17462 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 31, 1998 22 17463 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 17464 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 17465 1 2 INDEX OF PROCEEDINGS 3 Page 4 VIVIAN CARLTON 5 Continued Examination by Ms. Clark......17470 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 17466 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:05 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Guido? 6 MR. GUIDO: Your Honor, I have a 7 preliminary matter that I discussed with 8 Mr. Nickens briefly just before the hearing, and 9 it goes to the question of how we've been 10 proceeding the last few days of the proceeding. 11 I think, as you probably noticed, we've 12 ceased reading into the record portions of the 13 documents that the witness is asked to take a look 14 at and we ask the witness to read it. I have been 15 reading the transcripts in the evenings; and I've 16 noticed that it's now become a little more 17 difficult -- in fact, in some cases, impossible -- 18 to ascertain what the witness is being asked 19 about. 20 So, I think it would be appropriate for 21 us to discuss a uniform convention so that as we 22 go down the road, months later when we're all 17467 1 looking at these transcripts, we have some idea 2 that we're all thinking about the same thing. 3 THE COURT: I think the solution would 4 be to -- when you ask a question, to refer 5 precisely by identification the portion of the 6 exhibit that you're talking about and have the 7 witness read it to his or herself, and then we 8 have a clear record of what's going on. 9 MR. GUIDO: Your Honor, I was going to 10 make a suggestion to refine that somewhat, that if 11 there's a Bates stamp number or page number that 12 that can be referred to in the beginning of the 13 line that's being referred to and the end of the 14 line being referred to, that it's clear that 15 that's what we're talking about because it is 16 somewhat garbled in some places at the present 17 time. 18 THE COURT: All right. I'll hear the 19 respondents. 20 MR. NICKENS: Your Honor, Mr. Guido 21 raised this a few minutes ago. To me, it's a 22 question of judgment that there are instances 17468 1 where it will clearly make the record clearer. On 2 the other hand, to read the same paragraph into 3 the record five or six times I feel is 4 unnecessary. 5 And so, I don't know that -- I don't 6 personally feel like it would be possible to come 7 up with a convention that would govern all 8 situations. I think that we have fallen into the 9 habit of reading in too much, although there are 10 instances where I've certainly been guilty of that 11 where, you know, I thought either for your benefit 12 or for the benefit of the record, that we needed 13 to have that information immediately in front of 14 us. So, I don't -- I don't see much possibility 15 for getting a convention. 16 I do think it's a worthwhile subject to 17 raise because I think it's become -- you know, we 18 have 17,000 pages of transcript. And, you know, 19 it's -- a lot of it is simply reading the exhibits 20 in big portions in there which, in certain 21 instances, I feel it's gotten to where it's not 22 necessary. 17469 1 MR. GUIDO: I agree with Mr. Nickens, 2 Your Honor. I think for us to try and not have to 3 read everything into the record because I think 4 probably all the key paragraphs mostly have been 5 read into the record other than maybe for some 6 securities filings going forward. What I was 7 suggesting is a convention that we just read the 8 beginning, just a little bit of the beginning of 9 the section and then, when we tell them where it 10 ends, to just read a little bit of the end so that 11 when we go back and look at the record, we know 12 the area that's being discussed. 13 THE COURT: I think we're all now aware 14 of the problem, and I believe it can be handled. 15 I don't know if I can issue a general ruling. I 16 don't want to bar reading a short passage or 17 something. But for the record, whatever is being 18 discussed should be precisely identified without 19 any doubt. I'm glad you brought it up, and I 20 believe we can handle it as we go along. 21 MR. GUIDO: I wanted to raise that 22 issue because we have switched the method in which 17470 1 we're all proceeding to expedite this proceeding 2 for everybody's benefit, Your Honor. I just 3 wanted to raise that as an issue while everyone 4 was in the court so we understood. 5 THE COURT: All right. Thank you. 6 Are there other matters? 7 Ms. Clark, you may continue with your 8 cross. 9 MS. CLARK: Thank you. 10 11 CONTINUED EXAMINATION 12 13 Q. (BY MS. CLARK) Ms. Carlton, you are 14 aware, are you not, that the respondents in this 15 case are accused of hiding from the regulators the 16 fact that MCO Holdings, one of the companies that 17 Mr. Twomey instructed you to monitor, was holding 18 an option to purchase additional shares of UFG 19 from the Drexel firm. 20 You were aware of that, were you not? 21 A. We were not instructed to do anything 22 with MCO. 17471 1 Q. You were familiar with the fact that 2 MCO was a company in which Mr. Hurwitz had an 3 ownership interest, were you not? 4 A. Yes. 5 Q. And you were aware, were you not, that 6 the respondents are accused in this case of hiding 7 from the regulators -- of misrepresentations to 8 the regulators in connection with the option that 9 MCO held from Drexel to buy additional UFG shares? 10 A. I was aware of the allegation of 11 hiding. The rest of that sentence that you 12 provided, I was not aware of. 13 Q. You have reviewed the Notice of 14 Charges, I believe you testified? 15 A. Yes. 16 Q. Now, with respect to the Drexel option, 17 you reviewed the August 29, 1986 business plan 18 that was submitted by United to the regulators. 19 You testified to that effect on 20 direct-examination, did you not? 21 A. Yes. 22 Q. Let's take another look at that. It's 17472 1 Exhibit A10663. 2 MS. CLARK: And it's in the record, 3 Your Honor, at Tab 184. 4 Q. (BY MS. CLARK) Ms. Carlton, I would 5 ask you to look, if you would, at Page 16 of the 6 business plan that was submitted to the 7 regulators. 8 A. (Witness reviews the document.) 9 Q. There's a chart at the bottom of that 10 page which describes ownership in UFG held by 11 various entities. 12 Do you see that Drexel Burnham Lambert 13 Group, Inc. is shown as owning 6 percent of UFG? 14 A. Yes. 15 Q. Is that the source of the information 16 that you used when you noted Drexel's 6 percent 17 ownership interest in some of the reports that you 18 prepared? 19 A. I don't recall getting it from this 20 data. 21 Q. Do you know where you did get it? 22 A. We had requested information from the 17473 1 institution. 2 Q. So, you would have obtained the 3 information about Drexel's ownership from the 4 management of United? 5 A. Yes. We asked for a listing of 6 shareholders. We also asked for a listing of 7 shareholders that were held in the street name on 8 the C&D and was provided a full shareholders list 9 that provided us with that data. 10 Q. Was that a regular part of your 11 examination procedures? 12 A. It was a part of this one. 13 Q. Was that a procedure that was special 14 to this particular examination? 15 A. Whenever we were reviewing an 16 institution and we desired to obtain that 17 information, we requested it based on whatever the 18 conditions are. 19 Q. Was there something special about 20 United that led you to obtain a list of all of 21 United's shareholders? 22 A. We had received a special scope that 17474 1 was provided by Neil Twomey that had directed us 2 what to do. 3 Q. And was there any other procedure that 4 you did in connection with that request? 5 MR. VEIS: I don't think it's clear 6 which examination we're talking about. If 7 Ms. Clark could clarify that for me. I certainly 8 didn't understand that from the question. 9 Q. (BY MS. CLARK) Do you want to answer 10 the question from your counsel? 11 What exam was this? 12 A. In 1987, we had a special request. 13 Your question again? 14 Q. I would ask where you got the 15 information about Drexel's 6 percent ownership. 16 Was it obtained, in the first instance, because of 17 a special request from Mr. Twomey as you've just 18 described it? 19 A. We saw that number in different places. 20 As a part of the report, we have a list where they 21 have to list shareholders that's owning more than 22 5 percent as a part of the PERK information in 17475 1 which we have a page on which we provide 2 shareholder information. We saw numbers at 3.9, 3 numbers at 6 percent. I think the final number is 4 9.7. We saw it in various places. So, which one 5 was the first incident, I don't recall. 6 Q. Turn the page, if you would, please -- 7 actually, turn to Page 18. You will see that 8 there is a Note 6 to that chart. 9 And do you see that Note 6 to this 10 information in the business plan that was 11 submitted to the regulators in August 1986 12 describes the fact that Drexel granted to MCO a 13 call option on UFG shares? 14 Do you see that? 15 A. Yes. 16 Q. Okay. And it also describes the fact 17 that if MCO did not exercise the call, then it was 18 required to grant to Drexel a put option. 19 Do you see that, as well? 20 A. Correct. 21 Q. Now, let's look again at the Selby/Haas 22 memo that we discussed at some length yesterday. 17476 1 It's Exhibit A11011, and it's in the record at 2 Tab 256. 3 Ms. Carlton, we discussed this 4 memorandum yesterday as a memorandum evaluating 5 two applications that were being considered in 6 tandem by the Federal Home Loan Bank Board in 7 Washington, D.C. 8 One application was to issue 9 subordinated debt which would be allowed to be 10 counted as regulatory capital, and the other 11 application was for a modification of the net 12 worth maintenance condition that the Federal Home 13 Loan Bank Board had included in a resolution 14 relating to MCO and Federated. 15 Do you recall that? 16 A. Yes. 17 Q. Now, I would like you to turn to the 18 second page of that memo and look at the bottom 19 paragraph, which begins, "In addition, MCO and 20 Federated own an aggregate of 97.5 percent of 21 UFG's Series C convertible preferred stock." 22 Do you see the paragraph that begins 17477 1 with that sentence? 2 A. Yes. 3 Q. Do you see in the middle of the 4 paragraph, there is a reference to the call 5 option -- let me just read it to make the record 6 clear. "MCO also has a call option to acquire 7 300,000 shares of UFG's common stock from an 8 unaffiliated third party on July 1, 1988." 9 Do you see that reference, as well? 10 A. Yes. 11 Q. And this is in a document, again, that 12 was reviewed in the course of your examination 13 work as indicated by your handwritten note on the 14 first page. 15 Ms. Carlton, although they relied on 16 your interim report to -- for some of the 17 information in this memorandum being sent 18 Washington, D.C., do you believe that the 19 supervisory staff of the Federal Home Loan Bank of 20 Dallas obtained this information about the call 21 option from you? 22 A. No, they did not. 17478 1 Q. So, they had some other source of that 2 information, did they not? 3 A. Undoubtedly, they did. 4 Q. Let me ask you to look at a document 5 that was introduced in the record previously. It 6 was marked as Exhibit B954 and is in the record at 7 Tab 89. 8 MR. VEIS: What exhibit is that? 9 MS. CLARK: The exhibit number is B954. 10 MR. VEIS: And what is the document? 11 MS. CLARK: It's the subordinated debt 12 application. 13 MR. VEIS: Your Honor, I would like to 14 note for the record that other than identifying 15 the fact that certain information in the 16 Exhibit A14050, the Selby/Haas memo, had come out 17 of her interim examination, Ms. Carlton didn't 18 testify about either the net worth application or 19 the subordinated debt application. 20 I think Ms. Clark's question are going 21 well beyond the scope of direct. She didn't 22 address -- other than the fact that she knew that 17479 1 these things had happened or constructively knew 2 because the document was in the work papers, 3 Ms. Carlton essentially, I don't believe, 4 testified about these documents at all. I think 5 this is beyond the scope of direct-examination. 6 I'm not sure what Ms. Clark is hoping to 7 accomplish. If the question is what the 8 supervisory personnel knew and from whom they knew 9 it, I would think that supervisory witnesses would 10 be the individuals to talk to. 11 Now, Mr. Twomey is scheduled to 12 testify. I'm not sure what we're accomplishing 13 here by having Ms. Carlton address these issues. 14 She didn't approve applications. She's already 15 testified to that on direct. The mere fact that 16 she was aware an application was pending whether 17 to modify the net worth condition or for the 18 subordinated debenture issue really is not germane 19 to what she's testified to on direct. So, I 20 object to this full line of questioning. 21 MS. CLARK: Your Honor, I would have 22 accomplished my question on this document in 17480 1 approximately half of the time it took Mr. Veis to 2 make that objection. He apparently does not want 3 me to elicit from this witness the evidence 4 concerning the knowledge of the regulators of the 5 Drexel option. He's put into evidence a document, 6 and he doesn't want me to ask about other portions 7 of the documents. 8 I intend to ask the witness a very 9 brief question on this document and one other 10 document. She was intimately involved in the 11 monitoring of the agency's ownership with Drexel, 12 and I do not think it is fair to Ms. Carlton to 13 require that I bring her back in the direct case 14 to elicit information that could be elicited 15 during her cross-examination even if it were 16 beyond the scope of the direct, which I don't 17 believe it really is. 18 MR. VEIS: Your Honor, I appreciate 19 Ms. Clark's comments. I would note that I don't 20 believe there's any evidence that Ms. Carlton was 21 intimately involved in monitoring direction. I 22 believe all she's testified is she was looking at 17481 1 Drexel. I believe that's an overstatement of what 2 Ms. Carlton's responsibilities were. 3 MR. KEETON: Your Honor, we had an 4 objection from Mr. Guido about speaking 5 objections. Mr. Veis has been up here talking not 6 only now but throughout Ms. Clark's objection. 7 Furthermore, I join with Ms. Clark. Do we want to 8 bring this woman back in our case? I didn't think 9 we were going to be limited to just what Mr. Veis 10 wants us to ask. 11 MR. EISENHART: The only thing I would 12 add to this discussion is that Ms. Carlton has 13 testified that she was given specific directives 14 to look into Drexel's relationship and also the 15 relationships of Mr. Hurwitz and his company, 16 MAXXAM, Inc. I don't think, given that parameter 17 and given that testimony, that OTS can now limit 18 inquiry into what she learned in the course of 19 fulfilling those assignments. 20 THE COURT: All right. I'll deny the 21 objection. It is not my intention to rigorously 22 confine the cross to what took place on direct. I 17482 1 think we have a practical question of re-calling 2 witnesses and what-all. And I think that 3 Ms. Carlton is something of an important witness 4 here and we should get her knowledge on these 5 matters. So, I'll deny the objection. 6 MR. VEIS: Thank you, Your Honor. I 7 would like to note that we don't have the exhibit 8 that Ms. Clark is using here in the courtroom. 9 THE COURT: A11011? 10 MR. VEIS: It's B954. 11 MS. CLARK: Tab 89. 12 MR. VEIS: I would note that we were 13 not given a list of the documents that would be 14 used in this examination; so, we're at somewhat of 15 a disadvantage here. 16 MS. CLARK: We're very pleased to give 17 you a copy of it to follow along, Mr. Veis, in 18 light of that. 19 MR. VEIS: Thank you. 20 Q. (BY MS. CLARK) Ms. Carlton, first of 21 all, let's identify what this document is. 22 Does this appear to be the application 17483 1 which was one of the two applications that was 2 being addressed in the memorandum that Mr. Veis 3 asked you about in direct-examination, the 4 application for approval to issue subordinated 5 debt securities that is marked as Exhibit B954? 6 A. It states that this is an application 7 for approval to issue subordinated debt 8 securities. 9 Q. That would appear to be one of the two 10 applications that is in the Selby memo to Haas 11 that Mr. Veis asked you about, correct? 12 A. I would assume it is. 13 Q. And I had asked you whether you were 14 the source of the information about the Drexel 15 option that is included in the Selby memo. You 16 said you were not. 17 So, let's take a look at the actual 18 application and see whether that might be the 19 source of the information about the Drexel option 20 that is in the Selby/Haas memo. I would direct 21 you to Bates No. CN152394. 22 THE COURT: Could you state that again, 17484 1 please? 2 MS. CLARK: Yes, Your Honor. It is 3 Bates No. CN152394. This document also has 4 another Bates number. It was produced to us, in 5 fact, from the supervisory files of the Texas 6 Savings and Loan Department; and it has a second 7 Bates number which is TXS&L103834. 8 MR. GUIDO: Could you read that last 9 number again, please? 10 THE WITNESS: I don't see a 394. 11 Q. (BY MS. CLARK) There's a problem with 12 these numbers. Let me ask you to just go to 13 Page 86 of the application. Apparently, we've 14 reorganized the Bates number pages so that we are 15 in the proper order, and that's the confusion. 16 Can you find Page 86 of the actual 17 document? 18 A. Okay. 19 Q. Look at note 6 on the bottom of that 20 page. Do you see that it states in the 21 application for approval to issue subordinated 22 debt securities that was being processed in tandem 17485 1 with MCO's application to modify the net worth 2 maintenance condition that in 1985, DBL granted to 3 MCO a call option on 300,000 shares of UFG? 4 Do you see that? 5 A. I see that. 6 Q. And it also goes on to say that if the 7 call were not exercised, then Drexel would have a 8 put. 9 Do you see that? 10 A. Yes. 11 Q. And would you conclude from your own 12 experience working in the applications functions 13 in Washington that the supervisory staff in 14 Washington would have read this application in the 15 course of considering whether to grant it or deny 16 it? 17 A. I don't know what they would have read. 18 I did not do applications during my tenure in 19 Washington, D.C. 20 Q. Forgive me. I misunderstood your prior 21 testimony. I thought you had indicated that you 22 had been involved in the application process. 17486 1 Now, you have testified, I believe, 2 that you had discussed the relationship between 3 Drexel and United Savings with Mr. Twomey. Have 4 you, in fact -- I'm sorry. 5 Did you discuss the Drexel question 6 with Mr. Twomey during the course of your work as 7 the examiner-in-charge of the USAT examinations? 8 A. We did discuss Drexel. 9 Q. And do you recall a telephone 10 conversation that you had with Mr. Twomey in 1986 11 where you talked about Drexel and other affiliated 12 party issues? 13 A. We had conversations -- I had 14 conversations with him. 15 Q. And do you recall a conversation on 16 September 19th, 1986, in which you discussed 17 Drexel along with other matters with Mr. Twomey? 18 A. I don't recall a specific date. 19 Q. Okay. Let me show you what has been 20 marked as Exhibit A12074. 21 MR. VEIS: Is that in this book, or are 22 you providing me one? 17487 1 MS. CLARK: You'll be provided with a 2 copy now. It's a new exhibit. 3 Q. (BY MS. CLARK) Ms. Carlton, can you 4 identify this as a transcript -- a very rough 5 transcript but, nevertheless, a transcript of a 6 telephone conversation between you and one of your 7 examiners named Karen and Neil Twomey in September 8 of 1986? 9 A. I see my name is at the top. The name 10 Karen is at the top. And it appears to be some 11 type of transcript form. 12 Q. Now, Ms. Carlton, do you remember that 13 when I showed you this document during your 14 deposition, you told me that you never authorized 15 anybody to tape any telephone conversations with 16 you. 17 Do you recall that testimony? 18 A. That's correct. 19 Q. And do you recall that during the 20 deposition, you asked me not once but twice where 21 I obtained this particular document? 22 Do you recall that? 17488 1 A. I do. 2 Q. And who do you think taped this 3 conversation? 4 A. I have no idea. 5 MR. VEIS: Speculation. 6 Q. (BY MS. CLARK) Let me show you 7 another document to see if I can help you with 8 that question. I would like you to take a look at 9 Exhibit B1034, please. 10 Now, this is a memorandum from 11 Mr. Neil Twomey to John Scott, both of the Federal 12 Home Loan Bank of Dallas. 13 Do you see that? 14 A. Yes. 15 MS. CLARK: I'm sorry. Let me first 16 offer Exhibit A12074, Your Honor. 17 MR. VEIS: No objection, Your Honor. 18 MS. CLARK: And I will also offer 19 Exhibit B1034. 20 MR. VEIS: No objection. 21 THE COURT: Received. 22 Q. (BY MS. CLARK) Ms. Carlton, do you 17489 1 see the typed initials at the top of the 2 memorandum from Mr. Twomey to John Scott in the 3 upper right-hand corner? 4 A. Yes. 5 Q. Does that appear to be some kind of 6 word processing code to you? 7 A. It's whatever it is. 8 Q. Well, do you see that the taped -- the 9 transcript of the conversation -- telephone 10 conversation, which is A12074, appears to have 11 been typed by the same person or at least to have 12 come out of the same word processing code. 13 Do you see that? 14 A. Yes. 15 Q. Does that indicate to you that it was 16 Neil Twomey who must have had this transcript 17 prepared? 18 A. No, it does not. 19 Q. Okay. Well, let me show you another 20 document and see if I can help resolve this 21 question. It's Exhibit B1739. 22 MS. CLARK: This is a memorandum from 17490 1 Ginger Baugh to Neil Twomey and Danny Thomas that 2 was obtained out of the files of the Federal Home 3 Loan Bank of Dallas, the supervisory side, 4 Your Honor. I offer it in evidence. 5 MR. VEIS: No objection. 6 THE COURT: Received. 7 MR. GUIDO: Your Honor, back to my 8 preliminary matter. I've heard three documents 9 now being described, and we don't have the dates 10 on the documents. I don't think that they are 11 being adequately described for the record. 12 THE COURT: I think we have them 13 identified by the exhibit number. I don't want to 14 take time going farther -- they are not large 15 exhibits except the application, and I think it's 16 clearly identified on those. I mean, if there's 17 some confusion in your mind as to this, you may 18 state so. 19 MR. GUIDO: This isn't a question of 20 confusion. It's when people go back and look at 21 the record, you're looking at a lot of documents. 22 I think it's very important to have the dates 17491 1 because I do think the dates are rather 2 significant on the documents. 3 THE COURT: All right. Does this have 4 a date? 5 MS. CLARK: Let me further describe the 6 document. It is a memorandum that bears a date of 7 September 3, 1987, from Ginger Baugh to 8 Neil Twomey and Danny Thomas. It begins, "As you 9 requested, please find attached a summary of the 10 ownership of United to the extent we have that 11 information." There is a chart attached called 12 "United's related persons transactions." 13 At the bottom of that -- sorry. Let me 14 go back. There's a memorandum that's two pages 15 long. Then it is followed by one page that says, 16 "United related persons transactions" showing, as 17 attachments, a file memo dated August 20, 1985, 18 regarding transfer of WRI shares and a transcribed 19 copy of a telephone conversation. And then 20 there's a chart of ownership and control 21 relationships. 22 There is the August 20, 1985 memo from 17492 1 Carol Ondrake to the file. 2 Q. (BY MS. CLARK) And, Ms. Carlton, you 3 will see, as the last document which appears to be 4 the taped telephone conversation, the transcript 5 that we had discussed in your deposition. 6 Do you see all of these parts of this 7 exhibit? 8 A. Yes. 9 Q. Now, does this indicate to you that it 10 must have been Mr. Twomey who taped the telephone 11 conversation and gave it to Ms. Baugh to attach to 12 this memo? 13 A. No, it does not. 14 Q. So, you still do not have any idea who 15 it was that taped this telephone conversation 16 with -- between you and Neil Twomey and Karen 17 without your permission? 18 A. I do not know. 19 MR. VEIS: Your Honor -- I just want to 20 point out that Ms. Clark keeps talking about 21 taping. And I don't know if there's something 22 about that that is -- that is sinister. It's not 17493 1 established -- this might be a transcript of a 2 conversation. I think that's about as far as 3 we've gone. And whether it was taped or whether 4 someone sat and transcribed it, we don't know. We 5 know it appears to be a transcript. We don't know 6 for sure how it came into existence. 7 If Ms. Clark wishes to continue to try 8 to establish who caused the transcript to be made, 9 I certainly have no objection to that; but I don't 10 believe -- the reference to taping somehow, I 11 believe, lends some air of sinister to this. 12 MS. CLARK: Your Honor, I would offer 13 B1739. 14 MR. VEIS: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MS. CLARK) Now, I believe as we 17 discussed at your deposition, nobody was sitting 18 with you transcribing this conversation, correct? 19 A. No, there was not. 20 Q. Now, I'll ask you to focus, if you 21 would, on the transcript and, in particular, why 22 don't we use the one that is part of Ms. Baugh's 17494 1 memo to Neil Twomey and Danny Thomas. And I'll 2 ask you to look at Page 6 of the transcript. 3 Well, first of all, why don't we just start at the 4 beginning of the transcript. 5 Ms. Carlton, does this reflect that you 6 contacted Neil Twomey to talk to him about several 7 different issues about potential affiliated 8 transactions that you had been focusing on in the 9 course of the 1986 examination? 10 A. That's what the first sentence states. 11 Q. Okay. And you told Mr. Twomey that you 12 had discussed them with your field manager, 13 Richard Ward, and that most of the information 14 that you had obtained had, in fact, been disclosed 15 in the various securities filings by the company. 16 Is that what you told him? 17 A. That's correct. 18 Q. And you said that although you had 19 known all of this information from public filings, 20 that you had never discussed it or addressed it as 21 a potential affiliated transaction. 22 Is that what you told him? 17495 1 A. That's what it says. 2 Q. And you're bringing these matters to 3 Mr. Twomey's attention to get his guidance as to 4 how to proceed. 5 Is that what you were doing? 6 A. That's what it states. 7 Q. Do you have any doubt that that is what 8 happened, what you were telling him? 9 A. Since this is an illegal taping and 10 it's hearsay, I don't know where the information 11 came from. I can only read what's here. 12 Q. Well, you refer to it as an illegal 13 taping. Why would you call it an illegal taping? 14 A. It was without my knowledge. 15 Q. So, as far as you're concerned, the 16 taping of your conversation with Mr. Twomey was 17 illegal? 18 A. I was not aware of it. 19 Q. Well, even if it's illegal, I guess the 20 question I'm asking you is: Do you have any doubt 21 that this is an accurate reflection of the 22 conversation you had with Neil Twomey about the 17496 1 concerns that had come up in the course of your 2 work about potential affiliated transactions? 3 A. I can only say that it's here; and the 4 name is there, that it says it's a conversation 5 with me. 6 Q. Well, do you have any doubt that you 7 had the conversation that is reflected in this 8 transcript that is attached to Ginger Baugh's memo 9 to her boss and to Danny Thomas? 10 A. I had conversations. Whether it was 11 this one, I cannot say. 12 Q. Well, do you have any reason to believe 13 that Ginger Baugh would attach a transcript of a 14 telephone conversation in a memo to Danny Thomas 15 and Neil Twomey that was not a transcript of a 16 real conversation? 17 A. I have no way of saying what she would 18 do. 19 Q. Who is Danny Thomas? 20 A. He was a -- I don't know what title he 21 was carrying at this time. He was an area 22 director in the reorganization area. He was an 17497 1 employee of the agency. 2 Q. And was he a superior of Neil Twomey's? 3 A. What period of time are you looking at? 4 Q. During this period, was he 5 Neil Twomey's superior? 6 A. I don't know. In '86, he was over the 7 Houston office. He was later moved to Dallas; so, 8 I don't know the time frame in which his positions 9 changed. 10 Q. All right. Well, let's focus -- again, 11 I would like to put aside for a moment that this 12 is an illegally-taped conversation and focus on 13 the substance of what is reflected in the 14 transcript. And let's look at Page 6. 15 Do you see that at Page 6 of this 16 transcript, it appears that you're beginning to 17 talk to him about Drexel. You have talked to him 18 about Weingarten Realty and something called 19 EQUUS, and at Page 6 you begin to talk to him 20 about Drexel. 21 Do you see that? 22 A. Yes. 17498 1 Q. Now, why don't you read that paragraph 2 to yourself, if you would, please. 3 A. (Witness reviews the document.) Okay. 4 MR. VEIS: Your Honor, for the record, 5 could we have a somewhat better identification of 6 that paragraph? I believe this is the problem 7 Mr. Guido was addressing. 8 MS. CLARK: That's a good suggestion. 9 That's the problem. Perhaps it's more efficient 10 to actually read at least part of the paragraph 11 into the record so we know what we're talking 12 about. 13 Q. (BY MS. CLARK) I'm asking you about 14 the part that starts, "Also, you have Drexel 15 Burnham who owns 6 percent of Federated." Then 16 you go on to talk about how they are handling a 17 great percentage of the investment securities for 18 United. 19 Do you see that? 20 MR. VEIS: Your Honor, may I say, 21 there's no identification of the speaker here. I 22 think it's Ms. Clark's assumption that it is 17499 1 Ms. Carlton. And that may be correct, but I don't 2 think it's been established. 3 Q. (BY MS. CLARK) Okay. Have you 4 finished reading the paragraph? 5 A. Yes. 6 Q. Now, did you tell Mr. Twomey that 7 Drexel was handling a great percentage of the 8 securities business for United, including 9 mortgage-backed securities and equity stocks? 10 A. We had provided information in the 11 report that dictated what his ownerships were. 12 Q. Now, do you recall considering the fact 13 that Drexel only owned 6 percent and not the 14 10 percent that was required under the affiliated 15 person regulation that was applicable to these 16 situations? 17 A. I recall Drexel having 9.7 percent. 18 Q. And do you recall that at the time of 19 this conversation, that the ownership interest was 20 6 percent as reflected in your various reports? 21 A. We had several documents at various 22 times that had numerous different calculations. 17500 1 So, that number was a running number at any given 2 time. I don't know whether the time period at 3 that time, we had -- it was 6 percent or the 9.7 4 which, rounded up, is 10. I don't know. 5 Q. I think that's a very fair point. Some 6 years after the fact, it's awfully hard to 7 separate one month from the next or even one year 8 from the next. 9 Is that what you're saying? 10 A. I'm just saying that we had -- anytime 11 you asked for their ownership, you got a different 12 number. That was from '86 to '87. To say at this 13 point it was 6 percent when the final number -- 14 when we had a 9.7 percent number and questions of 15 other shareholders, I can't say that it was 16 6 percent at this point. 17 Q. Why don't we put aside this particular 18 transcript and just have you explain to the judge 19 what it is you talked to Neil Twomey about 20 concerning the Drexel relationship with United 21 during the 1986 exam and the fact that the -- 22 Drexel was handling securities business for 17501 1 United. 2 THE WITNESS: Your Honor, one of the 3 concerns that we had with Drexel Burnham is their 4 true ownership in UFG. They -- you saw a number 5 of 9.7 percent which was very close to the 6 10 percent rule in which if Drexel did, indeed, 7 own 10 percent, the institution would not have 8 been allowed to use them to broker most of the 9 securities that they were doing. They would not 10 have been allowed to allow him to underwrite 11 most -- and trade most of the securities he was 12 doing because that number was so close to 13 10 percent. 14 It was a continuing issue to verify the 15 exact number of that ownership. And it was also 16 our concern that if Drexel in some way was working 17 in concert with other individuals, it would not 18 only be an affiliate possibility or conflict of 19 interest -- and either way, it dictated an unsafe 20 and unsound practice because Drexel then would be 21 profiting by its ownership and could, in fact, 22 direct trades and sales to the institution in 17502 1 which it could benefit from a personal standpoint. 2 That was our key concern of trying to 3 identify the final ownership on Drexel. That was 4 the nature of the different conversations that we 5 were receiving. Ginger Baugh and Neil at the 6 Dallas office, if you look at certain statements, 7 they were getting certain information. 8 So, we were asked, then, to ask 9 management to provide an exact number of the 10 ownership of that company; and that's the process 11 in which we were doing -- trying to verify their 12 exact ownership. 13 Q. (BY MS. CLARK) Thank you. 14 I think you said that if they owned -- 15 if Drexel owned 10 percent of United, that it 16 wouldn't be able to do any transactions with 17 United. 18 Didn't you mean that if they owned 19 10 percent of United, that they would have to 20 retain supervisory approval for transactions? 21 A. It would require -- either way. It was 22 an option. The supervisory approval does not 17503 1 allow individuals to personally use the 2 institution to transact business in which the 3 regulators know that they were personally gained. 4 So, be it prior approval or not allowed, the 5 difference was it would not happen. 6 Q. Now, this question that you just 7 described to the judge was a question that was the 8 subject of conversations between you and Ginger 9 Baugh and conversations between you and 10 Neil Twomey during the course of the '86 exam; is 11 that correct? 12 A. '86, '87, '88, the whole period of 13 time. 14 Q. So, from start to finish, Neil Twomey 15 and Ginger Baugh were very focused on the question 16 of whether Drexel owned 10 percent and the reason 17 was if Drexel owned 10 percent, then certain 18 regulatory restrictions or requirements would come 19 into effect; is that correct? 20 A. Not only just the 10 percent ownership, 21 but they were a dominant broker that was selling 22 most of their securities. It's just like in 17504 1 lending. You typically do not allow one 2 individual to focus on an activity within an 3 institution because that one individual or one 4 corporation can be the demise of that institution 5 if, for any reason, they are doing something 6 that's unsafe and unsound. 7 Q. So, your focus and the focus of 8 Neil Twomey and Ginger Baugh was not just limited 9 to Drexel's stock ownership. You were also very 10 focused on the extent to which Drexel was entering 11 into transactions with United in the securities 12 area. 13 Is that fair? 14 A. In the securities areas, in the junk 15 bond area. Wherever we found they were the 16 broker, we were interested in the percentage. 17 Q. You reported that back to Neil Twomey 18 and Ginger Baugh? 19 A. We would report it to whoever asked for 20 the information. 21 Q. So, there's no question that 22 Neil Twomey and Ginger Baugh were being kept 17505 1 apprised by you of the extent to which United was 2 conducting business with Drexel in securities and 3 other matters? 4 A. You have a special scope that went into 5 the 1987 exam. That special scope -- one of the 6 items on there was to do that. That was reported 7 to Ginger and to Neil at their request as a part 8 of the scope for the '87 examination. 9 Q. And for '86, as well? You began 10 looking into this in '86? 11 A. We did not have a special scope for 12 that. Anytime you go into an institution, you 13 look for the top owners of that institution. You 14 look for any loans that's outstanding to 15 individuals, be it them directly, family members, 16 friends, associates, business partners, joint 17 venture ownerships. 18 Q. So, in the course of that sort of 19 review, you also took note of Drexel's activities 20 and ownership interest as part of the regular 21 review of potential affiliated or insider party 22 transactions? 17506 1 A. Any time we saw Drexel, we noted it. 2 Q. Now, the reason why you would pay 3 attention to Drexel's activities in light of its 4 stock ownership would be that you wanted to see 5 whether Drexel was obtaining any kind of special 6 advantage because of its insider or potential 7 insider status. 8 Is that the reason why you were 9 interested in that? 10 A. That could be one reason. 11 Q. That would be a principal reason why 12 you would be focusing on that? 13 A. The word "principal" is your term. 14 Q. Let me show you one additional 15 document. Actually, before we do that, I would 16 like to follow up and finish the review of the 17 document marked B1739. 18 I would like you to look on the first 19 page of Ginger Baugh's memo to Neil Twomey and 20 Danny Thomas and see whether you can find a 21 reference on the first page of that memo to the 22 Drexel option that we've been talking about. 17507 1 A. (Witness reviews the document.) 2 Q. If you look below that chart that lists 3 the ownership interest? 4 A. I see it. 5 Q. So, this memo, as well, reflects the 6 knowledge of the supervisory agent and his 7 assistant of the fact that MCO Holdings had an 8 option to purchase additional shares of UFG from 9 Drexel, correct? 10 A. Correct. 11 Q. Okay. Now, let's go back to the reason 12 why you and Neil Twomey and Ginger Baugh were 13 focusing on the Drexel relationship. Take a look, 14 if you would, at Exhibit A12120. 15 MR. GUIDO: Would you read that again, 16 please? 17 MS. CLARK: A12120. 18 Q. (BY MS. CLARK) Can you identify this 19 document for the record, please? 20 A. This is an examination worksheet. 21 Q. And what's the subject of this 22 worksheet? 17508 1 A. Assets and contra-items. 2 Q. This is a 1986 examination work paper 3 based on the production that was made to us. 4 Do you see your handwritten reference 5 to Drexel with a question mark in the left-hand 6 margin of this worksheet on the first page? 7 A. Yes. 8 Q. And what item is next to your 9 handwritten note of Drexel and question mark? 10 A. "Determine whether any insider or major 11 stockholder is benefiting directly or indirectly 12 as a result of manipulating the investment of 13 these assets." 14 Q. So, is this just another reference to 15 the fact that one of the -- one of the issues that 16 you were looking at in the 1986 exam was whether 17 Drexel was benefiting directly or indirectly as a 18 result of its relationship with United? 19 A. Yes. 20 MR. VEIS: Your Honor, we have no 21 objection if Ms. Clark's intending to offer this 22 exhibit. 17509 1 MS. CLARK: I would like to. Thank 2 you. 3 THE COURT: Received. 4 Q. (BY MS. CLARK) Now, you were aware, 5 were you not, of a sale to Drexel of United's 6 residual interest in a CMO? I believe it was 7 referred to in one of your interim examination 8 reports that we talked about yesterday. 9 A. Yes. 10 Q. That's Exhibit A14070, for the record. 11 And you had also figured out what 12 percentage of United's security purchases were of 13 Drexel underwritten securities, had you not? 14 A. Yes. 15 Q. Was that part of the special scope, or 16 was that part of your regular exam procedures? 17 A. It didn't matter. It was either one. 18 Q. You did it? One way or another, you 19 did it? 20 A. Right. 21 Q. And you obtained the information that 22 you used for that analysis from United, didn't 17510 1 you? 2 A. Various sources. 3 Q. The information that you used to study 4 and analyze what percentage of United's securities 5 business was being done with Drexel came from 6 United, didn't it? 7 A. Yes. 8 Q. Okay. 9 A. We also got information from Neil 10 which -- you had information coming down from 11 Dallas. Now, I don't know the source of that 12 information. So, it was still various sources. 13 Q. Sure. What information did you get 14 from Mr. Twomey coming down from Dallas? 15 A. Some of the correspondence that you 16 just presented was a part of the reading file, 17 which means it came down from Dallas. And it had 18 the 6 percent number in it. So, whether that 19 number, when you see it, came up or went down, I 20 don't know. 21 Q. But as far as studying what 22 transactions United was entering into with Drexel, 17511 1 what percentage of United's business was being 2 done with Drexel in any particular area, that 3 information would have come only from United? 4 Mr. Twomey wouldn't independently have that 5 information, would he? 6 A. We made special requests to obtain that 7 information. I don't know what he had. 8 Q. And it was provided to you by United's 9 management, correct? 10 A. Yes. 11 Q. Now, you were aware that United was 12 trading several different kinds of instruments 13 with or through Drexel as a result of the 14 examination that you did on that subject, correct? 15 A. Correct. 16 Q. You were aware that they were 17 purchasing mortgage-backs, entering into reverse 18 repo financing, and purchasing hedge instruments 19 from Drexel Burnham? 20 A. That's correct. 21 Q. And you were aware of the transactions 22 in so-called junk bonds or high-yield bonds with 17512 1 Drexel, were you not? 2 A. That's correct. 3 Q. Okay. Now, you never reached any 4 conclusion based on all of your review and 5 analysis that, in fact, Drexel was obtaining any 6 special kind of insider advantage in the business 7 that it was doing with United, did you? 8 A. We concluded that they received the 9 majority, that their numbers far exceeded any 10 other broker. And by that, whether it was special 11 treatment or just giving it to them, they had the 12 majority of the business. 13 So, it was -- it was documented and 14 demonstrated that they had the majority of the 15 business. 16 Q. So, the conclusion that you drew was 17 that Drexel -- that United did a high percentage 18 of its business through Drexel, correct? 19 A. Correct. 20 Q. You never reached a conclusion that 21 those transactions were entered into in any kind 22 of special or unusually advantageous terms, did 17513 1 you? 2 A. We, as examiners, felt that it was 3 possible that you had insider trading taking place 4 or special treatments taking place. 5 Q. I remember seeing a reference to that 6 in your handwritten notes that we talked about 7 yesterday where you said that there was an issue 8 about insider trading but the examiners couldn't 9 prove it. 10 Is that what you're talking about? 11 A. That's correct. It would have required 12 a special investigation in order to look at 13 securities outside of the institution. 14 Q. Now, if you had found -- well, the 15 information that you reviewed led you to conclude 16 that United was doing a certain percentage of 17 business with Drexel; and that's what you reported 18 to Mr. Twomey, correct? 19 A. Right. 20 Q. Going beyond that to say that they were 21 extracting special non-arm's length advantage, you 22 never reached any such conclusion, did you? You 17514 1 never reached that conclusion? 2 A. I had my personal opinion. 3 Q. And you never expressed that in any 4 written report to Mr. Twomey, did you? 5 A. It was expressed in that note that you 6 saw yesterday, and I expressed that to Mr. Twomey 7 about it. 8 Q. What did he say about that? 9 A. It was an issue that was always on the 10 back burner, something that was kept in mind. We 11 got calls from the SEC office concerning it. You 12 had Congressional inquiries concerning it. It was 13 an issue. 14 Q. So, it was an issue not only you were 15 focussing on and Mr. Twomey was focusing on but 16 you were getting calls from Congress about whether 17 Drexel was obtaining a special advantage in its 18 business dealings with United? 19 A. You had calls concerning Drexel's 20 involvement with Bank United. 21 Q. So, Congress was looking at it. You 22 were looking at it. Mr. Twomey was looking at it. 17515 1 You said SEC. 2 Was the SEC investigating whether 3 Drexel was obtaining special advantages in its 4 business transactions with United? 5 A. We had correspondence about it. 6 Q. Was there anybody else that was 7 investigating Drexel's business with United during 8 the time you were examiner-in-charge? 9 A. I'm not aware of everyone that was 10 involved in it. 11 Q. There could have been other people, but 12 you didn't know about them? 13 A. Right. 14 Q. And as far as you know, not one of 15 these different agencies or individuals ever came 16 to the conclusion that Drexel had extracted or was 17 extracting any special non-arm's length terms in 18 its business transactions with United; isn't that 19 correct? 20 A. Beyond my examination, I was not 21 privileged to whatever activity was taking place. 22 Q. So, can we conclude that that is, in 17516 1 fact, the reason why -- well, you're aware, are 2 you not, that United sent monthly reports on its 3 high-yield bond purchases and sales to the 4 supervisory staff, to Ginger Baugh. 5 Are you familiar with that? 6 A. Yes. 7 Q. So, you knew they were reporting on all 8 of their purchases and sales every month directly 9 to Mr. Twomey's assistant, correct? 10 A. I don't know to what magnitude. They 11 had requirements to report that. 12 Q. But you were aware that they were 13 reporting regularly on what they were doing with 14 respect to the high-yield bonds, correct? 15 A. Yes. 16 Q. And the principal focus, as your 17 document said, was on whether there would be any 18 special benefit directly or indirectly, as a 19 result of the insider relationship, correct? 20 A. We were looking for any improprieties 21 that could be taking place within the institution. 22 Q. And if you had found any such 17517 1 improprieties, you would have reported them to 2 Mr. Twomey, correct? 3 A. Right. 4 Q. And with that information, Mr. Twomey 5 had the authority to issue a supervisory directive 6 to United to stop doing business with Drexel, did 7 he not? 8 A. It's according to -- not just Neil 9 himself. It would be an issue that would be 10 handled by the regulators. Neil did not make all 11 the decisions himself. It was in accordance with 12 the institution. You had other groups of 13 individuals that had worked along with him. 14 So, I couldn't make that statement and 15 say, yes, that it was just Neil. It was the 16 regulatory agency and its authority working 17 together, not just Neil himself. 18 Q. So, if I amend my question to say the 19 regulatory agency, including Neil and his 20 superiors at the Federal Home Loan Bank of Dallas, 21 had they concluded that United was providing some 22 kind of special insider benefit to Drexel in all 17518 1 of these transactions, had the authority to issue 2 a supervisory directive to tell United to stop 3 doing business with Drexel, would you agree with 4 that? 5 A. They did have the authority. 6 MS. CLARK: Your Honor -- I'm sorry. 7 Can we offer A12120? 8 MR. VEIS: No objection. 9 THE COURT: Received. 10 MS. CLARK: I'm going to start on a 11 another section of the examination, if this would 12 be a good time to take a break. 13 THE COURT: Okay. We'll take a short 14 recess. 15 16 (Whereupon, a short break was taken 17 from 10:11 a.m. to 10:32 a.m.) 18 19 THE COURT: Be seated, please. We'll 20 be back on the record. 21 MR. GUIDO: Your Honor, I have a 22 scheduling issue. It looks like Ms. Carlton is 17519 1 going to carry over until tomorrow -- Monday. 2 Excuse me. We would like to know whether or not 3 it would be possible, since that is the case, 4 whether we can break at 4:00 today or if you want 5 to go later and we'll have to change our flights. 6 We thought originally we would be able to get 7 done. 8 THE COURT: All right. We'll adjourn 9 at 4:00. 10 Ms. Clark, you may continue. 11 Q. (BY MS. CLARK) Just to go back and 12 clarify, the discussion we were having about 13 Drexel and its relationship with United, could you 14 just take a look at Exhibit -- I'll just show you 15 mine -- 12143 and tell me whether it is the 16 document that you referred to when you said that 17 that's what set forth your thoughts on the Drexel 18 relationship? 19 MR. VEIS: Which document is that, 20 Counsel? 21 MS. CLARK: It's 12143. It's a memo 22 dated February 1988 concerning a meeting with GAO, 17520 1 and we referred to it without identifying the 2 exhibit number. 3 Q. (BY MS. CLARK) So, I want to see if 4 that's what you were referring to. 5 A. Yes. 6 Q. So, the handwritten notes on the second 7 page of that document are the notes that you 8 referred to just before the break. And I would 9 also like to just clarify this question of what 10 conclusions you reached in regard to the question 11 on Exhibit A12120 that we were talking about just 12 before the break, as well. 13 Do you have your copy of that? 14 A. You need me to do what? 15 Q. I just want you to refer to that 16 document and the question we were discussing about 17 whether, at any time, you ever concluded one way 18 or another anything about whether Drexel was 19 obtaining any kind of special benefit from its 20 relationship with United. I just wanted to focus 21 you back on that question. 22 Do you see that? 17521 1 A. Yes. 2 Q. Now, do you recall that during your 3 deposition, we also discussed this document; and I 4 asked you specifically whether you had reached any 5 conclusions as to whether Drexel was obtaining any 6 benefit from its relationship with United? 7 A. Yes. 8 Q. And do you recall that you told me at 9 that time last year that you never reached any 10 such conclusion? 11 A. If you say so. I don't have the 12 testimony before me. 13 Q. All right. Do you have recall -- 14 A. I would have to see what is stated. I 15 don't recall those exact words. 16 Q. Why don't you take a look at your 17 deposition at Page 893. 18 Do you still have that in front of you? 19 A. No. 20 21 (Whereupon the document was tendered to 22 the witness.) 17522 1 2 A. What's the page again? 3 Q. (BY MS. CLARK) 893. 4 A. (Witness reviews the document.) 5 Q. Do you find Page 893? 6 A. Yes. 7 Q. Do you see where you are talking about 8 the chart that you prepared showing what 9 percentage of United's securities business was 10 being done with Drexel, sort of at the top of 11 Page 893? Let me help you. The last question on 12 Page -- 13 A. What I say here is that "I do not 14 recall using the terms and language here and 15 whatever chart that you have presented to me would 16 show that Drexel would receive what percentage of 17 investment they have." I'm talking to 18 specifically whatever you have presented before 19 me. 20 Q. Let's -- just to make the record clear, 21 let's identify what the question was that you were 22 asked and then what your answer was. 17523 1 Do you see I asked you, "Do you recall 2 whether you reached any conclusion as to whether 3 Drexel was benefiting directly or indirectly as a 4 result of manipulating the investments of USAT or 5 assets of USAT?" That's a question that's 6 tracking the language of Exhibit A12120 which is 7 in front of you. 8 And your response was: "I don't 9 recall, as a result of manipulating, using the 10 terms of the language here. I do recall that 11 their chart will show that Drexel received what 12 percentage of the investment they had." 13 That's what you were just reading from, 14 correct? 15 A. Correct. 16 Q. Then we go on to say, "But you don't 17 recall reaching any conclusions one way or another 18 as to whether there was any benefit to Drexel as a 19 result of manipulating investments of USAT 20 assets?" 21 And your answer was, "No." 22 Then we follow up once more. "You just 17524 1 recall that there was business, and you reflected 2 the amount of business on the chart?" 3 And your answer was, "That's correct." 4 Do you see that? 5 A. Yes. 6 Q. Was that truthful testimony at the time 7 you gave it in May (sic) of 1987? 8 A. Yes. 9 Q. And that reflects that you did not 10 reach a conclusion that Drexel was benefiting 11 directly or indirectly as a result of manipulating 12 the investments of United, correct? 13 A. If Drexel had a great percentage of the 14 business, they wouldn't doing it free; so, they 15 did benefit. 16 Q. And your conclusion was limited to the 17 percentage of business that Drexel did with 18 United? I just want to be clear that that is your 19 conclusion as reflected in your testimony here. 20 You just recall that there was business and you 21 reflected, "The amount of business on the chart, 22 that's correct"? 17525 1 A. Whatever -- right. And whatever income 2 they received for that would be benefit. 3 Q. Ms. Carlton, by the time you had your 4 first examination of United, you were an 5 experienced examiner, were you not? 6 A. Yes. 7 Q. In fact, you were assigned to United 8 because you were an experienced examiner and it 9 was a relatively large and complex examination 10 job; is that correct? 11 A. I don't know what the rationale they 12 used to assign me. I was assigned. 13 Q. Do you recall testifying in your 14 deposition that you were assigned to United 15 because you were experienced? 16 A. I was experienced. 17 Q. And, in fact, you were a very highly 18 regarded examiner. You had won a national 19 competition. You were one of 20 people selected 20 nationwide to participate in that program? 21 A. Yes. 22 Q. By the time you started work at United, 17526 1 you had taken specialized instruction in finance 2 and other matters, had you not? 3 A. You mean training courses? 4 Q. Yes, I do. 5 A. Yes. 6 Q. You had taken a specialized course in 7 finance that covered financial futures and 8 options, puts, calls, and arbitrage, had you not? 9 A. Yes. 10 Q. You had taken a specialized course that 11 covered asset/liability management? 12 A. Right. 13 Q. Now, Mr. Veis asked you a number of 14 questions about your prior examination experience, 15 seeming to focus on how small the prior jobs were, 16 how small the institutions were or how traditional 17 their portfolios were. 18 But didn't you also examine Gibraltar? 19 A. I was not in charge of Gibraltar. 20 Q. But you were on the examination team at 21 Gibraltar, were you not? 22 A. That's correct. 17527 1 Q. Wasn't Gibraltar one of the largest 2 owners of mortgage-backed securities in the region 3 at that time? 4 A. And I did not review that area. 5 Q. Well, let me ask another question. 6 Weren't you the kind of examiner where, if you did 7 not understand something, you would dig into it 8 and ask questions until you did understand it? 9 Isn't that the way you approached your 10 work as an examiner? 11 A. I was a challenging examiner. 12 Q. Meaning that you would challenge 13 anything somebody told you to make sure you were 14 satisfied you knew the way it really was, correct? 15 A. Correct. 16 Q. If you ever saw a problem or an issue, 17 you would chase it down until you were sure you 18 totally understood it and were able to deal with 19 it to your satisfaction. Is that a fair 20 statement? 21 A. I would not go to that extreme. 22 Q. You wouldn't chase it down until you 17528 1 were satisfied that you understood the problem? 2 A. We work on a team concept. So, it's 3 not one individual conducting work. It's a team 4 concept. 5 Q. Well, were you familiar with the 6 regulations that were applicable to thrifts? 7 A. Yes, I was. 8 Q. And were you able -- even if you didn't 9 know the specifics of a regulation, you were at 10 least able to spot regulatory issues and know that 11 they were something that you had to follow up and 12 resolve? 13 A. Right. 14 Q. And again, once you spotted an issue, 15 if you thought there was a potential regulatory 16 problem, you would look into it until you were 17 satisfied that you understood the situation and 18 reached a conclusion one way or another as to 19 whether there was a regulatory problem. 20 Isn't that the way you conducted 21 yourself as an examiner at United? 22 A. I would report to the proper authority 17529 1 to take whatever actions needed to be taken. 2 Q. And you would pay particular attention 3 to any new issue or any new or evolving problem, 4 would you not? 5 A. That's a part of our role as examiners. 6 Q. You wouldn't just assume that things 7 were being done properly, would you? 8 A. No. 9 Q. In fact, that's what an examination is 10 all about. Examiners don't assume anything, do 11 they? 12 A. I won't say all examiners. 13 Q. Let's talk about Vivian Carlton. 14 You're the kind of examiner who 15 wouldn't assume anything, would you? 16 A. I wouldn't say "anything." 17 Q. Well, let's see about that. 18 Why don't you take a look at your 19 deposition at Page 165. Actually, if you would 20 begin at the bottom of 164, you will see that I'm 21 asking you questions about the fact that United 22 had established a trading room which was a new 17530 1 event or new development at United. And I asked 2 you whether it would raise any concerns or 3 curiosity on your part to find out what was going 4 on in this trading room facility. And you said, 5 well, you would assume if they were trading, they 6 would have adequate facilities, et cetera. 7 Then I asked you, "Would you really 8 assume that?" And the specific question is, on 9 Page 165: "But you would just assume -- when you 10 read this, you would just assume they had the 11 adequate facilities; and that would be it?" 12 And what was your answer? 13 A. "I would not assume anything." 14 Q. And that was your approach to your job 15 particularly as examiner-in-charge, was it not, 16 that you would not assume anything? You would 17 personally pursue something until you were 18 satisfied that you understood it and were able to 19 resolve it properly? Isn't that the way you 20 approached your job? 21 A. In my job, I'm charged as an examiner 22 to evaluate all situations to the point in which 17531 1 we can assess what the concerns are. That entails 2 whatever the procedures and guidelines that are 3 set before us to follow. 4 So, I'm following not my personal 5 assumptions. I have policies and procedures that 6 dictate what I do as an examiner. 7 Q. And one of the policies and procedures 8 that dictate what you do as the examiner is that 9 you, as examiner-in-charge, are the person who is 10 ultimately responsible for the final work product, 11 for the final examination, are you not? 12 A. The supervisory agent is responsible 13 and the Dallas office is responsible for the final 14 work product. We present the findings, and they 15 make the final decision. 16 Q. But you as the examiner-in-charge are 17 the one person who is responsible for presenting 18 the examination findings to the supervisory agent? 19 A. We are responsible for gathering the 20 data. 21 Q. And presenting it -- analyzing it and 22 presenting it to the supervisory agent; isn't that 17532 1 fair? 2 A. Right, right. 3 Q. And in the course of doing that, it was 4 your approach that you would not assume anything. 5 Is that fair? 6 A. Usually -- I don't know what you're 7 trying to make with the word "assumption." We did 8 what we had to do in order to provide it. It's 9 not a matter of not assuming. It's a matter of 10 our job function. 11 Q. I think that we understand each other. 12 What I'm asking you is: You don't take 13 things at face value? 14 A. No, I do not. 15 Q. You don't take something as true just 16 because somebody tells you. You satisfy 17 yourself -- you do whatever procedures you feel 18 are necessary to confirm that you understand what 19 you are seeing as the examiner? 20 A. Right. 21 Q. In fact, you would not hesitate to 22 follow up on any potential wrongdoing that you 17533 1 would see in the association, would you? 2 A. We are charged with unsafe and unsound 3 regulatory violation, fraud, criminal activity. 4 We are charged with, any time we find it, to 5 disclose it, take action on it, or enforce that 6 management does. 7 Q. So, you would follow up -- if you saw 8 anything that suggested there was wrongdoing going 9 on, you would follow it up, wouldn't you? 10 A. Yes. 11 Q. You wouldn't just let it go by. You 12 would follow it up to the point where you reached 13 a conclusion as to whether there was really a 14 problem or not? 15 A. Conclusions may not always be reached. 16 Q. Well, you would follow it up to the 17 point where you could make an assessment and send 18 that along to the supervisory agent for a 19 disposition, correct? 20 A. Yes. 21 Q. Now, if you asked management -- if you 22 saw something that raised a concern or even in the 17534 1 course of your regular examination procedures, if 2 you asked management for information, you wouldn't 3 take "no" for an answer, would you? 4 A. I didn't -- as examiners, we do not -- 5 if we request information and management will not 6 or chooses not to provide that information, we can 7 document it as such and rate management as not 8 being cooperative as far as taking correct 9 supervisory action. It would just be noted, that 10 situation. 11 Q. Do you recall when I asked you that 12 question in the deposition and I said, well, if 13 you asked for something and they didn't give it to 14 you, they just refused to give it to you, that you 15 said you would take that right up to the board of 16 directors of the association and to the 17 supervisory staff? 18 A. And you can do that. 19 Q. And you did do that? That was your 20 job, wasn't it? 21 A. When necessary, that's a part of our -- 22 that's a part of the process. It's ultimately 17535 1 providing information to the board of directors. 2 Q. Remember when I asked you during your 3 deposition whether you ever asked for any 4 information from United that you were not 5 provided, you told me that you could only remember 6 one instance in the entire time that you were 7 working on exams at United? 8 Do you recall that? 9 A. I don't recall that. 10 Q. Do you recall that the only instance 11 that you remembered over the entire time where 12 information was requested by United and not 13 provided had to do with the Couch Mortgage 14 situation? 15 A. I know there were other instances. If 16 you review the request log, it identifies what 17 requests were outstanding and what information 18 that was not obtained. I do specifically recall 19 that, as an example, Couch was one instance in 20 which we did not receive the files simply because 21 the institution didn't have them to provide them. 22 Q. But you do recall that when we 17536 1 discussed this question a year ago, that was the 2 only example that you could remember. You were 3 unable to remember a single other example in the 4 entire time you were there of anything you ever 5 asked United for that you were not provided? 6 A. I don't recall that. I may have made 7 the statement. 8 Q. Now, you just mentioned the request 9 log. What were you talking about? 10 A. You have a request log in which -- it's 11 a laundry list of items requested from the 12 institution. We also log in the date that we 13 receive data; and if data is not received, then 14 that is so documented. A lot of the information 15 is requested by my staff. Therefore, because the 16 information -- I may not have directly made the 17 request. 18 So, if I requested something or the 19 staff, that's two different questions. I 20 personally did not request all the data from the 21 institution. 22 Q. You would be aware if your staff 17537 1 requested information from United and it was not 2 provided, would you not? 3 A. Not in all cases. I had a staff of 4 approximately 13 individuals. 5 Q. And you would review the request log 6 and so would your field manager, correct? 7 A. Not necessarily field manager. 8 Q. But you would review the request log? 9 A. I had a person assigned to monitor as 10 an administrative person on the exam to follow up 11 to make sure that the exceptions and requests 12 where information was coming in. You had a person 13 responsible for that. 14 Q. And you, as examiner-in-charge, would 15 be made aware of any outstanding requests, 16 requests that were made and not responded to. 17 That is part of your job as examiner, is it not, 18 to know whether your team is getting all the 19 information from requests? 20 A. If it was something that was material, 21 I would possibly be made aware of it. 22 Q. Why don't we take a look at Page 243 of 17538 1 your deposition, please. 2 Do you see I asked you, "Would it be 3 your practice, if the institution simply ignored 4 your first request and second request, simply to 5 say, 'Okay. Well, never mind'?" 6 And you answered, "No." 7 "What would you do if you put out a 8 request and you put out another request and 9 nothing showed up?" 10 What was your answer? 11 A. "We would talk to the president, the 12 chairman of the board, the institution, and, if 13 necessary, inform upper management that they were 14 refusing to cooperate with the examination 15 process." 16 Q. And upper management, you're talking 17 about Dallas there? 18 A. No. 19 Q. You're talking about upper management 20 of the association? 21 A. Right. 22 Q. Then you go on -- let's go up to the 17539 1 top of the next page. "Anyway, at this point, you 2 don't remember any other examples of information 3 that was requested and never refused to be 4 provided by USAT and you would have to go back and 5 check the records?" 6 Do you see that? 7 A. Yes. 8 Q. That confirms, at least as of the time 9 of your deposition last year, there wasn't a 10 single other instance that you could remember, 11 correct? 12 A. Whatever. 13 Q. Now, you mentioned the request logs. 14 Let's look at the request logs to see if there are 15 any others that might have occurred that you 16 couldn't remember at the time of your deposition 17 since that's the source that you told me you would 18 have to go to to refresh your recollection. Let's 19 look at Exhibits B3972 and B3975. 20 Ms. Carlton, the exhibit we've marked 21 at B3975 is the control log for the -- request 22 control log in the 1986 examination produced out 17540 1 of the examination work papers. Can you identify 2 it as such? 3 A. Yes. 4 Q. And the Exhibit B3972 is the USAT 5 request control log for the 1987 exam; is that 6 correct? 7 A. Correct. 8 MS. CLARK: Your Honor, I offer 9 Exhibits B3975 and 3972. 10 MR. VEIS: No objection, Your Honor. 11 THE COURT: Received. 12 Q. (BY MS. CLARK) Ms. Carlton, I've 13 asked you to review these control logs to see 14 whether they refresh your recollection as to any 15 other instance in which the examiners made any 16 request for information to United and did not 17 receive the information requested. 18 A. You have one incident in 1987 in 19 which -- it's Item No. 35 -- that information is 20 incomplete. 21 Q. Okay. Can you tell what that is? 22 A. You have Item No. 46 dated 17541 1 December '87. That item is incomplete. 2 Q. Can you tell what that is? 3 A. No, I cannot. 4 Q. Okay. 5 A. You have Item No. 98, "partial 6 complete." You have Item No. 100, a question 7 mark. You have Item No. 105, "did not know this 8 information." You have Item No. 117, "partial." 9 Q. So, is that it for the Exhibit B3972, 10 which is the request control log for the 1987 11 exam? 12 A. It appeared to be. 13 Q. Let's go to the 1986 exam. 14 A. They all have an entry in them. 15 Q. I'm sorry? 16 A. They all have an entry. 17 Q. Okay. Do you know how the three or 18 four items that you saw on the 1987 request 19 control log were ultimately disposed of? 20 A. No, I don't. 21 Q. Would it be your belief, based on your 22 normal practice as examiner-in-charge, that you 17542 1 would have followed up and ensured that that 2 information was obtained if it was material to 3 your examination? 4 A. We probably got an oral -- some 5 explanation as to the situation. In some cases, 6 say, an example like the Couch where they said 7 they had no files, there was no action to take 8 place. If they didn't have it, there was nothing 9 to give. 10 Q. And you actually remember the Couch 11 situation, correct? 12 A. Yes, I do. 13 Q. I'm just exploring the ones you don't 14 remember at this point. Did anything on this 15 control log actually refresh your recollection of 16 any other specific instance? 17 A. No. 18 Q. And you don't know how those were 19 disposed of at this point, correct? 20 A. No. 21 Q. Okay. But if it was material to your 22 examination and the information was not provided, 17543 1 you would have noted that in a report to the 2 board; and, ultimately, if it was really 3 important, you would advise your field manager, as 4 well. Correct? 5 A. When you look at loan write-ups, you 6 will see that appraisals were not approved. In 7 your deficiencies, when you write in your loan 8 write-ups, you note that appraisal was not 9 obtained. You note approval was not provided. 10 Deficiencies that are noted in the examination is 11 a process of that document's information not 12 obtained or that does not exist. 13 Q. Sure. 14 A. When you look at books and records, 15 information that's not there and is written up, 16 that's a record of data not received or data 17 missing. 18 Q. I understand. I was really asking you 19 when you went to the association, you asked for 20 information; and they just wouldn't give it to you 21 or they were not responsive. 22 But you're pointing out there may be 17544 1 instances where you go to a loan file and there 2 isn't a title report? 3 A. Right. 4 Q. That's two different situations? 5 A. No. That's the same situation. 6 Q. If they don't have a title report, they 7 could look at the file and say there isn't a title 8 report here. That's not what I was asking you. 9 When you made a request, they didn't respond to 10 the question. I thought that's what the control 11 log reflected. 12 A. The request log is a list of -- after 13 you review work and you don't have that 14 information, you ask for it; so, you're talking 15 about the same thing. 16 Q. So, the control log would be a list of 17 all the things that you asked for and didn't get, 18 including both types of situation that we just 19 talked about? 20 A. Deficiencies and violations noted are 21 instances where information was not there. You 22 are talking the same thing. The log is only a 17545 1 process of gathering that data. 2 Q. Now, you said that as a result of the 3 Couch Mortgage situation, United starting 4 requiring that all requests be made in writing. 5 Do you recall that testimony? 6 A. That's correct. 7 Q. Is that what the control logs were? Do 8 they reflect the system that was set up as a 9 result of that incident? 10 A. No, it -- the control log is a system 11 that we have. After the Couch situation, along 12 with the control log that we had prior to the 13 Couch situation, we basically had free run of the 14 institution, meaning that if I'm reviewing a 15 creditor if I need to talk to a loan officer, if I 16 need to talk to a clerk, I could walk next door. 17 I could walk to the next floor and talk to that 18 individual, obtain whatever information I need, 19 and that does not slow the progress down as far as 20 having to sit down, draft up a request, and ask 21 that that -- find the individual, the liaison 22 individual, ask him to then provide that 17546 1 information. 2 After the situation that had taken 3 place with Couch when we went to individuals, they 4 would tell us, "We cannot directly provide you 5 this information. We will have to send it through 6 management or certain individuals." That took 7 place after Couch. 8 Q. And what you're describing is that when 9 you were making a request for some kind of file or 10 documents or the like, that you would have to put 11 that request in writing; and this began sometime 12 after the Couch situation -- 13 A. That's correct. 14 Q. -- developed? 15 Now, do you know whether that was 16 because there had been some kind of confusion or 17 disagreement about what the examiners had and had 18 not asked for or what the examiners had or had not 19 been provided that caused United to say, "Look. 20 From now on, we want all requests in writing so we 21 have a record of what you've asked for"? 22 A. We felt that it was, in part, because 17547 1 we had obtained information on the payment that 2 they had made to Couch without management knowing 3 that we had received payment of that -- that we 4 had received information on that situation. And 5 they had reported to Dallas that it was current 6 and were not aware that we were aware of how that 7 loan was brought current. 8 Q. So, your speculation is that because 9 you had found information about a payment which 10 you claim was not disclosed, that they then 11 wouldn't allow you to get any information anywhere 12 in the association because of -- excuse me -- 13 without making a written request. 14 Is that your theory? 15 A. I would say based on that information 16 that at that time we had, the information flow 17 changed. That was the significant event that took 18 place. 19 Q. Nobody ever told you that was the 20 reason, correct? 21 A. No. 22 Q. So, that is just your speculation based 17548 1 on suspicion or what? 2 A. Yes, based on my opinion of the 3 situation. 4 Q. And this would be consistent with your 5 sort of approach to examining: If not assuming 6 everything, taking everything with a suspicious 7 point of view, correct? 8 A. Anytime you have a change significant 9 in the flow of information or the attitudes of 10 management, you ask why. And anytime you had an 11 event like what had happened at that point which 12 directly reflected on management and its 13 integrity, you ask why. 14 Q. And you asked that question, and what 15 were you told? What did management tell you was 16 the reason for the new system? 17 A. They did not explain the reason for the 18 new system. 19 Q. You're saying you asked them about the 20 new system and they didn't give you a reason and 21 you stopped there? 22 A. I am saying that when we asked them 17549 1 questions for the reason for it, they did not 2 provide information. At that time, we were 3 getting out of the institution; so, it really 4 didn't matter as far as the flow of information 5 from that point going forward because they had to 6 at that point stop themselves, close down 7 everything. We had to move from the location, and 8 they had to focus entirely on Couch and trying to 9 obtain the information. So, it was a whole 10 different flow from the examination from that 11 point on. 12 Q. So this happened right before you were 13 leaving. So, when you asked them, "Why are you 14 doing this?" and they didn't answer, you said, 15 "It's not important"? 16 A. We were told that because in 17 conjunction with the flow of information, we also 18 had to move; and we had to move because of Couch, 19 because they had to make space to try to bring in 20 the files and make -- prove lien positions and the 21 files within the institution. So, we knew that 22 that was provided as a part of that information. 17550 1 Q. Well, you don't remember any discussion 2 about the fact that there was some confusion or 3 disagreement about what the examiners had asked 4 for and what they had received that was the reason 5 for starting to ask that all requests be put in 6 writing so it's documented for everybody to note 7 and no disagreements would be possible? You don't 8 remember any discussion about that? 9 A. We already had a log taking place in 10 which we would meet and discuss what was 11 outstanding. 12 Q. Okay. Let me ask you about your 13 comment that you didn't have access to association 14 personnel. 15 Isn't it true, Ms. Carlton, that you 16 were able to attend committee meetings whenever 17 you wished? 18 A. Yes. 19 Q. And, indeed, you did attend committee 20 meetings during the course of your work? 21 A. Yes. 22 Q. Including the audit committee? 17551 1 A. Yes. I'm referencing -- where we were 2 not afforded the opportunity was after -- this was 3 after we had -- at the time this incident 4 happened, we had gone through the examination 5 process; and we had attended the board meetings. 6 We had attended committee meetings, and we were in 7 the process of wrapping up the examination. We 8 had had the incident with Couch. When the 9 incident with Couch happened, it closed that 10 examination down. The whole process ceased to 11 operate in a normal flow. The management had gone 12 to Dallas directly. You had a flow of supervision 13 directly to examination. Nothing was normal from 14 that point on. Nothing was. 15 Q. So, the new system of asking for 16 requests in writing was only one part of a changed 17 procedure for the entire examination. Is that 18 what you're saying? 19 A. That is correct. 20 Q. And the change was that supervision in 21 Dallas now became involved directly with the 22 examination function, correct? 17552 1 A. That's correct. 2 Q. And to some extent, it meant that the 3 normal flow of information which would ordinarily 4 be going through your staff to you, through your 5 field manager, to Mr. Twomey, and then up the 6 chain was interrupted. Is that what happened? 7 A. The flow of information was still 8 going. 9 Q. Okay. So, what was it that you were 10 just trying to describe for us about how the whole 11 process changed? 12 A. It meant that management of the 13 institution was going directly to Dallas. 14 Q. What do you mean? Tell us what 15 happened. 16 A. Meaning that they were communicating, 17 calling to Dallas, writing to Dallas, trying to 18 ask Dallas to take action on certain items prior 19 to completion of the examination. 20 Q. And what did Dallas do? Did Dallas 21 communicate back to management of the association? 22 A. They communicated back to management 17553 1 that they had to await the results of the 2 examination. 3 Q. So, why is the fact that the management 4 of USAT was communicating to Dallas relevant to 5 the process of your examination? 6 A. That was relevant to the process of 7 examination because, again, the one issue in which 8 they were doing that was the Couch issue. Because 9 of the fraud and when that incident broke and it 10 caused such a jeopardy to the industry and to the 11 net worth of the institution, we had to cease any 12 other reviews and focus on that line, just on the 13 work of Couch. So, that in itself stopped even 14 other work for the exam that was taking place. 15 Q. So -- we'll come back and talk about 16 the exam and those issues more in a minute, but I 17 just want to make sure that we now -- I think we 18 now understand a little bit more about the 19 incident that you talked about in 20 direct-examination of having to put requests in 21 writing. 22 You're saying this occurred at the end 17554 1 of the exam at the time that Couch Mortgage 2 exploded and other parts of the -- and the 3 examiners' attention became focused so much on 4 Couch. 5 Do we have the timing right? 6 A. Right. 7 Q. Now, let's talk about before that 8 happened; that is to say, during the exam. Not at 9 the end but during the exam as it was taking 10 place. And during the exam in 1987, I would like 11 you to tell the Court a little bit more about the 12 extent to which you had access to the personnel at 13 United. 14 Isn't it true that when you had 15 questions about any aspect of United's operations, 16 you would go and talk to the people involved? 17 MR. VEIS: Your Honor, let me clarify 18 which examination we're talking about. Couch is a 19 1986 event. I believe Ms. Clark just asked about 20 both it and 1987. 21 MS. CLARK: I think you're right. You 22 did describe my question correctly. I'm asking 17555 1 generally about 1986 and 1987. 2 Q. (BY MS. CLARK) I would like the judge 3 to hear from you a more complete description about 4 the relationship between the examiners and 5 association personnel during the course of the 6 exam. 7 Isn't it true in that context that when 8 you had questions about a particular aspect of the 9 association's operations, you or your staff would 10 go and talk to the people in that department or 11 the people involved in that function? 12 A. The process of flow of information -- 13 and I would go on and label it even further in 14 communications with management -- takes on several 15 forms. 16 You have -- you have the communication. 17 You have where we attend board meetings in which 18 we are attending those meetings as observing the 19 activity of the institution. That's not for 20 obtaining information. We are looking at their 21 performance within themselves. We attend those 22 meetings with that in mind. That's our focus. 17556 1 Then you have the examination that's 2 taking place. During that -- in performing your 3 job as an examiner, you're taking -- you break it 4 down by categories. You have all your different 5 facets, be it commercial lending, consumer 6 lending, investment securities. And you have the 7 examiners that are assigned to those areas to go 8 out and review the different areas of those phase. 9 That requires requesting information. It 10 requires, in the example of -- if you reviewed 11 loans, you sit down and discuss those loans with 12 them. You -- the communication is flowing, but 13 you also have to have certain data in order to 14 make those final decisions. 15 So, if I'm reviewing a loan and I have 16 part of my information saying, say, an appraisal 17 and I don't have financial information, I cannot 18 complete that analysis. If it requires two 19 requests, three requests, that -- you have to put 20 that loan aside and start with the next review. 21 And this is all I'm saying is that 22 there were instances where the flow of information 17557 1 was there. That's not to say that in every area 2 we tried to review, that we had difficulty in 3 obtaining the information; and that's not to say 4 in everything that we wanted to do, they tried to 5 hinder us from doing that. 6 No, I am not making those statements. 7 Q. I want to make the record very, very 8 clear. I don't want the judge to come away with 9 an inaccurate impression of the relationship 10 between the examiners and the staff. So, let's 11 just clarify. 12 If you had a question about a loan file 13 that you were reviewing, you would go and talk to 14 the loan officer? 15 A. Yes. 16 Q. And if you had a question about 17 mortgage-backed securities, as you did in 1987 18 during the examination, you would go and talk to 19 Sandy Laurenson, which you did, correct? 20 A. Or whoever was responsible for the 21 areas. The institution would identify the person 22 that we needed to talk to. If that person could 17558 1 not provide it, we would be told someone else. 2 And if we still could not -- and there were cases 3 where you didn't find anyone that could provide 4 the information; and you would sit down with 5 management and say, "What do you know about this?" 6 or, "These are issues that are unresolved," you 7 know, "that are unresolved," or, "We are having 8 difficulty in obtaining this information. Can you 9 provide that information?" 10 We had management status meetings with 11 management, and they would be made aware when we 12 were not receiving information. We would have 13 discussions about it. 14 Q. In fact, I think you had meetings with 15 management where there might be as many as 10 or 16 20 people in attendance to talk about the status 17 of the examination? 18 A. Management, they always met in large 19 groups. It would take more time for them to sit 20 down than for the question we had to ask them. 21 Q. So, you had access to a lot of 22 different people at United; and you had many 17559 1 versions with Mr. Gross during the course of the 2 examination. 3 When you had a question or something 4 that couldn't be resolved, since he was president, 5 you would go and talk to him; and he would give 6 you his time to discuss what problems you were 7 having with the examination, wouldn't he? 8 A. He was not the liaison for the exam. 9 Q. But, in fact, you had numerous 10 conversations with Mr. Gross in the course of the 11 examination, didn't you? 12 A. Yes. 13 Q. And if you had a question about loan 14 classifications, you would even be able to talk to 15 Mr. Berner, who was the attorney for the 16 association. Correct? You could go in and talk 17 to him about your problems with loan 18 classifications; and he would make himself 19 available to discuss those matters, correct? 20 A. When we had loan discussions, you set 21 up loan discussions with -- I don't recall it 22 being Art Berner. You had -- there was a special 17560 1 meeting held in which you sat down and discussed 2 loans. It was not one individual. 3 Q. Take a look at Page 785 about 4 Mr. Berner and loan classifications. 5 A. What page? 6 Q. 785. This is Page 785 of your 7 deposition on March 27th, 1997. Do you see that 8 I'm asking you about a dialogue, let's say, taking 9 place about the classification of a loan? And 10 there's -- in the middle of Page 875, I say, "Do 11 you recall any discussion with Mr. Berner about 12 this document?" 13 Your answer, "Yes." 14 "Well, what do you recall?" 15 What do you see? 16 A. "He was always argumentative and just 17 arguing his point. And he wanted to set forth the 18 matter in writing; so, he did." 19 Q. Is that how you recall Mr. Berner? As 20 being very argumentative and always wanting to put 21 forth his views in writing? 22 A. He was a true lawyer. 17561 1 Q. Is that a "yes"? 2 A. Yes. 3 Q. Okay. So, there were several 4 differently liaisons. There was not one liaison 5 person. There were severity liaisons for the 6 requests that the examiners would make from 7 United's management for information needed in the 8 exam; is that correct? 9 A. We had two different liaisons. One 10 when Mister -- that guy -- what's his name? We 11 had one individual -- so, we had more than one. 12 Q. Was that Mr. Jim Pledger, the general 13 counsel -- 14 A. Yes. 15 Q. -- who is currently the Commissioner of 16 the Texas Savings and Loan Department? 17 A. Right. 18 MR. VEIS: I believe that the previous 19 question was slightly misleading. I believe it 20 was unintentional on Ms. Clark's part. I believe 21 the testimony in the deposition related to 22 exceptions. That is, if I understand, a different 17562 1 matter than a response to a request for 2 information. I believe Ms. Carlton's testimony 3 with respect to liaisons has been regarding 4 requests for information. 5 Q. (BY MS. CLARK) Now, if United had 6 tried to restrict your access to the individuals 7 you needed to talk to to get your questions 8 answered, you would have raised that issue with 9 management, correct? 10 A. Yes. 11 Q. So, you would not want to give Judge 12 Shipe any impression that you were denied access 13 to the individuals that you needed to talk to to 14 gather the information necessary to conduct your 15 examination, would you? 16 A. I would say to the judge that there 17 were instances where we did not receive 18 information that we needed in order to finish our 19 review. It was a combination of the -- them not 20 providing the data or streamlining the data to 21 such an extent that we, in all cases, did not 22 receive information. 17563 1 Q. Now, Ms. Carlton, we just talked about 2 the question of them not providing information. 3 Do you recall that? And we talked 4 about your deposition where I asked you twice 5 whether you remembered any instances of them not 6 providing information. 7 Do you recall that? Do you recall that 8 I asked you? 9 A. Yes. 10 Q. And do you recall that in your 11 deposition, you said that you couldn't recall a 12 single instance except Couch Mortgage; and that 13 where you would look to find out if there were any 14 others was the request control logs. 15 Do you recall that testimony in your 16 deposition? 17 A. Right. 18 Q. And we just looked at the request 19 control logs, didn't we? 20 A. Right. 21 Q. And that reflects the four or five 22 instances that you pointed out in the 1987 exam; 17564 1 is that correct? 2 A. And if you look at the loan reviews, 3 you will also see where information was not there. 4 Q. Okay. Just to be clear, what we're 5 talking about is information that was missing in 6 the loans files? 7 A. And where you see in other instances -- 8 and you go into the securities areas. If you read 9 through the reports, you'll see other instances 10 where information was not provided. They didn't 11 have the register. That's a request of 12 information that's not there and not provided. 13 Q. Let's talk about the register. You 14 cited them for not having -- for non-compliance 15 for a regulatory requirement for a contract 16 register. 17 Do you recall the citation in your 18 report that Mr. Veis showed you? 19 A. Right. 20 Q. Now, the contract register was a 21 regulatory requirement, was it not? 22 A. Yes, it was. 17565 1 Q. And what did it apply to? 2 A. It applied to the listing of trades 3 that you would have in your investment securities. 4 Q. Ms. Carlton, we can go back and look at 5 the document; and we will in a minute, if 6 necessary. But don't you recall that the 7 regulation required that you have a contract 8 register for your futures contracts? Isn't that 9 what that regulation was? 10 A. You have registers in which they had to 11 list all of their securities. 12 Q. Okay. After lunch, we'll bring the 13 list of all securities, if necessary. But don't 14 you recall, Ms. Carlton, that the regulatory 15 requirement -- there was one regulatory 16 requirement only, and it pertained to futures 17 contracts? 18 A. When I say "investment" -- you label it 19 "futures contracts." When I talk "securities," 20 I'm talking -- futures contracts is an investment 21 security. 22 Q. That's right. And that one kind of 17566 1 security, futures contracts -- and that one kind 2 alone -- is required to be recorded in a so-called 3 contract register. 4 Do you recall that that's what the 5 regulation was that you cited in your report? 6 A. We are talking about the same think. 7 Q. Okay. 8 A. You're calling it one thing. I'm 9 calling it something else. 10 Q. Let's just be clear that what you cited 11 them for was not having a contract log for the 12 futures contracts as required by the regulation? 13 A. Correct. 14 Q. It had nothing to do with other kinds 15 of securities. The regulation was limited to 16 futures contracts. 17 Do you recall that? 18 A. You can read that comment and see what 19 was cited, and we can pull the report. 20 Q. Again, we don't want the judge to get a 21 misunderstanding or misimpression of what it was 22 that they were cited for. 17567 1 A. And to keep the judge from not 2 obtaining information that's not correct, we can 3 go through each phase of those securities and 4 identify the deficiencies that were noted, be it a 5 register or whatever was not there. 6 Q. On that one, the best evidence of what 7 was cited would be the report itself, correct? 8 A. Correct. 9 Q. So, if you wanted to know what the 10 issue was, you would go and look and see what's in 11 the regulation and look at the regulation and see 12 what it pertained to? 13 A. That way you don't have to determine 14 whether I recall or not the facts that are in the 15 report. 16 Q. All right. We will do that. 17 Now, let's go back to your approach to 18 the examination process and your experience and 19 knowledge as relates to the work that you were 20 doing. 21 We talked about the fact that if you 22 didn't understand something, your approach, as an 17568 1 examiner, was that you would ask questions until 2 you understood. 3 Now, if you just couldn't understand 4 it -- that is to say, there were issues that you 5 simply couldn't figure out -- you had available 6 help from other people in the agency, did you not? 7 You had people to whom you could go and say, 8 "Look. I just don't understand this. Can you 9 please come and help me figure this out?" 10 A. We didn't have support groups back in 11 that day. 12 Q. You didn't have a district appraiser 13 that you could consult if you had an appraiser 14 problem? 15 A. Yes. You're being specific. Your 16 global question -- break it down. 17 Q. So, there were -- in certain areas at 18 least, you were able to consult people in the 19 agency to get assistance if you felt you just 20 didn't have the knowledge or the experience to 21 deal with the matters that were presented in the 22 exam, correct? 17569 1 A. Right. 2 Q. Now, we talked about the fact that John 3 Scott and Terry Smith came in to review United's 4 high-yield securities yet, didn't we? 5 A. Yes. 6 Q. Now, if that instance, Mr. Twomey made 7 the decision to send those two gentlemen in to 8 look at United's high-yield bonds. But if you had 9 felt you wanted additional help, you could have 10 also made that request, could you not, to get some 11 help from the Federal Home Loan Bank of Dallas 12 financial staff? That would have been an option 13 that you had? 14 A. That was an option. 15 Q. In fact, you didn't understand 16 securities and hedging instruments when you 17 undertook this examination, did you not? 18 A. Not fully, no. 19 Q. Do you recall in your deposition I 20 asked you, "Did you understand swaps?" and you 21 said, "Yes, I did." 22 Do you recall that? 17570 1 A. During the examination, we went through 2 a training program. We had the auditors. We did 3 research. We went to libraries and obtained 4 information in order to conduct that examination 5 because, as an agency at that time, we did not 6 have a specialized department that focused on that 7 area. 8 Q. Okay. Let's just review what you said 9 in your deposition about what you knew during this 10 examination. Let's start with swaps and go to 11 185, 86. 12 A. Mine doesn't go up any higher than 981. 13 Q. I misspoke, and I think I may also have 14 the wrong -- well, let's go to Page 190 then. 15 MR. GUIDO: 199? 16 MS. CLARK: 190. 17 Q. (BY MS. CLARK) Have you found 190? 18 A. Yes. 19 Q. Do you see there at the top, I say, 20 "Were you familiar with cap rate programs when you 21 undertook the examination of USAT in 1986?" 22 Do you see that question? 17571 1 A. Yes. 2 Q. And what was your answer? 3 A. "I know that cap rate programs in 4 general can be used as a hedge program against 5 different instruments." 6 Q. Okay. And you affirmed, yes, you did 7 you understand cap rate programs. "Were you 8 familiar with cap rate programs when you undertook 9 the examination of USAT in 1986?" 10 ANSWER: "Yes." 11 Do you see that? 12 A. Yes. 13 Q. And at the bottom of the page, "Were 14 you familiar with collar rate programs when you 15 undertook the examination of USAT in 1986?" 16 And your answer, "Yes." 17 Do you see that? 18 A. Yes. 19 Q. How about 194? 20 MR. VEIS: Your Honor, could we have in 21 the record the follow-up questions on both those 22 areas that indicate what Ms. Carlton's 17572 1 understanding actually was. I believe it would be 2 appropriate to complete that area. 3 THE COURT: Do you want to complete it, 4 or do you want to leave it to redirect? 5 MS. CLARK: She already read that. I 6 was just completing her answer, Mr. Veis. Let's 7 go to 194. She started out by reading the part 8 you wanted to read. 9 MR. VEIS: "And with respect to the 10 understanding of collar rate programs?" I don't 11 believe that's in the record. 12 THE COURT: What's the part that you 13 want to include? 14 MR. VEIS: I wanted to indicate after 15 the answer, "And what was your understanding of 16 what collar rate programs were?" 17 ANSWER: "Again, it was a hedging 18 program." 19 Q. (BY MS. CLARK) Turn to Page 194, 20 please. Actually, start at the end of 193. "You 21 felt that you understood swaps and caps and 22 collars and how they were supposed to work well 17573 1 enough that you could devise a set of test 2 procedures that would give you confidence whether 3 it was working or not working?" 4 You said, "Again, it was the 5 responsibility of management to demonstrate that 6 these instruments work." 7 I said, "Right." 8 "It was not the responsibility of the 9 managers. It was their responsibility to 10 demonstrate either it worked or didn't work, and 11 we could either buy off them at" -- 12 I'm sure there's a mistranscription 13 there. The question, "It was their burden to 14 prove it to you?" 15 ANSWER: "That's right." 16 "They had to prove it to you to your 17 satisfaction?" 18 "That's right." 19 "And you felt you knew enough about 20 these instruments that you could tell whether the 21 story you were getting was accurate enough? You 22 knew enough that you could tell whether they were 17574 1 accurately documenting and whether they themselves 2 knew?" 3 "Yes, they could tell. You could 4 tell." 5 "Okay. Good. Okay." 6 ANSWER: "You didn't have to be a 7 genius." 8 Now, that was your testimony that you 9 gave me back in your deposition in 1997. 10 Let's go to CMOs at 259 just to 11 complete the picture. Do you see at the bottom of 12 259, I asked you, "Ms. Carlton, were you familiar 13 with collateralized mortgage obligations when you 14 began the examination of USAT in 1986?" 15 ANSWER: "Yes." 16 "What were the collateralized mortgage 17 obligations?" 18 "Securities investments that were 19 typically held in subsidiaries." 20 Do you see that? 21 A. Yes. 22 Q. So, back in 1997, you testified that 17575 1 you did understand these various kinds of 2 securities and hedging instruments and, indeed, we 3 also talked about the junk bond portfolio. And I 4 asked you specifically, "Did you feel that you 5 were competent to examine an institution with 6 these various kinds of instruments?" 7 And do you recall that you told me you 8 felt you were competent to examine an institution 9 with these various kinds of new financial 10 instruments? 11 Do you recall that, Ms. Carlton? 12 A. Yes. 13 Q. Was that truthful testimony when you 14 gave it in 1997? 15 A. Yes. What's your question? 16 Q. Now, do you recall that you also 17 reviewed the outside auditors' work papers 18 regarding reverse repos, cash flow bond, interest 19 rate swaps, and the like, yourself? That was part 20 of the examination process that you personally 21 conducted? 22 MR. VEIS: Which examination are we 17576 1 talking about? 2 MS. CLARK: 1986. 3 A. I did not do it alone. 4 Q. (BY MS. CLARK) But you participated 5 in the review of those work papers, did you not? 6 A. Yes. 7 Q. I'm talking about the outside auditors' 8 work papers here, Peat Marwick's? 9 A. Correct. 10 Q. And do you recall that I asked you if 11 you felt that you had sufficient training and 12 experience to assess the adequacy of 13 Peat Marwick's work papers? 14 Do you recall that? 15 A. Yes. 16 Q. And do you recall what you responded? 17 A. It's probably in the depo. Can you 18 show me where it is in the deposition? I'll read 19 it. 20 Q. Look at Page 407. I believe that might 21 be it. I asked you, "And your prior training and 22 experience allowed you to review the Peat Marwick 17577 1 work papers and assess their adequacy?" 2 And your answer was, "As an examiner, I 3 was assigned to USAT and that I had the experience 4 to be there." 5 Do you recall giving me that answer in 6 Washington? 7 A. I don't recall it, but it's stated 8 here. 9 Q. Is that the way you feel? 10 A. Right. 11 Q. Okay. Now, I got the impression, 12 particularly with that exchange, Ms. Carlton, that 13 you sort of resented any suggestion that you were 14 not competent to examine United's securities and 15 the accounting for those securities? 16 A. That was your opinion, and I tried to 17 answer your question. There's no resentment on my 18 part. 19 Q. But you told me in no uncertain terms 20 that you were competent to examine -- 21 A. That doesn't affect my personal opinion 22 of me. That's your questions that you're asking 17578 1 and I'm responding to. 2 Q. So, that is your view. And is that 3 your view today, Ms. Carlton? That you were 4 competent to examine United, including its 5 accountants work papers on securities transactions 6 and all the other parts of the examination that 7 was involved? 8 A. I was assigned to review it, and I did 9 my job. 10 Q. And you were competent to do so, 11 weren't you? 12 A. Right. 13 Q. Now, as the examiner-in-charge, you 14 were governed by certain rules and procedures that 15 were published by the Federal Home Loan Bank 16 Board, were you not? 17 A. Yes. 18 Q. And, in fact, in the '86 exam -- when 19 you went into the field to do the exam, you took a 20 big book called the Examination Objectives and 21 Procedures with you and referred to it during the 22 course of the exam, correct? 17579 1 A. We don't -- yes. 2 Q. And that contained the rules and the 3 objectives and procedures that you were obligated 4 to follow in the course of conducting the 5 examination, correct? 6 A. Yes. 7 Q. Let's look at some of the objectives 8 and procedures that you were required to follow. 9 Let's look at A12106. 10 Is this a portion of the EOP relating 11 to examination reports? 12 A. Yes, it is. 13 MS. CLARK: I would offer A12106, 14 Your Honor. 15 MR. VEIS: No objection, Your Honor. 16 THE COURT: Received. 17 Q. (BY MS. CLARK) Now, Ms. Carlton, did 18 you understand that the examiners were an 19 important part of the supervisory system because 20 they actually went out to the field and dug into 21 the books and records of the association and were 22 able to provide the supervisory personnel with the 17580 1 information that the supervisory personnel needed 2 to have in order to carry out their function? 3 A. Right. 4 Q. So, one of the audiences for the 5 reports that you prepared was the supervisory 6 agents and their staff, correct? 7 A. Right. 8 Q. And that's what's stated on the first 9 page of this EOP on examination reports, correct, 10 where it says, "The objectives of examination 11 reports were to communicate with the Federal Home 12 Loan Bank Board and supervisory agents the results 13 of the examination," and the second one is, "To 14 provide supervisory agents with the information 15 required for communicating effectively with the 16 directorate and management of insured associations 17 to achieve positive results on matters of 18 supervisory concern"? 19 Do you see that? 20 A. Yes. 21 Q. Now, was it also important to the 22 supervisory process to inform the association's 17581 1 board of the results of the review of the 2 association's performance? Was that also an 3 important part of the overall process of 4 supervising the thrift industry? 5 A. Yes. 6 Q. The rules require that you look, among 7 other things, at the question of whether, even in 8 the absence of any violation of law or regulation, 9 there might be safety and soundness problems; is 10 that correct? 11 A. Yes. 12 Q. And I believe that -- well, tell us 13 what an unsafe and unsound practice was, as you 14 understood it? 15 A. Unsafe and unsound practices are trends 16 of deficiencies, trends of regulatory violations, 17 trends of behavior that can demonstrate adverse -- 18 adverse conditions to the institution if -- based 19 on a practice or behavior that is taking place is 20 allowed to continue for any length of time and not 21 corrected. 22 Q. So, the basic idea is that an unsafe or 17582 1 unsound practice would be one that could cause 2 harm or loss if it's not corrected, if it 3 continues and is not corrected. 4 Is that the basic idea? 5 A. That's the basic idea. 6 Q. Now, you understood, did you not, that 7 when you went in to conduct your 1986 examination 8 of USAT, your purpose was to assess the financial 9 condition of the association, determine whether 10 the institution was in compliance with law and 11 regulation, and whether the institution was being 12 operated in a safe and sound manner. 13 That was the purpose of your 14 examination, correct? 15 A. Right. 16 Q. And you were also to, as we've 17 discussed before, keep alert to any potential 18 conflicts of interest. That was another part of 19 your examination that you were obligated to 20 conduct, correct? 21 A. Yes. 22 Q. You've testified, I believe, about 17583 1 interim reports. Now, interim reports are reports 2 that are submitted after the first 60 days have 3 passed; is that correct? 4 A. Yes, approximately. 5 Q. But in addition to that, I think you 6 testified that if there was any serious problem 7 that threatened any harm to the institution, you 8 would also have to provide an interim report to 9 the supervisory side of the agency; is that 10 correct? 11 A. Correct. 12 Q. So, if you found anything in the course 13 of your exam that you felt could affect the 14 institution adversely, you were required to file 15 an interim report to your field manager who would 16 then transmit it to the supervisory side; is that 17 correct? 18 A. Either interim report or call them, but 19 communicate. 20 Q. Well, if you called them, then you were 21 obligated to follow up in writing as well, were 22 you not? 17584 1 A. If they accepted the oral communication 2 of it and did not demand we do a written 3 correspondence, we didn't have to. 4 Q. Let me ask you to look at 5 Exhibit A12055 if you would, please. 6 Can you identify A12055 as another 7 section of the EOP and this one concern interim 8 examination reports? It's a document that we 9 reviewed together at your deposition. 10 A. (Witness reviews the document.) Yes. 11 Q. Turn to Page -- well, the easiest way 12 of doing this is to turn to the second-to-the-last 13 page of this document. 14 Do you see it addresses the subject of 15 oral reports? 16 A. Right. 17 Q. Isn't it true that the EOP -- that the 18 required procedures specified that in order to 19 assure that interim reports are timely, initial 20 interim reports will usually be made orally by 21 telephone or in person but that telephone calls 22 and meetings were to be followed by a memorandum 17585 1 written by the examiner summarizing the oral 2 report? Isn't it true that that was the procedure 3 that was required by the -- 4 MR. VEIS: Your Honor, I believe she's 5 mischaracterizing the language of the document. 6 Her question appears to state that -- I believe 7 the language itself says "should be." There may 8 be a difference in meaning between those two. 9 MS. CLARK: I would be happy to 10 rephrase the question. 11 Q. (BY MS. CLARK) Wasn't it required 12 that telephone calls -- sorry. Let me start over 13 so it's exactly the words of this document. 14 "Wasn't it true that telephone calls and meetings 15 should be followed by a memorandum summarizing the 16 oral report, according to the Examination 17 Objectives and Procedures manual that governed 18 your work as an examiner?" 19 A. That's what it states. The field 20 manager and supervisory agent also had the 21 authority to direct us either to do or not to do 22 something, and we abided by those requests. 17586 1 Q. So, if the field manager or the 2 supervisory agent directed you not to file a 3 written report, you would not file a written 4 report; is that correct? 5 A. That's correct. 6 MS. CLARK: Let me offer A12055. 7 MR. VEIS: No objection, Your Honor. 8 THE COURT: Received. 9 MS. CLARK: Your Honor, I offered 10 12106. Did I? 11 THE COURT: Yes. 12 MS. CLARK: Thank you. 13 Q. (BY MS. CLARK) Now, did you follow 14 the procedures set forth in the EOP with respect 15 to interim reports, Ms. Carlton, except as 16 qualified by your last answer? 17 A. I provided to Dallas whatever they 18 wanted. It wasn't a matter of following the 19 procedure of the EOP manual. It was a matter of 20 following the supervisory agent's direction and 21 the field manager's direction that, at that time, 22 was the overriding decision and the satisfaction 17587 1 that I had an obligation to abide by. He did not 2 pull a book. He told me what to do. We were 3 not -- it was whatever we needed to get the 4 information, get it now, and get it here. 5 Q. So, did you file interim reports 6 whenever you found information that could 7 adversely affect the institution? 8 A. Right. 9 Q. And except as directed by the field 10 manager, you would follow up with a memorandum as 11 set forth in this interim examination report, EOP? 12 A. Yes. 13 Q. Now, at the end of the examination, you 14 prepared a final report of your findings, did you 15 not? 16 A. Yes. 17 Q. And that final report was prepared for 18 a number of purposes which are set forth in the 19 EOP, correct? 20 A. Right. 21 Q. We've talked about the fact that they 22 were prepared to communicate not only with the 17588 1 supervisory staff of the agency but, also, they 2 were prepared to inform the association's board of 3 what your results were in the examination, 4 correct? 5 A. Correct. 6 Q. Let's turn back to A12106 if we can and 7 to Page 6 of that EOP, which is the instructions 8 for preparation of regular examination reports. 9 A. I don't have Page 6. 10 THE COURT: Ms. Clark, my copy seems to 11 have only the odd numbers. 12 MR. VEIS: That's the case with mine, 13 as well. 14 MS. CLARK: I think we've had this 15 problem before. I apologize, Your Honor. I'll 16 have to come back to the document unless we have 17 any others. 18 Let's see if I can do it orally; and 19 then if I can't, we'll come back to it. 20 MR. VEIS: May we have the copy 21 substituted? 22 MS. CLARK: Of course. Let me see if 17589 1 we can do this orally; and if not, we'll come back 2 to the document later. 3 Q. (BY MS. CLARK) Do you recall, 4 Ms. Carlton, that it was the position of the 5 agency that the performance of the function of 6 preparing a regular examination report was to be 7 done by the examiner-in-charge who had the 8 authority and responsibility to perform that 9 function? 10 A. Yes. 11 Q. Performance of the function was not 12 optional since the policy of the Federal Home Loan 13 Bank Board vested the examiner-in-charge with the 14 authority and responsibility to prepare the final 15 report. 16 Is that your understanding of the 17 responsibility for preparing the final exam 18 report? 19 A. Yes. 20 Q. And was it your understanding as well 21 that it was essential to the supervisory process 22 that matters resolved by remedial supervision be 17590 1 recorded in the examination report for future 2 reference? 3 Did you understand that? 4 A. Yes. 5 Q. Now, sometimes there might be 6 relatively unimportant problems that can be solved 7 simply by raising them with management; and if the 8 problems are fixed prior to the time the final 9 report is being prepared, you would not 10 necessarily need to put them in the final report. 11 Was that your understanding and 12 practice? 13 A. That instance can happen like that, 14 yes. 15 Q. Now, when that happened, when you found 16 a violation or deficiency that was not significant 17 enough that it needed to go into the final report 18 which was solved before the final report was 19 prepared, was it your understanding that you, 20 nevertheless, had to document the deficiency and 21 that the exception sheet was the form in which you 22 would document those problems and their 17591 1 resolution? 2 A. That was one form. 3 Q. Well, do you recall that the -- that 4 the position of the Bank Board was that all minor 5 violations or other deficiencies which do not 6 adversely impact overall soundness shall not be 7 included as part of the comments to the 8 examination report but these items shall be 9 handled on the exception sheets and that the 10 exception sheet will contain sufficient detail, 11 the disposition of the exception, and the managing 12 officer's response? 13 Do you recall that that was the policy 14 of the Bank Board with respect to the examination 15 process? 16 A. Yes. 17 Q. And do you recall that the procedure 18 required that the examiner provide the managing 19 officer with copies of exception sheets and obtain 20 the managing officer's signature acknowledging 21 receipt of the exception sheets. 22 Do you recall that that was the 17592 1 required procedure that you followed in examining 2 USAT? 3 A. Yes. 4 Q. As far as any significant findings of 5 the examination are concerned that do not -- that 6 are not minor violations or deficiencies, was it 7 your understanding that you were required to 8 report them in the final examination report and to 9 document the basis for those findings in your work 10 papers? 11 A. Yes. 12 Q. Do you recall that there were set rules 13 for how the examination report would be put 14 together and organized? 15 A. We really didn't have set rules. It 16 depended on the pattern of -- the 17 examiner-in-charge as to the manner in which we 18 put the report together. 19 Q. Let me ask you: Do you recall that 20 there was a summary page to the report and that 21 the EOP stipulated what was to go into the summary 22 page? 17593 1 A. Yes. 2 Q. I believe you actually have this page 3 because it's not on the back. If you want to 4 refer to Page 3 of the EOP on final exam reports. 5 It's A12106. 6 A. Are you talking format in your 7 question? 8 Q. Uh-huh. 9 A. Then, yes, we had a format to follow. 10 Q. And do you recall that -- well, let me 11 ask it this way: Was it your practice that the 12 summary would succinctly present the major or 13 basic problem or problems? 14 Is that how you would present your 15 reports? 16 A. Yes. 17 Q. And you made reference to the pages or 18 comment involved where the specific details were 19 presented? 20 A. Yes. 21 Q. Was it your practice that the report 22 summary gave the reader an overall view of the 17594 1 significant problems confronting the association? 2 A. It would be a judgment made between the 3 examination staff and management as to what would 4 go in the final report. 5 Q. Did you mean management of the 6 association or management of the agency? 7 A. The field manager. 8 Q. All right. Why don't you take a look 9 at the third page of Exhibit A12106 relating to 10 the summary page of the exam report. 11 MR. VEIS: I don't believe we can tell, 12 given the missing pages, whether it's a carry-over 13 or not. If there's a discussion further, then I 14 think the witness needs to be able to read that to 15 answer the question. 16 MS. CLARK: Would you like to satisfy 17 yourself that it is here? 18 THE COURT: Perhaps we should wait to 19 have a complete document. 20 We'll adjourn until 1:30. 21 22 17595 1 (Whereupon, a lunch break was taken 2 from 11:57 a.m. to 1:36 p.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Ms. Clark, you may continue. 7 MS. CLARK: Thank you, Your Honor. 8 We'd like to substitute a complete 9 version of the Exhibit A12016 for the one that we 10 had at the tendered to the Court previously. 11 THE COURT: Thank you. 12 Q. (BY MS. CLARK) Ms. Carlton, turn to 13 Page 3, please, of the EOP that we were referring 14 before the break. It's A12016, and it's the EOP 15 on examination reports. 16 Do you see there is a section of this 17 EOP that governs the preparation of the summary 18 page of the final examination report? 19 A. Yes. 20 Q. Now, as we were talking about before 21 the break, Ms. Carlton, were you instructed in 22 this EOP that the report summary was to give the 17596 1 reader an overall view of the significant problems 2 confronting the association? 3 A. Yes. 4 Q. And did you follow that instruction? 5 A. Yes. 6 Q. Were you instructed that in preparing 7 the summary page of your final examination report, 8 you were to discuss matters of urgency, adverse 9 trends or unsafe and unsound practices which have 10 resulted or may result in unsatisfactory 11 conditions? 12 A. Yes. 13 Q. And did you follow that instruction? 14 A. Yes. 15 Q. Were you instructed that "these 16 significant matters of concern should be 17 identified clearly and specifically without 18 unnecessary details"? 19 A. Yes. 20 Q. And did you follow that instruction? 21 A. Yes. 22 Q. So, if the board of directors of the 17597 1 association wanted to find out what the 2 examination staff had determined to be matters of 3 urgency, adverse trends, or unsafe or unsound 4 practices that had resulted or could result in 5 unsatisfactory conditions, they would go to the 6 summary page of the final examination report that 7 you prepared and was ultimately delivered to the 8 association. 9 Would that be correct? 10 A. They would go to that, and they would 11 go to the management letter that would direct them 12 to the rest of the report. 13 Q. But this summary, report summary, is 14 the portion of the report where you were 15 instructed to and did discuss what you had 16 determined to be matters of urgency, adverse 17 trends, or unsafe or unsound practices which had 18 resulted or may result in unsatisfactory 19 conditions, correct? 20 A. Right. 21 Q. Were there procedures that you were 22 required by this EOP to follow in preparing the 17598 1 "comments" section of the report of examination 2 that followed the report summary at the beginning 3 of the report? 4 A. Yes. 5 Q. And are those procedures set forth on 6 Pages 4 and 5 of the EOP governing final 7 examinations? 8 A. Yes. 9 Q. Were you instructed that the comments 10 were to be presented in the order of their 11 significance? 12 A. Yes. 13 Q. And did you follow that instruction? 14 A. Yes. 15 Q. Were you instructed that material 16 deficiencies and other adverse or potentially 17 adverse matters which required supervisory 18 attention should be presented in the order of 19 their significance in the initial part of the 20 comments? 21 A. Yes. 22 Q. And did you follow that instruction? 17599 1 A. Yes. 2 Q. And when I asked you did you follow 3 that instruction, did you understand me to be 4 asking you about the preparation of the final 5 examination reports with respect to your 6 examinations of USAT? 7 A. Yes. 8 MR. VEIS: Your Honor, I believe 9 there's a completeness issue with respect to the 10 last segment that Ms. Clark presented. I think 11 that she really ought to ask or she really ought 12 to put in the rest of the paragraph. 13 THE COURT: Do you want to read it? 14 MR. VEIS: It indicates "The 15 determination of which specific matters should be 16 included is judgmental. Therefore, written 17 guidelines might tend to restrict rather than 18 assist in this judgment. Accordingly, no attempt 19 is made here to provide such guidelines." I 20 believe that should be included in the record. 21 Q. (BY MS. CLARK) Ms. Carlton, did you 22 use your very best judgment as the 17600 1 examiner-in-charge in determining what were the 2 material deficiencies and other adverse or 3 potentially adverse matters that were to be set 4 forth in the initial portion of your comment 5 section? 6 A. I used my judgment and the guidance 7 from management, and they determined what they 8 wanted to put in that report. 9 Q. Ms. Carlton, did you exercise your very 10 best judgment in determining what material 11 deficiencies and other adverse or potentially 12 adverse matters should be included in the initial 13 portion of the comment section as referred to in 14 this EOP? 15 A. I used my judgment along with my 16 management's judgment in deciding the final 17 report. 18 Q. So, the order of the comments and the 19 matters that were included in the comments as 20 material deficiencies and other adverse or 21 potentially adverse matters was decided by you in 22 consultation with superiors within the agency with 17601 1 whom you worked; is that correct? 2 A. Right, because we had prepared several 3 interim reports. What was already reported in the 4 interim reports had an influence on what actually 5 went into the final reports. And because you 6 typically don't have as many interim reports as 7 you have, the guidelines for this exam did not 8 follow this EOP manual. It was guided a lot by 9 management and supervision. 10 Q. Now, Ms. Carlton, you've mentioned the 11 interim reports again. Let's make the record very 12 clear. 13 You were instructed that all matters 14 that were -- had already been resolved by remedial 15 supervision were to be recorded in the examination 16 report -- that is, the final examination report -- 17 for future reference, were you not? 18 A. All matters in this case was from the 19 interim report, you would not find in the final 20 report. We would reject those documents. 21 Q. All matters that were significant 22 findings in your examination were required to go 17602 1 in the final examination report, isn't that -- let 2 me put it this way. Let me change my question. 3 You are not saying, are you, that if 4 something is in an interim report, it doesn't have 5 to go in the final report? You're not saying 6 that, are you? 7 A. I am saying that if management made a 8 decision that if something was in the interim 9 report, they didn't want to see it again, it 10 didn't go in. 11 Q. And as you understood it, the 12 procedural requirements were that all significant 13 matters were to be included in the final 14 examination report as we have discussed in 15 connection with this EOP. And what you're saying 16 is if management decides that something is not 17 significant, it doesn't have to go in the final 18 report and that's their judgment to make and not 19 yours. 20 Is that your testimony? 21 MR. VEIS: Your Honor, Ms. Clark is 22 arguing with the witness. That's not a question. 17603 1 I object. 2 THE COURT: Well, I think the witness 3 can answer it. 4 Can you answer that? 5 THE WITNESS: It's not a matter, Your 6 Honor, of it being significant or not. In the 7 case of the examinations, once you have your 8 interim reports and instead of having your final 9 report being a redundancy of facts that are 10 already being acted on by supervision, they would 11 decide "This matter is being addressed. 12 Therefore, we don't have to put it in the report 13 again." And those type of decisions were made by 14 management. 15 So, although this is the guidance for 16 following, this is minimum guidelines that are 17 followed. And you would not find one exam that 18 will probably follow this exactly. It's based on 19 the situation and circumstances of the examination 20 at that time that dictates what happened. 21 Q. (BY MS. CLARK) Ms. Carlton, let me 22 direct your attention to Page 6 of the EOP that 17604 1 we're discussing. 2 Now, we talked about the fact that the 3 final examination report is intended for two 4 different audiences. It's intended for the 5 supervisory staff to provide information that is 6 used in the supervisory process, and it's also 7 intended to inform the board of directors of the 8 results of the review of their performance by the 9 examiners, correct? 10 A. Correct. 11 Q. That is -- those are the two audiences 12 to whom it is directed, correct? 13 A. Right. 14 Q. And we've also talked about the fact 15 that the interim reports are documents which are 16 not sent to the board of directors of the 17 association. 18 They were not sent to the board of 19 directors of the association, correct? 20 A. That's correct. 21 Q. So, if the board of the directors of 22 the association is to be advised as to the matters 17605 1 of supervisory concern that were identified in the 2 examination as required by this EOP, those 3 matters, if they are significant, have to be put 4 in the final examination report. And that's what 5 this document says, correct? 6 A. We -- we have meetings with management. 7 The interim report is an in-house document. These 8 are the procedures, and this is what happened. I 9 can't argue what happens. I mean, you have the 10 manual. The management and board does not receive 11 the interim report. That's the way it is. 12 Q. So, you're not testifying, are you, 13 that you found significant deficiencies and 14 problems at the association, reported those to the 15 supervisory staff in an interim report, and then 16 just left them out of the final report of 17 examination because they had already been covered 18 in an interim report? That's not your testimony, 19 is it? 20 A. No, it's not. 21 Q. So, if something was significant as a 22 finding in your examination and met the guidelines 17606 1 set forth in this procedural manual, it would be 2 included in the final report as we've just 3 reviewed, correct? 4 A. There could -- as you have gone back 5 and forth, there are items in the interim report 6 that you would not find in the final report. We 7 had the board meetings and supervision had 8 meetings with management. And whatever they 9 wanted management to know, they made sure they 10 knew it. Now, what all that is, I don't know. 11 Q. So, supervision -- let's talk -- 12 management -- sometimes I don't understand whether 13 you mean management in your agency or management 14 of the association. 15 When you're talking about management, 16 do you mean the management in the Dallas bank? 17 A. Right. You have the -- you have -- the 18 bank back then had two divisions. You had the 19 examination side, and you had the supervision 20 side. Supervision included Neil Twomey and your 21 supervisory agents. Once we provided the 22 information to the supervisory agent and that 17607 1 information went up to them, it was their judgment 2 and their selection as to what they wanted to 3 provide to management. I had no say-so. I had no 4 decision. 5 My final report, Neil Twomey and 6 whatever supervisory agent reviewed that and the 7 field manager had the final discretion as to what 8 went in that final report. So, be it I prepared 9 it a certain way, the final decision, the edits as 10 you saw in the interim reports, items being 11 eliminated, the final judgment and what goes in 12 that report is not based on my judgment at that 13 point. It's based on what a supervisory agent or 14 a field manager feels should go into that final 15 report, and that's what I'm trying to get across 16 to you. 17 Q. Okay. I think I understand you. Your 18 testimony really relates to the final decision 19 that is made by the supervisory staff. 20 You're not saying that you didn't 21 follow the procedures laid out in the EOP. You're 22 simply saying that once the report leaves your 17608 1 hand, there are people above you in the 2 organization who will decide which of the matters 3 set forth in the report should be communicated to 4 the association? 5 A. That's correct. And the order in which 6 it's communicated. 7 Q. But you yourself would follow the EOP 8 in the work that you did? 9 A. To the extent I get no other guidance 10 from my management, my management decisions 11 override any policies and procedures. 12 Q. Now, can you recall any examples of 13 matters of urgency or adverse trends or 14 significant problems confronting the association 15 that were not included in the final examination 16 report because of a decision by supervision? 17 A. I would have to compare the interim 18 reports and see what's not in the final report. I 19 know that the final report did not include all the 20 items that we had identified in the interim 21 reports. 22 So, it is -- there are matters that are 17609 1 not in the final report that were ruled 2 significant and the examination staff reported to 3 them as that. So, you do have a difference. 4 Q. And then somebody outside of the 5 examination staff, in the supervisory staff, would 6 make its own judgment as to which are the matters 7 of urgency and significant problems that need to 8 be included in the report. 9 So, if they got omitted, it's not by 10 you. It's by someone in the supervisory staff. 11 Is that your testimony? 12 A. Right. 13 Q. Okay. We've talked about the 14 procedures for doing the final report, and I'd 15 like to go back and talk some more about the 16 procedures for actually doing the examination that 17 leads to the final examination report. 18 Now, the same manual, the EOP, also 19 provided for minimum procedures, I believe you 20 testified, that the examiners were required to 21 complete in the course of the examination; is that 22 correct? 17610 1 A. Right. 2 Q. And I'd like to show you the EOP that 3 governs that. It's been marked as A12039. 4 Is this the EOP governing minimum scope 5 procedures, Ms. Carlton? 6 A. Yes. 7 Q. It's marked A12039. 8 MS. CLARK: I offer it, Your Honor. 9 MR. VEIS: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MS. CLARK) Actually, going back 12 to the -- sorry to jump back, but I want to ask 13 one other question regarding the previous EOP, if 14 I might. 15 Looking at the bottom of Page 5 16 regarding the "comment" section of the report, I'd 17 like you to look at the last two paragraphs. The 18 first one on -- the first of those two paragraphs 19 at the bottom of the page says, "The most 20 important test to be made of a comment is that it 21 must contain sufficient information and supportive 22 documentation to permit the supervisory 17611 1 authorities to request and obtain the necessary 2 corrective action." It goes on to say, "Timely 3 supervision of deficiencies within the authority 4 of the association management to correct is 5 essential to the successful accomplishment of the 6 OES mission." 7 Ms. Carlton, was it your understanding 8 that in preparing the comments that went at the 9 beginning of your examination report you were to 10 include sufficient information and supporting 11 documentation to permit the supervisory 12 authorities to request and obtain the necessary 13 corrective action? 14 A. Yes. 15 Q. And did you do so to the best of your 16 ability? 17 A. Yes. 18 Q. And did you understand that the timely 19 supervision of deficiencies within the authority 20 of association management to correct was an 21 essential part of the mission of your agency? 22 A. Yes. 17612 1 Q. And that would -- and you would keep 2 that in mind in the preparation of the "comment" 3 section of the exam reports; is that correct? 4 A. Yes. 5 Q. All right. Now, let's go back to the 6 EOP on minimum scope procedures. 7 Can you explain to us, if you would, 8 what the concept of "minimum scope procedures" 9 meant? 10 A. This document sets out a minimum scope 11 procedure. One of the documents that have been 12 submitted into evidence in separate testimony was 13 what you call scope memorandums. Those scope 14 memorandums are actually what you receive and not 15 this. 16 Minimum scope procedures, you use a 17 combination of what's provided to you in the scope 18 memorandum. Also, that was provided as Exhibit 19 A12120, also worksheets that give examination 20 objectives. You use a combination of these 21 outlines and any special guidance that management 22 provides to you as the minute that you conduct an 17613 1 exam. 2 If you find items -- say, if you pull a 3 sample and that sample shows so many violations, 4 then you go into Phase 2 and you pull another 5 sample. And it's extended beyond that. 6 So, the guidance that you receive here 7 is basically if what you find in the institution 8 is normal and you don't find any adverse actions 9 or critical items of deficiency, then this is all 10 you need. If you run into areas of concern and 11 major problems, then you extend it to the next 12 level of review. 13 Q. Let's look at the other document that 14 you referred to. I believe it was marked as 15 A12041 and was offered in evidence by Mr. Veis 16 during your direct-examination. 17 Do you still have that on your pile of 18 documents there? This is a memorandum from 19 Michael Eide to you dated May 15th, 1986. 20 Is this the document that you were just 21 referring to? 22 A. Right. 17614 1 MS. CLARK: Your Honor, I may be 2 offering another copy of the same 3 previously-admitted exhibit. If so, I apologize. 4 Your Honor, it's also admitted as 5 A14014 with some additional handwritten notes, and 6 I'm happy to use the one that's previously 7 admitted and withdraw this. 8 9 (Discussion held off the record.) 10 11 MS. CLARK: A14015. Sorry. 12 Your Honor, is A14015 admitted in 13 evidence? 14 THE COURT: Yes, it is. 15 Q. (BY MS. CLARK) Do you have A14015 in 16 front of you, Ms. Carlton? 17 A. I have -- 18 MR. VEIS: Do you have a tab number? 19 20 (Discussion held off the record.) 21 22 Q. (BY MS. CLARK) Ms. Carlton, do I 17615 1 understand your testimony to be that these were 2 the minimum procedures that you were to do in the 3 course of the examination of United, assuming that 4 no special concerns arose during the course of the 5 examination that would require you to expand these 6 procedures? 7 A. Right. And in conjunction with that, 8 you also used this information here. This guides 9 your work papers. In here, also you have 10 objectives of questions that you have to fill out 11 and answers to go along with this. It's not one 12 document. 13 THE COURT: Would you identify the 14 other document? 15 THE WITNESS: It's Exhibit A12120. 16 THE COURT: Thank you. 17 Q. (BY MS. CLARK) Ms. Carlton, this 18 memorandum from Mr. Eide instructed you that among 19 the items that you were to review was the minutes 20 of the board of directors meetings as well as the 21 minutes of the principal operating committees. 22 Did you do so in your examinations of 17616 1 United Savings? 2 A. Yes. 3 Q. And would that be a standard procedure 4 for the examination of any association, no matter 5 how large or how small, how complicated or how 6 simple? 7 A. Yes, it is. 8 Q. And likewise, with regard to the second 9 procedure, were you required to review the loan 10 register for possible areas of concerns? For 11 example, new types of lending, higher-risk 12 lending, concentrations, loans to affiliated 13 persons, et cetera? 14 A. Yes. 15 Q. And did you do so at United? 16 A. Yes. 17 Q. And again, is that a standard procedure 18 in all exams? 19 A. This document is a standard procedure 20 that would be used in all exams regardless of 21 size, complexity, or diversity of that 22 institution. 17617 1 Q. If you'll turn to the third page of the 2 document, Ms. Carlton, you see some regulations 3 that were referred to in your initial scope 4 memorandum. 5 Do you see those on Page 3? 6 A. Yes. 7 Q. Was it part of your responsibility as 8 the examiner-in-charge to determine whether the 9 association was in compliance or in violation of 10 various regulations applicable to the association? 11 A. Yes, it was. 12 Q. And did you do so? 13 A. Yes. 14 Q. And you had sufficient background and 15 training and knowledge of the regulations that you 16 were competent to look for and spot regulatory 17 issues, correct? 18 A. Right. 19 Q. Now, did you complete the procedures in 20 this initial scope memorandum? 21 A. Not all of them. 22 Q. Which ones did you not complete? 17618 1 A. During the 1986 exam, we did not review 2 the service corporations and all of their 3 activity. 4 Q. I'm sorry. I misspoke. I meant to be 5 referring specifically to the regulations we are 6 talking about. 7 A. Whatever regulations were found was 8 cited in the report. 9 Q. So, you -- you were familiar with the 10 regulations, and you completed the scope 11 memorandum that required you to determine 12 compliance with applicable regulations as set 13 forth in this scope memo? 14 A. Right. 15 Q. Now, there were other required 16 procedures that dealt with loan underwriting, 17 correct? 18 A. Right. 19 Q. Let's look at the first page of the 20 scope memo. 21 Were you instructed to review all major 22 loans and participations -- that is, loans of 17619 1 $1 million or over -- to determine the quality of 2 loan underwriting and regulatory compliance? 3 A. Right. 4 Q. And were you looking for information 5 that would disclose to you the collectability of 6 the loans that you reviewed? Were you looking for 7 information that would disclose whether the loans 8 would be collectible? Is that one of the things 9 that you were looking for in your review of the 10 major loans and participations to determine 11 quality of loan underwriting and regulatory 12 compliance? 13 A. Yes. 14 Q. And you were also looking for 15 regulatory violations and loan concentrations and 16 affiliate involvement, were you not? 17 A. Right. 18 Q. Now, another procedure that you were 19 required to follow which is set forth in the 20 second page was that you were required to classify 21 assets in accordance with insurance regulation 22 Section 561.16(c), were you not? 17620 1 A. Right. 2 Q. That was not an optional procedure, was 3 it? 4 A. No, it was not. 5 Q. And you did complete that procedure 6 during the 1986 examination, did you not? 7 A. Yes. 8 Q. Now, I thought I heard you say 9 something during your testimony yesterday, I 10 believe it was, that you did not consider the 11 Park 410 loan for classification during the 1986 12 exam. 13 Now, you didn't mean you didn't 14 consider the loan for classification, did you? 15 A. No. 16 Q. You did consider it for classification 17 because, in fact, you were directed by Mr. Eide in 18 this scope memo to classify assets according to 19 regulation Section 561.16, correct? 20 A. When I designated the loan as "passed," 21 that is a classification. 22 Q. You were not free, as the 17621 1 examiner-in-charge, to not consider a loan for 2 classification. You had to consider it and make a 3 decision one way or another, and you did so on the 4 Park 410 loan in 1986, correct? 5 A. Yes. 6 Q. We will talk about your review of the 7 loans in a little bit, but I'd like to move on 8 more generally through the examination process and 9 some of the things that you reviewed in the course 10 of the examination. 11 We saw that you were required to review 12 the minutes of all board and operating committees 13 in the course of examination and that you did so. 14 I'd like you to take a look at A11051, please, 15 which is a document from the 1986 work papers. 16 I'm sorry. A document from the 1987 work papers. 17 Have you identified this as a portion 18 of the work papers relating to your review of the 19 minutes of the board of directors of United 20 Savings Association during the 1987 examination? 21 A. It is such. 22 Q. And is this your own handwriting in the 17622 1 document? 2 A. Yes, it is. 3 Q. Now, Ms. Carlton, did you -- were you 4 ever denied access to any minutes of the board of 5 directors or any of the committees at United? 6 A. No, I was not. 7 Q. Let's see some of the things that you 8 noted in your review of the minutes of the board 9 of directors of United in the 1987 exam. The 10 first entry is August 14th, 1986. 11 And does this reflect your review of 12 the minutes and selection of items that you 13 considered to be significant for some reason or 14 another and included in the summary? 15 A. Yes. 16 THE COURT: I think you'd better 17 identify the page number. 18 MS. CLARK: Yes, Your Honor. Also, I'd 19 like to offer A11051. 20 MR. VEIS: No objection, Your Honor. 21 THE COURT: Received. 22 Q. (BY MS. CLARK) The Bates number to 17623 1 which I'm directing you is OW129384. 2 Do you see where I am, August 14, 1986? 3 A. Yes. 4 Q. And I think my question simply was: 5 Does this reflect your review of the minutes and 6 selection of those items that you considered to be 7 significant for the examination process and, 8 therefore, included in your summary? 9 A. Yes. 10 Q. And it notes that there were reports 11 reviewed concerning the financial statements, the 12 delinquency report, lending reports, litigation 13 report, and the mortgage-backed securities 14 portfolio, correct? 15 A. That was highlighted as routine 16 business. 17 Q. And then the next section is the 18 non-routine business items that you considered 19 significant for the examination process? 20 A. Up front in the review of minutes, you 21 set out what is routine business. Those are the 22 items that you will see taking place in every 17624 1 meeting. Therefore, you don't have to repeat it 2 as you go through. 3 Q. What is included in "routine business"? 4 A. In most -- in all board meetings, you 5 have delinquency reports. You had a presentation 6 of financial information. You had approval of the 7 minutes from the previous examination, just to 8 cite a few. 9 Q. Now, what use did you make of this 10 document as a general rule? What was your purpose 11 in actually summarizing the minutes as you 12 reviewed them? 13 A. First of all, on the front page, on the 14 summary is to document the board of directors and 15 to assure that they are all attending the majority 16 of the meetings. If you have resignations that 17 take place, a death within board members, we 18 identify that as such. 19 Also, as far as the minutes, once the 20 minutes are complete, every examiner as they go 21 into the different phases of the examination would 22 then review the minutes to see if there's anything 17625 1 that should be covered in their areas of review. 2 Q. So, this is a document that you create 3 for future reference during the course of the 4 examination by you and by your staff members; is 5 that correct? 6 A. Right. If there's a question on a loan 7 approval, you may refer back to it. If there's 8 questions of resolutions that may have been made, 9 you go back to this document to determine kind of 10 if the flavor as happening in the institution is 11 actually being reported to the board or if, for 12 some instance, management is not being fully up 13 front with management as far as what's going on at 14 the institution. 15 Q. And that would be something that you 16 would note in your minutes, if that was a concern 17 that you -- 18 A. We would use what you find in the 19 minutes. And as you go through the operations of 20 the institution, you will see if there's a 21 difference. 22 Q. Let's go to the 10/14/86 meeting, which 17626 1 is summarized beginning on Page OW129385. I see 2 there's no routine business mentioned there. 3 Is that what you were saying, that you 4 would note it on your first board meeting and then 5 not have to repeat it thereafter? 6 A. Yes. 7 Q. So that that doesn't mean that they 8 didn't have financial statements discussed and the 9 other routine reports at the meeting, the fact 10 that you didn't note it here would be -- under 11 your procedure, it would just be assumed that that 12 was covered in the "routine business" section? 13 A. Right. 14 Q. Now, do you see that the items that you 15 selected to copy or to summarize, I should say, in 16 your summary of the minutes pertained to 17 mortgage-backed securities including AMPs? 18 A. Yes. 19 Q. And there is a reference here to a 20 5-million-dollar limit on mortgage-backed 21 securities transactions. 22 Do you see that? 17627 1 A. Yes. 2 Q. And then there is a reference to "The 3 board discussed the federal and state 4 examinations." 5 Do you see that? 6 A. Right. 7 Q. And then if you turn over, there's a 8 document which I take to be an excerpt from the 9 board minutes or the attachment to the board 10 minutes; is that correct? 11 A. Right. 12 Q. And on the first page of that excerpt, 13 which is OW129386, is that your handwriting at the 14 bottom to indicate that that was in the August 14, 15 1986 board minutes? 16 A. Correct. 17 Q. And the first item is -- appears to be 18 a resolution since it begins with a "whereas"? 19 Do you see that? 20 A. Right. 21 Q. And there is a reference there to the 22 association's written business plan to reduce the 17628 1 association's interest rate risk and to control 2 the association's credit risk. 3 Do you see that? 4 A. Yes. 5 Q. So, you were including in the board 6 summary a document referring to the association's 7 written business plan as it relates, in this 8 instance, to these AMPs investments. 9 Do you see that? 10 A. Yes. 11 Q. Okay. Going further to a page that's 12 Bates numbered OW129388, do you see there is a 13 paragraph that begins "Mr. Williams then discussed 14 the company's long-range business plan"? 15 A. Yes. 16 Q. And he goes on to note that the company 17 was preparing a business plan that would be 18 submitted to the board of directors in connection 19 with the company's offering of capital notes. 20 Do you see that? 21 A. Yes. 22 Q. And was that the business plan that you 17629 1 then reported on in your -- that -- I should say 2 that you reviewed in the course of your work as -- 3 on the examination and which was contained in the 4 work papers as presented by Mr. Veis? 5 A. I'm not sure, but I think that one may 6 have a different date on it. I'm not sure. 7 Q. The date on that one, as you recall, 8 was August 29th or 28th, 1986. 9 A. Okay. 10 Q. Okay. Going to the next page, which is 11 OW129389, that's an actual copy of a page out of 12 the board minutes for October 14th, '86, the same 13 meeting that you had summarized in your own 14 handwriting? 15 A. Yes. 16 Q. And the next page ending with 390 again 17 contains some resolutions which begin "resolved 18 further." 19 Do you see that? 20 A. Right. 21 Q. And do you see the bottom resolution 22 relating to the trading activities in 17630 1 mortgage-backed securities? 2 A. Right. 3 Q. And that's a portion of the minutes of 4 the meeting that you copied and put into your 5 summary which then went into the examination 6 process for all of your examiners to review as it 7 would be relevant to the work that they were doing 8 in the examination, correct? 9 A. Right. 10 Q. Next page, ending in 391, there is a 11 schedule relating to position limits for various 12 kinds of financial instruments. 13 Do you see that? 14 A. Yes. 15 Q. And that was part of the board's 16 resolution at the October 14th, 1986 minutes? 17 A. Yes. 18 Q. And then again, in the copy of the 19 minutes, right below the chart, there is a 20 reference to Mr. Williams' discussion of the 21 results of the association's Federal Home Loan 22 Bank Board and state examinations. And it 17631 1 indicates that a memorandum prepared by him was 2 presented to the board and fully discussed. 3 And that's what you reflected in your 4 notes of the meeting, correct? 5 A. Right. 6 Q. All right. Let's go forward through 7 your notes. On the Bates page ending 393, you 8 summarize the minutes of the November 13, 1986 9 meeting of the board. 10 Do you see that? 11 A. Yes. 12 Q. And the first item that you noted was 13 that four of the officers of the association had 14 been elected to conduct transactions in 15 conjunction with a mortgage-backed bond portfolio. 16 Do you see that? 17 A. Yes. 18 Q. And did you include that in the summary 19 of the minutes so that when the examiners were 20 looking through the mortgage-backed securities 21 transactions, they would have easy reference to 22 see who it was that was authorized by the 17632 1 association to conduct such transactions? 2 A. Right. 3 Q. Going to the 1/8/87 meeting which is 4 summarized on the bottom half of that page, do you 5 see there is a reference to the business plan 6 being discussed? 7 A. Yes. 8 Q. And on the next page, you've copied an 9 extract from the minutes that refer to the report 10 of Mr. Crow on the hedging activities of the 11 association. 12 Do you see that? 13 A. Yes. 14 Q. And do you see that he presented a 15 schedule to the members of the board which was, 16 after full discussion, unanimously approved? 17 A. Yes. 18 Q. It says, "A copy of the schedule was 19 ordered attached to the minutes of the meeting." 20 And so, in your review of the minutes 21 to prepare this summary, you would have also 22 reviewed the schedule presented and attached to 17633 1 the minutes, correct? 2 A. If it was there. 3 Q. If it was there. Let's go to the next 4 page. There are two meetings reflected on that 5 page. The one on the top of the page with the 6 Bates number ending 395 is a February 19th, 1987 7 meeting. 8 You reviewed the minutes of that 9 meeting and noted the election of the members of 10 three of the committees of the board; is that 11 correct? 12 A. Yes. 13 Q. And then the next meeting is summarized 14 beginning at the bottom of that page. It says, 15 "routine business"? 16 A. Right. 17 Q. That's the May 7th, 1987 meeting. 18 Do you see that? 19 A. Yes. 20 Q. And you noted in your summary of the 21 minutes that "It had been suggested that a 22 financial strategy to deal with the mark-to-market 17634 1 losses be prepared." 2 That was something that you reviewed in 3 the minutes of the board and included in your own 4 handwritten summary of the minutes, correct? 5 A. Right. 6 Q. Okay. Going over to the next page, 7 you've summarized the 5/15/87 minutes and the 8 6/9/87 minutes and the 9/9/87 minutes on this page 9 ending Bates 395, correct? 96. Excuse me. 10 A. Right. 11 Q. And do you see that the board minutes 12 reflect, for the June 9, '87 meeting, that 13 Mr. Twomey had recommended an outside certified 14 accounting firm be retained to review the 15 accounting system and Merrill-Lynch retained to 16 review the association's high-yield bond 17 portfolio? 18 Do you see that? 19 A. Yes. 20 Q. Now, were you aware that that had been 21 done prior to the time you reviewed the minutes of 22 the board of directors in the course of your 1987 17635 1 exam? 2 A. Yes. 3 Q. Let's go over to the next page, which 4 is Bates number ending 395, a brief summary of the 5 10/23/87 board meeting and then a somewhat longer 6 summary of the November 10, 1987 meeting, correct? 7 A. Yes. 8 Q. And the first item reflected in the 9 November 10, '87 meeting summary that you prepared 10 was that the committee approved MBS. And then you 11 say, "The association will eliminate certain MBS 12 positions as rates decline." 13 Do you see that? 14 A. Yes. 15 Q. And that's something that was reflected 16 in the board minutes and you reviewed those 17 minutes and copied that into your own handwritten 18 summary for the examination staff to refer to in 19 the course of the examination, correct? 20 A. Yes. 21 THE COURT: Ms. Clark, would you state 22 the pagination? I believe you said the last digit 17636 1 was 95. 2 MS. CLARK: Oh, I'm sorry, Your Honor. 3 Let me correct it. 4 Q. (BY MS. CLARK) I'm asking you about 5 the Bates No. OW129397. That's the page on which 6 you summarize the November 10, 1987 board meeting 7 and make the comment that we just mentioned about 8 "the association will eliminate certain MBS 9 positions as rates decline," correct? 10 A. Yes. 11 Q. Then the next page ending 398, you have 12 copied a certified resolution concerning which 13 brokerage companies the management was authorized 14 to do business with? 15 A. Yes. 16 Q. Continuing on November 10, 1987, you 17 reflect that there were some new officers who were 18 appointed or at least it lists people who were 19 appointed as some kind of vice president, correct? 20 A. Yes. 21 Q. And toward the end of that summary, 22 there is a reference to "Whatley reviewed the 17637 1 compensation committee's action on proposed 2 bonuses. The bonuses would be paid to 3 approximately 70 employees and the dollar amount 4 would be less than 2 million. It was stated that 5 the bonuses were attempts to achieve market-based 6 compensation." 7 So, you were reviewing the board 8 minutes and including in your own summary the 9 action that they were taking to award bonuses to 10 the employees of the association, correct? 11 A. Right. 12 Q. And this kind of process of reviewing 13 the board minutes and noting those items that you 14 thought might be significant to the ongoing 15 examination process was an absolutely standard 16 procedure in the conduct of examinations; is that 17 correct? 18 A. Yes. 19 Q. Let me ask -- 20 MR. VEIS: Excuse me, Your Honor. I 21 notice that Page 398 appears to be somewhat 22 illegible. I was wondering if Ms. Clark might be 17638 1 able to substitute a more legible page. I don't 2 know if that's the case in every copy. 3 MS. CLARK: I believe you have custody 4 of the original work papers. So, it might be 5 easier for you to get a more legible copy. That's 6 the best we have. 7 MR. VEIS: That would certainly be 8 acceptable. We'll look and see if we can do that. 9 Q. (BY MS. CLARK) May I ask you, please, 10 to look at B1183, Ms. Carlton. It is in evidence 11 at Tab 1292. 12 MR. VEIS: What is 1183? 13 MS. CLARK: It's the asset/liability 14 committee meeting summary prepared in the 1986 15 exam. 16 MR. VEIS: I don't believe a copy is 17 here, and we weren't notified it would be used. 18 MS. CLARK: It's at Tab 1292. 19 20 (Whereupon a copy was handed to Mr. Veis.) 21 22 Q. (BY MS. CLARK) Ms. Carlton, can you 17639 1 identify this as a summary that you prepared of 2 the asset/liability committee minutes of United 3 Savings Association of Texas? I will tell you 4 that it came out of your 1986 examination work 5 papers. 6 A. Yes. 7 Q. Now, this document seems to go backward 8 chronologically. Do you see that it begins with 9 8/15/86 and ends with June 14, 1985? 10 A. Yes. 11 Q. Do you recall why you prepared the 12 document in reverse chronological order? 13 A. The most current -- we use the minutes 14 that they had available, and that's -- these were 15 the minutes available. We went back as far as 16 they had minutes. You had to do minutes back to 17 the previous examination if they had minutes. 18 These were the minutes that they had. 19 Q. Now, I'm not going to go through all of 20 the minutes in detail with you, Ms. Carlton, but I 21 would like to ask you about a few of the items in 22 the minutes, if I could. 17640 1 Let's start at the back just because I 2 think it's less confusing to follow chronology 3 rather than go backwards in time. And the final 4 minimum is -- begins at OW120968. 5 Have you found that? 6 A. Yes. 7 Q. Now, this indicates that June 7th, 8 1985, was the initial meeting of the 9 asset/liability committee. 10 Is it your recollection that at the 11 time you arrived at United Savings Association of 12 Texas, the association had already established an 13 asset/liability committee which was functioning as 14 indicated in the minutes that you collected and 15 put in the work papers? 16 A. Right. 17 Q. Pardon me? 18 A. Right. 19 Q. Now, do you recall during the 20 deposition that you indicated to me that your 21 comment on interest rate risk in the interim 22 report appeared to you to have been written before 17641 1 you reviewed these asset/liability committee 2 minutes and that you -- based on reviewing the 3 document in the deposition, it was your belief 4 that the comment had assumed that there was no 5 such committee functioning and keeping minutes? 6 Do you recall that? 7 A. No. 8 Q. Well, I will find that in just a 9 minute. I don't have that easy reference, but I 10 will find that in a moment. 11 Why did you not prepare a summary of 12 these minutes? Why is it that you simply copied 13 all of them and put them into your work papers 14 except for the very first one? 15 Do you recall? 16 A. Because the requirements for the board 17 of directors minutes review is different than your 18 different committee minutes review. 19 Q. And you don't recall testifying in your 20 deposition that your belief was that the minutes 21 were not summarized and simply copied because you 22 did not review them until some time later and did 17642 1 not review them up front at the time you were 2 preparing the summaries? 3 A. Usually, the person that's reviewing 4 these areas are allowed to review the committee's 5 minutes. That, say, if you are doing investment 6 securities, that person can review those minutes. 7 I don't have to necessarily review those minutes. 8 Q. But this does indicate that you are the 9 person who pulled these minutes together as 10 indicated -- well, let's just get for the record, 11 you are the person who wrote this summary on the 12 first page? That is your handwriting, is it not? 13 A. Right. And tried to collect all of 14 those that covered the period that we were 15 reviewing. 16 Q. Now, who is it -- other than you, who 17 would review the minutes of the asset/liability 18 committee in the course of the examination? 19 A. As the individual go through and 20 review, say, the junk bond area, they would pull 21 the minutes. The different -- say, the person 22 that's reviewing the futures option, each 17643 1 individual by face, by investment, would go back 2 to these minutes because this would be the 3 governance that would cover those minutes. You 4 take a combination of these and investment 5 committee minutes if they have them. 6 Q. So, in the case of the board of 7 directors minutes, you prepared a summary which 8 would be available for reference by whoever was 9 examining an area where that might be relevant. 10 In the case of the asset/liability committee 11 minutes, since there was no summary, everybody who 12 was involved in examining any area to which this 13 would be relevant would simply have to go to the 14 actual minutes which you collected and review 15 those since there was no summary, correct? 16 A. Right. Sometimes you do -- we were 17 doing a three-year period. So, it was a matter of 18 how voluminous the data was. If it was not to the 19 amount that it would be easier to copy than to sit 20 and do narratives, then you copy it. If it wasn't 21 that many minutes, then you could do -- you used 22 your judgment as to whatever was most convenient 17644 1 for the time. 2 Q. Which areas of the examination would 3 call for someone to review the asset/liability 4 committee minutes? Which portions of the 5 portfolio of United or other parts of the 6 examination would require review of these minutes? 7 A. Anyone that's doing any type of 8 financial analyses, operational analyses, any 9 investments or any securities area, be it any of 10 the instruments that were there, including the 11 individual as they reviewed the subsidiaries. 12 Q. All right. I think we will go on 13 rather than spend time on the minutes. 14 Let me show you what's been marked as 15 Exhibit A12069. Can you identify what these 16 documents are? It's actually a collection of -- 17 A. It's a collection of requests in which 18 we were requesting different information. 19 Q. Does this relate to the document 20 control logs that we looked at before? 21 A. Yes. 22 Q. Can you explain how that worked? 17645 1 A. You have a request number in the 2 left-hand corner. We would request the 3 information, and the management was obligated to 4 provide that information back to you. 5 Q. So, this is the form in which you would 6 make requests to management for documents that you 7 wished to see in the course of doing your work on 8 the examination; is that correct? 9 A. That's correct. 10 Q. And the first one is from Curtis 11 McKinney to Ron Carlson. 12 Who were those people? 13 A. Curtis McKinney is an examiner. Ron 14 Carlson was an employee of the institution. 15 MS. CLARK: Your Honor, I offer A12069. 16 MR. VEIS: No objection, Your Honor. 17 I'd note that this appears to be a selection of 18 certain requests from the request log or from the 19 request that were submitted by the examiners. 20 Since each would be admissible individually as a 21 separate document, we have no objection to 22 offering them as a packet. 17646 1 THE COURT: Received. 2 Q. (BY MS. CLARK) And going through this 3 document, in the first request which was dated 4 September 3rd, 1986, you're requesting information 5 concerning Jenard Gross, Mr. Hurwitz, as well as 6 financial statements, correct? 7 A. Right. 8 Q. And the next document, which is Bates 9 stamped OW120292, you are asking for a list of 10 bonds for which scheduled payments of interest had 11 been delinquent or had not been made. 12 Do you see that? 13 A. Yes. 14 Q. What bonds were you asking about in 15 this -- and I say "you." It's Joseph Huber who 16 was on your examination team, correct? 17 A. These are corporate bonds. 18 Q. Would that be the high-yield bonds? 19 A. Yes. 20 Q. And again, that's directed to Ron 21 Carlson. 22 Do you recall what position Ron Carlson 17647 1 had in the association? 2 A. He was an accountant. 3 Q. So, he was in the department headed by 4 Mr. Jim Wolfe? 5 A. Yes. 6 Q. And the next item was a request that 7 you wrote out for Mr. Carlson to provide some 8 information concerning MCO and Federated 9 Development Company, correct? 10 A. Right. 11 Q. And the next one, which is Bates 12 No. OW120300, is another request from you to Ron 13 Carlson regarding loan review, correct? 14 A. Yes. 15 Q. And in this instance, you are 16 requesting three different loans, including the 17 Norwood/United Park -- sorry -- United Joint 18 Venture? 19 A. Right. 20 Q. And when you asked for a loan, what 21 were you asking for? The loan file? 22 A. Yes. 17648 1 Q. The next request was directed to Ron 2 Carlson and Jim Pledger by Mark Eversole. I take 3 it that Mark Eversole was someone who was working 4 with you on the examination team? 5 A. Right. 6 Q. And in this instance, you were asking 7 for the MBS market rates. 8 What did that mean? 9 A. That would have been the market rates 10 based on that period in order that we could 11 determine the -- have a comparison of the sales 12 that took place during that time. 13 Q. And it was -- actually, it was required 14 by regulation that as part of your examination you 15 determined the market -- current market prices of 16 mortgage-backed securities so as to determine the 17 value of the collateral for the reverse repo 18 agreements, correct? 19 A. Right. 20 Q. And you did that, correct? 21 A. Yes, I did. 22 Q. So, you -- you asked for information 17649 1 that would allow you to assess the current market 2 prices of the mortgage-backed securities held by 3 USAT in its portfolio and pledged as collateral on 4 the reverse repo agreements, correct? 5 A. Right. 6 Q. The next request, which is Bates 7 stamped 120309, requests all commercial, real 8 estate, and construction loans granted since 9 March 31, 1986, correct? 10 A. Right. 11 Q. And that's from Curtis McKinney to 12 Jim Pledger, correct? 13 A. Right. 14 Q. And again, that would be a request for 15 the loan files? 16 A. Yes. 17 Q. So, you were requesting to see the loan 18 files on all loans granted since March 31, 1986, 19 for the purpose of examining those loan files? 20 A. Right here, it's asking for a list. 21 Q. Oh, I'm sorry. I misread it. "A list 22 of all commercial, real estate, and construction 17650 1 loans granted since March 31, 1986." 2 And would you then select from that 3 list loans that you would pursue by obtaining the 4 underlying loan files for examination purposes? 5 A. Yes. We would pull a sample from that 6 list. 7 Q. And the next request is from Joseph 8 Huber to Jim Pledger regarding a securities 9 portfolio. 10 Do you see that? 11 A. Yes. 12 Q. That's Bates stamped 120323, correct? 13 A. Yes. 14 Q. And what are you requesting in this 15 request? 16 A. We were requesting different 17 information that we needed to complete the review: 18 Operating statements on the companies that were 19 listed below, coupon payment rates, and a copy of 20 the standards -- Moody's Standard & Poors that 21 rated corporate debt. 22 Q. So, are these the high-yield bonds in 17651 1 USAT's portfolio? 2 A. Yes, it is. 3 Q. And you were actually asking them to 4 provide operating statements on the companies 5 whose high-yield bonds USAT was holding in its 6 portfolio, correct? 7 A. Right. 8 Q. And you've written "complete" on that 9 piece of paper. 10 Does that indicate that you've 11 completed your review of those operating 12 statements? 13 A. Not necessarily. I don't know what 14 that "complete" meant. It could have meant that 15 the request was complete, not that the review was 16 complete. 17 Q. Just that you had obtained the 18 documents for your review, not that you had 19 completed your review? 20 A. I don't know exactly, but it could be 21 either one. 22 Q. Okay. Let's go to the next request, 17652 1 which is OW120324, which is a request relating to 2 loans, correct? 3 A. Right. 4 Q. Can you tell what you were requesting 5 there? I know it's not a very legible document. 6 A. It has something to do with Park 410 7 and Berg development and -- it's about four loans, 8 apparently, listed here. 9 Q. And again, you would be asking for the 10 loan file in this instance? 11 A. Right. 12 Q. And the last page is OW12325. 13 What were you requesting on that 14 request? 15 A. We were requesting the investment 16 securities policies and procedures, and we were 17 requesting the schedule of investment securities 18 as of April 30th, '86. 19 Q. And these are all instances where you 20 put to USAT the request in writing, and these 21 would be reflected on the control logs. This is 22 the system in the -- the number in the right-hand 17653 1 corner would be the number on the control log, 2 correct? 3 A. Right. And in the instance that you 4 see on Page 294 where you have a second request, 5 you may have a different number. But we noted 6 wherever we had to ask for the information again. 7 Q. And we saw -- this is the control log 8 for the 1986 exam, correct? 9 A. Yes. 10 Q. And as we reviewed the 1986 exam, all 11 of these items on the control log indicated that 12 they had been complied with, correct? 13 A. I haven't compared it to the list, but 14 according -- I would say yes. 15 THE COURT: We'll take a short recess. 16 17 (Whereupon, a short break was taken 18 from 2:41 p.m. to 3:04 p.m.) 19 20 THE COURT: Be seated, please. We'll 21 be back on the record. 22 Ms. Clark. 17654 1 MS. CLARK: Thank you. 2 Q. (BY MS. CLARK) Ms. Carlton, before 3 the break, I asked you about whether you recalled 4 your deposition testimony concerning the 5 asset/liability committee minutes. And I, over 6 the break, have located the deposition testimony 7 to which I was referring and I'd like to go 8 through it with you. 9 First of all, I'd like you to look 10 again at a document that I introduced earlier 11 which is A12071, which is the version of the 12 August 19th, 1986 interim report that bore your 13 handwritten note "corrected copy" at the top. 14 Do you recall that document we 15 discussed before? 16 A. Yes. 17 Q. Ms. Carlton, we discussed this very 18 document during your deposition, and I'd like you 19 to take a minute to refresh your recollection 20 about your deposition testimony on this document. 21 You will find it on Page 4 -- actually, it begins 22 on 448. 17655 1 A. Okay. 2 Q. In the middle of 448, we marked this 3 exhibit, which was Exhibit 36 to your 4 deposition -- that's the interim examination 5 report dated August 19 -- and it says "corrected 6 copy." 7 Do you see that? 8 A. Yes. 9 Q. So, that's the same document you have 10 in front of you now which has the trial 11 Exhibit No. A12071. If you go over to Page 450, 12 about halfway down the page, you'll see that I 13 start to ask you about the first item of the 14 report, which is risk management. 15 Do you see that? 16 A. Yes. 17 Q. And I ask you about the criticism that 18 you have in that report under the first section, 19 which was that USAT's monitoring of its 20 asset/liability structure was not documented and 21 that numerous -- well, "not documented for one to 22 determine if management has exercised prudent 17656 1 decisions." And it goes on to say "It appears 2 numerous individuals are responsible for various 3 facets in the trading of financial instruments. 4 The individual that discuss their strategies and 5 plans with the asset/liability committee on a 6 weekly basis. However, neither the individuals 7 nor USAT" -- 8 THE COURT: Can you -- too fast. 9 Q. (BY MS. CLARK) "However, neither the 10 individuals nor USAT maintained documentation to 11 support the thought and decision-making processes 12 involving the given hedging and investment 13 activities." 14 Do you see that? 15 A. Yes. 16 Q. And that's what we discussed beginning 17 on Page 450 of your deposition. 18 Do you see that? 19 A. Yes. 20 Q. On 451, I ask you what you remember 21 about this criticism that is reflected in the 22 interim examination report, correct? 17657 1 A. Yes. 2 Q. And you said that you recalled the 3 institution could not provide the information as 4 to how their investments in hedging program 5 totally work and which investment programs were 6 hedged against each other and it was a lack of 7 documentation that they did not have to document 8 such. 9 Do you see that? 10 A. Yes. 11 Q. Now, turn over to Page 463 at the 12 bottom. I begin to ask you about Deposition 13 Exhibit 37, which was a copy of the minutes of the 14 asset/liability committee on June 7, 1985, which I 15 found in the work papers, which is a portion of 16 the asset/liability committee minutes that we've 17 marked in their entirety as Exhibit B1183. 18 Do you see that? It's the very last 19 minute in that collection. 20 A. Yes. 21 Q. And we talk about that exhibit, the 22 asset/liability committee minutes, and about the 17658 1 establishment of the asset/liability committee. 2 And then you get to Page 466, and I say, "I think 3 we agree that your interim report reflects that 4 somebody reviewed the asset/liability committee 5 since it describes what happened at the committee. 6 I guess there is one other choice, and that would 7 be that they attended the meeting themselves, 8 correct?" 9 A. Yes. 10 Q. Now, why don't you just read for the 11 record what it is you responded to that question? 12 A. "Something here is a contradiction 13 between what's stated here and the correspondence. 14 So, either we received the minutes after the 15 document because here we're stating that they did 16 not have documentation to support their 17 decision-making." 18 Q. Okay. And so, that indicates that 19 during your deposition, once you saw the copy of 20 the asset/liability committee minutes that I 21 provided to you, you indicated that your interim 22 report, which is the document you're referring to, 17659 1 must have been written before you had seen the 2 asset/liability committee; is that correct? 3 A. Right. 4 Q. So, I go on and say, "Okay. So, you 5 would consider the document of the type that we've 6 been -- we have marked as 37 to supply the missing 7 documentation that you're referring to in your 8 interim examination report. Is that what you're 9 saying?" 10 "Correct. Correct." 11 Do you see that? 12 A. Yes. 13 Q. Now, does that refresh your 14 recollection that the criticism in the interim 15 report of August 19th, 1986, was at least as far 16 as you could recall last year, criticism that was 17 based on the fact that you had not yet seen the 18 asset/liability committee minutes? 19 A. Not in total because it gets into the 20 trading activity, and that's -- the second 21 paragraph is asking for additional information 22 than what you would find in committee minutes. 17660 1 Q. Well, that's not what you said at your 2 deposition, Ms. Carlton. It says -- I asked you 3 whether that document, which is Exhibit -- was 4 Exhibit 37 to your deposition and which is a part 5 of Exhibit B1183 was of the type required to 6 supply the missing documentation in which you 7 referred -- to which you referred in your interim 8 report. 9 That's what you testified last year, is 10 it not? 11 A. Yes. But I'm stating here that that's 12 in addition to what you would need -- in the first 13 paragraph, you would need additional information 14 for the second paragraph. 15 Q. And did you discuss that testimony of 16 your deposition with OTS counsel before your 17 hearing testimony today? 18 A. No, I did not. 19 Q. Let me show you Exhibit A11036. This 20 is a collection of requests -- I should say a 21 selection from among the requests that you made 22 during the 1987 examination, Ms. Carlton, taken 17661 1 out of the 1987 examination work papers. 2 Can you identify these as some of the 3 requests that were made during that examination? 4 A. Yes. These are requests made during 5 that examination. 6 MS. CLARK: Your Honor, I offer Exhibit 7 A11036. 8 MR. VEIS: Your Honor, we have no 9 objection. As Ms. Clark observed, this is a 10 selection from a larger universe of documents. 11 Each of the documents is a separate document and 12 would -- but we have no objection to their 13 admission as a package. 14 THE COURT: Received. 15 Q. (BY MS. CLARK) Now, do you see that 16 one of the requests that was submitted in the 1987 17 exam was a request for performance report packages 18 from the board reports for June '87, 19 September '87, and October '87? 20 A. Yes. 21 MR. GUIDO: What are those dates again? 22 THE COURT: Is that October? 17662 1 MS. CLARK: I'm sorry. Did I misspeak? 2 It's November '87. 3 Thank you, Your Honor. 4 A. Yes. 5 Q. (BY MS. CLARK) So, the examiners 6 requested of United copies of the performance 7 report packages from the board reports for those 8 three dates, correct? 9 A. Correct. 10 Q. The next request is one that you 11 yourself submitted for the information concerning 12 operating committees. 13 Do you see that? 14 A. Right. 15 Q. And there is a request for all 16 employment contracts between the institution and 17 its officers, employees, and third parties 18 including holding company, parent, and service 19 company subsidiaries. 20 Do you see that? 21 MR. VEIS: Excuse me, Your Honor. It 22 appears to me that that's a separate question. 17663 1 I'm not sure that the attached form reference on 2 Bates number ending 761 is -- has any bearing on 3 the next document. As you can see, the Bates 4 number there is 774. 5 MS. CLARK: Yes, Your Honor. I think 6 Mr. Veis is right. I think that there is some 7 attachment that is not in the document that should 8 be attached to the operating committees, which is 9 Bates 128761, and I'd be happy to provide a 10 substituted copy of that or provide the page that 11 is missing to substitute into the document. I'm 12 not asking questions on either the original page 13 or the attachment that's not here. 14 THE COURT: Okay. 15 Q. (BY MS. CLARK) And we were on Request 16 No. 48, Ms. Carlton, a request for employment 17 contracts. 18 Did you request all employment 19 contracts between the institution and its 20 officers, employees, and third parties including 21 holding company, parent, and service company 22 subsidiaries? 17664 1 A. Yes, I did. 2 Q. The next request is Request No. 28. 3 Did you request copies of the 10Ks 4 filed with the SEC for all of the companies listed 5 on this request? 6 A. Yes, I did. 7 Q. And why did you request that 8 information? 9 A. Because that's one of the items that we 10 request during an examination. 11 Q. Is that standard procedure? 12 A. Yes. 13 Q. And then you review those documents in 14 the course of the examination; is that correct? 15 A. Correct. 16 Q. The next one is Request No. 27. You 17 requested a list of all the officers of the level 18 of first vice president and above, as well as 19 directors of USAT and its subsidiaries that had 20 resigned or were terminated since the last 21 examination, correct? 22 A. Yes. 17665 1 Q. The next document is a request relating 2 to mortgage-backed securities filled out by Jack 3 Purvis. 4 Is he the individual -- I'm sorry. 5 Actually, looking at the handwriting, it looks as 6 if you filled it out with Jack Purvis' name; is 7 that correct? 8 A. Yes. 9 Q. And that's a request for a schedule of 10 mortgage-backed securities held as of 9/30/87 and 11 a schedule of all buy-sell transactions in 12 mortgage-backed securities since the last 13 examination, correct? 14 A. Yes. 15 Q. And you did request that during the 16 course of the 1987 exam; is that correct? 17 A. Yes. 18 Q. Why did you fill it out in Jack Purvis' 19 name? 20 A. Because he did not have the requested 21 information listed on the sheet. 22 Q. What information did he not have? 17666 1 A. He did not use the request form. So, 2 you attached his request to the form. 3 Q. The next request which is at 4 Page 128836 is a request for the loan -- complete 5 loan files for three loans, including the Stephen 6 Block loan. 7 Do you see that? 8 A. Yes. 9 Q. And was John Cottingham taking care of 10 the loan review on those loans? 11 A. Or he may have been administering that 12 review area. 13 Q. And the last page is Page 128842. Can 14 you tell me what that is? 15 A. It's a sheet that Mr. Cooper included 16 in the work papers showing that he reviewed the 17 requests. 18 Q. It says, "Joe." 19 Is that the signature of Joe Cooper, 20 the field manager in the 1987 exam? 21 A. Yes. 22 Q. And it says, "Reviewed requests and 17667 1 information received." 2 Do you see that? 3 A. Yes. 4 Q. So, that indicates that he not only 5 reviewed the requests but also the information 6 received in response to the requests? 7 A. That's what he said. 8 Q. And do you have any reason to believe 9 he didn't? 10 A. I didn't literally see him do it, so -- 11 Q. That's what he said and he noted that 12 in the work papers, correct? 13 A. That's right. 14 Q. Okay. Let's look then at -- I'm going 15 to show you three exhibits together. They are new 16 exhibits, I believe: A12233, A12118, and A12119. 17 Do you have those three exhibits in 18 front of you now, Ms. Carlton? 19 A. Yes. 20 Q. These are three documents that we 21 obtained from the work papers of the 1987 exam, 22 and the first one has the same signature of Joe. 17668 1 Would you interpret that to be Joe 2 Cooper's indication that he had reviewed the 3 performance report of UFG for September 1987? 4 A. Yes. 5 Q. And the other two documents come out of 6 the same section of the work papers. They are 7 also performance reports for different periods of 8 time. The first one is October 1987. That's 9 Exhibit A12118. And the performance report, 10 November 1987, is A12119. 11 Now, Ms. Carlton, did you review the 12 performance reports that were requested from USAT 13 during the 1987 exam? 14 A. I didn't review them all personally 15 myself, no. 16 Q. Who other than Mr. Cooper reviewed the 17 performance reports, to your knowledge? 18 A. They were used as a part of the 19 financial analysis. So, you would have different 20 examiners that may have used them for different 21 reasons. 22 Q. Were the examiners responsible for 17669 1 examining the various areas that related to 2 financial analysis expected to review the 3 financial performance reports at some point in the 4 course of the examination? 5 A. If for some reason they needed 6 something out of there or compare the numbers, 7 they would. 8 MS. CLARK: May I offer, Your Honor, 9 Exhibit A12233, A12118, and A12119? 10 MR. VEIS: We have no objection to any 11 of those exhibits, Your Honor. 12 THE COURT: Received. 13 Q. (BY MS. CLARK) And would the 14 examiners who were responsible for examining the 15 securities areas also be expected to review the 16 performance reports that described the securities 17 activities of the association during the course of 18 their examination? 19 A. If they needed that information that's 20 provided here, they would. 21 Q. This information was collected from the 22 association and included in the work papers as 17670 1 information that was available to be used by those 2 examiners whose particular areas of examination 3 would make that information relevant; is that 4 correct? 5 A. Right. 6 Q. Do you recall whether you did 7 personally review these performance reports during 8 the course of the work that you did on the 9 examination in 1987? 10 A. I can't say these specific reports. I 11 did some analysis of some financial reports. I -- 12 some information I would have to obtain and 13 reference back here, but I can't attest to these 14 specific reports. 15 Q. So, you would look at the performance 16 reports as relevant to particular areas of the 17 examination that you were personally working on? 18 A. Correct. 19 Q. Why were the performance reports 20 actually copied? And I've only selected some of 21 the ones that were in the work papers, but why 22 were the performance reports actually copied and 17671 1 included in the work papers of the examination? 2 A. So that we would have them readily 3 available and wouldn't have to request sheet by 4 sheet later on. We had all the information there, 5 that it would cause less interruption with 6 management to continue to have to go back and 7 forth getting data. 8 Q. So, you copied them so they would be 9 readily available to anybody to whom they would be 10 relevant in the course of the work that was being 11 done on the exam? 12 A. That's right. You had 13 individuals 13 plus how many individuals that the State of Texas 14 had. So -- and we were sharing information. So, 15 it was much easier to have the institution copy 16 the relevant data for us and have it there. And 17 we decided how to share it versus continuing to 18 have to communicate with management. 19 Q. Now, we have reviewed together, 20 Ms. Carlton, a number of different kinds of 21 documentation that the examiners reviewed and 22 either summarized or copied into the work papers, 17672 1 including minutes of the board of directors, 2 investment committee minutes, performance reports. 3 Do you recall that in the course of the 4 1986 exam, you actually asked Peat Marwick to 5 provide you with their audit work papers from the 6 audit of the association as of December 31, 1985? 7 A. Yes. 8 Q. So, you went beyond the association's 9 own reports, its own minutes, and required the 10 outside auditors to provide the outside auditors' 11 work papers for your review. 12 Do you recall that? 13 A. Yes. 14 Q. Let me ask you to identify A12063, 15 please. 16 A. (Witness reviews the document.) 17 Q. Is this your request to Mr. Gross on 18 July 21, 1986, for the work papers to support the 19 audit report of Peat Marwick for the period ended 20 December 31, 1985? 21 A. Yes, it is. 22 Q. You refer to a regulation, 17673 1 Section 563.17-1(a)(2) which apparently pertains 2 to the supplying of audited financial statements, 3 correct? 4 A. Right. 5 Q. So, what you're saying here is you want 6 the work papers that supported the audit report 7 that was submitted as evidence of compliance with 8 this regulatory section, correct? 9 A. That's correct. 10 Q. So, you had a regulation which required 11 the association to submit audit reports, and you 12 went beyond the actual audit report and said you 13 wanted the underlying work papers, correct? 14 A. That's correct. 15 Q. And do you see that somebody has 16 written here, "Are you taking care of complying 17 with this?" Initials, "MC"? 18 A. Right. 19 Q. And then a note by somebody. 20 Would you interpret that to be to 21 Mike Crow? 22 A. What do you mean? 17674 1 Q. Do you know whose initials are "MC"? 2 Do you know who that is? 3 A. Oh, that could be anyone. I would be 4 speculating if I guessed whose initials those 5 were. 6 Q. Then there is another note from Jim W. 7 to Jim P. saying "PMM said the request needs to 8 come from the district director. Examinations, 9 does this qualify?" 10 Do you see that? 11 A. Yes. 12 Q. Then the next document that I'll ask 13 you to look at is in evidence already. It's 14 A12064. It's at Tab 995. 15 MR. VEIS: Can we have a copy? 16 MS. CLARK: Sure. 17 Q. (BY MS. CLARK) Ms. Carlton, do you 18 see that Exhibit A12064 is a letter from you to 19 Mr. Rick Millinor of Peat, Marwick, Mitchell 20 & Company dated July 28, 1986? And is this your 21 request in writing for all work papers to support 22 the audit for the year ended December 31, 1985, 17675 1 conducted by Peat Marwick? 2 A. Yes. 3 Q. Now -- and do you recall that 4 Peat Marwick did provide you access to the work 5 papers, correct? 6 A. Yes. 7 Q. I think you indicated that you were not 8 able to make copies but that you were allowed to 9 review the work papers and made notes of what you 10 found there? 11 A. Right. 12 Q. Mr. Veis asked you a question about the 13 subsequent year and the fact that you had in your 14 work papers the management report and audited 15 financials for the 1985-'86 period at the time you 16 met with Peat Marwick in 1988. 17 And my question to you, Ms. Carlton, 18 is: Did you not have the ability to ask 19 Peat Marwick for a current financial statement and 20 management report if you felt you needed one since 21 you were able to obtain copies of their work 22 papers upon request in 1986? 17676 1 A. They were in the process of preparing 2 it at the time. 3 Q. So, when Mr. Veis asked you a question 4 about how you did not have the current report and 5 you said you did not, you did not mean to suggest 6 that you had not been provided the most current 7 report in existence? 8 A. Right. 9 Q. And, indeed, under the regulation, you 10 were authorized to require USAT to provide the 11 most current report, correct? 12 A. We had -- we met with the auditors and 13 discussed the findings of that period's report. 14 At the request of their partner, they wanted a 15 meeting to discuss their findings and wanted us to 16 discuss our findings of the examination. 17 Q. But based on the testimony that 18 Mr. Veis elicited in direct-examination, the Court 19 should not have the misunderstanding that USAT 20 failed to supply the examiners with the most 21 current financial report prepared by Peat Marwick, 22 correct? 17677 1 A. Right. 2 MS. CLARK: I'll offer Exhibit A12063, 3 please. 4 MR. VEIS: No objection, Your Honor. 5 THE COURT: Received. 6 Q. (BY MS. CLARK) Now, in the following 7 examination, which is the 1987 examination, you 8 did, as you just testified, meet with the 9 Peat Marwick auditors to obtain a report on the 10 status of their work, correct? 11 A. Right. 12 Q. And I'd like you to look at A12135, 13 which is your memorandum to Neil Twomey concerning 14 the meeting. 15 Is this your memorandum to Mr. Twomey 16 concerning a meeting that you had with the 17 Peat Marwick auditors on February 4th, 1988? 18 A. The 6th, yes. 19 MS. CLARK: Your Honor, I offer A12135. 20 MR. VEIS: No objection, Your Honor. 21 THE COURT: Received. 22 Q. (BY MS. CLARK) Now, in your memo to 17678 1 Mr. Twomey, you describe the purpose of the 2 meeting. 3 What was the purpose of your meeting 4 with Peat Marwick in -- on February 4th, 1988? 5 A. The purpose of the meeting was to 6 discuss the status of the examination report prior 7 to release of United's fourth quarter earnings 8 statement. 9 Q. And what did Peat Marwick want to know 10 from the examiners concerning the status of the 11 examination report? 12 A. They wanted to know the classifications 13 that we were requiring, the reserve information, 14 the securities -- information about the securities 15 portfolio, and we discussed the four items that's 16 presented there. 17 Q. The last item indicates that the 18 auditors also provided you with some information, 19 does it not? 20 A. Right. 21 Q. And what did they tell you about their 22 audit work concerning the securities portfolio? 17679 1 A. That they had noted no major exceptions 2 in this area. 3 Q. Now, Mr. Veis asked you several 4 questions about the subject of your communications 5 with the auditors and with United. And the 6 question he was asking was whether United told you 7 that the auditors had no exceptions regarding the 8 securities. 9 Doesn't this document reflect -- 10 MR. VEIS: I didn't ask that question. 11 I'm sorry. 12 Q. (BY MS. CLARK) Does this document 13 reflect -- 14 THE COURT: Excuse me. I didn't hear 15 your objection. 16 MR. VEIS: I'm sorry, Your Honor. I did 17 not ask that question. I don't know what point 18 Ms. Clark is trying to make. But if she has a 19 question to ask, I'm delighted to have her ask it. 20 But that's not a question that I asked in my 21 direct-examination. 22 THE COURT: All right. Well, let's ask 17680 1 the question. 2 Q. (BY MS. CLARK) Does this document 3 reflect that it was the auditors and not USAT that 4 told you that the auditors had no major exceptions 5 in the audit of USAT's securities portfolio? 6 A. Yes. 7 Q. Let's look at Exhibit A12136. 8 Ms. Carlton, can you identify this as 9 an exceptions sheet relating to the examination 10 work that was being done on USAT's securities 11 portfolio? 12 A. Yes. 13 Q. Do you see that in the third sentence 14 of -- well, let me first offer the exhibit. 15 MS. CLARK: Your Honor, Exhibit A12136. 16 MR. VEIS: No objection, Your Honor. 17 THE COURT: Received. 18 Q. (BY MS. CLARK) Do you see that in the 19 third sentence of the document it is stated that 20 "The association's records specifically for its 21 financial futures and options transactions are not 22 being maintained in such a manner which will 17681 1 readily disclose the association and its 2 subsidiaries' outstanding positions"? 3 Do you see that? 4 A. Yes. 5 Q. And further down in that paragraph, you 6 refer to -- well, I'm using the word "you" to mean 7 the examiners. 8 This is your initial at the bottom, 9 isn't it? 10 A. Yes. 11 Q. Okay. The examiners refer to the 12 specific regulation governing the maintenance of a 13 contract register. 14 Do you see that? 15 A. Yes. 16 Q. And what it says is that "The 17 regulation Section 563.17-4(f) specifically 18 requires that the institution maintain a contract 19 register identifying and controlling all interest 20 rate futures contracts." 21 Do you see that? 22 A. Yes. 17682 1 Q. Does that refresh your recollection 2 about what register it was that the examiners took 3 exception to in the course of the 1987 4 examination? 5 A. Yes. 6 Q. Go to the last paragraph, which begins 7 "however." 8 Do you see that it says that the 9 examiners have consulted with the association's 10 independent auditors, Peat Marwick & Main, who are 11 currently conducting its 1987 audit of the 12 association? 13 Do you see that? 14 A. Yes. 15 Q. And what do the auditors tell you when 16 you consulted with them about the audit concerning 17 the investment securities area? 18 A. They stated in general -- the auditors 19 stated that their review of the association, that 20 investment securities activity in general and 21 hedge accounting in particular disclosed that the 22 association has and is properly accounting for 17683 1 such transactions. 2 Q. Now, again, does this reflect the fact 3 that it was the auditors and not United's 4 management that told the examiners that the 5 auditors had found that their investment 6 securities activities in general and hedge 7 accounting in particular were properly accounted 8 for? 9 A. Yes. 10 Q. Now, Ms. Carlton, you were aware of the 11 fact that there were some former Peat Marwick 12 auditors who had gone to work at United, were you 13 not? 14 A. Yes. 15 Q. And that was one reason why you were 16 pursuing the issue of looking at the underlying 17 work papers. 18 Do you recall that that was one of the 19 reasons why you went beyond looking just at the 20 audit report and actually looked at the work 21 papers, as well? 22 A. We were looking for independents. 17684 1 Q. And you discussed this with Mr. Twomey, 2 correct? 3 A. Right. 4 Q. And that was one reason why you went 5 the extra step and not just looking at the report 6 but went and actually checked out the underlying 7 work papers supporting the work that Peat Marwick 8 had done to support its conclusions in the audit 9 report, correct? 10 A. And I think at some point, I was 11 directed to do that. 12 Q. So, that was an extra audit procedure 13 that went beyond the minimum scope procedures and 14 was designed to assure yourselves that the outside 15 auditors were conducting their work properly, 16 correct? 17 A. Right. You don't -- we don't do this 18 on every exam. 19 Q. I'd like to ask you to look again at 20 Exhibit A14063, which is admitted in the record at 21 Tab 1493. 22 Ms. Carlton, do you recall that you 17685 1 were asked about this document during your 2 direct-examination? 3 A. Yes. 4 Q. This is a letter from Roy Green to 5 Jenard Gross dated May 11th, 1987, advising the 6 association that its application to exceed the 7 direct investment limitation was to be denied. 8 Do you see that? 9 A. Right. 10 Q. And there is an attached memoranda from 11 Mr. Twomey to Mr. Green, as well? 12 A. Right. 13 Q. Now, do you recall in reviewing the 14 correspondence file that this -- that USAT had 15 previously applied for approval to exceed the 16 direct investment limitation and had been denied 17 on that previous occasion, as well? 18 A. I don't recall. 19 Q. Let me ask you to look at Exhibit 20 A12149. 21 Ms. Carlton, this is a document that 22 came out of the correspondence file for the 1986 17686 1 exam. You will see that there are initials "ME" 2 in the upper right-hand corner. 3 Would you interpret those to be the 4 initials of Michael Eide, the field manager, at 5 the beginning of the 1986 exam? 6 A. Yes. 7 MS. CLARK: Your Honor, I offer Exhibit 8 A12149. 9 MR. VEIS: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MS. CLARK) Now, do you see that 12 the document is a response to an application to -- 13 for approval to exceed the threshold limits on 14 direct investments? 15 A. Right. 16 Q. And that's the same kind of application 17 that was denied in the letter that Mr. Veis put in 18 evidence, which was A14065, correct? 19 A. Yes. 20 Q. This is the prior year. This is 21 January 8th, 1986? 22 A. Right. 17687 1 Q. Now, do you see what reason was given 2 for denying the previous application for approval 3 to exceed the direct investment limits? 4 MR. VEIS: Excuse me, Your Honor. It 5 may be a fine point, but I don't believe this 6 document relates to a denial. I believe it 7 says -- 8 THE COURT: I can't hear you. 9 MR. VEIS: I'm sorry. I don't believe 10 this document relates to a denial. I believe that 11 the word used in this -- 12 THE COURT: Which document are you 13 referring to now? 14 MR. VEIS: The A12149. It refers to 15 holding the application in abeyance. I don't know 16 what point Ms. Clark is trying to make, but I'd 17 like to make sure the record is clear. 18 MS. CLARK: I think that is certainly a 19 fair refinement. This is a response to a direct 20 investment application, Your Honor. It is the 21 same kind of application as the exhibit that 22 Mr. Veis put in, which was, I'm told, A14063, the 17688 1 subsequent year. On the second page of the 2 document, Roy Green states that the application 3 was disapproved. 4 So, I will amend my question to say 5 "disapproved" rather than "denied." 6 Q. (BY MS. CLARK) Now, do you see the 7 reason given for why the application was 8 disapproved in 1986? 9 A. Yes. 10 Q. And was that because, as stated in this 11 letter -- well, why don't you tell us how you 12 interpret the reason why the application was 13 disapproved in 1986? 14 A. It's not approved because of the 15 negotiation that's taking place on a net worth 16 maintenance agreement. 17 Q. And that's the net worth maintenance 18 agreement that is referred to in the Haas/Selby 19 memo that we've looked at a number of times during 20 your examination, correct, the request to modify 21 the net worth maintenance agreement imposed as a 22 condition of approval to increase the joint 17689 1 ownership of MCO Holdings and Federated 2 Development Company of United Financial Group? 3 That's the negotiations that are referred to here, 4 correct? 5 A. I don't know what year -- this is '86. 6 I don't know the time frame of that other memo, 7 but -- I don't know the time frame, but that other 8 memo did address a maintenance agreement. 9 Q. Okay. And what Mr. Green says is that 10 the negotiations between MCO and Federated and the 11 Federal Home Loan Bank concerning the modification 12 of the net worth maintenance condition are ongoing 13 and that the Federal Home Loan Bank has determined 14 that they -- that the board will hold the 15 application in abeyance until a finalized net 16 worth maintenance agreement is in place. 17 Do you see that? 18 A. Yes. 19 Q. So that when USAT applied for 20 permission to exceed its direct -- its direct 21 investment limits in this previous application, 22 the response was, "We are not going to grant that 17690 1 application until a finalized net worth 2 maintenance agreement between MCO and Federated is 3 in place," correct? 4 A. Yes. 5 Q. Now, we've talked on a couple of 6 occasions about the question of books and records, 7 loan files, and the like. And I would like to 8 simply go over a couple of the documents that we 9 have looked at before and point out some of the 10 other information in those documents that is 11 relevant to that question. Let's first go to the 12 exhibit marked A14020, which was the 1986 13 examination report. 14 The Tab No. is 1461. And I'd like you 15 to refer to Page 25, if you would, please, 16 Ms. Carlton. At the top of the page, there is a 17 paragraph that begins, "To further emphasize the 18 books and records problems." 19 Do you see that paragraph? 20 A. Yes. 21 Q. Now, are you reporting in your 22 examination report that United Savings Association 17691 1 had retained Arthur Andersen to review the loan 2 files and identify deficiencies in their loan 3 files? 4 A. That's correct. 5 Q. And you also point out that USAT had 6 actually initiated efforts to identify and correct 7 its loan documentation problems, correct? 8 A. That's correct. 9 Q. So, when you were there during the 10 examination, what you found is that United Savings 11 Association of Texas had gone out and retained a 12 major accounting firm to review the loan files, 13 identify deficiencies, and help them correct those 14 deficiencies, but that there were still -- there 15 still were several missing documents of the same 16 type despite those efforts that USAT had 17 undertaken; is that correct? 18 A. Yes. 19 Q. Okay. Let's look at the business plan 20 of August 29, '86, which is Exhibit A10663 at 21 Tab 184. And the page to which I will refer you 22 in that document is Exhibit 39 -- I mean Page 39. 17692 1 Do you see that there is a paragraph 2 that begins "To ensure that all books and records 3 are accurate, current" -- 4 MR. VEIS: I'm sorry. I was looking at 5 my copy, and I missed the page. I'm sorry to 6 interrupt. What page are you on? 39? 7 MS. CLARK: Uh-huh. 8 Q. (BY MS. CLARK) Ms. Carlton, do you 9 see the paragraph to which I am referring? 10 A. Yes. 11 Q. Now, does this paragraph pertain to the 12 efforts that USAT was undertaking and proposing to 13 undertake to deal with any deficiencies in its 14 existing records and files? 15 A. Yes. 16 Q. And this is a part of the business plan 17 being formulated in August of 1986? 18 A. Yes. 19 Q. So, United Savings Association's 20 management, as part of its business plan, actually 21 put together a set of steps that were designed to 22 identify and solve any problems that existed in 17693 1 the books and records of the association, correct? 2 A. Yes. 3 Q. And the first thing on this plan or in 4 this plan was the retention of outside consultants 5 to examine all loan files to determine what, if 6 any, documents were needed to complete the files. 7 Do you see that? 8 A. Yes. 9 Q. And was that the Arthur Andersen review 10 that you then recorded in your examination report? 11 A. I don't know exactly since the name is 12 not provided in the business report. 13 Q. And do you see that the business plan 14 also includes a provision for a complete analysis 15 of the general ledger and subsidiary ledgers 16 utilizing association personnel and outside 17 accountants? 18 A. Yes. 19 THE COURT: I think it says 20 "consultants." 21 MS. CLARK: Thank you, Your Honor. 22 That's correct. 17694 1 Q. (BY MS. CLARK) And there is a list of 2 other measures that the association had either 3 already taken or was planning to take to deal with 4 any problems with its books and records, correct? 5 A. Yes. 6 Q. And were you familiar with the steps 7 being taken by the association to deal with any 8 deficiencies in its books and records during the 9 time you were examining United? 10 A. Yes. 11 Q. Let me ask you to look, as well, at 12 Exhibit A14061, which is at Tab 1490. 13 This is a document that Mr. Veis and I 14 both asked you about before. What I'd like you to 15 focus on at this point is Pages 6 and 7. 16 MR. VEIS: Which document is it? 17 MS. CLARK: It's the letter to 18 L.L. Bowman dated January 9th, 1987, Exhibit 19 A14061. 20 Q. (BY MS. CLARK) Now, this is a 21 response to the state examination report for the 22 1986 state examination, is it not? 17695 1 A. Yes. 2 Q. And in this response, United's 3 management sets forth the association's view on 4 the current state of their books and records, do 5 they not? 6 A. Yes. 7 Q. And many of the points that are 8 addressed in this letter are similar to the issues 9 that you had raised in the federal examination 10 report, as well, correct? 11 A. Correct. 12 Q. So, if you wanted to find out what the 13 association's perspective on some of these books 14 and records issues was, this would be one place 15 where you could go, the response to the state 16 examination report, correct? 17 A. Right. 18 Q. Let me ask you to look at Exhibit 19 A12108. 20 MS. CLARK: Your Honor, I'm going to 21 withdraw that exhibit. It is actually part of an 22 exhibit that I want to offer anyway. So, let me 17696 1 just do one rather than do them in parts. This is 2 Exhibit A12175. 3 Q. (BY MS. CLARK) Ms. Carlton, can you 4 identify this as the association's response to the 5 1986 examination report dated May 1st, 1987, and 6 addressed to Danny Thomas, the senior supervisory 7 agent at the Federal Home Loan Bank of Dallas? 8 A. Yes. 9 Q. Ms. Carlton, turn to Page 12 of the 10 response, if you would, please. 11 A. You also have other documents. 12 Q. I believe they are all attachments to 13 the same response, Ms. Carlton. But I'm asking 14 you to look at Page 12 of the letter from the 15 board to Mr. Thomas. 16 A. Okay. 17 Q. Now, do you see that the association 18 responded to the books and records exceptions 19 cited in your examination report for the 1986 20 exam? 21 A. Yes. 22 Q. And in the very first paragraph, they 17697 1 talk about the fact that the books and records are 2 audited by Peat Marwick Main & Company and that at 3 no time had Peat Marwick reported that the books 4 and records of the association were inaccurate, 5 incomplete, or designed to arrive at a 6 predetermined result. 7 Do you see that? 8 A. Yes. 9 MS. CLARK: Your Honor, I offer Exhibit 10 A12108 -- 12175. 11 MR. VEIS: No objection, Your Honor. 12 THE COURT: Received. 13 Q. (BY MS. CLARK) Again, Ms. Carlton, if 14 you wanted to find out what the response of USAT's 15 management was to the exceptions cited in the 1986 16 examination report regarding books and records, 17 this would be the document or at least one of the 18 documents where you would go to find the 19 association's position, correct? 20 A. Yes. 21 MS. CLARK: Your Honor, it's nearly 22 4:00, and I would be moving on to another area of 17698 1 the examination if this would be an appropriate 2 time to break. 3 THE COURT: We'll adjourn until 4 10:00 o'clock on Monday morning. 5 MR. NICKENS: Your Honor, we do have 6 our -- we have our filing with regard to the 7 motion that was filed last Friday, and it is here 8 and available. This relates to the motion with 9 regard to the settlement discussions. 10 THE COURT: Are you filing that with 11 the office in Washington, also? 12 MR. DUEFFERT: Yes, we are. 13 MR. RINALDI: Have you served a copy on 14 Rick Stearns, as well? 15 THE COURT: All right. Are there any 16 other matters that need to be discussed on the 17 record? 18 MR. NICKENS: No, Your Honor. I don't 19 believe so. 20 THE COURT: All right. We'll adjourn 21 until 10:00 o'clock. 22 17699 1 (Whereupon at 3:59 p.m. 2 the proceedings were recessed.) 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 17700 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 31st 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 17701 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 31st 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