document in particular is missing, we will find 22 it. That is -- it's not something -- 16862 1 THE COURT: All right. Received 2 subject to that condition, that the exhibits -- 3 attachments will be made available. I don't know 4 whether either side wants to put them in 5 separately. I'll leave that to the parties. 6 MR. VEIS: I will note, Your Honor, 7 that the numbers that I gave Ms. Clark are all 8 imaging numbers from the imaging of the official 9 files in Washington last year. 10 So, the documents have been made 11 available. The issue here is whether the numbers 12 that I provided are accurate. Ms. Clark says that 13 they seem not to be. We will correct that. But 14 all of those documents were made available during 15 discovery. And if there is an issue in 16 identifying them in particular, we will resolve 17 that. But to my knowledge, there is no document 18 attached to this as an attachment that was not 19 provided during discovery. 20 MS. CLARK: Your Honor, it's clear what 21 was provided to us was not the exhibits. You can 22 tell from the face of the documents. What 16863 1 we've -- what I asked for and which I was not 2 provided was the actual documents that came out of 3 the files in the right order and the right 4 documents. And I think we are entitled to that at 5 the very least if this document is going to be 6 received without any sponsoring witness who has 7 anything to do with it. 8 THE COURT: Well, I think so, too. I 9 think you should make them available in the proper 10 form. 11 MR. VEIS: We'll make them available 12 again in proper form. I'll have them copied and 13 sent down here. It may not be here until 14 Thursday, simply due to the lateness of the hour; 15 but we'll have that copy sent from Washington as 16 soon as we can. 17 Q. (BY MR. VEIS) Ms. Carlton, have you 18 had an opportunity to read this document in the 19 course of preparing for your testimony today? 20 A. Yes, I have. 21 Q. I'd like to direct your attention to 22 Page 3 of Exhibit T8142, which is imaging 16864 1 No. OW075442. 2 A. Okay. 3 Q. I'd like to direct your attention in 4 particular to the section entitled "supervisory 5 history." 6 A. Okay. 7 Q. Subpart A where it says "May 27, 1986, 8 Regular Examination, Exhibit 1." 9 Do you see that? 10 A. Yes. 11 Q. Now, I'm going to read it to you and 12 ask you if it accurately summarizes -- 13 THE COURT: Are you going to read that 14 whole paragraph? 15 MR. VEIS: Well, I had intended to, 16 Your Honor. 17 THE COURT: Well, that might take a lot 18 of time. 19 MR. VEIS: Well, let me then ask 20 Ms. Carlton -- 21 Q. (BY MR. VEIS) Would you please read 22 the first two paragraphs of the section regarding 16865 1 the May 27, 1986 examination to yourself? 2 A. (Witness reviews the document.) 3 Q. Ms. Carlton, have you concluded reading 4 those two paragraphs? 5 A. Yes. 6 Q. Now, do those two paragraphs accurately 7 summarize the findings of your examination on 8 May 27, 1986? 9 A. Yes. It highlights the critical items 10 that were noted in the exam in the first 11 paragraph. 12 Q. Now, are you aware of the events in the 13 second paragraph in the meeting? 14 A. Yes, I was aware. 15 Q. Were you at that meeting? 16 A. I was at -- no. 17 Q. Were you told the results of that 18 meeting? 19 A. Yes. 20 Q. And you were told an outside auditor 21 would be engaged to review the accounting system? 22 A. Yes, I was. 16866 1 Q. And were you told that an independent 2 third-party review of the junk bond trading 3 activity would be conducted? 4 A. Yes, I was. 5 Q. And were you told that schedules of 6 loans and loan loss reserves would be provided to 7 the supervisory agent? 8 A. Yes, I was. 9 Q. Now, I'd like to turn your attention 10 back to the first sentence. It says here that 11 United was initially assigned a composite rating 12 of 3 which was subsequently downgraded to a 4 by 13 the supervisory agent due to supervisory concerns 14 arising from -- and then it has a list of areas. 15 Do you see that? 16 A. Yes, I do. 17 Q. Was United initially assigned a 18 composite rating of 3? 19 A. It was initially assigned a lower 20 rating than a 3. And the field manager's 21 signature went out on the 3 rating, and the 22 supervisory agent then changed the rating to a 4 16867 1 rating. 2 Q. What was your initial rating? 3 A. We initially recommended a 4 rating. 4 Q. Now, were you aware that Grant Thornton 5 had been selected to perform an outside review of 6 United's accounting systems? 7 A. Yes. Between the -- prior to 8 commencing the November '87 exam, a meeting was 9 held and I was called into that meeting. And at 10 that time, it was disclosed to me that they had 11 been engaged to conduct that review. 12 Q. And were you aware there was going to 13 be a third-party review of the high-yield 14 corporate securities activities? 15 A. That was disclosed at that time. 16 Q. Let me direct your attention to the 17 Subsection B and ask you to read the first 18 paragraph under that section. 19 A. A MACRO rating -- 20 Q. You don't need to read it aloud. Just 21 read it to yourself, and I'll have some questions. 22 A. (Witness reviews the document.) Okay. 16868 1 Q. Have you concluded your review? 2 A. Yes. 3 Q. Now, does that paragraph, the one that 4 begins "A MACRO rating and composite," accurately 5 summarize the results of your examination of 6 United Savings Association of Texas as of 7 November 16th, 1987? 8 A. Yes. 9 Q. Now, if you would turn back for a 10 moment to Page 3 under the May 27, 1986 11 examination. If you look up six lines from the 12 bottom, there is a reference there to Couch 13 Mortgage Company. 14 Do you see that? 15 A. Yes, I do. 16 Q. Are you familiar with Couch Mortgage 17 Company? 18 A. Yes, I am. 19 Q. Now, I'd like to direct your attention 20 then to Page 6 of the memorandum. 21 Do you see an entry there under "G" 22 headed "Couch Mortgage Company"? 16869 1 A. Yes. 2 Q. Would you please review those -- the -- 3 all four paragraphs under the heading? 4 A. (Witness reviews the document.) 5 Q. Have you finished, Ms. Carlton? 6 A. Yes. 7 Q. Now, with respect to the first 8 paragraph which begins "During the May 27, 1986 9 examination, examiners noted..." 10 Do you see that paragraph? 11 A. Yes. 12 Q. Does that accurately summarize the 13 findings of your examination with respect to Couch 14 Mortgage Corporation or Company? 15 MS. CLARK: Your Honor, objection. 16 There's no claim in this case about Couch Mortgage 17 Company. We've been through this before with the 18 state examiner Rex Cool. There are two loans at 19 issue in this case. There's a Park 410 loan. 20 There's a Norwood loan. 21 Couch Mortgage was a single-family 22 portfolio that USAT had bought from a mortgage 16870 1 banker who went to jail for defrauding a bunch of 2 the local financial institutions. It had nothing 3 to do with Park 410 or Norwood. 4 There were no exhibits identified on 5 Couch Mortgage when the OTS marked its exhibits as 6 far as I can remember when we exchanged pretrial 7 exhibits. The first time I note this issue has 8 been injected in the case was last week when we 9 got a whole bunch of exhibits on Couch Mortgage. 10 And this is the 17th week of this trial and it is 11 too late to start injecting new issues in this 12 case. 13 We certainly are not willing to try the 14 Couch Mortgage claim or case by consent. This has 15 nothing to do with the real estate issues in this 16 case, and we object to injecting it -- to putting 17 evidence in this record about the Couch Mortgage 18 situation. It was fully investigated. The 19 Government decided to bring no claim on Couch 20 Mortgage, and it shouldn't be injected into the 21 case at this late stage. 22 MR. VEIS: Well, Your Honor, we are not 16871 1 asserting a claim with respect to Couch Mortgage. 2 However, the Couch Mortgage matter has a great 3 deal to do with the history of the examination, 4 the reason that it was conducted in the fashion 5 that it was, and also with respect to certain 6 conclusions by Ms. Carlton and her examination 7 team with respect to the functioning of the 8 management of the institution which are highly 9 germane to the integrity with which that 10 institution was run and the degree of cooperation 11 or lack of it that was given by management during 12 this and subsequent examinations. 13 I don't believe this will take long, 14 Your Honor; but I think that Your Honor will see 15 it connects up as I complete my examination. 16 MS. CLARK: Your Honor, with all 17 respect, Couch Mortgage is obviously a smoke 18 screen. 19 The problem they have is that 20 Ms. Carlton, as examiner-in-charge, personally 21 decided to pass the Park 410 loan. And Couch 22 Mortgage is going to be put up as a smoke screen, 16872 1 a suggestion that Couch Mortgage somehow prevented 2 Ms. Carlton and her staff from doing a proper job 3 in loan review. It's just a smoke screen. It has 4 nothing to do with Park 410. 5 MR. VEIS: That's true. It has nothing 6 to do with Park 410, Your Honor, and I have never 7 argued that it did. 8 THE COURT: Well, I don't think what 9 you've said provides sufficient basis to go into 10 this. I'd like to go on. I don't think this 11 issue should be raised at this point. 12 MR. RINALDI: Your Honor, if I may have 13 a moment -- 14 THE COURT: Well, I thought we had one 15 OTS counsel, but go ahead. 16 MR. RINALDI: I would just point out to 17 Ms. Clark that this record has been replete with 18 references to Couch Mortgage. The whole subject 19 of why the institution was -- the whole issue of 20 general versus specific write-downs pertains 21 specifically to Couch Mortgage. There were a 22 series of letters back and forth where the 16873 1 regulators said, "We think you should take a 2 specific write-down" and they said, "No, that's a 3 general write-down that should be added to the -- 4 and counted towards minimum capital levels." And 5 they never -- and there was a dispute back and 6 forth. 7 I put on evidence with Mr. Crow the 8 other day where this went back and forth for a 9 period from the 1986 exam all the way to 1987. 10 All Mr. Veis is attempting to do is to put a 11 little bit of contextual background relating to 12 the Couch Mortgage to show how it fits into the 13 net worth requirement and their failure to comply 14 with that net worth requirement and the reasons 15 why the net worth requirements weren't met. 16 To suggest that the Couch Mortgage is a 17 smoke screen or hasn't been part of this 18 proceeding is ludicrous. There have been repeated 19 references to it, and the documents that have been 20 admitted thus far are replete with references to 21 the Couch Mortgage and how that pertained to the 22 net worth failure. 16874 1 And I would just suggest to the Court 2 that if Mr. Veis goes on at great length for 3 several hours about Couch Mortgage, it may be 4 appropriate to ask him to move on. But to suggest 5 that there be no evidence put in the record 6 regarding her involvement in the examination and 7 the involvement with respect to Couch Mortgage is 8 to ask the Court to accept half a picture of what 9 was going on at that institution. 10 THE COURT: Well, it's not part of the 11 notice. I'm going to sustain my ruling. 12 We'll take a short recess. 13 14 (Whereupon, a short break was taken 15 from 2:15 p.m. to 2:36 p.m.) 16 17 THE COURT: Be seated, please. We'll 18 be back on the record. 19 MR. VEIS: Thank, Your Honor. 20 THE COURT: Mr. Veis, you may continue. 21 MR. VEIS: First, I'd like to note for 22 the record that we've called Washington and we're 16875 1 arranging for a copy of the S memo to be made with 2 the attached exhibits. I'm not sure whether they 3 will be shipped tonight or whether they will be 4 shipped tomorrow, but they will be down here this 5 weekend. 6 THE COURT: Thank you. 7 MR. VEIS: Your Honor, I also neglected 8 to point something out as we were beginning. 9 Ms. Carlton has a chronic back condition as a 10 result of an automobile accident some years ago. 11 From time to time, it flares up and causes her 12 pain. I just wanted to make the Court aware of 13 that so in case she has a problem, we could 14 perhaps break more frequently if necessary. 15 THE COURT: All right. Yes. 16 MR. VEIS: She tells me at this point 17 it's not bothering her, and we'll hope that it 18 continues in that happy vein for the rest of the 19 examination. 20 THE COURT: Okay. 21 Q. (BY MR. VEIS) Ms. Carlton, would you 22 please turn to Page 7 of the memorandum, of the S 16876 1 memorandum, Exhibit T8142? That would be Bates 2 No. OW075446. 3 A. Okay. 4 Q. Do you see the section headed 5 "securities transactions"? 6 A. Yes. 7 Q. I'd like to direct your attention to 8 just a couple of sentences in there and ask you 9 about them. 10 Do you see the sentence that begins 11 with the parentheses on the third line which 12 states, "(At the November 1987 examination, the 13 examiners stated the association had a cumulative 14 net GAAP position through the year 1987)," close 15 paren? 16 Do you see that? 17 A. Yes. 18 Q. Are you the examiner referred to in 19 that sentence? 20 A. They are referring to the report 21 itself, comments made within the examination 22 report. 16877 1 Q. And that's your examination report; is 2 that right? 3 A. That's correct. 4 Q. What is a negative GAAP position? 5 A. A negative GAAP position is when the 6 length of your asset does not match the length in 7 maturity of the yield on your liabilities. 8 Q. Let me then direct you down a few lines 9 seven lines down from that sentence. There is a 10 sentence that begins "the manner in which." 11 Do you see that? 12 A. Yes. 13 Q. It refers in that sentence to "These 14 financial instruments" which appears to be a 15 reference to the preceding sentence. You can 16 begin with that sentence. It begins "these 17 vehicles." 18 Do you see that? 19 A. Yes. 20 Q. It says, "These vehicles consist of 21 financial futures and options, caps, collars, and 22 interest rate swaps to offset the cost and 16878 1 anticipated cost of funds. The manner in which 2 these financial instruments have been used was 3 criticized in the 1987 examination because the 4 examiners stated the hedging positions established 5 were actively managed so as to profit from them, 6 thereby incurring a degree of risk should interest 7 rates move in an unanticipated direction." 8 Do you see those two sentences? 9 A. Yes. 10 Q. Now, is the criticism in the -- in 11 these two sentences relating to the -- from the 12 1987 examination a criticism that was raised in 13 your report of examination? 14 A. Yes, it was. 15 Q. Let me then direct your attention to 16 Page 10 in the memorandum. At the bottom is a 17 segment called "personnel issues." Below that, 18 the item is "conflicts of interest." 19 Do you see that? It would be Bates 20 No. 75449. 21 A. Yes. 22 Q. There is a paragraph following that on 16879 1 the next page. Would you please read that to 2 yourself? I have a question for you about that. 3 MS. CLARK: Is that the paragraph 4 beginning "another appearance"? 5 MR. VEIS: No. It's the paragraph 6 beginning "In the November 16, 1987 examination 7 report." I'm sorry. 8 A. (Witness reviews the document.) Just 9 the first paragraph? 10 Q. (BY MR. VEIS) Yes, ma'am. 11 A. Okay. 12 Q. Now, does that paragraph accurately 13 summarize the findings in your report of 14 examination as of November 16, 1987, with respect 15 to conflicts of interest relating to Mr. Stanley 16 Rosenberg? 17 A. Yes, it does. 18 Q. And does that conflict relate in part 19 to the Park 410 West Joint Venture? 20 A. It is a part of this discussion. 21 Q. Thank you. Let me direct your 22 attention now to Page 14 of the S memorandum, 16880 1 T8142. That's Bates No. 75453. Under the section 2 headed "service corporation," Section F, would you 3 please look at the fourth paragraph? That would 4 be the last paragraph in the section. 5 A. (Witness reviews the document.) Okay. 6 Q. Now, does that paragraph accurately 7 restate information set forth in your report of 8 examination as of November 16th, 1987? 9 A. Yes, it does. 10 MR. EISENHART: Your Honor, a point of 11 clarification. Mr. Veis has used a couple of 12 phrases to refer to the examinations. At one 13 point, he referred to the 1987 exam. He's now 14 referring to the examination as of November 16, 15 1987. And the report refers to the examination 16 commenced November 16, 1987. I'm wondering if 17 those are all one and the same. 18 MR. VEIS: I think they are. Perhaps I 19 should ask Ms. Carlton to explain the dating of 20 examinations. 21 MR. EISENHART: That might be useful, 22 Your Honor. 16881 1 THE COURT: Let's clear it up. 2 Q. (BY MR. VEIS) Ms. Carlton, when we 3 speak of an examination and assign a date to it, 4 what does that mean? 5 A. The commencement date, the 6 November 16th date, will be the date that the 7 examination commenced. 8 Q. Is that referred to as the "as of" 9 date? 10 A. That's referred to as the "as of" date. 11 Q. Now, generally, is there more than one 12 examination of an institution in a year? 13 A. It could be. Typically, it's not. 14 Q. And in the case of United Savings 15 Association of Texas, there was not, correct? 16 A. Right. 17 Q. So, if I refer to the November 16th, 18 1987 examination as the 1987 examination, is that 19 a satisfactory reference to you? 20 A. Yes, I would understand it. 21 Q. And if I refer to the May 27, 1986 22 examination as the 1986 examination, is that also 16882 1 satisfactory? 2 A. I would understand it. 3 Q. Thank you. 4 Now, let's go to the 1986 examination. 5 I believe it's as of May 27th, 1986; is that 6 correct? 7 A. Yes, it was. 8 Q. Now, how long had it been since United 9 Savings Association of Texas had been examined -- 10 United Savings Association of Texas had been 11 examined? 12 A. Since 1983, there had been no other 13 examination. 14 Q. So, we're talking about three years? 15 A. Yes. 16 Q. Is that a long period of time? 17 A. Yes, it is. 18 Q. Do you know what rating United Savings 19 had gotten on its last examination? 20 A. It had received a 2 rating in 1983. 21 Q. Do you know why the next examination 22 didn't take place until three years after the -- 16883 1 A. Because the institution had received a 2 2 rating, which is considered a good rating, and 3 because we were not aware of any significant, 4 major problems. The more severe institutions that 5 were threatening the immediate adverse condition 6 of the depositors' FSLIC funds were examined 7 first. 8 Q. Did that cause a delay in examining 9 the -- what were perceived as the less threatening 10 institutions? 11 A. Yes, it did. 12 Q. Let me hand you an exhibit that has 13 been marked as -- well, it was initially marked as 14 A14009. I've been informed by my staff here that 15 we have previously used that number. We've 16 renumbered it as A14096. 17 Ms. Carlton, what is that document 18 A14096? 19 A. This is an assignment sheet that goes 20 out to the examiner-in-charge notifying them that 21 they have been selected to review a certain exam 22 and give the information of that assignment. 16884 1 Q. Now, directing your attention to the 2 2 segment at the top -- I'm sorry. 3 MR. VEIS: Let me first move the 4 admission of the A14096. 5 MS. CLARK: No objection. 6 THE COURT: Received. 7 Q. (BY MR. VEIS) Let me direct your 8 attention to the 2 segment at the top. 9 Do you see that? 10 A. Yes. 11 Q. Now, it notes your name as 12 examiner-in-charge? 13 A. Yes. 14 Q. And it was given to you on May 15th, 15 '86; is that correct? 16 A. That's correct. 17 Q. And who's Curtis McKinney, the entry 18 under "assistant"? 19 A. He was an examiner also assigned to the 20 job. 21 Q. And below that, it says seven Coopers 22 and Lybrand auditors? 16885 1 A. That's correct. 2 Q. Does that mean that Mr. McKinney was 3 the only other examiner besides yourself assigned 4 to this institution? 5 A. Yes. 6 Q. Could you explain why that was? 7 A. Because of the limited staff that we 8 had at the time, other examiners were assigned to 9 other exams and we were assigned a limited -- I 10 was assigned one examiner, and they had hired or 11 contracted with auditing firms, this one being 12 Coopers and Lybrand, to be of assistance on 13 examinations. 14 Q. Now, under the heading -- in the box 15 that starts with "name and address of 16 association," do you see a box on the right there 17 that indicates the approximate assets of the 18 institution at that time? 19 A. Yes. 20 Q. And what was that? 21 A. Approximately $4.5 billion in assets. 22 Q. Can you tell me what your reaction was 16886 1 to the staffing levels as compared to the size of 2 the institution? 3 A. The -- we felt that you had a 4 combination of auditors which was not typically 5 what you need in order to do an exam of that size 6 because auditors were not experienced and this 7 would be their first time in reviewing an 8 institution of this size or reviewing an 9 institution in the role of examiner versus the 10 role of an auditor. 11 Q. Now, as a general matter, about how 12 long would it take to conduct an examination of a 13 thrift the size of USAT: $4.5 billion in assets? 14 A. The matrix required an institution of 15 this size to be -- it's from -- the matrix 16 required for this size would be over 60 to 90 man 17 days. 18 Q. I'm sorry. 60 to 90 -- 19 A. Calendar days as far as calculation. 20 Q. And normally, what size staff would be 21 assigned to that of examiners? 22 A. Usually in examiners, you would have 16887 1 maybe 10 to 12 examiners. 2 Q. So, you started out with slightly less 3 than that and only two of them were examiners; is 4 that correct? 5 A. That's correct. 6 Q. Now, what criteria did the Federal Home 7 Loan Bank of Dallas use in deciding whether 8 examiners or auditors would be used for particular 9 examinations? 10 A. They started off reviewing examinations 11 that the perception did not have major problems or 12 was an institution that would have your normal run 13 of items to review as far as complexity. 14 Q. They -- by "they," you mean -- 15 A. The assignment was made at the Dallas 16 supervisory level, not at the examination level. 17 Q. And I take it from your answer that the 18 use of auditors meant that no problems were 19 expected at the institution? 20 A. That's correct, based on the prior 21 rating of the institution. 22 Q. Now, had any of these people worked 16888 1 together before? 2 A. We had not worked with the auditors 3 before, and some of them had not worked with each 4 other before. 5 Q. Let me hand you a document that's been 6 marked as A14010. 7 Can you tell me what that document is, 8 Ms. Carlton? 9 A. This is a document that was provided by 10 the partner to highlight the experience level of 11 the auditors that were used as assistants on the 12 exam. 13 Q. Well, could you please explain what 14 this shows? 15 A. It shows on the exam that -- only four 16 of the examiners were categorized under the senior 17 level of the exam. 18 Q. I think you said "examiners." Did you 19 mean auditors? 20 A. Auditors. And you had one B staff, 21 which would be in a medium level, and the rest of 22 them were the lower staff members of the exam. 16889 1 Q. You mean one Staff A? I think you said 2 B. 3 A. Yes. That's the medium level. 4 Q. Staff B is a lower level, I take it? 5 A. Right. And it also shows the number of 6 weeks that the individuals would be assigned to 7 the institution. You basically had a floating 8 staff. 9 Q. When you say a lower level with respect 10 to Staff B, what do you mean in terms of 11 experience? 12 A. They would have limited experience even 13 as auditors as far as being hired, and experience 14 level would be low with even the audit firm. 15 Q. Now, let me hand you a document that's 16 been marked as A14011. 17 Can you tell me what that is, please? 18 A. This is a summary, handwritten summary 19 of the staff that was finally used with the 20 examination of USAT that includes the name of the 21 auditors, examiners, managers, the partner, and 22 manager that was involved with that examination. 16890 1 MR. VEIS: Your Honor, I believe I 2 neglected to move the admission of Exhibit A14010. 3 I so move. 4 MS. CLARK: No objection. 5 THE COURT: Received. 6 MR. VEIS: I also move the admission of 7 A14011. 8 MS. CLARK: No objection. 9 THE COURT: Received. 10 Q. (BY MR. VEIS) Ms. Carlton, across 11 from each individual's name in that list is a 12 number. 13 Do you see that? 14 A. Yes. 15 Q. And what does that number represent? 16 A. That represents the total hours that 17 were charged to the exam. 18 Q. And then there's a total at the bottom. 19 Do you see that? 20 A. That represents the grand total of 21 hours for the examination, including staff and 22 management. 16891 1 Q. That's 5,366? 2 A. That's correct. 3 Q. Now, you said that a staff of eight to 4 ten examiners would normally be required for this 5 size institution? 6 A. Right. 7 Q. Now, can you translate that number of 8 hours into the length of time that a normal 9 staff -- into the length of time that ten 10 examiners working on an examination would have 11 taken to conduct this examination? 12 A. Typically, it would take from four to 13 five weeks on an exam of this size if you were 14 using -- in most cases, examiners -- based on the 15 conditions on a normal -- without critical issues, 16 at various ratings of an institution. 17 Q. But this would translate into a longer 18 examination, would it not? 19 A. Yes. 20 Q. How long would that -- 21 A. Based on the conditions were fine based 22 on very -- what the situation is as far as the 16892 1 examination process dictate the time in resolution 2 of those issues. 3 Q. So, it translates into more than 13 4 weeks, doesn't it? 5 A. That's correct. 6 Q. I'd like to show you two documents that 7 have been marked A14012 and A14013 respectively. 8 Let me first direct your attention to A14012. 9 Can you please tell me what that 10 document is? 11 A. This schedule breaks out the 12 examination work by exam phase. 13 Q. And is this from the work papers of the 14 examination? 15 A. Yes, it is. 16 MR. VEIS: Your Honor, I move the 17 admission of A14012. 18 MR. DUEFFERT: Your Honor, for the 19 record, this is already in as Exhibit B4162 at 20 Tab 978. 21 MR. VEIS: B41 -- I'm sorry? 22 MR. DUEFFERT: 62. 16893 1 MR. VEIS: That has that Bates number? 2 MR. DUEFFERT: Yes. 3 MR. VEIS: Let me then address it as 4 B4162. 5 Q. (BY MR. VEIS) Let me also then ask 6 you to identify A14013. 7 A. This is a summary of the exam phase 8 that dictates the documentation work paper numbers 9 by categories that we used in referencing work 10 papers after the completion of an examination. 11 Q. And does it also describe the subject 12 matters included under each of the headings? 13 A. Yes, it does. 14 MR. VEIS: Your Honor, I move the 15 admission of A14013. 16 MS. CLARK: No objection. 17 THE COURT: Received. 18 Q. (BY MR. VEIS) Let me direct your 19 attention back, Ms. Carlton, to the previous 20 document, B4162. It's marked on your copy as 21 A14012. 22 A. Okay. 16894 1 Q. Can you please explain to me under the 2 heading "underwriting" what's included? 3 A. Loan underwriting would include the 4 review of all loans within the portfolio. That 5 would include loans to employers, consumer loans, 6 single-family lending, and major commercial real 7 estate lending. 8 Q. How about -- I take it that the -- that 9 heading -- there were 2,805 hours? 10 A. Yes. 11 Q. So, that's more than half the 12 examination, isn't it? 13 A. More than -- it's a close -- large 14 percentage. 15 MS. CLARK: I'm sorry, Your Honor. 16 This document is not legible on my copy, and I did 17 not hear the number. 18 Can you just repeat the number of hours 19 there? 20 MR. VEIS: 2,805. 21 MS. CLARK: Thank you. 22 A. Yes. That represents about half of the 16895 1 hours. 2 Q. (BY MR. VEIS) And then financial 3 analysis is 1476? 4 A. 1476 hours, that's correct. 5 Q. And that's roughly a quarter of the 6 time; is that correct? 7 A. That's correct. 8 Q. Now, what's included under "financial 9 analysis"? 10 A. Under the financial analysis, you would 11 have the review of the trial balance. You would 12 have the reconciliation of the general ledgers and 13 any reports that are submitted to the board, and a 14 reconciliation of financial reports that tied to 15 any regulatory and state reports that the 16 institution are required to prepare. 17 Q. So, together, underwriting and 18 financial analysis is somewhere around 19 three-fourths of the time spent on the entire 20 examination; is that correct? 21 A. That's correct. 22 Q. Now, how many examinations had you done 16896 1 before going into United Savings Association of 2 Texas? 3 A. I had done approximately 38 -- thirty 4 some exams. 5 Q. Were those institutions that had been 6 placed into conservatorship or receivership? 7 A. Some of them had been. 8 Q. Had you encountered institutions with 9 so-called non-traditional investments prior to 10 this? 11 A. We had a few that had some. 12 Q. Had you ever encountered an institution 13 with the variety and amount of non-traditional 14 investments that United Savings Association of 15 Texas had? 16 A. No. 17 Q. Had you ever -- well, can you describe 18 for me just generally the investments that you 19 found at USAT? 20 A. We found that United was an institution 21 that basically every line item of the thrift 22 financial report United had activity, be it either 16897 1 on the institution side and also activity that was 2 off balance sheet and in subsidiaries that was not 3 even reported on the TFR report. 4 Q. Did they have security investments? 5 A. Yes, they did. 6 Q. What kind of investments did they have? 7 A. They had mortgage-backed securities. 8 They had finance subsidiaries and operating 9 subsidiaries that had financial caps, collars, 10 DARTs, futures, hedging. You had all -- junk 11 bonds, high-yield bonds, commercial lending, 12 single-family lending, consumer lending. You had 13 joint venture projects, and your regular 14 depository savings accounts. 15 Q. Ms. Carlton, let me show you a document 16 that's been marked A14014. 17 Could you please tell me what that is? 18 A. This is what -- is a copy of the PERK 19 letter that is sent to the examination which 20 notified the institution the date the examination 21 would commence, the number of examiners that will 22 attend the exam, the date which the financial 16898 1 information should be provided as of, and a 2 laundry list of data that should be prepared and 3 presented to the examiners at the commencement of 4 the exam or be available upon the request from the 5 examiners. 6 Q. I notice there's some handwritten 7 numbers on the sides, on the left side of the page 8 next to various items. 9 Do you see those? 10 A. Yes. 11 Q. And what are those? 12 A. That was the way in which we document 13 the receipt of different information. 14 Q. Are those dates that the information 15 was received? 16 A. That's correct. 17 Q. And on the back, the second page, I'm 18 sorry, the similar dates on the left side, are 19 those the same? 20 A. That's correct. 21 Q. And on the right, there's some 22 handwritten information regarding requests. 16899 1 Do you see that? 2 A. Yes. 3 Q. What would that be? 4 A. That would be where we put in written 5 form the requests of that information later on in 6 the exam. 7 Q. The numbers refer to a request number? 8 A. That's correct. 9 Q. And you numbered all your requests to 10 the management during -- 11 A. The majority of them were numbered. 12 MR. VEIS: Your Honor, I move the 13 admission of A14014. 14 MS. CLARK: No objection. 15 THE COURT: Received. 16 Q. (BY MR. VEIS) Ms. Carlton, the 17 examination commenced on May 27, 1986; is that 18 right? 19 A. That's correct. 20 Q. Now, if I understood your testimony 21 earlier, this letter, the PERK letter, requests 22 the institution to have information available for 16900 1 your review when you come in the door; is that 2 correct? 3 A. That's correct. 4 Q. Now, was that information available at 5 the time? 6 A. Not all of it. 7 Q. Well, what information was not 8 available? 9 A. The financial information was provided 10 at a later date. 11 Q. What date was that? 12 A. In July of '86. 13 Q. These are -- I take it you're referring 14 to the first two entries under the sentence "your 15 cooperation is anticipated"? 16 A. That's correct. 17 Q. So, the first bullet point, "trial 18 balance worksheets"? 19 A. Right. 20 Q. And that you didn't get until July of 21 1986? 22 A. That's correct. 16901 1 Q. And then "operating worksheets," July 2 of '86 again; is that correct? 3 A. That's correct. 4 Q. Would you have expected that when the 5 examination began in May that you would not have 6 available trial balance worksheets or operating 7 worksheets until July? 8 A. Those are documents that usually you 9 find readily available upon entry to an 10 institution. 11 Q. Are they supposed to be maintained 12 currently by the institution? 13 A. Yes, or within a short time frame based 14 on the "as of" date that we request certain data. 15 Q. So, they should be able to balance -- 16 let me rephrase this question. 17 How frequently is the institution 18 supposed to be able to balance its books? 19 A. They should be balanced -- trial 20 balanced monthly and they do their financial 21 statements on different periods according to the 22 PERK whether they do an annual statement or 16902 1 according to what statements they are putting 2 together. We had monthly and quarterly regulatory 3 reports that were required at the time. 4 Q. But you didn't receive it until July? 5 A. Right. 6 Q. Is that common? 7 A. No, it was not. 8 Q. Ms. Carlton, let me show you a document 9 that's been marked as A14015. 10 Could you please tell the Court what 11 that document is? 12 A. This document is a pre-examination 13 analysis. It's what we refer to as a scope 14 memorandum. And it outlines the minimum 15 requirements that should be followed by the 16 examination team in conducting an examination. 17 Q. Now, is there -- is this particular 18 scope memorandum specifically tailored to United 19 Savings Association of Texas? 20 A. It's a generic memorandum that's sent 21 to all institutions. 22 Q. Sent to examiners for institutions, do 16903 1 you mean? 2 A. Sent to the examination staff, to the 3 EIC. 4 Q. So, there is nothing in here that says 5 anything unusual about United Savings; is that 6 correct? 7 A. No. 8 Q. Did there come a time when the 9 examination team began to see problems in the 10 institution? 11 A. After a couple of weeks within the 12 examination, you had a slow-down of information in 13 which we were not receiving information. And as 14 we began to pull our loan samples, we were not 15 able to reconcile the subledgers. The numbers 16 that we were receiving, we were not able to obtain 17 the information in order to reconcile those to a 18 trial balance or to a general ledger. 19 Q. Did you begin to see significant loan 20 delinquencies? 21 A. We saw loan delinquencies. We began to 22 see -- in pulling the samples, we would begin to 16904 1 see a mix of different asset categories that were 2 in different categories in which they were 3 categorized as meaning that when we began to pull 4 consumer loans, we began to pull commercial loans. 5 And some of the loan ledgers, we began to find 6 single-family lending. The categories and coding 7 of their portfolio was not accurate. 8 Q. So, they had their loans classified 9 wrong. 10 Is that what you're saying? 11 MS. CLARK: Your Honor, I don't really 12 want to interrupt the flow of his examination. 13 But again, mixing up consumer loans with 14 commercial loans, coding of sub ledgers is not in 15 the notice of charges. It has nothing to do with 16 anything that's been charged in the notice of 17 charges. And we do not want to expand the 18 complaint against respondents in the 18th week of 19 trial to start talking about problems with a 20 low-level accounting function at USAT that are not 21 raised in the claim against our clients. 22 MR. VEIS: Your Honor, I think this has 16905 1 a lot to do with the way the hours were spent at 2 the examination, the emphasis on the examination. 3 Respondents fundamental argument is that the 4 examiners and the supervisory personnel knew 5 everything. 6 I think what we're doing here is 7 exploring how much they knew and how much they had 8 an opportunity to know. And I think the fact that 9 a significant portion of the time spent was spent 10 on incredibly complex matters and problems that 11 kept them from finding things and ultimately led 12 to the examiners leaving the examination before it 13 was completed because they simply ran out of time 14 has a lot to do with what with they knew in this 15 case. 16 And I would like to be able to explore 17 how this worked. It also has to do with the net 18 worth claim because all of these matters flow into 19 the calculation of required minimum net worth, and 20 it is necessary for Ms. Carlton to give some 21 explanation of how those numbers came about. 22 I don't believe this is going to be a 16906 1 long line of questioning, but I think it is 2 absolutely necessary to give a background as to 3 how the examinations were conducted. 4 MS. CLARK: Your Honor, again, this is 5 the same effort to suggest that Ms. Carlton and 6 her staff did an incomplete or improper job in the 7 things they covered. 8 MR. VEIS: I'm not suggesting there's 9 anything improper. 10 MS. CLARK: There is no dispute that 11 Ms. Carlton and her staff conducted a review of 12 major loans. They classified $130 million of 13 major loans as substandard. They -- 14 MR. VEIS: That was Couch Mortgage. 15 MS. CLARK: Your Honor, may I -- 16 THE COURT: Yes. 17 MS. CLARK: -- speak, please? 18 MR. VEIS: Sorry, Your Honor. 19 MS. CLARK: They completed a review of 20 major loans. There is not one piece of evidence 21 in the work papers or in any other contemporaneous 22 document for the representation that Mr. Veis just 16907 1 made to you, which is they did not complete their 2 work. 3 This is part of the smoke screen. 4 There is no evidence that they did not have access 5 to and reviewed the information that was necessary 6 to reach the conclusions they reached on the 7 issues that are put at issue in this case. We 8 should look at what information they had and what 9 conclusions they drew from the information they 10 had and not at areas of the exam that are simply 11 irrelevant to that endeavor. 12 There is no evidence whatsoever that 13 they did not complete the areas that we -- and, 14 you know, having not raised these issues in the 15 notice of charges, the OTS cannot expect us to 16 have identified and copied evidence that is 17 pertinent to these matters that are now being 18 raised in the context of the 18th week of trial. 19 Coding loans that should have been consumer loans 20 as construction loans is not pertinent to the 21 notice of charges. 22 Let's let her talk about what she did 16908 1 do and not what she didn't do that's relevant to 2 the notice of charges. We certainly don't want to 3 try this new issue by consent. 4 MR. VEIS: We're not making any new 5 allegations, Your Honor. However, all of these 6 factors bear on the calculation of the required 7 minimum net worth. They bear on the degree of 8 cooperation obtained from management. They bear 9 on whether, in fact, the examiners were given 10 complete information. And they bear on whether or 11 not the examiners were able to complete all 12 programs of the examination. 13 I don't intend to on long about this, 14 but I would like to be able to finish this line of 15 questioning. It's perhaps four minutes. 16 MS. CLARK: Your Honor, you ruled on 17 this very issue when Rex Cool was here. 18 Mr. Schwartz was making the argument that because 19 information in one area of the exam was hard to 20 get, that that was somehow relevant. And you may 21 remember, you asked him a very pointed question. 22 You said, "Are you saying that they couldn't get 16909 1 the information about the areas that are 2 pertinent?" At that point, he stopped that line 3 of questioning and moved on. It's the same 4 situation exactly. 5 MR. VEIS: I think I can ask that 6 question to Ms. Carlton. 7 THE COURT: Ask what question? 8 MR. VEIS: The question as to whether 9 she was able to get relevant information or 10 whether there was a pattern of withholding 11 information. 12 THE COURT: Well, I'm not sure where 13 you're going, but I'm -- I just don't want to get 14 into these areas that suggest wrongdoing that are 15 not included in the notice. It's my assumption 16 that if they were serious, they would be part of 17 your notice; and I'm not here to try issues that 18 are not in the notice. 19 Under your theories, you could drag 20 anything in that's remotely -- one figure is 21 related to the other and, therefore, we have to go 22 into all this to derive some other figure that is 16910 1 in the record and I just don't think that's -- 2 MR. VEIS: I don't intend to derive 3 every figure in the record. But I believe that we 4 do need to show the basis for the numbers that 5 went into that net worth calculation. We have 6 heard numerous representations, lately with 7 Mr. Crow, of the good faith with which the 8 management conducted itself with respect to the 9 examiners. 10 What I'm trying to do here is bring out 11 some examples that I think will contradict that if 12 Ms. Carlton is allowed to finish testifying on the 13 subject matter and will bear generally on the -- 14 THE COURT: That was not where you were 15 going with your last question. You were going 16 into classification of loans and whether they were 17 in the right file or something like this. 18 MR. VEIS: Well, that has to do with 19 another area -- 20 THE COURT: So, what is your next 21 question? 22 MR. VEIS: Let me think for a moment. 16911 1 I will move on, Your Honor. 2 Q. (BY MR. VEIS) Did management provide 3 the degree of cooperation necessary for the 4 examiners to conduct the examination efficiently? 5 A. Basic minimal. 6 Q. Minimal? 7 A. Minimal cooperation. 8 Q. Did there come a time when USAT 9 management told its staff not to communicate 10 directly with the examination staff? 11 A. Yes, they did. 12 Q. How did you find out about that? 13 A. That was under the disclosure of the 14 Couch situation. 15 Q. And what was told to you about that? 16 A. At that point, the staff was told that 17 they had been informed not to communicate directly 18 with us, that any further communication would have 19 to go directly to top management. 20 Q. Did management require that all 21 requests be submitted in writing? 22 A. From that point, yes. 16912 1 Q. Is that common? 2 A. No, it's not. 3 Q. Did management discuss this with you 4 before you began, before the policy began? 5 MS. CLARK: Objection, Your Honor. 6 This is Couch Mortgage again. 7 MR. VEIS: No, it's not. 8 MS. CLARK: I thought she answered that 9 this pertains to the questions regarding Couch 10 Mortgage. If I misunderstood her answer, I stand 11 corrected. But I believe she specifically 12 answered that this concerned Couch Mortgage. 13 MR. VEIS: No. She said it began with 14 Couch Mortgage. I intend to move on. 15 Q. (BY MR. VEIS) So, from that point 16 forward -- I'm sorry. 17 MR. VEIS: May I, Your Honor? 18 THE COURT: Yes, you may. 19 Q. (BY MR. VEIS) From that point 20 forward, were all requests required to be 21 submitted in writing? 22 A. Yes, it was. 16913 1 Q. Whether it related to Couch Mortgage or 2 not? 3 A. Yes. 4 Q. So, any request had to be in writing 5 after that; is that correct? 6 A. The majority, yes. 7 Q. Now, did management ever discuss this 8 with you before they decided on this policy? 9 A. No. 10 Q. Is that a common procedure in an 11 examination? 12 A. You typically do not find that, no. 13 Q. Now, did they designate liaison 14 personnel to respond to your requests? 15 A. Yes. 16 Q. Now, let me ask you: Did this 17 procedure continue into the 1987 examination? 18 A. Yes. 19 Q. And from 1987, were there also liaison 20 personnel? 21 A. Yes, there was. 22 Q. How did the liaison personnel generally 16914 1 respond to requests for information? 2 A. Typically, we would provide a written 3 request to that person. They would -- back then, 4 United was operating out of two offices -- one on 5 the opposite side of town -- that information 6 would be transferred to the offices that were 7 located off of Westheimer. At that time, the 8 office building was located off of the Southwest 9 Freeway and you would have to wait for that 10 information to transfer between those two 11 locations. 12 Q. If you gave a request to the liaison 13 and they liaison couldn't find exactly the 14 document to respond to your request, what 15 happened? 16 A. In a lot of instances, the information 17 requested, you just didn't get a response. You 18 never knew why. It would just take a long time in 19 order to obtain that information. If we didn't 20 receive it at first, later on we would do -- we 21 would request the information at a later date. 22 Q. And did you get it the second time? 16915 1 A. There were times where we did get 2 information. 3 Q. Now, let me ask you -- let me show you 4 a document that's been marked as A14016. 5 MR. VEIS: Your Honor, I've been 6 informed that I failed to move the admission of 7 14015. I so move. 8 MS. CLARK: No objection. 9 THE COURT: Received. 10 Q. (BY MR. VEIS) Ms. Carlton, what is 11 Exhibit A14016? 12 A. This is a copy of an interim report 13 that was filed during the 1986 examination in 14 which we highlighted the critical areas that we 15 had discovered during the examination. 16 Q. Now, why do you file an interim report? 17 A. Any time we have significant activity 18 that will affect adversely on the financial 19 viability of the institution, any time you 20 disclose practices of unsafe and unsound or 21 regulatory violations that would jeopardize the 22 net worth of an institution or the financial 16916 1 condition of that information, it is required that 2 we file this report. 3 Q. Now -- 4 MR. VEIS: Your Honor, I move the 5 admission of Exhibit A14016. 6 MS. CLARK: No objection. 7 THE COURT: Received. 8 Q. (BY MR. VEIS) Who is this interim 9 report addressed to, Ms. Carlton? 10 A. Michael Eide, who was a field manager 11 at the time. 12 Q. And it's dated July 15th, 1986 at the 13 time; is that correct? 14 A. That's correct. 15 Q. Now, let me direct your attention to 16 the first section -- well, first, let me ask 17 you -- I gather that these -- this report reports 18 the areas that were of concern to the examination 19 team as of the date that it was submitted. 20 Is that what it reports? 21 A. That's correct. 22 Q. Now -- so, let me direct your 16917 1 attention, if you would, to the net worth section. 2 Would you just please read under Item 3 No. 1, net worth, that -- those two paragraphs? 4 A. (Witness reviews the document.) Okay. 5 Q. Now, what does that -- if you could, 6 just distill that paragraph. 7 What does that say about the 8 institution's compliance with the minimum 9 regulatory net worth requirements as of July 15th, 10 1986? 11 A. It disclosed that based on our 12 calculation, the institution was not -- had failed 13 to meet the minimum requirement and it was based 14 on the additional classification of assets which 15 we had done, and those were presented here. 16 Q. Tell me -- well, let me -- the second 17 paragraph says that you think you might find more. 18 Is that what that basically says? 19 A. Yes. 20 Q. Now, how important is compliance with 21 the minimum net worth requirement to a savings 22 association? 16918 1 A. Once an institution fails its minimum 2 net worth requirement, certain supervisory actions 3 will automatically be implemented at that point. 4 Q. And what are those? 5 A. Some of it would be -- according to 6 what they are, it would put restrictions on 7 liability growth. It would put restrictions on 8 investing into direct investment. It would put 9 restrictions on loan to one borrower violations. 10 If it involves criminal activity, it could involve 11 the removal of management, removal of the board. 12 It could place the institution under some type of 13 supervisory agreement which would limit investment 14 in subsidiaries, limit lending activity, and -- 15 just to name a few. 16 Q. Well, I take it, then, institutions 17 probably weren't very eager to be told they were 18 out of compliance; is that correct? 19 A. Yes. 20 Q. So, now, let me ask you about other 21 consequences. 22 I think you mentioned service 16919 1 corporations; is that correct? 2 A. That's correct. 3 Q. Now, there would be restrictions on the 4 amount of loans to service corporations. Is that 5 what -- 6 A. Investment in service corporations. 7 Q. Investments. I'm sorry. 8 What about finance subsidiaries? 9 A. They could also be restricted from that 10 type of investment. 11 Q. Would that have any effect on an 12 institution's ability to utilize broker deposits? 13 A. It would be placed on limitation or 14 restricted altogether in some cases. If those 15 funds were used to engage in risky activity, that 16 would further jeopardize the net worth compliance 17 of that institution. 18 Q. What about the ability of an 19 institution to issue subordinated debt? 20 A. That's one of the items on the list of 21 things that's a part of restrictions that would be 22 placed. 16920 1 Q. And what about the ability to be 2 involved in repurchase agreements? 3 A. Those -- any risk items that -- with 4 high-risk categorization would be limited once you 5 failed your minimum net worth requirement. 6 Q. And does it change the limitations on 7 loans to one borrower? 8 A. Yes, it does. 9 Q. And how is that? 10 A. Once your net worth is being depleted, 11 the loans to one borrower addresses the dollar 12 amount of a loan that you can grant to one 13 borrower. Once that loss -- that you're not 14 meeting your requirement, they limit that because 15 they do not want the exposure, the failure of the 16 institution, to be based on concentration to one 17 individual. 18 Q. I believe you mentioned liability 19 growth; is that correct? 20 A. That's correct. 21 Q. That would be affected, also? 22 A. Yes. 16921 1 Q. What about the ability to distribute 2 capital? 3 A. Yes. That would also -- dividend 4 payments would be ceased. Salary and bonuses 5 would no longer be allowed or bonuses would no 6 longer be allowed and salaries -- any further 7 increase in salaries would be questioned or would 8 be an issue. 9 Q. Would there be any restriction on the 10 amount of an institution's outstanding forward 11 commitments? 12 A. Yes. Any borrowing capacity additions 13 or addition of funds would be placed at the 14 discretion of the regulators. 15 Q. Would it affect the institution's 16 ability to make securities offerings? 17 A. Yes. That's ruled as high-yield risk 18 activity, to be engaged in the traditional 19 single-family lending, and it would be an item 20 that could possibly be reduced or ceased 21 immediately. 22 Q. Would it -- would the regulators be 16922 1 able to reduce the rate that could be paid on 2 accounts? 3 A. It would reduce broker deposits, which 4 would limit your ability to get short-term 5 high-yield funds. In that way, it would affect 6 your deposits. 7 Q. By limiting the rate to be paid on 8 those deposits? 9 A. By limiting your activity back to your 10 normal accounts versus having brokered accounts, 11 which typically carries a higher yield than your 12 traditional -- regular savings accounts. 13 Q. And failing the net worth -- minimum 14 net worth requirement, again, would that allow the 15 regulators to limit the opening of new accounts? 16 A. It would limit the -- not just regular 17 accounts, no. 18 Q. What about the regulators limiting 19 lending? 20 A. It would limit your lending that you -- 21 in any area in which you could have a 22 concentration of any risky activity that was 16923 1 ruled. 2 Q. And that would be at the regulator's 3 option? 4 A. Yes. 5 Q. Could the regulators limit or prohibit 6 the making of specific types of investments? 7 A. Yes. 8 Q. Of any kind; is that correct? 9 A. Yes. 10 Q. Could the regulators limit operational 11 expenditures if an institution had failed its 12 minimum regulatory net worth? 13 A. Typically, when you fail your minimum 14 net worth requirement and your losses -- you 15 experience an operational losses, all costs that 16 would further demise that institution of 17 dissipation of assets to the point of its 18 insolvency would be monitored and questioned, and 19 decisions could be made by the regulators on those 20 items. 21 Q. Now, could the regulators require an 22 increase in liquid assets? 16924 1 A. I don't understand that question. 2 Q. Could they require the liquidity 3 portfolio be increased? 4 A. You were -- institutions were required 5 to maintain a certain liquidity level. Once you 6 failed that certain percentage, that also put 7 additional restriction on you. You were in 8 violation of a regulation which would require 9 supervisory action. 10 Q. So, I take it then the consequences of 11 failing the minimum regulatory net worth 12 requirement were quite significant. 13 Is that true? 14 A. That's correct. 15 Q. Let me move to Item 2 of Exhibit 14016. 16 See under "establishment of maintenance of books 17 and records"? 18 A. That's correct. 19 Q. Could you read that, please? 20 A. The first paragraph? 21 Q. Yes. The only paragraph. I guess it 22 is the first paragraph. Yes. I'm sorry. Go 16925 1 ahead. 2 A. "Contrary to -- 3 Q. You don't have to read it aloud. I'm 4 sorry. I'm just going to ask you a question about 5 it. 6 A. (Witness reviews the document.) Okay. 7 Q. It says there, essentially, that they 8 did not have accurate books and records. 9 Is that what that says? 10 A. Yes, it does. 11 Q. Is that important? 12 A. Yes, it is. 13 Q. Why? 14 A. Everything within an institution is 15 based on the management reflecting its daily 16 operations as far as what has happened on the 17 disposition, acquisition, and accurately reporting 18 the expenses and income of that institution. 19 If that information is incorrect or you 20 cannot reconcile that data, then any decisions, be 21 it regulatory or shareholders that use that 22 information, is basically using information that 16926 1 is flawed or questionable as far as the validity 2 of that data. 3 As far as regulators using that 4 information, it taints our database in that we use 5 that information in providing and establishing 6 peer group data and other information that we use 7 that's used in the financial analysis of banks and 8 thrifts and the financial industry in general. 9 Q. Let me direct your attention to the 10 following page. It's Page 2, Bates marked 11 OW121481. 12 Would you please read to yourself the 13 section under "Financial Report Analysis"? 14 A. (Witness reviews the document.) Okay. 15 Q. Please explain to the Court the issue 16 raised in the second paragraph regarding 17 documentation to readily permit reconciliation of 18 financial reports with books and records. 19 A. Because we could not tie our sample 20 selection to subledgers that ultimately tied back 21 to the trial balance which ultimately tied back to 22 the thrift financial reports that were presented 16927 1 to us, we made a decision that we could not 2 readily reconcile the books and records of the 3 institution to what was presented to us in -- as 4 regulators. 5 Therefore, the information that we were 6 trying to draw our conclusions on, we could not. 7 Q. Well, how important is a GAAP to RAP 8 reconciliation? 9 A. It's very important in that in the 10 GAAP -- RAP is regulatory accounting principles. 11 Back in the 1980s, in an effort to preserve or 12 prolong institutions to meet their regulatory 13 compliance in categories, the regulators in 14 financial industries created different procedures 15 in which institutions could include things like 16 appraised equity capital as a product of net worth 17 and that would allow them to be in capital 18 compliance longer using different instruments that 19 were not typically used as regulatory capital. 20 Under GAAP, those things would not be allowed. 21 Therefore, when an institution reported 22 its financial statements to accounting firms or 16928 1 published their financial statement, they would 2 always have to reconcile in footnotes the 3 differences between their calculations of their 4 net worth and their calculations in their reserves 5 as it relates to whether it was in compliance 6 based on generally-accepted accounting principles 7 or under the amended regulatory-required 8 requirements required by the federal regulators. 9 Q. Are you telling me that, basically, you 10 couldn't tell whether their financial records were 11 right or not? 12 A. We could not reconcile the financial 13 books for March of '86. Therefore, we did not do 14 a complete reconciliation of the books and records 15 of United in 1986. 16 Q. Let me address your attention then to 17 investment securities. Do you see Item 3 below -- 18 on the same page, Page 2? 19 A. Yes. 20 Q. Would you please read that to yourself? 21 A. (Witness reviews the document.) Okay. 22 Q. Now, does that reflect at that point 16929 1 the examination team's knowledge of the investment 2 securities held by the institution? 3 A. We at that point had done a cursory 4 review of the junk bond portfolio. We were aware 5 from information through the monitoring that 6 investments with Ivan Boesky at the time was 7 questionable and possibly had -- was in jeopardy 8 of defaulting and that management had asked them 9 to divest that junk bond with that individual. 10 Q. Now, I think you said earlier that an 11 institution that's failed its minimum regulatory 12 net worth requirement can be required to cease 13 certain kinds of investments? 14 A. That's correct. 15 Q. So, could the regulators have 16 required -- let me strike that question. 17 Then if an institution held high-yield 18 bonds and went into -- failed to comply with the 19 minimum regulatory net worth requirement, the 20 regulators could require that institution to 21 divest itself of those junk bonds; is that 22 correct? 16930 1 A. That's correct. 2 Q. So, an institution that held junk bonds 3 and was looking at regulatory capital failure 4 would be quite concerned about whether or not it 5 had to sell its junk bonds, wouldn't it? 6 A. Yes. 7 MS. CLARK: Objection, Your Honor. I 8 said objection, Your Honor. I don't think she has 9 any way of speculating about what would be in the 10 minds of the institution, and I think it's an 11 improper leading question in any event. 12 MR. VEIS: I'll withdraw the question, 13 Your Honor. 14 Q. (BY MR. VEIS) Ms. Carlton, I'd like 15 to show you now a document that's been marked -- 16 and this is out of sequence -- A14050. 17 Ms. Carlton, do you recognize that 18 document, Exhibit A14050? 19 A. This would have been a correspondence 20 document that would have been found in our general 21 file. This would have come in as information to 22 review on activity that had taken place since the 16931 1 previous examination. 2 Q. So, this is part of the work papers in 3 the 1986 examination? Is that what you're saying? 4 A. Yes, it is. 5 Q. And it's part of a reading file? 6 A. Yes, it is. 7 Q. Now, do you know why you were given the 8 letter? 9 A. Any correspondence that deals with 10 applications that are outstanding or applications 11 that have been approved between exams, most of the 12 information is passed down through the examination 13 process from supervision as information to read as 14 a part of the pre-examination analysis or as a 15 part of information to be just provided for your 16 information data. 17 Q. If significant correspondence arises 18 during the course of an examination, is it the 19 practice of supervision to send it to -- at least 20 some of those documents to the examiners in the 21 field? 22 A. They can either send it or call us and 16932 1 make us aware of it. 2 Q. And let me just direct your attention 3 to the "to" and "from" lines. Who's Mr. S.G. 4 Frank Haas? 5 MS. CLARK: Your Honor, just to clarify 6 the record, this document was previously admitted. 7 It's at Tab 256 and the exhibit number is A11011, 8 I believe. It's a July 24, 1986 letter from Selby 9 to Haas, which we believe has previously been 10 admitted. 11 THE COURT: Thank you. We'll take a 12 short recess. 13 14 (Whereupon, a short break was taken 15 from 3:42 p.m. to 4:05 p.m.) 16 17 THE COURT: Be seated, please. We'll 18 be back on the record. 19 Mr. Veis, you may continue. 20 MR. VEIS: Thank you, Your Honor. 21 During the break, it was pointed out to 22 me that the document I have identified as A14050 16933 1 is at Tab 256. It's Exhibit A11011. 2 Q. (BY MR. VEIS) Ms. Carlton, let me 3 substitute this and ask you to look at that. It 4 appears that the only difference between the two 5 is there's a cover memo on the one that is 6 actually in the record. 7 Ms. Carlton, look at the top of the -- 8 I'm sorry. 9 Who was S.G. Frank Haas, III? 10 A. He was an officer of the Bank of 11 Dallas. 12 Q. And who is H.J. Selby? 13 A. He was the director of examination on 14 the Dallas level. 15 Q. Ms. Carlton, there's some writing at 16 the top of the document. It says "important." 17 Whose handwriting is that? 18 A. It's mine. 19 Q. And why is that written there? 20 A. Because it was one of the documents 21 that I wanted to pass on to the assistants on the 22 examination to review as they planned their 16934 1 pre-exam analysis. 2 Q. And why did you want them to have that 3 information? 4 A. Because it gave background information 5 on applications that were outstanding at the 6 institution. 7 Q. And, in fact, it indicates that there 8 was an application with respect to an offering of 9 subordinated debentures at that point; is that 10 correct? 11 A. This is what -- this memo addresses 12 that, yes. 13 Q. I'd like to ask you to look at Page 6 14 of the memorandum, OW120672. 15 Now, this is dated July 24th, 1986, 16 correct? 17 A. Yes. 18 Q. I notice that the typist got about a 19 thousand years ahead in the interim -- the rest of 20 the document. 21 Looking at Page -- see, that is about a 22 week after your interim report, correct? That's 16935 1 Exhibit A14016, which is dated July 17th, 1986? 2 A. That's correct. 3 Q. And I'd like you to look at Page 6 of 4 Exhibit A11011. 5 Do you see the four numbered items near 6 the top of the page? 7 A. Yes. 8 Q. I'd like to direct your attention and 9 ask you to review the two succeeding paragraphs. 10 A. (Witness reviews the document.) Okay. 11 Q. Do those two paragraphs reflect the 12 information that you had previously submitted to 13 Michael Eide in your interim report dated 14 July 17th, 1986? 15 A. Yes, it does. 16 Q. Does that indicate at that point that 17 supervisory personnel were already considering 18 information that you had forwarded? 19 A. Yes, it does. 20 Q. And they sent you a copy of this 21 memorandum for inclusion in your work papers; is 22 that correct? 16936 1 A. That's correct. 2 Q. I'd like to show you a document that's 3 been marked as Exhibit A14018. 4 Ms. Carlton, do you recognize that 5 document? 6 MR. EISENHART: Your Honor, I didn't 7 hear the exhibit number. 8 MR. VEIS: A14018. 9 MR. EISENHART: Thank you. 10 A. (Witness reviews the document.) 11 Q. (BY MR. VEIS) Have you reviewed it, 12 Ms. Carlton? 13 A. Yes, I have. 14 Q. What is it? 15 A. This is a special report that was sent 16 to the field manager, Richard Ward, to show a 17 further indication of books and records problems 18 and to show that the institution was restating its 19 gains on the sale of mortgage-backed securities in 20 the amount of $36 million. 21 Q. Now, why a special report? 22 A. Any time an item or incident or a 16937 1 transaction that significantly impacts the 2 institution or materially impacts the financial 3 condition of an institution is made aware to the 4 examiners, we were required to submit a report to 5 Dallas to notify them of this. 6 Q. And -- 7 A. The fact that the institution was going 8 to have to restate its thrift financial reports 9 was ruled a material event and required this 10 report. 11 Q. Now, how did you first come to find out 12 about this particular event? 13 A. By reading the Houston Chronicle 14 newspaper. 15 Q. Management didn't tell you about it 16 before it happened? 17 A. No. 18 Q. Now, was this information -- well, let 19 me just be sure. This is September, 1986; is that 20 correct? 21 A. Yes, it is. 22 Q. And it's to Richard Ward. Who is 16938 1 Mr. Ward? 2 A. We had had a field manager -- a change 3 in management. This was a new field manager that 4 was assigned to the case. 5 Q. So, he took Mr. Eide's place? 6 A. Yes, he did. 7 Q. Did you subsequently incorporate the 8 information contained in the special report in 9 another interim report? 10 A. It was made a part of the final report 11 and, I think, the interim report. 12 Q. Let's just -- let's look at a 13 document -- I'm sorry. 14 MS. CLARK: Your Honor, is he going to 15 move this document into evidence? 16 MR. VEIS: Your Honor, I move the 17 admission of A14018. 18 THE COURT: Received. 19 Q. (BY MR. VEIS) Ms. Carlton, I ask you 20 to look at A14017. 21 MS. CLARK: Would that be A14017? 22 MR. VEIS: I'm sorry. A14017. 16939 1 Q. (BY MR. VEIS) Now, what is -- do you 2 recognize A14017? 3 A. It was an interim report that was 4 prepared on August 19th for the examination of 5 USAT. 6 Q. If you'd look at the cover memo, that's 7 dated September 16th, 1986, correct? 8 A. That's correct. 9 Q. Now, is the August 19th date on the 10 second page, which is Bates OW121469, is that the 11 date the report was actually submitted, or is that 12 the date as of which the information was current? 13 A. That's the date on which we started 14 compiling information to put together the second 15 interim report. 16 Q. So, then, I take it that this report 17 actually would have been submitted sometime after 18 August 19th; is that correct? 19 A. That's correct. 20 Q. Do you know whether it was submitted 21 after Exhibit A14018, which is dated 22 September 4th, 1986? 16940 1 A. It would have been presented after that 2 date. 3 Q. Thank you. 4 MS. CLARK: I'm sorry. Just a 5 clarification. Presented to whom? These are 6 documents addressed to different people. 7 Q. (BY MR. VEIS) Ms. Carlton, you 8 submitted your report to Richard Ward, correct? 9 A. That's correct. 10 Q. And when I asked when it was submitted, 11 I'm speaking of the submission to Mr. Ward. 12 Would it have been submitted to 13 Mr. Ward after September 4th, 1986? 14 A. Yes, it would have. 15 Q. Now, who is Daniel Thomas? 16 A. Daniel Thomas is the area director that 17 was over the Houston office examination staff. 18 Q. And who is Walter Faulk? 19 A. Walter Faulk was a supervisory agent 20 that was located in Dallas at the time. 21 MR. VEIS: Your Honor, I move the 22 admission of A14017. 16941 1 MS. CLARK: No objection. 2 THE COURT: Received. 3 MR. DUEFFERT: Your Honor, the record 4 might reflect that apparently this exhibit is in 5 as B1256 at Tab 589. 6 MR. VEIS: I was unaware of that. One 7 of the things I've noticed with some of the imaged 8 documents is that since these were taken directly 9 from the original work papers, the copies of some 10 of them -- I prefer to use this one if I might, 11 Your Honor. 12 13 (Discussion held off the record.) 14 15 MR. VEIS: I think there's some 16 confusion as to which tab the document is under. 17 I am informed that this Document 17 -- I think I 18 see what's happened, Your Honor, is that the 19 entire file of reports was submitted as a bulk 20 exhibit. 21 If Your Honor would please, I would 22 prefer to address each of the interim reports 16942 1 separately. 2 THE COURT: All right. 3 Q. (BY MR. VEIS) Ms. Carlton, I'd like 4 to direct your attention to Item 1, "risk 5 management," on Page OW12469. 6 Do you see that? 7 A. Yes. 8 Q. The first sentence says "USAT's 9 monitoring of its asset/liability structure is not 10 documented for one to determine if management has 11 exercised prudent decisions." 12 Do you see that sentence? 13 A. Yes. 14 Q. Could you please explain that to the 15 Court? 16 A. Yes. This was another area of the exam 17 that we commenced our review on, and it showed 18 that the individuals that were responsible for 19 that area did not maintain documentation to 20 support their rationale and the strategy that was 21 being used and did not explain -- could not 22 explain the hedging activity and the investment 16943 1 activity for that area and how it reflected back 2 to that business plan and overall strategy in 3 which they had invested those instruments. 4 Q. Directing your attention to the next 5 section, Item 2, investment securities, if you'd 6 take a moment to compare Exhibit A14018 to that 7 section, could you tell me if that section 8 beginning "investment securities" on OW121469 9 incorporates the comments in the special report of 10 September 4th, 1986? 11 A. (Witness reviews the document.) This 12 is a retyping of the special report made a part of 13 the interim report. 14 Q. So, it's substantially identical 15 information? 16 A. Yes. 17 Q. I'd like to direct your attention to 18 the Roman numeral III at the at the bottom of -- 19 I'm afraid my Bates numbers are cut off. I 20 believe it should be OW121470. It's Page 2 of the 21 memorandum to Mr. Ward. It's Item 3, "Independent 22 American Savings and loan preferred stock." 16944 1 A. Yes. 2 Q. Would you please read that to yourself? 3 I have a question to ask about it. 4 A. (Witness reviews the document.) Yes. 5 Q. Do you see that? 6 A. Yes. 7 Q. Now, do you know what the condition of 8 Independent American Savings and Loan was at 9 August 19, 1986? 10 A. It was on the brink of insolvency or 11 insolvent. 12 Q. Do you know what are the value of its 13 preferred stock was at that point? 14 A. According to this, it had no value. 15 Q. And USAT was aware of that; is that 16 correct? 17 A. Yes. According to them, the officer 18 had told them that it had no value. 19 Q. And USAT had no loss reserve for that 20 stock; is that correct? 21 A. That's correct. 22 Q. And what did that officer tell the 16945 1 examiners about what the management of USAT was 2 going to do about that worthless asset? 3 A. It was stated that they would do 4 nothing unless it was authorized by Dallas to set 5 up a reserve for it. 6 Q. Unless they were required to? 7 A. That's correct. 8 Q. So, they have a worthless asset and 9 they won't write it down unless the regulators 10 make them; is that correct? 11 MS. CLARK: Your Honor, this is 12 argumentative. It's leading. The lady can 13 explain what she thinks on this subject which is, 14 again, totally outside the notice of charges. But 15 I don't think we need this argumentative, leading 16 line of examination. 17 THE COURT: I think we've covered the 18 subject. Let's move on. 19 MR. VEIS: Thank you, Your Honor. 20 Q. (BY MR. VEIS) I'd like to direct your 21 attention to the following page, "Books and 22 records." 16946 1 Do you see the segment starting Item 4, 2 "books and records"? 3 A. Yes. 4 Q. Would you please review that? It 5 carries over two lines onto the next page. And 6 that's at OW121471. 7 A. (Witness reviews the document.) Okay. 8 Q. Have you completed your review, 9 Ms. Carlton? 10 A. Yes, I have. 11 Q. I gather that, again, you're reporting 12 a problem with the maintenance of the books and 13 records? 14 A. That's correct. 15 Q. And could you explain what the problem 16 was? 17 A. The problems were that the financial 18 reports that had been sent to the Federal Home 19 Loan Bank of Dallas were decided to be incorrect 20 due to the magnitude versus number and dollar of 21 the misclassifications and restating of financial 22 information. And every area that we went into, 16947 1 you only found more and more books and records 2 problems to the tune that those numbers were like 3 a moving target. Each time we would try to 4 reconcile the final numbers, they were either 5 restating something, reclassifying something, or 6 revising and sending in amended TFR reports to the 7 regulators. 8 Q. Is it common to amend a TFR report? 9 A. You find some amendments, but not to 10 the extent that you found here at this 11 institution. 12 Q. Now, you state that there would be no 13 thorough analysis of the financial reports 14 subsequent to the last examination? 15 A. Yes. 16 Q. Is that a common problem with 17 examinations? 18 A. Prior to this, you -- in most all 19 cases, you can reconcile books and records. To 20 not be able to reconcile these books and records 21 was not a common practice and was unusual. 22 Q. Let me show you a document that's been 16948 1 marked as A14085. 2 Ms. Carlton, do you recognize that 3 document? 4 A. Yes, I do. 5 Q. What is it? 6 A. It was a document in which we requested 7 information from our financial reporting area in 8 Dallas -- 9 MR. EISENHART: Your Honor, may we have 10 a moment? We don't seem to have this in our book. 11 MR. VEIS: 14085? 12 MR. BLANKENSTEIN: 14085? 13 MR. VEIS: Yeah. 14085. It was 14 certainly part of what was provided. 15 MS. CLARK: Your Honor, I think the 16 problem is that it is out of order in our booklet. 17 I think we're all set. Thank you. 18 THE COURT: All right. Thank you. Go 19 ahead. 20 Q. (BY MR. VEIS) I'm sorry, Ms. Carlton. 21 Please continue. 22 A. We had requested information from our 16949 1 financial reporting center that maintains a record 2 on all reports and amendments. And we compiled 3 this spreadsheet to show how many times the 4 different reports had been amended by the 5 institution. 6 Q. Is that a large or a small number of 7 times? 8 A. It was large for an institution. 9 Q. What inference did you draw regarding 10 the confidence with which you could -- 11 A. It showed us, from as far back as 12 December 1985, that they had been revising and 13 amending their problems -- their reports that were 14 submitted to Dallas. 15 Q. So, what degree of confidence could you 16 as an examiner have in the reports that they were 17 submitting? 18 A. When we see an institution that's 19 constantly amending their problems, we question 20 the accuracy of what's being provided and question 21 why we have so many amendments to the report and 22 whether you have a responsible person either 16950 1 reporting the information and compiling those 2 reports or whether it reflects back on just the 3 books and records actually not being able to be 4 reconciled in a timely manner in order to meet the 5 deadlines that are required to submit those 6 reports. 7 Q. Which of those, if either, did you 8 conclude with respect to United Savings 9 Association of Texas? 10 A. Based on our review, which was not -- 11 we were not able to finalize. But based on that 12 review, a combination of both, that the 13 institution and its staff had failed to accurately 14 reflect their financial data. And it was 15 reflected through the reports that they lacked 16 improper internal controls to detect those 17 violations and that that information that was 18 provided, you could not rely on it. 19 In our selection of sampling, in our 20 selection of any calculation that we had tried to 21 do, all the information had been -- either been 22 revised or changed or restated or misclassified or 16951 1 miscoded. 2 MR. VEIS: Your Honor, I offer A14085. 3 MS. CLARK: No objection, Your Honor. 4 THE COURT: Received. 5 Q. (BY MR. VEIS) Ms. Carlton, I'd like 6 to show you a document now that's been marked as 7 A14019. 8 Can you tell the Court what that 9 document is, please? 10 A. This is a copy of the final interim 11 report that was prepared on USAT prior to the 12 submission of the final report of examination. 13 Q. And who is it addressed to? 14 A. It is addressed to Richard Ward, who 15 was the field manager at that time. 16 Q. And that's from you? 17 A. Yes, it is. 18 MR. VEIS: Your Honor, I move the 19 admission of A14019. 20 THE COURT: I think it's in already. 21 We're showing it as Exhibit B1256. 22 MR. VEIS: Oh, thank you, Your Honor. 16952 1 Your Honor, I had requested with 2 respect to the other interim reports to treat 3 those as separate exhibits. May I do the same 4 with this? 5 THE COURT: Yes. 6 MR. VEIS: Thank you, Your Honor. 7 Q. (BY MR. VEIS) Well, Ms. Carlton, I 8 would ask you to review the document and -- take 9 just a moment to look through it, and then I have 10 some questions I want to ask you about it. 11 A. (Witness reviews the document.) Okay. 12 Q. I'm going to direct your attention to 13 the second page of Exhibit 14019 which has a Bates 14 No. OW121454 and also to the third page. 15 MS. CLARK: I'm sorry. I think before 16 you question the witness, have you offered this? 17 Has it been admitted as a separate document as you 18 preferred? 19 MR. VEIS: I believe it has. 20 MS. CLARK: Was it admitted in this 21 form, Your Honor? 22 THE COURT: He asked to. I didn't rule 16953 1 on it. 2 MR. VEIS: Oh, I'm sorry. I thought 3 you ruled. Is that -- 4 MS. CLARK: I have no objection if he 5 wants to do them as separate exhibits. 6 THE COURT: All right. Received. 7 MR. VEIS: Thank you, Your Honor. 8 Q. (BY MR. VEIS) Hopefully, without 9 being flipped, I think my fourth-grade teacher 10 would not have given these two pages a grade for 11 neatness, Ms. Carlton. 12 Can you explain the interlineations, 13 notes, and crossings out on these two pages? 14 A. The interim reports did not have 15 special requirements that you had to have every -- 16 the information either written or typed. The 17 point with interim reports were to get the facts 18 to Dallas as soon as possible without going 19 through the proper or the usual edit reports that 20 the final report does. And it's -- basically, 21 what you find, present, we will go through, read, 22 and understand the set of facts, the points of 16954 1 facts that you are trying to make irregardless of 2 the form that it comes in. 3 Q. So, I take it then that these 4 handwritten additions and the cross-outs in these 5 two pages are yours; is that correct? 6 A. Yes. Back then, we were not -- we did 7 not have typewriters that we could readily have 8 available to type everything that went into the 9 report. And it was before the computer era was 10 with us. 11 Q. Now, I'd like to address the net worth 12 compliance section here, Item 1 on Page OW121454. 13 A. Okay. 14 Q. Now, I believe you state there that 15 they are -- as of June 30th, there was some 16 $10,491,000 less than the required amount? 17 A. That's correct. 18 Q. And what was the reason for that? 19 A. A part -- a great percentage of it was 20 the additional scheduled items that, as examiners, 21 we had classified and the addition of reserves 22 that we had asked to be established based on the 16955 1 losses that had been found within the portfolio of 2 loans that either had built-in appraised losses or 3 identifiable losses that we could reconcile with 4 the institution. 5 Q. Were there other factors that affected 6 the net worth problem? 7 A. At this point of the examination, the 8 Couch loans had been proven to be apart of a fraud 9 and was made a part that 100 percent of those 10 loans would be classified because you either did 11 not have files or you had conflicting liens and 12 that management itself had actually brought those 13 loans current by granting additional loans and 14 those loans were, indeed, delinquent. Therefore, 15 we continued to include those as a part of the 16 classification which those that were substandard 17 were required 20 percent reserve which would 18 affect the net worth calculation because 19 20 percent of those loans would be a part of that 20 contingency factor that goes into the net worth 21 calculation. Those that were recognized as a loss 22 would require a 100 percent reserve recognition. 16956 1 That would be a direct hit to the net worth 2 calculation. 3 Q. Now, in the second paragraph near the 4 top of the page, it speaks about specific reserves 5 totaling $9.2 million. 6 Do you see that entry? 7 A. Yes. 8 Q. Now, is that amount included in the 9 10-million-dollar calculation referenced in the 10 first paragraph? 11 A. That's on -- yes. 12 Q. Perhaps my question confused you. 13 Please read the second paragraph to 14 yourself. 15 A. (Witness reviews the document.) At 16 this point, those numbers were not a part of net 17 worth calculation. 18 Q. So, in fact, the reported net worth 19 deficit did not include a number of other items 20 that you had found in the examination. 21 Is that what you're telling us? 22 A. That's correct. 16957 1 Q. Now, there is a reference to the 2 calculation of the base factor in the first 3 paragraph. 4 Do you see that reference? It's in the 5 fifth line. 6 A. Yes. 7 Q. And that is apparently a cause of a 8 part of the deficiency? 9 A. Yes. 10 Q. Could you please explain that? 11 A. In calculating the base, you have to go 12 back to the previous five years in determining the 13 liability number, and you get an average number 14 which is a part of the calculation. 15 The institution, in their calculation 16 of that number and probably some of the revisions 17 that had been made, had used an incorrect number 18 in that base factor calculation. 19 Q. Now, directing your attention to the 20 bottom paragraph on the page, does that discuss 21 that incorrect factor? 22 A. Yes, it does. 16958 1 Q. And could you please explain it? 2 A. That calculation was based on -- in 3 total, a part of calculation of direct investment 4 and scheduled items being incorrectly reflected as 5 a part of that calculation. 6 Q. Now, did the examination team working 7 for you prepare work papers reflecting the 8 calculation of minimum net worth for United 9 Savings Association of Texas? 10 A. Yes, we did. 11 MR. VEIS: And we will get to those, 12 Your Honor. 13 Q. (BY MR. VEIS) I'd like to have you 14 address now the "scheduled items" entry on the 15 third page of Exhibit 14019. It's at Bates 16 No. OW121455. 17 A. Okay. 18 Q. Would you just read that section to 19 yourself? It's quite short. 20 A. (Witness reviews the document.) Okay. 21 Q. Can you please explain the language 22 about the understatement of scheduled items? 16959 1 A. Once we complete our loan review and 2 analysis, we will go to the TFR report, which is 3 the regulatory report prepared by the institution. 4 We will take the numbers that were prepared by the 5 institution, and we will adjust that number by a 6 calculation of the numbers in which we have either 7 added additional loans to that classification or 8 clarified that the classifications that the 9 institution had prepared were, in some form, 10 incorrect based on the standards that were 11 established for the institution to establish that 12 list of scheduled items. 13 In this case, you had some REO that 14 were not properly reported and other regulatory 15 violations that were made in that transfer of 16 assets and specific reserves were not properly 17 established. 18 Q. Now, it says here, if I can read this, 19 "The scheduled items figure is understated by 20 308,678,000" and some dollars; is that correct? 21 A. That's correct. 22 Q. Now, what is the effect of that 16960 1 understatement on the calculation of required net 2 worth? 3 A. That means that the contingency factor 4 in which that number was used, instead of the 5 institution using 20 percent of 502 and including 6 it in that factor, they would have used 20 percent 7 of the 204, which means that they would have 8 understated their net worth requirement. 9 Q. By an amount equal to 20 percent of -- 10 A. 20 percent of the difference in those 11 numbers, yes. 12 Q. Which is $60 million? 13 A. Yes. 14 Q. I'd like to direct your attention to 15 Page 12 -- Page 13 of the document. It has Bates 16 No. OW121465. 17 A. Okay. 18 Q. Now, this is part of a discussion, I 19 believe, of the high-yield bond portfolio. If you 20 wish -- perhaps it would be a good idea. 21 Would you take a look at Page 11, 22 OW121463, and Page 12, OW121464? 16961 1 A. (Witness reviews the document.) Okay. 2 Q. Now, I'd like to direct your attention 3 to the last paragraph of that section which states 4 "For examination and discussion with Joe Phillips, 5 vice president of investments, it was noted that 6 many of the issues were underwritten/brokered 7 through Drexel Burnham Lambert, Incorporated, 8 which is a 6 percent (6 percent) stockholder of 9 United Financial Group, Inc., the holding company. 10 This has the appearance of a conflict of 11 interest." 12 Do you see that paragraph? 13 A. Yes, I do. 14 Q. Now, did Mr. Phillips inform you of 15 Drexel Burnham Lambert's holding of 6 percent of 16 the shares of United Financial Group? 17 A. We were already aware of their share of 18 ownership. 19 Q. How were you aware of it? 20 A. Because we had done an -- a review to 21 determine how much Drexel owned of the 22 institution. 16962 1 Q. You looked at the shareholder lists? 2 A. Yes. 3 Q. Now, let me direct your attention to 4 Page 15 -- first, did you have any additional 5 information regarding Drexel's holdings of shares 6 of United Financial Group at the point you wrote 7 this report? 8 A. We could just see on the underwriting 9 of different instruments the percentage at which 10 most of it was held, invested by Drexel, the 11 pattern -- there was a pattern there that you 12 could see when reviewing the different securities 13 and the different subsidiaries that we were 14 reviewing. 15 Q. So, you knew that they underwrote 16 securities, the institution or its sudsidiaries? 17 You knew they owned shares of the holding company? 18 MR. EISENHART: I don't understand who 19 the "they" is being referred to here. 20 Q. (BY MR. VEIS) You knew Drexel was 21 underwriting securities purchased by USAT and its 22 subsidiaries, correct? 16963 1 A. That's correct. 2 Q. And you knew that Drexel Burnham 3 Lambert owned 6 percent of the shares of United 4 Financial Group, Inc., the holding company. 5 Right? 6 A. That's correct. 7 Q. And did you have any other information 8 regarding Drexel at that time? 9 A. We had begun to receive information in 10 from the supervisory side to look for holdings and 11 different tradings held by Drexel. 12 Q. But you didn't have any other 13 information, did you? 14 A. No. 15 Q. "I observe that it has the appearance 16 of a conflict of interest." 17 Do you see that? 18 A. Yes. 19 Q. Does that mean that you had concluded 20 that there was a conflict of interest at that 21 point? 22 A. It meant that due to the indications at 16964 1 that time and by its share of ownership, that it 2 had proven that with these investments -- that you 3 had enough information that showed that, yes, with 4 Drexel being a shareholder and, yes, with them 5 receiving funds from this that it had the 6 appearance of a conflict of interest. 7 Therefore, any time we see the 8 appearance, an actual conflict of interest, we are 9 required to report it. 10 Q. But you didn't report it as an actual 11 conflict at that point, did you? 12 A. No. 13 Q. Let me direct your attention to Page 14 15, the section headed "Affiliated transaction." 15 Would you please review that to yourself? And I 16 have a couple of questions. 17 A. (Witness reviews the document.) Okay. 18 Q. Now, it discusses in the first 19 paragraph an investment in Weingarten Realty, Inc. 20 Do you see that? 21 A. Yes. 22 Q. Now, what's your observation with 16965 1 respect to Mr. Hurwitz' and Mr. Gross' involvement 2 in Weingarten Realty, Inc.? 3 A. It was our understanding at the review 4 at that time that they indirectly owned some 5 outstanding shares of UFC and they were also 6 directors at Weingarten Realty, owning 31,000 7 shares. 8 Q. And what's the significance of that? 9 A. Again, as a part of our management 10 analysis, we go through the portfolios and 11 determine if there are any areas in which we feel 12 that officers, directors can in any way enrich 13 themselves by engaging in activity in which they 14 either directly or indirectly own in some form or 15 participate in some form with -- it can either be 16 lending activity or investments in which they 17 themselves will profit as a result of that 18 involvement with those transactions. And involve 19 and engage in that activity and bringing it 20 through the thrift institution in which they are 21 responsible for overseeing. 22 Q. Now, in the next paragraph, you observe 16966 1 that, quote, "Mr. Charles Hurwitz appears to 2 control certain activities of the association." 3 Do you see that? 4 A. Yes. 5 Q. Now, you cited an instance there. Can 6 you explain your observations regarding the 7 May 8th, 1986 board of directors meeting which is 8 referenced following that sentence? 9 A. One of the ways that we as third 10 parties try to determine who is actually making 11 decisions or are over -- or in control or 12 oversight of the institution of who makes the 13 decisions in the board meetings and the chief 14 meetings are that we either observe or through the 15 minutes that we review as a part of our assessment 16 of the operations of management. 17 In this case, we noted -- it was noted 18 in the minutes that Mr. Hurwitz, who was not a 19 board member, had seconded a motion on approval of 20 the financial statement and lending reports. 21 Q. Now, did he also make a statement with 22 respect to the sale of Weingarten stock? 16967 1 A. Yes, he made a statement about it. 2 Q. Now, I note at the bottom of the page, 3 it states "The field work of the examination is 4 complete." 5 A. Yes. 6 Q. Let me ask you about the field work of 7 the examination. 8 THE COURT: Mr. Veis, we'll adjourn 9 until 9:00 o'clock. 10 11 (Whereupon at 4:54 p.m. 12 the proceedings were recessed.) 13 14 15 16 17 18 19 20 21 22 16968 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 28th 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 16969 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 28th 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