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 15 which we -- the records were so that we had to 16 make a statement that we could not reconcile each 17 quarter's work from the previous examination to 18 that current examination. And we only tried to 19 reconcile one quarter's information, and that was 20 March of 1986. That had not happened in any other 21 institution that I was involved in. 22 Q. And a year later when the third-party 18013 1 review was conducted at the direction of the 2 supervisory agent, the finding was that there were 3 no material weaknesses in the system, correct? 4 A. Right. 5 Q. Okay. Let me ask you to look at 6 Exhibit B1588. Tab 1187 is where it's located in 7 the record. 8 Ms. Carlton, this is a document that 9 has been received in evidence. It's a letter from 10 Mr. Claiborne to Mr. Gross dated April 29, 1987. 11 Do you see that Mr. Claiborne is 12 writing to Mr. Gross concerning the findings of 13 Peat Marwick in its audits for the years 1984, 14 1985, and 1986? 15 A. Yes. 16 Q. And was Mr. Claiborne advising 17 Mr. Gross to confirm Mr. Gross' understanding that 18 the management letters submitted by USAT's outside 19 auditors for the years 1984, 1985, and 1986 said 20 that their study and evaluation of United's system 21 of internal accounting controls disclosed no 22 condition that they believed to be a material 18014 1 weakness? 2 A. That's what they state. 3 Q. And that, indeed, United's outside 4 auditors had found no conditions that they 5 believed to be material weaknesses since the 1983 6 audit year, correct? 7 A. Yes. 8 Q. And those were the findings of United's 9 outside auditors as confirmed again in April 1987, 10 correct? 11 A. As you can recall, the restatement was 12 also a material item in which they restated the 13 1986 numbers; and I guess that did happen prior 14 to -- this letter is dated after that time in 15 which they did restate material numbers. 16 Q. Right. And the restatement you're 17 referring to is the incident where United's 18 management had decided not to recognize the gain 19 on sale of mortgage-backed securities and, 20 instead, to defer the gain so that the yield would 21 not be affected and, instead, the outside auditors 22 came in and the examiners and told them that they 18015 1 had to recognize those gains right then. 2 Is that the incident that you're 3 referring to? 4 A. Yes, I am. 5 Q. Now, you also are aware that 6 Prudential-Bache came in to do a third-party 7 review of United's high-yield bond portfolio, 8 correct? 9 A. Yes. 10 Q. And Mr. Veis showed you an internal 11 supervisory document that indicated that 12 Prudential-Bache may not have included all its 13 findings in the written report, correct? 14 A. Correct. 15 Q. And Mr. Veis asked you about that, and 16 you testified that Mr. Twomey told you that 17 Prudential-Bache had found some exceptions that 18 they would not put in writing. 19 Do you recall that testimony? 20 A. Yes. 21 Q. Did Neil Twomey ever tell you that he 22 and Ginger Baugh had followed up on that and had a 18016 1 further conversation with Prudential-Bache about 2 their findings? 3 A. I never asked him such questions. 4 Q. And did Mr. Veis advise you of any such 5 conversation at the time you and he were preparing 6 for your testimony? 7 A. I don't recall. 8 Q. Did you ever hear about any other 9 negative finding, or I should say did you ever 10 hear about any negative finding that 11 Prudential-Bache made that was not included in the 12 written report? 13 A. No. 14 Q. Let's look back at the S memo which was 15 the very first document, I think, that we've been 16 looking at. It's Exhibit T8142. Tab 1450 is 17 where it's located in the record. 18 Ms. Carlton, please look at the fourth 19 page of that document. The Bates page is 20 OW075443. Now, this document, Ms. Carlton, is the 21 so-called S memo. It's dated December 15, 1988, 22 long after you were involved in the examinations 18017 1 of United, correct? 2 A. Right. 3 Q. So, this is long after you would have 4 had the conversation that you testified about with 5 Neil Twomey concerning the Prudential-Bache 6 report, correct? 7 A. Right. 8 Q. Look at the last paragraph before the 9 heading B which refers to the Prudential-Bache 10 report. 11 Do you see that? 12 A. Yes. 13 Q. Now, what the S memo says about 14 Prudential-Bache's findings is the following: 15 "The report noted that the areas reviewed were 16 generally comparable to and consistent with those 17 of most of our other institutional clients 18 investing in securities." 19 Do you see that? 20 A. Yes. 21 Q. There's no reference in that S memo, is 22 there, to any negative findings by 18018 1 Prudential-Bache concerning the high-yield bond 2 portfolio? 3 A. Not in what you read. 4 Q. And this is a document that is intended 5 to summarize the supervisory history of the 6 association in connection with a -- summarize the 7 supervisory history of the association for the 8 Federal Home Loan Bank Board in Washington, D.C, 9 is it not? 10 A. It's selected data. 11 Q. It's a document addressed by the 12 director of regulatory affairs of the Federal Home 13 Loan Bank of Dallas to the actual Federal Home 14 Loan Bank Board, isn't it? 15 A. Yes. 16 Q. And it doesn't have anything in there 17 about any negative findings by Prudential-Bache, 18 does it? 19 A. No. 20 Q. All right. Let's talk a little bit now 21 about the 1987 examination, and we'll be done. 22 Let's start with the 1987 examination 18019 1 report which I believe is in front of you. It's 2 Exhibit A14073. I would like you to look first at 3 the Bates Page OW077256. It's the same page, I 4 believe, that we were looking at before. 5 Are you open to that page? 6 A. Yes. 7 Q. All right. This is the rating page for 8 the 1987 examination, correct? 9 A. Correct. 10 Q. And it shows that the association was 11 given a composite rating of 4 in the 1987 exam on 12 which you were the examiner-in-charge, correct? 13 A. Correct. 14 Q. Now, tell me, what is the rating that 15 you gave to United on management in the 1987 exam? 16 A. A 3. 17 Q. What did you -- how did you rate the 18 capability of executive management? 19 A. A 3. 20 Q. How did you rate their response to 21 supervision? 22 A. A 3. 18020 1 Q. How did you rate their compliance with 2 law and regulations? 3 A. A 3. 4 Q. How did you rate United on the accuracy 5 of its reports to the Federal Home Loan Bank 6 Board? 7 A. A 3. 8 Q. Now, let's look at some of the comments 9 in the report itself; and let's start with 10 Page 77126. 11 Do you see under the heading 12 "experience and background of management"? 13 A. Yes. 14 Q. This is part of the comprehensive 15 review of management that you were instructed to 16 do in the 1987 exam, correct? 17 A. Right. 18 Q. And you said in your report that USAT's 19 current management consists of seven EVPs, 12 20 SVPs, and 54 VPs. 21 Do you see that? 22 A. Yes. 18021 1 Q. What did you say about this group in 2 the next sentence? 3 A. "This group appears to be motivated and 4 skillful in their respective areas." 5 Q. "Motivated and skillful in their 6 respective areas," correct? 7 A. Yes. 8 Q. Turn to Page 5. 9 MR. GUIDO: What is the Bates stamp? 10 MS. CLARK: It is not legible on this 11 copy, but I would guess it must be 77128. 12 Q. (BY MS. CLARK) Take a look at the very 13 last paragraph where it refers to the fact that 14 United had converted to a hybrid savings and loan 15 involving real estate and securities. 16 Do you see that bottom paragraph? 17 A. Right. 18 Q. And what did you say about USAT's 19 employment of personnel in that regard? 20 A. "USAT has employed individuals with 21 experience in marketable securities and real 22 estate development." 18022 1 Q. So, you had indicated that they had 2 employed individuals with experience in the new 3 areas that were being pursued by United; namely, 4 marketable securities and real estate development, 5 correct? 6 A. That's correct. 7 Q. Now, turn to the next page, Page 6 of 8 the document. You say in that first section that 9 United's board of directors have not adopted a 10 formal written business plan, don't you? 11 A. Yes. 12 Q. And then you go on to say that 13 "United's management has adopted what appears to 14 be innovative and nontraditional strategies to 15 ensure the viability of the association." 16 That was your observation, correct? 17 A. Right. 18 Q. But nevertheless, its financial 19 condition was continuing to deteriorate. That was 20 part of your evaluation of management in this 21 report, correct? 22 A. Correct. 18023 1 Q. Let's go to Page 9 for further comment 2 on management and their performance. 3 Do you see the first paragraph before 4 the heading "asset quality," there's a reference 5 to real estate loan documentation deficiencies? 6 A. Right. 7 Q. What do you say about USAT's response 8 to that? 9 A. I say, "Although real estate loan 10 documentation deficiencies continue to exist and 11 are subject to comment in the current examination 12 report, United/USAT has established and 13 implemented policies and procedures to correct the 14 aforementioned reporting deficiencies." 15 Q. So, you're stating in this report that 16 United has implemented policies and procedures to 17 correct real estate loan documentation 18 deficiencies but that they haven't been completely 19 successful in totally eliminating that problem, 20 correct? 21 A. Right. 22 Q. Let's go to Page 15. 18024 1 MR. GUIDO: Do you have a Bates stamp 2 for that page? 3 MS. CLARK: The Bates number on that is 4 OW077138. 5 Q. (BY MS. CLARK) I would like you to look 6 at the second paragraph on that page. I suppose 7 it's the first full paragraph, the one that begins 8 "A review of the association's and UMBS's 9 financial futures and options activity." 10 Do you see that paragraph? 11 A. Yes. 12 Q. I would like you to read to the judge 13 what you say about the issue of the contract 14 registers. The sentence begins "although" in that 15 paragraph. 16 A. "Although the association's records, 17 specifically for its financial futures and options 18 hedging activity, appear to meet the minimum 19 requirements of Section 563.17-4 and 5(f), for 20 contract registers, these records are not being 21 maintained in such a manner which would readily 22 disclose the nature and results of each 18025 1 transaction." 2 Q. So, it is your finding in this report 3 that the association's records for financial 4 futures and options hedging activities appear to 5 meet the minimum requirements of the regulation 6 governing contract registers; is that correct? 7 A. Correct. 8 Q. Turn to Page 20. Do you see the second 9 full paragraph that begins "USAT appears"? 10 A. Yes. 11 Q. Can you tell the judge what was your 12 conclusion in that paragraph? 13 A. "USAT appears to have established 14 adequate policies and procedures as well as 15 secured a competent staff which can conduct its 16 investment securities activity." 17 Q. Okay. And then if you go down to 18 the -- one paragraph beyond where you're talking 19 about the sufficient documentation, tell the judge 20 what your conclusion was as to whether you had 21 received sufficient documentation for the 22 financial futures and options activity. 18026 1 A. Now, where are you? 2 Q. The first sentence of the paragraph -- 3 A. "The examiners were..."? 4 Q. Yes. 5 A. "The examiners were ultimately provided 6 sufficient documentation for the association's 7 financial futures/options activity during the 8 examination. However, these transactions with 9 respect to its hedging activity involved a series 10 of complex circumstances. Therefore, in order to 11 avoid misunderstanding on the part of regulators 12 as to the specific nature of these transactions, 13 the association should devise audit trails and 14 summation reports that will detail its financial 15 futures/options hedging activities in such a 16 manner/format (self-contained) which will 17 facilitate a third-party review." 18 Q. Okay. Thank you, Ms. Carlton. 19 Let's turn to Page 21. Under the 20 operating results MACRO factor, there is a second 21 paragraph that begins "the association appears." 22 Did you report in your report of 18027 1 examination that the association appeared to have 2 a sufficient and qualified management to effect a 3 positive change? 4 Do you see that reference? 5 A. Yes. 6 Q. But you go on to say that "the results 7 thus far have been essentially 'stop gap' measures 8 such as branch sales, investment securities 9 activity, loan sales," and the like. Your first 10 sentence is, "The association appears to have a 11 sufficient and qualified management to effect a 12 positive change"; is that correct? 13 A. Yes. 14 Q. Now, turn to Page 21. I would like you 15 to turn to the third paragraph on Page 21. Do you 16 find that? It begins at December 31, 1987. 17 THE COURT: I think you have the wrong 18 page. 19 MS. CLARK: I'm sorry. I misspoke, 20 Your Honor. It is wrong. Page 22 is the page I 21 would like her to turn to. 22 A. Okay. Which paragraph? 18028 1 Q. (BY MS. CLARK) The paragraph begins at 2 December 31, 1987. 3 A. Okay. 4 Q. Do you see that you are reporting there 5 that despite a positive interest spread, the 6 association's net interest margin was a negative 7 number? 8 Do you see that? 9 A. Yes. 10 Q. And that the negative interest margin 11 was due largely to the decline in interest-earning 12 assets. 13 Do you see that? 14 A. Yes. 15 Q. Now, what is the significance of the 16 fact that they had a positive net interest spread 17 but a negative net interest margin? 18 Do you recall that by any chance? 19 A. When an institution has a negative 20 interest margin, that's the difference between 21 their -- as you recall, United was operating with 22 most of their profits coming in through 18029 1 non-operating items. If a typical institution 2 that's operating without the blessings of 3 non-operating items, the differences between their 4 assets would produce a positive spread between the 5 difference in their assets and liabilities. Due 6 to the interest rate gap differences that the 7 institution had, it would show that they were 8 losing money just based on their normal operation 9 as far as on their mortgages; and that was due to 10 the delinquencies and to the REOs -- repossessed 11 assets they had within their portfolio. 12 Q. So, the problem you're discussing in 13 this report is that they had assets that simply 14 were not producing any income, such as 15 non-performing loans? 16 A. Right. And REO, once you take a 17 profit, you are satisfying that debt, not the 18 individual. 19 Q. So, although they were able to maintain 20 a positive net interest spread on their 21 investments, the problem was they didn't have 22 enough assets that were performing and generating 18030 1 income; and that produced a negative net interest 2 margin. That's what you're talking about here, 3 isn't it? 4 A. Correct. 5 Q. Now, if you look at Page 23, you will 6 see a reference to United's cost of funds. Do you 7 see in the second and third paragraphs that you 8 talk about the amount of interest or the rate of 9 interest that United was paying on its other 10 borrowings, including reverse repos, and comparing 11 that or -- which is 8 percent. And then it says 12 the regular interest-bearing deposits were costing 13 United 8.1 percent. 14 Do you see that? 15 A. Correct. 16 Q. So, this indicates that the reverse 17 repo financing was available to United at around 18 8 percent and the traditional interest-bearing 19 deposits were costing just a tiny little bit more, 20 8.1 percent. 21 Is that what you're reporting? 22 A. Yes. 18031 1 Q. Okay. Turn to Page 28. There's a 2 section on United MBS Corporation, and I would 3 like you to focus on the third paragraph of that 4 question in the last sentence. 5 What did you report about the 6 profitability of United MBS Corporation? 7 A. "UMBS is operating profitable at 8 December 31st, 1987, with a year-to-date net 9 income of 37 million rounded." 10 Q. Okay. Now, that's what you reported, 11 despite the fact that your own work papers show 12 that you were aware of a mark-to-market negative 13 position of United MBS during this period, 14 correct? 15 A. Restate that. 16 Q. Do you recall yesterday we looked at 17 some of your work papers which reflected United's 18 internal assessment of its subsidiary United MBS 19 and that those schedules showed a mark-to-market 20 negative number, a mark-to-market loss? 21 Do you recall that? 22 A. Yes. 18032 1 Q. So, in your report of examination, 2 despite your knowledge that there was a negative 3 mark-to-market position in that subsidiary, you 4 still reported that United MBS was operating 5 profitably at December 31, 1987, correct? 6 A. Yes. 7 Q. Okay. Let's go to United's response to 8 this examination. It's Exhibit B3974. 9 Ms. Carlton, this is a document 10 submitted -- well, let me just -- Exhibit B3974, 11 is this United Savings Association of Texas' 12 response to the report of examination as of 13 November 16, 1987? 14 A. (Witness reviews the document.) 15 MR. VEIS: Your Honor, I would like to 16 simply note for the record that the Bates number 17 on Exhibit B3974 indicates that, I believe, it 18 came from the record of United Savings and not 19 from the supervisory files so that -- I have no 20 doubt that somewhere in the supervisory files, 21 there is a copy of it. But this is not the one 22 that actually went to the -- or is in the files. 18033 1 THE COURT: Okay. 2 A. It appeared to be with other documents 3 attached at the back of the -- a response plus 4 attachments. 5 Q. (BY MS. CLARK) Okay. And the 6 transmittal letter is from Mister -- from the 7 board of directors of United Savings Association 8 of Texas by Art Berner, and it's directed to 9 Mr. Neil Twomey. And it's dated September 8th, 10 1988, correct? 11 A. Correct. 12 Q. And then there's a detailed response to 13 the report which has, at the very end, lots of 14 exhibits, exhibits from A through -- well, lots of 15 exhibits. And the last Bates number is US3002617, 16 correct? 17 A. Yes. 18 Q. Now, Ms. Carlton, if you would want to 19 find out all these many years later what United's 20 response was to your report of examination on any 21 particular problem or concern that you raised, you 22 could go, as one source, to look at this document 18034 1 to see what United had to say about your 2 criticisms, correct? 3 A. Correct. 4 MS. CLARK: And Your Honor, I would 5 offer B3974. 6 MR. VEIS: No objection, Your Honor. 7 THE COURT: Received. 8 Q. (BY MS. CLARK) Now, we've seen that you 9 gave a 3 rating to management in the 1987 exam, 10 correct? 11 A. Right. 12 Q. You have testified that a rating of 3 13 was not a good rating, haven't you? 14 A. Right. 15 Q. But you would not want to suggest that 16 a 3 rating was a bad rating, would you? 17 A. It's not one that I would want as a 18 management. 19 Q. But you would not testify that a 3 20 rating was a bad rating, would you? 21 A. It -- it -- it directs certain 22 supervisory actions to take place. 18035 1 Q. Well, Ms. Carlton, wouldn't you agree 2 that, in fact, particularly in those very 3 difficult economic conditions in Texas at the 4 time, that a 3 rating would be considered at least 5 average, if not better? 6 A. Yes. And it was given to United 7 because you had just had a management change; and 8 whenever you have a management change, we allow 9 that new managers -- we identify the critical 10 areas, but we also allow that new management team 11 an opportunity to -- to provide -- to prove 12 themselves. 13 Q. But the rating that you gave, 14 Ms. Carlton -- and I'm not going to take time to 15 go back over them one by one. 16 But the rating that you gave under each 17 of the factors under "management" reflected your 18 assessment of management at that time. That's 19 what it meant for you to give that rating at that 20 time, correct? 21 A. That's correct. 22 Q. Now, you have also testified that 2 was 18036 1 a good rating, correct? 2 A. Yes. 3 Q. In the context of discussing why it was 4 that United hadn't had an examination for three 5 years by the time you showed up in 1986, the 6 reason was that 2 was a good rating that indicated 7 essentially no problems at the association, 8 correct? 9 A. No material problems. 10 Q. So, if 2 means good, no material 11 problems, 3 really can't be below average, can it? 12 It has to be at least average, correct? 13 A. You have -- it's standard definition 14 language. The wording that you are using would 15 change those definitions. 16 Q. Well, you would agree with me that a 3 17 rating for management of United in 1987, given the 18 difficult economic circumstances in Texas at the 19 time, was at least average, if not better? 20 A. I would say average, yes. 21 Q. And in this case, you rated management 22 a 3 even though the other MACRO components were 4 18037 1 or 5, correct? 2 A. Correct. 3 Q. And that's despite the general practice 4 that management cannot be rated any higher than 5 the other MACRO components which you have 6 testified to in your direct-examination, correct? 7 A. As I stated, you had a new -- whenever 8 you have a change of control in management, you 9 have other factors that impact that rating as so 10 reflected in the rating that was assigned to 11 United. 12 Q. And you've also testified that the 13 ratings that you gave to management and each of 14 the components of management reflected your very 15 best judgment as to how the management in place at 16 that time should be rated, correct? 17 A. Correct. 18 Q. Let me show you one final document. 19 Not quite final but the one we're going to talk 20 about substantively where you actually recorded 21 your evaluation of some of the individual members 22 of management. Let me show you Exhibit A11039, 18038 1 and that was previously admitted in evidence at 2 Tab 1282. And I would like you to have handy the 3 1987 exam report which is A14073. 4 MR. VEIS: I'm sorry. Is this 11039 or 5 29? 6 MS. CLARK: Well, my handwritten 7 exhibit number is 11039. 8 MR. VEIS: Thank you. 9 Q. (BY MS. CLARK) Is this, Ms. Carlton, a 10 memorandum to the work paper files regarding 11 management interviews dated April 14th, 1988? 12 A. Yes, it is. 13 Q. And these are the -- 14 MS. CLARK: I would offer A -- sorry. 15 It's already in. 16 Q. (BY MS. CLARK) These are memos of the 17 interviews of senior management of United as part 18 of the comprehensive management evaluation that 19 you were instructed to do at the end of the 1987 20 exam, correct? 21 A. Yes. 22 Q. And you participated in some but not 18039 1 all of the interviews that are referred to in 2 these pages, correct? 3 A. Correct. 4 Q. But the summaries reflect the result of 5 consultation between you and the people who did 6 the interviews, correct? 7 A. Correct. 8 Q. And you initialed all of them, correct? 9 A. (Witness reviews the document.) The 10 Crow one is not initialed, but I initialed all of 11 them. 12 Q. Okay. Now, look at Page -- Bates 13 Page O129268 -- OW129268. 14 A. Okay. 15 Q. This is a summary of the results of 16 your interviews, is it not? 17 A. Right. 18 Q. And what did you say in that summary? 19 Let's start out with the consensus that you 20 report. 21 A. "The consensus for those persons 22 interviewed appear to be that they inherited 18040 1 substantial problems at their respective arrival 2 dates. They also" -- 3 Q. "Attribute"? 4 A. Okay -- "attribute these problems for 5 the most part to USAT's merger with Houston First 6 American." 7 Q. Why don't I read it. I would be happy 8 to. "They also attribute these problems for the 9 most part to USAT's merger with Houston First 10 American, current economic conditions, as well as 11 some of management's decisions which did not 12 anticipate the depth and breadth of the real 13 estate downturn." 14 Did I read that correctly? 15 A. Yes. 16 Q. Then you go on to say, "However, they 17 all appear to be optimistic, including" -- 18 sorry -- "concerning USAT's current preparedness 19 to resolve its adverse financial posture. The 20 majority of those persons reviewed stated that a 21 positive change in the economy, participation in 22 the Southwest Plan would be required, and external 18041 1 elements needed to return USAT to a viable 2 financial entity." Correct? 3 A. Yes. 4 Q. And then what do you say in the next 5 paragraph? 6 A. "This group appeared to have a high 7 degree of unity, skill, and motivation in their 8 respective areas." 9 Q. Now, Ms. Carlton, I would like you to 10 turn to Page 5 of the report of examination, which 11 is Exhibit A14073. And do you see there's a 12 paragraph that begins "from discussions with 13 senior management"? 14 Do you see that paragraph? 15 A. Yes. 16 Q. Now, if you look at the first page of 17 your interview report, you'll see there's a 18 reference to a discussion with Mr. Jenard Gross. 19 Do you see that? 20 A. Yes. 21 Q. That's the first page of 22 Exhibit A11039. It says, "Mr. Gross" -- this is 18042 1 the second paragraph I'm reading. "Mr. Gross 2 indicated that USAT has been plagued with internal 3 as well as external problems since his arrival in 4 1983." 5 Do you see that? 6 A. Yes. 7 Q. And does that appear to be the source 8 of your comment on Page 5 of your final report of 9 examination which is A14073; that is, the comment, 10 "USAT has been plagued with internal as well as 11 external problems since their arrival"? 12 A. Yes. 13 Q. Now, let's go back to the page we were 14 looking at in Exhibit A11039 that summarizes the 15 consensus. That's Bates No. OW129268. 16 And do you see there's a sentence that 17 says, "They attribute these problems for the most 18 part to USAT's merger with Houston First American, 19 current economic conditions, as well as some of 20 management's decisions which did not anticipate 21 the depth and breadth of the real estate market," 22 correct? 18043 1 A. Right. 2 Q. Now, does that appear to be the source 3 of the second sentence in your report of 4 examination on Page 5? That's Exhibit A14073 at 5 Page 5. 6 A. It's a part of it, yes. 7 Q. Now, do you see that at the very end of 8 that paragraph on Page 5 of your report of 9 examination, it says that, "They", referring to 10 senior management -- "They attribute these 11 problems to USAT's merger with Houston First 12 American, prior management's decisions in granting 13 real estate loans without the anticipation of the 14 depth and breadth of the real estate market 15 downturn," but then goes on to say that "They also 16 attribute the problems to poor underwriting 17 standards, the lack of policies and procedures, 18 and finally that senior management attributed the 19 problems to an inefficient management team"? 20 Do you see that in the paragraph that 21 we are looking at on Page 5 of your final exam 22 report? 18044 1 A. Yes. 2 Q. Now, that is nowhere to be found in 3 this summary of what senior management told you 4 during the interviews, is it? 5 A. Not on this page here, no. 6 Q. It's not on this page or anywhere in 7 this written summary of your interviews with 8 senior management as part of your management 9 evaluation, is it? 10 A. No. 11 Q. Does this appear to be -- well, this is 12 pretty strong language that you say in here to say 13 that senior management attributes its problems to 14 poor underwriting standards, lack of adequate 15 policies and procedures, and inefficient 16 management team. 17 That's a pretty strong statement to put 18 in the mouths of senior management, isn't it? 19 A. It's not put in the mouths of senior 20 management. 21 Q. Now, Ms. Carlton, the sentence begins 22 "they attribute these problems," doesn't it? 18045 1 A. Yes. 2 Q. And I believe this is a sentence that 3 Mr. Veis specifically focused on in his 4 direct-examination of you. 5 Do you recall that? 6 A. Right. 7 Q. So, you put in your final examination 8 report that senior management attributed their 9 problems to poor underwriting standards, lack of 10 adequate policies and procedures, and an 11 inefficient management team which is nowhere to be 12 found, anything like it, in your actual record of 13 the interviews you conducted, correct? 14 A. Right. 15 Q. Does this appear to be, Ms. Carlton, an 16 example of something that got edited into your 17 document sometime after the report left your 18 hands? 19 A. I don't see it as that. I see it as -- 20 you know, they did have a management team change. 21 The report reflects poor underwriting, and the 22 report reflects lack of policies and procedures 18046 1 which were presented to management in meetings in 2 which you see documentation where management 3 corrected these deficiencies even to the tune of 4 switching management. 5 So, I see it as somewhere during the 6 discussions. Maybe not in the actual interviews 7 themselves as this information being reflected by 8 management. 9 Q. Ms. Carlton, this paragraph as we have 10 seen is pretty much -- I mean, most of this 11 paragraph seems to be a cut and paste from your 12 interview memorandum, correct? 13 A. Right. But we also evaluate management 14 based on items other than just the actual 15 interviews themselves. This was just documenting 16 the interviews. 17 Q. And there's no evidence whatsoever to 18 support your statement in this final report of 19 examination that management told you that the 20 problems were the results of poor underwriting, 21 lack of adequate policies and procedures, and an 22 inefficient management team? 18047 1 There's no evidence in your actual work 2 paper memorandum that you were told that or 3 anything like that by the management team as you 4 say in your report of examination, correct? 5 A. It's not in this memo -- the interview 6 memo, no. 7 Q. Let's look at what you and your staff 8 actually did conclude about the members of senior 9 management as set forth in your work paper 10 memorandum of those interviews. 11 And I'll ask you, first, to turn to the 12 management interview of Mr. Art Berner. We're now 13 going to address the individual members of 14 management. We've seen that -- 15 MR. GUIDO: Can I have a Bates stamp 16 number? 17 MS. CLARK: Yes. OW129269. 18 Q. (BY MS. CLARK) We are focusing on a 19 portion of Exhibit A11039 that's going to address 20 the individual members of management. 21 We've seen that the general conclusion 22 was that the group appeared to have a high degree 18048 1 of unity, skill, and motivation in their 2 respective areas; but I want to now focus on the 3 individual evaluations that you performed. 4 With respect to Mr. Art Berner, you 5 concluded, did you not, that Mr. Berner indicates 6 initiative, has confidence, assumes 7 responsibility, and appears to be decisive. 8 Isn't that what this reflects? 9 A. Yes. 10 Q. And didn't you also conclude that he 11 was knowledgeable about USAT's procedures as 12 indicated in this document? 13 MR. VEIS: Your Honor, I think that 14 mischaracterizes that. I believe the word 15 "appears to be" precedes that observation. 16 MS. CLARK: Your Honor, I'm referring 17 to the checked item "knowledge of USAT's 18 procedures." 19 We'll get to his knowledge of existing 20 laws and regulations in just a moment, Mr. Veis. 21 MR. VEIS: I'm sorry. 22 A. Yes. 18049 1 Q. (BY MS. CLARK) Can you tell me what you 2 meant by the check next to "organization of 3 efforts"? 4 A. "Organization of efforts" meant that 5 when you evaluate a management team, you see if 6 they know, from top to bottom, what is taking 7 place at the institution as far as knowing the 8 organization's structure of the bank. 9 Q. And the check here indicates that you 10 felt that Mr. Berner was able to do all of those 11 things or was doing all those things? 12 A. Yes. 13 Q. Now, why don't you read for us the 14 other evaluation comments that Mr. Veis wanted to 15 talk about. 16 A. This appears to -- the statement is 17 that he appears to be knowledgeable of existing 18 laws, regulations, as well as highly influential, 19 USAT's executive managerial, some decisions. It's 20 not totally clear. 21 Q. So, that's the evaluation of 22 Mr. Berner. 18050 1 Let's look at Mr. Jackson, who is the 2 next person in this document. Did you conclude 3 that Mr. Jackson -- by the way, do you remember 4 that Mr. Jackson was head of the -- do you 5 remember what his position was? 6 A. It states here he was funds 7 procurement, savings operation, branch operations. 8 Q. So, Mr. Jackson was another member of 9 the management team; and you concluded that he had 10 initiative and confidence. He assumed 11 responsibility and appeared to be decisive, 12 correct? 13 A. Correct. 14 Q. And that he was knowledgeable about the 15 organization and USAT's procedures; and he 16 recognized weaknesses in internal control systems, 17 correct? 18 A. Yes. 19 Q. And what did you say in the other 20 evaluation comments about Mr. Jackson? 21 A. "Mr. Jackson has prior experience with 22 American Savings started California. It appears 18051 1 to be" -- 2 Q. Does it say "he appears to be"? 3 A. Okay. "He appears to be enthusiastic, 4 knowledgeable in the area of funds procurement, 5 and a balancing effort or effect missing for 6 USAT." (sic) 7 Q. Does that say "and the balancing effort 8 necessary for USAT"? 9 A. It could be "necessary." 10 Q. Okay. Let's skip Mr. Chilton. I don't 11 think his name has come up. How about -- let's 12 talk about Mr. Stodart. 13 What was his position at the 14 association? 15 A. Monitor the junk bond portfolio. 16 Q. All right. Did you conclude in your 17 management evaluation in the 1987 exam that 18 Mr. Stodart indicated initiative, had confidence, 19 assumed responsibility, and appeared to be 20 decisive? 21 A. Right. 22 Q. And did you conclude that he was 18052 1 knowledgeable about the organization and its 2 procedures and recognized weaknesses in internal 3 control systems? 4 A. Right. 5 Q. Can you tell us what the other 6 evaluation comments with respect to Mr. Stodart 7 were? 8 A. "Appears to understand the junk bond 9 industry, appears to control" -- something -- "a 10 trader's" -- something -- "to universe volume and 11 work within existing parameters established by 12 executive management." 13 Q. Do you think it might say, "Appears to 14 control a trader's desire to increase value and 15 work within existing parameters established by 16 executive management"? 17 Does that appear to be what it says? 18 A. "Trader's desire." 19 Q. Well, the part we can make out anyway 20 indicates that you concluded that he was working 21 within existing parameters established by 22 executive management, correct? 18053 1 A. Right. 2 Q. Now, let's turn to Mr. Bruno. What was 3 his role at USAT? 4 A. I can't see -- his role, I know, was in 5 the securities. 6 Q. Does it say "manager of mortgage bond 7 securities"? 8 A. Are you on 273 for Bruno? 9 Q. Yes, I am. 10 A. Mine is not legible. 11 Q. Here. Let me give you mine. I may 12 have a better copy. Oh, yours is -- yes. You may 13 have a bad copy. We'll make sure that this is 14 corrected in the record. 15 MS. CLARK: Your Honor, do you have -- 16 do you have a copy that shows Mr. Bruno's 17 position? 18 THE COURT: No. It is somewhat cut 19 off, including his name. 20 MS. CLARK: All right. Your Honor, may 21 I have permission to substitute a proper copy of 22 that particular page in the exhibit? 18054 1 THE COURT: Yes. 2 MS. CLARK: All right. 3 Q. (BY MS. CLARK) Let's just look at my 4 copy for now. We'll read it into the record. 5 MR. VEIS: May I join counsel, 6 Your Honor? 7 THE COURT: Yes. 8 MS. CLARK: Please. 9 Q. (BY MS. CLARK) What was Mr. Bruno's 10 position? 11 A. He was manager of mortgage-backed 12 securities. 13 Q. And did you conclude that Mr. Bruno 14 indicated initiative, had confidence, assumed 15 responsibility, and appeared to be decisive? 16 A. Yes. 17 Q. And did you make -- reach any 18 conclusion at that time as to his knowledge of the 19 organization and USAT's procedures? 20 A. We didn't note anything on those two 21 areas. 22 Q. But you did note that he recognized 18055 1 weaknesses in the internal control systems; is 2 that correct? 3 A. That's correct. 4 Q. What were your other evaluation 5 comments with respect to Mr. Bruno? 6 A. He appears to be very familiar with 7 industry, mortgage-backed securities, appears to 8 be willing to work/operate within parameter" -- I 9 don't know the word there -- "by executive 10 management and needs more time to" -- 11 Q. "Assess Mr. Bruno's performance"? 12 A. Yes. 13 Q. And lastly, the second sentence, does 14 that appear to be saying that he -- "Mr. Bruno 15 appeared to be willing to work within parameters 16 established by executive management"? 17 Does that appear to be what it says? 18 A. Yes. 19 Q. Let's look at Mr. Bruce Williams. He 20 has appeared as a witness in this case. 21 What was Mr. Williams' function at 22 United? 18056 1 A. Is that on 274? 2 Q. Yes, it is. 3 A. "Williams, senior VP"? 4 Q. Yes. 5 A. Okay. On that one, his duties are four 6 years of control and monitoring profits and loss 7 for each department. 8 Q. And did you conclude that Mr. Williams 9 indicated initiative, had confidence, assumed 10 responsibility, and appeared to be decisive? 11 A. Yes. 12 Q. And that he was knowledgeable about the 13 organization and its procedures and recognized 14 weaknesses in internal control systems? 15 A. Yes. 16 Q. Let's turn to Mr. Michael Crow, who is 17 one of the respondents. What was his function or 18 position at United? 19 A. He was EVP and chief financial officer. 20 Q. Did you conclude that Mr. Crow 21 indicated initiative, had confidence, assumed 22 responsibility, and appeared to be decisive? 18057 1 A. Yes. 2 Q. And did you conclude that he was 3 knowledgeable about the organization and its 4 procedures and recognized weaknesses in internal 5 control systems? 6 A. Yes. 7 Q. And with respect to the other 8 evaluation comments, did you note that he spoke 9 candidly about United's reliance on non-operating 10 income since 1985? 11 A. Yes. 12 Q. And did you note that he instituted 13 many of the existing accounting controls and 14 appeared to be knowledgeable about United's 15 systems? 16 A. Yes. 17 Q. And did you note that he had 18 implemented the computer conversion system in 19 1984? 20 A. Yes. 21 Q. And did you note that he was 22 responsible for putting together the current 18058 1 senior staff? 2 A. Yes. 3 Q. And did you also note that Mr. Berner 4 felt that the prior mergers -- 5 MR. VEIS: It's Mr. Crow. 6 Q. (BY MS. CLARK) Did you also note that 7 Mr. Crow felt that the prior mergers resulted in 8 USAT's being out of control for a period of time? 9 A. Correct. 10 Q. Now, finally, let's look at Mr. Wolfe 11 who has also come to testify in this hearing. 12 Do you recall what his position was? 13 It's not indicated on your memo, is it? 14 A. I think he was the controller. 15 Q. He was the controller? 16 MR. VEIS: Where is Mr. Wolfe? 17 MS. CLARK: On Page OW129276. 18 MR. VEIS: I don't have that page. 19 Q. (BY MS. CLARK) Did you conclude that 20 Mr. Wolfe indicated initiative, had confidence, 21 assumed responsibility, and appeared to be 22 decisive? 18059 1 A. Yes. 2 Q. And did you conclude that he was 3 knowledgeable about the organization and its 4 procedures and recognized weaknesses in internal 5 control systems? 6 A. Yes. 7 Q. And with respect to the other 8 evaluation comments, did you conclude that 9 Mr. Wolfe had the background to implement 10 executive management policies? 11 A. Correct. 12 Q. And these comments reflected your 13 evaluation of the individual members of management 14 who were included in your interviews, correct? 15 A. Right. 16 Q. Ms. Carlton, I have a couple of 17 document housekeeping matters that I would like to 18 do; and then I will be done. 19 MS. CLARK: Your Honor, I would like to 20 tender a more legible version of the loans 21 reviewed schedule that we previously offered that 22 had been reduced so much, it was awfully hard to 18060 1 read. It's Exhibit A12091, and I'm informed that 2 Mr. Veis regards this as an acceptably-legible 3 version of that document and I'd like to 4 substitute it. 5 MR. VEIS: It's better, Your Honor. 6 There are a few words that can't be made out, but 7 I believe it will suffice. 8 MS. CLARK: If there is a better 9 version in the original work papers, I would 10 appreciate it if you would bring it to our 11 attention; and we might substitute that. 12 MR. VEIS: We will do that. 13 THE COURT: Received. 14 MS. CLARK: I had offered Exhibit B3991 15 yesterday. It was a document that was provided at 16 the end of the lunch hour instead of at the 17 beginning of the lunch hour, and I offered to 18 withdraw it to give Mr. Veis an opportunity to 19 look at it more thoroughly overnight. I would now 20 offer it as a portion of the work papers of the 21 1987 examination of USAT. 22 MR. VEIS: Your Honor, the Bates 18061 1 numbers appear to indicate that it comes from the 2 work papers, although we haven't quite established 3 what exactly it is. We have no objection. 4 THE COURT: Received. 5 MS. CLARK: Then finally, Your Honor, 6 there was a question about whether the handwriting 7 on Exhibit B1136 would be admitted in evidence and 8 that, as you recall, is a copy of the 9 Norwood/United Park Joint Venture agreement that 10 came out of the work papers of the 1986 11 examination. And there are comments written in 12 the margin at various parts of this document. 13 Examples appear on Page 8 and Page 13. 14 MR. GUIDO: Do we have a tab number for 15 this document? 16 MS. CLARK: I'm sure we do. It's 17 B1136. 1554 is the tab number. 18 And I would simply like to bring to the 19 witness' attention Exhibit A12087, which was an 20 exhibit to her deposition as well as to the 21 deposition of Mr. Joseph Huber -- 22 MR. SCHWARTZ: What's the other 18062 1 exhibit? 2 MS. CLARK: A12087. 3 MR. SCHWARTZ: Do we have a copy of 4 that? 5 MS. CLARK: It's in evidence at 6 Tab 1557. 7 Q. (BY MS. CLARK) Ms. Carlton, do you have 8 Exhibit A12087 in front of you? 9 A. No. Should I have it in this stack 10 over here? 11 Q. I'm not sure. It might be easier for 12 me to ask you to look at the document with me, and 13 maybe Mr. Veis would like to join us. 14 MR. VEIS: I have a copy of it. Are we 15 talking about A12087? 16 MS. CLARK: Yes. 17 Q. (BY MS. CLARK) Now, Ms. Carlton, 18 Exhibit A12087 is the exception sheet on the 19 Norwood/United Park loan from the 1986 20 examination, correct? 21 A. Correct. 22 Q. And it was prepared by Mr. Joseph Huber 18063 1 who was the individual on the examination team who 2 took the lead in reviewing the Norwood/United Park 3 loan, correct? 4 A. Correct. 5 Q. I would ask you to look at this 6 document and -- the handwriting on this document 7 and compare it to the handwriting on the 8 Norwood/United Park Joint Venture agreement which 9 is Exhibit B1136. And let's review some of that 10 handwriting together. Let's -- 11 MR. VEIS: Your Honor, I haven't had a 12 chance to look at the handwriting myself. 13 Obviously, Ms. Carlton is not a handwriting 14 expert; and I think any response she might give 15 should be received with that view. 16 MS. CLARK: Your Honor, I believe 17 Ms. Carlton as examiner-in-charge certainly can be 18 asked whether looking at the handwriting and the 19 substance of what is stated on one of the work 20 papers refreshes her recollection as to who it was 21 that made the marginal comments on the document. 22 That's all I'm trying to do is see if they refresh 18064 1 her recollection. 2 A. Do I have that exhibit? 3 Q. (BY MS. CLARK) You should, but maybe it 4 would be easier to share with you. This is B1136. 5 Do you recall that we looked at that 6 yesterday? 7 A. Okay. 8 Q. It is the Norwood/United Park Joint 9 Venture agreement from the work papers. And you 10 will see that, for example, on Page 2 of the 11 document, there's checkmarks in the margin. 12 Do you see that? 13 A. Yes. 14 Q. Checking each of the items listed on 15 Page 3 and 4 -- 16 MR. VEIS: Which document are we 17 looking at? 18 MS. CLARK: We're looking at B1136. 19 MR. VEIS: And the checkmarks were 20 where? Oh, I see it. Thank you. 21 Q. (BY MS. CLARK) And then on Page 5, 22 there's a handwritten note in the margin that 18065 1 says, "Against this provision, conflict of 2 interest. United FC owns 10 percent." 3 Do you see that? 4 A. "Owns greater than 10 percent." 5 Q. "Greater than 10 percent." 6 Do you see that marginal comment? 7 A. Yes. 8 Q. And then on Page 6, there are 9 additional marginal comments in the margin. 10 Do you see that? 11 A. Yes. 12 Q. One of them refers to the fact that 13 "Within 18 months, Norwood must close at least 14 10 million of sales. If not, UFC can remove 15 Norwood as a venturer." 16 Do you see that? 17 A. Yes. 18 Q. That appears to be a summary of the 19 terms that are being reviewed in the document, 20 correct? 21 A. Right. 22 Q. And then the next comment, what does 18066 1 that say? 2 MR. SCHWARTZ: Your Honor, I appreciate 3 the comments earlier about one counsel speaking. 4 I was the person who raised the objection to this 5 document and this handwriting yesterday. The -- 6 if I may raise an objection now continuing on the 7 same line as I had raised yesterday, I would 8 appreciate it. 9 THE COURT: All right. Go ahead. 10 MR. SCHWARTZ: The objection is to 11 Ms. Clark reading into the record what Your Honor 12 has specifically said should not be admitted 13 unless she can identify it. If she wants to 14 direct the witness' attention to specific words, 15 then that's fine. But to stand here and read into 16 the record what's not been admitted, I think would 17 be improper. 18 THE COURT: Sustained. 19 MR. VEIS: We move to strike the 20 previous testimony. 21 THE COURT: Sustained. 22 Q. (BY MS. CLARK) Ms. Carlton, I would 18067 1 like you to review the comments on Page 6 of the 2 documents. We won't read them out loud in light 3 of the judge's order that we can't do that. 4 Do these appear to be the comments 5 about the documents that are being summarized in 6 the margin? 7 A. Yes. 8 Q. And if you turn to Page 12 of the 9 document, you again see that there are comments 10 that are summarizing the terms of this joint 11 venture agreement, correct? 12 A. Correct. 13 Q. Now, I would like you, if you would, 14 looking at Exhibit A12087 and comparing the 15 handwriting as well as the substance of the kinds 16 of comments that have been made in the document, 17 to tell me whether it was your conclusion that 18 these were comments that were noted in the margin 19 of the document during the course of the 20 examiner's review of the United/Norwood loan. 21 Would that be your conclusion as the 22 examiner-in-charge of this examination? 18068 1 MR. VEIS: Your Honor, we object to 2 this. This is a back door way of trying to get 3 those comments into the record when we've already 4 established that no one can identify whose 5 handwriting it is. 6 Asking the witness if they appear to be 7 the comments relating to something in a document 8 that's already in evidence, she's simply trying to 9 get around Your Honor's ruling. The question 10 before the Court is whether or not anyone can 11 identify these handwritten comments as an 12 examiner's or someone else's handwritten comment. 13 If they can be authenticated, then, obviously, we 14 would not object to their admission. 15 Until that has been done, I don't 16 believe it's proper for Ms. Clark to be asking 17 questions about the substance of the written 18 documents. She's already tried to ask her if it 19 refreshes her recollection, and I believe the 20 answer was "no." I believe Your Honor's ruling 21 should stand. 22 MS. CLARK: I understood your ruling 18069 1 yesterday to be that because I had no advance 2 warning that they were going to try to exclude the 3 portion of their work papers that consisted of 4 these handwritten notes, I had not brought with me 5 any additional materials or hadn't, frankly, even 6 thought about the question until that happened. 7 And I asked Your Honor for permission to bring 8 this issue up again after I had had a chance to go 9 back and review the work papers. 10 What I'm attempting to do is to find 11 out whether, by showing her the handwriting of 12 Joseph Huber who was taking the lead on the 13 examination of this particular credit along with 14 the actual substance of the comments which we did 15 not slow down to read yesterday, whether she would 16 be able to tell whether these comments were made 17 in the course of the review of this document by 18 Mr. Huber, who was in charge of that review. 19 THE COURT: All right. Let's have the 20 answer to that. 21 Do you know? 22 THE WITNESS: I really can't tell, 18070 1 Your Honor, based on comparing these two 2 documents. 3 Q. (BY MS. CLARK) So, it is your testimony 4 that neither the handwriting on these comments nor 5 the substance of the comments would suggest to you 6 that the comments were put on by Mr. Huber in the 7 course of his review of the joint venture 8 agreement. 9 Is that your testimony? 10 A. Yes. 11 MS. CLARK: Your Honor, I believe your 12 original ruling stands on that document; and I 13 conclude my examination. 14 THE COURT: All right. We'll adjourn 15 until 1:30. 16 17 (Whereupon, a lunch break was taken 18 from 12:17 p.m. to 1:32 p.m.) 19 20 THE COURT: Be seated, please. The 21 hearing will come to order. 22 I believe Ms. Clark has finished her 18071 1 cross? 2 MS. CLARK: Yes, Your Honor, I have. 3 THE COURT: Mr. Eisenhart, do you have 4 some questions? 5 MR. EISENHART: I do, Your Honor. 6 THE COURT: Proceed. 7 8 EXAMINATION 9 10 Q. (BY MR. EISENHART) Good afternoon, 11 Ms. Carlton. 12 A. Good afternoon. 13 Q. We've been kind of nodding and saying 14 "Hello" to each other all week, but I don't think 15 we've actually been introduced. My name is Frank 16 Eisenhart; and I represent MAXXAM, Inc. 17 MAXXAM is a company that used to be 18 known as MCO Holdings, and that's probably what it 19 was referred to during the time you were doing 20 your work there. 21 A. Okay. 22 Q. You'll be glad to hear that Ms. Clark 18072 1 has actually done most of the heavy lifting on 2 this case, but I have a few additional questions 3 for you. 4 A. Okay. 5 Q. As I understood the process, when you 6 were first appointed to do an exam, you get a 7 letter or memo from your superior telling you you 8 are appointed to be the examiner-in-charge to 9 examine this particular institution; is that 10 right? 11 A. That's correct. 12 Q. I think you described it earlier in 13 your testimony as sort of a form letter. You get 14 kind of the same memo on every institution at 15 first, and then you might get another memo giving 16 you some more specific or particular things to 17 look at on this institution? 18 A. Correct. 19 Q. So, you have kind of a standard scope 20 of examination; and then you have special items 21 that you're to look for on this one particular 22 institution. Is that right? 18073 1 A. Correct. 2 Q. Now, as I understand it, one of the 3 things that you were asked to look at, I think, on 4 both of your examinations at USAT was their 5 high-yield bond portfolio; is that right? 6 A. That's correct. 7 Q. High-yield or junk bonds. 8 A. That's correct. 9 Q. On the first day of your testimony, you 10 referenced an investment that USAT had on a bond 11 somehow associated with Ivan Boeske. 12 Do you remember that? 13 A. Yes, I do. 14 Q. And that I think was known as the 15 Hudson Funding bond. 16 Does that name ring a bell to you? 17 A. Yes, it does. 18 Q. Was that one of the things that you 19 were particularly asked to look at in your 1986 20 exam at USAT? 21 A. Yes, it was. 22 Q. Take a look at a document that should 18074 1 be in that pile right in front of you. It's 2 Exhibit B1034, and it's Tab 1522. It should be 3 maybe four or five folders down. 4 Now, this is a memo from Neil Twomey to 5 John Scott dated June 6th, 1986. And in about the 6 middle of the first paragraph, he says, "It came 7 to our attention several months ago that United 8 holds $10 million in Ivan Boeske bonds." 9 Do you see that? 10 A. Yes. 11 Q. And are those the Hudson Funding bonds 12 that we've just referred to? 13 A. Yes, it is. 14 Q. Now, Mr. Twomey goes on to say that 15 these bonds have been viewed unfavorably by 16 Washington. 17 Do you see that? 18 A. Yes. 19 Q. Do you know what he refers to there, 20 "viewed unfavorably by Washington"? 21 A. No, I don't. Only that the institution 22 should not have had them in the portfolio. 18075 1 Q. Well, that kind of gets to what I was 2 interested in. 3 Why were you asked to look specifically 4 at this Hudson Funding bond? Do you recall? 5 A. To look at the underwriting of the bond 6 itself as -- to see what documentation the 7 institution had on the bond. 8 Q. Did somebody seem to think that there 9 was something wrong with this particular bond? 10 A. They did, yes. 11 Q. And who was "they"? Do you know? 12 A. The supervisory agent and management 13 from Dallas was -- the information came from 14 Dallas. 15 Q. Did they ever tell you exactly what 16 they thought was wrong with the Hudson Funding 17 bond? 18 A. No. 19 Q. So, they just told you to look at it? 20 A. You followed the procedures as far as 21 junk bonds: The underwriting, the documentation, 22 what data they had on it. 18076 1 Q. Did you understand that you were 2 supposed to take a particularly hard look at this 3 one bond that had been singled out? 4 A. Yes. 5 Q. So, this one was going to get a little 6 closer scrutiny than the others, then? 7 A. Correct. 8 Q. But nobody told you exactly why it was 9 that supervisory or Washington wanted this one 10 looked at more closely? 11 A. No. 12 Q. Would you take a look at Exhibit B1042. 13 It's Tab 232. 14 A. Exhibit 1042? 15 Q. Yes, ma'am. 16 A. Okay. 17 Q. Now, we saw a moment ago in the 18 previous exhibit when Mr. Twomey wrote to 19 Mr. Scott. He also said, "In order that we may 20 assess the risks inherent in the portfolio, we 21 would appreciate your examination of United's 22 investments at your earliest convenience." 18077 1 I think there's been some earlier 2 reference in your testimony to Jonathan Scott 3 analyzing the high-yield bond portfolio at USAT? 4 A. Yes. 5 Q. Exhibit B1042 is a memo six days letter 6 from Jonathan Scott to Neil Twomey. 7 Do you see what I refer to? 8 A. Yes. 9 Q. And we've had subsequent testimony 10 about this document; and, essentially, it 11 comprises Jonathan Scott's report back to 12 Neil Twomey of his examination of the high-yield 13 bond portfolio. 14 Have you ever seen this document? 15 A. Not to my knowledge, no. 16 Q. Doesn't look like you got a copy of it 17 at the time, does it? 18 A. No. It's not referenced with any exam 19 reference on it. 20 Q. Okay. Going to the last paragraph -- 21 it's on the second page of the document, the last 22 paragraph. He says, "In summary, Terry Smith and 18078 1 I are of the opinion that United Savings is 2 responsibly managing its less than investment 3 grade portfolio." 4 Were you ever informed that Mr. Scott 5 and Mr. Smith had reached that conclusion? 6 A. No, I was not. 7 Q. Now, this was just shortly before you 8 were starting -- or I'm sorry. You were already 9 doing your '86 exam at this point, weren't you? 10 A. That's correct. 11 Q. Were you aware that this review of the 12 high-yield bond portfolio was taking place? 13 A. No, I was not. 14 Q. So, this was something then that was 15 being done by supervision totally separate and 16 apart from your operation? 17 A. Yes, it was. 18 Q. Now, you see again in that last 19 paragraph of B1042, Mr. Scott says, "As an aside, 20 we were told that the $10 million invested in 21 Hudson Capital Corporation bonds, Ivan Boeske's 22 firm, are in the process of being sold." 18079 1 Do you see that? 2 A. Yes. 3 Q. Now, when you took your look at the 4 Hudson -- he calls them the Hudson Capital 5 Corporation bonds, what were you told about them? 6 A. We were told that they were in the 7 process of either selling it or moving it. Moving 8 it could have meant moving it from the institution 9 to one of the other corporate units. 10 Q. And did the people you talked to about 11 this at USAT seem to be aware that they were under 12 pressure from Washington to get rid of these 13 bonds? 14 A. They were aware that -- of being 15 questioned. 16 Q. Now, who on your team actually looked 17 at the Hudson bonds? 18 A. I think it was Joe Huber. I would 19 think it was Joe Huber. 20 Q. Do you know exactly what he did by way 21 of examining these? 22 A. I would have to look at his work. He 18080 1 would have a comment on it. 2 Q. Do you know if he found any particular 3 problems or any deficiencies in the underwriting 4 of the bond? 5 A. I would have to read his comment for 6 any exceptions noted. 7 Q. You said in your first day of 8 testimony -- and this is at Page 16929 of the 9 transcript. You say, "We were aware from 10 information through the monitoring that 11 investments with Ivan Boeske at the time was 12 questionable and possibly was in jeopardy of 13 defaulting." 14 Do you recall what your source of 15 information on those subjects were? 16 A. It would have been the examiner's 17 review when they asked for the information and 18 analyzed the information. 19 Q. But you can't recall, as you sit here, 20 exactly what led him to this conclusion that the 21 bond was in jeopardy and in danger of defaulting? 22 A. It would have been information that he 18081 1 would have reviewed in his -- once he requested 2 the information and drew those conclusions. 3 Q. Now, after your people looked at the -- 4 at this particular bond, did you have any 5 communication with management at the institution 6 about selling it? 7 A. We communicated to them that it had not 8 been sold and that it was still in the portfolio. 9 Q. Okay. But did you have any 10 communication with people at the institution in 11 which you advised them that they really ought to 12 sell this? 13 A. I don't recall telling them to sell the 14 bond. I recall telling -- I recall that it was a 15 discussion item that we had with them. 16 Q. Well, did you yourself reach the 17 conclusion that they ought to sell the bond, that 18 there was some deficiency in it? 19 A. I didn't reach any conclusion as to 20 what they should do. I just reported the 21 information back to individuals that had the 22 authority to make those decisions. 18082 1 Q. That would have been the supervisory 2 staff, Mr. Twomey's people? 3 A. Correct. 4 Q. Do you know what Mr. Twomey's people 5 told them based on your analysis? 6 A. It's my understanding they were asked 7 to remove the bond. 8 Q. Would you take a look at -- I don't 9 seem to have it here. Just a second. 10 Would you take a look at A14016? It's 11 at Tab 1457. Now, this is -- this is one of your 12 interim reports, is it not? 13 A. Yes, it is. 14 Q. And this one is dated July 15th, 1986? 15 A. Correct. 16 Q. And on Page 2 of your report, which is 17 actually Page 3 of the exhibit, you have a 18 paragraph there about the Hudson Funding 19 Corporation investment, do you not? 20 A. Yes, I have. 21 Q. Now, you say that it's an investment 22 totaling $10 million with a coupon rate of 18083 1 13 percent; is that correct? 2 A. That's correct. 3 Q. And it matures on March 31, 1991, 4 correct? 5 A. Correct. 6 Q. And you say that as of July 15, 1986, 7 USAT had not been able to divest itself of the 8 investment, despite repeated efforts to sell; is 9 that right? 10 A. Correct. 11 Q. You don't note there any analysis of 12 the bond or any particular deficiency you found in 13 it, do you? 14 A. No. 15 Q. Now, take a look at A14060. That's 16 Tab 1492. 17 Do you have that document? 18 A. Yes. 19 Q. Okay. This is Mr. Gross and 20 Mr. Williams writing to you on September 18th, 21 1986, commenting on the preliminary results of 22 your examination; is that correct? 18084 1 A. Right. 2 Q. You go to the last paragraph on Page 2. 3 They say, "To conclude on something that should 4 make you happy, the Hudson Funding corporate bond 5 was redeemed yesterday." 6 Do you see that? 7 A. Yes. 8 Q. So, as of September or as of the middle 9 of September, they had sold it? 10 A. Correct. 11 Q. Do you know what the results of the 12 sale were? 13 A. No, I do not. 14 Q. You don't know whether they made money 15 or lost money on it or what? 16 A. No, I do not. 17 Q. Let's find out. Take a look at a 18 document which should be in front of you. It's -- 19 well, maybe it's not. I have copies of it. It's 20 B956, and it's in evidence at Tab 623. It's not 21 in that, is it? Yeah, it is. 22 Now, were you aware, Ms. Carlton, that 18085 1 USAT reported on a monthly basis to the Texas S&L 2 department and actually, later, to the Federal 3 Home Loan Bank of Dallas as well on all of its 4 securities transactions during the preceding 5 month? 6 A. I know they reported. I didn't know 7 the frequency of the reports. 8 Q. Okay. Well, B956 is a letter dated 9 April 30, 1986, from Joe Phillips at USAT to 10 Mr. L.A. Anderson, the Deputy Commissioner of the 11 Texas S&L Department. In this letter, he reports 12 on securities activity during the month of March. 13 Do you see that reference? 14 A. Yes. 15 Q. And if you turn to the second page of 16 that document, you'll see a little computer 17 printout there that's headed "United Savings 18 Association of Texas non-liquidity securities 19 transactions, March 1986." And if you go down a 20 little bit, you'll see it says "security 21 purchases." 22 Do you see that? 18086 1 A. Yes. 2 Q. And if you go five down, you will see 3 the report of the purchase of the Hudson Funding 4 bond. 5 Do you see that? 6 A. Yes. 7 Q. And that says that they purchased a 8 bond with a coupon of 13. 9 Do you see that? 10 A. Yes. 11 Q. So, a 13 percent coupon? 12 A. Yes. 13 Q. $10 million. And it would appear that 14 they purchased it at par. 15 Is that how you would read it? 16 A. Yes. 17 Q. You've worked with high-yield bonds. 18 You've seen them in the institutions you've 19 examined. 20 Do you understand basically how they 21 are bought and sold? 22 A. Yes. 18087 1 Q. That is, they have a par price; and you 2 can buy it either at par or at a discount or a 3 premium? 4 A. Yes. 5 Q. In this case, it appears they bought it 6 at a par? 7 A. According to this. 8 Q. So, they paid $10 million for a 9 10-million-dollar bond in March of 1986? 10 A. Yes. 11 Q. Would you take a look at document B1265 12 which is at Tab 261? 13 MR. GUIDO: 261 or 251? 14 MR. EISENHART: 261. 15 Q. (BY MR. EISENHART) Do you have that 16 document? 17 A. Yes, I have. 18 Q. That's another of these letters from 19 Mr. Phillips to Mr. Anderson, and this one reports 20 on transactions during the month of 21 September 1986. 22 Do you see that? 18088 1 A. Yes. 2 Q. And if you turn to the third page of 3 the document, you'll see again one of these 4 computer printouts headed "non-liquidity 5 securities transactions, September 1986." And 6 you'll see in the lower half of the page "sales." 7 Do you see that? 8 A. Yes. 9 Q. And, again, if you go down -- it would 10 be -- about a third of the way down that column, 11 you'll see "Hudson Funding." 12 A. Yes. 13 Q. Now, that indicates that the bond was 14 sold in September '86, correct? 15 A. Yes. 16 Q. And what did they sell it for? 17 A. 10,000 -- is it 10,000? 18 Q. Well, I think they are quoting that 19 number in thousands. So, I think that number 20 would actually be 10 million. 21 A. Okay. 22 Q. I think if you look up at the -- 18089 1 A. The zeros are omitted. So, it's 2 10 million. 3 Q. So, they sold it at par? 4 A. Right. 5 Q. So, the purchase and sale were a wash. 6 They didn't lose any money on it? 7 A. No. 8 Q. Assuming that it paid its coupon rate 9 of interest during the six months they held it, 10 they would have received roughly $650,000 in 11 interest. Right? 12 A. What was the interest rate? 13 13 percent? Whatever, 13 times that. 14 Q. 13 percent for half a year would be 15 $650,000, would it not, on a 10-million-dollar 16 bond? 17 A. Approximately. 18 Q. Now, as you sit here and think about 19 that Hudson Funding bond today, can you identify 20 anything that was wrong with that bond, any reason 21 why it should have been sold? 22 A. Not based on what I've reviewed. 18090 1 Q. The only thing we've seen, then, in the 2 record -- the only reason we've seen anyone give 3 to sell that bond was pressure from Washington, 4 correct? 5 A. I don't know what information they had 6 to make their decisions on; so, I can't state... 7 Q. Was that an unusual situation as you 8 were going to do an examination, that you would 9 have pressure from Washington or advice from 10 Washington to look at particular areas? 11 A. No, because during the monitoring 12 between one examination and another examination, 13 different situations exist in which information is 14 brought to the attention of management, being the 15 supervisory agent in Dallas, and the Washington 16 area. And you get inquiries, Congressional 17 inquiries. You get different inquiries from other 18 areas, and they act on it. 19 Q. And is there anything unusual in the 20 course of an examination about having to go to 21 management and say, you know, "Look. Whether you 22 and/or I think there's anything wrong with this 18091 1 particular investment, we're under some heat from 2 Washington; and you had better get rid of it"? 3 A. What we do is provide the facts to 4 them, and they are made aware of the situation. 5 In this case where they were communicating not 6 through the examination process, we were just 7 reporting what they would find. You have that 8 communication, then, that takes place between the 9 management and the regulatory bodies; and we're 10 not privileged to that. And since we don't have 11 the authority to act, we just provide the facts. 12 Q. But as you sit here today, you can't 13 recall anything you found about this particular 14 bond that would have led you to believe it was a 15 bad investment? 16 A. I would have to look at whatever the 17 write-up was, and I don't recall the exact -- if 18 exact exceptions were noted. 19 Q. One of the other things I think you 20 were directed to look at during the course of both 21 of your examinations was United's relationship 22 with Drexel Burnham Lambert; is that correct? 18092 1 A. That's correct. 2 Q. And who told you to look particularly 3 hard at Drexel? 4 A. It came in as correspondence, I know in 5 communication with Neil and Ginger. Those are two 6 individuals that I recall specifically. 7 Q. Neil Twomey and Ginger Baugh? 8 A. Yes. 9 Q. And did they tell you why they wanted 10 you to take a particularly close look at Drexel? 11 A. We were trying to determine the exact 12 percentage of ownership for one thing. 13 Q. Was there anything else that was 14 communicated to you as to why you should take a 15 close look at Drexel? 16 A. We wanted to know the percentage of 17 concentration or involvement that Drexel had as 18 far as the sales of different securities, the 19 underwriting of different securities to determine 20 what percentage Drexel was doing those things in 21 relationship to other brokerage companies. 22 Q. And was this something you were looking 18093 1 at at every institution, or was this focus on 2 Drexel something that was particular to United 3 Savings? 4 A. It was particular to United because of 5 its ownership interest there. 6 Q. Okay. And did Mr. Twomey or Ms. Baugh 7 specifically tell you that Drexel owned stock in 8 United Financial Group? 9 A. Yes. 10 Q. And they asked you as part of your 11 examination to find out exactly how much stock 12 Drexel owned? 13 A. Right. 14 Q. How did you go about doing that? 15 A. We requested from the institution that 16 they provide a list of their shareholders for 17 United, the institution, UFC, and MCO Holdings and 18 any of the affiliated companies. 19 Q. Now, the institution that you're 20 examining in this instance is United Savings 21 Association of Texas; is that correct? 22 A. That's correct. 18094 1 Q. It's not a publicly held company, is 2 it? 3 A. No, it's not. 4 Q. So, you made your request to USAT; and 5 you asked them to get in information from UFG? 6 A. Right. 7 Q. So, you go to the USAT people and say, 8 "We want to find out who owns stock in UFG. Would 9 you get us the UFG shareholder records?" 10 A. We asked for the -- right. 11 Q. Did you ask for any particular 12 shareholder records? Did you tell them, for 13 instance, "We want to know exactly how many shares 14 Drexel owns. Get us all the records pertaining to 15 Drexel"? 16 A. We asked for the whole entire 17 shareholders' list, including the backup support 18 for the street name and Cede that was also holding 19 shares for other individuals. 20 Q. So, you were getting shareholder 21 information on all the shareholders of UFG; is 22 that right? 18095 1 A. That's correct. 2 Q. Did you ask for any broader information 3 with respect to Drexel? 4 A. We could have. I know we had other 5 requests that were made as far as 10Ks. We had 6 10Qs. So, we did ask for other information, so... 7 Q. So, you had things like 10Ks, 10Qs, 8 13Ds, various securities filings? 9 A. Yes. 10 Q. And did you look at those as well in 11 connection with your determination of Drexel's 12 share ownership? 13 A. Yes. Wherever we could find something 14 that would document their ownership, we would make 15 note of it. 16 Q. Now, there's been some testimony -- 17 strike that. 18 There's been some reference during your 19 testimony to an option agreement that existed 20 between MCO Holdings and Drexel with respect to 21 shares of United Financial Group. 22 Do you recall that? 18096 1 A. Yes. 2 Q. And I think you were shown USAT's 3 business plan of August of '86, and that had a 4 reference to the option agreement? 5 A. Correct. 6 Q. I think you were also shown a memo from 7 Mr. Selby to Mr. Haas, and that had a reference to 8 it? 9 A. Yes. 10 Q. And I think you were also shown a 11 September '87 memo by Ginger Baugh that had a 12 reference to it. 13 Do you recall that? 14 A. Yes. 15 Q. Now, during the course of your 16 examinations of USAT, did you ever receive or look 17 at any information about this option agreement? 18 A. You would see it as a part of 19 correspondence that we filed in our general file 20 as far as correspondence that comes down from 21 Dallas to be made a part of the reading file. 22 Q. So, you recall seeing references to the 18097 1 option agreement in correspondence that you were 2 receiving from Dallas during your examination? 3 A. Yes, like the -- yes. 4 Q. Okay. Now, do you recall within the 5 institution actually getting any information about 6 the -- the option? 7 A. I don't recall them providing me 8 anything, no. 9 Q. Do you recall -- I think it was 10 mentioned earlier in your testimony. 11 Do you recall that the option agreement 12 was an agreement covering 300,000 shares? 13 A. I don't recall the exact number. 14 Q. Okay. Well, why don't you look at 15 Exhibit B1739; and this is Tab 1523. 16 MR. GUIDO: What's that tab number? 17 MR. EISENHART: 1523. 18 A. Okay. 19 Q. (BY MR. EISENHART) This is Ginger 20 Baugh's memo to Neil Twomey in September '87, and 21 she says in there that MCO Holdings -- 22 THE COURT: Go ahead. 18098 1 Q. (BY MR. EISENHART) She says in there 2 that MCO Holdings also has a call option for 3 300,000 of the 488,931 shares of UFG held by 4 Drexel Burnham to be exercised July 1, 1988, to 5 July 31, 1988. She then goes on to describe a 6 corresponding put option that Drexel would have in 7 the event that the call is not exercised. 8 Do you see that? 9 A. Yes. 10 Q. Does that refresh your recollection 11 that the -- the option was an option for 300,000 12 shares? 13 A. I see it here, yes. 14 Q. Okay. Would you take a look at A14020? 15 And that is Tab 1461. It should be in front of 16 you. This is a letter that was sent by the 17 Federal Home Loan Bank of Dallas to United Savings 18 dated April 16, 1987; is that correct? 19 A. That's correct. 20 Q. And that attaches some material 21 developed by you in the course of the 1986 exam; 22 is that correct? 18099 1 A. Right. 2 Q. It's got -- it's got your ratings of 3 the institution there. 4 Do you see that? 5 A. Yes. 6 Q. Go in that document to Page -- it's 7 OW078152. 8 And that, in about the middle of the 9 page, has a chart showing others owning 1 percent 10 or more of the outstanding shares. I assume 11 that's the outstanding shares of UFG. 12 Do you see that? 13 A. Yes. 14 Q. How many shares do you have listed for 15 Drexel Burnham Lambert? 16 A. 300,000 shares. 17 Q. All right. And based on that 300,000 18 shares, you calculated a percentage of 19 3.67 percent? 20 A. That's correct. 21 Q. Where do you think you got the 22 information that you put in this report to the 18100 1 effect that they owned 300,000 shares? 2 A. This information was provided by the 3 institution. That's one of the pages that comes 4 in with the PERK information, and they provide 5 that. 6 Q. Well, looking at that figure of 300,000 7 shares, do you think you might have -- may have 8 gotten that information as a result of being 9 supplied with information about the -- the option 10 agreement? 11 A. I don't know what basis they would have 12 provided it. We would have asked for it because 13 it's one of the required pages of the report. 14 Q. Let me show you an exhibit. This was 15 put in evidence actually by the OTS by Mr. Veis 16 earlier in the case. And this is -- it's 17 Exhibit T1214. That's at Tab 225. And this is a 18 record that Mr. Veis put together with the 19 assistance of a gentleman from OTS showing Drexel 20 Burnham Lambert's ownership of United Financial 21 Group stock. 22 Now, I don't imagine you've seen this 18101 1 document before, have you? 2 A. No, I haven't. 3 Q. Let me show you how it works. He's got 4 a series of dates down here starting with 5 January 21st, 1983, running up to December 30th, 6 1988. And then the bar graph, which is the only 7 thing I'm going to ask you to focus on -- don't 8 worry about that. The bar graph simply shows 9 shares in the thousands. 10 A. Okay. 11 Q. Now, you were doing your work on the 12 '86 examination -- you started, what? About 13 March? 14 A. May. 15 Q. May of '86. So, you're starting just 16 about there (indicating), correct? 17 A. Correct. 18 Q. And this report that you've sent or 19 that the Federal Home Loan Bank of Dallas has sent 20 to USAT is being sent in April of '87. So, that's 21 out around there (indicating). So, you're pretty 22 much right in this time period here? 18102 1 A. Correct. 2 Q. Now, as you can see from the chart, 3 Drexel's ownership of UFG stock during that period 4 of time was always just under 800,000 shares. 5 A. Okay. 6 Q. That's the -- that's the conclusion 7 that OTS reached, and I don't think we have any 8 dispute about that. I think that's, in fact, what 9 the record shows. 10 Now, against that background, would you 11 conclude that your finding of 300,000 shares was 12 probably based on information you had been given 13 about the Drexel option? 14 A. If you have 800 shares there -- well, I 15 didn't ask for information on Drexel options. I 16 asked for information on shares outstanding; so, I 17 assume they provided me what I asked for. I 18 don't -- I don't know how the basis of that's 19 done. 20 Q. Well, I think we can see that based on 21 Exhibit T -- 22 A. Is the green representing there 18103 1 300,000? 2 Q. Well, the green is 300,000 shares; but 3 the total of the yellow and the green is the total 4 share ownership. I think we can agree, based on 5 that exhibit, that the figure that you had in your 6 '86 exam report was incorrect. 7 Would you agree with me? 8 A. Based on that chart, yes. 9 Q. And I'm not saying that that's 10 necessarily your fault. You may have gotten 11 incorrect information. But, certainly, it's 12 inconsistent with that chart? 13 A. I could say it's inconsistent with that 14 chart. 15 Q. Now, my question to you is: You must 16 have gotten your 300,000-share figure from 17 somewhere. You didn't pull that figure out of the 18 air, did you? 19 A. It was provided to me by the 20 institution. 21 Q. Can you think of any source of 22 information for that 300,000-share figure except 18104 1 information that you got concerning the option 2 agreement? 3 A. I received information. If it's the 4 option, then that's what it is. When I asked for 5 it, I didn't refer to an option. I just asked for 6 the shares. 7 Q. Would you agree with me, Ms. Carlton, 8 that it appears at some point during the '86 9 examination, you got information about the 10 300,000-share option agreement; and, by some 11 process, that information wound up in your report 12 as Drexel's total share ownings? 13 Is that what it would appear? 14 A. I could say it would appear that way. 15 Q. Now, in any event, would you agree with 16 me that certainly the existence of that 17 300,000-share option agreement was no secret 18 either within the Federal Home Loan Bank of Dallas 19 or within United Savings? 20 A. They were aware of it. 21 Q. And you as -- your regulators were 22 aware of it, as well? 18105 1 A. When you say "you," I was not aware of 2 it. 3 Q. Well, you may or may not have been 4 aware of it based on what we've seen? 5 A. I guess they were. 6 Q. Certainly the people at the Federal 7 Home Loan Bank of Dallas were? 8 A. Yes. 9 Q. We can agree it's quite possible you 10 may have gotten some information about it as well 11 that found its way into your report? 12 A. That's possible. 13 Q. Now, you were looking at Drexel Burnham 14 Lambert, as I understand it, because there was 15 some concern about the volume of business that 16 USAT was doing with Drexel? 17 A. That was one of the areas we looked at. 18 Q. And I gather the particular point that 19 you were exploring was whether Drexel was somehow 20 profiting from its ownership of United Financial 21 Group stock? 22 A. Or whether there was any other type of 18106 1 affiliation that may be within the institution 2 through borrowings or lending that would reflect 3 any abnormal activity that the regular borrower 4 would not have an advantage to take advantage of. 5 Q. So, you're looking to see if there's 6 some sort of conflict of interest involving 7 Drexel? 8 A. Correct. 9 Q. Or you're looking to see whether 10 there's some regulation being violated because of 11 their ownership status and the business being done 12 with them? 13 A. Right. And the affiliation 14 transaction, if they were working in concert with 15 anyone else. 16 Q. Now, you referred to an affiliate 17 transaction. Is there some objective standard 18 that you use to determine whether a transaction is 19 an affiliate transaction? 20 A. Yes. You look for -- identify an 21 affiliate person. That would be an officer, 22 director, major shareholder in their family. We 18107 1 have a definition for an affiliate person. 2 Q. What was the standard at that time for 3 share ownership to be an affiliate? How much did 4 you have to own? 5 A. I think it was 25 percent. 6 Q. Are you sure of that? 7 A. You had -- one is a conflict of 8 interest of 10 percent, and one is affiliate for 9 25. So, it's either 10 or 25. 10 Q. So, you would look to see how much 11 stock Drexel actually owned to see if they would 12 qualify under either of those rules? 13 A. Either of those percentage limitations 14 that exist. 15 Q. Now, I gather that in doing this, 16 again, you went to the shareholder list? 17 A. Right. 18 Q. And you went to the various securities 19 transactions? 20 A. Right. 21 Q. Now, I believe in your 1987 report, you 22 found that Drexel owned roughly 9.6 percent of the 18108 1 UFG stock; is that right? 2 A. Maybe 9.7. 3 Q. Somewhere around there? 9.6 or 9.7? 4 A. Correct. 5 Q. Would that make them an affiliate 6 either for conflict of interest purposes or 7 affiliate purposes? 8 A. No. 9 Q. So, that's still under the limits that 10 you just described for me? 11 A. Yes. 12 Q. Incidentally, if they were found to be 13 an affiliate, if they had gone over the threshhold 14 for that, what consequences flowed from that? 15 A. You had certain documentation 16 requirements that they would have to maintain. 17 The board of directors would have to approve those 18 transactions setting out, identifying the 19 affiliate relationship and the conflict of 20 interest relationship. You have what you call 21 quantitative and qualitative requirements that you 22 have to follow which states that if you are doing 18109 1 business, you would have to have comparative data 2 that would show that that activity is not any 3 terms other than what you would find with a normal 4 line of business, meaning the rates should not be 5 higher or the term should not be excessive or 6 beyond what a normal borrower or transaction would 7 take place. 8 Q. You would have to show that these are 9 arm's length transactions? 10 A. Correct. 11 Q. And that you were doing it the same as 12 any comparable person that didn't have the 13 ownership interest could do it? 14 A. Correct. 15 Q. Might USAT have to get permission from 16 the regulators to engage in certain transactions 17 with Drexel if it was found to be an affiliate? 18 A. You had certain dollar limits that the 19 regs set out. And if you went beyond that, it did 20 require supervisory approval. 21 Q. This all flows from an additional 22 finding that it is, in fact, an affiliate? 18110 1 A. Correct. 2 Q. You have to make that finding first? 3 A. Correct. 4 Q. And then these other things will 5 follow? 6 A. Correct. 7 Q. And I gather you never made the first 8 finding. You never found them to be an affiliate 9 because the highest percentage of ownership you 10 ever found was 9.6 or 9.7? 11 A. I don't think we ever labeled them as 12 affiliate through correspondence. 13 Q. So that none of these requirements that 14 you've just described for me ever got triggered in 15 the case of USAT and Drexel? 16 A. Not that I'm aware of. 17 Q. Now, in the course of your examination, 18 did you look at investment committee minutes? 19 A. Yes, we did. 20 Q. Did you look at these letters that went 21 to the Texas regulators and the Federal Home Loan 22 Bank of Dallas of the type that I showed you just 18111 1 a few minutes ago? 2 A. I didn't recall seeing anything like 3 that. 4 Q. So, you might not have seen those? 5 A. I don't recall seeing those. 6 Q. But do you recall that on the 7 investment committee minutes, there were attached 8 to those each month a list of the transactions 9 that the institution had engaged in that month? 10 A. Yes. 11 Q. So, the information about the purchases 12 and sales of securities was there and was within 13 the scope of information you reviewed during the 14 exam; is that correct? 15 A. Yes. 16 Q. So, if there was any question about the 17 nature of the transactions USAT was entering into, 18 you at least had the information about those 19 transactions? 20 A. We would request it based on what areas 21 we were reviewing. 22 Q. And to your knowledge, did you get it? 18112 1 A. In most cases. 2 Q. Okay. Now, in the course of looking at 3 Drexel's relationship with USAT and the volume of 4 business it did with USAT, what sort of 5 information did you get about Drexel's volume of 6 business with USAT? 7 A. We requested a broker's list that 8 showed the brokers. We requested specifically 9 that they provide us the volume of work based on 10 by broker. And when we asked them to provide a 11 list of sales of different investments and asked 12 what percentage they reviewed, we put in a request 13 and asked for the information. 14 Q. So, they would tell you, say -- just to 15 use high-yield bonds for an example, they would 16 tell you that, "Over this period of time, we 17 bought so much of our high-yield bonds, say, from 18 Merrill Lynch, some from Goldman Sachs, so much 19 from Bear Stearns, and so much from Drexel"? 20 A. I recall a request in which they 21 provided that information, namely the top three or 22 top however many and provided out beside it a 18113 1 volume by those firms. 2 Q. And then you would look at that, what, 3 to determine what percentage of the overall 4 business Drexel seemed to have? 5 A. Correct. 6 Q. Now, in the course of looking at this, 7 did you ever develop any information about what 8 Drexel's market share was in any particular 9 industry -- just take the high-yield bonds for an 10 example -- what sort of market share Drexel held 11 in that? 12 A. Dallas was aware of the percentage of 13 their operation in the industry in that area. 14 Q. Oh. So, that would have been 15 information that the people in supervisory in 16 Dallas would have had? 17 A. Yes. They maintained industry data by 18 different firms. 19 Q. And would you agree with me that if you 20 were going to try to determine whether Drexel was 21 somehow profiting from its relationship with USAT 22 in terms of the volume of its securities 18114 1 transactions, you would have to consider not only 2 the volume of the transactions itself but what 3 Drexel's market share was, too? 4 A. Correct. 5 Q. Because, obviously, if a company has, 6 say, a 50 percent market share and the institution 7 is buying 50 percent of its securities from that 8 company, that that in and of itself doesn't 9 indicate any favoritism, does it? 10 A. Not just by shares alone. 11 Q. You might get concerned if the company 12 was buying 75 percent of its securities from a 13 company with 50 percent market share. 14 Would you agree with that? 15 A. They have a choice of where they want 16 to purchase. 17 Q. As regulators looking at that, if you 18 saw Drexel had a 50 percent market share and you 19 found that USAT was buying 75 percent of its 20 high-yield bonds from Drexel, that might be an 21 interesting statistic, would it not? 22 A. We would like to determine why only 18115 1 Drexel could underwrite these transactions versus 2 another firm and was that decision based on any 3 preferential treatment on the part of management, 4 or was it just the only market that existed for 5 that instrument. 6 Q. That scenario where Drexel was at 7 50 percent but USAT was buying 75 percent, that 8 would certainly suggest to you a need for a closer 9 look? 10 A. Well, you would look either way just to 11 make sure that if the question ever arose, that 12 you could say with some type of assurance that it 13 either did or did not exist or there was or was 14 not influence. 15 Q. Let me ask you to take a look for a 16 moment at Document B1770. This is not yet in 17 evidence; so, I'm going to give you a copy of it. 18 Ms. Carlton, B1770 is a memo from 19 Mr. Stodart to Mr. Berner dated September 29th, 20 1987; and the subject of the memo is "USAT 21 high-yield securities activities." 22 Do you recall ever seeing a copy of 18116 1 this? 2 A. Not that I can recall. 3 Q. Okay. I have no reason to believe you 4 ever did get a copy of it, but I didn't know 5 whether it triggered any recollection or not. 6 A. It does not. 7 Q. Now, Mr. Stodart says in here, "Per our 8 conversation, please find attached a breakdown of 9 the purchase activity in the high-yield bond 10 portfolio. The chart includes total amount 11 purchased, activity by underwriter, and 12 underwriter share of total marketplace." 13 And I think you and I agreed that 14 that's roughly the kind of information you would 15 want to look at if you were trying to make the 16 kind of determination you were asked to make, 17 correct? 18 A. Right. 19 Q. Would you turn to the third page of the 20 document? This chart is headed "1985," and 21 it's -- it says that the total USAT dollar 22 purchases -- and this is all for high-yield 18117 1 bonds -- in 1985 was about $761.9 million. 2 Do you see that? 3 A. Now, you said the third page? 4 Q. Yes, ma'am. It's the third page of the 5 exhibit. It's got a number on it: CN468062. 6 A. I have it. 7 Q. It says that total USAT high-yield bond 8 purchases for 1985 were about $761.9 million. 9 Do you see that? 10 A. Yes. 11 Q. And if you go four down in the column, 12 you'll see Drexel, do you not? 13 A. Right. 14 Q. Now, of that total amount, according to 15 this chart, $286 million was purchased from 16 Drexel; is that correct? 17 A. That's correct. 18 Q. And that amounts to 37.548 percent of 19 USAT's purchases, correct? 20 A. Right. 21 Q. And it also gives Drexel's market 22 share, does it not? 18118 1 A. Right. 2 Q. What is the market share that's 3 reported? 4 A. 56 percent. 5 Q. So that USAT's purchases for 1985, 6 according to this chart, were significantly under 7 Drexel's market share? 8 A. Correct. 9 Q. Turn to the next page. This gives you 10 the corresponding data for 1986. And we see total 11 purchases of $1.1 billion that year, correct? 12 A. Yes. 13 Q. Of which about 445 million were from 14 Drexel? And what was the percentage of Drexel's 15 to the overall -- 16 A. 40 percent at USAT, and 45 in market 17 share. 18 Q. So, again, the USAT purchases were less 19 than Drexel's market share -- 20 A. Right. 21 Q. -- according to this chart? 22 A. Right. 18119 1 Q. Let's turn to 1987, which is on the 2 next page. Now, this is not a full year. This 3 only goes up to mid-September which, of course, is 4 when Mr. Stodart is writing this memo. 5 But up to that point, the total 6 purchases of high-yield bonds were $250 million? 7 A. Yes. 8 Q. Of which 60 million were from Drexel? 9 A. Right. 10 Q. And according to this chart, what are 11 the percentages? 12 A. 24 percent to USAT, and 45 to market 13 share. 14 Q. So, again, significantly less than 15 Drexel's market share? 16 A. Right. 17 Q. And was it your impression that the 18 kind of analysis that is set forth in B1770 -- 19 that is, the comparison of purchases to market 20 share -- was going to be done by the supervisory 21 people in Dallas based, in part, on the 22 information you gave them? 18120 1 A. I don't know exactly what they were 2 going to do with the information. 3 Q. But did you assume that they would do 4 some sort of analysis roughly comparable to this? 5 A. I didn't even assume. I just provided 6 the information. 7 Q. You would agree with me that if they 8 were going to draw any real conclusions between 9 USAT and Drexel, they would have to do an analysis 10 of this sort, wouldn't they? 11 A. I don't know what the objectives were, 12 if they -- what objective they were trying to 13 prove. 14 Q. If we assume that their objective was 15 to do a fair and objective analysis, they would 16 have to do something comparable to this, wouldn't 17 they? 18 A. It's just what you say it is. It would 19 be just an assumption. 20 MR. EISENHART: Your Honor, I would 21 like to over B1770. 22 MR. VEIS: We have no objection, 18121 1 Your Honor. 2 THE COURT: Received. 3 Q. (BY MR. EISENHART) Ms. Carlton, I may 4 have asked you this before; but let me ask it 5 again in case I didn't. 6 In your either of your examinations, 7 1986 or 1987 examination, did you ever find any 8 conflict of interest involving USAT and Drexel? 9 A. Not with Drexel, no. 10 Q. And in either of your exams, 1986 or 11 1987, did you ever conclude that Drexel qualified 12 as an affiliate so that there would be 13 restrictions of the sort you applied earlier? 14 A. Not based on what we found, no. 15 Q. Now, I want to talk to you a little 16 more about the subject of high-yield bonds. 17 I think you said that prior to 18 undertaking your 1986 examination of USAT, you had 19 had experience at one other institution that held 20 significant high-yield bonds. Was that Gibraltar? 21 A. No. I said investment securities. 22 Q. I'm sorry. I misunderstood you. 18122 1 Had you ever examined an institution 2 prior to USAT that had any significant number of 3 high-yield bonds? 4 A. Not that I examined myself, no. 5 Q. I'm sorry. What do you mean not that 6 you examined yourself? You mean not as 7 examiner-in-charge? 8 A. Right, and not that I, as an assistant, 9 reviewed that area. 10 Q. Okay. So, USAT then was the first 11 institution you encountered that had significant 12 holdings in high-yield bonds? 13 A. Yes. 14 Q. Now, was there -- at the time you began 15 your examination in 1986, was there any 16 institutional view within the Federal Home Loan 17 Bank of Dallas as to whether high-yield bonds were 18 good things or bad things for an institution to 19 own? 20 A. It was monitored because of the high 21 risk involved as an item that fell under the 22 high-risk category. 18123 1 Q. And why were they regarded as high-risk 2 instruments? 3 A. They were regarded as high risk because 4 if -- if -- if something happened to that 5 instrument, you would not have any collateral or 6 you could sustain substantial losses based on the 7 deterioration of that bond. 8 Q. Well, you had those same kinds of 9 risks, did you not, in various loan portfolios? 10 A. But you always had land or some other 11 type of collateral that you could take possession 12 of as a secondary source of repayment when you 13 talk to your lending and real estate side. 14 Q. Well, that was true with respect to 15 home loans certainly. You had a home as your 16 underlying collateral and with respect to various 17 commercial real estate loans. But it was not true 18 of all loans, was it? 19 A. No, not of all loans. You had consumer 20 loans in which you would probably be sitting in 21 the same position as a high-yield bond. 22 Q. And things like credit card debt, 18124 1 various commercial loans often were 2 uncollateralized, weren't they? 3 A. Most institutions didn't have those 4 back in those days. 5 Q. So, you said it was -- there was an 6 institutional view, then, that these were risky 7 investments? 8 A. Correct. 9 Q. And I gather that was your mindset or 10 at least that was the viewpoint that you were -- 11 that was where you were coming from when you began 12 your examinations? 13 A. Yes. 14 Q. Take a look at Exhibit A14063, and this 15 is Tab 1493. 16 A. Is it one I would have looked at 17 already? 18 Q. No. It should be in that pile. It may 19 be down -- let's see -- maybe about a third of the 20 way down in the pile. It's A14063. 21 A. What's the other number? 22 Q. 1493. (Indicating) 18125 1 A. Okay. 2 Q. Now, this is a letter from Roy Green of 3 the Federal Home Loan Bank of Dallas to Jenard 4 Gross, and it has attached to it a memo from 5 Mr. Twomey to Mr. Green. 6 Do you see that? 7 A. Yes. 8 Q. I would ask you to look at the second 9 page of Mr. Twomey's memo. And in the third 10 paragraph on that page, he talks about United's 11 investment in high-yield bonds, does he not? 12 A. The second paragraph? 13 Q. No. It's the third paragraph on the 14 page. It starts out "of additional concern." 15 A. Okay. 16 Q. In that paragraph, he's talking about 17 United's investment in high-yield bonds, isn't he? 18 A. Yes. 19 Q. Toward the end of the paragraph, he 20 said -- he says, "Although we have had numerous 21 discussions with United's management regarding 22 these investments, we are not satisfied that the 18126 1 prospective earnings outweigh the risks associated 2 with high-yield securities." 3 Now, does that summarize generally what 4 you thought of as the prevailing view at this time 5 within the Federal Home Loan Bank of Dallas? 6 A. That's what this states, yes. 7 Q. Take a look, if you would, at A14083; 8 and that's at Tab -- 9 MR. EISENHART: I'm sorry, Your Honor. 10 I'm looking at an exhibit sticker that's 11 handwritten, and it may not be very legible. 12 A. What's the exhibit number? 13 MR. EISENHART: Sorry, Your Honor. We 14 will pass on this exhibit because we can't make 15 out the exhibit number. 16 MR. VEIS: Is that my handwriting? I 17 believe that's A14082. 18 MR. EISENHART: A14082. Let me make 19 sure that's going to be in front of you. 20 MS. CLARK: Is it 1510? 21 MR. EISENHART: I will pass on this 22 document, Your Honor, because I'm not sure it made 18127 1 it onto anybody's list. 2 Q. (BY MR. EISENHART) Now, Ms. Carlton, we 3 had talked earlier about Mr. Twomey dispatching 4 Jonathan Scott to review the high-yield bond 5 portfolio at USAT. 6 Do you recall that? 7 A. Yes. 8 Q. Did you know Jonathan Scott? 9 A. I -- yes. I had heard the name, yes. 10 Q. And how about Terry Smith? Did you 11 know Terry Smith? 12 A. Yes. 13 Q. Know him personally or heard the name? 14 A. No. Just know the name. I knew that 15 they worked within the collateral side of the 16 Federal Home Loan Bank Board. Whenever you made 17 advances, they would come out and verify that you 18 had sufficient collateral on your borrowings, on 19 the advances, is what role I had met them in. 20 Q. We've heard them described by various 21 people in the course of this trial as the 22 investment experts or the securities experts 18128 1 within the Federal Home Loan Bank of Dallas. 2 Would you regard them as such? 3 A. They work in that area of the bank. 4 Q. I think you said at the beginning of 5 your testimony that on your examination team, you 6 didn't have anybody who was particularly an expert 7 in the field of high-yield bonds; is that right? 8 A. Correct. 9 Q. But I think you said you had that kind 10 of expertise available to you within the Federal 11 Home Loan Bank of Dallas if you needed it? 12 A. Not in '86, no. 13 Q. How about in '87? 14 A. No. 15 Q. Well, would -- would Jonathan Scott and 16 Terry Smith have been resources that you could 17 have called on if you needed advice or expertise 18 in the area of high-yield bonds? 19 A. The supervisory agents could -- from 20 the examination standpoint, only the supervisory 21 agent could authorize that. 22 Q. Well, what would you have done if, 18129 1 during the course of an examination, you had a 2 particular question or a problem that came up in 3 the area of high-yield bonds and you felt you 4 needed more expertise than you had? 5 What was your method of obtaining help? 6 A. I would let my field manager know; and 7 he, in turn, would let whoever he would need to 8 know in order to obtain that person. 9 Q. Now, we looked earlier at Exhibit B1042 10 which was Jonathan Scott's report of June 12th, 11 1986, to Neil Twomey. 12 Do you remember that? I think it may 13 have been one of the ones that you've already got 14 pulled out here. 15 16 (Discussion held off the record.) 17 18 Q. (BY MR. EISENHART) That was after 19 Mr. Twomey had sent him to USAT and asked him to 20 review the high-yield bond portfolio, correct? 21 A. Correct. 22 Q. And he concludes -- and you can look at 18130 1 the last paragraph of the report -- that he's 2 satisfied that the portfolio is being competently 3 managed? 4 A. Yes. 5 Q. And was that generally the conclusion 6 that you reached during the course of your 7 examinations, that the people who were running 8 that portfolio knew what they were doing? 9 A. I recall having some exceptions on the 10 documentation. I don't think we ruled an opinion 11 on manage -- I don't recall an opinion being ruled 12 on the person running it, but we did have 13 exceptions. 14 Q. You don't remember reaching any 15 conclusions that are in direct contrast to the 16 conclusions that Mr. Scott reached? 17 A. It would be in the report. I don't 18 recall the exact language. 19 Q. Now, you were shown earlier today by 20 Ms. Clark a subsequent review of the high-yield 21 bond portfolio by Prudential-Bache. 22 Do you remember that? 18131 1 A. Correct. 2 Q. And Prudential-Bache had been asked to 3 conduct an independent review of the portfolio 4 specifically at the request of the Federal Home 5 Loan Bank of Dallas? 6 A. Correct. 7 Q. And they also reached the conclusion, I 8 think, as they expressed it, that the portfolio of 9 USAT was run in a way that was consistent with 10 what they saw at other institutions? 11 A. Correct. 12 Q. Did anybody, to your knowledge, at the 13 Federal Home Loan Bank of Dallas, ever reach the 14 conclusion that the high-yield bond portfolio at 15 USAT was being mismanaged? 16 A. Not that I recall. 17 Q. Did anybody ever conclude, to your 18 knowledge, that it was being run in a way that was 19 reckless or gambling or anything of that sort? 20 A. Not that I recall. You had exceptions 21 noted on documentation. 22 Q. But exceptions on documentation are a 18132 1 long way from a wild, speculative gambling 2 portfolio, aren't they? 3 A. Right. We had some comments on some of 4 it, but I don't know to the -- I would have to 5 look at the report to see the exact wording. 6 Q. Well, I would like to ask you to take a 7 look at a document in one of the folders in front 8 of you. It's B3819, and it's Tab 590. 9 Do you have that document, Ms. Carlton? 10 A. Yes. 11 Q. Now, this is a report dated 12 October 21st, 1986, from Robert Sahadi, who is 13 Director of the Office of Policy and Economic 14 Research of the Federal Home Loan Bank Board; and 15 it's sent to chairman Edwin Gray, member Donald 16 Hovde, and the senior executive staff of the Bank 17 Board. 18 Have you ever seen this document 19 before? 20 A. No. 21 Q. It concerns high-yield bonds or junk 22 bonds as he refers to them. I would like to take 18133 1 you through and ask you about some of the 2 conclusions reached in this report and how they 3 either agreed or disagreed with the views held at 4 the Federal Home Loan Bank of Dallas. 5 He says on the first page that the best 6 statistical evidence says that non-takeover junk 7 bonds, when broadly diversified and actively 8 managed, significantly outperform comparable 9 portfolios of Treasury issues, even after taking 10 defaults into consideration. 11 Now, do you have any view on that 12 discussion one way or the other? Do you agree or 13 disagree with that? 14 A. No. 15 Q. Is that consistent or inconsistent with 16 your experience as an examiner? 17 A. I know at USAT, they did have some 18 bonds that were in default which they had to set 19 up reserves for; but I have nothing to compare 20 that with. 21 Q. So, you don't know whether the defaults 22 you saw at USAT were higher than ordinary, 18134 1 ordinary, or lower than ordinary? 2 A. No, I don't. 3 Q. He also says, "It is not appropriate to 4 single out junk bond holdings, per se, because of 5 their perceived risk because consumer loans and 6 credit card receivables, both of which have 7 non-negligible default rates, are not singled out 8 because of their riskiness." 9 Was that concept ever discussed, to 10 your knowledge, within the examination or 11 supervisory staff of the Federal Home Loan Bank of 12 Dallas? 13 A. I would not know. 14 Q. That's not entirely consistent with the 15 view you described earlier, that these bonds are 16 particularly risky, is it? 17 A. No. I think here you're -- like we 18 didn't have credit cards. So, I know that 19 institutions at that point didn't have credit 20 cards; so, I would say it probably wasn't a 21 discussion. 22 Q. Turn to Page -- well, it's actually 18135 1 Page 2 of the report itself. It's the fourth page 2 of the exhibit. He describes in the first full 3 paragraph on that page an earlier report prepared 4 by the Office of Policy and Economic Research. 5 Do you see that? 6 A. Yes. 7 Q. He says, "That paper pointed out that 8 high-yield bonds carry more risk than 9 investment-grade corporate bonds, but they still 10 have some advantages over unsecured commercial 11 loans originated by thrifts and over participation 12 interests thrift institutions purchase in 13 commercial loans originated by others." 14 Was that consistent with your 15 experience? 16 A. Most of the institutions we had didn't 17 have real truly what you call commercial loans. 18 Q. It goes on to say, "The empirical 19 evidence generally supports the hypothesis that 20 the return on high-yield bonds more than offset 21 the additional risk." 22 Is that consistent with your 18136 1 experience? 2 A. Yes. 3 Q. He says, "The paper also pointed out 4 that although junk bonds have higher default and 5 loss ratios than bonds rated investment grade, the 6 loss ratios on high-yield bonds seem to correspond 7 fairly closely with the loss ratios on regular 8 commercial loans issued by money center banks." 9 Did you have any views on that? 10 A. No. I had no experience with that at 11 all. 12 Q. It goes on to conclude, "That is not to 13 say that investment in junk bonds is low risk, but 14 it does indicate that precluding of holding of 15 junk bonds on the grounds of safety and soundness 16 could be deemed arbitrary in the absence of data 17 to substantiate the assertion of excessive risk." 18 Do you agree with that? 19 A. I can't make any comments since I don't 20 have any information to compare it. I'm not 21 knowledgeable enough about the subject. 22 Q. Was this memo by Mr. Sahadi ever 18137 1 circulated out in the field that you know of? 2 A. Not to my knowledge. 3 Q. It seems to me he's telling the Federal 4 Home Loan Bank Board back in October of 1986 that 5 high-yield bonds really aren't all that risky. 6 I'm surprised that that information doesn't seem 7 to have been filtering down to those of you in the 8 field. 9 Do you know why that is? 10 A. I guess they decided who needed to 11 know, and we didn't need to know. 12 Q. Okay. I'm going to talk to you -- and 13 you'll be pleased to know this is the last topic 14 I'm going to talk to you about. 15 You were asked some questions by 16 Mr. Veis about trading in high-yield bonds and the 17 taking of gains on high-yield bonds. 18 Do you remember that? 19 A. Yes. 20 Q. I think he even had a favorite phrase, 21 which is -- I think I ought to be able to get this 22 by memory now -- "taking profits to enhance 18138 1 earnings or to enhance the capital of the 2 institution or to bolster the capital of the 3 institution." 4 Do you remember that? 5 A. Yes. 6 Q. As an examiner, Ms. Carlton, did you 7 generally find it objectionable when institutions 8 make profits? 9 A. No. 10 Q. I would think you would kind of like to 11 see that, don't you? 12 A. Right. 13 Q. Take a look for a moment at 14 Exhibit A14055A, and that is at Tab 1487. It 15 ought to be toward the bottom of the pile. 16 Now, you identified these earlier as 17 some notes you took summarizing investment 18 committee minutes at USAT; is that correct? 19 A. That's correct. 20 Q. On the first page of the document, 21 there is a reference -- and I assume this is to an 22 investment committee meeting that took place on 18139 1 April 24th, 1986. 2 Do you see that? 3 A. Yes. 4 Q. It starts out "routine business"? 5 A. Right. 6 Q. It then goes on to say, "The 7 association established the following investment 8 goals: (1) protection of capital, (2) the spread 9 between interest to be received from the corporate 10 debt security and the association's cost of funds, 11 and (3) capital appreciation." 12 Do you see that? 13 A. Right. 14 Q. I assume you're referring here to 15 high-yield bonds. It talks about corporate debt 16 security. 17 A. Yes. 18 Q. So, one of the goals of the high-yield 19 bond portfolio as you perceived it in June of 20 1986 -- or I'm sorry -- April of 1986 was capital 21 appreciation? 22 A. Right. 18140 1 Q. That was disclosed in the minutes of 2 the investment committee? 3 A. Correct. 4 Q. Keep that document in front of you but 5 take a look as well at a document called A12139. 6 That's at Tab 1599. 7 A. In the same folder? 8 Q. No. It should be -- let's see. I 9 think it's going to be three from the bottom. 10 Now, A12139, which I think was put in 11 evidence by Ms. Clark this morning, was a document 12 from the work papers of your 1987 exam, was it 13 not? 14 A. Yes. 15 Q. And it's also talking about the 16 high-yield securities portfolio, and it's headed 17 "investment limits and operating guidelines." If 18 you look down to Paragraph 6 on the first page, it 19 says, "Investment activity for the high-yield 20 security portfolio will reflect the following 21 priorities. First, capital preservation. Second, 22 management of yield spread. Third, capital 18141 1 appreciation." 2 Now, this was a document made available 3 to you during the 1987 examination, was it not? 4 A. That's correct. 5 Q. You know how high-yield bonds are 6 bought and sold within institutions, don't you? 7 A. Right. 8 Q. You buy a high-yield bond. You pay a 9 certain price for it; and you're going to collect 10 interest over a period of time, correct? 11 A. Correct. 12 Q. Assuming that the bond doesn't default. 13 We'll just take the norm. And you have a certain 14 risk, but the interest rate is set in a way that 15 theoretically compensates you for that risk? 16 A. If it functions properly. 17 Q. I'm talking the normal situation. Once 18 you buy that bond, there are really two things you 19 can do with it. You can hold it to maturity and 20 continue to collect the interest, or you can sell 21 it; is that correct? 22 A. Right. 18142 1 Q. And if you sell it, you may break even. 2 As we saw earlier with the Hudson Funding bond, 3 you may take a loss if you sell it for less than 4 you paid for it; or you might make a profit, 5 correct? 6 A. Right. 7 Q. If one of the goals of your high-yield 8 bond portfolio is capital appreciation as we saw 9 here was the case in 1986 or '87, how do you 10 realize capital appreciation? 11 A. You would have to sell it in order to 12 bring in an income. 13 Q. Capital appreciation doesn't do you any 14 good at all if the bond just sits there and you 15 hold it to maturity, does it? 16 A. You would have to make the 17 documentation whether you were holding it to 18 maturity or whether you were holding that 19 portfolio as a trading portfolio. 20 Q. But would you agree with me that if one 21 of the -- one of the goals in your portfolio is 22 capital appreciation, you're not going to meet 18143 1 that goal unless you sell some bonds from time to 2 time, are you? 3 A. Correct. 4 Q. And if you as an examiner are looking 5 at a portfolio of high-yield bonds and you see 6 capital appreciation as one of the goals, doesn't 7 that tell you that from time to time, sales are 8 going to be made and profits are going to be taken 9 out of that portfolio to bolster earnings? 10 A. Right. 11 MR. EISENHART: Thank you, Ms. Carlton. 12 I have no further questions. 13 THE COURT: We'll take a short recess. 14 15 (Whereupon, a short break was taken 16 from 2:56 p.m. to 3:18 p.m.) 17 18 THE COURT: Be seated, please. We'll 19 be back on the record. 20 Mr. Blankenstein, you have some 21 questions for Ms. Carlton? 22 MR. BLANKENSTEIN: Yes, I do, 18144 1 Your Honor. 2 3 EXAMINATION 4 5 Q. (BY MR. BLANKENSTEIN) Good afternoon. 6 My name is Paul Blankenstein; and I represent 7 Jenard Gross, one of the respondents in this 8 proceeding. 9 We've been in the courtroom together 10 for a few days now; but like you and 11 Mr. Eisenhart, we haven't been introduced. 12 So, hello, Ms. Carlton. How are you? 13 A. I'm doing good. How are you? 14 Q. You mentioned by client Jenard Gross in 15 connection with some sort of conflict of interest 16 pertaining to USAT's investment in Weingarten 17 Realty which you identified as an affiliated 18 transaction. 19 Do you remember your testimony in that 20 regard, Ms. Carlton? 21 A. Not the exact words. I recall that 22 situation, yes. 18145 1 Q. And that issue about Weingarten Realty 2 came up during the course of the 1986 examination; 3 is that right? 4 A. Right. 5 Q. Let me show you -- and you should have 6 in front of you -- what is already in evidence as 7 Exhibit A14019. That should be the top document 8 in front of you. 9 A. Yes. 10 Q. And that's the final interim report 11 that you prepared in connection with the 1986 12 examination; is that right? 13 A. That's correct. 14 Q. Do you remember discussing that report 15 with Mr. Veis and particularly the last page of 16 that report which is Page 15 that talks about 17 Weingarten Realty? 18 Do you remember that? 19 A. Yes. 20 Q. And you told Mr. Veis that Mr. Gross -- 21 that you noted in the report that Mr. Gross and 22 Mr. Hurwitz were both directors of USAT and 18146 1 Weingarten and that they both owned shares in UFG 2 and that in Mr. Gross' case, he also owned shares 3 in Weingarten Realty. 4 Do you remember that testimony? 5 A. Yes. 6 Q. And you went on to say that you noted 7 those things in the report because one of the 8 things that examiners regularly look for are 9 circumstances where directors can possibly enrich 10 themselves by causing the insured institution on 11 which they serve to engage in a transaction with 12 another company with which the directors are 13 affiliated? 14 Do you remember that? 15 A. Yes. 16 Q. And you had concerns in that connection 17 that were raised for two separate reasons. First, 18 that Mr. Gross and Mr. Hurwitz were both directors 19 of USAT and Weingarten. 20 Was that the first reason? 21 A. For Mr. Hurwitz -- he's of UFG. 22 Q. UFG and Weingarten. And Mr. Gross was 18147 1 a director of USAT and Weingarten. Was the first 2 reason you had? 3 A. Right. 4 Q. And for Mr. Gross, you had a separate 5 reason, which was that he was also a shareholder 6 of Weingarten Realty; is that right? 7 A. Right. 8 Q. Those were pretty serious charges that 9 you leveled, especially against Mr. Gross; isn't 10 that right, Ms. Carlton? 11 A. Right. 12 Q. But no supervisory action was ever 13 taken against Mr. Gross or against Mr. Hurwitz in 14 connection with this purported conflict of 15 interest related to Weingarten; isn't that right? 16 A. No, not to my knowledge. I don't 17 recall. 18 Q. In fact, there's not even a mention of 19 the Weingarten Realty issue in the final report of 20 the 1986 examination; isn't that right? 21 A. It could be. I would have to check. 22 Q. Take a look. That would be the next 18148 1 document in front of you. That's A140020, which 2 is already in evidence. 3 A. Okay. 4 Q. Now, if we look at the summary page of 5 the report, there's no mention of the Weingarten 6 Realty; and that's Page No. OW078149. 7 Do you have that? That's the 8 summary -- that's the first page that has the 9 summary report. 10 A. Yes. 11 Q. And there's no mention of the 12 Weingarten Realty conflict of interest listed 13 there, is there? 14 A. No. 15 Q. And I think you told Ms. Clark during 16 her examination that important issues that are 17 mentioned in the report are listed on the summary 18 page, is that right, in order of their importance? 19 A. Yes. 20 Q. And if you turn over to the management 21 section of the report, there's no mention of 22 Weingarten Realty or any conflict of interest 18149 1 involving Weingarten Realty in that section as 2 well, is there? 3 Is that right, Ms. -- 4 A. I'm looking through all the subject 5 matters of management. 6 Q. Why don't you take a look -- 7 A. (Witness reviews the document.) No. 8 Q. And if there was a conflict of interest 9 issue, it would appear there; is that right? 10 A. Right. 11 Q. The reason the final report of the 1986 12 examination is silent about this asserted conflict 13 as to Mr. Gross and Mr. Hurwitz is that it turned 14 out that there's absolutely no factual basis for 15 the concerns that you raised about a potential 16 conflict of interest; isn't that right? 17 A. The reason it's not in there is because 18 we had reported it in the -- in the interim 19 report, and there was a decision made that there's 20 no need to duplicate that data at that time. 21 Q. You didn't think that an issue of a 22 conflict of interest which you told me was a very 18150 1 serious charge that you leveled at Mr. Gross 2 shouldn't be included in the final report of the 3 examination? 4 Is that a decision you made? 5 A. That was a decision that -- when the 6 final report was presented, that was just not one 7 of the subject matters that was made a part of 8 that report. 9 Q. Let's see if there were any facts to 10 support your concerns about Mr. Gross first. 11 Let's get the facts of the Weingarten 12 Realty issue into the record. 13 A. Okay. 14 Q. First, do you remember when USAT 15 purchased its interest in Weingarten? 16 A. No, I don't recall the date. 17 Q. Why don't you take a look at the next 18 document in front of you, which is Exhibit A14054. 19 Do you have that, Ms. Carlton? 20 A. It starts off with "minutes"? 21 Q. Yes, that's right. 22 A. Okay. 18151 1 Q. Now, this is a summary of the board of 2 directors minutes that you prepared in connection 3 with the 1986 examination; is that right? 4 A. Right. 5 Q. And that's your handwriting? 6 A. Yes. 7 Q. And on the first page, there's a chart 8 which I call an attendance chart, is that right, 9 of directors at the board of directors meetings 10 for the period that you examined? 11 A. That's correct. 12 Q. And the earliest date, if I can read 13 this right, is January 25th, 1984? Is that the 14 earliest board of directors meeting? 15 A. That's correct. 16 Q. And the last board of directors meeting 17 that you looked at on this chart is 2/13/86, 18 February 13th, 1986; is that right? 19 A. That's correct. 20 Q. And on the left-hand margin, you list 21 all the directors of USAT; is that right? 22 A. That's correct. 18152 1 Q. And across the top, you have the dates 2 of each of the board of directors meetings; is 3 that right? 4 A. Right. 5 Q. And you record next to each of the 6 directors whether they are present or absent; is 7 that right? 8 A. Correct. 9 Q. And if they are present, you have a 10 checkmark; is that right? 11 A. Correct. 12 Q. And if they are absent, you put an "A"; 13 is that right? 14 A. Correct. 15 Q. Now, if you take a look at the line 16 next to Mr. Gross' name, are there checkmarks for 17 each one of the board of directors meetings? 18 A. That's correct. 19 Q. Does that indicate that he was present 20 at all of those meetings? 21 A. Yes. 22 Q. You would give him an "A" for 18153 1 attendance at least; is that right? 2 A. Yes. 3 Q. Why don't you take a look at Page 7, I 4 believe, of Exhibit 14054; and I think -- I don't 5 have -- my copy doesn't have an imaging number; 6 so, I can't tell you what it is other than by 7 looking at the next page. And my best guess is 8 that it's OW121042. 9 Does that help you, Ms. Carlton? And 10 in the lower right-hand corner, it has a number 7. 11 Do you see that? 12 A. It starts "the CRA statement"? 13 Q. Yes, that's right. And if you look in 14 the middle of the page, it says 8/29/84; is that 15 right? 16 A. Yes. 17 Q. And is that your summary of the events 18 that occurred during the August 29th, 1984 board 19 of directors minutes of United Savings 20 Association? 21 A. That's correct. 22 Q. And does that show that there was a 18154 1 discussion that day of a purchase by one of USAT's 2 subsidiary companies of a 36 percent interest in 3 Weingarten Realty? 4 A. Yes. 5 Q. If we can, for these purposes, ignore 6 the corporate form and talk about this as a 7 purchase by USAT of Weingarten shares, is that all 8 right with you? 9 A. It makes a difference. 10 Q. Well, if it does, why don't you point 11 it out to me as I go along. Okay? 12 A. Okay. 13 Q. So, the purchase occurred on or about 14 at the end of August or September of 1984; is that 15 right? 16 A. Yes. The 29th for exactness. 17 Q. Okay. And let's take a look at the 18 next exhibit now, which is A12069. And this is an 19 exhibit that was put into evidence earlier, I 20 believe, by Ms. Clark. And the first page is an 21 information request, No. 61? 22 A. That's correct. 18155 1 Q. And it was from a Mr. Curtis McKinney. 2 Was he a member of your examination team in 3 Dallas -- in Houston? 4 A. In Houston, yes. 5 Q. And it is to Ron Carlson. He was the 6 liaison for USAT? 7 A. Correct. 8 Q. And you're requesting information here 9 about Weingarten Realty? 10 A. Yes. 11 Q. In particular, you're looking for the 12 financial statements of Mr. Gross and Mr. Hurwitz? 13 A. Correct. 14 Q. And you also wanted to know when 15 Mr. Gross and Mr. Hurwitz were initially installed 16 as directors of Weingarten; is that right? 17 A. That's correct. 18 Q. And is it right that you got the 19 information that you requested? 20 A. I don't think we ever received the 21 actual financial statements. 22 Q. Well, let's look here. It says that 18156 1 you learned that Mr. Gross owned 31,605 shares of 2 Weingarten; isn't that right? 3 A. Right. 4 Q. And it also says that he purchased that 5 stock sometime in 1967 or 1968; is that right? 6 A. Yes. 7 Q. Okay. And it also tells you that 8 Mr. Hurwitz and Mr. Gross became directors of 9 Weingarten sometime in June of 1985? 10 A. Yes. 11 Q. Based on this information, your 12 conflict of interest antenna sensed the 13 possibility that because Mr. Gross was a 14 shareholder of Weingarten and a director of USAT 15 at the time USAT made this purchase of Weingarten 16 stock, there was some possibility that he may have 17 influenced that purchase in a way to profit 18 himself personally; is that right? 19 A. Yes. 20 Q. But if Mr. Gross was not an officer or 21 director of USAT at the time of the purchase, 22 would you still believe that he had a conflict of 18157 1 interest? 2 A. Well, we would use it in conjunction as 3 we went along on other analyses; but it was data 4 that was maintained. It was data that was 5 maintained. 6 Q. I thought you told me you had two 7 reasons, two reasons for this conflict of interest 8 concern that you had. And one was that Mr. Gross 9 was both a director of USAT and a shareholder in 10 Weingarten Realty and that he may have influenced 11 USAT to purchase the shares in Weingarten in order 12 to profit himself personally. 13 Wasn't that your concern? 14 A. That was one of them, yes. 15 Q. Okay. Would you still have that 16 concern if it turned out that Mr. Gross was not a 17 director of USAT at the time USAT purchased its 18 interest in Weingarten? 19 A. It would have been a lesser interest. 20 That was one of the reasons we wanted to know when 21 he became -- when -- the other questions that went 22 along with this. 18158 1 Q. Well, if Mr. Gross had no connection 2 with USAT at the time of the purchase, what 3 possible conflict of interest could arise from 4 that circumstance alone? 5 A. We had to make sure that he was not 6 affiliated through family members or other -- any 7 other relationship with him being an officer that 8 could have clouded that relationship as far as 9 working in concert with someone else. 10 Q. Well, let's see if we can find out when 11 Mr. Gross joined USAT as an officer and director. 12 If you would take a look at the next 13 exhibit in front of you, A1102. 14 A. (Witness reviews the document.) 15 Q. Those are the minutes of the 16 February 14th, 1985 meeting of the United Savings 17 Association of Texas board of directors; is that 18 right? 19 A. Yes. 20 Q. And if you take a look at the third 21 paragraph, could you read that out loud for me, 22 please? The one that starts "Mr. Bentley," could 18159 1 you read that out loud for the record? 2 A. "Mr. Bentley called to the board's 3 attention the minutes of the January 24th, '85 4 annual meeting of the association and the election 5 of Mr. Gross and Dr. Kozmetsky as new members of 6 the association's board of directors." 7 Q. And now if you would turn over to 8 Page 4 of the exhibit under the heading of 9 "executive," it shows that Mr. Gross was appointed 10 chairman of the board and CEO of United Savings 11 Association; is that right? 12 A. Correct. 13 Q. So, this shows that Mr. Gross joined 14 USAT in February of 1985, some six months after 15 USAT had purchased its shares in Weingarten? 16 A. Right. 17 Q. And you still think that's a conflict 18 of interest? 19 A. Well, we still reviewed to determine -- 20 Q. I understand you reviewed. But do you 21 agree with me now that the reason there's no 22 mention in the '86 report, the final report, is 18160 1 because the facts simply didn't support the charge 2 that Mr. Gross had a conflict of interest? 3 A. We also have an obligation to show any 4 appearance of conflict, also. 5 Q. And you think that appearance resulted 6 from the fact that Mr. Gross -- after February of 7 1985, he sat on the boards of both Weingarten and 8 USAT? 9 A. Right. 10 Q. All right. Isn't it true, Ms. Carlton, 11 that both Mr. Gross and Mr. Hurwitz were elected 12 to the board of Weingarten pursuant to an 13 agreement between USAT and Weingarten and they 14 were put on that board in order to represent the 15 interests of USAT to protect USAT's investment in 16 Weingarten? 17 A. I think you will see some 18 correspondence on that, yes. 19 Q. So, there is no real conflict of 20 interest, is there, if Mr. Hurwitz and Mr. Gross 21 were sitting on the board of Weingarten at the 22 specific direction of USAT in order to represent 18161 1 and protect USAT's interests; isn't that right? 2 A. You really can't tell, but that -- 3 that's a possibility. 4 Q. Well, let's see if we can tell whether 5 that's, in fact, the case. 6 You should have in front of you 7 Exhibit B573. I'm sorry. You don't have that 8 exhibit. Mr. Perry will give it to you. 9 This is an August 16th, 1985 prospectus 10 of Weingarten Realty; is that right, Ms. Carlton? 11 A. Yes. 12 Q. And if you turn back to Exhibit A12069, 13 which is the information request, it shows that 14 Mr. Hurwitz and Mr. Gross were appointed to or 15 elected to the board of Weingarten pursuant to an 16 agreement with Weingarten. 17 Is that what's referenced here? 18 A. Right. 19 Q. And is that your handwriting? 20 A. Yes. 21 Q. Let's just check that out in the 22 Weingarten prospectus of August of 1985. 18162 1 MR. BLANKENSTEIN: Your Honor, I would 2 move B573 into evidence. 3 MR. VEIS: No objection, Your Honor. 4 THE COURT: Received. 5 Q. (BY MR. BLANKENSTEIN) Now, if you turn 6 to Page 32 of the exhibit, that's a list -- if you 7 turn to the preceding page, you'll see that's a 8 continuation of the list of the directors and 9 executive officers of Weingarten; is that right? 10 A. Correct. 11 Q. And the first two names on Page 32 are 12 Jenard M. Gross and Charles E. Hurwitz; is that 13 right? 14 A. That's correct. 15 Q. And they are listed as directors; is 16 that right? 17 A. That's correct. 18 Q. And next to the director is a number 2 19 in parentheses; is that right? 20 A. Yes. 21 Q. That's the same both for Mr. Hurwitz 22 and Mr. Gross? 18163 1 A. Yes. 2 Q. If you look down in the footnotes 3 underneath, it says, "Nominated and elected 4 pursuant to the terms of an agreement among the 5 company and certain of the company's principal 6 shareholders, which agreement requires the parties 7 thereto to use their best efforts to nominate and 8 cause to be elected as directors two persons 9 designated by United Financial Group, Inc., the 10 indirect parent of the selling shareholder." 11 Do you see that? 12 A. Yes. 13 Q. And then it says, "See principal 14 shareholders - shareholder agreements - standstill 15 agreement"; is that right? 16 A. Right. 17 Q. And if you turn over to Page 44, it 18 describes -- tell me when you get there, 19 Ms. Carlton. 20 A. I'm there. 21 Q. Okay. At the top of the page, it says 22 "shareholder agreement"? 18164 1 A. Yes. 2 Q. Then underneath that, it says 3 "standstill agreement"; is that right? 4 A. Yes. 5 Q. Then it goes on to describe the 6 standstill agreement? 7 A. Right. 8 Q. And on the third page -- excuse me. In 9 the third paragraph, it shows that the parties to 10 the standstill agreement have agreed to use their 11 best efforts to nominate and cause to be elected 12 as director two persons designated by United. 13 Messrs. Hurwitz and Gross have been elected to the 14 board of directors pursuant to this provision of 15 the standstill agreement"? 16 A. Right. 17 Q. So, did you know that back during the 18 course of the 1986 examination that Mr. Gross and 19 Mr. Hurwitz had, in fact, been nominated and 20 elected to the board of Weingarten pursuant to the 21 standstill agreement? 22 A. Yes. 18165 1 Q. Do you agree with me, Ms. Carlton, that 2 given the fact that Mr. Gross and Mr. Hurwitz 3 served on the board of Weingarten at the specific 4 direction of USAT pursuant to the standstill 5 agreement, that there was no conflict of interest 6 of any kind involving the joint service on the 7 boards of Weingarten and USAT? 8 A. That only showed that when they -- that 9 it had an agreement that addressed that. We were 10 also looking at the Schnitzer family and Alexander 11 family and if you had any family relationships 12 into those, in-law relationships also. 13 Q. Did you find any relationships among -- 14 did you say the Schindler family? 15 A. Schnitzer. We were not able to find 16 any information. 17 Q. You weren't able to find out anything 18 that Mr. Gross or Mr. Hurwitz had any family 19 relations with either the Alexanders or the 20 Schnitzers? 21 A. No. 22 Q. That's why there's no mention in the 18166 1 1986 report of this purported conflict of interest 2 because there was no factual basis for the 3 allegations that you made in the interim final 4 report; isn't that right? 5 A. It was the -- the appearance still 6 exists. 7 Q. And the appearance still exists in your 8 mind even if Mr. Gross and Mr. Hurwitz were 9 serving on the board of Weingarten because USAT 10 specifically directed that they do that? 11 A. We still felt that it was -- it was -- 12 the appearance existed; and it was a possibility, 13 although we could not prove it. We felt that it 14 was a possibility that there was some influence 15 there. 16 Q. So, you put these comments in your 17 final interim report even though you didn't have 18 any proof to suggest that there was any conflict 19 of interest of any sort. 20 Is that what I heard you say? 21 A. Right. 22 Q. And you think it's appropriate to put 18167 1 into an official record of a federal examination 2 information that you know is wrong or that you 3 can't prove? 4 A. The reg states that if there is an 5 appearance, we were directed -- they would ask 6 some questions about the affiliation. In the 7 interim reports, we do put information that is not 8 complete at that time or the review is not 9 complete; and if the appearance is there, it does 10 get reported. 11 Q. Now, did the appearance end and that's 12 why you didn't put it in the final report? 13 A. That's one of the reasons we didn't 14 choose to put it in the final report was because 15 it was an item that was still provided to Dallas 16 for them to take advantage of it and not 17 necessarily for the examination. 18 Q. Now, at least with Mr. Gross' stock 19 ownership and the concern that you had that he may 20 have used his influence as a director of USAT to 21 influence -- to cause USAT to purchase shares of 22 Weingarten, we now know that's not true. Right? 18168 1 A. I don't know that for a fact. 2 Q. Well, he wasn't -- we've established, 3 haven't we, that he wasn't a director of USAT 4 until February of 1985, six months after the 5 Weingarten purchase? 6 A. I see the order of the purchase. 7 Q. And so, how, if he wasn't a director -- 8 you don't have any other information that he 9 somehow influenced the Weingarten purchase, do 10 you? 11 A. No. I have no other information. 12 Q. So, he couldn't have -- there was no 13 conflict, right, in those circumstances? 14 A. I have no evidence of that. 15 Q. But you put it in the interim report 16 based upon a mistake that you made that you 17 thought Mr. Gross was a director in August of 18 1984; isn't that right? 19 A. No. 20 Q. Well, did you think he was a director 21 in August of 1984 or not? 22 A. It was not a mistake. Those were the 18169 1 facts that we had. In September, we went back and 2 gathered -- as the review at the time, that was 3 information we had. It went into the interim 4 report as the status of the review at that time. 5 In September, we went back and 6 requested additional information, went back to the 7 institution to -- and asked for additional 8 information. 9 Q. Okay. Now, what's the -- if you would 10 pick up your interim report, which is 11 Exhibit A14019, it's dated October 10th, 1986; is 12 that right? 13 A. Right. 14 Q. That's after you had gathered all the 15 information you were going to gather. Right? 16 A. Yes. 17 Q. I'm sorry? 18 A. It was one of the items we had to 19 report on, regardless. It was an item to report 20 on. So, it would -- it was going in the interim 21 report because we had been asked to report on 22 affiliated transactions or situations. 18170 1 Q. And do you remember we -- we discussed 2 your attendance chart? 3 A. Right. 4 Q. And you told me that Mr. Gross -- you 5 had recorded Mr. Gross present on August 29th, 6 1984? 7 A. Right. 8 Q. And that was a mistake. Right? 9 Mr. Gross wasn't present at the board meeting that 10 was held on August 29th, 1984; isn't that right? 11 A. That information was provided by the 12 institution; so, I don't know whether it was right 13 or wrong. 14 Q. Well, let's take a look. You reviewed 15 the board minutes, didn't you? 16 A. Yes. 17 Q. And what we have here is your summary 18 of the board minutes of August 29th, 1984; isn't 19 that right? 20 A. That's correct. And what we do in 21 order to fill out this chart, they have typed in 22 those minutes the individuals that are in 18171 1 attendance. So, if it was typed, then it's 2 checked up here. 3 Q. Why don't we take a look at the minutes 4 of that meeting of August 29th, 1984. That's 5 Exhibit A10545. 6 Do you have that in front of you, 7 Ms. Carlton? 8 A. Okay. 9 Q. Now, does it indicate in those minutes 10 that Mr. Gross was in attendance? 11 A. It says all directors were present 12 except Mr. Whatley. 13 Q. And you assumed that Mr. Gross was a 14 director in August of 1984; is that right? 15 A. I would say yes. 16 Q. And that was a mistake. Right? 17 A. I guess based on this, yes. 18 Q. And you just -- and if we go back to 19 the August -- excuse me. If we go back to the 20 February 14th, 1985 minutes which we looked at, 21 you saw Mr. Bentley had announced that Mr. Gross 22 and Dr. Kozmetsky had been newly elected as 18172 1 directors of USAT; isn't that right? 2 A. "Newly elected," do you mean that was 3 that first time? 4 Q. Isn't that how understand it? Newly 5 elected? 6 A. That's what I'm asking you. I don't 7 know. 8 Q. Well, how did you read it at the time? 9 A. Undoubtedly, I had him prior to that 10 time. 11 Q. Excuse me? 12 A. I said undoubtedly, he was listed prior 13 to that time -- 14 Q. Now -- 15 A. -- in more than one meeting. So, I 16 guess my assumption at that time was that he was 17 on; and I don't know where I got that information 18 from. 19 Q. Do you remember Mr. Veis showed you a 20 newspaper article during your examination? 21 A. Right. 22 Q. And didn't that newspaper article say 18173 1 that Mr. Gross joined USAT in February of 1985? 2 A. I don't recall the date in that 3 article. 4 Q. You don't remember the date? 5 A. No. 6 Q. Now, do you know how the Weingarten 7 Realty investment turned out for USAT? 8 A. It was a profitable investment. 9 Q. Do you know how much they made? 10 A. Not exactly, no. 11 Q. Let me show you what's A14067 and see 12 if this refreshes your recollection as to whether 13 you knew when Mr. Gross joined USAT. I think the 14 highlighted part indicates that it was in February 15 of 1985? 16 A. Yes. 17 Q. So, you made a mistake? 18 A. Right. 19 Q. And you made a mistake in the official 20 records of a federal examination; is that right? 21 A. Correct. 22 Q. And that mistake caused you to level 18174 1 charges against Mr. Gross which turned out not to 2 be true. Right? 3 A. No. That just meant that for those 4 minutes, it reflected that I had him in attendance 5 in a meeting in which he had not been on board. 6 The analysis on Weingarten, that was a separate 7 analysis. 8 Q. The analysis on Weingarten was based on 9 the fact that Mr. Gross was a director of USAT in 10 August of 1984 and had influenced or possibly had 11 influenced that purchase of Weingarten so that he 12 could profit personally from his share holdings. 13 Isn't that what you told me earlier? 14 A. No. I stated we had requested 15 information in order to determine when he was 16 assigned to the board so we would not make a 17 mistake in our analysis. 18 Q. And you had a copy of the August 29th, 19 1984 minutes; is that correct? 20 A. Yes. 21 Q. And it doesn't show that Mr. Gross was 22 in attendance, does it? 18175 1 A. But we still put in the request -- 2 Q. And you had in the work file a copy of 3 this newspaper article that told you that he 4 joined USAT in February of 1985; is that right? 5 A. Right. 6 Q. You made a mistake. Right? 7 A. In the minutes. 8 Q. You made an honest mistake; is that 9 right? 10 A. Right. 11 Q. And does that mean you're an 12 incompetent examiner because you made a mistake? 13 A. No. 14 Q. Does it mean you're untrustworthy 15 because you made a mistake? 16 A. No. 17 Q. Does it mean you're incompetent because 18 the records of a federal examination now have 19 erroneous information in them? 20 A. No. 21 Q. Does it mean you're untrustworthy 22 because the files of a federal examination have 18176 1 erroneous information in them? 2 A. No. 3 Q. But you were willing to accuse the 4 respondents of being untrustworthy because there 5 was some loan files at USAT that were misfiled; 6 isn't that right? 7 A. No. 8 Q. That's not what you said? 9 A. The exceptions are -- by design of the 10 process, books and records fall under your 11 evaluation of management. 12 Q. But did you say -- I'm sorry. 13 A. That responsibility as managers to 14 assure that those things are done. That's part of 15 their job description. And if it's not there, 16 it's addressed as an exception. That's the way 17 the policies and guidelines are that goes into 18 evaluating management. That's not my personal 19 assessment. That's following the guidelines set 20 out by the regulations. 21 Q. Did I misunderstand you, then, when I 22 thought that you testified that part of the 18177 1 problems in the books and records of USAT, 2 including having construction loans and mobile 3 home loan files, demonstrated some 4 untrustworthiness on the part of the management of 5 USAT? 6 A. That demonstrates books and records 7 problems. 8 Q. It's just a mistake; is that right? 9 A. It demonstrates the books and 10 records -- that once the books and records are to 11 a certain degree, then -- not being correct, then 12 the integrity of the books and the integrity of 13 the management is at question as a part of that 14 analysis. 15 Q. Would you apply that same standard to 16 yourself? 17 A. Correct. 18 Q. So, the fact that you made a mistake, 19 does that raise questions about your integrity? 20 A. If you see consistent errors made by me 21 in examination reports, if you see the facts 22 totally being distorted by the records, that is 18178 1 grounds to question my integrity. 2 Q. Okay. Let's take a look at 3 Exhibit 14047. That's already in evidence. This 4 is Tab 1462. 5 This is the confidential or the 6 privileged information section of the examination 7 report for the '86 exam; is that right? 8 A. Correct. 9 Q. And this is the part that doesn't go to 10 the association? 11 A. Correct. 12 Q. It only goes to -- it only went to 13 Dallas and to the regulators in Washington? 14 A. It was an in-house document, yes. 15 Q. And Item No. 3 says, "Are the directors 16 persons of independent judgment who take an active 17 role in the guidance of association's affairs? If 18 not, comment." 19 And your comment is, "No. The three 20 directors -- Mr. Gross, Mr. Williams, and 21 Mr. Munitz -- who are officers of the association, 22 do take an active role in the guidance of the 18179 1 association's affairs." 2 I was unclear by what you meant there. 3 Are you suggesting that Mr. Munitz, Mr. Gross, and 4 Mr. Williams were persons of independent judgment; 5 or were you suggesting that they were not persons 6 of independent judgment? 7 A. That they were persons not totally of 8 independent judgment. 9 Q. That's what I thought I remembered you 10 testifying. 11 And if I remember right, you said you 12 came to that conclusion, in part, based upon your 13 review of the board minutes; is that right? 14 A. Correct. 15 Q. Now, can you tell me what in the board 16 minutes that you reviewed led you to that 17 conclusion? 18 A. In reviewing different board minutes, 19 we looked for the individuals that would be 20 authorizing or approving information; and those 21 individuals, in a lot of cases, was silent of 22 presenting facts or silent of being, I would say, 18180 1 outspoken in those -- in conduction of meetings as 2 far as presenting different activities. 3 Q. Now -- so, one of the things you 4 noticed about Mr. Gross is that he didn't speak up 5 in a number of these board meetings; is that 6 right? 7 A. Right. 8 Q. And that's because he wasn't there; 9 isn't that right? He wasn't a director until 10 February of 1985. So, the fact that he had 11 nothing to say before that is not indicative of 12 much, is it, Ms. Carlton? 13 A. That's correct. 14 Q. Is that another mistake that you made 15 in the records of a federal examination? 16 A. No. In this comment here, there's no 17 designated time frame. 18 Q. Okay. Would we be able to notice from 19 your summaries of the board meetings what you 20 observed in those minutes that caused you to reach 21 this conclusion with Mr. Gross for the meetings 22 that occurred after February 14th, 1985? 18181 1 A. No. 2 Q. So, you didn't record that anyplace; is 3 that right? 4 A. No. 5 Q. You know, we were talking about -- and 6 I had forgotten. We were talking about the 7 Weingarten Realty investment. And you told me 8 that it had been profitable, but you didn't 9 remember how profitable it was; is that right? 10 A. Right. 11 Q. Let's see if we can just finish the 12 picture with Weingarten Realty. If I can find the 13 appropriate document, we'll be okay. It's 14 Exhibit A11033. 15 Now, this is -- it's headed "USAT - 16 December 15th, 1987 index." 17 Do you recognize this document, 18 Ms. Carlton? 19 A. Yes. It was a document used for a 20 meeting that was held. 21 Q. And there's some handwriting on the 22 first page. Is that yours? 18182 1 A. Yes, it is. 2 MR. BLANKENSTEIN: Your Honor, I would 3 move A11033 into evidence. 4 MR. VEIS: No objection, Your Honor. 5 THE COURT: Received. 6 Q. (BY MR. BLANKENSTEIN) If you look under 7 the fourth Roman numeral, it's entitled 8 "Weingarten Realty." 9 Do you see that on the first page? 10 A. Right. 11 Q. And does that tell you -- does that 12 refresh your recollection as to what the profit 13 was for USAT from the Weingarten Realty 14 investment? 15 A. Correct. 16 Q. How much was it? 17 A. It was 25.4 million. 18 Q. Would you agree with me, Ms. Carlton, 19 that if all of USAT's investments turned out as 20 profitably, USAT would still be in business and 21 none of us would be here today? 22 A. Well, I can't go that far. I don't 18183 1 know what generated all the losses to the 2 proportion of gains but -- 3 Q. But if all the investments were this 4 profitable, then there wouldn't have been any 5 losses; and there would be no proceeding. Right? 6 A. I don't know -- you're talking 7 percentages which I can't calculate here, but it 8 was a profitable investment. I would not deny 9 that. 10 Q. There is another area that I'm going to 11 ask you some questions on, and it's the area of 12 compensation in which you provided some testimony 13 about. 14 Let's start off by looking at what the 15 regulations say about compensation to be paid to 16 officers and directors of an insurance 17 association. Is that okay with you? 18 A. That's fine. 19 Q. What I've done is I've blown up the 20 then-governing regulations so it would be easier 21 for you and I talk to about them. 22 The first one I want to talk to you 18184 1 about is Section 563.17 of CFR -- of 12 CFR. 2 MR. VEIS: Could you put the date of 3 the CFR in? 4 MR. BLANKENSTEIN: 1986. 5 Q. (BY MR. BLANKENSTEIN) And it's entitled 6 "management and financial policies"; is that 7 right? 8 A. Right. 9 Q. Are you familiar with this regulation? 10 A. Yes, I am. 11 Q. And it talks about -- in Section B, it 12 talks about compensation? 13 A. Right. 14 Q. It says, "Compensation to officers, 15 directors, and employees of each insured 16 institution and its service corporations shall not 17 be in excess of that which is reasonable and 18 commensurate with their duties and 19 responsibilities." 20 Did I get that right? 21 A. Right. 22 Q. It doesn't provide a lot of guidance, 18185 1 does it, for the officers and directors to set 2 compensation; is that right? 3 A. No. 4 Q. Very general? 5 A. Right. 6 Q. Do you remember whether, in that 7 connection, the Bank Board provided some 8 guidelines to provide some more concrete guidance 9 to help the management of an insured institution 10 to set appropriate and reasonable compensation 11 levels? 12 A. I think they had an R bulletin. 13 Q. Was it an R42? Does that refresh your 14 recollection? 15 A. I don't know the number. 16 Q. Okay. Let's take a look at R42, which 17 is Exhibit B4247. Why don't you take a look at 18 that and see if this refreshes your recollection 19 as this being the R bulletin that you mentioned 20 that the Bank Board issued to provide some more 21 concrete guidance in the area of compensation. 22 A. It is. 18186 1 Q. Now, it says that, "In making 2 determinations concerning institution's officers, 3 the board of directors should include at least the 4 following in the factors to which consideration is 5 given for the purpose of setting compensation"; is 6 that right? 7 A. Right. 8 Q. It sets out seven factors? 9 A. Right. 10 Q. The first one is the qualifications and 11 the experience of persons concerned? 12 A. Yes. 13 Q. Second, the compensation paid to other 14 persons employed by the institution or service 15 corporations; is that right? 16 A. Right. 17 Q. What did you understand that to mean? 18 What were you supposed to look at? What were the 19 board of directors supposed to look at in that 20 connection? 21 A. You would look at the activity that the 22 officers -- that they are assigned to be officers 18187 1 and manage the activity of the subsidiary; and 2 with that line position of that, they carried what 3 salaries should be reasonable for that position. 4 Q. Did you understand it to be that there 5 should be some sense of proportionality with 6 regard to the salary structure, some hierarchical 7 salary structure within the institution, like the 8 president should get more than the vice president? 9 A. Right. 10 Q. And Fact No. 3 was the compensation 11 paid to persons having similar duties and 12 responsibilities in other institutions? 13 A. Right. 14 Q. And that was a comparative study. You 15 looked at comparable institutions to see how they 16 were paying; is that right? 17 A. Right, based on the -- if you had a 18 president at one institution that was an executive 19 VP that carried other responsibilities along with 20 just being -- in some cases, you have a person 21 that's a president. He's also the chairman of the 22 board. So, you distinguish between one individual 18188 1 that's only functioning as president versus 2 another individual that's functioning as president 3 and chairman of the board. 4 Q. And in that connection, when you had 5 those responsibilities combined, you took that 6 into account? 7 A. Right. 8 Q. The next thing is the size of the 9 institution or the service corporation and the 10 complexity of its operations; is that right? 11 A. That's correct. 12 Q. What did you look for there? 13 A. You would look at the diversification 14 of the portfolios, say, if you had a company that 15 had a mortgage company that's involved or if you 16 had a institution that was basically just a 17 single-family portfolio. 18 Q. So, if it was a single-family 19 portfolio, it would be a less complex operation 20 than an institution that had moved away from 21 traditional thrift business; is that right? 22 A. Correct. 18189 1 Q. And you would take that into account? 2 A. Correct. 3 Q. No. 5 is the financial condition 4 including the income of the institution and the 5 individual's contribution thereto; is that right? 6 A. Correct. 7 Q. What did you look for in connection 8 with that factor? 9 A. If a -- you measured the performance of 10 a management team by their bottom-line operations. 11 Say, if you've got an insolvent institution, you 12 wouldn't say that those guys had purchased 13 profitably; and that would be reflected in that 14 they should not receive bonuses or get salary 15 increases at the end of that period in which that 16 took place. 17 Q. And No. 6, "Any amounts received, 18 either directly or indirectly, by the officer 19 whose principal occupation is with the institution 20 or service corporation for other services 21 performed for the institution or service 22 corporation (i.e., fees for serving as an 18190 1 appraiser, attorney, escrow agent, insurance 2 agent, et cetera.)" 3 What did you look for in connection 4 with that factor? 5 A. We had a page in the report wherein we 6 take -- we call it other remunerations. And other 7 remunerations, you would find fees or if they were 8 allocated cars or boats or airplanes, whatever 9 else was a part of that benefit package, you added 10 all of that together to become that person's total 11 package. 12 Q. Was this benefit package that you 13 referred to No. 7, the value of personnel fringe 14 benefits provided to the employee and also 15 perquisites such as an automobile, club 16 membership, and expense account? 17 A. Yes. 18 Q. So, it would fit in there. Let's go 19 back to 6. Fact No. 6, what you were looking for 20 there is whether they were receiving income for 21 other services that they provided to the thrift 22 such as if they were getting money as an escrow 18191 1 agent? 2 A. Right. And for their positions in the 3 service corporations, typically, you have fees 4 sometimes that can be charged for them attending 5 meetings of different suborganizations. 6 Q. So, you're looking for income outside 7 the normal compensation system that they might be 8 receiving; is that right? 9 A. That's correct. 10 Q. You needed to take into account at 11 least all of these seven factors; is that right? 12 A. Right. 13 Q. It was not one factor that predominated 14 over the others; isn't that right? 15 A. It was according to what information 16 you had and based on what -- each institution is 17 different based on the activity of that 18 institution. 19 Q. And you had to look at all of those 20 factors and measure it against the facts and 21 circumstances that existed at the time in the 22 particular institution; isn't that right? 18192 1 A. And based on what information the 2 institution did provide or did not provide. 3 Q. Now, this was guidance, right, for the 4 directors of the institution? 5 A. Right. 6 Q. Okay. But the examiners used this as 7 guidance as well when they reviewed the decisions 8 of the directors in setting salary, compensation, 9 bonuses; isn't that right? 10 A. Right. We would review what the 11 directors and management is charged with being 12 responsible for and determine if they had abided 13 by those guidelines. 14 Q. And in looking -- in doing that review, 15 you yourself were guided by these seven factors; 16 isn't that right? 17 A. Correct. 18 Q. Now, was a compensation review a 19 regular part of an examination? 20 A. In institutions where it was questioned 21 or warranted. It was not in every examination, 22 but there were in several -- in several 18193 1 institutions, we did do that. 2 Q. But did you always look at the salary 3 and bonuses of the senior officers of the 4 institution? 5 A. It could be a combination of even down 6 to teller level up. It was -- it varied. 7 Q. Didn't the report, the final report, 8 list the salary, the base salary, any bonuses 9 received by the principal officers of the 10 institution? 11 A. Right. You're talking specific now. 12 Yes. 13 Q. Well, any institution. Isn't that 14 typical in any examination report? 15 A. It's based on what we are looking for. 16 In the United report, it was VP and above. 17 Q. But you would list the salary of the 18 principal officers in any institution that you 19 were reviewing in the examination report; isn't 20 that right? 21 A. Correct. 22 Q. And you would list whatever bonuses 18194 1 they received? 2 A. Correct. 3 Q. And other directors' fees that they 4 might receive? 5 A. Yes. We have a page that's a mandatory 6 page on which you provide that data. 7 Q. Let's go back to 563.17, I believe. If 8 the compensation was in excess of what was 9 reasonable and commensurate for the duties and 10 responsibilities of the officers, would that be an 11 unsafe and unsound practice? 12 A. Yes. 13 Q. If the officers of an insured 14 association were being paid unreasonable 15 compensation, would that constitute an unsafe and 16 unsound practice? 17 A. Yes. 18 Q. And when you looked at the salaries and 19 bonuses received in filling out that page that you 20 said was standard, one of the things you would 21 look to see is whether the salaries and bonuses 22 were reasonable or not; isn't that right? 18195 1 A. Right. 2 Q. And if you concluded that there was -- 3 the compensation was unreasonable and constituted 4 unsafe and unsound conditions or practices, you 5 would note that in the report of examination; 6 isn't that right? 7 A. No. 8 Q. Weren't you directed to report all 9 unsafe and unsound practices that you found? 10 A. We would report that salary information 11 in the form that I recorded it in the confidential 12 information section. 13 Q. Let's assume that you looked at the 14 salary and you were examining the Beverly Hills 15 Savings Association -- and I believe the president 16 or CEO was a fellow by the name of Thomas 17 Spiegel -- and he was paying himself $3 million a 18 year and you came across that information and you 19 concluded that it was excessive. 20 Would you write that in the report of 21 examination that it was an unsafe and unsound 22 compensation practice? 18196 1 A. Not in every case. 2 Q. Even if you found that there was an 3 unsafe and unsound compensation practice, you 4 wouldn't put it in the examination report? 5 A. Right. 6 Q. Weren't you directed -- didn't you go 7 over with Ms. Clark the other day the directions 8 that you received in connection with the 9 preparation of examination reports, and one of the 10 things that you were supposed to do was identify 11 and comment about unsafe and unsound practices? 12 A. One of the rules in '86 was that you 13 provided it in the confidential section. 14 Q. Now, the confidential section doesn't 15 go to the institution; is that right? 16 A. Right. 17 Q. So, they don't know that you've 18 concluded that they have an unsafe and unsound 19 compensation system; is that right? 20 A. The supervisory agent -- they would be 21 communicated on that point. 22 Q. Would they been told in the final 18197 1 examination report? 2 A. It's not in every case. 3 Q. Well, when would you -- when would it 4 be that you would decide to mention compensation 5 in an examination report? 6 A. I think you will find that '87 was the 7 period in which we started commenting on 8 management and providing information on 9 management. It was the later years that we 10 started providing, in the open report, comments on 11 management as far as their competency, as far as 12 their salary information and reaching conclusions 13 on that -- on that information and even disclosing 14 the ratings. 15 That was a period of time when that was 16 not done. 17 Q. Before 1987, you didn't do that? 18 A. Well, I'm not saying we -- I'm saying 19 in '87, that was authorized as a reporting, which 20 we did do that. 21 And in this report in '86, if 22 management guided us to do it, it would go in 18198 1 there; but not as a general practice, it was not. 2 Q. Okay. You testified last Wednesday, if 3 I remember right, that during the 1986 examination 4 of USAT, you found that USAT's bonuses were in 5 excess of those paid by comparable institutions. 6 Do you remember that testimony? 7 A. Right. 8 Q. And you said that you questioned its 9 compensation because it was failing its net worth 10 requirements. 11 Do you remember that, as well? 12 A. Right. 13 Q. Now, if you can go back to the 1986 14 report. 15 A. What page? 16 Q. Well, you tell me, Ms. Carlton. Is 17 there any place in that 1986 report that offers 18 any criticism of any sort about the compensation 19 that USAT was paying its officers? I can't find 20 it. 21 A. It's not -- 22 Q. So, there's no criticism of USAT's 18199 1 compensation practices in the 1986 report, 2 correct? 3 A. That's correct. 4 Q. And do you remember you prepared three 5 interim reports during the 1986 exam? And they 6 are Exhibit A14016, A14017, and A14019. 7 A. Yes. 8 Q. And they are dated July 17th, 1986; 9 September 19th, 1986; and October 10th, 1986? 10 A. Right. 11 Q. And is there any mention of 12 compensation or any criticism of USAT's 13 compensation in any one of these reports? 14 A. (Witness reviews the documents.) No. 15 Q. Was one of the objectives of the 16 examination process to bring to the attention of 17 management deficiencies in its operations so that 18 they could correct those deficiencies? 19 A. Yes. 20 Q. And it was important to bring it to the 21 attention -- to bring those deficiencies to the 22 attention of management in a timely fashion; isn't 18200 1 that right? 2 A. Right. 3 Q. So, if you came across an unsafe and 4 unsound practice, would that be a deficiency in 5 the operation of the insured association? 6 A. Right. 7 Q. And you were obliged to bring that to 8 the attention of management so they could correct 9 that deficiency, correct? 10 A. Right. 11 Q. And the way to bring that to the 12 attention of management was either -- was in the 13 examination report. Isn't that what you were 14 directed to do? 15 A. Through either examination reports or 16 meetings with management. 17 Q. Now, did you have -- we've gone through 18 the 1986 report, the final report, and the three 19 interim reports; and there's no criticism of 20 management, is that right, on compensation issues? 21 A. Right. 22 Q. Now, I want you to turn back to 18201 1 Exhibit A14047. That's the privileged information 2 section? 3 A. Correct. 4 Q. Now, take a look at Item No. 11, which 5 is on the second page of the exhibit. And Item 6 No. 11 talks about, "Are fees, bonuses, expense 7 accounts, or other compensation given directors 8 and officers considered excessive? If so, 9 comment"? 10 A. Right. 11 Q. Did you comment there? 12 A. Yes. 13 Q. And you said that Mr. Jenard Gross and 14 Mr. Gerald Williams received bonuses of 90,000 and 15 70,000 respectively. These amounts appear 16 excessive when considering that they were paid 17 salaries of 250,000 and 242,000 respectively per 18 year; is that right? 19 A. Right. 20 Q. This was the privileged information 21 part that didn't go to the association? 22 A. That's correct. 18202 1 Q. So, USAT had no way of knowing of your 2 concerns about the bonuses that Mr. Gross and 3 Mr. Williams were receiving; isn't that right? 4 A. Right. 5 Q. Now, is the reason that you didn't 6 communicate this to them is because you didn't 7 make the type of finding that you were required to 8 make consistent with R42 to come to a firm 9 conclusion that the bonuses were excessive? 10 You only said they appeared to be 11 excessive; isn't that right? 12 A. Right. 13 Q. So, you didn't come to a firm 14 conclusion. You didn't conduct the type of 15 investigation that was necessary to find that the 16 compensation was unreasonable; is that right? 17 A. Right. 18 Q. So, this was a very tentative comment 19 that was unsupported by any examination or 20 consideration of the seven R42 factors; isn't that 21 right? 22 A. Right. 18203 1 Q. And that's why you didn't bring it to 2 the attention of USAT, because you hadn't 3 conducted the necessary groundwork. Right? 4 A. Right. 5 Q. And that's why it doesn't appear in any 6 of the reports of the examination? 7 A. You have -- it was presented to 8 management in the '87 examination. 9 Q. We're going to get to the '87 10 examination, but I want to stick right now with 11 the '86 exam because Mr. Veis brought this 12 information out about the '86 exam. And I want to 13 make sure that you didn't reach any conclusions in 14 1986 that compensation paid by USAT was 15 unreasonable. 16 You didn't reach any firm conclusions 17 consistent with R42; isn't that right? 18 A. I did. It was not in the body of the 19 report. 20 Q. Well, you just told me you didn't 21 undertake the examination necessary under R42 to 22 reach any conclusion as to whether or not the 18204 1 bonuses paid to Mr. Gross and Mr. Williams were 2 excessive; isn't that right? 3 A. Well, the fact that it's here is a 4 conclusion, so... 5 Q. It says "it appears." Right? 6 A. Right. 7 Q. And that means that you hadn't reached 8 any firm judgment; isn't that right? 9 A. Right. 10 Q. And that's because you didn't do the 11 work that was necessary under R42, and you didn't 12 want to make a charge that you weren't totally 13 confident of; isn't that right? 14 A. At that time, we were allowed only to 15 report this information in the format that I was 16 allowed to report it in; and that's what I did. 17 Q. Now, if you still have that format, 18 take a look at No. 1, Item No. 1. It says, 19 "Comment on any unsafe or unsound policy or 20 practice not fully discussed in the open section 21 including self-dealing conflict of interest and 22 financial or property interest"; is that right? 18205 1 A. Right. 2 Q. And what did you say in response to 3 that? 4 A. "None." 5 Q. That means there were no unsafe and 6 unsound practices that were not reported in the 7 open section of the 1986 report. Right? 8 A. That means for that question, because I 9 was putting it in the other question, it was not 10 duplicated. 11 Q. I'm sorry. I didn't understand you. I 12 didn't hear you. I apologize. 13 A. It means for Question No. 11, since it 14 was provided there under the fees which ask for 15 specific information, then that information goes 16 on those numbers; and that's where the information 17 was provided. 18 Q. But this question asks, "Is there any 19 unsafe or unsound policy or practice not fully 20 discussed in the open section?" 21 And you say there are none. And we've 22 gone through the open section, and we see there's 18206 1 no mention of any criticism of USAT's compensation 2 policies or practices; isn't that right? 3 A. I'm explaining how we fill out the 4 document. 5 Q. Does this refresh your recollection 6 that you didn't come to any firm conclusion in 7 Item No. 11, and that's why it says "appears"? 8 A. No. 9 Q. Let's turn to the 1987 report of 10 examination. 11 When Mr. Veis was questioning you last 12 week, he showed you Exhibit A14087. Do you have 13 that there? It's the salary comparison schedule. 14 Mr. Perry will bring it to you, I hope. 15 Do you remember discussing this exhibit 16 with Mr. Veis last week? 17 A. Right. 18 Q. He then asked -- Mr. Veis asked you 19 what conclusions you drew from the study. And 20 tell me -- if I remember right, I think you said 21 that only one of the four of the other 22 Houston-based thrifts in which you compared 18207 1 compensation had higher salary levels at the 2 senior vice president level than those paid by 3 USAT? 4 A. Right. 5 Q. You didn't mean to suggest by that 6 answer, did you, Ms. Carlton, that you had reached 7 a firm conclusion after consideration of the R42 8 factors that USAT was, in fact, paying 9 unreasonable compensation to its senior 10 executives, did you? 11 A. It meant that we had only found one 12 other institution. It means what it says. 13 Q. I understand that. My question is: 14 Did you mean to suggest that you had found that 15 USAT's compensation that it was paying to its 16 senior executives was unreasonable? 17 A. Yes. 18 Q. You meant to say that? 19 A. We were saying that there was only one 20 other institution that was higher, meaning that 21 USAT's was high -- high -- high salaries. 22 Q. Now, in 1987, were you then reporting 18208 1 unsafe and unsound compensation practices in the 2 report of examination as a regular practice? 3 A. Yes. 4 Q. Now, why don't you take a look at the 5 1987 examination -- report of examination. You 6 should have it there. And that's Exhibit 14073. 7 A. Okay. 8 Q. Do you remember, Ms. Carlton, whether 9 you made any mention -- any critical mention of 10 the compensation paid by USAT to its senior 11 executives in the 1987 report of examination? 12 A. (Witness reviews the document.) 13 Q. Now, I don't find it on the summary 14 page. Do you? 15 A. No. 16 Q. And I didn't find it in the discussion 17 of management; is that right? Did you? That 18 starts on Page 3. 19 A. No. 20 Q. So -- 21 A. It's not in the '87 exam report. 22 Q. It's not in the '87 exam report. 18209 1 Did you have interim reports in 1987? 2 A. Yes. 3 Q. Do you remember how many interim 4 reports you had? 5 A. In '87? 6 Q. Right. 7 A. I think it's two. 8 Q. And Mr. Perry is going to show you 9 those reports. One is March 10th, 1988; and 10 that's Exhibit A14070. Is that right? 11 A. I can't -- yes. 12 Q. And the other one is dated 13 January 15th, 1988; and that's Exhibit A14069. Is 14 that right? 15 A. Right. 16 Q. Why don't we start with the 17 January 15th report. 18 Is there any criticism of USAT's 19 compensation practices or policies in this report? 20 A. No. 21 Q. Now, let's take a look at the 22 March 10th, 1988 report. 18210 1 Is there any criticism in that report 2 of USAT's compensation policies or practices? 3 A. No. 4 Q. In fact, the March 10th interim report 5 does mention compensation, doesn't it? Take a 6 look at the last page, Page 11, under 7 "management." 8 A. (Witness reviews the document.) 9 Q. It's the last page of the document, 10 Ms. Carlton. 11 A. The last? 12 Q. The last page, yes. It says 13 "management." 14 Do you see that on top? 15 A. Yes. 16 Q. And it talks about Sandy Laurenson. 17 Do you see that? 18 A. Right. 19 Q. And it says that Ms. Laurenson was 20 under an employment contract which guaranteed a 21 600,000-dollar salary and bonus for two years? 22 A. Right. 18211 1 Q. And you didn't criticize -- and that 2 averages out to $300,000 a year. Right? 3 A. Right. 4 Q. You didn't criticize that compensation 5 as being excessive. Right? 6 A. Not in the report. 7 Q. Not in the report. And if I remember 8 right, you told me that in 1987, you began 9 recording unsafe and unsound compensation 10 practices in the official reports of examinations; 11 is that right? 12 A. Right. 13 Q. But it's not in the final report of the 14 1987 exam, and it's not in any of the interim 15 reports; is that right? 16 A. That's correct. 17 Q. Now, let's look at this Exhibit A14087, 18 which is the salary comparison schedule. 19 Do you have that? 20 A. Do I have it? 21 Q. I believe you should. It has a 22 companion exhibit which is A14086. I think you 18212 1 should have a copy of that, as well. 2 Do you have both of those? 3 A. Yes. 4 Q. Let me ask you a preliminary question 5 while Mr. Langdon looks for the exhibit. If we 6 turn to A14086 -- it may be hard to see the 7 numbers. It's this one. 8 A. Okay. 9 Q. Keep both of them out. 10 The first page of this exhibit appears 11 to be a summary of a salary comparison study that 12 was done. 13 Am I reading this correctly? 14 A. Right. 15 Q. But the remainder of this exhibit is 16 not the -- that salary comparison study; is that 17 right? 18 A. Right. 19 Q. That salary comparison study is 14087; 20 is that right? 21 A. Right. 22 Q. Okay. On 14086, that first page, if 18213 1 you turn over to the first page -- you have it in 2 your hand. Just turn to the first page. 3 Is this your handwriting? 4 A. No. 5 Q. Do you know whose handwriting it is? 6 A. No. 7 Q. The remainder of the exhibit which 8 starts "contract" -- "employment contract 9 analysis," is that your handwriting? 10 A. Yes -- 11 Q. If you go over -- 12 A. -- with the exception of the -- 13 Q. Last page? 14 A. No. The document with "Joe" written on 15 it. 16 Q. Who is Joe? 17 A. The field manager. 18 Q. What was Joe's full name? 19 A. Cooper. 20 Q. He was your boss in the examination? 21 A. Yes. 22 Q. Now, if we look at 14087 which is the 18214 1 salary comparison study -- 2 A. Right. 3 Q. -- is this your handwriting? 4 A. No, it's not. 5 Q. Do you know whose handwriting it might 6 be? 7 A. It is KC, Kathy Cronin. 8 Q. Excuse me? 9 A. Kathy Cronin. 10 Q. Was she part of the examination team 11 that you had in Houston? 12 A. Right. 13 Q. Now, if we look at the salary 14 comparison study, under the -- you said there was 15 a KC initial in the upper right-hand corner; is 16 that right? 17 A. Right. 18 Q. And it said "accountant." Does that 19 mean that it was one of the Peat Marwick auditors 20 that assisted you in the '87 examination? 21 A. No. 22 Q. What does that mean? 18215 1 A. It means that was a worksheet in which 2 she used, and accountants' worksheets have that on 3 it as a part of our sheets were accountants' 4 sheets. 5 Q. It has a date on it of 3/24/88? 6 A. Right. 7 Q. Does that mean when the study was 8 commenced or when it was completed? 9 A. It could be either. 10 Q. There was no convention? 11 A. No. It's according to whoever is doing 12 the work when they put it on there. It could be 13 the first day they started or -- there's no way I 14 can tell you that. 15 Q. And you have -- you can't recognize the 16 handwriting on the first page of A14086; is that 17 right? That's this document, the one that has 18 that summary of the salary schedule. 19 A. No. I don't, no. And the initial is 20 not on there; so, I can't tie it back to a name. 21 Q. Now, your initial is down at the bottom 22 of that page: 14086? 18216 1 A. That's correct. 2 Q. Does that mean that you reviewed this? 3 A. Right. 4 Q. And this summarizes the salary 5 comparison study which is 14087, correct? 6 A. Right. 7 Q. And it says, "From this review, it 8 appears directors, officers, and principal 9 employees may be overcompensated." Again, we have 10 that word "appears." 11 Do you see that? 12 A. Right. 13 Q. Do you know whether -- 14 A. I don't have -- which summary? 15 Q. It's right -- no. It's right here. 16 Right there. (Indicating) 17 A. Okay. 18 Q. Do you see where it says, "From this 19 review, it appears directors, officers, and 20 principal employees may be overcompensated"? 21 A. Right. 22 Q. Again, we have that word "appears." 18217 1 Right? 2 A. Right. 3 Q. Would you agree with me that that again 4 suggests there is no firm conclusion being reached 5 by this study? 6 A. Not when examiners used that term -- we 7 used it frequently back then -- it was a term that 8 was just about used in so many different 9 situations, it did not -- the word "appear" does 10 not necessarily mean that you didn't have firm 11 facts or exact data or a certain level of -- you 12 will find examiners just use it randomly. 13 Q. Well, did you -- 14 A. So, it's hard to say that each time you 15 see that term, that it meant work was incomplete. 16 For one examiner, that may mean that. For another 17 one -- it's a term that was just used like that. 18 Q. Can you tell from this document whether 19 the use of the term "appears" suggests something 20 less than a firm conclusion? 21 A. No. 22 Q. Do you remember in the circumstances 18218 1 whether you had reached a firm conclusion that 2 United was overcompensating its senior management 3 in 1987? 4 A. I did, yes. 5 Q. And, again, you told me -- and again -- 6 it's pointed out to me that the language here 7 says, "From the review, it appears directors, 8 officers, and principal employees may be 9 overcompensated." 10 That's another qualifying word, isn't 11 it? 12 A. Right. 13 Q. Does that refresh your recollection at 14 all as to whether you had reached the firm 15 conclusion that there was, in fact, 16 overcompensation? 17 A. That leaves a question there as far as 18 that. Management had agreed to do a compensation 19 study themselves which would provide -- in which 20 they would, indeed, comply to the guidelines here. 21 Q. Does that mean that you didn't do that 22 type of study under R42? 18219 1 A. No, no. But management wanted to do 2 that study themselves. 3 Q. Well, did you do the type of study that 4 satisfied the R42 guidelines? 5 A. Yes. It satisfied us. 6 Q. I guess my question is: Did you do a 7 study that you believed satisfied the R42 8 guidelines? 9 A. Right. And if you look at this, 10 also -- you also had employment contract 11 guidelines, and that's a part of that study. 12 Q. We're going to get to the employment 13 contracts, but I want to stick right now to the 14 compensation issue. Okay? 15 A. Okay. 16 Q. You went through and considered all of 17 the seven factors that are set forth in R42? 18 A. Whoever did the review did. 19 Q. Well, do you remember whether when 20 you -- strike that. 21 Did you reach a conclusion -- you 22 personally, did you reach a conclusion? 18220 1 A. I personally reached a conclusion that 2 the compensation was excessive, and I noted it in 3 the -- the confidential section of that document. 4 Q. That was the 1986 examination. We're 5 now on 1987. 6 Do you remember any place -- 7 A. In 1987, I commented also to management 8 in a meeting, I know. And in that meeting was 9 when management responded that -- and I recall 10 somewhere in a document where management, in their 11 response, noted that they had hired a firm that 12 would go out and do that review. 13 Q. The meetings that you're referring to 14 are those that you held with management and then 15 with the board of directors towards the end of the 16 examination? 17 A. Whenever they were held. 18 Q. Was that when you remember making these 19 comments about compensation? 20 A. I don't know exactly when, but I 21 recall -- that meeting, I don't know specifically 22 what -- whether it was at the end of the exam or 18221 1 the beginning of the exam. I don't recall the 2 exact date. 3 Q. All right. 4 THE COURT: Mr. Blankenstein, do you 5 have some more? 6 MR. BLANKENSTEIN: Yes, I do, Your 7 Honor. I have -- 8 THE COURT: All right. We'll adjourn 9 until 9:00 o'clock. 10 11 (Whereupon at 4:50 p.m. 12 the proceedings were recessed.) 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 18222 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 4th 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 . 18223 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 4th 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