17702 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 AUGUST 3, 1998 22 17703 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 17704 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 17705 1 2 INDEX OF PROCEEDINGS 3 Page 4 VIVIAN CARLTON 5 Continued Examination by Ms. Clark......17706 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 17706 1 P-R-O-C-E-E-D-I-N-G-S 2 (10:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Unless there are preliminary matters, 6 we will continue the cross-examination, Ms. Clark. 7 MS. CLARK: Thank you, Your Honor. 8 9 CONTINUED EXAMINATION 10 11 Q. (BY MS. CLARK) Good morning, 12 Ms. Carlton. 13 A. Good morning. 14 Q. As we discussed last Thursday, before 15 you gave your deposition in Washington last year, 16 you spent four days reviewing your work papers and 17 meeting with OTS counsel, didn't you? 18 A. Yes. 19 Q. And one of the people that you met with 20 was Mr. Paul Leiman, who was the person on the 21 prosecution team who was taking the lead on the 22 two real estate loans that are at issue in the 17707 1 notice of charges; isn't that correct? 2 A. Right. 3 Q. And you met with Mr. Leiman three or 4 four times, and you had in-depth conversations 5 with him, didn't you? 6 A. We had conversations. I don't know 7 what you describe as in-depth conversations. 8 Q. Ms. Carlton, didn't you meet with 9 Mr. Leiman three or four times and have in-depth 10 conversations with him in preparation for your 11 deposition last year? 12 A. I would not describe them as in-depth 13 conversations. 14 Q. Ms. Carlton, do you still have your 15 deposition transcript in front of you? 16 A. No, I don't. 17 Q. Okay. Let's give it to you. 18 Ms. Carlton, I'd ask you to turn to 19 Page 67 of your transcript of your deposition last 20 year, please. 21 A. Okay. 22 Q. Do you see at the end of Page 66, I'm 17708 1 asking you about the conversations that you had 2 with anyone other than Mr. Veis. 3 Do you see that? 4 A. Yes. 5 Q. And this was when you had come back 6 from the break and informed me that, contrary to 7 what you had testified before the break, you had 8 had conversations that had gone beyond casual 9 "hello, goodbye" type conversations with the other 10 attorneys, correct? 11 A. Yes. 12 Q. And then I asked you about those 13 conversations, and I asked with whom you had had 14 these conversations, and what did you say? 15 A. "We did have conversations -- in-depth 16 conversations with Paul and with Bruce." 17 Q. Does that refresh your recollection 18 that prior to your deposition, you had in-depth 19 conversations with Mr. Paul Leiman? 20 A. That's what I stated. 21 Q. Was that testimony true when you gave 22 it last year? 17709 1 A. That's what I described it as, the 2 terms I used. 3 Q. And was that truthful testimony when 4 you gave it -- 5 A. Yes, it was. 6 Q. -- last year? 7 Okay. Now, go over to Page 70. Do you 8 see that I'm asking you further about your 9 discussions with Mr. Leiman? And at the bottom of 10 the page, I asked you how many times you met. I 11 said, "Was it once or twice or was it nine or ten 12 times?" Do you see that? It's the bottom of the 13 first column. 14 A. On Page 70? 15 Q. Yes. It's the bottom of the first 16 column of the page of the transcript. 17 A. Okay. 18 Q. You see, I asked, "Was it once or twice 19 or nine or ten times?" 20 Do you see that? 21 A. I said, "We probably met three or four 22 times." 17710 1 Q. Okay. So, does that refresh your 2 recollection, Ms. Carlton, that in preparation for 3 your deposition in Washington last year, you met 4 with Mr. Leiman three or four times and had 5 in-depth conversations with him? 6 A. Yes. 7 Q. Now, you also had -- excuse me. And 8 Mr. Bruce Rinaldi also asked you questions about 9 the Park 410 documents during the preparation for 10 your deposition; is that correct? 11 A. Yes. 12 Q. Despite the review of the examination 13 work papers and the conversations that we've just 14 referred to, when I asked you what you remembered 15 about the Park 410 loan last year, you told me you 16 remembered virtually nothing; isn't that correct? 17 A. If it's in the deposition, I may have 18 said that. 19 Q. Well, isn't it true that the only thing 20 you could remember about the loan last year was 21 that it was a large real estate loan in Austin or 22 San Antonio? 17711 1 A. That may have been what I stated at 2 that time. 3 Q. Okay. And I asked you, well, if you 4 hadn't spent all this time reviewing the work 5 papers and talking to the attorneys, what do you 6 think you would have remembered about it? And you 7 said you would have remembered the name and 8 nothing else. 9 Isn't that what you told me last year? 10 A. I could have said that. 11 Q. Well, do you doubt that you said that? 12 A. If you state it's in the deposition, 13 then it's in the deposition. I don't recall the 14 deposition. 15 Q. Okay. Well, let's look at it. 568, 16 please. 17 Do you see at the bottom -- at the end 18 of Page 568 of your deposition transcript, I asked 19 you, "What do you recall about the Park 410 loan?" 20 Do you see that? 21 A. Yes. 22 Q. And what did you answer? 17712 1 A. "I recall that as being in the report." 2 Q. Are you looking at the bottom of 3 Page 568, Ms. Carlton? 4 A. Yes. 5 Q. And what did you answer to my question, 6 "What do you recall about the Park 410 loan?" 7 A. "That it is a property it -- I don't 8 recall exactly. It was either in Austin or 9 San Antonio. I recall it being a large real 10 estate loan." 11 Q. Then I asked you, "Well, do you recall 12 anything else about it?" 13 And what did you respond? 14 A. "No." 15 Q. Then let's turn over to the next page 16 of this transcript. At the very end of 569, I 17 asked you "If you hadn't reviewed the work papers 18 last week in Washington, would you have even 19 remembered it at all, do you think?" 20 And what did you answer? 21 A. What page? 22 Q. This is the very end of 569, which is 17713 1 on the next page of the version of the transcript 2 that you have in front of you. 3 Do you see where I asked you what you 4 would have remembered if you hadn't spent that 5 time reviewing the work papers? 6 A. At the bottom of 569? 7 Q. Yes. It is at the end of 569, which is 8 at the top of the next page of your version of the 9 transcript. 10 A. "I would have remembered the name." 11 Q. Okay. So, does that refresh your 12 recollection that at the time of your deposition, 13 you remembered nothing about the Park 410 loan 14 except for the fact that it was a large real 15 estate loan in Austin or San Antonio? 16 A. Yes. 17 Q. You didn't remember that it was the 18 largest loan that United ever made, did you? 19 A. I still don't know whether that's the 20 case. 21 Q. Well, you didn't even remember how 22 large it was, did you? 17714 1 A. No. 2 Q. You didn't remember who did the 3 write-up on the loan in the 1986 exam, did you? 4 A. No. 5 Q. You didn't remember that it was one of 6 the loans that the state examiner did the initial 7 write-up on, did you? 8 A. I don't recall. 9 Q. Even when I showed you the loan review 10 with Jeff Nunn's name on it, you didn't remember 11 that it was state examiner Jeff Nunn who did the 12 initial write-up on the loan, did you? 13 A. I don't recall. 14 Q. You don't recall whether you remembered 15 that or not last year? 16 A. Right. 17 Q. Let's turn to Page 602 of your 18 deposition. 19 Are you at that page? 20 A. Yes. 21 Q. Do you see at the top of the column, 22 which is continued on the next page where I say, 17715 1 "Okay. Do you recall whether Jeff Nunn was the 2 individual who conducted the initial review of the 3 Park 410" -- I'm doing it again -- "of the Park 4 10" -- "Do you recall whether Jeff Nunn was the 5 individual who conducted the initial review of the 6 Park 410 loan in the 1986 exam?" 7 And what was your answer? 8 A. "Yeah. I think that was. 9 Q. Ms. Carlton, are you reading on 10 Page 602 of your deposition transcript? 11 A. Yes. 12 Q. And do you see where it says -- where I 13 asked you, "Do you recall whether Jeff Nunn was 14 the individual who conducted the initial review of 15 the Park 410 loan," and you answered, "I don't 16 recall?" 17 Do you see that part of the transcript? 18 A. Yes. That's what it states there; but 19 right back to the same question is "Yes, I think 20 it was." 21 Q. Ms. Carlton, let's go back and look at 22 that question. The question there was, "Is the 17716 1 name Jeff Nunn someone who worked on the State of 2 Texas examination that was going on concurrently 3 with your examination in 1986?" 4 That's the question, correct? 5 A. Yes. 6 Q. And you answered to that question, 7 yes -- 8 A. "I think it was." 9 Q. -- you think it was. But when I asked 10 you whether it was Jeff Nunn who did the Park 410 11 write-up, your answer was? 12 A. "I don't recall." 13 Q. So, does that refresh your recollection 14 that having spent four days reviewing the work 15 papers and talking with OTS counsel, when you gave 16 your deposition last year you didn't even remember 17 that Jeff Nunn was the person who did the initial 18 write-up on the Park 410 loan? 19 A. That's what's stated. 20 Q. And that was truthful testimony at the 21 time you gave it, correct? 22 A. Yes. 17717 1 Q. Now, I asked you what weaknesses had 2 been identified with respect to the Park 410 loan 3 during the 1986 exam, and you didn't remember any 4 other weaknesses except some appraisal 5 deficiencies; isn't that correct? 6 A. Yes. 7 Q. You didn't recall anything about 8 Mr. Nunn's write-up of the loan or any discussions 9 that you had with Mr. Nunn about the Park 410 10 loan, correct? 11 A. If that's what the deposition says. 12 Q. You didn't remember whether you or 13 anybody else on the federal examination team even 14 reviewed the appraisal, did you? 15 A. I remembered that the appraisal was 16 reviewed. 17 Q. Let's look at Page 635 of your 18 deposition transcript. 19 A. What page? 20 Q. 635. 21 A. (Witness reviews the document.) 22 Q. Do you see at the bottom of the page, I 17718 1 asked you, "Do you remember whether anybody on 2 your staff looked at the Park 410 appraisal in the 3 1986 exam?" 4 Do you see that question? 5 A. Yes. 6 Q. And do you see your answer? 7 A. Yes. 8 Q. What was it? 9 A. "I don't recall." 10 Q. Does that refresh your recollection 11 that at the time of your deposition, you didn't 12 even remember whether anybody on your staff had 13 reviewed the appraisal? 14 A. In your previous question I stated that 15 we had appraisal deception -- exceptions. So, I 16 had to have -- can't get exceptions, you don't 17 review the appraisal. 18 Q. Well, then, why did you tell me when I 19 asked you that specific question that you didn't 20 recall whether anybody reviewed the appraisal, 21 Ms. Carlton? 22 A. It's probably your line of questions. 17719 1 Q. I beg your pardon? 2 A. It was probably due to your line of 3 your question, the way your question was 4 structured. 5 Q. Okay. Let me ask you, what did you not 6 understand about my question, "Do you remember 7 whether anybody on your staff looked at the 8 Park 410 appraisal in the 1986 exam?" 9 A. At the time, I don't recall. 10 Q. Now, Ms. Carlton, when you were deposed 11 in Washington last year, you didn't even remember 12 that the Park 410 loan was passed in the 1986 13 exam, did you? 14 A. I don't recall. 15 Q. Let's look at your transcript at 612 16 and 13. 17 At the bottom of 612, do you see where 18 I ask you, "Do you recall that this loan was, in 19 fact, passed for the purpose of the federal 20 examination in" -- I'm corrected to say 1986 -- 21 and what was your answer? 22 MR. VEIS: What page are you on? 17720 1 Q. (BY MS. CLARK) At the bottom of 2 Page 612 of your deposition transcript, 3 Ms. Carlton, do you see where I asked you, "Do you 4 recall that this loan was, in fact, passed for the 5 purpose of the federal examination in 1986?" 6 Do you see where I asked you that 7 question? 8 A. No. Mine says in 1988 and Mr. Leiman, 9 "What year?" 10 Q. Okay. And then what do I say? "For 11 the federal examination for 1986." 12 Do you see that? 13 A. Yes. 14 Q. All right. Now, what is your answer to 15 the question of whether you remembered that the 16 loan was passed in the 1986 examination? 17 A. No, I don't recall. 18 Q. So, does that refresh your recollection 19 that at the time of your deposition, you didn't 20 even remember that the loan had been passed in the 21 1986 exam? 22 A. Yes. 17721 1 Q. Now, Ms. Carlton, you don't really 2 remember what your thought process was in 1986 3 when you decided to pass the Park 410 loan, do 4 you? 5 A. After I have gone back, I know what's 6 written in the examination report; and those were 7 the facts as written back then. 8 Q. There is nothing in the examination 9 report in 1986 about the Park 410 loan, 10 Ms. Carlton, and you know that, don't you? 11 A. There is the write-up, and I made a 12 statement on that loan. That statement means what 13 I drew my conclusions from and is why it was not 14 classified. That is in the work papers. 15 Q. Ms. Carlton, don't you remember that 16 when you were deposed you offered a series of 17 different explanations for why you might have 18 passed the Park 410 loan? 19 Do you remember that? 20 A. I know the reasons that we passed 21 credits. Those reasons are standard passes. And 22 those reasons -- and I wrote on there that due to 17722 1 material weakness, that's the main reason why it 2 was passed. 3 Q. Ms. Carlton, I just asked you: Do you 4 remember that during your deposition you gave me a 5 series of different reasons why you might have 6 passed the Park 410 loan? 7 A. I don't recall exactly what I told you. 8 Q. Do you remember that you suggested that 9 maybe the loan wasn't pulled in the federal 10 sample, that it had only been pulled in the state 11 sample? 12 A. That's a possibility. 13 Q. That's one reason you gave me in the 14 deposition for why you might have passed the loan. 15 Then I asked you whether the loan -- 16 asked you about it again. I said, "Do you think 17 the reason it wasn't in the 1986 report was that 18 you passed it?" 19 And do you remember that you suggested 20 that maybe the federal team didn't examine it 21 because it was a direct investment that was made 22 by UFC, one of the subsidiaries? 17723 1 Do you recall that you gave me that 2 possible explanation for why you didn't pass -- 3 why you passed the loan? 4 A. No, I don't recall that. 5 Q. Well, let's look at 674 and see if that 6 refreshes you. 7 Do you see I'm asking you about the 8 1986 exam, trying to explore the question of why 9 the loan doesn't get mentioned in the exam report. 10 I say, "So, for the 1986 exam, consistently with 11 the work papers we reviewed, the Park 410 loan was 12 passed? It wasn't classified. Right?" 13 And what did you answer? 14 A. "Right, because we didn't review. That 15 falls under -- that subsidiary doesn't fall under 16 UFC." 17 Q. And then you go -- then go down and you 18 continue on and you say, "I think it's under the 19 UFC direct investments. Was it under the 20 institution?" 21 Do you see that? 22 A. Yes. 17724 1 Q. So, does that refresh your recollection 2 that in trying to come up with a reason why you 3 passed the loan in 1986, you offered the 4 hypothesis that it was actually not an association 5 loan but, rather, a direct investment held by UFC? 6 MR. VEIS: Your Honor, I believe that 7 mischaracterizes the testimony. It's clear from 8 the transcript Ms. Carlton's asking a question and 9 not offering a hypothesis. 10 Q. (BY MS. CLARK) Does that refresh your 11 recollection that when asked about the reason the 12 loan wasn't in the exam report, you suggested the 13 possibility that it was because it was a UFC 14 direct investment and not a loan by the 15 association? 16 A. Yes. 17 Q. Now, after this exchange, we broke for 18 the day and we came back the next day and I asked 19 again about the fact that you had passed the loan 20 in the 1986 exam. 21 Do you recall that? 22 A. No. 17725 1 Q. Well, I'll show you, if necessary. At 2 this point, after the break, we come back. We 3 discussed the question again. You explained that 4 "pass" simply meant that the loan had been 5 originated in April and there was no immediate 6 loss exposure because there was a built-in 7 interest reserve. 8 Do you recall coming back the next day 9 and offering that as a possible reason for why you 10 passed the loan in 1986? 11 A. No. 12 Q. Okay. Let's look at Page 757. 13 Actually, at the end of 756 I'm asking 14 you -- I've shown you the work paper with the 15 handwritten note "pass" on it. 16 Are you at the Page 757, Ms. Carlton? 17 A. Yes. 18 Q. At the bottom of the previous column, 19 I'm asking -- I show you the work paper. I'm 20 asking you follow-up questions. I said, "I just 21 wanted to see if this refreshes your recollection 22 as to conclusion that you reached with respect to 17726 1 the Park 410 loan during the 1986 examination." 2 You say, "Well, it appears to state 3 weaknesses not material." 4 Then I ask a follow-up question. "Does 5 that refresh your recollection as to your 6 assessment of the Park 410 loan during the 1986 7 examination?" 8 And then what is your answer? 9 A. "That meant that the loan was 10 originating in April of 1986. Our examination at 11 that time was conducted in May. At the 12 origination -- at the time of the review of the 13 loan, the origination of this loan, it was a loan 14 which was currently put on the books with no 15 exposed loss at that date to the institution. 16 Although the dollar amount was large and 17 significant, items like the Couch Mortgage which 18 had immediate loss exposure would have been put in 19 the report versus loans originated, although 20 weaknesses, there was not an immediate loss 21 exposure to the institution." 22 Q. So, does that refresh your recollection 17727 1 that after an overnight break when we went back to 2 the issue of why you passed the loan, you came 3 up -- you offered an explanation that maybe it was 4 because the loan had been originated in April and 5 there was a built-in interest reserve? 6 MR. VEIS: I don't believe there was a 7 "maybe" in this answer. 8 A. Yes. 9 Q. (BY MS. CLARK) And Ms. Carlton, 10 having gone back to this issue several times 11 during your deposition, do you recall that the 12 answer -- the final answer that you gave me was 13 that the reason why you did not include the 14 Park 410 loan in the final exam report was that 15 you had other critical major concerns that were 16 higher than this particular asset? 17 A. Right. 18 Q. Now, this explanation about the 19 built-in interest reserve that you came up -- that 20 you offered on the second day of your deposition 21 and which you have again offered in the testimony 22 in this court amounts to a claim that if you're 17728 1 going to classify a loan rather than pass it, you 2 have to have -- you have to see weaknesses that 3 would have an adverse impact on the institution 4 within what you call the immediate short-term. 5 Is that the position that you are 6 explaining to the judge in this trial, that in 7 order to classify the loan rather than pass it, 8 you have to find that there are weaknesses that 9 would cause loss in the amount short-term. 10 Is that your explanation? 11 A. It could vary from loan to loan because 12 with each loan, you have different criterias for 13 the classifications on loans. You can't just say 14 that -- say it's one rule that will stand for any 15 loan in every loan. 16 Q. Okay. I'm going to read to you from 17 the transcript of your trial testimony at 18 Page 170556 (sic) and see if that refreshes your 19 recollection about your testimony. This is during 20 the direct-examination of Mr. Veis. It's at 21 Page 17055. He asked you, "Well, what do you need 22 to show or to find in order to classify the loan?" 17729 1 And you answered, "when we make 2 classifications of a loan, we need" -- sorry. Let 3 me start over. Answer, "When we make 4 classifications of a loan, we identified 5 weaknesses that demonstrate an apparent loss in 6 some form or that a loss in adverse trend or 7 adverse impact will be immediate to the 8 institution, within an immediate short period of 9 time or within a length of time prior to us 10 reentering the institution." 11 Do you recall that testimony that you 12 gave in this hearing? 13 A. Yes. 14 Q. And then you went on to define that 15 period of time as a six- to 12-month period. 16 Do you recall that? 17 A. Yes. 18 Q. So, your explanation in this hearing 19 for why you did not classify the Park 410 loan in 20 1986 was that you looked at the loan and you did 21 not see an immediate loss in the loan within the 22 next six to 12 months because it had an interest 17730 1 reserve. 2 Is that your explanation to the judge 3 as to why you passed the loan in the 1986 4 examination? 5 A. Along with other items that was stated. 6 Q. What other items are you referring to? 7 A. You stated above. There was an "or" in 8 that statement that you just made. 9 Q. Now, Ms. Carlton, you were in 1986 an 10 experienced and competent examiner, were you not? 11 A. Yes. 12 Q. And you knew the regulations and you 13 applied those regulations to United in the work 14 that you did, didn't you? 15 A. Yes. 16 Q. If you were uncertain about how to 17 apply the regulations, you would seek guidance, 18 wouldn't you? 19 A. Right. 20 Q. You were instructed by your field 21 manager to classify United's loans under a 22 specific regulatory provision, weren't you? 17731 1 A. We had guidelines. 2 Q. You were instructed to classify 3 United's loans under a specific regulatory 4 provision, were you not? 5 A. We have regulations. We don't call it 6 provisions. The terms you are using are not the 7 terms. So, to say "yes" to your question is not 8 being truthful. 9 Q. Let me ask you to look at Exhibit 10 A14015, which is one of the exhibits that Mr. Veis 11 used in his direct-examination. 12 Do you see that is the May 15th, 1986 13 scope memorandum from Mr. Eide to you giving you 14 instructions about the procedures that you were to 15 follow in the course of the 1986 examination of 16 United? 17 A. Right. 18 Q. And do you see on the second page that 19 Mr. Eide instructs you that you were to classify 20 assets in accordance with insurance regulation 21 Section 561.16(c)? 22 Do you see that at the 17732 1 second-to-the-last bullet point on Page 2 of that 2 document? 3 A. Yes. 4 Q. So, you were instructed by your field 5 manager to classify assets under regulation 6 Section 561.16(c), correct? 7 A. Right. 8 Q. And that's what you did, isn't it? 9 A. Yes. 10 Q. Let's look at the regulation that you 11 used to classify assets in the 1986 examination. 12 I'm going to ask you to look at Exhibit B3969. 13 Ms. Carlton, this is a document which 14 is a copy of a portion of the Federal Register 15 published on December 31, 1985, which is the 16 promulgation of the final rule regarding 17 classification of assets. And the regulation is 18 said to be effective on January 30, 1986. 19 Do you see that in the upper left-hand 20 corner of the first page of this document? 21 A. Yes. 22 Q. Okay. Please turn to Page 53282 of the 17733 1 Federal Register where it defines the various 2 categories for classification purposes? 3 MR. VEIS: Your Honor, if Ms. Clark 4 wishes to offer the exhibit, we have no objection. 5 MS. CLARK: Thank you, Mr. Veis. I do 6 wish to offer the exhibit. 7 THE COURT: Received. 8 MS. CLARK: Thank you. 9 Q. (BY MS. CLARK) Do you see in the left 10 column, the regulation begins with a section on 11 scope? Do you see that "A" scope section? 12 A. Yes. 13 Q. And the very next section defines the 14 categories that are to be used to classify assets. 15 Do you see that? 16 A. Right. 17 Q. And do you see that the first 18 classification category is "substandard"? 19 Do you see that? 20 A. Right. 21 Q. Now, this regulation, which was to be 22 effective on January 1, 1986, said that an asset 17734 1 was to be classified substandard if the asset was 2 inadequately protected by the current net worth 3 and paying capacity of the obligor or the 4 collateral pledged, if any. 5 Do you see that? 6 A. Yes. 7 Q. And then it goes on to say, "Assets so 8 classified must have well-defined weakness or 9 weaknesses. They are characterized by the 10 distinct possibility that the insured institution 11 will sustain some loss if the deficiencies are not 12 corrected." 13 Now, that was the regulation that you 14 applied in deciding whether to classify the 15 Park 410 loan substandard during the 1986 16 examination, correct? 17 A. Yes. 18 Q. You don't see any reference to any six- 19 to 12-month rule in this regulation, do you? 20 There is nothing in what you just read here about 21 substandard assets that mentions anything about 22 six to 12 months, is there? 17735 1 A. No, there is not. 2 Q. This regulation doesn't say anything 3 about the loan having to demonstrate a loss within 4 the immediate short-term? You don't see that 5 anywhere in this paragraph, do you? 6 A. No, it's not. 7 Q. Now, in fact, wasn't this new 8 regulation promulgated precisely in order to give 9 the examiners and the supervisory staff a means of 10 dealing with commercial loans which typically had 11 payment schedules or other terms that meant that 12 they would not go into default for a long period 13 of time? Isn't that what this regulation was 14 intended to deal with? 15 MR. VEIS: Your Honor, I don't believe 16 that -- this calls for speculation. I don't know 17 that Ms. Carlton can -- 18 THE COURT: Well, she may know. If she 19 knows, she may answer. 20 A. The guidance in which I stated in which 21 you look for interest reserves are safe and sound 22 procedures that we used along with this guidance 17736 1 that would identify what you would recognize as 2 weaknesses built into real estate loans. That was 3 a part of our analysis of loans. If you found 4 loans that had built-in reserves -- 5 Q. (BY MS. CLARK) Ms. Carlton, I'm sorry 6 to interrupt, but I asked you a very specific 7 question and I'd like you to try to focus on that 8 if you could. 9 I asked you whether this regulation, 10 this new regulation that was promulgated in 11 December of 1985 to take effect on January 1, 12 1986, wasn't it designed specifically to deal with 13 commercial loans that had payment terms that meant 14 that they would not go into default for a long 15 period of time to allow the examiners and the 16 supervisory staff to deal with such loans. 17 That's my question. Can you give me an 18 answer to that? 19 A. No, it's not. 20 MR. VEIS: Your Honor, I find -- I 21 think Ms. -- 22 THE COURT: Well, we have the answer. 17737 1 Let's move on. 2 Q. (BY MS. CLARK) Okay. Let me ask you 3 to look back to the first page of the document, 4 Ms. Carlton. This is the Federal Register 5 publication of the Federal Home Loan Bank Board's 6 statement concerning the new regulation, and I'd 7 ask you to please focus on the middle column of 8 the first page of the exhibit and read along with 9 me where it says that "The board has determined 10 that its traditional method of classifying assets 11 is not effective for most commercial loans. The 12 current classification system, which is keyed to 13 the timely receipt of periodic payments, evolved 14 primarily to classify owner-occupied home loans 15 and has been sufficient for that limited purpose. 16 Under this loan" -- sorry. "Under this system, a 17 loan that is contractually delinquent is treated 18 as a scheduled Item . 19 And then go down to the end of that 20 paragraph. "The board believes, however, that 21 this system does not adequately identify credit 22 weaknesses in commercial loans whose payment 17738 1 schedules and other indicia of current status are 2 often of a different nature." 3 Do you see that? 4 A. Yes. 5 Q. Okay. And I'd also like you to turn 6 over to Page 53278. Further discussion of the 7 reasons for this regulation. 8 Do you see the first paragraph of the 9 left column says -- there is an example about an 10 ADC loan which you know to be an acquisition, 11 development, and construction loan, do you not? 12 A. Right. 13 Q. And then the Federal Home Loan Bank 14 Board says, "As this example indicates, the 15 board's current scheduled items approach to 16 identifying problem ADC loans and similar assets 17 is completely inadequate to deal with such loans 18 when there are no real periodic payments. As 19 noted, many such loans have nominal periodic paper 20 payments from an interest reserve. Such loans 21 cannot become delinquent as long as the interest 22 reserve lasts." 17739 1 Do you see that? 2 A. Yes. 3 Q. Now, do you see from this policy 4 statement that was issued in December of 1985, 5 Ms. Carlton, that the whole purpose of the new 6 classification system that was put into effect on 7 January 1, 1986, was to have the examiners move 8 beyond the question of whether the loan would 9 result in an immediate short-term loss and look at 10 the real quality of the loan? 11 Isn't that what the Federal Home Loan 12 Bank Board announced as its reasons for the new 13 classification system? 14 A. Yes. 15 Q. And you were a competent examiner who 16 understood and applied the regulations, were you 17 not? 18 A. Yes. 19 Q. And your field manager had instructed 20 you to look at the quality of the loan 21 underwriting, correct? 22 A. Right. 17740 1 Q. He didn't tell you to go and look at 2 the loan file and, if you found an interest 3 reserve, say, "Well, okay. There's going to be no 4 problem with payment between now and the next 5 exam. Let me just go to the next file." 6 He didn't tell you to do that, did he? 7 A. No. 8 Q. You would not have been doing your job 9 as an examiner if you had done that, would you? 10 A. Yes. 11 Q. You would have been doing your job as 12 an examiner? 13 A. Correct. 14 Q. If you had looked in a loan file, saw 15 that there was an interest reserve, and said, 16 "Okay. No problem until the next exam. Review 17 ended. Let's go to the next one" -- 18 A. That analysis included a complete 19 analysis of the credit. That is just one factor 20 of the way you are describing it. 21 Q. So, you're not, in the end, telling 22 Judge Shipe that the reason why you passed the 17741 1 Park 410 loan in 1986 was that there was an 2 interest reserve which meant that there would be 3 no immediate loss to the institution, are you? 4 A. I'm telling the judge that on that 5 loan, Judge, the loan had inherent in it an 6 interest reserve account. Along with it, it also 7 had a line of credit. That was a part of that 8 loan. Once you have that built in -- and that was 9 the characteristics of what you call acquisition, 10 development type lending -- we identified the 11 appraisal weakness. We looked at the financial 12 strength of the borrower. We go through a 13 complete analysis of that credit. At the time, 14 the loan was granted within three or four months 15 of the origination of the loan. Typically, 16 institutions don't originate a loan and on that 17 date it's delinquent. We look at the payment 18 stream that's inherent within that portfolio. 19 And at the time of the review, there 20 was no indication from that review due to that 21 reserve that within that short period of time you 22 would have any adverse impact to the institution. 17742 1 That's an underlying analysis that falls within 2 the actual language here that you have when they 3 say look at deficiencies and make that assessment. 4 That's a part of that assessment. 5 Q. Ms. Carlton, I'm sorry to interrupt, 6 but I asked you a specific question. 7 MR. VEIS: I object to Ms. Clark 8 continually interrupting the witness. If she does 9 not like the answer, she can move to strike it; 10 but the witness should be entitled to finish her 11 answer. 12 THE COURT: All right. Let's hear her. 13 Are you through? 14 A. And although here you may have the 15 words here as looking at the deficiencies as a 16 general characteristic of the actual reg, that's a 17 part of the thought process of getting from the 18 point of the reg to your final decision on the 19 reg. 20 Q. (BY MS. CLARK) Ms. Carlton, let me 21 see if I can summarize your position, and you tell 22 me if it's accurate or not. 17743 1 You understood and applied the 2 regulation as stated in the document that we just 3 reviewed, correct? 4 A. Right. 5 Q. And you also knew that it wasn't enough 6 to pass a loan that had a built-in interest 7 reserve because that was common to ADC loans and, 8 if that were true, then you would never classify 9 an ADC loan. That's what the Bank Board had in 10 mind when it promulgated these new regulations. 11 We agreed on that, correct? 12 A. Yes. 13 Q. So, based on your review of all of the 14 features of the loan, including any appraisal 15 deficiencies and all of the other features that 16 you reviewed, it was your conclusion as an 17 experienced, competent examiner that that loan did 18 not qualify as substandard under the regulations 19 as promulgated, correct? 20 A. Right. 21 Q. And what the new regulation asked was 22 whether this loan was inadequately protected by 17744 1 the current net worth of the borrower or by the 2 value of the collateral. 3 That's what the regulation said, 4 correct? 5 A. Yes. 6 Q. Now, you don't really remember your 7 thinking back in 1986, do you, about why you 8 classified this -- excuse me -- why you decided 9 not to classify this loan substandard? 10 You're trying to offer the Court your 11 thinking about what you must have been doing based 12 on your review of the file with OTS counsel and 13 your recollections of the rules in existence at 14 the time, correct? 15 A. No. 16 Q. No? 17 A. No. 18 Q. No, you do or you do not remember what 19 you were thinking? 20 A. I used the -- that's not the question 21 that you asked. That's not what you asked. 22 THE COURT: Re-ask the question, 17745 1 please. 2 Q. (BY MS. CLARK) Ms. Carlton, if we 3 wanted to find out what you knew and thought about 4 the Park 410 loan at the time you reviewed and 5 passed that loan, wouldn't the best place to go be 6 the work papers of your examination? 7 A. Correct. 8 Q. I'd like to hand you Exhibits B3971, 9 A12082, and A12094. 10 MR. VEIS: Sorry. Can we have those 11 numbers again? 12 MS. CLARK: You'll be getting copies, 13 Mr. Veis. But they are B3971, A12082, and A12094. 14 MR. GUIDO: Your Honor, I'd like the 15 record to show that other counsel at the table 16 don't receive copies of these documents as 17 Ms. Clark is passing them out. We did have an 18 understanding that documents would be made 19 available the night before and it hasn't been 20 done. And I think as time would progress, the 21 Court would see that it's a deliberate attempt to 22 disrupt redirect in this case, Your Honor. 17746 1 Q. (BY MS. CLARK) The first two 2 documents, Ms. Carlton, are from your 1986 work 3 paper. And the third document, A12094, is from 4 the 1987 work papers. 5 MS. CLARK: Your Honor, I offer B3971, 6 A12082, and A12094. 7 MR. VEIS: Your Honor, if Mr. Schwartz 8 might be heard. He's more familiar with this 9 particular set of documents. 10 MR. SCHWARTZ: Your Honor, just -- I 11 had a chance to look through this, and some of the 12 pages have initials of examiners; some of them 13 don't. I don't know what the source of this 14 material is, and -- or what -- Ms. Clark has 15 indicated that it came from the work papers, but I 16 don't have any indication that it did because some 17 of the pages are initialed and some are not. 18 MS. CLARK: Your Honor, these Bates 19 numbers indicate that they came from the range of 20 the 1986 examination work papers, and it is my 21 understanding that Mr. Dueffert reviewed the 22 examination work papers recently and had these 17747 1 very documents copied right out of them. 2 So, I don't think there should be an 3 issue as to authenticity. 4 MR. VEIS: Your Honor, what seems to 5 confuse me is these seem to be duplicative, and 6 I'm not sure what the purpose of that complication 7 is. For example, the beginning Page 12007 is -- 8 appears to be essentially duplicated at 120018. 9 And so, it looks like there's two copies of the 10 work paper followed by what I believe Mr. Cool 11 identified as a document he prepared. 12 MR. SCHWARTZ: The majority of these 13 documents, Your Honor, are already in the record. 14 So, I don't know why we need a second copy of it. 15 But aside from that, my initial -- my initial 16 impression is that some of these pages are 17 initialed by the examiners and some of them are 18 not. It's my understanding from the exam papers 19 that when an examiner is reviewing documents, they 20 initial the documents. 21 So, that's the only source of my 22 objection, the only basis for my objection to it. 17748 1 MS. CLARK: Your Honor, I'm sorry, but 2 these are quite extraordinary. These documents 3 come right out of the work papers. And if they 4 want to bring the original work papers in, we'd be 5 pleased to see them but these -- this is being 6 offered because it is the Park 410 write-up 7 exactly as it existed in the work papers or at 8 least that is my understanding. And that's the 9 reason it's being offered. There is obviously 10 some evidentiary significance to the fact that 11 certain documents were copied and put into the 12 examiners work papers and that's why it's being 13 offered as it is, even though there is no doubt 14 there will be some flux with documents in other 15 parts of the record. 16 MR. VEIS: Excuse me, Your Honor. I 17 would note for the record that we did, in fact, 18 put in the original work papers relating to the 19 first ten pages or actually first 20 pages of this 20 document. 21 With that said, Your Honor, we have no 22 objection. 17749 1 THE COURT: Received, all three. 2 Q. (BY MS. CLARK) Now, Ms. Carlton, the 3 top document on B3971 is the write-up of a loan by 4 state examiner Jeff Nunn, is it not? 5 A. Yes. 6 Q. You wouldn't just look at the state 7 examiner's note saying "pass" in the upper 8 right-hand corner and just move on to the next 9 loan, would you? 10 A. No. 11 Q. You would use your own judgment in 12 coming to a conclusion as to whether this loan 13 should be passed for the federal examination, 14 would you not? 15 A. Yes. 16 Q. The next document is -- A12082 is 17 excerpts from the summary that your examination 18 team prepared of the senior loan committee 19 minutes. It's a document that we reviewed 20 together during your deposition. 21 Do you see that? 22 A. What page are you starting on? 17750 1 Q. It's the document that has on the front 2 "Carlton 52" and also an exhibit sticker that says 3 A12082. 4 Ms. Carlton, if you took the other 5 exhibit apart, you probably ought to put it back 6 together so it doesn't get confused with the other 7 exhibits. 8 MS. CLARK: Why don't you go ahead and 9 put the exhibit back together for Ms. Carlton? 10 Q. (BY MS. CLARK) Now, Ms. Carlton, 11 let's go over some of the facts that you and your 12 examination team knew about the Park 410 loan as 13 reflected in your work papers. 14 You knew, did you not, that the senior 15 loan committee at United was a committee that was 16 made up of officers and not directors, didn't you? 17 A. Yes. 18 Q. And you saw nothing unusual about that, 19 did you? 20 A. You can have -- I don't understand your 21 question. 22 Q. As an experienced federal examiner, you 17751 1 saw nothing unusual about the fact that United's 2 senior loan committee was made up of officers, 3 correct? 4 A. No? 5 Q. Was that a "yes"? 6 A. No. 7 Q. Did you see something unusual about the 8 fact that the senior loan committee was made up of 9 officers and did not include any directors? 10 A. No. 11 Q. Okay. I'm sorry. I just misunderstood 12 your answer. 13 Now, you had no problem with the 14 fact -- with the delegation of loan approval 15 authority to the senior loan committee, did you? 16 A. No. 17 Q. The 80-million-dollar size of the loan 18 was also not a cause for concern about the safety 19 and soundness of the loan, was it? 20 A. We checked it for compliance to the 21 loan to one borrower violation. 22 Q. And you found that the loan was well 17752 1 within their loan limits and, therefore, not a -- 2 did not present safety and soundness concerns, 3 correct? 4 A. No. 5 Q. No, you didn't find it caused safety 6 and soundness concerns, correct? 7 A. Right. 8 Q. I'm sorry. We're just having a little 9 trouble with our "no's" and "yes's." I'll try to 10 frame my questions better in that regard. 11 Now, you did not have any concern or 12 criticism about the fact that the senior loan 13 committee approved the loan prior to the 14 completion of the final written appraisal, 15 correct? 16 A. You would have to -- I would have to go 17 through the actual comments to see the 18 deficiencies that were noted. 19 Q. Well, let me ask you to turn to Page 20 748 of your deposition. You'll see that I'm 21 drawing your attention to the loan committee 22 approval sheet. This is Page 747. 17753 1 Actually, Ms. Carlton, maybe a quicker 2 way of doing it is to ask you: If that was not an 3 issue that you cited in any sort of exception to 4 the loan in 1986 -- you can assume with me that 5 that's the case. We've seen no exception that you 6 prepared on the question of the fact that the loan 7 was approved prior to the final completion of the 8 appraisal -- would you agree with me that that was 9 not an issue that you took exception with in the 10 1986 exam? 11 A. The information that's provided here 12 would be the information that consideration was 13 made on. I won't assume anything. 14 Q. All right. Well, then, let's go to 15 your deposition. At the bottom of Page 747, I 16 draw your attention to the fact that the summary 17 of the senior loan committee minutes that your 18 examiners prepared indicated that Edward B. Schulz 19 was presently completing a detailed R-41B 20 appraisal which will indicate a present discounted 21 economic value between 86 million and $96 million. 22 Do you see that? 17754 1 A. Yes. 2 Q. That's in the summary of the senior 3 loan committee minutes that was in your 4 examination work papers. 5 And I then asked you, "Was there 6 anything about that information that called for 7 supervisory comment in your view, Ms. Carlton?" 8 And your answer was, "I don't think 9 you'd find anything that we noted," correct? 10 A. Yes. 11 Q. Then you said, "I was just taking it 12 out of context to you. It had no relevance," 13 correct? 14 A. Right. 15 Q. And finally, the fact that the loan 16 committee approved the Park 410 loan, approved 17 $70 million of the Park 410 loan before the board 18 had approved the entire $80 million again was a 19 fact that did not, in your view, raise any cause 20 for concern, correct? 21 A. No. 22 Q. No, it did not raise any cause for 17755 1 concern, correct? 2 A. Yes. 3 Q. Thank you. 4 You did not consider any of these facts 5 that we have just reviewed -- the size of the 6 loan, the fact that it was approved prior to the 7 final completion of the appraisal, the fact that 8 the loan committee approved $70 million before the 9 full board approved the entire 80, the delegation 10 of the loan approval authority to the senior loan 11 committee -- you didn't consider any of those 12 facts to be material weaknesses in the Park 410 13 loan when you reviewed it in 1986, did you? 14 A. No. 15 Q. You didn't believe that the facts that 16 were reflected in your work papers indicated that 17 United was inadequately protected on the Park 410 18 loan, did you? 19 A. Restate that. 20 Q. You didn't believe that the facts about 21 the loan as presented in the materials in your 22 work papers showed that United was inadequately 17756 1 protected on the Park 410 loan, did you? 2 A. No. 3 Q. Now, obviously, you took note of some 4 deficiencies that were noted in the Jeff Nunn 5 report. But ultimately, it was your best judgment 6 as the examiner that this loan did not qualify for 7 classification as substandard under the 8 regulations then in existence, correct? 9 A. Right. 10 Q. Now, I'd like you to simply identify 11 Exhibit A12094 and tell the Court what that is. 12 It was from the 1987 work papers. 13 Do you see that in front of you? 14 A. Yes. 15 Q. Is that an examiner's inspection report 16 based on an inspection of the Park 410 loan on 17 February 13, 1988? 18 A. (Witness reviews the document.) It's a 19 narrative of an inspection that was conducted by 20 Joanne, an examiner. 21 Q. Joanne was one of your examiners? 22 A. Yes. 17757 1 Q. And that was part of the review that 2 you did in the 1987 exam, correct? 3 A. Right. 4 Q. Okay. And I'd like you to look at 5 Exhibit A60 -- 6 MR. VEIS: Excuse me, Your Honor. I 7 don't believe that Ms. Carlton identified 8 inspection of what. I think the record may be 9 misleading. 10 THE COURT: Well, it's identified on 11 the first page of the exhibit as Park 410 West 12 Joint Venture. 13 MR. VEIS: I think the Court is left 14 with the impression it's an inspection of a loan 15 file. 16 THE COURT: Excuse me? 17 MR. VEIS: I believe the Court is left 18 with the impression that it's an inspection of a 19 loan file. I don't believe that's what it is. 20 MS. CLARK: Let's clarify that. 21 Q. (BY MS. CLARK) This is not the 22 inspection of the loan files. This is a report of 17758 1 one of your examiners going out and actually going 2 to the property and inspecting the property, 3 correct? 4 A. Yes. 5 Q. Thank you. 6 Let me show you Exhibit A6028, please. 7 THE COURT: We'll take a short recess. 8 9 (Whereupon, a short break was taken 10 from 11:01 a.m. to 11:24 a.m.) 11 12 THE COURT: Be seated, please. we'll 13 be back on the record. 14 Ms. Clark, you may continue. 15 MS. CLARK: Thank you, Your Honor. 16 Q. (BY MS. CLARK) Ms. Carlton, at some 17 point during your work on the 1986 exam, did you 18 review either the final report of examination for 19 the Texas state exam or drafts of that report? 20 A. We saw drafts of that report. 21 Q. Now, do you recall whether you did see 22 the final examination report or not? 17759 1 A. In the '87 exam. 2 Q. Would you have seen the final report of 3 the Texas state exam if it had been completed 4 while you were still in the field? 5 A. If it had been presented to our office 6 and transferred back to Dallas, we would have. 7 Q. But you would not have seen the final 8 report of examination during the course of the 9 field work itself, just the drafts that were being 10 produced by the examiners? 11 A. Correct. 12 Q. Let me show you, if I may, a copy of 13 the Texas examination. 14 MS. CLARK: Your Honor, I realize this 15 document is in the record in another form; but I'm 16 offering this document -- I will be offering this 17 document for a specific reason. It's A6028. 18 Q. (BY MS. CLARK) Ms. Carlton, this is a 19 copy of the examination of United Savings 20 Association of Texas by the state examiners who 21 were working in the field at the same time you 22 were doing your field work on the 1986 USAT 17760 1 examination, is it not? 2 A. Yes. 3 Q. And this particular copy has the 4 initials in the upper right-hand corner of your 5 field manager, Mr. Richard Ward, does it not, in 6 the upper right-hand corner, "RMW"? 7 A. Yes. 8 Q. And can you turn in to the fifth page 9 of the document and see if you can identify your 10 initials on the top right corner of a copy of the 11 first page of the examination report? 12 A. Right. 13 Q. And that bears a date of 2/17/1987? 14 A. Right. 15 Q. And would that -- that indicates, does 16 it not, that you reviewed the Texas report of -- 17 final report of examination on or around 2/17/87? 18 A. That's my initial. That's not -- the 19 date is not my handwriting. 20 Q. Well, do the initials indicate that you 21 did, indeed, review a copy of the final state 22 examination report at or around the time that it 17761 1 was transmitted as indicated by the date in the 2 upper right-hand corner? 3 A. The initial is mine. 4 Q. Does it indicate that you reviewed the 5 examination report, Ms. Carlton? 6 A. Yes. 7 Q. And do you recall when your final 8 report of examination was completed and 9 transmitted to the association? 10 A. It would be made a part of the actual 11 report up in the upper right-hand corner. 12 Q. And do you recall that we saw a 13 document that indicated that it was transmitted to 14 the association without a supervisory letter in 15 early March 1986 and then a supervisory letter was 16 sent in April? 17 Do you recall that? 18 A. Yes. 19 MS. CLARK: I offer A6028, Your Honor. 20 MR. VEIS: No objection. Okay. Let 21 Mr. Schwartz -- 22 MR. SCHWARTZ: Your Honor, there is an 17762 1 objection. This document was given to us just 2 when you announced the break. We have not had an 3 opportunity to review it. This is a continual 4 practice by respondents to give these documents to 5 us without any notice. Certainly Ms. Clark knew 6 before this morning that she was going to be using 7 this document. And we object to the practice. I 8 know Mr. Guido has raised this objection before. 9 It is a constant practice, and we would like a 10 stop to it. 11 MS. CLARK: Your Honor, this document 12 was an exhibit in Ms. Carlton's deposition in 13 exactly this form. It was an exhibit in Mr. 14 Twomey's deposition. It was Twomey Exhibit No. 4. 15 I did not remark it in the Carlton deposition. 16 Mr. Veis was sitting right next to Ms. Carlton 17 when we examined her on this very document, 18 including the initials and date in the upper 19 right-hand corner of the fifth page of the 20 document. 21 So, there is no surprise involved here. 22 And as we have discussed, there is no arrangement 17763 1 for us to be providing copies in advance of the -- 2 of the testimony so long as we provide copies, 3 which we have done. 4 To suggest that this document, which is 5 the state report of examination which they 6 themselves have introduced in evidence in this 7 hearing and which I examined Ms. Carlton on during 8 her deposition constitutes some kind of a 9 surprise, I think, is quite remarkable and there 10 is absolutely no cause for complaint on their side 11 on this issue. 12 MR. SCHWARTZ: That all may be true, 13 Your Honor. The objection is to the practice. 14 And I think Mr. Guido has addressed that in the 15 past. 16 THE COURT: Why don't you, as a matter 17 of courtesy, give your documents to the OTS prior 18 to your use of them? 19 MS. CLARK: Your Honor, because last 20 night I was pulling my documents together. If we 21 have this rule -- it has never been the practice 22 in this case. I was pulling my documents together 17764 1 last night. This is cross-examination, Your 2 Honor. This is -- 3 MR. GUIDO: Your Honor, may I be heard? 4 THE COURT: Mr. Guido. 5 MR. GUIDO: Ms. Clark just made an 6 outright misrepresentation to this court. Mr. 7 Nickens and I have struggled repeatedly and other 8 counsel have struggled repeatedly to provide each 9 other with as early notice as possible. I think 10 it's disingenuous on Ms. Clark's part to say that 11 she, you know, last night just looked at this 12 document. She's been questioning this witness for 13 three days, Your Honor. She should have been 14 prepared at the outset to do this. And what I 15 find very objectionable is I think that this is a 16 deliberate attempt to put the OTS at a 17 disadvantage because counsel feels somehow that 18 she can slip something by counsel. And I find it 19 very objectionable. She is the counsel that has 20 been doing this primarily. Everyone else has had 21 the courtesy to provide the information to the OTS 22 in the past, Your Honor. This counsel -- you 17765 1 yourself directed her to produce documents and it 2 turned out it was six months before I ever saw the 3 documents, Your Honor. It seems to me -- I think 4 this counsel should be instructed before the 5 documents are to be used that there be adequate 6 notification to counsel and not to drop them on 7 people's desk. This document is an inch and a 8 half thick, Your Honor. And Mr. Veis may have 9 seen this; but, you know, there are tens of 10 thousands of exhibits that are on people's exhibit 11 lists, Your Honor. And to say that Mr. Veis was 12 in a deposition and, therefore, saw it I think is 13 very disingenuous, Your Honor, and I think that 14 counsel should be instructed to provide the 15 documents in the future, at least the night before 16 they are to be used. 17 MS. CLARK: Your Honor, Mr. Guido has a 18 very unfortunate practice of accusing me and 19 others of misrepresentation to the Court, and I 20 think that there is no place for that in this 21 situation and in this courtroom. 22 In fact, this happens to be one of the 17766 1 documents that I specifically told Mr. Veis I 2 would be using in this examination. I told him 3 that I would be using -- 4 THE COURT: When did you -- 5 MS. CLARK: Last week, I told him I 6 would be using the Carlton deposition exhibits. 7 This is one of the Carlton deposition exhibits. I 8 said I would be using documents including the 9 Carlton deposition exhibits. 10 So, for him to, you know, raise an 11 issue about this document I think is -- he clearly 12 has an agenda that is known only to him perhaps. 13 But what he's saying here is simply not accurate 14 and not fair. I have pulled my documents 15 together. Most of them are Carlton exhibits. To 16 the extent they are not, they are documents that 17 I've been pulling together as I've been following 18 the testimony and trying to respond to it, Your 19 Honor. And the system is working adequately as it 20 is to date. 21 MR. VEIS: Your Honor, if I might. It 22 is true that Ms. Clark told me that she would be 17767 1 using exhibits from among the exhibits in 2 Ms. Carlton's deposition. However, I point out 3 that there are, I believe, over 200 exhibits in 4 Ms. Carlton's deposition. They fill several 5 binders. It is, I think, a little over-inclusive 6 to consider that I've been properly notified of a 7 specific exhibit by saying that "I may choose from 8 among several hundred." I don't have an exact 9 count of the Carlton exhibits, but it is a 10 voluminous record. 11 So, I think that Ms. Clark somewhat 12 overstates her case. 13 MR. VILLA: Your Honor? 14 THE COURT: Mr. Villa. 15 MR. VILLA: I'll try to be brief. You 16 know, we are trying to work this out so that if 17 authenticity of a document is going to be in 18 question, the other side is given notice. 19 Now, the OTS gives us identification of 20 documents. For example, for Mr. Huebsch, they 21 gave us -- I think it ended up being 12 volumes of 22 documents that they were going to use. So, when 17768 1 you -- I mean, they are doing it -- they are 2 giving us so many documents that you can't 3 possibly understand what they are actually going 4 to use. And then, as you remember with 5 Mr. Berner's examination right at the end, 6 Mister -- 7 THE COURT: Mr. Berner hasn't 8 testified. 9 MR. VILLA: I'm sorry. Mr. Crow's 10 examination right at the end, Mr. Rinaldi popped 11 up with three new documents and said, "Oh, these 12 haven't been marked and they haven't been marked 13 as exhibits and I'm going to use them now and I 14 haven't used these on the list" and handed them 15 out. He did it a number of times during 16 direct-examination. 17 The basic rule we're trying to follow 18 is to give the other side notice as to documents 19 as to which there will be an authenticity problem, 20 particularly on cross-examination. When you have 21 a witness who's come up, you can reasonably expect 22 that all of the exhibits that were marked in that 17769 1 witness' deposition are going to be used. I can't 2 possibly see how I or anybody else could be up 3 here complaining about unfair surprise. 4 Now, we're under a cross-examination 5 situation with a witness who was asked questions 6 that you might reasonably expect that she could 7 remember and then she's shown documents to refresh 8 her recollection. It's really not quite fair to 9 accuse us on a cross-examination area where people 10 don't usually bring up documents ahead of time to 11 say that we have to identify every document we're 12 going to use. 13 This is a document that they put in, I 14 believe, through Mr. Cool -- isn't that right? 15 You-all put in -- you put in this document through 16 Mr. Cool's examination. 17 MR. SCHWARTZ: We put in -- wait. 18 Excuse me. That's not actually correct. We 19 didn't put in this document. We put in the report 20 of the Texas Savings and Loan Department. Whether 21 or not it's this particular document page by page, 22 Mr. Villa, I haven't had a chance to determine. 17770 1 But nevertheless, a copy of it was already put in 2 the record as Ms. Clark has indicated when she 3 gave the witness this version. 4 MR. VILLA: You know, Your Honor, we 5 could make -- if we got up and argued about every 6 document that hasn't been put on their list or 7 they pull up for the first time, I don't stand up 8 when they do these things because if we can 9 authenticate the document quickly enough and if 10 they have got copies for us, look, this is a 11 trial. 12 But to start giving Ms. Clark a hard 13 time and all these personal accusations against 14 her, I think, are unwarranted. This is a document 15 they put into evidence. And for them to argue 16 with respect to a document that they put into 17 evidence which was actually put in as an exhibit 18 to her -- to Ms. Carlton's deposition is 19 unfortunate. 20 I'm going to follow the practice of 21 making all my representations to them in writing 22 so there will be no question as to what I've put 17771 1 them on notice of. But I don't think that 2 particularly under a cross-examination situation 3 any party should be required to identify in 4 advance every document they intend to use. 5 Certainly they don't do it. They give us so many 6 documents it's impossible, and the ones that they 7 really want pop up for the first time. 8 So, I object to the characterization of 9 our conduct, and I don't think it's fair. 10 MR. GUIDO: Your Honor -- 11 THE COURT: Well, this seems to be a 12 recurring problem, and it is troublesome and it 13 does seem to me more effort should be made to be 14 cooperative with opposing counsel and that there 15 should be some prior notification of what 16 documents are to be used, whether you're using 17 them on cross or direct. It just seems to me 18 there should be more courtesy extended to each 19 other and that -- I just don't think it's helpful 20 to bring up a document that's -- or say "I just 21 decided to use this the night before." And now 22 it's -- I want to use it. But I don't want to lay 17772 1 down the rule that there has to be so many hours 2 prior notification. It just seems to me it should 3 be worked out with counsel. I don't see why it 4 can't be. 5 I have a motion to receive this 6 document, and I'll receive it. 7 MR. VEIS: Your Honor, may I point one 8 thing out about the document? 9 THE COURT: Yes. 10 MR. VEIS: It appears the first, 11 roughly, five pages have bar code numbers on them 12 that indicate they came from the OTS files. The 13 following Pages do not. I don't infer from that 14 that these pages were not in the OTS files, but I 15 don't understand why part of the document is bar 16 coded and the bulk of it is not, if it is one 17 document. 18 THE COURT: Well, I assume that OTS has 19 the means to verify whether this is the complete 20 document and whether it is the report. You do 21 have copies of it? 22 MR. VEIS: Well, I believe we do. And 17773 1 we will certainly look in the files to ascertain 2 whether or not this is all one document. 3 Thank you, Your Honor. 4 MS. CLARK: Your Honor, I believe it 5 was used in three different depositions, including 6 Mr. Cool's, the state examiner, as well as 7 Ms. Carlton and Mr. Twomey's. So, they should 8 have seen it before. 9 THE COURT: All right. That is not my 10 concern. There is such a massive amount of 11 documents here that I think it would be helpful to 12 give opposing counsel some notification of what 13 you're going to be using. 14 MS. CLARK: Thank you, Your Honor. 15 Q. (BY MS. CLARK) Ms. Carlton, do you 16 recall that when you were deposed in Washington 17 you also really didn't remember anything about the 18 Norwood loan? 19 A. No. 20 Q. Do you recall that you -- when I asked 21 you about the Norwood loan in Washington last 22 year, you said that you thought it was an 17774 1 apartment loan in Austin but really couldn't 2 remember beyond that? 3 A. No. 4 Q. Look at 684 in your deposition, if you 5 would, please. 6 Do you find that page? 7 A. Yes. 8 Q. In the middle of the page, I asked you 9 what did you recall about the Norwood transaction 10 as it presented itself to the examiners in 1986. 11 Do you see that? It's in the middle of 12 Page 684. 13 A. Yes. 14 Q. And you indicated that it was a loan in 15 Austin and that it financed loans that were 16 previously delinquent. 17 Do you see that? 18 A. Yes. 19 Q. And then on the next page, I asked you 20 what kind of project it was. 21 Do you see that? Sort of about 22 2 inches down, 3 inches down from the top of the 17775 1 next column. 2 A. Yes. 3 Q. And you indicated that you weren't 4 sure, but mentioned that it was an apartment 5 complex perhaps? 6 A. Right. 7 Q. And that indicated the state of your 8 memory at the time you were deposed in Washington 9 last year, correct? 10 A. What do you mean by that? 11 Q. That's what you remembered about the 12 loan last year when you were deposed? 13 A. Yes. 14 Q. I'd like to show you a group of 15 documents. These were provided to Mr. Schwartz 16 and Mr. Veis over the break. I believe they have 17 had a chance to review them. I'm going to give 18 them to you as a group. 19 MR. SCHWARTZ: Your Honor, if I may, 20 not to belabor the same issue that was raised at 21 the objection that I raised earlier, but this 22 particular document -- compilation as Ms. Clark 17776 1 indicated -- was provided to me at the break along 2 with the Texas Savings and Loan report. 3 This document, however, is a 4 compilation of numerous exhibits, not sequentially 5 ordered, and we do not know if it's all-inclusive 6 of all the documents from -- regarding Norwood or 7 not from that report of examination. And because 8 it was only given to us at the break, we just 9 don't know whether or not it's complete or not. 10 MS. CLARK: Your Honor, I can -- I 11 believe I can advise the Court that this does not 12 constitute all of the underwriting files on the 13 Norwood loan. In order to avoid bulking up the 14 record too much, we have simply selected from 15 among the work papers of the state 1986 16 examination certain of the documents that were in 17 those files. 18 We have -- it's my understanding this 19 would be the entirety of the work papers, and you 20 can see approximately -- it's about half of the 21 work papers of the state examination -- sorry -- 22 the federal examination of the Norwood credit in 17777 1 the 1986 exam. 2 So, that's the source of these 3 documents, Your Honor, and I'd like to go through 4 them and offer them. They come out of the work 5 papers of the federal examination of the Norwood 6 loan in 1986. 7 MR. SCHWARTZ: Your Honor, the point of 8 them not sequentially numbered is that this is not 9 necessarily the order that the documents existed 10 in the files that were reviewed by counsel. 11 And so, I don't know if Ms. Clark is 12 planning to make any implication by the order that 13 these documents are placed into the record or not 14 with one document being on top of another. I 15 don't know if that holds any significance. 16 The objection, again, is to the process 17 of the production, that we just now received this 18 and haven't had time to go through it, as well as 19 the fact that it is incomplete by their own 20 representation. 21 MS. CLARK: Your Honor, to answer the 22 question that's been raised, we do not intend to 17778 1 urge on the Court any inference about the case 2 based on the order of these documents. We are 3 simply trying to provide the Court with 4 information concerning what was in the state -- 5 sorry -- the federal examiners' work papers 6 concerning the Norwood loan. And if there are 7 documents that we did not include in the selection 8 here that are significant, I'm sure that OTS 9 counsel will supply the missing documents on 10 redirect. 11 MR. GUIDO: Your Honor, one of the 12 purposes of the understanding that -- and what I 13 thought was a rule with regard to producing 14 documents is so that we would all know that we had 15 a complete set of documents that were going into 16 the record and it fully reflected all of the 17 facts. You've been here before when Mr. Nickens 18 and I have had dialogues about the document not 19 being complete because of something that we've 20 discovered in the process. 21 One of the reasons for the exchange is 22 not to clutter up the record in such a way with 17779 1 misleading documents that then, you know, weeks 2 later or days later have to be clarified. That's 3 why we've had the practice of doing so. 4 And for people to say, with regard to 5 these documents, that they didn't know there was a 6 previous understanding between counsel when 7 documents were provided, I have a letter that was 8 given to us on the 31st, Your Honor, that 9 transmits newly-marked exhibits. For example, one 10 of the problems that we've had is that each side 11 has found documents that hadn't previously been on 12 the exhibit list. 13 So, we've had the courtesy of providing 14 those documents, along with documents that we 15 intend to use. For example, I understand there 16 was a conversation about the next witness, that 17 someone on the other side said that the list that 18 was provided to them was too lengthy, that the OTS 19 had provided too lengthy of a list. And over the 20 weekend, it's my understanding that that had been 21 refined so that the other side had notice of a 22 more discreet set of documents. 17780 1 What I'm saying is -- and what I'm 2 objecting to and I have objected to repeatedly is 3 this continuation of this practice. If I can, a 4 document was given to us at the break, Your Honor, 5 not even this morning, not even last evening when 6 Ms. Clark must have known she was going to use 7 this document. And there is no way for anyone to 8 be able to even say at the break whether or not 9 this document is misleading in any respect as we 10 go forward. 11 That's what we've objected to 12 repeatedly, and that's what we believe something 13 should be done about. I do not believe this 14 document should be admitted until the OTS has had 15 an opportunity to review the document for its 16 completeness. Mr. Schwartz has just testified he 17 doesn't know, and he's the person that's been 18 looking at these documents in great detail. And I 19 think that it -- it's an unfortunate practice. I 20 do believe that it's designed for strategic 21 purposes and it shouldn't be permitted, Your 22 Honor. 17781 1 THE COURT: All right. I'm going to 2 defer receiving this document until we've had an 3 opportunity to review it. 4 MR. GUIDO: Thank you, Your Honor. 5 MS. CLARK: Your Honor, I'm going to 6 have to comment on a couple of the ideas that he's 7 expressed. I understand your ruling, Your Honor, 8 and I suppose we'll come back with Ms. Carlton on 9 another occasion to receive these documents. 10 Many of the documents that I am 11 offering, I am attempting simply to complete the 12 record of what she reviewed and what the examiners 13 reviewed in the 1986 examination. The documents 14 that were offered by OTS counsel were documents 15 from the work papers which they selected, and we 16 did not object to the receipt of individual 17 documents because they didn't put in all the 18 documents. 19 I believe it's appropriate on 20 cross-examination to go back to the same work 21 papers from which they selected their documents 22 and select additional documents in order to 17782 1 supplement the record so the Court has a better 2 idea of everything the state -- the federal 3 examiners looked at in the course of the 4 examination. It's simply an effort to complete 5 the record. And to go back into the very same 6 work papers that they spent two weeks reviewing 7 with Ms. Carlton and from which they selected 8 documents -- that was their prerogative on 9 direct-examination, to select the documents that 10 they wanted to offer the Court. And now, much of 11 my examination is going to be simply offering the 12 documents that they didn't select or some of those 13 documents. If they feel that there is another 14 round in which they would like to add additional 15 documents, that seems quite appropriate for 16 redirect. 17 I think that offering documents from 18 their work papers and having her identify them as 19 documents from the work papers, which I believe 20 they have been stipulated to be anyway, is 21 entirely appropriate -- 22 THE COURT: I'm not saying -- 17783 1 MS. CLARK: -- to complete the record. 2 THE COURT: -- that you can't select 3 documents, that if you select one document you 4 have to put the entire volume of work papers as to 5 a specific volume. I'm not saying that. I'm just 6 thinking that the OTS should have some opportunity 7 to review this document before it's received. 8 MS. CLARK: Would you like me to defer 9 the examination and then have them come back with 10 any objections after the exam is complete? Should 11 I proceed with the examination and have her 12 identify them so that we can at least get through 13 that and you can reserve a ruling, or how would 14 you like to proceed? 15 THE COURT: Well, I don't know that 16 there is any dispute as to identification or not. 17 MR. GUIDO: Your Honor, we don't know 18 whether there is a dispute with regard to 19 identification of the documents. And Ms. Clark, I 20 think, you know, stated that, you know, we had put 21 in documents that were what we believed to be the 22 relevant documents out of the work papers. Those 17784 1 were documents that we gave the other side notice 2 of well before we used those documents, Your 3 Honor, and that is according to the practice that 4 we have been following in this case. 5 What I'm objecting to and what we have 6 stated over and over again is -- and I believe 7 that Ms. Clark has just attempted to totally 8 ignore what our concerns are -- that each side 9 make an effort, the maximum effort it can, to give 10 the other side notice so that when we are in the 11 courtroom and they are listening to questions, 12 they can review the documents so they can 13 ascertain whether or not there are any questions 14 to ask on redirect or cross. 15 We've been doing that. We believe it's 16 been an understanding between counsel. We do not 17 believe that this whole question of adequate 18 notice to verify whether or not some document is 19 accurate or not has been the basis for the rule. 20 The basis for the rule is so the proceeding can 21 proceed as efficiently as possible, given the 22 circumstances and given the magnitude of the 17785 1 documents, Your Honor, and that's what we are 2 raising here. 3 And so, we believe that the Court 4 should make it clear and should deny the admission 5 of this document so that Ms. Clark finally 6 understands the need to make the information 7 available to counsel so that they can adequately 8 represent OTS's position. 9 Thank you, Your Honor. 10 MS. CLARK: How would you like to 11 proceed, Your Honor? 12 THE COURT: Well, I'm just saying I'm 13 not receiving this document until the OTS has had 14 an opportunity to review it. I don't know where 15 you want to proceed from there. I don't think 16 it's appropriate to question the witness about it 17 at this point. 18 So, if you have other matters, let's 19 proceed. 20 MS. CLARK: Would you like to take a 21 lunch break and let them look at it over lunch, or 22 how would you like to proceed? There will be 17786 1 issues -- these are all documents that I'm trying 2 to supply the Court to complete the record. 3 And -- 4 THE COURT: I assume you have other 5 documents that the OTS doesn't know about either? 6 MS. CLARK: Your Honor, the OTS knows 7 about all the documents. They came from the work 8 files that she's been reviewing. 9 THE COURT: You haven't told them that 10 you're going to be using them? 11 MS. CLARK: We have not exchanged 12 document lists. Truly, this is -- has not been 13 the practice up till now to do that. It just 14 hasn't. I know Mr. Guido's represented that to 15 the Court a number of times. But in fact, it has 16 not been the practice. 17 As we talked about yesterday, the 18 arrangement was that they would do that for us if 19 they didn't want to make five copies, and that was 20 the arrangement. Now -- so, I have not provided 21 the documents to them in advance, as I indicated. 22 MR. GUIDO: Your Honor, that is really 17787 1 just totally incorrect, and Mr. Nickens is in the 2 courtroom and he knows what we've been doing and 3 that each of us have been exchanging documents 4 back and forth. Mr. Villa knows we've been 5 exchanging documents back and forth. And for 6 Ms. Clark to say no, people have not been trying 7 to give each other as early as possible notice is 8 just not true, Your Honor. 9 THE COURT: Well, how much time does 10 OTS need to review -- 11 MR. GUIDO: Your Honor, I have no idea 12 what the documents are that Ms. Clark has not 13 provided us the exhibit numbers to or the 14 documents. So, I -- there is no way I can say, 15 Your Honor, what it is it will take us to review 16 the documents. 17 MS. CLARK: You know, Your Honor, for 18 them to raise this in the middle of my examination 19 is very disruptive. They knew last night, they 20 knew the day before, that I hadn't given them the 21 exhibit list. And truly, it was my understanding 22 that that was not required. 17788 1 Now, for them to wait and try to 2 disrupt this examination by raising it now, I 3 don't know exactly how to proceed other than to 4 suggest that we take the lunch break and I will 5 give them copies of the documents that I intend to 6 use and hopefully we can proceed more smoothly 7 after lunch. 8 MR. GUIDO: Your Honor, that also is 9 not true. And for Ms. Clark to say that she's 10 surprised, it may be almost a year since I've 11 raised this issue with the Court. It may be -- 12 you know, it was at the beginning of when we came 13 back I raised it again, Your Honor. For Ms. Clark 14 to say that she's surprised, I think, is just not 15 accurate. 16 I'm trying to control my reaction to 17 this, but I really do think that Ms. Clark is 18 deliberately trying to prevent the OTS from 19 preparing its rebuttal of this witness and that 20 she's known repeatedly in the past that this has 21 been a problem and you, Your Honor, had instructed 22 her to give us the documents previously just 17789 1 because of this objection. For her now to claim 2 that this is an attempt to disrupt her examination 3 of this witness, Your Honor, I just don't think 4 bears out given the facts that we know so far. 5 MR. SCHWARTZ: And in addition, Your 6 Honor, when Mr. Veis objected to Ms. Clark asking 7 questions of Ms. Carlton that were not covered by 8 her -- covered on direct-examination, Your Honor 9 said that he may -- that she may go ahead and do 10 that and raise new issues. 11 This is another example of something 12 where an issue has been touched upon in 13 direct-examination and now she's raising -- she's 14 going into the issue with a great more use of 15 documents that we've not been put on notice of. 16 THE COURT: All right. Would you 17 provide OTS with all the documents you're going to 18 use with this witness? 19 MS. CLARK: Yes, certainly. 20 THE COURT: All right. We'll adjourn 21 until 2:00 o'clock, and we'll see whether the OTS 22 is prepared to go forward. 17790 1 MR. GUIDO: Thank you, Your Honor. 2 3 (A luncheon recess was taken 4 from 11:57 a.m. to 2:08 p.m.) 5 6 THE COURT: Be seated, please. We'll 7 be back on the record. 8 There is a matter that's come up about 9 housekeeping. It appears that the Court is going 10 to be removing a wall to the jury room, and they 11 are suggesting that the documents in there be 12 moved. I believe they are respondents' documents. 13 So, I think you'll have to discuss with some of 14 the court people about where to put them and how 15 to handle that. It just came up about two minutes 16 ago. 17 MR. GUIDO: Your Honor, with regard to 18 that, we've had discussions at least between OTS 19 and some of the respondents' counsel and some of 20 their staff about the question of -- the whole 21 question of a number of documents and in 22 particularly, how crowded the courtroom is now 17791 1 getting. And I presume that now exacerbates the 2 problem. We will be working on that over the 3 break, Your Honor, to try and figure out what we 4 can do about both of those questions. 5 THE COURT: All right. 6 MS. CLARK: Did they indicate when the 7 wall will be removed? Is it going to happen 8 immediately? 9 THE COURT: Tonight. 10 MS. CLARK: I'm glad I asked. 11 MR. SCHWARTZ: It's nice to have 12 notice. 13 THE COURT: Notice is always a problem. 14 MR. SCHWARTZ: Yes, Your Honor, it is. 15 MR. EISENHART: Your Honor, on the 16 subject of notice and following up on this 17 morning's discussion, it had not been my 18 understanding prior to this morning that I had -- 19 there was any need for me to provide OTS with 20 lists of documents that I plan to use on 21 cross-examination. 22 However, as a result of this morning's 17792 1 discussion, I just wanted to inform the Court that 2 I did give OTS before the lunch break a list of 3 the documents that I presently plan to refer to on 4 cross-examination of Ms. Carlton. 5 MR. BLANKENSTEIN: Your Honor, I, too, 6 called OTS during the lunch break and read them a 7 list of the documents I contemplated using in 8 questioning Ms. Carlton. I also gave them, when I 9 returned from lunch, a typed-out list, as well. I 10 also gave them hard copies of two documents that 11 had not been previously identified by those 12 exhibit numbers so that they have that, as well. 13 THE COURT: Okay. Thank you. 14 What's OTS's reaction upon reviewing 15 the documents? 16 MR. GUIDO: Your Honor, Mr. Scott 17 Schwartz will address the documents. I have one 18 other preliminary matter, and that is with regard 19 to the motion that was filed with regard to 20 whether or not documents that were transmitted 21 from counsel for Mr. Crow to the FDIC would or 22 would not be covered by any privileges in light of 17793 1 the circumstances of their previous production. 2 I was -- I received a phone call over 3 the break from Mr. Stearns who said that he would 4 like us to file a brief response to that and ask 5 for permission from the Court for us to do so 6 since there had been no discussion about OTS 7 filing a response. And so, he asked me to make 8 that request of the Court. 9 THE COURT: All right. By when? 10 MR. GUIDO: He didn't say, Your Honor. 11 THE COURT: Well, I hadn't intended to 12 make my ruling until sometime next week. If you 13 could have it in by this Friday -- 14 MR. GUIDO: We definitely will get it 15 in by Friday, Your Honor. 16 MR. VILLA: Your Honor, we have no 17 objections. Is it going to be new factual matter 18 or just legal argument? 19 MR. GUIDO: No. It's just legal 20 argument. Your Honor, there was a question about 21 an affidavit that was raised in the response. I 22 didn't have a chance to talk to Mr. Stearns about 17794 1 it; so, I don't know. But if there is a new 2 factual matter, that would probably be -- 3 MR. VILLA: The only thing I would be 4 concerned about is if there is a new factual 5 matter, I want an opportunity to respond to it 6 because our affidavits were directed to what we 7 thought they were going to say. 8 MR. GUIDO: We wouldn't have any 9 objection to that, Your Honor. 10 THE COURT: All right. 11 MR. SCHWARTZ: Your Honor -- 12 THE COURT: Mr. Schwartz. 13 MR. SCHWARTZ: Thank you, Your Honor. 14 I appreciate your giving us the 15 opportunity to go through these documents over the 16 lunch break. 17 Just after the lunch break, Ms. Clark 18 provided us with a -- about an 8-inch high stack 19 of documents that she intends to use with the 20 witness before she concludes her examination. I 21 can't speak to these because I've not had an 22 opportunity to go through all of these. My 17795 1 understanding is that most of them have already 2 been admitted as tabbed documents and some of them 3 are -- some of them are new documents; but the 4 majority, it's my understanding, are already 5 admitted. But aside from that -- we'll address 6 those as they come up. 7 With respect to the Norwood documents, 8 I've had an opportunity to go through these. And 9 judging from the Bates ranges, it appears that 10 they are from a variety of different sources of 11 OTS files. 12 So, while we have no objection to the 13 authenticity of them from OTS files, we do object 14 to them coming in as a compilation as suggesting 15 perhaps that it's from one source. And so, that 16 would be our objection. But we do not have any 17 objection to them coming in as individual 18 documents. I understand from a conversation with 19 Ms. Clark earlier that it was her intention to 20 move them in as individual documents. 21 And so, with that in mind, we don't 22 have any objection to these documents coming in in 17796 1 that manner. 2 THE COURT: Are you going to introduce 3 this as a package or each document -- each marked 4 exhibit separately? 5 MS. CLARK: Your Honor, apparently 6 there was some misunderstanding. I was simply 7 trying to speed the proceedings up by handing up a 8 pile of documents, each one of which is separately 9 marked as an exhibit and each one I was intending 10 to offer as a separate exhibit. 11 THE COURT: All right. We'll proceed 12 in that manner. 13 MS. CLARK: Now, on the question of 14 from what files they were taken, sometime last 15 year we had presented to OTS a request that they 16 stipulate that Bates ranges pertaining to 17 particular examination work paper files, 1987 18 exam, 1986 exam. 19 It was my understanding that the work 20 we had done to set forth which files the 21 particular documents came from was acceptable to 22 them. And if there is a question about where 17797 1 these files are from, I would ask the Court to 2 request that they review the original files which 3 are, I understand, on the third floor of this 4 building and confirm that they are, in fact, from 5 the 1986 examination work files and that we have a 6 stipulation to that effect or if not, that we find 7 out promptly so that we can address the matter 8 with this witness. 9 MR. SCHWARTZ: Your Honor, I confirmed 10 over lunch. They are from the 1986 -- they are 11 from the 1986 work papers. The question is from 12 what original file source because they are not in 13 numerical sequential Bates stamp order. That's 14 the only objection we have. They are from the '86 15 work papers. The only question is which file out 16 of the work papers because, as you can imagine, 17 they are voluminous. 18 We have no objection to the documents 19 coming in just as an individual document rather 20 than as a compilation. 21 THE COURT: And they all relate to the 22 Norwood loan? 17798 1 MR. SCHWARTZ: Well, we'll -- Ms. Clark 2 is going to examine the witness about the subject 3 of each document, I would assume. 4 THE COURT: Well, I don't know how 5 specific we can get as to where they came from. 6 If the witness doesn't know -- I mean, does 7 Ms. Clark know? 8 MS. CLARK: Your Honor, it was not my 9 intention to examine the witness on these 10 documents. I was intending to offer them as 11 documents from the work paper files of the 12 examiners during the 1986 examination. 13 We had asked the OTS for access to the 14 original work papers to verify from which files 15 things were taken. And for procedural reasons, 16 they were unable to accommodate that request. But 17 if there is any question or significance about 18 from which particular files in the '86 exam work 19 papers these documents come, since they have 20 access to the original files and I do not, I 21 expect they could bring that out on redirect or 22 allow us to look at the files -- the original 17799 1 files. 2 I do not intend to make a point about 3 the documents coming from one file or another. I 4 was simply offering them as evidence of what was 5 in the examination work papers concerning the 6 Norwood loan in the '86 exam. And really, that 7 was -- 8 THE COURT: So, you're not going to ask 9 any questions? 10 MS. CLARK: No. I just wanted this to 11 be in the record as to what was in the examination 12 work papers on the Norwood loan. I think it's 13 important to have a complete or more complete 14 record than would be the case if the documents 15 were only selected documents that were put in by 16 OTS. 17 I can take the time and ask the witness 18 about them if you wish, but I was hoping to be 19 able to expedite my examination and move on to 20 other matters. 21 MR. GUIDO: Your Honor, this is why I 22 objected to large documents without being 17800 1 reviewed. There are supervision files, and then 2 there are examiner work paper files. 3 These may have come out of all of the 4 examiner work paper files, but some of them may 5 have come out of supervision files. What each of 6 those different entities knows isn't necessarily 7 known by the other at any given point in time. 8 We heard Ms. Clark ask a number of 9 questions about this witness' knowledge. I think 10 that if she's going to use the documents, that she 11 should clarify whether or not it's something that 12 this witness, as part of the work paper examiner, 13 knew about. 14 And that was my objection to the use of 15 large bulk documents all along, and that is that 16 we don't know some of the specific facts, Your 17 Honor. And that's what it is that led to the 18 objection. I think that the documents come in 19 separately and the witness is asked questions -- 20 if Ms. Clark doesn't want to ask her questions, 21 OTS can ask questions on redirect to clarify it, 22 but I do think that the record should be clear. 17801 1 THE COURT: All right. Proceed. 2 MS. CLARK: I think that we have -- at 3 least with respect to these documents, there is no 4 such issue. As I understand Mr. Schwartz' 5 representation, he was able, over the lunch break, 6 to verify that these came from the '86 examination 7 files rather than the Dallas supervisory files. 8 So, if an issue comes up later, I think 9 we can address it; but I think as to these 10 documents, as I understand OTS's position, there 11 is no issue on that. 12 MR. SCHWARTZ: My understanding, Your 13 Honor, is based on a telephone call to Washington 14 that I was able to make during the lunch break. 15 From that telephone call and a quick search, we 16 were able to determine that they were from the 17 actual work papers, which is consistent with 18 Ms. Clark's representation. 19 If anything comes up subsequent to my 20 representation now that we learn otherwise, I will 21 be more than happy to come in and make a 22 correction on the record. 17802 1 THE COURT: All right. Thank you. 2 Let's proceed. 3 MS. CLARK: Your Honor, let me then 4 move into evidence a series of documents. I'll 5 give the number for each one separately. 6 The first document is Exhibit A12084, 7 and it's Bates Pages OW159070 through OW159077. 8 It was also an exhibit to Ms. Carlton's 9 deposition. I move the admission of that 10 document. 11 MR. SCHWARTZ: No objection, Your 12 Honor. 13 THE COURT: Received. 14 MS. CLARK: The next document, Your 15 Honor, is Exhibit A12085. The Bates range is 16 159097 through 159103, and it was also Exhibit 55 17 to Ms. Carlton's deposition. 18 MR. SCHWARTZ: Your Honor -- you're 19 moving its admission? 20 MS. CLARK: Yes. 21 MR. SCHWARTZ: This was one of the 22 documents that we had a question about. This 17803 1 document is apparently an attachment to another 2 document. This is, again, one of the reasons that 3 we wanted to have a chance to go back and check 4 and see the source of the documents. But 5 apparently this is an attachment to another 6 document. But as it stands, no objection. 7 THE COURT: Received. 8 MS. CLARK: The next document, Your 9 Honor, is A12083. Its Bates ranges is OW121126 10 through OW121130 and it was Exhibit 53 to 11 Ms. Carlton's deposition. 12 MR. SCHWARTZ: No objection. 13 THE COURT: Received. 14 MS. CLARK: Next document is 15 Exhibit B783. The Bates range is OW121677. It is 16 a document with a title Frank P. Krasovec, 17 personal financial statement, January 6th, 1986. 18 MR. SCHWARTZ: No objection. 19 THE COURT: Received. 20 MS. CLARK: The next document is 21 Exhibit B602. The Bates range is OW121674 through 22 676, and it is a personal financial statement 17804 1 dated October 1, 85, from Mr. and Mrs. Minch. 2 I move that, Your Honor. 3 MR. SCHWARTZ: I'm sorry. Which? 4 THE COURT: B602. 5 MR. SCHWARTZ: B602? No objection, 6 Your Honor. 7 THE COURT: Received. 8 MS. CLARK: Your Honor, I move the 9 admission of Exhibit B1140, which is Bates range 10 OW121816 through 822. It is a guaranty, or it 11 says it's a guaranty, anyway. 12 MR. SCHWARTZ: No objection. 13 THE COURT: Received. 14 MS. CLARK: Exhibit B412, I move, Your 15 Honor. It's Exhibit 121708 (sic) through 710, and 16 it is a document entitled "Loan Committee 17 Approval." 18 MR. SCHWARTZ: No objection. 19 THE COURT: Received. 20 MS. CLARK: Your Honor, let me just 21 verify for the record that Exhibit B524 has been 22 previously admitted. This is a document with 17805 1 Bates No. 121704 which means that, from the Bates 2 number, it is from the 1986 work papers. And it 3 was previously admitted? 4 THE COURT: I am informed that it is, 5 yes. 6 MS. CLARK: I would just like it clear 7 on the record that that is the source of the 8 document. 9 The next document is Exhibit B1137. 10 And the Bates range on that is OW121759 through 11 802 and it's entitled "Development Loan 12 Agreement." 13 I move that, Your Honor. 14 MR. SCHWARTZ: No objection, Your 15 Honor. 16 THE COURT: Received. 17 MS. CLARK: I move the admission of 18 Exhibit B1136, which is Bates range OW121711 19 through 758 and it is entitled "Norwood/United 20 Park Joint Venture Agreement." 21 MR. SCHWARTZ: No objection, Your 22 Honor. 17806 1 THE COURT: Received. 2 MS. CLARK: The next document is 3 Exhibit A12089. It's Bates number is 121610 4 through 636. It was Exhibit 59 to Ms. Carlton's 5 deposition. 6 MR. SCHWARTZ: No objection to that 7 one, Your Honor. 8 THE COURT: Received. 9 MR. SCHWARTZ: If I may, on the 10 previous exhibit, Exhibit B1136, there's 11 handwriting and other marginalia that I don't know 12 if it's part of the original document or not. 13 MS. CLARK: What page is that, 14 Mr. Schwartz? 15 MR. SCHWARTZ: It's throughout the 16 document. I see it on 716, 717, 719 -- 17 MS. CLARK: Your Honor, may I inquire 18 of the witness whether she recognizes the 19 handwriting on this document? 20 THE COURT: Sure. 21 MS. CLARK: I'll show you my copy so 22 you don't have to dig it out, if I may. 17807 1 Q. (BY MS. CLARK) Do you recognize the 2 handwriting to be the handwriting of 3 Mr. Joseph Huber, one of your examiners on the 4 1986 exam? 5 A. I don't recognize it. I don't 6 recognize it. 7 MR. SCHWARTZ: With that said, Your 8 Honor, we don't object to the document coming in 9 with the exception of the handwritten notes. 10 MS. CLARK: Your Honor, I offer this 11 document with the handwritten notes as a document 12 that came to us directly from the work paper files 13 of the 1986 examination and -- 14 THE COURT: Well, I'm not sure what the 15 status of the handwriting is or who put it on 16 there or when. 17 MS. CLARK: Your Honor, we have the 18 practical problem that the documents that were 19 used by Ms. Carlton and her examination team were 20 produced to us by OTS. These handwritten notes 21 were not put on by any of respondents' counsel. I 22 can confirm that because I have looked at the 17808 1 original copies as they came out of the OTS, and 2 they aren't -- these were not put on by litigation 3 counsel. So, I believe that the information -- 4 the fair inference is that they were put on by 5 someone at OTS since OTS has had custody of this 6 document. 7 So, I would offer it as a document that 8 came out of the work papers. And if OTS has 9 further information to illucidate the source of 10 those comments or their meaning, then that would 11 be certainly something that they could inquire 12 into. 13 MR. SCHWARTZ: That's exactly the 14 point, Your Honor. we don't. And the witness has 15 indicated she doesn't know whose handwriting it is 16 or at least that it's not Mr. Huber's or she 17 doesn't recognize it as such. We don't have any 18 objection to the document coming in but for the 19 handwritten notes and I think that Your Honor has 20 in the past excluded handwritten notes where we 21 did not have a witness here to testify regarding 22 who wrote them and what their meaning was. 17809 1 MS. CLARK: Your Honor, I will be 2 willing to go ahead and offer the document with 3 the handwritten notes excluded, and if I do not 4 close my -- if I do close my examination at the 5 end of today, I would like permission to come back 6 and try to pursue this issue with Ms. Carlton out 7 of turn since I believe there are other documents 8 in the exam work papers which will help to 9 establish who the author of these notes is. 10 It frankly wasn't -- I wasn't -- 11 perhaps I should have, but I did not anticipate 12 such an objection and I do not have the documents 13 readily lined up in the form that I could use to 14 try to help answer that question. But for the 15 moment, with that understanding, I have no 16 objection to admitting the document without the 17 handwritten notes. 18 THE COURT: All right. So received. 19 MR. SCHWARTZ: I would just like to 20 make it clear on the record, we do object to 21 calling this witness back. Counsel has already 22 indicated that she should have prepared for this. 17810 1 She did not. This witness should not be punished 2 for that. She's been here now for several days, 3 and we would object to having her called back for 4 that reason. 5 MS. CLARK: Your Honor, I wouldn't 6 intend to bring her back to town. I'm sure that 7 she will still be on the stand tomorrow with the 8 cross-examination of the other counsel, and all 9 I'm asking is that I maybe ask -- if I can find 10 something to help the Court understand who wrote 11 those comments, that I be allowed to ask her, 12 either that or on recross. I don't intend to 13 bring her back to town for that question. 14 MR. SCHWARTZ: That's fine. 15 MS. CLARK: The next document is 16 Exhibit A12089, and it was Carlton depo -- 17 Deposition Exhibit 59. And the Bates range is 18 OW121610 through 636, and it is entitled 19 "Appraisal of Norwood Park." 20 MR. SCHWARTZ: No objection, Your 21 Honor. 22 THE COURT: Received. 17811 1 MS. CLARK: The next exhibit is B3961, 2 Your Honor. I move its admission. Its Bates 3 range is OW121896 through 910, and it appears to 4 contain a letter to Mr. Tom Gordon from Rex Bolin 5 with an attached document discussing salient facts 6 and important conclusions. 7 MR. SCHWARTZ: I'm sorry. The attached 8 document? 9 MS. CLARK: The attached document, 10 Bates range OW121897 through 910. 11 MR. SCHWARTZ: No objection, Your 12 Honor. 13 THE COURT: Received. 14 MS. CLARK: And the final document is 15 Exhibit A12087. It was Exhibit 57 to 16 Ms. Carlton's deposition, and it was also 17 Exhibit 3 to Mr. Huber's deposition. Bates number 18 is OW122313, and I'd move its admission, Your 19 Honor. 20 MR. SCHWARTZ: And 314? 21 MS. CLARK: And 314, yes. 22 MR. SCHWARTZ: No objection, Your 17812 1 Honor. 2 THE COURT: Received. 3 Q. (BY MS. CLARK) Ms. Carlton, do you 4 recall that Mr. Veis showed you a work program or, 5 actually, a document entitled "Examination 6 Worksheet, Assets and Contra Items, Securities 7 Trading Forwards" during your direct-examination 8 and you identified that as one of the programs 9 that you did not complete during the 1986 10 examination? 11 A. Yes. 12 Q. Let me show you what's been marked as 13 Exhibit B4264, please. 14 MS. CLARK: Your Honor, this document 15 was provided to OTS counsel before the lunch break 16 and, indeed, it was provided to me by OTS counsel 17 on Friday. It is a document that Mr. Veis and I 18 reviewed together, and then I asked him to have it 19 copied for me so that I could offer it in 20 evidence. And I do offer this document in 21 evidence, Exhibit B4264, from the 1986 examination 22 work papers. 17813 1 MR. VEIS: No objection, Your Honor. 2 THE COURT: Received. 3 Q. (BY MS. CLARK) Ms. Carlton, this is a 4 very thick exhibit, and we're not going to talk 5 about every page in it. But I would like you to 6 review it, if you would, and identify this for us 7 as the work papers that go with the examination 8 work papers on assets and contra items, securities 9 trading forwards that you discussed during your 10 direct-examination with Mr. Veis. 11 A. (Witness reviews the document.) 12 MR. VEIS: Your Honor, I'm not sure 13 that it's useful for Ms. Carlton to review the 14 entire document. I would inform the Court that 15 Ms. Clark and I had a discussion late last week -- 16 I guess it was Friday -- concerning this document. 17 She had asked me if she could see the entire file 18 from which the examination worksheets came. I 19 conceded to that request, and she then asked if 20 the entire file could be copied. Based on her 21 representation that this is the copy that was 22 made, we certainly would agree that it seems to 17814 1 constitute the entire file. I have not checked it 2 page for page, but I have no reason to believe 3 that Ms. Clark would not have submitted each and 4 every page. I'm not sure that there's really an 5 issue that Ms. Carlton has to address in terms of 6 the identification unless Ms. Clark has a specific 7 question about the document. 8 MS. CLARK: Your Honor, I think -- 9 Mr. Veis advised me as we reviewed this document 10 that Ms. Carlton had gone into the document and 11 rearranged it so that it was properly organized 12 after a lot of different people had been reviewing 13 the document. 14 So, I believe Ms. Carlton is familiar, 15 based on that representation, with the 16 organization of the document. I was just asking 17 her simply to -- if she can confirm that this is 18 the work paper file that went with or goes with 19 the worksheet about which she testified on 20 direct-examination. 21 THE COURT: All right. Did you 22 understand the question, Ms. Carlton? 17815 1 THE WITNESS: Yes, and yes, it is. 2 Q. (BY MS. CLARK) Now, Ms. Carlton, 3 there are work paper references at the bottom of 4 this worksheet which is unfortunately not Bates 5 stamped because we just copied it from the 6 originals last week. 7 Have you found the examination 8 worksheet that you and Mr. Veis were discussing 9 during your direct-examination? 10 A. Yes. 11 Q. And can you tell us what the work 12 papers are that are listed at the bottom as part 13 of this -- the work that related to this 14 particular program? 15 A. That's the index reference for those 16 work papers. 17 Q. And so, those are the work papers that 18 you compiled and put into the examination work 19 papers with respect to the subject of securities 20 trading forwards; is that correct? 21 A. Each work paper index would represent a 22 separate set or grouping of papers. 17816 1 Q. Would the work papers on this list be 2 the four groups of work papers relating to the 3 subject of this particular program that is part of 4 Exhibit B4264? 5 A. This is just the summary sheet that was 6 used in order to list all of them on. 7 Q. Can you tell by looking at the 8 worksheet, which you referred to as the program on 9 your direct-examination, or by the file review 10 that you did prior to your testimony exactly which 11 of these steps you were -- you did not complete 12 during the 1986 examination? 13 A. For each one of these different 14 groupings down here, you would have a separate 15 sheet like this to go along with it. 16 Q. Ms. Carlton, can you tell from looking 17 at this worksheet that you identified as a program 18 during your direct-examination which parts of the 19 program you did not complete during the 1986 20 examination? 21 A. I cannot tell by just looking at this 22 sheet, no. 17817 1 Q. Can you tell me -- without reference to 2 that, can you just tell me what part of the 3 program that we're talking about you didn't 4 complete? 5 A. No, I cannot. 6 Q. Do you have any memory of what part you 7 didn't complete? 8 A. You -- I would have to go through the 9 examiners' work papers themselves and see what 10 that individual noted as far as on the support 11 back here to determine what they did or did not 12 do. 13 Q. When you testified on 14 direct-examination that you didn't complete this 15 program, what were you thinking of? 16 A. When I made that statement, just 17 meaning that the individual sheets that support 18 each one of these analyses is not complete. 19 Q. Can you tell us what it is you had in 20 mind when you told the Court that the analysis was 21 not complete? What was it is that wasn't 22 complete? 17818 1 A. In 1986, they only did a summary review 2 of the work. And you would have an individual 3 sheet that lists other numbers here for each 4 category. And this is on the one sheet in which 5 they put all the information onto this one sheet. 6 So, I know that if I don't have an 7 individual sheet with a heading like this that 8 it's not complete. 9 Q. I'm sure it's just my problem not 10 understanding your answer, but I still don't -- I 11 still haven't quite understood what it is in this 12 program you had in mind when you told the judge 13 that you didn't complete this program. 14 A. As you notice on this sheet up here at 15 the top, you have "securities trading forward." 16 And if you notice the items listed here, that's 17 not the subject of those items that you have here. 18 Therefore, you would have a program with these 19 headings on it. 20 Q. Was -- 21 A. The examiners just used this sheet as a 22 top sheet as one location to reference the 17819 1 information. For each category, you have a sheet 2 like this with the proper heading on it. 3 Q. So, do you know today whether you 4 completed the steps in the program about which you 5 testified on direct-examination, the steps that 6 are listed on this particular sheet? 7 A. The fact that they are not there means 8 they were not completed. 9 Q. The fact that they were not in the work 10 papers right behind that? 11 A. Right. 12 Q. Okay. So, now let's talk about what 13 you did do in the course of the examination. 14 There are four different work paper 15 references, and the first one is mortgage-backed 16 securities. And it has a work paper index number 17 of WI1011A. 18 Can you tell us -- tell the Court what 19 it was that you and your team were looking at in 20 the first part of the work papers that are indexed 21 on this sheet? 22 A. They were looking at verifying the 17820 1 accuracy of the calculations. If you look at 2 WI101 at 1A, that was part of what they did. 3 Q. Okay. Well, I don't want to take a lot 4 of the Court's time because I know other people 5 are anxious to begin their examination. But let 6 me just ask you a few of the pieces of information 7 in the work paper that are collected behind this 8 program. 9 As I take it, your testimony is that 10 the work papers behind this program don't really 11 relate to this particular program. Is that what 12 your testimony is, that they relate to something 13 else besides the actual program to which they are 14 attached? 15 A. Right. 16 Q. Okay. Let's just find out what it is 17 you -- look at some of the things that you looked 18 at. Some of these items were offered in your 19 direct testimony. I'd like you to go about ten 20 or -- about ten documents in and see if you find a 21 schedule that has mortgage-backed securities 22 trades from January 1986 through June of 1986. I 17821 1 believe this may have been one of the documents 2 that Mr. Veis talked to you about individually. 3 Do you see this? 4 A. Can you come closer? 5 Q. Certainly. (Indicating) Do you see 6 that? 7 A. And your question about it? 8 Q. Yes. Well, first, I just wanted you to 9 find it. 10 Have you now found it? 11 A. Yes. 12 Q. Okay. Good. Now, does this -- is this 13 a schedule of mortgage-backed securities trades 14 from December of 1985 through June of 1986 showing 15 the broker, the amount, whether each was a buy or 16 sell, the agency of each of the securities, and 17 what the coupon rate was? 18 A. Yes, it is. 19 Q. And does -- did your examiners note at 20 the bottom of the page that this work paper is 21 included to show the activity of mortgage-backed 22 securities trading from December through June of 17822 1 1986? 2 A. Right. 3 Q. The next page says "support for 4 quarterly." 5 Do you see that? 6 A. Yes. 7 Q. And that is followed by a copy of the 8 TFR, correct, the thrift financial report, 9 quarterly statement of condition? 10 A. Yes. 11 Q. And behind that are the work papers, 12 many of which are provided by the association but 13 marked up by the examiners. The work papers 14 supporting the analysis of the quarterly report on 15 mortgage-backed securities, correct? 16 A. Right. 17 Q. And then there is another memo 18 regarding mortgage-backed securities, the 19 continuation of that memo where they talk about 20 the particular line on the quarterly TFR. 21 Do you see that? 22 A. Yes. 17823 1 Q. And then there are some schedules 2 beginning with "Ginnie Mae March 1986 summary." 3 Do you see that? It's a schedule that 4 is on a long piece of paper, and it's sideways. 5 Do you see that? 6 A. (Witness reviews the document.) 7 Q. Ms. Carlton, it's going to be very 8 time-consuming. If you don't mind, I would like 9 to simply show you pages out of mine rather than 10 asking you to follow along. 11 MS. CLARK: With the Court's 12 permission, Your Honor, I will approach and show 13 her my pages. 14 MR. VEIS: I'm not sure I can follow 15 along. 16 MS. CLARK: I invite you to join us 17 here, if you would like. 18 Q. (BY MS. CLARK) Ms. Carlton, is this a 19 schedule or a memo regarding mortgage-backed 20 securities reconciliation to the general ledger? 21 A. Yes, it is. 22 Q. And does it report that the examiners 17824 1 reconciled the mortgage-backed securities at 2 6/30/86 to the general ledger as follows? 3 A. Yes. 4 Q. And then it discusses how you tied the 5 Fannie Mae balances to the general ledger, and you 6 tied the Freddie Mac balances to the general 7 ledger, correct? 8 A. Right. 9 Q. So, you were able to tie the 10 mortgage-backs to the general ledger during the 11 1986 examination as reflected in this work paper, 12 correct? 13 A. Right. 14 MR. VEIS: Is there a work paper number 15 on that? 16 MS. CLARK: It's WI1011B and it says "1 17 of" and then it doesn't have the remaining number. 18 Q. (BY MS. CLARK) Let me show you 19 another small section. 20 MS. CLARK: Mr. Veis, would you like to 21 join us? 22 Q. (BY MS. CLARK) There is another 17825 1 schedule in here that's got the handwritten note 2 "July trading mortgage-backed securities 3 accounting." 4 Do you see that? 5 A. Yes. 6 Q. And is that followed by the account 7 journal entries and then a work paper that talks 8 about agreeing the transactions to the trade 9 statements issued by the broker? 10 Do you see that? 11 A. Yes. 12 Q. And it says, for example, that you 13 agreed information per client-prepared schedule to 14 confirmation of the trade statement issued by the 15 broker. No exceptions noted." 16 Do you see that? 17 A. Yes. 18 MR. VEIS: Can we have a work paper 19 number for that? 20 MS. CLARK: That's part of the work 21 paper WI1011C. 22 Q. (BY MS. CLARK) And the next document 17826 1 is another schedule of mortgage-backed securities 2 trade. This time for the month of July 1986, is 3 it not? 4 A. Yes. 5 Q. And what did your examiner write at the 6 bottom of that? 7 A. "Items highlighted are included these 8 work papers." 9 Q. And is that your initial at the very 10 bottom of the schedule, as well? 11 A. Yes, it is. 12 MS. CLARK: Work paper reference on 13 that is WI10116, Your Honor. 14 Q. (BY MS. CLARK) Ms. Carlton, the next 15 document I'd like you to focus on is a multi-page 16 document. 17 Do you recognize that to be a document 18 of journal entries being made to the general 19 ledger in the mortgage-backed securities 20 portfolio? 21 A. Yes. 22 Q. So, your examiners, in the course of 17827 1 examining the mortgage-backed securities portfolio 2 in 1986, actually copied -- 3 MR. VEIS: Can we have the journal 4 voucher numbers perhaps to clarify the record? 5 MS. CLARK: The first one, Your Honor, 6 is JV No. 19025055. It's in the left hand -- 7 right-hand bottom right. 8 Q. (BY MS. CLARK) So, in the course of 9 the exam, your examiners would review journal 10 entries and copy selected ones into the work 11 paper, correct? 12 A. Right. 13 Q. The next document I'd like you to look 14 at is a -- well, let me ask you: Is this a trade 15 ticket? 16 A. (Witness reviews the document.) Yes, 17 it is. It's the documentation of the activity for 18 that date. 19 Q. And at the top, somebody has written 20 "examples"? 21 A. Right. 22 Q. So, that would be an example of a trade 17828 1 ticket that would be copied and put into the work 2 papers regarding mortgage-backed securities 3 activities in the -- in the United Savings 4 Association portfolio. 5 This particular trade number is 860942, 6 correct? 7 A. Right. 8 Q. Now, I would show you a handwritten 9 memo, Ms. Carlton. This has a work paper 10 reference WI101 -- I believe it's 18 -- and the 11 heading is "To do: Swaps." 12 Do you see that? 13 A. Right. 14 Q. And that's your handwritten initial at 15 the bottom? 16 A. Right. 17 Q. And this would be a to do list for one 18 of your examiners of steps that remain to be done 19 in the examination of United Savings' swaps, 20 correct? 21 A. It's what she did, what they did. 22 Q. And the name Joe Phillips is written in 17829 1 the left margin? 2 A. Right. 3 Q. Do you recall that Joe Phillips was the 4 head of the mortgage-backed securities portfolio 5 at that time? 6 A. Yes. 7 Q. And one of the steps, Step No. 4 on 8 her -- do you recall who it was who prepared this? 9 A. The initials are not there, no. 10 Q. Do you recall -- is that your 11 handwriting at the top where it says "see 12 exception"? 13 A. No. 14 Q. And one of the steps on this to do list 15 was to determine the overall results of arbitrage, 16 correct? 17 A. Right. 18 Q. That was one of the steps that the 19 examiner was doing in the course of the 1986 exam 20 of United, correct? 21 A. Right. 22 Q. And that would be the mortgage-backed 17830 1 securities arbitrage, correct? 2 A. Right. 3 Q. I'd like you to identify, if you would, 4 please, another memo from this work paper file. 5 This one has a reference, also, of WI10118. The 6 title is called "Memo re: interest rate risk 7 management." It has a work paper date of 8/6/86 8 in the upper left-hand corner. 9 Does that appear to be a work paper 10 prepared by one of the Cooper's and Lybrand staff 11 people who were assisting you on the audit? 12 A. Right. 13 Q. And this is a work paper regarding 14 interest rate risk management, correct? 15 A. Right. 16 Q. And it reflects a discussion with Joe 17 Phillips about the swaps and the history of the 18 swaps, correct? 19 A. Right. 20 MR. VEIS: Your Honor, I note for the 21 record, if I might, this is in evidence at A14039. 22 Q. (BY MS. CLARK) And is that your 17831 1 initial at the bottom of the document? 2 A. Yes. 3 Q. And this is a memo that was prepared 4 during the course of the regular examination of 5 USAT to reflect inquiries and investigations made 6 concerning the swaps that USAT had put on in 7 connection with its mortgage-backed securities 8 portfolio, correct? 9 A. It appears to be a discussion where 10 they documented a discussion with Joe Phillips. 11 Q. Final document I'd like you to look at 12 with me, Ms. Carlton, is almost at the very back 13 of the package. 14 MS. CLARK: Your Honor, it's work paper 15 reference also WI1011H, and the title of the 16 document is "Settlement agreement relating to 17 interest rate payment exchange agreements between 18 the Federal Home Loan Bank of Dallas and United 19 Savings Association of Texas." 20 Is that your initial on the front page 21 of that document? 22 A. Yes. 17832 1 Q. And does that appear to be an agreement 2 that you copied and put into the work papers as 3 part of the documentation of your review of the 4 mortgage-backed securities activities during the 5 1986 exam? 6 A. It was a document that they placed in 7 there. 8 Q. And "they" meaning your examination 9 team? 10 A. Right. 11 Q. Okay. And do you recall what it was 12 that was being settled between the Federal Home 13 Loan Bank of Dallas and United Savings Association 14 of Texas with respect to swaps in this particular 15 agreement? 16 A. They had entered into an interest rate 17 payment exchange agreement. 18 Q. Okay. I'm going to ask you if we can 19 just put this document back together and put it 20 aside. We will not be coming back to that for 21 now. 22 MS. CLARK: Your Honor, this document 17833 1 was received, was it not? 2 THE COURT: Yes. 3 MS. CLARK: Thank you. 4 Q. (BY MS. CLARK) Now, I would like to 5 show you Exhibits A11138 and A11137, Ms. Carlton. 6 They were both exhibits to your deposition. 7 MS. CLARK: Your Honor, A11137 was 8 previously admitted and it's found at Tab 1293. 9 And I offer Exhibit A11138. 10 THE COURT: If it's already in, do you 11 want it in again? 12 MS. CLARK: No, Your Honor, I don't. I 13 just want to ask the witness a question about it. 14 Let me repeat the two documents. 15 I am offering A11138, which I do not 16 believe was previously admitted. 17 MR. VEIS: No objection on A11138. 18 Do I understand A11137 is previously 19 admitted? 20 MS. CLARK: It is my understanding that 21 it was previously admitted in this exact form. 22 Obviously, the fact that it came out of the 1986 17834 1 examination work papers, as referenced by the 2 Bates number, is significant, and I want to ask 3 the witness about it for that reason as I did in 4 her deposition. 5 THE COURT: All right. Proceed. 6 Q. (BY MS. CLARK) Ms. Carlton, do you 7 have the documents in front of you? 8 A. Yes. 9 Q. Let me ask you to focus on the document 10 marked A11138, which is a memorandum which was 11 copied into your work papers regarding the review 12 of the asset/liability committee minutes. It's 13 found in that part of the work paper. And I want 14 to ask you to tell us why it is you would have 15 copied a memo to the investment committee 16 regarding dollar roll proposals as part of your 17 review of the ALCO minutes. 18 A. So that I could pass it on to the 19 examiners that would review that area. 20 Q. And again, we talked about which 21 examiners would review the ALCO, asset/liability 22 committee area people involved in financial 17835 1 securities area of review, correct? 2 A. Right. 3 Q. Now, look at the other document which 4 was previously admitted. It's A11137. This is a 5 memorandum from Bruce Williams to the investment 6 committee regarding "Investments: MBS arbitrage." 7 Do you see that? 8 A. Yes. 9 Q. And you see that this memo that you 10 reviewed and copied into the work papers makes a 11 recommendation to add 75 to 100 million of Freddie 12 Mac 9 and a half coupon mortgage-backed securities 13 to the portfolio to balance assets and hedges. 14 And it refers specifically to swaps, caps, and 15 collars? 16 Do you see that? 17 A. Yes. 18 Q. And it reflects an analysis that there 19 were more mortgage-backed securities than hedges. 20 There was about $70 million more hedges than 21 mortgage-backs. 22 Do you see that? 17836 1 A. Yes. 2 MR. VEIS: I believe Ms. Clark confused 3 the first part of her statement. I think to have 4 a clear record, perhaps she could do it again. I 5 believe you said there was more MBS than hedges in 6 the initial part of your question. 7 MS. CLARK: Oh, thank you. 8 Q. (BY MS. CLARK) What I meant to ask 9 you is: Does the schedule reflect that there are 10 more hedges than mortgage-backs -- 11 A. Yes. 12 Q. -- under B? 13 And if you turn to the next page, you 14 can see that there is analysis of the performance 15 of the mortgage-backed securities arbitrage at 16 that point, correct? 17 A. It's an analysis, a spreadsheet. 18 Q. Okay. And it shows, for example, the 19 pre-hedge spread, the hedge impact, and the net 20 spread on the arbitrage at that time or what's 21 called the arbitrage. 22 Do you see that? 17837 1 A. No. 2 Q. If you look at the second page -- 3 A. Okay. I see it in the middle -- okay. 4 Q. All right. So, you copied into the 5 examination work papers an analysis showing the 6 relative position of mortgage-backs and hedges and 7 also showing that there was a negative net spread 8 on that portfolio at that time, correct? 9 A. Yes. 10 Q. Now, did you think that the 11 recommendation in this memo that they add 75 to 12 $100 million of Freddie Mac 9 and a half's to 13 balance the asset and hedge position reflected 14 poor and questionable judgment? 15 A. It's only a statement. 16 Q. Okay. So, you did not reach a 17 conclusion upon reviewing this memo that this 18 recommendation set forth in the memo reflected 19 poor and questionable judgment? 20 A. It was just reflecting whatever their 21 decisions were, and it was being passed on for 22 informational purposes. 17838 1 Q. And you did not reach a conclusion that 2 it was poor and questionable judgment at the time 3 you reviewed it? 4 A. I did not reach a conclusion, no. 5 Q. Let me show you Exhibit B3982 and 3981. 6 Ms. Carlton, are these two documents 7 relating to the examination on liquidity in the 8 1986 exam? 9 A. Yes. 10 MS. CLARK: I offer Exhibit B3982 and 11 3981, Your Honor. 12 MR. VEIS: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MS. CLARK) Turn to the third page 15 of Exhibit B3982, if you would, please. 16 Is that another to do list, this time 17 prepared by you and sent to Wanda, one of your 18 examiners? 19 A. Yes. 20 Q. And was that Wanda Manson? 21 A. Yes. 22 Q. And did you tell her that she had done 17839 1 an exceptionally good job in her liquidity review? 2 A. Yes. 3 Q. And her work is reflected in the 4 memorandum that's attached as the last page of 5 that document? 6 A. Right. 7 Q. And on the Exhibit B3981, did you write 8 a memo to the file reflecting your review of the 9 accrued interest difference noted on the 6/30/86 10 liquidity calculation? 11 A. Right. 12 Q. And you indicated that the association 13 had provided worksheets to support the differences 14 noted by the examiners and that there were no 15 other exceptions noted, correct? 16 MR. VEIS: Excuse me. That's not -- 17 that isn't exactly what it says. I think that 18 rather than characterize what it says, perhaps 19 Ms. Clark could read it into the record because 20 there's nothing but headings provided and I'm not 21 sure that this might not be a direction to make 22 some provision. 17840 1 THE COURT: All right. Let's read what 2 it says. 3 MS. CLARK: Ms. Carlton, can you read 4 what it is you were saying about worksheets? 5 A. "Reviewed the accrued interest 6 difference noted on the June 30, '86 calculation. 7 The association provided worksheets to support the 8 difference noted by the examiners. No other 9 exceptions noted." 10 Q. Now, do you understand that to mean 11 that there had been some exceptions noted with 12 respect to accrued interest, that the association 13 had provided the worksheets to support the 14 differences, and that there were no other 15 exceptions noted in the review? 16 A. Yes. 17 Q. Let me ask you to look at 18 Exhibit B3986, please. 19 Ms. Carlton, is this a worksheet 20 regarding -- setting forth the program for the 21 examination of service corporations in the 1986 22 exam? 17841 1 A. Yes. 2 Q. And on the second page, there is a 3 reference to the work papers that were prepared in 4 the course of the examination of service 5 corporations, correct? 6 A. Right. 7 MS. CLARK: Your Honor, I move the 8 admission of Exhibit B3986. 9 MR. VEIS: No objection, Your Honor -- 10 THE COURT: Received. I'm not sure if 11 I received 3981. 12 MS. CLARK: I move the admission of -- 13 MR. VEIS: No objection. 14 MS. CLARK: -- 3981, Your Honor. 15 THE COURT: Received. 16 Q. (BY MS. CLARK) I'm going to try to 17 save time by handing you at once several different 18 documents. I do not mean to indicate that these 19 documents are all part of one document, 20 Ms. Carlton. I'm just going to try to speed the 21 proceedings up by giving you more than one 22 document at once. 17842 1 The first document is 2 Exhibit No. A12053. It was Exhibit No. 16 to your 3 deposition. And can you identify this as a 4 summary of the committees at USAT that were -- 5 that was prepared by one of the members of your 6 examination team? 7 A. It is barely legible. 8 Q. It's small, isn't it? 9 A. (Witness reviews the document.) At the 10 top of it, it says "committee summary." 11 Q. So, if this came out of the examination 12 work papers for the 1986 exam, it would reflect a 13 committee summary by the examiners as of that 14 time, correct? 15 A. Yes. 16 MS. CLARK: I move the admission of 17 A12053, Your Honor. 18 MR. VEIS: Your Honor, with the 19 exception of issues regarding legibility, we have 20 no objection. It does appear to be a committee 21 summary from the 1986 examination work papers. 22 THE COURT: All right. Received. 17843 1 Q. (BY MS. CLARK) The next exhibit is 2 A12052, Ms. Carlton. Can you identify that as a 3 schedule that you prepared in your own hand of the 4 minutes that were reviewed in the course of the 5 1986 exam? 6 A. Yes. 7 Q. And on the bottom, you've made a note 8 of the name Rick Millinor, who was the 9 Peat Marwick engagement partner for United Savings 10 at that time, correct? 11 A. I have no idea. 12 Q. Oh, you don't remember who Rick 13 Millinor was? 14 A. No. 15 MS. CLARK: Your Honor, I move the 16 admission of A12052. 17 MR. VEIS: No objection, Your Honor. 18 THE COURT: Received. 19 Q. (BY MS. CLARK) The next document, 20 Ms. Carlton, is Exhibit A12060. It was Exhibit 25 21 to your deposition. 22 Can you identify this as a summary of 17844 1 minutes of the meeting of the audit committee 2 prepared by Ms. Manson during the 1986 3 examination? 4 A. Yes. 5 Q. And again, this would be pursuant to 6 the general practice of having someone on the 7 examination team review the minutes of the board 8 of directors and the operating committees and 9 prepare summaries or make copies so that other 10 people on the examination team would have that 11 information available, correct? 12 A. Correct. 13 Q. The next document is -- 14 MR. VEIS: Are you moving its 15 admission? 16 MS. CLARK: Yes, I am. Thank you. 17 MR. VEIS: No objection, Your Honor. 18 THE COURT: Okay. A12060 is received. 19 MS. CLARK: Thank you, Your Honor. 20 Q. (BY MS. CLARK) A12061, Ms. Carlton, 21 appears to be a handwritten summary of the minutes 22 of management committee meeting also prepared by 17845 1 Ms. Manson. 2 Is that what it is? 3 A. (Witness reviews the document.) It's 4 barely legible. It's notes from minutes. 5 Q. And the minutes are the minutes of 6 something called the management committee? Do you 7 see that? 8 A. No. 9 MS. CLARK: Your Honor, I move the 10 admission of A12061. 11 MR. VEIS: Except with respect to 12 reservations regarding legibility, we have no 13 objection. 14 THE COURT: Received. 15 MS. CLARK: Your Honor, could we 16 request that OTS try to obtain more legible copies 17 of these two documents on which they have raised 18 illegibility issues since they have custody of the 19 original work papers and this is the best we could 20 do with what we had? 21 MR. VEIS: We will attempt to find 22 these particular documents. I'm not sure which 17846 1 files they are in. So, it may take some effort. 2 I'm not sure how quickly it can be accomplished, 3 but we'll make the effort. 4 MS. CLARK: If we can find another one, 5 we'll substitute it, Your Honor, and have a more 6 legible version. 7 Q. (BY MS. CLARK) The next document, 8 Ms. Carlton, is A12057. 9 Is this a summary of the minutes of the 10 executive committee of United Savings during the 11 1986 examination? 12 A. Yes. 13 Q. And does it appear to be partly written 14 by you and partly by one of the members of your 15 examination team, based on the different 16 handwriting? 17 A. Yes. 18 MS. CLARK: Your Honor, I move the 19 admission of A12057. 20 MR. VEIS: No objection, Your Honor. 21 THE COURT: Received. 22 Q. (BY MS. CLARK) The next document, 17847 1 Ms. Carlton, is -- actually, the next document 2 after the summary -- we didn't copy them together 3 but they, in fact, follow one another in Bates 4 number order. 5 Can you identify it as a copy of the 6 minutes of the executive committee of the board of 7 directors of United Savings on August 7, 1986, 8 that was copied and put into the examination work 9 papers as part of the review of the executive 10 committee? 11 A. Yes. 12 MS. CLARK: I move the admission of 13 A12058, Your Honor. 14 MR. VEIS: No objection, Your Honor. 15 THE COURT: Received. 16 We'll take a short recess. 17 18 (Whereupon, a short break was taken 19 from 3:11 p.m. to 3:34 p.m.) 20 21 THE COURT: Be seated, please. We'll 22 be back on the record. Ms. Clark. 17848 1 MS. CLARK: Thank you, Your Honor. 2 Q. (BY MS. CLARK) I'd like to ask you 3 about some work papers from the 1987 examination 4 regarding mortgage-backed securities and financial 5 analysis, and I'd like to start by just asking you 6 to look at -- I'm going to give you three 7 documents at once, but we will move their 8 admission separately. The numbers are A12124, 9 A12125, and A12128. 10 Ms. Carlton, can you identify Exhibit 11 A12124 as the financial analysis interim program 12 which was completed by Mr. @F. Fultz, auditor, in 13 the 1987 examination? 14 A. Yes. 15 Q. And we talked about the fact that in 16 the 1986 examination, there were not detailed 17 programs set forth in the EOP but that in the 18 subsequent examination you were provided with more 19 detailed programs that you were to follow. 20 Was this one such example of the more 21 detailed programs that were to be used in the 1987 22 examination? 17849 1 A. Right. 2 Q. After the printed program, there are 3 some handwritten materials. 4 Are those materials prepared by 5 Mr. Fultz and initialed by you? 6 A. Yes. 7 Q. And the first one, which has Bates 8 No. 176167, reflects his review of the independent 9 auditor's report, does it not? 10 A. Yes. 11 Q. And then on the next page, it indicates 12 that he also reviewed the auditor's report on 13 internal accounting control; is that correct? 14 A. Right. 15 Q. And then in the following pages, 16 there's some analysis of the basic financial 17 numbers of the association during that period; is 18 that correct? 19 A. Yes. 20 Q. And there's a form called "Review of 21 Independent Audit Report." 22 Do you know who filled that out? 17850 1 A. No. 2 Q. And that is followed by a letter from 3 Mr. Carlson of United Savings to the Federal Home 4 Loan Bank. And I believe that's your initial on 5 the top of that document; is that correct? 6 A. Yes. 7 Q. And then the next page, which is ending 8 173, is another letter that you initialed on the 9 first page. This one is from Peat Marwick to the 10 board of directors of United? 11 A. Yes. 12 Q. And then followed by another document 13 that you initialed addressed to the board of 14 direct earrings and dated February 6, 1987, which 15 I believe you discussed in your 16 direct-examination, correct? 17 A. Yes. 18 Q. All right. Let's look at the next two 19 documents and see if you can identify them for me. 20 MR. VEIS: Are you moving the 21 admission? 22 MS. CLARK: If I didn't, I do, yes. 17851 1 A12124, Your Honor, I move its admission. 2 MR. VEIS: Your Honor, we have no 3 objection. I would note that the segment that 4 begins with the -- Page OW176171, review of 5 independent audit report, and then the actual 6 management letter were previously admitted. I'm 7 looking for the exhibit number. 8 THE COURT: All right. I'll receive 9 it. 10 MR. VEIS: Thank you, Your Honor. 11 Q. (BY MS. CLARK) The next document I'd 12 like you to look at for a moment is A12125. 13 Can you identify that as a handwritten 14 work paper regarding the financial analysis that 15 Mr. Fultz did during the 1987 examination? 16 A. Yes. 17 Q. And the second sentence of that 18 document states that "This non-operating income 19 has come principally from profits on sales of 20 investment securities ($33 million round numbers) 21 Loans ($75 million round numbers) and other assets 22 ($17 million round numbers)," does it not? 17852 1 A. Yes. 2 Q. At the bottom of the page, it notes 3 that only two of the previous five quarters have 4 had operating income, does it not? 5 A. Yes. 6 Q. And that's information that Mr. Fultz 7 derived from a review of the financial books and 8 records of the association; is that correct? 9 A. Yes. 10 Q. The next document -- 11 MS. CLARK: Did I move that one, Your 12 Honor? 13 THE COURT: No. 14 MS. CLARK: I do. 15 THE COURT: All right. 16 MR. VEIS: No objection, Your Honor. 17 THE COURT: A12125 is received. 18 MS. CLARK: And I would also move 19 A12128, Your Honor. 20 MR. VEIS: No objection, Your Honor. 21 THE COURT: Received. 22 Q. (BY MS. CLARK) Ms. Carlton, is this 17853 1 another handwritten work paper by Mr. Fultz 2 reflecting the work he did on financial analysis 3 in the 1987 examination? 4 A. Yes. 5 Q. And do you see at the bottom of the 6 page where Mr. Fultz records that "Non-operating 7 income for the last five quarters ending 8 September 30, 1987, amounted to $129,190,000. It 9 is comprised principally of gains on sales of 10 mortgage-backed securities, gains on sales of 11 investment securities, gains on sales of futures 12 contracts, and loan sales." 13 Do you see that statement? 14 A. Yes. 15 Q. And that information was derived by 16 Mr. Fultz from the books and records of United 17 Savings Association during the 1987 examination, 18 was it not? 19 A. Yes. 20 Q. And that's your handwritten initial on 21 the first page of that work paper, isn't it? 22 A. Yes. 17854 1 Q. The next document, Your Honor, is 2 Exhibit B3991. This is a document which we 3 inadvertently failed to provide to OTS counsel at 4 the lunch break because we got mixed up and gave 5 them two of one and none of this. 6 So, if OTS counsel have not had a 7 chance to review this document, I can hold it back 8 and offer it later or I would offer it now. 9 MR. GUIDO: We'd like to have it held 10 back and offer it later, not having been able to 11 identify what the document goes with. 12 THE COURT: Defer consideration. 13 MS. CLARK: All right. We'll do that 14 one later. 15 Just to identify it, this is Bates 16 No. OW176433, which comes from the 1987 work 17 papers. But I expect that OTS counsel will be 18 able to confirm its source from the original work 19 papers and do that overnight. 20 Q. (BY MS. CLARK) Let me show you 21 Exhibits B2200 and A12122, Ms. Carlton. 22 MR. GUIDO: Can we have those numbers 17855 1 again, please? 2 MS. CLARK: The first one is B2200. 3 Q. (BY MS. CLARK) Ms. Carlton, do you 4 have that document in front of you: B2200? 5 A. Yes. 6 Q. This, again, is a document from the 7 1987 work papers. 8 Can you identify it as a work paper 9 regarding liquidity? 10 A. Yes. 11 Q. And does the first page indicate that 12 Joe Cooper, your field manager, reviewed the 13 liquidity work papers in this file? 14 A. That's what he included this sheet for. 15 Q. Is that his handwriting or your 16 handwriting right above his handwritten name? 17 A. That's his. 18 Q. And the date of that is 5/18/88; is 19 that correct? 20 A. Yes. 21 Q. And then the rest of the document 22 consists of a printed program on liquidity level 17856 1 compliance interim program; is that correct? 2 A. Right. 3 Q. And you reviewed it as indicated on the 4 bottom right-hand corner of the Bates page ending 5 in 532; is that correct? 6 A. Right. 7 Q. And on the program are noted the work 8 paper references for the backup material for the 9 work done in this area of the examination; is that 10 correct? 11 A. Right. 12 Q. And the examination in this area was 13 conducted by Kirby Flucker, F-L-U-C-K-E-R, under 14 your supervision; is that correct? 15 A. Flucker. 16 Q. Flucker. Thank you. Is that correct? 17 A. Yes. 18 Q. And then Exhibit A12122, can you 19 identify this as a write-up on liquidity in the 20 1987 examination? 21 A. Yes. 22 Q. And it's initialed by you? 17857 1 A. Yes. 2 MS. CLARK: I move its admission, Your 3 Honor. 4 MR. VEIS: No objection, Your Honor. 5 THE COURT: Received. 6 MS. CLARK: And I also move B2200. 7 MR. VEIS: No objection, Your Honor. 8 THE COURT: Received. 9 Q. (BY MS. CLARK) Do you see on the 10 write-up of liquidity that at the bottom of the 11 page in the last paragraph it is noted that a 12 complete review of the association's investment 13 activities was in progress and should be completed 14 within the next two to three weeks? 15 Do you see that? I'm looking at 16 Exhibit A12122. It's a one-page exhibit. Let me 17 show you mine so you'll see what you're looking 18 for. 19 Do you see that one? 20 A. (Witness reviews the document.) 21 Q. Now, let me direct your attention again 22 to the bottom paragraph and the reference to a 17858 1 complete review of the association's investment 2 activities. 3 Do you see that? 4 A. Yes. 5 Q. What were the preliminary findings 6 regarding the association's investment securities 7 as of the date of this work paper memorandum? 8 A. That the institution has sufficient 9 staff, policies, and procedures to manage its 10 investment portfolio activities. 11 Q. And then the work paper goes on to make 12 note of the fact that the recent stock market 13 crash in October 1987 had adversely impacted the 14 association's operating results; is that correct? 15 A. Right. 16 Q. Again, I'm going to show you three 17 documents at once to try to move the examination 18 along a little faster. The numbers will be 19 A12141, A12142, and A12140. 20 Ms. Carlton, is Exhibit A12141 a 21 securities trading interim program that was 22 completed regarding United's high-yield bonds 17859 1 during the 1986 examination. 2 MR. VEIS: Excuse me. I'm sorry to 3 interrupt, but I don't seem to have my copy of it. 4 Could you identify it? (Whereupon Mr. Veis was 5 tendered a copy.) 6 A. Yes. 7 Q. (BY MS. CLARK) And is that your 8 handwritten note in the upper right-hand corner 9 saying "Jack" with the quotation marks? 10 A. Yes. 11 Q. And is that your initial at the bottom 12 where it says "reviewed by"? 13 A. Yes. 14 Q. And does this program indicate that the 15 high-yield bond review would be conducted by 16 Mr. Purvis under your supervision? 17 A. Yes. 18 Q. The next document is A12142. It's a 19 typewritten document, a page and a half long, with 20 a handwritten note at the bottom: "Examination 21 instructions: Junk bonds." 22 Do you see that? 17860 1 A. Yes. 2 Q. And that's your handwritten initial on 3 the bottom? 4 A. Yes. 5 MS. CLARK: Your Honor, I offer A12142 6 and A12141. 7 MR. VEIS: No objection, Your Honor. 8 THE COURT: Received. 9 Q. (BY MS. CLARK) Are these the 10 instructions that the examiners were provided with 11 respect to their examination of the high-yield 12 bond portfolios during the 1987 examination? 13 A. It was one of the sources of 14 information. 15 Q. Is this something that was provided by 16 the Federal Home Loan Bank of Dallas or the 17 Federal Home Loan Bank Board? 18 A. Yes. It's one of the district banks. 19 Q. Finally, I'd like to ask you to look at 20 Exhibit A12140. 21 MR. VEIS: This is A14082 under 22 Tab 1510, Your Honor. 17861 1 MS. CLARK: Your Honor, I was really 2 just offering this to complete the record on the 3 work papers; but since it's already been offered, 4 I do not need to ask any questions on it. 5 Q. (BY MS. CLARK) The next documents I 6 would like you to look at, Ms. Carlton, are marked 7 Exhibit A12126 and A12127. 8 The first document, A12126, was 9 Exhibit No. 110 to your deposition, Ms. Carlton. 10 Can you identify this as a page from 11 the United Savings consolidated transaction list 12 relating to gains on sales of mortgage-backed 13 securities for the September 1987 period which you 14 reviewed in the course of the 1987 examination as 15 indicated by the handwritten initials at the 16 bottom of this page? 17 I think you're looking at the large 18 collection. Is there a separate -- yeah. It's 19 just the first page of that collection. 20 Do you see the document marked A12126, 21 Ms. Carlton? 22 A. Yes. 17862 1 Q. And is that a page from the United 2 Savings consolidated transaction list reflecting 3 gains on sales of mortgage-backed securities for 4 September 1987? 5 A. Yes. 6 Q. And -- 7 A. Gains on sales of bond futures. 8 Q. Do you see the first item next to the 9 Account No. 3900-05 which says "gains on MBS"? 10 A. Yes. 11 Q. And do you see it says "no transactions 12 this account" right under that? 13 A. Yes. 14 Q. And is this a page out of the actual 15 general ledger of United Savings Association, the 16 computerized general ledger system of United 17 Savings Association? 18 A. Yes. 19 Q. The next document is also a document 20 from the 1987 examination work papers. This 21 appears to be a collection of pages from the 22 consolidated transaction list. 17863 1 I'd ask you to look through it, 2 Ms. Carlton, and say whether it appears to you to 3 be a collection of consolidated transaction list 4 pages relating -- well, including information on 5 gain on sales of mortgage-backed securities for 6 the period of August '87 working backward to 7 December '86, which is the last page of the 8 document? 9 MR. VEIS: Excuse me. In addition to 10 the consolidated transaction list, there appear to 11 be other documents attached here including some 12 handwritten spreadsheets that are just 13 interspersed in here. I don't know what the 14 meaning is. Perhaps Ms. Clark can clarify it. 15 Q. (BY MS. CLARK) Do you recognize this 16 to be excerpts from the consolidated transaction 17 list of United Savings Association? 18 MR. GUIDO: Your Honor, I object to the 19 question as being overly vague. As you'll recall, 20 one of the issues that's come up in this 21 proceeding is whether or not this consolidated 22 transaction list is for the consolidated entities 17864 1 or for USAT alone. And I think that the Court 2 said he wanted to hear from somebody inside the 3 association who knew what it was. Ms. Clark is 4 asking the question in a way that I believe is 5 overly ambiguous in light of this witness' 6 knowledge. If she wants to clarify her questions, 7 I think she should do so. But she's asking the 8 question in such a way to leave a very misleading 9 record, Your Honor. 10 MS. CLARK: Your Honor, I think that 11 this witness is certainly able to tell the Court 12 what she knows, and I don't know that the speaking 13 objection really adds much to the inquiry here. 14 Q. (BY MS. CLARK) Can you recognize 15 whether this is a consolidated transaction list 16 for United Savings Association of Texas or I 17 should say excerpts from the consolidated 18 transaction list of United Savings Association of 19 Texas as indicated on the top of the printout? 20 A. Parts of it is. 21 Q. And then your counsel made note of the 22 fact that there are handwritten schedules in the 17865 1 middle. I'd ask you to turn, as an example, to 2 Page -- Bates page ending 247. 3 A. Okay. 4 Q. Do you see that interspersed in the 5 pages from the consolidated transaction list are 6 some schedules prepared in the course of the 7 examination work? 8 A. It's not legible. I can't tell exactly 9 what it's saying, the two of them. 10 Q. Yes. Let's look at the one that ends 11 with the Bates Page 2 49. 12 A. That's a work paper prepared by an 13 examiner. 14 Q. Okay. And that talks about the summary 15 of activity in accounts included on Line D24 of 16 quarterly report for last six months of 1986, does 17 it? 18 A. Right. 19 Q. And that would have been a schedule 20 prepared by members of your examination team 21 concerning the mortgage-backed activity at USAT 22 during the second half of 1986? 17866 1 A. No. It's prepared by the institution. 2 Q. Do you see the upper right-hand corner, 3 that legend where it says "prepared by"? That's 4 on Page 249. 5 A. At the bottom of Page 2 49, you have 6 PBA. 7 Q. PBA means that it was prepared by the 8 association, correct? 9 A. Right. 10 Q. So, you would interpret that legend as 11 a legend that was put on by the association? 12 A. Yes. 13 Q. Okay. And it was copied and put into 14 the federal examiners' work papers as part of 15 their analysis of the mortgage-back activities? 16 A. Yes. 17 MS. CLARK: I offer A12127 and A12126, 18 Your Honor. 19 MR. VEIS: No objection, Your Honor. 20 THE COURT: Received. 21 Q. (BY MS. CLARK) Again, I'm going to 22 just hand up several documents at once to speed 17867 1 the examination, Ms. Carlton. And these documents 2 are going to have the following numbers: 3 Exhibit B2090, Exhibit B3987, Exhibit B1984, 4 Exhibit B0098, Exhibit B39 -- I'm not going to do 5 that one. That one, we've already done. So, let 6 me go to the next one. It's Exhibit B1772. 7 MR. VEIS: I'm not certain we have 8 these, Your Honor. May I see what they look like? 9 (Whereupon Mr. Veis was tendered a copy of the 10 document.) 11 MS. CLARK: Let's pause a moment and 12 let Mr. Veis catch up with us since he didn't have 13 the documents while I was going through them. 14 MR. VEIS: Thank you. 15 MS. CLARK: Sure. All right. Let me 16 start over again at Exhibit B98, Your Honor. The 17 next one after that is B1772. The next one after 18 that is B650. The next one after that is B1647, 19 and then B1987. 20 Q. (BY MS. CLARK) Let's go to the 21 beginning, Ms. Carlton. 22 Can you identify Exhibit B2090 as a 17868 1 handwritten summary comment relating to United's 2 interest rate swaps, caps, and collars prepared in 3 the course of the 1987 examination? 4 A. It is. 5 Q. And did you initial that document at 6 the bottom to indicate your review of it? 7 A. Yes. 8 Q. In the body of the document, did your 9 staff member write that United was utilizing 10 swaps, caps, and collars to create long-term, 11 fixed-cost financing that would otherwise be 12 available only at high cost? 13 Do you see that at the beginning of the 14 document? It's the very first sentence on the 15 first page after the heading "summary comment." 16 Do you see that? 17 A. Yes. 18 Q. And go to the bottom. Do you see a 19 sentence beginning with the word "due to"? 20 A. Yes. 21 Q. What did the examiner record in the 22 comment regarding the unforeseen decline in the 17869 1 LIBOR index? 2 A. You want me to read that? 3 Q. Yes, if you would, please. 4 A. "Due to an unforeseeable decline in the 5 LIBOR index brought on by a decrease in overall 6 market interest rates, the association incurred a 7 loss of 39 million for 1987." 8 Q. Now, does that reflect the examiner's 9 conclusion that, at that point in time, the swaps 10 entered into by United had a market value decrease 11 of approximately $39 million? 12 A. Yes. 13 Q. And then what did the examiner go on to 14 say in the remainder of that paragraph? 15 A. It states that the market suffered a 16 loss -- a loss. "Swaps, caps, and collars are 17 beneficial hedging tools for GAAP management." 18 Q. Turn to the next page, if you would. 19 It ends 972. 20 Do you see where the examiner recorded 21 the fact that United was locked into an overall 22 fixed rate of 10.88 percent and that that rate was 17870 1 4.32 percent above the aggregate LIBOR rates and, 2 therefore, USAT recognizes the loss? Do you see 3 that? 4 A. Yes. 5 Q. And does that indicate that USAT was 6 having to pay a higher rate on its fixed rate than 7 it was receiving on the LIBOR rates that it was 8 being paid by its swap partners and, therefore, it 9 was recognizing loss as it paid out those amounts? 10 A. It means that they did recognize a loss 11 and that the 10.8 is above the 4.3 percent LIBOR 12 rate. 13 Q. So, that reflects the fact that they 14 were locked into a fixed rate at 10.88 percent and 15 every month, they had to pay their swap counter 16 party the difference between that fixed rate and 17 the lower, much lower LIBOR rate that it was 18 receiving on the swaps. 19 Is that what your examiner is recording 20 in this paragraph? 21 A. It's what it's stating. 22 Q. Okay. And the next paragraph indicates 17871 1 that the swap transaction was irreversible and, 2 therefore, the association would be obligated on 3 certain swaps until 1995, correct? 4 A. Yes. 5 Q. Go to the last page -- well, I'd say 6 the page ending 974. 7 What did the examiner say in conclusion 8 in this memo? 9 A. "United has begun to turn around the 10 hedging area by obtaining caps and collars with 11 more reasonable fixed rates than those of the 12 swaps and by shortening the lives of the hedging 13 agreements." 14 Q. And just why don't you go on through 15 the next sentence, as well. 16 A. "With a continuation of this trend, the 17 association will be able to earn a reasonable 18 interest margin and, thus, better manage the 19 volatility inherent in these hedging activities." 20 Q. So, the examiners were able to 21 determine during the course of the 1987 22 examination that USAT was locked into certain 17872 1 high, fixed-rate swaps which were costing United 2 money as they had to pay the swap counter-parties. 3 That's what's reflected in this 4 discussion, is it not? 5 A. Yes. 6 Q. Turn to the next page. Does this 7 document request additional information on top of 8 the information that had previously been supplied 9 concerning the interest rate swaps? 10 MR. GUIDO: Could we have the Bates 11 stamp number, please? 12 MS. CLARK: Yes. It's the Bates page 13 ending 975. 14 Q. (BY MS. CLARK) Do you see at the 15 top -- 16 A. Yes, it does. 17 Q. So, it's saying "In addition to the 18 information supplied yesterday on special rate 19 swaps, please provide the following." 20 Is this document that would have been 21 used to request additional information from 22 United? 17873 1 A. Yes. 2 Q. And do you see that on -- the third 3 request is for the source documents for United MBS 4 interest rate caps at 11/30/87 schedule." 5 Do you see that? 6 A. Yes. 7 Q. And that's because the examiners wanted 8 to actually look at the interest rate cap 9 agreements, correct? 10 A. It doesn't ask for an agreement. 11 Q. What documents was it asking for? What 12 would you interpret that "source documents" to 13 refer to? 14 A. Meaning a schedule that would provide 15 the caps for that period. 16 Q. I'm sorry. Provide the caps for that 17 period? 18 A. Yes. 19 Q. All right. Let's go on to the next 20 document. 21 MS. CLARK: First, I'll offer B2090, 22 Your Honor. 17874 1 MR. VEIS: No objection, Your Honor. 2 THE COURT: Received. 3 Q. (BY MS. CLARK) The next one is B3987, 4 Ms. Carlton. This is a typewritten document with 5 some handwritten notes, as well. 6 Does this appear to be a sort of "to 7 do" list with respect to interest rate swaps and 8 caps? 9 MR. VEIS: I believe this is redundant. 10 It appears to me to be identical to a page that's 11 attached to Exhibit B2090. 12 THE COURT: Do you have a Bates number? 13 MS. CLARK: The Bates number is 14 OW156978, which would be the next document in 15 order at the -- after the end of Exhibit B2090 as 16 I intended the documents to be put together. If 17 there is a problem, we can fix it. 18 MR. VEIS: There are about probably ten 19 pages -- twelve pages, I think, beyond that. 20 MS. CLARK: Well, Your Honor, I 21 apologize. When you're pulling the exhibits 22 together late at night, sometimes things happen 17875 1 like this. I would have wanted the first 2 Exhibit 2090 to end at Bates Page 977, and I would 3 request that you simply remove the extra pages. 4 THE COURT: Well, there is quite a lot 5 of material beyond. 6 MS. CLARK: Your Honor, I believe -- I 7 certainly hope that those extra pages were marked 8 as separate exhibits and that they will be coming 9 up shortly. I thought as I went through them that 10 they were separate documents and, therefore, I 11 separated them or tried to. 12 THE COURT: So, now we're on -- 13 MS. CLARK: Now we're at B3987. 14 Do you have that, Your Honor? 15 THE COURT: Yes. 16 Q. (BY MS. CLARK) Ms. Carlton, what is 17 B3987? 18 A. It's a part of guidelines for questions 19 to answer in your review of interest rate swaps 20 and caps. 21 Q. Okay. And one of the items which is 22 listed under 2C is, with respect to the interest 17876 1 rate caps, to determine what the terms of the 2 agreement were, correct? 3 A. Yes. 4 Q. And this is partially illegible, but 5 does it appear to direct the reader to a certain 6 work paper reference for the copies of the 7 individual agreements? 8 A. Yes. 9 MS. CLARK: I offer B3987, Your Honor. 10 MR. VEIS: No objection, Your Honor. 11 THE COURT: Received. 12 Q. (BY MS. CLARK) The next document is 13 B1984. 14 What is this document, Ms. Carlton? 15 A. A request for additional information. 16 Q. And this is part of the examination 17 work that was done on United's interest rate swaps 18 and caps during the 1987 exam, was it not? 19 A. Right. 20 Q. Do you see the second page makes 21 reference to questions for John Price regarding 22 interest rate swaps and caps, the second page 17877 1 which ends in Bates Page 180? 2 MR. VEIS: Your Honor, I believe this 3 is a duplicate, although perhaps more legible, of 4 Bates ending 975 in a previous exhibit: It 5 appears to be identical. The last three pages of 6 2090. 7 MS. CLARK: What is the Bates page that 8 is duplicated, Mr. Veis? 9 MR. VEIS: Well, there are several 10 Bates pages. They appear to be the same document 11 copied a second time. 12 MS. CLARK: I think you're right. 13 Your Honor, I copied it because it was 14 legible and the other was not. But I think she 15 was able to interpret the language. And so, I 16 will withdraw this exhibit. We don't need it 17 since Mr. Veis is correct. 18 THE COURT: That's 1984? B1984? 19 MS. CLARK: Yes, I believe that's 20 right. 21 Mr. Veis, all three of the pages in 22 1984, are they in 2090? 17878 1 MR. VEIS: It appears they are. 2 MS. CLARK: We certainly don't need 3 them in the record twice if it is a duplicate. 4 MR. VEIS: It certainly appears that 5 way. 6 MS. CLARK: All right. I will 7 withdraw -- 8 THE COURT: Well, we just removed a 9 bunch of documents from the original 2090; but the 10 ones that you are referring to in 1984 are still a 11 part of 2090. 12 Is that what you're saying? 13 MS. CLARK: That's what Mr. Veis has 14 informed me and, if that's the case, then I don't 15 need to offer it again. 16 THE COURT: All right. 17 MR. GUIDO: Your Honor, I think -- if 18 you're talking about Exhibit B2090, I think 19 Ms. Clark and Mr. Veis may be talking past each 20 other and may have confused the record. I think 21 that you asked a question about 2090, and you 22 asked whether or not the pages after 975 should be 17879 1 pulled from the document. I thought that those 2 were pulled from the document. And now Mr. Veis 3 is talking about duplication with another exhibit, 4 and Ms. Clark is saying that the pages after 975 5 are already in the record at 2090. There is a 6 risk, based on that colloquy, that the document is 7 not in the record, and I think -- 8 THE COURT: All right. Well, the last 9 page of 2090 is 977. 10 MS. CLARK: Yes, Your Honor. And I 11 believe that the last document that I tendered in 12 the confusion of getting these things together is, 13 in fact, a duplicate of the last three pages. 14 But -- 15 THE COURT: I think that's correct. 16 MS. CLARK: Yes. Well, there is one 17 difference and that is that there is some language 18 that has been obliterated on this copy by 19 highlighting. 20 So, perhaps it would be more efficient 21 if I simply offered B1984, Your Honor, even though 22 it may involve some duplication. 17880 1 MR. VEIS: I'm sorry. Where was the 2 obliteration? 3 MS. CLARK: On the last page of 2090. 4 So, I would offer B1984, Your Honor. 5 MR. VEIS: No objection, Your Honor. 6 THE COURT: Received. 7 Q. (BY MS. CLARK) Do you see there is a 8 reference to questions from John Price on the 9 second page of B1984? It's at the very top of the 10 page. 11 A. The second page? 12 Q. Yes. The second page has the Bates 13 number -- 14 A. 180? 15 Q. Yes. And the page numbers end in 180. 16 Do you have any recollection as to who 17 John Price was? 18 A. No. 19 Q. Was -- would you believe, based on this 20 work paper, that he was a person at United Savings 21 to whom questions were being addressed regarding 22 the interest rates swaps, caps, and collars? 17881 1 A. I could not say. I don't know who he 2 was. 3 Q. Do you see a reference to a mirror with 4 Morgan Stanley? 5 A. Yes. 6 Q. And is the examiner noting that there 7 was a question regarding the rationale behind 8 setting up the mirror with Morgan Stanley? 9 A. Yes. 10 Q. And that is a question, then, that was 11 raised during the course of the 1987 audit and was 12 to be addressed in a question to John Price, 13 correct? 14 A. Yes. 15 Q. Do you see in Paragraph 8, which is the 16 second -- I'm sorry. The third page of the 17 exhibit has a reference to RC codes on "Summary of 18 Caps"? 19 A. Yes. 20 Q. And do you see -- and do you see that 21 the examiner who prepared this list of questions 22 is raising a question on the RC codes relating to 17882 1 the caps? 2 Do you see that? 3 A. Yes. 4 MS. CLARK: Your Honor, the next 5 document is B98. I would offer B98. 6 MR. VEIS: I'm sorry. No objection. 7 THE COURT: Received. 8 Q. (BY MS. CLARK) Is this another work 9 paper relating to your examination of the swaps, 10 caps, and collars in the 1987 examination of 11 United? 12 A. Yes. 13 Q. Ms. Carlton, look at the next page, 14 which is -- next document, which is Exhibit B1772, 15 which came out of the same section of the work 16 papers of the 1987 exam. 17 Can you identify this as a schedule 18 prepared by the association and included in the 19 work papers of the 1987 exam and initialed by you? 20 A. Yes. 21 Q. And it relates to the summary of swap 22 agreements, does it not? 17883 1 A. Yes. 2 MS. CLARK: I'll offer B1772. 3 MR. VEIS: No objection, Your Honor. 4 THE COURT: Received. 5 Q. (BY MS. CLARK) The next document, 6 Ms. Carlton, is B650. 7 Would you look at that and see if you 8 can identify that as a copy of a swap agreement 9 with Morgan Stanley and the Federal Home Loan Bank 10 and initialed by you? Let me amend my question, 11 Ms. Carlton. 12 Do you see that it is a -- it contains 13 copies of more than one swap agreement, one dated 14 November 11, one dated November 13, and one dated 15 December 23rd, 1985? 16 A. I agree. 17 Q. Pardon me? 18 A. I agree. 19 Q. Yes. 20 MR. VEIS: May we have those documents 21 identified by Bates numbers for the record? 22 MS. CLARK: The document is B650, and 17884 1 the Bates number of the first page, which I take 2 it is a part of the work papers, is 179431. 3 Q. (BY MS. CLARK) Is that a page 4 prepared by the examiners, the very first page? 5 A. Yes. 6 Q. And then it's followed by copies of 7 swap agreements. The first one beginning on 8 179432, do you see that? 9 A. Yes. 10 Q. That's the November 11, 1985 swap 11 agreement with the Federal Home Loan Bank of 12 Dallas. 13 The next one begins on Bates 14 Page 179435, and that's the November 13, 1985 swap 15 with the Federal Home Loan Bank of Dallas, is it 16 not? 17 A. Yes. 18 Q. And the next one begins on 179437, and 19 that's the December 23, 1985 swap with the Federal 20 Home Loan Bank of Dallas, is it not? 21 A. Yes. 22 MS. CLARK: I'll offer B650, Your 17885 1 Honor. 2 MR. VEIS: No objection, Your Honor. 3 THE COURT: Received. 4 Q. (BY MS. CLARK) Ms. Carlton, can you 5 identify Exhibit B1647 as a schedule relating to 6 interest rate swap recap, June 1987 that was 7 prepared by the association and included in the 8 examination work papers? 9 A. Yes. 10 MS. CLARK: I move B6 -- 1647 in 11 evidence, Your Honor. 12 MR. VEIS: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MS. CLARK) And can you identify 15 B1987 as an examination work paper relating to 16 interest rate swaps, caps, and collars entitled 17 "Swaps Summary"? 18 A. Yes. 19 MS. CLARK: I move that into evidence, 20 Your Honor, Exhibit B1987. 21 MR. VEIS: No objection, Your Honor. 22 THE COURT: Received. 17886 1 Q. (BY MS. CLARK) Next I would like to 2 show you three exhibits relating to something 3 called United MBS Corporation, Ms. Carlton. 4 The first one will be Exhibit A12137. 5 The second one will be B3990, and the third one 6 will be B1916. 7 MR. VEIS: I don't believe we have 8 copies of those. 9 THE COURT: I have a document here, 10 B3989. Has that been offered? 11 MS. CLARK: May I see what it is? Your 12 Honor, I withdrew it because it was already 13 admitted. 14 THE COURT: Thank you. 15 Q. (BY MS. CLARK) Do you have Exhibit 16 A12137 in front of you, Ms. Carlton? 17 A. Yes. 18 Q. And is this a handwritten memorandum 19 concerning United MBS Corporation prepared in the 20 1987 examination? 21 A. Yes. 22 Q. And did you initial the bottom of this 17887 1 memorandum? 2 A. Yes. 3 Q. And did you make some handwritten 4 editorial changes to the document? 5 A. I don't see any. 6 Q. I was looking in particular at the 7 second-to-the-last line on the bottom of the first 8 page, Ms. Carlton. 9 Does that appear to be your handwriting 10 in the inserted words "it appears"? 11 A. Yes. 12 Q. So, this is a document that you 13 reviewed and made some changes to in the course of 14 the examination of United MBS Corporation; is that 15 correct? 16 A. Right. 17 Q. Now, do you see that the memorandum -- 18 MR. VEIS: I'm sorry. Where is the 19 inserted language? I'm afraid I can't find it. 20 MS. CLARK: The second-to-the-last line 21 on the first page, Your Honor. We're going to 22 read that sentence into the record but, let me 17888 1 show it to you first. 2 Do you have that? 3 MR. VEIS: Oh, okay. Thank you. Yes. 4 Q. (BY MS. CLARK) Ms. Carlton, could you 5 simply read into the record the last two sentences 6 on that page beginning with "the spread income"? 7 A. "The spread income, the difference 8 between the proceeds received and the repurchase 9 value on these MBS contracts is predetermined and 10 it appears no speculation is involved. UMBS is 11 operating profitable at December '87 with a 12 year-to-date net income of 37 million rounded." 13 Q. Just one slight change there. Does it 14 say December 31, 1987, Ms. Carlton? 15 A. Yes. 16 Q. Okay. And what does the last sentence 17 of this analysis state? 18 MR. VEIS: What page? 19 MS. CLARK: This is on the Bates page 20 ending 136. 21 A. "This examiner believes the generated 22 benefits from these types of transactions 17889 1 outweighs the inherent risk associated." 2 Q. (BY MS. CLARK) Was the examiner who 3 prepared this work paper a person named Robert 4 Boudousque? 5 A. Boudousque. 6 Q. Boudousque, correct? And was he a 7 member of the Federal Home Loan Bank examination 8 staff, or was he an outside accountant who was 9 assisting in the examination? 10 A. Accountant assistant. 11 Q. Do you recall from what firm he was? 12 A. What is this? '87? I think we had 13 Peat in '87. 14 Q. Was it Grant Thornton? 15 A. With the '87? One we had Cooper's, and 16 I don't remember what the other one was. 17 Q. It was one of those large accounting 18 firms from which he came and assisted you in this 19 examination? 20 A. Right. 21 Q. All right. And then there is a 22 schedule of work paper references on the page 17890 1 ending 138, is there not? 2 A. Yes. 3 Q. And that would send you to the specific 4 work papers dealing with the various subjects 5 listed on that schedule; is that correct? 6 A. Right. 7 Q. And finally, on the page ending -- 8 beginning on the Bates Page 18139, there is one of 9 those printed forms called service corporation 10 interim program, is there not? 11 A. Yes. 12 Q. And that was completed by 13 Mr. Boudousque? 14 A. Boudousque. 15 Q. And you initialed to indicate your 16 review, as well, correct? 17 A. Yes. 18 Q. And the last page of the exhibit 19 indicates that your field manager, Mr. Joe Cooper, 20 also reviewed the United -- UMBS work papers, 21 correct? 22 A. Yes. 17891 1 Q. Let's look together at the next 2 exhibit, which is -- 3 MS. CLARK: First let me offer A12137, 4 Your Honor. 5 MR. VEIS: No objection, Your Honor. 6 THE COURT: Received. 7 Q. (BY MS. CLARK) Now let's look at 8 Exhibit B3990. 9 Is this a schedule prepared by the 10 association and copied into the examination work 11 papers to illustrate United's internal assessment 12 of the profitability of USAT's sub United MBS 13 Corporation? 14 A. Yes, it is. 15 Q. I'll offer that in evidence, Your 16 Honor. 17 MR. VEIS: No objection, Your Honor. 18 THE COURT: Received. 19 Q. (BY MS. CLARK) And then finally 20 Exhibit B1916, is that another schedule prepared 21 by the association and copied into the examination 22 work papers relating to mortgage-backed securities 17892 1 and hedging mark-to-market summary? 2 A. Yes, it is. 3 Q. And this particular summary contains 4 information concerning both the book value and the 5 mark-to-market gain or loss as of December 31, 6 1987, for United's preferred stock subsidiary for 7 United Savings Association itself, for United's 8 mortgage-backed securities residuals, and for 9 United MBS, does it not? 10 A. Yes. 11 MS. CLARK: I'll offer B1916, Your 12 Honor. 13 MR. VEIS: No objection, Your Honor. 14 THE COURT: Received. 15 Q. (BY MS. CLARK) Now, we saw on Exhibit 16 A12137, which was the handwritten write-up 17 regarding United MBS Corporation, that the 18 examiner noted that United MBS was operating 19 profitably at 12/31/87 with a year-to-date net 20 income of $37,000,479. 21 Do you recall that? 22 A. Yes. 17893 1 Q. And that information indicated that 2 United was generating a profit during that time 3 period, correct? 4 A. Yes. 5 Q. At the same time, in the examination 6 work papers it is reflected that United MBS 7 Corporation had a mark-to-market loss as indicated 8 on this schedule of $168 million, correct? 9 A. Right. 10 Q. So, although the examination team was 11 aware that there was a mark-to-market loss in 12 United MBS, the examination team noted that United 13 MBS was operating profitably at year end 1987, 14 correct? 15 A. Yes. 16 Q. Let me ask you to look at Exhibit B3988 17 and B1917, Ms. Carlton. 18 MR. VEIS: We didn't get a copy of this 19 one. 20 Q. (BY MS. CLARK) Ms. Carlton, can you 21 identify Exhibit B3988 as a work paper discussing 22 futures contracts and the conditions required for 17894 1 futures contracts to qualify as a hedge? 2 A. That's correct. 3 Q. And is Exhibit B1917 a work paper 4 headed "Eurodollar Futures Positions Speculative 5 Mark-to-market" dated 12/31/1987? 6 A. Yes. 7 MS. CLARK: I offer Exhibits B3988, 8 Your Honor, and 1917. 9 MR. VEIS: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MS. CLARK) The next two documents 12 that I'd like you to look at, Ms. Carlton, are 13 Exhibit B2207 and B2208. 14 Does Exhibit B2207 indicate that 15 Mr. Joe Cooper, your field manager, reviewed the 16 work papers in the file called hedge accounting 17 and reverse repos? 18 A. Yes. 19 Q. And does Exhibit B2208 indicate that 20 Mr. Joe Cooper reviewed work papers in a file 21 called hedging? 22 A. Yes. 17895 1 MS. CLARK: I offer B2207 and B2208, 2 Your Honor. 3 MR. VEIS: No objection, Your Honor. 4 THE COURT: Received. 5 Q. (BY MS. CLARK) The next two documents 6 I'd like you to look at are B2049 and B1648. 7 Ms. Carlton, is Exhibit B2049 a 8 memorandum from the federal examiners to Chuck 9 Doolittle of United regarding the TFR reports for 10 September 30, 1987, and December 31, 1987? 11 A. It's a request for information. 12 Q. So, this document is a request to 13 provide detail supporting the TFRs with respect to 14 the hedging impact line of those reports; is that 15 correct? 16 A. It's asking for the off balance sheet 17 items. 18 Q. And the request states that the 19 association's quarterly reports for September 30, 20 '87, and December 31, '87, disclosed a hedging 21 impact regarding liabilities of certain specified 22 amounts and asks the association to provide a 17896 1 detailed account of the on and off balance sheet 2 items for these transactions. 3 That's the request that's being made 4 here, is it not? 5 A. That's one of the requests, yes. 6 Q. And the association is also asked to 7 explain an omission concerning an asset hedge, 8 correct? 9 A. Yes. 10 MS. CLARK: Your Honor, I offer B2049. 11 MR. VEIS: No objection, Your Honor. 12 THE COURT: Received. 13 Q. (BY MS. CLARK) Ms. Carlton, 14 Exhibit B1648, also from the 1987 examination work 15 papers, appears to be a schedule prepared by the 16 association which was copied and included in the 17 work papers relating to the GAAP analysis for the 18 June 1987 schedule. 19 Is that what this document is? 20 A. No. This page is from the actual 21 examination report that provides a GAAP analysis 22 data. 17897 1 Q. Okay. If you go to the Bates page 2 ending 823, can you tell us what the materials are 3 beginning on that page? 4 A. It's GAAP analysis on information where 5 you have a spread for what's the sensitivity of 6 assets at one-year, three-year, and over three 7 years. 8 Q. Does this appear to be some analysis of 9 the information underlying the TFR reports filed 10 by United? 11 A. This is the information where he's 12 taking information from the actual numbers 13 generated by our report and doing a spread of that 14 information. 15 Q. So, this is an analysis of United's 16 GAAP analysis as of June 1987 that was prepared 17 and included in the work papers of the 18 examination? 19 A. Right. 20 THE COURT: I'm not sure I understood 21 that. Was this GAAP analysis prepared by the 22 association or by the examiners? 17898 1 THE WITNESS: It's prepared by -- it's 2 computer-generated and comes down with the shell 3 of the report. Some of the financial information 4 is a part of the actual shell. It's 5 computer-generated, a collection of data from the 6 institution's TFR, and is automatically provided 7 in the actual report itself. 8 THE COURT: Is that offered? Is 1648 9 offered? 10 MS. CLARK: Yes. I would like to offer 11 it if I have not, Your Honor. 1648. 12 Your Honor, again to save time, I've 13 grouped together several exhibits that I would 14 like to provide to the witness and to the Court so 15 that we can go through them more efficiently. I 16 will offer them separately, however. 17 MR. VEIS: Your Honor, I think we have 18 no objection with respect to most. I notice 19 there's one at Bates 829 that appears to be some 20 sort of review sheet that apparently is included 21 by someone in the -- I have no idea what the 22 origin of this is. I doubt that it is a work 17899 1 paper from the examiners. 2 MS. CLARK: All right. Mr. Veis is 3 correct. As far as I can tell from just reviewing 4 the documents, these types of worksheets appear in 5 a set of documents that was designated to us as 6 the Hopkins and Sutter pulls. And my 7 understanding is that these were documents that 8 were pulled out of the original examination work 9 papers by the FDIC's outside counsel in the course 10 of the FDIC's examination. And I'm happy to 11 simply pull that page out of this exhibit. I left 12 it in so that there would be no question about the 13 pagination of the document. 14 THE COURT: Are you objecting to 15 including that? 16 MR. VEIS: I guess I have no position 17 provided it's clear on the record that it's not 18 part of the work papers but an extraneous 19 document. I think, for convenience, it would be 20 better to keep it out. 21 MR. GUIDO: I think I can clarify 22 something, Your Honor. There are two sets of work 17900 1 papers that were made available to the respondents 2 so that we could make sure that in case anything 3 had been missing, that we had produced everything 4 that we had in our possession. We had in our 5 possession a duplicate set of all of the 6 supervisory files, I believe, that included the 7 work papers and all other papers that the receiver 8 had made copies of. 9 We made all of those available to the 10 respondents. They then sent in a team of people 11 to do the imaging and review all the documents. 12 This document may have been pulled from that set 13 because someone either didn't find a legible copy 14 or that it wasn't in the originals which were in 15 the OTS's possession. 16 That may be why that occurred, Your 17 Honor. I think it's probably better to have the 18 document introduced if that way so that we all 19 know sometime in the future, in case a question 20 comes up, which set of the files that the OTS 21 produced and the document came from, Your Honor. 22 THE COURT: All right. Do you want the 17901 1 document in or out? 2 MR. GUIDO: Your Honor, I'd prefer to 3 have the complete document in with the 4 understanding that it's from a different set. It 5 is not the OTS's original file. 6 THE COURT: All right. I'll receive it 7 on that. Received. 8 MR. GUIDO: If it clarifies that it 9 came from the Hopkins and Sutter receiver set, I 10 think it should be included. I have no objection 11 to the document; but I think for purposes of 12 clarity, the record should be clear that this is 13 one document -- it's the first one that I've heard 14 of that came from the supervisory or the exam 15 files that came out of that other set. And I 16 think that we should make it clear, that that's 17 where the document came from and the attachments. 18 To do that, I think that they should be left with 19 the document, Your Honor. 20 THE COURT: All right. We'll leave it 21 in. 22 MS. CLARK: Thank you, Your Honor. 17902 1 I'll be providing the witness with a set of 2 documents which we will go through one by one. 3 Q. (BY MS. CLARK) Ms. Carlton, take a 4 look at the first exhibit which is marked A12111. 5 It was Exhibit 82 to your deposition. 6 Can you identify this as a -- as a 7 request from you to Mike Crow and Chuck Doolittle 8 regarding the committees at United that you made 9 during the course of the 1987 examination? 10 A. It is. 11 Q. And attached to your request, there is 12 a memorandum from Mr. Hansen to Mr. Berner 13 concerning principal operating committees of UFG, 14 Inc. and USAT, is there not? 15 A. Yes. 16 MS. CLARK: Your Honor, I offer A12111. 17 MR. VEIS: We have no objection, Your 18 Honor. 19 THE COURT: Received. 20 Q. (BY MS. CLARK) The next document, 21 Ms. Carlton, is a one-page document marked Exhibit 22 A12131. It was Exhibit 106 to your deposition. 17903 1 Is this a copy of the minutes of 2 strategic planning and management committees? 3 A. Yes, it is. 4 Q. November 6th, 1987, that was copied and 5 included in the work papers of the 1987 exam? 6 A. Yes, it is. 7 Q. And does it reflect under the first 8 item that "After full discussion, the committees 9 determined that as rates declined, to reach a 10 break-even point, the association would eliminate 11 certain mortgage-backed securities positions"? 12 A. That's what it states. 13 MS. CLARK: Your Honor, I offer A12131. 14 THE COURT: Is that a one-page 15 document? 16 MS. CLARK: It is, Your Honor. 17 THE COURT: Received. 18 MR. VEIS: No objection, Your Honor. 19 MS. CLARK: The next document, Your 20 Honor, is already in evidence. It's Exhibit 21 A14088, and it's at Tab 1505. I simply would like 22 to ask the witness to identify some handwriting on 17904 1 the document. 2 Q. (BY MS. CLARK) If you would, please, 3 turn, Ms. Carlton, to Exhibit -- Bates page ended 4 993. The Bates page is obliterated on that page, 5 but it's immediately after the page ending 992. 6 Do you see handwriting and a question 7 mark on the bottom right corner of that page? 8 A. Yes. 9 Q. And is that your handwriting and your 10 question mark? 11 A. Yes. 12 Q. So, this indicates that you reviewed 13 these minutes in the course of the examination at 14 some point, does it not? 15 A. Yes. 16 Q. The next document is Exhibit 121 -- 17 sorry -- A12132, Ms. Carlton. It was Exhibit 107 18 to your deposition. 19 Do you see that? 20 A. Yes. 21 Q. Now, these are minutes of the 22 investment committee of United Savings Association 17905 1 that were copied and put into the examination work 2 papers for reference by the examiners as 3 appropriate during the course of their examination 4 work; is that correct? 5 A. Yes. 6 Q. Turn to Page OW180120, if you would, 7 please. 8 A. (Witness reviews the document.) What's 9 the number again? 10 Q. It's A -- sorry -- OW180120. 11 A. Okay. 12 Q. And do you see that this portion of the 13 investment committee minutes is a schedule which 14 is described as a summary of daily mark-to-market? 15 Do you see that? 16 A. Yes. 17 Q. And it has unrealized gain or loss 18 figures for various portfolios within United; is 19 that correct? 20 A. Yes. 21 Q. And it shows an unrealized loss in the 22 aggregate at that time of something in excess of 17906 1 $200 million; is that correct? 2 A. Yes. 3 Q. Turn to the next page, if you would, 4 please. The Bates number is OW180121. 5 Do you see that there is something 6 called a sensitivity summary on that page? 7 A. Yes. 8 Q. And do you see that it shows for each 9 of several different portfolios at United the 10 unrealized gain or loss in an unchanged 11 environment as well as with a minus 50 or minus 12 100 or a plus 50 or plus 100 basis point move? 13 Do you see that? 14 A. Yes. 15 Q. And that was part of the minutes of the 16 investment committee of United Savings Association 17 of Texas that was copied and put into the 18 examination work papers, correct? 19 A. Yes. 20 Q. Turn to the next document, if you 21 would, please. It's Exhibit -- 22 MS. CLARK: I'm sorry. Exhibit A12132, 17907 1 Your Honor, I offer it. 2 MR. VEIS: No objection, Your Honor. 3 THE COURT: Received. 4 Q. (BY MS. CLARK) The next document is 5 marked Exhibit A12138. It is similar to but not 6 identical to Exhibit A14089, I believe. 7 Is this a portion of the -- 8 MR. GUIDO: What page? 9 10 (Discussion held off the record.) 11 12 MS. CLARK: Mr. Veis may be getting 13 ready to say that the examiner's copy is a 14 different set of exhibits in this portion of the 15 work papers than in the portion of the work papers 16 than he put in evidence, and that's the reason I'm 17 offering it. 18 So, if I may, I would like to ask the 19 witness whether she can identify this as a portion 20 of the work papers of the 1987 examination in 21 which the minutes with exhibits were copied and 22 included. 17908 1 A. What number are you using? 2 Q. (BY MS. CLARK) I'm on Exhibit A12138. 3 MR. VEIS: Just to clarify, Your Honor, 4 it does appear that this comes from a different 5 section of the work papers. The minutes are -- 6 the cover sheet appears to be identical, but it 7 has a different Bates number than on Exhibit 8 A14089. It may well be -- as I look through this, 9 I see that at least some of the attachments or 10 following pages, whether they are attachments or 11 not, seem to be different. So, they do appear to 12 come from work papers of the examination, but 13 clearly from a different file from the work 14 papers. 15 THE COURT: You have no objection? 16 MR. VEIS: No, Your Honor. We have no 17 objection. 18 THE COURT: Received. 19 Q. (BY MS. CLARK) And again, these are 20 investment subcommittee minutes that are copied 21 and included in the examination work papers for 22 reference by those members of the examination team 17909 1 whose work on the examination -- to whose work 2 these minutes might be relevant; is that correct? 3 A. Right. 4 Q. And again, if you look at Bates page 5 ending 748, you see again there is a daily 6 mark-to-market summary. 7 A. Yes. 8 Q. And also a sensitivity summary. 9 Do you see that? 10 A. Yes. 11 Q. The next document is Exhibit A12139, 12 Ms. Carlton. 13 Can you identify this document as 14 USAT/UFG investment limits and operating 15 guidelines with respect to the high-yield 16 securities portfolio? 17 A. Yes. 18 Q. And it was copied into the work papers 19 for reference by anyone on the examination team 20 whose -- to whose examination work it might be 21 relevant; is that correct? 22 A. Right. 17910 1 MS. CLARK: I offer Exhibit A12139. 2 MR. VEIS: No objection, Your Honor. 3 THE COURT: Received. 4 Q. (BY MS. CLARK) The next document is 5 Exhibit A12130. It was Exhibit 105 to your 6 deposition. 7 Can you identify this document, 8 Ms. Carlton, as copies of various minutes and 9 resolutions for the board of directors meetings on 10 February 19th, 1987, and November 10th, 1987? 11 A. Yes. 12 Q. And do you see that at Bates page 13 ending 59 there is a reference to Mr. Crow 14 reviewing the status of the association's business 15 plan and noting that there would be a revision to 16 the business plan in connection with the refiling 17 of the offering circular? 18 Do you see that? It's the 19 third-to-the-last paragraph on the page ending 59. 20 A. Yes. 21 Q. And if you look at the very last page 22 of the exhibit, the minutes of the November 10, 17911 1 1987 meeting of the board of directors are copied 2 into the work papers. 3 Do you see that? 4 A. Yes. 5 Q. The Bates pages end in 60 and 61. 6 Do you see that? 7 A. Yes. 8 Q. And on the second page, there is a 9 reference to compensation committee's actions on 10 proposed bonuses. 11 Do you see that? 12 A. Yes. 13 MS. CLARK: I offer A12130, Your Honor. 14 MR. VEIS: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MS. CLARK) The next exhibit, 17 Ms. Carlton, is Exhibit A12117. 18 Do you have that in front of you? 19 A. No. 20 Q. Well, we'll provide it to you then. 21 Ms. Carlton, is this a copy of 22 United Financial Group, Inc.'s performance report 17912 1 for June 1987 which was initialed by your field 2 manager, Mr. Cooper, on the first page? 3 A. Yes. 4 Q. And I'd like you to turn to the page 5 ending 157, which is the second page of the 6 performance report. 7 Do you see that? 8 A. Yes. 9 Q. Do you see under the schedule, there is 10 a statement that the net earning power on the 11 company's asset portfolio has declined primarily 12 due to selling above-water assets? 13 Do you see that? 14 A. Yes. 15 Q. Then it goes on to say, "In addition, 16 increased prepayment speeds have lowered the 17 yields on mortgage-backed securities and related 18 assets and increased the rates on branch sale cash 19 flow bonds." 20 Do you see that? 21 A. Yes. 22 Q. Did Mr. Cooper come to you and discuss 17913 1 the fact that the performance report from United 2 Financial Group for June 1987 was saying that the 3 net interest earning power on the company's asset 4 portfolio had declined primarily due to selling 5 above-water assets? 6 A. No. 7 MS. CLARK: I offer A12117, Your Honor. 8 MR. VEIS: No objection, Your Honor. 9 THE COURT: Received. 10 Ms. Clark, how much more do you have? 11 MS. CLARK: I would like to do two more 12 documents, and then I can finish up fairly quickly 13 tomorrow morning. But just to finish up these 14 documents, I would like to offer two more, Your 15 Honor. 16 Q. (BY MS. CLARK) The next two exhibits 17 are A12114 and 12115. 18 Is Exhibit A12114 a memorandum from you 19 to the file dated February 10th, 1988, regarding a 20 meeting of United's audit committee which you 21 attended? 22 A. Yes. 17914 1 Q. Do you see that in the fourth paragraph 2 of your memorandum you record that Mr. Berner 3 stated at the meeting that you attended that an 4 application for capital forbearance would be filed 5 with the Federal Home Loan Bank of Dallas on 6 Tuesday, February 16th, 1988? 7 Do you see that? 8 A. Yes. 9 MS. CLARK: I offer A12114, Your Honor. 10 MR. VEIS: No objection, Your Honor. 11 THE COURT: Received. 12 Q. (BY MS. CLARK) And Exhibit A12115, 13 Ms. Carlton, also from the 1987 examination work 14 papers, which was Exhibit 89 to your deposition, 15 is a report to the audit committee from the 16 internal audit department, is it not? 17 A. Yes. 18 Q. And this document, again, was copied 19 and included in the work papers so that it would 20 be available for reference by any member of the 21 examination team to whose work it was relevant; is 22 that correct? 17915 1 A. Right. 2 Q. Turn to Bates Page OW129460F, if you 3 would, please. 4 Are you at that page? 5 A. Yes. 6 Q. And is that a copy of the minutes of 7 the audit committee of November 10, 1987? 8 A. Yes. 9 Q. And do you see at the bottom of the 10 page that Mr. Wolfe was discussing the state and 11 federal regulatory examinations? 12 A. Yes. 13 Q. And the last sentence in that paragraph 14 of the minutes indicates that Mr. Wolfe noted that 15 the Texas state examiners were reviewing the 16 unrealized losses in the mortgage-backed 17 securities and high-yield bond portfolios, as well 18 as the GAAP/RAP reserve question; is that correct? 19 A. Yes. 20 Q. So, this indicates that the Texas state 21 examiners were also aware of the unrealized losses 22 in the mortgage-backed securities and high-yield 17916 1 bond portfolios that we saw referred to in the 2 minutes that the federal examiners copied into 3 their work papers, correct? 4 A. Yes. 5 MS. CLARK: Your Honor, I can stop here 6 and finish up in the morning. 7 THE COURT: Are you offering that 8 exhibit? 9 MS. CLARK: Yes, I am, Your Honor. 10 MR. VEIS: No objection, Your Honor. 11 THE COURT: Received. All right. 12 We'll adjourn until 9:00 o'clock tomorrow. 13 14 (Whereupon at 4:55 p.m. 15 the proceedings were recessed.) 16 17 18 19 20 21 22 17917 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 3rd day of August, 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 17918 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 3rd day of August, 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