17919 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 4, 1998 22 17920 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 17921 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 . 17922 1 2 INDEX OF PROCEEDINGS 3 4 VIVIAN CARLTON 5 Continued Examination by Ms. Clark......17932 6 Examination by Mr. Eisenhart............18071 7 Examination by Mr. Blankenstein.........18144 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 17923 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. We'll 4 be on the record. 5 Ms. Clark. 6 MR. NICKENS: Your Honor, we have a 7 scheduling difficulty we need to relay to the 8 Court and get your guidance. The original 9 schedule following Ms. Carlton was Mr. Berner. 10 However, late last week, the OTS informed us that 11 because of his scheduling problems, they would 12 like to put Mr. O'Connell in front of Mr. Berner, 13 which we agreed to. And so, he was to follow 14 Ms. Carlton. Late yesterday, we learned that 15 Mr. O'Connell was ill; and then within the last 30 16 minutes, we've learned that he has a severe ear 17 infection and other kinds of maladies and that he 18 is not going to be available to testify following 19 the conclusion of Ms. Carlton. 20 The difficulty with going back to the 21 original plan with regard to Mr. Berner -- 22 Mr. Berner is available and here and has been 17924 1 putting this off. As we've -- he's -- he set 2 aside a fair amount of time for this. But I think 3 both sides agree that it is not desirable to break 4 up the testimony of a respondent where you would 5 get maybe a couple of days of the direct, not hear 6 his contentions contemporaneously with that. We 7 will be gone for more than a week. So, I think 8 both sides have agreed that that's undesirable; 9 but it is a possibility. The other possibility is 10 that Mr. Lapidus, who you will recall, was a 11 witness that was substituted for Ms. Bese and is a 12 person that did the 1988 examination on 13 mortgage-backed securities could be available. 14 However, the problem, we objected to the 15 substitution of Mr. Lapidus and you had entered an 16 order allowing us to take the deposition of 17 Mr. Lapidus prior to his testifying. We have 18 scheduled that and have, frankly, been putting it 19 off because we expected Mr. O'Connell to come on. 20 We could take his deposition at that time. I'm 21 going to take his deposition. But we had -- we 22 were planning on the conclusion of Ms. Carlton 17925 1 before we started that. 2 As it currently -- I don't know how 3 long Mr. Lapidus' deposition might take. It could 4 be anywhere from half a day to a day and a half. 5 And if we start that upon the conclusion of 6 Ms. Carlton and Mr. O'Connell is unavailable, 7 there would be a day where we would be -- we would 8 be taking his deposition and getting the 9 transcript before he would be available to testify 10 the following day. So, to sum up, we have the 11 possibility of Mr. Berner, which is a possibility, 12 as I said, but undesirable from both our points of 13 view. Or we have the possibility of Mr. Lapidus. 14 But with the -- with a -- with perhaps as much as 15 one day of dead time, probably it would be 16 Thursday. 17 THE COURT: How long would his 18 testimony take? Do you know at this point? 19 MR. NICKENS: I expect if it's as broad 20 as I think it might be, that he will be on the 21 stand for a couple of days. So, his testimony 22 would be started and then would have to be 17926 1 resumed, as well. There is a possibility that he 2 could be quicker than that. But given the breadth 3 of some of the conclusions stated in the 4 Southwest Plan examination, I really think it 5 would be more honest to say that it's likely to be 6 at least two days. 7 The -- now, the other -- you know, I 8 could start Mr. Lapidus' deposition right now; but 9 the OTS has informed us that Mr. Guido is going to 10 do Ms. Carlton's redirect. So, I need to be in 11 the courtroom for that eventuality. 12 We have no easy solution to the 13 problem. It's just a series of events that has 14 occurred that has put us here. 15 MR. GUIDO: Your Honor, I would like to 16 address that. We learned yesterday afternoon that 17 Mr. O'Connell was ill and arranged for him to go 18 to a doctor or a hospital. They reported back 19 that he had a severe ear infection and some kind 20 of a sinus infection. We thought that medication 21 and a day or two of rest would suffice. 22 Apparently, he concluded this morning that 17927 1 although he felt better after medication and the 2 night's rest, that when he was moving around, he 3 felt much more severe; and he felt that despite 4 the fact of the risks of traveling which we 5 brought out to him -- 6 THE COURT: Where is he? 7 MR. GUIDO: He's here at a hotel. He's 8 decided, for health reasons, that he has to go 9 back to Washington. And we haven't found any 10 reason that we can see to appropriately ask him to 11 change those plans. So, he is not available. It 12 was a surprise to all of us. 13 As soon as I heard about it yesterday, 14 I notified counsel that we were having him go see 15 a doctor. I reported to them what the results of 16 it were, and we've been trying to figure out what 17 is the least problems from your perspective and 18 the parties' perspective of how to proceed. We've 19 explored a number of options, and the one option 20 that Mr. NIckens raised about deposing Mr. Lapidus 21 after the conclusion of Ms. Carlton's testimony 22 is -- requires a downtime of the Court's time. We 17928 1 also discussed the option of putting Mr. Berner on 2 and starting with his deposition. The 3 respondents, in particular, don't want to break up 4 his testimony. We see a reason why they would not 5 want, you know, direct testimony and then a big 6 break before cross. In this case, it would be a 7 break between -- breaking up the direct testimony, 8 as well. We would have to carry over the direct 9 testimony. 10 I did propose to them that in this one 11 instance, we could think of an alternative; and 12 that is to have Mr. Berner only testify about one 13 subject matter that he was familiar with and then 14 have cross-examination on that. The respondents 15 said that they didn't think that was acceptable 16 and didn't want to start the precedent where we 17 started doing that. There were good reasons for 18 their concern about that, Your Honor. 19 So, we looked at the options; and it 20 appears that we're not going to get to redirect 21 with Ms. Carlton until either the end of the day 22 or first thing tomorrow so that Mr. Lapidus' 17929 1 deposition under Mr. Nickens' proposal wouldn't 2 probably start the earliest until tomorrow 3 afternoon and maybe not until the next day. I'm 4 not even sure we'll finish Mr. Lapidus before the 5 break under those circumstances, Your Honor; and 6 that's why all of these alternatives are not 7 particularly desirable. 8 THE COURT: If I get the drift of what 9 you're saying, you're proposing that we adjourn at 10 the conclusion of Ms. Carlton? 11 MR. GUIDO: No, I'm not. 12 MR. NICKENS: Neither party is in a 13 position to propose that. It might be the most 14 reasonable solution, but neither party is in a 15 position to propose that. That's the reason we're 16 coming to you with these proposals or 17 possibilities, but that's -- we've talked about 18 that, and it's just not -- it's something that we 19 couldn't suggest to the Court. 20 MR. GUIDO: Your Honor, I can't even 21 say that I acquiesce in it. I'm under 22 instructions that we are to do everything possible 17930 1 to expedite the proceeding. So, I'm not 2 proposing -- proposing that or even suggesting 3 that as an alternative, Your Honor. The only -- 4 the least worst alternative that I can see is, I 5 think, breaking up Mr. Berner's testimony. But I 6 appreciate opposing counsel's objection to that -- 7 that proposal, and I see that there are good 8 reasons for their objections. 9 MR. NICKENS: I want to say Mr. Berner 10 is available, you know; but we do find that it's 11 not desirable -- none of these are desirable. To 12 put him on for a couple of days without having an 13 opportunity at least within the normal confines of 14 direct and cross to get his side of the story out 15 is just not -- not something -- we would prefer 16 for Your Honor to hear both sides of the story at 17 the same time. But he is available. He has set 18 aside this and more time for it. He is the head 19 of the corporate section of a large Texas law 20 firm. It is -- he's available. He will make 21 himself available whenever the Court and 22 circumstances allow him to testify. 17931 1 THE COURT: But you're saying that 2 because of the deposition, we couldn't just go 3 from Ms. Carlton into Mr. Berner? 4 MR. NICKENS: We could do that, 5 Your Honor. We could do that. What we couldn't 6 do, because of the deposition, we couldn't go 7 directly from Ms. Carlton into Mr. Lapidus because 8 we have not had an opportunity to depose him. And 9 we really would prefer to have that -- have that 10 right. 11 MR. GUIDO: I mean, basically, 12 Your Honor, we could start with Mr. Berner and we 13 could get part of his direct done before the 14 break, just essentially. 15 THE COURT: I think we had better do 16 that. 17 MR. GUIDO: Thank you, Your Honor. 18 MR. NICKENS: Thank you. 19 THE COURT: Ms. Clark. 20 21 CONTINUED EXAMINATION 22 17932 1 Q. (BY MS. CLARK) Ms. Carlton, you've 2 testified that the 1986 examination terminated 3 because you were ordered to leave the field by 4 management when the Couch problem exploded; is 5 that correct? 6 A. Yes. 7 Q. Did you mean by the term "management" 8 to mean the supervisory staff of the Federal Home 9 Loan Bank of Dallas or your field manager? 10 A. It's a combination of both. 11 Q. You didn't mean to say, I take it, that 12 you were ordered to leave the association by the 13 management of United? 14 A. No. 15 Q. And you said as a result of being 16 ordered to leave the field when Couch Mortgage 17 exploded, that you were unable to complete all of 18 your programs, all of the normal examination 19 programs; is that correct? 20 A. That's correct. 21 Q. I would like to take just a few minutes 22 to review the sequence of events so that we can 17933 1 help the Court understand exactly what did and did 2 not get completed prior to the time when you were 3 ordered to leave the field as a result of the 4 Couch explosion. I would like to start by asking 5 you -- I'm just going to go through a chronology 6 with you. 7 I would like to start by asking you to 8 look again at the document we've marked as 9 Exhibit A12175 which is in evidence at Tab 1540. 10 I believe it's the first document on the stack of 11 documents we've put in front of you, and I'll 12 direct your attention to Page 154489. 13 A. Okay. 14 Q. This is part of the response by the 15 board of directors to the supervisory letter 16 concerning the 1986 examination, Ms. Carlton; and 17 it's an attachment to that letter. It's a letter 18 from the president of United, Mr. Gross, to Joe 19 Selby dated July 23, 1986. 20 Do you see that? 21 A. Yes. 22 Q. Now, do you see that in this letter, 17934 1 Mr. Gross in the second paragraph states that he 2 wanted to address certain concerns about some of 3 the preliminary results from the federal 4 examination of USAT and which were contained, he 5 was told, in a preliminary report to Mr. Selby or 6 other people at the Dallas bank -- 7 MR. VEIS: Do you have a Bates number, 8 please? 9 MS. CLARK: Yes. The Bates number, 10 Mr. Veis, is OW154489. 11 Q. (BY MS. CLARK) It's the first page of 12 Mr. Gross' letter to Mr. Selby dated July 23, 13 1986. 14 Do you see that, Ms. Carlton? 15 A. Yes. 16 Q. And then the rest of the letter 17 addresses concerns that have been raised with 18 Mr. Gross and United about the Couch Mortgage 19 loans that were -- or mortgages held by United. 20 Do you see that? 21 A. Correct. 22 Q. If you turn to the second page, do you 17935 1 see that the issue at that time on July 23 was 2 that the examiners were saying that the purchases 3 of Couch Mortgage Company mortgages were part of a 4 swap whereby United obtained an interest in these 5 mortgage loans as part of a swap of REO held by 6 USAT? 7 Do you see that? 8 MR. VEIS: Excuse me, Your Honor. Not 9 to beat a dead horse here, but I seem to recall 10 that when I was seeking to elicit information 11 regarding the Couch Mortgage situation, I was 12 told -- the objection was it had nothing to do 13 with this case. I certainly -- I know Ms. Carlton 14 responded at some points with information 15 regarding it, but I'm curious as to how it is that 16 Ms. Clark has now come full circle and seeks to 17 examine Ms. Carlton in depth about the issue. 18 I believe Your Honor had ruled against 19 me in that matter. 20 MS. CLARK: Your Honor, he elicited 21 from Ms. Carlton testimony that the examination 22 was not completed because they were ordered to 17936 1 leave the field; and I believe, on 2 cross-examination, it's absolutely essential for 3 the Court to know exactly what had been completed 4 and what had not. 5 As I indicated to Ms. Carlton, I'm not 6 going to be examining her in depth about the Couch 7 Mortgage problem. I'm going to go through the 8 chronology. I'm not going to ask any in-depth 9 questions about Couch Mortgage. I think it's 10 necessary for the record to be clear. 11 So, it will be a quick review of the 12 chronology; and that's all I'm asking about, 13 Your Honor. 14 THE COURT: All right. Proceed. 15 Q. (BY MS. CLARK) So, on July 23, the 16 issue still was whether the purchases were part of 17 a swap of REO for mortgages, correct? 18 A. Yes. 19 Q. Now, let's go to the August 19th, 1986 20 interim report that you prepared. It was admitted 21 at Tab 1459, and the exhibit number is 14017. I 22 would like you to go to the last page of your 17937 1 report. The Bates number is OW121473. 2 Do you see, in conclusion, you stated 3 that you were currently, on August 19, in the 4 process of completing the final phases of the 5 examination and that the areas still under review 6 at that time were service corporations, financial 7 analysis net worth, securities, and classification 8 of assets? 9 Do you see that? 10 A. Yes. 11 Q. And that was the status of the 12 examination as of August 19, 1986, correct? 13 A. That's right. 14 Q. And you stated in your report that you 15 expected the examination report to be completed 16 within the month of September; is that correct? 17 A. That's correct. 18 Q. Turn back to the fourth page of your 19 report, which is Bates No. OW121472 under Roman 20 Numeral VI regarding asset quality and scheduled 21 items loans review. 22 Do you see that? 17938 1 A. No. Go back. 2 Q. Page 4 of your report. It's in the 3 same document, Ms. Carlton. 4 A. Of the interim report? 5 Q. Yes, ma'am. 6 A. Okay. 7 Q. Do you see that on August 19, 1986, you 8 were reporting that your review of major 9 commercial loans was 85 percent complete? 10 Do you see that? 11 A. Right. 12 Q. Okay. I would like you to now look at 13 a document which has been marked as 14 Exhibit A12091. It was Exhibit 61 to your 15 deposition. It's a one-page document. 16 Do you see it there? 17 A. Yes. 18 Q. And this is a schedule that was 19 prepared by you and your staff showing the loans 20 that had been reviewed and the determinations that 21 had been made as to whether the loans would be 22 classified or passed or subject to special 17939 1 comment; is that correct? 2 A. Right. 3 Q. And this reflects the results of the 4 loan review, the final results of the loan review, 5 correct? 6 A. Right. 7 Q. Now, I would like you to -- 8 MR. VEIS: This is totally illegible. 9 MS. CLARK: I would offer 10 Exhibit A12091, Your Honor. 11 MR. VEIS: Your Honor, I think we have 12 to object. This document is completely illegible. 13 I don't know if there's a date on it. I can't 14 even make out the Bates number. 15 MS. CLARK: Your Honor, Mr. Veis has a 16 very reduced copy of the document in his binder. 17 And I wonder, is that also what you have? 18 THE COURT: Yes. 19 THE WITNESS: It's also what I have. 20 MS. CLARK: I will substitute a more 21 legible copy. It is a copy that we reviewed in 22 the course of her deposition, Your Honor. I 17940 1 apologize. I did not realize that the version 2 supplied to the witness and to counsel was a 3 reduced version, and I will substitute -- during 4 her deposition, she was able to identify the 5 document and testify about it as she has done 6 today. I would ask the Court to admit it subject 7 to substitution of a more legible copy which we 8 can provide by the lunch break. 9 MR. VEIS: Your Honor, we would prefer 10 to revisit the admission when the more legible 11 copy has been supplied. 12 THE COURT: Do you have any other 13 objection except legibility? 14 MR. VEIS: No, Your Honor, other than 15 it's very difficult for us to identify the date. 16 THE COURT: All right. I'll receive 17 the document subject to submission of a legible 18 copy. 19 Q. (BY MS. CLARK) Now, let me ask you to 20 look at a document that we have marked as 21 Exhibit B3980. It's an August 29, 1986 memorandum 22 from Vivian Carlton to Robert Creager regarding 17941 1 interim examination report. 2 Do you see that? 3 A. Yes. 4 MS. CLARK: I offer Exhibit B3980, 5 Your Honor. 6 MR. VEIS: No objection, Your Honor. 7 THE COURT: Received. 8 Q. (BY MS. CLARK) Mr. Creager was the 9 senior member of the Coopers & Lybrand team that 10 assisted you in the 1986 audit, was he not? 11 A. He was the partner. 12 Q. And, indeed, you referred to him as 13 sort of the examiner-in-charge for that part of 14 the examination team; is that correct? 15 A. No, I did not. He is the partner, and 16 he's regarded as the partner with no involvement 17 other than managing his staff that he supplied and 18 providing technical assistance. 19 Q. And these are the individuals that you 20 described to the Court who were retained to assist 21 you in the completion of the examination in 1986; 22 is that correct? 17942 1 A. That's correct. 2 Q. And in this memorandum to Mr. Creager, 3 you enclosed a copy of the interim report for the 4 month of August; and you advised him that you were 5 currently in the process of completing the final 6 phases of the examination; is that correct? 7 A. That's correct. 8 Q. And that was the status as of 9 August 29, 1986; is that correct? 10 A. That's correct. 11 Q. Now I would like you to look at 12 Exhibit B3978. This is a typewritten document 13 with handwriting on the document which is yours, 14 is it not? 15 A. Yes, it is. 16 Q. And in your own -- 17 MS. CLARK: Your Honor, I offer 18 Exhibit B3978. 19 MR. VEIS: No objection, Your Honor. 20 THE COURT: Received. 21 Q. (BY MS. CLARK) Is this an agenda for a 22 management meeting -- that is to say, a meeting 17943 1 with the management of United -- on September 11, 2 1986? 3 A. Yes, it is. 4 Q. And it reflects the items of 5 information that you were planning to discuss with 6 the members of management at that time; is that 7 correct? 8 A. That's correct. 9 Q. Now I would like you to look at 10 Exhibit B3983, Ms. Carlton. 11 Is this a memorandum from you to Jenard 12 Gross and Gerald Williams dated September 11th, 13 1986? 14 A. Yes, it is. 15 MS. CLARK: Your Honor, I offer 16 Exhibit B3983. 17 MR. VEIS: No objection, Your Honor. 18 THE COURT: Received. 19 Q. (BY MS. CLARK) This memorandum 20 indicates that you were enclosing the exceptions 21 written during the examination which disclosed the 22 noted deficiency, does it not? 17944 1 A. That's correct. 2 Q. And you asked him to sign below to 3 acknowledge that he has received copies of the 4 exceptions, correct? 5 A. That's correct. 6 Q. And this document is dated the same day 7 as your management meeting with the members of 8 management of United; is that correct? 9 A. That's correct. 10 Q. Now, this is an example of the 11 procedure that we talked about from the EOP 12 whereby you were required to provide the 13 exceptions to the management of the association 14 and to obtain signatures to indicate that they had 15 received the exceptions; is that correct? 16 A. That's correct. 17 Q. Ms. Carlton, I would ask you to look 18 next at Exhibit B3984. This is a letter on Arthur 19 Andersen stationery to a member of management of 20 United Savings Association of Texas, is it not? 21 A. Yes. 22 Q. And it reports on the results of a 17945 1 project that Arthur Andersen conducted in 2 connection with a review of the mortgage loan 3 files, correct? 4 A. Yes, it is. 5 Q. Now, someone has written on the top of 6 this document which, by the way, is in the same 7 section of the work papers as all the other 8 exceptions that were collected behind the memo 9 transmitting exceptions which was marked as 10 Exhibit B3983. 11 Someone has marked on the top of this 12 Arthur Andersen letter "Exceptions: Underwriting 13 deficiencies." 14 Is that your handwriting? 15 A. Yes, it is. 16 Q. So, this was transmitted to United as 17 part of the exceptions that were delivered at the 18 end of the examination and which management was 19 required to sign for receipt of; is that correct? 20 A. No, it was not. 21 MS. CLARK: I offer B3984, Your Honor. 22 MR. VEIS: Your Honor, I would note 17946 1 that there's more here than the letter on Arthur 2 Andersen stationery of March 10, 1986. That goes 3 on for four pages, and following that appear to be 4 two memoranda on United Savings Association 5 letterhead. I don't think those have been 6 adequately identified. I'm not sure if they are 7 unintentionally included with the memorandum or 8 what. I think you need some fuller explanation. 9 MS. CLARK: Your Honor, they are 10 labeled on the upper right-hand corner as 11 Exhibit 1 and Exhibit 2. I took them out of the 12 examination work papers section which contained 13 the exceptions which were right behind the letter. 14 I believe Mr. Veis has had an opportunity to 15 review this document since yesterday noon; and if 16 he has any cross-examination that he would like to 17 do on the document, I think that would be entirely 18 appropriate. 19 But I offer this document in evidence 20 as part of the examination work papers on which 21 Ms. Carlton wrote, "Exceptions: Underwriting 22 deficiencies." 17947 1 THE COURT: Are these attached exhibits 2 as part of the Arthur Andersen communication? 3 MS. CLARK: Yes, I believe they are. 4 They are referred to on Page 2. There's a 5 reference to Exhibit 1 at the bottom of the 6 paragraph immediately before Roman numeral III, 7 "project wrap-up." Yes, I do believe they are, 8 Your Honor. 9 MR. VEIS: The only other point I would 10 make, Your Honor, is that Ms. Carlton has not 11 identified these as exceptions that were 12 transmitted to the institution. I'm not sure if 13 there's any explanation for why they were in the 14 work papers. Ms. Clark is right that they were in 15 the work papers. 16 MS. CLARK: Your Honor, I would like to 17 progress through the examination quickly. These 18 objections, I think, can be resolved quickly. If 19 you would like to have me pull off the exhibits, 20 that's fine. I'm really trying to establish a 21 chronology here, Your Honor. 22 THE COURT: Well, it seems in the 17948 1 letter the exhibits are referred to. I will 2 receive the document with the exhibits. 3 Q. (BY MS. CLARK) Now I would like you to 4 look at Exhibit B3985. 5 MS. CLARK: Your Honor, I offer 6 Exhibit B3985 as a document that came out of the 7 examination work papers, the 1986 federal 8 examination. 9 MR. VEIS: Could we have the witness 10 identify it? It appears by its bar code that it 11 comes from the examination work papers, but I 12 think we ought to have the witness identify this 13 document. 14 MS. CLARK: Your Honor, I've tried not 15 to bring in massive files. I could have brought 16 in the entire exception file and put it in the 17 record. If there is any doubt in the minds of OTS 18 that this document did not come from that file, 19 then they can bring that out on cross-examination. 20 This is the part of the file I took it from. 21 THE COURT: All right. Received. 22 MR. GUIDO: May I address the Court, 17949 1 Your Honor? 2 THE COURT: Yes, you may. 3 MS. CLARK: Your Honor, may I ask that 4 we have one counsel from OTS -- one counsel making 5 objections? We spent most of the day yesterday 6 with three lawyers making objections. Mr. Veis is 7 the attorney who presented this witness, and it 8 really is disruptive to have to respond to 9 constant objections from everybody at the other 10 counsel table. 11 MR. GUIDO: Your Honor, this -- 12 THE COURT: Well, I think we should 13 establish a practice of one counsel handling the 14 witness. I've made an exception as to the 15 respondents; but the other witnesses, my feeling 16 is that one counsel should handle it. I will hear 17 you, Mr. Guido; but in the future, I think it 18 should be confined -- 19 MR. GUIDO: Your Honor, I've only 20 spoken up when it came to general practices. I 21 have not made specific objections. What I've been 22 listening to here again goes to my question about 17950 1 the record being complete. I think it would be 2 helpful -- and I know it takes a little bit of 3 time -- but it will be a much clearer record if 4 the document and the date is described as it's 5 being introduced, Your Honor. 6 THE COURT: All right. I receive the 7 document. Let's identify it as a memorandum from 8 Cecile Fite to the federal examiners; and it's 9 dated September 8, 1986. It's marked B3985. 10 MS. CLARK: And the reference number to 11 the document, Your Honor, is an attached list of 12 exceptions. The document states, "Friday, 13 September 5, 1986, Vivian Carlton and I examined 14 each file notated on the above-referenced list. 15 We found that most of the items referenced as 16 missing were, in fact, in the files in the proper 17 places. Evidently, some of the people helping her 18 with the examination of our commercial files 19 overlooked these items. That is the document. 20 Now, I would like to move on to 21 Exhibit A14060, Your Honor. 22 MR. VEIS: One other item. Will you 17951 1 identify who Cecile Fite is? 2 Q. (BY MS. CLARK) Do you remember that 3 Cecile Fite was one of the association personnel 4 with whom you worked in connection with reviewing 5 files in the 1986 examination? Do you remember 6 that particular name from back then? 7 A. No, nor is there an indication that 8 this is a document that I had. 9 MS. CLARK: Mr. Veis, can you confirm 10 that this is, in fact, a document out of the 1986 11 examination work papers since your witness is 12 raising a question that it's something she may not 13 have seen? 14 MR. VEIS: It appears from the bar code 15 number that it comes from that. I will confirm 16 that series. If there's any problem, I will let 17 the Court know. 18 MS. CLARK: Thank you. 19 Q. (BY MS. CLARK) I would like to move on 20 to A14060. It's in the record at Tab 1492. Is 21 this a letter to you from Mr. Gross and 22 Mr. Williams responding to the preliminary results 17952 1 of the examination and, in particular, to some of 2 the exceptions that you had delivered to them as a 3 result of the examination? 4 A. Yes, it is. And if you will notice, in 5 the right-hand corner, you have an identification 6 of correspondence which is not on the other 7 document that you provided. 8 Q. Now I would like you to look at 9 Exhibit B3979. Is this an agenda of a meeting 10 with the management of USAT on September 23, 1986? 11 A. Yes, it is. 12 MS. CLARK: And I offer Exhibit B3979, 13 Your Honor. 14 MR. VEIS: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MS. CLARK) At this meeting, the 17 agenda indicates that you were going to give the 18 management of United the highlights of your 19 examination report; is that correct? 20 A. That's correct. 21 Q. And you also stated that you wanted to 22 thank the management and the employees of USAT for 17953 1 their cooperation and assistance during the 2 examination, didn't you? 3 A. That's correct. 4 Q. Now I would like you to turn back, if 5 you would, to the first document that we looked at 6 which is the May 1, 1987 letter. And, again, I'm 7 going to focus you on one of the attachments to 8 that letter which is Mr. Gross' letter to 9 Mr. Selby on July 23, nineteen -- no, I'm sorry. 10 Yes. Let me just start this over. 11 I would like you to look at 12 Exhibit A12175. That was the first document we 13 looked at. And I would like you to look at Page 6 14 of the letter from the board of directors to 15 Mr. Danny Thomas responding to the supervisory 16 letter dated April 16, 1987, concerning your exam 17 report. 18 Do you see Page 6 of the document? 19 A. Yes. 20 Q. And do you see in the last paragraph of 21 that document that the board of directors referred 22 to the date on which United first learned of the 17954 1 double lien situation? 2 Do you see that? 3 A. Yes. 4 Q. And that date is September 25, 1986, 5 correct? 6 A. Right. 7 Q. And was that the date that the -- was 8 that the incident, the double lien situation, to 9 which you were referring when you referred to the 10 explosion of the Couch Mortgage situation? 11 A. No, it's not. 12 Q. That's not the -- the explosion that 13 you were referring to when it was learned that the 14 Couch Mortgage Company had defrauded United and 15 several other of the financial institutions in 16 town, a situation that you referred to as an 17 industry problem in your prior testimony? 18 A. No, it's not. If you go back to 19 July 23rd, the institution was disputing the Couch 20 loans in July. So, this date is prior to -- this 21 is a September date. The issue on Couch was 22 started in July. 17955 1 Q. When was the explosion that you 2 referred to which resulted in you being ordered to 3 leave the field? 4 A. It happened after July. 5 Q. When exactly? 6 A. I don't know the date. You should have 7 a record somewhere. 8 Q. We've just gone through the record. 9 Is there any indication in any of these 10 documents that we have reviewed that you had been 11 ordered to leave the field prematurely? Have you 12 seen one single reference in that entire 13 chronology to you being ordered to leave the field 14 prematurely? 15 A. The record came in as a telephone call, 16 not as a document. I was told that at the time, 17 the situation of Couch was as such, that the bank 18 needed to know all the details of the Couch 19 because it was affecting not just United but other 20 institutions. We were asked to do a cursory 21 review of the rest of the work of the examination 22 and not go into detail and to do everything to 17956 1 finalize what was in process at that time in a 2 summary form and close out the examination. And 3 that is what I did. 4 Q. You did that, did you not, when they 5 told you that it was a situation that was 6 affecting United and all other institutions or 7 many other institutions? 8 That's what you just said a second ago, 9 correct? 10 A. That's correct. 11 Q. And the situation that affected United 12 and all the other institutions was that it was 13 discovered on September 25th, 1986, that Couch 14 Mortgage had sold the same mortgages to more than 15 one purchaser or had given security interest in 16 the same mortgages to more than one purchaser so 17 that the financial institutions did not own or 18 hold the collateral that they thought they did. 19 That was the problem, was it not? 20 A. That's not the problem. The problem is 21 the -- if you go back to the July 25 -- the July 22 memo, United was arguing that those loans was -- 17957 1 were two-for-one swaps. And what was proven in -- 2 after July, when United tried to make the 3 payment -- United first made a payment to bring 4 the loans current. And when United went to the 5 Court to try to file a lien position and found out 6 that other institutions were ahead of them as far 7 as getting that lien claimed, that was the deal 8 that created the situation. United was well aware 9 and had argued with us that for 20 years, in fact, 10 they had been doing that. United was aware of the 11 double selling once they went to the courthouse 12 and found out that they did not have a lien 13 position. That's a documentation problem. 14 Q. Ms. Carlton, we went through the entire 15 chronology of documents where you reported -- 16 MR. VEIS: Your Honor, I don't think 17 anybody has testified that this is the entire 18 chronology. If Ms. Clark is going to represent 19 the few documents that she showed Ms. Carlton are 20 the entire chronology of the examination, I think 21 she has overstated her case; and she's 22 mischaracterizing it quite blatantly. 17958 1 Q. (BY MS. CLARK) Ms. Carlton, we have 2 reviewed a chronology of your communications to 3 your own management and to the association 4 beginning with the August 19th, 1986 interim 5 report, have we not? 6 A. You have selected random documents to 7 try to do that. 8 Q. And there's no reference in any of 9 those documents, is there, to you being ordered to 10 leave the field prematurely? And, indeed, the 11 references are on August 19th, 1986, that you were 12 in the final phases of the examination and that 13 you were still reviewing service corporations, 14 financial analysis, net worth, securities, and 15 classification of assets. 16 As of August 19, 1987, there's no 17 indication that you had been ordered to cease your 18 examination prematurely. You were still going on 19 and reviewing those areas as of that date 20 according to your memo; isn't that correct? 21 A. No. If you look at the 1987 22 examination and compare it to the 1986 17959 1 examination, you will see vast differences in 2 those two examinations. One in which a complete 3 review was done of everything; one in which, in 4 1986, not only did we not complete the exam, we 5 did not -- we only reconciled one quarter's 6 financial information. So, I cannot testify 7 throughout here and say that in any way, the 1986 8 examination was a complete examination following 9 all the guidelines. It was not. 10 Q. Ms. Carlton, my question is more 11 limited. Let me focus you back on the documents. 12 On August 19th, 1986, you reported to Richard 13 Ward -- and I quote -- "We are currently in the 14 process of completing the final phases of the 15 examination. The areas still under review are 16 service corporations, financial analysis, net 17 worth, securities, and classification of assets. 18 The examination will be completed within the month 19 of September." 20 Does it say anywhere in here, 21 Ms. Carlton, that you were going to stop those 22 areas prematurely because you had been ordered to 17960 1 leave the field? 2 Does it say in here that you had been 3 ordered to leave the field? 4 A. No. I communicated with my managers, 5 and they communicated with me. Even with the 6 financial analysis, once we could not reconcile 7 the numbers, we reached an agreement. If you 8 cannot reconcile numbers from '84, '85, and the 9 institution tells you that possibly one quarter is 10 all you can do, we agreed that is what I would do. 11 You would not find records of that either. 12 Q. I'm just trying to establish for the 13 benefit of the Court when it was that you were 14 ordered to leave the field. 15 Let me ask you: On August 29th when 16 you wrote to Robert Creager that "We are currently 17 in the process of completing the final phases of 18 the examination," was there anything in your 19 communication to him that indicated that you had 20 been ordered to leave the field as of that date? 21 MR. VEIS: That's been asked and 22 answered, Your Honor. 17961 1 THE COURT: Well, I don't know if it 2 has. I would like to hear the answer. 3 THE WITNESS: Sir, as an examination 4 team, we had communicated with the partner who was 5 over my assistants and with my management team. 6 Both managers, the partner for the auditors, 7 worked in a role as a manager like my field 8 manager did. They were well aware of the problems 9 that we were having at United as far as not being 10 able to complete certain phases of the exam. We 11 tried to complete it to the extent that we could, 12 that we could prove that they were not meeting 13 minimum requirements and to a point that, using 14 the bad data that we had, we tried to reach a 15 reasonable conclusion. 16 It was a comfort level that my 17 management had. I was directed by them to do the 18 things that I did. Not all the correspondence was 19 not (sic) in writing. We would have telephone 20 calls. We would have meetings. At the time the 21 Couch situation occurred, it came in as a 22 telephone call from the president of the bank in 17962 1 which they were calling to see, "What is going on 2 at United?" 3 At that point, he was saying, "We need 4 to know how much work you have done on Couch. 5 Will you copy everything and provide us that 6 information?" And that's what we did. 7 We had to at least summarize the other 8 work in order to do some type of form of final 9 report, but it was in no way complete. We knew -- 10 my management stated that due to the problems, we 11 would be going back in in a short span of time to 12 wrap up what we had and close it out; and we would 13 start another exam within the next six to 12 14 months, as soon as they could get a handle on 15 things. 16 THE COURT: Do you know what date that 17 was? 18 THE WITNESS: I don't recall the date, 19 no, sir. 20 THE COURT: Was it after or before the 21 August 26 or whatever? 22 THE WITNESS: I know it was after July 17963 1 because the institution had already planned a 2 meeting with Dallas, and it was July when that 3 meeting was planned. So, I know it was sometime 4 after July. 5 THE COURT: That you were told to leave 6 the examination? 7 THE WITNESS: Yes. When all of this 8 took place, yes, sir. 9 Q. (BY MS. CLARK) I think we can probably 10 make some progress if we simply go back through 11 the chronology. I'm trying to assist the Court in 12 figuring out when you were ordered to leave the 13 field because of the Couch explosion; and I think 14 it's pertinent to look at the documents, 15 Ms. Carlton. 16 You were an examiner, and you made a 17 practice of documenting important communications 18 and important developments. So, I think it's 19 relevant to look through the actual documents you 20 wrote at the time to see if we can refresh your 21 recollection about the sequences of events. 22 We've looked at the August 29, 1986 17964 1 memo to Mr. Creager about your interim exam report 2 in which you didn't mention any such order. Let's 3 take a look again at -- 4 THE WITNESS: Your Honor -- 5 Q. (BY MS. CLARK) -- the agenda for the 6 September 11, 1986 meeting. 7 Is there any meeting on this agenda to 8 the fact that you had been ordered to leave the 9 field as of that date? And the exhibit number is 10 B3978. 11 A. What's the number? 12 Q. B3978. 13 A. We do not address administrative 14 problems in the memorandums to the institution. 15 Q. So, there is no indication in the 16 memoranda that you had been ordered to leave the 17 field as of that date because of the Couch 18 problem; is that correct? 19 A. That's an administrative order. 20 Q. It's not in the agenda that you 21 addressed to the management of United, is it? 22 A. No, it's not. 17965 1 Q. And in the letter that you sent to -- 2 the memo that you sent to Mr. Gross and 3 Mr. Williams marked B3983 transmitting the 4 exception sheet, there's no indication, is there, 5 in this document that you had been ordered to 6 leave the field as of that date which was 7 September 11, 1986. Correct? 8 A. No, there's not. 9 Q. Looking at Exhibit A14060, the 10 September 18th letter to you from Mr. Gross and 11 Mr. Williams responding to the exceptions, there's 12 no indication in that letter that they had been 13 advised that you had been ordered to leave the 14 field because of the Couch Mortgage problem, is 15 there? 16 A. What's that document number? 17 Q. It's A14060. 18 A. What's your question. 19 Q. My question is: Is there any 20 question -- there is no indication anywhere in 21 that letter, is there, that the management of USAT 22 has been advised that you have been ordered to 17966 1 leave the field because of an explosion in the 2 Couch Mortgage situation? 3 A. No, there's not. 4 Q. And if you look at the agenda for the 5 September 23, 1986 meeting with management which 6 is marked as Exhibit B3979 -- do you have that 7 document? 8 A. Yes. 9 Q. That's the document that indicates that 10 you were going to give them the highlights of the 11 report. 12 There's no indication on that document 13 that you had been ordered to leave the field as of 14 that date, is there? 15 A. No, there's not. 16 Q. Let's look at one final document in 17 this series. It's Exhibit A14019. It's 18 previously admitted. It's your final interim 19 report. It's Tab 1460A. 20 MR. GUIDO: 1460A? 21 MS. CLARK: Yes. 22 Q. (BY MS. CLARK) And on the last page of 17967 1 that document which is Page 15, at the bottom, you 2 have written that the field work of the 3 examination is complete, have you not? 4 A. Yes. 5 Q. Ms. Carlton, isn't it clear from the 6 record that the explosion of Couch Mortgage to 7 which you referred when you said you were ordered 8 to leave the field happened sometime late in 9 September when United learned about the "double 10 hock" situation and, at that point, you had 11 already presented the final exceptions and you had 12 already had two management meetings to present the 13 results of your examination to United's 14 management? 15 Isn't that what the documents that 16 we've reviewed show? 17 MR. VEIS: Asked and answered. 18 Argumentative. 19 THE COURT: Denied. 20 Q. (BY MS. CLARK) Your answer to that 21 question is? 22 A. No. 17968 1 Q. No? All right. Let's go on to the 2 next question. 3 You testified several times on 4 direct-examination that United's management 5 repeatedly disobeyed or declined to follow 6 directives regarding asset classifications, didn't 7 you? 8 A. Yes. 9 Q. I would like you to look again at the 10 response of United to the preliminary results of 11 an examination that had been presented to them as 12 of September 18th. The document is A14060, and it 13 should be among the documents in front of you. 14 Just one follow-up question on this 15 question of when you were ordered to leave the 16 field. Ms. Carlton, you did complete all of the 17 procedures that were described in the initial 18 scope memorandum from Mr. Eide, did you not? 19 A. With the exception that I did not of 20 which I was directed otherwise, I did not complete 21 all those exceptions. 22 Q. Let's look at your deposition at 17969 1 Page 145 and 146. 2 A. What's those pages again? 3 Q. Page 145 and 46. 4 Ms. Carlton, I was asking you about the 5 scope memorandum from Mr. Eide which was dated 6 May 15th, 1986; and that set forth the minimum 7 procedures that you were directed to complete 8 during the course of your examination. 9 Do you recall that memo we've talked 10 about a couple of times? 11 A. Yes. 12 Q. And I asked you, "Did you complete all 13 of these procedures?" didn't I? 14 A. Where are you? 15 Q. I'm on Page 145. 16 A. Okay. Which item? 17 Q. "Did you complete all these 18 procedures?" 19 MR. SCHWARTZ: Do you have a line 20 number, Counsel? 21 MS. CLARK: The line number is 20. 22 Page 145, Line 20. 17970 1 A. I stated, "I would say yes. If not, 2 they would have been noted in this document or 3 the -- in the work." 4 Q. (BY MS. CLARK) "Work papers." Right? 5 A. "Work papers." 6 Q. Then I asked you, "So, unless there's 7 something in the work papers that reports that you 8 departed from the scope memo, you would conclude 9 that all of these procedures were completed?" 10 And what did you answer? 11 A. "That's correct." 12 Q. So, unless there's something that 13 reports in writing in the work papers that you 14 departed from the scope memo, you would conclude 15 that you completed all the procedures, correct? 16 A. Correct. 17 Q. Now, let's go back to the document 18 marked Exhibit A14060. This is a response to the 19 preliminary results of the examination which had 20 already been communicated to them by 21 September 18th, 1986, correct? 22 A. Yes. 17971 1 Q. And it refers to the second page in the 2 second-to-last paragraph to a letter that they had 3 sent to Mr. Selby about the Couch portfolio and 4 the issue that you had raised as to whether the 5 Couch portfolio was an REO swap, correct? 6 A. Correct. 7 Q. And this letter attaches their comments 8 or, I should say, their responses to the 9 exceptions that had been delivered to them by the 10 September 18th, 1986 memorandum that we reviewed, 11 correct? 12 A. That's correct. 13 Q. Now, let's look at Exhibit A12020, 14 which was the transmittal letter from the 15 supervisory staff to the board of directors 16 regarding the final examination. It's A14020, and 17 it's at Tab 1461. 18 MR. GUIDO: 61? 19 MS. CLARK: Yes, 1461. 20 Q. (BY MS. CLARK) I would like you to look 21 at the first page of that document, Ms. Carlton. 22 In particular, in the first paragraph beginning 17972 1 after the chart showing the various classification 2 numbers. The sentence, in particular, that I'm -- 3 I would like you to focus on is, "You are directed 4 to establish the required reserves in the amount 5 of $3,086,438 reflecting 100 percent of loss 6 classifications." 7 Do you see that directive from 8 Mr. Danny Thomas, senior supervisory agent, to the 9 board of directors in connection with the 10 examination report that you prepared for 1986? 11 Do you see that? 12 A. What page of the report are you on? 13 Q. The very first page of Exhibit A14020. 14 Do you have Exhibit A14020 in front of you? 15 A. Yes. 16 Q. Do you have the first page open to you? 17 A. Yes. 18 Q. Can you please look at the paragraph 19 that begins, "The classifications are detailed in 20 Section H of the report"? 21 A. Yes. 22 Q. And the next sentence says, "You are 17973 1 directed to establish the required reserves in the 2 amount of $3,086,438," correct? 3 A. Right. 4 Q. Now, with respect to the other 5 classifications which are described or discussed, 6 in any event, in the last paragraph saying, "We 7 acknowledge management's comments in subsequent 8 correspondence" -- do you see that paragraph? 9 It's the very bottom paragraph on the first page 10 of the letter. 11 A. Yes. 12 Q. Going over to the next page, Mr. Thomas 13 says -- with respect to the other areas of 14 disagreement including Couch, the classification 15 of $36.8 million of investment real estate as real 16 estate owned, the classification of $25.8 million 17 in condo units at Warwick Towers as nonconforming 18 loans, and the substandard classification of 19 94.3 million in loans due to well-defined 20 weaknesses or because they are slow, with respect 21 to those other four categories of disagreements, 22 what does Mr. Thomas direct the institution to do? 17974 1 A. It directs them to "thoroughly review 2 the examiners' comments on each criticized loan 3 and report and address your arguments both to the 4 comments made by the examiners and any updated 5 information relating to that loan." 6 Q. So, with respect to the other areas of 7 disagreement, the instruction was that they were 8 to provide updated information on criticized 9 assets -- that's the first sentence that you did 10 not refer to -- and thoroughly review the 11 examiners' comments and address your arguments 12 both to the comments made by the examiner and any 13 updated information relating to the loan. 14 That's the direction that management 15 was given with respect to all the other areas of 16 disagreement, correct? 17 A. In the '86 exam, yes. 18 Q. Now let's look at Exhibit A12175. It 19 was previously admitted in evidence, and it is at 20 Tab 1540. 21 Do you have Exhibit A12175 in front of 22 you? 17975 1 A. Yes, I do. 2 Q. That's a letter from the board of 3 directors to Mr. Danny Thomas responding to the 4 letter that he sent on April 16 that we just 5 reviewed, correct? 6 A. Right. 7 Q. Now, look at the second page in the 8 second paragraph under the heading "calculation of 9 net worth." 10 Do you see that paragraph? 11 A. Yes. 12 Q. And what did the board tell Mr. Thomas 13 in the first sentence of the second paragraph of 14 that section? 15 A. "The examination report alleged that 16 USAT failed to meet its minimum net worth 17 requirement as of March 31st, '86, and June 30th, 18 1986. The examination report's findings were 19 based on certain asset classifications with which 20 the field examiner's conclusion is different than 21 those of the association." 22 Q. And what does the first sentence of the 17976 1 second paragraph say to Mr. Thomas? 2 A. "In accordance with your directive, the 3 association has established a specific reserve in 4 the amount of 3 million reflecting 100 percent 5 loss classification." 6 Q. So, the response of United's board of 7 directors to the directive issued by Mr. Thomas 8 was to establish the reserves they were directed 9 to establish, was it not? 10 A. And that was done with the board, not 11 with the examiners on site as you traditionally 12 have with management doing. 13 Q. Now, Ms. Carlton, ultimately, it's the 14 supervisory agent who has the power and authority 15 to direct the establishment of reserves or the 16 classification of assets, is it not? 17 A. It's made a part of the examination 18 process. Once that action is not done in the 19 spirit of cooperation and done with the examiners, 20 then it is done as a directive from supervisory 21 agents. 22 Q. According to the regulation that we 17977 1 looked at yesterday, the ultimate decision on the 2 classification of assets is to be made by the 3 principal supervisory agent or his designee; isn't 4 that correct? 5 A. That's correct. 6 Q. So, in this instance, Mr. Thomas, 7 acting in that capacity, directed the association 8 to establish $3 million in reserves; and they did 9 so, correct? 10 A. Correct. 11 Q. And they directed the association to 12 submit additional information about the other 13 areas of disagreement; and that's what they did, 14 correct? 15 A. Correct. 16 Q. Ms. Carlton, I would like to conclude 17 by asking you some more general questions about 18 the two different examinations that you conducted 19 of United Savings and the conclusions that you 20 reached as a result of those exams. 21 And I would like to start with the 22 examination as of May 27th, 1986, which resulted 17978 1 in a report of examination which was delivered to 2 the association as we've seen in April of 1987. 3 I'm going to ask you, first, some questions about 4 the 1986 examination. 5 Now, I think you've testified that the 6 dominant event in the 1986 examination that 7 overwhelmed the whole process was the Couch 8 Mortgage situation which you described as an 9 industry problem; is that correct? 10 A. At the end, it dominated it. 11 Q. How many institutions were defrauded by 12 Mr. Couch? 13 A. I don't know the exact number. It 14 could have been -- close to 15 or 20 some 15 institutions. I don't know the exact number. 16 Q. So, 15 or 20 different institutions 17 were all defrauded by Mr. Couch's actions in 18 what's been referred to as the "double hocking" 19 process, correct? 20 A. Only United was double hocking. 21 Q. He defrauded other institutions in 22 different ways? 17979 1 A. The practice -- yes. 2 Q. So, that is a problem that affected not 3 only United but the -- Mr. Coach's fraudulent 4 practices actually affected a whole variety of 5 institutions during this 1986 time period. That's 6 why you referred to it in your testimony as an 7 industry problem, correct? 8 A. Correct. 9 Q. Now, you found this examination, this 10 particular examination, to be a very frustrating 11 examination, did you not? 12 A. Not really. It was a challenge. 13 Q. Let me ask you to refer to your 14 deposition at Page 806. 15 Now, do you recall that during this 16 examination, you were doing battle with everybody? 17 A. Correct. 18 Q. And when I asked you why you were using 19 the term "doing battle" to refer to your 20 relationship with the supervisory agent -- well, 21 let me just point you to Page 808. 22 Do you see I'm talking about why you 17980 1 had referred to your relationship with the 2 supervisory agents on this examination as doing 3 battle? And then I'll refer you to a specific 4 question. "Why did you feel that you were doing 5 battle with them? What did you mean when you said 6 you were doing battle with them?" 7 That's on Line 15 of your deposition at 8 Page 806. 9 Do you see that? 10 A. No. 11 Q. All right. Go to Page 806 of your 12 deposition. Are you on that page? 13 A. Yes. 14 Q. Go to Line 15. 15 A. Okay. 16 Q. Now, do you see I asked you, "Why did 17 you feel you were doing battle with them? What 18 did you mean when you said you were doing battle 19 with them?" 20 What did you answer? 21 A. "It was my terminology of the 22 frustration with that examination." 17981 1 Q. So, does that refresh your recollection 2 that you found this to be a very frustrating 3 examination? 4 A. No. The way you're using the 5 terminology is distorting the meaning of the word 6 being used. 7 Q. So, when you said that doing battle 8 with your supervisory agent was just your 9 terminology of the frustration of that 10 examination, you did not mean to say that you felt 11 frustrated during the examination? 12 A. I could be frustrated. That doesn't 13 mean the examination was frustrating. It's the 14 way you're wording it. 15 Q. So, the examination wasn't frustrating. 16 It was just that you were frustrated? 17 A. The people I was dealing with were. 18 Q. I'm sorry. I didn't hear that. 19 A. The people I was dealing with were. 20 Q. So, you felt you were doing battle with 21 everybody, including the supervisory agent, 22 because the people you were dealing with were 17982 1 frustrated. Is that what you're saying? 2 A. No. 3 Q. Let's go on and talk about doing battle 4 with everybody. 5 Didn't you find during this examination 6 that there was -- that this examination was very 7 controversial and there was lots of hostility 8 among the various different groups involved? 9 A. Yes. 10 Q. And you found that the people at United 11 were very adversary and very disagreeable and 12 arrogant in their personality and their management 13 style, correct? That's how you would describe 14 the -- United's management during this 1986 15 examination? 16 A. I don't know whether those are some of 17 the terms that I used unless that's what I said. 18 Q. Well, let me just ask you right now: 19 Did you find in dealing with United's management 20 during the 1986 exam that they were very adversary 21 and very disagreeable and very arrogant in their 22 personality and management style? 17983 1 A. Those are not the terms I would use. 2 Q. Let me ask you to look at Page 805 of 3 your deposition. All right. Let's go up a little 4 bit before to set the context. 5 A. Go where? 6 Q. Let's go up to 804, Line 16. Do you 7 see I asked you, "Did you feel that you were doing 8 battle with someone at that point?" 9 And what did you answer? 10 A. "I was doing battle with everybody." 11 Q. And then I asked, "Really? Who was on 12 the other side of these battles?" 13 And what did you say? 14 A. "Federal Home Loan Bank, supervisory 15 agent, field managers, USAT. You name it. They 16 were on the other side." 17 Q. Then I said, "Okay. Let's start with 18 USAT and work it backward. You felt that you were 19 on the other side of the battle with USAT. What 20 did you mean by that?" 21 And what did you answer? 22 A. "USAT was very adversary in their 17984 1 comments and disagreements on classification and 2 items that had been noted to them in exceptions." 3 Q. And I said, "Okay. Was that unusual in 4 your experience?" 5 And what did you say? 6 A. "You find certain managements that 7 that's their management style just being 8 disagreeable, arrogant. That's some people's 9 style." 10 Q. So, that was your response to my 11 question as to why you felt you were doing battle 12 with United's management during the 1986 13 examination, correct? 14 A. Yes. But as you notice, I did not 15 label that as management. That was as a group 16 management style. 17 Q. But that was your answer to the 18 question as to why you felt you were doing battle 19 with United's management during the 1986 exam, was 20 it not? 21 A. Yes, but I'm trying to clarify. You 22 made the statement a few minutes ago that that's 17985 1 what I said of United's management. It says that 2 certain management, that's their style. I just 3 want the record to reflect that. 4 Q. Now, one of the reasons why you felt 5 you were having battles with your supervisory 6 agent during this examination was that there were 7 disagreements over the ratings that were being 8 given to United as a result of the exam, correct? 9 A. Correct. 10 Q. And you felt that the way this exam 11 unfolded was unique, that you had never been -- 12 that an examination had never been done in that 13 form before, correct? 14 A. Yes. 15 Q. And the reason was that United's 16 management had gotten the president of the Federal 17 Home Loan Bank of Dallas involved in the 18 examination, correct? 19 A. Right. 20 Q. That's what made this examination 21 unique in your experience; isn't that correct? 22 A. That's only one item. 17986 1 Q. Now, part of the problem that created 2 was that it meant that the supervisory staff got 3 involved in the direct line of communication 4 instead of the field manager, correct? 5 A. Correct. 6 Q. So that information that would 7 ordinarily go through you and up through the 8 examination report instead was going directly to 9 Dallas, correct? 10 A. Correct. 11 Q. Indeed, I think you referred just a 12 moment ago to the fact that on this examination, 13 you got a call directly from the president of the 14 Federal Home Loan Bank, didn't you? 15 A. Yes. 16 Q. And that was Mr. George Barclay, 17 correct? 18 A. Yes. 19 Q. And he called you up, and he asked you 20 for information concerning the Couch Mortgage. He 21 just called you up directly. He didn't go through 22 channels. He just called you up and asked you for 17987 1 information on Couch Mortgage. Right? 2 A. I understand there may have been a 3 conference there where a group of them were 4 together. 5 Q. And when I asked you at your deposition 6 about what information he wanted about Couch 7 Mortgage, you told me he wanted all of the 8 information on Couch Mortgage to go directly to 9 him. Right? 10 A. Or to whoever he had directed it to, 11 yes. 12 Q. Now, this unusual situation where 13 United was defrauded by Mr. Couch, who went to 14 jail -- right? Mr. Couch did go to jail for what 15 he did, correct? 16 A. I don't know. 17 Q. You never heard that Mr. Couch was 18 convicted of criminal offenses and went to jail 19 for the frauds that he committed against the 20 various financial institutions? 21 A. I heard that he was convicted, and I 22 also heard that he was ill. I do not recall the 17988 1 final results of the trial. I know that there was 2 a trial that took place. 3 Q. And you know that he was convicted of 4 criminal offenses, correct? 5 A. I think someone has mentioned that you 6 had said there was a conviction of it. 7 Q. But you never heard he was convicted of 8 a crime for this? 9 A. I don't know the facts of that case. I 10 would not address who was convicted and who was 11 not. 12 Q. Well, putting that aside, this very 13 unusual situation where United was defrauded by a 14 person who was tried criminally for his conduct 15 and where there was an industry explosion of this 16 problem and where the president of the Federal 17 Home Loan Bank of Dallas started communicating 18 directly with the management of the association 19 and started picking up the phone or, in meetings, 20 asking you directly for all the information on 21 that subject, you did not find that helpful to the 22 examination process, did you? 17989 1 A. You do what you have to do based on 2 situations. Different situations reflect 3 different actions, and that's the -- that's the 4 role of an examiner, to be diversified. 5 Q. And to be flexible and to deal with 6 problems as they come along, correct? 7 A. That's correct. 8 Q. And you did your very best to do that, 9 didn't you? 10 A. That's correct. 11 Q. You tried to follow all the procedures 12 and to do the very best job you could in an 13 extremely unusual and difficult situation, didn't 14 you? 15 A. You do what you are directed to do. 16 Q. But you found it frustrating, didn't 17 you? This process, this very unusual process, was 18 frustrating to you, wasn't it? 19 A. That's your favorite word. 20 Q. Would you agree that you found this 21 frustrating? 22 A. No. 17990 1 Q. In the end, you and your superiors in 2 the examination's hierarchy rated United 3 right 3 across the board, didn't you? 4 A. I don't know the -- we rated them -- we 5 gave them ratings. I don't have before me what 6 the numbers were. 7 Q. Let me ask you to look at 8 Exhibit A12105. 9 Can you identify this as a letter from 10 Danny Thomas to Walter Faulk transmitting the 11 report of examination and the rating form for the 12 1986 examination on January 14th, 1986? 13 A. That's correct. 14 Q. And Danny Thomas was at that time area 15 director of examinations, and Walter Faulk was the 16 supervisory agent; is that correct? 17 A. I won't attest to the roles. They were 18 changing back in that time. 19 Q. This appears to be a transmittal of the 20 examination report to the supervisory side of the 21 bank, correct? 22 A. Right. 17991 1 Q. And on the -- 2 MS. CLARK: Oh, I offer Exhibit A12105. 3 MR. VEIS: No objection, Your Honor. I 4 would note that the second two pages are 5 duplicated in the materials under the report of 6 examination for 1986. 7 THE COURT: Received. 8 Q. (BY MS. CLARK) Now, if you'll look at 9 the last -- well, the second page of the document, 10 which is Bates No. 12334, it shows that the field 11 work was completed on October 3, 1986, and that 12 the report was transmitted on January 14, 1987, 13 correct? 14 A. Correct. 15 Q. And here it shows that in the current 16 examination, the examiner-in-charge was Vivian 17 Carlton. And it gives the composite evaluation 18 for the EIC and the DD. 19 The EIC is you. Right? 20 A. Yes. 21 Q. And the DD would be district director 22 of examinations? 17992 1 A. Yes. 2 Q. And both the district director and 3 examiner-in-charge rated the association as 3, 4 correct? 5 A. That's what is stated here. 6 Q. And if we turn over to the next page, 7 there's more detail about the ratings that you 8 gave, correct? 9 A. Yes. 10 Q. And that shows that the ratings that 11 you gave on the MACRO factors were 3 right across 12 the board, correct? 13 A. That's what is stated here. 14 Q. And it shows the district office 15 ratings were 3 right across the board as well, 16 correct? 17 A. This rating reflects Richard Ward's 18 rating in that you see his initials are there and 19 not mine. 20 Q. Now, in response to a question from 21 Mr. Veis, you said something about how -- I think 22 the quote is, "We initially recommended a 4 17993 1 rating." 2 Do you recall that testimony? 3 A. Yes. 4 Q. Who was the "we" to which you were 5 referring in that testimony? 6 A. The examination staff. 7 Q. Now, this document which was 8 transmitted to the supervisory side shows that 9 you, Vivian Carlton, recommended a 3 rating, 10 correct? 11 A. That's the record that is pulled out of 12 the records of the -- beyond the examination 13 staff. 14 Q. Ms. Carlton, I asked you whether this 15 document reflects that you, Vivian Carlton, the 16 EIC, recommended a 3 rating of United across the 17 board. 18 A. No. 19 Q. You did not? 20 A. No. 21 Q. Well, Ms. Carlton, why is it that this 22 document shows that you did recommend a 3 rating 17994 1 right across the board? 2 A. Because that's the record that you have 3 pulled out of the work papers. That's the record 4 that you have pulled with that on it. 5 Q. Ms. Carlton, do you have any reason to 6 doubt the authenticity of this document as a 7 transmittal from the examination staff reflecting 8 the recommendations made by the EIC, Vivian 9 Carlton, and the director of the district office, 10 both of which show 3 right across the board on the 11 MACRO ratings? 12 A. As I've said before, that reflects the 13 rating that was assigned by the field managers and 14 transmitted to Dallas and the area director 15 transmitted to Dallas. That does not reflect the 16 recommendation that came from the examiners. 17 Q. Well, Ms. Carlton, there's a separate 18 line here for you and for the district office. 19 Doesn't this reflect that you gave it a 3 and, 20 separately, the district office also gave it a 3? 21 A. As you will notice, my signature is not 22 there. As they file the ratings -- you will see 17995 1 other sheets where Neil signed off on his rating 2 and provided justification for any changes that 3 may take place. 4 Q. Now, Ms. Carlton, do you remember that 5 during your deposition, we talked about this 6 subject? And you testified that you and Richard 7 Ward discussed this; and he directed that you put 8 3 down as the rating, even though you felt it 9 should be a 4? 10 Do you remember that testimony? 11 A. He reflects the final rating. Your 12 question was: Is that my rating? If you check 13 your question that you asked. 14 Q. Well, you don't remember testifying 15 that it was directed to you that you put down a 3 16 even though you felt it should be a 4? You don't 17 remember that testimony? 18 A. Yes, I remember that testimony. That's 19 not the question that you asked me. 20 Q. So, let's find out what actually 21 happened here. 22 It is your testimony that you felt it 17996 1 should be a 4 but that you were directed by 2 Mr. Ward to put a 3 next to your name? 3 Is that your testimony? 4 A. That's correct. And the report went up 5 to Dallas with that on it. 6 Q. Now, you let the report go forward with 7 a 3 on it, didn't you? 8 A. As a part of the examination process, 9 the field manager had that authority to do that; 10 and that's the way the report goes. The 11 supervisory agent then has the -- as a part of the 12 examination process also, the field managers and 13 area directors' ratings can be overrode by the 14 supervisory agent. So, it's a chain of oversight 15 in review ratings that you can have differences in 16 ratings. 17 Q. But Ms. Carlton -- 18 A. That's a part of the process. 19 Q. I'm sorry. Are you finished? 20 A. Yes. 21 Q. Ms. Carlton, there's a separate line 22 item on this official form for the 17997 1 examiner-in-charge. Mr. Ward has his own line 2 here. There's a separate item that's supposed to 3 reflect the rating of the examiner-in-charge. 4 Didn't you protest the fact that -- in 5 an official recommendation from the examination 6 side to the supervisory side in this very 7 important examination, didn't you protest the fact 8 which, as you've testified, that you actually 9 wanted -- wanted to put a 4 rating and somebody 10 had forced you to put down 3 against your will? 11 A. The supervisory agent was well aware 12 with my disagreement of the rating of the 13 institution. 14 Q. Nevertheless, you let this go forward 15 in an official recommendation to be used in the 16 agency with a number that was false, correct? 17 A. I did not have the authority to make 18 that difference. 19 Q. Did you record your protest of this 20 false document being submitted to the supervisory 21 staff in any written form? 22 MR. VEIS: I object to the 17998 1 characterization as a false document. 2 MS. CLARK: I believe the witness 3 agreed with that in the prior question. 4 Q. (BY MS. CLARK) Did you record your 5 protest for this document containing false 6 information to go forward as an official record in 7 the supervisory process anywhere in writing? 8 A. I think that it -- it was somewhere in 9 writing, either in a form -- of the disagreement 10 on that rating. 11 Q. Where? 12 A. I don't know exactly where. 13 Q. Well, where do you remember it was? 14 A. I recall that it was in writing. One 15 thing, it was in a performance review. The issue 16 was addressed. 17 Q. A performance review of your 18 performance? 19 A. Correct. 20 Q. Where else? Where did you record your 21 protest of this document going forward with false 22 information about your rating of the association? 17999 1 A. It was communicated with Neil. And I 2 won't necessarily say it was in writing, but it 3 was communicated to the supervisory agent. 4 Q. And that's what you're referring to 5 when you said you were doing battle with Neil, 6 correct? That you were talking to him about how 7 you just didn't like the rating that was going 8 forward, correct? 9 A. That was not a battle with him. 10 Q. All right. Ms. Carlton, did you not 11 protest in writing. So, as best you can recall 12 right now, you did not make any written record of 13 your protest of this document going forward the 14 way it was, correct? 15 A. Not that you will find in the 16 examination report. 17 Q. Or anywhere else, correct? 18 A. It's a part of my performance review 19 somewhere in the system, but I don't know where 20 that is. 21 THE COURT: We'll take a short recess. 22 . 18000 1 (Whereupon, a short break was taken 2 from 10:35 a.m. to 10:56 a.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Ms. Clark. 7 Q. (BY MS. CLARK) Ms. Carlton, after the 8 recommendation for ratings and the examination 9 report left the examination's branch, it went to 10 Neil Twomey on the supervisory side of the Federal 11 Home Loan Bank of Dallas; and Mr. Twomey 12 ultimately downgraded the rating to a 4 instead, 13 did he not? 14 A. Yes. 15 Q. But the examination side never changed 16 its 3 rating, did it? 17 A. Once the actual report leaves, it's no 18 longer in our hands. We move on to the next exam 19 at that point, and it's up to them to make the 20 final decisions. 21 Q. Let me ask you to look at 22 Exhibit A14058 which is in the record at Tab 1488. 18001 1 This is the scope memo from Mr. Cooper to you 2 dated October 23, 1987. 3 Do you have the document in front of 4 you? 5 A. Yes. 6 Q. Now, do you see that when Mr. Cooper 7 wrote to you in October 1987 regarding the scope 8 of the next examination which was to begin to 9 November 16, '87, he showed to -- the last 10 examination date was 5/21/86 and that the rating 11 at that examination was a 3. 12 Do you see that? 13 A. Yes. 14 Q. And let me also ask you to look at 15 Exhibit A14073 which is that very thick document. 16 It's the 1988 report of examination. It's the 17 report of examination as of November 16, 1987. 18 I misspoke. I'm sorry. The exhibit 19 number is A14073, and I direct your attention to 20 the Bates Page OW077256. 21 A. (Witness reviews the document.) 22 Q. I believe you've testified about this 18002 1 page on direct-examination. I would like to draw 2 your attention to the central column on this 3 schedule which shows the rating for the prior 4 examination of USAT as of May 27, 1986. 5 And what does this schedule show was 6 the rating at the prior exam? 7 A. A 3. 8 Q. Now, ultimately, the 1986 exam report 9 was completed; and it was delivered to the United 10 board, correct? 11 A. Right. 12 Q. And as it went out in its final form, 13 it did include your finding of a net worth 14 deficiency, didn't it? 15 A. Correct. 16 Q. And it did include your findings on the 17 books and records deficiencies, didn't it? 18 A. Correct. 19 Q. And the final report also included your 20 classifications of major loans, correct? 21 A. Correct. 22 Q. And when Mr. Thomas, the senior 18003 1 supervisory agent, sent this report to the United 2 board with his April 16, 1987 supervisory letter 3 which we reviewed before the break -- that's 4 Exhibit A14020 -- Mr. Thomas advised the board of 5 United that they were to meet in the Dallas office 6 and that "a supervisory document to address our 7 concerns will be presented at the meeting." 8 Do you recall that? 9 A. No. Which document is that? 10 Q. Let's look then at A14020 again. I'm 11 going to direct your attention to the second page 12 of Exhibit A14020, the concluding paragraph. 13 Do you see that Mr. Thomas advises the 14 board of directors of United that they are 15 requested to attend a meeting at the Dallas office 16 of the Federal Home Loan Bank on May 18th and that 17 "a supervisory document structured to address our 18 concerns will be presented at the meeting"? 19 Do you see that? 20 A. Correct. 21 Q. Now, ultimately, you are aware, are you 22 not, that no supervisory agreement was required of 18004 1 United, correct? 2 A. I don't know exactly what supervisory 3 actions were taken. That's handled at the 4 supervisory level. 5 Q. Well, don't you recall, Ms. Carlton, 6 that although given your finding of net worth 7 deficiency, the supervisory agent had the power to 8 impose certain restrictions on United as Mr. Veis 9 elicited from you in your direct-examination that, 10 in fact, the supervisory agent ultimately decided 11 against imposing any such restrictions and, 12 instead, required United to undergo third-party 13 review of its books and records and its high-yield 14 bond portfolio. 15 Do you recall that? 16 A. I recall the third-party review. 17 Q. You testified in your 18 direct-examination that at some point prior to the 19 November 1987 exam, you were called into a meeting 20 and informed that Grant Thornton had been engaged 21 to conduct a review of United's books and records 22 and that it was also disclosed to you at that time 18005 1 that Prudential-Bache was to conduct a review of 2 United's high-yield bonds. 3 Is that your recollection? 4 A. Yes. 5 Q. And when was that meeting? Do you 6 recall? 7 A. It was prior to the '87 exam. 8 Q. Who attended the meeting? 9 A. You had representatives from the 10 institution. You had representatives from 11 supervision and representatives from the 12 examination staff and myself. 13 Q. Now, you also testified on 14 direct-examination that the report that was 15 prepared by Grant Thornton as a result of its 16 third-party review confirmed your examination 17 findings. 18 Do you recall that testimony? 19 A. Yes. 20 Q. Let me show you what's been marked as 21 Exhibit B1791. 22 Is this a communication from Grant 18006 1 Thornton to Michael Crow dated October 12, 1987, 2 reporting on Phase 1 of the Grant Thornton 3 third-party review? 4 A. Right. 5 MS. CLARK: Your Honor, I offer 6 Exhibit B1791. 7 MR. VEIS: No objection, Your Honor. 8 THE COURT: Received. 9 Q. (BY MS. CLARK) Now, isn't it true, 10 Ms. Carlton, that Grant Thornton reviewed United's 11 regulatory filings, the TFRs that you have 12 testified about, and found that only three and a 13 half months after your report was issued, United's 14 regulatory reporting was basically fine? 15 A. No. 16 Q. All right. I would ask you to look at 17 the letter that addresses the regulatory reports, 18 the quarterly reports. It begins on Page W10289. 19 A. (Witness reviews the document.) 20 MR. VEIS: What -- 21 MS. CLARK: I'm sorry. 849. I'm 22 sorry. 18007 1 Q. (BY MS. CLARK) Now, can you find in 2 this report, Ms. Carlton, the information that you 3 were referring to when you said that the 4 procedures followed by Grant Thornton resulted in 5 a confirmation of your findings? 6 A. As you will note here, they reconciled 7 the June 30 financials. You're talking apples and 8 oranges. We were reconciling two different 9 periods of time. 10 Q. So, what you're saying is that things 11 were okay as of June 30, '87; but that doesn't 12 really reflect on the reports that you yourself 13 were examining in the 1986 exam, correct? 14 A. Correct. 15 Q. Okay. So, really, that's all I was 16 asking you. My question to you was: Isn't it 17 true that on June 30, 1987, which was only three 18 and a half or four months after you completed -- 19 after the examination went forward, things were 20 basically fine according to Grant Thornton with 21 respect to USAT's Federal Home Loan Bank Board 22 quarterly reports? 18008 1 A. I would not say "fine." They had 2 improved a lot of the deficiencies that had been 3 noted earlier. As you recall, we started the exam 4 in '86. We walked out of the exam in late '87. 5 So, during that period, they were correcting 6 deficiencies and correcting -- making corrections 7 to their books and records. 8 MR. VEIS: I think the witness may have 9 misspoken for when she left. I wouldn't want the 10 record to be unclear. 11 Q. (BY MS. CLARK) Ms. Carlton, I think 12 we're perhaps talking past each other. Let me try 13 to formulate the question very clearly for you. 14 My question is: Isn't it true that the 15 Grant Thornton third-party review found that as of 16 June 30, 1987, the quarterly reports filed by 17 United appeared to be reasonable and complete? 18 A. Yes. 19 Q. And didn't Grant Thornton also find 20 that there were no serious deficiencies in USAT's 21 accounting controls for the period August through 22 October of 1987? 18009 1 A. What was your statement again? 2 Q. For the period August through October 3 1987, didn't Grant Thornton find that there were 4 no serious deficiencies in United's internal 5 accounting controls? I would focus your 6 attention, if I might, on Page W102853 in the 7 section headed "conclusion." 8 Do you see in the second sentence of 9 that section, Grant Thornton notes that their 10 review covered the period from August 18, 1987, to 11 October 9th, 1987? 12 Do you see that? 13 A. Yes. 14 Q. And then on the next page, the very 15 first sentence says, "Our review disclosed no 16 conditions that we believe constitute major 17 weaknesses in the system of internal controls." 18 Do you see that? 19 A. Yes. 20 Q. Now, does that refresh your 21 recollection that as of the date of this report, 22 Grant Thornton found that USAT's quarterly reports 18010 1 to the Federal Home Loan Bank Board as well as 2 USAT's system of internal controls contained no 3 major weaknesses or deficiencies? 4 MR. VEIS: Your Honor, I believe 5 Ms. Clark is misstating what the paragraph states. 6 The paragraph begins by noting they have tested 7 and evaluated the effectiveness of the controls of 8 the FMS application providing reliable but not 9 absolute assurance control, that the control 10 objectives specified herein were achieved. I 11 believe that that means that the reference to no 12 weaknesses in internal controls relates only to 13 the particular system that they reviewed and not 14 to all internal controls. I think the premise of 15 Ms. Clark's question was that it relates to all 16 internal controls. 17 MS. CLARK: If I made a misleading 18 characterization, I would like to be sure to 19 correct that very clearly on the record. The 20 question I'm asking relates to the internal 21 accounting controls reflecting the -- related to 22 the general ledger, Your Honor; and I think that's 18011 1 an important clarification to make. 2 Q. (BY MS. CLARK) Ms. Carlton, you told 3 Judge Shipe that United's books and records were 4 the worst you had ever seen, I believe, either 5 before or since and that they prevented you from 6 finding out what the true condition of United was. 7 Do you remember that testimony? 8 A. Yes. 9 Q. So, either United made some very, very 10 dramatic changes to its books and records and 11 accounting systems in a pretty short period of 12 time or the books and records were not, in fact, 13 so fundamentally inadequate at the time of your 14 1986 examination as you have testified to at this 15 hearing. 16 Would you agree? 17 A. I would agree that the books and 18 records did not reflect the actual transactions 19 and that the books and records were so -- and you 20 can find in some of the select documents that you 21 have provided where even the institution stated 22 that the further you went back, not only could 18012 1 they not reconcile it, the statement that I made 2 then is true; and the statement is true today. 3 Q. So, Ms. Carlton, your testimony is that 4 United Savings Association of Texas had the worst 5 books and records you had ever seen, so bad that 6 you couldn't tell what the true condition of 7 United was in the middle of 1986 and that they 8 made very, very, very dramatic changes to the 9 point where there were no material weaknesses a 10 year later when the third-party review was 11 conducted. 12 Is that your testimony? 13 A. My testimony is that United was the 14 only examination during my career at that time in 1